5-16-16 When Will Oil Prices Recover Enough To Re-establish Alaska & Alberta Prosperity?

Dan Yergin, NGP file photo. (See Yergin’s WSJ comments below)

By mid-year, 1967, Atlantic Richfield Company’s (ARCO) Susie rig had completed its Alaska North Slope oil exploration mission, unsuccessfully.  Then, an old friend and colleague, Harry Jamison, ARCO’s Alaska Manager, prevailed upon company Chairman, Robert O. Anderson, for one last well attempt.  “Robert O” as we called him, supported the recommendation to the Board, which approved that one more try.   Just after Christmas the one last try produced a discovery and made history.  In early 1968 Harry announced the great Prudhoe Bay discovery.

By late 1967 every oil analyst on the planet would probably have predicted against any major Alaska North Slope oil discoveries, a major example of the difficulty in predicting the future.  (We note that then, the Alaska investment climate was inviting.)

Yet, two years ago, oil analysts would probably have laid odds on Shell making a discovery in the Chukchi Sea last year.  And, they would have been wrong relying on that crystal ball, for the many reasons we have explored herein.  (We note that 50 years after the ARCO discovery, Alaska’s investment climate and a hostile federal regulatory policy, were not inviting.)

Similarly, predictions about construction of TransCanada’s massive, job producing Keystone XL pipeline persevered until the United States foolishly condemned the project on political grounds — not on due process merits.  So much for the, “rule of law“.

So now, Alaska and Alberta, joined by other oil and gas producing areas have been laid low by predatory pricing and supply manipulation initiated by the Saudi kingdom nearly two years ago.

…which leads us to the question: When Will Oil Prices Recover Enough To Re-establish Alaska & Alberta Prosperity?

While Yogi was right in warning of the difficulty making predictions, especially about the future, we can offer some hints and conclusions.

Hints about the future:

• The Saudi kingdom is searching for ways to maintain income in a continuing low price environment that seeks to keep competitors at bay.  Today, our friend Dan Yergin, IHS Vice Chairman, writes in the WSJ that , “…Saudi Arabia will seek to capitalize on its position as the world’s lowest-cost producer to expand output and enhance the competitive position of its oil in what is destined to become an ever-more-competitive global energy market.”
• North Dakota’s production levels are remarkably strong in spite of a dramatic drop in operating rigs.  Our Mid Atlantic energy analyst friend reports today that, “In the last  18  months, the oil-directed rig count has dropped from 194 to 29. It has dropped virtually every month along the way.  Daily Oil Production has ONLY dropped by 106,166 barrels per day (9.1%) from the high mark in December 2014 despite a 83% drop in rigs operating.
• Alaska’s legacy operators, BP, ConocoPhillips and ExxonMobil are making valiant attempts to maintain production in spite of Saudi initiated price and supply predation.  But rig count — and employment — reductions in the last 18 months have been dramatic.
• Opposition to Canadian pipelines along with a trend in lower production directly affects both the Province’s royalty income and the manufacturing economy, among other sectors.
• A ‘predicted’ increase in world energy demand could produce $50 oil within 6 months, according to IHS Vice Chairman Yergin.  While that price increase could benefit low cost of production areas like North Dakota’s Bakken and other shale plays, more price recovery will surely be required to satisfy the revenue needs for more industry-dependent areas like Alaska and Alberta and the high costs of production born by their producers.

Questions we ponder in the quest for accurate predictions:  Will Saudi action keep prices low?  Will N.D. thrive on low cost of production and enhanced technology?  What will be the effect on oil sands productivity in wake of the epic fire and epic environmental opposition?  Will dramatically lower North American rig counts be prelude to higher prices…or to continuing punishment from over regulation, over taxation, and effective predatory supply and price manipulation?  Will the United States again become vulnerable to foreign oil and gas imports in a continuing, low oil price environment?  How high must current rock bottom LNG prices go in order to justify Alaskan and Canadian LNG projects?  Which Alaskan/Canadian projects present the most favorable economics?

Conclusions we reach in absence of predictions:

• Readers can see, with the few examples above, that oil companies must make large profits on successful projects to support the many unsuccessful attempts.  This is why all companies — not only oil & mining companies — tell us that their first request of government is always to provide evidence of predictability, stability, fiscal certainty.  Alaska must overcome an unwholesome reality if not reputation of fiscal irresponsibility, instability and lack of predictability in order to once again attract significant new natural resource investment.
• Even if oil prices recover, Alaska’s declining production remains a challenge to the state’s prosperity, with 90% of the 49th state’s operating budget dependent on oil along with over a third of its economy.  The double whammy is that even with higher prices and increased production, economies highly dependent on one commodity must become more adept at developing sustainable economies and investment climates when their commodity prices are low as well as high.

So, to best answer the headline’s question, decision makers must learn to accept a similar degree of risk born by exploration and production companies.  If they do not learn to control public spending, offer stable investment climates and create economies that can weather changes of oil price and supply fortune, their citizens are destined to continue living from one boom to the next bust.  

It’s not tough to make that prediction.    After all, it’s fairly scientific to imagine the logical effects of actions: we get more of what we treat well and less of what we treat badly.  It’s more difficult — as Yogi would surely agree — to proudly predict a certain future in a chaotic world: especially when — in that world — one must risk hard-earned money and politicians have the power to take and redistribute it…and then come back again when foolish spending policies cannot weather economic storms.

At times, politicians have even shown that they can take and redistribute OPM (i.e. other people’s money) … retroactively.

And that, dear readers, is the opposite of certainty, reliability and predictability!