Shell's Sakhalin Shell Game

Coming Clean on Sakhalin-2

Europe Wary of Sakhalin Loan By GUY CHAZAN January 2, 2007; Page A4 MOSCOW — A potential about-face by the former Communist bloc’s biggest single investor over a massive Russian energy project comes amid rising Western concern about increasing state control of that nation’s energy sector. The European Bank for Reconstruction and Development is likely to abandon a loan to Sakhalin II, the huge energy project in the far east of Russia, after Royal Dutch Shell PLC and its two partners were forced to sell a 50% stake in the venture to Russian natural-gas giant OAO Gazprom.

One of the great legacies of the "excellent" rule of the Russian embarrassment, Yeltsin, was the would be economic disaster of Sakhalin-2, the first totally private development project in Russia.

The project was originally a three company cooperative lead by Shell 55%, Mitsui 25%, Mitsubishi 20% named Sakhalin Energy.

On the surface, the project looked like a normal enough setup. At a time, when Russia still lacked a lot of the newest technology for exploration, this project brought in 3 foreign companies to invest and develop the field. In exchange, all production would go to export and before any taxation was taken out on the product, the companies would be allowed to recoup their losses. Fair enough, right?

Well, as with all such things, when dealing with the West (and the Japanese in this case), best read all the fine, very fine, and minute print. The obvious question becomes, how do you screw the Russians out of all their oil and tax monies?

Actually, quite easily. First, the contract, which was signed on 22 June 1994, set the per barrel oil price at less then half the value of that day's oil value and set the growth on a standard, no questions asked, 3% per year growth rate through the year of 2045A.D. So, by the time oil was hitting $60, the contract had it at $34. Thus, by under scoring the cost of the product, you get a lot more out of the ground, to pay off the investment, before having to pay taxes.

The other way of doing this, and of course, they did both, was the highly increase the "cost" of the development. Originally billed at $12 billion, when the contract was signed, the cost of investment was rewritten as $22.2 billion through the year 2010.

Both these moves insured that less then 10% of the 150 million tons of oil and 500 cubic meters of gas, would be taxed and non of it would ever reach the Russian market. For Shell and its partners, this would be the robbery and hoodwink of all robberies and hoodwinks. At even $40 per barrel, they could easily pump all that oil out, without breaking down, even seriously, the $22.2 billion price tax, while realizing a $20+ (and that plus reached over $80 when oil hit over $120) profit per barrel (not counting logistics costs).

What a game, what a game.

Of course, when Putin and his people came in, they say the obvious theft and fraud for what it was and were at powerless to tare up the contract. The reason for this was the massive storm of negative publicity that would draw on Russia from the West's attack dog, slave media. This at a time when Russia was desperate for investment.

So, a Russian being a Russian, Putin looked at other options.

To that end, Putin sent Oleg Mutvol, the vice minister of Rosprerodobzora, the Russian version of the Environmental Agency. The man quite out did himself. Congratulations.

It is common in the West to believe that Russia is a lawless wild East. That is rather far from the truth. While it is true that enforcement is often lax, there are, actually, quite a large collection of very specific laws and standards.

What Oleg found were destroyed forests, polluted rivers, dead lakes and decimated off shore fisheries, all the result of Shell's careless construction of the pipe network and other infrastructure. Shell and its partners were so arrogant about their ability to do as they pleased, they did nothing to hide their crimes and paid little attention to Mr. Mutvol. However, Mr. Mutvol paid very close attention to them.

By September 2006, construction was halted and an accounting was begun. What is the value of a tree? Of a salmon? Of a Gray Whale? What is the value of the economic life of the local people being destroyed? Tens of thousands of fishermen and their families faced disaster. Over a million tons of waste and dredging soil was dumped off sea. For this alone, Sakhalin Energy was sued and forced to pay out $110k. A pittance of a compensation.

River effects are noted as follows in the "Sakhalin Energy's muddy waters - A "few cases" where Sakhalin Energy is endangering wild salmon on Sakhalin Island":

Pilenga River: Erosion control is visible on one bank but not on the other bank of
the as of April 2006.

Mereya River: Active slope erosion and water pollution as of July 2005.

Woskresenkovka River: The clear river is threatened by the creation of a junction of
two pipeline trenches filled with mud as of December 2005.

Golubichnaya River: Normally this river would not be frozen solid in winter but the
digging of the trench has provoked the complete lack of river flow as of December
2005.

Bystraya River: The river ice is covered by soil as a result of the river crossing,
which will result in additional contamination when the ice melts as of December
2005.

