The Weekly Wrap: Nov. 19, 2011

Season of uncertainty in Kurdistan: ExxonMobil has been red-faced since its big oil contract in Kurdistan was prematurely disclosed, subjecting the company to embarrassment in Baghdad, which forbids such back-room dealings without its permission. But that has only made the pressure for a revenue-sharing agreement between Kurdistan and Baghdad stronger. While the two sides continue to bicker, other Big Oil companies are in talks with Kurdistan. At stake in Iraq as a whole are some of the largest new volumes of oil and gas on the planet. The Financial Times’ intrepid Javier Blas produces a report on a several-day trip through Kurdistan. The Kurds envision shipping 1 million barrels a day of oil, up from the current 175,000 barrels a day, Blas writes, but no company will actually spend the needed billions of dollars for field and transportation development until that Kurdistan-Baghdad accord materializes in the form of a petroleum law. He notes that the two sides have described their deal as imminent for the last five years. Meanwhile, a boomtown atmosphere has been unleashed:

Erbil, the political capital of Iraqi Kurdistan, is entering an oil boom. The city of 1 million people, which still lacks a good hospital, has seen the opening of its first luxury hotel — and another three are under construction. Oil executives fly in and out with airlines offering new routes each month. But while money is pouring in, the region has yet to develop services to benefit from it, importing everything from equipment to food. Costs are rising fast, too. Housing prices are rocketing and salaries in the oil industry have doubled in the past five years. And with more than 40 companies elbowing for space in Erbil and the region, retaining competent staff is a problem. Local political commentators are already warning that the region — like others in Latin America, Africa and the Middle East — could see the blessing of oil turning into a curse.

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The flashpoint in the South China Sea: U.S. presidential politics have been injected into the high-tension squabble among nations in the potentially hydrocarbon-rich South and East China seas. On a trip through Asia, President Barack Obama put down 2,500 U.S. forces in Australia, and suggested that China stop using its heft to resolve its disputes, and instead "play by the rules of the road." For its part, China suggested that Obama butt out, and stop acting to "inflame regional tensions." The occasion for this brinksmanship is a meeting in Bali of Asean, the grouping of Southeast Asian countries. Japan and the Philippines have embraced a higher-profile U.S. presence in their seas after ending up in direct confrontation with Chinese naval vessels over the last couple of years; in the case of the Philippines and Vietnam as well, the altercations have involved disputes over offshore oil rights. Previously, Secretary of State Hillary Clinton said the U.S. would come to the aid of any ally in the region, but Obama’s assertions are at least in part a show of presidential leadership in advance of an expected tough election next year.

The Putin swoon: It’s that time of year again, when the world’s dedicated Russia experts fly to Moscow, get verbally put in their place by a pugnacious Vladimir Putin, then return home to describe their amusing dinner with the Czar. It is known as the Valdai Club (videos here. Photos here). Apart from the ethical question surrounding the many members whose expenses are covered by the Kremlin, there is nothing wrong, and much valuable in the way of insights, about this annual exercise. British academic Anatol Lieven, for example, wrote a nice piece about his Gloomy Dinner with Putin. My favorite is an account by the Financial Times’ Neil Buckley, who wrote that, in the lead-up to the dinner, the experts for the first time turned on Putin in a mildly critical fashion.  As for the Russian leader himself, says Buckley, no one need wait for "a possible Putin 2.0" when he wins back the presidential post in elections next March. Putin displayed "his old swagger," and invoked the "barbed criticisms of the West" that characterized his 2000-2008 period in the Kremlin. In terms of energy, some analysts think the boom in shale gas poses a challenge to Russia’s large natural gas exports, but Putin poured cold water on the idea, writes Buckley: "Mr. Putin grabbed a notepad to draw diagrams of how ‘fracking’ — the method used to extract such gas — could damage the environment."  

Times change, ado remains over pipelines in Europe: Europeans consume more than 500 billion cubic meters of natural gas a year, a volume that will grow as Germany closes its nuclear power plants. Luckily there is a growing glut of supply — liquefied natural gas from numerous places, possible shale gas on the continent, plus (as suggested above) reserves from Kurdistan when fields there come into play. This has not dissuaded Europeans and the U.S. from their fixation on Russia, and the political leverage afforded it by a dominating 30 percent share of the European gas market. They have sought to curtail Russian influence by attempting to pipe in more alternate supplies from the Caucasus and Central Asia through a proposed $10 billion system called Nabucco. This effort is early — the fields and politics of those former Soviet regions are not ready to send big volumes of gas in a westward direction, write the Wall Street Journal’s Marc Champion and Joe Parkinson. Yet, as suggested, the combination of events have eclipsed the Western strategy: Europe needs the Russian gas more than ever, but Moscow’s ability to exert pressure is being eroded naturally by the availability of other supplies, and the inevitable construction of a small-bore (non-Nabucco) pipeline from the Caucasus into Europe, plus connector lines into vulnerable Eastern European states. Gentle nudging around the edges can accelerate the construction of one or more of those pipelines, but this round of pipeline politics is looking over-played.