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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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US stocks rise as investors weigh strong earnings against spread of Delta variant

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Equities updates

Stocks on Wall Street edged higher on Tuesday as strong company earnings and economic data offset worries about the spread of the Delta coronavirus variant and fears over another regulatory clampdown from Beijing.

The blue-chip S&P 500 was up 0.7 per cent by mid-afternoon in New York, its best performance in more than a week. The tech-focused Nasdaq Composite climbed 0.3 per cent.

Investor sentiment was lifted by June data for US factory orders, which typically feed into estimates of gross domestic product. New orders for goods rose 1.5 per cent on the month before, well above the consensus estimate of 1 per cent.

In Europe, another wave of strong earnings results helped propel the continent’s stocks to a fresh record. The region-wide Stoxx 600 index rose 0.2 per cent after Paris-based bank Société Générale and London-listed lender Standard Chartered reported profits that beat analysts’ expectations.

London’s energy-leaning FTSE 100 index rose 0.4 per cent, aided by oil major BP, which rallied after announcing a $1.4bn share buyback programme and an increase in its dividend.

Line chart of Stoxx Europe 600 index showing Strong earnings help propel European shares to record high

On both sides of the Atlantic, earnings have been strong. More than halfway through the US reporting season, 86 per cent of companies have topped expectations on profits, while in Europe 55 per cent have outperformed so far, according to data from FactSet and Morgan Stanley.

“The continued healthy earnings outlook is a key driver of our view that the equity bull market remains on solid footing,” analysts at UBS Wealth Management wrote in a note. Such a growth rate is, however, “flattered by depressed levels in the year-ago period,” they said. “But the results are still impressive compared with pre-pandemic earnings.”

Oil slipped in a choppy session as the global benchmark Brent crude fell 0.7 per cent to $72.37 a barrel on fears that the spread of the Delta variant could depress demand for fuel.

The seven-day rolling average for new coronavirus cases in the US, the world’s largest economy, have hit nearly 85,000 from about 13,000 a month ago, according to the Financial Times coronavirus tracker. Similar trends have taken hold in other countries as well as authorities race to vaccinate larger swaths of their populations.

A log-scale line chart of seven-day rolling average of newcases showing that US coronavirus case counts rise from just over 10,000 in mid-June to nearly 100,000 by early August

In Asia, investors were again focused on regulation after Chinese state media criticised the online video gaming industry, calling it “spiritual opium”. Shares in Tencent, the Chinese internet group, fell 6 per cent before announcing it would implement new restrictions for minors on its gaming platform. NetEase and XD, two rivals, dropped 7.8 per cent and 8.1 per cent, respectively.

The Hang Seng Tech index, which includes Tencent and its peers, dropped 1.5 per cent, lagging behind the wider Hong Kong bourse, which slipped 0.2 per cent. The CSI 300 index of large Shanghai- and Shenzhen-listed stocks was flat.

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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Why it might be good for China if foreign investors are wary

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Chinese economy updates

The writer is a finance professor at Peking University and a senior fellow at the Carnegie-Tsinghua Center for Global Policy

The chaos in Chinese stock markets last week was exacerbated by foreign investors selling Chinese shares, leaving Beijing’s regulators scrambling to regain their confidence while they tried to stabilise domestic markets. But if foreign funds become more cautious about investing in Chinese stocks, this may in fact be a good thing for China.

In the past two years, inflows into China have soared by more than $30bn a month. This is partly because of a $10bn-a-month increase in the country’s monthly trade surplus and a $20bn-a-month rise in financial inflows. The trend is expected to continue. Although Beijing has an excess of domestic savings, it has opened up its financial markets in recent years to unfettered foreign inflows. This is mainly to gain international prestige for those markets and to promote global use of the renminbi.

But there is a price for this prestige. As long as it refuses to reimpose capital controls — something that would undermine many years of gradual opening up — Beijing can only adjust to these inflows in three ways. Each brings its own cost that is magnified as foreign inflows increase.

One way is to allow rising foreign demand for the renminbi to push up its value. The problem, of course, is that this would undermine China’s export sector and would encourage further inflows, which would in turn push China’s huge trade surplus into deficit. If this happened, China would have to reduce the total amount of stuff it produces (and so reduce gross domestic product growth).

The second way is for China to intervene to stabilise the renminbi’s value. During the past four years China’s currency intervention has occurred not directly through the People’s Bank of China but indirectly through the state banks. They have accumulated more than $1tn of net foreign assets, mostly in the past two years.

Huge currency intervention, however, is incompatible with domestic monetary control because China must create the renminbi with which it purchases foreign currency. The consequence, as the PBoC has already warned several times this year, would be a too-rapid expansion of domestic credit and the worsening of domestic asset bubbles. 

Many readers will recognise that these are simply versions of the central bank trilemma: if China wants open capital markets, it must give up control either of the currency or of the domestic money supply. There is, however, a third way Beijing can react to these inflows, and that is by encouraging Chinese to invest more abroad, so that net inflows are reduced by higher outflows.

