China's moment of coal truth: A question that has vexed us for some time is when we will witness an inflection point in ordinary Chinese tolerance for the coal-borne pollution in their air. At that time, we have argued, we will likely also see a sharp turn away from coal consumption, and more use of cleaner natural gas -- Communist Party leaders will see to it for reasons of political survival. With this shift will come important knock-on events, including a materially smaller increase in projected global CO2 emissions. According to Bernstein Research, that tipping point may now be past. In a note to clients yesterday, Michael W. Parker and Alex Leung argue that the moment of truth became apparent to them in two pollution protests over the last month in the cities of Shifang and Qidong. In the former, violent July protests resulted in the scrapping of a planned metals plant; in the latter last week, the ax fell on a waste pipeline connected to a paper mill, again because of an agitated local citizenry. Their paper's title -- Who Are You Going to Believe: Me or Your Smog-Irritated, Burning, Weeping, Lying Eyes? -- is a reference to what the authors regard as a general outside blindness to a conspicuous new political day. One reason no one is noticing, they say, is the curse of history itself. The record of surging economies -- comparing China with, say Japan -- suggests that a burning aspiration for cleaner surroundings over economic betterment should reach critical mass in China only in about a decade. Yet, "the clear signal from Shifang and Qidong is that China has reached the point today, where the population is ready to take to the streets in protest of worsening environmental conditions," the two researchers write. They go on:
Since we all agree that the Chinese government is focused on social harmony, the practical implication is that the government will do whatever is required to ensure that people aren't in the streets protesting not just food prices or lack of jobs, but also the environment. Few observers seem to classify the environment as the kind of issue that could excite the Chinese population into the street or the kind of issue that could result in changing political decision making and economic outcomes. And yet that is exactly what we are seeing.
The Bernstein writers seem under no illusion that their scenario will be widely embraced. In fact, they are not summoning anyone to the ramparts. Rather, their paper is a pragmatic nudge for equity analysts and customers to incorporate a very different scenario into their buy-and-sell decisions. That sounds like a reasonable call.
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Less than a year after the departure of U.S. troops from Iraq, Baghdad is losing a primary lever over independent-minded Kurdistan -- its grip on the northern region's revenue-earning oil industry. Kurdistan's secret weapon? Foreign oil companies are exasperated with Baghdad's stinginess and allured by the Kurds' more liberal terms for oil contracts.
These companies are becoming an unintentional fifth column in Kurdistan's march toward economic autonomy. On July 31, France's Total became the third big oil company to break with Baghdad by signing an unsanctioned oil deal with Kurdistan. Baghdad, intent on full mastery over the nation's massive petroleum revenue, forbids oil companies from dealing directly with Kurdistan and instead requires them to bid for projects through the Ministry of Oil and to ship their oil through Baghdad-controlled pipelines. However, ExxonMobil, Chevron, and Total have now flouted Baghdad's wishes, putting their oil deals in Iraq's south at risk in the process. Their calculus is that despite the relative inferiority of Kurdistan's oil reserves, the potential upside there outweighs the downside threat of possibly losing access to Iraq proper, according to oil company executives with whom I have spoken.
The pressure will now be on Baghdad to somehow stem what is looking like an oil-company rebellion. It's yet another challenge for the Iraqi government, which is already struggling with rising violence and dropping oil revenue because of sagging global prices.
History has seen numerous states taken over by companies -- one thinks, for instance, of the United Fruit Company's activities in Latin America. But should this trend continue in Kurdistan, it would mark, as far as I recall, the first time that oil companies have been principal actors in a nation becoming effectively autonomous. Of course, it will be up to the Kurdistan Regional Government (KRG) to ensure that it is not swallowed up by the companies, which was the fate of some Central and South American countries in the 19th and early 20th centuries.
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A mountain-top take on the flood: If Montana is a microcosm of the world, one message to glean is that we are not in the midst of a decades-long flood of oil supply in the United States, as many suggest. Instead, the red lights are blinking across the exuberant U.S. oil patch. As you recall, much has been made in recent months about the momentous prospects for U.S. oil and gas, which are said to be leading a global fossil fuel revolution, with meaningful implications for fortune-hunters and geopolitical players alike: North America will be independent of outside oil producers, the U.S. will experience an industrial revolution, and OPEC will drift into laggardly inconsequence. So what to think about the latest news from folks approaching the punch bowl with bad intentions?
Let's start with Montana, and the now-legendary Bakken shale oil formation. Bob Brackett, an analyst with Bernstein Research, studied a dozen years of shale oil drilling data for this mountainous state bordering Canada. What he found was a steep oil production increase through 2006 -- surpassing 100,000 barrels a day -- followed by a fast, 40 percent decline to about 60,000 barrels a day today. The plummet is counterintuitive because the time frame coincides with a capital spending binge by the industry -- tens of billions of dollars poured into the new innovations and technology that have opened up the Bakken and other shale plays. So why has Montana's production dropped? "Resource plays," Brackett writes in a note to clients today, "have limited/finite drilling locations. The best locations get drilled early, the less economic ones later, and once they are drilled, operators move on." In other words, Brackett told me in a followup email, "industry drilled the low hanging fruit first, and now can't find the same quality of opportunity."
But surely this is just Montana, right Bob? You don't mean to suggest that the entire Bakken formation, including North Dakota -- on which so many North American projections centrally rely -- is in trouble, too? Sadly, that is precisely what Brackett means. In fact, he has quantified the Bakken's production trajectory. The key number is six - that is the longevity of a Bakken well before it turns into a "stripper," industry argot for a worn-out nag producing just 10 or 15 barrels a day, from 400 barrels a day at its peak. Right now, just 200 modern Bakken wells are strippers. But in roughly six years, there will be 4,000 of them, Brackett says. "All good things in the oil patch come to an end," Brackett told me. "In the case of North Dakota, that is a long time -- years -- off, but even that too will suffer the same fate" as Montana.
