Royal Dutch Shell Plc  .com Rotating Header Image

Financial Times: The Geopolitics of Energy: Speech given at the IP Week, 2007

By Carola Hoyos, Chief Energy Correspondent

Introduction:

John Paul Getty once said: “The meek shall inherit the earth, but not its mineral rights.” If ever that were true it surely is today. The national oil companies that have inherited the world’s oil and gas resources are far from pushovers, while the international oil companies who have ventured into ever more treacherous territory to claim their thinning slice of the inheritance have adventurous souls deeply hidden beneath the thick layers of their corporate wrapping.

I’ve been asked to talk about the geopolitics of oil and gas, its impact on international and national oil companies and how it has affected supply and demand.

I propose we examine what prompted the shift in the industry and then take a quick jaunt around the world to look at some of the examples. I’ll interweave supply and demand effect as well as the changing fortunes of the NOCs and IOCs and then finish by taking a quick look at what we may be able to expect for the future.

For Christophe de Margerie, who takes over as chief executive of Total on Wednesday, three little words are the route of the massive changes this industry has seen in the past four years:

High oil prices

For me the journey of the oil price rise began in the ashes of downtown New York, as the smell of fire clung onto Manhattan despite the cleansing clear blue sky of September 2001.

I was still two years away from becoming the FT’s energy correspondent. As the paper’s United Nations correspondent I was busier than I had ever been covering the diplomatic fallout of the terrorist attacks.

What I didn’t realise as I watched the world’s leaders rally around the US only to later fall away in dismay as Washington prepared for war in Iraq, was that a second remarkable story was unfolding in parallel – that of the resilience of the US economy. Instead of collapsing as passengers shunned air travel, the US economy withstood the shocks and grew beyond expectations. Half way across the world – but inextricably linked – China was also gearing up for a remarkable run. Just three years later, China’s annual oil demand growth would rise a whopping 16 per cent. Together, the two would push refiners to maximize their capacity so much so that analysts worried the US distribution network of pipelines would not be able to keep up and Opec stopped taking about a wall of crude drowning them when Venezuela’s strike abated and Iraq recovered from Saddam Hussein’s downfall, and began to relax. Saudi Arabia particularly eased up as its policy to drain consuming country stockpiles proved successful and the power to move prices was back in its hands.

At the FT we watched prices shatter the $30, the $40, the $50, the $60 and the $70 mark, and each time I was told by economists, oil company chief executives and energy ministers that this could not go on – prices could not go any higher without slowing the world economy.

Even big producers didn’t believe high prices would stick around as long as they have. In the early days of the rise Kuwait and Saudi Arabia were still becoming more serious about letting international oil companies invest in their giant fields. Iran was talking of improving terms. I to my later embarrassment wrote a story in mid 2003 entitled “Gulf oil states hint at a new world of opportunity” in which I argued that the imminent opening of Iraq’s fields was prompting its neighbours to inch open their doors. Thankfully I hedged my bets and ended the piece with the line: “But for all the positive signals, oil executives will not easily forget the Middle East is a hard place to make money. Saudi Arabia, Kuwait and Iran still have plenty of time to change their minds if the political wind changes direction.”

Change their mind they did as the forecast for their earnings grew ever brighter with the continued rising of the oil price.

Remarkably, the sunshine in the Middle East did not bring rain to the rest of the world – by and large the world economy weathered the demand-driven tripling of prices.

That doesn’t, however, mean nothing changed. With the massive redirection of wealth, big shifts in the geopolitics began to emerge.

Geopolitical Shifts:

Russia:

While Europe and the US clung to history, making comparisons with the 1970s, and worrying about the rising power of the Middle East (remember President Bush’s concern about the US’s addiction to Middle Eastern oil in his 2006 “State of the Union” address) it was in fact outside the Gulf that some of the most concerning changes were happening.

I landed in Moscow in late-October 2003 just as thousands of miles east, Mikhail Khodorkovsky, the chief executive of Russia’s biggest and most dynamic oil company was being handcuffed and taken to prison in Siberia.

Unbelievably, Yukos did not cancel the interviews my Moscow bureau chief and I had lined up the next day and we literally watched from inside as the company’s walls collapsed around the rest of its management under the relentless onslaught of the Kremlin.

