The Weekly Wrap — Aug. 3, 2012 (Part II)

Posted by Logan Bayroff

Blackout: First India, then China? Astonishment has been one takeaway from India’s massive blackout, which by comparison is in the ballpark of a loss of power to the entirety of the United States and western Europe. Another reaction has been tut-tutting — we all knew that motley India, held together with gum and spit, was not long for BRIC status. Yet India is hardly the only major economy with a decrepit infrastructure – as the Washington Post’s Ashley Alsey points out, the U.S. itself is just a grid breakdown away from its own gargantuan electricity failure. In India’s case, the main problem is not just shoddy infrastructure, but a shortage of coal and natural gas: The Indians haven’t been able to get their hands on enough fossil fuels to fully power their economic growth.

As it happens, the world’s other key BRIC — China — pretty much faces the same conundrum. More than 70 percent of China’s energy comes from coal, and (as we note elsewhere in the Wrap) a growing percentage from natural gas. The Chinese have managed their domestic industries more successfully than India, making them less dependent on imports — but only just. Massive amounts of coal and natural gas pour into China every day, and as in India, it still may not be enough. The myth of Chinese efficiency might have some truth, but they have faced blackouts as well, and are not immune to an India-style meltdown. A May 2012 report by the Energy Transition Research Institute found that China’s electricity policy falls short of "the compound challenges of growing demand, rising costs and sustainability [and] represents a grave threat to the Chinese economy."

Matthew Hulbert, an analyst with the Clingendael International Energy Program in The Hague, calls the blackouts a "Fukushima moment" for both Beijing and Delhi. Just as Japan’s disaster was a wakeup call regarding nuclear power, the blackouts are a message regarding electricity security. Hulbert argues that the two BRICs, if they can set aside their long national rivalry, could find a solution in a collaborative approach. Specifically, they could obtain coal and natural gas supplies together. Here is why: If India becomes as aggressive as China has been in obtaining coal and natural gas supplies, the two in combination could seriously drive up asset acquisition prices. But if they strategize together, they might both acquire the supplies they need without pumping up the market.

Yet, if that is going to work, India needs to get serious, Hulbert argues. As it is, China has been much more proactive in securing key fossil fuel supplies, CNOOC’s July 23 purchase of Canada’s Nexen being only the latest example. India in fact has hardly been in the game. "A China-India relationship will only really work if it’s a case of making virtue out of necessity," says Hulbert. He said:

If India ups its game from its blackouts, China might just start taking them seriously. But if it’s a choice between digging India out of a hole and Beijing getting its energy fix to keep growth going at the levels they need, I’ll bet all day long on the latter.

The Indians have long been mulling a sovereign wealth fund for exactly this purpose. Bringing that idea to fruition would show Beijing that Delhi means business. Already, we’ve seen one tiny step down the path of collaboration — in June, India’s state-run Oil and Natural Gas Corp. and the China National Petroleum Corporation agreed to conduct joint exploration ventures worldwide. That may be a fine start, but much more will be required.

DIBYANGSHU SARKAR AFP/Getty Images

The Weekly Wrap — Aug. 3, 2012 (Part I)

Posted by Steve LeVine

China’s moment of coal truth: A question that has vexed us for some time is when we will witness an inflection point in ordinary Chinese tolerance for the coal-borne pollution in their air. At that time, we have argued, we will likely also see a sharp turn away from coal consumption, and more use of cleaner natural gas — Communist Party leaders will see to it for reasons of political survival. With this shift will come important knock-on events, including a materially smaller increase in projected global CO2 emissions. According to Bernstein Research, that tipping point may now be past. In a note to clients yesterday, Michael W. Parker and Alex Leung argue that the moment of truth became apparent to them in two pollution protests over the last month in the cities of Shifang and Qidong. In the former, violent July protests resulted in the scrapping of a planned metals plant; in the latter last week, the ax fell on a waste pipeline connected to a paper mill, again because of an agitated local citizenry. Their paper’s title — Who Are You Going to Believe: Me or Your Smog-Irritated, Burning, Weeping, Lying Eyes? — is a reference to what the authors regard as a general outside blindness to a conspicuous new political day. One reason no one is noticing, they say, is the curse of history itself. The record of surging economies — comparing China with, say Japan — suggests that a burning aspiration for cleaner surroundings over economic betterment should reach critical mass in China only in about a decade. Yet, "the clear signal from Shifang and Qidong is that China has reached the point today, where the population is ready to take to the streets in protest of worsening environmental conditions," the two researchers write. They go on:

Since we all agree that the Chinese government is focused on social harmony, the practical implication is that the government will do whatever is required to ensure that people aren’t in the streets protesting not just food prices or lack of jobs, but also the environment. Few observers seem to classify the environment as the kind of issue that could excite the Chinese population into the street or the kind of issue that could result in changing political decision making and economic outcomes. And yet that is exactly what we are seeing.

The Bernstein writers seem under no illusion that their scenario will be widely embraced. In fact, they are not summoning anyone to the ramparts. Rather, their paper is a pragmatic nudge for equity analysts and customers to incorporate a very different scenario into their buy-and-sell decisions. That sounds like a reasonable call.

 

The mysterious Mr. Putin: Feuds, grudges, vendettas — a general unwillingness to move on — are among the least-constructive of humankind’s nature. It is in that spirit that we put aside the nine-year-old, politically motivated imprisonment of oilman Mikhail Khodorkovsky, the 2006 London murder of KGB defector Alexander Litvinenko with radioactive polonium-210, and the still-unsolved early-to-mid 2000s killings of journalists Anna Politkovskaya, Paul Klebnikov and  Yuri Shchekochikhin.  Instead, we stay current, and ponder — why oh why does Russian President Vladimir Putin wish to be globally associated with protecting senior officials who, implicated in the theft of $230 million from the Russian treasury, imprisoned their accuser — lawyer Sergei Magnitsky — until he died of beatings and medical neglect? With the current jailing of three women members of punk ensemble Pussy Riot, who face seven years’ imprisonment for singing and kicking against Putin in church? And with the indictment of opposition leader and blogger Alexei Navalny, who could be imprisoned for 10 years for alleged embezzlement?

