Global Energy Security

2007-03-21T15:09:00.001Z

Riders of the Storm

2007-02-05T08:45:00.000Z

Resource nationalism: distant thunder or looming storm?

By Keith Campbell

It was last year’s Zambian presidential election campaign that brought the ‘resource nationalism’ issue into focus for Southern Africa.

Resource nationalism has been defined as the control, by the State in whose territory they are located, of in-the-ground (including under-the-seabed) resources and the means of extracting and refining them. As a phenomenon, it is by no means new – Mexico nationalised its oil industry in 1938, and has never privatised it.

In Zambia, opposition Patriotic Front (PF) candidate Michael Sata promised that, if elected, he would limit foreign ownership of the country’s copper mines. He was reported to have said that “we will give foreign investors 51% and the rest of the shares should be in Zambian hands”.

He also stated that, if elected, he would revoke the 15-year tax exemptions granted to mining companies by the incumbent administration of President Levy Mwanawasa in order to stabilise the sector. As it turned out, Mwanawasa was re-elected with 43% of the vote, with Sata running second with 29,4%.

In the simultaneous parliamentary elections, Mwanawasa’s party, the Movement for Multiparty Democracy (MMD), won 72 of the 148 contested seats – the president nominates a further eight Members of Parliament, giving the MMD 80 seats in total – and the PF won 46. So it seemed that, as far as the mining and minerals industry was concerned, the danger of resource nationalism emerging had been averted, though re-emerging would be more accurate, in that Zambia originally nationalised its copper mines in 1969 when it took a 51% stake in them; they were privatised again in 2000.

(But Zambia’s next elections are in 2011, and the electoral cycle for democracies is inescapably much shorter that the development, exploitation, and decommissioning cycle for large mining and minerals projects.)

Then, last November, Angola announced its application to join the Organisation of Petroleum Exporting Countries (Opec), an entity strongly associated with resource nationalism; Angola hopes to achieve membership by March this year.

Of course, the current inter-national focus on resource nationalism was triggered by events in a country, which, although part of Opec, lies far from Southern Africa and, indeed, the Middle East – Venezuela. It has been the perfervid nationalism, increasingly coupled with socialism, of Venezuelan President Hugo Chavez that has once more brought resource nationalism to the fore.

Chavez was originally elected, with 56% of the vote, at the end of 1998 (taking up office in early 1999); he had, however, attempted to overthrow the democratically elected President Carlos Andrez Perez in a coup in February 1992, which cost 18 lives, and, while in military prison, supported (through a video recording, broadcast on a television station temporarily captured by the rebels) a second coup attempt against Perez in November 1992 – Chavez was pardoned after spending two years in prison.

After his election, he oversaw the writing of a new constitution (by an elected constituent assembly in which his supporters were a majority), which was approved by 71% of the voters in a referendum; stood for and won the election in 2000 under this new constitution with 59% of the vote; survived a coup attempt in 2002; rode out a two-month national strike by managers and skilled workers at the State-owned hydrocarbons company Petróleos de Venezuela SA (PDVSA) in December 2002/January 2003; won a recall election in 2004,allowing him to complete his mandate; and was re-elected last month with almost 63% of the vote.

Chavez has focused his attention on hydrocarbons: the country has the largest oil reserves in the Americas and is the world’s fifth-largest oil producer – it also has the largest proven gas reserves in Latin America. Following the strike against him, he has brought PDVSA under tighter political control.

In 2005, 32 oil exploration deals involving foreign oil companies were declared illegal; foreign oil companies have also been hit by demands for back taxes – in March 2006, for example, BP was presented with a back-tax demand for $61.4-million for the years 2001 to 2004, while in July 2005 Shell was on the receiving end of a demand for $131-million for the same period.

Taxes and royalties on foreign oil companies have also been increased – in 2004, royalty payments for companies with drilling rights in Venezuela were increased from 1% of the sale price to 16%. Then, last year, Chavez replaced the (by then) 17% oil royalty with a 33% ‘extraction tax’.

Foreign oil companies producing extra-heavy crude in the eastern region of Faja, near the Orinoco river, which were already paying 34% in tax on income, had this figure raised to 50%.
Further, foreign oil companies were forced to transform their operations in the country into joint ventures (JV) with PDVSA, in which the Venezuelan company would have majority shareholdings; by last year’s March deadline, 16 had done so while the two that had not – Total, of France, and Eni, of Italy, – had their Venezuelan fields seized by PDVSA.

Then, in early January, after his re-election, Chavez announced that the electricity and telecommunications sectors were to be nationalised, that the foreign-owned oil operations in the Orinoco Basin – excluded from the previous round of forced transformation into JVs – were now required to give up majority stakes to PDVSA, and any who refused would have their operations completely nationalised. Chavez also announced that the country was to be renamed the Socialist Republic of Venezuela.

Fellow South American, President Evo Morales of Bolivia, has emulated Chavez. Elected in December 2005, Morales actually ran ahead of Chavez by nationalising Bolivia’s oil and gas sector in the middle of last year, the Andean country having the second-largest gas reserves in Latin America.

The main victims of this were not renowned international petrochemicals giants, such as Exxon, Chevron, Shell or BP, but Spain’s Repsol and, especially, Brazil’s Petrobras, itself predominantly State-owned. But the first sign of the re-emergence of resource nationalism in Bolivia occurred before Morales’ election – the erstwhile State oil company, Yacimientos Petroliferos Fiscales Bolivianos, privatised in 1996/1997, was renationalised in 2004.

Last November, Morales attacked Swiss mining company Glencore International, claiming that the company, which bought assets in the country – including Bolivia’s largest tin smelter, Compania Minera del Sur – in 2005, had obtained these assets “unlawfully”. Glencore rejected this claim.

Morales also stated that “(because) the country is asking for it, those mines are going to be taken back”. The 2007 theme would be the Bolivian mining industry, Morales has stated. In early January, Morales re-affirmed, “(last year,) we nationalised hydrocarbons. This year, it will be mining.”

However, Bolivian Mining and Metals Minister Guillermo Dalence subsequently suggested that, instead of nationalisation, the country would increase taxes on the mining sector by some 660%. According to Dalence, Bolivia’s mining exports were worth $1-billion but the country gained only $45-million in taxes and wished to increase this income to $300-million annually.

It should be noted that Bolivia may be seeking directly to emulate Venezuela – forcing foreign operators to hand over majority stakes in their Bolivian operations to the state mining company (Comibol) as well as massively increasing taxes on the international companies.

Meanwhile, in Ecuador, during his campaign for the presidency last year, Rafael Correa promised to renegotiate contracts with foreign investors in the country’s oil industry. Correa was inaugurated as Ecuadorian president on January 16, promising a “citizen’s revolution”. Ecuador is also considering rejoining Opec.

But while much international attention has been focused on the return of resource nationalism in the Andean region of South America – largely due to the colorful political showmanship and verbosity of Chavez – things have been quietly happening elsewhere, as well.

Last December the Export Finance and Insurance Corporation (Efic), the Australian government’s export credit agency, warned that resource nationalism was becoming a growing issue for mining and oil companies active in emerging market countries.

The Efic report cited Uzbekistan and Kyrgyzstan, whose governments had effectively expropriated the local operations of Western mining companies by imposing back taxes and starting bankruptcy proceedings.

In the Middle East, the agency points out that Dubai, Kuwait, and Qatar are all intent upon either strengthening fiscal and contract terms for international oil companies or restricting the territorial extent of their concessions. And in Iran, President Mahmoud Ahmadinejad was elected on a platform that included opposition to foreign investment in the country’s oil and gas sector. But the really big example is Russia. There, under the administration of president Vladimir Putin, the Russian private-sector energy giant Yukos was broken up at the direction of the State and, as a result, many privatised assets came back under the control of the state.

A recent subsoil law requires that ‘strategic’ – which seems to be interpreted to mean large oil and gas fields must be at least 51%-owned by Russian interests. The country’s oil pipeline system is controlled by the State monopoly, Transneft, while state-owned Gazprom holds the gas infrastructure. Gazprom has announced that it will develop the giant Shtokman gasfield without a foreign partner.

Further, Gazprom’s interruptions of gas supplies to, and through, Ukraine and Belarus in recent months, which hit other European countries as well, have been seen in the West as actions that are at least partly political in inspiration and intent, and not merely commercial disputes.
A return to resource nationalism is now also visible in North Africa.

Last year Algeria, which had been moving to liberalise its oil and gas sector, abruptly reversed course with the passage of a new law which imposed ‘windfall’ taxes of up to 50% on foreign oil companies whenever crude-oil prices go above $30/barrel. The new legislation also requires State-owned oil company Sonatrach to take a 51% share in all oil-production-related activities in the country.

In Libya, the government created a Council for Oil and Gas Affairs, which is a regulatory agency with the function of monitoring the hydrocarbons sector and setting policies. The mandate of the council stresses the issues of ‘national interests’ and ‘maximum revenue’, which suggest that it is intended to be an agency of resource nationalism.

Further south in Africa, Chad last year took what international consultancy Control Risks called “aggressive measures” to strengthen state control of the oil sector. And Angola and Equatorial Guinea brought in new laws that seek to increase the involvement of local companies in the sector. Overall, however, resource nationalism seems unlikely to become a major factor in sub-Saharan Africa, at least this time around.

Firstly, and with the notable exception of Bolivia, resource nationalism has been focused on the hydrocarbons sector, where demand is great, prices are high, and the product is the lifeblood of all modern economies. No one can do without oil and gas; although substitutes do exist – for example, nuclear power for energy generation, and biofuels for transport – it will take decades to switch to these energy sources on a large scale. This does not apply to many of the minerals and metals produced by African states.

Secondly, again with the exception of Bolivia, all the countries engaging in resource nationalism have significant indigenous technical expertise in the sectors involved – experienced managers, engineers, technicians, artisans, geologists, geophysicists, and so on. And Bolivia is being supplied with this expertise by Venezuela.

Most countries in sub-Saharan Africa are chronically short of skills and still heavily dependent on foreign expertise. Further, the consequences of the last round of resource nationalism – which swept Africa in the 1960s – are often still very visible.

For example, according to the World Bank, Zambia’s copper production peaked at 700 000 t/y in the 1970s, just after nationalisation – thereafter it was downhill until it fell below 300 000 t/y; following privatisation in 2000, the country’s copper production has now risen to some 500 000 t/y.

Keith Campbell is Senior Contributing Editor at Creamer Media's Mining Weekly. This commentary was originally published by Creamer Media's Mining Weekly on 30 January 2007.

Casting for a New Cartel

2007-02-02T16:51:00.000Z

Gas OPEC: economic advantages and political drawbacks

By Igor Tomberg

At the meeting with Secretary of the Russian Security Council Igor Ivanov in Tehran over the past weekend, Iran's supreme leader Ayatollah Ali Khamenei said: "Our countries could set up an OPEC-type organization on gas cooperation."

Judging from the initial response, the majority of analysts think that this proposal is rooted in politics rather than economics.

This is not the first time the idea has been put forward. Iranian President Mahmoud Ahmadinejad offered to Russian President Vladimir Putin at their meeting in Shanghai in June 2006 to establish what he described as cooperation "in fixing gas prices, and major flows in the interests of global stability."

Indicatively, the same idea was discussed during the recent Algerian visit of Viktor Khristenko, Minister of Industry and Energy: Algeria and Qatar could join the two countries. The resources of this potential cartel are very impressive - they account for more than 30% of the world's gas production, and their aggregate proven reserves exceed 60% of the total, which is comparable to OPEC's respective share in the global oil reserves - about 68%. The would-be cartel could include other members as well.

The excerpts of a confidential analytical report by NATO economic experts, published by The Financial Times last November, include Algeria, Qatar, Libya, Russia, Central Asian countries, and Iran into OPEC's gas counterpart. The list could be extended - Mauritania, Mali, and some Central African nations could also become part of it. Gazprom showed great interest in these countries during Khristenko's official visit.

In 2006, the appeals for a gas OPEC became stronger. The main reason was discontent with the European Union's energy policy. Its advocates see EU strategy as an attempt to set up an association of consumer countries aimed at driving a wedge into the ranks of gas producers in line with the divide-and-rule principle. In other words, the goal is to let the consumers dictate prices to the producers.

Judging by the number and tone of publications in the media, and interviews by politicians and experts, the idea of a gas OPEC is gaining a foothold in Russia as well. With different degrees of caution, it was supported by a number of State Duma deputies and Senators (Vladimir Medinsky, Viktor Orlov, Alexei Mitrofanov, and Gennady Seleznyov). The opinion they all share is that a gas alliance of producers is a sound idea, and Russia will profit from it. The bulk of experts polled by the media agree.

The official authorities have the opposite position. During his Algerian visit, Khristenko said that Russia and Algeria were against this idea. "We should not move towards a cartel agreement," the minister said.

For the time being, the Russian Government has not given any response to the latest Iranian proposal, which is understandable. Any clear-cut answer by the Kremlin is bound to directly influence the global geopolitical alignment of forces, something it does not seem to be ready for. For this reason, the authorities have limited their reaction to an interview by an anonymous official from the Ministry of Trade and Economic Development to RIA Novosti. It was clear from what he said that the ministry considered even a discussion of the idea premature.

The ministry's objections are based on the fact that OPEC has quotas for oil production, and this is something Russia does not need for gas. Gas production in Russia rests on potentialities of deposits and on the quickly growing demand for gas at home and abroad. Moreover, Gazprom is bound by long-tern export contracts, and they are its natural lodestar. As for OPEC, it was established in 1960 to coordinate the policy of oil producers in their clash with the U.S. and other Western countries.

In this case, the ministry's position coincides with Gazprom's view, which already accounts for a quarter of the European gas market, and half of import supplies. A formal alliance with other suppliers is the last thing Gazprom needs today. But this is today, when it still has enough gas to honor its long-term contracts and meet the growing external demand, although it already has to limit supplies to the RAO UES, the Russian electricity monopoly.

Gazprom's production is clearly lagging behind the growing demand. Under the circumstances, export quotas would not only help save face if there is not enough gas for exports, but also keep export profits at the same level with higher (or high) prices. Gas quotas promote rather than impede the development of the gas market in conditions of uncontrolled consumption. They are good for the global energy balance.

Interestingly, all politicians and analysts are trying hard to take the cartel idea of a gas OPEC out of its political context. It is clear that Khamenei's proposal is more political than economic. There is a risk that in a bid to restore its waning popularity, the George W. Bush Administration will still decide to deal pinpoint strikes at Iran's real or invented nuclear facilities. This compels Iran to go all-out in a bid to find potential allies, and prove that it has levers of influence on industrialized countries.

Clearly, Russia's cartel with Iran and Algeria would be an undisguised challenge to the West, and not only in the energy sphere. However, in perspective this alliance is quite possible. For the time being, long-term contracts are crucial in the world gas market, and most of them involve transportation through pipelines. But trade in liquefied natural gas (LNG) is skyrocketing. The LNG consumption is growing 3.5 times faster than that of pipeline-transported gas (7.7% a year against 2.2%). A clash of interests on the market between sellers and buyers may encourage consolidation of major gas exporters, all the more so since the LNG and oil markets have an identical structure. The EU is fully aware of this.

Some big Western companies are beginning to consolidate their positions in countries that can potentially become cartel members, ignoring political considerations, even the threat of America's anger.

On January 29, 2007, the European oil giants Royal Dutch Shell and Repsol YPF sighed a tentative agreement with the Iranian government to develop Persian Gulf gas deposits. Under the agreements, the UK-Dutch concern, and the Spanish company will build an LNG plant and a port terminal for the South Pars deposit in southern Iran. The plant will have a capacity of three billion cubic meters of gas a year. Shell estimates the project at $4.3 billion dollars. Iranian national oil company NIOC believes the costs may reach five to six billion dollars.

Returning to the question of Moscow's attitude to Iran's proposal, we should bear in mind that Russian President Vladimir Putin was the first to voice the idea of a gas OPEC. At the meeting with Turkmen President Saparmurat Niyazov in 2002, he offered Central Asian countries to create what he called a "Eurasian gas alliance" together with Russia. But at that time, Putin's suggestion did not meet with support of the proposed cartel's members, Turkmenistan above all.

Much has changed since then, including the gas correlation on post-Soviet territory. However, if Russia is to consider different versions of gas producers' alliances in the face of increasing consumer solidarity, it should start with its neighbors - Central Asian nations. The political will of potential members is the only missing instrument for translating the idea into reality, although in bilateral discussions, Central Asian leaders always talk about it.

Interest in this subject on the part of Iran, Algeria, and other Islamic countries may encourage Turkmenistan, Kazakhstan, and Uzbekistan to revive dialogue with Russia. Clearly, today Russia will have to share some of its monopoly, and possibly profits, on the Western markets with the future allies. But this turn of events may have its own advantages - guaranteed gas supplies, and a farewell to the tiresome competition for markets and top prices.

In mid February, Vladimir Putin will visit Saudi Arabia, Jordan, and Qatar. In April major gas producers and exporters - gas OPEC potential members - will meet in Qatar to discuss concerted efforts. The idea of a gas cartel will probably become institutional at this meeting.

Igor Tomberg, Ph. D. (Economics), is a senior research fellow at the Center for Energy Studies of the Institute of World Economy and International Relations, Russian Academy of Sciences.

The Problem in Venezuela

2007-02-01T11:16:00.000Z

Emboldened Chávez eyes oil sector, may run into problems

Venezuelan President Hugo Chávez may run into some significant obstacles when he tries to take control of heavy oil projects in the Orinoco River belt, analysts say.

By Steven Dudely

The largest section of the Venezuelan congressional law passed Wednesday, which gives President Hugo Chávez the power to rule by decree for the next 18 months, concerns the energy sector, where Chávez hopes to enact swift changes, including taking a majority stake in the production of 600,000 barrels a day of heavy crude in the Orinoco River basin.

But analysts say the complicated finance packages involved in these heavy-crude deals may slow the takeover process considerably and that the government's ability to manage these wells over the long-term is in doubt.

Venezuela is the fifth-largest oil producer in the world, the fourth-largest supplier to the United States and has the highest amount of reserves outside of the Middle East. In the 1990s, the government opened up the oil sector to foreign producers. Now Chávez, with the help of a national assembly that is controlled by his allies, is turning back the clock.

The law, which was passed in a spirited public session in downtown Caracas, states that the president can ``dictate laws that permit the government to assume control . . . of the operations of associations operating in the Orinoco.''

It adds that the government can create ''mixed companies,'' as it did in 2005 with 32 oil wells then controlled by multinationals, or take complete control of the fields.

As expected

The move was expected, as Chávez has been hinting at taking over ''strategic interests'' of the country for weeks, including the oil wells in the Orinoco, natural-gas projects and the bulk of the telecommunications and electricity industries, all of which are mentioned in the law.

But analysts say the government may have overlooked the type of fine print that could hold up its bid to quickly take the majority stake in the Orinoco.

Corporate obstacles

Currently five of some of the largest oil companies in the world, including U.S.-based ExxonMobil and ConocoPhillips, have a majority stake in the four Orinoco projects. The companies launched the projects in the late 1990s -- a time when crude prices were closer to $10 than $50.

Consequently, the banks financing part of the estimated $27 billion needed to get these projects off the ground required more assurances. Part of the deal for ConocoPhillips' Petrozuata project, for instance, involved channeling some oil revenue through the lenders, which included Citibank, to ensure payment.

In addition to the banks, Chávez will have to negotiate debt acquired through bond issuances and multiple layers of partnerships. One of the messier examples is the Cerro Negro, Orinoco's largest producer at 101,000 barrels a day.

ExxonMobil and Venezuelan state oil company, Petróleos de Venezuela SA, or PDVSA, have partnered on both the production and refining sides of the Cerro Negro project. But the two sides have squabbled in the past. ExxonMobil refused to accept the government's new terms on a field in 2005 and pulled out of that project.

ExxonMobil is also one of the few companies that has openly questioned the Venezuelan government's actions, and some analysts think there might be another showdown concerning the Cerro Negro field.

''The cost of a divorce would be really high for both sides,'' said Roger Tissot, an analyst at PFC Energy, referring to the ExxonMobil and PDVSA project.

Not all analysts are troubled by the complicated operational agreements in the Orinoco, and most point to the government's $37 billion in reserves as its ace in the hole.

''The small print always takes a lot of time,'' said Alberto Quirós, a former Shell and PDVSA executive. ``But at the end of the day, they'll work it out because the government has a lot of money.''

Can it work?

If the government manages to untangle the knots to take control of the Orinoco, some oil analysts wonder whether it will be able to efficiently run the operations.

The government has made an effort to train new oil engineers as part of its push to double production in the country to nearly 6 million barrels per day by 2012. But technical know-how in PDVSA is still suffering from the departure of close to 20,000 state oil workers during a national strike in 2002-03, as evidenced by a string of deadly accidents at refineries in recent months.

''The government is living in fantasy land if they think they can kick everyone out and do it itself,'' said one analyst whose company does not allow him to be quoted by name because of the sensitivity of the issue.

Despite the obstacles, Chávez is moving ahead, and some expect the changes in the Orinoco operating contracts to be the first decree he enacts.

Steven Dudley is a correspondent with the Miami Herald.

The New Cold War

2007-01-31T17:40:00.000Z

Energy war

Russia uses its vast oil and gas resources to trigger shifts in power equations, effectively eroding the West's post-Cold War gains.

By Vladimir Radyuhin

The year 2007 will see the confrontation between Russia and the West over the energy resources of the former Soviet Union gain new intensity. Throughout the past year the West watched with mounting alarm as Russia skilfully used its vast oil and gas resources to set a new energy agenda that is not only reshaping the domestic and international energy markets but triggering shifts in global power equations, effectively eroding the West's post-Cold War gains.

As Russia assumed the presidency of the Group of Eight (G-8) in 2006, President Vladimir Putin called for redefining the concept of energy security so that it involved not only the security of oil and gas supplies for the consumer, but also the security of sustained demand for the producer.

Under the current system, which Putin described as "energy egoism" benefiting "a small group of most developed countries", energy reserves across the world are open to, and controlled by, American corporations. In Putin's model, energy resources are controlled by state-owned companies, the "national champions" who would represent the country's interest in international commerce.

Putin's drive to regain government control over the country's energy assets, which had been sweepingly privatised under Russia's first post-Soviet President Boris Yeltsin, was marked with crowning success last year. Western energy giants suffered two major setbacks in their attempts to win a foothold in the Russian energy market.

In October, the state-owned natural gas monopoly, Gazprom, dropped plans to give a 49 per cent interest to Western firms in the Shtokman field in the Barents Sea and decided to retain full ownership of the world's biggest gas reserve holding 3.7 trillion cubic metres of natural gas and more than 31 million tonnes of gas condensate.

Sakhalin-2 Takeover

In December, Gazprom ousted Royal Dutch Shell from its leading position in Asia's biggest energy project, Sakhalin-2. Faced with multi-billion-dollar legal actions and licence recall over environmental damage, Royal Dutch Shell and its two partners, Mitsui and Mitsubishi, agreed to sell just over 50 per cent of their shares to Gazprom.

With the takeover of Sakhalin-2, the better part of the Russian oil and gas sector reverted to government control. The Kremlin's grip on energy exports was further consolidated last summer when the Russian parliament passed a Bill that gave Gazprom monopoly rights for the export of natural gas, both pipeline and liquefied natural gas (LNG). While the privately owned oil companies continue to produce the bulk of crude, they closely coordinate their corporate decisions and strategies with the Kremlin. Also, a state-owned company, Transneft, controls all oil export pipelines.

Putin's energy security model further threatens Western interests because it replaces the so-called "liberal, open global oil market order" dominated by American companies with a network of long-term agreements and joint ventures with other energy-producing and energy-consuming countries in the developing world, such as China and India.

Last year the Russian and Iranian Presidents agreed to coordinate their gas-marketing strategies in European and Asian markets. Gazprom signed a memorandum of understanding with the Algerian state company Sonatrach, the second biggest supplier of gas to Europe after Gazprom, to cooperate in upstream asset swaps, joint bidding for assets in third countries, and in the LNG business. In September the Gazprom chief paid the first visit to Qatar, another major gas producer, to discuss cooperation in the gas field.

Addressing the Shanghai Cooperation Organisation (SCO) summit in Shanghai last June, Putin called for the setting up of an SCO "energy club". In fact, Russia has come a long way towards forming such a club, having signed long-term oil and gas deals with China, and strategic pacts with Kazakhstan, Turkmenistan and Uzbekistan for the purchase and joint development of their hydrocarbons.

A confidential North Atlantic Treaty Organisation (NATO) report prepared in the run-up to its summit in Riga, Latvia, in November warned that Russia was out to set up a gas cartel stretching from Algeria to Iran and Central Asia, to use as a political weapon against Europe.

Wave of Nationalisation

Putin's natural resources nationalism has spurred a global wave of nationalisation and consolidation of state control over energy resources from Central Asia to West Asia, from Africa to Latin America. Russian supplies of weapons to energy-producing developing countries, such as Venezuela and Algeria, embolden them to challenge the dominance of the United States. Resources-rich countries today control over 70 per cent of global energy resources, while the share of Western energy giants has shrunk to less than 10 per cent. This has thrown the West into a state of panic.

"The mounting global energy leverage that is increasingly coming to reside in the hands of Russia and its strategic partners is an irresistible power literally unequalled in all human history, for it is the power to throttle, or even to credibly threaten to strangle, the highly industrialised economies of the West," warns W. Joseph Stroupe, a writer on energy geopolitics.
Where has all the hype about the West's victory in the Cold War gone?

Marshall Goldman, associate director of the Davis Center for Russian Studies at Harvard, U.S., claims that the U.S. is defenceless in the face of Russia's energy wealth which has made it more powerful now than at any time in its history. "In the Soviet era there was mutually assured destruction. They had nuclear weapons. We had nuclear weapons. We didn't use them, because we were worried they would and vice versa. Here you don't have that kind of restraint," he said.
What drives the West especially mad is that its companies can no longer walk into the Russian energy supermarket and pick up assets as they like. Moscow has made it clear that foreign companies will only get access to Russian energy resources if they offer their own assets and technologies in return, and if Russian companies find these assets worth swapping. Explaining Gazprom's decision to develop Shtokman alone, Putin said that foreign companies had failed "to offer adequate assets" in exchange for a stake in the vast Russian field.

To add insult to injury, Putin in October approved plans to promote Russia's own crude oil mix, REBCO (Russian Export Brand Crude Oil), which should eventually replace Brent as a pricing benchmark, and to set up the Russian Fuel and Energy Exchange where the new mix will be traded in roubles, rather than in dollars.

A month later, U.S. Senator Richard Lugar urged NATO to intervene to stop Russia from flexing its energy muscles. "The alliance must avow that defending against such attacks [using energy as a weapon] is an Article 5 commitment," the outgoing Chairman of the Senate Foreign Relations Committee said on the sidelines of the Riga summit, referring to the need to invoke the alliance's mutual defence clause. The "Comprehensive Political Guidance" document adopted at the summit identified "the disruption of the flow of vital resources" among "the main risks or challenges for the alliance" for the next 10 to 15 years.

While NATO refrained from pointing the finger at Moscow, the U.S. has vowed to take on Russia in 2007. National Intelligence Director John Negroponte predicted a further worsening of relations with Moscow in the New Year. He accused Russia of "attempting to exploit the leverage that high energy prices have afforded it, increasingly using strong-arm tactics against neighbouring countries".

"Russian assertiveness will continue to inject elements of rivalry and antagonism into U.S. dealings with Moscow, particularly our interactions in the former Soviet Union, and will dampen our ability to cooperate with Russia on issues ranging from counter-terrorism and non-proliferation to energy and democracy promotion in West Asia," the top U.S. intelligence official said in his annual review of global threats for the Senate Intelligence Committee on January 11.
The statement amounted to the declaration of a new Russia containment policy. U.S. media readily responded to the call.

"It's time we started thinking of Vladimir Putin's Russia as an enemy of the United States," The Wall Street Journal fumed. "... It is because the foreign policy of Russia has become openly, and often gratuitously, hostile to the U.S."

New Battleground

Energy will be the main battleground in a new Cold War the U.S. is going to wage on Russia; and the directions of attack have been already identified.

One is Georgia and Ukraine, key transit countries for oil and gas exports to Europe, which the U.S. will try to put under its control by getting them admitted to NATO. The Baku-Tbilisi-Ceyhan (BTC) oil pipeline, which transports Caspian Sea oil to Turkey, runs across Georgia, while Ukraine is the main transit route for Russian natural gas bound for Europe.

Washington last year put Georgia on the fast track for admission to NATO together with several East European countries that have been waiting for their turn since 2002. The U.S. Senate also voiced readiness "to support efforts by Ukraine" to join the alliance even though Ukraine's Prime Minister said his country had no plans to apply.

Central Asia is emerging as another focal point of energy wars in 2007. The sudden death of Turkmenistan's long-time autocratic ruler Saparmurat Niyazov in December gave the U.S. and the European Union a new chance to push through their strategic plan to build the Nabucco Pipeline, which would run from Central Asia through the Southern Caucasus and Turkey to Europe, bypassing Russia.

