The dubious economic calculus behind the Willow Project

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President Joe Biden’s decision to approve the massive Willow oil project earlier this week infuriated climate advocates and environmentalists while drawing praise from Alaska politicians and oil industry figures. As the Biden administration weighed the benefits and drawbacks of the project over the past year, the latter camp argued that the project would help replace Russian oil supplies as well as deliver an economic boon for Alaskans.

The Willow Project’s champions have stressed the need for the U.S. to achieve energy independence in light of Russia’s invasion of Ukraine. Senator Lisa Murkowski, an Alaska Republican, said last month that Willow could help “reduce our energy imports from some of the worst regimes in the world.” Mary Peltola, a Democratic representative and Alaska Native who was elected to Congress last year, said just last week that the project could “make us all safer in a world that has grown more unpredictable after Russia invaded Ukraine.”

There’s no doubt that the Willow Project, led by ConocoPhillips, represents the largest new Alaskan oil project in decades. At full capacity, it could increase total oil production in the state by more than a third. But experts told Grist that the energy and economic benefits of the project are smaller and less certain than its boosters have suggested. Not only will the Willow Project provide an insufficient substitute for Russian oil, but it will also deliver an ambiguous mix of costs and benefits to Alaska state coffers, which have long relied on fossil fuel revenue that is increasingly hard to come by — even with new drilling in the Arctic.

It’s not clear how much the Willow Project would help replace Russian oil supplies. First there’s the matter of timing: The project will not deliver its first barrels until 2028 or 2029, and it will take even longer for all three well pads that the Biden administration approved to start producing at full capacity. It’s possible the global oil supply picture will look very different by then: Western countries may have access to new sources of oil, like recent offshore projects in places like Guyana, and where crude prices will be is anyone’s guess.

Second, the particular kind of oil that Willow will produce isn’t a perfect substitute for the oil that the U.S. once bought from Russia. The chemistry of petroleum beneath Alaska’s North Slope is different from both light shale oil and the heavier oil that tends to come from places like Russia and Venezuela, so it will need to be blended with other oil in order to enter domestic refineries, which are mostly designed to refine specific types of crude. That’s why the United States kept importing oil even after the fracking boom began, and it’s why much of Willow’s oil wouldn’t replace imports from other countries.

“Alaska remains an important energy state, but it will not make or break the nation’s energy independence in the coming decades,” Phil Wight, an assistant professor of history and northern studies at the University Alaska Fairbanks, told Grist. 

Indeed, the federal Bureau of Land Management’s own analysis found that Willow’s effect on the global energy market and American energy independence will be muted. According to the Bureau’s final environmental impact statement, only around half of the oil produced from the project will replace foreign imports from tankers and pipelines, with around 30 percent replacing other oil extracted in the United States. 

Furthermore, the project’s position on the North Slope of Alaska will constrain potential demand for the new crude from refineries on the U.S. Gulf Coast, since it would need to travel through the Panama Canal to get there. The top domestic markets for the oil will be California, Oregon, and Washington, three states that are all making aggressive attempts to promote electric vehicles and transition away from fossil fuels. Given that some estimates suggest electric vehicles could make up the majority of U.S. passenger car sales by 2030, it’s difficult to gauge how much West Coast demand there will be for Willow’s oil over the coming decades.

Even if ConocoPhillips does find buyers on the West Coast and overseas, Willow’s overall impact on oil prices will likely be small. According to the Bureau’s model, Willow will lower global oil prices by about 20 cents a barrel for as long as it operated at peak capacity. As of late Wednesday, the Brent oil benchmark was trading at around $75 a barrel.

“It’s hard to say that this will make a dent in either prices or supply,” said Chanda Meek, a professor of political science at the University of Alaska Fairbanks.

The project’s economic impact within Alaska isn’t clearcut, either, despite what the state’s politicians say.

Alaska is the third-most oil-reliant state in the nation, behind Wyoming and North Dakota. According to the state’s own estimate, nearly 85 percent of the state budget comes from oil revenues. Taxes on oil have funded the construction of new buildings and hospitals, and oil prices affect how much funding public schools get. Alaskans, who don’t pay an income or sales tax, also get a check every year from a pot of money called the Permanent Fund Dividend, which is funded by oil royalties. (Each check topped more than $3,000 each last year, the highest amount residents have ever received.)

But this picture is changing. In 1988, Alaska’s trans-Alaska pipeline, or TAPS, was pumping a tremendous amount of petroleum from Prudhoe Bay on the North Slope to Valdez on the state’s southern coast — approximately 2 million barrels a day. Now, however, depleted reserves within Alaska and the competing fracking boom in the Southwest’s Permian Basin have made the state’s oil less relevant — Alaska is currently pumping less than a quarter of the oil it was moving in the 1980s. Alaskan oil production hit a 40-year low in 2020. 

That’s why the Alaska congressional delegation lobbied the Biden administration long and hard to approve the Willow Project. 

“Willow is finally reapproved, and we can almost literally feel Alaska’s future brightening because of it,” Murkowski said after the Biden administration announced its decision. “We are now on the cusp of creating thousands of new jobs, generating billions of dollars in new revenues, improving quality of life on the North Slope and across our state, and adding vital energy to TAPS to fuel the nation and the world.”

Experts in Alaskan economic policy say those assertions don’t hold up under scrutiny, and the Willow Project is unlikely to bring back the kind of economic security oil provided the state a few decades ago.

Some estimates say Alaska could see $6 billion in revenue from the Willow Project, but that payout is years away. In the short term, the state may actually see a decrease in revenue. Because the project is on federal land, the state can only collect production taxes on the project and can’t collect royalties on the oil produced there. More importantly, ConocoPhillips can use a carveout in the state’s tax law to write off its expenses for this project against the taxes the company pays on its other oil developments in the state. One analysis, conducted by the governor’s office in 2018, forecast that the state wouldn’t see a positive economic impact from the Willow Project until 2026 and that the development would result in up to $1.6 billion in negative revenue through 2025 — a 6 percent decrease to the state’s overall revenue. An analysis from this year, conducted by Alaska’s Department of Revenue, says the project wouldn’t become “cash flow positive” for the state until 2035.   

While the state would see negative revenue from the project’s first years of operation, municipalities will admittedly see more immediate positive benefits. Production taxes from the project are earmarked as grant programs for local communities, especially in the North Slope borough. The Department of Revenue’s recent analysis shows the North Slope will get $1.3 billion through 2053, and the cash will start flowing in the coming months. Communities impacted by the project will get an additional $3.7 billion over the next three decades.

Of course, the communities closest to drilling face a complex and sobering set of tradeoffs. The Alaska Native Village of Nuiqsut is going to be virtually surrounded by oil fields as a result of the approval of Willow, which threatens the subsistence hunting and fishing that has long sustained the town’s households. Nuiqsut’s mayor has been vocally opposed to the Willow Project, and local tribal leaders passed a resolution opposing it in 2019.

Zooming out, Wight said, the project signals to Alaskans, oil companies, and the rest of the world that the United States believes there will still be a market for Conoco’s oil three decades from now. At that time, however, the world’s governments should be completing a transition to clean energy. Indeed, President Biden recently signed a law that puts the nation on track to slash emissions 50 percent by 2030. How can that be the same world that needs 600 million new barrels of oil from Willow?

“We have the policy to build a renewable energy future,” Wight told Grist. “It’s much less clear how a managed decline of fossil fuels is going to happen.”

This story was originally published by Grist with the headline The dubious economic calculus behind the Willow Project on Mar 16, 2023.