The next stage in the Arctic drilling saga

Welcome back to Energy Source. Two things to start:

1. Activist hedge fund Engine No 1 won a third seat on the ExxonMobil board, according to preliminary results released by the oil major last night. Don’t miss Derek’s deep dive into the activist group behind Exxon’s historic boardroom defeat.

2. The Biden administration has slammed the brakes on development of the Arctic National Wildlife Refuge, suspending leases rushed out in the dying days of the previous administration.

Our first item today takes a closer look at the ANWR news and asks where the saga goes from here.

Our second looks at the case for shale oil and gas producers to clamp down on emissions amid rising investor pressure — and the novel proposal that the industry should set up its own offset market to drive this.

Thanks for reading. Please get in touch at energy.source@ft.com — Myles

Biden puts Arctic refuge development on ice

The Biden administration on Tuesday suspended controversial leases to drill in the Arctic National Wildlife Refuge that had been hurried through in the final days of the Trump White House.

The move stalls any development of the pristine reserve for oil and gas production until an environmental review is carried out — potentially setting the stage for an outright ban down the line.

Joe Biden had promised on the campaign trail to halt the development of ANWR. His climate adviser Gina McCarthy said Tuesday’s move was an “important step forward” towards fulfilling that pledge.

Why it doesn’t matter

As ES has noted before, the ANWR drilling question is more political theatre than a serious stand-off between the oil industry and environmentalists.

No company of any significance wants to drill in the reserve. In an era of readily available oil, Arctic projects — once the next frontier of exploration — are both too expensive and too risky. Hence only three groups — one of which was an Alaska state body and none of which were majors — actually bid for leases back in January.

What’s more, Tuesday’s decision was largely expected after Biden ordered a review of the Trump leases on his first day in office.

“It’s certainly not surprising given he very early issued an executive order calling for re-examination of these leases,” said Michael Gerrard, founder of the Sabin Center for Climate Change Law at Columbia University.

Just as pushing ANWR development forward was a symbolic gesture by the pro-fossil fuel Trump administration, so too is the pro-environment Biden administration’s move to stop it in its tracks.

Why it does matter

The significance of Tuesday’s decision stems from its part in a delicate balancing act the president is trying to play as he tries to court moderate lawmakers without alienating climate advocates.

In recent weeks the White House has provoked the ire of environmentalists — a key constituency in winning last November’s election — with decisions to keep the Dakota Access Pipeline open and to back the Willow project, a major Alaskan oil play being developed by ConocoPhillips. Biden’s interior secretary, Deb Haaland, vocally opposed both before taking office.

“In general the Biden administration is acting vigorously on climate change. This action on ANWR is quite consistent with that. The actions on the other two projects do not seem so consistent,” said Gerrard.

“President Biden is eager to maintain good relations with Senator [Lisa] Murkowski,” he added. “And I think that may have played a role in the Willow project.”

With such a slim majority in the House and Senate, securing the support of lawmakers like Murkowski, a moderate Republican senator from Alaska, are essential to Biden’s efforts to get anything done. But it will prove increasingly difficult to keep both the centre and the left happy.

The Sunrise Movement, a leftwing youth campaign group expressed its frustration with Biden’s action, or lack thereof, on climate last week: “POTUS continues to backtrack on promises made to the movement of working people and young folks that elected you.”

On Tuesday, it was Murkowski’s turn: “The Biden administration’s actions are not unexpected but are outrageous nonetheless,” she said of the ANWR decision.

What happens now?

For the time being, from a development point of view, nothing.

Biden’s interior department says it has “identified defects” in the previous environmental review and ordered a new one. This could have one of three outcomes: approving the leases as they are (which is unlikely), requiring additional mitigation measures, or scrapping them altogether. It will also take time.

“How long [the interior department] will need to properly complete the review is unclear, but it might consume a year or more,” said Carl Tobias, a law professor at the University of Richmond.

Should the leases be scrapped following the review, the holders of the leases — most of which were won by the state of Alaska — could sue. And litigation would take more time still.

If the litigants were to win in the district court, that decision would be challenged in the circuit court, where it would probably be reversed, said Tobias.

Still, as Murkowski and Alaska governor Mike Dunleavy pointed out on Tuesday, the lease sales were mandated by 2017 legislation, making it tricky for Biden to block them outright. And rewriting that law will not happen anytime soon given current Congressional dynamics.

That, said Tobias, is likely to be the strongest card the state of Alaska and the other leaseholders have to play in challenging any potential binning of the leases. But dragging the case through the courts will be expensive.

“The litigation could be costly in terms of time and [money] to litigate plus possible reputational harm,” said Tobias.

As Kevin Book of Clearview Energy Partners has pointed out before, slowing the development of ANWR to a snail’s pace — with all the uncertainty and expense that entails — will effectively kill it anyway.

(Myles McCormick)

Can shale go net zero?

America’s shale oil and gas industry was not in the spotlight last week when Big Oil suffered a string of stunning climate defeats.

But it is under the same kind of pressure to clamp down on greenhouse gases as lawmakers and investors demand swifter industry action to combat climate risk and faces questions over its competitiveness in a world aiming for net-zero emissions.

Enter activist investor Kimmeridge Energy Management, which argues in a new white paper that the industry should align its emissions targets with those of the Biden administration and set up its own offset market to help it get there.

“Reducing emissions is in everyone’s best interest. But vilifying the industry doesn’t achieve anything and forcing the industry to divest doesn’t achieve anything either because you usually divest to a lower-quality operator,” Ben Dell, a managing partner at Kimmeridge, told ES.

“So let’s create an exchange where everyone’s motivated to get their emissions down.”

It’s a novel idea from the investment firm, whose previous research reports on spending restraint and environmental performance have proven influential across the industry.

There are a number of emissions offset schemes up and running around the world, most of which focus on things like planting trees to generate credits that can be sold to polluters that want to offset their own emissions.

But Kimmeridge argues that oil and gas producers, and other major industrial polluters, are largely excluded from these programmes and should be able to generate their own credits by stripping emissions from their operations.

Rather than wait around for invitations from other markets, Dell says the industry should set up its own.

“We believe that an industry incentivised to get to net zero, through its own actions, and not just through paying others to plant trees, is the right path forward,” Kimmeridge argues in its white paper, which was seen by the Financial Times ahead of its release on Thursday.

Oil and gas producers under such a scheme could generate tradable credits in a number of ways: capping wells that have been abandoned by bankrupt firms and are leaking methane, investing in carbon capture and storage, buying renewable energy to cut operating emissions or even keeping reserves in the ground.

Some might say many of these are steps oil and gas producers should be taking regardless. “It’s a fair criticism, but the reality is they’re not,” says Dell. “You ultimately have to put a price on carbon and you have to incentivise people to reduce their emissions.”

Tackling greenhouse gas pollution, and eventually getting to net-zero emissions, is critical to ensuring the industry’s future amid rising climate demands from shareholders and increased competition from clean energy, argues Dell.

“There isn’t a simple solution. Saying we’re going to go all electric and all renewables tomorrow — that’s just not feasible. But the upstream industry has to make itself competitive with those other sources and in my view that means delivering a net-zero product.”

(Justin Jacobs)

Data Drill

US petrol demand has steadily recovered in recent months as the vaccine rollout allows a gradual return to normality. Now as Americans take to the roads for the summer, demand is set to jump once more.

“The summer driving season, already under way, is set to boost gasoline demand — although overall levels are still expected to lag pre-pandemic norms,” said Lenny Rodriguez, an analyst at S&P Global Platts.

Power Points