This year marks Alaska’s 40th anniversary of the Trans Alaska Pipeline Systems (TAPS)—an 800-mile-long crude oil route that runs from the North Slope to Valdez, the northernmost ice-free port in North America.
However, Alaska’s declining oil output in recent years has not only stretched the state’s budget, it has also added a challenge to the functioning of the pipeline—decreased throughput means the pipeline is now about three-quarters empty, and crude oil flows are slower.
The peak of oil flow through the pipeline was at 2 million barrels per day in 1988. Last year, throughput was 517,500 bpd, a 1.8-percent increase from 2015. This was the first annual increase since 2002, but still a far cry from the days of peak flow.
Pipeline operator Alyeska is adding heat to keep the crude oil warm and to prevent water from freezing in the line. It also uses so-called cleaning pigs to keep the pipe free of wax. That’s because less oil means slower-moving oil, and slower-flowing oil means colder oil. Alyeska admits that “challenges are immediate” and “ultimately may need shift to intermittent flow”.
Alyeska President Tom Barrett said in the press release announcing the 2016 throughput:
“More oil is the best long-term solution for sustaining TAPS, from a technical and operational standpoint.”
Recent new oil discoveries in Alaska have been welcome news for the sector and the state.
Last month, Spain’s Repsol announced the largest onshore oil discovery in the U.S. in three decades, a 1.2 billion barrel find on the North Slope.
In October last year, private equity-backed Caelus Energy said that it discovered as much as 6 billion barrels of oil on Alaska’s northern coast, of which 1.8-2.4 billion barrels are considered recoverable. The find could lift Alaska’s statewide recoverable oil reserve base by around 80 percent.
But with oil prices stuck in a narrow band just above $50, the extreme weather and the costly and currently uneconomical drilling in Alaska, new oil flowing through the pipeline is probably a decade or more away.
The state’s oil production has been declining. In the week of April 7, oil output was 534,000 bpd, nearly half of the volume Alaska pumped in the first week of April 2004. Last year, production averaged 490,000 bpd, and although it was slightly up from 2015, such low volumes as in the past three years were last seen in 1977, the year in which TAPS became operational.
With TAPS delivering around 90 percent of Alaska’s unrestricted general fund revenue, the state’s budget hinges on oil revenues, and Alaska is facing a $3-billion fiscal gap this year despite a 44-percent budget cut over the past four years.
Referring to the pipeline, Alaska Governor Bill Walker told Bloomberg in a phone interview:
“We need to see oil in that pipeline. That’s our cash register. That’s what generates the revenue.”
In The State of the State Address from January this year, Governor Walker said that revenues were down more than 80 percent from what they were four years ago. The budget has been cut by 44 percent over the period, but Alaska still faces a $3-billion fiscal gap. Nonetheless, “new oil discoveries have the potential to stem the downturn in production”, Gov. Walker said. However, “it would take a price of over $100 a barrel for a long period of time to solve our fiscal problem. Or it would require tripling the flow of oil in the pipeline. Neither is expected anytime soon,” the governor noted.
New drilling and new projects in Alaska’s harsh weather require much more investment than onshore shale plays. At current oil prices, total U.S. crude oil production is expected to rise this year compared to last year, but it will be driven by the Permian down in West Texas. Meanwhile, Alaska will continue with budget austerity waiting for better times—and much higher oil prices—that could make drillers comfortable with spending in frontier ventures.