Why you shouldn’t care about Nagorno-Karabakh (and why you might one day have to)

A while back I started a series on “frozen conflicts” in the former USSR. The first two (on Transnistria) can be found here and here. I was planning to do them in order from least bad to worst (which would put South Ossetia next) but decided to jump ahead a bit to Nagorno-Karabakh.

What the heck is Nagorno-Karabakh, anyway?

Briefly: it’s a small, mountainous territory in the Caucasus, about the size of a small US state or a large British county. Until the USSR collapsed, it was part of Azerbaijan. But the population was mostly Armenians. So there was a vicious little war in the early 1990s, which the rest of the world pretty much ignored.

The Azeris lost, so today Nagorno is almost entirely Armenian. It claims to be an independent country, but nobody recognizes it.
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Oil in Albania

Just ran across this interesting report on possible new oil reserves in… Albania.

Gustavson assigns 2.987 billion barrels with 3.014 trillion cubic feet of associated gas as the P50 prospective oil resources in its oil with associated gas case. Gustavson notes that because of the depth it is possible that the prospects will hold natural gas. In its oil with a gas cap case Gustavson calculates the prospective resources to total 1.4 billion barrels of light oil and 15 trillion cubic feet of natural gas. Gustavson estimates that in the event only gas is present the P50 prospective resource is 28 trillion cubic feet of natural gas.

Gustavson is a major petroleum engineering firm, so this should be taken seriously.

Just under 3 billion barrels, of which 1.4 bn is the easy-to-refine light oil: how much is that? Well, by way of comparison, Saudi Arabia has 260 billion barrels of proven reserves, and Mexico has 12 billion. So this is not exactly a new Caspian Sea. Albania won’t be joining OPEC. On the other hand, it’s not chump change either.

And the natural gas is nice too — 15 trillion cubic feet is enough to make it worth running a pipeline north to Central Europe. In the next decade, the Swiss and Germans may be heating their homes in part with Albanian gas. It’s not going to eliminate Europe’s reliance on Russian hydrocarbon, or even much reduce it. But it’ll help a bit.

Albania already has some modest oil fields — enough to supply about half the local energy needs. Fortunately for Albania, this hasn’t resulted in massive local subsidies; oil there costs only a bit less than elsewhere in the region. (I say “fortunately” because if it had subsidies, they’d now be impossible to get rid of.) It also has a couple of refineries, so it would be able to capture that much more value before sending the oil along.

The fields are at least three years away from exploitation, and probably more. So Albania will go through another election cycle, and will have some time to get ready. It will need to. While the amount of money involved is modest on the scale of global or even European oil transactions, it’s pretty big in an Albanian context.

PwC Makes a Funny

PwC was auditor for what was then one of Russia’s largest oil companies, Yukos. The Russian government took a serious disliking to Yukos and its then-president Mikhail Khodorkovsky, eventually putting the company effectively out of business (with key bits sold off to state-owned or state-controlled companies) and Khodorkovsky in jail. Now the Russian government is pursuing another case against Khodorkovsky, and it does not want PwC’s audits to be usable in his defense. So the Russian authorities claim that PwC has not been diligent in paying its own taxes. It has raided various offices and threatened to pull the company’s license to operate within the country.

Yesterday, PwC said that it was withdrawing its audits of Yukos from 1995 to 2004, after “new information came to light.” New information provided by the government. Will PwC say what that information is? It will not. Its management did offer an opinion on a related question:

PwC’s management said yesterday the decision to withdraw the audits had nothing to do with this pressure

That’s from the first page of the second section in yesterday’s FT. (Electronic version is in pay-per-view.) The reporter did not indicate whether it was said with a straight face or not. More here here here and here.

At any rate, the message is clear: Audits of businesses that are important to the Russian state will say what the state wants them to say. Caveat lector.