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The distinctly unsexy energy job Biden should fill



Three things to start: First, eight people have died in protests in Iraqi Kurdistan, where this year’s oil-price collapse has exacerbated economic misery. Second, don’t miss David Sheppard’s piece on Saudi Aramco and its treatment of workers. Third, hedge fund DE Shaw has launched an activist campaign at ExxonMobil — the second investor to do so in a week.

Our main item today is an interview with Sean Casten, a Democratic congressman with strong views on the US energy policy blob.

Also in today’s ES: shale spending plunged in the third quarter; the world might not need as much liquefied natural gas as thought; and Adair Turner, head of the Energy Transitions Commission, on the state of the energy transition as the world marks the fifth anniversary of the Paris Agreement.

Thanks for reading. Please get in touch at You can sign up for the newsletter here. — Derek

The case for a US energy tsar

Joe Biden, in an unprecedented move, is promoting climate change to a whole-of-government issue — making it the responsibility of key members of his administration who will transcend departments and agencies. The same should be done for energy policy, which has for decades been the remit of a ramshackle, patchwork quilt of government bodies with little-to-no centralisation.

That is the view of Sean Casten, a Democratic congressman for Illinois and former clean energy executive.

“We still don’t co-ordinate energy policy,” Rep Casten, a Democratic moderate, who sits between the party’s pro- and anti-fossil fuel extremes, told ES. “Where is energy policy done in the United States? Is it the Department of Energy, is it the EPA, is it the Department of Transportation? No one knows.”

The appointment of John Kerry as climate envoy, with cabinet rank and a seat on the National Security Council, puts global warming at the heart of US foreign policy. Mr Biden is expected to appoint a domestic counterpart as well.

John Kerry served as secretary of state under Barack Obama and brings considerable political heft to the climate envoy role. © AFP/Getty Images

But what of energy? Mr Kerry and his colleague will have some remit in this area but it will not be their focus. As it stands, energy is the responsibility of everyone and no one.

The Department of Energy (which you might reasonably think holds this role) is mainly involved with handling the nuclear arsenal and waste, as well as energy R&D. Underlining the current administration’s view of its significance, Donald Trump’s first pick for energy secretary was Rick Perry, a man who in 2011 said he wanted to scrap the department and then forgot its name.

The Environmental Protection Agency is often considered closer to energy in the traditional sense — tasked with things like regulating the emissions the sector pumps out. But the regulation of transmission? That falls to the Federal Energy Regulatory Commission. Rules on transporting fuels? Look to the Department of Transportation’s Pipeline and Hazardous Materials Safety Administration. Meanwhile, onshore oil and gas leases are handed out by the Bureau of Land Management and offshore by the Bureau of Ocean Energy Management (both part of the Department of Interior). What of financial disclosures by energy providers? For that, see the Securities and Exchange Commission.

“With no desk where the buck stops, the buck just keeps moving,” said Mr Casten, who has raised the matter with the Biden transition team.

“I do think that it’s really important that if we are going to treat climate policy as a whole-of-government problem, we have to also treat energy policy as a whole-of-government problem. And I would submit to you that no administration has ever done that,” Mr Casten said.

So what is the solution? Either carve out a new senior role for a member of the administration to manage energy policy, or make the domestic climate tsar a domestic energy tsar, said Mr Casten. Either way energy should not be just a side project, but the core focus.

“Climate would be part of the mandate, but you really have to tie a lot of these things together,” he said. It needs to be someone with real power if it is to be effective.

“If it’s just a tsar, but that person has to go get permission slips from the secretary of energy and the secretary of environment and the secretary of transportation, that’s not a whole-of-government solution, that’s just a co-ordinator.”

While political realities have shifted climate up the agenda, detangling the bureaucracy of US energy policy remains distinctly unsexy. Is an energy tsar a realistic prospect? “A boy can dream,” said Mr Casten. (Myles McCormick)

A bleak outlook for global LNG

Once seen as a promising transitional fuel, natural gas’s best days increasingly seem to be behind it.

