For generations now, oil has been the lifeblood of Alaska. It has powered the 49th state economy, filled state tax coffers with dollars, and helped support many non-profit organizations.
It has been to the State of Alaska what fisheries were when fish taxes covered 80 percent of the budget for the Territory of Alaska, and what gold was before that. In the early years of the 1900s, the so-called “Inland Empire” between Ruby and McGrath in the center of the state was the most populated place in the territory, and today it is desolate and nearly devoid of human habitation.
The oil industry isn’t about to follow that early history of northern gold, but it increasingly looks to be headed down the path of the fisheries, which in these times represent but 7 percent of the state’s top 100 employers and produce barely enough taxes to cover the costs of management and policing.
On the seemingly inevitable curve of business formation, growth, maturity and decline – itself a journey that seems to parallel nature’s arc of birth, growth, maturity and death – the oil industry is still a ways from the old-age diminution of the state’s commercial fishing industry, but the handwriting is on the wall.
Both Royal Dutch Shell and BP, the globe’s two largest privately-owned oil companies, have abandoned the state. BP pioneered the North Slope oil patch, the most productive oil field in U.S. history, and pumped oil from the 1970s right up until the time it decided the return on investment in the aging field was too small and got out.
Shell was the great hope for the future. The company spent $8 billion trying to develop oil prospects in the Chukchi Sea to the east of BP’s Prudhoe Bay oil find before reaching a 2016 conclusion that the falling price of oil and the high costs of development in Alaska penciled out to a losing proposition.
“Arctic exploration has been put back several years, given the low oil price environment, the significant cost involved in exploration and the environmental risks that it entails,” Peter Kiernan, the lead energy analyst at The Economist Intelligence Unit told Bloomberg as Shell was fleeing Alaska.
A different world
Given U.S. environmental restrictions of today, the associated costs thereof and shifting markets, oil exploration and development in the U.S. Arctic might now be on the verge of becoming history.
BP, which has been trying hard to diversify its energy focus to match markets, has expressed the belief global oil demand peaked in 2019 and is destined to undertake a steady fall.
Shell a week ago announced it shared that view and has begun an effort to increase company investments in biofuels and hydrogen, a carbon-free source of power, with the goal of becoming a net-zero carbon company by 2050.
Its future view appears to parallel that of BP.
“The world is shifting toward clean energy, which will lead to years of growth for options like solar and wind, stock analyst Reuben Gregg Brewer wrote at The Motley Fool in October.. “BP has, basically, said it sees the writing on the wall and is ready to make a green energy shift along with the rest of the world. Is the company’s big plan enough to make the stock a buy?”
Brewer summed the developing consensus among both oil company executives and industry analysts with the observation that the question now is not when the shift will start, “since it clearly already has, but how long it will take.
“The shift from coal to oil as the world’s major energy source took roughly 100 years. If that’s the case with renewable power and oil, then the changeover is really only just getting underway. In fact, based on the global efforts in place today, oil and natural gas (and even coal) will remain vital players in the world’s energy market for decades to come.”
How much the major, private, oil-patch players will be willing to invest in development of new oil is, however, a billion-dollar question. London-based Carbon Trackers earlier this month came out with a report warning countries dependent on oil and gas revenues to prepare for a $9 trillion drop in income over the next 20 years.
“A crash in revenues could lead to humanitarian crises and geopolitical instability,” warned S&P Global Platts in the wake of the report. A company involved in the analysis of market commodities, Platts is considered a world leader in forecasting petroleum markets.
It did caution that a report compiled by a group with environmental leanings toward reducing carbon dioxide emissions could be biased toward a rapid change versus a longer-term shift.
“OPEC has long maintained that oil will remain a dominant energy source in the decades to come,” Platts analysts added. “The bloc’s latest long-term forecast projects that peak demand will not occur until around 2040, when global consumption will rise from pre-pandemic levels of about 100 million barrels per day (b/d) to hit 109.3 million b/d, before declining to 109.1 million b/d in 2045 and plateauing ‘over a relatively long period.'”
