Geopolitics of Energy - ACUNS...Geopolitics of Energy Volume 34, Issue 1 January 2012...

Geopolitics

of Energy Volume 34, Issue 1 January 2012

Editor-in-Chief Jon Rozhon Editorial Committee Alberto Cisneros Lavaller Napier Collyns Antoine Halff Vincent Lauerman Julian Lee Michael Lynch Sulayman al-Qudsi Editorial Board Peter Adam Yasser Al-Saleh Anis Bajrektarevic Preety Bhandari Fatih Birol Ged Davis Robert Ebel George Eynon Herman Franssen Seyed Jazayeri Wenran Jiang Tatsu Kambara Alex Kemp Walid Khadduri David Knapp Michal Moore Edward Morse Francisco Parra Robert Priddle John Roberts Adnan Shihab-Eldin Robert Skinner Subroto Paul Tempest Wu Lei

Geopolitics of Energy was founded by the late Melvin A. Conant of Washington, DC in 1979. Since 1993, it has been published under the auspices of the Canadian Energy Research Institute. All views expressed in this journal are those of the individual authors and do not reflect the views of the Canadian Energy Research Institute. Relevant • Independent • Objective

Inside this Issue...

In this month’s Geopolitics of Energy, we feature two articles covering much that is current in energy geopolitics, including ramifications of the Arab Spring and the shift away from Middle East oil and gas to unconventional resources found elsewhere. GoE Editorial Board member Anis Bajrektarevic opens his piece with some thoughts on the recent revolutions that have swept through the Middle East and North Africa. He fears little democratic headway will be made in the region in the face of the much larger geopolitical imperative to maintain the “hydrocarbon status quo”. For their own very specific reasons, which Professor Bajrektarevic delineates herein, each of the world’s major military and economic powers has little motivation to alter its energy mix by embracing alternatives to hydrocarbons. The one possible exception is Japan, a country with scant indigenous hydrocarbon resources and a growing number of energy-related problems. Rashid Husain Syed offers readers a view of a world far less reliant on Middle East oil than our present reality. With shale gas now economic, vast oil sands and heavy oil deposits ready to be exploited, and deep offshore and arctic resources that have barely been touched, hydrocarbon energy potential is vast. This is not a world decades off into the future but one that Dr. Syed asserts is developing before our very eyes. Why Kyoto Will Fail Again Page 2 Anis Bajrektarevic A New Order Page 8 Rashid Husain Syed

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The unrest in the Arab world, which has continued for over a year now, implies one important conclusion beyond the regional struggle for democracy: the unrest is very much about new, globally important technology, but even more about a crucial geopolitical breakthrough – an escape from the logics of the hydrocarbon status quo. “No one governs innocently” – noted de Beauvoir in her 1947 The Ethics of Ambiguity… After a lot of hot air, the disillusioning epilogue of the popular McFB1 revolt is more about firearms and a higher (moral, economic and political) carbon energy price everywhere else; it is less about a growing confidence residing in the region. In lieu of far-reaching, meaningful policy, it appears as if confrontational nostalgia has prevailed again, perpetuated by intense competition over finite resources. Caught in the middle of indigenous incapability and the global blind obedience to fossil-fuel addictions, the Arab world and the wider Middle East theatre remains a hostage of mega geopolitical and geo-economic chess-board drama. However, all that appears over-determined now was not necessarily pre-determined in its beginnings... The MENA theatre is situated in one of the most dramatic locations of the world. It is the only existing land corridor that connects 3 continents. With some 6% of the total world population, it is roughly the same demographic weight as the US (4.5%) and Russia (1.5%) combined. While the US and Russia are single countries, the MENA composite is a puzzle of several dozens of fragile pieces where religious, political, ideological, cultural, social and territorial cleavages are entrenched, deep, wide, and long. However, the MENA territory covers only 3% of the Earth’s land surface (in contrast to the US’ 6.5% coverage and Russia’s 11.5%). Thus, with its high population density and strong demographic growth, this very young median population (on average 23–29 years old) dominated by young, mainly unemployed or underemployed, but socially mobilized and often politically radicalized males, competes over finite and scarce resources -- be they arable land, water, or other essentials. Competition in this theatre, that has a lasting history of external domination or interference, is severe, fluid, and therefore unpredictable. The recent crisis, nicknamed “The Facebook Revolution”, has so far caused revolutions only in MENA republics and for the time being has spared the Arab peninsular autocratic monarchies. The Gulf Cooperation Council (GCC) club has so far gained considerably in a number of ways from the calamities: Strategic gains—more durable regimes and ideologies, translated into their political and diplomatic offensives. Institutional gains—The GCC now practically controls the League of Arab States, sets its agenda, political direction, and punitive actions. Geo-economic gains—huge petro-dollar revenues, enlarged quotas caused by delivery disruptions and embargoes in Libya and elsewhere, as well as the general oil price increase due to MENA uncertainties – e.g., Bahrain’s state information agency reports nearly 20% economic growth in 2011.

