Last month, as federal officials continued to expand their historic efforts to rescue American businesses from the economic chaos caused by the spread of COVID-19, Denver-based Extraction Oil & Gas announced that it had filed for Chapter 11 bankruptcy — and no one was less surprised than veteran environmental activist Phil Doe.
“We predicted it a long time ago,” said Doe, environmental director of advocacy group Be The Change and a former U.S. Bureau of Reclamation official. “You can’t have $1.5 billion in debt and ever expect to come out of it when you never make any money. You don’t have to be the Oracle of Omaha to figure that one out.”
Over the last two years, Doe — a mainstay at public hearings on oil and gas issues in Colorado, where he often has harsh, uncompromising words for the industry and the regulators he accuses of not doing enough to hold it accountable — has frequently found himself talking just as much about share prices and debt loads as about safety risks and carbon footprints. He warned state officials that Colorado’s decade-long shale drilling boom was a financial house of cards that would soon come crashing down. Drillers were too deep in debt. Their new wells weren’t producing enough oil and gas. And the state would be left to clean up the mess.
“The reaction was always, ‘We have it under control,’” Doe said. “And the industry kept saying, ‘The wells will become profitable, they’ll become profitable, they’ll become profitable.’ But these … wells quit producing in about 18 months. There’s no way to catch up.”
It wasn’t just anti-fracking activists — Wall Street analysts, too, were already predicting a tough year ahead for many oil and gas companies in January, just before the coronavirus pandemic plunged the industry into an unprecedented crisis. A wave of bankruptcies has swept over the energy sector in the ensuing months, causing at least four Colorado-based operators to go under, and the industry now faces a high-stakes financial reckoning as the economy contracts, its creditors come calling, and scientists and advocates continue to call for a rapid global transition from fossil fuels to clean energy.
But there’s one thing that Big Oil will be able to count on as it tries to weather the storm: plentiful government assistance. A Newsline review of Federal Reserve data, corporate financial filings, lobbying disclosures and other documents shows that Colorado’s oil and gas industry has been buoyed by government relief measures worth hundreds of millions of dollars since the pandemic struck earlier this year. Relief has come in the form of federally-guaranteed loans, generous tax breaks, an unprecedented corporate bond-buying program, sharply reduced royalties on oil and gas extracted on public lands and more.
Many of these efforts are part of a wide-ranging corporate rescue package authorized by the Coronavirus Aid, Relief, and Economic Security, or CARES, Act, passed by bipartisan majorities in Congress in late March. While not all of the programs in question target the fossil fuel industry specifically, several are structured such that oil and gas companies, with their volatile cash flows and debt-ridden balance sheets, have disproportionately benefited. On multiple occasions, programs have been enacted or amended after lobbying campaigns by industry groups and their allies, leading some environmental activists to describe the federal government’s efforts as a “stealth bailout” of fossil fuel companies with close ties to President Donald Trump’s administration.
“Part of the very thin veneer that the Fed is operating under is that it needs to remain sector-neutral,” said Brett Fleishman, a Colorado-based organizer and head of global finance campaigns for climate advocacy group 350.org. “But there are these sneaky ways that the shale industry is tapping into the current lending facilities, and the politics behind it — Trump sees it as his base.”
In the eyes of activists and many top Democrats, any effort to use public money to shore up the fossil fuel industry’s finances is an unacceptable giveaway in a time of rising global temperatures and worsening climate impacts around the world. Scientists with the U.N. Intergovernmental Panel on Climate Change have warned that in order to avert catastrophic levels of warming, global greenhouse gas emissions must be cut roughly in half by 2030 and fall to near-zero by midcentury — a trajectory that requires a rapid decline in the production and combustion of fossil fuels, which account for roughly 90% of the world’s carbon emissions.
“We ought to a have an economic recovery that is a smart recovery, that leverages the best of what’s to come,” said Rep. Joe Neguse, a Democrat from Boulder and a member of the House Select Committee on the Climate Crisis, which outlined its clean-energy plan in a 500-page report released this week. “I think that means investing in renewable energy, it means investing in our public lands. It does not mean bailing out fossil-fuel companies.”
Industry officials reject the characterization of the CARES Act or other federal relief programs as a bailout for fossil fuels. Records show that the American Petroleum Institute, along with individual Colorado oil and gas companies like Noble Energy, lobbied members of Congress on the bill — but so did nearly every other business group in the country.
