From Kingdom Comes

Saudi Arabia's Strategic Energy Initiative

By Nawaf Obaid

As Iran seems likely to flout any United Nation Security Council resolution regarding its uranium enrichment program, sanctions against Tehran could soon become a reality. And even if they aren’t initially applied to the country’s oil exports, they will have a major effect on energy markets, because Iran has threatened to cut oil supplies in retaliation.

To confront this challenge -- as well as that from potential disruptions elsewhere -- Saudi Arabia has embarked on a strategic energy initiative with the explicit objective of maintaining enough spare oil capacity to compensate for the loss of oil from two of Opec’s major oil exporting countries.

Phase One of this effort extends until 2009, and will allow the Kingdom to replace all of Iran’s exported oil, if necessary. Thus, if Iran responds to UN-imposed sanctions by cutting its oil exports -- which its foreign minister implicitly threatened to do this month when he said that the "first consequence of these sanctions would be an increase in the price of oil to around $200 per barrel" -- the impact won’t be as severe as many think.

In fact, the Kingdom has largely already succeeded in achieving this goal. Iran currently exports between 2.2 to 2.4 million barrels of oil per day (mbd). Saudi Arabia exports nearly four times as much (approximately 8.5 mbd) and its spare capacity is 1.8-2 mbd. Thus, the Kingdom is currently just short of being able to fully offset Iran’s oil exports. And this relatively small gap will be closed by early 2007, when the Khursaniyah oil field goes onstream, adding an additional 500,000 barrels of lighter grade oil to the Kingdom’s sustained capacity.

Unfortunately, the problems afflicting oil markets today are not transitory. In addition to Iran, Venezuela is another potential trouble spot. To advance his "Bolivarian" revolution, President Hugo Chavez has nationalized privately-owned oil fields, unilaterally rewritten contracts requiring foreign oil companies to pay the state higher royalties than they originally agreed to, and has prioritized politics over competence in the management of the country's oil.

In addition, Chavez has threatened to use the oil weapon against the US. Unrest also threatens the supply in countries such as Iraq and Nigeria, where saboteurs have put a considerable dent in oil production.

In Nigeria, oil production is down by around 550,000 barrels a day, because members of the Movement for the Emancipation of the Niger Delta - which seeks to "emancipate" this oil-rich region from allegedly exploitative foreign oil companies, and return the country’s oil wealth to the people -- are attacking pipelines and kidnapping foreign oil workers.

And in Iraq, depending on the month, oil production is at least 500,000 barrels per day lower than the 2 million produced when Saddam Hussein was in power. This is because US and Iraqi militaries can't stop saboteurs from blowing up pipelines as soon as they have been repaired from the previous crippling attack.

For these reasons, Phase Two of the Kingdom's oil production expansion schedule calls for increasing capacity between 2010 and 2012 to approximately 13 mbd (with 3.5 mbd of spare capacity). At this level, the Kingdom will be in a position to make up for all of Iran's exports plus those of either Iraq, Nigeria or Venezuela. Each of these countries is susceptible to supply disruptions, and the Kingdom is dedicated to ensuring that even in the worst case scenario, global oil demand can be met.

Skeptics argue that Saudi Arabia will not be able to boost its production capacity by these amounts. While they are right that these targets are ambitious, they ignore the fact that Saudi Aramco, the state-owned oil company, has announced equally lofty goals throughout the past decade, and it has achieved them all.

In the past three years alone, Saudi Aramco has increased its sustained capacity by 800,000 barrels a day. And it is investing heavily to reach its goals: between 2004 and 2009, the Saudi government will have spent over $17 billion to increase its upstream capacity.

A disruption of Iranian (or Venezuelan, Iraqi or Nigerian) oil exports would undoubtedly push oil prices higher. But the consequences will not be as calamitous as many think. King Abdullah has decoupled politics from energy policy in the Kingdom and expedited its oil production expansion schedule as an insurance policy against potential instability in Opec oil exporters.

The Kingdom realizes its long-term interests are best served by a stable energy supply. This stands in contrast to the position of Iran and Venezuela's leaders, who are threatening to use their oil as a political weapon. Fortunately, the world's central bank of oil is not located in Tehran or Caracas, but in Riyadh.

Nawaf Obaid is currently the Managing Director of the Saudi National Security Assessment Project, a government consultancy based in Riyadh. He is author of "The Oil Kingdom at 100: Petroleum Policymaking in Saudi Arabia" (Washington Institute for Near East Policy, 2000).

Squeeze Play in the Baltics

Lithuania suspects Russian oil grab

By Andrew E. Kramer

The Russian government has never been straightforward about its plans to take control of the oil and natural gas business. So Lithuanians were suspicious in late July when Moscow said it had shut down the only pipeline supplying them with Russian crude oil and blamed it on the environmental risks of a leak.

In fact, it was not so much their pipeline the Russians were concerned about, according to Lithuanian officials, analysts and company executives. It was what the pipeline was connected to: Lithuania's sole refinery. And because in this region Moscow often gets what it wants, Lithuania's agreement in June to sell the refinery to a Polish company for more than Russians had offered did not end the story.

The Lithuanian government, oil analysts and the operators of the refinery have said they suspect Moscow had a darker objective - to win the refinery.

"The goal was to force Lithuania to reconsider the sale," said Tomas Janeliunas, deputy director of the Center for Strategic Studies in Vilnius, the capital of Lithuania. "They wanted a Russian company to buy the refinery, but for cheaper than a market price."

Lithuania's brush with Kremlin oil politics, critics of Russian business practices say, is a case study of what the U.S. vice president, Dick Cheney, called Moscow's use of energy exports as "tools for intimidation and blackmail" with the neighbors it once controlled under the Soviet Union.

That characterization angered Russian officials, who say they are simply being discriminated against in the business world. "What is all the hysteria about?" Vladimir Putin, the Russian president, asked rhetorically at a meeting with German business executives this month, the Interfax news agency reported.

Russian companies, their accounts padded by high commodity prices, are on a buying spree overseas - a steel mill in Michigan, a pipeline in Germany and a mine in Australia have recently been sold to the Russian companies Severstal, Gazprom and Rusal, respectively.

In Lithuania, the government and Yukos, the Russian energy company that is out of favor with the Kremlin, were trying to sell the Mazeikiu Nafta refinery in a sale organized by Lehman Brothers of New York.

Four companies bid: two from Russia, one from Kazakhstan and the Polish company PKN Orlen, which ultimately won. The Russian companies, Lukoil and TNK-BP, bid less than the others. When asked to match the competing prices, the Russians declined, Nerijus Eidukevicius, chairman of the board of the Mazeikiu refinery, said during an interview in Vilnius.

In June, PKN Orlen won the refinery with a bid of $1.49 billion for Yukos's 53.7 percent stake and $850 million for the 30.6 percent owned by the Lithuanian government. "They weren't showing interest," Eidukevicius said of the Russian companies. "It was strange." In fact, analysts and market participants say, the Russian government was pursuing strategies to gain the refinery for a Russian company outside the sale process - and at a discount price.

At the time of the sale, Yukos was heading into a politically tinged bankruptcy proceeding in Russia. Rosneft, the state-controlled oil company whose chairman, Igor Sechin, is a former KGB agent and Putin's chief of staff, had already acquired most of Yukos in a forced auction in 2004, and had its sights on the rest.

To get to the front of the line for Yukos assets, Rosneft signed a confidential agreement with Western creditor banks in December 2005 to assume Yukos's debt if the banks forced that company into liquidation, which happened in March. This made Rosneft a creditor in the bankruptcy filing.

The Russian bankruptcy receiver representing Rosneft's claim, Eduard Rebgun, then sued in New York and in the Netherlands to block the refinery sale, but lost both cases, ending legal attempts to win the refinery outside the auction run by Lehman Brothers.

In what Yukos executives say was a sign of the deep displeasure of the Russian government at these rulings, Russian prosecutors opened criminal fraud investigations against four Yukos executives. The announcement of these investigations came less than an hour after the decision in Amsterdam on Aug. 17.

Meanwhile, Russia suffered a setback of a different nature inside Lithuania, political analysts in that country say. In the midst of the sale process, a pro-Russian politician in the Lithuanian government whose ministry was responsible for overseeing the refinery sale was ousted in a campaign finance scandal. The minister, Viktor Uspaskich, fled to Moscow and is now wanted by Interpol.

The Russian government invited his successor, Kestutis Dauksys, to a Kremlin meeting on May 23 with Dmitri Medvedev, a Russian deputy prime minister, according to Dauksys. The message, he said, was that the Russians truly wanted the refinery. "He said the Russian government was interested in who buys Mazeikiu Nafta," Dauksys said. "He said Russian companies are interested in buying it."

"They thought they could buy it at low cost, but that is not possible today," he added.

Alexander Temerko, a former vice president of Yukos, said the company interpreted Dauksys's account of the meeting as a threat to the refinery's Russian-controlled oil supply through the Druzhba pipeline.

The refinery immediately retooled for tanker oil, a decision that proved prescient: The first shipment arrived a week before the pipeline was shut down.

The contract with PKN Orlen has an escape clause that would apply if the market value of the refinery dropped significantly before the sale closed. Lithuanian analysts and politicians said that one motive for Russia to shut down the pipeline was to force PKN Orlen to exercise this escape clause, thus reopening the sale for Russian companies.

Then, on Oct. 13, a fire at the Mazeikiu refinery caused about $75 million in damage and lost profit for 2006, according to the Lithuanian government and the Fitch credit rating agency. The fire is expected to reduce output by 50 percent until early next year. While arson has not been ruled out, Lithuanian media have reported that the likely cause was a petroleum leak. A formal determination is expected in November.

PKN Orlen, in a statement made shortly after the fire, said it would discuss with its lenders whether the sale could go forward.

With his country's largest asset tied up in business negotiations, the Lithuanian president has hinted at possible reciprocation in kind. The president, Valdas Adamkus, on Aug. 19, suggested that the only Russian railroad supplying the Kaliningrad region, which passes through Lithuania, could be shut for what the Lithuanian media called "political repairs."

"We should guarantee the safety of trains and passengers," he said, according to the Baltic News Service. "Should repairs be needed in order to increase the safety of railway services, I see no reason to heat up political tensions."

Andrew E. Kramer writes for The New York Times

Japan's Energy Insecurity

Russian energy roulette spooks Japanese

By Hisane Masaki

The imbroglio over the huge Sakhalin-2 oil-and-gas project in Russia's Far East involving two Japanese firms has cast a cloud over resource-poor Japan's new national energy strategy. It has also served as a fresh reminder that Japan's economic power seems to have lost much of its luster, at least in the eyes of the Russians.