Why Kyoto Will Fail Again (On the day after the Durban Summit—Technology, Geopolitics, and the Hydrocarbon Status Quo)

By Anis Bajrektarevic*

*Anis Bajrektarevic is a regular contributor to Geopolitics of Energy and a member of our Editorial Board. He is Chairperson for International Law and Global Political Studies at IMC University of Applied Sciences Krems, in Vienna. He may be contacted at [email protected]

Grand Dilemma in the Middle East

North Africa (MENA) Region

mailto:[email protected]

GEOPOLITICS OF ENERGY/JANUARY 2012 3

So, if there was any spring in the Arab world, it was the 2011 springing of ideological and hydrocarbon exports of the GCC autocracies. The US withdrawal from Iraq, announced military reductions in Afghanistan, limited influence in Pakistan, and overall overextension on the southwestern flank of the Euro-Asian continent – all of these outcomes have raised concern and feelings of insecurity within the GCC. And around the corner lurks an increasingly aggressive Iran, followed by Russia and China. Oil, its suppliers and its consumers, are resolute to fortify and eventually diversify and intensify their bitter fight in maintaining the status quo in the region. The US has a lasting geo-economic interest in the Gulf, which is inevitably coupled with its overarching global security concerns. As is well known, oil is the most traded commodity in the world–roughly 12% of overall world trade. By far the largest portion of internationally-traded crude originates from the Gulf. Thus, the US imperatives in the Gulf are very demanding: (i) to support the friendly local regimes (with their present socio-political and ideological setups); (ii) to get, in return, approval from these regimes for the massive physical US military presence (not to mention their voting support for the US in international fora); (iii) to maintain a decisive military force in the region, securing unhindered oil flows from the Gulf; (iv) to remain as the principal security guarantor and tranquilizer, preventing any hostile takeover – be it of one crude-exporting state by another or of internal, domestic political and tribe/clan workings; (v) to monitor closely the money flow within the Gulf and to recycle huge petrodollar revenues, usually through lucrative arms sales and other security deals with the GCC regimes;2 and (vi) to permit (calls for) gradual change of the domestic socio-economic and politico-ideological frames in the particular Gulf state, as long as it does not compromise the US objectives in the region as stated above – from (i) to (v). Hence, the US physical presence in the Gulf represents a double threat to Iran– geopolitical and geo-economic. Nearly all US governments since the unexpected fall of the Shah, with the G.W. Bush administration being most vocal, have formally advocated regime change in Tehran. On the international oil market, Iran has no room for maneuver, neither on price nor on quotas. Within OPEC, Iran is frequently silenced by cordial GCC voting.3 The US hegemony in the Gulf, a combination of monetary control (crude is traded exclusively in US dollars, predominantly via the New York-based NYMEX and London-based IPE) and physical control (the US Navy controls all transoceanic oil transports), is the essential confirmation as well as the crucial spring of the overall US global posture.4 In exchange for energy inflow security, the US anchors a loyal bandwagoning at many places around the globe. As long as oil remains priced in USD, it will represent the prime foreign reserve currency (some 68% of global reserves are held in US currency), as the functional tie between the major currencies’ exchange rates and fossil-fuel energy cannot be derailed or delinked. Finally, this hegemony is not only based on the exclusivity of oil currency, it is also about the very policy of pricing. Throughout most of oil’s short history, the price for “black gold” was high enough to yield profits (via the 7-Sisters, mostly for Wall Street and the US military – twin pillars of American might). But this commodity could never be priced at an overly high level, which would in return encourage sustained and consequential investments in alternative energy sources. The main problem with Green/Renewable (de-carbonized) energy is not the complexity, expense, or the lengthy time-line for fundamental technological breakthrough; the central issue is a geopolitical one. Oil and gas are convenient for monopolization (of extraction and international flows, of pricing and consumption modes) – it is a physical commodity of specific locality. Any green technology (not necessarily of particular locality or currency) sooner or later will be de-monopolized, and thereby made available to most, if not to all. Therefore, the overall geopolitical imperative for the US remains preservation – not change – of the hydrocarbon status quo.5

Hydrocarbon Status Quo:

Petrodollars and Petro-Security


Essentially, oil (and gas) represent far more than energy. Petroleum is a socio-economic, civilization-cultural, financial, and politico-military construct that architectures the world which is currently known to and therefore acceptable for us. “…bold Russian Arctic policy is (yet) another signal that the Federation… will increase its (non territorial leverage and geopolitical) projection as a major energy supplier of the world throughout the 21st century…” – I noted in 2009.6 To clarify: Not Russian territorial size nor historical passions, nor pride, nor socio-economic necessity will cause Moscow to sink down to second-rank power status. How will Russia meet its strategic imperative? We have already discussed the two important pillars of US strength (the so-called “East Coast might”: the Pentagon and Wall Street). Well, there are two more on the US Pacific coast. The post-Soviet Russia has neither the global soft power appeal of the US entertainment industry (i.e., Hollywood), nor has it the vibrant, world-leading, and highly lucrative High-Tech and IT sector (Silicon Valley) that the US possesses. But it does have hydrocarbons. Let us generously assume quantitative and qualitative parity between the US and Russian armed forces. Nevertheless, military modernization requires constant cash injections. How to maintain that? Moscow holds a big advantage: the US imports energy while Russia exports it. Nevertheless, Wall Street controls the international (petrodollar) monetary flow – even the post-Soviet republics are not trading oil in Rubles, but in US dollars. Hence, to meet and finance its strategic imperatives (and to respond to the growing international energy demands), Moscow has only non-high tech exports – fossil fuels – at its disposal. No Silicon Valley, no Hollywood. Therefore, Russia is more exposed and vulnerable than the US; it is an even stronger supporter of both current international market conditions7 and the hydrocarbon status quo. Considering the great ascendant power of the East – China – the Chinese vertigo economy is overheated and too petrodollar-integrated. Beijing, presently, cannot contemplate or afford to allocate any resources in a search for an alternative. (The Chinese economy is based on low wages and labor intensity. Chinese revenues are heavily dependent on exports and Chinese reserves are predominantly a mix of the USD and US Treasury bonds.) To sustain itself as one socio-political and economic entity, China requires more energy and less external dependency. So what would be China’s best external energy dependency equalizer? Recently, the Chinese seem to be turning towards upgrading its military rather than emphasizing Green-Tech investments; it has no time or resources to do both at once. Beijing (probably falsely) believes lasting military containment, especially in the South China Sea, is unbearable, and that – at the same time – fossil-fuels are available elsewhere (e.g., in Africa), and ever cheaper with the help of warships. Opting for either strategic choice will reverberate in the dynamic Asian/Pacific theatre. However, the messages are diametrical: an assertive military alienates neighbours. New technology attracts neighbours. Armies conquer (and spend) while technology builds (and accumulates). To complete the picture, both Russia and China are supporting the hydrocarbon status quo. Other major theatres are all geo-economically too dependent on the supply end (Central Asian republics, Brazil, Canada,8 Mexico) and on the receiving end (India, South Africa, etc.) – none is geopolitically emancipated enough to seriously consider any significant de-carbonization tilt. Less explicitly, the EU will turn consensual to the hydrocarbon status quo, too. When studying the institutions-making genesis of the phoenix known as the EU, three pillars are always illuminated. Apart from the Common Agricultural Policy (CAP), the two others are energy related: the European Coal and Steel Community (ECSC) and EuroAtom. Here comes the paradox: how does it happen that the EU – resting for over 50 years on the two energy-related entities – operates without a common energy policy to this very day? Well, the ECSC and EuroAtom were only seemingly energy-related. Up to the end of WWII, the nation’s output in coal and steel was commonly related to military strength, and after Hiroshima, nuclear energy joined the basket of these closely monitored (military) ingredients. By taking a closer look at all previous and current


