March 27, 2023

Portugal Bids To Boost Green Energy With First Hydrogen Auction
por Michael Kern

Oilprice.com / 2023-03-27 19:055


On Monday morning, Portugal announced that it would launch a pioneering auction for rights to sell hydrogen for injection into its natural gas grid in the second half of this year. This will be the first auction in Europe and is part of the country's efforts to reduce greenhouse gas emissions.

The Portuguese government has set ambitious targets to reduce emissions by 2030 and is now looking to green hydrogen to meet those goals. Hydrogen can be produced from renewable sources such as wind and solar energy, and when injected into the natural gas grid, it can replace fossil fuels like coal and natural gas.

The auction will be managed by a new body called Gás Natural de Portugal (GNP), which will buy renewable hydrogen and biomethane at auction and then sell it on to gas companies. The aim is to increase the amount of green hydrogen in the natural gas grid from 1% today to 10% by 2030.

"This is an important step towards achieving our climate objectives," said Gabriel Sousa, GNP's representative in Lisbon. "We are confident that this auction will help us reach our goal of reducing emissions while also providing economic benefits for businesses."

The Portuguese government has already taken steps towards increasing the use of green hydrogen, including investing in research and development projects related to electrolysis technology, which produces hydrogen from water using electricity. 

It has also launched initiatives such as H2Global to facilitate imports of renewable ammonia, e-methanol and sustainable aviation fuel through auctions.

However, some limitations are associated with blending hydrogen into the European gas grid. For example, due to safety concerns, there is a limit on how much hydrogen can be blended into existing pipelines without risking explosions or other accidents.

In addition, there currently need to be regulations or standards in place governing how much hydrogen should be blended into the grid or how it should be stored safely.

Despite these challenges, Portugal remains committed to reducing emissions through the increased use of green hydrogen. The upcoming auction is expected to provide an essential boost for businesses involved in producing renewable fuels while also helping Portugal meet its climate targets.

By Michael Kern for Oilprice.com

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How two weather balloons led Mexico to ban solar geoengineering
Reuters / 2023-03-27 19:3213
2023-03-27T18:16:59Z
On an April day, the founder of a U.S. startup called Make Sunsets stood outside a camper van in Mexico's Baja California and released two weather balloons containing sulfur dioxide into the air, letting them float towards the stratosphere.

Entrepreneur Luke Iseman said the sulfur dioxide in the balloons would deflect sunlight and cool the atmosphere, a controversial climate strategy known as solar geoengineering. Mexico said the launch violated its national sovereignty.

Iseman, 39, said he does not know what happened to the balloons. But the unauthorized release, which became public in January, has already had an impact: setting off a series of responses that could set the rules for future study of geoengineering, especially by private companies, in Mexico and around the world.

The Mexican government told Reuters it is now actively drafting "new regulations and standards" to prohibit solar geoengineering inside the country. Mexico also plans to rally other countries to ban the climate strategy, a senior government official told Reuters.

While the Mexican government announced its intention to ban solar geoengineering in January, its current actions and plans to discuss geoengineering bans with other countries have not been previously reported.

"Progress is being made... to prepare the new regulations and norms on geoengineering, that is, to advance an official Mexican standard that prohibits said activity in the national territory," Mexico's environment ministry said in a written statement to Reuters.

The backlash from Mexico arrives as growing numbers of scientists and policy makers are urging further study of solar geoengineering, recognizing that emissions cuts alone will not limit dangerous climate change and that additional innovations may be needed.

Climate policy experts said Mexico is in a position to help set the rules for future geoengineering research.

"A country like Mexico could start pulling together other countries and say: 'Let's work on this together and see how we can ban it together or make it happen properly together,'" said Janos Pasztor, executive director of the Carnegie Climate Governance Initiative (C2G), which advises on governance of solar geoengineering and other climate-altering technologies.

The Mexican environment ministry statement said it would explore using the Convention on Biological Diversity's call for a moratorium on "climate-related geoengineering activities" to enforce its ban.

