Algeria's Disappointing Gas-Plots Auction

Algeria's recent auction of exploration acreage was a key test of the state of play in the oil and gas industry and, in particular, of investor confidence in this important North African energy producer. The bid round, concluded on Dec. 13, attracted little interest from the world's oil and gas companies. While some 80 companies were approved, only nine bids were eventually submitted. In the end, exploration licenses were awarded for just four of the 16 tracts originally on offer. Susan Mance, an analyst at Edinburgh consultants Wood Mackenzie, termed the results "a major disappointment." Analysts say that this and other setbacks could leave Algeria struggling to meet its energy industry growth targets in the coming years.

The failure of Algeria's effort to bring in more international investment shows how much the world of energy has changed in a few months. Algeria has been a country of great interest mainly because of its large deposits of natural gas—a fuel whose use is still growing—and its proximity just across the Mediterranean Sea to Western Europe. Algeria already supplies around 10% of Europe's gas needs and plans to increase its output by about one-third by 2012. Algeria has attracted major investment from companies such as Italy's ENI (E) and Britain's BP (BP), which are big players in European gas. And despite concerns over its own political stability, Algeria looks like a good alternative to Russia as a source of gas, given the current dispute with Ukraine that is now disrupting Russian supplies to Europe.

Out of Step

But this time around, the companies for the most part weren't biting. Why not? Of course, the global economic downturn and collapse in oil prices played a role. But industry sources say the Algerians also shot themselves in the foot by failing to adjust to new market realities.

For starters, the acreage on offer wasn't very attractive. The Algerian government withdrew the most interesting block, which was located in the gas-rich Ahnet basin, after potential bidders balked at the requirement that the winner would have to grant access to a foreign upstream asset to Sonatrach, the Algerian national oil and gas company. One source says that the arrangement was "just too complicated."

The economic terms also weren't appealing in the view of some of the participants. Wood Mackenzie figures that on a large, hypothetical, 350 million-barrel field, a winning bidder would earn profits of less than 10% under the regime being offered. The disappointing result, Mance says, "shows [the Algerians'] continuing lack of appreciation of the international oil companies' frustration with unattractive Algerian fiscal terms." According to Mance, Algeria's "concession terms are among the most challenging fiscal regimes for international oil companies."

Khelil Isn't Fazed

While some major players including ENI, Britain's BG Group (BG.L), Russia's Gazprom (GAZP.RTS), and Ruhrgas, a unit of German utility E.ON (EONGn.DE), did make commitments to drill some 20 wells, "this will do little to improve the depressed rate of exploration activity in recent years," Wood Mackenzie says. Mance adds that the failure to find a partner for the Ahnet basin was a particularly hard blow because its fields "underpin Sonatrach's future development plans for the gas reserves in the southwest of the country and are a key component of the country's long-term energy strategy." Industry sources say that several of Algeria's major projects are running behind schedule partly because of lack of international help.

In a telephone interview, Algeria Energy Minister Chakib Khelil said he was not concerned by the poor outcome of the auction. "It is not a big disappointment as far as we are concerned," he said. "With conditions in the market [as they are], you would expect this kind of result." Khelil indicated that Algeria doesn't plan to rethink its approach. "We won't change anything," he said. "It is just a matter of waiting for prices to go back up." Khelil said he expected oil prices—to which the price of gas is pegged—to be back in the range of $70 to $80 a barrel in the next couple of years. He also expressed confidence that Algeria would have sufficient gas supplies for exports.

But privately, industry sources say the Algerians are worried by the poor results and are soliciting feedback from the international companies about why they shied away. With good reason: While Sonatrach is rated a technically capable organization, in the view of people in the industry, Algeria is going to struggle to meet its targets for export volumes unless it brings in more foreign help. "A lot of the gas is in difficult reservoirs that are going to require a lot of investment and specific technical expertise," says Ben Cahill, an analyst at Washington consultant PFC Energy. "They have to be somewhat concerned."

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What Big Three? Ford Motor Adopts a Scrappy Image

When Ford Motor (F) Chief Executive Alan Mulally decided not to ask for a government bailout, it wasn't just because Ford is in better financial shape than its Detroit rivals. Company insiders say the overarching goal was to separate Ford in the public mind from General Motors (GM) and Chrysler. As the crisis afflicting the auto industry has deepened, Mulally & Co. have gone out of their way to convince car buyers that Ford is stronger, greener, and more technologically advanced than those other guys. Executive Chairman William C. Ford Jr. sees an advantage if "people view us as a company that pulled itself up by its own bootstraps."

