This is the top story from our daily newsletter published on August 19, 2020. To have this and more delivered directly to your inbox scroll down and enter your email or click here to sign up.
Mystery Alaska: As mentioned in yesterday’s newsletter, the Trump administration approved an oil leasing program for the Arctic National Wildlife Refuge on Monday, opening up the pristine 19-million-acre wilderness to drilling for the first time. Timothy Puko reports for the Wall Street Journal that “the decision caps more than 30 years of efforts by oil companies and Alaskan leaders to drill in the refuge. However, environmentalists have raised concerns about the impact drilling could have on the polar bears and caribou herds that live in the remote refuge in northeast Alaska.” From afar, this is just another example of “greedy capitalists” versus “hippy tree-huggers,” something we’ve seen play out many times before, for example with the Keystone Pipeline or toll-road projects in Florida. On closer inspection, however, there have been some massive shifts over the past few years, and even past few months, that make this debate worth a deep dive. What are both sides saying about the decision and do oil companies even want to explore that far north? Here’s what we found:
On the Right: The Wall Street Journal Editorial Board says Alaska’s Arctic National Wildlife Refuge (ANWR) is “largely barren acreage” that has been “studied for its potential for oil and gas” since 1980. Although “the environmental lobby opposed any drilling, native communities in the region and Alaskans have long supported it as an economic boon with little risk to the land or grazing caribou of popular nature photography.” The WSJ Ed-Board says “92% of ANWR will remain untouched under the Interior plan, and the rest should be protected with extensive drilling protocols. Accidents can happen, but the leases and drilling could provide thousands of new jobs and revenue for Alaska and the federal government. The U.S. Geological Survey believes the ANWR coastal plan is the largest source of onshore oil reserves in North America. Alaskans are especially pleased because the flow of oil from current drilling sites is slowing down, and the pipeline to the lower 48 states needs new supplies. Alaskans also count on royalties from oil drilling for their state and personal coffers.” The WSJ Ed-Board says “lease auctions can begin before the end of the year [which] means they can’t easily be rolled back by the next Administration if Joe Biden wins the election.” In conclusion, any regulatory obstacles “would be a shame because, barring some technological breakthrough, America will need oil and gas for electric power and transportation for decades to come. Might as well let Americans benefit from producing it.”
On the Left: Scott Martelle writes for the Los Angeles Times that this decision is “manifestly a bad idea that Congress was wrong to slip into the 2017 budget bill.” In fact, “Congress approved offering the leases — ending more than 35 years of protections — not in response to the will of the people but in defiance of public sentiment. Only 35% of Americans supported drilling in ANWR. About the only people supporting the notion are some oil- and gas-industry firms and their political supporters — mainly Alaska Republicans. And Trump, whose retrograde enthusiasm for burning ever more fossil fuels endangers the health of the planet and its suitability for human habitation.” Martelle continues saying, “If there’s any good news here, it’s that current market forces weigh against the industry trying to sink new wells in such an expensive and inhospitable place, and that consumer pressure against such moves will be considerable. Even major banks are balking at financing such projects.” In conclusion, “The nation, and the world, needs to move away from burning fossil fuels if we are to stand any chance of limiting damage from global warming, which (as we learned just last week) has likely pushed Greenland’s massive ice sheet past the tipping point, leading ultimately to its disappearance — and eventually adding 23 feet to current sea levels. The government needs to pursue policies exactly opposite of those pushed by Trump. Which means we desperately need a change in government.”
Flag This: Okay, so par for the course in terms of reactions from each side, but what does Wall Street think about whether or not any firms will take the bait and head north? Avi Salzman of Barron’s says even though “there could be more than 10 billion barrels of crude under the refuge—an equivalent amount to other major recent oil discoveries like off the coast of Guyana—drilling there could be a tough sell for most major oil companies. In fact, there is a chance none of them will venture into the area.” Salzman lists three main reasons. First and foremost, “companies in general aren’t spending big money on major new projects with dubious payoffs right now. Oil investors have made it clear that they want companies to focus on generating cash flow from their current projects before spending heavily on projects that could take years to turn a profit. Another reason is that drilling in the refuge looks to be costly, and it appears that the price of oil will trade in a tight range for the foreseeable future.” Salzman also notes that “drilling in the wildlife refuge polls poorly among Americans as a whole.” In a corresponding report, the Pew Research Center corroborates this claim with a spring 2020 survey, in which “79% of U.S. adults said the more important priority for addressing the country’s energy supply should be to develop alternative energy sources such as wind and solar. Just one-in-five adults said the more important priority should be to expand the production of oil, coal and natural gas.” The oil industry understands this as well and “is generally trying to appeal to more investors by adding more environmentally friendly business lines,” Salzman notes. “That doesn’t mean they are all going to become solar companies, but it does indicate that making large investments in politically divisive projects could be off the table.” Furthermore, even if large oil companies did want to take their chances, they might have a hard time securing financing for any project. “Banks including Goldman Sachs and Wells Fargo have said they won’t finance drilling in the refuge, home to polar bears, herds of caribou, and other wildlife. BP agreed to sell its Alaska holdings last year, but the deal has reportedly been held up because of financing delays for the buyer.” Last but not least, local policy could create another headache for investors and oil companies. “There is also a measure on the ballot in Alaska this year that could cause taxes to rise for companies drilling in that state. Ballot Measure 1 could have ‘greater impact on near-term investment in the energy sector in Alaska’ than the wildlife-refuge decision, one industry expert said.” What Salzman doesn’t mention, and is worth thinking about, are the geopolitics of the arctic. Both Russia and China are heading north whether we like it or not. That doesn’t mean the US needs to blindly follow, but it also means it might not be a good idea to sit idly by. In conclusion, from a domestic standpoint, keep an eye on these arctic leases over the next few months. Do any big oil and gas firms make a bid? Simultaneously, from a foreign policy perspective, does a greater perceived openness invite a larger military presence in that direction to counter efforts from Russia and China? Both developments, or non-developments, will be worth having on the radar.