Redstate

Seven new sisters in the global energy business

By blackhedd Posted in Economy — Comments (0) / Email this page » / Leave a comment »

Let's talk a bit about where the world's oil and gas is. There are some really interesting tidbits buried in this wire story this morning. The story is initially about an ignorable quote from Iran's oil minister, who recent said exactly nothing while mouthing words to the effect that OPEC will not raise production this summer.

More noteworthy is some news about Iran's commercial ventures with China, and a comment from the CEO of US integrated-major ConocoPhillips.

More...

The top piece of news is that there is a lot of oil and gas in the world:

Global proven reserves are estimated at about 1.2 trillion barrels of oil, which could last 40 years at current production rate, while natural gas reserves could last 70 years, said [Malaysian Prime Minister] Abdullah, whose country is a leading global exporter of liquefied natural gas and significant regional oil producer.

What does that mean for all you global-warming aficionados? It means the world is going to burn up a lot of carbon for decades to come, and nothing we do in the West is going to stop that. Unless of course we and the Europeans choose to wreck our own economies, which would end export markets for all the developing countries in the world. That would delay the consumption of all the rest of the world's oil for perhaps a decade or more, as China moves into our position as the world's demand generator.

In short: if you thinking global warming is both man-made and a disaster, start investing in stomach remedies, because you'll have a lot of indigestion and not much else in the coming decades.

What dots did I connect to arrive at that statement? Simply this: every drop of oil in the world is going to get burned. If not by us, then by someone else. That's reality, get used to it.

Quickly noted about Iran:

With China and India expected to become two major oil consumers in the next 20 years, [Iranian Minister of Petroleum Kazem Hamaneh] said Iran is keen to build energy cooperation in Asia.

The government is finalizing five joint-venture refinery projects in the region in China, Indonesia, Malaysia, Singapore and Syria, which will have total capacity of 1.1 million barrels a day, he said without elaborating except to say Iran will provide the crude.

This is exactly what I'd do if I were the owner of a strategic resource (like a commodity or a technology): construct long-term markets for it. Let's discount this statement appropriately, noting that it was made for public consumption by Western wire-service readers. But let's also note that Asian consumers are not economically incompetent like the government of Iran. They definitely would like to lock up permanent deals to either own or control the disposition of almost half of Iran's current production.

China already has a large gas-development project on the ground in the South Fars region of Iran. (The British are developing the region immediately to the north.)

You may have noticed how hard China has made it for the world to take action against the murderous regime in Khartoum. China buys half a million barrels of crude per day from the Sudan. How much more difficult do you think it will be for us to do something about Iran's nuclear ambitions once the Chinese are much more dependent on their energy exports?

The last large thing I want to note in this grab-bag of a story is a throwaway line from Jim Mulva, CEO of ConocoPhillips:

...multinational companies currently have access to only 7 percent of the world's oil and gas resources, and to another 25 percent through partnerships with national oil firms, leaving "two-thirds of the world's resources off limits to us."

Now wait a minute, what happened to the "Seven Sisters," the eeeee-vil multinational oil companies that are racking up the obscene profits that are causing Hillary Clinton to publicly sharpen her knives for them?

The fascinating fact is that, over the last twenty years or so, the world's state-owned energy companies have become the the new centers of gravity in the "upstream" (exploration) end of the global industry. When global oil powers are discussed, you may think of ExxonMobil, Royal Dutch Shell, and British Pete. Get ready to start hearing names like Gazprom (Russia), Pemex (Mexico), Petrobras (Brazil), Petronas (Kuala Lumpur), CNPC/PetroChina/CNOOC (China), PDVSA (Venezuela), Saudi Aramco, and yes, Iran's NIOC.

You'll notice that a good many of these companies are in places that aren't friendly to freedom and private enterprise. Ostensibly national assets, in practice they're disposed by the power elites of their respective nations.

So exactly what is the business goal of a national oligarchy for their energy assets? Almost exclusively: current income. Look at Pemex and Petrobras, for just two examples. The majority (perhaps 70%) of their oil revenues is sucked out and used to fund government activity. Not for funding any kind of investment in productive infrastructure or long-term management of their assets. And not for building a basis for secondary development of native industries that can create wealthy, free societies.

What upstream role does that leave for the current multinational oil companies? Development and management expertise. These companies will increasingly find themselves forced to do business with somewhat unsavory groups of people on terms not as favorable as they may be used to from past dealings. Of course, the national oil companies have not much interest in acquiring oil-field management and other skills, as long as the multinationals are there to provide it.

Happy trading today, everyone. In case you caught my story on rates last week: the 10-year Treasury is trading lower this morning, to yield 5.15. That's up almost twenty basis points from when I wrote my piece last week. This is the biggest current business story in the world, so keep your eyes on it.