Agustin Avila, a senior environment ministry official, told Reuters Mexico will also try to find common ground with other countries on geoengineering at the COP global climate summit in the United Arab Emirates this year.

The Mexican government said Make Sunsets' balloon launch highlighted the ethical problems of allowing private companies to conduct geoengineering events.

"Why is this company, located in the United States, coming to do experiments in Mexico and not in the United States?" said Avila.

Iseman told Reuters in an email he chose Mexico because "most researchers report that particles launched into the stratosphere near the tropics will create more cooling by staying up longer." Also, he had a truck and camper in Baja and thinks the region is beautiful, he wrote.

David Keith, a professor of applied physics and public policy at Harvard University who has dedicated much of his research to solar geoengineering, called Iseman's launch a "stunt."

Iseman has a background in business, not science, but said he consulted with climate scientists. Other innovative startups were ridiculed in their early days, he said. "If the 'responsible experts' were solving the problem, we wouldn't have to," he said in an email.

Until Mexico's dispute with Make Sunsets, solar geoengineering had been gaining attention from policy makers and scientists as a possible solution to climate change, and limited research funding.

The strategy, also known as Solar Radiation Management, seeks to mimic the natural cooling effects of volcanic eruptions when ash clouds reflect back enough sunlight to reduce the warming of the earth by using planes or balloons to disperse tiny particles in the stratosphere.

Last month, 60 scientists including former NASA climate scientist James Hansen signed a letter in support of further research.

The Degrees Initiative, a UK-based non-government group, awarded $900,000 for research into the impacts of solar geoengineering on weather patterns, wildlife and glaciers to scientists from Chile, India, Nigeria and other countries.

The U.N. Environment Program in late February also recommended further study of geoengineering.

Yet some scientists remain opposed to further research, arguing that large-scale interventions in the atmosphere risk triggering extreme and unpredictable weather changes, including major droughts that would severely impact agriculture and food supply.

In 2021, the Swedish government grounded a Harvard-led study by Frank Keutsch and Keith, which planned to spray calcium carbonate dust into the atmosphere to deflect sunlight after indigenous Saami people accused researchers of lacking respect for "Mother Earth."

Frances Beinecke, a veteran environmental activist and board member of the Climate Overshoot Commission, a think tank focused on developing strategies to reduce the risk of overshooting 1.5 C in warming, said the Make Sunsets episode underscores the urgency of developing a regulatory framework that would allow further study of geoengineering and set safe and equitable rules for its use.

"The Mexico example illustrated to us that it's not only governance to consider whether or not to utilize it, but you need governance in the research phase," she said. "People can't just go all over the world and launch field experiments without some kind of oversight."

Iseman said he would welcome clearer regulation but that the international community is moving "too slowly."

Mexico has not set a date for implementing its ban, a spokeswoman for the environmental ministry said.

And it's unclear what effect a ban might have. Keith argues a ban is unenforceable. "You can't write legislation that says you can't put sulfur in the stratosphere since every commercial flight does that," he told Reuters.

Others note that a ban on geoengineering on Mexico's territory would offer no protection from the planet-scale impact of future experiments by any of its neighbors.

"It could happen literally next door. In terms of impacts on the world, it's the same," Pasztor said

Meanwhile, Make Sunsets said in a Feb. 21 blog post it had performed three additional launches near Reno, Nevada.

The National Oceanic and Atmospheric Administration (NOAA) said Make Sunsets did not report the launches. "The Weather Modification Act requires that any activity performed with the intention of producing artificial changes in the composition, behavior, or dynamics of the atmosphere be reported to the NOAA Weather Program Office before the commencement of such project or activity," NOAA told Reuters.

Iseman said he did seek clearance from the Federal Aviation Authority, but did not disclose the balloons contained sulfur dioxide. "As far as I can tell, there isn't any rule that would require us to do so - or even anyone who it would be relevant to notify," he said.

