China's moment of coal truth: A question that has vexed us for some time is when we will witness an inflection point in ordinary Chinese tolerance for the coal-borne pollution in their air. At that time, we have argued, we will likely also see a sharp turn away from coal consumption, and more use of cleaner natural gas -- Communist Party leaders will see to it for reasons of political survival. With this shift will come important knock-on events, including a materially smaller increase in projected global CO2 emissions. According to Bernstein Research, that tipping point may now be past. In a note to clients yesterday, Michael W. Parker and Alex Leung argue that the moment of truth became apparent to them in two pollution protests over the last month in the cities of Shifang and Qidong. In the former, violent July protests resulted in the scrapping of a planned metals plant; in the latter last week, the ax fell on a waste pipeline connected to a paper mill, again because of an agitated local citizenry. Their paper's title -- Who Are You Going to Believe: Me or Your Smog-Irritated, Burning, Weeping, Lying Eyes? -- is a reference to what the authors regard as a general outside blindness to a conspicuous new political day. One reason no one is noticing, they say, is the curse of history itself. The record of surging economies -- comparing China with, say Japan -- suggests that a burning aspiration for cleaner surroundings over economic betterment should reach critical mass in China only in about a decade. Yet, "the clear signal from Shifang and Qidong is that China has reached the point today, where the population is ready to take to the streets in protest of worsening environmental conditions," the two researchers write. They go on:
Since we all agree that the Chinese government is focused on social harmony, the practical implication is that the government will do whatever is required to ensure that people aren't in the streets protesting not just food prices or lack of jobs, but also the environment. Few observers seem to classify the environment as the kind of issue that could excite the Chinese population into the street or the kind of issue that could result in changing political decision making and economic outcomes. And yet that is exactly what we are seeing.
The Bernstein writers seem under no illusion that their scenario will be widely embraced. In fact, they are not summoning anyone to the ramparts. Rather, their paper is a pragmatic nudge for equity analysts and customers to incorporate a very different scenario into their buy-and-sell decisions. That sounds like a reasonable call.
Philippe Lopez AFP/GettyImages
Blackout: First India, then China? Astonishment has been one takeaway from India's massive blackout, which by comparison is in the ballpark of a loss of power to the entirety of the United States and western Europe. Another reaction has been tut-tutting -- we all knew that motley India, held together with gum and spit, was not long for BRIC status. Yet India is hardly the only major economy with a decrepit infrastructure - as the Washington Post's Ashley Alsey points out, the U.S. itself is just a grid breakdown away from its own gargantuan electricity failure. In India's case, the main problem is not just shoddy infrastructure, but a shortage of coal and natural gas: The Indians haven't been able to get their hands on enough fossil fuels to fully power their economic growth.
As it happens, the world's other key BRIC -- China -- pretty much faces the same conundrum. More than 70 percent of China's energy comes from coal, and (as we note elsewhere in the Wrap) a growing percentage from natural gas. The Chinese have managed their domestic industries more successfully than India, making them less dependent on imports -- but only just. Massive amounts of coal and natural gas pour into China every day, and as in India, it still may not be enough. The myth of Chinese efficiency might have some truth, but they have faced blackouts as well, and are not immune to an India-style meltdown. A May 2012 report by the Energy Transition Research Institute found that China's electricity policy falls short of "the compound challenges of growing demand, rising costs and sustainability [and] represents a grave threat to the Chinese economy."
Matthew Hulbert, an analyst with the Clingendael International Energy Program in The Hague, calls the blackouts a "Fukushima moment" for both Beijing and Delhi. Just as Japan's disaster was a wakeup call regarding nuclear power, the blackouts are a message regarding electricity security. Hulbert argues that the two BRICs, if they can set aside their long national rivalry, could find a solution in a collaborative approach. Specifically, they could obtain coal and natural gas supplies together. Here is why: If India becomes as aggressive as China has been in obtaining coal and natural gas supplies, the two in combination could seriously drive up asset acquisition prices. But if they strategize together, they might both acquire the supplies they need without pumping up the market.
