Arctic Drilling Ban is Antithesis of Respecting Market Forces

Arctic Drilling Ban is Antithesis of Respecting Market Forces
Doyon Drilling

A recent opinion in these pages, Market Argues Against Arctic Ocean Oil Development, claims that “it is curious that some Republicans are pushing to develop natural resources that the market does not need”. The gist of the piece is that in a $50-a-barrel price environment, the Trump Administration should respect market forces and not overturn President Obama’s moratorium on offshore Arctic energy.

That argument, of course, relies on a piece of linguistic sleight of hand to support its central premise. The crucial point is that Alaska’s Congressional delegation and other Republicans are not pushing to develop resources, they are arguing for the option to develop them; in other words to let the market - and not Presidential fiat - decide whether Arctic waters have the potential to be developed.

Supporting its claim, the opinion goes on to note that several majors have withdrawn from the Arctic. While it’s true that Shell and others did suspend their offshore operations in 2015, the piece fails to acknowledge a flurry of more recent activity. In the last six months Caelus Energy made a world class discovery in Smith Bay, the Arctic Slope Regional Corporation acquired 21 leases in the Beaufort Sea, the State of Alaska held a leasing round which delivered “outstanding” results - including the sale of 8 tracts in the Beaufort - and Italian major Eni Petroleum submitted a development plan to the Bureau of Ocean Management.

The author also argues that it could be “decades” before prices have rebounded sufficiently to justify Arctic development. That may or may not be right, forecasting any commodity price in the long term is notoriously challenging. But it is absolutely correct on one point; Arctic offshore energy is not a play for today, or even tomorrow.

Building out the necessary infrastructure will take time, possibly more than a decade, so prices may indeed have recovered by the time resources are ready to come on stream. But the point is that we need to start the process now if we’re even going to have the option to take advantage of the Arctic’s significant potential.

Ultimately the key word here is potential. Failure to address the ban today needlessly reduces the choices of Administrations tomorrow. Conversely opening the region up will increase optionality and provide future decision-makers with greater flexibility to make optimal choices.

Similarly allowing the potential for development will help stimulate a range of additional investments in wider infrastructure. In a report published earlier this year, the Alliance for Innovation and Infrastructure stressed this very point, concluding that offshore Arctic energy development would spur an estimated $6.3 billion investment in critical infrastructure. A case in point is the deep-water Port at Nome which would have been the first in the U.S. Arctic, but was shelved following Shell’s withdrawal.

All of which leads to the final contentious point. Noting the lack of infrastructure in the region, the piece claims that it significantly increases the difficult of responding to a spill, and thus that the oil and gas activity should be permanently banned from Arctic waters.

The problem is that that’s a circular, self-fulfilling argument, which ignores the fact that the industry is more or less the only driver for the creation of infrastructure in the far north. Without it there is simply no prospect that the ports, roads and airports that Arctic communities need, will ever be created. As the region opens up to new industries – witness the voyage of the Crystal Serenity – we are going to need to that infrastructure.

It’s fair to argue that offshore energy development in the Arctic is not an immediate proposition. But it’s untrue to claim that there’s no prospect of development and worse that the lack of historic investment in infrastructure prohibits any future activity. By that logic, nothing would ever get built.

Industry has repeatedly shown that it has the appetite to develop Arctic offshore resources, despite the efforts of the Obama Administration to shut the region down. The next logical step is to overturn the ban and allow the market to decide whether it is commercially viable to develop Arctic resources. Not only would that decision be consistent with the United States’ commitment to free market ideology, it’s also the most effective tool to catalyze the creation of new infrastructure in the region.

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