The Weekly Wrap: April 15, 2011

TNK-BP: Clutch play by Dudley puts momentum back with BP? Counter-intuitively, the momentum may have shifted back to BP in its latest high-wire negotiations in Russia. BP’s Bob Dudley (pictured above), attempting to turn around the company’s fortunes after the costly Gulf of Mexico oil spill a year ago, in January dived into a highly tenuous tie-up with Russia’s state-owned Rosneft, with whom it hoped to explore the oil-rich Arctic Sea. The tenuous part came because BP’s long-time Russian partners, the grouping of four oligarchs known as AAR, blocked the partnership through tribunal rulings in Europe. As late as yesterday, BP and Dudley seemed to be in deep trouble — BP had offered to buy out AAR’s 50 percent of their Russia-based partnership for $27 billion; AAR apparently counter-offered with an ask of $35 billion, part of which would be paid through 10 percent share holdings of both BP and Rosneft. Dudley balked at the shareholding part, and possibly the money too. But just when hope seemed lost, Dudley got Rosneft to extend what had been a drop-dead deadline yesterday for completing their tie-up. Now BP has until this time next month.

Now a curious thing has happened. In a statement issued today, AAR CEO Stan Polovets advises BP to find a way to honor their partnership agreement faithfully. "We trust that BP will use the extension it has got from Rosneft to ensure that both the Arctic opportunity and the share swap are pursued through a structure consistent with BP’s obligations under the TNK-BP shareholder agreement," he said. It’s curious because Polovets said almost the identical thing yesterday.

If one is in the catbird seat, one generally  remains sphinx-like. Hence, the signal that AAR is a bit uncertain. BP now has time to turn the tables. Chris Weafer, an analyst at UralSib, thinks that the long time extension suggests that the Kremlin intervened at the last minute to keep the deal alive.

Even if he was miserly with the cash — $35 billion does not seem like too much money for the unlisted company — Dudley was right to refuse AAR’s share demands. He would be a fool to hand over 10 percent of BP — and hence a board seat — to the litigious and shark-like AAR, who have shown over the last 15 years a zest for a bloody brawl. Nothing personal, of course.

Should the shale gas tent be folded up? If Cornell Professor Robert Howarth and a couple of his colleagues are correct, there is precious little hope — very close to none — of getting greenhouse gas emissions under control and preventing some of the less-pleasant repercussions of  climate change. This week, the Howarth team published a paper disputing one of the main assumptions accompanying the U.S. boom in shale gas drilling — that it is a positive development because natural gas emits half the greenhouse gases of coal, and a third less than oil. Gas, it has been said here and elsewhere, is a "bridge fuel" until an as-yet undetermined non-fossil fuel technology is scaled up to propel the global economy along with the world’s private vehicles. But Howarth says that, when one takes into account the methane released during shale gas production, coal in fact comes out cleaner. Given the hoopla surrounding shale gas, Howarth’s paper has attracted much attention, including prominent display in the New York Times. But is he right?

Over at the Council on Foreign Relations, Michael Levi isn’t so sure. There is no dispute regarding the hazards of methane — this gas is pernicious. But Levi takes Howarth to task for relying on "isolated cases reported in industry magazines" along with the performance of notoriously bad Russian pipelines for his conclusions regarding how much methane escapes into the atmosphere during hydraulic fracturing, the method by which shale gas is extracted. Levi is at his most brutal in an apparent scientific gaffe — Howarth used comparative gigajoules in order to measure the methane emissions of shale gas against those of coal. The problem is that gas produces a lot more electricity than coal gigajoule-by-gigajoule, something that Howarth doesn’t take account of. For that reason, Levi favors kilowatt-hours for comparison purposes, and regards Howarth’s failure to do so as "an unforgivable methodological flaw; correcting for it strongly tilts Howarth’s calculations back toward gas, even if you accept everything else he says." Ouch.

Howarth explicitly states his data are thin and that more research is necessary — methane is under-examined.  Levi agrees with him there.

Here is where we return to one of the industry’s own big failures to get out in front, figure out its weak points before critics do, and fix them. We have previously suggested that the error-prone shale gas industry ought to police itself, put peer pressure on its own bad actors to straighten up, and openly disclose the content of its fracking fluid. Now a new front has opened up. It could be too late to recover entirely — the industry is headed for serious federal regulation, the very thing it has sought to avert.

Read on for more of the Wrap

Was Saudi Arabia fibbing? When oil prices began rising on the halt to Libyan supplies, Saudi Arabians responded by quietly informing industry opinion-makers around the world that the kingdom was on the case — it was raising production to compensate for the loss of Libya’s 1.1 million barrels a day of exports. Specifically, it was producing above 9 million barrels of oil a day, a serious tick up from the previous approximately 8.6 million barrels a day.

This blog earlier cited suspicions that there in fact was no Libyan link to this increase by the typically secretive Saudis — that Saudi production in face rose over 9 million barrels a day in October, or four months before the kingdom began talking about it, largely because of domestic electricity demand.  Now David Blair at the Financial Times, quoting the International Energy Agency, reports that in fact the Saudi fibbing may have been a bit more basic: Saudi production may never have crossed the 9-million-barrel-a-day mark at all. The Saudis in fact may have had the willingness to increase supplies, but did not find takers for more of their heavy crude. Hence their production went up to 8.9 million barrels a day, and now appears to have dropped below that level.

Speculation was behind the runup: In 2008, when one would suggest that oil traders were principally behind the crude price runup to $147 a barrel, wise old hands among the analysts would gaze on you sorrowfully — "the man simply doesn’t get it," this gaze would say.  I have been getting similar grief during the current rush of prices past $100 a barrel, $110 a barrel — and $120 a barrel when you talk about Brent, the widely traded European-blend. I see fundamental reasons for the runup to be sure — fear of Saudi unrest in particular, and a narrowing of spare production capacity. But the way trading works is that the folks in the casino look at the fundamentals, then rev up the party machine, and before you know it, the oil price has gyrated.

Evidence for the casino theory came this week from none other than the granddaddy of the traders, Goldman Sachs. On Tuesday, the investment bank issued a note of advice to clients to lessen their investments in commodities of all types, including oil. Lo and behold, the oil price runup halted, and began a skid that has yet to abate. The momentum is out of the runup — at least for now.

Wise old hands: Mind averting that gaze?