PETROLEUM SECTOR REPORT. prepared by. Matthew Berman. and. Teresa Hull INSTITUTE OF SOCIAL AND ECONOMIC RESEARCH UNIVERSITY OF ALASKA ANCHORAGE

PETROLEUM SECTOR REPORT prepared by Matthew Berman and Teresa Hull INSTITUTE OF SOCIAL AND ECONOMIC RESEARCH UNIVERSITY OF ALASKA ANCHORAGE prepared for ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY and ALASKA DEPARTMENT OF COMMERCE AND ECONOMIC DEVELOPMENT October 1989

This report has been prepared as a part of a study of sectors of the Alaskan economy conducted for the Alaska Industrial Development and Export Authority and the Alaska Department of Commerce and Economic Development. The opinions in this report are those of the authors and do not represent the official views of the State of Alaska. ll

TABLE OF CONTENTS Executive Summary............................................ S-1 I. World Oil Markets............................................. 1 A Crude Oil Prices.................................... 1 B. Natural Gas Prices.................................. 2 II. Cost of Business.............................................. 7 A Drilling Costs...................................... 7 B. North Slope Construction Wage......................... 7 C. Transportation Costs................................. 7 D. Petroleum Industry Wages............................. 8 E. Taxes............................................ 8 III. Crude Oil and Natural Gas Production............................. 15 A Oil Production..................................... 15 B. Natural Gas Production............................... 16 C. Direct Economic Effects.............................. 16 IV. Exploration and Development Activities............................ 28 A Exploring for New Oil and Gas Fields.................... 28 B. Oil and Gas Field Development Activities................. 29 V. Downstream Operations........................................ 37 A. Transportation..................................... 37 B. Petroleum Refining.................................. 37 C. Natural Gas Processing............................... 38 Endnotes................................................... 43 Appendix... A-1 iii

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LIST OF FIGURES A. Price of Alaska North Slope Crude Oil B. Estimated Average Drilling Costs C. Total Alaska Crude Oil Production D. Total Well Permits Issued S-4 S-5 S-6 S-7 1. World Spot Market Oil Prices 2. World Spot Market Price Differentials 3. Weighted Average Wellhead Oil Price, Cook Inlet and North Slope Regions 4. Weighted Average Wellhead Gas Price, Cook Inlet and North Slope Regions 5. Estimated Average Drilling Costs, U.S. and Alaska 6. Average Monthly Construction Earnings, Prudhoe Bay Area 7. Annual Trans-Alaska Pipeline Tariff 8. Monthly Trans-Alaska Pipeline Tariff 9. Average Annual Earnings, Oil and Gas Extraction 10. Average Monthly Earnings, Petroleum Refining 11. Annual Crude Oil Production, Cook Inlet and North Slope Regions 12. Annual Crude Oil Production, North Slope Fields 13. Average Crude Oil Production Rates, North Slope Prudhoe Bay 14. Average Crude Oil Production Rates, North Slope Fields Other than Prudhoe 15. Annual Crude Oil Production, Cook Inlet Fields 16. Average Crude Oil Production Rates, Cook Inlet Fields 17. Net Natural Gas Production Rates, Cook Inlet and North Slope Regions 18. Marketed Gas Production, Cook Inlet and North Slope Regions 19. Average Monthly Employment, Oil and Gas Extraction 20. Annual Royalties Received from State Leases 21. Monthly Royalties Received from State Leases 3 4 5 6 9 10 11 12 13 14 17 18 19 20 21 22 23 24 25 26 27 v

22. Petroleum Geological and Geophysical Exploration Crewmonths by Crew Type 30 23. Petroleum Geological and Geophysical Exploration Crewmonths by Alaska Region 31 24. Petroleum Seismic Exploration Activity, Alaska Onshore and Offshore 32 25. Alaska State Drilling Permits Issued and Wells Drilled in Alaska OCS Region 33 26. Alaska Drilling Activity by Region, Exploration and Development Wells 34 27. Alaska State Well Permits Issued by Type, Cook Inlet and North Slope Regions 35 28. Average Monthly Construction Employment, Prudhoe Bay Area 36 29. Trans-Alaska Pipeline Operating Employment 39 30. Average Monthly Employment, Petroleum Refining 40 31. Natural Gas Consumption: LNG and Fertilizer Manufacturing 41 32. Value of Petroleum Products Exported from Alaska 42 vi

SECTOR REPORT PETROLEUM Executive Summary The petroleum sector contains a number of industries whose actlvitles include production, transportation, and manufacturing of crude oil and natural gas. The sector also includes activities related to exploration for new oil and gas fields as well as investments to develop or enhance production in new or existing fields. The petroleum sector directly employs over 10,000 workers and paid over $600 million in wages and salaries in 1988. Although the sector is the second largest natural resource sector employer (after fisheries), it provides the largest contribution to gross state product of any sector as well as the bulk of state government revenue. This report contains five sections. The first two sections discuss major demand and cost factors which influence growth of this sector. The last three sections discuss crude oil and natural gas production, exploration and development activities, and downstream operations, respectively. Each section contains a discussion of key economic indicators relevant to that aspect of the petroleum sector. World Oil Markets Worldwide markets for crude oil and its energy substitutes ultimately determine the demand for the petroleum sector in Alaska. Figure A shows that world market prices of crude oil were generally falling during most of 1988, reaching a low of around $11 per barrel for Alaska North Slope (ANS) crude in early October. Beginning in December, however, world oil prices rose rapidly, reaching a peak of over $20 per barrel for ANS in April 1989 before beginning to decline once again. Natural gas import prices on the world market are roughly equivalent over the long run to oil when measured on an energy-equivalent basis. At a world oil price of $17 per barrel, current Cook Inlet prices of $1.30 to $1.40 per Mcf are above the minimum level which would make construction of a new LNG export facility feasible. Cost of Business Important cost of business items include drilling costs, oil field construction wages, transportation tariffs, petroleum industry wages, and taxes. Drilling costs indicate the cost of basic exploration and field development investments. Oil field construction wages are a major component of the cost of installing production facilities, pipelines, and processing PETROLEUM SECTOR REPORT, ISER, AIDEA S-1