The U.S. will also lobby for the creation of an "Energy NATO", as America's main European ally Poland christened a new Western energy alliance against Russia. The idea is to make Europe speak to Russia with one voice and force it to ratify the Energy Charter, which would give Western companies free access to Russian energy resources and pipelines. "Energy NATO" would stop European nations from striking bilateral energy deals with Russia and prevent Russian companies from buying into downstream energy projects in Europe.

Washington also seeks to block the construction of the Nord Stream gas pipeline, which would bring Russian gas directly to Germany across the Baltic Sea, and scuttle Gazprom's plan to expand the Blue Stream gas pipeline - the Russian alternative to the Nabucco project - running from Russia to Turkey across the Black Sea.

The unfolding energy war between Russia and the West has a direct bearing on India's interests. The U.S. sees its confrontation with Russia as part of a wider competition for access to limited energy resources with the powerhouse economies of the rising East, above all India and China.

In his January review of global threats to the U.S., Negroponte warned that access to energy is emerging as a source of greater vulnerability for the West as consumers compete more aggressively for resources. "We have entered a new era in which security has become an increasing priority not only for the U.S. and the West, but also rapidly developing economies such as China and India that are becoming major energy consumers," he said.

What the U.S. National Intelligence Director coated in diplomatic language, Senator Lugar put quite bluntly in his keynote address on the sidelines of the Riga summit:

"As large industrialising nations such as China and India seek new energy supplies, oil and natural gas may not be abundant and accessible enough to support continued economic growth in both the industrialised West and in large rapidly growing economies. In these conditions, energy supplies will become an even stronger magnet for conflict."

In the race for the Russian energy resources, Asian consumers have important advantages, from Moscow's point of view, over the U.S. and Europe. India and China have no problems with Putin's model of energy security based on Russian state control over resources and pipelines, and a system of long-term contracts and joint ventures with consumers.

India, China, Japan and South Korea are all looking to benefit from Russia's plans to diversify its energy export routes, which mostly go to Europe today. Moscow plans to increase exports of crude to Asia from 3 to 30 per cent and that of gas from 5 to 25 per cent by 2020. India, however, faces stiff competition from other major energy consumers in Asia and will have to work hard to win its share of the Russian energy pie.

This article was published in the January edition of Frontline, India’s national magazine from the publishers of The Hindu (Volume 24 - Issue 02).

Vulnerablities of an Oil Axis

2007-01-30T14:52:00.000Z

Could Weak Oil Cost Venezuela, Iran Clout?

By David Luhnow, Bill Spindle, and Guy Chazan

Softening oil prices over the past few months have spurred hope in Washington that less revenue for oil-rich states could weaken the hand of governments the U.S. considers worrisome -- particularly those in Iran, Venezuela and Russia.

The three nations are potentially vulnerable: Oil-and-gas revenue accounts for between two-thirds and three-quarters of government income in both Venezuela and Iran, and only slightly less in Russia. So, a big drop in oil prices would slow economic growth and hit government finances, forcing them to cut back spending increases that have boosted the popularity of all three governments at home and emboldened them abroad.

But it is far too early to expect the changing economics of oil to have big political effects. For one thing, although the price of oil has fallen 28% since hitting an all-time high of $77.03 in July, it is still high by historical standards. The three nations, having weathered crises before, have all built up substantial currency reserves to cushion against a further fall in prices.

"Fifty-dollar oil doesn't put any of them in any grave danger," says Michelle Billig, director of political risk at PIRA Energy Group, a New York-based consultancy. "After all, it was only a few years ago that we were talking about an oil windfall for these places at $30 a barrel."

Equally important, it isn't clear that any of the trio would radically alter their policies even if squeezed harder economically. Under President Vladimir Putin, a former KGB spy, Russia has put a priority on reasserting its political might and reclaiming the global influence it wielded during the Soviet Union's heyday. Generations of leaders in Tehran have made the development of nuclear power a stated goal -- and asserted the country's hypothetical right to a nuclear weapon -- no matter the price of oil.

Venezuela might have the hardest time pursuing the assertive foreign policy of President Hugo Chávez, a populist and former army officer, if oil prices were to drop much more. Over the past few years, Mr. Chávez has used oil money to try to counter what he sees as harmful U.S. influence in Latin America. Caracas has helped finance some neighbors' debt, and it has handed out cut-rate oil to dozens of countries, including Fidel Castro's Cuba -- and even some U.S. communities through the state oil company's Citgo subsidiary.

Unlike Russia, and to a lesser extent Iran, Venezuela has been much more reckless in spending its oil windfall. Last year alone, public spending grew 43%, widening the gap between total government income and outlays to about 1.5% of the total economy, according to estimates by Morgan Stanley.

So far, falling oil prices haven't dented Mr. Chávez's spending habits. Just last week, he announced a program to send 100,000 poor Venezuelans each year to vacation in Cuba. He also recently offered the army's services to build a road in Nicaragua at a projected cost of $350 million.

While economists agree that Mr. Chávez's free-spending policies may eventually shipwreck the Venezuelan economy, they say that won't happen -- if it happens at all -- for at least another year. The main reason: Venezuela has accumulated more than $36 billion of reserves.

But there are signs Mr. Chávez could be headed for trouble, even without a much bigger drop in oil prices. He recently ordered an increase in gasoline prices -- which the government has long subsidized -- to raise federal revenue. And some economists view his recent nationalization of Venezuela's biggest telephone and electric companies as a sign his administration is eager to raise more money to keep up its spending.

A further drop in oil prices, then, might leave Mr. Chávez with some tough choices about where to trim the fat. High on the list would be his foreign aid. By far the chief beneficiary of Mr. Chávez's largesse is Cuba, which receives 103,000 barrels a day of refined petroleum products in exchange for the services of Cuban doctors and other specialists. Analysts believe aid to Cuba totals about $3 billion a year.

Cutting back on such aid would be a relief in Washington, which worries about the spread of Mr. Chávez's socialist message, and could also be welcome at home, where many Venezuelans resent Mr. Chávez's largesse toward others when Venezuela has seen little progress on issues such as reducing poverty. Indeed, a recent study by Claudio Loser, a former International Monetary Fund official, showed that Venezuela's real per-capita income has grown a cumulative 1% since 1998, the year Mr. Chávez took power.

Mr. Chávez also might be forced to cut back on the domestic front. Last year, Venezuela had Latin America's highest inflation rate, about 17% -- and it is expected to climb sharply this year.
"I think it will be a difficult year for the Venezuelan economy," says Francisco Rodriguez, who teaches Latin American economics at Wesleyan University in Middletown, Connecticut.

Russia is much less vulnerable to oil prices. Under Mr. Putin, the country has built up $300 billion of foreign-exchange reserves, an $89 billion rainy-day oil fund and runs big yearly budget surpluses. Mr. Putin is loosening the purse strings this year in the run-up to presidential elections in early 2008, with a 26% increase in spending from 2006. But the budget would still break even with oil as low as $38 to $40 per barrel. However, lower oil prices could hurt earnings at energy companies that form the backbone of Russia's economy.

Iran is more exposed to the vagaries of the oil market. As revenue has soared with oil prices, Iran's public-sector spending has expanded almost as fast. To pay for massive subsidies for most daily goods -- including gasoline, bread and heating fuel -- the government has borrowed in each of the past two years from a special rainy-day fund set up to retain some oil revenue for when prices fall again. But that spending has ignited inflation, now running around 15%.

Iranian President Mahmoud Ahmadinejad introduced a budget early last week that included a 20% increase in spending for the Iranian fiscal year that begins in March. He said the government, whose ultimate authority is held by a council of Islamic mullahs, would be able to add to its rainy-day fund if oil prices remain above $33 per barrel, the level the budget assumes for Iranian oil.

But some private economists doubt the budget calculations and predict Tehran would again fall back on those surplus funds to finance spending.

David Luhnow in Mexico City, Bill Spindle in Tehran, and Guy Chazan in Moscow are correspondents with The Wall Street Journal. Jose de Córdoba in Mexico City contributed to this article.

Where East Meets West

2007-01-29T22:21:00.000Z

Turkey’s Energy Dependence and Independence Dilemma

By Ahmet Türker

From one side, Turkey is signing all sorts of pipeline contracts to diversify gas supplies. From the other side, the growing dependence on foreign energy sources is a concern. These two view points may be nurturing each other to cause the Turkey’s energy dependence-independence dilemma.

This week, Prime Minister Erdogan expressed his concerns for the cost of total energy imports. He said "Turkey's annual cost of total energy imports was $29 billion". The $16 billion of this amount was the cost for oil and oil products imported. The remaining $13 billion is paid for the natural gas imports.

The total energy imports is the two thirds of Turkey’s current account deficit which is around $48.8 billion. The account deficit has been jumped from around $26 billion in 2005 to $48.8 billion.

In 2006, 24 million tons of crude oil was imported. Only 2.2 millions of it was produced domestically. The crude oil exports and the corresponding costs are given as follows. Despite high prices the oil consumption is expected to be strong in the domestic market. Already high taxes on oil and cars, is diminishing the effect of rising oil prices. Whether the average price for oil this year is above last year does not make such a big difference, because the elasticity is expected to be very low in the short term.

Probably aware of this, Turkish policy makers are pushing more for nuclear energy while public seems more in favour of using national resources such as hydro power generation. As the numbers increase, the debate for using the national resources or nuclear is expected to increase. Yet none of them produced any viable answers to the PM’s concerns.

The Minister for Energy, Hilmi Guler has been against a rise in electricity prices for over 4 years. As a result, using electricity for heating homes has been much cheaper than using natural gas which has increased 60% last year. The public however seems like not being aware of it. This week also, to a question asked by a journalist about the possibility of electricity crises, Mr. Guler has given a political answer that “We are working hard to avoid it”.

Turkey has around 40000 MWs of power generation capacity and its peak consumption has been around 26500MW. With theoretically plenty of reserve margins, electricity shortages shouldn’t be such a concern for at least 3-4 years.

But the bells for a crises are ringing now. As electricity prices stayed same for such a long time and the big jump of gas prices during that time has pushed some natural gas power plants operated by auto producers to stop. Turkey is currently generating around 32% of its electricity from natural gas.

As shortages become more and more likely and as the policy to increase the inflow of foreign gas from different countries, Turkey is expected to use that gas for its own electricity production. Because two years is not enough to built enough hydro capacity (including licensing), the only viable future seems to be already readily available natural gas from pipelines.

More than that, while trying to be an energy hub, Turkey’s current contracts are not permitting re-exportation of the gas imported from foreign countries. One of the major agreements is with Russia in terms of take or pay. As a result of this agreement Turkey found itself highly addicted to “take” the Russian gas to avoid any “pays”.

The doubts about the unreliability of Iranian gas are another problem. This week on 24th January 2007, Vatan, Turkish daily newspaper, has reported that Iran is sending 16 million cubic meters less gas than expected. The newspaper claimed the source as an unnamed officer from Turkish pipeline company BOTAS. The problem has not panicked anyone thanks to mild weather around the country. To avoid any problems, Turkey is buying LNG to backup this capacity which is also adding to increasing extra cost of importing energy.

There is nothing wrong with importing from different sources. But if the contracts are not crafted correctly and if the countries exporting gas fail to fulfil the agreements, Turkey’s grand energy transit strategy may cost dearly to its tax payers and cause its economy to slowly stagnate. The concerns about growing cost of energy imports may not walk further from being a concern, if Turkish policy makers can not match their strategies with policies to increase incentives for the private entrepreneurs to invest in domestic sources.

Finally, Turkey acts slowly to use its domestic resources to built capacity, but the growing economy deficits the energy balance. Due to the energy corridor strategy, there is plenty of gas to produce electricity. As long as there is readily available gas around, the policy makers do not act accordingly and urgently to built capacity from domestic resources.

This commentary by Ahmet Türker is from USAK's Energy Review Newsletter

Major changes for the Majors?

2007-01-26T21:20:00.000Z

Breaking up is increasingly hard to do in the oil business

By Tony Jackson

After last week's damning Baker report on BP's safety record, there have been predictable calls for the oil giant to be broken up. I have no special knowledge of how likely that is to happen. But the underlying issue goes well beyond the oil industry. In today's markets, what is the case for vertical integration?

The theoretical position was set out 70 years ago by the Nobel Prize-winning economist Ronald Coase. On the one hand, Coase said, firms will produce goods and services in-house whenever that is cheaper than buying them in. But the more they do that the more inefficient they become, eventually defeating the object.

In spite of that, vertical integration remained the norm until comparatively recently. Take the food and detergents manufacturer Unilever, which, as late as the 1970s, owned palm oil plantations, a shipping line, oil mills, packaging plants, truck fleets and supermarkets. Everything in the supply chain was controlled, from raw material to the final customer.

That kind of thing is long gone - except in the oil industry. The majors typically find oil, ship it and refine it. They have vast petrochemical operations. They are brand managers, both of petrol and motor oils. And they are retailers on a huge scale: Exxon, for instance, has 35,000 service stations worldwide.

Granted, the degree of integration varies. At one end of the spectrum is Exxon, which describes its intense integration as "a key differentiator versus the competition". More than 90 per cent of its petrochemical capacity, for instance, is directly linked to its own refineries or gas plants.

At the other end stands BP. In part, this is a matter of historical accident. In the second oil shock of the early 1980s, BP lost 40 per cent of its crude supply, mainly because of events in Iran, and therefore had to develop expertise in the spot markets in very short order.

The experience turned the company away from the integrationist philosophy, to the extent that in 2005 it sold its entire petrochemical operations - a feat that in Exxon's case would presumably be impossible. But BP is still bizarrely integrated by any standards other than the oil industry's. Like Unilever of old, it controls the entire process from the oil well to the final retail customer.

Hence the break-up argument. In the version proposed by JPMorgan Cazenove, this would involve an upstream and a downstream company. The first would comprise oil and gas production and pipelines, the second refining, shipping, marketing and retail.

The arguments for and against this are lengthy, and turn mainly on the short-term effects on the BP share price. But what concerns us here is the wider context. Is this the right time to be considering radical surgery of this kind?

Bear in mind that the disintegrationist philosophy has been dominant for almost two decades. From 1990 onwards, the demise of communism opened up vast new areas of cheap production, from China to Eastern Europe. Why make a thing yourself when the market price keeps falling?

In addition, the information revolution made the markets for goods and services more efficient and transparent. One of the main planks of vertical integration - the sheer difficulty of finding secure supplies at a good market price - fell away. And finally, the rise of shareholder power meant the gigantism favoured by managers went out of fashion. Break-ups became not only possible, but actively desirable.

Now, however, the pendulum may be swinging back. The China effect has been reversed. Rather than cheap goods, it now means dear commodities. In several industries, manufacturers are setting up strategic alliances to secure raw materials. And in the oil industry, companies are finding it much harder to wring supply from host governments on the old easy terms.

In such a world, creating a free-standing oil refining and marketing company might seem a dicey proposition. Such companies exist - Valero in the US, for instance, and Neste in Finland - and they have prospered greatly from recent shortages in refining capacity. But this is an acutely cyclical industry, and in time those shortages will go away.

So even if BP does decide to split itself up, I doubt if it will create a precedent for its rivals, as the UK chemicals group ICI did when it de-merged 14 years ago. Apart from anything else, one company that would certainly not follow BP's example is Exxon. And, sadly, these days it is Exxon, not BP, that commands the respect of its oil industry peers.

Tony Jackson is a writer for The Financial Times.

The Difference Between Politics and Reality

2007-01-25T15:21:00.000Z

'Energy Independence'

By Daniel Yergin

A cry is being heard across the nation, and loudly so in Washington. It is the call for "energy independence," and it will be at the center of the national energy debate over the next several months, providing the rationale for new policies and expansion of existing ones. Indeed, one might even anticipate a "declaration of energy independence" this July 4.

But what does "energy independence" mean for a $13 trillion economy that uses the equivalent of 50 million barrels of oil every day? Is it realistic and achievable? Or is it rhetorical overreach that will lead, as in the past, to disappointment and cynicism, the kind that drives the cycles of inconsistency in energy policy and leaves the U.S. no less vulnerable?

The latter is more likely -- at least without a realistic appraisal of the U.S. position and the country's possibilities. But "energy independence" can provide a constructive framework for policy if it is properly thought through and the realities are recognized.

With geopolitical turmoil, volatile prices and continuing reminders of the international political power of oil, the concept of energy independence is compelling and deeply appealing. In fact, it has been appealing for quite some time. The idea was introduced by Richard Nixon in November 1973, three weeks after the Arab oil embargo, when he introduced "Project Independence" and pledged that the U.S. would, within seven years, "meet our own energy needs without depending on any foreign energy source." It was a bold assertion but one that puzzled his own advisers. "

I cut the reference to 'independence' three times from the drafts, but it kept being put back," recalled Richard Fairbanks, a drafter of the speech. "Finally, I called over, and was told that it came from the Old Man himself." Nixon knew that energy independence was something that Americans would crave after the 1973 oil shock: He deliberately modeled his Project Independence on John F. Kennedy's Apollo goal of getting a man on the moon within a decade.

Back then, the goal may have seemed only somewhat unlikely. After all, when Nixon began his political career after World War II, the country already had a long history of energy independence -- and then some. For it had actually been the world's No. 1 oil exporter; indeed, out of seven billion barrels of oil used by the Allies in World War II, six billion were produced in the U.S. By the late 1940s, the U.S. had become a net importer of oil, although the real surge in imports did not begin until the 1970s.

It proved much easier to get a man on the moon than to make a nation energy independent. In the three and a half decades since Nixon, the U.S. has gone from importing a third of its oil to importing 60%, and that share is set to continue rising. The country is on a similar path for natural gas (which is about 25% of our total energy usage). North American supply has flattened out. Yet large amounts of new natural-gas-fired electric power generation have been added over the last decade, which means that demand will increase. Natural gas is also used in the making of ethanol, adding to the demand growth. This means growing imports of liquefied natural gas -- LNG -- rising from 3% of our current demand to more than 25% by 2020.

All of which suggests that thought needs to be given both to what energy independence means and what can be achieved. For, right now, the U.S. is moving at some speed in the opposite direction, toward greater integration into the global energy markets.

How dependent is the U.S.? If we look at total energy -- including coal, nuclear and a small but growing share from renewables -- the country is over 70% self-sufficient. Oil -- refined into liquid fuels for transportation -- is where most of the current dependence comes from. The risks do not owe to direct imports from the Middle East, contrary to the widespread belief. Some 81% of oil imports do not come from that region. Thus, only 19% of imports -- and 12% of total petroleum consumption -- originates in the Middle East.

Our largest source of oil imports is Canada. It's also the source of most of our current natural gas imports, via pipelines. One can hardly say that either Canada or energy imports from Canada constitute a major threat to national security. The energy trade is part of a normal trading relationship with the country with which we're conjoined economically and which just happens to be our biggest trading partner. Our second largest source is Mexico, with which we are also in a dense relationship. Mexico depends upon oil for about a third of total government revenues.

The picture becomes more complex when one turns to our third largest source of oil imports, Venezuela. The once much-discussed "hemispheric energy solidarity" loses much of its resonance when balanced against the "21stcentury socialism" of Venezuela's Hugo Chávez. After all, President Chávez is currently nationalizing the private sector, has on occasion threatened to embargo oil shipments to the U.S., and is putting much effort into fashioning an anti-U.S. alliance, the latest manifestation being the visit of Iranian President Ahmadinejad to Caracas. These are not the actions one normally associates with a good friend or a reliable trading partner.

Yet the source of imports is significant only up to a point. Energy security is a global issue.

Although oil around the world varies greatly in terms of physical qualities and transportation costs, there is only one world oil market. So disruptions and loss of supply in one place radiate throughout the global market -- and global politics -- affecting consumers everywhere. Even if the U.S. did not import a drop of oil, it would still be vulnerable to turmoil involving oil outside its borders.

What are the prospects for "energy independence" in the way that Richard Nixon defined it 34 years ago -- that is, 1930s-style "autarky" and total self-sufficiency? Based on where we are today, very small, at least for a couple of decades. In terms of vehicles, as pointed out in our new study on "Gasoline and the American People," only about 8% of the auto fleet turns over every year. So the lead times are long for more efficient vehicles to enter the fleet.

Ethanol, derived from corn, is on track to grow to about 10% of our total gasoline pool in a few years. This is certainly not inconsequential; it represents diversification and is equivalent to creating a new Indonesia-level oil-producing country in America's Midwest. But signs are already evident of an upper bound on corn-based ethanol, as the fuel-versus-food trade-off pushes up corn prices, setting off vocal protests from livestock growers and dairy farmers and, in due course, from those who buy breakfast cereals and soft drinks made with high fructose corn syrup.

What about technological advances that provide new answers? There is a "great bubbling" all along the innovation frontier of energy, ranging from conventional energy and efficiency to, especially, renewables, alternatives and "clean tech." Activity this wide-ranging has never been witnessed before. The impact could well be considerable, or even transformative. One would be very hard-pressed today, however, to say when and what form this impact will take.

In the end, if energy independence is presented as self-sufficiency, it will likely fall flat. And, as prices run through their cycles, disappointment will undermine the longer-term commitments that are required for a sound energy future. Today, quite simply, cutting ourselves off from global energy markets is not realistic.

But, if the goal of energy independence is understood differently, to mean energy security -- resilience, robustness, reduced vulnerability -- then it is much more useful.

This kind of definition recognizes that trade, in itself, is not bad. At the same time, it emphasizes the central goal of diversification -- encouraging investment and higher levels of research and development in both alternative and conventional energy sources. It means a new push for energy conservation, higher energy efficiency, lower energy intensity -- a theme that German Chancellor Angela Merkel will make the centerpiece of her agenda as chairman of the G-8 countries later this year. It certainly requires a consistent commitment to pushing the innovation frontier in ways that, eventually, lead to economically competitive alternatives and new technologies.

And it requires an understanding that this kind of energy independence -- as measured in energy security -- actually requires interdependence with other nations, both consumers and producers of energy. Indeed, how we manage our relations with other countries and other regions is a very essential ingredient for our own energy well-being.

Mr. Yergin, chairman of Cambridge Energy Research Associates, is writing a book on energy and geopolitics.

Struggle Between Neighbors in the Middle East

2007-01-24T16:42:00.000Z

Are Saudis waging an oil-price war on Iran?
Falling fuel costs probably not a coincidence, oil traders say

By Robert Windrem

Oil traders and others believe that the Saudi decision to let the price of oil tumble has more to do with Iran than economics.

Their belief has been reinforced in recent days as the Saudi oil minister has steadfastly refused calls for a special meeting of OPEC and announced that the nation is going to increase its production, which Saudi Oil Minister Ibrahim al-Naimi even said during a recent trip to India that oil prices are headed in the "right direction."

Moreover, the traders believe the Saudis are not doing this alone, that the other Sunni-dominated oil producing countries and the U.S. are working together, believing it will hurt majority-Shiite Iran economically and create a domestic crisis for Iranian President Mahmoud Ahmadinejad, whose popularity at home is on the wane. The traders also believe (with good reason) that the U.S. is trying to tighten the screws on Iran financially at the same time the Saudis are reducing the Islamic Republic’s oil revenues.

For the Saudis, who fear Iran’s religious, geopolitical and nuclear aspirations, the decision to lower the price of oil has a number of benefits, the biggest being to deprive Iran of hard currency. It also may create unrest in a country that is its rival on a number of levels and permits the Saudis to show the U.S. that military action may not be necessary.

The Saudis firmly and publicly deny this, saying it’s all about economics. Not everyone believes them. “If under normal circumstances, the price of oil was falling this dramatically [17% in the last few months], Saudi Arabia would have already called for a special OPEC meeting,” says one oil trader. “It’s got to be something else and that something else has to be Iran.”

Costs higher in Iran

The trader notes that Iran, OPEC’s second largest producer, is “in trouble” both in the short and long term. Iran’s oil reserves, he notes, are declining more rapidly than Saudi Arabia’s and are more difficult to extract. While a barrel of oil costs the Saudis $2-3 to get out of the ground and to market, that same barrel costs Iran as much as $15-18.

“Iran does have some oil that costs them $8-10 but most of it is in that upper range,” he said. Moreover, Iran has a large domestic market for oil, particularly fuel oil, which Saudi Arabia, with its smaller population and milder climate, does not.

Perhaps more important, because Iran has limited refining capability, it must import more than 40 percent its gasoline, making it the second largest importer of gasoline in the world after the United States, according to the Department of Energy’s Energy Information Agency.

And since Iran sells gasoline at a rate comparable to the rest of the Gulf states — around 33 cents a gallon — it must subsidize the price on a massive scale. In fact, say traders, Iran is paying about $1.50 per gallon to subsidize domestic gasoline consumption — the world market price of gasoline minus the tiny price per gallon — a practice that is costing Iran billions of dollars annually and eating up most of the state-run oil company’s discretionary funds.

Iran has other problems that make it vulnerable. Inflation is officially running at 17 percent, the highest since the revolution, and unemployment is at 11 percent. U.S. intelligence, though, believes the real figures are much higher, with inflation as high as 50 percent and joblessness much higher among the country's restless youth).

In addition, capital outflow is estimated at $50 billion annually and budget deficits are a chronic problem, leading to overseas borrowing. And none of this takes into account the possibility that the United Nations will impose harsher sanctions if Iran continues its work on nuclear weapons technology.

Political fallout

There are domestic political consequences to such a convergence, note traders and officials in both the U.S. and Iran. Ahmadinejad was elected on campaign promises that he would end corruption and better distribute the nation’s oil wealth. He has been unable to do either; now, with declining oil revenues, his job will be even more difficult.

One sign of this is the street demonstrations he has faced each time his administration has so much as floated the suggestion of a small increase in the price of gasoline. To counter his inability to fulfill his domestic promises, Ahmadinejad has played the nationalism/nuclear card, accusing the West of trying to stifle Iran’s legitimate energy needs.

How long and how successfully he can play these cards is debatable. Municipal elections last month unveiled a lot of dissatisfaction as opposition parties swept through municipal majlises throughout the country.

His rival in the 2005 presidential election, Akbar Hashemi-Rafsanjani, has criticized him publicly for the first time, as have others close to Supreme Leader Ayatollah Khamenei. Student demonstrations and local newspapers are becoming increasingly critical of the “dictator.”

Robert Windrem is an Investigative Producer for NBC News.

Middle Kingdom Takes Center Stage

2007-01-23T20:51:00.000Z

China’s Energy Policy: Strategic Implications

By Gawdat Bahgat

Following the establishment of the People’s Republic of China (PRC) in 1949, the nation was largely self-sufficient in energy. The largest oil field, Daqing, was discovered in 1959 and played a significant role in meeting China’s petroleum demand. Thus, the first two “oil shocks” (1973-74 and 1979-80) had little impact on the Chinese economy and energy sector. Indeed, China exported crude oil to several of its Asian neighbors during this period.

Since the early 1980s, China’s economy has grown by an impressive rate. This skyrocketing and sustained economic growth, in conjunction with a population of more than 1bn people, demanded more energy supplies. The country’s domestic production had failed to keep path with its growing energy demand. In 1993 China became a net importer of oil and in 2006 Beijing was the world’s third-largest net importer of oil behind the United States and Japan.

This current large gap between stagnant energy production and fast-growing consumption is projected to expand further in the next two decades. According to the Energy Information Administration (EIA) China’s oil consumption is projected to rise from 5.6mn b/d in 2003 to 15.0mn b/d by 2030 (3.8% average annual change – the highest in the world).

Similarly, natural gas consumption will jump from 1.2 trillion cubic feet (tcf) to 7.0 tcf during the same period (6.8% average annual change – again the highest in the world). China’s limited oil and natural gas proven reserves further complicate its energy outlook. In 2006 proven oil reserves were approximately 16bn barrels (1.3% of the world’s total) and gas reserves 83 tcf (also 1.3% of the world’s total).

This combination of limited indigenous energy resources and rising demand has prompted Chinese leaders to adopt a multi-faced energy strategy. Three elements of this strategy can be identified: (a) reform the energy sector to maximize domestic production and attract foreign investment; (b) diversify the energy mix to reduce the nation’s dependency on fossil fuels and contain pollution; and (c) diversify energy sources to restrain over-dependence on one or few producing regions.

Reform Of Energy Sector

Chinese leaders agree that a viable and aggressive energy policy is essential to maintain and further expand the high economic growth of the last two decades. However, unlike many other countries, Beijing lacks a national energy agency to draw and implement it. Since the founding of the PRC several national agencies have been established and dissolved. The Ministry of Fuel Industries was abolished in 1955, when separate ministries for coal, electricity and oil were established.

In 1970, a new Ministry of Fuel and Chemical Industries combined the functions of those three ministries, but it was dissolved five years later. In 1988, a Ministry of Energy was launched to oversee coal, oil, nuclear and hydroelectric development, but it was dissolved in 1993. In the early 2000s the central government created the Energy Bureau under the National Development and Reform Commission (NDRC) as an integrated central authority responsible for developing long-term energy strategies. This Bureau was replaced by the State Energy Office in May 2005 – with a mission to safeguard energy security. These continuing changes suggest that China lacks a strong national mechanism to oversee its energy sector.

This institutional instability aside, the oil and gas resources are controlled by three state firms: China National Petroleum Corporation (CNPC), China Petroleum and Chemical Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC) – the government holds a majority stake in all of them. CNPC and Sinopec operate almost all of China’s oil refineries and the domestic pipeline network, while CNOOC has the most expertise with international transactions.

