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.

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.

The International Energy Agency is out with its 2009 World Energy Outlook. Some of the revelations presented at the Council on Foreign Relations in New York on Monday were hardly startling: energy demand and investment down due to global recession, but demand expected to return and grow, China using more energy, etc.

But a couple of its predictions and analyses are both surprising and useful.
• To use an image, unless we cut back on energy needs, within 20 years we will need the equivalent of four Saudi Arabias to meet demand.
• Depending on the policies chosen, China alone could bring about 25% of the needed reductions in emissions to help with climate change. And they seem to be interested in moving that way. It isn’t so much that China is keen on greening the planet as it is concerned about its own energy security. Fatih Birol, the chief economist for the IEA, calls it the fear-of-the-return-of-$147-a-barrel-oil.  This sentiment is echoed not only in China but in much of the developing world, where countries have much shallower pockets, face local pollution problems from increasing fossil fuel use, and still remember the economic catastrophe of the oil shocks of the 1970s.
• The third was the emphasis on unconventional natural gas, mostly meaning shale gas. Although the IEA predicts a glut of natural gas, especially in the US, and that low prices mean that there won’t be sufficient investment (at least till gas hits $5 per million BTUs — it’s in the $3-4 range now), I do know that it has not slowed corporate interest and leasing in the Marcellus gas field. Recent leases in north central Pennsylvania were going for around $5,000 an acre with steep royalties. In Texas, sections of the Barnett shale deposit have gone for $25,000+ an acre (proven). There is a glut but at least in the US, investment in gas is moving forward fast.

Perhaps it is a complete coincidence that Brazil experienced a massive blackout affecting 60 million people only days after last week’s 60 Minutes showed a segment on cyber attacks on infrastructure including banks, internal governmental computer systems and power grids. In it, they mentioned a previously successful attack on a major electric power grid, which sources reported to be in Brazil. Apparently, either it wasn’t Brazil or the country didn’t learn the first time. The world does hope that they get it fixed in time for the Olympics in 2016, if not for the everyday lives of the inhabitants.

This time, a hydroelectric plant between Paraguay and Brazil suddenly and without explanation went offline. It stayed offline in Brazil for hours, affecting hundreds of communities as well as Rio. (Paraguay only lost power for a short time.) The failure has been blamed on a short-circuit, on transmission lines, falling trees, and lightening, but none of the explanations has stuck. Everyone denies sabotage. This is undoubtedly both embarrassing and puzzling for Brazilian officials who, according to the New York Times, have spent $47 billion in new plants and transmission systems.

Of course, Brazil isn’t the only country to have power issues. Many countries like Venezuela and Pakistan have electric problems because they do not invest in essential upkeep or development and because of poor management and planning. All countries experience power issues based on weather; in 2003, the US experienced a blackout blamed on a stick falling on transmission lines. (I experienced the blackout – it must have been a very, very large stick.)

But perhaps hackers did bring down the Brazil power system. Security experts have discussed it for years — what would happen if a hostile power used our computer dependence against us? I think it is worth thinking about.

Almost always these security experts build scenarios where an enemy attacks the US and its opening salvo is to turn off the lights in some major city and have the country drive itself crazy trying to figure out what’s happening. And then the Defense Department computers fail (for things like weapons systems and communications) and the banks fail etc etc.

I confess I have always thought that the above was a silly scenario since that would be more vandalism and harassment that actual war strategy — these glitches can be fixed and it’s hard to say that they constitute war — unfriendly, certainly, but hardly a real war that determines the fate of nations.

A more likely scenario, I think, is, that once we (or any other country) did get into a real shooting war with a powerful equal, to see cyber attacks on the power grid, communications and beyond. They would happen in the middle of the war, with sophisticated and complex tactical maneuvers. Fooling with the electrical power — to businesses, homes, urban transportation systems, and more —  in random patterns around the enemy country, attacking the computer controls on dams and nuclear plants, disinformation  (or telecommunications, military systems, banks and even more monetary records like currency and the central bank) — the creative mischief horizon recedes into infinity. You can bomb an enemy only so much, but you can harm and harass this way to amplify the effect exponentially.

We should take a moment to think about how totally messed up our way of life would be if we lost control of or could not depend on our energy supply, and other infrastructure controlled by computers. We have not had an all-out war between major powers in a very long time. As any student of military history will tell you, after a long peace, a new war is especially horrible because of all the new, terrible, unexpected and underestimated weapons and strategies developed in the interim.

Even if Brazil’s blackout turns out to be innocuous, perhaps it would serve us better if we look at the disruption it caused and think of it as a harbinger — and take a moment to consider what it says about out weaknesses and daily assumptions when it comes to energy.

This is “Upgrade Your Electric” week for the Obama Administration.  First, the President announced a $3.4 billion upgrade for the US electric power grid.

Then yesterday, Secretary of State Hillary Clinton announced that the State Department had decided to help Pakistan upgrade its electricity to prevent the frequent outages. These electricity problems, according to the State Department’s website, stem from outdated equipment, mismanagement, and non-payment.

The same website says the program will consist of six projects, such as the repair of 11,000 agricultural pumps, which are used for electricity transmission, and improved efficiency at various power stations, including a dam on a section of the Indus River in the Northwest Frontier Province.

Electricity in Pakistan is, I understand,  very expensive.  In a country with such huge income inequality, I do not know if this new plan will help those who cannot afford power.

