Photo: ben klocek, Flickr
Amidst the COVID-19 pandemic, global economic crisis, and crashing oil prices caused by the Saudi-Russia oil war, the U.S. oil and gas industry is in a state of crisis.
The fracking industry, already drowning in debt and unable to turn a profit, is collapsing. Many top drillers in the Permian Basin – the busiest oil field in the world, and the engine of the U.S. oil and gas boom – are halting or drastically cutting production. Tens of thousands of oil workers in Texas have been laid off. On March 30, the Permian’s flagship crude oil plunged to a stunning $10/barrel.
Drilling, pipelines, refineries, storage facilities, petrochemical plants – virtually all links of the fossil fuel industry chain are feeling the crunch. Banks have signaled that the easy flow of credit to shale companies has ended. A wave of bankruptcies is likely just beginning.
Against this backdrop, the question looms: will the U.S. government bail out the fossil fuel industry? And what could this bailout look like?
Different interests are mobilizing their forces to promote a bailout and shape its terms, or to oppose one. Industry powerhouses like the American Petroleum Institute and Marcellus Shale Coalition are tapping their access to the Trump administration to ram through their wish lists and demands. Meanwhile, climate organizers are proposing green stimulus measures, or even outright industry public ownership.
Indeed, the battle over what a fossil fuel industry bailout might look like, and the extent to which it proceeds, is a proxy for two larger battles.
First, it’s a battle between the indebted independent shale companies and the Big Oil majors over the fate of the industry’s structure. The former just want to survive, while, increasingly, it appears the latter want to wipe out and gobble up these weak links, consolidating the industry. It’s also a battle between different parts of the fossil fuel production chain – oil producers versus refiners and petrochemical producers, for example – and between producers of oil versus natural gas that are centered in different geographical regions.
Second, it’s a battle over our energy future and the terms of resolution to our current crisis. Namely: to what extent will we offer financial life support to our current carbon-intensive energy regime and the corporate power upholding it, versus using this moment to corral fossil fuel power and address multiple areas of crisis (unemployment, inequality, etc) through accelerating our transition toward a green future?
Below, we analyze and categorize the different ways the government may bail out, or is bailing out, the fossil fuel industry: direct corporate bailouts via varying rationales, government purchasing of oil, weakening of environmental regulations, weakening of climate- and fossil fuel industry-related banks regulations, crude oil import restrictions, and other measures.
We end with a brief overview of some strategic implications of our analysis for climate organizers.
1. Direct government bailout measures
The most obvious way the government could channel bailout funds towards the fossil fuel industry is through loans and other direct aid. There are a few ways this could happen.
(i) “Small business” aid for independent shale companies
The bailout bill contains $377 billion in aid reserved for emergency grants, forgivable loans, and loan relief for small businesses with 500 or fewer employees.
Many of the independent oil and gas companies that make up the upstream and midstream shale industry fall into this “small business” category. Many are in a state of collapse.
The Washington Post reported on March 10 that the Trump administration was “strongly considering” a federal bailout for the fracking industry via low-interest government loans, though the American Petroleum Institute and financial sector have signaled their opposition to this.
Many small drillers – in Texas, but also in Oklahoma, North Dakota, and elsewhere – are slowing or halting production, unable to maintain operations amidst the oil crash and coronavirus pandemic.
It’s still somewhat unclear exactly which small businesses might qualify for bailout loans, but there are different oil and gas companies that could potentially fall into this category – some with owners, executives, and investors who are major Trump donors.
For example, Tim Dunn is the founder and CEO of CrownQuest Operating, one of the more productive and durable independent Texas drillers. CrownQuest has between 201 and 500 employees, according to LinkedIn, which would qualify it as a small business under the bailout’s terms. Dunn and his spouse have donated $161,200 to Trump’s election efforts.
