Alaskanomics

North Slope oil production could shut down as early as 2035 according to new U.S. government report

The U.S. Energy Information Administration (EIA), in its Annual Energy Outlook 2012, projects that Alaska North Slope oil production could shut down as early as 2035 under their Low Oil Price case.

The EIA report assumed that for North Slope fields to be shut down, Trans-Alaska Pipeline (TAPS) throughput would 1) be at or below 350,000 barrels per day and 2) total North Slope oil production revenues would be at or below $5 billion per year. At that time, EIA assumes TAPS would be decommissioned and dismantled and North Slope exploration and production would stop. The EIA estimate is based on:

• Current maintenance capital expenditures of $1.6 billion annually
• Estimated operating expenses of $1.28 to $2.56 billion annually
• Alaska royalty cost of $1 billion annually

The agency estimated that in the Reference and High Oil Price cases, oil prices are high enough to stimulate the new development of new fields for new production, and to provide sufficient revenues to maintain existing North Slope production. The two most important variables affecting the long-term viability of North Slope oil production and continued operation of TAPS, according to the agency report, are the wellhead price North Slope producers receive and the cost of developing new resources.

The report does not evaluate the impact of Alaska's oil tax structure, which adds significantly more than the $1 billion in estimated royalties to the cost of production.

North Slope production decline highlighted in new U.S. Energy Information report; proposed remedies may be "both too little and too late"

In the U.S. Energy Information Administration's (EIA) Annual Energy Outlook 2012, the agency identifies the decline of oil shipped through the Trans-Alaska Pipeline (TAPS) as one of the more significant current and emerging issues impacting energy markets.

They cite Alyeska Pipeline's June 2011 Low Flow Impact Study but note that "the more fundamental issue is declining oil production" and list a number of ways the decline could be alleviated:

• discovery and production of large new sources of oil on the North Slope, including offshore oil in the Chukchi and Beaufort Seas and onshore shale and heavy oil
• production of the 10.4 billion barrels of technically recoverable oil resources in the Arctic National Wildlife Refuge (ANWR) although as the report notes oil and gas leasing in ANWR is currently prohibited
• conversion of North Slope natural gas to methanol or Fischer-Tropsch petroleum products that could be transported via TAPS
• or, in the absence of new supply, development of alternative crude oil transportation facilities for smaller volumes

Each of these solutions has different costs, risks and lead times, but the EIA notes "...there is also a significant risk that production from existing North Slope fields might decline much faster than anticipated and/or that the cost of operating those fields might escalate much faster than expected."

 

 

 

Alaska DNR releases draft Yukon Tanana Area Plan covering 9 million acres; recommends additions to State Forest and other changes

Alaska's Department of Natural Resources (DNR) has released a draft Yukon Tanana Area Plan covering 9 million acres of land. The plan will direct how DNR will manage state lands within the planning area. The last land use plan covering this area was developed in 1985 and partially revised in 1991.

Since the original plan was developed, the amount of state land in the area has declined significantly - particularly in populated areas along the Parks, Elliot and Dalton Highways - as a result of state land being conveyed to local governments, native corporations, the Mental Health Trust, the University of Alaska, and to private parties through land sales and settlements.

Highlights of the plan include:

• Recommended additions to the 1.8 million acre Tanana Valley State Forest to be managed as a "working forest" for timber harvest, recreation, and fish & wildlife habitat.
• Nearly 620,000 acres designated for "settlement" - seasonal and year-round residences and a limited amount of land for private commercial and industrial use. Settlement land disposals would be phased over the 20-year life of the plan.
• Oil and gas resources are likely, and coal resource potential is high, in the plan area. All of the lands covered by the plan are available for oil, gas and mineral development (unless specifically closed by legislation) following separate leasing and permitting processes set out in state law.
• The plan area includes two million acres of land that the state has selected, but which has not yet been conveyed to the state by the federal government. Fort Wainwright and Clear Air Force Station are included in these lands; those military reservations would only become state land if the military vacated the land.
• Recommended designation of a portion of the Nenana River as a State Recreation River and of portions of the Toklat Springs area as a Critical Habitat Area.

Public meetings on the plan will be held in August; dates have yet to be scheduled.

Texas and North Dakota have increased oil production dramatically; Alaska could do the same

Because Alaska’s economy is so dependent on petroleum, we need to turn our oil production decline curve around now. The energy sector provides 90% of state government’s unrestricted general fund budget, it is the principal source of the state’s roughly $55 billion in the Permanent Fund and other savings accounts, it pays the highest average wages in the private sector by far, and makes billions of dollars in direct investment to countless other industries in the state that provide related support services.

In 1988, when Alaska’s oil production peaked, we were briefly the number one oil producer in the country.  Alaska’s oil production has been declining for more than 20 years and I hear a lot of pessimism about our ability to flatten or reverse the decline curve. Some politicians in Juneau spent considerable and valuable time in this year’s Legislative session debating how low production can go in the pipeline, rather than focusing on ways to increase production.  However, the two oil-producing states that are now ahead of Alaska in oil production have both increased production, and I am confident Alaska can do it too.

The chart above shows oil production for Texas, North Dakota and Alaska since 1981. Alaska’s production did flatten for a little while starting in 1999 (remember the phrase “No Decline after `99?”) but started downward again a few years later. Texas’ production also flattened during that time period, but look what Texas has done over the last two years. They’ve turned around the decline curve and actually added nearly 500,000 barrels per day of new production. Their production started declining back in 1974 and continued to decline for thirty-five years, but as the graph shows they are now widening the gap between their production and Alaska’s.

While North Dakota’s production has been steady – and much lower than Alaska’s – over the past three decades, in the last five years North Dakota has added just about 500,000 barrels per day of production. As of March 2012 North Dakota is ahead of us, and we’ll be slipping past California into fourth place pretty soon if we do not take action now.

We have many more resources in Alaska – much more than North Dakota – so there is no reason Alaska should not be able to turn our production around as quickly as both Texas and North Dakota. All we need is the political will to make the changes necessary to attract industry investment in our state’s petroleum industry as Texas and North Dakota have done. 

We need a stable and fair tax environment to reduce uncertainty for investors.  The explorers also need access to land that is typically owned by the government, who represents us, the citizens of Alaska.  If we want production to increase to strengthen the economy then we need representatives who will honor our views. 

Alaska needs a healthy dose of optimism.  The energy resources are here in abundance.  Other states have shown that turning around a decline curve is possible.  Let’s believe it can be done, support the energy industry that is trying to make it happen and elect leaders that share our vision.

Alaska North Slope crude price drops 15% in May; production continues to decline

Oil prices continued to drop in the month of May, with Alaska North Slope crude falling from $121.16 on May 1 to $102.78 on May 31, a 15% decline. West Texas Intermediate fell from $106.16 to $86.53 over the same time period. Production in May ranged from a high of about 592,000 barrels per day on May 3 to a low of 531,000 barrels per day on May 25, ending the month at about 557,000 barrels per day. Alaska's FY2013 budget is based on $110 per barrel oil price and an average of 563,000 barrels per day production.