Latin America continues turn to the Left

Ecuador presidential election troubles oil sector

By Peter Howard Wertheim

The Nov. 26 presidential election in Ecuador of leftist economist Rafael Correa in a landslide victory against right-wing tycoon Alvaro Noboa is sounding alarms in the international oil sector.

Although all votes have not been tallied, Ecuador's Supreme Electoral Tribunal said Correa will be the President-elect even if Noboa wins all of the remaining votes. During the campaign, Correa said he wants to reduce foreign control over Ecuador's oil and distribute the benefits more broadly. Ecuador is a former member of the Organization of Oil Petroleum Exporting Countries, and Correa also said he will consider rejoining OPEC.

Except for Venezuela, Ecuador supplies more oil to the US than any other country in the region, according to the US Energy Information Administration. It also supplies oil to Japan and other Asian nations.

The Ecuadorian government, which controls about 75% of oil production through state-owned Petroecuador, had an ambitious plan to double oil production to 700,000 b/d within the next 4-5 years. However, its production has fallen in recent months to 183,000 b/d due to inefficiency and a lack of investment, said Petroecuador.

Oil earnings fund 50% of Ecuador's national budget, and continued oil exploration and production is thought to be necessary to ensure the country's wellbeing. It plans to increase production, and it holds auctions to increase foreign investment. Dependence on oil revenue has hindered Ecuador's environmental enforcement.

Interrupted exports

In May 2005, Petroecuador stopped crude oil exports following days of protests from demonstrators in the Amazon region for bigger share of oil revenues. The protesters wanted more money spent on infrastructure and new jobs and complained about the "degradation" of the environment by private oil companies. Ecuador said it faced an "economic emergency" because of the stoppage, which sent world oil prices higher.

International oil companies agreed to give Ecuador's oil rich provinces 16% of the 25% in income tax they paid to the central government (OGJ Online, Aug.30, 2006). Oil sales account for about a quarter of Ecuador's GDP. According to the president of Ecuador's Petroleum Industry Association, oil revenues pay for both state sector salaries and a significant amount of the national debt.

Correa actions

Trained in the US, Correa set off alarm bells as finance minister in 2005, when he introduced a law designed to redirect 30% of Ecuador's oil revenue away from external debt payments and toward health and education, tripling the amount of revenue used for social-sector spending.

This law drew the ire of the World Bank, whose sister agency, the International Monetary Fund, had designed the Oil Stabilization Fund. Its purpose was to siphon 70% of oil revenues directly to debt repayment. The World Bank responded to the new law by delaying and ultimately canceling $100 million in loans to Ecuador. This led to Correa's resigning his post.

Recent political developments in Ecuador also have sent shockwaves around the globe. Multinational corporations were put on notice when the government decided to expel Occidental Petroleum Corp. for allegedly violating its contract with the country.

Ecuador has several claims pending at the World Bank's International Center for Settlement of Investment Disputes in Washington, including one that Oxy filed after Ecuador seized its oil fields last May (OGJ Online, Sept. 29, 2006). Ecuador accused Oxy of selling part of an oil block without government approval. Oxy is seeking the return of its assets and $1 billion in damages.

On Oct. 10, 2006, City Oriente Ltd. filed an arbitration claim against Ecuador, charging the Andean country with breaching its contract after it passed a contested oil law that affects foreign operators, said a company spokesman. City Oriente, a Panama-based company run by US investors, has an output of around 4,000 b/d of oil in Ecuador.

The company's representative Jose Paez said the company filed the claim at World Bank arbitration center to force Ecuador to not apply the law. "This law is an unilateral modification of the contract," Paez said.

The law, approved by Congress last April, forces foreign oil companies to share with the state at least 50% of their extra oil revenues, above a benchmark price agreed in their original contracts.

Petrobras in Ecuador

Brazil's Petróleo Brasileiro SA (Petrobras) is investing $160 million in the Ecuadorian Amazonia during 2006, and it is a sure bidder should Ecuador seek bids for exploration of the Ishpingo-Tambococha-Tiputini heavy oil area in the Oriente basin field area.

Prior to Correa's election, Petrobras had also announced planned investments of $500 million in Ecuador during 2005-11 through a strategic alliance with Petroecuador. These investments are almost equal to the total Petrobras has invested in Ecuador since it entered the country in 1988. The funds would cover hydrocarbon exploration, refining, transport, and commercialization.

However, after Correa's election, Petrobras expressed doubts about future investments and voiced concerns over profits reduction in Ecuador, given its experience in Bolivia, where President Evo Morales' government confiscated Petrobras's $2.5 billion operations.

Analysts said that Petrobras' Bolivian investment decision showed two things:

-- The company does not fear an unstable political environment but thinks it is better to stay away from the possibility of arbitrary, confiscatory decisions such as those taken by Morales, who nationalized Bolivian energy resources.

-- It is willing to join forces with companies such as Petroecuador in precarious financial and managerial conditions by bringing in world-class managerial skills and processes and state-of-the-art technologies.

However, with President Correa now in power—He is known for his close ties with Morales and Chavez—the planned investments might be reviewed, said Brazilian government sources.

This article was publisheded by correspondent Peter Howard Wertheim in the Oil & Gas Journal on 29 November.

Canada's Gifts Pose Challenge

Canada stores up problems at its booming energy frontier

By Bernard Simon

Alberta’s blue-eyed sheikhs offered a plaintive prayer in the early 1990s as sliding oil prices plunged the energy-rich Canadian province into recession. “Dear God,” ran their plea, featured on a popular bumper sticker. “Let there be another oil boom and I promise not to piss it away this time.”

Their wish has been granted in spades. Huge investment in bitumen-like oilsands in Alberta has unleashed one of north America’s most frenzied resource booms since the Klondike gold rush of 1897.

But with prices sagging for oil and natural gas, which it also produces, there is anxiety that Alberta has again failed to keep its side of the bargain. “What we’ve been seeing is the current generation drawing the benefit and not leaving anything for the next generation,” says Casey Vander Ploeg, senior policy analyst at the Canada West Foundation, a think-tank based in Calgary, Alberta’s biggest city.

Alberta’s oil and gas riches have not only showered prosperity on its 3.2m residents but are also causing a tectonic shift in Canada’s economic and political landscape.

According to the Canadian Association of Petroleum Producers, oilsands extraction and processing projects valued at C$60bn ($53bn, £27bn, €40bn) are on the way over the next five years. The rush has produced an economic bonanza: Alberta’s growth rate, adjusted for inflation, is expected to reach 7 per cent this year. That is far above the 1.7 per cent projected for Ontario, the industrial heartland where manufacturers have been hit by bad times in the Detroit-based automotive industry and a strong Canadian dollar – itself buoyed by the oilsands boom.

Unemployment in Alberta has fallen to 3 per cent; jobs are available for just about everyone able and willing to work. So many from Newfoundland have been moving west in search of jobs that Air Canada operates a “Newfie Express” linking Fort McMurray, the centre of oilsands activity, to St John’s, almost 4,000km to the east.

Alberta’s clout in Ottawa is also growing. Stephen Harper, Canada’s prime minister, and many close advisers come from the western province. The population of Alberta and neighbouring British Columbia has overtaken that of Quebec for the first time. Together, the two will be entitled to more members of parliament than the French-speaking province.

The oilsands have boosted Canada’s profile in the US and abroad. McKinsey plans to hold its next global energy conference in Calgary. “It’s fantastic to have a piece of the economy that is so focused on improving productivity,” says Bruce Simpson, the company’s managing partner in Canada.

Yet, for all the benefits, a frisson of nervousness has recently emerged that short-term growth may be taking precedence over long-term prudence. Mr Vander Ploeg estimates that the province’s Progressive Conservative government has saved just 8.6 per cent of the C$120bn it has collected in non-renewable resource royalties over the past 30 years.

By contrast, Alaska has set aside about one-quarter of its resource revenues in “permanent” and “reserve” funds. Norway has tucked almost two-thirds of its North Sea riches into a rainy-day petroleum fund.

Alberta restarted contributions to its Heritage Savings Trust Fund two years ago, after suspending them in 1987 when oil prices dived. The Conservatives have also set up special-purpose funds to finance medical research and energy innovation among other projects. But the bulk of oil and gas revenues has been spent or returned in the form of tax cuts.

Alone among the country’s 10 provinces, Alberta has no retail sales tax. It paid off the last of its debt three years ago. Ralph Klein, the province’s avuncular premier, this year handed out a C$400 “prosperity bonus” to each resident. The government said this month it would spend another C$930m of its sizeable budget surplus on projects ranging from new schools and roads to an expansion of the Calgary Stampede showgrounds. Even the oil industry, generally supportive of Mr Klein, has pressed for a more coherent fiscal plan.

The oilsands investment has created such a dire labour shortage that one coffee-shop chain prints a “now hiring” message on its paper cups. But soaring accommodation costs have expanded the ranks of the working poor. The Mustard Seed, a church-based community group, serves 14,000 meals a month in the capital Edmonton. Tim Seefeldt, its chairman, says: “The impression people have that a boom makes all problems go away is not true.”

The impact of oil and gas development and urban sprawl on the environment has also come under scrutiny. Dave Poulton, executive director of the Canadian Parks and Wilderness Society in Calgary, cites a shrinking caribou population, an “unproven but perceived” fall in grizzly bear numbers and extensive damage by off-road vehicles to the slopes of the Rockies. Among the worries is the oilsands projects’ appetite for water: about four barrels of water are required to extract a single barrel of oil.

Oil and gas projects “could have been developed at a much more planned and moderate rate”, Mr Poulton adds. “Instead we’ve seen pressure to develop a lot of resources simultaneously. There’s been a political strategy of marginalising anyone who pointed out the costs of the strategy they were following.”