Stolichnyi stream: Ploughed-up channel of spawning stream and active erosion and
silted processes as of August 2005.

This was all just the tip of the iceberg. Before the full extent could even be calculated up, Shell saw the writing on the wall. In order to get out of its responsibility to pay, it gave up control of Sakhalin-2, handing Gazprom 50% +1 vote and leaving itself 27.5%, Mitsui 12.5% and Mitsubishi 10%.

Now that one more of Yeltsin's traitorous legacies has been cleaned up, taxes are flowing in to Moscow, even as Moscow spends large sums to purchase medical equipment, upgrade the universities and rebuild the army, as well as tax breaks to get new businesses and factories opened.

World Wide Threats to Oil

While the world seems awash in oil, with a daily production of some 78.9 million barrels, and oil in every imaginable container waiting for consumption and the great oil rally stalled out in the upper $60s, there are several very vicious hot spots that could and will drive up oil prices by threatening supply. Lets review.

Mexico:
Mexico is both a major producer of oil and sits on a major route for oil importation into the US. Mexico is also in the middle of an escalating and multi-layered civil war. The two top cartels (mafias) have more than enough foot soldiers to openly challenge Mexico's military and the weapons to do it with. There are dozens of smaller cartels, hundreds of gangs and the Zepotista uprising to boot, as well as the millions of returning Mexican poor, no longer employed in the USA.

Add to all of this, a rapid collapse in the Mexican surface based oil exploitations due to deposit depletion and the equivalent fall in revenues and you start to get the picture. In 2008, Mexico's dry earth oil production volumes collapsed 20%, after a 10% collapse in 2007. So even without a civil war, oil production is plummeting.

True, Gulf production is increasing, but a full blown civil war and anarchy will lead to major production problems, for all of the Gulf of Mexico. As has been seen in the Red Sea, a few hundred illiterates with modern weapons, on speed boats, can seriously endanger a critical world trade route. Unlike freighters, the oil platforms can not run from raisers and it will further hazard oil deliveries to the US port of Houston, as well as coastal refineries and villages, which are very vulnerable to such attacks.

All in all, just Mexican oil hazards run at 3.1 million barrels per day and an additional 1.6 million barrels per day of US production could be endangered.

Venezuela
With a production of 2.4 million barrels per day, Venezuela is also facing major economic and border issues that could easily disrupt at least part of the flow.

Since taking power, Chavez has watched oil production fall off by more than 25% from 3.2 million barrels per day, as he spent the monies marked for repairs, upgrades and exploration. His various social programs, arms build ups and the falling cost of crude, have driven profits to the breaking point. Venezuela is further in arrears of $5 billion to oil services companies, parts manufacturers and contractors, the lack of which will further degrade production.

Though the threat of US invasion is near zero, with a fellow Marxist in US power, the bristling border war with Columbia is something else. Both nations, as well as neighboring giant Brazil, are on a weapons buying spread from Russia. With both sides their clients, there is at least some chance that Russia will be able to contain the conflict, but it will continue to be a drain on Chavez's funds. As funds dry up and programs are cut, civil unrest may erupt up and out and also further disrupt production.

UK (North Sea)
To put simply, the North Sea fields are failing. Since their peak in 1999, production has fallen by 50% to around 1.6 million barrels a day and the UK, in 2006 and with little fan fare, transformed from a net exporter to a net importer of oil. If we take a straight line regression, than in another 7 or 8 years, the North Sea will be producing next to nothing. Further, that would be a drop of around 220,000 barrels per day per year.

The maintenance of the North Sea fields is now strictly running on an upward curve of diminishing returns for increased investment. Any future British recovery will be strictly as an importer nation.

Nigeria
With a rate of production of 3.6 million barrels per day and growing, Nigeria faces serious internal issue that may tear the nation apart. First and foremost amongst these is the split between a radicalized Islamic north and a Christian south. However, this is not directly threatening oil production. More dangerous is the uprising in the South's river deltas, where the locals, whose land is used for production and transport, see precious little if any of the profit. Kidnappings of foreigners and bombings of pipelines have escalated it no full battles between security forces and rebels, in May 2009, causing a 50% drop of production, down to 1.6 million barrels. The rest is also threatened.

While this barely registered on the world stage, at this point, combined with other issues, this could have a major contributing effect to shortages.

Sudan
Sudan, while not a major producer, does pump almost half a million barrels per day. This in turn is one of the major sources of income for the impoverished country. Of course, most of that land used to belong to the soutehrn Christians, who were forced off by the Muslim Arabs, after a 20 year bloody civil war. The peace that followed is now quickly unravelling.

