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New Geopolitics Means Arctic Oil, Mega-Projects’ BAU Could be Uphill

New Geopolitics Means Arctic Oil, Mega-Projects’ BAU Could be Uphill thumbnail

Western oil leaders may be worrying that Russian President Vladimir Putin’s actions in the Crimea will lead to a ban on international investment in the Russian Arctic, but if it does, that would be doing US companies a favor. The prospects that such mega-investments will remain profitable over 20 years looks questionable at best, even without the geopolitical risk.

The new BP Statistical World Energy Outlook (2013) is projected that “new energy” is expected to contribute more than half of the growth in future energy supplies in the coming two decades.  BP defines “new energy” as shale, oil sands, renewables, and bioenergy. BP’s projections for new energy are probably conservative because they don’t take into account how governments are going to react to the new nexus of geopolitical shocks now coming into the oil world.

As I write in a new article on the Mitchell Foundation blog, the need to think about an energy system that is less dependent on oil for mobility and industrialization is pressing. Political instability across the globe from Russia and Ukraine to Venezuela to Iraq has laid bare the false promise of relying on a global oil and gas supply business as usual. Europe is facing the unpleasant choice of choosing between an unacceptable Russian incursion into Ukraine and its own energy security. The United States is facing the hard cold truth that a political devolution in Caracas would open the difficult question of who, should chaos prevail, owns and operates the Venezuela-owned Citgo refining and marketing system that represents 5 percent of the US market.  And the critical challenge of climate change and related severe weather events dictates that governments renew efforts at both mitigation (less carbon intensive energy) and resilience (less large-scale, centralized energy).

As discussed at this year’s World Economic Forum, the oil industry has faced more Black Swans since 2012 than perhaps any other time in its history not only from these geopolitical and severe weather events, but also from disruptive technologies. And, the tech boom is going to continue to change the energy industry, for the better (productivity, safety, and sustainability) and for the worse (cyber-attack). The change is likely to be faster and more transformational than most senior oil industry executives care to admit.

BP in its 2013 World Energy Outlook acknowledged the high likelihood that oil demand in the industrial economies has peaked. BP’s 2013 outlook also opened the door to the idea that exponential growth in oil demand in China might similarly fail to materialize as the country evolved towards less oil intensive economic activities. The BP forecast cited tremendous gains in energy efficiency, changing patterns in the transportation sector and a rise in new energy such as shale gas and renewables as curbing the world’s future thirst for oil.

The idea that the world needs to –and might actually start to– abandon the age of oil is one that falls on deaf ears inside the oil industry itself which is committed to a business as usual model tied to legacy assets and mega-projects like the Arctic. But it is clear now that the world’s largest oil companies were caught off guard when smaller, more nimble competitors such as Pioneer Natural Resources, Continental Resources, Range Resources, Southwestern Energy, Noble Energy, and Devon, to name a few, cracked the code on US shale oil and gas resources. The industry is also betting on the impossibility of scale-up to new transportation technologies that would challenge oil’s dominance on that sector. However, new consumer technologies are starting to nip at the heels of the colossus that currently maintains oil’s dominance in the energy system. So far, that change is slow. But geopolitical events might drive change to move faster than expected by virtue of necessity as the ability of the oil industry to maintain investment in mega-projects falters due to growing political instability across the globe.

Fuel Fix

18 Comments on "New Geopolitics Means Arctic Oil, Mega-Projects’ BAU Could be Uphill"

  1. bobinget on Thu, 27th Mar 2014 2:53 pm 

    April 2012:
    If you must, skip to the last paragraph.

    Exxon and Russia’s Oil Company in Deal for Joint Projects

    HOUSTON — Exxon Mobil and the Russian state oil company Rosneft signed a strategic agreement on Monday that will open American domestic oil and gas fields to Russian investment for the first time.

    For Exxon Mobil, the deal offers expanded access to Russia’s offshore Arctic fields as it strains to find new reserves. But the agreement also means that Exxon will be wading more deeply into Russia’s risky business environment.

    The deal is potentially even more significant for Russia, which will gain at least some access to modern drilling techniques developed in American shale fields over the last decade. Since the days of the Soviet Union, the Kremlin has been eager to exploit giant nonporous rock fields in western Siberia, but the fields have proved unproductive using conventional vertical drilling techniques.

