Alaska Oil Reserves May Have Grown 80% on Giant Discovery
Comment of the Day

October 05 2016

Commentary by David Fuller

Alaska Oil Reserves May Have Grown 80% on Giant Discovery

Alaska’s oil reserves may have just gotten 80 percent bigger after Dallas-based Caelus Energy LLC announced the discovery of 6 billion barrels under Arctic waters.

The light-oil reserves were found in the company’s Smith Bay leases between Prudhoe Bay and Barrow along the Arctic shore, according to a statement from Caelus on Tuesday. As much as 40 percent of the find, or 2.4 billion barrels, is estimated as recoverable, the company said. That compares with the state’s proved reserves of 2.86 billion barrels in 2014, almost 8 percent of the U.S. total, Energy Department data show. 

“It’s a really exciting discovery for us, and we think it’s really exciting for the state of Alaska,” Caelus Chief Executive Officer Jim Musselman said in a phone interview. “They need a shot in the arm now.”

Alaska’s oil output has been gradually declining, to 483,000 barrels a day last year from a peak of more than 2 million barrels a day in 1988, Energy Department data show. The last major field brought online was Alpine in 2000, which averaged 62,000 barrels a day in September, Alaska Department of Revenue data show.

Musselman, the man who engineered the $3.2 billion sale of Triton Energy Ltd. to Hess Corp. in 2001, founded Caelus in 2011 to explore and develop petroleum resources on the North Slope. In 2014, the company formed a partnership with affiliates of Apollo Global Management LLC to invest in oil and gas properties in Alaska.

The development will cost between $8 billion and $10 billion over the life of the project, which could be brought into operation by the fall of 2022, Musselman said. Located about 125 miles from any other facilities, the company will need to build pipelines and roads. An oil price of about $65 a barrel and greater certainty on state tax policy and incentives is needed to develop the field, he said.

“A lot of the investment decision is going to revolve around what happens within the state from a regulatory standpoint,” he said.

Caelus said its newly discovered field could produce as much as 200,000 barrels a day.

David Fuller's view

Light crude oil is highly desirable, being more valuable than the many heavy crudes available because it produces more gasoline and diesel when refined.  Assuming further drilling confirms the size of this discovery, it is an important development for the economies of both Alaska and the USA generally, although Caelus’ oil cannot be developed quickly.  Nevertheless, it also has two important messages for the global crude oil market. 

1) Far from the views we heard for at least 40 years about the increasing scarcity of crude oil, technology is enabling more discoveries to be found, especially when the vast potential for shale oil is considered. 

2) Saudi Arabia’s belated realisation that OPEC no longer controls oil prices has led to its call for a freeze on production.  This is obviously a lot easier to announce than enact, let alone enforce.  Nevertheless, OPEC has discovered that the well-known commodity law: supply reductions lead to higher prices, also applies to them. 

In other words, oil producers will earn somewhat more from their resource by scaling back production.  Currently, Brent Crude has rallied to test this year’s highs, no doubt with the help of short covering.  While oil can recover further, assuming the OPEC agreement to freeze production does not fall apart, any moves above the $60 to $70 region are likely to be short lived.  Above ground oil currently held in tankers will be will be sold.  Production from other sources, not least shale oil, will also increase.  Additionally, higher oil prices will only hasten the development of renewables.  

(See also: Oil Tankers Piling Up in North Sea Show Glut Facing OPEC, also from Bloomberg)

Back to top

You need to be logged in to comment.

New members registration