Industry Affairs Report 11-09



November 13, 2009

This is the 55th report from the Industry Affairs Committee of OCAPL. The opinions expressed herein are those of the writers and not those of OCAPL, AAPL, former clients, or our current employers. The objective of this exercise is to alert OCAPL members to (a) the activities of organizations and governments that affect the way we do business, (b) public opinion that shapes legislation, and (c) judicial decisions relating to energy issues. Hopefully, this knowledge will provoke each of us to recognize the critical role we, as LANDMEN, play in sustaining America’s standard of living and thereby feel compelled to respond to the challenges before us. Your comments regarding this effort are always welcome. 

The Committee at Work: Current members in the OCAPL Industry Affairs committee include Phil Jones, Monica Smith, Brandt Vawter, Brett Hudson, John Raines and Matt Blomstedt. If you would like to participate in the committee’s effort, we would be pleased to hear from you.

Dark Pool Trade Limit Said to Be Cut 95% in SEC Plan, By Jesse Westbrook and Whitney Kisling,Bloomberg; October 20, 2009.

“The U.S. Securities and Exchange Commission will propose toughening its limits on the amount of anonymous trading carried out on stock platforms called dark pools, according to two people familiar with the deliberations. The commission will propose lowering the amount of daily volumein a company’s shares that can be executed on the networks before prices must be made public to 0.25 percent from 5 percent tomorrow, said the people, who declined to be identified because the discussions weren’t public. John Nester, an SEC spokesman, declined to comment. The rule change may curtail the number of transactions on dark pools, off-exchange platforms run by firms such as Goldman Sachs Group Inc. and Getco LLC that have drawn scrutiny from Democratic Senators Ted Kaufman of Delaware and Charles Schumer of New York. The systems usually shut down trading in a security when they approach the current 5 percent limit. “If you were to limit the dark pools to that small amount of trading, it will be much harder to find a counter-party,” said Dirk Hoffmann-Becking, a London-based analyst for Sanford C. Bernstein & Co. For stock exchanges, “if they would see less competition from the dark pool world, that would certainly be a positive for them.”

Concealing Trades

Traders turn to dark pools instead of public markets such as the New York Stock Exchange to avoid revealing their identities and giving competitors clues about their strategies. Kaufman and Schumer say the platforms limit transparency in securities markets and put smaller investors at a disadvantage. The SEC will exempt block trades, or orders exceeding a certain number of shares, from the new rule, according to one of the people. Firms specializing in blocks account for 8 percent of all dark-pool trading in the U.S., according to data compiled by Aite Group LLC, a Boston-based financial-services consultant. Transactions are biggest at Liquidnet Holdings Inc. and Pipeline Trading Systems LLC, where orders average 50,000 shares. That compares with 300 to 450 shares at venues such as Getco’s GES. The 0.25 percent threshold is smaller than Schumer has proposed. He sent a letter to SEC Chairman Mary Schapiro today requesting that the agency force dark pools to publicly display buy and sell orders after matching more than 1 percent of a stock’s average daily volume.

Schumer, Niederauer

Schumer, who held a press briefing today with NYSE Euronext Chief Executive Officer Duncan Niederauer, also wants the SEC to establish a “robust” approval process for new dark pools and treat some so-called indications of interest as formal bids. Brokers use indications of interest to demonstrate their willingness to trade shares. Schumer said they can be abused because they allow traders to gauge demand without the obligation to buy or sell. “We are not against dark pools,” Niederauer said. The NYSE just wants a “more level playing field,” he added. Employees at NYSE Euronext, the operator of the largest U.S. equity exchange, have contributed $27,250 to Schumer’s political campaigns since 2005, according to Trading on dark pools such as Credit Suisse Group AG’s Crossfinder and Goldman Sachs’s Sigma X, the two largest, has more than quadrupled to 9.4 percent of all U.S. equity volume in three years, according to estimates by Tabb Group LLC, a New York-based financial-services consultant. Bloomberg LP, the parent of Bloomberg News, also owns Bloomberg Tradebook LLC, an electronic stock-trading network that links to dark pools.

