Oil and gas companies are shedding value, taking on debt, and losing favor among financial institutions and investors.<\/b>
\nOil and gas companies were already facing structural problems before Covid-19 and are in long-term decline.
Update, June 29: Chesapeake Energy Corp., a massive US oil and gas company that led the fracking boom, has filed for Chapter 11 protection in a bankruptcy court in Texas following the collapse of energy demand in the Covid-19 crisis. The following post, first published April 20, explains why companies like it faced challenges predating the pandemic. (It\u2019s not clear whether Chesapeake received stimulus funds before filing for bankruptcy.)
As countries across the world have gone into lockdown in response to Covid-19, economies are in free fall. Almost every sector is taking a hit, hemorrhaging jobs and value. And almost every sector will be shaped, for years to come, by the speed, amount, and nature of public assistance it receives. There is a finite amount of time, resources, and political will available to get economies going again; not every sector will get what it wants or needs.
In short, the decisions legislators make in response to the coronavirus crisis will have an enormous influence on what kind of economies emerge on the other side.
In March, I wrote about what an ideal recovery and stimulus package would look like. Then I wrote about how shortsighted it is for Republicans (enabled by learned Democratic passivity) to reject aid for the struggling clean energy industry.
In this post, I take a look at why it is equally shortsighted for President Trump and congressional Republicans to remain so devoted to the fossil fuel industry.
The dominant narrative is still that fossil fuels are a pillar of the US economy, with giant companies like Exxon Mobilproducing revenue and jobs that the US can\u2019t afford to do without. Even among those eager to address climate change by movingpast fossil fuels to clean energy\u2014 a class that includes a majority of Americans \u2014 there is a lingering mythology that US fossil fuels are, to use the familiar phrase, too big to fail.
But the position of fossil fuels in the US economy is less secure than it might appear. In fact, the fossil fuel industry is facing substantial structural challenges that will be exacerbated by, but will not end with, the Covid-19 crisis. For years, the industry has been shedding value, taking on debt, losing favor among financial institutions and investors, and turning more and more to lobbying governments to survive.
It is, in short, a turkey. CNBC financial analyst Jim Cramerput it best, back in late January, before Covid-19 had even become a crisis in the US: \u201cI\u2019m done with fossil fuels. They\u2019re done. They\u2019re just done.\u201d
\u201cWe\u2019re in the death knell phase,\u201d he said. \u201cThe world has turned on [fossil fuels].\u201d
Cramer\u2019s take is not yet conventional wisdom, but he\u2019s right. Evidence in support appears in an April report from the Center for International Environmental Law (CIEL) called \u201cPandemic Crisis, Systemic Decline.\u201d Let\u2019s walk through it.
The UK-based think tank InfluenceMap recently did an analysis that tracks corporate lobbying in the face of the Covid-19 crisis. It found that, across the globe, the oil and gas sector has been the most active in lobbying for interventions, seeking, as CIEL summarizes, \u201cdirect and indirect support, including bailouts, buyouts, regulatory rollbacks, exemption from measures designed to protect the health of workers and the public, non-enforcement of environmental laws, and criminalization of protest, among others.\u201d In Canada, Australia, and the UK, the industry is arguing that it must be subsidized and deregulated in order to survive.
In the US alone, the industry is seeking access to a range of stimulus funds, relief from a variety of pollution regulations, and use of the strategic petroleum reserve to bolster prices. Journalist Amy Westervelt is tracking at least a dozen other lobbying efforts. Recently the Federal Reserve changed its rules to allow bigger businesses access to \u201cMain Street loans\u201d (widely seen as a sop to oil and gas companies) and, as Emily Holden reports for the Guardian, records show that fossil fuel companies have already gotten $50 million in loans meant for small businesses.
The petrochemical and plastics industry, which is in large part an extension of the oil and gas industry, is exploiting the crisis as well. It has lobbied the federal government to declare an official preference for single-use plastic bags and suggested that more fresh produce should be wrapped in plastic.