The conventional answers are variously that Putin cultivates a tough-guy image, that he is intolerant of critics, and that this is all about Russian power-politics. As for me, I have leaned toward a less-satisfying yet possibly more chilling explanation — that Russia’s culture of impunity for murder is larger than Putin. That is, there are no "to-be-murdered" lists in the Kremlin, and Putin has never uttered the phrase so often attributed to him, channeling Henry II, "Won’t someone rid me of this nettlesome (fill in the occupation)."  Rather, Putin lords over a pre-existing culture comprising lines not to be crossed, and we have either a case in which challenging that deep-seated system is too politically risky, or simply one that doesn’t trouble him much. As for Putin’s apparent eagerness to be linked with events widely seen abroad as stigmata, that is purely domestic politics — it plays well to a not necessarily obvious local constituency whose acceptance he cherishes above any other.

 

When Russia joined the Kurdistan oil-rush: After four unanswered triumphs by autonomy-minded Kurdistan, the ball is firmly in Baghdad’s court — it must craft a response to growing defiance by the world’s biggest oil companies, which have been signing exploration deals with the northern region. Baghdad claims the right to vet and approve all energy deals in Iraq, while Kurdistan argues that it is autonomous, and can make its own such decisions. The latest miscreant as far as Baghdad is concerned is Gazprom, whose oil affiliate Wednesday bought large percentages in two blocks of land that the Russian company estimates could contain 3.6 billion barrels of oil. The move follows on the heels of an announcement just the day before by France’s Total, which said it had bought a 35 percent stake in two Kurdistan fields. Last week, Chevron entered into a deal for a Kurdistan oilfield, and in October, ExxonMobil was the first Big Oil company to sign a contract in the region. As punishment, Baghdad excluded Exxon from a May auction, and wholly blacklisted Chevron from any future oil deals. But since the oil companies and Kurdistan itself have already said — loudly — that they don’t care about exclusion, "the next chess move needs to come from Baghdad," a Western oilman based in the country told me. Baghdad’s choices, according to this oilman: Do nothing; punish all the companies in a way that hurt them materially; punish Kurdistan – or punish both. "I don’t know which way they’ll go, no idea at all," the oilman said.

The issue is more than bragging rights or cash. We are talking nationhood and geopolitics — as this blog pointed out a couple of days ago, with their actions, the oil companies have effectively recognized Kurdistan as a stand-alone state. Ironically, Baghdad itself has set this course of events into motion with miserly oil-contract terms that make it ultra-profitable for the companies to pull up stakes and go north.

"The terms offered by Iraq are so thin, that the draw of Kurdistan seems irresistible," Steven Kopits, an energy analyst at Douglas-Westwood, told me. "So Iraq, in choosing to maximize its own oil revenues, may also be choosing to let Kurdistan go." Kopits said:

Could the matter end in open conflict sometime in the future?  Possibly. But given that Iraq can hardly manage its own restive minorities, and given that arbitrarily crafted countries like Iraq tend to fall apart into ethnic or religious groups when they become democracies, it would seem more likely that over time the de facto status will become the de jure status.  With oil revenues, acceptable governance, and the support of the oil industry, Kurdistan has the opportunity to survive as an independent entity.  In a Solomon’s choice of money or country, Baghdad has elected to take the money.

That may be the case, but Baghdad will still move to hold the country together.

Go to Part II of the Wrap.

Philippe Lopez AFP/GettyImages

Will oil companies provide Kurdistan its de facto statehood?

Posted by Steve LeVine

Less than a year after the departure of U.S. troops from Iraq, Baghdad is losing a primary lever over independent-minded Kurdistan — its grip on the northern region’s revenue-earning oil industry. Kurdistan’s secret weapon? Foreign oil companies are exasperated with Baghdad’s stinginess and allured by the Kurds’ more liberal terms for oil contracts.

These companies are becoming an unintentional fifth column in Kurdistan’s march toward economic autonomy. On July 31, France’s Total became the third big oil company to break with Baghdad by signing an unsanctioned oil deal with Kurdistan. Baghdad, intent on full mastery over the nation’s massive petroleum revenue, forbids oil companies from dealing directly with Kurdistan and instead requires them to bid for projects through the Ministry of Oil and to ship their oil through Baghdad-controlled pipelines. However, ExxonMobil, Chevron, and Total have now flouted Baghdad’s wishes, putting their oil deals in Iraq’s south at risk in the process. Their calculus is that despite the relative inferiority of Kurdistan’s oil reserves, the potential upside there outweighs the downside threat of possibly losing access to Iraq proper, according to oil company executives with whom I have spoken.

The pressure will now be on Baghdad to somehow stem what is looking like an oil-company rebellion. It’s yet another challenge for the Iraqi government, which is already struggling with rising violence and dropping oil revenue because of sagging global prices.

History has seen numerous states taken over by companies — one thinks, for instance, of the United Fruit Company’s activities in Latin America. But should this trend continue in Kurdistan, it would mark, as far as I recall, the first time that oil companies have been principal actors in a nation becoming effectively autonomous. Of course, it will be up to the Kurdistan Regional Government (KRG) to ensure that it is not swallowed up by the companies, which was the fate of some Central and South American countries in the 19th and early 20th centuries.

On the surface, the companies’ decision to spurn Baghdad seems foolish. Iraq is a huge prize in the oil business, with some 148 billion barrels of proven oil reserves — the second-largest conventional volume in the world. By comparison, the KRG claims to have another 45 billion barrels of oil under its own soil.

After Saddam Hussein’s overthrow in 2003, oil companies from around the world rushed in for the right to both rework old, debilitated fields, and to drill new ones. But Baghdad has exacted tight-fisted terms, signing only low-paying service contracts that effectively turn high-risk, high-return wildcatters into mere hired hands. Until recently, the world’s oil companies have bristled at the terms, but gone along in hopes of conventional production sharing agreements down the road. Now, the grumbling in the ranks is growing to a roar.

A fourth-round auction of oil properties in May showed both that Baghdad seems to have no intention of greater generosity — and also that the companies are fed up. Just three of 12 blocks on offer found successful takers.

In October, ordinarily ultraconservative Exxon uncharacteristically signaled the first sign of upheaval by signing an exploration deal with Kurdistan despite having an agreement to produce oil at Iraq’s West Qurna field. That seemed quite a gamble: West Qurna, after all, holds some 8.7 billion barrels of oil, and there was a distinct possibility that Baghdad would revoke the deal as punishment for Exxon’s opening to the Kurds. Now, Total’s decision — the purchase of a 35 percent stake in two exploration blocks in Kurdistan — makes what had been a gingerly tip-toeing toward the KRG look more like a headlong rush. Total did not respond to an email requesting comment.

Punishment has been meted out for the companies’ defiance: Exxon was barred from the latest auction, and Chevron, which has no current deal in the south, has been officially blacklisted from any future contracts. However, the companies don’t seem fazed in the least.

