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International: Comrades, come rally; Communism

Fifty years after the crushing of the Hungarian uprising, communism is thriving

HISTORY is perhaps on their side after all. At their annual conference next month, delegates from 70-odd Communist parties will be in a buoyant mood. Memories of Soviet crimes are fading, America’s stock is falling and the injustices of global capitalism make an increasingly easy target. Communists always had good songs. Their political tunes of justice and solidarity may still sound hollow to some, but they now resonate more widely.

The comrades’ label has become remarkably elastic. Some retain both a monopoly of power and a belief in socialism (eg, Cuba); some are dictatorial, but enthusiastic capitalists (China, Vietnam). Those that had a monopoly of power but lost it sometimes stay true to old beliefs (like the Czech party). Others have kept the name but dumped everything else (Moldova’s Communists, uniquely for eastern Europe, regained power through the ballot box, promised to create another Cuba, and then turned pro-Europe and anti-Kremlin).

Another group spent much of their lives as the persecuted opposition to an undemocratic regime, and retain an aura of heroism as they operate out in the open (South Africa, Iraq). Lastly come those who have simply won a share of power in an established democracy (Italy, India).

Without a Soviet Union to act as ideological enforcer, the communist tribe is more scattered than ever, and differences matter much less. Boundaries that were once stark are now fuzzy. India’s once-warring Communist parties are now electoral allies and coalition partners. Babis Angourakis, the international officer of Greece’s party, the KKE, says that origins are no longer an issue: any party “still fighting for a socialist transformation of society and defending the proletarian revolution described by Marx, Engels and Lenin” is welcome at the annual gatherings that his party launched in 1998. Eurocommunists can rub shoulders with Stalinists who would once have called them traitors; even different brands of Maoists turn up, ranging from the Chinese party to former admirers of Albania’s Enver Hoxha.

Friendship has its limits. Nepal’s Maoists, who have taken power in large parts of the country after a lengthy rebellion, have little to do with their nominal mentors in China. They will not be present at this year’s get-together; other parties view their armed struggle with distaste.

One difficulty is which model to defend. Almost all communists praise Cuba, the last outpost of what was once the Soviet empire. But North Korea’s bizarre mixture of personality cult and paranoia is a harder sell: most defend it as a victim of American imperialism; only a small minority insist that it is a workers’ paradise. The world’s biggest communist country, China, looks like the sort of society Marx criticised, not the one that he wanted to create. Libero Della Piana, the national organiser of America’s Communist Party, says dryly that the Chinese enthusiasm for profit “is a source of discussion in the world movement”.

But the biggest problem, history, is no longer such a vote-loser. Many who lived in their shadow may regard the hammer and sickle as akin to the swastika, but elsewhere communism prompts not revulsion but an attractive frisson of naughtiness. It is a good way of annoying conservatives, Atlanticists and plutocrats. European communists such as Mr Angourakis are cock-a-hoop about their success in blunting an attempt by the centre-right parties in the European Parliament last year to equate communism with Nazism.

No more tradition’s chains shall bind us

In much of the former Soviet empire, relabelled former communists plus their intelligence officers and other henchmen hold power. The Hungarian prime minister, Ferenc Gyurcsany, infuriates his anti-communist opponents (who boycotted this week’s official commemoration of the 1956 uprising) with his close family ties to the old Soviet-installed regime. Nobody else seems to care.

Some of that hold on power is fuelled by communist slush funds adeptly recycled into capitalist business. Hundreds of millions of dollars of such money have been flooding into Romania and Bulgaria as they prepare to join the European Union. “They’re not stupid, these guys”, says one Balkan security official. “They got the money out to Austria before they lost power. And now they are sure that it will be a safe investment here, they are bringing it back again.”

The most spectacular example of the erosion of the anti-communist taboo is in Italy, historically the home of the most powerful communists in an advanced economy. No fewer than three parties with communist roots are part of Romano Prodi’s left-of-centre government. Giorgio Napolitano, Italy’s president, and Massimo D’Alema, the foreign minister, were both leading members of the old Italian Communist Party.

Its Eurocommunist members mostly re-emerged as the Democrats of the Left, the biggest party in Mr Prodi’s coalition. But two groups of hardliners are also in the government. Communist Refoundation, the bigger of the two, got its best result for years in the parliamentary election in April, 7.2% in the election to the Senate, giving it 27 seats out of 315. Its leader, Fausto Bertinotti, is a strikingly patrician figure (a habitual feature of Italian proletarianism). He successfully appealed to a generally leftist constituency of pacifists, anti-globalisers and gay and lesbian campaigners. The party’s most flamboyant lawmaker is a transvestite actor and singer. All very different from the puritan spirit of traditional communism.

The Refounded Communists have muscles to flex. Mr Bertinotti took from the Democrats of the Left the speakership of the lower house, a post that brings prestige and influence over the parliamentary timetable. Italy’s tax-and-spend budget shows his influence, as does the halt to privatisation, which would have hurt his core constituency of public-sector employees.

In South Africa, by contrast, leading members of the Communist Party have turned into stern fiscal conservatives in the African National Congress-led government. But the rank and file, often active in the trade-union movement, is blocking labour-market reform, and chafing at an orthodox economic policy that it sees as too harsh on the poor and unemployed. The party is threatening to stand on its own in future elections, an option that would look more realistic if the ANC were to split.

India’s two Communist parties are more powerful and more contradictory. Both use communist symbolism, but in practice support the mixed economy and rule of law. Their nationwide appeal means that they are an important electoral force at national level; their block of 50-odd seats forms a key part of the governing coalition led by the Congress party. They also run three states: Kerala, Tripura and West Bengal. This latter state has been ruled by the Communist Party of India (Marxist) for 29 years, with a remarkable mixture of strong party discipline and ruthless electoral tactics. Traditional left-wing policies such as land reform have now been supplemented under the state’s chief minister, Buddhadeb Bhattacharjee, by a keen search for foreign investment, and support for privatisation–ideas that the party shuns at a national level.

Solid pragmatism in south Asia does little to excite the comrades in the wider world. Mr Angourakis reserves his greatest enthusiasm for the onward march of radical leftism in South America. In Nicaragua, Daniel Ortega, once a hardline leader of the Soviet-backed Sandinista regime, is the favourite in the presidential election on November 5th. Venezuela’s Hugo Chavez calls himself a “21st century socialist” but is adored by communists round the world, and returns the favour with subsidies for Cuba and comrades elsewhere in Latin America, especially Nicaragua.

Mr Angourakis says prospects are at their brightest since the “collapse” of 1991. The fate of hundreds of millions of people has worsened since the “counter-revolution” of that year, he says. Now the failure of “imperialist wars” in Afghanistan and Iraq creates new opportunities.

Hang on–the Iraqi and Afghan Communist parties were among the most determined foes of Saddam Hussein and the Taliban respectively; America’s invasion has put the Iraqi Communists in government. But on another point, most communists are clear; they eschew any alliance with jihadism or Islamic fundamentalism. Such opportunism, says one true believer disdainfully, is only for Trotskyists.

The Economist. London: Oct 28, 2006.Vol.381, Iss. 8501;  pg. 83

Development and Democracy

RICHER BUT NOT FREER

Ever since Deng Xiaoping opened up China’s economy more than 25 years ago, inaugurating an era of blistering growth, many in the West have assumed that political reform would follow. Economic liberalization, it was predicted, would lead to political liberalization and, eventually, democracy.

This prediction was not specific to China. Until quite recently, conventional wisdom has held that economic development, wherever it occurs, will lead inevitably — and fairly quickly — to democracy. The argument, in its simplest form, runs like this: economic growth produces an educated and entrepreneurial middle class that, sooner or later, begins to demand control over its own fate. Eventually, even repressive governments are forced to give in.

The fact that almost all of the richest countries in the world are democratic was long taken as iron-clad evidence of this progression. Recent history, however, has complicated matters. As events now suggest, the link between economic development and what is generally called liberal democracy is actually quite weak and may even be getting weaker. Although it remains true that among already established democracies, a high per capita income contributes to stability, the growing number of affluent authoritarian states suggests that greater wealth alone does not automatically lead to greater political freedom. Authoritarian regimes around the world are showing that they can reap the benefits of economic development while evading any pressure to relax their political control. Nowhere is this phenomenon more evident than in China and Russia. Although China’s economy has grown explosively over the last 25 years, its politics have remained essentially stagnant. In Russia, meanwhile, the economy has recently improved even as the Kremlin has tightened the political reins.

The overlap of these trends — economic growth and shrinking political freedom — is more than a historical curiosity. It points to an ominous and poorly appreciated fact: economic growth, rather than being a force for democratic change in tyrannical states, can sometimes be used to strengthen oppressive regimes. Zhao Ziyang, China’s premier during the 1980s, may have been right when he argued, “Democracy is not something that socialism can avoid.” But there is now plenty of evidence to suggest that autocratic and illiberal governments of various stripes can at least delay democracy for a very long time. Over the past half century, a large number of such regimes have undergone extensive economic growth without any corresponding political liberalization. In other cases, autocrats have been forced to introduce modest political changes but have nonetheless managed to limit their scope and hold on to power.

What explains the often lengthy lag between the onset of economic growth and the emergence of liberal democracy? The answer lies in the growing sophistication of authoritarian governments. Although development theorists are right in assuming that increases in per capita income lead to increases in popular demand for political power, they have consistently underestimated the ability of oppressive governments to thwart those demands. Authoritarian regimes are getting better and better at avoiding the political fallout of economic growth — so good, in fact, that such growth now tends to increase rather than decrease their chances of survival.

This is a truth that has largely been ignored by both development agencies and the Bush administration. Washington has blithely claimed that globalization and the spread of market capitalism will inevitably lead to the triumph of Western-style democracy. How the Bush administration explains away all the contrary examples is unclear. What is clear is that Washington needs to rethink its plans to spread democracy around the globe. In addition, development bodies such as the World Bank should reconsider the kinds of conditions they attach to their loans. Merely pushing for greater economic freedom is unlikely to have much political payoff — at least not anytime soon.

ESCAPING THE GROWTH TRAP

Autocrats have good reason to view economic growth ambivalently, as both a tool and a trap. On the one hand, it increases a tyrant’s prospects of survival, by expanding the government’s resources (through higher tax revenues) and improving its ability to deal with various problems (such as economic recessions or natural disasters). Over the short term, economic growth also tends to increase citizens’ satisfaction with their government, making it less likely that they will support a change of regimes.

In the long term, however, economic growth can threaten the political survival of repressive governments by raising the likelihood that effective political competitors will emerge. This happens for two reasons: economic growth raises the stakes of the political game by increasing the spoils available to the winner, and it leads to an increase in the number of individuals with sufficient time, education, and money to get involved in politics. Both these changes can set in motion a process of democratization that can slowly gather momentum, eventually overwhelming an autocratic status quo and creating a competitive, liberal democracy in its place.

Until now, many Western policymakers and development experts have assumed that political liberalization basically tracks the rate of economic growth, with only a slight lag, and that there is little that autocratic governments can do to stop it (as long as they remain committed to maintaining economic progress). Such thinking can be traced back to Seymour Martin Lipset, the eminent sociologist and political scientist who popularized the notion that economic growth fosters democratization by increasing the size of the educated middle class. Lipset, however, cautioned his readers that the process was not guaranteed: although it had worked in western Europe, success there had depended on a very particular set of circumstances. In the years since Lipset published his findings, unfortunately, his cautionary note seems to have been largely forgotten.

Lipset’s followers have also tended to overlook the fact that autocratic states are not passive observers of political change; in fact, they set the rules of the game and can rig them to suit their interests. Autocrats enjoy a marked advantage over the average citizen in their ability to shape institutions and political events. And they have proved far more savvy at this than expected, adroitly postponing democratization — often while still continuing to achieve economic growth.

THE FIX IS IN

To understand how authoritarian regimes manage this trick, it helps first to understand the concept of strategic coordination. The term “strategic coordination,” which comes from the literature of political science, refers to the set of activities that people must engage in to win political power in a given situation. Such activities include disseminating information, recruiting and organizing opposition members, choosing leaders, and developing a viable strategy to increase the group’s power and to influence policy.

