A Gonzo take on BP

Rolling Stone’s Sept. 30 issue features a new angle on BP-as-corporate-villain by Matt Taibbi, the magazine’s Hunter S. Thompsonesque writer, who, starting with his now famous “vampire squid” take-down of Goldman Sachs, has pushed business journalism in a fearlessly irreverent direction.

 The opening paragraph sets out the premise clearly:

It was sickening enough when British oil giant BP set new standards for corporate scumbaggery in the Deepwater Horizon oil spill, turning the Gulf of Mexico into its own personal toilet and imperiling entire species of wildlife in an attempt to save a few nickels. But with the Gulf geyser finally capped, there’s still a way for BP to cause an even more unthinkable disaster: an AIG-style, derivative-fueled financial shitstorm.

The risk, then, is primarily a Wall Street one: that the insurance market for debt – credit default swaps (CDS), which can also be characterised as a market to bet on (or hedge) the risk of a debtor defaulting – would amplify many-fold the impact of BP going into bankruptcy. Taibbi explains it in colourful fashion:

If a CDS is two bankers sitting on a bench placing bets on whether or not the oil company across the street defaults on its loan, a CSO [collateralised synthetic obligation] is a giant basket of those CDS bets whose contents can be chopped up and sold as securities-like products to whatever moron is interested in buying them.

With all the amoeba-like variations on bets against BP’s debt, Taibbi finds out from Moody’s, one of the main debt rating agencies, that almost one-in-five CSO’s in circulation have a link to BP.  The bottom line: a BP bankruptcy, or near bankruptcy, could have an effect on the corporate debt market similar in size to that of AIG’s near-death experience, though with perhaps less of a ripple effect through the world financial system.

The question, then, is what risk of BP going bankrupt? Clearly, the perception of that happening has receded as the company has come to grips with the Macondo gusher, finally sealing it last weekend. BP’s shares have recovered considerable ground since their nadir in the summer, rising from below £3 at their London Stock Exchange low to above £4, though still well off their highest this year above £6.50. In the debt market, as Taibbi acknowledges, the CDS rates (the cost of insuring the debt) have eased back to 240, two-thirds lower than the peak but still some 50-times higher than where they were before the blow-out.

In sum, Taibbi’s point is that there is a lingering risk that BP might try to choose bankruptcy as a way to avoid — “weasel out of” — paying liabilities for the Gulf spill if they reach far beyond the US$20bn the company agreed with President Obama to set aside in the summer.

For a company of BP’s size and resources, the bankruptcy scenario is far-fetched, a fact Taibbi acknowledges:  “It may very well be that BP won’t go bust — or that, even if it does, it won’t cause a financial catastrophe.”

But his point, ultimately, is about the unquantifiable nature of the risk because of the murky ways that banruptcy law, but more particularly the derivatives markets, work. BP’s Gulf spill saga will run and run, much as Exxon’s Valdez disaster has done, and while the bankruptcy scenario fades it is still a plausible one.

OPEC, a golden raspberry

OPEC, the oil producers’ cartel, turns 50 today, September 14, 2010.

To mark the occasion, OPEC’s Secretariat in Vienna has produced a lengthy brochure, with scrapbook photos and a fairly partisan version of the organisation’s history. 

OPEC's first meeting in Baghdad, Sept. 14, 1960 (Source: OPEC)

OPEC Secretary-General, Abdalla Salem el-Badri, sets the nationalistic tone in his introduction:

“It was therefore a heroic act by the Founder Members to come together in the Iraqi capital 50 years ago and decide that enough was enough. They could no longer allow the lifeblood of their economies to be drained” … by their colonial masters, in the shape of the “Seven Sisters”, the big oil companies that controlled world oil resources up to that point.

Writing in Foreign Policy magazine under the title “How to Ruin OPEC’s Birthday”, Gal Luft, an academic and former lieutenant colonel in the Israeli Defence Forces, takes the counterpoising position. Since the 1973 oil embargo, implemented to deter western support for Israel in the Yom Kippur war, “OPEC has earned a reputation as a club of greedy, non democratic governments whose oil ministers, who gather in Vienna every few months to set the price of crude, hold everyone else’s economic fate in their hands,” Mr Luft asserts.

