Академический Документы
Профессиональный Документы
Культура Документы
Grandt
PO Box 6603
Lincoln, NE 68506
(510) 432-1452
July 23, 2015
Jeff Flake
413 Russell
Maria Cantwell
511 Hart
Elizabeth Warren
317 Hart
Lamar Alexander
455 Dirksen
Cory Gardner
354 Russell
Al Franken
309 Hart
Ron Wyden
221 Dirksen
John Barrasso
307 Dirksen
John Hoeven
338 Russell
Martin Heinrich
702 Hart
Shelley Capito
172 Russell
Mike Lee
361A Russell
Mazie Hirono
330 Hart
Bernie Sanders
332 Dirksen
Bill Cassidy
703 Hart
Rob Portman
448 Russell
Joe Manchin
306 Hart
Angus King
133 Hart
Steve Daines
320 Hart
James E. Risch
483 Russell
Debbie Stabenow
731 Hart
Re: Oil Refining - Considering future eventualities versus the myopia of the present (letter #21)
Dear Members of the Senate Committee on Energy and Natural Resources,
Yesterdays letter #20 was meant to be my final communication to you before August recess,
then the attached article from last week came to my attention. The author explains in depth the
concept that I have been attempting to alert you to, so I am compelled to share it immediately.
Attorney Sharon Kelly evokes a Nobel Laureate economist and IEA chief economist. Firstly:
Fatih Birol, chief economist at the International Energy Agency, had a blunt message for
energycompanies.
My message that oil production and refining operations may go out of business if the low price
of petroleum continues is echoed throughout this very long and comprehensive summary, but it
is certainly worth your time to realize that I am not a lone wolf howling in the night. Secondly:
Kelly then dives into the nitty gritty, with specifics about what is already happening:
A Wave ofBankruptcies
Federal banking regulators have begun warning lenders that many of the loans made to
drillers at the height of the shale rush must be treated as substandard indicating an
increased risk that companies will default and fail to repay loans or that the regulators
doubt that the oil and gas reserves backing the loans will really prove to be worth what
borrowers claimed, according to the Wall StreetJournal.
Meanwhile the list of bankruptcies within the oil and gas drilling industry is growing, and
the auditing industry is taking note. In late March, Moodys Investment Services added
25 oil and gas-companies to its watch list of most financially stressed firms, double the
usual number, Ryder Scott, an oil and gas auditing firm, wrote in its quarterly newsletter.
Quicksilver Resources Inc., Dune Energy Inc. and BPZ Resources Inc. filed for Chapter
11 bankruptcy protection in March. Samson Resources Corp. said March 31 that it may
seek Chapter 11 bankruptcyreorganization.
All told, drillers have taken on debts adding up to more than $235 billion meanwhile
their revenues are shrinking fast due to low oilprices.
But it's not just low prices that have created this debacle. The problem for shale drillers is
that theyve consistently spent money faster than theyve made it, even when oil was $100
a barrel, Bloomberg reported last month. The companies in the Bloomberg index spent
$4.15 for every dollar earned selling oil and gas in the first quarter, up from $2.25 a year
earlier, while pushing U.S. oil production to the highest in more than 30years.
The oil and gas industry has historically far out-earned what it spent, giving more than
enough cash to fund more drilling out of its own pockets. But for many companies
especially the smaller wildcatters that have stoked enthusiasm about shale drilling even
while the majors like Royal Dutch Shell renounced it as a money-loser the current
drilling boom is fueled bydebt.
But that debt looks increasingly risky, as a wave of credit downgrades and lowered
financial outlooks have swept across the industry. A May report by Standard and Poors
found that fully one third of the world's three dozen corporate debt defaults this year were
by oil and gascompanies.
Frankly, I believe we are entering a near-term crisis with todays events foreshadowing dire
economic fallout from an insane paradigm that past success will extrapolate into the future.
How will refining continue profitably when crude feedstocks diminish as producers go belly up?
Sincerely yours,
Doug Grandt
answerthecall@mac.com
A Wave of Bankruptcies
Federal banking regulators have begun warning lenders that many of the loans made to
drillers at the height of the shale rush must be treated as substandard indicating an
Page 3 of 6
increased risk that companies will default and fail to repay loans or that the regulators
doubt that the oil and gas reserves backing the loans will really prove to be worth what
borrowers claimed, according to the Wall Street Journal.
Meanwhile the list of bankruptcies within the oil and gas drilling industry is growing, and the
auditing industry is taking note. In late March, Moodys Investment Services added 25 oil
and gas-companies to its watch list of most financially stressed firms, double the usual
number, Ryder Scott, an oil and gas auditing firm, wrote in its quarterly newsletter.