Strategic coordination is a useful concept here because it helps to explain why economic growth has traditionally been thought to promote democratization. The process works as follows: economic growth leads to urbanization and improvements in technology and infrastructure. These improvements dramatically facilitate communication and recruitment by new political groups. Economic growth also tends to lead to increased investment in education, which benefits the opposition by producing more learned and sophisticated individuals from which it can recruit supporters. Strategic coordination, however, also helps explain how some autocrats have managed to break or weaken the link between economic development and democratization. If authoritarian incumbents can limit strategic coordination by the opposition, they can reduce the prospect that their enemies will be able to remove them from office. There is a catch, however: to remain secure, autocrats must raise the costs of political coordination among the opposition without also raising the costs of economic coordination too dramatically — since this could stymie economic growth and threaten the stability of the regime itself.

Threading this needle is difficult, but not, as it turns out, impossible. Gradually, through trial and error, oppressive regimes have discovered that they can suppress opposition activity without totally undermining economic growth by carefully rationing a particular subset of public goods — goods that are critical to political coordination but less important for economic cooperation. By restricting these goods, autocrats have insulated themselves from the political liberalization that economic growth promotes.

HOW TO STOP A REVOLUTION

Examples of this strategy abound. Consider a few cases over the last three years. China has periodically blocked access to Google’s English-language news service and recently forced Microsoft to block the use of words such as “freedom” and “democracy” on the Microsoft software used by bloggers. These moves were only the latest in a long line of Chinese restrictions on Internet-related activity, strictures that have run the gamut from the creation of a special Internet police unit to limiting the number of Internet gateways into China. In Russia, meanwhile, President Vladimir Putin has placed all national television networks under strict government control. In October 2003, he engineered the arrest of Mikhail Khodorkovsky, one of his most prominent critics; a highly visible prosecution followed.

In Venezuela, President Hugo Chvez pushed through a new law in December 2004 allowing him to ban news reports of violent protests or of government crackdowns and to suspend the broadcasting licenses of media outlets that violate any of a long list of broadly phrased regulations. And in Vietnam, the government has imposed strict controls on religious organizations and has branded the leaders of unauthorized religious groups (including Roman Catholics, Mennonites, and some Buddhists) as subversives.

Each of these cases has involved the restriction of what might be called “coordination goods” — that is, those public goods that critically affect the ability of political opponents to coordinate but that have relatively little impact on economic growth. Coordination goods are distinct from more general public goods — public transportation, health care, primary education, and national defense — which, when restricted, can have a substantial impact on both public opinion and economic growth.

Historically, oppressive governments seeking to crack down on those pushing for democratic change have suppressed both types of goods — undermining their economies in the process. This was the dominant pattern in much of Asia and Africa until the 1980s, and it remains the case today in many of the poorest states, such as Myanmar and Zimbabwe. Recently, however, governments in Russia, China, Vietnam, and elsewhere have discovered that by focusing their restrictions on coordination goods only, they can continue to provide those other services necessary for economic progress while short-circuiting the pressure for political change such progress typically promotes.

Of course, the availability of most public goods has at least some impact on the ability of opposition groups to organize and coordinate. But four types of goods play a fundamental role in such activities. These include political rights, more general human rights, press freedom, and accessible higher education.

The first of these goods, political rights, includes free speech and the rights to organize and demonstrate peacefully. Although political rights are largely negative, in the sense that they limit state interference rather than require state action, they do sometimes require governments to take a variety of steps to enforce them, especially when they involve minority groups voicing opinions that are unpopular with the majority.

As for more general human rights, these include freedom from arbitrary arrest and the related protection of habeas corpus; the right to nondiscrimination based on religion, race, ethnicity, and sex; freedom from physical abuse; and the right to travel, both domestically and abroad.

A diverse and largely unregulated press (and other forms of media) is also vital to effective political opposition, since it enables the dissemination of information that can bring diverse groups together around common interests. Like political rights, the right to a free press is a largely negative one, since it generally requires the government not to interfere. It may also require affirmative steps, however, such as granting licenses to radio and TV frequencies, guaranteeing public access to those and other media, and translating official documents into regional languages.

Finally, broad access to higher education and graduate training is vital if citizens hope to develop the skills to communicate, organize, and develop a political presence. Advanced education also facilitates the creation of a large pool of potential opposition leaders, thereby increasing the supply of rivals to the incumbent government.

Some authoritarian governments claim that they deny access to higher education (and other coordination goods) because of their exorbitant costs. In reality, coordination goods are not generally more expensive than other public goods and are far cheaper than some, such as national defense or transportation. When governments choose to restrict them, therefore, it is to increase the political costs of coordination, not to save money. In fact, some coordination goods actually cost more to suppress than to allow — as when governments expend their resources cracking down on opposition movements or jam free media outlets and produce their own propaganda.

RECIPE FOR (AUTOCRATIC) SUCCESS

Recently, in order to better understand how autocrats and illiberal democratic incumbents manage to embrace economic growth while postponing democracy, we examined the provision of public goods in about 150 countries between 1970 and 1999. Four findings from this study are particularly noteworthy.

First, the suppression of coordination goods is an effective survival strategy; the study confirmed that providing coordination goods significantly decreases the survival prospects of incumbent regimes. The provision of other public goods, meanwhile, either does not affect survival at all or improves it. Allowing freedom of the press and ensuring civil liberties, in particular, reduce the chances that an autocratic government will survive for another year by about 15 to 20 percent: a stark statistic, and one that helps explain media and political suppression throughout the developing world.

Second, the study showed that today’s autocrats tend to suppress coordination goods much more consistently than they do other public goods. Around the world, from Beijing to Moscow to Caracas, authoritarian regimes seem to be well aware of the dangers of providing coordination goods to their people, and they refrain from doing so with remarkable consistency. On the other hand, most autocratic leaders appear to recognize that there is little to fear from providing other public goods, such as primary education, public transportation, and health care. Fidel Castro risked nothing politically when he aggressively improved public health care in Cuba, and Kim Jong Il did not place himself at much risk when his government committed itself to increasing the North Korean literacy rate to above 95 percent. Both regimes, however, have been careful to suppress coordination goods.

The study also confirmed that the greater the suppression of coordination goods in a given country, the greater the lag between economic growth and the emergence of liberal democracy. Of course, some undemocratic regimes are more successful at suppressing coordination goods than are others. But there is a clear correlation between failure at this and the likelihood that the state will become a modern democracy.

Moreover, the study found that except at the highest levels of per capita income, significant economic growth can be attained and sustained even while the government suppresses coordination goods (remember China, Russia, and Vietnam). And when such trends occur together — that is, when a state enjoys economic growth while suppressing coordination goods — the regime’s chances of survival substantially improve and the likelihood of democratization decreases (at least for five to ten years). Although data limitations make it difficult to determine whether in the long term economic growth will tend to push regimes toward democracy, there is growing evidence that at least in the short term economic growth stabilizes regimes rather than undermines them. China, therefore, is best viewed not as the exception to the rule that growth produces liberalization, but as emblematic of the fact that it usually does not.

WHO’S FOOLING WHOM?

The growing disconnect between development and democracy holds three important lessons for those policymakers — in the Bush administration and in other affluent liberal democracies — who are frustrated with the slow pace of change in the developing world and hope to speed up the process.

First and most obvious, democratic policymakers need to recognize that promoting economic growth in the developing world is not nearly as effective a way to promote democracy as they once believed. Oppressive incumbents have learned from their collective experience that although development can be dangerous, it is possible to defuse that danger to a considerable extent. By limiting coordination goods, autocrats can have it all: a contented constituency of power brokers and military leaders who benefit from economic growth, increased resources to cope with economic and political shocks, and a weak and dispirited political opposition.

The second important lesson for policymakers has to do with what the above means for the conditions they attach to the loans and grants they extend to the developing world. When the World Bank, for example, conditions a loan to a developing state on the requirement that the government invest in infrastructure, health care, or literacy, it does so in the belief that these investments will lead to increased economic growth, which in turn will lead to an expanded middle class and, eventually, democracy. But this expectation is unrealistic. Such investments are just as likely to extend rather than shorten the reigns of illiberal governments. Foreign aid, as it is currently administered, tends to bolster rather than undermine undemocratic leaders.

The answer to this problem is not to place a lower priority on economic growth or the provision of standard public goods. It is to broaden loan conditions to include requirements that recipient states supply their citizens with coordination goods, such as basic civil liberties, human rights, and press freedoms. Making it easier for ordinary citizens to coordinate and communicate with one another will promote the growth of political freedom. Accordingly, before autocrats get international aid, they should be forced to accept modest reforms such as supporting greater access to higher education, allowing a freer press, and permitting more freedom of assembly.

In introducing such conditions, development agencies should not be distracted by the debate over whether human rights are best defined in terms of housing, food, clothing, health care, and other basic human necessities or in terms of individual freedom and the protection of both minority and majority interests. Dictators prefer the former definition solely because it best suits their interests. Such arguments are transparently self-serving. Copious evidence suggests that political freedom and the provision of basic necessities go hand in hand; those societies that respect civil liberties almost invariably also provide for the survival of most or all of their citizens.

The third lesson of our study for policymakers concerns the recent events in the Middle East. It is tempting to view the elections in Iraq, Syria’s withdrawal from Lebanon and the subsequent elections there, the announcement that local elections will be held in Saudi Arabia, and the promise of more competitive elections in Egypt as collectively signaling a new democratic dawn in the region. But it is important to remain realistic. In particular, observers must remember that the repressive policies that have served Middle East autocrats so well for the past 50 years have not been significantly eroded in Saudi Arabia, Egypt, or even Lebanon. This is not necessarily grounds for despair. But those interested in measuring the democratic progress of the region should pay more attention to the availability of coordination goods there — to how tightly the media are controlled, for example, or how difficult it is to safely hold an antigovernment demonstration. These elements, more than the mere presence of elections, remain essential for the transition to real democracy. Until they appear, the United States, the EU, and other donors and aid agencies must keep exerting pressure for change.

Bruce Bueno de Mesquita and George W. Downs. Foreign Affairs. New York: Sep/Oct 2005.Vol.84, Iss. 5;  pg. 77

China’s Global Hunt for Energy

A NEW FOREIGN POLICY

An unprecedented need for resources is now driving China’s foreign policy. A booming domestic economy, rapid urbanization, increased export processing, and the Chinese people’s voracious appetite for cars are increasing the country’s demand for oil and natural gas, industrial and construction materials, foreign capital and technology. Twenty years ago, China was East Asia’s largest oil exporter. Now it is the world’s second-largest importer; last year, it alone accounted for 31 percent of global growth in oil demand. Now that China is the workshop of the world, its hunger for electricity and industrial resources has soared. China’s combined share of the world’s consumption of aluminum, copper, nickel, and iron ore more than doubled within only ten years, from 7 percent in 1990 to 15 percent in 2000; it has now reached about 20 percent and is likely to double again by the end of the decade. Despite calls by Prime Minister Wen Jiabao and other politicians to cut consumption of energy and other resources, there is little sign of this appetite abating. Justin Yifu Lin, director of the China Center for Economic Research at Peking University, in Beijing, says the country’s economy could grow at 9 percent per year for the next 20 years.

These new needs already have serious implications for China’s foreign policy. Beijing’s access to foreign resources is necessary both for continued economic growth and, because growth is the cornerstone of China’s social stability, for the survival of the Chinese Communist Party (CCP). Since China remains a relatively centralized, government-driven economy, Beijing has been able to adapt its foreign policy to its domestic development strategy. Traditional institutions, such as the Foreign Affairs Leading Small Group of the CCP, are still making the key decisions, but a more pluralistic environment is emerging and allowing business leaders to help shape foreign policy. The China Institute for International Studies, a government think tank, holds numerous conferences bringing together academics and leaders in business, the military, and the government to devise strategies for the top rung of the Communist Party.

Partly on these people’s advice, Beijing has been encouraging representatives of state-controlled companies to secure exploration and supply agreements with states that produce oil, gas, and other resources. Meanwhile, it has been courting the governments of these states aggressively, building goodwill by strengthening bilateral trade relations, awarding aid, forgiving national debt, and helping build roads, bridges, stadiums, and harbors. In return, China has won access to key resources, from gold in Bolivia and coal in the Philippines to oil in Ecuador and natural gas in Australia.