plants. Pipeline tariffs are a major cost of transportation, particularly for North Slope fields. Average wages in the petroleum industry indicate trends in operating and management costs. Average Alaska drilling costs are considerably higher than average U.S. onshore costs. Figure B shows, however, that Alaska onshore drilling costs were declining throughout the period from 1981 through 1987, the latest year for which data are available. Onshore drilling costs declined from $253/foot in 1986 to $212/foot in 1987. Average monthly earnings of North Slope construction workers declined by 40 percent between 1982 and 1987, but wage levels stabilized in 1988 at an annual average of roughly $4,500 per month. Annual petroleum industry salaries averaged around $63,000 in 1987. Although the average wage fluctuated somewhat in 1987 and 1988, there has been no downward trend since the mid-1980s as was noted for Prudhoe Bay construction wages. In 1988, Trans-Alaska Pipeline System (TAPS) tariffs averaged $3.18 per barrel. By early 1989, the tariff dropped still further to just over $3 per barrel as a result of the TAPS settlement agreement. This is only about one-half the tariff prevailing in 1986. TAPS tariffs may rise slightly in 1989 as a result of higher environmental and safety costs of Alyeska terminal operations in the aftermath of the March 1989 EXXON Valdez oil spill. Alaska's petroleum tax structure is complex and has been adjusted numerous times. Since effective tax rates vary widely by field and by producer, no indicator is meaningful. Crude Oil and Natural Gas Production In 1988, Alaska produced record totals of 738 million barrels of crude oil. North Slope fields contributed 722 million barrels of the total, with Cook Inlet fields contributing the remainder. Figure C shows the monthly average crude oil production rate for all Alaska fields. Alaska crude oil production peaked in early 1988 at around 2.1 million barrels per day. The recent decline is due to declining Prudhoe oil production, which had fallen by around ten percent to a level of less than 1,500 mb/d in early 1989. Alaska natural gas production net of the amount reinjected in producing fields averaged around 1,100 million cubic feet per day (mmcf/d) in 1988. Although North Slope net gas production is approximately the same magnitude as Cook Inlet production, most North Slope production is used on the site for fueling oil production facilities, so it is not sold. Alaska marketed gas production--over 90 percent is from the Cook Inlet region- averages nearly 20 million cubic feet per month. Indicators of the economic effects of petroleum sector production activities relate to oil company spending and generation of government revenues. Petroleum industry employment increased by about five hundred workers in 1988 to reach an annual average PETROLEUM SECTOR REPORT, ISER, AIDEA S-2

of around 8,600 workers. The State of Alaska received $719 million in oil royalties from production on its leases and $15.3 million in royalties on natural gas production in 1988. Exploration and Development Activities Drilling permits are an important leading indicator of exploration and development activity since the operator must obtain a permit from the state (or from the federal government for wells on the federal Outer Continental Shelf (OCS)) before drilling may begin. Figure D shows the number of Alaska state drilling permits issued each month since January 1985. In 1988, companies obtained permits to drill 148 development and service wells. The industry also received permits to drill 10 exploratory wells in areas subject to state jurisdiction (onshore and submerged lands up to three miles offshore) and 2 exploration wells on the federal OCS. The 160 total well permits issued represents a 15 percent increase over 1987, but still is far below the peak reached in 1985 of over 300 wells. The vast majority of this drilling activity took place on the North Slope or the adjacent Beaufort Sea. In 1987, the latest year for which data are available, oil companies supported 28 crew-months of fieldwork for geological and geophysical exploration in Alaska. About onehalf of the effort took place on the North Slope, with the remainder in Cook Inlet region and the Bering and Chukchi seas. In addition, construction employment in the Prudhoe Bay area--the best indicator of North Slope petroleum development activity--rose by nearly 30 percent in 1988 but was still less than one-third the 1986 level. The decline in North Slope petroleum construction spending is due mainly to completion of major development investments at Lisburne and Endicott Reservoirs. Downstream Operations Downstream operations in Alaska include transportation of crude oil and natural gas and operations of six oil refineries, an LNG plant, and a petrochemical plant manufacturing ammonia-urea based fertilizers. The LNG and fertilizer manufacturing facilities process natural gas from the Cook Inlet region. The available indicators of downstream operations are Trans-Alaska Pipeline employment, petroleum refining employment, natural gas consumption by industrial facilities, and petroleum sector exports. The petroleum sector provided $410 million in exports in 1988, including $16 million of Cook Inlet crude oil. Between 1986 and 1988, the share of LNG in total sector exports declined from about one-half to about one-third, due to increased exports of fertilizer and refined products. PETROLEUM SECTOR REPORT, ISER, AIDEA S-3

FIGURE A Price of Alaska North Slope Crude Oil Purchased at U.S. Gulf of Mexico in 1988 Dollars per barrel 18.---~-----------------------------------------, 14 12 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Weekly Average from Dally Spot Quotes Source: Table A-1 PETROLEUM SECTOR REPORT, ISER, AIDEA S-4

FIGURE B Estimated Average Drilling Costs Onshore Alaska Dollars per foot 500~--~--~~-----------------------------------, 400 300-200 100L_~ -L -L ~--L_~ L L ~--L-~---L--~ 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 Source: Table A-5, from Joint Association Survey on Drilling Costs, American Petroleum Institute PETROLEUM SECTOR REPORT, ISER, AIDEA S-5

FIGURE C Total Alaska Crude Oil Production Average Monthly Rate, Alaska Fields Million barrels per day 2.3~--------~--~---------------------------------. 2.1 1.9 1.7 1.5LLLLLLLULULULU~~~~lLLLLLLLLLUULULULULU~~~ 1985 1966 1987 1988 1989 Source: Table A-~3, A-14, and A-16, from Alaska Oil and Gas Conservation Commission, Bulletin PETROLEUM SECTOR REPORT, ISER, AIDEA S-6

FIGURED Number of permits per month Total Well Permits Issued Alaska State Jurisdiction 40 30 20 10 OLLLLLLLLLLLLLLLLLLLLLLJ-LLLLLJ-LLLLLLLLLLLLLLLJ-LLL~ 1985 1986 1987 1988 1989 Source: Table A-25, from Alaska 011 and Gas Conservation Commission PETROLEUM SECfOR REPORT, ISER, AIDEA S-7

