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.
China is becoming cleaner -- ever so slightly. This is because of fresh signs of a surge of Chinese natural gas demand over the next dozen years, which is likely to tamp down the burning of coal, according to Wood Mackenzie, the energy research and consulting firm.
This does not suggest that China -- the largest source of greenhouse gases on the planet -- is suddenly going pollution-free. But the trend is tidier, WoodMac concludes in a report to be issued shortly. The Edinburgh-based firm released a teaser on the report, and I spoke with two of its three authors today.
Until now, WoodMac estimated that Chinese annual natural gas demand would almost triple -- to about 350 billion cubic meters in 2020 from about 130 billion cubic meters last year. The firm's new estimate is that Chinese annual gas demand will rise to 500 billion cubic meters by 2025, a 42 percent increase from its previous estimate.
Noel Tomnay, who heads WoodMac's global gas team, attributes the shift to a few factors: Greater Chinese intolerance of coal fumes, and increasing personal wealth, which allows Chinese citizens to pay more for cleaner natural gas-fired electricity, particularly in coastal areas; plus a desire by provincial officials for greater energy security when they are less and less sure about the reliability of coal and nuclear power. Tomnay told me:
Our view of China demand is probably higher than anything you'll find from [the International Energy Agency), from BP, from Exxon. We are very bullish on China gas demand. Our view of China gas just keeps getting bigger.
Hype, awe and bubbles are inextricable from technology-led enthusiasms. So it was with the battery two centuries ago, the light bulb a few decades later, automobiles and planes in the subsequent half century, and laptops and cell phones in the last two decades. One of the latest fads is natural gas -- technological advances that have unlocked vast new volumes, and transformed it from a locally usable fuel into one economically transportable around the world.
Yet, as with all these other technologies, now comes the moment of truth -- how do you scale up and make money? If you can't, the technologies will ultimately return to the shelf until somebody can.
Shale gas is the main fashion. Companies are in a drilling frenzy in Texas, Oklahoma, Pennsylvania. This is not so much because the market demands so much of their product -- there is in fact a glut -- but because drilling is required by many of the leases. U.S. natural gas prices are below $5 per thousand cubic feet, and the futures market expects the price even five years from now to rise to just $6 per thousand cubic feet -- insufficient for most of the fields to break even. So when those leases expire, the boom could shrivel -- the companies could look forward in time and decide the risk simply doesn't justify continued production. Drillers are at work aggressively in Europe and China with hopes of unlocking huge volumes there (such as exploratory drilling in Poland pictured above), too, and meeting demand projected far in the future, but it's too early to know whether these prospects will turn out as well as the prolific U.S. fields, Andrew Peaple at the Wall Street Journal reports.
Shell is one of the main innovative actors in this technological battle of scaling up. In Australia, the company is building the world's first floating liquefied natural gas terminal, Reuters reports, to be situated offshore between East Timor and Australia. This facility -- six times the size of an aircraft carrier, and able to withstand a severe Category 5 cyclone -- is meant to more cheaply bypass the need to build connector pipes and land-based facilities, and allow all processing at the field itself, and the shipment of the resulting LNG directly to customers. This is meant to feed into China's projected voracious, five-fold growth in demand, from 9 million tons of LNG last year to 46 million tons by 2020.
But producing more gas, and making it more efficient, still doesn't get it past the profit bar -- oil remains far more valuable than gas on a BTU basis. But oil is harder and harder to come by in the volumes projected for demand in coming years, so drillers are having to be fleet-footed in unaccustomed ways. ExxonMobil -- which as I write this month in Alberta Oil magazine is doing everything to stay the large and profitable company established by John D. Rockefeller -- is attempting to get by with a strategy of tying as much of its enormous Qatari LNG contracts as possible to oil prices. But European customers are protesting this system, seeing as how it forces them to pay the price of one commodity -- oil -- for another currently much cheaper product, natural gas, Bloomberg writes.
