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How the US election could impact LNG exports

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One thing to start: A week before the election, the US has sanctioned Bijan Namdar Zangeneh, Iran’s veteran oil minister and supreme Opec diplomat. It’s an odd move and probably meaningless, but certainly an insult.

America goes to the polls in seven days’ time in an election that will be pivotal for the future of US energy.

The standard narrative has been that Donald Trump is good for fossil fuels, while Joe Biden would hurt the industry as he looks to transition to cleaner energy.

But it is not always as simple as that. Mr Trump’s efforts to deregulate the sector are beginning to undermine it, as European importers rethink their association with “dirty” US liquefied natural gas.

That is the subject of our main item today. Data Drill charts the hit to credit ratings among US independent producers versus majors. Endnote rounds things off with a look at the impact of this year’s oil crash on executive pay packets (or lack thereof).

Which US presidential candidate do you think would be better for the future of the country’s energy sector? Take our poll.

Thanks for reading. Please get in touch at energy.source@ft.com. You can sign up for the newsletter here. — Myles

The threat facing US LNG exports to Europe

Europe has become a key market for US natural gas. Soaring US production in recent years has allowed liquefied natural gas (LNG) exports to take off across the Atlantic Ocean.

The rise in exports of what the Trump administration has dubbed “molecules of freedom” has been rapid — notwithstanding a lull earlier this summer. Between 2016 and last year they grew from just 9bn cubic feet to 683bn cubic feet, according to the Center for Liquefied Natural Gas (CLNG), a Washington lobby group. Trade is brisk again now too.

But as perceptions of the country’s upstream oil and gas industry deteriorate, exports to Europe — the biggest importer of LNG in the world — are coming under threat. Take the events of recent weeks:

  • October 14: The EU launched a methane strategy that toys with the idea of imposing standards on gas imports to the bloc, prompting nervousness among US LNG exporters. 

  • October 21: Politico reported that the French government had stepped in to block a multibillion dollar deal with a US LNG company because it was too dirty. The nervousness turned to worry. 

While the French intervention — cracking down before the EU has a chance to debate, never mind finalise its methane standards — puts the cart before the horse to some degree, and industry executives said they fear it is a sign of what is to come. 

Kevin Book, managing director of Washington consultancy Clearview Energy Partners, said it could mark “the first tangible shot fired in a transatlantic carbon trade war”.

Column chart of But now they are under threat from an EU emissions crackdown showing US LNG exports to the EU have taken off in recent years

Has deregulation backfired?

All of this comes in the wake of the Trump administration scrapping swaths of environmental legislation, which has shifted the US from being a leader in tackling methane emissions to a laggard.

The rollbacks came despite opposition from some of the industry, with big upstream producers insisting they are still trying their best to cut back on leaks. Industry executives argue US LNG is being unfairly targeted when the EU’s imports from Russia — whose volume is five times that from the US — can hardly be described as environmentally friendly.

But in an increasingly climate conscious world, perception is key. And the image of US fuels on the far side of the Atlantic has plummeted.

“I think it’s this broader question of foreign perception,” said Charlie Riedl, executive director of CLNG.

“We’ve just left the Paris Climate Agreement and we’ve seen these actions that might have short-term domestic benefit that could potentially have negative consequences in the long term for US LNG if not addressed,” Mr Riedl said.

The Trump administration’s deregulation efforts have raised questions about US exports from European buyers, that industry players say might not otherwise have been asked. 

The election will be key . . . 

Much hinges on what happens at the polls next week. If Mr Trump loses the presidential election and is replaced by Joe Biden, things may change. 

If elected, the former vice-president has vowed to impose “aggressive methane pollution limits” on his first day in office.

“We’re at a crossroads,” said Mark Brownstein, senior vice-president for energy at the Environmental Defense Fund. The Trump administration, he said, “has been working overtime” to destroy US progress in tackling methane emissions from US oil and gas. 

“If we keep going in that direction. I think the US is going to be at a disadvantage. If we change directions and get back to where we were in terms of being in the forefront of addressing these emissions I think the US is well as positioned vis-à-vis the standards that Europe will be adopting. It’s really that simple,” Mr Brownstein said.

Mr Riedl agreed: “You could see a scenario where, if President Trump is re-elected and they continue to focus on this deregulatory agenda, that now, all of a sudden, you could see the EU methane emission measures potentially have an impact on US LNG.”

