Supermajordämmerung

The Economist has declared "The day of the huge integrated international oil company is drawing to a close" - Supermajordämmerung. Of course, they once declared that oil was heading for $5 per barrel, so I wouldn't necessarily happen on this betting any time soon. In the long run however, they are undoubtedly dead, as the product they are selling has a finite supply...

Poor choices and increased competition may explain deteriorations in the supermajors’ reserve replacement ratios (RRRs), a measure of the amount of oil discovered compared with production. In 2012 total hydrocarbon replacement (including gas) at Shell was a slender 44%. BP’s was 85% and Total’s 93%; that means reserves at all three are shrinking. Exxon’s RRR, which has not fallen under 100% for decades, was a more comforting 115%, and Chevron’s was 112%. But of Exxon’s 1.8 billion barrels, high-cost shale oil from the Woodford and Bakken fields in America accounted for almost 750m. Around 50% of Exxon’s reserves are now in heavy, unconventional or deep-water oil, compared with 17% in the early 2000s.

The supermajors are now spending $100 billion a year between them on exploration and production. But this level of effort has not impressed investors; their share prices (with the exception of Chevron’s) have been flat for years. Nor has it yielded net new oil; their output fell by 2% between 2006 and 2011. What it has delivered is greater gas production, a likely harbinger of things to come. The supermajors are finding themselves increasingly in the gas business. For most of them gas is currently more than 40% of their production—for Shell and Exxon it is more than 50%.

Oil and gas differ in several respects, none of them very good news for the supermajors. Because it requires the construction of expensive pipelines or liquefaction plants, gas is less profitable. It also needs to be marketed, with customers secured upfront to finance the vast cost of extraction at scale. And it could be susceptible to a steep worldwide drop in prices. The era in which most gas is sold at prices indexed to that of oil is coming to an end. Fields currently under development could provide a glut of gas in the second half of the decade which might put paid to indexation altogether.

What can the supermajors do about these threats? Spending heavily on replacing reserves to keep investors happy is not working. Selling off bits of the firms that no longer make sense, such as refineries, can help; ConocoPhillips hived off its upstream exploration and production from refining in 2011. But it hardly counts as a long-term growth strategy. Reviving unique in-house technology might help.

It will be an unhappy thought to many, but BP’s travails in the wake of the Gulf of Mexico disaster may be guide to the supermajors’ future. Forced to sell assets to raise cash to pay fines, it has found that those sales are often followed by a rise in the company’s share price. This suggests that investors like the idea of smaller, fitter oil firms. Rather than push towards ever more esoteric frontiers, the supermajors might do better to slim down and turn away from the oil that they prize so highly but that the world may no longer want ever more of—and that others can exploit equally well. They will find this hard, though. “Oil supermajor” has a much better ring to it than “fairly large gas producer”.

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Australia’s Liquid Fuel Security

The NRMA has issued a report on Australia's fuel security - Australia’s Liquid Fuel Security (pdf).

As the world’s ninth-largest energy producer, Australia has abundant renewable and nonrenewable energy resources. Despite these resources, we are heavily dependent on imports of refined petroleum products and crude oil to meet our liquid fuel demand.

This import dependency has increased in recent years.

Our transport systems are wholly oil dependent. The reasons for this dependency may be economically sound due to the relative lower cost of oil but the lack of fuel diversity significantly impacts our resilience if we experience supply interruptions or a reducing availability of affordable oil supplies in the future.

The very small consumption stockholdings of oil and liquid fuels in Australia, combined with what appears to be a narrow assessment of our fuel supply chain vulnerabilities, does not provide much confidence that the strategic risks to our fuel supply chain are well understood and mitigated by our nation’s leaders, the business community or the population at large.

In essence, we have adopted a “she’ll be right” approach to fuel security, relying on the historical performance of global oil and fuel markets to provide in all cases. Unfortunately, as a result of our limited and decreasing refining capacity, small stockholdings and long supply chains, our society is at significant risk if any of the assumptions contained in the vulnerability assessments made to date prove false.

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Chavez exits, stage left

I was sorry to see the always entertaining Huge Chavez passed away yesterday - Greg Palast has an article pointing out why Chavez (like so many developing world leaders before him) was so disliked by the West - he wanted a greater share of revenue from local oil extraction - Vaya con Dios, Hugo Chàvez, mi Amigo.