Azerbaijan-Georgia-Turkey Pipeline (BTC pipeline)
The one million barrel per day oil pipeline, passing through Georgia, is under threat once more. No, Russia is not preparing to invade America's puppet dictator, though that is never off of the table, all things considered.

Instead, the threat comes form the south, from Armenia. The Armenian-Azerbaijani conflict over Nagorni Karabach is reviving back up, threatening to explode into a fresh war. As such, the first thing that Armenia would do is cut the lifeline of the Azerbaijani regime, by striking the Georgian pipeline running through southern provinces of Georgia, dominated by Armenians. Georgia's defeated and humiliated military would be hard pressed to restore control in those regions.

Further, there is an upswing of Kurdish resistance in Turkey, especially along the pipeline's course. In 2008, the PKK blew up the pipeline and the threat of a repeat performance ha snot diminished.

North Korea
While producing no oil, NK sits near and on the key routes of oil and gas delivery from Russia to Japan, Taiwan, S.Korea, Philippines and China itself. Any war and the refugees that follow will have a determined effect on oil/gas deliveries. At least 500,000 barrels a day would be affected.

Conclusion
Thus, at present, under various threats are 12.9 million barrels per day or 16.3% of the world supply. Further, this does not even supposition a War with Iran by Israel and the US, terrorist attacks against Saudi oil facilities, a revolt in the UAE by Sunnies, a re escalation of the Iraqi civil war or the increased tariffs on US domestic drilling, all of which will have a further massive disruption of the world's daily output.

Even at 16%, oil would quickly scale upward as all those reserves around the world would start to run dry within 3-4 weeks and prices would sky rocket, crashing any chances of recovery.

America's Last Dominant Industry Starts to Leave

America has begun the initial steps to final outsourcing of it's last dominant industry. As before, a recession is the key to making the move. Even as we speak, the oil/gas and oil/gas services industries, always a US dominated industry, has begun mass layoffs. From Schlumberger to Baker to Halliburton and dozens of smaller firms, tens of thousands of jobs are either already gone on being shoved into the guillotine.

America has always been the dominant player in the oil/gas services field as it had led the way, back in the late 1800s, in oil and later gas exploration and exploitation. Oil services companies do everything that it takes to deliver the product to their clients, the major private and national oil companies. This includes everything from locating deposits, up to 10km under the ground, to drilling to them, to developing the wells and managing production, to transferring the product to refineries and storage facilities. As such, these companies employ an immense amount of technology and industry.

As oil/gas exploration moved to the far corners of the world, it made more sense to move at least some of the manufacturing closer to the international customers. However, the business units, engineering departments and quality personnel were almost all exclusively employed in America. This will be no more.

As with other formerly dominant industries, such as light manufacturing, IT, textiles, etc, a recession was used as the knife to finally do in the workers. IT is a prime example. While outsourcing was a force that was picking up steam throughout the 1990s, it was not until 2003, the year after the tech bubble bust of 2002 (and a short recession) that IT outsourcing finally took off. The companies involved, used the bust to lay off hundreds of thousands of tech workers around the US and Britain, sighting low profits or debt. The public as a whole accepted this, as part of the economic landscape and protest were few, especially with a prospect of the situation turning around. However, shortly after the turn around in the economy, it became very clear that there would be no turn around in the IT employment industry. Not only were companies outsourcing everything they could, under the cover of the recession, they had shipped in tens of thousands of work visaed workers who were paid on the cheap.

A similar process had already begun in the oil/gas services and oil/gas industries and has now begun it's initial acceleration into a full removal of the American worker from those positions. Regardless of the layoffs, work still has to be done, so new hires will be done in cheaper countries, where much of the manufacturing is already located. Once a subsection of a team or a new office is set up, it will become much easier to rationalize the movement of whole departments.

Worst of all, this is not a process that takes long to complete. In truth, the IT landscaped went through its total metamorphoses in less than 3 years and the recession, and thus excuse, were tiny compared to this one. America/British IT went from begging locals to work, due to the high demand for employees to having 700+ resumes on a single job opening with in a mere 24 hours. The situation has never changed.

So what is in store for America's energy industry future? For the owners, higher profits, when demand goes back up. For the workers? The same hell of unemployment that the rest of the US/UK now enjoys.

World to Face Super Oil Price Shock That Will Scuttle Any Economic Recovery

Several things have now moved to set the world up for one of the worst run ups in the price of oil and all coming by the second half of 2009.