One surprising critic is Peter Lougheed, Alberta’s premier from 1971 to 1985 and now a respected elder statesman. He says his eyes were opened by a recent helicopter trip over the oilsands projects. “I felt it was just really bad,” he says. “It was the opposite of orderly.”
Although he belongs to Mr Klein’s party, Mr Lougheed puts much of the blame on the laisser-faire approach to oilsands development. “The thing that’s being completely missed,” he says, “is: what is the benefit to the citizens from the overheating of the economy?”

Such concerns are dismissed by Shirley McClellan, provincial finance minister. She notes that Albertans overwhelmingly supported paying down the debt and that it would be hard to find anyone favouring a return of the sales tax. Mr Klein has held office since 1993, winning four consecutive elections. “For all the people who say we’re spending too much, we have far more who say we’re not spending enough,” Ms McClellan adds.

Now market forces are starting to take the economy off the boil, as some companies delay or trim projects in response to labour shortages and fast-rising costs as well as recently softer crude prices. The debate about whether Alberta is squandering its energy riches is set to intensify, especially if that recent fall in oil prices continues. Ms McClellan acknowledges that revenues in the year to March are unlikely to match the 2004-05 record.

But a change in direction is in the offing. Under growing pressure from fellow Conservatives, Mr Klein has announced his retirement from politics. Members of the ruling party will decide on his successor next Saturday. All the leading candidates have suggested setting aside a far higher proportion of oil and gas revenues for future generations.

Alberta’s new leader might need to act fast. Mr Vander Ploeg warns: “If the price of oil drops by 50 per cent, it won’t be pretty. We’ll be back to the 1980s again.”

Bernard Simon is a journalist with The Financial Times; this article appeared on 26 November 2006

New Perspective From the IEA

An alternative policy scenario

By Syed Rashid Husain

Claude Mandil is a well established and respected name in the energy fraternity. As the executive director of the International Energy Agency (IEA), the OECD energy watchdog, when he speaks on issues concerning the energy world, people listen to him attentively, for he speaks with authority and logic.

Thus when Mandil spoke to the press in London last Tuesday, it was with a reason. The IEA was presenting before the global audience the World Energy Outlook (WEO) 2006, mapping out a cleaner, cleverer and more competitive energy future.’

Mandil says the map was charted in the wake of the fact that keeping in view the current trends, the energy future the globe was facing was “dirty, insecure and expensive.” One definitely need not agree to what all Mandil was saying last Tuesday, yet he carried weight. He represented a school of thought, an interest group within the energy fraternity.

If we carry the current way, the IEA World Energy Outlook 2006 projected the primary global energy demand to go up by just over one-half between now and 2030 — an average of annual rate of 1.6 percent. Demand grows by more than one-quarter in the period to 2015 alone. He was hence emphatic when he said, ‘that fossil fuel demand and trade flows, and green house emissions would follow their current unsustainable path through to 2030 in the absence of new government action.

The report emphasized that the center of gravity of the global demand was shifting, as over 70 percent of the growth during this period was to come from the developing world and China alone accounting for 30 percent of that total.

In case of no remedial action from the governments, which the IEA report refers to as the Reference Scenario, fossil fuel would still account for 83 percent of the increase in energy demand between 2004 and 2030. Consequently the global crude demand would reach 99 million bpd in 2015 and 116 million bpd by 2030 — up from 84 million bpd in 2005.

However, in order to meet the galloping demand, the IEA projects cumulative investment of the order of over $20 trillion over the 25 year period until 2030. Of it, investment oil sector, and that with three quarters of it going into upstream, was estimated at $4 trillion over the same period — huge by any standards. Is that sort of investment forthcoming is anybody’s guess.

In the 2006 WEO, the IEA has once again emphasized that oil supply is increasingly dominated by a small number of producers. OPEC’s share of global supply grows significantly, from (less than) 40 percent now to 48 percent by the end of the outlook period.

Saudi Arabia, according to the projection continues to remain the kingpin, by far the largest producer. It also concedes that non-OPEC conventional crude oil output peaks by the middle of the next decade, though natural gas liquids production continues to rise.

The report also discusses various pricing scenarios and projections through to 2030. Indeed these projections Reference Case scenarios — in situation when things continue as they are today and consuming governments and societies do not take any action to change the outlook. That though looks unlikely.

As per the projections, the average IEA crude oil import price is assumed to be slightly higher than $60 per barrel (in real 2005 dollar terms) during 2006 and 2007 — up from $51 a barrel in 2005.

The report then predicts a decline in the global crude prices — to about $47 a barrel by 2012. The reports then assumes the prices would rise again thereafter — though slowly — reaching somewhere around $55 in 2030. Indeed Mat Simmons & co are not figuring in this OECD projection anywhere, otherwise they would have led every one to believe that crude prices would touch roof over the next few years.

The report urges the governments to take the steps to change the scenario — so as to enhance energy security, raising the issue of consuming countries’ vulnerability to supply disruptions and resulting price shock. سECD and developing Asian countries become increasingly dependent on imports as their indigenous productions fails to keep pace with demand.’’

The report hence warns, “Much of the additional imports come from Middle East along vulnerable maritime routes. The concentration of oil production in a small group of countries with large reserves — notably Middle East OPEC members and Russia — will increase their market dominance and their ability to impose higher prices.”

The IEA report exhorts the consuming nations to take urgent measures to alter the scenario — referred to as alternative policy scenario. The alternative scenario envisages the global oil demand to reach 103 million bpd in 2030 — 20 million bpd higher than 2005 but still 13 million bpd less than projected in the above reference scenario.

The report says that close to 60 percent of this saving could come from transport sector. More than two third could come from more fuel-efficient vehicles. Increased biofuels and nuclear energy use could also help in reducing oil consumption.

There could be people around who agree to all what is said above, yet Mandil and his team cannot be taken lightly. In all the projections being made in the global energy capitals today, the above has to be a part of the overall equation, for it has a direct bearing on their overall well being.

This article was published by Arab News on 10 November

All Things Considered in China's Strategy

China weighs Iran and Iraq risks for oil prize

By Jon Hemming

Hungry for oil and gas, China may take on political risks in Iran and security risks in Iraq to get a foothold where Western firms fear to tread. Iran and Iraq together have 19 percent of global oil reserves and some of the world's biggest undeveloped fields. China already gets almost half its oil imports from the Middle East, giving it a strong strategic incentive to secure big oil field deals in the two regional neighbours.

In Iran, Chinese firms are "operating in an environment where there aren't a full range of competitors. They have the opportunity to get involved in super giant oil fields," said Ian Brown, head of the Middle East research team at Wood Mackenzie. "In Iraq, whenever the time is ripe, it will be everyone and his dog competing and the chances of having a major share will be far less," Brown said.

Iran is heavily reliant on oil, which represents about 80 to 90 percent of its export earnings. But its aged and declining oil fields mean it needs increased investment just to keep output at the present level of around 4 million barrels a day. So Iran needs access to foreign money and technology, but U.S. laws prohibit American firms from investing in the Islamic Republic. Washington can impose penalties on firms from other countries investing more than $20 million a year in oil and gas.

Contract disputes, delays, bureaucratic and political meddling, infrastructure problems and concessions oil firms say are unattractive have reduced foreign investment to a trickle.
The problem in Iraq is perhaps more intractable -- the daily toll of bombings, sectarian clashes and spiralling violence.

Iraq has the third largest reserves in the world and only 10 percent of the country has been explored for oil. Dozens of foreign oil companies have signed memoranda of understanding with Iraq, seen as a way of initiating relations with the new Baghdad government that could develop into real deals if and when stability is achieved.

But between April 2003 and June 2006, there were an estimated 315 attacks on Iraq's energy infrastructure and few foreign oil firms have started work on the ground. To escape its bind, Iran has dangled the prospect of huge energy deals with China, which may be willing to accept less lucrative deals to attain energy security and which traditionally does not link investment with politics.

This strategy, if successful, "would allow Iran to attract the investment, expertise and technology it desperately requires without undercutting its current domestic and political positions," said a report by consultancy PFC Energy. For Iran, such deals might also help dissuade China from backing sanctions against Tehran over its nuclear programme.

While U.N. Security Council negotiations over Iran sanctions drag on, so do Tehran's talks with China's Sinopec over its Yadavaran oil field, a rich prize which could be worth as much as $100 billion. What is given may also be taken away. "If China agrees with sanctions on Iran, not only the government of the Islamic Republic, but also the people of Iran, would consider China an enemy of Iran and this may affect its political and economic cooperation," wrote Hossein Shariatmadari, an adviser to Iran's supreme leader.

China has yet to nail its colours to the mast as the United States pushes for a tougher sanctions draft against Iran and Russia argues for the European text to be watered down. "Russia is the key player for Iran in terms of thwarting U.N. sanctions," said Mark Fitzpatrick of the International Institute of Strategic Studies in London. China, he said "will come in behind Russia. If Russia accepts stronger sanctions, China will not object. China's relations with the U.S. are more important. Iran has to sell oil to someone and is not going to freeze China out of the market."

Before the 2003 Iraq war, China had agreed a $700-million deal with Saddam Hussein's government to develop the Ahdab oil field. Now that contract is being renegotiated and the new Iraqi government is keen to secure a deal with the Chinese. "Their contacts with Iraq never stopped," said a senior Iraqi Oil Ministry official. "They are the most active firms of all. They are on the ground with us and ready to offer all kinds of help to develop the oil sector."

Chinese firms are ready to take a more relaxed view of the security risk to get in ahead of other international players. "They are really competing with other companies to secure energy sources for themselves and so they are really assuming a higher risk and also even prepared to give better conditions," said Muhammad-Ali Zainy, senior energy economist and analyst at the British-based Centre for Global Energy Studies.

While Iraq is in such dire need of investment to repair the damage to its oil infrastructure from sanctions, war and looting, it is unlikely to fuss about the source. "It is not wise to sideline anybody. The era of signing contracts based on our mood and relations is gone. The contracts will be given to those who are capable of doing the work," the Iraqi official said.

This article is part of a special report on China in the Middle East issued on 27 November by Reuters. Additional reporting by Mariam Karouny in Baghdad.

