Last week, in a December 22th Wall Street Journal op-ed, Ibrahim Bahr Al-Uluom, a former Iraqi oil minister and current member of the Iraqi National Alliance (a political party), lamented the recent Iraqi oil lease auctions and suggested transferring as much of Iraq’s oil wealth directly to its citizens in the form of shares in an Iraqi National Oil Company. He’s not the first to do so (Nancy Birdsall, of the Center for Global development, suggested something similar in 2004) although he’s open that he seeks political advantage.

The idea that natural resource development must benefit the people (especially financially) is a great one, an essential one. The question is how to do it right. But is handling over shares of a national oil company the best way to enrich the people of Iraq?

I’m building a scorecard to see if the pros outweigh the cons.

PRO
1) Enriching the average citizen means they have more money to work with to improve their lives as they see fit.
2) They can start or develop a small business, which will help develop the economy on a grassroots level.
3) They can enhance their own living standards.
4) They can enhance their children’s well-being through health improvement (if necessary) or education
5) They can save money for a rainy day. Financial security is one of the greatest feelings in the world.
6) It can provide a floor for the poor financially.
7) If done right, it will theoretically force the government to be more responsive, the way corporations are supposed to be to their shareholders. It could offer a measure of control over how the oil is extracted (Shareholders unite!) to protect local interests, it prevents the divorce of government behavior and non-tax-paying citizens.
8) It would force the issue of transparency as the government would have to open its books for auditing.
9) Spreading out the oil money would also have the salutary effect of appeasing and integrating the Sunni population, which have less oil on their traditional lands that do the Kurds or Shiiites.

CONS

1) The oil of Iraq is political and the Sunnis have less of it than anyone. It’s not terribly political science-y to say this, but people in oil regions feel its their oil, and they should control and profit from it, and they don’t like anyone else telling them that it’s got to be different. This is a stick in the eye in Iraq, where the Kurds are determinedly hanging on to independently developing and selling “their” oil, and the Shiites are not far behind (even if less politically separatist). Anyone with a brain can see that oil money distribution in Iraq, for historic reasons, cannot be purely share-and-share-alike.
2) People waste money. Once, when I proposed individual dividends from extraction resources, a woman (who shall be nameless) at the World Bank shouted at me, “Do you know what happened when they tried that in Ghana? The people wasted the money. Like this one guy who started a taxi service and then found out the town didn’t have a mechanic to fix the car when it broke down!” I am not sure this qualifies as wasting money — it just sounds like a failed small business attempt to me. But people do waste free money, especially when they think it is theirs by right. What benefit they could develop gets piddled away, and Iraq might not be better off in the end.
3) A greater threat is that people begin to count on the money and the problem for everyone, country and people alike, is that you never know from year to year how much money you’ll be actually getting. It invariably leads to massive debt, and boom and bust cycles.
4) Just handing out money does not necessarily help politically. Just ask Iraq’s neighbors when the government does distribute (in different ways) oil wealth. Just ask Saudi Arabia.
5) It doesn’t address the problem of the Dutch disease — as the oil is extracted, Iraq’s currency will strengthen, goods will cost more and the increase in money may become moot. Of course, the Dutch disease is possible even without people getting more of the money, and then they would be worse off.
6) Is a cash dividend the best way to distribute the money? Would the Alaska model work, with local corporations as in Alaska and a tax rebate? Would a sovereign wealth fund like Chile’s set up to help the poorest Iraqis offer an acceptable safety net? Would local credit unions and microfinance offer better possibilities of developing alternative economic activities?
7) How will this protect the Iraqi environment or the people living in the way of its petroleum industry?
8) It will give incentive to the general public to develop the oil even when it is not in the best interest of the local people.

9) It will horrify the big oil companies (private and state-owned)  — although I am not sure if that’s pro or con.

If natural gas is so cheap right now, limping along between $2.50 and $5.50 per thousand cubic feet, why did Exxon pay the equivalent of $41 billion for natural gas giant XTO Energy? There is a global glut of natural gas, which won’t be disappearing any time soon.

I can think of a couple reasons. The obvious one is that the market is low right now and, as China has demonstrated for months, it’s the time to buy.

