BREXIT

London’s Listing Exodus Threatens Its Status As Global Financial Hub

By City A.M - Aug 28, 2023

• Numerous companies, such as Plus500 and YouGov, are considering leaving London's public markets for listings in the United States, adding to a growing list that includes Arm and Flutter.
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• Various factors are cited for London's declining allure, including Brexit, short-selling regulations, and the quest for more cash in New York; the number of small-cap firms listed on the FTSE has dropped from 155 in 2018 to 117.
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• Despite government reviews and proposed reforms from the FCA to make the UK more attractive for business, experts believe more measures are needed to revitalize London’s equity markets, such as tax reforms or mandatory pension fund investments in UK firms.

London’s status as a global financial hub may not be at risk – yet – but its equity markets are certainly out of favour with the wider world. How did we get here? City A.M. takes a long hard look at the state of the stock exchange

“I wanna be a part of it,” Frank Sinatra sang of New York, New York.

“Those little town blues are melting away.” 

Ol’ Blue Eyes may have made Liza Minelli’s song famous, but it’s a tune now whistled in the boardrooms of London boardrooms as they contemplate life beyond the capital’s grey summer skies in a year marked by fears London’s public markets have lost their lustre.

This past month saw two more of London’s listed outfits say they were pondering a state-side departure. Plus500, the Israeli retail investing platform, said they’d be worth more across the Atlantic. And YouGov, the polling firm adapt at reading a room, also confirmed they’d be looking at a secondary listing in New York in due course. 

They joined a lengthy list of firms looking to chance their arm on Wall Street. Arm, the UK chips firm, will list in the US, whilst gambling giant Flutter is set for a secondary listing. Commodity broker Marex, based in London, has also confirmed it would look at New York if it chose to list rather than letting equity markets this side of the pond have their wicked way. 

It wasn’t supposed to be this way. As long ago as 2021, then-Chancellor Rishi Sunak was talking up a ‘Big Bang 2.0’ in an interview with City A.M. 

Two and a bit years on, the City’s publicly-traded indices are still haemorrhaging listed companies. It’s not just the big boys. There were 155 small cap firms listed on the FTSE in 2018. That number is now 117.

Ask around the City and the reasons proffered for London’s demise are varied. Some simply say there’s more cash in New York. Bosses quietly complain institutional investors are biased towards short-term returns rather than long-term value. Others blame lax rules on short sellers for doing down London’s reputation. Seven years on from the vote, plenty too blame Brexit for permanently taking the heat out of London valuations – and the sharp and seemingly permanent devaluation of sterling has also made UK-listed firms easy prey for cash-rich US private equity. 

A flurry of activity 

When Mark Austin, a former journalist and now senior City lawyer, was tasked with reviewing listed markets back in 2020 as part of a government review, it seems there was precious little understanding of just how weak London’s capital markets might be. 

“Very often the response we got was ‘really? Reform? Do we need to?,” he told City A.M. earlier this year. 

“Now the conversation has totally moved on.” 

It’s not hard to see why. Whilst high-profile IPOs have been few and far between, firms have exited public markets at a rate of almost once a week.

Biffa accepted a take-private in June 2022, valuing the firm at £1.36bn. Dechra, the pharmaceutical firm, took a £4.5bn takeover deal from Swedes EQT in June of this year. 

Clinigen was taken over by Triton in 2022; Sureserve succumbed to a £200m plus offer earlier this year. Hyve, the events business, has also gone private. Even that great champion of Britishness the Daily Mail abandoned the London markets, with Lord Rothermere engineering a return into private hands last year. 

In a bitter twist of fate, that last privatisation was conditional on another British brand – Cazoo – listing in Wall Street. 

The slew of departures has spooked government sufficiently that it announced further reviews into London’s financial competitiveness. It may take some keeping up with: since 2020 we’ve had Lord Hill’s review of the listings regime, then Ron Kalifa’s analysis of the fintech sector, Austin’s assessment of the secondary capital markets, which reported in July of 2022. 

The government added a further review to that in March 2023, asking lawyer Rachel Kent to look at the research and analysis landscape. 

Add to that a host of work done by the City watchdog, the FCA, and we are certainly not shy of suggestions. 

Everyone recognises what the central question is, but we’ve all got a slightly different perspective and solution to the problem

Mark Austin

This year has seen, finally, some movement towards resolving the sticker parts of the listings conundrum. 

In May the FCA laid out plans to “make the UK a more attractive place for business,” with a twelve month plan to achieve “better outcomes for consumers and markets” including reforms of the UK’s listing regime and an overhaul of consumer protections.

Proposals included a single listing category to replace the current standard and premium segments, the removal of eligibility rules requiring a three-year track record, and a more welcoming approach to dual class structures, in which some shareholders – often founders – have greater say than others. 

Study of the reforms quickly scouted out that even the more liberal approach to dual class share structures would still be “more limited in certain respects than in the US,” as a Cooley legal analysis put it. 

Whilst that consultation was launched, the Capital Markets Industry Taskforce was plotting its own review. Set up in August 2022 “in consultation with the government,” the taskforce comprises CEOs and other senior City execs who seek to bring a private sector viewpoint to policy issues. Two weeks after the FCA discussion document was published, Mark Austin was again tasked with a further study – a ‘new market model’ review to carve out a new narrative for Britain as an international financial centre.” 

“Everyone recognises what the central question is, but we’ve all got a slightly different perspective and solution to the problem,” Austin told City A.M. at the time. 

“This all needs putting together into one cohesive, simple to understand model and vision, which goes all the way across law and regulation, market practice and the cultural attitude and mindset.”

Movement if not momentum 

Not everybody is convinced that listing reforms along will do the trick. 

One of the City’s most active investment banks has warned that the “considerable activity” to reinvigorate the UK’s equity markets will not be enough to turn around the decline. 

In a note seen by City A.M., Peel Hunt’s head of research Charles Hall sounded a distinctly downbeat note. 

“There is a problem,” he wrote.