Reverend Pat Robertson said, "Hugo Chavez thinks we're trying to assassinate him. I think that we really ought to go ahead and do it."

It was 2005 and Robertson was channeling the frustration of George Bush's State Department.

Despite Bush's providing intelligence, funds and even a note of congratulations to the crew who kidnapped Chavez (we'll get there), Hugo remained in office, reelected and wildly popular.

But why the Bush regime's hate, hate, HATE of the President of Venezuela?

Reverend Pat wasn't coy about the answer: It's the oil.

"This is a dangerous enemy to our South controlling a huge pool of oil."

A really BIG pool of oil. Indeed, according to Guy Caruso, former chief of oil intelligence for the CIA, Venezuela hold a recoverable reserve of 1.36 trillion barrels, that is, a whole lot more than Saudi Arabia.

If we didn't kill Chavez, we'd have to do an "Iraq" on his nation. So the Reverend suggests,

"We don't need another $200 billion war….It's a whole lot easier to have some of the covert operatives do the job and then get it over with."

Chavez himself told me he was stunned by Bush's attacks: Chavez had been quite chummy with Bush Senior and with Bill Clinton.

So what made Chavez suddenly "a dangerous enemy"? Here's the answer you won't find in The New York Times:

Just after Bush's inauguration in 2001, Chavez' congress voted in a new "Law of Hydrocarbons." Henceforth, Exxon, British Petroleum, Shell Oil and Chevron would get to keep 70% of the sales revenues from the crude they sucked out of Venezuela. Not bad, considering the price of oil was rising toward $100 a barrel.

But to the oil companies, which had bitch-slapped Venezeula's prior government into giving them 84% of the sales price, a cut to 70% was "no bueno." Worse, Venezuela had been charging a joke of a royalty – just one percent – on "heavy" crude from the Orinoco Basin. Chavez told Exxon and friends they'd now have to pay 16.6%.

Clearly, Chavez had to be taught a lesson about the etiquette of dealings with Big Oil.

Crikey's Guy Rundle has a straightforward left wing view of the late Hugo - Chavez dies and the West hates some more.

Hugo Chavez was a friend to the poor, in Venezuela and abroad. But the Western media all but ignored that in their demonisation of the Venezuelan president.

Last year, landing in South America just as Hugo Chavez departed it — for treatment in Cuba — your correspondent wrote an overview of the Chavez era, its achievements and shortcomings, and the sheer hatred it drew from a Western media, with few exceptions.

One story seemed to summarise it all. In 2005, the governors of Maine and New Hampshire sought help from eight oil companies to provide heating fuel for the poor. The Iraq war and Hurricane Katrina had driven oil prices sky high, and the poor in northern states had to choose between food, rent and heating.

Seven of the oil companies were US-owned; they all refused. The only one that responded was PVDSA, the Venezuelan state-owned oil company. When the provision of cheap heating oil for more than 100,000 families was revealed, the press focused not on the bizarre reversal whereby a Third-World country was subsidising a First-World one — but whether this was propaganda drive by Chavez. It was the height of the neo-liberal triumphalist era, only starting to fray at that very moment. The poor, at home or abroad, simply did not exist, save as a pretext for a “populism” whose rationale no one could remember.

That approach long ago became the template for dealing with Chavez’s Venezuela. What was at the centre of Chavez’s program for better and otherwise — the immediate alleviation of poverty — became the one thing that was never spoken of. The UK Telegraph’s ready-to-roll obit  — online today as news broke of his death — says it all:

“Hugo Chavez, the President of Venezuela who has died aged 58, was a shrewd demagogue and combined brash but intoxicating rhetorical gifts with a free-spending of oil revenues to turn himself into a leading figure on the world stage.”

The obit manages to give a fairly even-handed account of the years leading up to Chavez’s election in the late ’90s — how the poor watched, for decades, as the country’s burgeoning oil revenue failed to trickle down to them. Here’s the space The Telegraph gives a decade of social programs:

There then follows a long paragraph, stuffed with statistics, about the rise in crime in Venezuela. But 15 years of social programs? Not a word, not a figure. With a few exceptions, such as Al Jazeera, that has been the general condition throughout. The statistics were easy enough to find, since they came from the World Bank: poverty cut from 60% down to 25%, extreme poverty — regular hunger, malnutrition and lack of shelter — down from 30+% to 6%, millions getting regular medical care for the first time, subsidised staple food, land reform and much more.

