The Oil and the Glory

In Russia, another crisis point between BP and its oligarch partners

Steve LeVine — Mon, 28 May 2012 12:37:15 +0000

A rocky nine-year oil partnership between BP and four Russian oligarchs seems to have reached a tenuous new stage, with a source on the Russian side saying the highly lucrative-but-troubled venture has "run its course." The crisis comes in one of the era's stormiest corporate partnerships of any type, anywhere, one in which at one stage current BP CEO Bob Dudley was forced into hiding.

The stirrings from the Russian side of TNK-BP, including the resignation today of the partnership's Russian CEO, Mikhail Fridman (pictured above, left, with Russian President Vladimir Putin), suggest that it is attempting to fundamentally shake up the venture. What is not clear is whether this is simply a new phase of brinksmanship, or if, as another source close to the Russian partners said, "I think we are moving to the beginning of the end game in terms of the partnership." The partners themselves may know only that they are exasperated, and not whether this particular nadir is an inflection point. BP spokesman Toby Odone told me that the British company is "happy" with the partnership, and is not seeking to get out of it.

BP's often-dysfunctional relationship with its Russian partners has seemed rooted in cultural miscommunication: The buttoned-up Britons and the scrappy oligarchs have appeared simply not to speak the same language of business. And when those garbled translations have evolved into crisis, the oligarchs have usually won, given their close ties to the Kremlin and greater mastery of their home turf.

The lowest of the low points was in July 2008, when matters became so fraught that Dudley -- then running TNK-BP -- went underground against threats to his safety. The current bout of friction goes back to January 2011, when the Russian side accused BP of betrayal by going behind its back in order to obtain a huge Arctic gas deal with the Russian state. BP was attempting a big oil coup as part of its effort to recover from its disastrous 2010 oil spill in the Gulf of Mexico. But in doing so, it violated a key covenant with the Russians, who collectively are known as AAR. At this time last year, the sides were as far as they had ever gone toward divorce court, with BP making a $32 billion buyout offer to the oligarchs. But the divorce fell apart over yet another disagreement, and the tension went on.

Fridman's resignation, announced by TNK-BP, is a conspicuous signal that the discord subsided but hardly vanished. Fridman, one of Russia's most successful and skilled oligarchs, is chairman of Alfa Group, a holding company. A superlatively plucky competitor, Fridman has succeeded repeatedly in tying up BP in knots during their scrapes, whether in Russia or Europe. In last year's row, for example, Fridman appeared to be behind AAR's winning strategy of getting at least three European tribunals to declare BP's Arctic venture illegal.

Meanwhile, it cannot have sat well with anyone when ExxonMobil last August stepped into the breach, and itself snapped up the enormous Arctic assets at center in the brawl. And since then when Italy's Eni last month struck its own Arctic deal with Russia. And earlier this month, when Norway's Statoil got an Arctic deal, too.

The biggest sticking point in any divorce agreement -- if that is what is being sought -- may not be money. Oil prices were roughly the same last year as now, so the venture's cash-value may not be substantially different. Instead, it may be who gets the house and custody of the kids.

The Weekly Wrap -- May 25, 2012

Steve LeVine — Fri, 25 May 2012 21:19:07 +0000

How to incentivize bad behavior for the greater good: Last year, Mark Dubowitz, a Washington-based advocate of regime change in Iran, was mulling a conundrum with a colleague -- how to clamp painful oil sanctions on Tehran while harming no one else. They knew that members of both political parties opposed cutting off Iranian access to the global export market if it meant an oil-price surge. And that, since everyone thought a price spike was inevitable, nothing was consequently done as oil revenue continued to flow freely into Tehran. So Dubowitz and Reuel Marc Gerecht, his colleague at the Foundation for Defense of Democracies, looked for an improbable, sanitized cordoning of fiscal pain. That's when they hit an apparent brainstorm -- a simple form of game theory that they thought would work.

The game went like this: You divide players into the "white hats" and the "black hats." Global players likely to honor sanctions (the white hats) would be incentivized to do just that -- completely stop buying Iranian oil. But nothing would be done to discourage global players likely to ignore the sanctions from following those very dastardly instincts (the black hats, primarily China, but also India and perhaps another country or two). If everything worked right, Iran -- selling only to this latter, much narrower band of tough-bargaining buyers -- would wield much-diminished pricing leverage. It would consequently be forced to yield substantial discounts, putting great pressure on the regime's ability to finance itself.

In November, Dubowitz and Gerecht distributed the idea as a confidential, 32-page white paper to the White House and Congress, in addition to European capitals, titled "Oil Market Impact of Sanctions Against the Central Bank of Iran." Synthesizing the idea in an op-ed in the New York Times, the pair argued that to move Iran, one needed "to learn how to leverage greed." As Dubowitz told me over palak paneer and dal yesterday, "You give market power to the black hats and allow them to push down the price to earn money."

As we know, the current sanctions regime closely resembles the devilishly clever white paper -- you get obstinate forces and inveterate violators of norms to do what you want by appealing precisely to their baser instincts. Which made me wonder -- what other big problems might be solved using the same logic?

I drew up with a short list of names, along with possible vulnerabilities for use as leverage. How about you -- what problematic situation could you see shaken up?

Go to the Jump for the suggested list, and the rest of the Wrap

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1. Vladimir Putin

Vulnerabilities: Napoleon complex. Urge to strip publicly to his waist.

2. Wall Street bankers

Vulnerabilities: Greed. Being called greedy.

3. Mexican drug cartels

Vulnerabilities: Contempt toward other people with guns.

4. U.S. gun lobby

Vulnerabilities: Contempt toward other people without guns.

5. Climate change skeptics

Vulnerabilities: Contempt toward scientists afflicted with certitude.

Who's the baddest dude in oil? Oil and gasoline prices around the world have been plummeting, zeroing out a surge that began with the Libyan uprising in March 2011. How much lower can they go? A lot, especially if Russia and Saudi Arabia maintain their full-tilt pumping, and saturation of the global market. Lower still if an improbable diplomatic agreement is reached between international negotiators and Tehran, and Iran's 2.2 million barrels of oil flow back onto the market unimpeded.

Yet, when you talk about capacity to drive the oil price, who is bigger and badder -- Russia or Saudi Arabia, the world's two biggest producers? A few days ago, an agency with the acronym of JODI reported that it was Saudi Arabia -- it had zoomed past Russia and for the first time in six years had the largest oil production, Bloomberg reported Sunday. Saudi was now pumping 9.923 million barrels a day, compared with just 9.920 for the Russians, whose numbers revealed a rapid, 400,000-barrel-a-day falloff. A mere fractional difference you might say. But in the game of oil patch pride, fractions matter. The Saudi crowing was bitterly hard for the Russians to accept.

The next day, Russia struck back. Not only had its production not fallen, said Russia's Energy Ministry; it had in fact grown -- to 10.33 million barrels a day from 10.31 million barrels a day in December, Reuters reported.

Chris Weafer, chief strategist with Troika Dialog Bank in Moscow, suggested a Saudi motivation in massaging the numbers. "The Saudis never really forgave Russia for making no effort to support OPEC's efforts to prop up the oil price in 1999 or in 2008-'09," Weafer said in an email. "They accuse Russia of taking advantage of OPEC, i.e. mainly Saudi actions to support oil prices."

So who is the baddest? Let's call it a draw: Russia is still the biggest producer, but Saudi is the biggest exporter, at 7 million barrels a day.

The oil trader John Deuss, the oligarch Boris Berezovsky, and a sentence in a banking case

(This report is from Henk Willem Smits, an Amsterdam-based writer for quotenet.nl, who has followed the John Deuss criminal case.)

A long-running Dutch banking case has produced its first verdict -- a $409,000 fine and a suspended six-month jail sentence for John Deuss, once one of the most colorful figures on the global oil patch. Deuss was convicted yesterday of banking without a license and failing to report unusual transactions. The bank in question is the boutique First Curacao International Bank, which Deuss formerly owned and operated in the former Dutch colony of Curacao. While FCIB was based in the Caribbean, much of its activities were carried out in Deuss's small castle in Berg en Dal, a prosperous Netherlands village near the German border; Deuss doesn't have a Dutch banking license. And with whom were some of those unusual transactions? Ekaterina Berezovskaya, daughter of the London-based self-exiled Russian oligarch Boris Berezovsky. The judge called attention to Berezovskaya's shuttling of monies among accounts attached to her father's companies: "The transaction process points, in the opinion of the court, unmistakably to a suspicion of money laundering." Yet, Deuss did not report what was going on. Next up: Deuss faces a second trial on money laundering charges.

Deuss earned his fortune as an oil trader. His biggest trading coup came with the 1980s U.N. embargo against South Africa. Deuss earned hundreds of millions of dollars in fees by shipping oil out of Oman, shifting the oil mid-sea onto other, differently flagged tankers, and on to the South African port of Durban. In 1991, leveraging his close relationship with the Sultan of Oman, Deuss arrived in Kazakhstan aboard his private jet, accompanied by two dogs, statuesque models and British bodyguards, and forged a close relationship with the soon-to-be-independent republic's leaders. By the mid-1990s, Deuss was striking fear into the hearts of Western oilmen working in Kazakhstan, especially those working for Chevron. The California company had just acquired the rights to Tengiz, the world's sixth-largest oilfield. While Chevron possessed the field, Deuss held sole rights to any pipeline built to export its six billion barrels of oil. Chevron won the ensuing battle only after much intervention from then-U.S. Vice President Al Gore, and the timely death of Deuss' Omani benefactor in a car wreck.

The banking case stems from 2006 British allegations against Deuss for "carousel fraud," in which Great Britain was struck by a sudden outbreak of fraudulent VAT refund requests by cellphone merchants. Investigating, British authorities found that almost every suspect in the case -- some 2,500 people -- had an account at Deuss's bank.

In addition to Deuss, the judge sentenced his older sister Tineke, treasurer of FCIB, to a six-month suspended sentence. The sentences are lower than the Public Prosecutor sought -- prison sentences of 12 months for John and 10 months for Tineke -- because the court found no evidence of a criminal organization. Deuss lawyer Daan Doornbos said an appeal is being considered. "We wanted no less than acquittal," he said.

A public uprising over bad corporate behavior: I recently observed that there seems to be a diminishment of a traditional public stigma attached to corporate bribery. But a spate of attacks against perceived bad corporate behavior is making me reconsider. Wal-Mart, for example, is confronting a revolt against its board of directors over allegations of serious bribery in Mexico, detailed by a New York Times investigation; big shareholders want to expel members of the discount chain's board of directors. Then there is Chesapeake Energy and its high-flying CEO, Aubrey McClendon, the target of accusations of self-enrichment; some of his key shareholders, too, are seeking to eject board members. Investors in the U.S. and the U.K. have risen up as well against companies carrying out hydraulic fracturing, the method used to extract natural gas from hard shale, reports the Financial Times' Guy Chazan. Critics say fracking pollutes the air and ground water. Now, in the U.S., 55 institutional investors are pushing for "best practices" in the shale patch. In the U.K., the Scottish Widows Investment Partnership wants BP, Shell, ExxonMobil and Total -- it is a large shareholder in all four companies -- to reduce methane emissions from their drilling procedures. Are we watching a trend of greater investor and public boldness toward corporate boards?

One scenario for the U.S. and China to stop their brawling

Steve LeVine — Thu, 24 May 2012 11:39:42 +0000

Is it rational to fear resource war with China a decade or two down the road, when it surpasses the size of the U.S. economy, its appetites surge for metals, elements and energy, and its blue-water navy has grown in capability to secure large swaths of distant sea?

Yes, if you embrace the mainstream conviction that the pace of Chinese growth and call on finite resources are incompatible with consumption patterns in the U.S. and Europe. Under this scenario, the West and China are on a collision course: Starting in the next decade, one or the other must either begin to adapt to much-shrunken expectations, invent an entirely new set of fundamental fuels and high-tech building materials, or simply put up their dukes and fight it out.

But what if a new strain of thinking is correct, and we are entering a world not of fossil fuel scarcity, but of a surprising abundance of oil? The spreaders of this new narrative are tallying up production projections in a slew of new and long-known oil patches around the world -- Canada's oil sands; U.S. shale oil and deepwater Gulf of Mexico; deepwater Brazil; the Equatorial Margin of eastern South America; deepwater Angola; offshore Kenya; the Russian Arctic; and elsewhere (such as the Canary Island, pictured above).

They are suggesting by implication that, if all that pans out, the West and China will not be on the path of a smashup; rather, they will be having a much different conversation, which would center on a question of choice:

Until now, the push for clean-tech has been partly driven by a belief that oil is running out -- we had to develop new sources of energy, and fast, or go back to the forest. Now that there was no impending age of darkness, the U.S., China and others would have to decide on its merits -- do they want a cleaner world, one that is not heating up inexorably and sending seawater over the major cities and swallowing up island nations?

The reason they would have to hold such a conversation is that the corollary of this narrative is a wholesale swamping of clean-tech -- oil prices would probably drop so low as to eliminate the competitive economics of virtually any alternative energy source.

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Of course, this narrative works only if the stars align -- if the projections pan out, environmental and other regulatory hurdles are scaled, PR is carried out well, and so on. As context, Cuba last week delivered a dry hole to Repsol, which had hoped for more -- much more -- in an offshore belt north of Havana that it estimates holds 6 billion barrels of oil. The Cuban result underscores that oil projections are just that -- projections.

For those interested, I discussed these questions as part of a panel at the Center for National Policy, alongside Charlie Ebinger, who watches energy for the Brookings Institution, and Carter Page, a frontier investment banker.

The attempt to be too clever in the Iran sanctions

Steve LeVine — Wed, 23 May 2012 07:34:41 +0000

To understand the Iranian drama requires dual lenses. To the left are the nuclear talks, in which international negotiator Yukiya Amano has announced a potential breakthrough -- Tehran may agree to serious scrutiny of its nuclear research installations. To the right are Western-led sanctions, an attempt to motivate Iran as regards the left lens by slashing its main source of hard cash -- oil export revenue.

We are focused today on that right lens. But to dispense with the left first, Amano, head of the International Atomic Energy Agency, yesterday publicly announced the potential for a new day with Iran (above left, with Iranian nuclear negotiator Said Jalili). IAEA inspectors might for the first time in a half-decade take a look at all the sites, and interview all the players, that they have sought in order to remove the conclusion that Iran is bent on possessing a game-changing nuclear weapon. Later talks could focus on the end-game, which is elimination of Iran's weapons-grade nuclear material.

This announcement instantly unsettled my antennae. In most processes, announcements coincide with the peak achievement. According to that logic, the peak should be an actual binding agreement. That we get it when the peak is simply anticipated makes me suspicious that something less is forthcoming. Amano, himself a past doubter as to Iran's genuineness, says he perceives real movement this time.

