Drainage pierces ANWR in Alaska study scenario

July 5, 1999
A hypothetical scenario of petroleum industry activities adjacent to the 1002 Area of the Artic National Wildlife Refuge (ANWR) suggests that development from leases under State of Alaska jurisdiction could drain reservoirs that extend under ANWR.

A hypothetical scenario of petroleum industry activities adjacent to the 1002 Area of the Arctic National Wildlife Refuge (ANWR) suggests that development from leases under State of Alaska jurisdiction could drain reservoirs that extend under ANWR. Anticipation of such drainage might in turn trigger Congressional authorization for limited surface development of trans-boundary fields.

This is the first in a series of five petroleum development scenarios culminating in industry activities throughout the 1002 Area. The scenarios were developed for an interdisciplinary study of community sustainability in the Arctic funded by the National Science Foundation. The full model-which includes climate change, vegetation, caribou, subsistence hunting, community labor markets, and tourism development scenarios-is scheduled for release in September 1999. Details on the five scenarios are currently available at http://www.taiga.net/sustain

The 40-year scenarios are not offered as predictions, but as "science fiction:" stories combining the best available scientific information and a set of fictional but plausible assumptions to explore implications of a range of plausible outcomes. In each scenario, the locations and volumes of recoverable oil accumulations in and adjacent to ANWR, and the hypothetical sequence in which they would be discovered and produced, represent only a single run of a Monte Carlo simulation model. This model was based on probability distributions for the occurrence of recoverable hydrocarbon, estimated by the U.S. Geological Survey and published in 1998.1 The scenarios therefore do not purport to be "expected" values but only plausible in light of the USGS Assessment. The technical appendix to the USGS Assessment was released in April 1999 and was not available at the time the scenarios were developed.

Assumptions on field design and drilling and construction practices are based on the most recent Alaska North Slope operations: Arco`s most westerly Alpine development and BP Exploration`s (BPX) easternmost Badami development. The final scenario hinges on assumptions about continuing trends in technology that reduce future development costs and surface impacts.

Land status, resource assessments

The 1.57 million-acre 1002 Area of ANWR`s coastal plain contains some of the most prospective remaining targets for petroleum development in Arctic Alaska. (The term 1002 refers to Sec. 1002 of the 1980 Alaska National Interest Lands Conservation Act.) However, federal law currently prohibits exploration, development, or production of hydrocarbons in the entire 1002 Area, including enclaves of private (Alaska Native) mineral rights, pending specific approval by Congress.

Geophysical surveys and test drilling have nevertheless taken place within and especially on the margins of ANWR in the past, and a number of exploration wells have been drilled on its perimeter. Data from such sources stand behind recent estimates of hydrocarbons resources published by the USGS. However, the information remains too meager within the 1002 Area itself to make confident location-specific forecasts of potential production or the investment outlay and activity necessary to develop such potentials.

The "1002 Area" includes about 97,000 acres in the vicinity of Kaktovik on which the Arctic Slope Regional Corp. (ASRC) holds mineral title. ASRC is a for-profit Alaska Native regional corporation established under the Alaska Native Claims Settlement Act of 1981. The surface estate, owned by Kaktovik Inupiat Corp. (an ANCSA village corporation), is subject to the current Congressional prohibition against commercial oil and gas activity within the refuge. ASRC has leased most of its subsurface estate to BPX and Chevron, which drilled the "KIC" test well east of Barter Island.

State offshore acreage adjacent to ANWR-248,000 total acres-consists of a strip extending three miles from the shoreward boundary of the refuge into the Arctic Ocean. On the western end of this strip of submerged state acreage, two wells have been drilled and plugged without any announced commercial discovery. Another well has been drilled, plugged, and abandoned on the east end of the study area, on a federal lease just outside the outer jurisdictional boundary and five miles northeast of the KIC well. A few miles north of the outer boundary between state and federal acreage, ten wells have been drilled on federal offshore leases, with two discoveries of potentially commercial resources.

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Survey and exploration activity on state lands immediately to the west of ANWR includes six wells within three miles and 19 wells within about 30 miles of the refuge boundary and at least two announced discoveries of potentially commercial hydrocarbons (Fig. 1).

USGS 1998 assessment

The USGS divided its assessment area into four sectors.

Land status was classified as "federal" jurisdiction (the 1002 Area, less ASRC lands) and "non-federal" (state offshore lands, plus ASRC mineral inholdings in the 1002 Area). A geological distinction was made along the Marsh Creek anticline, separating "undeformed" (horizontal) formations to the north and west, and "deformed" (folded and fragmented) formations to the south and east. The anticline crosses the band of state offshore lands near the village of Kaktovik.

