The Weekly Wrap: June 11, 2011

Annals of geopolitical pipelines: A few weeks ago, we heard that BP and ConocoPhillips will not build Denali, a 1,700-mile natural gas pipeline from Alaska’s North Slope to Canada, and on to the United States. The companies have abundant gas, but an insufficient market — the Lower 48 states, their main intended consumers, do not need their fuel. The opposite problem confronts Nabucco, a separate proposed pipeline supported by the U.S. government and the European Union — it has a waiting market, but little gas to deliver. No countries have concretely committed to sell it gas. If any did, the 2,400-mile-long Nabucco would carry it to Europe, which wants to ease its reliance on Russian fuel, and with it Russian political leverage on the continent. Unlike BP and Conoco, however, Nabucco’s sponsors decline to acknowledge the formidable tide pushing against them. This week, these players lined up in the Turkish city of Kayseri for yet another in a years-long demonstration of faith in the project, which they know, just know, will materialize.

This is understandable — it’s unpleasant to concede probable failure and move on. So the Nabucco players soldier on. At the drop of a hat, they trot out a list of statistics validating their faith – the absolute volume of gas in the region, and the even greater volume of absolute demand in Europe. The numbers are impressive. But does that matter against confounding politics on the ground?

Let’s take a quick look under the hood. The pipeline requires 30 billion cubic meters of gas, according to its backers. There are four main potential sources: Iran, Iraq, Turkmenistan and Azerbaijan. Strike Iran because of nuclear politics. For the foreseeable future, strike Iraq, too, because it plans to use the bulk of its gas domestically. As for Azerbaijan, it and BP — whose gas from a gigantic field called Shah Deniz — have both said they might ship 10 billion cubic meters of gas a year through Nabucco should it be built.

Twenty billion cubic meters short, we turn finally to Turkmenistan. At a news conference in Kayseri, Stefan Judisch of Germany’s RWE, which is a Nabucco partner, noted that Turkmenistan has a huge natural gas supply: A field called South Yolotan appears to be the second-largest in the world, for instance. But the Turkmen cannot sell sufficient volumes, one reason being that Russian demand has plunged to just a fifth of what it used to. Nabucco director Reinhard Mitschek says that this inability to tap markets will lead Turkmenistan to sign a gas supply contract with him by the end of the year. And not just any contract — President Gurbanguly Berdymukhamedov (pictured above) has expressed interest in shipping up to 40 billion cubic meters a year to Europe, twice the volume necessary to make Nabucco a go. Strike up the parade, right?

Not quite yet. First, take a look at the history. The West has been attempting to get Turkmenistan to sign onto trans-Caspian pipelines for some 15 years. It has begged. It has cajoled. It has offered incentives. But Berdymukhamedov and his predecessor, Saparmurat Niyazov, both in the end have declined. Why? In the case of the latter, one reason was insufficient bribery. As for what else, smart oilmen and other observers believe it has been utter and mortal fear of Russia. What could and would Russia do if Turkmenistan mustered the temerity to side with the West and start to build Nabucco? In the short term, Russia would probably cut off imports of Turkmen gas entirely. After that, an outsider is pressed to imagine. But not Turkmenistan’s leaders — they seem to imagine a lot. And if you observe 15 years of consistent behavior of this particular type — meaning hiding in the closet — why do you expect the Turkmen to wake up in the morning behaving in the opposite manner? The answer we hear — and I am not joking — is that Berdymukhamedov said he would ship his gas West.

Among those still unconvinced is BP, which has suggested that the Nabucco folks scale back their ambitions and build a smaller line at first, and then hope that down the road Iraq opens up. Or, if luck is truly with them, Iran will settle its nuclear issues with the rest of the world. But the impatient Nabucco folks decline. They want the big gazoonga pretty darn soon, or nothing.

Now let’s loop back — in the likelihood that Turkmenistan does continue not to sign, the Nabucco folks are back to just Azerbaijan’s 10 billion cubic meters of gas. Or are they? If Nabucco lacks the requisite remainder of 20 billion cubic meters, would it make sense for BP to wait around when Shah Deniz will soon be ready to deliver gas? Of course not. So it will commit to another line. Which one? In Baku, the talk is of sending the gas through a cheaper route directly to Romania for distribution in gas-hungry Eastern Europe. One could accomplish that through a relatively inexpensive Bulgaria-to-Greece interconnector pipeline, which is already under way, and a proposed interconnector between Bulgaria and Romania. So Nabucco would have no gas.

Miracles happen — Berdymukhamedov could wake up a different man. But Nabucco has always been short of them.