EU energy policy initiatives, we see that the notion was primarily driven by security considerations – as an attempt to decrease external energy dependency (e.g., energy efficiency initiatives: EEP, Europe 2020, EUFORES, etc.). Hence, the EU was – and remains – most of all a peace treaty for the post WWII Europe recovery. Both energy entities therefore served a confidence building purpose – not as energy-related clearing houses. The energy policy strictly resides in the individual competence of the EU Member States. Any change in the present status quo would assume a common position of the Member States via the Council of the EU. The absence of such a commonly agreed position means more of the hydrocarbon status quo. And the issue of the hydrocarbon status quo is closely related to the very question of the Euro (and the US dollar alternate – the British Pound). For the severely exposed Euro-zone (unsettled global financial crisis), it is a bitter choice – either a petrol-pampered dollar or a return to gold (meaning to the pre-Nixon Shock times, before the Bretton Woods consensus was renounced). The EU/ECB believes it can exercise an influence on the USD, via the US Federal Reserve, while nowadays gold resides everywhere. Simply put, the post-Nixon currency/ies is/are negotiable; gold is a solid, non-corrosive metal. Also, we should never forget that the politically most influential segment of the EU – Atlantic Europe – shares the same ocean with the US, and all that comes with it. However, besides Japan, the EU will remain the main promoter of the “Kyoto II” mechanism. The UNFCCC’s 1997 Kyoto protocol placed China and India in the “emissions tolerant” Annex II, so both of those nations ratified the Instrument. The US and Russia were situated in the much less forgiving Annex I. After the collapse of the Soviet Union and contraction of the post-Soviet economy and demographics, Russia knew it could easily meet its pre-1990 emissions target. Still, it was bargaining until the end of 2004. Russia’s eventual ratification was enough to activate Kyoto, which eventually entered into force shortly after, in 2005. The EU’s loyal support to Kyoto and the “spirit of UNFCCC/IPCC” exists on several levels. Without detailed elaboration, let us just say that the EU’s reasons are of a political (declared principles) and economic (pragmatic) nature. As the conglomerate of states has committed to the supranational principle, it is natural for the EU to support any multilateral endorsement which assumes the supranational notion and monitoring of compliance mechanisms. The Kyoto provisions in the late 1990s were in perfect harmony with the two big EU strategy roadmaps: Lisbon (2000) and Goteborg (2001). This virtue out of necessity was clear: in the globalized competitive world, the EU of modest economic and of no demographic growth has only the option to become a “knowledge-based economy”. Both strategies were silently abandoned, the EU enlarged (to Eastern Europe, mostly the states whose economies also contracted past the breakup of the Warsaw pact countries – meaning an ability to meet the Kyoto targets), and the Union’s post-industrial Green-Tech renewal waits for better days. The EU is well-positioned but it will not be a global frontrunner in any technology shift. For this, it has neither an inner coherence nor an external posture. (The Europe of growth was a Europe of might; the Europe without growth is a Europe of principles). The Eastern enlargement of the EU was a territorial expansion that enabled Europe to do little more than to meet international climate treaty obligations. Within the OECD/IEA grouping, or more specifically, the G-8 (the states with resources, infrastructure, and know-how to advance fundamental technological breakthroughs), it is only Japan that may seriously consider a Green/Renewable-tech U-turn. Japan’s external energy dependencies are stark and long-lasting. After the recent nuclear trauma, Japan will need a few years to (psychologically and economically) absorb the shock – but it will learn a lesson. For such a huge economy and considerable demography, situated on a small land-mass which is repeatedly brutalized by devastating natural catastrophes (and dependent on yet another disruptive external influence – Arab oil), it might be that a decisive tilt towards green energy is the only way to revive, survive and eventually to realize a greater degree of energy emancipation.


