Exxon Mobil has considerably raised its forecast for the global switch to natural gas from far-dirtier coal. Exxon -- whose energy models have much influence because of the intellectual firepower the company's forecasters brings to bear -- says that not only will natural gas surpass coal use in the next two decades, but it will also start to come close to oil consumption, as Angel Gonzales reports at the Wall Street Journal. The big takeaway from Exxon's 20-year forecast, released today: China's natural gas demand will rise six-fold.
These are enormously consequential forecasts. We've been discussing what we think is coal's dim future for some months. Energy forecasts going forward are almost entirely founded in China's voracious appetite; it's been presumed that China will account for some 90 percent of the increase in global coal use over the coming two or three decades. But that's never made sense, unless you presume that China's Communist Party has a death wish. Unrest has already broken out in China over pollution, and it is simply absurd to conclude that the population will tolerate an order of magnitude greater coal smoke, or even more.
As we've discussed, the direction of the global energy supply will relatively soon trigger a sectoral shift in how China produces electricity. We will have supply-push demand: So much natural gas is sloshing around the world -- from Qatar, Australia, Yemen, and now possibly liquefied natural gas from the United States -- that China will shift massively to gas-fired electricity plants. This has enormous implications in terms of climate-change forecasts. In a nutshell, global warming may be less of a problem than a lot of people currently think because natural gas emits one-third of the CO2 as coal.
With Hu Jintao in Washington, and China's clean energy manufacturing juggernaut among the thorniest subjects between the U.S. and China, Steven Chu is doing his part to bring down the temperature. In a decade or two, the U.S. energy secretary asserted at a joint dinner last night, the symptoms of climate change will become so apparent that they will wash away the divisive politics we currently see in the United States on the issue. Most everyone will agree there is a serious problem, and the discussion will turn elsewhere, specifically to How Can I Get Rich in Global Warming. And somewhere in the race for wealth, said Chu, the two countries can find collaborative common ground.
It was hard to discern how many people in the packed ballroom at the Mandarin Oriental Hotel bought all that. Friendship? Hard to say. There is much acrimony over China's green subsidies, and Beijing's assertion that the U.S. does the same thing. But if there is agreement between the sides, it's on Chu's point that there is the potential for incredible economic growth for the country that best manages the green-energy manufacturing space, huge sums of cash. As we have discussed previously, the advanced battery and electric car industries alone may become large enough to drive economies.
It seems to me that, given the stakes, it will be hard to collaborate seriously, as Chu suggests. Yet the show of comradeship was there. Earlier yesterday, Wan Gang, China's celebrity minister for science and technology, called clean energy cooperation a potential "bright spot" in the two countries' relations, Reuters' Timothy Gardner and Ayesha Rascoe write. One possible area of cooperative business is the development of nuclear power - Bill Gates is talking up the deployment of a new U.S.-designed reactor in China that would not make it past U.S. regulators given years and years of trying, as Matthew Wald writes at the New York Times. If it's tried and works in China, it can be rolled out internationally.
The two sides orchestrated the signature of business deals. Yet one got the impression that at least some of this was of the Potemkin type - much nice talk without many of the details worked out. For example, Alcoa announced a $7.5 billion agreement to work with the China Power Investment Corp., but the sides actually have not agreed on any specific projects, nor any specific dollar amounts, Natalie Doss, Xiao Yu and Feifei Shen report at Bloomberg.
Chu, a Nobel laureate, said that some of his greatest scientific rivals have become his best friends. But he also noted a stark fact, which is that it's easy to be gracious once one wins the race: "The second person to say that E=MC2 doesn't get much credit." Which is why some of the rough edges can be shaved off, but the highly emotional atmosphere is likely to continue.
Drilling anywhere, any time: When in a negotiation, ask for the sky; perhaps you'll get half of it. So it is with the U.S. oil industry's chief lobbyist, Jack Gerard of the American Petroleum Institute. Interviewed by the Financial Times, Gerard says that the entire United States should be open for oil drilling, without exception. Just months after the unprecedented spill in the Gulf of Mexico, some might regard the position as a bit nervy. Not Gerard. "It is difficult to quantify how much increased production would affect imports," he told the FT, "but if companies had access to all U.S. areas now off limits, a substantial increase in domestic production would be possible." President Barack Obama has revived restrictions on offshore drilling on the U.S. East Coast, and new drilling in the Gulf of Mexico has been effectively frozen awaiting a decision on regulation of the area.
Another step toward speculation regulation: Three years ago, investor speculation rapidly drove global oil prices up to $147 a barrel, before it created a plunge to $32 a barrel. Amid another speculation-driven commodities price run-up, U.S. regulators have voted to impose caps on how much speculation a single investor can carry out. The vote in the Commodity Futures Trading Commission is not final -- that has to come later. But it would place position limits on bets on 28 commodities including oil, gas, gold, and certain foods. Such limits are required by financial-industry regulation approved by Congress last year.
Rare earths workaround: Toyota is trying to bypass a Chinese stranglehold on rare-earth elements by making cars that don't require them. Last year, China imposed a blockade on shipments of the elements to Japan, which uses them for high-tech products including missiles, windmills, advanced batteries, and hybrid vehicles. But blockades, sanctions, and shortages tend mostly to trigger inventiveness, and Toyota now says that it's close to a breakthrough in hybrid-electric motors that won't require rare-earth magnets, reports the Wall Street Journal. Rather than so-called permanent magnets, the motors would rely on electromagnets.
A new sultanate: Elections in the former Soviet Union are almost always scripted affairs -- in most cases, everyone knows who is going to win by a landslide before it happens. Such has been the case for the last two decades in oil-rich Kazakhstan, whose winner has always been President Nursultan Nazarbayev. But Nazarbayev appears to be dissatisfied with this state of affairs, and so a move is afoot to allow him to rule for another decade without the formality of the intervening two elections that are on the official calendar. The Parliament has voted to change the constitution to allow a public referendum on the question. If the referendum passes, Nazarbayev would be the first former Soviet leader to wholly dispense with the election charade.
Duke Energy's proposed $13.7 billion purchase of Progress Energy announced this morning could be a blow to Big Coal, which has ambitions to remain the planet's preeminent fuel for electric power. Both Duke and Progress have big ambitions for nuclear-fueled power plants, and Duke CEO Jim Rogers is among corporate America's loudest advocates for sharply slashed CO2 emissions.
Here is Rogers getting grilled by comedian Stephen Colbert:
|The Colbert Report||Mon - Thurs 11:30pm / 10:30c|
Much in the climate change arena has gone topsy-turvy in the last two years. Back in 2009, China and India seemed to be among the main roadblocks to a global accord on reducing the emission of heat-trapping gases; now, China is aggressively lowering its growth of CO2 emissions absent corresponding cuts in the United States. Back then, it was an article of faith that the U.S. -- the world's second-largest CO2 emitter -- was going to put a price on carbon, and lead a global campaign against Arctic melting; among the leading such voices were corporate giants including ExxonMobil. Now, climate skepticism is ascendant, Republican leaders vow to halt Obama Administration policy to begin regulation of CO2 emissions, and corporate green-speak is heard much less in the halls of power, as Anne Mulkern reported at Greenwire.
