The Arctic National Wildlife Refuge (ANWR) may contain billions of barrels of oil. Rights to explore ANWR will shortly be offered for lease by the U.S. Interior Department. Twenty, ten, even five years ago, oil company interest would have been great. Today, however, a financially constrained industry—one that confronts angry, environmentally concerned investors, capital deficiencies, boycotts from banks that once funded lavish exploration programs, and the possibility of rapidly falling consumption due to the global Covid-19 pandemic—will likely take a pass. The oil industry is out of money. The window for developing ANWR has closed. The failed Trump administration’s last-minute efforts to auction off drilling rights there will be crushed by the world oil industry’s harsh reality.
ANWR is safe. Markets have constrained the baying hounds in the oil industry seeking to drill (and spoil) that pristine wilderness for decades.
Oil executives, state and federal politicians, and many interested in energy security have long sought to open ANWR for exploration. Before the fracking boom, the refuge was seen as one of the last possible incremental oil and gas sources in the U.S. Officials at the Department of Interior have pushed for years to lease parts of it for drilling. Bloomberg reported on November 13 that federal leases would be offered before Joe Biden takes office on January 20, 2021.
Do not expect any publicly held firms to bid. The opening of ANWR comes too late. While the oil may be there, the money is not. Investors are forcing the oil firms still capable of conducting massive E&P programs out of the wildcatting business. BP’s decision to sell all its Alaskan properties to the privately held Hilcorp Energy signifies the oil business’s impending transition. In September, BP announced that it would direct investment toward renewables, not oil and gas exploration, was another sign. Like all publicly held companies, BP must be responsive to its investors and financial institutions. This responsibility is especially important for oil and gas because those companies need regular cash infusions to fund development programs.
The bank boycotts of firms drilling in the Arctic will further constrain the industry’s participation in the leasing. In October, The Wall Street Journal reported that five of the six largest U.S. banks—Citicorp, Goldman Sachs, JP Morgan Chase, Morgan Stanley, and Wells Fargo—have pledged to stop funding new exploration and production projects in the region. Only Bank of America has resisted joining the boycott despite intense pressure from the Sierra Club.
The Journal article noted that Senator Dan Sullivan of Alaska and other Republicans were lobbying the Trump administration to reconsider the Arctic leasing policy. Trump’s election loss sets up any firm taking a lease for failure because the President-Elect Biden, once in office, can take regulatory actions that further pressure financial institutions to avoid funding Arctic drilling.
Any large, publicly held firm capable of mounting E&P efforts in Alaska must be mindful of decisions made recently by banks and large investors, such as Norway’s sovereign wealth fund and a group organized by the Interfaith Center on Corporate Responsibility. Combined, these organizations manage more than $6 trillion and own substantial shares in companies that might drill. The Norwegian fund alone owns more than 2 percent of BP and Royal Dutch Shell. These investor organizations have warned that they might sell shares in any companies that embark on large exploration programs in sensitive areas such as ANWR. The Norwegian fund has already sold shares in Occidental and other US independents.
The threat of investor divestiture comes at an awkward time for publicly held energy companies. These firms have almost vanished from the S&P 500 index of the largest US companies. In 1979, oil companies accounted for nearly 30 percent of the index. At the end of 2017, their share had declined to 6 percent. It fell further, to 5.3 percent by the end of 2018, and at the end of September this year, it accounted for only 2 percent.
To understand how extreme investor disdain for the oil industry has become, take the example of ExxonMobil – he world’s largest publicly held oil company as tracked by the Energy Intelligence Group. In August 2019, ExxonMobil was dropped from the top ten list of U.S. companies by market capitalization for the first time since the S&P 500 was established in 1957. Exxon today is smaller than such old economy firms as Procter & Gamble and Johnson & Johnson, to say nothing of technology giants like Microsoft, Apple, and Facebook.
In these dire circumstances, senior oil industry executives must first focus on satisfying their remaining investors by sharing buybacks and dividends.They must also be wary of taking steps that would frighten or anger investors. A company electing to explore in Alaska would likely scare some investors, who would worry that a massive environmental disaster could bankrupt that company. A “go” exploration decision could also anger investors like Norway’s sovereign wealth fund that seek to curtail such activities for other reasons.
The rapidly changing energy situation provides a further reason to eschew the ANWR opportunity. The oil industry has always disdained efforts to reduce oil consumption. However, signs today point to global fossil fuel use possibly being much lower in 10 years than it is today. Auto manufacturers, who produce the vehicles that consume petroleum, must market and sell large numbers of electric vehicles (EVs) to meet regulatory requirements worldwide. California and several countries are even taking steps to assist the auto industry in this respect, to oil’s detriment.
For instance, in numerous places, EVs can use fast commuter lanes while petroleum-powered vehicles must stay in the slow lanes. Consumers are responding. Over 50 percent of the new cars sold in Norway this year were EVs, and EVs now make up 3 percent of California’s vehicles. Gasoline use in the state has fallen as EV penetration has increased.
The threat of declining oil consumption will further temper enthusiasm for exploring ANWR. Much, if not all of the Alaskan and Arctic production would come after consumption peaks and would likely be sold into a depressed market. In BP’s 2020 Energy Outlook, released in September, the company warned that some investments made in exploration and production in the next ten years “may not be fully utilized and so may become uneconomic” by 2050. This conclusion would apply to any ANWR development.
Executives of the large multinational oil companies understand that bankers and investors know these things. Given the uncertainty, the oil firms’ limited investment dollars will probably be allocated to short-cycle projects in areas such as the Permian, the Bakken, or other shale oil provinces worldwide.
The Arctic National Wildlife Refuge once offered the oil industry a perfect exploration prospect. The governmental legal framework was ideal. ANWR is near other producing areas and may contain significant oil volumes that would yield income for years. It was a perfect fit for the oil industry’s traditional investment model. That standard model no longer applies. Any oil in ANWR today will likely still be there in 100 or even 1,000 years.