Does Drilling in ANWR Make More Sense than the Alaskan Offshore?

Alaska still has significant oil potential. Even as production declines at Prudhoe Bay, the state’s future in petroleum production may not be so grim. The United States Geological Survey (USGS) estimates that thirteen percent of the world’s remaining undiscovered oil is located in the Arctic, with a very large portion located in Alaska. Some of this oil is on land in the “1002 Area” of the Arctic National Wildlife Refuge (ANWR) as well as offshore in the Chukchi and Beaufort Seas.  These reserves could be important for both the United States and Alaskan governments. Many feel the oil would enhance American energy security. Alaskans hope to increase revenues, as well as preserve the life of the Trans-Alaska Pipeline System (TAPS). TAPS has been carrying oil from Alaska’s North Slope to refineries in southern Alaska and for export since production began in Prudhoe Bay in 1977. Too little production (some estimate as low as 70,000 barrels per day) would force the pipeline to be abandoned.  

        Despite their potential, all three promising oil regions remain untapped. Petroleum companies have failed to receive federal approval to carry out exploration, mainly due to environmental concerns. Yet after several years of setbacks, Shell Oil Co. has encountered additional delays for final permits to drill exploratory wells offshore in the Chukchi Sea, calling into question the number of wells that might be able to be completed this year. As of July 31, Shell was still awaiting final approval from the Department of the Interior for its oil-spill containment system, as well as air quality permits from the Environmental Protection Agency, and unusually icy conditions pose additional challenges. Shell was not able to meet its July start date as planned. The company says it is monitoring the sea ice, and it has reduced the expected number of exploratory wells it plans to drill from five to two. Production in ANWR, however, continues to be prohibited.

        The Obama administration’s preference for offshore drilling in Alaska compared to a political compromise on ANWR makes sense politically inside the Beltway but here in Alaska, many ponder whether it makes sense on a technical and practical level. Shell’s plan to drill in the waters of Arctic comes just two years after the Deepwater Horizon blowout, the largest accidental marine oil spill in history.  ANWR, locals argue, has been left alone as the consequence of an extremely divisive political debate. House Republicans have passed close to a dozen ANWR drilling bills, only to be defeated in the Senate each time (except for once before being vetoed once by President Clinton).  Industry sources explain that the decision not to drill in ANWR can simply be traced back to politics. According to Kevin Simpson, the Senior Republican Counsel to the United States Senate Committee on Energy and Natural Resources, “Rationally speaking I have not seen a winning argument put up as to why the 1002 zone, with its statutory designations and pre-drilled status being what they are, should remain off limits while the rest of the state and federal onshore and offshore remain very much on the table, and you might find some acknowledgement of  this among some key Hill staffers on the other side of the issue.”

        The decision to drill offshore before in the refuge raises a few questions. Is it actually safer to drill in the Arctic seas? Is it more economic? The answers are far from clear.

         

The chart above produced with numbers from the USGS and Mineral Management Service, projects technically recoverable oil for the 1002 Area of ANWR and the Chukchi and Beaufort Seas. These estimates show significant untapped reserves in Alaska. At mean estimates, ANWR represents a little over a year of U.S. 2010 consumption. Offshore oil estimates equates to 2.8 years of American oil demands. 

Uncertainty surrounds the estimates for oil reserves in Alaska, as it does with most oil reserve predictions. Over the long term, however, more oil is expected to be offshore than in ANWR. There could nearly three times more oil in the Chukchi and Beaufort Seas than on land. Still, the projections of peak oil production from offshore and ANWR are about the same. The Department of Energy (DOE) and National Energy Technology Laboratory (NETL) predict ANWR’s peak production to be close to 958,000 barrels per day. This would represent close to 5% of 2010 U.S. consumption. The projections for combined peak production of the Chukchi and Beaufort Seas is not much different at a little over 1 million barrels per day, or 5.6% of consumption. In other words, there could be just as much oil produced on land as offshore as both regions would gear up. And neither region would happen quickly, with maximum production rates decades away for both ANWR and offshore oil, according to DOE/NETL. The bottom line is that Alaskan oil production rates are likely to fall for a while before they can recover, no matter the outcome of the politics of opening these new areas for drilling. 