"We understand completely that if we enter into a contract in the north, we’re probably going to be blackballed in the south," an official from one of the companies told me on condition of anonymity. "So the question is, ‘Have we exhausted all our options for getting a deal in the south on terms that we would find acceptable?’"

The answer for companies headed for the door is yes, the official said. "I think that’s beginning to be borne out as a lot of companies are looking to renegotiate their terms," he told me.

"The terms in the north are much better. The government gets a stake, but the better you do, the more you get, and the terms are attractive," he said. Plus the overall conditions are "night and day better" in Kurdistan than in Baghdad, he said. "You fly into a very modern, efficient airport. There are good hotels, good infrastructure."

When combined with the Kurdish authorities’ already-existing plans to build independent oil and natural gas export pipelines out of Kurdistan that avoid the Arab regions of Iraq entirely, the oil deals look increasingly like a robust, commercial-led carving out of the region as a stand-alone entity. Some might call it another substantial piece of the puzzle toward the creation of the Kurds’ longstanding national dream — a state of their own.

Robin Mills, a former Shell geologist and author of The Myth of the Oil Crisis who does private consulting on Iraq, said in a Twitter exchange that the Total news is a "big blow" for Baghdad. As for Total itself, the company seemed to be taking on sub-par fields in Kurdistan — "not a crown jewel in return for risk they’re taking with Baghdad" — but that "perhaps Total just doesn’t see any risk with Baghdad any more."

Can the embattled Iraqi central government get the rebellious oil companies back in line? Patrick Osgood, deputy editor of Oil & Gas Middle East magazine, suggested in a tweet that Baghdad could respond by making "a quick fire sale [of Total’s fields] to Petrochina," the publicly traded arm of the state-controlled China National Petroleum Company. But even that may not solve Baghdad’s basic problem: "Can’t see it’s smart for Baghdad to be so reliant on Shell, BP, Russians & Chinese," Mills said.

Some messages that run counter to conventional wisdom stand out from this showdown: Oil companies, it turns out, will not pay any price for access to the biggest fields in the world, but in fact will seek greener pastures. Oil cannot be bottled up — it will find its market. And sometimes, a new state can take form without a shot fired or a single protester in the street.

Louisa Gouliamaki AFP/GettyImages

The Weekly Wrap — July 27, 2012 (Part II)

Posted by Steve LeVine and Logan Bayroff

What is with superheroes and fission: No film is bigger this summer than the latest Batman offering, The Dark Knight Rises. While taking in the film, we couldn’t help but notice that clean energy is a central plot point — specifically, a nuclear fusion reactor that Bruce Wayne, Batman’s billionaire alter ego, builds to power his beloved Gotham City. While Wayne regards nuclear fusion as the key to clean, lasting energy for all, villains see its potential for big, city-destroying explosions.

This isn’t the first time Hollywood has weighed in on the upside and downside of nuclear fusion. In the 2004 film Spiderman 2, the brilliant-scientist-turned-evil-genius Doctor Octopus displays an obsession with creating a stable fusion reaction, hence threatening the safety of Spiderman’s (Tobey Maguire’s) New York. Then there is Iron Man. In two films, Robert Downie Jr. powers a technological-wonder-suit with a personal-sized fusion reactor of his own design. According to Iron Man, his reactor produces 3000 megawatts — enough to light up a few million homes. We know these characters belong in science fiction, yet how far off are their ideas from scientific reality?

The best-known nuclear energy process is fission, in which atomic nuclei are split into fragments. That is behind our nuclear reactors, in addition to the weapon that the U.S. is attempting to stop Iran from acquiring. With fusion, by contrast, nuclei fuse together and form a heavier nucleus, giving off far vaster amounts of energy as they do so. Fusion is what powers the sun (Doctor Octopus is only slightly exaggerating when he dreams of possessing "the power of the sun in the palm of my hand."). This has long enamored scientists, because fusion reactors emit less radiation and waste than fission. But fusion reactions require incredibly high temperatures, vast energy inputs, and complex pressurization techniques, leaving them still in the experimentation stage. Yet, scientists are getting closer. This month, the National Ignition Facility in Livermore, California, fired a record-setting 500 trillion watts of energy in a single burst — over a thousand times more energy than the entire United States uses at any given moment. If Livermore scientists have their way, such laser bursts will eventually drive fusion reactions — and a major of the supply of clean energy.

Still, that does not explain why superhero films are so hung up on fusion. By way of explanation, perhaps we can begin with their fitting grandiosity in scale and cost — the National Ignition Facility alone cost over $1 billion to build, the kind of big money that Bruce Wayne and Iron Man alter-ego Tony Stark relish throwing around. In addition, fusion represents a chance at a brighter future, something our heroes like to dream about while they battle the dark present. Safe civilian nuclear energy usage is also about turning the potentially destructive — nuclear power — into the productive. Often haunted by their own violent pasts, superheroes can relate to this. (So can studios, which usually hanker for a warm ending.)

Of course, it’s the downside of nuclear fusion that titillates the bad-guys. Some green energy advocates protest funding for nuclear fusion research, arguing that no form of nuclear energy can really be trusted. In a post-Fukushima world, those fears are more real than ever, and the evil plans of super-villains in The Dark Knight Rises reflect that. Yet we know that real-world Batman admirers in the laboratory will not stop attempting to realize his vision of super-charged nuclear-power.

Go to the Jump for the rest of the Wrap.

 

Hot week on the South China Sea: Japanese Prime Minister Yoshihiko Noda said today that he might send soldiers to secure the Senkaku islands should it be the scene of "illegal acts" meaning a Chinese incursion. This went over poorly in Beijing, which claims virtually every nearby island and the whole of the South China Sea as its own. Temperatures had begun the week high, with both China and the Philippines announcing military deployments in the sea. Few think that actual war is likely, but sometimes people can miscalculate, hence Noda’s announcement and China’s reaction have been noted.

Xinhua, the Chinese news agency, fired off two commentaries in protest. In one, the agency alleged that Japan is "heading down a dangerous path with its recent island-grabbing moves," even while peaceful "China has always shown constraint and remained cool-headed." "The Japanese government must drop its provocative moves and fully understand that any unilateral move on the … islands is illegal and invalid," Xinhua said, "and will not change the fact that the islands belong to China." The agency also took aim at the United States, which it accused of emboldening Japan by offering up its political support. The U.S., Xinhua said, had "turned a blind eye to a spate of provocative acts by other countries, such as Vietnam and the Philippines," with which Beijing is also in a territorial conflict in the South China Sea. "Such an adversarial approach, however, risks dragging the United States into another quagmire in the South and East China Sea, and is also detrimental to regional peace and stability," Xinhua said. Look for the temperamental atmosphere to continue at least three or so months longer and perhaps more as China passes through its once-a-decade leadership transition.

