Will a Stalemate in Libya lead to the Nationalization of Western Oil Companies?

The papers today were vey light on news from Libya so my guess is the polling numbers are not going Obama’s way. A week ago the rebels were marching west toward Tripoli. Gaddafi’s troops were in retreat and under attack from US fighter bombers. Cruise missiles were destroying Libyan air defenses. But the tide turned last Monday when Gaddafi’s forces repulsed the rebels at Sirte and retook the oil ports of Ras Lanuf and Brega. Note: Brega currently is being contested by rebels but is still considered in government hands.

NATO has since taken operational command of combat operations and the US has announced it has withdrawn its attack aircraft and will restrict itself to only tanker, jamming and reconnaissance mission. NATO has said it will not arm the rebels and the President and Defense Secretary have publicly ruled out the use of ground forces.

So where does that leave the coalition? Not in very good shape. We backed a ragtag undisciplined group of rebels with no fighting experience and expected them to defeat a trained military. We expected a no fly zone to halt Gaddafi’s troops then stopped flying support missions ourselves. Neither battles nor wars are won by timid actions and this will unfortunately prove it.

It will probably end up a stalemate, but with Gaddafi’s troops chipping away at the rebels in Benghazi. Likely they will simply drift away with Gaddafi and his family still in power. What the coalition never contemplated was the downside of not achieving victory.

Dictators, even benevolent ones, don’t take kindly to JDAMs landing in their sleeping quarters. It is likely Gaddafi is more than a little bit ticked at having his sleep disturbed followed by announcements from Washington, Paris and London that he must go. Will he retaliate? Of course he will. This is the Middle East.

The most vulnerable assets coalition countries have in Libya are its oil companies.  They include -- US: ConocoPhillips, Marathon, Hess, Occidental and ExxonMobil, UK: BP and Anglo Dutch Shell and France: government owned TOTAL. Oil likely will continue to flow, but not under the ownership of the western oil companies. Likely substitutes to operate nationalized facilities are Chinese and Russians operators who are ever willing to take advantage of western missteps.

Lesson for the future: There is no substitute for victory.

The BP oil spill is not our worst offshore environmental disaster

I don’t want to diminish the problems with the oil spill, but we have lived through far worse and our waters and shoreline recovered. During World War II, Nazi U-boats sank scores of oil tankers off the Atlantic Coast and the Gulf of Mexico.

The Gulf of Mexico campaign began precisely 68 years ago today, May 4, 1942. In a little over a month they had sunk oil cargoes of over 600,000 barrels (one barrel equals 42 gallons), and by December 1943 when they sank their last ship in the Gulf, nearly 900,000 barrels of oil and oil products had been left in Gulf waters. For comparison, if it takes BP 3 months to get the well under control, at the current estimated leakage rate of 5,000 barrels a day, 450,000 will have seeped into the Gulf. While a lot, it is just half of what was spilled during the war.

The difference between then and now is we were focused not on the environment, but on fighting a war that had reached our shores. For those of us who lived on the coast, we did step in “tar” on the beach. But it was more of a nuisance and nothing compared to the agony of those with silver or gold star flags on the front of their homes.

The tar releases continued after the war, no doubt from seepage from the sunken ships and from the collapse of tank walls that had rusted out. Yet as we look back on the late 1940s and early 50s, we consider them the pristine years. They really weren’t. We recovered without a lot of fuss, as we will from the BP mess.

Hugo Chavez seizes foreign oil service companies, because he hasn’t paid them

Chavez is following his earlier takeover blunders (telephone, cement and oil conglomerates) and now plans to seize the oil service companies that have remained. Most haven’t been paid since last summer and they are beginning to close down operations. This follows the seizure of Conoco and Exxon Mobil two years ago after they rejected a partial takeover and far higher taxes.

When they announced they were seeking international arbitration to challenge the amount of compensation offered, Chavez threw a fit and threatened to cut off oil deliveries to the US if President Bush didn’t make them stop. Then he realized the US has the only refining facilities that can handle his gunky, high sulfur crude. It also hit him that any award to the two US companies wouldn’t be out of their reach, they could simply seize his US assets which include Citgo. Even worse, the US is his only market price customer. The remainder are his politically favored pals, who pay only 30% of market and the balance over 25 years.

The inept state oil company (PDVSA) management has made few or no capital improvements and done little maintenance. They are simply milking the system and running it into the ground. And it is beginning to show. Venezuela was pumping 3.2 mbd in 1998 (before Chavez) and is now down to 2.13 in April. It is likely production will drop below 2 million in the near future. The US has been buying 1.2 million. The Finacial Times (UK) explains the rationale: PDVSA which is under pressure to cut expenses by 60 per cent because of tumbling revenues, is estimated to owe as much as $12bn (€8.9bn, £7.9bn) to contractors since suspending payments to them last August, shortly after oil prices began their precipitous decline. It has demanded that companies accept a 40 per cent cut in their bills, arguing that the decline in oil prices means they are charging too much. Sort of sounds familiar.