The second is that there are fewer and fewer major oil finds out there right now and it’s time to diversify. Natural gas is the logical step, since gas, upstream (drilling etc) and downstream (refining etc), is much more similar to oil than, say, mining or green energy — even shale gas, which is a large chunk of XTO’s business.

XTO also has proven reserves — always a comfort — here in the US, where the rules of the road are somewhat clearer, if often more expensive. It’s always better to buy a sure thing, if you don’t want too many ugly surprises. You don’t have to face the ground shifting under your feet as it so often does in Iraq or Nigeria or Russia or Central Asia.

Exxon may also be betting that the US will be moving away from coal and towards natural gas to power our electric supply. It would be a new opportunity.

The acquisition of XTO is not the only such investment Exxon has made this year: it is part of a consortium developing oil in Iraq, it is developing the offshore Ghanaian Jubilee oil field with the Chinese.

Energy companies around the world — multinational corporations, state-owned companies, smaller independents, little wildcatters — are in the proverbial scramble to sew up territories anywhere in the world. It almost doesn’t matter the challenges in getting the stuff out. There seems to be an industry-wide belief that it’s now or never. As bigger companies look to buy sure things,  exploration is left to the smaller independents companies (like Tullow Oil and Heritage in Uganda), and of course, China.

Increasingly this will matter, because the larger companies must, and mostly do, play by the rules of the road, no matter how close to the edge. Their leases today have far more environmental protections than in the past — they have to. The big companies are sometimes open to the idea of greater transparency. There is sometimes more involvement with local interests. The Western multinationals have inched towards being more willing to hire locals; many times, the Chinese use their own imported laborers and are openly not interested in transparency.

The problem with the smaller companies is that they often don’t or can’t offer the same levels of protection. Their margins are much smaller, their expertise less, their pockets shallower. They’re out there taking a chance. Environmental corners may be cut, local interests ignored, unsavory rulers supported. This means small poorer countries with little national expertise — the ones for whom an oil or gas strike would mean everything — are the most vulnerable.

(Of course, the big boys have done this too, but now less and less. It’s just not worth it. This week Shell began seeking buyers for 10 of its onshore oil assets in Nigeria, even with the possibility of more peace in the country. The Wall Street Journal quotes a Nigerian official saying they may be sold to the Chinese, but it is unclear if Shell is receiving Nigerian encouragement to divest.)

What began as a financial crisis in the energy sector this year has not been wasted: the seismic shifts in involvement by big companies and China have permanently altered the energy landscape forever.

Everyone seems shocked and discouraged by the outcome in Copenhagen. They shouldn’t be. We must control emissions. So why wasn’t there a deal that made everyone happy? Because that’s the nature of multilateral negotiations, with scores of parties with scores of interests. They are always, always like this, as anyone who has studied them knows: no one gets what they want, unless they can hold the final decision hostage. For an example of that strategy, look at the health care bill in Congress, tied up by the cynical calculations of Senators Ben Nelson and Joe Lieberman. Look back at the Kyoto Protocol.

Governor Arnold Schwarzenegger had it right when he told ABC News that the negotiations were a lot of “kabuki”. (Do you really think President Obama’s sudden appearance at a meeting the Chinese did not expect him at wasn’t theater, too? So was China’s Wen Jiabao’s decision to send lower-level officials to meet with President Obama.)

The negotiating process follows a very specific arc. The more parties, the more complex, fraught and risky it becomes. So with almost 200 countries present, the odds of a clean, pure agreement on a sweeping, binding law were always practically nil, even in the fairly weak field of international law.

Negotiations, like all games, are the process of the passage of time and its contained events. Early in any negotiation, most of the time is spent posturing, jockeying for position, and deciding angle. Testing the waters, testing the other side, making friends and allies, setting up competing early drafts of an agreement — particularly ones that suits your interests best, while giving the other side just enough to stay interested. These preemies never work — if they did, the other side would know for sure they are not getting all they could. But they do begin to give people a vague sense of what matters for a framework.

Most Americans find such behavior exasperating, infuriating. We think: just agree! Or come up with something better that we like too — right now! Then again, most Americans hate to haggle: it’s bad form. The rest of the world works differently.

