External Environment Analysis: Oil and Gas Industry in Alaska

External Environment Analysis of the

Oil and Gas Industry in Alaska
University of Alaska Anchorage
Strategic Management (BA 462-601)
Wednesday, September 21, 2016

Submitted by:
Sarah Boeckman
Eric Darbyshire
April Higgins
Cheryl Hoseth
Aleksei Nagibin

External Environment Analysis: Oil and Gas Industry in Alaska 2

Introduction
The balance sheet of Alaskas history is simple: Prudhoe Bay is worth more in real dollars than
everything that has been dug out, cut down, caught, or killed in Alaska since the beginning of
time. Terrence Cole, Alaska Historian
The first oil claims in Alaska were filed in the 1890s, on the west shore of Cook Inlet. In 1898
the first Alaska wells were drilled there, striking small amounts of oil, but also striking seawater.
The oil flows were insufficient to support production. Then around 1900 a group of investors
began Alaska's first productive oil drilling at Katalla, on the Gulf of Alaska, south of the Copper
River delta. While some wells found oil, conditions were rough and the investors decided not to
continue (Oil Discovery and Development in Alaska, 2016).
Around 1910 significant oil was being produced from new discoveries in the Katalla region.
Unfortunately, the quantities were still not large enough to justify the cost of transportation;
however, a refinery was constructed at Katalla, and most of the recovered oil was processed
there. The refined oil was then transported to Cordova. In 1933 a fire destroyed the refinery, and
the wells were abandoned. In the 1980s the Chugach Native Corporation got leasing rights in the
area as part of ANCSA (Oil Discovery and Development in Alaska, 2016).
The discoveries at Katalla indicated that significant oil deposits were present in Alaska. The
production attempts demonstrated that the costs of exploration and production would also be
significant; fields the size of Katalla that would have proven moderate successes in the Lower
48, were proven to be moderate failures in Alaska (Oil Discovery and Development in Alaska,
2016).

The General, Industry, and Competitor Environment (Threats and

Opportunities)
Alaska currently has two major oil producing regions, Cook Inlet and the North Slope. Oil was
first discovered in the Cook Inlet region in 1959, production began in 1961, peaked at about
230,000 barrels per day in 1970, and has been declining since. Oil was first discovered on the
North Slope at Prudhoe Bay in 1968. The Trans Alaska Pipeline System (TAPS) was constructed
between 1974 and 1977 and the oil began flowing in 1978. North Slope production was instantly
much greater than Cook Inlet. North Slope production peaked in 1988 at more than 2 million
barrels per day and has since fallen by almost 75% to just over 500 thousand barrels per day.
According to Gnapp (2016a), North Slope production is projected to continue falling to as low as
300,000 barrels per day by 2025.
The natural gas that is found on the North Slope is fed back into the wells. While the opportunity
exists to harvest this resource, there is currently no means (pipeline) to bring the gas to market
because the costs and risks involved with bringing it to market are too high. Transportation
would require massive capital investments; meanwhile, the global market is currently flooded,
which drives prices down. There are natural gas fields located beneath and near Cook Inlet.
Though none of this gas is sent to outside markets, it is an important energy source for much of
southcentral Alaska.

External Environment Analysis: Oil and Gas Industry in Alaska 3

Figure 1:1

Source: Gnapp, G. (2016). An Introduction to the Alaska Oil and Gas Industry [PowerPoint
slides]. Retrieved from https://blackboard.uaa.alaska.edu/
Alaskas geography creates unique challenges for oil and gas producers.
In 2008 seven oil companies bid and purchased different portions in the lease 193 zone in
Alaskas Chukchi Sea suggesting that they believe there is significant potential for oil and gas to
be found and developed there. The companies included Conocophillips, Shell Gulf of Mexico,
StatoilHydro USA E&P, the North American Case Research Association (NACRA), Repsol E&P
USA, Eni and Iona Energy Company. The only company to have begun exploration was Shell
Oil, which began drilling during the summer of 2012 but ran into a lot of problems, including
having their drill rig run aground when it was being towed south for maintenance. Shell
confirmed in early May 2016, it has abandoned all but one (The single site where drilling
occurred) of its 275 Chukchi Sea leases. Shell paid $2.1 billion for its leases (Joling, 2016).

