Bloomberg News

Alaska Hunts Oil as Arctic Damage Shows Most Change From Climate

October 02, 2013

The Trans-Alaska Pipeline Delivers Oil

The Trans-Alaska Pipeline, one of the world's largest pipeline systems, traverses the state from Prudhoe Bay on the north coast to Valdez in the south. Prudhoe Bay oil has powered Alaska's economy since the 1970s but production has dropped to 26 percent of its peak in 1988. Photographer: Benjamin Rasmussen/Bloomberg Markets

When Jerry Otto started hunting for Alaskan oil in 1980, his tractor-trailers barreled along ice roads as much as 10 feet thick for 180 days every year.

Last winter, when he set out to drill 80 miles south of the Arctic Ocean for Australia’s Linc Energy Ltd. (LNC), regulators opened the roads for 126 days. The rest of the time, warm weather left the routes too mushy for vehicles, Bloomberg Markets magazine will report in its November issue.

More from the November issue of Bloomberg Markets:

  • RELATED GRAPHIC: A World of Opportunities
  • CLIMATE CHANGE: Counting the Costs
  • CHINA: Amway's Harvard Guanxi
  • BRAZIL: Making Sao Paulo Work

Then in January, in a twist that embodies the perplexing reality of life and commerce amid a changing global climate, the temperature dropped suddenly to minus 40 degrees Fahrenheit (minus 40 degrees Celsius), encasing drilling-rig components in ice as Otto waited for roads to solidify to ship the gear to Linc sites.

After thawing the equipment with blowtorches, he discovered that the cold was decreasing oil flowing into Linc’s well. With 200 workers standing by, the company lost $300,000 a day with each delay, ending 2012 with a $61 million deficit.

Otto plans to try again in December, this time drilling sideways into a hill to get underneath 1,000 feet (300 meters) of permafrost and up into reservoirs he says hold 1.2 billion barrels of light, sweet crude.

“It’s getting more unpredictable,” says Otto, 59, who runs Brisbane-based Linc’s drilling rig in Umiat, Alaska, which is within the National Petroleum Reserve that President Warren G. Harding created in 1923 to guarantee oil for the Navy.

“We’re in a race against Mother Nature. If we don’t get cold weather early enough, or if it gets too warm too fast in the spring, it could stall the project.”

Collapsing Cliffs

Otto and others already braving the extremes of a region where sunlight disappears for 60 days a year are experiencing a new phenomenon: daily life navigating the risks and opportunities of climate change.

The Arctic has heated up twice as fast as the rest of the planet in the past three decades. By August 2013, sea ice had lost 76 percent of its volume compared to 1979, according to the University of Washington’s Polar Ice Center. Citing core samples taken from ice sheets, the Intergovernmental Panel on Climate Change, a United Nations group, reported on Sept. 27 that the three main gases blamed for global warming --carbon dioxide, methane and nitrous oxide -- are at their highest level in at least 800,000 years.

On Alaska’s Arctic coast, 30-foot-high cliffs that haven’t budged since the last ice age are tumbling into the ocean overnight and village coastlines are eroding, leaving residents in peril. Lightning-sparked forest fires have charred more than 1 million acres (405,000 hectares) in five of the past 10 years. By midcentury, the average area burned by wildfires each year is likely to double, the U.S. Environmental Protection Agency says.

Alaskan Laboratory

Heat waves are getting hotter and longer, and winters are producing more rain and less snow as the carbon-damaged atmosphere soaks up moisture, says Rick Thoman, a climate analyst for the National Weather Service in Fairbanks, Alaska.

“Alaskans are living through climate change in ways people have not experienced in many thousands of years,” he says. “Alaska is a laboratory for everybody in the sense that this is the kind of thing you can expect in your region down the road.”

Alaska, with just 731,449 residents in 2012, is at the forefront of a global challenge: How do individuals, companies and investors measure the costs -- and, yes, the economic benefits -- of a changing climate? In Alaska, the calculation starts with fossil fuels, the energy sources the United Nations’ IPCC says are heating the atmosphere.

Targeting 2050

Most scientists agree that human-produced carbon dioxide contributes to climate change, says William Reilly, a retired ConocoPhillips (COP:US) director and former EPA head.

