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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We are suffering whiplash: For nearly four decades, OPEC -- the cartel formally known as the Organization of Petroleum Exporting Countries -- has been a major economic and geopolitical force in our collective lives, driving nations to war, otherwise self-respecting world leaders to genuflect, and economists to shudder. The last half-dozen years have been especially nerve-wracking as petroleum has seemed in short supply, oil and gasoline prices have soared to historically high levels, and China has gone on a global resource-buying binge. Russia's Vladimir Putin has strutted the global stage, bolstered by gas and oil profits, and Venezuela's Hugo Chávez has thumbed his nose at los Yanquis.
Yet now we are hearing a very different narrative. A growing number of key energy analysts say that technological advances and high oil prices are leading to a revolution in global oil. Rather than petroleum scarcity, we are seeing into a flood of new oil supplies from some pretty surprising places, led by the United States and Canada, these analysts say. Rather than worrying about cantankerous petrocrats, we will need to prepare for an age of scrambled geopolitics in which who was up may be down, and countries previously on no one's A-list may suddenly be central global players.
One primary takeaway: North America seems likely to become self-sufficient in oil. "This will be a huge potential productivity shock to the U.S. economy," says Adam Sieminski, director of the U.S. Energy Information Administration, a federal agency. "It could grow the economy, grow GDP, and strengthen the dollar."
OK, we get it -- we will need to relearn our basic geopolitics. But how so? Last week, the New America Foundation gathered six leading energy analysts to take a guess as to the winners and losers over the next few decades from the unfolding new age of fossil fuel abundance (video here). Here's what they told us:
The United States: Jobs increase, wages and productivity go up, the dollar strengthens, the current account deficit becomes negligible, and America has a new day as an economically dominant superpower. It is far and away the biggest winner of the new age, the analysts agreed. As far as Americans are concerned, what's not to like? Citigroup's Ed Morse waxed rhapsodic: "We will no longer be kowtowing to despotic rulers and feudal monarchs whose oil supply lines are crucial to other aspects of foreign policy. Those tradeoffs will be eliminated." Perhaps a bit Pollyanna-ish, but we get the general idea.
New petrostates: Aren't we forgetting those unsung nations that, depending how they manage the new age of plenty, can also very well end up with far more robust economies and as geopolitical players? The following 10 countries -- all of them burgeoning new petrostates -- make the winner's list because, even if they ultimately botch the moment and send most of the profit into private Swiss bank accounts, the coming energy boom gives them a much greater chance at big economic prosperity: Cyprus, Ethiopia, French Guiana, Israel, Kenya, Mozambique, Sierra Leone, Somalia, Tanzania, and Uganda.
Cooperation: Western suspicion of China has been fueled by its aggressive acquisition of natural resources around the world, especially oil and gas fields. But "in a world of plenty," said Ed Chow of the Center for Security and International Studies, "the zero-sum nature of the discussion could come out of the equation." Chow thinks we are already seeing the first stages of this more relaxed future in the U.S. attitude toward billions of dollars in recent Chinese investment in U.S. shale gas and oil fields. That is far different from 2005, when public and political opinion aborted China's attempt to buy Unocal almost before it reached a serious stage. Chow likes this new atmosphere. "It was never a very healthy phobia that we had to begin with," he said. Looking ahead, Chow wonders whether the United States might end up collaborating with China and India in patrolling the Persian Gulf.
Go to the Jump for the Losers in the new age.
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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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The four squabbling fiefdoms in China's shale-led political transition
By Sophie Lu
The writer is a consultant with Regester Larkin Energy
For those tracking China's factional politics in this year of momentous transition, a telling indicator will be a coming brawl over its apparently gargantuan shale gas resources. In the arena of political power, where China's shale goes, so shall China.
Shale gas -- locked into barely porous rock deep within the Earth, and released through a method called hydraulic fracturing, or fracking for short -- has fundamentally disrupted the global energy balance, and changed geopolitics: American shale gas has undermined Moscow's political influence in Europe by reducing the dominance of Russian natural gas, and reverberations in the Middle East and elsewhere are likely in coming years.
The shakeup appears especially likely to strike China, which has the world's largest estimated reserves of shale gas. In August, the government will hold its second auction of shale reserves, and already we can make out the shape of a titanic struggle for them.
The shale brawl mirrors China's larger political currents. In the Fall, China will undergo a once-in-a-decade transition of power in which seven out of nine members of the country's top decision-making body, the Standing Committee, will be replaced. The struggle for who ends up on top pits two competing factions -- the reformists against the statists. Who are they, and what makes them tick? And how will their destiny be reflected on China's shale gas patch?
First, take a look at these two charts. The first juxtaposes the recent trajectory of U.S. shale gas production with China's own plans -- Beijing, as you see, hopes by 2020 to reach what the U.S. was producing four years ago.
This second chart details China's year-by-year plans.
Go to the Jump for the rest of China's shale brawl.
Charts by Sophie Lu
Is Barack Obama sufficiently dirty to win re-election? Not according to presumptive Republican nominee Mitt Romney, who says the president is too spic and span.
Calculating that clean energy is passé among Americans more concerned about jobs and their own pocketbooks, Romney is gambling that he can tip swing voters his way by embracing dirtier air and water if the tradeoff is more employment and economic growth.
Romney's gamble is essentially a bet on the demonstrated disruptive potency of shale gas and shale oil, which over the last year or so have shaken up geopolitics from Russia to the Middle East and China. Now, Romney and the GOP leadership hope they will have the same impact on U.S. domestic politics, and sweep the former Massachusetts governor into the White House with a strong Republican majority in Congress.
A flood of new oil and natural gas production in states such as North Dakota, Ohio, Pennsylvania, and Texas is changing the national and global economies. U.S. oil production is projected to reach 6.3 million barrels a day this year, the highest volume since 1997, the Energy Information Agency reported Tuesday. In a decade or so, U.S. oil supplies could help to shrink OPEC's influence as a global economic force. Meanwhile, a glut of cheap U.S. shale gas has challenged Russia's economic power in Europe and is contributing to a revolution in how the world powers itself.
But Romney and the GOP assert that Obama is slowing the larger potential of the deluge, and is not up to the task of turning it into what they say ought to be a gigantic jobs machine. The president's critics say an unfettered fossil fuels industry could produce 1.4 million new jobs by 2030. They believe that American voters won't be too impressed with Obama's argument that he is leading a balanced energy-and-jobs approach that includes renewable fuels and electric cars.
