Oil Change » Yue Wang http://oilchangeproject.nationalsecurityzone.org The World's Most Precious Commodity and the Future of U.S. Security Wed, 08 May 2013 18:39:32 +0000 en-US hourly 1 http://wordpress.org/?v=3.5.2 The diplomatic defense of energy http://oilchangeproject.nationalsecurityzone.org/diplomacy-is-another-way/ http://oilchangeproject.nationalsecurityzone.org/diplomacy-is-another-way/#comments Fri, 23 Nov 2012 15:46:02 +0000 Yue Wang http://oilchangeproject.nationalsecurityzone.org/?p=106

The image of President George W. Bush walking hand-in-hand with Saudi Arabia’s Crown Prince Abdullah during a 2005 meeting at Bush’s Crawford Ranch in Texas is emblematic of the power of oil to create alliances among otherwise unlikely partners.

Throughout history, the U.S. government has built close relationships with oil-rich countries like Saudi Arabia, Ecuador, Algeria, Equatorial Guinea and Azerbaijan. In the process, Washington often has overlooked significant policy differences, patterns of corruption and human rights abuses and anti-democratic actions of these governments.

According to many critics, it has done so to ensure U.S access to their vast oil reserves.
Below, we take a look at some of these complex, tangled relationships that the U.S. has fostered around energy issues.

We spent a week in Ecuador to report on the relationship between the smallest member of OPEC and Washington and to explore what big changes in Ecuador’s oil sector– and throughout Latin America– might mean for the future of U.S. energy security.


Ecuador

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On Nov. 28, Ecuador launched an oil licensing round for 13 blocks of oil in the southeast region of the country’s Amazon basin. A sign near the hotel where oil leaders met announces the bidding round as part of a large energy conference. The government of Ecuador has estimated that the land may hold as much as 1.6 billion barrels of oil.

QUITO, Ecuador — With spears pointed at police, tribesmen from Ecuador’s indigenous groups loudly protested outside a hotel here recently, decrying the government’s latest effort to lease their ancestral lands in the Amazon basin to foreign oil companies for exploration and drilling.

Ecuador, the smallest OPEC country, produces 500,000 barrels of oil a day, with some of that exported to the West Coast of the United States. But in recent years, production has stagnated, in part because President Rafael Correa’s anti-American rhetoric has scared off American oil companies that have the technology and financial resources needed to get the oil out of the ground.

As his relationship with the United States and its multinational oil companies has soured in recent years, Correa has increasingly looked to China to take its place and has found an extremely enthusiastic partner. Since 2009, China has provided Ecuador with billions of dollars in loans and financing for infrastructure improvement, such as the 2010 agreement to build the $1.7 billion Coca Codo Sinclair hydroelectric dam to power 75 percent of Ecuador’s energy needs starting in 2015. In exchange, Beijing has secured access to Ecuador’s potentially significant oil supplies, which it needs to fuel its rapid economic growth.

Ecuador expects as much as $1.2 billion in foreign investment in the latest licensing round that caused the protest by indigenous groups. State-owned oil companies in Peru and Colombia have expressed interest in the oil blocks. And the China National Petroleum Corporation’s branch in Ecuador, Andes Petroleum, also has shown interest, according to a Wall Street Journal report.

But China wants more than just oil from Ecuador and the rest of Latin America. In a June 2012 speech delivered to the United Nations Economic Commission for Latin America in Chile, Premier Wen Jiabao said China wants to establish a political and economic partnership with Latin America that is “as strong as the Himalayas and the Andes.”

China is making similar moves around the globe as part of an effort to wean itself off oil from the often-unstable Middle East. But its push into Ecuador and other Latin American countries is of particular concern to some U.S. officials, who fear that it could diminish U.S. influence in a key strategic region in its own backyard, and perhaps someday deprive Americans of an easily accessible supply of oil.

According to State Department cables published by the WikiLeaks organization, Washington has looked on with increasing concern as China focused on Ecuador—and the broader Andean region—as being central to its drive to secure greater oil resources.

In 2006, the U.S. Embassy in Quito noted that China sought to become a “major player” in the Ecuadoran oil industry. Almost overnight, diplomats noted in one cable, “Quito is playing host to a steady inflow of managerial, financial and technical representatives of China’s major and minor oil companies.”

Also, the cable added, “the overseas arms of three major Chinese oil conglomerates [including the China Petroleum Company or Sinopec as well as the Sinochem Corporation]… are present and have ongoing operations in Ecuador.”

In the seven years since, China has sought to cement those oil deals and also to increase its political clout in Ecuador and elsewhere in the region. It has become an important player in the renegotiation of the Quito government’s oil contracts, which increasingly favor state-owned oil companies at the expense of for-profit U.S. multinational corporations that had long done business there, such as Chevron and the Occidental Petroleum Corp. The departure of American investment has created a vacuum for Chinese oil companies to fill.

The Obama administration’s official position is that it is not concerned about Chinese competition in the Latin American markets, including oil.

“We see competition is a healthy thing,” said Heide Bronke Fulton, an official at the U.S. Embassy in Quito. “We believe that U.S. companies will continue to maintain a competitive edge based on the desire for U.S. technology, quality and other factors.”

But others say that, privately, U.S. officials have been concerned that U.S. influence in the region is waning with the exit of these American companies, as well as by Correa’s alliances with the Chinese at a time when he is also pushing away Washington.

Vowing to rid the country of foreign influence in 2009, Correa chose not to renew Ecuador’s 10-year agreement that gave the U.S. use of a military air base in Manta, which was used largely for anti-narcotics efforts in neighboring Colombia. And in April 2011, he expelled U.S. ambassador Heather Hodges after a leaked State Department cable revealed Hodges’ criticism of his government for alleged corruption. The U.S. was without an ambassador to Ecuador for nearly a year. Correa also has beefed up state authority over the oil industry, taking much of the profits and control away from the foreign multinationals.

Taken together, all of these changes could have a significant long-term impact on U.S energy security, according to Roger Noriega, the former assistant secretary of State for western hemisphere affairs.

Ecuador and the Latin America region traditionally accounts for a significant portion of the diversity of U.S oil supply – nearly 20 percent of U.S. imports in 2011. Correa’s oil policies and his decision to embrace China have considerably reduced Ecuador’s output since 2004. As China is strengthening its influence in Ecuador, the United States is losing a natural and convenient energy partner whose potential, experts say, could be further realized by American assistance.

A Changing Tide

While China has showered Correa’s government with attention and money, Latin America “has not been a priority for U.S. foreign policy for many years” because of American preoccupation with the wars in Afghanistan and Iraq, said David Goldwyn, former State Department special envoy and coordinator for international energy affairs, in testimony before the Senate Foreign Relations Committee in 2006.

Others say the U.S. has had little choice, given the Bolivarian Revolution, led by Hugo Chavez, Venezuela’s popular and anti-Western president since 1999, which has brought sweeping socialist reforms to the region. Chavez’s fervent nationalist ideology and denunciation of U.S. influence has spread to other leaders throughout the region.

