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

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

Ukraine's Gas Woes

James Stafford of Oilprice.com 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 Oilprice.com 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,” Oilprice.com, 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.”

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

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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.

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

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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

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.

PAST FAILURE MOTIVATES DEAL

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."

UNDERMINING BRUSSELS

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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Hydrofrenzy: China's Dam Building

The map is a snapshot of an interactive presentation by the China Environment Forum at the Wilson Center in Washington, D.C., under the title "Do China's Dam Plans Hold Water for Low Carbon Development."  A few notes from the Wilson's Center's presentation:

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The country is currently planning to build at least 84 major dams in its southwest regions. This interactive map shows the scale and number of these planned, under construction (33), existing (40), and cancelled (14) major dams. (Click on pins on map to see the information on individual dams.) These and other dams nationwide will increase China’s hydropower capacity to 284 GW—more than that of Europe— by 2015, and 380 GW (more than that of Europe and the United State combined) by 2020. . . .

More than 70 of the dams planned or being constructed are located in areas that Conservation International has identified as biodiversity hotspots. In this particular region, the three parallel rivers—the Nu, Lancang, and Jinsha (upper Mekong, Salween, and Yangtze, respectively)—construct corridors that connect tropical rainforests to the Tibetan Plateau. These corridors—sometimes referred to as climate refugia—allow species to easily migrate to cooler, more suitable climates as temperatures rise, assisting species to more easily adapt to climate change. The cascades of dams, however, will submerge parts of these corridors, dewater tributary river stretches between dam reservoirs, and make them less suitable habitat for many plant and animal species. Reductions in the diversity and overall robustness of ecosystems will in turn negatively impact the human communities that depend on those ecosystems. Moreover, large dams flood large areas of land adjacent to the river, land that is usually highly fertile and valuable to local farmers.

Many of the existing, planned, and under construction dams in China’s southwest lack comprehensive environmental and social impact assessments to fully evaluate their true benefits and costs. Undervaluing ecosystems and their services has resulted in the prioritization of pressing carbon reduction goals in China, while ignoring the significant ecological, social, and economic impacts of these hydropower projects. Notably, Chinese dam developers have often failed to respond to concerns over their build-out’s impact on downstream Southeast Asian countries, by limiting or outright refusing to share data on water and sediment that are critical for understanding how downstream riparian habitats will change. At the same time, developers must be especially attentive to the negative impacts on local communities in southwestern China, who face social and economic challenges after resettlement.

In December 2013, a group of Chinese environmental NGOs released “The ‘Last Report’ on China’s Rivers.” (Read the English executive summary here.) The report is a comprehensive assessment of China’s rivers and the lessons of past unchecked hydropower development. Chinese environmental groups advocate for an urgent determination of ecological redlines for China’s rivers, ambitious promotion of renewable energy, and a major push for ecological conservation legislation. How China can balance hydropower development and ecological protection in the coming years will have far-reaching consequences for China’s sustainable development, the environment for its future generations, and the wellbeing of mainland Southeast Asia. . . .

The map is part of the China Environment Forum-Circle of Blue Choke Point: China initiative. Special thanks to China Rivers Network —and its founder Dr. Yang Yong—and Conversation International for providing data. . . .

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h/t Yale e360 digest
 

South Stream Stutters

As geopolitical tangles go, the controversy over pipelines all along the rim of Eurasia can seem pretty daunting to sort out, but at bottom it is not all that complicated. If you rule out Russia as a source of additional gas for Europe, and you assume that Azerbaijan cannot displace Russia by itself, you are left with the following options: Iran, Kurdistan, and Israel and Cyprus. Turkey is needed as a corridor for any of this, so Turkey's relations with these various nations is an important factor to consider. Turkey's position gives it leverage with each of these actors, an unexpected boon from the Crimean crisis. 

The standoff over Ukraine hovers in the back of this controversy; there too a complicated array of pipeline politics is playing out. The Ukrainians can't pay for the Russian gas and are basically flat broke. The Russians are within their rights in raising prices, but Ukraine can't pay even for cheaper gas, so that is less significant than Ukraine's generally bankrupt finances (hence its inability to service the debt for gas previously consumed, estimated by Russian president Medvedev at $16 billion). If the Russians stop shipments of gas intended for Ukrainian consumption, the Ukrainians would then probably follow suit and suspend transits of Russian gas through Ukraine to Europe. To avoid those tumbling dominoes one would need some kind of diplomatic settlement among Russia, the EU and America, but the prospects for that in the short term look pretty dismal. 