The GOP's oil-and-jobs campaign -- in April alone, 81 percent of U.S. political ads attacking Obama were on the subject of energy, according to Kantar Media, a firm that tracks political advertising -- is a risk that could backfire. Americans could decide that they prefer clean energy after all. Or, as half a dozen election analysts and political science professors told me, energy -- even if it seems crucial at this moment in time -- may not be a central election issue by November.
Yet if the election is as close as the polls suggest, the energy ads could prove a pivotal factor. "Advertising is generally not decisive. Advertising matters at the margins. ... But ask Al Gore if the margin matters," said Ken Goldstein, president of the Campaign Media Analysis Group at Kantar Media. "This is looking like an election where the margin may matter."
Just months after an enormous discovery of natural gas off the coast of Israel, a local company has reported another potentially big strike -- an estimated 1.4 billion barrels of oil, in addition to more natural gas. The company, Israel Opportunity Energy Resources, says it will start drilling by the end of the year. All of a sudden, Israel has found itself a focus of the world's hydrocarbon interest.
Energy experts are tittering about a prodigious new golden age of oil and gas in the Eastern Mediterranean, where Israel and Cyprus could become substantial oil and natural gas exporters, in addition to some other surprising places including French Guiana, Kenya, North Dakota, and Somalia. All in all, say increasingly mainstream projections, the world is moving into a period of petroleum abundance, and not the scarcity that most industry hands embraced just months ago. Plus, the United States, or at least North America, may be on the cusp of energy independence while OPEC's days of über-influence are numbered.
What these experts have not said, however, is that while this new golden age may indeed shake up the currently rich and powerful and create new regional forces, it could also accelerate the swamping of the planet in melted Arctic ice. So much new oil may flood the market that crude and gasoline prices might moderate and lessen consumer incentives to economize. "In the absence of U.S. leadership, I tend to agree with NASA's James Hansen that it is 'game over for the planet,'" Peter Rutland, a professor at Wesleyan University, told me in an email exchange.
This unspoken flaw in the golden-age scenario suggests it might not unfold so smoothly. The projected turnaround of oil's sagging fortunes may indeed herald economic salvation for the U.S. and global economies. But the environmental consequences could also trip up its full realization.
Ebrahim Hamid AFP/Getty Images
This is the first stage in what could be a very lengthy process to sell our share in TNK-BP. It is far too early to say what we will do with the money. All we have done today is announce an intention to look further at expressions of interest in purchasing some or all of our stake in TNK-BP. It is not about Arctic or other businesses in Russia, current or future.
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In New Paltz, N.Y., 80 miles north of Manhattan, Richard Parisio laments the disturbance of the "sweet pure song of the white-throated sparrow." The culprit? Hydraulic fracturing, Parisio writes in the New Paltz Times -- "noise, night and day, from droning compressors, clanging drilling rigs, roaring gas flares."
Parisio worries that not just sparrows, nor their human appreciators, will be left the lesser for this state of affairs. There are the hermit and wood thrush, who could be "driven from their breeding grounds, unable to hear each other's songs, so crucial to courtship and the establishment of territory." And what about the bats? Will they manage to "find their food by echolocation amid all the background noise"? Parisio fears the answer may be no, which could trigger unknowable consequences such as a rise in the population of mosquitoes when their bat predators are fewer.
The new age of energy is making our lives less tranquil. Writer Robert Bryce has discussed the whoop-whooping of wind turbines, the "headaches, ear pain, nausea, blurred vision, anxiety, memory loss, and an overall unsettledness" suffered by those who live near them, not to mention the "fatigue, apathy, and depression, pressure in the ears, loss of concentration [and] drowsiness." This is a global phenomenon, says Bryce over at the National Review, a malady in "Missouri, Oregon, New York, Minnesota, Wisconsin, Britain, Australia, Canada, Taiwan, and New Zealand."
One can shake one's fist at windmills (pictured above, Copenhagen), but business is generally a cacophonous thing. Going back as far as one would like, merchants have probably always barked out the virtues of their wares, and some economic activities have been noisier than others. As we know, for instance, the racket of horse-drawn wagons in 18th and 19th century London was so ear-splitting that one simply could not speak audibly on the street.
Alas, the horses are gone, but the din remains. Across the globe, we are subject to disrespect of tender ears. At the Economist, there is gnashing over the defiant rustling of papers and cell-calling in the quiet cars of commuter trains across the Commonwealth, from Great Britain to Australia. Even in the joyfully raucous bazaars of Istanbul, there is a feeling that the shouting of merchants may have gone too far, reports the Wall Street Journal.
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Apart from the entertainment value, what is the big deal about the saga of Aubrey McClendon, the CEO of Chesapeake Energy, and his use of the company as a piggy bank? The big deal is that, more than any single individual apart from the innovator George Mitchell, McClendon is responsible for the shale gas boom that is shaking up geopolitics. Of course, McClendon's hijinx do not change the geopolitical shakeup, but they are a window into the type of personalities who make up the wildcat boom (pictured above, McClendon, left, owns the Oklahoma City Thunder professional basketball team along with Clayton Bennett, right). As with most such revelations, the kernels and sometimes the whole kit-and-kaboodle are detailed in the fine print of a company's annual 10-K filing with the Securities and Exchange Commission. The thing is, few people bother to read such material -- apart that is from the folks over at footnoted.org, whose whole business is to do so. The footnoted folks have been talking about McClendon for awhile now (such as here, here and -- from today's Website -- here). I asked footnoted's Theo Francis for some insight into Chesapeake. His reply follows.
O&G: What could and should a Chesapeake investor, given an ordinary read of the company's 10-K annual reports, have known about Aubrey McClendon's compensation package, perks and financial dealings in recent years? As a followup, if that same investor elected to dig deeper and follow the trail of citations, what would he or she have been able to know?
Theo Francis: Piecing it together can take some work and patience, but it's there, mostly in the annual proxy filing, with updates scattered across other filings over the course of a year.
A snapshot of McClendon's compensation in 2011 (primarily from an April 30 amendment to the company's 10-K filing) illustrates what's available: Salary of $975,000; a $1.95 million discretionary bonus -- meaning it isn't based on any kind of performance measures, but just on the board's general sense of how well he's done; $13.6 million in stock awards; and $1.3 million in perks and retirement-plan contributions. Those perks are telling too: $500,000 in free personal trips on company aircraft (on top of another $650,000 in jet rides for which he reimbursed the company), $250,000 in personal accounting services provided by company employees (about which more in a moment), and $121,570 in personal security benefits. Total for 2011: $17.9 million. Over the last three years, McClendon's compensation has added up to more than $57 million. Plus, Chesapeake doesn't even count some perks, because there's ostensibly no incremental cost to the company, including for an unknown number of tickets to sporting events. McClendon has also built up $7.5 million in a deferred-compensation plan, a kind of IOU from the company.
