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Tuesday, January 02, 2007

 

Consequences of scarce oil to go far beyond costly gas

Jon Talton The Arizona Republic Jan. 2, 2007 12:00 AM

Sakhalin Island, a bleak strip off the Pacific Coast of Siberia, was a penal colony under the tsar and the Soviets. Now, it's marketed for tourists, hardy ones at least. With its nasty weather and isolation, Sakhalin seems a most unlikely spot where one of the key conflicts of the 21st century would show itself.But offshore there are big natural-gas and oil fields. A consortium led by Royal Dutch Shell has spent years working to develop the Sakhalin 2 field, but late last month, Shell sold its majority share. It didn't do it willingly, but only after months of threats from the Kremlin. The lead company will now be Gazprom, the gas giant backed by the Russian government.Shell received what analysts consider a fair price, $7.45 billion. But this was hardly a transaction between willing parties in the free market. The deal was so politically explosive that it came only after months of negotiations between Russia and Britain, the Netherlands and Japan. (Shell's two junior partners, Mitsui and Mitsubishi, also cut back their stakes in the project in favor of Gazprom.) The affair received scant attention in the United States, the world's largest consumer of oil. But it illustrates a future that will challenge not only companies such as Shell, but also America's foreign policy, economy and individual consumers. It illustrates some stark truths that are operative now, not some possibility for the far future thrown out by wonks with bad attitudes. Higher prices at the gas pump may be one of the most benign outcomes.Are we paying attention when Chevron says in its "real issues" advertising campaign, "Energy will be one of the defining issues of this century. One thing is clear: The era of easy oil is over"? Like the island's one-time inmates, Shell went to Sakhalin because it had to. World production has not been keeping up with skyrocketing demand. Indeed, total daily production among the major oil companies has declined for the past four years. Meanwhile, some serious projections envision the world in 20 years using 40 percent more oil than it does now. One result: Companies such as Shell are having to go to forbidding places and spend huge sums in the hope they can keep up.In Sakhalin's case, the payoff could be worth its $20 billion price tag: oil and natural gas that could be exported to Asia and North America. But development hasn't come easily, and there are still questions about the offshore infrastructure's ability to withstand earthquakes and danger to the environment. Around the world, the majors bring new technology to recover oil that a few years ago was unreachable, but it will cost far more to find and refine than the crude once found in abundance in Texas and Arabia. Much of these resources are in places that are politically unstable or hostile to the West. The long-feared "new competition" for energy resources is happening, and nobody knows it better than Russian President Vladimir Putin. To be fair to Putin, Shell had been criticized for its slowness in developing the challenging Sakhalin field, and there were some legitimate environmental concerns. But Putin has made it clear that energy will be the weapon of the new Russia. Threats of energy cutoffs to its neighbors have been only one face of this strategy. Gaining clear control of Sakhalin is another. Meanwhile, China is spreading its influence around the developing world in the hunt for resources, supporting rogue regimes in Iran and Sudan in exchange for oil.This new era will be unstable and potentially dangerous, especially when paired with the environmental and economic consequences of fossil-fuel-driven climate change.In his inarticulate way, hemmed in by ideology and special interests, President Bush has tried to push the American people to recognize the hazards of our "oil addiction." That addiction raises the stakes from a bad outcome in Iraq - and can any realist see a good one?

Reach Talton at jon.talton@arizonarepublic.com. Read his blog at taltonblog.azcentral.com

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