DIBYANGSHU SARKAR AFP/Getty Images
Less than a year after the departure of U.S. troops from Iraq, Baghdad is losing a primary lever over independent-minded Kurdistan -- its grip on the northern region's revenue-earning oil industry. Kurdistan's secret weapon? Foreign oil companies are exasperated with Baghdad's stinginess and allured by the Kurds' more liberal terms for oil contracts.
These companies are becoming an unintentional fifth column in Kurdistan's march toward economic autonomy. On July 31, France's Total became the third big oil company to break with Baghdad by signing an unsanctioned oil deal with Kurdistan. Baghdad, intent on full mastery over the nation's massive petroleum revenue, forbids oil companies from dealing directly with Kurdistan and instead requires them to bid for projects through the Ministry of Oil and to ship their oil through Baghdad-controlled pipelines. However, ExxonMobil, Chevron, and Total have now flouted Baghdad's wishes, putting their oil deals in Iraq's south at risk in the process. Their calculus is that despite the relative inferiority of Kurdistan's oil reserves, the potential upside there outweighs the downside threat of possibly losing access to Iraq proper, according to oil company executives with whom I have spoken.
The pressure will now be on Baghdad to somehow stem what is looking like an oil-company rebellion. It's yet another challenge for the Iraqi government, which is already struggling with rising violence and dropping oil revenue because of sagging global prices.
History has seen numerous states taken over by companies -- one thinks, for instance, of the United Fruit Company's activities in Latin America. But should this trend continue in Kurdistan, it would mark, as far as I recall, the first time that oil companies have been principal actors in a nation becoming effectively autonomous. Of course, it will be up to the Kurdistan Regional Government (KRG) to ensure that it is not swallowed up by the companies, which was the fate of some Central and South American countries in the 19th and early 20th centuries.
Louisa Gouliamaki AFP/GettyImages
A mountain-top take on the flood: If Montana is a microcosm of the world, one message to glean is that we are not in the midst of a decades-long flood of oil supply in the United States, as many suggest. Instead, the red lights are blinking across the exuberant U.S. oil patch. As you recall, much has been made in recent months about the momentous prospects for U.S. oil and gas, which are said to be leading a global fossil fuel revolution, with meaningful implications for fortune-hunters and geopolitical players alike: North America will be independent of outside oil producers, the U.S. will experience an industrial revolution, and OPEC will drift into laggardly inconsequence. So what to think about the latest news from folks approaching the punch bowl with bad intentions?
Let's start with Montana, and the now-legendary Bakken shale oil formation. Bob Brackett, an analyst with Bernstein Research, studied a dozen years of shale oil drilling data for this mountainous state bordering Canada. What he found was a steep oil production increase through 2006 -- surpassing 100,000 barrels a day -- followed by a fast, 40 percent decline to about 60,000 barrels a day today. The plummet is counterintuitive because the time frame coincides with a capital spending binge by the industry -- tens of billions of dollars poured into the new innovations and technology that have opened up the Bakken and other shale plays. So why has Montana's production dropped? "Resource plays," Brackett writes in a note to clients today, "have limited/finite drilling locations. The best locations get drilled early, the less economic ones later, and once they are drilled, operators move on." In other words, Brackett told me in a followup email, "industry drilled the low hanging fruit first, and now can't find the same quality of opportunity."
But surely this is just Montana, right Bob? You don't mean to suggest that the entire Bakken formation, including North Dakota -- on which so many North American projections centrally rely -- is in trouble, too? Sadly, that is precisely what Brackett means. In fact, he has quantified the Bakken's production trajectory. The key number is six - that is the longevity of a Bakken well before it turns into a "stripper," industry argot for a worn-out nag producing just 10 or 15 barrels a day, from 400 barrels a day at its peak. Right now, just 200 modern Bakken wells are strippers. But in roughly six years, there will be 4,000 of them, Brackett says. "All good things in the oil patch come to an end," Brackett told me. "In the case of North Dakota, that is a long time -- years -- off, but even that too will suffer the same fate" as Montana.
Even now, the fortune hunters among us are suffering. ExxonMobil, the biggest player on the U.S. natural gas patch, made its second quarter numbers yesterday only by selling off $7.5 billion in hard assets such as its Japanese refining unit. In Pennsylvania, a court yesterday rejected the state's right to compel localities to allow oil and gas drilling. What does this tell us? That just because you pick up the scent of oil and gas, a load of other factors affect how much will actually be produced, and for how long. Says Brackett in our email exchange: "There is an emerging view of a wave of oil production (from shale and otherwise) coming. I just want to point out the difficulties in an exuberant view."
