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Why no one is impressed with Exxon’s emissions pledge

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One thing to start: Don’t miss David Sheppard’s deep dive into the treatment of expat staff at Saudi Aramco.

ExxonMobil yesterday joined the growing ranks of US oil producers that have vowed to tackle emissions. But the announcement elicited little more than a shrug from observers. That is the subject of our first item.

Our second is an interview with Heather Zichal, chief executive of American Clean Power, Washington’s newest energy trade group.

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

Exxon’s ‘underwhelming’ emissions pledge

ExxonMobil made headlines yesterday with a promise to cut its greenhouse gas emissions. Chief executive Darren Woods trumpeted the oil major’s commitment to “meaningful near-term emission reductions”.

If the company — under growing pressure from activist investors to change its ways — expected plaudits, it was disappointed. The reaction from activists and analysts has been lukewarm at best: “underwhelming”, “inadequate”, “business-as-usual”. Shares slid 4 per cent.

“That oil majors like Exxon feel the need to tout their climate plans is a testament to the growing urgency of the climate crisis,” said Kelly Martin at the Sierra Club, an environmental group. “But baby steps in the right direction by one of the world’s biggest polluters are far from what’s needed to address this crisis.”

Why the uninspired reaction? Consider Exxon’s targets. It says that by 2025 it will cut the intensity of its upstream emissions by 15-20 per cent compared with 2016 levels; methane intensity by 40-50 per cent; and flaring intensity by 35-45 per cent. Let’s dive into why observers are not happy with this.

Intensity vs absolute

The first problem is the focus on emissions intensity, ie: what the company emits per barrel of oil it produces. In theory, absolute emissions can rise with increasing production, even as emissions intensity declines.

As a result, most European producers — from BP to Equinor — have set goals that encompass absolute emissions. This distinction is particularly important for Exxon, which plans to expand oil drilling and production in the coming years.

The intensity focus, said Ben Ratner, senior director at the Environmental Defense Fund, renders Exxon’s ambitions “inadequate”.

“Meeting the goals of the Paris agreement requires an energy transformation that slashes absolute emissions, not piecemeal intensity targets backed by spotty methane data and reporting,” he said.

Engine No 1, one of the shareholder groups engaged in an activist campaign to shake up the company, agreed. “While reducing emissions intensity is important, nothing in ExxonMobil’s stated plans better positions it for long-term success in a world seeking to reduce total greenhouse gas emissions,” it said.

Exxon chief Darren Woods: ‘We respect and support society’s ambition to achieve net zero emissions by 2050’ © REUTERS

A difference of scope

Exxon’s targets also only extend to Scope 1 and 2 emissions — those from its own operations and those of its power producers. They exclude Scope 3 (those from the burning of its oil and gas by consumers), where the vast majority of energy-related emissions occur.

Many European companies have outlined ways to clamp down on this. In the US, Occidental Petroleum has vowed to overhaul its business model to tackle Scope 3 emissions by the middle of the century. While Exxon has pledged to begin reporting Scope 3 data, it insists these emissions are beyond its purview. 

“Meaningful decreases in global greenhouse gas emissions will require changes in society’s energy choices coupled with the development and deployment of affordable lower-emission technologies,” said Exxon.

What about Conoco?

Are observers being unfair on Exxon? After all, US rival ConocoPhilips, the first American producer to set comprehensive emissions goals, received praise for ambitions that also excluded Scope 3. 

But Conoco’s targets — net-zero Scope 1 and 2 emissions by 2055 — are strikingly more ambitious (even if Exxon’s are more immediate). It has also committed to investing only in projects that are economic in a low-carbon world.

“What’s really lacking from [Exxon’s] announcement is there’s nothing about capex or strategy or investment. It’s all sort of tinkering around the edges,” said Andrew Logan, director of oil and gas at Ceres, a non-profit organisation that coordinates investor action on climate. “Ultimately I think this is this is an underwhelming set of commitments.”

“I think you can design a strategy as an oil company to weather the low-carbon transition, but this is not that strategy. This is a strategy to respond to public pressure that you’re not doing enough about your emissions,” he said.

‘Business-as-usual’

And therein lies the crux of the matter. Exxon’s announcement doesn’t actually commit to any meaningful change.

“A 15-20 per cent reduction in greenhouse gas emissions intensity over nine years is not an ambitious target — essentially business as usual,” said Pavel Molchanov, an analyst at Raymond James. 

Exxon’s announcement only served to further underscore the growing divide between the US supermajor and its European rivals, which have set out more ambitious carbon-reducing strategies.

“They haven’t made the sort of strategic leap that the European majors have,” said Raoul LeBlanc, a vice-president at IHS Markit, a consultancy.

Embracing Scope 3 emissions reductions compels a far more fundamental strategic shift than Exxon is willing to take at this point. Its announcement does not set the stage for a capex shift away from oil and gas towards clean energy, as many European majors have started to do.

