The Power and the Money

Dubai bailout, nothing to see

  No, really.  Here’s the opinion of a Saudi Arabian banker on the Dubai default, dated November 27th:  “We believe that Abu Dhabi will come to the rescue… but like all rescues it would have a price. In that case it may well be first of all a political price.” Why did they believe that Abu Dhabi would rescue it’s neighbor?  Simple:  ADIA, Abu Dhabi’s sovereign wealth fund, has enough assets that if it seemed like bailing out Dubai world might preserve market values, then ADIA had enough of a stake in those markets to make the bailout a paying proposition.  Saudi did too, but Abu Dhabi, unlike Saudi, could more easily extract political gains in addition to the economic returns from a bailout.  

Thus, the bailout.  Stocks still seem to have reacted well, despite its wholly predictable nature.  Ni modo.

Doug in Congo, first days

   My good friend Doug Muir is in Congo, and as usual he has some interesting things to say.  So I’ll post some links below.  The fact that it never ever ever occurs to Doug to do likewise on either of the blogs that he regularly posts on, regarding either this blog or serious academic work, is not relevant.  

Here is a brief discussion of Congo’s bizarre borders, or at least the poor country’s lack of an Atlantic coast.  Congo is effectively land-locked, what with the eponymous river being impassable in its lower reaches.  I am surprised to hear that the railroad from Mabadi still works at all.  Doug tells you why the border was drawn so that Congo cuts the Cabinda enclave off from the rest of Angola, and how this weird geography sparked a long secessionist battle against Luanda. 

The unmentioned wrinkle is that Cabinda rests on a sea of oil, first discovered in 1962, late in the colonial era.  (It says something about the Portuguese desire to get the hell out of Africa that they didn’t set up Cabinda as a separate neocolonial enclave; it’s what Charles de Gaulle would have done.)   Cabinda’s Block Zero produces about 22% of the country’s production.  Block 14 produces another 3%, but it’s production is set to rise from 55,000 bdp to 340,000 by 2010.  Onshore exploration in the portion of Cabinda labeled “CN” on the map is underway. 

Currently the provincial government gets 10% of the oil revenues from its territory, which has done a lot to en ... uh ... lower the intensity of the insurgency.  Or at least get it down to a level where government ministers can credibly declare an end to the organized rebellion.  A Chinese company is supposedly developing a highway-bridge combo that will provide a direct link over Congo to the rest of Angola; I have my doubts, but it will be cool if it gets built.  (Note:  the article at the other end of the link was paid for by the government of Angola; it is not a real news report.) 

Meanwhile, here and here are some of Doug’s early impressions of Kinshasa; the place seems to make Tegucigalpa seem lively, Caracas seem safe, Maputo feel orderly, and Jalalabad seem ... well, it is probably better than Jalalabad.  Maybe.  That secret police story creeps me out, more so since they don’t seem to be a very effective secret police at creating a, you know, police state.  I eagerly await more reports.  Even if the jerk never bothers to link to me.

Above the clouds, or Venezuela’s electricity crisis

   No, it’s pretty clearly the flu.  I’m completely laid up.  Ugh.  Misery, compounded by the Broncos piling up 16-0 lead.  Yes, I’m a Patriots fan, in my one sporting concession to my new home town.  But I retain a little bit of love of for the Giants and Jets.  Not being returned so far.  Still, hearing that series of curses from the Bronco’s coach was awesome.

But Stephen Rogers wants to know about Venezuelan electricity, so I dig around to find out about Venezuelan electricity.  Why is an energy-rich country experiencing periodic blackouts?  I mean, there are a lot of things about the Bolivarian Republic which are in cloud-cuckoo land, not least the place where I was in the above photo.  But generating power should not be one of them, should it?

The immediate reason for the shortages is:  a really bad drought this year.  Venezuela, sensibly, does not burn exportable hydrocarbons for electricity.  The country has been slow in exploiting its natural gas resources, but given its immense hydro capacity, that is far from a disaster.  (Venezuela’s natural gas reserves are “associated,” which means that they require larger up-front investments to extract.)  In fact, the country has ramped up an almost-astounding amount of hydropower in recent years. 

Unfortunately, this year the rains have almost dried up.  (Ecuador has also been hit.)  This has caused hydro production to dip on the national level ... but Guayana, the big industrial province, only has one 15 megawatt diesel generator at Puerto Ayacucho as a backup. 

 

(Data comes from Venezuela's system operator, called Opsis.) 

That’s a problem, but it wouldn’t be a huge problem if it weren’t for the fact that Venezuela's grid is in worse shape than America’s.  In 2006, Venezuelan transmission and distribution losses ran 22%, against 7% in the United States.  That’s a crappy grid.  With a crappy grid, it is not easy to get electricity from where it is to where it is needed when the baseload capacity declines.  Blackouts result.  In October, Opsis carried out 48 planned outages and suffered 66 unplanned ones, even with all the diesel and gas peakers run way above their normal capacity. 

In fact, there is a second constraint on the grid.  Venezuela has managed to produce a lot more thermal electricity by running its thermal peakers at their maximum for more time ... but what it cannot do is get them to produce more power than their rated maximum at any given moment.  According to Opsis, peak demand is running 7.0% higher this year than in 2008, which was up 5.1% on 2007.  Overall load factors are down, but on those days when power spikes, there is nothing to be done.  Especially in Guayana.

Of course, one has to ask:  if Venezuela has succeeded in its heroic efforts to increase hydro capacity, why did demand outstrip supply this year?  Well, that’s easy to answer ... the government froze electricity rates in 2002.  Given the awesome scale of economic growth since then, and the even more awesome scale of consumption growth, and galloping inflation, what would you expect to happen?  Exactly. 

A lot of very poor people bought lamps and satellite dishes, a lot of slightly less poor people bought refridgerators and air conditioners, a lot of not-really-poor people got dishwashers and giant plasma screens, and a lot of not-poor-at-all people stopped caring and began to run their air conditioners with the balcony doors open.  If you aren’t going to ration by price, you've got to ration by other means, blackouts being one.  After all, in 2006, Chile was hit by a perfect storm when Argentina cut off the gas, a drought shellacked the dams, and oil prices spiked.  Was a lousy year for consumers and a lousier year for energy-company shareholders, but there were no blackouts. 

In short:

(1) Investment in generation has been just short of heroic.  ¡Viva la revolución Bolivariana!

(2) Investment in the not-as-sexy business of getting the stuff from where it’s generated to where it’s consumed has not been quite as heroic.  In fact, it’s been bloody awful.  ¡Malditos chavistas!

(3) Demand has quite deliberately been allowed, nay encouraged, to explode. 

Problems (2) and (3) were eventually going to outrun advantage (1).  This happened to be the year.

The government faces three long-term choices.  First, direct more-and-more-and-more investment into generation, first hydropower, then CCGT, maybe even nuclear.  Of course, that means burning associated gas instead of exporting it to (say) Trinidad’s industrial sector.  It also means diverting limited resources away from other things that might have much larger economic or political payoffs.  And it would force the government to have to show a level of execution that it hasn’t quite demonstrated, massive investment notwithstanding.

Second, cut demand.  Which means raising rates.  Won’t that be popular!

Third, get used to blackouts.  Hey, the Philippines lived with ‘em for a very long time, so have many other countries.  In fact, if Corpoelec can get good enough at directing where the power will go out, selective outages could be a win-win for the Socialist Party. 

Stephen, that answer your question?

End it, don’t MEND it

  So it appears as though the Nigerian government may have finally negotiated an end to the MEND rebellion.  MEND stands for Movement for the Emancipation of the Niger river Delta, and it has caused both the Nigerian government and the world oil industry major headaches over the past decade.  This success produced a lot of breathless hyperventilating about the unstoppable postimperial chaos overtaking the world ... only a matter of time before they blow up the Lincoln Tunnel!  Or something. 

 
The Yorkshire Ranter (who sometimes comments as Alex on this blog) summed it up pretty well.  MEND was not an amorphous group interested only in chaos, a sort of budget version of SPECTRE.  John Robb runs a website called Global Guerrillas, which postulates that the future lies with such unstoppable nihilists, who will use what he calls systempunkts to bring down our complicated economic systems.  (Calling Ashton Kutcher!)  Posts like this one assumed that MEND’s main goal, like SPECTRE, is chaos.(His math, I’ll add, is pretty fuzzy.  1.4 billion barrels disrupted?  Huh?  The increase in the oil price engendered by MEND attacks was a loss?  Wha?  The money was, what, burnt?)   