Furthermore, Mr Luft observes: ” OPEC’s well-deserved reputation as a bully obscures another fact: For all its bluster, the group seems almost uninterested in actually getting all its oil out of the ground. Today, the cartel’s 12 members account for 78% of global oil reserves, but produce only one-third of the actual oil supply; the world’s non-OPEC producers, with little more than a fifth of the world’s oil at their disposal, pump twice as much. Even with the 2007 induction of two new members, Angola and Ecuador, who collectively produce as much oil each day as Norway, OPEC produces today less oil than it did before the 1973 embargo.”

Mr Luft’s recommendation for spoiling OPEC’s birthday is twofold: a longer-term move to electric vehicles and a shorter term law – for the US, at any rate – requiring cars to be flex-fuel capable, running ethanol and methanol with conventional petroleum products.

In the Financial Times, Javier Blas takes a somewhat more circumspect view, listing what he sees as the main challenges for OPEC. Having demonstrated that a technocratic approach works better than a politically-motivated one, the FT reckons that OPEC will need to replace its technocrat-in-chief in the next year or so, namely Saudi oil minister Ali al Naimi, who turns 75 next month. The cartel will also have to deal with the ramping up of Iraqi oil, which is targeted to rise four-fold over the next decade to 10m, assuming the country continues to stabilise and can garner the investment required by international oil companies. Finally, OPEC will have to work within a world that is looking for alternatives to oil – and fossil fuels in general – more seriously that at any time before.

But the piece closes with a quote that acknowledges a fact that was as true at OPEC’s birth as it will be when and if it reaches its centennial: we have no clue what the energy world will look like in 50 years.

China’s mixed results

China‘s state-directed approach to making its energy use both more efficient and less polluting has its strengths and weaknesses.

As the Washington Post reported in its lead business story on Sunday, China has been taking some drastic action to meet its emissions-cutting goals, notably a central government campaign started in August that has required several of China’s provincial governments to make steel mills work nine days then take five days off and for cement plants’ electricity supplies to be cut off for stretches. As the story points out, the programme rewards officials who ruthlessly achieve their targets, even in the face of local protests.

The Banyan Notebook blog on Economist.com likewise contrasts China’s ability to direct energy and emissions cuts by fiat with the convoluted process required by western democracies. While the rule-by-edict approach of the Chinese achieves results, at least in the short-term, both stories note the drawbacks.

Banyan cites the example of Anping county, which it argues demonstrates both China’s seriousness in achieving its goals as well as the limits of its power after successful protests over the arbitrariness of the cuts led to a reversal of policy:

… Even so, China does seem to be taking its energy-intensity target extremely seriously, which must be welcomed. Nor is it bad news that a local government cannot get away with high-handed collective punishment of its power-guzzling citizens. It too will have to enter the morass, and try to persuade people to change their behaviour.

The Washington Post story also raises the difficulties of monitoring China’s progress due to questions of accuracy of its statistics. As is widely acknowledged, China’s statistics are notoriously subject to manipulation – due, at least partly, to the fact that preferment can be based heavily on statistical results. So, “the lack of a national accounting standard for emissions makes it difficult for independent observers in China and elsewhere to monitor how much progress is being made,” the Post’s story notes.

The story quotes Ranping Song, manager of a greenhouse gas accounting programme at the World Resources Institute, an environmental think tank, saying that work is being done on ways to bring China into compliance with international standards, “but it remains unclear whether companies will disclose their data publicly, and how they’ll be held accountable if they miss targets … “‘It may be difficult for the government to get the right information to make the right decisions,’ he said.”

Economist Intelligence Unit forecasts show that China’s electricity consumption (subscription required) alone will double over the next decade. (See sample table below).

