Big chill heats up prices

Storm freezes third of U.S. oil production; Permian Basin output down 65%

Steve Sutherlin

Petroleum News

Alaska North Slope crude eked out a 3-cent gain Feb. 10, notching a close of $61.26 to cap off the longest oil price rally in two years. Brent and West Texas Intermediate made small gains, closing at $61.47 and $58.68, respectively.

On Feb. 11, all three indexes fell as traders and analysts pondered whether prices had gotten ahead of themselves following a torrid run upward from the depths of pandemia in spring 2020. The indexes resumed an upward trajectory before signing off for a long holiday weekend Feb. 12.

Thoughts of a price pullback had all but disappeared when trading opened Feb. 16; prices continued to defy gravity as the full extent of an extreme cold front sweeping most of the United States became known.

Fast forward to Feb. 17, ANS continued upward $1.08 to close at $64.04, WTI rose $1.09 to $61.14 and Brent rose 99 cents to $64.34.

The destructive impact of the unprecedented cold blast sliced total U.S. oil production by one-third - the most ever - removing 3.5 million barrels per day or more from the market, according to Bloomberg in a Jan. 16 report. Production in the Texas Permian Basin fell by as much as 65%.

Restarting oil and gas wells closed by the weather anomaly is not going to be quick or easy, even once the ice thaws and power is restored, according to Richard Spears, vice president of consultancy Spears & Associates Inc.

Most wells produce a mixture of oil, gas and water and it is the last of which that causes the problems.

Although it may leave the well at boiling point, the water immediately contacts steel pipes more than a hundred degrees colder, Spears said. That can cause it to freeze, choking off the flow from the well.

Oil operations were further bedeviled by power outages that caused grief for millions of customers as rolling blackouts swept across Texas.

An official with the Electric Reliability Council of Texas said 18 gigawatts of renewable energy generation - mostly wind generation - were offline Feb. 17, while 28 gigawatts had been lost from thermal sources including gas, coal and nuclear energy, according to a report by the Texas Tribune.

Alaska canary in coalmine for policy experiment

While the financial damage has already begun, the effect on oil supply will not be felt immediately.

Rystad Energy estimates that as much as 72% of Alaska’s remaining recoverable oil resources could stay in the ground due to Biden’s actions, although the effect on production will be felt only after 2030.

There has been much discussion over the possible outcome for the upstream activity of the Gulf of Mexico, but one of the areas that will be affected the most in relative terms is Alaska, Rystad said in a Feb. 17 release.

As the canary in the coalmine for Biden’s jaunty experiment in central planning of the country’s energy mix, Alaska may prove a model for the future of such government manipulations.

The effects of the policy may be large, but the slow onset of consequences makes it difficult to decide how much medicine to administer to the patient without overdose. In fact, Alaska’s production will rise before it falls according to Rystad’s calculations.

Rystad estimates Alaska’s remaining recoverable oil reserves to be 23.3 billion barrels of oil and condensates, of which about 16.8 billion barrels may never be produced if the temporary bans on oil activity in the Arctic National Wildlife Refuge and on new lease sales on state-wide federal lands and waters are here to stay, the consultancy said.

A halt to oil and gas activities would mean that any potential ANWR discoveries are taken off the map, Rystad said.

“Based on our estimates, a permanent ban on new leases would remove 1.35 billion barrels of oil resources that could be developed from the currently unawarded or open acreage in ANWR,” Rystad said.

“An end to new offshore leases in Alaska could result in the state losing out on up to 10 billion barrels of oil resources from unawarded acreage,” Rystad said. “The state could also miss out on roughly 4.5 billion barrels of oil resources through unawarded onshore acreage in the National Petroleum Reserve Alaska.”

“Alaska’s economy is heavily oil-reliant and given this, it’s hard to see renewables replacing the North Slope oil any time soon,” said Krishan Pal Birda, Rystad upstream research analyst. “Consequently, the energy transition push brings unique challenges for the state, which needs to weigh associated direct and indirect job losses, while also replacing the revenue streams for the state and its people.”

Despite the new policies, Alaska oil production is expected to grow by approximately 50% from the current 440,000 bpd to 660,000 bpd in 2029, Rystad said.

“Considering the time it takes for new resources to be developed and come online, Biden’s policies - if they become permanent - will only affect Alaska’s production after 2030,” Rystad said. “Any effect on production in the last years of this decade will be negligible, only be limited to a handful of thousand barrels.”