December 20, 2014

Stranded Assets

Leonardo Maugeri is gloating these days, having warned over the last few years of the possibility that the massive increases in oil supply capacity “could lead to a glut of overproduction and a steep dip in oil prices” ("The Oil Crash: Why I Was Right," October 21, 2014). Maugeri, a former executive at the Italian oil company Eni and now a researcher at Harvard, detailed in his 2012 study, “Oil: The Next Revolution,” the huge increases in investments that were occurring worldwide:

From 2003 on, oil exploration and production (E and P) worldwide entered a new, impressive investment cycle, encouraged by ever increasing crude oil prices, private companies’ desperate need to replace their reserves, the re-emergence of Iraq as a major oil player, and the inaccurate but still widespread perception that oil is bound to become a rare commodity.
That cycle reached the status of a boom between in 2010 and 2011, when the oil industry invested more than $1 trillion worldwide to explore and develop new resources. According to Barclays’ Upstream Spending Review, 2012 might represent a new all-time record since the 1970s in terms of E&P investments, with a conservative estimate of slightly less than $600 billion. . . .
My field-by-field analysis suggests that worldwide, an additional unrestricted supply of slightly less than 50 mbd is under development or will be developed by 2020. Eleven countries show a potential outflow of new production of about 40.5 mbd, or about 80 percent of the total. After adjusting the world’s additional unrestricted production for taking into account risk-factors, the additional adjusted supply comes to 28.6 mbd , or 22.5 mbd for the first eleven countries – as shown in Figure 3.
Maugeri’s main conclusion was as follows (italics in original):
[T]he single most important issue that emerges from my analysis is that, from a purely physical and technical point of view, oil supply and capacity are not in any danger. On the contrary, they could significantly exceed world consumption needs and even lead to a phase of oil overproduction if oil demand does not exceed a compounded rate of growth of 1.6 percent each year to 2020.

More recently (October 21, 2014), he writes:

After a cycle of strong investments in oil and gas exploration and development started in 2003, since 2010 an investment super-cycle took shape: over four years, national and international oil companies spent more than 2,500 billion dollars just in the ‘upstream’ hydrocarbons sector (oil and gas exploration and production).
That was an absolute historical record for the sector, even in the presence of a specific inflationary pressure which more than doubled upstream costs in the course of a decade. Much of that investment has produced, or will produce, results with a considerable time-lag, since in the oil industry it takes years to bring a given field to production.
The result is that new production capacity, or simple resilient capacity from mature fields, is progressively made available just while oil demand remains weak due to a still gloomy economic outlook – and will continue to do so. Other factors contribute to worsen the situation. . . .[T]he overall effect . . . is that global oil production capacity has been growing too rapidly – and still does: It has already exceeded 100 mbd (including biofuels and natural gas liquids), whereas demand is hovering around 92-93 mbd.
In an essay at The National Interest  (“Frack to the Future”), published in March-April 2014, Maugeri insisted that the shale-oil boom was transformational and not a temporary bubble: “Even with a steady decline of crude-oil prices (for example, from $85 a barrel in 2013 to $65 a barrel in 2017), the United States could be producing 5 million barrels per day (MBD) of shale oil by 2017.” Taking together output of biofuels and natural gas liquids, “the United States could become the leading oil producer in the world by the end of 2017, with an overall oil production of about 16 MBD and a sheer crude-oil production of 10.4 MBD.” [The difference between "overall" and "sheer" presumably is made up by biofuels and natural gas liquids.] Shale oil requires intensive drilling. Maugeri notes that there were 45,468 wells completed in the United States in 2012, whereas the rest of the world (excluding Canada) only completed 3,921 wells. Given the long time required to build people-expertise and equipment in other countries, plus the very different tax and subsurface ownership regimes, Maugeri doubted that the shale revolution would be exportable, or at least that much would have to change to make it so.

Despite these cornucopian forecasts, Maugeri noted how it all might unravel. He explained in The National Interest that Saudi Arabia is “the central bank” of world oil production. Its choice was either to cut back production to maintain prices (as it did in the early 1980s) or engineer a price collapse (as it did in 1986). We now have the results of that Saudi deliberation in its decision to maintain production, with the resulting collapse in prices. That scenario, Maugeri noted, “would put in danger both U.S. shale oil and the more expensive Canadian oil sands. The final result would be highly detrimental to U.S. energy security.”
Though Maugeri saw, as few others did, the growing imbalance between supply and demand and noted that the oil sector would be vulnerable to a collapse in prices, his 2012 analysis of worldwide additional supply seems not to have been predicated on that scenario. Having seen the future of low prices, he did not integrate that into his analysis of worldwide production increases. In his 2012 exploration of production in the Western Hemisphere, for example, he noted, "The growing output of Canadian tar sands, the huge ultra-heavy oil resources of the Venezuelan Orinoco Belt, and the recent discoveries of Brazil’s ultra-deep offshore pre-salt formations, are all pieces of the unconventional oil mosaic that, by 2020, could deliver more than 10 mbd from the Western Hemisphere alone." He ought to have said that much of this effort would be deeply uneconomic and would pose a risk to the financial viability of firms and oil exporting countries worldwide. What he was really describing in the figure and table reproduced above was not the future of world oil production but the vast number of stranded assets that were looming on the horizon, made uneconomic by oversupply.

Joseph Schumpeter noted somewhere in Capitalism, Socialism, and Democracy that one of the great oddities (and virtues) of capitalism is that most entrepreneurs work for free. That is, most businesses fail after their originators devote untold efforts to making them successful. Something like this has occurred in the energy industry. $2.5 trillion in investments in the four years from 2010 to 2014 have brought low prices for consumers and losses to the companies responsible for them. The outcome is astonishing. Digesting its significance will take years.

Unplanned Oil Production Outages

These two charts from the Energy Information Administration (December 2014) show unplanned disruptions to oil production for OPEC and non-OPEC countries. Looking at these charts alone, one would surmise an upward rather than downward pressure on prices. 

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Energy Information Administration, Short Term Energy Outlook, December 2014

Breaking Even in Oil Country

The collapse of oil prices (from $107 in June to $55 in December) has raised a big question of which marginal producers will survive the coming austerity. The share prices of energy service firms and off-shore drillers have practically been annihilated, with falls of 80 percent not uncommon among the smaller firms. In assessing the geopolitical fallout, much depends on the cost of production, not an easy matter to determine. Herewith a series of charts attempting to shed light on that question.

The first is from an August 2014 study, “The Economic Impact of the Permian Basin’s Oil and Gas Industry,” produced by a team of researchers in the department of Petroleum Engineering at Texas Tech University. It estimates that average breakeven costs for shale plays have declined by 10 percent since early 2012 and now average $55 a barrel.

The Wall Street Journal took up the question in October, before the rout in prices. It notes that many exploration and production companies have already “sunk millions into buying land and securing licenses and access to infrastructure,” making the “real benchmark for drilling . . . the return from that point on.” It cites Paul Goydon, a partner at the Boston Consulting Group, who argues that “production in the three big shale basins—Bakken, Eagle Ford, and Permian—breaks even at $60 a barrel or less.” Two years ago, the break-even price was $75. Canada’s oil sands are much more expensive. Though projects already underway can keep operating in the short term with oil at $40 a barrel, new projects require a break-even price of nearly $90 a barrel. (Surely this will have an impact on the economics of the Keystone Pipeline.)
Another estimate prepared by Morgan Stanley appears to give breakeven prices for North American shale at a higher level than the Texas Tech experts. This chart, reproduced by Business Insider, should be compared with one produced a few years ago by the French oil major Total, which showed estimates for oil shale at over $100 a barrel, well above oil sands and Arctic exploration. The estimates plainly are something of a moving target. 

The following chart, also from Business Insider, is even better, showing the breakeven cost for every international oil company project through 2020. (The chart was taken from a presentation by Ed Morse, an oil economist for Citigroup.) This plainly shows that oil cannot stay at $55 a barrel indefinitely, that price being well below the breakeven for most international oil company projects.

One more chart from the New York Times reinforces the message from the foregoing. About 80% of planned oil projects would be uneconomical with prices at $60 a barrel. Notes the Times: "A recent study by Goldman Sachs estimates that many large new oil and gas projects being planned around the world will not be commercially viable with oil at $70 per barrel. 'The shale revolution is making $1 trillion worth of new oil projects potentially obsolete,' said Michele della Vigna, a London-based Goldman analyst. 'The industry needs to reduce costs by 30 percent to go ahead with these projects at the current oil price.'”