In addition to these state-controlled firms, the country’s first private sector company, the Great Wall Petroleum Group, was founded in 2005. These corporations seek to enhance China’s energy security by investing in domestic exploration and development operations and securing foreign supplies. In addition, Beijing seeks to neutralize threats to oil and gas shipments and to build a strategic petroleum reserves (SPR) as a safeguard against any interruption in oil and gas supplies.

Vulnerability To Attacks

China’s growing dependence on foreign oil supplies has heightened the country’s vulnerability to attacks by terrorists or pirates. Almost all of China’s imported crude oil and refined products are shipped by tankers. However, according to official data, Chinese-owned ships carried only 9% of imported products in 2005. Commercial interests and concern for safe transport of oil shipments have prompted Beijing to develop plans to build a national tanker fleet. By 2010, China intends to transport 40-50% of its oil imports in government-owned tankers, and by 2020 to carry 60-70%.

In addition, it has been building up its naval capacity to secure oil shipments, particularly through the Strait of Malacca, linking the Indian and Pacific Oceans. It is the shortest sea route between India, China, and Indonesia and therefore considered the key choke point in Asia. With Chinese oil imports from the Middle East increasing steadily, the Strait of Malacca is likely to grow in strategic importance in the foreseeable future.

Unlike other major oil consuming countries, China has only recently started to build a strategic petroleum reserve (SPR – MEES, 25 December 2006). The idea of building one has been considered since the late 1990s. The Chinese authorities have chosen four sites to store crude stocks: Dalian, Huangdao, Zhenhai, and Zhoushan. Chinese officials assert that eventually the SPR will hold oil stockpiles covering about 90 days supply.

Diversification Of Energy Mix

China’s energy consumption is overwhelmingly dominated by fossil fuels, particularly coal. This energy mix has caused serious environmental pollution and threatens the sustainable energy supply. Indeed, many of China’s cities are among the most polluted in the world.

For a long time production form the country’s largest oil field, Daqing, met a substantial proportion of its demand; but it peaked in the 1970s, and production has been reduced since 2004. In an effort to offset this decline, the Chinese authorities have sought assistance from international oil companies to boost oil recovery and extend the life of producing fields.

Furthermore, heavy investments were made in the exploration and development of new fields, particularly offshore. Since the early 1990s, domestic production has failed to keep pace with growing demand, and the gap between output and consumption has been increasingly filled by imported oil. This trend is certain to endure.

Figures show two important trends: (a) Natural gas represents a small proportion of China’s energy mix; (b) Natural gas consumption is growing faster than that of coal and oil. Several new discoveries have been made in recent years, but most of China’s current natural gas fields are located in the western and north-central part, away from population and industrial centers in the east and south-east.

In order to offset this imbalance, the West-East gas pipeline has been built. Other pipeline projects from Kazakhstan and Russia are under consideration. In addition, two LNG import terminals, one in Guangdong and the other in Fujian, have been built and several others have been proposed. In short, China’s natural gas development is still in its infancy, hence it has great potential. Future consumption growth will come from: higher domestic gas production, emerging LNG import terminals, and international pipeline projects.

China’s heavy dependence on coal is projected to decline slightly in the near future. This dominance of coal underscores the fact that China is the world’s largest consumer and producer of coal. In recent years, the Chinese authorities have sought foreign investment to expand coal liquefaction projects. The goal is to reduce the country’s dependence on oil and to increase energy efficiency and environmental benefits.

Finally, in order to improve environmental conditions and reduce dependence on fossil fuels, the authorities have shown strong interest in other sources of energy, particularly renewable and nuclear power. But despite these plans to diversify its energy mix, the country’s dependence on foreign energy supplies is certain to grow in the foreseeable future. Simply stated, indigenous energy resources are not sufficient to maintain high economic growth rate.

Going Abroad or ‘Zou Chu Qu’

China’s growing dependence on foreign oil supplies has prompted its oil companies to acquire interests in exploration and production abroad. Indeed, securing future energy supplies has become a key aim of China’s energy and foreign policies. Beijing officially joined the World Trade Organization in December 2001. Around this time, then Premier Zhu Rongji, and Hu Jintao, General Secretary of the Communist Party, called on Chinese companies to pursue a “going-out” or “Zou Chu Qu” policy – part of a broader policy of global economic engagement.

Three major characteristics of this policy can be identified. First, Chinese oil companies have only a short history of merger and acquisition activities abroad. The policy was launched and gained momentum only in the last few years. In the mid-1990s most of China’s oil deals were mainly with Indonesia, Oman, and Yemen.

A decade later, Chinese companies are actively pursuing oil deals in North and South America, Africa, Asia, and the Middle East. Second, Chinese companies have sought to establish a presence mostly in countries where US and European companies are absent or have withdrawn. These targeted countries, like Iran, Sudan, Uzbekistan and Venezuela, have adopted domestic and foreign policies that are largely in contrast with the interests of Western powers.

Furthermore, the absence of American and European companies means the Chinese companies do not need to compete with their more experienced and technologically advanced Western counterparts. Third, despite conscious efforts to diversify import sources, China’s oil suppliers are heavily concentrated in the Middle East and Africa. These two regions are likely to continue providing the bulk of China’s oil needs.

Conclusions

Several conclusions can be drawn from this discussion of China’s energy outlook. First, China’s demand for oil will continue to grow in order to satisfy its high economic growth and the needs of its large population. Given the country’s stagnant domestic production, China’s dependence on imported oil will further deepen.

Second, like other major energy consumers (ie, the EU and the US), China has sought to diversify its oil sources. Supplies from Russia, Central Asia, Latin America, and Canada are likely to contribute to Beijing’s energy security. However, Africa and the Middle East are likely to continue to be the main suppliers.

Third, a key challenge to China’s energy security is how to control and regulate the rising demand for energy and create the appropriate governing mechanism to achieve this goal.

Fourth, China’s energy security is increasingly an international concern. The nation’s rising demand is pushing prices higher and is raising serious concerns regarding global pollution and other environmental issues.

Fifth, securing energy supplies has become a major aim of China’s foreign policy. China is likely to play a stabilizing role in international policy to ensure the non-interruption of oil supplies. Finally, Beijing’s rising demand for energy should not be seen at the expense of the US or other major consumers. Today’s energy markets are well-integrated. The source of energy matters less than its availability.

Gawdat Bahgat is Director of the Center for Middle Eastern Studies, Department of Political Science, Indiana University of Pennsylvania (GBAHGAT@IUP.EDU). This commentary was originally published by first publish by Middle East Economic Survey (MEES), on January 15, 2007(VOL. XLIX, No 3 ).

Petroleum Power vs Ideology

2007-01-22T19:38:00.000Z

Politics bedevils Russia's march to energy superpower status

By Sebastian Smith

Russia controls the world's biggest energy reserves and Europe and Asia have almost insatiable demands. But this month's Belarus oil transit crisis highlights crucial flaws in what could be a supply-demand match, analysts said.

Industry experts say the main problem bedevilling Russia -- the number two oil exporter after Saudi Arabia and unrivalled top natural gas producer -- is Moscow's prickly relationship with ex-Soviet neighbours controlling transit routes to the European Union.

"The problem is that Ukraine is the dominant country for gas export transit and Belarus for transit of oil," MDM bank analyst Andrei Gromadin said. "What's missing is infrastructure to bypass these problem states."

That meant that an otherwise minor New Year's trade dispute between Russia and Belarus rapidly flared into an international crisis, since the tiny ex-Soviet republic controls the pipeline for a third of Russia's oil exports, amounting to 12.5 percent of total EU consumption.

Another purely bilateral tussle over gas prices between Russia and Ukraine one year ago likewise led to shortfalls of natural gas throughout Europe. About 80 percent of Russia's gas exports to Europe run via Ukraine.

Russian politicians now talk up the need to bypass transit countries, while alarmed EU leaders are renewing calls to lessen dependency on Russia, which provides about a quarter of both gas and oil supplies to the 27-nation bloc.

But UFG bank analyst Stephen O'Sullivan said both sides would learn to live with current realities. "Russia has again reminded people in the EU that there is a risk to their oil and gas supply. But does this matter? No. I'm sceptical the European Union will respond in any coordinated manner, since they all have such disparate interests," he said.

Likewise, expensive and geographically complex bypass routes are never going fully to replace existing pipelines, he said, meaning that Russia and the European Union are locked in an unbreakable, if uncomfortable embrace.

"The EU seems to be terribly worried over its dependency, but if you look at Russia's dependency on the European market -- it's total. There is no other market like that for Russian oil and gas. So there is mutual dependency."

And although many in Russia look to Asian markets, particularly China, as a way of getting away from this dependency on Europe, work has only just begun on creating the necessary infrastructure in eastern Russia.

Masha Lipman, an analyst at the Mosow Carnegie Centre, said that regardless of technical issues, economic relations will always be held hostage to Russia's turbulent internal politics.

Separately to the incidents in Belarus and Ukraine, the Kremlin had already jangled Western investors' nerves with the controversial dismantlement of private oil giant Yukos and the more recent takeover of the foreign-run Sakhalin 2 gas and oil project by Gazprom.

In each of these cases, "the Russian side decided that any fallout, such as a drop in Western confidence, was worth it," Lipman said. "This means that internal priorities are currently more important to the Kremlin and this is going to continue.

"MDM's Gromadin noted that Western countries did business with the Soviet energy industry. Oil and gas can trump ideology. "Whatever kind of government you have in the Kremlin, they're always going to be a big energy exporter," he said.

Sebastian Smith is a writer with Agence France Presse based in Moscow.

For All The Right and Wrong Reasons

2007-01-18T00:40:00.000Z

Why Balochistan is so crucial

By Chiranjib Haldar

Balochistan seems to be in the news for all the right or wrong reasons. Is it because it straddles Pakistan, Iran and Afghanistan borders the Arabian Sea and is a vast and sparsely populated province occupying 43 per cent of Pak territory?

A large part of United States military operations in Afghanistan are launched from the Pasni and Dalbandin bases situated on Baloch territory. For the Taliban, Balochistan is a fertile landmass and sanctuary.

The logic is simple. If the pressure on Western forces in Afghanistan were to become intolerable, Washington and its allies could always use the Baloch nationalists, who fiercely oppose the clerics and Taliban, to exert diplomatic pressure on Islamabad and Tehran. In addition, three fundamental issues are fueling this Baloch crisis: expropriation, marginalisation and dispossession.

Although Balochistan houses only 4 per cent of the Pakistan populace, it is economically and strategically important for India too. It is a potential transit zone for a pipeline transporting natural gas from Iran-Turkmenistan to India. Two of Pakistan's three naval bases, Ormara and Gwadar are situated on the Baloch coast.

Located close to the Strait of Hormuz, at the entrance to the Persian Gulf, Gwadar is expected to provide landlocked Afghanistan and Central Asian countries outlet to the sea. The Gwadar complex would substantially diminish India's ability to blockade Pakistan in wartime. It would also substantially increase Chinese supply lines to Pakistan by sea and land during a conflict.

Hence Balochistan would also diminish India's ability to isolate Pakistan from external support in any maritime conflict.

Some even consider Gwadar in the southwest of Pakistan to be a Chinese naval outpost on the Indian Ocean designed to protect Beijing's oil supply lines from the Middle East and to counter the growing US presence in Central Asia. Islamabad has always cried hoarse from rooftops that the Indian secret services were maintaining terrorist camps all over Baloch territory.

Since India, a traditional enemy, reopened its consulates in Jalalabad and Kandahar, it has been suspected of wanting to forge an alliance with Afghanistan against Pakistan. India may want to exert pressure on Pakistan's western border to force it to give up once and for all its terrorist activities in Kashmir and bring the 'composite dialogue' to an end on terms favourable to India.

Recent editorials in the Pakistani and West Asian press have continued to refer to India, but they also have expressed suspicion about Iranian and American involvement.

India considers the Sino-Pak entente cordiale in Balochistan, a quid pro quo to Beijing's surveillance post on Myanmar's Coco Islands to keep a watch on India's maritime activities and its missile tests in Orissa.

The Indian Navy has expressed fears that ties forged by the Chinese navy with India's neighbours might endanger India's vital sea links to the Persian Gulf. Iran and Pakistan have a common interest in exporting Iranian gas to India and any insurrection in Balochistan would only harm their chances of building a gas pipeline through the province.

Many Pakistani analysts feel Washington might use Balochistan as a rear base for an attack on Iran and would also like to get China out of the region. That is also disastrous for India.

The American position is equally perplexing. Are they opposing the Baloch nationalists because they are supported by Iran or are they supporting them because they are hostile to the Chinese? Or is it a continuation of the 'Great power game' being played in Central Asia since the Soviet breakup? Proponents of this view believe that the United States, in competition with China and Iran, would like to control the oil supply lines from the Middle East and Central Asia.

If Balochistan were to become independent, would Pakistan be able to withstand another dismemberment, thirty-four years since the secession of Bangladesh and what effect would that have on regional stability? Pakistan would lose a major part of its natural resources and would become more dependent on the Middle East for its energy supplies.

India may be tempted to look at the further partition of Pakistan as an opportunity for forging a new anti-Pak alliance. An insurgency in Balochistan might force Islamabad to resolve the Indo-Pak imbroglio over Kashmir. But a redrawing of regional boundaries could revive fears of irredentism in Kashmir and in the Northeast that a resentful Pakistan would be only too eager to exploit.

Despite the secular nature of Baloch nationalism, the United States is apprehensive about the likelihood of a war for independence complicating the US fight against Islamic terrorism in the region. If the United States were to embark on a military action against Iran, it could also utilise Pakistani Balochistan for conducting subversive acts in Iranian Balochistan.

For the United States to accomplish this, the Pakistani province would have to remain tranquil and not pose a peril to the well being of Washington's allies.

Chiranjib Haldar is content manager for Tata interactive systems and can be contacted at chiranjibh@tatainteractive.com.

Report from New Delhi

2007-01-17T09:56:00.000Z

Oil diplomacy in focus

By Deepak Joshi

External Affairs Minister Pranab Mukherjee on Tuesday underlined the need for 'oil diplomacy' to balance and harmonise the interests of global producers and consumers, while energy security must remain a prime objective of policies and all-round efforts.

His remarks came as oil prices dipped below $53 a barrel in global markets -- 13 per cent fall in the new year -- on doubts over plans of the Organisation of Petroleum Exporting Countries (OPEC) to cut production.

Nigerian Minister Edmund Daukoru, speaking at the global industry conference Petrotech 2007 in the capital, said the organisation must watch a planned 500,000 barrels a day cut from February before deciding the future course.

Inaugurating Petrotech, Mukherjee said, " Oil diplomacy must remain harnessed with a view to balancing and harmonising various interests, occasionally somewhat or seemingly contradictory, such as those between producers and consumers. I say seemingly, for there is in reality a natural alliance between the producers and consumers, both being two sides of the same coin, in a relationship of mutual dependence and cooperation."

Referring to the government's efforts at energy security, the minister said, "We are moving towards this through intensification of indigenous exploration, bringing in more equity oil from overseas, improving the recovery by leveraging advances in technologies and professional management, and tapping emerging areas like coal gasification."

Mukherjee said the robust price escalation was matter of concern for India as it is rapidly increasing oil imports to meet its growing requirements.

"Wider and more intensive exploration for new finds, more efficient and effective recovery, a more rational and optimally balanced global price regime-- as against the rather wide upward fluctuations of recent times, and a spirit of equitable common benefit in global energy cooperation, are major instruments in a strategy towards this objective," he stressed.

He said with hydrocarbons sector emerging as a high-tech industry, there was a need for affordable availability of new technologies. Besides spurring economic development more universally, a collaborative and inclusive approach will benefit all partners, he said.

Deepak Joshi is a writer for Hindustan Times reporting from the Petrotech 2007 conference in New Delh. He can be contacted at djoshi@hindustantimes.com.

Blunder of the Muddled Mullahs

2007-01-15T20:12:00.000Z

Iran actually is short of oil
Muddled mullahs

By Roger Stern

Iran has ensnared itself in a petroleum crisis that could drive its oil exports to zero by 2015. While Iran has the third- largest oil reserves in the world, its exports may be shrinking by 10 to 12 percent per year. How can this be happening?

Heavy industry infrastructure must be maintained to remain productive. This is especially so for oil, because each oil well's output declines slightly every year. If new wells are not drilled to offset natural decline, production will fall. This is what is happening in Iran, which has failed to reinvest in new production.

Why? For the mullahs, the short-run political return on investment in oil production is zero. They are reluctant to wait the 4 to 6 years it takes for a drilling investment to yield revenue. So rather than reinvest to refresh production, the Islamic Republic starves its petroleum sector, diverting oil profits to a vast, inefficient welfare state.

Employment in the loss-making state-supported firms of this welfare state is essential to the regime's political survival. Another threat to exports is the growth in domestic demand. Iranian oil demand is not just growing, it's exploding, driven by a subsidized gasoline price of about 9 cents a liter. This has created a 6 percent growth in demand, the highest in the world.

So Iran burns its candle at both ends, producing less and less while consuming more and more.
Absent some change in Iranian policy, a rapid decline in exports seems likely. Policy gridlock and a Soviet-style command economy make practical problem-solving almost impossible.

The regime could help itself by making it easier for foreign firms to invest in new production. Remarkably, it has not done this even though the decline in exports, which provide more than 70 percent of state revenue, directly threatens its survival.

While signs of a petroleum crisis in Iran, are numerous, neither the Bush administration nor its critics have recognized them. Even Iran's nuclear power program, dismissed by the U.S. administration as a foil for weapons development, is a symptom of petro-collapse.

The U.S. administration claims that a state as petroleum-rich as Iran cannot need nuclear power to meet its energy needs. Yet while Iran is guilty of deception about its nuclear program, it should not be inferred that all Iranian claims are false. Iran may need nuclear power as badly as it claims.

Most Iranian electric power generation is by oil or gas. Cheaper power from Iran's new Russian reactor will leave more oil for export. Rebuilding Iran's aging gas-powered generators may not be much cheaper than building a new nuclear reactor. But Russia sells reactors to Iran on the cheap in an indirect subsidy to the regime.

Investment in Iran has become so unattractive that even energy-desperate states have quit trying. Japan's Inpex, for example, just abandoned a seven- year negotiation for the Azadegan field. Had Iran been a better negotiating partner, Azadegan oil would be flowing today.

Refinery leakage exemplifies all that is wrong with the Iranian petroleum sector. According to the state-run Iran Daily, leaks account for 6 percent of total production, yet go unattended. This colossal revenue loss persists due to the Soviet-style logic of Iran's state-planned economy. Subsidized energy prices force the state oil firm to sell at a loss to the domestic market.

Therefore, while Iran could gain billions by fixing the leaks, the state oil firm would be worse off because the maintenance would generate no new revenue. Thus oil and money simply seep into the ground.

For a world rattled by President Mahmoud Ahmadinejad's bellicosity, Iran's petroleum problems sound like good news. The UN Security Council's newfound willingness to confront Iran over weapons development also seems a welcome sign.

Yet the economic damage Iran inflicts on itself is far worse than anything the meaningless UN sanctions could accomplish. Sanctions might actually worsen the position of Iran's adversaries if Tehran were to succeed in portraying them as the cause of its economic woes.

The mullahs are doing a good job of destroying Iran's economy. They should be left alone to complete their work. Attacking Iran would allow the regime to escape responsibility for the economic disaster it created. Worse, an attack could unite Iran behind the clerical terror-sponsors whose grasp on power may be slipping. For these reasons, the best policy towards Iran may be to do nothing at all.

Roger Stern is an economic geographer and national security analyst in the Department of Geography and Environmental Engineering at Johns Hopkins University. This column is adapted from his recent article, "The Iranian petroleum crisis and United States national security," published in the Proceedings of the National Academy of Sciences.

Looking for the Silver Bullet

2007-01-12T18:32:00.000Z

US foreign policy must consider changing energy world

By Nick Snow

US foreign policy needs to better recognize the impacts of a changing energy world, experts told the US Senate Energy and Natural Resources Committee on January 10.

"We're fighting in a post-9/11 environment with a pre-9/11 energy policy that's not sufficient to deal with disruptions," said Robert Hormats, vice-chairman of Goldman Sachs (International). "Look at what's happening in Nigeria, where there are kidnappings; in Russia, which is trying to exercise more direct influence on oil and gas, and in Iran and Iraq, where political prospects are uncertain."

Hormats was one of five witnesses discussing the geopolitics of oil in the committee's first hearing of the 110th Congress. The others were Fatih Birol, chief economist at the International Energy Agency; Linda Stuntz, a former deputy US energy secretary and current partner in the law firm Stuntz, Davis & Staffier; retired US Air Force Gen. Charles Wald, who is active with the Energy Leadership Council, and Flynt Leverett, director of the geopolitics initiative at the New America Foundation.

While technically not yet the committee chairman because the Senate had not held its elections, Jeff Bingaman (D-NM) ran the hearing, which he intended to help establish a context for subsequent deliberations. "The idea is to begin the year with an overview of the geopolitics of oil. I hope that it's useful," he said.

Other committee members sought information about potential benefits of developing alternative fuels more aggressively or sharing technology with other countries. Witnesses essentially responded that there's no single solution and every option needs to be pursued to reduce US dependence on crude imports from politically unstable foreign suppliers.

Supply, demand trends

Birol suggested that world oil markets are going through a profound change as demand becomes more widespread and supplies become more concentrated. "In the next 10 years, much of the world's production will come to a peak and then decline. New production will need to come primarily from three countries—Saudi Arabia, Iran and Iraq—which have substantial reserves and can bring oil to market fairly easily," he said.

US policymakers also should acknowledge the growing influence of national oil companies, others said. "The reality today is that [NOCs] control some three quarters of the world's proven reserves. ExxonMobil ranks 14th among the world's reserves holders," said Stuntz.

She said while publicly traded oil companies are returning to areas still open to them, such as the Gulf of Mexico and the North Sea, because operating terms in many producing nations are turning unfavorable, an increasing amount of new exploration and development will involve NOCs.

"It concerns me that more people in this country don't know about this. [NOCs] like Aramco have been around for years. They don't need western capital as they did before. There's also a myth that they won't have access to technology if they don't get it from the United States. But they are capable of making alliances with other countries," Stuntz said.

Few people in the US also recognize the extent to which their country's military forces protect critical oil trading routes, according to Wald. "There should be partners in this mission. The free flow of oil is crucial to many parts of the world. That is one reason why the US military is working with Caspian region governments in developing partnerships," he said.

Leverett said resource nationalism is growing in countries such as Venezuela and Russia as resource mercantilism increases in consuming countries such as China and India. "In my view, during the next quarter century, the most profound challenges to America's global leadership will flow from structural shifts in the global oil market," he said.

Leverett suggested an alliance between China and Russia has been successfully rolling back US efforts to influence oil in new areas of the Middle East following the Sept. 11, 2001, terrorist attacks. "Russia and Iran control almost half of the world's natural gas reserves. If they cooperate, they could be almost as influential with natural gas as Saudi Arabia is with oil," he said.

Contradictory signals

Leverett said some NOCs have begun to act independently of their governments, which US policymakers should encourage. Noting the response by some US politicians to Chinese National Offshore Oil Corp.'s interest in buying Unocal Corp. a few years ago, he noted, "We encourage the Chinese to pursue market solutions on one hand and discourage their initiative on the other."

Many witnesses and committee members agreed that US development of transportation fuel alternatives is vital. "I believe in the free market. But if it becomes a national security issue, I'm prepared to consider spending money to develop alternatives which would reduce our dependence on oil from countries whose interests are different from ours," said Sen. Jeff Sessions (R-Ala.).

Hormats said incentives to develop alternatives need to last long enough to complete projects, particularly the tax credit for investing in renewable resources. "Certain kinds of institutional and other investors can't put money into the business because the time spans aren't long enough. We have the technological ability on the supply side, with this country's entrepreneurial traditions and vitality, to use new sources as well as conventional sources," he said.

Witnesses generally agreed that every option should be pursued. "None of these things are silver bullets. We have to do all of them. But if we were to do everything that was mentioned today before this panel, it would still take us 10-15 years during which we would still be vulnerable," said Wald.

Nick Snow is the Washington Correspondent for the Oil & Gas Journal (contact him at
nsnow@cox.net).

Balancing Act in the Middle East

2007-01-11T10:48:00.000Z

Saudis Adjust Long-Term Oil Strategy

by Ian Talley

Saudi Arabia's growing fear of Iranian hegemony in the Middle East may be driving the world's largest crude oil exporter to prepare a more aggressive long-term political oil strategy that could subvert an Iranian ascendancy, insiders and analysts say.

Under a new, accelerated production program, the kingdom could increase its spare oil drilling capacity to at least 3 million barrels a day by 2011, up from around 2 million now. Intelligence experts estimate Iran might have the capability to develop nuclear weapons by then. Additional spare capacity could give the Saudis greater leverage as a political tool.

Iran's alleged aim to develop nuclear weapons and its interference in Iraqi and Lebanese politics and conflicts are feeding fears among the Sunni states in the region, particularly Saudi Arabia, that Iranian ascendancy might tip the balance of power towards a Shi'ite domination of the Middle East.

"Fear of an emerging Shi'a crescent has been reflected in speeches by Egypt's President (Hosni) Mubarak, Saudi princes and clergy, and other Sunni Arab heads of states," says Mordechai Abir, a senior Middle East analyst for Burnham Securities.

That anxiety, along with concerns for domestic security, has spurred Saudi Arabia to boost its defense spending to between $50 billion and $60 billion in the next several years for a major upgrade of its entire military.

Beyond A Military Revamp

Saudi Arabia has repeatedly said it won't use oil as a political tool and most experts agree that the kingdom's power to influence oil prices is currently limited by a tight global market and subsequently thin spare capacity. But recent developments in Saudi Arabia's plans to boost production, and briefings by a former consultant to the Saudi ambassador to the U.S. have raised questions about whether the country is considering new strategic oil options to counter Iranian influence in the region.

Some analysts say Saudi Arabia is preparing its massive crude oil reserves as its own "nuclear" weapon to undercut Iranian power.

In an opinion piece published in the Washington Post in late November, Nawaf Obaid, previously an advisor to the Saudi government, said the Saudis may consider not only officially funding the anti-Shi'te militias in Iraq, it also might consider strangling Iranian funding of the militias through oil policy. Obaid was fired by the Saudi government for airing his frank insights in the op-ed piece.

In the weeks prior to the op-ed, Obaid had briefed the U.S. State Department, the National Security Council and the Department of Energy on "New Strategic Initiatives" emerging in Saudi Arabia in his position as the head of the Saudi National Security Assessment Project.

If the Saudis were to flood the market with increased oil production, it could halve the price of oil, Obaid wrote, in the op-ed. Although the kingdom would be able to continue spending at current levels, with tens of billions of dollars in cash reserves, "it would devastate Iran, which is facing economic difficulties even with today's high prices," Obaid wrote.

The Saudi government vehemently denied statements Obaid made in his opinion article. Most analysts believe the Saudis are highly unlikely to use such a measure except as a last resort, nor would they currently be able to flood the market with crude oil given the tight margin between demand and supply. Still, analysts say Obaid's article reveals what some people in Saudi Arabia's policy ranks are thinking about longer-term oil strategy.

Accelerating Production

Saudi Arabia is already accelerating its near and long-term production expansion plans. The country's previous plans called for maintaining its spare production capacity - the prime metric that drives crude price levels - at around 2 million barrels a day.

After visiting the country, Guy Caruso, head of the U.S. Energy Information Administration, said last month he believes Saudi Arabia is about six months ahead of schedule and its spare capacity could hit 3 million barrels a day by 2011.

The first phase, increasing production to 12.5 million barrels a day from current capacity of 11.3 million barrels a day, has been placed on an accelerated timeline. The second phase - to grow capacity as high as 13.5 million barrels a day by 2011 - is in the planning stage.

With that kind of capacity, the country could be in a better position to influence prices. In December, the board of Saudi Arabian Oil Co., or Aramco, approved an "aggressive" operating plan for 2007, including the largest spending program in the company's history. The plan includes a goal of 121 drilling rigs, up from the country's previous target of 110.

Saad Rahim, a top energy analyst and Country Strategies Manager at PFC Energy, said "there's certainly a risk" of the Saudis using oil politically because of growing fears of Iranian power. Especially if U.S. President George Bush moves ahead with proposals to withdraw most U.S. troops by 2008, which the Saudis appear to adamantly oppose, he said.

"They feel that a withdrawal would leave the job unfinished, and leave not only a collapsing country to their north, but would embolden Iran even further," Rahim said. He added that although worries about a "Shi'ite crescent are overblown to a degree...the Saudis are very wary of what might be coming down the pike next year."

Holding Off

Rahim believes the Saudis will hold off on using the oil card and aren't likely to leverage their power as the de facto leader of the Organization of Petroleum Exporting Countries. "In fact, the longer they wait, the better positioned they are to undertake such a move," said. "They will have built up the capacity to really flood the market and they will have built up enough foreign reserves to feel comfortable doing so for an extended period of time."