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SECTOR REPORT PETROLEUM The petroleum sector contains a number of industries whose actjvjtles include production, transportation, and manufacturing of crude oil and natural gas. The sector also includes activities related to exploration for new oil and gas fields as well as investments to develop or enhance production in new or existing fields. This report on the petroleum sector contains five sections. The first two sections discuss major demand and cost factors which influence growth of this sector. The last three sections discuss crude oil and natural gas production, exploration and development activities, and downstream operations, respectively. Each section contains a discussion of key economic indicators relevant to that aspect of the petroleum sector. I. World Oil Markets Worldwide markets for crude oil and its energy substitutes ultimately determine the demand for the petroleum sector in Alaska. Since the cost of transporting oil by tanker is a small fraction of the value of the product, oil produced anywhere in the world may potentially compete with Alaska oil. Despite enormous current crude oil production, Alaska represents a small fraction--just over three percent--of world production. Consequently, Alaska production has little influence on world prices, although it may affect prices in certain regional markets, particularly on the U.S. West Coast. A, Crude Oil Prices Figure 1 shows weekly average prices of Alaska North Slope (ANS) and three other "marker" crudes from January 1988 to May 1989. Prices shown in Figure 1 are measured at varying places around the world and are for different types of oil, so one would expect them to differ somewhat. ANS prices are quoted from purchases at Gulf of Mexico refineries. Figure 1 shows that oil prices were generally falling through most of 1988, reaching a low of around $11 per barrel for ANS in early October. Beginning in December, however, oil prices rose rapidly, reaching a peak of over $20 per barrel for ANS in April 1989 before beginning to decline once again. Although all crude oil prices move together following world market fluctuations, prices vary by location and source reflecting quality and marketing differentials. Figure 2 shows spot market price differentials between Alaska North Slope oil and the other three crudes derived from the price data shown in Figure 1. Due to transportation bottlenecks and local refining capacity, price differentials for spot purchases fluctuate considerably, with no clear pattern. Figure 2 shows that the West Texas Intermediate (WTI) oil price is most stable relative to ANS, with the ANS gulf coast price remaining $1.50 to $2.00 lower than WTI. PETROLEUM SECTOR REPORT, ISER, AIDEA 1

Wellhead prices received by Alaska producers fall below the world market prices shown in Figure 1 by the cost of transporting oil from the oil field to a major consuming region. Figure 3 shows monthly weighted average wellhead oil prices for Cook Inlet and North Slope fields since January 1979. Three distinct periods may be noted in the figure, representing different market conditions for the Alaska industry. From 1979 through the first half of 1980, price controls remained on Cook Inlet oil, keeping its price low despite inflation in world prices. Then from 1981 through 1985 came the period of historic high and stable prices. During these years, the price differential between Cook Inlet and North Slope oil reflects primarily the Trans-Alaska Pipeline System (TAPS) tariff of around $6 per barrel, although ANS crude's relatively higher sulfur content and heavier gravity also reduces its market value somewhat compared to Cook Inlet oil. Finally, from 1986 to present, world prices fell dramatically from their 1981-85 level and began to fluctuate. North Slope wellhead prices fell by less than Cook Inlet prices due to a decline in the TAPS tariff following settlement of the major tariff dispute. B. Natural Gas Prices Natural gas prices on the world market are roughly equivalent over the long run to oil when measured on an energy-equivalent basis. At a world oil price of $17 per barrel, natural gas is worth roughly $3.00 per thousand cubic feet (Mcf) as an energy substitute for oil. However, gas costs more to transport per dollar value of product than crude oil, roughly $2.00 per Mcf to send LNG from Cook Inlet to Japan.' Since Alaska has a surplus natural gas, prices remain lower than in most areas of the world. But world energy prices less the cost of transportation from the field to a consuming area place a floor on the long-run wellhead price of natural gas. Figure 4 shows monthly weighted average wellhead natural gas prices for the Cook Inlet and North Slope regions since January 1979. The Cook Inlet prices remain quite stable until 1986 at $0.70 per Mcf or less. This is because most Cook Inlet gas was sold under fixed-price long-term contracts to Southcentral Alaska gas and electric utilities. As the old contracts began to expire, new contracts were negotiated at higher and more flexible prices. Current Cook Inlet prices of $1.30 to $1.40 per Mcf are slightly higher than the world price less the cost of new LNG facilities. North Slope gas prices shown in Figure 4 represent the wellhead price of gas produced from the Prudhoe Bay field. Most of North Slope gas production is used in oil field operations and for electric power generation for related industrial facilities. There is as yet no market for the enormous volume of North Slope gas outside the region, and the main purchasers of gas are also the producers. Consequently, the North Slope gas price does not necessarily reflect market conditions. PETROLEUM SECTOR REPORT, ISER, AIDEA 2

FIGURE 1 World Spot Market Oil Prices* January 1988 - May 1989 $24 - dollars per barrel J F M A M J J A S 0 N D J F M A E A P A u u U E C 0 E A E A N B R R Y N L G P T v c N B R 1988 1989 - ANS,_ WTI -+-SAUDI LT -a- BRENT A p R M A y Weekly averages of dally spot price quotes. Compiled by Dudley Platt, U.S. Dept. of Interior, MMS. PETROLEUM SECTOR REPORT, ISER, AIDEA 3

FIGURE 2 World Spot Market Price Differentials January 1988 - May 1989 dollars per barrel $3r---~----------------------------------------------.l $2 $1 ~)'~\ $0~~~~+---------------~----------~~~----~~ $1 $2 ' \(', I' A.\ J A N 1988 F M A M E A P A 8 R R Y J u N J u L A S 0 U E C G P T N D 0 E v c J A F E M A N 8 R 1989 ~ ANS WTI -t-ans-saudi LT --+- ANS-8RENT A P R M A y Weekly averages of daily spot price quotes. Compiled by Dudley Platt, U.S. Dept. of Interior, MMS. PETROLEUM SECTOR REPORT, ISER, AIDEA 4