The endless repetition of the one Chavez story in the Western media, the “populist” leader “much loved” in the slums, etc, but with a controversial record on democracy and a “worrying” tendency to pal up with dictators, etc. The very obtuseness of such insta-stories was based on the First-World/Third-World disjuncture that prompted Chavez’s election in the first place: the con job of global neoliberalism, the promise, after the collapse of communism, that playing by the rules of a market-based global system, other countries could join the First World club.

In Latin America, and perhaps more broadly, Chavez was the turning-point — the moment at which a popular process delayed by a century of US imperial dominance was restarted, and it was possible to imagine that poverty and underdevelopment could be really addressed. Chavez’s early victory, and Venezuelan oil money, went out to the whole continent, making it possible for Left victories in Bolivia, Ecuador, Nicaragua and elsewhere. They were joined by Lula’s separate victory in Brazil, and by the end of the decade, Right-wing pro-US governments were in the minority.

Whatever happens, Chavez has happened. Business as usual was suspended across a continent. A whole generation of a whole class of Venezualans had the opportunity for the fundamental things of life — food, shelter and the most basic medicines. Even in the US, the heating oil program continues, now into its eighth year. If it was deployed purely in the interest of propaganda, it was a pretty poor effort — since it now extends to the poor in 25 states of the US without much being made of it. As the West goes into a so-called “quadruple dip” recession, with another crash on the way, it may turn out that Latin America, with its movements of power and its re-assertion of the possibility of change, is a vanguard of things to come, rather than the long tail.

If so, that will be Chavez’s legacy.

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Greg Muttitt: Whatever Happened to Iraqi Oil?

TomDispatch has an update on Iraq's oil - Greg Muttitt, Whatever Happened to Iraqi Oil?.

In 2011, after nearly nine years of war and occupation, U.S. troops finally left Iraq. In their place, Big Oil is now present in force and the country’s oil output, crippled for decades, is growing again. Iraq recently reclaimed the number two position in the Organization of the Petroleum Exporting Countries (OPEC), overtaking oil-sanctioned Iran. Now, there’s talk of a new world petroleum glut. So is this finally mission accomplished?

Well, not exactly. In fact, any oil company victory in Iraq is likely to prove as temporary as George W. Bush’s triumph in 2003. The main reason is yet another of those stories the mainstream media didn’t quite find room for: the role of Iraqi civil society. But before telling that story, let’s look at what’s happening to Iraqi oil today, and how we got from the “no blood for oil” global protests of 2003 to the present moment.

Here, as a start, is a little scorecard of what’s gone on in Iraq since Big Oil arrived two and a half years ago: corruption’s skyrocketed; two Western oil companies are being investigated for either giving or receiving bribes; the Iraqi government is paying oil companies a per-barrel fee according to wildly unrealistic production targets they’ve set, whether or not they deliver that number of barrels; contractors are heavily over-charging for drilling wells, which the companies don’t mind since the Iraqi government picks up the tab.

Meanwhile, to protect the oil giants from dissent and protest, trade union offices have been raided, computers seized and equipment smashed, leaders arrested and prosecuted. And that’s just in the oil-rich southern part of the country.

In Kurdistan in the north, the regional government awards contracts on land outside its jurisdiction, contracts which permit the government to transfer its stake in the oil projects -- up to 25% -- to private companies of its choice. Fuel is smuggled across the border to the tune of hundreds of tankers a day.

In Kurdistan, at least the approach is deliberate: the two ruling families of the region, the Barzanis and Talabanis, know that they can do whatever they like, since their Peshmerga militia control the territory. In contrast, the Iraqi federal government of Prime Minister Nouri al-Maliki has little control over anything. As a result, in the rest of the country the oil industry operates, gold-rush-style, in an almost complete absence of oversight or regulation.

Oil companies differ as to which of these two Iraqs they prefer to operate in. BP and Shell have opted to rush for black gold in the super-giant oilfields of southern Iraq. Exxon has hedged its bets by investing in both options. This summer, Chevron and the French oil company Total voted for the Kurdish approach, trading smaller oil fields for better terms and a bit more stability.

