Summit fallout

The Guardian (UK) carried a fascinating insight into the failed Copenhagen summit from Mark Lynas, an Oxford-based climate change consultant and activist who was in attendance at the inter-governmental sessions there. The piece was titled How do I know China wrecked the Copenhagen deal? I was in the room, which really requires little further explanation.

Whether or not one shares Mr Lynas’ position on anthropogenic climate change, CO2 policies, etc., his account of the talks has a very convincing ring to it in terms of the process involved in one of these events. One doesn’t even have to agree with his conclusion that China is “to blame” for the failure to get the kind of deal that he, his fellow climate activists and indeed most governments appear to have wanted out of Copenhagen, to understand what went wrong. For the truth is that all of these processes, whatever the “One World” pronouncements from politicians involved, are ultimately a complex set of countervailing negotiations around national interests. The bigger the number of countries involved — 193 for Copenhagen, for goodness sake — and the more divergent those national interests, the less likely is the prospect of a meaningful outcome. In the case of Copenhagen, it was clear long before it commenced that there was little prospect that it would achieve anything conclusive. But the completeness of its failure exceeded even the pessemistic expectations. 

In a way, however, that failure — and the nature of the failure, as spelled out in Mr Lynas’ account –can be seen as a good thing. It is likely to focus governments more on what can — and should — be done at national levels, even if only rationalised on the grounds of pollution-control, energy security, promotion of economic and technological development, etc. There will be, of course, much debate at the natoional and the inter-governmental levels about costs, monitoring, effective delivery systems, etc. But it may well be more rational if done in more manageable, less amorphous groups than was seen to fail at the Copenhagen shambles. Already there is talk of a much smaller group of the most powerful — and most polluting — countries negotiating outside of a UN process, perhaps at a G30 level.

The UN’s top climate man, Yvo de Boer, generally a voice of reason in the process, could have had Mr Lynas in mind (as well as Ed Miliband, the UK environment minister and others from the west, and those responding for China) when he called for the blame game to finish and to move onto constructive talks. But sometimes a big, noisey row is needed so that everyone can see what really is what before moving onto the business at hand. And maybe the UN forum for debating and managing the climate change process has run its course.

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All about oil?

When the US-led “coalition of the willing” invaded Iraq in 2003, conspiracy theories were rife. The war, some muttered, was all about oil.

Iraq completed its second licensing round since the dethroning of Saddam Hussein on Saturday. The second round proved more successful than the first (see “Going twice…” – subscription required), but oil companies nonetheless shunned fields in the most volatile regions.  

Iraq’s first and second rounds share a notable (and pertinent) characteristic: the absence of US oil companies. So far, only Exxon Mobil and independent Occidental have an interest in new Iraq—Exxon as partner in a consortium with Royal Dutch Shell to develop the West Qurna phase 1 and Oxy as part of an Eni-led consortium awarded a contract to develop Zubair. These deals were negotiated after unsuccessful first-round bids but before this weekend’s licensing round (see “Sweetest crude” – subscription required).  

Unwilling?

In fact, in the second round, none of the “big three” US oil companies—Exxon Mobil, Chevron and ConocoPhillips—submitted a bid.

Total, the French oil major, submitted bids in both rounds. That Total won a contract to develop the Halfaya field, with China National Petroleum Corporation (CNPC) and Malaysia’s state-owned Petronas, will no doubt be galling to some in the US. The Paris-based firm did, however, lose out on bids for the giant Majnoon and West Qurna phase 2.

What explains the reticence of US firms?

Exxon always drives a hard bargain and may have felt the terms offered in the second round, which was far more competitive, were insufficient to justify a bid. Besides, Exxon’s confidence in its project pipeline has not wavered. It also already secured West Qurna phase 1. Exxon’s deal to buy North American gas explorer XTO, sheds further light on its decision not to participate.

Chevron appears to be preoccupied with projects elsewhere. Its project portfolio includes some 40 projects where its net capital commitment is over US$1bn, including the giant Gorgon liquefied natural gas (LNG) project in Australia. CEO elect John Watson, formerly of the finance department, may have decided that the numbers in Iraq’s second round didn’t add up.

ConocoPhillips’s absence from the bidding is easiest to explain. Having bid for Bai Hassan oil field in the first round it was expected to bid with Lukoil for West Qurna 2, a field the Russian firm has long coveted. However, much has changed at Conoco since the first auction in June (see “What does Conoco do best?” – subscription required). With cash scarce, the risks inherent in Iraqi fields were never likely to appeal to Conoco’s newfound austerity.

In the end, Washington probably cares little who develops Iraq’s 115bn barrels, so long as the oil is developed. BP, with its long history in the county, Shell, with its project management excellence, and Total and Eni, neither of which shies away from of political risk, were always strong candidates to lead the bidding. As expected, China’s state-owned firms bid aggressively, as did Russian-owned Gazprom and Lukoil. Success for Norway’s Statoil, Angola’s Sonangol and Petronas capped a good round for state-owned firms.

