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A Democratic Senate provides a surge for Biden’s energy agenda

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Energy might seem a lesser priority to US readers amid the chaos in Washington over the past 24 hours, as protesters sent the Capitol into lockdown.

But in spite of that, two big events in the past few days told us a lot about the direction of American energy and climate policy in 2021 — and they dominate our first newsletter of the new year.

First was the Senate run-off elections in Georgia, which delivered Democratic control of the upper chamber. What does this mean for Joe Biden’s energy plan? Read on.

Our second main note is on Alaska, where a controversial licensing round for drilling in protected wilderness ended up as a farce. We weigh in on what this says about American energy and its future.

Welcome back to Energy Source. Happy New Year to all our readers!

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

What the Georgia results mean for energy

Amid yesterday’s chaos on Capitol Hill, Democrat Jon Ossoff’s victory was called in Georgia’s run-off election, making it a sweep for the Democrats in the state and securing the party’s control of Congress in a major boost to President-elect Joe Biden’s plans for a clean energy revolution.

The win opens new avenues to pass green spending and shape legislation, but a 50-50 Senate — with Vice-president-elect Kamala Harris tilting the advantage to the Democrats — and a bitterly partisan Capitol Hill means Mr Biden’s $2tn climate ambitions will still likely have to be tempered.

Nevertheless, far more green spending can now be expected with Democrats controlling the floors of the Senate and House than if Republicans had managed to retain a majority in the Senate.

Mr Biden has said that he saw December’s $900bn omnibus stimulus bill as a “down payment” on the recovery and wants more spending in his first days of office to propel the economy out of the Covid crisis. The Democrats’ pair of victories in Georgia makes bigger sums far more likely.

Kevin Book, head of research at Clearview Energy Partners in Washington DC, expects a fresh stimulus package to be in the “triple digit billions”, rather than “double digit billions” had Republicans held on to the Senate.

Like December’s omnibus bill, that could funnel significant additional spending to renewables, clean tech research and development, energy storage, electric vehicles as well as other aspects of Biden’s green agenda.

At the same time, Mr Book says that garnering the 60 votes needed to pass such legislation means incentives for carbon capture and storage, which appeal to red state senators, will also likely be included.

Analysts at Capital Alpha Partners also point to the Democrats’ ability to use so-called “budget reconciliation” rules as a critical avenue for new green spending. The rules allow for passage of spending with a simple majority, as long as it is offset by new revenue such as tax hikes.

Capital Alpha argues a prospective infrastructure bill, a longtime Democratic priority, could give the party an opportunity to “bundle in as much of their clean energy agenda as possible” using budget reconciliation rules to fend off any Republican veto threat.

Manchin in the middle

The narrowly divided Senate will give Senator Joe Manchin, a Democrat from West Virginia who is set to take over the Committee on Energy and Natural Resources, and a small group of centrist lawmakers, outsized influence to shape legislation.

While this group will probably support some increased spending on renewables and clean energy, they will hem in Mr Biden’s green ambitions, especially where they directly attack the fossil fuel sector, such as rolling back oil and gas tax benefits, or when they feel exposed to attacks of supporting the Green New Deal, argues Mr Book.

With a 50-50 split, Democrats will also find it difficult to overcome the 60 vote threshold needed to pass landmark climate legislation in Mr Biden’s first term, such as implementing a national carbon tax or a national clean energy standard, which could enshrine Mr Biden’s ambitions for a carbon-free electricity system by 2035.

The Democratic wins in Georgia put the spotlight on Congress, but much of the action on energy and climate will still come through Mr Biden’s ability to wield presidential power in the regulatory and foreign policy arenas.

Mr Biden has put together an executive branch, including domestic and international climate tsars, that has won plaudits from progressives and points to an ambitious agenda from the White House.

The incoming Biden team has “built an apparatus for an executive led climate policy,” says Mr Book, and will see the Senate majority as “nice to have”. (Justin Jacobs)

Arctic drilling auction fails to drum up interest

We have been arguing in this newsletter for months that despite the Trump administration’s efforts to open the Arctic National Wildlife Reserve to drilling, companies would not be rushing to take part.

And sure enough, yesterday’s sale of leases in the region came up dry. Just three groups — one of which was an Alaskan state agency — put in bids, raising a grand total of $14.4m. (That is a far cry from the $2.2bn the administration expected to generate from this and a later sale).

So what went wrong? And what does the whole farce say about the state of US oil exploration?

