✚ Mission accomplished for big oil?

Greg Muttit in Le Monde Diplomatique:

Here, as a start, is a little scorecard of what’s gone on in Iraq since Big Oil arrived two and a half years ago: corruption’s skyrocketed; two Western oil companies are being investigated for either giving or receiving bribes; the Iraqi government is paying oil companies a per-barrel fee according to wildly unrealistic production targets they’ve set, whether or not they deliver that number of barrels; contractors are heavily over-charging for drilling wells, which the companies don’t mind since the Iraqi government picks up the tab.

Meanwhile, to protect the oil giants from dissent and protest, trade union offices have been raided, computers seized and equipment smashed, leaders arrested and prosecuted. And that’s just in the oil-rich southern part of the country.

In Kurdistan in the north, the regional government awards contracts on land outside its jurisdiction, contracts which permit the government to transfer its stake in the oil projects — up to 25% — to private companies of its choice. Fuel is smuggled across the border to the tune of hundreds of tankers a day.

Hergé’s caricatured arms dealer in The Broken Ear (1937) offers oil-hungry powers an unfortunate blueprint for influence building in the two Sudans. Credit: thinmanSouth Sudanese President Salva Kiir this week addressed a letterto dozens of “former and current senior government officials” pleading with them to return an estimated US$4b in “missing” government funds. The Globe and Mail reports that the US$4b reportedly stolen would add up to approximately 2 years’ worth of oil revenues for the country, which upon seceding from Sudan took about 75% of Khartoum’s oil reserves with it (amounting to some $5b worth of annual income, according to the Petroleum Economist trade publication). Some US$60m has reportedly been recovered, but continued mismanagement, graft and badly bid contracts (most notably, for food imports) means that additional funds still remain unaccounted for and may be unrecoverable.[1]

Despite the emotional plea from Kiir, in an unencouraging sign for transparency in South Sudan this past April, the ruling Sudan People’s Liberation Movement (SPLM) Party that Kiir leads “voted against a bill seeking to make contracts and information about the young country’s oil industry more transparent by making it available to the public.”

From the Sudan Tribune:

The lawmakers’ decision has created some public criticism. As well voting against the Petroleum Bill, which would have required the government to provide justifications for oil contracts with individual companies, MPs also voted against publishing sales and production data.

During deliberations, George Bureng, an SPLM member of the National Assembly representing Central Equatoria State said he would prefer to see that oil related information be limited to only relevant institutions not the general public because information about oil could be used against the country by her enemies, referring to Khartoum.

“It is good to allow [the] public [to] access any information but sometimes there is sensitive information which cannot be made available to the general public”, Bureng told the house.

Tensions are high in both Khartoum and Juba as a result of a recent conflict over the disputed oil fields in Helig (which was occupied by South Sudan) and the border region of Abeyi (which was occupied by Sudan). Though the fighting has died down, talks on establishing a demilitarized zone have stalled, the AFP reports from Addis Ababa, where the African Union-brokered talks are taking place:

Peace talks to end weeks of fighting between Sudan and South Sudan were deadlocked Tuesday after failing to agree on where to set up a demilitarized zone along their contested border.

“The position of the parties is still rather far apart on these issues, ”South Sudan’s foreign minister Nhial Deng Nhial told reporters during a break in the week-long talks, which still continue despite the lack of progress.

“We have not yet been able to agree on the line from which the safe demilitarized border zone is going to be drawn,” Nhial said, but adding he remained optimistic a deal could yet be reached.

Further complicating these talks is the arrival of delegates from the Sudan People’s Liberation Movement – Army North (SPLM/A-N). This organization is the branch of the SPLA, whose leaders dominate South Sudanese government, still operating in Sudan (the SPLA was founded in 1983). Small Arms Survey notes that because “the political and military high command in the SPLM/A-N significantly overlaps,” “the political and military goals of the organization can be viewed as one since it is now an armed opposition movement in Sudan.”

As a result, though SPLM/A-N delegates were invited to the talks by the African Union, Khartoum has “excluded” them from the talks. Fighting in Sudan’s Nuba Mountains between the SPLM/A-N continues, and the continued iciness between Juba and Khartoum over the SPLM/A-N’s insurgency seems irresolvable. Khartoum’s armed forces are reportedly too worn down by years of attritional counterinsurgency operations in Darfur and the “Three Areas” provinces (including the Nuba Mountains) to launch a full-scale operation against South Sudan, but refuse to give up any more territory to the SPLM/A-N. Meanwhile, Juba simply does not wish to lose a force operating in the border provinces of the regime whose embrace it just escaped from. Plus, there is the question proposed by Philip Thon Aleu to a South Sudanese governor last summer that offers insight as to why Juba would be hard-pressed to accept any “compromise” initiated by Khartoum over the “Three Areas” region:

The SPLM was joined by people from South Kordofan, Blue Nile and people from other parts of the country who are not from South Sudan. How do you think about those people who are not part of south Sudan’s freedom today? And what is the way out?

