The Power and the Money

France number two! France number two!

I know. Most people who watch the Olympics focus on track and field. All else is particular. In my case, I follow track and field when one of my family members is running. That happened in 2008, but sadly not in 2012.

Which means that the Olympics for me is all women’s basketball and women’s soccer. (And men’s basketball, but only when Team America is doing badly. Otherwise, it ain’t that interesting.) In soccer, U-S-A! U-S-A!

But in women’s basketball, I’m all about the France. Sorry, Australia.

The French won in Algeria, and that is why Assad will lose in Syria

A few posts ago, I noted that the French won the Algerian War militarily. My co-blogger has scolded me for being deliberately misleading. He is correct. The discussions with Lebanese army officers that produced the post were actually discussions about why the French experience illustrates why Assad is going to lose.

The French Army had three key advantages that Assad does not have. Moreover, at least one of the reasons why De Gaulle decided to abandon that military victory also apply. First, what advantages did the French have that Assad does not? First, French troop levels (proportional to the Algerian population) were four times the levels that Assad can muster. In theory, Assad can call up reservists and increase draft calls. In practice, that will not work.

Second,the French Army could draw on the resources of the Hexagon. In effect, it was financed by a large industrial power. Assad has ... nothing, except in Michael Ignatieff’s fever dreams.

Finally, troops could not and would not defect during the Algerian War. No matter how far morale declined (and it actually did not decline all that far) defection was simply not in their opportunity set. That is not true of Assad.

There are two more differences, but they are actually an epiphenomena of the above three French advantages. The French could credibly commit to remaining in control indefinitely. That commitment reduced the willingness to fight among the Algerian population. (That commitment turned out to be wrong, of course ... but in 1958 it seemed much more likely that France would be sovereign in Algeria in 1968 that it does that the Baath Party will still rule Syria in 2022.) In addition, the French army had the resources to engage large-scale population resettlements ... something far beyond Assad’s reach.

In other words, the reasons why France won in Algeria show why Assad is going to lose.

The problem is that he is going to lose slowly. He can easily fight on for another few months, although the correlation of forces has turned against him. De Gaulle abandoned the victory because of international pressure and because there were no real advantages (other than access to oil, which the Evian Agreements let France keep) to hanging on. The first applies to Assad. The second not so much.

What could change that timeline? Large-scale support for the rebels, which still does not seem to be happening, or a coup.

I see no signs of a coup, but I am not a Syria expert.

Is Venezuelan heavy oil less risky than French nuclear power?

 So I’ve been looking through the ICC decision against Venezuela. A few things are different from my back-of-the-envelop analysis. As I expected, they did not consider the change in royalty rates to be a taking. On the other hand, they did decide that ExxonMobil deserved compensation for the income tax hike. The panel included only lifting costs of $3.84 per barrel, not including depreciation. (I’m still trying to work out why they did not include upgrading costs.) These things, of course, raise the value of the project.

So what drove the value of compensation back down? The answer is that the tribunal selected a discount rate of 18%. How did they arrive at that number? First, they received expert testimony (provided by the Venezuelan side) that the “hypothetical return that could be gained if a willing buyer were found for the project prior to any events giving rise to the indemnity” would be 19.8% This was backed up by a report from Gaffney, Cline & Associates stating that an 18% return would be reasonable. Finally, the tribunal noted that the average long-term historical return for ExxonMobil shareholders was 18.4%, while the shareholders of the five larges companies earned 17.1%. (Page 428 of the decision. It’s a long decision.)

Is that a reasonable number? Well, EDF builds nuclear power plants in France. When the cost estimate for the Flamanville plant rose from €3.3 billion to €4.0 billion, EDF announced that the cost of electricity from the plant would rise from €46 per megawatt-hour to €54. From those numbers (plus data on the typical capacity utilization rate of a nuclear reactor in France) it is pretty easy to calculate the company’s cost of capital:

 

(This estimate is actually a bit low, since Flamanville is on the sea, and will therefore probably have a higher capacity utilization rate than the average for the French reactor fleet.)

It seems to me that if a French state-owned company uses 13% to evaluate big energy projects in France, then 18% is a reasonable rate to apply to an American private company evaluating a big energy project in Venezuela.

