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News, Analysis and Commentary on How the Oil Industry Works Today: Promises, Problems and Practices

Here you will find occasional news, analysis and commentary on subjects that have received too little notice from government agencies, the press and other policy analysts.

(This section was archived Mar. 2, 2005)


 

The Arctic Refuge Numbers Game

By RICHARD A. FINEBERG (1)
January 2005


The debate over whether to drill for oil in the Arctic National Wildlife Refuge, often described as this nation's premier environmental issue, is once again before the U.S. Congress.(2) The petroleum numbers at the root of this policy debate are frequently fogged by erroneous statement and controversy. This article focuses on some of the numbers that have confounded this major public policy issue in the past and continue to do so today.

Misleading, inaccurate and even false statements by drilling advocates are an all too frequent part of the Arctic Refuge debate. For example, in 1995, when Tony Knowles, then-Governor of Alaska, commissioned a promotional booklet on the Arctic Refuge, he wrote in the foreword that, "[a]ccording to a report by the U.S. Department of Energy, the North Slope fields currently using the trans-Alaska pipeline are expected to produce so little oil by the year 2009 that the pipeline could be abandoned."(3) The governor used a report that was four years old and whose estimate of North Slope development was out of date and far too conservative. The preceding year, the President of the pipeline had stated, in a letter to all employees, that expected investment in existing fields would keep the pipeline operating until at least 2030. When the governor's inaccurate statement was released in June 1995, the state's own Oil and Gas Conservation Commission was holding extended hearings on Prudhoe Bay in which producing companies were presenting scenarios were based on production through 2030 or 2040.(4)

Alaska Senator Ted Stevens vied with Knowles for top honors in the 1995 misstatement contest. That year, he testified to congressional colleagues on the same subject that by 2005 "the through-put of the pipeline will be down to about 100,000 barrels a day."(5) The Alaska Department of Revenue forecast at that time estimated production in 2005 would be about 1,000,000 barrels per day.(6)

In light of this background, perhaps it is not surprising that in 2003 a peer-reviewed analysis of the abuse of numbers in energy policy debates, "Sorry, Wrong Number," featured the Arctic Refuge. That report found that the press typically overstated potential production from the Arctic Refuge Coastal Plain because they relied on agency estimates of technically recoverable oil, overlooking the fact that discovered oil will not be produced unless and until it can be produced and delivered at a profit.(7) Agency publications often led reporters down this path by failing to make this important distinction clear.(8)

"The Worst Statistic Economically I've Ever Seen"

Senator Stevens, the powerful, outspoken curmudgeon who is the senior member of the Senate Republican majority, claims that the comparison of Arctic National Wildlife Refuge production potential to a half-year supply of this nation's oil consumption is "the worst statistic economically I've ever seen used on the floor of the Senate. It's so misleading as to be dishonest."(9)

That's a remarkable statement, coming from a man who claims to know Alaska North Slope petroleum issues inside-out but sometimes spews out erroneous information almost has fast as he can speak. In the same March 2003 speech on the floor of the United States Senate, Stevens stressed the point that when oil was discovered on the North Slope, "the estimate there was there would be one billion barrels of oil in Prudhoe Bay. Last year we produced . . . (the) 14 billionth barrel of oil." He stressed that original estimates "were conservative 14 times over."(10)

Again the senator was off by an order of magnitude. Shortly after its discovery in December 1967, it was estimated that Prudhoe -- the only super-giant reservoir discovered and developed on this continent in over 70 years -- would yield 9.6 billion barrels.(11) At year-end 2003, Prudhoe Bay had produced approximately 11 billion barrels of oil; with the addition of other reservoirs whose not included in the initial Prudhoe Bay estimates, the entire North Slope had produced approximately 14.4 billion barrels of oil.(12)

U.S. Geological Survey (USGS) reports pour more cold water on the senator's enthusiasm for invading a wilderness area that many consider a national treasure. The agency's economists have reported that the USGS three-year survey of available information about Arctic Refuge production potential "precluded accumulations as large as the Prudhoe Bay field."(13) Therefore, the senator's reference to Prudhoe Bay was not only inaccurate, it was also irrelevant.

Senator Stevens is well known for his wrathful outbursts. In fact, he wears his "incredible Hulk" tie to work on days he intends to blow up.(14) But why does the senator fulminate about this particular description of Arctic Refuge production potential?

His expressed concern is not that different forecast inputs - for example, the assumption of higher prices or the inclusion of lands beyond the federal 1002 area of the Arctic Refuge Coastal Plain - could add a few months to the six-months statement. Nor does he stop to acknowledge that the estimates could yield less oil, or even none at all. Nobody has a crystal ball when it comes to oil. The senator accepts this uncertainty with equanimity; what fuels the senator's anger is that the nation would not produce and use this oil all at one time.

