The changing world of energy trading #MasterEnergy @PlattsOil

Banks involved in energy have pulled back from the sector while merchant
traders known largely for their secrecy are strengthening their
position

The changing world of energy commodity trading

The Barrel Blog

By Jeff Ryser | March 28, 2014 11:48 AM Comments (2)

The
world of energy commodity trading has gone through a rather extensive
reshuffling over the past few months. The key thing to note is that
banks involved in energy have pulled back from the sector while merchant
traders known largely for their secrecy are strengthening their
position.

The most notable deal came last week when Swiss-based merchant firm Mercuria agreed to buy the entire physical commodity trading business of JPMorgan Chase
for $3.5 billion. Mercuria, which is headquartered in Geneva and is
predominantly a crude and refined products trading shop, has a team of
approximately 1,200 people working in some 37 offices around the globe
and has annual “turnover,” or essentially gross annual revenues of
around $100 billion.

JPMorgan, whose overall size is an
astounding $2.4 trillion in terms of the value of all its assets, had
valued the oil trading portion of the business it sold to Mercuria at
$1.7 billion. It valued its US and European natural gas trading business
at approximately $800 million, its metals business at $500 million and
its electricity and coal trading businesses at approximately $300
million, prior to the sale.

Mercuria therefore agreed to pay $200
million or so above book and will add JPMorgan physical assets, trading
books and contract to its already extensive trading portfolio.

Included
in the deal, apparently, is a trading team in London, New York, Houston
and Singapore that numbers more than 400 people. When JPMorgan bought
the trading operations of RBS Sempra in 2010 for $1.9 billion, it saw
its trading staff balloon to almost 700 people. It spent several years
bringing that staffing level down to a more manageable level.

Now,
Mercuria, founded by Swiss nationals Marco Dunand and Daniel Jaggi in
2004, will begin the task of integrating the various JPMorgan trading
teams with its own teams. Also now under discussion, according to
JPMorgan, is the future role at Mercuria, if any, of Blythe Masters, the
45 year-old British-born global head of JPMorgan’s commodities unit.

Dunand
and Jaggi have both spoken recently, and  publicly (at places like
Davos), acknowledging the fact that the merchants’ penchant for secrecy
runs counter to the push by governments to instill far greater trading
transparency. With its deal to buy JPMorgan, Mercuria, for example, will
have to report physical  US natural gas sales to the Federal Energy
Regulatory Commission. Its US affiliate already reports its quarterly US
wholesale power sales to FERC.

Mercuria’s vision of its business model is fairly clear. In a recent interview with the newspaper Neue Zurcher Zeitung,
Dunand offered that there are “two schools” for commodity trading. He
said, “One is the Marc Rich school, with Glencore and Trafigura, which
is obviously successful. And then there is the investment bank school,
which has more of a risk approach.”

Marc Rich, of course, is the
legendary commodities trader who, while working for Philipp Brothers in
the late 1960’s and early 1970’s essentially created the spot market for
crude, thereby breaking the hold over the market that big oil companies
had using long-term supply contracts with supplier countries.

The
key idea behind March Rich-style trading is to have access to your own
logistics, such as shipping and storage, and to strike deals with big
bulk buyers. The merchants are also not subject to Dodd-Frank trading
restrictions, as are the banks.

On the other hand, the investment
bank school of trading implies a far greater dependence on the
financial markets to not only hedge positions but also to hedge
positions for fee-paying clients. When trading for their own book–which
banks will be prohibited from doing when the so-called Volcker rule is
implemented in mid-2015–the investment banks rely heavily upon churn, or
buying and selling and re-buying and re-selling, to generate revenue
from large volumes of trading. This activity also provides markets with
liquidity.

Joining Glencore, Trafigura, and Mercuria as exemplars of the Rich school of commodity trading are Gunvor and Vitol.

On
Monday, the head of Vitol, Ian Taylor, made a comment on the impact of
the banks leaving the energy commodities trading business. He said, “The
withdrawal of some investment banks from commodity related activities
has reduced liquidity in markets such as power.” This is no doubt true,
since the pull-back by the banks has been most pronounced in the
wholesale power trading business due in no small part to tightened
regulations and lower prices and thus dampened price volatility.

It
was Taylor’s next comment, though, that also caught some people’s
attention. He said that the reduced liquidity “created longer-term
opportunities and our footprint in both the US and Europe is growing.”

Taylor
conceded that 2013 was “a very challenging year for many in the
physical energy distribution business.”” He said that “markets remained
extremely competitive with new entrants increasing margin pressure on
certain regional activity.” “While these market conditions aren’t
expected to change overnight, changing supply and demand balances are
generating some new opportunities,” Taylor said.

Meanwhile,
Barclays PLC and Deutsche Bank are understood to be selling their power
trading books, as the big UK and German banks announced they are exiting
the business.

While Citibank has been trying to strengthen its
trading in Europe and the US, Bank of America Merrill Lynch, strong in
the US, has shutdown European natural gas and power trading.

Morgan
Stanley, of course, is in the process of selling its Global Oil
Merchant unit to the Russian oil company Rosneft, for an undisclosed sum
that is nonetheless estimated to be in the range of $400 million.
Roughly 100 Morgan trading executives are expected to go to work for
Rosneft in London and New York, or about a third of  Morgan’s entire
global commodity trading team.  Rosneft earlier established a trading
unit in Geneva that is headed up by a former Shell trader.

One
question that has popped up is whether there are any future US or
European sanctions in the offing against Rosneft chief Igor Sechin, and
whether such sanctions could hurt the deal with Morgan Stanley.  The US
and the EU have already leveled sanctions against individuals in
retaliation for Russian President Vladimir Putin’s move into Crimea.
Sechin is a former chief of staff to Putin and was appointed head of
Rosneft by Putin in 2004.

On March 20 the US sanctioned the
Russian Gennady Timchenko, who was co-founder of Gunvor.  The
Geneva-based firm said that the day before the sanctions were announced,
Timchenko sold his shares in the firm to Swedish co-founder  Torborn
Tornqvist, who now owns 87% of the 14 year-old company.  Gunvor, mainly
an oil and products trader, employs approximately 500 front and back
office trading professionals and 1,100 people at logistical facilities,
has said that revenue in 2012 was roughly $93 billion.

The US
Treasury Department said it imposed the sanctions against Timchenko out
of the belief that Russian president  Vladimir Putin had earlier
invested in Gunvor and “may have access to Gunvor funds,” an assertion
that Gunvor denied.

The changing world of energy commodity trading « The Barrel Blog



The MasterMetals Blog

#Mining Project failure resulting from lack of social license is extraordinary expensive @Mineweb

Social development shortcomings blamed for mining project failures - Danielson

Although
mining’s record on social license to operate is often seen as poor,
sustainability expert Luke Danielson is confident mining can “lead the
way in pioneering new and more effective social relationships”.

Author: Dorothy Kosich 

Posted:
Monday
,
31 Mar 2014
 

RENO (Mineweb) -



“A large and growing number of project failures
are a direct result of the inability to deal successfully with the
combination of environment, community and social” concerns, said former
Mining, Minerals and Sustainable Development project administrator, Luke
Danielson.


In a speech to the 2014 Mining and Land Resource Institute in Reno,
Nevada, attorney Danielson observed, “(Mining) Project failure and
conflict resolution resulting from lack of social license is
extraordinary expensive.”


“Lengthy conflicts are all too frequent and debilitating” for
companies, governments, communities, shareholders and other
stakeholders, he said.


Danielson, now the president and co-founder of the Sustainable
Development Strategies Group highlighted several major mining projects
which have had difficulty with issues stemming from social license to
operate.


For instance, Freeport-McMoRan Copper & Gold’s Grasberg project
in Indonesia has experienced 51 incidents since July 2009, which
resulted in 17 fatalities and 59 injuries, Danielson noted. He estimated
that the company has incurred $352.3 million in direct security costs
from 2001-2012.


Plans by Rosemont to build North America’s largest new copper mine
were dealt a major blow in November when congressional supporters of the
project canceled their vote after Native American tribes through the
United States lobbied against the Arizona mining project.


The difficulties of securing a social license to operate also proved a
headache for Pebble Project partner Anglo American, which eventually
wrote off $300 million on the project, he observed.