Exxon simply doesn’t see the returns in clean energy to justify such a move, said Mr LeBlanc. “I think it’s difficult for them to see the returns on the renewable side able to replace the historical returns. Although frankly, the recent returns have not been good.” (Myles McCormick and Justin Jacobs)

A new energy trade group with the wind at its back

The newest player in Washington’s constellation of energy trade groups has hired as chief executive a former adviser to the Biden campaign who once sat on the board of path-breaking liquefied natural-gas export company Cheniere Energy. 

Heather Zichal will lead the American Clean Power Association when it launches January 1. The group will represent solar and windpower interests as well energy storage and transmission — two technologies that are critical to renewables’ growth.

Weeks later, Joe Biden will enter the White House with a goal to remove carbon from US electricity supplies by 2035. The association inherits strong connections through Ms Zichal: she said she had a “personal relationship” with the president-elect from her time serving in the Obama administration. Before that she was legislative director to then-senator John Kerry, who is soon to be Mr Biden’s climate tsar. 

“The wind is at our back. With the expectation that as the economy transitions to more climate-friendly technologies, we’re expecting to see renewable energy provide up to half the electricity domestically by 2030,” Ms Zichal told Energy Source. (It’s now about a fifth.)

Ms Zichal’s career reflects how clean energy discourse has shifted in the past decade. In 2011, as Barack Obama’s deputy assistant for energy and climate change, she said “we must focus on expanding cleaner sources of electricity, including renewables like wind and solar, as well as clean coal, natural gas, and nuclear power.” 

Coal has since vanished from the clean-energy conversation. Gas is embattled, as evidenced by the flak some climate activists gave Ms Zichal over her time on Cheniere’s board from 2014 to 2018. 

American Clean Power’s founding members include renewable energy companies such as Orsted as well as utilities such as Duke Energy, which still intends to add gas-fired power plants even as it doubles its renewables portfolio. 

Ms Zichal declined to comment on the outlook for gas. “We’re going to stay focused on clean power,” she said, adding that’s where her member companies “see the future and the opportunity.” (Gregory Meyer)

Data Drill

China is set to add fuel to the global offshore wind boom, one of the fastest growing corners of the renewables market, over the next five years.

The still nascent sector first took root in Europe, with the UK, Germany and Denmark leading the way. But with costs falling and Beijing ramping up its low-carbon ambitions, China is set to join the party.

Rystad, the energy consultancy, reckons China’s installed offshore wind capacity will rise fourfold to nearly 37GW by 2025. And with offshore wind farms sprouting up in other parts of Asia as well, especially in waters off Taiwan and Vietnam, installed capacity in Asia will nearly match that of Europe by 2025.

Column chart of Installed capacity, Gigawatts (GW) showing Offshore wind booming in Asia

Power Points

  • Extreme weather has driven a fivefold surge in solar power insurance premiums over the past two years.

  • Europe’s largest truckmakers have pledged to stop selling vehicles that produce emissions by 2040, a decade earlier than originally planned.

  • US renewables companies are lobbying for direct cash payments from the federal government instead of allocating tax credits to outside investors.

  • Are energy equities undergoing a “last hurrah” before the sector enters its inevitable twilight?

Endnote

Add Morgan Stanley’s analysts to the growing chorus turning bullish on beaten-down US oil and gas stocks as the global economy starts to emerge from the pandemic.

The bank noted that it had been a dismal decade for energy shares, which underperformed the market by 250 per cent because of disappointing returns, weak commodity prices and “poor capital allocation”.

However, the bank now says that “conditions are set for a sustained energy rally.”

What has changed? Morgan Stanley sees relatively robust global economic growth next year underpinning commodity prices. It also argues that consolidation and cost cutting this year in response to the oil rout has made the sector more financially disciplined and should help boost free cash flow, which investors have clamoured for from oil producers.

What about the energy transition? Analysts see it slowing oil demand growth in the coming years, although they do not expect global demand to peak until the 2030, and ultimately do not think it will derail a recovery next year.

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 Houston, Gregory Meyer in New York, and David Sheppard, Anjli Raval, Leslie Hook and Nathalie Thomas in London.



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Bond spreads collapse as investors rush into corporate debt

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The premium above super-safe US Treasuries that investors are demanding to buy corporate debt has dropped to its lowest level in more than a decade.

The collapse in the difference between yields — or spread — is a sign that investors are growing increasingly confident that recent rises in inflation will not hinder the booming economic recovery.

The spreads between US Treasury and corporate bond yields have tightened markedly this year, as investors gained confidence and clamoured to own even marginally higher yielding assets in a low return world.

That spread compression, which indicates the level of risk investors see in lending to companies compared to the US government, had come under pressure from the spectre of higher inflation from mid-April to May.