Even now, the fortune hunters among us are suffering. ExxonMobil, the biggest player on the U.S. natural gas patch, made its second quarter numbers yesterday only by selling off $7.5 billion in hard assets such as its Japanese refining unit. In Pennsylvania, a court yesterday rejected the state's right to compel localities to allow oil and gas drilling. What does this tell us? That just because you pick up the scent of oil and gas, a load of other factors affect how much will actually be produced, and for how long. Says Brackett in our email exchange: "There is an emerging view of a wave of oil production (from shale and otherwise) coming. I just want to point out the difficulties in an exuberant view."
Go to Part II of the Wrap.
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Oligarchs in the Kremlin: For the last dozen years, we have seen ample evidence of Vladimir Putin's policy on Russia's oil and gas industry -- a paramount strategic asset, it is to be jealously held, only begrudgingly ladled out to foreigners, and always, always to remain in firm Russian hands. That being the history, what are we to make of the assertion of a group of Russian magnates that Putin has changed his spots -- that he is now prepared to allow BP to assume 100 percent ownership of Russia's third-largest oil producer?
We are speaking of course of TNK-BP, the star-crossed, nine-year oil marriage between BP and AAR, a consortium led by a take-no-prisoners Russian financial titan, Mikhail Fridman. Over the years, the two companies have gone to war numerous times, only to regroup again and earn outsized mutual dividends. But this time, both sides seem prepared to call it quits. A few days ago, AAR announced that it will enter negotiations with BP to either rebalance or -- in the more optimal alternative -- dissolve the marriage. In AAR's preferred scenario, it will be bought out in a cash-and-share deal that gives it 10-12 percent of BP's shares, possibly the largest single stake in the British company. No one can say how the end game turns out, but as a mind exercise what say we kick the tires of AAR's strategy?
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The West zigs, China zags: The West is erecting tariff barriers to prevent Chinese renewable energy companies from dumping their products. What is China's reaction? To set its sights on the developing world. So far at least, this may be one of the few win-win areas in the East-West relationship.
In May, the Obama administration imposed 26 percent tariffs on Chinese-made steel towers that support wind turbines. Regulations and tariffs like these have made it challenging for Chinese wind companies to penetrate the U.S. or Europe, one result of which is that European manufacturers account for 89 percent of the installed wind capacity on the continent. That is good news for Western turbine-makers.
But it is only part of the story -- 63.5 percent of new wind capacity last year was installed outside North America and the European Union. And in these areas, Chinese manufacturers have the advantage. Chinese companies accounted for 30 percent of global wind turbine sales last year, and they hold four positions among the world's top ten turbine manufacturers (including Nos. two and three, Sinovel and Goldwind, respectively). Much of this success has come at home -- 44 percent of new capacity was in China itself last year. But Ming Yang Power Group is also partnering with India's Reliance Group to develop 2.5 gigawatts of wind energy in India. In Argentina, Chinese turbines and financing are building Latin America's largest wind-power project. And Hydro China has been assessing a wind farm project in Ethiopia. Lower costs account for China's success in frontier markets. Chinese-state financing helps Chinese companies to underbid Western rivals by 20 percent to 30 percent, report the Financial Times' Leslie Hook and Pilita Clark.
This bifurcated global market appears likely to grow, providing scope for both Western and Chinese companies to continue to compete side by side, according to Pike Research. Western companies still have the edge when it comes to integrating wind farms into electricity grid systems. Pike's Dexter Gauntlett told us: "With the switch to renewables, whole systems are going to change, and there will be a big market for Western tech and products."
Go the the Jump for the rest of the Wrap.
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The AWOL environmental lobby: Over the last several months, this blog has posted a series of lengthy contemplations of a momentous and unnerving new trend -- the possibility of yet another in the century-and-a-half-long cycle of global oil and gas surpluses. According to a consensus of leading analysts, the world -- led by North America -- is on the cusp of a surprising flood of new oil. This week, six of these analytical voices appeared together to scrutinize whether this new age will actually materialize, and if it does, what geopolitical implications will result. We gathered at the New America Foundation for a two-hour, live TV debate.
A couple of interesting takeaways: The new golden age of fossil fuels indeed has an aspirational quality -- the stars must line up, such as oil prices, which must stay pretty well above $70 a barrel in order to sustain most of the new fields. (That may sound easy, given the scale of prices to which we have become accustomed the last couple of years. But one forecast of the new age is that so much oil floods the market that it forces down prices.)
A second aspect of the discussion was the conspicuously little discussion of global warming, which would be seriously exacerbated, as I wrote last month. One reason for this near-omission of global warming was the nature of the discussants -- these are oil market and geopolitical analysts, not climate experts. Yet that in itself is illuminating. I must be missing some folks, but I can think of no one in the climate field who has injected him- or herself into the contemplations of this new age (unless one includes movement activists such as writer Bill McKibben and NASA scientist James Hansen.). One has the sense of an entire sector of business, academia and civil society -- the green energy industry, climate scholars and environmental activists -- on the verge of being obliviously bulldozed by an unseen force. McKibben and Hansen will say "game over" for the planet should the age proceed. The thing is, it appears to be proceeding of its own accord.
As I have criticized the natural gas industry for a self-destructive failure to be fully transparent, I wonder about the green sector's absence from the careful dissection of this powerful trend with the aim of formulating best policies.
