Alaskan North Slope Oil: Limited Effects of Lifting Export Ban on Oil and
Shipping Industries and Consumers (Chapter Report, 07/01/1999,
GAO/RCED-99-191).
The law requires GAO to review energy production in Alaska and
California and the effects of lifting the ban on exporting Alaskan North
Slope oil. This report provides information on (1) Alaskan North Slope
and California crude oil prices and production and (2) refiners,
consumers, and the oil shipping industry on the U.S. west coast. GAO
discusses changes in Alaska and California production during the past
decade (1989 through 1998). GAO also discusses export-related
environmental issues related to lifting the export ban.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-99-191
TITLE: Alaskan North Slope Oil: Limited Effects of Lifting Export
Ban on Oil and Shipping Industries and Consumers
DATE: 07/01/1999
SUBJECT: Domestic crude oil
Petroleum prices
Export regulation
Shipping industry
Petroleum products
Microeconomic analysis
Shipbuilding industry
IDENTIFIER: California
Alaska
Alaskan North Slope Oil
Hawaii
Oregon
Washington
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United States General Accounting Office GAO Report
to Congressional Committees July 1999 ALASKAN NORTH SLOPE
OIL Limited Effects of Lifting Export Ban on Oil and Shipping
Industries and Consumers GAO/RCED-99-191 United States General
Accounting Office
Resources, Community, and Washington, D.C. 20548
Economic Development Division B-282694
Letter July 1, 1999 Congressional Committees This report responds
to the mandate in Public Law 104-58, title II, that GAO review
Alaska and California energy production and the effects of lifting
the ban on exporting Alaskan North Slope oil. As agreed with your
offices, this report addresses the effects of lifting the export
ban on (1) Alaskan North Slope and California crude oil prices and
production and (2) refiners, consumers, and the oil shipping
industry (including the tanker fleet, the tanker building
industry, and the tanker repair industry) on the U.S. West Coast.
To put the effects of lifting the ban in context, the report
covers changes in Alaska and California production during the past
decade (1989 through 1998). This report also discusses export-
related environmental issues related to lifting the export ban. We
are sending copies of this report to the Honorable William M.
Daley, Secretary of Commerce; the Honorable Bill Richardson,
Secretary of Energy; the Honorable Bruce Babbitt, Secretary of
Interior; and the Honorable Rodney E. Slater, Secretary of
Transportation. Copies will also be made available to others upon
request. If you have any questions about this report, please
contact me at (202) 512-3841. Major contributors to this report
are listed in appendix III. Susan D. Kladiva Associate Director,
Energy, Resources, and Science Issues Letter United States General
Accounting Office Washington, D.C. 20548 B-282694
Letter List of Committees The Honorable Frank H. Murkowski
Chairman The Honorable Jeff Bingaman Ranking Minority Member
Committee on Energy and Natural Resources United States Senate The
Honorable Don Young Chairman The Honorable George Miller Ranking
Minority Member Committee on Resources House of Representatives
The Honorable Tom Bliley Chairman The Honorable John D. Dingell
Ranking Minority Member Committee on Commerce House of
Representatives Letter Page 2 GAO/RCED-99-191
Alaskan North Slope Oil Executive Summary Purpose
Over 12 billion barrels of crude oil have been produced on the
Alaskan North Slope since oil was discovered there in 1968.
Initially, U.S. tankers transported Alaskan North Slope oil to
California and other U.S. refineries, partly because the Congress
banned exporting such oil to foreign countries. The ban, intended
in part to reduce U.S. dependence on foreign oil, was
controversial from the beginning. Advocates of lifting the ban
argued that selling the oil in the world market would increase the
demand for it. Increased demand, in turn, was expected to
increase the price and production of Alaska and California crude
oil, thereby increasing the states' revenues. Opponents argued
that increased crude oil prices resulting from lifting the ban
would reduce some refiners' profit margins and force some to
become dependent on Alaskan North Slope oil because they would
have no practical access to cheaper foreign oil. Opponents also
argued that lifting the ban would take business from the U.S.
shipping industry because operators of oil tankers would use low-
cost foreign tankers and crews to export Alaskan North Slope oil
and have tankers repaired in low-cost foreign shipyards.
Legislation enacted in 1995 allowed Alaskan North Slope oil to be
exported (P.L. 104-58, title II). That legislation also required
GAO to review Alaska and California energy production and the
effects of lifting the export ban. As agreed with the Senate
Committee on Energy and Natural Resources and the House Committees
on Resources and on Commerce, this report addresses the effects of
lifting the export ban on (1) Alaskan North Slope and California
crude oil prices and production and (2) refiners, consumers, and
the Alaskan North Slope oil-shipping industry (including the
tanker fleet, the tanker building industry, and the tanker repair
industry) on the U.S. West Coast. For the purpose of this report,
the U.S. West Coast includes Alaska, California, Hawaii, Oregon,
and Washington State. To put the effects of lifting the ban in
context, this report discusses changes in Alaska and California
production during the past decade (1989 through 1998). This
report also discusses export-related environmental issues
resulting from lifting the ban (see app. I). Background
In 1968, billions of barrels of crude oil were discovered in
Prudhoe Bay on the Alaskan North Slope, significantly affecting
U.S. oil and oil-shipping industries. Alaska became a major U.S.
oil-producing state. U.S. West Coast refiners retooled to
efficiently process Alaskan North Slope oil, which accounted for
about 43 percent of all crude oil that was refined on the West
Coast in 1998. New tankers were also built to transport the oil
Letter Page 3 GAO/RCED-99-
191 Alaskan North Slope Oil Executive Summary from Valdez,
Alaska, on Prince William Sound, to West Coast and other
refineries. The first commercial tanker carrying Alaskan North
Slope oil left Valdez, Alaska, for the West Coast on August 1,
1977. The first commercial tanker exporting such oil left Valdez
for Asia on May 31, 1996, approximately 6 months after the
legislation lifting the ban was enacted.1 (See fig. 1.) Figure 1:
Locations of Alaska Oil Fields and Tanker Routes From Valdez,
Alaska, to Refineries That Received Alaskan North Slope Oil, 1977-
98 Arctic Ocean Prudhoe Bay North Slope Brooks Mountains
Arctic Circle Trans-Alaska Pipeline Cook Inlet
Valdez Nikiski U.S.EastandGul ia
f C As
oa U s
U ii
ts .S .
. S
W wa
a . n
es Ha V
d i P
t rg u
C i e
o n r
a t s o
t Is R la
ic n o d
v s ia v
Pa ia
na C
m a
a pe Horn Source: Alyeska Pipeline Service Company, BP-Amoco,
Alaska Department of Natural Resources, and Energy Security:
Impacts of Lifting Alaskan North Slope Oil Exports Ban (GAO/RCED-
91-21, Nov. 8, 1990). 1The Nov. 28, 1995, legislation authorized
the export of Alaskan North Slope oil unless the President found,
within 5 months of the date of enactment, that exporting the oil
was not in the national interest. Letter Page 4
GAO/RCED-99-191 Alaskan North Slope Oil Executive Summary GAO
conducted statistical and economic analyses of crude oil price and
production data, reviewed related studies, and obtained the views
of federal, state, oil industry, shipping industry, and other
officials to determine the effects of lifting the export ban. To
determine the effects of lifting the ban on oil prices, GAO
developed a time-series model. Because oil prices are influenced
by many factors in addition to removing the ban, GAO controlled
for these other factors by modeling the difference between the
prices of West Coast oils and the prices of similar oils in other
markets. Furthermore, where applicable, established economic
concepts and theories were applied to predict the likely effects
on Alaskan North Slope and California crude oil production in the
future. When important price, production, refining, and shipping
data were unavailable because they were proprietary, GAO
attempted, to the extent possible, to obtain such information from
alternative sources. However, because of proprietary data
limitations, GAO was unable to determine the full effects of
lifting the export ban on cost increases for refiners using
Alaskan North Slope or comparable California oil or on the U.S.
West Coast market in general. Results in Brief Lifting the
export ban raised the relative prices of Alaskan North Slope and
comparable California oils between $.98 and $1.30 higher per
barrel than they would have been had the ban not been lifted.2 To
date, these price increases have not had an observable effect on
Alaskan North Slope and California crude oil production.
Nevertheless, future oil production should be higher than it would
have been because higher crude oil prices have given producers an
incentive to produce more oil. According to projections by the
Alaska Department of Revenue and to oil industry officials, new
oil fields developed in Alaska since the ban was lifted are
expected to increase Alaskan North Slope oil production by an
average of 115,000 barrels per day for the next two decades.
However, it was not possible for GAO to separate the effects of
lifting the ban on expected production from the effects of broader
oil market changes occurring at the same time. For example,
relatively high world oil prices in 1996 and 1997 encouraged oil
producers to expand exploration and development activities, while
low prices in 1998 caused producers to close wells and reduce
development activities. Moreover, this expected production
increase will not reverse the decade-long decline of Alaska and
California 2 The price of Alaskan North Slope and comparable
California oils rose in comparison to selected, widely traded
world oils commonly used as benchmarks for comparing oils and
setting prices. Page 5
GAO/RCED-99-191 Alaskan North Slope Oil Executive Summary oil
production, which is expected to continue as aging oil fields
become depleted. Lifting the export ban increased some refiners'
costs but had limited effects on consumers and the oil-shipping
industry on the West Coast. While higher prices for Alaskan North
Slope and comparable California oil increased the costs of some
individual refiners using that oil, it was not possible to
determine the extent of cost increases for those refiners or the
West Coast market in general. Despite higher crude oil prices for
some refiners, no observed increases occurred in the prices of
three important petroleum products used by consumers on the West
Coast--gasoline, diesel, and jet fuel. Lifting the ban has also
had a minimal effect to date on most oil tanker operators that
transport Alaskan North Slope oil, the U.S. shipbuilding industry,
and the West Coast ship repair industry. However, shipbuilding
and ship repair industry officials on the West Coast are concerned
that Alaskan North Slope oil tanker business may shift in the
future to low-cost foreign shipyards. Principal Findings Lifting
the Export Ban Lifting the ban caused the relative prices
of Alaskan North Slope and Increased Oil Prices and
California oils with comparable characteristics to be between $.98
and Should Increase Future Oil $1.30 higher per barrel than
they would have been had the ban not been 3 Production
removed, according to GAO's analyses. In addition, lifting the
ban led to exports to Asia, which allowed oil companies to reduce
their shipping costs for the oil that was exported because Asian
ports are closer than the ports for the U.S. Gulf Coast and U.S.
