In his State of the Union address last night, President Barack Obama spoke of the United States' unaccustomed new impact on global energy -- in addition to its habitual role as a world-class oil glutton, the U.S. is delivering a growing volume of oil and natural gas that has already shaken assumptions, and looks likely to roil geopolitics in a way favorable to Americans.
The speech put a spotlight on a new trend of plenty in the U.S. oil patch: On Monday, the U.S. Energy Information Administration reported that the U.S. is in the midst of a dramatic turnaround -- by the year 2035, U.S. demand for imported oil will have fallen by 18 percent, to some 7.36 million barrels a day, or a respectable 1.6 million barrels a day less than last year's volume.
Obama was citing the shift as a way to outflank Republican opponents and oil industry lobbyists who, as we've discussed, intend to spend outsized sums of campaign dollars on claims that he is choking oil production and jobs creation. Against that, Obama threw the oil and gas bonanza into a package, and said that the U.S. must both drill and spend much on futuristic clean-energy technology. The Republican response, by Indiana Gov. Mitch Daniels, suggested that Obama is an anti-oil ideologue.
That is politics, and we are sure to hear much on this subject from both sides through November. What is most interesting from my own standpoint is the sober feel of the EIA's findings after the growing accumulation of punch-drunk forecasts from others: From an array of our best energy minds -- at ExxonMobil, BP, Daniel Yergin's CERA and others -- we have heard that, with the help of Canada and Mexico, the U.S. on the verge not only of the bright future described by the EIA, but of achieving the mythical state of energy independence (strike the operatic score.). These Wise Men foresee a doubling of North American production to a whopping 22 million barrels a day.
Among the geopolitical impacts of such a shift would be far more proportional influence from Middle Eastern and other petro-potentates. There would be more political balance.
One of our most prevalent current canards is the mantra that we must "get off foreign oil," by which we invariably mean Saudi Arabian crude -- and that we must generally distance ourselves from the kingdom and its leaders. Here is a rare issue that finds bipartisan traction. Last summer, for example, the comedian Jon Stewart looked and found that eight consecutive U.S. presidents starting with Richard Nixon, rolling through Ronald Reagan, both George Bushes, and finally Barack Obama have used the phrase in more or less the same formulation. Usually, the mantra is stated in the context of either the environment -- promotion of green industries -- or national security, meaning a way to confound terrorists who, it is said, are largely financed by Saudi and other Middle Eastern oil receipts. But ultimately they mean the same thing -- Saudi Arabia is bad, bad, bad.
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I become suspicious of phrases that roll off the tongue and get me riled up, because often they are intended to accomplish just that outcome. Such is the case with the get-off-foreign-oil sloganeering, as I write in the latest issue of Foreign Policy. News from the Middle East and elsewhere exhorts the United States not to distance itself from Saudi Arabia, but in fact to more fully embrace this definitively central relationship. The reasons include top-tier U.S. strategic priorities regarding Iran, terrorism, Afghanistan, and of course oil.
WikiLeaks showed that the Saudis, unsurprisingly, have been in lock step with Western policy on containing Iran's nuclear program. The most dramatic recent example of the Saudi alliance paying off came in October, in the form of abortive terrorist attacks that were halted in Europe before they could reach the United States. Last summer and fall, U.S. intelligence agencies received three progressively more unnerving warnings from Saudi Arabia, all suggesting that al Qaeda was preparing to set off bombs in either Europe or the United States. The final alert, sent Oct. 28, was the most explicit, providing tracking numbers for two suspected explosives-laden packages on their way to Chicago from Yemen. A day later, police intercepted the packages at FedEx and UPS facilities in Dubai and Britain and defused bombs containing enough of the explosive PETN to take down the cargo planes on which they were to be shipped. Al Qaeda's Yemen affiliate claimed responsibility and warned of more such attempts. The take-away: Short of Saudi Arabia's insistent calls to the Central Intelligence Agency, there is almost certainly no chance that the bombs would have been detected.
