Back to the future?

The busy, 1911 waterfront of what is today the ghost town of Iditarod/Wikimedia Commons

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.

The competition

“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 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

Those decisions will be made against a backdrop of the EIA forecasting a continuing shift away from petroleum-generated power to electric power with solar “the new king of electricity.

“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.”

Texans freezing in the cold and dark are now suffering in part with the storage problem, according to the Houston Chronicle.

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.






















23 replies »

  1. Face it, Alaska is a PITA to live in. Weather sucks, everything is too far apart, even when there are roads, and prices are too high.

    The only thing keeping it going since 1990 is high oil prices, and it made us too fat and happy to actually develop AK into an real functioning entity.

    I go back to the Midwest frequently, and it is remarkable how easy it is to live there, and that’s considered roughing it by lower 48 standards.

  2. Lost in the news about the Texas freeze is similar stories out of Germany, and for much of the same reason – wind isn’t turning and solar is covered in snow. Germany is not quite as far along retiring their coal, which are currently backing up their renewable shortfall.

    As this is the third episode like this where winter shuts down wind (Great Britain a couple times over the last decade). There may be a point where penetration of wind into the overall generation gets to the point where it makes the entire system unstable. That point in Texas is somewhere below the 23% penetration wind is today.

    Basic lesson in all this? Renewables make the electrical grid unstable. And you really don’t want unstable when it is cold. Cheers –

    • Ag,
      Properly outfitted turbines(see the dakotas)are
      winterized to about -20F.
      Never even got anywhere near that ambient temp in TX.
      Insulated wells,both water and crude/gas operate all winter,every winter across the NS.
      Without fail (frost jacking can be a problem though).But yet wells of all types froze in Tx.
      Most of our semi modern elec grid is a basket of solutions.
      AK southcentral is no different

      TX had there own state standards,didnt want fed oversight.
      Much like eagleriver opted out of muni earthquake standards.
      Which worked great,saved alot of $’s..
      Till it didnt…
      TX i suspect just got a bit more expensive,insurance companies will see to that

      • DMc (there was a rap group of that name a while ago) –

        Don’t disagree substantively with anything you wrote. Things don’t work all that well when the warm country gets cold.

        What I am wondering is that if other nations in the north who are supposedly smart on wind in cold country both had problems with wind in winter (Brits a couple times and Germany this winter), are we finding out that there is some maximum penetration of wind into the overall generation portfolio? Texas is around 23%, though I’ve seen numbers as low as 7% all the way to 36%.

        I think we are seeing a maximum of wind (and solar) generation into the grid around 20% and no more before that penetration makes the grid unstable. Perhaps that is a number we ought to pay attention to. Note that I haven’t even mentioned over two decades of federal subsidies for wind that have skewed the marketplace significantly. Cheers –

      • Ag,
        Interesting point, perhaps renewables have a saturation point.Logic and risk control one would think,demands perhaps a hefty percentage of traditional sourced peaking plants(NG would make sense).At least for the foreseable future.And our continent and country are awash in NG(and yes coal still, but with massive liability issues).


    Outages Morph Into Outrage As Texans Slapped With “Mind-Blowing” Power Bills
    Tyler Durden’s Photo
    by Tyler Durden
    Friday, Feb 19, 2021 – 8:35

    The rolling blackouts that plunged up to 15 million Texans into darkness amid a historic cold snap are diminishing by the end of the week. About 188k customers were without power in the state on Friday morning. Days after power prices jumped from $50 per Megawatt to more than $9,000, the horror stories pour in for those who had power this week during grid chaos as they are mind-boggled how their energy bills skyrocketed.

    None of these horrifying power bill stories below should be a shock as we described to readers in the piece titled “Power Bills To The Moon: Chaos, Shock As Electricity Prices Across US Explode,” that this would happen.

    Texans who were on a variable or indexed plans with power companies are only now reporting their bills have jumped hundreds of dollars, if not thousands of dollars for the month.

    Royce Pierce told Newsweek he owes electric company, Griddy, $8,162.73 for his electricity usage this month. He said that’s a massive increase from his usual $387 bill.

