Endless Summer - Energy Security Beat Goes On

Threats Continue, Region by Region

AA Energy Security Briefing

Middle East and North Africa: Attacks persist in Iraq with energy personnel being at particular risk. The Lebanon crisis continues to evoke fears of Syrian and Iranian involvement while terrorist attacks in Turkey highlight the risk to energy personnel in the south and east of the country. Iraq's new investment law will leave the industry still wanting while the Iran nuclear issue seems destined for sanctions from the UN. Algeria's tax laws appear regressive and changes in the Kuwaiti cabinet hold implications for the energy industry. Supply talks between China and 22 Arab states ensue while new political risks emerge in Algeria, and political risks emerge in Algeria

Former Soviet Union and East Europe: Political risks remain for those countries within Russia's ‘near abroad’ sphere of influence, from Turkmenistan to Moldova. The G8 summit which was supposed to focus on energy security was sidetracked by the Lebanon conflict, highlighting the differences of understanding of the concept of energy security between the EU and Russia. Concerns continue over Russian gas supply dominance and crude oil cut-off to Lithuania, but Kazakhstan agrees to join BTC project. New Ukrainian PM gives hope to peaceful settlement of Russian gas price dispute amidst a possible emergence of oil theft in Belarus

Africa: Lack of security in the Niger Delta continues to concern with personnel bearing the brunt of the risk. In Chad worker unrest creates a problem for Exxon as the government issues expulsion over taxes, while Angola's Cabinda problem moved towards a settlement, although risks still remain; further kidnappings and attacks against industry facilities in the Niger Delta, democratic progress in Mauritania; shift in activity in the Niger Delta and the emergence of specific attacks against energy industry personnel. Violence in Chad continues to cause concern over oil-producing areas. Positive political developments in Cote D'Ivoire

Asia: An amnesty in Baluchistan, Pakistan, makes headway in curbing tribal militancy. ASEAN looks to discuss sanctions and other action against Myanmar while both Papua New Guinea and East Timor move to cement political stability; expanding risk to energy facilities in Baluchistan, a resurgent ULFA in Assam, interest in East Timor energy environment despite instability; attacks in Baluchistan underscore need for a broad risk management approach, news of widespread oil theft in China and civil unrest in Assam (India). Sri Lanka violence threatens energy transport routes

Latin America: In Colombia FARC renews hostile activity following a lull during the May 2006 presidential election. Few physical security threats to hydrocarbons infrastructure, however a campaign of guerrilla attacks against power networks in Colombia and a state of emergency in Ecuador surrounding Occidental fields seized by PetroEcuador is in the news following a mild de-escalation in attacks on hydrocarbons infrastructure during the presidential election period. Nationalization of the gas industry in Bolivia invites a stronger opposition

North America: Few security incidents of note in the US but a new report underlines the country's growing recognition of energy security issues; Public and private sector statements concerning security of supply, questions over the allocation of 2006 Homeland Security funding, and fears mount over supply and refining capacity as the hurricane season approaches even as the price of gasoline drops with increased inventories the end of summer

Europe: Political developments were dominated by the G8 summit overshadowed by violence in the Middle East. Progress was made in deciding matters of energy security, although critics would claim that they are not especially substantial. Perhaps most encouraging of all was an apparent agreement on a pledge to create more transparent practices in the global energy industry; Russia did not open up its energy transit network to other non-Russian operators; Polish opposition to Baltic pipeline project. Requirement for a designated Energy Security agency mooted by UK opposition

The A&A Energy Security Briefing is a collaborative venture between Alexander's Gas & Oil Connections, the premier source of market information for the global energy industry, and AKE, the leading provider of specialist international risk mitigation services.

Classic Debate Over Public and Private Ownership

Bolivians Divided Over Gas Field Nationalisation

By Benedict Mander in Yacuiba, southern Bolivia, and Hal Weitzman in La Paz

Captain Julio Jiménez saunters away from his idle troops – save a couple manning the gates – and, grinning, stretches out his hand in welcome. He does not seem too fazed by the responsibility of guarding one of Bolivia’s most productive gas fields following the sudden nationalisation of its natural gas resources.

“I see no danger here, we’re just fulfilling our orders: to provide security and guarantee that production continues as normal so there are no shortages in the countries we export gas to,” he says, surveying the surrounding Andean foothills that rise abruptly from the plains of the semi-arid Chaco region.

A year ago, San Alberto, a gas field in the far south that fuels much of São Paulo’s energy needs, was operated by Petrobras, the Brazilian state energy company, which paid a tax rate of 18 per cent. From this week, and until the company renegotiates its contract, the field will be taxed at a rate of 82 per cent. Little wonder, perhaps, that President Evo Morales announced the nationalisation at San Alberto, and that the gas field is being closely monitored by the military.

Mr Morales and his troops have the unbounded support of many poorer Bolivians. Shortly after the nationalisation decree, some of the president’s more fervent supporters gathered in the modest central square of Yacuiba, a dusty town near San Alberto on the border with Argentina, shortly to chant: “Death to the neo-liberal expropriators! Long live Evo!”

“Our time has come. We have had enough of our country being ransacked by imperialists,” one enthusiastic speaker raged. “What is in Bolivia belongs to the Bolivians. If the foreign companies don’t like the new rules they can get out.”

In the days since the decree, the government has been doing its best to sell its message domestically, with television spots rebroadcasting highlights from Mr Morales’ announcement that conclude with the message “Evo cumple” (Evo fulfils).

However, most residents of the relatively wealthy province of Tarija, which has more than half of Bolivia’s natural gas reserves, are not quite so convinced by the nationalisation drive.
Not least the workers at the San Alberto plant, who ridicule the idea that the army needs to be there to prevent them from abandoning their posts, damaging production or sabotage. “We’re hardly going to do anything that would harm our own business,” says one employee. “It’s excessive. I mean, they have guns and bullets!”

