Geopolitical Vocabulary: Cabinda

Energy Intelligence Note: 12 May, 2007

A recent trend at Energy Intelligence has been assessing the geopolitical impacts of Peak Oil. While it is easy to discern these impacts today in places like Nigeria and Iraq, it may not be long before we must add a new term to our collective geopolitical vocabulary: Cabinda.

Cabinda is a small ethnic exclave of Angola. It is where most of Angola's oil is produced, and where most of Angola's future production increases will come from. It is also the only Angolan province with an active insurgency and independence movement. In my opinion, Cabinda--and Angola's oil production along with it--may be the next geopolitical casualty of Peak Oil. There haven't been any attacks on the oil infrastructure yet (unless Thursday's "suspicious fire" at a Total platform in next-door Congo turns out to be the first such incident), but the situation is the perfect tinder-box.

For more information on Cabinda, and on the potential for an "Oil Insurgency," see my article in today's Oil Drum: Cabinda: Prospects for an Oil Insurgency in the Angolan Exclave.

Nigeria Escalation

Energy Intelligence Note: 9 May, 2007

The situation in Nigeria is escalating--as expected, geologically-driven declines in oil production are spawning geopolitically-driven increases in disruptions from "above-ground factors." The recent attacks on major oil pipelines in Nigeria cut all oil flow to AGIP's Brass Export Terminal, taking a further 200,000 barrels per day off the market. On top of that, take a look at the latest unclassified figures on kidnappings in Nigeria, courtesy of the CIA:

2006:
Total Hostages (Unresolved): 66 (0)
American Hostages (Unresolved): 0 (0)

2007:
Total Hostages (Unresolved): 106 (17)
Amercan Hostages (Unresolved): 17 (5)

And 2007 is only half over! That represents a rougly 200% year-on-year increase in total hostages, and a huge leap in the "value" of these hostages, as reflected by the sudden shift toward higher-skill and western workers, as shown by the sudden prevalence of American hostages.

The coordinated nature of the recent triple pipeline attack suggests that broader, hierarchal organizations such as MEND are alive and well. This doesn't, however, mean that the kind of localized criminal organizations that I spoke of in my recent Oil Drum article on Nigeria are going away. On the contrary, it means that politically-motivated groups such as MEND must now differentiate themselves from the criminal gangs if they wish to put weight behind their political demands. If MEND and criminal gangs resort to the same tactics, there is no motivation on the part of either the Nigerian government or foreign oil companies to cave to MEND's political demands when this won't end the disruption caused by criminal gangs. MEND must pursue increasingly coordinated, high-impact attacks to give them a bargaining chip that is unique, a bargaining chip that is not shared by criminal gangs who won't participate in a cease fire. Logic dictates that differentiating themselves from criminal gangs requires a new targeting focus: offshore oil facilities. MEND has demonstrated a limited ability in the past to operate in the offshore environment. The Nigerian navy is certainly in no shape to effectively counter them. Expect a wave of significant offshore attacks to be the next major development in Nigeria. Offshore facilities are highly vulnerable and minimally defended--consider the destruction caused by mistake or malfunction at the Piper Alpha platform. Now consider how long it takes to repair a major offshore facility in today's economy. An attack on a major offshore facility is the next logical targeting choice, and MEND is at a critical juncture where it must demonstrate its political relevance or fade away as a centralized, unified organization.

A recent commen was right on the money: the geopolitical distruptions caused by geological peaking in oil production may provide exactly the cover necessary to avoid recognition of the geological forces driving these events. It's a challenge to make a scapegoat out of geological reality, but foreign terrorists and resource nationalism are easy marks!

Gas Gouging Legislation

Peak Oil Law Center: Gas Gouging Legislation

Summer driving season is almost upon us, and with low gasoline inventories (especially in some areas like Denver) we can expect two things this Summer—higher gas prices, and calls for the government to “do something” about gas gouging. 81 percent of consumers seem to think that gas prices are "unreasonable."

It’s becoming an annual exercise in trying to explain the basics of free market economics. Don’t get me wrong—our global economy is anything but a perfectly free market, and often free market rationale is simply wrong (though usually for failure to properly account for future costs, structural costs, and marginal values in pricing, but don’t get me started on that). One case where the free market works admirably well on a micro-level: distributing a scarce resource to those who most need it through dynamic pricing of that resource. In the case of gas, so-called “gas gouging” is one of two things: price-fixing, or free market pricing. Price-fixing is certainly anti-competitive, and is exactly the kind of thing that governments should address—for example, if all the gas stations in an area formed a cartel and agreed to raise prices by 50%. The kind of coordination required to pull off such a feat is quite visible, however, and would immediately run afoul of existing anti-trust laws. There is no need for new legislation to address this, and quite frankly, this is not why gas prices will be high this summer. The other kind of pricing—when a free market raises prices to reach an equilibrium between supply and demand—is highly beneficial to consumers. It ensures that gas is available—you may have to pay more for it, but if it isn’t worth the price to you, then don’t drive. At least if it is worth the price, you won’t find yourself in a two-hour line because of rationing, or simply find the pumps out of gas.