Given the severity of the price decline, one might surmise that oil production and consumption is badly out of whack. Estimated in news reports at 1 to 2 million barrels a day, the imbalance between production and consumption is barely noticeable in this chart from the Energy Information Administration. The EIA explains: "EIA estimates that global consumption grew by 1.3 million bbl/d in 2013, averaging 90.5 million bbl/d for the year. EIA expects global consumption to grow by 1.0 million bbl/d in 2014 and 0.9 million bbl/d in 2015. Projected global oil-consumption-weighted real gross domestic product (GDP), which increased by an estimated 2.7% in 2013, is projected to grow by 2.7% and 2.9% in 2014 and 2015, respectively."

The breakeven costs are also reviewed in a Goldman chart that is (wittily) annotated by Tom Randall of Bloomberg. Randall explains: "The chart below shows the break-even points for the top 400 new fields and how much future oil production they represent. Less than a third of projects are still profitable with oil at $70. If the unprofitable projects were scuttled, it would mean a loss of 7.5 million barrels per day of production in 2025, equivalent to 8 percent of current global demand."

Another chart in Randall's piece shows the impact of $75 oil on shale production. It's not clear what $55 oil would mean for the America's shale revolution, but the $75 level shows only a 40% drop in growth, not an absolute decline.

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For links to several of these charts, a tip of the hat to Mr. Cain Thaler, "My Worst Day in Three Years,", November 28, 2014

The 2C Red Line

This piece by Justin Gillis of the New York Times is part of a series on the most recent climate negotiations in Lima, Peru. The result of the meeting was preliminary language intended to keep warming from rising more than 2 degrees Celsius (3.6 degrees Fahrenheit) beyond the average global temperature at the beginning of the Industrial Revolution. Gillis explores where that figure came from, noting its emergence in the 1970s in the work of Yale economist William Nordhaus and its endorsement in the 1990s by the German government, the latter among the most active governmental campaigners for action on climate change. Gillis emphasizes the importance of the figure in relation to the melting of the Greenland ice sheet, and notes that some scientists believe that it is already beginning to break up.

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. . . A decade of subsequent research added scientific support to the notion that 2C was a dangerous threshold. Experts realized, for example, that at some increase in global temperature, the immense Greenland ice sheet would begin an unstoppable melt, raising the sea by as much as 23 feet over an unknown period. Their early calculations suggested that calamity would be unlikely as long as global warming did not exceed about 1.9 degrees Celsius.
 “Risking a loss of the whole Greenland ice sheet was considered a no-go area,” said Stefan Rahmstorf, head of earth system analysis at the Potsdam Institute for Climate Impact Research in Germany. “We are talking about really sinking a lot of coastal cities.”
As the economic and scientific arguments accumulated, the Germans managed to persuade other countries to adopt the 2C target, turning it into official European policy. The proposal was always controversial, with African countries and island states, in particular, arguing that it was too much warming and would condemn them to ruin. The island states cited the potential for a large rise of the sea, and African countries feared severe effects on food production, among other problems.
But as a practical matter, the 2C target seemed the most ambitious possible, since it would require virtually ending fossil fuel emissions within 30 to 40 years. At Cancun in 2010, climate delegates made 2C one of the organizing principles of negotiations.
The talks culminating in Paris next year are seen as perhaps the best chance ever to turn that pledge into meaningful emissions limits, in part because President Obama has gone far beyond his predecessors in committing the United States, the largest historical producer of greenhouse gases, to action. That, in turn, has lured China, the largest current producer, into making its first serious commitments.
Yet even as the 2C target has become a touchstone for the climate talks, scientific theory and real-world observations have begun to raise serious questions about whether the target is stringent enough.
For starters, the world has already warmed by almost one degree Celsius since the Industrial Revolution. That may sound modest, but as a global average, it is actually substantial. For any amount of global warming, the ocean, which covers 70 percent of the earth’s surface and absorbs considerable heat, will pull down the average. But the warming over land tends to be much greater, and the warming in some polar regions greater still.
The warming that has already occurred is causing enormous damage all over the planet, from dying forests to collapsing sea ice to savage heat waves to torrential rains. And scientists realize they may have underestimated the vulnerability of the ice sheets in Greenland and Antarctica.
Those ice sheets now appear to be in the early stages of breaking up. For instance, Greenland’s glaciers have lately been spitting icebergs into the sea at an accelerated pace, and scientific papers published this year warned that the melting in parts of Antarctica may already be unstoppable.
“The climate is now out of equilibrium with the ice sheets,” said Andrea Dutton, a geochemist at the University of Florida who studies global sea levels. “They are going to melt.”
That could ultimately mean 30 feet, or even more, of sea level rise, though scientists have no clear idea of how fast that could happen. They hope it would take thousands of years, but cannot rule out a faster rise that might overwhelm the ability of human society to adapt.
Given the consequences already evident, can the 2C target really be viewed as safe? Frightened by what they are seeing, some countries, especially the low-lying island states, have been pressing that question with fresh urgency lately.
So, even as the world’s climate policy diplomats work on a plan that incorporates the 2C goal, they have enlisted scientists in a major review of whether it is strict enough. Results are due this summer, and if the reviewers recommend a lower target, that could add a contentious dimension to the climate negotiations in Paris next year.
Barring a technological miracle, or a mobilization of society on a scale unprecedented in peacetime, it is not at all clear how a lower target could be met.
Some experts think a stricter target could even backfire. If 2C already seems hard to achieve, with the world on track for levels of warming far beyond that, setting a tighter limit might prompt political leaders to throw up their hands in frustration.
In practice, moreover, a tighter temperature limit would not alter the advice that scientists have been giving to politicians for decades about cutting emissions. Their recommendation is simple and blunt: Get going now.
“Dealing with this is a little bit like saving for retirement,” said Richard B. Alley, a climate scientist at Pennsylvania State University. “All delay is costly, but it helps whenever you start.”
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Justin Gillis, “3.6 Degrees of Uncertainty,” The New York Times, December 15, 2014


December 19, 2014

China's Global Reach in Agriculture

This article by a Chinese diplomat, Loro Horta, details China’s growing turn to overseas farming. These excerpts are from Yale Global Online, December 16, 2014

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China is home to 22 percent of the world’s population, but possesses around 7 percent of its arable land – 334.6 million hectares. However, in recent years the county’s arable land has been shrinking as a result of serious environmental damage such as soil erosion, deforestation and pollution of rivers and lakes. In November Chinese officials reported that more than 40 percent of China’s arable land is suffering from degradation.

The combination of rising food demand and reduced arable land makes it difficult for China to feed itself in the not so distant future. In the past decade China has experienced hikes in food prices and shortages of certain products.
China has no choice but to turn to overseas farming. In 2013 China imported 4 percent of the world’s grain and this figure is likely to rise in coming years.

Several Chinese government officials have also talked about the overseas option as a complement to strengthening domestic production. In 2010, Chinese Minister for Agriculture Han Changfu said, “The time is ripe for the country’s agricultural companies to embark on a go outward strategy.”
In recent years Chinese investment in overseas agriculture and land leases has steadily increased. Chinese companies began investing in neighboring Laos and Cambodia farmland in the early 2000s and slowly ventured further afield. Chinese-owned or jointly owned farms are in several African countries including Mozambique and Ethiopia.

In Mozambique, a Hubei-based company has invested $250 million in a rice farm in Gaza province. In November 2013 the country’s state-owned newspaper Notícias cited Raimundo Matule, a director at the ministry of agriculture, reporting that several Chinese conglomerates were expected to invest up to $2.5 billion in the country’s agricultural sector. In Angola Chinese state-owned giant CITIC pledged to invest $5 billion in agriculture in addition to its current lease of 20,000 hectares of land in the former Portuguese colony.
Mozambique and Angola in particular are large countries with immense tracks of fertile land and a small population. Angola has a land area of 1.24 million square kilometers and a population of 16 million.

China’s ongoing tensions with its Southeast Asian neighbors make other parts of the world even more attractive, and Africa could emerge as a major provider of agricultural products to China in coming years.
Chinese business interests have also leased tracts of land in Brazil, Peru Argentina and Mexico. China is also reported to be acquiring land in the sparsely populated Russian Far East just across the border from heavily populated northern China. Chinese companies are reported to have leased 1 million hectares of land through Russia. China’s most ambitious investment in the sector is a land lease deal with Ukraine for 3 million hectares to produce grain and raise pigs. In 2010 Chinese companies were reported to have requested the lease of 1 million hectares from the Kazak government to plant soybeans and wheat. In 2010 China was believed to have leased or bought over 2 million hectares of land abroad. In 2011 China’s largest agriculture group, Heilongjiang Beidahuang Nongken, announced that it was investing $1.5 billion to develop 300,000 hectares of land in Rio Negro province in Argentina .