Farris and Dan Wilks have stakes in a host of smaller Texas fracking companies that have seen major financial distress. The Wilks brothers have donated at least $111,600 to Trump election efforts. Both Dunn and the Wilks brothers also bankroll political efforts aligned with the agenda of Trump’s conservative evangelical base.
Many of these smaller companies are backed by private equity money, which raises another question: to what extent could any bailout assistance towards smaller fracking businesses wind up as profits for Wall Street?
(ii) “Big business” aid & the Oil Majors
However, as DeSmog journalist Justin Mikulka points out, there may be little to no assistance going towards smaller shale producers. This is because the shaping of bailout measures are intersecting with an intra-industry battle between the Big Oil majors who can withstand this crisis and the smaller, highly indebted, U.S.-based fracking companies that have yet to show they can turn a consistent profit.
The bailout package has $454 billion reserved for big businesses, states, and cities (this amount can be “leveraged up” by the Federal Reserve to create a “$4.5 trillion money cannon aimed at the largest corporations in America,” as David Dayen put it in the American Prospect).
The bailout does not contain any specific provisions for the fossil fuel industry – like it does for airlines, for example – but the Trump administration and Treasury Secretary Steve Mnuchin specifically have great leeway to decide where this huge chunk of money will go.
Mikulka notes that the American Petroleum Institute, which is controlled foremost by Exxon, has not pushed for bailout measures. Instead, it has lobbied for designations and weakened regulations (more on this below) that would benefit the Big Oil majors, with their sprawling pipeline and refinery infrastructure, rather than smaller independent shale companies.
Mikulka cites Pioneer Natural Resources CEO Scott Sheffield’s claim that Exxon and its lobbying groups – including API – want the Saudi-Russia oil war to take down the smaller shale companies. “They prefer all the independents to go bankrupt and pick up the scraps,” said Sheffield.
In other words, the current crisis may be the moment for Big Oil to destroy shale industry operations that have proven unsustainable – gobbing up debt, failing to turn a profit – and then integrate the wreckage of assets into its own, more deeply consolidated operations.
This also raises the question of whether the Big Oil majors will influence the flow of any bailout assistance going to smaller oil and gas companies whose operations or assets they may integrate.
At least seven current and former CEOs from some of the biggest oil and gas companies in the U.S. – Exxon, Chevron, Occidental, Devon, Energy Transfer, Phillips 66, and Continental – will attend an in-person meeting with Trump on Friday, April 3. Continental will be represented by Harold Hamm, founder, chairman, and former CEO, who has given more than $1 million to Trump’s election efforts.
In sum, while keeping an eye on where bailout money goes, observers must also gage how the direction – or absence – of any assistance is intervening towards a broader restructuring of power and assets within the fossil industry as a whole.
(iii) Assistance for business deemed essential to national security
It is also worth noting that $17 billion in bailout money is reserved for businesses working in national security. While this money appears to be intended for Boeing, other firms could receive funds. More broadly, officials could invoke this rationale for making other or later funds available to fossil fuel companies, including through the Defense Production Act.
Indeed, Trump has already signaled that he could invoke national security to aid the fossil fuel industry. On March 26, he tweeted: “Our great Oil & Gas industry is under under seige [sic] after having one of the best years in recorded history. It will get better than ever as soon as our Country starts up again. Vital that it does for our National Security!”
Our great Oil & Gas industry is under under seige after having one of the best years in recorded history. It will get better than ever as soon as our Country starts up again. Vital that it does for our National Security!— Donald J. Trump (@realDonaldTrump) March 26, 2020
Moreover, one of the American Petroleum Institute’s two major lobbying demands with the Trump administration was to recognize its corporate members with “Critical Infrastructure Designations” because they “provide the necessary fuels that ensure products and services are delivered in a timely fashion around the country.” This designation offers exemptions from costly government directives, and could be another rationale for bailout assistance, direct purchases of oil, or national security importance.
2. Direct government purchasing of oil
The Trump administration previously proposed that the government directly buy 77 million barrels of crude oil for the U.S. Strategic Petroleum Reserve (SPR), which the Department of Energy calls “the world’s largest supply of emergency crude oil.”