Last month, the Russian Natural Resources Ministry froze a key environmental permit for the project off the coast of Sakhalin Island, citing problems with conservation. The decision drew immediate protests from Japan and the European Union. Prime Minister Shinzo Abe, who was still his predecessor Junichiro Koizumi's chief cabinet secretary, said a major delay to Sakhalin-2 could hurt diplomatic relations.

Japan's ambassador to Moscow, Yasuo Saito, was blunter. He criticized the "unilateral" Russian decision as "lacking transparency". The British government said it was "deeply concerned".

The project is operated by an international consortium called Sakhalin Energy, in which Royal Dutch Shell has a 55% stake. Japanese trading firms Mitsui and Co and Mitsubishi Corp hold shares of 25% and 20%, respectively. Natural gas taken from two fields off the northeast coast of the island will be transported through an 800-kilometer pipeline to Prigorodnoye, in the island's southernmost part, where it will be liquefied and shipped to Japan, South Korea and the United States.

To be sure, even before Moscow began looking into the environmental problems surrounding Sakhalin-2, Russian and foreign environmental groups had raised strong questions about the project. But the stunning Russian move is widely believed to be a veiled ploy to pressure Sakhalin Energy to reshape the original 1990s deal to the Kremlin's benefit.

With prices for crude oil and other natural resources rising or at least stuck at high levels, the Russian administration of President Vladimir Putin has been promoting a strategy to place energy under national control. The major oil company Yukos, which was hostile to the government, was charged with tax evasion and eventually forced to dissolve. Sakhalin-2 is the only wholly foreign-funded project among major resource development programs in Russia.

There has therefore been growing discontent in Russia over the project, with some saying it is based on an "unequal treaty" that bars Russian companies from taking part, and which severely restricts the country's share of the profits. Russia's gas-export monopoly Gazprom agreed last year to acquire a 25% stake in Sakhalin-2 in exchange for ceding to Royal Dutch Shell a stake in its big gas field in western Siberia. But talks stalled after the Sakhalin-2 operator announced it would double costs to US$20 billion because of higher steel prices and the weaker US dollar.

There were also plans in effect for Mitsui and Mitsubishi to transfer a combined total of 5 percentage points of their stakes to the Russian company. Putin acknowledged on Friday that the conditions of the contract, known as a production-sharing agreement, and increasing costs for Sakhalin-2 are disadvantageous for his country because Russia cannot receive any profits until the project operator recoups the investment cost.

In what appears to be the latest in a series of Russian efforts to take greater control of domestic energy resources, Gazprom said this month that it will develop the giant Shtokman natural-gas field in the Barents Sea alone, a disappointing move for five foreign companies, including US oil majors Chevron Corp and ConocoPhillips, that had been on a short list to partner with Gazprom on the $20 billion project, one of the world's largest undeveloped gas fields.

Optimism on both sides

In what was seen by some as a conciliatory tone, however, Russian Natural Resources Minister Yuri Trutnev gave Sakhalin-2's operator a month - until the end of October - to come up with plans to rectify what they called major environmental violations before a possible shutdown of the $20 billion operation. The plans will be submitted to the minister this week.

Royal Dutch Shell's chief executive said that the company has fully addressed all ecological issues and is seeking dialogue with the Russian authorities. "Although the project has faced significant environmental challenges, we firmly believe these have been fully and transparently addressed," Jeroen van der Veer told an investment advisory council chaired by Russian Prime Minister Mikhail Fradkov.

"This project is 80% complete now with all LNG [liquefied natural gas] pre-sold under long-term contracts ... We are confident that all remaining issues can be resolved through our ongoing, constructive and fair dialogue with the Russian government."

Trutnev said that if the company's plan is acceptable, the development won't be stopped, and noted that he had received assurances from the Royal Dutch Shell head that the energy giant is working to resolve the problems. Trutnev praised the company for taking a more constructive approach to Russia's environmental concerns than has been the case to date.

"My meeting ... with van der Veer represents a 180-degree about-turn," Trutnev said. "He talked about existing violations, about ecological standards and how they have already started improving the situation." Trutnev noted, however, that "absolutely any sanctions" are possible if the proposals prove unsatisfactory.

Japanese Minister for Economy, Trade and Industry Akira Amari also expressed optimism recently about the fate of Sakhalin-2. Amari said he thought there would be a resolution between the operator Sakhalin Energy and the Russian government over the recent problems.

"One way or another, Sakhalin-2 will be resolved," Amari said. "The basic contract hasn't been nullified." Amari said he thought Sakhalin Energy would be able to convince Moscow of its efforts to deal with the environmental issues.

The Sakhalin-2 project is expected to turn out 9.6 million tons of LNG a year from 2008. Eight Japanese companies, including Tokyo Electric Power Co, Tokyo Gas Co and Chubu Electric Power Co, have agreed to purchase 4.73 million tons per year - equivalent to 8% of Japan's LNG imports in fiscal 2005.

The initial impact on Japan of a delay in imports from the project might be limited. But if there were a prolonged suspension, the impact could be far-reaching. Japan is the world's largest LNG importer, purchasing 58 million tons of LNG from abroad in 2005, of which 25% was from Indonesia.

Most of Indonesia's long-term LNG supply contracts with East Asian countries, such as Japan, China, Taiwan and South Korea, start expiring from 2010. Indonesia is poised to cut in half its Japan-bound exports of gas when long-term contracts expire in 2010 to boost the availability of natural gas for domestic industries amid decreasing natural-gas production at home. If imports from Sakhalin-2 are delayed for an extended period, affected Japanese companies would need to find alternative suppliers.

It remains to be seen, however, whether Japan will be able to secure the same volume it has been importing up until now, as countries with large energy demands, such as China and India, are increasing their imports of LNG. In 2010, China and India are expected to need an additional 5 million tons and 8 million tons, respectively, compared with current levels.

The island of Sakhalin also started producing and exporting crude oil in 1999, with exports to Japan beginning in 2001. In 2005, the area provided Japan with 10.89 million barrels, accounting for about 1% of the country's crude-oil imports. The new pipeline, scheduled to start operating in late 2007, will allow crude oil to be exported year-around, instead of only in summer at present.

Headwinds against Japan's energy security

The Sakhalin issue has come at an awkward time for Japan, which adopted this year the "New National Energy Strategy". The new strategy reflects growing Japanese concerns about energy security in the medium and long terms amid high oil prices and an intensifying global rush for oil, gas and other resources, led by China and India.

Japan imports almost all of its oil, about 90% of which comes from the volatile Middle East. Japan is also the world's largest LNG importer. Japan is struggling to diversify the suppliers of oil, gas and other energy resources.

The new strategy, adopted in late May, also calls for, among other things, increasing the ratio of oil developed and imported by domestic companies - from 15% to 40% of total imports by 2030. But this 40% target for "Hinomaru oil" has become even more difficult to achieve following Japan's recent agreement to give up its controlling interest in the $2 billion development of Iran's massive Azadegan oilfield amid tensions over Tehran's nuclear program.

After days of hectic haggling, Japan's Inpex Corp, a core firm of Inpex Holdings Inc, and National Iranian Oil Company reached a basic agreement early this month on a major cut in the largest Japanese oil and gas developer's stake in the oilfield, in southwestern Iran, to 10% from 75%. Inpex Corp will also return its status as operator of the project to the state-owned Iranian oil company. Still, Inpex Corp is expected to maintain the right to import crude oil from the field in the future with the 10% stake.

Meanwhile, Russia's energy-resource nationalism could spill over into another major project on Sakhalin - the $12.8 billion Sakhalin-1 project, managed by an international consortium led by US oil major ExxonMobil Corp. The project cost is now said to have increased to $17 billion.

Russia's environmental watchdog, Rosprirodnadzor, reportedly plans to check the project to determine whether it complies with environmental-protection laws after finishing such a check on Sakhalin-2. Other consortium participants include Tokyo-based Sakhalin Oil and Gas Development Co (SODECO), owned by the Japanese government and private sector, and Russia's state-owned oil firm Rosneft. The Russian firm has a 20% stake in the project.

In yet another blow to Japan's energy security, exports of natural gas from Sakhalin-1 could all go to China. ExxonMobil, which holds the right to decide which parties receive natural-gas exports, reportedly concluded this month a provisional contract with China's state-run China National Petroleum Corp (CNPC) on the import via a pipeline of about 6 million tons (in liquefied conversion) of natural gas to be produced at Sakhalin-1. ExxonMobil and CNPC reportedly plan to conclude a formal contract a year later.

The Sakhalin-1 development started on the condition that all of the 6 million tons of natural gas for export purposes - the amount excluding that to be taken by Russia - would be exported to Japan. SODECO reportedly agreed to the provisional contract on the condition it receives 30% of proceeds from exports to China. SODECO is jointly funded by Japan Petroleum Exploration Co, Japan National Oil Corp, Itochu Corp and Marubeni Corp. SODECO owns the right to acquire 30% of resources available from the project. Japan's imports of oil from Sakhalin-1, which began this month, will not be affected, but no natural gas may be exported to Japan.

Meanwhile, Japan and China have lobbied for alternative routes for a pipeline from eastern Siberia's oilfields to Pacific Rim nations. Russia has played the two energy-hungry Asian nations against each other. Japan failed to gain a guarantee that Russia will give priority to building a "Pacific route" from Taishet near Lake Baikal to Perevoznaya Bay near Nakhodka on Russia's Pacific coast via the halfway point at Skovorodino, near the Russia-China border, rather than to building a "China route" heading to Daqing, northeastern China, from Skovorodino.

Russian state pipeline monopoly Transneft is building the pipeline in two stages. It expects to finish the first stage at Skovorodino in 2008. Construction work on the first stage linking Taishet and Skovorodino began in late April. No date has been set for the second stage.

There are strong expectations that imports of oil from eastern Siberia through the proposed pipeline to Russia's Pacific coast, if and when they go into full swing, will help diversify oil sources and contribute to stable oil supplies to Japan in the long term. Tokyo has been asking the Russian government to sign an intergovernmental agreement pledging that it will build the entire route of the projected 4,188km pipeline.

But Moscow has rejected the Japanese request and said its priority now is to explore and develop the untapped reserves of eastern Siberia to provide the oil to fill the pipe. Although Inpex Corp and trading houses have been considering joining the Siberian project, they are waffling in view of the lack of a Russian government guarantee that Moscow will build a pipeline that could deliver oil up to the Russian Pacific coast - and then to Japan.

Japan on the diplomatic defensive

Japan once controlled the lower half of Sakhalin Island. After World War II this territory, and the string of islands to the south called the Kurils, was ceded to the Soviet Union. Tokyo no longer has territorial claims on Sakhalin, but sovereignty over the Kurils has been in dispute for decades.

