Shell's Arctic withdrawal adds to cold spell for Alaskan crude

HOUSTON (Bloomberg) -- Alaska, once the workhorse of the U.S. oil industry, is being put out to pasture.

Royal Dutch Shell Plc’s decision to end its $7 billion search for oil in the Arctic Ocean off the coast of Alaska is the latest bit of bad news for a state that went from producing one in every four bbl in the U.S. to an afterthought during the shale boom.

“Alaska used to be the No. 1 oil producer in the U.S.,” said Carl Larry, head of oil and gas for Frost & Sullivan LP in Houston. “Now there are a lot easier places and better ways to find and produce oil.”

Alaskan oil production topped out in 1988 at more than 2 MMbpd. It’s declined steadily since then, falling below 500,000 last year for the first time since the late 1970s, according to the Energy Information Administration.

Aging reservoirs tend to decline in production, and Alaskan leaders have in the past been slow to change tax and royalty policies to attract new investment in the oil patch, said Amy Myers Jaffe, executive director of energy and sustainability at the University of California-Davis. With oil prices in the $40s, investors are more likely to fund relative sure-things in the shale patch than big, uncertain projects like Shell’s.

Declining output is bad news to all Alaskan oil producers, including BP Plc, Exxon Mobil Corp. and ConocoPhillips. Alaska’s crude is produced on the northern coast of the country and travels down an 800-mi pipeline to a southern port. That Trans-Alaska Pipeline System could have operational problems if shipments fall below 350 Mbpd, according to operator Alyeska Pipeline Service Co.

Alaska Governor Bill Walker said he’s promised Alyeska he will help find new production to keep the pipeline running. “Oil prices are going to go up,” he said on a conference call Monday. “We’re optimistic about the future as far as more exploration.”

West Texas Intermediate crude traded at $44.86/bbl at 11 a.m. London time on Tuesday. That’s more than 50% below its level a year ago.