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Trump offered up the Arctic, but oil firms didn’t want it

What’s happening? The Trump administration’s auction of drilling rights in 1.6 million acres of the Arctic National Wildlife Refuge on 6 January raised just $14.4m dollars, or $27 per acre, with only half of the available acres receiving bids. A 2017 bill had projected the government would earn a billion dollars from the auction, alongside a second sale. Only three companies submitted bids, nearly all of which were won by the Alaska Industrial Development and Export Authority (AIDEA). Oil companies showed little interest in developing the wilderness, due partly to public opposition and the refusal of major banks to provide finance.

Why does this matter? Developing high-latitude oil projects, such as in Alaska’s coastal plain area, carries significant risk for delicate Arctic ecosystems. A major spill could be potentially catastrophic, partly due to the fact microbes that act to break down oil – for example in the case of the Deepwater Horizon spill in the Gulf of Mexico – are not present in these freezing environments.

These environmental risks, and the associated reputational risks due to public opposition, are only one part of the story. Economics are also factoring in.

Oil prices are low and developing projects in the Arctic is expensive and risky. It’s a difficult operating environment, the ground is frozen and offshore there is the hazard of freezing water and icebergs to contend with. There are infrastructure risks too – Norilsk Nickel’s diesel spill from a fuel tank in the Russian Arctic last year has been estimated to ultimately cost the firm $2.1bn in damages. There is also the financing issue – a host of financial institutions have specifically targeted Arctic oil, alongside coal and oil sands, as an area they will not fund. All these point to the risk of oil firms investing in assets that could eventually become stranded. These companies are also grappling with where to allocate increasingly scant capital with the cost of generating renewable energy falling at a time when the price of oil has been under stress.

Furthermore, there’s a human element at play. One could argue such projects provide jobs. Developing Alaska’s coastal plain, however, would also affect Indigenous groups and the UN has investigated whether it would constitute a human rights violation for the Gwich’in people who consider the area sacred. The recent incident involving the destruction of an Aboriginal heritage site by mining firm Rio Tinto shows how missteps in respecting Indigenous culture can have consequences – the episode forced its CEO to resign.

While the above issues, along with the incoming Biden administration’s opposition to development, mean the area may well remain untouched, elsewhere the Arctic is being explored for oil. Rosneft is active in Russia’s Arctic, leading some commentators to suggest bp’s 20% stake in the firm may become unsustainable as it jars with its net-zero commitment. Meanwhile, Norway’s supreme court has recently upheld the country’s government’s right to offer licences in the Barents Sea, though the country’s recent plans to triple its carbon tax to $237 per tonne may dissuade oil firms from taking them.

More macro factors will play into all this, for example McKinsey has saidCovid-19 has significantly brought forward the date for peak oil demand. And, of course, to meet Paris Agreement climate targets most fossil fuels need to stay in the ground anyway.

Lateral thought from Curation – The fact banks were unwilling to provide funding for these projects should be noted. This will, no doubt, be seen as a victory for those who have been campaigning for lenders to ditch financing for fossil fuels.

Should financial institutions now expect additional demands from emboldened grassroots organisations and activist shareholders and does this pose a risk to lenders?

Marc Height

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