The embarrassing lack of bids is the result of a “perfect storm” of events that put off prospective bidders, Carl Tobias, a law professor at the University of Richmond, told ES.

  1. Unnecessary risk: First there is a lack of appetite among producers — even before they slashed capital expenditure in the wake of last year’s crash — for high risk, high reward exploration projects in far flung places. The shale revolution has already provided companies with plenty of access to oil.

  2. Biden: Then, there is the imminent arrival of Joe Biden, who has voiced explicit opposition to the project (and the oil industry more broadly). The president-elect said 15 years ago that “preserving what’s special about Alaska’s wilderness” was one of his top priorities. Analysts reckon he will work hard to delay drilling projects and could drive up costs to the point that they are totally unviable.

  3. A bad look: There is the public relations minefield that Arctic drilling has become — especially in an era where investors are demanding that oil companies burnish their environmental credentials. As Prof Tobias put it:

    “Some entities, like BP, have signalled that they will end dependence on oil, others may have realised that drilling in ANWR will be too expensive and complicated, given Biden’s views and considerable strong public opposition, and perhaps the threat of much litigation challenging the leases.”

  4. Peak Oil: Constantly looming over the industry is the notion that demand for crude may soon begin to slide. There is no use pumping money into long-term projects — and Alaskan exploration is expensive — that the market may not need.

“These ideas alone, but especially together, seem like a perfect storm for companies that might have entertained the idea of bidding,” said Prof Tobias.

The lacklustre auction stands in contrast to the days of $100 oil when companies beat a path to the Arctic. The heydays of frontier oil projects have passed. (Myles McCormick)

Data Drill

Line chart of Net imports, million barrels a day* showing US ends 2020 a net oil exporter

It was a rough year for proponents of “American energy dominance”, but they had cause for optimism as 2020 drew to a close.

After spending decades becoming a net exporter of energy — a status it achieved in 2019 — imports outweighed exports for much of last year as the crash sent the industry into a tailspin.

But for now at least, the country has regained its net exporter mantle. It shipped out an average 1.6m barrels more than it brought in the final four weeks of 2020.

Power Points

  • Opec’s extended meeting this week ended with Saudi Arabia pledging to slash an extra 1m barrels a day of oil output in the coming months, even as Russia moves to increase production.

  • Defaults by US oil and gas producers are set to outstrip all other sectors again in 2021.

  • Mexico’s state oil company Pemex is running out of quick fixes to cover debt payments.

  • Trafigura has announced its first emissions reduction target as pressure to take action on climate change spreads to the commodity trading industry.

Endnote

After a bruising 2020, America’s shale producers were hoping for a little luck going into the new year. Saudi Arabia delivered at this week’s Opec+ meeting with a surprise 1m barrel a day supply cut, billed by the Saudi energy minister as a “gift” to the world’s crude producers.

The move sent US oil prices above $50 a barrel for the first time since last February and has many analysts arguing it could be a catalyst to keep prices creeping higher.

It won’t fix much of what ails the US oil sector. Investors still want to see a strategic shift that can deliver returns and deal with environmental, social and governance pressures. The incoming Biden administration will heap new regulations on oil and gas producers. And the Covid-19 crisis is far from over.

Yet a few dollars goes a long way in the shale patch, especially with prices teetering around the break-even point.

“Even a fleeting window of $50-55 a barrel WTI prices could be enough to jump start the battered sector’s recovery,” says IHS Markit analyst Karim Fawaz.

“Saudi Arabia’s unilateral output cut has been described as a gift to the oil industry,” Paul Horsnell from Standard Chartered wrote in a research note. “We think that the gift will be particularly gratefully received in Texas.” (Justin Jacobs)

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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A blueprint for central bank digital currencies

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Britain’s choice of world war two codebreaker Alan Turing to feature on its new plastic £50 note is ironically apt, and for several reasons. His work on cryptography speaks to the new front in monetary debates — how best to protect personal data in an age of digital payments. At the same time, the discrimination the war hero faced for his sexuality shows why privacy is important, including from the government.

In an interview with the Financial Times this week, European Central Bank executive Fabio Panetta said that a digital euro would protect consumer privacy — the public’s greatest concern over a central bank digital currency, according to a consultation by the ECB. Referring to Facebook’s attempt to launch the Libra stablecoin, Panetta warned that if central banks did not provide an alternative they would cede the ground to Big Tech. Companies could then use their dominant market position to set privacy standards.

