The Aftermath of Bolivia's Energy Nationalization

The Aftermath of Bolivia's Energy Nationalization Category: Energy, Country: Bolivia , Publish Date: 21/Aug/2006 , Company:
Bolivian President Evo Morales threatened to take Brazil to court to secure higher prices for his country's natural gas exports. Such an attitude seems a touch unwise for a landlocked country with limited options to take toward its largest foreign investor and neighbor; however, La Paz is no stranger to alarmingly unproductive policies such as this. The current situation has ideological underpinnings stretching over to the government of Venezuelan President Hugo Chavez, who has been steadily expanding the government's hold over the Venezuelan oil industry for a mix of political and economic reasons. Morales is Chavez's protege, after a fashion, and figured that if it was good for Hugo, then it was good for Evo. Thus, on May 1, Morales announced the nationalization of Bolivia's oil and natural gas industries. He sent the army into all facilities to establish control and informed all foreign companies that they must either renegotiate terms to give state oil firm Yacimientos Petroliferos Fiscales Bolivianos (YPFB) a 51 percent holding, or leave. Though not perhaps the most boneheaded move Morales could have made, it certainly was in the running. After YPFB's energy assets were privatized in the mid-1990s, the private sector trickled in substantial amounts of investment, increasing Bolivia's natural gas production threefold and its reserves sixfold. The country's oil industry also benefited, although not nearly to the same level. Pipelines were built or expanded to neighboring Brazil and Argentina, leading to the establishment of Bolivian energy as a stable of regional energy mixes, reaching even to Chile. The Bolivian scenario lies in stark contrast to Venezuela. It would be a stretch to say Chavez's policies have been farsighted; on Chavez's watch, energy output has slipped by one-third, corruption within the state oil complex is rampant and foreign assets are now being sold because the state cannot supply or service them effectively. But Chavez's nationalization program has been creeping, largely devoid of sudden actions or outright ejections. It also is linked to the government's broader political and strategic goals of solidifying control locally and opposing the United States internationally. Even after seven years of poor management, Petroleos de Venezuela remains a large entity with a hefty oil output, albeit one that is shrinking by the month. Bolivia entered into its nationalization without any such caution or strengths. YPFB can barely even be called a firm, much less an energy firm with a nationwide reach and competency. When we noted that YPFB's energy assets were privatized, we meant privatized. The company's energy assets were divested, sold or otherwise passed on to others. YPFB went from being among the most technically limited and capital-limited state energy firms in the world to having nothing aside from the authority to negotiate and monitor contracts with foreign oil firms. Sporting only a scant staff, and with only the slightest memory of its previous management abilities, YPFB was called upon May 1 to take over Bolivia's energy complex, all to satisfy the nationalist proclivities of a populist president. As such, investment has understandably screeched to a halt since the nationalization decree, and four months later YPFB has had to request a credit line from the central bank because it cannot even put the nationalization into effect, much less operate the industry. Accompanying the nationalization order was an alert to the countries that consumed Bolivian natural gas that they would soon face sharp price increases for the fuel, leaving Argentina, Chile and especially Brazil -- whose Petroleo Brasileiro (Petrobras) was the largest investor in Bolivia -- stewing in anger. Adding insult to injury, it is not like any of this is a particular surprise, or that excruciating incompetence in La Paz is a new development limited to the current president. This is the third time the Bolivian government has nationalized its energy industry, and the third time it has triggered a collapse of the country's production capabilities and with it La Paz's most promising source of tax receipts. What is different this time around is this: Bolivia's neighbors have internalized Bolivia's enthusiastically pathological desire to shoot itself in the head with a howitzer. Chile Bolivia's current behavior has not come as much of a shock to Santiago. The seminal moment in Bolivian-Chilean relations was in 1879 (yes, that is 1879) when a ridiculously militarily inferior Bolivia declared war on Chile and was soundly and humiliatingly defeated, resulting in the loss of Bolivia's maritime Litoral province, which contains the modern-day cities of Tocopilla, Mejillones and Antofagasta. Relations have never recovered from that point because of continued Bolivian intransigence and demands for territorial concessions from Chile. Bolivia still -- 127 years later -- does not man an embassy in Santiago. Occasional Chilean peace feelers have always either been batted aside or returned with demands for territory, and so Chile largely deals with such stubbornness by ignoring it. What natural gas Chile purchases from Bolivia comes via Argentina. To circumvent Bolivian shrillness, Buenos Aires and Santiago maintained a fiction that Bolivia sold natural gas to Argentina for domestic use, while Argentina sold its own natural gas to Chile. An Argentine tongue slip during price negotiations after the nationalization resulted in this fiction's dissolution, and the Bolivians became even less constructive in subsequent talks. Chile has responded to Bolivian demands -- and related Argentine production problems -- with a resigned sigh and a new game plan. Chile plans to sever all energy connections to its troublesome neighbors and seek supplies from more economically reliable, politically stable, technically competent and emotionally mature producers such as militant-rich Nigeria and Holocaust-denying Iran. Though Chile will have to pay more for Bolivian natural gas in the short run, construction is already well under way at a liquefied natural gas (LNG) import terminal near the port of Valparaiso, which should be operational in 2008, ending any need to deal with Argentina or Bolivia. The government is even considering taking a page from the French energy strategy and building nuclear power facilities to remove natural gas from the power mix completely, using it only for industrial sectors that require it as a feedstock. Brazil Brazil is implementing a similar divorce strategy, even though President Luiz Inacio "Lula" da Silva could be considered somewhat of an ideological cousin of Morales. Simply put, his patience has been stretched beyond the breaking point. Bolivia has yet to offer any compensation for Petrobras assets seized by the Bolivian state, and talks over the price of natural gas exports are as acrimonious as they are stalled. Da Silva has pledged that Brazil will never again fall prey to Bolivian shortsightedness, and expects his country to be fully weaned off of Bolivian natural gas by 2008. To that end, he has asked Petrobras to redouble its domestic exploration/production activities -- something the mostly private Petrobras figured out on its own. Petrobras has also launched construction of two LNG import facilities -- at Ceara and Rio de Janeiro -- and is seeking supply agreements with LNG power players Trinidad and Tobago, Nigeria, Algeria, Angola and Qatar. Still, considering the depth of Brazil's dependence on Bolivian natural gas, da Silva's 2008 target is likely too ambitious, with 2011 being a more likely date. Luckily for Brazil (and Chile too), the country enjoys robust hydroelectric capacity, which will ease the transition should Bolivian prickliness transform into Bolivian cutoffs. Until then, da Silva's strategy is simple: drag the Bolivians along as long as possible while Petrobras works furiously on alternatives. Already Brazil is operating in a 60-day extension window after Bolivia's original deadline; the Brazilians will certainly try for more such extensions. But it seems that not everyone has learned that lesson about Bolivian reliability. Argentina Rather than running in frustrated terror from Bolivia as Brazil and Chile are, Argentina is bellying closer. On Aug. 15, the two states agreed to build a $1.2 billion natural gas pipeline to quadruple current natural gas exports from 6 million cubic meters a day to 27.5 million cubic meters a day. The states plan to hold a tender in December to award the contract. This should prove to be a good show. First, this is more than a touch ironic; Argentina should never have even started importing Bolivian natural gas at all. This is not an issue of structural or historical awareness, but one of consequence. Until very recently, Argentina was a large oil and natural gas exporter. But after Argentina's December 2001 debt default, President Nestor Kirchner's populist government rose to power. Among his many policy changes was a freeze on retail energy prices. Though such policies kept inflation under control, the population quiescent (by Argentine standards) and the government popular, it came at the cost of driving away investment into the sector. With a 75 percent drop in the value of the Argentine peso and retail prices frozen, companies would never be able to recoup their investment into production. Production, predictably, stalled. And Argentina slashed its exports to first Chile, then Brazil, and then began importing natural gas from Bolivia for its own use (in addition to what it was passing on to Chile). The real kicker of this little deal is that Argentina has agreed to foot the entire bill for the $1.2 billion pipeline expansion and the $250 processing facility on the border. That raises two possibilities. One: Argentina's own energy complex has become so degraded that it cannot even invest such funds in domestic natural gas production because it has forgotten how. Two: This will not happen at all. Remember, Argentina defaulted on its debt because it had no money. Growth has certainly returned, but an energy exporter spending $1.45 billion to import energy is a sketchy proposition, to say the least. LIBYA: Libyan state-owned National Oil Corp. has invited major global oil firms to participate in a third licensing auction. The companies will have until Sept. 9 to provide their bids, and the oil blocs will be carved out Dec. 20. Libya has handed out 59 exploration contracts since emerging from international sanctions in 2004. The government intends to increase oil production from the current 1.6 million barrels per day (bpd) to 2 million bpd by 2007 and 3 million bpd by 2010. Libya needs robust foreign investment to reach those goals. CHINA: Super Typhoon Saomai roared ashore in China's Zhejiang province Aug. 10. Some reports put the death toll as high as 320. Saomai was the most powerful typhoon to make landfall in China since recordkeeping began in 1949. CHINA: The Beijing News reported Aug. 16 that Chinese President Hu Jintao himself ordered the All-China Federation of Trade Unions (ACFTU) effort to force Wal-Mart to accept unionization. Such personal involvement by Hu in dealing with foreign companies is rare, and could help to explain the ACFTU'S surprise success in forming a Wal-Mart union in July after the world's largest retailer resisted organizing efforts for two years. The effort is likely part of Hu's push for a "harmonious society" that emphasizes new welfare measures. This is not an innocuous effort by the state-run ACFTU to collect more dues. The state, at the highest levels, is pushing these measures. When a company unionizes in China, the ACFTU gains greater access to the company's books, including accounting records and supply-chain information. This information goes directly to the central government, which can then use it as leverage against the company when needed. UKRAINE, RUSSIA: Ukrainian and Russian leaders meeting in Sochi, Russia, on Aug. 16 established the framework for natural gas delivery, agreeing to keep pricing the same for the remainder of the year (at $95 per 1,000 cubic meters) and to fill Ukraine's underground storage tanks with 24.5 billion cubic meters of natural gas by winter at the above mentioned rate. The two sides said the prices will reflect market mechanisms, but discussions for pricing in 2007 will be held at a later time. Ukraine's newly confirmed pro-Russian prime minister, Viktor Yanukovich, represented Ukraine at the summit. IRAN: Iranian Ambassador to Azerbaijan Afshar Soleymani said Iran will soon conduct feasibility studies about transferring some of its oil via the Baku-Tbilisi-Ceyhan (BTC) pipeline, Fars News Agency reported Aug. 16. Soleymani said an Azerbaijani delegation will soon arrive in Tehran to study this and other economic issues, including exporting Iran's gas to Azerbaijan; the delegation also is to discuss Iran's exporting gas to Georgia and Europe through Azerbaijan, among other topics. He said some projects are presently under way in the energy sector in both countries. The United States has supported the BTC project explicitly to establish oil transport routes for Caucasian and Central Asian states that do not use Iranian or Russian territory. TURKEY, RUSSIA: Turkey is trying to convince Russian oil major LUKoil to relocate its planned $3 billion oil refinery from Zonguldak to Samsun. LUKoil prefers the Zonguldak site because it could use a short pipeline to Izmit to bypass the Bosporus. Turkey prefers the Samsun site because it would be situated at the head of a planned connecting pipeline to Ceyhan on the Mediterranean. Regardless of the refinery's location, LUKoil will likely enter into partnership with Kazakh state oil firm KazMunaiGaz, which wants access to refineries on the Black Sea in order to process its crude oil deliveries to the region in preparation for efforts to penetrate the European market, a goal that LUKoil shares



