From what I understand, under a conventional production sharing agreement an international oil company develops an oil field using its own capital. Once production begins, all income goes to the IOC to allow it to recoup its costs. When the costs are completely recouped, profit is shared between the IOC and the state.

How would high oil prices affect a PSA? Presumably, an IOC would be able to recoup its costs sooner, which in effect would allow the state to share in the field's earnings sooner as well.

On paper, this does not at all look good for the IOCs:

Example
Development costs of Field A: $10 billion
Cost per production: $20 (remains flat)

Price per oil: $50
Barrels of oil it will take for IOC to recoup costs: 333,333,333

Price per oil: $100
Barrels of oil it will take for IOC to recoup costs: 125,000,000

Unless I'm mistaken, this is an open and shut case: high oil prices result in lower bookable reserves for IOCs. And, in my opinion, because of this, IOCs are resorting to fraud; they are artificially raising stated "production costs" to allow the recoup-phase to last longer.

For example, when oil prices starting picking-up, Shell raised the development costs of the Sakhalin-II field in Russia from $10 billion to $20 billion.

Umm, sure.

And the western consortium developing Kashagan, the world's largest oil find in 30 years, recently said development costs have increased from $57 billion to $136 billion.

Lol.

Anyway, the reason I'm bringing this up is because Steve Gelsi of MarketWatch wrote an article today that sort of covers this phenomena.

Gelsi: Since Exxon Mobil relies on production sharing contracts with oil-rich countries to extract its crude, more expensive oil will likely limit the amount of petroleum it can supply to the world, analysts said... "They cannot have their cake and eat it too because of the high price of oil," said Fadel Gheit of Oppenheimer & Co. "They may cut their total production target by as much as 4%, but they'll be happy to boost profit by 20% or 30%. They're willing to trade off lower production for higher prices."

I'm in no way advocating PSAs. In fact, I believe the PSAs that IOCs have shoved down the throats of Nigeria, Venezuela, and Russia, for example, are exploitation in no uncertain terms. Putin, in fact, used harsher terms:

Vladimir Putin (in an interview with newspapers of G8 countries, 6/4/07): Did you like what was written? You know, that is a colonial treaty that has absolutely nothing to do with the interests of the Russian Federation. I can only regret that in the early 1990s the Russian officials allowed such incidents to take place, incidents for which they should have been put in prison.

PSAs are a historical wrong on moral grounds. High oil prices are allowing this moral wrong to be slightly balanced out and corrected. Just sayin'.

A week before Kosovo declared "independence," a friend of mine at work asked me how I thought Russia would respond if this happened.

Despite keeping a Russian news blog (winthrop88.blogspot.com, for those who don't know) it was hard for me to respond.

I immediately ruled out retaliation through the recognition of Abkhazia and South Ossetia. Russia's playing the principled position and successfully outlining the hypocrisy of its geopolitical adversaries. And it wants to continue doing this, quite naturally. So it wouldn't follow up as such, no way.

I also told my friend that Russia would make sure that the illegitimate state is not given a seat in the United Nations and a place at the Olympic Games.

Besides this, I said, Russia's options are limited. Obviously there will not be armed confrontation or energy embargoes.

But something will be done, I went on, and it will probably be something surprising and unexpected. That's what Russia is becoming known for lately, no less.

Closing the conversation, I whispered to my friend, "Maybe Russia will take this as a cue to help collapse the dollar, cooperating with China."

Well, I work in the Financial industry and know enough about it to know that these things don't happen. Individual actors can hardly play a role in day-to-day trading. Besides, major moves are widely passed on and reported upon.

I'm just saying that it could just be a coincidence.

Right?

A massive move from $1.45 to $1.50 in less than 3 weeks. To new highs.

Who knows what's going on. Only time will tell.

I'm just saying that certain statements of Russian officials point to unpredictable maneuvering in response to the cards they have been dealt. The statements are ambiguous in nature and can be seen as affirmation of the theory spoken above, if one chooses to believe it:

- Dmitry Rogozin: The recognition of Kosovo is "a strategic mistake, similar to the invasion of Iraq" (2/22/08)

- Vladimir Putin: "The independence of Kosovo is a terrible precedent. In effect, it breaks up the entire system of international relations, a system that has taken not even decades but centuries to evolve. And undoubtedly, it may entail a whole chain of unpredictable consequences" (2/19/08)

- Vladimir Putin: "We are not going to ape, but of course this will be a signal to us, and we will react to such behavior by our partners in order to safeguard our security -- we have a ready-made plan and we know what we are going to do" (2/14/08)

In closing, just one more thing:

The theory that China will never aid in the collapse of the dollar due to its vested interests in the stability of said currency is completely idiotic. Advocates of the theory mustn't be living in the real world.