Not so long ago, it was thought that Japan's trump card in the ongoing negotiations was its ability to develop the rich resources of the Russian Far East. However, what the Japanese government officials have long taken for granted as a negotiating chip - Japan's economic power - seems to have lost much of its luster, at least in the eyes of Russian leaders. For Russia, the strategic significance of Japan has declined.

The current situation is a stark contrast with just about a decade ago when Putin's predecessor Boris Yeltsin made what the current Russian government now thinks were too many concessions on the territorial row, driven by the need to seek Japanese help in turning around the then ailing Russian economy.

While Japan's economic power has been relatively on the decline after the burst of the asset-inflated "bubble economy" of the late 1980s, the Russian economy has been barreling ahead in recent years, thanks to high prices of crude oil, the country's main export item.

Russia, the world's second-largest oil producer, has posted robust economic growth, and its gold and foreign-currency reserves have hit record high levels. These days, the attraction of the Russian economic magnet for Japan seems even stronger than that of the Japanese one for Russia.

Japan's direct investment in Russia jumped more than sevenfold in fiscal 2004, which ended in March 2005, to $51 million, from fiscal 2003, although the figure represented a still minuscule 0.1% of the country's overall direct investment abroad. The two biggest Japanese auto makers, Toyota Motor Corp and Nissan Motor Co, have decided to build assembly plants in St Petersburg.

In the energy sector, too, Japanese companies are investing billions of dollars to help extract oil and natural gas in nearby regions of Russia, including the Sakhalin-1 and Sahkalin-2 projects. Many analysts say, however, that if Russia courts foreign capital in rough times but then twists the law to its own ends in good times, foreign companies, including Japanese ones, will become reluctant to invest in the country. It will not be in the interests of Russia in the long term, they say.

There is growing international distrust toward Moscow, particularly with regard to energy security. At this July's Group of Eight summit in St Petersburg, where energy security was high on the agenda, Putin failed to dispel the distrust.

In January, Russia temporarily stopped gas supplies to Ukraine in a price dispute. All of this has stirred considerable alarm among European countries that depend heavily on oil and natural gas supplied by Russia.

In St Petersburg, the G8 leaders agreed on an action plan to bring greater stability to energy markets. The program will promote development of more transparent and predictable energy markets and support energy-saving programs. If Russia wants to attract more foreign investment in its energy sector, it needs to win the confidence of potential investors, many analysts say.

On the oil pipeline linking eastern Siberia with Russia's Pacific coast, some Japanese government officials, concerned about the future possibility of a sudden halt to supplies as happened to Ukraine, have begun to ask: Will the pipeline actually contribute to ensuring Japan's energy security?

Prime Minister Fradkov is expected to visit Tokyo by the end of the year. Topping his agenda will be energy issues, including Sakhalin-2 and the Pacific-route oil pipeline. Fradkov's Japan visit will be preceded by a meeting of the trade and economic committee between the two governments, co-chaired by Japanese Foreign Minister Taro Aso and Russian Energy and Industry Minister Viktor Khristenko.

Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economy. This article was published in Asia Times Online.

The Question About Coal in the U.S.

U.S. coal plant boom poses big environmental, economic questions

The U.S. has the world's largest coal reserves, enough to last for the next 200 to 250 years, analysts believe

By Steve Quinn

A building boom that would add scores of new coal-fired power plants to the nation's power grid is creating a new dilemma for politicians, environmentalists and utility companies across the United States.

Should power companies be permitted to build new plants that pollute more but are reliable and less expensive? Or should regulators push utilities toward cleaner burning coal plants, even if it means they will cost more and are based on newer, yet still unproven, technology?

How those questions are answered will have huge implications over the next few decades. It could determine how Americans light, heat and cool their homes and business, the rate of return on utility investments and the potential environmental impact of the new plants.

Nowhere do these competing interests play out with such force as in Texas, where 16 new coal-fired plants are proposed - 11 of them by Dallas-based TXU Corp., the state's biggest power company. The scope of TXU's 5-year, $10 billion plan is considered bellwether and being closely watched by industry analysts, lawmakers, competitors and environmentalists across the U.S.

"TXU put its stake in the ground and said it will (build the plants) faster and cheaper than anyone else," said Daniele M. Seitz, analyst with investment firm Dahlman Rose. "So they have something to prove."

The company is hardly alone, however. Some 154 new coal-fired plants are on the drawing board in 42 states. Texas and Illinois are the only states where 10 or more plants are planned, according to the National Energy Technology Laboratory.

Energy analysts say factors driving coal's resurgence are soaring power demands, volatile natural gas prices and a favorable investment market. Coal now accounts for about 50 percent of the power generated in the U.S. By the year 2030, that share will increase to 57 percent, according to Energy Department forecasts.

Larry Makovich, managing director for consultant group Cambridge Energy Research Associates, said the urgency to bring more power-generating plants online cannot be understated. "A fundamental reality of the power business is there is no single fuel of choice, so if you are going to survive in the long run, you need to have a good mix of fuels and technologies," he said. "If we are going to keep supply and demand in balance, you're looking at a five-year lead time, so you have to get started building these plants now."

The argument over how TXU should build power-generating plants plays out almost daily with critics and proponents weighing in on the potential merits and drawbacks of the company's plans. TXU says the proposed plants will meet the state's growing demand for power, give a sorely needed economic boost to nearby small towns and will reduce toxic emissions by replacing older, less efficient plants.

"The coal plant of today is so much cleaner; it makes so much less emissions than what most Americans and Texans can conjure," said Mike McCall, chief executive of TXU's wholesale division. "It can be a good viable resource without really harming the environment. McCall says Texas is growing at a rate requiring the company to bring two big power plants online each year just to stay even with demand.

Critics, however, counter the company is driven by profits and is rushing to beat more stringent federal restrictions on carbon dioxide emissions in an era of escalating concerns over global warming. Texas already produces more carbon dioxide than any other state, a fact that worries big city mayors downwind of the proposed plants.

The debate soon could end up in federal court. Dallas attorney Rick Addison recently announced plans to sue TXU, alleging potential violations of the federal Clean Air Act. "It's remarkable and unnecessary the amount of pollutants they are going to put in the air," said Addison, a member of the Houston-based Locke Liddell and Sapp law firm. "The only way to get these issues resolved is at the highest level and reviewed under the appropriate law."

The battle lines were drawn April 20, when TXU Chief Executive John Wilder announced the company's plans shortly after much of Texas underwent a rolling power blackout. Since then, each side has assembled a team of backers comprised of affected residents, lawmakers, and lawyers.

In Colorado City, Texas, a town of 4,100 about 10 miles from where TXU wants to place one of the plants, civic leaders and lawmakers support the venture. They believe it will be an economic boon to the sleepy West Texas town, said Mayor Jim Baum.

Baum said TXU's project will provide the town a lifeline. He said he trusts TXU will be responsible to the area's environment, saying city officials would even support a second unit if TXU wishes. "We know they will not do anything to come in here and harm the environment," he said. "(TXU Senior Vice President) Richard Wistrand's mother and childhood friends still live there. Do you think he would do something to harm them?"

But Dallas Mayor Laura Miller and Houston Mayor Bill White recently formed a coalition of 17 mayors opposing the TXU's 11 proposed plants and five others being considered by other Texas companies. The group has lined up law firms statewide bracing for a courtroom battle. "Texas needs to be a leader on this issue and not where we are, which in my opinion is out of step and not aligned with people who are concerned about air pollution," Miller said.

Coal gasification plants can cost up to 20 percent more to build than a conventional plant. But they also can be more efficient to operate and save utilities the hassle and expense of adding pollution-control devices. Already, American Electric Power, of Columbus, Ohio, Minneapolis-based Xcel Energy Inc. and Charlotte-based Duke Energy Corp, are reviewing plans to implement this technology.

Mike Morris, chairman for American Electric Power, said the pressures on power companies to burn fuel in the cleanest way possible will only gain momentum in coming years. "From our vantage point we think the technology for clean coal is there," he said. "It can be done, but there is a challenge."

Projects such as these have Miller, some Texas lawmakers and environmentalists asking why TXU can't consider the gasification option, even for just a few of its 11 new plants. According to advocacy group Environmental Defense, TXU isn't doing enough to address carbon dioxide emissions.

The group says that if TXU proceeds with its building plan, annual emissions would jump from a level of 55 million tons in 2004 to 133 million tons by 2011 -- an increase equivalent to putting an extra 10 million Cadillac Escalades on the road.

For it's part, TXU says turning the coal into synthetic gas remains an unproven technology and not as reliable as burning pulverized coal -- the process the company's new plants would be designed to use.

Several analysts agree. "For purposes of generating electricity, a pulverized system is well-proven," said John Mead, who heads the Southern Illinois University Coal Research Center in Carbondale, Ilinois. "Gasification has much more limited commercial experience," Mead said.
"There are still some unknowns as to just what the operating costs would be and how reliable would such a system be."

Steve Quinn is a staff writer for The Associated Press

Africa is Key to China's Strategy

China's Oil Safari

By Shu-Ching Jean Chen

China has a straightforward strategy for diminishing its dependence on Middle East oil: buy from Africa. This year Angola has replaced the world’s largest oil producer, Saudi Arabia, as China’s main oil supplier.

A mere eight years after its first foray into Africa’s oil fields, an investment in Sudan after then U.S. President Bill Clinton imposed economic sanctions on the country in 1997, China is now importing 30% of its oil from Africa, compared with 47% from the Middle East.

For the past decade, Beijing has been shaping its foreign policy around securing long-term low-cost supplies of oil and other raw materials that it needs to sustain its economic development. It is a global hunt, from coal from the Philippines to natural gas from Australia to copper from Chile.

China has adopted an aid-for-oil strategy that has resulted in increasing flows of oil from African countries in return for China building lavish infrastructure projects such as hospitals, railways and sports stadiums and cutting trade and debt-forgiveness deals.

Not only does that gain Beijing natural resources. It also wins the Chinese new friends--and their votes it needs in international forums like the United Nations and World Trade Organization as it takes an ever larger role on the world stage.

China’s involvement in Africa’s oil, as well as the more recent presence of Malaysia’s and India’s state oil companies, not only adds a new dimension to China’s long-standing political influence on the continent. It is also disrupting the long dominance of Western oil companies such as Exxon Mobil, Chevron, Royal Dutch Shell, and Total.

