How Cheap Oil Saved the Arctic From Drilling

Save us from those "saving" the Arctic from discontinued plans for oil and gas drilling there.

There has been much hot air--gas, if you will--expended in the past few years over the potential dangers of drilling for oil and gas near the Arctic circle. I myself am not fully convinced about the climate justice in first having Arctic oil reserves made available to human exploration by burning fossil fuels that have played a part is causing polar ice to melt, then obtaining more fuel to shrink the aforementioned polar ice anew. There's even been a high-profile campaign aimed at Lego (of all companies) to get Shell to stop exploring these areas.

The recent plunge in oil prices as massive production continues untrammeled is having interesting effects the world over--including the Arctic. As it turns out, northern climes where it was previously economic to explore and eventually drill way above $100/barrel are no longer so when you have predictions that we will soon have $40 oil at spot prices. So, environmentalists are rejoicing for now in the misfortune that has befallen the evil energy firms who endanger these ecologically sensitive areas with the possibility of oil leaks and so forth:

The Arctic -- spanning Russia, Norway, Greenland, the U.S. and Canada -- accounts for more than 20 percent of the world’s undiscovered oil and gas resources, including an estimated 134 billion barrels of crude and other liquids and 1,669 trillion cubic feet of natural gas, according to the U.S. Geological Survey. That’s almost as much oil as Iraq’s proved reserves at the end of 2013 and 50 percent more gas than Russia had booked, BP Plc (BP/)’s Statistical Review of World Energy shows.

Yet, explorers seeking a piece of the Arctic prize have been tripped up for years. After spending $6 billion searching for oil off Alaska over the past eight years, Royal Dutch Shell Plc (RDSA) in October asked for an extension of licenses as setbacks including a stranded oil rig and lawsuits risk delaying drilling further. Cairn Energy Plc (CNE) spent $1 billion exploring Greenland’s west coast in 2010 and 2011 without making commercial discoveries, and OAO Gazprom (OGZD) has shelved its Shtokman gas field in the Barents Sea indefinitely on cost challenges. 

The militants at Greenpeace, for one, are quite pleased with this turn of events:

Environmental group Greenpeace has occupied oil rigs from Norway to Russia, arguing a spill would cause irreparable damage to ecosystems that sustain animals from polar bears to birds and fish. The possibility that economically marginal fields such as Arctic deposits might be stranded as governments adopt stricter climate policies has also shaken some investors.

The Brent crude benchmark fell 1.9 percent to $45.70 a barrel, deepening losses from the lowest closing price since March 2009. Statoil declined 1.4 percent to 127.3 kroner at 9:50 a.m. in Oslo, extending losses to 35 percent since a June high. 

As oil companies cut spending to cope with falling prices, already costly and risky Arctic projects will fall down the priority list even if crude is expected to recover by the time production starts, Henderson said. Global capital expenditure will probably drop by more than 20 percent this year, according to a Jan. 9 note from Sanford C. Bernstein. Like Statoil, Dong Energy A/S and GDF Suez have returned Greenland licenses because exploration has become too expensive, Danish newspaper Politiken reported.

Until oil prices climb again and these firms begin reconsidering extraction in these marginal regions, I'd save my attention for...other things.

Read More

Occupy Hong Kong Meets Occupy Taiwanese Parliament

Do we need another hero? Sticking it to the mainland sympathizers.

There is a saying that "the market" takes the brunt of the blame in capitalist countries when economic times are sour, while "the state" does in communist countries. In East Asia, there is another, rather more sinister offshoot at work--blame the PRC. We received a taste of this with the backlash against Hong Kong-based tycoons being perceived as the key mediators in the relation between that special administrative region and the mainland some weeks back. Well, guess what: largely the same things are happening in Taiwan at the moment as President Ying-Jeou is perceived as being too close to the PRC. Just as disaffected youths closed down Hong Kong's main thoroughfares for months on end, so too is there a youth backlash in Taiwan:

A 26-year-old graduate student is widely considered the spokesman for Taiwan's under-30 set, a generation struggling amid poor job prospects, stagnant wages and rising economic inequality. Lin Fei-fan is also one of the island's brightest political stars, thanks to his strong anti-China stance. He may well go on to influence cross-strait relations and even the democratic movement in Hong Kong, though he has not said whether he plans to run for public office..