Rather, MEND in fact had specific goals that it wanted to accomplish and a specific set of tools to accomplish them.  Once the Nigerian government realized this, and got its act together sufficiently to deploy a rational set of carrots and sticks, the rebellion ended.  Now, the Nigerian government needs to follow through on its promises ... but MEND and the like seem to be standard guerrillas.  Inasmuch as they slid into criminality, they were standard criminals. 

Maybe I’m too much of a small-c conservative, or maybe I’ve just seen the movie before with good old General Manuel Peláez, who wrote the playbook later followed by Jomo Gbomo et al.  (God, that Wikipedia article is terrible.  Ni modo.)  But the Yorkshire Ranter is neither, and he saw through it. 

Which bring me to a question.  Why the resonance of all the “chaos is upon is!” mongering, when that is pretty clearly not the case?  Brazilian drug gangs notwithstanding.

Uranium supply elasticity

  A long time ago, a commentator asked for figures on the supply elasticity of uranium.  He had read that a doubling of the price of uranium would lead to an increase in usuable supplies (of, say, yellowcake) large enough to support a millenium of consumption.   

Is that true?  Well, I now have the supply elasticity figures, courtesy of page 15 of the Uranium 2005:  Resources, production, and demand report put out by the OECD and IAEA.

World supply (millions of tons)	World price (U.S. dollars)
1,947	$ 40
2,643	$ 80
3,297	$ 130

Annual production ran about 104 million tons in 2006.  Consumption ran about 160 million tons, the difference met by a combination of reprocessed civilian nuclear fuel, old Russian warheads (which now provide about 10 percent of America’s electricity consumption), and the running-down of massive Cold War uranium stockpiles.  In other words, an increase in prices from the $40 actually prevailing in 2005 (more or less) to the $135 they peaked at in 2007 (more or less) would increase the commercially-available supply of uranium from 19 years of production to 32.

Of course, the numbers are meaningless.  By 2007, the same source (also known as the OECD Red Book) estimated the size of world’s economically-extractable reserves given a price of $130 to be 5,469 million tons, a substantial jump on the 2005 figure.  The reason?  Huge new discoveries in Australia (which accounted for 23% of the growth in world reserves), Russia (19%), Kazakhstan (14%), South Africa (8%), and Brazil (6%).  Roughly equal-sized discoveries in Niger, Namibia, and Canada made up two-thirds of the rest.   

In fact, considering as there is no spot market for uranium, the price number is almost as meaningless as the quantity.  Different consumers can pay radically different prices for the input, depending on their location and the contracts they have with their supplies.  In the U.S., for example, the average price agreed to under short-term contracts was $94 in 2007, whereas the average price paid under long-term contracts that same year was only $25.  In fact, given all the contingency clauses in the short-term contracts, the actual price paid for delivered uranium was only $51.* 

It is a very strange market.  The bottom line is even though the supply is nowhere near as elastic as has been claimed, the world is unlikely to run out of uranium any time soon. 

P.S.  The nuclear material portrayed in the photograph is fake.  The big black blob on the right is supposed to represent vitrified high-grade nuclear waste.  If I was actually standing that near to the stuff, I’d’ve received a fatal dose in about 15 minutes.

*All figures come from p. 6 of Areva and the Nuclear Renaissance, by yours truly and Forest Reinhardt.

Is the madre patria scamming the Républica Bolivariana? Probably not.

  Over at Caracas Chronicles, they’re perplexed by a deal just signed to build a combined-cycle gas turbine power plant in Cumaná, Venezuela.  The Spanish contractors, Iberdrola and Elecnor, want to charge €1.45 billion to build two 500-MW plants.  The cronologistas caraqueños have done some digging, and found that €1,450 per megawatt is a lot to charge for a CCGT installation.  The closest was a €1,225/megawatt project in Algeria.  The highest that I knew of before they started investigating was a UAE project that came in around €890. 

They conclude corruption.  Are they correct?

Well … maybe.  But to be fair, I suspect not.

Venezuela, you see, maintains exchange controls.  Official transactions need to be made at the approved exchange rate.  On the one hand, this shouldn’t bother the contractors all that much:  they’re getting paid in euros, and the price of imported equipment is the price of imported equipment regardless of the denomination.  The problem, however, is that the relative price of all of their domestically-sourced inputs will be much higher.

Think of it this way.  Imagine you imported €1000 worth of machinery to Venezuela in 2004, after paying Venezuelan tariffs (around 20 percent) and taxes.  In that same year, a manufacturing worker cost €7,388 to employ for a year at the official exchange rate.  You could buy a worker-year for 7 units of machinery.  By the middle of 2009, after several years of high inflation in Venezuela, that same worker cost €12,720 to employ — a worker-year now cost you the equivalent of 13 units of machinery.  Unless you figured out a way to use half as much labor as you did in 2004, your labor costs (in euros) have just doubled.  (All data comes from the Banco Central de Venezuela.)

In fact, the same problem applies for all domestic inputs.  According to the Venezuela central bank, the bolívar cost of construction materials (including taxes) rose 230% between 2004 and the middle of 2009, while the official exchange rate remained the same.  That’s going to further drive up your costs.  

If it turns out that the Bolivarian Republic has agreed to let the contractors use the parallel exchange rate to purchase bolívares, then this analysis goes out the window.  But if the contractors have to use the same exchange rate as everyone else when buying local inputs, then the price that they are charging for the plant seems entirely reasonable ... even without taking into account the political and economic risk.  (Will PDVSA pay everything up-front?  Will inflation in Venezuela accelerate?  Will there be labor trouble?)   

In other words, unless the contract exempts the Spanish companies from exchange controls, then I doubt that there is much corruption to be seen in this case.  Bad economic management yes, corruption no.   

Does anyone have more details about the contracts?

Brazil annexes Venezuela

 OK, not quite.  But our friend Chávez just did something that will put meat on the bones of his somewhat jokey promise not to expropriate Brazilian investments in his country.  What did he do?  He agreed to plonk around $4 billion into a refinery located in the Brazilian state of Pernambuco. 

Refineries are notoriously hard to liquidate.  The market is thin; prices for similar installations in the United States have jumped around by a factor of ten.  This is part of the reason why the big international oil companies continue to operate them, despite low margins and big liabilities.  It's also why PDVSA has been unable to unload Citgo for a reasonable price, despite the fact that President Chávez would clearly like to do so.  Add in the fact that PDVSA will be a minority shareholder with Petrobras, and there's no way it's going to get out of this investment easily.

Which means that the Bolivarian Republic just gave the Brazilians a big fat $4 billion hostage.  More so since (1) the only other reasonable outlet for Venezuelan crude is in the United States; (2) civil law, unlike common law, allows Brazilian companies to sign contracts that spell out a predesignated list of damages to be paid should the government take certain actions; and (3) Brazil is basically independent of foreign oil, and therefore well-positioned to exercise a threat to embargo Venezuela.  Viva the not-empire!

It is quite brilliant.  I stand in awe.  How did he sucker Hugo in that one?  Is the prize of Mercosur really enough?  Then again, our Bolivarian friend seems to have just signed a contract paying a Spanish company a ridiculous amount of money to build a CCGT plant, so who knows?

Back to Angola

  The Portuguese empire collapsed in Africa under the worst possible conditions.  After 15 years of bloody conflict, a military coup in Lisbon replaced the existing government with one that wanted to get the hell out of Africa yesterday.  The result was a chaotic flight of a half-million Portuguese settlers back to the metropole.  Over the subsequent decades, Portugal attracted some immigration from its former colonies, but other the Cape Verde (a country that almost certainly would have preferred to remain united with the metropole) it was never great.  As of 2007, only 33,000 Angolans lived in Portugal.  The reasons were simple.  First, it cost a whole lot of money to get to Portugal from Angola, and most Angolans were poor and getting poorer.  Second, Portugal shut the door to the citizens of its former colonies.  Third, Portugal itself wasn’t exactly a glowing destination for immigrants. 

But now it looks like the Portuguese are headed to Angola.  And not in small numbers, either.  Something like 17,000 people moved to Angola in 2006, followed by 24,000 in both 2007 and 2008.  So far this year they’re moving at an annual rate of 31,000.  Of course, 31,000 people is only 0.3% of Portugal’s population and 0.2½% of Angola’s, but still.   

