A question of power in Saudi Arabia: The al-Saud family of Riyadh has two principal tasks -- securing its rule, and guaranteeing the smooth, long-term flow of oil income. When these dual objectives come in conflict -- such as they have in the Arab Spring -- the former takes precedence. So it is that, with King Abdullah having allocated a whopping $129 billion in social spending over five years in order to pre-empt restiveness within his population, he has cancelled plans for a $100 billion buildup of the Kingdom's oil production capacity. Saudi Arabia can currently produce about 12.5 million barrels of oil a day, and it had plans to increase capacity to 15 million barrels a day by 2020. In the Financial Times, Aramco CEO Khalid al-Falih said the expansion is no longer necessary because of increased supplies announced elsewhere. The new Saudi plans could exacerbate a projected significant tightening of global supplies in the coming years. But Barclays Capital's Amrita Sen, quoted in the FT, suggested that the rationale is the family's core agenda: "The current focus of Saudi is on domestic social spending on the back of [the] Arab Spring."
Go to the Jump for more of the Wrap
How do you spell risk? (Hint: start with the letters b and p): Former senior executives of BP are the gift that keeps giving. That is, in terms of insight into what's behind the long, downward spiral of a company that until recently was one of the most valuable on the planet. Just two weeks ago, former BP CEO Tony Hayward surfaced with a highly risky oil-patch acquisition in Kurdistan, the oil-rich northern region of Iraq whose right to sign such deals has been challenged by the national government in Baghdad. This week the news is from the United Kingdom, where a company backed by John Browne (Hayward's predecessor in the BP CEO shot) announced an enormous discovery of shale gas near England's seaside resort of Blackpool. Matthew Hulbert, of the Clingendael International Energy Program, told me that the prospect of new jobs will ultimately bring public support of the drilling, yet as of now protests have broken out in an effort to halt the operation, which uses hydraulic fracturing, or fracking, over concerns that it could contaminate local drinking water. Whatever happens, Hayward and Browne help us understand how it is that BP has repeatedly found itself in trouble in recent years (for example by letting safety problems linger at its Texas City refinery; cutting corners in a problematic Gulf of Mexico oilfield called Macondo; and flagrantly violating a covenant with its crucially important Russian partners): A bugger-the-risks, full-speed-ahead attitude may be bred into the DNA of BP's senior executives. The question is how far down in the ranks one finds this trait.
Murder in Kabul: The last time I saw Ibrahim Haqqani -- brother of the Saudi-backed Afghan militia leader Jalaluddin Haqqani -- it was 1991, and he was concealed under a bridge outside the eastern Afghan city of Gardez. Haqqani was leading a futile rebel assault against the superior forces of then-President Najibullah, and to reach the underpass, we had to dodge targeted artillery. It was a frightening dash, and Haqqani seemed no less rattled than we; a few weeks later, he and his men finally abandoned the effort to capture Gardez. Flash forward a decade, Associated Press correspondent Kathy Gannon reports that Haqqani has met with U.S. officials working to find a settlement with his brother Jalaluddin, who since a few years after that encounter under the bridge has been a leading Taliban general.
For electric cars, a long battle: A misunderstanding about the international electric-car race -- the rivalry for domination of a possibly gargantuan market for electric cars and advanced batteries -- is that the winner will be known soon. It's clear why people would so conclude -- so much hoopla has surrounded the launch of the Volt, the Tesla, the Leaf and other models that the international contest looks a bit like the U.S. Open. We only wish we knew now which one is Rory McIlroy (pictured above). But does this perception conform with other recent examples of big technological adaptations? Not really. Even in our super-charged, accelerated world, laptops took 15 years of scaling up and pricing down before embedding themselves popularly, and cellular phones have been the same. By that measure, it will be the second half of the 2020s before electric cars are a significant part of the highway traffic.
In an upcoming study, the Boston Consulting Group, a management consulting firm, forecasts that electric cars will make their biggest splash from 2035 to 2050 (autonews.com helpfully posted a draft copy of the study). While no one can reliably forecast consumer taste one way or the other, this outlook seems a reasonable dart-throw. Of course, we are talking pure electric vehicles -- when you add in hybrids, penetration will be much faster. The reason is that both manufacturers and consumers are going to be thinking flexibility -- it will be prudent to have hybrid capability. Yet one reason the climb will be long is not just the height of the bar -- making models that travel far enough before requiring a recharge -- but the requirement to beat out gasoline-driven rivals, which for competitive reasons are bound to become far more efficient, as Jeff Bennett writes at the Wall Street Journal.
