Dalton Highway and Alaska Pipeline. Photo: Arthur T. LaBar
Alaska, the United States’ last frontier, purchased from the Russian Empire in 1867, home to the alpine forget-me-not, and birthplace of the Yukon Quest, the toughest dog sled race in the world. Moreover, the most sparsely state in the U.S. also has a century-long history of petroleum exploration and development. Over the past few decades, petroleum from Alaska supplied the United States with much needed energy, boosted the region’s economy, but also led to one of the biggest environmental catastrophes in U.S. history.
While the Arctic has often been framed as the world’s last energy frontier, the State of Alaska has experienced heated debates over its energy future. As the region’s proven oil resources become more and more depleted, politicians, producers, environmentalists, and local communities currently hotly debate the what, where, how, and when of Alaska’s hydrocarbon future. So, what is next for Alaska? What is the future of a U.S. oil state and how did it all start?
Alaska and its Petroleum History
Although Alaska’s petroleum history dates back to 1902 with a commercial oil discovery near Cordova in the south of the state, its true success story began after earning statehood in 1959. The discovery of the Prudhoe Bay Oil Field on Alaska’s North Slope in 1968 was the turning point for the United States’ last frontier to eventually become an oil state. Nine years later, one of the world’s largest pipeline systems began transporting oil from northern Alaska to a marine terminal at the northernmost ice-free port in North America at Valdez. The Trans Alaska Pipeline System (TAPS) was born. The system has transported over 17 billion barrels of oil in its 40-year history and fundamentally changed the State of Alaska with its tremendous economic, social, and physical impact. TAPS injected millions of dollars in royalty and tax money into Alaska, yet the pipeline system also delivered oil for the Exxon Valdez, an oil tanker that struck a reef in the Prince William Sound in 1989, leading to the then largest marine oil spill in U.S. history and pouring almost 11 billion gallons of North Slope crude into the Gulf of Alaska.
A Flourishing Energy Past, an Uncertain Energy Future
Today, the oil and natural gas industry still remains a key part of Alaska’s economy, with the North Slope containing half a dozen of the 100 largest oil fields in the United States. Despite steadily declining oil production, Alaska still provides for about 6-7% of US internal oil demand and was the fourth largest producer of crude oil among the 50 states in 2015. Until 2014, the state was also re-experiencing an economic boom as oil prices reached as high as $100/barrel.
However, the region’s oil and gas future is anything from certain. There is an estimated 50 billion barrels of undiscovered technically recoverable resources (roughly 26 billion barrels of oil and 132 trillion cubic feet of gas) in Alaska’s outer continental shelf region, with the Arctic Ocean’s Beaufort and Chukchi Seas alone holding an estimated 23 billion barrels of oil and 100 trillion cubic feet of gas. Yet, despite these estimates, given the current prolonged slump in the oil price, the outlook for production from the North Slope does not look too rosy. In 2015, only 0.1% of U.S. federal offshore crude production came from the Arctic. It is currently expected that the combined oil and natural gas liquids production will experience a 4.2% decline over the next 10 years, from about 509,000 barrels/day in 2017 to 339,000 barrels/day in 2026. A slowdown that would also cast doubt on TAPS’ viability.
Alaska in the Obama Years
Additionally, environmental concerns severely impact discussions on the future of Alaska’s petroleum industry. Aiming to leave a pro-environment legacy, President Barack Obama banned oil and gas drilling in federal waters of the Arctic Ocean at the end of his second term in December 2016. The ban essentially affects 115 million acres of federal waters off Alaska in the Chukchi Sea and most of the Beaufort Sea. The decision is, however, currently to be revised by the Trump Administration, as part of the America First Energy Plan. In 2013, President Obama further rejected an effort to start exploration drilling on a 1.5 million acres coastal plain in Alaska’s Arctic National Wildlife Refuge (ANWR) known as the ‘1002 area’, an area with an estimated mean value of 7.7 billion barrels of technically recoverable oil. Yet, the current government is more open to lift the related restrictions and allow for seismic testing in ANWR’s ‘1002 area’. The proposal has been heavily criticized by environmental activists but also by sportsmen and tourism groups due to the potential negative impact on the region’s habitat and its wildlife population.
However, President Obama was not entirely against new oil development in Alaska, especially if considering the efforts of Royal Dutch Shell, whose U.S. Arctic endeavors spanned his presidency. Only after years of stop-and-start, Shell eventually abandoned drilling efforts in 2015, officially due to marginal discoveries. Yet, lasting public opposition surprised the Dutch company and essentially contributed to the decision. Overall, Shell spent $7 billion on its ill-fated offshore Alaska project.
A new era with Trump?
In the face of the years-long slump in oil prices, combined with declining North Slope production and Shell’s false starts, Alaska’s economy is struggling. Not only is the state two years into a recession. Wages also fell in 2016 for the first time since the 1990s and the Permanent Fund dividend has been cut in half as a direct result of low oil prices.
Following the election results of 2016, many Alaskans saw the incoming Trump Administration as a potential boon to the Alaskan oil industry, and with it the rest of the state’s economy. Since taking office, the new administration has indeed taken steps to boost the Alaskan oil industry, including laying the groundwork for ANWR seismic testing, offering Beaufort Sea exploration licenses, signaling it may open up even more federal land and waters to exploration, and laying the groundwork for expansion of an Alaska LNG project.
Pro-oil, pro-growth policies on the federal level may indeed help out the Alaskan economy but the political relationship between the Trump Administration and the State of Alaska is anything but certain. In July 2017, one of Alaska’s two Republican Senators broke party lines and voted against an appeal of Obama-era healthcare laws—an appeal that was supported by the Trump Administration. In response to the vote, President Trump issued a public threat, critiquing Senator Lisa Murkowski and sending word through Department of Interior officials that the vote hurt Alaska’s standing within the Administration. Despite the kerfuffle, it is worth noting that only Congress can legally give the final approval for oil development in ANWR—not the President.
New Opportunities to Develop Exports?
Despite low oil prices, logistical challenges, and an unfavorable climate, oil exploration in the U.S. Arctic is not without its attractions. For example, major Italian oil firm Eni plans exploratory drilling in Alaska’s federal waters in the Beaufort Sea after receiving approval in July 2017. Logistically-speaking, TAPS is currently only operating at 25% capacity due to declining North Slope production, and pipeline managers would be thrilled to transport crude from new offshore and ANWR fields—and can be expected to offer favorable terms.
Finally, as the U.S. continues to grow as an oil exporter, especially to East Asia, Alaska is posed to potentially benefit. In terms of infrastructure, Alaska’s Valdez terminal has always been a seaborne export terminal—albeit those “exports” have historically been to the Lower 48 rather than Asia. In the Gulf of Mexico, however, infrastructure is geared toward seaborne imports, rather than exports, and dedicated export facilities are not slated to come online for several years. Geographically, the voyage of a crude oil tanker is far shorter from Alaska to South Korea than from Houston to South Korea. The economics of exporting oil en masse to East Asia are not quite there yet, but given the narrow margins involved, things may change in the coming years, with Asian refiners offering producers a dynamic market for Alaskan oil.
Despite recent energy policy developments concerning the U.S. Arctic, politicians do not set the global oil price. As long as the price of oil remains in a prolonged slump, Alaska will struggle regardless of how much it pumps. Some experts say that even in the best-case scenario of increased Alaskan exploration and production over the next decade, it can only slow or halt the state’s economic decline but eventually cannot reverse it. Hence, oil and gas will shape Alaska’s future—in one way or another.