Nicknamed God Fan by his supporters, Lin made his name as a frontman of the Sunflower Movement, a mass anti-Beijing rally that started in late March and saw a group of students occupy the island's legislative chamber for three weeks. The students were protesting the Nationalist government's efforts to push through a services trade deal with China.

It's another sign of disaffection with cottoning up to the mainland and supposedly accepting a subordinate political position relative to it as a result:

The Sunflower movement and the election results reflect growing public unease with Ma's direction. While the president has claimed his mainland initiatives are necessary for Taiwan's economic survival, many now think the 21 pacts he has signed with Beijing have benefited only big conglomerates, while hurting small businesses and undermining the island's de facto sovereignty.

The widespread fear of China gaining sway in Taiwan largely stems from Beijing's refusal to abandon its claim on the island, even though it has been 65 years since the two sides split in a civil war.

The parallels to Occupy Hong Kong are unavoidable since, well, both sides coordinate with each other to some extent:

"If China doesn't abandon its goal to have complete control of Taiwan and Hong Kong," Lin said, "it will only lead to more conflicts. Taiwan's civil society has gradually formed a consensus that we can no longer tolerate China's approach." Lin added that activists in Taiwan and Hong Kong keep in touch and learn from each other's experiences.

As with Hong Kong, I would understand their cause better if they took some time to distinguish between PRC-inflicted difficulties and those largely the creation of the Taiwanese government. As it stands, though, I think the PRC has become something of an all-purpose bogeyman: "whatever ails East Asian economies, the PRC is probably behind it" does not seem to be an especially sophisticated argument. Like many alter-globalization groups, this one appears diffuse and unfocused.

Read More

Boom's End? Saudis Sock It to North Dakota

Not everywhere in North Dakota adjacent to the Bakken Formation can be a boomtown.

Only a few weeks ago--it feels like eternities now--we talked about how the Saudi Arabian government convinced other OPEC nations not to lower their cartel's output in response to falling oil prices. Rather than take their collective foot off the pedal of production, it signaled that it would be steady going as far as output was concerned. The result has been a further fall in oil prices. In the space of less than half a year, they are down over 50%.

Although it's still early going, some of Saudi Arabia's intended targets--US shale produeers--are feeling the pinch. In particular, producers in marginal sites are in trouble given their higher operating expenses in extracting oil and gas. That is, not enough is extracted there to make up for what it costs to perform hydraulic fracturing at current market prices. Anecdotally, the number of oil rigs operating in these sites in North Dakota--second after Texas in terms of shale production--is noticeably declining:

Only five oil rigs were drilling in Divide County this week, down from 12 last August, according to state data. While those only account for a handful of the more than 162 rigs still drilling in North Dakota, the drop has been much steeper than elsewhere in the state and could signal trouble across the No. 2 U.S. oil producer behind Texas if prices continue to slide.

A "Coming Soon" sign still marks the spot on a patch of fallow farmland just outside of Crosby, the county seat, where a 200-person "man camp" to house oil workers was set to be built. Late last fall, Timberline Construction Group, an Alabama-based contractor, put the project on hold after an oil company pulled out of a housing contract. In downtown Crosby, restaurants and bars report fewer rig workers, and foot traffic has noticeably slowed. Two businesses have been put up for sale.

To be sure, there are more profitable sites that can probably wait out the current decline in oil prices. That said, those operating outside of these sweet spots are in trouble since they only become economic to extract at rather higher prices. Consider the aforementioned Divide Country:

That's partly because the state's Bakken shale formation is geologically immature throughout most of Divide County, only 40 feet in width here versus 60 feet in richer counties further south, according to state records. "Divide County is a little bit on the edge," said Julie LeFever of the North Dakota Geological Survey. "Each part of the Bakken has its own little idiosyncrasies."