Turkey: An Emerging Global Energy Hub Category: Energy, Country: Turkey , Publish Date: 21/Aug/2006 , Company:
Summary Former Soviet Union countries are producing more oil than ever, with newer energy producers such as Kazakhstan and Azerbaijan joining Russia in exporting large amounts of oil to the global market. The question now is how to transport the expanding oil production. Russia seems the logical choice, but Kremlin politics have gotten in the way of Russian infrastructure expansion. As a result, investors seeking to create infrastructure that will allow oil to be transported to market from the Middle East and the former Soviet Union are pushing Turkey to become a major global oil hub. Analysis Countries within the former Soviet Union (FSU) are producing more oil than ever before, with newer energy producers such as Kazakhstan and Azerbaijan joining Russia in exporting large amounts of oil to the global market. Routes to get that oil to market, however, are limited -- mostly passing through Russia. In light of increasingly unstable Russian energy policies and the country's decaying infrastructure, investors are looking to a new hub for oil export and refining: Turkey. After a sharp decline in oil production following the fall of the Soviet Union, Russia is now the world's second-largest oil producer, behind Saudi Arabia. The former Soviet state of Kazakhstan is beginning to see its potential as a major energy producer after years of foreign investment, and has increased its oil production to 1.5 million barrels per day (bpd). The Kazakh government is planning to more than double oil production within the next nine years, to 3.5 million bpd. Oil production in Azerbaijan, another former Soviet state, has more than doubled since 2004, increasing from less than 300,000 bpd to more than 600,000 bpd in 2006, and it is expected to further increase to more than 900,000 bpd in 2007. The question is how to get all this oil to market. The logical answer -- especially for the European market -- is through Russian infrastructure. Russia, however, has allowed politics to scare away those looking to invest in or finance new and expanded infrastructure. Russian state-owned pipeline company Transneft has exclusive jurisdiction over any crude oil -- except through one line, the Caspian Pipeline -- exported via pipeline from Russia. The Transneft system, however, is highly bottlenecked and the existing infrastructure is in decay. This leaves the rest of the oil to be shipped along more costly rail and river routes. Beyond Transneft's inefficiencies, the Russian government has not helped to expand oil transit capacity. Its state-owned oil, natural gas and pipeline monopolies -- Rosneft, Gazprom and Transneft -- have driven away investments by refusing to grant control proportionate to the financing private investors might provide, as well as arbitrarily changing the fees for transporting supplies. The monopolies also are increasing their influence in Russia and on Russian policy by using energy to impact foreign policy with its neighbors. The natural gas price dispute with Ukraine, in which Russia cut supplies transported to Europe via Ukraine, is a prime example. This also was seen when Kazakhstan's state-owned KazMunaiGaz proposed buying a majority stake in Lithuania's oil complex, Mazeikiu Nafta, which was owned by bankrupt Russian oil firm Yukos. Kazakhstan supplied roughly 10 percent of the complex's oil via a pipeline through Russia. Upon KazMunaiGaz's proposed purchase, Transneft revoked permission for Kazakh oil to be pumped through its pipeline to Lithuania. Rosneft then put in its bid for the complex, though Lithuania ended up sealing the deal with Poland's PKN Orlen. Foreign investors, though, are not hinging the future of energy supplies on Russia, and have found a new hub to move the increased oil supply to market: Turkey. The country's geographical position makes it ideal for moving oil to market from many locations, as Turkey sits between the oil-producing Middle East, the former Soviet region and a major oil market, Europe. Turkey also has major access to the important transport routes of the Black and Mediterranean seas. The problem has been that Turkey's main waterways -- the Bosporus and Dardanelles Strait -- have been major choke points, while no real infrastructure has been in place for exports. The new Baku-Tbilisi-Ceyhan (BTC) pipeline from Azerbaijan's oil hub on the Caspian to Turkey's large port on the Mediterranean opened in June, providing an alternative for Azerbaijan to move its oil. The pipeline also has become an alternative for Kazakhstan, which will provide half the oil when the BTC meets its full throughput capacity of 1 million bpd by 2008. The BTC offers one of the first large pipelines from a former Soviet state that does not run through Russia. Another oil transport route already in place is a pipeline from Iraq, with a capacity of 1.6 million bpd. Since the beginning of the Iraq war, oil flows through the pipeline have been erratic, though it is just a matter of time before it comes back online. In March 2004, Iraq also submitted a plan for northern Iraqi Kirkuk oil to be exported via Ceyhan, the first such proposal in three years. Offering even more promise for Turkey's goal of becoming a major energy hub are the numerous infrastructure projects planned in the country. The proposed projects include not only pipelines to transport oil from the Middle East or former Soviet Union to market, but refineries as well, which would allow a ready-to-use product to hit the market -- rather than comparatively high-bulk, low-value unrefined crude oil. The total capacity of planned refineries to be built in Turkey would double its refining capabilities, adding another 900,000 bpd in refining in the next few years. Three refineries are planned at the BTC's endpoint of Ceyhan -- to be built by Turkey's Petrol Ofisi and Cakik Energy, Italy's ENI and the Indian Oil Co. KazMunaiGaz said Aug. 14 it also is looking to build a refinery in Turkey. A key indicator of increasing investor rejection of Russia in favor of Turkey is the plan by privately owned LUKoil, Russia's second-largest oil company, to build a refinery in Turkey, specifically in the Black Sea city of Zonguldak. Although Russia is in dire need of energy infrastructure, Turkey offers a more secure option -- both politically and financially -- for transport and refining. LUKoil also announced plans in early August to build a pipeline from the planned refinery in Zonguldak to the Turkish port of Izmit on the Sea of Marmara. The port of Izmit allows oil transport to completely bypass the Bosporus and pass through the less-congested Dardanelles Strait to the Mediterranean. Another planned oil transport alternative is the Samsun-Ceyhan pipeline traveling south from the Black Sea to the Mediterranean port of Ceyhan. Italy's Eni and Turkey's Calik Energy finally inked their deal on the 1 million bpd pipeline in June. Once built, it will allow oil exporters all over the Black Sea to transport their supplies to Ceyhan's planned refineries, as well as Turkey's deep-water port on the Mediterranean. With the planned Samsun-Ceyhan pipeline, the new BTC pipeline and three planned refineries, Ceyhan is fit to become a major global oil hub. Moreover, with the LUKoil refinery and pipeline, Turkey itself is set to cash in on the growing oil production of its neighbors. Turkey is becoming a crossroads between Middle East and FSU oil producers and consumers in Europe and beyond. As a result of this evolution, Turkey and its issues -- the Kurds and a desired EU membership -- are becoming more important to those outside of the country.



First LNG Delivery Received by Mexico Category: Gas, Country: Mexico , Publish Date: 21/Aug/2006 , Company:
The delivery of a cargo of LNG from Nigeria to the Altamira regasification terminal marks the start of LNG imports by Mexico. Global Insight Perspective Significance The LNG-import terminal built by Shell in Altamira is the first LNG project to be completed in Mexico. Implications The country is seeking to diversify its fuel supplies through the construction of proposed LNG-import terminals. All gas imports previously came from the United States, but the construction of new LNG-import terminals means that Mexico will take imports from other parts of the world Outlook Higher domestic gas production-particularly non-associated gas production in the north of the country-has contributed to a reduction in Mexico's fuel-import bill. However, growing consumption levels mean that, despite plans to continue increasing domestic production, the country is expected to continue to rely on gas imports to cover demand. Altamira Terminal Receives First Cargo A LNG-import terminal in Altamira, on the north-east coast of Mexico, yesterday announced the arrival of the first ever LNG cargo delivered to Mexico. The 138,000-cm cargo owned by Shell was transported from the Nigeria LNG plant. The managing director of the terminal said in the statement that the arrival of the first cargo marks the end of the Altamira terminal's construction and the start of the commissioning phase. This is the final stage prior to the beginning of commercial operations, scheduled for October 2006. The Altamira project is the first LNG regasification terminal to be completed in Mexico, but others are expected to follow. Royal Dutch/Shell Group has a 50% stake in the project, Total 25%, and Mitsui (25%). Shell's Gas del Litoral signed a contract in 2003 to supply the state-owned Mexican power utility CFE with 500 MMcfd of gas per year from the Altamira project over a 15-year period, starting in 2006. The gas will be supplied to the Altamira V, Tuxpan V, and Tamazunchale combined-cycle power plants in the states of Tamaulipas, Veracruz, and San Luis Potosí. Outlook and Implications Mexico's gas market offers significant growth potential, as the government wants to increase the use of gas in power generation and as a domestic fuel. Although Mexico itself has abundant natural gas reserves, underinvestment in the state-run sector led to a decline in production, converting Mexico into a gas importer. Natural gas imports from the United States have been covering the shortfall in domestic production, but domestic gas supplies in that country are set to tighten and the United States itself is also looking to LNG projects to help meet the projected growth in demand in the coming years. In recent years, Mexico has increased domestic gas production by increasing the state oil company's own investments in exploration and production and through the award of multiple service contracts to foreign companies for non-associated natural gas production in the Burgos Basin. This strategy has been paying off. According to Pemex data, associated and non-associated natural gas production for the first six months of 2006 averaged 5.188 Bcfd, compared with 4.511 Bcfd in the whole of 2001. Demand is expected to grow at an average rate of 5.2% per year to reach 9.493 Bcfd in 2014, from 5.722 Bcfd in 2004, according to the Energy Secretariat's "Natural Gas Market Outlook for 2005-14". National production is expected to grow at the same rate, but is expected to reach 7.704 Bcfd by 2014, which means that there will still be a shortfall-almost 19% of total projected national demand by 2014 will have to be met by imports. This is an improvement on the Energy Secretariat's previous outlook that anticipated imports accounting for 40% of national demand by 2013. However, even if Mexico doesn't need to import as much gas to meet future demand as it had previously anticipated, the proximity of the United States means that there is potential for any surplus LNG imports to be sent on to its northern neighbour.