“There has been considerable de-equitisation of the UK market over a number of years and the pace is accelerating.

“Reform of the listing requirements and research rules should help, but much more needs to be done to ensure that being listed is seen as an attractive option.”

His concerns were echoed by the boss of the Quoted Companies Alliance, the trade body for small listed firms. 

“It would be churlish to reject all the work that is going into ensuring London’s public markets are fit for the future,” James Ashton told City A.M. 

“But as company numbers continue to decline, more must be done to get them functioning better right now.” 

Quick wins and tough losses

Ashton has cited tax reform as a way to boost liquidity, modelling a new type of investment vehicle that builds on the success of venture capital trusts. 

“Even bolder,” he said, “would be to scrap stamp duty on share trading, a £4bn-a-year dampener that doesn’t even exist across the Atlantic on Wall Street.” 

One sledgehammer of a measure that was under consideration at the highest levels in the Treasury was to mandate the UK’s largest pension funds put more cash into UK firms. 

The obligatory element of such a move eventually spooked the City and the Chancellor, with Jeremy Hunt instead announcing a voluntary pact between the Treasury and a host of large institutional investors. 

That ‘Mansion House Agreement’ will see firms like Aviva and Phoenix promise to put 5 per cent of their default funds into unlisted equities by 2030, giving high-growth companies access to capital that – in time – could see them become London-listed. 

Treasury sources said it could unleash £75bn-worth of investment into the UK’s private companies. 

But pension funds remain wary of equity markets. Though they tend to increase in the long-term, individual shares do not necessarily do so, even if a longer-term shift towards holding bonds rather than equities in recent years may have been checked by last year’s mini-Budget driven reminder of the need for liquidity.

Of course, London’s attractiveness as a listing destination also relies on valuations. 

The capital’s businesses trade at a significant discount, on a price to earnings ratio, than in the US. 

But it’s not just that crude measure putting founders off listing, or forcing others to think about secondary listings abroad. 

A number of high-profile UK firms have been given a torrid time of it on the public markets in recent years. 

Darktrace, for instance, is widely recognised as being one of the world’s leading cybersecurity firms, and a UK tech powerhouse. 

Yet a short-seller attack from New York saw the firm’s share price slide dramatically. It was accused of questionable marketing and the shorter, Quintessential Capital Management, said it was “deeply sceptical about the validity of Darktrace’s financial statements and fear that sales, margins and growth rates may be overstated.”

Darktrace appointed EY to look at the books. It received a clean bill of health. Lo and behold, shares rocketed. 

Some believe the UK’s short-selling regime is open to abuse. Market makers have an exception to a rule forbidding so-called naked short selling, when you sell shares you do not own and are not borrowing from somebody. Proponents of this system say market makers need to be able to do this to provide liquidity in the market.

The UK government, in a consultation published in July, committed to keep the market maker exemption in place, continuing to allow naked shorting. 

People power

It’s not just the mechanics of the financial markets, however, that are blamed for London’s malaise. 

More and more bosses are looking at London as lacking the institutional expertise and risk appetite to give sufficient fire to the FTSE. 

Chief amongst the complainants has been Julia Hoggett, boss of the London Stock Exchange itself. 

Back in April Hoggett was quizzed by MPs on the exodus of firms from public markets. 

“We need to recognise that stock markets are about risk capital,” she said. “We have to recognise that not every time, companies will succeed. Some will fail, and not every company will have the returns expected.”

“We’ve clearly got the desire and framework for it, but we’re not all providing financing and the rocket fuel that enables those companies to [grow],” she added.

She’s not the only one to make that complaint. 

London Stock Exchange chief Julia Hoggett has been critical of UK investor risk appetites

Schroders chief exec Peter Harrison has made similar noises. 

“How do we create a system that is more willing to accept risk,” he asked in an interview with Financial News in March. 

“Everything (has become) about risk reduction. That has been the thing that has undermined growth, and importantly it has undermined returns.”

Other corporate leaders have found issue with investors for other reasons; a focus on short-term returns over long-term value. 

BT’s outgoing boss Philip Jansen criticised London investors for turning against his £15bn investment plan, spending plenty of cash on fibre connectivity now to guarantee long-term relevance. 

UK investors “seem to have a focus more on the short term and find it harder to look at the longer term”, especially when compared to the US, Jansen said in an interview with The Sunday Times.

Jansen’s complaints are not new, with a number of City watchers having critiqued the relative underperformance of UK companies.

Respected stockpicker Nick Train said similar in July. 

However, one analyst pushed back on Jansen’s read of the market and said the short-termist mindset from investors went beyond just London.

“I don’t think that’s a completely fair assessment given that foreign investors own around two thirds of listed UK shares, so reticence towards UK companies is coming from overseas as well,” Susannah Streeter, head of money and markets at Hargreaves Lansdown, told City A.M.

“The London market has struggled to recover partly due to Brexit effect, current UK economic troubles but also the make up of the indices with far less of a tech focus, and so have been left on the sidelines of the recent AI fuelled euphoria.”

The Brexit effect

The reason du jour touted in the City is that the lack of pension fund cash flowing into the stock market has fuelled the decline in valuations, which is in turn blamed on accounting tweaks brought in around the turn of the millennium. 

Pension funds’ holding of equities has indeed plummeted since 2000. Just four per cent of the UK stock market is now held by pension funds – down from 39 per cent in 2000, according to a report from think tank New Financial. 

However, valuations did not correlate with that decline. As Fidelity fund manager Alex Wright pointed out earlier this year, much of that de-equitisation was done by 2015, and the valuation of the UK market “held up roughly the same”.

You also got a real divergence in valuations between the US and the Eurozone around Brexit. That is the real pushback I give against it being solely a Brexit effect.”

Adam Hoyes, Capital Economics

He says the elephant in the room came after that – in June 2016.

“Unfortunately, and again politicians don’t want to say this, but it’s very clear what’s caused the undervaluation: it’s Brexit,” he told Citywire in an interview.