Which brings us to the related-party transactions, the ones that the company did disclose: Buying McClendon's map collection for $12.1 million in 2008 (a transaction that was ultimately unwound after a lawsuit); paying the Oklahoma City Thunder basketball team, in which McClendon personally owns a 19.2% stake; $2.9 million to $4.1 million a year for more than a decade for stadium naming rights, plus another $36 million over 12 years for sponsorship and advertising costs; and $4.6 million on tickets and games in 2011-12. There's also the board's decision in 2009 to ease the stock-ownership requirement and front McClendon $75 million toward his investments in the company's drilling operations, after he had to sell pretty much all his Chesapeake shares in a margin call the year before.
And then, of course, there's the long-standing "Founder Well Participation Program," which allowed McClendon to invest alongside Chesapeake in its drilling operations, and which is what's at the heart of the current series of embarrassments for the company. The disclosure about the program in last year's proxy was 1,500 words, which sounds like a lot, and there is a fair amount of detail: How the program works (very generally), why the board does it (with extra business clichés) and so on, as well as an estimate of the present value of McClendon's interests in the wells ($308 million at the time) and a table showing annual revenues, capital and operating expenditures, along with cash-flow from the program for McClendon. But there was an awful lot that wasn't disclosed. Since the original Reuters report, the news of an informal SEC inquiry, the company's decision to wind down the well participation program, and so on, the company has produced a lot more information about the program, McClendon's borrowing and other details, in a series of filings and statements.
The bottom line, I think, for any reasonable outside observer -- and I'm talking about before the Reuters bombshell -- is that Chesapeake feels like a company run by McClendon, for McClendon and his buddies. As long as the company delivered for shareholders, there was a good chance that things could proceed with only minimal reforms for quite a while. But there's very little sense here that these people ever stopped and thought, ‘You know what, we're playing with other people's money; maybe we should rein it in a little.'
And as we've seen time and again over the years, that certainly sets the stage for a revelation like the one we got from Reuters.
Same framework -- what went undisclosed that we've learned about in recent weeks?
Quite a bit, and that's why you've seen shareholders react so badly.
For me, Chesapeake had the feel of an insouciant bad boy: It seemed like it was being pretty brash and up-front about its extremes, and that shareholders were for the most part shrugging it off. We always worry about what's not disclosed, and on one level, when a company flouts conventions to the degree that Chesapeake has, you have more to worry about (with Enron being perhaps the ultimate modern-day example). But after a while, it's easy to think, ‘OK, look, they almost got away with the map thing, and although they had to unwind the sale, there wasn't too much of a fall-out; if I were they, I'd just lay it all out and shrug when the good-governance types whine.' Maybe that's what they're doing -- you don't want to count on it, but heck, I don't own the stock, so I can let it lie.
Instead, the new revelations suggest there was, and is, a lot more lurking below the surface. There's a single line in last year's proxy that suggests McClendon might be borrowing under the Founder Well Participation Program, saying the program "does not restrict sales, other dispositions or financing transactions" involving his interests in it. What's missing is any indication that he might have more than $1 billion in borrowing backing the program, that his lenders might also do business with Chesapeake (putting him in a potentially awkward situation, to say the least), or that -- as the original Reuters article suggests -- his personal loans might require him to take certain actions that put him in conflict with Chesapeake's shareholders. That's a lot.
Now there's a suggestion, in an article by The Wall Street Journal's excellent Russell Gold, that Chesapeake may not have fully disclosed some $1.4 billion in off-balance-sheet arrangements of its own. That would seriously ratchet up the disclosure failures, in my view.
Go to the Jump for more of Theo Francis and the rest of the Wrap.
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Let's say you are hired to watch Aubrey McClendon, the titan of Oklahoma City. George Mitchell technically enabled the shale gas boom with his technological improvements in hydraulic fracturing. But it was uber-gambling, go-for-broke McClendon who, sweeping up millions of acres of land, putting down rigs and drilling before almost anyone else had risen from their chair, parlayed Mitchell's invention into the global, game-changing industry it is today. He single-handedly made his company, Chesapeake Energy, the king of the shale gas patch.
The thing is, McClendon (pictured above, left, with Jack Nicklaus) has a few ... ummmm ... eccentricities. Like the glutton in the sweet shop, the cash-minded McClendon cannot resist a taste of potentially profitable ventures to which he takes a hankering. He wants to run a hedge fun, for instance, not to mention a professional basketball team, a cattle ranch -- and let's have some restaurants! Every now and then, McClendon requires personal cash infusions in the tens of millions of dollars to cover bad investment bets. You are paid to patrol those gorging instincts, as described by the Wall Street Journal's Russell Gold, yet what to do when he simply goes on being ... being, well, Aubrey McClendon? He is your charge. Yet he is so ... entertaining. And successful!
Until he isn't, and don't you look flat-footed, and downright unseemly, when you shout about McClendon's excesses, and threaten his throne?
So we have the current narrative of McClendon. Three weeks ago, McClendon was broad-sided by a Reuters expose regarding his unusual contractual right to invest side by side with Chesapeake in shale gas wells, and borrow money to do so from Chesapeake partners. Today, Chesapeake's main investor, an investment firm called Southeastern Asset Management, is demanding that McClendon curb his speech, and who he meets with -- or else. By else, Southeastern means Chesapeake could be sold to the highest bidder. Already, Southeastern is partly responsible for McClendon losing his title as chairman, leaving him solely CEO. That's not a huge deal, but given the choice, most senior executives would prefer to be both.
But is the board, Southeastern or anyone close to the matter truly surprised by McClendon's behavior?
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On the shale gas patch, the twain decidedly do not meet: Shale gas drillers, on the receiving end of two years of withering attacks by anti-fracking elements, have launched a counter-offensive. A special-purposed group of 11 big industry players including ExxonMobil, Shell, Chevron and Anadarko issued an eight-page code of conduct for hydraulic fracturing in Pennsylvania and New York (pictured above, outside the town of Waynesburg, Pa.). I spoke with Anadarko CEO James Hackett, a leader of the group, before the Obama administration's release today of somewhat stiff rules governing fracking on federal land. As I wrote at EnergyWire, Hackett said the group wished to "set a good example" -- a high bar for all operators on the patch in order to reassure public opinion. But Hackett's vituperative description of critics suggests little room for conciliation between the sides. In a nutshell, Hackett sees himself as a patriot, and his critics as anti-science extremists, and worse.