FIGURE 3 Weighted Average Wellhead Oil Price Cook Inlet and North Slope Regions January 1979 - February 1989 dollars per barrel $35,-------------------------------------------, $30 $25 $20 $15 $10 $5 $OL---~--J---~---L---L--~--~----L---L_~ 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 - Cook Inlet -a- North Slope Estimated from severance tax returns. Source: Alaska Dept. of Revenue, 011 and Gas Audit Division PETROLEUM SECTOR REPORT, ISER, AIDEA 5

FIGURE 4 Weighted Average Wellhead Gas Price Cook Inlet and North Slope Regions January 1979 - February 1989 dollars per mel $2.50r---~-------------------------------------, $0.QQL---~---L--~----L----L ~--~----~---L--~ 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 - Cook Inlet -a- North Slope Estimated from severance tax returns. North Slope price Is price of Prudhoe Bay gas. Source: AK DOR. PETROLEUM SECTOR REPORT, ISER, AIDEA 6

II. Cost of Business Important cost of business items include drilling costs, oil field construction wages, transportation tariffs, petroleum industry wages, and taxes. Drilling costs indicate the cost of basic exploration and field development investments. Oil field construction wages are a major component of the cost of installing production facilities, pipelines, and processing plants. Pipeline tariffs and tanker rates represent the major categories of transportation costs. Average wage rates in the petroleum industry indicate trends in operating and management costs. A. Drilling Costs Figure 5 shows trends in average drilling costs in onshore and offshore environments in Alaska and the U.S as estimated from the Joint Association Survey. Alaska onshore drilling costs are considerably higher than average U.S. onshore costs, but declined steadily from 1981 through 1987, the latest year for which data are available. Because the number of development wells drilled greatly exceeds the number of exploratory wells in these onshore statistics, as will be seen below, this indicator more closely measures trends in development costs. Alaska offshore costs have generally been similar to national costs, and have also been declining for the past few years. From 1981 to 1983, however, expensive exploratory drilling in the Beaufort Sea, culminating with the "Mukluk" dry hole, temporarily disrupted the overall trend. Offshore drilling costs vary widely by location, and since the level of offshore drilling is sporadic, changes in this series may not necessarily signify changes in costs for the industry as a whole. B. North Slope Construction Wage In the 1970s, the center of Alaska's oil development activity shifted from the Cook Inlet region to the North Slope. Labor costs for North Slope construction is an important indicator of the cost of installing production facilities, pipelines, and supporting infrastructure. Figure 6 shows average monthly earnings since 1980 for construction workers in the Prudhoe Bay area, as reported by the Alaska Department of Labor. These earnings data cannot be adjusted for changes in hours and overtime, so there is considerably random fluctuation. Earnings peaked at over $7,000 per month in 1983. However, Figure 6 shows that there has been significant downward movement since that time, with wage levels stabilizing in 1988 at roughly $4,500 per month. C. Transportation Costs Pipeline tariffs are a major cost of transportation, particularly for North Slope fields. Figure 7 shows the historical pattern of tariffs for the Trans-Alaska Pipeline. The figure shows the amount North Slope oil producers report that they were charged per barrel for transporting crude oil from Pump Station One to Valdez. To compute the average, tariffs PETROLEUM SECTOR REPORT, ISER, AIDEA 7

posted by individual producers are weighted by the quantity of their transported crude. As shown in Figure 7, TAPS tariffs remained at around $6 per barrel from the beginning of pipeline operations in 1977 through 1985. After 1985, tariffs dropped steadily as a result of settlement of the tariff dispute. The TAPS tariff is a major cost of business to oil firrns producing or contemplating production on the North Slope. Alaska refiners of North Slope crude also pay for TAPS transportation. TAPS tariff times throughput volume--closely approximated by marketed North Slope oil production volume--represents revenues received by Alyeska Pipeline Service Company. Figure 8 shows the decline in the TAPS tariff since 1986. At the end of 1985, tariffs were still around $6. In early 1989, however, the rate was barely one-half that prevailing in 1986. Since most Alaska oil production is marketed outside the state, costs of water transportation via tanker are also a significant factor. Oil transportation from one U.S. port to another falls under the Jones Act, which requires cargo to move in more costly U.S. built vessels operated by higher-paid U.S. crews. The congressional ban remains on exporting North Slope crude, although some Cook Inlet oil--as noted below--has been exported in foreign tankers since 1987. D. Petroleum Industry Wages Figure 9 shows average annual earnings in oil and gas extraction from 1970 through the third quarter of 1988. Average wages in the petroleum extraction industry indicate trends in oil field operating costs and in management costs for the industry. Annual average salaries rose steadily from a level of around $20,000 in 1974 to over $60,000 in 1987. Although the average wage fluctuated somewhat in 1987 and 1988, there has been no downward trend since the mid-1980s such as was noted for Prudhoe Bay construction wages. Figure 10 shows average monthly earnings in petroleum refining over the same period. Refining wages have remained fairly constant since 1984 at around $4,000 per month. Unlike, drilling activities, labor cost is a relatively small portion of capital-intensive operations such as petroleum refining. E. Taxes The production or severance tax--the main state tax on the industry differs for oil and gas. Severance taxes are complicated by the Economic Limit Factor (ELF) which adjusts the tax rate for each field by a formula upon average production per well and, effective in 1989 for oil fields, by total field production. Effective oil severance tax rates range from zero for most Cook Inlet fields to near 15 percent for Prudhoe Bay. In addition, corporate income taxes for the petroleum industry are calculated using an apportionment formula based upon the ratio of Alaska to worldwide sales, assets and production. Since effective tax rates vary widely by field and by producer, no indicator is meaningful. PETROLEUM SECTOR REPORT, ISER, AIDEA 8

FIGURE 5 $1500 $1200 $900 dollars per toot Estimated Average Drilling Costs United States and Alaska 1975-1987 $600 $300.. $0,- 1975 1977 -~ 1979 ::::::;;; 1981 1983 1985 ~ ~ 1987 US Onshore -+- US Offshore ~ AK Onshore -e- AK Offshore Source: Joint Assn. Survey on Drilling Costs. American Petroleum Institute PETROLEUM SECTOR REPORT, ISER, AIDEA 9