Knight, ITG Decline

Knight Capital Group Inc. fell 3.2 percent in 4 p.m. Nasdaq Stock Market composite trading, the most since July 28. Investment Technology Group Inc. dropped up to 8.2 percent before paring its retreat to 1.9 percent. Both companies operate dark pools. Shares of Nasdaq OMX Group Inc., owner of the second-largest U.S. equity exchange, climbed 3.6 percent in the biggest rally since Aug. 7. Investors use dark pools to execute bigger orders and avoid revealing details such as price and size that could move a stock, according to Sang Lee, a market analyst at Aite. The growth is hurting traditional markets, which face more regulation, the World Federation of Exchanges said in a letter last month to Mario Draghi, chairman of the financial-stability board of the Basel-based Bank for International Settlements. “The more the dark pools exist without any comprehensive regulation, the more you’re going to see liquidity siphon off from exchange markets,” Chicago Board Options Exchange Chief Executive Officer and WFE Chairman William Brodsky said at a conference in Vancouver on Oct. 7.

Publishing Data

NYSE Euronext will begin publishing how much stock trading is conducted on dark pools every day on its Web site. The NYSE will let firms that run the private networks display trading volume starting in November, the company said in a statement today. Barclays Plc, Getco LLC, Goldman Sachs, Knight Capital Group Inc. and UBS AG plan to participate, NYSE Euronext said. Dark networks “can arbitrarily decide who gets to play in their pool and who doesn’t,” said Dan Mathisson, head of Credit Suisse’s algorithmic unit. “That’s something that needs to get cleaned up.”

Senator: Mining clean-energy minerals in U.S. is critical, by Sen. Lisa Murkowski, North of 60 Mining, Vol. 3; October 22, 2009.

“U.S. Sen. Lisa Murkowski, R-Alaska, issued a detailed warning about the dangers of the nation’s growing dependence on minerals mined in other countries. Murkowski, who is the senior senator for Alaska and the ranking Republican on the U.S. Senate Energy and Natural Resources Committee, released the following statement Oct. 20:

‘Clean energy technologies face a range of obstacles. The credit crunch has slowed capital investment, disputes have arisen over which lands are suitable for infrastructure, and the electric grid has sometimes proved incapable of handling new generation. Over the long run, however, our most difficult challenge may be our most fundamental: ensuring a stable supply of the raw materials needed to manufacture clean energy technologies in the first place. According to the U.S. Geological Survey, our nation’s reliance on foreign minerals has ‘grown significantly’ over the past several decades. Last year, we imported more than 50 percent of our supply of 43 different minerals and materials. This growing dependence is important because minerals offer our best chance to harness the potential of clean energy. Even now, we import 100 percent of the quartz crystal used in photovoltaic panels, the indium used in LED lighting, and the rare earth metals used in batteries and permanent magnets. The large quantities of minerals required for clean energy technologies only add to the scale of our needs. A large wind turbine can contain more than 1 ton of rare earth elements - in addition to more than 300 tons of steel, nearly 5 tons of copper and 3 tons of aluminum. 

Taken together, these statistics signal a little-known, yet rather worrisome, trend. And even though clean energy technologies account for a fraction of worldwide mineral consumption, we’re already seeing strains in global supplies. Countries such as China have undertaken a 50-year, or longer, view of the world and continue to lock down long-term supply arrangements through investments in Africa, Australia and South America. That will help China meet its burgeoning demand for these raw materials, but it could leave our nation out in the cold at the very time we need minerals most. Rare earth metals again provide a good example of what’s at stake. Chinacurrently accounts for 97 percent of global production of these incredibly important metals and last month set off a wave of anxiety among clean energy developers by announcing its intention to decrease export quotas for the eighth time in as many years. By cutting rare earth exports,China is seeking to ensure the manufacture of clean technologies within its own borders. But the implications for energy security and job creation in America are also apparent: We risk a future in which wind turbines, solar panels, advanced batteries and geothermal steam turbines are not made in the USA, but somewhere else.

