The Fuse

Last Minute Push for Alaska’s ANWR Won’t Stave Off Decline

by Nick Cunningham | November 16, 2020

The Trump administration is rushing to finalize details of a potential lease sale in the Arctic National Wildlife Refuge (ANWR) with a little over 60 days left before a new president takes over.

The opening up of ANWR, however, will probably not lead to an increase in drilling or large-scale development of the region as too many risks and obstacles stand in the way. More broadly, Alaska’s oil industry faces an uncertain future with poor economics, a shrinking pool of capital, and the prospect of tightening environmental policy dim the region’s long-term oil outlook.

 ANWR and the push for new drilling
ANWR’s coastal plain might hold between 4.3 billion and 11.8 billion barrels of technically recoverable oil, according to the U.S. Geological Survey. The vast coastal range has been off limits for drilling for decades, but in 2017, Congress officially opened up the reserve for exploration.

The Trump administration is now hurrying to finish the multi-year process to lease drilling rights. The Bureau of Land Management issued a “call for nominations” on November 16, essentially asking oil and gas companies to designate their preferred spots within ANWR for drilling, which can then be used for a lease sale.

The Trump administration wants to hold a lease sale in January before President-elect Joe Biden takes power.

Time is of the essence. The Trump administration wants to hold a lease sale in January before President-elect Joe Biden takes power. The call for nominations has a 30-day public comment period, which will be followed by the notice for a lease sale, setting off another 30-day period. With a little more than two months on the clock, the margin of error for the Trump administration to successfully pull off a sale is narrow, but likely doable.

Because the ANWR was opened up as part of legislation through Congress, rather than through an executive action, the incoming Biden administration likely cannot legally keep ANWR off limits. However, the Bureau of Land Management in the Biden administration have some leeway in slowing the push towards drilling. Federal courts could rule against any such effort to derail drilling or cancel leases, but “for the Biden Administration, a series of slow losses – and all the uncertainty that repeated slow-walking and court proceedings might create – could be tantamount to a win,” analysts at ClearView Energy Partners wrote in a note to their clients, adding that “big spenders have left the Arctic empty-handed in the past.”

There are also pending lawsuits from Indigenous groups against the opening up of ANWR, and the Biden administration could decide to stand down from those cases, remanding them back for more environmental review, ClearView said.

But the reasons why the Biden administration may have success in blocking or at least curtailing drilling boil down to the fact that the oil market is not crying out for new supply. Oil prices remain stuck in the low-$40s per barrel and it could take years for demand to return to pre-pandemic levels. Oil regions more competitive than Alaska are struggling to attract capital and new drilling.

Beyond the immediate recovery, climate policy is tightening the screws on the industry, likely leaving high-cost oil in the ground as demand peaks and gradually declines. In addition, financial institutions are increasingly imposing restrictions on the oil and gas industry. In February, JPMorgan Chase joined other major banks in cutting off lending for drillers in the Artic. JPMorgan has been the largest lender among American banks for Arctic drillers. Other banks, including Goldman Sachs, UniCredit, Royal Bank of Scotland, and Barclays, had previously ruled out financing for Arctic drilling.

As the pool of capital available for drilling shrinks, high-cost and hard-to-reach drilling frontiers could prove to be a disappointment. The Arctic is only one of a long list of regions that might be forced to leave oil in the ground as the world attempts to move on from fossil fuels. “[C]ompanies will be less willing to drill high-risk wells in environmentally sensitive frontier areas, both for financial and environmental reasons,” Rystad Energy wrote in a November 16 report. “As a result, the full petroleum potential of areas like the Alaskan Arctic, Foz do Amazonas in Brazil and the Barents Sea may never be unlocked.”

Declining production
ANWR may face problems for a change of government, but the lesser-known National Petroleum Reserve-Alaska (NPR-A) could hold even more oil, with estimates topping 8 billion barrels in undiscovered reserves. The Trump administration has moved to expand access to the NPR-A and some plans appear to be moving forward. ConocoPhillips is pushing forward with its Willow project in the NPR-A, which it says will produce up to 160,000 barrels per day.

Alaska’s state budget faces a deficit of at least $1 billion this year.

But a few days after receiving federal approval, Alaska’s voters were able to weigh in on the industry’s future. Alaska’s state budget faces a deficit of at least $1 billion this year, made worse by sinking prices and slipping production. In response to the crisis, a ballot measure put to voters in the November election would have raised taxes on North Slope oil production.

ConocoPhillips threatened not to move forward with the Willow project if Alaska’s voters approved of the ballot measure imposing a production tax. “We’ve got years of development opportunities left in Alaska, but a shift of capital from Alaska to elsewhere is going to be rational if taxes increase,” Matt Fox, Executive Vice President and Chief Operating Officer at Conoco, told analysts on its third quarter earnings call. If the tax was approved, Conoco warned that it would essentially pack up and leave.

That argument apparently won out with voters. The tax was shot down at the ballot box.

Meanwhile, despite ConocoPhillips’ interests on federal lands, the NPR-A has received less pushback in Washington DC than ANWR has. “We expect any implications of the change in administration in D.C. to have a relatively limited impact on us,” Fox said. He noted that the NPR-A process began during the Obama era, so Conoco is hoping that the Biden administration does not reverse course.

However, the Willow project may only offset eroding production from existing fields. The Trump administration’s struggles at jump-starting new drilling point to the broader problem for Alaska. Production has been steadily declining since the late 1980s when output peaked at over 2 million barrels per day. In a world of “lower for longer,” it is not clear that Alaska can return oil production to growth. Even opening up new areas to drilling may be enough to stave off decline.

 

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