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Trump’s grandstanding in the Arctic

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One thing to start: Joe Biden’s energy team is finally taking shape with the imminent appointments of Gina McCarthy and Jennifer Granholm to senior roles within the administration. We took a look at what the picks mean.

On to today’s newsletter. The prospect of the Trump administration selling drilling leases in a pristine Arctic wildlife refuge has generated headline upon headline across the globe in recent months. But what are the prospects of it actually happening?

We teamed up with our colleagues at Moral Money to dig into the question. Our discussion forms the core of today’s newsletter.

Thanks for reading. You can sign up for the newsletter here. — Myles

Who wants to drill in the Arctic anyway?

Once the US presidential race was called for Joe Biden, the world has watched to see what a lame duck Trump presidency would entail. Lots of golf? Executive orders? Pardons?

Arctic drilling may not have been top of mind, but in his final weeks in office, Mr Trump has moved to allow just that — with the interior department moving to auction off leases in the Arctic National Wildlife Refuge.

To tackle this very important topic, this week we’re doing something new. We’re hashing things out with our Moral Money’s Billy Nauman to give you a full picture of what this means for often intersecting worlds of energy and sustainability. You can hear more from our Moral Money colleagues by subscribing to their newsletter here. And tell us what you think of this new format at energy.source@ft.com.

Derek (ES): The Trump administration spent almost four years trashing rules designed to protect the environment, from loosening controls on oil and gas companies’ methane pollution, to allowing mercury emissions from power plants, to opening up national forests to drillers. It eased Obama-era fuel-economy and emissions standards for passenger cars. The day after President Trump lost the election, the US formally left the Paris climate pact.

But let’s be clear about Mr Trump’s hopes to open the Arctic National Wildlife Refuge to drillers. Yes, he plans to sell leases just days before President-elect Biden enters the White House. But this is pure symbolism. Exploring North America’s Arctic is expensive and risky. Shell, the last big major to launch a big Arctic campaign, blew more than $7bn before abandoning the idea in 2015. Forget climate activists, the market would punish any company willing to plough billions into such costly adventurism. Plus, there’s enough oil in Texas — available without much controversy, producible quickly and at relatively low cost — to keep producers occupied. The world is not clamouring for Arctic oil.

Moral Money colleagues, what do you think? Is Mr Trump just toying the Arctic stuff to own the libs one last time? 

Billy (MM): You nailed a couple important themes here, Derek. “Owning the libs” often appears to be Republicans’ sole aim these days. But Trump is not alone in creating Arctic policies that amount to little more than symbolism. Companies that claim to care about global warming are getting in on the action as well. 

After years of activists and investors ratcheting up pressure on banks that lend to fossil fuel companies, we’ve started to see a wave of new climate policies rolling in from the finance sector. One of the most common pillars of these policies is — you guessed it — a pledge to stop funding fossil fuel projects in the Arctic. Goldman Sachs, JPMorgan Chase, Wells Fargo, Citi, Bank of America and Morgan Stanley have all jumped on this bandwagon.

The zeitgeist is certainly changing in finance. Banks are finally waking up to the risk that fossil fuel companies will be forced to leave significant portions of their assets in the ground. The massive PR accompanying the announcements also indicates that they are still desperate to rehab their images after the last financial crisis, and see climate consciousness as a good way to do that.

But since no one wants to touch the Arctic anyway, as you point out, it is difficult to get too excited about these commitments. If Arctic oil became an attractive investment again, however, it would be meaningful if these banks actually stuck to their guns. (I’m sceptical that they all would). Doing it now is pure symbolism. 

At the end of the day, a banker’s job is to assess risk — and investing in Arctic oil exploration is just not a smart bet. They don’t deserve a pat on the back and a green star just for doing their jobs. 

Myles (ES): That is exactly the crux of it Billy: it’s easy to take a stand against something that isn’t going to happen. 

As Derek points out, the newfound ability to exploit America’s abundant shale resources has largely put paid to the days where plucky wildcatters would set out on high risk, high reward missions to unearth big oil reserves in far flung places. But there is another reason why drilling in ANWR is not a realistic prospect: a septuagenarian from Scranton named Joe Biden. 

Even if some enterprising upstart buys up leases in ANWR, despite the odds stacked against its success, the man who takes up residence at 1600 Pennsylvania Avenue next month will do all he can to impede the project. While Mr Biden cannot easily cancel the lease sales, he can slow the process to a snail’s pace, driving up costs to make the project even less palatable. 

Mr Biden has a range of tools at his disposal: an executive order to stop further development of ANWR pending a lengthy review; reallocating permitting staff away from Alaska; or he could go the whole hog and declare parts of the Alaska coastline a national monument, rendering it off limits to drilling. 

Rushing through lease sales may be a symbolic gesture by Donald Trump. Stopping the project in its tracks, by hook or crook, would be an even greater symbolic gesture for his successor.

