Early in the COVID-19 pandemic, the anticipation of trillions of dollars in federal government aid for businesses impacted by the pandemic set-off a massive surge of lobbying by the fossil fuel industry. The financial woes of the industry predate the pandemic, yet, according to report from InfluenceMap, the industry that was already struggling to find a way out its debt was 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 a bet on a future rise in oil prices. Since 2007, the oil and gas industry has lost more than USD 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 have plagued the oil and gas supermajors as well, despite the fact that they were, until recently, among the most profitable companies in the world. In the last decade, the five largest supermajor oil companies spent more than USD 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 decade, more than fifty 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 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 industry lobbying efforts focused on ensuring that the Federal Reserve’s Main Street Lending program and corporate bond buybacks program would 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, became eligible to benefit substantially from the program.
Additional lobbying efforts focused on the Federal Reserve’s $750 billion bond-buying program, which allowed the Federal Reserve to purchase debt through corporate bonds or exchange-traded funds. To be eligible for bond purchases, companies needed to have at least a triple BBB-/Baa3 score from multiple credit agencies by March 22nd. This standard presented significant risks; 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 benefited 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
Estimates suggest that lobbying by the fossil fuel industry paid off. While no funds were directed at the fossil fuel industry specifically, the industry benefited substantially from COVID-19 financial assistance through eligibility for small business loans, tax breaks, and bond buybacks.
Early analysis of disclosures in SEC filings showed that publicly-traded fossil fuel companies quickly 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.
These payments quickly ballooned into billions for the industry. By December 2020, analysis from Accountable.US found that companies in the oil, gas and mining industries had received over USD 4.5 billion through PPP loans.
Fossil fuel companies 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 was particularly advantageous for the fossil fuel industry due to the industry’s substantial existing losses and debt. In a report titled Bailed Out & Propped Up, BailoutWatch, Friends of the Earth, and Public Citizen found that oil, gas and mining companies received USD 5.5 billion in tax benefits.
Industry lobbying ensured that a greater number of fossil fuel companies became eligible for the Main Street Lending program. By November 2020, 37 mid-sized oil, gas, and coal companies received at least USD 582 million. Companies too large to benefit from the Main Street Lending program were able to qualify for the Federal Reserve’s $750 billion bond-buying program. In July 2020, InfluenceMap found the Federal Reserve’s disproportionately benefitted the U.S. oil, gas and coal industries, with corporate bond purchases that were more than three times the S&P1500 equity values for this sector.
Through the bond buy-back program, the Federal Reserve purchased USD 432.1 million in already-issued fossil fuel bonds from investors. More importantly, however, the Federal Reserve’s move effectively signaled confidence in the industry’s debt. Companies responded by issuing USD 93.5 billion in new bonds that were quickly purchased by investors in the five months after the Federal Reserve stepped in.
Fossil fuel companies whose bonds were considered too risky prior to the deadline were eligible to benefit from Federal Reserve purchases of 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 stood to benefit the most as the Federal Reserve buys shares in exchange-traded funds.
The industry also benefitted from a poorly-managed royalty relief program. The Government Accountability Office found that a lack of coordination in royalty relief programs led federal and state governments to lose a minimum of USD 4.5 million of royalty fees, with the ultimate total unknown.
High Risk of Fraud in Funding for Fossil Fuels
Critiques of the funding available to the fossil fuel industry 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 were required to make statements about their payroll costs, the number of employees they have, and the nature of their business. Companies who subsequently used 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 were required to state that credit was not reasonably available to them and that the investment was 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 also provided 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 federal relief related to coronavirus follows a similar trajectory, a substantial risk of fraud should be suspected. On March 26th, 2021, the Department of Justice announced that it had already charged 120 defendants with PPP fraud. In the announcement, the DOJ highlighted the use of both the False Claims Act and the Financial Institutions Reform Recovery and Enforcement Act.
The fossil fuel industry presents a particular risk. In contrast with industries whose financial challenges began with the pandemic, the fossil fuel industry had 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 – companies in these industries may have been 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 in April 2020 from fossil fuel companies who received funds suggested that there was a significant risk of misrepresentations of eligibility. 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.