Lower prices dim expectations for Alaska oil earnings in coming years, revenue forecast says

Alaska oil revenues are expected to decline over the next few years, helping create a budget deficit that will have to be filled in with state savings, according to a semiannual forecast released by the state Department of Revenue on Thursday.

The new forecast is more pessimistic about the state’s oil-money prospects over the next few years than was the department’s previous forecast, released in March, noted Department of Revenue Commissioner Adam Crum.

“This is due to lower oil prices, as well as higher lease expenditures,” Crum said at a news conference held by Gov. Mike Dunleavy. Oil price estimates are based on the futures market, he said.

Oil production through the end of the 2020s decade will also likely be lower than what was expected in the department’s previous forecast, released last spring, “but there is an expected increase in production and revenues after that,” Crum said.

The new forecast predicts that North Slope oil production will average 466,600 barrels per day in the current fiscal year, which started on July 1, and rise slightly to 469,500 in the fiscal year after that. Average production for fiscal 2024, which ended on June 30, was 461,000 barrels per day.

Alaska North Slope production peaked in 1988 at over 2 million barrels per day.

While Alaska North Slope oil prices averaged $85.24 in the 12 months that ended on June 30, they are expected to be only $73.86 in the current fiscal year and $70 in the year after that, then hold steady within a range between $68 and $73 a barrel through the early 2030s, according to the forecast.

That is $4.14 per barrel lower for the current fiscal year and $4 per barrel lower for the next fiscal year than the prices predicted in the department’s March revenue forecast.

Counting all sources, the state will receive $220 million less in the current fiscal year and $232 million less in the following year than was expected last spring, according to the forecast.

The forecast predicts a significant upswing in production in the latter part of the decade, eventually bringing average North Slope production to over 600,000 barrels per day in the early 2030s and 656,866 by the middle of that decade.

That is attributed in large part to two projects in development on the western side of the North Slope: Pikka, operated by the Australian company Santos, with Repsol as a partner, and Willow, the ConocoPhillips project that is on federal land and expected to produce up to 180,000 barrels per day at its peak. Willow production is expected to start in 2029.

But the revenue boost from that new development will lag the increase in production, according to the forecast.

The state’s total petroleum revenues in the 12 months that ended on June 30 were a little over $3 billion, the forecast said. That total will drop to around $2.2 billion in coming years before starting to rise in the early 2030s. A decade from now, Alaska’s total petroleum revenues will have rebounded – but only to a level about equal to the total in just-completed fiscal 2024. That would not account for inflation.

While Willow is set to be a major oil producer, it is not expected to provide significant royalty income that could be used for the state budget, unlike fields that are located on state land. Under federal law, royalties from oil production within the petroleum reserve are to be split between the federal government and a fund for North Slope communities’ use.

Oil income is less important to the state budget than it was in the past, when it contributed as much as around 90% of funds the state can spend on services without restrictions.

In the 12 months that ended on June 30, oil money made up 37% of the state’s $6.6 billion in unrestricted revenue, a category that does not include the $6.1 billion contribution from the federal government.

In contrast, earnings from investments – primarily from the Alaska Permanent Fund – accounted for 55% of the state’s unrestricted revenue in the last fiscal year, according to the newly released forecast.

Crum, at the news conference, explained the shift away from past patterns when oil was the main source of unrestricted revenue.

Starting about six years ago, he said, the state transitions from depending primarily on oil revenues to its unrestricted funds to depending on investment income for “a significant share” of the budget, he said. That investment money comes primarily from the Alaska Permanent Fund – the state spends roughly 5% of the fund’s total market value each year.

“Alaska is now, at least partially, an endowment state,” he said, adding that no new taxes accompanied the switchover. “Alaska is the first state in the United States to achieve this status,” he said.

Earnings from the Permanent Fund are expected to put $3.7 billion into the general fund for the current fiscal year and $3.8 billion in the following fiscal year, according to the forecast. That money is to be used both for state government operations and for annual dividends paid to residents, the forecast said.