“The CARES Act was not written for oil and gas companies,” Dan Haley, president of the Colorado Oil and Gas Association, said in a statement. “It included tax rebates in the form of checks and unemployment assistance for struggling households, it included specific help for state and local governments, hospitals, airports, and transit agencies, and it included important aid to help stabilize small businesses and markets. Keeping as many people employed as possible throughout this pandemic matters, whether that’s a teacher, a pilot, a small business owner, or an employee in the oil and gas industry.”
Amid the chaos and economic destruction caused by the coronavirus, however, experts worry that even temporarily bailing out the oil and gas industry could have devastating long-term consequences for the fight against climate change. In Colorado and beyond, policymakers are entering a critical, make-or-break decade for their efforts to reduce emissions, and as the federal government spends huge sums in an attempt to pull the economy out of a tailspin, Fleishman says it’s vital that the money be invested in accelerating the clean-energy transition, not slowing it down.
“The story right now is this money, and where it’s going,” he says. “Because the Fed is doing stuff it’s never done before in its 106-year history. It’s potentially loaning directly to local governments — that’s never happened before. It’s buying corporate bonds — that’s never happened before. We’re in this moment where the government has the power to do these big things, and make big changes. The Overton window has been blasted open.”
The CARES Act
Some of the most immediate aid offered to the oil and gas industry by the CARES Act came in the form of its $276 billion package of business tax credits and deductions — most notably a net operating loss “carryback” provision, which allows corporations to use their current losses to retroactively reduce tax bills from previous years. That’s a particularly enticing proposition for many oil and gas companies, which saw record profits as oil prices surged in 2017 and 2018 but can now offset that income and claim large, immediate tax refunds.
Colorado’s largest oil producer, Occidental Petroleum, told investors in its first-quarter filing with the Securities and Exchange Commission that it expects to receive a $195 million refund thanks to the net operating loss carryback provision and other CARES Act tax breaks. QEP Resources, a Denver-based firm with operations in Texas and North Dakota, anticipates $165 million in refunds in 2020. Antero Midstream, a subsidiary of Denver’s Antero Resources, claimed a $55 million refund, while drilling contractor Liberty Oilfield Services saw $9.3 million in gains.
Another major set of CARES Act relief measures is just getting started, and it could have far-reaching consequences for the energy industry in the months and years to come. The bill appropriated $454 billion to the Treasury Department’s Exchange Stabilization Fund, capitalizing a wide variety of lending programs that could allow the Federal Reserve to issue up to $4.5 trillion in loans.
Through one of these lending programs, the Secondary Market Corporate Credit Facility, the Fed has embarked on an unprecedented effort to directly purchase corporate debt, investing more than $6.8 billion in exchange-traded funds made up of bonds issued by the country’s largest corporations. The Fed’s equity stake in these exchange-traded funds amounts to hundreds of millions of dollars in guarantees on the debts of oil and gas companies with operations in Colorado, according to a Newsline analysis of the funds’ holdings. But the true impact of the Fed’s first-of-its-kind corporate bond-buying program has far exceeded these nominal dollar amounts. It has sent a powerful signal of federal support and stability to investors, causing bond markets to rally.
Once again, debt-ridden oil and gas companies are among those who stand to benefit the most from this relief. The Fed’s purchases have included hundreds of millions of dollars in junk-rated bonds — or “high yield” bonds, in Wall Street speak — from corporations deemed by credit agencies to be at the highest risk of default. Energy companies are the country’s largest issuers of junk-rated debt, accounting for more than 11% of bonds rated BB or below — a figure that includes top Colorado producers like Occidental, Extraction, PDC Energy and others.
The Fed’s move to backstop corporate credit markets quietly relieved huge amounts of financial pressure on over-leveraged oil and gas giants. Short- and medium-term bonds issued by Occidental and Noble Energy, Colorado’s two largest producers, have recovered nearly all of their value after plummeting following credit downgrades in March. The S&P U.S. High Yield Corporate Bond Index, which tracks junk bond prices, has similarly returned nearly to pre-pandemic levels, rising more than 22% since its late-March low. Meanwhile, healthier companies, like ExxonMobil — which operates in Colorado through natural-gas subsidiary XTO Energy — seized the opportunity to take out billions in new debt, adding to a record-shattering issuance of over $300 billion in corporate bonds in April, even as the U.S. economy suffered its worst month since the Great Depression.
For now, government relief efforts under the CARES Act have helped give energy giants some much-needed liquidity as they attempt to fend off their creditors and keep the lights on. But some financial analysts say that when it comes to the oil and gas industry, the Fed’s corporate rescue package is only delaying the inevitable.