Quicksilver Resources Inc., Dune Energy Inc. and BPZ Resources Inc. filed for Chapter 11
bankruptcy protection in March. Samson Resources Corp. said March 31 that it may seek
Chapter 11 bankruptcy reorganization.
All told, drillers have taken on debts adding up to more than $235 billion meanwhile their
revenues are shrinking fast due to low oil prices.
But it's not just low prices that have created this debacle. The problem for shale drillers is
that theyve consistently spent money faster than theyve made it, even when oil was $100
a barrel, Bloomberg reported last month. The companies in the Bloomberg index spent
$4.15 for every dollar earned selling oil and gas in the first quarter, up from $2.25 a year
earlier, while pushing U.S. oil production to the highest in more than 30 years.
The oil and gas industry has historically far out-earned what it spent, giving more than
enough cash to fund more drilling out of its own pockets. But for many companies
especially the smaller wildcatters that have stoked enthusiasm about shale drilling even
while the majors like Royal Dutch Shell renounced it as a money-loser the current drilling
boom is fueled by debt.
But that debt looks increasingly risky, as a wave of credit downgrades and lowered financial
outlooks have swept across the industry. A May report by Standard and Poors found that
fully one third of the world's three dozen corporate debt defaults this year were by oil and
gas companies.
effect, the volume in limbo in other words, the reserves whose future is uncertain,
researchers from Chatham House wrote.
If investors continue to pour money into pursuing assets that will wind up stranded, they
stand to lose enormous sums of money. The International Energy Agency estimates that
two-thirds of currently expected energy reserves can never be sold and burnt if climate
deals are to be kept adding up to $28 trillion dollars by 2100.
For some, the idea of leaving all that money on the table is galling but the financial costs
of a severely changed climate are incalculably higher. Promoting climate-smart
investment would generate up to $2.6 trillion a year by 2030, the World Bank calculated in
a study released last year an amount that would fast exceed the projected costs of
stranded assets.
But the longer policy-makers and investors wait, the more assets are at risk and the higher
the costs of dealing with the fallout of a hotter, more variable climate. Climate inaction
inflicts costs that escalate every day, Rachel Kyte, World Bank Group vice president and
special envoy for climate change, said.
Page 5 of 6
Wall Street Journal reported in April, and oilfield services contractors have slashed the
rates they charge to prevent more layoffs.
Jobs that were projected to last for decades with high wages have evaporated, and
contractors are cutting their costs to the bone.
[W]hat were seeing in terms of third party quotations is that these pressure pumping
companies are offering their services essentially at cash breakeven costs, Pioneer Natural
Resources Co. president and COO Timothy L. Dove said in February, according to Ryder
Scott's April newsletter.
Landowners who leased their acreage for drilling have seen their royalties plummet as
smaller companies go bankrupt leaving them also on the hook for any pollution or
damage since insolvent companies have no budget to pay for their liabilities.
Were seeing highly-levered companies, with high break-even cost requirements, with little
ability to generate cash and little access to liquidity, John Castellano, a managing director
at AlixPartners LLC, recently told Bloomberg, which profiled landowners harmed by the
downturn. I dont believe we are near the end of this.
The wave of bankruptcies has caught the attention of environmentalists, who argue that
building infrastructure for fossil fuels like oil and shale gas is not only damaging to air and
water, but also makes little financial sense.
And that holds true not only for notoriously polluting coal, but also for natural gas, which
has been marketed as a green alternative and called a low-carbon bridge to renewables
by the Obama administration.
Plans by U.S. drillers to export shale gas by liquefying it and shipping it across oceans in
tankers have drawn attention from Wall Street, with 19 of the top 20 Liquefied Natural Gas
(LNG) companies planning projects. But building that infrastructure today makes no sense
if burning that gas would send the climate over a tipping point. More than $283 billion worth
of currently proposed LNG projects those proposed by 16 of the 19 companies will
likely be uneconomic if the world sticks to its current climate agreements, a report by the
London-based group Climate Tracker found.
With financial uncertainty swirling, many argue that the time to transition away from fossil
fuels is now.
That market is inherently volatile, and the industry is vulnerable, wrote Carl Pope, former
executive director of the Sierra Club, in a Bloomberg column titled Why You Should Short
Public Oil Companies recently. Divestment from oil may be a moral cause for some
investors. Others those seeking profit over the long term especially might want to
follow suit simply to save their shirts.
Photo Credit: Risk Ahead blue road sign, via Shutterstock.
Page 6 of 6