Mr Morales is not popular in gas-rich Tarija. There is a suspicion that nationalisation is aimed at centralising the president’s control over natural resources ahead of a referendum in July that should result in greater autonomy for regional government.

“It’s all for show,” says Ramiro Gumiel, the mayor of the local district. He is dismissive of Capt Jiménez’s suggestions that locals who oppose nationalisation might try to seize the plant or do anything to further destabilise the situation. “Gas is the economic life blood of the region. Let us pray that Mr Morales’ antics do not halt foreign investment,” he says.

Victor Hugo Aguilar, who lives in Yacuiba, worries that Mr Morales is increasingly becoming a “puppet” of Venezuela’s President Hugo Chávez – who is no magnet for foreign investors – and that this is harming Bolivia’s relations with other countries.

The closeness between the two leaders is more than symbolic. Mr Chávez arrived in La Paz on Wednesday night to accompany Mr Morales to Thursday’s regional energy summit in Puerto Iguazu, for which the two leaders prepared a joint position to defend Bolivia’s nationalisation plan. After meeting Mr Morales, Mr Chávez announced that YPFB and PDVSA, Bolivia and Venezuela’s state energy companies, signed a “strategic alliance” last May under which Venezuela will invest in exploration and technology.

If Mr Morales is minded to take on his neighbours, he should be aware that Bolivia’s disagreements with foreign countries have not always ended favourably. In its last open conflict, Bolivia’s army suffered a disastrous defeat to Paraguay in the Chaco War of the 1930s, fought over land that was mistakenly believed to be rich in oil. Ironically, Mr Morales chose the name “Heroes of the Chaco” for the announcement of the nationalisation of Bolivia’s natural gas.

Mr Aguilar neatly summarises Bolivia’s dilemma: “The nationalisation of our natural resources is partly good, but partly bad. It is good that Bolivia profits more from its resources, but at the same time we don’t want to scare companies away. The world can live without Bolivia, but Bolivia cannot live without the world.”

The Financial Times Limited 2006

Reversing ‘Resource Nationalism’ in Latin America

This is interesting news in light of three nationalization movements this year in Venezuela, Bolivia, and Ecuador. The trend toward stronger state control of oil and gas resources in Latin America and other parts of the world will be tested by the tremendous capital requirements required to develop their assets. It is not likely that their governments can afford it, which explains Colombia’s actions.

James Angelus


Colombia to Privatize Part of State Oil Group

Bogotá, Colombia (Reuters)

Colombia will privatize up to 20 percent of state oil firm Ecopetrol in a bid to draw investment needed to modernize the country’s ailing petroleum sector, the government said on Tuesday. It marks Ecopetrol’s first opening to private investors, and comes as other Latin American countries like Venezuela, Bolivia and Ecuador are wresting control from foreign firms over their natural resources.

The government issued a statement saying it would prefer to sell the stake to Colombian pension and employee funds. "The country needs to make big investments in the exploration and production of hydrocarbons, as well as in the modernization of its petroleum infrastructure," the statement said.

The Andean country wants to find new oil fields before its 1.5 billion barrels in reserves dry up. Colombian oil production has fallen from a peak of 820,000 barrels per day in 1999, due in part to violence associated with the country’s four-decade-old guerrilla war. Production was 538,709 barrels per day (bpd) in May. "The difference between Colombia and some of its neighbors is that Colombian oil production is declining. So they need private investment in order to stabilize production and, hopefully, raise it," said Linda Giesecke, an analyst at Boston-based Energy Security Analysis Inc.

In bucking the Andean trend toward state control over the energy sector, Colombia is looking for partners to share the risk of exploring for oil in a country where Marxist rebels often attack pipelines and other energy installations. Colombian President Alvaro Uribe, popular for cutting crime as part of his U.S.- backed crackdown on the guerrillas, is liked on Wall Street for his market-friendly economic policies.

Two months ago he won re-election in a 62-percent landslide. "Colombia is moving in the direction of a more balanced hydrocarbons policy," said Eduardo Gamarra, Latin American analyst at Florida International University. "I do not expect this move to cause tensions with neighboring countries that are moving in the opposite direction because everyone knows that Colombia’s oil sector needs capital," he added.

Earlier this month, Colombia sold its biggest state gas transportation company, Ecogas, to local pension and employee funds for $301 million. The sale was part of the government’s privatization plan that includes state bank Granbanco-Bancafe, the expansion of its oil refinery in Cartagena and the modernization of Bogotá’s Eldorado airport.

What Tom Friedman Said About Iran Back When

A Shah with a Turban

By THOMAS L. FRIEDMAN

I'd like to thank Iran's president, Mahmoud Ahmadinejad, for his observation that the Nazi Holocaust against the Jews was just a "myth." You just don't see world leaders expressing themselves so honestly anymore --not about the Holocaust, but about their own anti-Semitism and the real character of their regimes.

But since Iran's president has raised the subject of "myths," why stop with the Holocaust? Let's talk about Iran. Let's start with the myth that Iran is an Islamic "democracy" and that Ahmadinejad was democratically elected.

Sure he was elected --after all the Iranian reformers had their newspapers shut down, and parties and candidates were banned by the unelected clerics who really run the show in Tehran.
Sorry, Ahmadinejad, they don't serve steak at vegetarian restaurants, they don't allow bikinis at nudist colonies and they don't call it "democracy" when you ban your most popular rivals from running.

So you are nothing more than a shah with a turban and a few crooked ballot boxes sprinkled around. And speaking of myths, here's another one: that Iran's clerics have any popularity with the broad cross-section of Iranian youth. This week, Ahmadinejad exposed that myth himself when he banned all Western music on Iran's state radio and TV stations.

Whenever a regime has to ban certain music or literature, it means it has lost its hold on its young people. It can't trust them to make the "right" judgments on their own.
The state must do it for them. If Ahmadinejad's vision for Iran is so compelling, why does he have to ban Beethoven and the Beatles?

