While we fixate on sexy headlines about Chinese military threats in the South
China Sea, for instance, or Washington 'lifting the ban' on crude oil exports,
we miss the bigger stories -- and we miss the reality. China's relentless resource
quest has the greatest impact on trading prices, which may not make for headline
news, but is a very important reality, while the stories about the US lifting
the crude oil ban were just wrong.
Michael Levi, David M. Rubenstein Senior Fellow for Energy and the Environment
and Director of the Maurice R. Greenberg Center for Geoeconomic Studies, navigates
us through today's oil headlines, extracting reality from sensation, and discusses
his new book, "By
All Means Necessary," co-authored with Elizabeth C. Economy, which takes
us through China's resource quest and how it will change the world.
In his second exclusive
interview with Oilprice.com, Levi discusses:
- The 'wrinkle' in US oil exports
- Political risk with exports ...
- And what it means for domestic prices
- The greater significance of the BP-CNOOC LNG deal
- US natural gas for China
- Why LNG is to weapons what spaghetti is to swords
- Why natural gas works as a weapon for Russia
- Competitiveness versus security with US LNG exports to Europe
- What the conflict in Iraq means for oil prices
- Why the EPA's new carbon targets are realistic
- But why implementation will be 'patchwork perverse'
- Why the real impact of China's resource quest is on trading prices
- China's resource quest and climate change
- Why Chinese companies still can't out-compete Western rivals
Interview by James Stafford of Oilprice.com
James Stafford: Several weeks ago American mainstream media headlines
were awash with sensational news that the US had lifted the ban on crude oil
exports, but in the fine print beneath the headlines this news was really just
about a loophole for processed condensates. How significant is this 'loophole'
for the future of US oil exports?
Michael Levi: I don't even know that it's a loophole. There has long
been a general belief that processed condensates can be exported under existing
law. The wrinkle in this case is that the processing is very much minimal,
and the administration confirmed that it still met the requirements for export.
I mean there's a broad view in the policy community that when push comes to
shove even unprocessed condensates are likely to be allowed to be exported.
James Stafford: Is it a question more of when the ban will be lifted,
rather than if?
Michael Levi: I don't have a particular time scale on that. I don't
see a lot of appetite in the administration for blocking exports on policy
grounds. I think that this is politically tricky territory, but to the extent
that the administration can allow a rational organization of energy markets,
I don't see a lot of appetite for going out of their way to avoid that.
By the way, the initial headlines were flat out wrong, which spurred a lot
of the confusion. There also was a sense out there that this was a first step
to a much broader relaxation. I actually read it in a very different way. This
was not a particularly politically risky step to take... so it doesn't give
much of an indication of what the administration's political appetite is for
more difficult steps. To the extent the administration can take some of the
pressure off the system by allowing condensate and condensate-like exports,
it actually lowers the need to make more significant reforms.
James Stafford: What would this then mean for domestic oil prices?
Michael Levi: Because this sort of export was generally anticipated,
I don't expect a significant impact on domestic oil prices as a result. If
there was a full out lifting of the ban on crude oil exports I think you'd
see some rise in domestic oil prices a few years out.
You would expect a complete removal of the oil export ban to have a larger
impact on domestic prices than on international prices. That's sort of a logical
implication of the fact that the domestic market's smaller than the international
market.
James Stafford: At the same time as this loophole was announced to
great fanfare, you noted that another, much quieter LNG deal between BP and
China's CNOOC was "at least as important as the U.S. move." What is so significant
about the BP-CNOOC deal, and what does it mean for the LNG market?
Michael Levi: There's a general belief even among a lot of people who
watch the LNG markets closely that China has no involvement in exports of US
natural gas. It's certainly true that no Chinese company has signed a contract
with an operator of a US LNG terminal.
But, I was struck during a visit to China last month to hear people describe
what they thought as upcoming exports of US natural gas to China. What they
identified were situations where traders who had contracts with US LNG exporters
had, in turn, other contracts to sell their gas on to CNOOC. The indicator
in these situations was that the contracts they signed, first with BG and now
with BP, have prices for delivered gas that are partially indexed to natural
gas rather than to oil.
Without seeing the contracts, no one knows whether this is linked to physical
flows as well. But at a minimum, it means that the emergence of the United
States as an LNG exporter has created an opportunity for buyers, including
buyers in China, to diversify some of their price risks that are traditionally
being associated with LNG imports.