Virgin Islands, where some Alaskan North Slope oil was shipped
before the ban was lifted. However, lifting the ban has not led
to a large volume of exports--only about 5 percent (60,000 barrels
per day) of all Alaskan North Slope production has been exported
to foreign countries since the ban was lifted. Furthermore, oil
production in Alaska and California has had no observable increase
to date as a result of lifting the export ban. 3 In conducting
these analyses, GAO selected three world oils that are commonly
used as benchmarks for comparing oil prices or with
characteristics (weight and sulfur content) comparable to Alaskan
North Slope oil. The lighter the weight and lower the sulfur
content, the higher the quality of crude oil because it costs less
to refine this oil. Page 6
GAO/RCED-99-191 Alaskan North Slope Oil Executive Summary GAO
believes future production should increase because the ban was
lifted, although not enough to reverse the decade-long decline in
oil production as aging oil fields become depleted. Higher market
prices and lower shipping costs have given oil producers more
incentive to develop new oil fields. Industry and government
officials told us that the development of new Alaskan North Slope
oil fields increased during the period after the export ban was
removed. These new fields are expected to average about 115,000
barrels per day between 1999 and 2020. Some oil officials
attributed part of this increase to the effects of lifting the
ban, while others said that these effects could not be separated
from broader market conditions. These officials cited high world
oil prices in 1996 and 1997 as one of the factors that encouraged
them to open new fields in Alaska. Conversely, oil officials said
that low oil prices in 1998 caused them to close California wells
to avoid costly maintenance and to modify their plans for the
future development of the Alaskan North Slope. GAO could not
separate the effects of lifting the ban on expected production
from these broader market changes. Nonetheless, while production
is expected to increase, the increase will not reverse the overall
long-term decline in Alaska and California oil production as aging
oil fields become depleted. Production in both states decreased
almost every year from 1989 through 1998 and is expected to fall
further in the future. The Effects of Lifting the Oil Lifting the
export ban generally had limited effects on refiners, consumers,
Export Ban on Refiners, and the shipping industry on
the West Coast. Higher market prices for Consumers, and the
Alaskan North Slope and comparable California oils translate
directly into Shipping Industry on the higher costs
for refiners buying these oils. However, not all refiners were
affected equally, as illustrated in the following hypothetical
cases. For West Coast Have Been refiners that
used large volumes of Alaskan North Slope and comparable Generally
Limited California oils, costs would have risen
when the prices of these oils rose. If the refiners bought only
these oils at the market price, costs would have risen by exactly
the amount the price increased as a result of lifting the ban--
about $.98 to $1.30 per barrel. For refiners that did not use
significant quantities of these oils, cost would have been less
affected by price increases. Finally, for refiners that used
mostly oil that came from their own companies' wells, information
was not available to determine how price increases affected these
companies' costs. Because data on all refiners' crude oil
purchases and internal transactions are proprietary, GAO Page 7
GAO/RCED-99-191 Alaskan North Slope Oil Executive Summary could
not determine the increase in refiners' costs that was due to
higher Alaskan North Slope and California oil prices. Despite
higher crude oil costs for some refiners, no observed increases
occurred in West Coast consumer prices as a result of lifting the
export ban. GAO analyzed three important petroleum products used
by consumers, which accounted for about 80 percent of the products
produced by West Coast refiners, and found no significant
increases in prices. According to GAO's statistical and economic
analyses, the prices of gasoline, diesel, and jet fuel on the West
Coast did not significantly change as a result of lifting the
export ban. Moreover, consumer groups and industry experts GAO
contacted were unaware of any adverse effects on consumers from
lifting the ban. To date, lifting the export ban has had limited
effects on most oil tanker operators that transport Alaskan North
Slope oil, the shipbuilding industry, and the ship repair
industry. The effect on tanker operators has been limited because
most Alaskan North Slope oil--about 95 percent--has continued to
be shipped to the U.S. West Coast. Officials of charter shipping
companies carrying the exported oil said that lifting the ban had
benefited their business by slightly increasing the demand for
tankers. In 1996 and 1997, according to GAO's analysis, exports
increased the demand for U.S. tankers by one or two and created an
estimated 58 to 115 new U.S. crew jobs on tankers used to
transport Alaskan North Slope oil. This was because U.S.-
registered tankers with U.S. crews used to export Alaskan North
Slope oil to Asia replaced foreign-registered tankers with foreign
crews carrying such oil to the U.S. Virgin Islands.4 These new
jobs partially offset overall job losses in the fleet resulting
from declines in Alaskan North Slope production during the past
decade. The U.S. shipbuilding and ship repair industries also have
experienced few effects. According to oil industry officials,
foreign-built tankers have not been used to export Alaskan North
Slope oil, and U.S. shipbuilders have not lost orders for new
tankers to foreign shipyards. Although U.S. shipbuilders expected
at least 10 new tanker orders in the 1990s, only 3 4 The 1995
export legislation mandated that U.S.-documented (including U.S.-
registered and -crewed) and U.S.-owned but not necessarily U.S.-
built tankers be used to export Alaskan North Slope oil. Foreign-
built tankers with foreign crews are permitted to carry such oil
to the U.S. Virgin Islands under an exception in the Jones Act,
which, along with several related trade laws, requires that any
vessel transporting cargo between U.S. ports must be U.S.-built,
U.S.-flagged (registered), U.S.-owned, and U.S.crewed. Page 8
GAO/RCED-99-191 Alaskan North Slope Oil Executive Summary have
materialized to date. Thus, half of the Alaskan North Slope oil
tanker fleet consists of older, single-hulled tankers built in the
1970s or before.5 Furthermore, while exporting crude oil has given
tanker fleet operators an added incentive to repair Alaskan North
Slope oil tankers in low-cost Asian shipyards during export trips,
there has not been a trend toward more foreign repairs since
exports began, according to U.S. Customs' repair data. However,
officials in the U.S. shipbuilding and West Coast ship repair
industries said that they are concerned that business may shift in
the future to foreign shipyards. For example, West Coast tanker
repair industry officials told us that a trend toward more foreign
repairs could be beginning. They cited as an example a U.S.
charter shipping company that used a U.S. tanker to carry an
export shipment of Alaskan North Slope oil to Korea and then had
the tanker repaired in a Korean shipyard at a cost well below
estimated prices for repair in a U.S. West Coast shipyard.
Recommendations This report makes no recommendations. Agency
Comments GAO provided a draft of this report to the Department
of Energy, including its Energy Information Administration and
Office of Policy, for review and comment. GAO discussed the
report with Energy Information Administration officials, including
the Director, Petroleum Division, and Office of Policy staff.
While the Department did not take a position on the findings
presented in the report, it provided clarifying comments that GAO
incorporated, where appropriate. 5 The Oil Pollution Act of 1990
requires that all single-hulled tankers be phased out of operation
by 2015, depending on the tanker age, and that all new tankers
built be double-hulled to reduce the effects of oil spills in the
event of an accident. Page 9
GAO/RCED-99-191 Alaskan North Slope Oil Contents Executive
Summary
3 Chapter 1 Alaskan North Slope Oil Discovery
Was Largest in U.S. History 13 Introduction
Alaskan North Slope Oil Discovery Changed the West Coast Oil
Industry 14 Original Ban Was Debated and Ultimately Removed
17 Objectives, Scope, and Methodology
19 Chapter 2 Prices of Some West Coast Oil
Rose as a Result of Lifting the Ban 22 Lifting the
Export Ban Shipping Costs Are Lower for Exported Oil
23 Improved Economic Conditions Have Had No Observable Effect on
Increased Oil Prices Oil Production to Date
25 and Should Increase Future Oil Production Should Be
Higher as a Result of Lifting the Ban 25 Future Oil Production
Despite Increases in Future Oil Production, the Long-Term
Production Decline Will Continue
27 State Oil Revenues Were Affected
28 Chapter 3 Some Refiners' Crude Oil
Acquisition Costs Rose, but the Extent Is Effects of Lifting Oil
Uncertain 30 Consumers Were Not Significantly Affected by Lifting
the Export Ban 31 Export Ban on Exports
Have Had a Limited Effect on Alaskan North Slope Oil Refiners,
Consumers, Shipping 31 and Oil Shipping Industry on
the West Coast Have Generally Been Limited Appendixes
Appendix I: Lifting the Oil Export Ban Has Had Little Impact on
the Alaskan Environment
41 Appendix II: Methodology for Estimating the Effect of Lifting
the Alaskan Oil Export Ban On Crude and Petroleum Product Prices
43 Appendix III: GAO Contacts and Staff Acknowledgments
56 Tables Table 2.1: Cost to Ship Alaskan
North Slope Oil, by Destination, 1996 24 Table 3.1: Destinations
of Alaskan North Slope Oil Tankers and Volumes Carried, 1994-98
33 Table II.1: Results of Price Analysis for Alaskan North Slope
(ANS) Oil 47 Page 10 GAO/RCED-99-
191 Alaskan North Slope Oil Contents Table II.2: Results of
Price Analysis for Line 63 (L63) Oil 47 Table
II.3: Results of Price Analysis for Kern River (KERN) Oil
48 Table II.4: Results of Price Analysis for THUMS Oil
49 Table II.5: Analysis of Jet Fuel (JET) Prices
50 Table II.6: Analysis of Diesel Prices
50 Table II.7: Analysis of Gasoline (GAS) Prices
51 Figures Figure 1: Locations of Alaska Oil Fields and Tanker
Routes From Valdez, Alaska, to Refineries That Received Alaskan
North Slope Oil, 1977-98
4 Figure 1.1: Map of Showing Locations of Alaska Oil Fields 12
Figure 1.2: Percent of Oil Removed From Alaskan North Slope and
Percent of Production Rights in Prudhoe Bay Oil Field, by Major
Oil Company, in 1998
14 Figure 1.3: Shipping Routes for Alaskan North Slope Oil
Tankers, 1989-98
16 Figure 2.1: New Fields Will Add to Daily Alaskan North Slope
Oil Production 26 Figure 2.2: Annual Alaska and California Crude
Oil Production, 1989-98 28 Figure 3.1: Number of Alaskan North
Slope Tankers Scheduled to Be Phased Out, 1999-2015
36 Figure 3.2: Number of Overseas Repairs of Alaskan North Slope
Tankers, 1989-98
39 Figure II.1: Proportion of Alaskan North Slope Oil Sold in the
West Coast Market
44 Figure II.2: Alaskan North Slope Oil Destinations Other Than
the West Coast
45 Figure II.3: ANS Wellhead Price Has Risen Compared With WTI
52 Abbreviations ARCO Atlantic Richfield Company BP-
Amoco British Petroleum-Amoco Page 11
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 1 Introduction
Chapter 1 In January 1968, oil was discovered in Prudhoe Bay on
Alaska's North Slope-an 88,000 square-mile frozen landmass
extending from the foothills of the Brooks Mountain Range to the
Arctic Ocean, as shown in figure 1.1. The Prudhoe Bay area,
located about 250 miles north of the Arctic Circle and about 1,200
miles south of the North Pole, had no local road system and was
inaccessible by tanker most of the year because extremely cold
temperatures freeze the nearby Arctic Ocean. Consequently, oil
companies began planning the construction of the Trans-Alaska
Pipeline System-an 800-mile pipeline to transport oil from the
frozen Alaskan North Slope to Valdez, on Alaska's Prince William
Sound, for shipment to distant refineries. The Congress approved
pipeline construction in November 1973, and construction was
completed in July 1977. The first commercial tanker carrying
Alaskan North Slope oil from Valdez left for the U.S. West Coast
on August 1, 1977. Figure 1.1: Map of Showing Locations of Alaska
Oil Fields Arctic Ocean Prudhoe Bay National North
Petroleum Arctic Slope Reserve
National Wildlife Refuge Brooks Mountains
Arctic Circle Trans-Alaska Pipeline Cook Inlet
Valdez Prince William Sound Source: Alyeska Pipeline Service
Company, BP-Amoco, and Alaska Department of Natural Resources.
Page 12
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 1 Introduction
Alaskan North Slope Alaska contains huge quantities
of crude oil. The Prudhoe Bay discovery Oil Discovery Was
was the largest in North America. Oil companies estimate that the
state had at least 41 billion barrels of oil in place at the time
of the North Slope Largest in U.S. History discovery. According
to Alaska Department of Natural Resources data, updated May 1998,
an estimated 19.5 billion barrels were extractable using today's
technology and under prevailing economic conditions (commonly
referred to as proven reserves). Of the 19.5 billion barrels of
proven reserves, about 13.8 billion barrels have already been
produced by 22 fields. Thirteen Alaskan North Slope fields that
contained an estimated 18.2 billion barrels of proven reserves
have produced about 12.5 billion barrels. Prudhoe Bay, the oldest
and largest field on the Alaskan North Slope, accounted for about
73 percent of those reserves and about 80 percent of total
production. The remaining proven reserves are contained in nine
Cook Inlet fields that have already produced about 1.2 billion
barrels. Since 1978, the first full year of Alaskan North Slope
oil production after the completion of the Trans-Alaska Pipeline,
Alaska has accounted for between 14 and 25 percent of U.S. crude
oil production and has ranked among the largest U.S. crude oil-
producing states every year. The Alaska Department of Natural
Resources' estimates, however, did not include all Alaska oil.
