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Thanks to higher oil prices, a projected $700 million state budget deficit has been erased for this year, and there could even be a small surplus. Or, maybe not.

Oil prices are heading down again and the surplus may not actually appear, state revenue officials warned Dec. 3.

The Department of Revenue issued what it called a “preliminary” prediction for state revenues Dec. 3, just as Gov. Mike Dunleavy was sworn into office, but is holding off on the full forecast until Dec. 15 to get a better feel for what may happen with oil markets, and prices.

Fiscal Year 2019, the current state budget year, is about half over, ending June 30. If oil prices tank in the next few months the projected surplus may vanish and a deficit reappear.

Earlier this year the Legislature approved a plan to use some of the Permanent Fund’s annual income to help fund the state budget. However, much of the budget is still financed by oil and gas revenues.

 “Once again, Alaska is experiencing oil price volatility,” outgoing Revenue Commissioner Sheldon Fisher said Monday, as the forecast was released.

Fisher said a team of economists at the revenue department worked with petroleum geologists and engineers in the state Department of Natural Resources, and private petroleum economists, through October to develop short and long-term projections of revenues and oil production.

Then things changed. “During November, however, the oil markets have experienced the largest monthly price decline, in terms of percentages, in a decade. Markets now appear to be oversupplied due to Iranian oil remaining in the market despite the imposition of oil price sactions during November,” Fisher said.

The revenue department had expected Saudi Arabia to replace the Iranian oil but instead it increased production further and added more oil,” he said, “which had a profound effect on prices in the last month.”

The question now is whether the Saudi government will implement production cuts to help stabilize the market. State economists hope to have a feel for that by mid-December and to issue the final revenue forecast document, Fisher said.

Meanwhile, the former commisioner turned over the reins at the revenue department to incoming Commissioner Bruce Tangeman, who Dunleavy appointed last week.

Also, before he left office last Monday Gov. Bill Walker proposing using part of the surplus, if there is one, to pay for a $230 million supplemental capital appropriation to tackle deferred maintenance on state and university buildings around the state. The state has a deferred maintenance backlog on facilities that exceeds $1.8 billion.

Now that he is in office, Gov. Mike Dunleavy will have to decide whether to act on Walker’s recommendation. It would fund repair work on public building in 60 communities, Walker said.

On the oil production forecast, Alaska production has been declining so far this year but is expected to increase in 2019 and 2020 thanks to new North Slope oil discoveries being brought on line.

North Slope production has dropped so far this year, averaging 505,184 barrels per day for January through October, or 17,402 barrels per day below the same period in 2017. However, the daily average is projected to be up to 529,800 barrels per day in 2019 and 533,000 barrels per day in 2020, according to the forecast.

State petroleum economists include only new projects that are sanctioned, or officially approved, in the forecast. This year two new developments included are ConocoPhillips’ GMT-1  and GMT-2 projects in the National Petroleum Reserve-Alaska. GMT-1 recently started production, and Hilcorp Energy’s new Moose Pad project in the Milne Point field, which the company said will begin production in January. GMT-2, ConocoPhillips’ second project in the NPR-A, is sanctioned and in construction, and is to be producing in 2021.

Two other larger developments are in the planning stages, ConocoPhillips’ Willow project in the NPR-A and Pikka, being developed by Oil Search and Repsol on state lands near the Colville River. Because these are not yet sanctioned, or approved, their production is not included in the forecast.

With Willow and Pikka not included the revenue department’s forecast is for a gradual decline after 2020 to 493,400 barrels per day by 2027. However, if Willow and Pikka are approved and proceed to development the production contribution will be substantial, estimated at 220,000 barrels per day at peak between the two.

Essentially, the new discoveries on the North Slope are offsetting declines in the older, larger fields on the slope. BP and ConocoPhillips, operators of the large “legacy” Prudhoe Bay and Kuparuk River fields on the slope, have worked hard to mitigate declining production largely with new technology.

The companies held Prudhoe and Kuparuk production generally flat in the two years following sharp oil price declines in late 2015. However, both fields are likely to show declines this year, former state Natural Resources Commissioner Andy Mack said he had been told by senior managers at both companies.

On Monday Corri Feige became the state’s natural resources commissioner after Dunleavy became governor. Mack spoke in an interview last Thursday, when he was still commissioner.

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