"However, we basically refer to this move as 'the nuclear option' for Saudi, and really only to be undertaken as a last resort," Rahim added.

The Saudi National Security Assessment Project said the increased capacity would also give the kingdom the ability to offset Iranian exports should they enact an oil embargo, which some Iranian officials have threatened should the U.S. try to destroy its nuclear program.

By the middle of the year, Rahim said, Saudis' spare capacity will be able to compensate for a complete loss of Iranian exports of around 2.5 million barrels a day. "But that essentially soaks up global excess capacity," he said. "So any other disruptions (such as from Nigeria or Venezuela) would really stretch the system."

Shibley Telhami, a senior fellow with Washington think tank the Brookings Institute, said the Saudis are unlikely to use their capacity as a weapon unless they have ruled out all other diplomatic means. "The Saudis want Iran contained, there's no doubt," said Telhami, "But they're also very worried about war with Iran," not least because it might prompt an uprising from their own Shi'a population.

Political use of oil would be seen as a declaration of war against Iran, Telhami said, even if it were an economic attack. Instead, the Saudis are plying a more careful approach, he suggested. "When you play for the long term, you want to be cautious, you want to have containment policy, you want to weaken," said Telhami, "But you don't want to go into an all-out confrontation that becomes a historical struggle."

Nevertheless, Telhami said, the Saudis remain pivotal for the global oil market. "Obviously, the more excess capacity they have, they more influence they have," he said.

Ian Talley reports for Dow Jones Newswires, which published this article on Wednesday, January 10, 2007.

EU Energy Review Reviewed

2007-01-10T00:47:00.000Z

'Beware the Russian bear'

By Michael Harrison

"Beware the Russian bear" is the motto Europe must adopt as it reviews its energy future .

Today sees the publication of the European Commission's review of energy - a subject which has climbed remorselessly up the political agenda in recent years to the point where it has now assumed the same kind of importance to world well-being and security as international terrorism or global warming.

The focus of Brussels' deliberations, however, is likely to be inward-looking, concentrating on the steps the European Union needs to take to reshape its own markets and, in particular, to unbundle those national monopolies on the Continent which have served to stymie competition and the free flow of energy.

If that is the case, it will be a lost opportunity because the biggest threat to the energy security of the EU is external and it can be summed up in one word - Russia. That the launch of the review by the EU's Competition Commissioner, Neelie Kroes, should take place against the backdrop of another piece of economic imperialism on the part of Moscow - the closure of its gas pipeline to Europe through Belarus - merely serves to underscore the point.

Coming exactly a year after a carbon-copy dispute between Russia and Ukraine, it demonstrates that lightning can and does strike twice in the same place and is likely to continue to do so as Russia's importance to the West as an energy supplier grows.

The point has not been lost on Angela Merkel, the Chancellor of Germany, a country which relies on Russia for a third of its gas. She has wasted no time in highlighting the Belarus episode as another reason why it is imperative not to be overly dependent on one supplier. She has called for the rapid construction of liquid gas terminals to act as a bulwark against Russia's use of its energy resources as a political weapon. She has even ventured that Germany may wish to slow or reverse its phasing out of nuclear power - a suggestion that would once have been anathema to any Germany politician.

It is true that Germany has more to fear than most due to its high dependence on Russian gas. But other EU members such as Britain cannot afford to be complacent: it is quite conceivable that a decade from now a fifth of our gas will be of Russian origin.

Robert Amsterdam, the Kremlin critic and defence counsel to the jailed oligarch Mikhail Khodorkovsky, has some trenchant views on the danger the EU runs if this unequal relationship with its near neighbour is not addressed. He catalogues how the state-owned Russian gas monopoly Gazprom, which harbours ambitions of swallowing up our own Centrica, uses its market power to divide and rule, cultivating certain countries such as Germany along with their political leaders, banks and utility companies and penalising others by withholding supplies - as it did with Lithuania as punishment for selling an oil refinery to Poland.

When cajoling and threats do not work, Gazprom simply uses its sheer might - as it did in Armenia where it pretty much bought up the local energy infrastructure to prevent Iran competing as a gas supplier to Europe.

Europe does have some cards of its own to play because the Russians are desperate for two things. One is access to and, if possible, ownership of Western distribution and supply networks - Gazprom is reliant on export markets in the West to help to subsidise the loss-making business of supplying domestic Russian customers. The second is Western expertise to help develop its huge indigenous supplies of oil and gas.

If Russia and Gazprom want more access to Europe, then they too must be prepared to reciprocate through market liberalisation of their own and parallel access to Russia for European energy companies. That may be a tall order given that Europe, as Ms Kroes will illustrate today, still has a long way to go to reform its own energy sector.

But today's publication of the EU energy review is as good a place as any to start. If Europe does not grasp the opportunity, it may come to regret the consequences.

Michael Harrison is a commentator with The Independent (UK).

Winter Chill from Russia - Again

2007-01-09T13:53:00.000Z

Belarus-Russia oil dispute highlights Europe's vulnerability

By Judy Dempey

The dispute between Russia and Belarus over oil is the latest reminder that Europeans must start diversifying to reduce their dependence on Russian oil and natural gas if they want secure sources of energy, analysts said.

"It is clear that these problems Russia is having with its neighbors are not going to go away," said Claudia Kemfert, director of the energy division at the German Institute for Economic Research, on Monday.

"It is not as if we did not receive enough warnings about how Russia has been using its energy wealth as a source of political power," she said. "With Germany now at the helm of the EU and G-8 presidencies, I hope Chancellor Merkel will take some action."

But with the exception of Poland, the European Union's initial response was muted compared with the outcry a year ago, when Russia cut gas deliveries to Ukraine.

Then, the EU sharply criticized President Vladimir Putin of Russia, accusing him of using energy as a political weapon against Ukraine as its president, Viktor Yushchenko, started shifting the country's foreign policy away from Russia toward NATO and the EU. This time, EU countries have not rallied to the defense of the president of Belarus, Aleksandr Lukashenko.

Some analysts say that is because of Lukashenko's authoritarian policies. He has curtailed press freedom and intimidated his small political opposition, even imprisoning some of its members. He has also forged close ties with Iran, Syria and Venezuela, further isolating himself from Europe.

Last year, the EU imposed a travel ban on Lukashenko and the top leadership of Belarus. Other analysts say that because only a fifth of Russian oil and gas passes through Belarus, the country is less important.

"In any event, what it shows is inconsistency on the part of the EU over how Russia uses its energy muscle," said Agata Loskot-Strachota, director of the energy policy program at the Center for Eastern Studies in Warsaw.

The German government of Chancellor Angela Merkel, which has close relations with the Kremlin, said Monday that it was concerned about the way in which energy supplies could be so easily shut off. Michael Glos, the German economics minister, said stopping oil deliveries was 'very worrying.' "I expect deliveries through the pipeline to be resumed as quickly as possible," Glos said.

Germany imports a fifth of its oil and 35 percent of its natural gas from Russia, a dependence that is being questioned by some politicians. The German foreign minister, Frank-Walter Steinmeier, said over the weekend that Germany should avoid relying too heavily on Russia for energy supplies.

At the same time, Germany is forging a closer link with Russian oil via a new North European pipeline that is being jointly built under the Baltic Sea, a venture that Kurt Beck, the leader of the Social Democrats, has argued is more important than ever to make Germany independent of disputes within transit countries. The North European pipeline would allow Russia to bypass countries like Belarus and Ukraine and send gas directly to Central and Western Europe.

But transit countries like Poland and the Baltic states say the pipeline would make them more vulnerable, since they would lose out on transit fees and would not be served by the new project, meaning it could cut them off from Russian supplies.

While Germany and Russia see the North European pipeline as an attempt to diversify their energy routes — even though it will make Germany even more dependent on Russian energy — much of Western Europe has been slow to find alternatives.

"The countries cannot agree in which direction they should diversify," said Loskot-Strachota at the Center for Eastern Studies. "The EU too is not united over insisting that Russia ratify the European energy charter, which is important for Europe, since it would allow foreign companies access to Russia's pipelines to transport their gas."

Not waiting for the EU to speak with one voice, a number of East and Central European countries — including Poland, the Czech Republic and Germany — have started to diversify. In December, the Baltic states — Lithuania, Latvia and Estonia — which depend on Russia for oil and natural gas, were finally linked to the continental European electricity network after an interconnector was constructed between Poland and Lithuania. Finland and the Baltic states were linked by an underwater cable.

Andris Piebalgs, the EU energy commissioner, said these developments "were a big step for the integration of the Baltic republics to the European Union."

The Polish energy company Orlen, supported by the government in Warsaw, recently acquired the Mazeikiu Nafta oil refinery in Lithuania in a move to give the company more access to oil capacity. This purchase was a setback for the Kremlin, which for months tried to acquire Mazeikiu Nafta to control the oil refinery market in the Baltics.

The Czech Republic has contracts to buy gas from Norway to reduce its dependence on Russia. Poland is constructing a liquefied natural gas terminal to diversify its energy supplies.

Judy Dempey is a writer for the International Herald Tribune; this article appeared in today's edition, January 9, 2007.

The Changing Balance of Power

2007-01-08T08:14:00.000Z

The misnomer of multipolarity

By W Joseph Stroupe

The term "multipolarity" has increasingly been trumpeted by Russia, China, India and many others since the mid-1990s as the most desirable and equitable configuration for the world order. Multipolarity is seen across much of the globe as the most attractive replacement for US-dominated unipolarity.

Does it really matter? Are unipolarity and the US-centric world order really at risk?

Indeed, yes. The fundamental configuration of the world order is rapidly undergoing transformation as US power and influence continue their progressive dilution in all spheres and those of rival centers or poles such as Russia and China are becoming ever more concentrated, thanks in no small measure to their advancing control over global strategic energy resources.

Control over strategic resources has become the primary lever to increased global influence for those powers either rich in such resources or closely allied with those who are. Hence, in the insidious and perceptible rebalancing of global power, moving from inordinate concentration in one pole (the US) to distribution among rival poles (Russia, China and others) we are witnessing the progressive rising of a new world order.

However, what will its true configuration turn out to be? Fundamentally, multipolarity simply means multiple poles, or centers of power, distributed widely and more equitably across the globe, with no single pole inordinately dominating the others. However, does the term multipolarity accurately describe the configuration of the new world order that is now arising? Or is its real configuration developing into something quite different than mere generic "multipolarity"?

The concept of multipolarity does not properly take into consideration a recent and ongoing development of fundamentally enormous significance - the redivision of most of the world order into two camps, "East" and West, with control over strategic energy resources as the primary dividing line between the two camps. Even the Non-Aligned Movement (NAM) consisting of 116 developing nations, encompassing most of the world's authoritarian governments and two-thirds of the United Nations membership, generally takes stances independent of, or even against, the US pole, thus most often in de facto alliance with the rising "East" rather than West.

Notably, NAM has come down on Iran's side in the ongoing nuclear dispute, reaffirming Iran's right to domestic enrichment activities, to the pointed chagrin of the US. Significantly, a large portion of the member nations of NAM possess great deposits of strategic energy and mineral resources of very high value. Thus, simple "multipolarity" allows for the fundamentally erroneous assumption that all the poles or centers of power are genuinely discrete, that each pole is virtually insulated from the gravitational effects of other poles.

In the real world such is certainly not the case. Any pole or center of power that achieves a noteworthy degree of power and influence tends to pull or attract other centers of power toward itself - especially those in proximity to it, geographically, economically or geopolitically.

Furthermore, that rising pole tends to draw additional power from the poles that begin to lean inward, as it were, toward it, thus fueling an accelerated rise of the more prominent pole. The result is a new center of power that is complex in nature, with many lesser poles arrayed around one or two greater poles in the nucleus of the newly arising center of power.

A prime example of the phenomenon noted above is the Russia-China axis that is rapidly attracting around itself an array of many lesser but significant poles. As noted above, the two poles (Russia-China and America-Britain) each possess a gravitational pull that no others on the globe can lay claim to, and the main dividing line between the two poles has become control over strategic energy resources. Consequently, the new configuration of the arising world order is fundamentally reverting to a bipolar nature. Just two primary rival poles increasingly dictate, by their gravitational influence, developments across the globe.

Stated another way, major global developments increasingly fit into the framework of the competition and rivalry between the two primary poles. Even the notably important emerging power India, for example, is extremely unlikely to develop into a genuinely discrete center of power that will make the global distribution of power a three-way equation between West, East and South/Southeast.

Rather, India will lean significantly inward either toward alignment with the US or with Russia-China. The fundamental evidence proves India is aligning with Russia-China, notwithstanding the "face" of its pragmatic policy of concluding certain cooperation agreements with the US for access to crucial advanced technologies to accelerate its rise as an emerging power, agreements India insists must be concluded mostly on its own terms.

The recent visit of China's President Hu Jintao to India resulted in the signing of a number of key agreements and documents deepening the strategic ties between the two great powers in the key spheres of economic and security relations, deepening trilateral relations between the two powers and Russia, and international energy security. Their joint statement declared their intent to work with Russia to create a new international energy order that is fair and equitable. That directly insinuates the current US-led global energy order is not the one to be strengthened nor adhered to. Generic multipolarity ultimately fails to describe properly these real-world phenomena, those of a global reversion to bipolarity along with the inherent complexity (multifarious makeup) found especially within the new pole arising in the "East".

But that is not all with respect to the failings of the multipolar model in describing accurately where the world order is really heading. "Multipolarity" insinuates that no single pole is inordinately dominant over the others. But contrary to that insinuation, the bipolar configuration that is even now arising will definitely facilitate a meaningful degree of control by one pole, the one now arising in the "East". Yet, the configuration that is now arising will still correctly be described as bipolar (not unipolar) because the pole in the West, though it is even now moving into a situation where a significant measure of control by the "East" is inevitable, will not be absolutely dominated in all spheres, nor will it be made to collapse as did the Soviet Union, nor will it cease to exist as a superpower.

How will the West fall under the significant control of the East? By means of the consolidation of its control over global energy and its mounting economic wealth and strength the East will take a significant measure of political, economic and even military independence away from the West, including the US itself. The US has become hopelessly dependent on foreign sources of energy, minerals and financing. In fact, the process of Eastern consolidation over global energy resources and the resultant Western loss of independent power is already underway and it is accelerating.

The Russia-China axis, increasingly winning the alignment and cooperation of India as well, is busily constructing a global complex of oil, gas and economic ties and alliances that includes most of the vital exporting states around the globe and the bulk of the rising powerhouse economies of the East. Russia, China and India are spreading their wings (or tentacles as the case may be) far and wide to encompass key oil and gas exporting states.

This is ushering the world's important producers into cooperative agreements that extend far beyond energy-related matters to include the military sphere as well. Wide-ranging agreements concluded with Venezuela, Algeria and Saudi Arabia for joint ventures in the production of oil and gas and for weapons and military technology sales are only three recent examples. A clear global strategy is evident, one that is compelling and brilliant. It is also virtually unstoppable by the West.

In the military, economic and energy spheres, the uniting of Russia's technical expertise and strategic resources with the enormous financing and manpower capabilities of China and the mounting technology and manpower capabilities of India, and the extension world-wide of their joint influence to gather into orbit about themselves the key global exporters of minerals, oil and gas, is a development of enormous consequence for the current unipolar world order. That de facto global complex, when soon completed, will incorporate a global energy monopoly whose strings are virtually pulled from Moscow and Beijing. Increasingly, key members of the complex speak about dispensing with the US dollar in their international energy transactions.

The eventual consolidation of the new global energy complex will result in loss to the West in various important ways, and in a grand reversal, will place the multifarious East in ascendancy over West. Russia and China, the foremost promoters of what they have called the multipolar world order, insist that such is not aimed at any single power such as the US. However, that is mere indirection on their part as they work smart and energetically to construct the foundation, namely global control of strategic resources, that facilitates the rise of their new world order, an order aimed directly at undermining the US global position.

Additionally, they now know full well that what is arising will not be merely "multipolar" in nature, that is, an even distribution of power centers across the globe. Instead, they fully realize their potential to achieve energy-based ascendancy over the West by means of the complex of global energy ties and alliances they are now constructing. Consequently, the move toward global equilibrium (from unipolar to so-called "multipolar") will overshoot the mark of equilibrium and hand energy-based ascendancy to the now rising multifarious pole of the "East".

Along the path toward this eventuality there will undoubtedly be more oil wars such as the one waged in Iraq in 2003, and ideological "wars" such as the "Orange Revolution" in Ukraine of 2004, but the West cannot prevent the eventuality described here being realized very soon judging by the rapidity with which global events are moving in that very direction. Hence, the bipolar world order that is even now arising will not, in fact, be balanced or symmetrical, with both poles roughly canceling each other out in a zero-sum game.

Instead, it will be asymmetrical, with the "East" in ascendancy over the West. In view of the foregoing, the term "multipolar" may adequately describe the complex, multifarious composition of the rising pole of the East itself, but that term is entirely inappropriate to describe the essentially (uneven) bipolar global configuration that is impending for the world order. From the preceding fundamental analysis of the geopolitical system we could now attempt to construct a new and more accurate term to describe where the world order is actually heading: Asymmetrical bipolar complexity refers to the uneven bipolar world order that is impending, one in which especially the East pole is complex (multifarious) in nature, consisting of many lesser poles in array around the nucleus that consists of the Russia-China axis.

To coin a new term, the phrase could be shortened to Asymm-Plexity by dropping the "bipolar" portion for the reason that in its most fundamental sense the word "asymmetrical" already strongly insinuates just two main parts (bipolar), but of unequal size or power. "Multipolarity" is a misnomer because it fails to meet the requirement of accurately describing where the world order is actually heading. Asymm-Plexity (asymmetrical bipolar complexity) more accurately describes the uneven bipolarity that is impending.

W Joseph Stroupe is author of the new book entitled Russian Rubicon: Impending Checkmate of the West, and editor of Global Events Magazine online at www.GeoStrategyMap.com.

A New Gas Option for Europe?

2007-01-03T19:13:00.000Z

Trans-Black Sea pipeline can bring Caspian gas to Europe

by Vladimir Socor

A New York-based consortium of several independent parties is completing the pre-feasibility study for a Georgia-Ukraine-European Union (GUEU) gas pipeline project. Led by the London-based Pipeline Systems Engineering (PSE) and the New-York-based Radon-Ishizumi consulting and engineering firms, the project envisages bringing Caspian gas to EU territory by pipeline via Georgia and the seabed of the Black Sea in the first phase, and connecting that line to a trans-Caspian pipeline in a follow-up phase.

The GUEU line is projected to carry 8 bcm of gas annually in the first phase from Azerbaijan's giant Shah Deniz offshore field. With at least 1 tcm in estimated reserves, Shah Deniz has ample potential for supporting more than the existing Baku-Tbilisi-Erzurum pipeline (BTE) and the planned Turkey-Austria (Nabucco) line. The GUEU pipeline targets Poland via the Black Sea and Ukraine with a relatively modest first-phase volume.

Thus, the project in no sense competes with BTE or Nabucco for upstream resources or downstream markets. The GUEU project offers an additional, necessary outlet for Caspian gas.

The planned GUEU line would branch off from BTE near Tbilisi and run for approximately 100 km to the Supsa area on Georgia's Black Sea coast. From there it would continue at ultra-deep levels across the seabed for 650 km to Ukraine's Crimea near Feodosia. Finally it would run on land for another 200 km to link up with Ukraine's gas transit mainlines headed for Poland.

GUEU's section across the Crimea might use an existing, 20-inch diameter pipeline, possibly rehabilitating or reconstructing some of its sections for the project's first phase. However, the GUEU pipeline's anticipated diameter is 42 inches for the land section in Georgia and 24 inches for the seabed section.

The project looks at an attractive range of market options in Poland and, via that country, Lithuania, or alternatively to Slovakia from Ukraine. All three countries are keen to diversify their supplies away from overdependence on Russian gas. The GUEU project envisages using the Ukrainian transit network's spare capacity to deliver Caspian gas to Poland and farther afield. Ukrainian transit pipelines have some unused capacity already now and will have more spare capacity after 2010, when Russia is expected to switch some export volumes from Ukrainian pipelines into the new Russia-Germany pipeline (North Stream).

However, the GUEU project would circumvent Ukraine's gas transit system in the event that Russia obtains some form of control over Ukraine's gas transit pipelines. In that eventuality, the GUEU pipeline could reach EU territory in Romania. The plan envisages laying a 200-km pipeline from the Crimea, again on seabed of the Black Sea -- in shallow waters on that stretch -- reaching Romania at a point northward of Constanta.

The highly challenging seabed section from Georgia to the Crimea can use the experience gained in laying the Blue Stream gas pipeline from Russia to Turkey on the seabed of the Black Sea. A technological feat accomplished by Italy's ENI and Saipem, that line runs in ultra-deep waters reaching 2,200 meters below the surface in some places -- the world's deepest-running pipeline.

The seabed between Georgia and the Crimea is almost as deep. Some of the engineers that worked in top posts on Blue Stream are said to be a moving force behind the GUEU project. The Saipem 700 J-lay barge was also key to Blue Stream's success.

The planned Georgia-Ukraine pipeline would intersect with the Blue Stream pipeline on the seabed. The project envisages lifting the GUEU line by an overpass bridge to be built at the point of intersection. Investment for the project's first phase is estimated at $ 2 bn over a five-year period, based on an annual throughput capacity of 8 bn cm of gas.

The second phase would add another 8 bn cm of gas annually, either from Shah Deniz or from Kazakhstan by trans-Caspian pipeline. That expansion would require a parallel 24-inch diameter pipeline on the seabed from Georgia to the Crimea.

The third phase would add another 16 bn cm of gas annually from Turkmenistan, based on the expectation that trans-Caspian links would be in place by that time. In that relatively optimistic eventuality, GUEU could carry a total 32 bn cm of Caspian gas annually to EU territory.

The GUEU project can provide a politically safe, shortest-route export outlet for Caspian gas to European consumer countries. It would advance the access of Caspian gas to Ukraine and the EU countries. Its planned second- and third-phase schedule is calculated to advance the time of full development of gas extraction in Kazakhstan and Turkmenistan and construction of trans-Caspian pipeline links.

Vladimir Socor is an analyst for the Eurasia Daily Monitor.

Security through Growth and Consolidation

2007-01-02T08:40:00.000Z

Energy sector could see more mergers in '07

Production and access challenges may drive growth

By Kristen Hays

Oil exploration and production companies that have enjoyed record profits fueled by high commodity prices over the last two years may go to the altar in 2007 to keep growing.
Analysts say the energy sector could see more mergers and acquisitions to counteract difficulty in gaining access to oil and natural gas and higher costs of getting it to the surface.

Fadel Gheit, an oil analyst with Oppenheimer & Co. in New York, said many oil companies are in prime financial condition with clean balance sheets and billions on hand. But he said the challenge to maintain production — let alone increase it — in the face of rising costs and competition for access could prompt companies seeking growth to go shopping. "Companies either have to grow or get out of the way," Gheit said.

This year companies largely pumped up or streamlined asset bases with multimillion-dollar deals to buy and sell portions of each other's holdings. Such deals often involved interests in oil and gas fields in North America and the Gulf of Mexico or access to unconventional resources such as oil-soaked sands in Canada or oil shale in the United States.

Bigger deals included ConocoPhillips closing on its $35.6 billion purchase of natural gas producer Burlington Resources. Then Anadarko Petroleum Corp. bought Kerr-McGee Corp. and Western Gas Resources for more than $21 billion to increase its North American footprint, particularly in the Rocky Mountains and the Gulf.

And earlier this month Statoil, Norway's state-controlled oil company, announced plans to buy offshore energy and oil operations of Norsk Hydro, Norway's largest publicly traded company. The $28 billion deal, expected to close in the third quarter of 2007, will create the world's largest offshore operator, surpassing Royal Dutch Shell. Norsk Hydro's aluminum, hydroelectric and solar power operations will remain as a separate company.

Reinvestment challenges

Analysts expect more mergers in 2007, particularly with increased competition from state-owned oil companies that can make acquisitions unfettered by investor pressure for near-term increases in earnings or cash flow.

"They're just seeing an increasingly challenging reinvestment environment," said Dan Pickering, an analyst with Pickering Energy Partners in Houston. "Access to foreign jurisdictions is tougher, competition from national oil companies is hotter, and host governments from across the world are extracting more money to participate."

When faced with such a playing field, and commodity prices unlikely to rise above 2006 levels, companies seeking growth tend to fall back to what has worked before: consolidating to cut costs while adding strength, Pickering said.

Simmons & Company International, a Houston-based independent investment bank, said in a recent research report that so-called organic replacement of reserves — or ability to replace reserves on their own rather than through acquisitions — was less than 100 percent in the last two years and likely to remain "relatively meager for some time to come."

Simmons estimated that oil majors would generate $245 billion in cash flow and asset sales in 2007, and have $80 billion of that available for stock buybacks or acquisitions. Simmons also speculated on which companies are likely acquirers or likely to be acquired.

The report said potential acquirers include Irving-based Exxon Mobil Corp., the world's largest oil company, which can best afford an all-cash deal, "but appears to be patiently awaiting one of its large peers to be selling at a steep enough discount to make the plunge."

The report also noted that San Ramon, Calif.-based Chevron Corp. has spare cash as well, and Houston-based Marathon Oil Corp. has said it's seeking a Canadian oil sands partner. Clarence Cazelot, Marathon's CEO, said at the company's recent annual analysts conference that acquisitions were "growth opportunities" and "are going to be part of our business."

When asked how strongly he felt about maintaining Marathon's independence, Cazelot reiterated his stance that any buyout offer would be evaluated to determine if it would benefit shareholders. "We have no hard and fast position either way. We spend our time growing the business," Cazelot said.

Seeking swaps

The Simmons report said Paris-based Total has indicated it's looking for asset swaps rather than acquisitions, while London-based BP has said it intends to distribute excess cash and has not claimed to be seeking acquisitions.

Houston-based ConocoPhillips has said the company is satisfied with its Burlington Resources addition for the time being, while the Netherlands-based Royal Dutch Shell's 2006 oil sands acquisitions could indicate a continued push to acquire unconventional resources, the report said.

Several companies declined comment on future merger and acquisition activity, as is routine. But Karen Matusic of the American Petroleum Institute said, "We believe market forces always lead companies to look for ways to improve their efficiency in order to compete on a global basis."

Antitrust drawbacks

Analysts don't rule out a combination of majors that would rival Exxon Mobil. However, antitrust issues would arise if a merger combines refining and marketing segments that could dominate refining capacity or corner a market of gas stations.

"If we look at 2007, it's unlikely that we'll see an integrated oil company taking over another integrated oil company if they both have a presence in the U.S. gasoline market," said John Walker, president and CEO of EnerVest Management Partners in Houston, which manages oil and gas assets for institutional investors. "It's unlikely that, say, a ConocoPhillips or a Shell could buy Marathon."

But some independent companies, which focus on oil and gas exploration and production rather than refining and marketing, could be attractive potential targets if they would quickly boost earnings without antitrust worries, analysts said. Those companies include Newfield Exploration Co., Anadarko, Noble Energy and Apache Corp., all based in Houston, as well as Oklahoma City-based Devon Energy, the Simmons report speculated.

Some could attract suitors because of diversified portfolios, although Apache's includes assets acquired from some of the oil majors. The report noted Anadarko's deep-water success — as well as its access to deep-water drilling rigs when other companies are struggling to secure them — could enhance its attractiveness.

But Anadarko's continued integration of assets from the Kerr-McGee and Western Gas acquisitions as well as ongoing asset sales to reconfigure its portfolio is "likely to keep potential acquirers away in the near-term," the report said.

Either way, Gheit said, acquisitions likely won't come cheap because acquirers want the right fit. "Cheap companies are cheap for a reason— either they don't have attractive assets or they don't fit with companies interested in buying assets," he said. "Regardless of how much it costs me, as long as I'm confident I can employ this money in a higher earnings investment, I'm ahead of the game."

Kristen Hays is an independent journalist, this article was published on 30 December in the Houston Chronicle

Looking Back at 2006 in Europe

2006-12-30T08:08:00.000Z

2006 Review: Europe's year in energy

By Stefan Nicola

Energy security concerns and super-mergers dominated Europe in the beginning of 2006 before experts and politicians began focusing on a much-greater problem -- that of climate change.

Europe's energy year started with a wake-up call for Western European politicians, when in January Russia temporarily shut off natural gas supplies to Ukraine over a price row, until Kiev agreed to pay higher prices. The row reminded Europe's politicians of Russia's hegemonic position when it comes to supplying energy to Europe, sparking calls for closer energy cooperation. Energy security became the topic of the moment, further fueled by rising oil prices.
Moscow has since been accused of using its vast oil and gas reserves as a foreign policy pressure tool, and Russian state-controlled energy giant Gazprom, the world's No. 1 gas firm, was seen as the Kremlin's economic branch. The Russian government at the Group of Eight summit in St. Petersburg, Russia, in July, put the issue energy security atop the agenda to demonstrate its newly acquired status of an energy superpower.

A German energy expert, however, said the political agitation in Western Europe was exaggerated. "That was bordering hysteria," Roland Goetz, energy expert at the German Institute for International and Security Affairs. "For years, Russia was seen as a solution to energy supply problems and high oil prices, and all of a sudden it was seen as unreliable."

