The Weekly Wrap: Dec. 16, 2011

Iraq — drilling in a (former) war zone: With the U.S. military role in Iraq officially over, so vanishes the main official outside protection afforded Big Oil, which is working there in droves.  Iraq is the largest potential new oil bonanza on the planet — it has the second-largest known reserves next to Saudi Arabia. For oilmen, this is a bracing new day: One can hire an army of former commandoes as security — which the companies do — but the presence of a friendly Western security force is a qualitatively different and assuring thing. Bombings are a regular occurrence; as the Wall Street Journal’s Hassan Hafidh reports, BP temporarily stopped producing oil in part of southern Iraq’s Rumaila field after someone bombed pipelines.

Yet business goes on: Big Oil’s stomach for badlands rises in proportion with the potential output, and in the case of Iraq’s three big southern fields — West Qurna and Zubair (pictured above), in addition to Rumaila — the companies have pledged to produce 6.8 million barrels a day. That is a massive goal, considering that the same companies — BP, Italy’s Eni and ExxonMobil — plan to produce just one-sixth of that daily volume from fields of similar collective size on the Caspian Sea. The Iraqi government has a stake in ensuring the companies’ relative safety as its ambitions are even greater — it hopes to raise the country’s production to 12 million barrels a day by 2017. Virtually everyone outside the country regards the higher aim as fantasy. One reason is that, quite apart from the security situation, Iraqi bureaucrats make it hard for the companies to operate, reports Bloomberg. "The red tape companies encounter in Iraq — when they apply for employee visas, for example, or try to import equipment or seek payment — seems to reflect attitudes rooted in the past," the agency writes.

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Gas hunger in China: We have another sign of China’s growing attachment to relatively clean-burning natural gas — an acquisition tear by oil giant Sinopec. The Chinese company this week significantly raised its ownership share in a big Australian liquefied natural gas play with ConocoPhillips, and followed that with a hostile bid for a China-based pipeline company to carry its added gas to Chinese homes. Then Sinopec joined a battle for a nearly one-third share of a Texas-based shale gas-drilling company (its competition is fellow China giant CNOOC and Saudi Aramco). What is going on? One answer is that Sinopec CEO Fu Chengyu, the mastermind of CNOOC’s failed 2005 bid for Unocal, has emerged as one of global oil’s premier wheeler-dealers (here the Financial Times calls him a visionary). Another is simple politics, suggest the Wall Street Journal’s Dinny McMahon and Chester Yung. They write: "China long has relied on its abundant supplies of coal to fuel the country’s fast-growing economy. But as an increasingly affluent population becomes less tolerant of the pollution shrouding many of the country’s biggest cities, China is ramping up imports of cleaner-burning gas." All of these deals face either shareholder or regulatory scrutiny, but the trend is clear — an accelerated Chinese push toward natural gas.

The measure of Brazil’s sanctimony:  Oil spills are objectionable — drillers pull out the stops to avoid them, and as BP has learned over the last 18 months, they can suffer mightily when they get it wrong. But given the fallibility of technology, spills can and will happen. So companies need to have genuine plans and equipment on hand to safeguard their employees, contain the spillage rapidly, and clean up any environmental damage. They need to be transparent and candid while doing so. If fines are to be levied and better safeguards enacted, the government should do so reasonably with due contemplation. But then by and large you get back to work. The reason is that hydrocarbon extraction usually is a strategic and highly remunerative business — countries and their populations usually need them.

Over the coming decade, Brazil seems likely to become one of the world’s most important oil-producing countries — it could export 5 million barrels of oil or more. Strategically speaking, it has the advantage of location in a stable part of the world. Yet Brazil is getting the last part of the informal spill rules wrong.

Chevron spilled about 3,000 barrels of oil into the Atlantic Ocean last month (.06 percent of the 5 million barrels spilled by BP in the Gulf of Mexico in 2010). For that miscreancy, Brazil wants to ban Chevron permanently from drilling in the country, and to fine it $10.6 billion (that would come to $3.5 million a barrel; as a comparison, BP has put aside $40 billion in potential costs and payouts for the Gulf of Mexico spill, or $8,163 a barrel, reports Bloomberg). Brazil justifies the penalties as a deterrence to other companies because past lenience hasn’t worked. Yet the outcome — if the companies take Brazil’s attitude seriously — could be a profound disincentive toward risk-taking of the type necessary to produce oil in Brazil’s deep offshore, where the biggest fields are located. Bluntly speaking, Brazil’s state-run Petrobras cannot work these fields without the expertise of Big Oil. That is what baffles one about Brazil’s pushing its luck. Writes the Financial Times’ Lex column:

Gearing up for what may be the largest and most complicated exploration project of the decade in its deep offshore "pre-salt" fields, Brazil cannot afford to chase away foreign capital and expertise. … Yet it is a reminder both of the high risks of offshore drilling and the fact that Brazil’s tolerance of big foreign oil companies is born of necessity, not affection.

One intuits that Chevron and Brazil will reach an accommodation. But companies now have an idea as to the state of Brazil’s petro-maturity.

The art of the deal in Kazakhstan: Over the last several years, Kazakhstan has gone to war with all the major oil companies doing business on land and offshore from the Caspian Sea republic. These conflicts almost all have ended with Kazakhstan holding a larger share of the fields in question. Kazakhstan itself cannot be said to be irrational — in each case, the companies opened themselves up to trouble either by contractual failure, or by relying naively on the endurance of Kazakh patience with the contracts themselves, often one-sided documents signed when Kazakhstan was prostrate almost two decades ago. In the latest dispute, the BG Group, Italy’s Eni and Chevron have agreed to Kazakhstan demands for a 10 percent share of the supergiant Karachaganak gas condensate field, near the border with Russia. The companies pretty much capitulated by assuming all the risk — Kazakhstan will fork over no cash. Rather, 5 percent of the field will be transferred gratis to Kazakhstan to satisfy penalties for back taxes and other disputed sums, and the $1 billion pricetag for the other 5 percent will be "borrowed" from the foreigners, and paid back over three years through produced oil, Bloomberg reports. The upsides include that the field will now be clear for expansion, and its oil will have greater access to the big Caspian Pipeline Consortium export pipeline. On the downside, Karachaganak’s main wealth — its 48 trillion cubic feet of gas, one of the 10-largest reserves in the world — remains largely stranded because Gazprom (owning the only pipelines out of the area) will ship the field’s gas only at a fraction of the world price. With a share of the field, perhaps Kazakhstan will now help to resolve that conundrum.