External Environment Analysis: Oil and Gas Industry in Alaska 4

Alaska has many areas of potential oil and gas production.

Figure 1:2

Source: Gnapp, G. (2016). An Introduction to the Alaska Oil and Gas Industry [PowerPoint
slides]. Retrieved from https://blackboard.uaa.alaska.edu/

External Environment Analysis: Oil and Gas Industry in Alaska 5

Although relatively small amounts of oil have been processed at refineries near Fairbanks, Kenai
and Valdez (most of these refineries are no longer in operation), most North Slope oil is shipped
on tankers to refineries on the U.S. west coast. Alaskas share of the oil sent to these refineries
has been declining since its peak in the late 1980s.
Figure 1:3

Source: Gnapp, G. (2016). An Introduction to the Alaska Oil and Gas Industry [PowerPoint
slides]. Retrieved from https://blackboard.uaa.alaska.edu/
Technological advances have allowed the North Slope oil companies to produce far more oil
from the Prudhoe Bay oil field than originally anticipated. Accordingly, the projected period of
operation will be much longer than was originally expected. The Prudhoe Bay oil field is nearly
40 years old. As equipment, facilities, and pipelines age, substantial costs are incurred to keep
them working. This is one reason why oil industry employment has not decreased at the same
rate as oil production. Some of the pipelines on the North Slope which bring oil from wells to the
central gathering stations where gas and water are removed have developed corrosion problems
which in some cases have resulted in spills. Addressing this corrosion problem is a major
expense.

External Environment Analysis: Oil and Gas Industry in Alaska 6

In 1988 Alaska was providing 25% of all U.S. oil; by 2015 that share had dropped to 5%.
Figure 1:4

Source: Gnapp, G. (2016). An Introduction to the Alaska Oil and Gas Industry [PowerPoint
slides]. Retrieved from https://blackboard.uaa.alaska.edu/

Figure 1:4 shows historical North Slope oil production and Alaska Department of Revenue
projections for future production. Prudhoe Bay production has been declining ever since peaking
in 1988. Even though new oil fields are being developed, the production from these fields is not
enough to offset the decline in production from Prudhoe Bay. Figure 1:5 on the following page
shows North Slope crude oil prices since May 2013 and market events (internal and external)
that influence oil prices; thus profitability, within the industry. The combination of rapidly
declining production and record low prices are a great threat to Alaskas oil industry.

External Environment Analysis: Oil and Gas Industry in Alaska 7

Figure 1:5

Source: Alaska Department of Revenue, Revenue Sources Book, Fall 2015

External Environment Analysis: Oil and Gas Industry in Alaska 8

Figure 1:6

Source: Alaska Department of Revenue, Revenue Sources Book, Fall 2015

Segments of the General Environment

There are several segments that contribute to the general environment of the Alaska oil and gas
industry: demographic, economic, political/legal, sociocultural, technological, global, and the
physical environment. The first of which is the demographic environment which encompasses
the aspects of the general population involved with the industry.
Demographic, Economic, and Political/Legal
The oil and gas industry is widely known for being mostly male oriented. A recent survey by the
U.S. bureau of Labor Statistics found that less than one in five workers are female (Medred,
2015). Furthermore, those women are employed in positions considered to be more suitable for
females, including administrative and cleaning duties. Operator, extraction, and other such
positions are mostly filled by middle aged males.
Although the demographic is mostly male employees, not all of them are Alaskan, 88 percent of
oil and gas employment is filled by Alaskan residents (AOGA, 2016). Even so, oil and gas

External Environment Analysis: Oil and Gas Industry in Alaska 9

makes up one third of Alaskas workforce. This is likely because of the high wages that workers
on the north-slope receive. The Alaska Department of Labor Oil and Gas Industry Occupation
Analysis shows that administrative clerks and laborers are compensated around $3,000 to $4,000
a month. This is high compared to what they would receive in the city. Management positions are
compensated from $8,000 to $10,000 a month which is also higher than rates in the cities
(Alaska Department of Labor, 2016). These compensation rates make slope jobs fairly attractive
which explains the oil and gas industry making up so much of Alaskas workforce. However, this
population is decreasing due to recent economic events.
The second general environment factor is the economic environment. In the last 18 months the
state has seen a decline in oil production and prices that is particularly disconcerting because of
how reliant Alaskas economy is on the oil revenue. As expected, because of this Alaska will be
seeing a one percent decrease of employment in 2016, according to the 2016 Alaska Economic
Forecast produced by the Anchorage Economic Development Corporation. Specifically in the oil
and gas industry they predict a loss of about 600 jobs due to the correlation between price per
barrel and available employment. As depicted by Figure 2:1 below provided by AEDC
(McDowell Group/AEDC, 2016).
Figure 2:1

