New York (CNN Business)The world is swimming in excess oil. Crude prices are weak. Oil companies are starving for cash. And climate change fears are palpable. It’s a bizarre time for the Trump administration to move forward with controversial plans to open Alaska’s pristine Arctic National Wildlife Refuge up to drilling.
Interior Secretary David Bernhardt predicted Monday that the administration’s oil and gas leasing program in Alaska’s Coastal Plain could “create thousands of jobs” and mark a new chapter in American energy independence.
Yet those dreams could be thwarted by the reality of the moment. The world simply does not need more oil right now. And when more barrels are needed, oil companies will surely prefer to focus on West Texas, Oklahoma and other sure-bets rather than gamble on a risky and expensive project in an unproven place like ANWR.
Even if Trump can overcome legal challenges to offer lease sales in ANWR, that doesn't mean anyone will show up given the rising social and environmental pressures, low oil prices and uncertainty about oil demand."
Jason Bordoff, founding director of Columbia University's Center on Global Energy Policy
“At current and foreseeable oil prices, the industry’s appetite to drill in ANWR will be exceptionally low and quite possibly will be zero,” Pavel Molchanov, energy analyst at Raymond James, told CNN Business.
That’s not to mention the public relations and legal nightmares that drilling in Alaska’s wildlife refuge would ignite. Oil companies are under fire from socially-conscious investors to embrace cleaner energy, not double down on fossil fuels in wildlife refuges.
“Management teams understand this is very politically controversial,” said Molchanov. “Oil companies would rather avoid the complications, the scandals and the headlines.”
BP (BP), once one of Alaska’s leading oil companies, reached a deal last year to leave the state despite the prospects of ANWR drilling. BP has also promised to increase its low carbon investments 10-fold by 2030 as part of its bid to get to net zero emissions by 2050.
Massive supply glut
The Interior Department’s announcement Monday to clear the way for drilling in ANWR was set in motion in late 2017 by the Republican tax overhaul. That law required the department to hold two lease sales in the refuge by 2024.
But the energy landscape has changed drastically since late 2017.
First, Russia and Saudi Arabia engaged in an epic price war that flooded the market with excess crude. Then, the pandemic caused oil demand to collapse as offices emptied, factories shut down and jets were grounded.
That one-two punch sent US oil prices crashing below zero for the first time in history. Brent crude, the world benchmark, plummeted to a two-decade low of $15.98 a barrel.
Although demand has rebounded, lifting crude back above $40 a barrel, there are concerns that the health crisis has forever changed the way people travel and where they work.
ANWR plan could be a ‘flop’
Against that uncertain backdrop, oil companies have slashed their spending, laid off workers and drastically cut production — even in lucrative areas like the Permian Basin of West Texas. The number of active US oil and gas rigs, a key indicator of future production, has plummeted to all-time lows in records that go back to 1940.
“Given the perpetual oversupply, the market does not need more drilling, and tighter budgets likely means that the industry is lacking the capital to do it,” said Michael Tran, director of global energy strategy at RBC Capital Markets.
Jason Bordoff, a former Obama administration energy adviser, said Trump’s moves to open ANWR to drilling “may turn out to be a flop.”
“Even if Trump can overcome legal challenges to offer lease sales in ANWR, that doesn’t mean anyone will show up given the rising social and environmental pressures, low oil prices and uncertainty about oil demand,” Bordoff, founding director of Columbia University’s Center on Global Energy Policy, said in an email to CNN Business.
Of course, the need for drilling in ANWR depends a great deal on one’s outlook for oil demand.
“Based on the prevailing ‘peak demand’ consensus…oil companies may prefer to develop less costly assets,” Robert McNally, president of consulting firm Rapidan Energy Group, wrote in an email to CNN Business. “However, history suggests the only thing that’s certain about a prevailing consensus in oil is that it’s wrong.”
In contrast with the gloom-and-doom forecasts for the oil market, JPMorgan Chase recently warned of a potential oil shortage that could catapult Brent to $190 a barrel by 2025.
“The coming boom oil price cycle will make ANWR development look a lot more attractive to oil companies than it does in today’s glutted market,” McNally said.
‘Very expensive’ place to drill
Still, there are serious obstacles before developing in ANWR becomes a reality, including a wave of litigation from environmentalists and tribal groups.
But the biggest hurdle is the staggering costs of drilling in a brand-new area where equipment, manpower and electricity would all need to be brought in.
“ANWR could be a very expensive zone to start in. It has little infrastructure,” Per Magnus, head of analysis at Rystad Energy, told CNN Business.
Unless a “massive discovery” happens, Magnus said that breakeven costs could be around $80 to $85 a barrel. That’s roughly double the breakeven levels in the low-cost Permian Basin.
Magnus said that there are likely tens of billions of barrels “hiding underground” in ANWR — but these barrels are “hard to find and even harder to extract and market.” Oil companies would need to launch massive and expensive exploration programs to find it all.
Climate change concerns
And while oil supermajors ExxonMobil (XOM) and Chevron (CVX) have the financial resources and expertise to drill in ANWR, analysts said they would likely prefer to avoid the negative publicity.
In a statement, Chevron said it “supports access to federal lands for responsible exploration,” including ANWR. The company did not, however, commit to bidding on leases in ANWR. Instead, Chevron said it would “consider” the opportunity within the context of its portfolio and the terms of the lease.
Magnus said that companies such as Italy’s Eni (E) and ConocoPhillips (COP) that already operate in Alaska could be interested in drilling in ANWR.
But these companies, along with private oil drillers, may have a hard time raising the cash required to explore in the Arctic.
Investors, tired of losing money in the energy industry, have urged oil companies to ditch their wild spending in favor of a more conservative stance. And the rise of ESG investing is making it very difficult for fossil fuel companies to attract investment on normal projects, let alone ones in ANWR.
Some big banks including Goldman Sachs (GS), Wells Fargo (WFC) and Barclays (BCS) have promised not to finance Arctic drilling because of climate change concerns.
For all of these reasons, it seems unlikely that Alaska’s wildlife refuge will become a hotbed for oil drilling anytime soon.
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