The stalled Newmont Conga Project may be headed for the same fate of
the Cerro Quilish project, which was suspended in 2004, Danielson
suggested.


Vedanta’s battles with indigenous tribes resulted in the suspension
of its Orissa bauxite mining project in India after the company had
invested $800 million in it, Danielson observed.


Among the other stalled projects highlighted by Danielson are the
Lucky Jack Molybdenum project in Colorado, Ascendant Copper’s Junin
project in Ecuador, along with Glencore-Xstrata’s intent to sell its
ownership in the controversial Tampakan copper-gold mine in the
Philippines.


Meanwhile, as global populations grow, so does the demand for
minerals to support their economic development, Danielson noted.
Ironically, securing a social license to operate has become even more
challenging for mining companies because it is becoming “harder and
harder to find places to mine that don’t have people living in them.”


He observed that the top five countries for mining investment also
have low populations. Even in the gold mining state of Nevada, the
percentages of persons employed by the mining industry have declined
dramatically, although the Nevada population has increased 17-fold since
1950, according to Danielson.


Danielson, who has served as a legal and sustainable development
consultant to a number of hardrock mining companies, highlighted what he
viewed as the questionable tactics of mining companies, including major
mining companies, to secure a social license to operate. Among the
tools utilized by miners is using high-tech software to identify and
track members of anti-mining project groups; or buying hundreds of radio
spots which promote the message that the Bible says minerals are good,
while the Catholic Church is wrong to oppose mining projects.


Mining companies have hired detectives to track opposition, while
other miners have doubled campaign contributions in an effort to buy
project approval, Danielson alleged.


A chairman of a mining company once reportedly declared,” We’ll give
10% of our stock to the Army and then see how long these [community]
protests last,” said Danielson.


Yet, another company has been engaging in a highly technical debate
of what constitutes a glacier. “Engaging in technical debates…with a
bunch of local farmers doesn’t work,” Danielson declared.


Meanwhile, most banks now subscribe to the Equator Principles, a
credit risk management framework for determining, assessing and managing
environmental and social risk in project finance transactions.


“The negotiation of community development agreements is now expected
in much of the world,” Danielson said. “We are headed toward of system
in which some form of community consent in the norm.”


“In Canada it’s almost impossible to develop a (mining) project without a community development agreement,” he added.


Another potential problem involves first contact between mining and
exploration employees and community members. Studies show community
attitudes are highly impacted by the actions and attitudes of the first
company representatives on the ground,” said Danielson. “How many drill
crew chiefs are trained in community relations?” he asked.


Nevertheless, Danielson is confident that mining will make the same
kind of strides in community consent for mining operations that the
industry has already made in environmental and health and safety issues.


Observing that in the past the mining industry has often employed
highly trained experts to analyze problems and devise solutions, “Today,
mining can lead the way in pioneering new and more effective social
relationships,” Danielson advised.


“These issues are extremely important to the future of the industry,”
Danielson concluded, adding they can become “very expensive when things
go wrong.”



Read the article online here: Social development shortcomings blamed for mining project failures - Danielson - SUSTAINABLE MINING - Mineweb.com Mineweb

Peter Munk: A mining magnate nears the end of his golden reign - The Globe and Mail

On his desire to merge Barrick with Glencore:

Mr. Munk's idea was to create a diversified,
Canadian-based mining giant that could compete with BHP, the world's
largest mining group, Rio Tinto, Brazil's Vale (which bought Inco) and
Anglo American. Part of the rationale was financial. A diversified miner
would be able to insulate itself from the worst of the cyclical
downturns. Gold, for instance, and copper, are countercyclical; the
former is bought by investors when economies are falling apart, the
latter when economies are posting strong growth. Glencore's commodities
trading and logistics business, a robust money maker regardless of
prices, would also protect the enlarged group. The biggest companies
also have the best access to the international capital markets, a
necessity to sate the voracious capital appetites of mining companies.

Peter Munk: A mining magnate nears the end of his golden reign

The Globe and Mail

---

On
a chilly evening in early March, Peter Munk picks me up from my hotel
in his tiny Fiat Punto, manual transmission, that he drives himself. His
wife Melanie is stuffed in the back and our destination is the local
schnitzel restaurant, where the Munks are treated like anyone else in
Klosters, the Swiss ski village near Davos.

What a change. The
last time I spent more than a few minutes with Mr. Munk was in 2008, in
Montenegro's glorious Bay of Kotor, the Mediterranean's only fjord. We
were on his chartered superyacht, the 50-metre Te Manu, a nautical
pleasure palace with a crew of 11 that would have made any oligarch
proud.

Has Mr. Munk, the founder, co-chairman and former chief
executive officer of Barrick Gold Corp., fallen on hard times since
then? Yes and no.

At $27-billion, Barrick is worth less than half
of its peak in 2011, just before the gold price collapsed and the
financial horror of the company's now-suspended Pascua-Lama mining
project in the Andes was exposed. Mr. Munk's wealth has declined along
with the share price (although he owns only 2.1 million common shares),
but certainly not to the point where he is flying economy and forgoing
oysters and champagne.

Instead, the Fiat represents the new,
simpler life of the Hungarian emigrant to Canada who turned a motley
collection of gold assets into the world's mightiest gold producer. Mr.
Munk will leave the Barrick board at the company's annual shareholders'
meeting in Toronto on April 30, after which John Thornton will go from
co-chairman to chairman. The Barrick board meetings, endless encounters
with institutional investors and phone calls at three in the morning
will disappear, along with many of the perks that went with his status
as one of the world's most powerful mining bosses. The little Fiat will
get driven more often. The vacations in Klosters, which the Munk family
considers home, and Montenegro will get longer.

The transition
could save his life or kill him. Mr. Munk is 87 and has been equipped
with a pacemaker for more than a decade. His famous energy is draining
away and he knows he can't do the job any more. At the same time, the
man who spent more than half a century building businesses on five
continents could find that retirement bores him rigid, or worse.
"Leaving Barrick is like a Chinese restaurant, sweet and sour," he says
"Sometimes you feel sweet in your mouth, sometimes sour. I live it –
Barrick is me. But I have heart issues. I can't travel like I used to."

I ask if he's worried about his health. "I don't mind dying," he says. "I just don't want Barrick to die."

Indeed,
Mr. Munk is worried about Barrick's future. A couple of years ago,
before Mr. Thornton, a former Goldman Sachs president, joined the
Barrick board, he and Ivan Glasenberg, CEO of Glencore International
(now Glencore Xstrata), talked about merging their companies. Mr. Munk's
idea was to create a fully diversified multinational that could
withstand the jarring ups and downs of the commodities cycle.

If
that had happened, the world's biggest gold mining company and the
world's biggest commodities trader would have formed a global resources
giant to rival BHP Billiton and Rio Tinto, with a market value (based on
today's values) of about $67-billion (U.S.). "It would have been a
perfect combination," Mr. Munk says.

Mr. Munk talks to me from the
living room of his Klosters chalet, which is called Viti Levu, after
the Fijian island where he and partner David Gilmour started the
Southern Pacific Hotel chain in the 1960s. The woody chalet is large and
comfortable, with a heated pool in the basement, but is far from
ostentatious. Its best feature is the magnificent view of Gotschnagrat
Mountain, which the Munk family has skied since the 1970s.

Mr.
Munk stopped skiing two years ago, because of his heart, and it was a
big blow to his recreational life; he had skied every year for 71 years.
Melanie, his second wife, and their five children – two with his first
wife, Linda, two with Melanie, and one adopted – keep the family
tradition going. The walls are decorated with enlarged photos of the
skiing Munks. Melanie keeps a large family scrapbook in the living room
and shows me the newspaper articles about the ski disaster in March,
1988, when a Gotschnagrat avalanche severely injured the wife of her
cousin Charles Palmer-Tomkinson, who was skiing with Prince Charles, and
killed Major Hugh Lindsay, one of Charles's best friends. On separate
occasions, Mr. Munk and his wife have broken bones on the runs, which
are considered among the most challenging in Europe.

