Daniel B. Markind, Esq.
Weir and Partners, LLP
Bankers refuse financing for oil and natural gas pipelines in the U.S. but will invest in Venezuela where the government is abusing its own citizens.
Two events took place in the last two weeks that exhibit vividly the interplay between energy and social responsibility. This is becoming a more contentious issue each day, and one that is inescapable. In each of these situations I submit the company involved made the wrong decision. All of us need to explore how to handle these matters, and on what to base our future decisions.
The first matter involves the nation’s fifth largest commercial bank, U. S. Bancorp based in Minneapolis. In April it released its 2017 Environmental Responsibility Policy. That policy states “(t)he company does not provide project financing for the construction of oil or natural gas pipelines”. While the bank lists wind, solar and geothermal as energy projects in which it invests and promotes, any energy project that has any relationship with oil and gas pipeline industries will be “subject to the Bank’s enhanced due diligence processes.”
U.S. Bancorp was targeted by environmental groups after its involvement with the Dakota Access Pipeline. By some accounts it financed $275 million of the project. In light of that, the substance of U.S. Bancorp’s policy is extremely important, as are the basic questions about it. What social goal does this policy serve? Further, what role should such a policy play in a capitalist enterprise?
Obviously, the policy is based on the concept of social responsibility, and in this case that responsibility involves moving to cleaner sources of energy. However, a closer look leads to the conclusion that the policy starts with assumptions that are inaccurate or incomplete and then works from there. The result is predictable.
Solar and wind energy can be great technology (full disclosure: I do a lot of work in both and am a strong and vocal proponent of both), but the full process is not truly “cleantech”. As for geothermal, does U.S. Bancorp understand that following the initial stages geothermal uses a process similar to hydraulic fracturing to stimulate energy output? Was this ever discussed in the Bank’s boardroom?
Not all of the elements of solar/wind technology are free from environmental downsides. Solar panels are made with silicon, which has to be mined and is linked with silicosis, a lung disease that has bedeviled humankind for centuries. Further, no one yet has an effective method to store and transmit the solar or wind power generated so that we will have it when and where we need it. That technology, if it exists at all, is decades away. Most current research for solar/wind energy storage and transmission involves battery technology, but batteries use lithium. Has anyone investigated the environmental situation at a lithium mine recently?
If the technology can be discovered, what would the solar or wind energy storage and transmission infrastructure look like? How much land would it take? What type of high-tension cables or (heaven forbid) pipelines would it involve? What would be the impact to fish and wildlife if a transmission line either came down in a stream or leaked into one? Would substations be needed? What types of toxic or other chemicals would be needed for that process?
None of this is to suggest we should stop producing, studying and perfecting solar, wind and geothermal technologies. It is to say, however, that the policy expressed by U.S. Bancorp may make for positive press, but environmentally is counterproductive.
Like it or not, currently oil and gas pipelines are the safest, cleanest, most efficient way to transport energy from place to place. They are not perfect (what is?), but the failure to invest in pipelines means that we will continue to rely on our crumbling roads and rails to transport gas and oil. If one believes this is good for the environment, I would suggest asking residents of Lac-Magantic, Quebec, Heimdal, North Dakota or Mosier, Oregon.
In short, while I applaud U. S. Bancorp’s willingness to invest in solar, wind and geothermal projects and hope the Bank continues to do so, I respectfully request the Board of Directors to revisit its Environmental Responsibility Policy in light of actual reality. One hopes that similar social responsibility policies at least would be environmentally helpful.
The second matter involves Goldman Sachs and a familiar figure, Nicolas Maduro of Venezuela. On Tuesday, Goldman Sachs completed a purchase of Venezuelan State Oil Company bonds with a face value of $2.8B for the bargain basement price of $865M, or $.31 on the dollar. The bond sale was negotiated through a bond trading firm called Dinosaur in London. According to Goldman, the bonds, which were issued in 2014, were bought in the secondary market.
Unfortunately for Goldman, it appears that at least $800M of the bonds actually had been held by the Venezuelan State Treasury and not by outside investors. This distinction is crucial. If the bonds truly were secondary market bonds and held by outside investors, Goldman’s money would have gone to these investors. Instead, much went to the Venezuelan government, which is systematically starving and abusing its people. Indeed, the day the trade was announced, the Venezuelan government reported an increase in $400M in foreign reserves, which had plunged from over $30B to just $10.8B.
Venezuela’s bonds are very popular worldwide, especially among those trading in “emerging markets”. Indeed the bonds form a substantial part of many of the indices used to value “emerging market” bond funds, much like the share prices of different stocks in the Dow Jones 30 Industrials which form the index that we know as the Dow Jones Industrial Index. The financial value of many of these bond funds falls and rises in no small part according to the market performance of Venezuelan bonds.
Venezuela is entirely dependent on energy exports for foreign currency. A default in the international markets would leave Venezuela’s ships, crude and other assets open to seizure by creditors. Therefore, the feeling is that President Maduro must continue to service his foreign debt, regardless of the hardship it causes at home. There now is pressure on international investors to shun any new offers of Venezuelan debt, lest the proceeds be used to continue to repress the population for the benefit of the elites. Mass protests in the country have been going on for months, crippling the Maduro government. People are starving and the economy is collapsing.
It was into this volatile stew that Goldman jumped. In doing so, it handed what the head of Venezuela’s congress, Julio Borges (a member of the opposition), called a “financial lifeline to the regime (that) will serve to strengthen the brutal repression…” Again, Goldman pleads ignorance of who owned the bonds. However, given Goldman’s sophistication and knowledge that claimed ignorance is met with substantial skepticism.
All of which raises another basic question. At what point are firms supposed to stop dealing with debt of countries whose policies they don’t agree with? How easy would it be to abuse this standard? Traders deal all the time with Saudi Arabia, with its historic mistreatment of women. Russia invaded Georgia and Ukraine. Turkey continues to occupy Northern Cyprus. Should financial firms stop dealing with them? And of course what about everyone’s bogeyman Israel?
I don’t know where to draw these lines, but they must be drawn. Capitalism may work well essentially because it is amoral, but capitalism collapses when it becomes immoral. When the public believes that a group of rich bankers is making profits off the blood of their suffering, the entire system is put at risk.
Venezuela is a country that is facing increasing sanctions pressure from the United States. Despite not being reported much in the American press (which is all Trump, all the time – except for Kathy Griffin), Venezuela is a BIG deal. It is in our hemisphere. It has the world’s largest proven oil reserves. It is strategically located on the northern tip of South America. It has a fairly well established democratic tradition that neither Maduro nor his predecessor Hugo Chavez has been able to wipe out.
Investors continue to invest in Venezuela’s debt for one reason, the energy industry. They believe that when Maduro falls, his successor will restart the economy by ending many of the corrupt and socialist policies. Still, anything that puts money into Maduro’s hands lengthens the time frame for this to happen, and exacerbates the suffering of the Venezuelan people. Ironically, Goldman’s move also risks putting the debt under the category of “odious debt”, which the international community has agreed is debt incurred by a ruling elite used to harm the public that is unfair to ask that public to pay back once the elite is removed.
Perhaps the best response to Goldman’s bond purchase is what has occurred – the massive publicity, ridicule and disgust directing toward the investment bank, and the prospect that if the people win in Venezuela Goldman’s bond investment may become worthless. Clearly, Goldman’s social responsibility policy either didn’t work here or didn’t care about the Venezuelan people. Now, those people can return the favor.