Keep in mind that the incapacity of the Iraqi government is hardly limited to the oil business: stagnation hangs over its every institution. Iraqis still have an average of just five hours of electricity a day, which in 130-degree heat causes tempers to boil over regularly. The country’s two great rivers, the Tigris and Euphrates, which watered the cradle of civilization 5,000 years ago, are drying up. This is largely due to the inability of the government to engage in effective regional diplomacy that would control upstream dam-building by Turkey.

After elections in 2010, the country’s leading politicians couldn’t even agree on how to form a government until the Iraqi Supreme Court forced them to. This record of haplessness, along with rampant corruption, significant repression, and a revival of sectarianism can all be traced back to American decisions in the occupation years. Tragically, these persistent ills have manifested themselves in a recent spate of car-bombings and other bloody attacks.

Washington’s Yen for Oil

In the period before and around the invasion, the Bush administration barely mentioned Iraqi oil, describing it reverently only as that country’s “patrimony.” As for the reasons for war, the administration insisted that it had barely noticed Iraq had one-tenth of the world’s oil reserves. But my new book reveals documents I received, marked SECRET/NOFORN, that laid out for the first time pre-war oil plans hatched in the Pentagon by arch-neoconservative Douglas Feith’s Energy Infrastructure Planning Group (EIPG).

In November 2002, four months before the invasion, that planning group came up with a novel idea: it proposed that any American occupation authority not repair war damage to the country’s oil infrastructure, as doing so “could discourage private sector involvement.” In other words, it suggested that the landscape should be cleared of Iraq’s homegrown oil industry to make room for Big Oil.

When the administration worried that this might disrupt oil markets, EIPG came up with a new strategy under which initial repairs would be carried out by KBR, a subsidiary of Halliburton. Long-term contracts with multinational companies, awarded by the U.S. occupation authority, would follow. International law notwithstanding, the EIPG documents noted cheerily that such an approach would put “long-term downward pressure on [the oil] price” and force “questions about Iraq’s future relations with OPEC.”

At the same time, the Pentagon planning group recommended that Washington state that its policy was “not to prejudice Iraq’s future decisions regarding its oil development policies.” Here, in writing, was the approach adopted in the years to come by the Bush administration and the occupation authorities: lie to the public while secretly planning to hand Iraq over to Big Oil.

There turned out, however, to be a small kink in the plan: the oil companies declined the American-awarded contracts, fearing that they would not stand up in international courts and so prove illegitimate. They wanted Iraq first to have an elected permanent government that would arrive at the same results. The question then became how to get the required results with the Iraqis nominally in charge. The answer: install a friendly government and destroy the Iraqi oil industry.

In July 2003, the U.S. occupation established the Iraqi Governing Council, a quasi-governmental body led by friendly Iraqi exiles who had been out of the country for the previous few decades. They would be housed in an area of Baghdad isolated from the Iraqi population by concrete blast walls and machine gun towers, and dubbed the Green Zone. There, the politicians would feast, oblivious to and unconcerned with the suffering of the rest of the population.

The first post-invasion Oil Minister was Ibrahim Bahr al-Uloum, a man who held the country’s homegrown oil expertise in open contempt. He quickly set about sacking the technicians and managers who had built the industry following nationalization in the 1970s and had kept it running through wars and sanctions. He replaced them with friends and fellow party members. One typical replacement was a former pizza chef.

The resulting damage to the oil industry exceeded anything caused by missiles and tanks. As a result the country found itself -- as Washington had hoped -- dependent on the expertise of foreign companies. Meanwhile, not only did the Coalition Provisional authority (CPA) that oversaw the occupation lose $6.6 billion of Iraqi money, it effectively suggested corruption wasn't something to worry about. A December 2003 CPA policy document recommended that Iraq follow the lead of Azerbaijan, where the government had attracted oil multinationals despite an atmosphere of staggering corruption (“less attractive governance”) simply by offering highly profitable deals.

Now, so many years later, the corruption is all-pervasive and the multinationals continue to operate without oversight, since the country’s ministry is run by the equivalent of pizza chefs.

The first permanent government was formed under Prime Minister Maliki in May 2006. In the preceding months, the American and British governments made sure the candidates for prime minister knew what their first priority had to be: to pass a law legalizing the return of the foreign multinationals -- tossed out of the country in the 1970s -- to run the oil sector.

The law was drafted within weeks, dutifully shown to U.S. officials within days, and to oil multinationals not long after. Members of the Iraqi parliament, however, had to wait seven months to see the text.

How Temporary the Victory of Big Oil?