Ecuador is emblematic of Chavez’s influence. Since 2009, Correa has closely aligned himself with Chavez, similarly using anti-American rhetoric to denounce U.S. influence and appeal to voters, and using social programs and infrastructure improvements built by oil revenues to ensure his popular appeal. Correa was re-elected in February, winning over 50 percent of votes.

Correa’s nationalistic attitude has bled into Ecuador’s energy policies. In 2007, Ecuador announced that the government would receive 99 percent of the oil windfall profits, which occur when the price of oil rises above the price set in the company’s contract. Previously, oil companies shared windfall profits with the government in a 50-50 split. The bigger cut gave Quito a stronger grasp on the energy sector and brought more money into the hands of the government.

In 2010, Correa established a new hydrocarbon law that ended the production-sharing contracts with foreign oil companies. The Ecuadoran government, now complete owner of underground oil resources, rents out blocks for exploration and production in service contracts. The state demands an initial payment of 25 percent of gross revenues as a “sovereign margin.”

As a result, companies no longer benefit from increases in the price of oil, said David Mares, of the James A. Baker III Institute for Public Policy at Rice University’s Institute for Public Policy. “Correa essentially eliminated that possibility,” he said.

Correa’s changes to the oil sector came on the heels of similar reforms in Venezuela, the largest crude oil exporter in the Western Hemisphere and one of the biggest oil suppliers to the United States. In 2006, Chavez increased the national oil company PVDSA’s share in oil projects to a minimum 60 percent. By 2009, PVDSA had taken control of all of Venezuela’s oil fields.

These reforms have made Ecuador unattractive to American investors. Many U.S. firms have been discouraged to invest in Ecuador, especially after an Ecuadorean court ordered American oil giant Chevron to pay an $18 billion compensation to native tribesman for allegedly dumping toxic oil waste into Amazon for more than 20 years.

A New Player In The Region

Historically, China had been reluctant to engage with Latin America because it had been considered a U.S.-dominated region, said Eric Farnsworth, vice president of the Americas Society/ Council of Americas and a former State Department official.

But, he said, “They’ve found out that there really is ample room for them to expand their operations and I think that’s what they’ve been doing.”

As a result China has aggressively moved in to Latin America, gaining an economic upper hand and political influence in the region.

China’s economy is expected to surpass the U.S.’s by 2030, according to “Global Trends 2030,” a December 2012 report by the National Intelligence Council. As its economy swells, China is turning to Latin America and Africa to secure future oil resources.

In January 2012, China committed to loan another $1 billion to Ecuador, adding to the billions the government had already borrowed from China, largely in exchange for future oil exports.

“Obviously it has been the government’s priority to work with the Chinese,” said Shamim Kazemi, an economics officer at the U.S. Embassy in Quito. “Part of it is geopolitical reasons and political affinity.”

China’s movement into Ecuador is emblematic of its growing interests throughout the continent. In May, Venezuela’s Congress approved a measure to allow the government to borrow as much as $8 billion from China in exchange for oil. A similar deal has been made in Brazil, where state oil company Petrobras also signed a deal with the Chinese company Sinopec in 2010 to develop the country’s oil reserves.

Latin America is turning to China in large part to become less reliant on the U.S. economy and imports.

The U.S. remains “Ecuador’s largest crude oil customer,” according to the U.S. Energy Information Association, but since China and Ecuador began making loan agreements for oil in 2009, an increasingly large share of Ecuador’s oil is heading to China.

“The Chinese tend not to get involved in local politics,” and are “certainly not trying to reform anyone’s domestic politics or economy,” Farnsworth said. “Because of that they have a different profile in the region than perhaps the US or other countries.”

While U.S. officials such as Bronke Fulton of the U.S. Embassy say “there is room for both” the U.S. and China to tap into Latin America’s energy resources, some argue that China will eventually overcome the U.S. as the major player in the region.

Farnsworth noted that U.S. leverage in the form of financing from the International Monetary Fund and other similar institutions may be waning. He said Latin American countries “may not require loans from those entities” because they “can get the support from financing needs from places like China.”

At the same time, as the Chinese invest in Latin America, they are not leaving behind the same kind of infrastructure and technology that U.S. and other private companies used to, Noriega said, adding that that could lead to further instability in these countries.

“[Ecuador] ha[s] rolled out the red carpet for China to take half their production and not put the kind of investment, infrastructure, on the ground that would help the Ecuadorean people develop the full investment of that sector.”

While some argue that the Chinese are not politically motivated, others point to growing ties between China and Latin America outside of the economic sector that might suggest otherwise.

In November 2010, People’s Daily, China’s Communist Party newspaper, reported that Bingde Chen, a senior People’s Liberation Army of China official, met with Ecuadorean Defense Minister Javier Ponce in Quito. Chen “said China pays great attention to the development of Sino-Ecuadorean military ties and would like to deepen bilateral military cooperation and relations on a mutually beneficial basis.” Chen also traveled to Venezuela and Peru on his trip.

Many experts believe that the growth of shale gas in the North America will allow the U.S. to look inward for energy rather than rely on oil from foreign sources. But, others say the U.S. should not turn away from Latin America as an energy partner. Instead, it should have a much bigger presence in Ecuador and the rest of Latin America.

Meanwhile, Latin America, home to some of the world’s biggest oil suppliers and fastest growing economies, is now a major global power that is increasingly projecting its economic and political power while seeking more and more independence from the United States, according to Farnsworth.

China, realizing the shifting the tides, wants Latin America countries to be strong allies. In his speech, Premier Wen said China wanted the total bilateral trade to exceed $400 billion in the next five years.

China’s investment in the region pays off handsomely, according to Paulina Durango, a Quito lawyer representing Ecuador in negotiations of infrastructure projects with China.

“I see how Ecuador is looking to China,” she said. “China is having a gate opened not only in Ecuador but in Latin America.”

U.S. officials and Ecuadorean scholars say China’s presence has changed the game and the United States needs a different approach to re-engage the region. Yet, the State Department doesn’t really have a comprehensive policy to do that, Noriega said.

Farnsworth said more cooperation in the energy sector is the key to a new strategy because the United States offers knowledge and understanding of the energy market that is crucial to the hemisphere’s future.

“We have taken it (Latin America) for granted for far too long,” he said. “I’d like to contend for the region. I’d like to fight for it.”


Saudi Arabia

In 2005, President George W. Bush walks hand-in-hand with Saudi Arabia’s Crown Prince Abdullah bin Abdulaziz at Bush’s ranch in Crawford, Texas. The image has become a symbol of the exceptionally close bond between the two countries created because of oil. Source: The White House

Aboard the U.S.S Quincy cruiser on Feb 14, 1945, President Franklin D. Roosevelt ensured King Abdul Aziz that the U.S. would militarily protect Saudi Arabia in return for access to its oil, and the “special relationship” between the two countries was born.

Now, 67 years later, oil continues to bind the U.S. to Saudi Arabia, despite underlying tensions regarding terrorist financing in the Middle East kingdom and fundamental differences in policies between the two countries on everything from crackdowns on democratic practices to the treatment of women.