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The USGS classification scheme allocates about one-third of the total acreage in the northwest corner of ANWR to the undeformed sector and the remaining two-thirds, including most of the ASRC lands, to the deformed sector. Table 1 summarizes the USGS assessments of total technically recoverable crude-oil volumes, and volumes in accumulations of 256 million bbl or more, in each of the four sectors of the study area.

Relative attractiveness

The undeformed sector, which accounts for only 33.7% of the study area but 85.3% of the estimated recoverable oil, contains the more attractive exploration targets.

The USGS expected 9.6 large (256 million bbl or more technically recoverable) crude-oil accumulations to exist in the undeformed sector: about one for every 23,000 sq miles. In contrast, USGS expected only 2.6 million bbl in the much larger deformed sector: about one for every 395,000 sq miles. Likewise, the mean expected volume of recoverable oil per unit area in the undeformed sector is almost nine times the volume of oil expected in an equivalent area within the deformed sector. The USGS did not report a significant difference in mean size or distribution of sizes of oil accumulations.

The expected concentrations of oil do not differ significantly between the federal and non-federal parts of the undeformed sector, as measured by either the expected number of accumulations per unit area or the volumes of recoverable oil per unit area. Moreover, because the existing stock of geophysical and geological information is much richer on the nonfederal than on the federal part of the USGS study area, we infer that:

  • Independently of their legal status, the undeformed sectors contain the more promising exploration targets for oil. (The April 1999 USGS Open File Report discloses that the deformed area is substantially more prospective for gas than for oil);
  • This assessment is more reliable for the nonfederal (i.e., state offshore) part of the undeformed sector than for the federal, because of the richer geophysical information base and because of the existence of two test wells on the undeformed portion of the offshore state strip;
  • Within the federal (i.e., ANWR) part of the undeformed sector, the USGS assessment is most reliable in the northwesterly corner-the Canning River Delta.
  • On balance, the most attractive petroleum exploration targets in the entire study area are likely to be the Canning Delta and its immediate vicinity, both within and outside ANWR.

Apparent USGS pessimism

The USGS assessed the expected volume of "technically recoverable" resources in the total study area at 10.3 billion bbl, with a 95% probability the actual value is at least 5.7 billion bbl and a 5% probability that it is 16.0 billion bbl or more. Of the expected 10.3 billion bbl technically recoverable, moreover, only 6.8 billion bbl are expected to be found in accumulations containing at least 512 million bbl, deemed the "minimum commercially recoverable field size."

More notably yet, the USGS estimates that no crude oil from the study area would be "economically recoverable" at a West Coast crude-oil market price of $15/bbl or less (1996 dollars) and that only 3.3 billion of the 10.3 billion bbl technically recoverable would be economically recoverable at a price of $20.

After averaging about $11 in 1998, reported West Coast prices for Alaska North Slope (ANS) crude oil fell to $9 in early 1999, rebounding to about $16 in mid-May. Some analysts, including Philip Verleger, expect even higher prices over the next year or so,2 and there are also those who still anticipate the imminent onset of the steep price rises which were widely predicted in the late 1970s and early 1980s.3 Nevertheless, we are not aware of any mainstream forecasting authorities that now anticipate long-term delivered prices for ANS crude oil greater than $15.

Taken at face value, the USGS assessment implies only a small probability that any crude oil resources at all will be developed, or produced from or immediately offshore of the ANWR 1002 Area. In particular, the study seems to rule out the discovery of "Prudhoe-size" accumulations of economically recoverable crude oil, i.e., ultimate reserves on the order of, say, 10 billion bbl. Combined with the probable geographic distribution of crude-oil accumulations within the study area, the USGS assessment implies that that little or no commercially recoverable crude oil will be found and developed on ASRC acreage or elsewhere in the deformed sector.

Countervailing considerations

Even in the face of these adverse implications of the recent USGS assessment, we conclude that some development of petroleum resources in or near ANWR is at least a plausible outlook. We base this on the following observations:

  • Experience over the last 25 years demonstrates that both prices and long-term price expectations are capable of changing dramatically in a very short time.

  • Since ANS crude oil began flowing in 1977, almost all reputable forecasting organizations have consistently under-forecast ANS production volumes for any given future year. Also, forecasters have consistently overestimated the constant-dollar prices necessary to evoke the production volumes that actually occurred.

  • Criteria for "economic recoverability" in the 1998 USGS assessment were based upon technologies of exploration, development, and production, and input prices that prevailed in the mid-1990s. Technical progress in Arctic oil operations since the commencement of production at Prudhoe Bay has steadily reduced average input costs to exploration, development, and production.

