By Justin Mikulka
The U.S. shale oil industry hailed as a "revolution" has burned through a quarter trillion dollars more than it has brought in over the last decade. It has been a money-losing endeavor of epic proportions.
In September 2016, the financial ratings service Moody's released a report on U.S. oil companies, many of which were hurting from the massive drop in oil prices. Moody's found that "the financial toll from the oil bust can only be described as catastrophic," particularly for small companies that took on huge debt to finance fracking shale formations when oil prices were high.
And even though shale companies still aren't turning a profit, Wall Street continues to lend the industry more money while touting these companies as good investments. Why would investors do that?
David Einhorn, star hedge fund investor and the founder of Greenlight Capital, has referred to the shale industry as "a joke."
"A business that burns cash and doesn't grow isn't worth anything," said Einhorn, who often goes against the grain in the financial world.
Aren't investors supposed to be focused on putting money toward profitable companies? While, in theory, yes, the reality is quite different for industries like shale oil and housing.
If the U.S. financial crisis of 2008 has revealed anything, it is that Wall Street isn't concerned with making a "shitty deal" when it means profits and bonuses for its traders and executives, despite their roles in the crash.
Wall Street makes money by facilitating deals much like a Vegas bookie makes money by taking bets. As the saying about Las Vegas goes: "The house always wins." What's true about casinos and gambling also holds true for Wall Street.
Wall Street caused the 2008 financial crisis, with some of its architects personally benefiting. However, while a few executives profited, the result was a drop in employment of 8.8 million people, and according to Bloomberg News in 2010, "at one point last year [2009] the U.S. had lent, spent or guaranteed as much as $12.8 trillion to rescue the economy."
JP Morgan (along with much of Wall Street) required large sums of money in the form of bailouts to survive the fallout from all of the bad loans made, which brought about the housing crisis. Is JP Morgan steering clear of making loans to the shale industry? No. Quite the opposite.
As shown in this chart of which banks are loaning money to shale company EOGResources, while all of the big players in Wall Street are in on the action, JP Morgan has the biggest bet.
To understand why JP Morgan and the rest of these banks would loan money to shale companies that continue to lose it, it's important to understand the gambling concept of "the vigorish" or the vig. Merriam-Webster defines vigorish as "a charge taken (as by a bookie or a gambling house) on bets."
Wall Street makes money by taking a cut of other people's money. To a gambling house, it doesn't matter if everyone else is making money or losing it, as long as the house gets its cut (the vig)—or as it's known in the financial world—fees.
Understanding this concept gives insight into why investors have lent a quarter trillion dollars to the shale industry, which has burned through it. If you take the vig on a quarter trillion dollars, you have a big pile of cash. And while those oil companies may all go bankrupt, Wall Street never gives back the vig.
Trent Stedman of the investment firm Columbia Pacific Advisors LLC explained to The Wall Street Journal at the end of 2017 why shale producers would keep drilling more oil even when the companies are bleeding money on every barrel produced:
"Some would say, 'We know it's bad economics, but it's what The Street wants.'"
And "The Street" generally gets what it wants, even when it is clear that loaning money to shale companies that have been losing money for a decade and are already deep in debt is "bad economics." But Wall Street bonuses are based on how many "fees" an employee can bring to the bank. More fees mean a bigger bonus. And loans—even ones that are clearly bad economics—mean a lot more fees.
Shale Oil Companies Are "Creatures of the Capital Markets"
In 2017 "legendary" hedge fund manager Jim Chanos referred to shale oil companies as "creatures of the capital markets," meaning that without Wall Street money, they would not exist. Chanos is also on record as shorting the stock of heavily leveraged shale oil giant Continental Resources because the company can't even make enough money to pay the interest on its loans.
And he has a point. In 2017 Continental spent $294.5 million on interest expenses, which is approximately 155 percent of its 2017 adjusted net income generation. When you can't even pay the interest on your credit cards, you are broke.
And yet in 2017, investor capital was still flowing, with Continental Resources among those bellying up to the Wall Street trough for another billion in debt.
"In 2017, U.S. [exploration and production] firms raised more from bond sales than in any year since the price collapse started in 2014, with offerings coming in at around $60 billion — up nearly 30 percent from 2016, according to Dealogic. Large-cap players like Whiting Petroleum, Continental Resources, Southwestern, Noble, Concho and Endeavor Energy Resources each raised $1 billion or more in the second half of 2017."
