Once-heralded North Slope ‘renaissance’ oil drilling projects now face uncertain futures

For several years now state officials and the leaders of Alaska’s oil industry have been touting a “North Slope renaissance” driven by large projects tapping newly discovered conventional Nanushuk oil plays across the western half of the region.

In the span of less than a year, however, two multibillion-dollar oil projects planned for the coming years have gone from promising to highly uncertain.

Early-stage construction at ConocoPhillips’ $6 billion-plus Willow project in the National Petroleum Reserve-Alaska was stopped before it started last winter when the federal 9th Circuit Court of Appeals granted a temporary injunction to environmental and North Slope Tribal groups that previously sued to stop Willow.

ConocoPhillips was expecting to dig a quarry to source gravel for permanent roads and pads to access the remote oil prospect until the mid-February ruling.

The company then requested a summer resolution to the matter from Alaska District Court Judge Sharon Gleason so work could commence this winter, but Gleason issued a subsequent ruling in August invalidating the Bureau of Land Management’s environmental impact statement for Willow, the overarching environmental document that formed the basis for the agency’s approval of the development.

Gleason ruled, largely based on the 9th Circuit injunction, that BLM and Fish and Wildlife Service officials under the Trump administration failed to adequately account for foreign carbon emissions stemming from Willow and did not provide sufficient specificity regarding how the development’s impacts to polar bears would be mitigated.

Gov. Mike Dunleavy and Alaska’s all-Republican congressional delegation previously lauded the Biden administration for backing the Willow EIS in court filings before Gleason issued her decision.

The August order has made the question, “What’s next?” unanswerable, at least publicly, for ConocoPhillips Alaska leaders. Company officials continue to review Gleason’s ruling and are moving ahead with engineering and design of Willow’s facilities in anticipation of a final investment decision, they have said.

BLM and the company have until Oct. 18 to appeal the ruling.

Specific flaws identified in environmental reviews are often remedied through a supplemental EIS that focuses its study on the given issues and can take as little as several months to complete.

Attorneys for the groups that brought the Willow lawsuits say a resolution might not be that simple. They contend the Willow Master Development Plan contains multiple significant legal violations that might necessitate a wholly new, and likely multi-year, EIS process for the project before construction could start.

First oil at Willow had been expected during the 2025-26 winter with peak production reaching upwards of 160,000 barrels per day, according to ConocoPhillips’ estimates.

Pikka

At Oil Search Alaska’s Pikka project on state land, the issue is money. Oil Search Alaska executives have openly acknowledged the struggles they have had in securing funding for the $3 billion first phase of the already scaled-back Pikka project.

With first oil from Pikka pegged for late 2023 as recently as early 2020 and peak production once seen at rates near 120,000 barrels per day, Oil Search representatives said earlier this month the midsized firm — historically a gas producer in the South Pacific — is investigating every avenue it can to secure funding and move Pikka forward.

However, such Arctic oil projects are rapidly falling out of favor with the large banks that traditionally fund them.

Startup of the first phase of Pikka is tentatively pegged for 2025.

Oil Search leaders insist they are still shooting for a final investment decision later this year but the company is also in the process of merging with fellow South Pacific producer Santos Ltd. The deal will give Santos owners a controlling share of the melded company. A Santos spokesman wrote to the Journal after the deal was formally announced that the company at this point supports Oil Search’s work to advance Pikka.

The uncertainty for two of the largest oil projects Alaska has seen in decades correlates directly to the numbers underlying the omnipresent fiscal debates in the state Capitol.

While its location on federal land means the State of Alaska will at best receive minimal royalty contributions from Willow to the general fund, state oil production taxes will still apply to the project. ConocoPhillips estimates Willow would generate approximately $2.1 billion for the state.

Oil Search estimates Pikka would produce upwards of $7 billion for the state over a roughly 30-year life.

Forecast uncertainty

The state’s latest official oil production forecast published in March projects North Slope oil will steadily increase to 565,000 barrels per day by 2030 after bottoming out at approximately 460,000 barrels per day this year. Those annual estimates are 30,000 barrels per day to more than 80,000 barrels per day greater than the forecast issued late last fall when uncertainties surrounding the pandemic were still in control of oil markets.

Taken at face value, nearly half of the forecast for the late 2020s could be comprised of oil expected from Willow and Pikka based on the companies’ public estimates.

Longtime oil analyst and Alaska oil and gas attorney Brad Keithley said he believes the state’s production forecast is overly rosy from a budgeter’s perspective.

“I’ve thought for a long time the back end (of the production forecast) is high,” Keithley said in an interview. “It may turn out to be accurate but if you were just sitting here with what we know now, with what we know about Willow and Oil Search it’s a stretch case, a big stretch case to think those production numbers are going to turn out.”

Keithley is also the managing director for Alaskans for Sustainable Budgets, a nonprofit project aimed at informing the public about the state’s financial challenges.

Former state petroleum economist Roger Marks said he has a hard time critiquing the state’s production forecast because “there are a lot of unknowable things out there right now,” but added, “I can imagine it staying where it is. I can’t imagine it going up too much.”

Marks foresees some sort of legal resolution that will allow ConocoPhillips to move ahead with Willow eventually and said the level of future North Slope investment will likely be tied to oil prices, which have been relatively robust this year in the $70-plus range.

Keithley noted that the Revenue Department’s most recent long-term price forecast calls for average Alaska North Slope crude prices to increase from the low $60s per barrel the next couple years to $71 per barrel by 2030; he suggests that’s backward.

“There’s a huge disparity between the oil price numbers that the (Dunleavy) administration is still using for the back end and what the markets are telling us the oil price numbers are going to be,” he said.

According to Keithley, oil futures for the late 2020s currently indicate a return to prices in the low $60s to high $50s per barrel, which was mostly the range they were in for several years prior to the arrival of COVID-19.

Pascal Umekwe, a commercial analyst with the Division of Oil and Gas involved in developing the oil production estimates, said in an interview that he could not attribute a specific volume of projected barrels in the forecast to a specific project.

For one, state officials use probabilistic not deterministic models to generate a range of likely outcomes. They also are reluctant to discuss information pertaining to individual operators to prevent potential violations of state confidentiality statutes and maintain the trust of company officials who discuss sensitive business information with them.

He stressed state forecasters bake the numerous risks inherent in major oil developments — regulatory and financial for ConocoPhillips and Oil Search — into their final numbers.

“We’re not happy these things happen but as a result of 1,000 factors (oil projects) might not happen the way they were supposed to happen,” Umekwe said in an interview.