Putting that aside, let's skip to the right lens -- the sanctions. As of July 1, they deny Iran access to the international banking and insurance system, without which it is very, very difficult to conduct a large-scale oil business. This blog has been skeptical that the sanctions will work -- the history of Iraq and South Africa, for example, shows that stubborn nations can work around apparently crippling sanctions. Iran specialists say the evidence is that Tehran is either anticipating or already feeling the pain, hence its presence and attitude at the talks. We are watching.

In an angle missed by everyone else as far as I can tell, the Financial Times' Javier Blas, James Blitz and Geoff Dyer report on Western sanctions tinkering. This is an attempt to address a serious flaw in the sanctions strategy that, if left untended, could seriously boomerang on the international community.

[Update: at Eurasia Group, David Gordon reminds me that their own Greg Priddy and Cliff Kupchan pointed out this problem, and its solution, a week ago at the New York Times a week ago. It is a must-read.]

The flaw involves tanker insurance, which no tanker will go without and risk the potential of billions of dollars in liability should there be an accidental spill or other incident. The tinkering is to waive the sanctions to allow insurance for certain volumes essentially to four countries -- China, India, Japan and South Korea. These are the biggest customers for Iran's 2.2 million barrels a day of oil exports. The last three have agreed to cut back their purchases, but still intend to buy some, which the West actually has encouraged. But the worry is that they won't buy any at all if there is no tanker insurance, or that rogue insurers could step in and offer so much insurance that the sanctions could become meaningless.

You see, in a perfect sanctions world, the punishment is bad for the victim, and does not inconvenience anyone else. However, should too much Iranian oil vanish from the global market, prices could surge, which would be very inconvenient, say, to President Barack Obama, currently a candidate for re-election, not to mention the struggling economies of Europe.

So the idea is to exchange this insurance tinkering -- they are calling it a shipping waiver -- for an Iranian "pledge" not to develop nuclear weapons. The trick is to do this in a way that does not appear weak, since pledges are not enforceable. To check this logic, I queried Daniel Byman, a Middle East analyst and professor at Georgetown University. Byman:

A pledge would be viewed with a lot of suspicion; [it would be] better than nothing, but most would doubt. And Obama could not publicly embrace this politically.

Yet Byman also thinks the story is credible. "Europeans are far more amenable to this than the U.S.," he told me. "It depends what the [Iranian] guarantees are in practice."According to the FT, the U.S. is together with Europe in the shipping waiver idea, the strategy being to lock in the cuts to Iranian exports, and no more. Here is what Citibank's Ed Morse told me about the report:

The shipping waiver is a bone. It enables the original sanctions to go into effect globally but enables those governments who limited the amount of oil being imported to have insurance coverage for that amount of oil. It reduces the impact of the unintended consequences of ancillary sanctions on insurance and makes for smoother relations with allies.

What troubles me is the attempt to be clever. When you try to be perfect in real life, you can end up with some imperfect results. Take our economic history of the last decade.

Will the Florida vote hinge on Cuban oil?

Steve LeVine — Tue, 22 May 2012 07:03:58 +0000

Florida's anti-Castro activists, along with both presidential candidates, can relax for the time being -- the latest attempt to strike oil in Cuba has failed. If Spain's Repsol had found what it expected underneath the Northbelt Thrust north of Havana, it could have seriously complicated politics in pivotal Florida, which decided the 2000 presidential race. Yet, Cuban oil politics may still be coming to Florida.

Few places in the U.S. are so tethered to the politics of another country as is Florida. Hundreds of thousands of Floridians -- Cuban-Americans -- continue to seethe at the Castro family's survival after a half-decade in power (waving above, President Raul Castro) and they expect their politicians to seethe with them. On the national scale, it is difficult to win Florida's 29 electoral votes if the Cuban-Americans are against you.

Hence the politics of Cuban oil. Estimates are that the Northbelt Thrust contains 6 billion barrels of oil. Repsol tried and failed to find commercial volumes in 2004, but was sure that the industry's vaunted new technology would succeed this second time. If its intuition was right, Repsol would have validated Cuba's aim of becoming the world's next petro-state. That oil would have buttressed the Castro edifice with a big new source of export dollars.

Because of U.S. sanctions, no U.S. technology was used in the drilling. Yet, some quarters predictably would have accused President Obama of allowing the hated Castros to get rich. Both he and presumptive GOP nominee Mitt Romney would have had to find a way to make the anti-Castro folks feel better. What neither would want to say is, "Get a life. It's called the free-enterprise system."

Because of this charged atmosphere, Repsol itself -- which has serious operations in the U.S. as well -- has been forced to lay extremely low, not talking at all publicly about its Cuban operations.

Alas, a few days ago, Repsol said the well was dry.

Yet no one can relax entirely - Malaysia's Petronas is in line to drill next in Cuba's waters, and the results seem likely well before November. Hence, Obama and Romney must keep watching Cuba.

The $5,250 game of fleecing the foreigners

Steve LeVine — Mon, 21 May 2012 11:14:05 +0000

As travelers to the world's frontiers know, it is not in the airport on the way into a country when the main fleecing usually begins, but on the journey out. You are at your most vulnerable -- laden with gear, trinkets and, if you are a businessman, country commitments such as infrastructure. You are usually in a rush.

Such is the case with Pakistani treatment of NATO aims to revive the use of Pakistani roads for the final 18 months of its deployment in Afghanistan. The Pakistani route has been closed since a NATO air strike last November killed two dozen Pakistani soldiers, and no one would apologize. But now NATO needs the roads to repatriate ground vehicles, aircraft and heavy equipment.

The negotiations to reopen the route, leading up to the current NATO summit in Chicago, has gone something like this: Let's see what you have. Ummh hmmh. We were charging you a $250-a-vehicle tax, but this is much more stuff -- very burdensome to our roads. Very burdensome. What would you say to $5,250 a truck? Twice that if it's a double-semi? Mmmm. And of course you will repair any damage to the roads.

President Obama and the U.S. military are offended. At the demanded rate, the total bill could come to hundreds of millions of dollars. U.S. negotiators have offered less, though neither they nor the Pakistanis have disclosed how much less.

The backdrop is that NATO is getting it from all sides. In 2011, the U.S. paid Pakistan about $17 million a month in taxes on trucks that carried about 40 percent of NATO cargo into Afghanistan. When things turned bad, the U.S. turned to what it calls the Northern Distribution Network, or NDN, a 3,000-mile network of roads starting in Europe, passing through the former Soviet Union, and terminating in Uzbekistan, from which cargo crosses over the Friendship Bridge into Afghanistan. NDN is three times the length of the Pakistani route, which starts in Karachi, and it consequently costs more -- six times more. NATO has been paying $104 million a month to transport its stuff across the NDN to Afghanistan, according to the Associated Press. Who gets this money? The countries along the way, plus the truckers.

But where do such situations end up? You know yourself -- you clench your teeth, reach into your wallet and pay. That is the price of adventures in frontier lands.

The Weekly Wrap -- May 18, 2012 (Part I)

Steve LeVine — Fri, 18 May 2012 15:57:45 +0000

The geopolitics of picking winners: Scorn is routinely heaped on the George W. Bush Administration for allegedly being in the pocket of Big Oil: Vice President Dick Cheney dined regularly with his old buddy Lee Raymond of ExxonMobil, Steve Coll writes in his new book on the company, and otherwise handed over the henhouse to the foxes. But this is not strictly true: Bush also put the government decidedly behind the development of technologies that could upend Big Oil -- battery-powered electric cars, and especially hydrogen fuel-cell vehicles. Positioning new technologies to challenge the economics of incumbents is always a tricky business, and so it has been with these non-fossil fuel approaches to locomotion. But Bush (pictured above at a hydrogen fuel cell event in 2003) decided to pour hundreds of millions of dollars into them anyway.

The laissez faire puritans don't like it, but governments around the world these days are in the business of choosing what industries and companies will win the day. The Brazilians like sugar ethanol and Petrobras, the South Koreans favor Samsung and their other national champions, and the Chinese hand-select for the entire economy. The common denominator in these examples is that a business decision is made by government, and generally maintained through successive national leaderships. Not in the United States, which has zigged and zagged according to the whims of who is in the White House or Congress. When critics of whatever stripe tell you that a given administration "has no policy" on (take your pick: Russia, energy, the Middle East), that is generally what they mean -- the White House has diverged from a prior policy that the critic embraces.

So it has been with the effort to upend how Americans transport themselves from place to place -- the Obama Administration's tastes have been the opposite of its predecessor's: From the beginning, it favored battery-driven electric cars, and shunted hydrogen fuel-cell vehicles to the back-burner. In fact, these are sister approaches -- both use electricity to move a car. Only, batteries store electricity produced elsewhere, while fuel cells produce their own from fuel (in this case hydrogen) stored on board. I have heard some disappointment from the fuel cell crowd -- it makes no sense, they say, to spend hundreds of millions of research dollars on hydrogen fuel cells, then overturn the process over policy. If your intuition tells you that batteries are a better bet, throw money that way too, but keep them going on parallel tracks. All of the above, as Obama describes it, ought to include fuel cells.

As I write this week at Slate, this line of thinking appears to have been heard in the Administration, which seems to have warmed up toward hydrogen fuel-cell vehicles. But to the degree that this change in attitude is carried through, it will have a steep climb. Fuel cells have the advantage of no range anxiety -- they can go 150-250 miles on a hydrogen fill-up, then refuel in a matter of three to five minutes. Only, while Germany is building hydrogen refueling stations like gangbusters, there are almost none in the United States. (There need to be about 11,000 at about $1.5 million each, according to General Motors.) The conventional thinking -- which I do not totally accept -- is that they may have to be stand-alone stations, because incumbent oil companies have no incentive to add hydrogen to their gas pumps when they themselves do not produce this fuel. From my side, I think that will probably be the case in the beginning, when the market is being formed; but once it gets going -- if it gets going -- entrepreneurs will step in and incentivize incumbent station-owners to add hydrogen tanks.

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Finally, John Voelcker, the dean of electric-car writers who edits Green Car Reports, takes issue with the suggestions, made in the Slate piece, that battery prices will be high for a long time, and that electric-car sales have been sluggish. Au contraire, says Volcker:

(1) Large-format lithium-ion cells for cars are likely to fall in cost at 6-8 percent a year (see this piece):

(2) I quibble with the trope that electric-car sales have been disappointing, in the choice of the words "sluggish start." Plug-in sales were always going to be low, just as hybrid sales were, in the early years. It's worth repeating that the Leaf and the Volt each sold more in their first year on the market (2011) than did the vaunted Toyota Prius (in 2000) (see this piece).

I agree with Volcker, not to mention that the chance remains for a major disruption that fundamentally shakes up the cost and sales equations. My main point is the wherewithal -- battery- and car-makers require deep pockets to survive this difficult period. It is important that they do -- a meaningful advance in batteries and electric cars would do more to shake up energy than any other single breakthrough -- and proactive government policy is the new market convention.

The U.S. war with everyone: Politics distorts policy, as every Russian, Israeli, Japanese, Pakistani and Egyptian knows. So it is as well in the United States, where the highly competitive election has led President Barack Obama to ruffle feathers abroad on issues that play well to his base. In January, Obama caused some friction with neighboring Canada by rejecting an expansion of the Keystone oil sands pipeline from Alberta to Texas; Obama is thought to support the pipeline, but must also attend to his environmentalist base in order to get the green crowd sufficiently excited to go to the polls in droves. Now, Obama is pursuing his favorite target of all -- the much-pummeled Chinese. In a decision yesterday, the Commerce Department slapped tariffs of up to 250 percent on Chinese solar panels, declaring that three companies are selling them in the U.S. at a price lower than it costs to make them. The decision -- sure to play well to labor, some high-tech industries, and generally to U.S. voters, who love to pick on China -- comes as friction is already high with Beijing on numerous fronts. How will these tensions resolve themselves? In the case of Canada, Keystone is likely to be approved after the elections regardless of who wins. As for China, the situation is more complex. But the Chinese companies have signaled that they already have a workaround in mind -- out-sourcing their business to other countries so that the panels will no longer be branded Chinese. For the next six months, look for more foreign shots across the bow.

We Russians are still here: Now that Vladimir Putin is back in the Kremlin, it is back to the bars and kitchen tables for Russia's electrifyingly rehabilitated political system, right? Wrong, said a diverse group of young activists visiting Washington this week. "We are here to say that we will go on. The demonstrations are not dead," Oleg Kozyrev, a well-known Russian blogger, told my wife and me over salad and oysters on DuPont Circle today. Kozyrev and eight other activists were speaking of the massive street protests that broke out in Moscow in the months since December elections. The group told its story to think tanks, news rooms, the National Security Council (where they met with Alice Wells, President Obama's senior adviser on Russian affairs) and the State Department. Next up? A demonstration June 12, the Russian national holiday, with an eye on regional elections scheduled in September. One is not entirely convinced -- it costs the formidable Putin nothing to allow more demonstrations that force him to take few reformist actions. Yet it is important that protesters do not intend simply to return to griping over drinks at home.

The Weekly Wrap -- May 18, 2012 (Part II)

Steve LeVine — Fri, 18 May 2012 15:55:50 +0000

Georgia without Misha

By Sam Patten

The writer was a political adviser to Saakashvili's United National Movement in the 2008 Georgian parliamentary elections, and more recently counseled Georgian opposition leaders Irakli Alasania and Bidzina Ivanishvili.

Outgoing Georgian President Mikheil "Misha" Saakashvili is a captivating figure, anyone who has met him would agree. Watchers of Georgia -- a nation that gets attention for its hosting of oil and gas pipelines, its willingness to challenge Russia, and its status as the closest thing to a democracy in the region -- might also concur that his larger-than-life personality overshadows his government's record of reform. That is why, at next week's Chicago NATO summit as well as elsewhere on stops throughout the United States, Saakashvili (pictured above, right, with New York developer Donald Trump) will be under pressure to avoid impromptu remarks.

But in Georgia, in Russia, the United States and elsewhere, it is Misha's infectiousness, positive or negative, that continues to define the discussion about the Caucasian country. Having worked both for and against him, I have come to believe that Misha's greatest gift for Georgia may be yet to come. If he steps back and allows his authoritarian system to relax, history and his own people will view him differently. He ought to step out of the picture, and watch his country evolve without him.

Several months ago, I was guiding a tour of international journalists through Georgia and providing my unvarnished view of local politics over dinner. I noticed one reporter looking at me knowingly, with a smile, which I returned with a quizzical look. "You're still in love with Misha, aren't you?" he suggested. The comment struck me as unnerving, especially as I was then representing the opposition and had just taken the crew to meet Saakashvili's billionaire opponent, Bidzina Ivanishvili. What haunted me throughout my most recent assignment in Georgia, is that there was an element of truth to the accusation. As $4 billion of foreign assistance in the wake of Russia's 2008 invasion of Georgia made perhaps more clear, in the West there is an enduring attachment to Misha despite his many flaws. Once the central figure in branding a modern Georgia, though, should Saakashvili cling to power in the next year, his legacy is sure to be measured only in diminishing returns.

