In a move that underscores Wall Street's growing unease over the business-as-usual strategy of the world's fossil fuel companies, Bloomberg L.P. unveiled a tool last week that helps investors quantify for the first time how climate policies and related risks might batter the earnings and stock prices of individual oil, coal and natural gas companies.
The company's new Carbon Risk Valuation Tool is available to more than 300,000 high-end traders, analysts and others who regularly pore over the stream of information that's available through Bloomberg's financial data and analysis service. The move significantly broadens and elevates the discussion of "stranded" or "unburnable" carbon reserves—expanding it beyond climate groups and sustainability investors to the desks of the world's most active and influential investors and traders.
"It demonstrates that there's demand for the information—more and more investors are interested in these issues," said Ryan Salmon, senior manager of the oil and gas program at Ceres, a nonprofit that organizes businesses, investors and public interest groups interested in climate change and other issues.
In the years leading up to ExxonMobil's Pegasus pipeline rupture in Arkansas, the company delayed a crucial inspection, put off urgent repairs, masked pipeline threats with skewed risk data and overlooked its own evidence that the oil pipeline was prone to seam failures, according to federal pipeline regulators.
The assertions are laid out in a bluntly worded notice sent to Exxon and released last week by the Pipeline and Hazardous Materials Safety Administration (PHMSA, pronounced fimm-sa). The preliminary citations, which came with a proposed $2.66 million fine for Exxon, grew out of the agency's investigation into the March 29 Pegasus seam failure that sent an estimated 210,000 gallons of crude into a Mayflower, Ark. neighborhood.
"From my perspective, this is a pretty important notice," said Richard Kuprewicz, a pipeline safety consultant who serves on the PHMSA safety standards advisory committee for oil pipelines. "They've used some fairly strong words ... and they don't choose their words casually."
The ongoing U.S. oil boom has flooded the Gulf Coast with domestic crude to levels not seen in decades, creating a homegrown oil glut in the nation's refining center just as the Obama Administration prepares to rule on a pipeline that would add a torrent of heavy Canadian crude to the same region.
It's just the latest in a string of developments that have surprised and roiled oil markets since 2009, when the combination of falling fuel demand and an unexpected surge in U.S. oil and natural gas production began destroying widely held assumptions about the nation’s need for imports.
"U.S. oil production is at a point that is changing the entire globe, and this is just more evidence that the U.S. producers are far exceeding anybody’s expectations," said Phil Flynn, senior oil analyst at Price Futures Group. "This is part and parcel of the big story—the U.S. energy boom."
Conditions have changed so radically that U.S. refiners are now exporting record amounts of fuel to overseas customers, and there’s a parade of tankers delivering Texas oil to refineries on the east coast of Canada. As these and other surprising trends unfold, it's becoming increasingly clear that the controversial Canadian oil import pipeline, the Keystone XL, is not an urgently needed link.
A well-heeled coalition of investors is asking top fossil fuel companies to calculate the risks of plowing billions into new oil, gas and coal projects. They fear that carbon emission limits and slowing demand will turn them into bad investments that leave investors worse off.
The requests, contained in letters sent to 45 companies last month, are part of an initiative aimed at persuading oil producers and others to rein in their quest to stockpile more carbon energy. They hope to do so by tapping into growing concerns that climate policies and market factors could prevent companies from selling all of their reserves of fossil fuels, which are still growing fast.
Companies with large amounts of such "unburnable" carbon resources could see their stock prices slashed, clobbering the value of investment portfolios that hold the shares. By one estimate, as much as 30 percent of the value of some of the world’s stock exchanges is in proven fossil reserves.
In the six months since an ExxonMobil pipeline unleashed Canadian oil in an Arkansas neighborhood, nearby residents have had much to endure—the muck and stench of heavy crude, lengthy evacuations, sickness and economic loss.
They've also been in the national spotlight, as the upheaval in tiny Mayflower, Ark., has come to symbolize the risks of aging and overlooked oil pipelines, especially when they're hundreds of miles long and carrying tar sands crude. From Illinois through Texas, many people who live along the pipeline's route are now worrying about whether or when the ruptured line will resume pumping oil through 858 miles of fields, waterways, cities and suburban backyards.
"I have no say, and I have no idea what's going to happen," said Mayflower resident Ann Jarrell, whose home is not far from where the Pegasus pipeline split open on March 29. "That's the worst part—the not knowing."
That nagging uncertainty, however, is likely to persist for many more months.