The four counties immediately south - Williams, McKenzie, Dunn and Mountrail - now produce 90 percent of the state's oil, and Divide was mostly left for smaller companies willing to take the risk when oil prices were riding near $100 a barrel. At under $50 a barrel, the economics change dramatically. The breakeven oil price, the price level needed to drill a new well, for Divide County is $85 a barrel, according to the state; for Williams, it's just $37. The difference is due to geology, among other factors.

To paraphrase another saying, is geology destiny? If it's mostly smaller, less-resourced oil concerns operating in these marginal sites, then they will be first to go. Not only do they have fewer financial resources to weather a period of sustained power prices as smaller companies, but they also have higher costs of operation in extraction. That said, it will take more to discomfort those with more productive sites, so the Saudis will have to wait and see if that comes to pass. The first wave of smaller companies falling by the wayside may not have much effect on oil prices, but if they can get to the ones operating at the heart of Bakken, who knows if the Saudi strategy can actually work?

1/17 UPDATE: The EIA provides further numerical support for the title's contention: from a recent peak of 1,609 rigs drilling for oil in October 2014 in the US, they are now down to 1,366. As for Bakken in North Dakota and Eagle Ford in Texas...

The total number of oil rigs working in the Williston basin, which includes the Bakken shale of North Dakota, has dropped by 34, or 17 per cent, since October, while the number in the Eagle Ford shale of south Texas has dropped by 32, or 16 per cent. The number in the Permian basin of west Texas is down 81 rigs, or 14 per cent.

It's game on: Are you tough enough to withstand the House of Saud, Yanks?

Read More

AirAsia & Dealing with Disaster's Aftermath

Partly due to appropriate post-crisis response, AirAsia stock has retained much value post-December 28 (Sunday).

It behooves me that attention is seldom paid to businesses operating in Southeast Asia unless extraordinary things happen. Such was the case with Malaysia Airlines prior to the two tragic incidents that occurred last year [1, 2], and so it is now with budget carrier AirAsia. In terms of profitability, both have had differing trajectories as Malaysia Airlines had to deal with significant "legacy" costs whereas AirAsia has been relatively free from those in running a young, dynamic operation. Prior to recent incidents, both also had sterling safety records. Recall, too, that both were momentarily connected in 2011 until Malaysia Airlines' vested interests vetoed the idea of a slimmer, trimmer Malaysia Airlines that emulated AirAsia's business model.

With the crash of an AirAsia jet, we are unfortunately back to circumstances everyone would much rather avoid. Nobody likes these things to happen, but they do. An interesting if unusual topic of interest in this regard concerns airline responses to air disasters. How should executive leadership respond to such events? Also, how is firm performance affected by these responses in the aftermath? The Nikkei Asian Review has an article that sheds some light on the matter. Given the charismatic leadership of Tony Fernandes, it appears that his firm is responding better than Malaysia Airlines did in terms of promptly disclosing available information and empathizing with those affected. Taking responsibility has helped:

Fernandes has won praise and support for his proactive communication with relatives of the crash victims via Twitter soon after the jet was confirmed missing in the early morning of Dec. 28. He asked his employees to remain strong, consoled the families of the crew and passengers, and alerted the media to upcoming company statements. Fernandes also took care to reflect the solemnity of the incident, changing the airline's bright red logo to a somber gray online.

 "I, as your group CEO, will be there through these hard times," Fernandes wrote on Dec. 28. He flew to Surabaya from his base in Kuala Lumpur within hours after the flight vanished from Indonesian air traffic control. There he met the families of the passengers and crew, and later flew to Jakarta to meet with authorities overseeing the rescue operation.

 AirAsia's response stands in sharp contrast to that of Malaysia Airlines, the country's flag carrier, which lost two of its jets last year. In an incident on March 8, it took the airline several days to publish an accurate version of the passenger list on its Flight MH370, which vanished with with 239 people on board and is still missing.