Three state Chinese oil companies now have interests in nearly 20 African countries, from Libya in the north, to Nigeria in the west, Angola in the south and Ethiopia in the east. They are China National Petroleum, which is the parent of New York-listed PetroChina; China National Petrochemical (Sinopec}, whose listed arm is China Petroleum & Chemical; and China National Offshore Oil Co., aka CNOOC.

In 2005, Chinese companies invested upward of $175 million in African countries, primarily on oil exploration projects and infrastructure, according to Chinese figures. Earlier this year, CNOOC stepped up the scale of China’s investments in Africa when it announced it had bought a 45% stake in the Akpo field off the shore of Nigeria for $2.7 billion. Sinopec followed with a $725 million investment with a local partner in a deepwater exploration block off the Angolan coast.

China is not alone in awakening to the potential of Africa’s oil, which promises both low exploration costs and the prospect of huge new reserves to offset the perils of Africa's civil and border wars, coups, rebellions and revolutions. But China’s growing presence has caused alarm among Western governments and oil companies for reasons of commercial competition and because it increases the difficulties Western governments are facing in dealing with rogue states such as Sudan and corrupt tyrannies such as Equatorial Guinea.

China, less concerned about human rights than Western countries, is prepared to deal with the rulers of such nations, weakening the West’s ability to impose economic pressure on them, including bans on arms sales. But, says Douglas Yates of the American Graduate School of International Relations and Diplomacy in Paris, “with the exception of Sudan, ultimately they are doing the same things as what the Western oil companies have been doing.”

In Sudan, Western oil companies are deterred by U.S. sanctions and the high investment costs resulting from the civil war raging in Darfur. China bought half of Sudan's oil exports in 2005, which accounted for 5% of China's oil needs.

In the two other African countries most often cited as cases of Chinese disregard of human rights, Angola and Equatorial Guinea, Western and Asian oil companies are no less enthusiastic than their Chinese counterparts in seeking contracts, but are getting outbid by Beijing’s willingness to pay high prices and to bundle oil contracts with generous government loans and investment.

For their part, “African governments have traditionally welcomed competition from outsiders," says Chris Alden, a foreign policy analyst at the London School of Economics. "They welcome Japanese, India, the Chinese and the Russians. They are not going to lock themselves up. They will diversify.”

China’s practice of exporting legions of Chinese laborers to Africa to build oil pipelines and refineries has also been criticized for taking away the potential to create new local jobs. However, some argue the concomitant arrival of Chinese merchants and the flood of cheap Chinese imports could benefit the local population in ways that foreign oil money, typically pocketed by corrupt local officials and politicians, often fails to do.

As well as an energy source, Chinese companies see Africa as a new market for their low-cost consumer goods (including weapons) and as an opportunity to get around U.S. and European quotas on Chinese textiles by investing in textile factories there.

Investing in Africa’s oil “is a brilliant stroke of Chinese diplomacy. In one fell swoop, it wins strategic and economic gains,” says the London School of Economics' Alden.

Shu-Ching Jean Chen is a Hong Kong-based staff writer at Forbes.com

Agreement in Iraq has Global Implications

Tussle between Baghdad, Kurds over crude resources

By Syed Rashid Husain

Temperatures are soaring. And the apples of discord are the energy riches of northern Iraq -– now firmly under Kurdish control. Stakes are getting higher as the issue enters a new, defining phase in the war-torn Iraq.

Already there are reports of a December deadline to the Iraqi government to finalise the oil law. Analysts are pointing out that the law will offer a much higher rate of return to the oil majors than currently offered by any other regional producer. Many say the new draft would lock the oil majors' control over Iraq’s ‘patrimony’ for decades. Little wonder that the major western oil majors, who have been complaining of little access to the oil riches of the region, are expecting to get the best of the option in Iraq.

And this is happening at a point in time when the Iraqi oil industry is beset with issues of all sorts and the battle to gain control over its energy riches is assuming critical dimensions. Marred by decades of neglect and lack of investments, crippled by years of embargo and non-availability of smart technology, the Iraqi energy infrastructure is currently confronted with major insurgency, targeting its oil and energy infrastructure.

Compounding the problem is the ongoing tussle between the central government in Baghdad and the Kurdistan regional government (KRG) on the issue of controlling the crude resources of the energy rich region.

There is a considerable infighting going on in the corridors of power in Baghdad and Irbil. The situation is holding the future of the Iraqi oil industry to ransom in many ways. The Kurdistan regional government headed by Masoud Barzani is accusing the central government of sabotaging oil investments in the region.

“The people of Kurdistan chose to be in a voluntary union with Iraq on the basis of a constitution. If Baghdad ministers refuse to abide by the constituent the people of Kurdistan reserve the right to reconsider the choice,” he warned.

Earlier the Iraqi oil minister had argued that all the oil deals signed between the KRG and the international companies needed to be ratified by Baghdad. The KRG has signed production sharing agreements with four consortiums for fields in its autonomous areas and more are in offing.

“Since 2003, IOCs have invested more than $100 million in exploration activities in our region and significant discoveries have been made in our region. Baghdad has done nothing to encourage investment is other parts of Iraq,” Barzani argued as the heated debate continues.

Kurdistan is oil rich. With a federal structure, apparently in sight in Iraq, the issue of who controls the oil riches of Iraq is assuming greater importance. The Kurdistan regional government is basing its arguments on the Iraqi constitution, approved in August last year that concedes that Baghdad would not have exclusive control of Iraqi oil and gas reserves.

A new law drafted by the KRG will seal its claim to all oil reserves in the north. KRG has thus proposed to set up five new companies that will operate all the existing fields in the north, explore new ones and market all petroleum produced. The regional government of Kurdistan is also holding direct negotiations for concessions with foreign companies, bypassing the central government in Baghdad.

Iraqi Kurdistan has proven reserves of 25,000 million barrels. Another 20,000 million barrels are in the category of probable reserves. Put statistically, this is about 22.5 per cent of the Iraq’s total reserves. Production which is minimal currently is targeted to reach 200,000 barrels per day over the short term and one million barrels a day thereafter, in the comparative longer run. The region also has substantial gas reserves to boast of.

Add to this Kirkuk, Iraq’s oil rich northern city, which is today probably the most critical and prized area in determining the future of Iraq. The giant Kirkuk oil field is estimated to have 10,000 million barrels and this is believed to be only a fraction of its true potential. In operation since 1927, it currently pumps about one million barrels per day, almost half of Iraq’s total current output.

The ongoing insurgency has also prevented the Iraqi government and international oil companies (IOCs) from undertaking the urgently required development work in many areas. The current Iraqi oil minister earlier in August signalled the race for official deals worth $20 billion would start this autumn. However, in the wake of the prevalent security environment in the country, much exploration activity seems improbable.

The IOC’s are reportedly working behind the scene to collect data and be ready to undertake assignments as soon as the situation on the ground improves. Oil majors Shell, ExxonMobil, BP, Total and Chevron are among the companies eager to get back into Iraq -– as soon situation permits -– for Iraq’s oil is ‘cheap and easy to produce’.

Over the past three years, scores of international firms have signed up for technical studies and training programmes that granted them regular access to oil ministry officials outside Iraq. Consequently, some of the oil majors have gained and gathered a wealth of information on Iraqi assets. These oil majors have also been reportedly scrutinising data on some of the biggest assets in country, especially in south. Total for instance has been in line for Majnoon and Bin Umar fields, ENI and Repsol have expressed interest in Nassiriyah, and Shell was known to be keen on Ratawi.

When fully tapped, these southern fields as well as West Qurna and Halfaya could help boost Iraqi output to three million bpd. Oil majors are also helping to trouble shoot at the North and South Rumaila oilfields, as well as at other problem fields currently ensuring the country’s production and exports capacity. A big if indeed!

And in the meantime, Baghdad and Irbil also need to settle issues between them before any major movement could be made. In order to achieve this, KRG will ultimately need to patch up with Baghdad. This will not be only to the benefit of Baghdad but KRG also has reasons for reaching a compromise with the central government in Baghdad on the issue.

For the land-locked Kurdistan, finding exports outlet is crucial. The existing Ceyhan pipeline to Turkey, according to experts, was not able to sustain any additional crude exports from north. Hence coordination with Baghdad is an imperative for KRG too.

It’s a two way process and despite political differences, pure economic reason commands a more mature posture. For the sake of the people of the country, the ongoing tussle needs to be resolved -– one way or the other -– before concrete steps could be taken towards exploiting the energy riches of Iraq.

Syed Rashid Husain is a widely published writer on Middle Eastern affairs

Achieving Security the Brazilian Way

A Well-Oiled Machine

By running Petrobras as a business, not a cash till, Brazil has been rewarded with self-sufficiency in petroleum.

By Marla Dickerson

Not far from this sultry port city, shipyard workers are hustling to complete the latest in a flotilla of vessels for the government-controlled oil firm. Financial statements show the company on pace for a year of record sales and earnings. In the cubicles of the organization's towering headquarters here, office workers have hung decorations celebrating Brazil's self-sufficiency in petroleum.

State ownership is synonymous with underachievement for much of Latin America's energy sector. But for Petroleo Brasileiro, known as Petrobras, the only thing rising faster than crude output is confidence.

While government-owned oil companies in Venezuela and Ecuador struggle with falling production, Petrobras has nearly doubled its output since the late 1990s. Production is about 1.9 million barrels a day and is projected to jump to nearly 2.8 million by 2011. Proven reserves are climbing at a healthy pace, up by nearly 50% between 2000 and 2005.

By comparison, reserves of Mexico's government oil monopoly, Petroleos Mexicanos, or Pemex, have slipped badly over the same period. Pemex is still Latin America's biggest oil producer, with an average output of 3.3 million barrels a day last year. But with its largest oil field in decline, Pemex could be overtaken by Petrobras within a few years, according to Mexico City-based energy analyst David Shields.

"That was something unthinkable even five years ago," said Shields, author of two books on Pemex. "Brazil is a country which until recently … had a very serious deficit in oil."No longer. Brazil this year celebrated its "oil independence" — the first time that domestic production exceeded demand.

When Petrobras was founded in 1953, its initial output of just a few thousand barrels a day amounted to little more than an oil leak. But Brazil got serious about reducing its dependence on foreign crude after the 1970s oil shocks jolted its economy.Bedeviled by meager onshore deposits, Petrobras transformed itself into an accomplished deep-water driller. It also worked with farmers to promote widespread use of sugar-cane ethanol, which today accounts for 40% of the fuel that Brazilians burn in their cars.