Go to Part II of the Wrap.
Mladen Antonov AFP/Getty Images
What is with superheroes and fission: No film is bigger this summer than the latest Batman offering, The Dark Knight Rises. While taking in the film, we couldn't help but notice that clean energy is a central plot point -- specifically, a nuclear fusion reactor that Bruce Wayne, Batman's billionaire alter ego, builds to power his beloved Gotham City. While Wayne regards nuclear fusion as the key to clean, lasting energy for all, villains see its potential for big, city-destroying explosions.
This isn't the first time Hollywood has weighed in on the upside and downside of nuclear fusion. In the 2004 film Spiderman 2, the brilliant-scientist-turned-evil-genius Doctor Octopus displays an obsession with creating a stable fusion reaction, hence threatening the safety of Spiderman's (Tobey Maguire's) New York. Then there is Iron Man. In two films, Robert Downie Jr. powers a technological-wonder-suit with a personal-sized fusion reactor of his own design. According to Iron Man, his reactor produces 3000 megawatts -- enough to light up a few million homes. We know these characters belong in science fiction, yet how far off are their ideas from scientific reality?
The best-known nuclear energy process is fission, in which atomic nuclei are split into fragments. That is behind our nuclear reactors, in addition to the weapon that the U.S. is attempting to stop Iran from acquiring. With fusion, by contrast, nuclei fuse together and form a heavier nucleus, giving off far vaster amounts of energy as they do so. Fusion is what powers the sun (Doctor Octopus is only slightly exaggerating when he dreams of possessing "the power of the sun in the palm of my hand."). This has long enamored scientists, because fusion reactors emit less radiation and waste than fission. But fusion reactions require incredibly high temperatures, vast energy inputs, and complex pressurization techniques, leaving them still in the experimentation stage. Yet, scientists are getting closer. This month, the National Ignition Facility in Livermore, California, fired a record-setting 500 trillion watts of energy in a single burst -- over a thousand times more energy than the entire United States uses at any given moment. If Livermore scientists have their way, such laser bursts will eventually drive fusion reactions -- and a major of the supply of clean energy.
Still, that does not explain why superhero films are so hung up on fusion. By way of explanation, perhaps we can begin with their fitting grandiosity in scale and cost -- the National Ignition Facility alone cost over $1 billion to build, the kind of big money that Bruce Wayne and Iron Man alter-ego Tony Stark relish throwing around. In addition, fusion represents a chance at a brighter future, something our heroes like to dream about while they battle the dark present. Safe civilian nuclear energy usage is also about turning the potentially destructive -- nuclear power -- into the productive. Often haunted by their own violent pasts, superheroes can relate to this. (So can studios, which usually hanker for a warm ending.)
Of course, it's the downside of nuclear fusion that titillates the bad-guys. Some green energy advocates protest funding for nuclear fusion research, arguing that no form of nuclear energy can really be trusted. In a post-Fukushima world, those fears are more real than ever, and the evil plans of super-villains in The Dark Knight Rises reflect that. Yet we know that real-world Batman admirers in the laboratory will not stop attempting to realize his vision of super-charged nuclear-power.
Go to the Jump for the rest of the Wrap.
Ronny Hartmann/Getty Images
No Russian oligarch has had a longer career stretch than Mikhail Fridman -- enfant terrible, tormentor of foreign titans and, according to Forbes, the 43d richest man in the world. Now, this last pillar of no-holds-barred Russian capitalism is under threat, at least in the oil industry, where he has earned many of his billions -- challenged in the early stages of his latest unsentimental caper. Are we witnessing the final act in two decades of some of the world's rawest displays of capitalism? If so, it will be another sign of President Vladimir Putin's crusade to wring out the disorder that has always vexed him. Russia may become more boring with a tamer Fridman. But in Putin's view, that is a small price to pay for the predictability he cherishes.