Here's the take of Alexander Panin, "New Sanctions May Freeze South Stream Pipeline," writing in the Moscow Times, April 9, 2014: 
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As the EU presses on with sanctions against Russia for seizing Crimea, the $50 billion South Stream pipeline, meant to bring Russian gas through the Black Sea to Europe, may be frozen in favor of other projects.

The European Union is close to freezing the progress of South Stream and has warned Bulgaria, the first country the pipeline would have a link to in Europe, to be very careful and not to interfere with the EU's new toughened position on the pipeline, said European Commission chief Jose Manuel Barroso, The Daily Telegraph reported Tuesday.

On Thursday, Bulgarian Foreign Minister Kristian Vigenin said in an interview with Reuters that while the standoff between the West and Russia over Ukraine may temporarily disrupt realization of the South Stream gas pipeline, there is no threat to it in the long run.

"Well, generally nobody is putting the project under question, but of course in a time when political relations become more complicated this may affect the speed with which the solutions are to be found," Vigenin said.

While South Stream is still far from receiving all the necessary permits to operate across EU, Guenther Oettinger, the European Commissioner for Energy, earlier said that discussions with Russia on the link were suspended.

South Stream pipeline will transport gas from Russia's Yamal peninsula in the north, across the country to the Black Sea and underneath it to Eastern Europe, bypassing Ukraine.

With a full design capacity projected at 63 billion cubic meters per year, it aims to supply 15 percent of Europe's gas by the end of 2018. Delivery of the first 15 billion cubic meters of gas per year is slated to start already by the end of 2015.

Now, with the standoff over Ukraine, Europe may consider other alternatives. A priority may be switched to gas supplies from Azerbaijan's Shah Deniz gas field, Rosbalt news agency said Tuesday, citing European Commission's Barroso.

But this one gas field will not be enough to meet European demand, said Mikhail Krutikhin, a partner and analyst at consulting firm RusEnergy.

Azerbaijan can supply about 10 billion cubic meters of gas per year, which will clearly not cover up for the South Stream, Krutikhin said, adding that other alternatives, if combined, could create a rival to the widely discussed pipeline.

"Iran is increasing the capacity of its pipelines. It is able to transport 10 billion cubic meters of gas per year to Turkey today and this could be boosted to 20 billion cubic meters and re-exported to Europe," Krutikhin said.

Among other alternatives, he named the Iraqi Kurdistan zone that could supply up to 30 billion cubic meters of gas per year and excess gas from Israel and Cyprus, which could together provide another 12 billion cubic meters.

"If Turkey agrees to become a transit corridor for all this gas, it could fill the Trans Adriatic Pipeline going through Albania to Italy or there could be a return to the Nabucco West project which aimed to transport gas through Turkey to Bulgaria and Romania toward Austria," Krutikhin said.

Nabucco West was abandoned in 2013 because it lacked gas to fill it to design capacity and it was labelled too expensive and lost support from main stakeholders.

At the same time both Nabucco and Trans Adriatic Pipeline would be economically competitive with South Stream, Krutikhin said, because with a price tag of more than $50 billion for all of its sections it is a "very expensive project that is unlikely to pay off."

South Stream's offshore part under the Black Sea is planned to be built by a consortium of international oil and gas companies led by state-owned Gazprom. Other participants are Italy's Eni, France's EDF and Germany's Wintershall. And most of them so far have voiced their support of the project.

A spokesman for Eni said, citing the company CEO Paolo Scaroni, that "South Stream is a very important project from a commercial point of view and we ought to be in favor of it to avoid the risks of transit [of gas] through Ukraine."

Wintershall agreed that the pipeline will ensure security of gas supplies to the EU and also voiced support for the project.

"Construction of the pipeline is on schedule. We are operating on the assumption that the applications required continue to be duly processed by the authorities responsible," the company said in a statement.


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From David Johnson's Russialist.org,, April 9, 2014. 

No Gas Bonanza for Levant

 

I noted earlier Richard Heinberg’s dim forecasts for expanded fracking in Europe, once the expected venue of a geopolitical revolution sparked by energy. Similar hopes have been held out for the Near East. In 2012, Walter Russell Mead heralded the emergence of Israel as an energy superpower, “a tiny nation whose total energy reserves some experts now think could rival or even surpass the fabled oil wealth of Saudi Arabia.” As these extracts from the Economist show, Israel’s political isolation constitutes a serious obstacle to the exploitation of these reserves. The regional situation is unbelievably tangled, but it is likely, argues the Economist, that the governments of the Levant are fooling their people [and probably deluding themselves] with false promises of an offshore gas bonanza.

