I wouldn't say Canadians were complacent about the U.S. market. But what has given them a bit of a wakeup call was that the evidence seemed so compelling why the U.S. should buy more oil from Canada, but yet the decision was delayed. We are not naïve about the politics in the U.S., but when we see such a compelling case, and yet it is not approved, it has given people a start. We need to look at alternatives.
In 2005, Fu Chengyu, then-CEO of the state-controlled Chinese oil company CNOOC, wrote an op-ed for the Wall Street Journal, titled, Why is America Worried? Fu (pictured above) intended to reassure Americans that he meant no harm with a bid at the time to buy Unocal, the California-based oil company. But it did no good: Americans were in fact worried about allowing what they regarded as a strategic resource to fall into the hands of a rival country. Instead Chevron, with a lower bid, ended up with Unocal.
Today, Fu, now CEO of another Chinese oil giant called Sinopec, is back in the United States. He has been buying up minority stakes in large unconventional oil fields -- shale gas and shale oil -- through deals with companies like Chesapeake Energy and Devon Energy. The Wall Street Journal says the state-by-state total investment since 2010 between Sinopec and CNOOC has been $17 billion.
So should America again be fearful? The answer is no. Specifically, if the U.S. were presented today with a similar situation in which Sinopec, CNOOC or another big Chinese enterprise bid on a U.S. oil company, it ought to eagerly embrace it.
The reason is that, unlike with IT or other high-tech intellectual property, it is in the United States' strategic interest for China to possess its companies' cutting-edge oilfield technology, specifically how to develop shale gas and shale oil. China will keenly seize on that technology and apply it back home, with the result that pressure will be reduced on global oil prices. On shale gas, because a big find of indigenous gas is one of the only ways in which China will switch out of far dirtier coal in the production of electricity, it would be a strategic achievement if China became a first-rate fracker.
I spoke this morning with an oilman having specific interest in the subject -- John Imle, Unocal's former president. Imle said that a Chinese acquisition of a U.S. energy company -- say, Chesapeake, the second-largest gas player in the country -- would be "all upside" for the U.S. He said:
It's part of globalization and not an unhealthy part. It's positive for humanity because it results in energy supplies that are adequate so we don't have energy wars down the road. And it should provide lower-cost energy globally, which is important for the global economy. So I don't see any downside. It's all up. We want the Chinese to have plenty of gas.
The history of sanctions and smuggling suggests that China and India will be big winners from oil sanctions slapped on Iran -- among just a few remaining large buyers of Iranian crude, they will enjoy immense bargaining leverage with Tehran, and pay far lower than the global crude oil price. But how much will that discount be?
If a crisis faced by Canada is any clue, Iran's crude oil revenues -- $73 billion in 2010, accounting for most of the state budget -- are going to plunge: In Canada's case, a transportation bottleneck into the United States is forcing local producers to sell their crude at a 33 percent discount, the lowest price in some four years, write the Financial Times' Gregory Meyer and Ed Crooks. Specifically, we are talking a price of about $67 a barrel, compared with nearly $100 a barrel for the U.S. traded blend, called West Texas Intermediate.
(Before you round up a bunch of friends with pickup trucks and head for Hardisty, you'd need to buy a considerable number of barrels to profit from this anomaly. But one would expect deep-pocketed entrepreneurs to be figuring out how to add tanker cars to the rail line.)
Until a few days ago, high gasoline prices threatened to bring down Nigerian President Goodluck Jonathan. A denial of oil markets to Iran is currently raising the specter of deadly brinksmanship in the Strait of Hormuz (pictured above, looking peaceful off the coast of Oman), and potential terrorism in Saudi Arabia. Now, if U.S. President Barack Obama's opponents have their way, his rejection of a new oil pipeline from Canada will help to incite his ouster later this year.
Ever since the mid-to-late 19th century, when Edwin Drake discovered oil in Pennsylvania and the Czar freed up drilling in Baku, the passions unleashed by energy have played an outsized role in local- and geo-politics. Yet there is something different today in sheer scale -- although wars and brandished fists over oil are not new, we'd need to go back to the Teapot Dome scandal of the 1920s, for instance, to find a pure energy event that so threatened an occupant of the White House.
