Oil and Gas Infrastructure

Oil and Gas Infrastructure

How to Profit From the Pipeline

By Byron King, Editor – Outstanding Investments and Whiskey and Gunpowder

I have returned home from my trip to Alaska, and now there is more hard work to do. I have to sift through the mountains of information that I gathered, in an effort to present you with information that you can use in planning your investment strategies. There is much to discuss about investment opportunities in Alaska. And in this weekly update, I am going to provide some background and perspective on one of the most famous of all modern man-made features in Alaska, or anywhere else for that matter, the Alaska Pipeline, which is part of the Trans Alaska Pipeline System (TAPS).

The Alaska Pipeline- An Old Story, A New Story

The immense, 15 billion-barrel oilfield at Prudhoe Bay was discovered in December 1967. Thus, this year of 2007 marks the 40th anniversary of the event. And it just so happens that the Alaska Pipeline went into operation about 10 years later, on June 20, 1977, making this date the 30th anniversary of operation. So on the one hand, the Alaska Pipeline might be what some folks refer to as “an old story.”

But as I hope to convey in this article, every day of safe pipeline operation is, in its own way, a “new story.” If you doubt that, just recall what happened last August when BP had to close the pipeline due to corrosion issues in parts of the Prudhoe Bay gathering system. Across the world, oil prices immediately spiked by up to $3 per barrel when the pipeline closed down. So the Alaska Pipeline does not just move oil — it moves markets, and in a big way. And any other pipeline that gets built in the far north will be an equivalent, if not greater, undertaking. So let’s start by using the Alaska Pipeline for comparisons.

Pipeline Implications

That decade between 1967-1977, between the Prudhoe Bay discovery well and the first operation of the Alaska Pipeline and TAPS, was a time and era that still resonates. The pipeline planners and builders of the 1970s made many decisions that dictate where things are today, and where things can go from here. The very existence of the pipeline has had a significant impact on energy price and availability over the past three decades. And the location and configuration of the pipeline means that some energy options are open to us in the future, while other energy options are rather foreclosed. There are many implications in all of this, and I will describe some of them in this article.

Pipeline 101Here are some basic facts, some “Pipeline 101” if you will. The Alaska  Pipeline is a 48-inch internal-diameter string of steel pipe, about 800 miles long. Simply to fill the pipeline with oil, so that the pumps can work, requires slightly in excess of 9 million barrels of oil, or what is called “line fill.” That line fill is about 42% of total U.S. oil consumption for a single day.

TAPS is one of the largest pipeline systems in the world. TAPS stretches from Prudhoe Bay on Alaska’s North Slope through rugged and stunningly beautiful terrain to Valdez, on the Pacific coast in the south of Alaska, the northernmost ice-free port in North America. In making this journey, much of it through almost unspoiled wilderness, the Alaska Pipeline crosses three major mountain ranges, namely the Brooks Range, the Alaska Range (home to the 21,000-foot-high Mount McKinley) and the volcanic Chugach Range. The pipeline crosses nearly 1,000 major rivers and streams, including the mile-wide mighty Yukon River in central Alaska. And the pipeline crosses earthquake zones, including the massive Denali Fault, which is, in its own way, comparable in size, depth, power and scope to the San Andreas Fault system of California fame.

TAPS and the pipeline are operated by the Alyeska Pipeline Service Co.Since commencing operation in 1977, TAPS has successfully transported over 15 billion barrels of oil to Valdez, including about 12 billion barrels extracted from Prudhoe Bay and 3 billion barrels extracted from other fields in the North Slope region. At its peak of operations in 1987 and 1988, the pipeline was carrying about 2.2 million barrels of oil per day. But currently, due to depletion of the North Slope oil fields, the Alaska Pipeline carries about 775,000 barrels of oil per day from Prudhoe Bay, south to Valdez.There at Valdez, the oil is loaded aboard tankers and transported to refineries in the U.S.