As everyone knows, oil is plunging, in part due to over production during the high times of the recent past. This is also partially due to the strengthened dollar's action, since that is what oil is valued in. The world economic depression has also done its part to further drive down the already staggering price.

As oil prices drop, many oil producing areas, on the fringe, such as the Canadian oil shales, no longer become cost effective. Coal gasification, arctic drilling and deep reserve harnessing all face similar fates: closure of these projects. The problem here, of course is not that they cannot be opened but that production cannot be resumed quickly and will again take time to rev back up.

The economic world collapse has also driven down demand for oil and many new, affordable projects are being put aside as existing production is quickly scaled down and alternative energy sinks faster than a holed submarine. These too take time to rev back up. Oil companies simply do not react quickly.

Enter the US Federal Reserve and the American elites, hell bent on escaping depression by mass liquidity: read printing money as fast as they can cut down whole forests for paper.

There is some chance this may rev production back up, before the hyper inflation hits. Further, as cash is king becomes again cash is trash, there will be another mass movement into commodities, such as oil.

What the world will suddenly face in mid 2009 is a massive demand for oil, coupled with a spike in its price due to the mass liquidity of the dollar. Supplies are already low, production is being cut back and development is idling faster and faster.

When demand is high, pricing pressures already pushing up and supply falling behind quickly, you are now looking at a serious oil shock. No, this will not be good for anyone, except maybe Russia and a few other states who produce oil and either do not sell it in dollars or are themselves not pegged to the dollar.

While any US/European recovery will collapse back down by a massive spike in energy costs that will be just one more crushing blow to the people and industry, countries like Saud Arabia, pegged to the dollar, will face inflation which will make the US hyper inflation seem modest. This will force them to either fall to revolution and civil war or to decouple from the dollar.

This will, in turn, of course cause even more market chaos as reserve currencies get sorted out. For the dollar it will be the end, as the hyper inflation and the decoupling will combine into a perfect Zimbabwe experience.

Hold on for the ride folks, we've passed the warm up hills...its about to get real interesting.

The Biggest Unreported Threat to Oil

Of all the threats to oil and gas stability in the world, one threat has gone latently unreported but holds the potential one of the most disastrous episodes in the history of oil: the upcoming Caucasus Wars.

The Situation

The US has three allies in the Caucasus: Turkey an Islamizing regional powerhouse; the Islamic pseudo monarchy/dictatorship of Azerbaijan where opposition leaders tend to die young; and Orthodox Georgia, where a US/EU backed tinpot dictator rules with an iron fist.

Opposing this are Russia and its full time ally Armenia, both Orthodox countries and the king of the Shiite Islamics, Iran, a some time partner of Russia. There are also two break away zones of Georgia, both desiring union with Russia.




At stake are a half dozen oil and gas pipelines and the Azerbaijan's oil/gas fields as well as northern Iranian fields.



As everyone who is familiar with the area, the Armenians and Azerbaijanies fought a bloody war over a large chunk of land known as Nagroni Koraban. This area, owned by Azerbaijan but populated by Armenians has been an unfinished conflict for the better part of the past 14 years, with shelling and sniper fire a weekly event. Clashes between armed forces, company or smaller in scale, are also rather common.

Armenia has rebuilt its economy, though it is still primarily an agrarian nation and one surrounded by enemies, both Islamic and fellow Orthodox. It has no land connection to its closest ally Russia and thus has become very militarized.

Opposing Armenia, Azerbaijan is a none sponsor of terrorists, both against Orthodox Armenians and Orthodox Russians. It is also an "elected" monarchy where the son of the president for life was elected in the loosest terms by one of the most blatantly rigged elections in human history. Dick Cheney, hypocritically, was quick to praise them. Azerbaijan is the poorest of the the former soviet republics, regardless of its oil/gas wealth. The money is either stolen, spent on the military or funneled to Islamic Jihadists.



Than there is the Republic of Georgia, a nation hobbled together from several former semi independent Georgian kingdoms, all of which have been dominated by either the Persians, Turks or the Russians for the past seven hundred years. Added onto this conglomeration, by Stalin, were the Ossessians, Abkhaz, Armenians, Chechens and Ajarians, totally separate ethnic groups. When, in post Soviet 1992 Georgia, these areas asked for autonomy, Georgia responded with a full fledged set of wars, even as it was fighting its own civil war, to exterminate these minorities. The Georgians, not having been good soldiers for some one thousand years, dully lost these wars.