Longer term view of Russian Gas

Problem for Europe: Russia needs gas, too
Ideological disputes over reliability of Moscow may mask a larger truth

By Judy Dempsey

When Gazprom, Russia's giant state-owned gas monopoly, cut supplies to Ukraine last January in a price dispute, shivers went through a wintry Europe, which started looking harder at ways to reduce dependence on Russian gas imports by finding more, and different, suppliers.

In the ensuing months, that quest has opened a fierce divide in the West between pro- and anti-Russian camps - those who believe Russia is just as reliable a source as alternatives in the Middle East, northern or sub-Saharan Africa, and those who see Russia exploiting its energy resources for political purposes.

The former German chancellor Gerhard Schröder, who now heads the effort to build a Baltic Sea pipeline to carry gas directly from Russia to Germany, and thus weaken Belarus, Ukraine and Poland as transit countries, has come to embody the first group.

This group, consisting of German Social Democrats as well as big German, Italian, Dutch and French energy companies, argues that Russia is a reliable supplier and that its dependence on revenues from gas sales in Europe is at least as great as Western Europe's need to get the energy. In this view, energy revenues will help spur and stabilize Russia's development, and thus bring it both economically and philosophically closer to the West.

On the other side stands an assortment of Western conservatives long mistrustful of Moscow, as well as former Soviet-bloc states, with memories of Communist domination and trade policies dictated by the Kremlin. To the delight of some Poles and Lithuanians, the U.S. vice president, Dick Cheney, earlier this year accused Russia of using its vast energy resources for "blackmail" during a speech in the Lithuanian capital Vilnius.

But it is in Poland where the nationalist-conservative government is leading the group inside the EU that believes Russia is using energy as a political tool. Prime Minister Jaroslaw Kaczynski is threatening to block an EU-Russia summit meeting later this week in part over energy supplies but also over Russia's year- long ban on Polish agricultural products, which Russia claims are unhygienic.

"We have been victims of many negative Russian gestures toward Poland for a long time," Kaczynski said in an interview Tuesday with the mass circulation newspaper Fakt. "Russia must accept the fact that the era of its rule over Warsaw is finished."

But these ideological disputes, which have flared with surprising vigor and even venom 17 years after the Berlin Wall fell, mask what is perhaps a more uncomfortable truth: Russia may not have enough gas to keep both Europeans and Russians themselves warm in winters to come.

"The issue is not about Russia's reputation as a reliable supplier of gas to Europe," said Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies. "The fact is that there is a limit over how much gas Russia can sell to Europe. I don't think Europe realizes it, but we are reaching the limit of Russian exports. Russia needs the gas for themselves."

The signs emerged during bitter cold last January and February when demand across Europe and Russia reached record highs. According to Vladimir Milov, president of the independent Institute of Energy Policy in Moscow and a former deputy minister of energy, "gas supply cuts to power states in central Russia reached between 80 and 85 percent as compared to base contractual volumes."

Milov, who quit his job in 2002 after failing to persuade President Vladimir Putin to restructure Gazprom and make it more competitive by breaking it up and giving the regulators genuine powers, says Russian and European customers could face a gas deficit of 100 billion cubic meters a year, beginning in 2010, compared to actual demand. "The Russians are suffering this monopoly environment in the gas sector," said Milov.

Gazprom produced 547.1 billion cubic meters last year. Of that amount, nearly 300 billion cubic meters was supplied to domestic consumers, at subsidized prices, and around 150 billion cubic meters was sold to Europe.

The company said it was planning to increase production to 560 billion cubic meters by 2010. And even if demand were to rise in Russia, Gazprom's deputy chairman, Alexander Medvedev, has dismissed suggestions that Russia would renege on its gas contracts to Europe. "Gazprom has and will remain a reliable partner for Europe" he said in a recent interview. Gazprom supplied 23 percent of Europe's gas needs last year.

Still, for a country which holds 40 percent of the world's gas reserves - making it the largest - shortages may seem a bizarre situation for Russia to find itself in. Robert Larsson, energy analyst at the Swedish Research Defense Agency, said the main reason is that "Gazprom is buying gas instead of developing the fields."

The Gazprom chairman, Alexei Miller, recently broke off talks with several foreign energy companies, including Conoco Philips of the United States and Norsk Hydro of Norway, on development of the huge Shtokman fields in the Barents Sea. "We will do it ourselves," Miller said.

But Roland Götz, an energy expert at the German Institute for International and Security Affairs in Berlin, said he was skeptical that Gazprom would develop the field, which holds 2.5 trillion cubic meters of proven reserves. "Gazprom has very little experience of doing offshore work," Götz said. "Gazprom stopped the international consortium because it did not want to lose control."

To make up for any shortfalls, Gazprom has bought gas from Turkmenistan while embarking on a separate program of heavy spending. "In the past three years, and after more or less sustainable windfall export revenues, Gazprom has spent nearly €14 billion on the acquisition of shares in companies operating outside the gas sector," Milov said. "This is more than had been invested in the development of upstream gas production in a decade."

The response by the Europeans to potential Russian gas shortages has been mixed. European energy companies which have very close ties to Gazprom have played down the issue.

But Andris Piebalgs, the EU's energy commissioner, acknowledges the problem. He wants to start focusing on energy efficiency, liberalization of the energy markets and more support for renewable, cheaper energy. "The EU must create the conditions for developing a long-term energy strategy and not let governments decide to deal with external suppliers like Gazprom," said Emmanuel Bergasse, an independent energy analyst in Paris. "If the EU is serious about an energy policy, it should reduce its vulnerability through robust energy efficiency and renewable-energy action plans."

A consensus is a long way off. "Old Europe," meaning Western Europe, has already diversified. It is New Europe, those countries which were under the Soviet Union, that had no chance to diversify," said Iwona Wisniewska, an energy expert at the Center for Eastern Studies in Warsaw.

Christian Egenhofer, an energy analyst at the Center for European Policy Studies in Brussels, said that if the Europeans were serious about wanting a more secure energy sector, the EU should plan for more storage facilities for reserves, begin interconnecting the pipelines running across Europe and give more emphasis on saving energy and renewables. "That is not yet happening because the member states, particularly Germany, are still thinking of their own markets," Egenhofer said.

Even if there were a decision to diversify further, Stern from the Oxford Institute for Energy Studies is not convinced buying gas from the Middle East, Central Asia, Iran or Nigeria would lead to greater security. "Why does everyone assume that non-Russian gas will be more secure than Russian gas," asked Stern.

Piebalgs, in the meantime, is still trying to persuade Russia to ratify the EU Energy Charter that would give European companies access to Russia's energy sector - particularly since Gazprom has already a free hand to enter the export and distribution market in Europe.

Were that to happen, it could at least create a level playing field and ensure that investments would flow into Russia's energy sector. So far, Putin has refused.

This article was published in the International Herald Tribune on 21 November 2006.

America Searches for Alternatives

In LNG, U.S. sees hope for new source of power

By Clifford Krauss

The languid Sabine River channel, where alligators and speckled trout live alongside petrochemical plants and oil refineries, has suddenly become the center of a quiet revolution in the world of natural gas.

The development has taken place mainly at the prodding of a little known company called Cheniere Energy, with help from Exxon Mobil and Sempra Energy, which together have overcome formidable regulatory hurdles to start building three new liquified natural gas terminals here that will, by 2011, double the current capacity of the United States to import natural gas.

It has been 24 years since anyone on American shores has built a new LNG terminal. Two of the four existing U.S. onshore terminals, which dock tankers the size of aircraft carriers ferrying supercooled gas from places like Qatar and Trinidad, were mothballed for years because production at home was plentiful and prices low.

As recently as five years ago, almost nobody in the energy world thought it possible to make money from a new American terminal project - with price tags that start at $600 million - let alone to obtain a federal permit.

One lonely believer was Charif Souki, a Lebanese immigrant entrepreneur who had previously raised money for real estate in Paris and hotels in Hawaii before becoming chairman of Cheniere, a floundering natural gas drilling company. Concluding that the United States was facing an imminent natural gas shortage because of declining North American production, Souki decided to shake up the company's business plan, defiantly changing its stock symbol to LNG. He searched the coastlines for potential terminal sites.

The already energy-intensive shoreline along the Gulf of Mexico, he concluded, made the most sense, economically and politically, and he started buying harbor real estate.

"People were actually amused that we would be thinking about importing natural gas," Souki said. "Nobody took us very seriously."

Cheniere was unprofitable and utterly spurned by investors in 2002. But over the past four years, Souki has managed to arrange financing, sign up long- term buyers and master the regulatory process. Two of the four terminals he has permits for are under construction, one in Freeport, Texas, which Cheniere partly owns, and a second here in Sabine Pass, which it owns outright.

When completed, six huge storage tanks, 24 vaporizer modules and docking facilities efficient enough to handle 400 cargo ships a year will help the Sabine Pass terminal process more natural gas than any existing terminal in the United States. That could amount to four billion cubic feet, or 115 million cubic meters, of the fuel a day, or more than 5 percent of what Americans now consume.

The company has not made any money yet, but its stock price has soared from less than $1 a share when Souki initiated his LNG strategy at the start of the decade to more than $40, including a split, though the stock has lagged this year with the fall in the price of natural gas. Cheniere hopes to build two more terminals along the Gulf of Mexico.

Cheniere is not alone anymore, ever since natural gas prices spiked between 2001 and 2005, and some federal regulations have been relaxed. Prices of natural gas futures may have fallen back this summer to four-year lows, but companies are spending as much as $9 billion on building new terminals and improving old ones, with the nexus of activity along Texas and Louisiana shores.

More than a dozen new LNG terminal projects have been approved by the U.S. government in the past four years, all but one in that region.

"The Gulf is where the United States consumes 25 percent of its natural gas," Souki said during an interview. "The Gulf is also the only coastal area that is connected by pipeline to the Midwest."