“You can see it to the day that international investors have disinvested from the UK market after the Brexit vote and the uncertainty that that has created. That is the key reason.” 

Analysts at Capital Economics similarly point out the emergence of a gap in equity valuations doesn’t tally with the timing of the pension accounting changes and it was only from 2016 that a substantial gap emerged. 

Smoking gun for the London Stock Exchange?

Given the timing, it’s tempting to attribute that gap solely to the UK’s vote to leave the EU, analyst Adam Hoyes of Capital Economics told City A.M. in June. 

The price/earnings ratio of UK firms, which compares a company’s share price to its annual net profits, was broadly comparable to the US up until 2016. It was only at that point that they began to diverge.

“It looks like a bit of a smoking gun” Hoyes said earlier this year. But, he cautions, the reason may in fact be more muddy.

 “You also got a real divergence in valuations between the US and the Eurozone around that time,” he adds. “That is the real pushback I give against it being solely a Brexit effect.”

The EU similarly began to deviate from the US in terms of valuation just prior to Brexit. Much of the valuation discount may in fact, he says, be a simple assessment of the UK and EU’s long term economic prospects against the US in that time.

Investors’ cash is not restricted by borders, and money managers may have just chosen to follow the more rosy economic outlook on the other side of the Atlantic.

Global IPO Market

It is also important to note the global picture of a major listings slowdown. The IPO market globally has been largely shuttered for the past year and the UK is not alone in that regard.

Global IPO activity was down by eight per cent in terms of deal numbers and 61 per cent in terms of proceeds compared to the same period last year, according to data from EY.

The amount of cash raised via UK IPOs did fall more sharply, however, with cash raised falling some 80 per cent on the same period in 2022, and 99 per cent on the blockbuster 2021 levels.

But for William Wright, the director of think tank New Financial, even taking into account that UK slump, the wider global picture shows that it is not Brexit that has dampened the UK’s appeal.

“I wouldn’t personally put Brexit towards the top of the list or even on the list,” he told City A.M. earlier this year. 

“If Brexit were a significant factor in the recent slowdown in IPOs in the UK, then surely the markets in the rest of the European Union, which were very active in 2021, would have continued to be very active in 2022 and into 2023 – and they just haven’t been.

“This is not a UK specific problem,” he added.

The fact the UK’s IPO market was going gangbusters in 2021 may also point to that argument. Britain had left the EU by then and it did not then prove to be too much of a deterrent for scores of firms to debut in London.

For Wright, the reason for the current slump on the stock market is the more macro assessment of the current state UK economy.  

“The only way that Brexit could be a factor is the extent – and one can argue this till the cows come home – to which Brexit has had a drag effect on the UK economy,” he said.

“They don’t understand” 

One other regularly heard complaint is the level of institutional knowledge in the City – with analyst and research coverage thinned out. 

Tech firms are particularly hit, one CEO of a listed firm told City A.M. 

“People literally don’t understand what we do,” he said after lunch. 

Peel Hunt’s Charles Hall also had concerns which date back to a very different element of our relationship with Europe. 

Brussels-era MIFID rules forced up the cost of research signficantly, by ‘unbundling’ coverage from trading commissions. In the old days, research was simply part of the service offered by brokerage firms. Now, it had to be paid for separately – and it became apparent that it was not a money maker. 

London, like other financial centres, saw vast swathes of its analyst base wiped out. That didn’t happen in the US, where the system continues to operate much as it used to. 

Often smaller companies only receive coverage from one firm – and it is often from the house broker, which comes with its own complications. 

Hall said “there is clear recognition that the current situation is not working for the benefit of all market participants, let alone the health of the UK economy and the ecosystem around listed companies.”

Tech firms are amongst those who most regularly complain about the lack of research coverage in London. 

As two Cambridge professors found, the capital – as you’d expect from a stock exchange still weighted towards ‘old’ industries – hasn’t adjusted its research coverage to the 21st century. 

“Investors may well be reluctant to pay for investment research in sectors underrepresented on the London Stock Exchange.  Tech firms stand out here as being in the minority, with, instead, mature, “old economy” sectors such as mining, energy, finance and retail featuring more prominently,” the authors Brian Cheffins and Bobby Reddy wrote in a piece for the Harvard Law School. 

The government has proposed a string of measures – including reform of Mifid – to revitalise the research world. 

Could this explain why shares like Ocado – itself the victim of a now unwound short-seller attack – have found it difficult to find love in London? Whilst critics point to the firm’s ‘jam tomorrow’ loss-making, US stock markets – especially the Nasdaq – are full of companies which are yet to break into profitability, but aren’t a punching bag for investors and commentators. 

Could Ocado boss Tim Steiner have a point when he implies London investors don’t understand quite how revolutionary the firm’s back-end technology really is? 

London Stock Exchange readies for battle

It’s hard to pin London’ stock market malaise on any one thing – and the solutions are similarly difficult to identify in isolation. 

The good news, for those looking, is that few are in denial about the scale of the problem. 

Efforts are certainly well underway to breathe new life into London’s stock markets – with the benefits of capital-raising and growth that a vibrant public trading exchange brings. 

Time will tell.

By CityAM 

Russia’s Mining Heartland Grapples With Fallout From Ukraine War

By RFE/RL staff - Aug 28, 2023

• More than 18 months into its invasion of Ukraine, Russia is facing high military casualties that are particularly affecting impoverished, remote areas like Kemerovo, known as the Kuzbass.
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• Locals are dealing with declining wages, obsolete mines, and health issues due to pollution, alongside the losses of fathers, sons, and brothers in the war.
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• Residents express skepticism about the war and corruption at local levels, drawing parallels to the poor-quality construction that followed the 2014 Sochi Olympics.
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In the heart of the Russia’s coal-mining Kemerovo region, residents struggle with the harsh economic realities of declining wages, obsolete mine facilities, and chronic medical conditions that come from life below, and above ground.