Saudi Arabia, home to one-fifth of the world’s proven energy reserves, was the second largest supplier of oil to the U.S. in 2011. The U.S. imported 1.2 million barrels of oil a day from Saudi Arabia that year and has been increasing its dependence on the country’s oil supplies since 2008, according to the U.S. Energy Information Administration.

Throughout history, Saudi Arabia’s vast energy reserves have given the monarchy a unique role and exceptional leverage over the U.S. government and its policies.

Prince Bandar bin Sultan, Saudi ambassador to the United States from 1983 to 2005, was known to conduct bilateral diplomacy in the White House with the president and his top advisers, said Lee Wolosky, former director of transnational threats on the National Security Council. Bandar’s privileged relationship with U.S. government officials was “unlike any other relationship with any other country,” Wolosky said.

The problem has been that the close bond based on oil has placed restraints on other issues in the bilateral alliance between the U.S and Saudi Arabia, he said.

“You are really restrained in your ability to have a hawkish policy in other areas, like terrorist finance to give you an example, if you are dependent on the Saudis for oil,” Wolosky said.

Critics, including some in Congress, have long argued that only when the U.S. reduces its dependence on Saudi oil can it truly be free to push for substantive reforms in the oil rich monarchy.

“If we are serious about energy independence, then we can finally be serious about confronting the role of Saudi Arabia in financing and providing ideological support for al-Qaida and other terrorist groups,” said Sen. John Kerry, D-Mass, during his bid for president in 2004.

Complexities underlying bond between the U.S. and Saudi Arabia were thrust into the spotlight in 2001 when it was reported that 15 of the 19 of the hijackers in the Sept. 11 terrorist attacks were Saudis.

“Fund-raisers and facilitators throughout Saudi Arabia and the Gulf raised money for al-Qaida from witting and unwitting donors and divert funds from Islamic charities and mosques,” according to the 9/11 Commission. Yet, the commission “found no evidence that the Saudi government as an institution or individual senior officials knowingly support or supported al Qaeda.”

Since 2004, the Saudi monarchy itself has been a target for al-Qaida attacks. The Riyadh government has cooperated with the U.S. in making some reforms to combat global terrorism, but privately, U.S. officials have continued to complain that the royal family hasn’t cracked down on terror financing and that it is still rampant in the country.

In a 2009 cable leaked to Wikileaks, Secretary of State Hillary Clinton wrote, “While the Kingdom of Saudi Arabia takes seriously the threat of terrorism within Saudi Arabia, it has been an ongoing challenge to persuade Saudi officials to treat terrorist financing emanating from Saudi Arabia as a strategic priority.”

The leaked State Department cables also reveal the Saudi government’s sensitivities to criticism by the U.S. government.

In 2010, the U.S. Travel Services Administration placed Saudi Arabia on a list of countries whose departing travelers require extra screening after the attempted 2009 Christmas Day bombing on a flight from Amsterdam to Detroit.

In response, Saudi Deputy Foreign Minister for Multilateral Relations Prince Turki bin Mohammed said, “he was very disappointed by the designation of Saudi Arabia as a country of interest, which makes Saudi Arabia feel and look like a ‘black sheep,’” according to the cable.

The cracks in the seemingly unbreakable oil bond extend beyond the issue of terrorist financing. In a cable to Secretary Clinton prior to a visit to Saudi Arabia in February 2010, Ambassador James Smith pointed to “the status of women, religious freedom and human rights” as “ongoing concerns” for U.S. officials.

As the Arab Spring spread across the Middle East in 2011, the Saudi monarchy responded by introducing new laws criminalizing freedom of expression and assembly, according to Human Rights Watch. Seeking to suppress public condemnation of the government, the monarchy also increased censorship of the media.

In Saudi Arabia, Islamic customs require that women have male guardians, who decide whether they are allowed to travel, study or work, according to Human Rights Watch. Similarly, women are not allowed to drive or vote.

Yet, “the US failed to publicly criticize Saudi human rights violations or its role in putting down pro-democracy protests in neighboring Bahrain,” the human rights organization said. “U.S. President Barack Obama failed to mention Saudi Arabia in a major speech on the Arab uprisings and continued to pursue a $60 billion arms sale to Saudi Arabia, the biggest-ever US arms sale.”


Algeria

Secretary of State Hillary Clinton greets President Abdelaziz Bouteflika during an October 2012 visit to Algeria. The U.S. continues to foster close relations with Algeria despite its record of corruption and human rights abuses. Source: U.S. Embassy Algeria

Algeria exports nearly 2 million barrels of oil a day, with about 25 percent of it going to the United States, the first country to invest in the North African nation’s hydrocarbon sector after a 2005 liberalization law allowed foreign investments.

The Obama administration is building stronger economic ties with Algeria by encouraging U.S. companies to do business in the country under the National Export Initiative, which seeks to double U.S exports globally by the end of 2014. Algeria, holding the 14th largest oil reserve worldwide, is already an active market for U.S investors, who dominate the country’s oil and gas sector.

However, corruption is a serious problem in the OPEC member country and the U.S. government is well aware of it.  A 2010 State Department cable obtained and published by Wikileaks said former Minister of Energy and Mines Chakib Khelil was responsible for the widespread “culture of corruption” in the state oil company Sonatrach, whose senior executives were investigated for corruption by Algerian authorities in the same year.

The investigation led to the removal of the Sonatrach’s chief of executive, Mohamed Meziane, and a dozen senior officials. The cable alleged that Reda Hemche, Khelil’s protégé and Sonatrach’s former chief of staff, was responsible for the corruption deals that shook the country’s oil sector.

Algeria also has a poor human rights record. It strictly restricts the freedom of assembly, discriminates against women, carries out torture and arbitrary killings and, during the Iraq war, was one of the largest suppliers of anti-coalition fighters, according to a 2012 report by the Congressional Research Service.

Despite these problems, the U.S. government is fostering closer ties with Algeria. The country, in addition to the oil deals, is also in a position to provide crucial assistance to U.S. regional counterterrorism activities because of its strategic location and influence, especially as the Obama administration steps up efforts to fight groups with ties to al-Qaida in North Africa after Secretary of State Clinton linked them to the Benghazi attack that killed U.S. ambassador Christopher Stevens.

The U.S. has tried to balance appreciation for Algeria’s contributions to counterterrorism with calls for political reform while expressing support for the Algerian government led by President Abdelaziz Bouteflika. In 2011, Bouteflika lifted a 19-year state of emergency that authorities said helped them combat Islamist extremists, but that critics said was used to repress political opponents.

The ban was lifted after Algeria faced waves of social protests similar to those that toppled regimes in Egypt and Tunisia in the so-called Arab Spring. Clinton called for greater political freedom in Algeria when she visited the region in 2011.

In his Senate confirmation hearing in 2011, U.S. Ambassador to Algeria Henry Ensher said he would prioritize outreach to the country’s people while deepening counterterrorism cooperation and economic ties. Algeria receives foreign aid assistance under the State Department’s Middle East Partnership Initiative, which was designed to help citizens in the Middle East and North Africa build more “pluralistc, participatory and prosperous” societies. 

