We are now through the first two months of fiscal year 2021. As things stand today, we see a picture of optimism on the horizon. The worst of the storm appears to have passed. There are still tough times in the short-term forecast, but the future is starting to look a little brighter.
The economy is slowly recovering
According to data from the Department of Labor, every sector of our economy is still far below last summer’s employment numbers. In July 2020, Alaska had 11.2% fewer jobs than in July 2019. But, at least things aren’t getting worse. The data show that the number of officially unemployed Alaskans is falling. So, that’s some good news.
July employment data also show that every private sector industry other than oil and gas added jobs last month. State and local government jobs continued to fall in July. Overall, the labor market is almost back to pre-pandemic employment levels, but remains nearly 40,000 jobs below a normal summer. Still, it’s looking like some sense of normalcy might appear this winter.
While it looks like we are now entering a recovery phase, it’s likely going to take a few years to fully rebuild the damage done by shutting down our economic system. Winter employment should get back close to last winter, but summer employment in 2021 will remain below the 2019 summer season. Plus, the oil and gas industry won’t recover for some time.
Of note, the economic disruption we’ve seen so far disproportionately falls on two groups of people — Low-income individuals and small business owners. An estimated 16,000 of the Alaskans who lost their jobs were making minimum wage, and somewhere around 25% of small business owners are at risk of closing permanently. While Federal support through unemployment insurance and business loans are helping mitigate the damage, there’s a long way to go.
Oil prices are holding flat
ANS closed the month of August with an average price of $43.47. That compares to an average price of $43.46 in July. Assessed values stayed in a narrow channel between $42.15 and $44.17 during the month. Looking forward, oil prices should trend up slightly during the next several months.
Based on current data, FY21 is on pace to average $46.53 +/- $11.57 per barrel (with 90% confidence). FY22 now appears that it will average somewhere between $29.08 and $79.44, with a most likely average price around $53.15.
Near-term risks mostly stem from a resurgence of COVID-19 during the flu season, leading to another shutdown. Upside comes from a faster than expected demand recovery falling on top of excess supply curtailments from record low drilling. But, for the next several months, the best guess is that prices will stay in the current channel between $40 and $45.
North Slope oil production is back to normal
Voluntary curtailments by ConocoPhillips in May and June have ended. The production cuts were necessary as West Coast refineries pulled back on operations in the face of a historic reduction in motor fuel demand. Now that Californians are driving around again, West Coast demand has mostly recovered, and ConocoPhillips is back to pumping at its full rate.
Those reductions resulted in 5.2 million barrels of deferred production. But, July production reports show that those curtailments ended, pumping 480,053 barrels of oil per day this July versus 472,448 barrels per day in July 2019.
Looking at data from Alyeska Pipeline, August production appears to be up considerably from last summer. Summer production is always lower than winter rates due to maintenance schedules. An estimated 469,078 barrels per day flowed down TAPS this month versus 390,222 barrels per day in August 2019.
But, the rest of the year will probably stay below 2019 levels. The consequences of stopping drilling activity will show up as accelerated decline in the months and years that follow. When COVID-19 canceled drilling activities for a few months, it created a shock to the system that will ripple for a long time. FY21 production is on pace to average 485,946 barrels per day.
Major oil projects are moving forward
Despite the fact that we are now seeing less production due to the lack of drilling and development in 2020, there were three important stories about North Slope development that broke in August. They give a glimmer of hope that the destruction caused by COVID-19 won’t be permanent.
ANWR lease sale ROD
The Department of Interior gave the green light for the first lease sale in the coastal plain of the Arctic National Wildlife Refuge last week. The record of decision was promptly met with a lawsuit — As expected. Once that litigation gets resolved, a lease sale could happen before the end of the year.
However, Joe Biden is on record as being opposed to drilling in ANWR. So, if the lawsuit drags on long enough, and if Biden wins in November, all of this anticipation will probably be for naught. Even if Trump wins a second term, there’s still a long way to go before any oil starts flowing.
Willow Final EIS
The Bureau of Land Management (BLM) issued a Final Environmental Impact Statement (EIS) for the ConocoPhillips led project named Willow. The BLM will now take another round of comments on the development within the National Petroleum Reserve – Alaska (NPR-A) before giving it a thumbs up.
ConocoPhillips will have to wait on the Record of Decision (ROD) before moving forward. It will probably also wait to see the outcome of the “Fair Share Act” in November before making an investment decision. The economics of the already marginal Willow project will take a hit if Ballot Measure 1 passes, primarily because of a “ring-fencing” provision that would slow down the recovery of project costs.
If the $4 billion Willow project does get a positive final investment decision, drilling will begin around 2024, with oil flowing about a year later. Production could exceed 160,000 barrels per day, totaling nearly 600 million barrels of oil production over 30 years.
Pikka development plan update
Oil Search, the company in charge of the Pikka development project, announced some changes to the way it will develop the field. Rather than building three drill pads at the same time, they will build one at a time. This phased approach will use the revenues from the one pad to build the next and to expand the processing facilities over time.
This phased approach will require less upfront capital, but it also means reinvesting proceeds. Consequently, it will take a lot longer to recover the investment. It also means that production will get spread across a longer time horizon, implying that the peak rate probably won’t reach the 130,000 barrels per day originally contemplated.