magazine - Eni · 2019-12-12 · J. Monaldi, Michael Murphy, Sergio Romano, Nicolò Sartori, Amrita...

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The term “disruption” can have different shades ofmeaning. We wanted to capture its positive sense,one that evokes a moment of transition thatchanges the focus of global business modelstowards more sustainable development—a

transformation process that calls upon the energy world toreconcile its production and distribution needs with itscommitment to fight climate change. The contours of this“shift” are emerging clearly, as described by Moisés Naím, andits origin is rooted in both technology and geopolitics. Fromthe Chinese economic slowdown to the crisis in the MiddleEast and the advent of new, more advanced technologies, manythings force the energy industry to rethink its modus operandi.

As detailed by Senator Gary Hart,international politics is struggling tokeep up with this revolution andrisks failing to seize opportunities fordevelopment, at the same time thattechnological research is riding thewave of change. According to DanielNocera of Harvard University,progress in solar energy led todiscoveries that laid the foundationsfor a new paradigm for the globalenergy model. This new paradigmhas affected Saudi Arabia which, in

the draft of Vision 2030, advances a plan for increasing themass use of alternative resources, without completely resigningfrom its role as a key producer of hydrocarbons.Accompanying this “vision,” another major internationalchapter is being written thousands of miles away: the electionof the President of the United States. We wonder whether thenew occupant of the White House will continue the strategyfor increasing the exploitation and export of hydrocarbons orwhether they will rely on a renewables development plan. Wewill also see how the international community welcomes theU.K.’s exit from the European Union and what repercussionsthis step will produce for the energy sector. Also overseas,Francisco J. Monaldi describes the difficult times of the majorLatin American “energy” nations. Unexpectedly, even China issuffering from development problems as it has experienced aslowdown in the double-digit growth rates of a few years agoand now has to develop an energy transition that lessensunwanted climate effects. Africa, meanwhile, needs strongergrowth. The continent is preparing to implementinfrastructure projects to expand access to electricity, even inlight of forecasts of population growth in the coming decades.Professor Michael Murphy of the London School ofEconomics explains that an aging and more populous globalcommunity will require services and guarantees, includingthose for energy, that are compatible with environmentalprotection. The world finds itself at a crossroads, the directionsof which lead to many different scenarios. Taking the rightturn has never been such a categorical imperative, as theatmosphere has no borders under international law, and thechoices of even one of the major international players mayaffect the future of all.

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Triannual Year 9 - N. 32 August 2016Authorization from the Court of RomeNo. 19/2008 dated 01/21/2008

n Editor in chiefGianni Di Giovannin Editorial DirectorMarco Bardazzi

n Editorial committeeGeminello Alvi, RobertArmstrong, Paul Betts, IanBremmer, Roberto Di GiovanPaolo, Bassam Fattouh,Gary Hart, Roberto Iadicicco,Alessandro Lanza, Lifan Li,Molly Moore, Moisés Naím,Daniel Nocera, Lapo Pistelli,Carlo Rossella, GiulioSapelli, Mario Sechi, Enzo Viscusi

n Editorial teamCoordinator: Clara SannaEvita Comes, RitaKirby, Simona Manna,Alessandra Mina, Serena Sabino,Giancarlo Strocchia, Manuela Iovacchini

n AuthorsSimone Cantarini, DemostenesFloros, Madison Freeman,Sebastiano Fusco, EllieGeranmayeh, David Koranyi, Atef Marzouk, Francisco J. Monaldi, Michael Murphy,Sergio Romano, Nicolò Sartori,Amrita Sen, Paul Sullivan, Davide Tabarelli, Eric Watkins

n Insert infographic LimpidoAuthors’ portraits Stefano Frassetton PhotographyPortfolio: Alessandro GrassaniAlamy, Contrasto -Reuters, Dreamstime,Getty Images - Corbis,Sie Masterfile

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DisruptionTHE SIX POLITICALEVENTS THAT HAVE“DISTORTED” THE WORLD OF OILby Moisés Naím