(This story has been corrected to say that David Keith was involved in the Harvard study, not lead it, in paragraph 23)

Related Galleries:
Luke Iseman launches a balloon in Baja California, Mexico, April 11, 2022. Luke Iseman/Handout via REUTERS

Clouds are seen on the horizon, in Playas Tijuana, Baja California, Mexico March 8, 2023. REUTERS/Jorge Duenes
European diesel futures down 55% as Asian imports ease supply pinch
Nikkei Asian Review / 2023-03-27 19:55


A car is filled with diesel fuel at a Shell petrol station in Berlin, Germany. Diesel accounts for half of the demand for refined petroleum products in the European Union.   © Reuters
SHINICHI ARAKAWA, Nikkei staff writerMarch 28, 2023 03:28 JST | Europe

TOKYO -- Diesel futures in Europe have plummeted from an all-time high in March 2022 as increased imports from Asia and the Middle East have alleviated concerns of a supply shortage from the Russian oil embargo.

Some countries that have significantly expanded their exports to Europe, such as India, have continued to buy Russian oil on the cheap, raising concerns that some of them are refining that oil and exporting it as their own, effectively bypassing the embargo.
Schwab's $7 Trillion Empire Built on Low Rates Is Showing Cracks
Yahoo! Finance: Top Stories / 2023-03-27 20:282


(Bloomberg) -- On the surface, Charles Schwab Corp. being swept up in the worst US banking crisis since 2008 makes little sense.

Most Read from Bloomberg

The firm, a half-century mainstay in the brokerage industry, isn't overexposed to crypto like Silvergate Capital and Signature Bank, nor to startups and venture capital, which felled Silicon Valley Bank. Fewer than 20% of Schwab's depositors exceed the FDIC's $250,000 insurance cap, compared with about 90% at SVB. And with 34 million accounts, a phalanx of financial advisers and more than $7 trillion of assets across all of its businesses, it towers over regional institutions.

Yet the questions around Schwab won't go away.

Rather, as the crisis drags on, investors are starting to unearth risks that have been hiding in plain sight. Unrealized losses on the Westlake, Texas-based firm's balance sheet, loaded with long-dated bonds, ballooned to more than $29 billion last year. At the same time, higher interest rates are encouraging customers to move their cash out of certain accounts that underpin Schwab's business and bolster its bottom line.

It's another indication that the Federal Reserve's rapid policy tightening caught the financial world flat-footed after decades of declining rates. Schwab shares have lost more than a quarter of their value since March 8, with some Wall Street analysts expecting earnings to suffer.

"In hindsight, they arguably could have had more prudent investment choices," said Morningstar analyst Michael Wong.

Chief Executive Officer Walt Bettinger and the brokerage's founder and namesake, billionaire Charles Schwab, have said the firm is healthy and prepared to withstand the broader turmoil.

The business is "misunderstood," and it's "misleading" to focus on paper losses, which the company may never have to incur, they said last week in a statement.

"There would be a sufficient amount of liquidity right there to cover if 100% of our bank's deposits ran off," Bettinger told the Wall Street Journal in an interview published Thursday, adding that the firm could borrow from the Federal Home Loan Bank and issue certificates of deposit to address any funding shortfall.

Through a representative, Bettinger declined to comment for this story. A Schwab spokesperson declined to comment beyond the Thursday statement.

The broader crisis showed signs of easing on Monday, after First Citizens BancShares Inc. agreed to buy SVB, buoying shares of financial firms including Schwab, which was up 3.1% at 2:29 p.m. in New York. The stock is still down 42% from its peak in February 2022, a month before the Fed started raising interest rates.

Unusual Operation

Schwab is unusual among peers. It operates one of the largest US banks, grafted on to the biggest publicly traded brokerage. Both divisions are sensitive to interest-rate fluctuations.

Like SVB, Schwab gobbled up longer-dated bonds at low yields in 2020 and 2021. That meant paper losses mounted in a short period as the Fed began boosting rates to stamp out inflation.

Three years ago, Schwab's main bank had no unrealized losses on long-term debt that it planned to hold until maturity. By last March, the firm had more than $5 billion of such paper losses — a figure that climbed to more than $13 billion at year-end.