China’s resources hunt has been a boon to some states, especially developing countries, as it has allowed them to exploit as yet untapped resources or gain leverage to negotiate better deals with older customers. But for other states, particularly the United States and Japan, China’s insatiability is causing concern. Some governments worry as Beijing enters their spheres of influence or strikes deals with states they have tried to marginalize. In some quarters in Washington, including the Pentagon, the intelligence services, and Congress, the fear that China could challenge U.S. military dominance in East Asia and destabilize the region is rising. Whatever the prognosis, China’s boom can no longer be understood in regional terms alone; as Beijing’s economic influence brings it international political influence and the potential for more military power, China’s growth will have worldwide repercussions.

Although China’s new energy demands need not be a source of serious conflict with the West in the long term, at the moment, Beijing and Washington feel especially uneasy about the situation. While China struggles to manage its growing pains, the United States, as the world’s hegemon, must somehow make room for the rising giant; otherwise, war will become a serious possibility. According to the power transition theory, to maintain its dominance, a hegemon will be tempted to declare war on its challengers while it still has a power advantage. Thus, easing the way for the United States and China — and other states — to find a new equilibrium will require careful management, especially of their mutual perceptions.

Because China’s extraordinary growth also increases its dependence on foreign resources, the Chinese government has developed a new sense of insecurity vis–vis the United States. An article published last June in the Beijing-backed Hong Kong newspaper Ta Kung Pao suggested that Washington might resort to economic tactics to contain China. Given the White House’s current penchant for unilateral intervention and the loud voices in Congress calling China a military threat, Beijing might reasonably begin to fear that the United States will try to block its purchases of natural resources to destabilize it. Washington must be mindful of these worries and not exacerbate them needlessly.

Interstate competition is natural, of course, but it need not be elevated to the level of conflict. And concerns over China’s impressive rise, while understandable, should not detract from the vast room for cooperation that the country’s new energy needs allow. After all, the United States and China share an interest in viable oil prices, secure sea-lanes, and a stable international environment, all of which can help sustain their economic prosperity and that of the rest of the world.

OIL-SLICK DIPLOMACY

State-owned Chinese firms are busily seeking resources abroad, often with the support of Beijing, which courts supplier states by cultivating bilateral relations and providing aid and other forms of development assistance. The Commerce Ministry and the National Development and Reform Commission have published a list of countries and resources in which investment is eligible for state subsidies. In addition to reinforcing the nexus between the Chinese government and the business sector, this strategy has solidified China’s relations with many developing countries. Previously the champion of the Third World, over the past 20 years China has paid far more attention to its ties with developed economies, from which it has sought investment and technology. Although those links remain crucial for China’s modernization, Beijing, with its growing energy needs, is again turning to resource-rich developing countries.

Oil dependence, in particular, has made China an active player in the Middle East. More than 45 percent of China’s oil imports were estimated to come from the region in 2004. In January of that year, President Hu Jintao met delegates from the 22 members of the Arab League in Cairo to boost political and economic relations and develop a “new type of partnership” that would further increase oil shipments to China and bilateral trade. Iran alone already accounts for about 11 percent of China’s oil imports, and in October 2004, the state-controlled China Petroleum and Chemical Corporation, known as Sinopec, one of China’s three major oil companies, signed an oil and natural gas agreement with Tehran that could be worth as much as $70 billion — China’s biggest energy deal yet with any major OPEC producer. Beijing committed to develop the giant Yadavaran oil field and buy 250 million tons of liquefied natural gas over the next 30 years; Tehran agreed to export to China 150,000 barrels of oil per day, at market prices, for 25 years.

In Africa, which already supplied 28.7 percent of China’s total crude oil imports in 2004, Beijing has recently expanded its traditional relationships; in some countries, it has even begun to challenge the influence of the United States. In 2000, Beijing established the China-Africa Cooperation Forum (CACF) to promote trade and investment with 44 African countries. In 2003, Prime Minister Wen visited several oil-producing African states accompanied by Chinese oil executives, and President Hu toured Algeria, Egypt, and Gabon. China has been working closely with governments in the Gulf of Guinea, from Angola to Nigeria, as well as with the Central African Republic, Chad, Congo, Libya, Niger, and Sudan.

Beijing has also been active in Latin America. Brazil’s development minister visited Beijing nine times in 2003 and 2004. Dozens of business leaders accompanied President Hu on his four-stop trip to the region in November 2004, during which he announced $20 billion in new investments for oil and gas exploration and other projects. During his visit to Latin America and the Caribbean last January, Vice President Zeng Qinghong signed various trade and oil-supply agreements with Venezuela. According to the Financial Times, trade between China and Latin America has quintupled since 1999, reaching almost $40 billion by the end of last year. A recent report by the Spanish bank BBVA indicates that Latin America has continued to benefit greatly from China’s economic growth, in terms of both investment and trade. Last year, China invested $1.4 billion in the region; it is now the main impetus for export growth for many Latin American states.

Securing China’s energy needs does not simply entail obtaining resources; it also requires getting them home. Transport is no easy feat for a country that still has no cross-border pipeline. The China National Petroleum Corporation struck a deal for a major pipeline with the Russian oil giant Yukos in 2003, but the plan fell apart after the Russian government first dismantled Yukos and then accepted Japan’s higher bid on the project. Negotiations for a pipeline that would transport Caspian Sea oil to China through Kazakhstan are slowly moving forward, but China remains heavily dependent on international sea-lanes, especially through the Strait of Malacca and other navigational chokepoints, to bring oil from Africa and the Middle East.

TRADING PARTNERS

The United States has recently been on the losing side of trade patterns, allowing China to leverage its economic heft to strike deals in America’s backyard. Thanks to bilateral trade agreements, aid, and debt relief, China has won the goodwill of various resource-rich states. In 2004, about 40 percent of China’s outgoing foreign direct investment went to Latin America, for example, and on a trip that year, Hu persuaded Brazil and Argentina to grant China “market economy” status, which benefits China in antidumping cases brought against it under the World Trade Organization’s dispute-settlement system. Likewise, Beijing has signed dozens of trade and investment treaties with African states and forgiven more than $1 billion in debt since the CACF was created in 2000.

Thanks to this strategy, Beijing has made some remarkable inroads, venturing into the United States’ traditional sphere of influence. Through trade, Beijing has turned around its relations with Australia, one of Washington’s staunchest allies in the Asia-Pacific region. Last year, Australian exports to China jumped by more than 20 percent, with a 41 percent increase in iron ore and a 72 percent increase in coal, and China is poised to displace the United States as Australia’s number two trading partner. (By some accounts, it already has.) Australia has also agreed to export to China, starting in 2006, approximately $1 billion dollars worth of liquefied natural gas every year for 25 years. Such deals are enhancing China’s soft power in Australia, perhaps to Washington’s detriment. According to a poll taken last spring, 51 percent of Australians surveyed believe that a free-trade agreement with China would be good for Australia (only 34 percent think well of the existing U.S.-Australian free-trade pact). And 72 percent agreed with Australian Foreign Minister Alexander Downer when he said last year that Washington should not automatically assume that Australia would help it defend Taiwan against a Chinese military attack.

Energy diplomacy has also prompted China to seek access to Canada’s resources, especially the massive tar sands of Alberta. Since late 2004, Beijing and Ottawa have concluded a series of energy and resource agreements, providing for greater Chinese involvement in developing Canada’s natural gas sector, its vast oil sands deposits, and its uranium sector. Last April, PetroChina and the Canadian giant Enbridge signed a memorandum of understanding to build a $2 billion pipeline that would carry oil to the western coast of Canada for shipment to Asia. Although no money is yet on the table, western Canadians see China’s investment in the tar sands as a major opportunity; according to an Enbridge analyst, without such foreign investment, the fields would remain undeveloped.

Yet the deal could create tensions between the United States and China, as well as between the United States and Canada, particularly since Vice President Dick Cheney’s 2001 national energy policy report emphasized the importance of Canada’s tar sands to U.S. energy security. According to one Canadian Foreign Ministry official who declined to be identified, the U.S. State Department is carefully watching negotiations between Beijing and Ottawa. David Hale and other American resource analysts believe that the U.S. Congress is getting nervous about Chinese fishing in American waters. This testiness highlights one of the risks of China’s energy strategy: by treading on what Americans perceive as their turf and vying for resources they also covet, Beijing is stepping on some very sensitive toes.

Although such friction is most obvious with the United States, resource competition could also pit China against Japan. Tension between Beijing and Tokyo is increasing over gas reserves they both claim in the East China Sea. In late 2004, Japanese media reported that the Japanese Defense Agency had revised its security strategy partly on the assumption that conflicts over resources could escalate into war. And last April, after the Japanese government awarded two Japanese companies the right to drill for oil and gas in a disputed area of the East China Sea, the Chinese People’s Daily argued that competition over the East China Sea was “only a prelude of the game between China and Japan in the arena of international energy.”

BEYOND GOOD AND EVIL

Another important feature of Beijing’s resource-based foreign policy is that it has little room for morality. Because coveted natural resources are often found in pariah states, Beijing has struck energy deals with governments that do not respect international regimes. This strategy has created a set of complicated problems. It does not exactly pit China against the United States in a competition over the same resources; by shunning these states, Washington had already given up on their goods. But it does undermine other U.S. goals, such as isolating rogue governments or punishing them for failing to promote democracy, comply with international law, limit nuclear proliferation, or respect human rights. As Beijing’s search for resources prompts it to reinforce relations with Iran, Myanmar, and Sudan, China is challenging the United States’ moral hegemony and its ability to check states whose records it abhors. Last June, Chris Hill, the assistant secretary of state for East Asian and Pacific affairs, told a subcommittee of the U.S. House of Representatives that a major task for the United States and its Asian allies was “to ensure that in its search for resources and commodities to gird its economic machinery, China does not underwrite the continuation of regimes that pursue policies seeking to undermine rather than sustain the security and stability of the international community.”

Such concerns have already proved justified, as in the case of Sudan. In 1997, while the Muslim-led Sudanese government was waging a gruesome war against Christian rebels in the south, Washington barred U.S. oil companies from doing business with Khartoum, leaving the door open for their Chinese counterparts to expand their operations there. Now China gets about five percent of its oil from Sudan and has reportedly stationed 4,000 nonuniformed forces there to protect its oil interests.

Beijing has brushed off accusations that it is helping to prop up Khartoum. “Business is business. We try to separate politics from business,” said then Deputy Foreign Minister Zhou Wenzhong in the summer of 2004. “I think the internal situation in the Sudan is an internal affair, and we are not in a position to impose upon them.” Meanwhile, Beijing has deftly protected its oil interests there. In September 2004, it successfully watered down a UN resolution condemning Khartoum, undermining U.S. efforts to threaten sanctions against Sudan’s oil industry. As if oblivious to the tensions created by Beijing’s maneuvering, two highly respected Chinese professors argued this past April that China’s assistance in turning Sudan into an oil-exporting state shows how China is raising standards of living in the developing world.

Washington remains wary, especially as Beijing seeks cooperation from other governments on the United States’ shortlist of rogue states. China is undermining U.S. efforts to contain Iran’s nuclear ambitions by resisting the imposition of sanctions against the Islamic Republic in the event it resumes its efforts to enrich uranium. And Beijing is strengthening ties with the temperamental Venezuelan president, Hugo Chvez, who likes to poke the Americans in the eye. “We have been producing and exporting oil for more than 100 years,” Chvez told a group of Chinese business executives last December. “But these have been 100 years of domination by the United States. Now we are free, and place this oil at the disposal of the great Chinese fatherland.” Souring relations between Caracas and Washington have already prompted the Senate Foreign Relations Committee to mandate contingency plans in case Venezuelan oil stops flowing to the United States. Chinese officials, meanwhile, deny that China’s oil hunger is increasing friction with the United States. According to Han Wenke, deputy director general of the energy institute affiliated with China’s National Development and Reform Commission, “Although oil trade plays an important role in every field, it has a limited influence in Sino-American relations.”

GOING “GUN”-HO?