The industry embarked on the standards as part of studies requested by the Department of Energy and a diverse group called the National Petroleum Council. But it was all against the backdrop of hyper-critical media like "Gasland," Josh Fox's much-watched 2010 documentary on fracking. The companies felt that shale gas "can be developed responsibly, but you had a slew of articles coming out from the New York Times. Whether they were fact-based or not didn't seem to matter," Hackett told me. "The Cornell study, the Duke study, the hysteria that people were trying to create around hydraulic fracturing, which was scientifically misplaced."
So there was industry interest in counter-attacking, Hackett said. But once they were into the process, the CEOs started thinking more broadly that they had something to gain by conceding to regulation. Hackett:
There was a feeling that this could be a useful way for us to proceed long term, because the truth is that the technology does keep changing and the practices keep changing. And we have every bit or more a stake of how the regulatory process evolves and society's acceptances of our industry. We have a bigger stake than I'd say than anyone else but the citizenry that we want to make sure is educated about what the benefits of this are so that they don't just say, ‘You lose your license to operate,' without understanding what it means when they say that.
Read on for more of James Hackett, and the rest of the Wrap.
Mladen Antonov AFP/Getty Images
By the end of the decade, Israel will probably satisfy all its own natural gas requirements, and become a serious exporter of liquefied natural gas. Argentina might produce the world's third-largest volume of shale oil. Mozambique seems likely to become one of the largest LNG exporters in the world. And the United States may meet most of its own liquid-fuel needs.
Which is to say that the geopolitical fabric with which we have grown up seems to be unraveling in spots, and a new patchwork taking its place in Africa, the Middle East, North and South America, and beyond. Settled power and influence are giving way to a maelstrom of moving parts.
The backdrop is a global revival in the oil and gas business, ignited by energy companies that, after two decades of largely standing still, are finally drilling with purpose. These companies could yet self-destruct if they are not environmentally watchful. Clean-tech could achieve massive advances and economies of scale. But as of now, the colossal hydrocarbons industry -- long the tipping point, and at times the singular force, behind countries becoming rich, or falling behind -- is serving as the weaver of the new geopolitical fabric.
What could geopolitics look like? It is premature to detect concrete shapes, as Citigroup's Ed Morse wrote in a much-read recent note to clients. Yet we can discern outlines of the potential appearance of the new world.
We already know, for example, that the heft of the U.S. shale gas boom has challenged Russia's natural gas grip on Europe. Saudi Arabia also fears shale gas, whose abundance could ultimately contribute to the erosion of U.S. oil demand, as Chris Weafer said last week on this blog (also see remarks below by oil scholar Philip Verleger.).
Saudi has valid reasons to worry, as it seems almost-certain that the fresh big oil finds on other continents will whittle away at the centrality of the mighty nations of OPEC, the bain of Western economies for 35 years. OPEC seems far less likely to call the shots in global oil and, according to Citigroup and other analysts, the per-barrel price its members earn could be much-reduced. The wild card will be demand, meaning China's future oil appetite, and the continued progress of energy efficiency.
Similarly, Russia, the world's other current major oil-exporter, will probably be forced into serious political and economic reforms or face decline. Its government spending is too high, its non-hydrocarbon economy too anemic, and now its oil and gas sectors under challenge.
On the other side of the ledger, numerous heretofore basket-case nations up and down Africa's coasts will have to decide whether to squander their unexpected new petro-fortunes, or build middle classes and stable societies. In addition to Mozambique, that includes Tanzania, Kenya, Cameroon, Cote d'Ivorie, and more. Similar prosperity would be in the line of sight of numerous South American nations.
As for the United States (pictured above, drilling in Pennsylvania), a small but growing number of economists see the potential for a resurgent economy, built on the back of cheap natural gas. Leading the pack is Citigroup's Morse, who in the report cited above says the U.S. may more than halve its budget deficit by 2020, and experience a radical economic "revitalization and reindustrialization."
Likewise, we have a dissection of a coming U.S. boom in the Financial Times from Philip Verleger, who ran the Office of Energy Policy in the Treasury Department during the Carter Administration, and is a fellow at the Peterson Institute for International Economics.
With all of this turbulence, is it an article of faith that China will rule the world in the second half of the century, as many presume? China still looks on track to have the largest economy, but the many moving parts -- including its challenging demography, as the Economist reports -- make its trajectory seem less certain.
I separately emailed Verleger asking his opinion of the bullish forecasts of shale oil that we are seeing from Morse and others -- what is the data backing up these predictions? Verleger had an answer, but was mostly interested in laying out a case for what he calls a "Kodak Moment" of marginalization for the U.S. oil industry. The email is provocative, and I reprint in full after the Jump.
Mladen Antonov AFP/Getty Images
What do you do if you have the natural gas equivalent of 6 billion barrels of oil, and no way to get it to a market? And what if you are uncertain that there will ever be a profitable market for this stranded treasure, at least in the coming couple of decades?
If you are Alaska and the Big Oil companies drilling there, you check the numbers, and check them again, but know that ultimately you will be gambling based on the following calculus: In the glutted U.S., natural gas prices are at their lowest in a decade, under $2 per 1,000 cubic feet; in Asia, the same volume of gas is selling for up to ten times that sum, or $20.
So it is that BP, ConocoPhillips and ExxonMobil are contemplating spending $40 billion for a liquefied natural gas system to emancipate their natural gas riches on Alaska's North Slope, and shipping it on to Asia, as I have written at EnergyWire.
If they proceed, which seems likely, they will be locked in battle with far-flung gas sellers -- Qatar, Russia, Australia and Mozambique among them -- who are already piling in to take advantage of Asia's high prices and voracious appetite. In particular, they are piling in to China.
Call China the Hub of Hope, the 800-pound gorilla in the whole of the big energy shakeup we are witnessing around the world. Oil demand is contracting in the U.S. and Europe, but it is soaring in China. Natural gas demand is ticking up gradually in these same developed markets, but China's is going up at double-digit annual rates.