An important part of the US–Japan security treaty is the US energy supply lines security guarantee given to Japan. After the recent earthquake-tsunami-radiation catastrophe, Japan will inevitably rethink and revisit its energy policy and the composition of its primary energy mix. That indicates the Far East as a probable place of Green-tech excellence in the decade to come. Endnotes 1Editor’s Note: “McFB is the author’s neologism (McDonalds + Facebook), referring to consumer-culture elements of the Arab Spring – a region-wide revolt aided by cellphones and social networking services. 2Contrary to the typical moral condemnations and usual pacific civil sector outcries, war and similar insurgencies (inter-state or intra-state) are – in strict Machiavellian or perhaps ‘commercial’ terms – desirable occurrences. Especially in countries where arms manufacturing and supply are detached from the state-owned military complex (situated in the hands of corporations), war-related military spending is usually good news for an economy. 3This is the reason why the second largest OPEC oil producer has opened its own Oil Bourse in early 2008. The IOB/Kish Bourse was intended for Iranian and regional crude, gas and petrochemicals to be traded freely in other currencies than the USD. Until mid July 2011, this stock market traded only in oil-derived plastic and pharmaceutical semi-final products using the basket of ‘petroeuro’ currencies – primarily the Euro and the Indian Rupee. Since the fall of 2011, oil has been traded at the Kish Commodity Exchange too. 4The US is often criticized for its omnipresence, but frankly speaking, maintaining the security of global fossil-fuels energy flow is silently taken for granted. Nobody dares contemplate any alternative. 5Thus, the stubborn American resistance to provisions of the UNFCCC’s protocol (Kyoto) is logical, if not justifiable. 6Bajrektarevic, A. (2010), “Arctic and Antarctic – Security Structures Surrounding the Two Poles”, Geopolitics, History and International Relations 2 (2): 218-219. A 7Trapped in a severe and lasting political deadlock (over the DDR), and in the meantime silently eroded by many, the WTO was still an international trade club that the Russians wished to join. After an 18-year-long negotiation marathon, Moscow was eventually admitted in December 2011. 8The recent Canadian withdraw from the Kyoto mechanism thus appears rationalized and logical.

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2020, Crans Montana Forum, Monaco; Maalouf, A., (1984) Les Croisades vues par les Arabes (The Crusades Through Arab Eyes), Schoken

Books Inc. New York; Rakove, J.N. (1997) Original Meanings – Politics and Ideas in the Making of the Constitution, First

Vintage Books The UN Development Program: Human Development Report 2011 (IHD Index, Poverty and Inequality); The World Bank – World Poverty Index, (2005 PPP), Statistics: 1990 – 2010; Bajrektarevic, A. (2010), Arctic and Antarctic – Security Structures Surrounding the Two Poles,

Geopolitics, History and International Relations 2 (2): 218-219 IAE, International Energy Agency – World Energy Outlook 2011, IEA Paris 2011; The UN Framework Convention on Climate Change, UN FCCC/1992/84, GE.05-62220 (E) 200705 and

the Kyoto Protocol to the UN FCCC of 1998, UN Office of Legal Affairs; The UN Climate Change Conference, Durban 2011, Reports November – December 2011 (COP 17, Bali

Action Plan and Cancun Agreements), Secretariat of the UN FCCC, Bonn Germany Stieglitz, J. (2002) Globalization and Its Discontents, Penguin Books Brzezinski, Z. (2004) The Choice, Basic Books (Perseus); Fukuyama, F. (2004) State Building, NY Cornell University Press; Mawdsley, E and McCann, G. (2011) India in Africa – Changing Geographies of Power, Pambazuka

Press/Fahamu; Kagan, R. (2003) Of Paradise and Power, Vintage Books New York Primakov, Y.M. (2004) A World Challenged, Brookings Institution Press/Nixon Center Kissinger, H. (1999) Years of Renewal, Touchstone- Rockefeller Center; Ivanov, I.S. (2002) The New Russian Diplomacy, Brookings Institution Press/Nixon Center


Leonard, M. (2005) Why Europe Will Run the 21st century, Fourth Estate London Ignatius, D. (2008) America and the World – Zbigniew Brzezinski and Brent Scowcroft by David Ignatius,

Advanced Uncorrected Proof Text, (September 2008) Basic Books Washington Friedman, G. (2009) The Next 100 Years, Anchor Books/Random House NY; Future Conflict Studies (2009) Understanding Human Dynamics, Report of the US Defense Science

Board Task Force, March 2009; Mulgan, G. (2006) Good and Bad Power – The Ideals and Betrayals of Government, Penguin Books


The global energy horizon is undergoing a major metamorphosis. A new energy order is very much in the offing. The global energy center is shifting away, gravitating towards the western hemisphere and not the Middle East. Battered by an economic crisis of immense proportions and the growing emphasis on promoting efficiency, global crude consumption is already in the process of receiving a hit in the near to medium term. And in the meantime, new technological and energy frontiers are pushing the boundaries. Technological advances are redrawing, in a literal sense, the energy map of the world. This carries major consequences on the geopolitical horizon, too. After all, energy and geopolitics have remained entwined for more than a century now. Many in the energy-rich Middle East insist on terming their energy resources a curse, a major cause of wars in the region. One could debate and differ with that. Yet there is no dearth of pundits who underline that the energy resources of the region have been the prime cause of many of its woes. And the theory gains credence when a Washington insider, a man of the caliber and stature of former Federal Reserve Chairman Alan Greenspan – states in the book, The Age of Turbulence: Adventures in a New World: "I'm saddened that it is politically inconvenient to acknowledge what everyone knows: The Iraq war is largely about oil." The statement echoes long-held complaints of many critics that a key motivating factor in the Iraq war was to maintain US access to energy resources of the region. Energy and politics go together – one definitely can't deny. Washington and Riyadh have been close political allies for almost seven decades now, ever since President Roosevelt met King Abdul Aziz of Saudi Arabia aboard the USS Quincy in Egypt's Great Bitter Lake, on February 14, 1945. Energy has been the glue binding these two, otherwise disparate, countries together - as yet - at least. And when President Roosevelt declared that "the defense of Saudi Arabia is vital to the defense of the United States," there was a definite oil connotation to the very statement. Energy was a lifeline to the growing US stature in the world, and the Middle East was vital to US strategic interests, especially in view of the fact that since World War I, the epicenter of oil production had moved from Texas and the Caribbean basin to the Middle East. The US needed oil resources and the Middle East had oil. A marriage of convenience was thus solemnized. When the President’s grandson, Kermit Roosevelt, orchestrated the August 19, 1953 coup against a democratically elected Mohammad Mosaddeq of Iran, the underlining factor was nothing else but the energy resources of Iran and the issue of control over them. The U.S. at the time could not have afforded to lose its hold on Iran. Hence, when the pro-Western Shah government was finally toppled in 1979, President Jimmy Carter announced the establishment of the Rapid Deployment Force to guard against "any attempt by any outside force to gain control of the Persian Gulf region, which will be regarded as an assault on the vital interests of the United States."