Pipeline and Haul Road

To build the pipeline required first building a “Haul Road” along which people, materiel and equipment could be transported to construction sites. This 20-foot-wide gravel road had to be able to bear the weight of the heaviest equipment and loads. The road also had to be constructed over rock and marsh, across river and mountain, atop muskeg and permafrost, in an engineering challenge that had never before been encountered. (The only thing comparable to the Haul Road was the “Alcan Highway” of World War II.)

In the course of my recent trip, I rode up the Haul Road from Fairbanks, in central Alaska, to Deadhorse, on the Arctic Ocean, a distance of about 420 miles. It is tough ground, and not for the faint of heart or those whose vehicles have bad tires or inadequate suspension systems. You share the road with very big-rig trucks, hauling loads of well over 100,000 pounds, and the truckers always have the right of way. This is an industrial road built through a federally designated “utility corridor,” not some designated scenic highway, no matter how incredibly beautiful the views might be — and trust me, they are spectacular.

Despite the bump and grind of the gravel bed, however, I have to note that I was utterly astounded at how clean the Haul Road is. I went 420 miles and scarcely saw even one piece of litter. In fact, litter was so notably absent on the Haul Road that, after a while, I was looking for it and not seeing it. We did, however, see plenty of wildlife. But I digress.

Everything about the TAPS construction effort turned into a big number. The initial late-1960s estimate of $800 million became, ultimately and 10 years later, $8 billion for the pipeline and another $3 billion for related infrastructure, and those are 1970s-era dollars, before interest and amortization. Just to commence construction, the Haul Road and pipeline required obtaining 515 federal and 832 state permits. That was also in the 1970s, and things are more difficult now, not less. Before beginning construction, about 330 archaeological sites were investigated or excavated.Along the route of the line of works, 14 airstrips were constructed to facilitate ferrying personnel and materiel. There were 29 working “construction camps,” in which personnel were housed during a grueling industrial effort that proceeded year-round, including working during the cold and dark of the pre-global warming Arctic winter. At the peak of construction, the pipeline camps were home to over 60,000 workers and support personnel, sort of a “skinny city” located along a north-south axis across Alaska.

Pipe and Welding

The pipe itself is a unique product. It is made of 48-inch internal-diameter, high-tensile steel, rated to 25,000 psi (stronger than the steel in the hull of a World War II-era fleet submarine), and about half an inch thick. When the pipeline construction consortium put the job out for bid in 1969, no U.S.-based steel firm could meet the specifications, so the award went to Japanese mills. The total cost for the pipe was about $100 million in 1970 dollars (still tied to gold at an exchange rate of $35 per ounce, by the way), which turned out to be among the lowest-cost elements of the entire pipeline system. Let me note that I recall this time, as I was growing up in Pittsburgh, when U.S. Steel turned down the pipeline job. U.S. Steel was more interested in building a new 63-story office building in downtown Pittsburgh than in upgrading its 48-inch plate-mill in Homestead, or putting new investment into its National Tube subsidiary in McKeesport, Pa.

The pipe was delivered to Alaska in 40-foot sections, which means that the entire, 800-plus-mile pipeline required about 110,000 pieces of 40-foot long, 48-inch diameter pipe. Each 40-foot section had to be welded together with adjacent sections.Some welding was accomplished “in the shop,” not out in the field, which allowed the fabrication of 80-foot sections under roof, which could then be moved into position in the field. But more than half of the welding was accomplished under “field conditions,” sometimes in winter temperatures as low as minus 70 degrees. Most of the welding was electric arc welding, which required immense levels of electric power to be generated in the field. Each complete joining weld required seven separate circumferential passes around the two opposing edges of the pipe sections. There was an initial weld, and then a “hot weld.” Then there were four “filler welds,” topped off with a “finish weld.” This translates into about 88 feet of weld being laid down for each joint of pipe, or about 9.7 million feet of welding just for the pipe (about 1,835 miles of weld over the entire length of the pipeline). Each pipe weld had to be inspected numerous times, then X-rayed and then pressure tested.