James Stafford: In terms of LNG for Europe -- particularly the idea
of using LNG as a weapon against Russia -- what would an increase in LNG activity
do to Gazprom prices in Europe? We understand that the effect would not be
immediate, nor would it be drastic, but Lithuania has shown that it is a good
bargaining chip.
Michael Levi: I think you have to distinguish between the first...
I have this image in my head of someone trying to use a piece of spaghetti
as a sword when people talk about LNG as a weapon against Russia. It doesn't
go where you want to push it.
You can allow LNG exports from the United States. They're going to go to where
the price is best. Right now, the price is best in Asia, and there's a reason
to anticipate that will continue to be the case.
If European buyers want to pay extra to get LNG from the United States rather
than from Russia then maybe you'll see flows moving into Europe. I don't see
a significant appetite for that yet. That's why we're not seeing European contracts,
not because of US regulations. US regulations haven't gotten in the way of
Asian contracts.
What's in the way of European contracts is a lack of commercial attractiveness.
What US LNG exports can do is push down the overall price of natural gas. Even
if US exports go to Asia, if that displaces other gas to flow from Europe,
it can push down prices that improve European competitiveness.
It doesn't change the ability of Russia to use gas as a weapon. The ability
to use gas as a weapon has to do with the ability to cut off physical flows
during a crisis. It's important to distinguish that from long-term competitiveness
issues.
It's inevitable that Europeans will describe their desire for greater US exports
in terms of energy security. It's much more compelling to talk to American
audiences about solidarity in the face of Russian threats than it is to say,
'we want you to do this because our chemicals producers will become more competitive
as a result.' But, the reality is that the main impact of US LNG exports in
Europe would be on competitiveness rather than on security.
Michael Levi: For Ukraine to be more energy secure it needs to have
industry that can be profitable without subsidized Russian gas.
That's the basic problem here, right? All Russia has to do is threaten to
charge Ukraine the same as everyone else would charge Ukraine, and Ukraine
is in trouble.
Everyone worries about countries cranking up prices to above the market price.
That usually corrects itself pretty quickly.
The real risks, as Ukraine illustrates, tend to come when a country sells
energy below the market price and then threatens to sell it at the same price
that everyone else does. There's nowhere to run when that happens. When you're
in that situation, your [energy] security is very low.
You saw that with the Soviet Union and Cuba. You see it with Russia and some
of the former Soviet states.
James Stafford: In our last interview with you, you discussed "outsized
disruptions" of the oil market focusing tightly on the Middle East. Over the
past couple of months, nothing could be truer. With the Islamic State (IS)
now in control of a large swathe of land bridging Syria and Iraq, fighting
for control of a key Iraqi refinery for domestic consumption and arguably in
control of all of Syria's relevant oilfields, how outsized do you expect the
disruptions to be in the coming weeks and months, keeping in mind that so far
the crisis has not begun to affect Iraqi oil exports?
Michael Levi: To understand impacts in the coming weeks, you want to
talk to an expert on Iraq and on Kurdistan. I think the big question looming
over all this is the long-run impact.
Most forecasts that foresee $100-ish oil prices definitely assume that a significant
part of delivering that comes from Iraq, and if the political and security
situations aren't conducive to substantially more investments that part isn't
there. That's why you're seeing the more distant oil prices perk up by more
than near term ones, because people are concerned about this long-term ability
to deliver.
James Stafford: Who has been benefiting the most from Iraqi oil?
Michael Levi: Look, the big oil consumers benefit from Iraqi oil regardless
of whether they actually import oil from Iraq.
I think one of the big fallacies in people's thinking about the Iraqi oil
sector has been the focus on who's making money producing the oil. The bigger
impact is on consumers. It's not clear to me that the Chinese make money producing
Iraqi oil, at least as producers; but as consumers--to the extent that Iraqi
oil production holds world prices down--the Chinese, the United States, and
also some other countries benefit.
On a numbers basis it wouldn't surprise me if Jordan benefits enormously,
not because of their economic relationship, but because Jordan spends so much
money on oil imports. Anything that keeps production up and holds prices down
is good for Jordan. I mean that's the way you think about it, not just in terms
of who's getting the chance to make $2 a barrel producing the stuff.
James Stafford: Back in the US, how do you perceive the EPA's new carbon
emission regulations for power plants? Are the targets realistic?