What about the other main theater of current U.S. strategic interest, Afghanistan and Pakistan? With its long close ties to all parties in the region -- Pakistan, including the Army's jihadi-linked Inter-Services Intelligence directorate; Afghanistan; and the Taliban -- Saudi Arabia was asked early last year by Afghan President Hamid Karzai to help mediate a political settlement with the Taliban. In February, the Saudi foreign minister, Prince Saud al-Faisal, agreed to receive a delegation of former Taliban, but in November he froze contacts after the Taliban refused to repudiate Osama bin Laden and al Qaeda. Riyadh's position is not new: The Saudis adopted a similar posture position prior to 9/11, when they severed ties with the Taliban after its leader, Mullah Omar, refused to force bin Laden out of Afghanistan. Yet it is yet another example of crucial alignment in U.S.-Saudi policy.
All the while there is oil, although many people seem to suggest that as a source of strategic importance it is a temporary artifice. What are the facts? Not only will Saudi Arabia's predominant oil market position not shrink over the coming decades -- it will grow. Consider the current activities of Chevron, the original developer of Saudi oil, in the partition zone that the kingdom shares with Kuwait. Vice Chairman George Kirkland told me about Chevron's findings in the Wafra field, a reservoir of highly viscous, heavy oil in which the company is using a method of steam-injection drilling to recover an expected 10 billion to 15 billion barrels of petroleum. (For perspective, the industry regards a 1 billion-barrel field as a supergiant.) Saudi Arabia, Kirkland says correctly, is "at the top of the mountain as it is. [Wafra] reinforces a longer future delivering liquid hydrocarbons to the world economy." Meaning probably far into the second half of this century, adding up to another pinion of U.S. strategic interest. Here, Bloomberg's Wael Mahdi reports on Chevron's current progress at Wafra.
Those who suggest getting off Saudi oil are violating the basics of economics. As the pithy Anthony Cordesman of the Center for Strategic and International Studies expressed it to me: "What is the benefit for the U.S. of 'deplete America first'?"
In the world of oil reserve forecasting, Iraq is hunky, handsome, and -- to its dissatisfaction -- often overlooked. Today, it sought to rectify this negligence with the announcement of a whopping 24 percent increase in its estimated reserves. With a poke in the eye to a traditional rival, Iraq's oil minister said the country had overtaken Iran as the world's fourth-largest petrostate, with 143 billion barrels of oil, or more than half of Saudi Arabia's mother lode.
Hussain al Shahristani appears to be targeting two audiences with his announcement, write Bloomberg's Kadhim Ajrash and Nayla Razzouk: cash-rich foreign oil companies and, more importantly, the Organization of Petroleum Exporting Countries (OPEC), which at some point will reassign Iraq a production quota.
Bluntly speaking, Shahristani was giving the following notice to OPEC: We are big, really big, and can shake up global oil prices if left to our own devices. Meaning that the house of petulance and jealousy that is OPEC is going to have to move back and create a significant space for Iraq, which has ambitions of producing 12 million barrels of oil a day, and might get halfway there. (Currently, Iraq produces about 2.4 million barrels of oil a day.)
Not everyone is impressed. Reuters, for example, queried a number of nonplussed industry analysts. Bassan Fattouh, at the Oxford Institute for Energy Studies, noted that OPEC determines quotas based on actual production, not reserves. "So I'm a bit surprised by the statement," Fattouh told Reuters. "I expect OPEC to continue having a wait-and-see approach and deal with this when Iraqi output and exports actually start increasing." Andy Sommer, of the Swiss trading firm EGL, agreed. "I do not see Iraq getting any OPEC quota for the time being until production reaches something like 4 million barrels per day, which is similar to Iran's production. … Everyone knows Iraq needs every penny it earns from oil to rebuild the country."