The virus has not slowed down the Trump administration\u2019s attempts to assist the industry. It is gutting fuel economy standards, which, by its own estimation, will increase pollution and eliminate 13,500 jobs a year. The EPA has dramatically eased the enforcement of pollution regulations and moved forward with its \u201csecret science\u201d rule, which will make it more difficult to understand and address the health impacts of air pollution \u2014 and more difficult to study the coronavirus.
During a supply glut driven by historically low prices, the Interior Department is rushing to lease federal land for oil and gas development, despite an anemic response, rock-bottom prices, and calls from conservative and taxpayer groups to suspend leasing in the face of the coronavirus.
The administration seems determined to bail out struggling shale gas companies, despite that overleveraged, debt-ridden sector being long overdue for a shakeout. (For more on that, check out Amy Westervelt\u2019s reporting at Drilled.)
Trump is negotiating with Saudi Arabia and Russia on oil supply cuts, and has the Department of Energy buying up millions of barrels of oil for the strategic petroleum reserve, all to try to boost the price of oil to help struggling oil majors. A group of GOP senators is lobbying for fossil fuel companies, including coal companies, to be eligible for the small business recovery fund.
In April, EPA Administrator Andrew Wheeler announced that the administration, in defiance of an enormous body of evidence and recommendations from EPA scientists and staff, will not tighten restrictions on soot pollution. And on Friday, Wheeler announced that the EPA will weaken standards on mercury and other toxic metals from fossil-fueled power plants, again in opposition to the scientific consensus, based on rigged cost-benefit analysis that deliberately excluded most benefits.
Across the board, the administration is doing everything it can to help fossil fuels. But it\u2019s a mug\u2019s game. The industry is faltering for reasons that well predate Covid-19.
US coal is in terminal decline, for reasons I\u2019ve written about many times before. No amount of stimulus money or weaker pollution regulations can save it.
But on the surface, things look different for oil and gas. Thanks to fracking, production has been booming for the past decade, vaulting the US ahead of Saudi Arabia and Russia to become the world\u2019s leading oil and gas producer.
And the same goes for petrochemicals and especially plastics, which have been forecast to be the main drivers of rising petroleum demand in coming years. The industry has issued rosy projections of plastics\u2019 growth and invested $200 billion in new petrochemical and plastics infrastructure.
But dig below the surface and things don\u2019t look so good.
First, fracking was a financial wreck long before Covid-19 hit. US fracking operations have been losing money for a decade, to the tune of around $280 billion. Overproduction has produced a supply glut, low prices, and an accumulating surplus in storage.
CIEL reports:
Even as its prospects grow dimmer, the enormous debt the industry has taken on over the years is coming back to bite it. Some $40 billion will come due this year alone, and around $200 billion in the next four years.
Second, both oil and gas prices were persistently low leading into 2019. Due to oversupply and mild winters in the US and Europe, there is a glut of both natural gas and oil, such that the entire world\u2019s spare oil storage is in danger of being filled. Many big oil deals in \u201cfrontier countries\u201d with as-yet-unexploited reserves, like Guyana, Argentina, and Mozambique, are falling through as low prices drag on.
Third, renewable energy and electric vehicles are threatening oil and gas\u2019s dominance in both transportation, which represents 70 percent of global demand, and electricity. Natural gas\u2019s status as a \u201cbridge fuel\u201d in the power sector is in increasing doubt; since 2014, orders for new gas turbines (to generate power) have fallen by half. As for transportation, a recent report from the international banking group BNP Paribas concluded that \u201cthe economics of oil for gasoline and diesel vehicles versus wind- and solar-powered EVs are now in relentless and irreversible decline.\u201d
Fourth, oil and gas majors are revealing their own weakness by writing down assets \u2014 effectively conceding that certain reserves cannot be profitably exploited. In 2019, Chevron wrote down $11 billion worth; Spanish oil company Repsol recently wrote down $5 billion worth. Exxon Mobil, after adding Canadian tar sands assets to its books in 2017, reversed course and wrote down 3.2 billion barrels last year.