How big of a problem is this business of loaning money to an industry burning through billions and burying itself in debt? So big that the CEO of shale company Anadarko Petroleum is blaming Wall Street and asking its companies to please stop loaning money to the shale oil industry. Yes, that's right.
In 2017, Anadarko CEO Al Walker told an investor conference that Wall Street investors were the problem:
"The biggest problem our industry faces today is you guys. You guys can help us help ourselves. It's kind of like going to AA. You know, we need a partner. We really need the investment community to show discipline."
The Wall Street Journal reported that Walker maintains: "Wall Street has become an enabler that pushes companies to grow production at any cost, while punishing those that try to live within their means."
Imagine begging banks to stop loaning you money. And being ignored.
Growing production at any cost is the story of the shale "revolution." The financial cost paid so far has been the more than $280 billion the industry has burned through—money that its companies have received from Wall Street and, despite the plea from Al Walker, continue to receive.
The Economist summarized the situation in 2017:
"It [the shale industry] has burned up cash whether the oil price was at $100, as in 2014, or at about $50, as it was during the past three months. The biggest 60 firms in aggregate have used up $9 billion per quarter on average for the past five years."
Higher oil prices are now being touted as the industry's savior but, as The Economist noted, the shale industry was losing money even when oil was $100 a barrel.
Still Wall Street keeps giving the shale industry money and the shale industry keeps losing it as it ramps up production. To be clear, this arrangement makes shale company CEOs and financial lenders very rich, which is why the trend is likely to continue. And why Continental Resources CEO Harold Hamm will continue to repeat the myth that his industry is making money, as he did at the end of 2017:
"For anybody to even put forth the suggestion we haven't had great expansion and wealth creation in this industry with horizontal drilling and all the technology that's come about the last 10 years, I mean, it's totally ridiculous."
No one will argue that Hamm and his partners on Wall Street are not extremely wealthy. That has happened despite Hamm's company and the rest of the fracking industry losing epic sums of money. The same year Hamm made that statement, his company couldn't even cover its interest expenses. To put that in perspective, Continental Resources couldn't even make the equivalent of the minimum payment on its credit card.
Watch What the Industry Does, Not What It Says
Higher oil prices are yielding more stories about how 2018 will be the year that the shale industry finally makes a profit. Harold Hamm refers to it as Continental Resources' "breakout year." Interesting how potentially not losing money for a year is considered a "breakout year" in the shale industry.
As reported on DeSmog, the industry certainly got a huge boost from the recent tax law, which will help its companies' short-term finances. Continental Resources alone took home $700 million in tax relief.
Recent reports in the financial press detail how the new approach in the shale industry will be to focus only on profitable oil production, not just producing more barrels at a loss. As The Wall Street Journal put it in a headline: Wall Street Tells Frackers to Stop Counting Barrels, Start Making Profits.
In that very article, Continental CEO Hamm assures that he is on board with this new approach, saying, "You are really preaching to the choir."
But has Continental actually embraced this new approach of fiscal responsibility and restraint?
Not so much.
The fracking firm appears to have done the opposite, increasing production to record levels along with the rest of the shale industry. Continental recently reported plans to drill 350 new wells at an estimated cost of $11.7 million per well, which adds up to over $4 billion in total costs on those wells. The company currently holds more than $6 billion in debt and less than $100 million cash.
How will Continental fund those new wells? Hamm has promised that going forward, there would be "absolutely no new debt." Perhaps Continental will fund it by selling assets because without more debt, Continental does not have the money to fund those new wells. However, if past is prelude, then Wall Street will happily lend Continental as much money as it wants.
Why would Hamm say one thing and do another? Well, he personally has accrued billions of dollars while his company has burned through billions.
Despite leading Continental to another money-losing year in 2017, Hamm took home a fat raise.
Correction: This article initially estimated the cost for 350 new wells at $400 million. The correct number is $4 billion.
Follow the DeSmog investigative series: Finances of Fracking: Shale Industry Drills More Debt Than Profit
Reposted with permission from our media associate DeSmogBlog.
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These longer periods of stratification could have "far-reaching implications" for lake ecosystems, the paper says, and can drive toxic algal blooms, fish die-offs and increased methane emissions.
The study, published in Nature Communications, finds that the average seasonal lake stratification period in the northern hemisphere could last almost two weeks longer by the end of the century, even under a low emission scenario. It finds that stratification could last over a month longer if emissions are extremely high.
If stratification periods continue to lengthen, "we can expect catastrophic changes to some lake ecosystems, which may have irreversible impacts on ecological communities," the lead author of the study tells Carbon Brief.