A mining mega-merger

When
I met Mr. Munk in Montenegro six years earlier, he was a mere 80 years
old and was full of bluster and optimism as he talked about his plans
for the future, as if he were an MBA fresh out of school. Gold prices
were on the rise and the financial crisis triggered by the Lehman Bros.
collapse was still a couple of months away. He and Barrick seemed on top
of the world.

At the time, Barrick, the product of 17 takeovers,
including Lac Minerals, Homestake Mining and Placer Dome, was the
unchallenged gold mining leader. It was on the verge of starting
construction of the enormous Pascua-Lama gold and silver mine, with more
than 15 million ounces of proven and probable gold reserves and an
astounding 675 million ounces of silver.

Mr. Munk was using his
fame and fortune – he denies ever reaching true billionaire status – to
have fun and make a few extra bucks on the side. The big non-Barrick
project was Porto Montenegro, the former Yugoslav naval base that Mr.
Munk and several rich partners, among them Russian oligarch Oleg
Deripaska and Lord Jacob Rothschild, are turning into a superyacht
marina and resort.

In typical Munk fashion, the investment happened through luck and circumstance.

A
few years earlier, he was swimming off his chartered yacht in Monaco,
felt something strange brush his skin and realized he had had a
distasteful encounter with a condom. At that point, he decided to ditch
the overcrowded and dirty waters of Monaco, learned about a discarded
naval base in clapped-out Montenegro, assembled a team of yacht-loving
investors and worked out a killer deal with the government, which allows
the owners of foreign-registered yachts to escape fuel taxes when they
fill up their floating gin palaces. The project has 200 yacht berths,
with another 200 to go. "I'm very proud of it," Mr. Munk says.

Meanwhile,
gold prices rose relentlessly – $1,200 (U.S.) in mid-2010, peaking out
at almost $1,900 a year later. Each $100 rise in gold was larding
another $750-million onto Barrick's bottom line. In 2011, profit was
$4.5-billion, the level of a big Canadian bank. In spite of the obscene
profits, Mr. Munk had no intention of leaving well enough alone. He knew
that one-product commodity companies were vulnerable to boom-bust
cycles (at the time, he was not aware that the Pascua Lama disaster
would accelerate Barrick's fall from grace).

So he called Ivan
Glasenberg, the head of Glencore (whose offices, in the Swiss canton of
Zug are not far from Klosters). Mr. Glasenberg is the secretive South
African-born accountant who learned the art of commodities trading from
Marc Rich of Marc Rich + Co. Mr. Rich made fortunes from trading oil and
other commodities but pushed his luck too far and was indicted in the
1980s for racketeering, tax evasion and trading with the enemy – Iran.
He was pardoned by Bill Clinton on his last day in the White House in
January, 2001, by which time Mr. Glasenberg and his team had taken Mr.
Rich's old shop and were transforming into a commodities-trading
powerhouse.

Through its own mines and a controlling interest in
Xstrata, the Anglo-Swiss miner that bought Canada's Falconbridge in
2006, Glencore was emerging as a mining force too. In 2011, Mr. Munk,
evidently well aware of the soaring value of Barrick's shares, which
could be used as a takeover or merger currency, started secret merger
talks with Glencore.

Mr. Munk's idea was to create a diversified,
Canadian-based mining giant that could compete with BHP, the world's
largest mining group, Rio Tinto, Brazil's Vale (which bought Inco) and
Anglo American. Part of the rationale was financial. A diversified miner
would be able to insulate itself from the worst of the cyclical
downturns. Gold, for instance, and copper, are countercyclical; the
former is bought by investors when economies are falling apart, the
latter when economies are posting strong growth. Glencore's commodities
trading and logistics business, a robust money maker regardless of
prices, would also protect the enlarged group. The biggest companies
also have the best access to the international capital markets, a
necessity to sate the voracious capital appetites of mining companies.

But
Mr. Munk's desire to transform Barrick into a BHP was also emotional,
which does not necessarily mean it was driven by shameless ego. Mr. Munk
decried the loss of Inco, Falconbridge and Alcan to foreign takeovers
during the great Canadian selloff in the middle part of the last decade
(which also saw Stelco, Dofasco, Algoma Steel and a raft of energy
companies vanish). At one point, during the "hollowing out" of Corporate
Canada, he charged into the Toronto offices of The Globe and Mail to
tell the editorial board that the sales would damage Canada's ability to
compete globally and that they should be reviewed carefully by the
federal government.

When Mr. Munk talks about vanishing companies,
he leaps out of his chair in the chalet and paces back and forth,
raging like a Fortune 500 King Lear. He rattles off the names of global
companies in small countries – Nestlé in Switzerland, Volvo in Sweden,
Philips in the Netherlands. "Why don't we have one?" he says. "Why the
hell should the Brazilians take our best nickel company?"

Mr. Munk
claims a merged Barrick-Glencore would have kept its Canadian identity
even if Mr. Glasenberg became the boss. The trading division would have
been headquartered in Switzerland, the mining in Toronto (the hometown
of Mr. Glasenberg's wife). However, the merger idea never made it beyond
the offices of Mr. Munk and Mr. Glasenberg. Mr. Munk says gold "didn't
fit into the trading pattern" of Glencore, which uses ships and
warehouses to trade coal and other bulk commodities. "It's also not easy
to get two cultures together and there would have been a great amount
of resistance from my shareholders, to switch them when there was a
runup on the gold price. It would be very difficult [for them to
contemplate] that the future cannot be in gold alone," he says.

But
Mr. Munk got a sort of consolation prize in the form of John Thornton,
who shares his ideas that Barrick should become bigger and more
diversified. "Operating under the Canadian flag is a huge competitive
advantage," Mr. Thornton says in phone interview. "The priority is to be
the world's leading gold company and to be the leading, or a leading,
copper company."

A disastrous mining project

Mr. Thornton
was Goldman Sachs's president and co-chief operating officer until 2003,
after which he delved headfirst into China. He served as a director of
HSBC Holdings, the bank whose roots are in China, until 2013, sits on
the international advisory council of China Investment Corp. and is a
professor at Beijing's Tsinghua University. He was appointed co-chairman
in early 2012 and awarded a $11.9-million (U.S.) signing bonus whose
disclosure a year later, when gold prices were sinking and Barrick got
whacked by a $4.4-billion after-tax impairment charge, enraged
shareholders. They voted against it, but since the vote was not binding,
the payment went ahead.

Mr. Munk defends his man to the hilt,
noting that the signing bonus was small compared to Barrick's market
value and arguing that Mr. Thornton is the right man to turn Barrick
into a global mining leader. "It took me years to find John Thornton,"
Mr. Munk says. "He wants to build a global entity."

If falling
gold prices were the only problem facing Barrick, Mr. Munk would be
leaving it relatively unscathed. But he is not – Pascua Lama took the
shine off his golden rule and delivered the message that the company
needs to learn a thing or two about mine development in difficult
terrain. The ultimate insult came when the market values of Vancouver's
Goldcorp and Barrick converged. At last count, Barrick's Toronto stock
exchange value was $27-billion (Canadian), Goldcorp's $25.8-billion. The
minor difference becomes shocking when you realize that Goldcorp's
annual production, at 2.67 million ounces in 2013, was well less than
half of Barrick's 7.66 million ounces.

Investors, in other words,
are valuing Goldcorp's per ounce production much more highly than
Barrick's. That will have to change if Barrick is to regain the
confidence of investors. To do so, Mr. Thornton and Jamie Sokalsky, the
CEO who replaced Aaron Regent, who took the fall for the Pascua-Lama
disaster, will have to ensure that Pascua-Lama's development costs are
tightly controlled once mine construction resumes and that a cost
blow-out like Pascua-Lama never happens again. "Priorities one through
five are operational excellence," Mr. Thornton said.

When Mr. Munk
talks about Pascua-Lama, his otherwise strong voice falls to a whisper
and he slumps in his chair. Indeed, the scale of the disaster is hard to
fathom. In 2013, Barrick reported a loss of $10.4-billion (U.S.), due
largely to the writedowns related to Pascua-Lama and the overpriced 2011
purchase of copper producer Equinox Minerals.

What went wrong? To
this day, Mr. Munk insists he doesn't know how the costs soared to
outrageous levels and why corrective measures were not taken earlier.
It's a classic mystery: Who knew what when? "I could not believe the day
[in 2012] when I was told we could be multibillion dollars over
budget," he says. "For 30 years, we never missed a budget."