The State Revenue

            If oil production were to begin in both the Chukchi and Beaufort Seas today, Alaska would see very little benefit. As law currently stands, the federal government would receive the benefits of new production taxes and royalties offshore. The oil is located in federal, rather than state waters, meaning the state government would see little change in its oil revenues. A 2011 assessment (done with price assumptions between $56 and $83 per barrel) estimated the Alaskan state government would receive only about $15.4 billion in revenue over a 50-year period. This equates to just over $307 million annually. Over the same period, the federal government would make close to $167.3 billion, or $3.3 billion annually.

Oil royalties from ANWR production, however, would likely be split 50-50 between the state and federal governments. At a price of $60 per barrel, the Alaskan and federal governments could expect to receive $28.5 billion in royalties over a thirty-year period. This equates to $950 million annually for the state, more than three times what it would receive from offshore oil. Alaska would also receive production taxes from drilling in the refuge. Currently, four states on the Gulf Coast have a revenue sharing agreement in which they receive 37.5 percent of the benefits of federal offshore production. Unless Alaska can reach a revenue sharing agreement regarding offshore oil, the Alaskan government would see more revenue flow as a consequence of ANWR production than from the opening of offshore drilling.

Hooking Up To The Pipeline

Even if oil is found and produced offshore and drilling were permitted in ANWR, hurdles would still remain before that oil could get to market. Oil produced from the Chukchi Sea would require a long, 300-mile pipeline connection to TAPS. Constructing such a pipeline could be a significant obstacle for Shell and other oil companies who hope to produce offshore. By contrast, in ANWR, much of the oil is located in the western part of the 1002 Area, which is only about thirty miles from TAPS. While oil in the Beaufort Sea may only have to be transported in a new pipeline for only 40 miles, a pipeline from the Chukchi (where there is expected to be more oil) would have to be over 300 miles long. Chukchi Sea oil would most likely have to travel through the National Petroleum Reserve in Alaska. Approval of such a pipeline would be difficult due to environmental conservation reserves. It would have to avoid damaging the Teshepuk Lake, an important nesting ground for migrating birds, and the caribou herds who live and calve in the reserve.

Environmental concerns are not the only complication a new transit pipeline would face. The greatest obstacle may be the ice they would have to travel through before coming on land. Ice has already created obstacles for Shell, causing it to scale back its exploratory drilling plans in the Chukchi and Beaufort this summer. A pipeline, however, would present a completely new series of concerns. Engineers would have to build the pipeline deep enough to avoid sea ice collisions. Scientific understanding of ice in the Arctic would need to be improved before such a project could be successful. Shell has been collecting data, but is looking for a better grasp of sea ice as pipeline considerations continue.

The project of connecting a pipeline from the Chukchi Sea to TAPS will be quite daunting. In an article for the Alaska Dispatch, pipeline engineer Erling Westlien explained, “it’s almost [as big a project as building] another trans- Alaskan Pipeline.” This may be the largest problem offshore production faces in Alaska. There are alternatives, such as transporting the oil by tanker. This may, however, be even more risky.  Even offshore advocate, Alaskan Lt. Governor Mead Treadwell, claims shipping is “the biggest risk for a spill in the Arctic.” (See video for more about Treadwell’s shipping concerns).

Environmental Concerns

Fear regarding harm to the environment and subsistence communities has often been decisive in the argument against drilling in ANWR. There has been great concern about what production would do to the muskoxen, polar bear, birds and vegetation of the region. Most discussion, however, has focused on the porcupine caribou, to which the 1002 Area is an essential calving ground. In all but three years of an eighteen-year observational period, the caribou have used the 1002 Area to calve. Calf survival was significantly poorer in those years where the caribou were forced elsewhere, according to U.S. Fish & Wildlife. Many fear new oil operations in ANWR would force the caribou to relocate, where they are exposed to more predators and forced to eat less preferred food. This would also be devastating to the native communities in the area, namely Kaktovik. One native, Carla Sims Koyatuk, expressed her concern in a 2005 Washington Post article: “They want to do the drilling where my family goes to hunt.” Losing the caribou would result in a loss off not only food, but also culture and tradition.

As expected, there is some uncertainty regarding what would actually happen to the caribou – which numbered 169,000 in 2010 – if oil were produced in the 1002 Area. John Payne of the North Slope Science Initiative feels improved drilling technology has reduced the footprint of oil infrastructure on land. (See video for more).  The caribou population has actually increased in the time oil production has occurred in Prudhoe Bay.