Phil Flynn, an analyst with PFG Best, is impressed, but for different reasons, he wrote in his daily column today. "Oh well," he said, "another setback for peak oil theorists."
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Macondo well to be "declared dead" this Sunday. Five months after a blow-out caused 4.9 million barrels of oil to spill into the Gulf of Mexico, the Macondo well is on track to be permanently sealed off by Sunday, according to National Incident Commander Thad Allen. On Thursday the relief well, which BP has been drilling since May 2, finally intersected with the blown-out well where it meets the oil reservoir some 2.5 miles below the Gulf's surface. Cement and heavy drilling mud are now being pumped down the relief well to kill the Macondo well once and for all. As the well is sealed, BP expects to scale back its spill response, a sign that cheered investors and ratings agencies on Thursday. Meanwhile, embattled BP CEO Tony Hayward, who will be stepping down from the post on October 1, made his first public appearance in weeks on Wednesday when he testified before a U.K. parliamentary committee. One week after BP published a report on the causes of the Gulf oil spill, Hayward told the committee that the company had exhibited "a lack of rigor and a lack of oversight of contractors," admitting that there had been a level of industry "complacency" towards offshore drilling risks prior to the accident.
China's coal and carbon conundrum. As Europe takes steps to scale back its coal usage, China remains as dependent as ever on black diamonds to fuel its rapid economic growth: The International Energy Agency has predicted that Chinese coal usage will more than double by 2050. After IEA executive director Nobuo Tanaka outlined this week that China's adoption of carbon capture and sequestration technology would be crucial to combating climate change, Elisabeth Rosenthal at the New York Times Green blog describes the challenge of making this adoption happen. Carbon sequestration is still an expensive technology, and it's not likely that China will be willing to embrace it on the massive scale needed to reduce its carbon emissions, unless it has outside investment. Beijing is already facing huge problems of meeting growth and energy efficiency goals at the same time, but given that it has poured $1.5 billion into green technologies, including $300 million for electric cars, attempts to mitigate the effects of its primary energy source may not be too far off.
A new use for those old oil wells. While the Interior Department on Wednesday ordered all non-producing oil wells in the Gulf to be permanently plugged, these wells might prove to be a new business opportunity for carbon capturing technology. BP and Shell may begin storing carbon dioxide by pumping the greenhouse gas into old oil wells in the North Sea, which could net them a sizeable profit as they work to extract the remaining oil in these wells. Though the costs of capturing, transporting, and pumping carbon dioxide into the wells remain high, turning older oilfields into CO2 storage sites could be a viable means of reducing carbon emissions.
As if the oil wasn't enough... Khalid al-Falih, the head of Saudi Aramco, revealed this week that Saudi Arabia could hold massive reserves of unconventional gas, totaling in the trillions of cubic feet. This is good news for the kingdom, which has lately been pouring more money into gas development than into oil, in a bid to satisfy its rapidly growing domestic energy demand. Burning oil for power generation is expensive and polluting, and a shift to natural gas-fired power plants would free up more oil for export, where profit margins are higher. However, developing the unconventional gas reserves poses new challenges; "fracking," the procedure used to access shale gas in the United States, requires large amounts of water -- clearly a problem for a country where water may be more valuable than oil. Aramco says it is working with the major oil companies to look at alternative extracting solutions.
The West's geothermal boom. Clean, renewable, and reliable, geothermal energy seems to be the perfect green energy source, but it has usually been difficult to develop due to the costs of locating geothermal resources on a commercially viable scale. However, technological advancements and government funding are giving geothermal energy a boost in the American West. Geothermal producers have been using such methods as aerial mapping and reflection seismology -- which uses man-made vibrations to map out geothermal resources underground -- to reduce exploration and development costs. At the same time, millions of dollars in federal grants towards renewable energy development, as well as state renewable portfolio standards, are suddenly making geothermal energy an attractive alternative in the West, where the U.S. Geological Survey estimates that there could be 30,000 megawatts of untapped geothermal power. Having proved itself in Iceland, geothermal energy could soon become a major electricity source for Nevada, Utah, and California.
