Diminishing Marginal Utility

Source: New York Times

A Quest for Energy in the Globe’s Remote Places

Photo by Geir Jenssen: A natural gas cargo ship passing Melkoya Island, across the bay from Hammerfest, Norway. Gas from this region is to start crossing the ocean, feeding into pipelines for America’s East Coast.

HAMMERFEST, Norway — For a quarter-century, energy executives were tantalized by vast quantities of natural gas in one of the world’s least hospitable places — 90 miles off Norway’s northern coast, beneath the Arctic Ocean.

Bitter winds and frequent snowstorms lash the region. The sun disappears for two months a year. No oil company knew how to operate in such a harsh environment.

But Norway has finally solved the problem. The other day, on an island just offshore, a giant yellow flame illuminated the sky here. It was just a temporary flare for excess gas, but it signaled a new era in energy production.

Across the bay from this small fishing town, where reindeer wander the streets, one of the world’s most advanced natural gas plants is coming to life.

Within weeks, gas will start crossing the ocean in specially designed ships, feeding into the pipeline network for the American East Coast. Before Christmas, furnaces in Brooklyn and stoves in Washington will be burning the gas. It will be the first commercial energy production from waters north of the Arctic Circle.

As global demand soars and prices rise, energy companies are going to the ends of the earth to find new supplies.

In Kazakhstan, petroleum engineers are braving wild temperature swings in the shallow waters of the Caspian Sea to tap the biggest oil discovery of the last 30 years. They are drilling wells six miles deep in the Gulf of Mexico. And on the island of Sakhalin, off far eastern Russia, they have drilled horizontal wells through miles of rock to produce oil from a stretch of ocean notable for giant icebergs.

But as the industry extends its reach, the quest is becoming more arduous. The cost of producing new oil and gas is rising fast, and companies are troubled by worsening delays. Drilling rigs are scarce. Engineers, geologists and petroleum specialists are in critically short supply.

And the politics of oil and gas are getting trickier, with producing countries demanding a bigger share of the revenue and growing angry about project delays that postpone their payments.

Industry executives say their ability to keep up with global demand is badly strained.

“We’re facing bigger risks and bigger difficulties when we go into new frontier regions,” said Odd A. Mosbergvik, a senior manager at the dominant Norwegian energy company, StatoilHydro. “But this is why the oil industry is for big boys. It’s a big gamble.”

The industry’s new reach is shifting the economics of energy extraction. According to a recent study, discovery and development costs, a key indicator for the industry, tripled from 1999 to 2006, to nearly $15 a barrel.

Last year alone, companies spent $200 billion developing new energy projects worldwide, according to the study by the consulting firms John S. Herold Inc. and Harrison Lovegrove — an amount larger than the economies of 147 countries.

These higher costs mean that the industry needs higher energy prices to finance new projects. They are also constraining its ability to expand quickly.

“There are no easy barrels left,” said J. Robinson West, chairman of PFC Energy, an industry consulting firm in Washington. “The only barrels are going to be the tough barrels.”

There is plenty of oil and gas still in the ground, energy executives say. But global consumption is rising so fast that they must keep looking for new sources. Despite worldwide concern over global warming and the role of fossil fuels in causing it, United States government specialists project that global oil and gas demand will increase by some 50 percent in the next 25 years.

At the same time, the big discoveries of the last three decades, like those in the North Sea and on the North Slope of Alaska, are drying up. This is leading oil companies to remote places like Hammerfest.

The United States will need to import about a fifth of the natural gas it uses by 2030, mostly in a liquefied form shipped across the seas in tankers. Such imports are expected to swell more than sixfold from 2005 to 2030, according to the Energy Information Administration. And consumption is rising fast in the economically booming Asian countries.

Producing oil and gas in polar regions is not entirely new, of course. Russian engineers have been doing it in Siberia for decades, with mixed results, and Alaska’s North Slope was long the most important United States oil field.

But those fields are on land. The Norwegian field is the first Arctic project to tap oil and gas reserves far offshore, in water more than 1,000 feet deep, where traditional exploration methods would be too costly.

The gas field, 340 miles north of the Arctic Circle beneath a stretch of ocean more commonly known as the Barents Sea, is called Snow White — Snohvit in Norwegian, where energy projects are named after mythical characters. Though the field was discovered in 1981, oil executives long considered Snohvit out of reach, because of the Barents Sea’s shifting ice packs, brutal waves and extreme cold.

“This is considered an unfriendly place, even by Norwegian standards,” Mr. Mosbergvik said.

Another big problem the engineers faced here was that Snohvit is situated hundreds of miles from Norway’s traditional pipeline network.

Over the years, Statoil considered many ways to get at the gas, including huge offshore platforms armored against the waves, but discarded them as too costly. Building a vast undersea pipeline that would take the gas south along the country’s stretched coastline was also out of the question.

Statoil engineers eventually came up with an ingenious solution. They installed production equipment directly on the seafloor, with no rigs breaking the surface. The wellheads are linked by 90 miles of pipe to a small island just off Hammerfest. Anti-freeze is injected into the pipes to prevent the natural gas from clogging on its way to shore.

On the island, Melkoya, Statoil built a processing facility to separate the brew of natural gas, oil, water and carbon dioxide that flows out of the field. The natural gas is cooled to a temperature of 260 degrees below zero, shrinking its volume to one-six hundredth and turning it into a liquid that can be shipped in tankers.

Construction of the liquefaction plant over the last several years involved 22,000 workers, one of the largest industrial projects in Europe, and cost nearly $10 billion, up from $6 billion when the project was begun in 2002.

“We did not have the experience to operate in an environment like this,” Mr. Mosbergvik acknowledged.

The field is so large that it could eventually supply nearly 10 percent of the demand for natural gas demand in eastern states of the United States. Dominion, an energy company, has expanded a gas import terminal at Cove Point, Md., to accommodate the Arctic gas, according to Donald R. Raikes, its vice president for marketing and customer services.

By the end of October, Statoil’s gas will begin flowing through a network of pipes to a stretch of the country from Maryland to Massachusetts, the largest consumer market in the United States, with some 16 million residential customers and 5 million industrial clients.

With the plant nearly ready, Statoil maintains that the Barents Sea could turn into a major oil and gas region in coming decades. Indeed, the world’s fast-rising use of fossil fuels, by contributing to global warming, could eventually make the Arctic more accessible for oil and gas production.

In Hammerfest,residents have welcomed Statoil’s project, hoping it will offset declines in fishing. Modern buildings are rising to house the influx of gas workers. New taxes from the gas plant are helping finance a cultural center.

Statoil hopes to double its capacity on Melkoya by 2015. That will require finding new gas fields in the Barents Sea.

Hans M. Gjennestad, strategy manager at Statoil for the Barents region, said, “We believe this resource potential may contribute significantly to the long-term security of supplies of Europe and the United States.”

Posted by Hugo Albert Orwell at 09:12 AM | Permalink | TrackBacks (0)

Source: Houston Chronicle.com

Dec. 21, 2006, 11:18AM
By ALEX NICHOLSON AP Business Writer
© 2006 The Associated Press

MOSCOW — A golden statue of Saparmurat Niyazov rotates on a pedestal in Turkmenistan's capital to always face the sun _ a testament to the leader's personality cult and a garish product of the Central Asian nation's vast energy wealth.

Now, the autocratic president's death on Thursday is set to fuel a rivalry between Russia, the United States and China for access to the former Soviet republic's massive gas reserves in what analysts call a repeat of 19th-century rivalries in the region.

"Turkmenistan has returned as a key piece in the new Great Game," said Alfa Bank strategist Chris Weafer, referring to Russia and Britain's jostling for pre-eminence in Central Asia in the 1800s. "It is a big prize."

Over the past year Niyazov, who personally brokered the country's energy deals, had sought to balance Russia's influence _ courting Turkish and, in particular Chinese companies, to help explore and develop its nearly 3 trillion cubic meters of proven gas reserves.

Russia's state-controlled gas monopoly OAO Gazprom controls the only transit route for Turkmen gas exports to other former Soviet states and Europe.

Keen to lock in fresh energy sources to feed its exploding economy, China saw its efforts rewarded with Niyazov's promise to pipe 30 billion cubic meters of gas beginning in January 2009. It also won an invitation last month to tap the giant Iolotan fields, which the late president declared, to international disbelief, to contain 7 trillion cubic meters of natural gas _ or more than even Saudi Arabia's proven reserves.

Washington, meanwhile, has lobbied for a pipeline out of Turkmenistan across the Caspian Sea to the west, bypassing Russian territory. That would meet a U.S. strategy of tapping sources of crude and gas outside the Middle East, and drawing Caspian states away from Russia and closer to the West.

Niyazov ultimately proved "too difficult" for U.S. officials to deal with, Weafer said.

The Turkmen leader used revenues from energy investments to nourish lavish construction projects _ a huge, man-made lake in the Kara Kum desert, a vast cypress forest to change the desert climate, a ski resort and a 40-meter (130-foot) pyramid to celebrate the anniversary of the country's independence from the Soviet Union.

"Russia will want to retain its political influence in the country and one assumes that the U.S. will try to use the opportunity (of Niyazov's death) to get back in there, increase its influence and resurrect the plan for the pipeline across the Caspian," Weafer said. "But my guess is that the Chinese will have the biggest delegation at the funeral."

Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, says that multinational oil companies will prick up their ears at the news of Niyazov's death, but serious reforms would need to be undertaken before they could enter the promising market.

"The big guys, the people who might be interested, can't touch the place _ it doesn't come close to meeting the standards of corporate responsibility," he told The Associated Press.

"Obviously they can't afford not to look that this place and the possibility that it might open up _ it's obviously clear that they need to consider this," he said. "I just don't think we'll see any rapid developments. We need to finds out if there will be real change in status quo."

That could come in the form of some indication of democratization in the capital Ashgabat or open auctions of its hydrocarbon reserves.

"Given the resource base, it's always been at the back of peoples minds, but it's become increasingly difficult to work there because of the centralized decision-making and dominance of state-run monopolies," said analyst Hilary McCutcheon of energy consultants Wood MacKenzie. "That may be on the brink of changing."

Turkmenistan's burgeoning relationship with China has also rattled Ukraine, which relies on cheap Turkmen gas supplies to keep its domestic bill down.

Gazprom has a contract until 2009 to buy 50 billion of the 60 billion cubic meters that Turkmenistan produces annually, most of which it then re-exports to Ukraine.

While a recent price hike secured by Niyazov just months before his death suggests that pact is unlikely to be reconsidered in the near future, analysts say little will be clear until a successor is named.

Turkmenistan's State Security Council named Deputy Prime Minister Kurbanguli Berdymukhamedov the acting president, even though the Constitution required Parliament Speaker Overzgeldy Atayev to take over as acting head of state. The council said the Prosecutor General's office has opened a criminal investigation against Atayev, making him ineligible to fill in as president. The move could herald a battle for succession between rival groups in the Turkmen administration.

If Ashgabat makes good on its deal with China, and if fresh reserves are not developed apace, supplies to Ukraine could be cut, analysts say.

If that happens, Kiev would be forced to buy more expensive Russian gas, potentially putting it into a situation similar to a price fight with Gazprom last winter, which resulted in some cuts in supplies to some European cities.

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Source: Eurasia Daily Monitor
By Igor Torbakov
Friday, September 8, 2006

Russia’s ambitious attempts to cast itself as the principal energy supplier to world markets explain the new deal on an oil pipeline linking the Black Sea with the Aegean. During his September 4 visit to Greece, Russian President Vladimir Putin made a seemingly attractive offer to the Greek and Bulgarian leadership to turn their countries into energy transit hubs for Russia’s oil exports. The main result of the negotiations in Athens between Putin, Greek Prime Minister Costas Karamanlis, and Bulgarian President Georgy Parvanov was the decision to revive a long-stalled project aimed at carrying Russian crude from Bulgaria to Greece.

Following the talks, the leaders of the three countries told journalists that the final deal on the 280-kilometer $900 million pipeline linking Burgas on the Black Sea coast and Alexandroupolis on the Aegean is to be signed by the end of this year. Although no concrete dates were given as to the beginning of construction work on the pipeline, the Russian side believes that oil could start flowing by 2009. Plans call for the pipeline to initially transport 15 million tons of crude per year and increase to its full capacity, 35 million tons, by 2012. “I don't think anybody can stop [the pipeline] now,” Karamanlis asserted.

First advanced some 12 years ago as a way to reduce tanker traffic through the overcrowded Turkish Straits, the project was abandoned over disputes related to transit tariffs, ownership, and construction contracts. Furthermore, in the 1990s Russian oil companies were reluctant to make a firm commitment to supply 35-50 million tons of oil yearly to fill the pipeline: in 1996-98, oil prices on the world market went down to $8-12 dollars per barrel, and under these conditions it did not make much sense to spend additional costs on increasing supplies and conquering new markets.

Nowadays the situation has changed; there are several reasons that make Russia particularly interested in the realization of the trans-Balkan pipeline project.

First, the current sky-high oil prices, in the range of $70 dollars per barrel, have significantly boosted the financial attractiveness of the Burgas-Alexandroupolis route.

Second, the U.S.-backed Tbilisi-Baku-Ceyhan (BTC) oil pipeline, which began operating this summer after four years of construction, likely acted as a catalyst for the revival of the trans-Balkan project. When the BTC came on stream, some Russian analysts say, Moscow started worrying that it might lose the strategic competition over exports to the Balkans and Southern Europe.

Third, the congestion in the Bosporus is being exacerbated by the growing rivalry between Russia and Kazakhstan and the problems related to the throughput capacity of the pipeline operated by the Caspian Pipeline Consortium (CPC) that transports the Kazakh crude from the Caspian oilfields to the Black Sea port of Novorossiysk. The Kazakhs have long pushed Moscow to double the capacity of the CPC pipeline to 67 million tons per year. Kazakhstan has said it plans to triple its crude exports within a decade, most of which travel through Russia via the Caspian pipeline. If Russia eventually agrees to expand the CPC pipeline, the pressure on the Bosporus will rise dramatically as a further 700,000 to 1 million barrels per day will be shipped through the Straits.

Finally, Moscow is keen to open new energy export routes to reach the lucrative European markets and reduce dependence on such “unreliable” transit countries as Ukraine.

But despite the tripartite agreement reached in Athens, there is a significant amount of uncertainty and hidden tension that might eventually derail the Burgas-Alexandroupolis project.

Energy analysts note that the shareholdings in Trans-Balkan Pipeline, the project developer, are still being negotiated. The Russian side, represented by GazpromNeft, Rosneft, and TNK-BP, is pushing for the controlling stake as the oil supplier. But other participants -- Bulgaria’s state-controlled Bulgargaz and Greece’s oil refiner Hellenic Petroleum, and pipeline constructor Prometheus -- appear to be in favor of all partners having equal stakes.

Furthermore, Bulgaria is reportedly interested in expanding the number of project participants. “We are talking about an inclusive project, not an exclusive one,” Bulgarian leader Parvanov was quoted as saying. A well-informed source close to the Athens talks told the Moscow-based daily Vremya novostei that the Bulgarian team had suggested inviting the Kazakh energy company KazMunayGaz and U.S. Chevron into the Trans-Balkan consortium. Their reasoning appears to be quite simple: as a transit country, Bulgaria is interested in guarantees to fill the pipe, and having the Kazakh and U.S. oil majors participate in the project seems to provide such guarantees, as these companies would get transit privileges for transporting their crude through the pipeline. Indeed, some energy experts suggest that Chevron could be looking to access new European pipelines to move its Kazakh crude.

The idea of Kazakh oil competing with Russian fuel on the European markets cannot look very attractive to Russia’s oil majors. “An alternative to the Bosporus needs to be found, of course without leaving the competition from Kazakhstan the chance to take the place,” a TNK-BP spokesperson told the Moscow Times on September 5.

(Krasnaya zvezda, September 7; Vedomosti, Vremya novostei, Izvestiya, Moscow Times, September 5; Strana.ru, Gazeta.ru, September 4)

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Source: The Pioneer [India]
By Sandhya Jain

If Iranian President Ahmadinejad is serious about opening a Euro-based oil bourse in Tehran to undermine the US dollar, now is the time to strike. Strategic experts believe that internationally, the mega strategic energy deals are slipping away from corporate America, whose strong arm tactics are alienating growing nationalist sentiment across the world.

Washington's use of the September 2001 New York terror strike to cynically assume a commanding position in oil and gas rich Central Asia has startled the international community, especially after the unwarranted invasion of Iraq and takeover of its economy by cronies of the White House. This has forced a major rethink in world capitals, and resource-rich regimes in the Gulf and Central Asia are responding to Russia and China, who are cooperating to combat America's monopolistic ambitions.

Pakistan is Washington's non-NATO ally in the war against terror, but has turned to China for economic development, as evident in troubled Balochistan. It is keen on an energy deal with Iran, bete noire of Uncle Sam, but the tripartite energy deal with India cannot take off due to Pakistan's status as the epicentre of jihadi terrorism. As a rising Asian economy, India is also engaging with the Central Asian Republics for better energy security, though its anxiety for American goodwill has upset Iran and caused a stalemate over the price of LNG.

Saudi Arabia, however, is moving out of the American orbit by sewing up energy deals with China and India, though Washington has compensated itself with the oilfields of Libya. Yet the unmistakable geo-political trend among oil and gas producing nations of the Gulf, Latin America, Africa and Central Asia is to avoid US oil companies in favour of nations that do not interfere in their internal affairs. America's high comfort levels with dictatorial regimes on one hand, and promotion of puppet democracies on the other, as per its corporate convenience, has diminished its value as a desirable economic and strategic global partner.

Central Asia is alert after the string of 'coloured' revolutions. America currently retains bases in Kyrgyzthan, Tajikistan, Ukraine, Georgia and Azerbaijan. But Uzbekistan asked it to vacate the crucial Karshi-Khanabad (K2) base after the failed Andijan riots. President Islam Karimov was warned by ousted Georgian leader Eduard Shevardnadze against American financier George Soros and West-funded NGOs; he promptly expelled the Open Society Institute, stifled other NGOs, and courted Russian President Putin. A gas deal with Russia's Gazprom is expected to affect America's hydrocarbon pipeline over Afghanistan to the Arabian Sea. Karimov has invited India to share an energy partnership along with Russia and China, a move that makes profound geo-political sense.

Meanwhile, the Shanghai Cooperation Organisation (SCO) is pressing America to wind up its bases in Central Asia, especially as heightened tensions with Iran raise fears of another regional misadventure. Kazakhstan, which has enormous hydrocarbon resources, is also upset with President Bush, and even allies like Kyrgyzstan and Tajikistan favour a security relationship with Russia. Tajikistan made the Russian military base there permanent after President Putin's visit in October 2004, while Russia has a base at Kant in Kyrgyzstan.

China is very proactive in the region. There is a thousand kilometre pipeline from Kazakhstan's central Karaganda region to Xinjiang, part of an ambitious three thousand kilometre link to the Caspian Sea. China has also invested heavily in Russia's energy sector, especially Siberia's coal and oil. It is active in Uzbekistan, Tajikistan and Kyrgyzstan.

Experts opine that Russia is leading the attempt to marginalise Western multinational oil companies. The move strikes a chord because the White House is dominated by a cartel of the oil and gas industry and some banker-financiers, and the oil-rich nations of Central Asia, the Gulf and Latin America prefer joint ventures with State enterprises rather than these rapacious multinationals. Thus, a very basic economic nationalism drives their tilt towards Russia and China. The West, used to more than a century of de facto imperialism in the oil and gas sector, finds itself on a sticky wicket.

The new oil-and-gas producer States and the key consumer Asian economies (China, India) are joining hands to forge State-to-State joint ventures and arrive at strategic energy security. Analysts say this could eventually diminish the role and status of OPEC in future. Russian leaders had cleverly positioned the Russian Federation to take advantage of global energy trends, and is now emerging as natural leader of the world's key producing and consuming powers.

Washington facilitated this process by its unacceptable oil greed in Iraq. In a path-breaking work, "The Bush Agenda: Invading the World, One Economy at a Time," Antonia Juhasz exposes the US corporate invasion of Iraq. So far, 150 US corporations have received a staggering $50 billion worth of contracts for the failed reconstruction of Iraq, even as a new oil law has opened the oil sector to private foreign corporate investment.

Copyright © 2006 Nick Anderson, Houston Chronicle

Under the Geneva Convention, it is completely illegal for an occupying power to change the laws or political structure of the occupied country. Yet the United Nations and the international community have been idle bystanders as the Bush Administration has changed all basic economic and political laws, while totally failing in the primary task of providing for the security and basic needs of the Iraqi people. Thus, as many as 30 oil contracts signed by President Saddam Hussein with oil companies from all around the world, except the US, were simply cancelled. Iraq oil is now being guzzled by Chevron, Exxon and Marathon. And when you consider that some geologists believe that Iraq's oil reserves are larger or at par with those of Saudi Arabia, you can envisage a very slow American pullout from the region. No wonder the Central Asian nations with American military bases are no longer keen to play host to Uncle Sam.

America's obduracy has reinforced the global preference for State-to-State long-term agreements and contracts which serve the energy-security interests of nations, rather than private corporate entities. Russia's domination of oil and gas flowing to the West has helped it re-emerge as a global power in concert with its strategic partners. And, surprising as it may seem, Washington lacks the global leverage to refashion events in its favour.

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