Fifth, financial institutions \u2014 \u201cinstitutional and retail investors, banks, insurers, and credit rating agencies\u201d \u2014 are catching wind of fossil fuels\u2019 weakness and beginning to back away. Many, like Wells Fargo, BlackRock, the European Investment Bank, and the World Bank Group, are restricting investments in carbon-intensive projects. As of March 2020, asset investors worth $12 trillion had declared that they would divest from fossil fuels.
As financial institutions divest, the ones still invested in carbon-intensive projects face increasing vulnerability to lawsuits charging them with ignoring material risks. \u201cAs the risks of investing in the oil and gas sector become ever more apparent,\u201d CIEL writes, \u201cmore and more investors subject to fiduciary duties will likely choose to steer clear of these companies.\u201d
Like these other dismal trends, the financial turn from fossil fuels was underway well before Covid-19. Over the past decade, companies in the sector have spent more on stock buybacks and dividends than they have brought in through revenue, leading to a greater and greater debt burden. Declining confidence in the sector has made it the worst-performing sector on the S&P Index.
Finally, plastics, the great hope of the oil and gas sector, do not appear to be growing fast enough to justify the industry\u2019s optimistic projections. Much of the US plastics industry is geared for export, but countries across the world (127 and counting) are adopting restrictions on single-use plastics. The most recent such restrictions were adopted by China, the world\u2019s largest plastic producer and consumer. Plastics, like oil and gas, are suffering from the dual malady of overexpansion and underconsumption.
As an example that encompasses all these structural problems, CIEL cites Exxon Mobil. The company\u2019s plan for growth involves growth in its petrochemical operations, which is now in doubt; fracking in the Permian Basin, which is now in doubt; and expanding oil production in Guyana, which is now (owing to political instability) in doubt.
All these doubts are converging as Moody\u2019s recently revised the company\u2019s outlook to negative. It fell out of the S&P\u2019s top 10 for the first time, its stock hit its lowest price in a decade, the rapid rise of renewables and electric vehicles rendered billions (and perhaps soon trillions) of dollars of its assets worthless, and it is keeping shareholders happy with debt-financed dividends. The Institute for Energy Economics and Financial Analysis found that over the past decade, Exxon Mobil has spent $64.5 billion more on payouts to stockholders than it earned in free cash flow. That can\u2019t go on much longer.
Again: All of these structural trends predate Covid-19. But the global lockdown in response to the virus has accelerated all of them.
Into this already dismal situation for fossil fuels came the virus and the subsequent lockdown. The vertiginous plunge in consumer demand has hit every sector of the economy, but oil and gas, already facing oversupply and persistent low prices, were particularly vulnerable.
\u201cOil, gas, and petrochemical stocks have been affected more rapidly and much more deeply than almost any other sector,\u201d CIEL writes. \u201cThe oil and gas sector lost more than 45% of its total value from the beginning of January to early April 2020.\u201d
The already declining stocks of Exxon Mobil, Royal Dutch Shell, and Occidental Petroleum were sent tumbling even faster. In July 2014, Exxon stock hit a high of $107; as of early April 2020, it was at $42, its lowest level in decades. (On June 29, it was at $44.)
Transportation represents 70 percent of petroleum consumption, but no one is moving. Rystad Energy estimates that as of March 2020, global traffic is down 40 percent. As lockdowns remain, that number will likely drop further.
Air travel has been the fastest-growing source of demand for transport fuels, but no one is flying. \u201cIn the final week of March 2020,\u201d CIEL writes, \u201ccommercial air traffic was almost 63% lower than in 2019.\u201d
Public health officials warn that there could be periodic outbreaks for months or even years. Meanwhile, there are rapid advances being made everywhere in the infrastructure, technology, and practices of working remotely, from home. It\u2019s entirely possible that auto and air travel won\u2019t reach their pre-virus levels in the US for years, if ever.