“We’re going to fill it right up to the top,” said Trump on March 13. Trump said that “the move would assist the U.S. oil industry and help the country achieve energy independence,” according to the Hill.
This purchase would have given the SPR 77 million more barrels of oil on the cheap while channeling a few billion dollars towards shale producers.
Nevertheless, the SPR purchases are still on the table. According to S&P Global Platts, the “$3 billion requested by the Trump administration to buy US-origin crudes could still be added to future coronavirus stimulus legislation,” and Politico Energy reports there may be a push for this. Moreover, the Trump administration could invoke the Defense Production Act to buy oil.
But with oil prices dirt cheap, there is little reason for the government to purchase oil right now, unless the Trump administration wants to use it as a short-term bailout lever for the fracking industry.
Filling up the SPR would disproportionately benefit independent shale companies. The API has not lobbied for it.
3. Weakening of environmental regulations
The Trump administration gave fossil fuel companies a backdoor bailout on March 26: a massive rollback of regulations that could save the huge sums.
The New York Times reports that the Environmental Protection Agency will now allow “power plants, factories and other facilities to determine for themselves if they are able to meet legal requirements on reporting air and water pollution” and that agency will “not issue fines for violations of certain air, water and hazardous-waste-reporting requirements.”
This was one of the main demands of the API on the Trump administration: “Non-essential Compliance Discretion” with regards to existing regulations, including waivers of “routine testing and reporting requirements.”
In other words: let the industry regulate itself, without outside oversight.
The API also asked for “waivers of seasonal fuel requirements (and relevant associated state waivers).” In plain terms, this means that the fossil fuel industry could sell winter grade gasoline into the spring and summer to relieve the production glut. This would save the industry money while delaying the switch to summer gasoline, which contributes less emissions and is more expensive to produce.
On March 27, the EPA issued a waiver on federal summer gasoline fuel requirements through May 20th.
While not assistance in the form of direct loans or investments, the weakening of environmental regulations is an indirect bailout measure to fossil fuel companies that will save them significant sums and externalize environmental costs onto society.
Again, as Mikulka points out, these EPA waivers will disproportionately benefit the Big Oil majors like ExxonMobil, Chevron, and others, who own supply chains of pipelines and refineries.
Moreover, the question arises whether – as often occurs with “disaster capitalism,” when powerful interests use crisis moments to win long-desired changes – these temporary waivers will become permanent.
4. Weakening of climate- and fossil fuel industry-related banks regulations
Banks are not a direct part of the fossil fuel industry, but they are an indispensable component of the industry’s larger structure, without which it simply could not function.
Banks provide the essential loans, advisory services, and other financial instruments that prop up the entire fossil fuel industry, and they profit greatly from all this. This is why climate organizers in recent years have begun to target major banks, such as JPMorgan Chase, the biggest financier of fossil fuels in the world.
In this crisis moment, some banks are pushing for weakened regulations surrounding their business with the fossil fuel industry and their climate accountability requirements.
(i) Weakening of regulations on bank loans to oil & gas clients
Regulators are moving towards easing lending restrictions to oil and gas companies so that banks could make higher-risk loans, all which creates more risk within the larger financial system.
On March 17, for example, CBNC reported that federal regulators were discussing “relaxing liquidity rules” on banks so they could “take on a higher proportion of loans with lower credit ratings” and be “more likely to extend loans to companies” – including energy companies – “that could, in the near future, be classified as risky.”
Both the Federal Reserve and the Office of the Comptroller of the Currency are considering relaxing required leverage ratios for lenders, who would therefore be able to make riskier loans.
Another alarming development is the decision by the Commodity Futures Trading Commission’s (CFTC) to issue a temporary waiver to Capital One on its commodity swaps with its oil and gas clients.