External Environment Analysis: Oil and Gas Industry in Alaska 10

The economic environment melds with the third general environment factor, political/legal, in
the Alaska oil and gas industrys case. Due to the oil price reduction, Alaska is faced with a $4
billion deficit. Budget cuts have been enacted across a variety of government programs, as well
as a cap placed on the Permanent Fund, lowering the amount to be received by Alaskans to
$1,000 beginning in 2016 (DeMarban & Rosen, 2016). The Permanent Funds earnings over the
principle will probably have to be used to cover the states deficit, however that has been an
unpopular opinion amongst Alaskans and several senators.

Due to the economic environment, Alaskas oil and gas industry is threatened. With the
inevitable decline of natural resource production rates, will come the further decline of
employment in the industry.
Income Distribution and Sociocultural
Employment numbers for the oil and gas industry regularly published by the Alaska Department
of Labor and Workforce Development include companies categorized under oil and gas
extraction (North American Industry Classification System code 211111), drilling oil and gas
wells (NAICS code 213111), and support activities for oil and gas operations (NAICS code
213112). This definition does not include oil and gas pipeline transportation companies,
refineries, and many construction companies involved in Alaskas oil and gas operations. It also
excludes the tens of thousands of jobs created across a range of other industries; jobs that are
often included in studies that quantify the importance of the industry to Alaskas economy. For
example, during the third quarter of 2012, nearly a quarter of the 11,100 jobs in Prudhoe Bay, all

External Environment Analysis: Oil and Gas Industry in Alaska 11

of which were oil-related, were not identified as oil industry employers. Some of these support
jobs include security, catering, accommodations, facilities management, transportation
companies, engineering services, and logistics (Fried, 2013).
Figure 2:2

Source: Alaska Department of Revenue - Tax Division. (2016). Revenue Sources Book, Fall
2015

Technological
Like any other industry, Oil and Gas industry is directly influenced by technology changes, and
the State of Alaska is no exception. New technologies allow to identify potential oil and gas
reserves, leading to improvements in oil and gas supplies. Also, technology changes help to
reduce environmental impacts of oil and gas production as well as to produce more
environmentally-safe products. Finally, technologies made the production of oil and gas less
expensive, significantly reducing capital costs. All of these changes helped the Oil and Gas
industry in Alaska to become and remain state's largest economy component.
However, Alaska faced several problems since 1985, when oil production in the United States
started to decline. In 2009, because of the technology advances and high oil prices, the
production increased and reached its highest rate since 1992. Texas and North Dakota were the
main contributors, but in Alaska, the production kept declining. The oil that is easy to extract
runs out, and Alaska's industry lacks technologies and equipment that can get deeper. North

External Environment Analysis: Oil and Gas Industry in Alaska 12

Dakota and Texas have been using new technologies(i.e. Horizontal Drilling, hydraulic
fracturing) that contributed to high production rates in these states, but none of these
technologies have yet been widely used in Alaska. The table below shows how technology
changes influenced the annual crude oil production in the period from 2003 to 2013, in The
United States.
Figure 2:3

Source: McDowell Group, Inc. The Role of the Oil and Gas Industry in Alaskas Economy.
May 2014

Global
Despite the continuous decline of oil production for many years, Alaska still plays a significant
role in the United States Oil and Gas Industry. The figure below shows the decrease in Alaska's
oil production compared to the overall production in other states. Alaska reached its peak in
1988, producing about 25 percent of the United States oil. In 2007, Alaska's share was
accounted for only 7 percent of oil production in the United States.
Figure 2:4

