Budget Battle Boils. B of A sees $100bbl oil. From Russia with Love.

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No progress on avoiding Alaska state government shutdown; new special session this week
Andrew Kitchenman, Alaska Public Media and KTOO, June 21, 2021

The Alaska legislative special session ended on Friday without an agreement to avoid a state government shutdown on July 1. Gov. Mike Dunleavy called the Legislature back into a new special session to start on Wednesday, June 23, with the goal of reaching agreement. 

He issued the call shortly after the House held a brief technical floor session to end the first 30-day special session.

Nearly 15,000 Alaska state workers received layoff notices on Thursday. 

Legal Arguments

Dunleavy and the Department of Law cite a section of the state constitution in giving the reason for the shutdown. That section requires that bills go into effect 90 days after they become law, unless two-thirds of both legislative bodies approve a different day. While the Senate had enough votes to approve July 1 as the day when the budget would go into effect, the House didn’t. 

“The budget passed this week is constitutionally impaired if the goal was for it to take effect on July 1,” said Dunleavy. 

House majority leaders said on Friday that the layoff notices and potential shutdown were Dunleavy’s choice. They point to a history of Alaska governors spending money based on bills that lacked the same effective-date provision as this year’s budget bill. And they did it based on advice they received from state lawyers. They say he could draw from available funds to cover state spending during the time period before the legal effective date.

“His choice to send out pink slips is a very sad day for Alaskans,” said House Speaker Louise Stutes of Dunleavy. “To put them on shaky ground needlessly is very distressing.”

Stutes is a Kodiak Republican who leads a caucus with 15 Democrats, four independents and one other Republican.

House majority leaders said Dunleavy should ask members of the House minority to vote for the effective date. 

Dunleavy told conservative talk show host Michael Dukes on Friday that the House majority tried to pressure the minority.

“Nobody should be strong-arming the other side,” he said. “They’ve got to sit down and work together and craft something that’s going to work, in which they want to bring people together, as opposed to twist arms and force them to vote. And that’s what happened the other day. That arm-twisting didn’t work. This is the result.”

What budget opponents want

With a shutdown on the horizon, legislators who voted to block the budget from going into effect on time gave the first public outline of what they want to avoid the shutdown. 

Members of the Republican House minority caucus said they want agreement on the components of a long-term plan for the state budget. 

Rep. Cathy Tilton did not say how detailed the agreement on the components must be. But she did say it extends beyond passing the budget.

“The budget is a part of that conversation,” she said. “It’s an integral part. But it’s not the only component of this long-term fiscal stability that we’re looking to get to.”

Other Republicans who voted against a July 1 start to the budget emphasized specific issues. 

Anchorage Rep. James Kaufman said he wants the Legislature to agree on what the sequence of policy changes will be, including which changes must happen at the same time. 

“For me, what this would look like would be the framework — the master framework — of what we’re doing, what components have already been put in place, and then what possible pieces need to be in place that are not yet there,” he said. 

North Pole Republican Rep. Mike Prax emphasized that the permanent fund dividends should be drawn from permanent fund earnings, and not other sources of funding, like most of the dividend money was in the budget bill. 

“The permanent fund dividend is only a permanent fund dividend, if it comes from the earnings of the permanent fund: easy concept,” he said, adding that if it comes from some other account it “is not a permanent fund dividend. We have to start recognizing that, and not letting them get away with deceptive words.”

Dividend remains controversial

Like in other years, lawmakers remain divided over the size of PFDs.

In May, Dunleavy proposed making dividends half of the annual draw from the permanent fund as part of a constitutional amendment to move permanent fund earnings into the constitutionally protected principal. This year’s dividend under the formula change would be roughly $2,350, rather than the roughly $3,500 they would receive under a formula in state law that hasn’t been followed the past five years. 

But lawmakers who worked on the budget are concerned that dividends of that size will draw down the earnings reserve account (ERA) and threaten the permanent fund’s future. 

Eagle River Rep. Kelly Merrick is, along with Stutes, one of the two Republicans in the House majority. She noted that Dunleavy’s administration wants the Legislature to adopt the $2,350 dividend formula before any other major changes.

“They are hoping to have that conversation about revenue and cuts later,” she said. “And I feel like it needs to be done at the same time, because you can’t pay out a big PFD now and decide how to pay for it later.”

Nonpartisan legislative analysts estimate the governor’s PFD proposal would lead to an average deficit of $1 billion per year for the next nine years under current state policies. Dunleavy’s administration hasn’t proposed policy changes on the scale necessary to close this gap. 

