By Sharon Kelly, an attorney and freelance writer based in Philadelphia. She has reported for The New York Times, The Guardian, The Nation, National Wildlife, Earth Island Journal, and a variety of other publications.Originally published at DeSmogBlog.
The oil, gas, and petrochemical industries have taken a massive financial blow from the COVID-19 pandemic, a new report from the Center for International Environmental Law (CIEL) concludes, but its financial troubles preexisted the emergence of the novel coronavirus and are likely to extend far into the future, past the end to measures aimed at curbing the spread of the disease.
“Oil and gas are among the industries hardest hit by the current economic crisis, with leading companies losing an average of 45 percent of their value since the start of 2020,” the report finds.“These declines touch on nearly every facet of the oil and gas sector’s business, including the petrochemical sector that has been touted in recent years as the primary driver of the industry’s future growth.”
That’s to some degree because of the abrupt plunge in demand for oil resulting from shelter-in-place and quarantine measures that, as of early April, applied to over 3 billion of the world’s 7.8 billion people — including 90 percent of the United States. And the United States uses an outsize amount of gasoline — in 2017, the US consumed one fifth of the gasoline used globally, the report notes. Nearly 70 percent of petroleum products are consumed for transportation, the report adds — meaning that the impact on demand resulting from quarantines is enormous.
But, before the pandemic, oil, gas, and petrochemical firms “showed clear signs of systemic weakness,” CIEL’s report says, listing factors like the industries’ poor stock market performance, high levels of debt, competition from cheaper renewable energy, slowing growth in demand for plastics, and growing awareness among investors of the impacts that action to slow climate change will have on the sector.
“The crash that we’re seeing in the oil and gas and petrochemicals industry is a recent intensification of what has been a very long-term trend,” said Carroll Muffett, president of CIEL. “If you look back over the last 5 years or more, we’ve seen the oil and gas industries significantly underperforming the broader Dow Jones on a long-term basis.”
Revenue Problems Predate Pandemic
The report includes recommendations that result from the industries’ prolonged struggles to satisfy investors.
“Public officials taking policy action to respond to COVID-19 and the economic collapse should not waste limited response and recovery resources on bailouts, debt relief, or similar supports for oil, gas, and petrochemical companies,” it concludes. “These efforts may succeed in diverting significant public resources to the sector and delaying the clean-energy transition; however, they are very unlikely to reverse the underlying trends driving the long-term decline of the oil, gas, and petrochemical industries.”
CIEL also noted that pension plan managers and other institutional investors have legal duties that may force them to keep an especially close eye on any oil, gas, or petrochemical projects in their portfolios.
“Because many investors, including pension funds, which are the largest category of equity investors globally, have fiduciary duties to their beneficiaries, they have legal obligations on top of the financial incentives to maximize profits: they must also reduce risk,” the report says. “As the risks of investing in the oil and gas sector become ever more apparent, more and more investors subject to fiduciary duties will likely choose to steer clear of these companies.”
A drilling rig on a former ranch outside of Bartsow, Texas in the Permian Basin.
The report notes that even before the pandemic began, global oil production was outpacing demand at a striking rate. “The International Energy Agency estimates that the oil industry had 2.9 billion barrels of oil in storage by the end of January 2020, just slightly below its all-time peak,” CIEL reported. “With government stockpiles holding an additional 1.5 billion barrels, roughly 4.4 billion barrels of oil were sitting in storage even before the first shutdowns of large sections of the economy began.”
“What is really critical to recognize is that that supply glut pre-existed the current crisis,” said Muffett.
That glut comes in part from the past decade’s rush to drill for shale oil and gas, which left many drillers deep in debt at the end of 2019. Oil giants wrote down billions of dollars in assets at the end of last year, the report notes, including an $11 billion write-down by Chevron, much of it tied to the company’s Appalachian-region shale gas acreage, which left the oil giant with a $6.6 billion loss for the quarter.
