High Risk of Fraud by Fossil Fuel Companies in Claiming Coronavirus Relief Funds

As fossil fuel companies struggle financially, they are ramping up efforts to tap into federal coronavirus relief funds. Will they engage in fraud at taxpayers’ expense?

The anticipation of trillions of dollars in federal government aid for businesses impacted by the COVID-19 pandemic has set-off a massive surge of lobbying in the fossil fuel industry. The financial woes of the industry predate the pandemic, yet, according to a report from InfluenceMap, the industry that was already struggling to find a way out its debt has been the most active of any industry in lobbying for aid.

Long before the pandemic, the U.S. oil and gas industry was struggling with problems brought on by a decade of debt-financed expansion based on the bet of a future rise in oil prices. Since 2007, the oil and gas industry has lost $280 billion betting on the shale boom, and, according to an analysis of 34 major fracking companies conducted by the Institute for Energy Economics and Financial Analysis, the sector has almost never generated positive cash flow.

Financial woes plague the supermajors as well, despite the fact that the oil majors remain among the most profitable companies in the world. In the last decade, the five largest supermajor oil companies have spent more than $216 billion more on their shareholders through dividends and buybacks than they raised in profits. Prior to the pandemic the industry was already struggling to raise new capital and, to pay off existing debt, of which 52% was either below or close-to below investment grade.

The coal industry is likewise struggling and looking for relief. Facing steep competition from gas and renewables, coal-fired power plants in the U.S. have been closing at a record pace. In the past four years, eleven U.S. coal mining companies, representing half of the coal mined in the country, have filed for bankruptcy. Coal companies emerged from bankruptcies with cleaner balance sheets and new financing amid a brief price resurgence in 2017 and 2018, but rather than investing in cleaner and more affordable technologies demanded by the marketplace, they spent billions on stock buybacks and dividends.

The pandemic exacerbated these issues as a drop in demand and a price war from Russia and China caused oil prices to plummet below zero. In contrast to industries whose short-term liquidity problems were created by the pandemic, the U.S. energy sector (comprised of fossil fuel and mining companies but not renewable energy) faces major long-term solvency issues due to competition from cleaner and more affordable technologies. Rather than face the rigors of the marketplace, the industry has lobbied hard for aid intended for small business and short-term financial issues, not large companies with long-term structural problems.

The industry initially hoped to receive direct, industry-specific relief, attempting to secure a $3 billion purchase of crude oil to fill the government’s Strategic Petroleum Reserve that was ultimately rejected by Congress. The fossil fuel sector then focused on becoming eligible to participate in the federal COVID-19 financial aid programs. The majority of COVID-19 relief remains in the Federal Reserve programs through the Main Street Lending programs and corporate bond buybacks program, and industry lobbying has focused on ensuring that these programs can benefit the industry.

It is worth noting that even before the pandemic, fossil fuel companies received generous subsidies from the government. Over the last several decades, policies like allowing oil and gas companies to write off exploration and development expenses and form limited master partnerships, among others, have increased industry profits by over $100 billion, at the expense of taxpayers.

Focus of Industry Lobbying

The Main Street Lending program through the Federal Reserve was intended for small business that were in good financial health prior to the pandemic. The size requirements, which originally were limited to companies with up to 10,000 employees and up to 2.5 billion in annual revenue, initially excluded many large fossil fuel companies from applying, and the guidelines also prohibited them from using money to pay off existing debt.

Oil and gas industry associations and companies such as Occidental Petroleum launched an extensive lobbying campaign to expand the eligibility requirements and to create a rule change that would allow companies to use the loans to pay off existing debt. The Federal Reserve’s final guidelines mirror these requests: it raised the maximum loan size to $200 million, the total number of employees for eligibility to 15,000, and the annual revenue limit to $5 billion. The guidelines also ease restrictions on borrowing for heavily indebted companies and allow companies to pay off existing debts. Oil and gas companies with significant debt, such as Occidental Petroleum and Chesapeake Energy, previously ineligible, now stand to benefit substantially from the program.