Ronny Hartmann/Getty Images

The Weekly Wrap — July 27, 2012 (Part I)

Posted by Steve LeVine

A mountain-top take on the flood: If Montana is a microcosm of the world, one message to glean is that we are not in the midst of a decades-long flood of oil supply in the United States, as many suggest. Instead, the red lights are blinking across the exuberant U.S. oil patch. As you recall, much has been made in recent months about the momentous prospects for U.S. oil and gas, which are said to be leading a global fossil fuel revolution, with meaningful implications for fortune-hunters and geopolitical players alike: North America will be independent of outside oil producers, the U.S. will experience an industrial revolution, and OPEC will drift into laggardly inconsequence. So what to think about the latest news from folks approaching the punch bowl with bad intentions?

Let’s start with Montana, and the now-legendary Bakken shale oil formation. Bob Brackett, an analyst with Bernstein Research, studied a dozen years of shale oil drilling data for this mountainous state bordering Canada. What he found was a steep oil production increase through 2006 — surpassing 100,000 barrels a day —  followed by a fast, 40 percent decline to about 60,000 barrels a day today. The plummet is counterintuitive because the time frame coincides with a capital spending binge by the industry — tens of billions of dollars poured into the new innovations and technology that have opened up the Bakken and other shale plays. So why has Montana’s production dropped? "Resource plays," Brackett writes in a note to clients today, "have limited/finite drilling locations. The best locations get drilled early, the less economic ones later, and once they are drilled, operators move on." In other words, Brackett told me in a followup email, "industry drilled the low hanging fruit first, and now can’t find the same quality of opportunity."

But surely this is just Montana, right Bob? You don’t mean to suggest that the entire Bakken formation, including North Dakota — on which so many North American projections centrally rely — is in trouble, too? Sadly, that is precisely what Brackett means. In fact, he has quantified the Bakken’s production trajectory. The key number is six – that is the longevity of a Bakken well before it turns into a "stripper," industry argot for a worn-out nag producing just 10 or 15 barrels a day, from 400 barrels a day at its peak. Right now, just 200 modern Bakken wells are strippers. But in roughly six years, there will be 4,000 of them, Brackett says. "All good things in the oil patch come to an end," Brackett told me. "In the case of North Dakota, that is a long time — years — off, but even that too will suffer the same fate" as Montana.

Even now, the fortune hunters among us are suffering. ExxonMobil, the biggest player on the U.S. natural gas patch, made its second quarter numbers yesterday only by selling off $7.5 billion in hard assets such as its Japanese refining unit. In Pennsylvania, a court yesterday rejected the state’s right to compel localities to allow oil and gas drilling. What does this tell us? That just because you pick up the scent of oil and gas, a load of other factors affect how much will actually be produced, and for how long. Says Brackett in our email exchange: "There is an emerging view of a wave of oil production (from shale and otherwise) coming.  I just want to point out the difficulties in an exuberant view."

Go to Part II of the Wrap.

Mladen Antonov AFP/Getty Images

The last free oligarch

Posted by Steve LeVine

No Russian oligarch has had a longer career stretch than Mikhail Fridman — enfant terrible, tormentor of foreign titans and, according to Forbes, the 43d richest man in the world. Now, this last pillar of no-holds-barred Russian capitalism is under threat, at least in the oil industry, where he has earned many of his billions — challenged in the early stages of his latest unsentimental caper. Are we witnessing the final act in two decades of some of the world’s rawest displays of capitalism? If so, it will be another sign of President Vladimir Putin’s crusade to wring out the disorder that has always vexed him. Russia may become more boring with a tamer Fridman. But in Putin’s view, that is a small price to pay for the predictability he cherishes.

The crisis for the 48-year-old Fridman, a pudgy man with an impish grin, has unfolded over the last few days. Last week, he unveiled a typically breathtaking resolution to a long-standing row with BP, his long-time partner on the Russian oil patch. If it worked, AAR, a financial group he leads, would end up with probably the largest single shareholding of the British oil company. And Fridman seemed sure it would — people close to the Russian told me that Fridman enjoyed the Kremlin’s blessing. Only, Fridman seems to have been misinformed: On Monday, his initiative was contested by Rosneft, Russia’s powerful state oil company. Rosneft chairman Igor Sechin, Putin’s chief oil advisor, announced that he would bid for BP’s share of TNK-BP, the nation’s third-largest oil producer, in which AAR and the British company are 50-50 partners. Sechin released a bland statement calling acquisition of BP’s stake "an attractive commercial proposition" that will "complement [Rosneft’s] existing portfolio and create value for all stakeholders." But for those who speak business Russian, the message was clear — "bid," when it comes to a Putin-linked company, means "buy."

Playing on the Russian oil patch is a definitively courageous act – Putin regards it as a state preserve, and Fridman’s 50-50 partnership with BP always crossed the line. The Rosneft move appears to be a signal of game over, according to close observers of the Russian industry with whom I’ve spoken — the Fridman group’s share of TNK-BP seems likely to be swallowed up by Rosneft along with BP’s, with terms to be determined, and he subsequently will be pushed entirely out of the oil sector.

Should this scenario play out, it would not be your standard oligarch hanging, the string of untimely departures witnessed in the early years of Putin’s first turn at leadership — the 2000 flights of media tycoon Vladimir Gusinsky and industrialist Boris Berezovsky, and of course the 2003 imprisoning of oilman Mikhail Khodorkovsky. Fridman would retain the bulk of his fortune, his financial and telecoms empire, and most important his freedom and right to move unencumbered in and out of Russia. The same would go for Fridman’s three partners in the AAR consortium — Russian-American industrialist Len Blavatnik, German Khan and Viktor Vekselberg. Yet, by circumscribing Fridman’s activities, Putin would arguably draw a final line under the age of the iconic post-Soviet oligarch, the hard-bitten, ultra-opportunistic, and ruthless men who came to symbolize Russia’s chaotic 1990s, and were demonized once Putin took power in 1999. Putin is "totally fed up with [Fridman’s] behavior," said a Moscow-based banker who did not want to be quoted by name. He went on in an email exchange: "Fridman has miscalculated Putin’s reaction here. Putin does not like nor trust the belligerent and (his mind) unreliable oligarchs. He wants them out of the oil business."