LNG represents a tiny 3 percent share of total U.S. natural gas consumption, which besides its industrial uses is also the most popular fuel for home heating. But Cambridge Energy Research Associates estimates that imported LNG will account for 10 percent of U.S. use by 2010, and as much as 25 percent by 2020.

The steps to import LNG are taking off at a time when some big multinational oil companies have shrinking reserves of oil but rising reserves of natural gas around the world. Such companies often want the gas to fuel their own petrochemical plants and refineries.

"LNG is going to have a growing importance," said Don Felsinger, chairman and chief executive of Sempra Energy, another early embracer of LNG. "The gas that we find here in North America is getting more and more expensive to produce. And because there is so much stranded gas around the world, LNG can be shipped here and compete very effectively with traditional supplies."

But while most experts agree that importing natural gas satisfies a growing demand for cleaner energy sources, some are skeptical about how wise it is to put one more major component of the country's energy grid around the stormy waters of the Gulf of Mexico. And others warn that there is a risk of a glut on the market at the end of the decade.

"The concern is for the potential for supply interruptions," said Robert Ineson, Cambridge Energy Research Associates' director for North American natural gas, noting that a major storm like Hurricane Katrina or Rita could move a seabed or sink a ship that would block the way into an LNG terminal.

Industry insiders largely dismiss the threat, noting that Hurricane Rita last year directly hit an existing LNG terminal in Lake Charles, Louisiana, but the terminal was largely unscathed.

Clifford Krauss is a writer for The New York Times

Signs of Moderation in Bolivia?

Morales opts for a pragmatic Bolivia

By Richard Lapper and Hal Weitzman

The patients start to queue at Chacaltaya hospital at 3.30am. By the time the doctors arrive, at 8am, the line stretches all the way round Plaza German Busch. This grubby square is in Alto Lima, the poorest area of El Alto, a city of 850,000 that sits above La Paz, Bolivia.

Chacaltaya is the first medical facility in South America’s poorest country to treat patients for free. Its staff are part of a contingent of 1,200 doctors from Cuba who have treated more than 2.2m Bolivians so far this year, or 25 per cent of the population.

The hospital, which is widely believed to be funded by Venezuela, highlights the relationship that Evo Morales, Bolivia’s president, has built with allies in Caracas and Havana. Yet in recent months La Paz appears to have been seeking greater independence from Venezuela and this radical Latin American axis.

Mr Morales, flush with energy revenues and a sense of importance from his position in the region, has shown signs of moving closer to more moderate regimes in the region, such as Brazil and Argentina, and of reaching out to long-time foes including Chile and the US.

Nowhere is the shift clearer than in Bolivia’s crucial energy industry. At the beginning of May Mr Morales announced the nationalisation of the gas industry. That was shortly after he had signed a trade pact with Hugo Chávez, Venezuela’s president, and Cuba’s Fidel Castro.

But after months of negotiations, Bolivia opted for a more pragmatic deal with 10 foreign companies, including Petrobras of Brazil, BG of the UK, Total of France and Spain’s Repsol. Officially, YPFB, Bolivia’s state-owned company, has taken ownership of the gas fields and will also oversee processing and shipment of the gas. The foreign companies will stay on but, under new contracts signed last week, will pay up to 82 per cent of their revenues to the government in the form of royalties and taxes.

In practice, however, the deal allows the foreign partners to take steps such as offsetting capital depreciation against these amounts. Given a rise in gas prices and production, the companies are doing better than they were. “The nature of the business has changed dramatically over the last four years,” says Jorge Quiroga, a former president and leader of the Podemos opposition party.

Companies will do better with the new contracts because the size of the cake has got bigger. The rhetoric is nationalisation but in reality they have just changed the tax rates,” says Carlos Toranzo, a political analyst with the Friedrich Ebert Foundation in La Paz.

Some Bolivians had hoped for more far-reaching reform, in which YPFB would have played a prominent role and the state-owned company of Venezuela, PDVSA, would have taken over the assets of foreign companies in marginal fields.

However, that plan foundered two months ago when Mr Morales sacked his hard-line and pro-Venezuelan hydrocarbons minister, Andrés Soliz Rada, after he had moved to nationalise two oil refineries that Petrobras managed.

According to analysts in La Paz, pressure from the company and from President Luiz Inácio Lula da Silva of Brazil helped pave the way for an accommodation with foreign companies.
There have been signs that Venezuelan influence has been waning in other areas too. Mr Morales has maintained Bolivia’s membership of the Andean Community, a trade pact that Venezuela abandoned earlier this year.

Expectations that Venezuelan interests would acquire rights to work the El Mutún iron deposit concession in the south-east were quashed in June when an agreement was struck with Jindal, an Indian steelmaker. And earlier this week a military agreement between Bolivia and Venezuela, which involved the construction of military posts along Bolivia’s borders, was postponed.

At the same time, Mr Morales has deepened ties with Argentina, recently signing a long-term deal to supply gas to Bolivia’s southern neighbour. Talks are even under way with Chile, a historic enemy, over potential electricity sales.

Bolivia has also warmed to the US by offering to co-operate on the eradication of coca, the raw material for cocaine. In response, the Bush administration has included Bolivia in its request to Congress to renew the ATPDEA low-tariff regime for imports from the Andean countries. One of the reasons for the shift is that the strength of the Bolivian economy gives Mr Morales much greater room for manoeuvre than his predecessors enjoyed.

Revenues from higher gas prices and gas tax increases imposed last year mean that the government is no longer strapped for cash. Debt payments have been reduced as the result of a debt forgiveness deal agreed by the World Bank and the International Monetary Fund.

The fiscal deficit, which peaked at 8.8 per cent of gross domestic product in 2002, fell to 1.6 per cent of GDP last year and this year is on course to run a fiscal surplus for the first time in three decades.

Patients at Chacaltaya hospital might have cause to thank Mr Morales’s radicalism but he is proving to be more pragmatic than looked likely six months ago.

This article was written by Richard Lapper and Hal Weitzman in La Paz, published in Financial Times on 16 November 2006.

Resource Nationalism in the Spotlight

Evo Morales' complete victory over big oil

By Newton Garver

I have previously argued that Evo Morales might best be described as a genius rather than put into any of the ready-made political categories that so regularly distort both news and policy. One main reason for this is his combination of principle and pragmatism, leading him into confrontations in which he does not attack opposing persons or institutions but instead invites them to join him in a struggle for justice.

The media regularly associate Morales with Chavez, but Chavez is more bully than genius, and it is impossible to imagine Morales denouncing Bush as a devil, as Chavez did at the United Nations. The other main reason is his extraordinary ability to exploit the moment, as he did after his election with his famous striped alpaca sweater and late this past summer by waving a coca leaf during his speech at the United Nations.

Another example, cited in my previous article, was his use of troops in the nationalization of oil and gas reserves on May 1, 2006, which of course garnered world-wide press attention, even though he knew full well that there was no opposing armed force and that the nationalization could as well have been accomplished by signing decrees in his office in La Paz.

At the time of the nationalization there was a near-consensus among analysts that the nationalization would fail. There were two reasons for this belief. One was that the opposing parties were the Brazilian government and very powerful and well-connected international cartels, who had plenty of other assets and were powerful enough to just leave Bolivia rather than renegotiate contracts that would give the lion's share of revenues to a desperately country that had few alternatives.

The other reason was that neither the Bolivian ministry of mines nor the national petroleum company, YPFB, had the expertise required to run the operation that the renegotiated contracts envisaged. Both reasons were based on solid knowledge of the details of the industry, so the skepticism was well founded.

The decree of May 1 gave the parties exploiting the hydrocarbon resources of Bolivia six months in which to renegotiate contracts with the government, after which they would have to leave and their property would be subject to confiscation. Bolivia's position in the negotiation was that a return on investment of 15% to 18% would be fair and just for the drilling and exporting companies, and that the balance of profits and revenues should revert to the Bolivian people through the Bolivian government.

At the time of the decree and the announcement of this demand, the popular cry was that the looting must end, and Morales himself referred to the process by which mineral resources of Bolivia had been extracted and exported for the previous four hundred years as "looting." The slogan was very popular, especially among the indigenous people of Bolivia. Thus populism and a call for justice were added to the power play of nationalization and the threat of confiscation. The stakes were high and the outcome uncertain.

Negotiations proceed slowly over the summer, and intransigent statements from Brazil darkened the prospects for a favorable outcome. This sentiment encouraged the opposition to the government of Evo Morales, which seemed likely to suffer a setback in its most significant initiative.

Other challenges faced the government toward the end of the summer. In September there was a clash at the tin mines near Oruro, leaving twenty miners dead. The clash occurred between the government employees who now operate the mines and a union of former miners who insist on being allowed access now that the price of tin has risen.

The roots of the dispute go back a quarter century, when the price of tin collapsed on the world market and thousands of miners were thrown out of work. (Many of them migrated to the Chapare region to grow coca.) Now that the price of tin has risen again, many of those who lost their jobs want an opportunity to share in the good fortune, but the skeletal force kept on in the mines did not want to share the bonanza. It was a conflict easily amenable to negotiation and compromise, since the pie that needed to be split was growing, but the ministry did nothing.

After the bloodshed Morales himself intervened, dismissing both the minister and another top administrator, and more miners now have access to jobs at the tin mines. That the armed conflict led to many deaths was a black mark for the government, but the decisive steps taken to get matters back on track showed its competence.

In October the city of La Paz was shut down by the union of drivers of buses and taxis. At first they simply called a one-day strike to protest changes in some bus routes and to demand, quite unreasonably, that a pedestrian area that for a decade has been the place of business for 400 street vendors be reopened to vehicles. During the day the strike was extended to be indefinite, and drivers parked their vehicles so as to block the main streets of the capital.

Although Morales has his base of support in the unions of miners and coca growers, this union supported an opposing candidate, making the dispute less amenable to mediation. But there was not popular support for the shut-down, and it and the strike were ended after the government made minor concessions.

