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Oh, Alaska! Former powerhouse frozen out of US oil boom

Arctic National Wildlife Refuge, Alaska
Universal Images Group | Getty Images
Arctic National Wildlife Refuge, Alaska

As the world's largest economy muscles its way back into the very top echelon of global oil and gas production, Alaska—once viewed as a linchpin of U.S. energy ambitions—has now become an afterthought.

Shale drilling has turned North Dakota and Texas into an embarrassment of oil riches, while the Arctic state has seen its output collapse. Since the shale boom took off five years ago, the Lower 48 states have seen production skyrocket by 77 percent, according to an analysis by Global Hunter Securities. Simultaneously, Alaska's oil production has plummeted from a peak of more than 2 million barrels per day in 1988 to less than 400,000 currently, the Energy Information Agency says.

The state fell to No. 3 in oil production, behind North Dakota, in 2012.

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The divergence between Alaska and the Lower 48 can be attributed to a little-understood fact. The drilling boom in Texas and North Dakota is largely due to state and private ownership of oil fields. Data from the Congressional Research Service show that oil production from federally owned land, like the Arctic National Wildlife Refuge, represents less than 40 percent.

"The U.S. talks about an "all-of the above energy policy while strangling development of federal oil lands," said Mike Krancer, head of the energy practice at the law firm Blank Rome. "It's politics. National parks are one thing, but when you have the oil acreage in a state like Wyoming, Colorado or Alaska, they make it prohibitive."

Whatever happened to ANWR?

Unlike other parts of the globe, the U.S. owns only the surface rights of key land, leaving whatever lies beneath to private development. That has allowed the domestic shale boom to flourish in a way that it hasn't internationally. However, the dynamics surrounding Alaskan oil are different.

Most tellingly about the decline in Alaska's fortunes, the ecologically sensitive Arctic National Wildlife Reserve (ANWR)—once the center of heated partisan battles over whether to drill on the pristine 19 million acre reserve—is seldom if ever mentioned as the holy grail of U.S. energy independence, as it was just several years ago.

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"The urgency to supply the nation with oil continues and hasn't fallen at all. But [Alaska] has to navigate the political quagmire of Capitol Hill to do it," said Adrian Herrera, D.C. coordinator for Arctic Power, an advocacy group for the wildlife reserve drilling. "In the case of North Dakota and Texas, you don't have to deal with Capitol Hill. It's all on state and private land."

Herrera argued that Alaskan oil capacity would even obviate the need for the hotly disputed Keystone XL Pipeline, which the group opposes. He cited U.S. Geological Survey data that ANWR's estimated reserves hold 5 billion to 16 billion barrels of black gold.

Although the state has its own share of state and private lands, those are nowhere near as prodigious as the sliver of wildlife reserve that backers say could satisfy virtually all the country's energy needs.

"Here we've got this pipeline that's three-quarters empty with all the mechanisms to deliver the oil, and a potentially large field," Herrera said. Yet opposition from conservationists has made ANWR "politically caustic, and you can't debate it without having a huge war."

The distinction between federal and state-owned oil rights means Alaska is being left in the dust as other states reap the fruits of surging oil production. The Alaska Oil and Gas Association acknowledges the state is "not competitive" with Bakken, which is in North Dakota and Montana, or south Texas' Eagle Ford, and is waging a battle to preserve a tax cut that encourages more production.

The backdrop of the arctic state's sluggish economy compares starkly to the state of play in North Dakota and Texas.

A report from the Minneapolis Federal Reserve highlighted how counties adjacent to the Bakken are all but fully employed with a mind-boggling 1.6 percent unemployment rate. That contrasts with 5.3 percent in Montana, 3.1 percent for North Dakotaall well below the national rate of 6.2 percent. For its part, Texas is frequently cited as a haven for rapid job growth, and its unemployment rate recently hit a prerecession low at 5.7 percent.

Counties housing the vast Eagle Ford shale formation—which the EIA projects will produce 1.5 million bpd next month–generated more than $61 billion in economic activity and generated more than 100,000 jobs, according to a 2013 study by the University of Texas at San Antonio.

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The production surge is expected to feed a boom in infrastructure building, increasingly gravitating to oil and gas behemoths like Texas, North Dakota and Pennsylvania. The longer Alaska sits on the sidelines, the bigger the risk of missing out on jobs and revenues associated with pipeline construction.

"The infrastructure goes where the production is. Right now, Alaska is declining while production is increasing in other regions," said John Stoody, vice president of government and public relations at the Association of Oil Pipe Lines. "You're seeing infrastructure activity move [to Texas and North Dakota], so that's a reflection of where the market is leading them."

—By CNBC's Javier E. David

Energy

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