It is this Chinese demand -- and not just political risk associated with Iran -- that is propping up oil prices at over $100 a barrel, as well as Asian gas prices. As long as these conditions keep oil at approximately such levels, you will continue to see a boom in the production of U.S. oil shale and Canadian oil sands, in addition to the excitement in ultra-deep water around the world. Lower those prices substantially, and at least some of the eagerness will go too.
To understand why companies wish to drill off the U.S. eastern seaboard, you need only make a beeline 5,000 miles southeast -- straight to Jubilee, an oilfield off the shore of the west African nation of Ghana. Because there are an estimated 1.5 billion barrels of oil in Jubilee, the reckoning goes, there just might be oil off the coast of Virginia. The reason is ancient geology -- Africa and the Americas were once one gigantic continent, and geologists have already found analogues to Jubilee across the Atlantic in French Guinea, as I write on EnergyWire.
These similarities are interesting not just for their curiosity value, but because they are part of a stark transformation in how experts perceive global energy, and trends in geopolitical power: Less than a year ago, the conventional narrative was scarcity -- Big Oil simply could not find any more super-giant oilfields, and were left trifling with comparative puddles. Hence, the world needed to develop alternative energy, and fast. Now, barely a week goes by without a fresh discovery in Africa, and a new expert report on the new U.S. oil bonanza; we are told we have oil and gas as far as the eye can see, limited only by the skilled labor, pricing points and equipment to produce it (pictured above, pipeline awaiting installation in Cushing, Oklahoma.).
In a significant way, that is good news -- to the degree it is accurate, we are not imminently returning to the Stone Age, as a new-age movement known as the Doomers have forecast.
But it is a highly challenging development for those concerned about the Earth's warming trend: They are stripped of one of the primary underpinnings of their argument for rapid development of solar, wind and electric cars -- that oil is running out, and that the West is too reliant on supplies from nefarious nations. As it appears, much of the new oil will be produced by quite normal nations, such as Canada and the United States.
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If the largest consumer of oil on the planet abruptly does two things -- doubles its own liquids production and cuts its imports in half -- one might find a big chain-reaction in both macroeconomics and geopolitics. This is precisely what many of the country's top industry analysts suggest is happening in the United States -- that the country will soon account for almost all its own oil requirements, and be in the position of exporting some of it. Count me as a skeptic, but since so many serious analysts are not, it merits looking under the hood.
Yesterday I raised the potential for a U.S. political shakeout if the oil-abundant theorists are correct: If the U.S. truly does become effectively self-sufficient in oil, political support for clean-energy would be seriously undermined.
Today, the Obama Administration imposed super-strict standards on the emissions from coal-fired power plants, incentivizing the development of carbon-capture technology, as well as the use of natural gas. This demonstrates that aggressive public policy can keep the goals of the clean-tech edifice alive; but it cannot be taken as a template, since policy ebbs and flows, and any future Republican administration, for example, is unlikely to embrace the same philosophy.
What about the economic wrinkles of a shift to oil as a trigger of a new U.S. Industrial Revolution, as forecast by Citibank analyst Ed Morse? Low-price energy provides a big advantage to U.S. makers of chemicals and plastics, since the feedstock -- natural gas -- is so cheap. Yet would this edge flow up the line to high-end technologies, the foundation of the overall U.S. economic advantage?
I exchanged emails with Michael Klare, a professor at Hampshire College and the author of The Race for What's Left. Klare thinks that oil abundance could have a fundamental impact on the character of the United States. He said:
I see this as making the United States more like a Third World petro-state -- we will see increased economic benefits in some quarters and among certain specialized labor sectors. But we will become more like a basic commodity producer that must lower its environmental standards in order to boost production, and less like a modern high-tech country like Germany and Japan.
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Nuclear power -- alive and well 1 year later: Technologist Bill Gates well explains why the nuclear power renaissance lives on despite the Fukushima earthquake-tsunami disaster: We simply know of no other mass, non-carbon source of baseload electric power. So it is that, a year after the Japanese nuclear accident (pictured above, precautions in the Fukushima area), there is hardly a blip in the total number of planned new nuclear reactors around the world. Just two of Japan's 54 nuclear plants are up and running, and Germany has closed eight of its 17 plants. Yet the rest of the world is different: China and India appear to have slowed their respective plans for a large-scale buildup of nuclear power in order to accommodate their booming economies, but neither seems likely to actually cancel any of the construction. And, according to the World Nuclear Association, 60 nuclear plants are currently being built (list) around the world, about the same number planned prior to the March 11, 2011, Fukushima accident. Gates argues that, given the unreliable nature of wind and solar power, the sole current substitute for the energy density of fossil fuels is nuclear power. He explains: "Nuclear power provides 1 million times the energy as hydrocarbons." A simple enough calculation.
Finesse and fracking: Hydraulic fracturing has seized the imagination of oilmen and politicians, who believe it will much-reduce the U.S. reliance on outside fossil fuel supplies, and has triggered similar hopes in Europe and China. But this crowd seems to exclude Andrew Gould, chairman of Schlumberger, the world's largest oilfield services company. Gould, who in May becomes chairman of the oil and gas giant BG Group, laments that "fracking," as the drilling practice is usually called, lacks grace, is too dirty and inefficient, and simply doesn't get enough out of the ground. Compared with how the industry typically operates, fracking is mere "brute force," he told a Barclays Capital Commodities conference in New York. It cannot go on long this way.
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The war of tight oil: Are we in an age of oil plenty, or a stubborn era of scarcity? The folks with skin in the game are among those who cannot agree. At Citigroup, Seth Kleinman leads a group of analysts (including the venerable Ed Morse) who issued a note to clients this week declaring "the death of the peak oil hypothesis," a belief that there is a limit to how much oil can be produced. The actor in this murder is shale oil, the sister to shale gas, which is being unleashed from hard underground shale through the application of hydraulic fracturing. "The U.S. appears to be on course, after many weak starts, to achieve energy independence this decade," Kleinman writes. In a shot over the bow of doubters, the Citi team snickers at those who cannot notice the truth before their eyes: "We expect industry expectations to lag behind reality, just as they did with shale gas for many years." They go on to tally up how they see the new oil patch:
U.S. crude and product imports are now about 11 million barrels a day, with about 3 million barrels a day of product exports. This leaves import reliance at 8 million barrels a day. If shale oil grows by 2 million barrels a day, which we think is conservative, and California adds its 1 million barrels a day to the Gulf of Mexico's 2 million barrels a day, we reduce import reliance to 3 million barrels a day. Canadian production is expected to rise by 1.6 million barrels a day by 2020, and much of this will effectively be stranded in North America, and there is the potential to cut demand both through conservation and a shift in transportation demand to natural gas by at least 1 million barrels a day and by some calculations by 2 million barrels a day.