The question is whether they’ll stay.  I tend to doubt it.  First, while Angola’s economy is exploding, it is pretty much all due to oil.  Most of the growth pulling in Portuguese expats (and Portuguese capital) is construction-driven and paid for out of government revenues.  To be frank, I would bet that the boom will last for a while, but the challenge for Angola is making the growth permanent.  Not that Gabon is a terrible outcome, but turning into Gabon is something that happens once, after which the foreigners who came in to help build stuff turn around and go home. 

Second, some of the movement is driven by a crappy economy in Portugal.  That could also turn around.

Finally, it isn’t all clear that Angola will be that welcoming.  Expats from the developed world go to all sorts of places.  Relatively few of them settle down and raise families outside their home, and even then mostly in other developed countries.  (Right, Doug?)  The French in Gabon, for example, are clearly an expat community and not part of the local fabric.  In Côte d’Ivoire they’ve mostly gone home.

So while this is a neat story, I’ll bet that it won't have much lasting effect on Angola.  I would like to be wrong.  Thoughts?

U.S. ♥ Canada, Earth not so much

  Thoughts on cost overruns in the oil sands will be coming up quickly.  Right now, just the (belated) news that the U.S. government has approved the Alberta Clipper, a pipeline that will move crude from Hardisty, Alberta, to Superior, Wisconsin.   

So what is the environmental problem?  Well, aside from the problems with tailings pools and the like within Alberta, the oil sands release a boatload of carbon.  After all, in order to make the stuff you need to inject steam right into the ground.  That takes a lot of energy.  In other words, you need to burn a lot of stuff in order to get stuff you can burn. 

Dealing with that carbon will be Canada's problem.  If Waxman-Markey passes, it is quite possible that the U.S. will tax Canadian oil exports.  Even if that doesn't happen, the adjustment burden will fall north of the border, unless Canada and the U.S. get together on a combined cap-and-trade system.  Unless ... well ... unless both countries decide that it is just more important to have a big and growing share of North American oil consumption produced in North America, with the rents (such as they are) going mostly to the Province of Alberta. 

One reason why oil sands project run overbudget below the fold.  Full explanation still forthcoming, with the preview that the comment thread pretty much nailed the reasons. 

Cost overruns in the oil sands

  As part of writing a book about the Panama Canal, Carlos and I had to do a lot of research into cost overruns on big infrastructure projects.  We found the usual horror stories.  The Panama Canal went over-budget by a factor of 2.0.  BART exceeded projections by 1.6, and the Washington Metro hit 1.8.  Miami’s Metrorail jumped the limit by 2.1, the Big Dig ran over by 2.9, and the Brooklyn-Queen Expressway beat its budget by an astonishing 5.1. 

Sounds bad, right?  And in the case of the BQE, it is bad.  But you haven't seen overruns until you've seen the private sector try build multi-billion dollar stuff in the Albertan oil sands.  Suncor's Millenium project ran over by 1.6, about the same as BART.  Shell's expansion of the Muskeg River mine has hit 2.2, and counting.  In 2008, Syncrude's Stage 3 expansion passed 2.4.  The Canadian Association of Petroleum Producers estimates that capital costs for ongoing projects are going to average as much as 2.7 times the 2005 projections. 

Not quite the Big Dig, but making the Panama Canal look good.  I have some thoughts as to why this happens, but before I reveal them, what do you think?

Canadian oil taxes: too high, too low, or just right?

  Even if the occasional bout of Canadian sanctimoniousness can make me want to try to bloody some noses, I am a huge admirer of the Great White North.  Which is why, among other reasons, I am trying to figure out whether said country’s tax policy towards its oil and gas industry is too lenient, too onerous, or just right. 

Statistics Canada publishes some very good statistics on the “conventional oil” industry, which, confusingly, includes natural gas but excludes the Albertan oil sands.  Their numbers include operating costs, capital expenditures, and exploration costs.  They also include taxes and royalty payments to provincial governments.  (The Canadian constitution reserves authority over natural resources to the provinces.)  You have to do some digging to get the equivalent numbers from the oil sands, including some figures from the Albertan Ministry of Energy that might not be entirely equivalent, but it can be done.

And the results?  Well, Alberta produced C$79 billion worth of hydrocarbons in 2007, C$22,687 for every man, woman, and child in the province.  Of that, conventional hydrocarbons made up C$55 billion.  The companies that produced those hydrocarbons spent C$4 billion on exploration, C$17 billion on development, and C$10 billion on operation.  That left them C$24 billion in net income, of which the government of Alberta took C$9 billion in taxes and royalties.  Add in another estimated C$2 billion in income tax payments, and you have a total take around 65% of the industry’s net cash flow before financing, which is what the measure really is.  Crushing socialism!  Or, put another way, a sensibly high tax rate, since the royalties are structured in such a way as to essentially exempt new investments until the initial costs are recovered.

That fact, however, suggests that maybe net cash flow isn’t the right denominator.  After all, income taxes are generally applied before investment expenditures.  Alberta is trying to subsidize them.  In that case, isn’t operating income the right measure?  Okay ... using operating income as the denominator, the effective tax rate on conventional hydrocarbons in Alberta drops to 22%.  That seems pretty low.  And, of course, if you just use the government take as a percent of revenues for your calculation, then you get a rate of only 18%.  That is almost tax-free compared to such left-wing hotbeds as Alaska.

The numbers for the oil sands are even stranger.  On the one hand, taxes and royalties as a percentage of operating income was only 28%, and as a percentage of gross revenues were only 19%.  On the other hand, if Statistics Canada is to be believed, the industry reinvested all of its operating profits and then some in 2007.  Royalties came to 150% of net cash flows before financing.  If the idea is to encourage investment despite low profits, then maybe the system is about as high tax as it can get.

So what’s the “right” number?  Are taxes high or low?  For what it is worth, other provinces, like Saskatchewan and Newfoundland, turn out to be even lower tax than Alberta ... but don’t have anything like the amount of investment.  Companies there are taking the money and running. 

Thoughts?

This blog’s intellectual foundations

  A friend in the Philippines, looking over the blog, concluded that it seemed all over the map.  And that’s true!  I put up plenty of personal stuff and random musings.  But there is a core set of interests that parallels the evolution of my academic work over the past few years.  The geographic focus is on Latin America, of course, but it goes beyond that.

(1)  Instability.  This is what I started out studying.  I was intrigued that Mexico had a pretty well-developed banking system by the 1930s, despite having gone from a dictatorship to bodies-bloating-in-the-sun chaos and back to dictatorship.  It also had steel mills and copper mines and produced a boatload of oil.  How did that happen?  You might say that most historians who get interested in Latin America start by asking the following:  “This place is much poorer than the United States!  Let’s look for the malfunctioning institutions and ask why they’re malfunctioning.”  I took the opposite approach.  “Man, stuff doesn’t work well here at all.  Property rights are all messed up. Why then is it so much richer than the DRC?”  In other words, how did businesses work around the lack of functioning political institutions?

(2)  Empire.  Now that’s a loaded word!  Let’s just define as the violation of one state’s Westphalian sovereignty by another.  In extremis, the violating state can end the sovereignty of the other. If it doesn’t then proceed to make the conquered population full citizens and create a legitimate shared political community, then you’ve got an empire.  In the other extremis, one government can tell key political actors in another, “Do this thing here and we’ll bribe you, otherwise we’ll sanction you.”  My interest in empire, thus defined, grew right out of the aforementioned interest in political instability.  The U.S. mucked around in Mexico for some time.  In some industries, U.S. mucking was key to compensating for the negative effects of domestic instability and political violence.  The general questions, then, became impossible to avoid.  Can foreign governments (or other supranational authorities) substitute for poorly-functioning domestic institutions?  When and why will they try?  What effects will they have?   Others have developed interest in empires and imperialism from a very different direction, of course.  The serious ones write good books about the rise and decline and collapse of empires.  The unserious ones wind up writing strange novels about worlds where meteor showers wiped out civilization in the 1870s, or some such.   Me, I come at the same interest from another direction:  curiousity about the economic causes and economic effects of the widespread phenomenon of strong states violating the sovereignty of weaker states. 

