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Two words: logistics and politics. This makes Alaska’s oil industry unique. It is the longest national supply chain in the industry. The North Slope of Alaska is the country’s most remote and coldest source of crude oil. This environment requires custom equipment capable of handling months of subzero temperatures.
Logistics are essential to maintain the flow of oil. But politics are also critical. Given that the government of Alaska is currently strapped for cash due to low oil prices – and its reliance on the oil industry for 90% of its tax revenues – politicians are watching the slope very carefully. North. Since virtually all of the land on the North Slope is owned by the federal or state government, oil companies must spend time and money acquiring leases and paying taxes on production. In Alaska, oil and politics are hard to separate.
Oil exploration is a global industry. Large multinational companies invest a lot of time and billions of dollars in exploration, drilling and transporting their products to market. With over 100 different types traded in the global market, crude oil is anything but homogeneous. Therefore, quality and end use are differentiating factors. Of course, they all have in common that they have to be shipped from the wellhead to a refinery.
Shipping a primary commodity like crude oil involves a lot of infrastructure and planning. This means that producers need to be aware of cost control. This is especially true in Alaska. Opportunities exist because Alaska has vast proven reserves awaiting drilling. But the challenges come from the fact that oil has to be brought to market to generate income. The revenue stream is determined by prices set in world markets, while many costs are determined by local and regional markets. As a result, income streams are often more volatile than costs. Alaska is arguably the most complex and costly example of crude oil logistics in the world.
Alaska North Slope (ANS) crude, which is an average grade, has been produced in the 400,000 to 600,000 barrels per day range since 2010. Of course, this is far from the high of around 2 million barrels per day. in the mid-1980s. Notable drops in the world price occurred in 1986, 2008, and 2014. Of course, COVID-19 did not spare ANS crude from dropping from $ 57 a barrel in January of this year to $ 12 in April before starting to rise again.
COVID-19 tops risk lists for 2020
A white paper released on June 16 by FreightWaves and nVision Global interviewed executives in the oil and gas industry. The COVID-19 pandemic was at the top of the risk list for 2020. The second on the list was an increase in freight rates. While each of these scores is in the moderate risk range, it is interesting to compare the two.
COVID-19, like any invisible enemy, tends to be viewed as riskier than it would be because not everyone can agree on how to handle it. In addition, its effects are economy-wide, which means that at any time, jurisdictions can be locked up for an indefinite period. This risky attitude resembles a greater fear of flying than of driving despite statistics on air and road safety. Compared to driving, air passengers have less control over the process, and if something goes wrong, the consequences seem more dire. Being all together and dependent on each other, COVID-19 adds to the feeling of heightened risk.
Transportation, unlike viruses, is easier to understand for the oil and gas industry. It also gives the industry some control because of the means of transportation they own and their ability to negotiate with any for-hire carriers they may need. Nonetheless, the concern expressed about rising freight rates is an ongoing problem in the industry. Indeed, it depends, to varying degrees, on the five modes of transportation – truck, train, airline, ocean-going vessel and pipeline. Each mode faces different challenges at different times. The share of transport in the total cost is always higher for primary products than for manufactured products. Therefore, any increase in transport tariffs is felt with greater intensity.
Sensitivity to time and cost is particularly important in Alaska. It is detached from Lower 48 in an area subject to extreme cold, earthquakes and volcanoes. The small population is widely dispersed, with minimal infrastructure to ensure connectivity. North Slope business requires all supplies to be shipped from Anchorage and Fairbanks. About 25% of the cost of producing crude oil in Alaska is related to transportation costs.
One way to lower 48
There is only one way to bring ANS rough to the market. The 800-mile Trans-Alaska Pipeline System (TAPS) pumps oil to the Port of Valdez before heading to the Lower 48 refineries via tankers. However, Alaska has five small refineries with a total processing capacity of about 170,000 barrels per day. This meets much of the state’s demand for refined products like gasoline, diesel, and jet fuel; but imports are still needed. This partly explains why gasoline is relatively expensive in such an oil-rich state. Of course, even at its current capacity, in-state refining involves far less than half of the North Slope’s daily crude oil production.
Transportation to and from oil-rich states like North Dakota and Texas offers several more options than Alaska. Other than Fairbanks’ 400-mile Dalton Highway (also known as the Haul Road), air is the only way to get workers and supplies to and from the North Slope. Even the Dalton Road is subject to closures due to snow drifts and seasonal flooding.
All workers arrive via Ted Stevens Anchorage International Airport (ANC) and typically work two-week shifts. The remoteness forces them to live in company-provided housing with nowhere to go. Thus, much of the responsibility rests with TAPS and ANC as singular transport nodes. If an emergency has hit an oil site in Lower 48, relief and civilization are on the other side of the impact zone. In Alaska, however, the other side of the impact zone is typically hundreds of miles of forest, tundra, or ocean. Alaskan risk mitigation necessarily costs more.
Higher transportation and risk mitigation costs mean that oil producers need significant economies of scale to validate drilling on the North Slope. This means relatively higher upfront costs – which, of course, presents other types of financial risks. Part of these upfront costs involves building long roads of ice and ice patches to reach drill sites and stage equipment. Why all the artificial ice? Since the tundra is soft, this would make the necessary infrastructure unstable. This means that most of the drilling at the site must take place during the freezing and dark arctic winter. Since the ice melts in the spring, the ice formation process must be repeated a few months later. Considering the time required to build the network of several hundred kilometers of ice roads and ice patches once the winter frost sets in, the typical schedule for the actual drilling is only January to April. . In contrast, operations in Lower 48 do not face such tight deadlines.
The exploration, production and transportation of petroleum in Alaska is a unique process. This enriched the state and prompted many innovations. But the costs involved have at times been a source of frustration for both oil companies and politicians. While oil and politics in Alaska are difficult to separate, the mix they create is by no means a harmonious mix.
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