The former pipsqueak of Latin American oil companies is now looming large. Growing world demand for "green" energy has Petrobras working to boost exports of ethanol. And it is betting heavily on another plant-based fuel, biodiesel.At the same time, Petrobras' deep-water expertise has become the ticket for tapping the planet's dwindling oil reserves, most of which lie far beneath the ocean floor. While continuing to drill off the Atlantic coast of Brazil, which currently provides 80% of its oil, Petrobras is looking abroad. It has hit pay dirt in U.S. waters off the Louisiana coast. And it is searching as far away as Africa and Asia.

"We are not a typical state-run company," said Jose Sergio Gabrielli de Azevedo, a bearded, bespectacled economics professor who took a leave from the Federal University of Bahia to become Petrobras president and chief executive.

Unlike other nationalized firms, where budgets and revenue are in the hands of politicians, Petrobras must answer to Wall Street. Although the Brazilian state owns 37% of the company and controls 56% of the voting rights, much of the firm's equity consists of freely traded shares, including American depositary receipts listed on the New York Stock Exchange.

This structure has provided the organization with billions in capital to improve its operations. It has also forced Petrobras to open its books and adhere to the regulatory standards for public companies. And it has imposed discipline on the government, which collects taxes on Petrobras but can't pinch from the oil company's purse.

Petrobras last year posted revenue of $74 billion and net income of $10.3 billion, up 67% from 2004.

"They run their national patrimony as a business, not the state cash register," said Jorge Pinon, an energy researcher at the University of Miami and a former executive with oil company Amoco in Latin America.

To promote competition in the oil sector, Brazilian lawmakers in 1997 approved legislation breaking Petrobras' monopoly over production and refining. Although the state firm still dominates, it now must go head-to- head with outsiders when bidding on drilling leases in Brazilian waters. The company also faces competition in the retail sector, where it operates about 7,200 gas stations, about 20% of the nation's total.

The way Petrobras does business differs markedly from that of Pemex, which has a monopoly on Mexico's oil industry from the wellhead to the pump. Critics have long derided the firm as a tar pit of inefficiency and corruption. Thieves make off with an estimated $1 billion in fuel every year. A top executive resigned in late 2004 after revelations that he billed the company for his wife's liposuction.

But analysts say the federal government is committing the biggest offense. Mexico's treasury last year siphoned $54 billion from Pemex — more than 60% of the firm's revenue — to fund public spending. The firm lost $7.1 billion, the eighth straight year it had bled red ink. Its heavy tax burden has left it little to spend on drilling and exploration to replace Mexico's aging Cantarell field, where production declined 12% in the first eight months of 2006.

In March, Pemex executives announced the discovery of what they say is a promising field called Noxal in the deep waters of the Gulf of Mexico. But the company lacks the capital and know-how to develop the field on its own. One solution would be to bring in an experienced partner in exchange for a share of the oil, a standard industry practice.

But Mexico's constitution allows Pemex to work with outsiders only on a fee basis. Gabrielli said Pemex executives had talked with him about hiring Petrobras to help with deep-water projects. Gabrielli said he told them that he wanted a piece of the action, not a paycheck. "We are not a service company," Gabrielli said. "We're a producer.

"To that end, the company is spending big to keep the oil flowing. Petrobras plans to invest $87.1 billion in its operations over the next five years, including $17.4 billion for projects such as refineries and vessels.

That spending is visible at the Maua-Jurong shipyard in the city of Niteroi in Rio de Janeiro state, where hundreds of workers are readying a Petrobras vessel known as an FPSO, or a floating production, storage and offloading system, to go to work in Brazilian waters next year. Petrobras and other offshore operators use such movable platforms to process and transport oil from remote wells.

The units are handy in areas where it is not cost-effective to lay underwater pipelines. Another advantage is that they can be disconnected from wells quickly and moved out of harm's way in the event of hurricanes. Petrobras has asked U.S. authorities for permission to introduce the technology into the Gulf of Mexico, where it is ramping up operations.

The company's U.S. subsidiary, Houston-based Petrobras America Inc., has secured 287 leases in the gulf and is planning to invest $1.5 billion in the region over the next five years, according to Renato Bertani, president of Petrobras America. The company has made discoveries in two fields known as Cascade and Chinook, about 200 miles off the Louisiana coast in waters 7,000 to 9,000 feet deep. Petrobras is the operator and has a major stake in those fields, where the first wells are scheduled to come on line by 2009.

Other gulf holdings include an 80% participation in a gas field known as Cottonwood, which is slated for start-up in 2007. The company has a non- operating minority stake in an oil field dubbed St. Malo, whose lead operator is San Ramon, Calif.-based Chevron Corp. Last month Petrobras purchased a 50% interest in a Texas refinery.Bertani declined to give an estimate of the size of the company's Gulf of Mexico discoveries. But he recently told Dow Jones Newswires that potential reserves of the Cascade, Chinook and St. Malo fields could be as much as 1.5 billion barrels.

The gulf "is one of our priority areas outside of Brazil," Bertani said. "We think there is sufficient potential to reward our investment."

Going abroad has its risks. Bolivia's nationalization of its hydrocarbon industry this year has strained relations with Brazil, its biggest customer for natural gas, and threatens investments made there by Petrobras. Bolivia wants to raise natural gas prices significantly and aims to assume control of two Petrobras refineries on its soil. The move has Petrobras scrambling to secure other sources of natural gas.

Petrobras likewise doesn't produce enough diesel to meet Brazil's needs. So it is looking to green alternatives. The company has patented a fuel known as H-Bio that uses vegetable oil in the refining of conventional diesel. The company said the process would save vast amounts of petroleum, turn out a cleaner-burning product and allow Petrobras to reduce its imports of diesel fuel substantially.

Petrobras is also betting heavily on the petroleum diesel substitute known as biodiesel, which can be made from animal fat or vegetable oil from crops such as soybeans, palm or castor beans. The company is building three production plants to try to meet a government mandate requiring every liter of diesel sold in Brazil to contain 2% biodiesel by 2008, rising to 5% by 2013.

It is already selling a blend containing 2% biodiesel in hundreds of its retail gas stations, and it has incorporated biofuels into its long-term planning."Petrobras decided not only to be an oil company but an energy company," said Ildo Luis Sauer, its director of gas and energy. "It's a strategy for our survival as a company."

Marla Dickerson is a staff writer for the LA Times

NOCs Hold, IOCs Fold

Oil firms’ united front cracks
Developing nations gain traction in bid for greater profits

By Steve LeVine in Dallas, Bhushan Bahree in New York and Gregory L. White in Moscow

A freshround of demands for contract concessions, and outright expropriation by oil-producing countries have brought down one of the most powerful negotiating tools used by major oil companies — their united front. The companies are divided into two camps: those still insisting a contract is a contract and others saying they are willing to renegotiate terms to reflect higher oil prices.

Until now, the oil companies have pushed back as developing countries have asked for a bigger share of what they regard as windfall profits from contracts negotiated during the days of $10-to-$20-a-barrel oil in the late 1990s. But senior executives of Chevron Corp. and France’s Total SA publicly said that they are ready to consider giving more of the profits to the countries.

Royal Dutch Shell PLC and Exxon Mobil Corp. are among the companies still adhering to the tough public posture toward changes in contract terms. They are rejecting suggestions by Moscow they alter early-1990s contracts under which they obtained rights to natural-gas fields in Russia’s Far East. This week, Russia raised the pressure by revoking an environmental permit for Shell, threatening to halt the project.

It isn’t clear whether the tough-guy or nice-guy approach will prevail. But the stakes are considerable. Ripping up agreements to give a bigger cut to oil-producing nations will hurt companies’ bottom lines. And if oil companies get booted out of oil fields, that could have a bigger effect.

The apparent crumbling of the unified front is notable. Three years ago, for instance, Chevron temporarily shut down its Tengiz oil field in Kazakhstan rather than accede to what it called an attempt to violate the “sanctity” of the contract by the government levying hundreds of millions of dollars in new taxes. Chevron eventually agreed to pay $810 million in new taxes, but it never acknowledged it had effectively agreed to altered contract terms.

Chevron Chief Executive Officer David O’Reilly, addressing the issue of greater demands for renegotiation, told Organization of Petroleum Exporting Countries representatives in Vienna that “it is natural that governments seek a greater share of the economic pie in good times.” He added: “However, it is very important that changes be carefully considered in the light of increasing costs, more sophisticated technology and the inevitability of a cyclical downturn in prices at some time in the future.”

In another speech at the OPEC meeting, Christophe de Margerie, president of exploration and production at Total, said: “At $70 oil, there is room for renegotiation. But we have to be careful that it’s a real negotiation and not new fiscal terms imposed on us.”

Developing countries haven’t been the only ones making demands. Last December, Britain raised taxes on North Sea oil and gas to 50% from 40%. And the U.S. Congress has had hearings on boosting royalties from oil companies drilling in federally owned waters in the Gulf of Mexico.
But the greatest pressure is coming from the developing countries. In a report issued by Standard & Poor’s cited six countries that have unilaterally increased royalties and taxes on oil revenue and profit this year. “In the end, what can the companies really do?” John Thieroff, the author of the report, said in an interview. “At the end of the day, you pay the taxes.”

In April, Ecuador passed a law requiring oil companies to give back half their oil revenue above a benchmark price contained in their original contracts. Algeria is imposing a windfall tax on companies. Chad wants a60% stake in oil deals. Venezuela, which has led the charge for concessions, has been raising taxes and royalties, and also requiring oil companies to give over majority control of their fields to the stateowned oil company. Italy’s Eni SpA and Total, which balked at the demand, have seen their fields in that country confiscated.

In Russia, the hardest-hit so far has been Shell’s $20 billion project, known as Sakhalin-II. Shell has said environmental issues raised inthedispute don’t constitute legal grounds for nullification of the project’s permits. Russian officials had said they wouldn’t take unilateral moves in the Shell and Exxon cases but suggested the companies voluntarily subject themselves to Russia’s regular tax regime, which analysts say would take a much bigger chunk of the profits.

And Russia’s Ministry of Natural Resources said it is considering canceling the license for Total’s Kharyaga production-sharing agreement, claiming the field hasn’t been adequately developed.

Chip Cummins, Greg Walters and Anne-Sylvaine Chassany contributed to this article.

Energy and Security Ties Russia with Vietnam

Russia's new Vietnamese courtship

By Federico Bordonaro

Russian-Vietnamese trade, energy and security ties are on the upswing, underscoring Moscow's latest bid to re-energize its strategic relationship with Hanoi and re-establish itself as a major Southeast Asian player at a time the United States, the European Union and China are likewise competing for regional influence.

