Confronting A Crisis
Fossil fuel companies are already benefiting from numerous changes to laws and regulations that have been sold to the public as vital for economic recovery.
Now the companies, many already deep in debt, are in line to receive more money through programs set up under the CARES Act, a $2.2 trillion stimulus package signed into law on March 27, which represents the single biggest such effort in U.S. history. The money includes loans that can be forgiven and low-cost financing that companies can use to pay off other lenders.
The combined effect of the programs will be to keep companies afloat in an industry that has already seen hundreds of recent bankruptcies. This year, the pandemic and an international oil price war together punished prices that were already soft before the crisis.
Here are some key initiatives that could serve to prop up the fossil fuel sector:
Bond Buying By The Fed
Under its Primary Market Corporate Credit and Secondary Market Corporate Credit facilities, the Fed will buy up to $750 billion in corporate bonds – debt obligations that typically are bought and sold among private investors. The Fed established the PMCCF and SMCCF on March 23 and expanded both on April 9, 2020.
By August, it had amassed a $3.5 billion portfolio of bonds through the SMCCF, including more than $300 million from energy companies. The Fed had bought more fossil fuel bonds than if it was assembling the portfolio based on employment, indebtedness, or stock-market value.
The program was so successful in opening up debt markets that companies had not needed to issue any new bonds through the PMCCF.
Like the loan programs, bond-buying is designed to help sustain companies that were healthy before the pandemic by ensuring they have access to funds that other lenders might not provide. This effort allows companies to issue new bonds that the Fed will purchase immediately, and supports the broader market by buying up bonds that were issued previously.
At the outset of the program, the Fed could only purchase corporate bonds and corporate bond ETFs that were rated at least BBB-/Baa3, which is barely considered investment grade. Over time, the Fed has relaxed its standards to include companies with even weaker credit, including issuers of “junk bonds” – bonds whose credit ratings fall below “investment-grade.”
Billionaire hedge fund investor Dan Loeb blasted the lower standards, saying the Fed's investments in junk bonds are "fraught with moral hazard on several fronts." Moral hazard occurs when government bailouts lead investors to believe they will be protected against losses, leading to excessive risk-taking.
As a result of this move, in addition to the biggest oil companies, the program now stands to benefit a dozen key companies involved in fracking that already carry heavy debt burdens and were struggling before the crisis, according to an analysis by Friends of the Earth. They include Continental Resources, which just barely qualified for the program’s expanded terms.
Industry leaders like ExxonMobil and Chevron are potentially eligible for $19.4 billion under this program, the analysis found.
Almost 83% of oil and gas industry’s debt could now be eligible for refinancing under these federal programs, despite about half of all oil and gas debt either below investment grade or very close to it at the onset of the outbreak.
Republicans have lobbied to weaken standards even further by backdating provisions to the beginning of March, a change meant to ensure eligibility for oil and gas companies whose bonds were downgraded to junk too early for them to qualify under the current rules.
Main Street Lending Program
The Main Street Lending Program (MSLP) aims to help companies that were healthy before the pandemic by establishing the Fed as a backup lender to fund their operations if private investors back out.
The MSLP expands the Federal Reserve’s emergency-lending operations to companies with fewer than 15,000 employees or $5 billion in revenue for 2019. Backed by $75 billion from the CARES Act, the program could fund $600 billion in loans to businesses that are too small to benefit from the bond-buying programs and too big to receive funds from the separate Paycheck Protection Program run by the Small Business Administration.
The Fed announced the program on April 9, 2020. In the weeks that followed, the fossil fuel industry and sympathetic lawmakers lobbied the Fed to relax its terms so that more companies would be eligible.
On April 30, the Fed appeared to bow to these demands, changing the rules to include:
- Companies that are more heavily indebted
- Companies planning to use the cheap government loans to pay off existing loans
- Companies that qualify using easier-to-fudge earnings metrics like “adjusted earnings” and “industry-specific” standards
- Companies that lay off workers, so long as they made “commercially reasonable efforts to maintain payroll and retain employees”
The Fed has denied the changes were made to benefit a particular industry.
But Trump’s Energy secretary later undermined this claim, saying in an interview that Treasury Secretary Steven Mnuchin “worked very closely with the Federal Reserve” to make the money available to more players in the oil and gas sector. A Congressional Oversight Commission has publicly doubted the Fed's denial.
The changes benefit oil and gas companies like Occidental Petroleum, whose enormous pre-existing debt would have rendered it ineligible under the earlier rules.
Paycheck Protection Program
The Paycheck Protection Program is an emergency program designed to help small businesses keep more workers on their payrolls. It offers a total of $670 billion to companies with 500 employees or fewer – those too small to qualify for the Main Street or bond market programs. This money is a loan, but companies don’t have to pay it back if they spend it on payroll, rent, mortgage interest, or utilities.
Oil, gas, and related industries collected nearly $3.9 billion by the program’s first reporting deadline on April 16th, according to a Western Values Project analysis. The analysis found that fully one-third of the nation’s privately-owned oil, gas, and mining corporations had already benefited.
Analysis by BailoutWatch found that coal, oil, and gas companies were more likely to receive bailout money, more likely to get the biggest loans, and tended to save fewer jobs, compared with companies in other industries. BailoutWatch also identified dozens of companies that took taxpayer money after being charged with pollution, safety, and fee violations.
The PPP is managed by the Small Business Administration. On June 19, Treasury Secretary Mnuchin reversed his earlier refusal to release the names of recipient companies, announcing plans to identify recipients of loans over $150,000.
Paycheck Protection Program Loan Recipients
Tax Change Windfalls
Tax law changes in the wake of the pandemic are injecting companies with billions of dollars. Some of the companies benefiting are already in bankruptcy.
The changes, which were part of the CARES Act, allow companies to claim tax credits based on previous years’ losses – a boon to fossil fuel companies that were unprofitable before the virus hit.
President Trump assured fossil fuel executives in an April 3 meeting that because of this change, the stimulus bill “gets you a lot of liquidity. And a lot of companies need the liquidity right now.”
As of May 15, at least 37 oil companies, service firms, and contractors had claimed more than $1.9 billion in immediate tax refunds, according to a Bloomberg News analysis. The number is expected to grow.
Support For Carbon-Intensive Industries
Treasury Secretary Steven Mnuchin and the U.S. Treasury will also oversee a separate $46 billion in loans and loan guarantees including:
- $25 billion for the commercial aviation industry
- $4 billion for aviation cargo carriers
- $17 billion for “...businesses critical to maintaining national security”