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For the last year, Deutsche Bank's Paul Sankey, one of the best long-range energy minds on Wall Street, has been distributing a series of provocative, deeply researched, and forward-looking notes to clients under titles like "The Peak Oil Market" and "The End of the Oil Age." Last week, Sankey produced a sixth note called "2011 and Beyond -- A Reality Check." Among the takeaways: As of 2010, the new electric car age is coming upon us faster than expected -- far beyond this year's conspicuous arrival of the General Motors Volt and Nissan Leaf, and the race among the world's industrial nations to dominate this technology. Converging even more rapidly, says Sankey, are far higher oil and gasoline prices, starting in 2012. Such shifts could have enormous geopolitical ramifications -- as a consequence, some countries will become poorer, and some richer, with corresponding impacts on their global influence.
Starting with the second forecast from this 59-page report, 2010 has seen a comparatively gentle respite in an otherwise unprecedented, decade-long period of turbulence in oil markets. According to Sankey, this calm is about to break. Sankey's forecast is based on the salient factor of "spare capacity." (If you are already familiar with the term, skip to the next paragraph. If you aren't, read on.) This refers to how much oil the world's petrostates can produce above and beyond current demand. So for instance, Saudi Arabia pumps about 8 million barrels of oil a day, but has dug enough wells in enough new fields to produce 50 percent more than that -- or 12 million barrels a day -- if it needs to. That excess Saudi productive capacity of 4 million barrels a day, plus about 1 million barrels a day of extra productive capability elsewhere, adds up to a global surplus of about 5 million barrels a day of spare oil production capacity -- the available volume above and beyond the 87 million barrels of oil a day consumed around the world.
Price-setters -- meaning oil traders -- see a lot of spare capacity as a cause for calm. They remain serene in the face of bad weather, pirate attacks, or pipeline explosions -- the sort of events that, in the 2006-2008 period (when there was much smaller spare capacity) sent them into paroxysms of panic, and accordingly sent oil and gasoline prices through the ceiling. This was because no one could say whence oil would come to fulfill demand. Since the world now has a cushion, we have the relative tranquility of 2010.
But Sankey effectively says that it's been a false calm. Reality is about to strike, he says, based on the following math: Global spare capacity is actually not 5 million barrels a day, but 4 million barrels a day when one takes into account what countries really produce, versus what they report. From there, Sankey projects that global demand will rise by 2.5 million barrels a day next year, and an equal volume in 2012. Looking at the future through this lens, you can see how we will rapidly work through our spare capacity buffer, and arrive right back on the knife's edge.
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A nod to $100 oil, and another sign of OPEC's wane. The Organization of Petroleum Exporting Countries (OPEC) is still closely watched for the minutest shift that could shake up oil prices, but yet again it's clear that the group is trying simply to stay ahead of more powerful market forces. The latest evidence came this week when OPEC members -- who control 40 percent of the world's oil supply -- gave their nod to $99.99-a-barrel oil prices. (This comes a month after the group expressed contentment with $90-a-barrel oil.) OPEC Secretary-General Abdalla El-Badri said that $100-a-barrel oil would be a sign that prices have gone out of whack with fundamentals, and that OPEC should act, presumably by loosening up its quota and adding supply to the market, report Bloomberg's Juan Pablo Spinetto and Nathan Gill. This week, oil momentarily crossed over the $90-a-barrel line before falling back. As for O&G, we are betting on the contrarians who believe that the giddiness is premature, and that prices will remain at current (historically high) prices in the coming year.
The big spend. Oil junkies have fretted that petroleum companies have so curtailed their exploration spending in recent years that we are headed for a huge jump in prices starting in 2012 and stretching through the decade. Not so fast: Yesterday we learned that Chevron, for one, is seriously stepping up its investment next year. The company says it will spend a full 20 percent more than planned, or $26 billion, to drill a lot more in Australia (gas) and the Gulf of Mexico (oil), among a few other places, Sheila McNulty reports in the Financial Times. This puts Chevron in the same league as top-rank spender ExxonMobil, which already said it planned to lay out between $25 billion and $30 billion a year for the next five years on exploration and other capital expenditures.
A newly cautious BP? The first possible signs of a new, far more careful BP showed up this week in the company's decision to forgo drilling in deep water off the coast of Libya until it can switch out the rig planned for the project. Eight months after the disastrous explosion of its Macondo well in the Gulf of Mexico, BP says it will not use Homer Ferrington, a rig owned by Noble Corp. that's already on site in the Gulf of Sidra, but Deep Ocean Ascension, a rig belonging to Pride International. The Pride rig is currently being outfitted, the FT's Sylvia Pfeifer reports, and drilling is now supposed to begin next year. No one is saying why Ferrington is more suitable than Ascension.
Argentina's big sale to China. Chinese oil companies continue their Latin American buying binge. In Argentina, a Sinopec subsidiary agreed to pay Occidental Petroleum $2.45 billion for oil and natural gas fields, report Jim Bai and Farah Master of Reuters. The deal includes 393 million barrels of oil equivalent (oil and gas) in what's known in industry argot as proven and probable reserves. The fields produced some 51,000 barrels of oil equivalent last year - a respectable though not eye-popping volume. But the big news is that this is just China's most recent deal in the region. In all, Chinese companies have spent $13.3 billion in Latin America on oil and gas deals this year; that is compared with no deals the previous year.
Tell me what's wrong with this picture: China burns half the six billion tons of coal consumed globally each year, a vast hunger that's ignited a free-for-all among coal suppliers and dealmakers for a piece of the action, and pushed coal prices to a two-year high. In just one week this month, U.S. and European companies signed $15 billion in deals for coal properties, Javier Blas writes in the Financial Times. Going forward, the United States appears likely to be a special focus of such mergers-and-acquisitions attention, report the FT's Ed Crooks and Helen Thomas. Yet China is barely in the dealmaking -- none of this new action involves Chinese companies. Blas quotes Melinda Moore of Credit Suisse on the topic: "I'm surprised that China has not had a greater presence in the latest round of M&A in coal, or at least not been financing more of the expansions."
That is quite an understatement. How is one to interpret why the most aggressive resource-buying force on the planet -- a country that derives most of its electricity from coal, and has a fixation on energy security verging on the paranoid -- is lying low in a buying frenzy?
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The drumbeat these days is that command economies, specifically China's, are tough to beat. Beijing simply formulates and executes a plan of action, absent messy public debate. That is the narrative, for example, on carbon emissions reductions - China, it is said, is on an inexorable Big Green Push as part of a new path of economic development. But is it?
The background is that China instructed local governments to meet emissions reductions of 20 percent by the end of the 11th five-year plan, which corresponds with the close of the 2010 calendar year. As UPI reports, local governments have responded by simply turning off the power. In a series of rolling blackouts, local authorities throughout China have cut off electricity to industries, both profitable and failing.
