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January 31, 2007

Energy Jihad | # | P&E — MaT @ 4:03 pm

by Dmitry Butrin, Natalia Grib, and Petr Yozh

Iran’s Ayatollah Khamenei Surprises Russia with "Gas OPEC" Proposal

Russia spent last year strenuously denying reports that it was participating in the creation of a cartel of gas suppliers to the EU. Now, however, the idea has received an unexpected boost from Iranian leader Ayatollah Ali Khameni, who called on Russia to create a "gas OPEC" at a recent meeting with Russian Security Council secretary Igor Ivanov. Although a cartel would be unprofitable for Gazprom, an energy union cum geopolitical alliance of Russia, Iran, and Algeria does appear to be in the works.

Russian Security Council secretary Igor Ivanov’s recent official visit to Tehran was in many ways the flip side of Russian first deputy prime minister Dmitry Medvedev’s speech at the World Economic Forum in Davos, where the agenda was focused on the political consequences of the increasing clout wielded by oil- and gas-rich countries in the global economy.

In Switzerland the discussion clearly went nowhere, while during Mr. Ivanov’s visit to Tehran, all it took was a few words from Iranian Supreme Leader Ayatollah Ali Khamenei to turn the occasion into a sensation. Commenting on the message sent to him by President Putin and the idea of partnership between Russia and Iran, the ayatollah unexpectedly initiated a discussion of creating a "gas OPEC." "Our two countries, in helping each other, can create an organization based on cooperation in the gas sphere, along the lines of OPEC," the Iranian state news service IRNA quoted Ayatollah Khamenei as saying.

IRNA did not report Mr. Ivanov’s answer, and there is a reason for that. The idea of a "gas OPEC" is explicitly Russia’s, but Russia consistently denies reports that the Kremlin has plans to create a cartel uniting the countries that supply gas to the EU. The most recent denial of the existence of plans for a "gas OPEC" came during Russian Minister of Industry and Energy Viktor Khristenko’s visit to Algiers in January, when Algeria and Russia issued a joint statement saying that they see no point in organizing a gas pricing cartel.

The phrase "gas OPEC" entered the global political lexicon in the wake of a Financial Times article from November 13, 2006 that asserted, with reference to a report compiled by NATO experts, that Russia, Iran, Libya, Qatar, Algeria, and the countries of Central Asia were considering creating a pricing cartel aimed at increasing their revenues by uniting the suppliers of natural gas to the EU and of liquefied natural gas to the global market.

The phrase was first uttered, however, in 2001 by representatives of Iran: during an interview with Kommersant on June 9, 2001, Iranian Ambassador to Russia Mahdi Safari talked openly about the idea as something that Iran was committed to realizing. For its part, Russia has always sworn off the idea. In a response to the article in the Financial Times, a senior representative of the Russian presidential administration huffed, "They [the EU] are simply not in a position to understand the idea of energy security advanced by Russia at the G8 summit in St. Petersburg."

Ayatollah Khamenei understood the idea of a "gas OPEC" in approximately the same terms as the NATO experts, but with one big difference: he embraced it wholeheartedly. "Our two countries can become mutually supportive partners in the spheres of politics, economics, and regional and international questions," said the ayatollah, emphasizing the political rather than the economic character of the idea. According to Khamenei, Iran and Russia together control "more than half" of the world’s gas reserves (in fact, the figure is 42%), meaning that such a partnership makes perfect political sense.

From an economic point of view, a "gas OPEC" would be minimally beneficial for Russia’s main gas exporter, Gazprom. At the present moment Iran supplies practically no gas to the countries of the European Union and to the EU’s neighbors; the only country in the region currently receiving minimal supplies from Iran’s gas network is Turkey. The majority of Gazprom’s supply links with key countries in the EU, including Germany, France, and Italy, are through long-term contracts in which the price of the gas is pegged to the price of oil. Controlling gas prices through a pricing cartel would be effective only if the EU follows through on its threat to limit future long-term contracts.

That is exactly the kind of liberalization in the EU’s energy market that Gazprom has come out strongly against, most recently last Friday, when Gazprom deputy managing director Alexander Medvedev called attacks on the existing system "impermissible." Creating a real gas cartel would be impossible without a shift in the pricing system in the EU market, and Mr. Medvedev explained that it will thus be impossible to organize a "gas OPEC" within the next 15-20 years. Yesterday Gazprom’s press service confirmed that it knew nothing about plans to create a "gas OPEC."