Resistance to demobilization of secessionist militias and some SPLM units is already proving to be a challenge for South Sudan. And neither side is likely to make the first move towards a ceasefire with or recall of the SPLM/A-N – which has its own particular goals, of course – for fear of being perceived as “weak” in the eyes of the other.

No “great power” better understands (and plays off of) these clashes than the People’s Republic of China. Beijing is Khartoum’s primary arms dealer, but at the same time presents itself as a mediator to both countries and take’s the bulk of the two countries oil exports. Even though most of Sudan’s oil now lies in South Sudan, the extensive damage to facilities (and investor flight over the past several years) and continuing transit dispute between the two countries means that the Chinese have a long way to go in implementing a comprehensive plan for the country.

Though Beijing just reached an agreement to build up South Sudanese “infrastructure,” a pipeline agreement was conspicuously absent. South Sudan is landlocked, and has since 2005 depended on Sudanese facilities or trucks to deliver its crude to ports, paying Sudan transit fees. China does not wish to alienate Sudan, with which it has a much closer relationship, yet South Sudan has the most potential for growth – and as bad as Sudan’s economy is, South Sudan’s is much worse, and much more dependent on foreign aid with strings attached.

It’s about a lot more than the oil for Juba and Khartoum, but oil is the prism through which the two government’s “great power” backers will most likely see their conflict.

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1. An unknown percentage of the lost money is thought to have been pocketed by officials to buy property overseas. Interestingly, last year, the Oakland Institute reported that American speculators were buying up South Sudanese properties.  ↩

Occasional contributor Paul Mutter has a piece up at FPIF looking at the situation of oil major in Iraq, where the US still trails behind China in presence and can't get the kind of legislation for oil. Does that prove that the US was not after oil in Iraq, among other grand geostrategic objectives? No, it just shows there's hardly a silver lining for Americans after all the blood and treasure that was sunk into that adventure.

Dahr Jamail's report on energy majors in Iraq reminds us of one of the other, other, other reasons for the U.S. invasion of Iraq, the one nearest and dearest to neoconservatives' political action committees: oil.

Ostensibly, "oil" was part of the discussion on Saddam Hussein because of U.S. sanctions, the threat that Saddam would use oil money to bankroll terrorist organizations, and the idea that new oil revenues would help jumpstart the post-Saddam Iraqi economy.

Those were the reasons paraded around in public. Then there were the ones being discussed -- well before Condi and Dick made the Sunday morning talk show rounds -- in the arcane, interconnected world of multinational corporations, federal departments and think tanks:

Like it or not, Iraqi reserves represent a major asset that can quickly add capacity to world oil markets and inject a more competitive tenor to oil trade. However, such a policy will be quite costly as this trade-off will encourage Saddam Hussein to boast of his "victory" against the United States, fuel his ambitions, and potentially strengthen his regime.

The U.S. invasion rather nicely took care of that dilemma, and, of course, the U.S. government and U.S. oil majors moved to secure pieces of the pie before other countries could come in. Alongside other Western governments and oil majors, Washington is pushing for an Iraq Oil Law that would allow privatization and Production Sharing Agreements (PSAs), which, Jamail reports, are only used in 12% of the world's oil market. Why only 12%? Because more nationalistic individuals don't like signing off on them: in Russia, for instance, Vladimir Putin made rescinding PSAs Boris Yeltsin's government had signed with U.S. and UK firms a top priority. The law has stalled in the Iraqi Parliament. 

Read the rest here.

It's worth keeping oil in mind when following Libya and the other uprisings. The FT had an in-depth piece looking at the strategic ramifications, comparing what is happening now to other major disruptions like 1973 or 1979. Below are some long excerpts.

The wave of discontent has shown that the oil industry can no longer ignore the region’s problems: booming population growth, high unemployment, rising inflation, lack of freedom in the age of the internet, and violent repression of dissidence. Few see a rapid end to the upheavals. “The genie is out of the bottle and there is no way to put it back,” says an executive at a top oil trading house.

In short, the cost of oil will be higher than before, as traders will demand a geopolitical price premium to compensate for the perception of higher risk. Even when the unrest settles and supply disruptions end, the emerging populism evident in the region is thought likely to push countries towards policies that imply high oil prices as they need to fund higher spending to buoy popular support.

Regime change and democracy could solve problems over time, bringing prices down. But not much of that stable new order is in sight within the next few months or even years. Worse, some regimes are resisting reform, notably in the Gulf, so unrest will continue to lurk in the background, like a volcano, with periodic eruptions that will push up prices, followed by periods of calm.

Oil is the world’s most important traded commodity and its significance will only increase as developing nations, from China to Brazil, demand more energy. The move to higher prices will have a profound impact on the global economy, acting as a tax in consuming countries, depressing growth worldwide and pushing inflation higher.

The most immediate concern is supply disruptions. Before the recent unrest, Libya was the world’s 12th-largest oil exporter, producing about 1.6m b/d of high-quality crude – enough to meet, say, the demands of Belgium and the Netherlands. Saudi Arabia and other leading members of the Opec cartel, including Kuwait and the United Arab Emirates, have rushed to offset the shortfall.