Data Drill

Global capital expenditure on renewables took a hit in 2020 as the pandemic disrupted new projects, but spending is set to recover to pre-crisis levels next year, predicts IHS Markit, a consultancy.

Global spending on renewables development (not counting hydro power) is set to fall 7 per cent this year to around $235bn. That will bounce back to around $255bn next year, IHS Markit expects, with spending levels then staying relatively flat through 2025, bringing total expenditure to $1.3tn between 2021 and 2025.

Stalled spending growth may sound counterintuitive given the boom in new wind, solar and other renewables capacity. IHS Markit points out that falling costs mean renewables developers will get a lot more bang for their buck in the coming years. Solar costs are expected to be about 40 per cent lower than 2017 levels by 2025. Onshore wind projects will be about 20 per cent cheaper.

Column chart of $bn showing Global renewables spending to bounce back from crisis hit

Power Points

  • Oil demand is set to rebound more slowly than anticipated in 2021 as the aviation sector takes longer to recover.

  • The US Federal Reserve has joined a consortium of central bankers supporting the Paris climate goals as it becomes more outspoken on the risk climate change poses to the global economy.

  • BP’s former finance chief Brian Gilvary is set to take a senior position at Ineos, ending speculation he could become Rio Tinto’s next chief executive.

  • Australia has warned China that a ban on its coal would breach World Trade Organization rules and harm both countries.

Endnote

The Trump administration’s latest effort to lock in a more industry-friendly regulatory regime in its waning days saw the US Securities Exchange Commission pass watered down transparency rules for oil and mining companies on Wednesday.

The Dodd-Frank legislation, passed in the wake of the financial crisis in 2010, included an anti-corruption provision, known as section 1504, to compel US-listed companies to report project-level payments to foreign governments. The first iteration of that rule was thrown out by the courts, and a second version was overturned by the Republican-controlled Congress in 2017.

The Trump administration yesterday passed an updated rule that only requires US-listed companies to report payments to foreign governments at the national level, not the much more detailed project level.

It was a big win for the US oil and gas industry, which had argued that detailed reporting put it at a competitive disadvantage to international competitors not subject to the disclosures. Resource companies listed in Europe and Canada are subject to detailed project-level reporting in those jurisdictions, which ironically modelled their own rules on the original Dodd-Frank legislation.

For all the twists and turns, it’s not clear how much the Trump administration’s efforts will matter in the years to come. Ken Rivlin, a partner Allen & Overy, argues that investor pressure around environmental, social and governance standards is pushing corporate America towards more disclosure — not less. And the Biden administration is likely to champion tighter reporting standards once it comes into office.

“Big picture I see most companies ultimately needing to disclose these types of activities down the road,” said Rivlin.

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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European stocks stabilise ahead of US inflation data

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European equities stabilised on Wednesday after a US central banker soothed concerns about inflation and an eventual tightening of monetary policy that had driven global stock markets lower in the previous session.

The Stoxx 600 index gained 0.4 per cent and the UK’s FTSE 100 rose 0.6 per cent. Asian bourses mostly dropped, with Japan’s Nikkei 225 and South Korea’s Kospi 200 each losing more than 1.5 per cent for the second consecutive session.

The yield on the 10-year US Treasury bond, which has dropped in price this year as traders anticipated higher inflation that erodes the returns from the fixed interest securities, added 0.01 percentage points to 1.613 per cent.

Global markets had ended Tuesday in the red as concerns mounted that US inflation data released later on Wednesday could pressure the Federal Reserve to start reducing its $120bn of monthly bond purchases that have boosted asset prices throughout the Covid-19 pandemic.

Analysts expect headline consumer prices in the US to have risen 3.6 per cent in April over the same month last year, which would be the biggest increase since 2011. Core CPI is expected to advance 2.3 per cent. Data on Tuesday also showed Chinese factory gate prices rose at their strongest level in three years last month.

Late on Tuesday, however, Fed governor Lael Brainard stepped in to urge a “patient” approach that looks through price rises as economies emerge from lockdown restrictions.

The world’s most powerful central bank has regularly repeated that it will wait for several months or more of persistent inflation before withdrawing its monetary support programmes, which have been followed by most other major global rate setters since last March. Investors are increasingly speculating about when the Fed will step on the brake pedal.

“Markets are intensely focused on inflation because if it really does accelerate into this time near year, that will force central banks into removing accommodation,” said David Stubbs, global head of market strategy at JPMorgan Private Bank.

Stubbs added that investors should look more closely at the month-by-month inflation figure instead of the comparison with April last year, which was “distorted” by pandemic effects such as the price of international oil benchmark Brent crude falling briefly below zero. Brent on Wednesday gained 0.5 per cent to $69.06 a barrel.

“If you get two or three back-to-back inflation reports that are very high and above expectations” that would show “we are later into the economic recovery cycle,” said Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management.