The storm of energy-driven geopolitical turbulence shows no signs of letting up any time soon. One impact is in the price of oil, which traders are keeping above $100 a barrel mostly over Iran, and the potential loss of some 17 million barrels a day to the market should it mine Hormuz or achieve the same outcome with speedboat harassment of tanker traffic. As precedence, traders are harking back to the nightmarish 1980s "Tanker War" between Iraq and Iran in which some 250 supertankers were sunk, write the Financial Times' Javier Blas and Caroline Binham. If it were not for such tension, traders might bid oil prices below $90-a-barrel, judging by a new International Energy Agency report that absolute global oil demand had a rare overall decline last year, and may fall in 2012 as well.
Oil prices are a prime geopolitical metric given their affect on the economic health of nations, along with their ability to at turns embolden or depress the leaders of nations like Russia, Venezuela and Saudi Arabia. But there are additional measures of energy's intensified geopolitical impact.
Go to the Jump.
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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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In and around Russia, pipeline politics means raw power -- who will exercise influence from Eastern Europe across to the steppes of Kazakhstan. In the United States, it's hardly more subtle: If companies and the Obama administration can navigate no-less-labyrinthine politics, the nation can more comfortably find its way in the Middle East. This lessened fear of lost supplies would coincide with a larger, steady source of both domestic crude, plus Saudi-size reservoirs across the Americas.
U.S.-style pipeline politics center on the proposed 1,600-mile Keystone XL oil pipeline, which would dedicate some 1.1 million barrels a day of Canadian oil to the United States and simultaneously unleash 46 million barrels of oil chronically bottled up as storage in a tiny Oklahoma city. Last Friday, the State Department issued a long-awaited opinion that Alberta oil sands pose no inordinate ecological risk, setting in motion a permitting process that could end up with the construction of the pipeline.
As with the cacophony that accompanies the Russian variety, Keystone has seen no quiet.
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The Santa Barbara syndrome: This week marks a year since BP at last stopped the oil spewing from its Macondo well in the Gulf of Mexico -- at 5 million barrels, it was the largest oil spill in history, and seemed on the verge of destroying BP as a company. Much has happened in that space of time: In February, Big Oil companies unveiled an emergency spill containment system to act against any new major accident, something that many outside the industry had thought already existed. The system arrived just in time for ExxonMobil to make a fresh, 700 million-barrel discovery in the Gulf and, further afield, for intensified efforts to begin exploring the environmentally sensitive Arctic Circle. BP is wobbly but got back on its feet.
The industry has marked the anniversary with a full-throated campaign for a restart of Gulf of Mexico drilling permits at pre-Macondo rates. Two industry groups -- the American Petroleum Institute and the National Ocean Industries Association -- funded and issued a 156-page study arguing that 186,000 jobs would result by 2013 if federal regulators clear a backlog of permit applications. The July 11 report was by Quest Offshore Resources, an oil industry consulting firm. This week came the release of a similar study, this one funded by the Gulf Economic Survival Team, a lobbying organization formed by Louisiana Gov. Bobby Jindal, a bitter critic of the drilling moratorium ordered after the spill by President Barack Obama. Among other findings, this report, carried out by IHS CERA, estimates that 230,000 jobs would result by next year in a pre-Macondo permitting environment.
One suggestion in both reports is that if only there were sufficient regulatory efficiency, the permitting backlog would vanish. But is that the case? I cannot say with certainty because spokespeople for the relevant regulators -- the Bureau of Ocean Energy Management, Regulation and Enforcement -- did not reply to a query. Another symptom of the backlog, you might say. But one wonders if the old pace will or even should return regardless of the resources thrown at the effort. After Macondo, the run-of-the-mill regulator might be expected for quite some more time to exercise exceeding caution in vetting drilling plans. Decades later, Santa Barbara and the Valdez, for example, still dog the industry.
Go to the jump for more of the Wrap.