Electricity consumption and supply
  2009a   2010b   2011b   2012b   2013b   2014b   2015b   2020b  
Consumption (twh)                
Industry 2,210.4 2,459.9 2,714.5 3,007.8 3,289.7 3,598.5 3,951.2 5,341.6
Transport 36.6 42.0 47.9 53.7 59.6 66.1 72.5 98.7
Residential 451.2 501.7 558.4 615.1 677.1 744.9 804.2 1,136.1
Commercial & public services 180.4 204.8 230.8 259.5 291.3 325.1 357.1 513.9
Other 818.5 895.8 977.8 1,066.0 1,157.4 1,253.3 1,354.5 1,831.6
Total 3,697.1 4,104.3 4,529.4 5,002.1 5,475.2 5,987.9 6,539.5 8,921.7
 % change, year on year 9.4 11.0 10.4 10.4 9.5 9.4 9.2 5.0
Capacity (gwe)                
Combustible fuels 674.5 759.5 850.1 941.4 1,036.4 1,136.4 1,251.4 1,812.8
Nuclear 9.0 9.8 11.4 17.0 24.1 35.4 44.2 60.2
Hydro 172.3 182.3 191.3 207.3 219.3 232.3 244.3 300.3
Non-hydro renewables 20.2 30.3 42.4 54.6 63.7 71.9 81.1 118.7
 Geothermal
 Solar 0.2 0.3 0.4 0.6 0.7 0.9 1.1 1.7
 Tide/wave/ocean
 Wind 19.2 29.2 41.2 53.2 62.2 70.2 79.2 116.2
Net maximum 875.9 981.8 1,095.1 1,220.1 1,343.5 1,475.9 1,620.9 2,291.9
a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.
Source: Economist Intelligence Unit.

In terms of its energy mix, combustible fuels – especially coal – still will account for the bulk of generating capacity, even though nuclear capacity grows exponentially and non-hydro renewables also continue their rapid pace of growth.

It should be noted, however, that China has consistently increased its targets for non-fossil fuels over the last few years and has also shown a greater determination to meet both clean-energy (and emissions-cutting) goals as well as economic growth. As China Daily reports on Monday, government direction is the overriding factor but also public (and business) opinion is coming round more to the idea that growth and a better energy mix are not mutually exclusive.

BP state’s its case

BP, having plugged the hole in the Gulf of Mexico and staunched the haemorrhaging of its market value (see share price chart), has now issued its take on the causes of the disaster last April, when a hydrocarbons leak from its Macondo oil well led to an explosion, a subsequent fire and the sinking of the Deepwater Horizon rig, with the death of 11 workers and an 87-day well gusher that resulted in the worst crude oil spill in US history.

Partial recovery

The full report can be read here and BP has even produced a full video presentation of its findings as part of its efforts to make its case. The company puts forward eight “key findings” describing a “causal chain of events” involving “various parties” that led to the explosion, and offers recommendations of how to prevent similar disasters in future.

Inevitably, critics say the report is BP rationalising a disaster for which it bears ultimate responsibility as operator, even if there were shortcomings among its sub-contractors and in the oversight regime for oil drilling more generally. The report will be weighed against others that are yet to be concluded, especially the national commission ordered by President Barack Obama in May, which is due to report within six months of its first meeting in mid-July.

But the legal proceedings regarding the spill – not only claims on BP and BP’s defence of those claims, but also the claims and counter-claims already being pursued between BP and its sub-contractors – will go on for years, so the report can also be seen as part of BP’s legal defence process too.

For most people, references in BP’s report to “the annulus cement barrier” and “shoe track” and “overboard diverter line” will mean little. But it is clear that there were a series of mistakes made during what should have been routine engineering operations and a failure to recognise warnings signs and to take action.

The report concludes, “The [investigation] team did not identify any single action or inaction that caused this accident. Rather, a complex and interlinked series of mechanical failures, human judgments, engineering design, operational implementation and team interfaces came together to allow the initiation and escalation of the accident. Multiple companies, work teams and circumstances were involved over time.”