ReflectionsDISRUPTION AND ITSOPPORTUNITIESby Gary Hart

Quantitative dataDEMOGRAPHYAND DISRUPTIONIN GLOBAL SYSTEMSby Michael Murphy

TechnologyHERE COMES THE SUNby Daniel Nocera

Brexit SHORT CIRCUITS ACROSSTHE ENGLISH CHANNELby Paul Betts

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THE AMERICANPERSPECTIVE

Energy THE NEWAMERICAN REVOLUTIONby David Koranyi and Madison Freeman

ElectionsBLACK, BLUE OR GREEN?by Molly Moore

Markets THE AMERICAN “COUNTER-REVOLUTION”AND THE OIL RECOVERYby Demostenes Floros

THE SAUDI PERSPECTIVEScenarios A PLAN

TO “BREAK FREE” FROM OILby Bassam Fattouh and Amrita Sen

Markets THE PRICE TRAPby Paul Sullivan

Energy THE BATTLE FOR MARKET SHAREby Eric Watkins

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Iran BETWEEN EUROPE AND THE ASIAN GIANTSby Ellie Geranmayeh

Yousef Baselaib, Executive Director ofSustainable Real EstateA MODEL ENVIRONMENTAL CITYby Simone Cantarini

Africa A VIRTUOUS COMMITMENTby Atef Marzouk

China THE DRAGON’SSKEPTICISMby Lifan Li

Latin AmericaTHE TRUE FLYWHEEL WILL BE A NEW POLICYby Francisco J. Monaldi

Arctic OIL AND NEW SHIPPING LANESby Sebastiano Fusco

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50THE AMERICANPERSPECTIVE

37THE SAUDI PERSPECTIVE

infograph

CHANGING ROUTE IS POSSIBLE

by Alessandro Grassani

4THE SIX POLITICAL

EVENTS THAT HAVE“DISTORTED”

THE WORLD OF OILby Moisés Naím

GIANNIDI GIOVANNI

Changes,challangesand charges

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When will the world runout of oil?” It’s hard tobelieve that was once acommon question, but

analysts of past decades forgot tofactor game-changing newtechnologies into their forecasts.In recent years, the world hasdiscovered much more oil than ithas consumed, as hydraulicfracturing, new horizontal drillingtechniques, and other factorsbrought previously inaccessiblereserves out of the ground andinto the market. In addition, growth in demand foroil has slowed. A bid by China’sleadership to transition thatcountry’s economy from a modeldriven by manufacturing andexports to one powered by thespending of Chinese consumershas (predictably) slowed economicgrowth. Gone are the days ofdouble-digit expansion andChina’s voracious appetite forcommodities of every description,including oil. This shift isirreversible. China can’t return tothe old model without giving backthe hard won gains of its middleclass and provoking a publicbacklash.China’s slowdown has hitcommodity exporters in LatinAmerica, the Middle East, sub-Saharan Africa, and East andSoutheast Asia. From Brazil andChile to Australia and Malaysia toSouth Africa and Russia,governments and economies arefeeling pain as China’s slowdowndeepens. Add uncertainty overEurope’s future with the beginningof negotiations over Brexit, therisk of a return of the migrantcrisis as the EU’s deal with Turkeybegins to unravel, plus thecontinued uneven recovery in theUnited States, and it’s difficult tosee where a future surge of oildemand might originate. As for the supply picture, in thepast, major oil producers, SaudiArabia, first among them, couldquickly and easily rebalancemarkets by increasing or cutting

production. Following SaddamHussein’s 1990 invasion of Kuwait,prices spiked, but the Saudiscooled the market by adding newsupply; after the collapse in pricesfollowing the onset of the 2008financial crisis, the Saudis slashedoutput to ease the pain. Things are different now. Theresilience of smaller U.S.companies at the forefront of thefracking revolution and therelative speed at which they canramp up production in response to