However, the overseas option China is pursuing carries risks as well as promises of reward. As shown by recent events in the Ukraine, once a relatively stable part of the world, nothing is guaranteed. Land is a sensitive issue that touches upon our most primordial fears. In Kazakhstan there is widespread concern, sometimes bordering on paranoia, that China is grabbing the country’s vast and sparsely populated land by bribing local officials. In Brazil several officials including former Minister of Agriculture Delfin Netto have accused China of carrying out a stealth land grab. 
In Mozambique a Chinese land lease in the Limpopo valley is reported to have displaced 80,000 people, while in Cameron tribal chiefs and local NGOs have protested against land acquisitions by Chinese companies. In Angola there have been allegations of physical assault against African farm labors by their Chinese managers, while such incidents have been isolated cases. Angola has bitter memories of Portugal’s brutal plantation system in which the chicote, or whip, was widely used.

China is not alone in its interest for African farmland. Brazil, Japan, South Korea and several Gulf States have leased large tracks of land in Africa. Brazil seems to have been far more successful than China, at least in Mozambique, having acquired 500,000 hectares of land in the country’s north. Brazilian land deals have been far less controversial than Chinese ones and elicited less suspicion. Brazilian companies are reported to be producing soybeans in Mozambique, and for several years, Brazil has been main supplier of this product to China. It seems that the Brazilians have stolen a march on the Chinese.
Despite these risks Chinese investment in overseas agriculture is likely to continue. China has little choice but to turn overseas to sustain its growing food needs.

However, one must be cautious not to see Chinese acquisitions of overseas farms as a mere land grab. The issue is far more complex. China has invested hundreds of millions of dollars in agriculture research centers throughout Africa that have greatly increase rice and other crops production and alleviated food shortages. Hundreds of Chinese agriculture scientists are working in Africa and elsewhere to improve efficiency. While Africa and other parts of the world are supplying China with products such as grain, soybeans and meat. China may also contribute to consolidating food security in Africa and other regions with its investment and expertise. China’s long-term strategy may be to boost Africa’s capability to produce agriculture surplus, both addressing the continent’s chronic food shortages and China's demand for imported food.
Chinese investment in overseas agriculture can bring significant benefits provided such investments are done in an open and transparent way and with respect for local communities. Indeed, certain countries – particularly Angola and Zimbabwe, to mention a few – are keen on such investments. China and the host countries for such investments can benefit tremendously – if both sides have the imagination to build mutually beneficial partnerships. 

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Lora Horta, Chinese Agriculture Goes Global, Yale Global, December 16, 2014

December 18, 2014

Oil Bust

The collapse in oil prices since the summer of 2014, accelerating over the last month, promises to have lasting affects on international politics. Provoked by Saudi Arabia's determination to drive down the world price, the oil price collapse is sending out rippling waves that touch the entire planet. Herewith a series of charts intended to put what has happened into perspective.

First off, the fall in prices itself. This chart shows West Texas Intermediate Crude, the benchmark U.S. price. Brent (traded in Europe) was a few years ago at a spread of over $20 dollars a barrel, but the spread is now only 3-4 dollars. Here is a twenty year chart of the price of U.S. oil, followed by a two year chart

Recall that only a few years ago the cost of the marginal barrel of oil was approaching $100, and one gets a sense of how many projects are rendered uneconomic by a price at $55 a barrel. For projects already underway, of course, on which the capital has already been spent, the marginal cost of operating a well is far lower. The longer a low price regime lasts, paradoxically, the greater is likely to be the spurt upwards when it occurs (since future supply will be reduced by the paring back of investment programs in the here and now).

The following chart from the Financial Times (December 15, 2014) shows the dollar cost of net imports and exports from selected countries. The data, though labeled as 2014, comprises totals for the previous four quarters as of the third quarter of 2014. As most of the price drop has occurred in the fourth quarter of 2014, this will dramatically affect the amounts reported in the chart.

Probably the average price of oil over the next year (from the 4th quarter of 2014 to the 4th quarter of 2015) will be higher than $55, but it would not be unreasonable to forecast that revenues for exporters and costs for importers will be some 60-70% of the figures reported above.  Even if prices have rebounded six months from now, the interim period will throw the entire sector (and many countries) into crisis. It is in the nature of markets to overshoot; it is not inconceivable (though I think unlikely) that the lows of late 2008 ($35 a barrel) will again be tested.

More to come.

August 13, 2014

Ukraine's Gas Woes

James Stafford of has the goods on Ukraine’s recent energy legislation: 

Ukraine doesn’t need Russia to take it down—Kiev is doing fine destroying itself, most recently with a new tax code that doubles taxes for private gas producers and promises to irreparably cripple new investment in the energy sector at a time when reform and outside investment were the country’s only hope.
Ukrainian President Petro Poroshenko on August 1 signed off on a new tax code that effectively doubles the tax private gas producers in Ukraine will have to pay, calling into question any new investment, as well as commitment from key producers already operating in the country.
The stated goal of the new tax code—a legislative package embraced by the parliament on July 31 with more than 300 votes--is to raise $1 billion, of which $791 million would go to fund the war effort in eastern Ukraine.
According to the Kyiv Post and Ukrainian law firms, the new code will remain in force until the end of 2014 during which time gas drillers will be required to pay 55 percent of their subsoil revenue for extracting under five kilometers. This is up from 28 percent--so it’s a significant hit for producers. Additionally, for any extraction beyond five kilometers, the tax will be 28 percent--up from 15 percent.
The only saving grace here is that this wasn’t the worst possible scenario: An early version of the bill called for a 70 percent tax on gas extraction.
Ukraine may have some of the most attractive gas prices in the world—the only thing that could have possibly lured investors there—but the new tax law renders this irrelevant, especially considering that in European countries, the tax does not exceed 20 percent.
The oil sector will also be hit with the new tax code, which increases rates to 45 percent for drilling under five kilometers—up from 39 percent. But it is the gas tax hike that will really cripple potential investment in Ukraine.
Private gas producers lobbied energetically against the new tax laws, arguing that it will crush investment and force investors to re-think their commitment to Ukraine. They also argue that it benefits some members of the political-business elite, and has nothing at all to do with funding the war effort in the east. Instead, it is the next phase in the battle among energy oligarchs to secure their interests in the dynamic political arena shaping up after the fall of President Viktor Yanukovych.
In an open letter sent to Parliament on July 29, a group of private producers stated: “The draft law may lead to a rapid increase in the tax burden on private gas producing companies, a significant decrease in project cost effectiveness in general (up to closing down due to unprofitability) and a general decrease in attractiveness of the Ukrainian market for foreign investors."
Speaking to from Kiev, Robert Bensh—a veteran Ukraine energy executive and partner and managing director of Pelicourt LLC, the majority shareholder in Ukraine’s third-largest gas producer, Cub Energy—was highly critical of the new tax law and fearful of what it means for Ukraine’s future at such a critical juncture its energy dynamics.
“This law is dangerous to the long-term security of Ukraine. It adds little to the budget and discourages drilling and investment in the upstream oil and gas sector, as well as calls into question the ability to invest in Ukraine at all,” said Bensh, who has been one of the most visible lobbying forces against the law.
“No one will invest in a country that arbitrarily punishes investors who are creating value by increasing reserves and production, or who are paying taxes and employing hundreds of thousands of people. No one will invest in an industry with the risk that taxes will be double or triple within a few months,” he said.
Bensh called the bill “highly political” and pointed to its two key beneficiaries: energy magnates Rinat Akhmetov and Ihor Kolomoyski, who “either own oil or mining assets that were taxed immaterially and punitively taxed gas producers.”
According to OP Tactical’s intelligence wing, the tax code was clearly maneuvered by Akhmetov and Kolomoyski and should serve as the first sign that key reforms of the energy sector will be challenged at every step to ensure that these interests are secured at the expense of the state.
“The failure of Ukraine to develop gas supplies, either due to years of corruption and or failure to attract outside investment into the upstream sector, is a material factor in Ukraine's current economic crisis and issues with Russia. Ukraine has always sought the easy solution.  This tax and the failure to see the strategic impact upon the country is yet again another example,” Bensh said.
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James Stafford, “Who Needs Russia? Ukraine Will Destroy Itself with New Gas Tax,”, August 7, 2014. Stafford has a August 12 update here, citing the protests of Cub Energy, Geo Alliance, Burisma, Kub Gas, and Regal Petroleum. They warn that “the 55 percent tax rate could ‘lead to the collapse’ of large- and medium-scale projects in Ukraine.”  Extension of the tax beyond the end of 2014 will lead these firms to leave Ukraine and mean “no further foreign investment in the country’s beleaguered gas sector.”