Many are retired coal miners like Vladimir Miroshenko, 71, who recalls the halcyon days of the 1970s, when Prokopyevsk became a sister city with Horlivka, in the heart of Ukraine’s Donbas coal-mining region. Miroshenko also recalls his service in the Soviet Army in the early 1980s, during the decade-long invasion of Afghanistan.

“We trained for a month and a half and then were sent to man the howitzers. I won't even tell you what happened there. When I came home, I just started drinking,” said Miroshenko, whose last name has been changed at his request.

“Now what’s going on in Ukraine -- the oligarchs; they were getting fat and they’re just getting fatter,” he said. “It’s the same thing that happened in Afghanistan. And for what? What’s the point? It’s not clear.”

“I heard here that 50,000 people have already returned from [Ukraine] with disabilities,” he told RFE/RL’s Siberia.Realities. “Why did they go? For the money, mostly. You yourself understand that now no one will go to war for Stalin, nor for Putin.

More than 18 months into its invasion of Ukraine, Russia is grappling with the mounting toll from what has become the largest land war in Europe since World War II. Anonymous U.S. officials have put Russia’s military casualties at close to 120,000 killed and up to 180,000 injured.

And the toll is hitting impoverished, remote, shrinking regions of Russia even harder. Like in Kemerovo, widely known as the Kuzbass, where economic opportunities are fewer and the allure of war wages in Ukraine and compensation for the dead draw capable young and less-young men, further draining the region of able workers -- and fathers, brothers, sons, and husbands.

At least 46 men from Prokopoyevsk, a city of around 170,000 people, have died since Russia launched its full-scale invasion in February 2022, according to an unofficial tally compiled by Siberia.Realities.

Many are buried in a special section of a cemetery in Vysoky, a village southwest of Prokopyevsk. According to Tatyana Yefremova, who sells flowers and funeral bouquets at the cemetery, the fresher graves include two riot police officers who died on February 25, 2022, just three days after the invasion was launched.

In the plots where new casualties of the war in Ukraine are buried, the graves are so close together that the wreaths appeared to be intertwined and entangled.

They include Ilya Piryazev, 45, who grew up and went to school in Prokopyevsk and who went on to serve as a conscript during the First Chechen War in the 1990s, then during Russia’s intervention in Syria in the 2010s, and also in Libya. According to his daughter Polina, a month after deploying to Ukraine in April 2022, he was killed in the southern Zaporizhzhya region.

In recent years, Polina said, she and her mother had had little contact with Piryazev; her parents divorced in the 2000s.

“We didn't even know he was in the war. We only found out when he died,” she said.

“He went to Ukraine on his own,” Polina said. “He didn’t need money, unlike many. It was just patriotism, the conviction that the country must be defended. He never spoke about the war, didn’t say why he constantly returned there.”

Not far from Piryazev’s grave is that of Andrei Yartsev, 22, who died on November 22, 2022, somewhere in the Luhansk region while serving as a marine infantryman attached to the Pacific Fleet.

Yarstev had served as a contract volunteer soldier for several years before enrolling in the law department at Novosibirsk State University. He was in his third year last fall when the Kremlin ordered a partial mobilization to bolster troop strength in Ukraine; Yartsev volunteered to fight, according to an acquaintance, who gave his name as Andrei.

“Apparently, he was smitten with this whole romantic army ideal: like, brother for brother, and so on,” Andrei said. “Seems to me that he had no idea what was really going on there, in Ukraine. It's too bad for the kid; he spent only a few weeks at the front.”

'We Don't Have Any Other Options'

At the mining technical school in Prokopyevsk, where engineers and other mine personnel are trained, officials put up a memorial plaque for dead graduates on May 5, 2023. The names included Yevgeny Kobzarev, a 37-year-old riot police officer who died on the second day of the invasion.

On the social media site formerly known as VKontakte, someone published a page about the memorial plaque for the dead alumni. “Soon enough there won’t be enough walls,” one anonymous poster wrote.

“When you look at the death toll, it’s a little creepy,” another graduate told Siberia.Realities. “But if they call me, I’ll go too, but where should I go? I don’t have any kids yet, though strangely enough, many go there [to fight] because of their children: to make some money for an apartment or for education. We don’t have any other options.”

Then there’s the case of Ilya Krumin, 21, who served as a driver and mechanic for a tank unit. He stayed in the military after completing his mandatory conscription service. An orphan, Krumin died about a month after the invasion.

“What choice did he have besides the army?” said one of his friends, who gave his name only as Aleksei. “As an orphan, there’s no one to take care of you, you have to live somehow. So this is the most obvious choice. Yes, and these kinds of soldiers are beneficial to the army: you don’t have to pay compensation later to relatives.”

'We're Dropping Like Flies Around Here'

Like many towns in the Kuzbass, Prokopyevsk has seen better days. Residents complain regularly about the state of city services, including the main local hospital where equipment frequently doesn’t work. Years of heavy industrial emissions, including coal ash and other toxic chemicals, has polluted wide swaths of the region, and left chronic health problems for many.

“We're dropping like flies around here. Some in the mines, some in the war,” said Vitaly Smorodin, a 55-year-old retired miner and lifelong resident who now works as a municipal security guard. “And the rest of them: from [the environment]. Every other person has [cancer].”

City officials are also happier to trumpet the sister-city relationship between Prokopyevsk and Horlivka, which is now mostly under Russian control in Ukraine, than they are to publicize the exact number of locals who have been killed or wounded in the war.

For residents jaded by endemic corruption on the local level, the cynical view is that the sister-city relationship will just be another way to steal municipal funds.

Vil Ravilov, who works as a photographer, pointed to the example of Mariupol, the Ukrainian Sea of Azov port that was all but obliterated during a Russian siege soon after the invasion began. Russian officials are now hurriedly building new apartment housing, and other structures in the city, but reports of shoddy construction abound.

Ravilov drew a parallel to what happened after the 2014 Sochi Olympics, when some of the public infrastructure built for the event was marred by bad-quality construction.