You can watch the video yourself:
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ExxonMobil is only a business, yet for a century and a half it has vexed, baffled, and unsettled us. Take Hannibal Lecter, Daniel Plainview, and Darth Vader, roll them into a single sinister character, and you start to grasp the feelings of generations of critics. "We need policy change on a global scale, and Exxon has been at the forefront of those blocking change," former Vice President Al Gore wrote a week ago on his blog.
But why? There are its outsized profits, of course -- $41.1 billion last year alone -- plus the remarkably enduring heartless persona of John D. Rockefeller, its founder in the old Standard Oil days. But Gilded Age ruthlessness and success in the contemporary capitalist West do not sufficiently explain the shadow that ExxonMobil seems still to cast on our collective imagination. After all, today's Apple is bigger than ExxonMobil, and the last of the robber barons have been dead for the better part of a century.
Enter a surprising and trenchant new decipherer of our confounded anxiety: Rex Tillerson, boss of the oil giant. Since becoming CEO six years ago, Tillerson has muddled the company's traditional image with a polished and deliberate nuance that seems to project caring. He has been "cautious, genial, accommodating and eager to soften [the company's] hard edges," Steve Coll, the author of Private Empire, a new book on ExxonMobil, told me.
But two weeks ago, the mild-mannered, pin-striped executive seemed to abruptly throw caution to the wind. In a speech before the elite Council on Foreign Relations (CFR) in New York, he suggested that Americans suck it up and adapt to global warming. "We have spent our entire existence adapting, OK? So we will adapt to this," Tillerson said in reply to a question from the audience. "Changes to weather patterns that move crop production areas around -- we'll adapt to that. It's an engineering problem, and it has engineering solutions." For starters, Tillerson said, ExxonMobil had set out to educate the "illiterate" public as to the facts, and move them away from the purveyors of "manufactured fear."
At once, we are back to the Exxon we once knew.
What got into the "cautious" Tillerson is a question between him, his board, and their shareholders. But conspiracy theories are unnecessary to explain the resulting nervousness of critics: As Coll's book describes, Tillerson's predecessor as CEO, Lee Raymond, declared war on efforts to restrain CO2 emissions, spending millions of dollars of company money starting in the late 1990s to fund writers and think tanks that cast doubt on climate science. The cash went both directly from ExxonMobil's public affairs unit, and was channeled through the American Petroleum Institute, the industry's lobbying arm in Washington, D.C., Coll writes, and it managed to help roil four decades of U.S. environmental politics.
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Afghanistan has set up a battle of global and regional bulls in the latest contest for its potential oil and gas riches. The country's Ministry of Mines has announced eight finalists to bid for an estimated 1 billion barrels of oil equivalent in northern Afghanistan. ExxonMobil has been pitted against companies from bitter regional rivals Pakistan and India -- Pakistan Petroleum and India's ONGC. Turkey's TPAO is also a powerful regional contestant. No finalists from China or Russia were on the list. But on Twitter, journalist Kabir Taneja suggested that Pakistan Petroleum has Chinese backing.
Other finalists are Dubai-based Dragon Oil, Kuwait Energy, Petra Energia of Brazil and Thailand's PTT. Bids are to be submitted in October, and a winner chosen by the beginning of next year. An initial tender for Afghan oil last year generated criticism after it was won by the China National Petroleum Corp., because China has been the victor of other resource contests in the country. CNPC's apparent decision to sit out the latest tender could be a tactical decision with a long-term view of future Afghan tenders.
ExxonMobil confirms that it has filed to bid on a group of Afghanistan oilfields containing an estimated 1 billion barrels of oil and gas, an instant validation of one of the riskiest resource plays on the planet. If the company's application proceeds, it could set up a battle of colossals, since the state-owned China National Petroleum Corp. and India's ONGC have also filed to bid, I have been told.
The tender deadline was yesterday to file an expression of interest. Company spokesman Alan Jeffers told me that the filing is among Exxon's global search for new hydrocarbon opportunities. The filings are to be made official after a government meeting Wednesday at which applications will be vetted.
The Exxon filing is surprising because until now the Afghan natural resource play, while rich, has been perceived as highly speculative, a place for the most daring wildcatters, in addition to regional state-owned companies such as CNPC, which won the first Afghan oil tender last year. The reason is both security -- no one knows whether a 30- 40-year project would endure since Afghanistan has been at almost constant war for more than three decades -- and the lack of infrastructure. Namely, how do you get the oil and gas to the market? Majors of the scale of Exxon rarely pursue such ventures, preferring for wildcatters to prove them out, then seek to buy in with their deep pockets.
The world according to Rex Tillerson: What are we to make of the CEO of ExxonMobil, who in a speech lasting just over an hour managed to tarnish journalists covering his industry as "lazy," the public as "illiterate," and critics as "manufacturers of fear"? As for worries about global warming, Exxon's Rex Tillerson suggested they relax about rising seas and disappearing agriculture -- "we will adapt," he said.
Cynics might say, ‘What should one expect from ExxonMobil'? But if so, they would not have been listening to Tillerson since he became CEO six years ago, a period in which he has been much more measured: In flat, evenly delivered and nuanced language, the 60-year-old native Texan has softened Exxon's sharpest and most-criticized edges, most conspicuously repudiating its funding of a clutch of scholars whose tracts -- challenging conventional climate science -- have been seized upon by global warming critics as evidence of a hoax. So was his speech Wednesday before the Council on Foreign Relations in New York simply a bad hair day? Or are we essentially watching a reversion to the days of Exxon's abrasive former CEO, Lee Raymond? Here, watch the video yourself:
The last time we witnessed such a philosophical lurch by Exxon was in January 2009, when Barack Obama was about to take the oath of office, and the sense of Washington politics was the inevitability of a federal cap on carbon emissions. Explaining explicitly that he sensed this political shift, Tillerson appeared at the Wilson Center in Washington, and announced that Exxon now accepted climate science. As an ameliorative, Tillerson proposed that emissions of heat-trapping gases be discouraged through the use of a carbon tax. It was after this speech that Exxon stopped funding hoax die-hards.
