Alaska Oil Exports
Larry Kumins
Specialist in Energy Policy
Resources, Science, and Industry Division
April 5, 2000
ncseonline.org
RS20540
Summary
As a reaction to oil prices and supply concerns, several bills have been introduced during 2000 which would ban the export of crude oil produced on Alaska's North Slope. The export of the oil had been prohibited by the 1973 law facilitating the construction of the pipeline system now transporting oil to the ice-free, southern Alaska port of Valdez. Subsequently, concerns about adverse effects on energy security, supply and price were alleviated. In 1995, legislation was enacted permitting export. Relatively small amounts - never more than 7% - of Alaskan crude have been sold to Korea, Japan and China. Korea imports about half of this oil.
The Alaska crude export issue has become especially focused on the West Coast, where gasoline prices are significantly higher than in the rest of the nation. Concern exists that the exports - which might otherwise be destined for the regional market - are not fully replaced by imported crude during the current episode of short supply, and that may have contributed to the region's higher fuel prices.
Ownership of Alaskan oil is changing. BP Amoco and Arco are planning to merge, and as part of this transaction, Arco's one-third stake is being sold to Philip's. This may change the dynamics of the market for Alaskan crude and could lead to a change in sentiment at BP Amoco (reportedly the only exporter) about selling crude abroad.
This report will be updated as legislative developments evolve or as conditions in oil markets change.
Introduction
About 7% of crude oil production from the Alaska North Slope (ANS) is currently exported to South Korea, Japan, and China. Tight supplies on world oil markets and unfavorable public reaction to exporting domestic oil during times of high prices and tight supply have focused legislative attention on the Alaska exports. ANS exports had been banned since construction of the trans-Alaska Pipeline System was authorized in 1973, but an apparent glut of oil on the West Coast persuaded Congress to lift the ban in 1995.
However, recent controversy over the effects of ANS crude exports has resulted in the introduction of several bills to reinstate the ANS export ban. These include:
• S. 2275, Oil Supply Improvement Act - provides that no crude transported over the pipeline right of way be exported.
• H.R. 4007 - reimposes the prohibition on the export of Alaska North Slope crude oil.
• H.R. 4017 - to suspend exports of ANS crude until the President determines the domestic economy is not experiencing a shortage of foreign crude oil or an inflationary impact due to the demand for foreign crude.
This report summarizes the history of the ANS export ban, the reasons it was lifted, and the possible impact of reimposing the ban as proposed by recent legislation.
Background
When the Arab Oil Embargo began in late 1973, oil development on Alaska's North Slope had been stymied since the Prudhoe Bay discovery in 1968 by lack of agreement on a pipeline destination. Two plans were at loggerheads. One favored by many policy makers envisioned the oil transiting Canada to a Chicago-area destination. Proponents of this plan pointed out that the Midwest had no indigenous source of crude; those opposing it cited the high cost of such a lengthy and expensive pipeline construction project.
The other plan, which ultimately became the Trans-Alaska Pipeline System (TAPS) was to ship crude oil to the southern Alaska seaport of Valdez, where it would be shipped to refiners by tanker. Proponents cited large cost savings and the timeliness of the smaller construction project. Opponents of this plan contended that TAPS sponsors' true intent was to export North Slope crude, a contention vocally denied by TAPS supporters. Exports, asserted Midwest destination proponents, were counter to the principle that U.S. oil be used domestically, and remain available for consumption in the U.S. as a matter of energy security.
Pipeline construction from Prudhoe Bay required transiting a route where much of the right-of-way was on federal lands. Legislation was required to end what had become a stalemate over the route. The Arab Embargo brought a new sense of urgency to the debate. As a gasoline shortage began to develop, a compromise - the Trans-Alaska Pipeline Act (P.L. 93-153) - was achieved. This right-of-way legislation enabled the shorter pipeline to Valdez, with the proviso that crude transiting the right-of-way that Congress granted would not be exported.
TAPS was completed in 1977 and initial oil shipments began to flow by year-end. With continued oilfield development on the North Slope, production climbed steadily for 10 years, peaking at 2.0 million barrels per day (mbd) in 1988. In subsequent years, ANS output declined, falling to 1.5 mbd in 1995 and continuing downward to current flows of 1.05 mbd.
CRS-3 Much ANS crude reached California, which is the nation's third-largest oil producer. During the mid-1990s, California produced 800,000 barrels per day (bd), an amount supplemented by another 100,000 bd from the federal Outer Continental Shelf (OCS). The combination of California's indigenous production, ANS crude, and foreign oil imports resulted in a California oil surplus. The local glut, which depressed prices for both California and ANS producers, necessitated the shipment of about 300,000 bd of crude through the Panama Canal to the U.S. Gulf Coast and U.S. Virgin Islands.
Congress Lifts ANS Export Ban
The West Coast oil glut elicited persistent expressions of concern from oil producers displeased with what they perceived as artificially depressed prices. Early efforts to achieve remedial action failed to establish traction until 1995, when low world oil prices, a relatively benign level of oil imports (8.0 mbd - in contrast to a current level of 9.7 mbd) and a supportive Department of Energy (DOE) coincided with renewed legislative efforts in both Houses of Congress.