“They’ve been kicking the can down the road for a long while, and they were running out of road,” says Clark Williams-Derry, an analyst with the Institute for Energy Economics and Financial Analysis. “So for them, these handouts just give them a few more yards of road to kick the can down.”
Over the last decade, Colorado’s oil and gas industry has been on the front lines of the “shale revolution,” a dramatic increase in production made possible by new technologies like horizontal drilling and advanced hydraulic fracturing, better known as fracking. Statewide oil production surged from just over 33 million barrels in 2010 to nearly 188 million barrels last year. The surge was driven almost entirely by unconventional shale production in the Denver-Julesburg Basin, which stretches across much of the northeastern quarter of the state.
But these soaring production totals in Colorado and beyond — which helped the United States overtake Russia and Saudi Arabia to become the world’s largest oil producer in 2018 — have papered over deep flaws in the shale industry’s business model, analysts say. Unconventional production is expensive, requiring huge capital expenditures and tight margins that make drillers highly vulnerable to price volatility. As their losses mounted, many operators doubled down, hoping to drill their way out of debt — only to find that newer shale wells were far less productive on average than they’d anticipated.
“They all think they’re going to be the lucky ones,” Williams-Derry says. He’s spent years studying the finances of oil and gas companies that invested heavily in shale production — and sounding the alarm about their unsustainability.
“No matter what the price of oil has been, frackers have spent more money on drilling than they have made by selling oil and gas,” he says. “The industry entered the coronavirus crisis in a place where it had been losing money for a full decade, and investors were getting sick and tired of pouring more money into shale companies that could never generate enough cash flow.”
Throughout 2019, a steady stream of headlines in the Wall Street Journal made clear that the financial sector was ready to bring an end to the shale revolution: “Shareholders Have No Love for Shale Companies.” “Banks Get Tough on Shale Loans as Fracking Forecasts Flop.” “Oil and Gas Bankruptcies Grow as Investors Lose Appetite for Shale.”
Then the pandemic hit, plunging the economy into chaos and offering Big Oil a chance to get in line behind the rest of corporate America to secure some sorely needed government relief. Don’t call it a bailout, Williams-Derry says — if only because the metaphor doesn’t quite fit.
In the case of the oil and gas industry, this is a boat with a hole in its hull. So bailing it out doesn’t do very much. -Industry analyst Clark Williams-Derry
In the case of the oil and gas industry, this is a boat with a hole in its hull. So bailing it out doesn’t do very much. -Industry analyst Clark Williams-Derry
“When you ‘bail out’ a canoe, what you’re doing is, you have a fundamentally sound canoe, but it’s taken on too much water — so you bail out the water, and you can sail on,” he says. “In the case of the oil and gas industry, this is a boat with a hole in its hull. So bailing it out doesn’t do very much.”
State officials to the rescue
Few interest groups wield greater influence at the Colorado State Capitol than the oil and gas industry, which spends millions of dollars annually to lobby lawmakers and regulators and millions more on state and local elections and well-organized PR campaigns. Even in an abbreviated 2020 legislative session with few major energy bills under consideration, oil and gas companies and trade groups spent at least $1.12 million lobbying state legislators this year, according to disclosure data from the Colorado Secretary of State’s Office.
Among the legislation they supported was a little-noticed measure passed in the whirlwind final days of the 2020 session, when lawmakers returned from a 10-week suspension caused by the spread of COVID-19 and raced to pass key bills and adjourn for the year. House Bill 20-1421, which was introduced on June 8 and signed into law by Gov. Jared Polis just six days later, granted local governments the authority to temporarily reduce or suspend interest payments on delinquent property taxes. According to state records, groups lobbying for the bill included the American Petroleum Institute, the Colorado Petroleum Association and Weld County, home to more than 90% of the state’s oil production. In 2019, nearly two-thirds of all assessed property values in Weld County were oil and gas assets held by production companies and other mineral rights owners; under HB-1421, they’ll owe virtually no interest on any property tax payments they miss between now and October.
“For some of our counties that really rely on certain industries, this in particular is very important,” state Rep. Lori Saine, a Republican from Weld County, told her fellow lawmakers in a June 9 hearing. “We want to make sure that they continue to make that decision to stay in business.”
Weld County’s Board of Commissioners voted unanimously on June 15 to slash delinquency interest payments from one percent to one-twelfth of one percent. Saine, who is term-limited and running for a seat on the county commission (she won a primary race, based on results on the morning of July 1), now touts the passage of HB-1421 on her campaign website, which says the bill will “help our oil and gas companies struggling to pay higher 2019 taxes with depressed 2020 revenues.”
