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. Alaska contains huge quantities of crude oil. The Prudhoe Bay discovery 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 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. 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. Fourteen other companies also had production interests in the Alaskan North Slope in 1998, including companies owned by native Alaskan groups. The addition of Alaskan North Slope oil production to the oil produced in 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’ demand for crude oil. Consequently, oil producers in Alaska looked to other markets. Figure 1.3 shows the historical shipping routes for Alaskan 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. 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. 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. The proximity to Valdez, along with the ban on exports, made the West Coast the preferred destination for the sellers of 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. The discovery of oil on the Alaskan North Slope, along with the export ban, also had an effect on the U.S. oil-shipping industry. U.S. shipyards built 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. The Congress banned exporting Alaskan North Slope oil when it authorized the construction of the Trans-Alaska Pipeline in 1973. The legislation, which was enacted in the midst of the Arab oil embargo, amended the 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 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. 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. 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. 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. We reported that some oil would likely be exported to Asia instead of being shipped to the U.S. East and Gulf Coasts, 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. The 1995 law required us to review Alaska and California energy 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 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 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. 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. While world oil prices have been volatile since the export ban was lifted, 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 been removed. Allowing exports to Asia meant increased demand for 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. 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 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. Lifting the export ban also resulted in lower shipping costs for oil exported 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. 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. 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 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. 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. 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. Higher market prices for Alaskan North Slope oil and lower shipping costs 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 Alaskan North Slope or California crude oil production. Oil industry officials told us that any effects on production would not occur 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. Oil companies began developing several new fields after the export ban was lifted, and production from these fields is projected to add significantly to future Alaskan North Slope production. Figure 2.1 shows the expected impact—starting in 1999—of the development of new fields since the 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 response to the removal of the export ban, while others said it was difficult to point to one factor to explain the change. 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 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. The expected increase in Alaskan North Slope oil production from lifting 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 shown in figure 2.2, crude oil production in both Alaska and California decreased almost every year from 1989 through 1998. During that period, 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 decreased production from aging fields. Low oil prices in 1998 also discouraged California production. Alaska revenue rose because of the higher market prices and lower 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 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. 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. While higher prices for Alaskan North Slope and comparable California oil 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 in general. Proprietary data needed to make the determination were not 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 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. We analyzed the differences between the prices of West Coast petroleum 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 gasoline, diesel, and jet fuel as a result of lifting the export ban. In 1998, 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. Lifting the oil export ban has had a limited effect on the Alaskan North Slope oil tanker fleet, the U.S. shipbuilding industry, and the West Coast tanker repair industry. Overall, most tankers carrying Alaskan North Slope oil continue to take the oil to the U.S. West Coast, and the demand for U.S. 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. shipbuilding and West Coast repair yard officials are concerned that they may lose future business to foreign shipyards in part because of oil exports. Lifting the oil export ban has not greatly altered the number and routes of tankers used to transport Alaskan North Slope oil to date. While the 1995 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) 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 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. 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. To date, lifting the oil export ban has also had a limited effect on the U.S. 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 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. 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. 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 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. The ability to export Alaskan North Slope oil has given tanker operators an added incentive to repair tankers overseas rather than on the West Coast 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 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. 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 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.

Summary: Pursuant to a legislative requirement, GAO reviewed Alaska and California energy production, focusing on 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 on the West Coast. GAO noted that: (1) 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) these price increases have not had an observable effect on Alaskan North Slope and California crude oil production; (3) 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; (4) 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; (5) 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; (6) 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; (7) 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; (8) lifting the export ban increased some refiners' costs but had limited effects on consumers and the oil-shipping industry on the West Coast; (9) 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; (10) 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; (11) 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; and (12) 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.