Price Dips Don’t Change Arctic Resource Potential

February 19, 2016 in Blog

If you follow developments in the energy space, you’ve probably read about how oil and gas companies have been responding to changes in oil prices by shelving or even ending projects entirely. But compared to short-term changes in commodity prices, what’s even more detrimental to the livelihood of projects often goes unreported: The systematic way an oppressive regulatory regime has added billions of dollars in operational costs, reducing the viability of projects, stifling America’s homegrown energy sector – and robbing Alaskans, and all Americans, of a unique opportunity to benefit from a stronger economy.

To begin with, short-term fluctuations in oil prices do not affect the intrinsic resource potential of the abundant oil and gas resources located in the Arctic. According to the National Petroleum Council (NPC), the U.S. Arctic holds approximately 35 billion barrels of oil in conventional resource potential, representing about 15 years of U.S. net oil imports at the 2015 level – and “an important role in extending U.S. energy security in the decades of the 2030s and 2040s.” This immense resource potential remains vast regardless of how prices might change.

While oil and gas companies do respond to oil prices in the short run by making operational adjustments, investment decisions on large-scale projects are made on a much longer time horizon, and the time frame for Arctic projects is one of the longest in the industry. Because of issues ranging from lengthier supply chains to shorter exploration seasons, Arctic projects have much longer lead times compared to other projects based in the U.S., as the NPC explains:

“The cycle of leasing, exploration, appraisal, development, and production…takes longer in the   Arctic than in other offshore regions.”

For example, it took one project 22 years after the leases were procured before it started producing – double the amount of time required for deepwater projects in the Gulf of Mexico. On average, the time frame for offshore Arctic projects is at least 10 years and could extend beyond 30 years, according to the NPC.

For large-scale projects like those in the Arctic, their viability is determined not by short-term price changes, but by projected costs and regulations – in particular, new regulations in addition to an already comprehensive body of regulations. Just last fall, Shell cited “the challenging and unpredictable federal regulatory environment” as one of the reasons it decided to pull back from the Alaskan Arctic. That a $7 billion project, premised upon leases that cost $2.1 billion, ultimately could not overcome the regulatory hurdles placed in its way is baffling. As Sen. Lisa Murkowski (R-AK) said,

“It is absurd that Interior has created a regulatory environment where operators cannot have commercially viable exploration programs, because so many requirements and hurdles have been put in place.”

Yet, even though Arctic oil and gas projects are already overseen by 12 federal agencies, 19 state agencies, and four local Alaska agencies (pg. 4-4), federal regulators continue to propose new regulations that could increase production costs by billions of dollars. Even a Department of Interior official recognized that these proposed rules would pose a “heavier financial challenge” to operators.

At the end of the day, measures that discourage Arctic oil and gas development are self-defeating, and the harm they inflict on Alaskans will be felt in very real ways. In the Far North, infrastructure and basic amenities like sewer and water systems are not as readily accessible as they are in the Lower 48, and revenues generated by oil and gas development go a long way in making them available, as Richard Glenn of the Arctic Slope Regional Corporation told Congress,

“Life can be challenging—and expensive—300 miles north of the Arctic Circle, but hardships have been tempered by revenues generated from oil development activities both onshore and in Alaska state waters.”

These oil and gas revenues have made a significant difference in their lives, as Jacob Adams, Sr., chief administrator officer for the North Slope Borough, recounted:

“Thanks to the property taxes we collect from the oil industry, villages on the North Slope have gone from basically Third World status to modern communities where we enjoy the pleasure of  flushing a toilet.”

Alaska Natives have not only been vocal about their support for Arctic oil and gas development, but the oil and gas projects they are spearheading speak volumes about their enthusiasm for development.

By imposing restriction upon restriction on Arctic oil and gas projects, the federal government is effectively taking from Alaskans the opportunity to live better lives. When anti-development activists celebrate new regulatory hurdles that greater hardship inflicted on Alaskans is what they are really celebrating.

Perhaps more concretely, increased regulatory uncertainty is making it less likely that Americans will be able to experience the bounty that accompanies Arctic drilling: to start, 55,000 jobs created nationwide, and $200 billion in government collected – every year. Arctic projects would deliver regional benefits as well, courtesy of their long supply chains that extend well beyond Alaska. For example, before Shell even drilled its first exploratory well last summer, it had spent $313 million directly on businesses in the Puget Sound area in Washington State from 2006 to 2014.

In Short

Oil prices go up and down, but Arctic energy development is a long-term opportunity. While changes in prices do affect the day-to-day operations of oil and gas companies, the burden of ever-growing government regulations is what really cripples projects in the long run. And the real victims are not oil and gas companies, but Alaskans – and Americans all over the country.