The main challenge to the government remained the gas and oil contracts. November 1, the end of the six-month period, was a make-or-break day for the government. The first hint of a solution came early in October, when Argentina signed an agreement to buy natural gas on terms much more favorable to Bolivia, and in much greater quantity than before.

But Argentina is not among the producers or explorers. The result was finally known at the very end of October, and it was a complete victory for the government. Petrobras of Brazil, the largest explorer/producer in Bolivia, broke the news, and the agreement of all the others was nearly simultaneous. The new contracts give Bolivia between 50% and 82% of the net revenues, they commit Brazil to investing $1.5 billion in new infrastructure and exploration, and they require that a portion of the profits of the international consortiums be invested in other industries in Bolivia.

So Evo Morales achieved what most of the analysts thought would be impossible, a complete victory in his struggle against the foreign companies exploiting Bolivia's natural resources. In his remarks hailing the agreements Morales stressed that this is a favorable outcome for everyone and noted that it had been achieved without the expropriation of the property or assets of the foreign companies. He looks forward to years of continued cooperation.

Having achieved what seemed to many impossible, Evo Morales now enjoys greater political strength and credibility with which to proceed with other steps on his agenda. The three most pressing and exciting are nationalization of the mining industry on terms similar to those of the petroleum industry, an agreement with Chile, and redistribution to peasants of huge tracts of land in the Amazonian provinces of Santa Cruz and Beni.

All of them involve technical and legal difficulties as well as overcoming entrenched opposition. Nationalization of mining will probably occur first, but agreement with Chile is most exciting and received most emphasis in the President's remarks following the agreements about gas.

Bolivia originally had twice the area of the present state, large chunks having been taken by each of its five neighbors. The piece that Bolivia most wants to get back, and whose loss still arouses most popular resentment, is the access to the Pacific Ocean that was lost to Chile at the end of the nineteenth century. The economic asset lost at the time was the guano, which Chile has since sold as fertilizer. This area in the northern part of Chile now has little economic value, so far as its resources are concerned, but it is a source of national pride to many Chileans.

On the other hand Chile has a rapidly growing economy that depends to a large and growing extent on imported fuel. Chile's plans to expand its own supply of power through hydroelectric projects in its southern mountains and valleys are controversial and would in any case be inadequate to meet currently foreseen needs. So these agreements that stabilize the production of natural gas in Bolivia suggest an answer to one of Chile's most pressing needs: import energy from Bolivia. Can it be arranged?

At the present time Chile is the only immediate neighbor of Bolivia with which Bolivia does not have good working commercial relations, the reason being resentment over the loss of access to the sea. Technically supplying gas to Chile would be easy, and the same pipeline that delivers the gas to Chile could also bring gas to a port from which to could be shipped to Mexico and California.

The problem is political. The same popular movement that brought Evo Morales to the presidency has been adamant that any gas sold to Mexico or California be shipped through Peru rather than through Chile, because of Chile's continued occupation of what had been Bolivia's only coastline.

Evo Morales has set as one of his goals to arrange a politically acceptable commercial agreement to supply Chile with gas on a long-term basis in return for Chile ceding Bolivia sovereign access to the sea. Morales attended President Bachelet's inauguration, the first Bolivian President ever to attend such an event. Both Bachelet and Morales are socialists and both have risen to their high office from outside the traditional ruling class.

Evo Morales is, as usual, approaching the matter with a combination of principle and pragmatism: it is only just that Chile should return to Bolivia what was taken by force of arms, and it is only reasonable that Chile should have a material reward for doing so. Since the nationalization of hydrocarbons means that Bolivia owns and controls the gas that is extracted, it is now in a position to supply Chile with those rewards.

The new natural gas contracts are an enormous achievement for Morales, for they strengthen him both domestically and internationally. It will be interesting to see what happens next. Morales continues to impress, and to make his little nation fascinating to watch.

Newton Garver is SUNY Distinguished Service Professor Emeritus at University at Buffalo. Eleven of his essays on war, power, ethics, truth and justice in the US during the Bush years, and the recent struggle for human rights and political decency in Bolivia, were recently published in Limits of Power.

Britain suffers from the Great Game

Russian thumb on EU gas pipe

By Liam Halligan

In the aftermath of British economist Sir Nicholas Stern's climate change report, "renewables" are in vogue. The reality is, though, that for this winter, and for the next 20 years at least, Britain's most crucial energy source is gas. In 1990 gas accounted for only 1per cent of Britain's electricity generation. That figure is now 39 percent - outstripping all other fuels. With North Sea reserves declining, the United Kingdom now imports 10 percent of its gas. But by 2020 official estimates put its gas import dependence at no less than 80 percent.

That brings Russia center stage. As well as being a hugely strategic oil exporter, Russia is the world's mightiest gas power by far. Home to a third of the world's known reserves, the country has over 70 percent more gas than its nearest rival, which is Iran. Russia's energy clout was demonstrated last winter when, only days after taking over the presidency of the G8, it turned off the gas to Ukraine. That, in turn, affected supplies to four other G8 members, including Britain.

Gazprom, the Kremlin-controlled gas monolith, produces around half the gas used by the European Union. With four fifths of that gas passing through pipelines crossing Ukraine, Moscow wanted to show it was not neutral about Kiev's dash towards integration with the European Union and Nato.

Little wonder that British ministers are now "relieved" that Russia and Ukraine have just signed a gas supply deal for 2007. In recent weeks, though, industry insiders have become increasingly concerned about other, less published developments in the energy relationship between Russia and the EU.

At last month's EU-Russia summit in Finland, President Vladimir Putin refused to sign an agreement with Europe involving "greater openness" and "more engagement" on energy. And now, instead of encouraging foreign investment in Russia's energy sector, Moscow has begun to question production-sharing contracts signed in the 1990s by the likes of Royal Dutch Shell and Total.

The Kremlin has just caused huge angst in Western capitals by ruling out the use of foreign capital, and thus any foreign control, in the development of Shtokman, one of the world's largest natural gas fields, which lies in the Russian portion of the Barents Sea. And over the past weeks there have been other developments that speak volumes about Britain's growing reliance on Russian energy and Moscow's ability to play energy-hungry Western powers against one another.

First, a row broke out when the United States criticized a huge pipeline deal that Berlin has signed with Gazprom. The 3.4 billion (HK$50.2 billion) "Nordstream" gas link from St Petersburg to Germany, traveling under the Baltic Sea, will pump 27 billion cubic meters of gas a year. Hugely expensive, this pipeline is deliberately designed to avoid the Baltic States and Poland. These Western- oriented countries have registered their disgust by describing it as a new "Molotov-Ribbentrop pact" - Russia and Germany deciding the region's future without consulting Warsaw or anyone else.

Now the United States is worrying aloud that Germany's growing closeness to Gazprom will undermine the EU's bargaining power with the Kremlin. "Very often," said a US official, "the monopolist will cut a specific deal with an individual country ... making it much harder for Europe to stand together."

While British politicians say the lights will not go out this winter, a deadly serious "great game" is taking place in central and eastern Europe. Over the past few weeks, Moscow has revealed its new tactic - appealing to individual EU countries and companies over the head of Brussels.

It appears to be paying off. Britain is now the third biggest consumer of gas in the world, after the United States and Russia. The fuel accounts for 30 percent of its total energy use, compared with an EU average of 18 percent. Langeled, a subsea gas link between Norway and Yorkshire, opened recently. But Norway's gas reserves amount to one 20th of those held by Russia.

In the long term, it is Moscow that holds all the cards. As the most gas- dependent economy in Europe, Britain is sitting at the end of a pipeline network at the mercy of strategic games it can do little to control.

Liam is a writer for the Sunday Telegraph in the UK

President-Elect Ortega Faces Daunting Energy Crisis

By BNamericas

One of the main challenges facing Nicaragua's president-elect and former revolutionary leader Daniel Ortega is the country's energy crisis, which has caused daily outages in what is one of the western hemisphere's poorest countries.

Ortega, of the leftist Sandinista National Liberation Front (FSLN), garnered 38.1% (854,316 voters) of the vote earlier this month, while Eduardo Montealegre, of the conservative Nicaraguan Liberal Alliance (ALN) party, picked up 29.0%.

Jose Rizo Castellon of the ruling center-right Constitutional Liberal Party (PLC) came in third with 26.2%. Ortega will take over from President Enrique Bolanos on January 10.
The FSLN also picked up roughly the same proportion of national assembly seats (37.59%), followed by the ALN (26.72%) and the PLC (26.47%).

The Daniel Ortega of today is not the radical of yesteryear, as he himself has admitted. Although he promised to continue the economic and political model that has been implemented to date, there undoubtedly will be changes and variations to reflect FSLN's political principles.

Beyond the rhetoric sometimes reminiscent of the 1980s, when Ortega was a staunch opponent of the US and the free market capitalist system, the president-elect has promised to respect private property. He says there will be no confiscations like those that occurred when he was last in power following the Sandinistas' overthrow of the Somoza dynasty in 1979.

According to the FSLN's preliminary government program, objectives will revolve around three pillars: jobs, credit and business, the latter of which places special emphasis on the energy sector.

Focus on Renewables

Ortega is seeking to transform the energy sector - a process already underway - to move away from oil-fired power generation due to high fuel prices that siphon away resources that could go to socio-economic development.

"The state will play an important role in transforming energy generation in geothermal, wind, hydroelectric and biomass," a process that will include local and foreign investment as well as workers, according to the FSLN.

However, the question is how much of a role the state will play in the energy sector and if this will slow down efforts to diversify the energy mix and move forward with fuel self-sufficiency plans.

Indeed, if the state decides to increase regulations for the energy sector, private investors may not be as free as they would like to implement new generation projects.

The Chavez Factor

Another point of contention could be Ortega's close relationship with Venezuela's leftist President Hugo Chavez and how much influence he will have on the incoming administration as he waves petrodollars around.