Russia is investing heavily in this prediction. The Russian government in January approved a program to offer $300 billion in incentives to encourage the production of oil and gas in the Russian Arctic.
“Russia’s New Arctic Project Will Be Biggest in Global Oil,” the Barents Observer headlined on Valentine’s Day. The Observer is a Norway-based publication focused on the Arctic.
The state-owned Rosneft oil company has big plans for development in the Primorsky Krai district Siberia about 1,600 miles northeast of Moscow. The Vostok Oil company there plans to build “15 new industry towns, two airports, a seaport, about 800 kilometers (500 miles) of new pipelines, 3,500 kilometers (2200 miles) of new electricity lines and 2000 megawatts of electric power capacity,” the Observer reported.
“It will also create 100,000 new jobs and lead to a 2 percent annual hike in national gross domestic product (GDP).”
As a state-owned company, the interests of Rosneft are different from those of BP, Shell or any other privately held company. Rosneft doesn’t need to produce profits that satisfy shareholders or negotiate wages and salaries with its employees. It has the liberty to do whatever the state believes it should do.
And one of Russia’s believes at this time is that it should develop Siberia. The U.S. believed the same of Alaska in 1935 when it established the Matanuska Colony in the Matanuska-Susitna rivers valley north of Anchorage.
“The decision to establish a colony in Alaska was largely economic and strategic,” according to a National Park Service history “From the Department of Interior’s perspective, an increase in Alaska’s population would help the territory to become economically self-supporting.
“At the same time, the War Department was looking to bolster Alaska’s defenses in response to Japan’s increasingly aggressive expansion. In planning for a build-up of
military personnel, the development of large-scale farming in the Territory would provide a more reliable and secure food source.”
Over time, and partly because Alaska was flush with oil money, the U.S. national interest shifted from the economic development of the north to its preservation. The change in philosophy culminated with the passage of the Alaska National Interest Lands and Conservation Act (ANILCA) of 1980 that placed more than a third of the state’s land in national parks, wildlife refuges or other federal, land-preservation programs.
Preservation of Alaska, rather than economic development, is now the prevailing federal position with newly elected President Joe Biden planning to order a ban on new oil and gas leases on federal lands and waters in Alaska and the West.
New sheriff in town
Biden has already ordered a halt to any activity in the Arctic National Wildlife Refuge adjacent to Prudhoe Bay, an area in which the administration of former President Donald Trump just completed a lease sale.
In the longterm, Biden’s actions are likely to have serious implications for Alaska oil production, but in the short term what happens in Russia and the rest of the world to influence oil prices and development decisions is of greater economic concern.
As the Rystad Energy report at OilPrice.com Tuesday noted, “despite the new policies, Alaskan oil production is expected to grow by approximately 50 percent from current levels to 660,000 barrels of oil per day (bpd) in 2029.
“Considering the time it takes for new resources to be developed and come online, Biden’s policies – if they become permanent – will only affect Alaska’s production after 2030. Any effect on production in the last years of this decade will be negligible.”
After that could come a dramatic decline in production and possibly the shutdown of the TransAlaska Oil Pipeline System, which had a designed life expectancy of 35 years at its completion in 1977. That the pipeline is well past that 2011 deadline and now permitted to operate through 2034 is a stroke of luck for the state, but also a warning.
The year 2034 isn’t that far off.
Where state oil revenues will go in the interim depend on markets. North Slope production in 2020 averaged about 400,000 barrels per day, according to the U.S. Energy Information Administration. (EIA).
A 50 percent boost in production over the next eight years could increase state revenues significantly or not depending on OPEC and Russian production. The EIA expects oil demand to slowly rise through 2030 before plateauing.
If global production lags behind demand, oil prices are expected to increase. If production gets ahead of demand, prices could flatline or even fall. Those dips would affect state revenue.
Oil company decisions on investments to increase production beyond 2030 would meanwhile impact on spending in the state as would decisions on spending for further upgrades to the pipeline with the hopes of renewing the permits again in 2034.
