As noted earlier today, the Obama administration on Monday gave Royal Dutch Shell “conditional approval” to drill an Arctic oil lease off the coast of Alaska in the Chukchi Sea – a move that has environmental groups in a tizzy.
Shell actually gave up on its hopes of drilling in the Arctic a little over a year ago after a setback in federal court, and at the time, environmental groups and the media were satisfied that the situation made sense, given the administration’s well-known posture on environmental issues and energy.
The mainstream media have been silent this week on why the Obama administration, with its pattern of uniform and ruthless hostility to the fossil fuels industry, has given this approval. Even the New York Times, which is usually able to mouth a narrative planted by administration officials, has offered no explanation.
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The best it can come up with is a general statement that the administration has sought to “balance” its ambitious environmental agenda by “opening up untouched federal waters to new oil and gas drilling.” This claim is based on one previous action: a decision in January 2015 to implement a five-year plan for opening limited drilling opportunities off the Atlantic coast and in the Gulf of Mexico.
The first stage of the plan won’t happen until 2017, however, after Obama has departed office. That could be seen as a red flag, if we consider that offering the enticement of drilling leases is lucrative in itself, for the politicians who control them – even if actual drilling is never authorized. Just putting the leases on the table is something governments can do to create bargaining chips out of thin air.
Read more closely, the approval for Shell in the Arctic offers the same kind of clue. Drilling is nowhere near starting:
The Interior Department’s approval of the drilling was conditional on Shell’s receiving approval of remaining state and federal drilling permits for the project, including permits from the Bureau of Safety and Environmental Enforcement and authorizations under the Marine Mammal Protection Act.
Shell still has a number of hoops to jump through, and with only 20 months left in Obama’s term, there’s no guarantee all the dotted lines will be signed.
That said, it does seem that Shell is getting most-favored-oil-company treatment at the moment. A federal district court judge on Friday ordered Greenpeace to stop harassing Shell’s ships and equipment in the Chukchi Sea, which Greenpeace has been doing with small boats and drones. Judge Sharon Gleason’s injunction requires Greenpeace to maintain a standoff distance from Shell assets. (And yes, Gleason is an Obama appointment who took the bench in 2012.)
With things coming up roses for Shell, it’s interesting to review just a few of the things the company has been doing in the last few months.
Courting Iran
One is lining up to resume its operations in Iran, as soon as sanctions are formally lifted. Shell isn’t at the back of the scrum for this either. In both the industry press and the mainstream media, Shell is characterized as leading the pack: one of the first companies – to all appearances, the first “super-major” – the Iranians have held talks with.
Newsweek reports that Shell “has been one of the few oil majors to acknowledge its interest in Iran,” so it’s noteworthy that Shell has no fear of doing that while its Arctic drilling application is before the Obama administration. Clearly, Obama’s executive agencies have to be aware of Shell’s eagerness to get back into Iran.
Plumping for a carbon scheme
Another thing Shell has done recently is send its CEO forth to advocate carbon trading, or the imposition of a “carbon price.” This global rent-seeking scheme is, of course, an ingenious way to force everyone on the planet to pay money to the recipients designated by a carbon authority. Call it what you want – rent-seeking, shakedown, extortion racket – it’s just a way of gaining leverage to force people to cough up, in perpetuity, for the privilege of being on the planet.
Shell has jumped in on “carbon pricing” with both feet, at least at the level of public lip-service. CEO Ben van Beurden penned an op-ed hailing carbon pricing in September 2014, the same day he appeared at the UN climate summit during the General Assembly meeting to push for a carbon scheme alongside other leaders from various industries. He doubled down on his push in a speech to oil and gas industry executives in February, arguing – not, of course, against his own interests – that the globe needs to shift from coal to gas as fast as possible.
So, fine. BP has also been running around for years trying to appeal to hipsters with a “green” message. Big deal, right?
But another noteworthy connection emerges from this advocacy nexus. In September, the lead speaker in the climate forum where CEO van Beurden appeared was the CEO of Norway’s Statoil, Helge Lund. Lund led the charge in arguing strongly for carbon pricing.
Buying BG Group – and shoring up an old friend of Obama’s
Shortly thereafter, Lund was lured away from Statoil to take over British energy conglomerate BG Group Plc – a move that emerged clearly, by early April 2015, as the prelude to Shell buying up BG Group. Lund was installed at BG in early February. The Shell tender, which will form the second-largest energy super-major in the world, was announced 8 April.
This is the third interesting thing Shell has done in recent months, as its Arctic drilling application awaited the decision of the Obama administration.
Of course, the joint appearance of Mr. van Beurden and Mr. Lund at the UN climate forum in September isn’t the principal interest here. What is of greater concern is whose interests are being basically bailed out by the Shell acquisition of BG Group. Shell is buying BG Group at an overvalued price, according to industry analysts. And the main beneficiary, other than BG Group shareholders, will work out to be that peculiar object of Obama’s solicitude from a few years ago: the Brazilian national oil giant Petrobras.