  • The USGS assumes a minimum economically viable field size of 512 million bbl, which it characterizes as "conservative" in the undeformed zones and other than conservative in the deformed zones. However, the smallest discrete reserves accumulations now being produced in Alaska`s Central Arctic are already in the range of 100 million bbl or less. The USGS Assessment points out that accumulations as small as 5 million bbl can be developed commercially as "satellites" to larger accumulations which they share infrastructure investments.

  • The USGS assessment reported a significant potential for natural gas in the eastern portion of the study area. Large natural gas resources remain shut in or undeveloped in Alaska`s Central Arctic region to the west and the Mackenzie Delta to the east because of remoteness from markets and high projected transport costs. There is no reason to assume a priori that the commercial gas potential of the North Slope, including ANWR, will permanently remain unattractive.

  • It is at least plausible to anticipate an ultimate sharing of pipeline access for oil and gas between the eastern Alaska Arctic (ANWR and vicinity) and the Canada`s Beaufort Sea and Mackenzie Delta areas, where substantial reserves have been discovered and confirmed but remain undeveloped or shut-in because of distance from markets or the lack of threshold volumes to justify an export pipeline. Because of transport economies of scale, such facilities sharing could be expected to increase netback values at the point of production in ANWR.

  • The persistence with which segments of the oil industry advocate opening ANWR for petroleum exploration and development suggests that a significant part of industry opinion has a more optimistic economic appraisal of the area`s petroleum potential than indicated by the USGS assessment. The differences in outlook likely include but need not be limited to those we have listed here.

    The scenarios

    We have constructed five scenarios representing successively greater extents of development. They are cumulative, each adding to the previous scenario. Figs. 2 through 6 show the areas of development under each scenario.

    Scenario 1 - Drainage of pools underlying the ANWR border

    We anticipate that industry will continue to extend and interpolate exploration, development, and production in the Central Arctic on the same pattern that has prevailed since the mid-1980s.4-6

    In Year 1 of our story, petroleum development commences in the vicinity of the Canning River Delta on state onshore acreage immediately west of ANWR, and on state offshore acreage immediately north of ANWR.

    Activity outside ANWR involves 5-acre offshore island drill pads and a three-phase undersea pipeline along the Arctic barrier islands that constitute the inner state-federal jurisdictional. This pipeline will connect the drillsites to a processing center either on Flaxman Island or onshore state lands west of the Staines River. These facilities will be constructed and equipped entirely without support from, of alteration of, the onshore surface of ANWR.

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    In this scenario, several oil and gas accumulations straddle the boundary between ANWR and state offshore or onshore acreage (Fig. 2). These accumulations are initially developed exclusively from wells on state leases, but wells drilled on state acreage outside the refuge boundaries are expected to drain pools that extend under it.

    In Year 3 of our story, Congress authorizes limited petroleum-related surface activity within ANWR in connection with "drainage" sales along the refuge boundaries, for the purpose of protecting the federal royalty interest in oil and gas occurring in such pools. Actual development and production under this provision would occur only in the extreme northwest corner of ANWR-essentially within the Canning River Delta as shown on Fig. 2. Two additional borderline accumulations are developed from wells on the Canning River Delta within ANWR.

    Scenario 2 - Leasing of ASRC holdings and the Canning Delta

    Scenario 2 continues this hypothetical chain of events and extends the scope of development. In Year 5, Congress permits renewed seismic exploration, followed by onshore oil and gas leasing, exploration and development drilling, attendant onshore surface activity (including construction), and production of hydrocarbons, on the following additional portions of the 1002 Area:

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    • The remainder of the Canning River Delta;
    • Mineral inholdings of the ASRC;
    • Intervening ANWR acreage north of 70? N. Lat., such as along Camden Bay; plus
    • Any additional acreage that is prospectively subject to drainage either from nonfederal acreage or federal acreage in the preceding categories (Fig. 3).

    This policy permits development on the best oil and gas prospects while avoiding the most sensitive core caribou calving grounds. In this scenario, oil from developments in the eastern part of the 1002 Area is transported from the area through an offshore pipeline.

    Scenario 3 - Roads and onshore facilities

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    This is a variation of Scenario 2 with more extensive onshore development. Leasing and development still occur in the Canning River Delta, on ASRC mineral inholdings, and on lands north of 70 N., but instead of temporary ice roads and an offshore pipeline, onshore facilities are developed. The scenario (Fig. 4) assumes that the legislation authorizing development of ASRC lands also authorizes:

    1. An onshore oil and gas pipeline corridor east to west across the 1002 Area;
    2. A parallel year-round highway extending from the eastern fields and Kaktovik, to the western boundary of ANWR (connecting with petroleum transport facilities and the North Slope haul road, respectively, near Prudhoe Bay);
    3. A state-owned jet-capable regional airport near Kaktovik; and
    4. Associated Kaktovik Inupiat Corp.-owned industrial, commercial and transient-accommodation facilities adjacent to the airport.