In March 2011, a U.S.-Algerian counterterrorism contact group was launched to share intelligence information, and Algeria receives U.S. assistance to strengthen its capacity to fight al-Qaida in the Islamic Maghreb, the regional affiliate of the terror network.


Equatorial Guinea

Secretary of State Condoleezza Rice greets Equatorial Guinea’s President Obiang Nguema Mbasogo in April 2006 at the White House. Rice tells Obiang,”You are a good friend and we welcome you,’’ despite well-documented entrenched corruption issues and serious human rights abuses in Equatorial Guinea. Source: State Department

American oil companies have invested almost $14 billion in the Republic of Equatorial Guinea since the 1995 discovery of the Zafiro oil field off the shores of this once isolated and impoverished West African country. They are now responsible for nearly all of its oil production.

Equatorial Guinea has become the third largest oil producer in sub-Saharan Africa and an important energy ally of the United States. According to the U.S. Energy Information Administration, the United States was the top destination for Equatorial Guinean oil in 2010, accounting for 29 percent of total exports.

The country is also strategically located in the Gulf of Guinea. The U.S. imports 12 percent of its oil from African oil producers in the region, according to U.S. Ambassador to Equatorial Guinea Mark L. Asquino.

A 2009 State Department cable obtained and published by Wikileaks said that U.S. energy strategy would have a “gaping hole” if it ignored Equatorial Guinea, whose light, sweet crude oil is highly prized in international markets.

But Equatorial Guinea has been plagued by official corruption ever since the sudden flush of oil wealth. The country’s lawlessness exacerbated the problem. President Teodoro Obiang Nguema Mbasogo, who has ruled Equatorial Guinea for almost 40 years, and his family have amassed billions of dollars while the majority of Equatorial Guineans live on less than $2 a day.

The corruption problems attracted widespread attention when the U.S. Justice Department alleged that Obiang’s son, Teodoro Nguema Obiang, had been laundering money in America. Prosecutors went to court in 2011 to seize $70 million of his assets, which included a $30 million Malibu mansion and $2 million in Michael Jackson memorabilia. Seven years earlier, a Senate investigation exposed the Obiangs’ secret accounts at Riggs Bank in Washington, which paid $16 million in fines for failing to report suspicious activities in the scandal that involved both the former Chilean Dictator Augusto Pinochet and President Obiang.

In August 2012, French police seized a five-story Paris pied-a-terre and 11 luxury cars belonging to the 43-year-old son following a corruption investigation involving President Obiang.

The State Department has tried to paint a rosier picture of the elder Obiang. Other 2009 cables said that Equatorial Guinea is “no worse than many of America’s energy allies and that hundreds of millions of dollars are going into social spending in the country. According to Ambassador Asquino’s 2012 statement to the Senate Foreign Relations Committee, the government is considering applying to be a candidate for the Britain’s Extractive Industries Transparency Initiative again after it failed to meet the requirements in the first application. The anti-corruption Program, which makes countries eligible for foreign aid, was announced in 2002 by then-British Prime Minister Tony Blair at the World Summit on Sustainable Development.

Equatorial Guinea is also notorious for its poor human rights record. Torture at prisons is systematically carried out despite laws forbidding it. A 2011 State Department human rights report said that the government was “intolerant” of critical views and maintained a “monopoly” over political life.

But the United States has been cautious in forcing Equatorial Guinea to tackle its problems; critics say that is to avoid potential fallout with the country’s leaders. The Obama administration is encouraging an evolving fiscal transparency instead of calling for the kind of immediate changes that the Wikileaks cable said could place the state in turmoil.

“Do we want to see the country continue to evolve in positive ways from the very primitive state in which it found itself after independence? Or would we prefer a revolution that brings sudden, uncertain change and unpredictability?” one State Department cable asked. “The former is clearly the path the country is on, and the latter has potentially dire consequences for our interests, most notably our energy security.”

The cable went on to say that Equatorial Guinea was reaching out for U.S assistance and called for a more appropriate guiding narrative for the relationship with this country.

“EG’s hand is not clenched in a fist,” it said. “It is reaching out for our assistance. Our own history has taught us that aiding those who ask for help can heal historical wounds and promote integration. This is a story we must tell again.”

Azerbaijan

Secretary of State Hillary Clinton talks to Azerbaijan’s President Ilham Aliyev at the presidential residence in Baku during a July 2012 trip. While in Azerbaijan, Clinton attended an oil and gas conference and pushed Aliyev to carry out human rights reforms, which have also long been a source of U.S. concern. Source: State Department

Since Azerbaijan gained independence after the fall of the Soviet Union in 1991, the U.S. relationship with the largest country in the Caucasus has revolved around its vast energy reserves. In 1997, Azerbaijan President Heydar Alyev made his first official trip to the U.S. to meet with President Bill Clinton and to sign production agreements with four major US companies: Chevron, Exxon, Mobil and Amoco.

With an estimated 7 billion barrels of proven oil reserves today, Azerbaijan remains a close partner on energy issues with the U.S., despite significant documented human rights abuses and corruption accusations against the government. In 2003, Aliyev was succeeded by his son, Ilham.

U.S. imports of crude oil from Azerbaijan began to increase significantly in 2002, peaking in 2009 at 75,000 barrels per day, according to the U.S. Energy Information Administration. While exports from Azerbaijan have decreased since 2009, the country remains a crucial supplier of oil to the U.S. The United States imported 7.78 million barrels of oil from Azerbaijan between January and August 2012.

Understanding the vast potential of the Caspian region’s oil reserves, the U.S. exerted its influence in the early 1990s to ensure that Russia would not control the energy resources of the region’s newly independent countries, including Azerbaijan, Kazakhstan and Uzbekistan.

The U.S. believed that “those that are blessed with energy resources ought to have an opportunity to produce and export them without having to obey Moscow’s dictate,” said Cory Welt, associate director of international relations at the Institute for European, Russian and Eurasian Studies at George Washington University.

Today, U.S. interest in Azerbaijan also lies in the country’s unique position to ensure European energy security by diversifying the oil and natural gas market for Europeans, who previously relied heavily on Russia.

“We want to assist Europe in its quest for energy security,” said Richard Morningstar, then- special envoy for European Energy before a House Foreign Affairs Committee in June 2011. “We have an interest in an economically strong Europe…so our aim is to encourage the development of a balanced and diverse energy strategy with multiple energy sources and multiple routes to market—a competitive, efficient market which offers the best prices for consumers.”

Yet, the oil-rich authoritarian government has long been criticized for human rights abuses and anti-democratic practices. Aliyev has placed significant restrictions on the freedom of speech and freedom of assembly of his people, Welt said. “You can get locked up for saying negative things about the government and people do.”

But, in 2006, Matthew Bryza, then deputy assistant secretary of state for Europe and Eurasian affairs and later ambassador of Azerbaijan, told NPR, “We don’t see Ilham Aliyev as a dictator. We see him as a leader of a country with an emerging democracy that has a long way to go.”