(3)  Energy.  Whaa? you may ask.  Well, what industries are most affected by political instability?  Oil and gas:  the resources are where they are.  When institutions fall apart, they remain viable.  (This applies to other hard-rock mineral resources as well, of course, but they tend to be less profitable.)  What industry has prompted (over the last century, at least) the most violations of sovereignty?  Once again, oil and gas.  (No, I am not suggesting that most such violations are over resources.  They are clearly not.  But if you limit yourself to economic motivations, you wind up again and again looking at the energy business.)  In the course of writing about issues (1) and (2), I got more and more interested in (3) ... and not just how it related to questions of instability or empire.  It is a fascinating business!  The economics of energy are just so weird, the politics are weirder, and it affects everyone’s life.  Moreover, the future of the planet is tied up in the future of the energy business.  Can we move away from fossil fuels?  What will we need to do?  Can it be done politically?   In short, my growing interest in the energy business came naturally, ever since that article on Mexico in the 1920s. 

Thus the progression:  Latin America --> Instability --> Empire --> Energy.  And thus the big theme tying together much, if not all, of this blog.  Even much of the random travelblogging falls into those categories.  Not all, of course.  I enjoy posting random political blather, talking about New York or Miami or elsewhere, and putting up pictures of my wonderful wife.  But here, at least, you have the three big themes of the blog, and why I believe that they fit together.

Brazilian magnaminity explained

  A while back, we discussed Brazil's decision to grant Paraguay a greater share in the rents from their joint hydroelectric project.  There were a number of excellent hard-headed reasons for the Brazilian government to do this, but we've just discovered another:  persuading the Peruvian government that it is worth getting into bed with Brasilia. 

Brazil is contemplating five hydroelectric projects in Peru that would cost about $15 billion and generate 6 gigawatts of power, 80 percent of which would go to Brazil.  That represents about 4½ percent of the country's current installed capacity.  The expansion will involve Electrobras purchasing Peruvian energy companies, something the Peruvian government won't accept lightly unless it trusts that it can negotiate with Brasilia.   After all, as things stand now, Brazil approaches its neighbors much as Teddy Roosevelt did:  it speaks softly, but it carries a big stick.  That makes people nervous.

By showing grace towards Paraguay, the Brazilian government showed Peruvians that it would be a reliable partner and take their interests into account, rather than using its power to take up all of the surplus.  We'll see if that attitude lasts (power corrupts and all that) but for now Brazil is managing the sudden and surprising emergence of its informal empire in South America with grace, aplomb, and plausible deniability. 

Magnanimidade para Paraguai

  Brazil just renegotiated its energy relationship with Paraguay, to the tune of $240 million per year.  The Paraguayans will now be able to sell the excess capacity from the Itaipú dam at something “close” to the Brazilian market rates.  (The concept of a “market rate” for electricity isn't as simple as it sounds.)  The deal also cuts out the Brazilian middleman.  In concrete terms, the price they receive will triple.  Moreover, the Paraguayans will get a new $400 million transmission line, financed by Itaipú revenues.  In other words, the Paraguayans will pay for only half the cost.  Symbolically, Itaipú’s financial offices will now be opened to Paraguayan nationals, at least in theory, and the Paraguayan government will get to look at the books.  The agreement punts on Paraguay’s right to sell electricity to consumers in third countries.

$240 million is a substantial number for Paraguay.  It’s about 2% of the country's total GDP in 2007, 4% of its exports, and 11% of its government revenue.  That ain’t nothing.  On the other hand, it is pretty close to nothing for the Brazilian government. 

And what does Brazil get in return?  Well, Paraguay is has long been to Brazil what northern Mexico has recently become for the United States:  a source of lawlessness and smuggling.  

Given the new administration is friendly to Brazil, and about as trustworthy as any Paraguayan government in decades (heck, since Francia) more resources for it means more to be spent on, say, customs enforcement or law and order ... and yes, Brazil has and will continue to pressure Paraguay regarding law enforcement.  At some point in the future, the Brazilian government may want and need to turn Mercopol into a serious organization capable of operating inside Paraguay, and it will be extremely useful if Brazil is viewed as a helpful neighbor and not an imperialist aggrandizer. 

Plus, it gives Brazil an ally in its continuing attempts to turn Mercosur into a de facto Brazilian empire.  After all, Brazil wants to give the Parlasur more power, and Brazil plus Paraguay would have an incontestable majority in that body.

And it sends a signal to Bolivia:  last time, we warned you that we had a very big stick, and would peel away half your country if you got too obstreperous.  Now, we say there are benefits for cooperation.  Play nice, Evo.  In the inestimable words of Porfirio Díaz, “pan y palo.”

Canada, I tell you, if American governments were half as smart, y’all could kiss your sovereignty goodbye. Finland, aren’t you glad the Russians ain’t nowhere as slick?

Chinese oil expansion

  What are Chinese state firms doing in Africa?  Among other deals, last year the CNPC agreed to get the right to the Agadem oil field in Niger in return for the construction of a 20,000 bbd oil refinery in the country.  It will also build a pipeline to export whatever it finds, although the route is still unclear.  And now the Chinese government has announced that it might start to subsidize the acquisition of natural resources even more.  Well, there are economic reasons to think that such subsidies don't make all that much sense.  So what is China doing?

I think there is an answer.  In reverse order:

(1)  Price hedging.  China wants to hedge against another oil spike.  Inasmuch as the Chinese will be able to push around African states, and keep them from expropriating the surplus, this would work.  And China might be able to do it.  States aren't unitary actors.  Bribing individuals within them brings value; recently the Chinese were involved in a bribery scandal in Namibia.  That one wasn't energy-related, but leaders can be bought, and so can influential actors within weak states.

(2)  Mad Max insurance.  What if the global trading system collapses?  Well, if the Chinese government has control of the marketing tools,and can plausibly threaten to destroy or interdict them, then it may have the ability to insure that its consumers have access to oil.  Moreover, it may be assuming that foreign states won't have the ability to find alternate markets in the event of such a collapse.  The rub?  I'm trying to picture such a collapse, short of a third world war.  It isn't coming to me.  Maybe a war that China isn't involved in?  I don't know.    

(3)  Production.  Maybe Chinese officials believe that oil investment won't increase as much as they need it to.  Oil companies sell project management skills more than anything else, but are subject to political risk.  Perhaps (1) is wrong, and the Chinese assume that African governments will hose them in the event of oil price spikes ... and perhaps they don't care, because the more oil that Chinese state firms can bring on line, the less likely such spikes will be.  If rational private actors won't make the investments, then the Chinese government will.

I'm leaning towards (3), but I don't know.  Thoughts?

Speculation in world oil markets?

  I report; you decide.

Now, these figures don't include stocks of refined oil products.  Perhaps speculation is easier in final products linked to the price of crude, rather than crude?

These figures don't include Chinese stocks, which are available but are also a bear to download and input.  They do include stocks held overseas, or on tankers.

Of course, Chinese stocks aren't the only missing figure.  Oil producers can speculate by leaving oil stocks in the ground:  e.g., cutting production.  That said, I'm not sure that's interesting; we already know that production declines will drive prices up.  

So can we see evidence for or against speculation in these graphs alone, or do we need more data?  I'm sure I was sending a signal to the Saudi photographer who took this picture; I'm just not sure what.

How can financial speculation affect oil prices?

  The Obama Administration just announced that they may limit the ability of financial companies to engage in speculative trading in oil futures.  The reason is the recent run-up in oil prices.  I don’thave a problem with the idea.  After all, I am a conservative of a sort, in the sense that I like to limit the animal spirits of those crazy market types on principle. 

But still, I don’t understand the point.  The reason why I don’t understand the point is that I don't understand how futures trading can drive up the spot price.  That doesn't mean that it can’t; that just means I don’t understand how it might in the absence of a rise in actual oil inventories. 

What’s a futures contract?  Simply put, it’s an agreement to sell a given quantity of oil at a given price at a given date in the future.  So let’s say you and I strike up a contract that says that I will sell a barrel of oil to you at $100 in a year.  How do I make good on that contract?  One way is to run out into the market, buy a barrel of oil, and sit on it.  That will drive up the price of oil, got it, very clear.  When a year rolls around, I sell you that barrel for $100. 

A second way is to wait around until the contract is due, buy oil at whatever the market price happens to be, and then sell it to you for $100.  I do not understand how doing so could possibly drive up the price of oil.  I can vaguely sort of see how it might increase volatility:  trading on the futures market presumably reveals information (if only information about the neuroses of futures traders) and that information will be used by traders on the spot market.  When they use that new information, prices will move.  More information revelation, more price volatility. 