The sceptics say that the main brake is a lack of regional co-operation rather than a shortage of oil and gas. The Americans’ official Geological Survey estimates that from Gaza’s coast to southern Turkey the eastern Mediterranean holds 122 trillion cubic feet of gas, comparable to the reserves of Iraq. But Lebanon’s caretaker government lacks the authority to pass the legislation needed to persuade foreign oil companies to start drilling; a heralded auction is again likely to be delayed. America’s effort to mediate over a disputed maritime boundary between Lebanon and Israel is stalling progress. The civil war in Syria is scaring away big oil companies. And drilling off the Lebanese coast has yet to begin.

It has done so off Cyprus, but estimates of the amount of gas and oil to be found there have been inflated, too. Delek Drilling and Avner Oil, two Israeli firms involved in exploration, say that Aphrodite, Cyprus’s only proven gasfield, has reserves of just 4.1 trillion cubic feet—barely enough to meet long-term local demand.

Oil companies, including Italy’s Eni and France’s Total, may find more gas there. If not, Cyprus’s LNG venture will depend on getting it from elsewhere, perhaps from Israel’s Leviathan field. In any case, Turkey and Cyprus both claim some of the same stretches of water. The Israelis, for their part, have prevented the Palestinians from developing Gaza Marine, a field off the coast of Gaza where BG (formerly British Gas) found gas a decade ago.

Israel, alone, is romping along. It has verified finds of 35 trillion cubic feet. Noble, an American company that has so far dominated Israel’s production, says that gas from its Tamar field, which began flowing this year, already supplies 45% of the country’s electricity. But development of the much larger Leviathan field, farther west, is slow. Fearing an outcry over the sale of public assets, Israeli ministers have delayed the timetable.

There are other obstacles. Asian buyers, who tend to pay the highest prices, are reluctant for security reasons to ship Israeli gas through the Suez Canal. Turkey, whose energy needs are soaring, might have been an attractive export market for Israel. Construction of a pipeline on the seabed between Turkey and Israel could prove more profitable than an LNG plant, because upfront costs are lower and Turkish gas prices quite high, says Robin Mills, head of consulting at Manaar Energy, an advisory firm in Dubai. But such a pipeline might have to pass through officially recognised Greek Cyprus and the Turkish-ruled north of the island, so an agreement with both would be needed. That will be tricky. An alternative route, under Syrian and Lebanese waters, would be trickier still.

In any case, Israel is loth to strike an export deal with Turkey at a time when that country’s foreign policy has become unpredictable and its prickly prime minister, Recep Tayyip Erdogan, could turn off the tap whenever he feels piqued. An Israel-Cyprus deal could make matters worse. Egypt’s decision to discard a Mubarak-era agreement to supply 40% of Israel’s gas serves as a warning against doing business amid unresolved conflicts. “Without peace with the Palestinians, we can’t sell our gas to Egypt, Jordan, Turkey and—who knows?—maybe even to the Europeans,” says an Israeli former energy minister, Josef Paritzky.

Tangled in red tape and regional disputes, even oil companies in Israel may flag. Woodside Petroleum, an Australian firm with LNG expertise, is still pondering an ambitious plan to build a floating LNG platform. Noble lacks the capacity to go it alone. Few developers will invest without secure long-term contracts. And buyers in Asia, the best market, are banking on getting an alternative deluge of gas from new finds in the United States. Without exports, regional prospects are less sunny. Ploughing billions of dollars into platforms, rigs, offshore pipelines or costly LNG plants is feasible only if drillers are confident of shipping gas to foreign markets.

 

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“Israel’s and Palestine’s Gas and Oil: Too Optimistic?” The Economist, January 25, 2014.

Japan's Growing Fossil Fuel Burden

From Platt's Energy Economist, a tally of the sharply growing costs of Japan's fossil fuel imports, a consequence of the near-total shutdown of the nuclear industry after the accident at Fukushima in 2011. For a time in 2012, no nuclear plant was operating in Japan; since then, a few (of the some fifty reactors) have been restarted. The consequences for Japan have proven quite serious.   

It is no surprise that less than three years after Fukushima, the Japanese government is seeking to rehabilitate the nuclear industry’s role in the country’s generation mix as indicated by comments made by Trade and Industry Minister Toshimitsu Motegi in December. Returning the country’s reactors to operation would have a significant impact on the trade balance, Japan’s over-dependence on imported energy commodities, and power prices.

It is a paradox that nuclear power can be described as both cheap and expensive. The cost of new nuclear power has risen over time and new reactor construction is significantly more expensive than in the past. Combined with the high capital cost and other risks involved it is hard to make the case that it is competitive with fossil fuels. But where the capital cost was sunk decades ago and paid down or written off, the ongoing low fuel costs of nuclear mean existing nuclear fleets do provide low cost and low carbon electricity.