However, an increasing number of investors are coming around to the Fed’s mantra that price rises will prove transitory as the economy reopens after the pandemic, pushing measures of expected inflation lower.

“The Fed has been controlling the transitory narrative which has provided confidence to corporate bond investors,” said Adrian Miller, chief market strategist at Concise Capital Management. “After all, corporate bond investors are more focused on the expected strong growth path.”

Line chart of Spread on US corporate bonds, by rating (percentage points) showing Investors are demanding less yield to lend to US companies

Confidence in the economic recovery was further bolstered on Wednesday as Fed officials signalled a shift toward the eventual repeal of crisis policy measures, embracing a more optimistic outlook of America’s rebound. The more hawkish tone from Fed chair Jay Powell — including comments that “price stability is half of our mandate” at the Fed — has helped to mollify concerns that inflation could run out of control, forcing a more abrupt response from the central bank.

The spread between US Treasury yields and investment grade corporate bond yields fell 0.02 percentage points to 0.87 per cent on Wednesday, according to ICE BofA Indices, its lowest level since 2007, and was unchanged on Thursday. For lower rated — and therefore riskier — high-yield bonds, the spread fell 0.05 percentage points to 3.12 per cent, below a post-crisis low last set in October 2018. It widened modestly to 3.15 per cent on Thursday.

The slide in spreads has been buoyed by the central bank’s accommodative policies through the pandemic crisis as well as the federal government’s multitrillion-dollar pandemic aid package. Financial conditions in the US are close to their easiest on record, according to a popular index run by Goldman Sachs, which has spurred a wave of corporate borrowing by riskier junk-rated businesses.

Some 373 junk-rated companies have borrowed through the nearly $11tn US corporate debt market so far this year, including companies hard hit by the pandemic like American Airlines and cruise operator Carnival. Collectively the risky cohort has raised $277bn, a record pace and up 60 per cent from year ago levels, according to data provider Refinitiv.

Column chart of Annual proceeds from high-yield US corporate bond sales ($bn) showing Risky junk-rated US companies are issung debt at a record pace

However the fall in spreads and investors’ perception of risk has not been enough to outweigh an overall rise in yields, which have been jolted higher by the prospect of rising interest rates as investors adjusted to a quicker pace of policy tightening from the Fed.

Higher rated debt, which is safer but offers less of a spread to cushion investors against a jump in Treasury yields, tends to suffer more in high growth, rising interest rate environments. High-yield bonds on the other hand tend to benefit, with the booming economy making it less likely that companies will go bust.

“For the time being people are not at all fearing the price action of a move higher in yields,” said Andrzej Skiba, head of US credit at BlueBay Asset Management. “Companies are doing really well and we are seeing a meaningful recovery in earnings.”

Investment-grade bond yields have moved 0.3 percentage points higher to 2.08 per cent since the start of the year, compared with a decline of 0.27 percentage points to 3.97 per cent for high-yield bonds.

Bank of America analysts expect the two markets to keep coming closer together, projecting that investment-grade spreads will widen to 1.25 per cent and high-yield bond spreads will continue to decline to 3.00 per cent in the coming months.

However, while optimism about the US recovery abounds the continued zeal for lower-quality corporate debt has caused consternation in some quarters. Investors worry that precarious companies are being offered credit at interest rates that don’t account for the high levels of risk involved.

“It’s very important for us that the yield we receive on a high-yield bond offers an appropriate level of compensation for the credit risks of investing. When yields are as low as this, that naturally becomes harder to say,” said Rhys Davies, a high yield portfolio manager at Invesco. “It’s quite simple — the lower the yield on the high yield market, the more carefully investors need to navigate the market.”



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Global stocks slip and bonds weaken after Fed signals tighter policy

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Global stock markets dipped, European government bonds dropped and the dollar strengthened sharply after US central bank officials brought forward the anticipated timing of the Federal Reserve’s first post-pandemic interest rate rise.

The FTSE All-World index of developed and emerging market stocks, which hit a closing record on Monday, headed for its third session of losses on Thursday, falling 0.6 per cent.

The Federal Reserve said on Wednesday that most of its officials expected a rate rise in 2023, against earlier predictions of 2024, as the US economy recovered strongly from the pandemic and consumer price inflation hit an annual rate of 5 per cent in May.

Fed chair Jay Powell also said the world’s most influential central bank was “talking about talking about” reducing the Fed’s $120bn-a-month asset-buying programme that has boosted financial markets since March last year.

The announcement rattled the US Treasury market on Wednesday, as the prospect of higher interest rates on cash lowered expected returns from fixed interest securities such as bonds, with traders in Europe following those moves in the next session.

“It was a hawkish surprise,” said Keith Balmer, multi-asset portfolio manager at BMO Global Asset Management. “Markets now see the Fed as stepping in to control inflation earlier than expected,” he added, following previous comments from Powell that suggested price rises above the central bank’s long-term 2 per cent target would be temporary.

