Energy might seem a lesser priority to US readers amid the chaos in Washington over the past 24 hours, as protesters sent the Capitol into lockdown.

But in spite of that, two big events in the past few days told us a lot about the direction of American energy and climate policy in 2021 — and they dominate our first newsletter of the new year.

First was the Senate run-off elections in Georgia, which delivered Democratic control of the upper chamber. What does this mean for Joe Biden’s energy plan? Read on.

Our second main note is on Alaska, where a controversial licensing round for drilling in protected wilderness ended up as a farce. We weigh in on what this says about American energy and its future.

Welcome back to Energy Source. Happy New Year to all our readers!

Please get in touch at energy.source@ft.com. You can sign up for the newsletter here. — Myles

What the Georgia results mean for energy

Amid yesterday’s chaos on Capitol Hill, Democrat Jon Ossoff’s victory was called in Georgia’s run-off election, making it a sweep for the Democrats in the state and securing the party’s control of Congress in a major boost to President-elect Joe Biden’s plans for a clean energy revolution.

The win opens new avenues to pass green spending and shape legislation, but a 50-50 Senate — with Vice-president-elect Kamala Harris tilting the advantage to the Democrats — and a bitterly partisan Capitol Hill means Mr Biden’s $2tn climate ambitions will still likely have to be tempered.

Nevertheless, far more green spending can now be expected with Democrats controlling the floors of the Senate and House than if Republicans had managed to retain a majority in the Senate.

Mr Biden has said that he saw December’s $900bn omnibus stimulus bill as a “down payment” on the recovery and wants more spending in his first days of office to propel the economy out of the Covid crisis. The Democrats’ pair of victories in Georgia makes bigger sums far more likely.

Kevin Book, head of research at Clearview Energy Partners in Washington DC, expects a fresh stimulus package to be in the “triple digit billions”, rather than “double digit billions” had Republicans held on to the Senate.

Like December’s omnibus bill, that could funnel significant additional spending to renewables, clean tech research and development, energy storage, electric vehicles as well as other aspects of Biden’s green agenda.

At the same time, Mr Book says that garnering the 60 votes needed to pass such legislation means incentives for carbon capture and storage, which appeal to red state senators, will also likely be included.

Analysts at Capital Alpha Partners also point to the Democrats’ ability to use so-called “budget reconciliation” rules as a critical avenue for new green spending. The rules allow for passage of spending with a simple majority, as long as it is offset by new revenue such as tax hikes.

Capital Alpha argues a prospective infrastructure bill, a longtime Democratic priority, could give the party an opportunity to “bundle in as much of their clean energy agenda as possible” using budget reconciliation rules to fend off any Republican veto threat.

Manchin in the middle

The narrowly divided Senate will give Senator Joe Manchin, a Democrat from West Virginia who is set to take over the Committee on Energy and Natural Resources, and a small group of centrist lawmakers, outsized influence to shape legislation.

While this group will probably support some increased spending on renewables and clean energy, they will hem in Mr Biden’s green ambitions, especially where they directly attack the fossil fuel sector, such as rolling back oil and gas tax benefits, or when they feel exposed to attacks of supporting the Green New Deal, argues Mr Book.

With a 50-50 split, Democrats will also find it difficult to overcome the 60 vote threshold needed to pass landmark climate legislation in Mr Biden’s first term, such as implementing a national carbon tax or a national clean energy standard, which could enshrine Mr Biden’s ambitions for a carbon-free electricity system by 2035.

The Democratic wins in Georgia put the spotlight on Congress, but much of the action on energy and climate will still come through Mr Biden’s ability to wield presidential power in the regulatory and foreign policy arenas.

Mr Biden has put together an executive branch, including domestic and international climate tsars, that has won plaudits from progressives and points to an ambitious agenda from the White House.

The incoming Biden team has “built an apparatus for an executive led climate policy,” says Mr Book, and will see the Senate majority as “nice to have”. (Justin Jacobs)

Arctic drilling auction fails to drum up interest

We have been arguing in this newsletter for months that despite the Trump administration’s efforts to open the Arctic National Wildlife Reserve to drilling, companies would not be rushing to take part.