FIGURE 6 Average Monthly Construction Earnings Prudhoe Bay Area, 1980-1988 Dollars per month per worker (thousands) 8~~~----~------~~--~----------------~ 7 6 5 4 3LL~-L~~LL~-L~-L~~LL~-L~~LL~-L~~ 1980 1981 1982 1983 1984 1985 1986 1987 1988 Source: Alaska Department of Labor PETROLEUM SECTOR REPORT, ISER, AIDEA 10

FIGURE 7 dollars per barrel $7 Annual Trans-Alaska Pipeline Tariff 1977-1988 $6 -,-,- - - - r--. - r- $5 $4 $3 $2 $1 I I.. I I..,-,- I,- $0 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 Source: Alaska Dept. of Revenue, Oil and. Gas Audit Division PETROLEUM SECTOR REPORT, ISER, AIDEA 11

FIGURE 8 Monthly Trans-Alaska Pipeline Tariff January 1986 - February 1989 dollars per barrel $5.00,---~----~-------------------------------. $4.50 ~\\.-.~-. $4.00 ~ $3.50 Source: Alaska Dept. of Revenue, 011 and Gas Audit Division " I! ' ' J 1988 1989 PETROLEUM SECTOR REPORT, ISER, AIDEA 12

FIGURE 9 Average Annual Earnings Oil and Gas Extraction Dollars per year per worker (thousands) 80.---~--~--~---------------------------------, 60 40 20 OL_---L--~----J---~----L----L----L----L--~~ 1970 1972 197 4 1976 1978 1980 1982 1984 1986 1988 Source: Alaska Department of Labor, Statistical Quarterly PETROLEUM SECTOR REPORT, ISER, AIDEA 13

FIGURE 10 Average Monthly Earnings Petroleum Refining Dollars per month per worker SOOOr--------------------------------------------. 4000 3000 2000 1000 OL---~ L ~----~---L--~----L---~--~~ 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 Source: Alaska Dept. of Labor, Statistical Quarterly. PETROLEUM SECTOR REPORT, ISER, AIDEA 14

III. Crude Oil and Natural Gas Production Since Alaska became a state in 1959, 11 oil fields have been discovered and brought into commercial production. None of these fields has yet been abandoned, although the Milne Point has produced intermittently since its development in 1986. In addition to gas produced in association with oil at the oil fields, natural gas reserves are being produced from 11 gas fields. In 1988, Alaska produced record totals of 738 million barrels of oil and 405 billion cubic feet of natural gas net of reinjection. Cumulative production by the end of 1988 was 7.7 billion barrels of oil and 4.5 trillion cubic feet net production of natural gas.' A. Oil Production Figure 11 shows historical annual crude oil production from the state's two producing regions: Cook Inlet and North Slope. Cook Inlet oil production began in 1959, and expanded to a peak of 82 million barrels in 1970. From that point, production has gradually declined, but Cook Inlet fields still produced 16 million barrels of oil in 1988. Commercial production began on the North Slope with completion of the Trans-Alaska Pipeline System in 1977 and increased rapidly to around 700 million barrels in 1980. During the 1980s, North Slope oil production continued to grow slowly to a record of 722 million barrels in 1988. Figure 12 shows the annual North Slope oil production for Prudhoe Bay, Kuparuk, and other fields. Kuparuk production began in late 1981 and has grown steadily. This and the development of the smaller "marginal" fields in the past three years has so far more than offset the beginning of the decline in production from the Prudhoe Bay field. Figure 13 shows average daily Prudhoe Bay production rates since January 1985. Prudhoe oil production averaged around 1,600 thousand barrels per day (mb/d) through most of 1988, but had declined to less than 1,500 mb/d by February 1989. Figure 14 shows average daily oil production rates for Kuparuk and other North Slope fields. It shows Kuparuk production rising from around 200 mb/d in 1985 to over 300 mb/d in 1988. The Milne Point field produced at around 10 mb/d through most of 1986 before being shut in due to low wellhead prices. Lisburne production started in late 1986, rising to a level of around 40 mb/d. The Endicott reservoir began production in October 1987, with production rates quickly rising to around 100 mb /d. Cook Inlet oil production is dominated by the giant McArthur River field, as shown in Figure 15. Like the North Slope fields, McArthur River, and the other offshore Cook Inlet fields, are located on state leases. Cook Inlet onshore fields--swanson River and Beaver Creek--are located within the Kenai National Wildlife Refuge. Figure 16 shows average daily production rates for the Cook Inlet fields since January 1985. All of these fields have been producing for a number of years and are declining slowly as reserves are depleted. In 1988, McArthur River production averaged about 20mb/d. Production rates at Middle Ground Shoal, Granite Point, and Swanson River were roughly similar at 8, 7, and 6 mbjd, respectively. The Trading Bay field produced at around 2.5 mb/d, while tiny (by Alaskan standards) Beaver Creek produced less than 0.5 mb/d. PETROLEUM SECTOR REPORT, ISER, AIDEA 15