External Environment Analysis: Oil and Gas Industry in Alaska 13

Source: McDowell Group, Inc. The Role of the Oil and Gas Industry in Alaskas Economy.
May 2014
Alaska has a major role in Domestic Oil industry, but in global perspective Alaska's share is very
small. The United States is third largest crude oil producer in the world, producing
approximately 10 percent of world's oil. On this basis, Alaska is only accountable for about 0.7
percent of global oil production, which means that it does not play significant role in global oil
industry.
Physical Environment Segment.
Oil and Gas Industry has a significant environmental effect, especially in Alaska. One of the
main issues is oil spills. Every year, more that 400 spills take place on the Alaska's Northern
Slope oil fields. Pollution occurred from oil and gas production seriously harms state's unique
nature and wildlife. There are many others environmental problems directly influenced by oil
and gas industry, which include: air pollution, soil pollution, water pollution, severe health
effects. Also, the effects from pollution are more severe and persistent in Arctic, due to cold

temperatures, the slower growth rates for plants, and the longer life spans of animals (AMAP,
1997).
It is very important that all of these issues should be addressed by State Administration. The
commission that regulates the the production of oil and gas is Alaska Oil and Gas Conservation

External Environment Analysis: Oil and Gas Industry in Alaska 14

Commission(AOGCC). This organization's main goals are: to regulate production and drilling, to
prevent waste occurred from production, and promote recovery of the environment.

Industry Environment Analysis

The industry environment analysis is the second external environment and consists of the five
forces model (Porter, 1980) which states the threats of new entrants, bargaining power of
suppliers, bargaining power of buyers, threats of substitutes, and rivalries of competitors has a
direct effect on the competitive actions and responses within a given industry.

Figure 3:1
Source: Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael
E. Porter, 1980.

Threat of New Entrants

Threat of new entrants means the potential new competitors that would directly influence the
industry. The threat of new entrants are small businesses entering the oil and gas industry in
Alaska. The State of Alaska offers tax credits to companies who explore for oil. This is key as it
directly relates to the future of Alaska and it is attracting new and smaller companies to enter the
oil and gas industry. (AOGA, 2016). To enter into the oil and gas industry it requires a huge
capital investment. It costs companies billions of dollars to explore, develop, and produce oil in
Alaska. Companies also have to pay for other expenses such as the cost to drill, labor force, and
research activities.

External Environment Analysis: Oil and Gas Industry in Alaska 15

Bargaining Power of Suppliers

The bargaining power of suppliers in the oil and gas industry are high because the suppliers,
including the big companies, affect the price of oil and they are highly involvement with all
segments of the industry. (Pitatzis, 2016). Most suppliers are involved in all three stages of the
oil and gas value chain. The value chain consists of upstream oil and gas, midstream, and
downstream. Upstream oil and gas is exploration, field development, and production operations.
Midstream involves transportation, processing, and storing of oil. Downstream is the refining,
manufacturing, wholesale and marketing area. By being involved in all stages, suppliers maintain
a high bargaining power.
Bargaining Power of Buyers
Buyers have a strong influence on the profitability of an industry. However, in the oil and gas
industry, the buyer power is relatively low due to the nature of the business. The main buyers of
oil and gas products in Alaska are refineries on the U.S. west coast. (Pitatzis, 2016).
Threat of Substitute Products or Services
The alternatives to oil and gas products include wind power, solar power, geothermal,
hydroelectric, coal, tidal, and biomass. While these alternatives are in research and development,
a large majority of consumers depend on oil and gas than any other resource. According to the
U.S. Energy Information Administration, U.S. consumers used 7.08 billion barrels of petroleum
products, that is, an average of 19.4 million barrels a day. (EIA, 2015)
Rivalry Among Existing Competitors
Existing companies create a competitive environment that directly influences the response and
actions of other existing companies. Currently, Alaska has 34 producers of oil and gas in the
public or private sector. British Petroleum and Conocophillips are the two largest companies in
the North Slope. Both are international companies and have a competitive advantage through
economies of scale. Although Exxon is currently not producing oil in Prudhoe Bay, it is still a
large shareholder.
Now, that we have discussed the general and industry environments of the oil and gas industry
Alaska, we will look at interpreting industry analysis.