And before we leave this subject of myths, let me add one more: the myth that anyone would pay a whit of attention to the bigoted slurs of Iran's president if his country were not sitting on a dome of oil and gas.

Iran has an energetic and educated population, but the ability of Iranians to innovate and realize their full potential has been stunted ever since the Iranian revolution. Iran's most famous exports today, other than oil, are carpets and pistachios --the same as they were in 1979, when the clerics took over.

Sad. Iran's youth are as talented as young Indians and Chinese, but they have no chance to show it. Iran has been reduced to selling its natural resources to India and China --so Chinese and Indian youth can invent the future, while Iran's young people are trapped in the past.
No wonder Ahmadinejad, like some court jester, tries to distract young Iranians from his failings by bellowing anti-Jewish diatribes and banning rock 'n' roll.

What is a fact is the danger someone like Ahmadinejad would pose if his country developed a nuclear weapon. But that is where things are heading. Iran has so much oil money to sprinkle around Europe it doesn't worry for a second that the Europeans would ever impose real sanctions on Tehran for refusing to open its nuclear program.

"The West has lost its leverage," notes Gal Luft, an energy expert at the Institute for the Analysis of Global Security. Europe is addicted to Iran's oil and to Iran's purchases of European goods. At the same time, the Iranian regime has been very clever at petro-diplomacy.
After the United States invaded Afghanistan and Iraq, "the Iranians knew they needed an insurance policy," Luft added. "So they did two things: they concentrated on developing a bomb and went out and struck gas deals with one-third of humanity -- India and China," the world's two fastest-growing energy consumers. So it is highly unlikely that China would ever allow the UN Security Council to impose sanctions on Iran.

The whole world seems to be getting bought off these days by oil. Gerhard Schroder, the former German chancellor, just became chair of a Russian-German gas pipeline project --controlled by the Russian government --that he championed while in office. The man just stepped down as the leader of Germany and now he's working for the Russians! I guess Jack Abramoff was not available.

Mr. President, what more has to happen -- how many more Katrinas, how much more reckless behaviour by Iran, how many more allies bought off by petro-dollars -- before you realize that there is only one thing to do for the next three years: Lead the United States and the world in an all-out push to conserve energy, reduce dependence on oil and develop alternatives?

Published in the New York Times, December 23, 2005

Foreign Oil Companies Out of Africa

Reuters news hot off the press
Saturday, August 26, 2006
N'DJAMENA, Chad

Chad president orders Chevron out

Chad ordered U.S. energy giant Chevron and Malaysia's Petronas on Saturday to leave the country within 24 hours for failing to honor tax obligations, in a move apparently motivated by a desire to earn more from its oil.

"From tomorrow, the representatives of Chevron and Petronas must leave Chad and close their offices," Idriss Deby, president of the central African nation, told a government meeting.

The surprise move followed Chad's decision to create a new national oil company, which it said should become a partner in the country's existing oil-producing consortium, led by U.S. major Exxon Mobil and including Chevron and Petronas. Landlocked Chad, which began pumping crude in 2003, produces around 160,000-170,000 barrel per day but most of its people remain poor.

Deby said the government had asked Chevron and Petronas this month to honor corporate tax obligations in their contracts. "Unfortunately the government has received no reaction from the two partners," Deby said. "Chad must get involved in the production of its oil to control its wealth and develop and increase its participation in the [consortium] pipeline," Deby said, referring to a 250,000 barrels-per-day pipeline to the Cameroon coast.

Under the 1988 agreement with the foreign consortium, Chad gets 12.5 percent of the wellhead value of total production, before quality discount and the cost of sending it through the pipeline to Cameroon's Kribi terminal. "Despite the rise in the price of a barrel, now estimated at around $70, Chad doesn't get much from its oil revenues," Deby told the meeting with government ministers and political parties. "In less than three years of exploitation the consortium has earned $5 billion for a $3 billion investment. In contrast, Chad has just received crumbs: $588 million, just 12.5 percent."

The current and former ministers who had handled Chad's oil negotiations are being dismissed. They would answer before the courts on charges they had sent letters to the two foreign oil firms advising them not to pay the taxes, Deby said. Deby, whose needs increased oil revenues to tackle a security threat from eastern rebels and also poverty, has called the original 1988 oil development deal "a fool's agreement" and called for its renegotiation.

A Transparency International survey last year ranked Chad the world's most corrupt state.

Copyright 2006 Reuters.

The Good News about Bad News in Alaska

What pipeline problem?

Lost in the fallout from BP's shut-down at Prudhoe Bay is the fact that the system is getting better, and oil supplies are growing

By Jon Birger, Fortune senior writer
August 21 2006

(Fortune Magazine) -- Big news stories have a way of morphing into emblems. Killer hurricanes represent global warming's arrival. CEO convictions symbolize corporate greed run amuck. But what happens when a news event is just a news event - when the tip of the iceberg is just a glob of floating ice?

Consider Prudhoe Bay, Alaska, and the brouhaha surrounding BP's troubled oil pipeline there. On Aug. 6, BP announced it would close 22 miles of oil transit lines for extensive repairs, sidelining some 400,000 barrels a day of Alaskan oil production. Days later BP backtracked a bit, saying it would be a partial shutdown affecting only 200,000 barrels a day.

The pipeline was the site of a major spill in March, and subsequent inspections revealed severe corrosion. Critics weren't surprised: Workers had raised safety concerns before, and BP acknowledged the pipeline hadn't undergone a "smart pig" inspection since 1992. (Named for the squealing noise they once made, "pigs" are devices used to scrape off buildup or, in the case of high-tech "smart pigs," test for wear and tear.) Standard operating procedure is for pipelines to be smart-pigged once every five years, says Kirk Langford, head of transmission pipeline inspection for oil-services firm Baker Hughes.

