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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Australia's lop-sided economy: Given the jobless, growthless doldrums affecting most of the world's economies, does it pay to rev up your economy and employment rolls with the engine of natural resources, as long as you are careful to avoid the dreaded resource curse? As it happens, this experiment -- being pushed by loud voices in the United States -- has been under incubation for several years in Australia, the leading producer of coal, iron ore and (in coming years) liquefied natural gas for booming Asia. As I write this week at EnergyWire, this raw materials juggernaut has resulted in a 51 percent Australian economic expansion over the last two years alone. And the plans are to go even bigger. The country plans a 20 percent, $23 billion expansion in coal production, adding some 75 million tons a year to the current production of some 350 million tons. On top of that, mining companies have proposed $46 billion in added coal projects that would more than triple current production to some 1,100 million tons.
As one might suspect, there are some problems with these numbers. First, the raw materials boom has not led to economic nirvana for Australia. According to the country's Bureau of Statistics, mining has added 103,000 jobs to the Australian economy over the last four years, but almost an identical number -- 97,200 jobs -- has been lost in manufacturing. Almost all the mining jobs have come in just two provinces -- Queensland and Western Australia. The rest of the country has largely stagnated. Meanwhile, Australians have turned profligate. As the boom has built, Australians have gone into debt -- last year, they owed an average of 156 percent of their disposable household income, more than triple their 49 percent debt load in 1991. "The amount of jobs being generated in the mining sector is really not that many compared with the lost tourism service jobs, the manufacturing jobs," Neil Bristow, managing director of H&W Worldwide Consulting," told me. "The commodities are bringing in significant money to the economy, but it's only very much in part of the economy."
And what about the coal projections themselves? Are they reasonable? Perhaps not, suggests Nikki Williams, CEO of the Australian Coal Association. "Australia has little or no chance of actually delivering growth of this magnitude," Williams told me in an email exchange. "Limitations to our access to capital, human resources and the capacity of our project approvals systems are just some constraining factors." And the projections of Australia's surge as an LNG exporter -- plans to become the world's largest LNG producer, and build from there? Joshua Meltzer, a former Australian diplomat and now a senior fellow at the Brookings Institution, says the scale of LNG production will be "fairly ground-breaking." Yet experts tell me that there simply is insufficient capital, equipment and manpower to manage everything on the drawing boards.
This is part of the point in evaluating the robust projections of oil and gas abundance we are hearing around the world. Paraphrasing Williams, will there be the capital, the people and the pure capacity to actually carry out the projects, presuming that all or most pass muster with the public and government agencies? The answer is most probably no.
Go to the Jump for the rest of the Wrap.
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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.
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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.
Go to the jump for more on shale gas and the rest of the Wrap
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Former BP CEO Tony Hayward is receiving hearty handshakes for the $2.1 billion deal he has organized for fields holding a reasonably rich 356 million barrels of oil in Kurdistan. The agreed merger of Hayward's Vallares with Turkey's Genel Energy is his "continuing professional rehabilitation," Forbes says in one on-line piece, and "Tony Hayward's Revenge" in another. "Tony Hayward Makes a Comeback," says the Wall Street Journal. "Turkish Delight for Hayward" says Upstream magazine.
Are these assessments correct -- has Hayward (pictured above in less-happy times), 17 months after the devastating BP oil spill in the Gulf of Mexico, demonstrated again that he has the right stuff? Mmmm ... no. What he has demonstrated anew is his taste for living on the edge, cutting corners and risk-the-company deals.
Those are not necessarily deadly attributes in the highly risky oil business. What makes them so hazardous is that Hayward does not appear to know his deals could jeopardize the company he happens to be running. He just stands on the ledge whistling. It is the same attitude -- one still apparent in his former company, BP (more on this below) -- that helped cause the Gulf spill of 5 million barrels of oil.
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