But seriously, people aren't worried about short-term volatility.  They'’e worried about big run ups and sudden falls.  I don't see how you can blame the speculators for those, absent big swings in inventories. 

In fact, inventory changes in the oil market tend to run against price swings.  During the recent price plunge, unsold oil piled up in stockpiles and supertankers all over the planet.  Those stockpilers were going long on oil, but in the context of falling prices.  Now that the price has risen, those stockpiles are shrinking ... and some analysts (not entirely coherently) blame the price rise on the inventory fall.

Am I missing something, or is this whole speculation story nonsensical?

Why costs rise

  Why do so many big projects regularly come in above budget?  Corruption?  Stupidity?  Or something else?  Well, I vote for “something else.”  Let's consider the French nuclear reactor project at Flamanville, which I had the honor to visit.

EDF initially costed the reactor in 2005 at €3.3 billion.  It is now estimated to cost €4.0 billion.  What happened?  Well, according to EDF, costs rose by €250 million due to inflation.  Special escalator clauses tied to the price of particular commodities (like steel) caused another €150 million.  Finally, an additional €300 million came from “évolutions techniques et réglementaires,” a fancy way of saying, “We learned on the job that some things are a little more complicated than we thought, but mostly the regulator kept changing the goal posts.” 

Considering that the head of L’Autorité de sûreté nucléaire, André-Claude Lacoste, actually said, “We wanted to show an example,” in regards to the construction of the first new reactor in 20 years, I find that last quite believable. 

Natural gas, energy security, and silly reporting

  Earlier this week, I learned about this report from a Chilean energy executive, which was officially released yesterday.  It seems as though the USA has much much more natural gas than anyone thought.  The increase is due to shale gas. 

Shale gas is found very deep, and it is rather expensive to extract.  Deep wells need to be drilled, the rock fractured, and horizontal wells dug to extract the gas.  A 2007 study found that even the cheapest shale gas deposits aren't viable at a price below $5.40 per million BTU (MMBTU).*

Which makes the market's reaction a little odd.  More accurately, it makes the reporting about the market reaction seem very silly.  Gas prices have been below the level that would make shale gas viable since the beginning of 2009.  So why attribute a tiny little drop to the report's release, especially since (a) the findings have been known to market insiders for some time, and (b) the price is currently below the level that would make shale gas viable. 

That said, the news is important.  U.S. reserves have risen from 79 years of consumption, up from 57.  More importantly, it means that annual production can (in theory) be upped.  That means that none of the LNG terminals approved by various U.S. agencies will be built anytime soon.  American natural gas prices will rise, but not as much as they might, and the U.S. will be one step closer to strong energy security.

Unless it won't be.  Because, well, why did prices spike in the first place?  Gas and oil must be better substitutes at the margin than people think, and that means that gas prices will be subject to pressure from oil shocks for some time to come. 

* Michael Godec, Tyler Van Leeuwen, and Vello A. Kuuskraa, “Rising drilling, stimulation costs pressure economics,” Oil & Gas Journal, 15 Oct. 2007: pp.45-51.  

Energy security

  So I’m in Santiago to talk about energy security.  “What does that even mean, anyway?” asked my father.  It seemed wise, then, to define “energy security.”  We use the phrase all the time, but what are we in fact talking about?

Energy security, I think, comes in three flavors.

Weak energy security:  insuring liquidity in the energy market, e.g., insuring that your country’s consumers can buy as much energy as they need at whatever the prevailing price happens to be.

Strong energy security:  insuring not only liquidity in the energy market at whatever price, but insuring liquidity along with some level of price stability. 

Extreme energy security:  insuring that should the maintenance of liquidity in the energy market create rents (during times of high prices, whether deliberately promoted or not) firms from your country will enjoy those rents.  Alternatively, it means trying to create circumstances at which energy is priced at marginal cost, and there are no rents for anyone ... or, should that be impossible, disadvantaging foreign companies or knocking off foreign governments that your government doesn’t trust with such rents. 

Thoughts?

The financial meltdown goes nuclear

  I just learned that in 1992 the U.S. Congress decided to help the nuclear industry by making it easier for plant operators to save for the future cost of decommissioning their plants.  How did they do that?  First, they lowered the tax rate on such savings from 34% to 20%.  Second, they removed the requirement to invest decommissioning funds in low-yield government bonds. 

The first didn't go far enough.  Why tax the funds at all?  They're a provision for a future expense. 

The second ... uh oh.  I really hope somebody walked that back between 1992 and today.  I really doubt anybody did.

The great socialist scramble for Africa

  So, China is trying to get into the Nigerien uranium business, for reasons known only to the China National Uranium Corporation.  (Although I will guess later in this post.)  Here's the story to date.  On June 5, 2007, the Nigerien government formed the Société des Mines d'Azelik (Somina) a mining enterprise intended to exploit the Azelik uranium deposit way up in the north.  Niger got a 33% stake in the enterprise, with China getting 67%.   On July 6, Toureg rebels kidnapped a Chinese national for four days.  On November 9, Somina got an official license to work at Azelik.  On November 11, the Toureg rebels declared that China's contracts were "invalid."  At which point the Nigeriens accused Areva (the French state-owned nuclear company) once again of funding the rebels.  The same rebels, that is, who attacked Areva in April.

So the Chinese suspended work.  And the Nigerien government started to hem and haw and stall and delay.  So much for all those Chinese plants to build 50 MW of (conventional) power plants in the country and a €27.3 million bridge over the Niger river.  On the other hand, the Chinese didn't want to lose their options, so on April 30, 2009, they agreed to lend the Nigerien government $95.22 million at 2% over ten years, with the loan explicitly (but vaguely) tied to the stalled Azelik project.  China, meanwhile, sold 5 percentage points of its interest in the mine to a state-owned Korean company, which promised the Nigerien government that it would buy 400 tons per year once (if) the 700 tons-per-year mine gets up and running.  The president of Niger has just visited the site, in order to show his seriousness about getting the project back on track. 

The hitch is that as the Chinese project in Azelik stalled, France was on the move. In January 2009, Areva signed a deal to open the largest uranium mine on the continent, and President Sarkozy visited Niger in March to give it his full-throated support.  That's a problem for the Chinese.

Now, the Chinese still have a good project if they can get it running.  After all, they have gotten the Korean government to implicitly promise to buy the uranium at whatever price the Chinese charge, which will be quite a coup if the mine opens.  Not a terribly bad plan.  That said, the overall impression is that the Chinese really don't yet know how to play this game.  

So what exactly is the game?  Suggestion below the fold.

On the edge of the French energy empire

  In 1965, the French discovered uranium in Niger.  Here is what the New York Times had to say about it in 1969, right before production began.  It makes for fascinating reading.  

The paved road comes to an end in this isolated, dust-colored market town on the southern shore of the sand sea known as the Sahara.  About 300 miles farther north, along an ill-defined track, lies the town of Agadez.  About 150 miles beyond that, near the jumbled boulders of the Air Mountains, the village of Arlit is rising.  Where nothing more than tumbledown mud huts stood two years ago, French and African workmen are building cement-block houses, shops, an electrical generating plant big enough for a city of 40,000 — and two uranium processing plants. 

The uranium will be produced by a company in which the government of Niger holds 20 percent, German groups 10 percent, and the French Atomic Energy Commission and two French mining companies 70 percent ...

In a country where the per capita income runs about $75 a year ($351 in 2008 dollars), peanuts and bony steers constitute the only significant exports, where fuel is so scarce that technicians once tried and failed to make a power plant run on peanut husks, the discovery of uranium was an extraordinary event.

Niger will receive about 40 percent of the company’s profits ... Niger is counting on only $4 million a year in revenues by 1975 — about a tenth of the current national budget.  “Even with this strike,” said a local economist this week, “this is never going to be a rich country—unless they find a market for sand.” 

Imperialism can pay ... the imperialized

  The French empire in Africa never really ended.  In 1960, the autonomous territories of the “French Community” got seats in the United Nations, but for most the change was less than dramatic.  Only Mali dropped the use of the old colonial currency.  The new African governments increased trade restrictions, bit by bit, and the French market closed to their exports, bit by bit, but Paris fought hard to keep the European market open for a very long time.  The Yaoundé and Lomé conventions granted the “associated” states preferential access to what later became the E.U. 