Algeria, Russia: Europe's Natural Gas Dilemma Category: Gas, Country: Algeria, Russia , Publish Date: 21/Aug/2006 , Company:
Summary A deal between Russia's Gazprom and Algeria's Sonatrach will increase Europe's dependence on natural gas supplies from a limited number of countries, Italian Energy Minister Pier Luigi Bersani said Aug. 9. Gazprom and Sonatrach signed a memorandum of understanding Aug. 4 on closer cooperation. Out of the many possible projects Russia and Algeria could be looking at -- liquefied natural gas, pipeline construction, purchasing assets in a third country or collaborating on natural gas prices -- the last is the most likely, leaving much of Europe at the mercy of two of its three largest natural gas suppliers. Analysis A deal between Russia's Gazprom and Algeria's Sonatrach will increase Europe's dependence on natural gas supplies from a limited number of countries, Italian Energy Minister Pier Luigi Bersani said in a letter to EU Energy Commissioner Andris Pielbags on Aug. 9. Gazprom and Sonatrach signed a memorandum of understanding Aug. 4 on closer cooperation. Out of the many possible projects Russia and Algeria could be considering -- liquefied natural gas (LNG), pipeline construction, purchasing assets in a third country or collaborating on natural gas prices -- the last option is the most likely. This course would leave much of Europe at the mercy of two of its three largest natural gas suppliers. A relationship between Gazprom and Sonatrach has been in the works since Russian President Vladimir Putin made his first official state visit to Algeria in March, accompanied by a large delegation of defense and energy representatives. During that meeting, Putin wrote off nearly $5 billion of Algerian debt to Russia, saying trade with Algeria is more beneficial to Russia than debt repayment. At that time, the energy talks between Gazprom and Sonatrach were overshadowed by a $7.5 billion defense deal between the two countries. Algeria may seem a strange choice as an energy ally, but the two sides have much in common -- both are large natural gas exporters to Europe -- and Russia wants a piece of technology Sonatrach can offer: LNG. LNG is produced by cooling natural gas to minus 360 F at a liquefaction facility; it is then loaded on to specially designed tankers for transport. Once the tankers reach re-gasification facilities, the LNG is offloaded, heated and fed into a standard natural gas pipeline network. Russia would love to get its hands on LNG technology, which has eluded it so far, since the technology would allow it to export natural gas to virtually anywhere in the world. LNG importers include Belgium, France, Greece, India, Italy, Japan, Portugal, South Korea, Spain, Taiwan, Turkey, the United Kingdom and the United States. Gazprom thus finally could begin exporting to new markets such as the United States and Southeast Asia, as well as gaining the ability to take control of Russia's Far Eastern Sakhalin-II LNG project, which is controlled by Royal Dutch/Shell. Signing a memorandum does not mean Sonatrach is ready simply to give Gazprom the technology it wants, especially since Gazprom operates by having its partners build and pay for joint projects, while Gazprom controls the projects. In order for Gazprom to get the LNG technology from Sonatrach, Gazprom would have to pay -- violating Gazprom's preferred means of doing business with partners. The possibility of Gazprom-Sonatrach collaboration to build new pipeline infrastructure and to purchase assets in a third country faces trouble in that Gazprom will not put up the money for what it wants. For the same reason, Gazprom has not invested in new infrastructure while its existing infrastructure has decayed, since Gazprom wants foreign investors to provide the money. Sonatrach certainly will not be willing to put up the cash for Gazprom to have a slice of assets in a third country with Gazprom only paying for those foreign assets if the price is right. Gazprom and Sonatrach could, however, quite possibly collude on a price for their respective natural gas exports. Russia and Algeria, along with Norway, make up the largest natural gas suppliers to Europe; combined, all three provide nearly half of the European Union's supplies. The European Union has been looking to diversify its energy supplies, especially after the January energy crisis in which Russia cut off natural gas supplies to Ukraine, hitting European supplies as well. Alternatives to this dependence either carry an uncertain return on a costly investment or are years away from development. Combined with its growing energy needs, this leaves the European Union without anywhere else to turn for the moment. If Gazprom and Sonatrach decide to raise natural gas prices jointly, most of Europe will have to live with it -- even more so if the two companies can also get Norway in on the move. Jointly raising natural gas prices is much easier than any other collaboration between Gazprom and Sonatrach, since it does not involve sharing technology or building new infrastructure. The Italian energy minister's concerns about the potential for this development derive from the fact that Italy relies for 69 percent of its natural gas on just two companies: Sonatrach (37 percent) and Gazprom (32 percent). Bersani thus said Gazprom-Sonatrach cooperation "confirms the concern already expressed about the effects on (natural) gas supplies to the European system, and on Italy in particular, derived from the dependence on imports from a limited number of supplying countries, which is expected to worsen in the coming years." A collaborative price increase would also hit at the worst time -- the onset of winter. Gazprom has sought access to European natural gas distribution and retail markets, but has been blocked at every turn. In response, Gazprom can continue to raise prices as long as European members do not want to let it in. Though Europe can try to pressure Algeria against colluding with Russia, or begin turning away from natural gas as a supply, it soon will see the effects of waiting a decade to decide to diversify its natural gas



Malaysia Unveils 15-Year Plan to Achieve Developed Nation Status Category: Geopolitics & Macro-Economy, Country: Malaysia , Publish Date: 21/Aug/2006 , Company:
The Malaysian government today unveiled an ambitious industrial development plan for 2006-20, which aims to counter the challenge posed by emerging manufacturing economies, while pushing the Asian nation into the ranks of developed economies by 2020. Global Insight Perspective Significance The Ministry of Trade has released its Third Industrial Master Plan for the period 2006-20—a blueprint for maintaining the economy's competitive edge. Implications The average annual growth rate for the period has been arbitrarily targeted at 6.3%. Manufacturing is placed at the heart of the development plan, with 12 specific sectors targeted for investment. Outlook The target rates for growth and investment remain ambitious; growth averaged 4.6% during the previous 15-year plan, against a target of 7.9%, reflecting the dubious worth of such grand-sweeping, top-down development programmes 2020 Vision The Malaysian trade ministry today published its industrial development strategy for the period 2006-20. The government stated that its "Third Industrial Master Planhad a dual aim: to preserve the economy's competitiveness vis-à-vis emerging-market manufacturing platforms, and for Malaysia to attain developed nation status by 2020. Towards that latter aim, average growth is targeted at 6.3% per annum, accelerating from 6.0% in 2006-10 to 6.5% in 2011-20. Total trade is expected to increase threefold, from 967.8 billion ringgit (US$263.7 billion) in 2005 to 2.8 billion ringgit by 2020. The strategy is sweeping in its aims but short on detail, despite the setting of arbitrary growth and investment targets. The basic thrust of the framework is to move production activities up the value-added chain and develop tertiary sectors in the economy, to maintain competitiveness. The key points of the programme include: Manufacturing remains at the heart of development strategy. The government will foster growth in 12 key sectors, ranging from electronics and pharmaceuticals to petrochemical and commodities. Electronics, which accounted for around half of Malaysia's total trade between 1996 and 2005, still feature prominently. Investment of 82.4 billion ringgit is targeted by 2020, with exports projected to almost triple to 738.6 billion ringgit. Investment in the heavily state-supported auto sector will aim to develop export sectors, which accounted for just 2.8% of total auto output in 2005. The consolidation of parts suppliers will be encouraged, to boost efficiency gains. Pharmaceutical industries will seek to counter growing competition from producers in India, South Korea, China and Taiwan by focusing investment on the generic drug sector, which is set to grow as long-standing patents expire. Biomedical export growth is targeted at 6.3% per annum. Service-sector growth is forecast to accelerate to an average of 7.5% per annum, from 5.6% in the previous 15-year plan, accounting for 59.7% of gross domestic product (GDP) by 2020. Tourism will remain a key focus, with arrivals targeted at 24.6 million and receipts rising to 59.4 billion ringgit, from 32.0 billion ringgit in 2005. Responding to strengthening global demand for commodities, downstream processing industries will be developed in already established petrochemical zones in Sarawak state, Labuan, Gurun, Kedah state and Johor state. Investment growth in the petrochemical sector is targeted at 7.0% per annum, rising to an average of 34 billion ringgit. Palm oil producers will seek to exploit growing global demand for bio-diesel, with an ambitious global market share of 10.0% targeted by 2020. The government will attempt to reduce red tape and regulations, in a bid to boost development. Outlook and Implications While the programme correctly identifies the challenges faced by the economy, the efficacy of such sweeping industrial plans is doubtful. In the previous 15-year industrial development programme, which ran until 2005, average annual growth was targeted at 7.9%. However, the actual outturn was far more modest, at 4.6%. Growth last crossed the 7.0% line in 2004, when the economy—buoyed by an upswing in global demand—expanded by 7.2%. The economy expanded at a more moderate rate of 5.2% in 2005. Over the next five years, Global Insight forecasts average growth of just 5.3%, barring any shocks. In common with other South-East Asian economies, Malaysia faces growing competition for the investment inflows that drove growth in the 1980s and early-1980s. However, reduced state interference in domestic markets, through deregulation and sectoral liberalisation, is central to boosting such inflows. The role of the state needs to be re-positioned, to provide an effective social security net to support the market, while directing restructuring to foster domestic demand and reduce reliance on net exports. While Malaysia's regular current-account surpluses provide the economy with a cushion against external volatility, they are also indicative of excess savings and redundant resources. The consolidation and deepening of the financial sector, exchange rate liberalisation and the downsizing of public enterprise are reforms that authorities still need to fully embrace, along with fiscal consolidation to reduce the encroachment of the state on private savings. Top-down development programmes belong to the country's early stages of development, and seem increasingly archaic and even obstructive to the open, enterprise-driven economy that the government is seeking Malaysia to become.