The trouble was: getting it through that parliament proved far more difficult than Washington or its officials in Iraq had anticipated. In January 2007, an impatient President Bush announced a “surge” of 30,000 U.S. troops into the country, by then wracked by a bloody civil war. Compliant journalists accepted the story of a gamble by General David Petraeus to bring peace to warring Iraqis.

In fact, those troops spearheaded a strategy with rather less altruistic objectives: first, broker a new political deal among U.S. allies, who were the most sectarian and corrupt of Iraq’s politicians (hence, with the irony characteristic of American foreign policy, regularly described as “moderates”); second, pressure them to deliver on political objectives set in Washington and known as “benchmarks” -- of which passing the oil law was the only one ever really talked about: in President Bush’s biweekly video conferences with Maliki, in almost daily meetings of the U.S. ambassador in Baghdad, and in frequent visits by senior administration officials.

On this issue, the Democrats, by then increasingly against the Iraq War but still pro-Big Oil, lent a helping hand to a Republican administration. Having failed to end the war, the newly Democrat-controlled Congress passed an appropriations bill that would cut off reconstruction funds to Iraq if the oil law weren’t passed. Generals warned that without an oil law Prime Minister Maliki would lose their support, which he knew well would mean losing his job. And to ramp up the pressure further, the U.S. set a deadline of September 2007 to pass the law or face the consequences.

It was then that things started going really wrong for Bush and company. In December 2006, I was at a meeting where leaders of Iraq’s trade unions decided to fight the oil law. One of them summed up the general sentiment this way: “We do not need thieves to take us back to the middle ages.” So they began organizing. They printed pamphlets, held public meetings and conferences, staged protests, and watched support for their movement grow.

Most Iraqis feel strongly that the country’s oil reserves belong in the public sector, to be developed to benefit them, not foreign energy companies. And so word spread fast -- and with it, popular anger. Iraq’s oil professionals and various civil society groups denounced the law. Preachers railed against it in Friday sermons. Demonstrations were held in Baghdad and elsewhere, and as Washington ratcheted up the pressure, members of the Iraqi parliament started to see political opportunity in aligning themselves with this ever more popular cause. Even some U.S. allies in Parliament confided in diplomats at the American embassy that it would be political suicide to vote for the law.

By the September deadline, a majority of the parliament was against the law and -- a remarkable victory for the trade unions -- it was not passed. It’s still not passed today.

Given the political capital the Bush administration had invested in the passage of the oil law, its failure offered Iraqis a glimpse of the limits of U.S. power, and from that moment on, Washington’s influence began to wane.

Things changed again in 2009 when the Maliki government, eager for oil revenues, began awarding contracts to them even without an oil law in place. As a result, however, the victory of Big Oil is likely to be a temporary one: the present contracts are illegal, and so they will last only as long as there’s a government in Baghdad that supports them.

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Chinese to develop Afghan oil field

The Gulf Daily News reports on a move by China to extract oil in Afghanistan - Afghanistan clears CNPC accord.

Afghanistan's cabinet cleared the way for the war-torn state to sign a deal with China National Petroleum Corporation (CNPC) for the development of oil blocks in the Amu Darya basin, the president's office said yesterday. ...

The deal covering drilling and a refinery in the northern provinces of Sar-e Pul and Faryab will be the first international oil production accord by the government for decades. It marks the second major deal for China, after Metallurgical Corporation of China signed a contract in 2008 to develop the huge Aynak copper mine south of Kabul, due to start producing by 2014-end.

State-owned CNPC and joint venture partner Watan Group, a diversified Afghan company, will explore for oil in Kashkari, Bazarkhami and Zamarudsay, which are estimated to hold around 87 million barrels of oil. ...

Indian and Chinese bidders have been front-runners to develop Afghanistan's vast mineral deposits, valued at $3 trillion, worrying Western firms that have hesitated to invest.

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Chart of Australian Oil Consumption and Production

Phil at TOD ANZ has a chart showing Australia's widening oil import gap - Chart of Australian Oil Consumption and Production.

This graph of Australian oil consumption and production is based on the BP Statistical Review of World Energy June 2011. I prepared it for a local government workshop later this week and thought I'd post it here for others to use.

Australia is one of very few OECD countries where oil consumption is still rising in this high oil price environment, albeit slowly. You can thank the resource economy for that (and the related strength of the Australian dollar).

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