Vietnamese Vice President Truong My Hoa said after meeting with Russian Prime Minister Mikhail Fradkov in Moscow on September 20 that "all-around cooperation between Vietnam and Russia should be further developed" and that "Vietnam wants Russia to invest not only in its oil-and-gas industry, but also in atomic-energy and hydroelectric-power projects". Fradkov diplomatically praised Vietnam's economic "renewal process" and indicated Russia's keen interest in responding to Hanoi's calls for closer ties.

Former Cold War allies, and later post-Cold War antagonists, nowadays there is plenty of economic and strategic incentive for the two sides to forge stronger bilateral ties. Hanoi and Moscow frequently refer to their bilateral relationship as a "strategic partnership". President Vladimir Putin used the term back in February 2001, when bilateral relations first got back on track, and mutual ties have since significantly strengthened.

It's a partnership of mutual convenience. Vietnam desperately needs to enhance its energy security and upgrade its dilapidated armed forces, while Moscow is seeking to expand its influence in Asia's energy sector, mainly through its giant energy concern Gazprom, and increase big-ticket military-related exports.

Significantly, Russia's new strategic push into not only Vietnam but Southeast Asia is predicated and somewhat restrained by Moscow's bigger concern of maintaining stable relations with China. Russia walks a thin line by helping Vietnam to improve its defensive capabilities, which for geographical and historic reasons are largely aimed at counterbalancing China.

Moscow's apparent deference to Beijing's wishes helps to explain why Putin agreed in 2001 to decommission Russia's naval base at Vietnam's Cam Ranh Bay three years before its lease expired - though subsequent US overtures to establish some sort of a military presence at the deepwater port have irked China. That's why Russian and Vietnamese officials have concentrated their new strategic embrace more on business than war games.

At the 11th session of the Vietnam-Russia Intergovernmental Committee for Economic, Trade and Scientific-Technical Cooperation, the two sides declared that bilateral trade would likely exceed US$1 billion in 2006. They also announced plans for the establishment of a new joint-venture bank to be established between the Bank for Investment and Development of Vietnam and Russia's Vneshtorbank, which will likely be officially opened for business when Putin visits Hanoi during this November's Asia-Pacific Economic Cooperation (APEC) summit.

Fueling new ties

Energy security, now as in the past, remains at the forefront of the bilateral relationship. As Vietnam's economy surges, its domestic energy sources are fast diminishing. Russia sits on huge fossil-fuel resources at home, and has the technical know-how to improve Vietnam's current exploitation and management techniques, industry experts say.

Top Gazprom and Petrovietnam executives met on September 20 to discuss a new bilateral agreement where the two sides drew up new guidelines for joint operating in oil production and processing and sketched a general scheme to develop Vietnam's nascent natural-gas industry. An official statement issued by Gazprom after the meeting announced that it plans to start new drilling in the Gulf of Tonkin by November.

The announcement could mark an important new direction for Vietnam's energy sector - though once again heavily reliant on Russian expertise and investment. Russia's hugely profitable Gazprom, which currently provides nearly all the gas needs of the former Soviet Union and Central and Eastern Europe and is ranked as the world's third-largest corporation, is set to replace Zarubezhneft as Moscow's main energy representative to Vietnam.

The beleaguered Zarubezhneft has for decades led the Vietsovpetro oil-and-gas joint venture, where contentious negotiations over how best to wind down the expiring venture have strained bilateral relations in recent years. Similarly, Petrovietnam has replaced Vietsovpetro and has emerged as Vietnam's new energy heavyweight.

The two sides are expected jointly to explore plenty of new potential drilling sites: recent geological analysis highlights the underdeveloped state of many of Vietnam's land-based wells, which apparently hold much deeper reserves than the country's fast-expiring offshore wells.

More significant, perhaps, Moscow is expected to sell and share its nuclear-power expertise with Vietnam's energy planners. Hanoi announced this year that it aims to generate 11% of its total electricity through nuclear means by 2025 and increase that level to 30% by 2040.

Vuong Huu Tan, director of Vietnam's Nuclear Energy Institute, said in February that he expected six reactors to be "operating at a potential of 1,000 megawatts each" by 2025. Assuming, as expected, that Russia will play a key role in helping Hanoi realize its ambitious nuclear designs, Moscow will assert strong influence over Vietnam's energy direction for the foreseeable future.

As bilateral trade and energy relations deepen, Russia will increasingly find itself between a rock and hard place on improving bilateral security relations, which Hanoi will no doubt pursue more actively than Moscow is - for now at least - willing to accommodate. Vietnam remains particularly sensitive to China's rising military might and is quietly seeking ways to counterbalance the perceived threat.

Long-simmering territorial disputes with Beijing over the Spratly and Paracel islands, from Hanoi's perspective, remain a significant security issue, although regional security analysts doubt the contested, reportedly resource-rich islands will be a major source of conflict over the short term.

As a holdover from the Cold War, Russia remains Vietnam's main weapons supplier. Since the dissolution of the Soviet Union, Russia has sold Vietnam 12 Svetlyak patrol vessels, 12 S-300PMU1 surface-to-air missile systems, and 4 Su-30 MKK fighter aircraft, as well as artillery. Furthermore, Russia has agreed to upgrade all weapon systems Vietnam has already purchased.

A renewed Russo-Vietnam strategic partnership will inevitably be complicated by sticky military-technology transfer issues. As Russia attempts to re-establish its influence in Southeast Asia while at the same time maintaining close ties with China, it will often bump up against US interests, including in Vietnam. Vietnam has taken a decidedly pro-American stance in its bid to hedge China's emerging strategic hegemony over the region.

Security experts contend that it is highly unlikely that Russia would support Vietnam in any possible crisis or conflict with China over contested territory in the South China Sea. So far, they say, Russia's supply of weapons to Vietnam is being driven more by market forces and profits than any desire to recalibrate the region's power balance.

Still, Russia appears eager to expand its all-around strategic cooperation with Vietnam, and enhanced business ties will inevitably lead to stronger political and strategic ties. Russia is back in Southeast Asia, and judging by Moscow's aggressive moves in Vietnam, similar developments with other regional countries may also soon get under way.

Federico Bordonaro is senior analyst with the Power and Interest News Report

Playing the Field from Tehran

Iran: Facing East And West

By Karin Kneissl

Iran is not in a hurry. The Islamic Republic appears comfortably placed, despite the tremendous domestic problems such as unemployment and general dissatisfaction with a failed economic system based on the Islamic revolution. And the explosive mix of repression and desire for change could spark off internal unrest. Nevertheless, the common aim of all layers of society is to change the country from within, and certainly not via outside intervention. The government’s handling of the nuclear crisis is ensuring it of popular support. Sanctions against Iran would strengthen solidarity with it.

On a wider diplomatic level, Tehran has attractive cards in its hands. Its quest for leadership in the Islamic world, the aim of Shah Reza Pahlavi until his fall in 1979, has become more marked under the populist revolutionary Mahmoud Ahmadinejad, in power since August 2005.

Regardless of its leadership, Iran will always behave like an empire and want to be treated as such. Dealing with the EU-3 (UK, France and Germany) in order to tackle the nuclear issue has been a useful tool to keep a dialogue going. But in the end, the Iranian “empire” wants a deal on an equal footing with the other “empire”: the US. Washington could benefit from dialogue with Tehran over the the US’s envisaged plans to withdraw from Iraq and Afghanistan where Iranian spheres of influence have significantly grown in the aftermath of the respective invasions in 2001 and 2003. Unexpectedly high oil and gas export revenues are providing Tehran with opportunities to experiment in domestic and foreign politics. Iran feels strong, and is convinced that it can set the rules of the game.

Europe Seeks Energy Partnership

Europeans are aware of Iran’s significance – not least as an oil/gas producer. Power cuts in Europe in January this year because of the Russian-Ukrainian price dispute increased calls for a new energy partership with Iran. Echoing Winston Churchill’s plea for “safety in variety”, the EU is again courting Iran as one of the partners in diversification. Investment opportunities in Iran are not that tempting for Western companies.

“But if they consider the draft contracts unsatisfactory, then Iran simply proposes them to China and India,” says Bijan Khajehpour, Chairman of the Atieh Group, a consultancy business based in Tehran. Iran seems to be in the comfortable position of being able to decide with whom to do business, be they Western or Asian partners. The prevailing consideration is obviously that investors will accept the Iranian terms if this is the only way to get into Iran. Can it work?

As far as hydrocarbon reserves are concerned, Iran holds 137 bn barrel of oil and gas liquids, accounting for 11.6% of world’s total proven reserves, and up to 29 trillion cu ms of natural gas, 15.3% of the world’s total reserves. That may not be all, for large parts of Iranian territory, especially the northern half the country, have not been explored for fossil fuels due to geographic proximity to the Soviet Union in the Cold War era. “More than 60% of Iranian gas reserves are located in non-associated fields and have so far not been developed,” says Hossein Adeli, Chairman of the Tehran-based Center for Economic and International Studies.

There is huge need for investment. According to a Ministry of Petroleum estimate, an annual investment of about $10 bn between 2005 and 2010 is necessary. One of the impediments for foreign investment is the buyback agreement – a short-term risk service-contract between the National Iranian Oil Company (NIOC) and an international oil company (IOC) for petroleum exploration and/or production rights. The IOC is a contractor to the NIOC and is reimbursed in cash after completing an agreed scope of work without obtaining equity rights in crude oil. The reimbursement includes cost recovery and an agreed rate of return. The main problem for IOCs is the very short time-frame. Compared to respective offers in Qatar, say, or Algeria, the buyback regime is simply not attractive.

Difficult Decision-Making Process

The ongoing review of the buyback formula reflects the difficult decision-shaping process in Iran. The Ministry of Petroleum seems to be alone in pushing for reforms in foreign investment and for more transparency in highly subsidized energy prices. But the power of the Iranian parliament (Majlis) should not be underestimated. Parliamentary filibustering on contracts with foreign investors is common and landed former oil minister Bijan Zanganeh in trouble.

The Fourth Development Plan presented by the government underwent numerous amendments and was finally passed by the Majlis in the fall of 2004. Obviously the Majlis was keen neither on the initially promoted “open doors” policy nor on a reduction of the state’s role in the national economy. However, in early July 2006 privatization plans were boosted. The Expediency Council, the top legislative body between the Majlis and the Guardian Council, and headed by former President Ali Akbar Hashemi Rafsanjani, ruled that the government’s role would shift from direct involvement in ownership and running the large companies to supervising and guiding different sectors of the economy.

With regard to the oil and gas sectors, the order specified that the downstream would undergo privatization, but not the upstream. This new course is based on an executive order by Ayatollah Khamenei passed on 2 July 2006. It is intended to support the targets envisioned in the 20-year strategy for economic, social and cultural development and at the same time bring about social justice and eliminate poverty.