The idea behind HB-1421 was first discussed by lawmakers, industry representatives and other public- and private-sector leaders appointed to the Governor’s Council on Economic Stabilization and Growth, an emergency body convened by Polis to guide the state’s response to the economic crisis caused by the pandemic. Among its recommendations, which were issued to Polis in April, was a request for the governor to “Advocate for (the) energy industry at (the) federal level,” according to a document on the council’s website.
“The COVID-19 global pandemic has had a widespread impact on Colorado industries and communities,” Polis spokesman Conor Cahill said. “The Governor is focused on ensuring our economy and hardworking people across all sectors are able to bounce back stronger than before. Industries across our state have felt the pain of the economic interruption caused by this pandemic.”
Other Colorado elected officials have been far more direct in their support for the industry. Rep. Scott Tipton, a Republican who represents the Western Slope, led other members of Congress in asking the Department of the Interior to fast-track royalty relief for oil and gas producers drilling on public lands, sharply reducing the payments to federal and state governments that drillers must pay for extracting publicly-owned minerals.
“We hope that you will use every tool at your disposal — including expedited royalty relief on federal lands and waters — to ensure that the COVID-19 pandemic doesn’t result in a further crippling of America’s oil, natural gas, and coal sectors,” Tipton wrote in a letter. “We must ensure that when our country emerges from this pandemic, America will continue to be the dominant energy producer in the world.”
The Interior Department, headed by Colorado native and former oil lobbyist David Bernhardt, has obliged, approving dozens of royalty cuts across the West over the last two months. Caerus Oil and Gas, a Denver-based driller that operates thousands of wells on the Western Slope, won approval in June for royalty reductions on at least five of its mineral leases across more than 4,000 acres of public lands northwest of Rifle, according to Bureau of Land Management records. The reductions will slash royalties owed by Caerus roughly in half, from 12.5% to 6.5%, for at least 60 days, at which point the company will have to reapply. In his letter, Tipton urged Interior officials to go even further, arguing that the current royalty relief process is “unnecessarily onerous and lacks the clarity needed to provide swift relief” and suggesting that companies should be able to apply for blanket relief across multiple leases, among other changes.
‘It’s a bailout for Wall Street’
In the unprecedented early days of the global coronavirus lockdown, carbon emissions plummeted as transportation, industrial activity and other source sectors slowed. Emissions fell 17% year-over-year in April, temporarily erasing 14 years of growth. In Denver and many other cities around the world, residents enjoyed noticeably improved air quality as tailpipes and smokestacks sat idle. But the respite didn’t last long.
In China, emissions have already returned to pre-pandemic levels, and global emissions are just 5% off their 2019 pace and continuing to close the gap as shutdown measures are gradually eased. Oil prices, too, have quickly rebounded, regularly trading above $40 per barrel in June.
Major components of the Federal Reserve’s relief efforts, however, are only just getting underway. On June 15, the Fed officially launched its Main Street Lending Program, an expansive credit facility for businesses with fewer than 15,000 employees, or less than $5 billion in annual revenue — conditions under which nearly all Colorado oil and gas companies will be eligible.
When first announced by the Fed in April, the Main Street program spelled out a far more stringent set of guidelines, including a provision mandating that borrowers “refrain from using the proceeds of the eligible loan to repay other loan balances.” Oil and gas groups and their political allies cried foul. In an April 15 letter to Fed chair Jerome Powell, Independent Petroleum Association of America CEO Barry Russell wrote that the restriction on debt repayment would prevent oil and gas producers from meeting “critical economic needs.”
Sixty GOP members of Congress, including Tipton, echoed the IPAA’s concerns in a letter to Powell and Treasury Secretary Steven Mnuchin on May 11. Tipton — who, according to his most recent congressional financial disclosure, owns at least $114,000 in stock in oil and gas companies — has consistently sidestepped questions about whether he accepts the scientific consensus on man-made climate change. A spokesperson for Tipton did not respond to a request for comment.
“It is crucial to keep the energy sector functioning and hard-working Americans employed, not only to retain U.S. energy dominance, but to rebuild our overall American economy,” reads the letter sent by Tipton and his colleagues to the Treasury Department. “Therefore, we respectfully request that the Department of the Treasury and the Federal Reserve resist calls to limit industry or company eligibility with regards to accessing the Main Street Lending Program.”
Four days later, the Trump administration once again gave the oil and gas industry what it wanted, issuing a new set of guidelines that substantially weakened the prohibition on debt repayment, along with other changes that expanded eligibility and increased the program’s maximum loan size from $150 million to $200 million.