The glitch is that factories still have the same production quotas, which they have been meeting by turning to diesel generators. One result has been wanton competition for diesel. Chinese diesel demand will rise by 1 million tons over the coming month, according to Stratfor. As the Financial Times' Leslie Hook notes:
The Chinese government is rationing the electricity supply as it rushes to meet ambitious energy and environmental targets by the year's end, hence boosting demand for diesel, power generators and even candles as the country scrambles for extra power.
It's not just emissions reductions targets that are soaking up these diesel supplies. Twin state-owned refiners Sinopec and PetroChina have a near-monopoly on domestic refining, and despite scheduled August maintenance, are struggling to keep up with demand. Sinopec says it's considering importing 200,000 tons of diesel and is pressuring subsidiaries to increase production, but critics are accusing the companies of hoarding the fuel in order to profit later when prices go up. The government says it may tap state fuel reserves to offset the shortage.
But the larger question is the result of all this diesel burning - the generators are pouring out heat-trapping gases, raising doubts of whether China will or will not manage to meet its emissions targets after all. As The Associated Press reports, some people think that authorities should abandon the blackout strategy. "The only solution is to begin supplying more power," Citigroup economist Ken Peng told the news agency.
The lesson is that central planning only goes so far. At this point, it seems highly unlikely that China will meet its emissions targets this year anyway.
In the coming weeks, we will see the rollout of the two most-watched entries in the global electric-car race, the Nissan Leaf and the Chevrolet Volt. Both are in the headlines today, and here is the detail that caught my attention: The Leaf, writes Nick Bunkley in the New York Times, will get the equivalent of 99 miles per gallon.
For months, a drumbeat of pessimism has threatened to drown out earlier optimism about the possibility of an electric-car juggernaut over the coming decades. Electric cars and hybrids will overwhelm power grids, we are told. Governments, specifically President Barack Obama and the leaders of most of Europe, Japan, and China, are too far ahead of consumers, warns the Economist. Few will buy a car that could stall on the way home from work, U.S. News predicts. At 24/7 Wall Street, Douglas McIntyre writes, "The dream of a highway populated by electric and other low emissions cars may be no more than hope. If wishes were horses, all the beggars would ride."
And yet, that figure -- 99 miles per gallon, calculated using an Environmental Protection Agency formula in which 33.7 kilowatt hours equals a gallon of gasoline -- tips the scales a bit in my eyes. We've all been on the showroom floor, and after admiring the design lines of this or that model, we take a sharp look at the sticker, and the prominent display of the premier maintenance cost we will face, which is fuel. Consumer psychology is a tricky thing, but suffice it to say that the number 99 is a lot different from 28 or 36. The EPA hasn't certified what the Volt will get on the road, but it's going to be in the same ballpark, and I think that is going to turn a lot of heads.
In the Financial Times, Ed Crooks writes that Nissan CEO Carlos Ghosn is already doing a victory lap, arguing that his $5 billion bet on electric cars has been vindicated. That's a bit premature. But pay attention to the number 99. It's important.
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Peak coal in China. First it was rare earths, now it's coal: Ravenous China is using so much coal that it's considering a cap on production of the fuel, writes David Winning in the Wall Street Journal. China accounts for some 47 percent of the world's coal consumption at the moment, and its 2010 imports of the fuel are already higher than all of last year. In fact, here is an area of unaccustomed Chinese global weakness: Wholly fixated on energy security to the extent that it's willing to burn domestic coal with abandon, China is facing a coal deficit -- it will run out of the fuel sometime in the next two to three decades at current rates of consumption, according to Winning's sources. The United States, meanwhile, has some 240 years of reserves, and India has about a century's worth. As a result, China may turn more fully to imports, while capping production at current levels.
The oil boom town of Havana? Moscow was Cuba's closest ally for decades until the Soviet collapse, when Russia simply didn't have the money any longer to support its foreign friends. Now, Gazprom is moving in to fill the gap. The Russian gas giant is joining a half-dozen other companies in a rush to explore for oil in Cuba's waters, writes the New York Times' Andrew Kramer. Since Gazprom has no actual experience drilling offshore, its oil arm, Gazprom Neft, has bought a 30 percent share of acreage controlled by Malaysia's Petronas, which will handle the actual work. Other companies drilling include Spain's Repsol, India's ONGC, Norway's Statoil, Venezuela's PdVSA, and Vietnam's Petrovietnam. China's Sinopec is working onshore in the country. No U.S. companies are present because of a 48-year-old trade embargo. President Barack Obama has been allowing a thaw in relations, but that is likely to slow given the composition of the new Congress, in which more members are opposed to closer contact with Havana.
Peak confusion. The Saudi kingdom is reacting to a fresh spate of reports predicting a waning of global oil supplies and a corresponding spike in prices. In a talk at Rice University, Prince Turki Faisal said that, regardless of China's and India's growing demand, Saudi Arabia will use its massive resources to keep global oil prices stable, according to Business Insider. "As the demand for oil continues to rise, especially in China and India, the kingdom has every intention of meeting that demand," Turki said. His remarks came the same week as an International Energy Agency report that conventional oil production has peaked, and higher prices are on the way.
Tony Hayward's next chapter. Run out of BP after mangling the company's public message during the Macondo oil spill in the Gulf of Mexico, former CEO Tony Hayward is setting up a private oil consulting firm, called 3E Capital, writes James Quinn of London's Daily Telegraph. Hayward is also serving on the board of TNK-BP, BP's Russian joint venture.
Tariff-supported ethanol industry boosts exports. The U.S. agricultural lobby and its congressional supporters have long argued that American corn ethanol producers cannot stand on their own feet -- they need a government subsidy, which currently stands at 45 cents a gallon. Yet it turns out that U.S. producers have been churning out so much of the fuel additive that there is a surplus, and they have been exporting this bounty at record volumes, writes Gregory Meyer of the Financial Times. Nearly four in 10 bushels of this year's corn crop will become ethanol fuel, according to the U.S. Department of Agriculture. Of that, government mandates add up to 12 billion gallons of the fuel, but the industry is on track to produce some 13.6 billion gallons this year, while Americans are driving less. So it is that, according to government data, the industry had exported some 250 million gallons of ethanol as of Sept. 30, more than double the entire figure for 2009. Rob Vierhout of ePure, a European ethanol trade association, said the subsidized exports are not fair, and that the group may seek to stop the United States from allowing them.
The battle over oil demand. Over at the Financial Times' Energy Source, Kiran Stacey explores the varying oil demand projections of OPEC and the International Energy Agency. The IEA projects oil demand of 99 million barrels a day by 2035. OPEC thinks it's going to be more like 116-121 million barrels a day. While it is impossible to reliably predict oil prices, supply, or demand, it is not an inconsequential exercise to try, since so much is at stake. Currently, the world uses about 85 million barrels a day. The prevailing wisdom falls into the OPEC camp; these thinkers look at China especially and see a huge uptick in demand going forward. A compelling minority of thinkers says the majority fails to consider underlying political trends in China; they say that China's oil demand curve will not be anywhere as steep as the majority believes.
For Japan, the rare earths embargo goes on. China continues to block Japan's rare earths. Beijing had signaled that the cutoff of the strategic elements was over, but Keith Bradsher at the New York Times quotes metals traders who say that while exports have been restored to the United States, not so for Japan. The unofficial export ban to Japan began Sept. 21 with a fishing dispute in the East China Sea and spiraled into an international incident.
