John Clarke’s Top 6 Stories of 2013: Metadata, Climate Change, Fracking Revolution, Banks Found Guilty — and more.

1.  Metadata

Gear LeverIt was the story of the year – if not the decade, redefining the relationship between the consumer and citizen with big business and government. In June 2013, the first story was published based on information leaked by former US government contractor Edward Snowden, who copied documents detailing the scale of global surveillance by the US and UK security services. A new word entered the lexicon for those that prefer to know what’s happening to them, rather than watch white broncos being chased on highways (apologies to Anchor Man 2 and OJ). Metadata is information that is generated as you use technology, and can be recorded and used to access any individual’s private communications and transactional details. Its use has been the subject of controversy since NSA’s secret surveillance program was revealed. Examples include the date and time you called somebody or the location from which you accessed your email, but the data can contain personal and content-specific details, as well as transactional information about the user, the device and activities taking place.

After revealing extensive monitoring and of mobile and web data, data interception, surveillance of foreign heads of state including German chancellor Angela Merkel and triggering a debate between Silicon Valley’s top executives and President Obama, Snowden stated that: “A child born today will have no conception of privacy at all. They’ll never know what it means to have a private moment to themselves – an unrecorded, unanalyzed thought. And that’s a problem because privacy matters; privacy is what allows us to determine who we are and who we want to be. All I wanted was for the public to be able to have a say in how they are governed.”

2. The Environment and Climate Change

In June 2013, President Obama’s announced his climate action plan  which outlined how the U.S. hopes to cut carbon pollution, protect its kids’ health and begin to slow the effects of climate change to leave a cleaner, more stable environment for future generations. Building on efforts in states and communities across the country, the President plans to cut carbon pollution that causes climate change and threatens public health. Cutting carbon emissions and encouraging innovation across a wide variety of energy technologies for cleaner forms of American-made energy will be linked to global efforts for climate change initiatives.

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The President stated that there was a “moral obligation to act on behalf of future generations” and that “climate change represents one of the major challenges of the 21st century, but as a nation of innovators, we can and will meet this challenge in a way that advances our economy, our environment and public health, all at the same time”.

The environmental lobby cannot nor should be ignored. In the most simplistic terms it pits industry and big business economic pressure against the few who are effected locally and the many that foresee a global crisis driven by climate change. The cancellation or deferment of development for mining projects from Romania, to Chile and Argentina, has resulted in billions of dollars in write downs due to local environmental concerns. In addition, both oil sands projects, and the pipelines required to move increased production from them, have been deferred, and are being closely examined for possible cancellation, due to widespread opposition to the higher carbon emissions from oil sands production and the potential to negatively impact global climate change. Environmental concerns are also extremely confrontational on a local basis, where the potential for rail, pipeline, or tidewater tanker-based disaster scenarios for oil transportation are readily supported by history and a rash of more recent incidents. The environmental lobby is also concerned with the impact of hydraulic fracturing (fracking) of both oil and gas resource plays, where local concerns have expanded to embrace the larger debate over global climate change.

With the Environment and Climate Change concerns providing the backdrop for discussion, debate and decision making around the future of the North American energy sector, this theme appropriately segues into the next two topics which have dominated energy business news over the past year.

3.  The Fracking Revolution

frackingThe fracking revolution has changed the global petroleum map, making North America the fastest growing oil and gas producer in the world (the IEA now expects the U.S. to overtake Saudi Arabia as the world’s biggest oil producer by 2015). Fracking in one form or another has been around for more than a century when a rudimentary version was used to stimulate shallow oil wells in Pennsylvania. The first commercial use of hydraulic fracturing (fracking with liquids) was conducted in 1949 in Oklahoma and Texas oil wells, and the current technology for gas fracking dates back to the mid-1990s.

Fracking, formally known as hydraulic fracturing, is under attack across the world, particularly in regions without long histories of oil and gas production, and the technology has been caught up in the larger, international debate over climate change. Environmental activists have persuaded New York state authorities to impose a statewide moratorium and a study which will try to assess the impact of fracking on potential ground water and air pollution. Groups with names like “Artists Against Fracking” get increasing press coverage, and film documentaries such as “Gasland”, a 2010 American production nominated for an Academy Award, are also popularizing the issue. Opposition to fracking is not limited to North America, and countries such as France have banned the technology, whilst others such as Canada and the U.K. have imposed moratoriums in various regions, whilst regulations are debated that would establish tight operating standards and close monitoring to address concerns ranging from toxic chemicals and petroleum entering aquifers, to the potential for causing or aggravating earthquakes!

