War in Ukraine propels the price of Alaska oil past other benchmarks

  • The Alaskan Explorer, a tanker owned by BP that can carry 1 million barrels of oil, is seen docked at the Valdez terminal of the Trans-Alaska Pipeline System. The U.S. response to Russia's invasion of Ukraine has tightened oil supplies on the West Coast and pushed the price of Alaska North Slope oil above the global Brent benchmark price. (Alaska Journal of Commerce/File/Photo)

While the cost of one is most certainly not worth the other, Russia’s invasion of Ukraine is proving to be an indirect windfall for Alaska’s treasury.

Alaska North Slope crude oil traded for $115.14 per barrel on April 14, according to state Department of Revenue officials. That same day, oil indexed to the Brent benchmark sold for an average of $111.70.

A premium of $3.43 per barrel for Alaska oil on a given day may not seem like much initially, but it has been larger in recent weeks and represents a reversal of a longstanding trend. Over time, it adds up.

The Brent benchmark originates from London with oil largely sourced from North Sea fields. It typically trades at a premium of a few dollars to Alaska North Slope, or ANS, crude. However, the normal Brent premium to ANS crude most recently started fading in late March, several weeks after President Joe Biden issued a March 8 executive order banning imports of Russian oil, gas and coal in an effort to retaliate economically against Russian President Vladimir Putin for his decision to invade Ukraine in late February. The current ANS premium over Brent peaked so far peaked at $4.99 per barrel on April 11.

Lower 48 oil sold on the West Texas Intermediate market, which typically carries the lowest value of the three, in recent weeks has gone from $2-$3 less than ANS to up to $9-per-barrel cheaper than Alaska oil.

Though in totality it is a swing of less than $10 per barrel from the traditional state of global oil markets in more stable geopolitical and economic times, the likely temporary paradigm shift could have a material impact on Alaska’s finances. A change of $1 per barrel in the average price of ANS crude over the year equates to a change of about $80 million to $85 million in unrestricted state revenue, according to Tax Division officials.

Revenue officials last month forecast an average ANS price of $91.68 per barrel this fiscal year.

The ANS-Brent price difference is the largely the result of there simply being less oil — specifically less of the light, sweet crude produced from the North Slope and Russia — available to refineries in Washington and California where most of Alaska’s oil is sent, according to Alaska Department of Revenue researchers and others. Members of the Revenue Department’s economic research group wrote in response to questions about the price difference that West Coast refineries have been working to meet the increased demand for fuel that materializes most summers while also dealing with the lack of Russian crude that has created a tighter supply in the West Coast oil market. A similar situation is playing out in the Asian market, the economists wrote, as well.

Longtime Alaska petroleum economist Roger Marks concurred, writing via email that the lack of Russian oil on the West Coast is driving up the demand for Alaska oil.

Last year, West Coast refineries purchased up to 3.5 million barrels of light, sweet oil per month from Russia during the peak of summer. Those refineries purchased more than 5.8 million barrels of Russian oil in total last June, according to data from the federal Energy Information Administration.

“Additionally, Saudi Arabia has increased their posted price premiums relative to Brent and other benchmark crudes. This makes ANS relatively more attractive in instances where ANS is competing with Saudi crude,” they wrote.

The last time ANS crude sold for more than Brent over a prolonged period was the spring and summer of 2019, when the Trump administration reimposed economic sanctions on Iran, limiting the Middle Eastern country’s ability to export oil. That coincided with about 36 million barrels of Russian oil being contaminated by organic chloride, which ultimately squeezed oil supplies for the West Coast.

The state researchers emphasized that oil markets are in a period of high volatility and they would expect any large price differentials between ANS and Brent-priced oil to eventually be resolved by more fundamental supply and demand forces, though it’s unclear when that might happen.

For its part, Congress might have slowed a resolution in oil markets at least a little by reinforcing the president’s ban on Russian energy. The House overwhelmingly passed the Ending Importation of Russian Oil Act April 7, shortly after it was unanimously approved by the Senate. The law, which prohibits all forms of Russian energy in the U.S., allows the president to end the import ban, unless it is rejected by Congress, if the administration certifies that Russia has withdrawn its forces from Ukraine and ended the corresponding military hostilities; Russia poses no threat of aggression to a member of NATO; and Moscow recognizes Ukraine as a free and independent state.

Elwood Brehmer can be reached at [email protected].

04/20/2022 - 12:57pm