Maybe The SEC Should Get a Life

Forget Shell you’ve failed to do your job here at home !

Shell is under investigation by authorities in the US for potential breaches of overseas bribery rules.

The Anglo-Dutch oil giant revealed today that it is being probed by the Securities and Exchange Commission and the US Department of Justice for alleged violations of the US Foreign Corrupt Practices Act.

The revelation came as Shell confirmed a 5 per cent dividend increase and pledged to invest $32 billion in a string of oil and gas projects.

In a statement, ahead of its annual briefing to investors, the group also said it was planning cost cuts.

Jeroen van der Veer, the Anglo-Dutch group’s chief executive, said the recession had “created opportunities for Shell to reduce supply-chain costs.”

Analysts say that staff cuts are likely.

Plunging oil prices have led to a mounting sense of crisis in the industry, which has reacted by axeing projects and shedding thousands of employees.

The problems resulted in BP last month reporting its first quarterly loss in more than seven years.

The falling oil price has also fuelled concerns about the ability of oil companies to pay increased dividends while meeting their investment needs.

But Shell, Europe’s largest oil company, pledged to pay $10 billion in dividends this year — a 5 per cent increase in the first quarter of this year compared with a year ago.

It would also invest $31-$32 billion in major projects around the world, it said.

The group expects annual production growth of between 2 and 3 per cent in the next decade

Its oil reserves remain unchanged from a year ago, making this the first year the group has not pumped more oil than it has added to its reserves since 2004.

Mr van der Veer said: “These are testing times in the oil and gas industry. While short-term measures are important, we keep our long-term perspective and continue to believe that energy needs over the long term provide a positive context for Shell’s investment programmes today.”

The group was planning “on the basis that the downturn could last more than a year,” he said.

Shell’s crude output has been under pressure because about 20 per cent of its oil production is from Opec member countries, where quotas have been slashed by about 14 per cent.

Shell’s net reserves were 11.9 billion barrels of oil or equivalents at year-end — enough to last about ten years if it stopped developing projects.

In January, Shell reported full-year 2008 earnings of $26.3 billion, down from $31.3 billion in 2007.

Shares in Shell were down this morning 2.44 per cent, or 40p, to £16.

What about RTK ?

EDWARDSPORT, Ind. — Near the middle of a dusty construction site here stands a patch of land, about the size of two football fields, notable because it is empty.

Duke Energy has high hopes for this two-acre plot: If all goes right, and there is a happy convergence of technology, money and federal energy policy, the construction project could become the first environment-friendly coal-fired power plant in the nation.

The company is studying a method for capturing the carbon dioxide produced by using coal and storing the gas underground, preventing it from entering the atmosphere. Machines to separate carbon dioxide from other elements in the coal may someday stand on the empty land.

For years, scientists have been experimenting with ways to “clean” coal, a carbon-heavy fuel that countries around the world increasingly rely on. But the technology for carbon capture and storage has been tried only on a small scale. Governments have not required companies to do what Duke is proposing here, in part because costs were so uncertain.

The allocation of $3.4 billion in the federal stimulus bill for carbon capture and sequestration, as carbon storage is often called, however, has allowed Duke Energy and other companies to consider mounting full-scale projects.

The federal money is the latest sign of a growing interest worldwide in clean coal technologies, which backers believe could prove one of the most significant ways to tackle global warming. The projects are being watched closely by environmentalists, engineers and energy officials.

The Duke effort, said John Thompson, a coal expert at an environmental group, the Clean Air Task Force, “may be the first commercial carbon sequestration site in the United States.”

If Duke is successful, the plant could be capturing about 18 percent of its carbon dioxide emissions within four or five years, and an additional 40 percent a few years after that. Carbon dioxide is the main heat-trapping gas linked to global warming.

Duke already received some money under the Energy Policy Act of 2005 to build a $2.35 billion coal-burning power plant, the largest new construction project in Indiana. The site here is already crawling with workmen and heavy machinery.

The new plant will differ from conventional coal plants in significant ways, cooking the coal into a fuel gas rather than burning it as a powder, and then thoroughly cleaning the gas and burning it in a jet engine, similar to that used to burn natural gas. Emissions of conventional pollutants, like sulfur, soot and smog-forming nitrogen, will be extremely low.

Two other such “gasification” plants already operate, in Florida and Indiana. Duke’s first addition would be to use a machine to strip the carbon dioxide out of the fuel gas.

