Pipeline Dreams

Alaska’s complex relationship with fossil fuels

by Larry Persily

Oil and gas production —and the good-paying jobs that come with it—have helped fuel the Alaskan economy for decades, and likely will for the near future. The far future is less certain. The industry’s tax and royalty revenues to the state treasury have allowed Alaskans to enjoy life without a personal income tax or a state sales tax—plus, they receive an annual dividend from investment earnings of the state’s 46-year-old oil-wealth savings account.

But there are a lot fewer of those jobs. And there is a lot less oil flowing through the trans-Alaska oil pipeline, putting a strain on the state budget. Still, the industry is an essential part of Alaska’s economy.

Pay is still good, but fewer jobs

Oil and gas jobs are among the highest paying in Alaska. State Department of Labor statistics put the average oil company wage at $173,000 last year versus the average wage for all Alaskan jobs at $62,000.

Oil and gas revenues this past fiscal year generated about six times as much unrestricted general fund cash for the state—the money that lawmakers can most easily spend on public services and projects—than all other taxes and fees combined.

“I think that oil in Alaska is always going to have a place in the economy,” said Bill Popp, president of the Anchorage Economic Development Corp., “though that place may shrink in the long run as the world transitions to renewable energies.”

Popp, who has followed the oil and gas industry for more than a quarter-century, is optimistic that two multibillion-dollar North Slope oil projects coming online later this decade will boost production, ensuring the industry’s premier spot in the economy “for at least the next 20 to 30 years.”

After that, it depends on the cost and availability of renewable energy, technological advances to recover more oil, and private industry’s appetite for new investment in oil and gas. Looking ahead, “I think it is going to be a smaller part” of the Alaskan economy, Popp said.

Meanwhile, the industry has learned how to be more efficient in producing oil. In 2015, direct jobs in oil and gas in Alaska peaked at just over 15,000. By 2023, that was down to 7,000, while North Slope production had fallen only about 5 percent.

Another way to look at it, Popp explained, is that it takes half as many workers to produce the same amount of oil as it did 10 years ago.

Economist Neal Fried, a 45-year veteran of the Alaska Department of Labor, sees a similar future as Popp. The global transition away from fossil fuels will cut into state revenues, private investment and jobs in Alaska, he said.  

Oil and gas tax and royalty revenues have helped build more than the asphalt, concrete and steel of schools, roads, community centers, ports, and harbors. The industry directly—or indirectly, through its contractors and revenues to the state—pays for more jobs than any other sector in Alaska.

“One oil job generates 15 more jobs throughout the state economy,” said Kara Moriarty, executive director of the Alaska Oil and Gas Association. There were about 315,000 filled jobs in Alaska this past spring, according to the state Department of Labor.

Production down to 25 percent of 1988 peak

But the heavy reliance on one industry generates the perpetual worry about the next economic bust, particularly as Alaska North Slope production has been in decline since its peak of two million barrels per day in 1988 when, for a few months, Alaska produced more oil than any other state, even Texas.

It took 11 years after Prudhoe Bay production started up in 1977 to reach that lofty status. Now, 35 years after peak production, North Slope output is just 25 percent of its record flow, at about 490,000 barrels a day—and Texas has grown to more than five million barrels per day.

Yet Alaska North Slope oil remains essential for the U.S. West Coast, where it feeds refineries in Alaska, Washington state, and California.

Alaska was not part of the shale oil and gas boom that has driven U.S. oil production to record highs, more than double the flow in 2003, building the country into the world’s largest oil producer. Yes, even more than Saudi Arabia.

U.S. natural gas production also is expected to set a record in 2023, almost double the output of 20 years ago, thanks to advances in hydraulic fracturing and shale gas recovery.

But those records don’t apply to Alaska, where less oil means less state revenue. The state’s economy is at its worst when oil prices collapse, as they did at the start of the COVID-19 pandemic in 2020 when planes, trucks, and cars stopped filling up at the pump. It’s better for the treasury when prices spike higher, as they did after Russia invaded Ukraine in 2022 and the world panicked about oil supplies and geopolitics, pushing crude to almost double from a year earlier.

“Price volatility” is so common a phrase in state budget discussions that it could be chiseled above the entryway at the Alaska Capitol.

Between 2013 and 2023, annual state unrestricted general fund petroleum revenues bounced up and down with oil prices, from a low of under $1 billion to a high of almost $5 billion. That volatility drives budget decisions every year, from public works construction and road maintenance to school funding and child care services.

“Today, we’re still trying to figure out how to pay for state services,” said Moriarty. “It’s been the same for years. Oil prices still greatly affect the state budget.” 

