mfioretti: big oil*

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  1. The Center for International Environmental Law, or CIEL, a nonprofit legal organization, said it traced the industry’s coordinated, decades-long cover-up back to a 1946 meeting in Los Angeles by combing through scientific articles, industry histories and other documents.

    It was during that meeting that the oil executives decided to form a group — the Smoke and Fumes Committee — to “fund scientific research into smog and other air pollution issues and, significantly, use that research to inform and shape public opinion about environmental issues,” CIEL says on a new website devoted to the documents.

    That research, CIEL says, was used to “promote public skepticism of environmental science and environmental regulations the industry considered hasty, costly, and potentially unnecessary.”

    Muffett said in a statement that the documents “add to the growing body of evidence that the oil industry worked to actively undermine public confidence in climate science and in the need for climate action even as its own knowledge of climate risks was growing.”

    Last year, InsideClimate News revealed that top executives at Exxon knew about the role of fossil fuels in global warming as early as 1977, then lobbied against efforts to cut greenhouse gas emissions. In January, the New York attorney general announced an investigation into ExxonMobil over allegations that it lied to the public and its investors about climate change.

    A report that surfaced in February revealed the American Petroleum Institute knew about climate change in the early 1980s.
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  2. Before the global financial crisis, a rise in raw-materials prices used to be bad news for the economy and stocks in general. Since central bank easy-money policies took off, that's become a thing of the past.

    One possible explanation is the level of exposure that banks and investors have to the industry. The 5,000 biggest publicly traded companies tracked by Bloomberg in the iron and steel, metals and mining, and energy sectors have a combined $3.6 trillion in debt, according to their most recent financial reports, double what they had at the end of 2008.
    Gushing IOUs

    Much of the increase is due to money that was borrowed to dig mines and wells whose output, at previous prices, would have easily repaid most maturing bonds and loans. But as commodity prices have tumbled, so has the ability of companies to meet their obligations. The Bloomberg Commodity Index is still only 3.9 percent higher than a 25-year low hit on Jan. 20.

    Five years ago, those companies tracked by Bloomberg had more operating income than debt, on average. Now, it would take them more than eight years' worth of current earnings, without provisioning for interest, taxes, depreciation or amortization, to clear their combined net obligations.

    It's unclear where the other portion of the $3.6 trillion in liabilities lies but probably, most of it is owed to banks. If the remaining $1.5 trillion is indeed on the balance sheets of financial institutions, that would represent about 1.5 percent of the total assets of all the world's publicly traded banks. That doesn't seem very significant, or any cause for concern. But to put it in some context, U.S. subprime mortgages represented less than 1 percent of listed banks' assets at the end of 2007.
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  3. Royal Dutch Shell has been accused of pursuing a strategy that would lead to potentially catastrophic climate change after an internal document acknowledged a global temperature rise of 4C, twice the level considered safe for the planet.

    A paper used for guiding future business planning at the Anglo-Dutch multinational assumes that carbon dioxide emissions will fail to limit temperature increases to 2C, the internationally agreed threshold to prevent widespread flooding, famine and desertification.
    'Don't mention the Arctic': Shell embarrassed by video competition row
    Read more

    Instead, the New Lens Scenarios document refers to a forecast by the independent International Energy Agency (IEA) that points to a temperature rise of up to 4C in the short term, rising later to 6C.

    The revelations come ahead of the annual general meeting of Shell shareholders in the Netherlands on Tuesday, where the group has accepted a shareholder resolution demanding more transparency about the group’s impact on climate change.
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  4. Christopher Helman, however, is paid to hype Big Oil. And to his credit, he does occasionally mention a few problems as he tries to gloss over their implications. For instance, in this same article dated September 2014 he states:

    “At the same time, they have to get their volumes up high enough that they can generate enough free cash flow to pay back their debt. If you can’t drill economically it all unravels.”

    Yes, it does.

    There’s just one problem. Shale operators have never been able to get their volumes up high enough to generate free cash flow though Mr. Helman leaves one with the impression that they have. But they haven’t…at least not since 2009! That’s right, 2009.

    Examining a universe of 21 shale operators including all the usual suspects, free cash flow has been overwhelmingly negative since at least 2009. Only three companies of the 21 have ever had positive free cash flow during that time frame. And even then it was nominal and not consistent.

    Mr. Helman, however, glossed over this but went on to state with his usual hyperbole that:

    “What is news is that the boom is showing no signs of slowing down.”

    Well, not exactly!

    Shortly after Mr. Helman’s statement, rig counts plunged. In fact, the plunge has been so precipitous that it is without precedent. Operations too are now being funded by massive amounts of additional debt. Never mind that there was too much debt already. Companies like Chesapeake and Range Resources would need between 15-20 years to pay off their debt if they used 100% of net income. Continental would need about 10 years. Further, Global Data conducted a review in April 2015 and found that debt and equity offerings from America’s game changing shale revolutionaries had soared off the charts…again. There have been a total of 78 deals including private equity and venture capital which totaled $30.6B just in March 2015 alone. This was a tremendous increase over the prior month which saw deals valued at $12B. But perhaps most troubling is that the majority of the offerings in March were debt. A full 70% of the total or $21.4B in one month! Again this was a substantial increase from February which saw $7.5B in debt. Funding operations with this much debt is not a sustainable business model particularly when your wells don’t cash flow. There seems to be financial disconnect here. At some point, you have to be able to pay this debt off. Or at least that is the way it used to work. Perhaps this gives a whole new meaning to shale operator claims of “game changer”.

