The Oil and the Glory

The Weekly Wrap: Oct. 14, 2011

In Ukraine, the gas bill is never paid: Ukraine’s president faces Western pressure to free his political rival, former Prime Minister Yulia Timoshenko. But the signs are that Timoshenko (pictured above) instead will face a much longer period of prosecution, including the possible fate of former oil tycoon Mikhail Khodorkovsky, who crossed Russian leader Vladimir ...

AFP/Getty Images
AFP/Getty Images

In Ukraine, the gas bill is never paid: Ukraine’s president faces Western pressure to free his political rival, former Prime Minister Yulia Timoshenko. But the signs are that Timoshenko (pictured above) instead will face a much longer period of prosecution, including the possible fate of former oil tycoon Mikhail Khodorkovsky, who crossed Russian leader Vladimir Putin and soon after was thrown in prison under sequential sentences. After Timoshenko was sentenced on Tuesday to seven years in prison, the weight of Europe and the U.S. fell onto President Viktor Yanukovich, who was accused of venting his political spleen in the courtroom. Yanukovich replied by saying that Timoshenko could yet be cleared of the charges, perhaps by legislative changes in Parliament. But if the conviction itself is not erased, Timoshenko could still be barred from running for office for a decade. As if to underscore that Yanukovich does not intend to call off the dogs, authorities yesterday unveiled new criminal charges against her, this time involving a $405 million debt that she is alleged to have illegally transferred from her former gas company to the government.

What seems to be getting lost in the gigantic brawl are the facts of the original case brought against Timoshenko. She is accused of exceeding her authority as prime minister with a natural gas supply deal she re-negotiated with Putin in 2009. But looking back at the contentious talks, it looks like she did pretty well. There were two main features of the deal: To shrink the price and volume of gas that Ukraine was obligated to buy, and to eliminate from gas dealings a shadowy middleman company called Rosukrenergo that earned  hundreds of millions of dollars for providing no necessary services. She accomplished both of those. Did she strike a perfect deal? No — it was flawed. On the other hand, Yanukovich himself went at Putin the following year. He did no better on price, and ended up giving away Sevastopol to the Russian Fleet for another 25 years to boot. Perhaps the biggest winners from all this hullabaloo are Rosukrenergo’s principal, Dmitry Firtash, who is back in the middle of the Ukrainian economy, and the white-shoe Washington law firm of Akin Gump, which has been paid top-dollar to lead the outside criminal investigation of Timoshenko.

 

For China, is there such a thing as too much gas? According to the new conventional wisdom, China is so saturated with sources of natural gas that it is prepared to turn back volumes. It is the thrust of this piece by Reuters’ Melissa Akin, addressing Russia’s gas supply. And this piece by the Australian’s Paul Garvey, talking about Australian liquefied natural gas. The articles suggest that in Russia’s case, there may be foolhardy haggling on price going on while it may lose China’s interest. As for Australia, western companies such as ExxonMobil and Chevron may be overbuilding LNG facilities aimed at the Chinese market. So here is an exercise: Name any major metal or energy resource that China has turned away apart from an occasional pause in voracious demand. Give up?

Energy security is China’s primary policy, leading it almost never to reject a new or added source of energy. There is a circle of logic: China’s Communist Party leaders recognize that political stability — the ultimate aim of all its policies — relies on sufficient energy, which drives the nation’s breakneck economic expansion, which keeps up with the growth of the country’s urban labor pool, who if they are dissatisfied could create instability. It’s safe to say that the conventional wisdom is misled, and that both Russia and Australia can rest easy.

 

Cyber experts on the grid: be afraid. Be very afraid: When it comes to the risk of cyber-attack, are we situationally in the cozy pre-9/11 days when our president blundered by ignoring intelligence alerts about an imminent attack by Osama bin Ladin? Or are the dire warnings we are regularly hearing a reflection of "threat inflation," as two George Mason University researchers suggest? Over at the Financial Times, Joseph Menn does a good job laying out the dueling scenarios (here is an accompanying video). From a pragmatic standpoint, it seems to me that last year’s Stuxnet episode, in which ultra-sophisticated cyber-warriors (probably from the U.S. and/or Israel) used Microsoft and Siemens software to infiltrate and seriously damage Iran’s nuclear centrifuges, is a head’s up to what is possible. Do we need to fear imminent collapse of the New York City or London grids? Probably not. But cyber-attack capability is already here. Two excellent reports have been compiled (here and here) on what is at stake in terms of electric infrastructure by McAfee and the Center for Strategic and International Studies. Stuxnet is the key. "About 85 per cent of the world’s utility networks have been infiltrated by criminals and spy agencies in the past year, up from just over 50 per cent before the discovery of Stuxnet," writes Menn, quoting the latest McAfee-CSIS report.

 

Just a little pipeline across the sea: Is Turkmenistan’s president truly prepared to do what his country has hesitated to for some 15 years — defy Russia and approve the construction of a 2,500-mile-long natural gas pipeline crossing the Caspian Sea and on to Europe? Gurbanguly Berdymukhamedov is publicly suggesting that he is. For those uninitiated, the idea is to build a pipeline called Nabucco, which would start in Turkmenistan, go on to Baku, through Georgia and Turkey, and on into the heart of Europe. Europeans are more and more apprehensive about their reliance on Russian gas, and are seeking diversified supply. But so far they haven’t managed to scare up the 30 billion cubic meters a day needed to fill Nabucco. So much hope has fallen on Turkmenistan. This is not a new story —  since the mid-1990s, companies and countries have courted Turkmenistan, which in response has cowered in its boots at the nightmarish thought of Russian commandos attacking the presidential palace in response. Not that anyone has ever seen a Russian commando in proximity to the Turkmen palace, at least not since the transition from Soviet days. But the Turkmen still fear the sort of assassination attempts that Georgia’s Eduard Shevardnadze suffered when in a parallel situation in the 1990s.

Yet Berdymukhamedov stood before the cameras this week and said his team would "get down to work on the contractual and legal basis for supplying Turkmen energy to Europe." As a teaser, the announcement coincides with a report this week officially stating that Turkmenistan possesses the second-largest natural gas field in the world. South Yolotan contains the natural gas equivalent of 9 billion barrels of oil, said Gaffney Cline, a U.K.-based auditor. (If the announcement sounds familiar, it is because this blog reported Gaffney Cline’s finding in May). As evidence of his good intentions, Berdymukhamedov noted that Turkmenistan has started construction of a 625-mile-long pipeline from South Yolotan to the Caspian. All of this has some Europeans tittering, since if Berdymukhamedov is serious this time, Turkmenistan might supply the necessary missing volumes to make Nabucco pipeline a reality.

I retain my doubts. It is not only Nabucco’s cost, which has grown to $13 billion to $19 billion, according to Guenther Oettinger, energy commissioner of the European Union, or more than 75 percent higher than the previous estimate. I also note that Berdymukhamedov is still using coward words that closely approximate those that Washington politicians roll out when they do not intend to act — ‘we will form a committee to jointly study the problem.’ A sign that would indicate seriousness — Sumitomo shows up with a stack of pipeline on the east Caspian shore. Tell me when the barges arrive.

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