State still pays oil-wealth dividend

As oil started to flow in the late 1970s, Alaskans amended the state constitution to stash away some of the income, creating the Permanent Fund. The money is invested in stocks, bonds, real estate, and private equity—the same as most any sovereign wealth or pension fund. It entered this past summer at about $77 billion.

For its first 36 years, the investment earnings were both plowed back into the fund and used to pay an annual dividend to Alaskans, projected at about $1,300 for the fall 2023 payment.

But then, in 2018, with oil revenues in decline, the Legislature and governor accepted the fiscal reality that some of the earnings needed to go into the budget to help pay for public services.

“The fundamental problem we face now is that we no longer have enough money to pay for the services Alaskans want, not pay taxes, and still pay half of Permanent Fund earnings as dividends,” Gunnar Knapp, former director of the Institute of Social and Economic Research at the University of Alaska Anchorage wrote.

“More than 40 years ago, when Alaska was awash in oil revenues, we made two choices that set us up for the political impasse we face now that oil revenues have dropped,” said Knapp, who was a member of the university faculty from 1981 to his retirement in 2016. Those decisions were eliminating the state personal income tax and instituting the annual dividend.

“Something has to give—but we can’t agree on what,” he said. “And it didn’t help that many legislators got elected by promising choices we can’t afford or wouldn’t accept.” 

More people leaving than moving here

Economists say people vote with their feet—they move to where they can find work and where they find quality of life. That worries Knapp.

“Our economic future is bleak if we don’t provide the schools and roads and other services that people want … and that businesses need to attract qualified workers.”

While Alaska has long coped with a high population turnover, the problem in the past decade has been fewer people moving to the 49th state.

Alaska has lost more residents than new ones have moved to the state every year since 2013, the state Department of Labor reported. If not for a healthy birth rate, the population would have fallen. But little kids can’t fill jobs, and an aging workforce has left many Alaskan employers short-staffed.

The number of working-age Alaskans—between 18 and 64 years old—peaked in 2013, and had lost 30,000 potential employees by 2022.

The lack of in-migration of new workers, along with an aging workforce, is a serious problem, said Fried, the state labor economist. “It’s a concern, it’s a worry, it’s a definite drag on our economy,” he lamented.

“Adults in their 20s and 30s used to be the main source of Alaska’s working-age migration gains, but adults in those age groups now constitute a new outflow of more than 500 people a year,” the Labor Department wrote in a report published in March.

Companies will need to invest billions of dollars in new projects if the oil and gas industry is to continue writing big checks to the state treasury, where the money could be spent on education and other quality-of-life public services. Those investment dollars would go toward expanding the flow from existing fields and exploring and developing new ones.

However, attracting those investment dollars is getting harder.

High costs make it harder on Alaska

Alaska is known as a high-cost oil and gas play. The environmental rules are strict, with activity mostly limited to the winter months when the ground is frozen and equipment will not damage the fragile tundra underfoot.

There is only a small, ice-free window for barge traffic to deliver large production modules and equipment to the North Slope.

And most of the land is owned by the state and federal governments, presenting its own political and permitting challenges. It’s a lot easier to work on private land in the Permian Basin of West Texas, where a company can drill year-round and nothing is more than a day’s drive away. It’s not like the remote work sites in Alaska that have no road access, and where explorers need to build their own airstrip.

“There’s been a general trend in recent years away from high-cost projects” that take a long time to pay back development costs—and earn a profit—said Ben Cahill, senior fellow in the energy security and climate change program at the Center for Strategic & International Studies, Washington, D.C.

“We’re past the point in the industry” of new frontier projects, he said. Companies—and their investors—are more attracted to short-cycle projects with a faster payback. Long-term exploration and development “is not a story that many investors want to hear,” Cahill said.

Even offshore drilling in the Gulf of Mexico, which is not low cost, has an advantage over Alaska, he said. There is no production tax in federal waters, only a royalty share of the output. The state of Alaska collects a production tax and a royalty share from oil on state lands, and a property tax on drilling rigs, pipelines, and other facilities.

Oil storage tanks at the Valdez Marine Terminal, the southern end of the pipeline, allow for temporary storage due to marine transport system delays. The terminal is opposite the town of Valdez; the port is ice-free year-round. A recent report commissioned by Prince William Sound Regional Citizens’ Advisory Council and conducted by an independent entity detailed wide-ranging and serious safety concerns at the aging facility. Alyeska Pipeline Service Company’s new CEO is working with the council to address the findings.