The US exported 683bn cubic feet of LNG to Europe last year. © Bloomberg

. . . but change is afoot no matter who wins

Even in that scenario, companies could look to go their own way and adhere to self-imposed standards.

“They are under pressure, but this pressure isn’t just coming from the European strengthening of standards,” said Victor Flatt, a law professor and director of the University of Houston’s Environment, Energy, and Natural Resources Center. “It’s going to come essentially, from a combination of that and the other pressures they’re facing from investors and financiers and the ESG movement generally.”

Indeed, given the federal government’s position, many fossil fuel producing states are already pushing ahead with methane standards. Pennsylvania, Colorado and even Wyoming have put in place rules. New Mexico is in the process of developing its own. 

Said Mr Brownstein: “The United States, like every other country that is a large producer and consumer of gas, has to be moving aggressively to address methane and CO2 emissions for its own sake — not just for the sake of exports.”

(Myles McCormick)

Join the FT on November 11-13 for our Global Board Room event featuring live online debate and interactive networking sessions as more than 150 leading minds in policy, business and finance share thoughts on where the world goes next. Click here for your free registration.

Data Drill

The oil crash has been hard on all operators in the sector. But scale offered some shelter, and integration (ie downstream assets) offered a hedge. This is visible in the impact on credit quality, according to data from Credit Benchmark, a financial data provider. Integrated operators’ credit quality fell this year by around 40 per cent; that for upstream producers plunged by 72 per cent.

Line chart of Cumulative change in credit risk (%) showing Credit ratings of independent US producers have fallen much further than majors

Power Points

  • How the US shale industry needs to win back Wall Street.

  • Oil traders braced for balancing act in wake of US election.

  • Cenovus Energy is to buy rival Canadian oil producer Husky Energy amid a wave of consolidation sweeping North American oil and gas.

  • A US oil and gas lobby group is embracing an ESG message to win back investors sceptical that fossil fuels have a future.

  • Japan has pledged to become carbon neutral by 2050 in a move that will require a big shift in energy policy.

  • We profile two big names in the energy business:
    1. ConocoPhillips boss Ryan Lance, the oilman defying crash with big bet on US shale
    2. Ignacio Galán, the engineer who made Iberdrola a ‘new energy major’

  • BP returned to profit in the second quarter, but warned of more volatility.

  • British special forces on Sunday stormed an oil tanker off the English coast to end a suspected attempted hijacking.

Endnote

As their companies contend with the worst price crash in decades, slashing equity value and forcing many into bankruptcy, oil and gas bosses are doing all right.

The majority of exploration and production companies have decided against imposing pay cuts this year and C-suite compensation will, on average, be higher than it was in 2019.

Those were among the key takeaways from a new study by advisory group Alvarez & Marsal, which found:

  • Fifty-six per cent of companies have not announced reductions to executive pay

  • Chief executive compensation will rise 7 per cent

  • Chief financial officer pay will rise 2 per cent

For what it’s worth, the index tracking E&P stocks on the S&P 500 is down 55 per cent this year. And more than 120,000 oil and gas workers have lost their jobs.

Energy Source is a twice-weekly energy newsletter from the Financial Times. Its editors are Derek Brower and Myles McCormick, with contributions from David Sheppard, Anjli Raval, Leslie Hook and Nathalie Thomas in London, and Gregory Meyer in New York.



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Vale chief rejects talk of iron ore supercycle

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Iron ore is not on the cusp of a new supercycle, according to the head of one the world’s biggest mining companies, who expects demand for the steelmaking ingredient to flatten out after a couple of years of the current tightness.

Eduardo Bartolomeo, chief executive of Brazil’s Vale, said the record surge in iron ore prices over the past year was very different to the boom of the early 2000s, which was driven by China’s rapid industrialisation. 

“In the last supercycle we had urbanisation in China. It was a structural change. A shock in demand,” he told the Financial Times. “We are not talking about a huge shock in demand now. I would say it is marginal. It is not a shock.”

But he added that, with big global economies revving up and iron producers running at or near capacity, prices could remain elevated until 2023.

“Although there is strong talk about cuts, production is still going up in China and now you have Europe coming back and the US announcing a huge stimulus package. There are also restrictions on supply,” he said. “This market is going to be tight for a while. At least two years.”