Beets, anyone? Energy guru Charlie Maxwell forecasts $300 oil by the end of the decade, and a higher diet of root plants. Speaking with Olivier Ludwig of IndexUniverse, Maxwell points to depletion as the key factor -- the natural pressure in old oil fields is dropping, and by 2015 or so the energy world will begin to be out of balance. Demand will begin to exceed supply, and a price spiral will begin. When that happens, our current lifestyles will start to be too expensive. Maxwell says that the only way out is more energy efficiency.
Costly but with a high envy quotient. With the gift-giving holidays upon us, the world's luxury carmakers respond with sleek, fast and comfy wheels for the green-minded, Vanessa Furmans reports at the Wall Street Journal. Hybrid entries are here or about to be from Bentley, BMW, Ferrari, Mercedes, and Porsche. They carry steep price tags -- Porsche may charge north of $600,000 for the model it expects to market in 2013.
The latest oil boomtown. The oil flow is picking up out of long-declining producer Iraq, reports Chip Cummins of the Wall Street Journal. Cummins profiles the world's newest oil boomtown, Basra. The activity is the object of much attention because, to the degree that Iraq can boost production toward its target of 12 million barrels a day from the current 2.5 million barrels a day, the country will reduce concerns of a price spike in the latter part of the current decade. The consensus among analysts is that the production aim is quite high, but that Iraq may be able to reach about 6 million barrels a day.
Autumn of the son-in-law. Finally, we turn to the travails of Rakhat Aliyev, the estranged former son-in-law of petro-state leader Nursultan Nazarbayev, the president of Kazakhstan. For the last three years -- ever since Nazarbayev ran Aliyev out of the country under still unclear circumstances -- Aliyev, on a blog at LiveJournal, has been providing a gusher of entertaining taped conversations, articles, and even a book that he says expose the corruption and general perfidy of his former father-in-law. On Tuesday that came to an end with the unexplained suspension of the blog, reports Lenta.ru. LiveJournal is owned by SUP, a Russian media company.
One truth that few people watching the energy space seem to grasp is that the world will not shift away from its absolute dependence on coal any time soon -- certainly not in the first half of this century, and probably not in the second, either. Coal provides half the U.S. electricity supply, and an even higher percentage of China's. Cleaner natural gas can and will provide a sharply growing percentage of the fuel needed to produce electricity, and more nuclear power plants will be built. But coal's advantages -- its plenitude, its cost, its carbon density -- all put it leagues ahead of the competition. Therefore, for those concerned about a rise in ground temperatures because of the increase in carbon dioxide levels, coal -- the dirtiest of the fossil fuels -- must be cleaned up.
As it turns out, China, which recently surpassed the United States as the biggest carbon dioxide polluter on the planet, is engaged in a typically gigantic enterprise to accomplish just that. In concert with experts from the United States and elsewhere, China is rolling out experimental coal-burning plants which, their managers hope, will eventually allow them to trap or sequester carbon, or to gasify coal instead of burning it, on a massive scale.
There: In 210 words we have synthesized James Fallows's 8,157-word opus gracing the cover of next month's Atlantic. Not to be snarky -- you can read the whole thing if you wish -- but that is basically the entire story.
Here are a couple of added snippets that were interesting, both from David Mohler, Duke Energy's chief technology officer. Mohler describes how his company, lacking the ability to road test its ideas in the highly regulated United States, finds synergies in China, which can and does roll out gargantuan new enterprises in the blink of an eye: "We have some advanced ideas. They have the capability to deploy it very quickly. That is where the partnership works." Mohler also riffs on the scale of future energy demand that is driving China's clean-coal research:
We learned that China is preparing, by 2025, for 350 million people to live in cities that don't exist now. They have to build the equivalent of the U.S. electrical system (that is, almost as much added capacity as the entire U.S. grid) by 2025. It took us 120 years."
The International Energy Agency -- the autonomous Paris-based research group funded by an array of mostly European and Asian governments -- has released its annual energy outlook (English language executive summary here), one of the most eagerly awaited big-picture prognostications in the business. The takeaway from this year's report, which was leaked to the Financial Times last week, is that governments matter: What they do, or don't do, about climate and energy policy in the next decade will determine what we pay for oil, and how much of it we have.
In the IEA authors' words, "the age of cheap oil is over." The question is how expensive it gets. Consider this chart:
We're looking at several energy scenarios for the next quarter-century: a business-as-usual scenario (the red line above), a scenario in which industrialized countries pursue the relatively modest policy goals they agreed to at the last year's botched Copenhagen summit (the blue line), and a scenario in which those countries pursue the sort of ambitious overhaul of their energy use that would be required to hold the atmospheric concentration of carbon dioxide to the level that climate scientists believe is necessary to avert the worst of climate change, or a 2-degrees Celsius rise in global temperatures (the green line).
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Over at the New York Times, I'm part of a panel discussing whether the United States needs to re-create a homegrown rare-earths industry even though such mining can be highly polluting. One point I make is that so many companies are responding to China's actions that we are actually in danger of a rare-earths bubble in a few years. The trick will be bridging the gap between the current shortage - in which China enjoys a near monopoly -- and a future period of abundance. Reuters raises the same point in an interview with a clutch of experts. One answer seems likely to be found in countries like South Korea, which says it has found a new rare earths deposit.
There has been talk that China is going to further tighten rare earth exports next year. On Friday, Trade Minister Chen Deming sought to tamp down the alarm by saying that exports will remain the same in 2011 as this year. But that served to confuse the situation as just three days earlier a ministry spokesman said the exports will be cut slightly in 2011. China meanwhile is also mulling tighter environmental rules governing rare earth mining.
The world versus China on rare earths. An unusually broad and multinational coalition of business associations wants the G-20 nations to help persuade China to reopen its exports of rare-earth elements. Some three dozen associations from the United States, Germany, Japan, South Korea, and elsewhere asked all G-20 members in a letter to "renounce interference with commercial sale of rare earth elements, domestically or internationally, to advance industrial policy or political objectives." The appeal follows a Chinese shipping embargo on rare-earth exports to Europe, Japan and the United States that began with a dispute over a fishing trawler in the East China Sea. The G-20 will start meeting next week in Seoul.
A Georgian vote for electric fleets. Shai Agassi got Israel to agree to be a guinea pig for his company Better Place, which aims to provide a network of battery-charging stations for electric cars. But now former Soviet Georgia wants to do him one better: It says it will replace its entire government vehicle fleet with electric and hybrid cars over the next four years. The New York Times' Andrew Kramer figures the plan will cost Georgia between $88 million and $166 million, depending on which commercial brands it buys. Georgia largely subsists on foreign aid, but the United States and Japan may welcome such ambition given current pessimism about electric-car sales.
