Banks' Arctic Financing Retreat Rattles Oil Industry

By Christopher M. Matthews and Orla McCaffrey

Defenders of the oil-and-gas industry in Washington are fighting back against big banks who want to stop financing new Arctic-drilling projects, fearing it could be a harbinger of an unbankable future for fossil-fuel companies.

Five of the six largest U.S. banks -- Citigroup Inc. (C), Goldman Sachs Group Inc., JPMorgan Chase & Co. (JPM), Morgan Stanley (MS) and Wells Fargo & Co. (WFC) -- have pledged over the past year to end funding for new drilling and exploration projects in the Arctic.

Alaska Sen. Dan Sullivan and a group of fellow Republican lawmakers, mostly from energy-producing states, have been lobbying the Trump administration to examine whether the federal government can prevent the banks from cutting off financing, or punish them for doing so.

Mr. Sullivan said banks are unfairly discriminating against oil-and-gas producers in Alaska, and that lenders ought to examine loans on a client-by-client basis instead of denying financing to an entire category of customers.

"That these banks would discriminate against one of the most important sectors of the U.S. economy is absurd," Mr. Sullivan said in an interview. "I thought it was important to push back."

The American Petroleum Institute, one of industry's most influential lobbying groups, has said it is working with the Trump administration on the issue, which it called a "bad precedent." API, Mr. Sullivan and others have also suggested the White House should examine whether it could cut off the banks' access to funding under coronavirus relief packages.

Representatives of the banks declined to comment. White House spokesman Judd Deere said Mr. Trump "has strong concerns if roadblocks are being thrown up to specifically harm the oil-and-gas industry."

Wall Street has been pulling back from the oil-and-gas industry after years of dismal returns from it and is under increasing pressure from environmentalists and others to limit fossil-fuel lending. While broader market conditions during the coronavirus pandemic this year have dried up capital for new exploration, some analysts have said a lack of bank financing could deter drilling in the Arctic National Wildlife Refuge, which the administration opened to exploration in August.

The retreat hastened this year following a collapse in oil prices because of the new coronavirus and an oil-price war between Saudi Arabia and Russia. While many expect an oil recovery once the global economy picks up, the industry is worried about its long-term access to capital.

In July, the acting head of the Office of the Comptroller of the Currency, Brian Brooks, said the regulator would examine whether the banks curtailing lending for new Alaska projects were violating a federal law the agency says requires banks to provide fair access to financial services. Mr. Brooks said in a letter to Mr. Sullivan that the OCC, part of the Treasury Department, would request information from the banks to explain their decisions.

Bryan Hubbard, an OCC spokesman, said the office is still gathering information from the banks.

Some believe the OCC might not be able to do much on the matter. Daniel Stipano, who served as the agency's deputy chief counsel from 2000 to 2016, said the fair access provision applies to the OCC itself, not individual lenders. Because financial institutions' decisions to curtail lending don't necessarily violate the statute, the OCC is limited in its ability to push banks to provide credit to certain industries or projects, Mr. Stipano said.

"At the end of the day, the OCC's only ability to compel a bank to do anything is through enforcement actions, but those have to be based on legal violations or unsafe and unsound practices," Mr. Stipano said.

Some environmentalists criticized the politicians' opposition to the bank policies as legally groundless.

"A growing number of banks are making the obvious business decision not to finance more drilling in the Arctic because it would threaten their bottom line and expose them to numerous risks," said Ben Cushing, who leads the Sierra Club's financial advocacy campaign. "The idea that this constitutes discrimination is ludicrous."

Before the recent pledges by banks, lending to the largest oil-and-gas companies in the Arctic had been growing in the past few years. Industry financing in the region by 35 leading banks increased 34% between 2018 and 2019, according to an analysis by several environmental and financial advocacy groups. The same group of banks poured $2.7 trillion into fossil-fuel related lending between late 2015 and 2019.

Still, capital flight remains one of the primary risks facing the industry, according to Moody's Corp. If the world were to accelerate a transition to renewable sources of energy, oil-and-gas reserves could become uneconomic and turn into a credit liability for producers, making it difficult to access longer-maturity loans, Moody's said.

Alaska's economy is almost entirely dependent on the fossil-fuel industry, which has historically funded about 90% of the state's general fund through tax revenues. Energy executives worry the pledges that banks are making could spread to other regions and parts of the industry as pressure mounts from environmental groups, and companies face the prospect of tighter government regulations. This week, JPMorgan (JPM) pledged to push clients to align with the Paris climate accord and work toward global net zero-emissions by 2050.

"If it is successful, why would they stop with the Arctic?" said wildcatter Bill Armstrong, founder of Armstrong Oil & Gas Inc., which has discovered more than 3 billion barrels of oil in Alaska. "A lot of misguided people are trying to make oil and gas the new tobacco."

Write to Christopher M. Matthews at christopher.matthews@wsj.com and Orla McCaffrey at orla.mccaffrey@wsj.com


  (END) Dow Jones Newswires
  10-08-20 0805ET
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