“From the start, API has consistently said that we are not seeking industry-specific financial assistance or legislative action as a result of the market disruption caused by the pandemic,” Scott Lauermann, a spokesperson for the American Petroleum Institute, said in a statement to Newsline. “Our efforts have been focused on ensuring our member companies have the same access as other industries to economy-wide programs that promote continued employment and maintain systemic liquidity.”
Unlike loans extended to small businesses under the Paycheck Protection Program, loans guaranteed by the Main Street Lending Program must be repaid in full. But they also don’t strictly require recipients to retain their employees, with the program’s term sheet stating only that a borrower “should make commercially reasonable efforts to maintain its payroll.” And contrary to claims made by Tipton and other industry boosters, analysts say that job losses in the industry will likely be severe as long as its business model remains fatally flawed. It’s Big Oil’s long line of creditors, not rig workers and their families, who are likely to benefit most from bailout funds.
“It’s a bailout for Wall Street, almost explicitly,” Williams-Derry said. “To the extent that it’s money going to the oil and gas sector, it’s mostly money that will wind up in the hands of debt investors who wouldn’t get paid otherwise. Federal money goes to the oil and gas companies, and they use it to pay back existing debt.”
Meanwhile, the Fed’s bond-buying program is continuing to expand, with the central bank now beginning to buy individual corporate bonds directly, rather than through exchange-traded funds. Officials promise a “broad and diversified portfolio” of holdings, but activists and critics of the Trump administration are watching closely for evidence of fossil-fuel favoritism, as party leaders continue to wrangle over transparency and oversight provisions governing the Fed’s CARES Act programs. Yet another corporate credit facility — which will buy “primary market,” or directly-issued, bonds — is still forthcoming.
“The very clear message that the government is sending is that it cares much more about what the stock market does, and these big-business metrics, than it does about lived experience, and things like hunger and unemployment and utilities,” Fleishman said. “And you can just extrapolate what that means for oil and gas and coal.”
“We will never let the great U.S. Oil & Gas Industry down,” Trump, who has repeatedly denied the scientific consensus on climate change, wrote on Twitter in April. He promised that his administration would “formulate a plan” to help the industry survive “long into the future!”
We will never let the great U.S. Oil & Gas Industry down. I have instructed the Secretary of Energy and Secretary of the Treasury to formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future!
— Donald J. Trump (@realDonaldTrump) April 21, 2020
Some lawmakers pushed back against such an agenda in a letter sent July 1. “While we have an incredible opportunity now to support the growth of pollution-free clean energy, we must confront the risk of an economic recovery that restores or even further entrenches our reliance on fossil fuels,” reads the letter, addressed to congressional leadership and signed by 60 House Democrats, including Neguse. “We have already seen the Trump administration use this pandemic to try and prop up the fossil fuel industry through waiving environmental enforcement, amending the Main Street Lending Program in ways that directly benefit oil and gas companies, and selling oil and gas leases at record low prices.”
As the world looks to climb out of what is likely to be a deep recession, climate activists fear what such a lifeline for the industry could mean for progress on carbon emissions in the years and decades to come. But they’re also excited by the possibility of charting the opposite path — using the massive spending authorized by the CARES Act, and potential future relief measures, to rebuild the economy around clean energy and sustainable infrastructure. Fleishman points to a mostly-overlooked Fed program called the Municipal Liquidity Facility, authorized to offer up to $500 billion in loans to state and local governments, which he says could be using the money to invest in electric vehicle fleets, public transit expansions, renewable energy generation and countless other projects.
“There’s this money just sitting there, that could be applied to a million amazing things,” he said. “It’s potentially the biggest step towards a Green New Deal we could have ever taken this year.”
But only a single state has received a loan through the program since its April 9 launch. Unlike the business-focused lending programs that were expanded after pressure from oil and gas groups, the MLF’s terms remain too restrictive to make its loans worthwhile for most local governments, Fleishman says.
Amid lingering uncertainty about the trajectory of the economy — and even the continued spread of the virus itself — plenty could change in the months ahead. Meanwhile, advocates for more aggressive climate action are hopeful that as the 2020 election nears, the coronavirus crisis could be remembered as a turning point in the battle to end the world’s dependence on fossil fuels.
“This is the do-or-die moment,” Fleishman said. “If we do this right — if the right people got behind the wheel of this new vehicle that this crisis has created for us, that could drive big, significant, meaningful change. But we all need to start screaming for it.”