A big test of the U.S.-Chinese relationship may come if China’s current economic growth and need for resources push it to expand its military influence — a prospect that makes many people nervous. Survey results released by the BBC in 2005 show that although 49 percent of respondents in 22 countries welcome China’s economic growth, most people feel negatively about the prospect of China significantly increasing its military power. Few analysts expect China to become belligerent. But its growing dependence on oil, especially from the Middle East, will make it more actively concerned with sea-lanes, in particular the Strait of Malacca and the Taiwan Strait, both of which its oil tankers use. Zhang Yuncheng, an expert at the Chinese Institute of Contemporary International Relations, in Beijing, believes that China would face an energy crisis if its oil supply lines were disrupted and that whoever controls the Strait of Malacca and the Indian Ocean could block China’s oil transport route.

Concerns about safety in the Strait of Malacca are not new, but the potential for terrorism to target oil tankers in the region has understandably been taken more seriously since the attacks of September 11, 2001. Although the coastal states of Indonesia, Malaysia, and Singapore have long patrolled the strait to ensure free passage, now that four-fifths of China’s imported oil comes through it, Beijing increasingly shares that interest. The Taiwan Strait has also long been a source of concern, since it is seen as a possible battleground between China and Taiwan were Taipei ever to declare full sovereignty. With China increasingly reliant on foreign resources, Beijing is now also worried that Taiwan could threaten China’s supplies.

But China’s oceangoing navy is small, and with a U.S. naval base at Diego Garcia, in the Indian Ocean, and India’s navy dominating the mouth of the Strait of Malacca, Beijing seems to feel vulnerable about its limited capacity to patrol on its own. President Hu has reportedly commented on the problem, which he calls “the Malacca dilemma,” and considers it key to China’s energy security. He is concerned that “certain powers [read 'the United States'] have all along encroached on and tried to control the navigation through the strait.”

There is talk of China boosting its navy to protect its commercial ships, although so far it is unclear how far that project has come along. In a January 2004 article in the Beijing-controlled Hong Kong newspaper Wen Wei Po, a Chinese military expert recommended both defensive and offensive options for a new naval strategy: “One [option] is making quick reactions, including military reaction, when a crisis occurs … to display the strength for safeguarding the country’s interests. The other is the capability of reciprocal deterrence. This means if you can threaten my international shipping route, I can also threaten your security in various fields, including your international shipping route security.”

Some members of China’s naval officer corps want to readjust the country’s entire naval strategy. In their view, China faces threats not only along its coast but also on the high seas and so it should shift its focus from coastal to oceanic defense. According to a report written for the Pentagon by the consulting firm Booz Allen Hamilton, “China is building strategic relationships along the sea lanes from the Middle East to the South China Sea in ways that suggest defensive and offensive positioning to protect China’s energy interests, but also to serve broad security objectives.” Beijing is reported to be helping Pakistan build a port at Gwadar, upgrading a military airstrip in the South China Sea and monitoring stations in Myanmar, and negotiating for naval facilities in Bangladesh.

For now, Washington’s views about China’s possible militarization remain divided and in flux. In February, Defense Secretary Donald Rumsfeld said that although the Pentagon was watching China’s growing naval power, he could not confirm reports that in a decade the size of the Chinese fleet would surpass that of the U.S. Navy. But in May, Rumsfeld challenged Beijing to explain why it is increasing its military investments when China faces no major threat. Assistant Secretary of State Hill, for his part, does not perceive China as a serious threat to the United States; he has said that China’s rise is not a zero-sum game for Washington. Others claim that China will need to expand more than its military capacity to remain secure. Bernard Cole of the National War College, for example, has argued that “Beijing will not be able to rely on its navy alone to protect its vital [sea-lanes], but will have to engage [in] a range of diplomatic and economic measures to ensure a steady supply of energy resources.”

Cui Tiankai, the director general of the Chinese Foreign Ministry’s Asian Affairs Department, has confirmed the view that whatever Beijing’s efforts to boost its navy, China will continue to rely heavily on diplomacy and cooperation. Speaking at a conference at Hong Kong University last February, he argued that countries along the Strait of Malacca have the main responsibility to protect the strait and that China is willing to cooperate with them. He also expressed the hope that China, Japan, and South Korea could work together to ensure the flow of energy to Northeast Asia. And although he said that he believes U.S. influence is expanding in the Strait of Malacca, he expressed no concern about it. Thus, although Beijing is trying to build its own capacity to secure sea-lanes, it clearly wishes to continue to cooperate with — and sometimes free-ride on — the United States, as well as Indonesia, Malaysia, and Singapore, to keep the straits open.

CONSUMER PROTECTION

In the past, most of China’s disputes, with both its neighbors and other states, centered on trade issues. But its rising need for resources affects its foreign relations in new ways. Like other resource analysts, Mikkal Herberg, director of the Asian Energy Security Program at the National Bureau of Asian Research, said at a seminar at the University of California, Berkeley, in April that he could not foresee any scenario that would not lead to confrontations between the United States and China over energy.

By no means are such conflicts a certainty, however. In assessing the dangers of China’s growing energy needs, certain important mitigating factors tend to be overlooked. For example, Beijing has set out to replace some of the oil it consumes with alternative forms of energy, such as coal, of which it holds the world’s third-largest reserves. China is projected to become the world’s largest producer of nuclear energy by 2050. It is also promoting conservation and the efficient use of petroleum. Following President Hu’s December 2004 exhortation to balance “economizing and resource exploitation” with “actively developing oil substitutes,” last spring Beijing established a new powerful energy agency, the State Energy Office, which reports directly to the prime minister. The SEO’s job is to lower China’s energy dependence — the ratio of the energy China imports to the total it consumes — to 5 percent, as Prime Minister Wen has advocated. This is an ambitious goal, but China is far ahead of the world’s other top consumers: according to the political scientist Robert Ross, it imports only 12 percent of the energy it consumes, compared with 40 percent for the United States and 80 percent for Japan.

Nor should the dangers posed by China’s rising energy needs be overstated. For one thing, China’s hunt for resources is helping some developing states. The rising cost of resources may be hurting poor countries that import oil, but it is helping those that supply it. Other states will also benefit. According to Homi Kharas, a chief economist at the World Bank, 45 percent of China’s total annual imports come from developing countries, and these sales help developing states offset the increased cost of crude oil and gas.

China’s hunt for resources may have less dire consequences for developed nations such as the United States than is often assumed by a strict zero-sum vision of the world’s natural-resources markets. China typically picks up secondary deals or moves into markets from which the United States is absent; thus in many places the two countries are not really in direct competition.

A much bigger issue is how the magnitude of China’s energy needs affects the international oil market: China’s demand is so great — and likely to get much greater — that it could affect global supplies and prices. Yet it is precisely because China and the United States are both great oil guzzlers that there are grounds for cooperation. Some energy experts, such as Amy Myers Jaffe at Rice University, argue that big consumers can best protect their interest in keeping oil supplies steady and prices predictable by joining forces to counterweigh the influence of producers rather than by trying to forge privileged relations with them. One strategy is to create joint reserves of oil. Members of the International Energy Agency, an organization of 26 industrialized states, including the United States, created to manage energy emergencies, have already contributed to such a common pool. And some analysts, such as Herberg, have urged Congress to invite China to participate.

Similarly, Washington and Beijing share a common interest in securing open sea-lanes to ensure the unhindered passage of cargo ships. That both governments want stability in the Malacca and Taiwan straits does not pit them against each other — just the opposite. Moreover, developing an oceangoing navy to defend far-off sea-lanes is an arduous and expensive project, which will take Beijing decades to complete. In the meantime, China must cooperate with the United States to maintain its sea-passage security, in particular the security of its energy shipping lanes. This should not be a problem, so long as China and the United States avoid war over Taiwan.

It is true that difficult times may be ahead. U.S. officials, particularly in the Department of Defense, the Pentagon, and Congress, see China’s resource hunger as a new strategic challenge. Consider, for example, Congress’ response to the China National Offshore Oil Corporation’s recent bid to buy the American energy company Unocal. Few impartial analysts see any serious threat to U.S. national security in the deal, yet in a statement approved by 398 votes to 15, members of the House of Representatives said the sale would “threaten to impair the national security of the United States.” Under its resource-based foreign policy, China has become quite assertive in seeking the raw materials it needs to keep its economic juggernaut rolling. Just how benign China’s rise remains is partly in the hands of China’s leaders. Supporting pariah states that scoff at global norms, all in the name of economic growth, will not endear China to the world, especially not to the United States. Washington and Beijing must reach some accommodation on how to view China’s ties to such rogue states.

Yet China has a right to pursue energy sources through market strategies, and unlike the Soviet Union, it is not orchestrating regime changes to advance its interests. Washington must recognize that it would be irresponsible for China’s leaders not to increase the country’s energy supply. Washington must learn to cooperate with this rising China and continue to work to integrate it into the global economy. Beijing, for its part, must develop ties that do not flout international standards of good governance and human dignity or threaten U.S. security interests. The world needs farsighted leaders on both sides of the Pacific to adapt to rapid changes in the global distribution of economic and political power, not leaders who let such shifts push them into an increasingly acrimonious confrontation.

David Zweig and Bi Jianhai. Foreign Affairs. New York: Sep/Oct 2005.Vol.84, Iss. 5;  pg. 25

Petroleum Economist News Oct 2006

Western Europe

Denmark Dong has agreed to sell its gas storage facility at Lille Torup to Energinet.dk. The sale, to be completed on 1 May next year, will bring it DKr2.0bn ($340m) plus a possible additional payment after 2030. Dong agreed to sell the facility to gain the European Commission’s approval for the merger of a number of Danish energy companies (PE 5/06 p40).

France Seismic firms Compagnie Generale de Geophysique (CGG) and Veritas are to merge to form CGG-Veritas, to be held about-65% by CGG shareholders and 35% by Veritas shareholders. The combined fleet will amount to 20 vessels, including 14 high-capacity 3-D vessels.

Germany EuroHub said last month that “for the time being” it will suspend operations at its physical gas hub between Emden, Oude Statenzijl and Bunde. The firm, owned by the Netherlands’ Gasunie, Germany’s E.On, BEB and Wingas, and Norway’s Statoil, said interest in its services was decreasing following the development of virtual trading points in Germany and the Netherlands.

Ireland Challenger Minerals, wholly owned by GlobalSanteFe, is to farm in to Providence’s licence options (03/8 and 03/1) over Celtic Sea areas. Challenger will pay 26.7% of this year’s seismic costs to gain a 20% interest, with Providence’s holding falling to 75% and the remaining 5% being held by Midmar. Challenger has the option of taking an additional 20% on the same terms by the end of October. Providence, listed in Ireland and the UK, says the areas hold five discoveries and another prospect. Last month, it awarded the contract for seismic work to Gardline Geosurvey, saying work will start in October. Lundin plugged and abandoned its 13/12-1 exploration well into the Inishbeg structure, 75 km off the northwest coast. Inishbeg had been flagged as a large and shallow Triassic gas structure. Island Oil & Gas (operator), Lundin and Endeavour have been awarded six part-blocks in the Donegal basin of the Irish Sea. The work programme includes acquiring 2-D seismic and reprocessing existing seismic data. Serica was awarded two blocks and one part-block in the Slyne basin, off the west coast. Serica, holding 100% of the areas, will reprocess existing 3-D seismic and will drill a well if it elects to go into the second phase of the licence. The blocks lie in 200-300 metres of water, some 40 km south of Shell’s Corrib gasfield.

Italy UK firm Independent Resources is planning to build an underground strategic storage facility for gas at Rivara, near Bologna – on the route of pipelines carrying gas from north Africa to Europe. The firm says the facility will have a capacity of 3.2bn cm, equivalent to 20% of the country’s present capacity. A nine-month environmental-impact study has been carried out and clearance is being sought for a Euro200m ($253m) appraisal and development programme. Start-up is targeted for 2010.

Netherlands Wintershall says it will bring its L/5-C gasfield on stream by end-year through a reconstructed and reinstalled platform, which had been used on the K/10-V field for 10 years. Reconstruction of the facility gave environmental advantages and saved costs and time, the firm says. From L/5-C gas flows to the firm’s L/8-P4 platform, 8 km away, for landing through existing pipelines. The firm’s partners are the state’s Energie Beheer Nederland and Petro-Canada. Total is to bring its L/4-G gasfield on stream through a subsea well. Gas will flow to the L/4-A platform, on which a new deck extension has been built, for landing at the Uithuizen terminal. Production, of about 1m cm/d, has been bought by Gasunie. Interests are Total, 55.66%, Energie Beheer Nederland, 40%, and Lundin, 4.34%.