The resource’s prospects in the low-carbon energy transition are under threat, especially as cleaner hydrogen emerges to muscle the fuel out of the market, according to new research from Wood Mackenzie.

The fuel’s dimming outlook could force companies to shelve prospective liquefied natural gas export projects and leave existing gas reserves stranded, the consultancy said.

WoodMac said 77 per cent of new supply from LNG projects was at risk under a scenario where emissions are reduced enough to keep global temperatures from rising beyond 2 degrees.

“With weaker global gas demand, the space for new developments will be limited. This is a significant challenge for companies considering final investment decisions on new projects,” said Kateryna Filippenko, a principal analyst at the firm.

Global oil majors once saw LNG as a relatively safe long-term investment with a robust demand outlook, even as countries looked to cut emissions, and ploughed tens of billions of dollars into mega projects over the past decade to find and export gas around the world. But that outlook has increasingly come under question.

In WoodMac’s 2-degrees scenario, only the fittest and lowest-cost producers will prevail in the shrinking market. Qatar and Russia, already moving ahead with the development of large and relatively cheap resources, are seen by WoodMac as the most likely survivors. Low-price US natural gas is likely to help new American export projects remain competitive as well. But more marginal expansion plans in places such as Canada and Mozambique would face the axe. (Justin Jacobs)

Data Drill

American shale companies spent less on capital expenditures in the third quarter this year than in any other quarter over the past decade as the oil price crash put the sector’s finances in a vice, according to data compiled by the Institute for Energy Economics and Financial Analysis.

The group of 33 fracking-focused companies included in the analysis spent just $5.8bn in the quarter, down nearly 60 per cent from the same period in 2019. The all-time high was more than $16bn in the third quarter of 2018, when US oil production was growing at a record pace.

The historically low spending levels came in response to April’s historic price crash, which prompted companies to slash their budgets, curtail drilling plans and lay off workers.

Sharply lower capital spending in the quarter, combined with a price-per-barrel recovery into the $40s, meant the companies generated significant free cash flow, a reversal for a sector that has historically spent more than it brought in. It was the strongest free cash flow performance in a quarter over the past decade, according to the IEEFA.

After a decade of poor returns, shale companies are under intense shareholder pressure to strike a new balance between spending on production growth and delivering free cash back to shareholders while also paying heavy debt loads.

Column chart of $bn capital expenditure by quarter showing Shale spending crashes after price collapse

Power Points

  • Toyota has launched a second-generation Mirai, its hydrogen fuel-cell vehicle, in hopes the technology is now ready for mass take-up.

  • The UK government’s climate advisers have recommended replacing home heating systems and that the population eat less meat, among other consumer-related decarbonisation measures.

  • Trafigura, one of the world’s largest commodity traders, cashed in on the oil turmoil this year to record its best ever gross profits.

  • Executives have left Shell amid discord about the company’s energy transition plans.


This week marks the fifth anniversary of the Paris climate deal — and thus far this marriage has been a rocky one. Ever since the Trump administration pulled the US out of the deal in 2017, the sense of urgency for climate action around the world has waxed and waned, especially with the onset of the coronavirus pandemic.

But with the Biden administration preparing to take the US helm, a slew of increasingly ambitious net-zero target announcements from major economies, and efforts to use the post-pandemic recovery to spur new green investment there is fresh momentum afoot.

In a live panel discussion earlier this week Adair Turner, head of the Energy Transitions Commission, took stock. He contrasted the speed of technological developments set to slash carbon in the long-term with the reluctance of governments to act as needed in the short-term.

“The world has to get the industrial and energy system to about zero carbon emissions by mid-century. We believe that this is absolutely possible — that we can get to a zero-carbon economy. The fundamental reason why we’re so confident is the revolution that has occurred in the cost of various [zero-carbon] technologies,” Lord Turner said.