Interpreting Industry Analyses

In general, the Alaska oil and gas industry is a relatively attractive industry. This is due to certain
barriers to entry such as product differentiation, high capital requirement, and governmental

External Environment Analysis: Oil and Gas Industry in Alaska 16

policy, high bargaining power of suppliers, high bargaining power of buyers, few competitive
threats from product substitutes, and low competition rivalry.
For instance, since established oil and gas companies already have a product and have a brand
reputation with seller and customer loyalty, the competing company would have to spend more
capital in order to achieve a competitive advantage over existing companies. Another barrier to
entry under a threat of new entrants is that the government can limit the entry of new companies
into the industry through licensing, royalties, imposing taxes and even environmental policies.
These high barriers to entry make the oil and gas industry an attractive one to compete in.
The bargaining power of the suppliers is relatively high due to dependency that buyers have on
the suppliers. In contrast, the bargaining power of buyers is relatively low because many buyers
are competing with each other to gain business with the suppliers in the industry. Oil prices in the
industry are often determined by the oil and gas suppliers in the market.
Although there are substitutes for oil and gas on the market, they are relatively low threats.
Substitutes such as coal, solar power, wind power, and hydroelectricity are costly to produce. So
far, the markets for these potential substitutes has not taken off and therefore pose as minimal
threats to the Alaska oil and gas industry.
The intensity of rivalry among competitors is fairly low in the Alaska oil and gas industry. This is
because the companies in the industry are dominating the market, such as British Petroleum and
Conocophillips.
After analyzing the Alaska oil and gas industry, it is clear to see that is a relatively attractive
industry to be in. This can be attributed to certain high barriers to entry, high bargaining power of
suppliers, low bargaining power of buyers, relatively small competitive threats from product
substitutes, and low competition rivalry among companies in the industry. (Oil Gas Industry,
2015)

Strategic Groups
The strategic groups in the Alaska oil and gas industry are the big name companies who have
similar production strategies. These companies would include BP, Conocophillips, Chevron, and
Shell. Exxon could be also considered although they are not currently producing any oil in the
North Slope. These companies all have similar strategies, and are all bringing similar products to
the market.

Competitor Analysis
When completing a competitor analysis of the oil and gas companies, it is important for the firm
to gain competitive intelligence through data and information which will help them better
comprehend and prepare for the competitors objectives, strategies, assumptions and capabilities.
For example, an oil and gas company in Alaska should be concerned with the objectives of
companies outside Alaska. A comparison of their current and future goals with the firm in
question is imperative, along with a comparison of the current competitive strategy of said firms.
Also, it is important for the firm to consider the assumptions of its competitors. If competitors
see the future as relatively resilient or unstable, the analyzing firm could use this information to

External Environment Analysis: Oil and Gas Industry in Alaska 17

gain the upper hand. Knowing the assumptions competitors hold about the oil and gas industry
has potential to help with a current or future strategy. Likewise, it is also crucial for a firm to
consider the capabilities of the competing firms. Knowing the strengths and weaknesses of other
companies as well as their own can greatly assist in achieving and maintaining profits. It is
important for the oil and gas companies in Alaska to have knowledge of where they rate relative
to competing oil and gas companies outside of Alaska. Having competitor intelligence is
essential when considering a competitor analysis and the potential responses.

Ethical Considerations
As with any industry, ethic considerations are important for oil and gas companies in Alaska. A
firm must follow a code of conduct and safety regulations, sustainability initiatives, and be
environmentally conscious. For example, in 2012 and 2013, the Ethisphere Institute awarded
Alyeska Pipeline Service Company in Alaska for the prestigious Worlds Most Ethical (WME)
Company award for demonstrating these very actions. (Alyeska Pipeline, 2013)

Conclusion
The oil industry in Alaska has always rested on the production of Prudhoe Bay. Today, Prudhoe
Bay is producing about 25% of what it yielded in 1988, and forecasters believe the decline will
continue until it reaches an economic limit; the point where the cost of extracting the oil
exceeds the value of the oil retrieved. Newer yet smaller oil fields have been discovered, but the
added production from these new fields has not offset the decline in Prudhoe Bays production.
This paper discussed the external environment that encompasses Alaskas oil and gas industry. It
provided an analysis of the threats and opportunities that the industry faces as well as delved into
each segment of the general environment, such as demographic and economic factors. In
conclusion, it was finished up with an industry, competitor, and ethical analyses.

External Environment Analysis: Oil and Gas Industry in Alaska 18

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External Environment Analysis: Oil and Gas Industry in Alaska 20

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