The nonpartisan analysts estimate that without new revenue or spending cuts, the state budget would be balanced in the long term with dividends of roughly $500 to $600. 

Dillingham independent Rep. Bryce Edgmon, a member of the House majority caucus, said the state may be able to pay dividends in the range of the $1,100 included in the original version of this year’s budget without instituting a broad-based tax. 

“We have the ability — if we do it right — to maintain essential services to the degree that Alaskans depend on them; have a sustainable permanent fund dividend at around the historical average of the dividend since it began in 1982; and have an environment where we continue to have low taxes in Alaska,” he said. 

Power Cost Equalization, scholarships remain unfunded

The failure of the effective date vote on the budget isn’t the only outstanding budget issue. Both chambers failed to pass a provision to draw funds from the Constitutional Budget Reserve.

Every year, that vote is used to re-stock dozens of funds, including the $1 billion Power Cost Equalization Fund, which lowers the cost of electricity in rural and other high-cost areas. 

The $340 million Alaska Higher Education Investment Fund also is maintained through the CBR vote. It funds $11.8 million in Alaska Performance Scholarships for high-achieving students and $6.4 million in Alaska Education Grants for students with financial need.

To restore these funds would require an even higher vote threshold then to pass the effective date clause — three quarters of both legislative chambers.  

The next special session is scheduled to begin at 10 a.m. on Wednesday in the Capitol.


Oil May Hit $100 a Barrel Next Year on Demand Rebound, BofA Says
Grant Smith, Bloomberg, June 21, 2021

Oil may surge to $100 a barrel next year as travel demand rebounds, Bank of America Corp. said, the strongest call yet among major forecasters for a return to triple digits.

Global oil consumption will continue to outstrip supply in 2022 as the economic recovery from the pandemic boosts fuel consumption, while investment in new production is crimped by environmental concerns, the bank said in a report.

“There is plenty of pent-up oil demand ready to be unleashed,” said Francisco Blanch, the bank’s New York-based head of commodities research. Brent futures traded near $74 a barrel on Monday.

While other market-watchers, from trading house Trafigura Group to Goldman Sachs Group Inc., have already said that oil could reach $100 again in the right conditions, the prediction from Bank of America is the firmest to date.

If crude does return to triple digits, it will be the first time since 2014, before a flood of North American shale oil sent the market into a slump from which it has never fully recovered.

The increasingly bullish outlook for oil is adding to pressure on the OPEC+ coalition led by Saudi Arabia and Russia, which meets next week to consider reviving some more of the production it cut during the pandemic.

While Riyadh has signaled it prefers to move cautiously, an ever-tighter world market could compel the alliance to open the taps a little. Prices have been stoked this month as fellow OPEC member Iran fails to clinch an agreement to relieve U.S. sanctions on its petroleum exports.

Car Travel

According to Bank of America, the immediate prospects for the OPEC+ alliance are bright.

Oil consumption will be bolstered next year as mass transit struggles to keep pace with extra travel demand, prompting passengers to make greater use of private cars.

Even the ongoing popularity of remote working won’t dent fuel consumption as much as expected, as home-workers use cars during the day to run personal errands, the bank said.

“Work-from-home means ‘work-from-car’ in many cases,” Blanch said.

At the same time, the bank expects that new oil supplies will remain constrained. Shareholders will pressure major companies to invest in renewable energy, or push shale drillers to return cash rather than spend on new drilling.

Still, expectations for a tight market in 2022 are far from unanimous. A report from the International Energy Agency earlier this month showed that half of the projected increase in demand can be met by recovering output outside OPEC, predominantly from the U.S.

That would leave the Organization of Petroleum Exporting Countries and its partners with significant quantities of idle output — and even more if Iran can strike a nuclear accord with the U.S. by then.


From Russia with Love
Timera Energy, June 21, 2021

Work on the much awaited new Bond film ‘No Time to Die’ began in 2016. After several delays and much suspense, it is due to be released later this year.  The Nordstream 2 pipeline has followed an uncannily similar development timeline and after its own set of delays and suspense, is set to start flowing gas around the time we’ll be making for the cinema’s to find out what SPECTRE has in store for Bond.

The Nord Stream 2 pipeline has become symbolic in a geo-political struggle between Europe, the US and Russia.  Behind all the political drama are some undeniably simple facts:

  1. Europe is facing a tightening gas market & soaring prices, with Germany in particular aware of the security of supply benefits of Nord Stream 2.
  2. The pipeline is essentially completed, with the first of two strings about to be filled and pressure tested and the second to follow across the next few months.

