**REPORT TITLE:** The Marketing and Equivalent Amortized Costs of
Bering-Norton Oil and Gas.

Special Report No. 3.

**STUDY TITLE:** Monitoring Petroleum Related Activities in Alaska.

CONTRACT NUMBER(S): BLM: CT6-61; MMS: 14-12-0001-29002.

SPONSORING OCS REGION: Alaska.

APPLICABLE PLANNING AREA(S): Norton Basin.

FISCAL YEAR(S) OF PROJECT FUNDING: 1978.

COMPLETION DATE OF REPORT: June 1980.

COST(S): FY 1978: \$42,439; CUMULATIVE PROJECT COST: \$42,439.

PROJECT MANAGER(S): W. Pyle.

AFFILIATION: Dames & Moore.

ADDRESS: 445 Figueroa Street, Suite 3500, Los Angeles, California 90071.

PRINCIPAL INVESTIGATOR(S)\*: P. Hanley.

KEY WORDS: Norton Basin; Alaska; Norton Sound; literature review; Bering
Sea; resource estimates; natural gas; Alaska Region.

ACCESS NUMBER: 29002

**BACKGROUND:** In order to meet requirements of the National
Environmental Policy Act of 1969 regarding a determination of the
environmental and socioeconomic effects of outer continental shelf (OCS)
development, the U.S. Department of the Interior, Bureau of Land
Management (BLM, now the Minerals Management Service) initiated the
Alaska Socioeconomic Studies Program (SESP). The SESP objectives were to
predict and evaluate the effects of offshore oil and gas exploration and
development activities on the economic, physical, and social
environments within the State. With the issuance of SESP Technical
Report No. 49 in January 1980, entitled \"Norton Basin OCS Lease Sale
No. 57 Petroleum Development Scenarios, Final Report\", the important
economic, environmental, and technical issues involved with production
of Norton Basin (i.e., Bering Sea) oil and natural gas were described.
The present report was developed as an appendix to Technical Report No.
49.

**OBJECTIVES:** (1) To predict how potential Norton Basin oil and
natural gas supplies would relate to the U.S. energy balance after 1990.

**DESCRIPTION:** This report was divided into three sections. The first
section detailed the economics of Norton Basin oil in relationship to
predicted demands and prices. It also focused on California and the
Northern Tier pipeline in order to show how Norton Sound oil could be
marketed in California or Washington. The second section followed a
similar analytical approach for natural gas. The third section described
an equivalent amortized cost (EAC) model and discussed the results of
EAC model calculations as applied to Norton Sound. Information for each
of these three sections was obtained from a variety of sources including
oil company publications, trade journals, government publications, and
review articles.

**SIGNIFICANT CONCLUSIONS:** Supply and demand forecasts for potential
Norton Basin (i.e., Bering Sea) oil and gas were presented. Because of
U.S. dependency on oil produced primarily in the Middle East (e.g., from
member countries of the Organization of Petroleum Exporting Countries
\[OPEC\]), the U.S. should maximize its development of domestic supplies
and shift to alternate energy forms. Supplies from Norton Sound were
expected to supplement supply shortages in the 1990s. At the time this
report was prepared (1980), it was predicted that Norton Basin oil was
marginally uneconomic; however, by 1990 the situation could be different
due to rising oil prices. California was projected to be the major
domestic market for both oil and natural gas. Because of declines in
domestic supplies of conventional natural gas, a need was predicted for
Norton Sound liquid natural gas (LNG).

