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.

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.

Right now, with oil rising to $80 a barrel, it is important to recognize that the price of oil does not reflect the value of oil but the value of the dollar. There is still fairly weak demand for oil.

Meanwhile, the fate of the greenback is being tugged in different directions by different international coalitions with very different agendas. East Asia, which has so much trade with the US and a lot of dollars in the individual reserves, has an economic incentive to help keep the dollar strong. And as the dollar falls, so does the Chinese yuan, making China’s exports more competitive than smaller countries in the region. Europe too is worried that as the buck falls, the euro will rise, meaning that continent’s exports will be priced out of some markets.

Ironically, the US itself has little incentive to prop up the currency — a weaker dollar makes American exports more competitive (good for the economy), even as the government prints more money (making each dollar supposedly inherently less valuable) for the stimulus and other projects. Of course, too weak would be bad — it’s a balancing act. Excessive debt can lead to some distrust of the future strength of the American economy.

The anti-dollar people have a more political agenda. Many of them are oil exporters who are not particularly politically cozy with the US, and some would like to see the dollar replaced altogether when it comes to paying for oil. This wouldn’t change how much oil was inherently worth, it’s just an opportunity to dig at the US.

The grumbling has been going on for months. In early October, there was a report out of London that a number of countries from the Middle East and China and Russia were planning to trade oil in a different currency. Even before that, it was not a secret that these countries have been unhappy with using dollars. Russia, China and others have suggested creating a global alternate currency to the dollar, which sounds like financial Esperanto and about as likely.

Others like Iran and the irrepressible Hugo Chavez of Venezuela are more interested in regional currencies. The regional currencies sound more practical and popular; but unlike Europe, there just isn’t a lot of trade between Latin American countries to make it useful. This reminds me of the old idea of import substitution — infinitely more appealing as an idea than needed as a practical reality.

Oil is priced in dollars but it isn’t tied to the value of the dollar. Countries can complain there are transaction costs and other considerations in converting other currencies to dollars to actually pay for the oil. But that’s what happens with any reserve currency.

The dramatic weakening of the US economy has undoubtedly offered opportunity to those who chafe at America’s global position (especially given the level of American financial irresponsibility that cause that weakness and would certainly have sunk many other countries) and those with ambitions to use its diminishment in search of their own aggrandizement. There’s nothing as informative as hard times.

Russian President Dmitry Medvedev attempted to allay global fears that Moscow is trying to amass access to natural resources this week during a trip through Egypt, Nigeria, Namibia and Angola as he signed billion dollar energy deals providing Russia a greater foothold in Africa .

In Angola, Medvedev emphasized that these resource contracts were important to coordinate “action in the context of the world crisis.”

In Nigeria, he boasted to his hosts about the economic benefits of the investment stating “the prospects are very good” that Russian investment within the country could be worth “billions of dollars”

In Namibia, during prepared remarks he stated “we must do everything possible to promote trade and economic ties” between the two countries, while mentioning energy only as one of the fields where Russia would invest. The list also included tourism and agriculture, hardly strategic imperatives.

Despite Medvedev’s touting of cooperation and economic benefits, it’s hard to see Mededev’s actions other than a …..click here to read more

Russian President Dmitry Medvedev is on a 4-nation tour this week through Africa to push his expansive international energy policy. Today, his former company, Russian gas giant Gazprom, signed a $2.5 bln deal with its counterpart in Nigeria to build infrastructure including refineries, pipelines and gas power stations.

The deal gives access to Nigeria’s resources and highlights Russia’s attempt to bolster its international stature by becoming a key global commodity supplier. However, the deals come as many Russian energy firms are saddled with debt; are producing less; and are failing to invest in domestic upstream activities (exploration and production), making it unlikely they can meet more ambitious investment plans without scaling back somewhere.

Gazprom announced today that it may cut its planned investment by 30% as the company expects sales to plummet roughly 40% this year. Deputy CEO Valery Golubec had previously announced cuts of 10% in output this year and the firm also signaled it would delay investment in several large projects including development of the Bovanenkovskoye field. Beyond a reduction in income and output, the company also faces substantial debt obligations of $60 bln with $10 bln due this year.

Gazprom is not the only Russian company facing recent worsening financial conditions:

Lukoil’s profit fell 71% in first quarter of 2009 over the previous year.

Gazprom Neft, Russia’s fifth largest oil producer, announced it would cut capital expenditures 43% after stating that crude oil output would drop over 5% from 2008. Profits also fell 76% in the first quarter of the year.

Rosneft profits similarly dropped by 20% in the first quarter of the year. The firm also has $7 bln in debt due this year and $24 billion in longer-term debt.

Transeft profit fell 33.6% in the first quarter of the year (although recovering some in the second quarter) and has roughly $4 billion in short term debt out of $8 billion outstanding.

Despite the weakened condition …..click here to read more

The European Union plans to announce today that it sees possible disruptions for its gas supplies from Russia via Ukraine, a liklihood we identified earlier this year. What’s worse, Gazprom is now demanding $230 in debt payments from Belarus, another key gas transit route to western Europe.

The payments from Belarus may stem from a political dispute over disagreements including Minsk’s failure to follow Russia’s lead in recognizing the independence of Georgia’s break-way republics and Moscow’s freezing of a $500 million loan for Belarus. However, due to the opacity of the gas trade in eastern Europe, Gazprom’s debt may be legitimate.

The saga of the dispute in eastern Europe is likely to play out in political circles over the summer until the weather gets cold. But for those in Europe looking for a warm apartment in the winter, they should follow Ukraine’s purchases from Russia over the summer. Ukraine’s national gas company, Naftogaz, will unlikely have the cash to pay to fill its storage capacity for the winter heating season. The Ukrainian newspaper Sehodnia reports that the company may not have the funds by as early as July. Unless Ukraine buys its required amount, a new flare-up is in the offing, which portends a few weeks of cold in western Europe.

Russian Prime Minister Vladimir Putin and his Ukrainian counterpart, Yulia Tymoshenko, are set to meet on 29 April. The meeting comes nearly four months after disagreements over gas prices led to a standoff between the two nations, leaving a good portion of the continent without gas supplies in the dead of winter. Fortunately, the price issue has been resolved. But a conflict still looms.

The agreement between the two nations, not only stipulated price, but quantity. And due to the economic downturn in Europe — Ukraine’s gas export market — and the country’s economic collapse which necesitated IMF help, Ukraine has imported less than half of the 5 billion cubic meters of gas which it had agreed to import in the first quarter. Russian gas giant, Gazprom, has already indicated that it will seek punitive damages of roughly $2.7 billion for the shortfall.

What’s worse for Ukraine is that it is not on pace to purchase the 80% of the 40 billion cubic meters to which it had agreed. It will also have problems paying the roughly $5 billion to fill up its gas reserves this summer, as Ukraine’s gas company, Naftogaz, does not have the cash, nor is it able to borrow from financial markets.

Putin will likely show little sympathy, especially when he has been asked to pony up $5 billion to help with Ukraine’s ailing economy. He is set to seek concessions from Tymoshenko over a planned modernization of Ukraine’s Soviet-era pipeline network. The Russian PM had been upset by previous discussions between the European Commission and Ukraine over declarations on March 23rd that paves the way for EU investment in Ukraine’s infrastructure. He called the deal “unprofessional” and he delayed talks with Tymoshenko to show his dismay.

Putin fears that an alliance between his gas customers would weaken his geopolitical position. Without cash to pay the bills, Tymoshenko is set to give up some control of the modernization effort, a far greater prize for Putin than the cash Ukraine may owe. And that’s a win for Putin.