A string of plant closures, project cancellations and other setbacks has raised new doubts about the future of nuclear power in the United States, but there's disagreement about whether the retrenchment will be limited and temporary or the beginning of a broad and permanent decline.
Renewed safety concerns and reinvigorated local opposition have played a role in the industry's recent troubles. But the most potent foe—and the primary force behind the spate of closures and abandoned projects—is economic.
The industry's run of bad news includes:
In the five months since ExxonMobil's Pegasus oil pipeline burst in Arkansas, two things have become clear. Flawed, 1940s-era welding techniques used when the Pegasus was built set the stage for the rupture, and an internal pipeline inspection failed to spot the problem just weeks before the spill.
The most critical question of all, however, has yet to be answered: What caused the pipe's long-dormant flaws—assumed to be J-shaped 'hook cracks,' in this case—to awaken and grow undetected until catastrophe struck?
"It is the extension of the hook cracks that is the key to this failure," said Patrick Pizzo, a professor emeritus in materials engineering at San Jose State University. "You have to get those cracks in motion in order to lead to a leak or a fracture."
Pizzo and several pipeline failure experts who reviewed the publicly available Pegasus reports say the pipe's cracks probably grew because of large swings in the pressure inside the pipe. So-called 'pressure-cycle-induced fatigue' is one of the top four threats in pipelines that—like the Pegasus—were built from pre-1970 pipe that is predisposed to cracking and corrosion problems along lengthwise seams.
But there could be other factors, too, including problems associated with the type of product the Pegasus was carrying—an oil-like substance called bitumen that is mined in Canada and diluted to form diluted bitumen, or dilbit.
Since at least 2006, ExxonMobil has known that its 1940s-era Pegasus pipeline had many manufacturing defects like the faulty welds that recently sent crude oil spewing into an Arkansas neighborhood. The company also knew that the seams of the pipe have been identified by the industry as having another dangerous flaw: They are especially brittle, and therefore more prone to cracking.
"Having a crack or flaw in a pipeline is a whammy," said Patrick Pizzo, a professor emeritus in materials engineering at San Jose State University. "But having a crack embedded in brittle material, such as the heat-affected zones of the pipeline seams—that's a double whammy."
Despite those inherent risks, Exxon added new stresses to the Pegasus by fundamentally changing how it used the line. It began carrying a heavier type of oil, reversed the direction of the flow and increased the amount of oil that surged through it.
For nearly two years, refineries in the Midwest have been buying crude oil at steep discounts thanks to a glut of U.S. and Canadian oil. But drivers in the Midwest haven't seen a corresponding decrease in gasoline prices. In fact, they sometimes pay more at the pump than people in other parts of the country, even as windfall profits flow to BP, Koch Industries Inc. and other large Midwestern refiners.
"It's good to be a refiner," said Tom Kloza, chief oil analyst at the Oil Price Information Service, a company that tracks energy markets. "For 20 years, the rule of thumb was that if you made $5 a barrel east of the Rockies, that was a good profit for a refinery. Recently, we saw a period in the Midwest where refiners were making $40, or $50, or even $60 a barrel on gasoline."
The disparity of fortunes between Midwest refiners and consumers isn't a surprise to industry analysts.
In today's complex fuel market, retail gasoline prices are no longer just a reflection of the cost of oil. A host of other factors—such as refinery fires, power outages and damage from extreme weather events—now have an increasing impact, in part because there are fewer refineries fulfilling the nation's thirst for fuel.
The argument is familiar to just about every American by now: The United States needs to import more Canadian crude oil to secure its energy independence, and building the proposed Keystone XL import pipeline is critical to accomplishing that goal.
Within the U.S. oil industry, however, the hot topic these days is not the nation's need to import Canadian oil—it's the possibility of exporting crude oil produced in the United States.
"A paradigm shift happens when reality smacks you upside the head, and reality is now smacking us upside the head," said Mark Mills, a senior fellow of the Manhattan Institute for Policy Research, a conservative, free-market think tank. "We're about to have a gusher of oil."
That expectation is causing the industry to make massive investments to reconfigure North America's pipeline network and change the way oil has been flowing for decades. "North America is in the process of being repiped," Al Monaco said as he kicked off his tenure as the new CEO of pipeline operator Enbridge Inc. earlier this month.
The Canada-to-Texas Keystone XL is the most visible and highly charged part of that pipeline system restructuring, even though critics are now questioning the logic of building an import pipeline when the industry is increasingly focused on exports.