The estimates excluded Alaskan North Slope oil fields in various
stages of development that had not produced measurable quantities
of oil by 1998. They also excluded the Alaska National Petroleum
Reserve, the Arctic National Wildlife Refuge, and undeveloped
Outer Continental Shelf areas. Oil analysts believe these areas
contain billions of barrels of proven reserves.1 British
Petroleum-Amoco Corporation (BP-Amoco), Atlantic Richfield Company
(ARCO), and Exxon have controlling interests in most Alaskan North
Slope oil production. As shown in figure 1.2, in 1998 these three
companies owned production rights for over 90 percent of the
Prudhoe Bay field and accounted for over 90 percent of all the oil
removed from the Alaskan North Slope.2 Fourteen other companies
also had production 1 Alaska also has trillions of cubic feet of
natural gas that Alaskan North Slope oil producers would like to
commercialize. The oil industry is exploring ways to convert the
natural gas to liquid to be transported off the North Slope,
possibly through traditional pipelines such as the Trans-Alaska
Pipeline. 2 BP and Amoco merged in 1998. In April 1999, BP-Amoco
and ARCO confirmed plans to merge. Page 13
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 1 Introduction
interests in the Alaskan North Slope in 1998, including companies
owned by native Alaskan groups. Figure 1.2: Percent of Oil
Removed From Alaskan North Slope and Percent of Production Rights
in Prudhoe Bay Oil Field, by Major Oil Company, in 1998 120%
Percentage 100% 80% 60% 40% 20% 0% Oil removed Prudhoe Bay
Other Exxon ARCO BP-Amoco Source: Alaska Department of Natural
Resources and Energy Security: Impacts of Lifting Alaskan North
Slope Oil Exports Ban (GAO/RCED-91-21, Nov. 8, 1990) Alaskan North
Slope The addition of Alaskan North Slope oil
production to the oil produced in Oil Discovery Changed
California and other West Coast states meant that, for the first
time, production on the U.S. West Coast was greater than West
Coast refiners' the West Coast Oil demand for crude
oil.3 Consequently, oil producers in Alaska looked to other
markets. Figure 1.3 shows the historical shipping routes for
Alaskan Industry North Slope oil and the
location of potential refining markets. This figure illustrates
the principal difference between these potential markets- namely,
the distance between these markets and the Port of Valdez. Page 14
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 1 Introduction
Generally, shorter shipping distances translate into lower
transportation costs and higher profits for oil producers,
although other factors, such as tanker size, also affect costs.4
The West Coast is the closest domestic market for Alaskan North
Slope oil, and Asia is closer than most other U.S. markets, such
as the U.S. Gulf Coast and U.S. Virgin Islands. However, the
Congress had banned the export of Alaskan North Slope oil.
Therefore, Alaskan North Slope oil producers took oil not sold on
the West Coast to more distant domestic markets. 3 For the purpose
of this report, the West Coast includes Alaska, California,
Hawaii, Oregon, and Washington State. 4 Because crew size and
operating costs other than fuel are basically constant regardless
of tanker size, the per-barrel cost to transport oil can be less
for larger tankers than for smaller tankers. Page 15
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 1 Introduction
Figure 1.3: Shipping Routes for Alaskan North Slope Oil Tankers,
1989-98 North Slope Prudhoe Bay Nikiski Trans-Alaska
Pipeline Valdez Asia West
Coast East Coast
Pipeline Hawaii Gulf Coast Puerto Rico U.S. Virgin Islands Trans-
Panama Pipeline U.S. VirginIslandsviaCapeHorn Refinery Source:
Energy Security: Impacts of Lifting Alaskan North Slope Oil
Exports Ban (GAO/RCED-91-21, Nov. 8, 1990). Page 16
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 1 Introduction
West Coast Refineries The proximity to Valdez, along with
the ban on exports, made the West Retooled to Process
Coast the preferred destination for the sellers of Alaskan North
Slope oil. Alaskan North Slope Oil Because this oil's
characteristics (weight and sulfur content) differed from those of
foreign oil, refiners had to invest in additional refining
equipment to handle the Alaskan North Slope oil. After West Coast
refiners retooled to efficiently process that oil, Alaskan North
Slope oil took the place of much of the foreign oil that West
Coast refiners had imported. In 1998, Alaskan North Slope oil
constituted about 43 percent of all crude oil refined on the West
Coast. New Tankers Were Built to The discovery of oil on the
Alaskan North Slope, along with the export ban, Transport Alaskan
North also had an effect on the U.S. oil-shipping industry.
U.S. shipyards built Slope Oil over 50 tankers
in the 1970s and 1980s to carry crude oil from Valdez to distant
refineries. Until the Congress lifted the ban on exporting
Alaskan North Slope oil, tankers transported the Alaskan North
Slope oil to U.S. ports. As a result, the tankers were required
to comply with the Jones Act. The Jones Act, along with several
related trade laws, require that any vessel transporting cargo
between U.S. ports must be U.S.-built, U.S.-flagged (registered),
U.S.-owned, and U.S.-crewed. Under an exception in the Jones Act,
foreign-built tankers were allowed to transport oil from Valdez to
the U.S. Virgin Islands. Original Ban Was The
Congress banned exporting Alaskan North Slope oil when it
authorized Debated and the construction of the
Trans-Alaska Pipeline in 1973. The legislation, which was enacted
in the midst of the Arab oil embargo, amended the Ultimately
Removed Mineral Leasing Act of 1920 and restricted the
export of U.S. oil transported over a federal right-of-way.
Exports were allowed only if the President found that they would
not diminish the quantity or quality of oil available to the
United States and were in the national interest. The Energy
Policy and Conservation Act of 1975, the Export Administration Act
of 1979, and various other laws provided additional restrictions
on Alaskan North Slope oil exports. These restrictions were
intended, in part, to reduce U.S. dependency on foreign oil,
ensure that Alaskan North Slope oil would be used to benefit U.S.
citizens, and protect the U.S. economy from a drain of scarce
resources. The export ban was controversial from its beginning,
and the pros and cons of lifting it were debated in congressional
hearings and in other discussions for years. In addition, several
studies addressed the likely effects of lifting Page 17
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 1 Introduction
the ban. At issue was who would benefit and who would not benefit
from lifting the ban. Advocates of lifting the export ban argued
that it created a surplus of Alaskan North Slope oil on the West
Coast, in turn depressing price and production and limiting state
governments' revenues.5 For example, the Department of Energy
concluded in 1994 that lifting the ban on exporting Alaskan North
Slope oil would (1) increase the price of the oil by expanding its
markets, (2) increase Alaska and California revenues through
increased royalties and taxes, and (3) generate new economic
activity and employment in Alaska and California.6 Moreover,
these benefits were expected to accrue without an increase in
gasoline prices. Opponents argued that lifting the ban would have
adverse consequences. For example, in a 1995 report prepared for
the Coalition to Keep Alaska Oil, consultants agreed with the
Department of Energy's 1994 conclusions that the price and
production of Alaskan North Slope oil would increase. But they
also predicted that oil companies' export-related revenue and
production gains would be small and of short duration because the
West Coast would become dependent on foreign imports.7 The
consultants also predicted that refiners that only refine crude
oil and do not produce oil (commonly referred to as independent
refiners) would become dependent on Alaskan North Slope oil
because they would have no practical access to cheaper foreign oil
and their profit margins would decrease. Furthermore, the report
stated, consumers' prices would increase because crude oil prices
would be higher. Finally, allowing companies to export oil on
foreign-built tankers instead of more costly U.S.-built tankers
was expected to hurt the U.S. shipping industry. In 1990, we
reported that lifting the ban would likely increase the price of
Alaskan North Slope oil. 8 We reported that some oil would likely
be exported to Asia instead of being shipped to the U.S. East and
Gulf Coasts, 5 States receive severance tax for oil extracted from
the ground for consumption in other states, royalty revenue based
on the value of oil, income tax, and property tax. 6 Exporting
Alaskan North Slope Crude Oil: Benefits and Costs, Department of
Energy (June 1994). 7 National Consequences of Exporting Alaska
North Slope Oil, Wilson Gillette & Co., Petroleum Economics and
Logistics Consultants (May 1995), prepared for the Coalition to
Keep Alaska Oil-a Washington, D.C.-based group that opposed
exporting Alaska oil. 8Alaskan Crude Oil Exports (GAO/T-RCED-90-
59, Apr. 5, 1990) and Energy Security: Impacts of Lifting Alaskan
North Slope Oil Exports Ban (GAO/RCED-91-21, Nov. 8, 1990). Page
18 GAO/RCED-99-191
Alaskan North Slope Oil Chapter 1 Introduction the U.S. Virgin
Islands, Puerto Rico, and possibly some U.S. West Coast ports
because transportation costs to Asia were lower. We also reported
that lifting the ban would promote economic efficiency by
increasing domestic oil production and allowing better use of
refinery resources. Finally, we stated that lifting the ban would
increase the decline in demand for U.S. tankers because Alaskan
North Slope oil would be exported on foreign-flagged instead of
U.S.-flagged tankers. In 1995, the Congress lifted the ban on
exporting Alaskan North Slope oil (P.L. 104-58, title II). The
1995 act eliminated the export restrictions in the Mineral Leasing
Act of 1920 and various other statutes and regulations. The act
also requires that oil tankers transporting Alaskan North Slope
oil to foreign destinations be U.S. documented (including U.S.-
registered and U.S.-crewed) but not necessarily U.S.-built.
According to the conference report accompanying the 1995
legislation, the purpose of lifting the export ban was to allow
Alaskan North Slope crude oil to compete with other crude oil in
the world market under normal market conditions. The first
commercial tanker exporting Alaskan North Slope oil left Valdez
for Asia on May 31, 1996, about 6 months after the ban was
lifted.9 Objectives, Scope, and The 1995 law required us to
review Alaska and California energy Methodology
production and the effects of lifting the ban on independent oil
refiners, consumers, and shipbuilding and ship repair yards on the
West Coast and Hawaii. As agreed with the Senate Committee on
Energy and Natural Resources and the House Committees on Resources
and on Commerce, this report responds to that mandate and
addresses the effects of lifting the export ban on (1) Alaskan
North Slope and California crude oil prices and production and (2)
refiners, consumers, and the oil-shipping industry (including the
tanker fleet, the tanker building industry, and the tanker repair
industry) on the U.S. West Coast. To put the effects of lifting
the ban in context, this report discusses changes in Alaska and
California production during the past decade (1989 through 1998).
This report also discusses export-related environmental issues
resulting from lifting the ban (see app. I). To assess the effect
of lifting the export ban on Alaskan North Slope and California
crude oil prices and production, we collected and analyzed 9 The
Nov. 28, 1995, legislation authorized the export of Alaskan North
Slope oil unless the President found, within 5 months of the date
of enactment, that exporting the oil was not in the national
interest. Page 19
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 1 Introduction
crude oil price and production data from the Department of Energy,
the Alaska Departments of Natural Resources and of Revenue, the
California Departments of Conservation and of Revenue, selected
oil producers and refiners, the Alyeska Pipeline Service Company-
the organization that operates the Trans-Alaska Pipeline System-
and Platts Oil Prices Data Base as reported by Standard & Poor's
DRI. We also reviewed previous GAO reports, studies, and other
available literature. In addition, we interviewed federal, state,
and oil industry officials to obtain their views on the effects of
lifting the ban. Furthermore, we conducted statistical analyses
using oil-price data before and after the ban was lifted to
determine how lifting the export ban had affected the prices of
Alaskan North Slope and California oil. A complete discussion of
our statistical and economic analyses for determining the effects
of lifting the export ban on Alaskan North Slope and California
crude oil prices is in appendix II. To assess the effects of
lifting the export ban on refiners, consumers, and the oil-
shipping industry on the West Coast, we interviewed West Coast
crude oil-refining officials, consumer groups, and oil-shipping
industry officials to obtain their views on the effects of lifting
the ban. We also conducted statistical analyses of the effects of
lifting the export ban on the prices of key petroleum products
used by West Coast consumers. These analyses were similar to
those used to determine the effects of lifting the ban on oil
prices. Furthermore, to review the effects of oil exports on the
U.S. oil-shipping industry, we talked to Alaskan North Slope oil
industry officials, tanker fleet operators, shipbuilding and ship
repair industry officials, maritime union representatives, state
environmental groups, and state and federal officials. We
contacted federal agencies, including the U.S. Maritime
Administration and U.S. Coast Guard within the Department of
Transportation and the U.S. Customs Service. We also interviewed
state officials in Alaska, California, Oregon, and Washington
State, and industry officials in these states (including officials
with oil companies that refine oil in Hawaii) and in Washington,
D.C. From these officials, we obtained and analyzed selected data
and records to understand trends in the Alaskan North Slope
shipping, shipbuilding, and ship repair industries and to identify
the impact of oil exports on these industries. In addition, where
applicable, we applied established economic concepts and theories
to predict the likely effects on Alaskan North Slope and
California crude oil production in the future. When important
price, production, refining, and shipping data were unavailable
because they were proprietary, we attempted, to the extent
possible, to obtain such information from alternative sources.
However, because of proprietary Page 20
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 1 Introduction
data limitations, we were unable to determine the full effects of
lifting the export ban on cost increases for refiners using
Alaskan North Slope or comparable California oil or on the U.S.