Quite a lot of people have joined the bandwagon lately speaking of the death of Nabucco. "No supplies for it" written over and over again in Eurasian sites of all types.

And, yes, Russia has taken Europe and the U.S. to school in Central Asia. China too has stepped up and the Central Asian states themselves, kudos to them, have shifted their policies to come more inline with Moscow. Even Azerbaijan has stopped cooperating with Washington and Brussels, earning the trademark of America's "last friend" in Central Asia.

Western execs in the area are scrambling, while their legacy in Central Asia has already been written. Exploitation, corruption, and environmental destruction. So if you've read about what they've done to the Third World for the last half a century, it's just more of the same. Sigh.

In partnership with local and state-owned companies, Russia companies are ready to takeover. Only a matter of time, really.

This geostrategic realignment in Central Asian is real and it is permanent.

But Nabucco need not Central Asian gas, nor Iranian gas, which btw is not heading west either (Iran's gas will mostly go east to India via Pakistan, with any remainders going north through Gazprom-operated pipelines to various distribution points). Nabucco can be supplied regardless.


This brings me to the gist of my story, which is a prophecy... A prophecy that emerged in 2003 in the governments of various western nations by well-educated people and reads as follows: "If all else fails, Iraq could supply Nabucco [and save western civilization from Russian energy blackmail]."

Yes, the prophecy was written exactly like that, including what's in the brackets. A copy was made and both the original and the copy were laminated in pure gold. One gilded page was put in a secret compartment of the Resolute desk in the Oval Office, another in the Inverted Pyramid in front of the Louvre. No one knows which is the original and which is the copy.

Intricate codes have been scattered across the world in case the locations of the priceless prophecies are ever lost and an adventurous type is needed to find them.


But in all seriousness, the west is fulfilling its own prophecy and there is no other way of explaining its freakishly dimwitted behavior in Central Asia besides this way. Since 2003, they stopped taking it seriously, knowing deep down that "Iraq could supply Nabucco."

As such, politicians risked not their political futures fighting for uncertain energy supplies of nations of questionable allegiance, which now seemed conveniently dispensable. Instead, they thought, "Iraq could supply Nabucco."

And there's no problem with this, of course. Iraq has more than enough gas; BP puts Iraq's proven reserves at 3.17 trillion cm (1.7% of the world's total), but this is certainly a gross understatement of its probable reserves. And the security situation will improve with time. I mean, people's wills and spirits do break eventually. It will happen to Iraq, for sure.


Oh, and what will this new pipeline be called?

Kurdistan-Istanbul-Pristina.

Honestly, that's what the prophecy says according to someone I know who's seen it; named after Bush administration official Kip Hawley.

09/24/07: Economic Development and Trade ministry raises 2007 GDP growth estimates from 6.5% to 7.3%

10/08/07: Kudrin confirms 7.3%

10/24/07: Igor Shuvalov says 2007 growth could exceed 7.7%

11/09/07: EBRD estimates 2007 growth at 7.2% (lol)

11/21/07: Consultants from FBK say that Russia’s GDP could be growing by 9-10% a year in three years

12/27/07: Economic Development and Trade ministry raises 2007 GDP growth estimates from 7.3% to 7.6%

12/31/07: I predict 2008 growth at > 8%

01/28/08: Economic Development and Trade ministry raises 2007 GDP growth estimates from 7.6% to 7.7-7.8%

01/30/08: Kudrin confirms 7.8% for 2007; estimates 2008 growth at 6.5-7%

01/31/08: Rosstat puts 2007 growth at 8.1%

02/11/08: Kudrin raises 2008 GDP growth estimate to 7%

02/25/08 (today): Due to a trend that's becoming clearer, I would like to raise my GDP growth rate for Russia in 2008 to 9.5%

Natural resource-rich countries need to take several steps to maintain their sovereignty in a geopolitical environment increasingly hostile to their well-being.

1. Form a cartel that would control supply and increase price of resource
2. Ban foreign ownership of strategic natural resources, including the renegotiation of historical deals if necessary
3. Neutralize the "diversify supply" tactic, which seeks to divide and weaken natural resource-rich countries, by diversifying both demand and transit routes
4. Broaden basket of accepted foreign currencies and foreign currency reserve allocation. Encourage payment in gold or other tangible assets and barter deals
5. Pay down external debt and become financially sound; cooperation between rich and poor natural resource-rich countries could create mutually-beneficial solutions in this regard
6. Encourage global environmental responsibility
7. Increase budget dedicated to education, especially math and science
8. Build-up national defenses and become a military power with an impenetrable fortress