The Weekly Wrap — Jan. 27, 2012

In the last episode, we were awash in gas: President Barack Obama is using the language of a shale gas enthusiast, crowing this week that the United States has sufficient reserves of the fuel to last 100 years. For that reason, the U.S. ought to push ahead with natural gas development, as long as safety concerns are kept in mind, said Obama (above, pictured this week on the campaign trail). Almost simultaneously, though, large volumes of that gas have vanished. First, the administration’s own energy think tank — the Energy Information Administration — sharply lowered its estimate of U.S. shale gas reserves: rather than the 827 trillion cubic feet in unproved technically recoverable reserves announced last year, the EIA estimates that the country has 482 trillion cubic feet, or 41 percent less. The drop is understandable — it has to do with the addition of completed wells, which provides more data points for the EIA to insert into its reserves model. But some serious analysts think even the lowered numbers are soft; Chris Nelder, for instance, writes that all that can be surmised credibly is an 11-year supply of gas at current consumption rates.

Then there is actual production. Chesapeake and ConocoPhillips have both announced the withdrawal of a substantial volume of gas from the market because of firesale prices that prevail, currently $2.77 per 1,000 cubic feet, compared with $13 in 2008. Chesapeake — the second-largest U.S. gas producer — said it will sell 8 percent less gas this year than last; Conoco says it will lower production by 4 percent. It is not that the companies are going broke — as discussed previously, much of the gas is in the same geological formations as highly lucrative oil, so drillers themselves say they earn excellent profit regardless. Yet, they would like to earn greater profit still by driving gas prices higher through the law of supply and demand — currently, there is a super-glut of gas; they would like to reduce that to a mere glut. Of course, the drillers in part have themselves to blame for sagging U.S. gas demand: In 2009, the shale gas industry vigorously opposed Obama’s push for cap-and-trade legislation, under which electric utilities  would have accelerated their transition from coal- to gas-fired plants. The drillers would be selling much more gas, and prices would thus probably be higher. Alas, those politics were not to be. The Financial Times’ Ed Crooks quotes Oppenheimer’s Fadel Gheit: "I would expect all large gas producers without exception to scale back production this year."

These developments are important for a single reason: The U.S. is the epicenter of the global shale gas boom. Because of the U.S. bonanza, for example, Russia has been shaken in Europe. China might be next to join the boom. It is importing U.S. technology; if it succeeds in producing substantial shale gas, it could transform its own set of circumstances. But if the numbers are consequentially smaller than supposed, and if the market is slow to absorb the higher volumes, the geopolitical outcomes will be muted.

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Iranian heavy crude anyone? Why don’t Russia and China go along with Western oil sanctions against Iran? One reason is that companies from both countries stand to profit handsomely once the crackdown begins, write Gabe Collins and Andrew Erickson at the Wall Street Journal. Stopping Iran from earning cash that might fund its nuclear ambitions is a worthy goal, but not something that impresses smugglers and middlemen. This is the history of embargoes, Collins and Erickson remind us — discounts or premiums are demanded, the oil’s provenance is disguised, and it ends up refined and pumped into our automobiles as gasoline. The post-1979 oil embargo against South Africa earned a smuggling fortune for Marc Rich (in addition, for O&G trivia hounds, the Dutch trader John Deuss); it is impossible to count the number of people who got rich on the post-Gulf War sanctions against Saddam Hussain. As for who will earn the big bucks this time, China’s oil trading giants Zhuhai Zhenrong and Unipec seem exceedingly well-placed, write Collins and Erickson. Since their country isn’t part of the sanctions, they themselves won’t be breaking any laws at home. One option for them is to mix their Iranian heavy crude cargoes with similar Russian Urals blend (Moscow has also opposed the sanctions regime), and sell the resulting concoction onto the international market. Collins and Erickson get added points for passing along this extremely handy report (from tanker brokers Poten & Partners) detailing China’s rise as global oil traders.

Sudan’s pipeline go-around: Independence, peace and the divvying up of oil wealth did not appear likely to go smoothly when Sudan split into two countries last summer, and it hasn’t in practice. According to South Sudan, the oil-deprived north has been filching its crude — diverting it through a purpose-built pipeline to the capital of Khartoum, and otherwise helping itself to some $800 million in oil since December, writes the Wall Street Journal’s Nicholas Bariyo. As for the north, the complaint is that it receives nothing — not even a traditional transit fee — for hosting the pipeline carrying the South’s oil shipments to the market. Both sides say the other is financing its battlefield opponents. As a result, the South has decided to shut off the oil flow while it builds a second, diversionary export pipeline through Kenya to the coast of east Africa. South Sudan leader Salva Kiir and Sudan’s Omar al-Bashir met today in Addis Ababa but failed to resolve their differences, writes Reuters. Any answer will have to include a sharing of the spoils. Meanwhile, writing at the New York Times, Alex De Waal calls the state of affairs an "economic doomsday machine," since the south will have almost no source of money for between one and three years, the time required to build the new line.