Lesson video

Hello, my name is Mr. Marsh, and I'm here today to teach you all about developing conventional oil and gas sources in sensitive, remote areas.

So grab everything that you need for today's lesson and let's get going.

So, by the end of today's lesson, you will be able to explain the economic costs and benefits of developing conventional sources of oil and gas in ecologically sensitive and isolated areas.

There are three key terms for today's lesson and those are reserve, viable, and finally, conventional.

Reserve refers to a known amount of oil or gas that can be taken from underground and used.

Viable, this word means able to generate enough money to cover costs and remain profitable.

Conventional refers to sources of oil and gas that are relatively easy to extract because the oil and gas can flow freely towards an oil well or a gas well.

There are two learning cycles for today's lesson.

We're gonna start with learning cycle one, which is all about how are new oil and gas sources developed.

Now, if you were investing in a new oil rig in the USA, where would you put it? On the screen in front of you, you've got two very different maps.

On the right-hand side then, you've got the map of the USA showing the names of the different US states.

On the left-hand side then, you've got the same map of the USA, but this time, it's broken down by the amount of crude oil that is produced by state.

And this is done in terms of one thousands of barrels a day.

So I'd like you to do that maybe is pause the video here whilst you really study those two maps and consider where you would perhaps think about investing in this new oil rig in the USA.

So, what did you come up with? Well, I'm sure that judging from which states and regions produce the most oil currently, you probably looked at putting it in Texas or the Gulf of Mexico or the Gulf of America, as it's sometimes called in the USA, as well as New Mexico and possibly even North Dakota since these areas are, in fact, the highest oil-producing states or region in the USA.

Now, this oil rig that you can see in front of you is found in the US state called Alaska and it's taken over 50 years to develop at a cost of 4 billion US dollars.

It currently, though, produces far less oil than the oil rigs which are found in Texas or the Gulf of Mexico.

This may be because of the temperatures in February, for example, which reach as low as -40 degrees Celsius on average.

And also, polar bears are a risk during some months of the year.

And finally, the nearest city, which is called Fairbanks, is 500 miles away.

Now I have a question for you, which is why would you then put an oil rig here? You may like to pause the video here whilst you consider your answer to that question or perhaps even have a discussion with someone near you.

So, let's first have a learning check, and the learning check is what US state is this oil rig in.

Now you can see you've got four options on the screen.

Now, what you need to do then is pause the video whilst you consider and then select your answer.

And the correct answer was A, Alaska.

Really well done if you were able to select A as the correct answer.

Now, when a new reserve of oil or gas is discovered, it rarely gets developed straight away because there's a key question we have to ask ourselves, will extracting the oil or gas be worthwhile financially? And there are a few different considerations within that calculation.

So first of all, we need to consider how much it will cost to drill the wells or build the oil rig, hire workers and transport equipment, and finally, the cost of protecting the environment.

And then there's the thought of how much money it will actually bring, which is based on current oil and gas prices, the amount that can be extracted per year in terms of the oil or gas and finally, how many years can it actually be extracted for.

What is the longevity of the oil rig or the oil well? And then, if revenues are higher than cost, the project may be considered viable and therefore could possibly go ahead.

Risks for a new project also need to be assessed.

And when costs are so high, it is critical to understand what could actually possibly go wrong.

Let's have a look at some of those risks for developing new sources of oil and gas.

The first one we need to look at are the technical risks, which are about possible complications in accessing the oil or gas.

For example, are there complicated rock formations which will make drilling and extracting the oil or gas more difficult? If the oil or gas is very deep underground, that adds to the technical challenges of getting it to the surface, which increases the risk of something going wrong and costs increasing significantly, which could stop the project from being viable.

Although oil and gas is usually under some pressure due to the weight of the rocks overlying the reserves, if the pressure is very high, it can complicate the extraction process and require more costly equipment.

There are also legal risks.

For example, if the reserve is located somewhere that has strict environmental protections, perhaps because of rare or vulnerable bird or animal species, then it might take a long time to get all the necessary permissions or the environmental protections needed would be much tougher than normal and therefore will add a lot to the costs.

Local communities may have rights to the land overlying the reserve.

In the Arctic, these may involve Indigenous communities whose land rights have additional government protections.

Again, this can mean it will take a lot longer to get the necessary agreements to proceed with development, and additional expense may be involved, which could threaten the viability of the project.

And then, there are economic risks to be assessed.

How likely is it that oil prices will remain high enough to keep the project viable? Time once again for another learning check, and it says true or false? If you find oil or gas underground, it is always worth extracting it.

So what I need you to do right now then is pause the video here whilst you consider and then select your answer.

And the correct answer was false.

Now, once again, I'd like you to pause the video whilst you consider as to why or how that statement is false.

And the reason it's false is because, well, just because a reserve of oil or gas exists, it doesn't mean that it will be technically or economically viable.