A June 1994 DOE study, Exporting Alaskan North Slope Crude Oil-Benefits and Costs, found that exporting Alaska crude would increase producer receipts for both California and Alaska oil. The increased producer receipts would be the result of transportation savings realized by avoiding a trip through the Panama Canal. Additionally, DOE predicted larger producer revenues at the wellhead would result in 100,000 bd more output from Alaska and California than would be the case with continued export restriction.
Absent a conclusive case for the oil's being needed in the United States, and with no measurable cost and substantial projected benefits, bills in the House and Senate (H.R. 70 and S.395) passed by large margins, 324-77 and 74-25 respectively. The Clinton Administration supported ANS crude exports and the President signed P.L. 104-58 in November 1995.
ANS exports totaling 36,000 bd began in 1996; they grew to 66,500 bd in 1997, dipped slightly to 52,900 in 1998 and rose to a high of 74,000 bd in 1999. According to unpublished DOE figures, during 1999, Korea (50%), Japan (36%) and China (12%) imported nearly all ANS exports. The list of customers has remained the same since 1996.
At current levels, ANS exports amount to about 7% of North Slope output. Viewed relative to total domestic consumption of 19.3 mbd, these exports comprise less than one- half of one percent. Compared to net petroleum imports of 9.7 mbd, they are the equivalent of three-quarters of one percent. As an absolute quantity, these numbers are not particularly significant. Nevertheless, ANS exports appear to have become a focal point of legislative debate in the context of current price and supply difficulties.
While the United States is a net importer of about 9.7 mbd of oil from abroad, it also exports considerable oil in addition to ANS crude. During 1999, nearly 900,000 bd were exported. A large percentage of this was in the form of petroleum coke (28%), which is used in making steel. Other exports are cross border exchanges of refined products, as well as some crude, with Canada (13%) and Mexico (28%). Trade in petroleum coke plus CRS-4 exports to Canada and Mexico account for 69% of U.S. oil exports. On the other side of the Canada-Mexico trade equation, these nations supply 15% and 13% respectively of total U.S. petroleum imports.
Current Debate
Since 1995, Alaska oil production has fallen by about 0.5 mbd. The output drop is larger than the West Coast surplus was in 1995, when it was estimated at 300,000 bd. Indigenous California crude production has declined about 10% since 1995. Moreover, output from the federal offshore has remained constant. It appears as if there is no current oversupply.
If the West Coast oil glut has disappeared because of falling production and there is no persistent oversupply, exported oil is being replaced by imported crude during a time when petroleum supply is tight and prices have risen sharply. Gasoline prices in particular have risen more on the West Coast than elsewhere in the nation. DOE reports that as of March 20,2000, West Coast pump prices were $1.73 per gallon, 22 cents above the $1.51 national average. While pump prices - particularly in California - have been higher than in the rest of the country for the past few years because of local environmental requirements and other factors, a differential this large is extraordinary. Not surprisingly, the West Coast gasoline pricing situation has resulted in consumer complaints and assertions that crude exports are one cause.
Could the exported 74,000 bd be a causal factor contributing to the West Coast gasoline price differential? While the oil exported represents less than 3% of regional consumption - and is presumably replaced by imports at equivalent prices - exports could currently be contributing to the price disparity. Highly inelastic oil markets can experience large price swings in response to small changes in supply.
Platt's Oilgram Price Report 1 contains an article on the ANS crude market which describes market dynamics. Platt's estimates the various producers' market shares, placing BP Amoco's share at 470,000 bd, Arco's at 360,000, and ExxonMobil's at 246,000. Six other firms hold minor production shares. BPAmoco is apparently the only oil exporter. Arco and BPAmoco are preparing to merge and, as part of that transaction, Arco's ANS business is being sold to Phillips. Phillips will then become the second largest producer of ANS crude, accounting for more than one-third of production. The article describes the market for ANS crude, indicating that Arco - an important California refiner as well - has been a net purchaser of ANS crude. This appears to suggest that crude-short Arco must go into the spot market seeking additional ANS supplies and compete for them with the Asian export market.
The Platt's article further states: "The BP Amoco spokesman said even though shipments to Asia only averaged 60,000 bd, the company was satisfied with the export program, because it assisted in weakening the grip of what he called a "captive market" for its crude in California." This statement could suggest that California refiners have been - or, without exports, would be - paying lower than world market prices for ANS crude.
But for this contention to be valid, local petroleum markets would have to be not fully competitive. Why else would West Coast refiners pay world market prices (there was no other choice) for foreign oil, and below market prices for ANS crude? It is also possible that the West Coast petroleum market may not lend itself to such a simplified analysis.
Local competitive conditions - if better understood - might help better explain the reasons that producers have found it economic to export ANS crude. But, as part of the BP Amoco deal to buy Arco (which apparently does not export North Slope oil), Arco's ANS properties are being sold to Phillips. Phillips reportedly has indicated that it will not export any acquired crude, and this - coupled with the controversy regarding exports - has apparently led BP Amoco to reconsider its export policy.2
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