Oil Abundance or Oil Curse?

Terra America
by Kirill Benediktov

oil

Editorial Note. At the end of the last year American political press turned out to be full of numerous articles dedicated to the topic of forthcoming oil abundance with U.S. as the main beneficiary and Russia as the main victim of it. Series of these publications seemed to be focused on the Russian middle class the well-being of which depends very heavily on stability of high energy prices. Why, however, did the Russian opposition turn out to be so indifferent to the issues of forthcoming energy resistance of the US and the subsequent crisis of the so-called putinomics? Editor of the department of intellectual investigations of Terra America Kirill Benediktov decided to get outside of this problem.

* * *

The latter half of 2012 was marked by the series of publications published in the English-language, predominantly in the US, focused on the issue of oil abundance.

It is fair to say that the issue of forthcoming energy abundance has been discussed in the US at least from August 2008 when the article “Drilling Boom Revives Hopes for Natural Gas” was published in NY Times [1], as well as analytical contribution by Jon Basil Utley “The Coming Energy Abundance” on Reason.com.[2]. Yet in the latter half of 2008 the world shook by global financial crisis did not care much of huge reserves of shale gas discovered in North America. Therefore this fact did not cause a sensation.

Nevertheless, in 2009 due to operation of unconventional sources of hydrocarbons like shale gas and coal bed methane, the US turned into the global leader in gas production. This phenomenon has been called the shale revolution and became a reason for lowering natural gas prices not only in the US but in the other regions of the world as well.

Yet the prices fell to such extent that supply in the gas market has been essentially outgrowing the demand. The result was that a year ago, in the end of January of 2012 several major gas producing companies announced scale reduction in gas production,[3] and a most active player in shale gas market Cheasapeake Energy Corp. announced the reduction in capital investments in drilling by70 percent. Nevertheless, even after that spot gas prices in the US did not exceed $100 for one thousand cubic meters.

In fact the well-publicized shale revolution in gas field can be compared with the snake biting its tail. Gal Luft, prominent expert of IAGS (the Institute for the Analysis of Global Security) and adviser to the United States Energy Security Council, provided the following answer on the question about perspective of shale gas production asked by Terra America:

“I think that some technologies have been developed up to the level when they can be considered profitable. However, they have been tested solely under specific geological conditions of Pennsylvania or Texas. We still don’t know whether these technologies would work that effectively under other geological conditions. We also know that in some countries they do not work that well. Another problem is that in fact due to the fall of gas prices many producers are losing their money. I predict that they will cut back production just because they won’t be able to receive profits on their investments.”

However, the situation in the market of hydrocarbons changed dramatically and shale did play its role in this change.

2011 became a make-or-break year. While oil production in the Gulf of Mexico was down by 240 thousand barrels a day and in Alaska it was cut by 40 thousand barrels a day, for the first time in a long period gross oil production increased in comparison with the previous year and reached 5.512 million barrels a day. Production of unconventional hydrocarbons including shale oil contributed a lot to this increase which amounts to additional 370 thousand barrels a day. Thus, that exceeded losses by 90 thousand barrels a day.

The most important thing is that in the share of oil imported by the US was down by 45 percent while several years earlier this figure amounted to over 60 percent. That was when in America they started talking about the coming oil abundance in the world.

Two Sides of the Same Coin

Before the summer of 2012 the attention of authors of the publications dedicated to oil abundance was focused mainly on the US national problems. The authors of these articles, particularly Jon Basil Utley, pointed to the fact that reserves of hydrocarbons in America are large enough to reduce dramatic dependence of the US upon the countries importing oil which, as they kept saying, “destroys our trade balance, funds most of our enemies and adds to the exorbitant foreign debt.”

Meanwhile the pipeline 800 miles long transporting oil from fields of North Alaska, reserves of hydrocarbons of which are considered to be as rich as those in Western Siberia, operate at slightly over a quarter of its power. Troubadours of oil abundance blamed for it mainly Obama’s administration that became hostage of its voters, the left alliance including particularly environmentalists. According to Utley, these “environmental extremists” have been doing their best to indefinitely delay the operation of new fields and technology advancement.