The human rights situation in Azerbaijan has recently worsened, according to Human Rights Watch’s 2012 World Report and U.S. State Department cables released by Wikileaks.

“Azerbaijan’s already poor democracy and human rights record is worsening, with media freedom deteriorating and a general disregard for freedoms of assembly and speech,” wrote Robert Gaverick, a former political-economic section officer at the U.S. Embassy in the capital of Baku, in a 2010 cable.

The cable stressed the need to promote democratic reforms in the country to protect U.S. interests. “Azerbaijan continues to be a strategically important country for the United States, particularly in terms of security cooperation and energy resources,” Gaverick wrote. “These developments, in our view, threaten the long-term stability of the country, and eventually could put other areas of cooperation at risk.”

Also, the vast oil revenues and lack of transparency has fueled corruption in the government. In 2012, Azerbaijan received one of the lowest Corruption Perception Indexes by Transparency International, ranking 139 out of 183 countries.

Despite these concerns, the U.S. continues to cultivate its relationship with Azerbaijan around energy issues. Secretary of State Hillary Clinton traveled to Azerbaijan in July 2012 and one of her primary stops was at the Caspian International Oil & Gas Exhibition, which was organized by a British and an Azerbaijani oil company.

A report from the exhibition, where experts discussed the country’s energy sector and leaders courted foreign investment., concluded that both President Barack Obama and British Prime Minister David Cameron “sent greetings and dignitaries” and “emphasized Azerbaijan’s key role in creating new energy corridors and the need to develop a closer relationship between Azerbaijan and their respective countries.”

During her visit, Clinton also stressed the need for further democratic reforms in the country so thatr the two countries can remain close partners in the future.

“We, as we always do, urge the government to respect their citizens’ right to express views peacefully, to release those who have been detained for doing so in print or on the streets or for defending human rights,” she said during remarks with Azerbaijani Foreign Minister Elman Mammadyarov.

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The new frontiers of oil http://oilchangeproject.nationalsecurityzone.org/to-counter-vulnerabilities-we-are-constantly-forging-new-frontiers/ http://oilchangeproject.nationalsecurityzone.org/to-counter-vulnerabilities-we-are-constantly-forging-new-frontiers/#comments Mon, 19 Nov 2012 15:48:17 +0000 Yue Wang http://oilchangeproject.nationalsecurityzone.org/?p=116
Introduction

U.S. oil firms are always forging new oil frontiers to increase the availability of oil supply. From the giant Kashagan field in the northern part of the Caspian Sea to the pre-salt zones deep  below the sea surface offshore Brazil, they are combating all kinds of complicated natural environments to get the oil out. With oil prices often at more than $100 a barrel, companies are willing to take risks in uncharted territories.

The U.S. government has launched different programs to improve the investment climate for those future big suppliers. For example, the State Department’s Energy Governance and Capacity Initiative provides foreign aid to help countries build a better fiscal system. David Goldwyn, former international coordinator of energy affairs, said that countries were much more likely to take American advice when they were not enriched with oil money and by helping them, the U.S. government also gained some “diplomatic capital.”

“When things eventually go wrong in the country as they almost always do at some point,” he said. “then the U.S government has some leverage, frankly, to hold that government accountable because it played an significant role in getting them to be the competitive producer in the first place.”

U.S. oil companies are not the only ones operating in these emerging producing countries. Their oil potential has lured companies from all over the world, such as China. Chinese national oil companies, fueled by growing domestic demand, have been actively courting the governments of those new producers for exploration and production contracts. According to former State Department officials, their presence is not a threat to U.S. energy security interests yet because it is still modest in many countries. But the way Chinese national oil companies operate has posed a challenge to U.S. good governance goals.

China is famous for its so called no-strings-attached approach. It doesn’t ask for changes in how these countries manage their oil revenue as a conditionality of its loans and aids. Instead, it wants secure oil supply as payments. Critics say this approach has strengthened the power of many oppressive regimes.


Ghana

Ghana, projected to be among the top 50 oil producers once its Jubilee Field is in full production , was President Barack Obama’s first destination on his trip to Africa in 2009. Obama outlined his foreign policy goals for Africa in an address to the Ghanaian Parliament, singling out energy as one area where America can do more to promote trade and investment in a “meaningful way.”

The country attracted worldwide attention in 2007 when British wildcatter Tullow Oil discovered the Jubilee Field, whose potential Tullow estimates may be as high as 4.5 billion barrels of oil. The Jubilee discovery is one of the largest in West Africa over the last two decades.

Compared with most African countries, Ghana is a relatively safe and stable country in which to operate and continues to be a preferred country in Africa for U.S energy firms. Kosmos Energy and Anadarko Petroleum Corp. are two major American companies operating there. They each have a 23.49 percent working interest in Jubilee.

One of the impediments to a more robust U.S-Ghanian energy relationship was Kosmos’ attempted sale in 2009 of its stakes in the Jubilee Field to Exxon Mobil for about $4.3 billion. The deal expired in 2010 after the state-run Ghana National Petroleum Corp. refused to recognize the sale, which was necessary for it to go forward.

The deal irked many Ghana officials, including former President John Mills, because GNPC was not part of the negotiation. GNPC accused Kosmos of sharing confidential oil exploration data with as many as 20 oil firms without its consent.

China has shown considerable interest in Ghana’s oil sector. Prior to the end of the deal between Kosmos and Exxon Mobil, a Chinese national oil company, CNOOC, entered talks with GNPC to make a rival $5 billion bid challenging Exxon Mobil’s $ 4 billion offer. The bid was later refused by Kosmos , which said it now intended to stay in Ghana as an oil producing firm.

Currently, Tullow Oil is the leading operator in the country, with a 49.95 percent working interest in Deepwater Tano and 26.4 percent one in West Cape Three Points. According to a 2009 Congressional Research Service report, as many as 50 oil firms may be interested in buying stakes in Ghana’s oil sector. They range from private companies such as Chevron Corp., BP PLC and Royal Dutch Shell to China’s CNOOC.

The first barrel from the Jubilee came out in 2011. Tullow said the company’s gross production averaged 66,000 barrels a day that year. About 120,000 barrels of oil per day may be produced once full rates of production are reached.

The State Department has designated Ghana as a tier one participant in the U.S. Energy Governance and Capacity Initiative, a program to help future oil producers manage their oil revenues to promote transparent energy sectors and ensure the security of oil and gas supplies.

In a 2010 cable obtained and published by Wikileaks, the State Department said that it believed the EGCI programs can “make a difference” in targeted countries, all of which are likely to receive tens of billions of dollars in oil and gas revenue during the coming decade.

According to another leaked 2010 State Department cable, Mills, while president, expressed “without reservation” to Assistant Secretary of State for African Affairs Johnnie Carson that he was committed to the rule of law so Ghana would account for all oil revenues in a transparent manner.

Mills also said in the cable that Ghana’s oil revenue belongs to the people and the country’s leadership will do “what is right” despite the challenges.