Empire didn’t go away in another more visible manner:   French troops remained on the continent, French nationals staffed the governments and newly-created armies, French companies (often state-owned) dominated the export industries, and France knocked over more than a few recalcitrant governments while propping up others. 

Niger, where the French found uranium, made for a particularly egregious example.  In 1963, French troops rescued the government of President Hamani Diori from a coup.  In 1969, the French discovered uranium, and two French companies got exclusive rights.  In March 1974, French, Nigerien, and Gabonese representatives meant in Niger’s capital to discuss Diori’s insistance that the country’s uranium contracts be renegotiated.  Coincidentally, Diori fell to a coup the next month.  It seems that all of Diori’s French military advisors had gone on vacation and no one picked up the phone in Paris when news of the violence arrived.  The New York Times went so far as to accuse France of abetting the coup because Diori wanted to give uranium concessions to Exxon.  The next guy kicked French troops out of the country, but the French remained in control of the mines ... and their troops came back in 1981 anyway.

So what did the combination of continuing French intervention and French uranium mining mean for Niger?  An unexpected answer below the fold. 

There is no bloody resource curse already

  So there are these people out there, notably the Oracle of Flat, talking about how high oil prices lead countries to do all sorts of crazy things, like take stuff or invade their neighbors or build weird shit. Which is a problem, see, because except for the building of the weird shit the real world just doesn't fit the model. 

Above you’ve got an example of weird shit.  Ditto to the right.  But what about the neighbor-invading or stuff-taking?  Well, I don’t have a whole lot to say about neighbor-invading at the moment, but there is some stuff-taking in the news: the Bolivarian Republic just cancelled all its oil service contracts.  That’s a form of stuff-taking, yet, as the great and immortal Onyx once said, but wait it gets worse!   The government also intends to nationalize the contractors’ assets.  That is stuff-taking of the purest form, which the “resource curse” models predict isn’t supposed to happen when oil prices are low.  After all, the government is supposed to need the service companies to keep production up.  And yet, here we are.

“Oil service companies” are at-their-simplest basically oil companies that extract petroleum for a fixed price on behalf the owner ... in Venezuela’s case, the government.   With nationalization of the oil services, the government gets a threefer:  the assets, the value of future payments, and the value of all unpaid bills.  But it loses the companies’ ability to run and maintain the assets and opens itself up to arbitration and lawsuits.  It also loses future investment.  Oil companies will tolerate expropriations-that-weren’t, like the Bolivarian Republics’s so-called “nationalizations” up until now.  They have less patience over the real thing.  It’s a particular problem for Venezuela because its wells tend to have a half-life around three years.  Without continual new investment, production will decline.

I’m not sure what Chávez’s motivation is, although I can speculate.  I am sure, though, that this is another sign that the whole petropolitics idea is worth a lot less than a gallon of crude, even at current prices.  Sure, it might be possible to take the political resource curse theories and mash them to fit recent events in Venezuela, but then you would wind up with a theory that predicted that governments nationalize when prices go up and they nationalize when prices go down; or that they nationalize when they don't need foreign technology and they nationalize when they do.  In other words, you would get a theory that predicted that the governments of oil producing states should always nationalize at all times. 

The proper word for such a theory?  Worthless. 

Churchill, paraphrased, sort of

  American electricity transmission is regulated in an odd way.  You’ve got 50 state regulators.  Then you’ve got three interconnected grids (the Eastern, the Western, and the Texan) and a separate grid in Puerto Rico.  (Alaska and Hawaii don’t have statewide grids.  Hawaii is an archipelago, and Alaska is too thinly populated.)  On top of the three Conus grids you’ve also got ten North American Electric Reliability Council (NERC) regions.  Only Texas, under the Electric Reliability Council Of Texas (ERCOT) coincides with an integrated grid.  Then on top of it all sits the Federal Energy Regulatory Commission (FERC).  The Energy Policy Act of 2005 — as best as I can tell, a not-bad piece of Bush-era legislation — gave it real powers for the first time.

A lot of that act was due to the work of Pat Wood, who ran FERC between 2001 and 2005.  Unlike a lot of political appointees from that era, Wood was supremely competent and very non-dogmatic.  You can get a taste of his approach in this 2001 interview.  He left FERC to go work for Airtricity, and thus in that capacity I’ve had the opportunity to hear him speak on several occasions.

Like a lot of people, he isn’t happy with America’s lack of an intelligent energy policy.  Where’s the carbon tax?  The centralized grid?  The feed-in tariffs?  And, of course, working in the Bush Administration didn’t help.  Admittedly, I last heard him back when “Drill baby drill” still echoed across the land, but as I watch the ugly sausage of cap-and-trade inching its way through the Congressional meat-grinder, with the threat of EPA regulation as a stick in the background, I can understand the disillusionment. 

Even if I wouldn’t take it quite so far as to say, in public, at an HBS conference, “Maybe in a country of 300 million people, democracy, even a republican form of democracy, doesn’t work that well.  But that’s a debate for the law school.”

The expropriation that wasn't

  Kevin Drum and Dan Drezner wonder why the oil companies would get back into Venezuela after the way Hugo Chávez treated them the first time around.  The answer is simple:  Chávez didn’t treat them badly.  When oil prices head back up, they’ll do fine even if he plays the same movie all over again. 

“What???” you say?  How can that be?  Simple.  Between 2004 and 2006, the Bolivarian Republic of Venezuela expropriated the marginal surplus generated by the run-up in oil prices.  It did not, however, reduce the revenues of the oil companies.  They took home about $10 a barrel when the contracts were signed in the late 1990s, and they took home about $10 a barrel in 2008.  In fact, some of the companies that had signed service contracts under the old regime received more money under the Bolivarian regime than they would have under the original rules.

So why not get back in?  It isn’t like there are a whole lot of places around the world for the oil companies to invest in, especially not on-shore.  Most oil reserves are closed to the majors, and political risk is everywhere, including Alaska under its radical socialist governor.   The companies have little chance of enjoying the upside from a return to high prices, but with estimated costs of $6-$7 a barrel, Venezuela is still a good bet. 

Details and money graph below the fold.

Data I'd like to have

  Where can I find time series on:

1. Gazprom's revenue, by market;
2. Russia's transit fee revenue, by originating market;
3. The average wholesale price per standardized unit for Russian gas and other gas, by market.

Get me that data, and I might be able to make some sense out of Russian policy.  I will say that current events make me think that Russia doesn't want to snarfle off bits of Ukraine.  You can extract a lot more surplus out of a neighboring vassal than you can out of your own citizens.

The resource curse doesn't exist, and please stop talking about it

  My friend Will hopes that oil prices stay low, in order to insure that the Russian Federation remains behaved.

My response:  Please get the stupid, and I mean truly monumentally stupid, idea of the resource curse out of your heads?  It's a well-accepted idea, but it's just plain wrong.  No matter what Tom Friedman writes about it.

Stephen Haber and Victor Menaldo have a paper coming out that shows that there is no, squat, zero, ningún relationship between democracy and oil resources.  Haber and ... uh ... me ... will eventually have a paper showing the same thing for civil war. 

But hell, maybe Russia is different.  So my question for you all is simple.  Why would an authoritarian government, no, why would a dictatorship give up power because its export revenues went down?  That makes no bloody sense.  It could default on foreign debtors.  It could blame foreigners for any crisis.  It could shoot dissidents, you know, the way Panama did under Noriega. 

Is there any reason to believe that a fat Russia would be more democratic and less expansionist than a lean Russia?  No.  F@&k no.  There isn't any reason to believe the opposite either, of course ... but by God do I wish that people would stop fooling themselves.  Resource money has fueled democratic transitions and dictatorial takeovers, foreign expansion and foreign engagement.  Those who know Russia better will be able to predict that country's idiosyncratic political reaction to declining export revenues ... but why any of the information in this story, about governments trying to crack down on the bearers of bad news, would make an observer hope for sustained bad news is beyond me. 

Ah, here comes my first AFOE cross-post.  But your reactions first.  At least until I can find the damned keys to that blog.

L’énergie atomique

  The Economist has an interesting article on French nuclear energy.  You read about it here first.  Be sure to check out the comments if you click the link. 