The softening stance of the US against Nord Stream 2 has paved the way for its commissioning later this year.  In today’s article we look at how Russia’s influence over the European gas market has returned in spades and why it is driving a big premium into gas prices.

The Russian flow situation

Chart 1 shows the evolution of Russian gas imports into Europe via the principle pipeline entry routes since the start of 2020.

Chart 1: Russian gas imports via primary routes

Source: Timera Energy, ENTSOG

The large stable grey volumes are Nordstream 1 imports (into Germany), Gazprom’s preferred route which is effectively flowing at max capacity.

The green volumes are the Yamal pipeline route via Belarus & Poland, also flowing at or near max capacity since the post Covid shock demand recovery.

The more variable light blue volumes are via the Ukraine/Slovakia route. Gazprom has a temporary transit agreement with Ukraine via this route with a 40 bcma equivalent ‘ship or pay’ volume. Flows via this route rose in Q4 2020 as gas hub prices recovered, but have conspicuously fallen back to minimum ‘ship or pay’ levels in 2021.

Despite a substantial increase in European hub prices in 2021 to above 28 €/MWh (10 $/mmbtu), Gazprom has shown no inclination to increase gas flows via Ukraine or place volumes on its ESP sales platform. This lack of supply response from Russia, against a backdrop of a tight LNG market and rising switching levels, is supporting price rises.

Russian strategic interests & gas price implications

In a tight gas market, Russia controls the marginal molecule of supply into Europe. Gazprom has capacity to flow more gas into Europe but is choosing not to do so, despite soaring prices.

There are strategic considerations in play, particularly around Nord Stream 2. Russia’s willingness to watch hub prices rise is putting pressure on Europe to clear the way for Nord Stream 2 commissioning.

The implicit ‘reward’ for completion of this pipeline is additional flow volumes via Gazprom’s preferred Baltic route. Those volumes can have a substantial impact on market prices and a very steep backwardation in the TTF forward curve recognises this, as shown in Chart 2.

Chart 2: Evolution of TTF forward curve across last 3 months

As the European gas market has tightened in 2021 and switching levels have soared with rising carbon & coal prices, the front of the TTF curve has surged. From 2022 onwards, price movements have been more subdued and the anticipation of incremental Russian imports via Nordstream 2 is an important driver.

The current gas market balance in 2021 means that an incremental molecule of gas demand must effectively be met by expensive switching of gas generation with coal or lignite. The TTF forward curve shape is consistent with incremental Russian imports in 2022 pushing hub prices back through key switching range levels to settle in a more balanced market state.

Whether the market obliges will depend on Russia’s flow strategy and the evolution of gas demand in both Europe and Asia.


Europe taking steps to cut reliance on China for raw materials
Valentina Ruiz Leotaud, Mining.Com, June 21, 2021

Speaking at the European Raw Materials Alliance Summit, the European Commissioner for Internal Market, Thierry Breton, rang the alarm bell regarding the EU’s dependence on third countries for 99 products – mostly raw materials – needed for the energy-intensive industries ecosystem. 

Breton made a case point regarding rare earths supply, 98% of which are delivered to Europe from China, either raw or refined. 

“It is not an enviable position to be in, but we are not alone: the US, Japan, the UK, Canada, Australia, India and others are rushing to address this vulnerability as well,” the commissioner said. “I believe we are in a similar situation with rare earths and permanent magnets as we were a few years ago with batteries and lithium: Total dependence on China, very limited EU production, no European regulation to encourage ethical sourcing of rare earths, create demand for recycled materials or give a competitive advantage to European manufacturers through carbon footprint requirements, and downstream industries which benefit from the current situation in terms of cost/benefit ratio.”

Given this context, Breton said that it is important for member states and regions to follow the directions established in the EU Action Plan on Critical Raw Materials and work together on identifying critical raw material and rare earths mining, processing and waste valorization projects that can be operational by 2025. 

The former French Minister of Economy pointed out that to work towards this goal, the EC has set up the European Raw Materials Alliance, ERMA, to deal with the rare earths magnets and motors value chain as a priority.

According to Breton, ERMA has prepared an investment pipeline that is expected to contribute to solving the dependency problem. 

“If these projects were realized, 20% of Europe’s rare earth needs could be sourced from the EU. Up from close to zero today,” he said. What is needed now is to find financing, both public and private.”

In his view, the national recovery plans could provide funding in this respect, which would be aided by the Important Projects of Common European Interest, IPCEIs. This initiative is available to member states to de-risk investment and mobilize private actors.