It's official: Higher oil prices are coming. Over the last two years, petroleum behemoth Saudi Arabia has endorsed oil prices in the $70-per-barrel range, and that is largely where they have stayed. Now the influential kingdom is backing a price boost to $90 a barrel, and prices have recently moved in that direction, closing over $86 a barrel. Saudi oil minister Ali Naimi signaled the shift in a statement in Singapore. Meanwhile JPMorgan Chase and Bank of America Merrill Lynch are both forecasting a jump to over $100 a barrel next year, and the International Energy Agency says prices will be tempered in the coming decades only if governments enact climate-change rules that cause oil demand to drop.
The coming Caspian oil boom. The International Energy Agency is projecting that the Caspian states -- Azerbaijan, Kazakhstan, and Turkmenistan -- will produce 5.4 million barrels a day by 2025, double today's volume, and enough to satisfy 9 percent of total global demand at that time. The IEA also notes, however, that Russia continues to choke off the Caspian natural gas exports.
Shell in trouble for palm-greasing. Royal Dutch/Shell, Switzerland's Panalpina World Transport and five oil service companies are paying $236 million in penalties to settle a bribery case with the U.S. government. The companies admit that they paid millions of dollars in bribes to officials in seven countries -- Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia, and Turkmenistan -- in order to facilitate customs shipments and to circumvent other rules.
Elon Musk's new friends. Panasonic is investing $30 million for a 2 percent share of Tesla Motors, the Silicon Valley electric-car startup run by Elon Musk. The Japanese electronics-maker joins Daimler and Toyota as big-ticket investors in Musk's company. Tesla already produces a $109,000 high-end car called the Roadster, and wants to build a mid-range vehicle called the Model S.
Hillary Clinton has urged Asia's smaller countries to rally around the United States. She has offered to mediate prickly territorial disputes between Asian allies and Beijing, and is trumpeting the early stages of an embryonic U.S.-India axis to thwart Chinese excesses in Asia. This is giving the United States some newfound credibility in Asia, where President Barack Obama begins a four-nation visit on Saturday. Leaving domestic trouble behind him, Obama will find Japan cooling down in a dispute with the United States over a Marine air base; the Vietnamese negotiating a deal to obtain U.S. nuclear power technology; and the Philippines thinking about turning to the United States as a go-between in its dispute with China over the Spratley Islands.
The forces behind this activity are not new -- Japan and the other rising tigers in Asia have been increasingly worried as China becomes less huggy and cuddly in the wake of a financial crisis that has accelerated its rise as a global power. But what's triggered the sudden upsurge now of tete-a-tetes, the type that have driven China's foreign minister, Yang Jiechi, to glare at the foreign minister of Singapore, George Yong-Boon Yeo, and pointedly declare, "China is a big country and other countries are small countries, and that is just a fact"?
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Rare earth watch. The escalating, month-long log jam in the Chinese export of rare earth elements may have come to a close. Keith Bradsher of the New York Times reports that Chinese customs officials this week began allowing shipment of the 17 minerals and metals -- essential in the manufacture of hybrid cars and wind turbines, in addition to a range of other high-volume consumer products. The cutoff coincided with a confrontation between China and Japan last month over a group of islands. This does not bring an end to the global trouble -- India, Kazakhstan, Mongolia, the United States, and elsewhere plan to start providing alternative sources of the elements, but it will take years to scale up such operations. Meanwhile, the price of the metals has soared.
BP's Dudley on the attack. BP's new CEO, Bob Dudley, expressed his unhappiness with rival companies and the media, which he said rushed to judgment while stirring up unnecessary fears after the April explosion at the company's Gulf of Mexico Macondo drilling operation. (A PDF of the speech is here.) But while Dudley is not thrilled with the company's rough treatment, more problems arose as a U.S. presidential investigative commission issued a report saying that both BP and Halliburton knew weeks before the accident that cement used to seal the well wasn't stable. Halliburton issued a statement raising questions about the report.
Build it and they will come? J.D. Power doesn't think so, at least as regards hybrid and electric cars that are about to flood the market. The market research company says that such vehicles will account for 7.3 percent of global sales by 2020. J.D. Power says that cost will be a major factor in holding down the sales -- regardless of government subsidies, the cars still cost more than gasoline-driven models. That's cold water on the plans of GM and Nissan, who are releasing the Volt and the Leaf, respectively, next month in the U.S.
Chevron is drilling again in the Gulf of Mexico, and the rest of Big Oil won't be far behind now that the Obama administration has cleared the way, the Financial Times' Lex columnists report. As for the South China Sea and the Gulf of Guinea, they are under siege by upstarts like PetroVietnam and Ghana National Petroleum Co.
It's not news that the age of Big Oil is waning, as national oil companies like Petrobras and the Chinese National Petroleum Co. drill their own reserves, and venture abroad as well. But PTT Exploration and Production? As Tim Johnston writes in the FT, Thailand's state-owned oil group is hunting oil, gas and coal assets in Brunei, Indonesia and Madagascar with a $1.9 billion war chest. It may not seem like much considering the sums that Big Oil throws around, but Thai companies in general have been successful acquirers in recent months.
The rare earths imbroglio continues. The New York Times' Keith Bradsher has another report on the slowdown of rare-earth exports from China: This time, he wrote, the flow of the strategic elements has slowed to not just the United States but also Europe. The Obama Administration ordered an investigation into the report. Two weeks before the U.S. mid-term elections -- in which the dastardly Chinese are already emerging as a popular bogeyman -- the elements are likely to come up as a political issue.
Sanctions tighten on Iran. The United States succeeded in further tightening oil sanctions on Iran this week, when Japan's Inpex said it would join European companies and halt its relationship with Tehran, which Washington is attempting to push to the negotiating table over its nuclear development program. (The Iranian government, meanwhile, played down Inpex's announced withdrawal from development of the Azadegan natural gas field.) That now leaves China as the last major country with significant energy investments in Iran, John Pomfret reported in The Washington Post.
Did Britain just institute a carbon tax? Earlier this year, Britain's Department of Energy and Climate Change launched a carbon emissions reduction policy that would have levied a pollution charge -- about $22 per ton of carbon -- on Britain's 4,000 biggest energy users, then paid the money back to the same companies in the form of energy efficiency incentives. It was a revenue-neutral approach -- until Wednesday, when the government quietly decided to keep the money, on the order of $1.58 billion a year. David Roberts at Grist explains.
China braces for a flood of LNG. If you want to gauge how much liquefied natural gas a country plans on using in the coming years, look to the shipyards. Case in point: The Chinese shipbuilding company that has built all of China's LNG tankers to date is ramping up its tanker construction efforts in preparation for what it anticipates will be a quadrupling of LNG imports between now and 2015, one of the company's top executives told Bloomberg News on Thursday. China's LNG consumption, if it lives up to the current projections, will have ramifications far beyond the country's shores -- just ask the companies building pipelines in Alaska.
Another $1.5 billion for biofuels in the United States. After the collapse of efforts to pass cap-and-trade legislation and hopes fading for even more modest renewable energy legislation, these are not the best of times for the clean energy industry in Washington -- unless, of course, you're in the biofuels business. Reuters reports that the U.S. Department of Agriculture is throwing another $1.5 billion at the industry in an effort to meet congressionally mandated targets for the production of still-commercially-unproven advanced biofuels by 2022. As for the 54-cents-a-gallon tariff on imported ethanol -- a reliable source of teeth-grinding for Brazil's government and sugar cane industry -- Agriculture Secretary Tom Vilsack says it's probably sticking around, though it's likely to be phased out in the future. File that in the "I'll believe it when I see it" folder.