As with many new disruptive technologies, “Fracking” is a Pandora’s Box, which once opened cannot be shut. The economic considerations attached just to the current increased oil production in excess of 1 million barrels per day in the U.S., amount to some $40 billion per year in trade balance, and do not include any impact for increased gas production, job creation, export potential, construction, service industries, transportation, and ingredients such as sands and chemicals for fracking operations.

4.  Keystone XL

w-Keystone296Following the U.S. State Department’s review of the Keystone XL pipeline project, President Obama will shortly decide whether to block or approve TransCanada Corp’s proposed project, which is planned to transport 830,000 barrels per day of Alberta oil to the Gulf of Mexico. Environmental lobbyists contend that Keystone would result in massive further development of Alberta’s vast bitumen reserves, which are recognized as having amongst the highest greenhouse gas emissions per barrel for petroleum resources. In addition, U.S. demand for crude imports is shrinking as a result of growing domestic production from the fracking revolution, and the prospect of near term self-sufficiency weakens the argument for “reliable and friendly” sources of oil for U.S. energy security.

While Keystone boosters claim Alberta’s vast oil sands reserves will get to market one way or another (and thus would not add to overall global carbon emissions), anti-Keystone activists claim the opposite, pointing out that the creation of cost-effective routes to global markets through tidewater ports would act to support massive new investment and expansion of the oil sands! Arguments that even without Keystone, Canada’s heavy oil would be able to move south by rail are unconvincing, since environmentalists correctly argue that transportation by rail produces more greenhouse gas emissions per barrel than by pipeline, and the same high emissions crude would still be involved. Pro-rail advocates also ignore increased safety concerns, which have emerged this year following several tragic high profile rail disasters. The future of the North American oil industry is being shaped now, but neither the U.S. nor Canada appear able to agree on how Keystone would work to the satisfaction of everyone!

5.  Canada’s Oil Sands

The prospect for massive expansion of Canada’s oil sands is resulting in conflicts for First Nations demands for maintaining their traditional way of life and local and national economic prosperity. These conflicts are resulting in an “energy resource development gridlock” and are impacting every stage of development, from approvals for several proposed new oil sands projects in Alberta, to the pipeline infrastructure required to move the increased production to tidewater ports.

The Alberta Energy Regulator has stated that “the economic benefits are so significant that despite the social and environmental impacts … the positive aspects of the project (in relation to the Fort McKay First Nations) outweigh the negative impacts”.

Enbridge’s proposed Northern Gateway project – a dual pipeline from Alberta to Kitimat on BC’s Pacific Coast – has thus far generated the most heated controversy, both from First Nations and environmental lobbyists. The westbound line would carry over 500,000 barrels of oil per day, and the eastbound pipeline will move almost 200,000 barrels of condensate per day to Alberta to thin heavy oil for pipeline transport (read more: click here). Douglas Eyford, the federal government’s envoy to First Nations on western energy projects, concluded there “has not been constructive dialogue” with aboriginal communities, and there was “a lack of respect for First Nations environmental and social obligations”. Canada’s federal Joint Review Panel has just granted Enbridge approval to proceed with Northern Gateway, but this is only the first stage of what will likely be a difficult and drawn out process that could end up in the courts if First Nations oppose the project, despite over 200 conditions regarding wildlife monitoring, spill prevention and response, and a long list of other requirements. The federal government has about six months to decide whether the project gets final approval, but First Nations opposition has warned that the government should prepare for “the biggest environmental battle we’ve ever seen in Canada”.

6.  Banks and Funds Found Guilty

Steve-CohenDodgy mortgages, interest rate fixing, inter-bank conspiracies, insider trading and criminal charges all played out as a Financial Soap Opera in 2013, as banks and the securities industry were revealed as the biggest contributors to the financial crisis of 2008, and are now under increasing scrutiny and regulation for continuing illegalities! U.S. and European regulators fined banks record amounts in 2013, imposing penalties and settlements of more than $43 billion. Banks are paying for misconduct that includes pooling and sale of mortgage-backed securities, rigging interest rates, and risky derivatives transactions such as the “London Whale” trades.  European authorities handed out record fines of more than €2.2 billion, primarily due to the fine against six financial firms for manipulating Libor and Euribor benchmark interest rates. Regulators are slapping bigger fines on banks in an effort to clean up standards and appear to be working better with each other.  Many firms appear willing to settle early to avoid political or public backlash, forced by an increasing willingness for reporting of misconduct and whistle-blowing. This trend is likely to leave banks facing the prospect of more big fines and settlements next year.