August 1, 2014

Avian Flu Bigger Threat Than Ebola

From Michael Specter at The New Yorker, putting the Ebola outbreak in West Africa into perspective:

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. . . As many as ninety per cent of those infected with Ebola will die. There is no cure or treatment. There are several vaccines under development; in early animal tests, more than one has shown promise. But it will be years before they are ready for humans. Until then, if you get Ebola, you are most likely done for. The virus can eat away at capillaries and blood vessels, causing you to drown in your own blood. As David Quammen wrote in “Spillover,” the definitive book about the origin and evolution of human epidemics, “Advisory: If your husband catches an Ebola virus, give him food and water and love and maybe prayers but keep your distance, wait patiently, hope for the best—and, if he dies, don’t clean out his bowels by hand. Better to step back, blow a kiss, and burn the hut.”
Still, Ebola’s more prosaic symptoms—abdominal and muscle pain, fever, headache, sore throat, nausea, and vomiting—also apply to at least a dozen other conditions. Could an infected airline passenger make it to the United States? Absolutely. But in this country every doctor and nurse in every clinic and hospital uses gowns, latex gloves, masks, and disinfectants. Those precautions are rarely available in the parts of Africa where the epidemic has been most severe. Ebola is contagious only when it is symptomatic, and by that time people are almost invariably too sick to travel. (Patrick Sawyer, the only American to die so far in this outbreak, collapsed after a flight from Liberia to Lagos. He was planning to fly next to Minnesota. He never got on that plane.)
“I wouldn’t be worried to sit next to someone with the Ebola virus on the Tube, as long as they don’t vomit on you or something,” Peter Piot told Agence France-Presse this week. Piot, the director of the London School of Hygiene and Tropical Medicine, was one of the two people who, in 1976, discovered Ebola. He then ran the United Nations’ AIDS program for more than a decade. “This is an infection that requires very close contact,” he said.
Ebola is truly deadly, but the many lurid headlines predicting a global pandemic miss a central point. In its epidemic reach, Ebola is often compared with H.I.V. But they are nothing alike. H.I.V. has killed at least thirty million people, mostly by spreading quietly, burrowing into the cells it infects, and then, at times, lurking for years before destroying the immune system of its host. Ebola’s incubation period is between two and twenty-one days long. The virus kills rapidly. There is nothing insidious about it.
Ebola won’t kill us all, but something else might. Like everything living on Earth, viruses must evolve to survive. That is why avian influenza has provoked so much anxiety; it has not yet mutated into an infection that can spread easily. Maybe it never will, but it could happen tomorrow. A pandemic is like an earthquake that we expect but cannot quite predict. As Quammen puts it, every emerging virus “is like a sweepstakes ticket, bought by the pathogen, for the prize of a new and more grandiose existence. It’s a long-shot chance to transcend the dead end. To go where it hasn’t gone and be what it hasn’t been. Sometimes the bettor wins big.”
He’s right, of course, and it is long past time to develop a system that can easily monitor that process. If we don’t, the next pandemic could make Ebola look weak.

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Michael Specter, “After Ebola,” The New Yorker, August 1, 2014

July 3, 2014

Iraq: Water as a Weapon of War

From John Vidal at the Guardian, a report on the huge significance of water in Iraq's burgeoning conflict:

The outcome of the Iraq and Syrian conflicts may rest on who controls the region’s dwindling water supplies, say security analysts in London and Baghdad. 
Rivers, canals, dams, sewage and desalination plants are now all military targets in the semi-arid region that regularly experiences extreme water shortages, says Michael Stephen, deputy director of the Royal United Services Institute thinktank in Qatar, speaking from Baghdad.
“Control of water supplies gives strategic control over both cities and countryside. We are seeing a battle for control of water. Water is now the major strategic objective of all groups in Iraq. It’s life or death. If you control water in Iraq you have a grip on Baghdad, and you can cause major problems. Water is essential in this conflict,” he said.
Isis Islamic rebels now control most of the key upper reaches of the Tigris and Euphrates, the two great rivers that flow from Turkey in the north to the Gulf in the south and on which all Iraq and much of Syria depends for food, water and industry. “Rebel forces are targeting water installations to cut off supplies to the largely Shia south of Iraq,” says Matthew Machowski, a Middle East security researcher at the UK houses of parliament and Queen Mary University of London.
“It is already being used as an instrument of war by all sides. One could claim that controlling water resources in Iraq is even more important than controlling the oil refineries, especially in summer. Control of the water supply is fundamentally important. Cut it off and you create great sanitation and health crises,” he said.
Isis now controls the Samarra barrage west of Baghdad on the River Tigris and areas around the giant Mosul Dam, higher up on the same river. Because much of Kurdistan depends on the dam, it is strongly defended by Kurdish peshmerga forces and is unlikely to fall without a fierce fight, says Machowski.
Last week Iraqi troops were rushed to defend the massive 8km-long Haditha Dam and its hydroelectrical works on the Euphrates to stop it falling into the hands of Isis forces. Were the dam to fall, say analysts, Isis would control much of Iraq’s electricity and the rebels might fatally tighten their grip on Baghdad.
Securing the Haditha Dam was one of the first objectives of the American special forces invading Iraq in 2003. The fear was that Saddam Hussein’s forces could turn the structure that supplies 30% of all Iraq’s electricity into a weapon of mass destruction by opening the lock gates that control the flow of the river. Billions of gallons of water could have been released, power to Baghdad would have been cut off, towns and villages over hundreds of square miles flooded and the country would have been paralysed. In April, Isis fighters in Fallujah captured the smaller Nuaimiyah Dam on the Euphrates and deliberately diverted its water to “drown” government forces in the surrounding area. Millions of people in the cities of Karbala, Najaf, Babylon and Nasiriyah had their water cut off but the town of Abu Ghraib was catastrophically flooded along with farms and villages over 200 square miles. According to the UN, around 12,000 families lost their homes.
Earlier this year Kurdish forces reportedly diverted water supplies from the Mosul Dam. Equally, Turkey has been accused of reducing flows to the giant Lake Assad, Syria’s largest body of fresh water, to cut off supplies to Aleppo, and Isis forces have reportedly targeted water supplies in the refugee camps set up for internally displaced people.
Iraqis fled from Mosul after Isis cut off power and water and only returned when they were restored, says Machowski. “When they restored water supplies to Mosul, the Sunnis saw it as liberation. Control of water resources in the Mosul area is one reason why people returned,” said Machowski.
Increasing temperatures, one of the longest and most severe droughts in 50 years and the steady drying up of farmland as rainfall diminishes have been identified as factors in the political destabilisation of Syria. 
Both Isis forces and President Assad’s army are said to have used water tactics to control the city of Aleppo. The Tishrin Dam on the Euphrates, 60 miles east of the city, was captured by Isis in November 2012.
The use of water as a tactical weapon has been used widely by both Isis and the Syrian government, says Nouar Shamout, a researcher with Chatham House. “Syria’s essential services are on the brink of collapse under the burden of continuous assault on critical water infrastructure. The stranglehold of Isis, neglect by the regime, and an eighth summer of drought may combine to create a water and food crisis which would escalate fatalities and migration rates in the country’s ongoing three-year conflict,” he said.
“The deliberate targeting of water supply networks ... is now a daily occurrence in the conflict. The water pumping station in Al-Khafsah, Aleppo, stopped working on 10 May, cutting off water supply to half of the city. It is unclear who was responsible; both the regime and opposition forces blame each other, but unsurprisingly in a city home to almost three million people the incident caused panic and chaos. Some people even resorted to drinking from puddles in the streets,” he said.
Water will now be the key to who controls Iraq in future, said former US intelligence officer Jennifer Dyer on US television last week. “If Isis has any hope of establishing itself on territory, it has to control some water. In arid Iraq, water and lines of strategic approach are the same thing”. The Euphrates River, the Middle East’s second longest river, and the Tigris, have historically been at the centre of conflict. In the 1980s, Saddam Hussein drained 90% of the vast Mesopotamian marshes that were fed by the two rivers to punish the Shias who rose up against his regime. Since 1975, Turkey’s dam and hydropower constructions on the two rivers have cut water flow to Iraq by 80% and to Syria by 40%. Both Syria and Iraq have accused Turkey of hoarding water and threatening their water supply.
“There has never been an outright war over water but water has played extremely important role in many Middle East conflicts. Control of water supply is crucial”, said Stephen.
It could also be an insurmountable problem should the country split into three, he said. “Water is one of the most dangerous problems in Iraq. If the country was split there would definitely be a war over water. Nobody wants to talk about that,” he said.
Some academics have suggested that Tigris and Euphrates will not reach the sea by 2040 if rainfall continues to decrease at its present rate.
John Vidal, Water supply key to outcome of conflicts in Iraq and Syria, experts warn, The Guardian, July 2, 2014

* * *

Keith Johnson at Foreign Policy has further info on the structural problems with the Mosul dam:

Built in the late 1980s, it has owned the title of "most dangerous dam in the world" for years, according to a 2006 assessment by the U.S. Army Corps of Engineers. It was built on an unstable foundation of water-soluble rock in an area prone to sinkholes. As a result, it is injected with grout around-the-clock to maintain structural integrity. Gen. David Petraeus, the former U.S. commander in Iraq, urged Iraqi Prime Minister Nouri al-Maliki to prioritize bolstering the dam in 2007. A U.S.-funded, $27 million plan to address the most glaring problems was found wanting by SIGIR that same year.