The study also finds that larger lakes will see more notable changes. For example, the North American Great Lakes, which house "irreplaceable biodiversity" and represent some of the world's largest freshwater ecosystems, are already experiencing "rapid changes" in their stratification periods, according to the study.
'Fatal Consequences'
As temperatures rise in the spring, many lakes begin the process of "stratification." Warm air heats the surface of the lake, heating the top layer of water, which separates out from the cooler layers of water beneath.
The stratified layers do not mix easily and the greater the temperature difference between the layers, the less mixing there is. Lakes generally stratify between spring and autumn, when hot weather maintains the temperature gradient between warm surface water and colder water deeper down.
Dr Richard Woolway from the European Space Agency is the lead author of the paper, which finds that climate change is driving stratification to begin earlier and end later. He tells Carbon Brief that the impacts of stratification are "widespread and extensive," and that longer periods of stratification could have "irreversible impacts" on ecosystems.
For example, Dr Dominic Vachon – a postdoctoral fellow from the Climate Impacts Research Centre at Umea University, who was not involved in the study – explains that stratification can create a "physical barrier" that makes it harder for dissolved gases and particles to move between the layers of water.
This can prevent the oxygen from the surface of the water from sinking deeper into the lake and can lead to "deoxygenation" in the depths of the water, where oxygen levels are lower and respiration becomes more difficult.
Oxygen depletion can have "fatal consequences for living organisms," according to Dr Bertram Boehrer, a researcher at the Helmholtz Centre for Environmental Research, who was not involved in the study.
Lead author Woolway tells Carbon Brief that the decrease in oxygen levels at deeper depths traps fish in the warmer surface waters:
"Fish often migrate to deeper waters during the summer to escape warmer conditions at the surface – for example during a lake heatwave. A decrease in oxygen at depth will mean that fish will have no thermal refuge, as they often can't survive when oxygen concentrations are too low."
This can be very harmful for lake life and can even increase "fish die-off events" the study notes.
However, the impacts of stratification are not limited to fish. The study notes that a shift to earlier stratification in spring can also encourage communities of phytoplankton – a type of algae – to grow sooner, and can put them out of sync with the species that rely on them for food. This is called a "trophic mismatch."
Prof Catherine O'Reilly, a professor of geography, geology and the environment at Illinois State University, who was not involved in the study, adds that longer stratified periods could also "increase the likelihood of harmful algae blooms."
The impact of climate change on lakes also extends beyond ecosystems. Low oxygen levels in lakes can enhance the production of methane, which is "produced in and emitted from lakes at globally significant rates," according to the study.
Woolway explains that higher levels of warming could therefore create a positive climate feedback in lakes, where rising temperatures mean larger planet-warming emissions:
"Low oxygen levels at depth also promotes methane production in lake sediments, which can then be released to the surface either via bubbles or by diffusion, resulting in a positive feedback to climate change."
Onset and Breakup
In the study, the authors determine historical changes in lake stratification periods using long-term observational data from some of the "best-monitored lakes in the world" and daily simulations from a collection of lake models.
They also run simulations of future changes in lake stratification period under three different emission scenarios, to determine how the process could change in the future. The study focuses on lakes in the northern hemisphere.
The figure below shows the average change in lake stratification days between 1900 and 2099, compared to the 1970-1999 average. The plot shows historical measurements (black), and the low emission RCP2.6 (blue), mid emissions RCP6.0 (yellow) and extremely high emissions RCP8.5 (red) scenarios.
Change in lake stratification duration compared to the 1970-1999 average, for historical measurements (black), the low emission RCP2.6 (blue) moderate emissions RCP6.0 (yellow) and extremely high emissions RCP8.5 (red). Credit: Woolway et al (2021).
The plot shows that the average lake stratification period has already lengthened. However, the study adds that some lakes are seeing more significant impacts than others.
For example, Blelham Tarn – the most well-monitored lake in the English Lake District – is now stratifying 24 days earlier and maintaining its stratification for an extra 18 days compared to its 1963-1972 averages, the study finds. Woolway tells Carbon Brief that as a result, the lake is already showing signs of oxygen depletion.
Climate change is increasing average stratification duration in lakes, the findings show, by moving the onset of stratification earlier and pushing the stratification "breakup" later. The table below shows projected changes in the onset, breakup and overall length of lake stratification under different emission scenarios, compared to a 1970-1999 baseline.