And sure enough, yesterday’s sale of leases in the region came up dry. Just three groups — one of which was an Alaskan state agency — put in bids, raising a grand total of $14.4m. (That is a far cry from the $2.2bn the administration expected to generate from this and a later sale).

So what went wrong? And what does the whole farce say about the state of US oil exploration?

The embarrassing lack of bids is the result of a “perfect storm” of events that put off prospective bidders, Carl Tobias, a law professor at the University of Richmond, told ES.

  1. Unnecessary risk: First there is a lack of appetite among producers — even before they slashed capital expenditure in the wake of last year’s crash — for high risk, high reward exploration projects in far flung places. The shale revolution has already provided companies with plenty of access to oil.

  2. Biden: Then, there is the imminent arrival of Joe Biden, who has voiced explicit opposition to the project (and the oil industry more broadly). The president-elect said 15 years ago that “preserving what's special about Alaska’s wilderness” was one of his top priorities. Analysts reckon he will work hard to delay drilling projects and could drive up costs to the point that they are totally unviable.

  3. A bad look: There is the public relations minefield that Arctic drilling has become — especially in an era where investors are demanding that oil companies burnish their environmental credentials. As Prof Tobias put it:

    “Some entities, like BP, have signalled that they will end dependence on oil, others may have realised that drilling in ANWR will be too expensive and complicated, given Biden’s views and considerable strong public opposition, and perhaps the threat of much litigation challenging the leases.”

  4. Peak Oil: Constantly looming over the industry is the notion that demand for crude may soon begin to slide. There is no use pumping money into long-term projects — and Alaskan exploration is expensive — that the market may not need.

“These ideas alone, but especially together, seem like a perfect storm for companies that might have entertained the idea of bidding,” said Prof Tobias.

The lacklustre auction stands in contrast to the days of $100 oil when companies beat a path to the Arctic. The heydays of frontier oil projects have passed. (Myles McCormick)

Data Drill

Line chart of Net imports, million barrels a day* showing US ends 2020 a net oil exporter

It was a rough year for proponents of “American energy dominance”, but they had cause for optimism as 2020 drew to a close.

After spending decades becoming a net exporter of energy — a status it achieved in 2019 — imports outweighed exports for much of last year as the crash sent the industry into a tailspin.

But for now at least, the country has regained its net exporter mantle. It shipped out an average 1.6m barrels more than it brought in the final four weeks of 2020.

Power Points

  • Opec’s extended meeting this week ended with Saudi Arabia pledging to slash an extra 1m barrels a day of oil output in the coming months, even as Russia moves to increase production.

  • Defaults by US oil and gas producers are set to outstrip all other sectors again in 2021.

  • Mexico’s state oil company Pemex is running out of quick fixes to cover debt payments.

  • Trafigura has announced its first emissions reduction target as pressure to take action on climate change spreads to the commodity trading industry.

Endnote

After a bruising 2020, America’s shale producers were hoping for a little luck going into the new year. Saudi Arabia delivered at this week’s Opec+ meeting with a surprise 1m barrel a day supply cut, billed by the Saudi energy minister as a “gift” to the world’s crude producers.

The move sent US oil prices above $50 a barrel for the first time since last February and has many analysts arguing it could be a catalyst to keep prices creeping higher.

It won’t fix much of what ails the US oil sector. Investors still want to see a strategic shift that can deliver returns and deal with environmental, social and governance pressures. The incoming Biden administration will heap new regulations on oil and gas producers. And the Covid-19 crisis is far from over.

Yet a few dollars goes a long way in the shale patch, especially with prices teetering around the break-even point.

“Even a fleeting window of $50-55 a barrel WTI prices could be enough to jump start the battered sector’s recovery,” says IHS Markit analyst Karim Fawaz.

“Saudi Arabia’s unilateral output cut has been described as a gift to the oil industry,” Paul Horsnell from Standard Chartered wrote in a research note. “We think that the gift will be particularly gratefully received in Texas.” (Justin Jacobs)

Energy Source is a twice-weekly energy newsletter from the Financial Times. Its editors are Derek Brower and Myles McCormick, with contributions from Justin Jacobs in Houston, Gregory Meyer in New York, and David Sheppard, Anjli Raval, Leslie Hook and Nathalie Thomas in London.

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