Suddenly the sky was falling. Pundits predicted a $10-a-barrel rise in the price of oil and warned that our pipeline infrastructure was crumbling. Representative Curt Weldon (R-Pennsylvania) and Senator Chuck Schumer (D-New York) accused federal regulators of being asleep at the switch. Of course, oil didn't rise $10. "Even if you took 400,000 barrels off the market permanently, that wouldn't happen," says oil expert Severin Borenstein, a professor at Berkeley's Haas School of Business. Prices barely budged. Why?

Give credit to all those evil futures traders who've been scapegoated for $70 oil. By bidding up futures prices, traders created incentives for oil companies to build bigger inventories. And those inventories acted as buffers when supplies were disrupted.

Another reason prices didn't increase: new production. A recent report by Cambridge Energy Research Associates identifies 25 new drilling projects, expected to push global production capacity from 89 million barrels daily to 110 million by 2015. (my note - see blog posted 21 August from CERA).

As for the notion that U.S. pipelines are in disrepair, there's no evidence to back that up. Yes, many pipes are 40 or 50 years old. But according to the federal Office of Pipeline Safety, the number of pipeline accidents in the U.S. has been falling. Accidents dropped from 245 in 1994 to 136 in 2005. There were 57 through July. And with proper maintenance, pipelines should remain safe for decades to come. BP's current pipeline woes are receiving disproportionate attention because of when and where they occurred - at a time of high prices and in a place where every accident is an argument against further Alaskan drilling.

When energy prices were much lower, even the most horrific pipeline accidents rarely received much national attention. In June 1999, for instance, a pipeline explosion in Bellingham, Wash., killed three people -including two 10-year-olds - and spilled a quarter-million gallons of gasoline into two nearby creeks. In August 2000, a family of 12 was burned to death when a corroded pipeline exploded near their New Mexico campsite. The latter story merited 89 words on page 22 of the New York Times.

The 1990s were a pipeline-safety low point. With oil below $20 a barrel, many companies simply cut back on maintenance, says Don Deaver, a former Exxon engineer who now works as a pipeline consultant. The accidents that ensued spurred tougher regulation and ultimately improved safety. Higher oil prices helped too. "The incentives to avoid an extended shutdown are so high right now that companies aren't going to take chances," says Steven Kean, chief operating officer of pipeline operator Kinder Morgan.

In the end, what happened at Prudhoe Bay probably says more about BP than the industry or its regulators. For all its holier-than-thou "Beyond Petroleum" advertising, BP hasn't always behaved like one of oil's good guys.

Cost-cutting at all costs?

The pipeline shutdown is only its latest black mark. The March spill occurred two years after BP worker advocate Chuck Hamel sent a letter to BP board member Walter Massey warning of corrosion problems.

In June the Commodity Futures Trading Commission accused BP traders of manipulating the propane market. And in 2005 an explosion at BP's Texas City refinery killed 15 workers and injured 170. Veteran energy banker Matthew Simmons thinks corporate soul-searching is in order. "What created the unbelievable aura of [BP chief executive] Lord John Browne of Madingly? He was the best cost cutter in the industry," Simmons asks, and answers.

"The whole culture at BP has made it a ruthless place to work, which is why I suspect you're going to see a lot more internal people speak out." Bob Malone, the man charged with fixing BP's U.S. operations, rejects the suggestion that recent accidents reflect deeper problems. Still, he acknowledges mistakes and promises change.

For his part, Kinder Morgan's Kean just hopes Prudhoe Bay doesn't give pipeline operators an undeservedly bad name: "You've got to remember there are millions of barrels moving over hundreds of thousands of miles of pipeline, day in and day out."

"You know how they tell you on the airlines that this is the safest part of your journey?" he continues. "Well, the journey on the pipeline is also safer than anything else on the value chain - including you putting gas into your tank."

All Quiet on the Ukrainian Front?

Ukrainian Prime Minister Offers Energy Assurances

By Andrew E. Kramer, The New York Times
Published: August 23, 2006

MOSCOW The new Ukrainian prime minister, Viktor Yanukovich, has promised that his government will refrain from siphoning natural gas from Russia's export pipelines to meet his own country's shortfall this winter, a practice that incensed Russian officials who characterized it as stealing.

The assurance marked a latest step by the a pro-Russian Yanukovich to unwind some of the conflicts between Kiev and Moscow in the three weeks since Parliament elected him prime minister on Aug. 5. The move was a concession, of sorts, to Russia - Ukrainian officials had never publicly admitted to taking the gas without payment - but one also likely to mitigate worries in Western Europe over the security of energy supplies this winter. About 80 percent of Russia's gas exports to Western Europe pass through Ukraine.

Yanukovich, who lost the election in what came to be known as the Orange Revolution in 2004 but staged an improbable political comeback this summer, has brought a more conciliatory stance to the energy talks with Russia, as expected. Talks are under way now for a contract for gas supplies in 2007.

Yanukovich said the Ukrainian national energy company, Naftogaz, was preparing for the winter heating season by pumping gas into underground storage. "I am saying this so Europe can hear and they can feel at ease," Yanukovich said at a news conference on Tuesday, according to a transcript provided by the prime minister's office. "We won't take European gas from the pipes this winter."

So far, Yanukovich has been feted by Russia more than the victor in the Orange Revolution, President Viktor Yushchenko, ever was. Just last week, in a break with protocol, President Vladimir Putin of Russia invited him to join leaders from the Eurasian Economic Community for informal meetings in the resort town of Sochi - though Yanukovich is not the Ukrainian head of state.

In turn, Yanukovich has vowed a more pragmatic approach to the energy dispute that last winter briefly reduced the flow of natural gas to Western Europe, and tried to reassure European governments they will not be faced with shivering citizens this winter. At the Aug. 16 Yanukovich secured a promise by the Russian natural gas monopoly, Gazprom, not to revisit the current gas price of $95 per 1,000 cubic meters until the end of the year.