Exxon did not respond to two emails seeking to plumb its latest thinking. But with this week's talk, which I describe at EnergyWire, Tillerson seems to comes full circle. Look for the company to pour its lobbying might into campaigns that twin climate adaptation with head-long development of American oil and gas resources.
Go to the Jump for the rest of Rex Tillerson, and more of the Wrap.
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BP and the Russian squeeze: BP may be moving toward yet another comeuppance in Russia. This chapter in the company's nine long years of Russian misery goes back to January 2011, when it announced a coup -- it was bouncing back from the devastating 2010 Gulf of Mexico oil spill, and forming a turbo-partnership with the Russian state oil company Rosneft to drill for oil and gas super-giants in the Arctic Circle. But then things went horribly wrong: BP's regular Russian oligarch partners accused the Britons of violating their rights of first-refusal for any BP deal in Russia. The oligarchs, collectively known as AAR, sued and scuttled the BP-Rosneft deal, and sought billions of dollars in alleged damages. Early this month, BP finally threw in the towel, and said it is assessing offers to buy its half of TNK-BP. Here is where the fresh trouble starts. BP has suggested that there are at least two bidders -- AAR and an unidentified state-run Russian company. Among stock analysts, the general thinking is that, whoever buys the 50 percent, BP could walk away with some $25 billion. But now it appears that that sort of payday will arrive only if AAR fails to have its way. Sadly for BP, the record supports the opposite outcome. In a note to clients on Wednesday, Citigroup's Alastair Syme said that, given the oligarchs' aggressively pursued, $13 billion lawsuit against BP, the Britons are unlikely to achieve the $25 billion figure. How much are they likely to receive? AAR (which believes that BP is bluffing about there being another suitor) is thinking more like $7 billion, right around the figure that BP paid for its share of TNK-BP in 2003 (the Financial Times' Guy Chazan first reported the $7 billion figure, which we have confirmed). In the Russians' apparent view, that would allow BP to save face by leaving with all the money it originally gambled on TNK-BP.
But that may not be the end of BP's latest shellacking. The company is thought to be seeking to leverage its exit from TNK-BP into a position on the resource-rich Arctic, similar to deals struck by ExxonMobil, Italy's ENI and Norway's Statoil, as I write at EnergyWire. But it should not expect kid-gloves treatment by the Russian government. The reason is that President Vladimir Putin and his oil lieutenant, Igor Sechin (pictured above, right and left, respectively), will have closely monitored the latest TNK-BP deal. They will see that BP can be shellacked with impunity. If indeed BP proceeds with the sale of its TNK-BP share, expect this sequence of events: BP sells out for a firesale price to AAR; AAR resells that share or more to a state-run company such as Rosneft at a markup, but less than the $25 billion market price; and BP gets a place on the Arctic, but on far more advantageous terms for the Russian side than achieved with the other western companies.
Go to the Jump for the rest of the Wrap.
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Vladimir Putin has resumed his occupancy of the Kremlin with two signals: He will again be tough with critics in the street. And he intends to attract deep-pocketed foreign business -- a lot of business -- back to Russia.
For much of the last 12 years, Putin has made Moscow's streets inhospitable to demonstrators apart from his often-aggressive youth band, called Nashi. This approach softened starting in December, when tens of thousands of Muscovites were permitted to demonstrate unaccosted against Putin's decision to shift back to president from the lesser prime minister's job. Yesterday and today, though, Putin has reverted to the rough-and-bloody methods to which critics have been more accustomed.
So on the strength of early evidence, Putin is not going to slowly, slowly move toward more open and participatory politics. Instead, it is back to one-man rule.
But is Putin also bad -- or at least not good -- for the Russian economy, as many suggest?
A look at the Micex index of 30 big Russian companies validates the worriers: It is trading near a five-month low against the backdrop of plummeting oil prices, the presidential victory of French socialist Francoise Hollande, and renewed worry over Greece's ability to stand on its own two feet, Bloomberg reports. Russia then, despite its reliable flow of oil and gas exports, remains exceedingly vulnerable to the global economy.
Yet a big business deal that Putin closed over the weekend suggests that Putin may not have lost his touch. The latest of three relatively quiet foreign tie-ups, the deal, if successful, could mean a large and long cash payday for the country. These deals -- all in the oil sector -- suggest that Putin is still an economic player to be reckoned with.
Vladimir Rodionov AFP/Getty Images
David Biello is associate editor for environment and energy at Scientific American magazine.
So far in 2012, ExxonMobil has made $104 million a day -- and that's an off year. In 2005, the oil giant earned a net profit of $36.1 billion, or "more money than any corporation had made in history," writes Steve Coll in his illuminating saga of the most successful and largest heir to John D. Rockefeller's strangling monopoly, Standard Oil. Simply put, ExxonMobil has been among the world's largest and most profitable companies since the 1950s, and it is so confident of its future that it recently raised the dividend paid to shareholders by a whopping 21 percent.
Private Empire begins in 1989 with the tale of the Exxon Valdez, the company oil tanker that ran aground in Alaska's Prince William Sound, and ends 22 years later with ExxonMobil's credit rating surpassing that of the U.S. government. The title derives from the company's need to control actual physical territory in order to profitably pump. The result is amassed power and influence, used mostly for ill (if one's interest is human rights, economic development or combating climate change), or good (if one's focus is cheap gasoline).