Last minute negotiations — and they always come down to the last minute— are fuelled by some desperation to save face by getting something done, a sense that the other side is now (on some level) a partner in all this, and a certain amount of the game of chicken. Sometimes exhaustion allows for compromises that would never otherwise be considered.

Copenhagen achieved some things: focus on the problems of poor countries and climate change; money to prevent de-forestation. True, emissions were not cut; there is no enforcement. As with the mice trying to decide who bells the cat, no one was willing to risk their interests for a common good. So there is a lot of disgruntlement. Failure is like that.

But there is the future (by that I mean next year). Perhaps now that everyone has had their say in pure democratic form and seen what a mess that can make, coalitions will come together and each send a representative team to cut down on the number of parties at the bargaining table. Such a step would increase the odds of success next time. Apparently, Copenhagen itself was only a step towards dealing with climate change, as was Kyoto before it.  A big problem will get a mammoth negotiation. It will take years, but humanity will survive – it has through all the catastrophes of time. (The world has been about to end so often and for so many reasons, it can be hard to keep track.)

Compromise has its costs and is slow; that’s the downside to democracy. But would anyone like to change systems?

Overview

2009 was all about China. Early in the year, when energy prices crashed due to disappearing demand, oil sank to slightly more than $30 barrel from its mid-2008 high of $147 and natural gas from $14 to around $3 per thousand cubic feet. China, flush with cash, for all practical purposes stabilized the market by going on a spending/investment spree in Africa, South America, even Russia. By the end of the year, oil prices had climbed back to more than $70 a barrel, due to the plummeting value of the dollar. (Gas prices has only rebounded to around $5 per thousand cubic feet.)

2009 also saw several countries attempt to use their natural resources for political power — most notably Russia’s decision to freeze Europe last winter (literally) in its displeasure with Ukraine and its natural gas pipeline bottleneck. Result? Europe is desperately developing alternatives sources and pipelines for gas.

Mining prices also tanked early on, with the same response from China. In mid-summer, China ominously arrested employees of mining giant Rio Tinto of charges of spying.

A number of gigantic mergers took place in 2009; most recently oil mega-company Exxon, seeking to become a major player in natural gas, bought regular-size-giant company, XTO, in a deal worth $41 billion.

Finally, 2009 will probably be remembered for the rise of new energy sources — not only green energy, but a transition to unconventional sources of natural gas, including coalbed methane and shale gas. Billions of dollars are being invested, due to new technology.

Those Who Made It The Year It Was:

The Winner: China, for the reasons cited above.

Honorable mention: President Umaru Yar’Adua of Nigeria for taking the first concrete steps to ending the fighting in the Niger Delta, and
President Luiz Lula da Silva of Brazil (for using the energy market) and President Michelle Bachelet of Chile (for using Chile’s copper-based sovereign wealth) to limit the recession’s impact on their countries.

The Rogues’ Gallery: Vladimir Putin of Russia; Ali Ben Bongo (for growing up to be an oil autocrat just like his dad); Hugo Chavez (for the priceless rebuke to his countrymen on the energy shortage: “Some people sing in the bath for half an hour. What kind of communism is that? Three minutes is more than enough!”); Paul Kagame of Rwanda (a hero for ending the genocide there, but who has tacitly allowed the bloodbath in the DRC to continue); Alan Garcia of Peru (for deciding that the indigenous people of his country were too ignorant to understand his leasing of their land in the Amazonian basin); and Idriss Deby of Chad (for using oil to keep himself in power and exacerbate an already tense region).

What Was That Again? (Most Unexpected Event)
China’s announcement that it tends to monopolize its rare earth minerals required for emerging green technology.

