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Economic Analysis of Oil Exploration and Drilling in Alaska’s Arctic National Wildlife Refuge

November 28, 2018
Located on the northeastern corner of Alaska, extending from the state’s northern coast to just south of the Brooks Range mountains, sits 19.3 million acres of what may be one of the most disputed lands in the United States. The Arctic National Wildlife Refuge (ANWR) is currently home to unique wilderness, wildlife, and a predicted 11.80 billion barrels of untouched oil.[1]

While the refuge has been protected under The Alaska National Interest Lands Conservation Act (ANICLA) since 1980, the “1002 Area” located on the coastal plain stands as an exception due to its immense oil reserve potential. Power was ultimately left in the hands of Congress to authorize exploration and development in the area until 2016 when President Obama invoked a ban on offshore drilling along the Arctic and Atlantic Seaboard.[2] Now as the Trump administration increases efforts to lower the price and foreign dependence on oil, the ANWR is back on the market and under more scrutiny than ever. Both sides of the issue are questioning whether the economic benefits outweigh the costs of exploration, development, and environmental damage.

Image: Map of northern Alaska showing location of Arctic National Wildlife Refuge, Source: U.S. Geological Survey 2002 Petroleum Resource Assessment of the National Petroleum Reserve in Alaska (NPRA)Image: Map of northern Alaska showing location of Arctic National Wildlife Refuge, Source: U.S. Geological Survey 2002 Petroleum Resource Assessment of the National Petroleum Reserve in Alaska (NPRA)

Economic Benefits

Since its establishment, the 1002 Area of the ANWR has been under constant debate due to its economic potential. While the area has always been contested, it wasn’t until 2017 that bids were officially released. Pitched as “a moneymaker for the federal government,” drilling in the area is believed to bring in about $2.2 billion in proceeds that will be split between Alaska and the U.S. government.[3][4] But further analysis along with consideration of costs concludes that the only substantial benefits from the project are its economic rents and tax revenues. More specifically, the only portion of the total revenue that will benefit society is its net return.[5]

The Trump Administration also claims that this project will result in lower prices and reduced foreign dependence on oil. But because “domestic oil prices are determined in a world market,” the .55 percent of oil present in the 1002 Area out of the total worldwide reserves is unlikely to have a substantial effect on oil prices in the U.S.[6]

Economic Cost

Many factors need to be taken into account when determining the monetary costs associated with exploring, developing, and producing oil in an area as remote as the ANWR. Pairing remoteness with a general lack of infrastructure and knowledge immediately spikes project costs.[7] The Trans-Alaska Pipeline System (TAPS) currently serves as the main transportation system carrying Alaskan oil to the Port of Valdez in southern Alaska where it’s then brought to the market by marine tankers. In the case of ANWR’s 1002 Area, TAPS is not close enough and thus requires the construction of brand new pipelines.[8] Furthermore, information on the size and location of oil reserves is currently unknown. Assuming that marginally sized accumulations are located in clusters and transportation facilities can be shared, the project may be more economically viable. But since size and location is still an unknown, extensive geologic assessments are necessary. This will, thus, compound another cost.[9] These facts must be taken into account on top of the given costs that any related operation faces such as exploration of well location, overhead charges, injection wells, facilities, labor, facilities maintenance, and transportation.

A report released by the Center for American Progress speculated that breaking even in ANWR would require oil companies to make $78 a barrel.[10] This is a value well above the current rate of about $68 a barrel.

Image: Summary of the USGS estimates of economically recoverable oil that may exist beneath the federal part of the Arctic National Wildlife Refuge 1002 Area. The three curves are based on estimates of technically recoverable oil volumes at the mean (expected) value, and at the 95 percent (F95) and 5 percent (F05) probabilities. Each curve relates market price/cost to the volume of oil estimated to be profitably recoverable. Included are the costs of finding, developing, producing, and transporting oil to lower 48 West Coast market based on a 12 percent after-tax return on investment all calculated in constant 1996 dollars. The chart is read as follows: At a market price of $24 per barrel, there is a 95 percent probability of at least 2.0 BB of economically recoverable oil and a 5-percent probability of at least 9.4 BB. The mean or expected value is at least 5.2 BB of economically recoverable oil at $24 per barrel, Source: Arctic National Wildlife Refuge, 1002 Area, Petroleum Assessment, 1998, Including Economic AnalysisImage: Summary of the USGS estimates of economically recoverable oil that may exist beneath the federal part of the Arctic National Wildlife Refuge 1002 Area. The three curves are based on estimates of technically recoverable oil volumes at the mean (expected) value, and at the 95 percent (F95) and 5 percent (F05) probabilities. Each curve relates market price/cost to the volume of oil estimated to be profitably recoverable. Included are the costs of finding, developing, producing, and transporting oil to lower 48 West Coast market based on a 12 percent after-tax return on investment all calculated in constant 1996 dollars. The chart is read as follows: At a market price of $24 per barrel, there is a 95 percent probability of at least 2.0 BB of economically recoverable oil and a 5-percent probability of at least 9.4 BB. The mean or expected value is at least 5.2 BB of economically recoverable oil at $24 per barrel, Source: Arctic National Wildlife Refuge, 1002 Area, Petroleum Assessment, 1998, Including Economic Analysis

Environmental Cost

Accurately quantifying environmental damage can be seen as an impossible task. While we may be able to predict the cost of remediating an environmental disaster, how do you place a price on the lives of endangered species? There may be no monetary cost associated with the disruption of local wildlife, but it is nonetheless a value to be considered when conducting an accurate analysis. Nicknamed, “America’s Serengeti,” the ANWR was created to protect a large spectrum of arctic and sub-arctic species including but not limited to caribou, musk oxen, wolves, wolverines, polar bears, and over 135 varieties of bird.[11] This wide diversity of species is put in danger in the event of an oil related catastrophe. While oil spills are not the sole environmental concern, it is one highly contested in relation to the ANWR discussion.