Companies ready to enter the Iranian market should be patient. And those which finally opt for Iran – small and medium-size companies tend to find the decision easier than the large IOCs – the thinking is clear: they do so because they find investment opportunities that they cannot encounter elsewhere. According to Mr Khajehpour, it is all about long-term contracts. The crucial point in the review process of the buyback scheme is the time-frame. Iranians dislike long-term contracts for historical reasons, remembering the concession regime. But it might prove difficult otherwise to specify the indicators of the rate of recovery, or how to obtain better technology at a better price.

Many questions remain, aside from the extremely volatile geopolitical situation in the region. The fundamental question for Iran remains: does it wish to attract real investment or is it simply about a buyer-seller relationship? The International Energy Agency stated in its World Energy Outlook Through 2030 that, “Iran has immense oil and gas reserves, but it is less able than other Middle Eastern countries to capitalize on them because of barriers to foreign investment and heavy subsidies”.

International Oil Company Interest

Nevertheless, various IOCs have ventured into Iran. Conoco did so with the silent blessing of the Clinton administration, only to be replaced by Total. And Iran demonstrated to the world that it could even sign a contract with Shell. And, according to an experienced oil engineer, the Iranian view is that “if the West does not accept the deal, we will work with the Asians.” One inherent problem of negotiations seems to be more psychological than anything else: Iranians are convinced that a good deal can only be one in which the other side looks like a loser. The idea of a win-win balance seems not to be widely accepted.

But Europeans generally seem keen to pursue an energy dialogue with Iran – which enjoyed some institutionalization until its termination in 2002. The idea to open an EU energy office in Tehran, however, lacked a legal basis and was abolished by the European Court of Justice. Even though the EU must have felt at various instances undermined by an often unpredictable Tehran in the course of the EU-3 negotiations on the nuclear program, the aspirations of the EU to do energy business with Iran have increased since the beginning of 2006. The Austrian EU Presidency which was not at all prepared to tackle the long-announced crisis between Russia and Ukraine on gas prices, hastily put energy on the agenda and lobbied for the Nabucco project on all possible occasions. So, is Iran the reliable option for diversification?

Europeans Court Tehran

The Italian group Eni/Agip is the largest investor in Iran, followed by various other European companies of different sizes. “However, many more investors would come if they did not have to fear some sort of US-bashing because of their business in Iran,” says Rocky Ansari of the investment group Cyrus Omron Int. Of course, Russia does not appreciate such moves, wishing to preserve and enlarge the European market for its own companies, he adds. Potential rivalry with Europe in the energy business is counterbalanced by Russian diplomatic support for Iran in the UN-Security Council and Russian arms supplies. In Moscow’s logic, the Iranians would be better supplying gas to India and China, rather than central Europe via the Nabucco project.

In January 2004, Austria’s OMV and the National Iranian Gas Export Company (NIGEC) signed a memorandum of understanding regarding exports of Iranian gas to Europe through the proposed Nabucco pipeline from Turkey to Austria. It would take gas from Turkey to Austria via Bulgaria, Romania and Hungary – a venture being planned by OMV and partners BOTAS of Turkey, Bulgargaz, MOL of Hungary and Transgaz of Romania. Proposed pipeline capacity is 20-25 bn cu ms/year, with potential gas sources including Russia, Turkmenistan, Azerbaijan, Egypt and Iran.

Austria is keen to get the Nabucco project under way, while Iran seems less enthusiastic. Is Tehran taking Russian sensitivities into account? This might be part of the answer. But the main problem lies in intrinsic Iranian deficiencies such as fragmented decision–taking, the absence of a coherent energy policy and hesitation about what to do with its natural gas reserves. The key question is: will there be sufficient reserves to meet all the demands of potential as well as current clients? If the gas pipeline project with India turns into reality, there will definitely not be enough gas for Nabucco. Domestic demand, increasing by 10% annually, poses a huge challenge. Some insiders speculate that Iran might lack gas by 2010 and would then have to enter some sort of arrangement with Turkmenistan.

Data/Reserves Caution

As is the case elsewhere, data on oil and gas reserves in Iran have to be taken with caution. For example, all gas fields, associated and unassociated, are put into one basket. And their life expectancy is often vague due to bad exploration methods. “Regarding the South Pars field, its best part is done,” says Paul Graf, oil engineer and consultant. In his view, the remaining exploration might be of far inferior quality. Such uncertainties and the difficulties with the investment scheme and the available engineering in Iran confront investors with various problems.

Attractive Asian Option

While the West has a strong tendency to patronize Iranians and colonialism is part of the collective Iranian memory, the Asians seem much easier partners. It is all about business and not human rights when it comes to China. That means no interference in domestic affairs. China has for some years been fostering strategic and energy ties with Iran, signing a preliminary deal in November 2004 to develop the Yadavaran, one of the world’s largest oilfields.

Interesting to note in the context of the developing China-Iran relationship is the rising importance of the Shanghai Cooperation Organisation (SCO). The emergence of countries like Iran, India, Pakistan, Afghanistan and Turkey with observer status dramatically changes the outlook, perception, and international dynamics of the SCO. It renews questions on how a supposedly uni-polar world order has changed. According to ex-diplomat Dr Adeli, an Asian identity ties countries like Iran to India and China, for an Asian identity evolves which prevails over specific Islamic, Hindu or other religious identities.

The SCO is significant enough for being led by China and Russia, both Permanent Members of the UN Security Council and very large countries with increasing international stature in their own right. The high-profile attendance of Iran at a sensitive time of international concern about its nuclear intentions immediately sharpens the mind. A central objective of the SCO is energy cooperation, so it easy to see why an energy-hungry China should conceive the organization as an important link with the world’s main supply lines.

Cooperation with India is particularly attractive, given the historic and ethnic links between the two countries. In 1993 the idea of an Iran-India gas pipeline through Pakistan was first proposed. But despite Iranian fostering and an “all-gain” project, politics for long cast shadows over economics. Finally things started to move. Recently India, Pakistan and Iran have agreed to appoint consultants in a bid to solve the issue of pricing over a proposed gas pipeline. The project would carry natural gas more than 2,500 km from Iran to India. But India and Pakistan cannot agree with Iran on the price of the gas. Iran wants it to be fixed to international market prices while India and Pakistan want a fixed price. The dispute continues to hold up the $7bn project.

Dealing With Iran

“We have to talk to Tehran” – a call voiced by various top European diplomats and also by some US veterans like former Assistant Secretary of State Richard Murphy. High-ranking US and Iranian officials met privately near Vienna in late 2005 to test the ground. So far, limited European-Iranian dialogue is limited to the nuclear issue. In general, Iran displays rigid self-confidence – feeling that its ambition to become the champion in the Islamic world is within reach.

The Palestinian cause has been on the Iranian agenda since the early revolutionary days of Ayatollah Khomeini. It could be that the Shia political dominance from Tehran via Karbala to Beirut comes to the rescue of the Palestinian cause. Already the Iraq war has strengthened Iran, an outcome expected by sober analysts, but certainly miscalculated by those in favor of dismantling the Baath regime.

How to deal with Iran in an emerging multi-polar world will be a harsh test for the West. Energy needs and the desire to pacify the Middle East logically offer Tehran an important position that should be used wisely. In 1906 Iran adopted its first constitution; a century later Iran could gain more from acting in accordance with international law. Even though the perspectives for the region look gloomy, there is still room for some hope: US and Iran have, to a certain degree, reciprocal interests.

There is even some symmetry. As one Iranian diplomat said: “I am confident that when President Ahmadinejad and Bush eventually sit down together, they will have a perfect understanding, for they both met God.

Karin Kneissl is an independent writer on Middle East affairs in Vienna who teaches international relations there and in Beirut.

Russia's Grip on Resources Tightens

Oil and gas rights: the weapons of a new Cold War

In recent weeks, hardliners in the Kremlin have cancelled or renegotiated deals with Western firms in order to pursue Russia's national interests - but their plans may backfire.

By Oliver Morgan

If there were any doubt about the ruthlessness with which Russia is executing its new nationalist energy policy, it was smashed last week. In an almost cursory announcement, Alexey Miller, chairman of the management committee of the massive Russian energy group Gazprom, told TV channel Russia Today that the state-controlled company would develop the 'supergiant' Shtokman gas field in the Arctic by itself and would not be inviting Western companies to join in.

At a stroke, Miller cut off five hopeful Western oil majors - Conoco and Chevron of the US, Statoil and Norsk Hydro of Norway, and France's Total, from taking a stake in the £10bn project to develop the world's third largest gas field, with 3.2 trillion cubic metres of reserves.

At the same time, Gazprom said it was abandoning plans to use Shtokman, which lies 500km north of the port city of Murmansk, to provide liquefied natural gas for transport by ship to the US, in favour of selling the gas into Europe by pipeline. The move could not have been a firmer snub to the US. It not only cut out two US oil companies from access to precious reserves, but deprived America of a valuable resource from a country that until recently appeared to be a reliable and stable ally.

Andrew Neff, energy analyst at Global Insight in Washington, says: 'There is an emerging demand/supply gap in the US which means that these developments will be seen negatively by US energy policymakers. Liquefied natural gas was going to be a magic bullet and Shtokman was an important part of that.'

The Shtokman decision does not stand on its own. It comes in a year that has already seen Gazprom cut supplies to Ukraine, while government ministers have more recently cast doubt over investments by Western companies in other areas. Shell's involvement in the £11bn Sakhalin-2 oil and gas project off Russia's east coast was thrown up in the air last month, as was US giant Exxon's in sister project Sakhalin-1.

Meanwhile, there have been concerns over BP's rights to develop the 1.9 trillion cubic metre Kovykta field in Eastern Siberia, and Total has had similar problems in the Arctic. The main commercial benefactors of these moves are the mighty Gazprom and Rosneft, the state-controlled oil group.

Gazprom's reserves are bigger than those of any country in the world except Saudi Arabia and Iran. Production last year increased by 138 per cent, its profits by 169 per cent. The company is enmeshed into Russian life - it has huge influence over the towns in which it operates, running schools and health services, even operating leisure centres.

It is woven into the political fabric too. Gazprom chairman Dmitry Medvedev is also first Deputy Prime Minister in Putin's government, and board director German Gref is minister for economic development and trade. Miller, who took over the company in 2001, owes his position to Putin's patronage. It should come as little surprise that decisions affecting the company's future are driven as much by political factors as commercial.

Chris Weafer, head of strategy at Moscow-based Alfa bank, says: 'The major decisions with these companies - as happens with, for example, the United Aircraft Corporation - are taken in the Kremlin. That is because they have been identified as national champions - they combine an important economic role with a geopolitical one.'