Oh, Crystal Ball… What to look for in Energy and Natural Resources in 2010
Conflict
1) Fallout following the Iraqi elections. Big question what will the Kurds do? What about relations between Sunni and Shiite?
2) The strong possibility of war in Sudan, this time between the North and South again. The South, with the oil, votes on secession in 2011.
Power politics
1) More power politics from Iran and Russia.
2) More pipelines in development create  more opportunities for profit, energy and political obstruction.
3) The main US question: will the US Congress actually pass a meaningful energy legislation after the chaos of health care?
Money
1) The outcome of the push for global financial transparency in the extractive sector — will dozens of developing countries who have “committed” to making their dealings transparent actually make good?
2) How will China’s acquisitions affect global demand and long-term prices?
3) Can everyone working together keep oil prices stable to sustain the global equilibrium of today?
Green energy
1) Ethanol begins to wilt; farmers go back to growing food for the starving world.
2) Coal has the stake pulled out of its heart by friends in Congress and China, natural gas tries to stab it back in.
3) Water supply becomes a serious problem for green energy
4) We arrive at the gloomy realization that there are no easy answers when it comes to weaning ourselves off oil.

Most of us stumble through life never knowing how oil or gas or mining works. That’s fine — right up till we’re facing drilling or mining in our own backyard, or we want to take a stand on it. There’s a lot of fear about the process, which is completely justified — a lot can go hideously wrong. There’s a lot of stuff we need to learn fast about how gas or oil are drilled or the process of mining.

So that the people in the Marcellus gas area can get more technical information about what is happening around and to them, the Penn State College of Agricultural Resources and its outreach arm, the Cooperative Extension, are running a new series of monthly webinars, designed to address questions that those leasing their land will have (i.e. what to expect after you sign a lease, money issues, etc), concerns of the general public (i.e. is underground injection disposal of the gas wastewater a good idea? What effect will this have on the local economy? How will this affect the forests?) and local government (zoning, land use, regulation, water etc). The first webinar is December 17th.

These webinars (and other outreach done by Penn State’s science and agriculture departments) have been immensely helpful to those seeking to drill, but who want to avoid the environmental catastrophes of those who blithely signed without doing their homework.

(Newspapers throughout the Northeast for months have been reporting the problems of Dimock, Pennsylvania, which was the site of serious water contamination to several local homes (which signed without decent leases), possibly through a drilling mistake, a shallower gas layer, or through contact with an long-lost, unmarked wellbore (of which there are thousands in every state). There have also been fluid spills on land by the industry giant, Cabot.)

The material and information on the website is technical but not too difficult. There is a slightly pro-drilling philosophy to the undertaking, since the sources are geologists and others who believe their processes can be safe when done properly. But it is an excellent primer on the drilling process itself.

Such information could and should be made available though extensive public outreach in every drilling situation. No, it doesn’t address a lot of what can go wrong and that is absolutely crucial too. But locals should have the right to make informed decisions about drilling (and mining) and understanding the process is essential.

If this sort of outreach was done in all emerging energy and mining sites, it would make a huge difference in how the public responded to these project — and not just in America. People would have the information on risks to the environment, on the different options they have, on what they can do to protect themselves, and an understanding of the project’s economic impact, positive and negative, on them. Those interested in leasing would know the pitfalls; those against it would be able to make better arguments or at least mitigate its potential harm.

(For more on the webinars, past and present, visit Penn State’s Natural Gas Impacts  http://naturalgas.extension.psu.edu/ )

Socialism and energy have a peculiar relationship to each other.  In most countries, no matter who owns the surface land, the subsurface rights to the oil, gas, or (sometimes) minerals, belongs to the national government, and, in theory, the people of the country.

The idea did not start with the 20th century: kings and rulers had often held that right eons before Karl Marx, but its peculiar current manifestation has ruled the energy field since 1938, when Mexico’s President Cardenas, despairing of American oil companies’ exploitation of Mexico’s oil fields (and workers), decided to nationalize the industry. The income would belong to the people of Mexico. A trend was permanently established.

It would seem like a winning idea for developing countries — take the benefits of a hugely lucrative natural resource out of the hands of the few to fund the economic development for all. The practical reality is that in most countries the wealth still mostly flows to the few at the top — of the government, as opposed to shareholders. Development has not happened consistently on the ground.

What’s tricky about socialized energy is that it often lacks initiative. Sure, Saudi Arabia, has the prodigious state-owned Aramco, but most countries with a long history of socialized energy do not know how to manage upkeep, upgrades and investment in it wisely. Too often, leaders consider it a cash cow. Politically, it’s easier to have an anachronistic policy than re-think the whole thing. They expect energy companies to invest billions of dollars in developing fields, not for companies’ enrichment (which offers incentive) for the country’s benefit (which does not). In many countries, the mentality has been either,  have those evil greedy capitalists sink the money into our country, or let them do all the investing — we’ve got other things to worry about!

