North To Alaska! The Next Oil Boom

The media was all atwitter about the announcement that Alaska might be the next oil boom province, based on a new report from IHSMarkit which estimated that 28 billion barrels of recoverable resources remain in the Alaskan North Slope (where supergiant Prudhoe Bay lies), as well as significant amounts of natural gas (geologically significant, but unfortunately not economically significant).  This, the firm estimates, could lead to a 40% increase in crude production in the next eight years.  That would amount to 200 thousand barrels per day, not very significant on a global scale, but important for the state and nation.

The 28 billion barrels estimate will no doubt be broadly misinterpreted.  Pessimists will note it amounts to only one year of global oil production, while optimists will point out it represents 150% of past Alaskan production and 15 times current reserves.  Both points of view are valid, but not particularly useful.  (I guess I could mention that this represents a lot more oil and gas than the Lynch family holdings in West Virginia, but that’s not a very useful metric either:  nearly everyone has more oil than us.)

Of primary importance is the discovery of conventional oil in a new basin, the Nanushuk and Torok, which are estimated by IHSMarkit to hold 5 billion barrels of shallow conventional oil.  Again, this is not the amount in a given field but a geologic formation, meaning that reserves will be added piecemeal and production will be much less than, say, half of the Prudhoe Bay field which was initially estimated to have 10 billion barrels of reserves.  On the other hand, the two discoveries alone (Willow and Pikka) have been estimated to have production potential of upwards of 200 tb/d, which might be trivial compared to the supergiant Iraqi or Saudi fields, but by U.S. standards are quite large.

This suggests that the area will receive much more attention from oil explorationists, who are attracted to areas with discoveries, since that is the best indication of the prospectivity for future finds.  It helps that this oil is relatively close to the Trans Alaskan Pipeline, currently operating at a fraction of its capacity (about 25%), meaning new infrastructure expenses will be minimal, and skilled labor is relatively available given the long history of operations in northern Alaska.  Application of horizontal drilling techniques perfected in lower-48 operations also promise to reduce production costs and improve the attractiveness of the province.

Political risk, unfortunately, remains a deterrent to investment in the state’s oil resources, as the government has long relied on the industry for a large portion of its budget and has sometimes raised taxes to offset lower revenue, focusing on the state’s immediate budgetary needs as opposed to setting an optimal tax rate that will encourage investment, raise production and thus improve long-term tax flows.  Repeated tax changes over the last decade have increased uncertainty for the industry and delayed investment.

Still, further conventional discoveries are all but certain, and the estimated billion barrels of shale oil resources  is also a target of development.  At this stage, Alaskan shale seems unlikely to challenge the Bakken or Permian basins in terms of size, but it is early days yet:  many of the existing shale basins have greatly exceeded initial expectations.  Again, existing infrastructure makes the sector more attractive than many other seemingly more attractive geographies and it is possible that production could grow by 1 million barrels a day or more, but not in the next decade.

For those with a longer view, the revival of a supposedly “mature,” declining basin through not just new technologies but simply more investment offers evidence of how the industry will continue to raise production despite all of the claims that there is nowhere left to drill and that all the oil has been found.  The biggest fear, as always, is that politicians will kill the goose that lays the golden eggs.