Coll, a two-time Pulitzer Prize-winning author of previous books on the CIA's history in Afghanistan and on the Bin Ladin family, here weaves a work around a profile of the reigns of two emperors. There is South Dakotan Lee "Iron Ass" Raymond, who parlays a relentless focus on safety in the wake of the Exxon Valdez into imperial corporate control, whether it is the initiation of a "safety minute" at the start of any meeting or the installation of tracking devices in the vehicles of known speeders. Raymond's successor, the Texan Rex Tillerson (the "Eagle Scout"), attempts to soften the company's image by doling out medals for good work, an incentive reminiscent of scout merit badges, and embracing a carbon tax to control greenhouse gas emissions.
ExxonMobil perhaps looms largest in the U.S. on this subject of climate change. Early in the book, Coll lays out the company's apparent objectives via an American Petroleum Institute memo from the 1990s:
Average citizen "understands" (recognizes) uncertainties in climate science; Recognition of uncertainties becomes part of the "conventional wisdom"; media "understands" (recognizes) uncertainties in climate science; media coverage reflects balance on climate science and recognition of the validity of viewpoints challenging current "conventional wisdom"; those promoting the Kyoto treaty on the basis of extant science appear to be out of touch with reality.
If that was also ExxonMobil's goal, the many millions of dollars that the oil company spent worked. Each item on that memo can be checked off -- thanks largely to Raymond's close relationship with then-Vice President Dick Cheney. "We just gave away the environment," observed then-Treasury Secretary Paul O'Neill after the Bush Administration repudiated action on climate change in 2001.
Similarly, just 12 days before Obama's inauguration, Tillerson publicly advocated a carbon tax. In fact, that thumbs up seemed to have more to do with further delay of any regulation than a change of heart on climate change. As Coll puts it nicely, quoting a company lobbying meeting with the new Administration, Tillerson "was happy to have a position that nobody was going to embrace."
The irony is that ExxonMobil found good use for climate change: It cut its greenhouse gas emissions as a result of its focus on profits, largely by avoiding the flaring of natural gas co-produced with oil. It even used climate predictions to inform exploration, banking on global warming to melt more ice and thus allow access to Arctic oil, a nice side benefit of the company's intransigence on climate change. "Don't believe for a second that ExxonMobil doesn't think climate change is real," Coll quotes a former manager.
Such quotations as well as anecdotes humanize the massive cast of characters in this sprawling book. Raymond is revealed as kind to the air crew of his private corporate jet while routinely excoriating journalists, analysts and underlings for alleged stupidity. Fine phrases -- "Chad's politicians and labor leaders might be poor and some of them might be unsophisticated, but they had been schooled in obduracy and provocation by French colonialists, which made them formidable" -- leaven the work. And Coll puts the reader inside very closed rooms, such as a barbecue thrown for Russian President Vladimir Putin by U.S. President George W. Bush in November of 2001.
The book reads much like Dan Yergin's magisterial The Prize, absent the zest of conquest and with just a whiff of distaste. Coll handles science -- whether climate change, endocrine disrupting chemicals or geologic estimates of natural gas reserves -- with clarity and power. There are tantalizing hints of massive technological feats, such as Sakhalin I, ExxonMobil's massive engineering project off the western coast of Russia. Yet the poetry of the vast machines that enable oil's journey from well to gas tank is foregone in favor of the endless mundanity of bureaucratic power.
Since its birth as Standard Oil in the 19th century, ExxonMobil has been at once the most profitable, demonized, secretive and uncompromising corporation on the planet, a black box that muckraker Ida Tarbell famously penetrated in the early 1900s, and no one since has managed. After books on the CIA in Afghanistan and the family of Osama bin Ladin, two-time Pulitzer Prize winner Steve Coll describes Exxon as the most-resistent of all to inquiry. His new book, Private Empire: ExxonMobil and American Power goes on sale Tuesday. Below, Coll replies to questions from the Oil and the Glory.
O&G: Of all the oil companies targeted for grievances, Exxon seems unusually stigmatized. Is it deserving of such criticism?
Coll: Yes and no. On the yes side, they are unusually, fiercely partisan; for example, their Political Action Committee effectively acts as a finance arm of the Republican Party in the United States, and until about 2006 they made aggressive investments in free market groups trying to combat mainstream climate science that I personally think will look pretty embarrassing for years to come. These are not the kinds of aggressive, one-sided interventions in American politics that you would expect from the country's largest or near-largest corporation (depending on the year and the method of measure), a corporation that has diverse employees and is very broadly owned by individual shareholders, government pension funds, mutual funds, and so on. Also, they are their own worst enemy in public relations -- remorselessly aggressive, arrogant, and often self-defeating. So in that self-inflicted sense, they also deserve their reputation.
On the no side, they have a pretty impressive operating record since the  Valdez [tanker] spill, if not as perfect as they sometimes seem to claim for themselves, and their internal discipline has produced a better environmental and worker safety record than their peers. They deserve more credit for that than they get. They've taken human rights where they work in conflict zones more seriously, too, and although they were late, they have adopted some of the better corporate responsibility standards in that area, although they are nowhere near the leaders that they might be. Also, they are stigmatized just for being huge, and I am sympathetic to their arguments that a) while they make large profits in number terms, their profit-margins are not especially high; and b) they get blamed by the public for a lot of things they really can't control, like retail gasoline prices.
Former CEO Lee Raymond seems the most interesting character in the book. What is your take on him? And is he responsible for Mikhail Khodorkovsky's imprisonment in Russia?
He's a fascinating character, larger than life. As a writer, you love anyone who is truly comfortable in his own skin -- not trying to shade or hide himself from the world, and that is certainly Lee Raymond. He was ruthless, effective, difficult, sentimental, loyal and enormously successful as chairman and chief executive, certainly on the operating and profit-making side of the business, although he is criticized by some for not doing enough to position ExxonMobil for the future in the upstream, and on reserve replacement, an issue on which he struggled. Given my main interests in the corporation as a kind of independent sovereign, Raymond is fascinating because that is really how he carried out his role, how he acted in the world -- as a kind of head of state.