Norway The southern part of Langeled pipeline, which will start contract deliveries of gas from Sleipner to the UK’s Easington terminal on 1 October, has been completed at NKr3bn ($457m) below the NKr20bn budget, Hydro says. The pipeline is due to be opened mid-month by the Norwegian and UK prime ministers. Hydro says the Ormen Lange field development, which is due to start flowing gas through Langeled in October 2007, is ahead of schedule and on-budget. Three pipelaying barges – Saipem’s S7000, the Acergy Piper and Allseas’ Solitaire – are working on the northern part of Langeled, which should be completed this autumn. Hydro was drilling an appraisal well last month into its Astero oil prospect, north of the Fram field in the North Sea. The firm said the discovery well, drilled in May last year, showed Astero to be “commercially interesting”. Statoil says its Gullfaks field – in production for 20 years and, according to original expectations, due to have been shut down by now – should be flowing for at least another 20 years. The firm was drilling the 50th well there last month and has plans to explore more than 50 possible tie-back structures in the area. Statoil made a gas discovery last month in the Barents Sea, with a well drilled as part of its drive to find gas for a possible expansion of the Hammerfest LNG facility. The 7122/6-7 well, drilled about 60 km east of the Snohvit field, found gas in several layers and was logged and sampled. The firm says it will carry out more drilling in the Snohvit area in 2007 and 2008. Meanwhile, the Polar Pioneer drilling facility goes to Eni for an appraisal well in the Goliat oil structure. Marathon submitted a plan for development and operation (PDO) last month for its Volund oil and gas discovery, near Alvheim in the North Sea. The firm plans to use subsea wells tied back to Alvheim, at a cost of about NKr2bn. First oil is targeted for first-quarter 2007, from reserves of 44m barrels of oil and 0.8bn cm of gas. Hydro says it will submit a PDO by year-end for a joint development of the Camilla, Belinda and Fram B gasfields. The fields will flow from subsea facilities to the Gjoa production semi-submersible, with gas piped through a new line connecting to the UK’s Flags pipeline, which lands at St Fergus. Condensate will be sent through a new link into the Troll Oil II line, for landing at Mongstad. Recoverable reserves are put at 18bn cm of gas and 25m barrels of condensate. Statoil has contracted the Transocean Leader semi-submersible drilling unit for 30 months starting at the end of 2008, at a cost of $378m.

Portugal Brazil’s Petrobras (50%) has signed an agreement with local firms Galp (30%) and Partex (20%) covering planned exploration in deep-water areas off the western coast. Petrobras, with its experience of deep-water operations in Brazil, will lead an initial study of existing geophysical data.

Spain Foster Wheeler has won the detailed engineering, procurement and construction contract for the 20,000 b/d delayed-coker at BP’s Castellon refinery, for which it is also supplying the technology and has completed the design work. Start-up of the facility is due in 2008.

Sweden Storrun Vindkraft, which holds the rights to build a 30 MW wind turbine at Krokum, in the mid-part of the country, is to be acquired by Denmark’s Dong. The seller, Borevind, has the right to buy back 20% of the venture. Dong says approvals for the turbine are in place, but work is needed on the project framework. It plans to take a final investment decision in mid-2007 and to complete the facility at end-2008.

Turkey Botas has awarded a three-year maintenance and supervision contract covering the Turkish section of the Baku-Tbilisi-Ceyhan pipeline to Wartsila. The firm supplied the 18 gas-fuelled pumping units at the pipeline’s four pumping stations on Turkish territory.

United Kingdom ConocoPhillips has discovered a new gas-condensate field at the boundary of Blocks 30/6 and 30/7, in the central North Sea. The firm said last month that it made the find with its 30/6-6 well, drilled about 9 km west of its Judy field in 81 metres of water. The well was immediately sidetracked to delineate the find, confirming a gross hydrocarbons column of more than 600 metres. The firm’s partners, Eni and BG, both said the discovery was substantial and would be developed, BG estimating that it held recoverable reserves of 100m-275m barrels. Use of Judy infrastructure could make for a low-cost project. Interests are ConocoPhillips, 36.5%, Eni, 33.0%, and BG, 30.5%. Venture is to sell 75% of its 100%-owned Ensign discovery to North Sea Gas Partners (NSGP) – the venture it launched in April with US investors led by ArcLight Capital Partners. Venture also said that NSGP is to farm-into its Amanda and Agatha prospects, near Ensign, by paying the full cost of a well on each to gain a 50% share of each. With Venture holding a 33.3% interest in NSGP, the deals will reduce its combined holding in Ensign to 50% and its combined holdings in Amanda and Agatha to 66.7%. NSGP was set up with funds of $300m (including $100m from Venture), with Venture acting as operator in return for a management fee and an enhanced share of dividends after a threshold return is achieved. Lundin is to acquire interests from Total in three blocks – two in UK waters, one in Norwegian waters – covering the undeveloped Peik gas-condensate field. The firm will pay $45m and estimates that the three interests will give it a total of 40% of the field, when a unitisation agreement is drawn up. Peik, with reserves of about 20m boe, is likely to be developed as a subsea step-out from a nearby platform. Norway’s Hydro will sell 0.5bn cm of gas to Russia’s Gazprom for marketing in the UK, over one year starting on 1 October. The gas will be delivered through the southern part of the Langeled pipeline, running from Sleipner to Easington, which is due to come into use this month. US firm Excelerate Energy has won planning consents for its gas-port project at Teesside, under which the firm’s Energy Bridge vessels will pump regasified LNG directly into the national transmission system. Onshore infrastructure is due to be completed in December.

Eastern Europe and CIS

Armenia Iran wants to build a second gas pipeline to the country, which would primarily supply Armenia, but could also use the territory for transiting gas to third countries. An initial 141 km pipeline connecting the two countries will be completed later this year.

Azerbaijan Production from the Shah Deniz gasfield was due to start at the end of September and will rise during the course of the year, according to BP. Initial output is put at 8.8bn cm/y. The gas will be transported through the new South Caucasus Pipeline and will reach Turkey by the end of this month. Ukraine and Azerbaijan are studying plans to co-operate in transporting Caspian gas to Europe. A parliamentary group will be set up to work on the idea, which is designed to help Azerbaijan find new routes to Europe for its gas and help Ukraine diversify away from Russian gas. AIOC, which is developing the Azeri-Chirag-Guneshli contract area, says oil output almost doubled to 14.3m tonnes in the January-August period, up from 7.4m tonnes in the same period of 2005. Natural gas output rose to 1.69bn cm in the January-August period, up from 0.98bn cm the year before.

Balkans Russia’s Lukoil has signed a preliminary agreement with Slovenia’s Petrol, a products retailer, to set up a marketing venture in the Balkans. Petrol will contribute its service stations in Slovenia, Croatia, Bosnia and Serbia to the new venture, in which it will hold a 51% share. Lukoil’s contribution will include Beopetrol in Serbia and its Lukoil Macedonia division. The venture is expected to be created by year- end.

Belarus Gazprom and Beltransgaz have signed a deal allowing ABN Amro to conduct an independent valuation of the Belarusian gas company’s assets in order to settle a dispute over their true value. After valuation of the assets – which Gazprom estimates at $1bn, but Beltransgaz values at $5bn – the companies will gather them into a joint venture.

Bosnia Herzegovina A government commission has shortlisted 11 firms to enter a second round of negotiations on a Euro2bn project to build eight power plants. The commission included in the shortlist all companies that recorded profits of over Euro100m in 2005, including Verbund, EVN, Enel, and CEZ. Hungary’s Mol and Croatia’s Ina have signed a long-awaited deal with the government to buy a 67% stake in Energopetrol. Mol will subscribe to new Energopetrol shares, worth $39m, leaving the state holding a stake of 22% in the fuel retailer.

Bulgaria The privatisation agency has shortlisted four firms in the tender for a 214 MW heating plant in the town of Plovdiv. The candidates – Czech CEZ, Austria’s EVN, France’s Dalkia International, and a consortium of Gazprom and Bulgaria’s Overgaz – were to be invited to file offers to buy 100% of the utility on 9 October.

Croatia The government says it will float at least 15% of the shares of Ina on the bourses in Zagreb and London in November. In 2003, the state sold 25% plus one share in Ina to Mol for $0.51bn.

Czech Republic The government is reportedly considering some state asset sell-offs to help fix the deficit-ridden budget. Up for grabs could be some of its 68% stake in power company CEZ, which is estimated to be worth some $15bn.

Kazakhstan KazMunaiGaz (KMG), the state-owned oil company, plans to list on the London and Kazakhstani stock exchanges within a few months. Credit Suisse, ABN Amro and Visor Capital, a local investment bank, have won a mandate to handle the IPO, which the company hopes will raise $2bn. KMG has created a special subsidiary, KMG Exploration and Production, for the listing. The new entity has been allocated KMG’s main onshore fields in western Kazakhstan, which produced 4.6m tonnes of oil in first-half 2006. Alexander Gladyshev has been hired to head KMG E&P’s investor relations team. Gladyshev earlier served in a similar role at Yukos. The country has signed an agreement to co-operate in the peaceful use of atomic energy with Japan. Sumitomo and Kansai Electric Power are already involved in a joint venture with Kazatomprom, the state-owned nuclear power company, to mine uranium in the south of the country. Last year, Itochu signed a 10-year contract to import uranium. The country is seeking investors to help boost uranium production, consequently, more Japanese deals could follow. If all targets are fulfilled, the country would be the world’s biggest uranium producer by the end of the decade. The state-owned power grid operator, KEGOC, says the power sector needs investment of $3.5bn-5.0bn to modernise existing generating facilities and build new ones before 2015. Of the total, about $1.8bn should be invested in the modernisation of existing power plants. The investment would increase power output by 10 TWh by 2010 and by 15 TWh by 2015. Max Petroleum says the first shallow exploration well it drilled on the Zhana Makat prospect flowed oil at around 180 b/d. The hole was drilled to a depth of 1,000 metres and “a 23-metre oil column” was encountered in sands from a depth of 812 metres. The firm is conducting further tests to optimise production. Total says talks with KazMunaiGaz over its possible participation in the development of the Kurmangazy oilfield have been suspended and the French firm is looking at other possibilities in the country. Total won a closed tender to acquire a minority stake in the field, which is being jointly developed by KazMunaiGaz and Rosneft.

Latvia Ventspils Nafta, which operates the country’s crude export terminal, says the pipeline link from Russia, which has been unused since Moscow cut supplies in 2003, will have a good chance of reopening once the state’s 38.6% stake in the company is sold at auction on 5 October.

Lithuania The Mazeikiai refinery received crude from Venezuela for the first time last month, as part of its efforts to diversify sources of oil after Russia cut off supplies by pipeline because of a leak (see p28). Mazeikiu Nafta, the refinery operator, says further purchases of Venezuelan crude are possible, but provided no further details.

Moldova The government has reached agreement with Ukraine on resuming the transit of Russian electricity supplies to the country. The transit of Russian power across Moldova was halted in May when the contract between Ukrainian electricity exporter Ukrinterenergo and Russia’s UES expired and the sides failed to agree new transit tariffs.

Romania Dexia Bulgaria, owned by Switzerland-based Wintershall Erdgas Handelshaus Zug, plans to invest around $11.5m to build a gas pipeline under the Danube from neighbouring Bulgaria.

