Monday, March 23, 2009

Assessing Trade-Offs

Today's posting serves in lieu of a letter to the editors of the New York Times, in response to the misleading comparisons drawn in today's editorial concerning the "Lessons of the Exxon Valdez." The editorial characterizes oil development as "an inherently risky, dirty business — especially so in the forbidding waters of the Arctic." It goes on to draw a comparison between the $2 billion per year Alaskan fishing business in Bristol Bay and the presumed value of future oil and gas production from this area, concluding that the trade-off is not worth the risk. It suggests that the new Secretary of the Interior focus on promoting wind and tidal energy, instead. Unfortunately, their assessment of the trade-offs involved is undermined by the use of a resource estimate that appears to have been misinterpreted from its original source.

Whether the Times drew its estimate of $8 billion of potential hydrocarbon revenue for Bristol Bay from a 2008 World Wildlife Fund report citing a US Minerals Management Service (MMS) estimate of 230 million barrels of oil and 6.79 trillion cubic feet (TCF) of natural gas, or merely draws on the same ultimate source, I found a rather different estimate in the official report of the MMS to the Congress, as mandated under the Energy Policy Act of 2005 . It reflected a range for the North Aleutian Basin, encompassing Bristol Bay, of 20 million to 2.5 billion barrels of oil and 0.04-23.3 TCF of gas, with a mean estimate of 750 million barrels and 8.62 TCF. At $70/bbl for oil and $6/MCF for natural gas, reflecting current long-dated futures prices, the mean expected value of the "undiscovered, technically recoverable resources" around Bristol Bay would be on the order of $100 billion, rather than $8 billion.

But even that assessment provides a poor basis for comparison, because of the economic criteria that would be applied to any oil or gas discoveries in Bristol Bay. No one can know how much oil and gas is actually under the waters of the North Aleutian Basin, without at least performing a seismic survey and interpreting the results, which would then have to be confirmed with the drill bit. Nor would a positive result from such tests guarantee development, even at the prices cited above. As the Times notes, Alaska is a hostile environment. That raises the costs of exploration and extraction. The minimum resource size required to justify building a production platform would generally be higher than in the Gulf Coast. Oil finds much below that 750 million barrel mean estimate would be unlikely to be pursued, and the outlook is even tougher for gas, for which there is insufficient local demand.

In light of these facts, the balance of risks from allowing lease sales in Bristol Bay looks quite different from the one indicated by the Times, in which we might jeopardize a world-class fishery resource for an inconsequential amount of oil and gas. In reality, whatever risks hydrocarbon development entails would only arise in the eventuality that a world-class oil or gas resource were found there. Otherwise, the government would pocket the bid premiums and rental fees, the local economy would get some welcome revenue during the assessment process, and that would probably be the end of it. It's also high time for the editors of a paper that likes to be thought of as the nation's newspaper of record to recognize that renewable electricity does not function as an oil substitute and won't be in a position to do so until there are millions of electric vehicles on the road. We're going to need billions of barrels of new oil discoveries as we make the long transition to greener energy sources.

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