Wall-to-wall coverage of the Covid19 crisis is obscuring a once in a generation punctuated equilibrium event that will forever alter the energy landscape.
This event could lead to a wave of bankruptcies that accelerate the arrival of peak fossil fuels. Or It could lead to dramatic state intervention that papers over the glaring weakness’ in the fossil fuel industry creating a zombie industry forever dependent on state aid for survival. It could even lead to a wave of nationalization of key companies and sectors opening the door to a managed transition. But how we got to this moment, and more importantly where we go from here, depends on the decisions taken in the days and months ahead. Decisions that could very well seal the fate of the fossil fuel era as we know it.
Billions in junk debt
Coming into the crisis the corporate world was sitting on trillions in debt it had issued in a time of easy money and high leverage. Estimates late last year put the debt pile at $10 trillion in the US alone. When the crisis hit, debt markets that companies had become so reliant on seized up, making a once easy task — pay the debt or roll it over — suddenly a life or death event.
Fossil fuel companies were particularly over-leveraged. Take the US shale industry which has 27 fracking companies with over $26 billion in debt coming due this year. Debt that was considered high risk (and thus high yield) a world ago will be nearly impossible to refinance today. Add to that a once in a lifetime combination of oil war induced negative pricing (negative!) coupled with demand destruction and it’s obvious why the industry is worried there won’t be takers for their junk bonds this time around.
The euphemism for what the US frackers are experiencing is a liquidity crisis. But that implies a healthy business proposition unable to tap debt markets that are under crisis. The truth is fossil fuel industries like US shale producers weren’t healthy to begin with. This shock has just laid bare how sick they really are.
Disaster induced opportunism
That’s why almost immediately fossil fuel industries began lining up for bailouts in a fit of disaster induced opportunism that was truly breathtaking to behold. First the US shale industry — a financial house of cards if ever there was one — began demanding handouts. Then the US coal industry handed the Trump administration a wishlist of regulatory rollbacks. Not to be left out, global banking lobbyists began a concerted blitz to rollback financial regulations including the baby steps progressive regulators like Bank of England had announced to deal with, ironically enough, the systemic financial risks posed by climate change. These industries saw an opportunity to strike in the midst of a crisis and they seized it.
But the real game for the fossil fuel industry was revealed in a telling line from the coal industry wishlist which explicitly sought ‘relief from divestment pressure and access to credit.” Because without a steady flow of finance these industries can’t operate.
Pre crisis that steady flow of money and easy access to credit was under severe pressure with the coal industry alone facing restrictions on access to finance from 126 globally significant institutions. This financial exodus was driven by mounting concerns over climate change, stranded assets and a steady erosion of industry growth by clean energy insurgents. All of which conspired to make one of the most pressing problems for the fossil fuel industry before the crisis, a truly life or death threat when things fell apart.
Which makes access to finance the game right now. Those able to tap debt markets in particular may be able to ride this storm out. Those that fail will see bankruptcy. The bell is tolling for the fossil fuel industry, the Great Shakeout has begun.
Access to finance, life or death decisions, and stealth bailouts
But while the shakeout has begun, the ultimate impacts could be delayed by dramatic moves central banks around the world are now making. They’ve rushed to put in place emergency Quantitative Easing (QE) programs to flood the system with liquidity (debt) and save vulnerable companies. That makes quantitative easing programs seeking to issue new debt or buy existing debt in fact stealth bailouts for the fossil fuel industry.
At least that’s what it looks like today. Because despite past calls to screen fossil fuels from QE programs leading progressive regulators have not made clear these programs will indeed be ‘green.’ Christine Lagarde, the head of the European Central Bank, for instance publicly stated the desire to ‘decarbonize’ the European Central Banks asset purchasing programs before the crisis as did Andrew Bailey the head of the Bank of England. Commitments that if in place now would prove tremendously significant for the fate of fossil fuel companies.
Then of course there’s the Trump administration which never met a fossil fuel company it didn’t love and wouldn’t be caught dead screening them from these programs. Which is why environmental groups are raising the alarm bells over two new programs announced by the Fed that will, for the first time ever, allow the institution to buy corporate debt (historically it’s only bought government debt and mortgages).
There’s a twist to this story, however. These programs will ironically be managed by BlackRock, the world’s largest asset manager, who recently made a historic shift that made climate change central to its financial decision making. If BlackRock applies that same climate lens to the management of these programs — and it appears they do indeed have discretion over what is purchased — they could turn out to be one of the most important climate related actors in this unfolding drama.