“What is happening in Ukraine is a huge tragedy, what else can I say?” Ravilov said. “I doubt that the houses that are being built in Mariupol or any other [Russian-controlled] territories are made with high quality. Most likely, everything is stolen, all this infrastructure is waiting for the same fate as the buildings after the Olympics, when asphalt paths were washed away after the rains.”

“Everything is done for the sake of appearances,” he said.

By RFE/RL

Russia’s Answer To The U.S. Shale Boom Takes A Huge Step Forward

By Simon Watkins - Aug 28, 2023

• Russia's flagship Arctic LNG 2 will begin operations before the end of this year.
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• Russia's Arctic sector comprises over 35,700 billion cubic metres (bcm) of natural gas and over 2,300 million metric tons of oil and condensate.
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• The key market into which much of this Arctic gas and oil output will flow will be China.

Despite multi-layered international sanctions on Russia following its 24 February 2022 invasion of Ukraine, President Vladimir Putin’s ‘special energy project’ – developing the country’s massive gas and oil resources in the Arctic – took a major step forward last week as it was confirmed that the flagship Arctic LNG 2 will begin operations before the end of this year. Over and above the significance of Russia being able to complete such a financially and technologically challenging project despite swingeing sanctions in place against it, Arctic LNG 2 is of vital importance to Russia for several wider reasons. Given the scale and scope of Russia’s broader plans for the Arctic, it is also vitally important to the U.S. and its allies how Russia proceeds there.

One reason why the Arctic is so important to Putin is the sheer size of its gas and oil reserves, much of them in Russian territory. According to various Russian authorities, the country’s Arctic sector comprises over 35,700 billion cubic metres (bcm) of natural gas and over 2,300 million metric tons of oil and condensate, the majority of which are in the Yamal and Gydan peninsulas, lying on the south side of the Kara Sea. These may well be underestimates, according to a senior source in the European Union energy security complex exclusively spoken to by OilPrice.com recently. Within this, Putin has long believed that Russia’s presence in the global liquefied natural gas (LNG) market does not reflect its enormous presence in the broader world gas and oil markets, and that the perfect foundation stone for this to be addressed is the Arctic LNG projects, as analysed in full in my new book on the new global oil market order. According to comments from Putin, the next 10 years or so will witness a dramatic expansion in the extraction of these Arctic resources, and a corollary build-out of the Northern Sea Route (NSR) as the primary transport route to monetise these resources in the global oil and gas markets.

The key market into which much of this Arctic gas and oil output will flow will be China - the second reason why the region is so important to Putin. Over the past 30 years, there has been a complete switch in the power relationship between the two former great Communist powers, with China now being the more dominant partner. Crucially, though, for Russia, it still holds some power with China in the matter of its gas and oil flows to the country. These flows mean that Moscow can continue to count on the military and political force-multiplier effect of Beijing as a major presence in the Asia Pacific theatre of potential conflict, if not directly in the European one. Given Russia’s poor performance in the Ukraine war to date, this force multiplier effect of its relationship with China has never been more important to it. In precisely this vein, around the same time as the invasion of Ukraine, Russian state gas giant Gazprom signed a deal to supply 10 bcm per year (bcm/y) of gas to the China National Petroleum Corporation (CNPC). This built on another 30-year deal between the two companies signed in 2014 for 38 bcm/y and this in turn was a part of, but significantly bolstered, the ‘Power of Siberia’ pipeline project – managed on the Russian side by Gazprom and on the China side by CNPC – that was launched in December 2019. 

The third reason why the Arctic LNG projects are so important to Putin is that LNG is the world’s emergency gas form, as was dramatically highlighted again most recently in the aftermath of Russia’s invasion of Ukraine, as also analysed in full in my new book on the new global oil market order. Unlike gas supplies delivered through pipelines, LNG does not require years of laying pipelines and building out corollary supportive infrastructure. It also does not require extensive, time-consuming negotiations over complex contracts. Instead, it can be picked up quickly in the spot market and shipped expeditiously to wherever it is required. With the world increasingly needing LNG supplies, given the spike in demand for them in Europe after flows from Russia’s gas pipelines stalled, Putin knows that increasing Russia’s own LNG supply capabilities has never been more geopolitically important to it. The importance that Russia is placing on being able to move LNG quickly to its key target markets of China, and in Asia more broadly, is underlined by the fact that it has pushed hard with the build-out of its trans-shipment LNG facility on the Russian Far East coast in Kamchatka and its Northern Sea Route as well.

A final key reason at play in Russia’s Arctic gas and oil drive is its capacity to subvert the U.S. dollar-based hegemony in the energy market, as also analysed in my new book, particularly as it features one of the world’s biggest oil and gas producers and one of its biggest buyers. Very early in the Arctic LNG projects’ history, Novatek’s chief executive officer, Leonid Mikhleson, said that future sales to China denominated in renminbi were under consideration. This was in line with his comments on the prospect of further U.S. sanctions - following Russia’s annexation of Crimea in 2014 - that they would only accelerate the process of Russia trying to switch away from U.S. dollar-centric oil and gas trading. “This has been discussed for a while with Russia’s largest trading partners such as India and China, and even Arab countries are starting to think about it... If they do create difficulties for our Russian banks then all we have to do is replace dollars,” he said. Such a strategy was tested in 2014, when the state-run Gazprom Neft tried trading of cargoes of crude oil in Chinese yuan and roubles with China and Europe, to reduce Russia’s dependence on crude trading in dollars, in response to the initial Western sanctions against Russia’s energy sector. 

Putin’s determination to push ahead with the Arctic LNG projects was truly seen after Russia’s 2014 annexation of Ukraine’s Crimea region. Moscow not only initially bankrolled the US$27 billion flagship Arctic LNG project in the Yamal Peninsula from the beginning with money directly from the state budget but also later in 2014 – after the U.S. had imposed sanctions on Russia over Crimea - supported it again by selling bonds in Yamal LNG (the program began on 24 November 2015, with a RUB75 billion 15-year issue). It further provided RUB150 billion of additional backstop funding from the National Welfare Fund. After that, April 2016 saw two Chinese state banks agree to provide US$12 billion to the Yamal LNG project in euros and roubles. The project was further helped by a tumble in the rouble in late 2014 that effectively cut the cost of Russian-sourced equipment and labour at a key moment in the construction.

