Roulston's Energy Consultant on Alaskan Pipeline

Roulston Research’s energy consultant Kevin Lindemer shares his thoughts on Wednesday’s Wall Street Journal article titled “Shrinking Oil Supplies Put Alaskan Pipeline at Risk.” Kevin states “Based on the article’s reference to E&P activity in the Arctic, it is reasonable to assume the producers feel there is sufficient resource available to keep the pipeline flowing above minimum for decades. Note that some interviewed said it could take up to 15 years just to bring on new fields. We don’t know what, if any, new fields are coming on stream in the near to mid-term that might help maintain flow. However, the pipeline company says 2013 is that date they may not be able to maintain operations.

If we assume a 6% decline rate as stated in the article, then in 2013 the flow rate will be +/- 500,000 bpd assuming no new fields coming on line. This is equal to about 9% of the US crude oil production in 2010. Therefore, if the pipeline shut down there would be an immediate drop of 500,000 bpd or about 9% +/- for US crude oil supplies.

Will this happen?

o It looks like it can be delayed with some technical fixes. But without more volume, these technical fixes may lose their effectiveness.

If the pipeline shut down would it impact prices?

o World oil prices would probably not exhibit a shock behavior if the line shuts down. Something like this would be known to be happening sometime in advance. Therefore the markets would ‘discount’ the event. It would have a long-term impact. Since world oil spare capacity is now only about 4.5 mbd, the loss of 500,000 from the US would reduce spare capacity by 11%. This would make markets tighter and could lead to a long-term increase in prices.

o USWC markets are the primary delivery point for Alaska crude oil. A shutdown of the pipeline would not have much of an impact on gasoline prices. Currently, the USWC markets receive/buy a lot of crude oil from the Middle East and locations further away than Alaska. Therefore, the delivered price to the west coast reflects its net import position. If the west coast was a net exporter of crude oil and the pipeline shutdown, then crude oil prices would increase by the incremental cost of transportation to replace the lost Alaska crude oil.

At some point, the continuing delay of new production on the North Slope will make this a moot point. If it is delayed long enough, physics take over and the line will be shut – it can’t remain open based on promises and plans. If the line shuts down, it not only causes the loss of an immediate 9% of US production, it would essentially end oil and gas production in Alaska, regardless of the estimated size of the resource base.”