But as Riyadh and others boost their production, Opec’s spare capacity shrinks. It is now less than 4m b/d – well below the peak of more than 7m b/d in 2009, though still well above the 500,000 b/d of 2004 after Iraq went offline following the US invasion a year earlier. Still, the cumulative effect of several disruptions in the Middle East could drain all the cushion. Michael Wittner, head of oil research at Société Générale in New York, says that after experiencing a true supply disruption this year, even if no further such events occur, “the market will see such events as real possibilities rather than abstract scenarios”. The list of countries under watch is lengthening almost by the day as unrest spreads. Oman, Syria, Yemen and Bahrain may be small producers but collectively they amount to a meaningful bloc of some 1.5m b/d.

Moreover, as Opec’s spare capacity shrinks, the market demands a bigger and bigger price premium to offset the risk that another big disruption – say a hurricane in the Gulf of Mexico – forces the system to run at full capacity. Supply disruptions also matter beyond lost volume. Although oil is a commodity, each producing country pumps a variety that is slightly different to the rest, making interchangeability difficult – in some cases impossible. Take Libya: the country produces one of the highest-quality types of oil in the world, light and with a low sulphur content. Although Saudi Arabia has acted to replace the number of barrels lost, it has been unable to match the quality.

European refiners are paying record premiums over the Brent crude benchmark in the physical market to secure supplies of high-quality, low-sulphur crude oil after the loss of Libya’s production. The price premium for similar crudes to those supplied by the north African nation – including BTC Blend of Azerbaijan, Algeria’s Bonny Light, Saharan Blend from Algeria and Kazakhstan’s Kumkol – has soared to multi-year highs. 

Another concern is when production will recover. In the case of Libya and to a lesser extent Yemen, violence needs to end to allow the return of both domestic and international workers to the oil fields. But even when staff come back, the task of restarting the fields will not be easy.

Antoine Halff of Columbia University says that the history of oil production disruption is not encouraging: countries struggle to return to their pre-crisis output levels. “It happened in Iran after 1979, Iraq after the invasion of Iraq in 1990, in Venezuela after the oil strike of 2002-03,” he says. “Even if there is no war damage, the emergency shut-in of the fields will cause problems.”

Apart from the short-term outages and difficulties in restarting production, the oil market could suffer bigger problems over the longer run. Analysts, consultants and industry executives fear that governments in the region – both new and old ones – are set to adopt fresh policies that would result in higher oil prices. The concern, says Bill Farren-Price of Petroleum Policy Intelligence, a consultancy, is that “when the tectonic shift in Middle East politics subsides, we are likely to see more populist energy policies in the region”.

The piece also had this sidebar:

FEAR AT THE PROSPECT OF BEING SHUT OUT

International oil companies are watching the events in the Middle East and north Africa with trepidation. The region is home to the bulk of the world’s oil reserves, so executives fret both about their current multi-billion dollar investments and future ones.

In the worst case, international groups could see their assets nationalised if new governments turn against foreign investment or if current regimes survive and move against the western investors – as some executives fear could happen in Libya if Muammer Gaddafi remains in power.

The expected turn towards populism, mixed with nationalism, could also slow overseas investment in hydrocarbons. While some countries – notably Saudi Arabia – remain closed to international companies, others such as Libya, Egypt and Oman had been opening up their markets, providing companies from Eni of Italy to US-based ConocoPhillips and Occidental Petroleum access to oil reserves and production.

The investment and technical expertise of foreign oil groups in the region are crucial for global oil supplies too. The Middle East and north Africa need to spend more than $20bn a year until 2030 to boost production, according to the International Energy Agency, the rich nations’ energy watchdog. If unrest slows foreign investment, state-owned companies could struggle to finance the requirements alone, thus tightening global supplies in the future.

This comes a little bit late, as I've been in the mountains of Northern Morocco for the last few days, in a tiny village where there is no mobile phone reception or internet.

I have started writing a weekly column for al-Masri al-Youm English (which will hopefully also soon start to be picked up in the Arabic edition). The column, out every Tuesday, will cover a very wide variety of issues, both Egyptian and regional. I'm sure it will cover some of the big themes and crises of the region, but one thing I want to focus on from time to time are issues not often discussed elsewhere in the Middle Eastern media or indeed in the blogosphere: the intersection of politics, business and science and the environment.

My first column is about something I've been thinking about ever since last April: the wide-ranging ramifications of the Deepwater Horizon spill in the Gulf of Mexico on the oil industry, and what it means for countries like Egypt where deepwater fields are the next frontier (many such fields will go online in the next decade) after the exhaustion of traditional shallow water fields in the Gulf of Suez. One aspect of this issue is that there is a brewing energy crisis in Egypt; the other is that one cannot help but think of the consequences of an accident like Deepwater off Egypt's coast, where the government is much less prepared than the US and much less able to put pressure on companies. I finished writing it on Sunday, and by coincidence two news items put the column in a new perspective: one is that the first rig to leave the Gulf of Mexico because of the ban on deepwater drilling started to head to Egypt, and the second is that BP announced a $9 billion deal to develop gas fields off Egypt's Mediterranean coast. So my column was quite prescient!

You can read the column here.