higher prices ensure that theSaudis can’t make a lastingdifference in oil prices. If theSaudis cut production, the pricedrifts higher, more U.S. frackingcomes back on line, and the addedsupply brings the price back down.The net effect is a Saudi loss ofmarket share and the realizationthat, after peaks at $147 per barrelin 2008 and $115 in 2014, oilprices will not again approach$100 for the foreseeable future.There are four implications ofnote. First, state-owned oil giantsare in big trouble because they arenot sufficiently agile and resilientto thrive in a market whereproduction is now more price-sensitive than ever. Inefficiency hasnever been more expensive.Second, the Saudis will becomeeven more anxious in coming yearsbecause they can’t cut productionto reach the oil price needed toprovide crucial governmentrevenue. Bitter rival Iran, now freeof sanctions, is rapidly increasing

production and growing market-share at Saudi expense. Adding tothis anxiety is the specter ofgenerational change in Saudileadership following the eventualdeath of King Salman and theaccompanying doubts that his sonMohammed bin Salman can leadan effort to bring the kingdom andits economy into the 21st century. Third, lower oil prices leave theRussian economy on anunsustainable course. VladimirPutin remains remarkably popular,and his government sits atopsubstantial financial reserves. Butover the longer term, Russia willface the same pressure tomodernize and diversify itsenergy-export-dependenteconomy just as the Saudis andmany others do. However, unlikethe Saudis, the Russians haven’tyet accepted that they have aserious problem.Finally, there is one oil-producingnation already on the brink ofdisaster. Venezuela importsvirtually everything except crudeoil, and shortages of electricity,water, staple foods, and othernecessities have the country on theverge of open conflict. Thosewithin the Chavista movementmay soon sacrifice PresidentNicolas Maduro to preserve theirown grip on power. But only amuch higher oil price can buy theregime a lot more time, and that’snot on the horizon. We live in a moment of seeminglyconstant change. Yet, all of us, oilproducers and consumers, mustprepare for a world in which crudeoil trades at a lower price, theimplications of which will onlybecome more important.

N T S

Social:About Oil@AboutOil

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n Editorial Staff Piazzale E. Mattei, 100144 Romatel. +39 06 51996385+39 06 59822894+39 06 59824702e-mail: [email protected]

n DesignCynthia Sgarallinon Graphic consultantSabrina Mossetton Graphics

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n PrinterIn Italy: Stab. Tipolit.Ugo Quintily S.p.A. viale Enrico Ortolani,149/151, 00125 Roman Chinese edition EUCA Culture &CommunicationsCompany Limitedtranslation, printing and advertisingwww.eucasolutions.com

n Translated by:RR Donnelley

Paper: Magno Natural 100 gr.

Sent to press on July 29, 2016

• Welcome to Oil, a publication of news andideas for the energy community and beyond.It provides authoritative analysis of currenttrends in the world of energy, with particu-lar attention to economic and geopolitical de-velopments. • For a free subscription to Oil, please wri-te to the editorial staff at: [email protected]• For your free subscription to Oil – whichincludes regular e-mail updates on theworld of energy and the chance to connectwith other opinion leaders – please sign upat www.abo.net

IAN BREMMER The New Era of low cost crude

“

The authorIan Bremmer is the President and founder of Eurasia Group, a global political riskresearch and consulting firm. Bremmercreated Wall Street’s first global political riskindex, and has authored several books,including the bestseller, The End of the FreeMarket: Who Wins the War Between Statesand Corporations?

Publisher eni spaChairman: Emma MarcegagliaChief executive officer: Claudio DescalziBoard of Directors:Andrea Gemma, Pietro AngeloGuindani, Karina Litvack,Alessandro Lorenzi, Diva Moriani, Fabrizio Pagani,Alessandro ProfumoPiazzale Enrico Mattei, 100144 Roma – www.eni.com

Portfolio CHANGINGROUTE IS POSSIBLEby Alessandro Grassani

Scenarios ARE ROBOTSTHE FUTURE? THE PROSPECTS OF ARTIFICIALINTELLIGENCEby Sergio Romano