As it now stands, according to comments from China National Offshore Oil Corporation (CNOOC) – which holds a 10 percent stake in the three-train 19.8 million metric tonnes per year (mt/y) Arctic LNG 2 project - the first 6.6 million mt/y train will start up before the end of this year. This follows its recent installation on the foundation in the seabed at the Utrenniy terminal on the Gydan Peninsula. Additionally, according to CNOOC, all the other stakeholders – Novatek 60 percent, and 10 percent each for CNPC, France’s TotalEnergies, and a consortium of Japan's Mitsui and Jogmec – have continued to pay the funding required on schedule. The start-up of the first train of Arctic 2 LNG is in line with Novatek’s plans to build out its LNG export capacity up to 70 million mt/y by 2030, including the 19.8 million mt/y Arctic LNG 2. In turn, this dovetails into Russia’s plans for LNG production of 80-140 million mtpa by 2035, which would be greater than that of LNG powerhouses Qatar and Australia. 

By Simon Watkins for Oilprice.com

Canadian Engineers Make "Revolutionary" Hydrogen Breakthrough

By James Stafford - Aug 30, 2023LONG READAlready one of the world’s top ten producers of hydrogen, Canada is at the forefront of the global effort to develop a sustainable hydrogen economy, and a recent breakthrough may just bring it closer to becoming one of the most important energy transition hubs on the planet.

Canada is home to more than 100 hydrogen and fuel cell tech companies, and one of them has flipped the switch on a unique new hydrogen reactor in Hamilton, Ontario, Canada.  

Canadian company GH Power and its team of world-class engineers led by CEO Dave White are bringing the world green hydrogen, high-quality heat and green alumina that can be fed into the grid using proprietary reactor technology that relies on only two inputs, creating zero waste and zero carbon emissions. 

The reactor is said to be the very first of its kind to operate continuously, extracting baseload energy and hydrogen from the rapid oxidation of metal in water. 

The Hydrogen system is designed to be modular and scalable and to enable local microgrids to supply baseload, reliable green energy solutions anywhere, anytime--even in the most remote areas of the world.

The reaction is exothermic and self-sustaining, safe, quiet and deployable within the last mile of the energy user.

For Canada’s ambitions of becoming a major hydrogen superpower, the reactor, which began final Phase II testing on June 23^rd, with commercial operations set to begin by Q4 2023, represents an impressive step forward in the high-stakes, low-carbon hydrogen game. 

For GH Power, seven years of quiet and painstaking research and testing has turned the company into an award-winning innovator that hopes to reward future investors with four potential revenue streams. 

PARTNERING FOR A CLEAN, SECURE FUTURE

In August 2022, just five months after Russia launched its war on Ukraine and the weaponization of energy rose to the forefront, Canada took decisive steps to accelerate the global clean energy transition, signing a Joint Declaration of Intent with Germany to collaborate on the export of clean Canadian hydrogen to Europe’s economic powerhouse. 

The deal means a commitment to enable investment in hydrogen projects through policy harmonization; support for the development of secure hydrogen supply chains; the creation of a Transatlantic Canada-Germany supply corridor; and the export of clean Canadian hydrogen by 2025.

GH Power’s unique hydrogen reactor has been a focal point of this alliance, and its technology has been awarded $ 2.2 million in federal funding from the National Research Council of Canada as part of the Transatlantic commitment with Germany. The award is intended to support further research of the optimum fuel mixture for its reactor and the ultimate refinement of its high-purity alumina. 

This award-winning technology is the result of seven years of painstaking research by world-class scientists and engineers led by GH Power CEO Dave White, a veteran engineer in the power generation space. Combined, the GH Power team has over a century of power generation experience, designing, building and operating power plants, refineries and other energy infrastructure. 

Chief Engineer Ken Steward has been designing and managing thermal power plants and petrochemical processes for over four decades across numerous different power plants in North America. COO Gary Grahn brings to the table 25 years of international energy experience, including in oil, gas, minerals, metals and utilities, and CFO Anand Patel contributes a decade of real asset capital markets experience, with over $4 billion in completed transactions, including for renewable energy giant Brookfield Asset Management. Finally, project development director Mike Miller offers more than 35 years of experience in infrastructure, private equity, and development for top companies along the energy supply chain, such as giant NextEra Energy. 

“Unlocking the potential of hydrogen is an essential part of our government’s plan for a sustainable economic future — not just for the domestic opportunities for emissions reductions but also for its potential as an export opportunity: to provide clean energy to countries around the globe,” the Honorable Jonathan Wilkinson, Minister of Natural Resources, said following the signing of the alliance deal with Germany. 

“Green hydrogen is an important key for a climate-neutral economy. We must resolutely pursue climate change mitigation in order to secure our prosperity and freedom. This is more important and urgent than ever at this time,” German Vice-Chancellor Robert Habeck said. “The Hydrogen Alliance between Canada and Germany is a significant milestone as we accelerate the international market rollout of green hydrogen and clear the way for new transatlantic cooperation. Specifically, we aim to build up a transatlantic supply chain for green hydrogen. The first shipments from Canada to Germany are to begin as early as 2025.”

In partnership with Carleton University, Germany’s ParteQ, particle separation equipment supplier, the National Research Council of Canada, and RWTH Aachen University, the first-of-its-kind reactor is now fully in the global, low-carbon hydrogen spotlight. 

INSIDE THE FIRST-OF-ITS-KIND REACTOR

The hydrogen produced by the modular version of GH Power’s 2MW reactor is pure and clean, with zero emissions, zero carbon and zero waste, using only 2 inputs (recycled aluminum and water). Only a small amount of energy is required to start the reactor, after which it is a self-sustaining operation that is a net generator of power to the grid. 

