Wednesday, May 11, 2011

North Shore Oil: from 14% to 0% in a hurry

The signal for this story was today’s front page Wall Street Journal Article on the concerns about keeping the Alaskan pipeline open.  To some degree, this is old news masking as urgent new news.  The Los Angeles Times had a report on this two years ago, and when we begin our quotes below we will start there.
The Alaskan Pipeline is the sole transport method for about 14% of our domestic oil supply.  Without the pipeline, we will be completely cut off from the Alaskan North Shore oil.   So when you reach the critical point (somewhere between 500,000 and 300,000 barrels a day) you do not have a gradual drop from 14% of domestic supply to ~8%; you go from 14% to 0%.
Dmitry Orlov in his recently released Reinventing Collapse 2nd Edition has noted that the downhill side of peak oil will not be a smooth progression.  I don’t know if he details this particular scenario.  But there are a number of reasons why you will get very choppy pricing and supply changes.
Some of the pricing change will be due to the pricing feedback loop between an item with a diminishing supply and a product with a very rigid demand elasticity.    If oil were Froot Loops , as price went up people would simply switch to Count Chocula.  But oil is one of those products that our economy has to have at least some of, no matter what the price.  Thus as supplies dwindles, there is some cut back in demand to help smooth out the rise, but not enough to make it even: prices spike. 
On the supply side, the nature of resource extraction dictates that supplies will not decrease at an even rate.  At a certain point, oil sources may have a certain amount of supply left within them, but at a certain price it is no longer feasible to keep paying the fixed costs of the infrastructure running and transport it to market.  Market mechanisms tend to work better in the here-and-now.  The market for the relatively more expensive alternate energy has this problems.  You may want some of it down the road, but the price today makes it hard to justify setting up the infrastructure in advance.
Kim Murphy, Los Angelos Times, 10 August 2010.
What this means for the continued delivery of oil to the rest of the U.S. from Alaska is significant. Engineers have warned that the pipeline — the only means of delivery of North Slope oil — will develop potentially dangerous problems with corrosion and ice if flows drop below 500,000 barrels a day, as they are expected to within the next five to 10 years.
At 350,000 barrels a day, which pipeline operators say could happen by 2022, frost heaves could cause the underground portions of the pipeline to dangerously wrinkle and kink.
Already, oil that once took 4½ days to surge from Prudhoe Bay to Valdez now crawls through in 14 days, with flow rates slowed to 2 mph.
Upgrading the pipeline to handle lower flows is possible but will cost "hundreds of millions of dollars," according to officials from the Alyeska Pipeline Service Co., which manages the facility for the three major oil companies that own most of it.
Since closing down the pipeline means shutting off all North Slope oil — 14% of the nation's domestic production — Alyeska has been working to reengineer the structure and says it hopes to keep it operating through 2030. The company has already replaced single-speed jet turbine pumps with variable-volume electric pumps, decommissioned six pump stations no longer needed and reconfigured others.
A study to be completed in December will determine just how low the oil flow can go before the pipeline is no longer viable. Options include heaters or chemical additives to keep ice from forming, lowering the water content of the oil before pumping or redesigning the "pigs" that course through the pipeline and clean it of wax buildup. Another is to just give up and build a smaller-diameter pipe.
You can see that there are alternatives to the existing pipeline, but they are expensive.  The current price of oil does not support the building of this infrastructure, although some future price may very well.
The oil companies of course are all in favor of the low cost, relatively low risk (to them) strategy of exploring for more oil in more areas.  If they find oil, they can send it along at a nice profit, if they do not:  they are only out the price of exploration: a normal operating cost for them.
There is more oil out there.  A guesstimate of about 10  billion barrels remains remains on the North Shore versus the 16.2 billion already pumped.  But the low hanging fruit has already been found and it will take 15 years to bring any oil found now online. The newer oil is more abrasive than the oil currently being pumped, and itself poses a risk to the pipeline.  From the stories, it is unclear how much of the “10” is known to be in the ground and is part of the supply being pumped, and how much” is speculative. Obviously, if they can explore and find newer supplies worth tapping that kicks the pipeline can down the road a little further.  I don’t have a problem with extracting the additional oil, but it would be nice if we used the time gained to put in emergency measures to deal with the dwindling supply.
Russ Gold, Wall Street Journal, 11 May 2011
Dwindling oil production along Alaska's northern edge means the pipeline carries less than one-third the volume it once did—and the crude takes five times as long to get to its destination…

"If I could ask for one thing, it is to figure out how to get more oil into this pipe," says Tom Barrett, president of the pipeline's owner, Alyeska Pipeline Service Co.
But production from Alaska's giant oil fields has been falling for years. Turning that around would require drilling in new areas, some of them environmentally sensitive and most controlled by the federal government.

Saving the pipeline has become a political issue in Alaska. The pipeline, which employs 2,000 people, still delivers more than 11% of the oil produced in the U.S. Almost all of it ends up in refineries in Washington, California and Hawaii. The end of the pipeline would likely translate into higher gasoline prices, which hit an average of $3.98 a gallon last week, the highest in nearly three years.

The pipeline throughput average per day can be found at the top of this page.

From the WSJ story

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