SLAPPING DOWN MERGER TALK

Mulally's go-it-alone strategy is risky because if he doesn't manage to transcend the "Made in Detroit" label and sell a lot more cars, he might find himself in the position of asking the feds for money later this year. What's more, Mulally's bid to prove to consumers that his company is healthier than its Detroit rivals could make the United Auto Workers less keen to give Ford the concessions it badly needs.

Still, there's no question Ford could use an image boost, and Job One is making that happen. On Dec. 19, Fox News (NWS) reported that Ford was talking to Chrysler about a possible merger. The last thing Mulally wanted was to be linked to a company many believe is a goner; Ford's PR team hit the phones faster than the Mustang GT500 does the quarter-mile. Mulally brusquely slapped down talk of a merger: "We haven't even been thinking about it, let alone discussing it," he told BusinessWeek at the time.

As the year came to a close, all eyes were on GM's near-death experience as it waited for the government to provide bridge loans. Then Ford changed the conversation by talking up the hybrid version of its Fusion sedan. Before long the blogosphere was full of breathless commentary about a car that beats Toyota Motor's (TM) Camry hybrid by seven miles per gallon and outpaces GM's Chevy Malibu hybrid by 15. Never mind that hybrid sales have tanked along with gas prices—and that the new Fusion costs $3,300 more than a comparable conventional model; talk of it cast a halo over Ford. The company also has been trumpeting a computerized key that prevents teens from driving without seat belts and limits speed and stereo volume. "Toyota has shown that unique technology creates enormous goodwill around a brand," says Steve Wilhite, president of Jumpstart Automotive Media, a Web marketing firm. "Ford has embraced that strategy with success."

STILL LENDING

At a time when GM's and Chrysler's financing arms have been hard-pressed to make loans to potential buyers, Ford has been using television, online, and radio ads to remind the world that it has money to lend. And executives have been falling over themselves to promote Ford's kudos from Consumer Reports, which this month noted that of eight new Detroit cars it recommends, six are Fords or Ford brands.

Is the PR offensive paying off? Ford says it is. In a dismal fourth quarter, it notes, only Ford, Honda (HMC), and Toyota increased their market share among the top six carmakers. Ford surveys, says a company insider, show that when consumers are asked about Ford as part of the Big Three or the Detroit Three, they "express pessimism, concern, and lack of confidence." But when the questions center on Ford alone, this person says, confidence shoots up—"and not just by a couple of points."

Ford's audience isn't only consumers, of course. Mulally's request for a credit line rather than loans has left lawmakers and the union believing Ford is stronger than its rivals. To a degree, that's true, partly because two years ago, Mulally raised $23 billion in new money and credit lines. But Ford also has $26 billion of debt—$19 billion of it unsecured—and for six months has been burning through cash as fast as GM. Mulally is understandably eager to retain Ford's independence by paying its creditors in full. But GM, in exchange for federal help, likely will swap equity for debt and may emerge with a stronger balance sheet. By taking the high road, Ford could find itself at a competitive disadvantage.

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NVIDIA Takes Video Games Into 3D

In recent years several companies have developed 3D computer displays, with results ranging from disappointing to, literally, nauseating. Graphics specialist Nvidia (NVDA) has a new approach that promises to take computing into the third dimension. Video games will be the first to benefit, followed by movies and certain business tasks.

Nvidia's GeForce 3D Vision system ($199) consists of software and special glasses that connect wirelessly to your PC. This approach is called stereoscopic because the computer sends separate images to each eye. Objects in the two images are slightly offset from each other—a gap the brain interprets as depth, resulting in a compelling 3D illusion.

Sharp, LG, and others have fielded a variety of displays that don't require glasses, but they don't work very well. Typically they succeed only if you are planted squarely in front of the screen at a precise distance. And even then, only a small part of the field is in focus.

Nvidia's 3D glasses are a far cry from the vintage red-and-blue specs once used to watch The Creature from the Black Lagoon. Each lens is a liquid-crystal shutter that opens and closes 60 times per second, so that at any time you are seeing through only one eye. The shutters are synchronized to the display, which switches between the left and right images so fast that you can't detect any flicker. The glasses, which can be worn over regular eyeglasses, also seem to dim ambient light, focusing attention on the screen.

One beauty of the Nvidia system is that it can create 3D images from any software that was produced using depth information. Most existing games were created with some level of depth, so they become 3D without any modification. The same is true for 3D computer-assisted design drawings.