Oil slips on lagging economic indicators. After topping $77 earlier this week, oil prices began a long slide, closing the week at $73.66 on Friday in New York. Crude saw a 3.7 percent loss for the week, the biggest weekly decline since mid-August and reaching its lowest price so far this month. Earlier in the week, pipeline operator Enbridge Energy reopened a major pipeline from Canada to the U.S., releasing tension in the markets that had helped push prices up last week after a leak near Chicago forced the pipeline's shutdown. Rising U.S. stocks and a falling dollar kept crude above $75 until Thursday, but continued high U.S. oil inventories and reports showing a drop in consumer confidence (indicating a negative economic outlook) contributed to a fall in prices towards the end of the week. Analysts continue to forecast oil in the $70 to $80 range, with Credit Suisse revising its estimates for 2011 prices down from $80 a barrel to $72.50.
Happy birthday, OPEC! The Organization of Petroleum Exporting Countries celebrates its fiftieth anniversary this coming Monday. Responding to a unilateral cut in the price of oil by the major Western oil companies, oil ministers from Saudi Arabia, Kuwait, Iraq, Iran, and Venezuela met in Baghdad for four days beginning on September 10, 1960. The result was OPEC, which was to forever change the oil industry by redefining the relationship between the oil companies and the exporting countries. Previously, oil-producing countries had granted concessions to the major oil companies, sharing in revenues but allowing the companies to determine the rate of production. The founding of OPEC marked the beginning of a shift in power towards the countries themselves, which reached its apogee in the 1970s with the 1973 oil embargo. OPEC has expanded its membership to twelve countries since its founding, and with the decline of oil supplies outside its member countries, it remains arguably as important and influential as ever. That importance also ensures that it will continue to be a lightning rod for criticism.
U.S. steelworkers cry foul over Chinese clean energy subsidies. The United Steelworkers union is filing a trade suit against China, accusing Beijing of maintaining illegal subsidies on its clean energy industries. The union alleges that the subsidies are giving Chinese exporters of solar panels and wind turbines an unfair advantage, violating World Trade Organization regulations. The trade dispute comes as China has rapidly become a hotspot for green energy investment and production, and follows Beijing's announcement earlier today of a $20 billion trade surplus for August 2010. As the White House decides whether or not to press forward with the case, the debate over China's trade policies once again returns to center stage, with Keith Bradsher of the New York Times examining in depth the country's "aggressive government policies" in the clean energy sector. Dissenting from the accusations towards Beijing is UCLA environmental economist Matthew Kahn, who points out in a blog post that Chinese prowess and innovation in clean energy will ultimately benefit both U.S. consumers and producers.
Kuwait's nuclear energy push. Kuwait unveiled plans on Thursday to construct four nuclear reactors for power generation by 2022. The decision to move into nuclear energy stems from burgeoning electricity demand -- expected to grow by 7 percent per year up to 2030 -- as well as expectations of oil prices above $50, which makes Kuwait's oil more valuable as an export than as an energy source. Kuwait's nuclear energy committee is expected to issue a "roadmap" for its nuclear development by January, and it has just signed a cooperative agreement with Japan to help it gain expertise in nuclear energy. The Gulf state joins a broader push into civilian nuclear energy in the Middle East, as Saudi Arabia, Jordan, and the United Arab Emirates begin to develop their first nuclear power plants.
The dive into deepwater continues. Chevron and BP have been approved by the Chinese government to take operating stakes in new deepwater drilling projects in the South China Sea. The two majors will operate alongside China National Offshore Oil Corporation to develop any oil found in the deep-sea blocks, which range from depths of 980 to 6500 feet. BP's damaged reputation after the Gulf of Mexico oil spill has evidently remained intact in China, and CNOOC executives have welcomed the addition of the Chevron and BP teams to the South China Sea projects.