    The Russian prime minister Vladimir V. Putin signaled the importance of the agreement, the broad outlines of which were agreed to last August, by hosting the signing ceremony at his home near Moscow.

    The agreement will form joint ventures in the frigid Kara Sea north of Siberia and the Black Sea, with initial exploration plans costing an estimated $3.2 billion. The Kara Sea prospect alone is estimated to hold 36 billion barrels of recoverable reserves, well more than the American company’s entire reserve base of oil and gas.

    Meanwhile, a Rosneft subsidiary will acquire minority shares in two shale and nonporous rock oil fields in West Texas and western Canada and more than a dozen oil and gas fields in the Gulf of Mexico operated by Exxon Mobil.

    “Today Rosneft and Exxon Mobil enter offshore projects of unprecedented scale,” said Eduard Y. Khudainatov, Rosneft’s president. “In so doing, we lay the foundation for a long-term growth of the Russian oil and gas industry.”

    The deal has been in the making for months, but Exxon Mobil, which is based in Irving, Tex., had warned that it could not complete major investments in Russia’s Arctic without first receiving assurances of a fair, long-term taxation regime. Mr. Putin appeared to try to put that concern to rest last week when he announced the canceling of high taxes on exports from new offshore fields for five to 15 years, depending on the scale of the project.

    By creating what he called “globally competitive conditions,” Mr. Putin was looking to attract investment in Russian oil and gas projects from Exxon Mobil, Total of France and Statoil of Norway to ensure the continued production of roughly 10 million barrels of oil a day as domestic consumption climbed. High oil prices have been a boon to the Russian economy.

    Energy specialists said that because Rosneft will be a minority investor in American fields, Exxon Mobil can control how much technology will be accessible to the Russians.

    “They will only see what is happening through the boardroom,” said David L. Goldwyn, a former State Department coordinator for international energy affairs. Nevertheless, the deal “gives Exxon access to the Arctic and gives Russia access to Exxon’s sophisticated project management, capital discipline and technologies,” he said. “These have not been the hallmarks of Russian national oil companies.”

    Western oil companies have long desired to invest more deeply in Russia, which is virtually tied with Saudi Arabia as the biggest oil producer in the world. But Russia has reneged on oil deals before, and the politics that surround the rough-and-tumble Russian business sector can be unpredictable.

    Rosneft’s effort to complete a similar strategic partnership with BP collapsed last year. The British company had a separate joint venture with another group of Russian investors, who sued and blocked the Rosneft deal in an international court. It was an embarrassment for Mr. Putin, who had publicly endorsed the BP-Rosneft arrangement, and for BP, which was trying to regain momentum after its giant Gulf of Mexico oil spill in 2010.

    Six years ago, the Kremlin compelled Royal Dutch Shell to sell half of a Sakhalin Island offshore development project to Gazprom, a state company, after Shell spent more than $20 billion on the project.

    The Exxon-Rosneft deal represents a major new Russian investment in the United States. The Russian oil company Lukoil has a network of gas stations around the country, and Lukoil has expressed interest in investing in American oil and gas fields. But until now, the Russians had not followed Chinese, Australian, Canadian and several European companies in investing in American shale fields.

    “Russia’s current fields are maturing and the country needs to develop a new generation of fields,” said Adnan Vatansever, a specialist in the Russian energy sector at the Carnegie Endowment for International Peace in Washington.

    “This deal may help the Russians learn how to develop them, and it will take some time and expertise to do that,” he said.

    Until now, Exxon’s top investment in Russia has been a production sharing agreement on Sakhalin Island, which waived local taxes and provided the Russian government a share of the produced oil. Exxon Mobil reduced its involvement in Russia after its effort to buy a piece of the Russian oil company Yukos was upended by the arrest in 2003 of Mikhail Khodorkovsky, who owned Yukos at the time.

    “Today really is a historic day,” said Rex W. Tillerson, Exxon Mobil’s chief executive, at the signing ceremony. “It marks the beginning of a new and broader relationship between our companies.”

  2. shortonoil on Thu, 27th Mar 2014 3:02 pm 

    The new BP Statistical World Energy Outlook (2013) is projected that “new energy” is expected to contribute more than half of the growth in future energy supplies in the coming two decades.