Not being aloof helps, as well as interacting in a timely manner with various stakeholders:

A newcomer to the airline business when he started, Fernandes said the secret of AirAsia success has been his ability to get close to his staff. "Thirteen years ago 'till now, I am still the same, willing to meet the staff and hear their problems out," he told The Nikkei Asian Review days before the crash.

When one of the bodies was identified as a crew member, Fernandes wrote Jan. 2 that he would personally escort the body to its final resting place. "I'm arriving in Surabaya to take Nisa home to Palembang," he said. Many of Fernandes' nearly 1 million followers on Twitter have responded with praise and admiration.

To be sure, the facts are not yet fully known about the causes of this accident. That said, the performance of AirAsia stock seems to reflect the proprietor's conviction that AirAsia will remain a viable concern. Contrast this situation with Malaysia Airlines that had to be nationalized yet again in the aftermath of its 2014 accidents.

The narrative that seems to be emerging is this one: AirAsia was in relatively good shape financially prior to its accident, whereas Malaysia Airlines was not. In the face of adversity, the former is better able to deal with adversities that may arise in the form of paying indemnities to passengers and so forth. That AirAsia's public relations has handled its crisis better-=likely in response to what happened to its fellow Malaysian carrier--bodes well for its longer-term prospects. Successfully dealing with adversity, after all, distinguishes those who thrive from the also-rans.

Read More

Sands' Sheldon Anderson 1, Online Gambling Stateside 0

The US nanny state and a casino mogul combine to frustrate online gambling Stateside.

For a long time, I have covered attempts to regulate Internet gaming Stateside and its effects on offshore service providers like the microstate of Antigua & Barbuda. It's a long story, but ancient, pre-Internet laws prohibiting interstate gambling have been invoked by those concerned about "morals" to not only stop foreign gaming sites but also those operating across borders of US states. Perhaps unsurprisingly, operators of bricks-and-mortar casinos have also lobbied against further liberalization of gaming laws to allow interstate online gaming. Step forward Sheldon Anderson of the Sands. The end result is that we are back to a kind of Stone Age situation in which people are not allowed to do as they please with their own money over dubious "security" concerns--unless you physically visit the Sands, of course:

Efforts to allow internet gambling across the US have stalled, after a campaign backed by casino owners pushed back against industry efforts to allow more widespread wagering on laptops and smartphones. New Jersey, Delaware and Nevada became the first states to liberalise online betting in 2013, prompting industry executives to predict that longstanding prohibitions on the practice would soon crumble as others followed their example. 

How bad is it? Those operating the aforementioned real-life casinos have poured much effort into stopping the online juggernaut to apparent success. Earlier predictions that in-state gambling operations would result in considerable revenues have not materialized as a result:

Instead, 12 months later, revenues from the three states have failed to come close to lofty expectations, and quarrelling within the industry has shelved hopes for further expansion...[C]asino mogul Sheldon Adelson used his presence on the AGA [American Gaming Association] board to persuade the group to withdraw its support for online betting. Mr Adelson, the billionaire chairman of Las Vegas Sands, pledged to spend "whatever it takes" to stop internet gaming.

The reversal dismayed other AGA members, such as Caesars and MGM Resorts, which had been vigorously pushing for a federal framework for internet gambling. Mr Adelson and his allies then helped derail attempts to legalise online play in California and Pennsylvania, although they were unsuccessful in pushing for a provision in a Congressional spending bill to restore a blanket federal ban.

The 1961 Wire Act prohibited wagering via electronic transmissions, but in late 2011 the Justice Department reversed its interpretation of the law to allow individual states to establish their own internet betting schemes.

To be sure, part of the reason why online gaming has not really taken off is residual concern from financial services providers about the unsettled legal situation:

New Jersey, by far the largest market of the three to do so in 2013, registered just $111.8m in revenues over its first 12 months — well shy of the $1bn projections offered by analysts and state officials at the outset. Some attribute the poor performance to a miscalculation of consumer demand and technical glitches, while others point out that banks have been reluctant to clear online gambling transactions — a problem that has caused similar headaches for the emerging legal marijuana industry.