Duke is conducting a $17 million study of that idea, and has asked permission from its regulators to study a second step, to capture an additional 40 percent or so of the carbon dioxide produced at a later stage. The carbon would then be stored in a deep well on the site or sent by pipeline to an old oil field, where it would stimulate oil production. Part of the test is meant to demonstrate that carbon dioxide can safely stay put underground.

Other companies around the country also are exploring carbon capture and storage projects. According to a recent report by Emerging Energy Research, a consulting firm, Illinois has passed legislation that could require its utilities to buy electricity from plants that sequester their carbon. And six other states are considering legislation to help pay for carbon capture or ease the way for carbon storage.

There are several competing technologies for approaching the problem — more than the money in the stimulus bill can pay for. And experts say that before new methods can be commercialized, projects need three to five years of planning and construction, followed by eight to 10 years of actual pumping of carbon dioxide into the ground.

“We need to get off the dime with this and build some full scale projects to demonstrate this technology at scale,” said Edward S. Rubin, a professor of environmental engineering at Carnegie Mellon University in Pittsburgh, “but the price tag per project is $800 million to $1 billion.”

The Edwardsport venture might prove a little cheaper. The first step, capturing the carbon dioxide created when coal is turned into a fuel gas, would add 5 percent to 15 percent to the initial $2.35 billion cost, according to W. Michael Womack, vice president of Duke Energy in charge of the project.

In the second stage, one of the components of the fuel gas, carbon monoxide, is mixed with water to make hydrogen, for fuel, and carbon dioxide, for sequestration. The cost of that is “a little fuzzier,” he said, and probably higher than the cost for the first step.

Until the beginning of last year, the Energy Department had backed a more ambitious effort, the FutureGen gasification plant in Mattoon, Ill., that would have sequestered 90 percent of its carbon dioxide, compared with a maximum of less than 60 percent at Edwardsport. Companies from the United States, Britain, China and Australia were to contribute.

But in January 2008, the Bush administration decided that the price for FutureGen had grown too high and withdrew financing, proposing instead to finance add-ons like the ones contemplated at Edwardsport. Last week, a report by the federal Government Accountability Office found that because of a math error, the Energy Department had greatly overestimated the cost increase for FutureGen.

At Peabody Energy, one of the FutureGen partners, Fred Palmer, a spokesman, said that the $1 billion in the stimulus bill that seems directed toward a project like FutureGen is not enough to finish that project, but that the partners could seek another appropriation in a couple of years.

An independent expert, Sarah Forbes, head of the carbon capture and storage project at the World Resources Institute, an environmental group, said that FutureGen had a tremendous strength, demonstrating the integration of capture and of storage at a large scale. But the project was so big, she said, that it could squeeze out others. “Perhaps it’s smarter to do four rather than one,” she said.

Proponents of smaller projects hope that there is enough money left in the stimulus bill for them. For example, Babcock & Wilcox has a different approach for capturing carbon: remove all the nitrogen from the air going into the boiler, so the output is nearly pure carbon dioxide.

A project that captured 92 percent of its carbon dioxide would cost nearly $1 billion, and the company is hoping the government will pay half, said Donald C. Langley, vice president and chief technology officer of Babcock & Wilcox. The company will make an announcement soon about its deal with a Western utility to partner in the project.

Later this year, American Electric Power will begin capturing carbon dioxide from 2 percent of the smokestack gases from its mammoth Mountaineer plant, in New Haven, W.Va., by using ammonia, and injecting the gas into a $4.2 million well nearly two miles deep.

If the ammonia works well, and if the carbon dioxide flows underground as expected, the company will try using the method to treat about 20 percent of the plant’s smoke and seeking government help to do it. The approach is important because it is intended for old plants.

Some environmentalists oppose carbon capture from coal under any circumstances. Greenpeace argues that the energy required to capture the carbon, pressurize it and pump it underground is too large and the risks of underground storage too high. The effort, the group says, would divert money from more promising alternatives. Others argue that making coal safe to burn would simply encourage damaging mining, like mountaintop removal.

But energy experts predict that countries around the world are certain to keep using coal, so someone had better find a safer way.

“With a big lump of money, the No. 1 priority is moving out with urgency,” said Ernest J. Moniz, a professor at M.I.T. and a former under secretary of energy. “If we want sequestration to have a serious market share in managing the climate problem by 2040, we have to start yesterday,” he said.