In BP’s press release, outgoing CEO Tony Hayward similarly spread the blame. Commentary has focused on his statement – “To put it simply, there was a bad cement job …” – as a clear reference to Halliburton, the company in charge of that operation. There is also reference to Transocean, owner of the Deepwater Horizon rig, and failure of its staff to recognise early warnings signs. No doubt both companies will have a response.

Clearly, the report is only the beginning of the disaster’s Phase II – the recriminations – which will end only after all of the reports have been issued, mulled over and ruled upon. The final phase – the implications – can then begin.

Frankenfuels

Under Steven Chu, the US Department of Energy (DoE) has never been so science-friendly. DoE has created and funded an idea’s incubation unit and has been busy with, in the energy secretary’s oft-quoted phrase, its “hunt for miracles” to transform America’s energy landscape.

The most substantial backing from the DoE’s Adnvanced Research Projects Agency – Energy (arpa-e) so far has been the package of grants, totalling more than US$92m, it announced in July. Among these, the largest single grant was one of more than US$5m to HRL Laboratories (formerly Hughes Research Laboratories), whose partners include GM, for a project to develop Gallium Nitride, a semiconductor material, to make small, efficient battery switches so that electric vehicles can interact more efficiently with the grid. Most of the grants on that list are to similar projects aimed at better batteries, more efficient grids, etc.

Impressive as these innovations promise to be, others working outside of the DoE’s aegis offer truly inventive breakthroughs. A team led by Michael Strano of the Massachusetts Institute of Technology, has used a combination of nanotechnology and bioengineering to reproduce nature’s “self-repairing” mechanism for solar cells. As Science News describes the process on its website, it could lead to solar cells with an indefinite lifetime:

The researchers began with light-harvesting reaction centers from a purple bacterium. Then they added some proteins and lipids for structure, and carbon nanotubes to conduct the resulting electricity.

These ingredients were added to a water-filled dialysis bag — the kind used to filter the blood of someone whose kidneys don’t work — which has a membrane that only small molecules can pass through. The soupy solution also contained sodium cholate, a surfactant to keep all the ingredients from sticking together. 

When the team filtered the surfactant out of the mix, the ingredients self-assembled into a unit, capturing light and generating an electric current.

Just as remarkable, Synthetic Genomics is researching DNA engineering that may lead, as the New York Times reports, to a way to transform coal into natural gas or to cut out the middle man, as it were, so that plants can produce fuel directly rather than via an expensive and energy-intensive refining process. It is getting substantial backing from industry:

Exxon Mobil is giving Synthetic Genomics $300 million in research financing to design algae that could be used to produce gasoline and diesel fuel. (The new greenhouse will be used for that research.)

BP has invested in the company itself, turning to Synthetic Genomics to study microbes that might help turn coal deposits into cleaner-burning natural gas. Another investor, the Malaysian conglomerate Genting, wants to improve oil output from its palm tree plantations, working toward what its chief executive calls a “gasoline tree.”

Low-carbon cuts

The UK’s Department of Energy and Climate Change has announced details of cuts it will be making as part of broader cost-cutting, with low-carbon projects bearing the brunt of reductions.

With few areas being spared from the UK government’s “age of austerity”, the country’s Department of Energy and Climate Change (DECC) announced back in May that it would contribute £85m to departmental cuts in government. DECC has now revealed that a sizeable chunk of those savings – £35m, or 40% of the total – will come from cuts in expenditure on low-carbon technology.

In May, the department unveiled plans to save £3m through the early closure of the Low Carbon Buildings Fund, which gave grants to help the installation of small-scale renewables in homes, replacing it with a scheme where homeowners and businesses can receive money for renewable electricity which they generate. The latest announcement indicates that several other green funding schemes will be shut down or curtailed.

The Carbon Trust, which promotes the transition to a low-carbon economy, will lose £12.6m from its budget for promoting green technology and business. The offshore wind capital grant scheme is set to have its scope reduced, with an expected saving of £3m. And the government will cancel £4.7m worth of final funding rounds of schemes which support bio-energy.

