State supreme court scuttles plan to pay oil explorer tax credit debt with state bonds

Alaska’s Supreme Court ruled Sept. 4 that a state plan to issue revenue bonds to pay for about $800 million in oil tax credits owed oil explorers is unconstitutional. Debt issued by the state must be approved by voters in an election, the court ruled.

This means the state will continue making minimum small yearly payment on the debt, owed mostly to small independent companies who had drilled exploration wells. It means the companies are essentially stuck with the tab. In addition, the debt owned the companies will weigh on the state’s balance sheet as an obligation.

The revenue bond plan would have allowed the state to issue special bonds to pay the companies immediately or at least sooner.

In another development Oil Search, a Papua, New Guinea company proposing a major new project on the North Slope, is reorganizing the project to reduce costs, according to reports. An early startup plan for the company’s Pikka project has been delayed because of oil prices, and a new plan to scale back the initial development is planned to allow it to be started at lower prices.

The new plan, according to the company, is to start the project with one drilling pad instead of three and a smaller production facility than can then be expanded. Oil Search and its partner, Repsol, hope to begin Pikka at 135,000 barrels per day by 2024.

In terms of production, the large Prudhoe Bay field on the North Slope dropped 13,051 barrels per day on average in August, compared with July, while most other North Slope fields mostly held even. That’s according to production data compiled by the Alaska Department of Revenue. Overall North Slope production averaged 472,165 barrels per day for August.

Prudhoe is being watched closely by state officials because independent Hilcorp Energy is now in its second month as field operator after taking over from BP July 1. Hilcorp purchased BP’s upstream assets in July and took over as operator at Prudhoe Bay. The field supplies more than half of total production from the North Slope.Hilcorp held Prudhoe production about even in July, in its first month as operator, with production averaging 287,341 barrels per day compared with and 286,200 barrels per day in June, BP’s last month as operator. In August, Hilcorp’s second month, average daily output for Prudhoe dropped to 274,290 barrels per day. Hilcorp was unable to respond to questions about the decline but it’s not unusual to see temporary production dips in summer as maintenance is done on field processing plants.

Other fields on the North Slope remained generally level. The Kuparuk River field averaged 121,595 b/d in July and 122,183 barrels per day in August. The Alpine field averaged 51,621 barrels per day in July and 55,493 barrels per day in August. Kuparuk and Alpine are operated by ConocoPhillips. The Lisburne field, also now operated by Hilcorp, averaged 17,388 barrels per day in June and 20,200 barrels per day in July.

Total North Slope production averaged 477,896 b/d in July and 472,165 barrels per day in August.

For several years slope production held generally level at 500,000 barrels per day to 525,000 barrels per day, but the outlook is now for a return to gradual decline, which may accelerate because in-field drilling and well workover work were cut in April after crude oil prices dropped. Drill rigs have not yet been put back to work.

Alaska North Slope crude oil is currently selling at about $42 per barrel, according to state revenue data. Sources in industry say that prices must climb to the $50 per barrel range before field activity will be resumed.

The longer-term outlook for the slope is more positive, however, assuming energy markets return to near-normal. One new project, GMT-2 by ConocoPhillips, is under construction and is to be in production in late 2021 with peak production is estimated at 40,000 barrels per day.

Longer term, two larger projects are planned but one is delayed and being rescoped because of prices, Pikka, by Oil Search and Repsol. A second large project, Willow, by ConocoPhillips, is in the advanced engineering and permitting stage and is still underway as to planning.

ConocoPhillips has not announced any change so far in its goal of having Willow in production in 2025 or 2026. Both projects combined could add 400,000 barrels per day or more in new production.