The table shows that even under the low emission scenario, the lake stratification period is expected to be 13 days longer by the end of the century. However, in the extremely high emissions scenario, it could be 33 days longer.
The table also shows that stratification onset has changed more significantly than stratification breakup. The reasons why are revealed by looking at the drivers of stratification more closely.
Warmer Weather and Weaker Winds
The timing of stratification onset and breakup in lakes is driven by two main factors – temperature and wind speed.
The impact of temperature on lake stratification is based on the fact that warm water is less dense than cool water, Woolway tells Carbon Brief:
"Warming of the water's surface by increasing air temperature causes the density of water to decrease and likewise results in distinct thermal layers within a lake to form – cooler, denser water settles to the bottom of the lake, while warmer, lighter water forms a layer on top."
This means that, as climate change causes temperatures to rise, lakes will begin to stratify earlier and remain stratified for longer. Lakes in higher altitudes are also likely to see greater changes in stratification, Woolway tells Carbon Brief, because "the prolonging of summer is very apparent in high latitude regions."
The figure below shows the expected increase in stratification duration from lakes in the northern hemisphere under the low (left), mid (center), and high (right) emission scenarios. Deeper colors indicate a larger increase in stratification period.
Expected increase in stratification duration in lakes in the northern hemisphere under the low (left), mid (centre) and high (right) emissions scenarios. Credit: Woolway et al (2021).
The figure shows that the expected impact of climate change on stratification duration becomes more pronounced at more northerly high latitudes.
The second factor is wind speed, Woolway explains:
"Wind speed also affects the timing of stratification onset and breakdown, with stronger winds acting to mix the water column, thus acting against the stratifying effect of increasing air temperature."
According to the study, wind speed is expected to decrease slightly as the planet warms. The authors note that the expected changes in near-surface wind speed are "relatively minor" compared to the likely temperature increase, but they add that it may still cause "substantial" changes in stratification.
The study finds that air temperature is the most important factor behind when a lake will begin to stratify. However, when looking at stratification breakup, it finds that wind speed is a more important driver.
Meanwhile, Vachon says that wind speeds also have implications for methane emissions from lakes. He notes that stratification prevents the methane produced on the bottom of the lake from rising and that, when the stratification period ends, methane is allowed to rise to the surface. However, according to Vachon, the speed of stratification breakup will affect how much methane is released into the atmosphere:
"My work has suggested that the amount of accumulated methane in bottom waters that will be finally emitted is related to how quickly the stratification break-up occurs. For example, a slow and progressive stratification break-up will most likely allow water oxygenation and allow the bacteria to oxidise methane into carbon dioxide. However, a stratification break-up that occurs rapidly – for example after storm events with high wind speed – will allow the accumulated methane to be emitted to the atmosphere more efficiently."
Finally, the study finds that large lakes take longer to stratify in spring and typically remain stratified for longer in the autumn – due to their higher volume of water. For example, the authors highlight the North American Great Lakes, which house "irreplaceable biodiversity" and represent some of the world's largest freshwater ecosystems.
These lakes have been stratifying 3.5 days earlier every decade since 1980, the authors find, and their stratification onset can vary by up to 48 days between some extreme years.
O'Reilly tells Carbon Brief that "it's clear that these changes will be moving lakes into uncharted territory" and adds that the paper "provides a framework for thinking about how much lakes will change under future climate scenarios."
Reposted with permission from Carbon Brief.
Currently the U.S. Supreme Court has on its docket a case between Texas, New Mexico and Colorado and another one between Mississippi and Tennessee. The court has already ruled this term on cases pitting Texas against New Mexico and Florida against Georgia.
Climate stresses are raising the stakes. Rising temperatures require farmers to use more water to grow the same amount of crops. Prolonged and severe droughts decrease available supplies. Wildfires are burning hotter and lasting longer. Fires bake the soil, reducing forests' ability to hold water, increasing evaporation from barren land and compromising water supplies.
As a longtime observer of interstate water negotiations, I see a basic problem: In some cases, more water rights exist on paper than as wet water – even before factoring in shortages caused by climate change and other stresses. In my view, states should put at least as much effort into reducing water use as they do into litigation, because there are no guaranteed winners in water lawsuits.
Alabama, pay attention to Supreme Court ruling against Florida in water war #Water #SDG6 https://t.co/wIjdoY6Ccr— Noah J. Sabich (@Noah J. Sabich)1617800452.0
Dry Times in the West
The situation is most urgent in California and the Southwest, which currently face "extreme or exceptional" drought conditions. California's reservoirs are half-empty at the end of the rainy season. The Sierra snowpack sits at 60% of normal. In March 2021, federal and state agencies that oversee California's Central Valley Project and State Water Project – regional water systems that each cover hundreds of miles – issued "remarkably bleak warnings" about cutbacks to farmers' water allocations.