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Passions have long driven politics in Georgia. The country's first post-Soviet president, Zviad Gamsurkhurdia, rode this instinct into a disastrous civil war from 1992-1993 before being overthrown and replaced by the more measured Eduard Shevardnadze (Gamsurkhurdia later committed suicide). When Shevardnadze's decade-long rule became mired in corruption and inefficiency, Misha was the face for change during the 2003 "Rose Revolution": he led supporters in storming parliament carrying only a rose. The symbolism is apt. One of the most famous ballads of the Russian pop icon Alla Pugachova, "A Million Roses," is dedicated to a Georgian painter who gave up his life's work in exchange for a million roses to win the heart of a Frenchwoman (doubly tragic in view of how lovely Georgian women can be). Yet in two terms in office, Misha is often seen to have traded his rose for an iron fist, and for many, the charm has worn off.

These same passions are a natural source of concern for Georgia's friends in the West. When Ivanishvili entered the political fray late last year, he summoned the foreign diplomatic corps to his ultra modern palace perched on a cliff over the capital city of Tbilisi. Most of those attending had never met him before, and the first question from U.S. Ambassador John Bass was about Ivanishvili's intentions with regard to inflaming the country's "political temperature." Bass' rationale was straightforward: Until that moment, opposition to Saakashvili had consisted of street protests marked by demands of "Go, Misha, Go." Saakashvili's phenomenally high personal approval ratings tell a different story. Misha has not suffered the same dip in popularity as his arch-nemesis, Russian President Vladimir Putin, and Georgia's opposition would be wise to heed the lessons of this. Love him or hate him, taking pot-shots at Saakashvili's frequently bizarre behavior is not a winning strategy. Only one-fifth of Georgians hate Misha's guts, and this is a dis-temperate lot more given to grumbling and the occasional street demonstration cum promenade than actually governing.

Those who think politics in the U.S. have become too polarized have never been to Georgia. It is not enough to win or lose a campaign: The "loser" must be utterly vanquished and the "winner" a cheater. When one of the more promising figures in the country, Irakli Alasania, lost the Tbilisi mayoral race in 2010, he took the unprecedented step of congratulating his opponent. What struck me and a handful of other outsiders as a classy move was, to the hard-core opposition, tantamount to treason. Saakashvili's party does take unfair advantages, it is true, but the persistent denial of reality in which both sides indulge themselves does the country and its citizens little good. Instead, it's time for Georgia to do what, for at least years, it has boasted to do: teach, by example, its neighbors something about democratic politics, fair competition and peaceful succession.

In order to do this, the opposition needs to take the first step in de-personifying politics. Ivanishvili needs thicker skin when it comes to personal attacks. After all, he voluntarily entered this often unpleasant game. Laundry lists of Misha's various iniquities, real and imagined, will only bore voters who are more concerned with what is or isn't on their kitchen tables. What the incumbent government professes to have done with its two terms in office is subject to examination, whether that means delivering a "Georgia Without Poverty," as Misha promised four years ago, or having successfully defeated corruption, as frequent full-page advertisements in the Economist insist it has. The opposition could learn something from the man whose government it seeks to replace: Listen carefully to people, not just urban elites, and make realistic proposals that address their concerns. Georgians may think Saaksahvili should give Ivanishvili his citizenship back (it was arbitrarily stripped when the latter entered politics last October), but they won't go to the barricades for it, I am almost certain.

As the man holding all the cards, though, Misha himself can do a lot more to earn himself the place in history he now so covets. Will he "pull a Putin," regional analysts anxiously ask one another -- engineer his own appointment as prime minister when his second term as president ends next year? Probably yes, but the outcome of October's parliamentary election could provide a real check against his increasing authoritarianism. To be as big a man as he was once believed to be, and to serve his own legacy better, Misha had better not stack the deck even further before October. The first recipient of a Muskie Fellowship to go on and lead his country, Saakashvili could do much to impress his once and current sponsor by showing a little generosity in the next five months: easing up on the media and one-sided prosecutions of his opponents and, when in doubt, doing what it takes to level the playing field. These things will be noticed.

The Chicago Summit is unlikely to end with any concrete pledges about when Georgia will join NATO. Its outcome is not the most important question for Georgia. Related to Georgia's eligibility for NATO is whether or not it is able to move beyond the politics of personality, and democratic governance is a front and center prerequisite written into the NATO charter. Diplomats want Misha to relax in the hopes of avoiding another war in the South Caucasus. I want Misha to relax for the sake of a country well-deserving of the West's love. Georgia can do better, but if it is to do so, it can no longer be all about Misha.

Celebrity scientists suffer the same bumps as the high-tech hoi polloi

Steve LeVine — Thu, 17 May 2012 15:41:09 +0000

Sports car companies, fashion designers, Silicon Valley startups -- these are the natural stuff of celebrity businesses. But battery-makers? Not so much -- unless you are A123 Systems, in which case, with your MIT superstars, you have scaled the high-tech world, and ended up in the rarefied air. But such company is transitory -- high-flyers come and go (Mark Zuckerberg: take note). For Boston-based A123, which went IPO a little over two years ago at a share price of $13.50, this week made a filing with the Securities and Exchange Commission that it may not survive, and sold today as low as a humbling 87 cents a share. (pictured above, better days: At the White House in 2007, actor Rob Lowe climbs into a car fitted with an A123 battery.)

A123's straits are notable for what they say about the global advanced battery business. If scientists somewhere in the world -- China, Japan, South Korea, the United States are all in this technological contest -- can create a big leap in battery capability, they could overturn energy and geopolitical presumptions. Companies and countries relying on the income stream of fossil fuels would be at once undermined. New companies and industries would rise to importance, and geopolitical influence could shift away from the Middle East.

But, quite apart from the issue of whose technology can or should prevail, the industry consensus is grim: Almost all current advanced battery and electrified-car companies are suffering the downside of being first-movers. They are far early into the market, which is fine for those with deep pockets -- after all, this is a normal part of the new product cycle (think cell phones and flat-screen TVs). But most start-ups do not have that luxury. Apart from Asian companies that make consumer batteries such as the AA, and the Toyota Prius, battery and car company products are too expensive, generally not consumer-ready, and have met slow sales.

A123 was started in 2001 by MIT professor Yet-Ming Chiang and Bart Riley, both of them coming from American Superconductor, which Chiang co-founded. For those paying attention, the company became synonymous with the notion of a new battery-driven age. Starting in 2006, it began to rack up joint venture contracts with companies including General Electric, Chrysler and Shanghai Automotive. In 2009, it was awarded a $249 million matching grant by the U.S. Department of Energy as part of the Obama Administration's effort to jump-start a U.S. battery-making industry.

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But in March, the company suffered a setback when its batteries were responsible for the aborted rollout of a plug-in hybrid vehicle by one of its key customers, Fisker Automotive. A123 had to recall its lithium-ion car batteries, costing it $66.8 million. This week, the company said it lost $125 million in the first quarter of the year. In its SEC filing Tuesday, the company said its revolving line of credit has terminated. It said it is hoping to raise $50 million by selling bonds by tomorrow. But A123 added:

There is no assurance that the company will be able to obtain such financing on favorable terms, if at all, or to successfully further reduce costs in such a way that would continue to allow the company to operate its business.

The statement appears to be aimed at legal damage control in case its finances go entirely south. It does not sound its own death knell, nor that of the battery and electric-car age -- not for the U.S., nor for any of the Asian contestants. The trick will be who can survive this valley of death.

What's wrong with bribing a foreign official or two?

Steve LeVine — Wed, 16 May 2012 15:26:30 +0000

Last month, the Financial Times reported that Goldman Sachs-backed Cobalt International Energy had partnered up with a local Angolan company as it sought rights to drill a world-class offshore oilfield. The company to which Cobalt offered the equity stake was partly owned by three senior Angolan officials, the FT wrote. Three months ago, Houston-based Cobalt went on to declare a discovery in a well called Cameia-1. Now, U.S. authorities are investigating Cobalt. [Update: Cobalt responds below.]

Angola has received much attention on the issue of payoffs in recent months. Global Witness, the U.K.-based investigative firm, has issued a report about $550 million in "social payments" provided to the state-owned oil company Sonangal by Cobalt, BP and a private Angolan-Hong Kong joint venture.

But this is just the way the oil business works on the frontier, as I write today at The New Republic. In December 2010, for example, Halliburton paid $35 million to Nigeria to settle a bribery case involving a big liquefied natural gas project that had drawn in former Vice President Dick Cheney. And not just the oil business - what makes the subject topical right now is a New York Times allegation of extensive bribery by Wal-Mart in Mexico.

I started looking at the phenomenon while based on the Caspian Sea in the 1990s. At the time, oil executives' faces would go uncomfortably pale when you mentioned a certain known go-between for bribes to senior Azerbaijan officials. In Kazakhstan, feet would shuffle and voices get rattled at the mention of James Giffen, the New York lawyer who later was charged with serving as a conduit of foreign oil payoffs to President Nursultan Nazarbayev. Two years ago, Giffen was acquitted in federal court in New York -- he did not contest the facts of the bribery accusations, but said he was innocent because the whole time he was serving his homeland, slipping inside dope to American intelligence agencies.

Things have changed. I talked to Joseph Covington, a Washington lawyer who in the 1980s headed the foreign bribery section at the U.S. Justice Department. He suggested that, unlike just a few years ago, American businessmen are no longer terrified of the Foreign Corrupt Practices Act, which outlaws bribery of foreign officials to obtain business. In the Caspian days, businessmen would fess up to bribery and pay for an extensive internal clean-up to avoid prosecution. That still is usually the case, but after Giffen showed that with the money and the gumption one can beat the FCPA, we are seeing more cases of executives electing to fight.

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Covington says he advises clients to strictly follow the law, but that if they find that someone in their organization violated the FCPA anyway, that they not turn themselves in.

First, he said, there is less of a stigma about foreign bribery than a few years ago because "lots and lots of companies have been identified as having this problem over the last five to 10 years."

Second, Covington thinks that the Justice Department has become unreasonable by slapping large fines on violators whether or not they have confessed and gone to great lengths to remediate the problem. "I don't recommend disclosure because I just don't think the benefit is there," Covington said. He said:

I've gotta have a fairly high degree of risk this is going to get detected and prosecuted and some other factors, and weigh it in the balance. I've changed because the enforcement has.

So bribery will go on, many times suggested not by the locals, but by the foreigners competing for prized oil and other business. It is reality in many places, which look at payoffs not as bribes but as compensation for allowing a deal to go through. If Western authorities want to reduce this, they will have to scale back the punitiveness for the folks who come clean.

Cobalt responds: Cobalt emailed the following letter this evening. The lead paragraph has been corrected to show that a company in which the three Angolan officials allegedly held interests, and not directly the trio themselves, received a stake in the offshore oil venture.

Steve,

I just read your piece in Foreign Policy entitled "What's Wrong With Bribing a Foreign Official Or Two?" Let me start by clearly stating Cobalt absolutely agrees that bribery is illegal and ethically wrong and we have not and will not engage in such behavior. Unfortunately, your piece misrepresents the facts and misinterprets the Financial Times story. We hope this was unintentional but felt it important to bring this to your attention. To be clear, it is categorically false that Cobalt provided equity stakes to three senior Angolan officials -- and the FT article did not state that Cobalt did, or even remotely imply so.

The opening line of your piece leads the reader to believe that Cobalt knowingly approached Angolan officials and offered them equity to secure drilling rights. While it is true that the FT reported allegations that Angolan officials owned stakes in one of our partners in Angola, they did not intimate that there was a direct connection between the alleged stakes and Cobalt securing drilling rights. The reality is that Cobalt did not play a role in selecting the partner companies. As is customary in the industry, the concessionaire determines who the partners will be.

Prior to the publication of the FT article, Cobalt went on the record asking for any documentation that the Financial Times could offer which was at odds with Cobalt's position. The Financial Times declined Cobalt's repeated requests for supporting documentation.

Cobalt began its investigation into its Angola business relationships in 2007 and enlisted the services of two international law firms to perform the due diligence to ensure that the company was in full compliance with all U.S. and Angolan laws. Cobalt strongly refutes any allegations of wrongdoing in its operations in Angola and stands behind its principles of full compliance with all laws in all jurisdictions in which it operates. In fact, well over a year ago, it was Cobalt, not the Financial Times, that publicly disclosed the existence of these allegations regarding a partner in Angola.

As such, we request an update of your article to reflect the truth about our operations in Angola which the readers of Foreign Policy demand and deserve, or, at the very least, a formal correction.

Regards,

Jeff

Jeff Starzec

Senior Vice President and General Counsel

Cobalt International Energy, Inc.

The air is crazy bad in Beijing, and no great shakes in Shanghai, either

Steve LeVine — Tue, 15 May 2012 05:09:41 +0000

Last year, the U.S. Embassy in Beijing caused a sensation when word spread that it was publicly reporting the air quality in Beijing. Chinese micro-bloggers cited an hourly Embassy tweet that often sharply diverged from official government monitoring. Official Beijing city reports generally showed healthful air in the capital; the Embassy meanwhile sometimes called the Beijing air “crazy bad.” After much criticism, the city vowed to use the same evaluation method as the embassy, reflecting the presence of especially dangerous particulates in the air.

Now, U.S. diplomats are at it again. On Saturday, the U.S. consulate in Shanghai launched a separate hourly Twitter feed of the air there. James Areddy of the Wall Street Journal notes that the initial readings were not reassuring: “Unhealthy, unhealthy, unhealthy.” The official Shanghai government reading -- good air.

The griping has already begun. The Shanghai Daily quotes Shu Jiong, an environmental professor at East China Normal University, who “questioned whether it was proper for the Consulate to use the U.S. standard to evaluate Shanghai's air quality.” Shu told the paper’s reporter: "The two countries have different demographic situations and are at different steps of development, so it will be more suitable to use the Chinese standard to evaluate the air quality in Shanghai."

This is no mere sniping. Pollution has been behind a surge in public discontent over the last couple of years, which is an unacceptable red line for Chinese authorities, who fear social instability and the threat it could pose to their political power. It is a principal reason why China is set on curbing coal consumption, and introducing green technologies into the economy.

The timing of the rollout of the Shanghai feed is likely to be met with greater than usual suspicion from some Chinese authorities. Already, this is an exceptional year for Chinese political turbulence, much of it linked to the U.S.

The Chinese Communist Party continues to be roiled by the fall of Bo Xilai, a senior regional Chinese official whose police chief triggered the trouble by disclosing a sensational murder plot to U.S. diplomats; reports this week are of another political victim -- Politburo member Zhou Yongkang, ousted as the head of the internal security system, reports the Financial Times.