Iran would also be anything but an uncomplicated partner for Gazprom. During the company’s earlier participation in the development of the South Pars gas field, despite having invested heavily in extraction infrastructure, equipment, and technology, Gazprom was denied the access it desired to Iranian gas exports. Clearly, Gazprom still has hopes of gaining access to the export of Iranian energy resources by entering into a partnership with Iran, but for that to happen, Iran would have to amend its laws to give the Russian gas giant the access it has demanded to Iran’s gas export market.

Moreover, Gazprom and Iran are potential competitors. Iran’s potential as a supplier of gas to the EU will develop fully only after the construction of the Nabucco gas pipeline in 2012 – a project that competes with the Russian pipeline project in southern Europe. With regard to the CIS, all of the countries named in the list of those purported to be contemplating participation in a "gas OPEC" project are either potential or actual competitors for Russia in the US, the EU, and Southeast Asia.

However, no competition between Russia and Iran is expected in the gas market before 2012, and a "gas OPEC" could have excellent potential as a political alliance. The first countries that could be convinced to join such an alliance may be Algeria and Turkmenistan, especially since Iran is known to have its eye on Turkmenistan as a potential source of gas (the country currently supplies around 5 billion cubic meters of gas annually to Iran) and Russia buys up the remainder of Turkmenistan’s gas.

In terms of gas supplies to the EU, it might be easier and more profitable for Russia to strike a deal with Algeria, since Gazprom supplies its crude oil to the countries of Eastern, Central, and Northern Europe, while Algeria sells its oil in Southern and Southwestern Europe. Thus, the two suppliers do not compete with each other directly.

In addition, yesterday Iran announced preliminary approval of a deal with the Spanish company YPF Repsol and Shell concerning a $10 billion project for developing the South Pars gas field. Under the terms of the agreement, liquefied natural gas will be supplied to terminals in Europe starting in 2015, which will mean competition for Russian, Norwegian, Libyan, Egyptian, and Algerian liquefied and pipeline gas.

In the political scheme of things, the Iranian ayatollah’s bold announcement plays right into the hands of the Kremlin in its foreign policy scuffles with the EU. At the end of last year relations between Moscow and Brussels cooled noticeably, chiefly because Russia disagreed with many of the points in the European Energy Charter and Poland vetoed the start of talks concerning partnership agreements between Russia and the EU. Since the gas war between Russia and Belarus, the tension has become even more unbearable, and criticism has mounted from European politicians and analysts alarmed by the course Russia is charting in the energy sector. There is no doubt that Europe’s attitude towards Russia on a wide range of topics will become even more cautious in the future. The possible liberalization of the EU’s gas market has the potential to be used to exert pressure on Russia, in which case Russia could hit Europe back with the threat of a gas cartel as a warning not to step too far out of line in its struggle against the westward expansion of Russia’s gas empire.

Though these are all long-term conjectures, today Igor Ivanov will meet with Bandar bin Sultan, the general secretary of the National Security Council of the real OPEC’s leading member, Saudi Arabia. Currently, Saudi Arabia extracts practically no gas for export and does not produce liquefied natural gas, meaning that it too could be a candidate for membership in a "gas OPEC" in the next few years.

The Ten Top Players on the World Gas Market
From Left to Right: Country, Proven Reserves (trillions of cubic meters), Extraction (billions of cubic meters), Deliveries to the EU (billion of cubic meters)

Russia: 47.82, 598.0, 121.9

Iran: 26.74, 87.0, 0

Qatar: 25.78, 43.5, 4.56

Saudi Arabia: 6.90, 69.5, 0

United Arab Emirates: 6.04, 46.6, 0.31

United States: 5.45, 525.7, 0

Nigeria: 5.23, 21.8, 11.81

Algeria: 4.58, 87.8, 55.8

Venezuela: 4.32, 28.9, 0

Iraq: 3.17, 1.75, 0

(2005 data from the BP Statistical Review of World Energy 2006)

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Mexican Cantarell Oil Field in Decline: Prelude to a Larger Crash? | # | P&E — MaT @ 10:44 am

by Tim Iacono

The Wall Street Journal had a frightening story last weekend about the rapidly declining output of Mexico’s giant Cantarell oil field.