Russia TNK-BP has agreed to build a pipeline to link the Upper Verkhnechonsk field in the Irkutsk region of eastern Siberia with Talakan, a deposit controlled by Surgutneftegaz in the Sakha republic. From Talakan, oil will be fed into an export pipeline to the Pacific Ocean. Transneft, the state-owned pipeline operator, launched the eastern Siberia project earlier this year. Oil producers have been invited to commit volumes to the system, which will eventually carry up to 80m t/y of Russian oil to Asia-Pacific. Lukoil produced 1.89m b/d of oil in the first half of 2006, 5.6% more than in the same period in 2005. First-half gas output climbed by over 265%, to 5.14bn cm, thanks largely to output from the recently commissioned Nakhodkinskoye field in western Siberia. Nakhodkinskoye yielded 4.1bn cm in the first half of the year. Lukoil processed 0.94m b/d of oil at its refineries during first-half 2006. Throughput at the company’s domestic plants increased by 7.3% to exploit the favourable products margins created by record high crude-oil export taxes. Gazprom has signed an agreement extending by 15 years its long-term gas-supply contract with Germany’s E.On Ruhrgas and pledging additional deliveries through a new export pipeline across the Baltic Sea, which the companies plan to build in partnership. The deal commits Gazprom to supply 300bn cm of gas to E.On between 2020 and 2035. E.On will lift around 4bn cm/y of gas through the new Baltic pipeline, which is due to start up in 2010-2011. Gazexport, the foreign trading arm of Gazprom, delivered 93.42bn cm of gas to Europe in the first seven months of 2006, fractionally more than the 92.14bn cm marketed in the region in the same period of 2005. Western Europe boosted imports of Russian gas during the period to 66.32bn cm, up from 65.95bn cm earlier. Exports to Eastern Europe totalled 27.10bn cm, up from 26.20bn cm in the first seven months of 2005. Transneft, the crude pipeline monopoly, plans to issue a Eurobond in October to help finance construction of the 4,000 km East Siberia-Pacific Ocean oil pipeline, the first phase of which is estimated to cost $8bn. The cost of the entire pipeline, which will run from Irkutsk region to Primorsky region, on the Pacific coast, has not yet been announced. The atomic energy agency has laid out three visions for developing the country’s nuclear power industry, the most bullish of which will see nuclear’s share in the consumption balance rise to 25-30%, up from 16%, by 2030. Meanwhile, the governor of Tomsk region says a new nuclear power plant with four generating units will be built in the Siberian town of Seversk by 2020. UES plans to restrict power supplies to 16 regions in the coming winter months in an effort to avert possible widespread power outages. UES introduced restrictions in three regions last winter, when severe cold weather triggered increased electricity demand for heating and strained the dilapidated power infrastructure. Gazprom is holding talks with Gaz de France and its own trading arm in the UK to sign long-term deals for gas supplies coming through the new North European Gas Pipeline to Germany. The pipeline, due on stream early next decade, will initially carry 27.5bn cm/y. Peter O’Brien, vice-president of Rosneft, says the state-owned company may use its gas reserves to produce liquid fuels if it cannot agree terms for using Gazprom’s pipeline network. Lukoil expects to boost domestic refinery throughputs in the medium term by 50%, to 75m t/y, by expanding capacity at the Volgograd and Norsi refineries. In the longer term, it plans to boost its processing capacity to 100m t/y.

Serbia and Montenegro The government was due to begin the auction of a stake in oil firm Naftna Industrija Srbije, which is valued about $2bn, early this month. Among interested bidders are Lukoil, OMV and Mol.

Ukraine Naftogaz Ukrainy says it has paid off the final $10.5m debt to Turkmenistan that the state-owned firm owed for gas supplies. The issue of Naftogaz’s debt to Turkmenistan has, until now, prevented an extension being agreed to the five-year gas supply deal signed in 2001 between the two countries. The government plans to spend $4.5bn to modernise its Soviet-era network of gas pipelines that supply Europe with much of its gas. The four-year reconstruction project will help increase gas transit volumes and the reliability of transit services.

Uzbekistan State-owned Uzbekneftegaz has teamed up with Lukoil, China National Petroleum Corporation, Korea National Oil Corporation (KNOC) and Petronas Carigali to explore in the Aral Sea. The group plans to invest $99.8m during an initial three-year exploration programme. Seismic will start in April 2007. With the exception of KNOC, all of the companies are already involved in Central Asian oil and gas projects. KNOC is close to finalising a contract for the Zhamboul block in the Caspian Sea offshore Kazakhstan.

Africa

Angola Another licensing round will open towards the end of the year, according to state-owned Sonangol’s exploration director, Severino Filomeno Miranda Cardoso. He was reported as saying that 12 areas will be offered, of which three – Blocks 46, 47 and 48 – are newly designated areas to the west of Blocks 31 and 32, where multi-field developments are being planned. Also offered will be Blocks 19, 20 and 21 in the central part of the offshore, the shallow-water Blocks 11 and 12, and four onshore blocks in the Kwanza basin. Sonangol has launched its first offshore development as operator. The firm has ordered a subsea production system for the Gimboa field, in Block 4/05, from Aker Kvaerner for $68m. Water-depth at Gimboa is 700 metres.

Chad The government told Malaysia’s Petronas and Chevron that they will have to surrender their interests – respectively, 35% and 25% – in the Doba basin oil development, which flows 170,000 b/d of crude to an export terminal at Kribi, Cameroon. It has alleged the two firms owe $450m in taxes, which they deny. The country has just set up a state-owned oil company, Societe des Hydrocarbures du Tchad, and has been seeking a higher share of oil proceeds to finance military expenditure. Last month, talks were under way and a government commission had been set up to renegotiate contracts. ExxonMobil, which operates the development and has a 40% share, says it expects “contract sanctity to be valued”.

Congo (Brazzaville) The UK’s Soco is to farm out half of its 75% interest in the shallow-water Marine XI block to Lundin and Raffia. Soco continues as operator and says PGS is due to start a 1,200 square km 3-D seismic survey in early October. Previous exploration has resulted in four small oil discoveries, the largest of which could hold 30m-60m barrels. Interests will become Soco, 37.5%, Lundin, 18.75%, Raffia, 18.75%, Societe Nationale des Petroles du Congo, 15%, and Africa Oil & Gas, 10%.

Egypt Egyptian General Petroleum Corporation is offering six blocks for exploration – four onshore in the Western Desert and two offshore in the Gulf of Suez. Bids must be in by 7 November. A partnership between Sipetrol (operator, 50.5%) and Oil Search (49.5%) was drilling the Shahd-1 well in the East Ras Qattara licence of the Western Desert last month.

Equatorial Guinea Marathon and its partners in the EG LNG venture are moving towards the construction of a second train. Marathon awarded a Feed contract for Train 2 to Bechtel in August and says discussions with owners of gas reserves in Equatorial Guinea, Nigeria and Cameroon are being held, in readiness for a decision on the train in 2007. The Feed contract covers a train of 4.4m t/y – up from the 3.4m t/y of the first train. The country could serve as a regional gas hub, commercialising stranded reserves in the Gulf of Guinea, Marathon says. Meanwhile, the US firm forecasts that the first train will start shipping LNG in the middle of 2007, ahead of the fourth-quarter 2007 target. Interests in EG LNG are Marathon, 60%, Sonagas (the state’s gas company, to which the share held by the state’s GEPetrol has been transferred), 25%, Mitsui, 8.5%, and Marubeni 6.5%.

Gabon Addax has taken over all of Pan Ocean’s operations in the country, with the completion last month of its acquisition of Pan Ocean Energy for C$1.605bn ($1.431bn). Pan Ocean has been developing a number of small onshore fields and has shallow-water exploration acreage. Addax says the acquisition will increase its end-2006 total production to nearly 120,000 b/d, with an average of over 130,000 b/d in sight for 2007.

Mauritania According to Hardman, a participant in the troubled Woodside-operated Chinguetti field, the wells in Phase 1 of the development plan are “not likely to recover significantly more than 50% of the original proved and probable reserves estimate of 123m barrels”. Production has declined to 37,000 b/d, from 66,000 b/d when the field came on stream in February. A 4-D seismic programme is due to start early next year.

Nigeria Just after the Brass LNG project had gained a full set of shareholders again (PE 9/06 p39), the government said it wants to cut company holdings to give 3% to the UK’s Centrica and 2% to BG. Total, which in August agreed to take up the 17% formerly held by Chevron, would see its holding cut to 12.5%, while ConocoPhillips would see its 17% cut to 16.5%. Total is reported to be meeting with the authorities before deciding on its response. BG, BP and Suez LNG Trading have initialled sales agreements covering 2.0bn cm/y each. Other interests in Brass LNG – Eni’s 17% and state-owned NNPC’s 49% – are unchanged. The oil industry contractor, Willbros, said last month that it will sell its operations in the country, where it has an order-book of $400m. Several of the firm’s staff have been held hostage recently. The firm says new owners could continue operations with less risk to personnel and property than itself.

Uganda Hardman’s Mputa-1 well, drilled early this year, was tested in August, flowing 820 b/d of 33[degree]API crude from an upper zone and 300 b/d of 32[degree]API crude from a lower zone. The firm says the find, in the onshore Block 2, is “potentially commercial”. Block 2 is held by a 50:50 partnership between Hardman and Tullow.

North America

Canada Canadian Natural Resources (CNR) has paid $4.2bn for the local unit of Anadarko, acquiring proved reserves of 48m barrels of oil and 1.56 trillion cf of gas, which produce 9,300 b/d of oil and natural gas liquids and 358m cf/d of gas. The deal also includes 1.5m net undeveloped acres in northeastern British Columbia and northwestern Alberta; seven major gas facilities; 2,800 miles of pipelines; and 1,500 future drilling locations. Closure of the deal will give CNR production of up to 0.61m boe/d. Chevron Canada, with Western Oil Sands as a 20% partner and Shell Canada contemplating an equity option, plans to drill up to 100 appraisal wells to define the “ultimate recovery potential” of its 75,000 acres of oil-sands leases, which are estimated to hold 7.5bn barrels of oil in place. A final economic decision on whether to proceed with the Ells River project, targeting 100,000 b/d by 2015, is due in November. Harvest Energy Trust became the first income trust to enter the refining field, buying Newfoundland’s Come-by-Chance facility for C$1.6bn ($1.4bn) from Swiss trader Vitol. The newest of Canada’ 16 refineries, it processes 115,000 b/d of imported crude, exporting 90% of its products to New England and New York. The deal extends Harvest’s economic life to 16 years from 9.5 years. It expects to produce about 67,000 boe/d in 2007. Crescent Point Energy Trust is taking over Mission Oil & Gas for C$0.76bn, gaining control of a possible 1bn barrels oil find in the Bakken area of southeast Saskatchewan. The trust will gain 5,500 boe/d of production, boosting output to 26,500 boe/d, build its proved and probable reserves to 111.6m boe and its undeveloped land base to 317,000 net acres. EnCana has filed plans with regulators for a scaled-down Deep Panuke gas project offshore Nova Scotia, lowering expected production to 300m cf/d from the 400m cf/d planned when the development was put on hold in 2003. It tentatively plans to start delivering gas to Atlantic Canada and New England in 2010. The project’s forecast operating life has been extended to 13.3 years from 11.5 years. A final decision to proceed will not be made until late 2007, after regulatory approval. The value of mergers and acquisitions totalled C$13.9bn in the first half of 2006, C$4.1bn more than a year earlier, according to Sayer Energy Advisors. The second quarter saw five deals valued at C$1bn or more, representing two-thirds of the first-half value. Income-trust transactions amounted to C$7.8bn. Acquisition prices averaged C$20.34/boe for proved-plus-probable reserves, 33% more than the same period of 2005. Bruce Power, operator of six nuclear plants supplying 20% of Ontario’s power, has filed an application with federal environmental regulators outlining plans for four 1 GW units costing C$8bn-10bn. Final decisions will wait for completion of the environmental assessment, which could take three years. Penn West Energy Trust has identified 6bn-7bn barrels of recoverable bitumen after evaluating its 370,000 acres of leases in Peace River, northwestern Alberta. The Seal project, producing 4,000 boe/d, is expected to reach 20,000 boe/d within five years at production costs of C$7-8/b. Canadian Oil Sands Trust has concluded a $197m take-over of Canada Southern Petroleum, ending a bidding contest with Petro-Canada and Canadian Superior Energy. Canada Southern’s major assets cover 184 square miles of Arctic islands, including 0.93 trillion cfe of marketable gas, 13.7 trillion cfe of reserves, seven significant discovery licences and one production licence. The trust has no immediate plans to develop the resources.