There is also the awkward matter of Chen Guangcheng, a dissident who, after being taken in by the U.S. Embassy in Beijing, is seeking to leave along with this family to the United States. Beijing also partly blames the U.S. for rising friction with its neighbors over rights to the South and East China seas.

A possible saving diplomatic grace: The Shanghai readings are nowhere near as bad as those from Beijing.

The global failure to shut up

Steve LeVine — Mon, 14 May 2012 10:49:14 +0000

In New Paltz, N.Y., 80 miles north of Manhattan, Richard Parisio laments the disturbance of the "sweet pure song of the white-throated sparrow." The culprit? Hydraulic fracturing, Parisio writes in the New Paltz Times -- "noise, night and day, from droning compressors, clanging drilling rigs, roaring gas flares."

Parisio worries that not just sparrows, nor their human appreciators, will be left the lesser for this state of affairs. There are the hermit and wood thrush, who could be "driven from their breeding grounds, unable to hear each other's songs, so crucial to courtship and the establishment of territory." And what about the bats? Will they manage to "find their food by echolocation amid all the background noise"? Parisio fears the answer may be no, which could trigger unknowable consequences such as a rise in the population of mosquitoes when their bat predators are fewer.

The new age of energy is making our lives less tranquil. Writer Robert Bryce has discussed the whoop-whooping of wind turbines, the "headaches, ear pain, nausea, blurred vision, anxiety, memory loss, and an overall unsettledness" suffered by those who live near them, not to mention the "fatigue, apathy, and depression, pressure in the ears, loss of concentration [and] drowsiness." This is a global phenomenon, says Bryce over at the National Review, a malady in "Missouri, Oregon, New York, Minnesota, Wisconsin, Britain, Australia, Canada, Taiwan, and New Zealand."

One can shake one's fist at windmills (pictured above, Copenhagen), but business is generally a cacophonous thing. Going back as far as one would like, merchants have probably always barked out the virtues of their wares, and some economic activities have been noisier than others. As we know, for instance, the racket of horse-drawn wagons in 18^th and 19^th century London was so ear-splitting that one simply could not speak audibly on the street.

Alas, the horses are gone, but the din remains. Across the globe, we are subject to disrespect of tender ears. At the Economist, there is gnashing over the defiant rustling of papers and cell-calling in the quiet cars of commuter trains across the Commonwealth, from Great Britain to Australia. Even in the joyfully raucous bazaars of Istanbul, there is a feeling that the shouting of merchants may have gone too far, reports the Wall Street Journal.

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I grew up in a voluble house in which the persuasiveness of an argument among brothers could be gauged by how loud one could make it, or so we thought. Yet when I returned to the United States from a long stint abroad, I was startled by how much noisier the United States seemed when compared with memory. In cafes, in supermarkets, and in boutiques, there seemed no evading music at a decibel level that I associated with boyhood Saturday evenings at the Whiskey a Go Go.

On this blog, I protested this degradation. We seemed to have become unfavorably like the Soviet Union, where public places were generally inundated with intrusive music, which many of us perceived as yet another instrument of political-control -- if plotters could not hear one another, how could they co-conspire?

But what was our excuse? There was none. We simply seemed to have drifted down a slippery, silentless slope without taking account of it.

Some feel the answer is the pocketbook -- that the loudness-challenged among us will muffle up only if it hurts in the wallet. So it is that Istanbul has instituted fines on traders who cannot keep to a reasonable yowl, the Journal writes.

Yet one can go only so far -- how would one measure excessively loud paper-rustling on the train, for example? For that reason, the Economist suggests charging more for quiet car tickets, which seems unjust in that victims are then paying for the crime of the miscreants, but it still may come to that.

And what of the din of energy-production? Vestas, the wind-turbine manufacturer, has griped that its business is subject to unfair noise restrictions in windy Denmark, which is something of a laboratory and trend-setter for wind-power. It says it is trying to make its products quieter, and that communities must be reasonable. Given their own tortoise-paced approach to community management, shale gas and oil drillers, one suspects, will move no faster, and probably slower, than turbine-makers in addressing the racket they produce. And then will come mosquito season in New Paltz.

The Weekly Wrap -- May 11, 2012 (Part I)

Steve LeVine — Fri, 11 May 2012 16:02:06 +0000

Apart from the entertainment value, what is the big deal about the saga of Aubrey McClendon, the CEO of Chesapeake Energy, and his use of the company as a piggy bank? The big deal is that, more than any single individual apart from the innovator George Mitchell, McClendon is responsible for the shale gas boom that is shaking up geopolitics. Of course, McClendon's hijinx do not change the geopolitical shakeup, but they are a window into the type of personalities who make up the wildcat boom (pictured above, McClendon, left, owns the Oklahoma City Thunder professional basketball team along with Clayton Bennett, right). As with most such revelations, the kernels and sometimes the whole kit-and-kaboodle are detailed in the fine print of a company's annual 10-K filing with the Securities and Exchange Commission. The thing is, few people bother to read such material -- apart that is from the folks over at footnoted.org, whose whole business is to do so. The footnoted folks have been talking about McClendon for awhile now (such as here, here and -- from today's Website -- here). I asked footnoted's Theo Francis for some insight into Chesapeake. His reply follows.

O&G: What could and should a Chesapeake investor, given an ordinary read of the company's 10-K annual reports, have known about Aubrey McClendon's compensation package, perks and financial dealings in recent years? As a followup, if that same investor elected to dig deeper and follow the trail of citations, what would he or she have been able to know?

Theo Francis: Piecing it together can take some work and patience, but it's there, mostly in the annual proxy filing, with updates scattered across other filings over the course of a year.

A snapshot of McClendon's compensation in 2011 (primarily from an April 30 amendment to the company's 10-K filing) illustrates what's available: Salary of $975,000; a $1.95 million discretionary bonus -- meaning it isn't based on any kind of performance measures, but just on the board's general sense of how well he's done; $13.6 million in stock awards; and $1.3 million in perks and retirement-plan contributions. Those perks are telling too: $500,000 in free personal trips on company aircraft (on top of another $650,000 in jet rides for which he reimbursed the company), $250,000 in personal accounting services provided by company employees (about which more in a moment), and $121,570 in personal security benefits. Total for 2011: $17.9 million. Over the last three years, McClendon's compensation has added up to more than $57 million. Plus, Chesapeake doesn't even count some perks, because there's ostensibly no incremental cost to the company, including for an unknown number of tickets to sporting events. McClendon has also built up $7.5 million in a deferred-compensation plan, a kind of IOU from the company.

Which brings us to the related-party transactions, the ones that the company did disclose: Buying McClendon's map collection for $12.1 million in 2008 (a transaction that was ultimately unwound after a lawsuit); paying the Oklahoma City Thunder basketball team, in which McClendon personally owns a 19.2% stake; $2.9 million to $4.1 million a year for more than a decade for stadium naming rights, plus another $36 million over 12 years for sponsorship and advertising costs; and $4.6 million on tickets and games in 2011-12. There's also the board's decision in 2009 to ease the stock-ownership requirement and front McClendon $75 million toward his investments in the company's drilling operations, after he had to sell pretty much all his Chesapeake shares in a margin call the year before.

And then, of course, there's the long-standing "Founder Well Participation Program," which allowed McClendon to invest alongside Chesapeake in its drilling operations, and which is what's at the heart of the current series of embarrassments for the company. The disclosure about the program in last year's proxy was 1,500 words, which sounds like a lot, and there is a fair amount of detail: How the program works (very generally), why the board does it (with extra business clichés) and so on, as well as an estimate of the present value of McClendon's interests in the wells ($308 million at the time) and a table showing annual revenues, capital and operating expenditures, along with cash-flow from the program for McClendon. But there was an awful lot that wasn't disclosed. Since the original Reuters report, the news of an informal SEC inquiry, the company's decision to wind down the well participation program, and so on, the company has produced a lot more information about the program, McClendon's borrowing and other details, in a series of filings and statements.

The bottom line, I think, for any reasonable outside observer -- and I'm talking about before the Reuters bombshell -- is that Chesapeake feels like a company run by McClendon, for McClendon and his buddies. As long as the company delivered for shareholders, there was a good chance that things could proceed with only minimal reforms for quite a while. But there's very little sense here that these people ever stopped and thought, ‘You know what, we're playing with other people's money; maybe we should rein it in a little.'

And as we've seen time and again over the years, that certainly sets the stage for a revelation like the one we got from Reuters.

Same framework -- what went undisclosed that we've learned about in recent weeks?

Quite a bit, and that's why you've seen shareholders react so badly.

For me, Chesapeake had the feel of an insouciant bad boy: It seemed like it was being pretty brash and up-front about its extremes, and that shareholders were for the most part shrugging it off. We always worry about what's not disclosed, and on one level, when a company flouts conventions to the degree that Chesapeake has, you have more to worry about (with Enron being perhaps the ultimate modern-day example). But after a while, it's easy to think, ‘OK, look, they almost got away with the map thing, and although they had to unwind the sale, there wasn't too much of a fall-out; if I were they, I'd just lay it all out and shrug when the good-governance types whine.' Maybe that's what they're doing -- you don't want to count on it, but heck, I don't own the stock, so I can let it lie.

Instead, the new revelations suggest there was, and is, a lot more lurking below the surface. There's a single line in last year's proxy that suggests McClendon might be borrowing under the Founder Well Participation Program, saying the program "does not restrict sales, other dispositions or financing transactions" involving his interests in it. What's missing is any indication that he might have more than $1 billion in borrowing backing the program, that his lenders might also do business with Chesapeake (putting him in a potentially awkward situation, to say the least), or that -- as the original Reuters article suggests -- his personal loans might require him to take certain actions that put him in conflict with Chesapeake's shareholders. That's a lot.

Now there's a suggestion, in an article by The Wall Street Journal's excellent Russell Gold, that Chesapeake may not have fully disclosed some $1.4 billion in off-balance-sheet arrangements of its own. That would seriously ratchet up the disclosure failures, in my view.

Go to the Jump for more of Theo Francis and the rest of the Wrap. [[BREAK]]

What is unusual, and what is de rigeur, about the disclosures? Is there a tradeoff -- if you throw in your lot with a wheeling-and- dealing risk-taker such as McClendon, in which the upside is there for the very reason of that part of his character, are these downsides just part of the calculus? Or is what we have learned even outside that pale? Do McClendon or Chesapeake differ materially from other big shale gas wildcatters?

I'd say he stands out not just from other big energy tycoons but also from among the other flashy, perk-laden, royal CEOs. McClendon and Chesapeake are a beautiful example -- from the compensation, conflicts and corporate-governance perspective, anyway -- of the perils of the imperial CEO. Accounting and auditing experts have called imperial CEOs a red flag for years -- the my-way-or-the-highway, brash, domineering CEO of Hollywood. We don't look so much at how executives run their companies except through the narrow lenses of their pay and governance practices. But from that angle, McClendon is a prime specimen. And the Founder Well Participation Program isn't the kind of thing we see very often.

So on the one hand, a lot of what we saw at Chesapeake was unusual. On the other hand, it was mostly unusual by degree. A lot of companies pile on the perks; Chesapeake just did so to an extreme. Too many companies have one or two or three questionable related-party transactions; Chesapeake seemed to make them a specialty.

Not surprisingly, these kinds of extremes can seem a little more common where you find flashy risk-takers -- casino companies, energy exploration and production companies -- but I'm not sure that's necessarily accurate. Barry Diller collects pay and perks from multiple companies, and title insurer Fidelity National Financial (FNF) paid more than $450,000 in membership and other costs to a ranch owned by its executive chairman, on top of more than $40,000 to wineries and restaurants he owns. So it can crop up in a lot of places.

Is it a tradeoff? I suppose it can be, but it isn't a necessary one. Plenty of larger-than-life and extremely successful CEOs manage to avoid this kind of thing. Warren Buffet is perhaps the obvious example. Steve Jobs was another (though the company did once give him a free airplane.) They might be extremes in the other direction -- high-performance executives who pare their pay and potential conflicts back to the basics. But there's a lot of room between them and McClendon.

Is there anything super-interesting in the SEC documents on which you guys have reported that has not yet hit the mainstream news?

One of the things that struck me about Chesapeake early on, and which I think hasn't gotten enough attention, is who's been minding the store. The board of directors is ultimately responsible for overseeing management. McClendon may have been chairman, but the board, and each director, has an obligation directly to shareholders, and is supposed to watch the company on their behalf. Even if a board at some point argues that its CEO was misleading them, it was their job to ask the tough questions and to be comfortable that their CEO isn't misleading them; did they go far enough?

At Chesapeake, these guys made big bucks: Every director who served the full year, save one, made more than $550,000 in 2011, and the exception (Charles T. Maxwell, who's retiring this year) made more than $386,000. That's high, for any size company. Most of it is stock -- $230,000 or more in most cases -- which makes some corporate-governance experts happier. But most of them also took home more than $150,000 in cash, and another $150,000-plus in personal flights on Chesapeake's NetJets account. Each director gets up to 40 hours of flights a year, on top of flights to board meetings (spouses included, plus a tax gross-up for spousal travel). That's not a very common perk for independent directors, much less an entire board.

Nor are they paid so handsomely for a particularly onerous job: This board met four times in 2011, and held eight conference calls; none of the committees met more than four times in person, or more than 10 times counting phone calls. There are higher-paid directors around. A number of companies have individual directors who make more than $1 million; a very few companies have boards that average $600,000 or more apiece. But Chesapeake's directors are very well compensated for what is very much a part-time job.

Even in less clubby circumstances, with a less dominant executive, you can imagine it being pretty difficult to make too many waves when you're being taken care of so well. That's not to say highly paid directors are being paid off to turn a blind eye, but I think the threat of complacency rises with pay beyond a certain point.

Your call: do McClendon and/or Chesapeake survive?

Probably the most eye-opening development for me in all of this -- other than the sheer magnitude of the $1 billion in loans, which seems to have swollen even as the market showed its disapproval in recent weeks -- are the revelations about the board and what it knew. First, we were told the board was "fully aware" of McClendon's loans. Then it turns out the board was only "generally aware" but didn't know specifics.

It's not very reassuring for investors, and it can't be fun for the directors (however much they might have brought it upon themselves). Even congenial boards can turn on a CEO when they feel they've been burned -- left in the dark, misled -- or when they feel their own necks are on the line. Look at what happened to Hank Greenberg at AIG when Eliot Spitzer and the SEC came sniffing around in the middle part of the last decade. But a key word here is "can" -- they don't necessarily turn on the CEO that has fed them for all these years. And it isn't clear yet how much pressure this board is going to face -- real pressure, in the sense of shareholder backlash or regulatory scrutiny.

If they really want to clean things up and regain investors' trust, McClendon may well have to go. Much of the board may have to go, even if gradually, if they really want to be convincing about it. Chesapeake's annual meeting is usually held on the second Friday in June. Shareholders are sometimes willing to forgive a lot as long as the share price broadly heads in the right direction. We'll see.

