Bankruptcies Ripple Oil/Gas – Leaving Taxpayers with Toxic Mess

July 15, 2020

An infrared image last year of an MDC Energy well pad leaking methane (which is invisible to the naked eye). This month, the site has continued to leak gases, government violations show.

Fortune:

When Royal Dutch Shell warned it will write down up to $22 billion in assets in the second quarter on Tuesday, it became the largest of an expanding group of companies to face a reckoning over the brutal economics of oil and gas as the coronavirus pandemic has warped global demand. 

The record write-down for the company also provided an initial signal of what’s to come, as the world’s largest non–state-owned oil and gas company faces an even larger challenge: its own transition away from fossil fuels, in a bid to dramatically reduce its emissions. 

In April, the Anglo-Dutch giant announced it would target net zero emissions by 2050, in order to align with the Paris Agreement. Its write-down announcement on Monday comes just two weeks after British energy giant BP, the world’s second largest non–state-owned energy company, said it expected to write down roughly $17.5 billion worth of assets. BP made the same commitment to cut emissions in February, then the first major oil company in the world to do so. 

“The impairment Shell has announced is about more than an accounting technicality, or an adjustment to near-term price assumptions. It’s about fundamental change hitting the entire oil and gas sector,” said Luke Parker, vice president of corporate analysis at consultancy Wood Mackenzie, in a note on Tuesday.

“Within this write-down, Shell is giving us a message about stranded assets, just like BP did a few weeks ago.”

The two threads behind the massive write-downs—shorter-term price assessments and longer-term climate strategy—are difficult to separate. 

In the nearer term, the decline in global energy demand owing to worldwide lockdowns and economic crises has rocked oil and gas prices, and forced companies to reassess their price forecasts—and therefore, which of their projects will still be profitable.

That reassessment has accelerated a spate of write-downs that had in fact begun months before the pandemic arrived. The U.S. shale sector in particular went into the crises struggling under the weight of sky-high debt levels and a glut of gas that had sent global prices spiraling downward. 

In the first quarter, as the crisis was only beginning to take hold, shale companies alone wrote off $38 billion in assets, according to Rystad Energy, an Oslo-based consultancy. Analysts estimate those write-downs have only picked up steam, with Deloitte predicting in a report earlier this month that write-downs could hit at least $300 billion beginning in the second quarter.

Not just write downs, but bankruptcies.
New York Times asks if taxpayers will be left holding toxic assets.

But don’t worry, the executives are in good shape.

New York Times:

The day the debt-ridden Texas oil producer MDC Energy filed for bankruptcy eight months ago, a tank at one of its wells was furiously leaking methane, a potent greenhouse gas, into the atmosphere. As of last week, dangerous, invisible gases were still spewing into the air.

By one estimate, the company would need more than $40 million to clean up its wells if they were permanently closed. But the debts of MDC’s parent company now exceed the value of its assets by more than $180 million.

In the months before its bankruptcy filing, though, the company managed to pay its chief executive $8.5 million in consulting fees, its top lender, the French investment bank Natixis, later alleged in bankruptcy court.

Oil and gas companies in the United States are hurtling toward bankruptcy at a pace not seen in years, driven under by a global price war and a pandemic that has slashed demand. And in the wake of this economic carnage is a potential environmental disaster — unprofitable wells that will be abandoned or left untended, even as they continue leaking planet-warming pollutants, and a costly bill for taxpayers to clean it all up.

Still, as these businesses collapse, millions of dollars have flowed to executive compensation.

Whiting Petroleum, a major shale driller in North Dakota that sought bankruptcy protection in April, approved almost $15 million in cash bonuses for its top executives six days before its bankruptcy filing. Chesapeake Energy, a shale pioneer, declared bankruptcy last month, just weeks after it paid $25 million in bonuses to a group of executives. And Diamond Offshore Drilling secured a $9.7 million tax refund under the Covid-19 stimulus bill Congress passed in March, before filing to reorganize in bankruptcy court the next month. Then it won approval from a bankruptcy judge to pay its executives the same amount, as cash incentives.

“It seems outrageous that these executives pay themselves before filing for bankruptcy,” said Kathy Hipple, an analyst at the Institute for Energy Economics and Financial Analysis and a finance professor at Bard College. “These are the same managers who ran these companies into bankruptcy to begin with,” she said.

MDC’s listed telephone number appears to be disconnected, and repeated attempts to contact its C.E.O., Mark Siffin, and the company’s bankruptcy lawyers were unsuccessful. Whiting Petroleum and Diamond Offshore did not respond to requests for comment, and Gordon Pennoyer, a Chesapeake spokesman, declined to comment.

The industry’s decline may be just beginning. Almost 250 oil and gas companies could file for bankruptcy protection by the end of next year, more than the previous five years combined, according to Rystad Energy, an analytics company. Rystad analysts now expect oil demand will begin falling permanently by decade’s end as renewable energy costs decline, energy efficiency improves, and efforts to fight climate change diminish an industry that has spent the past decade drilling thousands of wells, transforming the United States into the biggest oil producer in the world.

The environmental consequences of the industry’s collapse would be severe.

Even before the current downturn, methane, a powerful greenhouse gas, was being released from production sites in America’s biggest oil field at more than twice the rate previously estimated, according to a recent study based on satellite data. Some experts say that with the industry in disarray, efforts to fix leaks of methane, which pound for pound can warm the planet more than 80 times as much as carbon dioxide over a 20-year period, may fall by the wayside. Low natural gas prices may lead to increases in flaring or venting, the intentional release of excess gas, the International Energy Agency said this year.

It is also likely that many companies haven’t set aside enough money, as required by law, to restore well sites to their original state. An analysis of recently bankrupt oil and gas companies’ financial statements, prepared for The New York Times, shows a funding shortfall.

The federal government estimates that there are already more than three million abandoned oil and gas wells across the United States, two million of which are unplugged, releasing the methane equivalent of the annual emissions from more than 1.5 million cars.

“They’re sitting there and they’re leaking. And they’re much leakier than a well that’s still in production and being monitored, although those leak, too,” said Robert Schuwerk, executive director for North America at Carbon Tracker. “And companies haven’t been setting aside the money, because they’d rather spend the money on drilling a new well.”

3 Responses to “Bankruptcies Ripple Oil/Gas – Leaving Taxpayers with Toxic Mess”

  1. jimbills Says:

    ‘”This is not the right path”‘:

  2. Jean Mcmahon Says:

    Yikes…they could have tried to think of future generations before they cookd the Planet

  3. doldrom Says:

    Count on all of them unloading the safety of the wells on the tax paying public.
    Don’t expect any of them to have been above board with pension obligations.

    It’s all grift and grifting now — since 2008 has become obvious there’s no penalty.
    From here on in, it’s take the money and get out of Dodge.
    And not just the FF sector.


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