With rising energy scarcity, and the ongoing failure of America to take adequate measures to address the problem of Peak Oil, we can expect this annual exercise in populist proposals for gas gouging legislation to intensify. While there are some signs that politicians will resist the pressure—witness former Colorado Governor Bill Owens’ veto of just such a bill last June—these populist flames are already being fanned by local news reporting. Maybe journalism majors should be required to take a course in economics? I wonder who they’ll blame when they begin reporting on the plastic yellow “out of gas” bags covering gas pumps? My guess is that it won’t be the consumer, though that’s where the blame belongs. Gas gouging legislation only substitutes one negative—high gas prices—with a worse negative—no gas.

On a "canary in the mineshaft" note, energy investment banker Matt Simmons seems to think that a full-blown gasoline crisis this summer will be the opening bell for true Peak Oil-related problems (Warning, PDF. See page 40). Also of interest, another refinery fire yesterday--it's as if these places are full of flammable liquids or something... at least no one is actively trying to blow them up in the US. Yet.

Have the Kurds Abandoned All Hope of a Stable Iraq?

Energy Intelligence Note: 1 May, 2007

Salman Banaei recently published an analysis of Iraq’s draft Oil & Gas Law in the Association of International Petroleum Negotiator’s March issue of "Advisor" (also available via his Western Energy Blog). He shows how the draft law allocates control over production from “current” fields to the Iraqi National Oil Company, and that regional governments retain control over “undiscovered” fields. While regional governments can sign contracts with international oil & gas firms, the draft law ensures federal oversight by requiring approval of these contracts by Iraq’s Federal Oil & Gas Council (FOGC).

Recent events in Kurdistan, however, suggest that the Kurds may have other plans. UAE-based Dana Gas announced recently that they have agreed with the Kurdish Regional Government (KRG) to develop the Kormor gasfield (see graphic). The Kormor Field clearly falls under the draft law’s envisioned federal control, as it is a “current” field, discovered in 1928. The contract has not received FOGC approval, and it breaks the KRG’s promise to avoid signing new contracts until the end of May, to give the federal government time to pass the Oil & Gas Law.

What does this signify? It seems that the KRG is not satisfied with the division of gas fields between federal control (“current” fields) and regional control (“undiscovered” fields). This “current” vs. “undiscovered” designation seems to have little basis in geological reality, but rather is the political gloss given to the apportionment of existing fields, which is detailed in an annex to the draft law. Petroleum Intelligence Weekly reports that the KRG will reject the law if this annex remains as is. The decision to contract for development of the Kormor Field with Dana Gas prior to the official vote on the law suggests that the KRG believes the annex will not be changed, and that the law will not pass the end-of-May vote.

While none of this should come as a shock—Iraq is a sham Nation-State where mutually exclusive minimum requirements by the component national groups will prevent cooperation—it does carry significance. The prospects for a military solution in Iraq are as slim today as ever, and this failure to bridge the competing demand of Iraq’s many nations suggests that a political solution is no more likely. This reality may not seriously deter oil & gas production in the Kurdish region, where there is relative unity and security, but it will likely present a geopolitical barrier to developing the highly theoretical reserves of Iraq’s Western Desert. Furthermore, while it may be possible for the KRG to produce from their oil & gas fields, their export market is highly limited—the pipeline through Syria is non-functional, and the Turkish government is unlikely to help their rival with a viable export channel. The most viable market for Kurdish oil & gas is Iraqi domestic consumption, but reaching this market requires relying on a handful of critical pipelines that are frequent targets of insurgent attacks. It may be impracticable to market any increase share of oil & gas that the KRG may be able to exploit. Will this fact alone be enough to force them to compromise on their short-term selfish interest to form a viable Iraqi state that will benefit them in the long term by way of a valid export route? Is a willingness by the Kurds to compromise enough to bring together the rest of Iraq’s disparate factions in a similar spirit? Probably not—and the Kurds have probably considered exactly these issues in arriving at their decision to go it alone with regional production. Probably a wise choice for the Kurds, but an ominous sign for the future of the figment of Colonial Cartography that we call Iraq.