Pipelines used to be just a way to get oil or gas from Point A to Point B — mostly political locally, especially for environmental reasons. Sometimes, they are locally strategic, the way they are in Nigeria — want to get the government’s or the company’s attention? Blow up a pipeline. Increasingly, they are geo-strategic, for energy security reasons, not done in a financially sensible way. Pipelines are political.

Since the 1970s, access to oil has also been used as a weapon to express political displeasure, as with OPEC. Today, the pipelines in question are mostly gas. Oil can go by tanker, but natural gas is mostly transported by pipelines — it’s cheaper than liquefied natural gas. Nowadays when it comes to energy, everyone now is working to minimize the number of political choke points. Two ways to do this: maximize the number of oil producers, and vary the transit routes.

The political displeasure these days is Russian. For several years, Russia, which supplies varying (but significant) amounts of natural as to various European countries, has spent each winter in dispute over transit fees or other bilateral issues with members of the “near abroad” – especially Ukraine, through which most of its pipelines go. When it cannot resolve the problem through talk, it shuts off the gas to Ukraine and so to Europe. Sometimes a cut-off is expressly to voice political displeasure. This has made Europe desperate to diversify its gas sources, and Russia desperate to diversify its pipelines so that when it seeks to punish or leverage a dispute, it has choices that aren’t so costly. Hence the new pipelines. Everyone knows this.

Last week, Russia and Germany got the green light from Finland to build a 750-mile pipeline, Nord Stream (majority-owned by Gazprom)  on the floor of the Baltic Sea, to entirely sidestep Eastern Europe. Russia’s second pipeline project,South Stream, would cross the Black Sea to Bulgaria, split and go on to Greece and Austria.

And the West has an alternate pipeline to avoid Russia itself,  the well-known Nabucco, which would access gas from Central Asia (like Azerbaijan and Turkmenistan) as well as possibly the Kurdish region of Iraq (which would open up a whole new can of worms) via Turkey, ending up in Austria. Even better, to America (which supports Nabucco), it avoids Iran. But look at the difference in costs.

Nabucco’s estimated cost is about  €8 billion with a completion date of 2014 while South Stream’s estimated cost is from  €19 to €24 billion with a completion date of 2015. South Stream was launched in 2007 when Russia’s President Dmitry Medvedev was then Chairman of the Board of Directors of Gazprom, Russia’s largest company and the world’s largest gas producer.(In theory) Nabucco could carry some 30 billion cubic metres of gas a year. But that is only a fifth of what Russia exports to Europe; and it will not be finished until at least 2015. OilPrice.com and Mineweb 11-19-09

There’s an internal political stake as well: the New York Times reports that German Social Democrat Gerhard, now working for Gazprom and Angela Merkel support Nord Stream, but her former rival, Joschka Fischer, is backing Nabucco.

It’s not just Europe and Russia. The Economist reported July that Gazprom has signed a $2.5 billion deal with Nigeria. Of course, this doesn’t even touch on the Central Asia pipeline plans of China.

The completion in October 2009 of $400 million 188-km section in Turkmenistan of a 7,000 km natural gas pipeline that will reach China is an important step towards diversification. OilPrice.com 11-19-09

So what does this amount to? Just what you might think: a gas glut that will last a long time. Central Asia is coming online at speed, across the US gas and oil companies have been sinking huge sums investing in unconventional gas like shale gas, coalbed methane, etc. And that doesn’t even deal with green energy. These very expensive pipelines may have a hard time paying for themselves as gas stays dirt-cheap.

Just in time for Valentine’s Day, Hugo Chavez, President of Venezuela, has changed his mind.  He loves big oil companies after all.

The history of Big Oil and Hugo Chavez reads like one of those dysfunctional relationships most of us have at least briefly been involved in: he or she only loves you when they need you. At first it seems passionate and real. The first time they want to get back together, you believe them, but after a couple rounds, it just seems stormy and dispiriting. If you feel you need to keep going back, it’s time for addiction therapy.

In 2006, President Chavez took over control of two oil fields from France’s Total and Italy’s Eni; in 2007, he moved to nationalize oil projects by, among others, Exxon and ConocoPhillips. They subsequently pulled out.

But nationalization hasn’t worked out so well; President doesn’t want to invest but he does want the money. More than 80% of Venezuela’s export income comes from oil and although oil is at $70-80 a barrel, demand is still weak. The economy, which was afloat when demand and prices were high has contracted, the Economist says, by 2.9% last year and the country is in a recession. Chavez devalued the bolivar earlier this year to try to ease the situation.

Even more tantalizing, the US Geological Survey has just upped the amount of recoverable oil it believes is in Venezuela’s famous Orinoco oil belt: It is now estimated to hold 513 billion barrels of oil — up there with Saudi Arabia, but of a heavier, gloppier kind. President Chavez has a lot of oil to sell.