As for oil-industry executives, “I don’t know a single CEO of a major company who doesn’t expect carbon regulation in our future,” Reilly says.

Even if carbon is taxed, oilmen will still heed consumer demands for energy, making Alaska’s offshore reserves too big to ignore, he predicts.

Robert Blaauw, Royal Dutch Shell Plc (RDSA)’s senior Arctic adviser, says his company is interested in the Arctic not for today but for 2050 -- when power use will have doubled and two-thirds of energy will still come from fossil fuels.

“Shell and the other majors will continue their search for Arctic oil and gas,” Blaauw says.

On Sept. 24, ConocoPhillips announced the first-ever federally approved test of unmanned drone aircraft for commercial purposes in the U.S. Drones could be used to monitor ice floes and marine mammal migrations in the Arctic, ConocoPhillips said.

Another Prudhoe?

The oil and gas industry generates 30 percent of Alaska’s personal income and provides about 90 percent of the revenue that runs the state government each year. But the Prudhoe Bay field, which has powered the Alaskan economy since 1977, is so old that it’s producing at just 26 percent of peak output.

Oil drillers are seizing a fresh opportunity: As receding summer ice exposes previously unreachable oil under the sea, Statoil ASA (STL), Shell and others are buying drilling rights to technically recoverable deposits that the U.S. Bureau of Ocean Energy Management says could total 23.6 billion barrels.

The original Prudhoe Bay field held 25 billion barrels, 13 billion of which were considered recoverable, according to a 2006 BP Plc (BP/) fact sheet.

Opponents say Alaska is precipitating its own decline by chasing fossil fuels.

“Continuing to spew carbon into the atmosphere is only making climate change worse,” says Frances Beinecke, president of the Natural Resources Defense Council. “The Arctic is where you can see that more clearly than anywhere.”

Polar Bears

Alaskans from the quarter-mile-wide village of Kivalina to the commercial center of Anchorage are taking stands on climate-change trade-offs for everything from petroleum extraction to wildlife migration.

“What’s more important: polar bears or another decade of oil?” asks Raymond Pierrehumbert, a University of Chicago climate scientist, referring to the animals facing starvation because the sea ice from which they hunt seals is disappearing.

“It’s hard to know how people will react when presented with this choice.”

Richard Glenn wants his state to reap the benefits of more oil drilling. Glenn is executive vice president for land and resources for Arctic Slope Regional Corp., a Native Alaskan-owned company to which the U.S. Congress gave land and mineral rights in a 1971 settlement. ASRC generates $2.5 billion in annual revenue from refining and other businesses and pays dividends to 11,000 Native Alaskan shareholders.

‘Time Bomb’

Glenn lives in Barrow, which enjoys running water, sewers and a health clinic. He says his city has these necessities because the Prudhoe Bay oil field brings the town revenue as part of the North Slope Borough’s taxing authority.

Barrow artist Vernon Rexford opposes offshore drilling because he says it threatens native lifestyles.

“Offshore drilling directly infringes on our ability to continue as Eskimo people with subsistence living,” he says. “It’s a time bomb waiting to activate.”

John Moran of the National Marine Fisheries Service is assessing the pluses and minuses of climate change at 10 p.m. on an August Saturday in Barrow, with the sky still bright from the sun just below the horizon.

Standing in the Arctic Ocean in khaki waders, Moran launches a remote-controlled boat that tracks how cod and salmon are faring in waters that are getting warmer and more acidic.

‘Winners, Losers’

“There will be winners and losers,” he says. “There are lots of variables we don’t understand.”

Shipping and vacation cruises are enjoying a boom with climbing temperatures. Yet the heat is melting glaciers and may force wildlife to flee north from national parks, potentially damaging the state’s $1.8 billion tourism industry.

The Red Dog mine in Kotzebue in northern Alaska is experiencing more ice-free days, expanding the weeks it can ship zinc and lead. With longer summers, the mine stockpiles less of its cache, cutting costs. Vancouver’s Teck Resources Ltd. (TCK/B), which runs the mine, may be able to open new deposits nearby, says Reggie Joule, mayor of the Northwest Arctic Borough based in Kotzebue.