West Coast market in general. We provided a draft of this report
to the Department of Energy, including its Energy Information
Administration and Office of Policy, for review and comment. We
discussed the report with Energy Information Administration
officials, including the Director, Petroleum Division, and Office
of Policy staff. While the Department did not take a position on
the findings presented in the report, it provided clarifying
comments that we incorporated, where appropriate. We conducted our
work from July 1998 through June 1999 in accordance with generally
accepted government auditing standards. Page 21
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 2 Lifting the
Export Ban Increased Oil Prices and Should Increase Future Oil
Production
Chapter 2 Lifting the export ban raised the prices of Alaskan
North Slope and some California oils between $.98 and $1.30 higher
per barrel than they would have been had the ban not been lifted.
To date, these price increases have not had an observable effect
on Alaskan North Slope and California crude oil production.
Nevertheless, future oil production should be higher than it would
have been had the ban not been lifted because higher crude oil
prices have given producers an incentive to produce more oil.
According to oil industry officials, new oil fields developed in
Alaska since the ban was lifted are expected to increase Alaskan
North Slope oil production by an average of 115,000 barrels per
day for the next two decades. However, we could not separate the
effects of lifting the ban on expected production from the effects
of broader oil market changes occurring at the same time. For
example, relatively high world oil prices in 1996 and 1997
encouraged oil producers to expand exploration and development,
while low prices in 1998 caused producers to close wells and
reduce development. Moreover, this expected production increase
will not reverse the decade-long decline of Alaska and California
oil production, which is expected to continue as aging oil fields
become depleted. Prices of Some West While world oil prices
have been volatile since the export ban was lifted, Coast Oil Rose
as a the price of Alaskan North Slope and some California
oil sold in the West Coast market is higher than it would have
been had the export ban not Result of Lifting the been
removed. Allowing exports to Asia meant increased demand for Ban
Alaskan North Slope oil and higher prices. To determine the
effect of lifting the ban on oil prices, we developed a time-
series model. Because oil prices are influenced by many factors
other than removing the ban, we had to control for these other
factors. We did this by modeling the differences between the
prices of West Coast oils and the prices of similar oils in other
markets. Our analysis indicates that the market price of Alaskan
North Slope oil rose compared with the prices of three oils--Brent
Blend, Nigerian Forcados, and West Texas Intermediate.1 The price
increase for Alaskan North Slope oil relative to these three oils
ranged from $0.98 to $1.30 per barrel. The effect of lifting the
ban on California oil prices depends on the type of oil examined.
Light-weight oil with a low sulfur content is higher quality 1
Brent Blend and West Texas Intermediate oils are widely traded
oils and are commonly used as benchmarks for the purpose of
comparing other oils and for setting prices. Nigerian Forcados oil
is similar in characteristics to Alaskan North Slope oil. Page 22
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 2 Lifting the
Export Ban Increased Oil Prices and Should Increase Future Oil
Production and more valuable than heavy oil with high sulfur
content because high-quality oil costs less to refine into
gasoline and other light petroleum products. Alaskan North Slope
oil is lighter weight and has a lower sulfur content than most
California oils. Our analysis indicates that the price of "Line
63" oil in California, which is similar in quality to Alaskan
North Slope oil, rose by $1.28 per barrel compared with the price
of West Texas Intermediate oil as a result of lifting the ban.
However, the effect of lifting the ban on the prices of two other
Californian oils we examined (Kern River and THUMS) was
insignificant. These two oils are heavy in contrast with Alaskan
North Slope and Line 63 oil, which may explain why their prices
did not respond to the removal of the export ban in the same way.
Appendix II explains the methodology we used to estimate these
price increases as well as the economics explanation for why oil
prices were expected to increase when the ban was lifted. Shipping
Costs Are Lifting the export ban also resulted in
lower shipping costs for oil exported Lower for Exported Oil to
Asia. For example, total transportation cost in 1996 for oil sold
in Asia was about $4.51 less per barrel than for oil sold on the
U.S. Gulf Coast. Overall, shipping costs fell by at least $15
million in 1996, $28 million in 1997, and $22 million in 1998 from
what they would have been had oil not sold in the West Coast
market continued to go to other domestic markets. Like higher oil
prices, lower shipping costs improve oil companies' incentives to
produce more oil. Table 2.1 shows the differences in length of
tanker voyages, pipeline tariffs, and total transportation costs
per barrel for oil shipped from Valdez, Alaska, to Asia and the
U.S. Gulf Coast, the U.S. Virgin Islands, and the Mid-Continent in
1996.2 As the table shows, an average tanker trip to Asia took 30
days, while the average trip to the Gulf Coast took 41 days. In
the case of oil sold in the Gulf Coast and the Mid-Continent,
shippers paid pipeline tariffs in addition to tanker costs.3 The
additional pipeline tariff was approximately $0.82 per barrel for
Gulf Coast shipments and $2.17 per barrel for Mid-Continent
shipments. U.S. Virgin Islands shipments went by 2 For the
purposes of this report, the Mid-Continent includes Indiana,
Illinois, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri,
Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee,
and Wisconsin. 3 Oil destined for the U.S. Gulf Coast was
typically taken by tanker from Valdez, Alaska, to the Pacific side
of Panama and then transported by pipeline to the Atlantic side of
Panama, where it was reloaded onto tankers for the trip to its
final destination, such as Louisiana. Shipments to the Mid-
Continent went from Valdez to Los Angeles and from there by
pipeline to their final destinations. Page 23
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 2 Lifting the
Export Ban Increased Oil Prices and Should Increase Future Oil
Production tanker from Valdez around Cape Horn. This route took
an average of 84 days, or about twice as long as the next shorter
route. However, the shipping costs to the U.S. Virgin Islands
were slightly lower than for the much shorter journey to Asia
because the oil companies used larger foreign tankers with foreign
crews to transport the oil to the U.S. Virgin Islands.4 Foreign
tankers are much less costly to build, and operating costs for
foreign-crewed vessels are lower than for U.S.-crewed vessels.
Although the 1995 law does not prohibit exports on foreign-built
tankers, all shipments of Alaskan North Slope oil other than to
the U.S. Virgin Islands have gone on U.S.-crewed tankers.5 Table
2.1 also shows the average costs for West Coast shipments in 1996.
As the table shows, the West Coast is the lowest cost destination
for Alaskan North Slope oil. Table 2.1: Cost to Ship Alaskan
North Slope Oil, by Destination, 1996 Pipeline tariff per
Destination Tanker days
barrel Cost per barrel Asia
30 $0.00 $2.64 Gulf
Coast 41
$0.82 $7.15 Virgin Islands
84 $0.00 $2.35 Mid-
Continent 16
$2.17 $3.80 West Coast
5-18a $0.00 $1.63 Note.
The cost figures are from 1996, the last year of sales to the Gulf
Coast and the only year in which sales to Asia coincided with
sales to the other destinations shown. a Shipments to Nikiski,
Alaska, and Hawaii took 5 and 18 days, respectively. Shipments to
all other West Coast destinations took between 6 and 17 days.
Sources: BP-Amoco, U.S. Maritime Administration, and Alaska
Department of Natural Resources. 4 To date, oil companies have
used U.S.-built and U.S.-crewed tankers to export oil to Asia. 5
One exporter told us that while shipping costs to the U.S. Virgin
Islands were lower than to Asia, sales to Asia are still more
profitable than sales to the U.S. Virgin Islands because the price
paid by the Islands refiner was below the price paid in Asia.
This exporter told us that its revenue minus shipping costs is
between $1 and $2 per barrel higher for Asian sales than for sales
to the U.S. Virgin Islands. Page 24
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 2 Lifting the
Export Ban Increased Oil Prices and Should Increase Future Oil
Production Improved Economic Higher market prices
for Alaskan North Slope oil and lower shipping costs Conditions
Have Had for exported oil have given oil producers
incentive to produce more crude oil. To date, however, this
incentive has not had an observable effect on No Observable Effect
Alaskan North Slope or California crude oil production. Oil
industry on Oil Production to officials told us that
any effects on production would not occur Date
immediately. There is a lag between the time producers begin to
receive higher prices for Alaskan North Slope oil and the time it
takes for additional development activities to produce more oil.
Future Oil Production Oil companies began developing several new
fields after the export ban Should Be Higher as a was lifted, and
production from these fields is projected to add significantly to
future Alaskan North Slope production. Figure 2.1 shows the
expected Result of Lifting the impact-starting in
1999-of the development of new fields since the Ban
export ban was lifted on production levels. The bottom line in
the figure shows the current projected production of fields that
existed prior to the lifting of the export ban. The top line
shows the current projected production of all fields--including
those that were developed and those for which development has been
planned and approved-since the export ban was lifted. The
additional projected production between 1999 and 2020 from these
new fields is about 115,000 barrels per day, on average. Some oil
industry officials told us that some of these new developments
were in Page 25 GAO/RCED-
99-191 Alaskan North Slope Oil Chapter 2 Lifting the Export Ban
Increased Oil Prices and Should Increase Future Oil Production
response to the removal of the export ban, while others said it
was difficult to point to one factor to explain the change. Figure
2.1: New Fields Will Add to Daily Alaskan North Slope Oil
Production 1400 Thousands of barrels per day 1200 1000 800 600 400
200 0 1998 2000 2002 2004 2006 2008
2010 2012 2014 2016 2018 2020 Years All Fields:
1998 Forecast 1995 Fields: 1998 Forecast Source: Alaskan
Department of Revenue, Revenue Sources Book: Forecast and
Historical Data, Fall 1995 and 1998. We found no evidence of a
similar increase in oil production in California. Overall oil
production in California has continued to decline in the years
since the ban was lifted, and we did not observe an expansion of
development activity. While an increase in the market price of
some California oils would be expected to lead to increased levels
of production, none of the oil producers contacted said they had
increased their production as a result of lifting the ban. We
could not separate the effects of lifting the export ban on
expected production increases from the effects of broader oil
market changes Page 26
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 2 Lifting the
Export Ban Increased Oil Prices and Should Increase Future Oil
Production occurring at the same time. Among the other factors
positively affecting production decisions were generally high oil
prices in 1996 and 1997 and improvements in oil exploration and
recovery technology. Higher oil prices encourage greater
investment in production and exploration. Average market prices
for Alaskan North Slope oil in 1996 and 1997 were $17.74 and
$20.90 per barrel, respectively, compared with $15.86 in 1998.
Similarly, improved production and exploration technology has
lowered production costs, providing greater incentive to produce
more oil. More recently, low oil prices in 1998 caused California
oil producers to close some oil wells to avoid maintenance costs.
The low prices also caused Alaska oil producers to delay planned
investments and development. Oil company officials, government
analysts, and industry experts told us that separating the effects
of lifting the export ban from such other factors is difficult if
not impossible. Despite Increases in The expected
increase in Alaskan North Slope oil production from lifting Future
Oil Production, the ban will not reverse the long-term decline in
oil production in Alaska and California as aging oil fields in
these states become depleted. As the Long-Term
shown in figure 2.2, crude oil production in both Alaska and
California Production Decline decreased almost
every year from 1989 through 1998. During that period, Will
Continue Alaska production decreased by about
35 percent, or about 696,000 barrels per day, primarily because
increased production in new, relatively small oil fields did not
offset decreased production in large aging fields. New fields and
fields that had been closed but were reopened during that period
added about 236,000 barrels per day in 1998, which was less than
the production decrease in the Prudhoe Bay field, the oldest and
largest oil field on the Alaskan North Slope. By 1998, the
Prudhoe Bay field was about 74-percent depleted, and production
was about half the 1989 level-about 713,000 barrels per day versus
about 1.43 million barrels per day. California production also
decreased by about 9 percent during that period, or about 94,000
barrels per day, because production in new fields did not offset
Page 27 GAO/RCED-99-191
Alaskan North Slope Oil Chapter 2 Lifting the Export Ban Increased
Oil Prices and Should Increase Future Oil Production decreased
production from aging fields. Low oil prices in 1998 also
discouraged California production. Figure 2.2: Annual Alaska and
California Crude Oil Production, 1989-98 2.5 Millions of
barrels per day 2.0 1.5 1.0 0.5 0 1989 1990 1991
1992 1993 1994 1995 1996 1997 1998 Years Alaska
California Source: Alaska Department of Revenue and California
Department of Conservation. State Oil Revenues Alaska revenue
rose because of the higher market prices and lower Were Affected
shipping costs that resulted from lifting the export ban.