Early this year, Venezuela's state oil firm PDVSA and the association of Nicaraguan municipal governments (Amunic) created a JV to distribute Venezuelan crude and fuels in the Central American country.

Business groups also will no doubt come knocking on Ortega's door - as they have done with Bolanos - demanding a solution to the country's energy crisis, which they say has hampered economic growth.

The crisis has prompted authorities to make an effort to advance with electric power and oil and gas projects. The government's hydroelectric portfolio includes the 1,700MW Copalar, 17MW Larreynaga, 21MW La Serena-Los Calpulis and 10-12MW El Barro projects.

In addition, an international E&P tender process is underway for three geothermal blocks with combined potential to generate 1,500MW. The government has also launched second round bidding for offshore oil E&P contracts with the goal of reducing fuel imports.

Outlook

"The significance of Ortega's victory for the economy depends on the way he will balance his populist rhetoric with the realism of the possible," according to Manuel Orozco from Washington DC-based think tank Inter-American Dialogue.

"Many rank-and-file Sandinistas have moderated their views and accept the role of markets and political freedoms in making Nicaragua more prosperous. The question is whether Daniel Ortega is with them," Orozco said.

This article was published by BNmamericas on 14 November 2006

A View from India

Equity and inequity in Sakhalin

By Sudha Mahalingam

Energy security is believed to be synonymous with acquisition of overseas oil equity, a strategy aggressively followed by importers like China, Japan and India. But if developments in Sakhalin 1 are any indication, how good is overseas oil equity, either as an energy security measure or even as a sound commercial proposition?

Just one year after it commenced commercial production, Sakhalin 1, India’s largest overseas investment, seems to be heading for stormy weather. Recently, Lev Brodsky, chief of Sakhalin Projects in Rosneft, announced that oil production from the project will peak in 2006 and begin to decline thereafter. Considering commercial production started only from October last year, one might wonder why peaking should occur so soon.

Not surprising, if you consider that Exxon, the operator of Sakhalin 1 — in which ONGC Videsh Ltd (OVL) has a 20% stake — had assumed it would be allowed to drill wells outside the contract area awarded to it under the production sharing agreement. The company’s estimates of reserves and production targets from Salkhalin 1 included these new wells.

However, Russia has refused permission to expand the contracted area, throwing a spanner in the calculations of all the shareholders of the project. The Inter-departmental Commission of the energy ministry of Russia has not only denied permission to Exxon to expand the licence area, but it also wants to auction the new discoveries to the highest bidder. If Exxon is keen on acquiring these fields without going through the bidding route, the Russian government insists it will review the terms of the original PSA, something that is not in the interest of the project promoters.

After all, the two Sakhalin fields — Sakhalin 1 and 2 —have some of the best terms ever offered by Russia to any foreign investor in its oil sector. They were signed at a time when oil prices were low and Russia was desperate for financial resources as well as technology. Any review of the ‘grandfathered’ PSAs now is bound to result in rewriting the terms of the contract to the detriment of the foreign investors.

But that is not even the worst news for Sakhalin 1. After launching an extensive environmental audit of Sakhalin 2, which found Shell, its operator guilty of environmental violations, Russia’s natural resources ministry has ordered an environmental probe into Sakhalin 1 as well. It wants Exxon to undergo more environmental checks at its De Kastri terminal before exports are resumed. Shell has allegedly been found guilty of five violations for which the Russian government intends to file criminal charges against the company. It has already revoked the environmental licence awarded to Shell for operating Sakhalin 2 and has ordered the re-routing of a pipeline being built to ferry oil from Sakhalin island to the Russian mainland.

Russia’s new green evangelism is widely seen as yet another weapon wielded by the Putin administration to tighten control over the country’s mineral resources. The two Sakhalin projects will comprise the single largest source of supply addition to the global oil markets in recent years and Russians seem eager to get a bigger share of the pie. These developments are occurring at a time when the gas export question has not been resolved.

In the summer of 2004, Russia had nominated Gazprom as the monopoly exporter for all gas supplies to Northeast Asia. Vedomosti, Russia’s financial daily, reported in April this year that Gazprom wants to buy all of Sakhalin 1 gas at wellhead price, for export to China and others. Whether Gazprom will buy this gas at the Russian domestic prices — which are a fraction of global prices — is the question that is unanswered.

On October 19, this year, Exxon signed a preliminary agreement with China National Petroleum Corporation on future gas supplies from its Sakhalin 1 project, but the final sales and purchase agreement will have to await the blessings of Gazprom. The US oil major is negotiating to supply eight billion cubic metres a year of natural gas to northeast China through a pipeline which will have to be built, possibly by Gazprom. Whether the Russian government’s manoeuvres to tighten state control over its energy industry projects has to do with the sudden increases in project costs proposed by the two operators of Sakhalin 1 & 2 is a pertinent question.

While Shell proposed a development cost increase from $15 billion in 2003 to $28 billion, Exxon, the operator of Sakhalin 1 has also claimed that its production costs will go up from $12.8 billion to $17 billion, proposals that Russians baulk at. Bigger project budgets imply less and delayed revenues for Russia. Under the PSAs, the operator can first recoup its costs before profit share is paid out to the host government. Higher budgets also mean pushing back the date from which profits would accrue to host governments, by which time, the field may well be past its prime and the host government could well be left with smaller and dwindling profit shares from a declining field.

At its peak, Sakhalin 1 is expected to produce around 250,000 barrels of oil daily, but with the downgrade, it might be less. For now, OVL is getting its first consignment of equity oil — 90,000 tonnes — from Sakhalin 1 headed towards Mangalore port.

Physically ferrying Sakhalin oil to India is not exactly going to enhance India’s energy security since the shipments will have to pass through the congested Malacca Straits, clogged with tankers ferrying energy to Japan, China and South Korea from the Persian Gulf and other parts of the world. In fact, OVL is literally going against the tide in physically bringing this oil to Indian shores when energy importers in the region are looking to Sakhalin as a source of diversification precisely to avoid the sea lane congestion. OVL might be content to argue that global oil and gas prices have skyrocketed since it acquired its stake in Sakhalin 1 and so the venture is still a profitable one.

But that is a fortuitous development that has little to do with OVL’s foresight. What is pertinent now is whether OVL will realise the full benefit of the oil price rise or are its gains being prised away by the claws of the Russian state and the games played by the operator of Sakhalin 1.

Sudha Mahalingam is a Senior Fellow at the Nehru Memorial Museum & Library, New Delhi

An Alternative Policy Scenario

Oil Scene - As Seen From The IEA

By Syed Rashid Husain

Claude Mandil is a well established and respected name in the energy fraternity. As the executive director of the International Energy Agency (IEA), the OECD energy watchdog, when he speaks on issues concerning the energy world, people listen to him attentively, for he speaks with authority and logic. Thus when Mandil spoke to the press in London last Tuesday, it was with a reason. The IEA was presenting before the global audience the World Energy Outlook (WEO) 2006, mapping out a cleaner, cleverer and more competitive energy future.’

Mandil says the map was charted in the wake of the fact that keeping in view the current trends, the energy future the globe was facing was “dirty, insecure and expensive.” One definitely need not agree to what all Mandil was saying last Tuesday, yet he carried weight. He represented a school of thought, an interest group within the energy fraternity.

If we carry the current way, the IEA World Energy Outlook 2006 projected the primary global energy demand to go up by just over one-half between now and 2030 — an average of annual rate of 1.6 percent. Demand grows by more than one-quarter in the period to 2015 alone. He was hence emphatic when he said, ‘that fossil fuel demand and trade flows, and green house emissions would follow their current unsustainable path through to 2030 in the absence of new government action.

The report emphasized that the center of gravity of the global demand was shifting, as over 70 percent of the growth during this period was to come from the developing world and China alone accounting for 30 percent of that total.

In case of no remedial action from the governments, which the IEA report refers to as the Reference Scenario, fossil fuel would still account for 83 percent of the increase in energy demand between 2004 and 2030. Consequently the global crude demand would reach 99 million bpd in 2015 and 116 million bpd by 2030 — up from 84 million bpd in 2005.

However, in order to meet the galloping demand, the IEA projects cumulative investment of the order of over $20 trillion over the 25 year period until 2030. Of it, investment oil sector, and that with three quarters of it going into upstream, was estimated at $4 trillion over the same period — huge by any standards. Is that sort of investment forthcoming is anybody’s guess.

In the 2006 WEO, the IEA has once again emphasized that oil supply is increasingly dominated by a small number of producers. OPEC’s share of global supply grows significantly, from (less than) 40 percent now to 48 percent by the end of the outlook period. Saudi Arabia, according to the projection continues to remain the kingpin, by far the largest producer. It also concedes that non-OPEC conventional crude oil output peaks by the middle of the next decade, though natural gas liquids production continues to rise.

The report also discusses various pricing scenarios and projections through to 2030. Indeed these projections Reference Case scenarios — in situation when things continue as they are today and consuming governments and societies do not take any action to change the outlook. That though looks unlikely.

As per the projections, the average IEA crude oil import price is assumed to be slightly higher than $60 per barrel (in real 2005 dollar terms) during 2006 and 2007 — up from $51 a barrel in 2005. The report then predicts a decline in the global crude prices — to about $47 a barrel by 2012. The reports then assumes the prices would rise again thereafter — though slowly — reaching somewhere around $55 in 2030. Indeed Mat Simmons & co are not figuring in this OECD projection anywhere, otherwise they would have led every one to believe that crude prices would touch roof over the next few years.

The report urges the governments to take the steps to change the scenario — so as to enhance energy security, raising the issue of consuming countries’ vulnerability to supply disruptions and resulting price shock. OECD and developing Asian countries become increasingly dependent on imports as their indigenous productions fails to keep pace with demand.’’

The report hence warns, “Much of the additional imports come from Middle East along vulnerable maritime routes. The concentration of oil production in a small group of countries with large reserves — notably Middle East OPEC members and Russia — will increase their market dominance and their ability to impose higher prices.”