Although apparently unmolested by ISIS so far, a worst-case scenario could unfold even if it becomes just collateral damage.

If the ISIS offensive disrupts the dam's intensive maintenance, it could further deteriorate or even be breached. Researchers say it could send as much as 50 million gallons of water per second crashing toward Mosul that would cover more than half the city under 25 meters of water within hours. Further down the Tigris River, Baghdad itself could be under 4 meters of water within three days. It would also wipe out more than 250 square kilometers of prime farmland.

"The only measure which can reasonably be taken to reduce the risk to downstream populations" is building another dam downstream, researchers concluded earlier this year. Construction started on the Badush Dam in the 1990s but never completed.

Mosul Dam's regular maintenance appears to continue uninterrupted by ISIS, said researchers at Lulea University of Technology in Sweden, who have studied the dam. The dam's manager declined to discuss the facility's state or the risks posed by ISIS.

* * *

Keith Johnson, Water Wars in the Land of the Two Rivers, Foreign Policy, July 2, 2014

June 4, 2014

Economist to Coal Industry: Stop Your Mendacious, Homocidal, Greedy Whining

The Economist’s Democracy in America blog weighs in on industry opposition to Obama’s climate regulations:

WHAT would life in America be like if the Clean Air Act of 1970 had never been passed? In terms of breathing, an activity that's easy to overlook until it becomes difficult, it would probably resemble life in many of today's developing countries, where factories and cars are multiplying unhindered by environmental regulations. In Hanoi, where I lived in the mid- to late 2000s, the importance of breathing really started to make itself felt five or six years ago, and at that point a number of my friends decided to leave. By the time my wife and I left too, at the end of 2010, our then 8-year-old daughter had a persistent thick yellow slime in her throat that she would periodically cough up (it went away after about a year living in the clean air of the Netherlands). Things are even worse in large Chinese cities, where coal fumes, auto exhaust, smog and particulate matter are so coruscating that most Americans would consider raising a family there an act of child abuse. Rich people send their children to private schools with pressurised domes over the sports fields. Every well-off family owns an air purifier. Poor people cannot afford air purifiers; they and their children will die earlier.
American cities once looked rather similar, in the 1950s and ‘60s. And if the coal, electric power and automotive industries had had their way in the early 1970s, American cities would look like Chinese cities today, too. As Tom Zeller notes at Bloomberg View, the adoption of the 1970 Clean Air Act triggered the same kind of hysterical industry denunciations we are seeing today in response to Barack Obama's move to force the electric power industry to reduce greenhouse gas emissions. Ford Motor Company claimed the 1970 act "could cut off automobile production in just five years, lead to huge price increases for cars even if production were not stopped, do 'irreparable damage' to the American economy—and still lead to only small improvements in the quality of the air." The auto industry reprised that act in 1972, when Congress was considering forcing them to adopt catalytic converters: the vice president of General Motors said "complete stoppage of the production line could occur," while Lee Iacocca, then president of Ford, claimed it would "cause Ford to shut down", cut gross national product by $17 billion, and raise unemployment by 800,000. The mining and electric power industries made the same sorts of wild claims. In 1974, as Congress debated amendments to the act cutting sulfur emissions, the head of American Electric Power spent $3.1m on an ad campaign to convince the American public that installing scrubbers on coal-fired power plants would be a disaster. 
Needless to say, this was all nonsense. Since the Clean Air Act was signed in 1970, America's GDP has grown 212% while emissions of traditional air pollutants fell by 68%. Without the Clean Air Act's pollution reductions, adult mortality in the United States would have increased by 160,000 in 2011 alone. Over the course of 40 years, the act's pollution reductions have quite literally saved millions of lives. This follows a fairly reliable pattern: whenever the government considers environmental or safety regulations, manufacturing and energy companies and industry associations put out "studies" that grossly overestimate the costs and understate the benefits. In retrospect, the industry response to environmental regulation in the 1970s can best be described as mendacious, homicidal, greedy whingeing. 
Predictably, the US Chamber of Commerce's Energy Institute and the American Petroleum Institute have recently released reports warning of economic disaster if Mr Obama's new rules limiting greenhouse-gas emissions are implemented. The CoC report, carried out by an economic research bureau called IHS, is typical: it finds that the rules will lead American GDP to be about $50 billion per year (around 0.3% of total GDP) lower than it otherwise would be, but does not provide any estimate of the value of lower carbon and other emissions the rules will produce. This is akin to doing a cost analysis of the Clean Air Act without trying to account for the value of your kids being able to breathe. And why does IHS think the rules will lower GDP? Because of the opportunity cost of forcing utilities to replace coal-fired power plants early; this, they say, takes up capital that otherwise would have been employed in ways that generate more economic activity. How do they know that? They know it because they plugged it into their economic model, which assumes that capital generates more economic activity when its use is not dictated by regulations. Other economists have other models, some of which take into account the fact that in conditions like those we have today, with a glut of capital, low aggregate demand and little productive lending or borrowing going on, regulatory requirements can actually increase GDP by forcing companies to invest. Obviously, though, those economists would not get hired by the CoC.
The passage in the IHS report that really jumped out at me was this one:
“The required capital expenditures are essentially unproductive uses of capital because one source of electricity generation (i.e., coal-fired plants) will simply be replaced by an alternative source (i.e., natural gas–fired plants, renewables, nuclear).”
This, as far I can tell, is gibberish. The productive difference between a coal-fired power plant and a solar one is that the solar one does not produce carbon dioxide. That is the added value, just as the added value in switching from a crummy old refrigerator to a frost-free one is that you don't have to clean out the ice. The need to build solar power plants will drive the development of new technologies and of a whole new chain of suppliers, just as any other technology investment drives innovation and supports new chains of suppliers. IHS's attempt to call the switch to renewable energy "essentially unproductive" is hocus-pocus, strangely akin to the manoeuvre Soviet economists used to pull off claiming that Ladas were just as valuable as Mercedes because they're both cars.
All of which might just occasion a bit of eye-rolling, were it not for the fact that the carbon which utility companies churn out is gradually cooking the climate. It is difficult to decide what tone to adopt when speaking of organisations that spew foulness for a living, and then employ their free-speech rights to advocate for their interest in spewing more of it. Mr Zeller takes a modest, reasonable tack, writing that one should “[keep] the end-times wailing of the fossil-fuel lobby in perspective” when considering the CoC's and API’s claims. This is one way to phrase it: when considering the industry response to stronger greenhouse gas limits, one should keep in perspective that in the past they have been laughably wrong, and that the positions they have advocated would have led to the deaths of millions. But Mr Zeller also writes, in passing, that businesses can be expected to protect their bottom lines, and are "right to do so."
That's clearly true in general, but I don't think it bears any application to this situation. Even people who believe the debatable proposition that corporations have no responsibilities except to maximise shareholder return recognise that there are some limits to the arguments a business can make. Raytheon might sell more missiles if the United States were to go war against Iran, but the American public would react with disgust if a defence industry association were to put out a report arguing that war against Iran would be great for the economy. If the electric power industry wants to "talk its book", that's fine, but there need to be consensual limits set by the public's sense of the decent interests of society. The tone of hard-line, toes-in-the-dirt opposition to any and all greenhouse-gas regulation that we see from industry today is in some ways more extreme than what one saw in the 1970s; in those days, one would sometimes find business leaders expressing a recognition that they had to strike deals with government based on the broad public interest.
The obvious environmental challenge America faced 40 years ago, and which China and other developing nations face today, was the struggle for clean air. Executives in the power, mining and automotive industries made fools of themselves at the time by cooking up economic and scientific arguments against pollution regulations that turned out to be utterly wrong. Today the glaring environmental challenge is the effort to reduce carbon emissions and avoid catastrophic climate change. If America's power industry had any sense, it would have spent the past four years backing the cap-and-trade approach to reducing carbon emissions, which gives businesses more flexibility to adapt. By helping lead the campaign to defeat cap-and-trade, as Mr Zeller writes, power industry leaders have brought Mr Obama's more rigid regulatory approach on themselves. It is infuriating to see them now cough up the same tired, half-baked arguments against carbon-emissions limits that they have been making, wrongly, for four decades against the whole slate of government environmental and safety regulations—the very regulations that have made America the cleaner, safer country we know it to be. We have become so accustomed to seeing industry leaders spew this stuff out that we shrug and accept it; what do we expect them to say? We ought to expect them not to insult our intelligence. We ought to expect them to show some respect for our health, and that of the planet.
* * *
M.S., Democracy in America, “Claws in the Dirt,” The Economist, June 4, 2014.