Alaska's petroleum revenue comes from severance taxes, royalties,
corporate income tax, property tax, and petroleum rent and lease
bonuses. Royalty, severance tax, and income tax revenue are based
on the value of oil after excluding pipeline tariff and
transportation costs. In April 1998, the Alaska Department of
Revenue estimated that the annual increase in revenue resulting
from higher West Coast market prices for Alaskan North Slope oil
was $40 million. The officials also estimated that the annual
increase in Page 28
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 2 Lifting the
Export Ban Increased Oil Prices and Should Increase Future Oil
Production revenue from lower shipping costs to Asia was $10
million. These effects were the direct result of lifting the
export ban. California revenue comes from a share of federal
royalties, income taxes, and property taxes. California officials
told us that they receive relatively little revenue from these
sources. Consequently, there was no significant change in revenue
as a result of lifting the export ban. Page 29
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 3 Effects of
Lifting Oil Export Ban on Refiners, Consumers, and Oil Shipping
Industry on the West Coast Have Generally Been Limited
Chapter 3 Lifting the oil export ban has had limited effects on
refiners, consumers, and the oil-shipping industry-including
Alaskan North Slope fleet operators, shipbuilders, and tanker
repair yards. Higher market prices for Alaskan North Slope and
some California oil increased some refiners' costs but had no or
an unclear effect on other refiners' costs. Despite higher crude
oil costs for some refiners, West Coast consumers appear to have
been unaffected by lifting the ban because the prices of important
petroleum products they use have not increased. There have also
been minimal effects on the shipping industry to date, although
shipbuilding and repair industry officials are concerned that
business may shift in the future to low-cost foreign shipyards.
Some Refiners' Crude While higher prices for Alaskan North Slope
and comparable California oil Oil Acquisition Costs
increased the costs of some individual refiners, we could not
determine the extent of the cost increase for these refiners or
for the West Coast market Rose, but the Extent Is in general.
Proprietary data needed to make the determination were not
Uncertain available. The impact of rising
costs on refiners depends on their ability to pass these costs on
to consumers by raising the prices of the petroleum products they
sell. Higher market prices for Alaskan North Slope and comparable
California oil translate directly into higher costs for refiners
buying this oil on the market. However, not all refiners are
affected equally. We looked at three hypothetical cases. First,
a refiner buying large volumes of Alaskan North Slope and
comparable California oil would experience cost increases when the
prices of such oil rise. In the case in which a refiner buys
nothing but this oil and always at the market price, costs would
rise by exactly the amount the price increased as a result of
lifting the ban-about $.98 to $1.30 per barrel on the basis of our
analysis. Second, the costs for a refiner buying little or no
Alaskan North Slope or comparable California oil would be largely
unaffected by increases in the market prices of this oil.
Finally, for some refiners that refine mostly oil that comes from
their own companies' wells, the effect of the increase in the
market price of the oil they produce and refine is unclear because
their oil is not sold in the market. Data on refiners' crude oil
purchases and the prices paid are unavailable because they are
proprietary. Therefore, we could not determine the increase in
refiners' costs because of higher Alaskan North Slope and
California oil prices that resulted from lifting the ban. Some
refiners we contacted said they pay higher prices for this oil,
some said they were Page 30
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 3 Effects of
Lifting Oil Export Ban on Refiners, Consumers, and Oil Shipping
Industry on the West Coast Have Generally Been Limited unaffected,
and others said it was analytically impossible to determine the
effect. However, none of the refiners shared specific cost data
with us. The extent to which refiners can pass higher costs on to
consumers determines how their profits are affected by increased
crude oil prices. The ability of West Coast refiners to pass
rising crude oil costs on to consumers may be constrained by
competitive oil market conditions. All refiners were not affected
equally by increasing oil costs. Therefore, those refiners whose
costs increased the most may not be able to increase their product
prices to fully recoup the costs without losing sales to those
refiners whose costs did not rise by as much. Increases in crude
oil costs not passed on to consumers in the form of higher prices
will reduce profit margins for refiners. West Coast refiners we
contacted did not reveal the extent to which they passed on
increased acquisition costs for crude oil to consumers. Consumers
Were Not We analyzed the differences between the prices of
West Coast petroleum Significantly Affected products and the
prices of the same products in other U.S. markets. Our analysis
indicates no significant changes in the prices of regular unleaded
by Lifting the Export gasoline, diesel, and jet fuel as a
result of lifting the export ban. In 1998, Ban
these three products accounted for more than 80 percent of the
total output of West Coast refineries, as well as the bulk of
consumers' expenditures on petroleum products. These products
were chosen because they are good indicators of any potential
change. Exports Have Had a Lifting the oil export ban has
had a limited effect on the Alaskan North Limited Effect on
Slope oil tanker fleet, the U.S. shipbuilding industry, and the
West Coast tanker repair industry. Overall, most tankers carrying
Alaskan North Slope Alaskan North Slope oil continue to
take the oil to the U.S. West Coast, and the demand for U.S. Oil
Shipping tankers to transport Alaskan North Slope
oil has continued to decline, although exports have slightly
offset the decline. Foreign-built tankers have not been used to
export Alaskan North Slope oil, and U.S. shipbuilders have not
lost orders for new tankers to foreign shipyards. Furthermore,
there has not been a trend toward more foreign repairs of Alaskan
North Slope tankers since exports began. Nevertheless, U.S. Page
31 GAO/RCED-99-191
Alaskan North Slope Oil Chapter 3 Effects of Lifting Oil Export
Ban on Refiners, Consumers, and Oil Shipping Industry on the West
Coast Have Generally Been Limited shipbuilding and West Coast
repair yard officials are concerned that they may lose future
business to foreign shipyards in part because of oil exports.
Effects on Tankers Lifting the oil export ban has
not greatly altered the number and routes of Transporting Alaskan
North tankers used to transport Alaskan North Slope oil to date.
While the 1995 Slope Oil Have Been Limited law that lifted the ban
does not require companies to use U.S.-built tankers for export
shipments, the fleet serving the Alaskan North Slope remains
basically domestic, both in vessel registration and shipment
destinations. Moreover, this fleet is almost entirely owned by, or
under long-term-charter to, the major Alaskan North Slope oil
producers. The number of tankers used to transport Alaskan North
Slope oil from Valdez has been decreasing steadily in the 1990s,
as a result of the downward trend in Alaska oil production. In
1998, the Valdez fleet had 30 tankers, compared with over 50 in
1990. Lifting the ban has not significantly altered Alaskan North
Slope shipping operations. Most of the oil produced continues to
be shipped to West Coast refineries. A small percentage-about 5
percent-of the oil has been exported since the export ban was
lifted. The major oil producers in Alaska ship most of their oil
to West Coast states, particularly Washington and California-to
refineries around Puget Sound, San Francisco, and Los Angeles. In
1998, the average volume shipped to West Coast refineries was a
little over one million barrels per day, carried by 30 tankers in
465 shipments. In comparison, only one major producer-BP-Amoco-
has been a significant exporter. Since exports began in May 1996,
it has exported an average of about 60,000 barrels per day. For
example, in 1998, five different tankers chartered to BP-Amoco
took a total of 20 shipments to Korea, China, Japan, and Taiwan.
An Exxon tanker also took one shipment to Japan in 1997 and one in
1998. Recent trends in major destinations and volumes shipped are
shown in table 3.1. (continued) Page 32
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 3 Effects of
Lifting Oil Export Ban on Refiners, Consumers, and Oil Shipping
Industry on the West Coast Have Generally Been Limited Table 3.1:
Destinations of Alaskan North Slope Oil Tankers and Volumes
Carried, 1994-98 Thousands of barrels per day Destination
1994 1995 1996 1997 1998
California/Washington 1,279 1,229
1,205 1,113 1,026 Hawaii
53 49 50 39 43
Alaska 28 32
34 36 26 U.S. Gulf Coast via Panama
75 62 4a 00 U.S. Virgin Islandsb
95 88 48 5a 0 Asia
0 0 36a 68 53 Total
1,530 1,460 1,377 1,261 1,149c a On a
full-year basis; for the partial year during which oil was
shipped, per-day volume was higher. b All shipments were made on
foreign-flagged tankers. c Does not add due to rounding. Source:
U.S. Maritime Administration. As shown in table 3.1, the volume of
oil shipped to Washington/California and Hawaii has decreased
gradually in recent years, while the volume shipped to Alaska
increased from 1994 through 1997, then decreased in 1998. At the
same time, the volume shipped to the U.S. Gulf Coast via Panama
and to the U.S. Virgin Islands around Cape Horn fell to zero after
the export ban was lifted. According to federal maritime and
industry officials, both the U.S. Gulf Coast and U.S. Virgin
Islands destinations were declining even without the influence of
exports because, compared with U.S. West Coast destinations, they
involve high shipping costs, especially the shipments to the U.S.
Gulf Coast. Some officials said that export shipments in effect
replaced the trade with the U.S. Virgin Islands and accelerated
its end. Exports have affected some tanker operators more than
others. Officials of ARCO and Exxon, which have subsidiaries that
own and operate tankers in the Alaskan North Slope trade, said
that because they have made few, if any, export shipments, lifting
the export ban has had little or no effect on their Alaskan North
Slope tanker fleets. However, officials of BP-Amoco (which is not
a U.S.-owned corporation and therefore is not permitted to own
tankers engaged in the U.S. domestic trade) said that exports to
Asia allow the company to lower its transportation costs and thus
provide an important new market. In addition, officials of the
charter shipping companies that carried exports for BP-Amoco said
that the export legislation benefited their business. These
officials said that exports have Page 33
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 3 Effects of
Lifting Oil Export Ban on Refiners, Consumers, and Oil Shipping
Industry on the West Coast Have Generally Been Limited slightly
increased the demand for U.S. tankers to carry Alaskan North Slope
oil. According to officials of two companies, because of exports,
a few of their tankers that might otherwise have been unused were
active in the Alaskan North Slope fleet. Our analysis confirmed
that while overall fleet size continues to decrease, exports may
have slightly increased the demand for U.S. tankers in the Alaskan
North Slope trade in 1996 and 1997. Exports have led to the
disappearance of foreign-registered tankers from the Alaskan North
Slope fleet and may therefore have caused an increase in jobs for
U.S.-tanker crews. Foreign tankers with foreign crews carried
Alaskan North Slope oil from Valdez to the U.S. Virgin Islands
under a long-standing exception in the Jones Act. As shown in
table 3.1, before the ban was lifted, oil was shipped from Valdez
around Cape Horn to refineries in the U.S. Virgin Islands.
Several foreign-registered, foreign-crewed tankers made these
trips. According to our analysis, lifting the ban caused these
foreign tankers and crews to be replaced by U.S.-crewed tankers
going to Asia. Tankers carrying Alaskan North Slope oil from
Valdez to Asia to date have been U.S.-documented (including U.S.-
registered and U.S.-crewed) and U.S.-owned, as required by the
1995 legislation that lifted the export ban. As a result of this
change in destinations, the equivalent of one or two additional
U.S. tankers were used to carry Alaskan North Slope oil in 1996
and 1997, creating an estimated 58 to 115 U.S. tanker crew jobs.1
These jobs partially offset the overall decrease in U.S. tanker
crew jobs in the Alaskan North Slope trade during the past decade
caused by declining crude oil production and fleet size. Effects
on U.S. Shipbuilding To date, lifting the oil export ban has also
had a limited effect on the U.S. Have Been Limited
shipbuilding industry. Demand for new tankers for the Alaskan
North Slope trade-either U.S. or foreign-built-appears to be
minimal at present and driven primarily by factors other than
exports. Since the export ban was lifted, Alaskan North Slope
tanker operators have had the option of exporting oil in foreign-
built tankers, but to date they have not done so. Likewise, U.S.