 

Japan is the world’s largest importer of LNG, the second biggest importer of coal and the third largest importer of oil. Having minimal production of any of these three key energy commodities, nuclear power has been essential to offsetting the security and economic implications of such a high degree of import dependency. As a result of much reduced nuclear generation, in 2012, Japan spent $289 billion on net imports of fossil fuels, more than any other country in the world, including China and the United States, according to the Institute for Energy Economics Japan. . . .

Fukushima was a disaster not just in human terms, for the nuclear industry or the finances of the Tokyo Electric Power Company, but for the country and economy as a whole. The increase in fossil fuel imports and the money paid to secure them has outweighed economic growth and gains in income. The situation has been exacerbated by depreciation of the Yen, which has made energy commodity price imports, all priced in US dollars, more expensive in local currency terms.

 Spending on net imports of fossil fuels as a ratio of nominal GDP for Japan is thought to have reached 5.3% in 2013, compared with 3.1% for China and 1.5% in the US. According to the IEEJ’s senior economist Akira Yanagisawa, China’s ratio fell because GDP grew more strongly than the increase in net fossil fuel imports, meaning no additional burden on the economy. But for Japan the opposite was the case, while currency depreciation added one percentage point to the increased burden.

 Bringing the country’s reactors back on line is proving a slow and uncertain process, owing to the new regulatory safeguards put in place in the aftermath of Fukushima. But for commodity markets, the impact will fall entirely on oil rather than LNG or coal.

 According to the IEEJ’s medium-case scenario — 16 reactors back in operation for an average of eight months in the year — oil consumption would fall from a projected 241.8 GL in fiscal 2013 to 220.4 GL in fiscal 2014, a drop of 8.6%. In contrast, natural gas use is expected to continue to rise to a record 91.1 mt in fiscal 2014, while coal consumption will increase to 191.1 mt. Even with final energy consumption falling by 0.4%, Japan’s natural gas and coal usage are expected to breach new historic highs. As such, Japan has little choice but to revert to nuclear energy.

 

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Ross McCracken, “The burden that Japan is facing in its higher energy costs,” Platt’s Energy Economist, January 24, 2014. Via Barrel Blog.

Major Shakeout in Iraq

This piece by Guy Chazan, part of a retrospective at the Financial Times on Iraq ten years after the American invasion, offers a fascinating look at the dashed expectations attending the Iraqi oil industry. By contrast with the heady expectations of Cheney and company in 2003, “American companies are now almost absent from the Iraqi upstream scene.” Forced to choose between Iraq and Kurdistan, Exxon seems to have thrown in with the Kurds. China, led by its state oil companies, has a big and growing presence in Iraq, forming a new trade axis between Baghdad and Beijing. The Iraqis have brought down estimates of future production from 12 to 9 mbd by 2017-2020, still quite optimistic in a country that presents “the toughest environment” in the world for oil companies.    

When Iraq held its first postwar oil licensing round in June 2009, groups like ExxonMobil, Royal Dutch Shell and BP flocked to Baghdad for what was one of the most eagerly anticipated events in the oil industry calendar. At the fourth round last May, none of them bid. The poor attendance epitomises a general disenchantment with Iraq’s oil sector. The country was once the hottest ticket in global energy. But the widely predicted bonanza for western oil companies in postwar Iraq has failed to materialise.

Political instability, poor contractual terms and infrastructure bottlenecks have sharply reduced the country’s appeal to Big Oil. Many companies have shifted their attention from the south to the semi-autonomous Kurdistan region, angering Baghdad. “Iraq is the toughest environment we operate in,” says the chief executive of a big western oil company. “And it will be tough for many years to come.”

It is an ironic outcome. When US troops invaded Iraq 10 years ago, conspiracy theorists predicted that American oil companies would immediately seize control of the country’s vast oilfields. “People say that the Iraq war was fought over oil,” says Robin Mills of Dubai-based Manaar Energy Consulting. “But American companies are now almost absent from the Iraqi upstream scene.”

With the fifth-largest proven oil reserves in the world, easy geology and low production costs, Iraq was expected to become a hotspot of global oil investment. The victorious Americans set out a blueprint for rehabilitating vast oilfields and raising production from about 1.5m b/d in 2003. Investment poured in. In August, Iraq overtook Iran to become Opec’s second-largest oil producer, for the first time since the late 1980s, pumping more than 3m barrels a day – the highest level since the US-led invasion.

But the business climate has soured. Political volatility, fears about security and problems with infrastructure, including a lack of pipelines, pumping stations and oil storage facilities, have slowed the oil sector’s recovery. Iraq is now talking about increasing production capacity to around 9m barrels a day by 2017-20, sharply down from an earlier target of 12m b/d.