GH Power’s Zero-Carbon Hydrogen

Zero-carbon hydrogen is arguably what could make or break the world’s net-zero emissions goals. It’s the closest answer we have to combat the disastrous impacts of climate change. The Hydrogen Council estimates that hydrogen will represent 18% of all energy delivered to end users by 2050, avoiding 6 gigatonnes of carbon emissions annually and turning around $2.5 trillion in annual sales (not to mention creating 30 million jobs globally). 

For now, the majority of hydrogen in North America is produced by natural gas reforming in large central plants—an important step in the energy transition. The end goal, however, is to produce hydrogen without creating carbon emissions. Now, scientists are attempting to advance a process called “electrolysis” to create pure, clean hydrogen by splitting water into pure hydrogen and oxygen using high-temperature electrolyzers. 

According to the U.S. Department of Energy (DoE), the cost of producing hydrogen from renewable energy is around $5 per kilogram, or approximately 3X higher than producing hydrogen from natural gas. The DoE hopes the billions of dollars it’s pouring into R&D now will reduce hydrogen production costs by 80% (to an ideal of $1 per kilogram) within a decade.

By the company’s estimates, GH Power’s reactor is already 60% cheaper than producing hydrogen than DoE estimates, and it is a net producer of electricity to the grid.  Its green alumina by-product production costs are also 85% cheaper than the most commonly used processes such as hydrochloric acid leaching and hydrolysis for alumina production. 

The company has also had successful tests using scrap steel (iron) as another metal fuel providing a scalable hydrogen generation solution with a much lower costs basis at under a $1/kg hydrogen. Scrap steel (iron) is a widely available metal fuel that GH Power is testing.

Zero-Carbon Alumina—A World First

GH Power’s reactor produces green high-purity alumina (HPA)—a valuable specialty product used by several high-growth technology markets, including semiconductors, LED products, lithium-ion batteries, Smartphones, a multitude of other electronic devices, and industrial ceramics.

LED is a high-growth industry because it is critical to improving energy efficiency. Lithium-ion batteries are likewise experiencing soaring growth amid an energy transition driven heavily by the mainstream adoption of electric vehicles. Demand for Smartphones and other electric devices is also continuously rising. All of this suggests significant growth in demand for HPA.

Today’s supply is determined by production processes that are highly capital-intensive. Projects face financing issues as a result of high energy prices for production, leading to tight supply. GH Power looks to be very well position to compete in this market sector with their low-cost green alumina products. 

Exothermic Heat & Carbon Credits

This is a new technology based on a circular economy. Not only does it use recyclable inputs, but the exothermic heat from the reaction can also be used to generate high quality steam and hot water for industrial applications.   

And once scaled up, GH Power’s 27-megawatt plant will run off the combustion of hydrogen gas and capturing the energy from the reaction’s exothermic heat.  This combined cycle (CHP) approach can be added to an existing power generation asset which could significantly reduce CO2 emissions or it can be utilized in a green field application thus significantly reducing greenhouse gas emissions associated with traditional fossil fuel power generation.       

First Revenue Generation

First revenue generation is anticipated in the fourth quarter, and then the future plan is all about scaling up the modular technology to much larger Combined Cycle Power Plants. 

WHAT NEXT? SCALING UP THE ENERGY TRANSITION

“The only practical solution for society to reduce carbon emissions is to transition from 100% fossil fuels to cleaner tech,” and one of the steps in tackling this is to blend hydrogen with fossil fuels and ramp up the hydrogen content whenever possible,” says Dave White, GH Power CEO and a veteran engineer in the power generation space.   GH Power’s technology is modular and scalable which makes a plant’s configuration very flexible with maximum efficiency while meeting a customer’s energy requirements.   GH Power has modeled a 27MW combined cycle plant and is in the early planning stages with customers. 

Other companies looking to compete in the hydrogen race:

TotalEnergies (NYSE:TTE) is not the sort of company that half-commits to anything, and its hydrogen plans are no different. We're talking about a traditional oil and gas titan that's increasingly putting its chips on green energy—hydrogen being a key player. This isn't just some pilot project or a sideline venture; they're in it to become leaders in the hydrogen value chain.

Now, when a company with TotalEnergies' clout gets serious about something, you've got to take notice. They're applying their years of experience in the energy sector to this nascent industry, and it's pretty exciting. They're not just dipping their toes in the water—they're doing a full swan dive.

For investors, the upshot here is simple yet profound. TotalEnergies offers a balanced bet. They've got the traditional fossil fuel revenues to offer stability and a burgeoning green energy portfolio that promises growth. Hydrogen is a cornerstone of that portfolio, and the company's aggressive push into this sector could be a boon for shareholders.

Chevron (NYSE:CVX) seems to have taken the old adage "Go big or go home" quite seriously when it comes to hydrogen. This is a company that's looking at the whole hydrogen landscape—from fuel cell vehicles to power plants—and thinking, "We can do something big here." And considering their financial muscle, who's to say they can't?

What's different about Chevron's hydrogen endeavors is that they're not abandoning their old roots; they're leveraging them. It's a multi-layered approach, integrating hydrogen into their existing operations. That's both smart and economical, an evolutionary rather than revolutionary approach.

Investors, here's your cue. Chevron's in-depth involvement in hydrogen doesn't just offer a slice of the green pie; it promises a whole new bakery. They're using their financial clout and existing infrastructure to make a significant mark in this emerging field, and that could mean robust returns down the line.

ExxonMobil (NYSE:XOM) in hydrogen? Yep, you heard it right. They might be a latecomer, but they're no slouch. The plan here is meticulous, using their already sprawling infrastructure to tap into this growing market. It's a masterstroke that adds another layer to their energy portfolio without starting from scratch.

Sure, ExxonMobil isn't ditching oil and gas anytime soon. But here's the kicker: they don't have to. They're looking to be the smart integrators, the folks who can blend the old with the new seamlessly. If they pull it off, it's akin to having their cake and eating it too.