Transition to renewables adds uncertainty

Alaska does share at least one long-term concern with every other oil-producing state in the country, and with other oil nations: The global transition to renewables.

“It definitely makes it harder,” Cahill said, while adding, “oil and gas will not disappear in 10 or 15 years.” Particularly in the United States, there are economic and geopolitical reasons to keep investing in oil and gas, he said. 

“We’re within the window” of peak demand for oil as the world moves away from fossil fuels and toward renewable energy, said Mark Myers, a former commissioner of the Alaska Department of Natural Resources with more than 40 years of experience in geology and resource policy issues.

Opinions vary, but many analysts say the world could reach peak demand for oil sometime in the 2030s.

A related challenge is that a growing number of investment funds, banks, pension funds, and even insurance companies are turning away from doing business with fossil fuel producers, especially focusing on avoiding Arctic endeavors, which includes Alaska.

“The environmental lobby has had an effect on the ability to finance oil and gas,” particularly for smaller companies, said Myers.

Even with the challenges, Moriarty of the Alaska Oil and Gas Association is optimistic. “There is absolutely a 30- to 40-year future in oil and gas in Alaska.”

She points to two large-scale projects—Willow and Pikka—that are expected to start producing over the next several years, adding substantially to North Slope output—and jobs and state revenues.

After years of environmental reviews, challenges, and litigation, with the White House involved in the final decision, ConocoPhillips Alaska earlier this year won federal approval—and also won in court—to start work on its multibillion-dollar Willow project. 

Located on leases in the National Petroleum Reserve-Alaska, federal acreage set aside in 1923 for its oil potential, Willow is projected to cost up to $7.5 billion, with its first oil to flow into the trans-Alaska pipeline in 2029, according to the company’s presentation to investors and analysts in April.

Peak production is forecast at 180,000 barrels a day—almost 40 percent of the pipeline flow in 2023. ConocoPhillips Alaska President Erec Isaacson has said the company expects to recover approximately 600 million barrels over the life of the project.

The construction workforce is estimated at 2,000, with 300 permanent jobs to run the operation.

The company started site work early this year in anticipation of going ahead and staying on schedule, pending its final investment decision.

As approved by the U.S. Department of Interior, the company will be allowed to develop three drill sites to reduce its environmental impact, not the five it had requested. If Conoco stays on schedule and starts production in 2029, that would be 12 years after it announced the discovery.

ConocoPhillips, which has worked in Alaska about 40 years, has other North Slope prospects that match up with Cahill’s comments that companies look to use existing facilities to minimize risk and develop new oil on a shorter timeline.

“Coyote is a great example of developing a new reservoir from an existing pad. And Nuna is a great example of a new pad tied back to existing infrastructure,” Andy O’Brien, Conoco’s senior vice president for global operations, said on an investor call in April.

Between the two projects, Conoco plans 65 new wells with a peak production of about 40,000 barrels a day.

East of Willow, back toward Prudhoe Bay, an Australian-listed company, Santos, has started work toward its first oil production in North America: the $2.6 billion Pikka project, which is expected to start sending oil down the line in 2026. Santos holds a 51 percent interest in the development, and is the operator. Spanish energy firm Repsol holds 49 percent.

The project has all its permits, and the company took its final investment decision in August 2022, almost a decade after an earlier explorer discovered the field.

There is a reason why Pikka has been less contentious than Willow: Unlike Willow’s location within the environmentally contentious National Petroleum Reserve-Alaska, Pikka is on state lands.

Pikka Phase 1 reserves are booked at almost 400 million barrels, with peak production expected at 80,000 barrels of oil per day. The facilities are designed to be expandable, as the company is drilling to prove up more reserves for further production.

A production boost also is coming from the newest big player in Alaska, Houston-based Hilcorp, founded in 1989 and one of the largest privately held independent exploration and production companies in the country.

New player in Alaska boosts production

Hilcorp describes itself as a leader “in taking on legacy oil and gas assets across the United States and reinvigorating production,” which is exactly what it has done in Alaska since buying into Cook Inlet oil and gas production as legacy players Chevron, Marathon, Unocal, and Conoco pulled out of the mature province.

Production in Cook Inlet, almost 700 air miles due south from the North Slope, came before Prudhoe Bay, pumping 230,000 barrels of oil a day at its peak in 1970, almost as much as Prudhoe produces today. 

Since 2012, Hilcorp has invested more than $1 billion in Cook Inlet projects, including 90 new wells, 400-plus repaired wells and adding new technologies to boost production, Luke Saugier, senior vice president for Alaska, told state legislators in May.