“Critically, fracking isn’t profitable,” said Steven Feit, a CIEL staff attorney. “It has been a gigantic money pit kept afloat by external financing.”
High Yield Junk
By 2025, over $200 billion of debts amassed by the oil and gas industry are scheduled to come due — including $40 billion that the industry must repay this year alone.
Much of that debt already looked risky going into the crisis.
A new Friends of the Earth (FOE) report, titled “The Big Oil Money Pit,” highlighted the ways that the federal bailout of the high-yield market could allow energy companies “to benefit disproportionately” from efforts by the Federal Reserve to use $75 billion of a “$500 billion corporate slush fund” to buy corporate debt.
“High-yield” debts generally offer investors higher returns because of the higher risks associated with that debt.
“FOE’s report identifies a dozen shale drillers that might qualify for that federal bailout, including Apache, Devon Energy, EOG Resources, and Pioneer Natural Resources, estimating that the 12 firms might qualify for over $24 billion in benefits a piece. ExxonMobil, Chevron, and Conoco, it estimates, could qualify for an additional $19.4 billion.
The report notes that some of the fine print in the bailout plan makes Continental Resources — the company founded by Trump advisor and confidant Howard Hamm — eligible for federal support despite the fact that S & P downgraded its debt to junk-grade on March 27, 2020.
Even companies that don’t qualify for that federal support could receive help from another piece of the bailout plan, FOE adds.
“Because the junk bond market is now 11 percent energy companies (predominantly oil and gas), any attempt to bolster the entire sector is going to benefit heavily indebted frackers,” the report predicts.
“The thing to keep in mind is that in the world of high-yield debt, the oil and gas industry is actually the single largest issuer of junk debt,” said Lukas Ross, senior policy analyst at FOE.
FOE pointed to $6.9 million in bonds issued by Chesapeake Energy and $37.4 million in bonds issued by Range Resources as examples of debts that could benefit from what it termed “a back-door bailout for the accumulated bad debts of the fracking industry.”
“The big question is, can the oil and gas industry convert its political power into economic survival,” Ross added.
Pollution and the Pandemic
Oil, gas, and petrochemical lobbyists have sought a broad array of other government responses to the pandemic, as highlighted by a third report, recently released by UK think tank InfluenceMap.
“It’s not just financial bailouts that are underway, there’s regulatory intervention,” said Dylan Tanner of InfluenceMap. “The rules of the game in many ways are changing.”
The industries have sought the rollback of pollution controls in many countries as a part of the response to the COVID-19 pandemic, the report notes, including requests to curtail or delay programs designed to cut climate changing pollution.
Journalist Amy Westervelt at Drilled News has compiled a tracker of climate change-related rollback efforts in the U.S., at both the federal and state levels, and in other countries. It includes the announcement by the Environmental Protection Agency that it would not penalize “violations of routine compliance monitoring” resulting from COVID-19, exceptions from the Toxic Substances Control Act for chemical manufacturers, and a pending rollback of pipeline safety rules.
At the same time, ongoing pollution from the oil, gas, and petrochemical industries may also be making the impacts of the pandemic worse, health experts say.
COVID-19 testing site in LaPlace, in St. John the Baptist Parish. Credit: Julie Dermansky for DeSmog
The highest per-person COVID-19 death rate in the United States can be found in Saint John the Baptist Parish, Louisiana, population 43,000, CNN reported today.
The tiny parish, one of two profiled by DeSmog’s Julie Dermansky this week, is in the heart of Lousiana’s Cancer Alley — an area along the Mississippi River that’s densely packed with petrochemical plants and oil refineries.
“They’re already very vulnerable,” Wilma Subra, a chemist and MacArthur genius grant fellow, told Dermansky, referring to St. John the Baptist residents living near one plant. “Add the long-term exposure of toxic chemicals to the virus, which has a huge impact on the lungs, then they are much more apt to get it and then to have very detrimental effects.”
