Arctic National Wildlife Refuge, Alaska.

Arctic National Wildlife Refuge, Alaska. Credit: Getty Images/Patrick J. Endres

The Mukluk well, drilled in the unforgiving waters north of Alaska's Prudhoe Bay, is the stuff of awful legend in oil circles. When it came up dry in 1983 after $2 billion had been sunk, some surmised oil had definitely been there at one point but perhaps shifted elsewhere in a sort of vast geological leg-pull. As one executive, quoted in Dan Yergin's "The Prize," remarked: "We drilled in the right place. We were simply 30 million years too late."

Fortitude helps, it seems, but timing clearly is everything when it comes to Alaskan wildcatting. The current controversy over new leases to drill in the Arctic National Wildlife Refuge, or ANWR, won't play out over eons. However, that's exactly the sort of timeline the incoming administration of President-elect Joe Biden — which opposes the auction — will work toward.

A drilling lease is an option. An oil producer pays a premium up front, and then the value they realize (or don't) is a function of several things: Is oil or gas actually there? How much? What does it cost to find and produce?

The other thing it is a function of is time. The longer it takes to develop an oilfield, the more that old bugbear, the time value of money, eats into your return on investment. One of the reasons oil companies like shale is that barrels can start flowing in a matter of months, as opposed to conventional resources in remote areas that can take years or even decades to develop. This has become especially important of late amid the industry's dismal return on capital. A big reason for this was billions of dollars being tied up in big, complex projects, which ran over budget and got delayed, trashing their economics.

So while the outgoing administration of President Donald Trump is rushing to get the first ANWR leases auctioned off in early January, Biden's greatest weapon in trying to prevent any actual drilling will be delay.

With Democrats unlikely to have the requisite numbers in the Senate, even after Georgia's runoffs, the auction results can't be overturned easily. But they can be messed with in the myriad ways government can mess with things, especially on federal lands. These include having the Bureau of Land Management step down from contesting the lawsuits filed already by indigenous and environmental groups; the BLM itself suing to reopen the review process; or an executive order mandating nothing happen ahead of an extensive review of climate-related risks, according to Kevin Book of ClearView Energy Partners, a Washington-based research firm. "Slow works as well as no," when it comes to a project's economic viability, he said.

All of that might be successfully challenged in courts (with lots of Trump-appointed judges). That said, by rushing the auction, Trump may make those leases more susceptible to challenges on technical grounds. In any case, courts are time machines, as in machines for chewing up time. Whereas environmentalists bemoan the "predatory delay" of oil interests putting off action against climate change in order to realize profits, Biden could engage in what might be called preparatory delay as a tactic to defer them to the point of expiration.

And ANWR oil is already on a long fuse, mainly because of the sheer difficulty of drilling in the Arctic. In an analysis published in 2018, the Energy Information Administration surmised that first oil from any new wells in the ANWR's coastal plain wouldn't arrive until 2031 — and that was under the explicit assumption of "no protracted legal battle." Peak production wouldn't be reached until 2040. Moreover, while the EIA's mean estimate of technically recoverable oil from the area topped 10 billion barrels — a huge prospect — that was under an assumption back then of Brent crude oil averaging $86 a barrel in real terms this decade and $100 in the next.

Optimists may still like those odds or something approaching them. While predictions of peak oil demand have grown more widespread (and imminent in their nature), there are still many who see the seeds of at least one more oil-price spike being sown in the industry's current spending cutbacks. For their bet to potentially work, peak oil demand forecasts don't have to be completely wrong, just too early.

Still, the list of potential bidders is likely to be a short one. Major banks have already signaled their reluctance to lend to such endeavors, prompting proposed rules forcing them to do so from Republicans (the party of free enterprise, remember them?) Oil majors such as Exxon Mobil and Chevron, which have been busily slashing capex budgets, would struggle to justify taking a punt anyway, not least because of the extra PR damage entailed. BP just pulled out of the North Slope. ConocoPhillips, while it may be Alaska's biggest oil producer, is scaling back its exploration activity in general and has led the charge on prioritizing payouts to investors over production growth.

Privately held operators with less exposure to the spotlight might yet decide the option is worth it — especially if bids are low precisely because the usual crowd shies away. Indeed, January's auction doesn't look set to be a gusher; the pressures of low oil prices today and the here-be-dragons level of uncertainty ahead demand low bids.

Even after any lease is obtained, buyers must still be comfortable enough to then spend the vastly bigger sums required to actually explore and develop. That's why delaying progress after leases are sold, or simply threatening to do so, can be such a potent tool for opponents.

It isn't just that a dollar of revenue is worth less the further it is deferred. The original development of the North Slope was delayed for five years by environmental objections. But these were ultimately swept aside by the exigencies of the 1970s oil crises. Today, the context is entirely different.

The longer development is delayed in ANWR, the closer we get to the 2030s and '40s — and the clearer the impact of things like electric vehicles on oil demand will become. In that sort of oil market, relatively expensive barrels from Alaska would struggle to compete, especially if their biggest nearby outlet, California, was more electrified than elsewhere. At this point, a tectonic shift in oil can happen in years rather than millennia.

Denning is a Bloomberg Opinion columnist covering energy, mining and commodities.


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