The IEA report exhorts the consuming nations to take urgent measures to alter the scenario — referred to as alternative policy scenario. The alternative scenario envisages the global oil demand to reach 103 million bpd in 2030 — 20 million bpd higher than 2005 but still 13 million bpd less than projected in the above reference scenario.

The report says that close to 60 percent of this saving could come from transport sector. More than two third could come from more fuel-efficient vehicles. Increased biofuels and nuclear energy use could also help in reducing oil consumption.

There could be people around who agree to all what is said above, yet Mandil and his team cannot be taken lightly. In all the projections being made in the global energy capitals today, the above has to be a part of the overall equation, for it has a direct bearing on their overall well being.

This article was published by Arab News on 10 November 2006

The Ultimate Question of Security

Dangerous new world

By Reuven Pedatzur

This should be a serious warning to the international community: The expected participation of six Arab states in the nuclear race will transform the Middle East into a focal point of tension that will adversely affect global stability and potentially serve as cause for the outbreak of a nuclear war.

The destructive effects of such a war will extend well beyond regional borders. Egypt, Algeria, Morocco, Tunisia, Saudi Arabia and the United Arab Emirates announced, according to The London Times, that they would join the group of states developing nuclear technology. However, all made it clear that they would only undertake nuclear development for civilian purposes - but Iraq, North Korea and Iran did the same in the past.

The absurdity in the regimes that currently seek to prevent nuclear proliferation is that the International Atomic Energy Agency (IAEA) will assist these states in acquiring the technologies necessary for the development of fissile material - the primary element in the development of a nuclear bomb. And this is in accordance with the Nuclear Non-Proliferation Treaty (NPT), of which all six states are signatories/members.

The lesson is not being learned. Even when Iraq used its membership in the treaty, and vigorously sought to develop nuclear weapons under its aegis; after North Korea managed to complete the development of the bomb while being a member of the NPT; and as it becomes clear of late that Iran, another member state, continues to develop nuclear weapons - the international community is not taking any action to alter this unacceptable situation.

The failure of the United States to prevent North Korea from completing development of the bomb made it clear once more that whoever hopes for an international mobilization to firmly oppose Iran, will be disappointed.

Even when it was clear that Iran's progress toward a nuclear capability would result in the entry of its neighbors and regional rival into a nuclear armament race, the main players in the international arena, who negotiated with the regime in Tehran (Britain, France and Germany), have continued to treat the blackmailing tactics of the Ayatollahs with great leniency.

If indeed the six Arab states, or some of them, do succeed to develop a bomb, this will signal a lot more than a "new Middle East": It will be a new world, significantly more dangerous than the world that existed during the Cold War period.

The model of mutual deterrence based on a balance of terror, which constituted the basis for strategic stability until the collapse of the Soviet Union, succeeded mostly because only two players took part in it. The rules of the game between the United States and the U.S.S.R., regarding mutual deterrence, were clear to both sides, and so was the recognition that a nuclear war was futile.

A similar model, of mutual assured deterrence, can be forged, with a great degree of success, between Israel and Iran. The rules of the game that will crystalize between the two, when Iran has nuclear arms, will ensure that the two regimes will avoid making use of the bomb, out of an understanding that this will result in the total destruction of their countries.

However, if the nuclear game is joined by other players, it will be impossible to create a bilateral model of deterrence. It will be necessary to develop a number of combined deterrent systems, against a number of players. It will thus no longer be an Israeli attempt to deter Arab states and Iran, but also an attempt by them to deter each other.

The existence of a large number of circles of deterrence - every one with its own rules of the game and different strategic considerations - will necessarily lead to instability. The dangers of miscalculation, of misunderstanding the actions of the opponent and of uncontrolled use of the bomb, will increase dramatically.

Out of this it would appear that the collapse of the nuclear nonproliferation regime should be the most important issue on the agendas of Western leaders. The problem is that most of them have still not linked their lenient policies toward North Korea and Iran, to the expected acquisition of nuclear weapons by other countries.

The behavior of the head of the IAEA, Mohamed ElBaradei, is even more troubling. He is the person who is supposed to warn against the nuclear activities of member states in the NPT, and encourage the international community to take steps against proliferation. Instead, he is opting to "play dumb" and undertake the role of the understanding, sympathetic inspector.

Only recently he announced that in spite the inspections, he is unable to determine whether Iran is marching toward the development of nuclear weapons - using the same attitude of forgiveness and understanding he showed with North Korea in the past.

ElBaradei may set the tone, but the failure belongs to George W. Bush, Tony Blair, Jacques Chirac and Angela Merkel. The cost will be borne by us all.

Reuven Pedatzur is a lecturer at the Department of Political Science at Tel Aviv University. He received his Ph.D. in 1992 from the Department of Political Science, Tel Aviv University, and is the Director of the Galili Center for Strategy and National Security.

Shifting Grounds in Ukraine, Still

New gas deal fuels questions, concerns

By Tammy Lynch

Ukraine’s recently announced gas agreement with Russia has received a generally favorable response from Western organizations. These groups have expressed optimism that the deal will help stabilize European gas supplies.

When examining the issue, however, it is difficult to understand these responses. In reality, this agreement could signal big problems for Europe in the coming years, as the continent becomes more and more dependent on Russian gas. Simply put, the agreement appears to hand Russia a larger role in gas transit through Ukraine to Europe, while setting the stage for future disagreements between Russia and Ukraine over gas.

Currently, 25 percent of the EU’s gas supply comes from Russia. Eighty percent of that – or 20 percent of the total gas consumed by members of the European Union – is transited through Ukraine’s vast pipeline network. The United States estimates that Russia will provide 33 percent of the EU’s gas in 10 years, and despite Russia’s plans to build at least one new pipeline, the majority of this gas will continue to transit through Ukraine.

The contract allowing Russia to use Ukraine’s pipelines is contained within the overall agreement setting the conditions for Ukraine’s purchase of Russian gas. In addition, Russia uses some of the same pipelines to deliver its gas to Europe. As Europe discovered in January of this year, the two issues are interconnected. Uncertainties about Ukraine’s agreement with Russia have the potential to impact the transit of gas through Ukraine to Europe.

As much as many in Europe would like to think differently, there are numerous uncertainties about this agreement.

First, despite Prime Minister Viktor Yanukovych’s announcement that the country will receive 55 billion cubic meters of gas at $130 per 1,000 cubic meters, key political leaders and the general public have not been allowed to see the contract. Even President Viktor Yushchenko’s deputy chief of staff on October 25 suggested that it remained unclear what criteria were used to determine the announced price.

Critics of the deal wonder whether the contract truly guarantees the price of $130 for a full year. It is obviously in the prime minister’s interest to say it does so. But providing the document would allay the fears of many who remember previous claims of guarantees that turned out to be false.

President Yushchenko also has urged Yanukovych to submit the announced agreement for approval to parliament, as envisioned by a 2001 intergovernmental protocol between Russia and Ukraine. This agreement provides the guiding framework for dealing with gas issues and requires that any price accord should be debated and ratified by lawmakers.

Yanukovych has declined to do so. He suggests that the accord falls outside the oversight of the parliament, since it is an agreement not between two states but between two state-controlled firms. In essence, Yanukovych’s stance implies that the deal falls outside the public oversight of the government.

With this agreement, Ukraine effectively cedes control over its gas procurement to the private corporation, RosUkrEnergo. The company has had a troubled history. It is 50 percent owned by Russia’s Gazprom and 50 percent by two enigmatic Ukrainian businessmen, Ivan Fursin and Dmytro Firtash. The company reportedly was investigated by the U.S. Justice Department for its ties to Semyon Mogilevich – a “businessman” on the FBI’s most wanted list for money laundering.

Since 2004, RosUkrEnergo has acted as a middleman, purchasing gas from Russia, Central Asia or both, and selling it to Ukraine. For its troubles, in 2005, the company admits to receiving $500 million, but former U.S. Ambassador John Herbst claimed in February 2006 that the company had received up to $3 billion from its various deals throughout the former Soviet Union. Calling the company a “suspicious organization,” Herbst questioned its role in Ukraine’s gas industry.

On October 26, one-time Prime Minister and current opposition leader Yulia Tymoshenko charged that Ukrainian Fuel and Energy Minister Yuriy Boyko held a seat on RosUkrEnergo’s coordinating council, and that, therefore, the new deal he approved with RosUkrEnergo was a direct conflict of interest.

When Tymoshenko produced a RosUkrEnergo document with his signature, Boyko admitted to sitting on the council. He claims he now has withdrawn, but has produced no documentation to support this assertion. Should Boyko remain on the council, he could earn a considerable sum from the new deal. Tymoshenko is now calling for his dismissal and a parliamentary inquiry into the deal. In a fully developed democracy, there would be little question of Boyko’s need to step down. But, although supported by Yushchenko’s political bloc, these calls have received little attention in Ukraine.

Critics of the deal have also expressed concern over what recourse would be available to Ukraine if RosUkrEnergo suddenly increased the gas price. The price is set technically by the company, not by Russia or Turkmenistan, allowing those countries publicly to wash their hands of future pricing responsibility.

Additionally, the price is secured in a private contract, apparently with a new private entity, Ukrgaz-Energo, instead of with Ukraine. This latest company is 50 percent owned by RosUkrEnergo and 50 percent by Ukraine’s state oil and gas corporation, Naftohaz Ukrainy. Ukrgaz-Energo will now be responsible for distributing gas to industrial consumers in Ukraine, a right previously granted solely to Naftohaz Ukrainy.

It is a murky, opaque and confusing arrangement that has not been explained either to Ukrainians or to Europeans. In a recent BBC Panorama documentary, Jonathon Stern of Oxford’s Institute for Energy Studies warned, “If RosUkrenergo breaks up because there are some problems of governance, or some problems of alleged mafia connections, that could eventually disrupt gas supplies.”