It appears probable that some of these publications were biased and met the interests of oil companies that invested considerable funds in development of bituminous sands in Canada and shale coals in Green River Formation. For instance, the publication posted on Bloomberg.com claiming to be objective leads readers to the thought that while Obama’s administration being under pressure of environmentalists resists implementation of the project of the pipeline 2,673 kilometers long from Canadian province Alberta to the Gulf of Mexico coast, the Chinese invest heavily in the development of bituminous sands of Alberta.

According to Canadian analyst Jeff Rubin, continuous postponement of the decision on Keystone XL pipeline does not mean that bituminous sands of Canada will be given up for lost. However, the largest part of Canadian oil will be delivered to China.

Simply said, tone and trend of these publications were determined mainly by concern for the future of hydrocarbon reserves of the Continent of North America.

“To use identified resources and new technologies for getting rid of energy dependence and minimize access to the competitors’ cake” – that is a brief description of sentiments that prevailed in U.S. expert community in 2009-2011.

Everything changed in the spring of 2012.

One of the first signs was a large article by Steve Levine eloquently entitled “The Era of Oil Abundance: Meet Winners and Losers of the Coming Age of Plenty” in influential political journal Foreign Policy. After repeating arguments in favor of the coming energy independence of United States that are well-known to readers, Levine described the near future for stakeholders on hydrocarbon market with reference to six prominent analysts invited by New America Foundation.[4]

First off, Unites States will win due to increasing employment opportunities and GDP, strengthening dollar, as well as termination of humble worship of authoritarian rulers and feudal monarchs. New petrostates like Cyprus, Ethiopia, French Guiana, Israel, Kenya, Mozambique, Sierra Leone, Somali, Tanzania and Uganda will turn out to ride a high horse as well. Why so? The arguments are too vague. The coming energy boom just offers excellent opportunities for economic exuberance. Mentioning Israel looks rather strange as this country still depends much on external supplies of all petroleum products. The old fields like Heletz and Meged 5 bring rather small income. However, many geologists think that in Israel there are oil fields with general resource amounting to about 1.400 million barrels under the explored gas fields, but due to low level of technology their commercial development is impossible.

Strange as it may appear, China also joined the ranks of “lucky things” mainly due to its willingness to invest in U.S. oil fields that scared so much Bloomberg analysts in case with Canada. According to Levine and analysts of New America Foundation, losers of the coming age of oil abundance are not the countries but their leaders, among which are President of Venezuela Hugo Chaves, President of Turkmenistan Gurbanguly Berdimuhanedov, President of Equatorial Guinea Teodoro Nguemo and the Supreme Leader of Iran Ali Khamenei. The Russian President Vladimir Putin was announced the key loser of the coming era.

The article states with reference to analyst of Council on Foreign Relations Michael Levi that the Russian leader turned out to be incapable of real economic diversification and the budget of Russia will go all to pieces if oil prices will get down below $117 per barrel. Prices have already got down up to $103 per barrel. As in the case of Israel, these expert appraisals are surprising in some degree. The budget for 2012 was processed at the rate of price of Russian oil blend URALS for $100 per barrel while average annual price at $117 guaranteed a balanced budget to Russia. In the spring of 2012 oil prices came up and ranged from $115 to $120 per barrel. Back then target prices of the budget were adjusted up to $115 and hence budget deficit was cut from 1.5 percent to 0.1 percent of GDP. At the end of spring prices were off again and then independent analysts interviewed by Levine came for help.

Today oil prices have gone up again ranged from $108 to $110 per barrel for recent months (URALS). The budget of 2013 has been processed at the rate of the estimated $91 per barrel.[5] Meanwhile budget deficit should not exceed 0.8 percent of GDP. For reference, the U.S. budget deficit of 2012 amounted to $1.089 trillion or 7 percent of GDP. (It is fair to say that this indicator is not as bad as the last fiscal year in the US was closed by deficit of 8.7 percent of GDP, or $1.297 trillions).

Things must change when the era of oil abundance comes. OPEC countries which, according to Shell ex-President John Hoffmeister, cannot imagine how cordially they are hated in the world, will turn out to be in the “losers’ corner” together with Russia.

As is easy to see, the distribution presented by Steve Levine in his article, have been determined not so much by economical as political considerations. The good guys benefit from oil abundance and the bad guys lose all bargaining chips thrown into chaos and hence they stop being key players in the global arena.

The End of Putinomics?