With the plunging of oil prices, Capital One faced what Zero Hedge called a “margin call effect” on its swaps exposure that would have normally required the bank to register as a “Major Swap Participant.” This, in turn, “entails a number of complex and costly reporting and compliance obligations” that could “could hurt the institution’s ability to keep lending.”
Tyson Slocum, Energy Program Director of Public Citizen, warned in a letter to the CFTC that “exemptions for Major Swap Participant Registration threaten systemic risks, especially given some financial institutions’ exposure to the precarious economics of the oil and gas sector.”
Moreover, this exemption for Capital One could set a precedent. Attorney Nihal S. Patel suggested that the CFTC’s letter granting the waiver suggested that it “is open to considering needed relief related to the current severe market conditions.”
Climate organizations like Stop the Money Pipeline have begun to oppose these weakening of regulations.
(ii ) Weakening of climate-related disclosure requirements
On March 19, the Financial Times reported that the “global banking industry is demanding regulators relax or delay a raft of post-crisis rules on everything from capital and liquidity to accounting and climate change.”
In particular, it noted, “banks are pushing back against newer regulations that will require them to start disclosing the exposure to climate-related risks from the end of the year.”
The article noted that, in the United Kingdom, “banks are also pushing for the [Bank of England] to delay climate change stress tests.” One bank executive said that “Steps on the whole green debate have put an additional onus on banks,” and that “We’ve got to be pragmatic.”
This comes as banks and asset managers face increasing public and regulatory pressure to account for increased climate crisis-related cost risks and sustainability measures in their business operations.
It is unclear what these efforts to weaken climate-related disclosure requirements in the U.S. might look like, or the extent to which U.S. financial institutions are seeking these measures. The article stated that bank executives are trying to convince “US regulators” as part of their “globally co-ordinated push” to “ensure that new rules and standards do not impede their efforts to keep money flowing to the real economy.”
(5) Restrictions on the import of crude oil
As DeSmog’s Nick Cunningham reports, some leaders, including Trump, have floated placing tariffs or bans on crude oil imports so that refiners would have to purchase domestic oil. Oil producers in shale fields like the Permian and Bakken, which center around oil drilling, could be the primary beneficiaries of this policy.
However, as with the question over whether to bailout the fracking industry, this proposal is “creating another fissure in the industry,” writes Cunningham.
First, the refinery and petrochemical industry – and its lobbying arm, the American Fuel and Petrochemical Manufacturers (AFPM) – oppose restricting oil imports, which could raise the cost of and flexibility around purchasing oil for refiners.
Second, the U.S. shale gas industry also opposes restrictions on oil import restrictions because it would increase its domestic competition. Cunningham quotes a March 25 letter sent to Commerce Secretary Wilbur Ross by the Marcellus Shale Coalition, the industry group for Marcellus Shale-region fracked gas producers. The letter opposed restrictions on oil imports that would “stimulate crude oil production” and “cause the production of additional incidental or ‘free’ gas to be produced out of those crude-oil plays.”
In other words: drilling operations in oilfields like the Permian Basin and Bakken, while centered on oil production, also produce natural gas as a byproduct. This “secondary” gas production enters the domestic market and competes with production in regions like the Marcellus Shale, which focus primarily on producing natural gas. Hence, natural gas producers, like those companies represented by the Marcellus Shale Coalition, oppose measures like oil import restrictions which could stimulate natural gas production as a byproduct of oil production in places Texas and North Dakota.
Once again, the question of oil import restrictions shows how the fate of proposed bailout measures intersects with intra-industry battles between the interests of different industry sectors and geographies.
(6) Other possible bailout measures
These are some other ways the fossil fuel industry might receive bailout assistance and favors:
- Reduction in royalty rates. The Western Values Project warns of lessee royalty rate reductions by Interior Secretary David Bernhardt which could suspend or lower royalties that oil and gas producers pay the federal government. For example, Louisiana Senator John Kennedy sent a letter to Bernhardt asking him to “[press] pause on the royalties the federal government charges,” which would benefit oil producers in the Gulf of Mexico that operate in offshore areas under the Interior Department’s jurisdiction. The WVP notes that taxpayers have already “lost $12.4 billion in revenue from oil and gas drilling on federal lands over the last decade” and that revenue “from drilling on these leases has instead gone into the pockets of the oil and gas corporations.” The WVP also warns of the Interior Department following the EPA “by waiving environmental reviews, limiting oversight and compliance, and fast-tracking permit applications.”