Also, Yushchenko has signaled that Ukraine will probably continue next year to import natural gas through a Swiss-registered intermediary, RosUkrEnergo, that is controlled by Gazprom, though the United States had opposed the arrangement as nontransparent and prone to corruption. "God help us to prolong it for several more years," Yushchenko said of the deal on Saturday, according to the Interfax news agency.

Still, in the tangled energy trade between the countries, Ukraine's practice of withdrawing gas intended for Western Europe from Russian pipelines has long been a thorn in the side of Gazprom. It has also been a source of leverage for Ukraine in the pricing talks with Russia, leverage now apparently off the table for Kiev.

View from the Middle East

Global Energy Security: A Strategic Perspective

By Nader H Sultan

The following is the text of the speech delivered by Nader Sultan, Deputy Chairman & CEO, Kuwait Petroleum Corporation, at the 12th MPGC 2004 conference, held in Bahrain on 9-11 March.

The theme of the conference, “Rising to the Challenge – Middle East Oil & Global Energy Security”, is a very topical one. Since 11 September, energy security has received a new focus, with increased emphasis on the physical aspects of security as well as on the more traditional one of supply security. More recently the implication of the growing dependence on Middle East oil has been raised as a major issue. There is also new attention being paid to the quality and size of the reserves in our region. This has led to questions about the ability of the Middle East not just to increase production, but simply to maintain it at current levels.

However, whilst a lot of emphasis has been placed on the subject from the consuming nation’s side, little attention has been paid to the concerns of the energy producers and their perception of energy security, namely that of demand security and the long-term viability of being so dependent on oil in our economies.

To set a framework for my talk, let me start by reviewing the key common themes, which come out of the latest forecasts covering the next 20 years such as those from the IEA and EIA.

With the expected growth in GDP of the world economy, oil demand is projected to increase to about 120mn b/d over the next 25 years. The bulk of the increase, some 70%, will be in the developing countries, with Asia and China showing the largest increases.

On the supply side, the Middle East will strengthen its position as the world’s largest oil exporter. In fact the IEA projects that with half of the world’s reserves, the Middle East will meet at least two-thirds of the increase in global oil demand. However, as the main areas of supply are not the main consuming areas, the inter-regional trade in crude oil and refined products is projected to increase 80%.

With regard to the shorter time frame of the next 10 years, recently ExxonMobil has repeatedly cautioned that about half of the oil and gas volume needed to meet demand 10 years from now is not in production today. Therefore the industry will have to add capacity equal to two-thirds of today’s production levels.

In view of the recognized growing importance of the Middle East in future supply, key concerns are being raised about the region’s ability to produce the oil needed. The status of the reserves in the area is being questioned, as well as the technical and financial ability to make the necessary investments. Finally, the geopolitics of the region remains a key worry. So let me try to address these issues broadly first and then I will focus on Kuwait’s particular perspective.

In March of this year, Lord Browne, the CEO of BP, speaking in Washington had some important points to make on energy security. He stated;

“In reality, energy security is about the supply of oil and gas to meet the future demand”, which is expected to grow dramatically. He then asked: “Can the oil and gas industry meet that demand? In physical terms the answer is clearly yes. So in terms of physical resources, energy security is within reach”. However, he went on: “One key element of risk arises from the fact that supply and demand is not typically co-located. So one of the key issues of energy security over the next decade will be the growing trade in both oil and gas which will be necessary to match supply to demand.”

The other key issue of security arises because the resources needed to supply the world’s growing demand are concentrated in three regions. The Middle East, Russia and Africa. I think Lord Browne addressed the right issues, and his point about the concentration of supplies is an important one; but let me take a minute to distinguish between the regions.

Firstly, let me say that real security comes from diversity of supply. So it is important that the world should develop the resources in Russia, Africa and the Caspian.

Similarly, in the context of differentiating between the regions, Dan Yergin, Chairman of CERA, made an interesting observation in a paper to the US Senate just before the Iraq war. He argued that the US should recognize that there is really only one oil market. The US is part of a global oil market, an extraordinarily huge logistical system that moves 80mn b/d of oil around the world every day. So US security resides in the stability of the overall market. So it does not make sense to focus on imports or reliance on one region. Once again the importance of diversity of supply is stressed.

At the same time, Vahan Zanoyan, President of Petroleum Finance, also submitted a paper to the Senate in which he strongly argued the need to distinguish between large commercial suppliers like Russia, the Caspian and Angola, versus strategic suppliers like Saudi Arabia and the Gulf countries which are prepared to maintain spare capacity. This is a very important distinction, as in the latter countries, government policies are more important. Naturally, commercial companies, in developing reserves, try to maximize the economic return during the life of the contract. They have no incentive in maintaining spare capacity.

On this same topic of spare capacities, Nordine Ait-Laoussine, President of Nalcosa, at the Oxford Energy Seminar, pointed out recently that the maintenance of spare capacity and the defense of stable oil prices were two sides of the same coin. Without spare capacity prices would fluctuate more widely. Similarly, Ali Naimi, the Saudi Minister of Oil recently reminded us that it was his country’s spare capacity, and not any non-OPEC production, that came to the rescue during the Iranian revolution, the Iran-Iraq war, the Gulf war, and the Iraq war.

When you think about it, one year ago, there was a major war in our part of the world and remarkably, because of the policy to maintain spare capacities, supplies were not affected. So the first distinction to make is the important role of the Gulf governments in maintaining spare capacity.

The second distinction is to accept the reality of where the reserves lie. God Almighty has blessed us with the huge and low cost oil reserves. A recent study by Dresdner Kleinwort Wasserstein entitled “World Oil Supply – Cost Matters” emphasized the relative low cost of exploration and production in the Middle East of around $2/B compared to cost of $10/B in North America, or Russia at $6/B, (without the rail transportation costs).

