Can Alaska Turn It Around?

After Years of Disappointment in the Oil and Gas Sector, There Are Signs of Encouragement

When you think of Alaska, one of the first things that probably comes to mind is a robust oil and gas industry. Alaska has been a world leader in oil production for decades. But a recent slew of disappointments, initially led by federal government action, then by falling oil prices, has taken its toll on the state.

If it weren’t for oil and gas resources, Alaska might never have become a state. Prior to statehood, the basis of Alaska’s economy was natural resources, but it wasn’t until the Swanson River oil discovery, the first in the state, by the Richfield Oil Company (which later became ARCO) in 1957, that a viable pathway for statehood emerged. In addition to political maneuvering between Republicans and Democrats (at the time Hawaii was considered a likely Republican state and Alaska a Democratic one) and over major civil rights legislation, Alaska’s newly found oil resources helped grow support for statehood. “Alaska statehood happened because of oil and gas development,” says Dave Harbour, former Commissioner at the Regulatory Commission of Alaska.

The Alaska Statehood Act, which narrowly passed Congress in 1958, led to statehood in 1959. It provided for 104 million acres to be given to the state. Most of the state’s federal acreage, including its vast offshore acreage, was also believed to be available for resource development.

With the discovery of oil at Prudhoe Bay and the subsequent construction of the Trans-Alaska Pipeline System (TAPS), Alaska became a globally significant oil province, playing a huge role in enabling the U.S. to respond to OPEC and threats of future oil embargoes. It also played an important role in maintaining U.S. energy security as U.S. energy supply struggled through the 1980s and 1990s. In 1988, Alaska North Slope oil production accounted for 25 percent of total U.S. production. Throughput in TAPS also peaked that year at around 2 million barrels of oil per day (BOPD), and is now roughly 600,000 BOPD, according to the Alaska Oil and Gas Association.

In the late 1980s and through the 1990s, a number of actions within the industry and the federal government began to impact the ability of the oil and gas industry to replace declining production in Prudhoe Bay. The Exxon Valdez oil spill created a huge public outcry regarding oil and gas development in Alaska. Environmental nongovernmental organizations (NGOs), whose position in the U.S. public policy debate was on the increase, began to use the Valdez spill as a rallying cry against oil and gas production in Alaska, particularly in the Arctic National Wildlife Refuge (ANWR). A small section of ANWR, known as the 1002 area, had been reserved for potential future oil and gas development.

Efforts to open ANWR, the National Petroleum Reserve in Alaska (NPRA) and other North Slope areas were met with strong opposition by certain members of Congress and anti-development groups. At the same time, the federal government began applying federal environmental statutes and executive actions like the National Ocean Policy in more restrictive ways. These actions reduced access to oil and gas resources; delayed permitting for drilling, infrastructure and related activities; increased the expense of oil and gas development; and made all activities more susceptible to litigation. “Over 60 years, the federal government has eroded access to Alaska’s oil and gas through the application of onerous statutes and regulations,” Harbour says.

Toward the end of the 1990s and into the early 2000s, Alaska began to recognize potential markets for its natural gas resources. Natural gas resources on the North Slope, which the U.S. Geological Survey (USGS) estimates could be as high as 80 trillion cubic feet (TCF), have no pipeline access and are therefore stranded. A number of pipeline proposals emerged in the 1990s and 2000s that would bring that gas to market in the lower 48, where U.S. markets for electricity were suffering from a supply shortage.

Then Gov. Frank Murkowski negotiated a deal with Alaska oil and gas producers for a natural gas pipeline that would create a commercially viable option, but it wasn’t popular with many Alaskans. Sarah Palin, then mayor of the city of Wasilla, unseated Murkowski in the Republican primary largely due to her charge that Murkowski negotiated a sweetheart deal for the oil companies. Since his defeat, no Alaska gas pipeline proposal has received serious consideration and the market no longer exists in the lower 48.

The 2005 Energy Policy Act provided a royalty holiday for initial production of oil and gas in Arctic Alaska as a way to incentivize frontier oil and gas exploration. The Alaska Outer Continental Shelf (OCS) offers extensive resources estimated by the USGS at 27 million barrels of oil equivalent (BOE) and 132 TCF of gas. Shell, ConocoPhillips and Eni were among companies that acquired leases in the Alaska OCS (Beaufort and Chukchi seas). Opposition and litigation delayed an Alaska drilling program for years. Shell alone spent $6 billion in pursuit of a drilling program that was fought by NGOs and delayed by lawsuits. Shell ultimately drilled a dry hole in the Chukchi Sea in 2015 and has exited Arctic exploration; however, Eni is still pursuing an OCS program. With lower oil prices and a very difficult regulatory and legal environment, enthusiasm for Arctic OCS oil and gas development is quite low at this time.