Trade wars heating up

The Mexican government said Monday it would slap tariffs on 90 U.S. industrial and agricultural products, in a trade dispute that underscored the difficulties facing President Barack Obama as he tries to assure business and global allies that he favors free trade.

Mexico said the tariffs were in retaliation for the cancellation of a pilot program allowing Mexican trucks to transport cargo throughout the U.S.

Unions have for years fought to keep Mexican trucks off U.S. highways, despite longstanding agreements by the two countries to eventually allow their passage. Legislation killing the pilot program was included in a $410 billion spending bill Mr. Obama signed last week.

The White House responded Monday to the tariff threat with assurances that Mr. Obama would work with Congress to create a new cross-border trucking program that addresses safety concerns

White House spokesman Robert Gibbs said U.S. and Mexican officials would work on legislation for a new plan “that will meet the legitimate concerns of Congress and our [North American Free Trade Agreement] commitments.”

Mexico’s Economy Minister Gerardo Ruiz Mateos said Monday the legislation signed by Mr. Obama was “wrong, protectionist, and clearly violates” the free- trade treaty signed by the U.S., Mexico and Canada in 1994. Mr. Ruiz Mateos said the ban protected U.S. truckers while hurting Mexico’s ability to compete.

The Mexican government wouldn’t say Monday exactly which products would be hit with tariffs but that the total value of the products was $2.4 billion in 2007 and originated in 40 states. A detailed list was expected to be published this week.

Republican members of the House suggested such commodities as wheat, beans, beef and rice would likely be targeted.

The back-and-forth between the U.S. and its third largest trading partner dramatized the pressure on Mr. Obama as he prepared for an April meeting of G-20 leaders in London. Mr. Obama campaigned as a trade skeptic, and urged the North American Free Trade Agreement, known as NAFTA, be renegotiated to better protect U.S. workers.

But fears are rising around the world that protectionism will erupt amid the global recession. Since he has taken office, Mr. Obama has moved to burnish his trade credentials. Last week, he told U.S. CEOs that a top priority was “making sure that we’re not dropping back into protectionism.”

Rising economic anxiety in the U.S. is stoking a political backlash against free trade, raising worries American workers and businesses aren’t getting a fair shake in the global marketplace. Since taking control of Congress in 2007, Democrats have put the brakes on new free-trade deals.

In recent weeks, Congress has pushed to include measures requiring that U.S.-made products get favorable treatment in projects funded with Mr. Obama’s $787 billion stimulus package.

The so-called Buy American provisions are creating worries abroad. During a visit Monday to New York, Brazilian President Luiz Inácio Lula da Silva warned against rising protectionism and said choking off trade threatens to hurt poor nations the most.

The International Brotherhood of Teamsters hailed the end of the road for the trucking program, and issued a sharp rebuke of Mexico’s retaliatory action Monday. “The right response from Mexico would be to make sure its drivers and trucks are safe enough to use our highways without endangering our drivers,” Teamsters President James Hoffa said.

A transborder trucking program was intended to be created under NAFTA in 1993, and has been a point of tension in U.S.-Mexico economic relations for years. Supporters said the program, which was designed to facilitate two-way border traffic, would bring lower consumer prices and new business.

But the program was grounded by safety concerns and political objections during the Clinton administration. As senators, both Mr. Obama and Vice President Joe Biden voted against Mexican truckers in 2007.

Under President George W. Bush, the Transportation Department eventually put a demonstration project in motion 18 months ago, hoping it would prove Mexican carriers could safely operate on U.S. roads. Instead, the program met fierce opposition.

Democratic critics have questioned whether Mexican authorities maintained adequate safety records on drivers, as well as whether Mexican drivers spoke English and were adequately tested for drugs and alcohol.

A long-time critic of the program, Sen. Byron Dorgan (D., N.D.) said he would work with the Obama administration to address the safety concerns. “I have said all along that I have no problem with Mexican long-haul trucks being allowed into the United States if it can be done safely,” he said.

The pilot program at the center of the trade dispute involved 29 Mexican carriers and roughly 100 trucks, far less than the 100 carriers and 500 to 1,000 trucks initially projected by the Transportation Department.

The kind of story that makes one ill

(Reuters) – Anticipating restrictions on bonuses, officials at Citigroup Inc and Morgan Stanley are exploring ways to sidestep tough new federal caps on compensation, the Wall Street Journal said.

Executives at these banks and other financial institutions that received government aid are discussing increasing base salaries for some executives and other top-producing employees, the paper said, citing people familiar with the situation.