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Last Friday, we discussed what happens when one adopts a my-way-or-the-highway approach to energy development, in this case opposition to Canadian oil sands. You get what we already have, which is projections of $150-a-barrel oil and $4.50-a-gallon gasoline, the product of a belief that, starting next year or soon thereafter, oil demand will start to exceed supply. This state of affairs vexes Christophe de Margerie, the CEO of France's Total oil company, who met with a small group over breakfast this morning at the Center for Strategic and International Studies. "If you say no to shale oil, no to heavy oil, no to Iran -- no, no, no, no -- what about life?" de Margerie said. Oil companies must be responsible in how they work, but everyone else must grasp that they actually need oil, and will for many decades to come, he said.
De Margerie is refreshing on two fronts -- his wicked sense of humor (Note to oil CEOs: it is possible to be funny and successful) and among the clearest minds on the oil patch. When we last visited with de Margerie, he was on a similar bent -- he was saying that the world is fast approaching the maximum volume of oil it can possibly produce, which he reckons is about 95 million barrels a day; that's just 8 percentage points higher than the 88 million barrels a day the world consumes at the moment. Today, he dove deeply into the wrong-headedness of attempting, at least at the moment, to weed out large energy supplies that one will and will not accept. When it comes to oil, we need all of it.
We still want to drive our cars at will, and own all the plastic gadgets in our homes. We want to fly off to Costa Rica and Bangkok. Not incidentally, we would like our helicopter-borne armies not to worry if they wish on the spur of the moment to capture Osama bin Ladin. That is the stuff that's at risk.
So among other things, the United States would be shrewd to accept the added 500,000 barrels a day to be produced from oil sands in the Canadian province of Alberta, which has been under long scrutiny because of the pollution produced when it is mined and refined. At the same time, Chesapeake Energy CEO Aubrey McClendon might stop congratulating himself for a billion-dollar venture-capital subsidiary aimed at creating demand for surplus shale gas, and instead act aggressively to become super-transparent and police the bad actors who are driving doubts about his industry.
The Kremlin Contest: Perusing the first week of entries in our friendly, low-risk wagering contest for who will be Russia's next president, I've discovered that I am not alone: Many conclude that Vladimir Putin will step aside and permit Dmitry Medvedev to remain Russia's president. But where are the Putin bettors -- the multitudes who are sure that Putin will return to the Kremlin in elections next year? Get your bets in: You must name who will be president, who will be prime minister, and the date on which Putin will disclose his choice. You must also name your small, non-cash wager (one contestant has wagered a shot glass; I have wagered a glass of Rioja). Remember that, if you lose, you must mail your wager directly to the winner. You can use the email link in the "About this Blog" box on the right, or my twitter address: @stevelevine. The deadline is Sept. 1.
When oil is next door: On paper, the gasoline-guzzling United States has no oil scarcity problem. To the south, Venezuela has 211 billion barrels of oil reserves, second only to Saudi Arabia. To the north, Canada's Alberta province possesses a conservative estimate of 175 billion barrels of oil. At home, there are the newly prolific volumes of the Bakken and Eagle Ford oil shales, and new plays in the Gulf of Mexico. So why do Americans fret about the supposed peaking of oil? Because of geopolitical, environmental and self-imposed impediments that keep these enormous volumes at arm's length.
Alberta is the piece of this picture that's on my mind today. Chip Cummins and Edward Welsch weigh in with a long, page-one piece in the Wall Street Journal on the province's long, grueling campaign to persuade its southern neighbor -- the United States -- to accept a near doubling of current oil exports to 1.1 million barrels a day, and more down the road. The hang-up is that the crude comes from oil sands (pictured above), which get a lot of Americans riled up because of the pollution created during production and refining.
The worries about oil sands have led Alberta and the companies working there to try to make the sands more environmentally acceptable. For instance, unlike shale gas drillers in the United States, who all-but refuse to police themselves and go transparent, Alberta has adopted a pro-active carbon offset program. They say that, all in all, oil sands are now no more polluting than almost any other form of oil drilling.
Over at Time, Tara Thean asks validly whether new doubt is cast on Alberta's plans to pipe more oil to the United States because of a fresh oil spill from an ExxonMobil pipeline in the Yellowstone River. Alberta will have to respond. But if it does -- which one imagines it will -- U.S. environmentalists ought to reconsider their opposition to this expanded oil flow. Hydrocarbon developers have little incentive to repent if environmentalists demonstrate no capacity for compromise.
