State’s new method leads to lower production forecast

  • By ELWOOD BREHMER
  • Wednesday, December 28, 2016 8:17pm
  • News

There is good news and bad news when it comes to the State of Alaska’s closely monitored oil production forecasts.

A new method should mean more accurate forecasts; but future production estimates will likely be lower as a result, according to the state officials compiling the data.

The Department of Revenue used to farm out the semi-annual oil production forecasts published early each spring and late each fall to an outside consultant.

However, in an effort to save money while at the same time produce better results, Revenue officials turned to their Department of Natural Resource colleagues — the state’s technical experts on all things oil — to put together the in-house forecast that was included in the annual Fall Revenue Sources Book released Dec. 15.

Keeping the consultant off the books saved the state a couple hundred thousand dollars, Deputy Revenue Commissioner Jerry Burnett said, while the new production forecast methodology uses more detailed, field-specific data that should generate more accurate numbers, according to Division of Oil and Gas Director Chantal Walsh.

“When we did a look back over (prior forecasts) we found they were always higher than actual production came in,” Walsh said, so the department went to work trying to resolve the issue.

In compiling prior forecasts, consultants discussed the potential of oil prospects with operators and generally used a judgment call to weigh the likelihood long-term plays would produce what was hoped. That led to deterministic forecasts that included production on some level from most all projects slated to start in the next 10 years, Walsh said.

This year, the time horizon was cut to five years and a probability of success was weighted toward nearer-term projects within that window.

Further, she said DNR found the number of wells operators anticipated they would drill in their field plan of development documents submitted to the department annually was also often greater than what played out, and because fewer wells means less oil, it contributed to inaccurate forecasts.

Finally, Revenue’s consultants used to use a Slope-wide well production curve to make the projections, Walsh said. DNR has the data to use individual production estimates for each field, she said, noting for larger fields the department can even differentiate production estimates based on the type of well that will be drilled.

The change in method combined with the price-induced declining field activity to make for a rather sharp decline projection in North Slope production for the remainder of the 2017 state fiscal year, which is nearly half over, in the latest Revenue Sources Book.

North Slope operators are now expected to produce an average of 490,300 barrels per day, instead of the 507,100 barrels per day projected in the Spring 2016 Revenue Book published last March.

The 490,300-barrel per day average would be a decline of about 5 percent from the 514,900 barrels per day produced in fiscal 2016.

Department of Revenue Petroleum Economist Michael Malin noted the old forecast method not only led to artificially high near-term projections, but also lower long-term figures because production from anticipated developments was rapidly “risked away,” leaving little in the forecast beyond 6 years, despite the fact that new fields generally produce for much longer.

Those production curves cross in 2021 and 2022 when comparing the Spring and Fall 2016 forecasts. The Spring forecast calls for an average of 418,600 North Slope barrels in 2021 and 387,100 barrels in 2022.

The Fall forecast anticipates a 413,500-barrel per day average in 2021 and a 398,200-barrel average in 2022; and the difference continues to grow through 2025, when the projections end.

The state officials’ assertion of historically inflated production forecasts is somewhat born out looking back a little further.

The 2016 fiscal year production of 514,900 barrels per day was higher than anticipated in Fall 2015 by more than 14,000 barrels — it was also the first increase in Slope production since 2002 — but it was also below the Fall 2014 forecast of 524,100 barrels for 2016.

The 2014 projection also had 538,900 barrels per day projected for 2017.

The 2017 decline to 490,300 barrels and expected 2018 production of 455,600 barrels per day from the Slope is also due to activity pullback from producers primarily because oil has been mostly less than $60 per barrel for over two years, according to state officials.

To date, fiscal 2017 North Slope production has averaged about 505,700 barrels per day.

BP, operator of the massive Prudhoe Bay field, indicated early in 2016 that it would simply be drilling fewer wells in the near term. Caelus Energy also suspended full-time drilling at its smaller Oooguruk island field in 2016 because of price and other considerations.

According to Baker Hughes, a large oilfield service company that tracks drill rig activity, there was an average of seven rigs working in the state in December, down from 12 a year ago.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

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