State: Cheaper oil could bust budget in 2007

Iraq, Russia figure in revenue department's slide prediction

Posted: Sunday, December 14, 2003

Ramped-up oil production in Russia and Iraq are likely to push world oil prices down, exhausting Alaska's budget reserves by 2007, according to the state Department of Revenue.

But high oil prices today will make it easier to balance the budget this year, said Revenue Commissioner Bill Corbus.

"Matters which could affect the near-term volatility of the price of oil are the increasing global demand for oil, the Iraqi oil production, non-OPEC oil production - in particular that of Russia - and finally the following value of the American dollar," Corbus said, during a Friday press conference following the release of the department's fall revenue forecast.

The 2005 state budget - which covers July 2004 to June 2005 - will be released Monday by Gov. Frank Murkowski, who has said he will use no more than $400 million from the state savings account to cover the fiscal gap.

That leaves lawmakers $173.5 million to find in budget cuts or taxes next year. The gap will grow 40 percent to $806 million in 2006, the Revenue Department predicts.

It also said the average price of a barrel of oil from the North Slope will average $27.70 in fiscal year 2004, Corbus said. That price will drop just over $3 a barrel to $24.65 a barrel in 2005. In future years it will drop to $22 a barrel.

The drop in oil price will result in a $300 million reduction in oil revenue next year, with total oil income dropping from $2.02 to $1.72 billion in 2005.

Corbus said he expects the state to maintain an average production of 978,000 barrels of oil a day from fiscal year 2004 through fiscal year 2007. Oil production, which accounts for over 80 percent of Alaska's revenue, has gradually declined by about half since a peak in 1989 of 2 million barrels a day.

Chuck Logsdon, chief petroleum economist for the state, said the Organization of Petroleum Exporting Countries (OPEC) is predicting that Russia and other countries will glut the world oil market.

The state is hoping tax breaks for exploring new wells will attract new development.

"It is of interest to note that by the year 2012 about 19.9 percent of the oil production will come from new developments," Corbus said.

Oil exploration could be spurred by a controversial tax break for oil companies that was passed by the Legislature this year. The law gives a 20 percent tax credit to oil companies for drilling exploration wells at least three miles from existing wells.

The tax break could cost $50 to $100 million a year and critics argue that new exploration wells would have been drilled anyway.

Logsdon said there are four prospective wells that might qualify for the credit, but added the state won't know whether it has a firm commitment until as late as next April.

The state also is hoping to capture incremental revenue from satellite wells on the North Slope, National Petroleum Reserve-Alaska wells and production on the Beaufort Sea, Logsdon said.

• Timothy Inklebarger can be reached at timothyi@juneauempire.com



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