A New Order By Rashid Husain Syed*

*Rashid Husain Syed is an energy analyst, based in Saudi Arabia for the past 25 years. He is a widely published expert on Middle East energy matters and appears regularly on BBC and other news media to comment on Middle Eastern Politics, economics, and other regional issues. He can be reached at [email protected]


Subsequently the US 5th Fleet was permanently stationed in the tiny island Kingdom of Bahrain, and is still there, basically to ensure control of the Persian Gulf. For strategic reasons, Washington needed to have as free as possible, access to the energy resources of the Middle East. It was apparently with this notion in mind that former Halliburton CEO and US Vice president Dick Cheney once said: "The problem is that the Good Lord didn't see fit to put oil and gas reserves in places where there are more democratic governments." Energy security – for geopolitical reasons – has therefore been a major concern to the US and the rest of the West. These concerns were exacerbated in the wake of the 1973 Arab Israel war, when Arab oil producing states placed an embargo on exporting crude to non-friendly western states. The very specter of long queues before gas stations, in the wake of the embargo, was enough to keep the western leadership in a state of constant anxiety, fear, and terror. To them, the very idea of depending on the Arab oil – in the wake of political differences - sent shivers down the spine. But is an embargo by Arabs even possible in current times? Gone indeed are the heady days of the 70s. After all, the producers too now desperately need the flow of petrodollars in their kitty to survive and deal with their bloated budgets. Gone are the days when King Faisal of Saudi Arabia could warn Henry Kissinger, 'if we are pressed too much, we will burn our wells and go back to tents.' Today the Arab way of life precludes a return to Bedouin tents. They are dependent on their oil incomes to keep their homes and palaces running. Furthermore, there were long-term consequences when the Arabs decided to use oil as a political weapon against the West, some 38 years ago. Over the next 10 years, their market share dwindled to about 30 percent from 50. Arab states no longer have the clout to impose an effective embargo today. Yet the very thought of a recurrence has kept haunting the west, urging the strategists to try to wriggle out of the Arab hold and develop some sort of energy independence. But this has remained an elusive dream, at least until recently. These days a revolution seems to be overtaking the energy world. The focal centre of global energy is shifting back to the West from the East. The elusive energy independence of the West now seems at hand. America can see its super power status continuing even further with new domestic resource discoveries and technological advances making more of existing resources economic to produce. These new oil and gas discoveries are not occurring in a vacuum. The entire Western Hemisphere is enjoying a fossil fuel boom, from northern Canada to Brazil and Argentina. America's backyard will soon be comparable to the oil-rich Persian Gulf. And the troubling Hugo Chavez of Venezuela will soon be one of many regional exporters. Driving the change is the boom in unconventionals - the tough kinds of hydrocarbons like shale gas, tight oil and oil sands that were once considered too difficult and expensive to extract. They are now being exploited on an unprecedented scale from the US to Australia and Canada to elsewhere. From the high Arctic waters north of Norway to a shale field in Argentine Patagonia, from the oil sands of western Canada to deepwater oil prospects off the shores of Angola, giant new oil and gas fields are being mined, steamed, and drilled with new technologies. Advances in technology have made such resources accessible. Consequently the global energy map is being redrawn. And there are many elements to this changing topography.