The political and regulatory environment during the Obama administration put additional pressure on oil and gas development in Alaska. The Department of the Interior under Secretary Ken Salazar was quite contentious with Alaska as permits, both onshore and offshore, faced delays, and development in new areas was not really on the table. In mid-2014, the threat to oil and gas in Alaska from the federal government was replaced by oil prices that had plummeted in early 2014 and have struggled to recover ever since.

“Clearly for Alaska oil and gas, one of the major challenges is the lower price scenario and the cyclical nature of the business,” says Kara Moriarty, President and CEO of the Alaska Oil and Gas Association. “While the Trump administration has been good news, for Alaska (already in a high-cost environment), low oil prices make it that much harder to compete against a global portfolio.”

There are signs of encouragement, though, Moriarty notes: “This administration knows the importance of oil and gas and the role Alaska can play in energy dominance.” The management plan for NPRA and an update of the assessment of ANWR oil and gas resources ordered by Secretary of the Interior Ryan Zinke are “very encouraging,” she says. “Alaska also has a strong congressional delegation that knows the importance of oil and gas and is focused on making the permitting system more reasonable and rational.”

Faced with budget deficits, largely due to declining oil and gas revenues, the state has been under pressure to increase revenues by taxing the oil and gas industry. The state just experienced the seventh change to its oil and gas tax policy in 12 years. It continues to look at new ways to raise revenue, and Gov. Bill Walker and members of the Legislature find themselves increasingly at odds with the oil and gas industry, not only over tax policy, but also over the state’s changing policy for building a gas pipeline and supporting liquefied natural gas exports.

Despite the uncertainty and low commodity prices, Alaska has vast oil and gas resources that many oil and gas producers are willing to pursue.

There has been a great deal of activity in recent years in the Cook Inlet and Kenai region of Alaska. Hilcorp has been a leader in developing offshore resources in the Cook Inlet, which has been instrumental in securing long-term gas supplies for Anchorage. Other smaller companies have also pursued projects in the region but have been struggling due to low oil prices and the fact that the Alaska Legislature has not fully funded tax credits that were initially made available for small producers in Alaska, a result of the budget shortfall that is now hurting smaller oil and gas producers.

There are also exciting things in the works on the North Slope: ConocoPhillips announced the Willow discovery at NPRA, which could produce 100,000 BOPD over the next six years. Hilcorp is pursuing necessary approvals to drill and produce the Liberty Project, which the company describes as the largest undeveloped, light oil reservoir on the North Slope. It has an estimated 80 to 150 million barrels of recoverable oil with peak production of between 60,000 and 70,000 BOPD projected within two years of initial production and a life expectancy of 15 to 20 years. It is an artificial island located 15 miles east of Prudhoe Bay.

Armstrong Energy and Repsol announced the discovery of a massive field on the North Slope with an estimated 1.2 billion BOE of recoverable oil, the largest onshore conventional hydrocarbon discovery in the U.S. in the last 30 years, according to Repsol. The companies have submitted permits to develop the Pikka area of the field, anticipating first production in 2021 and a potential rate of 120,000 BOPD.

Caelus Energy is pursuing a discovery at Smith Bay, with an estimated 6 to 10 billion barrels of oil in place. It believes the development has the potential to provide 200,000 BOPD of light oil to TAPS. Caelus is also pursuing onshore development of the Nuna field, just east of the Colville River. It estimates a resource potential of 75 to 150 million BOE and peak oil production of 15,000 to 18,000 BOPD.

Earlier this year, the U.S. Bureau of Ocean Energy Management approved a plan for Eni to drill a well in the Beaufort Sea from an artificial island. It still has permits to obtain but plans to use extended wells more than 6 miles long.

88 Energy and Burgundy Xploration, which operate under Accumulate Energy Alaska, are pursuing the Icewine prospect in a potential shale play on the south side of the North Slope on state lands near TAPS. A resources appraisal firm estimated that the prospect could contain about 980 million barrels of recoverable oil and natural gas condensate liquids — about 200 million barrels of which is oil, according to 88 Energy.

Collectively these projects and prospects could do a lot to extend the life of TAPS. “We just passed the 40-year anniversary of Alyeska and Prudhoe Bay, and if we play it right they could be around for another 40 years,” Moriarty says.

It is unclear whether or when Alaska will return to its former glory as a global energy producer, but with its huge untapped resources, it will certainly play a big role for years to come.

 

About the author: Jack Belcher is Executive Vice President of HBW Resources and consults energy and transportation clients on government relations, regulatory affairs, situational risk management, coalition building and stakeholder relations. He is also Managing Director of the National Ocean Policy Coalition. Previously, he was Staff Director for the U.S. House of Representatives Subcommittee on Energy and Mineral Resources.

 

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