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.

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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.”