The BlackRock program is a great example of the upshot during the bailout and stimulus era — the ultimate impact of QE programs is far from certain, the details matter, and now is the time to pressure regulators and key financial actors like BlackRock to make good on their commitments to decarbonize. Because there will be a moment post crisis when central banks around the world step back and reassess whether these programs should continue, adjust, or be removed. Fights now serve to highlight the long term climate impacts of these programs and set up the all important decision point down the road.
Bailouts or buyouts? Time for permanent retirement
Ultimately, even if vulnerable fossil fuel companies are able to tap emergency credit at best it’s delaying the inevitable. For instance when investors return to the market they won’t have missed the bloodbath suffered by fossil fuel companies (Exxon and Peabody Coal are down a stunning 70% compared to just 30% for the broader market) nor oil companies pending decisions to cut dividends the bribe that has until now kept them at the table. The financial house of cards is set to crash and the impacts will be plain for all to see. All in all a significant win for climate — or is it?
The problem is that in capitalism companies don’t die. They become zombies stripped of financial liability that screw over workers and lose future shareholders money. This is especially true in the fossil fuel sector, where even if a company goes bankrupt, its fossil fuel infrastructure — oil wells or coal mines, pipelines or power plants — all remain. All it’s waiting for is another reckless owner to turn it all back on. It’s a cycle that companies like Peabody have repeated endlessly. So while a shakeout will cull the fossil fuel herd it doesn’t serve our ultimate end goal of removing them from the landscape. It’s a Pyrrhic victory that wins a battle but loses the war.
Unless we find a way to make this shakeout permanent. Enter bailout money.
Separate and apart from QE programs are the bailouts (euphemistically called stimulus despite the fact you can’t stimulate an economy on lockdown) handed out by governments around the world. Nowhere is this handout as active as the US where a $500 billion corporate slush fund is fueling concerns that the US oil industry in particular will be first in line for a bailout. A fear Donald Trump all but guaranteed is reality when he tweeted that oil and gas were central to our national security, a direct reference to the $17 billion earmarked for industries critical to national security in the US stimulus bill.
But what if bailouts were the ultimate opportunity? What if instead of a bailout, we made it a buyout? If governments around the world took a public stake in key companies and industries in exchange for a Paris compliant business plan (or in many cases a managed decline in production) we could have the opportunity to make the shakeout permanent.
During the last crisis for instance the Obama administration used this leverage to secure agreement from leading automakers like GM on fuel efficiency standards and an acceleration of EV investment. What if this time around we used investments in coal and oil companies to manage their decline? If we did, the price tag for a buyout has never been cheaper.
Take Peabody. It’s trading at two dollars a share and has a total market cap of $280 million. That’s less than half what Michael Bloomberg has spent on the US Beyond Coal campaign. Instead of letting the Peabody zombie continue to wreak havoc, what if the US government (or a high profile philanthropist) instead bought them out and permanently retired not only their carbon but their political influence?
This won’t work with all companies. Neither utilities nor oil majors are vulnerable enough to justify a total buyout with market caps still in the hundreds of billions. But what if we leveraged their need to secure cheap debt to secure accelerated coal plant retirements in exchange for debt relief? A version of the coal plant retirement idea has been floated by both RMI and Michael Liebreich founder of BNEF.
Last but not least let’s not forget the banks. While banks are not the central actors in this crisis in the way they were in 2008 it’s still clear they need to be stabilized and are central actors in the plumbing of the financial system. Why don’t we condition increased liquidity and support on credit guidance that puts an absolute cap on fossil fuel finance?
Regardless of the ultimate path chosen to drive fossil fuel company retirement, it’s clear this time has to be different. We can’t default to pre-Covid strategies reliant on free market dynamics, voluntary commitments and a theory of change predicated above all else on clean energy becoming cheaper than fossil fuels alone. That’s already happened and we’re still not shifting the global economy fast enough to solve climate change. We now need aggressive state backed intervention.
With a series of bailout and stimulus packages and a US election looming large the fate of the fossil fuel era hangs in the balance. The key lesson from the Obama era stimulus programs that helped birth the modern solar industry is that we can’t let a crisis go to waste. With Covid we were just handed a once in a lifetime opportunity to fundamentally alter the energy landscape. Now we must seize it.