Polar Notes

Jan 2018

Prising open Alaska for oil

Oil has been produced at Prudhoe Bay on the North Slope of Alaska since 1977. Production peaked in the 1980s when Alaska produced around 25 per cent of US oil. Today though, as Prudhoe Bay has matured, that has fallen to seven per cent. Debates rage on about whether Arctic oil is a sustainable prospect for Alaska, either economically or environmentally.  

Back in September 2015, in the midst of the tumbling oil prices and resistance from environmentalists, Shell ended its drilling operations in the Alaskan Arctic. The Anglo-Dutch company had spent over £4.6bn exploring for oil in the Chukchi Sea with little success. Following the drilling of a dry well, Shell cited the high costs of operating in the Arctic offshore, the unpredictable federal regulatory environment in Alaska, and the low oil price outlook as the reasons for its withdrawal from the Chukchi Sea.

Two months later, the Norwegian state-owned oil major Statoil also abandoned its operations in the Chukchi Sea because they were uncompetitive. ConocoPhillips followed in April 2016, ditching its licences for the Chukchi Sea. As commercial interest in new projects fell away, shortly before leaving office, former US President Barack Obama banned drilling in Alaska offshore, and expanded the area protected from drilling in the Arctic National Wildlife Refuge (see PolarNotes #12)  

Over the last 12 months, Obama’s successor, President Donald Trump, has started to unpick these restrictions in an effort to prise open new parts of Alaska for oil producers. Trump was always likely to depart from Obama’s approach. However, early attention was on whether Trump would lift sanctions targeting Russian oil and gas projects. That never came to pass. Trump instead turned his attention to Alaska. In April 2017, he overturned Obama’s ban on new offshore operations in Alaska. That was followed recently by a new five-year licensing plan that encourages companies to drill in Alaska offshore, as part of broader effort to increase oil and gas production in nearly all US coastal waters.  

Meanwhile, Republicans in Congress, including Alaskan Senator Lisa Murkowski, successfully attached a proposal to the Tax Cuts and Jobs Act (passed in December 2017) that included a provision to allow drilling in part of the near-pristine Arctic National Wildlife Refuge known as the 1002 area. That ended a ban on drilling in the Arctic Refuge, which had been in place since 1980. This is the homeland of the Gwich’in people, as well as caribou, wolves and polar bears. But is also expected to contain an estimated 7.7 billion barrels of technically recoverable oil. Alaskan leaders have been seeking to address the decline of oil production in Alaska (and the associated risk of the Trans Alaska Pipeline System running dry in the near future) ever since.

Despite the dramatic turnaround in federal policy towards drilling in Alaska, questions remain about whether any significant increase in oil production will follow in the short term. Alaskan lawmakers have asked for efforts to be focussed on the Chukchi (where there is an estimated 15.4 billion barrels of oil) and Beaufort
(8.9 billion barrels) seas in the Arctic, and the Cook Inlet in southern Alaska, rather than allow drilling along Alaska’s entire coastline. However, as Shell and others have concluded, most drilling in Alaskan waters is unlikely to be commercially viable for the foreseeable future. The industry also believes that the reputational risk for re-entering the large offshore basins on Alaskan’s North Slope is a significant hurdle as well. During the most recent oil and gas lease sale in Arctic Alaska last December, bids were received for less than 1% of the 10.3 million acres offered.  

At the same time, the shale revolution across America means that the Arctic Refuge is no longer prized by industry. The area being opened to drilling is remote and lacks infrastructure and drilling permits will certainly be hotly-contested in court by the NGO community and their allies. With oil prices still a long way off $100 per barrel, the commercial sector remains hesitant. However, even a small increase in production

would generate significant returns for Alaska, with Senator Lisa Murkowski arguing that around $2 billion could be generated for the state through royalties over the next decade.  

Time will tell whether the Trump administration has overestimated the level of interest from oil and gas companies in drilling new Arctic territory. It should be noted though that there is still a high level of interest and activity in Alaska’s North Slope onshore and coastal areas, spurred on by the announcement in recent months of significant discoveries, which are close to existing infrastructure. However, high costs combined with still relatively low oil prices make more controversial remote and offshore areas in the Alaskan Arctic a challenging prospect. New projects require significant investment in infrastructure at a time when onshore shale and non-Arctic offshore production is developing at a fast pace. Any development will be challenged every step of the way by environmentalists. It will take years to realise any returns at which time the world may well have taken a significant step away from oil as part of the Paris Agreement.  

Prising open Alaska may be a vote winner but the reality of an Alaskan oil renaissance beyond ongoing oil and gas activities remains in doubt.  

Arctic oil and gas in Alaska

NPRA: National Petroleum Reserve in Alaska

ANWR: Arctic National Wildlife Refuge

TAPS: Trans-Alaska Pipeline System

Alpine: oil field by ConocoPhillips

Prudhoe Bay: oil field operated by BP

Pt. Thomson: gas field being developed by ExxonMobil and BP