The Oil and the Glory

The Weekly Wrap: May 28, 2011

The dictator’s playbook: You are a cosseted dictator in the world’s most strategic place — the hydrocarbon engine of the global economy — but then a vegetable-seller sets himself on fire, and your life is suddenly upside down. How do you manage in this state of upheaval known as the Arab Spring? The response of ...

Ahmad Gharabli  AFP/Getty Images
Ahmad Gharabli AFP/Getty Images

The dictator’s playbook: You are a cosseted dictator in the world’s most strategic place — the hydrocarbon engine of the global economy — but then a vegetable-seller sets himself on fire, and your life is suddenly upside down. How do you manage in this state of upheaval known as the Arab Spring? The response of the Middle East’s king of kings — Saudi Arabia’s Abdullah — is an attempt to stabilize not just himself, but the entire edifice of long-time U.S.-aligned Sunni autocrats who, among other things, worked with Washington to make peace with Israel, Neil MacFarquhar reports in the New York Times. The elderly Abdullah has sought to ease out Yemeni President Ali Abdullah Saleh (street scene in Sana’a pictured above), shore up the Bahraini ruling family with both troops and cash, stabilize Egypt with some $4 billion, and fundamentally undermine Iran, which he sees as fomenting the trouble for example in Bahrain. Combined, Abdullah’s actions are pro-monarchy, and self-serving — the Saud family believes it is personally entitled to the country’s wealth, and cannot imagine a world in which it does not rule that stretch of oil-rich sand.

We understand Abdullah — who wants to lose power and fortune? But we also notice his agile hybridization of the dictator’s playbook, the limited number of options open to autocrats whose people pour into the streets. Generally, an autocrat has two alternatives, which for ease of clarity we call the Karimov and Shevardnadze plays. The latter refers to the decision by Georgia’s Eduard Shevardnadze to step down in the face of massive 2003 protests in his country; the former suggests the calculus of Uzbekistan’s Islam Karimov, who in 2005 gunned down hundreds of protesters in the city of Andijan. In trying to persuade Saleh to leave, Abdullah is invoking Shevardnadze; in bolstering Bahrain’s al-Khalifa family, he is giving voice to his inner Karimov.

Notwithstanding the cleverness, we see the Karimov play shining through in Abdullah’s calculus, because what is this all about but reinforcing the hold of the Saud family itself?


Flashpoint alert: Oil rush on the South China Sea    Recall that last fall, China and Japan went to blows over an errant fisherman who rammed a Japanese naval cutter in the disputed, oil-rich waters of the East China Sea. In cutting off rare earth elements to Japan, China signaled yet again that it takes its ostensible rights to both the East and South China seas very seriously. Therefore, we ought to pay attention now that Vietnam and the Philippines are getting set to drill for oil in South China Sea waters claimed by Beijing. Bloomberg reports that Vietnam’s oil partner, Talisman Energy, plans to begin drilling next year in the South China Sea; ExxonMobil intends to drill an exploratory well off of Vietnam’s waters later this year; and the Philippines, with whom the United States has a defense treaty, plans to do similar exploration in the South China Sea. China’s neighbors assert that often these claims are much closer to their own shores than to China’s, but China has regularly dispatched ships to disrupt such oil work. Look for more such incidents in coming months.



New bonanza in Wonderland: The Caspian Sea has another confirmed super-elephant. Already, the states around the sea have three of the largest oil and natural gas fields on the planet — Kashagan and Tengiz (oilfields) and Karachaganak (a gas condensate field), all of them in Kazakhstan. Now, Gaffney, Cline & Associates, a Britain-energy auditing firm, says that neighboring Turkmenistan’s onshore South Yolotan field contains the natural gas equivalent of about 9 billion barrels of oil. That makes it the second-largest gas field in the world, next to North Field, which straddles Qatar and Iran. In a conference in Turkmenistan, Gaffney’s Peter Holding said the field is 1,160 square miles in size, with an astonishing 1,625-foot-tall column of hydrocarbons. Most of the world’s Big Oil companies have opened offices in the Turkmen capital of Ashkabad with dreams of tapping South Yolotan, or even some lesser onshore field. Chevron, ExxonMobil, PetroChina, Malaysia’s Petronas, Shell and Norway’s Statoil are all there. None can be very expectant — in the almost two decades since independence, Turkmenistan has been the least open among any former Soviet state to major hydrocarbon development.  Yet Holding’s presentation "raised eyebrows," I was told by someone who attended it. The presentation

had an air of certainty to it, even if every other word was about the uncertainty of the data — I think in part because the images were impressive, showing what they knew from 2008 and what they know now in 2011. And mainly because that there was so much they don’t know, but all that unknownness points to more gas, not to less. So the other thing that they know now in 2011 is that they don’t know the borders to the northwest and maybe even the southeast (or some other direction). So the field is bigger than they can even know.  And that South Yolotan is one field, not two. Salivating stuff.


