An Arctic Oil Bonanza that Never Was
by John M. Miller
Alaskan Oil System vi Preface Rather than posing an environmental dilemma, Alaskan oil has presented a profit trilemma instead. That is, how to fairly share the value of billions of barrels among three major stakeholders: the state of Alaska, the federal government, and the oil companies that take the investment risk. Despite the state’s good fortune, anti-oil company sentiment in Alaska has been increasing in inverse proportion to declining production. Elected leaders and newspaper editorial pages claim the state never got its fair share of the profits as fear of a future without oil grows. Whenever energy prices spike higher, so does national political debate about drilling in ANWR. There are dreams of finding another giant reservoir or building a natural gas pipeline to the Lower 48. It is implicitly assumed by just about everyone that oil companies cannot wait to garner more huge profits in Alaska. On the contrary, in light of the first fifty years of Arctic experience, it is becoming increasingly likely that the bulk of the remaining petroleum resource will go undeveloped. Every late September, termination dust, a light layer of snow on mountain peaks, signals a fast-approaching winter in subarctic Alaska. Autumn in the Anchorage Bowl, home to nearly one-half of Alaska’s population of 670 thousand (2009 estimate), is short. Leaves change color and fall at time-lapse speed. In mid-November, 650 miles away, seven thousand residents of eight small Arctic villages and a few oil workers see their last sunlight for more than two months. Although there are no mountains to sprinkle with snow on the Arctic coastal plain, there are clear signs of another kind of termination dust. Oil production in Arctic Alaska is in steep decline. The Last Alaskan Barrel begins with abridged histories of Alaska and the oil age leading to exploration of the Arctic. This is followed by the dramatic discovery of large oil deposits near Prudhoe Bay. A White House study follows, claiming the nation is swimming in cheap Alaskan crude. “Expert” opinions abound. There is a rush to find more, and a near-decade ordeal to get Arctic oil to consumers. This book examines how, when crude finally flows, stakeholders breathe a brief sigh of relief. However, the economic ordeal has only just begun. An updated federal study just before start of production has contradicted the earlier White House study. The new study says that Alaskan oil is expensive and a marginal investment just as companies had claimed from the start. Over the next decades, oil prices, development costs, and a variety of taxes further shrink the size of the prize. Finally, the actual investment return for Alaskan oil is compared to other investments. The distribution of profits among the state of Alaska, the federal government, and oil companies is shown. The book concludes with a glimpse at future oil and natural gas potential in Arctic Alaska. Matthew R. Simmons, in Twilight in the Desert (Wiley 2005), writes that the time has come for energy analysts to calculate real-market economics (page 346). The Last Alaskan Barrel does just that. It is thoroughly researched by an author who directed technical and economic analyses of Alaskan oil and can clarify the issues. The book includes extensive references gathered from public sources. The material is accessible to readers unfamiliar with petroleum and economics. Petroleum is coming from more remote, costly, challenging, and government-controlled sources worldwide. For over three decades, an average one-fifth of domestic oil production in the U.S. has come from 9 thousand feet under the tundra of Arctic Alaska, just more than a thousand miles from the North Pole. Understanding the fifty-year investment life of Alaskan oil finally brings unemotional, objective clarity to the complex world of energy economics.
Preface vii
Acknowledgments xi
one Profits Trilemma 1
two Looking for Prudhoe 19
three Great Alaska Oil Rush 39
four Long Ordeal 57
five Winner’s Curse 75
six Shrinking Prize 93
seven No Way Out 115
Epilogue 129
Appendix 135
Endnotes 143
Index 165
Alaskan Oil System
Prudhoe Bay, the largest petroleum reservoir in North American history, and several smaller oilfields are located on state-owned land between the National Petroleum Reserve—Alaska (NPR–Alaska) to the west and the Arctic National Wildlife Refuge (ANWR) to the east. The 1002 Area is the coastal portion of ANWR endlessly debated for exploratory drilling. The 800-mile Trans-Alaska Pipeline System(TAPS) transports crude oil from the Arctic coast to the ice-free port of Valdez. Through 2009, more than 20 thousand ocean tanker shipments had carried 16 billion barrels from Valdez to mostly domestic refineries thousands of miles away.
With constant talk about “exorbitant profits” for oil companies and “pain at the pump” for consumers, it seems reasonable to assume that Alaskan oil has proven to be a bonanza. Yet, contrary to popular belief, it has been a financial disappointment for the companies and their shareholders that risked billions of dollars to make it happen. In fact, if oil companies had known at financing what they know today about prices, costs, and taxes, they would never have developed Alaskan oil over the last fifty years.
State leaders anticipated potential riches when they selected land on the Arctic coastal plain in the vicinity of Prudhoe Bay as part of the statehood pact of 1959. The federal government made Alaska the 49th state partly because future oil revenue might reduce the amount of federal subsidy required to manage it as a territory. With confirmation of large reserves near Prudhoe Bay in 1968, oil was destined to become the dominant force in the economics and politics of Alaska for decades.
Early on, many claimed Arctic development posed an environmental dilemma. Some still do. While there have been tradeoffs and a few human errors, the “Great Land” remains beautiful and virtually pristine.
The standard of living for Alaskans is higher than ever. The caribou herd has grown by a factor of thirteen. Salmon are spawning, while bear, moose, and caribou wander the state unfettered. Though once feared, no fast-food restaurants or billboards exist along the pipeline route.