However, European Union officials remain wary of increasing delivery dependence on Gazprom, which is 51 percent-owned by the Kremlin, which appoints the company`s senior managers.
"This is not a company that is playing by OECD rules," said Friedemann Mueller, another energy expert at the institute, referring to the Organization of Economic Cooperation and Development, in an interview with United Press International earlier this year. Gazprom's bids for getting access to end consumers in Europe were met with discomfort, but recent deals with Italy and France show the tide may be turning -- after all, Russian gas still is substantially cheaper than gas from Norway, Europe's No. 2 supplier.

Money also was the main, but not the only subject in a series of large mergers in the European energy sector this year. The other subject is government protection. In what observers say was a bid to fend off a takeover bid from Italian rival Enel, France was accused of orchestrating a merger between French companies Gaz de France and Suez earlier this year.

Eon, the German energy giant, during the past months tried to buy Spanish competitor Endesa, but despite a bid worth $50 billion, Madrid put several conditions and restrictions on the sale, favoring a domestic merger between Endesa and Gas Natural instead.

The European Commission, the EU's executive arm, decided to take action: In a decision earlier this month, it ordered Madrid to remove the hurdles by Jan. 19 or face legal action -- a call on Europe's governments to finally enable free competition on the European energy market.

A call on the world's governments -- a wake-up call -- was delivered in October, when former World Bank chief economist Nicholas Stern said in his report that failure to tackle climate change would cost the global economy some $7 trillion dollars by 2050, followed by social unrest. "Without action, droughts, floods and rising sea levels would mean that up to 200 million people could be displaced," the report said.

The Stern report and Al Gore's documentary on climate change urged politicians to focus more on lowering greenhouse gas emissions, and rightly so, Goetz said. "This is by far the world's greatest problem, and, unlike energy supply problems, there comes a moment when you can't control climate change anymore," he told UPI.

The report thus has unsettled the world's politicians. Germany, which takes over the EU and G8 presidencies in 2007, said it will make climate protection one of the key issues of its G8 summit, which will be held in June 2007.

But other recent politic signals -- Canada just joined the United States in ignoring the Kyoto Protocol, which regulates greenhouse gas emissions -- prove that the tide has not yet turned in a positive direction, Goetz said. "This will be a problem that will dominate for the next years," Goetz said. "If emissions continue to climb, soon enough, nature will hit back."

Stefan Nicola is a staff writer for United Press International

New Challenges in Central Asia

2006-12-29T07:28:00.000Z

Russia versus Iran/US in Turkmenistan

By Scott Sulivan

In a matter of weeks, as Iran's influence spreads, Russian President/dictator Vladimir Putin is taking up the US role as power broker in the Middle East.

As a result, Russia and Iran are facing confrontation in the Middle East. Now, in a major new crisis with the demise of President Niyazov in Turkmenistan, Russia and Iran are facing confrontation in Central Asia. What is called the "Great Game" between Russia and Iran for control of Central Asia's vast energy resources is underway with this political transition in Turkmenistan.

Good. Antagonism between Russia and Iran is an essential precondition for international stability. The US cannot or will not contain Iran. In fact, the US increasingly seems comfortable in the role of Iran's junior partner. The US is running interference for Iran in the Middle East, Iraq, and Central Asia, while Iran consolidates for the long term gains.

To put it another way, US appeasement of Iran in the Middle East and Central Asia forces Russia to confront Iran. In this regard, the crises in Lebanon, the Palestinian Authority, and Iraq have claimed Putin's attention in recent weeks after Iran scored gains, unopposed by the US. President Putin stepped in by inviting Lebanese Prime Minister Siniora and Syrian president Assad to Moscow last week for immediate consultations.

Russia was advancing in the Middle East after years of being absent as a major player. President Putin did so because he was unhappy with Iran's adventurism, as evidenced by Iran's support for confrontational policies by Hamas and Hezbollah.

Moreover, Syria, who has long been Russia's closest ally in the region, was telling Putin that Iran was fast becoming a threat to Iraq and the Arab states in general. Syria's President Bashar al-Assad warned Putin against Iran's presence in Iraq and called for Arab solidarity against Iran.
While the US remained passive, Russia was emerging as the counterweight to Iran in the Middle East. Russia was already the counterweight to Iran in Central Asia. Under Russian prodding, Iran was excluded earlier this year from full membership (and therefore security guarantees) in the Shanghai Cooperation Organization (SCO), Central Asia's NATO.

The financial stakes for Russia and Iran are very high in Turkmenistan. Turkmenistan is a major supplier of natural gas to Gazprom, who in turn supplies Ukraine. In this context, the loss of Russsian access to Turkmenistan's natural gas would be seen a major national security threat for Putin.

As far as Iran is concerned, a breakthrough in relation with Turkmenistan would significantly weaken Russia's entire policy of containing Iran in Central Asia. The US in recent years has been acting in tandem with Iran's policy of opening up Turkmenistan. The US has established a major military base in Turkmenistan, much to Russia's discomfort.

Will Russia stand alone with a policy designed to contain Iran in Iraq and Central Asia? The good news is that Turkey is a natural partner for Russia in a Contain Iran policy. Like Russia, Turkey sees great danger from Iran's presence in Iraq. Iran, with US support, is behind Kurdish aspirations for an independent state. Turkey, along with Russia, views the an independent Kurdistan and breakup of Iraq into two or more states as bringing disaster to the Middle East.

Turkey, in short, like Russia, is on a collision course with Iran. To contain Iran, Turkey and Russia are already coordinating policy on Iraq. President Putin and Turkish Prime Minister Erdogan also need to coordinate policy on the Middle East and Central Asia. Turkey should offer Russia full support as the political transition in Turkmenistan unfolds. Iran and the US will be making mischief there, but a Russian-Turkish coalition would secure Turkmenistan and Central Asia, in a major setback for Iran.

Moreover, Russia and Turkey should not despair of gaining eventual US support for a Contain Iran policy, even in Turkmenistan.

Scott Sullivan is a former Washington government employee.

Containment and Contradictions

2006-12-28T13:18:00.000Z

Using India to keep China at bay

By Tim Beal

U.S. attempts to construct and consolidate an alliance to contain China's seemingly inexorable rise registered another milestone in November when the U.S. Senate passed a bill to allow the government to transfer nuclear fuel and technology to India. The nuclear deal with India flies in the face of long-standing U.S. rhetoric about nuclear proliferation and is yet another blow to the nuclear Non-Proliferation Treaty (NPT).

There has been a degree of opposition in the United States to the agreements with the India deal. For example, in an op-ed in the Washington Post, former President Jimmy Carter was scathing about the “dangerous deal with India.” Many predicted a difficult time for the administration in pushing through a bill so flagrantly in conflict with its posturing on proliferation. “In concluding its nuclear deal with India, the Bush administration faces significant opposition in Congress and tough questions from its allies on whether the arrangement could set a precedent encouraging the spread of nuclear weapons to… potential foes of the United States,” opined Steven Weisman in The New York Times.

But when it came to it, this “significant opposition” faded away like the morning mist. On November 17, the Senate decided by 85 votes to 12 that, in the words of The New York Times correspondent, the “goal of nurturing India as an ally outweighed concerns over the risks of spreading nuclear skills and bomb-making materials.” The U.S. decision to tie the nuclear knot with India is in part about money -- the size of the growing Indian economy and the profits to be made in the new nuclear-military relationship. More importantly, however, India figures prominently in general U.S. geostrategic aims in Asia and toward China in particular.

India is the second fastest growing major economy in the world. According to the CIA its real GDP grew 7.6% in 2005, not far behind China's 9.3% and over twice America's 3.5%. It is also, again according to the CIA, the fourth largest economy in the world on a purchasing power parity basis (China comes in at number two) and accounts for 1.1% of world imports. In general, India is a large and increasingly attractive market and economic partner. The nuclear deal links this rapidly growing economy more closely to the United States and also boosts trade in a particularly profitable sector. The nuclear industry is big business, and “nuclear transfer” translates into significant sales for U.S. nuclear technology firms.

Then there are conventional armaments. India is a major military power with an appetite to match. In 2005 it was the largest buyer of arms in the developing world with purchases of $5.4 billion. Russia, to America's chagrin, was the largest seller to the developing world, and India is its principal market. The administration hopes that the nuclear deal will change all that by paving the way for a huge $6 billion contract to buy 124 U.S. fighter aircraft.

Such arms deals, of course, will have no relationship with proliferation, because that is what countries like Russia, China, and North Korea do, not the United States. Bill Clinton, in his State of the Union speech in 1999, proclaimed, “We must increase our efforts to restrain the spread of nuclear weapons and missiles, from (North) Korea to India and Pakistan.” In the world of geopolitics, however, seven years is a very long time. And the past is very much a different country.

Although important, money is only part of the reason behind the nuclear deal. The U.S.-India strategic relationship -- and that's what they are calling it -- gives the United States leverage over India in many ways, or so it is hoped in Washington and feared in Delhi. The Communist Party of India, a junior partner in Singh's coalition government, has warned that “the strategic relationship only means that India will be part of the U.S. strategies of global policing and undermine its role in international politics and its resolve to promote multilateralism in international relations.” United Progressive Alliance Chairperson Sonia Gandhi said that the UPA, and the Congress party, would not accept anything outside the original agreement of July 18, 2005.

One huge danger, which for obvious reasons is seldom articulated in public, is that India will become embroiled in America's anti-Islamic crusade. India has, in the past, refused to send troops to Iraq. That particular request is unlikely to surface again, given likely U.S. plans for disengagement. But as the relationship deepens, similar requests might be more difficult for India to reject. Nearly one-seventh of India's population is Muslim, and inter-communal violence, and terrorism, is a constant concern.

While deployment of Indian troops to Iraq is unlikely, the United States may well call on India for other forms of assistance, such as support against Iran. India has traditionally maintained good relations with Iran, in part to counterbalance Pakistan. Also, for a number of years, India has talked with Iran about a pipeline that would supply natural gas from Iran via Pakistan. This energy deal must produce palpitations in certain Washington hearts. Not merely would it provide revenue for Iran (and Pakistan), and give India (and Pakistan) a degree of energy security, away from the immediate attention of the U.S. navy, it would also tie the three countries together in mutual benefit.

For America, however, the real strategic target of the U.S.-India relationship is China. How the United States implements its China containment strategy, and how successful such a strategy will be, is another matter. China has military, economic, and diplomatic cards to play. India came off badly when it picked a fight with China in 1962 and is not looking to revive any conflict. China overtook the United States a couple of years ago as the major supplier to the Indian market. President Hu Jintao has just concluded a visit to South Asia where he appears to have pulled off quite an achievement in developing a better relationship with India without annoying Pakistan, something that Bush has not been able to do.

In addition, China (presumably with Russian approval) implemented a significant strategic counter-offensive in June 2006 by inviting India (along with Iran, Pakistan, and Mongolia) to become full members of the Shanghai Cooperation Organization (SCO). This invitation reversed China's position, stated as recently as January, that India and the other countries would have to be content with observer status. The SCO, formed in 2001 to check U.S. influence in Central Asia, may well expand to counterbalance a similarly expanding NATO. So the contest for India's favor is by no means a forgone conclusion.

Moreover, India has its own games to play and is no mere cat's paw of other powers. Apart from its perennial contest with Pakistan, it seeks a dominant position in South Asia with its interventions in Bangladesh and Sri Lanka, and expansion of influence in the Himalayan states. It has also sought a degree of primacy in the Indian Ocean and adjacent Southeast Asia. In short, India is looking to establish a role commensurate with its importance on the world stage.

Nevertheless, the strategic interests of India and America with respect of China have a natural overlap. Washington would probably view favorably any increase in India's ability to project military power in Asia. The U.S.-India agreements allow for closer cooperation in defense and in areas such as satellites and space exploration. It is not clear to what degree the United States will help India develop its nuclear missile capability, and such protocols will certainly not be made public. The New Framework for the U.S.-India Defense Relationship of June 2005 certainly does not clarify this matter.

India's missile program is a key determining factor shaping the U.S.-India-China triangle. India's Agni III missile, which has a design range of 3,500 km, had an unsuccessful test in July when it only reached 1000 km. India claims that a special steel to be used in its scheduled 2007 test will increase the design range between 15 and 30%. The distance between Delhi and Beijing is 3,800 km, so the improved Agni III, if successful, will bring all of China within range. How much help are Indian scientists getting from their new friends in Washington? It is not yet known but one area of missile cooperation the New Framework did specifically mention was “missile defense.” On November 27, India claimed to have successfully conducted an anti-missile test, intercepting one (nuclear-capable) Prithvi with another.

This developing friendship between the United States and India has all sorts of ramifications. It influences, for instance, America's relationship with Pakistan, and the United States needs Pakistan in its increasingly difficult struggle to control Afghanistan. However, Washington's willingness to jeopardize other important relationships indicates just how central the containment of China is to U.S. strategic policy.

Tim Beal teaches at Victoria University of Wellington. He is the author of North Korea: The Struggle Against American Power, is currently working on a study of the impact of China and India on international political economy, and is a contributing writer to Foreign Policy In Focus (www.fpif.org).

US Energy Policy Debate Begins

2006-12-27T16:49:00.000Z

Keep U.S. energy companies armed

Talk by Democrats of a windfall profits tax and an end to subsidies is a prescription for failure

By Warren Hudak

Imagine if the Continental Congress declared independence from Great Britain in 1776 and at the same time took away the Continental Army's muskets. What kind of strategy would that have been?

While this tactic seems ludicrous, this is the approach that incoming congressional Democratic leaders are proposing as energy policy. While they talk about "energy independence" they are also signaling that they will take away the best available means of achieving any level of energy security.

The next House speaker, Rep. Nancy Pelosi, has outlined an agenda for the first 100 hours of the Democratic-controlled 110th Congress. On her blog, Rep. Pelosi says: "We will energize America by achieving energy independence, and we will begin by rolling back the multibillion-dollar subsidies for Big Oil."

The subsidies Rep. Pelosi talks about include tax breaks for refinery expansion and for geological studies to help oil exploration. Also included is repealing tax credits for companies that choose to drill domestically instead of going abroad. And most ridiculous is Rep. Pelosi's support for a "windfall profits" tax on energy companies. How will America's energy supply and energy producers be energized by taking away incentives for producing/developing fuel within our own borders and then adding a job-killing windfall profits tax?

Significant increased domestic drilling was almost a reality this past summer when Congress was on the verge of expanding offshore drilling. Expanded offshore drilling would give access to the more than 55 billion barrels of oil estimated in the Gulf and off the East and West Coast shorelines. However, with new Democratic leaders seeking to eliminate tax credits for domestic oil exploration, expanded offshore drilling looks as though it's dead in the water.

A host of Democrats (Rep. Pelosi and Sens. Charles Schumer, Byron Dorgan, Christopher Dodd, Hillary Clinton) are once again calling for a new windfall profits tax. It seems as if these windfall profits proponents lost their notes on the results of President Carter's last attempt at such a tax.
It is widely known from the Congressional Research Service's analysis that the previous windfall profits tax was a complete failure and was finally repealed in 1989. President Carter's windfall profit tax "energized" our energy independence by reducing domestic production by 3 to 6 percent and increasing oil imports by 8 to 16 percent.

As an accountant and tax specialist, I know a thing or two about the cost of administering a tax -- both on the taxpayer and government. The cost of administering the 1980s windfall profits tax was an accounting nightmare, and between 1987 and 1988 resulted in virtually no revenue.
My firm, Hudak and Co., also specializes in company benefit plan services and pension funds -- and a new windfall profits tax on energy companies would hurt consumers not only directly at the pump, but also on the back end as the value of their mutual funds, 401(k)s, IRAs and pension funds nose-dive.

A study by Robert Shapiro and Nam Pham of the Investors Action Foundation from earlier this year found that more than 40 percent of U.S oil and gas company stocks constitute securities held in retirement accounts and pension funds.

This study revealed "on average, state and local pension funds invest more than 66 percent of their assets in equities, including mutual funds and index funds. Across the 50 states these funds hold approximately $64 billion in shares of U.S. oil and gas companies." Thus, new taxes on company profits don't take money just from corporate bottom lines; they also weaken the wallets of thousands of retirees and other investors.

Additional government intervention in the energy sector (whether by additional regulation, mandates or new taxes) will only result in higher prices and slow the entire economy.
Government must realize that crude oil (the main component of fuels) is a commodity that will be required as a fuel source for at least the next 20-plus years. Crude oil is traded in the global marketplace and global demand continues to grow. In the long run, energy independence is impossible and global energy interdependence is unavoidable.

U.S. gas and oil companies might appear as massive corporations, but they are minuscule when compared to the foreign, nationally owned oil and gas companies that possess 77 percent of world oil reserves. Our government must support domestic companies and not take away their muskets when they go up against foreign competitors.

Warren Hudak is the president of Hudak and Co., an accounting firm headquartered in New Cumberland, Pa. (whudak@comcast.net).

A Shifting Security Paradigm

2006-12-26T18:20:00.000Z

Russia defends its gas honor

By Nina Kulikiva

This year has been the most eventful for Russia's energy policies since the break-up of the Soviet Union.

Moscow has convinced everyone that the many years of subsidized gas prices for neighboring economies are becoming a thing of the past and that it is firmly determined to defend the position of its energy industry on the international stage.

When Gazprom first announced its plans to go over to market prices for all its partners, including in the CIS, few could believe it possible or imagine the outcome. Yet the first days of January 2006 showed that Gazprom was determined to deal with the gas transit problem in a decisive way. Throughout 2005, Ukraine had ignored the gas monopoly's proposals to discuss gas prices and their rise. When 2006 came, and there was still no agreement in place, gas supply to Ukraine was suspended. Then Kiev began siphoning off Russian gas transported via its territory to the EU, which caused a shortage of gas and a subsequent outrage in West Europe.

The Russian government argued that the shift to market gas prices inside the CIS, no matter how painful, would eventually improve the competitiveness of economies and companies in these countries. Moreover, Europe had often called for ensuring equal terms for everyone, Moscow emphasized.

Yet if anyone in Russia had expected support from the West, they were completely wrong. The EU lodged complaints about disrupted energy supply to Moscow, not to Kiev. Western mass media began discussing Russia's "unreliability" as an energy supplier. All objections of the Russian authorities, which pointed out that Russia had never ever failed to honor its energy commitments, even during the Cold War, were drowned in a chorus of accusations of gas blackmail, with which the Kremlin allegedly thought to undermine the neighboring economies that were leaving its sphere of influence. When similar talks began with other CIS members, the phrase "energy weapon" came into use. Russia allegedly used it to "mount the gas blockade" of Ukraine and Georgia.

This unilateral interpretation of the complicated situation on the part of the West shows one thing clearly: the EU has its own interest in the sphere and it is determined to get what it wants. Concerns about the growing energy dependence on the "unreliable" supplier provided another opportunity for Europe to announce the need to diversify energy sources and to demand that Moscow ratify the Energy Charter and sign the transition protocol to it. Russia believes that the protocol in its present form contradicts its interests as it envisages open access to Russian pipelines for independent gas producers, and insists on amending it.

There has been no progress on the issue this year. As a result, the Russia-EU summit in November blocked the decision on a new agreement on partnership and cooperation. The previous one, which expires in 2007, is to a large extent outdated and does not reflect the current state of bilateral affairs. So Europe in fact has refused to create the basis for further cooperation until Russia makes concessions in the energy sphere. The fact that formally the ultimatum was delivered by Warsaw, not the EU, does not change much.

Yet despite the West's attitudes, Russia has been active on the energy markets this year. First of all, the shift toward market gas prices for the CIS has become irreversible. Despite the intense discussions with Georgia and Belarus, all talks are expected to be completed by the end of next year. Compared to the events in January 2006, Gazprom has succeeded in making the dialog with its partners constructive.

Last spring, the West expressed its annoyance with the agreement on further cooperation in gas production between Gazprom and Algerian Sonatrach. Russia's intention to take part in the construction of a gas pipeline from Iran to Pakistan and India alarmed it, because this rapprochement between Moscow and Tehran could lead to the appearance of a so-called gas OPEC that will set prices and put political pressure on European countries. Given that Iran has the world's largest gas reserves after Russia and Algeria is an important supplier for Europe, this fear can be understood.

As to Russia's domestic energy policies, the most important was Gazprom's announcement in October that the Shtokman gas field in the Barents Sea would not be developed under a product-sharing agreement. Given the Russian government's obvious dissatisfaction with other PSAs and Gazprom's talks on joining Sakhalin 2, Moscow is apparently determined to toughen control over its own gas reserves. This resulted in vehement criticisms in the West. Experts and journalists began speaking of Russia going back to totalitarian rule, of economy nationalization and of the Kremlin's energy dictate.

The concept of energy security proposed by Moscow exposed one of the bitterest controversies on the global energy market: misbalance between the interests of energy suppliers and consumers. Russia argues that a stable system of energy security should take the interests of both into account.

Until now, the global energy system has been based on the interests of developed countries, which are mainly energy consumer. The West is accustomed to oil and gas majors from G8 member states controlling energy production and transportation and determining the development strategy of energy markets. Yet the major energy producing centers are located in developing countries. Meanwhile, Europe's own energy reserves are gradually running out.

The world's most promising oil and gas provinces - the Middle East, Latin American producer countries, Russia and Central Asia - are in no way controlled by Western companies. The instability in the Middle East, the declarations of the Bolivian and Venezuelan authorities about new measures to control operations of foreign energy producers and Russia's active efforts to build new pipelines and develop new markets show that the balance of power in the global energy industry is shifting.

So the more active Russia's energy policy, the more pressure comes from the West, both economic and political. Any Russia's moves on the energy stage are rejected and the energy dialog boils down to a fight for control over energy resources and transportation routes. This is the reason behind all gas conflicts.

Given obvious mutual dependence between Russia and the EU, it would be logical for them to unite efforts in solving common problems. This year, however, Russia and the West have failed to reach an understanding on the essence of energy security.

Nina Kulinova is an economic commentator for RIA Novosti. The opinions expressed in this article are those of the author and may not necessarily represent those of RIA Novosti.

Crisis in the Caucasus

2006-12-22T12:43:00.000Z

Georgia claims energy crisis 'over'

By Diana Petriashvili and Joshua Kucera

A recent agreement signed with Azerbaijan and Turkey appears to have lessened Georgia’s gas woes just in time for the winter. But the country’s energy talks with Iran remain a wild card - both in terms of the Georgian government’s relationship with the United States, and its ability to do without higher-priced Russian gas.

During a 4-14 December visit to the United States, Georgian Prime Minister Zurab Noghaideli affirmed that his country has averted the energy crisis that could have come from Georgia’s refusal to pay the new US$230 per 1,000 cubic meters price demanded by Russian energy giant Gazprom, which supplies the bulk of Georgia’s natural gas.

By 1 January 2007, Russian gas will account for only "20 percent or zero percent" of the gas that Georgia imports, Noghaideli forecasted in a 13 December speech at the Johns Hopkins University School of Advanced International Studies in Washington, DC. "There is no energy crisis any longer," he said.

But despite the prime minister’s assertions, talks with Turkey, Azerbaijan and Iran over alternative gas supplies to those offered by Gazprom continue. On 15 December, energy ministers from Georgia, Turkey and Azerbaijan in Baku reached an agreement about the delivery of 1.01 billion cubic meters of gas from Azerbaijan’s Shah Deniz field to Georgia in 2007.

Turkey has also agreed to hand over to Georgia 800 million cubic meters of gas from its take of the field’s output. This comes in addition to the 250,000 cubic meters Georgia will receive as a transit fee for the pipeline that carries the gas from Azerbaijan to Turkey via Georgian territory. The Georgian energy ministry has stated that Georgia consumed 1.8 billion cubic meters of gas in 2006. Noghaideli in Washington claimed that conservation measures have allowed Georgia to decrease its natural gas consumption by 15 percent.

While the deal would appear to remove considerable pressure from Georgia this winter, the start date for delivery of the Azerbaijani gas has been postponed. Earlier plans to start pumping the Shah Deniz gas to Georgia on 15 December were postponed until 20 December after "minor technical problems" arose, a spokesperson for the Georgian energy ministry said. Georgia expects to receive 10 million cubic meters of gas from Azerbaijan by the end of the year, Azerbaijani television broadcaster ANS reported Alexander Khetaguri, president of the Georgian Oil & Gas Corporation, which controls Georgia’s main gas pipeline, as saying in Baku on 15 December.

The actual cost of the deal with Azerbaijan to Georgian coffers remains unclear, however. Georgia’s Rustavi-2 television news, a media outlet with close ties to the government, reported on 15 December that Georgia has agreed to pay US$120 per 1,000 cubic meters of gas from Azerbaijan’s Shah Deniz field. The price is US$10 higher than the US$110 per 1,000 cubic meters currently paid to Russian energy giant GazProm, but far below the US$230 price GazProm has said it would charge Georgia as of 1 January 2007. President Saakashvili has termed GazProm’s proposed fee a "political price." Talks between Georgia, Azerbaijan and Turkey about Shah Deniz gas supplies continued on 16 December in Baku. Details were not immediately available.

In this game of strategy, however, Iran also plays a role. The two countries have deep-rooted historical ties – dating back to the Persian Empire’s control of much of eastern Georgia from the 16th until the 19th century – and the Tbilisi government has recently taken steps to enhance its commercial ties with Tehran. An investment conference for Iranian businesspeople with Georgian officials was held in Tbilisi in November.

Noghaideli is expected to discuss the issue of Georgia’s gas imports from Iran during a trip to Tehran later in December. The issue, however, is not without its potential stumbling blocks for ties between Georgia and its key strategic ally, the US. US Ambassador to Georgia John Tefft, however, has stated that the American government does not approve of Tbilisi striking long-term deals with Iran.

"We understood when, last year, because of the emergency situation, Georgia ended up without gas because of the gas pipeline [in the North Caucasus] blast, and had to import a small amount of gas from Iran," the ambassador said in an interview with the Georgian newspaper Kviris Palitra, published in the weekly’s 27 November edition. "But long-term cooperation between Georgia and Iran is unacceptable for us."

The US embassy in Tbilisi has declined further comments on the issue, but has indicated that the ambassador’s views were accurately portrayed.

Some Georgian politicians and analysts have reacted to the warning by blaming the government for inactivity in putting together a package of alternative gas supplies to those received from GazProm. In an interview with EurasiaNet, Zviad Dzidziguri, a parliament member for the opposition Conservative Party, termed the talks 'ineffective' and 'late.' "This kind of negotiations should not be taking place in December," Dzidziguri said, "It is too late now. If talks like this would have been completed in the summer, [any] surprises would not be so painful."

Economic analyst Niko Orvelashvili, who has recently joined the National Forum, a non-parliamentary opposition party, said that because of Georgia’s attempts to cooperate with Iran "too much time and money was spent in vain. It was not hard to figure out that our strategic partner, the U.S., would not let Georgia sign an agreement with Iran," Orvelashvili said, adding that trips by the prime minister and Energy Minister Nika Gilauri to Tehran have so far proven "useless."

For now, however, the government shows little sign of ending its talks with Iran. "I do not know what the US Ambassador said," Noghaideli said on 27 November in remarks broadcast by Georgian TV channels. "As for our relations with Iran, we will cooperate in the energy field with it. This year we are likely to buy gas from Iran and we will possibly exchange electricity with Iran."

In Washington, Noghaideli struck a similar note, affirming that the US will not stand in the way of short-term gas deals with Tehran. "Why should we be discussing it here [in Washington]?" he said, referring to Georgia’s energy ties with Iran. "The Iran gas issue will be discussed with Iran."

In his remarks to Georgian media, Noghaideli referred to an earlier statement by US Deputy Assistant Secretary of State Matthew Bryza, who, according to the prime minister, "made it clear that the United States, regardless of its relations with Iran, cannot tell Georgia to freeze in winter and not to buy gas from Iran."

Interpretations of Bryza’s actual comments at a 17 November press conference in Tbilisi have slightly varied, however. While the Georgian and Russian media initially presented the remarks as signaling US support for Georgian purchases of Iranian gas, a US embassy transcript of Bryza’s remarks suggests a less categorical stance.

Terming Georgia’s decision about paying a higher price to GazProm "very difficult," Bryza told reporters that "If Georgia, under such pressure, feels it has to look elsewhere for gas, looking first and foremost to Azerbaijan as a supplier, we understand that. While we are pursuing our policy toward Iran, we certainly don’t want Georgia or Armenia or any other country to be in a situation where it has not energy for the winter," he concluded.

Georgian analysts have assumed that Noghaideli would discuss the issue of Iranian gas in his trip to Washington, but details about such talks, if any, have not been forthcoming. Noghaideli’s trip featured four days of meetings with Washington officials, including Secretary of State Condoleezza Rice, Vice President Dick Cheney and World Bank President Paul Wolfowitz, among others.

In his 13 December speech, the prime minister described Gazprom’s price increase as part of a pattern of Russian attempts to put pressure on Georgia and its pro-Western government, a comment that is now a recurring refrain for Georgian government officials in trips abroad. "We have to deal with constant meddling in our internal affairs," he said.