Central bank digital currencies, however, raise questions about how to protect data from the state. If CBDCs became the dominant money then central banks could have vast data repositories of nearly every transaction in an economy. The need to clamp down on illegal money laundering would mean central banks, just like commercial banks today, would not allow individuals to hold their money anonymously — linking these transactions, however compromising, to individuals.

That might be acceptable in authoritarian regimes like China, where a digital currency project is moving ahead at pace. In democracies it is not. For this reason the Bank for International Settlements is right to call for the preservation of a two-tier financial system in its annual economic report. The so-called central bankers’ central bank advocates an account-based design with regulated private banks dealing with the public and the central bank maintaining digital currencies to make the payment system more efficient. It calls for digital identities tied to these accounts — fighting identity fraud as well as money laundering.

This arms-length structure would preserve privacy — since the state could access records only once a criminal investigation begins — and allow the private and public sector to do what they do best. The BIS argues the central bank coins could work as the plumbing of the system while banks and others could innovate and have responsibility for keeping data secure. Alternative token-based designs for a digital currency could preserve anonymity but facilitate crime.

One such token in the private sector, bitcoin, is the favoured means of payment for hackers’ ransom demands, as well as for some of those avoiding tax; this week the South Korean government seized millions of dollars’ worth of cryptocurrency from 12,000 people accused of tax evasion. Monero, a cryptocurrency that promises even more privacy than the pseudonymous bitcoin, has started to become the choice of many criminals. Cash has the same problem: at one point investigators concluded 90 per cent of £50 notes were in the hands of organised crime.

A two-tier financial system means banks could, as they do at present, have responsibility for checking identities and keeping up with “know your client” rules. While state-run identity schemes such as India’s Aadhar can be used to make sure digital currencies are going to the right place, there are valid ideological questions about government-run ID schemes. The BIS blueprint is a good start for central banks considering digital currencies, but more radical steps such as handing more personal data to the central banks need more widespread consultation and support.



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Pakistan’s Gwadar loses lustre as Saudis shift $10bn deal to Karachi

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Saudi Arabia has decided to shift a proposed $10bn oil refinery to Karachi from Gwadar, the centre stage of the Belt and Road Initiative in Pakistan, further supporting the impression that the port city is losing its importance as a mega-investment hub.

On June 2, Tabish Gauhar, the special assistant to Pakistan’s prime minister on power and petroleum, said that Saudi Arabia would not build the refinery at Gwadar but would construct it along with a petrochemical complex somewhere near Karachi. He added that in the next five years another refinery with a capacity of more than 200,000 barrels a day could be built in Pakistan.

Saudi Arabia signed a memorandum of understanding to invest $10bn in an oil refinery and petrochemical complex at Gwadar in February 2019, during a visit by Crown Prince Mohammad Bin Salman to Pakistan. At the time, Islamabad was struggling with declining foreign exchange reserves.

The decision to shift the project to Karachi highlights the infrastructural deficiencies in Gwadar.

A Pakistani official in the petroleum sector told Nikkei Asia on condition of anonymity that a mega oil refinery in Gwadar was never feasible. “Gwadar can only be a feasible location of an oil refinery if a 600km oil pipeline is built connecting it with Karachi, the centre of oil supply of the country,” the official said. There is currently an oil pipeline from Karachi to the north of Pakistan, but not to the east.

This article is from Nikkei Asia, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.

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“Without a pipeline, the transport of refined oil from Gwadar [via road in oil tankers] to consumption centres in the country will be very expensive,” the official said. He added that at the current pace of development he did not see Gwadar’s infrastructure issues being resolved in the next 15 years.

The official also hinted that Pakistan’s negotiations with Russia for investment in the energy sector might have been a factor in the Saudi decision. In February 2019, a Russian delegation, headed by Gazprom deputy chair Vitaly A Markelov, agreed to invest $14bn in different energy projects including pipelines. So far these pledges have not materialised, but Moscow’s undertaking provided Pakistan with an alternative to the Saudis, which probably irritated Riyadh.

Arif Rafiq, president of Vizier Consulting, a New York-based political risk firm, told Nikkei that a Saudi-commissioned feasibility study on a refinery and petrochemicals complex in Gwadar advised against it. “Saudi interest has shifted closer to Karachi, which makes sense, given its proximity to areas of high demand and existing logistics networks,” he added.

Rafiq, who is also a non-resident scholar at the Middle East Institute in Washington, considers this decision by the Saudis as a setback for Gwadar, the crown jewel of the China-Pakistan Economic Corridor, the $50bn Pakistan component of the Belt and Road.