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Fracking isn’t profitable. Not sure that’s the money quote but it says everything about this segment.
Fracking is costly, damages local roads and infrastructure as heavy trucks loaded with sand are or were constantly running. Sand most likely imported by railcar, of course.
I’m not an engineer but curious if the capacity exists to stockpile excess product? I’m aware the strategic reserves are practically maxed on storage. Or I think ive heard that.
Its very hard to stockpile petroleum and gas products. The amount of storage is pretty much fixed as its costly and takes time to build. It can be in surface tanks, or other forms of storage like underground voids (usually made in salt deposits, so its only possible where the geology is favourable) You can also use oil tankers as ‘temporary’ storage – you can see if this is happening by going to marinetraffic.com to see if there are more tankers moored than at sea – when there are, you will know we are in trouble. Gas (and sometimes oil) can be pumped into worked out oil and gas wells for future use. Another form of ‘storage’ is to simply temporarily cap wells that have been engineered, which is the most likely way most frackers will approach it.
So essentially, its hard to define ‘storage’, but whichever way you look at it, the extent of storage in the US is limited, and its rapidly filling up. It will happen on a regional basis as much depends on the distribution network. you will know when capacity is reached when operators find themselves quite literally trying to give it away. We are not there yet, but I think its probably only a matter of weeks.
In his last paragraph ‘trying to give it away’ PK is alluding to what is called ‘negative oil’, by which oil producers pay for those (usually traders) who control storage space to take the oil
Instead of closing down production, which is expensive and in some cases very hard to reverse
But this is hardly a new concept or product – there’s close to negative pax in airtravel at the moment, only the government is, as it has long been,subsidising the airlines
Whatever the climate change or otherwise fashion of the moment is, oil and gas are essential infrastructure and revenue to producing countries, especially poor
And if the bug has taught anyone anything it is to retain diversified products and production chains, not to bet the farm on the next new thing, as if the world was always straightline
Most in fact of the anti oil blurb is big money propaganda, big capital sniffing a new market, GSachs selling the new dot.com boom
Citations needed in regards to your conspiracy tainted assertion about “big money propaganda”. In my experience professional environmentalists are usually ‘true believers’, not corporate stooges or PR flacks. Irrespective of whether their viewpoints are wise and fact-based, or not.
The money trail is much more obvious on the other side of the divide, and the beneficiaries of “drill baby, drill” arguments tend to be very comfortable with appropriating public monies in order to fund their lifestyles. The product seems almost incidental at this point.
Good info, thanks for the additional detail. I lived in N Texas btwn 2006 to 2015, so the energy boomlet was evident. But as with most things, a boon to the economy comes with a cost often ignored or defrayed onto a future generation.
Seeing price levels for 87 octane drop to levels when I drove a 4 cylinder tin can is both great and jarring, anecdotally.
Part of the challenge is transportation of the product. Fracking opened up many areas that have not been serviced by the O&G industry for many decades. They have been struggling to build pipeline capacity to easily transport oil and gas from both oil sands and fracking.
This is one of the reeasons that the Permian Basin has been successful. It is located in the heart of Texas-Oklahoma O&G networks of pipelines but there are limits of tank space available in that region.. Alberta, Dakotas etc. are away from the markets and struggle to transport in hot markets. Appalachia gas is at least close to the Northeast markets.
I suspect we will see tankers floating off of Texas and Louisiana soon just acting as temporary storage tanks. Then the crews get Covid-19 and a hurricane comes….. the Texas version fo a cruise ship.
Shale is worthless or actually negative value. But re the article, all junk and all IG issuers benefit from the Fed program as spreads come in – XOM, CVX are IG not high yield. But high yield participants are not bidding up everything, its clear some energy debt post fed announcement barely caught a bid.
