American Oil Is Cheap Enough for Climate Activists to Buy It

(Bloomberg) -- The title of this column—“stranded assets”—describes the financial implications of a climate truism: maintaining an environment that’s somewhat hospitable to humans means that a lot of identified fossil-fuel reserves will have to stay in the ground, thus rendering them worthless.

We’re seeing a kind of partial foreshadowing of this scenario right now. Demand for oil has crashed, and prices are so low that some U.S. shale oil producers are filing for bankruptcy. But the oil and gas they planned to extract doesn’t simply disappear. Reuters reports that banks are getting ready to take on the reserves those producers once put up as collateral, creating holding companies and attempting to wait out the price war.

From a climate perspective, the thing that matters most is whether or not that supply ever reaches the Earth’s surface. With shale oil currently so cheap and unloved, what if someone maybe … bought those dormant pumping operations and shut them down for good?

Philanthropic foundations with large endowments and climate objectives might, conceivably, be able to do this, and buying up tracts of land to preserve them is a well-established form of environmental philanthropy. Buying and shutting down business operations is less common, but examples do exist.

For instance, the woodchip industry in the Australian state of Tasmania divided the community for decades over its plundering of the state’s old growth forests. It was already struggling in the early 2010s due to competition from South American plantation forests when it was dealt a decisive blow: two entrepreneurs with environmental leanings bought Triabunna, a wood mill that also included access to a critical deepwater port, intending to prevent either from being used again. They succeeded, but not in the way they’d initially hoped. When a conservative federal government was elected in 2013 and hinted that it would intervene to support the logging and woodchip industries, Triabunna’s new management destroyed the facility.

That less-than-perfect precedent aside, there are some pretty big arguments against buying-out-and-shutting-down as a deliberate tactic. Firstly, there’s cost. There are several oil and gas companies in talks with their creditors, but let’s focus on the one that’s actually filed for Chapter 11 restructuring: Whiting Petroleum Corp., one of the largest producers in North Dakota’s Bakken Shale. Retiring Whiting’s long-term debt would cost close to $3 billion. Based on estimates of the company’s remaining reserves and the chemical composition of Bakken Shale oil, that would eliminate about 228,000 metric tons of CO₂ emissions. By contrast, the Sierra Club’s Beyond Coal campaign says it’s retired 265 coal power plants, equivalent to 605 million metric tons of CO₂, at a cost of around $80 million. Unless philanthropists and activists can access vast sums of money, “buy and close” looks unlikely to work, even as a symbolic move.

Secondly, it’s not clear one actually could stop production by buying oil company assets. Oil and gas companies like Whiting and its fellow stressed shale producers tend to lease mineral rights from landowners rather than buying up land. The leases often contain provisions for landowners to be paid even if production is suspended or delayed. A climate philanthropist could, perhaps, simply pay those penalties. But that might not stop the landowners from coming to an arrangement with another producer, even if they had to wait a little while to do it. If the hydrocarbons are eventually extracted and combusted, the climate effect is the same.

There is a perennial criticism leveled by certain types of economist at climate campaigners, and it goes like this: Tree-huggers should stop targeting fossil fuel producers and instead focus on stopping demand for their products. If there’s no demand, the logic goes, then supply will naturally evaporate. But in the messy real world, governments, industries, and authorities will often go to great lengths to shield incumbents from growing market distaste.

At the end of our current, coronavirus-induced crisis, shale facilities that lose money on every barrel they extract might still be around, having been protected by bailout money, Fed asset purchases, or efforts of their desperate creditors. As the industry runs out of space to store unsold crude, President Donald Trump is even floating a plan to pay producers for oil they haven’t extracted, a kind of opposite-day version of the climate refrain to “keep it in the ground.”

If that’s dispiriting, remember that we aren’t in a true climate-risk stranded assets scenario. It makes sense that authorities are focused on public health and stabilizing the economy. But “stable” was already problematic for listed oil and gas producers, who were falling out of favor with equity investors even before Saudi Arabia and Russia’s shock and awe campaign. Banks who’ve loaned against oil and gas reserves may be much more reluctant to do so again in future after scrambling to make good on bad shale debts and struggling to flip them to once-enthusiastic private equity funds.

Climate campaigners don’t need to buy shale assets and shut them down because capitalism will do on its own. The question is how quickly that will happen, and who’ll be left holding the losses. 

Michael R. Bloomberg, founder and majority owner of Bloomberg News parent Bloomberg LP, financially supports the Sierra Club’s Beyond Coal campaign, which seeks to retire U.S. coal-fired plants.

Kate Mackenzie writes the Stranded Assets column for Bloomberg Green. She advises organizations working to limit climate change to the Paris Agreement goals. Follow her on Twitter: @kmac. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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