- Real estate tax breaks. According to the New York Times, the second biggest tax giveaway in the bailout package is a tucked-away provision that will “permit wealthy investors to use losses generated by real estate to minimize their taxes on profits from things like investments in the stock market.” The new rule lifts restrictions so that real estate investors can use losses that they write down on the paper value of their investments to counteract and avoid other taxes. The New York Times states that “oil and gas and commodities trading” also “stand to benefit from the change,” though it is not yet clear how this would work.
- Denying paid sick leave to workers. On March 10, the Washington Post reported that “concerned energy sectors allies” had been calling the Trump administration and “privately warning against the administration supporting any sweeping paid sick leave policy.” The denial of paid sick leave to oil and gas workers, or the subsidizing of their paid leave by the government, would save fossil fuel executives significant sums. Oil and gas companies have begun to put workers on furlough. Tens of thousands of Texas oil and gas workers have been laid off.
Implications for climate organizers
While the full landscape of fossil fuel industry bailout measures is still coming into focus, we see some clear strategic implications for climate organizers.
- Restructuring of the fossil fuel industry – and how to orient towards it. Competing blocs and geographies within the fossil fuel industry are contending over the terms of bailout measures: Big Oil majors versus smaller independent shale companies; oil producers versus refiners and natural gas producers; operations centered in states like Texas and North Dakota versus Pennsylvania. Among other things, the coming months could spell the collapse of the shale industry landscape as we know it, with a wave of industry consolidation that further empowers the Exxons and Chevrons, and bailout measures the Trump administration decides on could make or break, for example, the petrochemical plant boom, or oil and gas production in varying geographies more broadly. Organizers should observe these dynamics and think about how all this might call for some reorientation in analysis and strategy in opposing fossil fuel operations and industry power.
- Resist weakening regulations on banks. The easing of rules on lending to oil and gas companies is emerging as a backdoor bailout measure for banks and parts of the fossil fuels industry. The fight against this can be seen as part of the larger battle to challenge the finance-fossil fuel nexus and protect against systemic financial risk. Two aims go hand-in-hand: banks shouldn’t finance any deepening of our climate crisis, and they should limit their – and our financial system’s – exposure to the growing financial risk of the fossil fuel industry.
- Weakening environmental regulations & disaster capitalism. The fossil fuel lobby and a friendly administration are already using this crisis to drastically rollback environmental regulations. There is a danger that, going forward, these could be expanded and made permanent – again, something to keep a close eye on. Poor and working class communities and communities of color, already hit the hardest by public health problems like air pollution, stand to be the biggest victims of weakened regulations, pointing towards the alignment of fighting these regulatory rollbacks with environmental justice goals.
- Keep an eye on Wall Street vultures. Private equity firms are one of the major behind-the-scenes investors in the kinds of independent oil and gas companies that are facing collapse. Organizers should monitor how private equity looks to exit this crisis and/or acquire any bailout money directed towards oil and gas companies or the financial sector. Moreover, keep an eye on private equity and hedge fund vulture attempts to use their $1.5 trillion in “dry powder” and favorable loan terms to scoop up companies with dirt-low valuations.
The terms over how we respond to this historic global crisis are in flux and up for grabs. How this resolves itself – which interests prevail in defining those terms – will deeply shape our fate. Amidst the peril of this moment, however, there is also promise: to resist the fossil fuel industry bailout and fashion a response to this crisis that will curtail corporate power, create green jobs and infrastructure, and guide us towards a truly sustainable and equitable future.