Read on for more of the Wrap.
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When it comes to Russia, BP stands out for its untiring
use of the end-run as an operative corporate strategy, regardless of how often
it is tackled on the way to the end zone. On Monday, BP floated its latest sure-fire
attempt to bypass its rapscallion Russian oligarch partners, and win prize Arctic
acreage in partnership with state-run Rosneft. By yesterday, though, the
company had thought better of the play -- CEO Bob Dudley got in front of reporters
effectively, "Never mind." Back to the huddle.
Before long, it will be a year since BP stopped the spewing of oil from its Macondo rig in the Gulf of Mexico. The company has been unmoored since, a condition that BP itself hopes to correct with a dashing combination of panache, legal reasoning and negotiating skill. It may do so yet -- I hear compellingly from a few smart thinkers who argue in emails and conversation that Prime Minister Vladimir Putin himself ultimately will intervene in order to advance the best interests of Rosneft. But on the way to resurrection, there is much self-inflicted suffering.
Recall that in January, BP unveiled a bold plan to drill for Arctic oil with Rosneft; as part of the deal, the two companies would become blood brothers, swapping some $8 billion in shares, sufficient to earn mutual board seats, though that part was left for discussion later. Meanwhile though, BP's existing Russian spouse -- the four oligarchs known collectively as AAR -- screamed foul, and stopped the agreement in European court decisions. BP was violating a long-standing exclusivity agreement with AAR for Russian ventures -- that was the main attempted end-run -- and the oligarchs would not be appeased. Since then, BP has tried to commit bigamy peacefully, and to buy out AAR for $32 billion, but miscues on both sides have stood in the way. (Pictured above: happier days, from left Mikhail Fridman, the leader of the oligarch group; then-British Prime Minister Tony Blair, Putin; and then-BP CEO John Browne.)
This week came the latest BP play. The story was broken by both the Wall Street Journal and the Financial Times, which published anonymously sourced articles on a devilish new BP strategy for untethering itself from the oligarchs -- its lawyers somehow determined that if the company sold out any part of its TNK holding, the exclusivity agreement was null and void. Even if "one share of [BP's] 50 per cent stake" were sold, the FT reported, BP would be released from its misery. I myself do not grasp at this point why that would be the case. But I am told that this was the gist -- or threat -- of two separate conversations held Monday between AAR and extremely senior BP executives (according to the terms of the interviews, I cannot identify the participants by name; suffice it to say, however, that they hold decision-making positions).
John Stilwell AFP/Getty Images
BP, faced with Shakespearean-scale woes from Louisiana to Moscow, went to extra-legal lengths to avoid exploring Russia's oil-rich Arctic alongside its four oligarch partners. Now that it's been told it must if it wishes the benefits of the potential bonanza, does BP truly intend now to accept just half the upside that buttressed the Arctic venture's original logic? The answer is yes and no -- BP will proceed with the venture, but with a reasonable possibility of another attempt to buy out the oligarchs, according to a person involved in the process, though the latest news much increases the pricetag.
Recall that, after opting to scale back his ambitions in the U.S., BP CEO Bob Dudley (pictured above) announced a blockbuster deal for an ownership tie-up with Russia's state-owned Rosneft, with which BP would explore the Arctic together. Only, BP already had a long-standing exclusive Russian partner -- the oligarchs, who collectively call themselves AAR -- and they objected. Two European tribunals took AAR's side, thus embarrassing Dudley and, more important, jeopardizing his big return to the big leagues. On Friday, a London arbitration panel said the deal can proceed after all -- if Dudley does it through BP's partnership with AAR.
With a deadline looming next Monday, perhaps Dudley is calculating that swallowing the bitter pill of much-lesser profit in the Arctic is a necessary step in reviving BP's and his own credibility after last year's Gulf of Mexico oil spill and the mystifying continued incompetence of its Russian affairs. Dudley may also reckon that even half the Arctic's potential riches is sufficient to exchange 5 percent of BP's shares for around 10 percent of Rosneft's, which is the entry fee for access to the Arctic.
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What do you do with an outlaw company? With Enron, the market acted, and destroyed it. Then Broadway put on a play (pictured above), and that didn't work out so well either. With Arthur Andersen, management surrendered after an indictment on criminal obstruction charges, and broke up the accounting firm pre-emptively. But what about BP -- six years of catastrophic accidents, 26 deaths, a case of market manipulation and now a fundamental contract violation make it a serial bad actor.
Does such recidivism signal essential untrustworthiness? And if so, is there anything to do if both the market and management fail to act and establish more responsible stewardship?