In most annals of the era, Khodorkovsky’s arrest — after Putin decided he had been double-crossed — marks the start of the post-oligarch era. In their place are approved oligarchs — gas magnate Gennady Timchenko, metals titans Oleg Deripaska and Mikhail Prokhorov, among others — who either serve specific purposes for Putin, or whose latitude is confined. Then there is Fridman, who traveled with the 1990s outcasts but managed to survive and keep up his devil-may-care ways, even in the most strategic sector of all — oil — always careful to assure Putin that he was only conducting tough business.

According to Chrystia Freeland’s classic Sale of the Century, a history of the oligarchs, Fridman had already become a millionaire by the time of the 1991 Soviet breakup through ventures such as ticket scalping and oil exporting. Growing up an outsider in the Ukranian city of Lviv, he became one of Russia’s top oligarchs, plotting and sharing equally in the landmark loans-for-shares scheme that made all billionaires, and enabled Boris Yeltsin’s 1996 re-election as president.

The following year, Fridman intersected with BP, which along with all the world’s major oil companies was attempting to strike lucrative deals across the former Soviet space. In 1997, the British company paid $571 million for 10 percent of a Siberian oil company called Sidanko. Only, in a typical post-Soviet raid, BP went on to lose the share to Fridman, who carried out a series of fixed courtroom maneuvers that resulted two years later in BP effectively losing everything.

The Sidanko episode seemed to sum up Russia’s 1990s business environment, but in Freeland’s account, BP was not in fact the target of Fridman’s shenanigans. Not that it matters in terms of the results, but it was an unintentional victim of a vendetta against fellow oligarch Vladimir Potanin. "The tragedy of the situation was that we took aggressive measures against Sidanko, wanting to go to battle against Potanin, but we ended up fighting with BP," Fridman told Freeland. "We never wanted to go to war with BP. We wanted to go to war with Potanin."

The dustup foreshadowed a long, turbulent partnership between Fridman and BP. In 2003, BP, putting the past behind it, paid $6.75 billion to AAR for 50 percent of TNK-BP, an oil vehicle that included Sidanko and a few other oil enterprises. Over the subsequent nine years, AAR and BP each earned $19 billion in dividends from what turned out to be a cash cow. But they also often — in Fridman’s earlier language — went to war. Judging by his actions, Fridman seemed to see BP as weak and irresistible prey.

In 2008, the relationship became fraught over disagreements opaque to the outside world but clear enough to the partners. Bob Dudley, then the Moscow-based head of TNK-BP, fled underground incognito for several months in what BP officials said was fear for his safety.

The current state of play traces back to a row early last year, when BP and Rosneft announced a blockbuster deal: They would swap large blocks of shares and partner up in oil and gas drilling in the Arctic and other unidentified places around the world where BP did business. Negotiated directly by Sechin, the agreement had the Russian leader’s explicit approval.

But Fridman had other ideas. He went to court in Europe and persuaded multiple judges that the BP-Rosneft agreement violated a covenant under which AAR and BP had mutual rights of first refusal for any business done in Russia. The deal was scuppered.

Meanwhile, the war continued between the AAR partners. Fridman seemed to smell blood. The climax came in May, when he resigned as CEO of TNK-BP, saying he could no longer work with BP. Something had to give — one of the partners needed to take charge. A few days later, BP seemed to bow to Fridman’s demarche — it announced that it had received unsolicited offers to sell its half of the enterprise, and that it was prepared to seriously consider the idea.

Over the next few weeks, Fridman responded to BP’s initiative with a charm offensive. He visited large BP shareholders in Boston, London, and New York, attempting to demonstrate both that he was not demonic, as some might think, and that TNK-BP was a central pillar of BP’s profitability. In fact without TNK-BP, he said, BP would earn almost no profit.

Fridman’s objective was to persuade the shareholders to back his drive to negotiate a BP buyout of AAR’s 50 percent share of the partnership. He had a prize in mind — an unspecified sum of cash plus a 10-12 percent piece of the British company, which seemed likely to make AAR its largest shareholder. Fridman and his partners would be a key part of an international oil company, with global possibilities. Alternatively, Fridman told the BP shareholders before him, AAR was willing to buy half of BP’s holding — or 25 percent of TNK-BP — but for the current share price, absent the traditional premium paid in large acquisitions. Clearly, the former suggestion was preferable, Fridman said. In response, BP said it would negotiate in good faith with AAR, as well as with anyone else who wished to bid. The suggestion was that competitive bidders — it intimated a Russian state actor — were waiting in the wings.

People close to AAR told me flatly that BP was bluffing — there was no other bidder. BP would end up doing the deal with AAR. As for Putin, who all along has insisted that Russian oil companies must remain in majority Russian hands, he had signaled that "under certain circumstances" he would approve 100 percent BP ownership of TNK-BP. The people close to AAR did not say what circumstances Putin meant.

What happened in the intervening days isn’t publicly known. But it is clear that the banker with whom I spoke is right — Fridman miscalculated. The Kremlin did not approve of his latest scheme. Why? Putin does seem to want Fridman out of the oil patch.

A scenario that would appeal to BP would be a resurrection of a form of last year’s cash-for-shares deal with Rosneft in which it ends up again with prime Arctic acreage and a global joint-venture arrangement with the state oil company.

As for AAR, it seems likely that Fridman and his partners will be forced to sell at least some of their shares to Rosneft, so as to become minority owners, or perhaps all of them. No one can say whether Putin will force AAR to sell at a knock-down price, but I’d venture that the deal will be fair to the oligarchs. As one of Fridman’s long-time Western observers told me: "I’ve been a great admirer of Mikhail’s survival skills." Fridman will survive. He will simply be the last free oligarch in Russia’s most lucrative and powerful industry.

Natalia Kolesnikova AFP/Getty Images

The Weekly Wrap — July 20, 2012 (Part I)

Posted by Steve LeVine

Oligarchs in the Kremlin: For the last dozen years, we have seen ample evidence of Vladimir Putin’s policy on Russia’s oil and gas industry — a paramount strategic asset, it is to be jealously held, only begrudgingly ladled out to foreigners, and always, always to remain in firm Russian hands. That being the history, what are we to make of the assertion of a group of Russian magnates that Putin has changed his spots — that he is now prepared to allow BP to assume 100 percent ownership of Russia’s third-largest oil producer?