Damage inflicted by an oil spill in this area would easily parallel the Exxon Valdez catastrophe that cost the lives of between 100,000 and 250,000 sea birds along with otters, seals, eagles, orcas and fish in Alaska.[12] Over two decades after the spill, it was recorded that sea otter populations had lacked any noticeable recovery.[13] Moreover, as time passes, species such as polar bears will only become more vulnerable. Shrinking sea ice has already begun forcing polar bears to move their dens further onshore, and therefore closer to potential oil reserves. It is without question that we see environmental cost increasing under the authority of our changing climate.

Still, environmental cost is not objective, so while we can conclude that it is increasing, it is unknown at what rate and by what value. Contingent valuation gives researchers a generic basis to conduct analyses in cases such as these. By gathering data on the amount of money individuals are willing to pay to keep this specific environment protected and the amount of money individuals are willing to accept for drilling to occur, a monetary value can be approximated for environmental cost.[14] It is also important to keep in mind the specific stakeholders being questioned. An Alaskan community whose livelihood depends on oil drilling is likely willing to accept a much lower value to drill in the area compared to a group of environmentalists miles away who have devoted their lives to wildlife conservation. In a study conducted by Matthew J. Kotchen and Nicholas E. Burger using contingent valuation, it was concluded that, “… the average breakeven willingness to accept compensation to allow drilling in ANWR ranges from $582 to $1782 per person, with a mean estimate of $1141.”[15] In other words, the average willingness to accept value for drilling in the ANWR that would result in equal values for both cost and benefit is calculated at $1141 per individual. This is a value that we can only expect to rise when coupled with the ecosystem’s heightening vulnerability.

Conclusion

Until exploration and geologic tests are completed, it is unknown exactly how much oil lies beneath the plain and is difficult to accurately measure the project’s costs and benefits. As seismic work begins to gain this knowledge though, so does environmental disturbance. Despite there being only seven bids for less than 1% of the 1002 area in 2017 and a permit application notable for, “…how many inaccuracies and missing pieces of information there are,” this year, the project continues to move forward and the fate of the ANWR is unknown.[16][17]

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References

  [1]https://www.sciencedirect.com/science/article/pii/S0301421507001541

  [2]https://www.nytimes.com/2016/12/20/us/obama-drilling-ban-arctic-atlantic.html

  [3]https://www.washingtonpost.com/news/powerpost/paloma/the-energy-202/2017/12/08/the-energy-202-large-and-unprecedented-alaska-oil-sale-falls-flat-as-congress-readies-arctic-refuge-drilling/5a29c92030fb0469e883fab3/?utm_term=.727ab95f6643

  [4]https://www.nationalgeographic.com/magazine/2018/06/arctic-national-wildlife-refuge-america-oil-risk/

  [5]https://www.sciencedirect.com/science/article/pii/S0301421507001541

  [6]https://www.sciencedirect.com/science/article/pii/S0301421507001541

  [7]http://eot.us.archive.org/eot/20170217215436/https://pubs.usgs.gov/of/2009/1112/pdf/ofr2009-1112.pdf

  [8]http://eot.us.archive.org/eot/20170217215436/https://pubs.usgs.gov/of/2009/1112/pdf/ofr2009-1112.pdf

  [9]http://eot.us.archive.org/eot/20170217215436/https://pubs.usgs.gov/of/2009/1112/pdf/ofr2009-1112.pdf

  [10]https://www.americanprogress.org/issues/green/news/2017/11/13/442603/energy-case-drilling-arctic-national-wildlife-refuge/

  [11]https://www.sciencedirect.com/science/article/pii/S0301421507001541

  [12]www.bbc.co.uk/newsbeat/article/42223757/how-donald-trumps-tax-reforms-could-mean0more-oil-drilling-in-alaska

  [13]https://www.usgs.gov/news/wildlife-recovery-following-exxon-valdez-oil-spill-was-highly-variable-across-species?qt-news_science_products=4#qt-news_science_products

  [14]https://www.sciencedirect.com/science/article/pii/S0301421507001541

  [15]https://www.sciencedirect.com/science/article/pii/S0301421507001541

  [16]https://www.washingtonpost.com/news/powerpost/paloma/the-energy-202/2017/12/08/the-energy-202-large-and-unprecedented-alaska-oil-sale-falls-flat-as-congress-readies-arctic-refuge-drilling/5a29c92030fb0469e883fab3/

  [17]https://www.washingtonpost.com/business/economy/companies-take-first-steps-to-drill-for-oil-in-arctic-national-wildlife-refuge/2018/05/31/8f133464-643a-11e8-a768-ed043e33f1dc_story.html?noredirect=on&utm_term=.504aa91cd6d8

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