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Evan Kelly

Evan Kelly

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The Next Great Scandal For The Oil Industry?

Related: Crude Sinks As Jobs Report Propels Dollar Even Higher

Related: Two Deals, And A New Financial Order In Zinc And Iron Ore

U.S. President Barack Obama rejected the Keystone XL pipeline today, issuing a statement at the White House. The decision will end a process that has stretched more than seven years. Not only are environmental groups achieving their goal of blocking the project, but they have seemingly convinced the President to do so on climate change grounds. Environmental groups hope to parlay the success into other areas of energy development, seeking to elevate climate change criteria as a means to scrutinize all sorts of oil, gas, and coal projects. Readers will most likely be inundated with post-mortems on the Keystone XL, but suffice it to say that the decision is a momentous shift from years ago when the administration had looked favorably upon the project. TransCanada’s (NYSE: TRP) share price dropped by more than 5 percent on the news.

The allegations that ExxonMobil (NYSE: XOM) covered up its climate science and lied to the public about the dangers of climate change has rapidly moved from a small news story into a full-fledged scandal. That is because the New York Attorney General launched an investigation into potential wrongdoing this week. It is early days for this probe, which could widen to ensnare other oil companies that peddled climate misinformation. It will take time to fully grasp the ramifications of what might stem from this, but it is important for investors to keep an eye on it. To be sure, proving some sort of criminal wrongdoing is going to be extremely difficult, but it could balloon into a significant problem for the energy industry.

Meanwhile, a survey by U.S. regulators found that there remains significant financial exposure from major lenders to creaky energy debt. The report gave a negative rating to 9.5 percent of loans, or $372 billion out of $3.9 trillion in loans. A big portion of the worsening quality of loans was related to oil and gas companies. The investigation, completed by the FDIC and the Fed, found “persistent structural deficiencies found in loan underwriting.” They, of course, singled out the energy sector. So-called “classified commitments,” or debt with a credit rating of ‘substandard,’ ‘doubtful,’ or ‘loss,’ reached $34.2 billion for oil and gas this year, a jump from just $6.9 billion in 2014. They went on to add, “Aggressive acquisition and exploration strategies from 2010 through 2014 led to increases in leverage, making many borrowers more susceptible to a protracted decline in commodity prices.” Increased scrutiny from federal regulators could put a chill on lending to the energy sector in the months ahead. Related: Canada’s Oil Sector Cautiously Optimistic About Late 2016 Recovery

Another development to watch is the next move from the Federal Reserve on interest rates. The U.S. Commerce Department released monthly job figures today, with gains of more than 271,000 jobs for the month of October. The job increases wildly exceeded expectations, and substantially increased the likelihood that the Fed will raise interest rates when it meets in December. Robust job growth is obviously bullish news for oil demand, but a subsequent rate hike will strengthen the dollar and as a result, push down oil prices.

Brazilian oil company Petrobras is dealing with a wide-ranging union strike, which has impacted several hundred thousand barrels of production. Oil workers unions are striking over pay, but also over what they see as an unfolding privatization of the country’s state-owned oil company. Petrobras, crushed over plummeting oil prices and a horrific corruption scandal, has been forced to propose major asset sales. The company plans on selling off tens of billions of dollars’ worth of assets, which the unions fear will result in thousands of layoffs. The strike is the largest to hit Brazil’s oil sector in more than two decades. While data is murky, Petrobras estimates that the strike has knocked at least 273,000 barrels of oil production per day offline. But the problems could be even worse for the battered oil company. Turmoil in the company’s boardroom – including resignations, leaves of absence for top officials, and verbal altercations at board meetings – threatens to undermine the company’s corporate strategy. With the absence of leadership, there won’t be any recovery for the company in the near-term.

Finally, the Wall Street Journal reports that low oil prices are cutting into oil projects in the Arabian Gulf. While we have witnessed a long list of project delays and cuts to spending in the private sector, even the rich Arab Gulf states and their state-owned companies are starting to delay projects because of low prices. Saudi Aramco has delayed the $3 billion expansion of an oil field by at least one year, as well as plans to develop an LNG export terminal. A UAE oil field that would add 100,000 barrels per day in production has also been put on ice. The news that major state-backed projects are being affected suggests the downturn will continue to deepen before it gets better.

By Evan Kelly of Oilprice.com

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