Some experts contend that the lack of a cap-and-trade system is at the root of this emerging crisis. I disagree, and I believe the primary reason why our nation has fallen behind is that we have slowly but surely surrendered the front end of the clean energy supply chain. We’re left with quite a paradox. Even as many political leaders take steps to limit mining, a reliable supply of minerals has become essential to the manufacture of clean energy technologies. If allowed to continue, we will simply trade our current dependence on foreign oil for an equally devastating dependence on foreign minerals. Even our environmental goals could be jeopardized. The widespread deployment of clean energy technologies is not only contingent upon breakthroughs in research and development but also the affordability of the raw materials used in them. If prices spike because the supply of raw materials is insufficient, entire technologies could fail. The good news is that the United States has, within its borders, abundant reserves of many critical minerals. These reserves represent an opportunity to create many new American jobs, and their production would undoubtedly facilitate a robust clean technology manufacturing sector. Particularly in these tough economic times, we should recognize that mining jobs pay well, require a high level of skill, and provide an excellent career path for those who pursue them.

I understand that many people do not want land used for mineral extraction and a wide variety of other purposes. The truth, however, is that those views are both short-sighted and counterproductive. Our standard of living requires us to generate a significant amount of energy, and that energy must be produced somewhere. All resources carry some cost to the environment, whether in carbon content or the raw materials and physical area needed to tap their potential. Albert Einstein once wrote that ‘in the middle of difficulty lies opportunity.’ Our nation faces a great challenge in the form of climate change and as we seek to advance the technologies needed to address it. But as we struggle to find our way forward, we’ll also be presented with new opportunities to strengthen our economy and our security. This is an issue on which we, too, must take the long view.’”

Shell Considering Arctic Drilling for Oil, United Press International; November 05, 2009.

“Shell said it will decide within months whether to begin drilling for oil and gas off the Alaskan coast despite strong opposition. The Anchorage Daily News said Thursday that environmentalists and Alaska North Slope officials are opposing possible Arctic drilling in the Beaufort and Chukchi seas.  Scientists suspect the two seas may hold significant stores of oil and natural gas.  Shell has already spent more than $2 billion to obtain leases in the seas, but its plans to drill there were delayed the last two years by successful litigation by the officials and environmentalists. The two drilling opponents allege drilling in the seas could lead to oil spills and negative impacts on the bowhead whale population in the surrounding area. Despite such delays, Shell has readied equipment for possible drilling to begin next summer. Shell Alaska Vice President Peter Slaib said Wednesday a final decision on the matter should be determined by December or January. The Daily News said key to Shell's drilling plans is whether the company can obtain federal air pollution permits for drilling.”

Chevron Confident About Exploiting US Shale Gas, By Isabel Ordonez, Dow Jones Newswires;October 30, 2009.

“Chevron Corp. is confident in its ability to exploit shale gas in the U.S. despite the challenges this type of resource poses for oil major companies, the head of the company said Friday. ‘Our drilling organization and our company is quite capable of multiple-well programs," Chief Executive David O'Reilly said on an earnings conference call. We have demonstrated that capability.’

Taking full advantage of the vast shale gas deposits in the U.S. is seen as a challenge for large producers. Shale gas is trapped in rocks formations, requiring intensive horizontal drilling to be unlocked -- a different set of skills than the oil giants have acquired developing large, massive oil projects based on vertical drilling. Independent, smaller producers are the ones that have been able to produce domestic shale gas successfully. O'Reilly said Chevron is trying to replicate its experience drilling multiple wells in the Gulf of Thailand where it is now producing conventional natural gas. ‘I feel pretty confident that it can be done," O'Reilly said. "But we have to be able to do that on scale to move the needle.’”

Climate Bill Likely on the Shelf for Rest of the Year, By Ian Talley, Dow Jones; November 11, 2009.

“Key Senate Democrats Tuesday said it is unlikely there will be any more major committee action on climate-change legislation this year, the strongest indication yet that a comprehensive bill to cut greenhouse-gas emissions won't be voted on until at least next year. Although the Senate Environment Committee last week approved a version of the bill, the proposal will face strong revisions from moderate Democrats, particularly from senators on the Finance and Agriculture committees.

‘It's common understanding that climate-change legislation will not be brought up on the Senate floor and pass the Senate this year,’ Senate Finance Chairman Max Baucus said on the sidelines of a caucus lunch. Mr. Baucus, a Montana Democrat, said he planned to hold a number of hearings on climate legislation and eventually mark up a bill in his panel. ‘But I don't know that I can get a bill put together by this year, as important as climate-change legislation is,’ he said.

