The Oil and the Glory
The Weekly Wrap — June 22, 2012
BP and the Russian squeeze: BP may be moving toward yet another comeuppance in Russia. This chapter in the company’s nine long years of Russian misery goes back to January 2011, when it announced a coup — it was bouncing back from the devastating 2010 Gulf of Mexico oil spill, and forming a turbo-partnership with ...
BP and the Russian squeeze: BP may be moving toward yet another comeuppance in Russia. This chapter in the company’s nine long years of Russian misery goes back to January 2011, when it announced a coup — it was bouncing back from the devastating 2010 Gulf of Mexico oil spill, and forming a turbo-partnership with the Russian state oil company Rosneft to drill for oil and gas super-giants in the Arctic Circle. But then things went horribly wrong: BP’s regular Russian oligarch partners accused the Britons of violating their rights of first-refusal for any BP deal in Russia. The oligarchs, collectively known as AAR, sued and scuttled the BP-Rosneft deal, and sought billions of dollars in alleged damages. Early this month, BP finally threw in the towel, and said it is assessing offers to buy its half of TNK-BP. Here is where the fresh trouble starts. BP has suggested that there are at least two bidders — AAR and an unidentified state-run Russian company. Among stock analysts, the general thinking is that, whoever buys the 50 percent, BP could walk away with some $25 billion. But now it appears that that sort of payday will arrive only if AAR fails to have its way. Sadly for BP, the record supports the opposite outcome. In a note to clients on Wednesday, Citigroup’s Alastair Syme said that, given the oligarchs’ aggressively pursued, $13 billion lawsuit against BP, the Britons are unlikely to achieve the $25 billion figure. How much are they likely to receive? AAR (which believes that BP is bluffing about there being another suitor) is thinking more like $7 billion, right around the figure that BP paid for its share of TNK-BP in 2003 (the Financial Times’ Guy Chazan first reported the $7 billion figure, which we have confirmed). In the Russians’ apparent view, that would allow BP to save face by leaving with all the money it originally gambled on TNK-BP.
But that may not be the end of BP’s latest shellacking. The company is thought to be seeking to leverage its exit from TNK-BP into a position on the resource-rich Arctic, similar to deals struck by ExxonMobil, Italy’s ENI and Norway’s Statoil, as I write at EnergyWire. But it should not expect kid-gloves treatment by the Russian government. The reason is that President Vladimir Putin and his oil lieutenant, Igor Sechin (pictured above, right and left, respectively), will have closely monitored the latest TNK-BP deal. They will see that BP can be shellacked with impunity. If indeed BP proceeds with the sale of its TNK-BP share, expect this sequence of events: BP sells out for a firesale price to AAR; AAR resells that share or more to a state-run company such as Rosneft at a markup, but less than the $25 billion market price; and BP gets a place on the Arctic, but on far more advantageous terms for the Russian side than achieved with the other western companies.
Go to the Jump for the rest of the Wrap.
When you are Saudi: Saudi Arabia’s royal family has been in power since Ibn Saud founded the kingdom in 1932, and for decades the country has enjoyed tremendous reach — its world-leading exports of oil cast a shadow over global energy, and its policy inclinations influence the global economy to a degree exceeded perhaps only by the United States and China. So what do you want when you already have it all? You cherish your perks — the palaces, the cash, the influence in venues of grand power. But mainly you want to stay there, five words that go far in explaining much of what we see from the Saudis these days. Start with potential security threats, such as that posed a couple of decades ago by Saddam Hussain, or now by al Qaeda in Yemen, along with the sentiments underlying the Arab Spring: The Saudis want the U.S. 5th Fleet to continue to cruise the Persian Gulf, a commitment that some analysts suggest may be under reconsideration by the U.S. since its reliance on Middle East oil is on the wane. While actual disengagement is quite a stretch, this scenario still unsettles the Saudis. "In the long term, the Saudis know their markets and customers are to the East. But they also know there is absolutely no security alternative to the U.S. They’re stuck with us," F. Gregory Gause III, a professor at the University of Vermont, told us. Then there is the U.S. shale oil boom. The Saudis have been producing oil at a breakneck 10 million barrels a day, a rate that has led to enormous stockpiling of petroleum, and a plunge in global prices — yesterday, the price of benchmark Brent crude crashed through the psychological $90-a-barrel barrier to close at $89.23 a barrel; the U.S.-traded benchmark punched through the similarly important $80-a-barrel barrier to close at $78.20 a barrel. The Saudis have several motivations in driving down the price: to cushion the blow of lost Iranian exports to international sanctions; to improve the chances of global economic recovery, which in the long run helps the oil business — and to make the development of U.S. shale oil less economical. To the degree that oil prices moderate, the economics of shale oil are less attractive. The Saudis are not necessarily working to cut the legs out from under the long-term competition. But they would not mind if those legs were a bit shorter, and less sturdy.