BHP Billiton Ltd. (BHP), meanwhile, is struggling with climate change. The world’s largest mining company applied for an exploration permit for 2 billion tons of low-sulfur coal near Point Lay in Alaska’s northwestern corner in 2010. The coal, most of which lies under ASRC-owned land, can’t be loaded directly onto ships because the area is a breeding ground for threatened diving ducks called Stellar’s eiders.

Palm Leaves

Under the Endangered Species Act of 1973, BHP can’t significantly modify the ecosystem without federal approval. The eiders feed on clams, and warming seas are preventing the mollusks from getting nutrients, says Jacqueline Grebmeier, a University of Maryland biologist.

BHP may instead move the coal overland 150 miles (240 kilometers) to ship it, adding to costs and environmental risks.

Linc is proceeding at Umiat in spite of increasingly soggy tundra and hotter summers.

Otto says he knows the climate is shifting because he wrestles every drilling season with pulpy permafrost. He also remembers drilling for oil in Prudhoe Bay in 1995. Back then, his drill bits brought up palm leaves and redwood trunks, which he says are remnants of a time when Alaska’s north coast was a tropical swamp.

“Some people say that what we’re seeing could be a natural variation; others say no, it’s the emissions,” Otto says. “I came away with mixed ideas.”

White Cliffs

Employees preparing the Umiat site on a 70-degree-Fahrenheit August day step off the drilling pad and sink to their ankles in the water, moss and lichens of the tundra. The Colville River flows past Umiat Mountain, which rises like the white cliffs of Dover. Blue and white shipping containers are bolted together for storage and living space. An old Navy airstrip operates in summer for the only access.

Linc endures the conditions because oil prices make the hardships worth it, says Scott Broussard, Linc’s president of oil and gas. Global oil sold for $109.12 a barrel on Oct. 2, up from a low of $9.55 15 years earlier.

To provide more reasons to drill, the state in May enacted $1.1 billion a year in tax credits and other incentives for such oil and gas companies as Exxon Mobil Corp. (XOM:US), ConocoPhillips, Linc and Shell.

Migrating Caribou

Broussard says Linc plans to invest $1.3 billion in Umiat, 75 percent of which will come from state inducements. He’d like to start production in 2018 and ship 50,000 barrels a day as Linc races against ever-shorter seasons.

“All the easy oil is gone,” Broussard says. “That’s why we’re in Umiat.”

More hurdles are looming. The company wants to build a gravel road and an 80,000-barrel-a-day underground pipeline to ship oil 109 miles east to the Trans-Alaska Pipeline System. Alaska needs permanent thoroughfares because climate change is likely to trim the ice-road season further, says Joe Balash, deputy director of the state’s Department of Natural Resources.

Eighty miles south, the 350 Native Alaskans who live in Anaktuvuk Pass in the foothills of the snow-capped Brooks Range mostly oppose a permanent road. The route could disrupt caribou migration, says lifelong resident Jerry Sikvayugak. In 2007, a fire burned 401 square miles (1,039 square kilometers), hindering the animals’ journey and depleting residents’ food supplies.

Broussard says Linc has met with the village’s inhabitants and hopes to find an acceptable pathway.

Shell’s Armada

“Climate change could cost us trillions of dollars, but we’ll also see new industries grow,” says Mark Begich, Alaska’s Democratic U.S. senator.

He says that by investing in wind, geothermal and solar power, Alaska plans to surpass all other states and rely on renewables for 50 percent of its energy needs in 2025, up from 27 percent this year.

Shell learned how volatile Alaska’s climate can be in October 2012. It sent an armada of 22 ships to the northern coast to begin searching for oil. First, a patch of ocean the size of Pennsylvania froze in 48 hours, forcing the company to delay drilling for two weeks. After that, a drilling rig broke free and ran aground in heavy surf.

Shell has canceled drilling for 2013 and has made no announcement about 2014. With its Alaskan drilling on hold, Shell in April added its name to a parade of companies eyeing the Arctic Ocean north of Russia. It agreed to study joining OAO Gazprom, already the world’s biggest natural gas producer, in an offshore drilling program for oil.

