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History of Northern Alaska Petroleum Development

History of Northern Alaska Petroleum Development In the early 1970s, as petroleum production from the Lower 48 states entered a decline, a new discovery of oil at Prudhoe Bay on the North Slope of Alaska offered the U.S. the promise of a significant new source of competitive domestic supply on a world class scale. The discovery was initially estimated to be 9.6 billion barrels of oil, nearly double the size of the largest field ever previously found in North America. Despite high costs, hostile climate, untested technology, unsettled land claim issues, and major environmental challenges, supply from Prudhoe Bay came online in 1977, offsetting most of the decline in Lower 48 supply through the mid-1980s.

By the mid 1980s, the Alaskan North Slope was supplying about a quarter of U.S. oil production. Meanwhile, as Prudhoe production grew, the estimated resource potential of the North Slope began to grow as well, in several ways. First, increased understanding of the initial discovery gained during production, combined with technical progress, led to steady upward revisions of the estimated recoverable oil from the Prudhoe Bay discovery. Second, operations in the area led to a series of other major new discoveries in the vicinity of the initial discovery, several of which also rank among the largest in North America, and which themselves gave rise to a sequence of new development. Third, cumulative experience with Arctic operations and the application of new technologies has resulted in major sustained declines in exploration and development costs. Fourth, these cost reductions and the availability of North Slope infrastructure has reduced the minimum size at which a new field is economic to develop, leading to new developments drawn from the inventory of smaller satellite fields identified in the process of developing the major discoveries. Fifth, the ongoing development effort, combined with the increasing availability of pipeline capacity as Prudhoe Bay production declines, has stimulated interest in three adjacent areas also thought to contain major resource potential – the Arctic National Wildlife Refuge (ANWR) to the East, the National Petroleum Reserve – Alaska (NPR-A) to the West, and the offshore areas to the North.

However, the current realities of North Slope development have been falling increasingly short of this growing potential. North Slope production peaked in 1988, and by 1998 had fallen by nearly 40%. This decline is widely attributed to depletion of the major initial discoveries at Prudhoe Bay. In a narrow sense, this is accurate. While active development continues on the periphery of Prudhoe Bay, these new developments to date have been too small to fully offset the decline from the main field. But other facts suggest the inadequacy of this explanation. Declining costs and increasing resource estimates have sustained steady increases in the supply estimated to be recoverable at prevailing prices, yet the North Slope continues to decline.

The most significant barrier to realization of the growing resource potential of Northern Alaska has been a policy of consistently over-restrictive limitations on access to Federal land. That is not to say that Federal policy has not attempted to facilitate oil and gas development in the area. In fact, Federal programs intended to facilitate oil development on the North Slope go back to nearly the turn of the century. Significant areas of Northern Alaska were set aside by Federal policy for the express purpose of oil development as early as 1923. More importantly, a series of Federal oil and gas exploration and leasing programs have been administered in Northern Alaska intermittently since shortly after World War II. Nonetheless, it has only been very recently that private competitive leasing has been utilized as the key instrument for development of those properties. As of mid 1999, federal leasing had failed to result in a single barrel of commercial oil production, and only small quantities of gas production used by local villages.

It is unlikely that this failure is attributable to a lack of resource potential. All of the Northern Alaskan oil development to date, which has included some of the largest resource discoveries in North America, has occurred on state and native lands surrounded by vast expanses of Federal properties. Development of those state and native properties has extended to the very boundaries of Federal areas to the East, the West, and the North of current development. Moreover, available geologic information in each of those Federal areas has increasingly suggested that the major resource potential realized on the state and native lands likely extends well into the Federal areas, and may actually far exceed the potential of State lands.

Based on current assessments of the resources available in those Federal areas, relaxing access to those Federal lands offers the clear potential to reverse the decline in Alaskan oil supply, and a reasonable prospect of offsetting most if not all of the expected decline in Lower 48 supply over the next few decades. Without such access, companies will continue to develop oil from the known fields in Northern Alaska, and to discover and develop smaller deposits in the vicinity of known fields. The State of Alaska has already announced plans for a series of lease sales designed to facilitate such development on state lands. Nonetheless, even aggressive developments of this sort will at best offset the decline in Prudhoe Bay output.

As it did a quarter century ago, Northern Alaska today offers the U.S. an opportunity to stabilize or even increase domestic oil supply. Exploiting that opportunity then proved an extraordinarily valuable contribution to enhancing the security of U.S. supply in the past. Given the prospects for future world supply, the value of the opportunity today is as great if not greater than it was then. But today the opportunity is not being seized, but forgone.