B. Natural Gas Production Alaska natural gas production net of the amount reinjected in producing fields averaged around 1,100 million cubic feet per day (mmcf/d) in 1988. Figure 17 shows that Alaska gas production is approximately evenly divided between the Cook Inlet and the North Slope regions. Except for two small fields supplying gas and electric utilities in the Barrow area, North Slope gas is produced mainly from oil fields. Although most of this associated gas is reinjected into the reservoirs to enhance oil production, a growing fraction is used for industrial purposes, chiefly to produce more oil from North Slope oil fields. Since producers use most North Slope gas on their leases, it is not considered marketed, and therefore, is not taxed. On the other hand, an active market flourishes for Cook Inlet gas for a variety of uses. Figure 18 shows how Cook Inlet gas represents the major proportion of marketed natural gas production, the quantity which forms the base for state severance taxation. Alaska marketed gas production averages nearly 20 million cubic feet per month. Sharp fluctuations in recorded marketed production in 1988 do not show up in the net production curve of Figure 17, so they presumably represent accounting corrections for tax purposes. C. Direct Economic Effects Direct effects of petroleum production activities on the Alaska economy include employment and state revenues. Figure 19 shows average monthly employment in oil and gas extraction (Standard Industrial Classification major group 13) since 1959. The figure shows that petroleum industry employment grew from several hundred workers in the first half of the 1960s to an average of around 8,000 workers in the 1980s. Although the number of employees fluctuates from quarter to quarter, the overall employment level has been fairly constant since 1982. Figure 20 shows royalties the state of Alaska has received from ownership of oil and gas lands by calendar year since 1968. Before completion of the Trans-Alaska Pipeline in 1977, the Cook Inlet region contributed all the state's production revenues. Low Cook Inlet oil prices due to national crude oil price controls depressed state petroleum revenues from this region during the period 1974-1980. Figure 20 clearly shows the dominant role of North Slope oil for producing state revenues. Since production has been stable or increased slowly since 1981, fluctuations in the 1980s reflect principally fluctuations in world oil prices. Figure 21 which shows state royalties received monthly between January 1987 and January 1989, illustrates how changing world oil prices affect revenues over the short term. Average North Slope wellhead oil prices ranging from $7 to $12 per barrel result in royalties ranging from approximately $50 million to $90 million per month. PETROLEUM SECTOR REPORT, ISER, AIDEA 16

FIGURE 11 Annual Crude Oil Production Cook Inlet and North Slope Regions 1959-1988 million barrels per year 800,---------~~--------------------------------- 600 400 200-0 '+--'-~...-- '-""~---.J-'!"-,'-- I I I llilrj --,... LII.U.._._..._,._, 1959 1963 1967 1971 1975 1979 1983 -~~--_..]-' 1987 -Cook Inlet D North Slope Alaska 011 and Gas Conservation Commission, Statistical Reports and Bulletin PETROLEUM SECfOR REPORT, ISER, AIDEA 17

FIGURE 12 Annual Crude Oil Production North Slope Fields 1974-1988 800r.m.. ~il~lio~n~b~ar~r~e~ls~p~e~r~y~e~a~r--------------------------------. 600 1981 1983 5 1987 D Prudhoe - Kuparuk D Other Other fields include Lisburne, Endicott, and Milne Point. Source: AOGCC PETROLEUM SECTOR REPORT, ISER, AIDEA 18

FIGURE 13 Average Crude Oil Production Rates North Slope Prudhoe Bay January 1985 - February 1989 thousand barrels per day 2,000,--------: _:, 1,800 I 1,6oo ~!'-;,!'*.. hr'\ I'Y'\ fv. 1 K f'*"~,;/\,..._,,.,.--"'! II V ~.. '\I "J \. V ~I * ~ 1,400-1,200 1, 0 0 0 LLLLJ'_l'_j'..-LJ j j j_ '.LLLLLLJ'--'-l..-Ll_j j j j LL.l LLLJLLJ..-Ll_j j j j_j_j_ll_lj'''-l 1985 1986 1987 1988 1989 -+-- Prudhoe Bay Source: Alaska 011 and Gas Conservation Commission, Bulletin PETROLEUM SECTOR REPORT, ISER, AIDEA 19

FIGURE 14 Average Crude Oil Production Rates North Slope Fields Other than Prudhoe January 1985 - February 1989 t ~ h~o~u~sa=n~d~ba=r~r~el~s~p~e~r~d~a~y 350' 300 ~ I 250 i 200 I! 150 100 50 Q~~~LU~4J~~~~~LU~LU~~~~LL 1985 1986 1987 1988 1989 -Endicott --">-- Kuparuk River ~Lisburne -e- Milne Point Source: Alaska Oil and Gas Conservation Commission, Bulletin PETROLEUM SECTOR REPORT, ISER, AIDEA 20

FIGURE 15 Annual Crude Oil Production Cook Inlet Fields 1974-1988 million barrels per year 80r---------~~---------------------------------- 0 McArthur River filllm Other Offshore D Onshore Fields Trading 8, Mid Grd Shoal, Granite P. Swanson River and Beaver Creek. Source: AOGCC PETROLEUM SECfOR REPORT, ISER, AIDEA 21

FIGURE 16 Average Crude Oil Production Rates Cook Inlet Fields January 1985 - February 1989 thousand barrels per day 30r--------------------------------------------, 25 20 15 -l!- Beaver Creek Granite Point --G- Middle Grd Shoal -&--- Swanson River McArthur River Trading Bay Source: Alaska Oil and Gas Conservation Commission, Bulletin PETROLEUM SECTOR REPORT, ISER, AIDEA 22

FIGURE 17 Net Natural Gas Production Rates* Cook Inlet and North Slope Regions January 1985 - February 1989 mmcf per day 800,-------~----------------------------------, 700 600 6 500 400 300 200 100 0 1985 1986 1987 1988 1989 -<>-Cook Inlet -B- North Slope Gross production less reinjection. Source: Alaska Oil and Gas Conservation Commission, Bulletin PETROLEUM SECTOR REPORT, ISER, AIDEA 23

FIGURE 18 Marketed Gas Production Cook Inlet and North Slope Regions January 1977 to February 1989 billion cubic feet per month 40,-----------~---------------------------------- Cook Inlet -North Slope Estimated from severance tax returns. Source: Alaska Department of Revenue, Audit Division. PETROLEUM SECTOR REPORT, ISER, AIDEA 24

FIGURE 19 Average Monthly Employment Oil and Gas Ex traction Number of employees (thousands) 10,---------~----------------------------------~ 8 6 4 2 0~----~------~------~------L-------L-----~ 1959 1964 1969 1974 1979 1984 1969 Source: Alaaka Department of Labor, Statistical Quarterly PETROLEUM SECI'OR REPORT, ISER, AIDEA 25

FIGURE 20 Annual Royalties Received from State Leases 1968-1988 million dollars $1800,-------------------------------------------~ r- $1500 r- r-...,-r- $1200 r- r-.. $900. r $600 r-!.. r - $300 I..QD I r I I r.. '-I mild ' ""' $0 ' ' 1968 1970 1972 1974 1976 1978 1980 ' 1982 1984 1986 1988 J BOil Cook Inlet D Oil North Slope -Gas, all areas Source: Alaska Dept. of Revenue, 011 and Gas Audit Division PETROLEUM SECTOR REPORT, ISER, AIDEA 26

