Alaska is considered by many to be an oil region in decline, with natural depletion and oil prices combining to pressure the growth of the oil industry in one of America’s longest-producing regions.
This decline, however, is reversible.
In fact, crude oil production in Alaska could double from less than 500,000 bpd in 2019 to over 900,000 bpd by 2041--as long as the price of oil is right, the Energy Information Administration said in its 2020 Annual Energy Outlook.
Alaskan oil is far from dead, though this misconception is rife.
Alaska’s Banner Oil Year
The December lease sale in Alaska by the Bureau of Land Management was hailed as the most successful in as many as 13 years. The sale attracted bids worth a total $11 million and covering more than a quarter of the acreage on offer. That compared with just $1.5 million in bids under the December 2018 lease sale, with just 6 percent of the acreage offered attracting bids.
The vast oil reserves of Alaska are not a secret. But until recently, many of these resources were simply too expensive to exploit. Now, new tech is making these reserves recoverable—and Alaska’s future brighter.
The U.S. Geological Survey earlier this month released an update of its resource estimate for the North Slope—Alaska’s oil heartland—estimating that the technically recoverable resources in the Central North Slope alone stood at 3.6 billion barrels of oil and 8.9 trillion cu ft of natural gas. These resources, the USGS said, did not include discoveries made between 2013 and 2017.
The fact that discoveries are still being made in Alaska may come as a surprise if you have only been following the shale industry, which has indeed hogged the headline space in recent years. But oil companies are indeed discovering new oil and gas in Alaska. Between 2017 and 2019 alone, some 1.5 billion barrels of new oil was discovered in the state.
One of the largest among these new discoveries was Willow. ConocoPhillips struck oil in the northeastern part of the Alaska National Petroleum Reserve in 2017. The field has resources of between 400 and 750 million barrels of oil equivalent. The federal government approved Conoco’s development plan for the Willow project last year, with average daily production at peak levels seen at 130,000 bpd, with the cumulative output over the project’s lifetime estimated at 590 million barrels. Related: Jim Cramer: ‘’Fossil Fuels Are Done’’
Another company, an Australian energy junior named XCD Energy, earlier this month said it had made an estimate of 1.6 billion barrels in resources at the Peregrine project, in the North Slope. That was up from an earlier resource estimate of 255 million barrels.
A Renewed Frontier
Oil companies operating in Alaska could spend up to $24 billion on new production in the state over the next ten years, S&P Global Platts reported early in January. Much of this investment, the report noted, would go towards maintaining current production levels of around half a million barrels daily. New fields are coming on stream to replace depleted ones. Yet, under the right price environment, production could grow from the current level as well—and substantially.
There are, however, problems. The most obvious one is, of course, oil prices. S&P Global Platts writes that production costs have fallen in Alaska as elsewhere, with some as low as $18 per barrel to $45 per barrel. That will provide some shelter for oil producers in the north but unfortunately not all new projects can boast these production costs, so an oil price slide will cloud the prospects of some new Alaska production.
A potentially bigger problem is a proposed increase in state production taxes for the oil industry. If approved at a citizens’ ballot, the higher tax would swell oil companies’ annual tax bill by $1-2 billion. The latest news is not good for oil: the group that proposed the higher tax, called “Vote Yes for Alaska’s Fair Share,” said two weeks ago that it had collected more than 43,000 signatures from 35 state districts. It needs 28,501 signatures from at least 30 districts to qualify for the ballot. Related: Oil Bankruptcies Are Reaching Worrying Levels
The tax will hit only the large legacy projects in the North Slope, but according to industry insiders, this will be enough to hurt new discoveries as many field operators fund their exploration work with money from the oil they pump from the older fields.
Clearly, challenges abound for Alaskan oil. Yet the assumption that nobody is exploring for oil there is wrong. There are at least seven new projects under development, with most of them scheduled to start producing sometime during the net five years.
Whether production will indeed increase twofold by 2041 remains doubtful because of the price and tax regulation challenges. But at the very least Alaska will continue contributing a sizeable chunk of the U.S. oil total for years to come.
By Irina Slav for Oilprice.com
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