The "oil sands" in Canada, the "pre-salt" deposits in Brazil and "tight oil" in the United States, have been known for decades, but they were for years too expensive to produce on a large scale. Rising oil prices have altered the economics in their favor – attracting multibillion-dollar investments from international oil companies, including from China. In little more than a decade, Canada's oil sands have gone from being a fringe resource to a major one. Since 2000, production has expanded to more than 1.5 million bpd from 600,000, making Canada's oil sands the most important source of oil imported to the United States. Canada also exports considerable conventional oil to the United States. If and when the Keystone XL pipeline project gets done, Canada would be able to move an additional 700,000 barrels a day – further weaning the US from Middle Eastern oil. Canadian oil sands production is now expected to increase by as much as 200,000 barrels a day every year for the next two decades. IHS Cera projects $100 billion in investments in the oil sands over the next decade. Current estimates of how much is there already top Iraq's total reserves, guaranteeing Canada's place as a premier oil producer for many decades. Some say that the oil sands hold volumes of extractable resources that are comparable to the Saudi reserves. The U.S. is definitely at the forefront of the unfolding unconventionals revolution. By 2020, shale sources will make up about a third of total US oil and gas production, according to PFC Energy, a Washington-based consultancy. By that time, the U.S. will be the top global oil and gas producer, surpassing Russia and Saudi Arabia, PFC predicts. Yet, the biggest wild card for the future of both oil and gas appears to be shale and other tight formations. Shale gas production in the United States is already more than five times the 2006 level, and the country surpassed Russia as the world's leading gas producer in 2009. Gas shales are being developed elsewhere too. Gas shale drilling appears to continue at a fast pace in the most important gas-producing states. China National Petroleum Corp. just announced its first discoveries of shale gas in Sichuan Province. With a goal of satisfying 10 percent of its gas demand from shale by 2020, China held its first shale gas auction in June. Poland is likely to be the next big shale player, with the government eager to lessen its gas dependence on Russia, which provides half of Poland's energy today. Already more than 8 million acres have been leased by Chevron, Exxon Mobil, ConocoPhillips and other large international companies. Drilling success in Poland could lead to more drilling in shale fields in Germany, Norway, Sweden, France and Ukraine. The rest of the world is watching too. Moratoriums are in place in parts of France, Germany, South Africa and the Canadian province of Quebec; Britain, Ukraine and other countries are moving cautiously forward. Recently, a small British drilling company reported that it has confirmed a shale gas deposit in northern England that could heat the country for 60 years. The US Energy Department projects that gas from shale could account for 14 percent of global supplies by 2030, with as many as 32 countries having production potential. Europe now imports about 60 percent of its gas, roughly half of that from Russia. That too is now in for a major change - bringing to the fore another changing geopolitical reality of the recent months and years.

Oil Sands

The Shale Gas Revolution


At the same time, shale oil is involved in the process of revolutionizing global energy dynamics. The development of technology combining horizontal drilling and hydraulic fracturing, which enabled profitable production from gas shales, has already led to huge increases in estimates of US crude reserves. Many now believe that it could be possible for the US to cut crude imports from about 10 million bpd to about 3 million bpd by the early 2020s. Over the last five years, technology has also helped extract oil from shale rocks. The Bakken field in North Dakota and Montana now produce 400,000 barrels a day, up from a trickle in 2007, and industry experts involved with the extraction now predict production could soar to a million barrels a day by 2015. The first of these wells was drilled in the Eagle Ford shale in south Texas three years ago and is now producing more than 100,000 barrels a day, with projections saying it could produce 420,000 bpd by 2015. There are 20 other shale and similar tight rock fields across the United States that could make states like Ohio and Michigan major crude producers in the foreseeable future. Techniques such as those being used in North Dakota are now being tried in tight oil reserves all over North America, in the Eagle Ford shale and Permian basin in Texas and the Utica shale in Ohio and Pennsylvania. IHS CERA forecasts that US tight oil production will rise from 900,000 b/d this year to 2.9 mb/d in 2020 – roughly half of today's total US output. Meanwhile, over the same period, Canada too could double its production from Alberta’s oil sands to about 3 mb/d. In 2010, the US and Canada produced almost 10 mb/d and consumed about 22.5 mb/d. Given the right opportunities and incentives – and the access to closed areas, such as America's east and west coasts, for which the oil industry is lobbying – by 2035, the two countries could produce 22 mb/d. If demand could be held constant, that would cut North America's shortfall to just 0.5 mb/d. And in the meantime, the US, like other advanced economies, is entering the era of "peak demand." A slowdown in car use, tighter fuel economy standards for vehicles and greater use of ethanol, hybrids and electric vehicles are all helping to hold down the crude demand. It is quite possible that the pre-recession year of 2007, when the US used an average of 20.7 mb/d, will mark a historic high for US crude demand. Consequently, the US has already cut its crude imports from OPEC countries by 1 million barrels per day. That is significant, not just from an economical or environmental point of view but from a geopolitical angle too. ExxonMobil now says that US oil imports will continue to decline as domestic production rises, and by 2040, Canada and not Saudi Arabia, would be the sole crude exporter to the US. The forecast depends on off-shore, Arctic, oil sands and unconventional resources being made available for development in coming decades. "We believe oil imports have reached a peak in the US," said William Colton, ExxonMobil Vice President of Corporate Strategic Planning at a recent company announcement in Washington, DC. He said Exxon's forecasting models show that imports, other than Canadian, could reach 1 million barrels per day or less – perhaps as little as zero – in the coming 30 years. Edward Morse, a former US energy diplomat, and now global head of commodities research at Citigroup, believes it will be possible for the US to cut imports from about 10m barrels per day to about 3 mb/d by the early 2020s. All of its import demand could then be met from Canada and Mexico. Its reliance on OPEC would fall to naught. Already, America has cut the share of its oil consumption met by imports from more than 60 percent in 2005 to 47 percent last year – a major transition indeed. The US Energy Information Administration says crude imports set a record in 2005 of 10.1 million barrels per day and have declined since. Now the US averages about 8 million b/d, of which a

