Journey to the West

By Alexander B. H. Turnbull

As anyone who has not been living under a rock this summer may know, international oil markets have been incredibly volatile. At the same time, most analysts have been pointing the finger at skyrocketing Chinese demand and falling oil supplies the world over. As an analyst in the energy and utilities group of an investment bank in Hong Kong, I’ve been on the bleeding edge of oil and gas investment all summer.

Media coverage in the United States all too commonly refers to the plight of the typical American driver who has now found himself another couple of hundred dollars poorer thanks to fuel costs. Their response is to shake their fist at the Saudis, or Russia or whoever else has been most recently accused of constricting supply; or, if you’re listening to National Public Radio, it’s the oil companies’ fault.

Strangely, thanks to my summer experiences I have developed some pity for oil company executives. There is not much oil left in the world, certainly not enough for oil companies to increase their reserves (oil in the ground that they own) to match world consumption. To keep investors happy, they have to go into weirder and wilder parts of the world to augment their reserves: places that are getting more and more expensive to buy into. Try as they might to move into other compelling energy investments whether renewable or otherwise, the market does not seem to reward creative thought among energy executives. As a result most CEO’s are beholden to the unhealthy obsession most investors have with oil reserves.

No firms are more keen to keep their reserves from falling than those in India and China. These countries were not particularly well blessed with natural resources, and they have been hungrily consuming what they were blessed with for the last twenty years. The fact of the matter is that Chinese firms need to move elsewhere to get their oil, and Central Asia seems to be the destination of the hour.

From a geological perspective, former Commonwealth of Independent States members like Kazakhstan and Turkmenistan look like great places to buy up oil. There’s plenty of it, infrastructure is reasonable and Islamic separatist movements are not as formidably organized as they are in Saudi Arabia or Iraq. Then again, these places are political and environmental disaster zones in their own rights, replete with legacy pollution from the Soviet era and rapacious governments that are only too keen to make you pay for their mistakes. One typical experience this summer had me constructing a financial model to price an oilfield with a $200 million liability for legacy pollution. The variable in the model that covered this was “theft—yes/no.” Simply put, several hours of modeling a number of oil fields, their refineries, transport assets and the like came down to one question: Is the government going to screw us at the first available opportunity? This country’s attractiveness to investors hinged on the greed of its government. Judging from this example, those firms that do get their money’s worth in Central Asia will be the lucky few. And they are likely to be Chinese, since it is seldom wise even for the greediest of Central Asian bureaucrats to anger a larger, more powerful neighbor’s state-owned enterprises when they are busily investing in your country’s natural resources.

As much as it offended the sensibilities of the people I worked with, I could not help but think that maybe, just maybe, the “Great Game” of oil exploration and production was coming to a close. Most of these “new,” Central Asian fields will be emptied by 2020; some of their counterparts in West Africa will be more or less finished as early as 2015, many Latin American fields do not look feasible beyond 2020 and only a handful of Saudi and Russian fields will be producing in 2030. It doesn’t take much to realize that moving on from oil is something we must do sooner rather than later. That’s a no-brainer. The real question is whether bankers, energy companies and, most importantly, investors will start taking renewable energy and other resources seriously before it is too late to invest and turn ourselves around.

Alexander B. H. Turnbull ’05, a Crimson editorial editor, is an economics concentrator in Quincy House.