Voila, U.S. energy independence.
Not so fast, say the analysts at Barclays Capital, who issued their own, nearly simultaneous note to clients saying the opposite. The note, by Paul Horsnell and Amrita Sen, suggests that Barclays' clientele guard against "the near-euphoria surrounding the potential of oil shales in the U.S., together with a natural bias in the market to be overly optimistic on oil supplies." The oil market is extremely tight, made the more so by political upheaval, says the Barclays team. They write:
While posing some stirring prospects following almost a decade of dismal performance by non-OPEC supply, oil shales alone are simply not enough to offset the decline in other parts of non-OPEC and meet all the incremental demand growth. The scale of growth in U.S. output really needs to be put into perspective. North Dakota still only produces 0.5 million barrels a day, which in a weak year, incremental Chinese oil demand alone can consume all of and more. Does shale oil help the U.S. reduce its dependence on foreign oil? Yes, it does. But does it remake the U.S. into the next Saudi Arabia? No, at least not yet.
There you have it.
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Shale gas fever has overtaken America, but we have seen this sort of mania before.
In 2003 and 2004, a "hydrogen economy" was touted as the Next Big Thing. The United States was poised to run its 240 million cars and trucks on it some day, and wean itself off of oil. California would lead the way, putting half a million hydrogen vehicles on the road and building 200 fueling stations by 2010. Today, after the expenditure of around $2 billion of public funds, the U.S. has just two-dozen fueling stations and 500 hydrogen vehicles, plus only modest progress in fuels cells. There is no longer mainstream discussion of a hydrogen economy.
Then Americans became drunk on ethanol. More than $20 billion in subsidies was spent over a three-decade period ending Dec. 31 that ultimately turned nearly 40 percent of the U.S. corn crop into less than 10 percent of the country's fuel needs by volume, and less than 7 percent by energy content. In 2009, the U.S. taxpayer subsidized 75 percent of the price of each gallon of gasoline replaced with ethanol.
Now the U.S. has gone batty for natural gas. President Barack Obama and key members of Congress have cited a humongous estimate for the natural gas supply supposedly possessed by the United States -- nearly 2,200 trillion cubic feet of the fuel, the equivalent of 379 billion barrels of oil, which if accurate would exceed the crude oil reserves of Saudi Arabia, and satisfy U.S. gas demand at current levels for around a century. Only, that widely published figure represents what are called "possible" reserves, not the more certain categories known as "proved" and "probable" -- gas that is more likely to be producible under current technological and market conditions. When discussing proved reserves, the U.S. Energy Information Administration says the U.S. possesses just one-twelfth of that volume, or 273 trillion cubic feet of gas, the equivalent of 47 billion barrels of oil. That is still a lot but, at the country's 2010 rate of consumption of 24 trillion cubic feet a year, it's just an 11-year supply. Even if we assume a very optimistic 50 percent recovery factor for the estimated 550 trillion cubic feet of probable gas, we would still have just a 31-year supply.
A lack of good data, in addition to an apparent bias toward optimistic data, underlies this perception gap. Consider a new, well-by-well analysis by Houston-based petroleum geologist Arthur Berman. Berman, a long-time doubter of mainstream gas estimates, writes that, contrary to popular belief, gas production is not growing under current conditions; instead, 80 percent of the country's shale gas production (pictured above, shale gas operation in Springville, Pa.) has flattened out or declined over the past year. Total U.S. gas production has been on an "undulating plateau" since the beginning of 2009, Berman says, as new shale gas output struggles to compensate for a 32 percent-per-year decline in conventional gas production. This picture is missing from the EIA's data because the U.S. agency bases its reporting on shale gas data only for 2008 and 2009, and does not do well-by-well sampling.
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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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When someone invites you to a party but leaves before dessert, it might be time to locate your own coat and hat. Such are the suspicions generated by Chesapeake Energy, which after selling numerous billion-dollar pieces of its vast shale gas holdings to the world's largest energy companies has abruptly announced that it is drawing down.
A Chesapeake-led rage in shale gas has gone on for some four years, ignited by advances in a drilling method called hydraulic fracturing. In the beginning, Oklahoma-based Chesapeake, run by a wildcatter named Aubrey McClendon, was among the most aggressive acquirers of shale gas leases in the United States. A Forbes writer described McClendon as perhaps "reckless," but also "charming" and "erudite," not to mention youthful, ingenious and even heroic. (At O&G, we have found McClendon temperamental and ideologically self-destructive to a degree that risked the entire shale-gas bonanza, but that's just us.)
Altogether, drilling by Chesapeake and other companies has since then transformed the U.S. from a natural gas importer into a country so awash in gas that it may spend decades as an exporter. Russia has been rendered less secure in Europe, and China may shake things up further by opening up an even larger shale-gas frontier.
Along the way, Chesapeake has generously let later-comers into the game. Among McClendon's deals, he got $3.6 billion from BP for a 25 percent stake of Chesapeake's Fayetteville shale in Arkansas, and all of its Woodford Shale of Oklahoma's Arkoma Basin. A year ago, McClendon got $4.75 billion for Chesapeake's Fayetteville Shale holdings from Australian mining giant BHP Billiton. That was just after he did a $1.3 billion deal with China's CNOOC for a piece of his company's Niobrara Shale, straddling Colorado and Wyoming.
Four weeks ago, Chesapeake disclosed another blockbuster deal -- a $2. 3 billion partnership with France's Total for part of the company's Utica Shale holdings in Ohio.
But last week, Chesapeake announced that the risk is too high. The shale-gas rush had resulted in the historical boom-bust bane of the oil patch -- massive over-production, and a price collapse -- and McClendon was moving on; oil, for example, was looking pretty good, the company said. In an amusing piece at the Financial Times, John Dizard, a long-time shale gas skeptic, quotes from Catch-22, and goes on to describe Chesapeake's announcement:
The Wall Street maxim is that they never ring a bell at the top. However, on Jan. 23, Chesapeake Energy did ring a bell at the bottom. The undoubted leader of the shale gas revolution announced that it would reduce drilling expenditures this year by more than 70 per cent, curtail its gas production by 8 per cent, cut land buying by $2 billion, and allow uneconomic gas leases to expire.
