You can download the show (21 mins) here: RealPlayer | WinAmp | Windows Media | MP3

See also: 

Energy politics at the piano bar

Reframing the transportation debate

The narrow ledge of oil prices

Have we reached an inflection point in economics history?

I appeared on the Financial Sense with Jim Puplava program today, in a segment they titled  ”The Time for Energy Transition is Now.” We discussed the IEA’s latest World Energy Outlook report, the ongoing debate about peak oil and energy illiteracy in the mainstream press, the formation of the State Department’s new Bureau of Energy Resources, the outlook for oil production, the political standoff over the Keystone XL pipeline, why the U.S. must focus now on energy transition, and why the U.S. military is still ahead of the curve on that.

You can download the show (24 mins) here: RealPlayer | WinAmp | Windows Media | MP3

See also:

Press releases on the new State Department Bureau of Energy Resources:
The State Department’s New Bureau of Energy Resources: Shaping America’s Global Energy Policy
State Department Launches “Bureau of Energy Resources”

Our response in the Harvard Business Review blog to Dan Yergin’s anti-peak oil screed in the Wall Street Journal.

My recent article: When Should We Pursue Energy Transition?

The IEA 2011 World Energy Outlook

My take on the IEA’s 2009 report: Is the IEA World Energy Outlook Politically Distorted?

We also discussed David Strahan’s observations on the lack of progress being made in the UK on crafting peak oil policy, and Jim’s observation that oil prices have taken the place of monetary policy and federal funds rates in moderating the economy, which I think is a very astute observation.

The Race for Arctic Oil Is On

By Chris Nelder
Wednesday, August 31, 2011

Yesterday Rosneft, the 75% state-owned Russian oil giant, kicked BP to the curb in favor of ExxonMobil as its joint venture partner to explore Russia’s portion of the Arctic for oil and gas.

The French television station France 24 asked me to weigh in on the deal (my thanks to @willedwards and producer @jenfrance24 for having me on). Here’s the clip:

Where BP Went Wrong

Rosneft needed a Western oil company partner with the deepwater drilling expertise to tap one of the most challenging and untried oil provinces on earth, the Arctic.

BP thought it had secured the partnership back in January, and had touted it as part of its future growth strategy to recover from the Macondo well disaster in the Gulf of Mexico. That strategy is now thrown into question.

BP had offered Rosneft a 5% stake in BP in exchange for a 9.4% share of Rosneft, in a $16 billion share swap deal. BP’s investors hated it, partly because it would dilute their shares, and partly due to a longstanding aversion to having Russian owners in the company. But that’s not what killed the deal.

BP had some Russian billionaire partners known as AAR—Alfa, Access and Renova—in a separate joint venture called TNK-BP, which BP was supposed to represent as its exclusive partner for investments in Russia. AAR viewed the overture to Rosneft as a breach of that agreement, and they opposed the deal, which was later voided in arbitration. BP attempted to buy them out for $32 billion in May, but failed. That left the door open for Exxon.

Exxon offered a simpler exchange of assets, which would not dilute its shareholders. Exxon will gain access to three oil deposits Russia’s East Prinovozemelsky blocks in the Kara Sea, and one in the Tuapse license block in the Black Sea. In exchange, it will give Rosneft a joint venture role in at least six of its exploration projects in the Gulf of Mexico and “tight oil” formations inTexas. Rosneft liked Exxon not only for its  expertise and deep pockets; they also salivated over the prospect of getting more exposure to oil and shale gas fields in the US. Further, Exxon was already a trusted Rosneft partner, working with it on an offshore project near Russia’s Sakhalin island.

Exxon will put up $3.2 billion in initial funding for the joint venture. Drilling is expected to commence in 2015. Rosneft will have a two-thirds stake, and Exxon one-third, but Exxon will bear the lion’s share of the exploration costs.

Some $200 billion to $300 billion dollars in direct expenditures are anticipated to develop the Russian resources, but the total project cost might be as high as $500 billion including related infrastructure investments, according to Vladimir Putin.

In short, Exxon got a better deal with fewer concessions than BP had offered, and BP’s CEO Bob Dudley came off looking like an inferior negotiator to Exxon’s Rex Tillerson. More to the point, BP showed that it couldn’t play Russian oil hardball. They weren’t prepared for it legally, nor did they have the political savvy to survive internal Russian business politics. During earlier negotiations in July 2008, as readers may recall, Dudley fled Moscow and went to a secret, high-security location in a hurry, to escape intimidation by Russian authorities (likely at the behest of AAR) who intended to summon him for questioning over alleged violations of labor laws. I don’t blame him for wanting to escape the same fate as Mikhail Khodorkovsky, but I do think he was a bit out of his league in negotiating with the Russians. Tillerson, in contrast, is a tried-and-true American oil company warrior.

As further evidence that BP might be having “a spot of trouble” with the Russian oligarchs, their offices in Moscow were raided today by Russian court officials, in pursuit of a lawsuit filed by AAR. Non-executive employees were sent home and the offices were sealed, Reuters reported. But political analyst Nikolai Petrov of the Moscow Carnegie Center downplayed the raid, calling it “a coincidence in timings,” not evidence that BP will see further pressure from Russian authorities.

BP is now working to convey the image that it still has other meaningful opportunities, including Brazil, the Caspian Sea, Australia and elsewhere. However BP is still unable to resume drilling in the Gulf of Mexico after the Macondo well disaster. BP has lost 22% of its market capitalization this year.

How Big Is The Prize?

The Arctic is thought to hold one-fifth of the world’s undiscovered, recoverable oil and natural gas, according to the most recent (2009) assessment by the United States Geological Survey (USGS). Sixty percent of the oil is concentrated in just six small areas (“assessment units,” or AUs, in USGS parlance), predominately in Alaska, and two-thirds of the undiscovered gas is in just four AUs, predominately in Russia. Of the 61 significant Arctic oil and gas fields, 43 are thought to be in Russia. The Russian Arctic is thought to be gas-prone, while the North American Arctic is likely richer in oil.