Line chart of FTSE All-World index  showing Global stocks dip from record high

The dollar index, which measures the greenback against trading partners’ currencies, jumped 0.7 per cent after gaining a similar amount on Wednesday as traders anticipated higher returns from holding the world’s reserve currency. The euro lost 0.5 per cent against the dollar to $1.193.

The yield on the benchmark 10-year Treasury note, which jumped 0.09 per cent on Wednesday evening to 1.58 per cent following the decision from the US central bank, moderated slightly in European trading hours to 1.558 per cent.

European bond yields, which move inversely to prices, raced higher as traders bet on other central banks following the Fed to rein in their crisis-era stimulus spending. The UK’s 10-year gilt yield rose 0.09 percentage points to 0.828 per cent. Germany’s equivalent Bund yield added 0.04 percentage points to minus 0.164 per cent.

Stock markets were less affected by the rate increase forecast as investors focused on the strength of the post-pandemic economic recovery and bought up shares in businesses expected to benefit from higher borrowing costs.

The Stoxx Europe 600 index, which rallied to an all-time high on Wednesday, fell 0.3 per cent on Thursday. Shares in European banks, which benefit from higher interest rates that enable lenders to make wider profit margins, gained 1.2 per cent.

The next US rate rise “will be happening at a time when the [global] economy is able to stand on its feet”, said Zehrid Osmani, manager of Martin Currie’s global portfolio trust.

Futures markets signalled the S&P 500 index would slip just 0.2 per cent at the New York opening bell after declining 0.5 per cent on Wednesday, while the top 100 stocks on the technology-focused Nasdaq Composite would lose 0.3 per cent.

Elsewhere in markets, the Norwegian krona rose 0.1 per cent against the euro to €0.984 despite the Norges Bank saying it was likely to raise interest rates in September. Some traders had expected an increase on Thursday.

Brent crude, the international oil benchmark, rose 0.1 per cent to $74.48 a barrel.



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Hawkish Federal Reserve forecasts jolt Treasury market

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US equities slid and Treasury yields surged after policymakers at the Federal Reserve signalled that they expected to lift interest rates in 2023, a year earlier than previously thought.

The benchmark S&P 500 fell 0.6 per cent, led by a decline in the shares of technology companies including Oracle, Microsoft and Facebook. The Nasdaq Composite was also down 0.6 per cent.

The equity market decline accompanied a sell-off in the $21tn Treasury market, where the yield on the benchmark 10-year note rose 0.06 per cent to 1.56 per cent.

Among shorter-dated government bonds most sensitive to interest rate policy, there were even larger moves. The yield on the five-year note climbed 0.09 percentage points to 0.88 per cent, while the yield on the two-year note briefly hit its highest level in a year at 0.19 per cent.

“Just as the market was getting comfortable with a patient Fed and inflation considerably above target, the dot plot has shifted,” said Seema Shah, the chief strategist of Principal Global Investors, referring to the graph showing Fed officials’ interest rate predictions.

“Now it will be up to [Fed chair Jay] Powell and other Fed speakers to once again reassure markets that tightening in 2023 doesn’t need to be disruptive.”

The equity market rally over the past year has been in part predicated on rock-bottom interest rates, which the Fed has anchored near zero since the crisis began in March last year.

While policymakers at the US central bank showed that they could raise rates sooner than previously thought, they did not yet signal changes to the Fed’s $120bn-a-month asset buying programme, which investors are starting to expect will be tapered soon.

But markets have worried that signs of higher inflation, which Fed policymakers acknowledged in their economic projections published on Wednesday, could force the central bank’s hand.

“Given that the only takeaways from the Fed update involved higher rates, it follows intuitively that Treasuries are trading lower,” said Ian Lyngen, the head US interest rate strategist at BMO Capital Markets.

Ian Shepherdson, the chief economist at Pantheon Macroeconomics, added that the forecast for higher rates in 2023 meant that members of the Fed’s policy-setting committee “now are ready to talk tapering, so chair Powell is not going to be able to repeat his March/April stonewalling . . . We expect him just to acknowledge that the discussion is under way, but that a firm decision is a way off.”

The US dollar index climbed 0.4 per cent along with the uptick in Treasury yields. The pound fell 0.4 per cent against the dollar, while the euro slipped 0.7 per cent to $1.20.

European stocks finished at new records before the release of the Fed decision. The Stoxx Europe closed up 0.2 per cent for another all-time peak, the region-wide benchmark’s ninth session of back-to-back rises.

Frankfurt’s Xetra Dax rose 0.1 per cent, while both the CAC 40 in Paris and London’s FTSE 100 climbed 0.2 per cent.

Additional reporting by Siddharth Venkataramakrishnan in London

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday



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