Georgian officials point to the government’s September 2006 arrest of Russian military officers on espionage charges as the proof of such alleged meddling. In the weeks that followed the officers’ arrest and subsequent release, Russia deported scores of Georgian citizens living in Russia, removed most of its diplomatic mission to Tbilisi and cut off all transportation and postal communication links with the country.

Both domestic and international observers have kept a close eye on what these moves will mean for Georgia’s developing economy. Noghaideli said that Russian sanctions on Georgian wine, mineral water and other products, measures imposed before the espionage scandal, will decrease Georgia’s Gross Domestic Product by about 1.5 percent in 2006, but that the Georgian economy is still on target to expand by about 10 percent this year.

The International Monetary Fund, however, has projected slightly lower growth. In a 12 December statement, the IMF’s Tbilisi mission reported that Georgia’s "economic performance continues to be strong," but put GDP growth at a possible 8 percent for 2006. "Economic growth has been hindered by the loss of Russian export markets, but remains robust," the statement read.

Diana Petriashvili and Joshua Kucera submitted this article to EurasiaNet, which
provides information and analysis about political, economic, environmental, and social developments in the countries of Central Asia and the Caucasus, as well as in Russia, the Middle East, and Southwest Asia.

Iraq's Drop in the Bucket

2006-12-21T13:21:00.000Z

Looking for Iraq's oil windfall

The country, which has one of the largest reserves in the world, could pump 6 million barrels a day or more. But that sure isn't happening now.

By Steve Hargeaves

Iraqi oil revenue was supposed to cover nearly all the costs of reconstruction. The county's reserves are on the order of 115 billion barrels and, depending on who does the counting, tied with Iran for the world's second largest behind Saudi Arabia's 264 billion, according to the Energy Information Administration.

In early 2003, proponents of the war in the Bush administration said the entire effort might cost as little as $50 to $60 billion. Iraq was though to be capable of producing 3.5 million barrels of oil a day in short order, with that jumping to 6 million barrels a day or more in a few years' time. At current oil prices, that could have meant over $130 billion a year in oil money.

Now the U.S. will pour over $100 billion this year into the country, torn apart by a bloody three-year war, while oil production remains below pre-war levels. The latest EIA estimate said Iraq was pumping 1.9 million barrels per day. Obviously, the continuing violence is largely to blame for keeping the country's spigots flowing at a relative trickle.

But uncertainty over who controls what fields is also keeping investors, badly needed to repair the country's aging infrastructure, away. And massive corruption means a sizeable amount of oil - some estimates have been as high as 500,000 barrels a day - goes straight to the black market.

"The fields are still there," said Manouchehr Takin, an energy analyst at the Center for Global Energy Studies in London, who also added that vast parts of the country are still unexplored. "It's the politics that have degraded."

Ongoing violence

First and foremost, pipelines and refineries have to stop exploding. The best way to do that, experts say, is to give disaffected Sunnis, responsible for many of the infrastructure attacks, a stake in the oil wealth. At issue is who has the right to sign oil contracts with foreign companies and how the royalties should be divided. Currently, royalties on existing oil fields go to the central government while royalties on future oil fields go to the regions. But the issues of contract rights and royalty payments are being debated in the Iraqi parliament.

Supporters of more regional control include the Kurds and some Shiites. Oil-rich northern Iraq is largely Kurdish while oil-rich southern Iraq is largely Shiite. The Sunnis, who tend to have greater presence in oil-free central areas, want royalties to go to the central government and then be doled out based on population.

"Think of how people behave if someone in the family dies without leaving a will, and you'll see how important it is to get this right," said Amy Myers Jaffe, a fellow in energy studies at the James A. Baker III Institute for Public Policy who worked on the recent Iraq Study Group Report.

The report, also known as the Baker-Hamilton report after its co-chairs James Baker and Lee Hamilton, said all oil revenue should go to the central government. "No formula that gives control over revenues from future fields to the regions or gives control of oil fields to the regions is compatible with national reconciliation," the report said.

Oil companies, which must make multi-billion dollar investments with decades-long time horizons, would also prefer to sign a contract with the central Iraq government rather that with the leader of some semi-autonomous region, said Steven Simon, a Fellow for Middle Eastern Studies at the Council on Foreign Relations. "The (current) environment for investors is utterly uninviting," said Simon.

But Simon gave the current Iraqi parliament only a 20 percent chance of passing something that quelled the violence, provided a stable legal framework and was acceptable to the Shiites and Kurds. "A one-in-five chance in the current Iraqi environment is pretty optimistic," he said.

An Iraqi government committee working on the issue deadlocked Wednesday. As for the Iraqis ramping up production on their own, Simon said it wasn't likely. "If you're an (Iraqi) oil guy and you've got technical skills, you try to get out of there and get a job someplace else," he said.

Deadly corruption

Corruption is the other problem the country must get resolve before Iraq can get serious about rebuilding its oil industry. Jaffe said that when the Baker-Hamilton report was being prepared, one Iraqi official told her so much fuel disappears from a big refinery near Baghdad that the country would be better off to just close it down.

Jaffe said those skimmed petrol products are then shipped all over the region by a clandestine trucking network that's been in place since the oil-for-food program limited oil sales under Saddam Hussein. Or the products go to fill shortages in Iraq caused by fuel subsidies that don't allow the market to meet demand.

Profits from these black market fuel sales are a main funding source for insurgent and other violent groups inside the country. The New York Times recently reported that Iraq's insurgents are now economically self-sufficient and even have the means to sponsor terrorist groups outside the country.

To combat corruption, the Baker-Hamilton report recommended installing meters to measure how much oil flows through a pipeline and then paying security guards based on output, not a flat rate.

The report also recommended reducing the fuel subsidies to better allow the market to meet domestic demand, as well as provide training in areas such as procurement and accounting, to make the industry more transparent.

Steve Hargeaves is a staff writer for CNN

A National Champion Rises in the West

2006-12-20T19:19:00.000Z

Statoil to buy Norsk offshore operations in $28 billion deal

By Heather Timmons

Statoil will buy the oil and natural gas operations of Norsk Hydro in an estimated $28 billion deal that creates the largest offshore operator in the world and a new national energy champion for Norway, the companies announced Monday.

Combining Statoil's oil and natural gas operations with those of Norsk Hydro will create a 1.9 million barrels-a- day powerhouse that will be controlled by the government of Norway. As well as dominating local production, the expanded Statoil will have operations in 40 countries from Iran and Russia to Angola and the Gulf of Mexico, and a fattened treasury to finance new projects.

Offshore oil and natural gas production will become increasingly important in coming years, as new technology allows producers to extract resources from thousands of feet under the ocean, while reserves dwindle in easy-to-reach projects on land.

Countries with sizable energy reserves have been consolidating control of these assets, as rising oil prices make them more valuable. Such energy nationalism makes it more difficult for nongovernment oil companies to win new fields or projects outside their own countries, unless they can offer a clear technological edge.

For instance, Russia said in October it would develop its Shtokman natural gas field on its own, ending talks with Norsk Hydro, Statoil and other Western developers, though analysts were skeptical that Russia could get the offshore project running alone.

With the latest deal, Norway seems to be taking a similar tack. Prime Minister Jens Stoltenberg of Norway said Monday that the deal represented the beginning of a "new era." Norway is "creating a global energy company," he said.

Norway holds about half of Europe's remaining oil and natural gas reserves. It is the world's third-largest oil exporter after Saudi Arabia and Russia. The expanded Statoil's estimated 6.3 billion barrels in oil and natural gas reserves would be just a small fraction of Saudi Arabia's national oil company, Saudi Aramco, or Russia's gas company, Gazprom, but the company's exports are strategically important to Western Europe.

The company will be a "major and reliable supplier of gas into Europe," said the Norsk Hydro president and chief executive, Eivind Reiten, who would be chairman of the new company. Some European countries were unsettled last winter when Gazprom temporarily suspended natural gas supplies to Ukraine in a price dispute.

Changes in Norway's energy landscape could have far-reaching repercussions for some countries. Britain is becoming more dependent on Norway as its own North Sea reserves dwindle, for example, and Norway's Ormen Lange field could supply up to 20 percent of Britain's energy demands when it starts pumping next year.

Norway is also expected to start shipping liquefied natural gas to the United States next year. The new company will be a "more efficient operator" and a "clear Arctic leader" moving forward, said Helge Lund, president and chief executive of Statoil, who would retain those titles at the new company.

The deal was announced near the end of a record-setting year for mergers. As of the beginning of this month, there have been $3.3 trillion worth of deals in more than 32,000 transactions, according to Thomson Financial.

Norsk Hydro's shareholders would have 32.7 percent of the new company, and Statoil's the remainder. Norsk Hydro shareholders would receive 0.8622 share in the new company for each share they own, and continue to own shares in Norsk Hydro's core aluminum business, which would remain independent. The expanded Statoil would have a market value of about 575 billion Norwegian kroner, or about $92 billion.

The Norwegian government, which owns large stakes of both companies, would own 62 percent of the newly enlarged Statoil, and was expected to increase that stake to 67 percent after the deal closes, something expected in the third quarter of 2007. Thanks to energy supplies, Norway has amassed a giant Government Pension Fund, which holds about $250 billion in assets that are invested around the world.

Merrill Lynch analysts estimate that the offer represents a 20 percent premium for Norsk Hydro shareholders, based on the closing price Friday and a value of 37 Norwegian kroner a share for Norsk Hydro's aluminum business. "There is compelling strategic logic for this move," they said. Statoil shares fell 3 kroner to close at 170 kroner in Oslo. Shares in Norsk Hydro gained 32.25 kroner, or 20.6 percent, to finish at 188.50 kroner.

European energy companies are in the midst of a robust round of consolidation, ahead of the European Union's opening up of competition in the energy industry next year. Even though Norway is not part of the EU, developments in Brussels may have pushed the Norwegian companies to combine oil and gas assets as well.

"The new company will be a highly competent and financially strong Norwegian-based energy champion," that can compete in a more difficult international landscape, the Norsk Hydro and Statoil chairmen, Jan Reinas and Jannik Linkbaek, respectively, said. The strategic logic for the deal is strong and may allow both companies to cut some costs where there are overlaps in Norway, Citigroup analysts said.

Executives from both sides were loath to talk about cost cuts on Monday, saying the deal was about growth. Statoil's payroll will increase by about 5,000 employees, to 31,000. Statoil will also be renamed, but a new name has yet to be picked. The new company's board will be composed of three members of Norsk Hydro, four from Statoil and three employee representatives.

Heather Timmons is a writer for the New York Times

Tales of a Tangled Gas Game

2006-12-19T15:03:00.000Z

Sakhalin gas: Shell loses, whales win

By John Helmer

There are three opponents of Russia's strategy to become a global liquefied natural gas (LNG) exporter - the western gray whale, the US government and Gazprom.

Until this week, and for quite different reasons, all three, including the LNG producer itself, Gazprom, have succeeded in delaying and redirecting plans to start shipments from the first of Russia's LNG plants at Aniva Bay on Sakhalin Island, in the Far East; and to postpone indefinitely drawing-board plans and joint-venture agreements to build the second and third LNG plants on the Baltic, and to the north, on the Barents Sea.

During the Soviet period, energy planners in Moscow concentrated on piping natural gas to domestic users, and for export westward by pipeline across land to Europe. At the consumer end of this pipeline system, reliance on Russian gas is currently 100% in Finland; 99% in Bulgaria; 97% in Slovakia; and 76% in Greece. In volume of Russian gas consumption, Germany takes most, followed by Italy, Turkey and France.

In the Soviet period, the technology for liquefaction was costly, and although in development by Soviet ally Algeria, Moscow believed there was no pressing economic reason for installing it. The energy-price boom of the past three years has created enormous cash reserves for Gazprom, which the Kremlin-directed management wants invested as quickly as possible, avoiding devaluation by the unstable dollar, and threatened market manipulation by the Americans and Western Europeans. That has meant increasing interest on Gazprom's part in diversifying upstream, as well as downstream, in the gas market.

Shell had started the ball rolling a decade ago with its plan to build the Aniva Bay plant to liquefy gas, and tanker it to Japan and South Korea. With 9.6 million tonnes in annual export capacity, this plant has already contracted to sell more than 7 million tonnes for 20 years to Japanese and Korean buyers. However, a combination of huge cost overruns, postponements of tax payments to the Russian Treasury, and environmental damage led the Kremlin to attempt a move this year to transfer operating control, and shareholding equity in the project, to Gazprom.

For the time being, Asian buyers cannot count on a whiff, or a drop, of gas from Sakhalin. The campaign to protect the whales by Russian environmental organizations - endorsed by regional court rulings - has been under way for several years. Royal Dutch Shell, controlling shareholder and operator of the Sakhalin-2 project, has repeatedly denied that its dredging, construction of offshore production platforms and a tanker-berthing jetty, and the laying of undersea pipelines, had upset the marine ecology in the Sea of Okhotsk.

Starting in 2005, the Russian courts began to disagree. This year, the federal authorities extended their criticism to onshore pipeline construction, the cutting of forest, the heightened threat of mudslides, and other problems. After suspending the project's environmental clearances, the deputy head of the Russian environmental protection agency Rospriradnadzor, Oleg Mitvol, said Shell's proposed new cleanup plan was worthless. "It is not serious. It is a joke collection. We had expected to see technical solutions and they are dealing with small local problems," Mitvol said during a site inspection on November 11.

The changing economics of gas exports persuaded Gazprom strategists in Moscow that they too should build their own LNG facilities. Accordingly, during 2006, Gazprom negotiated agreements with Algeria's Sonatrach to cooperate in developing these plants in Russia for export of the product to the North American market. Natalia Bortsova, a gas-industry analyst in Moscow, told Asia Times Online: "Gazprom has a serious intention to produce LNG, but currently has no production facilities of its own." She said the technology required is readily available, and Sonatrach has unique experience building LNG plants, operating them, and marketing the product. "

Sakhalin LNG is controlled by Shell, and Gazprom has been trying to get a share there without success yet. [An LNG project for St Petersburg involves] Petro-Canada and Gazprom, but the negotiations are still at the stage of memorandum of intentions." She acknowledged that Gazprom's desire to export LNG to the US market will run into potential competition with Sonatrach, already a major US supplier, unless the two companies agree to cooperate. "It is very important to create the partnership, not to compete," Bortsova said.

The US government has objected, saying that a Gazprom-Sonatrach combination threatens gas markets with the potential for cartel pricing. European Union officials mimicked the Washington line in public. But neither they nor the Americans were able to dissuade Sonatrach from signing its memorandum of understanding (MoU) with Gazprom.

In case the Algerians started marching to the Western tune, in October Gazprom negotiated a fresh option with Repsol of Spain. A communique, issued in October by Gazprom, after a meeting of chief executive officers Alexey Miller for Gazprom and Antonio Brufau for Repsol, referred to their plan of cooperation as extending to "the territory of Europe, Latin America and Africa, and also in projects for production of LNG with use of the resource base of the Russian Federation, including the project Baltic LNG".

At the same time, the Kremlin was persuaded to rethink the usefulness of allowing US partners to take equity and possibly operational control of the northwestern LNG plants in planning - one on the shore of the Gulf of Finland, near St Petersburg, in planning with Petro-Canada; and another on the Barents Sea coast, above the Arctic Circle, with US oil companies ChevronTexaco and ConocoPhillips.

According to the statement by Petro-Canada on October 12, 2004, CEO Ron Brenneman and Gazprom's chairman, Alexey Miller, had signed an MoU "to investigate a joint liquefied-natural-gas project which would see LNG from Russia shipped to North American markets by 2009. Specifically, the MoU covers options for Petro-Canada and Gazprom to jointly develop a liquefaction plant in the St Petersburg region, and investigate options for gas supplies to that LNG plant and re-gasification in North America."

Without a supply of gas on tap, however, that deal is a dead letter. Thus the decision Gazprom made on October 9 this year - two years after the Petro-Canada MoU - to limit initial production from the Shtokman field to pipeline deliveries of natural gas could defer the Baltic plant indefinitely. According to the Gazprom announcement, "pipeline gas deliveries from the Shtokman field to the European market would take priority over LNG shipments. Shtokman will be the resource base for Russian gas export to Europe via the Nord Stream gas pipeline. Gazprom will develop the field on its own, without attracting foreign partners."

The latest Gazprom evaluation of Shtokman boosted field reserves by 10% to more than 4 trillion cubic meters. It also concluded that lifting the gas and condensate, and piping it 550 kilometers to shore, will be less risky, and less costly, than Gazprom has previously thought.
The political value, however, of liquefying the gas, either on the Barents shore or on the Gulf of Finland, has vanished, at least for the time being - and Russia will leave the American LNG market to Sonatrach for the foreseeable future.

The China market remains difficult for Gazprom to supply, unless it can divert Sakhalin gas away from its intended and contracted Japanese and Korean customers. A fresh estimate, released last month, suggests that the cost of building overland the 2,700km Altai gas pipeline from West Siberia to China would require an investment of about US$14 billion. Even if that is affordable, Gazprom's ambition to place large volumes of gas in the Chinese market as early as 2010 may be defeated by lack of gas. "We do not think that Gazprom has the gas for this, at least from West Siberia," said Adam Landes, a Renaissance Capital analyst. "We therefore continue to believe that Russian gas exports to Asia will be sourced from East Siberia and Sakhalin only, and dismiss the notion that the Altai pipeline will ever be built."

When Russian President Vladimir Putin was last in Beijing a few weeks ago, the emphasis in the energy-sector talks was on overland pipeline transportation, not on increased shipping from Sakhalin, industry sources say. All CEO Miller would say in China was that his company might start shipping gas to China through pipelines, from Sakhalin, East Siberia, and West Siberia, within five years.

New gas deliveries from Western Siberia are estimated to total 30 billion to 40 billion cubic meters. An alternative to the Altai pipeline route to China is being considered from the Eastern Siberian field of Kovykta to China. Gazprom's size is deceptive. Its capacity for grand strategy is quite limited, and its drive into both the Asian and European markets much more commercially driven, and opportunistic, than the Western press understands.

Had Shell's public relations advisers, along with Mitsui and Mitsubishi, not tried to defend against Moscow's charges against the Sakhalin-2 investors of cost overruns, tax evasion, and environmental non-compliance by attacking the Kremlin for political interference, a resolution of Shell's problems in completing the Aniva Bay project might have come more swiftly, and less painfully for Shell. Russian finance officials accuse Shell, principal shareholder of the Sakhalin Energy Investment Co (SEIC), and operator of the Sakhalin-2 project, of fabricating costs, which have jumped since last year by almost 125% to $22 billion.

According to the terms of their production sharing agreement (PSA), signed by corrupt officials of former president Boris Yeltsin's administration when Russia's Treasury was close to bankruptcy, oil production declining, and Russian corporates desperately short of investment capital, Shell (and ExxonMobil at Sakhalin-1, an oil-export project) would not have to pay profit taxes until they had cleared their project costs.

The cost overruns have significantly postponed these tax payments. "If costs continue to rise without control, Russia will be left with only 6% of royalties, while all profit will go to repaying costs," Sergei Fyodorov, head of geological and subsoil use policies at the Natural Resources Ministry, said in September. "The production sharing agreement presumes two kinds of taxes, the royalty and the profit tax," Fyodorov explained. "

From Sakhalin-2 we receive about $20 million in royalties. There is no profit. They are now extracting 1.5 million to 2 million tonnes [of crude oil] a year. If we take $60 a barrel and convert the barrels to tonnes, we get about $400 a ton. Accordingly, if the usual tax regime were operative here, that is, 50-55% of earnings, we would have about $200 of taxes from every ton of oil. In a year we would receive $300 million to $400 million. And we get just $20 million."

To convince Shell that the terms of the PSA should be voluntarily renegotiated, the government in Moscow has identified other, equally pressing, violations and reopened the environmental file which Russia's environmentalists and regional courts have been urging for years. The first regular oil shipments by ExxonMobil from the field, through DeKastri port, were delayed, while environmental inspectors checked regulatory compliance at the port terminal. Leaders of Russian environmental-protection organizations on the island of Sakhalin have told Asia Times Online that they back their government's decision to cancel the three-year-old license for completion of the Sakhalin-2 project.

Dmitri Kisitsin of Ecological Watch of Sakhalin said: "It is obvious that the first ecological clearance [for Sakhalin-2] was granted with violations already. They started to construct from simple stages, but now they can't make the rest go normally. The Sakhalin-1 story is more simple. Exxon didn't make the same level of violations, but they have some problems too."

Oleg Mitvol, deputy director of Rospriradnadzor, said at a press conference in Moscow that SEIC's pipelines risk landslide damage, oil spills, and threats to marine life. "We are just doing what any country in the world would do," Mitvol said. If someone had done this in the United States, "he'd be in jail. Here, he's sitting in a Mercedes." For the longer term, the Russian government came to the conclusion that the optimum method of regulating the Sakhalin project would be a change in project shareholding. Gazprom then sought a 25% blocking stake in Sakhalin Energy, reducing both the Shell and Japanese stakes.

The terms of this shareholding plan, reported by the Alfa Bank brokerage in Moscow in September, would have seen minority shareholders Mitsui and Mitsubishi selling parts of their respective 25% and 20% stakes to Shell, which currently holds the controlling 55% interest in the project company. Shell, it was reported, would then swap a 25% shareholding in Sakhalin-2 with Gazprom, in exchange for a 50% stake in Gazprom's Zapolyarnoye field. These terms did not stick, and as the public bickering between Russians and Westerners over the project intensified, shell's bargaining position deteriorated.

Gazprom told Asia Times Online in September that talks with Shell on this matter had been underway, but noted that the license cancellation ordered by the environmental regulators had halted them. After a chief executives' meeting last Friday, this week it has been reported in Moscow, but not confirmed officially, that Shell has agreed to sell Gazprom shareholding control of Sakhalin Energy. The terms are still under negotiation, according to Dmitri Medvedev, chief of the Kremlin staff and chairman of the Gazprom board.

Russian reports suggest that Gazprom will not pay cash up front. Instead, it will reportedly defer payment for its stake until the project starts operation, and cash is generated from LNG shipments and sales. This suggests that the takeover will oblige Shell to accept an audit of its actual project costs, instead of its estimated $22 billion in capital expenditure; and that the income that would otherwise have flowed to Shell under the PSA will be diverted to Gazprom, and then paid to Shell for shares. If Gazprom were to accept Shell's capex estimate of $22 billion, its 50% buyout would notionally cost about $11 billion.

But neither side is keen to acknowledge publicly what discount price has been tabled. This was clearly one of the sticking points when Russian Energy Minister Victor Khristenko said early this week that the talks were "difficult". A revision as clever as this to resolve the strategic control issue leaves undecided how Rospriradnadzor will settle the environmental non-compliance issues, and the agency's claim, purportedly for $10 billion in damage to the Sakhalin land and marine environment charged against Shell's project management.

Mitvol of Rospriradnadzor has already announced that a Gazprom takeover would have no effect on his claims. It may, however, impact on the price Gazprom ends up having to pay Shell. In such a deal, even the whales may be compensated.

This article was published by Asia Times Online on 15 December.

Into Africa, Out of Asia

2006-12-18T10:08:00.000Z

Western Oil Companies Face Asian Upstarts Over African Oil

by Ian Talley and Angel Gonzalez

Western oil companies operating in Africa, one of the world's fastest growing petroleum regions, are meeting their match - in the form of Asia's national oil companies.

Aggressive, determined and motivated by burgeoning domestic demand, the Asian upstarts are making their way into African plays by addressing the countries' developmental needs, aided by huge state coffers provided by governments less concerned with profit than supply. African government officials say unless Big Oil adapts to meet the challenge, it risks losing market share.

"I'm concerned about the U.S. companies...they have very tough competition," particularly from India and China, Algerian Oil Minister Chakib Khelil said at a U.S.-Africa oil and gas conference sponsored by the Corporate Council On Africa. The domination of western oil companies in Nigeria, Algeria, Angola and other African oil producing markets "is not going to work like it was before," said Khelil. Now, he said, "they have to work with state oil companies...to have access to acreage and also diversify their risk in various countries."

National oil companies such as Chinese National Petroleum Corp. and India's ONGC Videsh, the overseas exploration unit of state-run Oil & Natural Gas Corp., "are changing the rules of the game," said Warwick Davies-Webb, a poltical analyst at the South-Africa based Executive Research Associates.

Some analysts, however, play down all this talk about competition between East and West for limited resources. Asian investments in energy help raise production everywhere - and since oil markets are global, higher output benefits all consumers, said Cambridge Energy Research Associates Director Dan Yergin. "The notion that they invest in Angola" doesn't mean that "they've tied up," said Yergin. "With the Chinese growing the way they are, not investing more on a global basis would be worse. I don't believe it's a zero-sum game."

A Matter of Priorities

For publicly traded, private-sector companies such as Exxon Mobil Corp., Royal Dutch Shell PLC, and Chevron Corp., the companies' primary priority is profit, said Davies-Webb. "But the first priority for national oil companies is supply...They have lower profit expectations and are more determined to segment out oil and gas supplies for the motherland," he told ministers, officials and executives at the conference Thursday.

They do so with support from institutions such as China's Development Bank, which has reserves of around $350 billion. "That's massive financial power that can be leveraged in their energy strategy," the Executive Research Associates research director said. In terms of making bids, the Algerian oil minister said Western companies have a better chance of competing against national oil companies in Algeria because of the open bidding process. But in countries that don't have as much transparency, bidding against NOCs with deep pockets will be much more difficult.

Oil companies should be talking to U.S. Energy Secretary Samuel Bodman and President George W. Bush to "create a big fund for oil companies, to help those companies move into these countries," Khelil said with a laugh. But Khelil says many U.S. companies have been somewhat slow to adapt to the changing nature of the game. "We have been trying many times to try to develop projects with U.S. companies outside Algeria, even talking about exchange of assets, but we haven't been able to do that."

Western companies must show a "willingness" to define their strategy in the current competitive environment, where national oil companies are open to swapping assets and partnering across the globe with African state firms such as Algeria's Sonatrach and Angola's Sonangol, the minister said.

Mozambique Deputy Minister of Minerals Abdul Razak Noormahomed said although Western companies currently are the only foreign shareholders in exploration and production in his country, both Chinese and Indian company officials "are coming to check out our resources" and are awaiting exploration results to prove the country's attractiveness.

Norsk Hydro ASA, Anadarko Petroleum Corp., ENI SpA, and a handful of small U.S. companies have won lease agreements to explore several of Mozambique's prospects which government officials said show potential for trillion-cubic-feet of gas and billion-barrel fields. Anadarko has been studying one of Mozambique's offshore basins and says it is highly prospective and could rival proven world-class petroleum systems of the Niger Delta, Mahakam Delta and the Gulf of Mexico.

A Matter of Culture

Part of the Asian companies' allure is that they seem to understand the logistics of local development better than their Western peers, African officials said. They're also more eager to please. "The reason Africans approach China is because the Chinese know the needs of Africans," said Gabriel Nguema Lima, vice minister of oil for Equatorial Guinea. "What we need is hospitals and infrastructure. The oil company won't build them - but they will call their government to make sure our needs are met."

Major Western companies have less flexibility, he said - with the exception of the independents, which are scooping up many of Equatorial Guinea's new exploration blocks. "The independents are like the Chinese. They're interested in helping the country, talking to the ministers and presidents, and understand what we want." Some independents can also get along with their new Asian partners.

Max de Vietri, chief executive of Baraka Petroleum Ltd., an independent oil company that's been operating in Mali for five years and has close ties with the government there, said the Chinese are "model partners." The company this week showed successful exploration results on a prospect that could total 400 million barrels. In the joint-venture with Baraka, De Vietri said that his Chinese partners were "willing to listen" on proposals for operating strategies.

"That doesn't happen" with many Western companies, he said.

Ian Talley and Angel Gonzalez are correspondents with Dow Jones & Company

Foundations for International Insecurity

2006-12-15T07:12:00.000Z

The global clash of emotions

By Dominique Moïsi

Thirteen years ago, Samuel Huntington argued that a "clash of civilizations" was about to dominate world politics. Events since then have proved Huntington's vision more right than wrong. It would be more correct, however, to speak of a "clash of emotions." The Western world displays a culture of fear, the Arab and Muslim worlds are trapped in a culture of humiliation, and much of Asia displays a culture of hope.

The United States and Europe are divided by a common culture of fear. On both sides, one encounters, in varying degrees, a fear of the other, a fear of the future and a fundamental anxiety about the loss of identity and control over one's destiny in an increasingly complex world.

In the case of Europe, there is the fear of being invaded by the poor, primarily from the south. Europeans also fear being blown up by radical Islamists or being demographically conquered by them as their continent becomes a "Eurabia." Then there is the fear of being left behind economically. Finally, there is the fear of being ruled by an outside power, even a friendly one (such as the United States) or a faceless one (such as the European Commission).

Some of the same sense of loss of control is present in the United States. Demographic fears are mitigated, but they are clearly present. Americans do not fear economic decay the way Europeans do (although they worry about outsourcing). Yet they, too, are thinking of decline — in their bodies, with the plague of obesity; in their budgets, with the huge deficits; and in their spirit, with the loss of appetite for foreign adventures and a growing questioning of national purpose. And of course after 9/11, Americans are obsessed with security.