Mr. Baucus was the lone dissenting Democratic vote on the Environment Panel last week because he wanted weaker emission-reduction targets and stronger provisions to protect energy-intensive industries and encourage clean-coal technologies. ‘I wouldn't want to bet my paycheck that all the relevant committees will report out legislation by the end of this year,’ said Sen. Thomas Carper (D., Del.).

Sen. Debbie Stabenow (D., Mich.), who is leading an effort by moderate, heartland Democrats to protect manufacturing and agriculture industries, said committees were no longer under any timetables to produce legislation. Ms. Stabenow said the Agriculture Committee—which has jurisdiction over climate provisions fundamental to containing costs and cutting emissions in the farming and forestry sectors--might not even debate or vote on any provisions for the bill. ‘The question is whether or not Agriculture actually marks up something or it gets done on the floor,’ she said.

Sen. Blanche Lincoln (D., Ark.), who chairs the Agriculture Committee, is facing a tough re-election campaign next year, and handling a highly controversial climate-change bill in her panel may risk alienating voters.

In the face of the hard-fought debate on health-care legislation--not to mention appropriations bills and finance-reform proposals—Senate Majority Leader Harry Reid (D., Nev.) has dropped his earlier schedules for committees. A Reid aide said he hadn't drafted any new timetable for panel action on climate change.

Even Sen. John Kerry (D., Mass.), a climate-bill champion who last week said committees should have climate legislation processed by the end of the year, Tuesday backed off such expectations. ‘I don't want to create artificial deadlines which get in the way of our being methodical about this,’ he said. Instead, Mr. Kerry said he is focused on getting the 60 votes necessary to pass controversial climate legislation -- a higher margin than a simple majority and no mean feat. ‘The main thing to do here is to build the adequate base of support and consensus,’ he said.”

Strong Voice for Clean Air, Editorial, The Dallas Morning News; November 12, 2009.

“The Environmental Protection Agency sent a strong message with its appointment of Al Armendariz to the region's top post: It's time to clear the air.  The selection of the Southern Methodist University professor signaled a notable shift in the EPA's approach to regulating pollution. Armendariz, who will serve as regional administrator over Texas and four other states, has been a vocal critic of both his predecessor and state regulators. He has been firmly entrenched in the clean-air camp, serving as a strong advocate for more stringent smog plans and tougher enforcement of pollution regulations. Plenty of Texas environmentalists are downright giddy about Armendariz's appointment. Several clean-air organizations went to bat for him during the selection process, writing to officials in Washington on his behalf.  Now they have reason to celebrate, as do all North Texans who are tired of inhaling our smog-choked air. There's little doubt that Armendariz will bring a much-needed, more aggressive approach to regulating dangerous pollutants.

Last year, when the EPA signed off on an inadequate air quality plan, Armendariz offered a tough critique, calling the proposal weak and "doomed to fail." He was right. But now Armendariz must find a way to transition from outspoken advocate to respected administrator. Because he has been aligned with a number of environmental groups, he now needs to build confidence among state officials and industry leaders that he will be guided by science and his strong background in environmental engineering.  

The Texas Commission on Environmental Quality already has telegraphed its concerns, with chairman Bryan Shaw issuing a statement that congratulated Armendariz but added: ‘While he has a long history as an environmental activist, I hope Dr. Armendariz recognizes that this position is too important to be used as a podium for environmental activism.’  

The EPA post is in part focused on enforcement, but the job also requires consensus building and ensuring that all sides have seats at the table and a say in the process. Armendariz certainly is up to this challenge, but he will have work to do as he builds relationships with those he has criticized.  With new ozone standards looming, tougher cement kiln rules pending and another round of pollution plans on the horizon, Armendariz comes to this job at a critical time. EPA officials in Washington already have publicly expressed their displeasure with Texasenvironmental programs, so Armendariz no doubt will have Washington's blessing to take a harder line against industries that foul our air.

For too long, Texas has shown deference to polluters, and Armendariz is poised to change that. The transition will be interesting to watch. But most important, the result should be cleaner air.”

For those who follow environmental issues, this gentleman is notorious. TheTexas DEQ is well served to be very concerned. All industries would do well to join with others to speak with a common voice to bring reality into this conversation. The economy of the State of Texas is at stake as the EPA has the power to shut-down all industry that might produce any substance that this administration feels might be excessive or detrimental regardless of the quantity.  

- J. Phil Jones