Rewarding, rather than picking, winners. Ugo Bardi, a chemistry professor at the University of Florence and peak oil theorist, argued on the Oil Drum this week that it might make more sense for governments to award prizes, rather than research grants, to spark innovation in renewable energy. In the case of research grants, the government decides the themes on which the research should focus before any funds have been allocated, and this narrowing of the parameters may do little to actually achieve a marketable result from the research. But if prizes are awarded for innovations in green energy and energy efficiency research, the funds go to the accomplishment itself, and not the promise that it may or may not happen. Using the example of Europe's feed-in tariff system, Bardi claims that prizes are more effective in stimulating developments in green energy because they reward success and not failures.
Oil rallies to its highest levels in a month. Oil prices climbed above the $75 mark for the first time since August 11 this week, ending the week at $76.49 a barrel in New York. A variety of factors contributed to the rally. Chinese imports of crude climbed 10 percent in August from July levels, while the International Energy Agency revised its 2010 oil demand forecast upward by 50,000 barrels per day. Reports from the American Petroleum Institute revealed a decline in U.S. oil stockpiles, sparking expectations of increased future demand. And the dollar weakened slightly, driving traders back into oil. A final contributor to the 3 percent price surge today was the shutdown of a major pipeline from Canada, which sprung a leak near Chicago. Still there remains a generally unchanging view among analysts that the economic fundamentals of oil demand are weak, and some models show oil hitting $50 a barrel this winter.
Would you like a wind turbine with that inexpensive and fashionably Scandinavian-looking bookshelf? Furniture giant Ikea announced on Wednesday that it will acquire six German wind farms in order to keep up its company goals of generating its complete electricity needs from renewable energy sources. It's unlikely that this move towards electricity self-sufficiency will make the jump to other retailers, but the image-conscious Swedish company is hoping to be a trend-setter.
The countries of the Middle East might seem like the last places that would embrace non-hydrocarbon energy sources. With a total of 55 percent of the world's crude oil reserves and 41 percent of its natural gas, why should they? But the past year has seen a major push towards nuclear and renewable sources of energy in the Middle East, as the region's states work to solve the problems of burgeoning domestic growth through energy diversification.
In last week's Bloomberg Businessweek, Stanley Reed described the rise of the "nuclear option" in the United Arab Emirates, Saudi Arabia, and Jordan. At the forefront is the U.A.E., which placed a $20 billion order for four nuclear reactors from Seoul-based Korean Electric Power Corp. last December. The Saudis have followed with a plan to construct an entire city focused around nuclear energy, while Jordan's extensive nuclear ambitions, fueled by the discovery of large uranium reserves, see the country satisfying a third of its electricity demands with atomic power by 2030.
BP's Libyan drilling delay. BP moved yesterday to delay the starting date for its planned deepwater drilling project off the coast of Libya. The project, which had been scheduled to begin within a number of weeks, has now been put off to an unspecified date later this year. BP says the company is delaying work because it is still finalizing preparations, which could mean that the company is wary of European fears that a Macondo-like well blowout could occur in the Mediterranean. But the delay also comes in the wake of allegations that BP's ties to Libya played a role in the Scottish government's decision to release convicted Lockerbie bomber Abdel Baset al-Megrahi last year, and after the Senate Foreign Relations Committee held hearings on the subject two weeks ago.
Energy innovation from an unexpected source. On Sunday Abu Dhabi announced that it would install "smart grid" electricity meters in every home in the emirate this year, while at the same time creating a subsidy system for solar panels. The subsidy is expected to create a $2 billion market for solar panels over the next decade, which the emirate's government hopes will attract international investment in the technology, driving down the costs of the technology and encouraging local solar entrepreneurs. Abu Dhabi's move towards efficient electricity-generation may seem surprising, coming as it does from a country with vast petroleum reserves. But the United Arab Emirates has big plans to expand its current oil output, and part of this plan involves freeing more oil for export from the country's burgeoning demand for electricity -- which also explains the construction of four nuclear reactors there by a Korean firm.