In the case of nations, this is an irreproachable question. In Egypt and Tunisia, long years of irresponsible leadership have led to ousters embraced by the West and much of the remainder of the world. In the case of Iraq, though controversial, the Bush Administration -- agitated over Saddam Hussain -- invaded. These are examples just of our current era, but the practice goes back to the beginning of the historical record. Read on to the jump.
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A year after the BP Gulf of Mexico oil spill, Rex Tillerson is aggravated. What is upsetting the CEO of ExxonMobil, the biggest oil supermajor? His company is being mentioned in the same breath as BP and its lesser drillers, men who required 87 days to cap the runaway Macondo oil well, while Tillerson's own team knew that the British company was frittering away precious time with faulty ideas for ending the crisis,Tillerson tells the Financial Times. Meanwhile, the whole industry's reputation was going down the drain. Oh the injustice. Oh the calumny.
As a point of fact, Tillerson has a case. The procedure to which he is referring -- the early attempt to contain the April 20, 2010, spill underneath a dome -- was an utter failure. Hydrates formed in the containment dome, thus blocking a tube meant to siphon oil to the surface, and buoying the structure back toward the ocean surface.
What vexes Tillerson is that at this time -- meaning in early May of last year -- an Exxon man on the spot suggested that the only way to stop the spill was to install what's called a "stacking cap" on top of the blowout preventer. Indeed BP itself hadn't believed that the dome stood much of a chance to succeed, but said it was worth a try, and on its own had considered a stacking cap for a time, but then put it on the back burner for fear of a second, underwater blowout.
But here is what really galls Tillerson -- in the end, BP did install such a cap, and that is what worked. Tillerson thinks that BP should have weighed the chances of success and risks of failure of each possible resolution, skipped the containment dome and gone straight to the stacking cap. That's what Exxon would have done, he suggests, and obviously it would have worked much earlier than 87 days. Read on for more of the Tillerson-BP spat.
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A year after the Gulf of Mexico oil spill, there is a stampede to get on with it. Oil majors and independents, the governors of Louisiana and Mississippi, among others gripe about the Obama administration's pace of permitting drilling to return to the Gulf. The dozen companies whose deep-water operations have been suspended note that a joint spill response mechanism -- a gigantic piece of equipment called a Containment Response System, plus teams to operate it -- has been put in place, as Sheily McNulty describes today in the Financial Times. Meanwhile, they say they should not all be tarred with the same brush -- BP was slipshod, they argue, but everyone else observes ultra-safe practices. For the governors, the assertion is that it's time to put thousands of people relying on the industry back to work at a tough economic juncture. All argue that the administration is turning an environmental accident to unjustifiable political and ideological advantage.
But is the industry truly ready to go back to work? A couple of points make one uncertain. For starters, assurances that BP was the only bad actor aren't good enough, and verge on the naïve -- all actors in the Gulf knew or should have known that any accident by anyone would affect all.
What about the spill containment equipment? As described, this is an impressive bit of work. Yet it also has a distinct political quality -- in order to get working again in the United States, the industry was forced to take such action; otherwise no one would be convinced it is serious about the environment. But we see no word of such equipment being deployed elsewhere in the deepwater world, such as in Angola, Brazil, Canada, Nigeria and Norway. Are we to believe that the Gulf of Mexico is the only place at risk of a big spill? For more on the future of the Gulf, read on to the jump.
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In a war zone, you have your vanguard. Then you have your tanks, your main body of troops, and your artillery. If all that fails, and you are being overrun, there is your rear guard. If they fail, and you cannot retreat, all is lost.
For the last 11 months, that has essentially been BP's explanation of what went wrong at the Macondo well in the Gulf of Mexico, where a mighty explosion killed 11 men and spilled five million barrels of oil into the water over a three-month period before the company managed to seal it in with concrete. But all along there has been the question -- what about that rear guard, in this case a much-trumpeted piece of technology known as the blowout preventer?
Whenever worriers have trotted out their concerns regarding offshore oil spills, the industry has in return trotted out trusty photographs of this gigantic, 50-foot-tall contraption that -- bolted to the top of the well, right at the sea bottom -- would save the day in any crisis. If there were a blowout, doubters would be assured, the preventer would act like gigantic shears, slicing through the well piping, and sealing in all the hydrocarbons below the surface.
In a new report prepared for the U.S. Interior Department, though, we get good news and bad news. The good news is that the blowout preventer does what is suggested in the photos and accompanying charts. The bad news, according to the 551-page report by Det Norske Veritas, a Norwegian risk management company, is that it only does so in photographs and charts, and not in real-life crises such as the Macondo blowout. (Here is volume 1 of the report. Here is volume 2).