And this is exactly what the regulators have been trying to do. Since October of last year they have implemented a series of policies to encourage Chinese to invest more abroad, not just institutional investors and businesses but also households.

But even if these policies were successful (and so far they haven’t been), this would bring its own set of risks. In this case, foreign institutional investors bringing hot money into liquid Chinese securities are balanced by various Chinese entities investing abroad in a variety of assets for a range of purposes.

This would leave China with a classic developing-country problem: a mismatched international balance sheet. This raises the risk that foreign investors in China could suddenly exit at a time when Chinese investors are unwilling — or unable — to repatriate their foreign investments quickly enough. We’ve seen this many times before: a rickety financial system held together by the moral hazard of state support is forced to adjust to a surge in hot-money inflows, but cannot adjust quickly enough when these turn into outflows.

As long as Beijing wants to maintain open capital markets, it can only respond to inflows with some combination of the three: a disruptive appreciation in the currency, a too-rapid rise in domestic money and credit, or a risky international balance sheet. There are no other options.

That is why the current stock market turmoil may be a blessing in disguise. To the extent that it makes foreign investors more cautious about rushing into Chinese securities, it will reduce foreign hot-money inflows and so relieve pressure on the financial authorities to choose among these three bad options.

Until it substantially cleans up and transforms its financial system, in other words, China’s regulators should be more worried by too much foreign buying of its stocks and bonds than by too little.



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Square to acquire Afterpay for $29bn as ‘buy now, pay later’ booms

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Square Inc updates

Payments company Square has reached a deal to acquire Australian “buy now, pay later” provider Afterpay in a $29bn all-stock transaction that would be the largest takeover in Australian history.

Square, whose chief executive Jack Dorsey is also Twitter’s CEO, is offering Afterpay shareholders 0.375 shares of Square stock for every share they own — a 30 per cent premium based on the most recent closing prices for both companies.

Melbourne-based Afterpay allows retailers to offer customers the option of paying for products in four instalments without interest if the payments are made on time.

The deal’s size would exceed the record set by Unibail-Rodamco’s takeover of shopping centre group Westfield at an enterprise value of $24.7bn in 2017.

The transaction, which was announced in a joint statement from the companies on Monday, is expected to be completed in the first quarter of 2022.

Afterpay said its 16m users regard the service as a more responsible way to borrow than using a credit card. Merchants pay Afterpay a fixed fee, plus a percentage of each order.

The deal underscored the huge appetite for buy now, pay later providers, which have boomed during the coronavirus pandemic.

“Square and Afterpay have a shared purpose,” said Dorsey. “We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles.”

Adoption of buy now, pay later services had tripled by early this year compared with pre-pandemic volumes, according to data from Adobe Analytics, and were particularly popular with younger consumers.

Rivalling Afterpay is Sweden’s Klarna, which doubled its valuation in three months to $45.6bn, after receiving investment from SoftBank’s Vision Fund 2 in June. PayPal offers its own service, Pay in 4, while it was reported last month that Apple was looking to partner with Goldman Sachs to offer buy now, pay later facilities to Apple Pay users.

Steven Ng, a portfolio manager at Afterpay investor Ophir Asset Management, said the deal validated the buy, now pay later business model and could be the catalyst for mergers activity in the sector. “Given the tie-up with Square, it could kick off a round of consolidation with other payment providers where buy now, pay later becomes another payment method offered to their customers,” he said.

Over the past two years Afterpay has expanded rapidly in the US and Europe, which now account for more than three-quarters of its 16.3m active customers and a third of merchants on its platform. Afterpay said its services are used by more than 100,000 merchants across the US, Australia, Canada and New Zealand as well as in the UK, France, Italy and Spain, where it is known as Clearpay.

Square intends to offer the facility to its merchants and users of its Cash App, a fast money transfer service popular with small businesses and a competitor to PayPal’s Venmo.

“It’s an expensive purchase, but the buy now, pay later market is growing very rapidly and it makes a lot of sense for Square to have a solid stake in it,” said retail analyst Neil Saunders.

“For some, especially younger generations, buy now, pay later is a favoured form of credit. Afterpay has already had some success with its US expansion, but Square will be able to accelerate that by integrating it into its platforms and payment infrastructure — that’s probably one of the justifications for the relatively toppy price tag of the deal.”

Square handled $42.8bn in payments in the second quarter, with Cash App transactions making up about 10 per cent, according to figures released on Sunday. The company posted a $204m profit on revenues of $4.7bn.

Once the acquisition is completed, Afterpay shareholders will own about 18.5 per cent of Square, the companies said. The deal has been approved by both companies’ boards of directors but will also need to be backed by Afterpay shareholders.

As part of the deal, Square will establish a secondary listing on the Australian Securities Exchange to provide Afterpay shareholders with an option to receive Square shares listed on the New York Stock Exchange or the ASX. Square may elect to pay 1 per cent of the purchase price in cash.

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