Kereco Energy has acquired Chamaelo Exploration for C$332m, increasing its production by 40% to 15,000 boe/d. The assets include 14.03m boe of proved-plus-probable reserves – 53% natural gas and 47% crude and gas liquids – plus 130,000 net acres of undeveloped land valued at C$26.2m. The transaction works out at C$27.08/boe of reserves and C$66,416/boe/d of production.

United States Arizona Clean Fuels has an additional 18 months to begin construction work on its planned $2.7bn, 150,000 b/d refinery near Yuma, Arizona. Last month, the Arizona Department of Environmental Quality reissued the Class 1/Title V air permit for the facility, originally granted in April last year, with additional testing and certification requirements. The firm, which already holds an operating permit for the refinery, is seeking finance. ExxonMobil (25%, operator), with partners Newfield Exploration, BP, Petrobras, Dominion and BHP Billiton have abandoned their $210m Blackbeard West wildcat well, widely regarded as a pointer to the future of ultra-deep-water gas exploration in the GoM. The Blackbeard well was drilled to a record 30,067 feet and encountered only “thin gas-bearing sand”. High pressure prevented the well from reaching its primary targets. ExxonMobil is reviewing data before deciding whether to drill more test wells. Western GoM Lease Sale 200 attracted $341m in high bids, the strongest response in the region since 1998. Postponed three times because of court rulings, the sale had 541 bids on 381 blocks. Six of the top 10 bids were placed on the ultra-deep-water Keathley Canyon, with BP offering $21m for KC 58. Petrobras paid $23.7m for two blocks and led the overall bidding at $45.5m for 34 blocks, followed by BP at $37.5m for 31 blocks. Cabot Oil & Gas is leaving the GoM shelf region after selling its assets to privately held Phoenix Exploration for $340m. The deal involves 20% of Cabot’s North American production of 248m cfe/d and 5.4% of its proved reserves of 1.33bn cfe. Nexen expects initial production of 12,000-15,000 boe/d from its deep-water Aspen field in the Gulf of Mexico following a “successful” delineation well. Aspen, 150 miles south of New Orleans in 3,150 feet of water on Green Canyon, is expected on stream this quarter. Nexen, operator and 100% owner, found 160 feet of net pay in drilling to a depth of 20,691 feet. Chevron has penetrated a pool of petroleum on its Jack 2 prospect, in the Walker Ridge area of the GoM about 270 miles southwest of New Orleans, which could boost the nation’s reserves by more than 50%. A test well on the field, which was discovered in 2004, indicates it could hold 3bn-15bn barrels of oil and NGLs, which would make it the biggest domestic oil discovery since Prudhoe Bay. The well was drilled to a total depth of 28,175 feet, the deepest successful well test to date in the GoM. Chevron has a 50% stake in Jack 2; Statoil and Devon Energy own 25% each. BP has agreed to acquire Greenlight Energy, which develops large-scale wind-power projects across the country, for $98m, excluding working capital and tax adjustments. BP America has made an oil discovery on the Kaskida prospect, in about 5,860 feet of water on Keathley Canyon Block 292 of the GoM. Whiting Petroleum has acquired 1.4m boe in Michigan from a private seller for $26m. The acquisition includes 65 producing properties, a gathering line, gas-processing plant and 30,437 net acres of leasehold held by production. Regency Energy Partners has completed its $358.8m acquisition of TexStar Field Services, which has 1,476 miles of gas-gathering pipelines and four gas-processing plants. Alternative Energy Sources plans to acquire Flex Fuels USA and its affiliate, ACN Energy Consulting, in a stock-for-stock transaction. Flex Fuels has developed methods of producing cellulosic ethanol made from biomass and other types of waste. Lyondell Chemical has acquired Citgo’s 41.25% stake in the 268,000 b/d Lyondell-Citgo refinery on the Houston Ship Channel for $2.1bn. Westar Energy plans to construct a $300m gas-fired peaking power plant in Lyon County, Kansas. The plant’s initial phase, which will have a generating capacity of up to 300 MW, will begin operations in summer 2008. Additional capacity will be added in phases, bringing the total to 600 MW. Woodside Natural Gas is planning a project designed to supply gas from Australia to California without construction of an onshore LNG import terminal or offshore platform. The OceanWay project would consist of two delivery buoys, more than 20 miles offshore Los Angeles, which would receive LNG transported on specially designed ships that would convert it back into gas. The gas would be delivered to shore through dual undersea pipelines. OceanWay would initially process about 0.4bn cf/d of gas, with plans for increasing the capacity in phases to 0.8bn cf/d and then 1.2bn cf/d. French seismic services company Geophysique has agreed to acquire Houston’s Veritas for $3.1bn in cash and stock. The acquisition will create the world’s largest surveyor of oil and gas fields. Citing market conditions, BP has halted its plans to build a $0.65bn LNG-import plant on Pelican Island, near Houston. UGI Utilities has completed its acquisition of the gas utility assets of PG Energy, a subsidiary of Southern Union, for $0.58bn. Arch Coal has agreed to acquire a 25% equity interest in DKRW Advanced Fuels, the principal developer of the Medicine Bow Fuel and Power coal-to-liquids project in the Carbon basin of southern Wyoming, and to invest $25m in the company. An investment group that includes Kinder Morgan’s chairman and chief executive, Richard D Kinder, company co-founder Bill Morgan, other members of management and the board of directors and investment companies Goldman Sachs Capital Partners, American International Group, Carlyle Group and Riverstone Holdings, will take Kinder Morgan private in a cash deal worth $15bn plus $7bn in debt. W&T Offshore has acquired Anadarko’s GoM shelf subsidiary for about $0.75bn. Anadarko recently acquired Kerr-McGee, which had already agreed to sell the shelf subsidiary to W&T Offshore. Western Refining has agreed to acquire Giant Industries for $1.22bn. The transaction would create the fourth-largest publicly traded independent refiner and marketer in the country. The acquisition includes three refineries, a chain of retail stations, a fleet of crude oil trucks and wholesale petroleum products distribution. Brookfield Power of Canada is acquiring two 107 MW hydro-electric plants in West Virginia from Alloy Power and West Virginia Alloy. Noble’s semi-submersible drilling unit, Noble Amos Runner, has established a new world record for the deepest conventionally moored rig by mooring in 7,650 feet of water in Green Canyon Block 955 in the GoM. Noble is drilling a well at the site, about 200 miles south of Houma, Louisiana, for Kerr-McGee Oil & Gas, a subsidiary of Anadarko. Earth Biofuels subsidiary Earth Ethanol has agreed to acquire a 50% interest in South Louisiana Ethanol (SLE) from HPS Development. SLE owns a former ethanol production facility in Plaquemines Parish, about nine miles southeast of New Orleans. Earth Ethanol plans to reconstruct the facility. When the reconstruction is completed in third-quarter 2007, the facility’s production capacity is projected to be at least 65m gallons a year. Duke Energy Indiana and Vectren Energy Delivery of Indiana plan to build a 630 MW power plant in Edwardsport, Indiana, using gas converted from coal. Construction of the plant, which will cost an estimated $1.3bn-1.6bn, could begin as early as mid-2007. Duke Energy plans to spin off its gas transmission and field services units into a separate, publicly traded gas company capitalised at over $15bn. The new Houston-based company, GasSpinCo, will be in place by 2007. GS AgriFuels plans to construct a multi-stock, multi-fuels production facility in Memphis, Tennessee. The proposed plant will have an initial production capacity of 10m gallons of biodiesel and 5m gallons of ethanol, methanol and/or biomass-derived synthetic diesel. Production should start in 2007. Geokinetics has completed the acquisition of Grant Geophysical for $125m in cash. Grant Geophysical conducts seismic operations in North America, Latin America, Asia and the Middle East. FPL Group subsidiary Florida Power & Light plans to build a coal-fired power plant in Glades County, Florida. The first 980 MW unit is scheduled to begin operations in 2012, and a second unit will go on line in 2013. The proposed FPL Glades Power Park will cost between $2bn and $3bn. Dynegy is combining its operating assets and establishing a joint venture with LS Power. LS Power will receive 340m Dynegy shares, $100m in cash and a $275m Dynegy note and will hold a 40% stake in the combined company. The new group will assume $1.8bn in LS Power debt; Dynegy will have a 50% ownership interest in the venture. Wisconsin Power and Light plans to build the Cedar Ridge Wind Farm in Fond du Lac County, Wisconsin. The 80-100 MW project is expected to cost $140m-175m and to start operating in either 2007 or 2008.

Latin America

Argentina The government has agreed to consider a new pipeline project that would increase gas exports to Chile. The plan would involve construction of a 475 km pipeline in Chile to connect the existing Gas Andes and Pacifico lines that transit Argentine gas across the Andes. The addition of the new link would increase capacity from 10m cm/d to 19m cm/d. Argentina reduced exports to Chile in 2004, in the wake of a domestic fuel shortage and a 10% fall in production. The country now says it wants to increase exports to Chile, but will also increase the price of the gas it sells.

Bolivia President Evo Morales says state-owned YPFB will begin drilling for oil and gas next year, marking its re-entry to the country’s upstream. Morales did not say how much the firm would spend to drill. Earlier this year, YPFB said it would work with Venezuela’s PdV on an exploration project in the north of the country. The company also claims that Russia’s Gazprom wants to partner it in an upstream venture. The energy sector needs new investment of up to $1bn so that it can supply neighbouring Argentina with more natural gas, according to planning and development minister Carlos Villegas. The country recently signed a contract to increase exports to Argentina from 5m cm/d to 27.7m cm/d.

Brazil US independent Devon Energy will drill three new exploration wells in the country starting this month. The company says the wells will further delineate the Polvo field, in the BM-C-8 block in the Campos basin. Devon intends to produce up to 50,000 b/d of oil from Polvo by July 2007. A fixed drilling rig, in 105 metres of water, will have 10 production and three water injection wells and will be linked to a 1.5m b/d FPSO. Devon has spent $200m-300m on the block so far, in which it holds a 60% share, with South Korea’s SK holding the remainder. Repsol YPF has emerged as favourite to partner Petrobras in the development of the Mexilhao gasfield, in the Santos basin. Petrobras earlier announced plans to spend some $2bn to produce up to 9m cm/d of gas by 2009, but had refused to name its partner. Petrobras says it will only work with a partner on condition that the Brazilian company retain operatorship and a majority stake. Mexilhao, in the BS-400 block, and a nearby field in the BS-500 block, have formed the basis of Petrobras’ plans to increase gas production by 2011 to around 70m cm/d from just over 10m cm/d. Total combined reserves in the blocks are some 14.8 trillion cf, making them the country’s largest discovery. Petrobras and its partner, White Martins, a unit of Praxair, have begun production from Brazil’s first gas-liquefaction plant, in the city of Paulinia. The $50m plant will produce 14,500 cf/d of LNG, to be transported by trucks throughout southern Brazil. The venture, known as Gas Local, may double capacity in future, according to Petrobras. The company plans to build an LNG network in the country as a means of transiting gas to areas that are not accessible by pipeline.

Colombia China’s Sinopec and India’s ONGC entered a joint venture to buy half of Omimex de Colombia, a subsidiary of the US’ Omimex Resources. The fee paid for the stake has not been disclosed.

Jamaica Brazil’s Petrobras is considering exploring the island’s offshore, says the government. The country’s industry, technology, energy and commerce minister, Phillip Paulwell, says Jamaica expects progress with Petrobras in October. The country has licensed eight of 20 offshore blocks. Two companies – Australia’s Finder Exploration and Canada’s Rainville Energy – hold five and three blocks, respectively.

Mexico State-owned Pemex says it will bid for three ultra-deep-water drilling rigs, according to contract driller Transocean. Two of the rigs will be for water depths of 7,500 feet, with a third able to operate in 10,000 feet. Transocean says Pemex intends to buy up to nine ultra-deep-water units. Pemex announced its first significant deep-water discovery, Noxal-1, earlier this year (see p26).

Peru The country’s anti-trust regulator, Indecopi, should rule later this month on Hydro Quebec’s sale of a stake in local transmission company Transmantaro. The Canadian company agreed in May to sell its 56.7% share in Transmantaro to ISA and EEB, of Colombia, for $67m. ISA says that it and EEB will also try to win a further 15% stake in the company through a tender. Bids for that stake, costing $15.2m, were due last month. Transmantaro runs a 600 km, 220 kV line that connects Mantaro and Socabaya, Peru’s southern and central grids.