In the case of Macondo, the intense pressure of the blowout bent the well pipe, and pushed it out of position. And when the mighty sheers were activated, they could not close entirely. It was through that "not entirely" -- a 1.4-inch diameter opening, according to the Wall Street Journal -- that much of the oil flowed. Read on for more details.
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The global oil industry is in a fix. It's still trying to persuade Washington to revive access to the Gulf of Mexico, one of the world's sole remaining dictator-free oil-rich zones, and it's locked out of Libya for the foreseeable future. Meanwhile, its greatest recent coup -- a technological breakthrough that has unlocked a bonanza of natural gas locked in shale in the United States -- is under threat by homeowners and activists across the country who question whether the method is environmentally safe. On top of all this, global oil demand is rising fast along with robust economic recovery, and the world will pour terrible scorn on the industry if, despite the hurdles, it fails to supply sufficient oil and natural gas to fuel everyone's cars, homes and factories.
Such is the outlook of Christophe de Margerie, CEO of the French oil company Total, and by far Big Oil's most plain-spoken (and most distinctively mustachioed -- see above) representative. He delivered it to a packed house of about 1,500 of his peers, gathered in Houston for the opening session of CERAWeek, the Davos of the oil industry, a conference hosted by Dan Yergin, author of The Prize.
De Margerie's somewhat counterintuitive prescription for the industry? In order:
1. Hunt aggressively for oil and gas;
2. When you find it, make sure to produce it in a way that non-oil industry folks can live with;
3. Meanwhile, get the world to use less oil and gas.
Why should oil companies persuade the world to use less of its product? Because, asserted de Margerie, starting in just a few years, the industry will be incapable of producing as much as the world wants. In his reckoning, demand for oil will surpass the current 87.5 million barrels a day, but various hindrances will prevent the industry from producing much more -- it can increase supply by an additional 8 percent, to about 95 million barrels a day, but "it's impossible to go higher."
The market is taking comfort in a 48-page partial report issued today by a presidential investigative commission into last summer's BP oil spill in the Gulf of Mexico. But should it be? The answer is no -- BP isn't out of the woods yet.
Where investors and analysts are taking heart is that the report does not single out BP, nor say that BP or any of its partners deliberately cut corners or took excessive risks in order to save money while drilling the Macondo well prior to the April 20 accident. Best of all, the dreaded, single word -- negligence -- is absent from the findings, as Oswald Clint of Bernstein Research wrote in a note to clients this morning. In a nutshell, as we've discussed previously, if BP were convicted of gross negligence in a U.S. court, it could face a quadrupling of its estimated $20 billion bill stemming from the spill. At least in part because there is no mention of negligence, BP share price is up more than 2 percent in early trading today.
BP itself sounds relieved: "Today's release largely adopts the preliminary findings of the commission's chief counsel, and like several other inquiries, including BP's internal investigation, concludes that the accident was the result of multiple causes, involving multiple companies," BP said in a statement.
But this is a false calm, as I discuss on CTV's morning show in Canada. As it turns out, the commission was specifically barred from delving into BP's legal culpability, Dave Cohen, a commission spokesman, told me in an email. "We are under explicit order by the executive order establishing us not to do anything that might interfere with the [Department of Justice] investigation. They will decide legal matters," Cohen said.
The report walks right up to that line without actually using the words. It accuses BP of a "failure of management," and says the accident was "avoidable" and "preventable." It accuses BP and its partners of taking numerous risks that, when added together, were "both unreasonably large and avoidable," and resulted in the blowout. The commission does not accuse the companies directly of taking such risks in order to economize, but does connect the two -- money was saved because of the risks. From the report:
Whether purposeful or not, many of the decisions that BP, Halliburton, and Transocean made that increased the risk of the Macondo blowout clearly saved those companies significant time (and money)
The report -- the full version of which is due to be released next Tuesday -- contains much grist should the U.S. Department of Justice decide to level the gross negligence charge:
The well blew out because a number of separate risk factors, oversights, and outright mistakes combined to overwhelm the safeguards meant to prevent just such an event from happening. But most of the mistakes and oversights at Macondo can be traced back to a single overarching failure-a failure of management. Better management by BP, Halliburton, and Transocean would almost certainly have prevented the blowout by improving the ability of individuals involved to identify the risks they faced, and to properly evaluate, communicate, and address them.
Update: The market appears to have grasped that its optimism was premature -- BP's share price closed down today by a penny.
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.