Opening up, and paying up. It was a good week for federal energy regulators, as the new financial regulation law brought unexpected consequences for energy companies. On Wednesday the Wall Street Journal revealed that last month's Dodd-Frank law contained a provision requiring U.S. oil companies to disclose all payments made to foreign governments in the development of energy and mineral resources. The transparency measure was quietly inserted into the bill, but it has provoked much noise from the industry, which argues that the law will put them at a disadvantage to foreign competitors when vying for exploration and development contracts. Meanwhile, BP agreed to pay the Occupational Safety and Health Administration a record $50.6 million fine yesterday in response to charges from OSHA that the oil giant had neglected to upgrade the safety conditions at its Texas City, Tex. refinery, where a 2005 explosion killed fifteen people and injured nearly 200. These were both rare victories for advocates of tighter energy regulation, whose efforts to create a more far-reaching regulatory environment for oil were frustrated by the Senate's decision to punt on an energy bill last week.
Sanctions take their toll. Iran is suspending development on two liquefied natural gas projects, forcing the country to scale back its once-ambitious plans to become a leading exporter in the global LNG market. Officials of the National Iranian Oil Company cited costs and complexity as the reasons for the suspension, but the move comes weeks after the United States and European Union introduced tightened sanctions on Tehran. The sanctions have closed off Iranian access to the technology necessary to move forward on its LNG projects; expertise in the sector is heavily concentrated in Western energy firms. News of the suspension comes as a report from the International Energy Agency revealed that Iran's gasoline imports have been hit hard by the sanctions-despite possessing some of the world's largest oil and gas reserves, Iran lacks the refining capacity to meet domestic fuel demand. Although Tehran has repeatedly denied the impact of external sanctions, the LNG project suspension may be a grudging acceptance of the effect that the sanctions have had on the country.
Saudi Aramco: What, me worry? Khalid F. Al-Falih, the president and CEO of Saudi Aramco, dismissed concerns about peak oil as "baseless" at the Oxford Energy Forum in the United Kingdom on Tuesday. Citing geological evidence and analyses, Al-Falih argued that the world's sources of oil and natural gas have remained plentiful, and that with the proper technology, policy decisions, and economic and regulatory environment, these resources can be successfully developed. Saudi Aramco, the world's largest exporter of crude oil, has repeatedly brushed aside the threat of peak oil in the past, arguing that such concerns have only contributed to price volatility in world oil markets.
Oil markets still a roller-coaster ride. Oil prices fell back to earth this week, after touching 12-week highs last week, to settle at around $76 a barrel yesterday in New York. The Federal Reserve's announcement on Tuesday that it would hold interest rates at record lows, along with a rise in U.S. applications for unemployment benefits, caused investors to turn sour on crude. Meanwhile OPEC released its global oil demand forecast today, predicting a 1.2 percent increase in demand for the next year, driven by rising consumption in Asia, the Middle East and Latin America. Last week I wrote that oil prices may be heading south thanks to a conflict between Asian growth and weak U.S. demand, and this week's news seems to confirm that oil will be hanging around the $70-$80 price range for the time being.
The energy world lost one of its most provocative thinkers this weekend: Matthew Simmons, a former investment banker and adviser to President George W. Bush, who died of a heart attack at his home in Maine last night.
For the past five years, Simmons, 67, had been the premier pessimist in an industry that, on the main, tends towards optimism. He was arguably the most thoughtful and influential advocate of the idea that the world's steadily increasing appetite for petroleum would lead to peak oil -- the point at which production capacity can no longer ramp up to accommodate increasing demand -- and that it would happen sooner rather than later.
India -- tired of losing bids for oil assets around the world to China -- is turning to a more aggressive, state-backed approach. One wonders, however, if it's a bit late in the game.