Additional lobbying efforts have focused on the Federal Reserve’s $750 billion bond-buying program, which allows the Federal Reserve to purchase debt through corporate bonds or exchange-traded funds. To be eligible for bond purchases, companies must have had at least a triple BBB-/Baa3 score from multiple credit agencies by March 22nd. This standard presents significant risks, as BBB- bonds already carry risks and many companies scores have dropped precipitously since then.

A letter from a group of eleven senators pushed back on the requirement that companies have ratings from multiple credit agencies and requested that the cutoff date be moved back to an earlier day in March. These changes would benefit companies like Alliance Resource Partners, which received an acceptable investment rating from only one agency, and Occidental Petroleum, a company with an estimated debt of $39 billion, including $37 billion from an acquisition prior to the pandemic, and whose credit rating dropped below investment grade prior to the March 22nd deadline. Four of the letter’s signatories received campaign contributions from Occidental’s PAC.

Industry groups have also attempted to use the pandemic as a justification to request waiving regulations and payments they have previously attempted to avoid or underpay. The National Mining Association sent a letter to the president and Congress requesting the suspension of payments for victims of black lung diseases, funds for environmental cleanups, and federal leasing royalties. Although Congress has not included these requests in relief bills, the Association stated that they will continue to request those changes. The American Petroleum Institute requested that environmental compliance reporting requirements for oil and gas companies be waived prior to the EPA announcing guidelines for company self-reporting on environmental obligations.

Federal Assistance for the Fossil Fuel Industry

Early estimates suggest that lobbying by the fossil fuel industry has paid off. While no funds were directed at the fossil fuel industry specifically, the industry will substantially benefit from Covid-19 financial assistance through eligibility for small business loans, tax breaks, and bond buybacks.

Analysis of disclosures in SEC filings shows that publicly-traded fossil fuel companies have received some of the largest loans from the Small Business Administration’s Payment Protection Program (PPP), such as Independence Contract Drilling, which received $10 million in stimulus money. Four publicly-traded companies in the coal industry, Hallador Energy, Ramaco Resources, Rhino Resource Partners, and American Resources, received a total of $31 million.

Analysis from Vice News found that oil and gas companies received at least $72 million, and Accountable.US identified more than $100 million in PPP bailouts that went to the fossil fuel industry. Because identifying company-specific PPP information has been dependent on voluntary disclosures, the actual amount of funding is likely to be substantially higher. According to a Payment Protection Program report released on April 16th, the mining industry as a whole, which includes oil, gas, and coal, received more than $3.9 billion. This number may also go up as additional funding is authorized.

Oil and gas companies have also uniquely benefitted from a tax change in the CARES Act that allows companies to carry back net operating losses and claim immediate tax refunds. The change was intended to provide short-term liquidity for small business during the pandemic, but it will be particularly advantageous for the fossil fuel industry due to the industry’s substantial existing losses and debt. According to a Bloomberg News review of recent SEC filings, 37 oil companies, service firms and contractors have claimed CARES Act tax benefits totaling more than $1.9 billion.

Industry lobbying has ensured that a greater number of fossil fuel companies will also be eligible for the Main Street Lending program. Companies too large to benefit from the Main Street Lending program can qualify as well for the Federal Reserve’s $750 billion bond-buying program. Analysis from the Rainforest Action Network found that least 90 fossil fuel companies, including ExxonMobil, Chevron and Koch Industries, stand to gain from the purchase of corporate bonds, as well as 150 utilities including coal-heavy firms such as American Electric Power and Duke Energy.