End of oil? No, it's a new day dawning Category: Oil, Country: Global , Publish Date: 22/Aug/2006 , Company:
It's all over the worldwide headlines: "Is the World Running Out of Oil?," TRB, Australia. "Oilfields Won't Satisfy World Demand," Le Monde Diplomatique, France. "Is the World's Oil Running Out Fast?," BBC News, England. Plenty of people, including informed people, are worried that oil is running out. There is good news and bad news with respect to the future of oil. The good news is, we are not running out of oil; The world still has over 1 trillion bbl of proved reserves. The bad news is that access to the world's remaining oil is getting much more difficult, and serious supply disruptions are highly likely to occur in the future. On the basis of geoscience and engineering, there is still plenty left. The limits are largely political. This article takes a look at the facts. Fewer big finds First, it's true that oil and gas discovery volumes peaked decades ago, oil in the 1960s and gas in the 1970s. The actual number of discoveries peaked in the 1980s-30 years ago (Fig. 1). We are not finding the elephant fields anymore, either. Today, about half of the world's oil production is from 116 giant fields that each produces more than 100,000 b/d of oil. All but four of those were found more than 25 years ago. Maybe a few more elephants exist, but we're just not discovering those monster fields anymore. The other half of current world production comes from more than 4,000 not-so-large fields. It is true that oil exploration discovery volumes are declining, from about 60 billion bbl/year in the early 1960s to one-fourth that amount today (Fig. 2). At the same time, production has been climbing to meet demand-from about 10 billion bbl/year in the early 1960s to about three times that much today. In fact, production has exceeded discovery for the past 20 years. The rising water cut-from 22% in the early '60s to more than 40% today-makes it clear that our existing fields are getting old, playing out. In the US, new fields are providing less than one-fourth of reserve additions, and we can extrapolate that to other mature oil and gas areas worldwide (Fig. 3). So we can't expect to find many new fields in mature areas like the US. It is depressing to think about, but the news isn't all bad. For one thing, even in mature areas, we're still finding plenty of new reserves: in deeper pools, in extensions, in infill drilling-as well as in adjustments and revisions to our earlier numbers. In fact, over the past 10 years in the US, 75% of new reserves were found in and around old fields. We still have a lot to gain in these old areas. They'll continue to increase proved reserves. For another, we have ramped up exploration in deep water in the last decade, and we are finding an average of 3 billion bbl/year in more than 1,000 m of water (Fig. 4). That's replacing fully 10% of the world's yearly production-a pretty impressive number. The number of active offshore rigs has continuously increased but not the corresponding reserves found because we tend to find the big fields first and as the rig count increases we find smaller fields. So, while deepwater drilling is important, it doesn't solve all of our problems. Spending money well A major solution, though, is seismic technology, which helps us find more prospects-onshore and offshore. Oil companies have been devoting a lot of time and money to seismic and probably should be doing even more of it (Fig. 5). In fact, as in so many other areas of our lives, technology plays a huge role in solving the problem of "not enough oil." More about that later. The industry's spending on exploration has been fairly constant, but that's because we all know that it is hard to "spend one's way to success" in exploration (Fig. 6). The key is spending money well, and for that we need better quality prospects. Seismic exploration "highgrades" our prospects so we can spend money wisely. At Apache, we've recently doubled our seismic budget. We're looking for a quality portfolio so we can choose the best opportunities from within that portfolio. And that's my second plug for seismic. Here is a very telling illustration (Fig. 7). Today, about half the world's production comes from fields that contain a small fraction (13%) of the world's proved reserves: non-OPEC reserves. The good news is that we're maximizing the production of these reserves-and that's due to advanced technology and some very hard work by oil companies worldwide. The oil endowment It is stunning to think of how much oil could be produced if all of the world's acreage were worked as hard as that non-OPEC acreage. We international oil companies (IOCs) are really squeezing that acreage hard. As hard as we are working non-OPEC acreage, it also means that this resource will begin to decline soon. This means we will have to change our business strategy as this decline begins. Yes, we'll have to make that shift, and we need to start now. The world's ratio of oil reserves to production has held steady or increased for the past 25 years, and we still have a 40-year supply of proved reserves in the ground. Granted, a lot of this is in the Middle East, but that just means we have to be very aware of how political problems can affect the world's oil supply. It's easy to forget about the gigantic numbers we're talking about (Fig. 8). In terms of conventional oil resources, the experts seem to agree that the earth holds somewhere between 6 trillion and 8 trillion bbl of oil in place. Of that, we've produced only about 1 trillion. We think we have roughly another 1 trillion in proved reserves-and maybe another 1 trillion in probable/possible reserves. That's a lot of oil. The rest-more than half of the total-will require enhanced oil recovery (EOR), which currently is difficult and expensive but will become easier and more economical in the future. Then there's the vast potential of nonconventional resources, which include extra-heavy oil, oil shales, tar sands, and bitumen, and extra-heavy oil. The earth offers about as much in nonconventional resources oil in place as it does in conventional: about 7 trillion bbl. That's huge. Role of high prices In the past, we have not had cost-effective extraction technologies to get much of that oil out of the ground. It's pie in the sky right now-but probably not for long. Higher prices make these resources attractive enough to overcome the incredible effort and cost required to produce them. Here's why: When we look at the demand side of the oil equation, we see evidence in Europe's gasoline prices (currently about $6/gal-over $250/bbl) that Western consumers are willing to pay the price for this "expensive" nonconventional oil-if and when it becomes necessary (Fig. 9). Oil is an extremely valuable commodity with no practical alternative at this time. Yes, Europe's (and Asia's) gasoline prices are high due to high taxes, but they still demonstrate consumers' willingness to pay much higher prices if necessary. It's just a matter of time before the demand price and the supply price for EOR and nonconventional resources match up. Of course, the other big demand-side factor is world population growth, and increased oil use in China and India. This galloping demand is not going to let up, and we expect other developing countries to use more oil and gas as their economies improve. This trend will give us the price flexibility to develop both enhanced oil recovery techniques and the technology to produce nonconventional resources. Theoretically, the cushion of recoverable reserves gives us the time needed to develop and prove these new technologies. It also gives us time to build consensus within nations (on import issues, taxes, and the like) and in cooperatives around the world (nations with nations and commercial oil companies with national oil companies). And, finally, it gives us the time to develop new talent in our business-young people who can develop the technologies and build the level of worldwide cooperation that the future of oil will demand. However, as Yogi Berra said, "In theory there is no difference between theory and practice. In practice, there is." Political factors It is foolish to assume that significant supply disruptions will not happen in the future. Consider the War on Terror, Iran, Saudi Arabia, Venezuela's Chavez, and the nationalization of reserves in Russia and Latin America. More oil is becoming less available to the most efficient explorers and producers: the IOCs. This is a real problem that will be up to politicians to solve, but the potential for man-made problems makes it imperative that we use all the tools at our disposal to lessen our vulnerability to disruption and the economic see-saw that results. We are working our conventional reserves hard, and non-OPEC oil production will begin to decline soon. But even that is not the end of oil. If politicians can address international issues effectively, we can depend on oil from the Middle East and other areas for many decades to come. And, as long as we can develop the technology to produce nonconventional reserves, we're set to use some amount of oil for much longer-a century or more. Today, more than ever, our future energy resources are in the hands of the world's politicians. Our job, in the energy business, is to keep squeezing that oil out of the ground and to continue developing EOR and nonconventional recovery technologies. Perhaps most importantly, we need to expect and plan for significant supply disruptions due to political events. If we take the critical steps to become well prepared, the headlines can read, "Oil Scare a Nonevent," "Growth Continues Worldwide," and, maybe even, "Seismic Saves the Day."

Oil Production Limits Mean Opportunities, Conservation Category: Oil, Country: Global , Publish Date: 22/Aug/2006 , Company:
In the face of looming oil production shortfalls, all individuals as well as nations as a whole will have to use less oil. And now is the time to begin developing programs accommodating the need for less oil. The coming shortage could provide excellent opportunities for those able to identify them and act strategically. Civilization is increasingly dependent on oil, now the most important global commodity. The oil and gas industry has surpassed agriculture as the biggest industry in the world. At $70/bbl, the value of the world's crude oil business is about $2 trillion/year. But crude oil is far from uniformly distributed around the world, and only a limited number of countries are significant producers. Oil production and consumption figures are published annually in the BP Statistical Review of World Energy,1 and from these figures we can determine which countries are net importers and which are net exporters. In 2005 the export trade was 48 million b/d, and 29% of global crude oil exports went to the US, up from 27% in 2004. Japan was number two importer with 11%, up from 10% the previous year, and China was number three with 7%, up from 6% in 2004. Importing nations must find countries that are prepared to export oil to them. Normally the flow of oil into one country will come from several different sources. Adding all the exports, we find that Saudi Arabia is the number one exporter with a volume of just over 9 million b/d, up slightly from 2004. Russia is number two with 6.8 million b/d, slightly up from 6.7 million b/d in 2004, and Norway is number three with 2.8 million b/d, down slightly from 3 million b/d in 2004. During the last 30 years, the annual increase in average gross domestic product (GDP) globally has been 3%/year compared with an average increase in oil consumption of 1.6%/year.2 In developing countries, the correlation between GDP and oil consumption is stronger than average. For example, China's increase in GDP on average has been 8.2% during the last 5 years, and the increase in oil consumption, 8.5%.3 In its 2004 World Energy Outlook, the International Energy Agency (IEA) forecast that the increase in oil consumption would be 1.6%/year for the next 25 years, requiring oil production of 123 million b/d in 2030. A detailed analysis, however, found that this objective for the oil industry was not possible to fulfill.4 In IEA's 2005 World Energy Outlook, the target had dropped to a 1.4%/year increase in the production of oil, and the number for 2030 was projected at 115 million b/d. The US Energy Information Administration (EIA) forecasts a production of 117 million b/d for the same year. Compared with today's production of 85 million b/d, an increase of 30 million b/d in global production will be needed if IEA forecasts are correct. According to EIA, US consumption will increase by 7 million b/d (33%) by 2030. At the same time, consumption in China will increase by the same amount but in percentage terms, by over 100%. In discussions of the global economy, only the increase in China's demand is mentioned as a threat. China has 21% of the global population today and is consuming 8.5% of the world's oil, up from 8% last year. In 2030 China hopes to use 12%, and there is no doubt that it can afford to pay for this increase. The US has just 5% of the global population but intends to maintain its current share of 25% of the global consumption. Compared with China, it appears that the US will have to increase its debt to pay for the crude. If the decline in existing production and all additional demand forecasts are added, imports by 2030 will have to increase by some 30 million b/d. Would exporting countries be able to meet the demand from the net importers? Possible production According to Saudi Aramco, Saudi Arabia has reserves enabling a sustainable production of 10.8 million b/d for more than 50 years, but it plans to boost its production to 12.5 million b/d in 2009. This production is not sustainable, because the country would have to find new oil fields and put them in production before 2030 to maintain the same level of production. When determining possible future exports, the growing Saudi population must be taken into account, as the country will require more of its oil domestically. Exports can be expected to increase by only about 2 million b/d. Officially, Saudi Arabia claims to have found 720 billion bbl of original oil in place. So far it has produced 15% of that, and, with a claim of 260 billion bbl as proved reserves-36% of the OOIP-the recovery factor would be 51%. At a hearing at the Swedish Royal Academy of Sciences in spring 2005, Tor Ragnar Merling from Statoil ASA presented a detailed study of recovery factors of thousands of oil fields in sizes varying from small ones to giants. The average recovery factor was 29%. Merling thought it was possible to increase this number to 38%. Even though Saudi Arabia produces most of its crude from only a few oil fields, there are hundreds of oil fields there. If the global average recovery factor is applied to the 720 billion bbl of OOIP, the reserves would be 110 billion bbl, and with the Merling future recovery factor, they would be 160 billion bbl. Because Saudi Arabia refuses to be transparent with its oil field data, conservative planners in the future should use these numbers. In early June, the Russian Ministry of Economics announced that Russia would reach a maximum production of 9.85 million b/d in 2009. By accepting this number as a plateau number for 20 years, taking into account that the GDP will increase 3%/year, and applying a 50% decoupling factor (when the oil consumption is less then the growth in GDP), Russian exports are calculated to be 5 million b/d by 2030-a decline of 1 million b/d. Norway, the number three exporter today, says that in 2030 its maximum production will be 500,000 b/d, and the minimum, 200,000 b/d. The 2005 export of 2.8 million b/d will decline by more than 2 million b/d by 2030. Mexico is another export country that will lose a big fraction of its export capacity if new fields are not discovered and massive additional production developed. According to "scout" information from Mexico, Cantarell production will decline by 1 million b/d in coming years. Over the next 5 years, Angola and Nigeria will increase production by 3 million b/d, but by 2030, production there will have declined back to today's levels. To avoid any more clouds on the future stark horizon, just assume that other Middle East countries can keep their export volumes constant. Export shortfall real In summary, by 2030 it is very likely that there will be an export shortfall of more than 30 million b/d, and it is most irresponsible of IEA and EIA to say "Be happy, don't worry." The implications are quite clear: Overall, everyone-both nations as a whole and individuals-will have to use less oil in the future. And now is the time to develop conservation tactics. There are alternatives to oil, but they are most unlikely to be available in sufficient quantities to replace the current enormous demand for cheap oil. However, this will not necessarily put an end to society as some believe. Rather, the situation presents enormous business opportunities for individuals in the future. The US and some other importing countries have already faced an artificial "Peak Oil" scenario in the 1970s when the taps were intentionally closed in the Middle East. When those who lived through that time think back, they will recall that life was still OK. It might be more difficult now, as we cannot foresee an increase in the production of crude oil, but by then electric cars will have replaced urban transportation. We do have a future; life will just be quite different than it is today.