    Another wolf in sheep’s clothing. With depletion cutting into conventional crude at about 3% per year (and increasing rapidly), there isn’t going to be any “growth” in energy supplies. There is going to be a reduction in energy supplies that will reform the world’s financial, and business structure in ways we can’t even image at this point. Of course, we can hardly expect to learn from BP that BAU is about to go the way of the Dodo bird. They are invested in it up to their of their beady little eyeballs, or the full extent of their balance sheet. After reading this, anyone expecting that “they” will solve the energy problem for us is setting themselves up for one very big disappointment. The BP’s of the world have one goal; keep the illusion going for as long as possible. What happens after that – that will be the a problem for someone else!

  3. Davey on Thu, 27th Mar 2014 3:16 pm 

    Amen short!

  4. rockman on Thu, 27th Mar 2014 3:45 pm 

    “…Russia, which will gain at least some access to modern drilling techniques developed in American shale fields over the last decade.” Just a small point: Russia has access to all the tech knowledge about drilling shales anytime they want and don’t need Exxon or any other US operator’s help. All the tech and it’s application is controlled by the service companies such as Halliburton and Schlumberger. The same companies that supply all the equipment and personnel to drill and frac the US shales. My dog can get a shale well drilled and frac as long as she signs the work orders for the contractors. LOL.

  5. J-Gav on Thu, 27th Mar 2014 4:30 pm 

    Strange isn’t it, that just when the old cold war rhetoric ratchets up between the U.S. and Russia, their energy majors cut a deal for cooperation … Think about that the next time you hear more bla-bla on how serious our sanctions are going to be over the Ukraine situation.

  6. GregT on Thu, 27th Mar 2014 4:39 pm 

    “What happens after that – that will be the a problem for someone else!”

    Yup, in Rex Tillerson’s own words:

    “Changes to weather patterns that move crop production areas around, We’ll adapt to that.”

    “It’s an engineering problem, and it has engineering solutions.”

  7. Arthur on Thu, 27th Mar 2014 4:53 pm 

    Meanwhile ***KANADA*** has offered itself as replacement for Putin:

    You can’t make this stuff up!

    Close down the brand new pipelines and construct new ones under the ocean. Piece of cake.

    Can’t believe this is happening.

  8. shortonoil on Thu, 27th Mar 2014 5:02 pm 

    “My dog can get a shale well drilled and frac as long as she signs the work orders for the contractors”

    That’s just the point! The Russians have huge untapped high-permeability condensate fields, some fields, like Vuktyl, they have operating since the ’60s. Yet we are supposed to believe that they want American technology badly enough to give up 36 Gb of light sweet crude to go drill in some brick yard in Siberia. Right! The whole deal smells to high heaven!!

    Wonder what’s really going on, got any ideas Rock?

  9. Northwest Resident on Thu, 27th Mar 2014 5:03 pm 

    “…beady little eyeballs…”. Yep. I can picture those beady little eyeballs glowing in the dark as the corporate execs at BP and other oil majors lie awake at night, contemplating their dismal future, feverishly trying to think of ways to keep the gravy train rolling.

    Actually, I read this article earlier this morning before any comments had been posted. I was so baffled by the bullshit and the hodgepodge of disconnected points being made that I decided to just shut my browser down and get some work done for a change.

    That 50% “new energy” is a real eye-catcher though, I’ll admit to that. She looks real nice strolling down the street in those high heels and tight dress, but just wait till you have her under the covers and see what you’re really getting. Hope you have a strong heart…

  10. rockman on Thu, 27th Mar 2014 7:22 pm 

    shorty – I can only assume it’s just some good old fashion horse trading. Nothing personal (or patriotic)…just business. I suspect it all hinges on Russia not wanting to spend to the capex and supply the smart bodies with Exxon not having enough big/good projects to drill.

    “…a new and broader relationship between our companies.” IOW Exxon makes money and Russia makes money. everything else is just filler material.

  11. Northwest Resident on Thu, 27th Mar 2014 7:23 pm 

    On the topic of “new energy”…

    There appear to be vast amounts of “cheap to produce” oil just sitting under Iraq, waiting to be developed. Iraq is sitting on a “sea of oil”, it is “the prize”. By some estimates, there are 10mpd of undeveloped oil reserves just waiting to be exploited.