Games, of course, long have been at the leading edge of computer technology. Movies are also going 3D, so films on DVD eventually will be viewable with Nvidia gear. I also expect to see more business applications tailored to 3D, such as scientific modeling of complex molecules in the pharmaceutical sector or geologic visualizations used for oil exploration.

One caveat for consumers: You need a fairly high-end desktop to run Nvidia's system, starting with a $300-plus display that refreshes the screen 120 times per second instead of the standard 60. Possibilities include 22-inch monitors from Samsung and ViewSonic and an assortment of projection TVs that use Texas Instruments' DLP technology. You also need a Windows Vista PC with a high-end Nvidia graphics adapter, along with the whole 3D Vision kit, which includes a wireless transmitter used to synchronize the screen with the glasses.

I should add that the picture Nvidia makes possible isn't truly natural 3D. Objects seem to be arranged in several planes at various depths, almost as if you were looking at pictures with a View-Master—if you can remember that far back. But game developers can improve the illusion with better encoding of the depth information. When they create the games specifically for 3D, objects appear to pop out of the screen, as opposed to disintegrating when they hit the front of the display.

Today's 3D films weren't produced with Nvidia in mind. But down the road, programs like GeForce 3D Vision could really bring DVDs of these films to life. Your kids won't want to watch Harry Potter and the Order of the Phoenix the old way. And you'll probably feel the same when James Cameron releases Avatar, his much heralded 3D movie and game, later this year.

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Columbia's Amar Bhidé and NYU's Nouriel Roubini

A year from now we may look back on this column and thank heaven that not all of its grim predictions came true. But don't bet your kid's lunch money against Nouriel Roubini. A professor of economics at New York University's Stern School of Business and chairman of the consultancy RGE Monitor, Roubini in 2006 predicted the housing bust and an ensuing recession, among other on-the-money calls. And he says the worst is still ahead. Amar Bhid, a professor of business at Columbia University, is a former McKinsey executive, a staff member for the commission that investigated the stock market crash of 1987, and author of the new book The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World. He, too, expects a trying year ahead. But beyond the black cloud hanging over America, he sees a country chastened and an economy strengthened by the ordeal.

MARIA BARTIROMO

Where are we right now in this economic slowdown?

NOURIEL ROUBINI

We are looking at the most severe U.S. recession in the last 50 or 60 years, both in terms of length and depth. Every piece of economic news that's come out in the last few weeks and months has been much worse than expected, from employment, holiday sales, capital spending by the corporate sector, the continued collapse of residential real estate, and a weakening even of the trade balance, so the rest of the world is also contracting.

You say we are looking at a deep and possibly multiyear recession in America; an additional 15% drop in U.S. home prices; painful recessions in Europe, Canada, Japan, and other established economies; a sharp slowdown in China, India, Russia, and Brazil; and possibly default by some emerging-market countries. Can anything stop this locomotive bearing down on us?

The only positive news I see is that the policy response, both in the U.S. and in other countries, is going to be quite aggressive. But in my view, that policy stimulus is going to have most of its effects in 2010. And the cost of issuing a huge amount of public debt will be trillion-dollar budget deficits this year and next, which eventually is going to have a crowding-out effect on private demand. So either we issue a huge amount of public debt to finance it, and that's going to push up interest rates, or we print a lot of money that eventually is going to be inflationary and again damaging to the economy. We have no choice but to have an aggressive policy response, but it's not a free lunch.

In a new article in Foreign Policy, you suggest that corporate earnings will shock any equity analysts still deluding themselves. Where will the Dow be at midyear?

I see it about 20% below current levels. Same for the S&P.

How many jobs do you think will be lost in 2009?

I expect job losses of at least 2.5 million.

How much confidence do you have in the new economic team that President-elect Obama has named?

I think folks like Tim Geithner, Larry Summers, and others are as good as you can get. But the problems they're facing are so vast that even the best economic team and the best economic policies are not going to start having an effect until the end of 2009 [or beginning of] 2010.

Do you think criticism of how Hank Paulson and his team have handled the crisis is fair?

It was a very tough situation, of course, but I think that the policy response by Paulson has been relatively confused, not credible, and inconsistent. So I give them a low grade in terms of performance.

As an investor, what do I do in this scenario?

Safe assets such as government bonds are the place to be until midyear when we see whether the fog of uncertainty clears in the direction of a recovery.

And keep as much of my assets as possible in cash for the near term.

Absolutely.

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The New Focus Group: The Collective

There's probably no better time for an organization to ask the question, "What's the return on investment?" Given the economic uncertainty, it's an understandable instinct.