DECC was keen to stress that the department would still spend over £150 million on low carbon technology this year, including the recently announced formation of a Green Investment Bank (GIB) – although there has been reported tension (FT, subscription required) between Chancellor George Osborne and Business Secretary Vince Cable over the scale of the institution.

Perhaps inevitably, the announcement got a poor reception on the opposition benches, with former climate change secretary and Labour leadership prospect Ed Miliband denouncing the plans, saying “On the one hand they call for tougher carbon emissions targets but with the other they take away the means to achieve these targets.”

On his well-subscribed Twitter account, Miliband later added “so much for greenest govt ever”, a reference to Prime Minister David Cameron’s pledge to the 10:10 campaign in May. The sentiment was echoed by John Sauven, executive director of Greenpeace, who said that Cameron’s green promises were “beginning to crumble”.

Given that almost half of cuts affected low-carbon schemes, it is inevitable that the government’s green promises would be called into question. The coalition has not abandoned its commitments as much as Labour would like to suggest. But it will need to ensure that its remaining commitments, including the GIB, are run effectively, or Cameron’s pledge may become a point of attack for Labour, and of tension between the coalition partners.

Hurricane season

As BP continues to work on its containment, the Gulf Coast oil spill is being given different senses of scope all the time. Two recent examples offer very different perspectives on the spill. Meanwhile, tropical storm Alex looks set to disrupt operations from afar.

The USA’s National Aeronautics and Space Administration (NASA) has released a timelapse series of pictures, taken from two of the agency’s orbital satellites. The pictures offer a space-based point of view of the spill, tracking it since its beginning as it spreads and changes shape due to weather conditions, currents and the use of oil-dispersing chemicals.

Meanwhile, a no less compelling ground-eye view of the spill’s consequences has been broadcast by Russia Today, filming in Louisiana. The video shows the aftermath of a rainfall which has left puddles of oil on the city’s streets.

Although they offer very different views of the disaster, both videos drive home its scale in a way that BP is unlikely to appreciate at the moment. Still, it’s not all bad news for the company. There had been concerns that tropical storm Alex, expected to become big enough soon to be reclassified as Hurricane Alex, would hit the area around the oil spill. However, the storm now appears to be heading towards Mexico, with its predicted trajectory carrying it well away from the spill area.

This is fortunate for BP; experts say that favourable wind and tidal patterns, as well as Mississippi River currents countering the flow from the Gulf, have spared the wetlands the worst of the oil. A direct hit by a hurricane on the area could hurl oil-soaked water inland, severely increasing the impact on the environment and the company’s far from glowing reputation.

However, the storm will not leave the spill unaffected. While BP may have avoided direct disaster, the company’s senior vice-president Kent Wells admitted that the storm is expected to make sea conditions too rough to connect various parts of the new floating riser system together, delaying its completion to the middle part of next week.

Coast Guard Admiral Thad Allen has said that the current operation of transferring oil onto the Discoverer Enterprise containment ship, which is currently siphoning around 28,000 barrels a day, could also be disrupted. However, he added that the storm was unlikely to affect the two relief wells that are currently BP’s long-term hope for stopping the leak altogether.

Aside from disruption to the relief effort, there has been disagreement over whether the storm, even at a distance of 600 miles, will have an adverse effect on the slick itself. Admiral Allen has claimed that the oil, which was generally heading east, has now turned north, already affected by the storm system. However, Dr. Piers Chapman, chair of Texas A&M University’s oceanography department, has argued that the storm may in fact have a positive effect, breaking down the oil slick into smaller patches that will evaporate more quickly.

Soon-to-be-Hurricane Alex will affect more than the physical aspects of this spill. The markets have already lurched in response to fears that it would hit directly, and failed to respond strongly to the news that it would not. Analyst Tim Evans has predicted that the approaching hurrican season will bring a “long and choppy summer” if that reaction is any indication.

Clearly, though, BP’s greatest concern will be a hurricane that affects the region directly. If that happens, not only will recovery operations be devastated, but there will be a far greater influx of oil than Russia Today recorded in Louisiana.