What is heavy oil?
As defined by the U.S. Geological Survey (USGS), heavy oil is a type of crude oil characterized by an asphaltic, dense, viscous nature (similar to molasses), and its asphaltene (very large molecules incorporating roughly 90 percent of the sulfur and metals in the oil) content. It also contains impurities such as waxes and carbon residue that must be removed before being refined. Although variously defined, the upper limit for heavy oil is 22° API gravity with a viscosity of 100 cp (centipoise).
The American Petroleum Institute's "API gravity" is a standard to express the specific weight of oils, computed as (141.5/sp g) – 131.5, where sp is the specific gravity of the oil at 60 degrees Fahrenheit. The lower the specific gravity value, the higher the API gravity will be.
Light oil Also known as "conventional oil," light oil has an API gravity of at least 22° and a viscosity less than 100 centipoise (cp). Heavy oil Asphaltic, dense (low API gravity), and viscous oil that is chemically characterized by its content of asphaltenes (very large molecules incorporating most of the sulfur and perhaps 90% of the metals in the oil). Although variously defined, the upper limit for heavy oils has been set at 22°API gravity and a viscosity of less than 100 cP. Extra-heavy oil The portion of heavy oil having an API gravity of less than 10°. Natural bitumen Also known as "oil sands," bitumen shares the attributes of heavy oil but is even more dense and viscous. Natural bitumen has a viscosity greater than 10,000 cP.

In comparison with heavy oil, light or "conventional" oil flows naturally and can be pumped without being heated or diluted. Light oil is characterized by an API gravity of at least 22°, and extra-heavy oil has an API gravity of less than 10°. Natural bitumen, also known as oil sands, shares the characteristics of heavy oil but is even more dense and viscous - with a viscosity greater than 10,000 cP.
Heavy oils typically are not recoverable in their natural state through a well or by ordinary production methods. Most require heat or dilution to flow into a well or through a pipeline.
Formation of heavy oils
The formation of heavy oil and bitumen, like other forms of petroleum, originated with plant life millions of years ago. When the plants and small organisms (plankton) that fed on them died off, the sediments containing their remains were buried at the bottom of inland seas. In a highly simplified explanation, over time, the heat and pressure converted the carbohydrates into hydrocarbons.
Oil formation usually takes place in very fine-grained sedimentary rocks known as black shales. After oil is formed, continued pressure from overlying rocks causes it to migrate through permeable rock layers until it becomes trapped in reservoirs of porous rocks such as sandstone or limestone.


Energy spotlight falls on the Arctic Category: Oil, Country: Canada, United States , Publish Date: 22/Aug/2006 , Company: BP
The recent decision by energy company BP temporarily to halve its output from Alaska's Prudhoe Bay field has brought to attention the risks and rewards of Arctic oil production. The sudden reduction by 200,000 barrels per day reflects the difficulty of extracting Arctic oil and gas. US markets have withstood the cut without major repercussions, but with crude-oil prices moving toward US$80 per barrel, gasoline averaging more than $3 per gallon (about 80 cents a liter) in the US and no sign that costs will decrease, the United States continues to look for ways to diversify its energy sources. Meanwhile, Canada, Russia and the US have sparred over territorial claims in the Arctic region, and record energy prices are creating renewed interest in projects that had not been considered cost-effective. The Arctic region holds vast energy resources, possibly greater than 25% of global reserves, most of which is offshore beneath thick ice and deep water. The oil and gas contained in this area had been unreachable or far too costly and dangerous to extract. Rising global temperatures, however, are causing formerly impenetrable ice sheets to melt and access to Arctic energy resources is increasing. Despite some national claims to ownership, the North Pole was traditionally considered international territory. Increased access to Arctic oil and gas has brought several territorial disputes. These include disagreements between Russia and Norway over the Barents Sea; Canada and the US on several matters; Russia and the US over the Bering Sea; and Canada and Denmark over Hans Island. Additionally, Denmark has gone so far as to claim the North Pole under the pretense that it lies on a natural continuation of Greenland. Thus far, these countries have looked to independent third parties for solutions. Canada and the US clash The Northwest Passage connects the Atlantic and Pacific Oceans by way of waters around the Arctic Archipelago. During the next 20-30 years, continually melting Arctic ice will increase access to what will become a vital shipping lane. Climate studies have shown that temperatures are rising faster at the Earth's poles than the rest of the planet, which will increase annual navigation via the Northwest Passage from approximately 30 days to 120 days by century's end. As such, the Northwest Passage could reduce the trip from London to Tokyo by some 5,000 kilometers compared with traveling through the Suez Canal, or by nearly 8,000km when going through the Panama Canal. While the United States and the European Union designate the Northwest Passage as international waters, Canada claims it as an internal strait. Last year, Canadian Prime Minister Stephen Harper reprimanded the US ambassador for criticizing his government's intent to establish Canada's ownership of the region. Likewise, after several instances in which US commercial and military vessels passed through the disputed area without informing Canada, the Canadian military stated it will no longer refer to it as the Northwest Passage, but rather as Canadian internal waters. Another point of contention is over the Beaufort Sea, which contains significant energy resources. While it currently remains frozen year-around, increasing temperatures are expected to open the Beaufort Sea to oil and gas exploration in the future. Alaska and ANWR BP's shutdown of 26km of pipeline has returned attention to the issue of oil-drilling in the Arctic National Wildlife Refuge (ANWR), a matter that has been debated since the 1979 oil crisis. Proponents of drilling in ANWR look to the area as a way to reduce US dependence on foreign oil, citing US Geological Survey estimates of 10.4 billion barrels of oil in the region. However, other US agencies and private firms have performed surveys of ANWR that found only 4.3 billion to 7.7 billion barrels of recoverable oil. Opponents focus on environmental concerns and question the impact oil from ANWR will have on reducing import needs, as the US consumes in excess of 7 billion barrels of oil annually. The US Geological Survey also estimates that 200,000 trillion cubic feet of methane hydrate gas exists under Alaskan territory outside of ANWR. While only a fraction of this amount is extractable, to recover even 1% would double proven US gas reserves. As such, the US Interior Department announced last Wednesday plans to open the National Petroleum Reserve-Alaska (NPRA) to drilling. Positioned west of Prudhoe Bay, NPRA is a 9-million-hectare area that was earmarked for oil and gas exploration in 1923. Bidding for leases in the area will begin this year. Russia and Norway look to settle differences The 32nd Group of Eight summit in St Petersburg saw Russia seemingly indicate that the US would be left out of efforts to develop the Shtokman gas field, which represents the potential of Arctic energy reserves. The Shtokman field lies under Russia's portion of the Barents Sea and holds 3.2 trillion to 3.7 trillion cubic meters of gas. It was discovered in 1988, but harsh conditions and extreme sea depth hindered development until now. A short-list of five firms to develop the Shtokman field with Russian state-owned Gazprom includes US companies Chevron Corp and ConocoPhillips, Norway's Statoil and Norsk Hydro ASA, and France's Total SA. While the official announcement will come no earlier than the end of the year, Russian President Vladimir Putin seemed to favor the Norwegian firms when he stated, "They don't go around with their noses in the air. They work objectively, very professionally." This barb aimed at the US came after the Kremlin announced in April that the opportunity to participate in the project was directly connected to Russia's bid for World Trade Organization membership, which the White House blocked. Russia, however, intends to sell 40 billion to 50 billion cubic feet of gas from Shtokman to the US annually by 2010. To that end, Gazprom recently created Gazprom Marketing and Trading USA, which will allow the world's largest oil company to supply gas directly to US consumers. Politics aside, Statoil and Norsk Hydro also have the advantage of experience in developing gas and oil fields in Arctic conditions, particularly in the Barents Sea. As such, Putin has made overtures to settle the boundary dispute so as to increase cooperation between Oslo and Moscow. With 45 billion barrels of offshore oil, Sakhalin Island is another key to Russia's future wealth. In conjunction with Gazprom, Russia has contracted Royal Dutch Shell, BP and ExxonMobil to manage the Sakhalin II project that requires building a complete production facility in an area with extreme conditions and little or no preexisting energy infrastructure. Costs for this program, considered "a vanguard project for all of Russia" and maybe the most ambitious energy recovery plan to date, have already exceeded $20 billion. Conclusion While extensive access to energy supplies and transportation routes in the Arctic will not come about for decades, the legal and political battle will only escalate in the near future. The countries involved seem content to settle their disputes through the United Nations and other international bodies. As Arctic oil and gas become readily available, however, it is likely that territorial claims and tension between states will increase. The move toward increasingly expensive and dangerous projects highlights the changing approach that states and oil companies are taking to secure energy resources. Projects such as Sakhalin II and New Zealand's Great South Basin, once seen as exceptional, will surely become the norm. Short-term issues such as development of the Shtokman field will be resolved in coming months. Even if Moscow selects Norwegian firms that are uniquely suited for the project, expect the United States, as the world's largest energy consumer, to create opportunities for US firms in the Russian project. Meanwhile, the politically loaded matter of drilling in ANWR will be passed on to the next US administration, as has been the case for nearly three decades.



