The short-term energy outlook has improved considerably over the past few months, thanks mainly to the ongoing Covid-19 vaccine rollout. A cross-section of analysts now expects oil demand to bounce back to near pre-pandemic levels during the second half of the year, while others are predicting a shortfall and price rally.
The same can, however, hardly be said about the long-term outlook, with WoodMac recently causing some consternation after predicting that Brent will change hands at just $10 per barrel in 2050 as renewables rapidly take over.
However, most experts agree that fossil fuels will continue to be our most dominant energy source for at least a decade—maybe even two—depending on how fast the energy transition happens.
As such, major oil and gas discoveries such as ExxonMobil's (NYSE:XOM) Guyana find will continue to dominate headlines even as the bears warn of the massive risk of these assets being stranded.
Which prompts the trillion-dollar question: Why is most of our oil found in deserts and Arctic areas? The U.S. Geological Survey estimates that the Arctic National Wildlife Refuge (ANWR), the crown jewel of the 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.
Also, why has Big Oil generally been giving the Arctic a wide berth? Virtually no major oil companies bid on ANWR's more than one million acres after the Trump administration auctioned off drilling rights on January 6 in a last-gasp effort to open up the refuge for drilling.
But make no mistake about it: Despite the legal and environmental implications, Big Oil companies such as ExxonMobil and ConocoPhillips (NYSE:COP) still have their sights trained on the Arctic's vast hydrocarbon wealth. Related: The World Still Needs Hundreds Of Billions Of Barrels Of Oil
ConocoPhillips remains the largest producer in Alaska, with extensive holdings in the National Petroleum Reserve-Alaska (NPR-A) and Prudhoe, while ExxonMobil Alaska's CEO, Darlene Gate, recently told investors that "There will continue to be the need to explore and develop oil and gas on the North Slope" and that "It's important not to give up on a growth mindset."
But first things first, why so much oil in the world's biggest deserts and so little or none elsewhere?
Plate tectonics is the best clue we have in 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 are 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.
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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 landmasses, 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.
- Lack of financial backing
- High drilling costs/Thawing permafrost
- 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 investing $750 billion over the next decade into areas that focus on climate transition.
Others soon followed suit: All five major U.S. banks and more than 60 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 Exxon's Darlene Gates showed a chart comparing estimated returns on investment at oil fields in 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 last summer 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 land sinkholes, lakes, and boggy peat in the summer. Last June, 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 remain 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 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.
By Alex Kimani for Oilprice.com
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