The ongoing ICSID arbitration is not bound by the ICC decision, of course. But the fact that the ICC included the income tax in its decision makes it less likely that ICSID will decide to give ExxonMobil more money. Unless they decide that the royalty changes were a taking, which I still very much doubt, the fight will all come down to the discount rate.

I should add here that it seems that Exxon spent $24.9 million to pursue the arbitration. (Page 459.) I am sure that it’s spending at least as much at ICSID. This stuff ain’t cheap, but I do think it beats calling in the gunboats or the CIA.

Irony of ironies

 There are many things to be depressed about these days. The imminent collapse of the eurozone. The disasterous level of unemployment in the United States. The unstoppable spread of childhood obesity. The rise of the robots. (Artificial intelligence has been particularly depressing me lately.) And ... the declaration by Socialist Party of France that they will form an electoral pact with the Greens to shut down 24 reactors by 2025.

This is insane on any level. French electricity is quite inexpensive; shutting down depreciated reactors will destroy that. Nuclear power is, in fact, becoming competitive with other power sources. This is especially true in France, which would rely on expensive liquified natural gas. (I will post some numbers later, but for not note that investors hammered EDF stock at the news: they would not have done so had nuclear power from existing plants been more expensive than alternatives.) And let’s not talk about climate change: natural gas is better than coal, but still depends on setting something on fire to generate energy. I wish them luck with the whole wind and solar thing, but even Denmark has been unable to get wind above 20%, given its intermittancy, and solar suffers from the same problem.

It’s also a business problem for EDF. In the past, the company has worked hand-in-glove with Areva, the reactor company. EDF wants now to become more international, offering reactors and reactor operation to hedge against insanity at home. That is all well-and-good, but it could destroy the relationship with Areva.

Depressing, although I suspect this is something that the Socialists will walk away from once in office. Anyway, it gives me an excuse to post this awesomely ironic (given the current image of the Iranian nuclear program) advertisement from four decades ago:

Hat tip: William Wu.

Another Libya post

 Various people have noticed that this Libya thing has been dragging on for a while now, and various explanations are being trotted out. But not by me! I was against intervention in the first place, but now that it’s happened I think it’s going reasonably well.  

What’s “reasonably well”? Isn’t Qaddafi still in power? Well, yes he is. But he’s also continuing to lose ground on every front. I already wrote about the “correlation of forces” notion; nothing has changed in the three weeks or so since then. If I stare very closely, it does look like the speed of disintegration may be slowing, which would be bad — but he’s still not winning any battles, morale in Tripoli is still low, and defections are continuing. A while back, I predicted that he’d be gone “by August, give or take a month” — in other words, between July 1 and September 30. I’ll stand pat on that.

Meanwhile, four quick thoughts.

(1) Most of the action seems to be taking place in the western mountains and around Misrata. The eastern front, out by Benghazi, has been relatively quiet. That seems a bit odd, given that Benghazi is the rebel capital and, presumably, the largest concentration of forces are located there. Thinking out loud: if the war ends after a string of victories in the west and central fronts, without anything much having happened in the east, you’d expect that to affect the postwar balance of forces in the country.

(2) France has resorted not just to arming the rebels, but arming them via large, random weapon dumps out of planes. This suggests some things, both bad and good. Bad: the French aren’t coordinating with Tunisia or the various rebel groups in the west. Good: the French chain of command (including, but not limited to, President Sarkozy) is getting anxious. Libya is a much bigger deal in France than in the U.S., and Sarkozy has an election coming up next year. (An election he’s currently favored to lose in a landslide, I should add. But ten months is a long time.) I don’t see Sarko caring to start his campaign without having resolved Libya — somehow. So while I’m ready to be wrong about September 30, I will be astonished if Qaddafi is still clinging to power by next February — the point at which the French presidential campaign really takes off.

(3) The fact that the Libyan rebels are willing to tolerate and work together with large numbers of armed Berbers strikes me as cause for cautious optimism. (Qaddafi spent 40 years demonizing the Berbers as dim, treacherous primitives who are Not Really Libyan.) Of course, the Berbers seem to be doing more than their share of the fighting. 