Train at its back, ExxonMobil fights for shale gas: ExxonMobil CEO Rex Tillerson says shale gas drillers are getting an unfair shake — "a lot of pretty casual statements about risks that are simply not backed up by facts," Jeff Ball writes at the Wall Street Journal. Tillerson is talking about allegations that hydraulic fracturing, or fracking — the method by which natural gas is extracted from hard shale — poisons drinking water. France and Quebec have banned fracking over environmental concerns, and activists in U.S. states subject to the drilling have insisted on various forms of regulation. We feel deep sympathy for these drillers. Why should they be compelled to do annoying things such as always properly lining the wells and publicly disclosing all the ingredients of the fluid used in the fracking process?

Obviously we kid. As discussed here previously, much is at stake both in terms of cleaner energy and geopolitical power in getting fracking practices right. The shale gas chain-reaction has already shaken up Russia’s political position in Europe, for example. There is so much new gas that Cheniere Energy is poised to start exporting it from Louisiana, an astonishing turnaround from the United States’ gas shortage of just a few years ago. But, instead of getting in front of a moving public relations disaster put in motion by fracking skeptics, the companies routinely make remarks pretty similar to this one from Tillerson: "The early detractors slap a label on something, and then it takes us a long time to get it peeled off." Not that the industry has failed to browbeat its own bad actors into best practices, or to pre-emptively adopt an across-the-board transparency regime, but that the activists are at fault for complaining.

Not everyone is unhappy. South Texans who have profited from the fracking of a gigantic oil formation called the Eagle Ford Shale are ecstatic, we surmise from the last portion of this Cliff Krauss piece in the New York Times. And an important committee in the British Parliament has scoffed at the notion of following France and banning fracking, Sylvia Pfeifer writes in the Financial Times. In addition, shareholders of both Exxon and Chevron rejected efforts in their ranks this week to force the companies to disclose information about shale gas risks.

Yet, Texans as a whole appear to be concerned about the boom, which started in their own state a few years ago. A bill is moving through the Texas Legislature that would require companies to disclose their fracking fluids in many cases, and analysts expect it to be signed into law. Frackers brand homeowners and activists as petty gripers, and government officials as bureaucratic overreachers, but they are not. The potential of shale gas is at risk not because people are complaining and officials potentially regulating, but because the shale gas industry thinks it’s the 1940s, when bad actors were simply an unavoidable fact of life and not to be regulated out of existence. Already Pittsburgh has banned fracking and New York’s state assembly has instituted a moratorium, Sheila McNulty writes at the Financial Times. "It’s a big deal," Robin West, chairman at PFC Energy, a Washington-based consultancy, told McNulty. "If this issue can’t be solved, a lot of gas won’t be produced.”


Gas crimes:  We are sensing the onset of the annual Russia-Ukraine gas drama. Past episodes, as you recall, have resulted in the severing of natural gas to Europe. What is the entertaining twist this year? First, recall a little over a year ago, when Ukraine President Viktor Yanukovych almost declared a national holiday after managing to cut a deal with Vladimir Putin that allowed Ukraine to pay just market prices for natural gas rather than a higher rate, and extended Russia’s basing rights at Sevastapol by only 25 years. Atta boy, his countrymen said. Now, Yanukovych says he wants Russia to reduce its gas prices by about 20 percent, to about $240 per 1,000 cubic meters, rather than proceeding with the one-third increase — to $400 per 1,000 cubic meters — that is set to occur. How to manage that trick? What about charging his blood rival, former Prime Minister Yulia Timoshenko, with bad dealmaking before he took power?

I am not joking — Yanukovych’s prosecutors have charged Timoshenko with exceeding her authority in 2009 gas negotiations with Putin with hopes of staving off higher fuel prices in coming months. The criminal charge ignores his own sorry role in the hike. It also neglects another aspect of Timoshenko’s negotiations with Putin, which was the sidelining of a shady middleman company called Rosukrenergo from the cross-border gas equation. This mysterious company for years profited from the gas sales in exchange for no discernable service. As part of the deal struck with Putin, Rosukrenergo was jettisoned from gas sales. But once Yanukovych took power, Rosukrenergo and its chief, Dmitry Firtash, were back as power players in Kiev. Meanwhile, Timoshenko is suing Firtash in U.S. federal court for illegally earning hundreds of millions of dollars in the local gas trade. The relief for Europe is that the drama is taking place early, rather than in the dead of winter.

<p> Steve LeVine is a contributing editor at Foreign Policy, a Schwartz Fellow at the New America Foundation, and author of The Oil and the Glory. </p>