    Going back to Christopher Helman’s statement that “if you can’t drill economically it all unravels”, it should be noted that large investors and hedge fund managers are also starting to grouse about shale investments. At the the annual Sohn Investment Conference in New York this week, David Einhorn, manager of Greenlight Capital, one of the most successful hedge funds had this to say about the shale investments:

    “We object to oil fracking because the investment can contaminate returns.”

    Yes, they can. Just ask KKR or Apollo or Carlyle …all private equity funds that have been singed by shales in the past 6 months. In the last quarter of 2014, Carlyle’s profit declined about 68%; Apollo saw losses of about 79%; and KKR got smashed at 94%. All thanks to shales.
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  5. In its current configuration the petroleum industry is dying. For the foreseeable future there will be a need for some petroleum. But it will be vastly scaled back, and not used for combustion.

    Many reasons have been provided for the dramatic plunge in the price of oil to about $60 per barrel (nearly half of what it was a year ago): slowing demand due to global economic stagnation; overproduction at shale fields in the United States; the decision of the Saudis and other Middle Eastern OPEC producers to maintain output at current levels (presumably to punish higher-cost producers in the U.S. and elsewhere); and the increased value of the dollar relative to other currencies. There is, however, one reason that’s not being discussed, and yet it could be the most important of all: the complete collapse of Big Oil’s production-maximizing business model.

    With demand stagnant and excess production the story of the moment, the very strategy that had generated record-breaking profits has suddenly become hopelessly dysfunctional.

    To fully appreciate the nature of the energy industry’s predicament, it’s necessary to go back a decade to 2005, when the production-maximizing strategy was first adopted. At that time, Big Oil faced a critical juncture. On the one hand, many existing oil fields were being depleted at a torrid pace, leading experts to predict an imminent “peak” in global oil production, followed by an irreversible decline; on the other, rapid economic growth in China, India, and other developing nations was pushing demand for fossil fuels into the stratosphere. In those same years, concern over climate change was also beginning to gather momentum, threatening the future of Big Oil and generating pressures to invest in alternative forms of energy.

    The most visible element of this new equation,” he explained in what some observers dubbed his “Brave New World” address, “is that relative to demand, oil is no longer in plentiful supply.” Even though China was sucking up oil, coal, and natural gas supplies at a staggering rate, he had a message for that country and the world: “The era of easy access to energy is over.”

    To prosper in such an environment, O’Reilly explained, the oil industry would have to adopt a new strategy. It would have to look beyond the easy-to-reach sources that had powered it in the past and make massive investments in the extraction of what the industry calls “unconventional oil” and what I labeled at the time “tough oil”: resources located far offshore, in the threatening environments of the far north, in politically dangerous places like Iraq, or in unyielding rock formations like shale.

    On this basis, Chevron, Exxon, Royal Dutch Shell, and other major firms indeed invested enormous amounts of money and resources in a growing unconventional oil and gas race.

    Only one top executive questioned this drill-baby-drill approach: John Browne, then the chief executive of BP. Claiming that the science of climate change had become too convincing to deny, Browne argued that Big Energy would have to look “beyond petroleum” and put major resources into alternative sources of supply. “Climate change is an issue which raises fundamental questions about the relationship between companies and society as a whole, and between one generation and the next,” he had declared as early as 2002. For BP, he indicated, that meant developing wind power, solar power, and biofuels.

    Browne, however, was eased out of BP in 2007.

    Bob Dudley, assured the world only a year ago that Big Oil was going places and the only thing that had “peaked” was “the theory of peak oil.”

    That, of course, was just before oil prices took their leap off the cliff, bringing instantly into question the wisdom of continuing to pump out record levels of petroleum.

    The production-maximizing strategy crafted by O’Reilly and his fellow CEOs rested on three fundamental assumptions: that, year after year, demand would keep climbing; that such rising demand would ensure prices high enough to justify costly investments in unconventional oil; and that concern over climate change would in no significant way alter the equation. Today, none of these assumptions holds true.

    Demand will continue to rise — that’s undeniable, given expected growth in world income and population — but not at the pace to which Big Oil has become accustomed. With so much anticipated demand vanishing, however, prices were bound to collapse.

    Indeed, the financial press is now full of reports on stalled or cancelled mega-energy projects. Shell, for example, announced in January that it had abandoned plans for a $6.5 billion petrochemical plant in Qatar, citing “the current economic climate prevailing in the energy industry.” At the same time, Chevron shelved its plan to drill in the Arctic waters of the Beaufort Sea, while Norway’s Statoil turned its back on drilling in Greenland.

    There is, as well, another factor that threatens the wellbeing of Big Oil: climate change can no longer be discounted in any future energy business model.
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  6. After decades of experiments, U.S. Navy scientists believe they may have solved one of the world’s great challenges: how to turn seawater into fuel.

    The development of a liquid hydrocarbon fuel could one day relieve the military’s dependence on oil-based fuels and is being heralded as a “game changer” because it could allow military ships to develop their own fuel and stay operational 100 percent of the time, rather than having to refuel at sea.

    The new fuel is initially expected to cost around $3 to $6 per gallon, according to the U.S. Naval Research Laboratory, which has already flown a model aircraft on it.
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  7. Syria aside – can we expect Lord Patten to have no conflict of interest in managing the ‘direction of BBC editorial output’ on matters such as Fracking, New Nuclear Energy and climate change when he is receiving more money from the energy industry than the media? i »
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