THE ARCTIC IS COLD, RENEWABLE HYDROGEN IS HOT
August 20, 2020 § 4 Comments
Oil drilling leases will soon be available in the Arctic, according to a story in the New York Times. The Alaska National Wildlife Refuge (ANWR), a land-based portion of the Arctic, is cited. But the Arctic is cold, both figuratively and literally. When he took office in 2017, President Trump announced a roll back of a “permanent” ban on Arctic drilling that President Obama instituted as he was leaving the White House. I opined then that the roll back would have no net effect because interest from oil companies would be minimal. I also wrote at the time that President Obama’s action was also largely symbolic, and not material.
The principal reason for these conclusions is that the price of oil has been low since 2015, when US shale oil became the determinant of oil price in the world and the ability of the Organization of Petroleum Exporting Countries (OPEC) to prop up prices was deeply undercut. USD 120 per barrel highs became USD 70 highs. The Covid-19 pandemic has decimated shale oil company ranks, but it has also caused demand, and price, to plummet to historic levels. Accordingly, the crystal ball of future oil prices is murky. Murky crystal balls equate to uncertainty, which, added to the environmental risks, further equates to higher discount rates. Making matters worse on the investment side, any Alaska play has a long-term payout. First oil is likely a decade after the lease purchase. This involves forecasting the price of oil into the second half of the century.
All the indications are that oil demand will reduce significantly by 2040, largely through electric vehicle adoption. Certainly, the super-major oil company BP’s beliefs in this regard have translated into plans for a major replacement of oil revenue with revenue from renewable electricity. They recently announced that by 2030, their oil production will be reduced by 40%, concurrent with major investment in renewables, resulting in 50 GW electricity production. That production is up there with good size electric utilities. This decision also comes at a time when the dividend has been halved and properties divested to raise cash. It also is coincident with the divestiture of their pioneering Alaska North Slope holdings to privately held Hilcorp, during which transaction they sweetened the pot with a loan to ensure closure of the deal. This does not sound like a company that will invest in a US Arctic lease. I do not see any oil company headquartered in Europe doing it either.
Hydrogen is an important industrial commodity even not counting the possible use as electric vehicle fuel. US refineries purchase 2 billion cubic feet per day of hydrogen (in addition to using another 0.5 billion cubic feet produced internally). Virtually all of it is produced from natural gas. As we discussed in these pages earlier, hydrogen produced using surplus electricity during low demand periods is one of the most promising solutions for the problem of intermittency of renewable electricity. Oil companies like BP, doubling down on renewables, are unlikely to miss this point. Also, if conversion to ammonia is more appropriate for storage and transport, who better positioned than an integrated major oil company? In its announcement, BP makes a vague reference to hydrogen. No mention is made of geothermal electricity, but it is highly unlikely they are not watching that space.
Returning to the issue of success of a lease sale in the ANWR, one of the primary challenges is the paucity of high-quality seismic data. These are subsurface images acquired by individual oil companies in proprietary shoots or by seismic operators speculatively shooting to then sell subscriptions to the data in “libraries”. The acquisition and interpretation of the data is the edge employed by oil companies in obtaining the winning bids without overpaying. Less data means more uncertainty. My take on the situation is that there will be fewer bids due to competing capital spend directions, the uncertainty in the price of oil, the environmental risks, and the delays likely due to litigation (case in point the litigation based delays in the Keystone XL oil pipeline construction). But whatever bids that materialize are likely to be low-balled. In that case, the revenue from the sale will be underwhelming. This assumes, of course, that the administration goes ahead with plans to auction the tracts. More than likely this is just another tempest in the Alaskan teapot.
August 20, 2020