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The Energy 202: Federal Reserve's changes to lending program could be boon to hurting oil companies

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with Paulina Firozi

Changes the Federal Reserve made to its soon-to-start lending program for midsize companies could give ailing oil producers more time to pay off loans and easier access to money as they try to make it through the coronavirus pandemic.

Oil lobbyists are eyeing the central bank’s Main Street Lending Program as a lifeline for companies struck hard by the downturn in oil prices amid the stay-at-home orders to stop the spread of the virus. The program is part of a massive stimulus effort aimed at all sectors of the economy to help it survive the economic downturn sparked by the pandemic.

While companies from all sectors can apply for the loans from the program, which is expected to dole out up to $600 billion, environmentalists are already up in arms about it potentially being used to bail out oil companies.

The Fed has moved to further bolster the Main Street program in ways that may help oil companies.

On Monday, the central bank announced it will give borrowers an additional year to repay the low-interest loans in five years instead of four. Companies will also have a holiday on making payments on the principal of two years instead of one year. 

The extra time is beneficial to all industries, said Kevin Book, an analyst at ClearView Energy Partners. But it will be especially helpful for oil companies as they wait for the price of crude to recover after dropping by nearly 40 percent since the start of the year. 

“Not everyone thinks this will be a two-year or three-year turnaround,” he said.

For heavily indebted companies that want to refinance their existing debt, the Fed said it will buy 95 percent of the loans, up from 85 percent, with private banks taking on the rest. 

By absorbing more of the risk, the Fed is encouraging the flow of credit to firms already saddled with debt. That includes many U.S. oil producers that raced to grow during the fracking boom of the past decade.

And for companies looking to expand an existing loan, the central bank said it is raising the maximum loan from $200 million to $300 million.

Increasing both the loan size and the public share of debt is a “surefire way to put taxpayers on the hook for distressed oil companies,” said Lukas Ross, senior policy analyst for the environmental group Friends of the Earth.

Lee Fuller, executive vice president of the Independent Petroleum Association of America (IPAA), expressed cautious optimism at the Fed’s announcement, noting that private banks still need to sign off on any of the Fed-backed loans.

“We're gathering that access may depend on the lender and vary bank to bank,” he said. “While these recent changes appear to make the scope of the program broader, the ultimate key will be the participation of lenders.

This isn’t the first time the Fed has fiddled with the Main Street program.

Last month, the Fed said it would give companies with higher debt-to-earnings ratios access to more lending options — a boon to highly leveraged oil firms

And in a reversal from its previous stance, the Fed also said it would permit borrowers to use the loans to pay off old debt. That move was called for by both IPAA, which represent small to midsize oil producers, and Sen. Ted Cruz (R-Tex.)

The oil-state lawmaker wrote in an April 24 letter to Fed Chair Jerome H. Powell and Treasury Secretary Steven Mnuchin that preventing oil companies from using the Fed-backed money to refinance “risks the loss of hundreds of thousands of American jobs and irreparable damage to our domestic energy infrastructure.”

Forty-seven congressional Democrats, in turn, have accused the Fed of helping to bail out financially imprudent fossil fuel firms.

“The Main Street Lending Program’s apparent oil and gas expansion plays into the public’s worst assumptions about crony capitalism and the dangerous lack of urgency for limiting emissions causing climate chaos,” read a May 13 letter to Powell led by Rep. Rashida Tlaib (D-Mich.) and Sen. Jeff Merkley (D-Ore.). 

The Fed says it isn’t playing favorites with oil.

A spokesman for the central bank says neither the first nor the second rounds of alterations were made to expand the program for oil and gas companies. The purpose of the changes is to make the Main Street program more appealing to all sorts of firms.

By law, Fed officials can’t create a lending program targeted to help a single industry. The Main Street program is designed to help midsize companies from all sectors too big to receive payroll loans from the Small Business Administration but too small to participate in the corporate bond market.

Coronavirus fallout

Tesla workers at its California factory have contracted the coronavirus.

Two workers told Faiz Siddiqui that supervisors told employees the company had several cases of the coronavirus. The news follows chief executive Elon Musk’s defiant reopening of the facility in Fremont.

“The plant employs about 10,000 workers, who are spread out among multiple shifts and are now required to wear masks and limit contact with others in break rooms, for example, while keeping ample space between one another as they work with heavy machinery to produce electric cars,” he adds. “…As part of the agreement struck allowing Tesla to reopen on May 18, Tesla would have to report all positive cases to the Alameda County Public Health Department. But because Tesla restarted production a week earlier, there could have been cases that were never reported to the county because Tesla was ‘not required to directly report known cases’ before the agreement, county officials said.”

Conservationists are worried about the impact of discarded personal protective equipment on the environment. 

Discarded face masks and plastic gloves have been spotted scattered amongst the discarded plastic cups and beer cans on the Mediterranean seabed, according to footage filmed by Laurent Lombard, who works for French nonprofit Opération Mer Propre (Operation Clean Sea), Jennifer Hassan writes.