So from a reserve and cost standpoint, the Middle East and Gulf countries will remain important. What about from the geopolitical perspective?

In December 2002, the Economist had on its cover the title “Addicted to Oil”.

The arguments in the Economist were as follows: “The world will be increasingly dependent on the Middle East for oil. The region is unstable. There is a vulnerability to possible disruption of supply. OECD countries are evaluating policies to reduce imports from the Middle East”.

However the Economist also came to what I would call some “common sense” conclusions. One of these was that to the oil producers in the region, oil is of no use buried in the ground; so under whatever scenario of politics, producer governments will ensure that the oil will flow. It further argued that dependence on the Middle East may be unavoidable but it need not be a problem.

Robert Mabro, in an article before the Iraq war, argued that as opposed to the US approach to reduce import dependence from the Middle East, and the European approach to reduce demand as a way to reduce dependence, there is also a third solution, not mentioned by energy policy makers, which is for the major countries, by their policies towards the region, to enhance the reliability of those on whom dependence is inevitable for many years to come.

Let me now turn to a different interpretation of energy security

Once again, Vahan Zanoyan, wrote a very perceptive article on Energy Security entitled “Energy Security – The Tables Have Turned” (MEES, 24 January 2000). In it he argued; “It is the oil exporters, particularly those in the Gulf, who now face the more serious energy security problem. Two distinct but complementary challenges best characterize this problem: first, the challenge to secure a material place in the global energy business of the future. Second, the challenge of reducing their dependence on oil revenues.

So he recommended two strategies:

1. First secure the present, through:
(i) Prolonging the importance of oil as a source of energy in the global economy; and
(ii) Prolonging the importance of the Gulf as a source of oil.

2. Second, secure the future, through:
(i) A significant reduction in the dependence to the Gulf economies on oil revenues; and
(ii) Investing in, or buying a right of passage to, the energy business of the future”.

Interestingly, in this regard, in Bahrain a few months ago, Michael Porter gave a fascinating presentation on the challenges being faced by the oil rich Gulf countries. In it he emphasized that whilst the Gulf countries had registered solid economic growth, that in per capita GDP had been negative in some countries, and population and work force growth would challenge economic development efforts. He then went on to distinguish between “inherited” prosperity, such as that from natural resources, to “created” prosperity, coming from creating valuable products and services and created by companies. With “inherited” prosperity, governments are the central actors, whereas with “created” prosperity it is the companies, or private sector. He cited research, which indicated that the presence of high natural resource exports was associated with declining competitiveness over time.

In essence he was arguing for the need to diversify from our dependence on oil and for governments to create the right business environment to allow private companies to become globally competitive ones.

So this is the other side of the security argument, where to achieve security we need to prolong the importance of oil, and the Gulf as a source, while securing our future by reducing our dependence on oil.

Having emphasized the critical role that the Middle East and Gulf countries will play, how are we meeting the investment challenges? Let me share with you Kuwait’s perspective.

We in Kuwait believe strongly that dependence is not the same as being vulnerable. Actually it is mutual interdependence, since we want security of demand and we realize that to monetize our reserves below the ground we need the markets. This interdependence may actually be a source of energy security.

Today we should recognize the inevitable advance of forces promoting stability. There is greater internationalization of economies, with joint ventures fostering common interests. As you know most of the Gulf countries, in their quest to expand capacity, have chosen the route of joint ventures with international oil companies. We are hopeful that Project Kuwait will succeed as well within the same framework. Such joint ventures create growing interdependence between producer and consumer.

So what are we doing to meet the investment challenge? On the upstream, we are progressing with our plans to expand our productive capacity to between 4-5mn b/d by the year 2020. We expect in this process to spend some $30-45bn to reach these targets. On the financial side, we see no difficulty in being able to fund the investment.

On the reserves side, we are confident that they are adequate to increase our production to these levels. But as is normal with reservoirs, the higher the production targets we set in the shorter time frame, the higher will be the decline curve later. So our objective is always to maximize reserves recovery over the longer term.

However, we do anticipate serious technical challenges, with regard to the new reservoirs we wish to develop.

We will need to produce crude from the heavy crude reservoirs, some of which have 18° API, which are more complex and have larger water cut. For instance at a crude production rate of 4mn b/d, we anticipate a water production of some 10mn b/d. So the managing of so much water, with its associated corrosion, will be a challenge. This is why we believe the participation of the international oil companies in our future investments is critical. So we remain committed to work with our parliament to bring Project Kuwait to a conclusion.

However, in planning for our investments, one major uncertainty is the security of demand. As you all well know, there are so many assumptions built into the long-term demand and supply forecasts, and any of them could change. So as a major resource holder there is always the risk that the capacity you build will not be required. This could result in higher operating costs but more important it could be a waste of resource allocation. However this risk is taken in the context of our commitment to ensure long-term stability of markets. In a sense it comes with the responsibility of being a large resource holder and this is what distinguishes us from the international companies.

So in conclusion, while energy security appears threatened by dependence, it is actually strengthened by interdependence. Although the oil market is a global one, the future role of the Gulf and the Middle East will be critical, and we in Kuwait, remain committed to make the necessary investments to ensure energy security. We recognize the inherent risks in investing for the long term, but that is part of the responsibility and burden we carry as a major resource holder. We support and encourage diversity of supplies, but our policies in maintaining spare capacities need to be recognized as contributing to the long-term stability of markets. As we support the international markets, we will also have to meet our internal challenge of reducing our dependence on oil so as to ensure our future economic security.

G-8 Summit Hangover in Central Europe

Russian Crude Oil to Lithuania Cut by Damaged Pipeline - Again

by James Angelus

The Russian diplomat in Warsaw had a strange smirk on his face when he tried to explain the cut-off of Russian crude oil supplies on 29 July to Lithuania’s sole refinery, Mazeikiai, the largest on the Baltic Sea surrounded by Scandinavia and Northern Europe. “We need time to repair the damaged pipeline,” he smiled, “it will take time.” The damage he refers to was front page news in Western media two weeks ago as Russia’s environmental agency caused a stir by announcing a “major catastrophe” near the Russian-Belarussian border, as the main oil pipeline to Lithuania sprang a leak.

