Huge Find Could Save Alaska Oil Sector

Spanish oil firm Repsol SA just announced the largest onshore oil discovery in the U.S. in three decades, a 1.2 billion barrel find on Alaska’s North Slope. Repsol has been actively exploring in Alaska since 2008 and finally hit a big one.

The find came after drilling two wells with its partner, Armstrong Oil & Gas. Repsol says that it if it moves forward and develops the project, first oil could come by 2021. The field could produce 120,000 bpd, a significant volume given the predicament the state of Alaska finds itself in.

Alaskan oil production has been declining for decades. After BP’s massive Prudhoe Bay oil field came online in the 1970s – the largest oil field in North America – Alaska’s oil production shot up. But the field saw its production peak in the late 1980s at 1.5 million barrels per day, after which it went into long-term decline.

The Trans-Alaskan Pipeline System (TAPS) has made oil production on Alaska’s northern coast possible. With a price tag of $8 billion, the pipeline was the largest privately-funded construction project in the 1970s. The 800-mile pipeline carries oil from Alaska’s northern coast to a terminus on its southern coast in Valdez for export. The pipeline traverses mountain ranges, and much of it has to run at an elevated position above ground because of melting permafrost.

The pipeline is absolutely critical to Alaska’s oil industry – without it, producing on the North Slope never would have gotten off the ground. But falling output levels on the North Slope from aging fields like Prudhoe Bay put the pipeline’s existence into jeopardy. The pipeline has a throughput capacity of 2 million barrels per day, but actual oil flows have declined to roughly 0.5 mb/d, and are falling by about 5 percent per year.

That isn’t just a problem from a revenue standpoint, but also from an operational one. Declining throughput means slower moving oil, which means lower temperatures for that oil. Slower and colder oil leads to water separating from the oil and freezing. That can damage the pipeline. Also, oil contains some small amounts of wax, and when the crude flow slows and gets cold, wax separates and sticks to the pipeline. Removing that wax requires more cleaning and maintenance, raising costs and operational problems.

If the oil flow drops too low, the pipeline operator might have to switch from continuous flows to more intermittent throughput. Ultimately, the pipeline’s very existence is in doubt if the state’s oil production continues to fall.

That puts greater weight on Repsol’s discovery. The Pikka area, as it is known, could add 120,000 bpd to North Slope production and throw a life line to the Trans-Alaskan Pipeline. “We must all pull together to fill an oil pipeline that’s three-quarters empty—and today’s announcement shows measurable results of that hard work,” Alaska’s Governor Bill Walker said on Thursday.

We think that Pikka is going to be critical to bring production not only in balance, but to raise it tremendously,” Andy Mack, Alaska’s Commissioner for the Department of Natural Resources, said back in November. Repsol’s partner Armstrong Oil & Gas said that there is probably even more oil to discover in the area.

Separately, a small exploration company known as Caelus Energy made another discovery last October, a “world class” find that could hold as much as 1.8 to 2.4 billion barrels. That amount of oil could raise Alaska’s reserve base by 80 percent. However, Caelus Energy’s discovery would require much heavier investment in infrastructure. Caelus’ play is tricky: it would have to drill in the winter through frozen manmade islands and then piped through a yet-to-be-built $800 million pipeline to connect to existing infrastructure at Prudhoe Bay. The discovery’s prospects are uncertain at this point.

Yet another route for the resurgence in Alaska’s oil industry is from ConocoPhillips, which is hoping to drill in the National Petroleum Reserve-Alaska. However, conflict with Inupiaq communities caused Conoco to recently put its drilling plans on hold, a move that has angered state officials. The fortunes of this oil prospect are also unknown.

And, of course, drilling offshore in the Chukchi Sea was essentially put on ice in 2015 when Royal Dutch Shell pulled out after disappointing exploration results.

That arguably makes Repsol’s discovery the most viable of the bunch. The state of Alaska is desperate to see somebody move forward and produce more oil in order to save the Trans-Alaskan Pipeline – and the state’s deteriorating fiscal situation.

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