Reserves that are in remote locations or in challenging conditions may have high development costs, especially if oil prices fall.

So, really, really well done if you're able to get those two answers correct.

Now, conventional sources of oil and gas are technically much easier to extract than non-conventional sources.

And the diagram in front of you does a great job in actually illustrating where those conventional oil sources are found.

Let's have a look at it now.

So, the oil and gas are in permeable rock layers and they're under pressure.

An impermeable layer of rock traps that oil and gas and it's called the seal.

Once a well is drilled through the seal, oil and gas can flow nicely into the well and this therefore means that it's easier to access and therefore much more financially viable as a result.

So, let's now have a learning check and it says which two of the following could be economic risks that make a new oil well project less viable.

So, on the screen then, you can see you've got four different statements.

What you need to do then is pause the video here whilst you read through those statements and select what you think are the two correct answers.

And the two correct answers were B, a predicted fall in world oil prices over the next 10 to 15-year period and finally, D, a remote location 500 miles from the nearest city with challenging winter conditions.

Both of those two factors would certainly make it more economically challenging to develop this oil region or this oil well.

So, really, really well done if you were able to select B and D as the correct answers.

We're on now to our one and only practise task for the first learning cycle and it says to make a list of the information you would need to assess how viable a conventional oil and gas rig would be at Point Thomson near Deadhorse in Alaska.

So what I need you to do right now then is pause the video here whilst you also study the map and the climate graph in front of you to really aid your answer and think back through our first learning cycle to try your best to answer this practise task.

Best of luck.

In terms of feedback then, your list is likely to include some of the following.

In terms of cost estimates then, we need to consider how much it will cost to drill the well, build the rigs, hire the workers and transport important equipment, as well as protect the environment.

Then there's the revenue forecast and how much money can be made can be based on the following things.

For example, the current oil or gas price, the amount that can be extracted per year and finally, how many years it can be extracted for.

And finally, then, the risk factors, the technical risks.

For example, the geology, the pressure that the oil or gas is under, the legal risks, for example, the environmental as well as the local land rights as well of local people, for example, those Indigenous peoples.

And finally, the economic risks of perhaps future oil prices falling.

So, really well done if you were able to include anything like that in your own answer.

We're on now to our second and final learning cycle, and this is all about, well, what are the economic costs and benefits? Point Thomson in Alaska, as we said before, is in a really isolated and ecologically important area.

It's found 500 miles away from the nearest city, Fairbanks, and 50 miles from the nearest town, which is called Deadhorse, which has a population of 3,000 people.

Point Thomson is located on the coastline of Beaufort Sea in a region of Alaska called North Slope, and you can see that clearly on the map in front of you.

North Slope is isolated from the rest of Alaska Bay by mountains called the Brooks Range.

And there is one highway, just one highway connecting Prudhoe Bay to Fairbanks in central Alaska.

The North Slope region is ecologically extremely important.

It includes the USA's largest national wildlife refuge, the Arctic National Wildlife Refuge and species here include the following: polar bears, grizzly bears, and black bears, moose and caribou, wolves, arctic foxes, Canada lynx, as well as wolverines, as well as hundreds of species of migratory birds.

At the coast, you can find walrus, seals, and bowhead whales as well.

North Slope is also the traditional homelands of the Gwich'in people.

The caribou is central to the traditions of the Gwich'in.

So, time once again for a learning check, and it says to match up these North Slope features with the correct descriptions.

So, on the left-hand side then, you can see the different features of North Slope and on the right-hand side, then, you can see those different descriptions.

What you need to do right now then is pause the video here whilst you try your best to match those together.

Best of luck.

And the correct answers were: so Deadhorse is the name of the town with a population of 3,000 people, Brooks Range is the range of mountains that isolate North Slope from the rest of Alaska, Arctic National Wildlife Refuge is the USA's largest national wildlife refuge, caribou is an animal at the centre of the traditions of the Gwich'in Indigenous people, and finally, 500 miles is the distance between Prudhoe Bay and the city of Fairbanks in central Alaska.

Really, really well done if you were able to match those five different features with the description.

Now, North Slope is also an ecologically sensitive region.

The ground is permanently frozen, we call this permafrost, with only the top layer of the soil thawing during the summer.

As a result, the soil is very easily damaged.

Also, thawing permafrost releases greenhouse gases which is driving climate change.

Millions of migratory birds rely on the wetlands and lakes of North Slope for breeding areas.

Now, any disturbance to that, as well as those breeding areas, can affect bird population numbers on a global scale.

And finally, two large caribou herds, the Porcupine and the Central Arctic, migrate to North Slope each and every single year where caribou calves are born.

Disruption and noise from human activities can scare away these caribou, disrupt their migration, and threaten their reproduction and thereby affect their numbers.