Solar and wind
“With sharp cost reductions over the past decade, solar PV is consistently cheaper than new coal- or gasfired power plants in most countries, and solar projects now offer some of the lowest-cost electricity ever seen,” according to the IEA’s World Energy Outlook 2020.
“(But) the pace of change in the electricity sector puts an additional premium on robust grids and other sources of flexibility, as well as reliable supplies of the critical minerals and metals that are vital to its secure transformation. Storage plays an increasingly vital role in ensuring the flexible operation of power systems.”
A cold snap in that state stopped wind turbines from spinning and froze natural gas supply lines as the demand for electricity to heat homes skyrocketed. As electricity demand threatened to overwhelm the weather-hampered supply, the state instituted rolling electric blackouts.
Some of the blackouts have now lasted for days.
The Chronicle said electric problems were compounded by the lack of stored energy sources, poorly insulated homes, the failure of consumer cooperation in cutting energy use as a disaster approached, and a Texas electric grid that operates independent of that of neighboring states in order to avoid federal regulation.
Globally, storage is one of the biggest problems facing an even faster shift to electricity these days and is part of the reason for reviving interest in clean-burning hydrogen.
The U.S. Department of Energy in a report issued last summer suggested hydrogen, which can be used as carbon-dioxide-free energy source for fuel cells or internal combustion engines – “could become a long-term storage option to balance seasonal variations in electricity demand.”
When energy demands are low, offshore wind farms, which are booming globally, could use surplus power to convert seawater to hydrogen to use as fuel for electric plants or transportation systems. A growing market for hydrogen might also present Alaska a new opportunity for the use of an estimated 45 trillion cubic feet of gas stranded in the North Slope oil fields.
Efforts to move that gas to market, first via a pipeline from the North Slope to the U.S. and later via a pipeline to a liquefied natural gas (LNG) plant on Cook Inlet and then via ship to ports around the Pacific Ocean, have all failed.
Natural gas converted to carbon-dioxide-free hydrogen is most efficiently moved by truck than pipeline, according to at least one U.S. government study, and might present an opportunity for North Slope gas. So, too, electric generation at gas-fueled power plants on the North Slope with the energy shipped south to the rest of the state and possibly Canada and the Lower 48 via high-voltage direct current (HVDC) power lines.
The Brazilians now have an HVDC line carrying power for more than 1,500 miles from the Belo Monte hydroelectric power plant to Rio de Janeiro. Construction on the powerline began in September 2017, and it was completed in March 2019 at a cost of $2.14 billion.
Former Gov. Bill Walker’s plan for an 800-mile gas pipeline to an LNG plant in Nikiski had a projected cost of $43 billion. That plan is now considered dead, but a 500-mile, $5.9 billion pipeline from the North Slope to Fairbanks has been proposed.
Meanwhile, hydrogen fuel is heating up in Europe because no greenhouse gases are emitted when it is used for power. Equinor (the Norwegian, state-owned company formerly known as StatOil) and Engie, a French company, only today announced plans to partner on the production of “blue hydrogen” in Europe, Reuters reported.
Blue hydrogen is made from natural gas in a process that allows the capture of about 95 percent of carbon emissions. The Europeans consider it a “bridge fuel” to “green hydrogen” freed from water by using the process of electrolysis powered by surplus electricity from renewable power plants.
A white paper authored by the Institute for Energy Studies at England’s University of Oxford concluded that “developing blue hydrogen (now) is a must, as green hydrogen will not be available in substantial volumes until the power sector is fully decarbonized by renewable electricity, i.e., not before 2040, possibly 2050.
“Therefore, to decarbonize the non-electric sector expediently, a market switch to hydrogen must be developed based on blue hydrogen with the use of existing technology of steam methane reforming and auto-thermal reforming….Starting with blue hydrogen will be essential for timely and deep decarbonization and will pave the way for green hydrogen to enter the market as soon as it becomes possible.”
Change is both a threat and an opportunity. Only time will tell which path Alaska ends up following, but the state’s history is a tale of boom and bust. Given that about a third of all the jobs in the state have been linked to the oil industry in one way or another, it’s fading could turn into a monster of a bust.