Pascua-Lama
is located at a height of 5,000 metres in the Andes, on the southern
reaches of the Atacama Desert. Because of the dizzying elevation,
location in two countries and proximity to glaciers, it presented a
unique geopolitical, engineering and construction challenge. The air is
thin and the high winds and low temperatures can be vicious. Feeding the
thousands of workers and removing the garbage and human waste they
produced proved to be a hideously expensive logistical nightmare. "Every
hour of productive work required probably five hours of work to keep
[the employees] up there working," Mr. Munk says.

As Barrick was
building, the environmental regulations multiplied. "Each new rule
brought the need to build another wall," he says. "Resolving each and
every one of them resulting in more building. The cost of building
escalated to the point it was unreal."

The development costs went
to $8-billion from the initial $3-billion estimate (about $5-billion has
been spent so far). By last autumn, Barrick had had enough and put the
project into cold storage. It plans to revive it once gold prices
recover and it figures out a ways to control the costs. Bringing in a
development partner to spread the risk and the workload is one idea that
is gaining currency within Barrick's executive offices.

Enter Mr.
Thornton, who is impeccably connected in China. "One thing would be to
consider the Chinese as operational partners either for Pascua Lama or
the other mines," he says, referring to the other five big deposits
nearby. "The Chinese are very good at bringing in projects on time and
on budget."

Mr. Munk refers to a "specific event" that he and Mr.
Thornton had hoped to announce by now. He won't say what it was, though
it may have been news about a Chinese partner or possibly the sale of
African Barrick. Barrick tried to sell African Barrick, Tanzania's
biggest gold producer, to China National Gold Group, but those talks
collapsed last year. Since then, Barrick has been paring back its
controlling stake in African Barrick, although an outright sale of the
remaining 64-per-cent investment is not out of the question.

The
"event" could also been the purchase of a large gold producer. But given
the sharply reduced value of Barrick shares, their use as a takeover
currency has vastly diminished.

Mr. Munk has a month left on the
job. He will no doubt step down from the board with a standing ovation
at the annual general meeting. In spite of the Pascua-Lama fiasco, he
did build the world's biggest gold company and, for prolonged periods,
created a lot of wealth for shareholders. He also spared Toronto from
mining company oblivion during the hollowing-out era. While he lived
well, he did give away much of his wealth – $200-million (Canadian) and
counting – to good causes, such as the Peter Munk Cardiac Centre at
Toronto's University Health Network.

Barrick will never be far
from his heart. He hopes Mr. Thornton and the senior executives will ask
his advice on how Barrick can evolve into a global mining champion. He
would love to see Barrick achieve that status before he goes to the
great golden ore body in the sky. "Barrick is my legacy," he says. "The
thing is to leave something behind that is meaningful, especially for
me. I'm an immigrant. I owe Canada. Canada gave me everything I have."



Read the article online here: Peter Munk: A mining magnate nears the end of his golden reign - The Globe and Mail

Eyeing #Brazil and #Africa, #potash juniors defy industry slowdown #AgriBiz

Eyeing Brazil and Africa, potash juniors defy industry slowdown

FAST NEWS

Tepid global demand and falling prices have crimped profits for producers across the industry and hurt prospects of many of the exploration firms.

Author: Rod Nickel (Reuters)
Posted: Friday , 14 Mar 2014 

WINNIPEG, Manitoba (Reuters)  - 

Two junior potash producers working in unusual locations look set to shake off the most bearish industry conditions in five years and open new mines, helped by their proximity to Brazil and Africa, two of the world's most promising but under-served fertilizer markets.

Tepid global demand for the crop nutrient and sagging prices have crimped profits for producers across the industry and hurt prospects of many of the exploration companies aiming to develop new mines for the already-oversupplied industry. 

The world's biggest fertilizer company, Potash Corp of Saskatchewan, slashed 1,000 jobs in December, while Mosaic Co, a major U.S.-based producer, last year suspended part of its expansion plans. 

Yet prospects are bright for Allana Potash Corp and Verde Potash PLC, two small producers developing low-cost potash mines in Ethiopia and Brazil respectively, far from the world's main potash regions of Western Canada and eastern Europe.

Each promises a shortcut to fertilizer-hungry markets and has attracted strategic or government backing, removing some of the risk.

Shares of Verde, which is still in the early stages of project development, have doubled in value since July 30, when Belarusian Potash Co, one of the world's biggest potash traders, broke up and potash prices went into free fall because of the prospect of increased competition. 

Allana stock is slightly higher over the same period even as Karnalyte Resources Inc, owner of a similar project in potash-rich Western Canada, has lost about half of its value. 

The faith in Allana and Verde shows investors are still willing to bet on the long-term fundamentals of potash, which are based on population and income growth in the developing world fuelling greater food demand. Even so, only junior projects with such unique, built-in advantages are likely to proceed in the near term.

MINING POTASH IN AFRICA

Allana's 1-million tonne Danakhil mine in Ethiopia may turn out to be the world's first major greenfield potash mine in seven years if it opens on schedule in late 2016.

The estimated $642 million cost of building the mine is lower than the cost of conventional underground projects. It uses a technique that pumps water into shallow potash beds, producing a brine that is evaporated on the surface, leaving potash-bearing crystals. 

Allana would provide significant domestic potash supplies for African crops and benefit from short distances to established buyers in India and Southeast Asia. 

"Allana is a relatively modest cost cap-x project with low operating costs as well, so they have fared better," said Raymond James analyst Steve Hansen. "Even in a low potash price environment, you could still argue the project has some merit.

There's also no competition so far - unlike in the Western Canadian province of Saskatchewan.

"You're talking about competition in the case of Saskatchewan for infrastructure, for railways, for water, for the port, so no doubt that has its own impact on the finance-ability of junior projects there," Allana Chief Executive Farhad Abasov told Reuters, referring to the province where most of Canada's potash is mined.

Location is also the critical selling point for Verde Potash, which aims to satisfy a sliver of Brazil's huge demand for fertilizer to boost corn and sugarcane yields.

Verde plans to take potash from the surface at its mine in the Cerrado region to produce a modest 300,000 tonnes or more a year of ThermoPotash, a special fertilizer tailored for Brazilian soils. That capacity represents just over 10 percent of the annual capacity of Potash Corp's Rocanville, Saskatchewan, mine.

A second phase would produce conventional potash. 

The project's pre-feasibility study, a preliminary assessment of its viability, is due later this month. 

"If you could choose one place in the world for a potash mine, I think the consensus would be Brazil," Cristiano Veloso, chief executive of Verde Potash, said in an interview. "And then if you could pick one location in Brazil, it necessarily would be where we are in the Cerrado region."

The Cerrado is Brazil's grain belt, where more than half of its fertilizers are consumed, according to Verde.

Brazil relies on foreign sources for 90 percent of the potash it uses, with Vale SA operating the country's only potash mine.

"The one thing you do hear that's positive in the potash sector is Brazil keeps importing record amounts every year," said John Chu, analyst at investment bank AltaCorp Capital. "Obviously if you're based in Brazil and you can provide that domestic production, that would be a positive." 

ADDING TO OVER-SUPPLY? 

But adding to a potash surplus comes with considerable risk.

Global potash production capacity currently exceeds demand by 15 million tonnes, or 27 percent, and further build-out in the next few years may limit any price rebound, according to a March 5 report by TD Economics senior economist Sonya Gulati. 

Germany's K+S AG and Australia's BHP Billiton Ltd already have new Canadian mines in the works, although low prices have caused BHP to hold off on final approval.

The spot Vancouver, British Columbia price was $300 per tonne in January, the lowest since 2008 and well below the long-term potash price of $430 assumed by Allana in its feasibility study, although prices have since risen in some markets.

It's also no sure bet when Africa's fast growth will translate into fertilizer demand.

"Africa will one day be a very important market. The issue is people have been saying that for 20 years," said Mosaic Chief Financial Officer Larry Stranghoener, on Wednesday, adding that his company has no plans to significantly invest there.

FUNDS FROM HIGH PLACES 

Powerful partners help offset some of those risks.

