Oil on the Alaskan North Slope

The first public announcement of the discovery of large-scale oil reserves on the Alaskan North Slope was made not much more than a year ago. Since then intensive exploratory activity has been under way; additional oil discoveries have been made; work has started on an 800-mile pipeline to south-central Alaska, described as the largest single private construction project ever undertaken; the largest lease sale ever, yielding close to $1 billion to the state of Alaska, was held on selected acreage in the area; a test run of an icebreaking tanker through the Northwest Passage was completed; and the international structure of the oil business was shaken up by the entry of The British Petroleum Company, Ltd. (BP) into the U.S. market on the strength of its holdings of particular tracts on the North Slope, already shown to be rich in oil deposits.

Reports of these events have called forth much speculation on the larger question of the impact of the Alaskan discoveries on the U.S. oil position, and even of the effects that these discoveries may have on the importance of Middle Eastern oil in the world.

Long before the announcement in July 1968 of the first successful oil strike on leased acreage it was known that geological circumstances in the Alaskan Arctic favored the accumulation of oil deposits. What kindled the intense commercial interest of recent months was the size of the oilfield indicated by the two discovery wells that had been drilled on acreage jointly held by the Atlantic Richfield (ARCO) and Humble Oil companies. The field was estimated to contain between 5 and 10 billion barrels of recoverable oil reserves, which if eventually proved up to the higher end of the range, would make it about twice as large as the biggest oilfield heretofore discovered in North America—the East Texas field.

For the North Slope as a whole, informed speculation almost immediately raised these estimates, on the assumption that the single field was not the only one that would be found, and also in the belief that the recoverable oil contained in the particular field might itself have been conservatively estimated. This optimism appears to have been justified by later developments. The firm of DeGolyer and MacNaughton, which prepared the original ARCO-Humble estimate, subsequently placed the recoverable reserves on BP leaseholds in the same general area, some within the same (Prudhoe Bay) field, at close to 5 billion barrels. To date, therefore, leases acquired during earlier sales by the state of Alaska, for which the total proceeds to the state were $12 million (as compared to $900 million in the September 1969 sale), appear to contain at least 10 billion barrels of reserves, and possibly more. In addition, in a more general evaluation of Alaska, based to a greater extent on broad biological indicators, DeGolyer and Mac-Naughton has ventured an estimate of recoverable reserves for Northern Alaska of about 25 billion barrels, with the observation that ". . . at the present stage of exploration and development in Alaska, one hazards an estimate today only with the knowledge that he may change it tomorrow."

Compared with roughly 30 billion barrels of proved oil reserves (or about 40 billion barrels including natural gas liquids) in the contiguous 48 states, the recoverable reserve estimates for northern Alaska are very large. "Proved reserves" as defined in the United States are, however, subject to severe constraints; they are meant to measure what has been called the industry's below-ground working inventory of quantities of oil known to be recoverable under present-day costs and technology, while what are labeled "recoverable reserves" (as in the Alaskan estimates) are not defined within strict limits of present-day economics and technology. This distinction prompted the Securities and Exchange Commission to issue a statement in October cautioning the investing public against the danger of misinterpreting North Slope "reserves" estimates.

Although the published information concerning "recoverable reserves" must be regarded with caution, actions in the field of transportation by a number of the oil companies heavily involved in the North Slope indicate a belief that much oil is expected to flow from this region. Even in 1968 plans had been announced for construction of a pipeline from the North Slope to Valdez, an all-weather port in south-central Alaska. These plans, as they have progressed to date, will involve an investment of close to $1 billion for an 800-mile pipeline to be built across very difficult terrain, with an initial capacity of 500,000 barrels per day that could be increased to 2 million barrels per day with the installation of additional compressor horsepower. The earliest deliveries are projected for late 1972 and, in the past year, five more companies have joined ARCO, Humble, and BP (the prime backers) in financing this venture. From Valdez the oil would be tankered to the West Coast of the United States for consumption in that region and perhaps for pipeline shipment to points east.