We are speaking of course of TNK-BP, the star-crossed, nine-year oil marriage between BP and AAR, a consortium led by a take-no-prisoners Russian financial titan, Mikhail Fridman. Over the years, the two companies have gone to war numerous times, only to regroup again and earn outsized mutual dividends. But this time, both sides seem prepared to call it quits. A few days ago, AAR announced that it will enter negotiations with BP to either rebalance or — in the more optimal alternative — dissolve the marriage. In AAR’s preferred scenario, it will be bought out in a cash-and-share deal that gives it 10-12 percent of BP’s shares, possibly the largest single stake in the British company. No one can say how the end game turns out, but as a mind exercise what say we kick the tires of AAR’s strategy?

We start with AAR’s view that over the years it has been on the receiving end of the unfair insinuation that it is a mere band of self-interested brutes looking generally to pillage a lamb-like BP. With that feeling of unappreciation in mind, Fridman recently made the rounds of BP investors in Boston, London and New York, armed with a short, four-slide Power Point. Contrary to the opinion of some, Fridman suggested in his crisp presentation, it is BP that has been on the winning end of the partnership. Unlike BP’s other "poorer assets," Fridman said, TNK-BP is a "local champion" in Russia, producing "best in class financial performance," and in fact spitting out more than 90 percent of the dividends distributed by BP to its shareholders last year. Fridman’s takeaway? Let us really nice guys do BP shareholders a favor and sell you our 50 percent of TNK-BP.

Okay … but what about Putin’s history, and the fact for example that Mikhail Khodorkovsky has been sitting in a Russian prison since (among other transgressions) moving to sell a large stake of his oil company (Yukos) to Exxon and Chevron? According to the AAR folks, that sort of thinking is well out of date.

"[Putin] is more progressive then you assume," I was told. "There [have been] preliminary conversations" with the Kremlin. The result of those conversations are that "under certain circumstances" Putin would go along with 100 percent BP ownership of TNK-BP. There was no reply when I asked for an example of those circumstances.

Should BP shareholders take relief in such assurances? Not necessarily. "I would very much doubt [that BP] would be allowed to hold such a high equity percentage in a company holding what are still Russian strategic assets," Bernstein Research’s Oswald Clint told me. Personally, I am reminded of the comfort that Progress Energy chief Bill Johnson must have felt in the hours before the Machiavellian Jim Rogers swooped in and reclaimed the job of CEO of Duke Energy earlier this month.

But for argument’s sake let’s say that BP more or less embraces AAR’s argument, and agrees to the cash-and-share deal. Being a smart fellow, BP CEO Bob Dudley would still be on guard for the sort of shellacking that the company has regularly suffered in Russia. And even if Putin has changed from a leopard into a tiger, we are talking the same general animal, and he would be looking out for Russia’s best interests as well. As was intimated at the Davos session in St. Petersburg last month, Putin knows that Russian oil needs the West’s technology more than ever; in addition, Russia’s newest objective is to go global. So Putin would dispatch his main oil adviser — Rosneft chairman Igor Sechin — over to see Dudley. And what would Sechin look for? Joint development of difficult but potentially rich older fields in Russia, such as a recent agreement with ExxonMobil to apply hydraulic fracturing to the enormous Bazhenov structure in Siberia. Plus joint work in promising BP fields abroad. Again, a model is Rosneft’s agreement with Exxon, which includes a Rosneft role in developing fields in Texas and the Gulf of Mexico.

In this scenario, the operative phrase for Dudley would be averting a shellacking. BP seems very much to be playing a weak hand both against AAR and Putin — no outsider has done exceedingly well in Russia when playing the long game, and BP has generally fared worse. The test for Dudley would be avoiding overpaying for AAR’s half of TNK-BP, and making sure that Rosneft does not underpay for the assets it seeks.

Go to Part II of the Wrap.

Alexei Nikolsky AFP/GettyImages

The Weekly Wrap — July 20, 2012 (Part II)

Posted by Steve LeVine and Logan Bayroff

The West zigs, China zags: The West is erecting tariff barriers to prevent Chinese renewable energy companies from dumping their products. What is China’s reaction? To set its sights on the developing world. So far at least, this may be one of the few win-win areas in the East-West relationship.

In May, the Obama administration imposed 26 percent tariffs on Chinese-made steel towers that support wind turbines. Regulations and tariffs like these have made it challenging for Chinese wind companies to penetrate the U.S. or Europe, one result of which is that European manufacturers account for 89 percent of the installed wind capacity on the continent. That is good news for Western turbine-makers.

But it is only part of the story — 63.5 percent of new wind capacity last year was installed outside North America and the European Union. And in these areas, Chinese manufacturers have the advantage. Chinese companies accounted for 30 percent of global wind turbine sales last year, and they hold four positions among the world’s top ten turbine manufacturers (including Nos. two and three, Sinovel and Goldwind, respectively). Much of this success has come at home — 44 percent of new capacity was in China itself last year. But Ming Yang Power Group is also partnering with India’s Reliance Group to develop 2.5 gigawatts of wind energy in India. In Argentina, Chinese turbines and financing are building Latin America’s largest wind-power project. And Hydro China has been assessing a wind farm project in Ethiopia. Lower costs account for China’s success in frontier markets. Chinese-state financing helps Chinese companies to underbid Western rivals by 20 percent to 30 percent, report the Financial Times’ Leslie Hook and Pilita Clark.

This bifurcated global market appears likely to grow, providing scope for both Western and Chinese companies to continue to compete side by side, according to Pike Research. Western companies still have the edge when it comes to integrating wind farms into electricity grid systems. Pike’s Dexter Gauntlett told us: "With the switch to renewables, whole systems are going to change, and there will be a big market for Western tech and products."

Go the the Jump for the rest of the Wrap.

Does Exxon + Chevron mean the jig is up in Baghdad? Chevron says it has bought two oilfield blocks in the Kurdistan region of Iraq. This comes eight months after ExxonMobil made a similar play, signing a big exploration deal with the isolated and oil-rich northern region.  There is just one problem — Baghdad, where the central government is situated, has prohibited foreign oil companies from signing such deals without permission, and in neither case was there authorization. On paper, there is much at stake. Already, Baghdad has excluded Exxon from an April oilfield auction, and if it wishes, it can also penalize a pre-existing Exxon deal to develop the 8.6-billion-barrel West Qurna field in southern Iraq. While Chevron itself has signed for no Iraqi projects as yet, it has bid to develop a 4.4 billion-barrel field called Nassiriya, and also is looking at the rehabilitation of a Basra chemical plant. Yet is either company materially exposed? When Exxon went into Kurdistan, we thought it was a big gamble. But two makes company, and so many months down the road, it looks more like Baghdad has no teeth. Look for more companies to take the plunge in Kurdistan.

