The future of Alaska oil

Anyone trying to divine the future of the Alaska oil industry based solely on the events of this young decade could be forgiven for taking a pessimistic outlook. ConocoPhillips, the most active company in the state, is not drilling exploration wells for the first time since 1965 (decades before the mergers that created the company). BP, the second largest oil producer in Alaska and the operator of Prudhoe Bay, plans to spend 15 percent less this year on Alaska capital projects than it did in 2009. Those two companies together own 62 percent of the oil that moves down the trans-Alaska oil pipeline, and as the operators of most of the North Slope oil fields and major infrastructure, they also produce or handle much of the remaining 38 percent that other companies own and sell.

These short-term travails come amid larger obstacles for the industry. Lawsuits postpone offshore drilling. Congress stopped debating opening the Arctic National Wildlife Refuge when gas prices fell. Permitting challenges delay production from federal lands. Behind all of that is a steady hum, the sound of North Slope production falling annually and the threat of a pipeline that becomes troublesome at low throughput. So as Alaska enters its fifth decade as an oil-producing basin, what is the future of the oil industry?

For ConocoPhillips, the future is west of the Colville River, the boundary between state and federal lands on the North Slope. The company is gearing up to drill in the Chukchi Sea and deciding whether and how to develop oil discoveries in the National Petroleum Reserve-Alaska. Neither is a sure bet. When ConocoPhillips spent half a billion dollars on Chukchi Sea leases in early 2008, it fit into a larger offshore strategy, adding to the dozens of Beaufort Sea leases the company picked up over the previous decade. In early 2009, though, ConocoPhillips gave back most of its Beaufort Sea leases, saying it didn't see "hub potential" in the area, or a way to improve the economics of an expensive region by developing several smaller oil prospects together. The Chukchi Sea is even more expensive and more remote than the Beaufort, meaning any discovery needs to either be large enough to support standalone production, or it needs hub potential.

Hub potential got ConocoPhillips to the edge of the 23-million acre federal reserve in Northwest Alaska. After bringing the Alpine field online in 2000, the company developed three smaller "satellite" fields, none economic on their own. That westward march is stalled at the Colville River, which ConocoPhillips has been trying to cross since 2005. Negotiations with Native landowners delayed development for years. Those have been resolved, but the feds recently denied ConocoPhillips a crucial permit for environmental reasons. Now, at the very least, the company will begin a lengthy appeals process.

For BP, the future is heavy oil. Over the past decade, the company began promoting a 50-year plan for the state based in part on developing an estimated 20 billion barrels of heavy oil that sits in existing fields. Unlocking heavy oil is expensive, though. Underground pressure naturally pushes normal oil to the surface. For heavier oils, companies can inject water or carbon dioxide underground to rebuild that original pressure. For the heaviest oils, though, that technology isn't enough: Engineers compare it to sucking molasses through a straw. For BP to find a way to produce that molasses, it needs either high enough oil prices to make the deposits economic, or it needs to spend money to develop technologies that bring down the cost of development -- or, more likely, it needs both.

Focusing on the inactivity this winter, though, doesn't tell the whole story about the changes underway in the oil industry, and what they mean for the future of the state.

You also have to look at the activity.