    Don’t believe me? Read this:

    anz dot theoildrum dot com/node/4675

    That piece was posted back in 2008. Now here it is 2014. The economy is a wreck, the frac’ing companies are punching holes in rock like crazy most of them losing money, international disputes are heating up directly related to oil, etc…

    QUESTION: WTF don’t they just develop those Iraq oil fields, pump millions and millions of cheap oil back into the global economy, spur some real economic growth for a change and put the world back on stable energy platform?

    I hope to see some answers to that question, as I am very interested to know what others think on the subject.

    Could this be the “new energy” that this article is talking about that will carry us through the next two decades, relatively unscathed?

    If this IS the “new energy” — and where else could enough “new energy” be found anywhere else in the world capable of carrying us through the next two decades — of which this article speaks, then WHY in the hell aren’t they actively developing that sea of oil right now?! What in hell are they waiting for?

  12. DC on Thu, 27th Mar 2014 7:30 pm 

    Art that zionist control freak buffoon doesn’t speak for the country. If you want a good representative sample of what people actually think of that blustering fool, hes a link for you.

  13. Arthur on Thu, 27th Mar 2014 8:01 pm 

    Umm DC, he is your PM.

    Meanwhile, you can pick up signals from German media that the German industry is very worried about this move away from Russia. Merkel does not have the spine to defend her countries interest against those who could not care less about German interest. This mess could set in motion a process of rapid estrangement between Russia and the EU. The EU fools jumped on the Maidan bandwagon because they smelled an opportunity for yet another expansion, as if Greece had not caused enough trouble. Europe must face the fact that it does not have credible leadership, it used to have with Adenauer, de Gaulle, Schmidt, Kohl, Delors, Mitterrand, Chiraq, Schroeder.

    Garden gnomes wherever you look.

  14. Plantagenet on Thu, 27th Mar 2014 8:14 pm 

    Russia started Cold War II when it invaded Ukraine.

    The last Cold War lasted almost 40 years. This one is just getting started.

  15. J-Gav on Thu, 27th Mar 2014 8:58 pm 

    NW – Okay, I’ll tell you what I think on the subject: THERE ARE considerable resources remaining to be developed in Iraq. And it is some of the best quality crude left in the world, probably gas too. After the murderous fiasco that was the U.S.invasion of that country (on false pretenses), a somewhat lower U.S. profile is required there for the time being. But nobody has forgotten about those resources. The instability which reigns in the country at present (see the Kurds, who have been exporting to Turkey for some time WITHOUT ACTUALLY SELLING). Oil production is nevertheless inching up in Iraq but, should the West find itself shut out of the coming Big Deals on further exploration and development, expect renewed concern about ‘terrorism’ or some damn thing to bring fresh attention to the area.

  16. Northwest Resident on Thu, 27th Mar 2014 10:05 pm 

    J-Gav — Thanks for your feedback on this topic. You could be right. I wonder if the fact that burning all or any significant portion of that oil to maintain BAU with 7+ billion people consuming might push climate change past the point of no return has anything to do with it? I wonder if TPTB are just going to drive us off the cliff, hide in their bunkers while the smoke clears from global collapse, then reemerge with a vast store of easy-to-get oil and a significantly smaller population to sustain (and control)? That’s just my conspiratorial speculation…

  17. Davy, Hermann, MO on Fri, 28th Mar 2014 11:08 am 

    Gav & NR, echoing your thoughts and adding. In a global system suffering economic and social entropic decay this cheap high quality oil may never make it to market. They have no industry and little education to produce all the resources needed to mine the oil. Then the oil needs a market. If the global system is collapsed where will the oil go? Are they going to eat and drink the oil? They have little water and food. This does not even take into account a simmering civil war going on. What about regional rivalries. Much of Iraqi oil moves through a very dangerous choke point where war is ever present. Let us hope ME region stabilizes and a significant portion of Iraqi oil can be accessed to help with a soft landing. With conventional sources depleting as they are and the very high cost of the unconventional we need Iraqi oil to average out the overall high cost of oil in summation. Our very survival at this point will be from this region. If this region falls apart then the global system will crash sooner than later and the crash will be more severe.

  18. Arthur on Sat, 29th Mar 2014 9:28 am 

    Russia started Cold War II when it invaded Ukraine.

    The US tried to start Cold War 2.0 and drive a wedge between the EU and Russia when it gave decisive help to overthrow the legitimately democratically elected government in Kiev. It remains to be seen if the US will actually succeed in achieving that aim.

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