THE CARBON WAR

From carbon capitalism to climate capitalism 133
picture is worse than we painted it: nearly a trillion dollars of what they call
“zombie” investments above an oil price of $70.
And I repeat, the oil price is at $60 and falling.
The BBC reports that in the North Sea the oil industry is “close to collapse”.
The Chairman of the independent explorers association has told them
that almost no new projects are profitable. A third of quoted UK oil and gas
companies face bankruptcy, Company Watch estimates: 70% of them are unprofitable,
racking up losses.
Chevron has dropped its Arctic drilling plans indefinitely. Economics
plus regulatory requirements have put them off a target of drilling a first well
as far away as 2025.
The debt-laden oil industry now poses a new threat to banks, the FT
reports. As much as half of outstanding financing may be stuck on banks’
balance sheets. Bond investors are becoming skittish over the plight of big
energy companies in emerging markets. Once popular bonds of Petrobras,
Pemex, and Gazprom are looking shaky. Meanwhile, credit derivatives are
becoming a headache. The bill here could exceed $100 billion if the worst drillers
default, the FT reports. The Bank of England has warned that lenders to US
shale drillers may not be able to repay their loans. This could have a knock-on
effect in the wider junk bond market, Governor Mark Carney worries.
The International Monetary Fund also warns that there is risk of contagion.
This is how crashes occur, as we saw in 2008: fast-rising panic about losses
actual and potential, and infectious loss of confidence in markets, leading to
sudden collapse of value.
In Russia, the government is having to prop up both ailing energy companies
and banks. Rosneft’s precarious finances have become part of a blame-game
raging in Moscow. The first Russian bank has been bailed out, suggesting
echoes of Northern Rock in the days leading into the 2008 global financial
crisis. Russia’s Central bank has handed Trust Bank $530 million. The ruble
has fallen to dramatic new lows as a Kremlin-imposed interest-rate rise fails
to halt sliding stock values.
In Brazil, Petrobras sits on $170bn of debt, by some estimates the most
indebted corporation in the world. It professes to need $221 billion in capex
for drilling in the sub-salt over the next five years. (I marvel at the 1 in the 221.
Such precision in financial forecasting.) But it risks pariah status among the
investors it needs to attract. With billions creamed off the company’s contracts
in blatant fraud by executives, PWC has so far refused to sign off accounts.