“Secondly, I will also launch a dialogue with downstream market players. I have already spoken with rare earth and magnet producers, so I know that it is feasible for the EU to diversify throughout the whole supply chain, from rare earths to magnet recycling. Now it is time to speak with the downstream manufacturers in the automotive, wind energy, defence and digital sectors using these magnets about what their concerns are and how they can contribute to resilient EU value chains,” Breton said. 

As a third pillar in the strategy to reduce Europe’s reliance on China, the Commissioner for Internal Market said that as part of the EU Action Plan, his office has been fostering a number of partnerships with resource-rich countries to secure a diversified supply of sustainably mined critical raw materials away from a single source. These partnerships focus on the integration of raw material value chains between the EU and third countries, cooperation in the area of research and innovation and social and environmental criteria.

Breton highlighted a recent deal signed with Canada but said that the goal is to also connect with some African countries, while the partnerships on the ground are to be implemented by the members of the European Raw Materials Alliance and the European Institute of Innovation and Technology.

Domestic sourcing

For the Commissioner, however, there aren’t enough partnerships to fulfill the continent’s growing demand for critical raw materials. Thus, he called on member states to start considering domestic sourcing.

For him, this proposal not only refers to boosting circularity and recycling and increasing the use of secondary raw materials but also to supporting mining projects.  

“I believe that the reasons to explore sustainable mining in the EU are not only of economic and geopolitical nature. We also have a moral obligation,” he said. “If we do not have an open debate about sustainable mining in Europe, without taboos, we will continue in a situation where we import raw materials from mines far away from our homes and conveniently close our eyes on how the were sourced. 


From the Washington Examiner, Daily on Energy:

BIDEN SELECTS KEY NEW INTERIOR NOMINEE: Biden nominated Laura Daniel-Davis on Friday to be the Interior Department’s assistant secretary for Land and Minerals Management.

Davis would oversee the Bureau of Ocean Energy Management and the Bureau of Land Management, which regulate offshore and onshore energy production on federal lands, respectively.

Davis is already working at Interior on an acting basis, helping to lead the agency’s pending report on the future of the oil and gas leasing program as principal deputy assistant secretary of Land and Minerals Management.

In March, she said the purpose of the administration’s updates to the federal oil and gas leasing program are to “restore balance on America’s lands and waters and to put our public lands’ energy programs on a more sound and sustainable conservation, fiscal and climate footing.”

Davis was previously chief of policy and advocacy at the National Wildlife Federation and s chief of staff to former Obama administration Interior secretaries Ken Salazar and Sally Jewell.


A $1 billion plan to deploy clean power in developing nations
Ben Geman, Axios, June 21, 2021

Two foundations just unveiled a $1 billion initiative to help deliver clean energy to huge numbers of people worldwide who lack electricity access — and they hope it catalyzes vastly more outside capital.

Driving the news: The Rockefeller and Ikea foundations said the new program “aims to reduce 1 billion tons of greenhouse gas emissions and to empower 1 billion people with distributed renewable energy.”

  • The new platform will be housed in the RF Catalytic Capital division that Rockefeller launched last year, which it calls a way for “impact investors, and governments to combine their resources and expand their global philanthropic reach.”
  • The goal is to unlock finance for areas like micro-grids and off-grid renewable power.

Why it matters: While the initial $1 billion on its own is nowhere near the scale needed to sustainably expand global access, the Financial Times reports that the effort is aimed at mobilizing much more money.

  • “[T]hey hope to attract $10bn of additional funds this year from international development agencies, before opening up to institutional investors in a bid to expand renewables investment in countries such as India, Nigeria, and Ethiopia,” the FT reports.
  • It quotes Rockefeller President Rajiv J. Shah expressing hope that the effort could eventually reach $100 billion or even $1 trillion by using “philanthropic capital as a lever to get commercial capital.”
  • This morning’s announcement says the foundations see the new platform as a way to identify “viable, investment-ready projects.”

The big picture: Meeting rising global energy demand in developing countries without a corresponding increase in emissions is a key global challenge — especially as scientists say steep emissions cuts are needed to contain global warming.

By the numbers: An estimated 759 million people worldwide lacked electricity as of 2019, per joint analysis from the World Bank and other agencies.And the two foundations’ announcement this morning notes that access is unreliable for another 2.8 billion people.

What they’re saying: An International Energy Agency report this month looked more broadly at the need to scale up finance for climate-friendly energy in emerging and developing economies worldwide.

  • They estimate that by the end of this decade, “annual capital spending on clean energy in these economies needs to expand by more than seven times, to above USD 1 trillion, in order to put the world on track to reach net-zero emissions by 2050.”

Go deeper: EPA releases list of top cities with Energy Star-certified buildings