Verde scored a $105 million commitment in loans, equity and grants last month from the Brazilian government, worth 90 percent of the construction cost for its first phase.

Allana signed a partnership in February with the world's sixth-largest potash producer, Israel Chemicals Ltd, which agreed to buy at least 16 percent of Allana's regular shares and the mine's output.

The company's Ethiopia site has also brought on board the International Finance Corp, a member of World Bank Group, which took an equity stake and agreed to help with construction.

Western Canada is more stable politically than East Africa, but in the current environment to finance a potash project, "you're better off being in a developing nation," Allana's Abasov said.

"We're talking about fertilizer, a food-related product, in a country that has been experiencing recurring famines until recently. There's a great overlap of all interests." (Editing by Jeffrey Hodgson and Frank McGurty)

Eyeing Brazil and Africa, potash juniors defy industry slowdown - FAST NEWS - Mineweb.com Mineweb

An excellent article discussing Israel's future in the court of the energy superpowers. http://www.commentarymagazine.com/article/will-israel-be-the-next-energy-superpower/

Will Israel Be the Next Energy Superpower?

They will feast on the abundance of the seas, and on the treasures of the sands.
—Deuteronomy 33:19

Tamar sits 56 miles off the coast of Israel, an offshore gas platform rising up from the Mediterranean like a white steel beacon whose roots reach down 1,000 feet to the seabed. Named for the natural-gas field beneath the sea floor, Tamar is the symbol of a bright future for Israel if Israel is ready for it: as the newest energy producer and exporter in the Middle East, and potentially the most important.
A classic quip since the creation of the state of Israel in 1948 has been that Moses brought his people out of Egypt to the one spot in the Middle East that didn't have oil. "We proved that joke to be wrong," says Gideon Tadmor, chairman of the Delek Group, one of a consortium of companies that built the Tamar platform. Delek and its partners began extracting gas from Tamar in March 2013 and has been doing so with the natural gas from three other fields as well. Ten years ago, Israel was a country 80 percent powered by coal, with the remaining 20 percent from oil—all of which had to be imported. Now, natural gas supplies half those energy needs. The known fields could contain more than 900 billion cubic meters of natural gas. In global terms, that's not much—roughly the amount the United States consumes in a year. But for a country of only 8 million people, it's an energy bonanza. And, according to the U.S. Geological Survey, the Levant basin in which Israel's fields sit may contain a total of 3.5 trillion cubic feet of natural gas—about half the reserves in the United States with a fraction of the demand.
Nor is that all. Even before the first discoveries of natural gas in 1999, geologists had determined there were huge oil-shale fields stretching along Israel's coastal plain. Those fields contained recoverable reserves, according to the latest estimate, of up to 250 billion barrels—almost equal to Saudi Arabia's.
In short, Israel is poised not only for future energy independence, but for becoming a major regional energy player—maybe even, if it uses its resources wisely, the next energy superpower. The looming question, however, is not whether the world is ready for Israel to be the next Texas. It's whether the Israelis are ready.
I got my introduction to the Tamar platform, and to Israel's adventure in becoming an energy player, even before my wife, Beth, and I arrived in Israel, on the plane from Newark bound for Tel Aviv. The passenger sitting next to us looked as if he was headed for a country-music festival. He wore a baseball cap with the logo of Noble Energy—one of the key players in the natural-gas revolution. We learned he had spent 30 years in the oil and gas business as a platform operator, including in West Africa and Thailand, before Noble had sent him out to Israel. Now he works on the Tamar platform. After 28 days there, he'll head home to Louisiana for four weeks to see his family and kids; they will be able to afford college thanks to the money he's earned working for Noble in Israel.
He also pointed out his fellow workers on the plane scattered among the Orthodox and Hasidic passengers—"roughnecks" (members of a drilling crew), "tool pushers," and mechanics. They all hailed from Texas, Oklahoma, and his native Louisiana, and one or two wore baseball caps with Hebrew lettering. These are the migrant laborers of Israel's newest industry, and proof of how much Israel depends on the United States for exploring, drilling, and developing its new-found energy resources. That may change as Israel's talent for innovation gets focused on energy technologies; Israelis themselves may accelerate the transition to faster, more efficient, and environmentally safer exploitation of both deep-water gas reserves and what are called the "unconventional oil sources," meaning oil shale and oil sands.
Indeed, it is in oil shale that the story of Israel's energy revolution really begins.
Israel has had a long and bitter history of looking for oil and finding none. Beginning in 1953, the National Oil Industry began launching a series of exploratory drilling holes. In just over 33 years, it sank more than 410 wells—and found exactly five gas fields and three oil fields. The country's most productive oil field is near Helez, and it wasn't even discovered by Israel; Iraq Petroleum found it before 1948 and then sealed it up when Israel achieved its independence. Since the Israelis opened it again in 1955, Helez has produced 17.2 million barrels—an amount that would power Israel's current economy for only five weeks. In 1986, the Israeli government finally gave up and suspended its three-decade ritual of frustration.
Then, just two years later, the ground shifted, almost literally, under the government's feet. The very first comprehensive geological survey of Israel, including the coastal plain, revealed the existence of large deposits of oil shale, or kerogen.
Kerogen is a pre-petroleum organic compound of dead algae from long-extinct bodies of water. It is, in effect, a precursor to oil. Under great pressure and heat, kerogen can turn into the same kind of hydrocarbon compound as conventional petroleum. Rich kerogen deposits are found all over the world, from the Green River formation in Colorado to the Jordan River valley, including Israel.
Once the discovery was confirmed in 2006, the Israeli government began looking for partners in the United States. American companies had been wildcatting in Israel for decades. But while most knew how to drill, they were clueless about where. Instead, like Zion Oil's John Brown, they were managed by Christian fundamentalists who were literally relying on the Word of God as their guide. One wildcatter in the 1960s was led by a passage from Deuteronomy to conclude there was oil located somewhere on the ancient lands of the tribe of Asher, on "the foot of Asher" between Haifa and Caesarea. No luck.
In 2007 the search for an American partner brought an Israel Petroleum Authority official to Houston and the offices of Shell Oil. It was a smart choice. Shell had been making breakthrough discoveries in how to produce oil from shale rock, thanks to its chief scientist, Harold Vinegar. He had modified a process, developed by the Swedes during World War II, of distilling kerogen into a usable fuel—an innovation that made the extraction of oil shale in Colorado's Green River formation feasible and economical.
Vinegar had been working in Colorado when he learned about the rich kerogen deposits in Israel that extended into Jordan. Shell had already partnered with Jordan's King Abdullah—and Vinegar, a Jew, was unhappy that the project didn't include Israel, especially since the best shale rock was known to be on the Israeli side of the border. But he also knew that Shell, like all the other major oil companies, feared offending the Saudis by involving itself in Israeli oil speculation. Vinegar knew the Israeli official was on a fool's errand.
One night the official came to dinner with Harold and his wife, Robin, and pressed Vinegar again and again. "Are you sure you can't get Shell to come to Israel?" Vinegar had to keep repeating, no there was no way that was going to happen.
So the official suddenly changed gears. "Then you come!" he urged Vinegar. "Start a company. Put in an application for oil-shale exploration rights."
Vinegar had been to Israel exactly once, back in 1972. His roots were in America. He had never formed a company in his life. But as Vinegar tells the story, the Israeli wouldn't take no for an answer. Finally the Israeli took his leave, but not before he made one last pitch: "You just come," he told Vinegar. "The money will find you."
On October 31, 2008, Vinegar wrapped up his job at Shell and made the move. He was joined soon afterward by Yuval Bartov, who was teaching petroleum geology at the Colorado School of Mines. With backing from an American investor named Howard Jonas, whose path he had crossed working in Colorado, Vinegar was able to raise the money to create Israel Energy Initiatives in 2009, with Yuval Bartov as its first employer.
Today Israel Energy Initiatives sits in Har Hotzvim, the modernistic office park outside Jerusalem where many of Israel's most innovative high-tech companies have their headquarters (some have taken to calling it "Shalom Valley"). Vinegar is a broadly girthed, vigorous, and gregarious sixtysomething with a shock of white curly hair and a loud, infectious laugh. He reminded me instantly of Herman Kahn, whose iconoclastic theories of thermonuclear warfare sent shock waves through the American public consciousness—just as Harold Vinegar and his investors are sending shock waves through Israel's.