Chevron drills deeper. Well, that didn't take long -- barely a week after the Obama administration lifted its moratorium on deepwater drilling in the Gulf of Mexico, Chevron announced Thursday that it would develop two fields in the Gulf estimated to contain some 500 million barrels of oil. The project is pegged at $7.5 billion, and would involve drilling wells deeper than BP's ill-fated Macondo operation. "In the end, the United States needs the oil and gas and other countries need the oil and gas, and some of the best places to explore are deepwater environments," Bobby Ryan, Chevron's vice president for global operations, told the New York Times' Clifford Krauss.
The supply of so-called strategic rare earth metals -- needed for wind turbines, advanced batteries, disc drives, flat-screen TVs, and smart bombs, among other things -- has definitely either slowed or stopped from China. The question is why: Has China cut off Japan in a pique of ill-will triggered by festering resentment over World War II or over the maltreatment of a fisherman? Is the U.S. now suffering because it has dared to challenge China's clean-energy industry subsidies? Or are there more benign reasons, such as the possibility that widely announced quotas for the minerals have run out in the late part of the year?
Chinese Premier Wen Jinbao says that China isn't using its near rare-earths monopoly as a "bargaining chip," China Daily reports. Beijing also says it is not violating its pledges under the World Trade Organization, as the Financial Times' Leslie Hook and Mure Dickie write.
The rare-earth hullabaloo is reminiscent of the alarm bells raised over Middle East control of oil -- it is inherently concerning, after all, when one country or a set of countries wield leverage over a desperately and widely needed product. The more so when those holding that near-monopoly shrink the product's availability, as China has done. China retorts that it's a bunch of Sturm und Drang: It is not embargoing anyone, and if shipments are down, it is because China must husband a limited resource, protect its environment, and supply its own industries.
A few days ago, the United States responded to a United Steelworkers suit by announcing an investigation of China's alleged gargantuan subsidizing of its clean-energy industries -- something regarded by many countries, including China, as a strategic priority. Today we get China's apparent reply: Beijing is cutting off its exports of rare-earth minerals to the United States, according to the New York Times' Keith Bradsher.
The 17 rare-earth minerals are crucial to the manufacture of high-tech products such as advanced batteries and flat-screen televisions, and in military equipment such as missiles and jets. China mines about 95 percent of the world's rare earths.
The news comes the same day that China announced that it is further reducing the export of the minerals to all countries next year. In July, Beijing said it would reduce its rare earth exports by about 40 percent. Next year, it's set to reduce that volume by another 30 percent, according to another report by Bradsher.
The issue of rare earth availability has alarmed numerous companies and countries. Japan got cut off Sept. 21 after one of its naval cutters arrested a Chinese fisherman for ramming Japanese patrol boats. Since then, several companies have announced plans to accelerate the re-opening of rare earth mines in Australia, the United States, Mongolia, and Kazakhstan, but bringing such projects to fruition can take years.
This latest move significantly escalates a steady increase in economic and trade moves by both countries. If confirmed, the Obama administration might have no choice but to reply with some similar action, particularly given the poisonous mid-term election atmosphere in the United States.
Luck has not been BP's dominant experience this year. But the company is trying to align the stars as it can by shoring up relations where it needs to, while scaling back where it has to. Case in point: The company has sold oilfields in Venezuela and Vietnam to its volatile Russian joint venture, TNK-BP. That raises $1.8 billion for BP, and throws wood on the fire of its newly warm relations with its sometimes-restive Russian associates.
The four oligarchs who are BP's partners in TNK-BP have had two main complaints over the years. One is BP's reluctance to broaden TNK-BP's reach outside of Russia; the purchases in Venezuela and Vietnam, plus plans to try to buy BP gas assets in Algeria, address that. The other gripe has been cold cash: The Russians want more dividends for their 50 percent stake in the company. BP has addressed that one too, last week announcing a record $4 billion cash dividend to shareholders.
New CEO Bob Dudley is on a similar charm offensive with BP shareholders. A couple of weeks ago, he announced that he will try to restore BP's usual Big Oil-leading dividend next year. The dividend payment, which had been 9 percent, was frozen in June amid the Gulf of Mexico oil spill crisis.
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CNOOC, Statoil Invest $1 billion in south Texas' Eagle Ford oil shale. Guess who will be scrutinized and who won't? The betting is that the Chinese National Offshore Oil Corp. will not suffer another fiasco like in 2005, when it lost in its attempt to land Unocal. This time it will manage to hold on to its investment, in this case a $1.1 billion buy-in into the scorching hot shale bonanza. Yet some analysts say that election-year jingoism in the United States could again leave China out in the cold. Ditching the deal will be difficult, however, since it was announced on the same day -- Oct. 10 - that Norway's Statoil unveiled its own, $1.3 billion deal with Talisman involving another section of the Eagle Ford field. Given the continued interest of U.S. energy companies in China, the Administration and Congress may have to tough out any instinct to scuttle the CNOOC project.
IEA Bumps Up Oil Demand Forecast for 2010, 2011. The Paris-based International Energy Agency lent credence to those who believe that the global economy is slowly recovering with its much-watched oil report. The agency said increased demand in both developing and industrialized countries means the world will use 86.9 million barrels a day this year, 300,000 barrels a day higher than previously forecast, and a full 1.5 million barrels a day more than last year's recessionary pullback. Next year, the IEA predicts, demand will rise another 1.3 million barrels a day. What does this mean? Not lower gasoline prices at the pump, that's for sure. Possibly, however, that the record inventories of oil around the world will start falling, and put a floor under what this year has been a volatile market. Reports by Deutsche Bank, France's Total and a couple of think tanks have foreseen comparatively high oil prices headed into the middle of the decade, before falling again, and this could be the start of that climb.
Oil: another target in the Afghan war. Militants linked to the Taliban have spent much of the last 10 days or so blowing up NATO oil and fuel tankers plying routes from Pakistan into Afghanistan. Today there was another attack in the Khyber Pass leading from the Pakistani city of Peshawar into eastern Afghanistan near Jalalabad, where two died in an attack on a NATO fuel truck. It is a time-tested strategy -- war combatants have been targeting each other's fuel supplies ever since Winston Churchill triggered the age of strategic oil just before the outbreak of World War I. Over at Wired's Danger Room blog, Katie Drummond writes of a three-mile-long jam of NATO fuel trucks on the very same route (the piece includes must-see satellite images of the bottleneck by DigitalGlobe).
Moratorium lifted in the Gulf of Mexico. Taking no chances with control of Congress on the line in Washington, President Barack Obama lifted a moratorium on drilling in the Gulf of Mexico more than a month before scheduled. Six months after five million barrels began spilling into the Gulf from BP's Macondo well, the administration said that oil companies again can drill in both shallow and deep water, though under a tighter regulation regime, and with more surprise inspections. At Investing Daily, Jim Fink calls it Obama's "October Surprise." But Obama was wrong if he thought the move would silence the hecklers. Over at the State Column, a still-dissatisfied Louisiana Gov. Bobby Jindal took a swipe at Obama and his "harsh," "job-killing," "arbitrary," and "capricious" decisions regarding the Gulf.
