This Slight Change In Energy Debt Has Huge Implications For Oil Supply by Dave Forest, Pierce Points

Lots going on with global oil these days. Particularly in regards to shifting supply balances around the world.

Data over the weekend showed that Iran is starting to draw down huge stockpiles of crude held in floating storage for the last several months. With the numbers suggesting the nation may have dumped as much as 1.4 million barrels on the market in a single day.

At the same time, plans in Libya to restart crude exports may have hit a snag. With the head of the country’s national oil company saying that a deal with rebels controlling Mediterranean ports should be scrapped.

But one item the past week has even bigger implications for crude supply going forward.

A subtle, but powerful change that could be coming for E&P debt ratings in America.

That tweak is being driven by ratings agency Moody’s. Which released a report on Thursday suggesting that it could begin penalizing ratings of oil and gas developers that drill too aggressively.

Moody’s particularly took issue with the fact that many U.S. E&Ps link CEO compensation to reserves and production targets. With execs often getting million-dollar bonuses only if they drill to find new petroleum pools each year.

The ratings agency says this often encourages management to “drill at all costs”. Even when new reserves and production don’t add to overall corporate profitability — in fact, sometimes when more production actually loses money for the company.

And Moody’s isn’t going to stand for such practices anymore. With the agency saying it is considering lowering debt ratings for companies that overly tie compensation to drilling.

Such a move would represent a major drag on exploration and development across the U.S. With the threat of lower ratings likely to kill executive drilling incentives — and slow the pace of production and reserves growth.

That would have significant implications for oil and natgas supply. Watch for a final decision from Moody’s on this game-changing policy — and any similar moves from other agencies like S&P coming afterward.

Here’s to killin’ the drillin’,

Dave Forest

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Oil Supply Crunch