(Bloomberg) — State legislatures across the U.S. are drafting bills to prohibit business with finance firms that restrict ties to the oil and gas industry, following in the footsteps of Texas.
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Last year, the Lone Star state prohibited government contracts with or pension investments in companies that have shunned fossil-fuel producers. The group behind the measure, the Texas Public Policy Foundation, has transmitted model legislation to states through the American Legislative Exchange Council, a corporate-funded lobby that disseminates bills popular among Republicans. Louisiana, West Virginia, Oklahoma, Kansas and South Carolina are among states considering similar measures.
With President Joe Biden and other world leaders promising to pursue a net-zero emissions future, many of the largest U.S. banks are restructuring their lending portfolios. Citigroup Inc. last year said that it won’t provide services to certain oil and drilling projects or coal mines. Bank of America Corp. has pledged to zero out greenhouse-gas emissions from its “financing activities, operations and supply chain” by 2050. And Blackstone is telling its clients its private-equity arm will no longer invest in exploration and production.
Texas is the nation’s No. 1 oil and gas producer, but its economy is increasingly diverse, thanks to knowledge industries in Austin and the high-profile relocation of electric car-maker Tesla Inc. Brent Bennett, a policy director at the Texas Public Policy Foundation, said the state has to protect its traditional mainstay.
“We don’t want Texas supporting those policies,” Bennett said. “We don’t think it’s good financially for Texas.”
Attacking ESG
The group started working on the idea when oil prices began falling and there was a wide push for sustainable investing, he said. “With the rising popularity of ESG investing in 2020, that drove a lot of people in the industry to look at it and say something needs to be done,” Bennett said.
The Texas Public Policy Foundation has received funding from Koch Industries, the massive conglomerate that’s involved in everything from oil refining to producing fertilizer and paper. The group brought up a model bill at a December meeting hosted by ALEC, which convenes corporate lobbyists and conservative state politicians and also has Koch backing.
The measure was inspired by a 2017 law that prohibited economic activity with companies that boycott Israel, which ALEC spread to many states. The council’s board still must give its imprimatur to the energy measure, Bennett said.
Texas’s oil industry would benefit from such legislation. Todd Staples, president of the Texas Oil and Gas Association, blamed investment cuts for a global energy shortage, which has led to spiking gasoline prices in the U.S.
“Texans value the indispensable role that the oil and natural gas industry plays in our state’s economy,” Staples said in a statement. “Due to adverse policies and restricted investment in oil and natural gas, we are seeing unnecessary supply constraints.”
Big State
But Texas is no longer just an oil and gas state, said Luke Metzger, executive director for the nonprofit group Environment Texas. The industry has been making up a smaller share of jobs over the years as the state diversifies into other areas like professional services, health care and real estate. Texas’s economy is the second-largest in the U.S. and has benefited from an influx of people and businesses — many from California, the biggest state economy, which is home to a tolerant political culture and cutting-edge tech companies.
“Clearly, the state is interested in promoting clean energy and attracting companies that are committed to sustainability to Texas,” Metzger said. “But then you have a law like this that completely sends the opposite message and works to put the thumb on the scale on behalf of dirty energy.”
Banks are divesting from fossil fuels just as shale explorers are supercharging returns to investors. Oil drillers have the most free cash flow in seven years, when crude last traded for more than $100 a barrel. But a paramount concern for management teams assembled in Houston for the World Petroleum Conference in December was whether the industry is investing enough in new drilling to meet demand and stabilize prices.
“Investment is the greatest challenge the oil industry faces today,” said John Hess, chief executive officer of the U.S. shale giant Hess Corp. “Oil and gas are going to be needed for the next 10 to 20 years, and a lot of it is going to be needed.”
Making a List
The Texas measure — which the industry likes to call the “energy discrimination” law — went into effect Sept. 1 and the state treasurer’s office said it has already begun working on the divestment list, which it has a year to complete. It’s unclear what practical impact the law will have, because it permits exceptions when divesting would hurt a fund’s performance.
Still, Lieutenant Governor Dan Patrick asked the treasurer to put BlackRock Inc., the world’s largest asset manager, at the top of its blacklist last month, accusing the firm of being hostile to oil and gas. The firm has disputed Patrick’s assertions and said it will continue to invest in Texas fossil-fuel companies.
BlackRock has also faced blowback from other energy-producing states, with West Virginia Treasurer Riley Moore saying doing business with the firm is against the interests of the state economy. A Republican lawmaker introduced legislation requiring the treasurer to publish a list of finance firms engaged in boycotts of energy companies, in line with the Texas bill. It remains in committee.
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