“Iraq is still nowhere near achieving its potential, considering the resources that it has,” says Raad Alkadiri of PFC Energy, a consultancy. “The Iraqi oil industry has always been bedevilled by politics.” The country has yet to pass a hydrocarbon law, first mooted in 2007, which would resolve who controls its oil and gas resources.

One part of Iraq that has retained – and even increased – its appeal for western energy groups however is Iraqi Kurdistan, a semi-autonomous region that has run its own affairs for about 20 years. The Kurdish regional government (KRG) has signed 50 deals with foreign oil companies, including Exxon, Chevron, Total SA and Russia’s Gazprom Neft. Officials there want to raise production from about 200,000 barrels a day now to 1m b/d by 2015.

The production-sharing contracts offered by Kurdistan are more generous to the majors than the technical service contracts on offer in southern Iraq, where oil companies earn a flat fee per barrel of oil produced and the lion’s share of earnings goes to the government.

But Baghdad considers the Kurdish deals illegal and refuses to pay oil companies operating in Kurdistan their share of export revenues. In retaliation, the KRG has stopped oil exports through Iraq’s main pipeline. Baghdad has told oil companies they can work either in the south or in Kurdistan, but not in both. Faced with that choice, Exxon decided last year to sell its stake in the $50bn West Qurna-1 oil project.

People close to the two sides say Baghdad might be open to sweetening the terms of Exxon’s contract in order to keep the company in Iraq. In January, Rex Tillerson, Exxon’s chief executive, met Nouri al-Maliki, the Iraqi prime minister, in Baghdad. But there are still no signs of a breakthrough.

Other western companies have found Iraq tough going. Statoil, the Norwegian company, quit the country last year in frustration.

But state oil companies have flourished. Of these, the Chinese are the most prominent: CNPC is a partner in the BP-led consortium developing Rumaila, one of the largest Iraqi oilfields, and also operates the Ahdab field. PetroChina operates Halfaya and Cnooc the Missan group of fields.

According to the International Energy Agency, a quarter of Iraqi oil, about 2m barrels a day, will be heading for China by 2035. “A new trade axis is being formed between Baghdad and Beijing,” said Fatih Birol, the IEA’s chief economist.

Analysts say state companies are much less likely than the oil majors to be deterred by low fees and low returns: for them, the key is access to Iraq’s hydrocarbon resources, and the off-take deals that allow them to export crude.

But ultimately, the winner of the past decade has been the Iraqi state. The IEA predicts Baghdad stands to gain almost $5tn in revenues from oil exports to 2035 – offering a “transformative opportunity” for the economy.

“It has secured a tremendous amount of investment and international help to develop its energy sector while giving away very little,” says PFC Energy’s Mr Alkadiri. “The Iraqis are well and truly in control of their own oil industry.” 

Guy Chazan, “Iraq’s appeal wanes for oil majors,” Financial Times, March 17, 2013

See also on the shifting estimates for Iraq's production my earlier posts of May 14, 2011 and March 2, 2011.  

"Give Us 24-Hour Electricity"

From the Gulf Times:

Protests against chronic power shortages spread to Yangon late Tuesday, . . . following rallies in Myanmar’s second city Mandalay which saw several opposition party members briefly held by police.

People in the country formerly known as Burma are testing the boundaries of their freedom under the quasi-civilian government which took power last year after the end of decades of outright military rule.

Two short but noisy demonstrations involving a total of 150 people took place in front of Sule Pagoda in the heart of Yangon, the focus of uprisings in 1988 and 2007 which were brutally crushed by the military.

Activists and former political prisoners at the second—and larger—of the protests shouted “give us 24-hour electricity” for around 10 minutes before the crowd dispersed on the police’s request, a reporter said.

Myanmar suffers crippling power cuts, with six hour blackouts commonplace in Yangon and outages three times as long in Mandalay, where around 1,500 people on Monday protested as news of the rallies spread on Facebook. “We can’t have a good quality of life without electricity, which is the basis for development of the country,” said 21-year-old protester Shew Yee in Yangon. . . .

AFP: "Myanmar Power Shortage Protests 'Spreads to Yangon,'" via Energy Shortage.

Free-Flowing Rivers in Global Decline

The greenish line in the following chart shows trends in the number of global free-flowing rivers greater than 1,000 kilometers in length. The number has declined from 160 in 1900 to approximately 60 today and is projected to fall further to 2020.

The bars in the chart show the number of big rivers damned in each decade of the last century. Notable is the big surge in the decades after World War II and the revival projected over the next decade.