It shifted $189 billion of agency mortgage-backed securities from "available-for-sale" to "held-to-maturity" on its balance sheet last year, a move that effectively shields those unrealized losses from impacting stockholder equity.

"They basically saw higher interest rates coming," Stephen Ryan, an accounting professor at New York University's Stern School of Business, said in a phone interview. "They didn't know how long they would last or how big they would be, but they protected the equity by making the transfer."

The rules governing such balance sheet moves are stringent. It means Schwab plans to hold more than $150 billion worth of debt to maturity with a weighted-average yield of 1.74%. The lion's share of the securities — $114 billion at the end of 2022 — won't mature for more than a decade.

The benchmark 10-year Treasury yield now: 3.5%.

Cash Business

Schwab's other headache from higher interest rates stems from cash.

At the root of Schwab's income is idle client money. The firm "sweeps" cash deposits from brokerage accounts to its bank, where it can reinvest in higher-yielding products. The difference between what Schwab earns and what it pays out in interest to customers is its net interest income, among the most important metrics for a bank.

Net interest income accounted for 51% of Schwab's total net revenue last year.

"Schwab's counting on inertia," said Allan Roth, founder of Wealth Logic, a financial-planning firm.

After a year of rapidly rising rates, there's greater incentive to avoid being stagnant with cash. While many money-market funds are paying more than 4% interest, Schwab's sweep accounts offer just 0.45%.

While it's an open question just how much money customers could move away from its sweep vehicles, Schwab's management acknowledged this behavior picked up last year.

"As a result of rapidly increasing short-term interest rates in 2022, the company saw an increase in the pace at which clients moved certain cash balances" into higher-yielding alternatives, Schwab said in its annual report. "As these outflows have continued, they have outpaced excess cash on hand and cash generated by maturities and pay-downs on our investment portfolios."

In their statement, Bettinger and Schwab wrote that "client deposits may move, but they are not leaving the firm."

FHLB Borrowing

To plug the gap, the brokerage's banking units borrowed $12.4 billion from the FHLB system through the end of 2022, and had the capacity to borrow $68.6 billion, according to an annual report filed with regulators.

Schwab borrowed an additional $13 billion from the FHLB so far this year, the filing showed.

Analysts have been weighing these factors, with Barclays Plc and Morningstar lowering their price targets for Schwab shares in recent weeks.

Bettinger and Schwab said that the firm's long history and conservatism will help customers navigate the current cycle, as they have for more than 50 years.

"We remain confident in our client-centric approach, the performance of our business, and the long-term stability of our company," they wrote in last week's statement. "We are different than other banks."

--With assistance from Silla Brush, Miles Weiss and Noah Buhayar.

Most Read from Bloomberg Businessweek

©2023 Bloomberg L.P.

Enclosures

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2023 GICS Classification Change: Impact on S&P 500 Earnings
por Tajinder Dhillon

Earnings | Lipper Alpha Insight | Thomson Reuters / 2023-03-27 20:28

Effective Monday March 20th, 2023, 14 constituents in the S&P 500 have been impacted by a GICS Classification change which was originally announced in December 2022.

As shown in Exhibit 1, 14 constituents across two sectors will move into three new sectors (level 1).  The largest change will be within Information Technology, where eight constituents will move to the Financials sector, followed by three constituents moving into the Industrials sector.  From a market cap perspective, Visa and Mastercard will be the largest change who now rank as the 3rd and 4th largest constituent in the Financials sector and move into a newly created sub-industry (level 4) titled 'Transaction & Payment Processing Services'.

The other sector impacted is Consumer Discretionary, which will see Target Corp, Dollar General Corp, and Dollar Tree Inc all move into the Consumer Staples sector and 'Consumer Staples Merchandise Retail' sub-industry.  Target Corp now ranks as the 9th largest constituent in the Consumer Staples sector.

Exhibit 1: GICS Classification Impact on S&P 500 (click image to view full screen)


As we enter 2023 Q1 earnings season in April, we look at the impact on both y/y earnings growth and earnings weight by sector using data from March 17th (old classification) and March 24th (new classification).  Y/Y growth rates saw a minimal impact for both 2023 Q1 and full-year 2023, and instead, we see a more notable change in the earnings weight at a sector level.