If shale is allowed to implode you can get to 70 Brent next year. Us shale is 10-13pct of supply and is undisciplined and capital destructive. It was already floundering but covid and the opec move in March could have led to a lot of permanent closures. This is the kind of psychic shock to energy investors that the dot com was to nasdaq ones. Took a decade plus to work through which I think will happen here for shale.
If shale goes away 10-12mmbpd is gone, Saudi and Russia reclaim some of that but u get a market much more balanced than the past 3-4 years. Libya, Iran, Vz can always add to take from shale but I suspect this problem with shale results in the industry and capital drying up for many years ie no swing production.
Why does SWIFT still exist?
Certainly not because of the brains on Wall Street.
Where did the money and impetus come from to build Silicon Valley?
If not for MMT, the S&P would be stranded at 1250.
Why does the response to the virus have nothing to do with the virus?
What is going to happen when the next virus arrives, and the one after that?
Are you willing to give up all your civil rights, to the end of the university medical complex?
When is enough enough?
sorry, forgot tag,
Why does the military keep sending oil competitors back to the dark ages, at any cost?
Better question would be; who gives the military their marching orders? Cui bono is not always uniform.
my experience suggests – momentum, gravity, false narratives and peer pressure, like all tribes.
A lot of good information in this article. Thanks J-L S!
One paragraph caught my eye:
Plummeting oil prices, along with plummeting demand from coronavirus, is also causing shutdowns for ethanol processing plants with interesting secondary effects.
– Distillers grains are a byproduct of production that is a low cost additive to beef cattle feed. Shortages in distillers grains is causing a rush for farmers to find alternative cattle feeds, and because of ethanol subsidies, alternatives are much more expensive. This could lead to faster culling of herds to reduce costs and feed demand, which could lead to higher levels beef prices and shortages down the road.
-Ethanol plant byproducts also provides a significant supply of low cost CO2 gas used by beer and carbonated soft drink plants. Beer availability and prices could be impacted. On the soft drink side, I was surprised that, in my locale at least, there seems to be an abundance of carbonated sodas still on the groceries shelves that can’t seem to keep milk in stock, so maybe soda may not be as big a deal as beer.
– Stoppages of ethanol production have caused corn prices to drop substantially impacting farmers.
Any others I haven’t mentioned?
“… Beer availability and prices could be impacted.”
Nooo…! Say it ain’t so.
As regards soft drink – which is just sugar+water+gas – that’s true but a beer – if it’s a true beer rather than a beer-flavoured sugar+water+gas concoction – produces its own gas as part of the fermentation process.
There was some bragging going on about how shale drillers are now making more money “short selling” than ever before. That’s not saying much since they never turned a profit. But interesting time-honored tactic: borrow tons of easy money for an enterprise everyone knows is a lost cause; keep it up for 10 years and with the help of the Fed, or snake oil; the stock will rise exponentially – then just do the about face and start to sell enough everyday to buy up more bottomed-out stock at the end of the day; sell it first thing in the morning; rinse and repeat. Or is there some new method to make money short selling? Just sell it all to the Fed? How on earth isn’t this regulated?
And the United States uses an outsize amount of gasoline — in 2017, the US consumed one fifth of the gasoline used globally, the report notes. Nearly 70 percent of petroleum products are consumed for transportation, the report adds —
and, from the WIKI:
The Department of Defense uses 4,600,000,000 US gallons (1.7×1010 L) of fuel annually, an average of 12,600,000 US gallons (48,000,000 L) of fuel per day. A large Army division may use about 6,000 US gallons (23,000 L) per day.
that is 11,665,000 Barrels used yearly by the US MILITARY
and they want more subsidy–just saying
IS the US still paying $400 a gallon to move petroleum products to “the front” in Afghanistan? Or to maintain US/“Coalition” troops in the oil areas of Syria? In Afghanistan, nobody seemed to care that petro deliveries to fuel the Abrams tanks and “up-armored Humvees” and “Mine-Resistant” [not “mine-PROOF] troop carriers and those drones and Apaches and super-gunned AC-130s. The War Toys that give us the disinterested War Pron of laconic pilots and spotters looking through their video ‘green screens” and then “lighting up” people who dared resist the invasion of their country with 30mm or 105mm cannon shells, some made of depleted uranium, https://foreignpolicy.com/2017/02/14/the-united-states-used-depleted-uranium-in-syria/. And of course those juices-stirring Hellfire missiles.
