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Alaska’s Oil in Jeopardy

November 19, 2013

The umbilical cord that brings oil from the North Slope of Alaska to the lower forty-eight and the rest of the world is in danger of being cut.

The Trans Alaskan Pipeline System (TAPS) was built to bring oil from Prudhoe Bay, south, to Valdez, where it could be shipped to the West Coast of the United States, Hawaii and elsewhere.

At its peak in 1988, 2 million barrels of oil per day (bbl/d) were transported through TAPS from Prudhoe Bay to Valdez.

Today, only 500,000 bbl/d of oil are being shipped down the pipeline.

The Prudhoe Bay oil fields are in decline, and are producing less oil each year.

Unless new oil fields are opened, the flow of oil will fall to a level where the pipeline becomes inoperable, which, according to Alyeska, is about 300,000 bbl/d. As flow rates decrease, the temperature of the oil drops. It enters the pipeline at 110 degrees F, but drops to the point where water and ice can form that could damage pumps and equipment, and, if it drops too far, the oil becomes too viscous to flow.

To the best of my knowledge, TAPS must be dismantled when it stops operating. When the flow drops to less than around 300,000 bbl/d, TAPS could disappear.

Searching for and developing new fields is extremely difficult. Building roads and exploration work must be done during the winter, when the ground is frozen and ice roads can be built.

With 98% of the land belonging to either the state (including native lands) or federal government, the bureaucratic process of obtaining necessary licensing and permitting can take several years … slowing down the development process.

On the plus side, very large new fields have been discovered; one, about 250 miles Northwest of Prudhoe Bay, in the Chukchi Sea, bordering the Arctic Ocean, the other in the Beaufort Sea, some 75 miles East of Prudhoe Bay. Shell has the leases, but may not have the financial resources to develop the fields. Beaufort alone has the potential to produce about half the current production from the Gulf of Mexico.

The Shell drill rig that was to explore the Chukchi Sea tracts ran aground in December 2012, so the 2013 season was lost.

The investment required to bring these developments to fruition could be between $100 and $180 billion. Without clear signs that the developments can be profitable, or result in positive cash flow, Shell may not be able to develop the fields1.

Also on the positive side, the state of Alaska has been able to lease additional tracts for exploration in the Beaufort field and on the North Slope. Additional leases could lead to more oil production.

In addition to the economic equation, there is the question of whether TAPS will still be in operation when Shell starts to produce oil from the Beaufort or Chukchi fields. Without TAPS, there is no way to bring the oil from northern Alaska to Valdez. Without TAPS the investment would be wasted, and the oil stranded.

It could take Shell seven years to begin producing oil, but, at the expected decline rates from existing Prudhoe Bay fields, TAPS could be shutdown before that2.

Alyeska Pipeline Service Company, the operators of TAPS, is studying possible alternatives for keeping the pipeline in operation when flow rates fall below the threshold requiring TAPS to be shut down. Alyeska has developed a computer simulation in Tulsa headquarters to simulate different conditions on the 800 mile pipeline3.

Extrapolating current decline rates, flow would reach a level of approximately 330,000 bbls/d in seven years4, 2020. The oil companies predict a decline rate of 4% per year, which brings the flow rate down to 300,000 bbl/d in 20245.

Another study said TAPS could be operated with a flow of only 100,000 bbl/day, though that would require considerable new investment in heaters and increased maintenance costs.

Photo Courtesy of Department of Natural resources

Photo Courtesy of Department of Natural resources

What happens to TAPS is important to Alaskans and to Americans in general. Allowing TAPS to be dismantled would be a disaster for all Americans.

Added to this mix of uncertainties is an issue of taxation in Alaska. Alaskans could vote to restore higher levels of taxation, which were reduced a few years ago, on the oil companies.

Also potentially on the plus side are areas in which companies are not permitted to drill, such as ANWR to the East of Prudhoe Bay, which could hold 10 billion barrels of untapped oil, and the National Petroleum Reserve (NPR) just to the West of Prudhoe Bay along the North Slope.

Extreme environmentalists are conflicted over the TAPS issue, because oil companies are saying they should be allowed to drill in ANWR to increase the flow by producing more oil. Extreme environmentalists want to prove drilling in ANWR isn’t necessary to keep TAPS operating … while also wanting to stop oil production entirely so as to cut CO2 emissions.

For the moment they are opting to find ways to keep TAPS in operation without opening ANWR to drilling. They say oil companies are crying wolf, and that the problems of decreasing flow are being exaggerated.

The other variable is whether it’s possible to increase the amount of economically recoverable oil. As one might expect, this is also a contentious issue, with extreme environmentalists claiming the oil companies are understating recoverable reserves.

It’s absurd to think the oil companies wouldn’t recover as much oil as economically possible6.

No matter what the voters decide about taxation, or what Shell decides to do in the near term about developing the Chukchi and Beaufort fields, a way should be found to keep TAPS in place.

TAPS is the only way to move oil from northern Alaska to Valdez, where it can be shipped to refineries.

Without TAPS, all the oil in northern Alaska and the seas surrounding it will be stranded.

If TAPS is dismantled, the huge reserves of ANWR, the NPR and the new fields in the Chukchi and Beaufort Seas will be unavailable to America.

 

Notes:

  1. Alaska’s oil crossroads: lucrative OCS prize and TAPS pipeline fuse, By Steven R. Kopits, Douglas-Westwood LLC, New York City, Oil & Gas Journal, November 4, 2013.
  2. Ibid
  3. How Long Will The Trans-Alaska Pipeline Be Viable? By Anne Hillman, APRN – Anchorage, November 2, 2013.
  4. Alyeska Pipeline Service Company web site.
  5. Alaska’s oil crossroads: lucrative OCS prize and TAPS pipeline fuse, By Steven R. Kopits, Douglas-Westwood LLC, New York City, Oil & Gas Journal, November 4, 2013.
  6. The issue revolves around light and heavy crudes, with the heavy crude currently too costly to process.

 

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