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Alaskan TAPS turn off takes on political dimension

Alaskan TAPS turn off takes on political dimension

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Market Briefing
Published: October 2013
Pages: For full details, please email keithw@cmsinfo.com
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The Major Pipelines of the World map, 4th Edition shows a thin red line running north to south across Alaska, and apparently isolated and distant from any other pipeline networks or refinery. This is the Trans-Alaska Pipeline (TAPS) that conveys oil from Prudhoe Bay to Valdez, Alaska.

Despite its isolation, it has the distinction of one of the world's largest pipeline systems, consisting of 12 pump stations, several hundred miles of feeder pipelines, and the Valdez Marine Terminal. The bit most people think of is the 800 miles (1,287 km) or so of pipeline with the diameter of 48 inches (122 cm) that makes up the 'main line'. The first barrel of oil travelled was pumped in 1977, and full-scale production had started by the end of that year.

It hasn't all been plain sailing for TAPS, as there have been a number of leaks, some as a result of sabotage, or maintenance failures, and even gunshot holes. However, despite these set-backs, as of 2010, the pipeline had pumped nearly 16 billion barrels (2.5×109 m3) of oil.

History is littered with stories of communications infrastructure built to service mines, quarries and oil wells whose production peaked just a few years after the installation was completed. Abandoned in the jungle - as recovery was deemed uneconomical - often with ore cars still loaded at the mine. And so it is with TAPS, as Alaskan oil production peaked in 1988 at around 2 million bpd and has been falling since, possibly down to 510kbpd this year, according to Steven Kopits of the Douglas-Westwood energy analyst firm.

According to Kopits, TAPS is operating below a quarter of its capacity, with fears that it will lose its viability below 300kbpd. In the wake of the run-up in oil prices before the recession, then governor Sarah Palin brought in a 75% tax rate from 2007. This stalled investment and production decline rates increased to nearly 7% from 4% a decade earlier.

The current governor Sean Parnell reacted by reducing the top tax rate to 35%. This brought promises of investment by BP and ConocoPhillips. However, expectations remain modest, at best to reduce declines to 20kbpd / year from the current 40kbpd pace. If expectations are met, TAPS will reach the 300kbpd threshold in 2024, rather than 2020.

Many Alaskans are unimpressed and are forcing a referendum to re-instate the higher tax rates – they see the end of the state’s golden age of oil and want to get all they can, while they can. On the other hand, Shell has big plans, as much as 1.8 mbpd from Alaska’s Outer Continental Shelf, 40% more than Gulf of Mexico production today. But cost to first oil is in the US$ 40-60 billion range, and one has to wonder whether Shell has the fortitude to hold out until initial production in 2025.

Kopits also observed that Goldman Sachs spent much of a recent report berating Shell for 'overspending in low return assets and unproductive capital'. Shell’s incoming CEO, Ben van Beurden, comes from the chemicals division, where he managed to increase profitability and lower Capex.

Will a downstream manager feel the exotic lure of Alaska as much as the upstream team has? Or will he decide that 2025 is just too long for investors who are looking for cash quarter by quarter? As the Chinese say. 'may you live in interesting times'. You might want to just check out Douglas-Westwood's World Onshore Pipeline Market Forecast 2013-2017 oil & gas market study published in February 2013, which highlights the growing onshore pipeline construction demand for the next four years, including likely values.


Keith Wallace

Further reading:

The Oil & Gas Pipelines Market 2013-2023
Published by Visiongain in March 2013
Oil & gas pipelines are an essential part of hydrocarbon transportation and distribution, required to ensure the smooth operation of the energy industry. The market is currently experiencing a number of important changes, with the factors driving spending differing ...(more)

World Onshore Pipeline Market Forecast 2013-2017 oil & gas market study
Published by Douglas-Westwood in February 2013
Growing Onshore Pipeline Construction Demand 2013-2017 Now in its 4th edition, The World Onshore Pipelines Market Forecast 2013-2017 from Douglas-Westwood, considers the prospects for the onshore pipelines construction business and values the future markets through to ...(more)

The LNG Carrier Market 2013-2023
Published by Visiongain in January 2013
LNG carriers are used to transport liquefied natural gas around the globe. They have been in widespread commercial service since the late 1970s, but only in the 21st century have they become an integral part of the global energy market - more than 80% of the LNG carrier...(more)

Major Pipelines of the World, 4th Edition
Published by Petroleum Economist Ltd. in September 2012
The Major Pipelines of the World map, now in its 4th edition, provides a comprehensive overview of the global pipeline networks for oil, gas and refined products whether existing, planned or under construction. Shown on a satellite-derived base to depict the geographica...(more)


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