Janek Skarzynski AFP/Getty Images
Japan/Libya/Bahrain: trader heaven (or hell) One of the main canards of times such as this is that the markets hate uncertainty. The truth is that traders and investors are in a heavenly time. It's pretty simple - if you are a bettor (which is what oil traders, for example, are), you make money only if the price changes on the volumes you buy. When they do shift either up or down -- and keep doing so -- you win (assuming, of course, that you bet on the correct direction). The last 24 hours have been absolute nirvana for the shrewd trader (though not so much for the laggards). Oil prices were down, then they shot up after Col. Moammar Qaddafi threatened to pursue his enemies into their closets (there is something apparently chilling about that closed-in image; or perhaps it's the shoes?) and the United Nations Security Council voted to bomb him. We were well back up into the $100s-a-barrel prices. Now, after Qaddafi appears to have blinked (deciding perhaps that he prefers not to risk a possible indeterminate period of time confined to a spider hole with a long beard), oil prices have plunged. On each of those movements -- if you were a well-hedged trader -- you have earned big, big bucks. Of course, there are many losers too. Regardless, this is what traders live for -- the profit potential in uncertain times.
Big Oil and the calculus of friendship: Paolo Scaroni, the agile CEO of Italy's Eni, who manages to maintain relations no one in Big Oil can match -- with Russia's Vladimir Putin, with Kazakhstan's Nursultan Nazarbayev and, of course, with Libya's Col. Moammar Qaddafi with -- is bristling at the international sanctions slapped on Libya. Scaroni calls the sanctions "shooting ourselves in the foot."
There is some fear that Eni, along with BP and Exxon, could face contractual problems with Qaddafi, Bloomberg reports. But that isn't how oil deals have really worked in recent decades. Instead, governments have generally honored oil contracts from one regime to another, of course with some possible renegotiation.
So what is Scaroni really up to as he calls on Europe to abandon the sanctions against Qaddafi? Perhaps he is emitting a friendship code intended for others, such as Putin and Nazarbayev, a message that he is not a fair-weather friend.
Coal: When pressed, even the choosey loosen up. Being health-conscious, you thought you'd never eat another cheeseburger -- until you were starving that one day, and McDonald's was the only place open. So it is with electricity producers. Many nations have been moving away from coal-fired electricity, since it's so dirty and spews out so much CO2, but now Japan's dual natural disasters have shaken up those preferences. Coal may be back in a big way, reports the Wall Street Journal (though, for the record, the Journal is also hedging its bets. In addition to today's optimistic coal piece, the paper ran separate optimistic natural gas and nuclear energy stories).
Here is how the dots connect: Japan, having to replace nuclear-produced electricity, is going to buy a lot more coal, and also liquefied natural gas. Some of the LNG is being diverted from Europe. That has made LNG more expensive in Europe and elsewhere as markets tighten. At the same time, Germany has at least temporarily shut down seven nuclear reactors. Put together the higher LNG prices, and the closed German nuclear reactors, and you get more European demand for much-cheaper coal. Make the same calculus in Japan and elsewhere, and you get the larger picture -- more coal demand.
If this is right, much of the clean-air progress made in recent years appears likely to be set back in the coming months. Yet one would be remiss to ignore the shift of public sentiment, and hence political support, in recent years toward a cleaner environment. If that holds -- and that's my bet -- then there may be added use of coal in the short- and medium-term as the market resolves the current uncertainty over nuclear power, but there will also be a mighty hindrance toward a wholesale shift to coal. Instead, there is reason to expect more momentum coming to the natural gas future that we've been discussing.
The Gazprom State: Outbreak of pragmatism. But does Nabucco win? Not to equate Russian gas policy with Col. Moammar Qaddafi's war footing, but are we seeing a case of forced practicality? Qaddafi, after threatening to enter the closets of his enemies in Benghazi, has had a change of heart now that he might be bombed by France and the United Arab Emirates. As for Russia, it's making more noises about reversing a long-standing war-footing in Europe, fought on the battlefield of natural gas pipelines. As we discussed last week, Gazprom, Russia's politically inclined natural gas giant, has sought to reinforce its hold on the European market (where it supplies some 30 percent of the gas) by connecting up a gigantic new pipeline called South Stream. The United States and Europe have countered with Nabucco, their own proposed pipeline starting at the Caspian Sea. At stake, according to the latter folks, is the political independence of eastern and central Europe. But Russian officials are offering more details on possible plans to scrap South Stream and instead ship its gas to Europe in the form of liquefied natural gas.