Petroleum that came through the Khyber Pass from Pakistan on convoys often driven by “insurgents” with bribes being paid to other “insurgents” along the way to keep them from blowing up the convoys, https://abcnews.go.com/WN/Afghanistan/united-states-military-funding-taliban-afghanistan/story?id=10980527
All so that petroleum could fuel some “game changing” operation in Wardak or Ghazni or Kandahar or Helmand that petered out to be replaced by some new commanding general’s Grand Strategic Vision Doctrine which also sputtered?
Here’s what we mopes are paying for “fully burdened” cost of a barrel of petro to feed the insatiable petro appetite of a military whose mission is mostly about controlling the sources of the petroleum it needs to control the sources of its petroleum:
“ You know who’s not getting cheap gas? The US military”
https://www.cnbc.com/2014/12/17/you-know-whos-not-getting-cheap-gas-the-us-military.html
$400-600 a gallon, delivered to “the front.” And of course that ‘fully burdened” cost does not include the external costs of petroleum production, which are way more: https://www.ucsusa.org/resources/hidden-costs-fossil-fuels
How are we going to pay for this?
Greg Palast suggests the purpose of the war in Iraq was to keep the Iraqi oil in the ground. Iraq has lots (second or third proven reserves in the world), but security for oilfields and pipelines is critical. In any case, trouble in the Middle East keeps the price up as long as there’s enough demand…and the U.S. has been working overtime to make the Middle East a war zone.
On the demand side, building sprawl cities insures every single trip is in an auto–also, having to own a car is the most regressive U.S. “tax.” On that front, the State of California now mandates new development have “Complete Streets” that accommodate pedestrians and bicycles in addition to autos, and the State now mandates development proposals do traffic engineering to minimize vehicle miles traveled rather than minimizing congestion. There’s also some indication we’ve reached “peak driving.”
Those are some of the most hopeful signs.
In the oil states (LA, TX, OK, Southern CA, etc.) the “conservatives” were in the ascendant because Obama policies were squeezing drillers to the point of bankruptcy. Sounds like not even the “Trump bump” can save them now.
In a way there’s a downside to a declining oil industry. It was one of the few sophisticated manufacturing industries remaining in the U.S. Computer technology for oil discovery and the actual machines themselves (e.g. Hughes Tools) were among the best in the world. Probably not for long.
Too bad the will to change and the incentives to do so are largely missing in action.
I estimate that my wife and I are saving about $200/month in fuel charges in March and April due to working from home and reduced trips for entertainment, restuarants, local trips. In Upstate NY that would be about two-thirds gasoline cost and about one-third federal, state, and local taxes at the preCovid $2.50/gal price.
Previously weekly fillups of about $30 per vehicle plus additional for extended trips. Now we just top up the fuel tank once per month whether it needs it or not. I haven’t put any gas in my car since mid-March and it is still over half-full while my wife had gotten down to a quarter tank in that time and just filled up.
I don’t see this changing substantially for months.Not a good look for shale oil.
Shut down the oil / gas wells, store our excess supply in tankers and aircraft carriers until it can be drawn off and used. Focus investment on renewables. It will still be very lucrative for interested capitalists but Germany, Japan, China are racing ahead in their research and production and we have fallen behind.
During April a slump has started in oil production in the US according to EiA weekly oil production statistics. Still nothing out of bounds compared with other occasional slumps but we will see. I am wondering wether some reduction could be explained directly by Covid-19, by excess inventories or both.