But will US oil companies regret their absence? Iraq’s fields, it goes without saying, come with a myriad of risks. The promises made by winning oil companies to develop fields on a cost-per barrel basis tie them to strict profit margins, while the above-ground issues (subscription required) make Iraq’s prospects less “all about oil” than American companies would prefer.

It’s a gas, gas, gas

The prospects for the world gas market may look better long term, but near-term forecasts keep getting gloomier.

To wit, Deutsche Bank analyst Elaine Dunphy, in assessing the outlook for Statoil in a Dec. 7th research note, sees problems ahead for Norway’s state-owned company, which is Europe’s second-largest gas producer, after Gazprom, with a market share of about 15% (total 2008 sales 45.2 billion cubic meters).

The basic problem, according to Ms Dunphy, is that while Statoil has seen rising gas sales and profits through the third quarter of this year, “reality may be about to bite”. By reality she means that some of its big European gas buyers – industry, power generators, etc., which are concentrated in western Europe – are expected to require about the same volume of gas next year at a time when supply is increasing, leading to pressure for a change in their contracts to reflect a weaker gas market.

About two-thirds of Statoil’s gas sales are covered by long-term contracts (mostly to German and French buyers,  see here for link to Statoil’s interactive pipeline map), according to which prices are set with reference to oil prices. While oil prices have rebounded strongly this year, those contract prices have been slow to respond to gas market fundamentals. Another third of Statoil’s gas is sold into the UK with reference to spot gas prices, where the weakness is reflected clearly in futures prices; for example, the March 2010 UK natural gas futures contract listed on I.C.E. has collapsed from about 56p per therm in May to about 30p/therm in early December. This means that Statoil customers whose contracts are oil price-based are demanding a change in the contract terms or else they’ll exercise their options to take minimum amounts of gas and cover the rest of their needs on spot markets.

In common with most analysts, Deutsche Bank sees European gas markets oversupplied through 2012 at least. While long-term demand for gas is growing worldwide – especially in terms of long-term contracts for liquefied natural gas (LNG) – that demand is struggling to keep pace with rising supply. (See the EIU’s December gas outlook).

In Europe, in particular, rising supply from the Norwegian Continental Shelf will contribute to the glut, while the addition of re-gasification infrastructure to handle LNG imports has increased buyers’ options. This is a situation that is not expected to be fully alleviated until about the middle of the next decade. (See graph below).

A dilemma for Statoil is whether it will give into the market pressures and change long-term contract terms in order to hold onto European market share, or decide to leave gas in the ground and lose market share in order to maintain margins.

Ms Dunphy at Deutsche Bank says there are “too may moving parts” to determine how it will pan out for Statoil, but she expects that the company will decide to sell less gas – she figures a volume decline of about 7% from 2010 through 2012.

Gazprom, on the other hand, has eased contract terms for Ukraine some and is negotiating with Turkey and others. Statoil has less flexibility in terms of the markets it serves and if it holds out on easing its contract terms and goes for lower volumes that, in turn, might help the market overall but allow Gazprom and others to capture some of its market. So, it depends on which bullet Statoil decides to bite.

Slippery Slope

News that BP has discovered a spill on an oil pipeline feeding Prudhoe Bay, from its Alaska North Slope operation, will come as a blow CEO Tony Hayward, who has worked hard to fix a corporate reputation damaged by previous mishaps in the US. When Mr Hayward became CEO in early 2007, he inherited a business reeling from a number of high profile calamities.

A damning report into the March 2005 explosion at BP’s Texas City Refinery, which killed 15 workers, was a low point. BP also experienced a number of high profile setbacks in the development of its Thunder Horse field, delaying start-up by three years. The combined effect of hurricanes Rita, Wilma and Katrina left BP with a repair bill approaching US$1bn. Then in 2006, pipeline corrosion led to two major oil spills in Prudhoe Bay. Mr Hayward was global upstream manager at the time.

Despite the challenging operating climate, solid performances over the second- and third-quarters of this year (see BP – risk appetite and BP, Astride Petroleum) have enhanced BP’s and Mr Hayward’s reputation; BP expects to save around US$4bn this year, is on track to boost oil and gas production and has made a number of significant discoveries and, led a return to Iraq.

But the news will serve as a reminder that BP is far from problem-free. The Prudhoe Bay spill, which is now being cleaned up, follows an October report by US labour regulators critical of current safety standards at the Texas City refinery. The US Labour Department said that company still had systemic safety problems at the refinery, which were yet to be addressed following the accident in 2005.

That the spill follows this report so closely is, undoubtedly, embarrassing for BP and Mr Hayward. It also taints what, in other respects, has been a very solid year for the company. If taken to be indicative of wider problems within BP’s US business it could prove a real headache for Mr Hayward and BP.