The first reports from RosPrirodNadzor (Russia’s Natural Resources Oversight Agency) said that a “huge” oil leak covered an area of about 10 square kilometers with half the amount seeping into the water table. Finally, it appeared, the government was subscribing to Western norms of transparency by diligently reporting this “catastrophe” immediately after the accident. But it was later discovered that the spillage amounted to less than one rail tanker car would carry affecting about 450 square meters of land. “It will take 2 years to repair,” the diplomat affirmed, again with that strange smirk on his face.

Actually the Russian state-owned pipeline monopoly, Transneft, says it will take only one year and nine months to repair. The whole 70 km section of the pipe has to be replaced. Even with a twin pipeline leading to the refinery through Belarus it is “too risky” to keep one line open as repairs are made on the ruptured twin although the flow to Belarus continues uninterrupted. The latest statements by Transneft president Simon Vainshtok infer that this northern spur of the Druzba line may be shut down permanently as major parts of the 42-year old system are replaced and as Russian crude is shifted south toward the Black Sea and eastward toward China.

The G-8 Summit in July, headed for the first time by Russia with elaborate ceremonies in St. Petersburg, was supposed to demonstrate that Russia was a mature state and would not use energy as a foreign policy tool to blackmail its neighbors. The Summit was to feature a new arrangement on energy security with the European Union to stop these kinds of incidents. The basis of this agreement has been the Energy Charter which calls for third party access to markets and distribution channels. What Gazprom has done in the West, for example, by buying distribution networks in Germany and Slovakia and Hungary, among many others deals, would be offset by Western access to Russia’s pipeline system. Unfortunately, the Summit ended without any agreement at all, except a more emphatic Russian ‘niet’ to ratify the Energy Charter they signed a few years ago and confusion in the EU about what to do.

In the meantime the new owner of Mazeikiai, PKN Orlen in Poland which beat a couple of Russian majors and Kazakh oil companies in May for the tender to take over fallen Yuko’s stake, has been scrambling to find suppliers via tankers through the Baltic Sea. Orlen’s president Igor Chalupec said this week that the company “wishes to express its hope that there are not any non-business related reasons behind the reported pipeline failure. If that were the case, Russia could not be perceived as a trustworthy supplier of energy resources. PKN Orlen is deeply convinced that Transneft will soon remove the pipeline failure and resume oil deliveries via the pipeline. Any prolonged interruption of pipeline deliveries might result in Transneft’s loss of its reputation as a reliable partner.”

This was actually the third time Russia cut its crude supplies to the Baltic states since their independence from the Soviet Union in 1991, each time driven by Russian oil interests to force their way into ownership positions in these strategic assets on the Baltic Sea. In 1999 the American company Williams bought a controlling interest of the Mazeikiai refinery with strong Russian opposition, leading to the collapse of the Lithuanian government at the time. Lukoil, now viewed as a fair player in international markets with public listings in London and ConocoPhillips as a minority shareholder, cut off crude supply to the refinery in protest, forcing the eventual sale to a user-friendly privately owned Yukos in 2002. In 2003, Transneft cut supplies to the oil export terminal Ventspils in Latvia as it attempted to privatize, which only survived by getting its crude via rail carriers that Transneft did not control. The privatization process is still “in progress” with several bidders, including perhaps PKN Orlen, in the running after Transneft feigned little interest.

For Orlen, the prospects of its purchase of Mazeikiai are now in doubt. The EU Commission has to rule on the deal by March and market jitters from the cutoff already caused Morgan Stanley to sell 2.6 million shares in Orlen which reduced the company’s market value by 2% overnight. They can opt out of the deal if the market value of the refinery falls, or if dividends are not forthcoming, which may be exactly what the Russian strategy is. Lithuanian Prime Minister Gediminas Kirkilas is quoted as saying in March this year that a Russian diplomat warned him that the oil supply might dry up if the “right” bidder did not win the tender. Already Mazeikiai has lost half its production – which provides 10% of the country’s GDP – and seen its market value slashed.

The latest news is that the Lithuanian government may begin ‘repairs’ on the main transit artery between Russia and its Kaliningrad enclave unless Transneft can fix the pipeline soon. This rail link across Lithuania is the primary means for Russians to access Kaliningrad – a source of trouble before between the two countries and the European Union – that could spark an international row.

The vodka toasts to “energy security” at the G-8 Summit only a few weeks ago, a welcome meeting of the boys after Gazprom’s cut-off of gas to Ukraine, Moldova, and Georgia in the last year alone, are a faint memory now, with a hangover in Central Europe that bodes ill for the future. Energy is not getting more secure any time soon in this part of the world.

CERA Report Contradicts Peak Oil Theories

World Oil & Liquids Production Capacity to Grow Significantly Through at Least 2015


CERA REPORT, 8 AUGUST - Field-by-Field Analysis of Current Oil Fields and 360 Major New Projects Worldwide


CAMBRIDGE, Mass., August 8, 2006 – Global oil and liquids supply capacity could increase as much as 25% by 2015, with unconventional sources, including gas-related liquids and extra-heavy oils accounting for a major proportion of net capacity growth, according to Cambridge Energy Research Associates’ (CERA) July, 2006 benchmark field-by-field analysis of worldwide hydrocarbon liquids production capacity.


“This capacity growth would accommodate rising world oil demand so long as there are no major disruptions in the actual flow of oil, for political or other reasons,” said CERA Chairman Daniel Yergin in releasing the study. “The current worldwide aggregate disruption in production of 2.3 million barrels/day (mbd) is about 2.6% of total world capacity. That disruption, along with geopolitical risk, has driven prices into the mid-$70s. In this very high oil price environment, companies are diversifying into unconventional assets. These unconventional liquids will loom increasingly large in the world’s oil supply – going from less than 25 percent today to almost 40 percent by 2015.”