“When you suddenly have a population of 7 million people wearing one to two masks per day, the amount of trash generated is going to be substantial,” said Marine conservation organization OceansAsia, which recorded footage of discarded supplies during a trip in February to the Soko Islands in Hong Kong. 

The U.S. shale-drilling industry is zeroing in on the richest oil fields as it tries to mount a comeback.

Investment in some areas were diminishing even before the pandemic-driven slow down had an impact on oil prices, the Wall Street Journal reports.

“Now, the sprawling Permian Basin oil field straddling Texas and New Mexico is securing its place at the center of U.S. oil production as companies concentrate on their richest targets,” per the report. “The Permian Basin is set to return to growth by next year and continue through 2030, consulting firms Rystad Energy and Wood Mackenzie estimate. By contrast, the Eagle Ford region of South Texas is unlikely to top its average 2019 shale-oil output until 2024, and then will decline, the firms said. Rystad projects North Dakota’s Bakken region will reach last year’s average again—but not until 2026.”

Electric vehicle production could be delayed for years because of coronavirus-related metal shortages. 

Per E&E News: “Already prone to supply shortages, cobalt could fall into a moderate supply deficit this year that could worsen from 2021 to 2023, BloombergNEF said in an analysis released last week. Mined nickel, manganese and hydroxide could also experience a deficit this year, while lithium will remain in stable supply through 2020, BNEF said."

The shortages are a result of lockdowns in countries that supply or produce these materials, according to BloombergNEF metals analyst and report author Kwasi Ampofo. But Ampofo said the demand decline was bigger than the supply drop, dual problem that could cause problems for electric vehicle projects ahead.

Power plays

Federal prosecutors are looking into a global hacking operation that targeted environmental organizations, local officials and reporters. 

The federal criminal probe follows after environmental groups noticed suspicious emails three years ago, the New York Times reports. The emails contained links and fake articles related to climate campaigns against ExxonMobil. 

“Details of the hacking campaign were made public on Tuesday in a report by Citizen Lab, a cybersecurity watchdog group at the University of Toronto. The report said that thousands of people on six continents had been targeted by phishing emails for at least four years in the same operation,” per the report. “…Citizen Lab’s report said a large group of targets in the hacking campaign were American nonprofit groups that had been battling publicly with Exxon Mobil for years over whether the oil company engaged in an effort to mislead the public about climate science, which the company has denied.”

Citizen Lab said there was no strong evidence connecting the hacking to a corporation, and it did not point fingers at ExxonMobil for any wrongdoing. 

The Trump administration plans to expand sanctions on dozens of tankers as it increases efforts to halt Venezuela-Iran oil trade. 

“The U.S. Treasury Department’s Office of Foreign Assets Control is preparing to add as many as 50 tankers to its blacklist for working with Venezuela’s Maduro government,” the Wall Street Journal reports. “…Treasury officials last week sanctioned four firms and their vessels for involvement in Venezuelan oil trade.” 

The new efforts follow the State Department’s move to sanction tankers owned by Greece last month. The latest sanctions signal a “dramatic expansion of the U.S. effort both to interrupt the revenue and commodity streams and disrupt a developing relationship between the two autocratic governments.” 

Storm watch

Tropical Storm Cristobal destroyed more than a mile-long stretch of sand dunes meant to protect a vulnerable community in Louisiana.  

“Though the majority of homes and businesses were spared significant damage from a weakened storm, Police Chief Laine Landry said it is a troubling sign not only for Grand Isle, a barrier island located 108 miles south of New Orleans, but for all of the people across the region,” Ashley Cusick, Richard A. Webster and Matthew Cappucci report.

The storm shifted inland, bringing heavy down pours and tornadoes to the Central United States. 

“Continued heavy rains and a few tornadoes are likely from the Missouri Valley to the Midwest on Tuesday as Cristobal’s remnant tropical circulation continues to whirl its way northward,” Cappucci reports. “The unusual system could become the farthest north and west tropical system on record, set to breeze into Canada while retaining some tropical and subtropical characteristics. Eventually, Cristobal could even begin producing winds to tropical-storm-force again as it merges with another weather system and sideswipes Hudson Bay.”

Latest on Russian oil spill

A major diesel fuel spill near Norilsk, Russia is spreading to a lake near the Arctic Ocean. 

The spill is also threatening a nature reserve, the New York Times reports.

“The accident, which environmental groups have compared to the Exxon Valdez tanker spill in Alaska in 1989, has highlighted the risks of industrial development in the thawing Arctic, where climate change is warming the environment at a rate about twice as fast as the rest of the Earth,” per the report. “…By Tuesday, fuel was found in a 43-mile-long finger lake called Pyasino, which stretches toward the Arctic Ocean, Aleksandr Uss, the governor of the Krasnoyarsk region, told local media.”