What has captured the public imagination far more than the pipeline is the icebreaking tanker that was tested in the late summer and fall of 1969. If successful, this venture would open the Northwest Passage to commercial shipping and make major world markets, such as Western Europe and the eastern seaboard of the United States, accessible to competitive oil from the Alaskan and Canadian Arctic. The Canadian Arctic, incidentally, although as yet without reported oil discoveries, may be of even greater promise than Northern Alaska. In due course, other minerals found in the Arctic—such as Baffinland iron ore—would also benefit from this new trade route.

The S. S. Manhattan, largest commercial tanker in the U.S. merchant marine, successfully completed its voyage to Prudhoe Bay. But the voyage did not prove the commercial feasibility of year-round use of the Northwest Passage. The time required for such trips on a routine basis will be a critical factor in the economy of tanker transport and on this question the present evidence gives no clear answer. Also, under long-standing U.S. legislation tankers for intercoastal use within the United States would have to be built in American shipyards and manned by American crews at much higher costs than would characterize foreign construction and operation. In addition, ice conditions of greater severity would be encountered in year-round service; as it was, help was required several times from the conventional icebreakers. Nevertheless, Humble Oil, chief financial backer of the $40 million Manhattan experiment, remains optimistic about the eventual commercial success of the icebreaking tanker, and is reported to be planning another test run in the early spring.

Although the available information is not helpful on such critical matters as size of recoverable reserves, rate at which they will be "proved up," costs of production, and economics of transport, billions of dollars have already been staked, on the promise of competitive oil from the Alaskan North Slope.

Running as a counterpoint through these developmental themes are the several risks of environmental damage that could accompany oil recovery and transportation. The degrees of risk and the size and nature of possible damages are uncertain but they have to be weighed by state and national authorities. Among the ecological disturbances are pollution of poorly drained land and water areas of the North Slope, Arctic Ocean pollution resulting from any breaking of tankers in the ice, surface erosion along roads and pipelines due to thawing of permafrost, and interference with caribou migrations. These and perhaps other disturbances would be occurring in an exceptionally fragile natural environment in which recovery powers are weak and slow. The severity of their effects is not well understood, nor are the difficulties of overcoming them.

It is important, however, to keep a sense of balance regarding the impact of these developments, should they be successful, not only on the northern environment but also on the oil situation of the United States and on the role of the Middle East and North Africa in the world oil economy.

As for the United States, its apparent reserve situation, as indicated, is greatly strengthened, even allowing for the definitional differences referred to above. However, even the higher 25 billion barrel recoverable reserve estimate is equivalent to not much more than five years of U.S. domestic oil consumption at current rates. Allowing for the continuation of current import restrictions, a reserve of 25 billion barrels constitutes a relatively small multiple of domestic production levels. Plainly, large amounts of additions to reserves beyond the 25 billion barrels indicated for the North Slope will be required over the next decade if the United States is not significantly to increase its present level of import dependence (about 20% of domestic consumption, mostly from Western Hemisphere sources). A part of these added amounts will no doubt continue to originate in the contiguous 48 states and a part may well come from larger amounts than are currently projected for the Northern Slope.

Compared with proved reserves of close to 300 billion barrels in the Middle East, Northern Alaskan potentials of 25 billion are relatively small. Estimated North Slope discoveries are more nearly in the class of North African proved reserves of 49 billion barrels and, in particular, Libyan reserves of about 30 billion. This situation could change markedly if far greater reserves are discovered in Northern Alaska and in the Canadian Arctic, and its international implications would become more pronounced if the tanker transport problem were to be solved. No doubt this possibility will increasingly affect the bargaining strategies of oil companies and the governments of producing countries in the Middle East and North Africa.

However, even under the most favorable circumstances, it will probably be many years before productive capacity in the Arctic can be developed near the levels already reached in today's leading export areas. By way of illustration, Middle Eastern exports in 1968 came to more than 11 million barrels per day; North African to about 4 million. The most optimistic estimates from responsible sources place Northern Alaskan productive capacity at 5 million barrels per day in 1980, with an amount in the neighborhood of 3 million generally regarded as a more likely figure.