3 Reasons Big Oil Might Turn Down Biden’s Arctic Bonanza

• Plate tectonics play a crucial role in creating large hydrocarbon reserves in deserts and arctic regions, leading to the question of whether Big Oil companies might tap into these resources.
• Major financial institutions, including Goldman Sachs and major U.S. banks, have pledged to restrict or cease funding for Arctic oil exploration due to environmental concerns.
• High production costs, exacerbated by the thawing permafrost, and doubts about the quantity of oil reserves in the Arctic may discourage Big Oil companies from exploring this region.

Back in March, the Biden administration issued the green light for ConocoPhillips’ (NYSE:COP) long-disputed $8 billion Willow project in Alaska, much to the consternation and chagrin of environmentalists. ConocoPhillips remains the largest producer in Alaska, with extensive holdings in the National Petroleum Reserve-Alaska (NPR-A) and Prudhoe.

The development was a 180-degree turnaround from Biden’s actions just two years ago when he placed a temporary moratorium on oil and gas activity in the Arctic National Wildlife Refuge(ANWR) just hours after ascending into the Oval Office. It was also an admission of the huge role energy and fuel prices play in American politics considering how pro-renewables the current administration is.

Although Biden blocked other oil drilling in Alaska, it’s not inconceivable that he might give in again if, for instance, oil supplies fell sharply thus triggering skyrocketing fuel prices. After all, Biden has been pleading with American producers and even OPEC to ramp-up production in a bid to keep oil prices low. The U.S. Geological Survey estimates that ANWR, the crown jewel of American wilderness in the northeast corner of Alaska, holds a staggering 12 billion barrels of oil, or 27% of U.S. proven oil reserves of 43.8 billion barrels. 

That said, there is no guarantee that Big Oil would jump at such an opportunity. After all, virtually no major oil companies bid on ANWR’s more than one million acres after the Trump administration auctioned off drilling rights two years ago in a last-gasp effort to open up the refuge for drilling.

But first things first, why so much oil in the world’s biggest deserts and so little or none elsewhere?

Tectonic activity

Plate tectonics is the best key we have to understanding why deserts and arctic areas hold some of the largest hydrocarbon reserves on earth. Plate tectonics also create the "pressure cooker" that slowly matures the organics into oil and gas. However, other important locations of large reserves include river deltas and continental margins offshore.

Oil and gas is created mostly from the rapid burial of dead microorganisms in environments with very low oxygen concentrations that hinder decomposition. Newly developing ocean basins--usually formed by plate tectonics and continental rifting--provide just the right conditions for rapid burial in anoxic waters. Rivers tend to rapidly fill these basins with sediments containing an abundance of organic remains. A good example is the Gulf of California, an ocean basin in real-time development. The Gulf of California formed in as little as 6 million to 10 million years--a lot faster than most of the world’s ocean basins. The Gulf of Mexico is another great example of new oil and gas formation in a restricted circulation environment.

The same plate tectonics that provides ideal locations and conditions for anoxic burial are also responsible for processes such as continental drift, subduction and collision with other continents that determine the geological paths that sedimentary basins usually take--currently to the poles and deserts. For instance, Antarctica has extensive coal deposits--and very likely abundant oil and gas--while the Libyan Sahara Desert contains unmistakable glacial scars which establishes that their plates were once at the other ends of the earth. Being much more buoyant than water, these hydrocarbons eventually force their way to the surface, or do so through rifting, collisions between land masses, and other tectonic forces.

When it comes to the Middle East, the most widely accepted theory for why the region is so loaded with oil is that it was not always a vast desert. Rather, scientists speculate that 100 million or so years ago, the area was a massive body of water known as the “Tethys Ocean,” fed by nutrient rich rivers. As the land in the modern Middle East region gradually rose due to tectonic activity, the Tethys Ocean receded leaving behind the sandy, dry Middle Eastern desert.

Taking a pass

As one of his first actions in office, President Joe Biden imposed a “temporary moratorium” on all oil and gas leasing activities in the ANWR, citing the “alleged legal deficiencies underlying the program” as well as the inadequacy of a required environmental review.

However, there are several reasons why Big Oil is likely to continue shunning the Arctic even in the event the Biden administration lifts the moratorium.

1. Lack of financial backing
2. High drilling costs/Thawing permafrost
3. Unproven reserves

One of the biggest reasons why Big Oil is largely disinterested in Arctic drilling is due to many potential backers backing off. Back in 2019, Goldman Sachs became the first big U.S. bank to rule out financing new oil exploration or drilling in the Arctic, as well as new thermal coal mines anywhere in the world. The bank’s environmental policy declares climate change as one of the “most significant environmental challenges of the 21st century” and has pledged to help its clients manage climate impacts more effectively, including through the sale of weather-related catastrophe bonds. The giant bank also committed to invest $750 billion over the next decade into areas that focus on climate transition.

Others soon followed suit: All five major U.S. banks and hundreds of financial  institutions across the globe have pledged to restrict or stop financing Arctic oil exploration.

The second big reason why Big Oil does not find the Arctic an attractive proposition is due to high drilling costs. For instance, when former President-Alaska Production at Exxon Darlene Gates showed a chart comparing estimated returns on investment at oil fields such as the Gulf of Mexico, the North Sea, the North Slope and Angola, Alaska oil was by far the least profitable due to its high cost of production. It’s a big reason why BP Inc.(NYSE:BP) sold off all of its assets in Alaska, including leases on lands that lie within ANWR, after 60 years in the state. The situation is not helped by the thawing permafrost. The Arctic is warming twice as fast as the rest of the planet, turning the permafrost into a land of  sinkholes, lakes and boggy peat in the summer. Three years ago, a giant diesel fuel tank in the Siberian city of Norilsk sank into the tundra and ruptured, spilling 21,000 metric tons (157,500 barrels) of fuel after weeks of record high temperatures that hit over 100 degrees Fahrenheit. That marked the largest spill in modern Russian history and nearly half the amount spilled by the Exxon Valdez tanker off Alaska in 1989.

Finally, there’s a lot of speculation regarding how much oil actually resides beneath the ANWR. Results of the only test well ever drilled in the refuge back in the early 1980s remains one of the most tightly guarded secrets in the oil industry. Interestingly, a 2006 National Geographic investigation reported the well was a “dry hole.’’ The fact that  BP executives who knew what was down that hole and were on the cusp of getting the greenlight to develop their leases for the first time in 40 years thanks to the Trump bonanza instead chose to walk away does not inspire a lot of confidence in the refuge's potential. Neither does the fact that the British oil giant sold its Alaskan assets to Houston-based Hilcorp, Inc.,a privately held company specializing in squeezing the last drop out of dying oil fields. Meanwhile, oil companies have been cutting their workforce in Alaska, from 15,000 in 2015 to 6,900 in 2019 well before the pandemic hit, pushing 40,000 more Alaskans out of work. 

In the final analysis, the triple whammy of high production costs, lack of financial backing and hostile government policies might mean that ANWR continues to be the refuge’s “biological heart” and a breeding ground for polar bears, caribou and more than 200 other species for decades to come.

But then again, who knows if Big Oil might reconsider if oil prices hit, say, $200 per barrel?

By Alex Kimani for Oilprice.com

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