The Weekly Wrap: August 26, 2011

The guessing game on Libyan oil:  Technically speaking, it shouldn’t be a big deal to restore Libya’s full oil production of 1.6 million barrels a day once Col. Muamar Qaddafi is out of the way. Production has fallen to around 60,000 barrels a day, but Eni, Total and rebel-affiliated Agoco are poised to bring some 600,000 barrels a day on line within just a few months, Platts reports. Then, contractors and companies can tidy up pipelines and infrastructure (such as the Zawiya oil refinery pictured above) bombed by both sides since February, and the whole pre-revolt production could be back.

The problem is that we are not talking about entirely a technical matter. Instead, the bottlenecks are how quickly a new government can be functioning in Tripoli. Which companies will it want to include in future production, and which will it want out, and under what terms? In addition, remember that one large obstacle to getting Iraq’s oil and gas up and running after the fall of Saddam Hussain has been who profits from it — is it local governments? The central government in Baghdad? Whose companies? That scenario will figure in Libya too. So the restoration of Libyan oil is very much a guessing game. This is the way the market perceives the situation — it’s why oil prices haven’t plunged with Qaddafi’s apparent collapse.

For betting folks, Edward Morse of Citigroup can be counted on for a sensible take, and he is optimistic, Bloomberg reports. Morse thinks the entire pre-revolt production volume will be back by the end of next year.

The days of coal: The world is not going to stop burning coal in massive quantities for many decades and probably into the next century — there is simply too much of it, making it economically competitive with almost any alternative fuel for creating electricity. But its use may not grow at the breakneck pace that many forecast. In the United States, for example, the Environmental Protection Agency is about to enforce new emission rules that will probably result in the closure of a slew of superlatively dirty coal-fired plants built up to 70 years ago, writes Brad Plumer. They will be replaced by natural gas-burning turbines, which produce one-third of the pollutants. Then there is China, which has plans for a monumental increase in the construction of coal-burning power plants. Minxin Pei writes brings this scenario into question with a piece laying out why the Communist Party’s economic model is starting to undermine its power. The problem starts with public outrage over the deadly crash of a bullet train and extends to anger over the positioning of a new petrochemical plant. "The party can be ruthless and effective in crushing any direct challenge to its authority by pro-democracy activists, but is often hamstrung in dealing with ordinary citizens asking for nothing more than safe transportation, breathable air, and affordable housing," Pei writes. Can coal-burning plants proceed as planned as a price of economic progress when cities are already choking? Pei does not mention coal specifically but writes of the political atmosphere:

Instead of bolstering the party ‘s legitimacy, rapid growth is undermining its authority and generating social tensions, which have galvanized more and more ordinary citizens to take part in protest activities and add their voice to criticisms of government policy and behavior.

How to move Exxon: The oil industry and some analysts have a rap on President Barack Obama — he has shackled oil companies, they say, and thus worsened the country’s unemployment, in addition to their ability to supply the U.S. with domestic crude. Case in point? The administration’s moratorium on drilling in the Gulf of Mexico following last year’s BP spill, and microscopic inspection of the industry’s exploration and production plans since then. Does this gripe stand up to scrutiny?

Some analysts say it does — Cambridge Energy Research Associates says, for example, that prior to the moratorium, the Gulf added an additional 1 billion barrels of oil to U.S. industry reserves every year, a volume that has been lost. But it turns out that the Gulf has been a lot more active than these critics suggest. Consider just one company — ExxonMobil. In June, Exxon announced the discovery of a 700-million-barrel field called Hadrian. And this week, the Wall Street Journal reports that Exxon is sitting on another, even larger discovery — Julia, a field with 1 billion barrels of recoverable crude, which would be the largest Gulf discovery ever. In an email exchange, ExxonMobil spokesman Alan Jeffers told me that the company hasn’t yet booked the Julia reserves, and plans "to develop it in phases due to the technical challenges of the deep water location." Yet, the oil is there, the Journal reports, and taking the two fields together, we get from just one company precisely the same pace of discovery as CERA logged for previous years.

An alternative narrative is possible. It is that the industry has not been exceedingly aggressive in drilling and producing in the Gulf. Again, take Exxon’s Julia field. The news of the discovery came to light because Exxon is suing the Interior Department, which wants to revoke Exxon’s license for Julia for failure to show that it plans to develop it in a timely fashion. If the revocation stands, it would be a serious loss for Exxon, which like all the oil companies does not easily find new reserves to replace what it pumps each year. In its suit, Exxon accuses Interior of a money grab — Interior is motivated by the big money that would come if it can relicense Julia. But the Interior Department isn’t in a money grab — it simply wants companies to take advantage of their leases in hand and not wait until it’s convenient to drill. This is not an isolated problem — in similar circumstances, Alaskan officials have threatened to revoke Exxon’s lease on a gasfield in Alaska called Point Thomson. Exxon’s response has been to get to work immediately after decades of delay. One might expect similar action at Julia, where Exxon may now find reason to advance its plans.

The administration announced this week that it is holding the first outright sale of Gulf drilling licenses since the BP spill, to be held in December. The New York Times editorial board correctly says this is "calling industry’s bluff."

 The market’s call in the Kremlin Contest: Russia’s Micex stock market index is down significantly this year, and Bloomberg reports that part of the reason is a conviction that Prime Minister Vladimir Putin will decide to return to the Kremlin as president. But if Putin opts to allow President Dmitry Medvedev to remain in the job, the market should surge by 10 percent, the agency said, quoting Julian Rimmer, a London-based trader at CF Global Trading.

Is the market correct? Five days remain to make your opinion known in the Kremlin Contest. Send me an email (using the box to the right of the blog) stating who will be Russia’s next president and prime minister, and what date Putin will make his wishes known. This is a small-scale wagering contest, so you must ante up a minuscule bet. Current wagers include glasses of wine, t-shirts and books.