Fossil fuel companies whose bonds were considered too risky prior to the deadline will also benefit as the Federal Reserve purchases exchange-traded funds, in which investment firms pool together high-yield bonds. As fossil fuel companies struggled to raise cash on Wall Street prior to Covid-19, they had increasingly turned to corporate bonds. As the single largest issuer of junk bonds, the industry stands to benefit the most as the Federal Reserve buys shares in exchange-traded funds.

High Risk of Fraud in Funding for Fossil Fuels

Critiques of the funding available to the fossil fuel industry have highlighted that the funding could pose both a credit risk and a climate risk to taxpayers. It could also pose a risk of fraud.

In order to receive assistance, through a loan or buying corporate debt, the borrower or seller has to make certain representations and warranties to the federal government. To obtain funding through the Payment Protection Program, fossil fuel companies must make statements about their payroll costs, the number of employees they have, and the nature of their business. Companies who subsequently use the funding for unauthorized purposes may be subject to an audit or criminal prosecution.

To obtain funding from the Treasury Stabilization Fund for critical business, oil and gas companies must state that credit is not reasonably available to them and that the investment is prudent. The eligibility for Federal Reserve programs is dependent on a variety of financial criteria and companies must present accurate financial statements. To be eligible for some types of relief, companies must also certify that they have not already received funding from other programs.

However, with such a large amount of money being distributed quickly, the potential for false statements about eligibility is high. A great reliance on self-reporting on environmental compliance could also create provide greater opportunities to make false statements about pollution or other environmental impacts.

During a crisis, financial crimes often proliferate, and the availability of significant federal funding can further increase fraud. After the financial crisis in 2008, Congress created the Troubled Asset Relief Program and quickly disbursed funds to stabilize the economy. In the years following, investigations by the Special Inspector General for the program, SIGTARP, identified a substantial amount of fraud from companies who failed to adequately maintain records. Since 2008, these investigations ultimately led to more than 400 criminal charges, 300 prison sentences, and the recovery of $11 billion.

If the federal relief related to coronavirus follows a similar trajectory, a substantial risk of fraud should be suspected, and the fossil fuel industry presents a particular risk. In contrast with industries whose financial challenges began with the pandemic, the fossil fuel industry has the added motivation of proving that a business model dependent on burning carbon is still viable in an era when governments and investors around the world are prioritizing carbon reduction.  Fossil fuel companies are facing the added pressure of paying off massive, accumulated debt. Given the billions of dollars that many oil, gas and coal companies lost before and during COVID-19 – and the potential for gaining billions of dollars in federal relief – these companies may be particularly motivated to misrepresent their eligibility.

A significant portion of employees in the fossil fuel sector also say that they can rationalize fraud when there is financial pressure, according to a recent EY survey of employees in the oil, gas, and mining industry. In the survey, 43% of employees said that they would engage in fraud to meet financial targets, and 35% would engage in fraud to help a business survive a downturn.

Early indicators from fossil fuel companies who have received funds suggest that misrepresentations of eligibility may already be an issue. After Treasury Secretary Steven Mnuchin said that companies who receive PPP loans could face audits or criminal liability if they misstate their needs, three oil and gas companies, DMC Global, Natural Gas Services Group, and Graham Engineering, quickly returned their loans and another, Energy Services of American Corp, gave part of the money back.

For years, the fossil fuel industry has operated as if in a bubble, financing exploration and development on the premise of unlimited growth and a future rise in prices. Research has highlighted a strong correlation between bubbles and epidemics of fraud, which are typically revealed after the bubble bursts. As the pandemic rapidly deflates the industry’s optimistic assumptions, fraud that has inflated the bubble may be easier to detect and, as the industry rushes to use relief funding to pay off long-standing debt, the risk of companies misrepresenting their eligibility will likely increase as well.

With intense incentives and pressure to acquire federal relief, a greater reliance on corporate self-reporting amid the chaos, and a workforce that can already rationalize fraud, this unique combination of motivation, opportunity, and rationalization suggests that fossil fuel industry presents a serious risk of fraud with respect to federal relief funds.

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