He is looking to the next round of climate talks, COP26, scheduled for November 2021 in Glasgow, to spur governments into action. “Above all, what one wants from COP26 is to focus countries on the action needed in the next 10 years . . . The crucial issue is what happens in the 2020s.”

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

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US stocks make gains on Fed message of patience over monetary policy




Stocks on Wall Street reversed earlier losses after Jay Powell, the Federal Reserve chairman, reiterated the central bank’s desire to stick with accommodative policies during his second day of testimony to Congress.

The tech-heavy Nasdaq Composite ended the day up 1 per cent, having fallen almost 1 per cent at the opening bell. The S&P 500 climbed 1.1 per cent, marking the blue-chip benchmark’s second consecutive rise after five sessions of back-to-back losses.

A morning sell-off in US Treasuries also faded, with the yield on the 10-year note having climbed as much as 0.07 percentage points to slightly less than 1.43 per cent, its highest level since February last year, before settling back to 1.37 per cent.

Treasuries have been hit by expectations that US president Joe Biden’s $1.9tn stimulus plan will stoke inflation, which erodes the cash value of the debt instruments’ interest payments. However, the more recent rise in yields has also been accompanied by a rise in real rates, which are more indicative of the return investors make after inflation and signal an improving growth outlook for the economy.

Higher yields, which move inversely to the price of the security, also knock-on to equity valuations by affecting the price-to-earnings multiples investors are willing to pay for companies’ shares. A higher yield, analysts say, makes fast-growth companies whose earnings represent a slim proportion of their stock market value less attractive in comparison.

Shares in the 100 largest companies on the Nasdaq are valued at a multiple of 37 times current earnings, against 17 times for the global FTSE All-World index of developed market equities.

“When bonds yield close to zero, you are not losing out by investing in those companies whose cash flows could be years into the future,” said Nick Nelson, head of European equity strategy at UBS. “[But] as bond yields start to rise, that cost of waiting [for companies’ earnings growth] increases.”

Earlier on Wednesday, investors’ retreat from growth stocks rippled into Asia. Hong Kong’s Hang Seng index sank 3 per cent, its worst daily performance in nine months. Chinese investors using market link-ups with bourses in Shanghai and Shenzhen dumped Hong Kong-listed shares at a record pace, selling a net HK$20bn ($2.6bn) on Wednesday. China’s CSI 300 index fell 2.6 per cent. Japan’s Topix slipped 1.8 per cent, dragged down by tech stocks.

Column chart of Hang Seng index, daily % change showing worst day for Hong Kong stocks in 9 months

European equity markets closed higher, with the Stoxx 600 regional index rising 0.5 per cent and London’s FTSE 100 index up 0.5 per cent. UBS’s Nelson said European equities were less vulnerable to rising yields because European stocks generally traded at lower valuations than in Asia and the US. “We have fewer big technology companies here.”

While the bond market ructions have unsettled many equity investors, some believe this should not affect stock markets because the inflation expectations that have driven the Treasury sell-off are linked to bets of a global recovery.

“Rising bond yields and rising inflation from low levels provide a historically attractive environment for equities,” said Patrik Lang, head of equity strategy and research at Julius Baer. Traditional businesses whose fortunes are linked to economic growth, such as “industrials, materials and especially financials”, should do better in a reflationary environment than tech stocks, added Lang.

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Fed needs to ignore ‘taper tantrums’ and let longer rates rise




The writer is chief executive officer and chief investment officer of Richard Bernstein Advisors 

The Ferber Method, a sleep training technique, teaches babies to self-soothe and fall asleep on their own. It’s as much a training technique for new parents to ignore their baby’s crying as it is for the child to learn to cope by themself. 

The US Federal Reserve should consider Ferberising bond investors and ignore future “taper tantrums” like the market disruption that occurred when the central bank signalled tighter monetary policy in 2013. The long-term health and competitiveness of the US economy may depend on bond investors’ self-soothing ability to cope with reality.