(4) Two big question marks: Egypt and Tunisia. Egypt is a poor country, and its military is no great shakes, but they’re so big that even a very modest intervention could have disproportionate effect. Tunisia is much smaller — but even Tunisia has half again the population of Libya, and they’re right next to the most intense theater of fighting. I have the strong impression that both countries are being very very cautious and moderate in their responses because they’re both internally unstable at the moment, having just come through their own revolutions. Still, it’s interesting that nobody in either country cares to busy giddy minds with foreign quarrels.

Let’s see how it looks in August.

Europe goes to war

 Libya update: So far, both Doug Muir and I appear to be correct. The war has devolved into a stalemate, but casualties are only racking up in Misrata, where the New York Times estimates between 313 and 1,000 deaths thus far. That is a tragedy, but far less than it could have been.

Calls to send ground forces are growing, but the United States so far shows no signs of seeing any political pressures, domestic or foreign, to send American troops. The E.U. has signed off on a 61-page “concept of operations” to send roughly 1,000 troops to coordinate humanitarian relief, most likely in Misrata.

According to the Guardian, Eufor Libya “would be authorised to fight if they or their humanitarian wards were threatened.” The Guardian reports that the current on-call European battlegroup is mostly made up of German troops, but it turns out to be predominantly Dutch, although the Germans are involved. The other battlegroup is from the Nordic countries; predominantly Swedish. French units, in particular, are not involved. Inside a European Union that appears to be straining over economic adjustment and immigration, the politics of this will be problematic. (I for one would like Doug Muir’s insights here. After all, so far we’re both right!)

A French parliamentarian, Axel Poniatowski, has correctly pointed out that in order to be more effective, NATO will need to put spotters on the ground. Reports that the Europeans are running short of precision-guided munitions only make that more pressing; moreover, the Europeans may have to deploy helicopters, which means ground crews.

And that means a need to creatively interpret the U.N. resolution or go back and get a new one. France and Britain seem to disagree on this point.

This is an intervention that should be easy. The rub is that the Europeans really have let their military capacities deteriorate to a rather remarkable extent. Moreover, coalition warfare is extremely difficult; more so, when the allies do not agree. So far, the six bad results have been avoided, including the 7th possibility of prolonged attrition warfare. Conditions in rebel-held territory seem good, and the oil industry is getting organized. But the jury is still out.

The mystery of rising nuclear costs

 What’s the biggest obstacle to greater use of nuclear power? In some countries, like Germany, it’s public opinion. (The German reaction to the disaster in Japan does not make sense to me, but I’m the sort of person who finds these facts about radiation poisoning to be reassuring.) As the Japanese situation continues to unfold, that may re-emerge as a problem elsewhere.

But in most of the Americas and in Asia, though, the problem is that the cost is too damn high. In fact, the cost is high and rising. Here are estimates for American plants from Koomey and Hultman, in thousands of 2009 dollars per installed kilowatt by date of completion:

But this is not true everywhere. Below is a preliminary estimate for France, made along the same lines, and calculated by myself and Carlos Yu. It includes interest costs and decommissioning expenditures. The French data are such that it is not possible to break out the cost of every individual plant, but it is possible to break out the cost for plants of a particular vintage. The dots show the cost per kilowatt in 1000s of dollars on the right axis; the vertical bars represent the number of plants under construction in a given year: 

The overall picture is not all that different from the United States. At first, there are some diseconomies of scale as construction ramps up to an astonishing peak of 37 reactors. Costs then stabilize until 1987, when they begin a relentless march upwards, save for the final plant opened at Civeaux in 1999. New plants aren’t getting any cheaper: the gold triangle is where the Flamanville plant was supposed to clock in; the circle off to the right is where it is going to come in.

While preliminary and subject to change, our estimates are not wildly out of line with these two.

What happened? At first, it looks like diseconomies of scale as the number of plants under construction reaches an astonishing 37 per year, after which things stabilize until 1987, when they begin a relentless climb. What’s the reason? I don’t know, but a highly-placed EDF official pinned it on safety requirements. Another possibility is that the country lost its chance at keeping scale economies when it rolled out the P4 and N4 reactor designs instead of continuing to churn out the old 900-MW plants. The truth is that I have no idea.