The crisis for the 48-year-old Fridman, a pudgy man with an impish grin, has unfolded over the last few days. Last week, he unveiled a typically breathtaking resolution to a long-standing row with BP, his long-time partner on the Russian oil patch. If it worked, AAR, a financial group he leads, would end up with probably the largest single shareholding of the British oil company. And Fridman seemed sure it would -- people close to the Russian told me that Fridman enjoyed the Kremlin's blessing. Only, Fridman seems to have been misinformed: On Monday, his initiative was contested by Rosneft, Russia's powerful state oil company. Rosneft chairman Igor Sechin, Putin's chief oil advisor, announced that he would bid for BP's share of TNK-BP, the nation's third-largest oil producer, in which AAR and the British company are 50-50 partners. Sechin released a bland statement calling acquisition of BP's stake "an attractive commercial proposition" that will "complement [Rosneft's] existing portfolio and create value for all stakeholders." But for those who speak business Russian, the message was clear -- "bid," when it comes to a Putin-linked company, means "buy."
Playing on the Russian oil patch is a definitively courageous act - Putin regards it as a state preserve, and Fridman's 50-50 partnership with BP always crossed the line. The Rosneft move appears to be a signal of game over, according to close observers of the Russian industry with whom I've spoken -- the Fridman group's share of TNK-BP seems likely to be swallowed up by Rosneft along with BP's, with terms to be determined, and he subsequently will be pushed entirely out of the oil sector.
Should this scenario play out, it would not be your standard oligarch hanging, the string of untimely departures witnessed in the early years of Putin's first turn at leadership -- the 2000 flights of media tycoon Vladimir Gusinsky and industrialist Boris Berezovsky, and of course the 2003 imprisoning of oilman Mikhail Khodorkovsky. Fridman would retain the bulk of his fortune, his financial and telecoms empire, and most important his freedom and right to move unencumbered in and out of Russia. The same would go for Fridman's three partners in the AAR consortium -- Russian-American industrialist Len Blavatnik, German Khan and Viktor Vekselberg. Yet, by circumscribing Fridman's activities, Putin would arguably draw a final line under the age of the iconic post-Soviet oligarch, the hard-bitten, ultra-opportunistic, and ruthless men who came to symbolize Russia's chaotic 1990s, and were demonized once Putin took power in 1999. Putin is "totally fed up with [Fridman's] behavior," said a Moscow-based banker who did not want to be quoted by name. He went on in an email exchange: "Fridman has miscalculated Putin's reaction here. Putin does not like nor trust the belligerent and (his mind) unreliable oligarchs. He wants them out of the oil business."
In most annals of the era, Khodorkovsky's arrest -- after Putin decided he had been double-crossed -- marks the start of the post-oligarch era. In their place are approved oligarchs -- gas magnate Gennady Timchenko, metals titans Oleg Deripaska and Mikhail Prokhorov, among others -- who either serve specific purposes for Putin, or whose latitude is confined. Then there is Fridman, who traveled with the 1990s outcasts but managed to survive and keep up his devil-may-care ways, even in the most strategic sector of all -- oil -- always careful to assure Putin that he was only conducting tough business.
Natalia Kolesnikova AFP/Getty Images
Oligarchs in the Kremlin: For the last dozen years, we have seen ample evidence of Vladimir Putin's policy on Russia's oil and gas industry -- a paramount strategic asset, it is to be jealously held, only begrudgingly ladled out to foreigners, and always, always to remain in firm Russian hands. That being the history, what are we to make of the assertion of a group of Russian magnates that Putin has changed his spots -- that he is now prepared to allow BP to assume 100 percent ownership of Russia's third-largest oil producer?
We are speaking of course of TNK-BP, the star-crossed, nine-year oil marriage between BP and AAR, a consortium led by a take-no-prisoners Russian financial titan, Mikhail Fridman. Over the years, the two companies have gone to war numerous times, only to regroup again and earn outsized mutual dividends. But this time, both sides seem prepared to call it quits. A few days ago, AAR announced that it will enter negotiations with BP to either rebalance or -- in the more optimal alternative -- dissolve the marriage. In AAR's preferred scenario, it will be bought out in a cash-and-share deal that gives it 10-12 percent of BP's shares, possibly the largest single stake in the British company. No one can say how the end game turns out, but as a mind exercise what say we kick the tires of AAR's strategy?
Alexei Nikolsky AFP/GettyImages
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.