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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Fossil Fuel Financing Under Pressure As Wall Street Caves To ESG Demands

  • While U.S. oil and gas firms are expected to raise their capital spending in 2022, constrained funding could put a cap on their ambitions.
  • Low capital funding availability poses a significant threat to consumers already struggling with soaring oil and gas prices.
  • Some said Wall Street’s ESG trend is to blame for restrained capital, while others laid the blame squarely on the Biden Administration.
Fossil Fuel Financing

Most U.S. oil and gas firms expect to raise their capital expenditures next year, as analysts have largely forecast in recent months. Yet, capital available to the industry is constantly shrinking as banks continue to shun the sector due to ESG pressures and as the Biden Administration, with its green agenda and anti-oil policies, is discouraging many in the shale patch from boosting capital budgets beyond the bare minimum. 

These were some of the comments and views expressed in the Dallas Fed Energy Survey for the fourth quarter released this week, which showed the oil and gas industry’s frustration with constrained funding availability from banks and with the uncertainty the U.S. Administration’s green policies poses to the future of America’s oil and gas production.    

Low capital availability will ultimately lead to higher oil and gas prices, U.S. oil and gas executives said in the latest Dallas Fed Energy Survey.  

Access to expanding credit on reserve base loans was already flagged as one of the greatest headwinds to the industry—alongside restricted skilled labor supply—by an executive in the previous survey for the third quarter. 

In the fourth quarter, shale executives didn’t spare criticism of the Biden Administration’s policies toward the sector. This follows months of U.S. officials begging OPEC+ for higher oil output instead of turning to their own domestic companies, which, given certainty over future policies, could have been more willing to invest in drilling additional wells and increasing production, helping to tame the oil price rally. 

The Administration faced the highest gasoline prices in America in seven years, yet it turned to OPEC+ first to ask for more oil supply. The U.S. shale patch didn’t take that well and is now wary of committing more capital to production. The key factors behind the cautious approach are policy uncertainties, investor demands for higher returns, and banks’ reluctance to fund the industry due to ESG considerations and political and societal pressure on lenders to cut financing for fossil fuels. 

Low capital availability from banks is a problem for everyone in America—and in the world for that matter—as it would lead to higher commodity prices, which will do the opposite of what the Biden Administration desperately wants: lower gasoline prices. 

“A Problem For Everyone”

“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,” one executive said in the comments accompanying the survey for the fourth quarter. 

“Despite us being one of the top-performing energy funds in America, investors are cutting our funding by 80 percent. We believe this is a two-edged sword—if it is happening to us, it is likely happening to everyone,” the executive added.  

“The political pressure forcing available capital away from the energy industry is a problem for everyone,” another executive at an exploration and production (E&P) firm noted. 

“Banks view lending to the energy industry as having a “political risk,” the executive added. 

Uncertainties Ahead 

ESG concerns, pressure from investors, and the Administration’s policies have been the three key factors why U.S. oil and gas production hasn’t ramped up quickly with the rise in commodity prices in 2021, according to Douglas Beath, Global Investment Strategist at Wells Fargo. 

Yet, U.S. oil and gas production could accelerate growth again, the bank says, firstly because “The American consumer has become increasingly frustrated with higher gas prices and may force the Biden administration to rethink its current energy strategy.” 

Shale executives also find that the ESG trend, the green agenda push, and the Administration’s anti-oil policies are key factors for greater uncertainty in their business and plans for capital expenditures for 2022 and beyond. 

Some said Wall Street’s ESG trend is to blame for restrained capital, while others laid the blame squarely on the Biden Administration. 

“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,” an executive said in the comments to the Q4 Dallas Fed Energy Survey. 

Overall, the Dallas Fed Energy Survey showed that while oil and gas activity in the Eleventh District comprising Texas, southern New Mexico, and northern Louisiana continued to expand this quarter, costs jumped for yet another quarter to signal significant cost pressures

Due to uncertainties over capital availability and domestic policies, some executives say they cannot provide detailed expectations of capital investment in 2022. 

“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,” an E&P executive said. 

Another top manager said: 

“The push for going all green will cause more energy shortages and much higher prices. Like the pilot said, “Sit down and put your seat belts on. It’s going to get a bit bumpy.” 

By Tsvetana Paraskova for Oilprice.com

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Leave a comment
  • Kenneth Gallaher on January 02 2022 said:
    It is not good business to lean to dead enders.
  • Lee James on January 02 2022 said:
    Question: What is the long-term prospect for oil prices, not considering government and ESG-investor action?

    My answer: Up. Up faster than the rate of inflation. Up, because US oil production is increasingly way-deep in the earth and is a diffusely distributed resource, or in deep-water. The old bonanza-oil reservoirs are becoming increasingly rare. Cost of production is up, and will likely continue up, even with tech improvements.

    Now, in addition to simple cost of production issues, we have government and ESG, added in.

    You know, some folks advocate for instituting a price on carbon. This action would increase cost to the consumer. That idea doesn't seem to fly, politically speaking. Now, it looks like fossil fuel costs are probably going to go up anyway, making folks wonder what they can do to get out from underneath them.

    Alternatives to burning fossil fuel seem to be inevitably more attractive -- looks to be the trend. Won't all happen right away. Smell the benzene.

Leave a comment

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