What I do know is that the barrier to greater use of nuclear power has been and remains its cost. Safety is a secondary issue, except inasmuch as safety requirement directly drive up the cost. I have trouble believing, however, that investment in actual safety equipment is wasted the way the time spent getting permits is wasted. So if it is safety that is driving up nuclear costs, then nuclear power is not going to be competitive for a long time to come, regardless of the political reaction to the ongoing disaster in Japan.

What’s the case for dollarization?

 This is not a post about organized crime in Mexico, although I will be returning to the topic shortly. This post asks simply: given all the things that can go wrong with a fixed exchange rate, let alone a currency union, why do so many countries continue to return to them? After all, when they go wrong, they can go very wrong. You can get horrible explosions like Mexico in 1994 or the Asian currency crashes in 1998, or you can slow grinding meltdowns like the depressions in Argentina around the turn of the century or the Baltic States today. 

Yet countries continue to do it. All the West Indies save Jamaica fix to the dollar. Ecuador, El Salvador, and Panama have dollarized. The Baltic States have already been mentioned. Denmark fixes to the euro. The euro itself has no shortage of suitors, even now. In fact, even with the Eurozone’s problems, countries want to form currency unions. East Africa wants to form a currency union. Why? 

Well, history is a big reason. The CFA franc, for example, exists and is linked to the euro because of the French non-empire also known as Françafrique. A similar thing can be said about the West Indian links to the dollar. These historical links make it very hard to figure out the effects of a currency link. Maybe countries link to countries with which they trade. Or countries trade more and link with countries with whom they have special political links. All that would make it hard to tell whether exchange rate certainty has a big effect on trade, because causality could run both ways. That didn’t stop Andy Rose from trying, but the results were still highly contested.

Jeffrey Frankel came up with a neat natural experiment. In his own words:

“The long-time link of CFA currencies to the French franc has clearly always had a political motivation. So CFA trade with France could not in the past reliably be attributed to the currency link, perhaps even after controlling for common language, former colonial status, etc. But in January 1999, 14 CFA countries woke up in the morning and suddenly found themselves with the same currency link to Germany, Austria, Finland, Portugal, etc., as they had with France. There was no economic/political motivation on the part of the African countries that led them to an arrangement whereby they were tied to these other European currencies. Thus if CFA trade with these other European countries has risen, that suggests a euro effect that we can declare causal. The dummy variable representing whether one partner is a CFA country and the other a euro country has a highly significant coefficient of .57. Taking the exponent, the point estimate is that the euro boosted bilateral trade between the relevant African and European countries by 76%. It is not doubling, and the timing is not perfect. But it does suggest that the effect on trade among small countries is very substantial even after correcting for endogeneity.”

It is true that the CFA franc is in a fixed exchange rate with the Eurozone, not a currency union. Still, as fixed exchange rates go, this one is very strong. It’s supported by the French treasury and not just the governments of the countries in question. Moreover, these countries are dependent on France in umpteen ways, and their governments would find it very difficult to leave the zone without risking economic and political collapse. So there doesn’t seem to be a strong institutional reason to reject the results. It isn’t quite a currency union, but it is close. So what happened in 1999 between the CFA countries and the Eurozone wasn’t quite an accidental currency union, but it was close. And even if it isn’t a real currency zone, the experiment can shed a lot of light on fixed exchange rates. 

So fixed exchange rates promote trade! Great news for those of us with strong intuitions that fixed exchange rates and currency unions should be good things for small countries. Problem is, the quantitative results are a little odd:

First, the effect starts in 1997, not 1999. It is possible that expectations of the fixed rate with the rest of Euroland caused the trade boom, but that seems a little ad hoc. Second, the effect seems to have faded out by 2006. Neither result lets one say with confidence that dollarization (or even fixing to a bigger currency) is a good thing for poor countries. Either the result from the CFA-Eurozone experiment is stronger than it looks (maybe 2005-06 were just bad years, or the authors failed to correct for some important factor), or fixed exchange rates only have brief and transitory effects. 

We still have a mystery. Thoughts? 

Occidental, Iraq, France, Britain, travel, my wife (♥) and whatever else

 The short answer to Bernard's question about Oxy is that they bid too high. They were the minority partner in a field with Eni, Sonangol, CNOOC and Kogas ... and they lost.

The rest of the final post in the Iraqi oil series is going to be held up for a bit. The reason is left for an exercise by the reader, but it is a good one. The worst case scenario is that you will see it here fast.