People's Bank of China Raises Interest Rates to Temper Risks Generated by Investment Surge Category: Geopolitics & Macro-Economy, Country: China , Publish Date: 22/Aug/2006 , Company:
The People's Bank of China (PBoC) raised interest rates on Friday (18 August) to rein in unrelenting investment growth that is fuelling financial imbalances and pockets of overheating in the economy. Global Insight Perspective Significance The PBoC raised leading one-year lending and deposit rates by 0.27% to 6.12% and 2.52% respectively. The adjustment marked the first time in two years that lending and deposit rates have been increased simultaneously. Implications The move clearly signals the intent of authorities to curb surging investment, which has been fuelled by above-target money supply growth. Over-investment runs the risk of fuelling a fresh generation of non-performing loans (NPLs) in the banking system while aggravating excess capacity in the economy and weighing on domestic demand. Outlook Global Insight expects the PBoC to implement two more rate increases before the end of the year, along with the imposition of additional administrative controls. Investment, and hence growth, will begin a modest slowdown in the later months of 2006 or early-2007. Tightening the Screws On Friday (19 August), the People's Bank of China (PBoC) lifted deposit and lending rates at the same time for the first time in two years. Benchmark one-year lending and deposit rates were both raised by 0.27% to 6.12% and 2.52% respectively. The move marked the fourth tightening of monetary policy since April 2005. Lending rates were raised by 0.27% in April, followed by two 50-basis-point increases in the reserve requirement ratio for commercial banks. Outlook and Implications Monetary policy is being tightened, despite the persistence of benign inflation. The consumer price index (CPI) rose by just 1.0% year-on-year (y/y) in July, slowing from a 1.5% gain in June. Final-stage prices have remained weak, despite increases in production costs, driven in large part by high commodity prices. Producers remain reluctant to pass on costs to consumers, as domestic demand remains circumscribed by high unemployment and significant wage disparities across the country. Aiming to Restrain Investment However, the prime target of policy is investment and money supply, which have been growing out of the central government's control. Despite the earlier imposition of administrative controls to slow down local lending and investment, urban fixed investment and money supply have been rising at respective rates of around 30% and 20%. Driven by heated investment spending, the economy expanded at a torrid rate of 11.3% during the second quarter of 2006, gaining further momentum from the already heated 10.3% growth rate recorded in the first quarter. Hard Landing Unlikely, but Risks Grow While a busting of the current growth cycle is unlikely, given the weak state of inflation, continued heated investment will further worsen China's excess capacity and create more bad loans in the banking system, which is currently subject to a major restructuring programme. Still-deficient risk management and surveillance systems and legacy relationships between state-owned banks and enterprises increase the risks associated with asset and loan quality. The repeated tightening of monetary policy is intended to send a clear signal to state-owned banks that the government is serious in its intention to tame heated investment. Additional Tightening, but Major Yuan Revaluation Counterproductive However, moves thus far are still too modest to have a significant impact on credit and, hence, investment growth. Global Insight expects two more rate increases within the next six months, as well as the imposition of additional direct controls. A major crackdown on feckless provincial governments is already in progress, while state banks have been instructed to restrain lending, although such measures are irrelevant in the private sector, which now accounts for more than 50% of total investment. Conversely, the transmission effect of increases in policy rates is undermined by the underdeveloped state of market instruments. Short-term rates posted only modest increases today in response to the central bank's action, rising by 0.1% to around 2.5%. Given the balance of forces, investment—and, therefore, growth—will begin a modest cool-down in the later months of 2006 or early-2007. Our revised forecast projects that the economy will expand by 10.6% in 2006, before slowing to 9.2% growth in 2007. Nevertheless, it is premature to conclude that authorities will allow the yuan to appreciate more sharply, in order to slow growth in monetary aggregates. Money supply growth is being fuelled by central bank interventions to mitigate the impact of huge capital inflows on the yuan exchange rate. However, letting the yuan crawl up more aggressively would be counter-productive, generating more speculative or "hot money" inflows, exerting additional pressure on China's money supply growth. Moreover, capital controls ringfencing the domestic financial system cannot be lifted until the banking system, exposed by the recent investment boom, is stabilised. As state sector restructuring continues, the maintenance of export-led growth at a level sufficient to absorb shocks remains a key policy priority, and a counterpoint to accelerated exchange rate appreciation. Global Insight maintains its forecast for a 3.0% appreciation in the yuan during 2006, strengthening to 5.0% in 2007



Drama on the High Seas Before Iran Relinquishes "Hijacked" Romanian Rig Category: Geopolitics & Macro-Economy, Country: Iran, Romania , Publish Date: 24/Aug/2006 , Company:
Iranian naval forces took a gung-ho approach to a commercial rig dispute this week, seizing the Romanian-owned vessel with force, before good sense prevailed and the rig was handed back, raising a number of more important issues in its wake. Global Insight Perspective Significance Iran's conduct has seen it come close to risking an international incident at a time of already-heightened tensions over its nuclear programme, all in the interests of two disputed offshore rigs for which its contractual claims are by no means clear. Implications A belated note of caution seems to have been injected after yesterday's adventures on the high seas, resulting in the return of the vessel concerned to its Romanian owners and a recourse to more conventional methods of arbitration. Outlook The incident may have provided some amusement for onlookers, but serious issues lay beneath the surface; notably the kind of decision-making process that led Iran to use gunboat diplomacy in a commercial dispute at such a time, and the country's overall reliability as a contract party with the investors and service players essential to maintain its oil sector. Too Many Action Adventures? Iran's increasingly erratic behaviour took a further leap away from reality yesterday when the navy moved in to board an oil rig with guns blazing in an effort to stop a Romanian services firm from reclaiming the vessel. Twenty-four hours later, the initial red mist seemed to have cleared, facilitating the rig and crew's release, although questions about Iran's grip on reality in an already-tense international climate remain live and valid in its wake. The incident was sparked by last week's removal of the "Fortuna" oil rig from its drilling position in offshore Iranian waters by Romanian owner, Grup Servicii Petroliere (GSP). It claimed that the lease with the Dubai-based Oriental Oil was null and void due to illegal subcontracting to PetroIran and non-payment of some US$17 million-worth of bills. GSP and its Emirati backers, al-Fajr Lil-Aqarat, had taken the decision to physically remove the vessel after an Iranian court order was ignored, with plans to take the same action with the sister vessel, the "Orizont" this week. In an apparent determination to use muscle, where arbitration had not yet succeeded, Iran's navy decided to employ some gunboat diplomacy to resolve the dispute, firing on and boarding the Orizont in offshore Persian Gulf waters yesterday morning. It then arrested the 26 crew members, sending an already-tense diplomatic standoff with Romania into overdrive. "We are dealing with a commercial dispute that is being treated in an extreme way by the Iranian authorities", Romanian Presidential Adviser, Sergiu Medar, told Associated Press. Twenty-four hours later, good sense seems to have prevailed on the Iranian side, enabling the US$150-million rig's release early this morning. However, the immediate issue is far from resolved, with both sides now locked into a war of words and rival legal claims. The lease party, Oriental Oil Co. told Reuters that the two rigs are the subject of an arbitration suit that was filed with the International Chamber of Commerce in Paris (France) in June after GSP terminated the contract. It had also obtained an Iranian court order to keep the rigs where they were until the arbitration result was released. Outlook and Implications The rather bizarre dramatic qualities of this incident mask some very real issues provoked by Iran's behaviour—which do little to moderate its reputation for "extremism" at a time of increasing concern over the country's conduct. The first key issue relates to the country's willingness to resort to gunboat diplomacy at a time of such heightened diplomatic tensions, which have put Iran firmly in the sights of the United Nations Security Council over its determination to pursue a nuclear programme, despite fears that this will be used for weapons rather than civilian power-generation purposes. The second point relates to the reliability of the Iranian government in meeting contract commitments with investors and service companies—a point which has serious implications for the country's economic mainstay, the oil and gas sector. With only four foreign rigs estimated to be operating in the country, two of which belonged to GSM, Iran is already facing a serious shortfall in the equipment necessary for new exploration and oil development, which this incident will do little to redress. The end result is that this short-lived adventure may cost Iran much-needed support and sympathy at a time when it is attempting to woo "undecided"' members of the international community to prevent further U.S. moves towards sanctions.


Australian Pipeline Trust Lodges A$452-mil. Bid for Control of GasNet Category: Investor Relations, Country: Australia , Publish Date: 23/Aug/2006 , Company:
Australia's leading gas pipeline investment firm, the Australian Pipeline Trust (APT), has set out a new take-over bid for GasNet, the gas transmission company whose midstream assets in the state of Victoria are attracting considerable attention. Global Insight Perspective Significance The Australian Pipeline Trust (APT)'s bid of A$3.10 (US$2.36) per share, totalling A$452 million, trumps rival offers for GasNet and exceeds prevailing valuation. The premiums involved reflect the lucrative upside of the Victorian gas market to which GasNet offers access. Implications Although APT is offering a heavy premium, the bidding for GasNet's assets could well continue. The offer reflects the improved financial position that recent equity investments in APT have instilled and the value the company surmises GasNet holds. Outlook GasNet's agreement with earlier bidders implies a response to APT's new offer will be swift. If it is successful, APT will have gained a strong complement to its existing operations and beyond this scale, the consolidation of Australia's national gas industry will also be furthered. Most Wanted The competition for one of Australia's promising gas transmission companies, GasNet Australia Trust, is heating up. On the backs of earlier hostile bids, today the Australian Pipeline Trust (APT) has announced that it has submitted a A$452-million (US$344.8-million) offer for the company. APT's bid of A$3.10 per share now tops the pile of offers for GasNet and its network assets in the southern state of Victoria. APT's bid follows two earlier offers. APT itself was involved in the first move, a hostile bid made jointly with Babcock & Brown Infrastructure Ltd (BBI). According to the Australian Associated Press (AAP), APT and BBI offered 1.545 stapled BBI securities for every GasNet security. Next, Colonial First State Global Asset Management made a bid of A$2.88 per share. This proposition outstripped the BBI/APT joint bid and valued GasNet at roughly A$418 million. In the interim, APT made the determination that it could extract greater value from an individual bid than would be possible in the joint format it had adopted. Today the two firms announced that their joint script offer has been withdrawn. In its place, APT's offer represents a considerable premium. It equates to a 22% premium per share on the offer made by Colonial, and one of between 17% and 38% more than independent evaluations. However, as each of the bids has shown, the would-be investors have considerable confidence in the play. GasNet owns Victoria's principal high-pressure gas transmission network. It transports almost all of the state's natural gas and supplies more than 1.4 million households, as well as 40,000 commercial offtakers. On top of what is an already attractive existing client base, GasNet is also well positioned to grow. The southern markets it dominates hold their own among the country's most bullish growth forecasts. Moreover, it is in a position to benefit from proximity to Bass Strait gas production. This upside is among the factors that have compelled APT to lodge a bid of today's scale. Indeed, the union of the two holds greater potential benefits. APT has substantial midstream holding in neighbouring New South Wales (NSW) and is in the best position to offer GasNet's shareholders strong operational complements. The combination of APT and GasNet assets would allow for greater competition in eastern and southern markets. It could rival the Eastern Gas Pipeline, and as APT managing director Mick McCormack is quoted as saying, the increased gas volumes this merger would allow would also increase revenues. It is the returns from the synergistic nature of the two firms' assets that provide the underlying rationale for APT's move. Outlook and Implications The premium that GasNet has been afforded is considerable, but may be seen as much a consequence of international market currents as domestic rivalry. The midstream position is critical to enable the growth in consumption that Australia's markets look able to support. APT is also in a strong position to absorb the costs of this acquisition on the basis of recent investment activity. APT's own short-term cash position improved with Alinta's move for a stake in the investment firm (see Australia: 17 August 2006: Alinta Farms Into Australian Pipeline Trust, Eyes Even Bigger Stake). Indeed, one can perhaps see Alinta's ambitions for a share of Australia's lucrative eastern gas markets at work in the bid APT has lodged. Whatever the indirect play that might be involved here, one can also look at the move in simpler terms. While APT already has some 8,000 km of gas transmission pipelines under its control, its exposure in Victoria's market has been limited to date. The direct access to Bass Strait output and its existing connections to gas markets in NSW, all within the broader context of a strong economy and demand growth, imply APT's move has generalised merit. Putting the two portfolios together will also result in operational savings that will improve the picture further. GasNet and Colonial are both expected to reply to the development in due course. GasNet's agreement with Colonial calls for a period of two days' consideration for any future bid. Other bids may follow and Colonial could well table an improved offer. While the fickle industry regulator, the Australian Competition and Consumer Commission, remains an ever-present obstacle to such mergers, one thing is certain: today's proposal will only look better two days down the road.