As shown in Exhibit 2, Financials will see the largest increase in earnings weight next quarter, rising from 17.6% to 19.7% (+2.1 ppt) due to Visa Inc and Mastercard Inc, followed by Industrials (+0.3 ppt), which will be offset by the decline in Information Technology (-2.6 ppt).

Consumer Staples will see its earnings weight rise moderately (+0.4 ppt) which will be offset by Consumer Discretionary (-0.3 ppt).

We also include an additional graph showing the same data but for full-year 2023 estimates.  We note Financials has an earnings weight of 19.7% post-classification, far greater than its current market-cap weight of 12.9%, which indicates some form of value being offered.  Conversely, Information Technology has its earnings weight reduced to 18.9%, far less than its market-cap weight of 26.1%, which partially contributes to the premium paid for companies in this sector.

Exhibit 2: 2023 Q1 and 2023 Earnings Weight Impact





A closer look at the newly formed sub-industry within Financials
Financials was most impacted by the classification change, and we dive further into this sector by looking at the newly created sub-industry in more detail.

The Transaction & Payment Processing Services (TPPS) sub-industry will consist of eight constituents (mostly coming from the legacy Data Processing & Outsourced Services sub-industry) including Fidelity National Information Services Inc, Fiserv Inc, Global Payments Inc, Mastercard Inc, PayPal Holdings Inc, Visa Inc, Fleetcor Technologies Inc, and Jack Henry & Associates Inc.  The remaining constituents in this legacy sub-industry now move to Industrials which includes Automatic Data Processing Inc, Paychex Inc, and Broadridge Financial Solutions Inc.

As a group, TPPS widely outperformed its benchmark sector (Financials) and the broader index in 2022 Q4, with an earnings growth rate of 12.7% compared to a growth rate of -8.9% for Financials and -3.2% for the S&P 500.  We note a similar observation when looking at full-year 2022, with TPPS delivering a 15.3% earnings growth rate in comparison to -13.2% for Financials and 4.8% for the broader index.

Based on analyst expectations, TPPS is expected to marginally outperform the broader sector and strongly outperform the broader index in 2023 Q1.

TPPS is also expected to significantly outperform the S&P 500 on a full-year 2023 basis due to strong expected y/y growth rates from Visa Inc, Mastercard Inc, and PayPal Holdings.

Exhibit 3: Earnings Growth Rate for Transaction & Payment Processing Services Sub-Industry



From a valuation perspective, many companies in TPPS trade at a substantial premium to its parent sector.  TPPS as a group trade at a forward P/E of 21.1x in comparison to 12.6x for Financials and 17.9x for the S&P 500.  This results in the Financial sector seeing its forward P/E rise from 11.7x to 12.6x which becomes more 'growthy'.

Exhibit 4: Forward P/E for S&P 500 Sectors



We conclude by looking at the forward net profit margin for each sector, which sees Financials being the largest beneficiary of the classification change with a +1.1 ppt improvement (18.9% today vs. 17.8% prior), which is offset by a -0.7 ppt decline in Information Technology.

The improvement in net profit margins can be explained by Visa Inc and Mastercard Inc which has a current forward 12-month net profit margin estimate of 54.6% and 46.6% respectively, far greater than the traditional banks of JPMorgan Chase (27.1%), Bank of America (27.2%), Citigroup Inc (14.9%) and Wells Fargo Inc (23.0%).

Exhibit 5: Forward Net Profit Margin for S&P 500 Sectors



Conclusion
The GICS classification change resulted in 14 constituents moving into new sectors.  Financials saw the largest change, with 8 of these constituents move from Information Technology into Financials.

Financials also saw a newly created sub-industry which comprises of payment processors including Visa Inc and Mastercard Inc.  Financials will have a marginal increase in its earnings weight, forward P/E ratio, and forward net profit margin based on current analyst estimates.

 

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