Insulation and Protection

For much of its length, and where it is above ground, the pipeline is insulated all around with about 4 inches of fiberglass insulation. This is in turn wrapped with an aluminum skin, the grayish face of which is what one sees when looking at the pipeline today. There is almost no heat loss from the pipeline, as oil moves through it at temperatures near 140 degrees Fahrenheit, and it is normal for winter snow to accumulate on top of the pipeline and not melt until spring. This assemblage of steel and insulation is quite robust, and has survived numerous attempts of sabotage and vandalism over the years, to include dynamite and large-caliber bullets fired by people with whom you would probably not want to be caught associating. The Alyeska Pipeline Service Co. has a high level of security in place, including helicopter inspections and numerous other surveillance methods that, for reasons I am sure you understand, I am not at liberty to share.

In areas of permafrost and seismic activity, the pipeline is elevated and rests atop steel supports that are anchored in the ground. Many of the anchoring piles are refrigerated to significant depth, so as to keep the permafrost cold. Each section of pipeline sits on a steel skid, with a Teflon pad at the bottom. In case of thermal expansion or contraction, or if there is permafrost heave due to changing temperatures, or in the event of seismic activity, the bottom of the Teflon pad slides along the top of the steel support and protects the integrity of the pipeline.

For example, during a recent earthquake with magnitude of 7.2 on the Richter scale along the Denali Fault, the Teflon padding worked as designed. The pipeline moved in excess of 40 feet laterally on its skids (well, to be precise, the Earth moved more than 40 feet laterally and the pipeline sort of stayed where it was, per Newton’s law of inertia), but there was no damage whatsoever to the pipeline or its structural integrity.

There are also many areas where the pipeline is buried. These include many river and stream crossings, where the pipeline is far safer underground than above, and not subject or exposed to potential flooding. In such cases, each buried 40-foot section of pipeline is coated and weighted down with about 75,000 pounds of concrete ballast. This is to keep it from, in essence, “floating” to the surface. The pipeline is also buried in places like Atigun Pass, the tight and dangerous spot in the Brooks Range at 4,800-foot-elevation, where the pipeline crosses southward from the North Slope. Burial protects the pipeline from landslide or avalanche damage.Mile after mile, the pipeline follows its track. During our movement across Alaska, we drove north for hours on end, with nothing man-made but the Haul Road before us and the pipeline at our side. It can be hypnotic in a way, and the experience certainly casts its own spell. From the air, however, it is almost impossible to see the pipeline unless you know exactly where to look and what you are seeing.You would look for the small, almost insignificant trace of the Haul Road and then look for the tiny gray thread of the adjacent pipeline. With the exception of the infrequent pump stations and relief valves, there is essentially nothing else man-made along the entire pathway of the pipeline through northern Alaska. And that is in June, with much daylight at your disposal.

The Purpose of the Pipeline

So as you can certainly discern, building the Alaska Pipeline was a monumental technological feat, and its daily operation is a remarkable effort. TAPS and the Alaska Pipeline offer an almost incredible example of a “system of systems” working almost continuously, and working very well. (The operational reliability of the pipeline routinely exceeds 99.4%.)

But let’s get back to the purpose of the pipeline. Shortly after the great discovery at Prudhoe Bay in 1967, it dawned on many people that it would be necessary to figure out a way to move large volumes of oil to the south. One early proposal was to extend the line of the single-track Alaska Railroad from Fairbanks to Prudhoe Bay and haul the oil out by rail tanker car. But it rapidly became clear that there was no way to build and operate a railroad of any scale that far in the frozen north. And there is no way that any railroad could ever cross the all-but-impenetrable Brooks Range.