You mention the Khodorkovsky case, which is an example. Of course, [Russian leader] Vladimir Putin and his henchmen are responsible for Khodorkovsky's imprisonment, and Khodorkovsky himself miscalculated in the game of political chicken he played with Putin prior to his arrest. But Raymond figures in the story in a fascinating way. I don't want to give away too much of the fun stuff in the book. But in short, Raymond was negotiating to acquire a stake in Khodorkovsky's company, Yukos, in the weeks prior to his arrest. Raymond and Putin had a fascinating one-on-one at the New York Stock Exchange, which I recount, and which reads basically as an encounter between two very powerful men who see themselves as sovereigns.
Just how powerful is Exxon?
I think it depends on the setting. In some of the weak, poor countries where they produce oil -- a place like Chad, for example -- they are immensely powerful, almost comparable to the colonial powers of yore. Chad is one of the world's poorest countries -- Fourth World, really. The United States gives just a few million dollars a year in aid; ExxonMobil's tax and royalty checks in good years recently were higher than five hundred million dollars. If you're the president of Chad, whom do you care about, and whom are you going to listen to? In fact, ExxonMobil allowed Chad's authoritarian president, Idris Deby, to defy the Bush Administration and the World Bank during 2006 because of the sheer size of the cash flow the corporation delivered to Deby, and the way it collaborated with him at the Bush Administration's expense -- I found that an amazing story.
Overseas, in general, ExxonMobil finds its match when governments are well-funded and confident, such as in Russia, or where it is competing with other capable oil companies. It has more clout when it is the big fish in a smaller pond, as in Africa and in some of the weaker states in the Persian Gulf where it has established a huge presence, as in Qatar. Within the United States, ExxonMobil is powerful, yes, especially when it zeroes in to lobby in Congress on an issue that it really cares about, such as tax or climate, and when it is just trying to block legislative outcomes, rather than create them. In those circumstances the corporation can be very hard to defeat. But its power is constrained, as we were mentioning above, by its poor public reputation.
Go to the Jump for the rest of the Coll interview.
In a 2006 cover story in FP, the columnist Thomas Friedman described what he called "The First Law of Petropolitics." In it, Friedman revealed an inverse relationship between oil prices and the kindliness of petrocrats: As oil prices surge, the rulers of oil-producing countries tend to become inflated jerks; when prices are low, they are high-minded pussy cats.
Yet for all its genius, Friedman's law is limited: He was talking about pure petro-states such as Russia, Nigeria and Saudi Arabia. Isn't the behavior of freely elected leaders in developed economies influenced by any oil commandments?
I raise this question while observing President Barack Obama and oil companies act upon some other mutually understood political principle in the heat of the election-year campaign: Over the last week or so, American oil giants Chevron (see interview below) and ExxonMobil have suggested that Obama wise up and embrace America's inner-petrostate. Obama has responded by embracing his inner-cudgel, urging oil companies to accept a non-fossil fuel future, and meanwhile surrender $4 billion in tax breaks.
Oil is pivotal in the campaign platform of Obama's opponents. We see this most recently in finger-pointing over gasoline prices. But gasoline is not the operative hothouse for the top-line political battle. Instead, it is a sideshow to the central backdrop, which is the nation's high-stakes oil boom, a projected surge in the U.S. oil supply over the coming decade from shale oil, deepwater Gulf of Mexico reserves and imports from Canada's oil sands.
The opposing sides are capitalizing on high gas prices to advance competing, long-existing agendas -- Big Oil to pry open coveted basins underlying coastal and federal areas, and Obama to keep incubating still-early clean-energy technology.
Toward these aims, the oil industry's strategy is to persuade Americans that these closed-off lands are all that stand between U.S. independence from foreign oil, and continued fealty to those fellows governed by Friedman's First Law. For Obama, it is to contextualize the oil boom as big but historically ephemeral: Americans can bask in their gas-guzzling ways now, but must also begin to pave the way for the inescapable post-hydrocarbon era.
To state this as a corollary, there is a direct relationship between the vigor of an oil boom, and the temperature of high-flown political rhetoric. (Given the apparent hurt feelings afflicting both sides, one observes another active corollary -- a direct association between rising wealth and thinning skin, a sublaw that seems to straddle the oil and financial industries.)
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When it comes to energy policy, is the United States worse than Turkmenistan? How about Russia, where a contract is a contract only when President-elect Vladimir Putin so decides? Is it less congenial than Brazil, where according to Reuters, Chevron executives seem likely to face criminal charges over a leak of 2,400 barrels of oil, 0.1 percent the size of BP's 2010 Gulf of Mexico spill?
In a speech Friday, ExxonMobil CEO Rex Tillerson (pictured above left, with Putin) said the U.S. compares unfavorably from an energy policy standpoint not just to those countries, but also to China, Argentina and Kazakhstan. The backdrop is a humongous, high-stakes boom in U.S. oil and gas drilling, and a superlative election-year battle between the U.S. industry and the Obama Administration. Both sides think the bonanza will much improve the U.S. economy and its balance of payments, but after that their respective fact sheets barely coincide.
I won't parse the whole flurry of industry and Administration statements. But Tillerson's speech -- delivered at the IHS CERA annual oil conference in Houston -- caught my eye both because he runs the industry's most successful company, and for his atypical rhetorical flourishes. You can watch yourself.
Natural gas is roiling global geopolitics, but the latest news -- a bad result in Europe -- is that the tsunami is still very much solely U.S.-based.