The chart comes from a 2006 report by the World Wildlife Fund, from which Desdemona Despair provides a few excerpts:

The rapid development of water management infrastructure – such as dams, dykes, levees, and diversion channels – has left very few rivers entirely free flowing. Of the approximately 177 rivers greater than 1,000 kilometers in length, only around a third remain free-flowing and without dams on their main channel.

While clearly this infrastructure provides benefits at one level, such as hydropower or irrigation, there is often a hidden cost to aquatic ecosystems and the wider ecosystem services that they provide. In order to sustain the wealth of natural processes provided by freshwater ecosystems – such as sediment transport and nutrient delivery, which are vital to farmers in floodplains and deltas; migratory connectivity, vital to inland fisheries; and flood storage, vital to downstream cities – it is imperative to appreciate the importance of free flowing rivers, and developing infrastructure with a basin-wide vision.

Grand Renaissance for Ethiopia, Doom for Egypt

Conflict over water supplies between “upstream” and “downstream” states is emerging as a vital incubator of international conflict. Though control over water has long played an important role in domestic and international politics, increasing population pressures have made for growing conflicts over this vital resource, indispensable to agriculture, energy, and industry.

Turkey’s diversion of water from the tributaries of the Tigris and the Euphrates, at the expense of Syrians and Iraqis; Israel’s diversion of water to its West Bank settlers, and away from the Arab population; China’s increasing mobilization of the waters of the Tibetan plateau, to the detriment of downstream nations such as Vietnam and India—all these reflect intractable conflicts that seem likely to grow in importance in future years.  

Ethiopian’s announcement that it intended to build the “Grand Renaissance” dam on the waters of the Blue Nile is another illustration of these polarizing conflicts. The dispute between Egypt and Ethiopia, among other upstream states, is highlighted in a series of reports by Erin Cunningham of Reuters. It is difficult to see the dispute as anything other than a “zero sum” game, with one side losing what the other side gains; certainly that is how the parties themselves seem to see it. Also notable is how larger geopolitical changes are affecting this issue—Cunningham points especially to China’s willingness to finance Ethiopia’s new dam, shocking to Egypt, and Egypt’s loosening of ties with the United States and the international financial institutions. These external supports previously buttressed Egypt’s historic claims to the Nile.

Until now, Ethiopia has lacked both the technical capacity and the diplomatic support to trap its Blue Nile waters — which give Egypt’s Nile 86 percent of its own flow — for domestic use. A 1959 colonial-era treaty brokered by Great Britain gave Egypt, and to a lesser extent Sudan, unrivaled “historic rights” over nearly all of the Nile River’s resources.

But now all that could be changing as upstream states like Ethiopia and Burundi seize on Egypt’s post-revolution political uncertainty to finally wrest at least some control of the world’s longest river.

Just 16 days after President Hosni Mubarak stepped down in February 2011, Burundi reneged on its erstwhile promise to Egypt not to sign a new treaty that seeks to adjust water rights in the basin. If ratified by other basin states, the agreement would strip Egypt of its majority share of the river’s water.

The most serious threat, however, comes from Ethiopia, already Egypt’s regional rival. In May 2011, Ethiopia announced plans to build a massive, $4.8 billion hydropower dam — known as the Grand Renaissance Dam — along the stretch of river within its own borders, despite Egypt’s opposition to the project. “Most of us here are eager to use the Nile. But every farmer expects Egypt to be the enemy,” said Manichey Abey, a 33-year-old Ethiopian farmer.

While hydropower dams — used to generate electricity — in theory eventually allow the dammed water to flow through, Egyptian officials remain wary of Ethiopia’s intentions. They demanded in October of last year the creation of a tripartite committee, now at work, to study the new dam’s effects and are worried the project could set an unwelcome precedent for more ambitious schemes in the future.

At 6,000 megawatts, the dam would be the largest hydroelectric power plant in Africa, with a reservoir capable of holding roughly 65 billion cubic meters of water. “It will be a renaissance for the Ethiopian system,” Abey said. “The Nile is the main source of Egypt’s economy, and if the amount of water they use is reduced, it will be a big problem. But we have the right to use it.”

Such ambitions by upstream states are contributing to the gradual loosening of Egypt’s 5,000-year grip on its nearly sole source of freshwater, threatening not only the desert nation’s ability to grow enough food for its expanding population, but also its political stability and regional hegemony.

Egypt’s uprising ushered in a period of political and monetary volatility, stalling the economy, shaking up relations with the US and kicking off a year of sporadic protests and clashes between protesters and Egyptian security forces.