Sitting down to an afternoon with Vinegar and Bartov means having an engaging seminar not just on the technology of oil shale and its extraction, but on the opportunities as well as obstacles to their vision of an oil-rich Israel. The company drilled a test well in the Elah Valley southwest of Jerusalem. Based on the information they gleaned from that test, Bartov now thinks there are at least 40 to 60 billion barrels of recoverable oil there—about one-quarter of the 250 billion barrels Bartov and the Israeli Geological Survey estimate are within Israel's reach.
But here is the problem. Current techniques for extracting oil, including the relatively new method called fracking, won't work with kerogen. And it is too time-consuming and expensive to mine the kerogen and then, after pulling it up, apply the heat and pressure necessary to turn it into oil.
The trick, as Vinegar and Bartov explain it, is heating and pressuring the kerogen while it's still in the ground. To do so, they would use a series of heater wells, each six inches in diameter, driven down into the kerogen. The wells would act like a pot still for whisky, literally cooking the shale at around 300 degrees Celsius until its various components are distilled and collected. Those include natural gas, water, and hydrogen sulfide (which is highly toxic but can be isolated to make by-products such as fertilizer).
But mostly, the process (called "retorting") would produce oil—roughly 25 barrels per ton (which equals roughly a cubic meter of oil shale). It would come out as a translucent golden-brown liquid instead of the typical black sludge that passes as crude oil—ready to go to one of Israel's two refineries for conversion into fuel.
The process is expensive, but it can still produce oil at $40 a barrel, well below the current global price of $80–$100 dollars a barrel. If it sounds complicated or wasteful, consider: A single square kilometer of shale could supply enough oil to meet Israel's entire needs for a year. That's because horizontal drilling—the other technology besides hydraulic fracking that's opened up oil and gas reserves once considered inaccessible—enables the direction of drilling to turn sideways, allowing a much wider area of shale rock to be exposed. In effect, a single well can spread its drilling tentacles wide and deep underground, making development not only more efficient, but also economical in terms of land use.
For now, Vinegar and Bartov envision a pilot program involving a series of wells in the Elah Valley heating a 30-meter zone and producing the first 500 barrels in the first year, in order to establish the commercial viability of the oil-shale project. And with reserves holding the equivalent of 250 billion barrels, that would just be the start.
In the meantime, however, their discoveries have been overshadowed by natural gas.
As with oil shale, Israel's natural-gas story involves Israeli and American entrepreneurs working together to change the country's energy fortunes.
The Israeli in this case was Gideon Tadmor, a former lawyer who in 1991 set up his own gas-drilling company, on the bet that the same offshore fields that provided Egypt with its natural gas from the Nile Delta might extend into Israeli territorial waters. Like his Israel Petroleum Authority counterpart, he then set off on a pilgrimage to America to find a company bold enough to open the offshore fields, and brave enough to defy any possible Arab boycott.
That company was Noble Energy of Houston—an oil-drilling company founded in southern Oklahoma by Lloyd Noble in the 1930s that had expanded its operations to offshore natural gas. For its CEO, Charles Davidson, the Israeli offer was an opportunity to use their deep-water expertise to make some money while helping the state of Israel.
Noble engineers arrived in 1999 and, with deep seismic testing, confirmed the existence of hitherto unknown deposits of natural gas just a few miles off the Israeli coast. Noble helped to sink Israel's first offshore gas well in 2002, called Noa, followed by Mari-B in 2004. Then in 2009, Noble's geologists disclosed to Tadmor and the Israelis that they had found a much larger field named Tamar, with roughly 10 trillion cubic feet of gas. Those were reserves rich enough to invest in erecting a $3 billion offshore platform to which gas from the entire Tamar field could be piped—the biggest infrastructure project in Israeli history. Divers operating as deep as 800 feet installed 457 miles of pipe and 1,200 miles of umbilical tubing to move the gas from fields 90 miles out to shallower water where the platform sits—the longest undersea "tie back" in the history of the offshore-energy world. The platform itself weighs 34,000 tons, and from sea floor to the tip of the platform measures 950 feet, 150 feet higher than Israel's tallest skyscraper, the Moshe Aviv Tower in Ramat Gan.
Fifty workers labor around the clock, monitoring the flow from six principal wells—some more than 20 miles away and three miles below the seabed—to the platform, where various contaminates (sand, water, sulphur, and extraneous gases) are extracted so the final product can be shipped via a 150-kilometer pipeline to a terminal at Ashdod, from which it is fed to power stations that supply Israel's electrical grid.
Tamar opened for business in March 2013. It currently pumps 1 billion cubic feet of gas a day, more than enough to serve Israel's natural-gas needs—even though, thanks to Tamar and Mari-B, almost 40 percent of Israel's electricity supply has now switched over to natural gas. The opening of Tamar was pronounced "historic" by Prime Minister Benjamin Netanyahu's office. It was the crucial element in the Netanyahu government's 2010 plan to enable Israel to achieve energy independence in 10 years.
But nothing prepared anyone for the next discovery, dubbed Leviathan. Found in 2010, Leviathan is more than double the size of Tamar, with 16 to 18 trillion cubic feet of gas. The full extent of the field is still unknown, but energy consultant Paul Mecray told me it's easily one of the biggest offshore gas discoveries in a decade.
Together with Tamar, Leviathan is big enough to supply all of Israel's energy needs for decades, even if everything in the country is switched over to natural gas from electricity to cars—and with plenty left over for a booming export business. Noble's estimate is that Israel will be looking at $145 billion in energy savings and in revenue from taxes.
As Noble awaits approval of a lease to develop the massive field, a wealth of options open up, both for Noble and her Israeli partners Delek Drilling and Avner Oil and Gas Exploration, and for Israel. Almost all involve exporting the bulk of Leviathan's gas. As Amit Mor, former assistant to Israeli Ministry of Energy and Infrastructure and now CEO of Eco Energy, says, "We now have gas for 50–60 years, in terms of domestic reserves, and that's even with the most [pessimistic] figures."
One option involves building an export pipeline to Turkey, which would want the gas as a cheaper alternative to buying from Russia. Given Israel's up-and-down state of relations with Turkey, however—and a lack of encouragement from the current Turkish government—that option has few supporters.
More attractive is building a pipeline to Egypt, where facilities already exist to collect and process the gas—a special irony considering Egypt was once Israel's own longtime source of natural gas until the now-ousted President Mohammed Morsi cut off the supply in early 2013.
A third option would be to create a major liquid-natural-gas hub in conjunction with Cyprus, only 250 miles as the crow flies from Israel. The island nation has recently discovered its own huge offshore fields—more than 500 billion cubic feet's worth. The government of Cyprus would love to see that gas exported as a way to resuscitate its economy, but it needs 600 billion cubic feet to build an export facility that's economically feasible. If Israel supplied that extra 100 billion, and shipped its own gas to the same facility, Israel and Cyprus together could become important players in the European energy market. Russia is now the principal supplier, at more than three times the global market price for natural gas—and Vladimir Putin is not afraid to use the threat of cutting off supplies for political leverage.
A European Union market for Israeli liquid natural gas could have huge geopolitical ramifications in changing Europe's perception of the Jewish state. It's one reason the Israeli government is negotiating with Woodside Petroleum, an Australian company that specializes in building liquid-natural-gas facilities, for a 30 percent stake in the development of Leviathan. Such a market might even make internal European pressures to boycott Israel go away. Yet Cyprus's close ties to Russia, and its dealings with Russia's state-run gas monopoly Gazprom, raise questions about whether relying on the Cypriot connection might be sowing the seeds of trouble later on.
Another idea I discussed with Noble officials would be to construct a floating liquid-natural-gas plant (or FLNG) that would collect, process, and liquefy natural gas for export directly from a Leviathan-based platform. FLNGs are huge and expensive—the one Royal Dutch Shell is building in South Korea for the western Australian gas fields is the size of six aircraft carriers—but it costs less than an onshore facility. A Leviathan-based FLNG could serve as the anchor for processing and liquefying Cypriot gas as well—except under Israel's control instead of Cyprus's.
These and other scenarios have one thing in common: the assumption that exporting a sizable portion of Israel's gas finds is the key to getting the most out of the discoveries, financially as well as politically, and that includes exporting to Israel's more immediate neighbors.