Whereas Europeans try to protect themselves from the world through a combination of escapism and appeasement, Americans try to do so by dealing with the problem at its source abroad. But behind the Bush administration's forceful and optimistic rhetoric lies the somber reality that the U.S. response to 9/11 has made the United States more unpopular than ever. The U.S. intervention in Iraq, for example, has generated more problems than it has solved.

The Muslim world, meanwhile, has been obsessed with decay for centuries. When Europe was in its Middle Ages, Islam was at its apogee, but when the Western Renaissance started, Islam began its inexorable fall. Muslims saw the creation of the state of Israel in the midst of Arab land as the ultimate proof of their decline.

For Jews, the legitimacy of Israel was manifold; it combined the accomplishment of a religious promise, the realization of a national destiny, and compensation by the international community for a unique crime, the Holocaust. For Arabs, by contrast, it was the anachronistic imposition of a Western colonial logic at the very moment decolonization was getting under way.

The unresolved conflict between Israel and its neighbors has helped turn the culture of humiliation into a culture of hatred. Over time, the conflict's national character has shifted to its original religious basis — a conflict between Muslims and Jews, if not a clash between Islam and the West at large.

The combination of the deepening civil war in Iraq and the fighting in Lebanon between Hezbollah and Israel has reinforced a sense of outrage in many Muslims that has been fully exploited by Iran and its allies. And globalization, with its expansion of the gap between economic winners and losers, has contributed to the problem.

The culture of humiliation extends to the Muslim diaspora in the West as well. The riots in France during the autumn of 2005, for example, had an essentially socioeconomic origin, but they were also a lashing out by the disaffected against a society that claims to give them equal rights in principle but fails to do so in practice.

As the West and the Middle East lock horns, confidence in progress has been moving eastward. After two centuries of relative decline, China is recovering its legitimate international status. Its policy of concentrating on economic development while avoiding conflict seems to be earning Beijing both material benefits and international respect.

As for India, for the first time in its modern history it has stepped onto the world stage as both an independent and an important power. Difficulties abound for both, but the optimism today is real and seems likely to last as long as growth continues.

Given the global clash of emotions, the first priority for the West must be to recognize the nature of the threat that the Muslim world's culture of humiliation poses to Europe and the United States. Neither appeasement nor force alone will suffice. The war that is unfolding is one that the culture of humiliation cannot win, but it is a war nonetheless and one that the West can lose by continuing to be divided or by betraying its liberal values and its respect for law and the individual.

The challenge is not figuring out how to play moderate Islam against the forces of radicalism. It is figuring out how to encourage a sufficient sense of hope and progress in Muslim societies so that despair and anger do not send the masses into the radicals' arms.

In that regard, the Israeli-Palestinian conflict appears more than ever as a microcosm of what the world is becoming. Israel is the West, surrounded by the culture of humiliation and dreaming of escape from a dangerous region and of re-entry into a culture of hope. But it must find a solution to the Palestinian problem first, or else the escape will not be possible. So, too, Europe and America seek to permanently banish their fears but will be able to do so only by finding a way to help the Muslim world solve its problems.

Dominique Moïsi is a senior adviser at the French Institute of International Relations. This article is based on an essay for an edition of Foreign Affairs.

Trouble in Petroleum Paradise

2006-12-14T17:33:00.000Z

A country rich in oil yet mired in poverty

By Jacques Lhuillery

Nigeria, which will on Thursday host its first-ever meeting of the Organisation of Petroleum Exporting Countries (Opec), is a paradox: the country ranks sixth among the world's oil producers and yet remains mired in poverty.

Africa's most populous nation, with its 130 million inhabitants, produces 2,6 million barrels of oil per day, pumped from the expanse of swamps and creeks in the south of the country known asthe Niger Delta, an area the size of the whole of Scotland where Shell discovered Nigeria's oil in 1956.And yet, according to the United Nations Development Program (UNDP), almost three-quarters of Nigerians live on less than one dollar a day.

A finance official from one of the southern oil-producing states suggests that oil breeds corruption and greed on a massive scale and in fact thus actually hinders the development of Africa's oil producers.For if the masses have not benefited from their country's oil, which accounts for 95 percent of its foreign exchange earnings, a handful of the country's leaders certainly have.

An official report recently estimated that the country's leaders have stolen about $384-billion from the state's coffers since Nigeria gained independence from Britain in 1960. That is roughly the same sum as was spent on the Marshall Plan for Europe after the Second World War.Several audits, the most recent an independent one dating from early 2006, have revealed "serious shortcomings" in the management of Nigeria's petro dollars. Colossal fortunes have been built onoil while the population of the Niger Delta has seen only the pollution of its land and its waters.

This has led to resentment and armed attacks on oil installations and oil workers. In the past six years about 600 people, among them two Americans and a British national, have been killed in the delta and 187 oil workers have been taken hostage by armed groups claiming to be fighting for a fairer share of oil revenues for the local population.

For the militant groups in the delta have two enemies: the federal state, which, according to the constitution, owns the country's petroleum riches, and the oil majors such as Shell,Chevron and Exxon-Mobil whom they accuse of "conniving" with the government to "loot" the riches in question. And whilst Edmund Daukoru, as Nigerian oil minister, might be the current OPEC president, the man who really has the last word on oil in Nigeria is none other than President Olusegun Obasanjo himself.

Obasanjo, who will step down after two terms at the end of April 2007, is fond of saying he will not leave the country's oil eldorado in the hands of "bandits". All this means that this part of Nigeria, one of the biggest suppliers of petroleum to the US, is a very sensitive zone for the world economy, with one oil executive likening Bonny oil field in the extreme south of the delta to the Strait of Hormuz

Welcome to the Brave New World

2006-12-13T22:21:00.000Z

Nationalism is added to the oil mix
Western producers are pressured to adapt to new terrain

By Matthew Saltmarsh

Tension in the Middle East and demand from the roaring economies of India and China have already caused the price of oil to surge this decade. Now, the oil market has a new force to reckon with: nationalism.

Oil-producing countries are seizing domestic resources that were once shared with international oil companies, bolstering national corporate giants and even starting to buy energy assets abroad. Taken together, this wave of so-called energy nationalism is likely to continue to keep oil prices high next year, and beyond, analysts say.

All this is clouding the outlook for the security of the supply of oil and suggest that Western oil companies, or "majors," will have to adapt to keep flourishing. In the latest episode, Royal Dutch/ Shell offered this week to sell a major stake in its $20 billion Sakhalin Island oil and natural gas project to Gazprom, the Russian state-controlled energy giant.

"When oil was $20 a barrel," said John Hall, the managing director of John Hall Associates, an energy consultancy in Horsham, England, "most producers wanted all the outside help they could get. When it's $60, outsiders are told to go. Not many people are expecting a significant price decline, so life for the majors will get much more difficult from here."

Russia is not the only worry. Large Western oil companies are also now having to compete much more fiercely with Chinese and Indian national champions, which have been pushing hard to win market share in Africa and Central Asia and whose position in parts of the Middle East has been strengthened by the ill-fated intervention by the United Sates and Britain in Iraq.

And Hugo Chávez, newly re-elected as Venezuela's president, will "make life as difficult as possible for the U.S.," Hall said, "and then there's resurgent resource nationalism elsewhere in Latin America, Iran, Algeria and Russia."

The trend shows no sign of abating, with oil hovering around $60 a barrel in recent months and forecast to edge up next year. Nationalism is adding to other factors for high oil prices; they include a supply that is just barely keeping up with growing demand and insufficient investment to tap new resources.

The price of oil, which helps determine corporate profits and consumer spending, plays a crucial role in the health of the global economy. So far, most economists agree that the effects of the oil price rise on the world economy have been muted, though that could change as several years of high prices begin to take their toll.

At the same time, the two largest European oil companies, Shell and BP, have suffered a series of setbacks. For Shell, they included huge cost overruns and an overstatement of reserves in 2004. For BP in the United States, they included the shutdown this year at Prudhoe Bay, the largest U.S. oil field, after the discovery of corroded pipelines.

The added pressure on major oil companies could prompt a round of consolidation among those of all sizes, analysts said. In December an ABN AMRO analyst, David Cline, issued a report examining the possibility of a merger between Shell and BP or a combination with Total, the French oil company.

Looking merely at supply and demand, analysts see an oil market that appears to be relatively well balanced.

The International Energy Agency, which acts as energy policy adviser to 26 member countries, forecasts oil demand in 2007 at 85.9 million barrels a day, compared with 84.5 million this year. Supply reached 85.3 million barrels in October 2006 as increases from producers outside the Organization of Petroleum Exporting Countries countered lower supply from the cartel.

The main problem for the supply-demand balance rests further in the future. The International Energy Agency predicts that at current trends, global oil demand will surge to 99 million barrels per day in 2015 and 116 million barrels in 2030. This increase is expected to be led by China, India and the global transport sector as the lower cost of automobiles and airline travel further opens up those sectors, which in the near future have no viable energy alternative beyond oil.

In its last annual report, the International Energy Agency looked at investments by oil companies in the last five years and made projections for the coming half-decade. It found that spending had increased because of higher costs as companies moved to remoter locations and related expenses soared. In real terms, the increase in investment was negligible. This trend is expected to continue. Edward Morse, energy economist at Lehman Brothers, said the sector had been shaped by "a generation of underinvestment."

Benchmark New York crude futures gained 448 percent from a low of $17.50 a barrel in November 2001 to the record high in July of $78.40 a barrel, before falling back to trade in a range around $60 in recent months. The drop was attributed to the end of the U.S. summer vacation driving season, a cease-fire in the Israeli-Lebanese conflict, the easing tensions in the Niger Delta region of Nigeria and the return to production of half of Prudhoe Bay.

Other influences included the avoidance of an escalation of tensions between the United States and Iran over Tehran's uranium enrichment program, a mild U.S. hurricane season and high oil stock levels among members of the Organization for Economic Cooperation and Development. A poll released in November by Reuters showed that the consensus of 32 analysts forecast a crude price of $63.80 a barrel for all of 2007.

With around two-thirds of proven oil reserves in the Middle East, the importance of OPEC in the price equation appears to be rising. OPEC accounts for around 40 percent of all production, but over the next 10 years, this level should rise to 45 percent as U.S. and North Sea supply falls, said Fatih Birol, chief economist of the International Energy Agency. Meanwhile, OPEC's internal floor price, or the desired price for oil that is used as a yardstick in decisions on output, rose to $55 from $50, from a range of $20 to $30 several years ago, analysts said.

OPEC's next official meeting, set for Thursday in Abuja, Nigeria, is expected to agree on an output cut. At its previous meeting, in October in Doha, Qatar, OPEC agreed to cut output after prices softened. Most recently, members have been complaining about the dollar's decline, because oil is traded in dollars.

The politics of OPEC are also in flux, partly because of energy nationalism. Meanwhile, Sudan, Angola and Brazil are reported to be considering applying for membership in the cartel. What everything suggests, according to Birol, the economist, is that the days of oil at $50 a barrel appear to be over.

Matthew Saltmarsh is a features writer for the International Herald Tribune

Putin's Power Play

2006-12-12T19:45:00.000Z

$20bn gas project seized by Russia

By Terry Macalister and Tom Parfitt

Shell is being forced by the Russian government to hand over its controlling stake in the world's biggest liquefied gas project, provoking fresh fears about the Kremlin's willingness to use the country's growing strength in natural resources as a political weapon.

After months of relentless pressure from Moscow, the Anglo-Dutch company has to cut its stake in the $20bn Sakhalin-2 scheme in the far east of Russia in favour of the state-owned energy group Gazprom.

The Russian authorities are also threatening BP over alleged environmental violations on a Siberian field in what is seen as a wider attempt to seize back assets handed over to foreign companies when energy prices were low. The moves will alarm many investors in the City of London as Shell and other share prices are hit, but the news will also increase ministers' concerns about Britain's energy security.

Russia is becoming a key source of natural gas to the UK and Gazprom has already made clear it would like to buy a company such as Centrica, which owns British Gas. One third of western Europe's natural gas is supplied by Russia - a figure expected to rise over the next decade.

The security of energy supply is now the main political issue between the EU and the Kremlin. Nervousness about the Russians was heightened last winter when the gas supply to Ukraine was cut off in the middle of a political dispute.

Shell confirmed last night that its chief executive, Jeroen van der Veer, met Gazprom's chairman, Alexei Miller, in Moscow last Friday but would say only that the talks on Sakhalin-2 were "constructive". The Russian company said that "Shell did indeed make several proposals concerning Sakhalin-2" at the meeting which came after Shell was threatened with having its operating licence withdrawn.

The energy minister, Viktor Khristenko, is expected to give details today of a deal under which Shell and its Japanese partners are likely to get a cash payment in return for giving Gazprom a stake in the project.

Dmitry Peskov, the official spokesman of Russia's president, Vladimir Putin, hit out yesterday at critics in the western media who implicated the Russian government in manipulating oil projects and the poisoning of dissidents. He said there was too much "anti-Russian hysteria". With reference to BP's oil spills in Alaska, he added: "If it's an environmental problem in Alaska it's environmental. If it's in Russia you call it politics."

But other senior politicians in Moscow had no doubt Shell was being harassed into reducing its 55% stake in Sakhalin-2 to something close to 25% through relentless pressure from ministries.
"In the current situation Shell will not be able to defend its economic interests in a civilised process with the Russian authorities, so they will be obliged to give up control if they want to save at least some adequate part of the project," said Vladimir Milov, Russia's former deputy energy minister.

Bob Amsterdam, the lawyer of the jailed oil oligarch Mikhail Khodorkovsky, said the Kremlin was "once again" using legal pretexts to cover what was essentially an expropriation of private resources in the energy sector. "The Kremlin ought to cease this behaviour," he said.

The Sakhalin-2 project is scheduled to start operations in 2008 and involves finding and producing oil and gas near Sakhalin island, formerly known only as a penal colony during the tsarist and Soviet eras.

The two fields that make up Sakhalin-2 have an estimated 1.2bn barrels of oil and 500bn cubic metres of natural gas. The gas is to be brought ashore, liquefied and frozen before being shipped to customers in Japan and elsewhere.

The scheme created almost immediate controversy with western conservation groups because it involves putting equipment close to breeding grounds of endangered western grey whales. There has also been criticism that sensitive salmon fishing areas are being hit by dumping of dredging spoil waste amid worries about oil spills from platforms in the Okhotsk and Japanese seas.

But even non-governmental organisations have expressed surprise at the way the Russian authorities have taken up environmental issues since the summer after taking little interest before.

Mr Peskov said it was a coincidence of timing and that it was "a process that is natural for every country" to come to eventually. Mr Putin's spokesman said Russia wanted to encourage western investment and wanted closer links with west European countries to foster mutual "interdependence".

Terry Macalister and Tom Parfitt are staff writers for The Guardian

Toward a New Union in South America?

2006-12-11T19:04:00.000Z

Peru's Garcia cozies up to Ecuador, Venezuela

By Tamy Higa and Edison Lopez

As South American leaders explored a continent-wide political union, Peruvian President Alan Garcia kept the good vibrations going by making nice with leaders of Venezuela and Ecuador.
At a summit in Bolivia on Saturday, Garcia, who won a runoff in June, embraced and shook hands with Venezuelan President Hugo Chavez — who several month ago he had called a "historic loser" with "psychological problems."

Their row started in April, when Chavez called Garcia a thief, liar and lapdog of Washington, openly endorsed Garcia's campaign opponent, Ollanta Humala. Chavez later suggested that Garcia's victory was due to fraud. Garcia in return accused Chavez of using Venezuela's immense oil wealth to buy influence across Latin America. The exchange prompted the two South American countries to recall their respective ambassadors.

But on Saturday the two were positively chummy. "The two of us are well-mannered and cordial people, so any kind of argument, any previously made statements, remain a closed chapter," Garcia told Peru's Radioprogramas from Cochabamba, Bolivia, where the second South American Community of Nations summit was held. He said that he felt "good chemistry" with Chavez.

Later the same day in Peru, Ecuador's President-elect Rafael Correa, speaking to reporters at the presidential palace where he met with Garcia, said his country's relations with Peru were at their best ever. The 1995 border war between the Ecuador and Peru over their Amazon boundary appeared a fading memory.

"Ecuadorean-Peruvian relations are at their best moment in history, but we still have a lot to do," Correa said before dining with Garcia. "We are here to build not only peace but brotherhood between Ecuador, Peru and all Latin American peoples."

Both presidents had just come from the Bolivia summit, where leaders from around the region talked about creating a South American community similar to the European Union. Correa, who won Ecuador's presidency in a runoff Nov. 26, said Peru and Ecuador must work to mend wounds caused by the long-running border dispute, which was ended with an October 1998 treaty.

"We've achieved the absence of war, but we haven't achieved peace," Correa said, adding that Ecuador's border areas have been and devastated since Ecuador adopted the U.S. dollar as its currency.

On Sunday, Correa said he will not sign a bilateral free trade agreement with the United States, saying it could create "incalculable" damage for Ecuador since the country cannot control its currency's value.

"We don't have a national currency, we have the dollar," he told Radioprogramas. "If as a result of the agreement, Peru and Colombia have a problem in the external sector, they reduce the currency's value and correct the imbalance. Ecuador can't do that, and the consequences could be incalculable."

While critical of the decision in 2000 to adopt the dollar to halt hyperinflation, Correa, who takes office Jan. 15, has reassured Ecuadoreans that he intends to maintain the dollar as Ecuador's official currency for the next four years.

Bolivian President Evo Morales and Chilean President Michelle Bachelet also used the summit to further diplomatic ties between their countries, strained ever since Chile seized Bolivia's Pacific coast during an 1879 war.

The two presidents met in a closed-door session Saturday to continue recent discussions over Bolivia's demand for maritime access. No agreements were announced, but afterward Morales happily cited recent opinion surveys showing that both nations' citizens were warming to their historical rival.

Published by Associated Press writers Tamy Higa in Lima, Peru, and Edison Lopez in Cochabamba, Bolivia, on 9 December

Calling for a Multilateral Approach

2006-12-08T22:25:00.000Z

East Asia and Challenge of Energy Security

By Behzad Shahandeh

East Asia’s reliance on Persian Gulf oil will deepen despite its efforts to diversify its energy sources and stockpiling. The region currently imports some 70 percent of its oil from the Persian Gulf, and at the same time accounts for half of the latter’s crude exports. With 65 percent of global proven oil reserves located in the Persian Gulf, the region will play an ever important role vis-à-vis energy-hungry East Asia.

China, the number two world consumer of oil after the United States now imports 65 percent of its oil needs, of which more than half come from the Persian Gulf (Iran and Saudi Arabia now represent almost two-third of China’s Persian Gulf oil imports).

Japan, which has recently been overtaken by China (the awakening dragon) and currently the third biggest consumer of oil, imports nearly 100 percent of its oil needs, of which some 90 percent come from the Persian Gulf. Then there is South Korea as the fourth, importing 80 percent of its oil needs from the same region.

It is contended that East Asia’s dependence on oil may exceed 90 percent in 2010 with the Persian Gulf supplying the bulk (by that year total oil consumption in the region could reach 25 to 30 million b/d of which 18-24 million b/d will have to be imported). While oilfields in Russian Siberia and Central Asia do offer some short-term energy relief, the lack of existing infrastructure to facilitate the transport of this oil poses costly political and economic challenges of their own.

Closely connected to the above is the possible danger of tension stemming from such an oil shortage within the East Asian region itself. The ever-growing demand for energy (fossil fuel as the source of energy has no viable alternative since solar energy is very expensive and the nuclear one dangerous) may strain relations between such important regional actors as China and Japan, for example, which may engender a set of new destabilizing regional or international conflicts.

But an even more immediate problem is the effect of oil-market volatility on the region, with a sharp rise in oil prices putting particular pressure on the currencies of some crude importing emerging- market countries. Several key economies in the region are at the most risk from persistent high crude prices, with the major net importing countries like China, South Korea, as well as Taiwan, being the most vulnerable. The danger for these economies lies in the impact on the current accounts and growth, and domestic purchasing power.

Regional energy security in East Asia is thus called for, and one needing a multilateral approach. It remains a complex multifaceted challenge requiring coordinated action by its three major countries: China, Japan, and South Korea. Analysts contend that measures are needed to reduce dependence on fossil fuel or to secure an alternative supply to meet rising demand. But it is easier said than done since all alternative energy sources have their problems and are poor competitors to oil.

We also hear that East Asia must address the environmental impact of the region’s energy structure, as seen by the environmental repercussions from the heavy use of coal in Chinese industries, for example. But the proposal has its problems since any reduction in coal use would require importing more oil, which challenges the first contention.

Thirdly, a challenge is raised in ensuring nuclear security in the face of regional ambitions to expand nuclear power. The status has come under severe strain by North Korea’s recent atomic test, ushering calls by some circles in both Japan and South Korea to revise their nuclear policies.

And the issue of improving the vulnerable regional infrastructure and transportation networks, as well as safeguarding vital sea-lanes and chokepoints is raised. But again facts on the ground testify to the opposite with China spending huge amounts of money to patrol the troubled waters and raising worries among other East Asian countries about securing their lifelines.

The positive result of all this is that East Asian countries have become aware of the threats and are conscious about the need to tackle them, but the question is how. Knowing the problem and feeling the need is half the solution and is in itself a step forward. But for East Asia to embark on a coordinated effort, much more than knowing the problem is required.

Behzad Shahandeh is a professor at the Graduate School of International Area Studies at Hankuk University of Foreign Studies in Seoul.

A Key Player in Central Asia

2006-12-07T21:53:00.000Z

Turkmenistan: The Achilles' Heel Of European Energy Security
By Daniel Kimmage

In the wake of the "gas war" between Russia and Ukraine in early 2006, and the brief interruption it caused in supplies to Europe, the world awoke to the increasing importance of Central Asian natural gas for European energy security. After all, the bulk of the natural gas that Ukraine imports through Russia comes from Turkmenistan.

Now, with international ratings agency Fitch warning that the elements are in place for a "perfect storm" of an energy crisis, news comes on July 30 that talks between Turkmenistan and Ukraine over an independent agreement for gas supplies in the fourth quarter of 2006 have bumped up against the issue of transit through Russia. The previous day, Turkmenistan and Russia's state-controlled Gazprom broke off talks on late-2006 shipments to Russia amid Turkmen threats to cut off supplies in September. Is the storm fast approaching?

Ukrainian Fuel and Energy Minister Ivan Plachkov arrived in Ashgabat on June 29, as Turkmenistan and Gazprom both reported that negotiations between Gazprom Chairman Aleksei Miller and Turkmen President Saparmurat Niyazov were "broken off." Gazprom's press release stated that the breakdown occurred after the sides "failed to reach an agreement" over Turkmenistan's insistence that Gazprom pay $100 per 1,000 cubic meters for 2007 shipments and additional 2006 shipments. Until now, Gazprom has paid $65 per 1,000 cubic meters of Turkmen gas.

Turkmenistan's official TDH news agency reported that Turkmenistan will finish deliveries of a previously contracted 30 billion cubic meters (bcm) at $65 per 1,000 cubic meters by September. After that, Turkmenistan threatened, it will halt shipments to Russia.

Feeling The Effects In Kyiv

The Gazprom-Turkmenistan price tiff had direct implications for Ukraine, which consumes 76 bcm of gas a year but produces only 20 bcm. It imports the remainder, with 41 bcm in Turkmen imports planned for 2006. The January compromise that ended the Russian-Ukrainian gas showdown set up a complex scheme for Ukrainian imports. Ukraine buys gas at $95 per 1,000 cubic meters from Rosukrenergo, a Swiss-registered trading company owned half by Gazprom and half by two Ukrainian businessmen. Rosukrenergo buys gas from Gazprom, which sells the trader a mixture of Russian gas at over $200 per 1,000 cubic meters and much cheaper Central Asian gas (primarily Turkmen, with lesser quantities from Kazakhstan and Uzbekistan).

For Ukraine, the upside of the January compromise was the final price of $95 per 1,000 cubic meters, lower than prices elsewhere in the former Soviet Union (outside Russia and Belarus) and far lower than the EU average price of $240 per 1,000 cubic meters. And price matters -- analysts forecast a grim fate for Ukraine's energy-intensive chemical industry if the price of gas edges above $100, and tough times for the metal industry if it goes higher.

Which brings us to two significant downsides of the January compromise: 1) its reliance on cheap Central Asian gas, and 2) its susceptibility to renegotiation after six months. Both downsides were soon evident. In May, Kazakhstan, which is slated to ship 8 bcm to Russia in 2006, garnered a price hike from $50 to $140 per 1,000 cubic meters, "Vedomosti" reported on June 22.

On May 22, Gazprom Deputy Chairman Aleksandr Ryazanov announced that the rising price of Central Asian gas could increase Ukraine's purchase price to $130, according to the Economist Intelligence Unit. On June 20, Turkmenistan's Foreign Ministry announced that it planned to raise the price of gas for Gazprom in the second half of 2006 from $65 to $100 per 1,000 cubic meters. Ryazanov told a press conference the same day that he envisaged Ukraine paying $150-$160 per 1,000 cubic meters by the end of the year.

Tricky Spot

In the Ukrainian-Turkmen talks on June 30, the Turkmen side noted that it will complete deliveries of the 30 bcm it has contracted to Russia by September. Then it offered Ukraine an independent deal for the fourth quarter of 2006 at $100 per 1,000 cubic meters, turkmenistan.ru reported.

But the offer came with a catch beyond the expected price hike: Ukraine must arrange transit for the gas -- presumably in the quantity of approximately 10 bcm -- through Russia on its own. The Ukrainian side will now return to Kyiv for consultations, and negotiations with Ashgabat will be continued later, turkmenistan.ru reported.

The failed talks between Gazprom and Turkmenistan on June 29, inconclusive negotiations between Ashgabat and Kyiv on June 30, current lack of an agreement to ensure Ukraine's supplies through the end of the year, and the Turkmen threat to cut off shipments in September if its rising price demands are not met are, in the best light, tough bargaining in the extreme; in the worst, they represent a step toward a new gas crisis.

For now, the episode lays bare the shifting sands on which Ukraine's gas supply rests. Those shifting sands led Jeffrey Woodruff, director of the energy group at ratings agency Fitch, to warn on June 27 that the problems besetting the Turkmenistan-Ukraine gas nexus had "the makings of a perfect storm," Reuters reported.

The specific elements Woodruff had in mind were Turkmenistan's threat to raise prices and the knock-on effect for Ukraine, Russian allegations that Ukraine was failing to refill underground storage tanks at sufficient rates, and rumblings in Ukraine of the need to renegotiate the knotted deal with Rusukrenergo. Woodruff stressed that "any of the events in isolation could be enough to spark new supply interruptions in Europe, but all of them colluding near the beginning of the G8 summit on energy security seems unbelievable."

The root of Europe's vulnerability is that Ukraine remains the conduit for 80 percent of the gas shipments the continent receives from Russia. And as the events of January demonstrated, if Ukraine experiences a shortfall, Europe does, too.

Systemic Problem

The underlying problem is the fragility of the entire framework for keeping Ukraine supplied with Turkmen gas, the essential component shielding Ukraine's economy from a potentially lethal price hike. What's worse, the fragility has multiple causes. For starters, Ukraine's economy is ill suited to withstand higher gas prices even as those prices are rising.

And Ukrainian oil and gas company Naftohaz Ukrayiny is financially strapped, with a $60 million debt to Turkmenistan for 2003-05 shipments and, according to Gazprom, arrears of $370 million for 2006 shipments as of June 15 (although Gazprom Deputy Chairman Ryazanov said that he expected Ukraine to pay that debt down to $100 million by July 1, and Ukraine has apparently promised to make good on its $64 million debt to Turkmenistan in September).

Moreover, with prices in Western Europe well over $200 per 1,000 cubic meters, Turkmenistan's desire to receive more than $65 per 1,000 cubic meters is natural. And Russia, which controls the only pipelines capable of delivering Turkmen gas to Ukraine, has made it clear that it plans to seek price increases across the board in the former Soviet Union, even from ally Belarus. Against this challenging backdrop, political conflict in Ukraine -- where the formation of a coalition government has stalled amid parliamentary infighting -- has hampered the government's ability to fashion a unified negotiating position.

Rocky relations between Russia and Ukraine are another impediment. Both elements have been on full display of late. Yuliya Tymoshenko, the expected prime minister in Ukraine's nascent ruling coalition, announced on June 22 that Ukraine must review existing gas deals and "build new agreements on a friendly basis with the Russian Federation, Turkmenistan, Uzbekistan, and Kazakhstan."

Gazprom spokesman Sergei Kupriyanov warned the next day of a "new gas crisis" and charged that Tymoshenko's statements "once again confirm that Ukraine is the weak link in the system of gas suppliers to Europe," AP reported. Days later, amid continued wrangling in Ukraine's parliament, Ukrainian Fuel and Energy Minister Ivan Plachkov told Kyiv's Channel 5 that there was, in fact, no need to renegotiate the January 4 deal with Russia over Turkmen gas.

The Niyazov Factor

Yet another factor is Turkmen President Saparmurat Niyazov, who enjoys nearly unlimited power and has used it to indulge in such megalomaniacal whimsy as the construction of a huge golden statue of himself that rotates to face the sun at all times.

