Funds available to support the state budget will be up $100 million next year thanks to strong earnings of the Alaska Permanent Fund, which will offset a dip in state oil income.
That’s according to the state’s fall official revenue forecast, which was issued last Friday, Dec. 6.
Unrestricted General Fund state revenues from traditional income sources, much of it oil and gas, are expected to decline $100 million next year, from $2.1 billion in Fiscal Year 2020, the current budget year, to $2.0 billion next year, or FY 2021.
But under a formula in a state law enacted last year the Permanent Fund will contribute $2.9 billion to the budget this year and $3.1 billion next year, a $200 million increase or a net gain of $100 million, according to the forecast.
The Permanent Fund contribution includes funds for both payment of Permanent Fund Dividends and to support public services like schools, police and roads. Gov. Mike Dunleavy and the Legislature will decide how much of it goes to the PFDs and how much is used to support services.
Dunleavy and the legislators will also wrestle with cost increases in state services driven by inflation, rising health care costs and, for this year at least, large costs borne by the state in fighting last summer’s wildfires.
Since oil and gas royalties and taxes still pay for a big share of the budget, the expected crude oil price is an important part of the estimate.
The state Department of Revenue’s outlook is for slightly lower oil prices next year, but that could change. “The revenue forecast incorporates the most current indications from financial markets and is based on an annual average Alaska North Slope oil price of $63.54 per barrel for FY 2020 and $59.00 per barrel for FY 2021,” the revenue department said in a statement accompanying release of the forecast.
Oil prices are volatile and unpredictable, however. The actual price received for the sale of Alaska oil will depend on changes in oil supply and demand in world markets. Geopolitical events, such as a supply disruption in the Middle East, can cause prices to increase.
Alaska oil production is the other part of the equation, and the outlook is not so favorable, at least for the near term. State forecasters predict a dip in North Slope liquids production through 2024 but then a gradual increase back toward current output of about half a million barrels per day as several projects now planned start up.
The prediction is for slope output to decline to an average of 492,000 barrels per day through state Fiscal Year 2020, the current budget year that ends June 30. Production is expected to drop again in FY 2020 to an average of 490,500 barrels per day. The forecast includes crude oil as well as natural gas liquids produced and blended with crude for shipment through the Trans Alaska Pipeline System.
However, steeper declines are expected by FY 2024when slope production is expected to average 434,300 barrels per day. With the impact of expected new production later in the decade the forecast predicts a return to 494,500 barrels per day by 2029.
“The oil production forecast balances projected declines in production at existing fields with incremental production from new fields and new developments,” the revenue department said in a statement issued Friday.
“Following several years of relatively stable production, most existing fields are expected to return to declining production during the forecast period. Meanwhile, several new oil fields are progressing through the planning and development process. These new fields are expected to contribute to stable and increasing production later in the forecast period,” the department said.
Explorers are finding more oil on the North Slope and producers have a full plate of new projects, but several near-term new developments won’t be enough to offset natural declines in existing fields typically 6 percent per year.
To keep production level producers will have to add 25,000 b/d to 30,000 barrels per day to offset the decline. Near-term projects like Fiord West, Nuna and GMT-2, all by ConocoPhillips, as well as expansions in the Milne Point field planned by Hillcorp Energy, can cover part of the gap but not all of it.
After 2024 several other projects including the larger Pikka and Willow developments by Oil Search and ConocoPhillips, and other projects, could add 250,000 barrels per day or more of new production at peak.
These projects haven’t been given final approval, but assuming they get that the revenue department’s 2029 target could be achieved.
Alaska’s production forecast is done by the State Department of Natural Resources for the revenue department’s use as part of the state’s annual December revenue forecast. The state’s petroleum economists tend to be cautious in the forecast and include risk factors for possible delays of projects, which is not unusual.
Assumptions behind the analysis were not made available because they are based on confidential information from project developers.