The drums of war sound for Iran Category: General, Country: Iran, Israel, Lebanon, United States , Publish Date: 21/Jul/2006 , Company:

WASHINGTON - The week-old Israeli-Hezbollah conflict is likely to boost the chances of US military action against Iran, according to a number of regional experts who see a broad consensus among the US political elite that the ongoing hostilities are part of a broader offensive being waged by Tehran against Washington across the region. While Israel-centered neo-conservatives have been the most aggressive in arguing that Hezbollah's July 12 cross-border attack could only have been carried out with Iran's approval, if not encouragement, that view has been largely accepted and echoed by the US mainstream media, as well as other key political factions, including liberal internationalists identified with the Democratic Party. "In my reading, this is the beginning of what was a very similar process in the period, between [the September 11, 2001 terrorist attacks against New York and the Pentagon] and the Iraq war," said Gregory Gause, who teaches Middle East politics at the University of Vermont. "While neo-cons took the lead in opinion formation then, eventually there was something approaching consensus in the American political class that war with Iraq was a necessary part of remaking the Middle East to prevent future 9/11s," he said. "That strong majority opinion was bipartisan [and] crossed ideological lines - neo-cons supported the war, but so did lots of prominent liberal intellectuals," he said. "I think it is very possible that a similar consensus could develop over the next few years, if not the next few months, about the necessity to confront Iran." Indeed, almost as if to prove the point, the US Senate voted unanimously on Tuesday to approve a resolution that not only endorsed Israel's military actions in Gaza and Lebanon without calling on it to exercise any restraint, but also urged US President George W Bush to impose across-the-board diplomatic and economic sanctions on Tehran and Damascus. The House of Representatives was expected to pass a similar resolution on Thursday. To Gause and other analysts, Tehran, even before the current crisis, offered a tempting target of blame for Washington's many frustrations in the region. In addition to its long-standing support for Hezbollah, whose political power has, in Washington's view, stalled last year's so-called "Cedar Revolution", Iran has backed both Hamas, including the Damascus-based military wing that last month precipitated the current round of violence by abducting an Israeli soldier outside Gaza, and Shi'ite militias that have helped push Iraq to the brink of a sectarian civil war. "The world needs to understand what is going on here," wrote the influential liberal New York Times columnist Thomas Friedman last week as Israel launched its military counter-offensive against Hezbollah. "The little flowers of democracy that were planted in Lebanon, Iraq and the Palestinian territories are being crushed by the boots of Syrian-backed Islamist militias who are desperate to keep real democracy from taking hold in this region and Iranian-backed Islamist militias desperate to keep modernism from taking hold." But Iran can be blamed for other ills, as well. By allegedly promoting instability throughout the region, as well as fears of an eventual military confrontation with Washington, Iran can also be blamed for the rise of oil prices, from which it is profiting handsomely, to record levels. And its repeated rejection of US demands that it respond to the pending proposal for a deal on its nuclear program adds to the thesis that Iran is engaged in its own form of asymmetric warfare against Washington. Indeed, it has become accepted wisdom in Washington that Iran encouraged Hezbollah's July 12 raid as a way to divert attention from growing international concern over its nuclear program. "There has been a lot of connecting of the dots back to Iran," said retired Colonel August Richard Norton, who teaches international relations at Boston University. "This goes well beyond the [neo-conservative] Weekly Standard crowd; we've seen the major newspapers all accept the premise that what happened July 12 was engineered in some way by Iran as a way of undermining efforts to impede its nuclear program." Graham Fuller, a former top Central Intelligence Agency and RAND Corporation Middle East expert, noted that there has been a "buildup of domestic forces that now see Iran as inexorably at the center of the entire regional spider web". "The mainstream is unfortunately grasping for coherent explanations, [and] the neo-con/hard right offers a fairly simple, self-serving vision on the cause of the problems, and their solution," Fuller said. In much the same way that Saddam Hussein was depicted, particularly by neo-conservatives, as the strategic domino whose fall would unleash a process of democratization, de-radicalization, moderation and modernization throughout the Middle East, so now Iran is portrayed as the "Gordian Knot" whose cutting would not only redress many of Washington's recent setbacks, but also renew prospects for regional "transformation" in the way that it was originally intended. The notion that, as the puppetmaster behind Syria, Hezbollah, Hamas and Shi'ite militias in Iraq, an aggressive and emboldened Iran is the source of Washington's many problems has the added virtue of relieving the policy establishment in Washington of responsibility for the predicament in which the US finds itself or of the necessity for "painful self-examination, or serious policy revision", said Fuller. "Full speed ahead - no revision of fundamental premises is required. And even though we revel in being the sole global superpower, God forbid that anything the US has done in the region might have at least contributed to the present disaster scene," he said. As was the case with Iraq, the only dissenters among the policy elite are the foreign-policy "realists", who argue that the Bush administration, in particular, has made a series of disastrous policy errors in the Middle East - especially by providing virtually unconditional support for Israel and invading Iraq. They also include regional specialists such as Norton, who maintain that the depiction of Hezbollah, for example, as a mere proxy for Iran - let alone the notion that Tehran was behind the July 12 attack - is a dangerous misreading of a much more complex reality. These forces have been arguing for some time that Washington should engage Iran directly on the full range of issues - from Tehran's nuclear program to regional security - that divide the countries. But the current crisis, and Israel's and the neo-conservatives' success in blaming Iran for it, is likely to make this argument a more difficult sell.





Forward-Looking Emphasis in U.S. Federal Reserve Chairman's Testimony is Welcomed Category: Geopolitics & Macro-Economy, Country: United States , Publish Date: 21/Jul/2006 , Company:
Federal Reserve chairman Ben Bernanke presented his much-anticipated Semiannual Monetary Policy Report to Congress yesterday, and made it clear that he is focused on the coming slowdown and the need for the Federal Reserve to be forward-looking. Global Insight Perspective Significance Federal Reserve chairman Ben Bernanke's testimony to Congress on monetary policy highlighted that growth is slowing, and that the Federal Reserve must take account of previous policy tightening in setting interest rates. The question is, does that mean that the Fed can stop hiking? Implications Global Insight thinks not, since inflation risks in the immediate future still lie to the upside. Outlook We have predicted one more rate hike in 2006, but Bernanke's testimony raises the chances of another, before policy easing ensues in 2007. Bernanke Lays Out Thinking Federal Reserve chairman Ben Bernanke presented the Federal Reserve's Semiannual Monetary Policy Report to Congress on 19 July. His testimony contained a welcome focus on the future rather than the past. Given lags between policy actions and effects, he emphasised that the Fed must be forward-looking and base its actions on the longer-term outlook for inflation and economic growth. In particular, he noted that the Fed must take account of the effects of previous policy tightening that are still in the pipeline. Bernanke made clear that the economy is in a period of transition to slower growth - although the Fed thinks that GDP growth will still be roughly in line with potential, at just over 3%. The slowdown will be driven by weaker residential construction and slower consumer spending growth. He noted that business investment and exports still look strong, however. With slower growth, the Fed sees inflation easing down in 2007. Outlook and Implications The financial markets jumped on Bernanke's words - especially the mention of the tightening effects already in the pipeline - as an indication that the Fed may be done, or close to done, with rate hikes. It is indeed possible that the Fed is nearly done. The present Global Insight baseline assumes one more 25-basis-point rate hike to 5.50% in August. Nevertheless, we still see clear and growing risks that the Fed will have to do more than that. The inflation figures will get worse before they get better, and the Fed may have to do more to keep inflationary expectations in check. The Fed's new inflation projections highlight the risks. The Fed expects core personal consumption expenditure (PCE) inflation to be running at 2.25-2.50% as of the fourth quarter of 2006, above its 1.0-2.0% comfort zone. However, some officials from the Federal Open Market Committee (FOMC) see a risk that inflation could be as high as 3.0%. Bernanke noted that the Fed must examine not only the most likely outlook, but also the risks to the outlook and the costs that would be incurred if those risks should be realised. We believe that if push comes to shove, upside inflation risks would have to take priority over downside growth risks. The Fed may therefore have to do more than implement the single rate hike that we have pencilled in for the rest of 2006. Nonetheless, we still think that at some point in 2007, the Fed will be able to start to ease rates down - even if inflation is still running above 2%, as both we and the Fed anticipate - based on below-trend growth and a declining, rather than rising, inflation trend.

Forward-Looking Emphasis in U.S. Federal Reserve

Forward-Looking Emphasis in U.S. Federal Reserve Chairman's Testimony is Welcomed Category: Geopolitics & Macro-Economy, Country: United States , Publish Date: 21/Jul/2006 , Company:
Federal Reserve chairman Ben Bernanke presented his much-anticipated Semiannual Monetary Policy Report to Congress yesterday, and made it clear that he is focused on the coming slowdown and the need for the Federal Reserve to be forward-looking. Global Insight Perspective Significance Federal Reserve chairman Ben Bernanke's testimony to Congress on monetary policy highlighted that growth is slowing, and that the Federal Reserve must take account of previous policy tightening in setting interest rates. The question is, does that mean that the Fed can stop hiking? Implications Global Insight thinks not, since inflation risks in the immediate future still lie to the upside. Outlook We have predicted one more rate hike in 2006, but Bernanke's testimony raises the chances of another, before policy easing ensues in 2007. Bernanke Lays Out Thinking Federal Reserve chairman Ben Bernanke presented the Federal Reserve's Semiannual Monetary Policy Report to Congress on 19 July. His testimony contained a welcome focus on the future rather than the past. Given lags between policy actions and effects, he emphasised that the Fed must be forward-looking and base its actions on the longer-term outlook for inflation and economic growth. In particular, he noted that the Fed must take account of the effects of previous policy tightening that are still in the pipeline. Bernanke made clear that the economy is in a period of transition to slower growth - although the Fed thinks that GDP growth will still be roughly in line with potential, at just over 3%. The slowdown will be driven by weaker residential construction and slower consumer spending growth. He noted that business investment and exports still look strong, however. With slower growth, the Fed sees inflation easing down in 2007. Outlook and Implications The financial markets jumped on Bernanke's words - especially the mention of the tightening effects already in the pipeline - as an indication that the Fed may be done, or close to done, with rate hikes. It is indeed possible that the Fed is nearly done. The present Global Insight baseline assumes one more 25-basis-point rate hike to 5.50% in August. Nevertheless, we still see clear and growing risks that the Fed will have to do more than that. The inflation figures will get worse before they get better, and the Fed may have to do more to keep inflationary expectations in check. The Fed's new inflation projections highlight the risks. The Fed expects core personal consumption expenditure (PCE) inflation to be running at 2.25-2.50% as of the fourth quarter of 2006, above its 1.0-2.0% comfort zone. However, some officials from the Federal Open Market Committee (FOMC) see a risk that inflation could be as high as 3.0%. Bernanke noted that the Fed must examine not only the most likely outlook, but also the risks to the outlook and the costs that would be incurred if those risks should be realised. We believe that if push comes to shove, upside inflation risks would have to take priority over downside growth risks. The Fed may therefore have to do more than implement the single rate hike that we have pencilled in for the rest of 2006. Nonetheless, we still think that at some point in 2007, the Fed will be able to start to ease rates down - even if inflation is still running above 2%, as both we and the Fed anticipate - based on below-trend growth and a declining, rather than rising, inflation trend.