As Bloomberg's Rakteem Katakey and John Duce write, China's national oil companies outbid Indian firms in some $12.5 billion worth of contracts over the last year. The bidding rivalry -- and China's superiority in it -- goes back as far as 2005, when for example China National Petroleum Corp. twice beat out India's state-run Oil and Natural Gas Corp., acquiring the lucrative oil assets of PetroKazakhstan and Calgary-based EnCana Corp.'s oil and pipeline assets in Ecuador. That has stymied India's efforts to satisfy projected demand that, according to the International Energy Agency, will double to 6 billion barrels a year in oil-equivalent energy by 2030. The two Asian giants are not in a death grip -- each is pursuing its own interests. But there's clearly tension, at least on the Indian side.
New Delhi is fighting back. This year, Oil Minister Murli Deora (above right, with Hugo Chávez) has launched a worldwide charm offensive, traveling to Nigeria, Saudi Arabia, Uganda, and Venezuela in order to chat up local oil ministers and their staffs. The national oil firms, ONGC and Oil India Ltd., have been authorized to spend up to $1.1 billion on investment or acquisitions without government approval.
The most decisive action may be the creation of a sovereign wealth fund to back overseas energy investments. In March, the oil ministry proposed such a fund, to draw on India's foreign currency reserves, and last week the government advanced the idea by forming a task force to draw up a more specific plan.
Yet the still-unnamed sovereign wealth fund comes long after China -- as well as the petrostates of the Middle East -- launched their own such vehicles. Beijing already has a $300 million energy sovereign wealth fund, earmarked out of $2.4 trillion in total foreign currency reserves; India's total foreign currency reserves, by comparison, are $277 billion. That is quite a bit of money in India's paws, but you get the picture -- the country could still face trouble in the bidding process.
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Cash-filled briefcases lead to $365 million fine for Eni. A U.S. probe brought to light the latest chapter in a Nigerian bribery scheme, this time involving the Italian energy company Eni Sp.A. and its oil services subsidiary Snamprogetti Netherlands. The bribes, which involved deliveries from Eni and Snamprogetti of cash-filled vehicles and briefcases to contacts in Nigeria's oil ministry, were part of a larger scheme involving several oil groups building a liquefied natural gas (LNG) terminal in the Niger Delta.
Chesapeake pitches to Chinese investors. Chesapeake Energy is making an appeal to Chinese and other Asian investors to buy stakes in several of its gas projects. Since Congress's rebuff of a Chinese bid to acquire Unocal in 2005, Beijing has been wary of buying stakes in U.S. energy fields. A deal could signal a new trend regarding Chinese investment in strategic U.S. industries.
Preparing for the worst. Egypt and Saudi Arabia announced an oil spill exercise in the waters off the Egyptian coast near the city of Alexandria, scheduled for later this year. In the wake of the BP spill in the Gulf of Mexico, the two countries want to demonstrate their ability to respond to and contain a major tanker spill in the Mediterranean or the Red Sea, among the most heavily trafficked waterways for global oil shipments.
Back to the future? The latest five-year energy prediction from the International Energy Agency estimated that the vast majority of growth in oil production between 2010 and 2015 would come from OPEC countries, illustrating the cartel's increasing relevance over the long term in world oil markets. But the IEA has been wrong before in its predictions, and the development of unconventional sources of oil outside OPEC, as well as the greater interest in shale gas and LNG, could dampen any rising influence OPEC may gain.
Could the post-Macondo oil industry be self-regulated? That's what William Reilly, the co-chairman of President Obama's appointed commission investigating the BP spill, has hinted. Reilly draws inspiration from the Institute for Nuclear Power Operations, an industry group that has proposed and enforced standards for American nuclear power plants since the Three Mile Island accident. But an industry-run watchdog would not be the sole regulator for oil companies operating in the United States. Reilly has only suggested a self-regulating agency as "an addition, not as a substitute for regulation." The American public and Congress, however, are likely to be more skeptical.