 The 2006 Unlawful Internet Gambling Enforcement Act, which the Justice Department used to go after offshore poker operators in 2011, has been an important obstacle. "Under [UIGEA], failing to block restricted transactions could result in liability. But there is no liability for over-blocking or refusing to honour Internet gambling-related transactions. This was a carefully considered provision designed to make it much more difficult for internet casinos to operate," said Michael Borden, an attorney with Sidley Austin and former congressional aide who helped draft the law.

In effect, many financial services providers have decided to err on the side of caution in overzealously restricting the use of depositor accounts for gambling purposes.  Absent a new law to replace the 1961 Wire Act (and UIGEA) by extension, we will still be stuck in this Flintstones-era situation.

Let my people do what they with their money. It's theirs to gamble with. 

Read More

Polanyi & British Football's Great Transformation

Karl Polanyi's The Great Transformation is, by now, probably regarded as one of the main texts on the emergence of capitalist transformation alongside Adam Smith's The Wealth of Nations and Karl Marx's Capital. To explain Polanyi's thesis in a nutshell, the emergence of the self-regulating market (supply and demand work conditions themselves out absent non-market intervention) has disembedded the economy from society. Whereas consumers once knew producers and their relations were embedded in society, ever-lengthening "supply chains" have alienated consumers from producers and vice-versa. However, it is not a simple story of Marxist alienation; Polanyi sees this phenomena undergoing a double movement: eventually people tire of the endless commodification of their existence and band together to re-embed the economy in society during a backlash. Hence the so-called "double movement."

David Webber of Warwick University offers an interesting application of Polanyi's "double movement" to English football. As more and more foreigners with next to no vested community interests have bought into the English game--Russian oligarchs, Middle Eastern monarchs, American LBO-ers and so forth--teams have become little more than holding companies of others' commercial interests. That is, there is no longer a community spirit motivating the fans. Unlike in other European countries like Germany where supporters own the club, these teams have become disembedded from the communities they are named after:

Earlier I described how the first phase of Polanyi’s ‘double-movement’ might be used to understand the ‘disembedding’ of football from its traditional communities. Polanyi however, didn't stop here. In the second movement of his ‘double-movement’ thesis, Polanyi argued that wherever this market activity threatened social life, there would be an instinctive reaction against it by society. In the broader movement ‘against modern football’, we have seen precisely this occur. Fans, fed up of being politically and economically excluded from their own clubs, have set up independent supporter groups and supporter unions, such as the Spirit of Shankly. Some supporters, as those at Portsmouth and Wrexham, have gone further still. They have rescued their clubs from the financial mess created by previous owners by taking control themselves.

These movements are an important reminder that clubs are not simply businesses, but are in fact, socially always embedded. Local communities, families and/or friendship groups all revolve around a shared love of the game and affinity towards a particular club. Given that they invoke and reinforce strong bonds of identity and affection, these ties cannot and perhaps should not be easily commodified. It is hardly surprising then that the financialisation of football has been politicised and met with such resistance.

So, how will English clubs take ownership back from Putin loyalists, Arab sheiks and American debt addicts? Or, in other words, how does the second phase of the double movement take place? Here we must speculate a bit more:

How England’s clubs might be socially re-embedded leads us back, rather appropriately, to Polanyi’s earlier observation concerning the formation of market structures. We suggested then that English football’s ‘great transformation’ was not inevitable, but rather a carefully constructed, deeply political response to the crisis experienced in the game, most notably in the aftermath of the Hillsborough disaster [where nearly a hundred fans were crushed to death in an FA Cup match]. The political and legal framework mapped out in the early 1990s incentivised clubs to pursue a more market-minded strategy; one which has created the ‘modern football’ that fans are disillusioned with today.

Here, however, Polanyi’s work provides a note of optimism for those keen to deliver football back into the hands of its supporters. If ‘modern football’ required a distinct political structure in order to transform English football then this would suggest that if there was the political and social will, then the space exists to embrace an alternative, more socially-embedded game. Of course, these small movements face several challenges, not least between competing political and economic interests. Nevertheless, there is at least the possibility of political reform and social change within the game.