The slope of the yield curve is a simple model of the profitability of lending. Banks pay short-term rates on deposits and other sources of funds and receive longer-term rates by issuing mortgages, corporate loans, and other lending agreements.

A steeper curve, therefore, is a simple measure of better bank profit margins, and has in past cycles spurred greater willingness to lend. Historically, the Fed’s Survey of Senior Bank Lending Officers shows banks have been more willing to make loans to the real economy when the yield curve has been steeper.

A chart showing how banks have been more willing to lend with a steep yield curve. As the slope on the US treasuries  10-year-less-2-year yield curve has steepened, so the net percentage of banks reporting tighter lending standards has fallen

With that simple model of bank profits in mind, textbooks highlight the Fed’s control of short-term interest rates as a tool to control lending. The Fed reduces banks’ cost of funding and stimulates lending when it lowers interest rates. But it increases funding rates and curtails lending when it raises short-term rates. Coupling lower short-term rates with a steeper yield curve can be a powerful fillip to bank lending. 

However, policies in this cycle have been unique. As US short-term interest rates are near zero, the Fed has attempted to further stimulate the economy by buying longer-dated bonds and lowering long-term interest rates. Those actions have indeed lowered long-term borrowing costs in the economy, but banks’ willingness to lend has been constrained because lending margins have been narrow and risk premiums small.

Banks in past cycles might have been willing to lend despite a relatively flat yield curve because they could enhance narrow lending margins by using leverage. However, regulations after the financial crisis now limit their ability to use leverage.

This policy and regulatory mix has fuelled some of the growth in private lending. Private lenders are not subject to regulated leverage constraints and can accordingly lend profitably despite a flat curve. The growth in private lending effectively reflects an unintended disintermediation of the traditional banking system. This has meant liquidity destined for the real economy has largely been trapped in the financial economy.

The yield curve has started to steepen, and the Fed should freely allow long-term interest rates to increase for monetary policies to benefit the real economy more fully. Allowing long-term rates to increase would not only begin to restrain financial speculation as risk-free rates rise, but could simultaneously foster bank lending to the real economy. 

Thus, the need for the Fed to Ferberise bond investors. Banks’ willingness to lend is starting to improve as the curve begins to steepen, but some economists are suggesting the central bank should continue its current strategy of lower long-term interest rates because of the potential for a disruptive “taper tantrum” by bond investors. The Fed needs to ignore investors’ tantrums and allow them to self-soothe.

The investment implications of the Fed allowing longer-term interest rates to rise seem clear. Much of the speculation within the US markets is in assets such as venture capital, special purpose acquisition vehicles, technology stocks and cryptocurrencies. These are “long-duration” investments that have longer-time horizons factored into their valuations. They underperform when longer-term rates rise because investors demand higher returns over time. Capital would be likely to be redistributed to more tangible productive assets.

Investors and policymakers should be concerned that monetary policy is fuelling speculation rather than supporting the lending facilities needed to rebuild the US’s capital stock and keep the country’s economy competitive.

Like a new parent to a baby, the Fed should not rush to coddle bond investors’ tantrums and should let the financial markets soothe themselves. Short-term financial market volatility might cause some sleepless nights, but the Fed could unleash the lending capacity of the traditional banking system by letting the yield curve steepen further.

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What we’ve learned from the Texas freeze




One thing to start: While the freeze in Texas caused havoc for most, some companies have reaped big rewards. Australia’s Macquarie Group said yesterday full-year profits could rise by up to 10 per cent as a result of a surge in demand for its natural gas shipping business.

Welcome to today’s newsletter, where Texas remains in focus. In our first item, Derek Brower asks if oil’s modest price rise in reaction to last week’s events signals that the rally will soon run out of steam.