So he has come back around sweet-talking. For all the loud acrimony on both sides, the United States is still the largest consumer of Venezuelan oil. What will the oil companies do?

AP reports that one block will be developed by a consortium that includes Spain’s Repsol, Malaysia’s Petronas and three Indian companies — Oil and Natural Gas Corp., Oil India Ltd. and Indian Petroleum Corp.

The other block will be worked by a consortium that includes US-based Chevron, which, it is agreed, had always maintained a closer relationship with Venezuela than other American oil companies.

In an unusual display of warmth given his friction with Washington, Mr. Chávez happily greeted a senior Chevron executive in attendance, Ali Moshiri, the company’s president of African and Latin American operations. The groups led by Chevron and Repsol agreed to cede control in their ventures to Petróleos de Venezuela, Mr. Chávez’s national oil company, in addition to securing all the financing for their projects, which could require as much as $30 billion. New York Times  2-11-10

Not everyone is seduced. The Times goes on

Some foreign oil companies that had shown interest in the auction — including Royal Dutch/Shell, Brazil’s Petrobras and Total of France — opted not to bid. Mr. Chávez is moving ahead with nationalizations in other industries, like the seizure last month of stores controlled by the French retailer Casino, which appears to have scared foreign investors.

A contract for a third area in the Orinoco Belt was not awarded, reflecting the reluctance of other oil companies to take part in the auction.

Will the relationship work this time? Is it true love?

”I’d say it’s very risky (to invest in Venezuela) because once you’re investing money in the country, the government is your partner,” William Edwards (an oil analyst with the U.S.-based Edwards Energy Consultants) said in a phone interview from Katy, Texas. ”They could set one set of rules to invite you in, then they can change the rules, and that’s risky.

Some private energy executives here doubt that the oil projects will materialize due to technical difficulties.. Moreover, Mr. Chávez announced only the award of the deals; final operating agreements must still be negotiated and signed. Recent attempts to reach other oil production ventures with companies from China, Belarus, Russia, Italy and Vietnam have advanced slowly, if at all. AP 2-10-10

“Here now I wander alone as I wonder/Why you did leave me to sigh and complain./I ask of the roses, why should I be forsaken,/ Why must I here in sorrow remain?” — Early One Morning, folk song

Thursday, New York Times columnist Gail Collins spent significant time mocking New York City councilman Larry Seabrook, who is charged with doctoring a receipt for a bagel sandwich from $7 to $177.

Most people around the country aren’t too surprised (but remain disgusted) by such behavior in politicians. Gail Collins should see what I see.  When I think about energy and natural resources, I look at Councilman Seabrook and think, why that simple-minded sweet potato, look how small he thinks! Why, anyone in a resource country with any government position — sometimes even those who don’t have one — can find a way to pilfer a thousand times that amount and never get caught. Globally, we are losing ground in education, economic clout, political capital, and now even our corruption.

This brings me to a new report, by the Investigations subcommittee of the US Senate Committee on Homeland Security and Government, on international corruption and how it makes its way into the US. The 330-page report details only a few examples, but of course, it could, if it had wanted to, found thousands. But then the report would have been much, much longer than it already is. Money laundering is illegal under several US laws; international bribery and corruption is illegal under the Foreign Corrupt Practices Act. The NGO Global Witness has been harping on problems in the banking system for years.

It isn’t an accident that the individuals come from oil-rich countries: Gabon, Equatorial Guinea, Nigeria, and Angola. And in these cases, US lawyers, bankers and other financial persons aided the money laundering. After the UBS scandal, I don’t know why anyone would be surprised at the idea of bankers in bed with the corrupt, but Washington likes to fulminate. According to the Senate announcement,

The report presents four case studies exposing how politically powerful individuals –known internationally as “politically exposed persons” or PEPs – are taking advantage of the U.S. financial system. In each case, weaknesses in our financial regulations have allowed these PEPs to move millions of dollars into or through U.S. bank accounts, often by using shell company accounts, attorney-client accounts, escrow accounts, or other accounts, or by sending wire transfers that shoot through the system before our banks react.

Case 1: Teodoro Obiang, son of the President of Equatorial Guinea, uses US lawyers, bankers and others to bring $110 million into the country and buy planes and palaces in Malibu.

Case 2: Omar and Ali Bongo (father and son leaders) of Gabon buy a lobbyist. With $18 million, the lobbyist launders some of the money and transfers it to an account in Malta, and also buys armoured cars and cargo planes. (Gee, why would the Bongos want those???) Omar Bongo also brings in $1 million, shrink-wrapped, into the US under diplomatic immunity.