Neither of us could have imagined that the exercise would end with Khodorkovsky still imprisoned years later and western investors sealing the Kremlin’s actions with a $10 billion kiss by allowing Rosneft, bolstered by Yukos’s assets, to launch (late last year) a successful IPO on the London Stock market.

Of course, Russia’s actions did not stop with Yukos. The story continued, with major chapters including Sakhalin II and Moscow’s gas disputes with Ukraine and Belarus. And as Yukos’s death built Rosneft, the Kremlin’s successful wrestling match with Shell and other IOCs has benefited Gazprom.

From the other side, the US, Europe and Nato watched with concern. Bush had clearly misread Putin’s soul as he famously looked into his eyes. In Washington disillusionment has set in as the world has watched the newfound power oil prices have afforded the Kremlin erode democracy, shut down free speech and fuel corruption.

During a speech in Europe this weekend, Robert Gates, the US’s new defense secretary and an old cold warrior, said he was almost nostalgic for a less complex time. The former director of the CIA said he “wondered” about Russian policies that seemed to work against international stability, bluntly giving as an example: “Its temptation to use energy resources for political coercion.”

The impact of Russia’s actions has also been detrimental on its longer-term energy supplies. The double digit oil production growth the country had achieved as recently as 2002 has slowed to a trickle and the IEA worries Gazprom is investing too little to be able to meet its future commitments to Europe. Meanwhile, the promising new energy frontier of the post-Soviet era has turned into a difficult, dangerous or impossible place to do business for many international oil companies who had been scrabbling to strike deals such as the one BP achieved when it created TNK-BP.

Meanwhile, downstream, Russia’s new muscle has led to deep distrust as European national champions have emerged and sentiment is growing to keep Russia – and also Algeria – from being able to market directly to customers.

Venezuela:

But Russia has not been the only hotspot. In Caracas, oil wealth had already begun to have major political implications.

After the bitter general strike President Hugo Chavez began his purging of PDVSA and proved that high oil prices do not always come to the benefit of the resource-rich national oil company.

In terms of production the 2003 strike and Mr Chavez’s policies have been devastating. Luis Guisti’s ambitious goal of reaching 6m b/d seems a far away dream as the country’s output shrinks, rather than grows.

Even Venezuela’s relationship with its fellow Opec members has suffered. The others – save perhaps Iran – have felt uneasy about the country’s direction in the past five years. Ministers were clearly uncomfortable at last year’s Caracas Opec meeting, shifting in their seats during the president’s fiery speech that alluded to the common history and purpose if the 11-nation group, but at the same time laid bear just how isolated Venezuela was in its outwardly hostile position towards its largest consumers.

But if Caracas is making Opec uncomfortable, it is outright torturing the international oil companies — or so weary executives complain.

Many of you will know better than I how difficult the situation in Venezuela has been. I have watched from the outside as Mr Chavez has used his heightened platform to spread his populist and often colourful anti-US message.

Meanwhile, day-to-day life clearly has become more difficult and unpredictable for IOCs. Executives are grudgingly getting used to having to rewrite contracts, so it has not been the Chavez government’s clawing back of control and profit share that has astounded them, but the often-hostile way in which it has been done.

How has this impacted IOCs?

In fact Russia and Venezuela’s nationalism has contributed significantly to the existential crisis international oil companies face today. Many of them are failing to replace their reserves and to grow production. They are moving to gas and more technologically difficult terrain, but even there they now face increased competition from national energy groups.

Canada’s oil sands are a big hope for companies such as Shell, Total and Exxon, but alternatives, such as solar and wind won’t make much of a dent, so much so that Total’s Christophe de Margerie told me in that interview I alluded to earlier that he was beginning to eye nuclear.

Total is also a good example of a company that has done its sums and made the politically difficult decision that in a fungible market, their oil and gas producing partners are more important than the governments of their customers. The company has sold its assets in the US, which has allowed it to continue to more easily deal in Iran and other politically sensitive places.

Still, the place Total and its peers would most like to see open its oil doors to them is Saudi, right next door. But Saudi Arabia’s position has grown stronger and its already capable national oil company, Saudi Aramco, has grown even more so, making it less likely to happen any time soon.

Saudi Arabia:

The kingdom has been an interesting study in the past four years, The world’s biggest producer has in fact maintained a benign position. Some would say: “Well that’s because it has not allowed international oil companies to exploit its fields since 1980 and therefore has not had to correct lopsided contracts written when the market favoured the foreigners.” Indeed, but Saudi Arabia has also opened its spigots when needed – even during the internationally unpopular US-led invasion of Iraq.