    These developments are not motivated by technical or economic necessity or preferences of the operators. Rather, we assume these facilities are chosen and sited to serve regional social and economic objectives, as well as to allay concerns about the marine environment.

    Scenario 4 - Gas commercialization and leasing throughout the 1002 Area

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    In Scenarios 1 through 3, any natural gas discovered in the course of oil exploration and development not used on ANS leases continued to be reinjected or (in the case of nonassociated gas) shut in. However, Scenario 4 (Fig. 5) assumes that, in Year 5, ANS gas producers, other private investors, the State of Alaska, and ASRC agree upon a "commercialization" system and associated financial arrangements for natural gas produced at Prudhoe Bay and other accumulations in the Central Arctic. To capture potential economies of scale, this system would be designed to gather natural gas produced from Point Thomson and other sources east of Prudhoe Bay, including ANWR and perhaps as far east as Canada`s Mackenzie Delta. Accordingly, Scenario 4 involves development and commercial production of natural gas in the ANWR study area, chiefly in the disturbed sector south and east of Kaktovik.

    New legislation in Year 10 permits the search for and production of smaller, more elusive, and previously sub-marginal oil and gas accumulations throughout the 1002 Area. This added activity would occur under the assumption that, and only after such time as:

    • Virtually the entire stock of "technically recoverable" oil and gas in pools of 64 million bbl or more within the 1002 Area and the adjacent state offshore acreage is capable of being extracted profitably, even if expected energy prices remained materially below those that prevailed during the 1990s; and
    • Demonstrated advances in petroleum development and production technique are capable of reducing incremental surface disturbance and artificial cover, and other predictable environmental impacts attendant on this process, to levels deemed compatible with the refuge, and are otherwise politically acceptable.

    Extrapolation of technical progress in North Slope hydrocarbons exploration since 1977 suggests that the combined impact of advances in remote sensing, geophysical analysis, three dimension imaging, directional drilling, recovery, transport, hydrocarbons processing, and construction techniques is likely to imply a reduction of the minimum commercial field size to no more than 32 million bbl of oil equivalent. This is consistent with variable production costs of no more than $1/bbl (oil) and no more than 25 cents/MMBtu (gas). For the remainder of the study period we assume that the entire stock of "technically recoverable" oil and gas within the 1002 Area and the adjacent state offshore acreage can be discovered and economically produced even if energy-price expectations and actual prices are materially below those of the 1990s; and the incremental surface disturbance, artificial cover, and surface or atmospheric waste discharges associated with this process would be negligible.

    Scenario 5 - Maximum extent of development

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    This scenario is the same as Scenario 4, except that the spatial impacts modeled are the full extent of the 1002 area, including the southeast uplands where oil and gas prospects are least likely (Fig. 6).


    1. U.S. Geological Survey Fact Sheet FS-040098, Arctic National Wildlife Refuge, 1002 Area, Petroleum Assessment, 1998.
    2. Crow, Patrick, Bullish on Oil, OGJ, May 3, 1999, p. 52.
    3. Campbell, Colin, and Jean Laherrere, The end of cheap oil, Scientific American, March 1998.
    4. Alaskan North Slope operators shift focus from stemming decline to hiking production, OGJ, Aug. 24, 1998, p. 20.
    5. North Slope`s exploration revival targeting satellites near giants, OGJ, Aug. 31, 1998, p. 18.
    6. The changing oil industry: Will it affect oil prices?, University of Alaska-Anchorage, Institute of Social and Economic Research, Fiscal Policy Papers, May 1999.

    The Authors

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    Arlon R. Tussing has been affiliated with the University of Alaska as professor of economics and in other positions since 1965 and is president of ARTA Inc., economic consultants. He has been chief economist of the U.S. Senate Committee on Energy and Natural Resources and served on numerous public boards and commissions in the U.S. and Canada. He is co-author with OGJ Editor Bob Tippee of The Natural Gas Industry: Evolution, Structure and Economics (PennWell Books, 1984 and 1995). Tussing is a graduate of the University of Chicago, holds a PhD degree in economics from the University of Washington, and lives on Mercer Island, Wash.

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    Sharman Haley has 15 years of experience in public policy analysis and consulting in Alaska on a wide range of topics, most recently focusing on rural development. She holds a doctorate in economics from the University of California Berkeley, 1994. She is assistant professor at the Institute of Social and Economic Research, University of Alaska Anchorage.