Mexico’s Oil Output Cools
Slowing of Major Field May Pressure Prices,U.S. Import Diversity

Daily output at Mexico’s biggest oil field tumbled by half a million barrels last year, according to figures released Friday by the Mexican government. The ongoing decline at the Cantarell field could pressure prices on the global oil market, complicate U.S. efforts to diversify its oil imports away from the Middle East, and threaten Mexico’s financial stability.

The virtual collapse at Cantarell—the world’s second-biggest oil field in terms of output at the start of last year—is unfolding much faster than projections from Mexico’s state-run oil giant Petroleos Mexicanos, or Pemex. Cantarell’s daily output fell to 1.5 million barrels in December compared to 1.99 million barrels in January, according to figures from the Mexican Energy Ministry.

…
Mexico’s troubles at Cantarell mirror the larger problems in the global oil market. Many of the world’s biggest fields are old and face decline, which can be sharp and sudden. Like other big producers, Mexico is struggling to make up the difference because new big fields are in harder-to-reach places like the deep waters of the Gulf of Mexico.

The field’s decline is expected to continue, if not worsen, this year, according to most estimates. That will subtract valuable oil from the world market, which is under pressure from rising demand by growing economies like China and India. It also means less oil headed to the U.S. from Mexico, which has long relied on Mexico as one of its top-three oil suppliers.

"This is bad news for Mexico. The field is declining faster than even the government’s pessimistic scenarios," says David Shields, an oil industry consultant in Mexico City who has been warning about Cantarell’s collapse for the past two years.
…
None of this is welcome news in a country that relies on oil exports for some 37% of government revenue. So far, relatively high oil prices have kept the country from feeling the effects of lower output. But prices could continue a recent drop, adding to Mexico’s woes from a production shortfall. This year’s Mexican budget is based on Pemex’s official production targets as well as a relatively high oil price—about $50 on the world market.

In many older oil fields, companies inject gas to keep the pressure in the wells high and the oil flowing. In the case of Cantarell, Mexico injected vast quantities of nitrogen in the past few years. But the gas can only do so much, and using it means the decline in production can be sudden and sharp. In the case of Cantarell, which lies in the shallow waters of the Gulf, experts say that seawater is fast invading the wells.

Some would have you believe that the same thing is happening to the giant oil wells in Saudi Arabia and Kuwait.

Not BusinessWeek apparently. According to this report, last year’s high oil prices were an anomaly, not soon to be repeated. Everyone can relax and go back to doing what they’ve been doing – the speculators are long gone and there’s no reason for them to return.

Oil: It’s Back To Supply And Demand
The speculators who bid up the market last year are in retreat. So much for the new reality

Last July, when crude oil was surging toward $80 a barrel, the talk of a new reality in the energy markets hit a fever pitch. Some said China and India would so voraciously suck up supplies that we might never see $50 a barrel again. Others noted that the nations that make up OPEC had finally figured out how to put the screws to the West for good, emboldening Iran and Venezuela to send prices higher with a mere rattle of their sabers. The "multi-decade supertrend" mantra echoed through the canyons of Wall Street.

Then oil crashed, touching $50 in January, 35% off its peak. Since July, in fact, crude has underperformed the stock market by 48 percentage points. All this while China’s oil-thirsty economy remains white-hot, Iran is barring nuclear inspectors, Venezuela is booting foreign oil investors, and Russia is putting the energy squeeze on neighbors.

So what happened? Call it a return to normalcy. The speculators and latecomers who bought into the new-paradigm argument suddenly turned tail—and traditional drivers of the oil market reemerged in force.
…
For all the fast action, O’Grady’s statistical research finds that the recent commodities bull market was, contrary to conventional wisdom, very much cyclical—and in fact was a tiny blip within a 100-year trend of falling commodity prices (adjusted for inflation). "The idea that this commodities run would be permanent kept resonating with investors," he says, "until it didn’t."
…
It’s anyone’s guess where oil prices will go from here. Not that this is stopping the supply-demand school from enjoying a bit of vindication. "There were times when I felt like the class clown," says Benchmark Co. oil and gas analyst Mark Gilman, of the way his skepticism was received when oil hit $78. "All of a sudden my thoughts aren’t so funny.

It’s funny how you can write an entire article about the supply /demand fundamentals of oil without saying a word about daily production versus daily consumption.

Stockpiles are important, but only for a few months – something that the world is likely to learn in the not-too-distant future.