Travel by ship is also taking a hit. Cruise ships, beset by a series of viral horror stories, have suspended operations and many analysts doubt they will ever fully recover.
Meanwhile, oversupply, exacerbated by the drop in demand, is taxing the nation\u2019s storage capacity \u2014 the International Energy Agency says global capacity is about 85 percent full. \u201cNearly all observers have concluded that at projected levels of demand destruction,\u201d CIEL writes, \u201cthe total global capacity for storing unneeded oil and gas will soon be exceeded.\u201d At that point, many producers will be forced to simply shut down operations and write-downs will accelerate.
On top of all this has come a price war between Saudi Arabia and Russia, competing for the shrinking supply left over by the US supply glut. Global oil prices were at $69 per barrel in January 2020. The price of a barrel of Canadian tar sands oil appears headed into negative prices, as are Texas oil and natural gas in some parts of the US, for May futures (June prices are higher). The so-called OPEC+ group of oil-producing nations (OPEC + Russia) recently agreed to a 10 million barrel a day cut in production, but analysts agree that it is unlikely to be sufficient to stabilize prices.
(In the hours after this article was first published on April 20, oil futures for May fell to negative prices. Mind-boggling.)
When storage capacity runs out, producers are forced to pay people to take oil off their hands. (Raise your hand if you had \u201cnegative oil prices\u201d on your 21st-century bingo card.) Even if storage doesn\u2019t completely run out, it will be close to full, serving to suppress prices, for years. Petrochemicals and plastics don\u2019t have it much better, with major investors delaying or dropping out of projects left and right.
\u201cIn the medium term,\u201d CIEL writes, \u201cthe prospect of a full recovery for many of these revenue streams is, at best, uncertain, and, in many cases, unlikely.\u201d Fossil fuels and petrochemicals could struggle for years.
And even if they eventually manage to achieve something like their pre-virus trajectory, that trajectory was sloping downward. As CIEL summarizes: \u201cthe pandemic exposes and exacerbates fundamental weaknesses throughout the sector that both predate the current crisis and will outlast it.\u201d
Slowly but surely, the world is beginning to take global warming seriously, shifting attention and investment to materials and sources of energy that do not produce greenhouse gas emissions. As more and more jurisdictions, institutions, and investors turn away from fossil fuels, explicitly citing climate change, those left holding carbon-intensive assets will become targets of increasingly intense legal and civic activism holding them responsible for the damages.
CIEL concludes with recommendations to investors, frontier countries, and local communities: Take heed of fossil fuels\u2019 long-term weakness when making decisions about the future. CIEL also argues that public officials \u201cshould not waste limited response and recovery resources on bailouts, debt relief, or similar supports for oil, gas, and petrochemical companies.\u201d
Given the well-established inclinations of Trump and congressional Republicans, that recommendation is likely to fall on deaf ears, at least in the US. If Democrats do not muster the courage to stop them \u2014 and it does not seem they will \u2014 the GOP is likely to continue showering the fossil fuel industry with favors while dismissing aid to the clean energy industry as frivolous.
At best, they can slow down the transition to clean energy a bit. They cannot stop it. Adding stimulus money to fossil fuels\u2019 already subsidy-rich diet will allow a little more pollution and a little more damage to public health for a little longer, but it\u2019s only a delay. Meanwhile, other countries will be establishing a commanding position in some of the biggest growth industries of the 21st century.
It would be a shame to emerge from this crisis still clinging to the past rather than facing, and preparing for, the future.
Editor\u2019s note, May 1: This piece has updated to note new Federal Reserve rules to allow bigger businesses access to \u201cMain Street loans.\u201d
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