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International tensions boost price premium for Alaska crude

Sanctions against Iran and contaminated oil from Russia appear to be giving Alaska a small but much-needed financial boost.

Alaska North Slope crude oil is bucking a longstanding trend and is now trading at a premium to Brent crude, a leading benchmark price followed closely by global oil traders.

The Brent benchmark originates from London with oil largely sourced from North Sea fields.

Alaska North Slope oil has sold for a premium to Brent in every month since November except for May, when Brent averaged 1 cent more per barrel. Since May, the daily average Alaska price premium has gone from $1.28 per barrel in June to $1.96 per barrel so far in August, according to the Alaska Department of Revenue. The spread peaked on July 9 when Alaska oil sold for $3.25 per barrel more than Brent-priced crude.

For years, Brent crude consistently sold for a higher price than Alaska oil. The Brent premium to Alaska oil has typically been in the $1 to $2 per barrel range, but hit a near-term peak in February 2015 when Brent oil sold on average for $4.80 per barrel more than Alaska North Slope crude.

More recently, in August 2016 Brent sold for $2.99 per barrel more than Alaska, according to Alaska Department of Revenue data. At that time Alaska oil was also selling for slightly less than West Texas Intermediate — the benchmark for Lower 48 oil — which was also bucking tradition.

Over the previous five years, Alaska North Slope crude has sold for a significant premium to West Texas Intermediate. The Alaska premium over WTI peaked at $10.04 per barrel last February and has been more than $5 per barrel for more than a year.

Alaska oil is traded on its own price for a variety of reasons, but a major driver is that the vast majority of shipments from Valdez are sent to West Coast refineries. Transportation constraints limit the amount of oil produced east of the Rocky Mountains that can be sent west. That soft barrier has led to the development of ostensibly two oil markets in the U.S.

Economist Ed King, who recently served as the lead economist in Gov. Michael J. Dunleavy’s administration, wrote on his firm’s website July 23 that a $3 premium to Brent — going from $2 less to $1 more — correlates to “an extra $100 million or so of financial gain” to the state through extra royalty value and tax collections.

According to Alaska Tax Division Director Colleen Glover, every dollar change in the price of Alaska North Slope crude equates to roughly $42 million more, or less, to the state treasury over the fiscal year at the current price band of $60-$65 per barrel. Alaska oil sold for $62.82 per barrel on Aug. 13, according to the state Department of Revenue.

The Alaskan Explorer, a tanker owned by BP that can carry 1 million barrels of oil, is seen docked at the Valdez terminal of the Trans-Alaska Pipeline System. In late June, the tanker was loaded with North Slope crude bound for South Korea and was delivered on July 14, according to Bloomberg. Alaska oil has been trading at a sizable premium to the worldwide Brent benchmark since the Trump administration reimposed sanctions on Iran and ended waivers for seven countries, including South Korea, to purchase oil. (Alaska Journal of Commerce)

Economists say it’s often difficult to pinpoint a specific reason as to why one oil price changes in relation to another, but according to American Petroleum Institute Chief Economist Dean Foreman, the new Alaska premium over Brent oil correlates to increased exports to South Korea from the Valdez oil terminal at the end of the Trans-Alaska Pipeline System.

Foreman said in an interview that trade data compiled by the U.S. Census Bureau indicates South Korean oil buyers purchased 42% more oil in June than they did a year prior and Bloomberg reported July 23 that two 1 million-barrel capacity tankers —ConocoPhillips’ Polar Adventure and BP’s Alaskan Explorer — were delivering oil to Yeosu, South Korea, last month after being filled in Valdez.

BP Alaska officials declined to comment on the exports; ConocoPhillips Alaska spokeswoman Natalie Lowman wrote via email that the company recently sold a cargo of Alaska oil to customers in Asia, its first export of Alaska oil this year.

Longtime Alaska petroleum economist Roger Marks surmised that traditionally low North Slope production during the summer months could be straining the ability of West Coast refineries to find adequate supplies, which could contribute to the price premium as well.

Foreman noted there is rarely a single explicit answer as to why oil is traded or priced as it is, but he said South Korea is likely buying more Alaska oil because the country’s typical supplies of light crude from Iran and Russia have been choked.

President Donald Trump re-imposed economic sanctions on Iran last November that restricted its ability to export oil after his administration chose to withdraw from the Iranian nuclear deal the Obama administration agreed to in 2015. South Korea was one of a handful of countries that the Trump administration granted waivers to, allowing buyers to keep purchasing Iran oil without repercussions until those waivers expired at the end of April.

Additionally, about 36 million barrels of Russian oil were contaminated in spring by organic chloride, which curbed Russia’s oil exports and further limited South Korea’s options, Foreman said.

“If you increase by 40% the amount of crude that South Korea wants, if you have existing supply channels (of Alaska North Slope crude) going into California, it’s going to have to compete against that and that would be the process of bidding the price up,” Foreman explained of the Alaska oil premium over Brent.

“We’re talking about 2,000 to 3,000 barrels a day; this is not huge volumes but it is enough on the margins that it would be one source of a possible premium leading to higher prices on the margins.”

He added that Alaska oil has a similar “weight,” or gravity, to Iranian and Russian crudes, making it a viable substitute for South Korea refineries designed to handle oil from those areas.

“ANS was obviously an attractive and available source for (South Korea) to want to take more year-over-year,” Foreman said.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

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