This month begins a horrendous travel month during which I will go from Boston to Los Angeles to New York to Tulsa to Shamrock TX to Burlington to New York to Miami to Atlanta to home and my wife!!! (Who will be visiting me in both New York stops, thank the Lord.) France was much more fun. Oddly enough, I'm really only looking forward to the Tulsa-Shamrock bit of the trip, although I will enjoy smoking cigars in New York and Miami with my hermanos if I get the chance.

As someone who has a great affinity, even a love, for both Britain and France (maybe it's a color-combo thing, or a losing land wars in Asia thing, or some else ... thing) I present you with the following:

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Sarkozy Visits the U.S.
www.thedailyshow.com
Daily Show Full Episodes Political Humor Health Care Reform

I eagerly await the Ranter's informed commentary.

Overwork, French neocolonialism, and the economics of labor migration

 One thing that truly does suck is being in Paris on a rainy weekend with your wife and being utterly unable to enjoy the city, let alone take that side trip to the south of France, because a chapter of your next book (and an article for a conference) is taking much longer to write than it ought to. This post therefore gets a leisure tag, because of the lack thereof. But now you know why I haven't finished the Dubai posts (one more is waiting about Iran) or said more about nuclear power, the reason for my trip.

One thing that doesn't suck is Doug Muir's explanation of Comorian independence. It may be unsatisfying, but so is reality. It does leave me wishing that Julius Nyerere, a heroic man of heroic accomplishments, hadn't been so ... well ... unyielding in his anticolonialism. The world, I think, would be a marginally more happy place with 800,000 additional French citizens in the Indian Ocean, rather than 800,000 poor victims of lousy institutions wedded to French neocolonialism.

Something that doesn't suck but is, I think, incorrect, is Charlie Stross's analysis of the economics of restrictions on labor mobility. The discussion gets started at comment #27. Go, argue!

Of course, I have a dangerous streak of Francophilia, and am therefore not to be trusted.

Near-recolonization in the Comoros

 Oh, gosh, the Comorian story gets weirder. I knew that one of the Comorian islands, Anjouan, had to be invaded by the African Union (with much French support) in 2008 when Mohamed Bacar refused to step down as the president of the province following a disputed election. I also knew that Anjouan had declared independence in 1997 and was reluctantly coaxed back into the Union, which contributed to the crisis 11 years later.

What I did not know was that the separatists did not actually want independence. Rather, they wanted reunion with France. In all seriousness, the rebels raised the Tricolor and asked to become an overseas collectivity. Paris said no, of course. It would wreck relations with Africa and cost no small amount of money. And where would it end? Still, I can't imagine that nobody in Paris was tempted; one hell of a compliment, that. I don't know of any British ex-colonies petitioning to re-become a Crown Colony. 

To be fair, the story isn't completely unique: Cape Verde tried to get into the European Union back in 2006, and given how reluctantly it accepted independence I suspect that a vote to reunite with Portugal would probably pass. That said, I'm still not sure what to make of the Anjouan story. Probably nothing, truth be told. But it does bring home to me the overall weirdness of the initial vote to secede from the French Republic. Puerto Rico, Samoa, the CMNI ... most American possessions with status akin to an overseas collectivity do not seem to want independence. The few that did (e.g., the TTPI, whose residents were neither American citizens nor nationals, whereas the Comorians enjoyed full French citizenship before 1975) carefully negotiated a limited form of independence that preserved the benefits of association with the United States. So what happened in the Comoros to push its leaders into not only accepting independence, but a very badly negotiated independence deal with a French government that would have been happy to keep the islands within its orbit?

And don't say nationalism, because many places are nationalist yet eschew sovereignty when the costs are high enough. They certainly were high in the Comoros, and it would seem that by the 1970s those costs should have been manifest. Why then did Comorian nationalism drive its leaders towards secession ... a decision a good chunk of the nation's people seem to regret?

Random observations

 I don't do a lot of random observing on this blog. It may be time to start. So here are few. As always, comments and long involved arguments are desired.

