ConocoPhillips economist: Lower oil prices may be here to stay

Editor's note: This article has been updated to reflect that Marianne Kah asked for the state to provide fiscal stability.

 

The lower oil prices that Alaskans have been anxiously hoping will go back up may be the trend for the next several years.

With Alaska North Slope oil hovering around $50 per barrel, less than half the price it traded for in early 2014, producers are trying to make ends meet and the state is puzzling over how to recover from the loss of the production tax and royalty income from oil production. Gov. Bill Walker has estimated that the state’s budget would need oil to trade at $103 per barrel to balance it on oil revenue alone, but that doesn’t seem likely in the face of global oversupply and toughening competition, said Marianne Kah, chief economist for ConocoPhillips

In a speech at the annual Alaska State Chamber of Commerce’s Fall Forum on Wednesday in Kenai, Kah outlined some of the challenges in the oil and gas market and what the future may hold for producers in Alaska. Chief among the causes in the toughening market is the sharp spike in the production of tight oil, the name for oil extracted from low-permeability rock layers such as shale, in the Lower 48, she said.

“(The boom in tight oil production) has really changed our outlook for not only the short term, but maybe for the long term,” Kah said.

ConocoPhillips operates oil and gas production units around the state, including production rigs on the North Slope and the oldest liquefied natural gas export facility in North America, located in Nikiski. Since the beginning of the decline in oil prices, the company has curtailed its capital expenditures by about 68 percent, reducing the expenditures in 2016 from $6.4 billion to $5.7 billion, according to the company’s most recent quarterly filing with the Securities and Exchanges Commission. The company also plans withdraw from deepwater exploration, which is much more expensive than other types of exploration, according to the filing.

Kah said Alaska has been relatively buffered from most of the major layoffs and cuts so far compared to Houston, where the company is headquartered. However, oil production is Alaska is being challenged because of the high cost of entry compared to the faster and cheaper setups of tight oil production in the Lower 48.

Production of tight oil has climbed quickly in the last five years as methods of extraction become more efficient, as has the resource potential. Some of the oil patches in the Lower 48 have the potential to be Prudhoe Bay-sized fields, she said.

“This is truly a game changer in our world,” she said.

The U.S. Energy Information Administration projects tight oil production to double between 2015 and 2040, reaching about 10.36 million barrels per day in its International Energy Outlook 2016 and Annual Energy Outlook 2016. Most of that production will come from the U.S.

Tight oil production is also more resilient to low prices, according to the EIA. Most of the production is coming from new wells, with about half of the Lower 48’s oil production coming from wells drilled since the beginning of 2014, according to a March 22 analysis from the EIA. That’s partly because horizontal wells drilled into tight formations have high initial production rates but it quickly declines over time.

The number of rigs in the U.S. has dropped from a high of nearly 1,600 rigs in the fall of 2014 to 524 as of Oct. 7, according to Baker Hughes.

The glut in the market has dislodged the high prices of recent years, but a historical analysis shows the current lower price is not an anomaly from the historical trend of oil, Kah said. In general, except for particular periods of history — the formation of OPEC and the rapid industrialization of China in the mid-2000s, for example — oil prices have been relatively low and declining since the 1860s as new resources rapidly came online, she said.

“Those probably are the exceptions, and … the question is what does oil return to when it does return to a normal rate?” Kah said. “I would say in a … system like oil, I’m beginning to believe there is no such thing as an equilibrium price.”

Drivers for future demand on oil may include growth in the global GDP, large geopolitical events such as the United Kingdom’s recent vote to leave the European Union, known as Brexit, the future demand for oil in China and India and global investment uncertainty. Governments around the world are also beginning to look to alternative energy with subsidies, adding further competition to the market, she said.

Natural gas prices are also on a downhill slide worldwide. A global oversupply of liquefied natural gas has pushed prices down and two new facilities in the U.S. have recently come online, with more planned in the U.S. and worldwide.

Renewable energy sources are taking a cut out of the natural gas market as well, Kah said.

That, in combination with the lower cost of shale and Permian oil production, should drive Alaska to find ways to lower its cost of production, she said.

“Alaska has to find a way to make its production more competitive,” she said. “Other countries around the world are doing the same because they’re very much threatened by this environment where U.S. tight oil and OPEC are taking most of the production.”

ConocoPhillips recently stepped back from its investment in the Alaska LNG Project, which is transitioning to state leadership through the Alaska Gasline Development Corporation, and Kah said she saw advantages in the state-led structure because of the possibility for tax exemptions. To encourage further resource development, the state needs to provide fiscal stability and both the state and federal government should also simplify the permitting process and opening up access to federal lands in Alaska, she said.

“The state should do everything it possibly can to make investment in Alaska more competitive. Further unlocking resources in Alaska I think would require greater access to federal acreage,” Kah said.

 

Reach Elizabeth Earl at elizabeth.earl@peninsulaclarion.com.

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