New revenue estimate for Willow project presents rosier picture for Alaska treasury
Changed assumptions about tax credits, oil prices and other factors result in an estimate of early cash losses over a shorter period than was previously predicted
An exploration site at ConocoPhillips' Willow prospect is seen from the air in the 2019 winter season. A revised Alaska Department of Revenue analysis of the project's fiscal impact presents a more positive outlook for the state treasury than one issued on Feb. 28. (Photo by Judy Patrick/provided by ConocoPhillips Alaska Inc.)
A revised estimate by Alaska Department of Revenue experts projects that ConocoPhillips’ massive Willow oil project will start paying off to the state treasury by 2030, years earlier than past analyses, department experts told legislators on Thursday.
The new analysis presents a more positive picture for state revenues than did an analysis issued by the department three weeks ago. The Feb. 28 analysis estimated that it would take a decade for the Willow project to produce more money for the state treasury than is lost through reduced production taxes from elsewhere on the North Slope. The February analysis found that reduced production taxes would cause the state to lose cumulative $1 billion in revenues during those early years before reaping billions of dollars of benefits later on.
But the revised calculations find that rather than being $1 billion in the hole in the first 10 years of Willow’s life, the state will more than break even before the end of the first decade, according to testimony to the Senate and House Finance Committees by Dan Stickel, chief economist for the department’s tax division, and Owen Stephens, a commercial analyst for the department.
The new analysis shows that there will be less than $400 million in pre-production negative impact to the state and an overall $1.3 billion positive impact over the 10 years, though more precise dollar estimates are not yet available, Stephens said.
“We still expect a modest reduction in state revenue during construction, and a significant positive after, but peak production is pushed beyond the 10-year window,” he told the Senate Finance Committee in its hearing.
The Willow project, just approved by the Biden administration, is expected to produce about 600 million barrels over its lifetime, with peak daily production at 180,000 barrels early in the field’s life. It is located in the National Petroleum Reserve in Alaska; if developed, it would be the westernmost producing oil field on the North Slope.
Stephens and Stickel told lawmakers the differences between the new analysis and the February analysis is due to four factors.
One is a limit to which production taxes elsewhere on the North Slope are able to be offset by Willow capital costs. That limit is the result of a minimum tax rate in the state’s system, Stickel said. “We assumed in the original report that they could apply all their lease expenditures without bumping up against that minimum tax,” he said. The new analysis changes that assumption, he said.
Another factor changing the analysis is the new projection for oil prices, the two officials said. The Feb. 28 analysis was based on price estimates made in December, while the new analysis factors in the lower oil prices estimated in the spring revenue forecast issued on Wednesday. Lower oil prices generally reduce the level to which producers may claim credits to offset production taxes, the two said.
A third factor is a recalculation of impacts to corporate income tax receipts.The fourth factor is a recalculation of state financial benefits from having higher oil flow not only in the Trans Alaska Pipeline System, as was considered in the February analysis, but also in the feeder pipelines running through the Alpine and Kuparuk units on the west side of the North Slope. Higher oil volumes reduce the per-barrel transportation costs that affect tax receipts.
Senate Finance Committee co-chair Bert Stedman, R-Sitka, said he was relieved to see a change from the alarming figures in the earlier analysis.
“I’m glad that the initial report was simplified. It caught our attention, so that made us invite you here to go into the details,” he said in his closing remarks at the Thursday morning hearing.
Stedman said there is more for legislators to learn from the Willow analysis and the broader trend of oil development on North Slope federal lands, from which the state general fund is not entitled to royalty revenues, unlike the case on state lands.
“It definitely changes the dynamics of changing oil prices,” he said. He cited a long-used calculation of $70 million impact for each $1-per-barrel change in oil prices that will not be valid for oil produced from federal territory.
“All oil’s not equal, so that is not lost on us,” he added in comments to close the hearing.
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