Juneau, Alaska

(907) 699-6788 ed.king@kingecon.com

Guess Where Alaska Stands in the Oil Race

Back in the 1980’s Alaska was a powerhouse in the oil market. At the time, our young oil fields were the envy of our peers. Texas production was falling, approaching 2 million barrels per day from above as Alaska approached the same mark from below. Briefly, Alaska challenged Texas as the number one oil producing state in the union and was responsible for 25% of all oil production in the nation.

Meanwhile, California oil production was dropping below the one million barrel per day mark. No other state was producing more than half that much back in 1988 (Louisiana). That handful of “small” producing states could not compete with the vast opportunity in the Last Frontier.

At the time, Alaska had a lot of leverage. Our land was known to have good source rocks and the region was underexplored. Companies were chomping at the bit to get exploration rights as their lower 48 resources were being depleted and they needed to replace those reserves. The state was awash with a previously unfathomable amount of money. So much money that we repealed our individual taxes, socked a quarter of the royalty money away, and started writing checks to our residents.

Those were the days.

No Longer a Dominate Player

Times have changed.

In 2019, Alaska is now a mid-level player – coming in 6th place (and barely above California) among the oil producing states. We now produce only 5% of the oil coming from the USA.

Our oil production is now only 10% of Texas’ and a third of North Dakota’s. We’ve been replaced as the perpetual runner up and we no longer compete with the “big dogs” at all. Those “small” producing states like New Mexico and Colorado have become our peer group – and competitors for investment.

Most people don’t realize this. After all, it’s a fairly new development. Almost everyone knows that Texas is pumping oil like crazy. But, did you know it was approaching 5 million barrels per day? You’ve probably heard that North Dakota shale gave them an incredible boost. But did you know that they’ve increase production by 1,226% over the last 15 years?

And you might not have noticed that in just the last twelve months, the landscape has dramatically shifted. You might not have realized that Alaska has fallen out of the conversation as a top oil producing state altogether. That we’ve been passed by Colorado, New Mexico, and Oklahoma (with Wyoming trying to make a move).

A Consolation Prize

If there is any good news, it’s that things are not worse. For the last 5 years, oil companies have been able to stop the bleeding in Alaska.

 

 Source: EIA

 

 Source: EIA

Oil decline rates have dropped considerably since SB21 took effect. Under the old ELF system, decline rates averaged 4.8% per year. That rate went largely unchanged under the PPT/ACES era, averaging 4.7% per year. Since SB21 took effect, decline rates have averaged just 1.2% per year (including two of only four years in which production increased during the last 30 years).

That doesn’t mean it was the cause, but something definitely changed the course. For whatever reason, we produced 28 million more barrels of oil last year than the state projected we would in 2012 – even as the price of oil fell out from under us.

 

 Sources: 2012 Revenue Sources Book; 2018 Revenue Sources Book

Just finding a 28 million barrel oil field would make the news, and we are putting one in the pipeline every year. So, we are fortunate that things are not considerably worse. While there’s no way to say that the DOR forecast would have been correct under different circumstances, you can draw your own conclusions (I drew my own here).

Plus, there is a sense of optimism in the air. Over the last few years, a renewed exploration effort has resulted in numerous discoveries. Some of which are quite large. And, the potential for even more exploration success is just on the horizon.

While we may never rival Texas again (without a technological breakthrough that unlocks our tremendous amount of unconventional resources), at least we can still be in the race.

New Reality

Although we still have good rocks, our resources are still largely undiscovered. Finding that oil in Alaska is much more difficult and expensive than finding it in Texas or North Dakota these days (or even New Mexico for that matter).

When companies do hit pay dirt, the track is already laid in those lower 48 plays. And when they are ready to put money into a project down there, those shale plays are sprints versus our marathons. That provides for a much quicker recovery of capital that can act as seed money for their next bet.

That means that we can’t simply rely on the fact that we have oil anymore. We aren’t the only ones in the race these days. So, while there’s a lot of exciting opportunities being considered right now, we can’t bank on those prospects giving us a boost.

Companies run their numbers across all their opportunities and choose the ones that provide the best return. And they have a lot more horses to choose from than they used to.

Maybe those exciting developments can put Alaska back in contention. The amount of potential in Alaska is incredibly high. But, if we want to return to glory, it’s going to take a lot of money. If we want investors to bet on us, we need to pay a whole lot of attention to project economics – not just state finances – as we discuss what happens next.

Oh, by the way. Did you notice the “scores” button on top of that first animation? Scroll back up and watch it again.

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