A Change Is Gonna Come? Improved ANS Crude Prospects in a Lower Price Environment

In 2015 Alaskan crude has enjoyed something of a change in fortunes compared to the past few years – when shale production seemed to threaten its future. Production was up by over 50 Mb/d in the first 4 months of 2015 (according to the Energy Information Administration – EIA). The market share of Alaskan crude in West Coast refineries also crept up by 1% this year compared to 2014 at a time when crude throughput at those refineries increased. Today we discuss the changes and whether they are likely to continue.

 We’ve posted a number of blogs on the challenging prospects for Alaskan crude oil in the face of the shale revolution. Back in January 2013 we described how the State’s crude output has declined steadily from a peak of 2 MMb/d in 1987 to 512 Mb/d on average in 2012 (see After The Oil Rush). By last year (2014) production was down to 497 Mb/d. The vast majority of that crude is a type known as Alaskan North Slope (ANS) from the Prudhoe Bay field on the northern coast of Alaska beside the Beaufort Sea. ANS production is shipped 800 miles south on the Trans Alaska Pipeline system (TAPS) from Prudhoe to the ice free Port of Valdez in Southern Alaska. From Valdez the crude is mostly shipped to West Coast refineries using U.S. flagged tankers from the Jones Act fleet (see Rock The Boat).

Although production has been declining there is no lack of Alaskan oil in the ground. A 2011 EIA estimate of Alaska reserves indicated up to 3.5 Billion Bbl of proven conventional oil reserves in producing fields onshore and 36 Billion Bbl of unproven reserves in federal lands offshore and onshore. As we explained in June 2013 (see Anchored Down In Anchorage) the State has implemented a new tax regime to encourage new development. The State also plans to invest in liquefied natural gas (LNG) export infrastructure to encourage natural gas production (see Might As Well Jump). But the main challenge for Alaskan producers is that the risks and costs of developing and producing crude in sub-zero northern Alaska are higher than those for unconventional drillers in the Lower 48 – where shale oil has begun to threaten ANS market share at West Coast refineries. ANS (a medium sour crude with an API gravity of 31.5 and 0.96 % sulfur) continues to be the West Coast’s benchmark crude but surging light sweet crude supplies from shale – particularly the Bakken in North Dakota have begun to compete with ANS over the past three years – pushing prices down. Narrowing price differentials between ANS and the U.S. Midwest benchmark West Texas Intermediate (WTI) led to rare exports of ANS last fall as producers looked to Asian buyers for better prices (see We’ll Find Out In The Long Run). Last year’s crude price crash has added insult to injury for Alaska producers and the State Government that relies heavily on oil royalties for revenue. This time we look at how lower crude prices appear to have actually improved ANS prospects at West Coast refineries.

state of the energy markets

State of the Energy Markets

What is going on in today’s markets for natural gas, NGLs and crude oil, why it is happening, and what is likely to happen next?

July 23rd, 2015 New York City

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