    “It’s mind-blowing. I honestly didn’t believe the price at first,” Pierce said.

    “It’s not a great feeling knowing that there is a looming bill that we just can’t afford.”

    Pierce was one of the lucky ones who maintained power through the entire grid crisis, but it came at a steep cost.

    “There is nothing we can do now. This is already an insane thing and I don’t care about the money when it comes to people’s health,” Pierce said, adding that if the virus pandemic hadn’t affected his work, “we could have taken care of this.”

    Other horror stories of soaring power bills flood local television stations across the Lone Star State. When food and housing insecurities are incredibly high due to pandemic job loss, many folks in Texas who were on variable power plans could be financially devastated.

    WFAA Dallas spoke with one person who said:

    “Mine is over $1,000…not sure how…700 square foot apt I have been keeping at 60 degrees.”

    One couple said:

    “When your electric company tells you to switch but there has been a hold on switching for over a week now. Using as little as possible 1300 sq ft house and this is my bill. . How is this fair. I only paid $1200 for the whole 2020 year. ”

    A tweet was accompanied by a screenshot of their bill that now stands at $3,800 for the month.

    Ty Williams told WFAA that his average electric bill is around $660 per month. He said it now stands at $17,000.

    Williams wondered: “How in the world can anyone pay that? I mean you go from a couple of hundred dollars a month… there’s absolutely no way…it makes no sense.”

    … and in case you were wondering, ran the numbers of how much it would cost to charge a Tesla in Texas earlier this week. While a regular charge costs around $18 using a Level 1 or Level 2 charger at home, estimates showed that the surge in power prices would have cost $900.

  4. Battery storage systems are just starting to come online in any meaningful manner, no matter how small in the grand scheme of things. Some places these batteries will mean more than others, but they are costly just like how wind and solar are since they need to be backed up with conventional, reliable, and proven power reserves…something it appears Texas has failed at. We are in the beginnings of a transition period to be sure, but this transition period cannot and will not impact all aspects of our economy at the same time and in the same way, no matter how quickly some might hope and wish or jump up and down stomping and demanding it be their way or imminent death. Vehicles are the first major shift, wind and solar will not bridge that gap even with the current battery growth the technology and scale will not be able to replace conventional, reliable, and proven power sources to provide replacement power for gasoline and diesel power. We need conventional, reliable, and proven power to charge vehicle batteries for the first major shift to occur.

    People like when their lights come on and their heaters work and the water flows. Frozen wind turbines and darkness do not make electricity…conventional, reliable, and proven power sources do.

    Do not underestimate how HUGE this recent electrical reliability upset in Texas will be to the reality of our modern life, for both sides of the coming greenshift.

    • Crunch the numbers and you will find the amount of rare earths needed for the batteries just to convert to all electric transportation is so large that society would not tolerate the required strip mining. Plus, acid is used in large quantiles to separate and refine the rare earths, which leaves behind huge lakes of toxic slag.
      If this link still works it is a story written by someone who visited a Chinese rare earth mine site. The picture in the article is dismaying.

      • Ken,

        Don’t forget the ability of some folks to simply disregard any “environmental justice” when it happens outside of their eyesight. NIMBYism is a real disease and affects those leading the environmental movement disproportionately to those who actually care for our environment and care for responsible development.

  5. Based on what I just learned from Ken and Craig, it seems the obvious solution for stranded north slope gas would be produce energy right there on the Slope (either HVDC transmitted or Hydrogen) if we can sequester the carbon from the combustion product. How feasible is carbon sequestration technology? Could we manufacture a usable product with the excess carbon? Carbon fiber? And ultimately we need to develop value added industries that require a lot of energy. I remember when someone wanted to smelt iron ore at point mckenzie because our natural gas was so cheap and plentiful. Iron ore I believe shipped in from somewhere far away.

  6. Hydrogen is not a source of power.
    It is a means of storing power.
    The act of storing 100 units of energy in hydrogen results in the storage of only 70 to 80 units as 20 to 30 units are expended in the conversion process.

    Then, storage, transportation, and heat loss when the hydrogen burned results in the loss of another 10 to 15 units.