Case 3: Jennifer Douglas, the American fourth wife of former VP of Nigeria, Atiku Abubakar, brings $40 million laundered through offshore corporations, into the US for her husband. She is also supposed to have been bribed $2.8 million by the German company, Siemens AG.

Case 4: Aguinaldo Jaime, the head of the Angola Central Bank, tries to transfer $50 million into private accounts in the US. This is just too much money and is stopped when US banks become suspicious. Citibank decides to close all Angolan government accounts.

The report offers some recommendations: PEP controls as per a recent WB report, requiring US corps to identify the real “beneficial” owners of shell companies, rnding exemprions on money-laundering (real estate and escrow agents have to identify and reject suspicious would be clients) as per the Patriot Act, tightening visa and immigration laws, and stronger international banking procedures.

But crooks will always find a way. It’s what they do. Next week, I will write on the NGO/anti-corruption vs. energy security conundrum Washington faces. In the meantime, I wish Gail Collins was here.

It’s striking is how quiet things are in oil for the moment. The focus in the energy field is more different now both in substance and location than any other time I can remember. Everything used to center on the Middle East, especially Saudi Arabia. But now, with the occasional exception of Iraq (and for different reasons, Iran), the Middle East is quiet, below the radar. Even Russia has, except for a brief snit with Belarus earlier this winter, been quietly pumping along.

2009 last quarter profits were a mixed bag. Shell, which relies heavily on natural gas (which is cheap now), was hurt worse than BP and Exxon which are more reliant on oil. Oil had hovered between $70-80 a barrel for months, despite still-weak demand. But the point is they are making money — last year around this time, oil was nose-diving to $34 a barrel.

Now in 2010,  instead of the major oil multinationals, the talk is all about natural gas, green energy and China.

The oil companies — the supers, majors, small, wildcat — are not disappearing. But they are changing because the global environment on energy has changed considerably in the past year and a half, since the oil boom and bust. Oil companies see the future and apparently realize it’s adapt or die.

Of course, much of the oil in the world is now in the hands of national (or sort of national) oil companies, like Aramco in Saudi Arabia, or adventurous national companies which bid outside their own countries, like Petronas (Malaysia), Sonangol (Angola), or CNPC or other Chinese companies.

That’s one reason the oil companies are diversifying. For another, there’s just less easy oil around. You know when you hear that Exxon is out there wildcatting in the Philippines that easy oil is over. (A wildcat explores/drills in a new area that has never produced anything to date)

The most obvious first move is to natural gas. In December, Exxon acquired XTO in a deal worth $41 billion. XTO is/was a natural gas extraction company. Exxon did it to buy into the Marcellus shale gas field and other sites. Gas is extremely plentiful the world over and requires less research and innovation than green energy. Gas and oil have many points in common — often found together, they both used drilled wells, pipelines, refinement etc etc — it’s petroleum, after all.

Big oil companies are looking at green energy. Last week, Shell announced a $1.6 billion investment in Brazilian ethanol and, over 2009, spent $60 million on research at Codexis, according to the Wall Street Journal. In the same article, Exxon said it was spending $600 million on algae-based green research with Synthetic Genomics. Chevron and BP are also looking at biofuels. (These do not involve plants primarily used for food.)

Another reason to diversify: it will be tougher on oil (and other) companies that have traditionally looked to US public lands for cheap leases. In January,

The interior secretary, Ken Salazar, said that his department would conduct more rigorous reviews of oil and gas leasing on public lands, declaring that the agency would no longer be a “candy store” for the petroleum industry, as he said it had been during the Bush administration…
Many auditors and judges have found that previous decisions were made arbitrarily and with little consultation with other agencies. Under the new guidelines, teams from several agencies will consult and officials will physically inspect the sites rather than making decisions from behind their desks, said Bob Abbey, the bureau’s director.” (New York Times 1/6/10)

Salazar had also rescinded environmentally threatening leases in the West earlier. Needless to say, the oil/gas/mining industries are unhappy. Yet leasing on public lands (federal, state) has been often too cheap and, recently, too easy. So this development would be a welcome trend for those outside the industry.

We will still need oil for decades, and new oil is now found mainly in hard-to-reach or otherwise expensive places like offshore deep-water oil in the Gulf of Mexico or off the Atlantic shores of Africa. Extraction from these sites still requires immense know-how and capital to extract. Few besides the biggest oil companies will have the money to risk or the technical expertise to try. Big Oil isn’t going anywhere.

