The Oil and the Glory

The Weekly Wrap — June 15, 2012

The Weekly Wrap — June 15, 2012

Oil king Venezuela? Is Saudi Arabia’s mere possession of much oil the central reason it is the most pivotal energy player on the planet? Observed through the prism of Venezuela, the answer is no. BP’s 2012 Statistical Review of World Energy, the bible of the energy industry, was released this week, and makes official something that OPEC asserted months ago — Venezuela has surpassed Saudi, and become the world’s largest reserve of oil. With 296 billion barrels, Venezuela has 18 percent of the oil on the planet; Saudi Arabia, with 265 billion barrels, has 16 percent (Canada’s 175 billion barrels make it third, with 11 percent of the global total). Yet, oil is one sphere where possession is not nine-tenths of the law. Saudi Arabia remains king because of what it does and, more important, can do with its oil. For starters, the Saudis are the world’s biggest oil exporters (10.1 million barrels a day in April); Venezuela exported 2.1 million barrels of oil a day, the seventh in rank, according to OPEC. But the more salient factor is Saudi’s residual capability — it is the sole country able to add meaningful daily volumes to global production in a pinch; Venezuela’s spare production capacity is effectively zero. And that factor — spare capacity — is pivotal in the stability, or lack of, in global energy. When the world knows that there is oil to be had regardless of what calamity ensues, it can go and worry about other matters. Conversely, when spare oil production capacity becomes razor-thin, the world fixates on petroleum; prices go through the roof. Conclusion: Little sleep was lost this week in the kingly palaces of Saudi Arabia.

Go to the Jump for the rest of the Wrap.

AWOL in Mexico: As this blog has discussed, we appear to be on the cusp of an oil and natural gas boom so massive that it is disrupting geopolitics around the world. The Athabasca Oil Sands in Canada, the Bakken Formation in North Dakota and the ultra-deepwaters of the Gulf of Mexico seem about to spearhead a North American fossil fuels bonanza, at least if drilling advocates have their way. Angola, Brazil and French Guiana are all the scenes of massive gushers. But one country is noticeably absent: Mexico. Where is this former global oil power in all the action? And can it get back in?

Mexico used to be a backbone of non-OPEC oil. Powered by the super-giant offshore Cantarell field, it became a principal supplier of oil to the U.S., and contributed to the industry glut of the early 1980s. Today, Mexico is still the world’s seventh-largest oil producer — ahead of Brazil, Nigeria and Venezuela. But crude oil production has fallen off a steep 25 percent in the last eight years — to 2.5 million barrels a day from 3.4 million barrels a day in 2004. At the same time, Mexicans are consuming much more of their own oil. Within a decade, Mexico could be a net oil importer, according to a report by the James Baker Institute. That could hobble the country’s economic growth.

The problem is not that the country has run out. Geologically speaking, there’s plenty to be excited about, particularly off-shore in the Gulf of Mexico, where Pemex, the state oil company, estimates there are 29 billion oil equivalent barrels. The issue is years of bad law, and the conversion of Pemex into a milking cow for political patronage and government revenue. Even if Pemex discovers a humongous new Gulf field, the Mexican constitution forbids it from sharing ownership of the hydrocarbons with foreign companies, which have the necessary know-how but seek such profit incentive in high-risk projects. Companies behind the booms in Brazil, Canada and the United States enjoy such profit rights (Mexico will award new contracts for oilfield development in the current, more constrained fashion next Tuesday). As for Pemex itself, it is so bloated and hobbled by patronage-induced expenses that next to it, the hollowed-out PDVSA of Hugo Chavez’ Venezuela can look like a sleek and disciplined operation.

Stephen Johnson of the Center for Strategic and International Studies calls for a housecleaning. "In a private corporation, revenues would be reinvested in field maintenance and exploration leading to greater productivity," he told us. In order to set things right, "the constitution should be amended, Pemex taken out of the government budget, and the company should be run like a for-profit enterprise that pays [only] its fair share of taxes." Johnson said:

Then its executives could make decisions on the basis of what’s good for the company and its mission, versus what’s needed to fund the government.

Are such changes in the cards? One indication will be who wins July 1 presidential elections. The leading candidate, Enrique Pena Nieto, supports a constitutional change and structural reforms that could allow reserve-sharing joint-venture deals with foreign companies. So too does competitor Josefina Vazquez Mota. The leftist candidate, Andres Manuel Lopez Obrador, vows to keep Pemex largely as is. Yet even under Pena Nieto, we may not be talking wholesale reform. The PRI, his party, is reliant on organized labor, especially the oil union, which is embedded in Pemex, and likely to block any shift that could jeopardize its perks and perch.