The thing is, I suspect that more than a few of us who don't regularly attend games may consider the Premier League era as a welcome one since we don't have to pay for exorbitant tickets. Plus, the worst of English football excesses--fan hooliganism especially--have been reduced. You can certainly argue that we have to take the good with the bad: the price for the civilizing effects of commerce noted by Adam Smith and Albert Hirschman have to be balanced with the Disneyfication of the game together with higher costs of attendance.

Unless the Premier League adopts a German model in the future--which I doubt--we have what we have. 

Read More

Political Barriers for Game Console Makers in China

A game console bonanza in China? Not yet so far.

The irony for video game console makers in China is that while some components are made there, the likes of Microsoft, Nintendo and Sony have not been able to sell console makers in the mainland--at least until January of 2014 when the ban on selling consoles was lifted. Starting in 2000, there had been a ban due to supposed concerns about video game consoles engendering moral decay from pervasive violence. No Witcher 3 for you. buddy. However, console makers are not home-free yet by a long shot: There being no such thing as a free lunch, they have to establish operations in China's newfangled Shanghai SEZ and obtain local partners besides if they wish to sell these things in the PRC. From the Nikkei Asian Review:

The ban, which was put in place in 2000, was lifted in January for companies that build operational bases in the China (Shanghai) Pilot Free Trade Zone. Foreign console makers also have to partner with Chinese companies. To meet this requirement, Sony in May agreed to set up joint ventures with Shanghai Oriental Pearl Culture Development, a government-affiliated media company.

What are the barriers to entry? Let us count the ways. First off, note that consoles are not totally unavailable since there has been an active grey market for these devices:

China’s ban didn’t totally eliminate consoles there — a grey market of smuggled and home-grown consoles has long existed there. But analysts say the rule caused China’s gaming market to be dominated by PC and mobile games. That means Sony and Microsoft now have to convince Chinese gamers they should buy a console, too.

Why, then, should Chinese consumers buy consoles when there are PC and smart device games aplenty? Note, too, that the censors will have a crack at approving titles as well--not something they necessarily do with PC or smartphone games. Speaking of which, PRC regulators are (surprise!) much more willing to cut local developers slack, hence the drive to obtain local partners' existing content which can be ported immediately without passing through the electro-nannies again:

But while China is letting foreign consoles through the front door, whether or not they can bring along Call of Duty or Titanfall is another question. Each game sold in the country has to win the hard-to-earn approval of China’s Ministry of Culture, which prohibits everything from blood to touchy political topics...

The key for Sony and Microsoft, analysts say, is for them to build partnerships with Chinese game makers, who enjoy pre-existing relationships with regulators and whose games have already passed the lengthy approval process. For now, Sony and Microsoft can entice Chinese developers to port their pre-approved games to the Xbox and PlayStation. If consoles take off with Chinese gamers, local developers are likely to start making dedicated games for them.

With an entrenched based on PC and smartphone users, the Johnny-come-lately console makers don't have it easy. For instance, Microsoft Xbox One sales have been limited thus far:

Microsoft has not done nearly as well. In China, only around 100,000 Xbox Ones have been sold in the three months or so that the console has been in stores. The low number comes despite spirited promotions. Working with the Lenovo Group and Chinese consumer electronics retailers, Microsoft has set up 4,000 locations in 37 cities where consumers can try their hand at console gaming.

Microsoft is also promoting the Xbox as an educational tool. In late November, it launched an online English language course for 2- through 8-year-olds. Yusuf Mehdi, a Microsoft corporate vice president, stresses the Xbox's ability to play movies and music, and to be used for educational and health care purposes.

While it's great to portray game consoles as multi-purpose devices, don't smartphones, tables and PCs do those things better already? Like I said, it's going to be an uphill battle given commercial challenges on top of sundry regulatory ones imposed by the Chinese government.

Read More