Time once again for a learning check and it says which two of these North Slope facts relate to its ecological sensitivity.

So once again, then, you've got four different statements and once again, what you need to do then is pause the video here whilst you read through those four statements and select what you think are the two correct answers.

And the two correct answers are B, millions of migratory birds rely on the wetlands and lakes of North slope and C, two large caribou herds migrate to North Slope each year to give birth.

Really well done if you were able to select B and C as the correct answers.

Economic benefits of the Port Thomson project cannot be overstated.

US geologists estimate that North Slope holds 22 billion barrels of oil and 230 trillion cubic feet of gas.

And that is around half of the USA's conventional oil reserves and a third of its gas reserves, so it's truly a important source of non-renewable energy for the USA.

Port Thomson is estimated to have around 200 million barrels of oil and around 8 trillion cubic feet of gas.

The oil from Port Thomson is called natural gas condensate, a sort of light oil.

Now, light oils are generally more valuable than heavy oils.

And Jun asks a really good question, "The economic benefit is having lots more oil and gas to sell?" Well, Jun, absolutely correct.

The more oil and gas that there is available to sell can generate income for that country, which can then really boost its economy and provide jobs and a better quality of life for its people.

Let's really study those economic benefits of the Port Thomson project.

Port Thomson currently produces around 5,000 barrels of oil per day.

The oil goes in a pipeline to Prudhoe Bay, where it joins the Trans-Alaska Pipeline System or TAPS.

You can see that really nicely mapped out on that map in front of you where it stretches from Prudhoe Bay in the north through TAPS and finally meeting the port at Valdez.

The Trans-Alaska Pipeline is 800 miles long and delivers North Slope oil to Valdez.

Valdez is a port on the Gulf of Alaska which stays ice-free all year round.

Now, constructing the Point Thomson project also created many jobs.

For example, 99 companies from Alaska were involved in the building of the facility.

Secondly, 1,100 Alaskans worked at Point Thomson during construction, and around 200 people still work there now.

Alaska will also get 25% of all sales of Point Thomson oil and gas.

As Aisha correctly recalls, 4 billion US dollars were invested into the Point Thomson project.

So clearly, for it to be financially viable, Port Thomson must be generating much more income than the $4 billion that was initially invested.

So, time now for a learning check and it says it is unlikely that Point Thomson would be a viable project without TAPS, T-A-P-S.

So, what you need to do then right now is pause the video here whilst you consider and then select your answer.

And the correct answer was true.

Now, once again, I'd like you to pause the video whilst you consider how or why then this statement is true.

And the reason it's true is that the Trans-Alaska Pipeline System or TAPS transports oil from Prudhoe Bay to the ice-free port of Valdez in south Alaska.

The Beaufort Sea is frozen for most of the years, so without TAPS, Point Thomson would not have a cost-effective way of transporting its oil to where it could sell it.

So, really well done if you're able to get those two answers correct.

In order to exploit those economic benefits, Point Thomson, though, faces many, many different challenges, including its remote and isolated location.

Connecting Point Thomson to TAPS required a 22-mile-long insulated pipeline.

Equipment has to be flown in and out of the base, which, of course, is very expensive.

And secondly, the polar climate workers have special training to stay safe in temperatures of -40 degrees and below.

Machinery needs special lubricants and heating systems in order for them to work in those cold conditions.

Pipelines have to be insulated to prevent permafrost from melting and fences are also needed to keep away polar bears.

Further challenges include the high-pressure oil and gas because specialised machinery is actually needed to deal with that high pressure and the cost of that as well as cost of upgrading the drilling equipment was estimated at 35 million US dollars.

It also increases safety risks, meaning higher insurance costs as well.

Secondly, there is no pipeline yet for gas.

The gas and oil condensate actually come out together, but because there is no way yet to transporting the gas to market, the gas has to be pumped back underground, adding to the costs.

There are also the environmental challenges as well.

For example, in order to allow caribou migration, the pipeline to Prudhoe Bay has to be raised seven feet above the ground and this required 2,200 supports to be constructed to actually support that pipeline.

Furthermore, oil wells were drilled using long-reach directional drills, which are more expensive, but having the wells offshore reduces the impacts on the Alaskan coastline.

Next, we also have social challenges.

And these social challenges come from the Indigenous rights, the rights of the Indigenous peoples that live there.

The oil and gas company investing in Point Thomson involves local Indigenous communities in their planning and has donated a huge amount of money into a fund to improve community facilities.

Next, there was the legal challenges because gas was actually first discovered at Point Thomson in 1975 and the company submitted 20 development plans before the first two wells were actually drilled in 2009.

So clearly, there was a 34-year gap of legal challenges between the moment when the gas was actually discovered to when the first two wells were actually drilled and this was following numerous court challenges.

Time now for a learning check and it says to match the problem to the Point Thomson solution.

