What's new in production

It’s hard to imagine, but the Trans-Alaska Pipeline System (TAPS) is pushing 40 now. TAPS began construction in March 1974 and was completed 38 years ago this month, in May 1977, following some of the most contentious dialog and crosstalk in modern energy history. The first barrel of oil flowed out the south end at Valdez, Alaska, on July 22, 1977.

The enormity of the reserves in Prudhoe Bay field had been known since the late 1960s, but the infeasibility of transporting the oil out of the North Slope kept a lid on production. There were some experimental shipments by icebreaker/tanker ships, but it took the Arab oil embargo to incentivize investors to put up the funding.

As an achievement in petroleum midstream transportation, considering topography and weather challenges, not to mention politics, TAPS is unmatched. At 800 mi, it is not the world’s longest crude oil pipeline. (It’s not even North America’s longest. That would be the Interprovincial, which runs 2,300 mi from Edmonton to Montreal.) What it went through just to be constructed is remarkable, and a source of legends. TAPS crosses three major mountain ranges and 34 major waterways, and employed tens of thousands of workers, many of whom endured brutal cold and harsh, dangerous conditions. 

Workin’ on that great Alaska pipeline / Many men were lost in the pipe / They went to fuelin’ cars / How smog might turn to stars someday …

—“Someday” by Neil Young

Nobody was actually lost “in” the pipe, but there were 32 official construction deaths. Despite the hardships, the pay was good, and outsiders poured into Alaska. The economic impact on Alaska has been enormous, not just from the “boomtown” effect of construction jobs and rising wages, but once the crude oil flowed, so did the money. Alaska went from one of the highest-taxed to one of the lowest-taxed states in the country. Pre-TAPS, the gross state product was $8 billion. Today, there is no personal income tax, and by the first decade of the 21st century, the gross state product was $39 billion.

Better than salmon. Beginning with a windfall of $900 million from the Prudhoe Bay lease sale, Alaska started receiving royalties from all oil production on state land. There is a property tax on oil production facilities and pipeline property (the only property tax in the state), and a corporate income tax on oil companies. Finally, there is tax on the amount of petroleum produced. Not only does oil provide 90% of state revenues, but, thanks to the Permanent Fund created in 1980, individual Alaskan citizens receive dividend checks. In 2014, every resident got $1,884. Not a fortune, but it didn’t hurt anyone’s feelings.

Everything of any value that the state has ever produced—from gold mines, forests, fisheries, beaver pelts and you-name-it—is  worth far less, combined, than the revenue provided by the oil and gas industry. It was put best by Professor Terrence M. Cole, Alaska historian: “One Prudhoe Bay is worth more in real dollars than everything that has been dug out, cut down, caught or killed in Alaska since the beginning of time.”

As all things must, Prudhoe Bay field declined. At its peak in 1988, Prudhoe yielded 738 MMbbl of oil. By 2013, it had dropped to 188 MMbbl of crude, or 534,000 boed including NGLs. Last year, the figure had fallen to 513,000 boed. This is raising more and more concern about keeping the pipe flowing, because at these throughput levels, there is greater tendency for water in the line to freeze and form plugs, and there is a point at which TAPS may no longer be usable. Heaters and increased pigging can help. So would a new oil field. 

Land or sea? At the IHS CERAWeek conference last month in Houston, Sen. Lisa Murkowski (Rep.-Alaska), Chairman of the U.S. Senate Energy and Natural Resources Committee, told attendees that “now is the prime time to make lasting improvements” in U.S. energy policy. She said her committee is starting work on a comprehensive energy bill, to be introduced to the Senate floor this summer.

One primary goal on the senator’s wish list—opening the ANWR coastal plain to oil and gas development. The Alaska National Wildlife Refuge is 19 million acres in the state’s northeastern corner, down the coast from Prudhoe. The part that interests the oil industry is the 1002 Area (the ten-oh-two). The EIA has estimated that the 1002 Area holds about 5.7 Bbbl of recoverable oil, a number that has been batted about for years. One problem with that figure is that EIA has been relying on old, 1980s-era 2D surveys to support its estimates, and the science has improved since then.

Accordingly, the state of Alaska has proposed an ANWR 1002 Area Exploration Plan to better define the area’s oil and gas potential. The U.S. Department of the Interior has, so far, rejected the proposal, and has continued to oppose anything that would move the industry in the direction of drilling in the refuge.

Instead, as part of its Draft Proposed Program (DPP) for the OCS oil and gas leasing program for 2017–2022, DOI has focused on offshore development of the Beaufort and Chukchi Seas. The fact that the administration has set its sights offshore, while the State of Alaska has put its weight behind onshore development, is interesting but not surprising. Offshore Arctic exploitation is an even messier environmental can of worms than ANWR, if that is possible. What is at stake is pretty simple—any oil revenues produced in the Chukchi or Beaufort leasing areas will be federal, and will bypass the increasingly stressed coffers of the state government. 

You can’t blame the Alaskan government for favoring onshore development. If they can’t find another source of income, the future will be very, very different.