The problem is, traditional ROI, with its focus groups and lab-type settings, is less relevant in a fast-paced digital world. Hyperfocusing on ROI as a key indicator of future success limits the quality of insights that can be obtained when an initiative is launched in a real environment. In the real world, a "mass audience" doesn't really exist (this is especially true on the Web) and brands that deal in niches are rewarded. In the real world, the collective is the focus group.

It's time to focus on another type of ROI, one we like to call Return on Insight. Here are some tips on how brands should think about this new form of ROI.

LISTEN

There are many ways to listen to what's being said about your company, product,brand,service and most importantly, related universe. Services from vendors such as Radian 6, Collective Intellect, Networked Insights, or Nielsen BuzzMetrics uncover and analyze what people are saying both inside communities and on the open Web. For our recently launched Pampers Village community, P&G (PG) partnered with a company called Liveworld (LVWD), which offers such services as building and managing the community. Liveworld helps us listen to and moderate user interactions in the community, which not only helps filter out inappropriate comments so the quality of the community experience is maintained, but also allows the brand to listen to what consumers want to discuss—from parental topics to features they would like to see in the community. Another great technique for listening is using the social network Twitter. Brands can use search.twitter.com to monitor what people are saying about them—in the context of actual conversations.

Crucially, brands need to listen at all times, not just at the beginning of a project. Listening through the life of a campaign or initiative yields insights into attitudes and identifies which consumers have influence, as well as the most fertile ground for digital engagement.

LEARN

If you don't launch, you don't learn. Pilot initiatives can be quickly launched using prototype methodologies. We typically perform "rapid design labs," engaging multiple stakeholders across multidisciplinary teams to flesh out objectives and get into some rough design activity. By the end of a typical rapid design lab, we have the beginnings of something that can be built. Part of the goal is to see what happens so we can analyze findings along the way. When we worked on the NASA.gov redesign, we got the idea of "social bookmarking" content and organizing topics in "tags" from these sessions.

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Obama's Budget Watchdog: Nancy Killefer

George W. Bush may have been the first President with an MBA, but President-elect Barack Obama is filling the role of the country's first "chief performance officer" with a partner from one of the world's top management consulting firms.

Obama announced on Jan. 7 that Nancy Killefer, a senior partner at McKinsey will fill the newly created position, aimed at improving efficiency and stamping out government waste. Killefer has worked in Washington before, serving in the Clinton Administration as the assistant secretary for management, chief financial officer, and chief operating officer of the Treasury Dept. from 1997 to 2000. Before helping launch McKinsey's public sector practice, she consulted with a range of consumer goods and retail companies on strategy, marketing, and organizational effectiveness. She was the chairperson of the IRS Oversight Board in 2002-04.

Line-by-Line Budget Scrutiny

The task ahead of her is exceptional. Even as Killefer is charged with making government more efficient, her new boss has warned of trillion-dollar deficits for years to come. Killefer will oversee the "line-by-line" scrutiny of the vast federal budget Obama mentioned frequently during his campaign. And filling government jobs with talented, efficiency-minded individuals will be a major challenge as federal employees begin retiring en masse: The average age of federal employees is 46 and rising, according to a McKinsey paper Killefer co-wrote. The public sector also has a higher proportion of older workers than the rest of the workforce. "Employees of government have been viewed as costs rather than as valuable partners," says Max Stier, the president and CEO of the nonprofit Partnership for Public Service, on whose board Killefer sits.

How much Killefer will use the McKinsey consulting playbook in her job is an open question. While Killefer was instrumental in building up the public sector practice at McKinsey after she returned from her job at Treasury, the firm hasn't traditionally been a government consulting powerhouse in the U.S., say industry observers and firm alumni.

McKinsey Influence

McKinsey partners are often behind-the-scenes advisers to government officials, but large-scale government consulting engagements are less common, notes Tom Rodenhauser, vice-president of Kennedy Information, which publishes information on professional services firms. "The government can't afford McKinsey rates," Rodenhauser says. In addition, many government consulting contracts are for information technology gigs rather than the organizational and strategy work McKinsey and its peers specialize in. Outside the U.S., says Rodenhauser, the firm has traditionally done more government work, particularly on privatization efforts that involve the kind of mass reengineering efforts that play to McKinsey's strengths.