Centers of gravityTHE GEOPOLITICS OF ENERGY INNOVATIONby Nicolò Sartori

ForecastTHE INTERNETREVOLUTION AND THE “SIMPLEPROMISES” OF TECHNOLOGYby Davide Tabarelli

SocietyTHE TRUMP ENIGMA AND THE RESURGENCE OF FUNDAMENTALISMby Roberto Di Giovan Paolo

Data OBSTACLECOURSE FOR RECOVERYby Market Scenarios and Long-Term StrategicOptions – Oil (SMOS/OIL) – Eni

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Disruption/When politics is more disruptive than technological innovations

From climate change to the crisesin the Middle East, from the slowdown

of the Chinese economy to the Russian sanctions

and the collapse of the SouthAmerican energy giants:

the factors that have changed the global energy scenario

in recent years

political eventsthe world of oil

The

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CHANGES, CHALLENGES AND CHARGES

isruption, mostly due to the advent ofnew technologies that make old busi-ness models uncompetitive and even-tually obsolete, has become a fash-ionable concept. Established compa-nies fear it and start-ups hope to cre-ate it. We know the iconic examplesof disruption: Amazon practicallywiped out bookstores, travel agenciesand newspapers have been “dis-inter-mediated” and Uber and Airbnb areupending the business of taxis and ho-tels. No industry has been spared, andthe energy sector is no exception. Hy-draulic fracturing and other tech-nologies that have deeply altered theway in which hydrocarbons are pro-duced and advanced the industry’stechnological frontier have changednot merely the oil and gas business butaltered longstanding geopoliticalarrangements. Yet, notwithstandingthe indubitable impact of new tech-nologies, another source of disruptionwell known to oil and gas companiescontinues to be a major force in shap-ing the world of energy: politics.In fact, the attention to technologicaldisruption has distracted us from the

fact that politics continues to be themost disruptive force of all in the oiland gas markets.

A brief intellectual history of disruptionThe pattern whereby an entire in-dustry can be disrupted was firstidentified by the German Marxist so-ciologist Werner Sombart in his1913 work War and Capitalism. Theidea was later refined by JosephSchumpeter in his 1942 book: Capi-talism, Socialism and Democracy.Schumpeter famously called it “cre-ative destruction” and said that it was“an essential fact about capitalism,”basing his ideas on Marx’s early as-sertion about the self-destructivetendencies of capitalism. He char-acterized it rather dramatically as “aprocess of industrial mutation that in-cessantly revolutionizes the economicstructure from within, incessantlydestroying the old one, incessantlycreating a new one.”Half a century later, Clayton Chris-tensen, a Harvard Business SchoolProfessor, extended this idea by de-

scribing in 1995 what he called “dis-ruptive innovations”: new technolo-gies and business strategies that cre-ate a different product, one that of-ten displaces the dominant player inthat market and at times even createsan entirely new market. iPad is, ofcourse, the paradigmatic example ofthis latter phenomenon. Christensen’s concept of disruptive in-novation was validated by a flurry ofnew technologies and business mod-els—often related to the Internet—that in turn spawned a wave of newcompanies that quickly became mar-ket leaders. Searching for the “dis-ruptive innovation” that would dras-tically alter the old ways of doing busi-ness in a given sector became the ob-session of inventors, entrepreneurs,investors and analysts. Existing com-panies became alert to threats repre-sented by the irruption of a new wayof doing business that would wreakhavoc in their traditional markets.As noted above, in the oil and gas in-dustry, hydraulic fracturing and re-lated technologies have created newways of producing hydrocarbons, in

DMOISÉS NAIM

He is Distinguished Fellow at theCarnegie Endowment for InternationalPeace and member of the editorialboard of Oil.

