The future of Alaska oil
| Feb 21, 2010Anyone 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.
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To the current piece, however, we should add one additional note of concern about relying on the independents to fuel Alaska's future. In a report on "Arctic Oil and Natural Gas Potential" last October (http://bit.ly/4bXhOK), the US Department of Energy's Energy Information Agency concluded "[t]he high cost of doing business in the Arctic suggests that only the world’s largest oil companies, most likely as partners in joint venture projects, have the financial, technical, and managerial strength to accomplish the costly, long-lead-time projects dictated by Arctic conditions." The report provides detailed backup for that conclusion and is well worth a read in its own right.
In short, the future of oil in Alaska is the same as its past -- high cost, high risk projects funded by the oil majors. We ignore that at our peril.