The U.S. shale gas boom has shaken up geopolitical presumptions by challenging Russia's gas-led hold on Europe, and threatening to crush far-dirtier rival fuels such as coal around the world. The thinking has been that Europe -- specifically Poland -- might be next in unleashing big, new shale gas supplies, an event that would make life even more difficult for Russia's petro-ruler, Vladimir Putin.
But ExxonMobil yesterday announced that its Polish drilling efforts (pictured above, drilling in the eastern Polish village of Grzebowilk) thus far have failed, reports Bloomberg's Joe Carroll. Exxon, the world's largest publicly owned producer of natural gas, said two exploratory wells in eastern Poland failed to produce sufficient gas to be profitable. This comes on top of a slew of bad signs about Europe's gas prospects: Over the last two years, drilling by three wildcatters -- Lane Energy, 3Legs Resources and BNK Petroleum -- produced only small volumes in northwest Poland, Bernstein Energy said in a note to clients this morning. Last year, Shell announced similar negative results in Sweden, and in 2010 Exxon declared its Hungarian shale-gas efforts a failure. On top of this, France and Bulgaria have banned hydraulic fracturing, the method used to produce shale gas.
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Has ExxonMobil -- the annoyingly prissy schoolboy who always obeys the teacher -- risked weakening one of its distinguishing pillars in order to break into a single oil patch? And if so, could that shake up the global oil market along with geopolitics?
We are referring to the news, indiscreetly disclosed by a Kurdistan official last week, that the northern Iraqi region has signed an oil exploration agreement with Exxon. The reason this is a problem is that Kurdistan has been in a long-standing turf war with the folks in Baghdad over how to divide the spoils from its hydrocarbon riches. Until it's settled, Baghdad has forbidden foreign oil companies with which it does business -- which include Exxon, Shell, Italy's Eni, France's Total, the China National Oil Corp., Russia's Lukoil and virtually every substantial name in the industry -- to sign any deals with the Kurds without its okay. In September, for example, the U.S. company Hess was barred from a new round of Iraqi leases explicitly because of deals it executed with the Kurds three months earlier.
The stakes are high not just for Exxon, but for Iraq, the U.S., and the international community: The commercial tensions arise a little over a month before the Dec. 31 deadline for U.S. troops to be out of Iraq, and a predictable rise of other, security-based challenges to Prime Minister Nuri al-Maliki. In an analysis, Reuters' Patrick Markey writes that a hard line against Exxon by al-Maliki could backfire by encouraging other companies to pull up stakes in Iraq proper and take up drilling in Kurdistan, hence jeopardizing his aim of building up oil exports from the south; but if he isn't tough enough, he could lose authority with other restive Iraqi regions.
The U.S., too, has a stake in stability on the ground once it leaves, and in Iraq's oil exports rising from the 2.9 million barrels a day it currently ships. The U.S. also is eager for a north-south agreement since it could result in Kurdistan's natural gas flowing into Europe through the proposed Nabucco pipeline, with which the U.S. hopes to curb Russian market dominance of the continent. Already, Genel, an oil company linked to former BP CEO Tony Hayward, is planning a 400,000-barrel-a-day oil export pipeline from Kurdistan, to be finished in the second half of 2013. In a statement, State Department spokeswoman Victoria Nuland said that the Obama administration had advised Exxon that "they run significant political and legal risks if they sign contracts" with Kurdistan.
Season of uncertainty in Kurdistan: ExxonMobil has been red-faced since its big oil contract in Kurdistan was prematurely disclosed, subjecting the company to embarrassment in Baghdad, which forbids such back-room dealings without its permission. But that has only made the pressure for a revenue-sharing agreement between Kurdistan and Baghdad stronger. While the two sides continue to bicker, other Big Oil companies are in talks with Kurdistan. At stake in Iraq as a whole are some of the largest new volumes of oil and gas on the planet. The Financial Times' intrepid Javier Blas produces a report on a several-day trip through Kurdistan. The Kurds envision shipping 1 million barrels a day of oil, up from the current 175,000 barrels a day, Blas writes, but no company will actually spend the needed billions of dollars for field and transportation development until that Kurdistan-Baghdad accord materializes in the form of a petroleum law. He notes that the two sides have described their deal as imminent for the last five years. Meanwhile, a boomtown atmosphere has been unleashed:
Erbil, the political capital of Iraqi Kurdistan, is entering an oil boom. The city of 1 million people, which still lacks a good hospital, has seen the opening of its first luxury hotel -- and another three are under construction. Oil executives fly in and out with airlines offering new routes each month. But while money is pouring in, the region has yet to develop services to benefit from it, importing everything from equipment to food. Costs are rising fast, too. Housing prices are rocketing and salaries in the oil industry have doubled in the past five years. And with more than 40 companies elbowing for space in Erbil and the region, retaining competent staff is a problem. Local political commentators are already warning that the region -- like others in Latin America, Africa and the Middle East -- could see the blessing of oil turning into a curse.
Go to the Jump for more of the Wrap
Annals of the court of public opinion:
Shale gas has a bad week ... On the plane to California, I happen to sit next to a shale-gas driller. He waxed enthusiastic about the prospects of the Utica Shale, a relatively fresh discovery underlying eight U.S. states. Until now, the Marcellus has been the most promising shale gas formation in production, but the Utica may rival it in size and volume, the driller said. But what about the PR shellacking that shale gas has been enduring? I asked. That is quieting down, the driller replied, as folks digest the economic value of the shale. Perhaps in the long run he will be right. As for now, not so much. This week may have been the industry's worst since Josh Fox released Gasland.