As we noted in a piece earlier this week, financial fine-tuning can spiral out of control, and the bottom could fall out of the oil market. While the Saudis are brimming with more than $700 billion in investments and reserves, another $30- or $40-a-barrel drop in prices would hurt. Estimates are that the Saudis need the revenue of $80-a-barrel oil to finance the state budget, as social spending has gone up and the country continues to burn through a full third of its output — some 2.8 million barrels a day — for electric power plants and cars. "The idea that they could survive fiscally at $60 a barrel is questionable," says Gause. "They’ve got a lot of money in the bank, but their [budgetary] break-even point has gone up, and domestic oil use is a restricting factor as well." The Saudis have proven superlatively adept at the long game. But the circumstances show that lots of oil does not solve everything.
Rio, schmio: There was much wringing of hands in the runup to the Rio de Janeiro conference on global warming, and more in its wake, as Bruce Jones wrote here at FP. But there should not be — given the global economy since 2008, there is no conceivable scenario in which Rio, or any other such omnibus gathering, could have achieved a breakthrough consensus on heat-trapping gases. Yet there are counterfactuals out there to cheer the fretters. In Japan, we see an elevated promotion of solar energy to compensate for the near-shutdown of the nuclear power industry in the wake of the 2011 Fukushima disaster. The Japanese government has mandated that utilities buy all solar power produced by private companies at a fixed, high rate of 53 cents per kilowatt hour, around twice that charged in Germany and four times the U.S. average. Given the scale of Japan’s power consumption, this single directive could change the economic game for Japanese companies such as Sharp and Kyocera, and China’s Suntech. Not so much for western companies, which have been marginalized by lower-cost Asian manufacturers, but to the degree they can get their pricing down, they could get a boost as well. Solar has generated positive news elsewhere too. In India, the largest solar park in the world has opened in Gujarat. In Germany, solar power plants set the world record for solar energy generated in a single weekend — 22 gigawatts of electricity, or the equivalent of 20 power stations, Reuters reported. What about the effort to clean up fossil fuels? General Electric and Norway’s Sargas say they have developed a cheap, gas-fired power plant that captures 90 percent of its carbon emissions. The recovered carbon can be injected into oil fields to extract greater amounts of crude oil.
iPolitics: As of the first half of this year, Apple had sold more than 200 million iPhones and some 67 million iPads, catapulting it past ExxonMobil as the largest of any publicly traded company in the world. That is a lot of buzz, and a lot of players wish to capitalize on it. Consider the matter of electricity. The Palo Alto-based Electric Power Research Institute has attracted attention with a report showing that all those devices use a miniscule amount of power. If all were currently still operating, their owners would be paying a collective $146 million a year for charging them up every other day. Late last year, Exxon itself sought to get in on Apple’s action. Ken Cohen, an Exxon vice president, wrote a post on the company blog that calculated how many gallons of gasoline would be required to charge up an iPhone. Gasoline is so dense with electrons, Cohen wrote, that one gallon would charge the device once a day for 20 years. He added helpfully, "Consumers at times may take for granted the convenience and time-savings offered by the existing fuel station network." Okay, you caught our attention.