In our videotaped interview last week with South Stream CEO Marcel Kramer, he said that he was in the dark about any such change of Russian plans. But now a couple of Russian government officials say South Stream may face an "insurmountable" political hurdle in Turkey, and so they are seeking economical alternatives toward accomplishing the same aim, but with LNG.
On first glance, this would appear to be a possible victory for Nabucco. But not so fast. First, Nabucco still doesn't have sufficient gas to be built, mainly because the Turkmen -- as they have done since the 1990s -- won't get with the program and commit to gas shipments and a pipeline. Second, what is the effective difference if Russian gas goes to Europe via pipeline or LNG? True, a pipeline suggests a more permanent marriage. But these days, divorce is mighty common. LNG provides the Russians a lot more flexibility in terms of markets.
Perhaps the Nabucco folks will go LNG as well?
Paul J. Richards AFP/Getty Images
More on the dictator's playbook: A couple of weeks ago, we suggested a test for dictatorial leadership called the "Dictator's Playbook." When faced with popular unrest, are you statesmanlike, or brutal? As models, we pointed to Georgian President Eduard Shevardnadze's resignation in 2003 (he was not a dictator, but it was clear from protests that people wanted him out), and the 2005 massacre of protestors by Uzbekistan President Islam Karimov. After the comparatively peaceful ouster of the leaders of both Egypt and Tunisia -- the Shevardnadze play -- we have the alternative side of the playbook this week in Bahrain and Libya. Yesterday, forces in Bahrain stormed Pearl Square at 3 a.m., shooting at will and killing five protestors, and Libyan security forces killing perhaps two dozen people protesting the continued rule of Col. Muammar el-Ghaddafi. The clear signs are that we may have seen the extent of imminent regime collapse in the region.
In Iran, one hears the usual calls for the execution of opposition leaders, but interestingly a letter is also circulating in which senior officers in the Revolutionary Guard request a guarantee from superiors that they will not be asked to fire on anti-government protestors. The money call is on the current regime, but this one bears watching.
Bahrain borders Saudi Arabia, the linchpin of the global oil industry, but is trouble possible in the latter? In the Wall Street Journal, Karen Elliott House delivers a take well worth reading on the fragility of the al-Saud family's hold on power. House's view: It is fragile indeed. However, most of the smart analysts believe there is very little chance of a Tunisian-style uprising that could upend the Saud grip on power.
The trouble with pirates: The thing about pirates is that they are inherently working outside the box. If they were always doing what people expected, they wouldn't survive very long. Hence the international strategy adopted to combat Somali pirates was never a long-term one. The Greek-flagged Irene SL, a supertanker carrying 2 million barrels of oil worth some $200 million, discovered that a little over a week ago when it was captured in ostensibly peaceful waters 900 nautical miles from Somalia. The oil was Kuwaiti and headed to the United States.
The world's seafaring countries -- the United States, Europe, China, Russia -- have succeeded in making it difficult for pirates operating around Somalia proper (though as we see in the picture above, Mohamed Garfanji, one of Somalia's top pirate bosses, remains on the loose). So now they have figured out how to venture further out, reports Robert Wright at the Financial Times. Write quotes Lt. Commander Jimmie Adamsson of the European Union's anti-piracy Navfor mission: "It is like squeezing a balloon.If you squeeze a balloon in the Gulf of Aden, it will definitely expand in other directions because we're not there."
What is it like to be hijacked aboard an oil tanker in supposedly safe seas? In 2009, Saudi Arabia paid $3 million to gain release of the Sirius Star, a supertanker with $100 million in oil aboard that was hijacked more than 600 nautical miles from Somalia. Here are two illuminating videos with a British crew member of the Sirius discussing the experience:
Criminalizing cleverness in China: Many times, the definition of opportunity is recognizing what's sitting before your face when almost no one else does. In China, that can be a serious violation of the law, as Xue Feng has discovered in the oil business. Xue, a Chinese-born American who successfully negotiated the purchase of an apparently open oil database for the U.S. consultant firm IHS (which also owns Dan Yergin's outfit, CERA), has lost an appeal of his conviction and eight-year prison sentence for spying. Three Chinese nationals have been imprisoned in the same case.
