The Weekly Wrap: June 24, 2011

A war against speculation: A coordinated set of acts by big oil consumers and the world’s biggest crude producer is creating misery among oil traders. One is the planned injection of an impressive 60 million barrels of oil — or about 42 days of Libya’s usual exports — over the next month onto the global market from strategic oil reserves, half of it from the United States. The second is Saudi Arabia’s decision to show who is boss in OPEC by boosting its oil production to 9.5 million barrels a day, or even 10. The target of Saudi’s ire is mainly Iran, which defied and embarrassed Saudi Arabia in an OPEC meeting earlier this month by helping to block the kingdom’s aim of raising overall OPEC output and stemming market instability. Writing at the Financial Times, Citigroup analyst Ed Morse says Saudi ire is reflected in its wholehearted agreement with the strategic reserve release of oil. Why is all of this a war against speculation? Because, by knocking the wind out of oil prices at least for now, the twin acts reveal the bubble contained in prices even absent the Arab Spring. Over at the Wall Street Journal, Liam Denning says the lagging economy led President Barack Obama to put together a "coalition of the willing."

But is a war with a long-term victory in sight? Writing at the FT, Javier Blas says the answer is yes, and he lines up a formidible army of analysts to back up his assertion. I am not so sure. It seems to me that after awhile, oil traders will become less intimidated by the prospect that a release from the reserve will put the kabosh on their bets. They will relish the gamble. In fact a new sort of betting could emerge — on whether the United States will pull out its petroleum reserve weapon. A sort of brinksmanship will result. In the end, the U.S. will continue to use the reserve only on rare occasions. And the players will be back in charge of the casino, pushing up and down the price of oil.

Read on to the jump

More on the big and mysterious Kashagan game: As we’ve been discussing, ExxonMobil has been offered $5 billion for half its 16.8 percent stake in the world’s largest offshore oilfield — Kazakhstan’s Kashagan. I cast doubt on the suggestion that Exxon will sell part of the stake. If it’s to sell anything to ONGC, which made the bid, it would sell the whole stake, since it’s usually not Exxon-like to reduce itself to such a small interest (all major Kashagan shareholders hold 16.8 percent, making Exxon an equal partner). An additional point that triggers skepticism is the knowledge that ConocoPhillips also reportedly wants out of Kashagan; but its stake is precisely at the 8.4 percent mark that ONGC wants; so wouldn’t the Indians’ ambitions be much more cleanly achieved if they simply bought out the Conoco stake? Why is only the more convoluted, uncharacteristic Exxon route discussed?

Whatever the case, one thing I have been told since is that Exxon has established what’s known in industry argot as a data room for its Kashagan stake; a data room is a place where companies store detailed proprietary information on fields that are up for sale so that potential buyers can dig in and truly scrutinize them. Sometimes, to root out unserious rivals, companies charge an entry fee into their data room, though I do not know if that’s the case now. If the room has been set up, it means that Exxon isn’t a passive player being courted by ONGC. In addition, we would be getting a fuller picture of what I see not as Exxon selling, but as applying pressure on the Kazakhs — who have been delaying full field development — to ease up and allow Kashagan to scale up over 1 million barrels a day of production by the end of the decade (from zero today). The rationale for this pressure is that Exxon is no ordinary player; unlike Shell or ENI or ConocoPhillips, if Exxon pulls out or even sells half its Kashagan stake, it could shake some international confidence in Kazakhstan.

Meanwhile, we have a report of another potential hovering buyer — the Azerbaijan state oil company, according to Caspionnet.