Joel Saget AFP/Getty Images

Meet the winners and losers of the coming age of plenty

Posted by Steve LeVine

We are suffering whiplash: For nearly four decades, OPEC — the cartel formally known as the Organization of Petroleum Exporting Countries — has been a major economic and geopolitical force in our collective lives, driving nations to war, otherwise self-respecting world leaders to genuflect, and economists to shudder. The last half-dozen years have been especially nerve-wracking as petroleum has seemed in short supply, oil and gasoline prices have soared to historically high levels, and China has gone on a global resource-buying binge. Russia’s Vladimir Putin has strutted the global stage, bolstered by gas and oil profits, and Venezuela’s Hugo Chávez has thumbed his nose at los Yanquis.

Yet now we are hearing a very different narrative. A growing number of key energy analysts say that technological advances and high oil prices are leading to a revolution in global oil. Rather than petroleum scarcity, we are seeing into a flood of new oil supplies from some pretty surprising places, led by the United States and Canada, these analysts say. Rather than worrying about cantankerous petrocrats, we will need to prepare for an age of scrambled geopolitics in which who was up may be down, and countries previously on no one’s A-list may suddenly be central global players.

One primary takeaway: North America seems likely to become self-sufficient in oil. "This will be a huge potential productivity shock to the U.S. economy," says Adam Sieminski, director of the U.S. Energy Information Administration, a federal agency. "It could grow the economy, grow GDP, and strengthen the dollar."

OK, we get it — we will need to relearn our basic geopolitics. But how so? Last week, the New America Foundation gathered six leading energy analysts to take a guess as to the winners and losers over the next few decades from the unfolding new age of fossil fuel abundance (video here). Here’s what they told us:

WINNERS

The United States: Jobs increase, wages and productivity go up, the dollar strengthens, the current account deficit becomes negligible, and America has a new day as an economically dominant superpower. It is far and away the biggest winner of the new age, the analysts agreed. As far as Americans are concerned, what’s not to like? Citigroup’s Ed Morse waxed rhapsodic: "We will no longer be kowtowing to despotic rulers and feudal monarchs whose oil supply lines are crucial to other aspects of foreign policy. Those tradeoffs will be eliminated." Perhaps a bit Pollyanna-ish, but we get the general idea.

New petrostates: Aren’t we forgetting those unsung nations that, depending how they manage the new age of plenty, can also very well end up with far more robust economies and as geopolitical players? The following 10 countries — all of them burgeoning new petrostates — make the winner’s list because, even if they ultimately botch the moment and send most of the profit into private Swiss bank accounts, the coming energy boom gives them a much greater chance at big economic prosperity: Cyprus, Ethiopia, French Guiana, Israel, Kenya, Mozambique, Sierra Leone, Somalia, Tanzania, and Uganda.

Cooperation: Western suspicion of China has been fueled by its aggressive acquisition of natural resources around the world, especially oil and gas fields. But "in a world of plenty," said Ed Chow of the Center for Security and International Studies, "the zero-sum nature of the discussion could come out of the equation." Chow thinks we are already seeing the first stages of this more relaxed future in the U.S. attitude toward billions of dollars in recent Chinese investment in U.S. shale gas and oil fields. That is far different from 2005, when public and political opinion aborted China’s attempt to buy Unocal almost before it reached a serious stage. Chow likes this new atmosphere. "It was never a very healthy phobia that we had to begin with," he said. Looking ahead, Chow wonders whether the United States might end up collaborating with China and India in patrolling the Persian Gulf.

Go to the Jump for the Losers in the new age.

LOSERS

Unenlightened petrocrats: Oil prices could be lower and volatile in a world of surplus. So for states relying on a single economy such as oil or gas, "it is not a pretty picture," said Morse. He forecasts much political turmoil, and a struggle to keep market share. That includes Chàvez for sure, but could also jostle Teodoro Obiang Nguema, the allegedly corrupt president of Equatorial Guinea, Turkmenistan President Gurbanguly Berdymukhamedov, and Iranian Supreme Leader Ayatollah Ali Khameini.

Russia: Michael Levi of the Council on Foreign Relations led the panelists, plus many audience members, in singling out Russia as a key loser since Putin shows no sign so far of genuine economic diversification. For his state budget to break even, Putin requires an estimated oil price of $117 a barrel. Right now it is 12 percent below that threshold, or about $103 a barrel. Struggling to make up the difference but with no tools other than oil and gas to do so, Putin seems headed for a tougher political experience than in his previous tenure as president in the 2000s, when he rode a wave of public popularity based on a growing and optimistic middle class. When Russians realize their living standard is static or diminishing, they will not be happy. (On the plus side, a Putin shorn of the emboldening force of petrodollars might be friendlier with the rest of the world.)

The green edifice: The movement to slow or stop global warming could be derailed as winning nations focus more on getting rich than cleaning up their carbon footprint, concluded Robin West, chairman of PFC Energy, an energy research firm. The bar was already high for green-tech companies to compete against the economics of fossil-fuel energy; with lower oil and gas prices, the bar rises higher. There is a ray of hope, though: Rather than driving green-tech companies out of business, lower energy prices could create a new consumer choice. "Depending on how you value the environment and [what you think about] global warming," you can choose to run your life on fossil fuels or on cleaner technology, said Chow. Who knows? Policymakers may reverse their current ambivalence, too, and decide that, even though fossil fuels are plentiful, it is better to go clean.

OPEC: With prices dropping and competing supplies flowing from numerous new producers, OPEC will lose much relative influence, and may simply cease to be a pivotal economic player. "OPEC will descend into chaos as an organization," said John Hofmeister, former president of Shell USA. "They don’t know now how much they are hated by the entire world. But they will find out as things unfold." One litmus test for this new era of abundance will be if there is some form of repetition of Saddam Hussain’s 1990 invasion of Kuwait. Two weeks ago, a senior Middle East diplomat asked PFC Energy’s Robin West whether, a decade from now, the American public would get behind the deployment of tens of thousands of troops if Kuwait’s oil were threatened. "I said, ‘I don’t think so,’" West said.

So there you have it: OPEC gone, Putin flat on his back, Iran’s theocracy seriously undermined, and suspicion of China tamped down. What will we worry about?

Karen Bleier AFP/Getty Images

The Weekly Wrap — July 14, 2012

Posted by Steve LeVine

The AWOL environmental lobby: Over the last several months, this blog has posted a series of lengthy contemplations of a momentous and unnerving new trend — the possibility of yet another in the century-and-a-half-long cycle of global oil and gas surpluses. According to a consensus of leading analysts, the world — led by North America — is on the cusp of a surprising flood of new oil. This week, six of these analytical voices appeared together to scrutinize whether this new age will actually materialize, and if it does, what geopolitical implications will result. We gathered at the New America Foundation for a two-hour, live TV debate.