Michael Levi: There's no question that these targets can be met. The
EPA has gone out of its way to propose targets that can be achieved without
people needing to be particularly creative.
The implementation will be very interesting to watch. I think a lot will depend
on the decisions that individual states make about implementation. If you have
a patchwork of different approaches you could see some perverse outcomes.
As a general matter the EPA seems to be trying to have achievable targets
and to have as much flexibility under existing law as can possibly be given
to the states that have to comply. You still shouldn't ignore the fact that
comprehensive national legislation would be more efficient than using this
authority for something that it wasn't designed for. But, within the confines
of the law, they're trying to create as much of that flexibility as they can.
James Stafford: A number of analysts are suggesting that the EPA's
proposed regulations could help revive nuclear energy. Do you see this happening?
Michael Levi: The EPA regulations don't really tell you anything about
which sources will benefit, because the micro-level incentives that will affect
investments in operation are all going to be determined by the states. The
EPA certainly uses the possibility of nuclear shutdowns in determining its
baseline.
So, there's a bit of a message there that saving nuclear power plants is one
way you can achieve your goals, but it's all up to the states whether that's
how they do things or not.
James Stafford: Your new book, co-authored with Elizabeth C. Economy, "By
All Means Necessary," takes us through China's resource quest and how
it will change the world. What is the key takeaway message from this work?
Michael Levi: To me there are two very large takeaways. The first is,
while we fixate on the sexy headlines about how Chinese workers in Africa are
changing society there or on how Chinese behavior in the South and East China
Sea is creating military risks, by far the biggest consequence of China's resource
quest so far has been through its simple impact on trading prices. That's had
consequences for producers and consumers all over the world regardless of whether
they have direct interactions with China. We often skip over that, but it's
enormous.
The second big takeaway to me is that while China's changing the world, China's
engagement with the world is changing China in big ways as well. You see that
in the behavior of Chinese companies on the ground in the countries where they
invest. You see it in the way that China thinks about military deployments,
about cooperation in securing sea lanes.
You see that in the way that China is addressing its own demand and its own
production opportunities, as it responds by itself to the high prices that
it's played a critical part in creating. Its impact on China itself, as China's
resource quest evolves, I think is something that's been under-appreciated
but that over the long run will be very consequential.
James Stafford: In terms of impacting climate change, how does China
compare globally and what can we expect over the next 5-10 years?
Michael Levi: What we do see is an interaction between China's efforts
to deal with its local environmental problems, its efforts to provide security
of supply for its energy sources, and the climate outcomes that develop. To
the extent that China feels more confident, for example, in securing natural
gas from a variety of sources--domestic, LNG, Russia, Turkmenistan--it becomes
more willing to use natural gas to replace coal as a way of cutting local air
pollution. That, in turn, has benefits for global climate change.
I think that's how you think about the impact of China's resource quest on
climate change. It's the sort of second order effect. I would've said a few
years ago that extreme Chinese concerns about the security of natural gas supplies
means that there won't be a substantial shift from coal in that direction,
which itself has timing implications, but this changing level of confidence,
together with much greater concerns about local air pollution, starts to tilt
things in a different direction.
James Stafford: How is China's resource hunger changing the face of
competition globally for oil and gas plays in frontier venues in Africa and
the Middle East?
Michael Levi: Still, I think you need to distinguish between two different
kinds of frontier venues. Chinese companies appear to have considerably more
appetite for politically risky places. You've seen that in Sudan, for example.
That's a place where they have a peculiar kind of competitive advantage over
Western firms.
Where I think the competitive advantage has been overstated, at least by casual
observers, is in frontier places that are frontier because of their technical
difficulties. The Chinese companies still are not on the cutting edge. They
still need to partner, at a minimum, with Western companies, and that constrains
their ability to directly out-compete Western multinationals, because in so
many cases they need the Western multinationals.
You saw that, for example, in the more technically complicated parts of the
Iranian natural gas sector. When Western companies pulled out because of sanctions,
there was a fear that Chinese companies would fill in and undermine the impact
of sanctions. It turned out that in a lot of cases, the Chinese companies weren't
capable of operating the projects, or needed equipment from Europe or the United
States that they simply couldn't get.
Source: http://oilprice.com/Interviews/What-The-Oil-H...chael-Levi.html