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Time To Buy Oil? | # | P&E — MaT @ 10:39 am

by Todd Sullivan

In order to have this discussion, we have to do one thing first….. Stop calling it oil. As soon as the word is mentioned, people’s emotions take over and rational analysis stops. Emotion is the enemy of any investor. When people either sell due to fear or make buying decisions out of greed, the results are seldom stellar. This is exacerbated when the discussion turns to oil. The conversation will inevitably turn from oil fundamentals to conspiracy theories about Bush keeping the price of oil high to help his "oil buddies," the oil companies manipulating the price of oil for profits, the Saudi’s funding terrorists with oil profits, Iran building "the bomb" with oil money, the drilling, refining and use of oil is ruining the environment (the irony here is that the oil industry argues that corn-based ethanol is more harmful to the environment, but that’s another post) and the list goes on. In order to have a conversation that allows us to get anywhere, we need to strip away the fear.

This will allow us to see "what is" with oil and come to decision based on value. We can then add the fear back in to see its effect on the market. In the oil markets, fear has the inverse relationship that it does in the stock market. When fear in stocks drives their prices down; fear in the oil markets drives its price up. So, let us refer to oil as wood blocks [WB]. There is a worldwide market for WB. As a matter of fact, people cannot live without them. They use it everyday in their life and there is no widespread substitute for it. Now, the supply of wood for the blocks is finite, it is very expensive to get and the easy access to it is diminishing, causing only the more expensive wood to be available. Once we get the wood, we have to process it into blocks. There are only so many centers in the U.S. to process the wood into blocks, so we have a finite capacity to supply the finished products despite growing demand (there are no plans to expand this capacity anytime soon and as a matter of fact, it has not been expanded in over 30 years). As developing countries grow, their demand for WB is growing exponentially along with them. This puts more strain on the supply – demand equation that is currently just about equal (meaning our supply is about equal to demand).

Now as we look at the market for wood and its blocks, we really cannot see downside price risk for it. Right now the market is at equilibrium and the supply – demand equation tilts toward demand overcoming supply, which will lead to a price increase. When you have growing demand and a supply that is virtually maxed out you must have a price increase for the product, whatever it is.

Back to reality. Let’s talk about oil. The fundamentals of oil dictate a price increase in the future. But, if we want in invest in oil, we must do so at a time when the fear factor of it has moderated and the "fear premium" is mitigated in its price. In the spring of 2006 oil prices surged past $70 a barrel. The fears that drove it was a hurricane forecast that predicted a hurricane season greater than the 2005 one, which crippled refining and drilling capacity in the U.S., tensions with Iran (the second largest OPEC producer) were escalating and fears grew that they would restrict oil from the market, and the U.S. was rapidly filling its strategic oil reserves (adding to demand) after they were irresponsibly depleted in the 90’s (this artificially lowered the price of oil in the 90’s as it dumped an excess supply on the market).

What has happened since then? The hurricane season was not only not as bad as 2005, but was one of the most benign in history (betters should get these folks’ Super Bowl prediction and bet the opposite). Iran is still making threats to destroy the western world and Israel, but it is doubtful it actually has the ability to so. This has caused the world to just stop listening to President Ahmadinejad’s rantings. If I tell you the first day of school I am going to bring a stick in tomorrow and beat you with it, you would be scared. After months of making these threats and failing to produce the stick or even try to beat you, your reaction would be to dismiss me as a nut. It is no different with world leaders (It reminds me of the old SNL skit about "Generalissimo Fransisco Franco is still dead" substitute "President Ahmadinejad’s today again promised to destroy the world").

Add to this the realization that Iran cannot restrict its oil from the market. Its economy relies wholly on oil revenues and even with oil at$70,it is struggling. While a prolific producer of oil, Iran has no ability to refine it into anything. It relies on the rest of the world to do it and ship it back to them. Result? When it comes to oil, with our reserves now filled at 700 million barrels, up 160 million barrels from when George Bush took office (he has asked congress to double this capacity), they need us more than we need them when it comes to oil.

How is that, you ask? Iran produces about 14% of the world’s oil. We currently have 57 days of total U.S. imports in our reserves. If we import from Iran at same percentage as they produce for the world markets, what would their elimination of oil exports do to our reserves and how long could we go without? I will use this 14% for the comparison, the actual amount may be more or less but there would be vast debate on it were I to "assume" a number. If we released oil from the strategic reserve to eliminate the effect of Iran’s stoppage, in 406 days the reserves would be empty. Iran’s economy would have collapsed well before then. Translation? This threat is a non issue. Would it be easy and pleasant? No, but they have far more to lose in this scenario. We would survive this event; they would not.