Go to Part II of the Weekly Wrap

The Weekly Wrap -- May 11, 2012 (Part II)

Steve LeVine — Fri, 11 May 2012 16:01:53 +0000

The geopolitics of bananas, China and over-heated rhetoric: Are oil rigs a strategic weapon? The answer is apparently yes if you are China, which has joined Russia in the league of large nations carrying big petro-spears. The South and East China seas have long been a source of friction between China and its neighbors for reasons of Beijing's naval aspirations, the promise of oil and gas riches underlying the waters, plus the occasional kerfuffle over fish. For a month, China and the Philippines have been in a standoff over a fishing ground called Scarborough Shoal. But now the gloves are off. China has begun to block imports of Philippine bananas, and to suspend tourism in the Philippines. On Monday, an anchor on China's state-run CCTV went so far as to say -- twice -- that the Philippines is in fact a Chinese territorial possession, reports Time's Hannah Beech. Two days later, we heard from Wang Yilin, chairman of the state-owned oil company Cnooc, speaking on the usually staid occasion of the launch of new oil drilling, in this case in the South China Sea off the coast of Hong Kong. "Large deep-water drilling rigs are our mobile national territory and strategic weapon for promoting the development of the country's offshore oil industry," Wang said, according to the state news agency Xinhua. Erica Downs, the China oil watcher at the Brookings Institution, told the Wall Street Journal's China Real Time blog that she suspects that Wang is addressing either domestic political or financial audiences -- seeking favor or more financial support. Look for more such tantrums given the numerous political flaps going on simultaneously in China, along with the scheduled turnover of national leaders.

Abundant oil, and the hope of serendipity: Is the problem with the oil abundance narrative -- the talk that the U.S. is on the cusp of energy independence -- that it relies too heavily on everything going right? Perhaps. Frank Verrastro -- who runs the energy program at the Center for Security and International Studies, and was formerly with Pennzoil, and before that in numerous federal government positions -- thinks that a multitude (and probably too many) stars need to line up for the abundance folks to have their way. There is much oil below ground to be sure, specifically in the shale oil of North Dakota and Texas. The hangups come in extracting it -- little matters such as the cost of production, the impact on water, and the price at which the oil can be sold. "If you are just doing energy resource development balls to the wall, then can you do this because the resource is there? Absolutely," says Verrastro -- as long as you ignore project economics, financing, government regulation, environmental concerns, required infrastructure and rates of return. John Hofmeister, the former president of Shell USA and author of Why We Hate the Oil Companies, also thinks the U.S. oil abundance narrative is optimistic. As field development proceeds, oil production will level off at some point, and not grow as far as the eye can see, Hofmeister told me. Shale oil and gas development will have to slow as it gets closer to population centers, he said. Says Verrastro: "[The forecasts are] way premature. We are in chapter 1, page 10, and some people have us at 18 million barrels by 2020."

For the Sudanese, first it was oil and now it is survival: Sudan broke into two nations last July, and since then has spent much time in virtual war with itself. Apart from the usual ethnic and religious rationale, there are economic reasons: Both states -- Sudan and South Sudan -- are in deep trouble. Before the breakup, Sudan got about 90 percent of its revenue from oil exports. In the first quarter of 2011, the country had a trade surplus of $1.7 billion, Reuters reports; but in the same quarter this year, it has a trade deficit of $540 million. Against these data, opposition leader Hassan al-Turabi is forecasting doom for the regime of his former protégé, Sudan President Omar Hassan al-Bashir. "The economic crisis has intensified and this is very dangerous. If the hungry go out in a revolution, they will break and destroy," Turabi said in the Reuters report. " ... I expect it won't take us long now." South Sudan, which received most of the oilfields in last year's national divorce, cut off oil production in January after accusing the north of stealing shipments. So, in order to stave off collapse, it has been borrowing abroad, reports Bloomberg. South Sudan secured a $100 million line of credit from Qatar National Bank, $500 million from an unidentified benefactor, and expects money from China as well. Will reason prevail? Last year, we thought it already had.

Could Israel relieve Europe's Russia dependence?

Steve LeVine — Thu, 10 May 2012 21:47:33 +0000

Is Europe, wishing for energy security and crispy winters indoors, looking in the right places for its natural gas salvation from a supply grip held by Russia?

As of now, Europe continues to cast its gaze 1,700 miles to the east in Baku, and across the Caspian Sea from there to gas-rich Turkmenistan. Breaking the news gently, Azerbaijan does not have the spare 30 billion cubic meters a year that Europe is seeking -- it has about 5 billion cubic meters. As for Turkmenistan, it simply is not going to take on Russia's Vladimir Putin, who opposes any such shipments.

Iran is off the table. Until it breaks a logjam with Baghdad, Kurdistan is too. Ukraine deals expected with Chevron and Shell may result in a bit of shale gas, the Financial Times reports. ExxonMobil and Austria's OMV may add a similar volume from fields in the Black Sea.

Yet, all of this together is minuscule compared with the 20 billion cubic meters a year that Israel appears prepared to export in the form of liquefied natural gas starting in five years, as I write this week at EnergyWire. The volume is larger if you include gas discovered in adjacent Eastern Mediterranean fields in Cypriot waters, according to Houston's Noble Energy, which is doing the drilling in both countries.

This is not the scale of gas that creates petro-states. But it will provide a tidy sum for Israel and Cyprus, and much of the gas that Europe is pursuing.

The finds are part of the Levant Basin, which, according to the U.S. Geological Survey, contains 122 trillion cubic feet of natural gas and 1.7 billion barrels of oil underneath the waters of four countries -- Cyprus, Israel, Lebanon and Syria. Oil drilling is also being carried out on- and off-shore in Israel (pictured above, drilling for kerogen last year near the Israeli kibbutz of Beit Guvrin).

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For Israel, the gas is a win-win proposition regardless of how much it exports and to whom. The country probably could have seriously benefited from the profits decades ago. But Natan Sachs, an analyst with the Brookings Institution, told me that it is best for the country that the bonanza came now, when Israel's economy is more mature. The reason? It is unlikely to contract the so-called resource curse, a malady of corruption and chronic poverty that tends to get entrenched in undeveloped petro-states. Sachs:

From an Israeli perspective, it's an unmitigated blessing, and I would say from a social science perspective that it's good, that it only came now and not much earlier when Israel might have become dependent on resource exports.

I checked out the idea of exports to Europe in a round of phone calls and emails, and heard almost wholly silence. One reason for the skepticism was that Europe's consuming nations may get pushback from Arab oil and gas producers with which they already have supply agreements. Another was that, if a fixed pipeline were the conduit of the gas, it would probably need to traverse Syria before going on to Greece and the rest of Europe, and we all know what is going on in Syria. Yet a third was simply that commercial suppliers may not wish to commit so much volume to Europe when there is also a hungry Asia.

Of course, Noble's idea is to export LNG from a gigantic offshore field called Leviathan, in which case this fuel could go anywhere, including Greece, China and so on. "You are going to be meeting all the needs of the [Israeli] domestic market for 25 years, and exporting for the next 20," Noble spokesman Bini Zomer told me.

A breakthrough in Syria could be a gamechanger, said Crispin Hawes, who watches the Middle East for the Eurasia Group. It would be felt in Lebanon, specifically by the powerful Syrian-supported paramilitary group Hezbollah. Hawes told me:

If the Assad regime collapses, that implies a different future for Hezbollah, which also has implications for the security of Israel's northern border, and implications on Israel and Lebanon's ability and willingness to negotiate an agreement on a shared maritime boundary, which at the moment is undefined.

Hawes said some Israeli gas will ultimately end up in Europe, but the volume and timing cannot be pinpointed because no one knows definitively when the LNG and export facilities will be built. It is not outlandish for the Europeans to make a Grecian landfall a priority.

Is energy independence all it's cracked up to be?

Steve LeVine — Wed, 09 May 2012 10:49:14 +0000

If oil and gas are dirt-cheap, suddenly as abundant as hamburgers, or both, is it time to ring out the Hallelujah Chorus? Even if you are a climate change skeptic, the answer is no, according to two interesting reports this week.

A growing number of analysts and writers are joining a parade celebrating what they believe is an imminent age of U.S. self-sufficiency in the production of oil and gas. This blog has raised questions about the lack of data behind these projections, while analyzing the considerable geopolitical disruption to come should they be correct.

This week's addition to the discussion comes from Michael Levi, who watches energy for the Council on Foreign Relations, and the Energy Security Leadership Council, a group of retired U.S. senior military officers and current and retired corporate executives. Neither challenges the underlying assumption of a new era of fossil fuels, but instead take aim at those shouting kumbaya.

On his blog, Levi asserts that forecasts of a new industrial age, ignited by cheap natural gas, and of the near-elimination of U.S. vulnerability to energy-borne instability are "detached from basic economic and geopolitical reality."

Levi quotes Robin West, the head of PFC Energy, from a Washington Post piece. West said: "This is the energy equivalent of the Berlin Wall coming down. Just as the trauma of the Cold War ended in Berlin, so the trauma of the 1973 oil embargo is ending now. The geopolitical implications of this change are striking: We will no longer rely on the Middle East, or compete with such nations as China or India for resources."

In 1973, the U.S. relied on imports for 15 percent of its oil and gas, Levi notes. Boom enthusiasts say that U.S. imports will fall from the current 45 percent of consumption, to 22 percent of the total. Which makes him ponder: "If 1973 ushered in a new age of energy insecurity, it is tough to see how a fall in imports to a level still higher than the 1973 one would reverse that."

Update: After the Jump, West responds to Levi.

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Levi also challenges an assertion, made most prominently by Citigroup's Ed Morse, that cheap natural gas prices will lead to a gigantic U.S. manufacturing and industrial revival. Manufacturers spend just 2 percent of total sales on energy, says Levi. Any benefit from lower gas prices will be only at the margins of the chemical, steel, cement and paper-making industries, he argues.

What raises the most concern from Levi and the retired generals and executives of the Energy Security Leadership Council, however, is a corollary advanced by the energy abundance wing -- that now the U.S. can consider pulling back its military footprint abroad, the billions and billions spent on naval fleets to secure the Persian Gulf and Asian sea lanes(pictured above, USS Chaffee off Tien Sa port in the Vietnamese city of Danang last month). If they think it will no longer be a primary U.S. interest to protect global seaborne commerce, U.S. policymakers could be led to some wacky decisions. Levi:

People who otherwise would have worried about protecting communities and the environment can become oddly eager to dig up a few mountains or drill through a dozen national parks when someone tells them that another million barrels a day of oil production will fundamentally change the U.S. position in the world.

In their own report this week, the generals and executives, such as retired Marine Gen. P.X. Kelley and Fred Smith, the CEO of Fed-Ex, argue that the entire debate is out of whack -- that the very concept of seeking security through the reduction or elimination of oil imports is "a goal that is fundamentally misguided."

The U.S. will benefit from a reduction in import payments -- its balance of trade will be vastly improved, they say. But that does not add up to a less vulnerable nation. Say the generals and executives:

Changes in oil supply or demand anywhere tend to affect prices everywhere. The impact on the United States -- or any other consuming country -- is a function of the amount of oil consumed and is not related to the amount of oil imported.

Rather, the U.S. must still "get off of oil,"as the slogan goes, the report concludes. The ups and downs of global oil prices have a severe impact on the U.S. economy, and will continue to do so, whether or not the U.S. imports even a teaspoon of oil. At the leading edge, U.S. vehicles need to be weaned off of fossil fuels. Their report:

Over the long term, the United States can achieve meaningful energy security by transitioning away from liquid fuels in the transportation sector. Vehicles that derive motive power from grid-generated electricity stored in onboard batteries are entering the market today and over time could represent a key pillar in a more secure transportation sector and economy. Plug-in electric vehicles are particularly promising in light-duty applications, which account for roughly 40 percent of U.S. oil demand.

As suggested above, there is reason for skepticism regarding the foundation of the oil-abundance narrative. However, even if its proponents do possess the numbers to validate their forecasts, the irrational exuberance extends to the benefits of independence.

Robin West responds:

Steve, obviously Mr. Levi did not contact me for my views. Some of his observations are quite obvious. David Ignatius took a small sound bite from a longer conversation. I believe that the North American transformation is huge -- I still stick to the Berlin Wall analogy. I do not subscribe to the concept of Energy Independence, but I do subscribe to the concept of energy security -- reliable supply at reasonable cost. Reliability of supply will be largely dealt with by the North American (U.S. and Canadian) oil surge. I do not need Mr. Levi to remind me that oil is a fungible commodity whose price is set globally. But if the price rises, foreign exchange is preserved and domestic economic activity will boom. Of course the rest of the world economy will rely on oil, largely from the Middle East, and the U.S. is a critical beneficiary/player in the world economy. Did I say that the U.S. should abandon its responsibilities? I do not recall that I did, ever. As to natural gas, the fallacy of the argument is that prices are so low that they are trivial except for a few industries. This is true, because U.S. prices are so low. An examination of the data would show the fiasco for the consumer of the European utility sector versus the U.S. Why doesn’t Mr. Levi compare the two? The decisions of the European Green movement will help strangle economic growth in Europe.

As to the solution of get off oil, an admirable goal, most of the solutions proposed have proven to be somewhat disappointing to date in spite of substantial investment. I am unaware of any observations by Mr. Levi on the abysmal failure of the Administration to hit their 2015 target on electric cars. Would he be kind enough to share the formula for cellulosic ethanol which is scalable and commercial? Glib statements on electric cars ignore the challenges and massive failures to date.

In some of my speeches, I have pointed out that I believe Fed-Ex is probably the most innovative player, public or private, in the field, and should be encouraged. They are examining everything. As I understand it, their rigor is based on technology and economics, not politics and emotion. That is what is needed.

As with the Berlin Wall coming down, one should not assume the “end of energy history.” The U.S. is not completely out of the woods, but we are much better off than we were before, and we are certainly better off than most of the rest of the world. There are still energy challenges which will impact the global economy and the U.S.

The shocking, shocking behavior of Aubrey McClendon

Steve LeVine — Tue, 08 May 2012 19:29:53 +0000

Let's say you are hired to watch Aubrey McClendon, the titan of Oklahoma City. George Mitchell technically enabled the shale gas boom with his technological improvements in hydraulic fracturing. But it was uber-gambling, go-for-broke McClendon who, sweeping up millions of acres of land, putting down rigs and drilling before almost anyone else had risen from their chair, parlayed Mitchell's invention into the global, game-changing industry it is today. He single-handedly made his company, Chesapeake Energy, the king of the shale gas patch.