In the past weeks, these foolish philosophies have come home to roost, in (of all places) Mexico, as well as Venezuela, Iraq, and Russia.

A quick overview: in Mexico in October, President Felipe Calderon finally closed Luz y Fuerza del Centro, a state-owned, bloated and antiquated electricity distributor, to much hue and cry. The Economist reported

The government was pumping $3 billion a year into Luz y Fuerza. Most of this went on fat salaries and even fatter pensions for its 44,000 employees and 22,000 pensioners. The company managed to lose 30% of its electricity through illicit connections and technical failures.

Iraq has been gearing up for its second round of oil lease auctions this week. The first round in June went poorly, with only one field (the giant Rumaila) going to a BP/China consortium. This would seem strange for a country with such huge oil reserves, but not when you consider the terrible terms they offered the oil companies: a fee of $2 for every barrel the oil companies drilled and then pumped out of the ground. The companies saw a profit at $4. The government decided to squeeze a little too much for its indispensable hydrocarbons only to find buyers losing interest and shopping elsewhere. I will write more on the Iraqi oil auctions later in the week.

Venezuela, which apparently relies on hydroelectric dams for a surprising amount of its electricity,  has been facing power shortages due to lack of investment in alternatives and infrastructure development. There has been a drought as well.  How to deal with this?

Mr Chávez has called on Venezuelans to take quicker showers. “Some people sing in the bath for half an hour,” he told a recent cabinet meeting, broadcast live. “What kind of communism is that? Three minutes is more than enough!” (The Economist)

(I am trying to imagine any other leader in the world doing this.)

Finally, Russia was told by an independent arbitration panel to pay shareholders of the formerly privately-held oil company, Yukos, $100 billion. Russia has a long history of nationalizing oil resources even when they have been contracted to a foreign oil company. The New York Times wrote,

From 2004 until the onset of the global financial crisis last year, the Russian government engineered a series of forced sales and bankruptcies in the oil and natural gas industry.

Yukos, you will remember, was expropriated in 2004, supposedly for back taxes but really in a political struggle between Vladimir Putin and oligarch, Mikhail B. Khodorkovsky. Russia will appeal and probably not pay in the end, although technically claimants could go after Russia’s assets outside the country.

The financial crisis and subsequent dive in oil and gas demand has changed Russia’s behavior: they are much friendlier for the time being to foreign investment rather than find money to do so on its own. In this terrible economic climate they are even being asked to consider the unthinkable: bailing out the home-grown oligarchs.

The moral to the story: if you own it — house, car, giant oil field — you are responsible for maintenance, repair, upgrades, and replacement. It’s painful for resource countries to find the money, but that’s what it means to actually own something. Resources may be the free lunch, but they’re only just so free.

Last spring, I attended an event about the new positive resource contracts of Liberia, held at Revenue Watch, an international NGO which seeks transparency in the finances of governments with natural resources. During the Q & A, a man got up to congratulate a Liberian official there, and to pray that in his own country, Guinea, the new military government would have the wisdom to follow suit.

No such luck. Guinea, with its huge deposits of bauxite (aluminum), gold and iron, has always hit below its weight. After a hopeful but fitful start, the new President, Captain Moussa Dada Camara, sat by in September as troops went on a rampage slaughtering and raping civilians in the streets. Even the African Union condemned it. This week he seems to have barely survived an assassination attempt, and is currently in Morocco for medical treatment, they say. But according to Reuters, mining giants Anglo Gold Ashanti, Rio Tinto and others have not been affected by the violence. That would be politically stupid.

This parallels the ongoing conflict in the Democratic Republic of Congo, where chaos continues to flare and subside in the eastern part. The war there, a spillover from the Rwandan genocide more than 15 years ago, has cost five million lives and untold misery as the weak leader, Josef Kabila, son of the former (and also weak) Laurent Kabila, remains unable to bring an enduring stability to the region.

