Douglas A.

Grandt

PO Box 6603
Lincoln, NE 68506
(510) 432-1452
July 23, 2015

Members of the Senate Committee on Energy and Natural Resources

Lisa Murkowski
709 Hart

Jeff Flake
413 Russell

Maria Cantwell
511 Hart

Elizabeth Warren
317 Hart

Lamar Alexander
455 Dirksen

Cory Gardner
354 Russell

Al Franken
309 Hart

Ron Wyden
221 Dirksen

John Barrasso
307 Dirksen

John Hoeven
338 Russell

Martin Heinrich
702 Hart

Shelley Capito
172 Russell

Mike Lee
361A Russell

Mazie Hirono
330 Hart

Bernie Sanders
332 Dirksen

Bill Cassidy
703 Hart

Rob Portman
448 Russell

Joe Manchin
306 Hart

Angus King
133 Hart

Steve Daines
320 Hart

James E. Risch
483 Russell

Debbie Stabenow
731 Hart

Re: Oil Refining - Considering future eventualities versus the myopia of the present (letter #21)
Dear Members of the Senate Committee on Energy and Natural Resources,
Yesterdays letter #20 was meant to be my final communication to you before August recess,
then the attached article from last week came to my attention. The author explains in depth the
concept that I have been attempting to alert you to, so I am compelled to share it immediately.
Attorney Sharon Kelly evokes a Nobel Laureate economist and IEA chief economist. Firstly:

Fatih Birol, chief economist at the International Energy Agency, had a blunt message for
energycompanies.
My message that oil production and refining operations may go out of business if the low price
of petroleum continues is echoed throughout this very long and comprehensive summary, but it
is certainly worth your time to realize that I am not a lone wolf howling in the night. Secondly:

A mixture of many different changes going on consumption patterns, civil society,

political action will be disruptive to the carbon economy, Nobel prize-winning
economist Joseph Stiglitz added at the conference that day, as he dismissed the notion that
voluntary measures could be effective.
As low prices and high costs have hammered the oil and gas drilling industry, an
increasing number of experts and institutions are scrutinizing the industry's short- and
long-term viability in unprecedentedways.

Kelly then dives into the nitty gritty, with specifics about what is already happening:

A Wave ofBankruptcies
Federal banking regulators have begun warning lenders that many of the loans made to
drillers at the height of the shale rush must be treated as substandard indicating an
increased risk that companies will default and fail to repay loans or that the regulators
doubt that the oil and gas reserves backing the loans will really prove to be worth what
borrowers claimed, according to the Wall StreetJournal.
Meanwhile the list of bankruptcies within the oil and gas drilling industry is growing, and
the auditing industry is taking note. In late March, Moodys Investment Services added
25 oil and gas-companies to its watch list of most financially stressed firms, double the
usual number, Ryder Scott, an oil and gas auditing firm, wrote in its quarterly newsletter.
Quicksilver Resources Inc., Dune Energy Inc. and BPZ Resources Inc. filed for Chapter
11 bankruptcy protection in March. Samson Resources Corp. said March 31 that it may
seek Chapter 11 bankruptcyreorganization.
All told, drillers have taken on debts adding up to more than $235 billion meanwhile
their revenues are shrinking fast due to low oilprices.
But it's not just low prices that have created this debacle. The problem for shale drillers is
that theyve consistently spent money faster than theyve made it, even when oil was $100
a barrel, Bloomberg reported last month. The companies in the Bloomberg index spent
$4.15 for every dollar earned selling oil and gas in the first quarter, up from $2.25 a year
earlier, while pushing U.S. oil production to the highest in more than 30years.
The oil and gas industry has historically far out-earned what it spent, giving more than
enough cash to fund more drilling out of its own pockets. But for many companies
especially the smaller wildcatters that have stoked enthusiasm about shale drilling even
while the majors like Royal Dutch Shell renounced it as a money-loser the current
drilling boom is fueled bydebt.
But that debt looks increasingly risky, as a wave of credit downgrades and lowered
financial outlooks have swept across the industry. A May report by Standard and Poors
found that fully one third of the world's three dozen corporate debt defaults this year were
by oil and gascompanies.
Frankly, I believe we are entering a near-term crisis with todays events foreshadowing dire
economic fallout from an insane paradigm that past success will extrapolate into the future.
How will refining continue profitably when crude feedstocks diminish as producers go belly up?
Sincerely yours,