Shale Oil

Peak Demand


quarter comes from Canada. US consumption is currently running at 19-20 million b/d, and the revolution has just begun. Although there are major shale fields across Europe, China, Australia, Africa and South America, exploration outside the United States and Canada is barely in its infancy. "It could change production forecasts around the world," says Bobby Ryan, Chevron's vice president for global exploration. "But we are still at the point of the spear. We have to shoot the seismic first to find out." Chinese, Norwegian and other foreign companies are entering into joint ventures in shale oil and gas exploration in the United States to learn fracking techniques. Argentina also looks promising for oil and gas, with American companies including Apache, Exxon Mobil and EOG Resources, making large investments in shale in the Argentine province of Neuquen. Even Saudi Arabia is evaluating shale prospects in the Kingdom. The global rush for fossil fuel seems unending. New resources are coming to the fore and some of them are exciting too. Venezuela probably has greater oil reserves than Saudi Arabia, awaiting proper incentives for investments. Some say Brazil also has greater reserves than Saudi Arabia. Mexico has huge reserves too, and as with Venezuela, these reserves await efficient exploitation. Apparently Colombia and Argentina possess large reserves as well. China is already drilling in Cuban waters. Australia has vast reserves of gas and coal. Greenland possesses large oil reserves – perhaps greater than Iraq's (which are exceeded only by Saudi Arabia's). Poland, too. Angola, too. And the list goes on. The Norwegian state oil company Statoil has recently confirmed the discovery of even more oil tied to its Aldous Major South project in the North Sea. A new well drilled near the original shows a "large oil column" that doubles Statoil's estimates for recoverable oil volume, extending Norway's oil era by at least another 30 years. The Aldous Major Sør reserves tied to the Avaldsnes discovery off Norway's southwest coast were expected to yield between 400 million and 800 million barrels of oil equivalent (boe). Now Statoil officials have doubled that estimate, to around 900 million to 1.5 billion barrels. The oil found in the new discovery comes in addition to the Avaldsnes discovery. "Along with Avaldsnes, this is gigantic among the five largest oil discoveries on the Norway continental shelf through the years," Ola Andersen Skauby of Statoil told Norwegian Broadcasting. Colombia's oil production is climbing so fast that it is closing in on Algeria's and could hit Libya's pre-war levels in a few years. ExxonMobil is striking new deals in Argentina, which recently heralded its biggest oil discovery since the 1980s. Unlike the recent past, when they appeared limited, global energy frontiers seem fast expanding. In the meantime, global deepwater oil production has also leapt to roughly 7 million barrels a day over the last 11 years, up from 1.5 million barrels, and now providing about 8 percent of the world's oil supply. That production could double by 2020, experts say. Most of the drilling is in the Gulf of Mexico, off Brazil, Australia and India, and along the west coast of Africa. In order to protect its vast, new offshore oil discoveries, Brazil has even begun building its first nuclear submarine. Cuba is also planning to start drilling exploratory wells offshore at the end of the year, and Mexico is slowly moving towards deepwater drilling to revive its flagging oil industry. Drilling has begun in the deep waters off Ghana too, and experts believe fertile fields exist all the way down the west coast of Africa to Namibia.

Global Rush for Oil

Deepwater Drilling


Total and Royal Dutch Shell recently made a major discovery along the coast of French Guyana, and neighbouring Suriname is likely to become an important producer as well. More new offshore fields may be discovered along the Brazilian coast and south to Argentina. Analysts believe only about 10 percent of the world's deepwater oil and gas fields have been extensively explored and drilled. In 2000, fewer than 20 vessels in the world could drill deepwater wells. Now there are nearly 200, and more almost every month. In recent years, advances in computer processing power have allowed geologists to make sense of seismic data 15,000 feet or more below the ocean floor. Three-dimensional imaging and seismic mapping are now possible even below thick layers of salt, which used to blur views of untapped reservoirs. Super strong alloys allow drill bits to go into hot, high-pressure fields. The coasts of East Africa are rich in gas, and China, Indonesia, Malaysia, Australia and the Philippines also have significant deepwater potential. Heavy oil fields in the Orinoco Belt, in the northeast part of Venezuela could also produce 2 million bpd by 2020. Deep water exploration and extraction is set to significantly impact global energy security. The last frontier, at least for the foreseeable future, is the high Arctic, most of which remains unexplored. A 2008 assessment by the U.S. Geological Survey estimated that roughly a quarter of the world's remaining undiscovered conventional oil and gas is in the Arctic, more than 80 percent of it in forbidding offshore areas. Operations accelerated after the discovery of an estimated 250 million barrels of retrievable reserves of high-quality sweet crude oil in the Skrugard field in April, the seventh-largest oil or gas find in the world this year. Amidst the technological revolution that has swamped the energy world; the Arctic is also presenting itself as another major global energy frontier. For years, experts knew that the Arctic contained about 20 percent of the world's unexploited oil and gas reserves. Now, there are reasons to believe that the Arctic hides a much greater share of natural resources. Thirty percent of oil and gas production has been aimed seawards. This will make the Arctic Region a global oil and gas hub in the near future. In 2008, the UN Geological Service published the results of a five-year study according to which the bulk of gas rich areas in the Arctic are in the Russian sector. The Kara and Barents Seas store between 65 and 215 billion barrels of oil equivalent. Gas accounts for 80% of the deposits. According to official reports submitted by the Russian Institute of Oceanic Studies, the western sector of the Russian Arctic has about 42 billion tons of oil and 71 trillion cubic meters of gas. The eastern Arctic seas contain about 9 billion tons of oil and 10 trillion cubic meters of gas. Gazprom estimates the resources of the Barents, Pechora and Kara Seas at around 70 billion tons of fuel oil equivalent. Gas reserves of the Barents and Kara shelf are estimated at 4.8 trillion cubic meters. According to current reports, the Barents Sea's oil reserves, estimated at 450 million tons, are all being exploited. Scientists hope that the Arctic Region will soon turn into a major source of oil and gas. In 2012, the Russian government will adopt a program to tap the resources of the Arctic continental shelf.