    This does not account for the energy that will be used for changing out most of the gas infrastructure because hydrogen molecules are small enough to leak out of many gas pipelines and storage facilities and corrode metals currently used.

    It is inefficient and wasteful to convert energy to hydrogen and back.
    Much more efficient to use the source energy directly.
    That requires less energy to do the same work and less carbon is released that way.

    If wind energy is expended creating and storing hydrogen, then other sources like fossil fuels will have to be used to make up that loss.

    • the theory is only surplus wind energy will be used to create and store hydrogen. the big problem with wind energy, even more so than solar, is storage. you’re often producing a lot of power when the demand for power is low. it not only goes to waste, it creates management problems for a grid. if you can shunt that power to hydrogen production at its source when the power is neither wanted nor needed in the grid, everyone wins.

      and you have energy to stored to make up for when the wind isn’t blowing.

  7. The global warming myth has now killled in Texas. People were saved by thier gas powered cars, without those cars many more would freeze to death. Getting off carbon is impossible. Bill Gates can not give up his private jet .

  8. Plan B is and remains GTLs / CTLs off the Slope, batched with crude down TAPS. Market is either side of the Pacific Rim for syn diesel and that marketplace should be operational for decades to a century or more. Cheers –

    • Or we could just dawdle a while longer,voting for status quo.OTOH
      HVDC seems the cheapest conceptually,but youd be priced against hydro in the PNW.
      Not sure how much would net back to state.
      I suspect theres enough NG on state lands to get around a fed induced drilling ban,but youd still have to do an EIS.
      And you run into the problem of still utilizing NG to pressurize current pools of oil(except for PT Thompson).

      • One of the big waste products from the Fischer – Tropsch process used in GTLs / CTLs is CO2. If you are getting into the GTL business on the Slope, capture the CO2 at the last stage of the process and us it for gaslift / reservoir repressurization.

        If you grow your output to the say 1 million bbl/day off the slope, product will end up being the dominant flow thru TAPS and batching issues will be minimized. I am told a small topping plant in Valdez can be used to separate batches. Cheers –

    • yes, but there you have the batching problem which entails maintaining adequate flows of crude in the pipeline in winter. unless, of course, Alyeska were to join those other Alaska industries that only operate in the warm season.

      • If you’re batching a million bbl/day of syn diesel with the current half million bbl/day crude, you have 3x the current daily flow. Sun diesel is not all that problematic when it is cold. Problem is finding a customer for that combined flow. Once the customer goes away, so does the flow, and F-T is not something that you can turn on or off at a whim, so storage – massive storage – on the production end becomes critical.

  9. The world is awash in Natural Gas

    Natural Gas powered vehicles are cleaner and cheaper than electric vehicles(think batteries). Also, NG vehicles don’t put a drain on the USA’s already stressed electrical grid(think California). Factually, subsidized solar and wind can never produce enough electricity to overcome the drain even if the country was covered with wind turbines and solar panels……………

    • no doubt as to your first claim but there is no fueling structure, and that makes use of CNG vehicles impractical except for local uses. the infrastructure already exists for EVs, and it is getting built out more as demand increases. have you heard of anyone driving a CNG from the East Coast to Alaska. this guy managed that with an EV during the pandemic. it’s an interesting read:

      and, no, i’m not planning to trade in my two-decade-old diesel truck (it still runs fine) or my high-mileage around town Ford Focus, but it’s impossible deny the rapid evolution of EVs.

      • That’s exactly why a tax incentive needs to be given to gas stations to implement NG fueling capability. With all the taxpayers’ money the government has spent on solar and windturbines, a tax incentive would be more palatable

      • Craig,
        You are right on EV’s…they are coming fast.
        China is currently selling around 250 new EV’s per day.
        Tesla, Luccid, GM, F, VW, Toyota will all be pumping the streets with new EV’s through the next decade….but will they plug into a grid still run on coal and natural gas…probably for some time to come until the hydrogen cell technology improves & cuts down it’s cost.
        Apple campus runs entirely on Bloom Energy hydrogen cells…extracted from Natural Gas.

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