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In the last episode, we were awash in gas: President Barack Obama is using the language of a shale gas enthusiast, crowing this week that the United States has sufficient reserves of the fuel to last 100 years. For that reason, the U.S. ought to push ahead with natural gas development, as long as safety concerns are kept in mind, said Obama (above, pictured this week on the campaign trail). Almost simultaneously, though, large volumes of that gas have vanished. First, the administration's own energy think tank -- the Energy Information Administration -- sharply lowered its estimate of U.S. shale gas reserves: rather than the 827 trillion cubic feet in unproved technically recoverable reserves announced last year, the EIA estimates that the country has 482 trillion cubic feet, or 41 percent less. The drop is understandable -- it has to do with the addition of completed wells, which provides more data points for the EIA to insert into its reserves model. But some serious analysts think even the lowered numbers are soft; Chris Nelder, for instance, writes that all that can be surmised credibly is an 11-year supply of gas at current consumption rates.
Then there is actual production. Chesapeake and ConocoPhillips have both announced the withdrawal of a substantial volume of gas from the market because of firesale prices that prevail, currently $2.77 per 1,000 cubic feet, compared with $13 in 2008. Chesapeake -- the second-largest U.S. gas producer -- said it will sell 8 percent less gas this year than last; Conoco says it will lower production by 4 percent. It is not that the companies are going broke -- as discussed previously, much of the gas is in the same geological formations as highly lucrative oil, so drillers themselves say they earn excellent profit regardless. Yet, they would like to earn greater profit still by driving gas prices higher through the law of supply and demand -- currently, there is a super-glut of gas; they would like to reduce that to a mere glut. Of course, the drillers in part have themselves to blame for sagging U.S. gas demand: In 2009, the shale gas industry vigorously opposed Obama's push for cap-and-trade legislation, under which electric utilities would have accelerated their transition from coal- to gas-fired plants. The drillers would be selling much more gas, and prices would thus probably be higher. Alas, those politics were not to be. The Financial Times' Ed Crooks quotes Oppenheimer's Fadel Gheit: "I would expect all large gas producers without exception to scale back production this year."
These developments are important for a single reason: The U.S. is the epicenter of the global shale gas boom. Because of the U.S. bonanza, for example, Russia has been shaken in Europe. China might be next to join the boom. It is importing U.S. technology; if it succeeds in producing substantial shale gas, it could transform its own set of circumstances. But if the numbers are consequentially smaller than supposed, and if the market is slow to absorb the higher volumes, the geopolitical outcomes will be muted.
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Texas, the deliriously pro-oil birthplace of modern hydraulic fracturing -- the method used to crack open shale and extract its gas and oil -- is about to force all drillers by law to do what many opposed: mandatorily disclose many of the chemicals that they inject into the Earth. As of Feb. 1, drillers must also reveal how much water they use, writes Kate Galbraith in the Texas Tribune. The question is to what degree Texas' move - six other U.S. states also require disclosure, writes NPR's Scott Detrow -- will defuse critics who portray the fracking industry only a bit less demonically than Salem did its witches.
Of all the ways devised to provide energy to the world, none today seems to excite greater passions than hydraulic fracturing, known for short as fracking. The practice has generated a frenzied gas rush in the United States, reports Bloomberg, creating both great wealth and geopolitical turbulence as an unexpected bonanza has shifted the global energy balance. At once, the U.S. has shifted from a gas deficit to a huge surplus, cutting electricity prices last year in half, according to Bloomberg, and China may go the same way. Russia's powerful gas primacy in Europe has been undermined.
Against this, fracking has sparked a robust protest movement that accuses drillers of poisoning drinking water, triggering earthquakes, and ruining roads and landscapes. Bulgaria last week, for instance, issued a moratorium on fracking (Sofia protest pictured above), joining France and Quebec as places stopping the practice. Such resistance has been egged on by intense industry secrecy, along with the traditional fierce independence of the oil patch.
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Role-playing in the Persian Gulf: Iran continues to insist that it is building an innocent nuclear power industry but, as it discovered again this week, a successful serial assassin does not believe it. Mostafa Ahmadi Roshan is the fifth Iranian nuclear scientist to be slain in four years, writes the New York Times' Scott Shane, who reports on a general spate of mayhem rained on Tehran's purported foray into nuclear energy. At New York magazine, Dan Amira regards the predicament of Iranian nuclear scientists as an opportunity for amusement. Certainly there is something darkly satirical about Iran's self-parody. If you really are only developing nuclear power, open the whole thing up like a public swimming pool so any mystery vanishes. If you, conversely, are carrying out as everyone assumes -- that is, developing nuclear arms -- why stir the pot with provocative outbursts all-but certain to lead to attempts to confound your program? Why not wait until your work is complete before throwing sand into others' eyes?
Whatever the case, the U.S., Europe and an important majority of their allies have agreed collectively to stop buying Iran's 2.3 million barrels a day of oil exports. Of Iran's major customers, only China and perhaps Turkey so far refuse to go along. The client for some 540,000 barrels of Iranian crude a day, China will probably continue this trade and store the crude in its strategic petroleum reserve, reports the Financial Times' Javier Blas. As for the rest of Iran's output, those familiar with oil smuggling have assumed that Iran will simply turn to deep discounts in order to unload its crude on the black market, but Blas writes that Tehran may have a difficult time doing so because of a global embrace of the sanctions.
Iran has threatened to block the Strait of Hormuz, but probably won't do so since it would be one of the primary victims of such a blockade, assert Frank Verrastro, David Pumphrey and Guy Caruso at the Center for Strategic and International Studies in Washington. Yet one cannot feel entirely certain about that, they add. "Desperate nations driven to the brink sometimes do desperate and unpredictable things, and even if short lived, disruption to shipping in the Gulf would undoubtedly wreak havoc in oil markets," the trio says.
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Oil, and the geopolitics of China and Iran: President Barack Obama's new military policy -- the U.S. focus will shift to two geographic areas, China and Iran -- steps up the geopolitics of oil. In the case of China, what keeps American policymakers up at night? It is the prospect of a challenge to the U.S. control of movement on the world's seas. As of now, Beijing's navy isn't impressive, but it has proven a nuisance in one place -- the South China Sea. It is there that Washington -- along with Chinese neighbors such as Vietnam and the Philippines -- has thrown down a red line. What has the South China Sea friction been about? As suggested, for the U.S. it is the geopolitical influence that accompanies dominance of the world's seaways. But, locally speaking, it is mostly a belief that the South China Sea lies above massive volumes of oil and gas. So the U.S. will maintain a naval presence in the area.