Further rises, after all, will only tempt America’s shale producers to dive into growth mode. For our second item, Justin Jacobs speaks to Devon boss Rick Muncrief about when the taps will be turned back on.

Elsewhere we round up the key reading on the Texas fallout from the FT and beyond; ask how the appointment of a general to head up Brazil’s Petrobras has gone down in the markets (hint: not well) and bring you the latest on the proxy battle to green ExxonMobil.

Thanks for reading. Please get in touch at You can sign up for the newsletter here. — Myles

Is the oil rally nearing the end of the road?

Texas’s cold snap last week lifted oil prices — yet still brought a warning for the market’s bulls. The Permian Basin, the world’s most prolific oil-producing region, froze up. US production fell by 2m barrels a day, according to Wood Mackenzie. Kpler, a data provider, estimates the country’s total output in February will be down by 1m b/d.

By Tuesday morning, after it emerged that producers would take weeks to fully restore flows, US oil futures were trading for around $62.50 per barrel, just $2.50 or so more than its price on the eve of the snowstorm. Hardly an Abqaiq-style oil-price leap.

One explanation is that huge volumes of refining capacity are offline too, removing a big source of demand and neutralising some of the supply disruption. But the market’s relative calm also begs questions about how resilient oil’s rally is — especially with an Opec meeting next week, when the cartel must decide how much, if any, of its 7m barrels a day or more of offline supply it will begin restoring.

Many analysts remain bullish. Goldman Sachs, Wall Street’s most influential oil-price forecaster, upped its expectations by $10 a barrel this week. It now expects Brent, which was above $66 on Tuesday morning, to hit $75 in the third quarter.

Line chart of US crude production showing The big Texan freeze

Yet the bull case increasingly depends on many things coming true at once, points out Neil Atkinson, an independent analyst who was formerly head of oil markets at the International Energy Agency. Sanctioned Iranian barrels must remain offline; US supply must remain constrained; and economies must rebound quickly. Above all, Opec must keep cutting.

Current prices are in a “sweet spot” for the cartel, said Atkinson. But any further price rises could prompt a response from shale (see below) and test Opec’s discipline, prompting a response from its biggest producer.

“Over the years, Saudi Arabia has shown its willingness to shift policy and maximise output if compliance falls and/or if the perceived costs of co-operation exceed the perceived benefits,” wrote Bassam Fattouh, head of the Oxford Institute for Energy Studies and a Saudi oil-policy expert, in an article explaining the kingdom’s recent decision unilaterally to deepen its owns cuts.

“Thus, Saudi Arabia can easily swing in the opposite direction in response to low compliance and given the relatively low level of Saudi production, the size of the upward swing could be quite substantial, as was the case in April 2020.”

(Derek Brower)

American oil market eyes production boost

After the oil-price surge of recent weeks, the big question hanging over the US shale patch, and broader oil market, is when American producers will start loosening the purse strings and opening up the taps.

That point might now be visible on the horizon. “If we do see commodity prices rapidly increase back to $70 or $80 a barrel, you’re going to be generating a lot of free cash and that gives you a lot of optionality on things you could think about,” Rick Muncrief, chief executive of Devon Energy, a major Permian producer, told ES last week.

For now, Muncrief’s company is keeping a 5 per cent cap on production growth and promising a windfall for shareholders if prices keep climbing. “First things first, we want to make sure we stay disciplined,” Muncrief said.

But his comments to ES point to when companies might ditch the capital discipline mantra and become more vocal about their ability to both accelerate output growth and keep cash flowing to shareholders.

Robert Kaplan, head of the Dallas Fed, also talked about the potential for oil producers to pivot away from capital discipline as prices rise. “I’ve learned sometimes if prices get high enough mindsets can change,” he told an International Energy Forum conference yesterday.

“To get back to 13m barrels a day, yes, you would need a change in mindset. Probably spurred by higher prices. Can I predict whether that will or won’t happen? No I can’t predict it, but I think we should be on watch for it,” Kaplan said.