May 25, 2014

EIA Reduces California Shale Estimates by 96%

Visions of US energy independence have been widely adopted over the last several years, with a major contribution expected from the development of the Monterey Shale deposits in central California. But according to this report from the Los Angeles Times, the U.S. Energy Information Administration will be reducing estimates of the recoverable oil by 96%, from 13.7 billion barrels to 600 million barrels.

The significance of this dramatic revision is shown by the effusive estimates that had previously gained wide acceptance. In May 2013, National Geographic wrote: “According to U.S. government estimates, as much as 15.4 billion barrels of oil could be locked within the Monterey shale. That would be more than double the amount of oil reckoned to lie within the Bakken shale, the booming play that has made North Dakota the nation's number 2 oil-producing state behind Texas. It's more than five times the oil of Texas' thriving Eagle Ford shale. Indeed, Monterey holds more than half of the undeveloped, technically recoverable shale oil resources believed to exist in the continental United States.”

It seems reasonable to conclude from this that the new estimate for the Monterey Shale reduces U.S. recoverable shale oil resources by 50%. Poof!
Federal energy authorities have slashed by 96% the estimated amount of recoverable oil buried in California's vast Monterey Shale deposits, deflating its potential as a national "black gold mine" of petroleum.
Just 600 million barrels of oil can be extracted with existing technology, far below the 13.7 billion barrels once thought recoverable from the jumbled layers of subterranean rock spread across much of Central California, the U.S. Energy Information Administration said.
The new estimate, expected to be released publicly next month, is a blow to the nation's oil future and to projections that an oil boom would bring as many as 2.8 million new jobs to California and boost tax revenue by $24.6 billion annually.
The Monterey Shale formation contains about two-thirds of the nation's shale oil reserves. It had been seen as an enormous bonanza, reducing the nation's need for foreign oil imports through the use of the latest in extraction techniques, including acid treatments, horizontal drilling and fracking.
The energy agency said the earlier estimate of recoverable oil, issued in 2011 by an independent firm under contract with the government, broadly assumed that deposits in the Monterey Shale formation were as easily recoverable as those found in shale formations elsewhere.
The estimate touched off a speculation boom among oil companies. The new findings seem certain to dampen that enthusiasm.
Kern County in particular has seen a flurry of oil activity since 2011, with most of the test wells drilled by independent exploratory companies. Major oil companies have expressed doubts for years about recovering much of the oil.
The problem lies with the geology of the Monterey Shale, a 1,750-mile formation running down the center of California roughly from Sacramento to the Los Angeles basin and including some coastal regions.
Unlike heavily fracked shale deposits in North Dakota and Texas, which are relatively even and layered like a cake, Monterey Shale has been folded and shattered by seismic activity, with the oil found at deeper strata.
Geologists have long known that the rich deposits existed but they were not thought recoverable until the price of oil rose and the industry developed acidization, which eats away rocks, and fracking, the process of injecting millions of gallons of water laced with sand and chemicals deep underground to crack shale formations.
The new analysis from the Energy Information Administration was based, in part, on a review of the output from wells where the new techniques were used.
"From the information we've been able to gather, we've not seen evidence that oil extraction in this area is very productive using techniques like fracking," said John Staub, a petroleum exploration and production analyst who led the energy agency's research.
"Our oil production estimates combined with a dearth of knowledge about geological differences among the oil fields led to erroneous predictions and estimates," Staub said.
Compared with oil production from the Bakken Shale in North Dakota and the Eagle Ford Shale in Texas, "the Monterey formation is stagnant," Staub said. He added that the potential for recovering the oil could rise if new technology is developed.
A spokesman for the oil industry expressed optimism that new techniques will eventually open up the Monterey formation.
"We have a lot of confidence in the intelligence and skill of our engineers and geologists to find ways to adapt," said Tupper Hull, spokesman for the Western States Petroleum Assn. "As the technologies change, the production rates could also change dramatically."
Rock Zierman, chief executive of the trade group California Independent Petroleum Assn., which represents many independent exploration companies, also sounded hopeful.
"The smart money is still investing in California oil and gas," Zierman said.
"The oil is there," Zierman said. "But this is a tough business."
Environmental organizations welcomed the news as a turning point in what had been a rush to frack for oil in the Monterey formation.
"The narrative of fracking in the Monterey Shale as necessary for energy independence just had a big hole blown in it," said Seth B. Shonkoff, executive director of the nonprofit Physicians Scientists & Engineers for Healthy Energy.
J. David Hughes, a geoscientist and spokesman for the nonprofit Post Carbon Institute, said the Monterey formation "was always mythical mother lode puffed up by the oil industry — it never existed."
Hughes wrote in a report last year that "California should consider its economic and energy future in the absence of an oil production boom from the Monterey Shale."
The 2011 estimate was done by the Virginia engineering firm Intek Inc.
Christopher Dean, senior associate at Intek, said Tuesday that the firm's work "was very broad, giving the federal government its first shot at an estimate of recoverable oil in the Monterey Shale. They got more data over time and refined the estimate."
For California, the analysis throws cold water on economic projections built upon Intek's projections.
In 2013, a USC analysis, funded in part by the Western States Petroleum Assn., predicted that the Monterey Shale formation could, by 2020, boost California's gross domestic product by 14%, add $24.6 billion per year in tax revenue and generate 2.8 million new jobs.  

* * *
Louis Sahagun, “U.S. officials cut estimate of recoverable Monterey Shale oil by 96%,” Los Angeles Times, May 20, 2014.

See also Josie Garthwaite, “Monterey Shale Shakes Up California's Energy Future,” National Geographic, May 27, 2013.

For an extensive report by J. David Hughes of the Post Carbon Institute, see Drilling California: A Reality Check on the Monterey Shale, December 2013. And see here for an earlier report by Hughes on the extravagant projections for the recovery of oil from shale deposits.

May 24, 2014

Clinton In a Bind Over Keystone

Hillary Clinton, a presumptive candidate for president in 2016, has not yet declared herself on the Keystone pipeline. As Politico reports, she is in a deep bind over the issue, in that support for the pipeline would hurt her in the Democratic primaries and opposition would hurt her in the general election. Politico assesses the dilemma thusly:

If she supports the pipeline, she’ll run afoul of the Democratic Party’s increasingly vocal environmentalist base, as well as climate-minded donors like billionaire Tom Steyer, who has ties to the Clintons. That could provide an opening for a liberal opponent in the 2016 primaries, similar to the way Barack Obama outflanked her with the anti-war left in 2008.
But if she opposes Keystone, she’ll go up against labor unions that welcome the project’s promise of thousands of jobs — along with moderate Democrats and, according to polls, most of the American public.
Clinton has offered no public comments about the pipeline in 3½ years, and until now people in her circle have declined to address it too. But people close to Clinton told POLITICO this week that she won’t weigh in on the project anytime soon, saying it would be inappropriate for her to appear to push either Obama or Secretary of State John Kerry on an issue that’s still under review. . . .
But some in the party are worried. “The nightmare is that Democratic primary voters would put withering pressure on her to come out against the pipeline in the primary, a position that would be a huge liability in the general election,” said former Clinton administration climate aide Paul Bledsoe, who thinks Obama should approve Keystone. “As a general election issue, it’s a no-brainer.”
That pressure is going to increase, said one person with close ties to the environmental movement. “Once Obama makes a decision, then the pressure on HRC will amp up on [Keystone] from mainstream enviros,” the person said in an email. “In the meantime, if I’m Martin O’Malley, Bernie Sanders or any other person running for POTUS regardless of HRC, I would come out loud and hard against [Keystone] as a way of rallying true believers in early states,” especially Iowa and New Hampshire.
Another potential rival in 2016 is Vice President Joe Biden, whom a Sierra Club activist quoted last year as saying during a rope-line greeting that he opposes the pipeline. Biden’s office declined to confirm whether he said that, but it became instant lore among climate activists.
Some Keystone opponents already distrust Clinton based on her one public comment about the pipeline — off-the-cuff remarks at a San Francisco speaking engagement in 2010 in which she said the department was “inclined” to green-light the project.
“We’re either going to be dependent on dirty oil from the Gulf or dirty oil from Canada … until we can get our act together as a country and figure out that clean, renewable energy is in both our economic interests and the interests of our planet,” said the then-secretary of State, whose department was studying the Alberta-to-Texas pipeline’s potential environmental impacts.
Her husband, former President Bill Clinton, also indicated he favors the pipeline during remarks in 2012 that still appear in pro-Keystone television ads.
Some Keystone opponents have repeatedly accused the State Department of favoritism toward the project, including during the years when she was secretary. Climate activist Bill McKibben, co-founder of the group, also blamed her for the disappointing outcome of international climate negotiations in 2009 in Copenhagen, Denmark, which he called “certainly the biggest foreign policy fiasco of the first Obama term.”
“And she wanted to approve Keystone before there was any data on it,” McKibben said. “So I’d say there’s no huge reservoir of trust just yet.”
Other environmentalists point to the fact that Clinton has made climate change a major theme of several of her speeches in recent months. During March remarks in Arizona, for example, she called for a “mass movement” to tackle the issue.
Privately, Clinton allies said those comments reflect concerns she’s heard from people, some of them donors, about moving the issue to the forefront. . . .
Bledsoe said one person who can take Keystone off Clinton’s plate is Obama, who could neutralize the issue by approving the pipeline.
“Of all the reasons to approve Keystone, clearing the way for Hillary Clinton may be the most salient,” Bledsoe said. “If Obama denies the permit, Keystone will become a massive litmus test issue in the Democratic primary for the left and a huge rallying cry for Republicans in the general election.”
But environmental activists say they’ll continue pushing Clinton to take a stance. Neutrality is an “untenable” position for Clinton, Friends of the Earth President Erich Pica said.
“She’s going to have to have a position on it,” he said in an interview. “She can’t urge young Americans to rise up and lead on climate change if she herself isn’t willing to take controversial positions on projects that exacerbate climate change.”
* * *