The Saudi decision “is a setback for Pakistan’s plans for Gwadar to emerge as an energy and industrial hub. Pakistan has struggled to find a viable economic growth strategy for Gwadar,” he said. Any progress in Gwadar in the coming decade or two will be slow and incremental, he added.

Local politicians consider the shifting of the oil refinery a huge loss for economic development in Gwadar. Aslam Bhootani, the National Assembly of Pakistan member representing Gwadar, said the move is a loss not only for Gwadar but for all of the southwestern province of Balochistan. He said he would urge the Petroleum Ministry of Pakistan to ask the Saudis to reconsider their decision.

The decision has shattered the image of Gwadar as an up-and-coming major commercial hub. In February 2020, the Gwadar Smart Port City Masterplan was unveiled, forecasting that the city’s economy would surpass $30bn by 2050 and add 1.2m jobs. Local officials started calling Gwadar the future “Singapore of Pakistan”.

Rafiq said such dreams are unrealistic. “A more prudent strategy [for Pakistan] would be to use the city as a vehicle for sustained, equitable economic growth for Balochistan, especially its Makran coastal region,” he said.

Relocating the refinery from Gwadar to already developed Karachi also implies that CPEC, or BRI, has failed to promote Gwadar as a mega-investment hub. “Foreign direct investment in Gwadar will be limited and will remain exclusively Chinese,” an Islamabad-based development analyst said, “limiting the city’s scope for development”.

The refinery decision has once again exposed the infrastructural shortcomings of Gwadar, which Pakistan and China have failed to address in the past six years. Without highways and railways connecting it with northern Pakistan, the city will never develop as its proponents hope.

A version of this article was first published by Nikkei Asia on June 13, 2021. ©2021 Nikkei Inc. All rights reserved.

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Oil hits highest price since April 2019 before moderating

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The price of crude oil briefly hit its highest level for more than two years on Monday, lifting shares in energy companies, as traders banked on strong demand from the rebounding manufacturing and travel industries.

Brent crude crossed $75 a barrel for the first time since April 2019 before falling back slightly, while energy shares were the top performers on an otherwise lacklustre Stoxx Europe 600 index, gaining 0.7 per cent.

The international oil benchmark has risen around 50 per cent this year, underscoring strong demand ahead of next week’s meeting of the Opec+ group of oil-producing nations.

US manufacturing activity expanded at a record rate in May, according to a purchasing managers’ index produced by IHS Markit. Air travel in the EU has reached almost 50 per cent of pre-pandemic levels, ahead of the July 1 introduction of passes that will allow vaccinated or Covid-negative people to move freely.

“This is a higher consuming part of the year,” said Pictet multi-asset investment manager Shaniel Ramjee, referring to the summer travel season. “And the oil market is pricing in strong near-term demand that is better than previous expectations.”

In stock markets, the Stoxx Europe 600 dipped 0.3 per cent while futures markets signalled Wall Street’s S&P 500 share index would add 0.1 per cent at the New York opening bell.

The yield on the 10-year US Treasury was steady at 1.494 per cent. Germany’s equivalent Bund yield gained 0.02 percentage points to minus 0.154 per cent.

Equity and bond markets have consolidated after an erratic few sessions since US central bank officials last week put out forecasts indicating the first post-pandemic interest rate rise might come in 2023, a year earlier than previously thought.

US shares tumbled last week, while government bonds rallied, on fears of tighter monetary policy derailing the global economic recovery.

Wall Street equities then bounced back on Monday, with a follow-on rally in some Asian markets on Tuesday, as sentiment got a boost from more dovish commentary from Fed officials.

Fed chair Jay Powell, in prepared remarks ahead of congressional testimony later on Tuesday said the central bank “will do everything we can to support the economy for as long as it takes to complete the recovery”.

John Williams, president of the Federal Reserve Bank of New York, also said that the US economy was not ready yet for the central bank to start pulling back its hefty monetary support.

Jean Boivin, head of the BlackRock Investment Institute, said that “the Fed’s new outlook will not translate into significantly higher policy rates any time soon”.

“We may see bouts of market volatility . . . but we advocate staying invested and looking through any turbulence,” Boivin added.

The dollar index, which measures the greenback against trading partners’ currencies and has been boosted by expectations of US interest rates moving higher before other major central banks take action, was steady at around a two-month high.

The euro dipped 0.1 per cent against the dollar to purchase $1.1901, around its lowest level since early April. Sterling also lost 0.1 per cent to $1.3909.



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