The Russian government has until recently been content to allow foreign investment in Russian strategic industries as long as Russian entities maintain control. With the Shtokman decision - Gazprom would have taken a 51 per cent share of any venture - this appears to have changed. Why?

The first reason is the one given by Miller: that Gazprom and the Westerners could not agree terms. Despite its huge reserves, Gazprom needs capital and expertise to exploit them. According to Moscow-based Deutsche Bank/UFG, production from existing fields will fall from today's level of about 600 billion cubic metres to some 140 billion cm in 2020, which means that opening up fields like Shtokman and Kovykta is crucial.

In the past, with a low oil and gas price, Russia has signed deals (such as Sakhalin) it now believes are disadvantageous. With today's high prices, the balance may have swung too far the other way. As Stephen O'Sullivan of DB/UFG says: 'Foreign companies may have concluded that the political, technical and financial risks involved in the project were such that they could not offer Gazprom what it wanted to bring them on board as partners.' But, he adds: 'This was a political decision, along the same theme as with Sakhalin and Kovykta.'

Weafer agrees: 'Moscow has got tired of US criticism over a range of issues, most recently Russia's attitude to Georgia. Another sticking point was the US refusal to admit Russia to the World Trade Organisation at the July G8 summit.'

Meanwhile, as relations with the US sour, those with its Western neighbour Germany warm. Putin met Angela Merkel last week. Analysts sense this may explain the timing of Miller's announcement, which was greeted with enthusiasm by Burckhard Bergmann, chairman of E.ON subsidiary Ruhrgas. 'Gazprom's decision is good for the supply of gas to Europe because it improves the production base,' he said. Such enthusiasm is unsurprising - Bergmann is also a board member of Gazprom.

Gazprom's plan was to allow access to reserves in return for access to Western markets. But Miller's hints that he would like to take a stake in Centrica, owner of British Gas, earlier this year were greeted with barely disguised hostility by UK ministers, who last week reiterated that such a move would be examined on national interest grounds. And after one of Russia's state banks bought a 5 per cent stake in European aerospace champion EADS, Putin's requests for a Russian seat on the board were rebuffed. Analysts say there are indications that Putin's attempts to balance liberal reformers in his administration, who include Medvedev and Gref, with 'hardliners' may be suffering a reactionary backlash.

Experts point to the influence of Igor Sechin, chairman of state-controlled oil group Rosneft, deputy head of Putin's administration, and one of a group known as the 'Siloviki' with close links to the security services.

There are discussions about restructuring BP's joint-venture with Russian group TNK, which hopes to develop Kovykta. Here, Gazprom would like to buy out the three oligarchs who currently own TNK, but it will have to fight off Rosneft. Meanwhile, it is seeking to improve terms for entry into the Sakhalin-2 project - Rosneft is already involved - in an agreement that was made with Shell last year to swap assets it has on the mainland for a stake.

From where the international oil groups like Chevron, Statoil, BP and Shell are standing, this all looks bad. Together, they now account for only 20 per cent of the world's reserves.

There could be nasty repercussions in Russia, too. Frank Harris, analyst at consultancy Wood Mackenzie Harris, says Gazprom may have abandoned the Shtokman partnership from a position of weakness - it would have cost too much. Costs could spiral as expertise is spread thinly across the growing number of projects around the world. 'Two years ago, liquefaction plants were built at $300-400 per tonne of capacity. Now that is probably $600 and may be even more,' he says.

Neff adds: 'Once they had decided to keep foreign companies out, they could not afford LNG.' This could deprive Russia of one of the key emerging technologies in oil and gas production in future.

The silver lining for the West is that Putin has hinted that companies may be allowed back into Shtokman on a contractual, rather than equity, basis. This would mean oil service operators, such as KBR and Technip of France, moving in.

From Gazprom's point of view these pose less of a short-term threat. But in the long run, it has to develop technical expertise of its own, and doing so through contracts, rather than equity partnerships, may well limit its ability to do so in the future.

Oliver Morgan is a journalist with The Observer

Energy Security Hugo Chavez Style

Chavez spreads oil wealth abroad, cementing support ahead of U.N. vote

By Katie Burford, Ellsworth Carter, and Nick Wadhams

As Venezuela lobbies for a U.N. Security Council seat, President Hugo Chavez has bolstered its chances by spreading petrodollars across the Americas and beyond — extending an airstrip on a Caribbean island, sending emergency food aid to Africa, fixing a rundown hospital in Uruguay.

Chavez's international support will be put to the test on Monday as Venezuela goes up against U.S.-backed Guatemala in a General Assembly vote. At the same time, Chavez is confronting accusations at home that his generosity has been excessive, and has argued it's a modest amount of aid for nations he sees as suffering from U.S. domination.

At Uruguay's Hospital de Clinicas, a state-of-the-art transplant unit is being built with Venezuelan money. The emergency ward's leaky roof and exposed cinderblocks have given way to freshly painted walls, windows in rust-corroded frames are being replaced, and new elevators are on order.

Hospital director Graciela Ubach put a hand over her heart to show her gratitude to Chavez.
"I thank him with my soul," she said. "Honestly, it's been a dream for the country." The public hospital struggled for funding for years until Venezuela came through with US$20 million (€16 million) — half in donations and the other half to be paid off in reciprocal training and other services.

Other Chavez pledges include: US$260 million (€207 million) in financing to repave a Jamaican highway and US$17 million (€14 million) in upgrades to airports on the Caribbean islands of Antigua and Dominica.

Chavez also came up with US$5 million (€4 million) for an Uruguayan tire plant, glass business and leather factory as part of a US$400 million (€320 million) flow of aid since March 2005, when Uruguay's leftist President Tabare Vazquez took office, according to the Venezuelan Embassy in Uruguay.

According to the U.S. State Department, which tracks the bulk of U.S. foreign aid, US$3.3 billion (€2.6 billion) was allocated in financial and development aid to Latin America and the Caribbean for all of 2005 and 2006, including military and anti-narcotics programs. Other estimates, which include aid not tallied by the State Department, put that figure closer to US$4 billion (€3.2 billion).

A consolidated figure for Venezuelan aid is harder to come by, but a review of public pledges by its government suggest Venezuela, with an economy one-ninetieth the size of America's, has offered at least US$1.1 billion (€880 million) since the beginning of 2005 in loans, donations and financial aid in the region.

U.S. aid to Jamaica for 2005-2006 is listed as US$42 million (€33 million); the Chavez-financed highway job is six times costlier. The Venezuelan figure of US$400 million (€320 million) for Uruguay compares with U.S. aid of US$49,000 (€39,000) through the State Department plus an estimated US$800,000 (€640,000) in military education and counter-drug assistance. No U.S. money was specifically set aside for Dominica.

In the case of Bolivia, the State Department estimates about US$117 million (€93 million) in aid for 2006 compared with US$140 million (€112 million) in Venezuelan donations and loans for scholarships and other programs.

Some of the aid involves relatively small sums aimed at highly symbolic targets, such as the tire-making cooperative in Montevideo that was abandoned three years ago by a U.S. company that ran into economic troubles. The factory was restarted with money from Chavez. "The Venezuela government has given us a big hand," said worker Wilson Tolotti, 57. "We will always be grateful."

Venezuelan bulldozers have already begun clearing land at Dominica's Melville Hall Airport for a longer runway to boost tourism. Under Petrocaribe, a deal bringing Venezuelan oil to needy Caribbean countries, the island has received asphalt, fuel storage tanks, university scholarships and US$12 million (€9.5 million) for housing.

Dominica has supported Venezuela's U.N. bid despite lobbying by Guatemala, and its foreign minister, Charles Savarin, has acknowledged that Venezuela's aid "cannot go unnoticed" as a factor in the decision.

Both Venezuela and Guatemala say they have a majority in the 192-member General Assembly ahead of Monday's poll, but either would need two-thirds to win. If after repeated ballots neither side is able to muster that many votes, the 33-nation Latin American group might decide to put up another candidate.

It's a secret ballot, and countries aren't obliged to make known their preference, though much of the Caribbean and South America — including Uruguay — have voiced support for Venezuela. U.S. officials, however, have spoken out against Venezuela and lobbied for Guatemala, which has the support of Colombia, apparently most of Central America, Europe and other countries.

The 53 countries in the African group are expected to tilt toward Venezuela, while Asia's 54 nations are said to be split. Ten of the Security Council's 15 seats are filled by the regional groups for two-year stretches. The other five are occupied by its veto-wielding permanent members: Britain, China, France, Russia and the United States.

Chavez's aid pledges, meanwhile, have come under attack ahead of Venezuela's Dec. 3 presidential vote by opposition candidate Manuel Rosales, who says poor Venezuelans need the money. Chavez points to government-funded improvements at Venezuela's universities, medical clinics, subsidized food markets and train lines, and insists his foreign aid is aimed at countering the effects of U.S.-inspired capitalism.

Ironically, this aid is bankrolled in large part by oil sales to the United States.

Venezuela also bought or pledged to buy more than US$3.6 billion (€2.9 billion) in bonds from Argentina, Ecuador and Bolivia to help them cover deficits. Most of that — US$3.5 billion (€2.8 billion) — went to Argentina, helping a leftist ally pay off its World Bank and International Monetary Fund debts. Venezuela then recycles the bonds though its own banks and ends up with a profit that between early last year and July 2006 totaled US$200 million (€160 million).

It's difficult to quantify the value of Chavez's many oil-supply agreements under preferential terms to at least 17 countries across the region, including Cuba. Venezuela says it sells the fuel at market prices but offers low-cost financing and accepts partial payment in goods from cows to bananas.

The state oil company even offered an unspecified sum this year to a Brazilian samba group that won first prize in the Rio de Janeiro carnival parade. "It made us very happy and feeling like we are part of the triumph," Chavez said later.

The U.S. is the world's largest overall aid donor, though far less generous than Japan and European countries, given the size of its economy. Venezuela's largesse, meanwhile, goes far beyond the Western Hemisphere.

Last year it gave a total of US$3 million (€2.4 million) in emergency food aid to Burkina Faso, Mauritania and Niger. It pledged to sell oil under preferential terms for London's trademark red buses in return for the leftist-run city's expertise in transport, housing and other areas. It is expanding its program in the United States to provide discounted heating oil to the poor.

Chavez says he's helping to build a "multipolar" world to counter U.S. dominance, lining up allies against what he calls a perpetual threat from Washington. A U.N. Security Council seat would give this ambition a sharp boost.


Associated Press correspondents Katie Burford in Mexico City, Ellsworth Carter in Roseau, Dominica, and Nick Wadhams at U.N. headquarters in New York contributed to this report