Strategic Reserve release, a vey bad idea

Barak Obama has proposed the release of 70 million barrels of oil from the Strategic Petroleum Reserve to alleviate prices. This represents about 10% of the entire reserve and three years of accumulation. It is a very bad idea.

The Strategic Petroleum Reserve was authorized after the Arab Oil Embargo of 1973-74, when Arab countries cut off oil to Western Europe, Japan and the United States for their support of the Israelis in the Yom Kippur war. The purpose of the reserve was and is to mitigate supply disruptions or shortages that would jeopardize our national security. We simply do not want to be blackmailed by our enemies. The conditions for the release of oil must come from “a severe energy supply disruption” and satisfy three conditions according to the 2006 CRS Report to Congress:

The Energy Policy and Conservation Act authorizes drawdown of the Reserve upon a finding by the President that there is a “severe energy supply interruption.” This is deemed by the statute to exist if three conditions are joined: If “(a) an emergency situation exists and there is a significant reduction in supply which is of significant scope and duration; (b) a severe increase in the price of petroleum products has resulted from such emergency situation; and (c) such price increase is likely to cause a major adverse impact on the national economy.”

 Additionally in 1990, allowance was made to release small amounts to make up for limited supply disruptions such as harbor entrance closures, ship groundings and the like. Two releases stand out as violating this principal, both under the Clinton administration, and both in election years. In 1996, 28 million barrels were sold to “balance the budget.” And in 2000, in the two months prior to the election, 30 million barrels were released to alleviate home heating oil shortages in the politically important New England states.

Outside of the legalities, the country and the world will be faced with real shortages if there is a conflict between Israel and Iran. The Straits of Hormuz will be mined and closed by Iran, cutting off a major portion of Persian Gulf oil. It is an easy, cheap and effective retaliatory strategy. If we diminish our supplies now, we will run out sooner. And be weaker.

Risk taking bureaucrats…and Democrats

In the mid 1970s this oxymoron was brought home when my newspaper (the Washington Star) invited two top level oil executives to chat with our business executives and news/editorial staff. After luncheon pleasantries, the oil execs related a story about a lease they had explored in the Gulf of Mexico. Said they paid short of a billion dollars for the lease, and over a billion for survey and drilling costs. But they came up with nothing, “only dry holes,” one explained. They had to abandon the lease.

One of the reporters took the bait. She asked, “What happened to the person who made that decision? Was he fired?” The answer was no, and as a matter of fact he had subsequently received a promotion. The exec went on to explain that all the research data had pointed to oil formations, that they had once contained oil, but over the millennia the oil had escaped. It just wasn’t there when they looked for it.

Then he turned the tables. He asked what would have happened if the government had done the drilling? How many congressional hearings would there have been? Would the bureaucrat who had made that decision been raked over the coals for wasting billions of taxpayers’ money? Government wants only sure bets, but the oil companies are in the risk business. They have costly failures, but they also have successes. It takes risk takers to succeed in the oil business.

Today there are new, but very high financial risk and potentially very high reward technologies to tap our oil shale deposits. If they can be developed, they will dwarf all oil fields ever discovered in the US, and are estimated to contain 800 billion barrels of recoverable oil. A Shell Oil physicist with the unlikely name of Harold Vinegar, has been working for nearly 30 years to find a better way than conventional surface or in situ (underground) retorting. Retorting techniques were wasteful, yielded a liquid that needed further processing before refining and in the case of surface retorting, left the landscape badly scarred.

Vinegar and Shell think they have found a better way. Their method is to heat the shale with electric heating rods to nearly the full depth of the deposit, and when the shale oil begins to flow, pump it out using conventional oil drilling equipment. Initial results in 1981 from a small privately owned test field successfully yielded oil, but initially it was unacceptably “gunky.” By keeping the conversion temperatures low (650º F) and prolonging the heating period (three years) he was able to produce a clear pipeline grade oil. More information on this may be found in the November 1, 2007 issue of Fortune and the 2005 Rand Study: Oil Shale Development in the United States.

Now Shell would like to do this on a larger scale. But they are stymied. Why? Because the Senate Appropriations Committee on a straight party line vote in May, extended the moratorium on shale oil lease development, to let “risk taking” bureaucrats at the Dept. of Interior study it for another year. At some point Democrats must support the economic well being of this country. And it isn’t just a price issue. It is about the security of the US.

Already Hugo Chavez of Venezuela threatened to cut off his 1.2 million barrels per day (roughly 10% of US imports). The majority of Americans now support offshore drilling. Why is it better to outsource our drilling to the Saudis, Libyans or the Indonesians? What does it accomplish? Oil imports adversely affect our balance of payments by $700 billion per year. And much of that goes to less than friendly governments. It’s time to stop being ideologues, and look at the needs of the country.

Wake up Democrats!