Andrew Restuccia and Maggie Haberman, “Hillary Clinton’s  Keystone headache,” Politico.

May 18, 2014

Crimea's Oil and Gas

This piece by William J. Broad of the New York Times, "In Taking Crimea, Putin Gains a Sea of Fuel Reserves," details the implications of Russia's annexation of Crimea for the exploitation of the Black Sea's fossil fuel reserves. (May 18, 2014)

* * *

When Russia seized Crimea in March, it acquired not just the Crimean landmass but also a maritime zone more than three times its size with the rights to underwater resources potentially worth trillions of dollars.

Russia portrayed the takeover as reclamation of its rightful territory, drawing no attention to the oil and gas rush that had recently been heating up in the Black Sea. But the move also extended Russia's maritime boundaries, quietly giving Russia dominion over vast oil and gas reserves while dealing a crippling blow to Ukraine's hopes for energy independence.

Russia did so under an international accord that gives nations sovereignty over areas up to 230 miles from their shorelines. It had tried, unsuccessfully, to gain access to energy resources in the same territory in a pact with Ukraine less than two years earlier.

"It's a big deal," said Carol R. Saivetz, a Eurasian expert in the Security Studies Program of the Massachusetts Institute of Technology. "It deprives Ukraine of the possibility of developing these resources and gives them to Russia. It makes Ukraine more vulnerable to Russian pressure."

Gilles Lericolais, the director of European and international affairs at France's state oceanographic group, called Russia's annexation of Crimea "so obvious" as a play for offshore riches.

In Moscow, a spokesman for President Vladimir V. Putin said there was "no connection" between the annexation and energy resources, adding that Russia did not even care about the oil and gas. "Compared to all the potential Russia has got, there was no interest there," the spokesman, Dmitry Peskov, said Saturday.

Exxon Mobil, Royal Dutch Shell and other major oil companies have already explored the Black Sea, and some petroleum analysts say its potential may rival that of the North Sea. That rush, which began in the 1970s, lifted the economies of Britain, Norway and other European countries.

William B. F. Ryan, a marine geologist at the Lamont-Doherty Earth Observatory of Columbia University, said Russia's Black Sea acquisition gave it what are potentially "the best" of that body's deep oil reserves.

Oil analysts said that mounting economic sanctions could slow Russia's exploitation of its Black and Azov Sea annexations by reducing access to Western financing and technology. But they noted that Russia had already taken over the Crimean arm of Ukraine's national gas company, instantly giving Russia exploratory gear on the Black Sea.

"Russia's in a mood to behave aggressively," said Vladimir Socor, a senior fellow at the Jamestown Foundation, a research group in Washington that follows Eurasian affairs. "It's already seized two drilling rigs."

The global hunt for fossil fuels has increasingly gone offshore, to places like the Atlantic Ocean off Brazil, the Gulf of Mexico and the South China Sea. Hundreds of oil rigs dot the Caspian, a few hundred miles east of the Black Sea.

Nations divide up the world's potentially lucrative waters according to guidelines set forth by the 1982 Law of the Sea Treaty. The agreement lets coastal nations claim what are known as exclusive economic zones that can extend up to 200 nautical miles (or 230 statute miles) from their shores. Inside these zones, countries can explore, exploit, conserve and manage deep natural resources, living and nonliving.

The countries with shores along the Black Sea have long seen its floor as a potential energy source, mainly because of modest oil successes in shallow waters.

Just over two years ago, the prospects for huge payoffs soared when a giant ship drilling through deep bedrock off Romania found a large gas field in waters more than half a mile deep.

Russia moved fast.

In April 2012, Mr. Putin, then Russia's prime minister, presided over the signing of an accord with Eni, the Italian energy giant, to explore Russia's economic zone in the northeastern Black Sea. Dr. Ryan of Columbia estimated that the size of the zone before the Crimean annexation was roughly 26,000 square miles, about the size of Lithuania.

"I want to assure you that the Russian government will do everything to support projects of this kind," Mr. Putin said at the signing, according to Russia's Interfax news agency.

A month later, oil exploration specialists at a European petroleum conference made a lengthy presentation, the title of which asked: "Is the Black Sea the Next North Sea?" The paper cited geological studies that judged the waters off Ukraine as having "tremendous exploration potential" but saw the Russian zone as less attractive.

In August 2012, Ukraine announced an accord with an Exxon-led group to extract oil and gas from the depths of Ukraine's Black Sea waters. The Exxon team had outbid Lukoil, a Russian company. Ukraine's state geology bureau said development of the field would cost up to $12 billion.

"The Black Sea Hots Up," read a 2013 headline in GEO ExPro, an industry magazine published in Britain. "Elevated levels of activity have become apparent throughout the Black Sea region," the article said, "particularly in deepwater."

When Russia seized the Crimean Peninsula from Ukraine on March 18, it issued a treaty of annexation between the newly declared Republic of Crimea and the Russian Federation. Buried in the document - in Article 4, Section 3 - a single bland sentence said international law would govern the drawing of boundaries through the adjacent Black and Azov Seas.

Dr. Ryan estimates that the newly claimed maritime zone around Crimea added about 36,000 square miles to Russia's existing holdings. The addition is more than three times the size of the Crimean landmass, and about the size of Maine.

At the time, few observers noted Russia's annexation of Crimea in those terms. An exception was Romania, whose Black Sea zone had been adjacent to Ukraine's before Russia stepped in.

"Romania and Russia will be neighbors," Romania Libera, a newspaper in Bucharest, observed on March 24. The article's headline said the new maritime border could become a "potential source of conflict."

Many nations have challenged Russia's seizing of Crimea and thus the legality of its Black and Azov Sea claims. But the Romanian newspaper quoted analysts as judging that the other countries bordering the Black Sea - Georgia, Turkey, Bulgaria and Romania - would tacitly recognize the annexation "in order to avoid an open conflict."

Most immediately, analysts say, Russia's seizing may alter the route along which the South Stream pipeline would be built, saving Russia money, time and engineering challenges. The planned pipeline, meant to run through the deepest parts of the Black Sea, is to pump Russian gas to Europe.

Originally, to avoid Ukraine's maritime zone, Russia drew the route for the costly pipeline in a circuitous jog southward through Turkey's waters. But now it can take a far more direct path through its newly acquired Black Sea territory, if the project moves forward. The Ukraine crisis has thrown its future into doubt.

As for oil extraction in the newly claimed maritime zones, companies say their old deals with Ukraine are in limbo, and analysts say new contracts are unlikely to be signed anytime soon, given the continuing turmoil in the region and the United States' efforts to ratchet up pressure on Russia.

"There are huge issues at stake," noted Dr. Saivetz of M.I.T. "I can't see them jumping into new deals right now."

The United States is using its wherewithal to block Russian moves in the maritime zones. Last month, it imposed trade restrictions on Chernomorneftegaz, the breakaway Crimean arm of Ukraine's national gas company.

Eric L. Hirschhorn, the United States under secretary of commerce for industry and security, said sanctions against the Crimean business would send "a strong message" of condemnation for Russia's "incursion into Ukraine and expropriation of Ukrainian assets."

Alexandra Odynova contributed reporting from Moscow.