The thing is, McClendon (pictured above, left, with Jack Nicklaus) has a few ... ummmm ... eccentricities. Like the glutton in the sweet shop, the cash-minded McClendon cannot resist a taste of potentially profitable ventures to which he takes a hankering. He wants to run a hedge fun, for instance, not to mention a professional basketball team, a cattle ranch -- and let's have some restaurants! Every now and then, McClendon requires personal cash infusions in the tens of millions of dollars to cover bad investment bets. You are paid to patrol those gorging instincts, as described by the Wall Street Journal's Russell Gold, yet what to do when he simply goes on being ... being, well, Aubrey McClendon? He is your charge. Yet he is so ... entertaining. And successful!

Until he isn't, and don't you look flat-footed, and downright unseemly, when you shout about McClendon's excesses, and threaten his throne?

So we have the current narrative of McClendon. Three weeks ago, McClendon was broad-sided by a Reuters expose regarding his unusual contractual right to invest side by side with Chesapeake in shale gas wells, and borrow money to do so from Chesapeake partners. Today, Chesapeake's main investor, an investment firm called Southeastern Asset Management, is demanding that McClendon curb his speech, and who he meets with -- or else. By else, Southeastern means Chesapeake could be sold to the highest bidder. Already, Southeastern is partly responsible for McClendon losing his title as chairman, leaving him solely CEO. That's not a huge deal, but given the choice, most senior executives would prefer to be both.

But is the board, Southeastern or anyone close to the matter truly surprised by McClendon's behavior?

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Much has been said about Chesapeake's rubber-stamp board of directors. This impression has been reinforced by Reuters' latest followup, in which we see McClendon trading commodities, and receiving retroactive permission from the board to continue. One would like to imagine McClendon -- deer-in-the-headlights expression crossing his face -- caught red-handed by a tut-tutting board member as he makes a personal trade on gas futures from his cell phone while meanwhile sweeping up more shale-gas acreage for Chesapeake. But given the after-the-fact permission slip, one concludes that this highly unusual behavior -- a significant CEO acting like a simple trader -- was not outed so much as having his behavior chalked off as yet another McClendonism, an avocation to be tolerated while the CEO earns millions for the hangers-on (more on that below).

In the current griping, one senses opportunism in folks who, having skin in the game, must have read an expose last October by Forbes' Chris Helman, who made issue of McClendon's over-extended use of debt. Or a piece a year ago at this time by Theo Francis at footnoted.org, who documented Chesapeake's 2010 bankrolling of a few other McClendon eccentricities -- $6 million in sponsorship bills for the Oklahoma City Thunder basketball team, in which McClendon holds a 19.2 percent stake; a $119,000 bill for his family's personal security, and another $500,000 for his family's use of the corporate jet.

Or a red flag for those concerned about oversight - salaries of $248,000 to $623,000 to each Chesapeake board member.

Putin is a brute. But is he bad for business?

Steve LeVine — Mon, 07 May 2012 10:10:51 +0000

Vladimir Putin has resumed his occupancy of the Kremlin with two signals: He will again be tough with critics in the street. And he intends to attract deep-pocketed foreign business -- a lot of business -- back to Russia.

For much of the last 12 years, Putin has made Moscow's streets inhospitable to demonstrators apart from his often-aggressive youth band, called Nashi. This approach softened starting in December, when tens of thousands of Muscovites were permitted to demonstrate unaccosted against Putin's decision to shift back to president from the lesser prime minister's job. Yesterday and today, though, Putin has reverted to the rough-and-bloody methods to which critics have been more accustomed.

So on the strength of early evidence, Putin is not going to slowly, slowly move toward more open and participatory politics. Instead, it is back to one-man rule.

But is Putin also bad -- or at least not good -- for the Russian economy, as many suggest?

A look at the Micex index of 30 big Russian companies validates the worriers: It is trading near a five-month low against the backdrop of plummeting oil prices, the presidential victory of French socialist Francoise Hollande, and renewed worry over Greece's ability to stand on its own two feet, Bloomberg reports. Russia then, despite its reliable flow of oil and gas exports, remains exceedingly vulnerable to the global economy.

Yet a big business deal that Putin closed over the weekend suggests that Putin may not have lost his touch. The latest of three relatively quiet foreign tie-ups, the deal, if successful, could mean a large and long cash payday for the country. These deals -- all in the oil sector -- suggest that Putin is still an economic player to be reckoned with.

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While Russia needs to diversify into other business sectors, it also needs to pay its bills -- for the foreseeable future, oil and gas exports will continue to finance some 60 percent of the national budget, and its big Siberian oilfields are fast declining. The Arctic can fill that gap for decades. Big Oil companies also need the deals -- they are of a size that only gigantic fields can sustain.

The agreements feed the needs of both sides.

On Saturday, Putin presided over an agreement with Norway's Statoil to explore four Arctic fields estimated initially to hold a whopping 15 billion barrels of recoverable oil and gas. Like deals consummated over the last two weeks with ExxonMobil and Italy's Eni, the agreement requires Statoil to pay every dime of expenses, which in the case of the Norwegian company could reach $100 billion, according to the Wall Street Journal. In addition, all three companies give Russia's state-owned Rosneft partnership rights in some of their own major oil and gas deals abroad, thus going far toward Putin's aim of creating a Russian oil champion with serious global reach. In exchange, they each have minority, 33.3 percent ownership of their apparently rich Arctic fields.

While Putin struck a strong deal for Russia, the companies also did well since they obtain footholds in the world's largest remaining untapped hydrocarbon frontier on a gargantuan scale. Eni's fields, for example, are estimated to hold the equivalent of 28 billion barrels of oil and gas. ExxonMobil's may hold 90 billion oil equivalent barrels.

Drilling may not begin until the 2020s. Yet the potential is so large that, to the degree the Arctic pans out, Russia will easily continue to be the largest oil exporter, and one of the largest sources of gas, on the planet.

This appears to be just the beginning. BP was actually supposed to have ExxonMobil's deal, but it fell through because of an epic blunder last year by the British oil company. Now, though, its Russian joint venture, TNK-BP, appears to be in line to negotiate its own Arctic venture with Rosneft, reports the Telegraph of London.

Rosneft is also speaking with Russia's Lukoil about an Arctic deal, reports Upstream magazine.

The agreements align with a global trend in which fossil fuels have surged back from what only recently seemed a long decline. A bonanza of new exploration and oil discoveries around the world have knocked clean-tech back on its heels, and suggested that, until one or more of the clean energy technologies achieve a disruptive advance, oil and gas will continue to far dominate the global economy and transportation sector.

The Weekly Wrap -- May 4, 2012

Steve LeVine — Fri, 04 May 2012 19:24:12 +0000

On the shale gas patch, the twain decidedly do not meet: Shale gas drillers, on the receiving end of two years of withering attacks by anti-fracking elements, have launched a counter-offensive. A special-purposed group of 11 big industry players including ExxonMobil, Shell, Chevron and Anadarko issued an eight-page code of conduct for hydraulic fracturing in Pennsylvania and New York (pictured above, outside the town of Waynesburg, Pa.). I spoke with Anadarko CEO James Hackett, a leader of the group, before the Obama administration's release today of somewhat stiff rules governing fracking on federal land. As I wrote at EnergyWire, Hackett said the group wished to "set a good example" -- a high bar for all operators on the patch in order to reassure public opinion. But Hackett's vituperative description of critics suggests little room for conciliation between the sides. In a nutshell, Hackett sees himself as a patriot, and his critics as anti-science extremists, and worse.

The industry embarked on the standards as part of studies requested by the Department of Energy and a diverse group called the National Petroleum Council. But it was all against the backdrop of hyper-critical media like "Gasland," Josh Fox's much-watched 2010 documentary on fracking. The companies felt that shale gas "can be developed responsibly, but you had a slew of articles coming out from the New York Times. Whether they were fact-based or not didn't seem to matter," Hackett told me. "The Cornell study, the Duke study, the hysteria that people were trying to create around hydraulic fracturing, which was scientifically misplaced."

So there was industry interest in counter-attacking, Hackett said. But once they were into the process, the CEOs started thinking more broadly that they had something to gain by conceding to regulation. Hackett:

There was a feeling that this could be a useful way for us to proceed long term, because the truth is that the technology does keep changing and the practices keep changing. And we have every bit or more a stake of how the regulatory process evolves and society's acceptances of our industry. We have a bigger stake than I'd say than anyone else but the citizenry that we want to make sure is educated about what the benefits of this are so that they don't just say, ‘You lose your license to operate,' without understanding what it means when they say that.

Read on for more of James Hackett, and the rest of the Wrap. [[BREAK]]

Critics responding to the standards said the companies did not in fact set a high bar. And on one of the key metrics -- full public disclosure of the ingredients of fluid used in the fracking process -- Hackett in my view was not flexible. He said that -- by posting all but 0.5 percent of fracking fluid content on the website fracfocus.org, and by making private disclosure of 100 percent of the fluid content to state regulators -- companies are doing what they should. He said that drilling service companies such as Halliburton and Schlumberger -- which do the actual fracking for the production companies -- have competitive reasons why they don't wish to publicly reveal every molecule contained in their fluids.

I suggested that, on balance, the financial and national security stakes of getting shale gas right are higher than protecting the competitive edge of a fluid. But Hackett replied, "If society ever decides that it has to compel the service companies to give up trade secrets, that's crossing a pretty interesting line."

Hackett was the most expansive when he decided to broaden out the discussion to the whole matter of environmentalism and clean energy. Hackett:

It is a huge issue for me emotionally and as a patriot that we have a chance for the first time in my 30-year-plus career to actually become close to technically independent of foreign sources of oil. You think about that for a country that has had an energy policy that only consists of aircraft carriers in the Middle East for over 30 years of my life, and the opportunity to change that metric, and the leverage it affords American policy, the lives it saves, the balance of payments implications, making us less susceptible to people who don't like us. Letting free enterprise flourish in a way it wasn't a few years ago.

We are on the cusp of this, and there are people in the country who, I don't know if they care like I do about those things. Well I will be darned if I let them keep me from educating my fellow citizens about why this is so cool. And if it takes us to our dying breaths and spending a lot of personal time on this, we gotta get this message across. And I don't think that comes by just sitting still. It's obvious in this country that it's not enough. There's an element that will take to the streets, will use any tool at its disposal including bad science to create a fiction that is not scalable, affordable, for the poor, for anyone, and doesn't get us off foreign oil. To think that somebody can actually say to an American that renewable energy is somehow fixing our dependence on foreign oil is unforgiveable. How does wind and solar in any near term, medium term horizon ever make us less dependent on foreign oil? Well of course it doesn't because it doesn't provide transportation fuel. And until you have electric cars, it won't. And until you have battery technology for storage, it doesn't.

The opposing sides harbor mirror images of the other: Hackett accuses anti-frackers of injecting false science into their grievances; anti-frackers accuse the energy industry of undermining science in order to kill global warming legislation.

Can oil prices be manipulated? Yes, suggests an investigation on Urals blend: In a must-read investigative piece two years in the making, The Economist magazine considers the question of whether Gunvor, Russia's biggest oil trading firm, has manipulated the price of the country's crude oil blend. The magazine's suspicion is that Gunvor did so over the four-year period that its journalists studied: From 2005 through 2009, Gunvor drove down the price of Urals crude, bought up large volumes of oil at that price, then sold it on in Europe and elsewhere at a large markup, the magazine asserts in words, charts and graphs.

This story is important for a couple of reasons. The first is that Gunvor head Gennady Timchenko is a long-time friend of Russian leader Vladimir Putin, under whom he rose from obscurity to dominate oil trading, one of the nation's most competitive and rough-and tumble industries, and a top player in natural gas. This blog has described how in 2009 Putin forced France's Total to partner with Novatek, another company-from-nowhere, if it wanted access to a premium natural gas field. Timchenko owns 23.5 percent of Novatek.

The other reason is the matter of how oil prices can be set by forces other than the free market. For a long time, some of our top-tier institutions and colleagues have suggested that oil prices cannot be manipulated, or if they can, not in a way that matters. The promoters of this case have included both people with skin in the game, such as investment banks, and those without, such as impartial think tanks. I have gone the other way, arguing that the question is not whether trading results in the rise and fall of oil prices -- it definitely does; the question is whether to allow healthy speculation such as airlines hedging fuel purchases, while zeroing out what is arguably abuse, such as hedge funds pushing up prices simply to earn a dollar. In its piece, the Economist -- while writing that in the end it has "no proven case" -- effectively argues that the latter is what occurred at Gunvor's hands in Russia.

Last days of the Czar's serviette: On Monday, Russian President Dmitry Medvedev will step down, and probably vanish into obscurity as the underling honored to serve four years as a placeholder as Vladimir Putin reoccupies the Kremlin. By appearances a thoughtful man, Medvedev will doubtlessly experience a bittersweet sensation. The sweet part will be a feeling of patriotism and fulfilled duty: In 2008, with his mentor legally barred from serving more than two consecutive terms as president, Medvedev stepped in to carry out the distinctly Russian political philosophy known as Putinism. Now, he gracefully steps aside, probably to serve as Putin's prime minister. The bitter part will be departing with no other legacy.

History has other such figures -- in Russia, there is Alexander Kerensky, who led Russia in the few months between the fall of the Romanov Dynasty and the Bolshevik takeover; in the U.S., there is Gerald Ford, who served Richard Nixon's final two years after Watergate before Jimmy Carter's populist triumph. In the case of Medvedev, others read possibilities into his tenure that he himself apparently did not -- that he could have worked harder to usher in blind and irreproachable justice; that he could have done more to establish a truly impartial electoral system; that, as president, he could have simply shown more spunk. Ironically, by playing out his farcical role, he helped to galvanize the previously disparate opposition, furious at the presumptuousness and self-entitlement of Putinism with which Medvedev himself opted to live.

LBJ, Exxon and Bin Ladin: The received wisdom is that serious non-fiction is dying, and it is not hard to decipher the source of that perception. Just look at the dearth of morning newspapers on the driveways in your neighborhood, and in the hands of the riders on your morning train to work -- there is the occasional Economist, and Kindle, but I underscore the word occasional. The quarterly earnings of newspaper companies continue their long slide. So one is surprised and gratified, but mostly relieved, at the market response to this week in serious non-fiction book publishing. Tuesday saw the launch of three big books: As of this writing, Steve Coll's Private Empire, the only genuine treatment of ExxonMobil in many decades (review and interview published here at O&G) is No. 36 on Amazon; Peter Bergen's Manhunt, a definitive look at the lead-up to Osama bin Ladin's killing last May, is No. 19; and Robert Caro's The Passage of Power, the fourth in his seminal biography of Lyndon Johnson, is No. 9. The market pie for serious non-fiction is not defined -- consumers appear to be willing to buy as many important works as they deem interesting. Coll's early success is especially satisfying as a New York book editor friend told me only recently that energy books "do not sell."

Should U.S. troops really spend another 12 years in a bloodied Afghan seige?