(1) The internet and social networking are overrated. (I'm looking at you, Randy.) Way way overrated. Had computer technology been four decades more advanced, we would be pinning all the tumult of the sixties and seventies on the internet. Weather Underground, blame it on Facebook! Had it been six decades more advanced, we would have been bored. You know, like anyone surfing the net in the UAE can get bored. Click the link and tell me why I'm wrong. (That one goes to Charlie Stross. But how the hell did he manage to erase my post about meeting him in a bad bar in Boston?)

(2) Lay off my man from St. Lucia Saint Kitts! Alexander Hamilton is the hero of every muscular patriotic American pinko. He is why you can be a lefty Big Government type (with all respect to Alex Harrowell, I will have to disavow the term socialist, since it's become a curse word in my country) and still evoke the founding fathers. I will give props to libertarians (hey! Guy Tower! Why you don't read this, G?) but I will not let Dick Armey lie about the founding father of the nationalist American left.

(3) Basta with the Massa puns. (Scott? I haven't heard any from you, but I know you thinking 'em.) Seriously, people. Funny once. No more emails, please.

(4) You should all read more Alex Harrowell.

(5) I write this in Paris. Paris has a lot of white people. Really, the city is surprisingly chock full of 'em. But a major figure at a well-funded think tank says it ain't! Am I confused? So I looked up the figures. I was only able to find the 1999 results, which told me that 17.6% of the city's population was foreign born. Of those, 14% were Algerian-born, 13% from Portugal, 10% from Morocco, 6% from Tunisia, 4% from the madre patria, another 4% from the country that I often think really should be the madre patria, and 3% from Turkey. That comes to 54% of the foreign-born. Speaking as somebody who mistook the Moroccan fellow who drove him from the airport for an Eastern European and then asked his equally-Moroccan barber if he was from Italy, I leave any conclusions about Charles Murray's character (or my ability to identify accents in a foreign language) as an exercise for the reader. I do of course assume that Mr. Murray realized that people from Martinique, Guadaloupe, Guyana, Reunion, and (very soon) Mayotte are indeed as French as any blond German-speaking dude from Alsace.

(6) Man, there were a lot of cigarette butts in the gutter this morning when I took the metro in to the office. I ... like that.

I like France. I can't help it.

Reshaping geopolitics

 Two days ago, in a Financial Times column that was bullish on the long-term potential of the Indian economy, Martin Wolf said something very sensible:

“Exhausted by the burden of its pretensions, the U.K. should soon offer its seat on the Security Council of the United Nations to its former colony. Its condition would be that France does the same in favor of the European Union.”

Yes, indeed. Too bad that Mr. Wolf and myself are in agreement that it won’t happen. But still. What does Britain get out of its seat on the Security Council? Countries with rotating seats, like Mexico, have often found it more of a pain than a benefit. (It makes neutrality difficult.) Small countries get a monetary benefit as the U.S. bought their votes (joined in the old days by the USSR, and probably the PRC in future ones.) And I can imagine that France likes the insurance policy of a veto; after all, it does have a penchant for randomly invading African countries. But the U.K.? Why bother? Sell it to India.

Nice buildings in London, I must say. Even the new ones.

Nuclear power in the UAE

  The below picture does not show a nuclear power plant.

 
While cooling towers can bear a resemblance to the onion domes, I suspect that the nuclear reactors that Korea will build in the UAE will not be as pretty.

The Korean victory in the UAE bidding process came as a huge surprise to Areva, the French nuclear conglomerate. They had the EPR design ready to be rolled out. President Sarkozy had pulled out all the stops. France had a military base in the country and was training Emirati troops. The President had visited Abu Dhabi. Areva could offer a long-term fuel contract, delivering fresh uranium from its mines in Niger (enriched, of course, in France). Moreover, Areva could accept used fuel and reprocess for reuse it at its plants in La Hague and Mercoule. France meant nuclear. It had to happen.

Yet suddenly the South Koreans came out of nowhere. Huh?

I’d been wondering that myself. So I asked some fellows I know in the Abu Dhabi government. They gave me a simple answer. The Koreans offered a cheaper price, guaranteed that price, and offered a long-term service contract. The Korean price came to $3.64 million per megawatt for a 1400 MW reactor. The French offered something similar, but they refused to take on the risk of cost overruns. When pushed to offer a fixed-price turnkey project, they came back with a price of $5.45 million per megawatt for the 1650 MW EPR design.  Now, Areva’s ability to guarantee fuel for a decade or two is a big advantage ... but Areva will sign such contracts with anyone. No need to buy one of their reactors. In fact, the Koreans already have a 10% stake in Areva’s new mine in Niger, which guarantees supplies to their domestic plants under long-term contracts.