The discussions are at an early stage, partly because the government has not yet issued specific rules on the bonus payments that will be allowed at companies that received aid under the government’s Troubled Asset Relief Program, the paper said.

The report comes on the heels of widespread outrage that insurer AIG, kept alive on a government bailout of up to $180 billion, was paying its employees bonuses of $165 million.

In February, President Barack Obama set a $500,000 annual cap on pay for top executives at companies receiving taxpayer funds.

Citigroup officials have considered designating which 25 executives will be subject to bonus limits, the paper said, citing people familiar with the discussions.

In that scenario, the new rules might not apply to lower-ranking yet still highly lucrative traders and investment bankers, the people told the paper.

“We will comply with the restrictions, in addition to the substantial changes we have already made to our compensation structure,” a Citigroup spokeswoman told the paper.

A Citigroup spokesman in Hong Kong declined to comment on the report when contacted by Reuters.

Wall Street compensation has come under intense scrutiny, especially at banks that have received taxpayer money from TARP.

Citigroup has received $45 billion of TARP money. Morgan Stanley has received $10 billion.

Morgan Stanley could not immediately be reached for comment by Reuters.

The bonus forms a large part of salaries of traders and bankers on Wall Street, the paper said.

Wells Fargo & Co, which took $25 billion of capital last year under TARP, disclosed last week that it increased the base salaries of CEO John Stumpf and two other executives, the paper said.

Raising base pay at J.P. Morgan Chase & Co isn’t being discussed, the paper said, citing people familiar with the matter.

Put the pedal to the metal Bernanke

March 17 (Bloomberg) — Chairman Ben S. Bernanke and Federal Reserve policy makers may have to ramp up their purchases of mortgage securities and other assets after the economy and job market deteriorated further since they last met.

The Federal Open Market Committee, gathering today and tomorrow in Washington, needs to redouble its efforts after the central bank’s balance sheet shrank 17 percent from a $2.3 trillion December peak, Fed watchers said. The retreat came even as Bernanke acknowledged the chance that the unemployment rate will exceed 10 percent for the first time in a quarter century.

“It takes massive balance-sheet expansion to generate significant easing in financial conditions,” said Andrew Tilton, an economist at Goldman Sachs Group Inc. in New York who used to work at the Treasury. “More needs to be done.”

This week’s FOMC meeting could mark a shift toward more aggressive monetary expansion to fight deflation after demand waned for many of the Fed’s existing programs. One top consideration is an increase in the pace and size of a $600 billion program to buy bonds issued and backed by U.S. housing agencies such as Fannie Mae, analysts said.

Other measures could include everything from purchases of Treasuries to corporate bonds, Tilton said. The Fed has already agreed to work with the Treasury on implementing a program to revive consumer and business loans, which the Obama administration has said could reach $1 trillion.

Fed Statement

The Fed is scheduled to issue its statement around 2:15 p.m. tomorrow. The yield on the benchmark 10-year Treasury was unchanged at 2.953 percent at 9:34 a.m. in London.

“The FOMC statement is the natural place to announce when such an increase would occur,” said Michael Feroli, an analyst at JPMorgan Chase & Co. in New York and former Fed economist. “Doing so at the March meeting would have the added benefit of showing the public that the Fed can respond when the outlook deteriorates.”

The Bank of Japan said today it will buy subordinated debt from banks in an effort to spur lending and the Bank of England has started buying government bonds to boost the money supply.

Financial markets have diverged since the FOMC last met Jan. 27-28, with stocks rallying even as credit markets remained distressed.

Equity investors were encouraged by signs in the past week that a depression will be averted, with Bernanke playing down that scenario in a television interview with CBS’s 60 Minutes that aired March 15. The Standard & Poor’s 500 Stock Index has risen 11 percent since March 9.

Corporate Bonds

The Bloomberg U.S. Financial Conditions Index is still about five standard deviations below the average of the 1992 to 2008 period. Standard deviation measures how much a value varies from the mean.

Investors demand an average of 6 percentage points more than corresponding U.S. Treasuries to buy investment-grade U.S. corporate bonds, according to data compiled by Merrill Lynch & Co. That’s up from 5.40 percentage points when the FOMC met Jan. 28.

Consumer borrowing costs are also elevated. The rate on 60- month loans for new cars climbed to 7.32 percent, close to a seven-year high, as of March 13 from 7.08 percent when central bankers last gathered.