that have “distorted”


the process bringing new companiesand new financial models to life, andunleashing enormous and unprece-dented geopolitical shifts, such as thedramatic emergence of the UnitedStates as one of the three main oil andgas producers (with the potential tobecome a major exporter). In additionto hydro fracking, solar panels andbatteries, wind turbines, biomassgasification and the promise of tidalenergy, are only a few of the techno-logical innovations changing theface of the energy industry across theplanet.But focusing only on technological-ly induced disruption obscures the factthat politics can be as disruptive to anindustry as a new technology. Al-though the term "disruption" oftenbrings to mind the dramatic changesbrought about by technological in-novation, most commonly relatedto information technologies, com-puting and the internet, the realityis—at least in the world of energy —that political changes are having asgreat an impact as new technologies—if not more.The oil industry has a long experiencewith the impact of politics on its op-erations and profitability. Recenttrends confirm this historical pattern.Here are six examples of recent po-litically induced disruption that il-lustrate the importance of non-tech-nological factors in defining win-ners and losers in energy markets.

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On www.abo.net, read otherarticles by the same author.

THE POLITICS OF CONTAINING GLOBAL WARMING

It has taken a while but now there is close to a scientificconsensus about the link between fossil fuel consumptionand global warming. This scientific consensus has led to apolitical consensus about the need to minimize the use ofsuch fuels if the planet is going to avoid major climatechange. The political decision reached in Paris by 150nations in November 2015 to limit global temperatureincrease to well below 2 degrees Celsius, while urgingefforts to limit the increase to 1.5 degrees, establishedbinding commitments by all parties to make “nationallydetermined contributions” (NDCs) and will have enormousconsequences for the energy industry. The Parisagreement represents the biggest game changer in theglobal pattern of energy consumption, which has beenbased for more than 100 years on coal and fossilhydrocarbons. Direct actions resulting from this decision

include a $19 billion pledge made by developed countriesto support developing nation efforts to promote renewableenergy and the creation of a 120 nation International SolarAlliance, led by France and India, to support solar energydeployment in their countries. Non-governmentalorganizations, cities and private investors also becameinvolved in this major initiative. Bill Gates and ten otherinvestors have launched the Breakthrough Energy Coalitionto steer private capital into clean energy projects. At a sidesummit in Paris, the Compact of Mayors, hosted by ParisMayor Anne Hidalgo and former New York Mayor MikeBloomberg, has committed more than 360 cities aroundthe world to deliver over half of the world’s potential urbanemission reductions by 2020. These are political decisionsthat will drive immense change in the industry and spur thecreation and growth of new energy-related businesses.

THE U.S. ENERGYPOLICY

The dramatic increase in oil andgas production in the UnitedStates, mostly the result of theintensive use of hydro fracking,has triggered important politicallydetermined changes in energypolicy. Perhaps the mostimportant has been the lifting, inNovember 2015, of theprohibition to export crude oil,which had been in place since1973. Such a major politicaldecision comes at a time whenU.S. domestic refineries arereaching their maximum levels ofshale oil processing capacity, andoil storage in the U.S. is at anhistorical high, making crude oilexports a logical move. Thedecision has opened the door forsignificant changes in the globalrole of the U.S. as a nethydrocarbons exporter. Oneexample is its impact in Europe,which can now reduce itsdependence on Russian gas.Lifting the ban on U.S. oil exportsalso provides Washington with aformidable geopolitical weapon inits relations with oil producingcountries.

DISRUPTION

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CHINA’S ECONOMIC SLOWDOWN

The impact of China’s level of economic activity on global energy demand(and prices) is well known. An economic downturn in China means lowerprices for all the commodities that the Asian giant voraciously imports and oilis no exception. The current lower rate of growth of China’s economy can bedismissed as just a transitional phase of a normal economic cycle. Thatmeans that after decades of double-digit growth, it is only normal that aperiod of slower growth ensues. But the concern is that China’s economy maynot just be slowing down temporarily but has instead entered a new andprolonged period of meager growth. The experts who hold this less sanguineview of the Chinese economy argue that there is ample evidence pointing tothe fact that a major structural change is underway. Last year, China’s growthwas the weakest of the last 25 years, accompanied by a collapse of the stockmarket and a significant devaluation. In January of 2016, some $110 billion leftthe country, while over $600 billion of capital flight took place during 2015.The most troubling sign, however, is the skyrocketing growth of the nationaldebt, which has tripled since 2007. In response, the government has stressed its intention to move the economyaway from its reliance on exports as a source of growth to the expansion ofthe domestic market and from massive infrastructure investments andindustrial development to the stimulus of a larger and stronger service sector.All these are political decisions that will profoundly change the way Chinaproduces and consumes energy.