shipyards have not lost orders for new Alaskan North Slope export
tankers to foreign shipyards. Although several U.S. shipyards are
equipped to build Alaskan North Slope tankers, no U.S. shipyard
has delivered one since 1987. According to industry officials,
U.S. shipbuilders have been at a price disadvantage in the world
commercial shipbuilding 1 Based on U.S. Maritime Administration
estimates of 25 billets per tanker and 2.3 crew members per
billet. Page 34
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 3 Effects of
Lifting Oil Export Ban on Refiners, Consumers, and Oil Shipping
Industry on the West Coast Have Generally Been Limited market
because of, among other reasons, higher costs and less-modern
production methods. U.S. shipbuilders and other industry officials
expected 10 or more new orders in the 1990s for tankers to serve
the Alaskan North Slope. These expectations resulted in part from
the enactment of the Oil Pollution Act of 1990, in response to the
Exxon Valdez accident.2 The act mandated, among other things, the
phaseout of single-hulled tankers and the transition to double-
hulled tankers by 2015, in order to reduce the effects of oil
spills in the event of accidents. However, only three orders have
materialized so far. All three orders were from ARCO for tankers
to be built by Avondale, Inc., of Louisiana, and to be delivered
between 2000 and 2002. Additionally, a proposed order from BP-
Amoco for three tankers to be built by the National Steel and
Shipbuilding Company, of San Diego, was deferred indefinitely in
October 1998. According to industry officials, factors in the
lack of orders to date include falling oil prices in 1998 and
their effect on Alaskan North Slope planning and development, as
well as the price of new tankers-in some cases up to three times
as much in U.S. shipyards compared with overseas yards. Despite
the lack of tanker demand to date, there could be some demand for
new Alaskan North Slope tankers in the next decade, according to
shipbuilding and oil company officials. As shown in figure 3.1,
under Oil Pollution Act of 1990 requirements, 26 Alaskan North
Slope tankers are due to be phased out of the fleet by 2015. 2On
Mar. 24, 1989, the Exxon Valdez ran aground on a reef, spilling
about 11 million gallons of Alaskan North Slope crude oil into
Prince William Sound. Page 35
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 3 Effects of
Lifting Oil Export Ban on Refiners, Consumers, and Oil Shipping
Industry on the West Coast Have Generally Been Limited Figure 3.1:
Number of Alaskan North Slope Tankers Scheduled to Be Phased Out,
1999-2015 4.0 Number of tankers 3.0 2.0 1.0 0.0 1999 2000
2001 2002 2003 2004 2005 2006 2007 2008
2009 2010 2011 2012 2013 2014 2015 Years
Source: U.S. Maritime Administration. As shown in figure 3.1, 19
tankers serving the Alaskan North Slope are to be phased out by
the end of 2006. Some of these tankers, but not all, would need
to be replaced, assuming that Alaskan North Slope production
continues to decline. Oil companies would have replacement
alternatives to new U.S.-built tankers, including (1) extending
the life of existing tankers by converting the hulls and (2) using
existing or new foreign-built tankers for exports. Oil company
officials told us that their needs for future U.S. tankers will
depend on various oil industry and market factors. Although
introducing foreign-built tankers into the Alaskan North Slope
Page 36 GAO/RCED-99-
191 Alaskan North Slope Oil Chapter 3 Effects of Lifting Oil
Export Ban on Refiners, Consumers, and Oil Shipping Industry on
the West Coast Have Generally Been Limited trade to carry exports
is an option, oil company officials told us they have no plans to
do so in the foreseeable future. Nevertheless, officials in the
U.S. shipbuilding industry said they are concerned about losing
future Alaskan North Slope tanker orders to overseas shipyards, in
part because of exports. They contend that the export option
gives oil companies an added incentive to further postpone orders
for new U.S.-built tankers. According to these shipbuilding
officials, foreign-built tankers to export Alaskan North Slope oil
are a possibility within a few years, if not immediately. If so,
jobs in U.S. shipyards could be affected. According to company
officials, each tanker order postponed or lost to a foreign
competitor costs about 1,000 U.S. shipyard jobs for the 18 months
it takes to construct a tanker. In addition, postponed tanker
orders contribute to the aging of the Alaskan North Slope fleet,
with a potential impact on fleet safety. Because no new tankers
have entered the fleet since 1987, half of the fleet consists of
single-hulled tankers built in the 1970s or before. Even though
the oldest tankers have been phased out of service, the phaseout
has been so gradual that, on average, the remaining fleet has
gotten older. The average age of the fleet has increased since
the Oil Pollution Act of 1990 was passed- from about 16 years old
in 1990 to 21 years old in 1998.3 Effects on West Coast The
ability to export Alaskan North Slope oil has given tanker
operators an Tanker Repair Yards Have added incentive to
repair tankers overseas rather than on the West Coast Been Limited
because they can reduce costs by combining oil shipments to Asia
with less expensive Asian repairs. However, since the export ban
was lifted, there has not been a trend toward more overseas
repairs. Tankers serving the Alaskan North Slope undergo major,
scheduled "drydock" repairs about twice every 5 years at a cost of
$1 million to over $10 million each. A drydock repair can take a
tanker out of service for several weeks. Exact information on the
number of Alaskan North Slope tanker repairs for recent years was
unavailable. However, according to data supplied by industry
officials, and on the basis of recent fleet size, we estimate that
3 The 1990 fleet included four tankers rebuilt in 1983 or earlier
and the 1998 fleet included three such tankers. Page 37
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 3 Effects of
Lifting Oil Export Ban on Refiners, Consumers, and Oil Shipping
Industry on the West Coast Have Generally Been Limited about 10 to
15 such repairs have occurred annually for tankers serving the
Alaskan North Slope in recent years. On average, repairs have been
decreasing in the 1990s at a rate that is commensurate with the
decline in Alaskan North Slope production and fleet size. Three
West Coast repair yards, in California, Oregon, and Washington
State, compete with several Asian yards for the Alaskan North
Slope tanker repair business. These West Coast yards are situated
near Alaskan North Slope shipping lanes and destinations.
However, according to industry officials, the U.S. repair yards
are at a competitive disadvantage because Asian yards may charge
less than half of what a U.S. yard would charge for a comparable
tanker repair. Combining an oil shipment to Asia with a less
expensive Asian repair allows tanker operators to avoid the extra
cost of going without oil cargo to Asia for a repair. Overseas
repairs of U.S. ships are subject to U.S. Customs duties of 50
percent of certain repair costs levied on the vessel operator.
According to U.S. Customs and shipping industry data, overseas
repairs of Alaskan North Slope tankers have not increased
significantly since the ban was lifted, as shown in figure 3.2.
Page 38 GAO/RCED-99-191
Alaskan North Slope Oil Chapter 3 Effects of Lifting Oil Export
Ban on Refiners, Consumers, and Oil Shipping Industry on the West
Coast Have Generally Been Limited Figure 3.2: Number of Overseas
Repairs of Alaskan North Slope Tankers, 1989-98 8 Number of
repairs 7 6 5 4 3 2 1 0 1989 1990 1991 1992 1993
1994 1995 1996 1997 1998 Years Source: U.S. Customs
Service. As shown in figure 3.2, overseas repairs of Alaskan North
Slope tankers have averaged between three and four a year. No
significant trend toward more overseas repairs has developed since
exports began. Of the nine total overseas repairs since 1996,
seven involved the tankers of one oil company that has
historically repaired its tankers overseas and has not been an
exporter of Alaskan North Slope oil. Officials of the West Coast
tanker repair industry said that their recent experience raised
concerns that a trend toward more foreign repairs of Alaskan North
Slope tankers could be beginning to develop, with exports as a
contributing factor. They cited two foreign repairs of Alaskan
North Slope tankers in Asia in 1998. In one of these cases, a
tanker that transported crude oil to Korea underwent a scheduled
drydock repair in a Korean shipyard before returning to the United
States. According to West Coast repair industry officials, this
case illustrates how exports may be Page 39
GAO/RCED-99-191 Alaskan North Slope Oil Chapter 3 Effects of
Lifting Oil Export Ban on Refiners, Consumers, and Oil Shipping
Industry on the West Coast Have Generally Been Limited starting to
harm the West Coast ship repair industry. In the other case, the
tanker went without cargo to Singapore for a scheduled drydock
repair. According to operators involved in the two cases, a major
factor in having repairs done overseas was the significantly lower
cost in Asian repair yards compared with U.S. West Coast yards,
even when U.S. Customs duties are added and even without carrying
cargo, as in the latter case. According to West Coast repair
industry officials, the two lost repairs represented several
million dollars in business and potential lack of employment for
over 500 workers a day for each repair. Page 40
GAO/RCED-99-191 Alaskan North Slope Oil Appendix I Lifting the
Oil Export Ban Has Had Little Impact on the Alaskan Environment
Appendix I According to our discussions with Alaskan North Slope
oil industry officials, state of Alaska officials, and
environmental groups, lifting the export ban has had little effect
on the Alaskan environment to date. Their opinions are based in
part on the fact that export shipments from 1996 to 1998 were more
limited than projected by some analysts. Export shipments have
not resulted in the use of larger tankers or new, potentially more
hazardous shipping routes to Asia and have not significantly
increased the risks of invading nonindigenous marine species, such
as plankton and other organisms, into Alaskan waters. Prior to
lifting the oil export ban, according to some projections, exports
of 200,000 barrels of oil per day or more were to be carried in
Alaskan North Slope tankers that were of larger than average size-
vessels with a capacity of 200,000 deadweight tons or more.1 In
addition, some environmentalists foresaw the use of new,
potentially more hazardous shipping routes to Asia along the
Aleutian Islands coast instead of in deep water. However, this
projected new tanker traffic has not materialized. There have
been a relatively small number of export shipments to date-a total
of 21 in 1998, for example--and existing tankers have been used.
In addition, export tankers have been avoiding near-Aleutian
routes in favor of already existing routes for which contingency
planning and spill response teams are already in place.
Furthermore, officials for the oil industry, Aleyska Pipeline
Service Company (the organization that operates the Trans-Alaska
Pipeline System), and U.S. Coast Guard said that they have not
changed their operations as a result of the ban's being lifted.
Rather, any changes made resulted from the Exxon Valdez accident
in 1989. The existing routes involve escorted transits out of
Prince William Sound into deeper ocean, where tankers then head
toward the U.S. mainland, Hawaii, or Asia. Nonindigenous marine
species may come to Alaska in a tanker's ballast water, which is
routinely exchanged (taken on board and/or discharged from the
vessel) either in port or under way, in order to maintain vessel
stability. Potentially invasive species include plankton,
crustaceans, and other organisms that could disturb the local
marine ecology. However, the export-related invasion of Asian
marine species does not appear to be a significant problem to
date. Alaska officials and two representatives of an
environmental group told us that this is an issue in Alaska, but
not necessarily because of Alaskan North Slope oil exports.
According to oil company officials, the operators of export
tankers have added a second 1 Deadweight tons are a measure of a
ship's cargo capacity. Page 41
GAO/RCED-99-191 Alaskan North Slope Oil Appendix I Lifting the
Oil Export Ban Has Had Little Impact on the Alaskan Environment
mid-ocean ballast water exchange while under way toward Valdez in
addition to the one exchange required by federal law-the National
Invasive Species Act of 1996. They said this step helps to avoid
the invasion of nonindigenous species. In addition, according to
an interim report commissioned by the Regional Citizens' Advisory
Council of Prince William Sound, species in ballast water from
Asia may not as readily occur or survive in Alaskan waters as
species from Washington and California ports.2 A final report on
this matter is due to be issued later in 1999. 2Biological
Invasion of Cold-Water Coastal Ecosystems: Ballast Mediated
Introduction in Port Valdez/Prince William Sound, Alaska-1998
Progress Report, Dec. 3, 1998, for Regional Citizens' Advisory
Council of Prince William Sound. Page 42
GAO/RCED-99-191 Alaskan North Slope Oil Appendix II Methodology
for Estimating the Effect of Lifting the Alaskan Oil Export Ban on
Crude and Petroleum Product Prices
Appendix II This appendix provides details on the statistical
analysis we used to explain and estimate how lifting the ban on
Alaskan oil exports has affected crude oil and petroleum product
prices on the U.S. West Coast. We conducted statistical analyses
using data on oil prices before and after the ban was lifted to
determine whether the effects on price predicted by previous
studies were borne out. We used a similar analysis to determine
what effect the ban's lifting had on the prices charged for
gasoline, diesel, and jet fuel on the West Coast. In summary, our
statistical analysis indicates that lifting the export ban led to
relative prices for Alaskan crude oil and for comparable
California crude oil that were higher than they would have been
had the ban remained in force. However, lifting the ban had no
statistically significant effect on the prices of gasoline,
diesel, or jet fuel. These results are consistent with
predictions of earlier studies. In addition, we found that sales
of Alaskan crude oil destined for the U.S. Virgin Islands and the
U.S. Gulf Coast ended and sales to the Mid-Continent fell abruptly
once exports became a feasible alternative. Relatedly, we found
that the proportion of Alaskan oil sold on the West Coast has
risen over time as Alaskan and California production have fallen.