By 2014, Hilcorp had expanded into the North Slope, buying three fields from BP: North Star, Endicott, and a share of Milne Point. Since 2015, when it took over operations at Milne Point, Hilcorp has invested $1 billion in the field, drilled 100-plus new wells, with 20 planned for 2023, and added horizontal drilling and polymer flooding to push more oil out of the reservoir, Saugier told lawmakers.

Showing what it does best, Hilcorp has taken Milne Point from 18,400 barrels a day in 2014 to 41,000 barrels a day in the summer of 2023, Saugier said. “We expect to see production near 60,000 in four or five years.”

In 2020, Hilcorp bought the remainder of BP Alaska’s assets for $5.6 billion, taking over the region from the British oil major that had operated in Alaska for 60 years. In the deal, it took over as operator of Prudhoe Bay, the oldest and largest field. Hilcorp also acquired BP’s nearly 49 percent interest in the trans-Alaska oil pipeline system, with Conoco and ExxonMobil the other two major shareholders. The three companies together own about 99 percent of the interest in Prudhoe Bay leases.

Applying its expertise at getting more oil out of older fields, Hilcorp has stopped the production decline at Prudhoe, Saugier said. Production grew in state fiscal years 2021, 2022, and 2023, and is expected to keep building through 2025, according to the Alaska Department of Revenue.

“We’re seeing a shift in the type of companies” working in Alaska, said Moriarty, of the oil and gas association. “Who would have thought that BP would ever leave Alaska.”

And while the North Slope is known for its oil, Cook Inlet natural gas helps to power and heat the state’s population centers from the Kenai Peninsula to Fairbanks. But after almost 60 years of production, proven gas reserves are playing out, and the utilities—and their customers—are worried about future supplies.

There is a concerted push toward renewable energy from Alaska’s wind, solar, and tidal power potential. However, gas will still be in the mix, and Hilcorp plans to invest more than $1 billion in Cook Inlet over the next five years on exploration, new wells, and possibly new platforms, “all in the search of additional gas,” Saugier said.

Better technology can see more in rocks

Nothing is guaranteed, though, and the utilities have been looking at all energy options as they realize Cook Inlet gas will not last forever at sufficient volumes to meet every need.

With improved exploration technology, the potential is there to find oil and gas not seen before, said Myers, with more than 20 years of experience at the Alaska Department of Natural Resources, followed by three years as director of the U.S. Geological Survey, a stint as vice chancellor for research at the University of Alaska Fairbanks, and a U.S. Arctic Research Commissioner since 2021.

“These are huge fields,” he said of new discoveries in the Nanushuk and Torok formations of the central and western North Slope, the area of Pikka and Willow. “These are younger reservoirs,” not looked at before. Younger is all relative—maybe 100-million-year-old layers of rock and oil and gas.

The challenges, said Myers, are finding a field with a “cap” rock layer that seals the top of the reservoir, preventing the oil and gas from seeping out, and permeability, the ability for the oil to flow out of the rock and into the well pipe that will bring the wealth to the surface.

This is his area of expertise. Myers has a Ph.D. in sedimentary rock, interpreting rock to learn the history of the subsurface. He’s the guy who can interpret a core sample pulled out of the ground in exploratory drilling. “It’s a giant jigsaw puzzle,” he said of exploration.

A big piece in that puzzle is the data that explorers learn when they shoot sonic waves into the Earth to “see” what might be underground. The industry has evolved from basic 2D to highly technical 3D seismic mapping. “It’s like an MRI versus an X-ray,” Myers said.

Alaska’s future is more than oil

Alaska has more oil, no question about that, Myers said. But attracting the investment will depend on multiple variables. “We live in a world market,” he said.

Much of the competition comes from shale drilling in Texas, New Mexico, and elsewhere in the U.S., where oil and gas are more easily accessible year-round, with infrastructure and pipelines close by. 

Competition is purely economic. It’s very hard for large infrastructure projects to compete against smaller, less risky ventures that consume less capital and provide a faster payback, Myers said.

While oil and gas jobs are holding steady, and there are several North Slope oil projects underway, Popp sees long-term growth for Alaska in tourism, seafood, air cargo, and mariculture—such as kelp farming. And mining. “I think our future,” he said, “is in rare earth minerals, graphite, copper, gold, lead, and zinc. I think resources will still be an important part, if not the main part … of the on-the-ground Alaska economy.”  

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Larry Persily has split his 47 years in Alaska between journalism and public policy work for state, federal, and municipal offices, focusing on oil and gas, taxes, and fiscal policy.