The Weekly Wrap: Oct. 22, 2011

The fuss over Afghan oil: Afghanistan has finalized its first oil deal in decades — an agreement with the China National Petroleum Company to develop fields in the northern part of the country. That could make Afghanistan a small oil-exporting country in a few years. Meanwhile, though, there continue to be grumbles from one of the three losing bidders in the tender — Zalmay Khalilzad, the former U.S. ambassador to Afghanistan, whose private consulting firm, Gryphon Capital Partners, represented the bid of Tethys Petroleum, a U.K.-based oil company. In a series of articles, Khalilzad and his son, Alexander Benard, have criticized the tender process and the Pentagon contractors who helped to write the rules governing it. The Pentagon’s Task Force on Business and Stability Operations, Khalilzad asserts, devised the tender in a way that is "slanted toward state-owned foreign competitors" such as CNPC, and against private Western firms such as his client. Khalilzad wrote his most recent piece as a rebuttal to a post on this blog in which I suggested that the essence of his and his son’s complaint is not a pro-Chinese slant, but this: sour grapes.

But one set of folks with whom no one has spoken is the target of the Khalilzad family’s ire. Not surprisingly, the Pentagon is unhappy with the allegations. "Zal might not like the outcome, and that’s his business, but what this shows is that the system worked," one Pentagon official told me. "There are winners and losers in every tender process, and losers are never happy about it. But it is quite another thing to start lobbing allegations about misconduct with nothing to back that up. It’s incredibly irresponsible."

Read to the jump for more on the Afghan deal and the rest of the Wrap.

In the coming month or so, the Afghan Ministry of Mines will release the detailed documentation behind the tender award, this official told me. For now, he said that the reason Tethys lost the tender is not CNPC’s fat wallet, but that the U.K. company’s bid was not remotely competitive. CNPC’s financial offer and those of the other two losing bidders were closely grouped — within $100 million of each other over a 20-year financial projection, the Pentagon official said. Tethys’s bid was $2 billion lower than all three of its competitors. The second-highest bid was from Buccaneer Energy, an Australian company.

Moreover, in the lead-up to the award, all four bidders were assertive in contacting the Pentagon and the Afghans to alter this or that tender criteria in order to make the deal more attractive. None of the requests forwarded by Tethys or Khalilzad spelled out the former ambassador’s central assertion — that the procedure favored state-owned enterprises, the Pentagon official said. That complaint arose only once CNPC was announced the winner. Khalilzad’s firm offered suggestions "that made it more attractive for everyone," including CNPC, the official said. "The [Pentagon’s] objective was to make sure this was incredibly transparent. We have succeeded in making sure this was transparent, that it adhered to western and international standards."

Here is a statement I received from the Pentagon task force:

The Hydrocarbons Law of the Islamic Republic of Afghanistan requires that oil and gas production sharing contracts be awarded by a competitive, transparent tender process.  The Task Force on Business and Stability Operations assisted the government of Afghanistan in designing such a tender process for the Amu Darya Oil Tender.  The four bids received were opened in a public proceeding.  CNPC International was the highest bidder, at 15 percent royalty, and the only bidder whose bid conformed to the tender rules.  The evaluation of the bids was performed by the Afghanistan Government, observed by transparency consultants, and took into account noneconomic factors in addition to the economics submitted by the bidders.  Upon approval of the contract by the Council of Ministers, a summary of the tender and the evaluation process will be published according to Afghan law and the report of the transparency consultants will also be made public.

Regulating fracking: For a couple of years, natural gas companies have been subject to heavy criticism regarding their newest method of releasing fuel from the depths of the Earth. Hydraulic fracturing, its critics say, harms aquifers and generally leaves dangerous pollution in its wake. Not so, the industry has retorted — when done correctly, "fracking," as it is known for short, is a safe and highly effective method of extracting the gas required to produce our electricity. This blog has argued that the critics are winning the debate, and that the boom in shale gas could be stunted if the industry does not become proactively transparent and self-police its bad actors. This week, we get the news that the Environmental Protection Agency is writing rules regulating how frackers dispose of the wastewater produced in the drilling process (I discuss the subject with Scott Tong of Marketplace here). And a new study released by the British Geological Survey finds that fracking was responsible for two earthquakes earlier this year. Is this just the beginning of wide industry regulation? We cannot know with certainty, but the direction of events suggest so.

Punishing Iran: For three U.S. presidential administrations, Washington has attempted to suppress Iranian efforts to create a nuclear weapon. Among the tactics has been to starve Iran of oil income; at best the effort has been partly successful — sanctions may have slowed down, but not stopped Iran’s efforts. Now there is a complication — the U.S. has accused Iran of plotting to assassinate Adel Al-Jubeir, the Saudi Arabian ambassador to the U.S. Traditionally, countries do not appreciate threats to foreign ambassadors posted in their capital cities; on the contrary, it is almost unheard of to allow harm to a foreign envoy, even of one’s bitterest enemy, since that could make one appear unfriendly and unreliable to all. So how can the U.S. demonstrate its intolerance of threats against envoys posted on its soil when mere arrest of the culprits might appear to be a slap on the wrist? I am told that one option under discussion is to further tighten the oil noose on Iran with a strategy that could also aid the anti-proliferation effort. As it stands, Iran sells much of its oil to three countries with which the U.S. has close relations — India, Japan and South Korea. The idea is to persuade these three countries to sharply curtail Iranian oil imports, and offer them an equivalent volume of Saudi Arabian crude in exchange. If that happened, Iran might still manage to unload the oil, but it might also have to accept a black-market discount on its prices. That would accomplish two goals — the message would be clearly communicated that assassination is frowned upon, and Tehran might end up with less money to spend on nuclear arms development.

The solar brawl: Seven U.S. solar companies are seeking a 100% tariff on Chinese solar panel imports, which they say wholesale far below the cost of manufacture and shipping. The Chinese dispute the allegation, and the row is likely to be rowdy over the coming year. The backdrop is the three-year-old global economic turmoil, and the difficult great power adjustment under way between the two countries. But there is an additional underlying factor, and that is a conflicted U.S. jitteriness — the U.S. and its companies wish to act against perceived Chinese bad faith, but are so reliant on Chinese business that they fear provoking retaliation. So it is that only one of the plaintiffs — Oregon-based SolarWorld, a subsidiary of a German company of the same name — had the courage to identify itself in the complaint; the other six hid behind procedures allowing them to remain cloaked. In addition, in order to bring the case, the seven companies formed a new industry association since nothing was being done by the establishment one, the Solar Energy Industries Association, whose members include many U.S. subsidiaries of Chinese manufacturers and U.S. suppliers to China.

On its face, the case seems to merit consideration. Since 2008, China’s share of the U.S. solar market has soared to 45 percent from 8 percent, the plaintiffs say, worth $1.6 billion in the first eight months of this year. This gusher of production has lowered prices significantly — solar panels now cost $1.20 a watt of capacity, a little over a third of the $3.30 price in 2008. But China is likely to argue that the case is more complicated than that: The U.S. companies’ case is that China has poured billions of dollars into support for its solar power champions. But China is bound to retort that the U.S. solar industry, too, has received an estimated $1.13 billion in government subsidies.

Ultimately, the U.S. will argue the matter of degree — U.S. companies have received assistance, but nowhere near the scale of China subsidies. In addition, the U.S. companies do not appear to be attempting to dump their product at fire-sale prices in China.