This past weekend, I watched the science fiction movie Tenet. I won’t spoil anything, other than to say I was quite confused by the time travel/parallel universe aspect. Bill and Ted’s phone booth made more sense to me. Tenet did, however, prepare me for results of the Fourth Quarter 2021 Federal Reserve Bank of Dallas Energy Survey. The survey indicated that oil and gas companies are doing well financially while simultaneously unable to secure debt financing – showing parallel universes may exist.

Several respondents from Exploration & Production and Oil & Gas Services firms called out difficulties getting loans/credit from banks due to ESG pressures and Biden Administration energy policies. Those companies are therefore holding back capital plans to minimum maintenance requirements. Yet survey respondents were optimistic about their industry for 2022, as according to the Fed 2021 ended like this:

“… the oil and gas sector continued growing in fourth quarter 2021 … [o]il production increased at a faster pace… [and] oilfield services firms reported improvement across all indicators.”

A few comments to survey question from Exploration and Production firms are below. It isn’t clear if companies commenting have low ESG ratings (if they are even rated at all) or whether they signal a systemic view by potential creditors that the fossil fuel sector is inherently undesirable.

It is impossible to make realistic assessments for capital expenditure budgets given the current administration’s policies and, for that reason, capital expenditure commitments are being restrained and limited. Why would any rational person feel comfortable with expanding capital commitments beyond minimum maintenance requirements at most when nominees at the federal level are hoping for bankruptcy and closure of the oil and gas sector.

Constrained capital will lead to significantly higher commodity prices. And it isn’t the administration’s fault—this is a Wall Street and environmental, social and governance-led charge.

The political pressure forcing available capital away from the energy industry is a problem for everyone. Banks view lending to the energy industry as having a “political risk.” 

With the current administration in Washington being so anti-fossil-fuel industry, I question how much longer I will stay in the business. The good news is that they have so little understanding of the free market that prices usually spike with the Democrats in charge.

The regulatory environment in our state has led us to the decision to sell all of our operated and nonoperated interests. We believe the future for oil and gas in our state is not good.

A Less Cosmic Explanation

It is possible that another explanation exists, other than simultaneous existence in multiple dimensions. A piece published in Forbes one day after the Fed Survey discussed the conundrum of ESG-focused equity investment strategies and the market for fossil fuels:

“… the popularity of ESG-based funds has done shamefully little to reduce demand for fossil fuels. This has created a situation where feel-good investment funds are starving investment in new production – leaving oil markets hurtling toward a supply crunch and price spike…. It’s intensified investors’ interest in companies with high ESG scores by putting climate policy above energy security on the White House agenda, and it’s made U.S. oil companies wary of investing in new drilling. Investment rates are expected to remain near record low levels in 2022.”

The author makes an all-too-frequently overlooked point about the equity-centric focus of ESG business conversations: “As we enter 2022, it’s clear the ESG movement has had a far more significant effect on investors’ psyches than on consumer demand for petroleum products.” 

Encouraging consumer behavior change toward products and services that are “responsibly produced” with smaller carbon footprints and other ESG benefits is a complicated multi-faceted matter too deep to explore in a blog. But we will be covering it in some of our upcoming resources. Make sure you subscribe to our blog to stay updated.

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