It's been almost three weeks since BP pulled its not-so-press-savvy CEO, Tony Hayward, off the Gulf oil spill. What's he been up to since? Trying to keep his company together, more or less. In his new role as BP's globetrotting diplomat, Hayward has turned up in Moscow and Baku -- both pillars of BP's asset base -- in an effort to assuage shareholders that the company will survive its current cataclysm more or less intact. The Baku properties appear to be safe, but not necessarily BP's Russian reserves, which could be in jeopardy should BP's oligarch partners decide to strike.
Now Hayward's in the Persian Gulf, visiting Abu Dhabi -- home to one of the world's premier sovereign wealth funds -- yesterday, apparently to talk about a strategic investment in BP. The company has stressed that it is not going to issue new shares, but there are plenty of other shares to go around: in the company treasury, for instance, and in the hands of currently disgruntled shareholders. Yesterday, the Saudi business newspaper al-Eqtisadiyah reported that a group of unidentified investors from that country are interested in a 10 to 15 percent stake in BP.
Of course, as Ed Crooks reports bluntly in today's Financial Times, all of Hayward's efforts could be in vain if his U.S. colleagues fail to stanch the catastrophe in the Gulf. If the relief well doesn't work, Crooks writes, "the company may be doomed." BP hopes to cap the well before July 27, earlier than the August date the company had announced before, but the new target may have less to do with engineering ability than with corporate necessity. The 27th is the date of a conference call tied to BP's second-quarter earnings report, in which executives must answer to furious shareholders wondering how this could have happened, and just what it's all going to cost.
Barack Obama's administration has much riding on BP's success as well: The president's slide in the polls has coincided with the out-of-control spill, and one of the administration's bids to appear on top of the situation, a six-month moratorium on drilling in the Gulf, was blocked last month by a federal judge in New Orleans. Today, the administration will ask a three-judge panel to reinstate the moratorium while it appeals U.S. District Judge Martin L.C. Feldman's injunction. (Loyola Law Professor Dane Ciolino, interviewed by Don Ames at WWL radio in New Orleans, has a good description of the stakes.)
But the administration is also woven into BP's decision-making, as the Wall Street Journal's Monica Langley reports today. Energy Secretary Steven Chu has pushed the company to formulate a Plan C and Plan D should its current relief well strategy fail.
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Al Qaeda chose three strategic oil assets to attack -- two large Saudi Arabian refineries, two choke points in Southeast Asian sea lanes, and five refinery complexes in and near Houston. In all, the attacks immediately pulled 8 million barrels a day, or about 10 percent of global demand, off the market, and forced the rerouting of another 15 million barrels. Global oil prices spiked to $250 a barrel, as the United States, the Saudi kingdom, and the rest of the world's major nations contemplated how to respond.
So went the scenario at the "energy games," a day-long role-playing exercise yesterday at the Heritage Foundation in Washington. Teams played China, the European Union, India, Iran, Japan, Russia, Saudi Arabia, various parts of the U.S. government, and of course al Qaeda. As a condition of playing -- I was on the European team -- I agreed not to identify the other participants. But suffice to say that those around me were a realistic bunch.
Three countries provided the game's best moments: China, Iran, and Russia. All of them were resource-rich and suddenly cash-rich -- and wanted to exploit the situation for all it was worth. What they did was instructive. In real life, we know that an oil-price spike is probably coming in the middle to late part of the next decade. This is because of an expected oil supply shortage, the result of a decision by oil companies to halt numerous exploration and production projects in the three years since oil prices dipped below $100 a barrel. By the 2020s, oil prices will probably start declining because of a steady and long-term fall in global demand. But if yesterday's energy games were at all representative of the middle period between now and the 2020s, some of the world's resource-rich nations, suddenly in possession of a commodity of unprecedented value, may change the global economic landscape for decades to come.
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.