Doug Grandt
answerthecall@mac.com

Drillers Under Pressure as Low Prices, Broad Uncertainties

Put Oil & Gas Industry's Financial Prospects 'In Limbo'
By Sharon Kelly Thursday, July 16, 2015 http://bit.ly/DeSmog16July15
At a climate change conference in Paris last week, Fatih Birol, chief economist at the
International Energy Agency, had a blunt message for energy companies.
We see some moves from energy companies
in the direction of sustainable development.
However, it is not at the level you would like to
see, Mr. Birol, who will be promoted to chief of
the IEA in September, told those assembled.
If they think that their businesses are immune
to the impacts of climate policy, they are
making a strategic mistake.
Other experts sound a similar note, calling for
changes so fast and sweeping that they would
be like an induced implosion.
In order to stay below 2 degrees C (36F), or even 3 degress C, we need to have
something really disruptive, which I would call an induced implosion of the carbon economy
over the next 20-30 years, Prof. Hans Joachim Schellnhuber, founding director of the
Potsdam Institute for Climate Impacts Research and advisor to Pope Francis and the
German government, said the next day. Otherwise we have no chance of avoiding
dangerous, perhaps disastrous, climate change.
A mixture of many different changes going on consumption patterns, civil society, political
action will be disruptive to the carbon economy, Nobel prize-winning economist Joseph
Stiglitz added at the conference that day, as he dismissed the notion that voluntary
measures could be effective. The atmosphere is a public good all want to get the
benefits, but no one wants to pay the cost.
In the realpolitik world of investing and economics, a slowly-emerging awareness of the
need to take steps to mitigate climate change seems to be emerging making fossil fuel
investments look not only hazardous to the climate, but also turning long-time blue chip
stocks into investments that look uniquely financially risky.
As low prices and high costs have hammered the oil and gas drilling industry, an increasing
number of experts and institutions are scrutinizing the industry's short- and long-term
viability in unprecedented ways.

A Wave of Bankruptcies
Federal banking regulators have begun warning lenders that many of the loans made to
drillers at the height of the shale rush must be treated as substandard indicating an
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increased risk that companies will default and fail to repay loans or that the regulators
doubt that the oil and gas reserves backing the loans will really prove to be worth what
borrowers claimed, according to the Wall Street Journal.
Meanwhile the list of bankruptcies within the oil and gas drilling industry is growing, and the
auditing industry is taking note. In late March, Moodys Investment Services added 25 oil
and gas-companies to its watch list of most financially stressed firms, double the usual
number, Ryder Scott, an oil and gas auditing firm, wrote in its quarterly newsletter.
Quicksilver Resources Inc., Dune Energy Inc. and BPZ Resources Inc. filed for Chapter 11
bankruptcy protection in March. Samson Resources Corp. said March 31 that it may seek
Chapter 11 bankruptcy reorganization.
All told, drillers have taken on debts adding up to more than $235 billion meanwhile their
revenues are shrinking fast due to low oil prices.
But it's not just low prices that have created this debacle. The problem for shale drillers is
that theyve consistently spent money faster than theyve made it, even when oil was $100
a barrel, Bloomberg reported last month. The companies in the Bloomberg index spent
$4.15 for every dollar earned selling oil and gas in the first quarter, up from $2.25 a year
earlier, while pushing U.S. oil production to the highest in more than 30 years.
The oil and gas industry has historically far out-earned what it spent, giving more than
enough cash to fund more drilling out of its own pockets. But for many companies
especially the smaller wildcatters that have stoked enthusiasm about shale drilling even
while the majors like Royal Dutch Shell renounced it as a money-loser the current drilling
boom is fueled by debt.
But that debt looks increasingly risky, as a wave of credit downgrades and lowered financial
outlooks have swept across the industry. A May report by Standard and Poors found that
fully one third of the world's three dozen corporate debt defaults this year were by oil and
gas companies.