First came some audiotapes recorded during an industry gathering in Houston by an environmentalist blogger named Sharon Wilson, otherwise known as "Texas Sharon." In the tapes, Wilson runs her recorder as communications executives from two of the world's biggest industry players use the unforgiving language of war to advise other hands how to deflect critics (CNBC's Eamon Javers posts the recordings here.). A Range Resources official speaks of hiring combat veterans for expertise in "psy-ops," and an Anakarko Petroleum executive recommends that fellow industry hands read the U.S. Army/Marine Corps Counterinsurgency Field Manual. "Having that understanding of psy ops in the Army and in the Middle East has applied very helpfully here for us in Pennsylvania," Range's Matt Pitzarella tells his audience. The cracked door into company boardrooms reinforced the impression of an industry that perceives itself to be under siege, not one necessarily focused on simply doing its best.
Go to the jump for more on shale gas and the rest of the Wrap
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The governor of Alaska is saying publicly what we've known for some time -- that his state's bonanza of natural gas is best shipped to Asia. Gov. Sean Parnell is asking oil companies that control Alaska's gas equivalent of 6 billion barrels of oil -- BP, Shell ExxonMobil and ConocoPhilips -- to explore the details of shipping the largesse across the Pacific. Yet the companies continue to be slow off the mark, and may still have their eye stubbornly on the hopelessly glutted Lower 48 U.S. states, according to Rebecca Penty of the Calgary Herald.
Unlike the estimates under circulation regarding the Western Hemisphere's oil reserves, this side of the globe definitively does have an embarrassing surplus of natural gas. It's this surplus that has stranded Alaska's North Slope riches. It's not needed in the continental U.S., which is replete with both conventional and shale gas.
Much new gas is being directed to China -- from Qatar, Australia, Turkmenistan and probably from new discoveries in eastern Africa. Russia would like a deal to ship nearly the equivalent of China's entire current annual gas consumption. Yet Parnell is betting that the increased supply would not glut Asia, but trigger a demand chain reaction and further boost China's shift to gas, which seems to be a reasonable economic calculation. If that happens, it would shake up geopolitics since less coal might be burned than is projected, hence reducing expected emissions of CO2.
A much-trumpeted partnership of one of today's most celebrated scientists and the world's largest publicly traded oil company seems stalled in its aim of creating mass-market biofuel from algae, and may require a new agreement to go forward. The disappointment experienced thus far by scientist J. Craig Venter and ExxonMobil is notable not only because of their stature, but that many experts think that, at least in the medium term, algae is the sole realistically commercial source of biofuel that can significantly reduce U.S. and global oil demand.
Venter, the first mapper of the human genome and creator of the first synthetic cell (pictured above), said his scientific team and ExxonMobil have failed to find naturally occurring algae strains that can be converted into a commercial-scale biofuel. ExxonMobil and Venter's La Jolla, Ca.-based Synthetic Genomics Inc., or SGI, continue to attempt to manipulate natural algae, but he said he already sees the answer elsewhere -- in the creation of a man-made strain. "I believe that a fully synthetic cell approach will be the best way to get to a truly disruptive change," Venter told me in an email exchange.
Venter made his remarks before a conference this week on the future of energy at the New America Foundation in Washington, D.C., and in subsequent emailed replies to questions.
Read on to the jump for the rest of the story including Q&A.
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Montana's governor says he's going to ride ExxonMobil "like smell on a skunk," not to mention mete out more conventional unpleasantries like going to court. In case the oil giant has any funny ideas while being subject to these measures, "There ain't nobody gonna blow smoke up the south side of this north-facing governor." Gov. Brian Schweitzer, who is a soil scientist, has been driven to this display of trash-talking by the July 1 spill of some 1,000 barrels of crude oil into the pristine Yellowstone River, about 100 miles downriver from Yellowstone National Park.
Does Exxon deserve this scale of rudeness? After all, when BP suffered this treatment last year, it had spilled 5,000 times that volume into the Gulf of Mexico. Unlike the 56 minutes it took Exxon to sever the flow of oil, BP took five days short of three months to shut off the Macondo oil well. In addition, as far as I know, nobody at Exxon has asked to get his life back, the innocently delivered but unfortunately received remark that then-BP CEO Tony Hayward will rue for the rest of his days.
The answer is yes. The main reason is that Exxon has all but danced on BP's grave since the Macondo spill. For example, back in March, BP's new CEO, Bob Dudley, delivered his first full-blown speech since the spill, sort of a coming-out address at Dan Yergin's annual oil show in Houston. Dudley's main message was that what happened to BP could happen to anyone and that all oil companies would have to change their procedures. It is "unrealistic" to dismiss Macondo as a "'black swan', a one-in-a-million occurrence that carries no wider application for our industry as a whole," Dudley said.
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ExxonMobil is experiencing an identity crisis. For a century and a half -- ever since John D. Rockefeller switched from the produce business to oil in Cleveland, and created the precursor to Exxon along with the entire petroleum industry as we know it -- this company has been synonymous with the distinctive personality of oil. But as we learned yesterday, Exxon is now mostly a natural gas company. Is that anything to boast about? Probably not -- Daniel Day-Lewis, for instance, would likely get little traction as a natural gas man, armed with a deadly bowling pin, shouting, "I drink your milkshake." In fact, Upton Sinclair would never have written the book. Take a look yourself:
Is Exxon's shift -- its proven reserves are now 53 percent gas, and just 47 percent oil -- important? It is most certainly in a financial sense to the company's options-laden Exxon executives and their shareholders, but we'll get to that below.
But it is also significant geopolitically, and for the average driver, because it's emblematic of a big shakeup in power. Industry and motorists around the world are increasingly relying for their fuel not on publicly traded companies like Exxon, based solely on the profit motive, but on state-owned oil firms with a complex range of incentives and abilities. Multinationals like Exxon are becoming gigantic gas companies because they are being turned away by the petro-states of the world, which want to produce their own oil.
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Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.