 


Kazakhstan/The Caspian Sea

Kazakhstan in Central Asia holds an estimated oil reserve of 30 billion barrels, the 12th largest in the world, luring oil companies from the United States, China and elsewhere to the Caspian Sea region in what is being termed the “black gold rush.”

Discovered in 2000, the Kashagan oil field near the harbor city of Atyrau has an estimated reserve of 11 billion barrels. Oil firms haven’t seen such a huge discovery in four decades. On top of that, Kazakhstan already has the Tengiz field, which holds up to 9 billion barrels and is about the size of Chicago.

American oil giant Chevron Corp. started negotiations to develop the Tengiz field with the Soviet Union in 1990 and began to work in the field in 1993. It is now the largest producer in the region, holding a 50 percent stake in the Tengiz field, whose daily production of 520,000 barrels accounts for about one-third of the country’s total output.

Steve LeVine, a fellow at the New America Foundation and author of “The Oil and the Glory,” a book about the oil rush in the Caspian Sea, said U.S. policy is aimed at making this area “a pro-western swath of territory between Russia and Iran” in a 2007 panel discussion. The landlocked Kazakhstan and other Caspian countries such as Azerbaijan and Turkmenistan traditionally relied on a pipeline system running through Russia that delivers their oil to Black Sea ports. Designed by the former Soviet Union, the system maximized transport of oil for Russia, giving the country almost complete control over Kazakhstan’s exports following the Soviet Union’s break up.

Now these countries are enmeshed in negotiations over potential pipeline routes and fees they would pay the former Soviet Union as demand for their oil rises dramatically in other parts of the world.

In a 2009 interview with the European newspaper New Europe, former U.S. Ambassador to Kazakhstan Richard E. Hoagland said that it was long-term U.S. policy to support oil transportation out of Central Asia because American companies considered Kazakhstan an“important strategic partner and an attractive long-term investment opportunity.”

“We have nothing against Kazakhstan participating in projects with Russian partners,” he said. “We just don’t think it is wise for any one country to have monopoly control over Kazakhstan’s export options.”

Starting in 2001, the State Department and Kazakhstan established an energy partnership in which Washington provides assistance to diversify Kazakhstan’s oil and gas export routes.

According to Hoagland, the U.S. encourages Kazakhstan to further consider the Trans- Caspian oil pipeline, which would go under the Caspian Sea to provide a western export route for both Kazakhstan and Turkmenistan. Russia and Iran, both coastal states of the Caspian Sea, said the project must get approval from all five costal states to go forward and even so, they oppose it on the grounds that it is too environmentally damaging.

China also has a lot of interest in Kazakhstan’s oil. The 1,384-mile Kazakhstan-China pipeline runs from the Atyrau port in northwestern Kazakhstan to Alashankou in China’s northwest Xinjiang region. According to the U.S. Energy Information Administration, the pipeline’s capacity is being expanded from 240,000 barrels a day to 400,000 barrels a day.

In addition to export problems, boosting Kazakhstan’s oil output is a big challenge. Start of production of the Kashagan project has been pushed back to 2013 from the original scheduled start date in 2005 while a consortium of oil companies including Kazakhstan’s national oil company KazMunaiGas, Exxon Mobil Corp., Royal Dutch Shell and French oil giant Total, builds a mammoth island in the northern part of the Caspian Sea to combat extreme weathers and shallow waters that make the transportation of heavy equipment very costly.

More than $30 billion has been spent on the Kashagan project already, three times the original estimate of $10 billion.

The delay has strained the relationships between western oil companies and the Kazakhstan government, which counts on the project to double the country’s current daily output of 1.6 million barrels.

Another impediment to realizing the region’s energy potential is the legal status of the Caspian Sea. Despite repeated efforts, so far only Azerbaijan, Kazakhstan and Russia have reached agreement on the ownership of the sea’s resources among all littoral states.

 


Brazil

The largest oil discoveries in recent years have been in Brazil’s offshore pre-salt basins, previously inaccessible until recent developments in deep-water drilling technologies offered a way to get at a huge reserve that some say may yield as much as 50 billion barrels of oil.

The pre-salt zones under the seabed off Brazil’s coast consist of irregular layers of salt up to a mile thick, or more, with the oil underneath that. In 2006, a consortium of Petrobras, Brazil’s state oil company, British’s natural gas firm BG Group PLC and Portugal’s Petrogal made the first significant pre-salt discovery in what is now known as the Lula field in the Santos Basin, about 155 miles off the coast of Rio de Janeiro.

Other pre-salt discoveries were announced subsequently in the Santos Basin. Petrobras said that the Lula field alone could hold up to 8 billion barrels of oil, more than half of Brazil’s total proven reserve, the majority of which is located off the country’s southeast coast in the Campos and Santos Basins.

Drilling for pre-salt oil is daunting. Companies have to go through about two miles of water, one mile of rock and another two miles of salt layer before reaching the oil, which often emerges scathing hot when first extracted from the reservoir.

The Petrobras website said that there is “no doubt” of the economic feasibility of commercially developing pre-salt oil and this venture is “guaranteed to be successful.” According to Petrobras, current production from its pre-salt fields is about 100,000 barrels per day. The company’s goal is to reach a daily production of more than 1 million barrels of oil by 2017 in the pre-salt operation areas.

In response, the U.S. has strengthened its energy cooperation with the country. A U.S.-Brazil Strategic Dialogue was created following President Barack Obama’s visit to Brazil in 2011. The two countries have held workshops and other events featuring offshore technologies, and the White House said it is “committed” to finding solutions to challenges for the safe and efficient development of Brazil’s oil reserves.

China, driven by its domestic energy demand, is willing to spend significantly in Brazil in going after the country’s rich oil resources. China Development Bank Corp. has agreed to lend Brazil $10 billion in return for oil supply for ten years. In June 2012, Brazil and China signed a $30 billion deal. China will make more investment in Brazil’s oil and gas field under the deal.

The arrangements between China and Brazil came after Obama said that he wanted the U.S to be one of Brazil’s best consumers during the 2011 visit to the country.

The pre-salt discoveries have also attracted the attention of many international oil companies, but they consider Brazil’s regulatory framework “debilitating” to future developments, according to a 2009 State Department cable obtained and published by Wikileaks. The Brazilian National Congress passed  legislation designating Petrobras as the chief operator of pre-salt projects, which the Brazilian Institute for Petroleum, an industry group representing major international oil companies operating in Brazil, said made it impossible to compete in bidding rounds with national oil companies such as China’s Sinopec and Russia’s Gazprom.

More than 90 percent of Brazil’s oil production is in very deep waters and of mostly heavy grades. Six of the Petrobras-operated fields in the Campos Basin account for more than 50 percent of the country’s crude production, according to the U.S. Energy Information Administration.

Petrobras says that the light and high quality pre-salt oil raises the company to a “new level of reserves and oil production.” According to its 2011-2015 business plan, the company wants to invest $53 billion in pre-salt exploration and production.


