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Alaska North Slope crude squeezed at refineries as shale oil flows west

Alex DeMarban
Will the Midwest oil boom squeeze Alaska North Slope crude out of West Coast refineries, forcing down its price? Industry watchers from Alaska don't seem especially worried -- despite plans for increased shipments of Bakken crude by rail to the West Coast. State of Alaska photo

Will the Midwest oil boom squeeze Alaska North Slope crude out of its West Coast refineries, forcing down its price and one day causing the oil industry to consider exporting the state's most important resource overseas?

Key industry observers from Alaska don't seem especially worried -- despite plans for increased shipments of Bakken crude to the West Coast by rail, and despite the fact that some Alaska oil has already been bumped from one refinery, while other refineries gear up to take the Midwest oil.

But Dan Lawn, a consultant for environmental groups and once a state tanker inspector for the Department of Environmental Conservation, believes West Coast refineries suddenly have more oil than they can handle, given that some oil tankers have returned to Alaska from Lower 48 refineries with part of their original cargo undelivered.

Lawn's been prophetic before. He rang bells long before the 1989 Exxon Valdez disaster, claiming diminishing oversight would lead to an oil spill.

Alaskans should hope lightning doesn't strike twice. Plunging oil prices could be catastrophic for the state budget, which for the first time in years has suddenly been thrust into deficit spending because of dropping production. The recently passed tax cut will add to the pain, at least in the short-term.

Factor in the prospect of falling crude oil prices -- they're currently perched at $110 a barrel -- and Alaska could be in a world of hurt.  

"Tesoro has basically said they're replacing ANS (Alaska North Slope) crude with North Dakota crude," said Dan Lawn, owner of Environmental Information Services, referring to a move by Tesoro designed to bolster its capacity to process light, sweet Bakken crude in the state of Washington.  

For Lawn, that raises questions about what the state's major oil producers and taxpayers -- BP, ConocoPhillips and ExxonMobil -- will do with all that extra oil if they increase production, something they promise to do in the wake of the state's oil tax cut.

"The question is how can they, with a straight face, want tax relief to produce more ANS crude, when they can't use all the ANS crude they're producing now?" Lawn asked.

Exxon and BP, which each own a West Coast refinery, had little to say on the topic. ExxonMobil said in a statement that it would not speculate on what the boom in Midwest oil would lead to.

BP economist Mark Finley, general manager of global energy markets for BP America, also refused to predict where North Slope crude prices would head. He said North Slope prices will largely be influenced by the global price for oil – and that's affected by many factors.

That world price has puzzled some observers who note that the price has held steady this year, despite new production that typically would trigger a price drop.

Finley said the anomaly stems in part from supply disruptions related to international sanctions against Iran and civil unrest in countries such as Sudan. That heightened concerns, leading China and Saudi Arabia to stockpile oil for strategic purposes, Finley said.   

Other industry watchers based in Alaska, including a pair of consultants who stand on opposite sides of the tax break, suggested there's a good chance markets and industry will adapt to the increase in Midwest oil while leaving Alaska relatively unscathed.

Richard Fineberg, who opposed the tax cut, said oil prices are notoriously hard to understand so it's tough to know exactly what will happen. But he said oversupply of Alaska North Slope crude has been an issue in the past, and industry came up with a solution to stabilize crude prices.

That was in the pipeline's early days, when Alaska gushed so much oil that is was shipped not only to West Coast refineries, but also to the U.S. Gulf Coast, with large oil tankers traveling around South America. The route was shortened in 1982, when the trans-Panama pipeline was built to carry North Slope crude to tankers on the Atlantic side, shipments that continued for about 15 years.    

In 1988, the North Slope pumped more than 2 million barrels of oil daily, providing about 25 percent of U.S. supply. There was so much extra oil that Alaska was allowed to export crude starting in 1996. The overseas shipments ended in 2004, after some 100 million barrels of Alaska crude -- about 3 percent of production those years -- had been sent to Asian countries.

Now, thanks to the shale-oil boom, U.S. production this year saw its biggest jump in history. Growth is expected to continue for years, and one solution may be exporting all that Bakken crude overseas,

That would take a change in federal law.  In the 1970s, Congress made it illegal to export domestically produced crude oil without a license, aiming to conserve domestic oil reserves and discourage foreign imports.

Roger Marks, a former state petroleum economist who supported Senate Bill 21, said the increased oil may lead to a drop in the price of North Slope crude, but it will likely bring it in line with world benchmarks, an adjustment that's already underway.

Alaska North Slope crude currently sells for about $3.50 more a barrel than West Texas Intermediate and about $2 more for Brent. The coming drop may not be significant, said Marks.

"Whatever the world level is, it would stay there," he said. "But I don't think there's any risk of North Slope crude being squeezed out of the West Coast. That's the premium West Coast crude."

Alaska's crude has an advantage over its competitors because West Coast refineries built in the 1970s were meant to handle its unique chemical characteristics -- such as the amount of bitumen and naphta it contains.

Any other crude would create "operational complexities," he said.  

"North Slope crude would have first dibs on getting in," said Marks. "So if North Slope oil gets produced, it'll go to the West Coast."

Addressing concerns that Bakken oil and tar sands oil from Canada can be mixed to replicate North Slope oil, Marks said refineries would still accept North Slope oil.

Contact Alex DeMarban at alex(at)alaskadispatch.com