All of this has diminished the Egyptian government’s traditional ability to stonewall both financing and diplomatic support for independent Nile Basin projects. “Ninety-five percent of Egypt’s water comes from the Nile. We depend on the Nile more than any other country,” said Hani Raslan, an expert on water politics at the government-affiliated Al-Ahram Center for Political Strategic Studies in Cairo. “But right now, the [Egyptian] government is only a transitional government,” he said. “It has nothing to do with the long-term plan for the Nile, and is only paying attention to our internal affairs.”

The importance of the Nile to Egypt is hard to exaggerate. Like a slender, green thread, the waterway fastens Upper Egypt in the south to Lower Egypt in the north, and has nurtured agricultural civilizations in its verdant Delta for millennia.

As a result, and also because of significant US financial and military patronage over the years, Egypt has long been able to dominate the terms of Nile basin negotiations, thwarting independent water projects by other countries and manipulating international customary water law to maintain the status quo, water experts said.

“Egypt did have, until fairly recently, some kind of ideological hegemony [in the Nile Basin],” said Richard Tutwiler, director of the Desert Development Center at the American University in Cairo, a research facility aimed at serving Egypt’s desert communities. “They were able to frame the entire issue of Nile waters in their own context, both within the basin, but more importantly outside the basin and in international forums and so forth,” he said.

For years, Egypt also skillfully influenced international financial institutions such as the African Development Bank and World Bank to sustain its outsized water quota, says Christine Anderson, former associate professor of international water law at the American University in Cairo. “The UN moved on to an international water law treaty standard incorporating equitable distribution [of water resources],” Anderson said. “But the IMF and World Bank … upheld their regional alliance structures in Egypt’s favor … thus preventing any forward movement for the rest of the Nile states.”

Since Egypt’s revolution, however, its new rulers have made decisions that run afoul of the organizations that once helped it maintain its control over the Nile. Last spring, for instance, Egypt’s headstrong military rulers scoffed at the International Monetary Fund’s offer of a $3.2 billion loan package — only to later backtrack and ask again for the funds. They also brazenly put American democracy activists and their Egyptian colleagues on trial for attempting to subvert the state, souring relations with the US, the IMF’s largest stakeholder.

Analysts say Western donors are wary, and that the Egyptian government’s erratic behavior may temper support for its Nile dominance in the future.

In addition, Anderson said, China’s willingness to finance a number of Ethiopia’s dams, including the new Grand Renaissance Dam, has startled Egyptian officials, and indicates a potential new regional order in which US largesse may no longer secure Egypt’s place as the Nile Basin’s most powerful state.

Egyptian officials, for their part, remain defiant.

“Egypt has been asking these countries to come together so we can reach an agreement on the Nile,” said Al Ahram’s Raslan, adding that because Egypt receives negligible rainfall, its water quota should remain the same under any new agreement. “But no one is responding to Egypt’s call. These countries, especially Ethiopia, are making a grave mistake,” he said. “Because Egypt is not a weak country. If it was ever in real peril, it won’t be silent.”

Erin Cunningham, “Egypt is Losing its Grip on the Nile,” Global Post, April 9, 2012. See also by Cunningham, “Could Egypt Run Out of Water by 2025?” Global Post, April 9, 2012.

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A more hopeful analysis of the situation comes in this January 10, 2011 report from the Stimson Center, written just before the outbreak of the Egyptian Revolution (and before the May 2011 announcement that Ethiopia intended to build the Grand Renaissance Dam). It gives a good depiction of the legal regime surrounding the Nile and provides an interesting perspective on Egypt's water diplomacy before the fall of the Mubarak regime. Somewhat incongruously in light of Cunningham's report, however, it emphasizes the "cooperative dynamic between basin states" and argues that, "belligerent as the rhetoric can get, these states understand that water is a means for greater cooperation."

The famous Egyptian Nile only comprises the last stretch of an enormous, complex river system. 86% of the Nile's flows come from the Blue Nile, Atbara, and Sobat rivers (these rivers primarily originate in Ethiopia, but also cover parts of Eritrea and Sudan), while the other 14% of the Nile's flows come from the White Nile, a sub-basin that includes Burundi, Rwanda, Tanzania, Kenya, Uganda, the Democratic Republic of Congo, and Sudan. These rivers merge north of Khartoum to form the proper Nile River.

These ten countries rely significantly on Nile waters: 22 million people depend on fish protein from the source of the White Nile, Lake Victoria; half of the Nile's journey through the basin takes place in countries with no effective rainfall, making them overwhelmingly reliant on these rivers for every aspect of daily life; and Nile waters drive hydroelectricity for some of the poorest countries in the world.