I don’t doubt Secretary Clinton really wants to improve the lives of Pakistanis or that better electric service would be a help. The problem with this sort of announcement and project is that, unlike huge US projects of yesteryear, this kind of Lady Bountiful act does not serve US interests as well as the State Department PR department seems to think it will.

This kind of aid is not soft power. It’s naked power, albeit of an economic and political kind. The plainly visible strings attached can only fuel the suspicion and cynicism of those in Pakistan who are already suspicious and cynical towards the US.

Real aid is a real gift – it can be offered in charity (as in natural disasters) or as the right assistance at the right moment (as with the Marshall Plan). The right time for America to have helped Pakistan with its power was probably decades ago. We should still give it, but unfortunately, this gift from the US is probably not going to change any hearts and minds.

I myself hate it when people go around telling me they are going to give me what I really want, when they haven’t even had the respect to ask. As in Afghanistan, the trick is not to give the people what we think they must want most. It is about what they think they want most.

A Gallup poll done two weeks ago reveals that of all industries, Americans rated the oil and gas worst, even worse than banking, GM and lawyers.

There have been some annoyed, defensive responses from workers in the oil and gas field — understandable since most people in the industry are hard-working, honest and understandably offended at being categorized as disreputable.

These complaints are undercut by recent oil company actions, like this month’s artificially staged “grassroots” events in Texas against stronger emissions controls. The New York Times reported:

“The event on Tuesday was organized by a group called Energy Citizens, which is backed by the American Petroleum Institute, the oil industry’s main trade group. Many of the people attending the demonstration were employees of oil companies who work in Houston and were bused from their workplaces…
For its part, the oil industry plans to raise the pressure in coming weeks through its public rallies so that it can negotiate more favorable terms in the Senate than it got in the House. The strategy was outlined by the American Petroleum Institute in a memorandum sent to its members, which include Exxon Mobil, Chevron and ConocoPhillips. The memorandum, not meant for the public, was obtained by the environmental group Greenpeace last week.”

In a related story, PR firms for the coal industry were found to have sent more than five dozen fake letters ( supposedly from groups like senior centers and the NAACP) opposing new climate change laws to members of Congress. The PR company, Bonner and Associates, blamed it on a rogue temp. The coal industry has apologized. But it’s understandable that public suspicion continues.

China-based solar producer Suntech Power announced plans this week to build a manufacturing facility in the United States to serve the growing U.S. market for large-scale utility projects and to take advantage of government incentives.

“We believe in the outstanding long-term prospects of the solar energy market in the United States” Suntech Chairman and CEO Zhengrong Shi said.

The Suntech announcement reflects the value of federal and state incentives for renewable energy. It also counters a favorite argument of climate action opponents on Capitol Hill that shifting the United States to a clean energy future will send U.S. jobs overseas. Suntech, the world’s largest solar energy company in terms of photovoltaic module production, said it could cut transport costs and emissions by building closer to its market. The cost of shipping heavy renewable units, combined with the fact that the U.S. and EU currently constitute the majority of clean tech demand, makes local manufacturing facilities a sensible strategy for long-term growth.

Political considerations were also not lost on the company. Appealing to both green jobs enthusiasts and those who perceive China as taking manufacturing jobs from the U.S, Shi said he is hopeful that “initiating manufacturing in the U.S. will drive further growth of green jobs.”

Suntech America President Roger Efird said as many as 1,000 jobs could be created through Suntech’s U.S. operations over the next few years. The company plans to settle on a location in the next six months.

“We are currently in discussion with the governors of three different states who have been recruiting us to build factories,” Efird has said.

In making the announcement this week, the company specifically identified that its decision would be based on “local manufacturing incentives” and “long-term policy commitments.” …..click here to read more

Forging a new partnership between the United States and China can help address climate change, but only if regulatory and market shortcomings can be overcome.

A new alignment on energy and the environment between China and the United States sounds like a formula capable of delivering real solutions on climate-change issues. China’s abundant scientific research-and-development resources and manufacturing capacity not only help carbon sink testing and the scaling up of renewable energies become more feasible, but also less costly.

However, the potential cost effectiveness of reducing emissions in China could prove more of a liability than a benefit where the environment is concerned. Systemic regulatory and market shortcomings demonstrate the difficulty of managing and preventing environmental degradation and guaranteeing public health in a developing country context. One example is in the power sector, where in some cases emissions performance has not matched infrastructure upgrades as expected because the use of low-grade coal has gone unmonitored. Does the new US administration have the will to face the prospect that a low-cost approach might be inimical to a low-carbon strategy? Will they ensure careful planning and responsible oversight?

The recent release of a joint Asia Society and Pew Center on Global Climate Change report (see “Road to rapprochement” by Banning Garrett and Jonathan Adams), followed by secretary of state Hillary Clinton’s trip to China, generated considerable US interest in enhancing US-China coordination on energy and the environment.

Grand bilateral collaboration undoubtedly can help reduce the rate of growth of emissions in both countries, and bring much needed efficiency improvements to China’s outdated power production and transmission infrastructure. And a powerful US-China nexus may help break post-Kyoto gridlock at Copenhagen in December. However, a partnership between the world’s largest carbon dioxide emitters is not the “holy grail” for preventing further environmental degradation. Though full of promise, the “China advantage” comes with its own pitfalls. …..click here to read more