FIGURE 21 Monthly Royalties Received from State Leases January 1987 - January 1989 million dollars $100.--------------------------------------------, $80 l I $60 $40 $20 $OP-~==~~m=~~-==p-=~~--9=~===F~ 1987 1988 1989 BOil Cook Inlet D Oil North Slope - Gas, all areas Source: Alaska Dept. of Revenue, 011 and Gas Audit Division PETROLEUM SECTOR REPORT, ISER, AIDEA 27

IV. Exploration and Development Activities Developing new oil and gas reserves requires making investments which may have a large impact on the economy. First, geological and geophysical crews collect and analyze field data in order to locate favorable sites for drilling exploratory wells. Then, after obtaining leases and permits, the next step is to drilling one or more exploratory wells. If a well shows a promising amount of oil or gas, the company is likely to drill several additional wells to see if the discovery is of sufficient size to support commercial development. If a decision is made to proceed to develop new reserves, then there will be major economic impacts associated with installation of development facilities, pipelines, and pumping stations, along with drilling of development wells. Development activities do not stop after the field comes into full production, however. The operator is likely to drill additional production wells, work over existing wells, and install enhanced recovery facilities as existing reserves are gradually depleted. A. Exploring for New Oil and Gas Fields The main indicators of economic activity related to oil and gas exploration are the number of geological and geophysical crews operating in the field and the rate of exploratory drilling. Figure 22 shows the number of geological and geophysical exploration crew-months in Alaska between 1958 and 1987, as reported by the American Association of Petroleum Geologists. From 1958 through 1985, the number of exploration crew-months fluctuated between 50 and over 200, with peak periods immediately preceding and following major state and federal OCS lease sales. Lower oil prices in 1986 and in 1987, the latest year for which data are available, served to discourage exploration activity. Geological and geophysical work continued, however, at a rate equivalent to at least two crews working continuously year-round. The decline during the period 1958-1987 in the number of geological relative to geophysical crews, shown in Figure 22, reflects the influence of advancing geophysical technology as well as increased knowledge of regional geology. During the same period, geological and geophysical exploration increasingly shifted toward the North Slope region and away from Cook Inlet and other areas. Figure 23 shows the regional distribution of the crew-month data shown in Figure 22. The majority of these exploration crews worked onshore, although marine seismic crews represented a significant fraction of the total. Figure 24 shows the number of petroleum seismic crew-months by onshore vs. offshore, from 1967 through 1987, as reported by the Society of Exploration Geophysicists. Seismic surveys represent the predominant type of geophysical exploration. However, the data shown in Figure 24 come from a different survey from the data shown in Figures 22 and 23, so the totals do not necessarily agree. Figure 24 shows that while most Alaska seismic crews worked onshore, marine seismic exploration was equally important in the mid 1970s and early 1980s during periods of extensive exploration of the federal OCS. PETROLEUM SECTOR REPORT, ISER, AIDEA 28

Exploratory wells drilled onshore or off the coast of Alaska have averaged around 15 to 20 wells per year, but range from a high of 40 wells drilled in 1984 to a low of 8 drilled in 1986. In 1988, oil companies received permits to drill 10 exploratory wells in areas subject to state jurisdiction (onshore and submerged lands up to three miles offshore) and 2 wells on the federal OCS.' By comparison, permits were obtained to drill nearly 150 development and service wells in 1988. Since offshore or remote exploratory wells often cost at least ten times as much as development wells, the effect on the economy of exploration activities may often be comparable to that of development activities. We shall examine drilling activity in greater detail below. B. Oil and Gas Field Development Activities Figure 25 shows the number of exploratory wells drilled on the federal OCS, as well as the number of permits issued for exploratory wells and for development and service wells in state jurisdiction, from 1970 through 1988. No commercial development of oil or gas reserves has taken place on the Alaska federal OCS to date. Service wells are wells related to developing an oil or gas field which are not intended to produce oil or gas. They are most typically used for injecting fluids or natural gas into an oil reservoir to enhance recovery. Figure 25 shows that the total number of well permits generally increased from 1970 to reach a peak in 1985 at over 300 wells. In 1987 and 1988, companies obtained permits to drill less than one-half this number. Generally only 10 to 20 percent of well permits are related to exploration, with the remainder in the development and service category. Figure 26 shows the regional distribution of the drilling permits shown in Figure 25. Figure 26 illustrates the increasing share of drilling activity taking place on the North Slope or the adjacent Beaufort Sea. Now a minor share of total drilling activity, the Cook Inlet region still accounts for around 15 wells drilled each year. Although important in geological and geophysical surveys, areas outside the Cook Inlet and the North Slope regions have made an insignificant contribution to total Alaska drilling activity. Figure 27 shows the number of Alaska state drilling permits issued by region and by type on a monthly basis. This figure describes an important current economic indicator for the petroleum sector. Occasionally, however, there may be a time lag of a month or two between the time a permit is obtained and the time drilling starts. A permit is required for each well, but not all permits result in a well actually being drilled. Development of new reserves requires construction of new production facilities, pipelines, and pumping stations, in addition to drilling wells. As we have seen, the North Slope region has become the center of petroleum development activity in Alaska. Consequently, the level of construction employment for the Prudhoe Bay area--the headquarters of North Slope development--provides a useful economic indicator of petroleum development. Figure 28 shows average monthly construction employment reported for the Prudhoe Bay area from 1980 through the third quarter of 1988. The size of the construction work force increased from several hundred in early 1980 to a peak of nearly 4,000 in late 1983 as major facilities were installed at the Prudhoe Bay and Kuparuk fields. Prudhoe area construction employment dropped rapidly to less than 1,000 two years PETROLEUM SECTOR REPORT, ISER, AIDEA 29

later, then picked up in late 1986 as facilities were installed for the Endicott reservoir before falling even further in 1987. By the beginning of 1988, Figure 28 shows that construction employment at Prudhoe Bay had returned to the 1980 levels of around 300. FIGURE 22 Petroleum Geological and Geophysical Exploration Crew-months by Crew Type Alaska, 1958-1987 number of crew-months 250.------------------------------------------------, 200 150 100 50 0 ' ' 195819601962196419661968197019721974197619781980198219841986 D Geophysical rnlil Geological Geological not available for 1982~1986. Source: American Association of Petroleum Geologists PETROLEUM SECfOR REPORT, ISER, AIDEA 30

