Prophets

Trump's Plan for Arctic Drilling Won't Hit a Gusher

The timing couldn’t be worse, as the world faces an oil glut.

Russia is already there.

Photographer: Vladimir Smirnov/TASS via Getty Images

President Donald Trump is pressing for offshore drilling in the Arctic Sea. In April, he signed an executive order directing Secretary of the Interior Ryan Zinke to rethink and advocate a rollback of an Obama administration rule from December 2016 and to reconsider multiple drilling safety regulations. The Obama rule put large swaths of the Arctic Ocean off limits to oil and gas drilling, citing environmental concerns and fragile ecosystems in the area.

The Arctic region is estimated to contain about 90 billion barrels of oil and 1.7 trillion cubic feet of natural gas. Trump argues that renewed offshore production will reduce energy costs, create countless new jobs and make the U.S. more secure and more energy independent. The president also asked Zinke to oversee the nation’s public lands and any fossil fuel extraction on federal property.

Zinke, a former Navy SEAL and Montana congressman, is not an easy read when it comes to environmental issues. Democrats view him as relatively moderate compared to other cabinet selections. During his January Senate confirmation hearing, he said he would consider reversing the Obama rule; yet he broke with other Republicans and members of the incoming administration by expressing his belief in climate change, saying it was not “a hoax,” as Trump had previously tweeted.

Zinke pointed out that revenue from offshore leasing had dropped by $15 billion during the Obama administration, partially due to the decline in oil prices. With 94 percent of the nation's outer continental shelf now off limits for development, Trump claims that the industry is eager to see more of the Arctic open to leasing. Maybe so, but oil prices would have to increase sharply to spur any significant production there. When asked whether the administration had been approached by any companies interested in drilling in the Arctic, Zinke responded, “No.”

The level of interest from U.S. exploration and production companies in drilling in the Arctic is unclear. Over the years, they have struggled to establish a presence in this polar region, considered unfriendly to drilling. But it’s not just about regulatory delays. The area features punishing weather conditions, remote locations on land and sea and stunted infrastructure, all of which translate to high operating costs, of particular concern now as crude oil struggles to rise from 6-month lows.

For these reasons, Royal Dutch Shell in 2015 abandoned its $7 billion attempt to extract riches beneath the seabed off Alaska’s Arctic coast. That same year, Imperial Oil, on behalf of partners ExxonMobil Canada Ltd. and BP Plc, announced an indefinite delay in plans to drill in the Arctic’s Beaufort Sea. Other companies have been abandoning old leases without seeking new ones.

There is no question that Arctic sea ice continues to melt, through oil price rallies and price crashes, from oil shortages to gluts. And as the ice melts, the conditions improve for building remote oil platforms in the frigid waters and for land-based drilling operations that take advantage of newly thawed shipping routes.

The timing, nevertheless, couldn’t be worse, as the world faces an oil glut. Yet rig counts in the U.S. are increasing, as are oil exports, which were banned for 40 years, with minor exceptions, until 2016. As of May 5, the U.S. total rig count was 877, a year-on-year increase of more than 111 percent, according to the rig count by Baker Hughes. Meanwhile, the Organization of Petroleum Exporting Countries, which meets on May 25, may be forced to extend its ineffective output cut. 

Despite enhanced drilling technologies, the risks of drilling in the Arctic are too great and the area too sensitive. Millions of Americans don’t want to put the Arctic Ocean, coastal communities and wildlife at risk of an ecological catastrophe.

Paramount are the disastrous ramifications of an oil spill. It took a multi-month Herculean effort to wrangle BP’s 2010 Gulf of Mexico’s Deepwater Horizon disaster, even though it occurred just 40 miles off a more heavily populated and industrialized U.S. coast. The response involved mobilizing and coordinating an armada of vessels, crews and equipment. If a spill occurs off Alaska, getting the necessary ships and gear to the spill site would be much more difficult.

According to the World Wildlife Fund, there’s no proven effective method for containing and cleaning an oil spill in icy water. Deepwater occurred in a large, warm gulf populated by microbes that eat oil; quite unlike the Arctic Ocean’s low temperatures and limited sunlight, making an oil spill more likely to fester, similar to the 1989 Exxon Valdez 10.8-million-gallon Alaska spill.

The Arctic also lacks the required infrastructure to transport natural gas -- pipelines or facilities that convert natural gas to liquefied natural gas for eventual tanker shipment. Thus, offshore rigs would likely flare off the extra natural gas on-site. While flaring is preferable to letting the gas escape, since methane is a potent greenhouse gas, it can still produce other pollutants such as black carbon, causing ice and snow melt.

Source: Arctic Sea Ice Graphs Yellow=1980, Red=2016

An additional concern is the acoustic disturbance to marine mammals from offshore oil development, as underwater noise can affect communication, migration, feeding and mating.

Finally, reversing the Obama rule jeopardizes U.S.–Canadian relations. Earlier this year, Prime Minister Justin Trudeau defended his government’s ban on Arctic drilling for the next five years, saying it simply couldn’t be done safely.

Bottom line, the study could take two years to conduct, as it would include multiple federal waters. Meanwhile, lawyers say it’s unclear whether Trump has the power to reverse this separate offshore drilling ban, because the Outer Continental Shelf Lands Act does not explicitly allow a president to get rid of a designation. On the other hand, Trump is not considering opening the eastern portion of the Gulf of Mexico and is keeping the oil industry out of the waters that Floridians have long protected as vital to the state’s tourist industry.

From an investor standpoint, should Trump succeed in the Arctic, the equities of exploration and production companies would initially rally, while crude oil prices would drop in anticipation of greater supply. Yet the complications and public pushback makes this scenario unsustainable when there is an oversupply of oil. Better yet, this is an opportunity for these companies to focus on to satisfy the demands of the public and institutional impact investors.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Shelley Goldberg at shelleyrg3@gmail.com

    To contact the editor responsible for this story:
    Max Berley at mberley@bloomberg.net

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