Oilfield data is regarded as a state secret in large parts of the world -- much of the former Soviet Union and the Middle East, for example. But one is pressed to think of another place that imprisons foreigners for collating and paying for apparently open data. What's the definition of what Xue was doing? Business.
Gas in, coal out, but when? It has seemed clear that the global glut of natural gas will ultimately trigger a demand response in the countries most thirsty for more electric power like Japan and China - they will use much more gas than currently planned, an event that is part of an ongoing shakeup in energy-driven geopolitics. But when exactly will that happen?
Not soon enough as far as Alaska and Russia are concerned. In Alaska, ConocoPhillips and Marathon are closing Kenai, a liquefied natural gas plant on the Cook Inlet that had exported LNG to Japan since the 1960s. I asked Conoco spokesman John Roper why the plant would be closed given rising natural gas demand. He replied in an email that the glut is simply too formidable. "The current market conditions in Asia and our inability to get commercial supply contracts there made the facility no longer economically viable," Roper said. In Russia, the news is that the gigantic Shtokman natural gas field in the Arctic is again being delayed, and now isn't envisioned for startup until the end of the decade. Shtokman has been wholly intended for export.
The Alaska decision bears watching because of what it says about efforts by BP and ExxonMobil to export the gas equivalent of 6 billion barrels of oil from the North Slope. These two companies are leading rival efforts to build a pipeline to ship out the gas, but they have been delayed because of the gas glut in the market-of-choice -- the United States. It's been presumed that if the U.S. market won't work, they can ship the gas by LNG tanker to fast-growing Asia. But at the Alaska Daily News, Tim Bradner wonders whether the Kenai decision signals that the Asian market has fundamentally changed, too.
More likely is that one must maintain a long-term view, and meanwhile economize, economize, economize. Consider news going the opposite direction - Bloomberg reports that demand is so high for LNG that a surplus of tankers is drying up, and doubling freight rates. Exxon has designed its own LNG tankers for this purpose, the Q-Max, which effectively make gas as fungible as oil in terms of the ability to ship it anywhere economically. There is also the sound of what one does not hear -- news of Exxon closing in any of its gigantic and ever-growing LNG supply in Qatar. Whatever trouble Conoco and Russia are having with their future marketing plans, Exxon has the largest LNG project in the world, and is not scaling back.
Roberto Schmidt AFP/Getty Images
When big-thinkers at companies with the most skin in the energy game are behind closed doors and they discuss how the world really looks going forward, do they say that there are bumps in the road but that things will be fine, just fine, as they suggest publicly? Three years ago, we got a glimpse into the room when Royal Dutch/Shell issued a scenario forecasting the world in 2020. Based on current economic and energy-use patterns around the world, Shell said that energy supplies will be so tight that they will tip the world into a full-blown crisis in which governments will force their populations to reduce driving, use less electricity, and pay an extremely steep increase for what they do consume. There will be a massive, decade-long economic slowdown, and geopolitical power will shift dramatically to energy-producing nations, the company said.
Today, Shell returned with an update. The company said that the 2008 financial crisis interrupted the slide it predicted, but that the clock has begun ticking again. If the world does not change how it uses energy, its scenario will hold true.
In recent weeks, we've heard almost identical energy-consumption projections from ExxonMobil (here is Exxon's neat slide show), BP and now Shell: The world will use about 40 percent more energy by 2030. The difference is that Exxon and BP more or less just toss out the numbers, while Shell suggests that one might consider running for the hills, oh, sometime around 2016 or 2017 before everyone else shows up. You all can plan to return home around 2030, Shell has said, when the world has come to its senses and adopted all the efficiency and price-signal mechanisms that some forward-thinkers are suggesting now.
There is some optimism in the report, such as descriptions of actions by nations like Japan and Norway and companies like Wal-Mart to lower greenhouse gas emissions. But the United States, for example, has not reversed energy-use practices that helped lead to the Shell scenario, the company says.
I myself tend to believe that, although it looks otherwise at the moment, nations will not put themselves in the collective position of unhappiness described by Shell. For example, there will be an even greater than projected shift to plentiful natural gas, thus tempering Shell's projections. Yet, it's worth reading on to the jump for more about the reports. Meanwhile, for the visual-minded, here is Shell's glossy video presentation.
Alain Jocard/AFP/Getty Images.
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.