It is, moreover, unclear that environmental concerns are deeply compelling in ANWR but not for offshore drilling. The Chukchi and Beaufort Seas are the habitat for a variety of marine animals, including herring, walruses, seals, birds and bowhead whales. Some are concerned that the production, as offshore drilling anywhere could, would alter the animals’ migratory patterns in a harmful way. Additionally acoustics from oil exploration could be extremely dangerous, and even fatal, to whales. The whale is an essential part of the native Inupiat community, for both food and preservation of culture and tradition.

To its credit, Shell has responded to these environmental issues with an extensive science initiative to study these impacts. The company has conducted many studies to further its understanding of the Arctic.  It has altered its drilling plans to help preserve the wildlife and natives of the region. Shell agreed to halt its production in time for the annual whale hunt in the fall. It has altered its exploration technology so that to limit the acoustics’ impact on the whales. Even so, the impact of drilling will not be fully understood until this it actually begins. Uncertainty will always exist until the effects can actually be observed.

Oil Spills

An oil spill is always possible and some experts argue that this would make drilling in ANWR preferable to doing so offshore. While a large blowout would be serious anywhere, its impact offshore could be catastrophic. Arctic Researcher Henry Huntington believes that “if you’re gonna spill oil, do it on land… It’s containable and it’s sort of limited. The land doesn’t move.” (See video for more). In fact, the thirteen largest oil spills in history have all occurred in water. The 2010 Deepwater Horizon blowout served as a reminder of how devastating an offshore spill can be.

Cleaning up an offshore spill in the Arctic would be more difficult, as the climate and logistical concerns pose a series of unique challenges for oil producers. A recent report by the GAO argues that despite improvements in technology in recent years, Arctic ice still presents challenges for Shell or other offshore Arctic operators. The effects of a late season spill could be exacerbated by icy conditions that would make containment more difficult. Equipment such as the capping stack placed underwater could be damaged by ice that floats near the sea floor. Logistical concerns may also make cleanup more difficult. If a spill were to occur, personnel would have to be moved to the site, which would take time and delay a response. The Arctic’s climate would make transporting staff more difficult. Because of the lack of North Slope production, there is very little equipment available if a spill were to occur.  

Shell has acknowledged these existing concerns and produced what it believes is an effective spill response plan. It has shortened its drilling season so that there would be enough time to drill a relief well before surface ice develops. Shell placed much of its equipment such as the wellhead and blowout preventer underwater to prevent collisions with sea ice. It also has its own icebreakers and containment to make up for the absence of spill response material in the area. Lt. Governor Treadwell maintains that Shell has “very strong prevention techniques” and has made “significant improvements in oil spill containment.”

Still, some are unsure if Shell’s plan is adequate if a spill were to occur. Many fear that the technology is not as effective one may expect. “The spill response… just won’t work,” argues Arctic scientist Rick Steiner. (See video for more on Steiner’s concerns).

Others are concerned that since the spill response equipment has not been tested in Arctic waters, we cannot be sure that it would effectively work. Offshore drilling carries some inherent risks. And the Arctic itself, as Sierra Club representative Lindsey Hadjuk explains, very well may be “the riskiest place you may possibly want to drill.” (See video for more) Drilling in the Beaufort and Chukchi Seas will present unique offshore challenges.

Conclusion

Permitting oil production only in the Chukchi and Beaufort Seas suggests that offshore is a superior alternative to drilling in ANWR. Yet this seems to be a questionable conclusion. The 1002 Area may produce as much oil per day as drilling offshore. As it stands right now, the Alaska would receive more revenue from ANWR than from onshore oil. A pipeline from ANWR might be easier to get approved than one from the Chukchi Sea. The environmental and subsistence concerns regarding the porcupine caribou are not much different from those surrounding bowhead whale. And – perhaps most importantly – an oil spill offshore would be far more devastating than one in ANWR. Existing evidence suggests something that politicians and environmentalists do not want to admit: if there has to be Arctic drilling – and that is a big “if,” given the substantial risks involved – ANWR may actually make more sense. That should be food for thought for both politicians who advocate drilling in Alaska and activists who fight against it: Have battlegrounds been drawn in the right place?