Another substitute for Libyan light — south Texan crude: The civil war in Libya has roiled the global oil market — 1.4 million barrels a day of some of the world’s most valuable light crude oil has been suddenly lost. The resulting rise in oil prices has caused much economic difficulty in many nations. Empathizing, the Saudis agree to increase their production, but unfortunately their crude is of a heavy variety, and refineries don’t want more of that type. As it happens, the trouble may be over by then, but next year the United States may be exporting hundreds of thousands of barrels of some similarly light crudes, writes Esa Ramasamy at Platts. The source could be the Eagle Ford Shale in south Texas, where a boom is under way. Why would the crude be exported rather than refined into gasoline and burned by notoriously ravenous Americans? The reason is the very high quality of the Eagle Ford — refineries on the Gulf of Mexico are jiggered to process much heavier crudes. So Eagle Ford drillers may have to export most of their output. Estimates are that the shale will produce some 600,000 barrels a day of oil and natural gas liquids. Already, U.S. shale gas drillers are talking about shipping liquefied natural gas to Europe. Combined, the gas and oil exports would be a huge turnaround for the heretofore hydrocarbon-short United States — and a potential political firestorm.

Exxon’s high-end sale? Kashagan is the world’s biggest oilfield find in four decades. It holds 38 billion barrels of oil, of which some 12 billion barrels are commercially recoverable at the moment, or 17 times the volume of three oilfield discoveries about which ExxonMobil has crowed this week in the Gulf of Mexico. I raise the subject of Kashagan because, in addition to the Gulf news, we hear that Exxon has received an informal $5 billion offer from two big state-run Indian energy groups for half of its 16.8 percent share of Kashagan. They are ONGC and India’s gas company GAIL. Is this serious — is Exxon truly open to cutting its exposure to this long mismanaged oilfield? We can’t know with certainty as Exxon has declined to comment. But it looks improbable.

The first tipoff is the headline — that Exxon is selling half its share. On its face, this conflicts with Exxon’s personality — as a corporate practice, this gargantuan company is highly unlikely to reduce itself to such a stature; instead, if it had determined that Kashagan was too risky or a relative losing proposition, it would seek to get out entirely. So then we ask — if Exxon is selling to the Indians, to whom would it sell the other half of its stake? One buyer who comes to mind is the Chinese, but they have already been blocked once by Kashagan’s partners, and there’s little reason to think that Sinopec or Cnooc would be welcomed now. A more likely other buyer is the Kazakhs, who have been acting in recent years to obtain stakes, or enlarge existing stakes, in the country’s major oilfields. But there, too, I do not see traction — the cost of developing Kashagan is an estimated $136 billion, or $11 billion for that 8.4 percent share. The Kazakhs said in March that they will borrow $1 billion to cover current costs for the 16.8 percent share of the field that they already own. In short, they would be seriously stretched to pay the $33 billion share of Kashagan’s development costs that a total 25.2 percent share would imply. Hence, I see no buyer for the other half.

Back to the first half — if Exxon is probably not selling, why are the Indians signaling that sales talks are under way? One reason is that there may in fact be a sales dance going on. And why would Exxon — if it has no intention of selling — do this dance? One reason could be to convey a message: While the six foreign oil companies involved in the project have been hapless since development started in the 1990s, more recently the project’s biggest impediment has been the Kazakhs. Here is a field that would rain torrents of cash on this Central Asia country, but the Kazakhs have stubbornly delayed it, one reason being sticker shock over the above-mentioned development costs. They simply can’t believe they must pay that much. There must be something wrong with the math. But Exxon is telling Kazakhstan that, regardless of its thoughts about costs, selling out would be no small thing — unlike when BG did so in 2005, Exxon reducing its Kashagan share could seriously deflate international investor confidence in Kazakhstan. The state should be more cautious, Exxon is saying.

What is next? Unless Exxon receives an improbably sweet offer for all its stake, the likelihood is that it will remain in Kashagan; the foreign partners will make some concession that helps Kazakhstan calm down; and, for its part, Kazakhstan will make the foreigners relax by extending the duration of the contract past its current 2037 termination.

Cut cables and tangled fishing nets in the South China Sea: Just when much of southeast Asia had persuaded the United States to lower the temperature with China in the South China Sea, Vietnam itself has turned up the flame. On Monday, Vietnam plans to hold live fire naval exercises in a disputed area off its coast. This is not unprecedented — Vietnam has held such exercises in the past — but the Associated Press reports that it is the first time that Hanoi has announced them in advance. The two countries — along with Malaysia, the Philippines and Taiwan — have been in a running conflict over rights to the waters for many years. All these countries think tens of billions of barrels of oil underlie the sea. In the latest dust-up, Vietnam accused a Chinese boat crew of cutting the seismic cables of one of its oil survey vessels. The story is a bit muddled, writes Michael Wines at the New York Times:

China blames Hanoi for that episode, saying that armed Vietnamese boats were illegally chasing Chinese fishing boats out of the area, and that a fishing net accidentally snagged the research cable. Vietnam, however, called the damage to the research cable premeditated and said it was the second such confrontation in recent weeks.

Last year, U.S. Secretary of State Hillary Clinton said the United States regarded freedom of the sea as a U.S. strategic interest, a clear message of support for the smaller Asian nations against Beijing. But this year, the U.S. has backed off the confrontation, mostly in reaction to southeast Asian concern about friction between it and China. Territorial disputes in the region can become unpredictable — last year, China cut off Japan’s supply of rare earth elements for its high-tech manufacturing sector in a row over a Chinese fishing boat in disputed waters. Now it is the U.S. turn to advise a lowering of the heat.