We will get more of an idea of the mood in the shale patch later this week, after Pioneer Natural Resources, EOG Resources, Diamondback Energy, Occidental Petroleum and Apache have all reported earnings.

Expect a lot of talk about when producers might start getting back into the growth game. (Justin Jacobs)

What to read on the Texas freeze

A weeklong catastrophe left millions without power and heat amid some of the coldest weather the state has seen in a century.

The failure of the state’s electric grid caused immense human suffering, financial pain for consumers (and gain for some energy companies), and has spawned a wide-ranging conversation about where things went wrong and how to prevent it from happening again. Here are the key pieces to read:

  1. Start with Bloomberg’s in-depth account of the early hours of Monday morning, when the state’s grid operator, the Electric Reliability Council of Texas, was forced to plunge millions into darkness as power generation seized up.

  2. The International Energy Agency put the pieces together here in a broad overview of how the grid broke down — and points out that the lessons from Texas should be learned far and wide, especially as the world becomes increasingly electrified and vulnerable to disruptions.

  3. Gregory Meyer and I covered the financial fallout from the storm, including the story of one family in Burleson, Texas, which saw their electric bill suddenly spike to more than $8,000. We also explored who the winners and losers were in a $50bn bonanza of power trading.

  4. Some companies that cashed in on the crisis are being accused of profiteering. The gas producer Comstock Resources said surging natural gas prices were like “hitting the jackpot”.

  5. The crisis sparked an inevitable debate pitting renewables advocates against fossil fuel backers. This green versus brown debate generated much more heat than light. But the issue of intermittent renewables’ reliability is a critical one. The FT’s editorial board argued that frozen wind turbines were hardly the main cause of the grid’s collapse as the natural gas system, which has the largest share of the power market, also failed.

  6. A less sexy but probably more important issue is why so much of Texas’ energy system was so easily felled by temperatures that much of the rest of the country sees on a regular basis. This excellent Texas Tribune story looks at why “winterising” power plants, pipelines and wells might not be as easy or cheap as state officials hope.

  7. Finally, there is a fascinating debate over the role climate change did or did not play in the Arctic blast. My colleagues Leslie Hook and Steven Bernard have a nice explanation (and graphic) of how the jet stream bent south, covering Texas in freezing arctic air.

(Justin Jacobs)

Data Drill

Shares in Petrobras fell off a cliff yesterday as the market absorbed Brazilian president Jair Bolsonaro’s decision to oust the state oil group’s chief executive in favour of a general.

Bolsonaro had blamed Petrobras’s erstwhile boss Roberto Castello Branco for recent rises in petrol and diesel prices, which had provoked the ire of the country’s truck drivers.

Strikes over fuel costs in 2018 paralysed Brazil’s economy and sapped support for the government, helping secure Bolsonaro’s election to office.

Line chart of Share price (Brazilian reals) showing Petrobras shares plunge after Bolsonaro ousts CEO

Power Points


The proxy battle at ExxonMobil rumbles on, with activist group Engine No.1 blasting the oil major’s assertion that its carbon-cutting plan was in line with the Paris accords.

Exxon has stuck to its guns as an oil producer even as rivals like BP and Shell lay out plans to shift into greener sources of energy and reduce fossil fuel output. But it has made concessions in the face of investor pressure, including pledges to cut emissions intensity by 2025.

This month the company said that its emissions targets were “projected to be consistent with the goals of the Paris agreement” and would position it to be “an industry leader in greenhouse gas performance by 2030”.

Engine No.1, which wants to install four new energy-transition-focused directors on Exxon’s board, was having none of it. In a letter to the board yesterday, it wrote:

“None of the company’s new claims change its long-term trajectory which would grow total emissions for decades to come. This is not consistent with, but rather runs directly counter to the goals of the Paris agreement.”

Exxon did not respond to a request for comment.

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