**STUDY RESULTS:** Oil was expected to remain the predominant U.S. fuel
through 1990. It was predicted that oil supply limitations would occur,
being attributed to political instability rather than to a depletion of
actual oil reserves. OPEC was expected be the major source of the
world\'s oil in the 1980s and 1990s. Oil company predictions of OPEC
production for 1990 ranged from 32 to 39 million barrels per day. By the
year 2000, production was expected to plateau at about 65 million
barrels per day; however, other sources predicted only 50 million
barrels per day. U.S. demands for oil in 1990 were expected to reach
47.6 to 49.9 million barrels per day oil equivalent; other estimates
were lower (i.e., in the range of 20 to 21 million barrels per day). As
of 1980, U.S. annual production was estimated to be 3.75 billion barrels
of oil. By 1990, domestic production was expected to be 9.3 million
barrels per day. Thus, it was expected that the U.S. would be very
dependent on OPEC oil in 1990.

The refining of oil from the Alaska North Slope results in too little
gasoline and too high a proportion of residual oil with an elevated
sulfur content. California was predicted to be the most likely market
for Alaskan oil. Existing refineries in California were not capable of
processing all Californian and Alaskan oil without producing a surplus
of fuel oils and a deficit in gasoline. Necessary refinery modifications
were suggested to effectively use Alaskan oil. Use of Alaskan gas to
replace fuel oil in California power plants would provide environmental
benefits. Because of economic uncertainties, it was unclear whether
California would be the major consumer of Alaskan oil.

It was predicted that future crude oil shortages in the midwestern
portion of the U.S. may not be covered by U.S. west coast surpluses
unless Alaskan OCS lease sales were accelerated.

Potential production scenarios for Norton Basin oil were as follows. In
the low find case, production started in 1990 at 38.4 million barrels
per day and peaked in 1993 at 154 million barrels per day. In both
medium and high find cases, production started in 1989 at 19.2 million
barrels per day. Under the medium find case, peak production was reached
in 1994 at 436 million barrels per day. For the high find case, peak
production was projected for 1995 at 764.4 million barrels per day.

It was postulated that unpredictable political forces, as opposed to
economic forces, would determine the future price of Middle Eastern oil.
Forecasts indicated that in 1990, world oil prices for Arabian Light
would be \$22 to 42.60 per barrel (in 1979 dollars).

Conventional supplies of U.S. natural gas were running out. By the year
2000, annual production was estimated to be 12 to 14 trillion cubic
feet; however, potential demands could exceed 30 trillion cubic feet per
year by 1990. Therefore, in order to meet anticipated domestic demands,
one or more changes in current trends must be realized: (1) consumption
must decrease; (2) production must increase, or (3) natural gas must be
imported. The most likely source of imported natural gas cited was
Canada.

The potential production scenarios for Norton Basin natural gas were as
follows. In the low find case, annual production started in 1990 at 21.0
billion cubic feet and peaked in 1993 at 84.1 billion cubic feet. In the
medium and high find cases, annual production started in 1989 at 21.0
billion cubic feet and peaked between 1992 and 1993 at 168.2 to 336.4
billion cubic feet.

Alternative transportation options for Norton Sound gas to the
contiguous U.S. (i.e., the lower 48 states) were via overland pipeline
or marine transport after conversion either to ammonia, LNG, methanol,
or urea. Of these options, it was predicted that conversion to LNG and
transport by cryogenic tankers would be most cost effective. Estimated
costs of two LNG projects were compared, with the Arctic Pilot Project
being the cheapest. It was predicted that development costs (in 1980
dollars) for a medium‑sized gas field in Norton Sound would be \$2.40 to
\$2.90/billion BTU (MMBTU). Delivered costs to California would be
\$6.25 to 6.75/MMBTU. In view of the high predicted demand for LNG,
supplies from Norton Basin would be competitive, even with expected high
production and transport costs.

**STUDY PRODUCT(S):** Dames & Moore. 1980. The Marketing and Equivalent
Amortized Costs of Bering-Norton Oil and Gas. Special Report No. 3. A
final report for the U.S. Department of the Interior, Bureau of Land
Management Alaska OCS Office, Anchorage, AK. Social and Economic Studies
Program Special Report No. 3. Contract No. 14-12-0001-29002. vii + 91
pp. + app.

\*P.I.\'s affiliation may be different than that listed for Project
Manager(s).