BG Group has a major stake in Petrobras’ offshore drilling projects – for some of which Obama had the U.S. Ex-Im Bank provide billions in loan guarantees to Petrobras starting in 2009. (The interests involved coincide quite exactly in the Tupi oilfield, which was named as the target of exploration in the Obama loan guarantees, and is the oilfield where BG has the major stake.)
The Petrobras projects off Brazil in fact represent a very large part of BG’s activities, a position that turned sour by mid-2014 with the explosion of Petrobras’ ongoing corruption scandal, which has adversely affected its production and financial condition.
The Shell tender couldn’t have come at a better time for shoring up Petrobras – and, perhaps, for making it beholden. (See below.) Industry reaction has been mixed, with many expressing the sentiments summarized in this Wall Street Daily piece. Deep-pocketed Shell appears to be taking on a lot with BG’s Petrobras connection. It’s also betting heavily – at some risk – on an increase in liquefied natural gas (LNG) demand in Asia. The two major risks in this buyout are not offsetting; they’re additive. After the tender was announced in April, the price of BG Group shares went up, and Shell’s went down.
That doesn’t mean Shell wouldn’t see value in playing a long game, one that might be costly in the short run. But the question asks itself: is Shell getting a quid for a quo here, with the uncharacteristic – even inexplicable – Arctic drilling approval from the Obama administration?
Could be. Whether it will ever turn into actual drilling is another story. But it will be valuable to Shell, for a while at least, as the promise of potential drilling. The Arctic lease’s value as a company asset has increased.
The Soros factor
Does George Soros figure into this, as he was thought to with the Petrobras gambit in 2009? Again, could be. His latest move with Petrobras shares was remarkably timed.
In October 2014, the first reporting emerged that Helge Lund was being enticed to exit Statoil for BG Group with a big £12 million incentive. The timing of subsequent events suggests that the idea of the Shell-BG buyout was probably already being discussed. Certainly – see links above – BG Group was seen as a prime takeover target in 2014. Lund would have known that going in. (Indeed, from the earliest days of his tenure at BG – see links – it was clear that he expected to be with the company only a short time. Shareholders cried foul over the whole deal, which in hindsight looks very much like Lund being paid handsomely just to helm a preplanned sale to Shell.)
It was at the same time, in the fourth quarter of 2014, that Soros sold out of his more than 766,000 Petrobras shares and cut his call options stake in half, basically cutting his overall stake in the company by more than 50%. The effect, noted by Bidness writer Michael Kaufman, was to “dampen further” troubled Petrobras’ liquidity and investor confidence.
And one effect of that was to make BG Group, heavily invested in Petrobras projects, even more of a takeover target. The worse Petrobras was doing, the cheaper it would be – even at an overvaluation – to buy out BG Group.
Helge Lund took over at BG Group 9 February, three weeks earlier than originally scheduled after what was universally described as a “surprise announcement.” In the next six weeks, the outlooks for both Petrobras and BG Group continued to decline. On 8 April, the Shell tender for BG Group was announced.
As far as we know at this point, Soros still has his Petrobras call options, which will probably be increasing in value. Reportedly, an abashed and reforming Petrobras is now offering project buy-ins to U.S. companies with smaller partnership requirements for the Brazilian company, and more work for the foreign partners. This week, it’s holding an auction for drilling leases in its most prized offshore fields, apparently on a more advantageous basis for foreign investors.
It’s probably fair to say that this more malleable Petrobras “broke” itself, with corruption internal to Brazil. But a predatory investor like Soros is gratified at the prospect of a weaker, more vulnerable Petrobras sitting on top of all that offshore oil and gas.
LNG angle
The LNG aspect of the Shell-BG deal is interesting in its own right, given that the buyout will create by far the world’s largest LNG producer. As discussed at some of the links above, a Shell-BG combination will represent more than twice the production capacity of the current LNG leader, Exxon Mobil.
So it’s interesting – that word again – that a handful of major investors, including Soros, completely divested themselves of Exxon Mobil in the eventful fourth quarter of 2014.
Warren Buffett sold all of his shares from two oil and gas majors — Exxon Mobil Corp. and ConocoPhillips Co. — worth $3.87 billion and $36 million, respectively, according to Berkshire Hathaway Inc.’s latest 13F filings. The Bill and Melinda Gates Foundation sold its entire Exxon position, too — jettisoning $765.9 million overall last quarter. And George Soros got out of Exxon, as well, shedding $88 million worth of the stock through a put option.
Admirably prescient move, assuming the Shell-BG deal goes through – and assuming there’s an interest, on someone’s part, in (a) shorting conventional oil’s biggest giant (at a convenient time, when crude prices are falling); and (b) being able to leverage the competing LNG industry through a single, super-major pressure point.
And that does circle us back around to the carbon-pricing push. Both of the interests above, (a) and (b), would be common to invested advocates of carbon-pricing schemes, as Buffett, Gates, and Soros all are.
Pull these threads far enough, and the politicians – even the president of the United States – come off looking as unsavory as their company, if perhaps more manipulated than manipulating.