Rosneft claims there are an estimated 36 billion barrels of recoverable oil in the Kara Sea, out of a 110 billion barrel resource base. The Black Sea block is thought to have 9 billion barrels of reserves. However those numbers are probably on the high side.

As I detailed in my June 2009 article, “Arctic Oil and Gas Potential,” USGS gave a 95% probability for there being 44 billion barrels of oil, and 770 trillion cubic feet of gas, waiting to be discovered in the Arctic. Allow me to underline that these are undiscovered resources. At 50% probability, they said there might be 83 billion barrels and 1547 trillion cubic feet of gas. In my experience, the P95 numbers should be used, especially in an area we know so little about. So I am skeptical of the claim offered with the news of this deal that there are 60 billion barrels recoverable in the Arctic. Assuming a generous 25-35% recovery factor, the Arctic may in fact have only a 4-month world supply of recoverable oil, and around a 2-year supply of gas.

Even so, I think it’s safe to say that Exxon got a pretty good deal in the Rosneft joint venture, even assuming the high estimate of $500 billion for the total project cost. If the 110 billion barrel number is credible for the Kara Sea resource, and they are only able to achieve the low end 25% recovery factor, they’ll get around 27 billion barrels out of it for a production cost of $18.18 per barrel. And if the high 60 billion barrel recoverable figure is correct, the cost would be a mere $8.33 a barrel. With Brent crude trading at $115 today, the payoff for the joint venture could be huge either way.

But we must never forget that oil exploration in the briny depths is always a highly risky endeavor. It’s not unusual in today’s oil business, while trying to plumb the most remote resources on the planet, to drill a $200 million dry hole. It’s not unusual to run into unforeseen technical challenges, or have equipment failures, as we all saw last year. It’s very likely indeed that the $500 billion figure will turn out to be on the low side, as the original project timeline gets stretched out, and prices for key structural commodities like steel rise to heretofore unseen levels…especially if my guess is right, and the world enters the age of terminal oil decline starting around next year. And if that happens, prices could spike like they did in 2008, crushing demand, and forcing oil prices back down to very low levels. So the Arctic prize may or may not turn out to be as golden as this quick math might suggest.

Indeed, altogether new technology will have to be developed to produce oil from the Arctic. Exxon and Rosneft will create an Arctic research and design center in St. Petersburg to invent it, as part of the joint venture. For example, the oil business currently does not know how to clean up a spill in the months-long night of Arctic winter. Technology to manage ice will be needed, and higher specification components will have to be developed that can endure the freezing conditions. Even simply housing and feeding the workers and attending to their medical needs so far from civilization will be a major challenge. All of this will extend the usual timelines for deepwater projects significantly.

Until next time,

Chris

Related Articles

Arctic Oil and Gas Potential
Energy analyst Chris Nelder summarizes a new USGS report on the oil and gas potential of theArctic.

Arctic Oil and Gas Challenges
Energy analyst Chris Nelder reviews some of the challenges that face Arctic oil and gas de

I appeared on the Financial Sense with Jim Puplava program today, in a segment they titled  ”2012 Energy Crisis Now Looking Likely.” We discussed the futility of releasing oil from the Strategic Petroleum Reserve, and why our government officials and business leaders are failing to come to grips with the loss of spare oil production capacity and consequent oil price spikes that should develop in 2012, followed by the long-term decline in global oil production. (I did not actually predict oil over $150 a barrel, as they indicated on their site, but I do think we’ll hit a maximum pain tolerance point that will kill demand in the OECD, and that price point will likely be lower than the $147 peak we saw in 2008.) My long-term thesis for this century is that fossil fuel supply will decline to almost nothing over the next 90 years, resulting in what I’m calling The Great Contraction–a century of economic shrinkage, and a long process of relocalization (the reversal of globalization). But our leaders are utterly failing to plan for it. I concluded that “there is no intelligent life here.” But on the bright side, solar installations are setting new records in California.

You can download the show (32 mins) here: RealPlayer | WinAmp | Windows Media | MP3

See also: Seven Paths to our Energy Future

I appeared on the Financial Sense with Jim Puplava program this week, to discuss the latest data on oil supply and demand; the question of whether Saudi Arabia tried to make up for Libyan production or not; the state of the US economy and our pain tolerance limits on gasoline prices; the volatility of oil prices and the role of speculators; Japan’s cancellation of its plans for new nuclear power plants; the outlook for renewables; China’s economic growth and the shifting of global oil demand from West to East; and the data on production from Brazil’s Tupi field. Simply: world commodity markets are tight and we are seeing the fireworks that should be expected in that situation.

You can download the show (18 mins) here: RealPlayer | WinAmp | Windows Media | MP3

I appeared on the Financial Sense with Jim Pupalava program this week, to discuss the implications of high oil prices; OPEC’s ability to compensate for lost production from Libya; how Japan will replace lost power generation from the Fukushima nuclear plant; and the outlook for future energy choices.

You can download the show (18 mins) here: RealPlayer | WinAmp|  Windows Media| MP3

You can download the show (20 mins) here: RealPlayer | WinAmp | Windows Media | MP3

You can download the show here: RealPlayer | WinAmp|  Windows Media| MP3

My segment (24 mins) is first.

Recommended related reading:

The Coming Misery that Big Oil Discusses Behind Closed Doors – Steve LeVine, Foreign Policy

The IEA’s Come-to-Jesus Moment – My commentary on IEA’s modeling from July 2007

Watch it here: Market Shrinkology – January 18, 2011