In all prepossession Levine’s article did not lay claim to relative objectivity – at any rate, it concerned all the countries that will be influenced by the wave of prospective oil abundance.

Still the series of articles published in many authoritative English-language media at the end of the last year concerned Russia alone. However, while oil prices have gone up again the key focus was made on gas issues.

For instance, Owen Matthews in his article “The End of Putinomics”states the following:”Two words have already begun rocking Putin’s world: shale gas. The new technologies, which allow natural gas to be extracted cheaply and in previously untapped places, is about to upend not only global energy prices but also the geopolitical status quo – with Russia as the prime loser.”

Although crude-oil prices have stayed firm, Matthews notes with some regret, due to rising Chinese demand and continued unrest in the Middle East, world natural-gas prices have fallen through the floor. In the past five years the United States have overtaken Russia as the world’s largest natural gas-producer, and U.S. domestic prices are a quarter of what Russia’s gas giant, Gazprom, has been trying to charge in Europe. It is no wonder that Gazprom profits fell “by half” in the last quarter of 2012, and its total stock value has plunged from $365 billion in May 2008 to $ 120 billion as of the end of 2012.

The author’s conclusion is that “shale gas and LNG have broken Gazprom’s stranglehold on Europe’s energy supply.”

This is not to say that these figures are spun out of thin air (though capitalization of Gazprom amounted to $128 billion as of the end of 2011 and in 2012 it went up by 14.5 percent, i.e. up to $146 billion). It is worthwhile noting that fall of Gazprom’s stocks in 2008 was the consequence of crash of the Russian stock market but not of “the shale revolution”. In October 2008 capitalization of Russia’s gas giant amounted to $95.9 billion. It means that from 2008 to 2012 capitalization increased by the good $50 billion. It certainly does not mean that Gazprom and other energy companies do not have any problems. It just means that in their zeal to write a story of close and inevitable collapse of putinomics in consequence of changes in the energy market, authors of the articles about hydrocarbon abundance take liberties with facts.

In his article “Russia’s Murky Energy Future” member of the Atlantic Council Robert A. Manning takes advantage of the stereotype stating that Gazprom market value has plummeted from $365 billion in May 2008 to $ 120 billion as of the end of 2012. Gazprom is the object of EU antitrust litigation and therefore it has to pay remunerations by way of backdated discounts to the delivered and paid gas.

The European gas market is really diversifying and Gazprom has been through it. Yet does that mean that Russia should inevitably put up with loss of the status of energy superpower? It seems not, because apart from the Western direction, Russia has the Eastern one. China is the key prospective marketing outlet and the demand in energy constantly grows. Major changes in perspective planning of the company for 2013 prove that Gazprom is ready to reorient. In particular, such priority projects as full-field development in Yamal (capital investments has been reduced almost by half to 163.49 billion rubles); South Stream pipeline (by 27 percent to 90.93 billion rubles) and Shtokman field. The new programs were launched instead, such as the state-run Development Program for an integrated gas production, transportation and supply system in Eastern Siberia and the Far East with account of possible export to China and other countries of  Asia-Pacific Region.[6].

In his article Manning worriedly states that Rosneft took over the Russian-British partnership known as TNK-BP. This is another reason why it deserves attention.

According to Manning, “the $60 billion Rosneft acquisition is likely to shape Russia well beyond the energy industry: it dims the already faint prospects of Russia diversifying and modernizing its economy to become more than a petrostate.”

However, Manning admits that a new model for joint venture is critical for Russian oil industry in terms of “management skills and technology”. What are they if not the elements of modernization? Doesn’t this fact prove that “the petrostate” remains investment-attractive in the extreme?

The Curse or the Blessing?

From a point of view of creators of the new world energy model, Russia being an undemocratic authoritarian state does not have the right to robust economy. The fact that it received leverages over the countries of the ex-Soviet area and even Western Europe is an unfortunate mistake of history which should be corrected as soon as possible.

That is why “shale revolution” is being dished up as manna from heaven for EU that now can crush Gazproms’ position. In fact the share of shale gas consumed by EU countries is not large[7], LNG delivered from North Africa and Qatar as well as solid fuel, coal primarily, are of greater importance.