Iraq

Iraq, the world’s third largest oil exporter with the world’s fifth largest proven oil reserves, has been a major player in the global market for decades. But the country, which, according the International Energy Agency’s 2012 Iraq Energy Outlook, has only produced about 15 percent of its estimated recoverable resources, is set to assume a vastly important new role in the coming years as world oil demand increases. With countries like China expanding rapidly and requiring a larger share of the world’s supply, Iraq will be expected to provide a significant ramp-up in production in order to help stabilize global oil costs.

In the IEA’s Central Scenario, which outlines its predictions, Iraq will more than double its production to 6.1 million barrels per day by 2020 and reach 8.3 million barrels per day by 2035, and it stands to gain almost $5 trillion in oil export revenues between now and then. But a number of factors may prevent Iraq from meeting these desired output levels, and the IEA predicts that delay in production development could lead to volatile oil prices reaching almost $140 per barrel in 2035.

In a special presentation of the Iraq Energy Outlook in October 2012, the IEA’s chief economist, Fatih Birol, said that Iraqi will be responsible for about 45 percent of growth in global oil production through 2035. But he outlined threats to reaching that benchmark ranging from political unrest to lack of accessible supplies of water and technical expertise.

Birol also highlighted the lack of legal consensus on governance of the hydrocarbon sector, an issue that continues to make world headlines as oil disputes fuel disagreements between Iraq and its autonomous Kurdistan region in the north. Delays and differing opinions on hydrocarbons law have spurred Kurdistan to begin signing its own deals for oil and gas development with foreign multinationals despite fierce opposition from the central Iraqi government.

Iraq has long threatened repercussions against any company that signs a deal with Kurdistan, and it excluded Hess Corp. from an energy auction in 2011 after such an infraction. More recently, Exxon Mobil faced a similar penalty after disregarding threats from Baghdad and partnering with Kurdistan.  But later last year, Exxon Mobil went one step further, expressing a desire to pull out of the large-scale West Qurna-1 project in the Iraqi south to avoid further conflict over its interest in Kurdistan.

With so many looming variables that could affect oil output, the State Department is looking to play a part in securing the necessary investment and infrastructure development and protection in Iraq and other countries.  One such avenue is through the Bureau of Energy Resources, established in November 2011 as a direct result of the first Quadrennial Diplomacy and Development Review. With stated core objectives of energy diplomacy, energy transformation and energy transparency and access, the Bureau represents the State Department’s current view of what the term “energy security” comprises.

“In terms of the role the State Department plays, there’s a lot of things that vary by country: how we can facilitate and be a help, and is there a role which we can work on with each other as equals with the expertise we do have?” Principal Deputy Assistant Secretary Robert Cekuta said in an interview. “It’s certainly talking to Iraq about the geopolitics of its region; about how the market, how companies and how investors see the market and see the situation in Iraq; and what Iraq can do to help attract the outside capital.”

Cekuta said one mistake some countries have made is to try to do too much unilaterally instead of letting the market and private sector work to help them develop their resources. Fulfilling the IEA’s Central Scenario will a cumulative investment of over $530 billion, and Cekuta said the Bureau of Energy Resources is advising Iraq on how best to procure those finances.

“That’s a huge amount of money,” Cekuta said. “The question of getting the market conditions right and making yourself an attractive place for foreign investment is really key to that and has global consequences. These are things we can engage with Iraq and other countries on and talk about.”


The Arctic

The Arctic holds an estimated 13 percent of the world’s remaining undiscovered oil resources and 30 percent of its undiscovered natural gas resources, according to estimates by the U.S. Geological Survey. As global temperatures rise, the sea floor that covers the untapped reserves and that was previously locked beneath a layer of ice is now becoming accessible.

Royal Dutch Shell hoped to be the first company to commence drilling in the Arctic, acquiring the necessary permits for exploratory wells in 2012 after five years of delays and more than $4.5 billion in investments. But drilling in Alaska’ Chukchi Sea was halted on Sept. 9 of that year, just one day after it began. Shell could not demonstrate preparedness for a spill emergency in the Arctic’s cold, dark conditions and was restricted from drilling into petroleum reservoirs. Instead, Shell did exploratory drilling in the Chukchi and Beaufort seas until Oct. 31, the cutoff date before winter.

But Shell’s Arctic woes haven’t ended there. Most recently, at the end of last year, an Arctic drilling barge and its crew, en route to Seattle for maintenance work, were set adrift during a storm before the U.S. Coast Guard helped a tug vessel recover them.

The incident prompted U.S. Department of Interior to launch an expedited, high-level assessment of the 2012 offshore drilling program. The review is expected to be completed by March, 2013.

Other Arctic endeavors have faced similar setbacks. Technical challenges pose financial hurdles that can render projects unprofitable. In August, with the availability of American shale gas depressing prices and the decreasing European natural gas demand, Russian giant Gazprom pulled the plug on the development of Russia’s Shtokman gas field in the Barent Sea. The move came shortly after its partner company, Norway’s Statoil, returned its stake in the project.

While steady hydrocarbon extraction in the Arctic may not be feasible for a number of years, numerous countries are jockeying for position, which has caused diplomatic rifts. By ratifying the U.N. Convention on the Law of the Sea (UNCLOS), each country with Arctic territory is eligible to make a formal claim to it. Doing so grants countries a territorial rights extension of up to 150 miles of seabed and an exclusive economic zone of 200 miles off its coastline.  But those rights have fueled disputes over where the boundaries begin and end.

So far, territory-related issues in the Arctic have been resolved diplomatically, including a 40-year-old rift between Russia and Norway. But recent years have seen military demonstrations and flag-planting in undesignated polar areas by countries eager to display their Arctic posture.

The U.S. is the only Arctic country that has yet to ratify UNCLOS, which is due to opposition by Senate conservatives who say that the treaty will cost the U.S. trillions in royalties and threaten national sovereignty. Led by then-Senator Jim DeMint of South Carolina, this summer 34 Republicans submitted a letter to Senate majority leader Harry Reid re-asserting their commitment to blocking ratification.

Because it is not a ratifying country, the U.S. has not formally laid claim to its Arctic territory, which may be about the size of California, and cannot submit further territorial claims for the extended continental shelf.

U.S. treaty supporters have included the Pentagon and every U.S. president since Richard Nixon (though Reagan opposed it, substantial changes were later made to address his concerns). They argue that without ratifying the treaty, the U.S. cannot position itself as a leader in the region, which may become increasingly important as warming seas and melting ice give access to new sea lanes for use by non- Arctic nations such as China.

Without any Arctic territory of its own, China has been relying on investment and diplomacy to build up a presence in the region. Chinese officials visited Sweden, Iceland and Greenland this past year, and Chinese companies have already acquired stakes in Arctic-related companies and projects in Iceland, Greenland and Canada.

China is also lobbying – along with the European Union, Japan and South Korea – for permanent observer status on the Arctic Council, an intergovernmental policymaking body comprising eight countries. Inclusion would not grant them a vote, but it would allow them to present their opinions on matters that may soon include polar shipping.  A commercial trans-Arctic route would greatly benefit China, as it would dramatically reduce the amounts of time and money it spends on exports. But it could also put a Chinese presence close to home for the U.S., which so far has done comparatively little to bolster its own Arctic presence.