Prior Studies Found Several analyses by the
Department of Energy, GAO, and the private sector That the Ban
Resulted found that West Coast prices of Alaskan oil were lower
as a result of banning exports of this oil.1 These studies
concluded that this ban resulted in Lower Oil Prices
in an abundance of crude oil relative to refining demand on the
West Coast, leading to lower crude oil prices there. The studies
contend that lifting the export ban would result in Alaskan oil
being sold in Asian markets, causing its price to rise on the West
Coast. Because California oil is also refined on the West Coast,
higher Alaskan prices would tend to increase refiners' demand for
California oil, pushing up its price as well. The effects of
lifting the ban on oil production, refining costs, and consumer
prices were also predicted in these studies. For example, higher
oil prices were expected to encourage more oil production while
also leading to higher costs for refiners buying that oil and
possibly higher prices for consumer petroleum products. 1Exporting
Alaskan North Slope Crude Oil: Benefits and Costs, U.S. Department
of Energy (June 1994), Alaskan Crude Oil Exports (GAO/T-RCED-90-
59, Apr. 5, 1990) , and Samuel A. Van Vactor, Time to End the
Alaskan Oil Export Ban, Policy Analysis, May 18, 1995, No. 227.
Page 43 GAO/RCED-99-
191 Alaskan North Slope Oil Appendix II Methodology for
Estimating the Effect of Lifting the Alaskan Oil Export Ban on
Crude and Petroleum Product Prices Alaskan Oil Is No Longer
Sales of Alaskan oil to the U.S. Gulf Coast ended about 5 months
before the Sold in the U.S. Gulf Coast first exports to Asia,
and sales to the U.S. Virgin Islands ended about 8 and U. S.
Virgin Islands months later. Sales to the Mid-Continent
states dropped off abruptly when the ban was lifted. Before the
ban was lifted, total sales to these markets were falling as
Alaskan oil production fell from its peak in 1988. Whether the
lifting of the ban, rather than falling production, caused the
cessation of sales to the Gulf Coast and Virgin Islands is
unclear. However the abrupt drop in sales to the Gulf Coast,
Virgin Islands, and Mid-Continent states coincided with the ban's
removal. Figures II.1 and II.2 illustrate the observations listed
above. As production has fallen, the proportion sold to West
Coast refiners has risen, and sales to alternative markets have
declined. Finally, since the ban was lifted, some sales to these
other markets have been replaced by Asian sales. Figure II.1:
Proportion of Alaskan North Slope Oil Sold in the West Coast
Market 120% Proportion of oil 100% 80% 60% 40% 20% 0% 1994
1995 1996 1997 1998 Years Alaskan
North Slope oil sold in other markets Alaskan North Slope oil sold
in West Coast Source: U.S. Maritime Administration Vessel Loading
and Destination reports. Page 44
GAO/RCED-99-191 Alaskan North Slope Oil Appendix II Methodology
for Estimating the Effect of Lifting the Alaskan Oil Export Ban on
Crude and Petroleum Product Prices Figure II.2: Alaskan North
Slope Oil Destinations Other Than the West Coast 30 Millions of
barrels of Alaskan North Slope oil 25 20 15 10 5 0 1996
1997 1998 Years Asia Mid-Continent Virgin Islands
Note: The 1996 figures for Asia are for May 31 through December
31, corresponding to the period in 1996 during which oil was
exported to Asia. Source: U.S. Maritime Administration Vessel
Loading and Destination reports. Statistical Analysis
As predicted by the studies described above and as we found in our
Indicates That Lifting analyses of the prices of oil
before and after the ban was lifted, the price of Alaskan North
Slope oil has risen relative to other oil as a result of lifting
the Ban Resulted in the export ban. We also found
that the price of a comparable blend of Higher Prices for
California oil--Line 63--rose as a result of lifting the ban.
Alaskan and To determine the effect of
lifting the ban on oil prices, we developed a Comparable
California time-series model. Because oil prices are influenced
by many factors other Oil than
removing the ban, we had to control for these other factors. We
did this by modeling the differentials between the prices of West
Coast oil and the prices of similar oil in other markets.
Modeling the price differentials Page 45
GAO/RCED-99-191 Alaskan North Slope Oil Appendix II Methodology
for Estimating the Effect of Lifting the Alaskan Oil Export Ban on
Crude and Petroleum Product Prices between two crude oils is a way
to control for all the factors that affect the two oils similarly-
such as changes in global supply and demand-while capturing
changes in the local markets of the two oils that affect only one
of the oils. To control for local factors affecting the prices of
individual comparison oils, we examined three price differentials
for Alaskan North Slope (ANS) oil and three for Line 63 (L63).
The comparison oils, making up the other part of the differentials
are Brent Blend (BB), Nigerian Forcados (FOR), and West Texas
Intermediate (WTI). For each of the six differentials, the price
differential is defined as the price of the comparison oil minus
the price of the West Coast oil-be it Alaskan North Slope or Line
63 oils. We used daily spot price data as reported in Platts Oil
Prices Data Base. The data series we used run from January 8,
1992 ,through December 4, 1998, and are in nominal dollar terms.2
To compare the price differential before and after the export ban
was lifted, we included in the regression a dummy variable to
indicate when the ban was removed. Diagnostic tests indicated
that the price differential series was auto-regressive of order
one. Therefore, we included a lagged price differential as a
regressor. Diagnostic tests also revealed that the residuals were
auto-regressive conditionally heteroskedastic. To correct for
this, we included a GARCH(1,1) component to the regression.3 The
estimated form of the equation of the price differential is = +
-1 + + t DIFF t DIFF
t EXPORT t , where DIFF is the difference between
the prices of the comparison and West Coast oils; EXPORT is a
dummy variable to indicate the removal of the ban; , , and are
parameters to be estimated; and is a random error term.4 The
subscript t denotes time. The parameter does not measure the
marginal effect of lifting the ban on the price differential
because of the auto-regressive property of the model.5 The
results of maximum likelihood estimation are shown in tables II.1
and II.2. 2 We used daily spot price data rather than constructing
weekly or monthly averages of this data because we wanted to
examine prices that reflect actual transactions. It is possible
that using weekly or monthly averages would change the results of
the statistical analysis but we did not explore this approach. 3
The details of the diagnostic tests and the choice of the final
form of the regression model are discussed in detail below. 4 The
dummy variable takes on the value of unity for dates on or after
May 28, 1996, and is otherwise equal to zero. Page 46
GAO/RCED-99-191 Alaskan North Slope Oil Appendix II Methodology
for Estimating the Effect of Lifting the Alaskan Oil Export Ban on
Crude and Petroleum Product Prices Table II.1: Results of Price
Analysis for Alaskan North Slope (ANS) Oil Coefficients
WTI-ANS BB-ANS FOR-ANS CONSTANT
0.037* 0.019* 0.022* (0.003)
(0.005) (0.006) DIFFt-1
0.986* 0.976* 0.982* (0.002)
(0.003) (0.003) EXPORT
-0.018* -0.024* -0.02*
(0.004) (0.007) (0.008) -
1.295 0.979 1.102 Adj. R-
Squared 0.976
0.946 0.952 Note: Standard errors are in
parentheses. An asterisk denotes significance at the 5-percent
level. The long-term increase in the relative price of Alaskan
North Slope oil relative to the three comparison oils ranges from
$0.98 to $1.30 as shown in the - cells. All coefficient
estimates are significant at the 5-percent level. Table II.2:
Results of Price Analysis for Line 63 (L63) Oil Coefficients
WTI-L63 BB-L63 FOR-L63 CONSTANT
0.051* 0.017* 0.025*
(0.007) (0.008) (0.009) DIFF
0.986* 0.987* 0.986* t-1
(0.003) (0.003) (0.003) EXPORT
-0.018* -0.005 -0.012
(0.006) (0.009) (0.01) -
1 . 2 8 2aa Adj. R-Squared
0.975 0.956 0.959 a Not
applicable. The export coefficient was not significant, so we did
not calculate the value. Note: Standard errors are in
parentheses. An asterisk denotes significance at the 5-percent
level. 5 The auto-regressive structure of the model requires that
the long-run impact of lifting the ban be calculated as follows: =
1 1- where is the long-term effect of lifting the ban on the
differential, and and are as defined above. The negative of
can be interpreted as the increase in the price of the West Coast
oil relative to the comparison oil. These values are listed in
tables II.1 and II.2 for the cases in which the EXPORT variable
was statistically significant. Page 47
GAO/RCED-99-191 Alaskan North Slope Oil Appendix II Methodology
for Estimating the Effect of Lifting the Alaskan Oil Export Ban on
Crude and Petroleum Product Prices The price of Line 63 oil rises
significantly compared with West Texas Intermediate but does not
rise significantly compared with either Brent Blend or Nigerian
Forcados. In the latter two cases, the direction of change is the
same and the order of magnitude of is similar to the significant
case. However, because the coefficients are not statistically
significant, we did not calculate the long-term effect. No Effect
Found on the We conducted a similar analysis using the
prices of two heavy California Prices of California Heavy
oils-Kern River and THUMS-and found no significant changes when
the Crude Oils export ban was lifted. We used
daily spot price data as reported in Platts Oil Prices Data Base.
The data series we used run from January 8, 1992, through December
4, 1998, and are in nominal dollar terms. We compared the prices
of these two oils to the prices of Duri, Indonesia (DU); Shengli,
China (SH); and West Texas Intermediate oils. West Texas
Intermediate was chosen to provide some consistency between these
and the previous regression results.6 The other two oils were
chosen because, like Kern River and THUMS, they are heavy oils and
therefore their prices should be expected to be affected similarly
by global market conditions. The regression results follow. Kern
River oil shows no significant change in price compared to any of
the comparison oils, as shown in table II.3. Table II.3: Results
of Price Analysis for Kern River (KERN) Oil Coefficients
WTI-KERN SH-KERN DU-KERN CONSTANT
0.186* 0.048* 0.0574* (0.041)
(0.013) (0.014) DIFFt-1
0.969* 0.984* 0.982* (0.006)
(0.004) (0.004) EXPORT
-0.013 0.002 -0.001 (0.019)
(0.012) (0.013) -
aaa Adj. R-Squared 0.917
0.958 0.952 aNot applicable. The export
coefficient was not significant, so we did not calculate the
value. 6 In the case of the WTI-Kern and WTI-THUMS differential
models, we also ran regressions that included a world "light-
heavy" differential (specifically, Brent Blend and Duri,
Indonesia) to control for structural changes in the light-heavy
differential in the mid-1990s. Adding this term in the regression
did not change the significance of the EXPORT coefficient, so we
do not report these results. Letter Page 48
GAO/RCED-99-191 Alaskan North Slope Oil Appendix II Methodology
for Estimating the Effect of Lifting the Alaskan Oil Export Ban on
Crude and Petroleum Product Prices Note: Standard errors are in
parentheses. An asterisk denotes significance at the 5-percent
level. As with the Kern River results, there was no significant
change in the price of THUMS relative to any comparison oil, as
shown in table II.4. Table II.4: Results of Price Analysis for
THUMS Oil Coefficients WTI-THUMS
SH-THUMS DU-THUMS CONSTANT
0.144* 0.027* 0.031* (0.033)
(0.01) (0.011) DIFFt-1
0.97* 0.986* 0.986* (0.006)
(0.004) (0.004) EXPORT
-0.016 -0.005 -0.009 (0.018)
(0.011) (0.012) -
aa a Adj. R-Squared 0.913
0.956 0.95 aNot applicable. The export
coefficient was not significant so we did not calculate the
value. Note: Standard errors are in parentheses. An asterisk
denotes significance at the 5-percent level. Statistical Analysis
Our analysis of prices of three key consumer products-gasoline,
diesel Indicates No Effect on the fuel, and jet fuel-indicated
that lifting the ban had no statistically Prices of Petroleum
significant effect on them. Because higher crude oil prices
translate Products directly into higher
refiner costs for refiners, it would not be unusual to find that
some of the increase in costs was passed on to consumers in the
form of higher prices for petroleum products. However, refiners
whose costs rose as a result of removing the ban may not have been
able to pass these costs on to consumers because of competition
from imported final products or from other West Coast refiners
whose costs did not rise. To determine the effect on petroleum
prices of removing the ban, we conducted an analysis of petroleum
prices that was similar to the crude oil price analysis described
above. We used daily spot price data as reported in Platts Oil
Prices Data Base. The data series we used run from January 8,
1992, through December 4, 1998, and are in nominal dollar terms.