Iron ore has spearheaded a broad-based rally in commodities over the past year, rising more than 150 per cent to a record high above $230 a tonne last week, mainly on the back of strong demand from steel mills in China, before paring gains and hitting $209.35 on Friday.

As China’s steel production continues to expand analysts believe prices can remain around current levels but say the market will be highly volatile.

Iron ore’s turbocharged performance has been a boon for big producers including Vale, which require a price of only about $50 a tonne to break even.

It has fanned talk of a new commodities supercycle — a prolonged period where prices remain above their long-term trend, usually triggered by a structural boost to demand to which supply is slow to respond.

Following a deadly dam disaster two years ago that killed 270 people, mainly company employees and contractors, Vale was forced to curtail production.

Its output fell from a planned 400m tonnes a year to about 300m tonnes in 2019 and 2020, and the company lost its position as the world’s largest iron ore producer to Rio Tinto, which has managed to produce about 330m tonnes in each of the past two years.

Bartolomeo said Vale eventually needed to increase production to 400m tonnes because iron ore was a “high fixed-cost business”. However, he said the company would do so in a “very paced way”, mindful of safety.

Erik Hedborg, analyst at the CRU consultancy, said Vale’s journey to 400m tonnes would take time because it required the “restart of many mines, which will go through several complex licensing processes”.

Over the medium term — from 2025 to 2030 — Bartolomeo said Vale expected diminishing demand for iron ore from China because of increasing use of scrap in electric arc furnaces.

“Everybody talks about the circular economy. Scrap is going to come to China. It has to. We see it diminishing demand for iron ore from China.”

Bartolomeo said there would also be a shift to higher-quality iron ore as the steel industry sought to reduce emissions by moving to less polluting methods of steelmaking such as hydrogen-based production.

“All the roads lead to high-quality iron ore and Vale is very well positioned for that,” he added. 



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US banks could cut 200,000 jobs over next decade, top analyst says

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US banks stand to shed 200,000 jobs, or 10 per cent of employees, over the next decade as they manoeuvre to increase profitability in the face of changing customer behaviour, according to a banking analyst. 

“This will be the biggest reduction in US bank headcount in history,” Wells Fargo analyst Mike Mayo told the Financial Times. If his forecast bears out, this year would mark an inflection point for the US banking sector, where the number of jobs has remained roughly flat at 2m for the past decade.

The jobs most at risk are those in branches and call centres as banks prune their sprawling networks to match the new realities of post-pandemic banking, Mayo’s report found. That is consistent with Department of Labor statistics that predict a 15 per cent decline in bank teller jobs over the next decade.

Historically, lay-offs, particularly for lower-paying jobs, have been a contentious issue for the banking industry, which is often held up by progressive politicians as an example of a wealthy industry prioritising profits over people.

But the threat of technology companies and non-bank lenders chipping away at the business of payments and lending, which have traditionally been dominated by banks, has intensified over the past year, making job cuts necessary, Mayo said.

“Banks must become more productive to remain relevant. And that means more computers and less people,” he said.

Most of the reductions can be achieved through attrition over the next 10 years rather than cuts, reducing the risk of a backlash, Mayo said.

The new research, reported first by the FT, comes on the heels of disappointing jobs data that showed the US economy added just 266,000 jobs last month, sharply missing estimates of 1m. Structural elements of unemployment like accelerated automation that took place during the pandemic could pose stronger than anticipated headwinds to a recovery in the labour, economic officials said following the report. 

Pandemic activity pushed headcount up roughly 2 per cent last year as banks hired staff to meet the sudden demand for labour-intensive mortgages and government-backed small-business loans. But that trend is likely to be reversed in the near-term as lenders refocus on efficiency to compete more effectively with technology companies that increased their share of business during the health crisis. 

Increased competition from unregulated companies such as PayPal and Amazon entering financial services was one of the principal concerns JPMorgan Chase chief executive Jamie Dimon outlined in his annual letter to shareholders last month. 

Mayo estimates that banks currently represent just a third of the overall financing market.

“Digitisation accelerated and that played to the strength of some fintech and other tech providers,” Mayo said. 

Many of the bank branches that were closed during the pandemic will probably stay that way, and even those that remain open are likely to be more lightly staffed as branches become more focused on providing advice than facilitating transactions. A large amount of back-office roles also stand to be automated but those numbers are harder to quantify, the report said. 

