Decreased production hikes price of some Alaska oil; Alaskan North Slope crude faces long-term pressure.

Decreased levels of production of Alaskan North Slope crude is forcing prices of the oil up both in the California market as well as on the Gulf Coast of the United States. As of April 21, ANS crude was trading in California at $18.30 per barrel, which was 25 cents higher than the Gulf Coast trading price of $18.05.

Keith Mueller, an oil trader for Cleveland-based BP America Inc. in Long Beach, explained that there are seasonal factors that play into a shortage of ANS crude oil. "In summer, as temperatures get warmer in Alaska, production falls a bit because compressors don't operate as efficiently," he said.

Additionally, demand for crude oil tends to increase in the summer months on the West Coast because gasoline consumption increases then, Mueller said.

Unfortunately, rising prices may not be a purely seasonal occurrence in the future.

"The bottom line is that ANS crude oil production is declining and demand for products is going up on the West Coast," explained Ken Miller, oil pricing analyst for the Dallas-based oil industry consulting firm of Purvin & Gertz Inc. "The trend is definitely going toward higher and higher crude oil prices in the West."

Despite announcements of major new findings in Alaska made last week by Atlantic Richfield Co., production of its new fields will not begin soon enough to avert a pricing war on sour crudes in the United States, according to John Vautrain, oil industry consultant in Purvin & Gertz's Long Beach office.

"I don't think you will see anything from their Sunfish or Kuvlum discoveries for quite some time," he said. "It will be a matter of years, not a matter of months."

Estimates of total crude oil production in Alaska made by the Alaskan Department of Natural Resources put production figures at about 1.6 million barrels per day. That is a decrease of about 4 percent from last year's figures.

Al Greenstein, spokesman for Atlantic Richfield Co., concurred that Arco's Alaskan production has been declining in recent years.

"We are expecting total production to average 440,000 barrels per day in Alaska," he said. "We are experiencing production falls in our fields each year, but we are stepping up exploration in Alaska to try to avert a shortage situation."

ANS production by BP America, by far the largest producer of ANS crude oil, is currently around 700,000 barrels per day, according to BP's West Coast trading manager, Ed Missik. That figure has declined from years past.

The fact that California prices for ANS are up over trading prices on the Gulf Coast is telling.

"ANS was historically sold on the West Coast at a discount to undercut foreign competition with equivalent crudes," said analyst Miller. "The major suppliers of ANS, British Petroleum, Arco and Exxon, could do that because their transportation costs are less than their foreign competition's. The fact that prices are higher in the West indicates that there is a supply problem."

Tom Treichler, manager of crude oil supply and logistics for Tacoma-based U.S. Oil and Refining Co., agreed that ANS is presently in short supply in California.

"Exxon and ARCO are not in the market because their production is down," he said. "They have always supplied themselves and sold the balance. Apparently, that balance is dwindling."

But BP's Missik said the market for ANS is NOT at all constrained.

"The reason that prices for ANS are high now is simply because refining margins are very high at West Coast refineries," he said. "Refiners are doing so well here that they are willing to pay higher prices to get the crude."

This does not mean that there will be gasoline shortages. There are equivalent crudes that can be sold to refiners in California.

Most will probably come in from the Middle East and South America and a lot more foreign oil can be expected to be traded in California in the years to come. But the increase in the number of players in the California oil market will not bring prices down in the state.

"California is a demand-driven market," said Miller. "There are many refineries, demand for products is up and prices for products in California remain high, so those refiners need to be supplied."

If prices stay high, there could be some hard times ahead for the already sensitive refining industry in the state. As Miller explained, "Small refiners could face particular difficulty. Many of them in California export products that are not finished and prices for them are remaining constant. If prices increase for crude, they may see declining profit margins."