Does the deal make sense for the UAE? The UAE government takes a rather long-term view, so a 5% discount rate seems reasonable. (For comparison, EDF uses an implicit discount rate of 13% in its investment decisions.) Assuming that the reactors manage to reach the 89% capacity utilization reached in the United States, the Korean price implies a capital cost around $23 per megawatt-hour. Fuel costs about $4. Operation and maintenance costs are harder to know, but the word is that the Koreans offered to run the plants for their useful lifetime (presumably 40 years) for roughly $5 billion each. That implies a cost around $11 per megawatt-hour, which is in line with the $8 estimated by the OECD for South Korean reactors. Total cost, $39 per megawatt-hour, assuming that Kepco absorbs the inevitable cost overruns.

What about the other options? At those prices and discount rates, nuclear is competitive with coal. Coal costs quite a bit in peripheral areas — $19 in Finland, for example, and $20 in Japan (per megawatt-hour of electricity produced) — and in a world where the United States has begun exporting the stuff to China via the Panama Canal those costs are unlikely to decrease.  The capital costs of your typical coal plant come to about $11 per MWh, but political pressures would almost certainly drive the UAE to purchase the most advanced “clean coal” technology, which would push the cost up to $20. (No, it isn’t that clean, but it emits less carbon by dint of burning the stuff at higher temperatures.) Adding in the O&M costs from the Japanese coal plants (which use high-temperature furnaces) drive total coal costs up to $50 per megawatt-hour.

The rub is gas. Gas is cheap. Capital costs are tiny; less than a quarter of nuclear. Fuel costs are relatively high in most of the world, except the UAE, where Qatar stands poised to export endless amounts of the stuff via the Dolphin pipeline.

Why choose nuclear over gas? Abu Dhabi is making a strategic calculation, not an economic one, at least not in the short term. Perhaps they think that the local price of gas will rise, either due to increasing demand or because the cost of making LNG for export will fall. Perhaps they are making some sort of inexplicable calculation about foreign exchange. Perhaps they are taking a long-term bet on nuclear power. Or they might simply think that Qatar will be unable to supply them with the quantities they will eventually need for electricity generation at any price, considering that the UAE isn’t their only GCC customer.

I honestly don’t know, although I am trying to find out. What I do know is that they aren’t making a political calculation ... otherwise they would have gone with the French.

Should I add some graphs and charts?  

Things that make you go “hmmm”

   Can’t sleep, my head is so stuffed up.  (Sleeping 17 hours the day before probably didn’t hurt.  Docs think I had a virus but kept wandering around in the rain anyway, allowing a secondary infection.  Lesson:  machismo does not pay.)  So I surf the net.  And what do I find?  France’s “hamster hotel.” 

Every country, paradoxically, has a typical way to be weird.  Most Americans, for example, don’t own more guns than socks, or dress like something out of a blaxploitation flick, but those would be very American ways to be outside the American norm.  You can all think of others, or examples from different countries.

So all I can say here is that a hamster hotel is not only weird, it is a very un-French way to be weird.

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. 

A real anti-imperial triumph

  It seems as though the Argentine ambassador in France will no longer need to pay embassy expenses out of his own pocket.  A French judge lifted the freeze imposed on April 3rd.  More importantly, a German judge released the funds that German companies owed Argentine tax authorities.  Interestingly, Judge Wölber did not base his decision on sovereign immunity.  Rather, he ruled that since the tax payments were owed by the companies’ Argentine operations, German courts had no authority.  It remains to be seen if this precedent will be followed by other European courts, but the Argentine government is optimistic.

Interestingly, U.S. courts have taken the same position.  In 1999, the New York-based Leucadia National Corporation sued Nicaragua over $26 million in defaulted debt that it had purchased for $1.14 million.  A New York court granted the company $87 million.  (No, I don’t know why.)  It tried to collect by attaching Nicaragua’s share of the ticket and landing fees paid by U.S.-based airlines that flew to that country.  U.S. courts, however, refused to uphold the judgment.  But don’t cry for Leucadia.  Eventually the World Bank paid off the debt at 4.5¢ on the dollar, including accrued interest.  By my calculations, Leucadia received about $7.8 million, for a nice return of 584%. 