He added that the pandemic had sped up deflationary forces that would moderate cost pressures over time, such as the growth of online shopping that economists believe constrains retailers’ abilities to raise prices. Widespread working from home would also encourage more parents and carers into full-time work, he said, “increasing the labour supply” and keeping a lid on wage growth.

In currency markets on Wednesday, sterling was flat against the dollar, purchasing $1.141. The euro was also steady at $1.214. The dollar index, which measures the greenback against a group of trading partners’ currencies, dipped 0.1 per cent to stay around its lowest since late February.



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Potash/grains: prices out of sync with fundamentals

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The rising tide of commodity prices is lifting the ricketiest of boats. High prices for fertiliser mean that heavily indebted potash producer K+S was able to report an unusually strong first quarter on Tuesday. Some €60m has been added to the German group’s full year ebitda expectations to reach €600m. Its share price has gone back above pre-pandemic levels.

Demand for agricultural commodities has pushed prices for corn and soyabeans from decade lows to near decade highs in less than a year. Chinese grain consumption is at a record as the country rebuilds its pork herd. Meanwhile, the slowest Brazilian soyabean harvest in a decade, according to S&P Global, has led to supply disruptions. Fertiliser prices have risen sharply as a result.

But commodity traders have positioned themselves for the rally to continue for some time to come. Record speculative positions in agricultural commodities appear out of sync even with a bullish supply and demand outlook. US commodity traders have not held so much corn since at least 1994. There are $48bn worth of net speculative long positions in agricultural commodities, according to Saxo Bank.

Agricultural suppliers may continue to benefit in the short term but fundamentals for fertiliser producers suggest high product prices cannot last long. The debt overhang at K+S, almost eight times forward ebitda, has swelled in recent years after hefty capacity additions in 2017. Meanwhile, utilisation rates for potash producers are expected to fall towards 75 per cent over the next five years as new supply arrives, partly from Russia. 

Yet K+S’s debt swollen enterprise value is still nine times the most bullish analyst’s ebitda estimate, and 12 times consensus, this year. Both are a substantial premium to its North American rivals Mosaic and Nutrien, and OCI of the Netherlands, even after their own share prices have rallied.

Any further price rises in agricultural commodities will depend on the success of harvests being planted in the US and Europe. Beyond restocking there is little that supports sustained demand.

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Amazon sets records in $18.5bn bond issue

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Amazon set a record in the corporate bond market on Monday, getting closer to the level of interest paid by the US government than any US company has previously managed in a fundraising. 

The ecommerce group raised $18.5bn of debt across bonds of eight different maturities, ranging from two to 40 years, according to people familiar with the deal. On its $1bn two-year bond, it paid just 0.1 percentage points more than the yield on equivalent US Treasury debt, a record according to data from Refinitiv.

The additional yield above Treasuries paid by companies, or spread, is an indication of investors’ perception of the risk of lending to a company versus the supposedly risk-free rate on US government debt.

Amazon, one of the pandemic’s runaway winners, last week posted its second consecutive quarter of $100bn-plus revenue and said its net income tripled in the first quarter from the same period a year ago, to $8.1bn.

The company had $33.8bn in cash and cash equivalents on hand at the end of March, according to a recent filing, a high for the period.

“They don’t need the cash but money is cheap,” said Monica Erickson, head of the investment-grade corporate team at DoubleLine Capital in Los Angeles.

Spreads have fallen dramatically since the Federal Reserve stepped in to shore up the corporate bond market in the face of a severe sell-off caused by the pandemic, and now average levels below those from before coronavirus struck.

That means it is a very attractive time for companies to borrow cash from investors, even if they do not have an urgent need to.

Amazon also set a record for the lowest spread on a 20-year corporate bond, 0.7 percentage points, breaking through Alphabet’s borrowing cost record from last year, according to Refinitiv data. It also matched the 0.2 percentage point spread first paid by Apple for a three-year bond in 2013 and fell just shy of the 0.47 percentage points paid by Procter & Gamble for a 10-year bond last year.

Investor orders for Amazon’s fundraising fell just short of $50bn, according to the people, in a sign of the rampant demand from investors for US corporate debt, even as rising interest rates have eroded the value of higher-quality fixed-rate bonds.

Highly rated US corporate bonds still offer interest rates above much of the rest of the world.

Amazon’s two-year bond also carried a sustainability label that has become increasingly attractive to investors. The company said the money would be used to fund projects in five areas, including renewable energy, clean transport and sustainable housing. 

It listed a number of other potential uses for the rest of the debt including buying back stock, acquisitions and capital expenditure. 

In a recent investor call, Brian Olsavsky, chief financial officer, said the company would be “investing heavily” in the “middle mile” of delivery, which includes air cargo and road haulage, on top of expanding its “last mile” network of vans and home delivery drivers.



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