Alaska's Oil Exports

In 2003, a freshly christened oil tanker named the Polar Discovery sailed out of a shipyard in New Orleans.

The vessel was one of ConocoPhillips’ fleet of five E-class tankers that shipped oil out of Valdez, Alaska, dropping off its crude cargo at various ports along the United States’ West Coast.

At the time, more than 900,000 barrels of oil were being extracted from fields in the North Slope on a daily basis. And even though the state’s production was in a seemingly inevitable decline from its peak of 2 million barrels per day in March of 1988, Alaska was still our second-largest oil producer; Texas’ production at the time was only slightly higher.

Look, you and I both know how this story is turning out. Over the last decade, Alaska’s output has been cut in half, with the state barely extracting more than 400,000 barrels per day in July.

Of course, you might sit back and say that that much production is nothing to sneeze at and that the Last Frontier State is still our fourth-largest oil-producing state.

What else could possibly go wrong?

TAP Dancing to Death

I’ve mentioned before that the biggest issue facing Alaska right now is the production threshold at which the 800-mile Trans-Alaska Pipeline System (TAPS) can operate before major flow problems occur.

By 2023, North Slope production is expected to drop to 315,000 barrels per day. (Then again, if things keep going the way they’ve been, production will reach that mark much sooner.)

As it stands now, Alaska is on pace to average about 490,000 barrels per day in 2014. Just last month, ExxonMobil said it expected a 5.3% decline over 2013 production levels.

Exacerbating the situation further — if that were even possible — is the fact that the tight oil renaissance taking place in the Lower 48 is putting even more pressure on North Slope producers. Alaska’s output gets cut in half, and Texas’ production jumps twofold.

Sometimes life just isn’t fair for Big Oil.

Well, if the rest of the United States doesn’t want Alaska’s crude oil, it’s only fair it finds a new market… which is precisely what it did.

East to the Future

Today, the Polar Discovery is heading toward a different port of call.

Two weeks ago, nearly 800,000 barrels of Alaskan crude was loaded into the tanker’s hull at the Valdez Terminal. That’s enough oil to fill roughly 50 Olympic-sized swimming pools.

This time, however, its destination is Yeosu, South Korea.

This isn’t the ultra-light condensate that two companies in South Texas are exporting out of Corpus Christie, mind you. Thanks to an exemption written into the law, Alaskan producers are allowed to export crude oil.

That’s right — Big Oil would rather go up against OPEC in Asia than go head-to-head against the independent oil and gas companies that are pushing the United States’ domestic production to record levels.

Stiff Competition All Around

The Polar Discovery’s shipment marks the first time in a decade that Alaskan oil was exported to foreign shores.

The reason why is simple enough — South Korea is willing to pay more. In 2013, the country consumed over 2.3 million barrels of oil per day, and demand has been growing slowly over the last six years.

Having a few more available sources from which to buy its crude supply doesn’t hurt, either. Nearly 90% of the country’s oil imports come from OPEC members.

When it comes to production on the North Slope, there are really only three giant oil companies at play: ExxonMobil, BP, and ConocoPhillips. And while a chart of Alaska’s production since the early 1990s is enough to make me cringe, companies like ConocoPhillips are much better on the eyes.

ConocoPhillips’ latest tanker shipment isn’t a one-of-a-kind transaction, and it’s only a matter of time before more Alaskan crude hits Asian ports. Don’t be surprised when these exports begin to ramp up as the rest of the U.S. is flooded with oil from tight oil plays in North Dakota and Texas.

The real question is whether these three major oil companies can halt the long-term production decline currently plaguing Alaska.

Fortunately, oil isn’t the only card in their deck. Along with TransCanada, these companies have officially requested approval from the Federal Energy Regulatory Commission to get the ball rolling on their LNG project that would carry natural gas from the North Slope and export it out of Alaska as LNG.

If nothing else, potential LNG exports across the Pacific would also help cushion the blow from a diminishing oil industry.

I’ll leave you with one lingering question: Is Big Oil finally a buy?

Until next time,

Keith Kohl

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