The Long Run, Starting Today

In April, HSBC issued a research note warning of growing financial and reputational risks
for those who continue to invest in oil, coal and gas companies and advising its investors to
protect themselves against the risk of so-called stranded assets.
In the context of fossil fuels, [stranded assets] means those that will not be burned they
remain stranded in the ground, the research note explained. We believe the risks of this
occurring are growing.
A major international think tank also focused on the risk of stranded assets in a report
published last week, citing the combination of low oil prices, geopolitical factors that made it
likely prices would stay low, and upcoming climate talks as reasons to doubt the core
viability of the oil and gas industry's future.
The difference between the oil (or gas) that would remain in the ground in any case (that
is, without strong policies) and what would remain if strong policies were adopted is, in
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effect, the volume in limbo in other words, the reserves whose future is uncertain,
researchers from Chatham House wrote.
If investors continue to pour money into pursuing assets that will wind up stranded, they
stand to lose enormous sums of money. The International Energy Agency estimates that
two-thirds of currently expected energy reserves can never be sold and burnt if climate
deals are to be kept adding up to $28 trillion dollars by 2100.
For some, the idea of leaving all that money on the table is galling but the financial costs
of a severely changed climate are incalculably higher. Promoting climate-smart
investment would generate up to $2.6 trillion a year by 2030, the World Bank calculated in
a study released last year an amount that would fast exceed the projected costs of
stranded assets.
But the longer policy-makers and investors wait, the more assets are at risk and the higher
the costs of dealing with the fallout of a hotter, more variable climate. Climate inaction
inflicts costs that escalate every day, Rachel Kyte, World Bank Group vice president and
special envoy for climate change, said.

Shadow Banking, Risky Finance

Many in the oil and gas industry argue that the chance that their reserves will be stranded
are remote.
A 2014 Exxon report, issued at the behest of activist shareholder groups, concluded: We
are confident that none of our hydrocarbon reserves are now or will become stranded.
But an investigation by Institutional Investor found that if Exxon's conclusions were sound,
the climate changes could be catastrophic.
Moreover, Exxons 2014 report did not specify which global temperature rise scenario it
used in its analysis, says Shanna Cleveland, senior manager on the Carbon Asset Risk
Initiative at Ceres, a Boston-based nonprofit that focuses on sustainability issues, reporter
Carol J. Clouse wrote. After being pressed, Exxon did acknowledge that one of its
scenarios could be compatible with an average global surface temperature rise of 4.5
degrees Celsius (8.1 degrees Fahrenheit) over a time frame to 2050, Cleveland says.
And not everyone is avoiding the fiscal risks associated with fossil fuel development, as
some investors hope that high risk will lead to high returns. Drillers have already begun
raising capital in ways that let them dodge the post-2008 banking restrictions, taking
investors along for the ride.
Shadow banking and other forms of finance are developing (with less rigorous
regulation), Chatham House said in its report, but there are mismatches between the level
of sophistication of some borrowers and that of some financial innovators.
It's not only major corporations who are affected when risky financial bets go south, as the
current oil price drop illustrates. Over 100,000 oil workers have already been laid off, the

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Wall Street Journal reported in April, and oilfield services contractors have slashed the
rates they charge to prevent more layoffs.
Jobs that were projected to last for decades with high wages have evaporated, and
contractors are cutting their costs to the bone.
[W]hat were seeing in terms of third party quotations is that these pressure pumping
companies are offering their services essentially at cash breakeven costs, Pioneer Natural
Resources Co. president and COO Timothy L. Dove said in February, according to Ryder
Scott's April newsletter.
Landowners who leased their acreage for drilling have seen their royalties plummet as
smaller companies go bankrupt leaving them also on the hook for any pollution or
damage since insolvent companies have no budget to pay for their liabilities.
Were seeing highly-levered companies, with high break-even cost requirements, with little
ability to generate cash and little access to liquidity, John Castellano, a managing director
at AlixPartners LLC, recently told Bloomberg, which profiled landowners harmed by the
downturn. I dont believe we are near the end of this.
The wave of bankruptcies has caught the attention of environmentalists, who argue that
building infrastructure for fossil fuels like oil and shale gas is not only damaging to air and
water, but also makes little financial sense.
And that holds true not only for notoriously polluting coal, but also for natural gas, which
has been marketed as a green alternative and called a low-carbon bridge to renewables
by the Obama administration.
Plans by U.S. drillers to export shale gas by liquefying it and shipping it across oceans in
tankers have drawn attention from Wall Street, with 19 of the top 20 Liquefied Natural Gas
(LNG) companies planning projects. But building that infrastructure today makes no sense
if burning that gas would send the climate over a tipping point. More than $283 billion worth
of currently proposed LNG projects those proposed by 16 of the 19 companies will
likely be uneconomic if the world sticks to its current climate agreements, a report by the
London-based group Climate Tracker found.
With financial uncertainty swirling, many argue that the time to transition away from fossil
fuels is now.
That market is inherently volatile, and the industry is vulnerable, wrote Carl Pope, former
executive director of the Sierra Club, in a Bloomberg column titled Why You Should Short
Public Oil Companies recently. Divestment from oil may be a moral cause for some
investors. Others those seeking profit over the long term especially might want to
follow suit simply to save their shirts.
Photo Credit: Risk Ahead blue road sign, via Shutterstock.

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