In late December, Niyazov signed a deal with Ukraine to supply 40 bcm in 2006 at $50 per 1,000 cubic meters in the first half of the year and $60 in the second. Days later, he signed another contract with Gazprom at a higher price, and that deal eventually served as the basis for the arrangement with Rusukrenergo that has seen Ukraine pay $95 per 1,000 cubic meters thus far in 2006. The contract with Ukraine was never implemented.

The deal that was implemented -- involving Turkmenistan, Russia, the Swiss-registered Rosukrenergo, and Ukraine -- drew fire for its murk and middlemen. In an April 2006 report on the Turkmen-Ukraine gas trade, NGO Global Witness documented a history of business practices that can charitably be described as highly unorthodox culminating in the creating of Rosukrenergo.

Global Witness also reported that 75 percent of Turkmenistan's hard-currency revenues from gas sales go into shadowy extra-budgetary funds controlled by Niyazov. The report concluded that the January 4 contract that resolved the Russia-Ukraine gas dispute, and ended the interruption of supplies to Europe, "does not guarantee any security for any substantial period of time." Global Witness stressed that "the tangled maze of companies described in this report is hardly a solid foundation for a trade of such commercial and geostrategic importance."

Gazprom On Its Guard

And then there is Kremlin-controlled Gazprom, which jealously guards the only pipelines that can ship Turkmen gas to Ukraine. Before he arrived in Turkmenistan, Ukrainian Fuel and Energy Minister Plachkov had said that he hoped to negotiate with Turkmenistan under the original, late-December contract that set a price of $50 per 1,000 cubic meters in the first half of 2006 and $60 in the second. But Turkmenistan's Foreign Ministry announced on June 30 that Gazprom, citing limited pipeline capacity, refused in December to provide a license for the transport of gas through Russia under the Turkmen-Ukraine contract.

It is precisely such a license that Turkmenistan has now proposed that Ukraine try to negotiate with Russia, turkmenistan.ru reported. What's more, Turkmenistan "is ready to review the issue of gas shipments to Ukraine in 2007 if the Ukrainian side receives a license for its transit."

The negotiating ploy here seems clear -- to put the ball in Gazprom's court, letting Russia decide whether or not it wants to imperil a possible Turkmen-Ukrainian gas deal. And the timing is dramatic, with Russia set to host a G8 summit on energy security in only two weeks' time.

Yet the waters of the Turkmen-Ukraine gas trade have never been muddier. For one, the 2007 shipments Turkmenistan is now "ready to review" were thought to have been promised to Russia under a 2003 "contract of the century."

But as previous experience with Turkmenistan has shown, contracts are not the final word. That belongs to Niyazov -- who is only one factor among the many enumerated here, all of which are coming into play as Europe, which receives one-fifth of its gas through Ukraine, watches and wonders about the winter ahead.

Daniel Kimmage is a staff writer for Radio Free Europe/Radio Liberty based in Washington

Drilling Our Way to Security?

2006-12-06T18:25:00.000Z

Recent oil finds won't come close to meeting energy needs

By Louis Grinzo

Jeffrey Loney's Speaking Out essay ("Tap U.S. soil, seas for oil, gas; stop buying foreign energy," Nov. 14) is a classic example of the "we can drill our way to a better energy future" approach. I don't think that view fully represents our situation, for several reasons:

It's not the amount of oil or natural gas in the ground that matters, but the rate at which they can be extracted and at what cost. For example, Mr. Loney mentions the recent find in the Gulf of Mexico that "might contain up to 15 billion barrels of oil, increasing U.S. reserves by 50 percent."

If you look carefully at the reports of that find, you see that the field is spread over 300 square miles, requiring multiple, very costly wells. The most widely quoted estimates say that this field holds between 3 billion and 15 billion barrels of an unknown mix of oil and natural gas. Further, it is estimated that it will take at least six years to bring it fully online, and even then it will produce only 1.5 million barrels of oil per day.

Currently, the United States consumes more than 20 million barrels per day. It will take many millions of dollars to exploit a resource that's beneath 7,000 feet of water and another 21,000 of rock. Mr. Loney says, "Our nation's offshore oil and gas could replace Persian Gulf imports for many decades."

That's an interesting way of putting it, as the United States imports more oil from Canada (2.1 million barrels per day) than from any other country, and almost the same amount from Venezuela as from Saudi Arabia. A more reasonable approach is to consider all U.S. imports. The United States currently imports 13.5 million barrels of oil per day — two-thirds of all the oil we consume. Deep offshore sources couldn't come near replacing those imports.

Many of the "conventional" oil reserves around the world are past their peak of production or very close to it. Deep-sea, Arctic, shale/sand and extremely heavy (and therefore expensive to refine) oils make up an ever increasing portion of world consumption.

But that oil is much more expensive to locate, extract and turn into usable products. The fact that oil companies are already spending enormous sums of money to develop such reserves is the clearest sign possible that the age of cheap, conventional oil has all but ended.

The U.S. Department of Energy's projections leave a great deal to be desired. Aside from the 40 percent increase in oil and natural gas consumption by 2030, which Mr. Loney quotes, the DOE also says that Mexico will continue to provide the same level of oil to the United States for decades, even though we know that their production peaked in 2004. The DOE is an excellent source for statistical summaries, but a highly questionable one for predictions.

As for what happens next, I think it's unmistakably clear: We will indeed exploit those offshore oil and natural gas resources, but not as part of any attempt to wean us from imports or achieve the Holy Grail of energy independence. We simply won't have any other choice. We use too much oil in a world that's increasingly turning to ever tighter and more expensive reserves.

Similarly, we use too much natural gas, five years after the peak in North American natural gas production and without sufficient LNG (liquefied natural gas) terminals in operation to import a significant portion of our consumption of that fossil fuel. As a result, there will be endless political wars over when and how to exploit which oil and natural gas resources, and how quickly and where we can build new LNG terminals (there are dozens in the planning stage, with only five in operation).

I am absolutely confident that we will find a way out of this complicated mess and build a cleaner, better world for our children, but it will be far more economically, environmentally and politically painful than many people yet realize. We will have to rely on a mix of new energy source development, alternative sources and plain old conservation. We don't have a single silver bullet that will fix our energy woes, but a whole handful of silver BB's that collectively can get the job done.

Louis Grinzo is an economist and publisher of "The Cost of Energy" a Web site that can be found at www.grinzo.com/energy.

On the Fringes of Civilization

2006-12-05T20:28:00.000Z

Myanmar Is Left in Dark, an Energy-Rich Orphan

SITTWE, Myanmar

In the balmy waters of the Bay of Bengal, just off the coast, an Asian energy rush is on. Huge pockets of natural gas have been found. China and India are jostling to sign deals. Plans are afoot to spend billions on new ports and pipelines.

Yet onshore, in towns like this one, not a light is to be seen — not a street lamp, not a glow in a window — as women crouch by the roadside at dawn, sorting by candlelight the vegetables they will sell for two cents a bunch at the morning market. Paraffin and wood are major sources of light and heat. People receive two hours of electricity a day from a military government that is among the world’s most repressive.

But attempts at outside pressure to prod the government to address its people’s needs and curb abuses have faltered, in large part because China’s thirst for resources has undermined nearly a decade of American economic sanctions.

Critics say that Washington’s policy has handed Myanmar, formerly Burma, to China. Still, as President Bush prepares to meet with leaders at the Asia-Pacific Economic Cooperation summit meeting in Vietnam on Nov. 17, one topic on his agenda will be how to keep up the pressure. He is not likely to find cooperation, not from rivals like China and Russia, nor even countries like Singapore and Indonesia, which trade freely with Myanmar.

The Asian energy rush is the latest demonstration of how the hunt for oil and gas, and China’s economic leverage, are reshaping international politics, often in ways that run counter to American preferences. In many respects, with the rise of China’s economic power and its unflagging support, the government here has become more entrenched than ever, people inside and outside the country say.

“What can we do about it?” said a well educated man here, when asked about the plans to sell the gas abroad in the face of the deprivation at home. “What good would it do to protest, what would we get?” People were too afraid of the 400,000-member strong army supplied by China, Russia and Ukraine to complain, he said.

In numerous encounters in Myanmar, where most speak with extreme caution to foreigners and almost always anonymously for fear of jail, people joked sardonically that China was the “big daddy” and that soon it would “own” Myanmar. “China is a good friend of the government, not of the people,” one woman said. “They are like brother and brother-in-law.”

The Bush administration has pledged that it will not let up on its sanctions against the government until it releases the opposition leader, Daw Aung San Suu Kyi, who has been under house arrest for 11 of the past 17 years. Mrs. Aung San Suu Kyi’s political party won an overwhelming victory in elections in 1990, and Washington insists that the government recognize those results, and release an estimated 1,100 political prisoners.

The Bush administration says it plans to file a Security Council resolution at the United Nations in coming weeks condemning the government for its human rights abuses, and tightening sanctions further. The United Nations under secretary general, Ibrahim Gambari, met with the junta leader, Gen. Than Shwe, on Nov. 11 in Myanmar and urged the government to mend its ways on forced labor and political prisoners. The meeting ended inconclusively, United Nations officials said.

With so much energy and other resources at stake, and given its preference to shun outside interference in internal politics, China’s leaders are seemingly unbothered by what is happening inside Myanmar.

China’s National Development Reform Commission approved plans in April to build a pipeline that would carry China’s Middle East oil from a deep water port off Sittwe across Myanmar to Yunnan, China’s southern province. This would provide China with an alternative to the Strait of Malacca, which it now depends on for delivering its oil from the Middle East.

Though no date has been announced for work on the new pipeline across Myanmar, the military appeared to be getting ready to build the deep sea port on the island of Ramree, to the south of here, local people said.

In another sign of the importance of Myanmar to China, the chairman of the China National Offshore Oil Corporation, Fu Chengyu, said in a speech this year that the company would focus its investment in the medium term on two countries: Myanmar and Nigeria. Engineers at the company, known as Cnooc, are currently exploring for oil on Ramree, and the company has rights to other oil deposits in central Myanmar, according to Myanmar government reports.

India, thirsty for energy to fuel its own fast-growing economy, sees Myanmar as a place where it needs to contain China. In the late 1990s, democratic India switched its policy toward Myanmar from antagonism to friendship. And Thailand, Southeast Asia’s largest economy, spends about $1.2 billion a year for Myanmar’s natural gas, giving the military government badly needed hard currency.

In conversations with people in a number of towns, a portrait emerged of a universally unpopular, deeply corrupt government. People told of worsening poverty, a collapsed education system and a health care system that could deal only with those who paid. Tuberculosis, malaria and AIDS were rampant, they said. The government’s budget for its AIDS program in 2004 was $22,000, according to a recent health survey by John Hopkins University Medical School.

The junta leader, Gen. Than Shwe, 73, whose early military training was in psychological warfare, was described by many here as a master manipulator of his minions. He insisted, apparently out of fear of a coup, that the capital be moved this year from Yangon, formerly Rangoon, to a new site in the jungle, Naypyidaw.

The move, costing millions of scarce dollars, was in step with the general’s belief that he marched in the footsteps of the old Burmese kings — the name of the new capital means “Royal City.” Then, as now, there was a fierce line between the rulers and the ruled.

For the first time, health workers said they were discovering severe malnutrition among children in urban centers, a true anomaly in a lush country that was once the world’s biggest exporter of rice.

In Mandalay, the second-biggest city, almost naked children with distended stomachs scrounged on the riverfront. In one village on the Thwande River on the west coast, nomadic families were too strapped for food to offer any to visitors, a traditional courtesy in Myanmar.
“Why is there severe malnutrition in this Garden of Eden? Because people are poor,” said Frank Smithuis, a physician who has worked in Myanmar since 1994 and heads the Doctors Without Borders, Holland, medical programs. “People are going from three meals to two meals to one meal. One meal a day just isn’t enough.”

In the village of Leat Pan Gyunt, south of Sittwe, villagers said they could afford to send their girls to school for only three years. The local school consisted of one dirt-floored room for all grades from first to eighth. The desks were planks of wood supported on two bricks.
Afraid of protests by students, the government dispersed the University of Yangon to sites outside the capital.

At the new Magway University, the medical students were learning surgery from books and videos, without working on human corpses because the government refused to pay for formaldehyde, two people familiar with the situation said.

In contrast to the deepening poverty — Myanmar’s per capita income is calculated at $175 a year, far below neighboring Bangladesh — the military leaders were amassing fortunes, people said.

The latest evidence was a video leaked to a Web site, www.irrawaddy.org, based in Thailand, of the recent opulent wedding of General Than Shwe’s daughter, Thandar Shwe. The video showed the bride, with her father alongside her, decked out in a necklace of six ropes of large diamonds, her hair looped with diamonds as well.

For those educated people who want change, the path is treacherous. “I don’t want to waste myself in jail,” said one woman, who had two relatives imprisoned. “They were not the same when they came out.”

In a similar vein to the dissidents in Eastern Europe in the 1980s, the woman said she believed change had to come from inside the country. But unlike Poland under Soviet rule, no unions are allowed in Myanmar, and most kinds of formal associations are considered suspect.

She said she held classes at her home on how to be more confident, how to strategize. She was trying to spread her classes to Buddhist monasteries and Christian churches, she said. "Only education can change people because people don’t know anything,” she said. “Only about 10 percent of the people know what is going on.” Sometimes she was in such despair, she said, that she believed that the only way to win against the government was “to think like them.
But we can’t think like them,” she added, “nobody thinks like them.”

Not all opposition groups that work outside the country believe that Washington’s hard line is serving the best interests of Myanmar or the United States.

With its policy of isolation, the Bush administration was allowing China, and to a lesser extent, India, to have a free hand in Myanmar to the exclusion of the United States, said Aung Naing Oo, who spent a year at the John F. Kennedy School of Government at Harvard University and who is the author of several books on Myanmar. “The geopolitical situation favors the Burmese military,” he said. “China and India both want to support it, and the Asian nations have no teeth.”

Still, on a recent trip to Vietnam, a delegation of Myanmar officials heard something that astounded them, he said. They went to find out why Vietnam had become so suddenly prosperous.

“The Vietnamese said one word: ‘The Americans.’ The Burmese could not believe that after fighting a war Vietnam was friendly with the United States.”

Showdown On The Energy Frontier

2006-12-04T21:12:00.000Z

Russia's huge oil and gas fields test relations with foreign investors

By Sandra Upson

When it comes to oil and gas, things in Russia are large—very large. Russia controls more oil and gas reserves than any other single country and is the world’s largest natural gas producer and exporter. Two of the world’s three largest natural gas fields lie within its borders. And as Western Europe, the northeast Asian countries, and the United States maneuver to line up reliable suppliers for the next decade, Russia has gained enormous leverage.

The Russian Federation’s temporary suspension of natural gas shipments to Ukraine last winter, together with plans for a subsea gas pipeline to Germany that will bypass the Eastern European countries, have heightened concerns about whether Vladimir Putin’s government might manipulate energy supplies to achieve larger political objectives.

At the same time, foreign investors have had plenty of reason to worry about whether the government is playing fair financially, as it seeks to renegotiate long-term development contracts on terms more favorable to itself. Recent moves by OAO Gazprom, in Moscow, the state-owned giant that is also the largest oil and gas company in the world, have riled Western energy companies already working in Russia.

Two situations in particular have brought issues to a head: one involves development of gas reserves around Sakhalin Island, just north of Japan, the other in an area in the Barents Sea near Murmansk known as Shtokman, believed to be the third-largest natural gas field in the world. Because of these fields’ remote and hostile environments, Russia will need some of the most advanced technology in the world to exploit them. Major Western oil and gas companies expected a slice of Russia’s energy pie in exchange for their technical expertise and money. But newly rich Russia is proving it has the cash to buy these technologies from other sources and could shut out the West.

The area around Sakhalin Island, the site of a former penal colony and historically a major bone of contention in relations between Russia and Japan, has oil reserves estimated at about 14 billion barrels and natural gas reserves of about 2.7 trillion cubic meters. Two major combined oil and gas development programs make Sakhalin the target of immense foreign direct capital investment. Development at the field designated Sakhalin-I is controlled by a consortium spearheaded by Exxon Mobil Corp. Meanwhile, Royal Dutch/Shell Group and its partners are developing Sakhalin-II with plans to ship liquefied natural gas, or LNG, to the United States, among other destinations.

In mid-September the Russian government announced that Shell had violated environmental permits while developing Sakhalin-II, threatening to stall production. The controversy came on the heels of an earlier announcement from Shell that its production costs had ballooned to US $22 billion through 2014 from an original estimate of $12 billion. Agreements drafted in the turbulent early 1990s allowed Shell and other major oil companies to develop natural gas fields in Russia and specified that the Russian government would turn a profit from production only once the developers had paid off their investment. As a result, Shell had little incentive to constrain costs, angering the Russians.

The government’s environmental concerns may be genuine: Greenpeace and the World Wildlife Fund have raised strong objections to the damage inflicted on the island as a result of the energy companies’ operations. However, if the Russian government is challenging the companies’ environmental permits in Sakhalin solely to rework contracts to include Gazprom (as most analysts believe), the government is threatening the sanctity of all business relationships that bring in outside companies and capital. “Law which is selectively enforced is no law,” said former U.S. Federal Reserve chairman Alan Greenspan, speaking at a recent New York City conference on investment in Russia.

Others agreed. “These rather arbitrary ways of renegotiating these deals…is, I think, the central thing that haunts an otherwise fantastic economic story” of Russia’s rebound, said Michael McFaul, a senior fellow at the Hoover Institution in Stanford, Calif. Besides Sakhalin, the Russian government has also threatened to revoke a license for a giant project in eastern Siberia controlled by BP, the British energy company.

The question of foreign investment is not merely a matter of whether huge multinational oil companies are getting a fair shake from the Putin government, but also a question of whether Russia will be able to obtain advanced technology fast enough to develop reserves to meet global demand. The Shtokman disputes exemplify that dilemma.

The United States and Europe have been wrangling to win the bulk of Russia’s anticipated exports from Shtokman—a reserve estimated to be 3.2 trillion cubic meters. Until recently, Western companies had assumed that Russia would bring on board at least one outside company to assist in the numerous technical hurdles that lie ahead in developing an arctic field as challenging as Shtokman.

According to Michael Cohen, an economist at the Energy Information Administration, a policy-neutral branch of the U.S. Department of Energy, only the Norwegian companies NorskHydro and Statoil have worked in offshore arctic waters, but even they have not worked as far from shore as the Russians will need to work at Shtokman. Drilling platforms will have to be ice-resistant, and workers will have to contend with a dense ice flow, factors that put the project in a league of its own.

While Russia has some experience operating barges and drilling platforms in the Arctic, it has struggled immensely, according to Nils Røkke, vice president of gas technology at The Gas Technology Center, in Tronheim, Norway, a joint research arm of the Norwegian University of Science and Technology and Scandinavia’s Foundation for Scientific and Industrial Research.

Ice is not the only problem; in winter, there is very little daylight at this latitude. Working in the dark makes it more difficult to manage the production’s impact on the environment and to avoid spills. Because gas must be transferred to shore across 550 kilometers of ice‑laden waters, whether by ship or by pipeline, the project will have to contend with icebergs that could scrape along the sea bottom, severing a pipeline or damaging a drilling platform.

In order to send the natural gas down a pipeline, Gazprom will probably need to add agents, such as glycol, to the natural gas and water mixture (natural gas often is extracted with water). These agents lower the freezing temperature and prevent the water from reacting with the hydrocarbons to produce gas hydrates, which form at low temperatures and high pressures. The gas hydrates aggregate into a sticky snowball-like material that can clog a pipe. Once the gas reaches shore, the glycol and water have to be separated from the hydrocarbons. The presence of glycol hydrate inhibitors gives rise to other problems, however, such as greater risk of corrosion at the end of the transport system, adding a number of complications to the search for the ideal mix for each project.

The technology to pull this off at comparable temperatures and pressures so far has been explored only in the Snohvit natural gas field, a neighboring Norwegian project currently in development. “[Snohvit] will be a record breaker, in such cold waters, and all kinds of steps are being made to make sure they don’t get plugging of the pipelines,” says Røkke. Many analysts believed that Gazprom would be obliged to take on a partner to mitigate the project’s risk and share the estimated $20 billion price tag for production.

But does Russia need foreign investment to get that kind of technology? Perhaps not. President Putin announced in October that Gazprom would proceed alone in developing the massive, hard-to-reach Shtokman natural gas reserve in the Arctic Ocean. The company scrapped a bidding process that had involved four prospective foreign partners, whose offers of stakes in other oil and gas projects had been deemed insufficient.

Awash in cash from high gas prices, Gazprom has proven itself capable of purchasing any technical expertise in the form of contractors, without having to give away stakes in its oil and gas projects. As Jonathan Stern, director of gas research and Gazprom specialist at the Oxford Institute for Energy Studies, in England, points out, Gazprom was able to cobble together $13 billion in a couple of weeks last year to buy Sibneft, another Russian oil and gas company. “It’s taken a lot of people around the world a long time to get out of the traditional mind-set that Russia is poor. Forget it—that’s a world that passed by several years ago,” he said.

It bears noting that even after Putin suddenly cut gas supplies to Ukraine last January, alarming almost everybody, foreign investment in Russia rose 42 percent during the first six months of 2006 over the comparable period of 2005, to more than $23 billion, according to the Moscow investment firm Renaissance Capital Securities.

Nonetheless, says Stern, foreign assistance will likely find its way into Shtokman. Gazprom faces large upcoming expenditures in developing its giant fields, laying vast swaths of new pipelines, and repairing an aging infrastructure, in particular the many pipelines that are reaching the end of their expected 25-year lifespan. Gazprom also has bought stakes in reserves around the world to gain footholds in projects less capital-intensive than its own. “They are spending a lot of money to do anything but develop natural gas resources at home,” says the Energy Information Adminstration’s Cohen.

So while foreign partners may not be necessary, they may offer welcome assistance as Gazprom faces a future in which heavy demands are placed on its capital. The terms on which Gazprom chooses to develop Shtokman will be driven by how the oil and gas giant decides to fill its technological gap.

In spite of the Russian government’s capricious handling of foreign companies’ rights, Western natural gas companies are still hoping for inclusion. As Kevin Petak, director of energy modeling and forecasting at the Arlington, Va.–based Energy and Environmental Analysis, puts it, “At the end of the day, it still comes down to lots of gas reserve and resource potential. Russia is too big a player to ignore.”

Sandra Upson is a writer for IEEE Septrum

New Era for Asian Giants - and the World

2006-12-01T17:11:00.000Z

A nuclear dimension to Indo-China relations

By Siddharth Srivastava

Chinese President Hu Jintao's recent visit to India has opened a small window for possible nuclear cooperation between the two countries. As the US Congress comes close to ratifying a historic nuclear pact with India, Beijing seems to be looking to turn aside geo-strategic and security concerns (which it has been underlining so far) in the interest of business opportunities that building new nuclear reactors could open.

Indeed, business has taken precedence over politics, especially when the stakes involved can be more than US$100 billion, the estimated civilian nuclear energy reactors market in India. Summing up Beijing's new thinking, Hu declared that "India's growth is an opportunity, not threat".

This is the first time that a joint statement at the highest level has talked about cooperation in nuclear energy between India and China. The two countries have had limited nuclear relations in the past, including Chinese supplying low-enriched uranium to India's Tarapur atomic reactor in 1995 and heavy water in the 1980s.

There is still a long way to go. Beijing's position will become more apparent when it will be required to elucidate its stand at the Nuclear Suppliers Group (NSG), where discussions regarding international acceptance of India's nuclear status should proceed after US congressional ratification of the nuclear pact.

Indian officials, however, say China is now unlikely to oppose the deal at the NSG and is more likely to concentrate on winning contracts and nuclear tenders. The competition can be stiff, with top companies from countries such as Russia, France, apart from the US already in the race. A US business delegation comprising representatives of top nuclear firms will visit India this month.

But India will be closely watching China's dealings with Pakistan and whether it does go ahead with a similar nuclear pact as the Indo-US deal, as has been suggested. Hu will head to Pakistan after the conclusion of his India trip.

One reason New Delhi has been averse to Chinese firms' close involvement in key strategic areas such as telecoms and ports is China's support to Pakistan and other countries such as Bangladesh in the same areas, including involvement in the Gwadar port in Balochistan. Gwadar opens the possibility of Chinese naval presence very close to Indian shores.

It will not be palatable to Indian security mandarins that the same set of engineers should be setting up nuclear reactors in both the countries. China has been involved in the construction of at least two nuclear reactors in Pakistan. The US has refused to deal with Pakistan on nuclear energy because of its dubious proliferation record.

In the past, reacting to the Indo-US civilian nuclear energy deal, China has asked India to sign the nuclear Non-Proliferation Treaty first. India has refused to sign the NPT as it considers it to be biased in favor of countries that already possess nuclear weapons. Beijing has been critical of the US for violating international norms by signing the nuclear pact with India and was unhappy about Indian nuclear-weapon tests in 1998.

Not too long back, Beijing said that given India's strong military strength, it was Pakistan more than India that needed nuclear weapons to defend itself.

Because of intense pressure from Beijing, including the possible blacklisting of Indian information-technology firms keen to expand in China, New Delhi has refrained from a comprehensive law against foreign investments by Chinese firms. But the suspicions harking back to a war fought in the early1960s continue to be there, though the Chinese companies have still won several contracts in India, in several infrastructure, oil and gas projects, because of the sheer cost advantage and quality of delivery.

Language, culture and different political systems (read democratic rights), however, continue to be issues with the very efficient Chinese personnel, a contrast to the slightly more laid-back and affable approach of Indians.

Still, even talking about opening the doors for future nuclear cooperation, in the context of raging nuclear-weapons-related controversies in North Korea, Iran and Pakistan, is a significant move forward.

The joint statement issued after the deliberations involving Prime Minister Manmohan Singh and Hu said: "There is the need for an international energy order, and for global energy systems to take into account the needs of both countries based on a stable, predictable, secure and clean energy future. In this context, the international civilian nuclear cooperation should be advanced through innovative and forward-looking approaches while safeguarding the effectiveness of international non-proliferation principles."

While enhanced Indo-US relations are being seen as Washington's attempt to balance the might of China in the region, it is clear now that Beijing does not want the US to walk away with business as well. The more difficult task in this context, however, will be relations with Islamabad, with which Beijing has enjoyed long close military ties.

Indeed, Hu's day-long meetings with top Indian dignitaries were a clinical exercise. There were no asides, warm handshakes, impromptu speeches, smiles and laughter. Hu and Manmohan during the joint press declaration looked more like the chief executive officers of two large corporates announcing the results of a successful partnership so far, in the strict interest of business parameters and quarterly results. There was nothing cultural, unlike, say, a conference with former US president Bill Clinton or even George W Bush.

The declaration issued after talks between Manmohan and Hu says: "Both sides believe that comprehensive economic and commercial engagement between India and China is a core component of their strategic and cooperative partnership." Setting a target of raising bilateral trade flows to US$40 billion by 2010 (double the current level), it emphasizes that the two countries will make joint efforts "to diversify their trade basket, remove existing impediments, and utilize the present and potential complementarities to sustain and strengthen bilateral commercial and economic cooperation".

A Bilateral Investment Promotion and Protection Agreement has been signed, while a joint task force will expedite its study of the feasibility and benefits of India-China regional trading arrangement and submit the report by next October.

The two countries, which have been competing globally to acquire oil and gas fields, have agreed to implement closely the provisions of the memorandum on cooperation in oil and gas signed last January. Next year has also been designated the China-India Friendship Year for Tourism. The two special representatives leading the discussion on the boundary question have been asked to accelerate efforts to arrive at a settlement.

The 13 agreements the two countries made during Hu's visit cover diverse areas, including protection of bilateral investment, trading of iron ore and export of rice, agriculture, education, forestry and the conservation of cultural heritage.

India and China have decided to hold regular summit-level exchanges in each other's country and on multilateral forums, open new consulates in Kolkata and Guangzhou, and set up an "expert-level mechanism" to discuss issues relating to trans-border rivers.

Hu said China and India are major developing countries, and that their relationship is of global significance in bilateral, regional and international dimensions. He said the two share "broad and sustained interests".

Manmohan said, "At the fulcrum of our efforts is our collective political will to enrich and reinforce our strategic and cooperative partnership for peace and prosperity, and to resolve our outstanding issues in a focused, sincere and problem-solving manner."

It is true, however, that cooperation in nuclear energy has opened a new dimension.

Siddharth Srivastava is a New Delhi-based journalist

Latin America continues turn to the Left

2006-11-30T12:45:00.000Z

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

2006-11-29T22:35:00.000Z

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

2006-11-28T21:20:00.000Z

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

2006-11-27T15:42:00.000Z

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

2006-11-23T15:30:00.000Z

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

2006-11-22T16:40:00.000Z

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?

2006-11-20T20:34:00.000Z

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

2006-11-17T17:53:00.000Z

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

2006-11-16T19:39:00.000Z

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

2006-11-15T19:36:00.000Z

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

2006-11-14T17:33:00.000Z

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

2006-11-13T15:34:00.000Z

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

2006-11-10T22:52:00.000Z

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

2006-11-09T21:46:00.000Z

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?

2006-11-08T20:12:00.000Z

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

2006-11-07T08:53:00.000Z

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.