Farther, if gas prices are really coming down worldwide, it is not the case in terms of oil. In this regard another argument is usually put forth: the notorious “oil curse”. Manning writes that Rosneft-BP deal is likely “to worsen what some call the “oil curse”, reinforcing capitalism and reducing incentives for economic reform.”   Political projection of this “oil curse” is Putin and his power encirclement. The reformers like Dmitry Medvedev, Arkady Dvorkovich and other liberals are trying to resist but their fences are rather weak.

According to Manning, the Russian middle class alone, whose benefits from this political path are minimal, can deliver the goods. The interesting question is whether the middle class will be seriously looking for alternatives when Putin thinks about a second term in 2018.

Well, the part of the Russian middle class, or creative class being a trendy name for it these days, came to think of it back at the end of 2011. It is remarkable though that in all its creativity the opposition have not thought of (or did not want to think?) being armed with an advantageous propaganda story about the doom of putinomics based upon hydrocarbons amidst global oil abundance.

Everything was subjected to criticism, from collapse of the army to the ban on adoption of Russian orphans by Americans. People voice their concerns for the fact that high oil prices do not make a positive impact on their incomes and GDP growth. In addition, they disapprove “the deal of the century” – purchase of TNK-BP by Rosneft (“the government makes the choice in favor of the further socialization of economy” [8]), but for some reason none of Russian oppositionists repeats after American analysts the syllogism carefully made up by them. The syllogism says that the era of oil abundance is coming which means that Putin’s regime is doomed.

We do not have a decisive answer to the question why the opposition does not use oil abundance scenario in their ideological struggle. We do have one assumption though.

Perhaps, the fact is that the key element of oil abundance concept is U.S. energy independence. It means that America will pass from the former scheme “order in exchange for oil” providing military and political presence in the Middle East and Central Asia to a more isolationist model. It is already passing on to it. Apart from everything else, this model includes reduction of support for Israel as well as mending of diplomatic fences and then development of economic ties with Iran.

There is a strong probability that such change in U.S. foreign policy is unacceptable for the majority of Russian liberal opposition.

On the other hand, convergence with China is unacceptable for it either. It obviously makes American political analysts anxious and explains the disapproval of both to Rosneft – BP deal. Such convergence is highly possible in the conditions of possible new configuration of the world energy market.

However, it is just an assumption. Yet the question remains, as well as the question about significance of hydrocarbon resources for our country, whether they are the curse or the blessing. Besides, it is still not quite clear what a new round of the global game on energy resources, for which oil abundance concept is a part of ideological provision, will bring to the world.

Emergence of the concept of abundance of energy resources per se but not, say, refusal or at least reduction of their consumption, prove that in the medium term the big oil and the big gas will remain the key geopolitical factors.

On the other hand, it helps to remember that somebody will have to use a potential “sea” of the new oil; otherwise, as is evident, there is no point in it. Therefore industries and technologies should develop, and new markets for new products should emerge, etc. So if even oil abundance “threatens” the world it will be possible to make the first step to that after ending the worldwide recession. The new energy theories will remain just theories unless this global issue of the XXI century is dealt with.

 


[1]Drilling Boom Revives Hopes for Natural Gas // http://www.nytimes.com/2008/08/25/business/25gas.html?_r=2&partner=rssuserland&emc=rss&pagewanted=all&oref=slogin&

[2]http://reason.com/archives/2008/09/22/the-coming-energy-abundance

[3]ConocoPhillips company has planned to reduce gas production in Canada by 2.8 million cubic meters per day, while in the contiguous states of U.S. they planned to cut gas production by 1.35 million cubic meters per day.

[4]The Fund founded in 1999 determines its mission as the encouragement of public debates on key issues of today that are not always raised on both sides of political spectrum.

[5]The budget for 2013 has been processed with application of the budgeting rule. The rule takes into account a ten year period of oil pricing. However, from 2013 average oil price for the last five years has been taken into account and further on the period of average pricing will annually be increased by one year. Thus, the budgeting rule presupposes budget calculation for 2013 based on oil price at $91 per barrel and respectively at $92 per barrel in 2014 and $93 per barrel in 2015.

[6]http://www.vedomosti.ru/finance/news/7342241/gazprom_gotov_ekonomit#ixzz2HzOn694x

[7]For instance, the French government banned shale gas drilling for environmental reasons. Bulgaria walked in its footsteps.

[8]Ашурков В. «Оппозиция как бизнес-проект». (V. Ashurkov. Opposition as a Business Project)

Terra America