I have a terrible feeling that the emerging potential depression has changed the economics of nuclear power, such as they were.  First, the cost of traditional energy sources has plunged along with the overall demand for energy.  (I don't think today's low prices will outlast the downturn, but the fact remains.)  Second, the credit markets are pretty messed up at the moment.  How would you finance a project based on the idea that energy prices will rise in the long term?  In the long term, everyone is bankrupt.  Third, nuclear power plants as they are currently designed seem to be pretty bad as a Keynesian fiscal demand boost.  The lead times are far too long; it'd be years before a project leads to a dime of actual purchases.  That means that governments will be ill-advised to include subsidies to nuclear power in the capital projects that they are going to undertake over the next few years. 

Still the energy of the future.  Perhaps the article's relative optimism will prove justified.  I hope so, but it isn't how I'd bet. 

Half moon at bay

The consequences of persistent inequality are with us today.  They appear to be pushing Bolivia towards civil war in slow motion.  Today there was a brief flutter of news about the situation because Evo expelled the American ambassador, and the U.S. followed suit, but in general you've got media silence in America.  The split is between the central government and “autonomists” in the “Media Luna,” which is marked off in dark green in this map taken from Mark Weisbrot: 

Things are bad.  How bad?  American Airlines just stopped flying to the country.  Autonomists in Santa Cruz have seized control of most federal offices in the province.  Tarija — which produces 60% of Bolivia's natural gas — experienced bloody riots yesterday, where autonomists seized the customshouses and airport and federalistas (my term, not a Bolivian one) blew up the governor's parking garage.  Meanwhile, the nightmare that my Brazilian and Bolivian colleagues discussed in Venezuela?  Well, it came true for about 12 hours. 

Brasilia is reacting in a manner that could best be described as confused, but understandably so.  On Tuesday, the Brazilian foreign minister committed a Kinsley, when he stated that if Morales can't secure the pipeline, then his government will be forced to open relations with the Media Luna.  Today, however, the Brazilian national security advisor reiterated Brazil's position that Bolivia has but one government and intimated that his government might send troops to support Evo. 

So what's it all about?  I'm sure you all can guess, but a rough overview is below the fold. 

El Hugo del extremo norte

In a previous post, I wrote that total taxes as percentage of revenues on hydrocarbon extraction in Alaska were 25 percent.  Well, I've just had a chance to play with the data, and it turns out that my estimate was flawed.  (It failed to take into account that profit margins in Alaska are substantially higher than the overall profit margins in hydrocarbon extraction across the United States.)  Direct taxes on Alaskan oil & gas actually turn out to be 32 percent of gross revenues ... 33 after Governor Palin's tax hikes. 

One-third of revenues is a nice round number that you can use to put hydrocarbon tax burdens in other countries into perspective.  Bolivian taxes, for example, had fallen impressively low by the time Evo Morales assumed office, and some revision was almost certainly in order.  Time will tell whether he found the right level, and the means by which he raised taxes caused unnecessary uncertainty, but a substantial tax hike on the industry was the right thing to do by the people of Bolivia.  Regardless of whether you're a Bolivarian.

Reason to fear

I worry about Venezuelan government spending.  I just don't believe that oil prices are going to stay this high for long.

I could be wrong, but one of the things I learned in Venezuela was that Belize started producing oil in 2006.  They quite literally found oil on some dude's farm.  Production is now up to 3,000 barrels per day.  That's about 15 trips per day for a typical tanker truck.

Even more strangely, Venezuela gives Belize money through Petrocaribe.  Chávez, I would think, gets even less out of his spending there than in the rest of the Caribbean. He is, in essence, giving away money to up global oil production with only a very small claim on the corresponding returns. 

So, nothing in the global scheme.  But when prices are so high that Belize gets into the oil industry, you've got a tidal wave of other producers waiting in the wings.  They'll be high-cost, of course, so given the increase in global demand the days of $20-per-barrel oil are over.  In fact, I'd bet that the days of $40 oil are over.  But I wouldn't bet on triple-digit prices being with us for much longer.

Strangely enough, I'd like to be wrong.  For the planet.   

There really was a revolution

My previous post on the Bolivian hydrocarbon nationalization of 2006 made it seem like nothing changed.  And in terms of the security of supply (in price or quantity), not much did.  Ditto, the industry wasn't really nationalized.  Rather, the decree gave Bolivia's state hydrocarbon company, YPFB, a mandated 32% share of the output of the San Alberto and San Antonio fields, on top of a 2005 law that cancelled the preferential tax treatment the previous law had granted new gasfields.  Thus, Brazil's equanimity in the face of “nationalization.”

In other words, the nationalization was in fact a tax hike, and a rather large one.  According to work by Luis Carlos Jemio, the state's take of gross revenues jumped from 28% in 2004 to 41% in 2005 and 65% in 2006. 

How high is that?  Well, I just spent more time than I should have estimating the total value of taxes (including corporate income taxes) paid to the federal and state governments by oil and gas companies operating in Alaska.  The result?  In 2006, they paid 25% of their gross revenues (or 50% of their declared profits) in taxes and royalties.  Now, these estimates do not include gasoline taxes, or any other taxes on refined products ... because the Bolivian figures don't either.  They also do not include the tax hikes that the Palin administration just pushed through, but those hikes will only up the figure on gross revenues to 26%.

In other words, Bolivian tax revenues went from around the level found in Alaska to almost 2½ times that level.  There really was a revolution.  (And now you understand why the gas-producing provinces in the east are so damn upset.)

Was it a good idea?  I'm undecided.  Investment in exploration boomed in 1996, with the passage of the law favoring new fields, but started declining in 1999 and was down two-thirds by the time 2005 rolled around.  If one makes the assumption that geology drove that decline, then Morales hiked taxes at just about the right time.  If no more investment is coming anyway, why worry about discouraging it?

To be fair, foreign direct investment in exploitation (not exploration) did collapse in 2006.  That said, Bolivia could potentially make up for that via service contracts and the like.

The reason that I'm undecided is that I don't know how much of the exploration decline was due to geology, and how much was due to the increasing political instability in Bolivia.

But I'm not that undecided.  In this case, I think a massive tax hike on the industry was fully justified, and probably the best thing for the people of Bolivia.  Now if only they can figure out how to divvy up the new revenues without blockading roads or shooting at each other ...   

Bolivia versus Brazil

  On May Day, 2006, Bolivian troops occupied the country's natural gas facilities.   

Petrobras, Brazil's national oil company, owned the largest stake in the fields and Brazilian industries depended on Bolivian gas.  Yet Brasilia reacted quite calmly.  Why?

Simply because Bolivia had no leverage.  The “nationalization” raised taxes on the gas companies (Petrobras, Repsol, British Gas, and Total), but changed nothing else.  Brazil wasn't happy about losing the profits, of course (the Federal Republic of Brazil owns a 55.7% stake in Petrobras), but all Brasilia really cared about was retaining access to the gas at a reasonable price.  And that's what they got:  the red line shows the date of the nationalization:  the big run-up in price preceeded it.

Petrobras and Bolivia had a “take-or-pay” contract, in which Petrobras promised to purchase no less than 65% of Bolivia's daily capacity, even if they couldn't use it, at rates based on this (get ready for it):

The price per million BTUs, PGt = 0.475 × [0.5 × (FO1t-1/FO10) + 0.25 × (FO2t-1/FO20) + 0.25 × (FO3t-1/FO30)] + 0.5 × PGt-1, where FO1 is the price in $/ton of fuel oil with a 3.5% sulphur content (aka, “Cargoes FOB Med Basin Italy”), and FO2 and FO3 are the price of fuel oil with a 1.0% sulphur context (aka, “U.S. Gulf Coast Waterborne” and “Cargoes FOB NEW.”

Another way of putting it is that the contract stipulated that if oil prices doubled, it would take two years for Bolivian gas prices to increase 97 percent.  Which doesn't quite seem to have been what happened, since crude oil prices don't quite track fuel oil and Brazil sometimes needed to overpay when it couldn't use all the gas on offer, but close enough.

In other words, the revolution turned out to be something of a dud.  Petrobras kept its assets and its contract.  Bolivia did get more revenues but a tax hike didn't require troops.  Political theater, it was.

Of course, whether it was good theater depends on your seat.  Investment in the gas industry has collapsed, and Petrobras now prefers to access higher-cost gas deposits at home ... not because of the taxes, but because of the uncertainty.  Similarly, the dramatic way in which the tax hikes were guised as a nationalization meant tossing out the old revenue-sharing agreements with the provinces, and thus the current autonomy crisis.