If you want to invest in oil, I would argue it is fairly priced now. We have had a very mild winter, the Iran issue has subsided, the reserve is filled and hurricane season is six months away. We are in a lull in the "fear factor" for oil. The price has cooperated and fallen to around $50 a barrel and bounced around there for a while now. Even the announcements from OPEC that they will cut production has only lead to small price increases. What does this tell us? The supply demand equation is equal – the diminished supply from OPEC is being offset by the diminished demand from the mild winter. $50 seems to be the "fair value" of oil.

So, how to get in? You could buy stock in one of the oil majors, Exxon (XOM), Chevron (CVX) or BP (BP) but I would advise against it now. Why? One word, Democrats. They are in charge of congress and love to vilify oil companies. They will take aim at them and try to grab their profits where they can. Until this issue is settled I would avoid these stocks. It may amount to nothing, but why risk it? If you want to go the oil route go with USO, the US Oil Fund ETF. It tracks the cost of a barrel of oil.

Caution: Oil is very volatile, especially when supply and demand are equal. Picture a piano wire pulled tight: if you hit the wire you get a sound, and the harder you hit it the louder the sound. That sound is the price movement of oil. Impacts (news events) will make the price jump either way, at times dramatically . You must set your time frame and parameters for the investment. If you are long term (years), you are really only looking at supply and demand, as long as it does not change from its current long term trend, the price must go up. There will be daily or hourly prognostications that will make you doubt your choice. Just stay focused and ignore the noise.

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Why Venezuela and The U.S. Need Each Other | # | P&E — MaT @ 10:35 am

by Mark Turner
In light of the ongoing bad blood between Venezuela’s socialist President Chavez and the USA, a rather plain fact is overlooked: when it comes down to the economic reality of both countries, the USA needs Hugo Chavez, and Hugo Chavez needs the USA. This fact is easily passed over when Chavez makes his frequent headlines attacking the American way. There is little doubt that Chavez’s "Socialist Revolution" is based on cold, hard capitalist cash. The state oil company, Petróleos de Venezuela S.A. [PdVSA], reported revenues of U$75Bn in 2006, a simply enormous amount of money for a developing nation with a population of around 28 million. Oil exports supply Venezuela with 80% of foreign revenues and, as 60% of all oil sales are directly to the USA, the role of the US purchases in fueling Venezuela’s socialist pretentions is clear. Meanwhile, compared to the trade bans the White House uses against Cuba, the US administration’s stance on Venezuela seems strangely muted. It would not be difficult for the US President to find an excuse for a fight, as Chavez has used a myriad of insults aimed at himself, his entourage and his country. When Chavez told the USA to "Go to hell" in a recent live radio broadcast, the US public were suitably outraged by the reports. But White House spokesman Sean McCormack replied with:

"We are ready to have a positive relationship with the Government of Venezuela and work with them on issues of mutual interest and concern".

Hardly the stuff that won the West. The lack of "serious" response to Chavez’s barbs is a roaring silence. However, we note that Bush, Cheney and company come from an oil background and are well-known for their knowledge of the business. Do they refrain from responding to Chavez’s constant and somewhat juvenile comments because of this? Comments that could, given a more retaliatory stance from the USA, blow up into a more serious international incident and (heaven forbid) affect the supply of black gold reaching the US?

So stands the status quo, but are there any scenarios that might change this oil-based relationship in the future? Firstly, Venezuela might seek new clients for its oil and, in fact, it has already made overtures on this very subject. During his state visit to China in August 2006, Chavez proposed upping Sino-Venezuelan oil shipments eightfold from the current modest 150,000bpd to 1.2mbpd, a number which incidentally closely matches his current US shipments.

China would be the obvious alternative market for Venezuelan heavy crude, and perhaps Chavez dreamed of dramatic breakthroughs. All fine in theory, but in practice it would be rather difficult and possibly politically unsuitable for China. It would certainly entail China investing time and money in new refineries. Equally, it may not be in China’s best interest to be seen "stealing" oil supplies away from its main trading partner. The Chinese have since commented nothing on the Chavez proposal, apparently letting the matter drop. Realpolitik, or perhaps in this case realeconomik, would seem to have stopped the matter.