Riyadh has been careful not to alienate the US and together with many of its neighbours has learned the lesson from the 1970s and used its new wealth relatively more wisely, paying down its debts, bolstering its rainy day fund and reinvesting in its declining fields as well as its new ones. This has helped Saudi grow more powerful still.

But trouble is brewing:

Non-State Actors:

Saudi:

Al Qaeda has recognised the potency of high oil prices and low spare capacity and targeted oil facilities and the people who run them, giving the world just one example of another tenant of the geopolitical shift: the rise in prominence of non-state actors.

Nigeria:

Nigeria is arguably the clearest example, however. Rebels in the Niger Delta have seized the power and prominence a world with no spare capacity has afforded them. They have taken oil workers hostage and sabotaged facilities, cutting the country’s production by a quarter and getting their voice heard. Just how well they have mastered their new weapon is eminently clear to us oil journalists. Shortly after they act, we often get a call from a mobile phone. The man at the end of the line is able to tell us with more certainty than the oil company whose facility he had just hit how much production has been shut in. He knows that wires such as Reuters will almost immediately relay the information to the markets, giving the rebel the headline and the price spike that reminds the world of his cause.

Nigeria’s rebel activity has been a big factor – but not the only – supply-side factor that drove prices higher.

Since 2000, global politics – including in places such as Nigeria, Russia, Kuwait, Iraq and Iran – have cost the world nearly 8m barrels of oil a day, estimates Julian Lee of the Centre for Global Energy Studies here in London. That’s the equivalent of the total consumption of Germany, France, Italy and Spain. And I think he’s being conservative.

And long-term, there has been a serious cost as well: The IEA says the world is at least 20 per cent behind its target to invest the $20 trillion needed to ensure our energy future for the next quarter of a decade. For oil particularly, the outlook isn’t good as Iran and Iraq, which are to help provide much of our growth to 2030, are suffering investment-stunting international political quagmires.

Clearly it is not only exporting countries’ governments who have made an impact on global supplies by reacting to the shift in power that oil prices have caused.

This leads me to the energy politics of the consuming countries:

US:

In the US, foreign and energy policy has become even more schizophrenic. Activists’ theories and George Clooney’s blockbuster Hollywood movie Syriana aside, Washington’s actions have in fact done much to inhibit oil flow. Its hardline against Iran, Iraq, Sudan and until recently Libya is just one basket of examples. Kazakhstan is another neat illustration of just how torn the world’s superpower is between pushing its human rights agenda and its energy security one. Last September, George W. Bush welcomed President Nursultan Nazarbayev to the White House (Bush senior even took him for a boating trip in Maine) all while the US attorney’s office in Manhattan was preparing to launch the country’s largest foreign bribery case against him.

Meanwhile, Washington has also hit out against China, its biggest competitor in terms of securing oil.

In May 2005 pressure from lawmakers forced Cnooc to withdraw its bid for Unocal, a mid-sized US energy company whose acquisition by a Chinese company would have been no threat to national security. Instead Chevron of California ended up with the prize.

China:

That China is being aggressive in trying to secure energy – for example in Sudan, Angola and Kazakhstan – is a well-documented story. But it makes little sense, as markets are fungible. What is less well known among the general public is the influence Beijing peddles in these countries through its generosity in loans and other forms of assistance.

But there is a hope that the US and China are not in fact moving towards a head on collision. Both countries are beginning – if slowly – to look inward at the true source of their influence when it comes to the future of the world’s oil supply: the demand picture.

Conclusion:

They are starting to understand the need to improve efficiency and find alternatives that will allow them to increase their energy security.

However, whether their drive will lead them to improve the world’s chances of stemming global warming by cutting down on waste and finding carbon free sources of energy or whether it will lead in the disastrous opposite direction and back to their dirtiest and most abundant hydrocarbon: coal, is a story for another day.

Copyright The Financial Times Limited 2007

Published: February 19 2007 14:55 | Last updated: February 19 2007 14:55

 

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

0 Comments on “Financial Times: The Geopolitics of Energy: Speech given at the IP Week, 2007”

Leave a Comment

%d bloggers like this: