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How to Convert the Country to Natural Gas, by T. Boone Pickens

Photograph by Matt Rainwaters for Bloomberg Businessweek

April 11, 2013
By T. Boone Pickens

It starts with getting into the transportation sector. When I started the Pickens Plan in 2008, there were about 200,000 vehicles on natural gas in the world; now there’s about 16 million. That growth’s coming from everywhere but the U.S. Places like Iran and Argentina. China’s already got 40,000 trucks on LNG [liquefied natural gas], and they import the stuff. And here we are in the U.S., with more natural gas than any other country in the world, and we aren’t doing a thing about it. It’s just amazing to me that these dumb f-‍-‍-s in D.C. don’t see this opportunity and try to capitalize on it.

The best thing to do is focus on heavy-duty trucks and give them a tax credit. It could work like a toll road, what you call a pay-for system. If you use it, you pay for it. So you give these guys a break upfront to convert to natural gas trucks, and then you tax the natural gas.

You don’t put natural gas in your corner gasoline station. You put natural gas in a truck stop. It’s a fuel that competes against diesel. There are about 8 million heavy-duty trucks in the U.S. If you convert them to natural gas, that boosts consumption by about 15 billion to 20 billion cubic feet a day. Right now we do about 70 billion cubic feet a day. So that extra demand would immediately boost the price and get drills moving again. Today natural gas is about $2.79 a gallon, compared with about $4.79 for diesel. That’s a huge advantage. But here’s the thing: If you take natural gas from about $4 (per thousand cubic feet) to $6, you only increase it by about 28¢ a gallon. So it’s cleaner by 30 percent and still cheaper by almost a half.

Pickens is founder, chairman, and CEO of the hedge fund BP Capital. As told to Matthew Philips

Source

US Banks: Funds file against Argentina remedy

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Published November 22, 2012

Associated Press

BUENOS AIRES, Argentina –  Argentina is running out of wiggle room in a billion-dollar showdown over foreign debts left unpaid since the country’s world-record default a decade ago, and the stakes couldn’t be higher for President Cristina Fernandez.

She risks triggering another historic debt default if she doesn’t agree to pay the so-called “vulture funds” she blames for much of Argentina’s troubles.

Fed up with Argentina’s refusal to honor its debts despite losing in appellate court, U.S. District Judge Thomas Griesa in New York said he is determined to make Argentina pay at least something to the plaintiffs.

His idea is to tap into the money Argentina already pays to other bondholders, by making banks that process the payments divert some of the money to the plaintiffs. U.S. financial institutions would become his enforcers, either helping to satisfy the judgment or “aiding and abetting” a crime.

The unprecedented idea was broadly upheld on appeal last month and Griesa tried to push the case closer to resolution late Wednesday by lifting a legal stay, and issuing an order directing Argentina to make a first round of payments into an escrow account on Dec. 15, when the country is scheduled to make payments to the other bondholders.

The idea has sent jitters through the legal departments of the most powerful financial institutions in the United States.

The U.S. Federal Reserve and the Clearing House, a trade group representing the world’s largest commercial banks, warned that Griesa’s remedy could have severe consequences for the backbone of the U.S. financial system, which automatically moves an average of $2.6 trillion a day in half a million transfers between more than 7,000 banks.

The Federal Reserve’s legal brief, filed Sunday, said the entire system depends on transfers being “immediate, final and irrevocable” when processed. Requiring intermediaries to identify, stop and divert payments according to court orders “would impede the use of rapid electronic funds transfers in commerce by causing delays and driving up costs.”

The plaintiffs dismissed the concerns, saying that the only bank at risk would be Argentina’s “paying agent,” the Bank of New York Mellon, which should be held responsible by the court if it doesn’t guarantee compliance.

Still, the Federal Reserve’s filing pleased Fernandez so much that she cited it in a speech Monday night.

“When an Argentine says something, the President of the Argentines or the economy minister, well, everyone comes out to criticize them, but now it’s (Federal Reserve Chairman Ben) Bernanke talking, honey, and everyone shuts their little mouth,” she said.

As with so many other things involving Argentina, these debts date back to the bloody dictatorship that ruled from 1976-1983. The military junta tripled the country’s foreign debts. By 2001, the burden had become unsustainable and the economy collapsed. Argentina’s $95 billion default still stands as a world record.

Sovereign debt is supposed to be paid no matter who runs a country, but Fernandez has always considered this defaulted debt to be illegitimate, forced onto the Argentines by dictators acting in concert with international financial speculators. She and her late husband and predecessor Nestor Kirchner, who took office in 2003, have never made any payments on the defaulted bonds.

Instead, they offered new bonds paying less than 30 cents for each dollar owed in default, and by 2010, 93 percent of the original bondholders agreed to the swaps. The debt relief granted by these “exchange bondholders” enabled Argentina to climb out of a deep economic crisis, and many analysts have described it as a model for Greece and other debt-burdened countries to consider.

Hold-outs led by NML Capital Ltd., an investment fund owned by U.S. billionaire Paul Singer, refused the swaps, insisting on payment in full plus interest, even though some bought the defaulted debt for pennies on the dollar after Argentina’s economy collapsed. Singer’s lawyers have traveled the world since then seeking to embargo Argentine assets, even getting its navy ship Libertad seized in Ghana as collateral. But they have never collected.

The judge’s solution to all this is to force Argentina to pay the holdouts an equal amount each time it makes a payment to the exchange bondholders.

This prompted an outcry from a group of exchange bondholders who collectively own $20 billion in the restructured Argentine debt. They said they “already suffered tens of billions of dollars in losses,” and that it’s not fair to harm their already diminished returns so that a few holdouts can earn up to 200 percent on their original investments.

If allowed to stand, this kind of remedy will make it impossible for other countries to get critical debt relief, they argued.

The holdouts’ response: “Those parties made a business judgment to accept assurances of prompt payment rather than being forced to litigate against the Republic around the world, as the plaintiffs have been forced to do at tremendous expense.”

Argentina, meanwhile, has told the judge that its responsibility ends once it delivers the cash to the Bank of New York Mellon, which in turn pays the exchange bondholders. This bank, in turn, said it would suffer lawsuits from all sides if it did anything other than process the payments as intended.

There was no immediate indication from Argentina’s government late Wednesday about how it would respond to Griesa’s ruling.

The judge said he was taking the action precisely because of “inflammatory declarations” made by Argentine officials, who have vowed not to pay a cent to NML Capital Ltd.

“It is the view of the District Court that these threats of defiance cannot go by unheeded, and that action is called for,” Griesa wrote.

Argentina is running out of options. Anything short of full payments could trigger holders of all sorts of Argentine bonds to demand immediate payment in full.

“In reality, what I think they’re looking for is to provoke a technical default,” the president said Monday night. “What’s a technical default? It’s when you pay, but not in the right time, or manner, or place. For example, you don’t pay in New York so that they don’t seize the money.”

The exchange bondholders warned that if this happens, “the injunction will have turned a relatively minor default into a cataclysmic default that will further unsettle the already fragile global economy.”

Fernandez sought to calm matters, noting that Argentina has $45.3 billion in reserves and a much lighter debt burden than it did years ago.

But if Argentina pays the plaintiffs the $1.43 billion they are demanding, Moody’s Investors Service said it could set a legal precedent for other holdouts who together claim nearly $12 billion in unpaid debts.

A default, meanwhile, could put more pressure on an economy already suffering from capital flight and dangerously high inflation. Argentine debt is already rated by Moody’s as junk, so the government has few other places to turn for financing.

The holdouts blamed all this “emergency litigation and anxiety” on Argentina’s “unrelenting bad faith,” and predicted that if it is finally given no other alternative, it will submit to the courts’ will.

“There is no reason to believe — and common sense rejects — the notion that Argentina would harm its reputation and credit, and unnecessarily allow tens of billions of dollars of debt to accelerate, simply to avoid paying the plaintiffs $1.43 billion,” they said.

Source

Heads We Win, Tails We Win

By Marin Katusa, Chief Energy Investment Strategist

Hugo Chàvez is undoubtedly one of the most polarizing politicians in the world today. The man who has led Venezuela for 14 years is vehemently anti-American, a proud voice for Venezuela’s poor, a patriot and a poet, and a firm believer that national resources belong to the nation and no one or nothing else.

That final Chàvez mainstay – that resources are best and most appropriately managed by the people for the people – has positioned Venezuela at the head of a group of Central and South American nations that are trying resource nationalization on for size as they struggle to make the most out of their oil and gas bounties. Venezuela is a global oil heavyweight – its 211-billion-barrel reserve is one of the top three national oil reserves worldwide – so Chàvez’s moves to nationalize his country’s massive oil machine gave neighboring countries the confidence to follow suit.

Sometimes national control over oil and gas resources can work well. Saudi Arabia, Brazil, and Kuwait are all prime examples of well-functioning, state-controlled oil sectors. However, resource nationalization is a tricky business, and more often than not the process goes awry.

Venezuela is no exception. Chàvez’s efforts to kick foreign firms out of Venezuela and use oil and gas revenues to fund social programs worked pretty well initially, but despite rising oil prices that early success has slipped away. In recent years Chàvez has demanded too much from the oil and gas sector, expecting ever-increasing revenues despite his reluctance to fund infrastructure and exploration programs. The result has been declining production, an exodus of technical expertise, and a pariah reputation in the international oil and gas industry.

Now, with a presidential election looming and Chàvez struggling with a cancer that it’s rumored will take his life within months, the path forward for the country that has been a firebrand for South American resource nationalization is far from clear.

Venezuela’s Love-Hate Relationship with Resource Nationalization

Venezuela nationalized its oil industry in 1976, at a time when many countries in the southern hemisphere were asserting sovereignty over their natural resources. The transformation of Petróleos de Venezuela SA (PDVSA) into a state-owned company was hailed as a national victory. However, it did not take long for trouble to begin.

In the 1990s global oil prices plunged and Venezuela, having based its budget on a certain level of oil income, found itself in deep economic trouble. PDVSA had 900 to 1,300 billion barrels of oil on its reserve books, but the company didn’t have the money or the technological know-how to tap into these reserves, most of which sat trapped in the geologically challenging Orinoco Belt. Seeing few other options, the country opened its oil sector to foreign investors: PDVSA started seeking out international partners willing to provide expertise and funding in exchange for a share of the profits. Big Oil arrived and started spending billions of dollars to unlock the heavy oil of the Orinoco.

Then Mr. Chàvez won the 1998 presidential election on a populist ticket that promised to use the country’s vast oil wealth to benefit the poor. Venezuela’s experiment with foreign involvement in its oil sector slowly came to a halt. Despite initially adopting “orthodox” economic policies, Chàvez soon started making good on his promise to his people – he gradually closed the door on international investment, raised rents, and changed fiscal agreements to retain ever more oil revenue for Venezuela. Imagine this: at one point the government take on oil contracts was more than 100% – foreign producers would have had to pay Chàvez for the privilege of producing oil in his country.

Chàvez brought a new form of politics to Venezuela. He identified with his supporters because he was one of them, having grown up poor, and he used language they understood, caring not that the elites saw such language as one of many signs that he was a buffoon with limited education and experience. His style stuck and the people grew to love him.

As he gained in popularity and confidence, Chàvez grew bolder in his moves to control Venezuelan oil in its entirety. In 2002 a group of PDVSA executives kick-started a general strike aimed at ousting Chàvez that lasted for a month and cut oil production to about 30% of normal levels; in response Chàvez fired nearly half of the company’s employees – 18,000 people in all – erasing large swaths of technical know-how in one fell swoop but sending a clear message that he would not tolerate dissent against his control over Venezuela’s oil.

By 2007 Chàvez had gained enough confidence to essentially complete his oil renationalization campaign – he expropriated oil assets in the Orinoco by issuing a decree that PDVSA hold at least 60% ownership in all international partnerships. What little was left of Big Oil pretty much packed up and left Venezuela. National oil production immediately fell by 25%.

You could say that was the beginning of the end, or the end of what had been a great beginning. That great beginning was undoubtedly aided by rising global oil prices: when Chàvez came to power, oil prices were sitting near $12 per barrel. By 2006 prices were averaging almost $60 a barrel, Venezuela’s coffers were overflowing, and the Venezuelan president felt unstoppable.

Those rising prices created such a sense of success around Chàvez’s experiment with renationalizing Venezuela’s oil and gas sector that Chàvez was able to convince his compatriot leaders in South America to follow in his footsteps. And it worked – Bolivia and Ecuador renationalized their oil sectors, and the concept of resource nationalization took hold in Argentina. As his geopolitical influence grew, Chàvez also devoted attention to the oil-needy nations in his neighborhood, implementing an oil-transfer program to energy-needy Central American and Caribbean countries. With his oil sector seemingly able to provide for so many, resource nationalization took on new life across South America, and Chavez was the movement’s proudest spokesman.

But here the word “seemingly” is key. As oil prices rose, PDVSA profits also rose, and it seemed that nationalization had been a boon to Venezuelan oil. But the increased profitability stemmed only from rising prices; the company itself was being strangled by a lack of investment – Chàvez spent all of PDVSA’s profits on his domestic fuel subsidies and social programs – and its dearth of technical expertise.

In short, a sector can only provide profits if it is also supplied with investment; and that is where Chàvez went wrong. Like so many other socialist leaders who nationalized resource sectors with great fanfare only to see the sectors wither away because of insufficient TLC, Chàvez failed to put money back into PDVSA.

Now the country’s once-proud oil and gas sector is in disarray. Infrastructure is old and insufficient, and production volumes are declining instead of climbing. In 2005 the company launched a new six-year plan calling for investment of US$239 billion to boost oil production to 5.8 million bpd by 2012. Instead, output has fallen from 2.9 million barrels per day (bpd) to 2.5 million bpd. Things are even worse when you look at Chàvez’s tenure as a whole: from 1998 to today, production has fallen from 3.5 million bpd to 2.5 million bpd, a decline of almost 30%:

Not only has production declined, but PDVSA’s financials have also deteriorated dramatically, its debt increasing from US$2.7 billion in 2005 to some US$33 billion now. Yet PDVSA continues to borrow money at an incredible rate, in large part to fund those domestic oil subsidies that are so very popular among Chàvez supporters. These subsidies cost the company US$15 billion a year.

The view forward is unclear. PDVSA lacks the technical expertise to take advantage of the heavy oil in the Orinoco. With foreign investment – and therefore involvement – in the oil sector banned and PDVSA drowning in debt, the prospects for turning Venezuela’s fading oil sector around are pretty dim.

Unless, of course, the sector is opened up to outside investment… which could well happen if Chàvez ceases to be part of the picture.

The Cancer

Over the last 12 months Chàvez has made regular trips to Havana for cancer treatments. The only official information about these treatments is that two malignant tumours were removed from his pelvic region. The secrecy surrounding Chàvez’s cancer and the fact that Chàvez, who rarely goes a few days without speaking directly to his people, enters radio silence during his trips to Cuba have fueled rumors of his declining health. Several times already these have ballooned into claims that the Venezuelan president had died.

The latest twist in the Chàvez cancer drama came from venerated journalist Dan Rather, the former CBS anchor who now hosts and directs Dan Rather Reports, a weekly news television show on HDNet. In a report he labeled as “exclusive,” Rather revealed on May 30 that he had been told that Chàvez is suffering from metastatic rhabdomyosarcoma, a rare and aggressive cancer that has “entered the end stage.” Rather said the information came from a highly respected source who is close to Chàvez and in a position to know his medical condition and history. This source says the prognosis is dire and that Chàvez is not expected to live “more than a couple of months at most.”

This is not the first time rumors of Chàvez’s pending death have surfaced. However, with his treatment having dragged on for a year already, with his uncharacteristic disappearances to Cuba growing longer and more frequent, and with Rather’s reputation for accuracy lending credence to this new information, it is time to ponder Venezuela – and South America – without Hugo Chàvez.

Chàvez would be incredibly difficult to replace. His rags-to-riches story line, bold governing style, and idiosyncratic mannerisms have earned adoration from the Venezuelan population, especially the poor and working class masses who constitute his prime electoral base. He also enjoys broad support from Venezuela’s military members.

This is a president who announces executive orders between readings of poetry, regularly draws families around their televisions to listen to his lengthy and often fiery speeches, and sings Venezuelan folk songs on a weekly show called Hello President. There are few people in the world who could match his charisma and earn such allegiance from a national population. That is why, even though others from Chàvez’s inner circle bear similar political views, most observers think any Chàvez successor would have a very difficult time maintaining the Chavista movement.

So when Chàvez dies, what might become of Venezuela? In the immediate aftermath, Vice President Elías Jaua would take power, according to the Constitution. In fact, Chàvez recently formed a nine-member State Council headed by Jaua to assist him with executive duties, a move many interpreted as a preparation for his impending demise.

In the longer term, Venezuelan political observers see five potential successors within Chàvez’s Socialist Party. All hold similar views, but none enjoy anything close to Chàvez’s recognition and support. The Party would have to hope that Chàvez’s reputation can carry one of these candidates to the presidency, but such a succession is far from assured.

If Chàvez dies before the October presidential election, opposition candidate Henrique Capriles would suddenly see his odds of winning jump dramatically. Polls show Capriles currently lagging behind Chàvez by roughly 5%, but the same polls found that Capriles would win the race by double-digit margins if he were to face a Chàvez successor instead of facing Hugo himself… unless, of course, the Socialists rig the election. Given that Chàvez has proven that a high regard for democracy is not a required characteristic for someone holding the Venezuelan presidency, this is not unlikely.

Capriles is a veteran politician, having previously served as governor of the state of Miranda despite being just 39 years old. He is a center-left politician who has cleverly focused on issues close to the day-to-day lives of Venezuelans: crime, corruption, declining services, inflation, and jobs. Capriles’ petroleum policies are less clear, but his rare comments on the matter indicate he would keep PDVSA as a national entity while allowing the company to engage in investment partnerships with foreign firms, much like the Brazilian national oil firm Petrobras.

If Chàvez is healthy enough to run, he will almost certainly win the election in October. If he is not, we see two possible paths. The first is that Capriles finds himself president of Venezuela, and South America loses its resource nationalization ringleader. However, a desire to change how Venezuela’s oil sector operates is very different from the actual ability to do so. The biggest obstacle to change: those domestic oil subsidies. If Capriles wants to revitalize PDVSA – indeed, if he simply wants to give PDVSA a chance at economic survival – he would have to significantly reduce the domestic oil subsidies, and likely also reduce social spending to free up some oil revenues for reinvestment into the country’s oil fields. And that would cause riots. We have seen it before, most recently in Nigeria: populations that are accustomed to having access to cheap oil are highly unwilling to let go of that benefit and will riot, often violently and for extended periods, at the mere suggestion that gas prices need to increase.

Oil-related riots in one of the world’s top-ten oil-producing nations would undoubtedly push global oil prices higher.

The other potential path for a post-Chàvez Venezuela is that his successor within the Socialist Party wins the presidency, legitimately or with the aid of electoral fraud. This Chàvez clone would then be stuck trying to fill Hugo’s shoes, a near-impossible task in which he would only have a chance at success by promising even more in the way of social spending. These expensive programs would put even greater strain on Venezuela’s budget, which is funded in large part by revenues from PDVSA. There would continue to be no money available to finance PDVSA’s spending needs, and production would continue to decline.

Guess what? This scenario – of continued production decline in a major world supplier – would also push global oil prices higher. The bottom line is that Chàvez has created a lose-lose scenario for Venezuelan oil. The country has become reliant on a one-way flow of money and cheap oil from PDVSA to society, but after a decade of neglect PDVSA is withering away and the flows are drying up. Even if Chàvez dies and a left-leaning leader like Capriles comes to power, Venezuela will have to convulse through many ugly years before a functional relationship can be reestablished between its oil riches and its social demands. In the meantime, Venezuelans and the world will have to do with only limited access to Venezuelan oil.

So, for those of us positioned to gain from a long-term rising oil price, it’s heads we win, tails we win.


Additional Links and Reads

Oil Prices to Ease Further This Year (Reuters)

The CEO of Royal Dutch Shell expects oil prices to continue easing through the rest of the year, as demand reacts to a slowing global economy and international tensions ease. Peter Voser’s statement came just as Brent crude dropped to a 16-month low – below US$96 per barrel – on the heels of further weak economic news from the US and China. In addition, concerns over the state of the European economy have taken the spotlight away from the lingering tensions between Iran and Western powers, which just three months ago helped to push Brent above US$128 a barrel.

Global Gas Demand to Grow by 2.7% Annually to 2017 (Platts)

Global demand for natural gas will rise by 2.7% annually for the next five years, a faster growth rate than previously expected. China and the United States are driving the additional demand by switching from coal to gas to generate electricity. In China alone consumption is expected to double to 273 billion cubic meters in 2017 from 130 billion cubic meters today, representing an average growth rate of 13% per year.

King Coal Still Reigns Despite Drop in Prices (Vancouver Sun)

Canadian coal companies are not slowing down exploration nor development programs despite a drop in prices in China, their main export market. Companies are generally viewing depressed prices as a transient problem and see demand from Asia remaining strong in the medium term, especially for British Columbia’s high-quality metallurgical coal.

South Sudan’s $4-Billion Question Answered: Oil Revenue Stolen by Corrupt Officials (The Globe and Mail)

It has been a mystery for years: how does South Sudan remain so poor and hungry when it receives billions of dollars in oil revenues every year? The answer is now clear: South Sudan’s president says corrupt officials have stolen $4 billion in oil revenues since 2005. He is asking those officials to return the stolen funds. Any returned funds would be especially useful at the moment, because a dispute with Sudan has shut in South Sudan’s oil production and thereby eliminated about 98% of the government’s official revenue.

Oil Rush in the Arctic Gambles with Nature and Diplomacy (The Guardian)

A small group of international scientists, politicians, and business leaders are gathered in the Ny-Alesund research station on the Norwegian island of Svalbard to discuss the path to a global low-carbon economy. Meanwhile, just outside the station an oil rush looms – one that threatens to spark territorial disputes and saber-rattling as a host of nations compete to claim rights to the Arctic seabed.

Germany Plans Massive Wind Power Grid (The Globe and Mail)

Germany’s utilities have tabled plans to build four high-voltage electricity lines to link wind turbines off the north coast with manufacturing centers in the south. The plan is a boost for Angela Merkel, who has been criticized for announcing an accelerated nuclear-power phase-out a year ago without producing an alternative plan. The lines are expected to cost around €20 billion

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Desperate Argentina Now Seen Begging for Oil Investment

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Thursday, May 10, 2012 – by Staff Report

Argentine Vice President Amado Boudou on Tuesday urged US companies to invest in YPF, the nationalized oil company that Argentina recently expropriated from Spain’s Repsol … “We are very optimistic in terms of what is coming for the Argentine economy in general and the hydrocarbons sector specifically” Boudou said at a Conference on the Americas at the US State Department in Washington. Far from scaring off foreign investment because of the expropriation, the government of President Cristina Fernandez has set the framework for “excellent opportunities for those who want to invest in joint ventures and possibilities of joint work in the energy sector,” he said. The Cristina Fernandez administration is gambling that the discovery in May 2011 of a giant oilfield in Argentina’s Patagonia would be too tempting for foreign oil giants to ignore. YPF needs the know-how and the capital to fully exploit the oil fields in the south-western Nequen province, known as Vaca Muerta (Dead Cow), which according to official estimates holds 150 million barrels of oil. YPF is “open to capital and the possibility of working together with public or private companies in Argentina or abroad,” Boudou said. – Merco Press

Dominant Social Theme: Don’t cry for Argentina. It’s all under control …

Free-Market Analysis: Are Argentina’s top officials having second thoughts about their expropriation of Spain’s Argentine oil-producer? It would seem that way from the above news report via Merco Press.

If the move was as wildly destructive as people think it may have been, then this posture would tend to confirm the idea that one of the world’s more powerful and influential states is simply spinning out of control.

The results may be truly catastrophic, not just for Latin America but for the larger, struggling world.

This boom may well be ending – or certainly growing long-in-the-tooth after a decade or more.

Although the Argentine expropriation of Repsol made major shock waves, the Argentine government under President Cristina Fernandez has portrayed it as a judicious and necessary gambit.

Many other observers regardless of political affiliation have branded the move as a shallow populist one that will bring disaster to Argentina and environs.

As the predictions of damage mount, there is more speculation that Fernandez’s action may bring down not only her own government but other regional governments as well.

These predictions involve inevitably a peso devaluation that will set off a dollar-withdrawal frenzy in big regional banks. Real estate prices – radically inflated after a decade of monetary expansion – may well plunge. The results could affect large swaths of South America.

Countries that could be affected include Uruguay, Brazil, Chile and Peru among others – all countries that have pursued moderate market-based policies and have benefitted from the South American industrial and monetary boom.

Meanwhile, Repsol doesn’t seem apt to surrender. Here’s more from the article.

YPF is “open to capital and the possibility of working together with public or private companies in Argentina or abroad,” Boudou said.

Last week the Argentine president signed a bill expropriating 51% of YPF stock from Repsol, its majority shareholder, sealing a measure that has roiled the country’s trade ties with Europe.

Cristina Fernandez has argued that the move was justified because Argentina faces sharp rises in its bill for imported oil, and Repsol has failed to make agreed investments needed to expand domestic production.

In Madrid, a Repsol spokesman Tuesday said the company has warned its competitors that they will face legal action if they invest in YPF.

“The idea is to protect the assets that were confiscated in Argentina until the situation is resolved in a satisfactory way for the parties that are involved,” the spokesman said.

Conclusion: A cascading crisis in South America may still seem likely …

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Oil Wars on the Horizon

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Posted by Michael Klare at 7:42am, May 10, 2012.

There has been much discussion recently about the Obama administration’s “pivot” from the Greater Middle East to Asia: the 250 Marines sent to Darwin, Australia, the littoral combat ships for Singapore, the support for Burmese “democracy,” war games in the Philippines (and a drone strike there as well), and so on.  The U.S. is definitely going offshore in Asian waters, or put another way, after a decade-long hiatus-cum-debacle on the Eurasian continent, the Great Game v. China is back on.

While true, however, the importance of this policy change has been exaggerated.  At the moment, as it happens, the greatest game isn’t in Asia at all; it’s in the Persian Gulf where, off the coast of Iran and in bases around the region, the U.S. is engaged in a staggering build-up of naval and air power.  Most people would have little idea that this was even going on, since it rarely makes its way into the mainstream and even less often onto front pages or into the headlines.  The Washington Times, for instance, has been alone in reporting that, for the U.S. military, “war planning for Iran is now the most pressing scenario.”  It adds that the “U.S. Central Command believes it can destroy or significantly degrade Iran’s conventional armed forces in about three weeks using air and sea strikes.”

Most of the time, however, you have to be a genuine news jockey or read specialist sites to notice the scale of what’s going on, even though the build-up in the Gulf is little short of monumental and evidently not close to finished.  It’s not just the two aircraft carrier task forces now there, but (as the invaluable Danger Room website has reported) the doubling of minesweepers stationed in Bahrain, as well as the addition of minesweeping helicopters and coastal patrol boats that are being retrofitted with Gattling guns and missiles.  Throw in new advanced torpedoes for Gulf waters and mini-drone subs; add in newly outfitted units of F-22s and F-15s heading for bases in the Gulf to make up “the world’s most powerful air-to-air fighting team.”  And don’t forget the major CIA drone surveillance program already in operation over Iran (and undoubtedly still being bolstered).

And then, of course, you would have to add in what we don’t know about, including — you can be sure — the strengthening of special operations activities in the region.  It’s the perfect build-up for a post-presidential-election war season.  After a failed war in Iraq that left that country ever more firmly allied with Iran and another failing war in Afghanistan, you might think that the Pentagon would want to back off.  Well, think again.  To adapt the famed mantra of Bill Clinton’s 1992 presidential run, “It’s the oil heartlands of the planet, stupid.”  And as TomDispatch regular Michael Klare, author of a new, must-read book, The Race for What’s Left: The Global Scramble for the World’s Last Resources, points out, we’re now entering an era when “war” and “oil” may become synonymous. (To catch Timothy MacBain’s latest Tomcast audio interview in which Klare discusses global energy conflicts, click here or download it to your iPod here.) Tom

 

Oil Wars on the Horizon

by MICHAEL T. KLARE

Conflict and intrigue over valuable energy supplies have been features of the international landscape for a long time.  Major wars over oil have been fought every decade or so since World War I, and smaller engagements have erupted every few years; a flare-up or two in 2012, then, would be part of the normal scheme of things.  Instead, what we are now seeing is a whole cluster of oil-related clashes stretching across the globe, involving a dozen or so countries, with more popping up all the time.  Consider these flash-points as signals that we are entering an era of intensified conflict over energy.

Six Recent Clashes and Conflicts on a Planet Heading Into Energy Overdrive

From the Atlantic to the Pacific, Argentina to the Philippines, here are the six areas of conflict — all tied to energy supplies — that have made news in just the first few months of 2012:

* A brewing war between Sudan and South Sudan: On April 10th, forces from the newly independent state of South Sudan occupied the oil center of Heglig, a town granted to Sudan as part of a peace settlement that allowed the southerners to secede in 2011.  The northerners, based in Khartoum, then mobilized their own forces and drove the South Sudanese out of Heglig.  Fighting has since erupted all along the contested border between the two countries, accompanied by air strikes on towns in South Sudan.  Although the fighting has not yet reached the level of a full-scale war, international efforts to negotiate a cease-fire and a peaceful resolution to the dispute have yet to meet with success.

This conflict is being fueled by many factors, including economic disparities between the two Sudans and an abiding animosity between the southerners (who are mostly black Africans and Christians or animists) and the northerners (mostly Arabs and Muslims).  But oil — and the revenues produced by oil — remains at the heart of the matter.  When Sudan was divided in 2011, the most prolific oil fields wound up in the south, while the only pipeline capable of transporting the south’s oil to international markets (and thus generating revenue) remained in the hands of the northerners.  They have been demanding exceptionally high “transit fees” — $32-$36 per barrel compared to the common rate of $1 per barrel — for the privilege of bringing the South’s oil to market.  When the southerners refused to accept such rates, the northerners confiscated money they had already collected from the south’s oil exports, its only significant source of funds.  In response, the southerners stopped producing oil altogether and, it appears, launched their military action against the north.  The situation remains explosive.

* Naval clash in the South China Sea: On April 7th, a Philippine naval warship, the 378-foot Gregorio del Pilar, arrived at Scarborough Shoal, a small island in the South China Sea, and detained eight Chinese fishing boats anchored there, accusing them of illegal fishing activities in Filipino sovereign waters.  China promptly sent two naval vessels of its own to the area, claiming that the Gregorio del Pilar was harassing Chinese ships in Chinese, not Filipino waters.  The fishing boats were eventually allowed to depart without further incident and tensions have eased somewhat.  However, neither side has displayed any inclination to surrender its claim to the island, and both sides continue to deploy warships in the contested area.

As in Sudan, multiple factors are driving this clash, but energy is the dominant motive.  The South China Sea is thought to harbor large deposits of oil and natural gas, and all the countries that encircle it, including China and the Philippines, want to exploit these reserves.  Manila claims a 200-nautical mile “exclusive economic zone” stretching into the South China Sea from its western shores, an area it calls the West Philippine Sea; Filipino companies say they have found large natural gas reserves in this area and have announced plans to begin exploiting them.  Claiming the many small islands that dot the South China Sea (including Scarborough Shoal) as its own, Beijing has asserted sovereignty over the entire region, including the waters claimed by Manila; it, too, has announced plans to drill in the area.  Despite years of talks, no solution has yet been found to the dispute and further clashes are likely.

* Egypt cuts off the natural gas flow to Israel: On April 22nd, the Egyptian General Petroleum Corporation and Egyptian Natural Gas Holding Companyinformed Israeli energy officials that they were “terminating the gas and purchase agreement” under which Egypt had been supplying gas to Israel.  This followed months of demonstrations in Cairo by the youthful protestors who succeeded in deposing autocrat Hosni Mubarak and are now seeking a more independent Egyptian foreign policy — one less beholden to the United States and Israel.  It also followed scores of attacks on the pipelines carrying the gas across the Negev Desert to Israel, which the Egyptian military has seemed powerless to prevent.

Ostensibly, the decision was taken in response to a dispute over Israeli payments for Egyptian gas, but all parties involved have interpreted it as part of a drive by Egypt’s new government to demonstrate greater distance from the ousted Mubarak regime and his (U.S.-encouraged) policy of cooperation with Israel.  The Egyptian-Israeli gas link was one of the most significant outcomes of the 1979 peace treaty between the two countries, and its annulment clearly signals a period of greater discord; it may also cause energy shortages in Israel, especially during peak summer demand periods.  On a larger scale, the cutoff suggests a new inclination to use energy (or its denial) as a form of political warfare and coercion.

* Argentina seizes YPF: On April 16th, Argentina’s president, Cristina Fernández de Kirchner, announced that her government would seize a majority stake in YPF, the nation’s largest oil company.  Under President Kirchner’s plans, which she detailed on national television, the government would take a 51% controlling stake in YPF, which is now majority-owned by Spain’s largest corporation, the energy firm Repsol YPF.  The seizure of its Argentinean subsidiary is seen in Madrid (and other European capitals) as a major threat that must now be combated.  Spain’s foreign minister, José Manuel García Margallo, said that Kirchner’s move “broke the climate of cordiality and friendship that presided over relations between Spain and Argentina.”  Several days later, in what is reported to be only the first of several retaliatory steps, Spain announced that it would stop importing biofuels from Argentina, its principal supplier — a trade worth nearly $1 billion a year to the Argentineans.

As in the other conflicts, this clash is driven by many urges, including a powerful strain of nationalism stretching back to the Peronist era, along with Kirchner’s apparent desire to boost her standing in the polls.  Just as important, however, is Argentina’s urge to derive greater economic and political benefit from its energy reserves, which include the world’s third-largest deposits of shale gas.  While long-term rival Brazil is gaining immense power and prestige from the development of its offshore “pre-salt”petroleum reserves, Argentina has seen its energy production languish.  Repsol may not be to blame for this, but many Argentineans evidently believe that, with YPF under government control, it will now be possible to accelerate development of the country’s energy endowment, possibly in collaboration with a more aggressive foreign partner like BP or ExxonMobil.

* Argentina re-ignites the Falklands crisis: At an April 15th-16th Summit of the Americas in Cartagena, Colombia — the one at which U.S. Secret Service agents were caught fraternizing with prostitutes — Argentina sought fresh hemispheric condemnation of Britain’s continued occupation of the Falkland Islands (called Las Malvinas by the Argentineans).  It won strong support from every country present save (predictably) Canada and the United States.  Argentina, which says the islands are part of its sovereign territory, has been raising this issue ever since it lost a war over the Falklands in 1982, but has recently stepped up its campaign on several fronts — denouncing London in numerous international venues and preventing British cruise ships that visit the Falklands from docking in Argentinean harbors.  The British have responded by beefing up their military forces in the region and warning the Argentineans to avoid any rash moves.

When Argentina and the U.K. fought their war over the Falklands, little was at stake save national pride, the stature of the country’s respective leaders (Prime Minister Margaret Thatcher vs. an unpopular military junta), and a few sparsely populated islands.  Since then, the stakes have risen immeasurably as a result of recent seismic surveys of the waters surrounding the islands that indicated the existence of massive deposits of oil and natural gas.  Several UK-based energy firms, including Desire Petroleum and Rockhopper Exploration, have begun off-shore drilling in the area and have reported promising discoveries.  Desperate to duplicate Brazil’s success in the development of offshore oil and gas, Argentina claims the discoveries lie in its sovereign territory and that the drilling there is illegal; the British, of course, insist that it’s their territory.  No one knows how this simmering potential crisis will unfold, but a replay of the 1982 war — this time over energy — is hardly out of the question.

* U.S. forces mobilize for war with Iran: Throughout the winter and early spring, it appeared that an armed clash of some sort pitting Iran against Israel and/or the United States was almost inevitable.  Neither side seemed prepared to back down on key demands, especially on Iran’s nuclear program, and any talk of a compromise solution was deemed unrealistic.  Today, however, the risk of war has diminished somewhat – at least through this election year in the U.S. — as talks have finally gotten under way between the major powers and Iran, and as both have adopted (slightly) more accommodating stances.  In addition, U.S. officials have been tamping down war talk and figures in the Israeli military and intelligence communities have spoken out against rash military actions.  However, the Iranians continue to enrich uranium, and leaders on all sides say they are fully prepared to employ force if the peace talks fail.

For the Iranians, this means blocking the Strait of Hormuz, the narrow channel through which one-third of the world’s tradable oil passes every day.  The U.S., for its part, has insisted that it will keep the Strait open and, if necessary, eliminate Iranian nuclear capabilities.  Whether to intimidate Iran, prepare for the real thing, or possibly both, the U.S. has been building up its military capabilities in the Persian Gulf area, deploying two aircraft carrier battle groupsin the neighborhood along with an assortment of air and amphibious-assault capabilities.

One can debate the extent to which Washington’s long-running feud with Iran is driven by oil, but there is no question that the current crisis bears heavily on global oil supply prospects, both through Iran’s threats to close the Strait of Hormuz in retaliation for forthcoming sanctions on Iranian oil exports, and the likelihood that any air strikes on Iranian nuclear facilities will lead to the same thing.  Either way, the U.S. military would undoubtedly assume the lead role in destroying Iranian military capabilities and restoring oil traffic through the Strait of Hormuz. This is the energy-driven crisis that just won’t go away.

How Energy Drives the World

All of these disputes have one thing in common: the conviction of ruling elites around the world that the possession of energy assets — especially oil and gas deposits — is essential to prop up national wealth, power, and prestige.

This is hardly a new phenomenon.  Early in the last century, Winston Churchill was perhaps the first prominent leader to appreciate the strategic importance of oil.  As First Lord of the Admiralty, he converted British warships from coal to oil and then persuaded the cabinet to nationalize the Anglo-Persian Oil Company, the forerunner of British Petroleum (now BP).  The pursuit of energy supplies for both industry and war-fighting played a major role in the diplomacy of the period between the World Wars, as well as in the strategic planning of the Axis powers during World War II.  It also explains America’s long-term drive to remain the dominant power in the Persian Gulf that culminated in the first Gulf War of 1990-91 and its inevitable sequel, the 2003 invasion of Iraq.

The years since World War II have seen a variety of changes in the energy industry, including a shift in many areas from private to state ownership of oil and natural gas reserves.  By and large, however, the industry has been able to deliver ever-increasing quantities of fuel to satisfy the ever-growing needs of a globalizing economy and an expanding, rapidly urbanizing world population.  So long as supplies were abundant and prices remained relatively affordable, energy consumers around the world, including most governments, were largely content with the existing system of collaboration among private and state-owned energy leviathans.

But that energy equation is changing ominously as the challenge of fueling the planet grows more difficult.  Many of the giant oil and gas fields that quenched the world’s energy thirst in years past are being depleted at a rapid pace.  The new fields being brought on line to take their place are, on average, smaller and harder to exploit.  Many of the most promising new sources of energy — like Brazil’s “pre-salt” petroleum reserves deep beneath the Atlantic Ocean, Canadian tar sands, and American shale gas – require the utilization of sophisticated and costly technologies.  Though global energy supplies are continuing to grow, they are doing so at a slower pace than in the past and are continually falling short of demand.  All this adds to the upward pressure on prices, causing anxiety among countries lacking adequate domestic reserves (and joy among those with an abundance).

The world has long been bifurcated between energy-surplus and energy-deficit states, with the former deriving enormous political and economic advantages from their privileged condition and the latter struggling mightily to escape their subordinate position.  Now, that bifurcation is looking more like a chasm.  In such a global environment, friction and conflict over oil and gas reserves — leading to energy conflicts of all sorts — is only likely to increase.

Looking, again, at April’s six energy disputes, one can see clear evidence of these underlying forces in every case.  South Sudan is desperate to sell its oil in order to acquire the income needed to kick-start its economy; Sudan, on the other hand, resents the loss of oil revenues it controlled when the nation was still united, and appears no less determined to keep as much of the South’s oil money as it can for itself.  China and the Philippines both want the right to develop oil and gas reserves in the South China Sea, and even if the deposits around Scarborough Shoal prove meager, China is unwilling to back down in any localized dispute that might undermine its claim to sovereignty over the entire region.

Egypt, although not a major energy producer, clearly seeks to employ its oil and gas supplies for maximum political and economic advantage — an approach sure to be copied by other small and mid-sized suppliers.  Israel, heavily dependent on imports for its energy, must now turn elsewhere for vital supplies or accelerate the development of disputed, newly discovered offshore gas fields, a move that could provoke fresh conflict with Lebanon, which says they lie in its own territorial waters.  And Argentina, jealous of Brazil’s growing clout, appears determined to extract greater advantage from its own energy resources, even if this means inflaming tensions with Spain and Great Britain.

And these are just some of the countries involved in significant disputes over energy.  Any clash with Iran — whatever the motivation — is bound to jeopardize the petroleum supply of every oil-importing country, sparking a major international crisis with unforeseeable consequences.  China’s determination to control its offshore hydrocarbon reserves has pushed it into conflict with other countries with offshore claims in the South China Sea, and into a similar dispute with Japan in the East China Sea.  Energy-related disputes of this sort can also be found in the Caspian Sea and in globally warming, increasingly ice-free Arctic regions.

The seeds of energy conflicts and war sprouting in so many places simultaneously suggest that we are entering a new period in which key state actors will be more inclined to employ force — or the threat of force — to gain control over valuable deposits of oil and natural gas.  In other words, we’re now on a planet heading into energy overdrive.

Michael T. Klare is a professor of peace and world security studies at Hampshire College and the author, most recently, of Rising Powers, Shrinking Planet and The Race for What’s Left.

This article originally appeared on TomDispatch.

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