In October, JP Morgan agreed to a record $13 billion settlement with the U.S. Justice Department as part of a continuing criminal investigation of past abuses in the pooling and sale of mortgage-backed securities during the run-up to the 2008 financial crisis. The US’s biggest bank admitted wrongdoing as part of the settlement for failing to keep watch over its traders as they overvalued a very complex portfolio to hide massive losses. Earlier, JPMorgan also agreed to pay about $920m in penalties to US and UK regulators over the “unsafe and unsound practices related to derivatives trading activities conducted on behalf of the bank by the chief investment office (CIO)”. The agreement is related the bank’s $6.2bn London Whale losses from derivatives trading. “JP Morgan’s senior management broke a cardinal rule of corporate governance and deprived its board of critical information it needed to fully assess the company’s problems and determine whether accurate and reliable information was being disclosed to investors and regulators.”

Bank of America and Wells Fargo have also paid out billions of dollars and European rivals UBS, Deutsche Bank and Royal Bank of Scotland have also had hefty US fines. Bank of America’s losses and fines alone, are estimated at over $40 billion, including a

$12 billion settlement for mortgage foreclosure abuses. Goldman Sachs agreed to pay a $550 million penalty and reform a number of its internal business practices to settle charges that it misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse. The SEC alleged that Goldman “misstated and omitted key facts regarding a synthetic collateralized debt obligation (CDO) it marketed that hinged on the performance of subprime residential mortgage-backed securities”

In the Financial Funds sector, we witnessed how Steven Cohen gained the title of “one of the savviest investors ever”, as SAC Capital was fined $1.8 billion to resolve the criminal indictment brought against the firm for insider trading—the largest fine for insider trading in U.S. history.

The firm will receive credit for a $616 million penalty SAC already agreed to pay the Securities and Exchange Commission (SEC) over related insider trading charges, which lowers the net total to $1.2 billion. SAC will also end its investment advisory business as soon as possible. The administrative proceeding previously filed against Steve Cohen by the SEC is still unresolved. Unlike the criminal case, the SEC’s action targets Cohen personally rather than his company and seeks to bar him permanently from the securities industry.


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John Clarke

About John Clarke

Founder and President of Clarke Energy Consulting Inc. since 2004, John has over 35 years of international experience in industry and financial services for the energy sector. John has helped found and has served as a director of a number of public and private companies, including Candax Energy (TSX: CAX), Vena Resources (TSX: VEM), Shoal Point Energy (CNSX: SHP), and Enviromena Power Systems. On April 1, 2015 John joined Octagon Capital as “Consultant – Energy Services”.
  1. John Clarke of Clarke Energy Consulting Inc. is simply one of the smartest people I know — bar none. I met him through a Tunisian oil and gas company 8+ years ago, and is the only oil and gas analyst to ever be ranked #1 in North America for 2 years running. We were delighted to have him commit to guest appearances on InvestorIntel in 2013, and we look forward to having him for many years to come. If you haven’t read ‘I spy with my little eye’ written by John earlier this year, this is simply an example of why II is worth reading — great work, loved this story….and the message is critical to understand. — HNY

  2. Great article John and some terrific analysis offered on your 6 choices. All well spoken. Banks and funds found not guilty was my personal #1.

    • I offer the following answer … Because most people, either individually or in the form of corporations, are predominantly governed by their own and immediate economic benefit. Individually, I suggest that few people like Walmart’s part time, minimum wage employment practices – but will continue to buy the cheapest price goods there, even if they know that deplorable offshore manufacturing conditions and employment terms make this feasible.

      Climate change is real; the threat of disastrous accidents for transport of oil is real; both local (NIMBY) and global environmental opposition is real; and REAL effort is required to disrupt the status quo! Without government “PUSH” through taxes and/or regulations, you might still have lead in your gasoline and paint, and more people with lung cancer from smoking, etc. Many people look to Government for policy to protect them from the abuses of unrestrained economic drivers. It’s really a view for the future, which may not benefit people today, but will help their children and future generations.

      I guess the closest example, much in the news, revolves around how powerful (or not) will be the push on Obama from all sides to decide for or against the Keystone Pipeline – In this case, I believe Big Oil has an economic clout powerful enough to force a decision (but this will be economically rather than environmentally based).

      It is not evident whether the U.S. will benefit more economically by keeping Canadian oil prices low and restricting the expansion of the oil sands with cancellation of the project, or whether there is a nearer term view that is economically preferable to the U.S. with its approval? We recognize that infants prefer instant gratification, but many adults act in a manner that suggest they too would prefer a minor benefit now, rather than a much larger one in the longer term.

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