Another early proposal involved running icebreaking tankers from Prudhoe Bay to the south, but the next question was what if the ice broke the tanker, and not the other way around. Even then, it was obvious that any oil spill in the icy Arctic Ocean would be all but irremediable. There was one utterly cockeyed proposal that involved building nuclear-powered submarine oil tankers to haul the oil under the ice. It was good for a laugh or two, and rapidly dismissed.

The solution to the problem of how to move the North Slope oil was to build a pipeline.Hence, the origin of the Alaska Pipeline and TAPS. But note that this solution was an oil pipeline, not a natural gas pipeline. Everything about the Alaska Pipeline is built to move oil. The natural gas of the North Slope remains in the ground — or when it is produced in association with oil, it is reinjected back into the reservoir to maintain pressures.

The Next Great Issues

The next great issues for northern Alaska, and, by extension, for Canada and the energy security of both Canada and the U.S., involve the fate of that northern natural gas.The natural gas is up there, to be sure, and associated with oil production, and deep gas reserves its own right.

One gas field, for example, called Thompson’s Point and located east of Prudhoe Bay, was discovered by Exxon more than 25 years ago. But it contains what is called “wet gas,” meaning that the gas holds high concentrations of natural gas liquids. So in order to extract anything from this field, Exxon would be required to lift out the natural gas, separate the liquids and then reinject the dry gas, for lack of alternative to moving it to market. So far, absent a more extensive infrastructure for gathering gas and liquids, and for moving hydrocarbon products back and forth across the tundra, it has been uneconomical for Exxon to make the necessary investments.

And there are more vast oil and gas plays beneath the North Slope. West of Prudhoe Bay lies the “National Petroleum Reserve — Alaska” (NPRA). NPRA may hold many trillions of cubic feet of natural gas, as well as multibillions of barrels of oil reserves.And to the west of NPRA lies the Chukchi Sea, again with similar multibillion barrel, and multitrillion cubic feet of hydrocarbon resource potential. But we are dealing with the Arctic, not with the U.S. midcontinent.

Where is the infrastructure to move any product to market from most of the North Slope and adjacent waters? There is none, which makes for quite a problem. Aside from the Alaska Pipeline and its gathering systems at Deadhorse and Prudhoe Bay, there is no means to move product from where it is located in northern Alaska to any outlet and any market whatsoever. And I hope that my discussion of the Alaska Pipeline itself, and its complex and expensive period of construction, gives you an understanding that the pipeline was all but unique, and a massive, once-per-generation kind of effort.

But this is the 40th anniversary of the discovery of Prudhoe Bay. And we are celebrating the 30th birthday of the Alaska Pipeline. This is a new generation.Prudhoe Bay and environs are depleting. We are close to, if not at, the Peak Oil point for world hydrocarbon production. So will the U.S. government, and the government of Alaska, let alone the players in the hydrocarbon industry, permit these North Slope resources to go untapped for another generation?

How do the distant, scarcely accessible resources of Alaska fit into the North American energy scheme? Will U.S. (and, of course, Canadian) consumers simply turn down the thermostats and enjoy the cold when they experience natural gas shortages in winters to come? I doubt it, and that is why we are coming to the time when new “northern pipelines” are being discussed. In the abstract, it all sounds so eminently doable, to place slender veins into the hydrocarbon-bearing areas of Alaska and to carry away the natural gas riches of the Arctic. But on closer examination, one might also say that it is the turn of a new generation to accept the hard fact that it is about to embark on a project that is not just difficult, but near-on impossible.

So I leave you to ponder the pipeline and its progeny. Can we, as a nation and as a culture, afford to do what all of this is going to require in the future? Can we, as a nation and as a culture, afford not to do what it will require?

Until we meet again…

Byron W. King

Additional Oil and Natural Pipeline Resources:

Pipeline Facts

How to Screen For Oil Stocks

Investing in Oil: Barrels of Oil, Miles of Mud

The Alaskan Pipeline- The State of Alaska

The Daily Reckoning