Steve LeVine — Thu, 03 May 2012 14:47:40 +0000

"It is too late to try to build ‘Afghanistan right,'" Anthony Cordesman concludes in an exceptionally clear piece for the Center for Strategic and International Studies. Cordesman ticks off the crippling weak spots that fatally undermine peace with honor in Afghanistan. Without saying so explicitly, he forecasts a best-case return to the pre-9/11 status quo -- the Taliban in the center, vying for national power against canton-based local strongmen around the country, anchored by a refortified Northern Alliance.

Cordesman is right as far as he goes. Yet like numerous wise hands weighing in similarly in the wake of President Barack Obama's weekend accord with Afghan President Hamid Karzai, Cordesman is reluctant to draw a line under his stacked-up facts and provide the sum of the parts: There is no further constructive role for the U.S. military in Afghanistan. If American troops leave, Afghanistan is likely to devolve into civil war; if they stay, there will be the same outcome.

But there is an upside of U.S. troops leaving entirely that is absent from the alternative: The mayhem potentially has an endpoint of Afghan-run stability, albeit many years hence probably. With a continued U.S. military umbilical cord in place, that is far less likely.

For those who were on the ground in the first years after the Soviets left, this is easy enough to see. A year ago, on the killing of Osama bin Ladin, this blog suggested declaring victory and getting out. It simply is folly to suggest that the U.S. will avoid the experience of the Soviets, and the British before them. U.S. foreign assistance -- for construction and civil support -- will be welcome, but not a military presence in any form.

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Writing at the Financial Times, Ahmed Rashid laments a stubborn Vietnam-era mentality -- "the hubris of the U.S. military, which at the back of its mind still believes there are battles, if not a war, to be won; Taliban to be killed; and at least some success to be gained. They are wrong." Rashid says that the Taliban leadership must be negotiated with, that it fears civil war as much as its opponents.

Rashid is partly right, but veers off-track when he suggests that there is still something for the U.S. to do at the negotiating table. The Taliban may fear civil war, but only to the degree they are in charge in Kabul. If they are not, they will fight that civil war until they are.

In terms of continuing to stage U.S. troops in Afghanistan beyond the 2014 withdrawal deadline, Richard Haass, president of the Council on Foreign Relations, echoes Cordesman: "Past sacrifice is a poor justification for continued sacrifice unless it is warranted. The truth is that while the United States still has interests in Afghanistan, none of them, other than opposing al-Qaeda, rises to the level of vital."

Yet Haass too holds back from calling for a full withdrawal. The truth is that an early U.S. military exit will happen with or without an explicit decision. U.S. troops, envoys, aid workers and experts will be harassed, attacked and killed until the harder decision is made to pull out troops completely. As for Karzai, he has no greater a secure future in Afghanistan than do U.S. troops. He will end up hounded, assassinated or in exile.

Cordesman writes that the truth is not pleasant. But the whole truth is even less so.

I ate dog meat, but alas never got the sheep's eye

Steve LeVine — Wed, 02 May 2012 20:47:40 +0000

I caught up to the Obama-ate-dog story only in replays of the White House correspondents dinner, but this is important: I confess that I ate dog meat, too. It was in the Philippines, in my first foreign posting. I was wandering through the mountains of Cebu province, looking for members of the outlawed New People's Army (remember them?) to interview. The owner of the hut in which we stayed one night offered up breakfast on our way out. "It's black dog," the fellow said, smiling and holding out the delicacy with both hands. "Why thank you," I replied. I dined gratefully. This is called going with the flow. (Memo on how to eat black dog meat while searching for rebel fighters in mountain hideouts: Don't think. Eat. Smile at host.)

My next posting was Pakistan. On a trip through Afghanistan during the Najibullah days (remember him?), I was the guest of some mujahedin in Kandahar province. Near the end of an outdoor dinner, the local commander bestowed on me the most honored morsel he could think of -- a fistful of raw sheep's fat. Mmmmmm. Scrumptious. (Memo on how to eat fistful of raw sheep's fat while with Pathans: Wrap it in naan. Eat fast. Smile at host.)

After that came the former Soviet Union, and fresh camel's milk in Turkmenistan, horse meat in Kazakhstan, and who-knows-what-kind-of-innards in Chechnya.

What I was never offered in Kazakhstan or Kyrgyzstan was the most delectable nomad delicacy of all -- sheep's eyeball. In my first book, there is a photo of then-BP CEO John Browne (remember him?) being handed one during dinner over a big Kazakh oil deal that he desperately wanted. When you want an oil deal, you eat the eyeball, and Browne did.

(Memo on how to eat an eyeball -- or a sheep's ear -- during oil negotiations in Kazakhstan: Don't chew. Swallow fast. Smile at host.)

Book review: Steve Coll's "Private Empire"

Steve LeVine — Tue, 01 May 2012 02:32:00 +0000

David Biello is associate editor for environment and energy at Scientific American magazine.

So far in 2012, ExxonMobil has made $104 million a day -- and that's an off year. In 2005, the oil giant earned a net profit of $36.1 billion, or "more money than any corporation had made in history," writes Steve Coll in his illuminating saga of the most successful and largest heir to John D. Rockefeller's strangling monopoly, Standard Oil. Simply put, ExxonMobil has been among the world's largest and most profitable companies since the 1950s, and it is so confident of its future that it recently raised the dividend paid to shareholders by a whopping 21 percent.

Private Empire begins in 1989 with the tale of the Exxon Valdez, the company oil tanker that ran aground in Alaska's Prince William Sound, and ends 22 years later with ExxonMobil's credit rating surpassing that of the U.S. government. The title derives from the company's need to control actual physical territory in order to profitably pump. The result is amassed power and influence, used mostly for ill (if one's interest is human rights, economic development or combating climate change), or good (if one's focus is cheap gasoline).

Coll, a two-time Pulitzer Prize-winning author of previous books on the CIA's history in Afghanistan and on the Bin Ladin family, here weaves a work around a profile of the reigns of two emperors. There is South Dakotan Lee "Iron Ass" Raymond, who parlays a relentless focus on safety in the wake of the Exxon Valdez into imperial corporate control, whether it is the initiation of a "safety minute" at the start of any meeting or the installation of tracking devices in the vehicles of known speeders. Raymond's successor, the Texan Rex Tillerson (the "Eagle Scout"), attempts to soften the company's image by doling out medals for good work, an incentive reminiscent of scout merit badges, and embracing a carbon tax to control greenhouse gas emissions.

ExxonMobil perhaps looms largest in the U.S. on this subject of climate change. Early in the book, Coll lays out the company's apparent objectives via an American Petroleum Institute memo from the 1990s:

Average citizen "understands" (recognizes) uncertainties in climate science; Recognition of uncertainties becomes part of the "conventional wisdom"; media "understands" (recognizes) uncertainties in climate science; media coverage reflects balance on climate science and recognition of the validity of viewpoints challenging current "conventional wisdom"; those promoting the Kyoto treaty on the basis of extant science appear to be out of touch with reality.

If that was also ExxonMobil's goal, the many millions of dollars that the oil company spent worked. Each item on that memo can be checked off -- thanks largely to Raymond's close relationship with then-Vice President Dick Cheney. "We just gave away the environment," observed then-Treasury Secretary Paul O'Neill after the Bush Administration repudiated action on climate change in 2001.

Similarly, just 12 days before Obama's inauguration, Tillerson publicly advocated a carbon tax. In fact, that thumbs up seemed to have more to do with further delay of any regulation than a change of heart on climate change. As Coll puts it nicely, quoting a company lobbying meeting with the new Administration, Tillerson "was happy to have a position that nobody was going to embrace."

The irony is that ExxonMobil found good use for climate change: It cut its greenhouse gas emissions as a result of its focus on profits, largely by avoiding the flaring of natural gas co-produced with oil. It even used climate predictions to inform exploration, banking on global warming to melt more ice and thus allow access to Arctic oil, a nice side benefit of the company's intransigence on climate change. "Don't believe for a second that ExxonMobil doesn't think climate change is real," Coll quotes a former manager.

Such quotations as well as anecdotes humanize the massive cast of characters in this sprawling book. Raymond is revealed as kind to the air crew of his private corporate jet while routinely excoriating journalists, analysts and underlings for alleged stupidity. Fine phrases -- "Chad's politicians and labor leaders might be poor and some of them might be unsophisticated, but they had been schooled in obduracy and provocation by French colonialists, which made them formidable" -- leaven the work. And Coll puts the reader inside very closed rooms, such as a barbecue thrown for Russian President Vladimir Putin by U.S. President George W. Bush in November of 2001.

The book reads much like Dan Yergin's magisterial The Prize, absent the zest of conquest and with just a whiff of distaste. Coll handles science -- whether climate change, endocrine disrupting chemicals or geologic estimates of natural gas reserves -- with clarity and power. There are tantalizing hints of massive technological feats, such as Sakhalin I, ExxonMobil's massive engineering project off the western coast of Russia. Yet the poetry of the vast machines that enable oil's journey from well to gas tank is foregone in favor of the endless mundanity of bureaucratic power.

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In the end, this book is about Exxon's fraught relationship with the U.S. government, and really any government with which it interacts. That underlying tension may stem from the original sin of the court-ordered split of Standard Oil into pieces in 1911, the biggest of them Standard Oil of New Jersey (to become Exxon in 1973, and later ExxonMobil). One would think that blow would have been softened by the fact that Rockefeller and his executives became significantly richer by holding on to stock in each of the successor companies. But, as Coll writes, Exxon's disdain for government suggests that company executives never got over it.

And yet the book details ExxonMobil turning to the U.S. government time and again for favors, such as for the State Department to help Chad to renegotiate a contract with the World Bank to enable more spending on weaponry -- and more oil pumping by Exxon.

Through the last two decades, ExxonMobil's main challenge has been replacing the oil it pumps from the ground in vast volume or, as Raymond puts it, the task of how "to find a Conoco every year." That also lies at the heart of Coll's main charge against the company -- that Raymond and Tillerson routinely ignored U.S. government rules when reporting reserves.

As Raymond's quote suggests, Exxon is better at finding oil by buying companies than by discovering it. That is borne out by its 1999 acquisition of Mobil, but also its attempt to repeat the feat more recently with the purchase of shale gas player XTO. This trick has an even longer history. The original Standard Oil of New Jersey, when hived off from the rest of Standard Oil, was refinery-rich and oil-poor. Its first chief executive -- Walter Teagle -- made it his priority to scour the world for oil-rich companies to acquire, starting with Texas's Humble Oil in 1919. That dimension of Exxon's historical reality diverges from company culture as described by Coll, and epitomized by Rex Tillerson, who was chosen over other potential claimants to the throne because "real men -- they discover oil."

This points to what makes the book, at times, feel incomplete. Private Empire often elides the history that led to ExxonMobil's behavior in the span covered. Might it be possible that ExxonMobil's success has something to do with it and other U.S. oil companies taking more oil wealth out of the Middle East in the 1950s and 1960s than the British Empire wrung from India in the entire 19th century? Given the profound industry cost-cutting and layoffs of the 1980s, could it not be that we are looking back on a set of circumstances similar to those that produced the BP blowout in the Gulf in 2010? The similar context certainly contributed to the Valdez accident and ultimately to the safety tenets that characterized Raymond's reign. This is the history that formed the Raymond we know, and informed his tenure as chief executive.

And the hard-and-fast Exxon Way goes only so far, we learn. The relentless emphasis on safety, depicted as pervading everything at ExxonMobil, is later revealed to be carried out by a company vice president with a secret life as a thrill-seeker, jumping out of planes among other life-threatening pursuits. The company tolerates chronic oil spills in Nigeria, begging the question of how pervasive Emperor Iron Ass's safety culture really was.

***

ExxonMobil doesn't often return my own calls, and when some benighted public relations person finally does, he follows the confining PR script laid out in such compelling detail by Coll so closely that it's a useless conversation. So the volume of detail that Coll and his able assistants managed to dig up on this corporate behemoth is incredibly impressive.

But if Coll is seeking to build an indictment against ExxonMobil, as seems to be his aim, he does not achieve it. Circumstantial evidence of human rights abuses in Indonesia, corruption in Chad or Equatorial Guinea, and lobbying in Washington corridors do not make a strong case of malfeasance. After all, as Coll rightly notes, private companies have been involved in wars since at least the East India Company.

Rather, the book might have added a crucial point. It scrupulously documents what we already know: Oil companies operate in bad parts of the world, more often than not following local rules about greasing the wheels. As Coll quotes Cheney: "The good Lord didn't see fit to put oil and gas only where there are democratically elected regimes friendly to the United States. ... We go where the business is."

But in the rest of the world, ExxonMobil is a corporation deputized by us to slake our seemingly unquenchable thirst for oil. In the end, Raymond, Tillerson and everyone else at ExxonMobil are servants, well-paid servants, managing a global effort to meet a demand for oil that knows no bounds and only cares to be satisfied. Exxon sells 14 billion gallons of gas to Americans per year, most of it from its 14,000 branded gas stations. In a sense, ExxonMobil is America's national oil champion, vying with the national oil titans of China, Russia or Saudi Arabia around the globe (though, of late, Chevron has vied for that crown). Its major crime at home seems to be a "burn your house down" legal strategy, a habit of bringing tremendous financial resources to bear against anyone with the temerity to sue it, whether for the toxic properties of gasoline additives or plastic-softening phthalate chemicals.

Petroleum is a dirty business, but ExxonMobil most often gets dirty on our behalf and at our behest. My fellow Americans and I treat cheap energy as a right and the solution to all problems. ExxonMobil merely serves that greed -- it isn't the problem, despite shady practices. We are, as evidenced by U.S. willingness to tolerate oil wealth wrested from Equatorial Guinea and invested by kleptocrats in luxury goods or real estate in this country. Or as Coll observes at the very end: "The environmental consequences of a single accident could be very severe, but they did not threaten the lives of oil customers or change their purchasing behavior." I would have liked to see Coll explore this angle -- how in fact we need ExxonMobil. There is a symbiosis between this oil giant and the people it serves.

Read this book to learn the secrets of ExxonMobil's business, and yet its soul will remain opaque. The book precisely details the intertwined history of ExxonMobil and the U.S. government -- a tremendous achievement, and worth reading. From 450 interviews and countless diplomatic cables and government documents, Coll proves what we already sense is true: Did Exxon pervert the debate on climate change? Yes, quite successfully. Does Exxon involve itself with distasteful governments? Yes, along with the active collusion of the U.S. government. Does Exxon mint money? Yes, it is the most successful corporation in the history of corporations. But I am nagged by the question of why it does so. Could it be simply the banal aim of perpetuating the company, as an end in itself?

This book is an exhaustive addition to the weight of evidence surrounding ExxonMobil, but we are left baffled by the motives of the people who run it. ExxonMobil will not tell, and the oil company's accomplices -- all of us -- have slipped away.