For those with their eye on long-term investment, ExxonMobil’s foray into hydrogen offers something tempting—a blend of the stability from traditional fuel sources and the growth potential of renewable energy. In an evolving energy market, that could be a sweet spot for many an investor.

Equinor ASA (NYSE:EQNR) play in hydrogen has a distinct character. Think of it as the Norwegians doing what they do best—leading by example in sustainability. Yes, we're looking at a company that aims to fully integrate hydrogen into Europe’s energy transition. They've got projects focused not just on hydrogen production, but also on carbon capture and storage.

You can think of Equinor as a puzzle master of sorts. Their talent lies in piecing together the many elements of the hydrogen economy into a coherent whole. And hey, they've got the Scandinavian flair for efficiency and sustainability.

For investors with an appetite for something a bit more international, Equinor presents a tempting option. This is a company that's got its hands in several cookie jars—from oil and gas to wind energy—and now it's diving deep into hydrogen. It’s a well-rounded play in an energy market that's becoming increasingly complex.

Eni SpA (NYSE:E) hydrogen story is intrinsically linked to Italy’s energy transition. From a company deeply rooted in the oil and gas industry, Eni is making audacious strides into hydrogen. Their recent partnerships aim to develop hydrogen production from renewable energy sources, and they’re already knee-deep in European projects aimed at creating hydrogen valleys.

The thing that sets Eni apart is their clear-cut focus on partnerships and collaboration. They're not going it alone; they're enlisting academic institutions, tech companies, and governments in their hydrogen endeavor. It’s a comprehensive ecosystem approach, which might just be their winning formula.

Now, why should an investor get hyped about Eni? Well, we’re talking about a company that’s making all the right moves to ensure it remains a key player in the future energy landscape. Their diversification into hydrogen is more than a fling—it's a long-term commitment that could yield solid returns.

Dow Inc. (NYSE:DOW) brings a unique lens to the hydrogen world. This isn't just about energy production for them; it's also about industrial applications. Dow is keen on using hydrogen as a raw material in its chemical manufacturing processes, which is a pretty smart way to kill two birds with one stone: reducing their carbon footprint and advancing hydrogen use.

Investors should take note of Dow’s multipronged approach. They’re not just consumers of hydrogen; they’re enablers. This dual role makes their involvement in the hydrogen economy distinct and impactful. They’ve got the muscle and the motivation to be influencers in this sector.

So, where does this leave an investor? With Dow, you're backing a company that's more than just a sideline spectator in the hydrogen game. They're a major player with skin in the game. As hydrogen becomes increasingly vital for both energy and industrial applications, Dow’s stock might just rise alongside.

Honeywell International Inc. (NYSE:HON) isn't just a spectator in the hydrogen game; it's an enabler. With a rich history in developing technologies for a range of industries, Honeywell sees hydrogen as a natural extension of its existing operations. We're talking about hydrogen production tech, storage solutions, and even safety systems tailored for hydrogen applications.

If you're thinking this sounds like a hydrogen one-stop-shop, you're not wrong. Honeywell is crafting an integrated approach that makes hydrogen adoption simpler and more efficient for everyone else. They’re the architects building the very framework upon which the hydrogen economy could stand.

For investors, Honeywell represents an investment in the backbone of the burgeoning hydrogen economy. It's a way to wager not just on one company, but on the success of hydrogen as a whole. Their cross-industry involvement provides a diversified hydrogen play that's worth paying attention to.

NextEra Energy, Inc. (NYSE:NEE) is big on wind and solar, but let's not overlook their hydrogen agenda. They’ve recently initiated pilot projects to produce hydrogen from solar power, a method that's as green as it gets. This is the firm betting that hydrogen will be the perfect companion to renewable energy sources, providing storage and versatility.

It's like they've put their ear to the ground, heard the rumblings of the green hydrogen revolution, and decided they need a piece of that action. Their pilot projects may be small-scale now, but the implications could be massive. They're not just dabbling in hydrogen; they're connecting the dots between different renewable sources.

If you're an investor looking for a diversified renewable energy portfolio, NextEra is where the action is. They’re already a powerhouse in renewables, and their hydrogen projects could add another layer of growth potential. It’s the sort of multi-layered bet that might just pay off big.

Dominion Energy Inc. (NYSE:D) is carving out a niche for itself in the hydrogen economy by focusing on clean hydrogen solutions. They're taking their utility expertise and applying it to the production, storage, and distribution of hydrogen—creating an integrated, end-to-end offering that's not easy to come by.

Here's the kicker: Dominion isn’t just looking at hydrogen as an add-on; they're eyeing it as a critical piece in a broader clean energy strategy. They've got projects focused on using excess renewable energy to produce hydrogen, creating a synergistic relationship between two of the hottest sectors in clean energy.

So, why should this matter to an investor? Dominion is a prime example of an established utility company leaning into the future. By embracing hydrogen, Dominion is positioning itself as a leader in what could become one of the most transformative shifts in the energy landscape. It's like betting on a seasoned athlete who has found a second wind.

PG&E Corporation (NYSE:PCG) has had its share of challenges, but don't overlook their foray into hydrogen. They've been working on integrating hydrogen into California's renewable energy scene, which is no small feat. The company is exploring projects to harness wind and solar power for hydrogen production, effectively knitting together a sustainable energy tapestry that's hard to rival.

What's intriguing about PG&E is how they're leveraging their existing infrastructure. The company is investigating the potential for hydrogen blending in natural gas pipelines, which could be a game-changer. It's like they're playing 3D chess while the rest of us are still figuring out checkers.

From an investment perspective, PG&E’s involvement in hydrogen is noteworthy. This is a company that's looking to redefine itself and emerge stronger from its past setbacks. Their hydrogen initiatives provide a glimpse into a more resilient and diversified future, potentially offering investors an opportunity for both redemption and growth.

By. James Stafford