A second hypothesis to consider would a be a substantial drop in world oil prices. PdVSA figures suggest that cost price for crude oil production in Venezuela averages around U$28bbl. Thus any drop to below $40bbl for crude oil would severely dent the economic power of the Chavez administration, and therefore stall his grand plans. Short term adjustments in the price of oil [POO] have recently seen the benchmark WTI crude oil price under $50 a barrel, but the rebound was sharp and quick to $55. This is not the place for a full rundown of the world oil market, but we would concur with the market view that $40 oil is now very much confined to history.

Thirdly, it would seem from previous attempts that any "dirty campaign" against Chavez would be doomed to failure. Corruption is traditionally rife in Venezuelan politics and big business, but Chavez has created an impeccable personal image that plays an integral part of his growing personality cult within Venezuela. Subtle and not-so-subtle "news" reports of corruption in the Presidential office, support for Colombian FARC rebels, military build-ups that threaten neighbors and arms trafficking over the last few years have not damaged Chavez in the slightest. And, as Luis Vincete Leon, head of the independent Caracas polling firm Datanalisis told Time magazine recently, "every time the US tries to demonize Chavez, it makes him larger than he really is".

Finally, and more radically, a Chavez assassination attempt is worth closer consideration. If Chavez were "removed", Venezuelan-exposed international business would breathe a collective sigh of relief…or would they? We feel that the window of opportunity for this extreme measure passed with the outcome of the December 2006 presidential election. Chavez collected 63% of the vote and now has an indisputable popular mandate. His party now fully controls the Venezuelan congress and has the teeth to retaliate even without its charismatic leader. Another downside to an assassination attempt would be the possibility that, successful or botched, the smoking gun could be traced back to a US organization such as the CIA. This might provoke Venezuela to cut oil shipments and cause an almighty supply squeeze in the lower 48 states. The resulting price-hike would not be the kind of thing that any US President would like to be remembered for.

We therefore discard changes to the present situation and envisage that the status quo will remain as such for the forseeable future. Big oil will continue to make money, the social revolution will move forward and Chavez will continue to make headlines. He does seem to enjoy the controversy he creates, but serious money is long-used to his bombastic style and can separate the wheat from the rhetorical chaff, the business world often quietly reassured after a Chavez speech with noises from more responsible speakers.

For example, on 25th January, Rodrigo Cabezas, the Venezuelan minister of finance, spoke about the Venezuelan telephone and electricity nationalizations, so widely publicized thanks to the Chavez "style". In relation to these nationalizations he said (in translation):

"Other national and international companies would not be affected by similar measures, as they are a focus of capital that we want to keep on producing, keep employing people and not to be paralyzed. We want people to rest assured that what we are doing is for the benefit of all society".

This kind of statement makes no headlines, but makes perfect sense to Chavez-watchers. Another under-reported development this week was when Venezuela decided to accept tenders for undeveloped oil fields in the Orinoco basin. Despite all that has been reported about the nationalization of the Venezuelan oil business, 34 international companies are signed up to compete in the tender process, demonstrating the ongoing popularity that the region has for big oil.

To conclude, we believe that Venezuelan political risk is currently overblown, especially in the oil sector. The future of Chavez’s social changes would seem to be targetted at internal structures and will have a low impact on international concerns now operating in Venezuela. As investment analysts, we would look to undervalued oil companies operating in Venezuela as potential investment opportunities. Petrofalcon [TSE:PFC] has seen its share price slide to all time lows in recent days despite having solid fundamentals and a good operating relationship with the Venezuelan state. It is one example of a the good opportunities available for the investor who can look beyond the daily headlines for bargains that will pay off in the medium to long-term.

Another that catches the eye is Harvest Natural Resources (HNR), currently at a discount as it goes through the birthing pains of creating a joint venture with the Venezuelan state. We would also reiterate our buy recommendations on mining companies Crystallex International (KRY) and Gold Reserve Inc (GRZ), as the projects will not be affected by current nationalization plans and have the active support of the Venezuelan government.

However, isn’t the USA the same country that Chavez unendingly attacks as the "Evil Empire"? Would it not be easy enough for the USA to pull the rug from under Chavez’s feet? Stop buying his oil, and Venezuela’s GDP would drop by around 40% in one fell swoop; enough to stop any mad leader firmly in its tracks. No more revolution, no more "Bush The Devil" chants at the United Nations, and South America’s oil reserves will be back under a stable government. Also, what of Chavez and his apparent hypocritical stance? Surely he shouldn’t have his most hated enemy as best customer? If the man has any scruples he would sell his oil to any other country bar the States.