According to the BBC,  it was announced yesterday that Nigerian President Umaru Yar’Adua would soon write a letter handing over power to his vice president. Yar’Adua has been hospitalized in Saudi Arabia since November with heart and kidney ailments — there was even speculation he was dead. It was news many had been dreading even though it has looked to be inevitable for a long time. The current vice-president Goodluck Jonathan is from the south (Yar’Adua is from the north) and this may create further ethnic strains.

As President, Ya’Adua had been slow-moving but perceived as honest. He had also brokered a promising peace deal with the rebels in the violent, oil-rich Niger delta. Now, the rebels in the Niger River delta in Nigeria are have announced the end of the cease-fire.

Despite pledges of retraining for thousands of militants and development aid for the impoverished Niger Delta region, little has been done since the government announced an amnesty program for militants in August… The militant group, the Movement for the Emancipation of the Niger Delta, or MEND, warned that it would resume attacks on oil company pipelines and personnel, a threat analysts said was credible. (New York Times)

In late January, Royal Dutch Shell announced that a  pipeline in the delta had been sabotaged.

Nigeria is not the only place facing increasing violence in resource-rich areas. One always hopes for the best in a new year. And like most New Year’s resolutions, these hopes always crash into the never-ending constant of human nature.

The new decade seems to be getting off to a violent start. Here are a few more ominous events of the first month of 2010.

Pakistan is once again facing problems in Baluchistan.

A Pakistani provincial government plans to cancel a $3 billion joint venture copper and gold project owned by Canada’s Barrick Gold (ABX.TO) and Chilean copper miner Antofagasta (ANTO.L), a provincial mining official said …
The cancellation of the license — apparently meant to ease anger in Pakistan’s poorest province over outsider exploitation of its natural resources — would further damage Pakistan’s image as a destination for foreign investment and would throw a wrench into the plans of the mining companies. (Reuters 1/12/10)

And although Indonesia seems to be doing fairly well in gas-rich Aceh, its problems in Papua in the east are flaring up again.

At least seven persons were wounded in an attack on a convoy of Freeport-McMoRan Copper & Gold’s Grasberg mine, including Freeport employees American Howard James Lochart and South African Sandy Wilson, as well as Cindy Mokodampit, the 13-year old daughter of a Freeport employee.
A series of attacks on company employees last year between June and November killed three people, including an Australian engineer performing contract work at the Grasberg mine, the world’s largest gold mine and third-largest copper mine. Grasberg is also the focus of protests by locals who claim they are not benefitting from the extraction of Papua’s resources. (Mineweb 1/25/10)

The area near the Grasberg mine has experienced violence and environmental devastation for more than three decades. The same in Nigeria, Baluchistan also for decades. When it comes to dealing with the combination of long-standing bad relations with the central government, ethnic tensions and natural resources, it seems there are no easy answers, a lack of political will and focus, and a tone-deaf approach towards resolution. Yar’Adua will be missed.

According to Mineweb, Greenland Minerals and Metals (a company) has finished an initial report on the Kvanefjeld site on Greenland’s southwest tip. Kvanefjeld could potentially become a major rare earth mine and would also produce uranium.

Greenland noted that Kvanefjeld’s Joint Ore Reserve Committee (Jorc)-compliant resource estimate, containing 4,79-million tons of rare earth oxides (REO) and 0,12-million tons of uranium oxide, was recognised as the world’s largest REO resource by Jorc standards.

The prefeasibility study provided a net present value (NPV) of $2,18-billion and free cash flow of $8,9-billion over the life of the project using a processing rate of 10,8-million tons a year, a conventional openpit mining system, and a waste to ore strip ratio of 0,8:1.

The study also estimated that construction would start in 2013 with production commencing in 2015. (Creamer Media Reporter)

Rare earths are required for many green technologies; most of the current mines are located in China, which has been making noises about limiting their trade and which has serious problems with environmental oversight at many locations. Such a find could have a significant impact on China’s ability to control the market and hence the global development of green technology. Greenland is also expected to have sizable natural gas and oil reserves offshore.

This is of course, the rosiest industry picture. Gigantic environmental, technological and transportation hurdles loom. Social and environmental impacts studies have not been done yet, and it is sure that Greenlanders, who have voiced concern, even opposition, to such extraction industries in the past will surely demand strong protections. According to the Economist last year,

An official of the island’s Bureau of Minerals and Petroleum has specified that any companies extracting hydrocarbons in the neighbourhood must also develop and use carbon-storage technology. This would involve reinjecting carbon dioxide either deep underground or under the sea, in order to compensate the amount of heat-trapping gas that is being released into the atmosphere.

Since Greenland is hardly a forested island, it would be hard to use trees as a carbon sink.

Of all the extraction industries, mining leaves the largest, longest-lasting footprint and the sort of mining proposed at Kvanefjeld will be particularly destructive. Will it still be a green project if it despoils a currently pristine wilderness?