Is China still sore over the humiliation of tuna fisherman Zhang Qixiong? Is it China's 32 rare-earth metals exporters -- are they, as Chinese Commerce Minister Chen Deming suggests, so wound up over Japan in general that they have decided collectively to strangle Japan's electronics and hybrid-car industries, as Keith Bradsher and Edward Wong report at the New York Times?
China's ban on the export of the 17 so-called rare-earth metals -- indispensable as of now in the manufacture of high-tech products like wind turbines, advanced batteries and flat-screen TVs -- has now passed three weeks in length. Chinese Prime Minister Wen Jiabao says this isn't political: Beijing, he says, isn't attempting to demonstrate its dominance over Japan. That sounds right. Instead, this looks like standard economics.
What hasn't received much attention is that, while no rare-earth metals have gone -- at least legally -- to Japan since Sept. 21, China has continued to freely export finished products such as advanced magnets in which rare-earths are embedded.
Beijing Review has an interesting interview with Lin Donglu, of the Chinese Society of Rare Earths, and Wang Hongqian, of China's Foreign Engineering and Construction Co. In it, the two men discuss China's efforts to develop advanced rare-earth industries, and not be simply a raw-materials supplier to the world. They also cite western complaints about China's hardball incentives for western companies to relocate in China -- these companies are facing restrictions on rare earths that they can import, but are offered all the metals they wish, at lower prices, if they move their factories to China.
This may explain the China-Japan rare-earths standoff: Beijing is signaling more forcefully now that, if Japanese companies want broad access to rare earths, they should move to China, or buy their rare-earth components from Chinese companies.
Beijing is telling companies in the rest of the world the same thing: You could be next.
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The crazes come upon us with such increasing frequency that it's easy to become jaded. There are the "i's" for instance -- the iPod, iPhone, iPad. Before we know it, many of them become bubbles -- solar panels, mortgage-backed securities, ocean-front Florida real estate. So is President Barack Obama feeding another of these manias with his push for advanced batteries and electric cars? He is getting push back, to be sure. At Slate, for example, Charles Lane says basically that Obama has gone in for rich, snobbish sissies. The Economist says electric cars are "neither as useful nor as green as their proponents claim."
But, in a piece in the new issue of Foreign Policy (just out today), I argue that, notwithstanding whether the surge of electric cars upon us actually gains traction, the race to create and dominate this new industry is very real. And the contestants - every major economy on the planet, and more - think the prize to the winner will be geopolitical power. In a nutshell, China, Japan, South Korea, a bunch of European nations, the U.S. and others think the winner will dominate the last half of this century. All could be wrong, but they would feel worse if they weren't in the race at all. Here is a slide show of some of the cars we are talking about.
For the Chinese National Offshore Oil Co., otherwise known as CNOOC, the summer of 2005 must seem like ages ago. That's when the entirety of the U.S. foreign policy apparatus, the state of California and all good American patriots arose in unison and said no, a Chinese company could not buy the highly important strategic U.S. asset known as Unocal. So it was that Chevron swallowed Unocal, and CNOOC (pronounced Shnoss) and other Chinese companies went on to acquisitions elsewhere in the world.
Over the weekend, CNOOC closed a $1.1 billion deal to help finance Chesapeake Energy's enormous gamble on shale oil and gas drilling, the big new rush in the energy industry. Specifically, the money will go for Chesapeake's shale oil play called Eagle Ford, in south Texas.
Has anyone heard a peep from the anti-foreign investment crowd this time around? Not me.
Tianjin climate talks get underway -- but does anyone care? A new round of international climate talks opened on Monday, as delegates from 177 countries met in the northeastern city of Tianjin for preliminary discussions on a carbon emissions agreement to replace the Kyoto Protocol, which is set to expire in 2012. The talks are to be followed by a more formal climate summit in Cancun set to open on November 29, and the Tianjin meeting was a chance for delegates to discuss the complex legal framework and cost estimates that will come with instituting a global emissions reduction scheme. The finger-pointing that plagued the abortive Copenhagen talks last December resurfaced, as Chinese officials accused developed countries of not doing enough to reduce their own carbon emissions and argued that those countries should accommodate the growth of emerging economies such as China. The conference stalled as Beijing repeatedly refused to discuss a global emissions reduction scheme, favoring a system of varying individual commitments. Although China has great ambitions in clean energy development, it has long been reluctant to adopt any globally-binding set of carbon reductions for fear of curbing its economic growth.
Shale gas boom could turn U.S. into exporter. The U.S. is continuing to experience a shale gas boom, as companies sunk $21 billion into the shale gas investments for the first half of 2010, according to a report by consultancy Wood Mackenzie. High-profile investments in gas have also come this week, as Barclays paid $1.15 billion for some of Chesapeake Energy's shale assets and General Electric announced its $3 billion acquisition of Dresser, which makes gas engines used in natural gas production. As new extractive technologies have made shale gas commercially viable, U.S. gas supplies have continued to grow ever larger, pushing prices down to some of their lowest levels in the last decade. But despite the adverse pressures of a domestic gas glut and low prices on U.S. gas production, companies are eager to enter the market for what they see as a potential growth prospect. As Sheila McNulty reports in the Financial Times, that growth could come increasingly from U.S. natural gas exports, as some companies are already looking to refit expensive liquefied natural gas import terminals for export. Natural gas exports would give a boost to U.S. gas producers by raising the price slightly at home and thus discouraging cutbacks in production. While natural gas prices in Asia remain high thanks to strong demand, U.S. gas exports could join those from Russia, Qatar, and Australia in bringing down world natural gas prices for years. The upside from this domestic gas glut? Lower prices could see gas continue to become a highly attractive and cleaner alternative to coal and oil as a power source, though admittedly, as McNulty writes on the FT's Energy Source blog, U.S. energy policy and infrastructure have a way to go before that happens. So for now, look for exports to be the path to profitability for U.S. gas producers.
First U.S. wind farm finally moves forward. The Cape Wind development off the coast of Massachusetts, the first U.S. offshore wind farm project, cleared the last regulatory hurdle this week nine years after it was submitted for approval, as Interior Secretary Ken Salazar signed the federal lease for the project on Wednesday. The project is expected to generate enough electricity to power 400,000 homes, but it had faced stiff opposition from wealthy landowners and local businesses on Cape Cod and neighboring islands. The Obama administration is expecting news of the project's green light is shore up its commitment to green energy, particularly after an accompanying announcement this week that the Interior Department has approved the first solar power plants to be constructed on federal land.