A couple of interesting takeaways: The new golden age of fossil fuels indeed has an aspirational quality — the stars must line up, such as oil prices, which must stay pretty well above $70 a barrel in order to sustain most of the new fields. (That may sound easy, given the scale of prices to which we have become accustomed the last couple of years. But one forecast of the new age is that so much oil floods the market that it forces down prices.)

A second aspect of the discussion was the conspicuously little discussion of global warming, which would be seriously exacerbated, as I wrote last month. One reason for this near-omission of global warming was the nature of the discussants — these are oil market and geopolitical analysts, not climate experts. Yet that in itself is illuminating. I must be missing some folks, but I can think of no one in the climate field who has injected him- or herself into the contemplations of this new age (unless one includes movement activists such as writer Bill McKibben and NASA scientist James Hansen.). One has the sense of an entire sector of business, academia and civil society — the green energy industry, climate scholars and environmental activists — on the verge of being obliviously bulldozed by an unseen force. McKibben and Hansen will say "game over" for the planet should the age proceed. The thing is, it appears to be proceeding of its own accord.

As I have criticized the natural gas industry for a self-destructive failure to be fully transparent, I wonder about the green sector’s absence from the careful dissection of this powerful trend with the aim of formulating best policies.

You can watch the video yourself:

How the Tuvaluans became important: When one thinks "geopolitical flashpoint," Tuvalu does not immediately come to mind. The world’s third-smallest country, with a population of just over 10,000, this Pacific island nation rarely makes it onto the global radar. Independent from Great Britain since 1978 and a U.N. member state since 2000, Tuvalu is known for pleasant beaches and a threadbare economy that survives on staples such as prodigious production of pulaka, a taro-like crop. It has a national soccer team, but is not a member of FIFA. One upside of this anonymity is that Tuvaluans have few mortal fears — they have no defense budget, for example. But this week, they have been catapulted onto the world stage for unaccustomed political reasons. Tuvalu, it seems, has been instrumental in helping to disguise Iran’s fleet of oil tankers, with which Tehran is attempting to bypass U.S.- and EU-led sanctions.

Tuvalu flags fly over 22 tankers in Iran’s 58-vessel oil fleet. They now carry names like Blossom, Precious, and Honesty. The idea is to cloud the origin of the oil so as to maintain Iran’s oil export earnings against the sanctions regime. The Obama Administration has begun to push Tuvalu (and Tanzania) to stop serving this role for Iran. California Congressman Howard Berman has appealed directly to Prime Minister Willy Telavi. Why is Tuvalu involved in such a scheme? For one thing, it is not illegal, and the Iranian fleet only became a direct sanctions target on Thursday. The other thing is that vessel-flagging can be lucrative, and when you are reliant primarily on pulaka proceeds, that counts for something.

But there is also painful irony in the news. To date, Tuvalu’s biggest concern has been climate change: A major rise in sea levels would be "catastrophic" for the island chain, its then-prime minister told the United Nations in 2008. Yet Tuvalu is facilitating the movement of Iranian crude even while demanding more clean energy.

Exxon’s Afghan feint? Ultra-frontier business-making — the pursuit of work in the more dangerous, out-of-the-way and fringe areas of the world — doesn’t ordinarily attract blue-chip companies, and Afghanistan is no exception. We don’t see the likes of Warren Buffett, Alan Mulaly, Tim Cook or Lakshmi Mittal in these parts of Asia. So why do we find gargantuan ExxonMobil among the names of those filing an expression of interest in a few oil exploration areas offered up by the Afghan government? The question is important because an Exxon win in Afghanistan could be a game-changer for this troubled country, at once bolstering its reputation as a serious place for investment. Yet the potential resource isn’t of the eye-popping scale that usually exemplifies an Exxon play: The northern Afghan fields in question contain fewer than 1 billion barrels of oil equivalent, according to the U.S. Geological Service — not a volume that would move the needle for a company of Exxon’s size. And even if the potential volume were larger, the working environment will be daunting, with years of instability and outright civil war seeming to lie ahead, especially after the 2014 U.S. troop withdrawal. Call me puzzled.

By way of explanation, Exxon itself offers up the boilerplate that its Afghan flirtation is "part of our on-going evaluation of oil and gas resources around the world." But I wonder if we can derive a better answer by observing the larger geographic tableau. For instance, by turning our gaze a bit to the northwest: What if we are observing not an Afghan strategy, but a feint with an aim at Turkmenistan?

For years, ExxonMobil has patiently put down roots in Turkmenistan, the possessor of South Yolotan, the world’s second-largest natural gas field. In 2008, U.S. diplomat Richard Hoagland (now No. 2 in the U.S. Embassy in Islamabad) wrote a cable, disclosed by Wikileaks, describing Exxon’s eagerness for an onshore Turkmen gas deal, by which we presume it meant a piece of South Yolotan. To that end, two years ago, Exxon became the first global major to reopen an office in the capital of Ashgabad (its rival on the spot is Chevron). But Turkmenistan has been confounding Western oil companies for two decades, and President Gurbanguly Berdymukhamedov continues to do so. One reason is that they refuse to mimic the pioneering success formula established by the China National Petroleum Corp., which acquired rights to onshore Turkmen supplies after first agreeing to build an export pipeline to carry the gas to the Chinese market. Both Exxon and Chevron are pursuing the conventional Western approach of insisting on a large gas deal first, then discussion of a means of conveyance.

To loosen up this logjam, the U.S. government, development banks and regional powers are working to organize an export pipeline that they call TAPI (for Turkmenistan, Afghanistan, Pakistan, India). I personally think that TAPI has little chance of materializing under current political conditions in the region, and, for argument’s sake, let’s say that Exxon feels the same way. In that case, how do you shake a confused and ambivalent object of desire (Berdymukhamedov) into clarity and decisiveness? An age-old answer is that you present a rival, and scare the bejesus out of him.

Enter Afghanistan. If we are watching a feint, the options are that you express interest in the fields, but don’t necessarily meet the October deadline for filing an actual bid. If signals of alarm do not surface in Ashgabad, you can file an intentionally losing bid. If that still fails to impress Berdymukhamedov, you can win, and let the development niggle at the Turkmen leader’s craw.

The question is whether Berdy is watching.

Mladen Antonov AFP/Getty Images