Cruise Ships

In Nome, on Alaska’s western coast, Mayor Denise Michels is looking to capitalize on shipping now that melting ice has opened the sea for longer summers.

Dockings in Nome harbor grew to 430 in 2012 from 30 in 1988, forcing vessels to tie up three abreast. Some 200,000 cruise ship passengers planned to visit the Arctic this year, and retirees may rush to Alaska as temperatures rise and water dwindles in such parched U.S. cities as Phoenix, says Fran Ulmer, chairman of the U.S. Arctic Research Commission.

Commercial shipping to Europe is growing in the Bering Strait via the Northern Sea Route along Russia’s coast. Permits for sailing in the area skyrocketed to 556 this year from four in 2010.

‘New Species’

Michels recognizes the impacts of the shipping bonanza. She says Nome would be overwhelmed by a maritime disaster. In 2010, 128 passengers were stranded for two days when cruise ship MV Clipper Adventurer struck an uncharted rock in the Canadian Arctic.

Michels expects more noise and says routine discharges of bilge water may contain pollutants and invasive species.

“You have to adapt,” she says of climate change. “You plan for more storms, more often. You watch roads and buildings sink into the permafrost as it melts. You watch as new species arrive -- insects, fish, crabs, vegetation -- and watch the impact they have on animals that have been here forever and on which we depend.”

The 400 residents of Kivalina, a barrier island about 300 miles north of Nome, are nervously preparing for the winter as rising seas erode their coastline.

‘Freaking Out’

Storms are more violent on land because there’s less sea ice to slow them. Stan Hawley, the tribal council administrator, says bad weather has washed human excrement from the island’s landfill into a lagoon used for drinking water and closed the airport, trapping residents.

“The elders are unsettled, watching the waves,” Hawley, 51, says. “The kids are freaking out.”

Kivalina was a fishing camp until the Bureau of Indian Affairs built a school in 1905. Today, it’s half its width of 30 years ago. Weather-beaten houses on stilts sit near tanks holding fuel delivered once a year by barge.

Kivalinians survive in part by floating on ice to hunt whales. The U.S. government allows subsistence hunting by Native Alaskans as long as the catch doesn’t threaten the herd. Rising temperatures are making that harder.

“The ice is too thin and moves too fast,” Hawley says. “We used to camp out there for weeks as we hunted. Now, it’s a few days.”

Glenn, the ASRC official, says he’s happy to work to combat climate change -- but not without better understanding the effects on the environment, and not if it means blocking development and the improvements oil revenue will bring.

World’s Guilt

“To assuage the guilt of the world, we’d be telling this community to stay the way you were,” he says of native peoples. “In the whole history of the human race, not one generation has been willing to say: ‘I want to turn back. I want my life to be harder.’”

When he worked for the North Slope Borough, Glenn rebuilt a Navy gas field south of Barrow -- the only place where Native Alaskans control the extraction of hydrocarbons.

“When you turn the stove on, it’s a good feeling that the gas is coming from the local community, without ever going through a pipeline,” he says.

At ASRC, Glenn is advocating a road leading due north from Umiat, avoiding Anaktuvuk Pass, to help develop his company’s oil deposits west of Prudhoe Bay.

“There are organizations who want to stop all hydrocarbon development in the Arctic in the name of stopping or slowing down climate change,” he says. “It isn’t going to change the trend the world is experiencing. They’d just open up the valve a little wider in Saudi Arabia or somewhere else.”

As for the state’s warming environment, Glenn says Alaskans are used to change: They experience extremes like few others.

“We roll with the punches as ice comes and goes every year,” he says. “And we’ll roll with the punches of a changing climate.”

Get your free issue of Bloomberg Markets! SUBSCRIBE TODAY

To contact the reporter on this story: John Lippert at jlippert@bloomberg.net;

To contact the editor responsible for this story: Michael Serrill at mserrill@bloomberg.net


The Good Business Issue
LIMITED-TIME OFFER SUBSCRIBE NOW

Companies Mentioned

  • COP
    (ConocoPhillips)
    • $70.5 USD
    • 0.37
    • 0.53%
  • XOM
    (Exxon Mobil Corp)
    • $93.95 USD
    • 0.17
    • 0.18%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus