Oil Change International, a research and advocacy organisation focused on exposing the true costs of fossil fuels, released a recent report that examines how major banks have financed the US fracking “fiasco”. Below are some of the key highlights of the report:
What’s wrong with fracking?
Fracking is a method for extracting oil and gas through the high-pressure injection of fluid into shale rock. However, like all fossil fuel extraction and burning, fracking is increasingly contributing to the depletion of the global remaining carbon budget. Fracking companies continue to plan for aggressive expansion of production, which would severely hinder efforts to limit global warming to 1.5°C. It has been estimated that as much as 12% of fracked gas is leaked into the environment during production, and the resulting methane emissions trap more heat in the atmosphere in the short term than burning coal. Fracking infrastructure can be dangerous, and has caused explosions and fatal accidents in surrounding communities. Communities living close to fracking sites are also at a higher risk for a variety of health issues, including asthma, high risk pregnancy, and even higher rates of cancer.
Why is fracking a bad investment?
In addition to the many environmental, climate, safety, and community health concerns that fracking presents, it is also not a safe investment. Fracking requires a large amount of capital to build infrastructure and drill new wells, which the profits from low oil and gas prices are not sufficient to pay off. Fracking companies end up paying off their old loans by taking out new loans, rather than paying their debt from company profits. 36 fracking companies, with $50 billion in debt, filed for bankruptcy so far in 2020, with many more expected to declare bankruptcy in the coming years.
So why are banks involved?
Oil Change International discovered that banks have continued to finance fracking companies, despite years of warnings that the sector is financially unsustainable. Banks have issued billions of dollars in financing, in the form of loans, bonds and equity, with the expectation that these would be paid back with the profits made from fracked oil and gas. The likelihood that these loans will actually be paid is very low, indicating “a story of short-term greed drowning out long-term rationality”. Even after 2016, when investors began to demonstrate hesitance to invest in fracking, banks continued to “shower the sector with loans.”
Why should we care?
Beyond the environmental and health implications of continued fracking, the continued support of fracking companies by banks could have financial costs for the rest of us. Investors throughout the economy – including pensions – are hurt when fracking stocks and bonds tank. Banks are allowing these companies to survive and have a presence on the market, when their financial inviability should be an obvious reason to deny them loans.
Oil Change International provides the following key recommendations:
- Stop financing companies with fracking infrastructure or plans to expand fracking activities.
- Make concrete plans to phase out current financing for these companies.
- For companies in which they have a stake, ensure worker and environmental considerations are prioritised over financial obligations
For investors and asset managers:
- Engage with banks to demand a policy on fracking
- Divest from companies engaged in fracking
- Pressure major oil and gas companies to cease their fracking activities
- Ensure that companies receiving public money are committed to a fossil-fuel phase out
- Reform bankruptcy law to require that fossil fuel companies are required to pay worker benefits and repair environmental damages
Read the full report here.