Much has been made of Congo’s free-for-all mining of gold, coltan and other minerals, which are exported through only-too-willing neighbors like Uganda and Rwanda. It’s the classic greed-versus grievance/chicken-and-egg story: do they mine to keep a war going that they believe and have a job fighting in? Or is the war is just an excuse to make money from illegal mining?

What is indisputably true is that parts of Africa (the despotic parts) are witnessing the law of genetics at work: the original hybrid tyrant may have been strong, but the descendants are much weaker and unpredictable. The Big Men of Africa (totally unmourned) are replaced by the Little Big Men: Camara, Bongo II (Gabon), Kabila, and someday, Teodoro Obiang (Equatorial Guinea). The original strong men who held their country together through terror, corruption and tyranny are followed by those who cannot even do that.

The age of the despot is over — those who can muster the violence to seize power rarely have the ability to run a viable economy. Historically those with resources relied on advanced industrial companies to translate it into cash. As the world moves into ever more technological economies, the miserable shrunken dictators (and they are not only in Africa) and their countries remain unhappily stuck in the past.

Can democracy survive 21st century capitalism?

In October, the courts of France dismissed a suit by Transparency International (and other plaintiffs) that sought to investigate how three African dictators in Francophone Africa came to possess hundreds of millions of dollars even though the people of  their countries were amongst the poorest in the world. The Africans were dictators, but France is a democracy.

In Namibia, an extremely poor but technically democratic African country, the Chinese government has offered scholarships to the children of the best connected families according to The New York Times. This is nothing new for China, of course, where kind touches and nice gifts — of roads and other infrastructure and no one knows what else — is part of the package to secure access to various natural resources. Undermining fairness may not bother the non-democratic Chinese, but it has infuriated many locals in the source countries. It ruins the equation that elections mean democracy means fairness.

The United States has the Foreign Corrupt Practices Act, which prohibits (in theory) bribery in order to secure foreign business. But early this year, Halliburton paid more than a half a billion fine for bribing Nigerian officials (to the tune of $180 million) for $6 billion worth of business. Officials and family members of officials, all with suspiciously large bank accounts and holdings, are regularly allowed into the US (especially, according to numerous reports, if their countries have oil).

Although corruption is so visible and so common in oil countries, it is scarcely limited to them. Afghanistan, which has limited natural resources, deals with corruption on all levels, a (probably) stolen election, a US-backed President who seems to uninterested in stopping it. A viable economy is thwarted by the current illegal one.

To me, Afghanistan shows most clearly the potential costs to democracy without equally enforceable laws. Defense Secretary Robert Gates has suggested tying aid to anti-corruption efforts, but that has rarely worked elsewhere. What will we do instead? Democracy relies on coalitions (although this is rarely emphasized in American politics these days either),but not necessarily a corrupt one. Building a working coalition in Afghanistan has meant deals with corrupt warlords, tribal leaders and drug lords. This behavior is the only thing that can validate the Taliban.

Historically, when we have promoted democracy around the world, we have linked the system with improved freedom and greater opportunity, especially economic opportunity. After all that is our legacy, if not exactly our own 19th century history. Now much of the rest of the world has elections: Nigeria has a civilian government — and is it beyond corruption? Kenya? Zimbabwe? Pakistan? Russia? Iran? People become disgusted with democracy when they connect it to democracy.

Democracy without honesty, without accountability, gives the best system in the world a bad name and bad image, with dangerous consequences. Unless America and the West can find a way to control the corruption that seems to follow the beginning of democracy, it will undermine the validity of the concept by association. Will people ultimately pull away, give up in the name of another organizing principle? Communism was once seen as a viable alternative to capitalist but democratic Western countries. Today, this is the attraction to other, antiquated, approaches, like sharia.

As we have seen in Guinea, Gabon and other places, the end of one dictator often means elections that are farces and a new old dictator comes to power. The “election” of Bongo’s son in Gabon this summer brought furious local protests blaming France. France, once an ocean-worthy power, now seeks to retain its glory in a duck pond, as protector of some of the worst dictators in its former colonies.

All countries endure some corruption — it becomes unendurable when wealth is limited to those in positions of power, however petty. Allowing corruption to become associated with democracy or the West (especially the US) will undermine the best hope for us all.