How the Senate energy bill was lost. Ryan Lizza at the New Yorker has a detailed and comprehensive piece out this week chronicling the failure of the Senate's climate change bill. According to Lizza, the Senate and the Obama administration had a golden opportunity to pass a comprehensive climate change bill in 2009 and early 2010, especially as bipartisan support in the Senate seemed likely. Sens. John Kerry, Joe Lieberman, and Lindsay Graham had formed a working partnership to getting a bill passed. But the bill foundered as the administration's commitment to climate change took a backseat to healthcare reform, and the White House repeatedly gave up concessions -- such as an easing of offshore drilling restrictions in March -- that the three senators had planned on using as bargaining chips to attract Republican support. The bill was further strained by the influence of utility special interests, and as the political atmosphere ahead of the midterm elections turned increasingly partisan, the partnership at the heart of the bill ultimately disintegrated.
Oil continues rally to new highs this week. Crude oil remained above the $80 mark this week, reaching five-month highs above $83 a barrel on Wednesday and Thursday before declining late Thursday. Crude rebounded on Friday, currently trading at $82.56 per barrel in New York. The price climb has been driven primarily by a weak dollar, which hit a 15-year low against the Japanese yen this week. Contributing to the dollar's decline was speculation that the Federal Reserve would act soon to print more money in order to bolster the economy, a procedure known as quantitative easing. The release of the Labor Department's jobs report on Friday, which detailed no change in the unemployment rate for September 2010, only fed that speculation, lessening the appeal of the dollar and boosting the appeal of crude, which are denominated in dollars and become attractive when the currency weakens. As OPEC prepares to meet next week in Vienna, the cartel is unlikely to respond to the recent price rise by increasing production quotas.
One of the strongest current global trends, as we've been discussing, is the world's growing glut of natural gas. We are swimming in it, and yet more keeps coming. This has both financial and political implications. On the financial side, nations relying on gas income -- Australia and Qatar among them -- have years to wait until prices recover from their current fire-sale lows. On the political side, the ocean of gas is likely to push its way on a much larger scale into China, which will be a much cleaner industrial power than feared.
But how much of a game-changer is this surplus? Could it, for example, seriously curb the world's appetite for abundant and cheap, but dirty, coal? If it does, it will mean an additional political shift, since coal is the key driver of current projections of the rise of heat-trapping gases over the coming decades. John Malone, an analyst with New York-based Ticonderoga Securities, tells me that the chessboard extends to developments in India, East Africa and South Korea, and that a general gas-triggered shift away from coal "seems inevitable:"
On the supply side, there's all the sources you mention, plus the domestic unconventional gas potential, plus the Turkmenistan supply, and further out, as Central Asian infrastructure supplying gas to China expands, you could finally see a real outlet for the world's second-largest gas reserves next door in Iran. And there are going to be plenty of significant gas finds as exploration ramps up in East Africa, where I suspect the Chinese will be bumping up against India and the old-school Japanese and Korean LNG players to get export plants lined up.
On the demand side I think gas has a lot of support as well -- plentiful, diversified supply, relatively cheap and clean (especially important given the anecdotes I've heard about local disturbances over pollution). China is putting serious effort into electric transportation, which gas will support until renewables take hold. They have the right idea about transportation -- take the pain now of building the infrastructure needed to solve the chicken/egg problem, then use every means possible (gas, coal, hydro, solar, etc) to make the power -- an electron's an electron, doesn't matter how it's created. And after all that Beijing gets to brag about Chinese greenhouse gas cuts, all for doing something they'd have done regardless of the emissions reduction. Not a bad deal.
If you've been looking for a sign as to where Alaska will ship its latest bonanza -- a mother lode of natural gas -- it came yesterday, when ConocoPhillips CEO Jim Mulva announced that his company was reviewing its plans to work with BP on a $32 billion pipeline project. Translation: the winds are blowing to Asia, specifically China, and away from the Lower 48. Why is this important? Because it could transform China's future energy appetites -- for the better.
The backstory is this: ConocoPhillips and BP have the gas equivalent of 6 billion barrels of oil stranded on Alaska's North Slope. The oil flow from the north is dropping, and now Mulva and BP CEO Robert Dudley -- and the whole state of Alaska, whose population relies on annual dividend checks from their hydrocarbon bounty -- need to figure out how to make up for the revenue loss by getting that gas to people who will buy it.
There have been two options: piping the gas to the Lower 48, or to a West Coast port, from which it would be shipped to Asia in the form of liquefied natural gas. ConocoPhillips and BP's project -- a $32 billion, 1,700-mile pipeline called Denali that would carry the gas to Alberta, Canada, from which it would continue on to Chicago -- would have done the former.
Speaking to reporters in Houston, Mulva said two things: First, he's reassessing the Denali project. Second, he‘s shutting in already-producing gas wells in the United States, waiting for prices -- which are currently in the gutter -- to rise to profitable levels. "We'd rather keep it in the ground for when it will have greater financial impact," Mulva told Bloomberg.
Now, you tell me: If Mulva is shutting in U.S. wells, are there any appreciable odds favoring the construction of Denali to the United States? Let's deconstruct the industry jargon:
Conventional dictionary: Think anew; reconsider.
Oil dictionary: Get the heck out of Dodge.
The Conoco-BP pipeline isn't the only Alaska gas project on offer. Exxon Mobil and Trans-Canada are also in the game, and hedging their bets by proposing two options: a similar pipeline to the Lower 48, and an 800-mile, $20 billion line to an as-yet-unbuilt LNG terminal in the West Coast port of Valdez (yes that Valdez). In the latter case, the gas would be liquefied and loaded aboard ships from Valdez to Asia and elsewhere.
The Exxon-TransCanada team stopped accepting bids at the end of July, and BP-Conoco's bid deadline is next week. The announcement of a winner probably won't come before the end of the year or even early in 2011 because of the required negotiations with ostensible shippers, according to the federal official in charge.
Of course, both teams could decide to punt for now, and return to the question in a few years -- the current gas glut is that intimidating. But if there is a decision to proceed, look for the Valdez option to win. Forbes' Christopher Helman explains the already-growing Chinese appetite for gas here. Injecting an Alaskan gas supply route to Asia's fast-growing mega-economy could have huge consequences. Just as demand creates supply, the inverse is also true: The growing global glut of natural gas seems headed toward a tipping point in which China and other big energy users massively embrace the fuel, and use far less dirty coal than expected.
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Moscow and Beijing have spent two decades trying to patch up relations that went bitter long ago in a battle over Communist purity. In the latest installment in the rapprochement, they are using their most hallowed mutual interest -- oil and gas -- to signal that this time bygones really are bygones. In Beijing today, Russia's Dmitry Medvedev agreed to supply a huge volume of oil and gas to China, not to mention coal and two 1,000 megawatt nuclear power reactors. Then came the pipelines. In a ceremony, Medvedev and China's Hu Jintao marked the completion of the first oil pipeline connecting the countries, a 624-mile project. Not to be outdone, another Chinese neighbor, Turkmenistan President Gurbanguly Berdymukhamedov, debuted new equipment that allows the former Soviet republic to almost double its natural gas supplies to China through a 4,300-mile long pipeline.
This is a multi-dimensional charm offensive. Beijing wants to show that, just because it's quarreling with Japan and the United States, it also can be quite a friendly chap. As for Russia, it wishes to issue a warning to Europe, which has spent much of the last four years loudly proclaiming an intention to wean itself off of reliance on Russian gas. The message: There are other fish in the sea.
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Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.