THE CRISES IN THEMIDDLE EAST

Bloomberg reports that “about 2.6million barrels a day are being keptfrom the market by conflict andsanctions in the region, more than fivetimes the average from 2000 to2010.” The IEA energy outlook for2016 reports oil productiondisruptions averaging 3.2 millionbarrels per day over the last twoyears, mostly due to political instabilityin Iraq, Libya, South Sudan and Syria.This significant supply imbalance hasbeen partially compensated by newIranian exports, which have doubledsince last year, reaching 2.1 millionbarrels per day in May. Such anincrease is the result of the lifting ofsanctions against Iran by westernpowers, following the nuclear dealreached in July 2015. This decisionhas disrupted the global oil supplyand has contributed to fragment andweaken OPEC, leading one ofVladimir Putin’s main collaborators,Igor Sechin, to say that “OPEC haspractically stopped existing as a

united organization.” And this ofcourse is just one example. Libya,Syria, Egypt and the EasternMediterranean are all hotspots rifewith instability and hydrocarbons. Inthe Middle East politics far outweighstechnology in defining its weight in theworld of energy.

RUSSIA’S EXPANSIONISM

AND SANCTIONS

Russia’s 2014 annexation ofCrimea triggered economicsanctions by the European Unionand the United States. Some ofthese sanctions directly affect theRussian energy sector and its abilityto continue to be the foremost

supplier of natural gas to Europe.The sanctions include the freezingof exports to Russia of energyrelated equipment and technologyand the banning of the supply toRussian oil and gas companies ofservices like drilling, well testing andcompletion services. Theimplications are as enormous asthe surprises. Many observerspredicted that the internationalcoalition that supported thesanctions would quickly fragment,that the sanctions would bewatered down or that they wouldbe short-lived and ineffectual. Noneof these predictions has come topass. Instead, the Kremlin’sdecision to annex Crimea anddestabilize Ukraine has resulted inmajor upheavals in Russia’s oil andgas industry and an unexpectedopening for U.S. gas exporters toEuropean markets.

THE IMPLOSION OF VENEZUELA AND BRAZIL

Mismanagement, lack of investment and massive corruption in Venezuela’sstate oil company, Petroleos de Venezuela, and corruption scandals inBrazil’s state oil company, Petrobras, are causing severe disruption in theproduction and development plans of these two oil giants. Petrobras is nowafflicted by the largest debt among all major oil companies and its 5 yearinvestment plan to 2020 is down by 25 percent, while its stock has lost 80percent of its value in the last two years. In spite of its large oil reserves,Venezuela’s production and exports have declined significantly, relegatingthe country to playing a minor role in the global energy sector. In both cases,technology had nothing to do with their downfall. It was all about politics.It is common for corporate leaders of oil and gas companies to stress thattheir companies are as technological as those of any other industry—if notmore so. In fact, the investments in research and development of the largeoil companies are staggering and the list of successful innovations that theyhave brought to the markets is equally impressive.There is no denying that technological innovation is an integral part of thisindustry. But it is equally true that few other industries are as directly impactedby politics as oil companies. Yes, technology can disrupt this industry and inthe past it has done so, but not as much nor as often as politics.