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h/t Johnson's Russialist

May 4, 2014

Austria and Bulgaria Defy EU over Russia's South Stream

The following report details how Austria and Bulgaria, with the implicit support of Germany, have defied the EU’s attempt to thwart Russia’s South Stream natural gas pipeline. Henning Gloystein of Reuters explains how “Side deals with Moscow thwart drive to wean Europe off Russian gas” (May 4)

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While officials in Brussels were calling for Europe to reduce its dependency on Russian natural gas and negotiate with Moscow as a bloc, Austria was quietly bypassing the European Commission to cut its own bilateral deal on building a pipeline.

The deal on the South Stream pipeline, which will be built under the Black Sea to Bulgaria and on to central Europe, shows the European Union's difficulty in creating a unified energy policy on Moscow during the Ukraine crisis.

While EU officials are calling for Europe to wean itself off Russian gas, private and state-owned firms, with the support of politicians, are pushing ahead with projects to buy ever more.

Austrian energy firm OMV agreed last week with Russia's state-controlled Gazprom to bring the South Stream pipeline to Austria's Baumgarten gas hub, outmanoeuvring Italy which had wanted it to end there.

The deal is also likely to please some in neighbouring Germany, as the gas will now be delivered closer to customers.

It shows that when it comes to natural gas diplomacy, European countries still have their own competing interests which are difficult to unite under an EU flag.

The timing of the deal, which coincided with Europe announcing new sanctions on a list of Russians designed to push the Kremlin to reduce its support for separatists in Ukraine, could hardly have been more at odds with official EU policy.

The Commission had put the approval process for South Stream on hold after Russia annexed Ukraine's Crimea region in March, hoping the delay would push Moscow to stop what the West says is its intervention in Ukraine.

Brussels says South Stream does not comply with its regulations on ownership and pipeline access. But Austria and Russia have circumvented this by announcing that their deal is based on a bilateral agreement between the countries rather than an EU accord.

South Stream's main purpose, like the German-Russian Nord Stream pipeline under the Baltic Sea, is to circumvent Ukraine. This would ensure that disputes between Moscow and Kiev do not interfere with the flow of Russian gas to Europe, much of which crosses Ukraine in existing pipelines.

"If we agree to South Stream, Europe will sell the rope with which Russia will hang Ukraine, and it will also agree to increase its energy dependency on Russia," said Frank Umbach, at the European Centre for Energy and Resource Security (EUCERS), a research team at King's College London.


Austria was motivated to push for the South Stream deal after it lost out to Italy in a competition last year over a separate pipeline bringing gas to Europe from Azerbaijan.

OMV's Nabucco pipeline project was dropped in favour of the rival Trans-Adriatic Pipeline (TAP) to Italy. That derailed years of Austrian lobbying, which the EU had initially backed, for Nabucco to bring the Azeri gas to central Europe.

"Current international developments show once again that in the long-term we don't only have to diversify our energy sources, but also our routes," said Austrian economy and energy minister Reinhold Mitterlehner. "Should the South Stream pipeline end in Baumgarten, we will get closer to this target."

Gazprom sources said they had been approached during the last four weeks by Austria, and a deal was put together as fast as possible.

Gazprom and OMV aim to get the remaining permits by the end of next year and start delivering gas by 2017.

"For Russia, this project is a clear signal to Ukraine that it intends to avoid any future disputes or supply disruptions," said Friedbert Pflüger, director of EUCERS. "The reference to a 2010 bilateral agreement for regulatory approval demonstrates Moscow's intention to circumvent the EU's regulations that would make the realisation of the project more difficult."


The Gazprom-OMV agreement continues Russia's strategy of making bilateral deals that undermine the Commission, the EU's executive arm, which wants to build up a European front on energy supplies.

Bulgaria, which imports almost all its gas from Russia, also backed South Stream last month in defiance of Commission calls that member states should not enter bilateral deals with Gazprom without its approval.

"South Stream is a project of strategic importance. Now they (the European Parliament) want to stop South Stream. How are we to develop? This crisis at the moment shows that we do not have security of natural gas supplies for Bulgaria," energy minister Dragomir Stoynev said.

Quietly supporting smaller EU member states such as Austria and Bulgaria is Germany, where the government has said it sees Moscow as a reliable gas supplier and industry has made big investments in securing Russian gas.

Germany is by far Gazprom's biggest customer in the EU, paying around $15 billion a year for Russian gas.

After years of lobbying by former German chancellor Gerhard Schroeder, the Nord Stream pipeline began operations in 2011.

Schroeder chairs Nord Stream's board and has been an outspoken critic of moves to isolate Russia diplomatically. He drew strong criticism in the German press last week for bear-hugging President Vladimir Putin during a visit to Russia.

South Stream's proposed 2,500 km (1,500 mile) route would stretch from Russia under the Black Sea through Bulgaria and Serbia to Hungary and now Austria.

Germany's BASF, the world's biggest chemicals company, is a partner in South Stream through its gas supply subsidiary Wintershall.

The head of BASF's advisory board is Eggert Voscherau, brother of Henning Voscherau, who is chairman of South Stream Transport's board of directors and a prominent former politician of Schroeder's Social Democratic Party.

A government adviser in Berlin, speaking on condition of anonymity said Berlin was happy that the new pipeline was now going to Austria rather than Italy: "Bringing South Stream's gas to Austria is far better for Germany's industry and gas security than pumping it far to the South to Italy."

Source: Johnson's Russia List, May 4, 2014
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Update: The FT has further detail on the new pipeline politics:

This week, Gazprom signed a preliminary deal with the energy company OMV to build a spur of South Stream into Austria. It also announced deals with Switzerland’s Allseas Group and Italy’s Saipem to build South Stream’s submarine pipelines in the Black Sea. Many of the project’s pipes are being manufactured by the German company Europipe.
“[Russian President Vladimir] Putin is using South Stream to undermine the EU and its cohesive energy policy from within,” said Ilian Vassilev, an energy consultant and Bulgaria’s former ambassador to Russia. EU countries with interests in the project – Italy, Germany, Bulgaria, Hungary and Austria – are all reticent about imposing broad economic sanctions on Russia.

The deals with OMV, Saipem and Allseas come amid a crucial dispute in Bulgaria that cuts to the heart of whether the EU can use competition law to undermine Gazprom. Bulgaria is a key battleground because construction work is due to start there in June and its socialist government has some of the EU’s strongest ties to Russia.
The arguments centre on EU policies called the “third energy package”. These measures are intended to prevent a monopolistic supply chain and would limit the volume of gas that Gazprom could export to the EU, even to a point where the company could only supply half of the pipeline’s gas. Analysts argue this would weigh on the project’s profitability. Russian officials have stressed the importance of winning exemptions from the competition rules but Brussels is signalling that it is unlikely to grant Gazprom any leeway.

Bulgaria’s parliament has opened a new front to support Gazprom by seeking to amend its energy law and exempt the offshore pipeline from EU rules. The commission has reacted sternly to what it sees as a test of its resolve, warning Bulgaria that submarine pipelines are still subject to EU law and adding that Sofia could face “legal steps”.
The EU’s inflexibility over the third energy package is an obstacle for Gazprom as it needs to arrange financing for South Stream. The first gas supplies are due to be delivered next year. In a sign of its concern, Russia has launched a dispute over the EU’s third energy package at the World Trade Organisation.

“What they are most concerned about is that the EU can sabotage South Stream,” said Jonathan Stern of the Oxford Institute for Energy Studies, who is a member of the EU-Russia Gas Advisory Council. Russia has a key strategic interest in wanting to diversify its exports away from Ukraine. With 63bn cubic metres of planned capacity, South Stream would be able to replace almost entirely the volume of gas that currently transits Ukraine – planned at 70bcm this year,
Earlier this year, Gazprom had been on the point of winning an important exemption to the competition rules to supply extra gas to Germany. Russian officials had hoped that this was a sign that the commission could also be flexible on South Stream. But commission officials now say that decisions on exemptions from the third energy package are on ice for political reasons.

Still, Mr Vassilev said that Russia was likely to pay for South Stream from its own treasury if commercial lenders were deterred by the EU’s stance. He said that Mr Putin would seek to defend the pipeline as “a huge lever”.
“They would use state money to be seen to be in a position to ignore European Commission concerns,” he said.

Europe’s rifts are growing. Italian oil companies Eni and Saipem have important stakes in its construction, although a spur into Italy itself is in doubt. While Hungary has not rallied to defend South Stream as vocally as Bulgaria’s government, Budapest has aligned its energy policy with Moscow more closely this year by granting it a multibillion-dollar nuclear reactor deal. Serbia, which is applying for EU membership, also supports the pipeline.
Ironically, Professor Stern noted that the crisis was likely to make pipelines bypassing Ukraine, such as South Stream, even more important for European energy supplies: “We may be in a situation where we will be accusing Russia of not delivering and preventing them from delivering through these pipelines. It’s a black farce.”

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