The drums of war sound for Iran

The drums of war sound for Iran Category: General, Country: Iran, Israel, Lebanon, United States , Publish Date: 21/Jul/2006 , Company:

WASHINGTON - The week-old Israeli-Hezbollah conflict is likely to boost the chances of US military action against Iran, according to a number of regional experts who see a broad consensus among the US political elite that the ongoing hostilities are part of a broader offensive being waged by Tehran against Washington across the region. While Israel-centered neo-conservatives have been the most aggressive in arguing that Hezbollah's July 12 cross-border attack could only have been carried out with Iran's approval, if not encouragement, that view has been largely accepted and echoed by the US mainstream media, as well as other key political factions, including liberal internationalists identified with the Democratic Party. "In my reading, this is the beginning of what was a very similar process in the period, between [the September 11, 2001 terrorist attacks against New York and the Pentagon] and the Iraq war," said Gregory Gause, who teaches Middle East politics at the University of Vermont. "While neo-cons took the lead in opinion formation then, eventually there was something approaching consensus in the American political class that war with Iraq was a necessary part of remaking the Middle East to prevent future 9/11s," he said. "That strong majority opinion was bipartisan [and] crossed ideological lines - neo-cons supported the war, but so did lots of prominent liberal intellectuals," he said. "I think it is very possible that a similar consensus could develop over the next few years, if not the next few months, about the necessity to confront Iran." Indeed, almost as if to prove the point, the US Senate voted unanimously on Tuesday to approve a resolution that not only endorsed Israel's military actions in Gaza and Lebanon without calling on it to exercise any restraint, but also urged US President George W Bush to impose across-the-board diplomatic and economic sanctions on Tehran and Damascus. The House of Representatives was expected to pass a similar resolution on Thursday. To Gause and other analysts, Tehran, even before the current crisis, offered a tempting target of blame for Washington's many frustrations in the region. In addition to its long-standing support for Hezbollah, whose political power has, in Washington's view, stalled last year's so-called "Cedar Revolution", Iran has backed both Hamas, including the Damascus-based military wing that last month precipitated the current round of violence by abducting an Israeli soldier outside Gaza, and Shi'ite militias that have helped push Iraq to the brink of a sectarian civil war. "The world needs to understand what is going on here," wrote the influential liberal New York Times columnist Thomas Friedman last week as Israel launched its military counter-offensive against Hezbollah. "The little flowers of democracy that were planted in Lebanon, Iraq and the Palestinian territories are being crushed by the boots of Syrian-backed Islamist militias who are desperate to keep real democracy from taking hold in this region and Iranian-backed Islamist militias desperate to keep modernism from taking hold." But Iran can be blamed for other ills, as well. By allegedly promoting instability throughout the region, as well as fears of an eventual military confrontation with Washington, Iran can also be blamed for the rise of oil prices, from which it is profiting handsomely, to record levels. And its repeated rejection of US demands that it respond to the pending proposal for a deal on its nuclear program adds to the thesis that Iran is engaged in its own form of asymmetric warfare against Washington. Indeed, it has become accepted wisdom in Washington that Iran encouraged Hezbollah's July 12 raid as a way to divert attention from growing international concern over its nuclear program. "There has been a lot of connecting of the dots back to Iran," said retired Colonel August Richard Norton, who teaches international relations at Boston University. "This goes well beyond the [neo-conservative] Weekly Standard crowd; we've seen the major newspapers all accept the premise that what happened July 12 was engineered in some way by Iran as a way of undermining efforts to impede its nuclear program." Graham Fuller, a former top Central Intelligence Agency and RAND Corporation Middle East expert, noted that there has been a "buildup of domestic forces that now see Iran as inexorably at the center of the entire regional spider web". "The mainstream is unfortunately grasping for coherent explanations, [and] the neo-con/hard right offers a fairly simple, self-serving vision on the cause of the problems, and their solution," Fuller said. In much the same way that Saddam Hussein was depicted, particularly by neo-conservatives, as the strategic domino whose fall would unleash a process of democratization, de-radicalization, moderation and modernization throughout the Middle East, so now Iran is portrayed as the "Gordian Knot" whose cutting would not only redress many of Washington's recent setbacks, but also renew prospects for regional "transformation" in the way that it was originally intended. The notion that, as the puppetmaster behind Syria, Hezbollah, Hamas and Shi'ite militias in Iraq, an aggressive and emboldened Iran is the source of Washington's many problems has the added virtue of relieving the policy establishment in Washington of responsibility for the predicament in which the US finds itself or of the necessity for "painful self-examination, or serious policy revision", said Fuller. "Full speed ahead - no revision of fundamental premises is required. And even though we revel in being the sole global superpower, God forbid that anything the US has done in the region might have at least contributed to the present disaster scene," he said. As was the case with Iraq, the only dissenters among the policy elite are the foreign-policy "realists", who argue that the Bush administration, in particular, has made a series of disastrous policy errors in the Middle East - especially by providing virtually unconditional support for Israel and invading Iraq. They also include regional specialists such as Norton, who maintain that the depiction of Hezbollah, for example, as a mere proxy for Iran - let alone the notion that Tehran was behind the July 12 attack - is a dangerous misreading of a much more complex reality. These forces have been arguing for some time that Washington should engage Iran directly on the full range of issues - from Tehran's nuclear program to regional security - that divide the countries. But the current crisis, and Israel's and the neo-conservatives' success in blaming Iran for it, is likely to make this argument a more difficult sell.

Australian Pipeline Trust Lodges A$452-mil

Australian Pipeline Trust Lodges A$452-mil. Bid for Control of GasNet Category: Investor Relations, Country: Australia , Publish Date: 23/Aug/2006 , Company:
Australia's leading gas pipeline investment firm, the Australian Pipeline Trust (APT), has set out a new take-over bid for GasNet, the gas transmission company whose midstream assets in the state of Victoria are attracting considerable attention. Global Insight Perspective Significance The Australian Pipeline Trust (APT)'s bid of A$3.10 (US$2.36) per share, totalling A$452 million, trumps rival offers for GasNet and exceeds prevailing valuation. The premiums involved reflect the lucrative upside of the Victorian gas market to which GasNet offers access. Implications Although APT is offering a heavy premium, the bidding for GasNet's assets could well continue. The offer reflects the improved financial position that recent equity investments in APT have instilled and the value the company surmises GasNet holds. Outlook GasNet's agreement with earlier bidders implies a response to APT's new offer will be swift. If it is successful, APT will have gained a strong complement to its existing operations and beyond this scale, the consolidation of Australia's national gas industry will also be furthered. Most Wanted The competition for one of Australia's promising gas transmission companies, GasNet Australia Trust, is heating up. On the backs of earlier hostile bids, today the Australian Pipeline Trust (APT) has announced that it has submitted a A$452-million (US$344.8-million) offer for the company. APT's bid of A$3.10 per share now tops the pile of offers for GasNet and its network assets in the southern state of Victoria. APT's bid follows two earlier offers. APT itself was involved in the first move, a hostile bid made jointly with Babcock & Brown Infrastructure Ltd (BBI). According to the Australian Associated Press (AAP), APT and BBI offered 1.545 stapled BBI securities for every GasNet security. Next, Colonial First State Global Asset Management made a bid of A$2.88 per share. This proposition outstripped the BBI/APT joint bid and valued GasNet at roughly A$418 million. In the interim, APT made the determination that it could extract greater value from an individual bid than would be possible in the joint format it had adopted. Today the two firms announced that their joint script offer has been withdrawn. In its place, APT's offer represents a considerable premium. It equates to a 22% premium per share on the offer made by Colonial, and one of between 17% and 38% more than independent evaluations. However, as each of the bids has shown, the would-be investors have considerable confidence in the play. GasNet owns Victoria's principal high-pressure gas transmission network. It transports almost all of the state's natural gas and supplies more than 1.4 million households, as well as 40,000 commercial offtakers. On top of what is an already attractive existing client base, GasNet is also well positioned to grow. The southern markets it dominates hold their own among the country's most bullish growth forecasts. Moreover, it is in a position to benefit from proximity to Bass Strait gas production. This upside is among the factors that have compelled APT to lodge a bid of today's scale. Indeed, the union of the two holds greater potential benefits. APT has substantial midstream holding in neighbouring New South Wales (NSW) and is in the best position to offer GasNet's shareholders strong operational complements. The combination of APT and GasNet assets would allow for greater competition in eastern and southern markets. It could rival the Eastern Gas Pipeline, and as APT managing director Mick McCormack is quoted as saying, the increased gas volumes this merger would allow would also increase revenues. It is the returns from the synergistic nature of the two firms' assets that provide the underlying rationale for APT's move. Outlook and Implications The premium that GasNet has been afforded is considerable, but may be seen as much a consequence of international market currents as domestic rivalry. The midstream position is critical to enable the growth in consumption that Australia's markets look able to support. APT is also in a strong position to absorb the costs of this acquisition on the basis of recent investment activity. APT's own short-term cash position improved with Alinta's move for a stake in the investment firm (see Australia: 17 August 2006: Alinta Farms Into Australian Pipeline Trust, Eyes Even Bigger Stake). Indeed, one can perhaps see Alinta's ambitions for a share of Australia's lucrative eastern gas markets at work in the bid APT has lodged. Whatever the indirect play that might be involved here, one can also look at the move in simpler terms. While APT already has some 8,000 km of gas transmission pipelines under its control, its exposure in Victoria's market has been limited to date. The direct access to Bass Strait output and its existing connections to gas markets in NSW, all within the broader context of a strong economy and demand growth, imply APT's move has generalised merit. Putting the two portfolios together will also result in operational savings that will improve the picture further. GasNet and Colonial are both expected to reply to the development in due course. GasNet's agreement with Colonial calls for a period of two days' consideration for any future bid. Other bids may follow and Colonial could well table an improved offer. While the fickle industry regulator, the Australian Competition and Consumer Commission, remains an ever-present obstacle to such mergers, one thing is certain: today's proposal will only look better two days down the road.