I am increasingly unsympathetic to Argentina.  But I am also relatively unsympathetic to the vulture funds that try to use the judicial system to impose sanctions on defaulting governments.  I may change that position if we start seeing more ploys like President Correa’s brilliant gamble, but that’s still a hypothetical fear, not a real one. 

P.S.  It seems like I was wrong about Ecuador.  I’ll discuss why, but only if there’s interest.  No reason to admit error if nobody cares ...

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. 

Observatorio Argentino 10: French lawyers declare war!

  It seems as though some French lawyers have decided to do a Rogers on the Argentine Republic. 

A few years ago, in 2005, Argentina repudiated a big chunk of its foreign debts.  Since then, the jilted bondholders have been trying to get it back.  On April 7th, the famous NML-Elliott announced that their lawyers managed to get a French bailiff to put a stay on all Argentine accounts in the country.   “The frozen assets in France are not diplomatic, and therefore are not protected by sovereign immunity,” said an Elliott spokesperson. 

Well, Buenos Aires wasn't going to take this lying down.  Elliott had already tied up funds held in France by the Banco Hipotécario and Banco Central.  The Argentine embassador to France, Luis Ureta, complained to the French foreign ministry.  The French diplomats were not happy to hear the news.  “On Monday night, a bucket of cold water landed on the heads of the diplomats at the Latin American Desk of the French foreign ministry,” was how La Nación described it.  The Argentines asked France to unfreeze the accounts “by any means necessary.”  (Argentines are not Filipinos:  I don't think the phrasing was deliberate.)

The French response?  Well ... it was rather American, actually.  A spokesman expressed support for the Argentine position, and then told the Argentine government that if they didn't like it, it was up to them to appeal.  In the interim, the Argentine embassador is paying for burnt-out light bulbs and the like out of his own pocket.  I suppose the embassy employees are getting paid back in Argentina and withdrawing their salaries out of ATMs, or some such.  The account itself is only a million euros or so, but man is it a pain to have to run a big office without any access to, you know, modern finance. (Although many Argentines have some recent experience of doing exactly that.)

Anyway, it's a bit of mess.  Argentina has already lost access to several hundred million dollars worth of bank accounts and all of the nationalized pension funds held abroad.  About the only bright light in the legal firmament is that a New York judge just declared that the recently-nationalized Aerolineas Argentinas is “not an alter ego or agent of the Republic, and the recognition of Aerolíneas’s independent status won't serve as a fraud or injustice against the Republic’s creditors.”  So that's one bright spot.  

In other news, I've added an “empire” tag to this blog.  I'm still not sure what I mean by it, but once I figure that out, I'll try to reclassify past posts appropriately.  Suggestions?

Oh, and go listen to Will.  I need help with this stuff!

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. 

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. 

Piratas atacan la madre patria

Newsflash:   pirates just captured a Spanish fishing boat off the coast of Somalia.  A Spanish frigate has been dispatched from the Red Sea and Madrid has requested assistance from NATO countries with a naval presence in the area. 

Considering as I just posted about pirates, I figured that it'd be remiss not to mention that the French raid doesn't seem to had an immediate deterrent effect.  Not that there's anything surprising about that.

Pirates!

In a scene of most superior uber-cool, the French military arrested the Somali pirates who’d captured a cruise vessel returning from the Seychelles on April 4th. 

So, of course, the New York Times would take the opportunity to publish an op-ed blaming namby-pamby British cupcakes for failing to enforce international law by arresting Somali pirates.  Why did the author claim that the Brits were wussing out? Because they were all worried that these scurrilous lawbreakers might claim asylum if they were brought back to the U.K.  Worse yet, the Somali government might violate their human rights if they were turned over to Mogadishu.   

“The British attitude has come a long way since the days when pirates were chained to pilings at Wapping and left there until the tidal water of the Thames ebbed and flowed over the bodies three times. So much for Britannia ruling the waves.”

Sounds good, right?  Fits a whole narrative of European decline, although, well, the part about French military prowess doesn’t quite fit.   

Too bad it’s all complete crapola.  Details below the fold.