CERA’s examination of actual activity and production data covered existing fields and 360 new projects -- 250 new non-OPEC and 110 new OPEC development projects -- expected to start production by 2010. The analysis points to global productive capacity rising from 88.7 mbd in 2006 to 110 mbd in 2015 (Figure 1). CERA’s “reference case” analysis projects strong potential growth in both the OPEC (7.6 mbd) and non-OPEC (5.7 mbd) sectors to 2010, with continued expansion of OPEC capacity by 5.3 mbd between 2010 and 2015. Non-OPEC growth is projected to be 2.7 mbd in the 2010 to 2015 time frame, lower than recent high expansion rates.

“These levels of growth depend on continuing high rates of investment,” write CERA Director of Oil Industry Activity Peter M. Jackson and CERA Director of Global Oil and Gas Resources Robert W. Esser in Expansion Set to Continue, Global Liquids Capacity to 2015. “The reference case includes assessments of the 10-year consequences of current disruptions, and assumes that disruptions over the next 10 years will average more or less the same magnitude as the current level with a similar impact. Our focus is on physical capacity, not actual production which can fluctuate for political, economic, or technical reasons,” they explain.

Despite the “aggregate disruption” of 2.3 mbd of production because of disruptions in the Gulf of Mexico, Nigeria, Venezuela, Iraq and on the North Slope of Alaska, total productive capacity continues to grow, according to the report. “The ability of E&P companies to collectively grow global production capacity at a rate allowing a comfortable supply-demand buffer that will absorb supply disruptions and manage these risks will be a critical factor in ensuring global energy security,” Jackson and Esser observe.

The aggregate disruption – and its impact on capacity as well as production – has been factored into the current CERA projections, as along with the more rapid capacity increases registered in for example, Angola, China and Equatorial Guinea, and new gas-to-liquids (GTL) capacity. Updated activity and investment tracking indicates the some capacity additions shifted out of 2005 will move to a 2006-2008 timeframe, according to Jackson and Esser.

Jackson and Esser’s 2006 analysis found that productive capacity is still rising globally, with expectations for strong continued growth and a gradual improvement in the supply-demand balance. They identified five primary factors affecting strong capacity growth:

· High oil prices and strong competition for access to reserves and pressures
on the service sector

· The search for new sources of conventional crude and non-traditional supply

· Increasing global gas productive capacity driving up the volumes of
associated liquids

· The pace and scale of deepwater discoveries and development

· E&P company diversification

“During 2000, unconventional liquids represented 16% of global capacity, and by 2006 this had grown to 24% of the total,” they write. “We expect this strong growth to continue to over one-third of total global capacity (38%) by 2015, especially if E&P companies believe that the oil price will remain high.”

The CERA report also anticipates a geographic shift in the distribution of liquids capacity by 2015. “By 2015 approximately 66% of global productive capacity will be sourced from only 15 countries that are largely outside the traditional markets of North America and northwest Europe, and in some cases distant from the rapidly expanding markets in India and China. This compares to 59 % today.”

CERA’s 2006 update projects a short-term rate of capacity growth in 2005/2006 which is slightly lower than its May 2005 report as a result of slower Canadian oil sands expansion, a lack of capacity growth in Iraq, new project delays in Iran, political difficulties in Venezuela, lower growth in Russia, lower North Sea performance levels and hurricane-related difficulties and project delays in the Gulf of Mexico. These were partially offset by faster capacity growth in Africa and Asia. “We see much of the lost ground being made up by 2010, along with an increase of about 4 mbd in our global estimate by 2015, with the inclusion of GTLs in the outlook along with new discoveries and existing field reserve upgrades in non-OPEC areas,” Jackson and Esser observe.

Major Projects

The 2006 CERA report, drawing on CERA databases and those maintained by CERA ’s parent company IHS, identifies 250 non-OPEC and 110 OPEC projects expected to start producing in the next five years with plateau rates in excess of 10,000 barrels/day (bd).


CERA projects potential capacity growth of 13.3 mbd in the five years from 2006 through 2010, followed by 8 mbd in capacity growth from 2010 through 2015, producing a total of up to 21.3 mbd in new capacity over the next ten years. These are projects which are either approved and under development or very likely to be approved, according to Jackson and Esser. Just over 60% of the additions are expected to occur in OPEC countries.

Based on the report’s extensive field-by-field analysis, Jackson and Esser conclude that the data reinforce CERA’s view that the specter of “peak oil” is not imminent, nor is the start of an “undulating plateau” pattern of supply capacity.

Light vs Heavy Crude

Contrary to what seems to be a common belief, the overall proportion of lighter liquids is expanding faster than heavy and extra-heavy crudes, according to the CERA report. Although the market seems to be very focused on heavy and extra-heavy crudes, there is a strong trend toward an expanding stream of light crude, condensates and natural gas liquids (NGLs).

Jackson and Esser’s analysis indicates that extra-heavy oil productive capacity will more than double from approximately 1.9 mbd in 2006 to 4.7 mbd in 2015. However, this increase in dwarfed by a four-times-larger rise in gas-related liquids capacity, from 15 mbd to 26 mbd during the same time frame.

About CERA

Cambridge Energy Research Associates (CERA), an IHS Company, is a leading advisor to energy companies, consumers and industrial companies, financial institutions, technology companies, and governments. CERA (www.cera.com) delivers strategic knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA is based in Cambridge, Massachusetts, and has offices in Bangkok; Beijing; Calgary; Dubai; Johannesburg; Mexico City; Moscow; Mumbai; Oslo; Paris; Rio de Janeiro; San Francisco; Tokyo; and Washington, DC.