It takes more than being a China hawk to produce rare earth metals

Steve LeVine — Mon, 30 Apr 2012 10:41:00 +0000

Twenty months after China began to ratchet down its exports of rare-earth elements, the first new Western-run mine is more or less ready to crank out refined metals used in high-tech products including wind turbines, electric cars and missiles. But a delay in Malaysian permission to start the refinery illustrates how the West got into this fix in the first place -- rare-earth mining is among the dirtiest and stigmatized enterprises on the planet.

Australian-run Lynas has been the most aggressive Western company working to pivot off of draconian export reductions imposed by China in September 2010. The result is its rare-earth operations in Malaysia. It has been mining tons of ore in Australia in preparation for refining in the Malaysian town of Gebeng -- it expects the ore to yield a relatively high 7.9 percent of rare-earth metals. But the refinery has been the subject of fierce public Malaysian protests (pictured above, a protest earlier this month), and government permission to open it has not yet been granted.

A mine in California called Mountain Pass used to be the world's biggest rare-earth mine -- until it was discovered that there had been enormous spills of radioactive waste-laced water into Ivanpah Dry Lake. The environmental backlash, in addition to plummeting global prices for rare-earth elements, resulted in the mine closing in 2002.

China picked up the slack. Since the 1990s, China had been on its own rare-earth mining buildup, and now it came to dominate the global industry. But in September 2010, China began a cutoff of rare-earths to Japan in a diplomatic spat over the East China Sea, and a general export reduction followed.

Part of Beijing's export reduction has been a tough-guy inducement for Western companies using the elements to relocate factories to China, where they are offered cheap and liberal allotments of rare-earths.

[[BREAK]]

But China is also attempting to clean up its industry. The New York Times' Keith Bradsher has done probably the best reporting on the intense pollution and gangsterism that has characterized the Chinese industry.

The West has reacted to the rare-earths crisis with mining deals in India, Kazakhstan and Mongolia, in addition to a revival of Mountain Pass, which is to resume operations toward the end of this year and next. Manufacturers are developing substitutes for rare-earths.

Meanwhile near the Malaysian refinery, protests have broken out over fears of radioactivity. Local critics say there is evidence of birth defects at another Malaysian rare-earths operation. Lynas says it is demonstrating that its refinery is safe.

The delays go on, showing that there will be more to establishing a balanced rare-earths supply than mere anti-Chinese rhetoric.

The Weekly Wrap -- April 27, 2012

Steve LeVine — Fri, 27 Apr 2012 15:50:28 +0000

Testing out a fuel cell-driven vehicle: General Motors lent me a hydrogen fuel cell-powered Equinox for the last three days for a test drive around Washington (that is the car above, but not the time I drove it). These are cars powered by an electric motor, and fueled by four tanks of compressed hydrogen (see technical description at Edmunds.com). They are alternatives to battery-powered electric cars. They can technically go 200 miles or so on a single fill up, and be refueled in minutes. GM and most of the rest of the major carmakers are pushing the fuel-cell case pretty hard -- in the U.S., they feel they have to if they are to meet tough 2025 car-efficiency standards. In addition, California, the ultra-important, cutting-edge global vehicle market, is insisting that 15 percent of all cars sold in the state in 2025 be either electric, plug-in hybrids or hydrogen fuel-cell. In Germany, Daimler is aggressively advancing a fuel cell-driven fleet, writes Scientific American, as is Honda in Japan. GM and Mercedes plan to roll out fuel-cell driven vehicles in three years or so, if everything goes well.

So what about the Equinox? To clear one thing out of the way, it is a 2008 model -- GM says it has not yet decided which vehicle it will use for its rollout. So what you are doing is testing not the comfort of the seats, the ride or the internal gizmos, but the propulsion. The first thing that you notice about the system is the gurgle when the car is idling and shutting down -- as my wife described it, like a rattling refrigerator (I at first thought it was more like a garbage disposal, but then decided she was right). After the second day, I got used to the sound, but it is not the sort of thing that you want to get used to, or think that you ought to get used to. People go bonkers at the slightest squeak in their cars, and it is back to the dealer with them. One presumes that GM will engineer that away, as Mercedes has already done with its test vehicle, according to Popular Mechanics.

The ride itself is quiet and pleasant. I am not a green fanatic, but there is something placidly cool about knowing you are not burning a teaspoon of gasoline. When the girls and I were driving Wednesday, a fellow on the East-West Highway asked us to roll down the window. "You are not burning any gasoline?" he asked. Zero, I said. He and the other guys in his car laughed. They liked the idea. "So you just plug it in?" was his second question. I did not have the heart to tell this fellow that, yes, technically you can rapidly pump in your hydrogen fuel -- except that there are no hydrogen fueling stations in Washington. Not one! (There used to be, but it has shut down as of 2010. In case you are curious, here is an international list of hydrogen fuel filling stations.)

Much is made of this lack of fueling stations -- that the government must get behind their construction, or carmakers won't build a lot of vehicles. I personally think that, when profit-minded filling-station owners sense these vehicles coming on the market, they themselves will gradually, and perhaps more than gradually, install hydrogen tanks.

One item: When I picked up the car, it registered 177 miles of hydrogen remaining in the tanks. I had to leave 50 in the car so that, when it was picked up by the GM representative, it could be returned to its Virginia resting spot. I drove 89 miles, and left 54 in the tank. So I lost 34 miles, or 19 percent of the capacity, and this was almost wholly tame driving -- I did not accelerate out the wazoo or hang tight corners. I drove a tiny bit fast once (okay, maybe twice). The performance improves when you figure out how to modulate the accelerator.

One can imagine that these vehicles will take off at once, presuming they are marketed to the right niche, at the right price point, and that they will do really well when they are priced competitively. And when those profit-minded filling station owners get their hydrogen tanks.

Go to the Jump for the rest of the Wrap. [[BREAK]]

Aubrey McClendon, in trouble: The high-flying CEO of Chesapeake Energy, with his vintage wine collection, and homes in Bermuda, Michigan, Minnesota and Oklahoma City, has been pushed back on his heels by embarrassing financial disclosures. He is being investigated by the Securities and Exchange Commission, and his board says it will roll back his perks. As broken first by Reuters, the news is that McClendon has borrowed hundreds of millions of dollars in one-way bets on the very same shale gas wells being drilled by the publicly traded company he founded. If the wells hit no gas, he owes nothing. We have been writing about the self-entitled McClendon for a year or so -- how Chesapeake is his personal piggy bank in a way that a Russian oligarch would understand. In 2010, the company picked up more than $100,000 a year in his personal security expenses, plus half-a-million dollars for his personal use of the corporate jet, as disclosed by footnoted.org. What is in store for McClendon? The Chesapeake board is not acting out of a sudden sense of responsibility, but self-survival. One intuits that both he and the board are at risk of expulsion by shareholders. However, one needs to keep in mind that boards and CEOs can hang on for a long time; there needs to be a pretty substantial nudge for an earthquake of that type. All we can say at this juncture is that McClendon will have to pay a few more dollars for his personal expenses.

More on Asteroids: There is scientific pushback on a skeptical post here yesterday on asteroid mining. To summarize, a Seattle-based venture honchoed by X-Prize founder Peter Diamandis has announced plans to mine platinum and other valuable metals from asteroids. I quoted Tom Murphy, a physics professor at the University of California at San Diego whose back-of-the-envelope calculations question the practicality of the idea. One commenter said that Murphy has his math and methods all wrong -- getting to the asteroids, grabbing them and extracting their innards will be easier than he thinks. Greg Fish, a blogger at the World of Weird Things, says the answer is actually somewhere in the middle. In an email, he told me that some parts will be easy -- getting to the asteroids -- but others hard, such as mining them. The latter, Fish says, "is a massively money-losing effort." Fish adds, however, that nanotechnology could help (see this post): Small-scale genetic engineering could produce particles that themselves could bring out gold or platinum. Those particles would then be brought back down to Earth. I still wonder why anyone would spend so much money to find and transport such metals from space when they are present in reasonably quantities right here on Earth. Call me skeptical, but one senses a couple of things:

**A lot of space nuts with too much time on their hands;

**A lot of space nuts may be attempting to construct a profit reason for wealthy benefactors to finance their efforts to go privately to space.

Not the CIA, not bin Ladin -- Exxon is the toughest nut

Steve LeVine — Fri, 27 Apr 2012 07:19:28 +0000

Since its birth as Standard Oil in the 19^th century, ExxonMobil has been at once the most profitable, demonized, secretive and uncompromising corporation on the planet, a black box that muckraker Ida Tarbell famously penetrated in the early 1900s, and no one since has managed. After books on the CIA in Afghanistan and the family of Osama bin Ladin, two-time Pulitzer Prize winner Steve Coll describes Exxon as the most-resistent of all to inquiry. His new book, Private Empire: ExxonMobil and American Power goes on sale Tuesday. Below, Coll replies to questions from the Oil and the Glory.

O&G: Of all the oil companies targeted for grievances, Exxon seems unusually stigmatized. Is it deserving of such criticism?

Coll: Yes and no. On the yes side, they are unusually, fiercely partisan; for example, their Political Action Committee effectively acts as a finance arm of the Republican Party in the United States, and until about 2006 they made aggressive investments in free market groups trying to combat mainstream climate science that I personally think will look pretty embarrassing for years to come. These are not the kinds of aggressive, one-sided interventions in American politics that you would expect from the country's largest or near-largest corporation (depending on the year and the method of measure), a corporation that has diverse employees and is very broadly owned by individual shareholders, government pension funds, mutual funds, and so on. Also, they are their own worst enemy in public relations -- remorselessly aggressive, arrogant, and often self-defeating. So in that self-inflicted sense, they also deserve their reputation.

On the no side, they have a pretty impressive operating record since the [1989] Valdez [tanker] spill, if not as perfect as they sometimes seem to claim for themselves, and their internal discipline has produced a better environmental and worker safety record than their peers. They deserve more credit for that than they get. They've taken human rights where they work in conflict zones more seriously, too, and although they were late, they have adopted some of the better corporate responsibility standards in that area, although they are nowhere near the leaders that they might be. Also, they are stigmatized just for being huge, and I am sympathetic to their arguments that a) while they make large profits in number terms, their profit-margins are not especially high; and b) they get blamed by the public for a lot of things they really can't control, like retail gasoline prices.

Former CEO Lee Raymond seems the most interesting character in the book. What is your take on him? And is he responsible for Mikhail Khodorkovsky's imprisonment in Russia?

He's a fascinating character, larger than life. As a writer, you love anyone who is truly comfortable in his own skin -- not trying to shade or hide himself from the world, and that is certainly Lee Raymond. He was ruthless, effective, difficult, sentimental, loyal and enormously successful as chairman and chief executive, certainly on the operating and profit-making side of the business, although he is criticized by some for not doing enough to position ExxonMobil for the future in the upstream, and on reserve replacement, an issue on which he struggled. Given my main interests in the corporation as a kind of independent sovereign, Raymond is fascinating because that is really how he carried out his role, how he acted in the world -- as a kind of head of state.

You mention the Khodorkovsky case, which is an example. Of course, [Russian leader] Vladimir Putin and his henchmen are responsible for Khodorkovsky's imprisonment, and Khodorkovsky himself miscalculated in the game of political chicken he played with Putin prior to his arrest. But Raymond figures in the story in a fascinating way. I don't want to give away too much of the fun stuff in the book. But in short, Raymond was negotiating to acquire a stake in Khodorkovsky's company, Yukos, in the weeks prior to his arrest. Raymond and Putin had a fascinating one-on-one at the New York Stock Exchange, which I recount, and which reads basically as an encounter between two very powerful men who see themselves as sovereigns.

Just how powerful is Exxon?

I think it depends on the setting. In some of the weak, poor countries where they produce oil -- a place like Chad, for example -- they are immensely powerful, almost comparable to the colonial powers of yore. Chad is one of the world's poorest countries -- Fourth World, really. The United States gives just a few million dollars a year in aid; ExxonMobil's tax and royalty checks in good years recently were higher than five hundred million dollars. If you're the president of Chad, whom do you care about, and whom are you going to listen to? In fact, ExxonMobil allowed Chad's authoritarian president, Idris Deby, to defy the Bush Administration and the World Bank during 2006 because of the sheer size of the cash flow the corporation delivered to Deby, and the way it collaborated with him at the Bush Administration's expense -- I found that an amazing story.

Overseas, in general, ExxonMobil finds its match when governments are well-funded and confident, such as in Russia, or where it is competing with other capable oil companies. It has more clout when it is the big fish in a smaller pond, as in Africa and in some of the weaker states in the Persian Gulf where it has established a huge presence, as in Qatar. Within the United States, ExxonMobil is powerful, yes, especially when it zeroes in to lobby in Congress on an issue that it really cares about, such as tax or climate, and when it is just trying to block legislative outcomes, rather than create them. In those circumstances the corporation can be very hard to defeat. But its power is constrained, as we were mentioning above, by its poor public reputation.

Go to the Jump for the rest of the Coll interview. [[BREAK]]

Your last two books involved tough subjects -- Afghanistan, the CIA, and the Bin Ladin family. But you say that Exxon was an even more daunting challenge.

They maintain remarkable discipline internally about most of what they do, but particularly about the media. They are not a corporation that welcomes serious or deep scrutiny from journalists, and they have been able to persuade -- and intimidate -- many of their managers, executives and even independent members of their board of directors, who by law are supposed to think for themselves, away from speaking independently to journalists. Most senior employees sign non-disclosure agreements that could put them in a vulnerable position with their pension or stock benefits if management concluded that they had talked to a reporter without authorization and had breached certain duties in doing so. They have a reputation for retaliating against people who cross them -- whether it is a fair reputation or not, they definitely have it. As you know from doing this sort of work yourself, you expect a certain percentage of the people you contact for interviews to decline to participate or to insist on not being identified. I had no trouble getting people around ExxonMobil to talk. But persuading current or former employees to help was harder than typically. Eventually, I got where I wanted to go in many cases, but it was exceptionally hard work and I was impressed by how worried people seemed to be about cooperating -- more worried than the average government intelligence officer I might approach, I would say, not that they are especially easy group, either.

Until recently, Exxon and other big oil companies were highly challenged to find new oil reserves. Now, almost every week we seem to read of a new oil find. Do these finds give Exxon a new lease on life, or is Big Oil still confronted by existential challenges?

I think it may depend on how big an opportunity shale oil and gas will really be over decades in free-market countries, including the United States. That's where ExxonMobil has the greatest strategic opportunity to own new reserves, if it can manage the political and environmental equations (which I sometimes wonder about, given its stiffness and capacity to defeat itself). I don't think anyone really knows what that opportunity will become, however, and factors like price and technology are just inherently hard to predict.

In conventional oil plays overseas and in deepwater, as ExxonMobil has always said, the problem is not geology but politics. I don't see the politics getting any easier. I would imagine ExxonMobil faces a future of continuing and deepening political risk in the upstream. The world is not about to get calmer. Nationalism, the effort to force super-majors into non-equity contracts, and the improving capabilities of competitive state-owned companies are challenges that are not going away.