In the Year 2025 - The Challenges Facing Alaska Crude Oil Producers

Forty years ago, Alaska was seen as the next big thing for U.S. crude oil production––and it was. With the completion of the Trans Alaska Pipeline System in 1977, Alaska North Slope production took off, and by early 1988 it was topping 2 MMb/d and accounting for nearly one-quarter of total U.S. output. But that was the peak; since then, ANS production has fallen steadily, and in August 2016 it averaged only 443 Mb/d, or 5% of the national total. While there is clearly a lot of oil (and natural gas) still in the ground in the North Slope region, developing those resources would be very costly. Today we begin a two-part series on energy production in the 49th state with a look at the oil side of things.

If RBN had been blogging about the energy industry in the mid-1970s, the development of the vast crude oil reserves on Alaska’s North Slope would have been Topic #1. After the shock of the 1973-74 OPEC oil embargo, U.S. consumers welcomed the 1977 completion of the 800-mile Trans Alaska Pipeline System (TAPS) and the increasing flow of ANS oil to West Coast refineries with open arms. Alaskan oil didn’t give the U.S. “energy independence”––a rallying cry in the Ford, Carter and Reagan years––but it sure helped. While our blogging focus the past few years has understandably been on the Shale Revolution and its effects on oil, natural gas and natural gas liquids (NGL) markets, we’ve checked in on Alaska from time to time. Way back in 2013, after presenting at the Alaska Oil and Gas Infrastructure and Development Summit in Anchorage, AK, we discussed (in Anchored Down in Anchorage) the ANS production declines that had already occurred, as well as the competition from shale and tight-oil plays in the Lower 48 that were attracting an increasing share of investment dollars. The physical characteristics of the North Slope’s medium sour crude, with a 31.5 API gravity and about 1% sulfur, were (and are) a plus––West Coast refineries were configured to use it, and ANS crude is marketable in Asia too, at the right price. But without a new round of investment in new production, North Slope production was (and is) destined to continue falling, a point driven home in A Change Is Gonna Come in mid-2015. There, we also talked about the fact that, as volumes transported on the 2.1-MMb/d TAPS ratchets down from 550 Mb/d to 350 Mb/d, more and more mitigation would be needed to keep the oil flowing through the pipe (due to freezing, wax buildup and other problems), and that if and when volumes fell below 350 Mb/d or 300 Mb/d all bets were off on whether the pipeline could continue to operate without a major re-do.

The Energy Information Administration (EIA) sees those declines on the horizon. In its Annual Energy Outlook 2016, released in August, EIA’s reference-case projects that Alaska production (green line in Figure 1) slipping by an average of 4.7%/year to 410 Mb/d in 2020, 320 Mb/d in 2025 and 240 Mb/d in 2030, assuming oil prices––all in 2015 dollars––of $74/bbl in 2020, $88/bbl in 2025 and $99/bbl in 2030. (The projected declines continue post-2030, to 190 Mb/d in 2035 and a paltry 150 Mb/d in 2040––assuming TAPS is reconfigured to allow operation at such low-volume flows.) In a low oil price scenario, under which the price of light sweet crude stays below $50/bbl (again in 2015 dollars) through 2030, ANS output would fall to zero by (the year) 2025.

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