The Arctic


The US Department of Defense appears keen to promote biofuels and is taking the lead in diversifying away from fossil fuels. Biofuels have been taken seriously by the military in recent months and years, as the US Air Force and the Navy are taking a lead role in creating a U.S. market for them. They have spent the past few years testing and certifying aircraft to run on them. Every day, the US Navy consumes approximately 80,000 barrels of fossil fuels afloat and 20,000 megawatt hours of electricity ashore. With a long history of leading energy transformations – from coal to oil and to nuclear power – the US Navy seems now taking another lead. Almost 75 percent of the energy consumed by the Navy is used in ships, aircraft, and vehicles, and close to 60 percent of that usage can be attributed to liquid petroleum-based fuels. Navy Secretary Ray Mabus now has ordered the Navy to get ready to use alternative energy for half of its power at sea and on shore by 2020. That would require more than 300 million gallons of biofuels a year, for blending with conventional fuel. The US Air Force also aims to fly on a 50-50 blend of biofuels and conventional fuel by 2016 Oil majors cannot remain oblivious to all this development back “home”. They are now catching onto the developments. The change is reshaping their terrain, as they appear to be reallocating more and more resources to new areas and new kinds of fuel. They are adapting to the changes taking place. For decades, these corporations have been targeting the developing world – the Persian Gulf, the desert sands of North Africa, the Niger Delta, and the Caspian Sea. But over the past few years, that geographical focus seems to have undergone a radical change. Western energy giants are increasingly hunting for supplies in rich, developed, industrial countries - a shift that could have profound implications for the industry, global politics and, indeed, consumers. By pursuing these non-traditional fuels, the oil companies are committing themselves ever more deeply to the Organization for Economic Cooperation and Development member states. That in itself has political and economic repercussions. Wood Mackenzie says that of the $1.7 trillion of future value for all the worlds oil companies – some 52% is in North America, Europe and Australia. The consultancy has identified a "significant westward shift" in oil-industry investment, away from traditional areas like North Africa and the Middle East "towards the Brazilian offshore, deepwater oil in the Gulf of Mexico and West Africa and unconventional oil and gas in North America." And then there's Australia, far out east, "which is in the early stages of a spectacular growth phase." In the wake of the emerging realities, the US is no more the largest buyer of Saudi crude. Instead, China has emerged as the largest importer of the Saudi crude. And this cannot be overlooked by the political scientists. An eastward-looking policy has taken shape in Riyadh. After all, Riyadh too needs to secure future markets for its crude. Slowly and gradually, an Asian energy grid is developing – one could say with little concern of denial. And conceding that shale gas exploration and production technologies are now working their magic on the oil side of the business too, state oil company Saudi Aramco CEO Khalid al-Falih recently underlined, "abundance isn't limited to gas reserves, but is also the new headline when it comes to oil." This was an admission at the highest level. Consequently Saudi Arabia is no longer inclined to add new capacity, halting a proposed $100 billion expansion plan, keeping its output capacity at 12.5 million b/d, and not beyond as was earlier envisaged. In order to exploit its energy riches better, Saudi Aramco is going downstream. It has recently announced a close to $20 billion joint venture with the US chemicals giant Dow Chemicals.

Biofuel

Oil Majors Heading West

New Realities


Basically the objective of the project is to add value to available energy riches, rather than simply exporting crude – in an otherwise softening market. Commenting on this ongoing change within the oil and gas industry, Daniel Yergin says:

“For more than five decades, the world's oil map has centered on the Middle East. No matter what new energy resources were discovered and developed elsewhere, virtually all forecasts indicated that U.S. reliance on Mideast oil supplies was destined to grow. This seemingly irreversible reality has shaped not only U.S. energy policy and economic policy, but also geopolitics and the entire global economy. Today, what appeared irreversible is being reversed. The outline of a new world oil map is emerging, and it is centered not on the Middle East but on the Western Hemisphere. The new energy axis runs from Alberta, Canada, down through North Dakota and South Texas, past a major new discovery off the coast of French Guyana to huge offshore oil deposits found near Brazil."

The growth in US and Canadian production from new sources coupled with other emerging frontiers, and the softening demand – a consequence of the collapsing economy and more efficient use of fuel – is creating a realistic possibility of energy independence in North America. This is in sharp contrast to what was envisaged just a few years back. As recently as 2007, the National Petroleum Council, an adviser to the US government with members from industry, academia and environmental groups, concluded that energy independence was "unrealistic in the foreseeable future" and suggested the best that could be hoped for was a slowing of the decline in US oil production. "It's amazing how far we have come in just four short years. And we're just seeing the beginning of it," says Clay Bretches of Anadarko Petroleum, who worked on the NPC study. A major tectonic shift in the global energy map has taken place – almost unnoticed – and rather instantly. The energy world is undergoing a major metamorphosis. And the world is only beginning to comprehend the geo-political consequences of this major shift. A new world energy order is emerging and we are witness to it.


Publication Date: February 2, 2011

Submit manuscripts and Letters to the Editor to Jon Rozhon, Editor-in-Chief, Geopolitics of Energy, in-care-of the address below or via email at [email protected]. Manuscripts dealing with energy and geopolitics, generally between 2,000 and 4,000 words in length, will be considered for publication. Unsolicited manuscripts will undergo peer review by members of the editorial board. Available by subscription for $800 (US) per year; $400 (US) for universities. For Canadian residents—$800 per year; $400 for universities—plus 5% GST. Publisher: Canadian Energy Research Institute, #150, 3512 - 33 Street NW, Calgary, Alberta, Canada T2L 2A6 Telephone: (403) 220-2370; Fax: (403) 220-9579; Email: [email protected]. Reproduction without permission is prohibited.

Geopolitics of Energy - ACUNS...Geopolitics of Energy Volume 34, Issue 1 January 2012...

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