The Colorado River Basin is mired in a drought that began in 2000. Experts disagree as to how long it could last. What's certain is that the "Law of the River" – the body of rules, regulations and laws governing the Colorado River – has allocated more water to the states than the river reliably provides.
The 1922 Colorado River Compact allocated 7.5 million acre-feet (one acre-foot is roughly 325,000 gallons) to California, Nevada and Arizona, and another 7.5 million acre-feet to Utah, Wyoming, Colorado and New Mexico. A treaty with Mexico secured that country 1.5 million acre-feet, for a total of 16.5 million acre-feet. However, estimates based on tree ring analysis have determined that the actual yearly flow of the river over the last 1,200 years is roughly 14.6 million acre-feet.
The inevitable train wreck has not yet happened, for two reasons. First, Lakes Mead and Powell – the two largest reservoirs on the Colorado – can hold a combined 56 million acre-feet, roughly four times the river's annual flow.
But diversions and increased evaporation due to drought are reducing water levels in the reservoirs. As of Dec. 16, 2020, both lakes were less than half full.
Second, the Upper Basin states – Utah, Wyoming, Colorado and New Mexico – have never used their full allotment. Now, however, they want to use more water. Wyoming has several new dams on the drawing board. So does Colorado, which is also planning a new diversion from the headwaters of the Colorado River to Denver and other cities on the Rocky Mountains' east slope.
Drought conditions in the continental U.S. on April 13, 2021. U.S. Drought Monitor, CC BY-ND
Utah Stakes a Claim
The most controversial proposal comes from one of the nation's fastest-growing areas: St. George, Utah, home to approximately 90,000 residents and lots of golf courses. St. George has very high water consumption rates and very low water prices. The city is proposing to augment its water supply with a 140-mile pipeline from Lake Powell, which would carry 86,000 acre-feet per year.
Truth be told, that's not a lot of water, and it would not exceed Utah's unused allocation from the Colorado River. But the six other Colorado River Basin states have protested as though St. George were asking for their firstborn child.
In a joint letter dated Sept. 8, 2020, the other states implored the Interior Department to refrain from issuing a final environmental review of the pipeline until all seven states could "reach consensus regarding legal and operational concerns." The letter explicitly threatened a high "probability of multi-year litigation."
Utah blinked. Having earlier insisted on an expedited pipeline review, the state asked federal officials on Sept. 24, 2020 to delay a decision. But Utah has not given up: In March 2021, Gov. Spencer Cox signed a bill creating a Colorado River Authority of Utah, armed with a $9 million legal defense fund, to protect Utah's share of Colorado River water. One observer predicted "huge, huge litigation."
How huge could it be? In 1930, Arizona sued California in an epic battle that did not end until 2006. Arizona prevailed by finally securing a fixed allocation from the water apportioned to California, Nevada and Arizona.
Litigation or Conservation
Before Utah takes the precipitous step of appealing to the Supreme Court under the court's original jurisdiction over disputes between states, it might explore other solutions. Water conservation and reuse make obvious sense in St. George, where per-person water consumption is among the nation's highest.
St. George could emulate its neighbor, Las Vegas, which has paid residents up to $3 per square foot to rip out lawns and replace them with native desert landscaping. In April 2021 Las Vegas went further, asking the Nevada Legislature to outlaw ornamental grass.
The Southern Nevada Water Authority estimates that the Las Vegas metropolitan area has eight square miles of "nonfunctional turf" – grass that no one ever walks on except the person who cuts it. Removing it would reduce the region's water consumption by 15%.
Water rights litigation is fraught with uncertainty. Just ask Florida, which thought it had a strong case that Georgia's water diversions from the Apalachicola-Chattahoochee-Flint River Basin were harming its oyster fishery downstream.
That case extended over 20 years before the U.S. Supreme Court ended the final chapter in April 2021. The court used a procedural rule that places the burden on plaintiffs to provide "clear and convincing evidence." Florida failed to convince the court, and walked away with nothing.
Robert Glennon is a Regents Professor and Morris K. Udall Professor of Law & Public Policy, University of Arizona.
Disclosure statement: Robert Glennon received funding from the National Science Foundation in the 1990s and 2000s.
Reposted with permission from The Conversation.