The prime minister may also want to avoid questions about possible side agreements attached to this deal. Kommersant newspaper has suggested that, in exchange for the below-market price of $130, Ukraine agreed to delay its membership in the WTO and to allow the Russian Black Sea Fleet to remain in Crimea past the previously agreed 2017. Perhaps not coincidentally, Prime Minister Yanukovych recently stated that WTO entry would be delayed and that he supported an extension of the Russian navy’s stay in Crimea.

Clearly, the questions surrounding this deal are unlikely to go away easily. But examining them will be a delicate balancing act.

Tammy Lynch is a Senior Fellow at Boston University’s Institute for the Study of Conflict, Ideology & Policy. This article was published in the Kyiv Post on 9 November 2006

Is US Energy Security in Canada?

Changing outlook for Canada's oilsands

By Staff Writer with the Financial Times

For optimists about global oil reserves and US energy security, Canada's oilsands are a vital piece of evidence.

Located in three main deposits across an area the size of Florida, the Alberta oilsands are estimated to contain reserves of 179 billion barrels of oil, a figure exceeded only by Saudi Arabia.

The sands have been exploited since the 1970s. But as the price of oil soared, oilsands rose to prominence as one of the solutions to the US's dependence on energy supplies from the Middle East and other politically unstable areas.

Canada already supplies about 2 million barrels per day of the US's consumption of 12 million bpd: about half of that coming from oilsands. As other sources of oil decline, the importance of the oil sands is expected to grow.

The problem, however, is that costs of producing oil from the sands are high and rising fast.
As the oil price has fallen by more than 20 per cent from its peak in the summer, the outlook for Canada's oilsands has been clouded by fears that oil may not be expensive enough to keep the industry viable.

The oilsands, which look and feel like molasses, are found in bands between 6-10 metres thick.
Extracting the oil is laborious. Two tonnes of oilsands yield just 1.25 barrels of bitumen and a barrel of crude.

Foreign players have flocked to the oilsands in recent years. ExxonMobil, Royal Dutch Shell, Chevron, ConocoPhilips, Devon Energy and France's Total are among those with stakes in either existing or proposed projects.

Two of China's biggest energy groups, China National Offshore Oil Corporation and Sinopec Group, have invested in small Calgary-based companies with oilsands ambitions.

The half-dozen or so existing oilsands producers currently turn out about 1 million barrels per day. If all the projects now on the drawing boards come to fruition, output could rise to almost 3 million bpd by 2015.

But as investment has poured into the region, at a time of strong demand for skilled staff and equipment, costs have soared. Petro-Canada estimated earlier this month that the cost of expanding its Mackay River oilsands project had soared.

Dominion Bond Rating Service of Toronto concluded in a study that companies were taking a more cautious view of oilsands projects as a result of escalating labour and material costs.

The study noted that "the non-discretionary nature of oilsands capital spending, long lead times to first oil production and escalating costs in a highly competitive environment combine to create significant potential financial and execution risk for companies with major oilsands projects should prices weaken".

Several companies are having second thoughts about their projects. For instance, Husky Energy, controlled by Hong Kong businessman Li Ka-shing, is reconsidering plans to build an upgrader for its project.

"Under the current economics and also the labour supply, and the cost of construction, it is very difficult and it is very challenging to maintain the building in Canada," John Lau, Husky's chief executive, said earlier this year.

Murray Edwards, vice-chairman of Canadian Natural Resources, which has big plans for the oilsands, argued last month that many of the projects now being proposed would need oil above $50 a barrel to be profitable.

However, different companies take different views. Integrated oil companies have the ability to benefit from taking the oil they extract and to refine it and sell the products, which the companies that only have upstream operations cannot. That should help make the business viable at lower oil prices than for some competitors.

However, while oilsands may have their difficulties, none of the other options available to international oil companies is easy. "International oil companies are having to adapt to survive," says Jason Kenney of ING.

"Politically, outside of the OECD countries, things are getting worse and worse. With oilsands, at least companies have got a chance of keeping the reserves in the long term, and they know they can get earnings out of them."

This article was published by The Financial Times on 25 October 2006

An Energy Security Plan for Japan

Japan runs obstacle course in search of energy security

Geopolitics hinder the import-dependent nation. Its nuclear power program treads lightly after North Korea's test

By Bruce Wallace

One by one, the foreign mega-projects that were supposed to guarantee Japan's long-term energy supplies are hitting the skids.Japan's energy future is being squeezed in Iran, where the diplomatic struggle to contain Tehran's nuclear ambitions has pushed Tokyo out of a coveted oil deal.

And it is being jeopardized on Russia's Sakhalin Island, where projects that were supposed to herald a new generation of natural gas supplies are snagged amid Moscow's tough bargaining for a bigger stake in the profits.

Add predicted cuts in liquid natural gas imports from Indonesia — whose contracts are up for renewal — and this oil- and gas-guzzling country finds itself in a terrific struggle to expand its overseas energy sources.

"We know we rely on oil too much," said Hideki Tanaka of the Petroleum Assn. of Japan, which represents oil refining and marketing companies. "That's why in order to secure a constant supply, we make diplomatic efforts to keep good relationships with oil-producing countries."

But the vagaries of oil diplomacy are proving problematic for Tokyo, especially in a world on heightened alert against the spread of nuclear weapons.

Anxious nuclear diplomacy around Iran and North Korea is hindering Japan's ambitious plan to diversify its energy sources.The strategy took a big hit last month, when Japan's deal with Iran to lead development of the rich Azedegan oil field was done in by the Bush administration's campaign to isolate Tehran, which Washington accuses of trying to develop nuclear weapons.

Japan's state-controlled Inpex Holdings Inc. owned 75% of the Azedegan project but had consistently pushed back the launch because of the tense political environment. Increasingly impatient and with competitors such as China eager to pick up any slack, Tehran and Inpex finally agreed to slash the Japanese company's stake to just 10%.

Japan is the world's second-largest energy consumer, though its use is less than a quarter of that of the U.S.

The country imports nearly all its oil and gas, with oil meeting about half of total energy demand. More than half of its imported oil comes from Saudi Arabia and the United Arab Emirates.

Japan's energy vulnerability also came into play last month in reaction to North Korea's underground nuclear arms test. In the wake of that watershed event, senior Japanese politicians have raised the specter of a nuclear arms race in Northeast Asia with murmurs that their nation should reconsider its policy against possessing, stationing or developing atomic weapons.

Prime Minister Shinzo Abe has tried to quash that debate, in part, advisors say, because of Tokyo's sensitive relations with the International Atomic Energy Agency. The agency, which promotes and supervises civilian nuclear power while monitoring possible weapons proliferation, allows Japan to reprocess fuel from its civilian nuclear reactors under strict supervision, guarding against the diversion of spent fuel to a bomb-making program.

Abe worries that speculation about a Japanese bomb, no matter how idle, might raise hackles at the atomic energy agency.

The agency has pledged greater vigilance against proliferation. In mid-October, the agency's director-general, Mohamed ElBaradei, warned about unnamed countries "hedging their bets to have [nuclear weapons' technology] know-how in case they need to develop their own deterrence."

Abe's advisors say Japan can't put its civilian nuclear program in jeopardy. Japan is the world's third-largest nuclear energy producer, after the United States and France, and wants to increase the percentage of domestically generated power it gets from those plants from one-third to 40%.

"Nuclear is one of the most promising prospects for Japan's energy needs," said Tsutomu Toichi, managing director of the Institute of Energy Economics, Japan. "Now is not a good time for influential politicians to be talking about security options, even if it is a very minority view."

Alarmed by high oil prices and its dependence on fossil fuels, Japan released a national energy strategy in May that called for, among other things, strengthening diplomacy to help secure foreign supplies.

It also encouraged Japanese companies to invest more aggressively in the exploration and development of overseas oil and gas. Japanese companies currently have ownership stakes in projects that produce about 15% of the imported crude. Tokyo wants to see it jump to 40% by 2030.

That's the model that trading companies such as Mitsubishi and Mitsui & Co. were following when they took on 45% of Russia's Sakhalin 2 project, which was expected to begin shipping natural gas to nearby Japan by 2010.

But in September, Moscow balked, announcing plans to re-structure the deal with its foreign partners and threatening criminal charges against the companies for alleged environmental infractions. Moscow's irritation stems from massive cost overruns by lead developer Royal Dutch Shell. That could delay the flow of revenue to Russian coffers, which won't begin until foreign investors recover their costs.

Japanese officials say they expect a new revenue-sharing deal to be struck but remain uneasy about the fate of the project.

The frustration only increased last month, when Exxon Mobil Corp., which has rights to market natural gas from Sakhalin 1, said it had reached a preliminary agreement to sell the gas from that other mega-project to China instead of Japan.

Casting for alternative sources led Tokyo to give $20 million to Iraqi Oil Minister Hussein Shahristani on his recent visit to Tokyo, aimed at shoring up production in Iraq's battered southern fields. A joint statement declared that "Iraq is an irreplaceable partner for Japan in terms of stable energy supply." Analysts are divided on the seriousness of the risks these recent setbacks pose to Japan's long-term energy security.

Optimists point out that Japan is an aging country with a shrinking population and advanced conservation technologies, all of which should combine to diminish long-term demand. They also note that Japan, unlike most countries, is increasing its investment in alternative energy, contending that the fossil fuel setbacks are only temporary.

"It's a seller's market, with producers taking a very aggressive attitude," said Toichi, referring to the problems at Sakhalin 2. "So you see Russia seeking to revise terms. But if both sides do not agree, then both sides will be losers. So I'm not pessimistic in the long term."

But those who are point to Japan's lingering inability to find alternatives to its dependency on Middle East oil."Japanese bureaucrats don't think of risk," said Yoshinori Ishii, author of "The Last Battle for Oil," a well-received book that warns that the world is running out of the stuff.

"Oil reserves have passed their peak, but many in Japan still say there is enough. It is a lie."

Bruce Wallace is a staff writer for the Los Angeles Times, Naoko Nishiwaki contributed to this article.