FIGURE 23 Petroleum Geological and Geophysical Exploration Crew-months by Alaska Region 1958-1987 number of crew-months 250.------------------------------------------------, 200 m1 150 ~: 1\\1 I'",,, 100 :: ':.. 50...!! w m!!1 TIID.~b]~ o~~+.uu~uu+.uu~~+.uil~uil+,uil~ull~,~~uil~~.~~.~ 195819601962196419661968197019721974197619781980198219841986 D Cook Inlet M North Slope ffililil Other Areas Note: For 1981~86 Includes only geophysical crew-months. Source: American Association of Petroleum Geologists PETROLEUM SECfOR REPORT, ISER, AIDEA 31

FIGURE 24 Petroleum Seismic Exploration Activity Alaska Onshore and Offshore 1967-1987 number of crew-months 200r---------------------------------~----------~ [ITIT] Onshore Seismic 0 Marine Seismic Source: Society of Exploration Geophysicists, Annual Activity Reports 1 and Geophysics: The Leading Edge PETROLEUM SECTOR REPORT, ISER, AIDEA 32

FIGURE 25 Alaska State Drilling Permits Issued and Wells Drilled in Alaska OCS Region 1970-1988 number of wells 350.------------------------------------------------, 300 250 200 150 100 50 Q~~LY~LU~LU~UiLY~LU~LU~LU~~~~LU~ 1970 1972 1974 1976 1976 1960 1982 1984 1986 1988 D State Dev/Srvc -State Exploratory - OCS Exploratory Sources: Alaska 011 and Gas Conservation Commission, and Minerals Management Service PETROLEUM SECTOR REPORT, ISER, AIDEA 33

FIGURE 26 Alaska Drilling Activity by Region Exploration and Development Wells 1970-1988 number of wells 350r---------------------------------------------, 300 250 200 150 100 50 D Cook Inlet - N.Siope/Beaufort Sea -Other Areas State well permits Issued, and OCS exploratory wells drilled. Sources' AOGCC; MMS PETROLEUM SECTOR REPORT, ISER, AIDEA 34

FIGURE 27 Alaska State Well Permits Issued by Type Cook Inlet and North Slope Regions January 1985 - March 1989 number of permits 35,-----~-------------------------------------, 30 25 20 15 10 5 \ 0~~~~~~~~~~~~~~~~~~ 1985 1986 1987 1988 1989 Exploratory Cook I Exploratory N Slope Devlp/Srv Cook I Devlp/Srv N Slope Source: Alaska 011 and Gas Conservation Commission PETROLEUM SECTOR REPORT, ISER, AIDEA 35

FIGURE 28 Average Monthly Construction Employment Prudhoe Bay Area, 1980-1988 Number of workers (thousands) 4~----------------~------------------------. 3 2 1 Source: Alaska Department of Labor 1982 1983 1984 1985 1986 1987 1988 PETROLEUM SECTOR REPORT, ISER, AIDEA 36

V. Downstream Operations Downstream operations in Alaska include transportation of crude oil and natural gas and operations of six oil refineries, an LNG plant, and a petrochemical plant manufacturing ammonia-urea based fertilizers. The LNG and fertilizer manufacturing facilities process natural gas from the Cook Inlet region. A. Transportation Transportation of oil and gas in Alaska is dominated by the Trans-Alaska Pipeline System (TAPS). The Alyeska Pipeline Service Company operates the TAPS pipeline running from Prudhoe Bay to Valdez and the Valdez tanker terminal. Alyeska receives revenues from transporting North Slope crude which approximately equal the TAPS tariff times the rate of North Slope oil production. Figure 29 shows annual average TAPS operating employment since the pipeline began operations in 1977. TAPS employment declined from the level of around 1,100 workers in the early years to stabilize at just under 900 employees for the past three years. In addition to TAPS, several other pipelines transport oil and gas, including lines for processing, and distribution within Alaska. On the North Slope, Arco's Kuparuk pipeline runs from the Kuparuk field to Pump Station One of TAPS. Smaller pipelines run from the Milne Point field to the Kuparuk line and from Endicott to TAPS. Cook Inlet oil pipelines include the Kenai Pipeline Company transporting Swanson River oil to Nikiski and the Cook Inlet Pipeline servicing oil production from the McArthur River, Granite Point, and Trading Bay fields. The ENSTAR Natural Gas Company operates two natural gas pipelines carrying gas from Cook Inlet fields to Anchorage. Tesoro also operates a petroleum products pipeline from its Nikiski refinery to Anchorage. Employment estimates for these smaller pipelines, or for the industry as a whole, are not available, since most integrated companies do not report separate estimates of pipeline employees. B. Petroleum Refining Alaska contains six oil refineries with a combined capability of processing around 225 thousand barrels per day (mb/d) of crude oil. Chevron's Nikiski refinery began operations in 1963 and has a capacity of 25 mb/d, manufacturing primarily jet fuel and diesel. The Tesoro refinery at Nikiski, starting operations in 1969, can process up to 80 mb/d, making primarily gasoline and jet fuel. The MAPCO North Pole refinery has a capacity of 90 mb/d and has produced gasoline, jet fuel and diesel since 1977. Petrostar also has operated a small refinery in North Pole since 1985 which now can process as much as 7 mb/d of crude into diesel and kerosene.' These four refineries sell the products mentioned mainly to Alaska markets, but send heavy residual fuel oil outside. Some products are also exported, as we shall see below. In addition to the Cook Inlet and Interior refineries, two refineries operated by ARCO process a small amount of Prudhoe and Kuparuk oil for local use on the North Slope. PETROLEUM SECTOR REPORT, ISER, AIDEA 37