The historical naval fueling squabble: In 1911, Winston Churchill famously decided that as a strategic matter, the British Navy would convert from coal to an oil-burning fleet, a shift that historians regard as crucial in the victory over the Central Powers a few years hence. A century later, a new strategic battle is raging over how to power the U.S. Navy: Regarding oil as their Achilles Heel, senior naval leaders want to create a biofuel-driven "Great Green Fleet." But Republicans are united in barring the Navy from buying biofuels. As in Churchill’s day, it is a battle over who writes the future.

The squabble comes late in the U.S. military’s embrace of fossil fuel alternatives: The Pentagon’s plans for renewables go back to the George W. Bush Administration. By 2020, the Navy wants to power half its ships with renewable fuels; the Pentagon as a whole aims to source 25 percent of its energy from renewables by 2025. The rationale is national security — serving and retired senior officers say oil costs too much, is too subject to abrupt price fluctuations, requires the expensive protection of shipping lanes, and tends to put money into the pockets of detestable foreign leaders. Then there is climate change — a rising tide may lift all boats, but the military worries that it may also increase the potential for disruptive global calamity.

Opponents do not quibble with any of that. Instead, they oppose using the military for the incubation of a biofuels industry, which is what is clearly happening: Were it not for the Pentagon, much of the experimental U.S. push for non-fossil fuel liquids would be dead. The renewables industry, says critic John McCain, the Republican senator from Arizona, "is not a core defense need and should be left to the Department of Energy … or to the private sector to take the lead."

McCain is entitled to his opinion. But successive senior military leaders through Republican and Democratic administrations disagree — they say renewables are a definitive defense priority, and if a robust biofuels industry results as a byproduct, so be it. They cite voluminous reports demonstrating the outsized occurrence of combat death and injury to soldiers guarding lengthy military fuel convoys in Iraq and Afghanistan. As to McCain’s point about private industry, the military’s centrality to once-experimental-now-essential technologies is so well-known, it verges on cliché (the Internet, GPS, semiconductors, etc. etc. See Fred Kaplan’s list of the original prices of some of these technologies.). Indeed, though McCain no doubt would vociferously protest, his own critics might argue that his position is dreadfully bad economic policy.

The real issue is that some politicians simply don’t buy into renewables as a worthy public policy priority. Often, the same public servants back government support for the much-heralded North American oil boom (the Republican action allows the Navy to buy alternative fuels if they are made from fossil fuels, reports Wired magazine’s Danger Room). Retired officers backing the Navy’s plan say such folks are guilty of backward thinking. A group of them has been traveling the country as part of Operation Free, a campaign sponsored by the center-left Truman National Security Project. "This goes to the core of military history — no power succeeds by saying, ‘Let’s just keep doing it the way we’re doing it,’" Operation Free’s Ben Lowe told us.

The case of Matt Bryza: Matthew Bryza, until recently the U.S. ambassador to Azerbaijan, is back in the news, this time for allegedly crossing the line and joining the board of a Turkish oil company partly owned by the Azerbaijan state. The origin of this reporting — most prominent in the Huffington Post, and also at Registan.net — is an announcement a week ago of Bryza’s appointment to the board of Istanbul’s Turcas Petroleum. The appointment news is accurate. The rest of the reporting appears to be wrong, according to a check of the Turcas website and an email chat with Bryza.

Turcas is a publicly traded refining and fuel-distribution company with significant partnerships with Shell and RWE, the German utility company. The June 7 announcement of Bryza’s board appointment triggered a flurry of angry stories (such as this one), primarily on Armenian websites. That is unsurprising, since in our most recent episode of Matt Bryza’s life, U.S.-based Armenian groups had successfully blocked his permanent appointment as ambassador to Azerbaijan; in January, Bryza quit the State Department, and moved to Turkey, the birthplace of his wife, Zeyno Baran. We have previously discussed Bryza (here, here and here), and I last saw him in Baku about a year ago. He has a long (since about 1997) history dealing with the Caucasus, and Azerbaijan in particular, first as sherpa to Richard Morningstar, and later a director on the National Security Council, and a deputy assistant secretary of state, before his 1-year recess appointment as ambassador to Baku in 2011. In addition to consulting, Bryza is head of an Estonia-based think tank.

The apparent truth is that until December, Turcas and Socar, the Azeri state oil company, were partners in a joint-venture refining company, according to the Turcas website. In December, Turcas sold its share of the company to Socar. Today, Turcas and Socar are partners in a single refinery known as STAR. In an email exchange, Bryza told me that neither Turcas nor Socar exerts control over the other, and that his appointment is rooted in a long, direct relationship with its chairman, Erdal Aksoy. He said:

Erdal Aksoy and I have known each other for 14 years. He, his wife, and two brothers attended Zeyno’s and my wedding, and are neighbors of Zeyno’s mom. I’ve admired the Aksoys as examples of how to do business the right way in Turkey. I’m certainly benefiting as much from their mentoring as Turcas is obtaining from my strategic advice.