The plain vanilla fact-of-the-matter is that Venezuela has no other market for the greater part of its oil. Heavy crude is special stuff and is not for the average refinery. The majority of Venezuela’s oil can only be processed in the specialist refineries run by Hovensa (a joint venture between US refiners Hess Corp and PdVSA) located in the US Virgin islands, amongst other places. Meanwhile, the USA readily accepts the Venezuelan heavy crude because, without it, the heavy crude refineries would close. There is no other supplier of this special crude available, so the US would lose around 11% of its total domestic oil products supply in one fell swoop. The result is of the 2.15mbpd (million barrels per day) Venezuela pumps presently, 1.35mbpd has to go to the USA. Simply put, without Venezuela, the US refineries will close and the country will have an oil supply crisis. Meanwhile without the USA, Venezuela will have no market for the lion’s share of its crude. Looking more closely at Venezuelan oil export figures, we see that US sales have dropped from 1.54mbpd to the present 1.35mbpd in the past year. This present level is seen by analysts as the minimum amount that Venezuela can send to the USA. Apparently Venezuela has already pared their US exposure to the bone and has no more room for maneuver; from here it’s USA or bust. Like bickering Siamese twins, they might hate the sight of each other but they are still joined at the hip.

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Oil prices rise, natural gas jumps | # | P&E — MaT @ 12:50 am

Oil prices rose more than US$2 to above US$56 a barrel Tuesday on OPEC production cut concerns, while natural gas soared more than 10 percent on expectations of more Arctic weather in the Midwest.

The Wall Street Journal reported Tuesday that Saudi Arabia has told its customers it will cut supply by a further 158,000 barrels a day, effective Feb. 1. "After these cuts, our oil production will have declined by about 1 million barrels a day since last summer," a senior official said, according to the newspaper.

The markets responded by sending prices for light, sweet crude for March delivery up $2.40 to $56.41 a barrel in afternoon trading on the New York Mercantile Exchange. March Brent crude at London’s ICE Futures exchange jumped $2.21 to $55.89 a barrel.

"It seems a cartel has a right to change its mind," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. "Yesterday, Saudi Arabia says it’s happy with $50-a-barrel oil, then today there’s a report on the Saudi’s cut in production. It’s a day of contradictions."

On Monday, prices fell by more than $1 to settle at $54.01 barrel after a Saudi official reiterated that they don’t favor further production cuts and are comfortable with prices at current levels, according to a Dow Jones newswire report. The Saudi Arabia ambassador to the U.S., Turki al Faisal Saudi, was speaking at a National U.S.-Arab Chamber of Commerce event.

The Organization of Petroleum Exporting Countries said it would begin cutting production by 1.2 million barrels a day in November but some traders speculate that some cartel members were not complying. The group said late last year it planned to cut production an additional 500,000 barrels a day starting Feb. 1. Saudi Arabia is OPEC’s biggest producer.

Meanwhile, continued winter weather across the U.S. helped to support crude oil prices and drive up prices for natural gas.

"Petroleum traders are taking their cues from the natural gas market, which is up on cold weather patterns," said Tim Evans, energy analyst at Citigroup Global Markets.

Natural gas futures jumped after a seven-day forecast for the Midwest predicted temperatures dipping below zero, Flynn said. The Midwest is considered the heart of the natural gas market. Natural gas futures rose more than 70 cents to $7.642 per 1,000 cubic feet on the NYMEX.

Heating oil also rose 6.6 cents to $1.6150 a gallon. Colder-than-normal temperatures are expected through mid-February in the Northeast, which is responsible for 80 percent of the country’s heating oil consumption. The markets are also looking ahead to the weekly report on U.S. inventories on Wednesday.

U.S. crude imports are expected to have risen by 1.2 million barrels in the week ended Jan. 26, according to a survey of analysts by Dow Jones Newswires. Gasoline stockpiles are expected to gain 1.6 million barrels, while distillate stockpiles, which include heating oil and diesel, are seen falling by 2.6 million barrels.

In other NYMEX trading, gasoline futures rose nearly 6 cents to $1.5000 a gallon.

CANADA.COM

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Big business says it has got the message and will help the world fight climate change. | # | P&E — MaT @ 12:47 am

by Tim Weber (BBC News)

Sounds good, but is it for real?

Davos already had a green tinge in the past few years, with earnest discussions of environmental issues and polite requests that participants should make up for the carbon emissions of their journey to come here.

In the past this was mainly veneer. This year it feels different.

