The Trump administration announced this week it would issue decades-long leases in the massive Arctic National Wildlife Refuge (ANWR), potentially holding its first auctions by the end of the year.
It’s not clear anyone will take them up on the offer.
For quite some time, oil and gas companies (and their financers) have been running in the other direction. Major banks have already refused to lend to projects that would drill in the 19.6-million-acre Alaskan preserve known as the “last great wilderness.” Morgan Stanley, Goldman Sachs, JPMorgan Chase, and Wells Fargo had all sworn off financing oil development in the tundra’s refuge.
And few oil firms appear ready to take out loans, in any case. Last year, BP sold off its Alaska operations (including leasing rights in a private inholding of ANWR). Anadarko, Pioneer Natural Resources, and Marathon Oil have hocked their holdings. Shell left Alaska without bothering to sell its assets. That’s left two companies, ConocoPhillips and Hilcorp, controlling 72% of Alaska’s oil production (the rest are owned by ExxonMobil and a few smaller firms).
For all Donald Trump’s talk of “energy dominance,” the future of ANWR may be out of his hands. The hesitancy to drill new wells in Alaska’s Arctic is driven in part by a warming world: The state is heating up twice as fast as the rest of the nation, and its melting permafrost wreaks havoc on drilling infrastructure. But it has much more to do with the dire economics of drilling for expensive oil in remote locations.
Because of those high costs and low prices, the state’s oil production has declined 75% from its 2 million barrels per day peak in 1988. Alaska is predicting no growth in oil production for the rest of the decade.
“ANWR is a distraction,” said energy consultant Phil Verleger. If any leases do go up for auction, he predicts, “I doubt any company will bid.” Yet the refuge remains a battleground. The possibility of a billion-barrel oil discovery remains, and a few oil companies are holding out in hopes of hitting pay dirt one last time before the global economy shifts definitively away from fossil fuels.
Big Oil, no money
For decades, Republicans in the US have been trying to open up a critical strip of the refuge’s coastal plain to drilling. And until recently, legislators have been able to stall those efforts. Since 1980, more than 50 votes over ANWR drilling have gone before Congress. All have gone on to defeat—until 2017, when drilling was finally authorized as part of Republicans’ “Tax Cuts and Jobs Act.”
The decision came just late enough to be virtually irrelevant. Drilling in this region of Alaska might have made economic sense 10 or even five years ago. Today, it’s risky and out of reach for a diminished oil and gas industry that has seen its stock prices plunge along with the price of oil.
Energy companies’ share of the S&P500 has fallen from nearly 30% in 1980 to less than 5% today. “There is almost no rationale for Arctic exploration,” said Goldman Sachs analyst Michele Della Vigna on CNBC’s Squawk Box in 2017. “Immensely complex, expensive projects like the Arctic we think can move too high on the cost curve to be economically doable.”
Since then, it’s only gotten worse. Oil prices have hit historic lows, dropping to $45 this year, while breakeven prices to extract oil in Alaska’s rugged, remote terrain remain between $55 to $65 per barrel, estimates S&P Global Platts Analytics. In ANWR itself, the bar may be even higher: $80 to $85 per barrel, according to Rystad Energy.
This all comes on top of the logistical difficulties of building infrastructure in a place that is rapidly melting as a result of climate change. ConocoPhillips, one of the few major operators left in the region, is proposing a drilling project on Alaska’s North Slope. Expected to be approved by the federal Bureau of Land Management, it is so vulnerable to melting permafrost that the environmental impact statement proposes re-freezing the Alaskan tundra beneath its oil platforms (using gas-filled cylinders called thermosyphons), as well as constructing gravel roads built five to seven feet deep to prevent more thawing.
Oil production in ANWR is decades away, if it happens at all. With oil prices expected to fall along with demand as electric vehicle sales rise, it’s unclear if prices will rise again to the point where it makes economic sense to open ANWR.
So why issue leases that will never be signed?
Prudhoe 2.0
One clue may lie in the havoc created by the decision. The White House announcement evoked an immediate rebuke from congressional Democrats as well as environmental groups who vowed to fight it, yet again. Paul Musgrave, an assistant professor of political science at the University of Massachusetts at Amherst, writes that the scramble to respond to hot-button issues like ANWR oil sales—even if they never happen—is yet another weapon Trump can wield to waste his opponents’ time.
But another possibility exists: the discovery of a second Prudhoe Bay. In 1968, prospectors exploring Alaska’s North Slope drilled into one of the world’s largest reservoirs of oil. The Prudhoe Bay oilfield would go on to produce more than 12 billion gallons of oil, the largest oilfield ever found in the US—and among the cheapest, with costs comparable to the Middle East.
At its peak in 1988, more than 2 million barrels a day gushed through the 800-mile trans-Alaska pipeline, transforming Alaska’s economy and environment (the 53 million gallons of crude spilled by the Exxon Valdez tanker in 1989 came from Prudhoe Bay).
The lure of a second find fuels the oil industry’s fixation on ANWR, says Will Fleckenstein, a professor of petroleum engineering at the Colorado School of Mines. ConocoPhillips, Eni, and other oil producers are planning projects in the region. The recoverable oil under the reserve could be as high as 7 billion barrels. “It’s one of the last areas in the US that has a chance for giant conventional resources,” he says, compared to more expensive fracking methods required elsewhere in the US. “You find it, drill, and you produce. Everything is in place if they actually find something.”
ANWR’s convenient location adjacent to the trans-Alaska pipeline, and potential for an easy strike, is now its greatest threat, according to Yale Environment 360. The pipeline is now operating at 25% capacity as Prudhoe Bay production has dwindled. Oil executives explained in 1970 that they designed pipeline capacity assuming more drilling in restricted areas, and today’s relative trickle of oil has sent costs soaring as pipeline operators have to clear blockages and fix complications.
Without more oil, industry executives and Alaska’s Republican senators fear the pipeline will close—and with it any hopes of reviving oil production in northern Alaska. “The reserves are there,” explained the president of the firm operating the pipeline. “Just getting the obstacles out of the way to get them in the pipe is the simplest solution to a lot of our challenges.”
But after years of punishingly low prices, few oil and gas firms will be ready to take on the risk of prospecting for America’s next big oilfield in the midst of one of its last great wildernesses.