The geopolitics of rare earth local politics: When are local, profit-motivated financial decisions in one country not purely local in nature? When the deciders know in advance of the fundamental geopolitical repercussions to another country that happens to be a chief economic rival. Such is the case with recent actions inside China that have doubled and tripled the price of some of the 17 metals known collectively as rare earths, of which China controls some 95 percent of the global supply. One reason prices have surged is that Chinese exports of the elements have plunged by 8.8 percent in the first five months of 2011 from a year earlier, the Wall Street Journal reports. One main victim: Japan. Rare earths are essential in many of Japan’s high-tech export mainstays, including electronics and hybrid vehicles.  But now the price of terbium oxide, used in hybrid cars and sonar systems, has more than doubled in three weeks, writes the Financial Times, and dysprosium oxide has doubled in price over the past two weeks.

Beijing says it’s simply establishing strategic stockpiles for its own industries, the FT says, although Chinese analysts told the paper that the reason for the price rise is not the state but instead "hoarding by companies who expect prices to rise further." Whichever the case, the situation continues a flashpoint of Chinese-Japanese tension that began last summer with an altercation between a Chinese trawler and a Japanese patrol boat. As a result of that seemingly inconsequential incident, all Chinese rare earths were cut off to Japan and — when much of the West voiced support of Japan — to those countries too. Since Japan’s geopolitical power flows from its economy, it has been weakened. The converse is true for China — it has buttressed its economy, and hence its power.

… tell us what you really think: Unlike with its Japanese confrontation, China came right out and spoke its mind when it came to a recent concern about the United States — you are "playing with fire," it said. I cannot precisely recall, but the last I heard that expression was either from Muhammad Ali in juxtaposition with Joe Frazier (their 1974 fight in Manila is pictured above), or my sixth-grade school bud Steve when I nicked his frog. In this case, it was China’s vice foreign minister, Cui Tiankai, describing why the United States had better keep its mitts off the South China Sea while Beijing sorts out the restless neighborhood. The Philippines and Vietnam are aggravated with China over the actions of its patrol boats, which have interfered with the two nations’ oil prospecting, and both invited U.S. assistance on their behalf. All three Asian nations — plus Brunei, Malaysia and Taiwan — assert rights on overlapping sections of the South China Sea (though in China’s case, it appears to claim the whole thing). While U.S. Secretary of State Hillary Clinton last year said the U.S. had a "national interest" in the sea, she and the rest of the administration have since used much less forceful language, with the thinking that China is pretty sensitive about the body of water. It seems that they were right.

Finally … Sir Aubrey McClendons’ excellent adventure: Why do we call the Oklahoma-born CEO of Chesapeake Energy "Sir"? Because he reminds us a lot of Sir John Browne, the former CEO of BP, who readers of O&G (the book) recall once rejected the deli sandwiches offered up by American lunch companions, and dug ever-so-genteely into catered smoked salmon served on china, carried on his behalf by BP sherpas. We recently mentioned McClendon‘s prissiness in relation to his preference for keeping Chesapeake’s prodigious supplies of natural gas in the ground rather than making a deal with tree huggers who heretically believe that climate change is real. We thought that was just McClendon acting macho and ultra-political on his company’s dime. We thought, and said, he was living in the 1940s, when oilmen ran roughshod. But now we learn that we had him all wrong in that regard. McClendon’s anti-shareholder eccentricities actually transcend politics. They are not about machismo. Over at footnoted.com, my former BusinessWeek colleague Theo Francis dug into some SEC documents and found more complex behaviorisms, such as the time that McClendon spent years collecting $12 million in antique maps, then had the company buy them from him (it would have cost the company a lot more if it had to go find all the maps itself!). This is a fearful man — the company paid $119,135 in 2010 for his and his family’s personal security (it is really dangerous being an Oklahoma gas man). I suppose it is fun being one of those personal security individuals, seeing as how you probably get to accompany McClendon on his personal flying adventures (Chesapeake paid $500,000 for his personal use of the corporate jet that year). Oh but wait — is that $6 million in corporation-paid promotion for a business privately owned by McClendon? Why yes it is — Chesapeake coughed up that sum to sponsor the Oklahoma City Thunder basketball team, in which McClendon holds a 19.2 percent stake. Wow, it’s really cool being Aubrey McClendon.