I don’t mean the fridges in the press centre that carry the Greenpeace seal of approval. But when hundreds of participants voted on what the world’s most pressing issues were, a large majority said "climate change", and also found that the world was not ready to tackle it.

Newfound enthusiasm

It’s difficult to say what caused the change.
German supermodel Claudia Schiffer says that seeing Al Gore’s film on climate change An Inconvenient Truth made her support the LOVE campaign, which hopes to do for climate change what Bono’s Join Red initiative does for Aids in Africa.

As it happens, there are plenty of chief executives who also point to the former vice president’s film as a turning point.

Others are more sober, with German Chancellor Angela Merkel highlighting in her speech the Stern report on the economic impact of climate change, which was commissioned by the UK government.

"It’s fascinating how green issues such as climate change have gone mainstream in the past six month," says Richard Punt, a managing partner at consulting firm Deloitte.

But he also has a word of caution: "I don’t know whether the discussion here in Davos is actually moving forward or whether it is stagnating." Regardless, "there is a spirit of enthusiasm across the business community, a sea change on green issues," says Daniel Esty, director of the Yale Center for Environmental Law and Policy. But enthusiasm alone does not solve the problem, and the bosses know it.

"It is probably too late to counter climate change," say a number of corporate leaders.

With climate change inevitable, we have three options, they say: mitigate, adapt, or suffer. When an environmental expert argues that we will have to face up to all three options, but that it is up to us to determine the mix, many heads in the room nod in agreement.

Searching for solutions
The World Economic Forum has always been about free market economics. But most power brokers seem to agree with Dan Esty, who says that "we have environment as a market failure". Utz Claassen runs German power company Energy Baden-Wuerttemberg. He is passionate about climate change.

"Can markets save the planet? No!," he says. "Can governments save it? Definitely not!"

Only if governments put regulations and clear targets in place, but leave it to the markets to set prices and allocate resources, can the world tackle climate change.

And what if we fail? Mr Claassen is dead serious: "Climate change will kill us all."
Even politicians agree. UK environment minister David Miliband calls global warming a market failure and a "political failure".
Industry, he says, needs clear signals from government, for example a reassurance that there must and will be a carbon market in place once the current arrangements run out in 2012.

And he tries to talk himself out of a job. This problem can not be solved by environment ministers, he says, it has to be done at the level of prime ministers and finance ministers.

Elephants in the room
Better regulation, better markets, and better technology – all have to combine to ensure that resources are used and deployed correctly, says Mr Esty. There is a reason, he says, why General Electric is betting the company on the assumption that environmental opportunities will create a billion dollar market.

But there is not much time, warns Frances Beinecke, president of the Natural Resources Defense Council in the US.

Will we put markets in place "in time to ensure the integrity of the planet"? she asks, pointing to the world’s surging output of carbon, with a new coal-fired plant coming on to the grid every three days. And then there are the two big elephants in the room, India and China. They have no emission caps, and especially US politicians argue that they can’t sell a climate deal to their voters if it does not include clear environmental targets for these two rapidly developing nations.

But even if they come on board, it may not be enough.
We have to solve poverty first, warns a social entrepreneur from Brazil, because if we don’t get the buy-in of the billion people who live in poverty, the fight against climate change will never be a success.

BBC NEWS

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Iran-Switzerland contract gas export | # | P&E — MaT @ 12:44 am

ments are contracted," informed Iran’s national gas export company director, Nasrollah Seifi while saying that Iran-Swiss gas transfer would take place through the Turkey pipeline.

He went on to state that Austrian and Syrian companies also called for Iran’s gas export contract. When asked by an ISNA reporter that if there was a possibility that Turkey would export Iran’s gas to Israel, Seifi responded that Iran would make sure that the entire gas export amount to Turkey would be consumed only in that country.

"Also Iran’s export is much lesser than what is estimated in the Iran-Turkey contract. For example, this year 9 billion cubic meters should be transferred to Turkey while the real amount transferred is something about 7 billion cubic meters and sometimes as Turkey reports, it downs to about 5 billion," he added.

He also noted the 10 billion cubic meters Iran-Turkey gas export and the 14 billion cubic meters Turkmenistan-Iran gas import.

"We’ve got an annual record of 4 billion cubic meters gas import. We predict that with the initiation of Iran-Armenia 0.5-3 billion cubic meters gas export, Iran’s export and import become equally balanced," he concluded.

CAUCAZ

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