Well, duh.

Who said otherwise? It is well understood that if sufficient oil to warrant development were discovered beneath the Arctic Refuge Coastal Plain, that oil would be produced over a period of several decades. And, as any reporter will tell you, in writing on any complicated subject, it is customary to look for clear, understandable ways to convey to the general reader the significance of specific statistics, such as quantities of oil, or other energy sources.

Perhaps the senator rants about the six-month straw man he has created to cut off reasoned discourse that would reveal the rank folly of the claim that this drilling proposal will play a significant part of the solution to this nation's energy needs. Figure 1 compares potential production from the Arctic Refuge Coastal Plain to this nation's anticipated total petroleum consumption This figure represents the U.S. Geological Survey (USGS) estimate of mean discovery potential production for that area at a long-term price of $30.00 per barrel in 2004 dollars.(15) The profile of annual production, based on a plausible set of discovery, development and production assumptions, results in peak production at 0.704 million barrels per day (bpd) 12 years after production begins in 2016. In this chart, estimated domestic consumption is based on the long-term forecast of the U.S. Energy Information Administration (EIA).(16) The volume of production from the 1002 area of the Arctic Refuge Coastal Plain - approximately 5.9 billion barrels - is the sliver at the bottom.


FIGURE 1

 

If the Arctic Refuge Coastal Plain contributed 5.9 billion barrels of oil to the domestic energy supply, that would constitute approximately 1.2 percent of total domestic petroleum consumption between 2005 and 2050 (approximately 487 billion barrels). Although other Arctic Refuge production estimates and profiles are possible, in view of the relatively small contribution of the Arctic Refuge to the domestic petroleum supply, when placed against the long-term forecast for domestic consumption, other published estimates would appear little different from the accompanying chart. In sum, even a major discovery in the Arctic Refuge would do little to ameliorate this nation's long-term energy problems. The dimensions of the nation's long-term energy problem are underscored by this additional fact: although EIA projections indicate that the United States will consume nearly 500 billion barrels of oil between now and 2050, this nation possesses an estimated 31 billion barrels of discovered petroleum reserves.(17)

The annual Arctic Refuge 1002 area production estimates shown in this chart are higher than those published by the Alaska Department of Revenue (ADOR),(18) but lower than those of the EIA.(19) ADOR estimates that Arctic Refuge production will peak at a level of almost 0.400 million bpd. EIA, on the other hand, estimates a mean resources case (reference case) peak of 0.876 million bpd. Annual production estimates depend on the profile of production over the entire life of the producing region. Because neither agency has published production profiles beyond the early years of production, their published annual production estimates cannot be used with confidence.(20) In any event, direct comparison is not meaningful because ADOR and EIA have include potential production from areas outside the federal 1002 area of the Arctic Refuge, while this chart includes only the area whose status is under consideration by Congress.(21)

By wearing his "Hulk" tie and acting out, Senator Stevens avoids these considerations. He better take more mean pills, because there are many other pitfalls to avoid. One is the estimated 21 billion barrels of heavy oil already discovered in the Schrader Bluff and West Sak fields, directly beneath the Prudhoe Bay complex. That oil is technically recoverable, but only a small fraction has been developed. As in Alberta and Venezuela, technological progress is unlocking that potential; in August 2004, major Alaska producers announced a $500 million investment program aimed at quadrupling West Sak heavy oil production by 2007.(22) Could more of the heavy oil deposits near Prudhoe Bay be developed economically, thereby sparing developers the additional $1.30 to $1.90 per barrel in pipeline costs to link any oil deposits that might be discovered beneath the Arctic Refuge Coastal Plain to existing infrastructure at Prudhoe Bay?(23)

Lease Bonus Bids: Fact and Fancy

In 2002 and again in 2003, the U.S. House of Representatives approved a drilling in the Arctic Refuge; each time, the proposal was rejected by a majority vote in the United States Senate. To get around this obstacle, drilling advocates devised a procedure to by-pass the Senate's normal deliberative process. This stratagem inserts revenues from leasing on the Arctic Refuge Coastal Plain in the Senate's budget resolution. Although the budget is supposed to carry out policy - not make it - by putting a call for a specified amount of revenue from leasing on the Arctic Refuge Coastal Plain into the budget, this back-door strategy would do so. This back-door strategy is appealing to the drilling advocates in 2005 for this reason. Under Senate rules, normal legislation can be stopped with a procedure known as the filibuster -- talking until proponents give up and drop the legislation; it takes a two-thirds vote to stop a filibuster. But if drilling advocates succeed in putting Arctic Refuge revenue into the budget resolution, the enabling legislation to make that happen can't be filibustered.(24)

How much revenue are we talking about? Here again, the critical numbers appear to be very much at odds with reality and common sense.(25)

The Congressional Budget Office (CBO) has estimated that leasing on the Coastal Plain of the Arctic National Wildlife Refuge will bring in more than $4.0 billion in lease revenues (with half of this amount going to the federal government and half to Alaska). To generate this sum in lease bonus payments, oil companies would have to bid an average of $2,667.00 per acre for each acre of the 1,500,000-acre Arctic Refuge Coastal Plain. Meanwhile, the President's last two proposed budgets have contained estimates that companies will pay $2.4 billion to lease 400,000 to 600,000 acres in the first two lease sales on the Arctic Refuge Coastal Plain - an average of $4,000.00 to $6,000.00 per acre.