Add to this the three main regional powers: Russia with an islamic jihad in Chechnya; Persia with Kurdish and Azari uprisings and terror; Turkey with Kurdish insurgents and you get an area with an extremely volitile mix of religions, ethnicities and alliances and national goals.

Enter Saakashvillie the Mad

It all started with the Rose Revolution and never mind how a half million roses "spontaneously" sprouted in Georgia, particularly around it's capital Tbilisi, in the midst of winter...Washington and the American taxpaying suckers er citizens have a way of making these things happen.

A Georgian US (NYC) trained lawyer (at this point most sensible people would be either running or grabbing rope and pitchforks) through massive US/EU funding and corruption was able to remove the former US/EU favorite Shevardnadze (who had become to close to Russia-the US/EU center of all evil and badness and scary people) and take supreme "democratic" power.

Murdering his own party members, like his prime minister Zurab Zhvania and arresting opposition party heads while sending hundreds of their followers to the hospital, simply isn't enough. No our would be Napoleon, king of a mouse, has nothing short on his mind then the reconquest of Abkhazia and S.Ossessia and the Final Solution to their people. With the backing of Bush the Bubbling and Cheney the Bloodthirsty and the various hordes of cannibalistic Neocons and their Marxist ideology, Saakashvillie feels he can take on those areas and even stave off the Red Army.

Problem here is, does he 1. believe that Russia will not protect its citizens (95% of the people living in those two areas, to include the Georgians, are Russian citizens) 2. believe that Russia, if it were to move in to protect its people would be countered by the US both diplomatically and militarily or 3. that the great Georgian army of 37,000 (only about 5,000 are fully battle trained, most of the rest barely know what end the bullets come out) can not only stop the Red Army but reconquer Sochi, too.

More than likely, he believes number 3. Megalomaniacs tend to be like that. Already, Georgian troops are massing in Kodorski Ushel (valley) after having destroyed an opposition Georgian politician there and his followers-- Kvistiani. I knew him personally and he made a toast to my new, young bride, shortly after our wedding, at a big diplomatic dinner I had arranged. While Kvistiani was accused of being Moscow's man, he was anything but and worst, he was not Washington's man and that, folks, simply can not be tolerated.

But I digress. Kodorski Ushel is strategically placed to allow the Georgians to by pass the best protected routes and defenses of the Abkhaz. Never mind the Red Army has a division in the area and another, armored division on short deploy notice not far inside of Russia.

Furthermore, S.Ossessia is in the middle of a sniper siege and women and children are being evacuated into Russia's N.Ossessia province to it's capital Vladikovkaz (home of the Beslan massacre). So where is Washington and Brussels when their puppet orders his men to gun down through sniper fire, women and children? Oh, that's right, it's only terror if a Serb is accused of doing this, not a puppet of the West. As this is happening, N.Ossessian militia, Russian Federal Special Forces and Russian Cossacks are streaming in to the area to once again defend it.

All this is of course making for a fun late summer/early fall. A tinder box full of dynamite and everyone is throwing lit matches.

Washington has once more stuck its nose in and glued it to something out its control.

As the War Starts

Sooner or later and I'm betting on sooner, the war between Georgia and Russia will fully explode, the Georgian dictator and murderer counting on Americans in country (some 1,500 US service men) and those out of country to come to his side and die for his genocidal ideals. Many more than likely will. Georgia's ally, Azerbajan will more than likely enter, drawing in Armenia on the opposing side. The Armenians living in southern Georgia (a people who have been abused non-stop by the Georgians for the past 15 years) will more than likely blow the Baku-Ceyhan pipeline, cutting off 1 million barrels per day off the world market.

The conflict will quickly spread, with Chechens and other Islamics streaming into Russia and possibly attacking the Dryzina pipeline, threatening another 1-2 million barrels. Russia will be forced to further invade Azerbaijan and more than likely Iran will strike north into it also. DC or Israel might take this opportunity to attack Iran, which will cascade into a whole other conflict and cut off another 25% of world oil.

Even if the US has a sudden and rare attack of common sense and does not move into the conflict, Turkey will more than likely also get sucked into the fight. This will of course draw northern Iraq in. A Turkey busy fighting Russia will be much easier to deal with by the Kurds and by the Greek Cypriots out to get the invaded half of their island back.

At this point, the question becomes: does Greece and Bulgaria and possibly other Balkan countries sit this out or do they take the opportunity to revenge upon Turkey again and this time free Constantinople.

In gist, this is the most under reported but yet volatile situation to affect the oil world. At a minimal 1 million barrels will be brought off of the market. The volume could easily go up to 5 million.

How will the blind world react to that?