We compared West Coast prices of regular unleaded gas, diesel
fuel, and jet fuel with prices of these same products in other
markets. The time series of the petroleum product price
differentials and the crude oil price differentials behaved
similarly, making the same model structure appropriate. Our
analysis revealed no statistically significant change in West
Coast petroleum product prices that was not explained by similar
Page 49 GAO/RCED-
99-191 Alaskan North Slope Oil Appendix II Methodology for
Estimating the Effect of Lifting the Alaskan Oil Export Ban on
Crude and Petroleum Product Prices changes in the prices of these
products in other markets. Specifically, we did not find any
change in the prices at the time the ban was lifted, indicated by
the absence of a statistically significant estimated coefficient
for the export dummy variable. The results of our regressions are
listed in tables II.5 through II.7. Table II.5: Analysis of Jet
Fuel (JET) Prices Coefficients
LA-CHIJET SF-CHIJET CONSTANT
0.622* 0.581* (0.079)
(0.081) DIFFt-1
0.965* 0.966* (0.005)
(0.005) EXPORT
-0.027 -0.02 (0.043)
(0.045) -
aa Adj. R-Squared
0.922 0.921 a Not applicable. The
export coefficient was not significant, so we did not calculate
the value. Note: Standard errors are in parentheses. An asterisk
denotes significance at the 5-percent level. Lifting the ban had
no significant effect on the prices of jet fuel in Los Angeles
(LA) or San Francisco (SF) when compared with the price of jet
fuel in Chicago (CHI). Table II.6: Analysis of Diesel Prices
Coefficients
SF-GULFDIESEL CONSTANT
0.417* (0.083) DIFFt-1
0.972* (0.005) EXPORT
0.028 (0.051) -
a Adj. R-Squared
0.941 a Not applicable. The export coefficient was not
significant, so we did not calculate the value. Note: Standard
errors are in parentheses. An asterisk denotes significance at the
5-percent level. Diesel fuel prices in San Francisco were also
unaffected by lifting the export ban when compared with diesel
prices in the Gulf Coast (GULF). Page 50
GAO/RCED-99-191 Alaskan North Slope Oil Appendix II Methodology
for Estimating the Effect of Lifting the Alaskan Oil Export Ban on
Crude and Petroleum Product Prices Table II.7: Analysis of
Gasoline (GAS) Prices Coefficients
LA-GULFGAS SF-GULFGAS CONSTANT
0.236* 0.101* (0.029)
(0.031) DIFFt-1
0.961* 0.969* (0.004)
(0.005) EXPORT
-0.011 0.044 (0.054)
(0.06) -
aa Adj. R-Squared
0.934 0.94 a Not applicable. The
export coefficient was not significant, so we did not calculate
the value. Note: Standard errors are in parentheses. An asterisk
denotes significance at the 5 percent level. Again, there was no
significant change in the West Coast prices of regular unleaded
gasoline as a result of lifting the export ban. Further Evidence
of an Higher market prices for Alaskan North Slope oil and
lower shipping costs Increase in the Price of mean higher
revenues for producers of this oil. The impact of lifting the
Alaskan North Slope Oil ban on Alaskan North Slope producers'
revenues net of transportation costs can be seen in figure II.3.
This figure shows the prices received at the "wellhead" for two
oils-West Texas Intermediate and Alaskan North Slope-as well as
the difference between their respective prices. These so-called
wellhead prices reflect the revenue the producer receives net of
transportation and shipping costs. Rising market prices for
Alaskan North Page 51
GAO/RCED-99-191 Alaskan North Slope Oil Appendix II Methodology
for Estimating the Effect of Lifting the Alaskan Oil Export Ban on
Crude and Petroleum Product Prices Slope oil and falling shipping
costs both contribute to the shrinking of the gap between the two
oils' wellhead prices. Figure II.3: ANS Wellhead Price Has Risen
Compared With WTI 25 Dollars per barrel 20 15 10 5 0 1994
1995 1996 1997
1998 Years WTI wellhead price ANS wellhead price WTI-ANS
differential Source: GAO's analyses of Energy Information
Administration data. Tests for Stationarity and To ensure that
we estimated the correct model of the price differentials, we
Diagnostics: Development checked for stationarity of the
price differential time series and did some of the Correct
Statistical standard diagnostic testing. These tests helped
us to develop the final form Model of the
model and give us confidence that the results of the estimations
are not spurious. A detailed description of the development of
the model follows.7 7 The process described for choosing the
correct statistical model was followed for each oil price
differential and for each petroleum price differential. Page 52
GAO/RCED-99-191 Alaskan North Slope Oil Appendix II Methodology
for Estimating the Effect of Lifting the Alaskan Oil Export Ban on
Crude and Petroleum Product Prices We chose a period of study of
January 8, 1992, through December 4, 1998, and used daily spot
prices as reported by Platts Oil Prices Data Base. This period
was chosen in order to encompass the removal of the export ban
with sufficient time on either side of this event. An arithmetic
mean of the low and high spot prices was used for the analysis.
All tests for stationarity and diagnostics were performed on data
prior to May 28, 1996. The simplest model of the price
differential is a standard ordinary least squares (OLS) regression
of the price differential on a constant term with a dummy variable
to pick up the effect of lifting the export ban. Test statistics
derived from an OLS regression of a time series will not be
reliable if the time series is not stationary.8 Therefore, the
first step is to test for stationarity of the series of price
differentials. To test for stationarity, we used the Augmented
Dickey-Fuller (ADF) test. First, we estimate the following
equation using OLS: PDt = + PDt 1 + t j PDt
j + - - - t j=1 where PD is the
difference between the prices of the comparison oil and Alaskan
North Slope oil; is the difference operator; , , and are
parameters to be estimated; and is a random error term. The
subscript t denotes time. The number of lags of PD (denoted by )
is chosen by starting with a large number of lags and sequentially
dropping the statistically insignificant lags from the highest lag
down. Lags greater than have a statistically insignificant effect
on the regressand. A test for nonstationarity amounts to a test of
the null hypothesis that is equal to zero. If is equal to
zero, the time series PD has a unit root and t will behave
analogously to a random walk, which is nonstationary.
Alternatively, if is negative and statistically significant,
then the time series (expressed as deviations from the mean) will
converge to zero in response to shocks. Using the period prior to
the lifting of the export ban, the ADF test rejects the null
hypothesis of nonstationarity at the 5-percent 8 A time series is
stationary if its mean, variance, and autocovariances are
independent of time and nonstationary otherwise. If the price
differential we model is stationary, then we would expect to see
that the mean of the differential is unchanging over time except
when it changes in response to an event, such as the removal of
the export ban. Page 53
GAO/RCED-99-191 Alaskan North Slope Oil Appendix II Methodology
for Estimating the Effect of Lifting the Alaskan Oil Export Ban on
Crude and Petroleum Product Prices level.9 We also performed the
Phillips-Perron test and were able to reject nonstationarity at
the 5-percent level. Results of these tests indicate that standard
regression techniques are appropriate for modeling the price
differentials. Next, we performed some diagnostic tests to
determine whether lagged values of the differential affect current
values. More specifically, we checked the order of the model by
examining the correlogram and partial correlogram. The
correlogram showed a steady decline in the size of the
coefficients after the first lag of the dependent variable,
suggesting an auto-regressive order 1 (AR(1)) process. The
partial correlogram revealed a strong partial correlation between
PDt and PDt-1 but very small partial correlations for PDt and
PDt-k for k>1. This further indicated an AR(1) process. Next, we
estimate the AR(1) model using OLS: PD = - + t
k PDt k t We performed some diagnostic tests of the
residuals of the regression. Specifically, we tested for
autoregressive conditional heteroskedasticity (ARCH) using a
Lagrange Multiplier test. ARCH residuals have the characteristic
that high values of the estimated residuals bunch together
temporally. ARCH residuals are quite common in time series
analysis of economic variables. The Lagrange Multiplier test
allows us to reject at the 1-percent level the null hypothesis
that the residuals are not ARCH. We re-estimate the model using
the maximum likelihood method and including a GARCH(1,1) component
to correct for the ARCH residuals.10 This is the most standard
version of this type of model. The correlogram and partial
correlogram of the residuals of the new specification reveal no
further ARCH terms.11 Finally, we estimate the model over the
entire time period, including the dummy variable for exports. The
model was estimated using the entire sample and adding an
indicator variable for dates after the export ban was 9 We used
the period before the ban was lifted to test for stationarity
because if we had included the lifting of the ban and the period
following that event, then the differential might change as a
result of lifting the ban. This, in turn, could cause us to
incorrectly conclude that the time series is nonstationary. 10The
GARCH(1,1) estimation includes an auto-regressive term and a
moving-average term to correct for the existence of ARCH
residuals. The price differential and variance equations are
estimated simultaneously. Page 54
GAO/RCED-99-191 Alaskan North Slope Oil Appendix II Methodology
for Estimating the Effect of Lifting the Alaskan Oil Export Ban on
Crude and Petroleum Product Prices lifted. (We used May 28,
1996.) The equation is estimated using maximum likelihood methods
and including a GARCH(1,1) component to correct for ARCH
residuals. The final price differential model is PD = +
-1 + + t PDt t t . 11To further
ensure that the price differential model did not have a unit root
or was otherwise misspecified, we performed a test for model
specification developed by Davidson, Godfrey, and MacKinnon
(1985). This is equivalent to the Plosser-Schwert-White (1982)
differencing test. The test statistics for the Davidson, Godfrey,
and MacKinnon test do not allow us to reject the null hypothesis
that the differenced and undifferenced models result in identical
parameter estimates. This is strong evidence that our original
model is properly specified. Page 55
GAO/RCED-99-191 Alaskan North Slope Oil Appendix III GAO Contacts
and Staff Acknowledgments
Append Iix II GAO Contacts Daniel Haas (202) 512-9828
Acknowledgments In addition to the above, Charles
Bausell, Dave Brack, Rodney Conti, Byron S. Galloway, Sterling
Leibenguth, and Frank Rusco made key contributions to this report.
(141229) Letter Page 56
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Address Correction Requested PAGE 59 GAO/XXXX-98-??? NAME OF
DOCUMENT Contents Table 2.1: Cost to Ship Alaskan North Slope
Oil, by Destination, 1996 24 Table 3.1: Destinations of Alaskan
North Slope Oil Tankers and Volumes Carried, 1994-98
32 Table II.1: Results of Price Analysis for Alaskan North Slope
(ANS) Oil 47 Table II.2: Results of Price Analysis for Line 63
(L63) Oil 47 Table II.3: Results of Price Analysis
for Kern River (KERN) Oil 48 Table II.4: Results of
Price Analysis for THUMS Oil 49 Table II.5:
Analysis of Jet Fuel (JET) Prices 50
Table II.6: Analysis of Diesel Prices
50 Table II.7: Analysis of Gasoline (GAS) Prices
51 Page 60
GAO/XXXX ????? Contents Page 61 GAO/XXXX ????? Contents Figure
1: Locations of Alaska Oil Fields and Tanker Routes From Valdez,
Alaska, to Refineries That Received Alaskan North Slope Oil, 1977-
98 4 Figure 1.1: Locations of Alaska Oil Fields
12 Figure 1.2: Percent of Oil Removed From Alaskan North Slope
and Percent of Production Rights in Prudhoe Bay Oil Field, by Oil
Major Company, in 1998 14 Figure 1.3: Shipping Routes for Alaskan
North Slope Oil Tankers, 1989-98 16 Figure 2.1: New Fields Will
Add to Daily Alaskan North Slope Oil Production 26 Figure 2.2:
Annual Alaska and California Crude Oil Production, 1989-98 28
Figure 3.1: Number of Alaskan North Slope Tankers Scheduled to Be
Phased Out, 1999-2015
36 Figure 3.2: Number of Overseas Repairs of Alaskan North Slope
Tankers, 1989-98 39 Figure II.1: Proportion of Alaskan North
Slope Oil Sold in the West Coast Market 44 Figure II.2: Alaskan
North Slope Oil Destinations Other Than the West Coast 45 Figure
II.3: ANS Wellhead Price Has Risen Compared With WTI
52 Page 62
GAO/XXXX ?????
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