But during the last two decades oil companies have been willing to bid, on average, little more than $50.00 per acre for petroleum leasing rights on Alaska's North Slope and near-shore waters. Despite high oil prices in the last four years, speculating oil companies have been willing to spend less than $40.00 per leased acre on new northern Alaska prospects in15 state and federal lease sales.

Government lease revenue budget documents contain no explanation for the difference in their estimates, or for the extraordinary disparity between their estimates and long-term North Slope lease bonus payment trends, which is illustrated in Figure 2. In considering the marked discrepancy between both government projections and historical data, it should be noted that another major domestic petroleum province, the Gulf of Mexico, has also experienced a significant drop in lease bonus payments during the last two decades, despite discoveries that have sparked major development. The congruence between North Slope and Gulf of Mexico lease bonus payments reflects broad petroleum development trends that further call into question the projections for lease bonus revenues that might be anticipated from the Arctic Refuge Coastal Plain. government agencies.(26)

 

FIGURE 2

 


Before inserting multi-billion-dollar lease bonus revenues from the Arctic Refuge Coastal Plain into the budget, fiscally responsible policy makers should seek cogent explanations for the extreme difference between government estimates of bonus bid revenues and the well-established historical pattern of much lower lease bonus revenues from Alaska's North Slope. To the extent that estimates of lease bonus from the Arctic Refuge Coastal Plain are derived from economic models, policy makers should examine carefully the inputs and the methodology of the model or models employed in the estimate.

Conclusion

The Arctic Refuge appears unlikely to hold petroleum that can be produced in sufficient quantities to resolve national security issues arising from the tremendous imbalance between the amount of oil this nation can produce and the amount it consumes. The fundamental fact is that this nation, with less than three percent of the world's petroleum reserves and five percent of the population, consumes approximately 25 percent of the oil produced around the world. As shown in Figure 1, the United States is expected to consume nearly 500 billion barrels of petroleum between 2005 and 2050. In contrast, this nation possesses about 31 billion barrels of the stuff.

Estimates of the revenues that leasing of the Arctic Refuge Coastal Plain will generate are equally at odds with reality.

All those old aphorisms about bad numbers (you know the ones: lies, damn lies and statistics, etc.) seem to be applicable to the Arctic Refuge debate. If nothing else, this long-running congressional saga demonstrates that the numbers game is easy to play, while the consequences of bad numbers are difficult to unravel. But careful scrutiny of the numbers, some simple math and another shaggy, old maxim offers a clear path out of this swamp:

If it walks like a duck and quacks like a duck, it's a duck.

 

 
 

____________

Notes to "The Arctic Refuge Numbers Game"

 
 
  1. The author consults to Alaska and national environmental groups on Arctic Refuge economic issues.

  2. For a brief history and summary of the issues, see: M. L. Corn, B.A. Gelb and P. Baldwin, Arctic National Wildlife Refuge (ANWR): Controversies for the 109th Congress, Congressional Research Service, Dec. 29, 2004 (Report No. 1B10136).

  3. Governor Tony Knowles, The Arctic National Wildlife Refuge: Its People, Wildlife Potential, and Oil and Gas Resources, Office of the Governor, North Slope Borough and Arctic Slope Regional Corporation, June 1995 (introductory statement, unnumbered p. 3).

  4. Letter to all employees from David Pritchard, President and CEO, Alyeska Pipeline Service Co., Oct. 6, 1994.

  5. Senator Ted Stevens, testifying before the Committee on Natural Resources, United States House of Representatives, Aug. 3, 1995 (Arctic Coastal Plain Leasing), Serial No. 104-33, p. 10.

  6. At the midpoint of the current fiscal year, the Alaska Department of Revenue forecasts that fiscal year 2005 production will average 923,000 bpd (Alaska Department of Revenue, "FY 2005 Weekly Update," Jan. 19, 2005.

  7. Jonathan G. Koomey, et al., "SORRY, WRONG NUMBER: The Use and Misuse of Numerical Facts in Analysis and Media Reporting of Energy Issues," Annual Reviews: Energy and the Environment, Vol. 27 [2002], pp. 119-158.