As a result, McKinsey alums don't populate the corner offices of Washington to the same degree they do corporate executive suites, making Killefer among the most high-profile McKinsey alums to turn to public service. That doesn't mean there aren't notable exceptions. Bobby Jindal, Louisiana's governor and a rising Republican star, is a McKinsey veteran. Roger Ferguson left McKinsey to join the Federal Reserve, later becoming its vice-chairman. Al McDonald, McKinsey's managing director in the early 1970s, went on to become White House deputy chief of staff under President Jimmy Carter. And McKinsey famously helped the Eisenhower Administration fill key jobs back in the 1950s.

Focus on Transparency

What will Killefer's priorities be? If McKinsey white papers are any indication, she'll focus on improving transparency and reviving government productivity metrics. As Killefer and her colleague Lenny Mendonca wrote in a 2006 BusinessWeek column, the Bureau of Labor Statistics stopped measuring productivity in 1996. "We think a radical new approach to transparency of how government programs are performing is required," the pair wrote in "Unproductive Uncle Sam." "Only this will push Congress to exert performance pressure on government agencies." They go on to suggest a Morningstar-like body called "Gov-Star" that would provide "completely independent measurement of government program performance."

While Killefer's "chief performance officer" title may be new, Obama will not be the first President to try to reduce government waste. Elaine Kamarck, who created and managed the Clinton Administration's National Performance Review, also known as "the reinventing government project," says Killefer's role "sounds very similar" to the one she held in the mid-1990s. Still, Kamarck, who worked to bring the federal government into the Internet age and introduce business practice reengineering and performance management to the federal government, notes Killefer's task is extraordinary. "It's a particularly big job because the country is facing so many problems and we have such enormous federal deficits," says Kamarck, who is now a lecturer at Harvard's Kennedy School of Government.

One thing that's likely to change for Killefer: her weekends. On an online McKinsey careers Q&A, Killefer, an avid bicyclist and mother of two, said she has "always kept my weekends sacred. I am highly productive during the week, but I can count on one hand the weekends I've worked in more than 25 years with the firm." As a deep recession grips the economy and federal deficits balloon, the country's "chief performance officer" could find herself working a few more Saturdays and Sundays.

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Stocks: Will the Barrage of Bad News Scare Bulls?

Stocks in the past month bounced off their 2008 lows, but keeping that stock market rally going will be a big challenge for Wall Street's bullish investors.

It's not that the bulls' case is wrong. Many argue that, after aggressive actions by the Federal Reserve and the federal government, the U.S. economy will recover by midyear. And that could happen.

Rather, the bulls' problem is so far their hopes are nowhere to be found in reality. In fact, real measures—from earnings results to economic data—continue to deteriorate at a frightening pace.

Anticipating the December Jobs Report

Plenty of scary headlines could have spooked the market in the past month, from a horrible holiday season for retailers to the collapse of Bernard Madoff's $50 billion hedge fund. However, the market is "almost ignoring the news," says Richard Sparks of Schaeffer's Investment Research.

The broad Standard & Poor's 500-stock index is up more than 20% from its lows of late November. For now, Sparks says, "that uptrend is in place, but I think it's tenuous."

Economic realities could knock stock market optimists off their stride. A key moment will be Jan. 9, when the Labor Dept.'s December employment report is expected to show massive job losses. Economists expect the unemployment rate to jump from 6.7% to 7%, and the U.S. to lose another half a million jobs.

Quincy Krosby, chief investment strategist at the Hartford (HIG), says most professional investors already expect "really ugly" economic data from both the fourth quarter of 2008 and early 2009.

"If [the jobs report is] much uglier than that, we'll see how the market absorbs it," she says. Investors could be spooked if a weak jobs report indicates economic stabilization is even further away.

Action Economics Chief Economist Michael Englund assumes the U.S. unemployment rate could reach 8.6% by the middle of 2009, but then start to recover. Recent estimates by the Congressional Budget Office are especially gloomy: The CBO says the jobless rate could average 8.3% for all of 2009 and average 9% in 2010.

Angst Is Factored In

It's not surprising the market can shrug off gloomy news. After all, the S&P 500 dropped almost 39% in 2008, so investors expect tough times.

"A lot of angst has already been factored into the stock market," says Gary Wolfer, chief economist at Univest Wealth Management (UVSP). But, he adds, "we're still in for a rough patch in the first half of 2009."

The market did flinch after a spate of scary headlines on Jan. 7. The U.S. ADP employment report, though often an unreliable gauge, showed a 693,000 decline in December private payrolls. News broke of accounting irregularities at Indian outsourcing firm Satyam Computer Services (SAY). Intel (INTC) warned sales could plummet 20% in the fourth quarter. Alcoa (AA) announced it's cutting 13,500 jobs, or 13% of its workforce, this year.

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