Mayo said his team 20 years ago was twice as large and responsible for half as much. Doing more with less was the new norm across the industry.

“If I was giving advice to my kids, I’d say you probably don’t want to go into the financial industry,” Mayo said, adding that technology and customer or client-facing roles are probably the only areas that will see growth. “It’s likely to be a shrinking industry.”



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Inflation wild card unsettles markets

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Regime changes usually take a while to fully register among investors. The big talking point in markets at the moment surrounds the potential return of a more troublesome level of consumer price inflation and what protective action investors should take.

The underlying trend of inflation matters a great deal for financial markets and investor returns. The rise in both equity and bond prices in recent decades has occurred during a long period of subsiding inflation pressure and from recent efforts by central banks to arrest disinflationary shocks since the financial crisis. 

A year after the global economy abruptly shut down, activity is duly picking up speed. The logical outcome has been a surge in readings of inflation and this week, a measure of US core prices recorded its largest annual gain since 1996, running at a pace of 3 per cent*.

Core readings exclude food and energy prices and are deemed a smoother gauge of underlying inflation pressure, a point that many people outside finance find baffling when budgeting the cost of groceries and petrol.

So the significant jump in the core measure, and even accounting for the base effect of the pandemic’s brief deflationary shock a year ago, has understandably generated plenty of noise.

This will remain loud in the months ahead as activity recovers from lockdowns with a hefty tailwind of fiscal stimulus working its way through the broad economy.

But muddying the waters for investors is that the outlook for inflation is still difficult to judge at this stage.

“There is so much dislocation in the economy from the reopening and base effects from a year ago that it will take at least six to 12 months before we get a clear view of the underlying inflation trend,” said Jason Bloom, head of fixed income and alternatives ETF strategies at Invesco.

Investors who are now worried about an inflation shock face a dilemma. Some assets seen as traditional hedges against such a risk, like inflation-protected bonds and commodities, have already risen appreciably. Effectively a period of inflation running hot has been priced in to some degree.

And history does provide a cautionary note for those moving late to buy expensive inflation protection.

Past inflationary alarms, as economies recovered in the wake of the dotcom bust in the early 2000s and the financial crisis of 2008, proved false dawns. After a mercifully brief pandemic recession, the powerful and well entrenched disinflationary trends of ageing populations and falling costs associated with technological innovation are by no means in retreat.

For such reasons, a number of investors and the US Federal Reserve expect inflationary pressure this year will prove “transitory”. But stacked against deflationary forces is the immense scale of the monetary and fiscal stimulus of the past year.

The effects of monetary and fiscal stimulus means “inflation may settle into a pace of 2.5 per cent (annualised) and that would be different from the average of 1.5 per cent before the pandemic”, said Jason Pride, chief investment officer of private wealth at Glenmede Investment Management. “Inflation will be higher. At a dangerous level? No.”

In an environment of firmer growth and moderate inflation pressure, equities will benefit, led by companies that have earnings more influenced by the economic cycle. Investors also will seek companies that have the ability to pass on higher prices to customers in the near term and offset a squeeze on profit margins.

Still, a troublesome period of elevated inflation cannot be easily dismissed. The “transitory” argument could be challenged if economic growth continues to run hot into next year, accompanied by a trend of higher wages from companies finding it hard to attract workers.

Before reaching that point, expected inflation priced into the bond market may well push past the peaks of the past two decades and enter uncharted territory in the US and also for other developed markets in the UK and Europe.

Bond market forecasts of future inflation pressure over the next five to 10 years have already risen sharply in recent months. But the rebound is from a low level and for now, expected inflation is not far beyond the Fed’s long-term target of 2 per cent.

“It is the change in inflation expectations that drives asset returns,” said Nicholas Johnson, portfolio manager of commodities at Pimco. Assessing almost 50 years of data, a portfolio holding equities and bonds underperforms during bouts of elevated inflation, while real assets including inflation-linked bonds and commodities prosper, according to the asset manager.

“Most investors have not experienced a period where inflation surprised to the upside,” added Johnson. Clients are asking more questions about insulating their portfolios, but their present exposure to commodities and other assets show that in broad terms investors are “not paying much of an inflation premium”.

That can change and the prospect of inflation regime change remains a wild card for investors.

michael.mackenzie@ft.com

*The value of core inflation has been changed since first publication.



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