“The more they expand, the better markets are going to be,” said Richard Schlanger, a vice president who helps invest $13 billion in fixed-income securities at Pioneer Investment Management in Boston, referring to U.S. central bankers.

‘Move Aggressively’

Total assets held by the Fed stand at $1.90 trillion, down from a record $2.31 trillion in December. Credit outstanding in four Fed liquidity programs, such as loans to banks and primary dealers and a facility for commercial paper, has shrunk $118 billion in two months.

“They need to make it clear they want to move aggressively,” said Ethan Harris, co-head of economic research at Barclays Capital Inc. “The economy warrants a faster move and the markets do, too.”

Bernanke calls the Fed’s policies “credit easing” to contrast with the “quantitative easing” used by the Bank of Japan earlier this decade, which targeted reserves injected into the banking system.

The Fed’s current focus is on purchases of mortgage securities and a program designed to boost consumer lending called the Term Asset-Backed Securities Loan Facility, known as TALF, which could grow to $1 trillion.

Skepticism

Bernanke’s view is if the Fed provides liquidity, credit will flow and lower the price of loans, feeding pent-up demand for homes, cars, credit-card borrowing and capital expenditures by business in the depths of the worst recession in a generation.

Analysts are skeptical. “The concern about the TALF is not so much the investor interest in it, but the availability of eligible” securities to buy, given lack of consumer demand for new debt, said Tilton of Goldman Sachs.

Consumers will borrow if they see solid job prospects and rising wealth, economists said. Right now, neither condition is in place. The unemployment rate in February was 8.1 percent, up almost 2 percentage points in the past six months. Household wealth fell by a record $5.1 trillion last quarter. Personal savings as a percent of disposable income has risen every month since August.

A less effective TALF would lead the Fed to use its authority to purchase assets and expand the supply of money, some Fed watchers said.

“I would be surprised if they didn’t continue buying another $500 billion of mortgage-backed securities in the second half given the downside risks to the economy and the fact that the mortgage market is still in a shambles,” said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

Liquidity still needed

March 17 (Bloomberg) — The Bank of Japan said it may buy subordinated loans from banks for the first time to revive lending and replenish capital depleted by falling stock prices.

The central bank is considering the purchase of up to 1 trillion yen ($10 billion) of the debt in an “exceptional” step, it said in a statement in Tokyo today. The bank concludes a two-day policy meeting tomorrow.

The 48 percent drop in the Nikkei 225 Stock Average since the beginning of 2008 decimated the value of equities held by banks, making it harder for them to maintain capital ratios and limiting their ability to lend. Earlier efforts to buoy bank balance sheets have so far failed to arrest Japan’s descent into what may be the worst recession since World War II.

“Authorities are showing that they won’t let a vicious spiral take hold between the financial system and economy,” said Toru Kitani, who manages the equivalent of $2.9 billion at Sompo Japan Asset Management Co. in Tokyo.

Holders of subordinated bonds get paid after investors in senior debt in the event of a bankruptcy, so the BOJ’s action means the institutional investors will still have an incentive to subscribe to bonds sold by the banks.

The Bank of Japan may tomorrow announce an increase in the amount of government bonds it buys from lenders as Prime Minister Taro Aso prepares a third stimulus package to ease the nation’s recession, according to economists.

The Bank of England last week started buying U.K. government bonds to expand reserves in the financial system and the Federal Reserve may unveil a similar program this week.

Government Bond Purchases

More purchases of Japan’s government bonds would help avert a jump in bond yields, which have risen on concern that the government will have to sell more debt to pay for the stimulus. The yield on the benchmark 10-year bond rose to 1.295 percent at yesterday’s close from 1.165 percent.

In the past two days bank stocks surged on speculation the central bank was considering the subordinated debt purchases.

Mitsubishi UFJ Financial Group Inc., Japan’s largest bank by market value, rose 13.8 percent in the past two days. Mizuho Financial Group Inc. climbed 12 percent and Sumitomo Mitsui Financial Group Inc. added 14 percent.

The government started its attempts to shore up bank capital in December last year by offering to buy as much as 12 trillion yen of preferred shares.

Lenders have been reluctant to participate in that program because of concern a government-sponsored injection of funds could damage their reputations. The preferred shares may also convert into common stock if the lenders fail to pay dividends or if they are unable to repay the funds by a set date. Only three regional banks applied for the funds.

A separate proposal last month by the Bank of Japan to buy stock held by the banks was met by reluctance because the lenders didn’t want to sell their holdings, after which they’d be obliged to book further losses.