Shipping traffic, oil and gas exploration and tourism contributed to an increase in the responsibilities of the U.S. Coast Guard, which currently is not getting the support it needs to adequately protect the region. And unlike its Arctic counterparts, the U.S. has an obsolete fleet of icebreakers, with only one operative ship capable of carrying out the Coast Guard’s Arctic duties.  Stephen L. Caldwell, Director of Homeland Security and Justice, said in a December, 2011 testimony before the House of Representative’s Subcommittee on Coast Guard and Maritime Transportation that the Coast Guard has “limited capacity to operate in the waters immediately below the Arctic Circle.”

“Increasing responsibilities in an even larger geographic area, especially in the harsh and remote conditions of the northern Arctic, will further stretch the agency’s capacity,” Caldwell said.

Furthermore, in 2010 DHS reported that its annual budget was expected to remain constant or decrease over the following 10 years, meaning the Coast Guard is unlikely to receive the funding it needs to support its Arctic operations.


North Dakota

Oil and gas were first discovered in North Dakota in 1951, but it wasn’t until much more recently that engineer and entrepreneur George Mitchell’s ingenuity helped the state become the epicenter of  U.S. domestic energy revolution.

Mitchell took hydraulic fracturing, or “fracking” – a process that involves blasting rock with a mixture of sand, water and chemicals to create and prop open fissures through which oil and gas can escape – and tweaked it to unlock the Barnett shale field in his native Texas. With subsidies from the government, Mitchell drilled the Barnett’s first horizontal well in 1991 and had achieved commercial shale gas extraction, releasing previously unobtainable resources, by 1998.

The technology quickly spread to North Dakota’s Bakken formation. According to 2010 data from the U.S. Energy Information Administration, North Dakota has proven oil reserves of about 1.89 billion barrels and liquid natural gas reserves of 1.869 trillion cubic feet. Its Bakken shale is a deep basin deposit dating back 360 million years, and the oil it produces is commonly known as “tight oil,” referring to the shale’s low porosity and low permeability. Today, fracking, in combination with recent technology that allows for drilling horizontally and two miles deep into the heart of the Bakken, has rocketed North Dakota to second on the list of oil-producing states behind Texas. That has created thousands of jobs and revitalized the state’s economy.

But the effects of the ramp-up in American shale hydrocarbon production are much more widespread. The International Energy Agency’s 2012 World Energy Outlook, released in November, forecasts that the U.S. will become the world’s largest oil producer by 2020 and be nearly energy self-sufficient in net terms by 2035. The effects of such developments would be far-reaching. The U.S. providing a larger share of its own fuel would impact the global oil market by diverting the flow of less-dependable Middle Eastern oil east to rapidly developing countries like China.

“North America is at the forefront of a sweeping transformation in oil and gas production that will affect all regions of the world,” IEA Executive Director Maria van der Hoeven said in a news release on Nov. 12, 2012.

In January, 2013, North Dakota had 185 active rigs, operated by companies such as Whiting Petroleum Corp. and Hess Corp. So far, other countries have been unable to replicate U.S. success with shale hydrocarbon extraction, leaving the U.S. uniquely positioned as the pioneer in shale exploration. Exxon Mobil Corp. abandoned its shale gas projects in Poland earlier this year after encountering failure with post-fracking gas flow, and other countries such as China face problems like lack of water that make the process more challenging.

North Dakota Petroleum Council President Ron Ness called the Bakken region a hotbed for innovation.

“At this point, people across the world are looking at the technology we’re employing,” Ness said in an interview. “It’s essentially one big research lab for the world. If you can take this technology to other places, it certainly has the ability to not only change our nation’s energy security, but also the world’s energy security.”


Canada

Canada has the third-largest proven oil reserves in the world behind Saudi Arabia and Venezuela thanks to its oil sands, which contain a viscous unconventional petroleum deposit. The oil sands are largely concentrated in the Athabasca deposit, which sits in the northeast corner of Canada’s Alberta province.

Oil sand is composed of sand, minerals, water and bitumen, an extremely heavy crude oil. Dr. Karl A. Clark’s hot-water bitumen extraction process, released in 1929, is the basis for today’s large-scale production. Oil sands can be extracted through surface mining or in situ techniques, such as steam-assisted gravity drainage.

A wide range of oil companies operates in the oil sands, including private Canadian companies, state-owned companies like China’s Sinopec and international private-sector companies such as Shell, BP, Exxon Mobil and Chevron.

Canada, which is the top source of U.S. energy imports, holds 170.4 billion barrels of oil recoverable with today’s technology and at a competitive price, and the Athabasca deposit alone contains 315 billion additional potentially recoverable barrels. As oil sands investment increases and new technology is developed, some of those reserves may become available, which is good news for the U.S. as it looks to shift more and more of its oil imports from Canada and elsewhere in the Western Hemisphere.

Part of America’s Canadian oil intake is made possible by Transcanada Corp.’s Keystone Pipeline, a project that delivers crude oil from Alberta to American markets in Illinois and Oklahoma.

Currently, the Keystone Pipeline system can transport up to 590,000 barrels per day, but the proposed Keystone XL Pipeline project between Alberta and Nebraska would increase capacity. The extension, however, has raised controversy among a host of safety, environmental and land-ownership concerns, and many scientists, citizens and politicians alike are urging President Barack Obama to reject it. Obama blocked the expansion last year after Nebraska Gov. Dave Heineman (R) would not permit the pipeline to run through the state. But Heineman reviewed an environmental assessment of a revised route and approved it this January, meaning Keystone XL’s fate is now back in the hands of Obama.

Although the U.S. is still a faithful customer, Canada has been looking to diversify its exports and gain broader foreign investment, in part by approving a pair of recent takeover bids – China’s state-owned CNOOC’s acquisition of Canadian company Nexen and Malaysia’s Petronas’ purchase of Progress Energy Resources. CNOOC offered $15 billion to buy the struggling Nexen last July, and while CNOOC was already operating in the oil sands at the time, its bid was a cause for alarm by some in Canada.

With national concerns mounting that a critical sector of the Canadian economy could fall under foreign control, a warning about the takeover from the Canadian Security Intelligence Service was reported by Reuters. While the government still approved the bid, Canadian Prime Minister Stephen Harper did note in a news conference that, “when we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments.” He added that similar purchases would only be approved under “exceptional circumstances” in the future.

The bid also raised concerns among some U.S. policymakers, including Senator Charles Schumer (D-NY), who urged the Committee on Foreign Investment in the United States (CFIUS) to block the deal until China eased restrictions on foreign investment.

The U.S. government held the power to veto part of CNOOC’s takeover because it included access to Nexen’s production sites, among them oilfields in the Gulf of Mexico.  But this February CFIUS, which evaluates whether transactions pose national security threats to the U.S., approved the deal, which was re-filed by CNOOC on November 27, 2012. Nexen’s Gulf assets will provide CNOOC with deepwater oilfields from which to acquire the technology to drill in the disputed South China Sea.

 

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