One of those is Jordan. Israel now has a fast-growing network of gas pipelines running from Noble and Delek's processing center at Ashdod up the coast, and across to the east. Extending the pipeline into Jordan would help not only to create an economic bond between the two countries but also to stabilize Jordan's economy and King Abdullah's government, especially since Jordan's own oil-shale project, so elaborately put together with Shell, might not produce anything until the 2020s.
The other is the Palestinian Authority. Its own offshore gas fields, Gaza Marine, lie untapped and unexplored because Hamas refuses to allow anyone to get near them—largely because Hamas's patron, Iran, has ordered that they lie fallow. So while Hezbollah and Hamas are managing to keep Israeli gas out of Gaza and Lebanon, at least for now, Israel is opting instead to pump to the West Bank. Noble already signed a 20-year contract to supply the Palestine Power Company, starting in 2016 or 2017. A similar contract with Jordan is in the works.
There is time to weigh all options. No supplies from Leviathan can start flowing until Noble and its partners have built an onshore terminal in Israel for supplying the domestic market (two sites are now pending). That won't happen before 2017. A FLNG couldn't begin operating until sometime in 2018. A link-up with Cyprus would not come until after that.
All the same, combined with the promise of oil shale, Tamar and Leviathan together seem an unbelievable bonanza for the state of Israel, including its foreign relations. Back in his office at Har Hovitzim, Vinegar sees the two projects working together in harmony. "The natural gas in the Mediterranean will have a very favorable impact on the economy; but this will have a greater effect," Vinegar told me. "[The kerogen production] means energy security for Israel, almost forever. It means an enormous continuing source of income. It means so many jobs—in both primary and related industries." But with a wry smile, he adds, "I wish it were going faster." The fact is, many Israelis are skeptical about Vinegar's project and Israel's offshore gas prospects.
And, incredibly, there are even some who'd like to put a halt to the entire proceedings.
During our visit to Israel, friends took my wife and me to a large beach north of the city of Benyamina that sits within walking distance of their former kibbutz. They explained that this beach was one of the sites where Noble Energy had proposed building a reception terminal for Leviathan, until residents and communities banded together to say no, and in a series of furious public meetings blocked the plan.
For many in the Benyamina area, including our friends, the words Noble Energy are dirty. Listening to the roar of the surf and watching the sun set in an explosion of orange and pink over sand dunes that have been largely untouched since Phoenicians came to trade here three millennia ago, it was easy to see why.
The sudden oil and gas explosion has set off a predictable blowback from elements of the Israeli public, and the Israeli political class, especially on the left. It's not just the "not in our back yard" mentality and fears of burgeoning industrial sites where there used to be pristine beaches, or the specter of historic sites in the Holy Land destroyed in a reckless quest for oil (Elah Valley is where the Bible tells us David fought Goliath). It has also triggered a furious campaign from environmentalists, who've gone after the oil-shale project with the same rage and determination as opponents of fracking in this country.
Leading the environmentalist charge since 2011 has been Orr Karassin, who represents the Green Zionist Alliance on the board of directors of the Jewish National Fund. She spearheaded a high-profile report opposing oil-shale production and Vinegar's pilot program. "There are too many questions," she told the Jerusalem Post, "regarding the environmental consequences," especially regarding safety concerns, including pollution of the water table, the possibility of underground fires, and even, she says, "very substantial indications of seismic activity, to the point of earthquakes."
Others share her apocalyptic vision of what might happen if Vinegar and his team get their way. "The Elah Valley will be turned into a great oil-shale production site," an article in Haaretz claimed. "Its vistas will likely be ruined, its soil and groundwater polluted by heavy metals, and its clean air will become a distant memory."
Vinegar rolls his eyes at the suggestion that his production method will trigger earthquakes. The retorting process he and his team would use is "environmentally sound," he says emphatically. Since the process is operated at pressures below hydrostatic pressure, any flow will be into the heated zone, not out into the aquifer, which is protected by thick layers of impermeable rock.
In addition, he points out, unlike conventional oil drilling, the retorting process will leave a tiny environmental footprint: less than a square kilometer over the life of 30 years of production, thanks to horizontal drilling.
Karassin and her supporters remain unconvinced. Any oil-shale pilot program, she says, "must be defined to the point where the impact of the technology is clear." But as Vinegar and Bartov point out, there's no way to understand the impact without a pilot program: "I'm sure we'll have a very small impact on air and no effect on water. But the pilot has to show it."
It's a classic catch-22, with opponents saying a project should be blocked because the technology is untested even though the only way the technology can be tested is by running the project. Yet Karassin is honest about the fact that, even if every environmental concern were answered, she would still be opposed: "Oil shale does not synchronize well with the current Israeli policy on alternative" energy sources such as wind, solar, and biofuels, she told the Post. (The Netanyahu government publicly pledged to convert 10 percent of Israel's electricity production to so-called clean renewables.) "Israel's wider interests must take precedence. And those require that the oil shale stays where it is."
Vinegar is incensed at this myopia masquerading as farsightedness. Oil, even more than natural gas from the sea, "means energy security for Israel, almost forever." It offers more options than just relying on gas exports as a national energy dividend, and in more concrete terms. Israel's vehicle as well as civilian- and military-aircraft needs amount to 50,000 barrels of oil a day. A successful program in the Shefla basin could deliver as much as four times that, or 200,000 barrels a day—more than enough to sustain Israel's fighting forces on the ground and in the air during a prolonged crisis.
Critics like Karassin refuse to listen, or don't care. Yet the green lobby has twice failed to halt the Elah Valley pilot project in Israel's Supreme Court. Vinegar's Israel Energy Initiatives is now embarked on the final review process, which will take another nine months (it may be another year and a half before final approval of contracts to get started).
But the Greek chorus of critics doesn't stop with the Vinegar project. Their attacks extend to the coming offshore gas bonanza as well.
A "clean" fossil fuel like natural gas makes a difficult target for attacks based on environmental grounds. But there are worries that the Israeli energy boom will have the dire economic impact known as the Dutch Disease. The term was coined by the Economist to describe what happened when discovery of natural gas in Holland in 1959 triggered a decisive decline of other sectors of the economy, especially manufacturing, as revenues from natural-gas exports pumped up the price of the guilder and made other Dutch exports less competitive. When the gas boom was over in the early 70s, the Dutch economy was in worse shape than when it started. In many ways, it still hasn't recovered.
The Bank of Israel has dealt with a possible outbreak of the Dutch Disease in a report issued in April 2013. The bank recommended creating a sovereign wealth fund, or national pension fund, to ensure that export income from the sale of gas doesn't convert into shekels or enter the Israeli economy or even the national budget. This should quell any distorting effects. Still, many remain skeptical and worry about what will happen to Israel if and when the gas runs out.
Still others worry about security concerns, and the possibility that Israel's emerging oil and gas facilities, including its offshore gas platforms, make perfect targets for terrorist attacks. As Eco Energy's Amit Mor notes, Israel's current floating storage re-gasification unit six miles off Hadera already makes it a "sitting duck" for groups such as Hezbollah and Hamas. If jealous neighbors like Lebanon (which is already insisting that parts of the Leviathan field extend into its own EEZ) or oil-rich countries in the region, such as Iran feel the heat from Israel's emergence as a major energy player, will they look for ways to shut it down—ones that include terrorist destruction? The specter of a Tamar platform hit by Hamas missiles and set ablaze, like BP's Deep Horizon, dampens the mood in any discussion of Israel's energy future.
Many inside and outside the Israeli Knesset also see in the rise of Israel's gas industry a more sinister trap. Ariella Berger, at the Israel Institute for Economic Planning, thinks there may be far less gas in recoverable reserves than Noble and its partners claim. Even if all contingent proven gas reserves are included, she pushes a final figure closer to 650–680 billion cubic meters, far lower than the 950 billion figure the Netanyahu government accepts. That lower number, she points out, would put Israel at No. 29 on the list of nations with provable reserves, behind the Ukraine—which is hardly an energy superpower. From Berger's perspective, an aggressive export-driven policy runs the risk of emptying the gas tank and leaving Israel high and dry just as it completes its shift from coal and oil to natural gas. She is urging instead that the vast bulk of the offshore finds should be kept at home for domestic use—and many in Israel agree with her.