So what you need to do right now then is pause the video here whilst you look at the problem on the left-hand side and the solution on the right-hand side and do your best to match those together.

So pause the video here, and best of luck.

And now the answer.

So polar bears matches with the need to build fences, caribou migration, well, they needed to raise the pipeline seven feet into the air to allow migration to actually happen, no gas transportation, well, it is then pumped, the gas is then pumped back into the ground, high-pressure oil needs specialised and expensive machinery, and finally, no roads matches with the transport equipment in and out by air.

So, really, really well done if you're able to match those five together.

Currently, T-A-P-S only transports crude oil, but North Slope has huge stores of gas.

There are plans to develop an 800-mile gas pipeline from North Slope to south Alaska.

The gas could then be cooled into liquified natural gas or LNG and transported by ship to Asian countries within seven days.

Currently, it takes a month to transport gas from Texas and the Gulf of Mexico through the Panama Canal to Asian markets.

The cost, though, of this proposed Alaska LNG project is up at 44 billion US dollars.

So, a quick learning check, it says true or false? It is unlikely that Point Thomson will be a viable project without the proposed 44 billion US dollar Alaska LNG project.

So what I need you to do right now then is pause the video here whilst you consider and then select your answer.

And the correct answer is true.

Now, once again, I'd like you to pause the video whilst you consider as to why this statement then is true.

And the reason it's true is that there are many economic costs to developing Point Thomson and currently, it's not possible to sell the gas from the reserve.

If gas from North Slope could be transported quickly to markets in Asia through a new Alaska LNG project, then maybe it could be economically viable.

Really well done if you're able to identify those two correct answers.

We're on now to our two final practise tasks for our final learning cycle, and the first one says to describe three economic costs involved in developing conventional oil or gas sources in isolated and ecologically sensitive areas.

The second one says to explain the economic benefits to the USA of developing conventional oil and gas reserves in an isolated or ecologically sensitive area of Alaska.

So what you need to do right now then is pause a video here whilst you attempt these two practise tasks.

Best of luck.

And now some feedback.

So, your answer may have included the following.

"Because isolated areas are a long way from where the oil and gas can be sold, a pipeline often needs to be constructed to actually transport it out of the area.

Pipelines, though, are very expensive to construct and maintain." It continues.

"Pipelines can be a problem in ecologically sensitive areas because they get in the way of migrating animals like caribou.

One solution is to raise the pipeline up into the air so that the animals can pass underneath it.

This means that animals can migrate, but it adds a lot to pipeline costs." The answer continues.

"If isolated areas do not have good transport links, then the equipment to develop conventional oil and gas sources, as well as the workers to build and run the development, may have to be flown in by plane, which is very costly.

In order to avoid causing damage to ecologically sensitive areas, special equipment may be required.

For example, to avoid melting permafrost, pipelines need to be installed, which adds to their cost.

To avoid disrupting coastlines, long-reach directional drills may be required.

They are more expensive, but having the wells offshore reduces the impacts on the coastline." And now for the second question.

Now, you may have answered something like this.

"Alaska's North Slope has half of the USA's conventional oil reserves and a third of its gas reserves.

The problem is that the North Slope is isolated from the rest of Alaska and Alaska is a remote part itself of the USA.

It's also an ecologically sensitive region with permafrost that makes its soils easy to damage and with wetlands and coasts that are vital for migratory birds.

The USA has invested in T-A-P-S or TAPS, an 800-mile pipeline that transports oil from North Slope to southern Alaska, from where it can then be transported by ship to markets in the rest of the USA and around the world." The answer continues.

"If this oil can be sold for more than it costs to extract from North Slope, then the USA will get economic benefits.

Oil prices probably need to be quite high for North Slope Oil to make a profit, though.

Other economic benefits to the USA are that people in the isolated area can get jobs and that states like USA can earn a percentage of the oil and gas sales.

That can be really important for areas that don't have many other industries or services for people to work in." The answer continues.

"Looking to the future, if countries around the world keep using oil and gas, then there might be a time when other conventional sources of oil and gas have run out.

Then the USA will be glad that it spent the money on developing its conventional oil and gas reserves in Alaska, even though it will cost a lot of money to do it." So, really well done if you're able to include anything like that in your own answer.

We're on now to our learning summary, and what do we need to know from today's lesson? Well, we need to know that a viable source of oil and gas will be one in which the economic benefits outweigh the economic costs of development.

Remote, isolated areas mean added costs for development.

For example, the oil or gas needs to be transported from the area to markets where it can then be sold.

Ecologically sensitive areas can add economic costs if the development takes care to minimise environmental harm.

And finally, consequently, the economic benefits of development need to be very significant for the development to be viable.

So, really well done during today's lesson.

It was a pleasure teaching you and I will see you again on the next lesson.

Goodbye.