It's not clear where the country goes from here.  I had lunch with a Bolivian and a Brazilian who joked about civil war.  The Brazilian was sanguine until the Bolivian suggested that eastern rebels might cut off the taps.

“No, you can't have a war,” joked the Brazilian, “until we get the other gas projects going. Then we will happily sell you weapons.”      

Blowing hot or blowing cold?

A few weeks ago I was at a conference where I heard a former Bush Administration official publicly wonder whether democracy was a good form of government for a nation of 300 million.  Now that's disillusionment! 

His disillusion stemmed from many things — it must be a sad thing to be a conservative these days — but some of it stemmed from this map:

The fact that good wind power isn't where the people are (or in all that many states) makes federal support highly intermittent.  The federal tax credit for wind comes and goes, gets renewed, expires, gets renewed, expires ... and with its see-sawing so see-saws wind investment.  Similarly, it's practically impossible to get federal support for the necessary investments in long-distance HVDC lines, which is why PG&E has so much trouble coordinating across only the West Coast. 

Peek this chart of the gross increase in electrical power generation, in gigawatts:

Is it good or bad?  Too much coal and gas, but the nation is on track to double its windpower by the end of the year, even with erratic federal policies. 

The reason is state mandates, good old command-and-control systems that force utilities to get a certain percentage of their power from renewable sources by a certain deadline.  (Spiralling fossil fuel prices don't hurt, although coal prices remained pretty flat until 2008.)

And who started the trend?  Well, I don't like the answer ...

Gridlocked

As I mentioned earlier the U.S. grid isn't very good.  Doug asks why.  I say bears.

Other hypotheses from our readers, however, would be very welcome.

Some current attempts to fix the problem below the fold.

Serious big actual built-stuff problems

What is the big limit to wind power in the continental United States?

The grid.  Simply put, our grid sucks.

I mean really truly seriously sucks, as in will collapse if highly variable power sources (like wind farms) make up more than 2% of the power pumped into the grid.  Worse yet, wind in the United States tends not to be near where the people are.  (Not even in Texas.  Texas is big.)  In other words, to really capitalize on wind power, the U.S. will need to spend quite a bit of money to add reserve power stations, upgrade local transmission grids, and build long-range HVDC lines to bring power from where the wind is to where the air conditioners run. 

Betting (on) the (wind) farm

I get into the office this morning, ready to do some reading (on Chinese and Russian energy policy) and writing (on American intervention in the Dominican Republic) when I spot two new hits from India, both for "Blowin' in the wind."

And so, I think, it behooves me to write a bit about Indian wind energy.  Thankfully, Dick Vietor, right down the hall, has done a lot of work on the topic.  Much of what follows comes from him ... wind power in India makes a great story.

The Myth of French Nuclear Technology

  A lot of myths accrue to France and the French.  For example, that the French military isn't very very very good at defeating its enemies.  Or that the French don't get fat.  Or have bad taste in comedy, or can't make decent action movies (most untrue!), or are peculiarly racist towards immigrants.  (Although ... another post.) 

Me, I love France in that peculiar way that (I like to believe) only Americans can.  So much of the place reminds me of home!

But still, I gots to punch the myths.  The latest one I've run into is that France has discovered a way to make nuclear technology pay that doesn't involve huge dollops of taxpayer money.  As with so many things, the proof comes from Finland, a country I really have to visit soon.

Now, I want to make clear that I am not opposed to spending large dollops of taxpayer money on nuclear energy.  I am agnostic.  But I am pretty clear that such is what needs to be done in the absence of serious carbon caps, high carbon taxes, of further run-ups in the price of fossil fuels, because nuclear power plants are just plain expensive and very hard to build.

Frex the saga of the Areva reactor under construction in Finland.  As of September 7th of last year, it had already run 25% over its €3 billion budget and had its opening delayed at least two years.  Bloomberg quoted Robin Kendall, director of project finance at Société Générale: “You have to go in with your eyes wide open.”  Poor Société Générale is one of the banks that lent €1.95 billion euros to the Finnish national utility for its new reactor.  The Finns refused to pay Areva for the overruns, which has blown a hole in the French company's bottom line. 

Were the banks just stupid?  Is Robin Kendall an idiot?  Have super-canny Finnish negotiators stiffed hard-working French financiers?  The answers are no, no, and no.  Rather, the French government guaranteed the loans that the Finnish utility took out to finance its share of the project ... and French taxpayers may yet wind up eating the losses. 

Under an Obama Administration, a real cap-and-trade system (you, know, with caps) may make subsidies and guarantees unnecessary.  And even if it doesn't, subsidies and guarantees may in fact be a good idea. 

But at the current state of play, they're very necessary to make nuclear economic ... and without carbon caps or taxes, subsidizing nuclear power seems like an unwise use of limited public resources. 

Blowin' in the wind

Flying into Berlin, you can't help but notice the wind farms.

Germany has 22.2 gigawatts of installed windpower, just a percentage point shy of a quarter of the world total, and a third more than the United States.  It gets more than 6 percent of its electricity from windpower, a number matched only by Denmark and the great state of Texas.  Inside Germany, the mouthful provinces of Sachsen-Anhalt, Mecklenburg-Vorpommern, and Schleswig-Holstein get almost 30% of their electricity from wind. 

How did Germany do it?  How far can they go?  Will others follow?  Some analysis below the fold. 

The Earth Award goes to ... AMLO!

Pemex, Mexico's national oil company, is in trouble. Production is declining.  More than three-quarters of all petroleum comes from fields on their last legs.  Cantarell, the largest, is almost tapped out.  On current projections, the country will become a net oil importer by 2016.  (Joining Indonesia, whose government just recognized reality and quit OPEC.) 

President Calderón has proposed a sensible (if insufficient) reform that would alter Pemex's relation with the government from that of a state agency to that of a state-owned company, with the ability to control its own investment budget and hire foreign companies to provide exploration and production-related services.  It's sensible, small-c conservative, preserves national control of the oil, and rather badly needed if Mexico is to remain an oil exporter.

So, of course, the center-left PRD, under the influence of your hero and mine, Andrés Manuel López Obrador (AMLO), is fighting it tooth and nail.  They forced the PAN to agree to 71 days of Congressional debate on the bill ... which will then almost certainly face a Supreme Court challenge. 

And I say ... good for AMLO!  Falling Mexican production means higher oil prices, and higher oil prices mean more conservation.  It's better for the environment, it's better for alternative energy companies, it's better for small cars, it's better for America.  Heck, it's probably even better for Mexico --- the place has done a great job of avoiding the Dutch Disease, but the federal government is gonna hafta wean itself from oil revenues someday, so why not today?

Go mismanagement of state-owned oil companies!  Up with nationalization!  Viva MEND!  At some point those big Brazilian fields will come on line, and Iraq will get its oil act together, and who knows how much oil is in the rest of West Africa?  So if you believe that $200 a barrel oil is a good thing for the world, then let's cheer on Hugo and AMLO and all the rest! 

It's a dirty job, saving the Earth, but somebody has to do it.

The Loss of El Dorado

This post is dedicated to Bernard Guerrero.  And Carlos's aunt.

Trinidad is the sort of place when you ask somebody to show you the sights, they go out of their way to show you the industrial park.  "Point Lisas, mon.  Gotta see Point Lisas."  So we saw Point Lisas. 

It is quite impressive.  The place employs more than 11,000 people (about one out of every 50 working Trinidadians, not including ancilliary operations in the surrounding area) in a urea manufacturer, a chlorine producer, a lube-oil blending installation, a natural gas fractionation facility, 4 methanol factories, 10 ammonia plants, and one giant honking steel mill. 

The Point Lisas Industrial Estate (related to, but not quite the same as the eponymous port) started under the administration of Eric Williams, Trinidad’s first prime minister.  It could have been a poster child for the failure of 20th-century socialism.  The place took two decades to get running, and once it did its heavy industries managed to lose money at such a prodigious rate that the industrial park managed to play a large role in Trinidad’s debt-led economic collapse in the 1980s.

Past failure is not what makes Point Lisas interesting; certainly less interesting than its equivalents in (to pick two countries completely at random) Romania or Armenia.  What makes Point Lisas interesting is the place's present success, and what that says about Trinidad's economic and political future.

More below the fold.