Read on for more of the Wrap
Members of OPEC will agree to increase their official production today, but that won't do much to lower prices -- the plenitude of energy-related stress across the globe underscores more than ever how power has dispersed out of OPEC's hands. It's not only the civil war in Libya, and the loss of its 1.4 million barrels a day of oil exports, or the chaos in Yemen. From the South China Sea to Alberta, Canada, tempers are flared over the control and movement of oil.
The Vietnamese, the Filipinos and the Japanese are vexed over unneighborly behavior by China, which most recently severed the seismic cables of an oil exploration ship, and fired at fishing trawlers in the South China Sea. For their part, some Chinese call their neighbors plunderers and the U.S. a hegemonist. For now, southeast Asia is more worried about U.S.-Chinese friction over these confrontations than winning the debate of the moment with Beijing, and so the Obama administration has relaxed its posture of last year, when Secretary of State Hillary Clinton declared the dispute a U.S. strategic interest. I exchanged emails on this with Bonnie Glaser, a China expert at the Center for Strategic and International Studies. "I think that if Chinese intimidation of oil exploration activities continues, the U.S. will have to take a stronger stand -- especially if Exxon is involved. But the Obama administration hopes it doesn't come to that," Glaser said.
Fighting continues in Sudan, this time in a contest over the breakaway south's oil, writes Jeffrey Gettleman at the New York Times. Southern Sudan is set to become independent next month, and Sudan President Omar Hassan al-Bashir has taken a hostage -- the entire town of Abyei -- as leverage in order to obtain more oil in the split-up. The south produces about 500,000 barrels of oil a day, and though there appears to be little chance of renewed full-out war as long as the south slices off some of that for the north, there is plenty of violence for now.
In western Pakistan, the Taliban yesterday again blew up U.S. fuel supply tankers destined for Afghanistan (pictured above). Such acts do not change the global picture, but illustrate the Taliban's understanding of the centrality of oil in running the war.
A more peaceful but still hardball struggle has gone on a long time between independent-minded Kurdistan and the central Iraqi government over control of natural gas in Kurdistan. There could be a deal yet as Prime Minister Nuri al-Maliki relies on Kurdish political support, writes Tamsin Carlisle at the National, but not very soon. Meanwhile Canada is grappling with the U.S. over its desire to send the bitumen from its Alberta oil sands to Gulf of Mexico refineries.
And all this excludes the impact of natural disasters, such as we may see with the summer hurricane season. So what OPEC decides will help to bump prices one way or the other, but it may not be the main determinant even today.
Update: We are getting a jump in oil prices this morning after OPEC's announced decision to punt on Saudi's proposed increase in production, and keep output where it is. Traders are engaging in opportunistic buying. This should last for a day or two until the reality of an oil glut settles in again, along with the multitude of other factors influencing prices.
ExxonMobil is experiencing an identity crisis. For a century and a half -- ever since John D. Rockefeller switched from the produce business to oil in Cleveland, and created the precursor to Exxon along with the entire petroleum industry as we know it -- this company has been synonymous with the distinctive personality of oil. But as we learned yesterday, Exxon is now mostly a natural gas company. Is that anything to boast about? Probably not -- Daniel Day-Lewis, for instance, would likely get little traction as a natural gas man, armed with a deadly bowling pin, shouting, "I drink your milkshake." In fact, Upton Sinclair would never have written the book. Take a look yourself:
Is Exxon's shift -- its proven reserves are now 53 percent gas, and just 47 percent oil -- important? It is most certainly in a financial sense to the company's options-laden Exxon executives and their shareholders, but we'll get to that below.
But it is also significant geopolitically, and for the average driver, because it's emblematic of a big shakeup in power. Industry and motorists around the world are increasingly relying for their fuel not on publicly traded companies like Exxon, based solely on the profit motive, but on state-owned oil firms with a complex range of incentives and abilities. Multinationals like Exxon are becoming gigantic gas companies because they are being turned away by the petro-states of the world, which want to produce their own oil.
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Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.