Venezuela A new reform of the tax regime will increase the rate on oil developments and eliminate several tax breaks, local reports said. Income tax on oil activities – including the four Orinoco belt projects – will increase from 34% to 50%. Harvest Natural Resources has amended a joint venture it has with state-owned PdV to include three new oilfields. The companies will now control the Isleno, Temblador and El Salto oilfields, Harvest said. The venture will continue to operate the three other fields in the South Monagas unit in the southeast of the country. PdV controls 60% of all the fields, and Harvest holds the remainder. The country will increase oil exports to China to 200,000 b/d by the end of 2006, according to Rafael Ramirez, oil minister and president of PdV. Exports are 150,000 b/d. Meanwhile, Ramirez says PdV will develop older oilfields in the Zumano area, in Anzoategui state, with China’s state-owned CNPC. CNPC is already involved in a project with PdV to certify oil reserves in the Orinoco heavy-oil basin. PdV signed a contract with Belarusneft, the state energy company of Belarus, to certify reserves in the Junin-1 block, in the Orinoco belt. The two companies also signed a deal covering joint exploration in the region. A wide-ranging memorandum also covered development of natural gas projects in Venezuelan cities.

Middle East

Dubai The Dubai Multi Commodities Center (DMCC) says it will launch its gasoline futures contract in first-half 2007. The company says an active spot market in gasoline futures has emerged in Jebel Ali, helped by rising imports of gasoline in Iran. Meanwhile, trading of DMCC’s Fujairah 380 CST fuel oil futures contract on the Dubai gold and commodities exchange will begin at the end of this month.

Iran A downturn in the country’s oil sector triggered by UN sanctions is a bigger threat to the international economy than the prospect of Iran withholding exports in response to sanctions, former Opec president and Algerian oil minister Sadek Boussena said last month. Any sanctions that the West imposes on Iran for its nuclear programme would cause a fall in investment into the country and its oil sector and could see Iran unable to add spare capacity to its production capabilities. Oil exports of 2.5m b/d account for some 92% of the country’s revenues. GSP, a Romanian oilfield services company, said last month that Iranian forces had attacked and occupied one of its drilling rigs in the Mideast Gulf. Local reports said the action followed a contractual dispute over the facility. GSP claims that it leased the rig, Orizont, to Oriental Oil, of Dubai, which in turn sublet it to Petroiran, a subsidiary of state-owned NIOC. When its contract with Oriental ended, GSP took possession of the rig, prompting the attack from the Iranian authorities. Petroiran was using the rig to develop the Hangam field, in the Strait of Hormuz, some 20 km from Qeshm island. Japan’s Inpex says it is still waiting for NIOC to tell it that the Azadegan field has been completely de-mined before work can begin to develop it. The field contains an estimated 26bn barrels of oil. Inpex and NIOC signed a 75:25 joint venture to develop the field in 2004, but work has not begun while the field is cleared of mines laid during the Iran-Iraq war. Earlier this summer, Inpex denied NIOC had threatened to revoke the agreement unless work had begun by September 2006. Inpex now says that the field is 90% free of mines, but will continue to wait for NIOC’s go-ahead. Investment on the field will be $2bn-4bn. Iran says production of 260,000 b/d should be on stream by 2012. Oil minister Kazem Vaziri Hamaneh said last month that he was pleased with progress made in negotiations with the EU over the issue of the latter’s nuclear programme. Hamaneh also reiterated that Iran would not withhold exports of oil for political reasons. “I’ve said repeatedly that during Saddam’s war with Iran, Iran didn’t stop one day of its exports,” he said. “Our policy is not to use oil as a tool.” Total says it will abide by any international judgement for sanctions against the country over its nuclear programme. The company’s chief executive, Thierry Desmarest, said the company “will always respect all the decisions made at the level of the French government, the EU and the UN”. Total is hoping to join Japan’s Inpex in development of the $2b Azadegan field, in the southeast. Hydro-Zagross, a subsidiary of Norway’s Hydro, has signed a $107m E&P contract on the Khorramabad block, in the west of the country. Hydro-Zagross must spend $49.5m initially on exploration and another $58m to develop any discovery. China’s state-owned Sinopec and India’s state-owned Oil and Natural Gas Corporation (ONGC) will soon sign a contract to develop the Yadavaran oilfield, in the south. Sinopec will hold 51% of the field, with ONGC taking 29% and the rest held by local companies. Sinopec originally signed a memorandum about the field in 2004. A gas export pipeline to Armenia will be on stream by the end of this year, according to local reports. The 160 km line will export 36bn cm/y to Armenia for the next 20 years.

Iraq Production from the country’s northern fields increased in August, taking total average output during the month to 2.285m b/d, up by 42,000 b/d on July. Production from the northern fields averaged 308,000 b/d. The oil ministry said the rise followed repairs to pipelines connecting the Kirkuk oil production centre and the major refining and pumping hub in Baiji. Pumping to the Turkish port of Ceyhan is continuing, say local reports and State Oil Marketing Organisation last month issued a tender to lift 6m barrels of Kirkuk crude. The al-Ahdab oilfield will be the first to be developed in the new regime, oil minister Hussein al-Shahristani said last month. Al-Ahdab is close to the giant East Baghdad oilfield. Shahristani did not say when the field would be developed.

Jordan Iraq will supply the country with 10,000 b/d of crude at preferential prices, following an agreement signed by the two countries last month. The oil, which will account for 10% of Jordan’s demand, will reach the country by truck. Before the US-led invasion of the country, Iraq supplied Jordan with 100,000 b/d of cheap crude.

Saudi Arabia Saudi Aramco has found a new gasfield south of the giant Ghawar field, in Eastern Province. The country’s oil minister, Ali al-Naimi, says the Kassab-1 field has production capacity of 16.2m cf/d, and is 50 km from the infrastructure of Ghawar. Enhanced oil recovery and other technological advances could increase the world’s recoverable oil reserves by 4.5 trillion barrels, according to the chief executive of Saudi Aramco, Abdullah Jumah, He told a seminar at last month’s Opec meeting that the oil industry was too conservative in its estimates of oil reserves and claimed that the world had so far consumed only 18% of total reserves, “not including oil shale”.

Yemen Four suicide bombers and one security guard died during co-ordinated terrorist attacks on oil facilities in the southeastern province of Hadhramout and the northeastern province of Marib, according to local reports.

Asia and Australasia

Australia

The DBP consortium, which owns Western Australia’s main gas pipeline, from Dampier to Bunbury, is to invest A$0.7bn ($0.53bn) on another expansion project. The line connects gasfields on Australia’s Northwest Shelf to customers in southern Western Australia. Construction on the latest upgrade will begin early next year and should increase capacity by around 100 terajoules/d to more than 700 tj/d. The new capacity should be on line by end-2008. Shareholders in the DBP consortium are Diversified Utility & Energy Trusts (60%), Alinta (20%) and Alcoa of Australia (20%).

Australia/Japan Japan’s Osaka Gas will sign shorter-term contracts for LNG from Australia’s North West Shelf project when its 20-year deal expires in 2009, according to local reports. The Japanese firm takes 0.8m t/y of LNG from the project. In future, says the company, its contracts will probably be for five or 10 years. The North West Shelf project has capacity of 11.9m t/y from four trains and supplies several Japanese companies. The Woodside Petroleum-led project is signing contract renewals with its partners.

China State-owned PetroChina says it found 250m tonnes of oil in the Daqing field, in the northeast of the country, in the first six months of 2006 – more than twice the amount it found in the whole of 2005. The company says the new reserves could help to slow the field’s output decline – production fell by 2% last year, to 22.26m t/y. The newest reserves are in four blocks, one in Taidong Qijiabei area in Heilongjiang province, where reserves are 73m tonnes. The second block, in the Talaha Changjiaweizi area of Heilongjiang, holds proved reserves of 60m tonnes. A field in Gulong Maoxing, also in Heilongjiang, holds proved reserves of 96m tonnes. The fourth field, in Woerxun area, in the Hailaer basin in Inner Mongolia Autonomous Region, has proved reserves of at least 30m tonnes. PetroChina has not disclosed the total reserves of Daqing, the country’s oldest oilfield. The West-East gas pipeline will operate at around 84% of its capacity in 2006, according to state-owned CNPC. CNPC’s subsidiary, PetroChina, operates the pipeline, which has nameplate capacity of 12bn cm/y. The company plans to increase capacity to 17bn cm/y by 2010. The 4,000-km line came on stream in 2003 and transits gas from Xinjiang Uygur Autonomous Region, in western China, to Shanghai and other eastern cities.

China/Vietnam The two countries will accelerate exploration of the shared Beibu Gulf, according to a statement. The communique, signed during a summit between the countries’ leaders in Beijing, also discussed ways of settling border claims in the Beibu Gulf.

India State-owned ONGC will drill 138 exploration wells this year, according to the ministry of petroleum. The new wells will add 147.5m toe to the country’s reserves, the ministry says. So far, the company has drilled just 24 wells. The government has transferred many of its powers as a hydrocarbons regulator to the Directorate General of Hydrocarbons (DGH), the oil ministry said last month. The government claims that the move will help the DGH to “oversee ever increasing E&P activities in India”. Among the powers that the DGH has assumed are monitoring of upstream activities, including coal-bed methane development.

Indonesia The state-owned energy company, Pertamina, plans to increase refining capacity in the country by 20% by 2012, the firm said last month. Capacity is 1.04m b/d. Pertamina says its expansion programme will begin next year and modify refineries to handle more sour crude. Most of the country’s refineries are designed to handle expensive sweet crude. Total investment in the projects will come to more than $1bn. The Bontang LNG plant, in East Kalimantan, will use coal and not natural gas as its source of power in an effort to save more gas for exports. The energy ministry says converting the plant could save 220m cf/d of gas – equivalent to 22 LNG cargoes a year. The conversion will cost $0.6bn and be on line by 2009.

Japan Russia’s Gazprom shipped its first cargo of LNG to Japan in August. The announcement followed news that Tokyo Electric Power had signed a deal to import LNG from Gazprom. Gazprom does not yet produce LNG and bought the 145,000 cm cargo, which it sold to Chubu Electric Power, from Mitsubishi for an undisclosed sum. A statement from Gazprom said it planned to “build up its presence in the Asia-Pacific region both by commencing long-term pipeline gas deliveries and through the supply of LNG”.

New Zealand The government plans to run tenders to find companies willing to hold oil on its behalf, so that the country can meet its obligations as a member of the IEA. The government will ask companies to hold these stocks in New Zealand, Australia, the UK, Netherlands, or the US. The tenders will close towards the end of this month. The IEA demands that its members hold in reserve the equivalent of 90 days of net imports from the previous calendar year, meaning the country must add some 3.29m barrels to its stocks.

Papua New Guinea Local Oil Search has signed an MOU with a subsidiary of the UK’s BG to investigate the potential for an LNG plant in the country. The study will focus on gasfields close to the Hides and Kutubu licences, the fields to be used for exports to Australia. Oil Search says it has some 1bn boe of natural gas, of which 40% has been committed to Australia.

Singapore Vopak is to increase the capacity of its 1.04m cm Sebarok storage terminal, constructing 216,000 cm of new capacity for fuel oil. The firm says the expansion will be ready for use by the end of 2007.

South Korea The country’s five oil refiners will invest a total of $10.4bn by 2010 to increase capacity for high-end, low-sulphur products, such as diesel and kerosene, according to the ministry of commerce and industry.

Vietnam Prime minister Nguyen Tan Dung has signed a bill to restructure the state-owned oil and gas company, PetroVietnam. The new company will operate as a parent-subsidiary corporation, with the state owning 100% of the parent company’s legal capital. Four of the subsidiaries will be limited liability companies, also wholly owned by the state. The restructuring will also allow PetroVietnam to operate in the financial services sector, in addition to its businesses in the energy industry. Earlier this year, the country launched a major expansion of its oil and gas sector, opening 17 offshore exploration blocks to tender. Importers of gasoline have been making mandatory tests for acetone content since the end of August and have told suppliers that they will reject shipments found to contain acetone. The new restrictions followed studies showing that acetone was responsible for widespread mechanical failures in Vietnam.