In 2013, the export of natural gas became a fierce political issue. Matters came to head in June, when a select committee mandated by the government to study the issue and headed by Shaul Tzemach, director general of the Ministry of Energy and Water Resources, released its report. The committee recommended exporting up to 53 percent of Israel's offshore gas while making sure Israel has a reserve to last for 25 years. Even after the Netanyahu cabinet voted to cut that number to 40 percent, it was still too high for the leaders of both the Likud and Labor parties, who denounced the decision as "reckless." Release of the report triggered demonstrations that blocked roads in central Tel Aviv, while demonstrators also besieged the home of Minister of Energy and Water Silvan Shalom.
For once parties on the left and right in Israel could agree: Exporting Israel's precious natural-gas resources would be a catastrophic mistake, no matter how much foreign currency it would draw in or how many minds in capitals in Europe or elsewhere it might change regarding Israel.
For those on the right, the debate largely hinges on a question of exports versus energy security. For those on the left, it's also about profits versus people—more specifically, profits for Noble Energy and its Israeli partners. They see the current export model as a payoff by the Netanyahu government to its capitalist supporters; or as Dror Strum, former head of Israel Antitrust Authority, puts it, "There are actually [only] two sides to the story, the gas monopolies and the Israeli public."
Indeed, it's not hard to find those on the left who wonder, like their ideological allies in the Green Zionist Alliance, whether it would have been better if Israel hadn't discovered its new energy resources at all—and whether Israel's national identity can even survive the onslaught.
"Nonsense." That is the reaction of Uri Aldubi, chairman of Israel's Association of Oil and Gas Exploration Industries, to this rising tide of anti–fossil fuel propaganda and defeatist pessimism about Israel's energy-rich future. On fears of the Dutch Disease, he points out that the Tamar field hasn't added more than 1 percent of GDP to Israel's already booming and diversified economy. Even Leviathan, for all its potential riches, won't be able to overbalance an economy—which, unlike Holland's in the 1960s and 70s, is one of the most dynamic and innovative in the world. "The Start-Up Nation will adjust," Aldubi assures me, as will Israel's thriving entrepreneurial culture. And far from misdirecting economic resources, Israel's homegrown energy start-ups will only add more to the mix.
Aldubi has an even harsher reaction to worries that exporting too much gas will wreck Israel's own domestic market. "Quite frankly, this is B.S.," he says. "There is no way Israel can develop fields of this size without exporting." No one, not even an Israeli energy company, would invest the time and resources in opening the Leviathan field just to meet the tiny Israeli market. It's a point you hear from others who understand the energy business: Reserves in the ground count for nothing unless it's economically feasible to open them up. Israel's own neighbor Egypt is the classic example of a country that has very large natural-gas reserves and that suffers from an acute gas shortage. Israel could find itself in a similar squeeze once the Tamar field starts to play out, if there aren't enough export-earned shekels to pay for new wells to serve that domestic demand.
As for Israel's oil potential, he points out—like Harold Vinegar—that the aquifer in the Shefla basin is protected under the development scheme proposed by Israel Energy Initiatives. He, too, sees exploiting Israel's oil-shale potential as a way to diversify risk as well as economic opportunity, and not just for Israel but for its neighbors.
Indeed, what many in the Israeli Knesset seem not to understand is that what looms on the horizon is more than just energy independence—or lots of new government revenue. Turning Israel into an energy-market player could be the beginning of a revolution in the country's relations with its neighbors, who are already contracting to buy the gas. The list includes Jordan and Egypt—the latter, as Aldubi likes to point out, is the country that used to supply natural gas to both Israel and Jordan-—as well as the Palestinian territories.
And this is where the possibilities become intriguing.
Shlomi Fogel may be described in the financial press as "one of Israel's wealthiest and most secretive billionaires," but in the flesh he is affable, eloquent, and passionate about the most prolonged of all Israel's agonies, the conflict with the Palestinians and the status of the West Bank. Fogel is no milk-and-water Israeli liberal; he is close to Netanyahu and his master architect of the government's export-driven energy policy, Egon Kandel. But Fogel is also friends with key officials in the Palestinian Authority, as well as leading Palestinian businessmen, and he sees in Israel's energy discoveries an unprecedented opening to a new Israeli–Arab future.
The founder in 1993 of Ampa Industries, one of Israel's largest diversified companies, Fogel says he sees "four vectors signaling Israel's future rise as a world-class economic power." The first is its impressive command of leading high-tech industries. The second, its up-to-date infrastructure, including high-speed Internet, far ahead of any other Middle Eastern country and even in some respects the United States. The third, its gift for entrepreneurial flair. The fourth is now oil and gas.
When asked whether the growth of Israel's oil and gas business can promote Palestinian–Israeli amity, Fogel is emphatic. "Absolutely," he replies. People have had enough of politicians manipulating the issue for their own gain, he says. On both sides of the security fence, it's time for a bottom-up solution, taking root in one business deal at a time and creating a powerful middle-class constituency that has a stake in creating wealth instead of fomenting war. The export of natural gas to revivify the economy of the West Bank, with Palestinians finding well-paying jobs on building and servicing pipelines or in oil-shale production, could be a compelling way to jump-start the process.
"Jordan is moving toward development and purchasing of gas from us," he tells me. "I believe we will see better times with them." He sees the same possibility with the Palestinians, even in Gaza. "The rockets are not giving them a better future," he says. "Their young people will not accept misery and unemployment" for very long if they see a better more prosperous future unfolding in Jordan and the West Bank.
Of course, there are many reasons for believing ancient enmities won't die away anytime soon, especially when there are outside powers ready to exploit them. In mid-January, Russia's Gazprom announced it was talking to Palestinian officials about developing Gaza's offshore gas fields. Gazprom had tried to take a stake in the development of the Leviathan field, even though it might pose a challenge to Russia's natural-gas market in Europe. (The Israelis opted for the Australian company Woodside instead.) Making gestures toward Gaza might be Putin's way of getting revenge, as well as reasserting Russia's geopolitical stake in the eastern Mediterranean, as it did by taking a leading role in staving off an American attack on Syria last year. Certainly none of it bodes well for the future—especially with Russia's partner in the Middle East, Iran, likely to follow close behind.
All the same, Fogel's enthusiasm is infectious, especially when he looks at the impact Israel itself could have on the global energy picture. Once Israel commits itself to expanding its own energy sector, the results, he is convinced, will reverberate back to America and beyond. As the energy industry becomes increasingly high-tech, once the Israeli penchant for improving and innovating those technologies kicks in, what seems impossible today could become common practice. (Four years ago, a Noble Energy official told me that the idea of developing the Leviathan field entirely offshore would have seemed impossible.)
The ultimate question is, Can the Israelis live with this new bounty? Have they become so accustomed to living in survival mode and being under constant threat that they simply cannot believe their good fortune—and cannot act on the opportunity?
In the end, what Israelis do may depend on how the outside world does, especially the Jewish community and supporters of Israel in this country. In order for its oil and gas bonanza to succeed, Israel needs two things, says Uri Aldubi: "operators and investors." Almost all of them, for now, will have to come from outside—not only from the United States but from Europe as well. Universal Oil and Gas is a London-based company that recently partnered with the Association of Oil and Gas Exploration Industries to host a series of conferences to champion those links and also possibly to prepare the way for a future European market for Israeli gas. The talks are to take place in Europe and in the Mecca of America's energy industry, Houston. The Israeli ambassador in Norway organized a similar conference in Stavanger last November, where Norwegian service and exploration companies with long experience in offshore gas development along their own continental shelf came not only to offer their knowledge and skill to Israel but also to learn how Israeli expertise in high-tech pursuits might transform their own businesses. The first outlines of Shlomi Fogel's prediction may be coming true.
But in the meantime, the world waits as Israel makes up its mind.

About the Author

Arthur Herman is the author, most recently, of The Cave and the Light: Plato Versus Aristotle and the Struggle for the Soul of Western Civilization. Support for the research and writing of this article was provided by the Hertog/Simon Fund for Policy Analysis.