  8. See, for example, U.S. Energy Information Administration, Potential Oil Production from the Coastal Plain of the Arctic National Wildlife Refuge: Updated Assessment, May 2000 (Report No. SR/O&G/2000-02).

  9. Congressional Record, March 18, 2003, p. S3862.

  10. Congressional Record, March 18, 2003, p. S3861. It should be noted that this transcript contains corrections to the senator's actual floor remarks, and that he made a similar one billion barrel statement during floor debate the previous year (Congressional Record, April 12, 2002, p. S2815).

  11. See: Harry C. Jamieson, "Prudhoe Bay Revisited - A 35-Year Perspective," American Association of Petroleum Geologists, Annual Meeting, March 10-13, 2002 (abstract).

  12. See: "Oil Production - Historic" (Table IV.3), in Alaska Department of Natural Resources, Division of Oil and Gas, 2004 Annual Report, Table IV.3.

  13. Emil Attanasi and J.H. Schuenemeyer, "Frontier areas and resource assessment: Case of the 1002 area of the Alaska North Slope" U.S.G.S. Open File Report 02-119, circa 1999, p. 10.

  14. Liz Ruskin, "Anger Management: Stevens Meets the Hulk," Anchorage Daily News, June 20, 2003, p. A1.

  15. Production from the 1002 area based on U.S. Geological Survey (USGS) data (updated from USGS, The Oil and Gas Potential of the Arctic National Wildlife Refuge, 1002 Area, Alaska, 1999 [USGS Open File Report 98-34], Ch. EA [economic assessment], Table EA4, p. 32). Prices converted from 1996 dollars to 2004 dollars using U.S. Bureau of Economic Analysis GDP implicit price deflator (2004 = 1996 * 1.52714). For current GDP deflator and price data, see U.S. Energy Information Administration (EIA), Annual Energy Outlook 2005, Table 11 (Reference Case).

  16. Domestic consumption from: Annual Energy Outlook 2005, Table 11 (Reference Case). EIA's estimate of domestic oil consumption through 2025 was extended to 2050 using the average annual increase projected by the EIA between 2020 and 2025 (1.2 percent).

  17. According to BP's Statistical Review of World Energy, at year-end 2003 the U.S. possessed approximately 30.7 billion barrels of the world's 1,147 billion barrels of proved oil reserves (BP, 2004 Statistical Review of World Energy [Oil - Proved Reserves]).

  18. Alaska Department of Revenue, Revenue Sources Book: Forecast and Historical Data, Fall 2004, p., 21.

  19. U.S. Energy Information Administration, Analysis of Oil and Gas Production in the Arctic National Wildlife Refuge, March 2004 (Report No. SR/OIAF/2004-04), p. 6.

  20. Production profiles are determined by assumptions about factors such as the size of individual fields, the pace of field development, the peak production in each field and the rate of decline from that peak. Both EIA and ADOR present profiles only through the early years of production, omitting more than half of the productive life of the region. While long-term forecasts are more problematical, total production bears a direct relationship to the profile of annual production. Analysis of EIA data suggests that the agency's annual production estimates for the Arctic Refuge would sum to a significantly higher volume than the stated 4.2 billion barrel estimate of total production in the "mean oil resource case."

  21. This estimate does not include potential production from areas outside the federal 1002 area, including areas thought to be more difficult to produce (state coastal waters to the north of the 1002 area already open to development and Native holdings on the Coastal Plain). Based on USGS and EIA data, at a long-term price of $30.00 per barrel in 2004 dollars, inclusion of these areas could increase potential production from the region to 8.4 billion barrels, or 1.7 percent of total domestic consumption from 2005 to 2050.

  22. Alaska's two major North Slope producers recently announced plans to spend $500 million on "the largest-ever heavy oil development program in Alaska" at West Sak. The companies plan to spend $500 million to increase West Sak oil production from a current level of 10,000 bpd to 45,000 bpd by 2007. "ConocoPhillips, BP Announce West Sak Heavy Oil Expansion" (ConocoPhillips news release), Aug. 10, 2004.

  23. Revenue Sources Book: Forecast and Historical Data, Fall 2004, p., 20.

  24. See: Arctic National Wildlife Refuge (ANWR): Controversies for the 109th Congress, "Summary."

  25. For additional discussion and documentation of this section, see Richard A. Fineberg, Projected Bonus Payments from Proposed Leasing on the Arctic National Wildlife Refuge Coastal Plain Greatly Exceed North Slope Historical Trends, Alaska Wilderness League, Jan. 15, 2005.

  26. The two federal agencies that have conducted economic analysis of Arctic Refuge production potential (EIA and USGS) both simplified their task by expressly omitting consideration of lease bonus payments.

 
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