Despite such wide-ranging dependence on Nile waters, only Egypt and Sudan are legally entitled to dam the rivers. This disparity stems from a series of agreements brokered by the British between 1929 and 1959: Egypt was allotted the annual use of 55.5 billion m3 of Nile waters while Sudan was given 18.5 billion m3. But these treaties have strained relations in the greater basin for over 50 years, especially between Egypt and Ethiopia (Ethiopia, a severely underdeveloped country, has enormous potential for generating hydropower). In 1994, when Ethiopia announced plans to build dams on the Blue Nile, Egyptian President Hosni Mubarak threatened to bomb Ethiopian dam infrastructure and in 1990 Egypt successfully blocked an African Development Bank loan to Ethiopia for dam construction on the Nile.

In response to increasing complaints of inequity, the World Bank in 1999 sponsored the creation of the Nile Basin Initiative (NBI), an effort to foster economic cooperation and establish a permanent governing body for the river. But discord over the Nile treaties has continued, and arguments peaked this past summer when the parties of the NBI met to discuss a draft version of the Cooperative Framework Agreement (CFA), a document intended to establish laws and infrastructure to govern the Nile. Negotiators could not agree on terminology that would both satisfy the Egyptians and Sudanese and placate the other states which seek greater use of the Nile. Sudanese and Egyptian spokesmen claimed their historical rights were being threatened and only five states ultimately signed the CFA.

NBI negotiations currently treat the basin as a single integrated whole, allowing Egypt to frame the dispute in zero-sum terms. But the NBI's need for basin-wide consensus and its failure to attain that consensus has given individual states free reign to undertake harmful unilateral projects. For example, due to a lack of coordination and monitoring in the basin, Uganda was allowed to mismanage Lake Victoria to the point where lake levels dropped dramatically and harmed fisheries vital to the livelihoods of millions of people.

So what is the best way forward? The NBI is set to expire in 2012, and basin states will reconvene later this year to re-try a settlement. But it seems unlikely that a deal that will be acceptable to all states will have much substance to it. Egypt is already scrambling to accommodate its ballooning population and resulting water scarcity. Northern Sudan is becoming a strong agricultural producer and hopes Nile water will help the country develop further. Meanwhile, the remaining basin states are some of the least-developed in the world and hope that using hydropower (and selling excess power that their grids can't handle) as well as reservoirs for irrigation will provide much-needed revenue.

Rather than treating the basin as a single, integrated system (which invites too much political deadlock), Nile states and donors should emphasize more smaller-scale, sub-basin approaches to river management. This way, states can improve information-sharing and allow scientific and technical issues to take precedent over political distractions.

Indeed, the NBI already separates basin states into two sub-basin programs-the Eastern and Nile Equatorial Lakes programs-and this approach can help to promote better technical coordination between states. In addition, sub-regional programs should be strengthened so that basin states and donors can more effectively monitor and prevent environmental catastrophes. The egregious mismanagement of Lake Victoria is less likely to happen again if Uganda believes it is accountable to (and can be punished by) neighbors in its sub-region-Tanzania, Kenya, Burundi, and Rwanda-that would be the worst-affected by such mismanagement.

The NBI needs to effect these changes if it hopes to remain relevant. Egypt, knowing that it wouldn't be punished, worked hard in 2010 to circumvent the NBI altogether: it made bilateral agreements with individual states, including with Uganda and southern Sudan (which, should it secede, will have control over White Nile flows). Egyptian officials have also emphasized that their investments in Ethiopia surpassed $1 billion for 2010. Ethiopia in fact recently opened a $520 million hydroelectric plant that uses Lake Tana as a reservoir (and thus is not disrupting Abay/Blue Nile flows) and Ethiopia is reportedly in talks with Egypt and Sudan about building more dams.

These non-NBI agreements are both dispiriting and heartening. Dispiriting because Egypt has not only stymied progress on intra-basin cooperation, but is also content to ignore the spirit of the NBI by pushing for a strictly bilateral approach to the basin. But these developments are heartening, too, since they reveal a cooperative dynamic between basin states. Armed conflict has not arisen over the Nile in the modern era, and belligerent as the rhetoric can get, these states understand that water is a means for greater cooperation.

As basin representatives and NBI donors come together in 2011 to try and make real progress on Nile management, they will need to take a hard look at the current structure of the NBI. Improving information sharing and other forms of scientific and technical cooperation are crucial to the sustainability of the river, as is creating viable accountability mechanisms that favor long-term sustainability over short-term benefits. The disagreements of ten heads of state cannot compromise a resource that is crucial to 160 million people, and it is imperative that no more time is lost in finding better ways to protect the Nile.

Corey Sobel, "Negotiating the Nile: The NBI Impasse and Possible Ways Forward," Stimson Center, January 10, 2011

4/30/12