No one at the moment is going to go to war over the South China Sea, but in the case of Iran, we enter a different universe. Europe appears likely Jan. 30 to approve a near-cutoff of oil purchases from Iran. Obama signed a U.S. version of the sanctions this week. Iran's response has been military -- it calls the sanctions an act of war, and has threatened to close the Strait of Hormuz, the channel for 17 percent of the world's daily oil supply. As a demonstration that it can do so, Iran has announced more naval maneuvers, to be held next month, reports Reuters' Robin Pomeroy. So are we at the cusp of World War III, as some have suggested, especially if Iran unleashes Hezbollah on Israel? In Tehran, the Washington Post's Thomas Erdbrink and Joby Warrick describe a populace stocking up in the event of fighting. At Foreign Affairs, Suzanne Maloney suggests that Iran correctly defines the sanctions as a war footing: By attacking Iran's Central Bank, and thus its ability to pay its bills, and be paid, the West has "backed itself into a policy of regime change." Even if one regards negotiations as ineffectual, Maloney writes, a shift to promoting the ouster of Iran's rulers is worse, placing a reliance on dynamics that "Washington has little ability to influence." Commentator Fareed Zakaria disagrees. He says that Iran is no threat, but instead is becoming "weak and getting weaker."
Read on for more on Iran, and the rest of the Wrap.
Iraq -- drilling in a (former) war zone: With the U.S. military role in Iraq officially over, so vanishes the main official outside protection afforded Big Oil, which is working there in droves. Iraq is the largest potential new oil bonanza on the planet -- it has the second-largest known reserves next to Saudi Arabia. For oilmen, this is a bracing new day: One can hire an army of former commandoes as security -- which the companies do -- but the presence of a friendly Western security force is a qualitatively different and assuring thing. Bombings are a regular occurrence; as the Wall Street Journal's Hassan Hafidh reports, BP temporarily stopped producing oil in part of southern Iraq's Rumaila field after someone bombed pipelines.
Yet business goes on: Big Oil's stomach for badlands rises in proportion with the potential output, and in the case of Iraq's three big southern fields -- West Qurna and Zubair (pictured above), in addition to Rumaila -- the companies have pledged to produce 6.8 million barrels a day. That is a massive goal, considering that the same companies -- BP, Italy's Eni and ExxonMobil -- plan to produce just one-sixth of that daily volume from fields of similar collective size on the Caspian Sea. The Iraqi government has a stake in ensuring the companies' relative safety as its ambitions are even greater -- it hopes to raise the country's production to 12 million barrels a day by 2017. Virtually everyone outside the country regards the higher aim as fantasy. One reason is that, quite apart from the security situation, Iraqi bureaucrats make it hard for the companies to operate, reports Bloomberg. "The red tape companies encounter in Iraq -- when they apply for employee visas, for example, or try to import equipment or seek payment -- seems to reflect attitudes rooted in the past," the agency writes.
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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.
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About the impending arrival of U.S. energy independence: We return to the twist in our energy and geopolitical circumstances that we are hearing about -- that, contrary to the drumbeat regarding peak oil to which we have become accustomed, there is no problem on the global energy patch. There is abundant oil, report the New York Times, the Washington Post and the Financial Times; not only that, it is located in the nearby, secure Western Hemisphere (pictured above, happy days in Brazil), and not in the violent-and-volatile Middle East; moreover, the United States may be on the verge of achieving what had seemed to be merely fabled -- "energy independence." We expressed our doubts about these findings when they emerged a few days ago. And though this is not a peak-oil blog, suffice it to say that our brow has not become less furrowed. One reason is the mathematics behind the theoretical revision. Let's start with the suggestion that the gravitational center of oil is shifting from the Middle East to the Western Hemisphere, as we read in the Times, the Post, and last month here at Foreign Policy. In order for that to happen, Western Hemispheric oil production should comfortably surpass the Middle East's 25 million barrels of oil a day. When you add up the numbers, North and South American producers currently pump some 21 million barrels a day. The bright-picture scenario suggests another 7-9 million barrels a day (additional supplies of 3 million barrels a day from Brazil, 1.5-4.5 million barrels a day from Canadian oil sands, and 2.5 million barrels a day from U.S. onshore oil shale). Shaving off a bit for depletion of current fields, and you get roughly the same production for the concentrated Middle East as for the far-flung Western Hemisphere, with no single country bearing the singular heft of a Saudi Arabia. It is a tidy volume, but not quite the forecasted tectonic shakeup.
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One becomes nervous when a consensus begins to form around a Big New Idea -- it starts to sound like group think. So what are we to make of the cottage industry developing around the notion that the U.S. not only isn't facing an impending oil shortage -- it is on the cusp of being nearly energy independent, short of a margin of barrels that will be imported from friendly Canada and Mexico?
As discussed over the weekend, Clifford Krauss of the New York Times and oil consultant Daniel Yergin, writing at the Washington Post, have published long pieces marveling at the emerging picture of a hydrocarbon bonanza in the United States and right on its borders. Today, the Financial Times' Ed Crooks adds a third lengthy analysis to this growing train, suggesting that by 2035, the U.S. and Canada together could be producing a whopping 22 million barrels of oil a day -- more than twice the current volume - and thus requiring almost no other crude from anywhere. Add up oil shale from North Dakota (pictured above, North Dakotan oil camp), Texas and elsewhere; Gulf of Mexico crude; natural gas liquids from shale gas; plus Canadian oil sands, and you get the picture. In combination, the analyses leave one with whiplash.
How surprising is this shift? In his Washington Post piece published Sunday, Yergin describes the emergence of a "new world oil map ... centered not on the Middle East but on the Western Hemisphere." But just six weeks ago, Yergin published The Quest -- his comprehensive, 754-page fresh dive into global energy -- which not only doesn't mention such a shift, but describes a continued Middle East-centered oil universe in which the notion of energy security is a mere "mantra." Yergin already needs to go to an updated second edition.
What could undermine the prognoses is if the result is relatively low oil prices, and a resumption of America's gluttonous gasoline appetite, which would erode millions of barrels of oil a day. Still, Crooks finds solace in the volumes further afield, but still in the Western Hemisphere: "Even if the most optimistic hopes are not fulfilled," he writes, "one can imagine a future in which the U.S. imports oil only from Canada, Mexico and a handful of other friendly countries such as Brazil."
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Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.