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Reflections/Past route changes and the potential for future routes

Disruption and its op p

New governance systems may reduce “disruptions”and provide a higher level of stability. The key lies in anticipating rather than reacting. Preparation willbe essential if the world wishes to avoid significantupheaval in the future

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portunities

lthough it’s a blunt word, disruptionnevertheless characterizes the age inwhich we live. Old formulas are dis-solving. Traditional systems are dis-integrating. Established orders arefragmenting. Dependable alliances aresundering. All of this is synonymouswith disruption. We know what rev-olutions are. Like traditional wars,they have a beginning and an end. Butthe disruptive age of the early 21stcentury had no official beginning, andwe do not know when and how it willend.Arguably, this age of disruption andrevolution, much of it occurring be-low the visible surface like tectonicplate shifts, began in 1973-74 with theOPEC oil embargo. Then America’sdefeat in Vietnam. Domestically inthe United States, there was the civ-il rights movement, the women’sequality movement, the dawn of theage of environmentalism, and wide-spread shedding of traditional socialnorms. Variations of these cultural

shifts were experienced in much of theWest. But the world also was experi-encing the disintegration of nation-al borders. Economically, this cameto be called globalization. Socially, itwas the beginning of mass south-north migrations. The dissolution ofthe Soviet Union then led to the endof the Cold War and the end of thebipolar world divided betweendemocracy and communism. On topof all this was the information revo-lution. Some have argued that the faxmachine played a central role in thecollapse of the Soviet Union be-cause authoritarian governmentsdemand control of information.When information is widely shared,centralized political systems lose au-thority. Economically, the explosionof information technologies, espe-cially in the United States, signaledthe shift of our economic base fromtraditional manufacturing to the sil-icon chip and all the technologies thatgrew from it.

As the geographic center of eco-nomic power in the United States wasshifting from Detroit and Pittsburghto Silicon Valley in California, Asiawas awakening to dominate the pro-duction of mass-market consumergoods and low value technologies.Trade barriers and protectionismcould not stem the tide of containerships. On they came with automo-biles, television sets, textiles, shoes, ap-pliances, and an endless stream ofconsumer products.

When policy is the latecomerA survey of public policy in theUnited States from the mid-1970suntil today reveals a pattern of delayin responding to the forces of dis-ruption. A few younger U.S. politi-cal leaders urged economic policies,including education reforms, a focuson laboratories, science, and tech-nology, and job retraining for olderworkers, to ease the transition froman industrial to an information-based

AGARY HART

He is a former United States Senatorand is currently Chairman of theAmerican Security Project and amember of the U.S. Energy SecurityCouncil.


economy. The call for these initiativeswas not heeded. Likewise, during theMikhail Gorbachev years in the So-viet Union, a few American electedofficials urged new thinking aboutAmerica’s role in a post-Cold Warera. However, traditional defenseand foreign policies, often fostered byCold Warriors, prevailed, as somecame to miss the certainty of thebipolar world and to look for op-portunities to recreate it. Where themilitary and U.S. national securitywere concerned, efforts to instituteserious military reforms in anticipa-tion of the rise of unconventionalconflicts and irregular warfare, as na-tion-state borders and sovereigntyeroded, met with resistance and tra-ditional thinking. Even in a nationsuch as the United States, whichprides itself on innovation, leaving be-hind traditional policies to addressdisruptive events meets with resist-ance. The status quo takes strongroots in the minds of conventionalthinkers committed to preservationof things as they are. Machiavelli ob-served “the incredulity of mankindwho do not believe in anything newuntil they have had actual experienceof it.” And the American Ralph Wal-do Emerson wrote of “gravity, cus-tom, and fear” making experimenta-tion and innovation difficult to bringabout. All these disruptions con-tributed to the beginning of erosionof nation-states, the basic global po-litical building blocks since the Peaceof Westphalia in 1648. As finance and

economics became ubiquitous andoutside the control of national fi-nancial ministries, so political sov-ereignty began to weaken. The na-tion-state demands a monopoly on vi-olence, but this monopoly crumbledas disaffected peoples shifted theirloyalties from states to religious fun-damentalism, ethnic nationalism andeven tribes, clans and gangs.Given the declining ability of nation-states, including the powerful Unit-ed States on 9/11, to provide securi-ty for their citizens, a vast new in-ternational industry of private secu-rity for individuals and communitiesarose virtually overnight. New mafiasarose out of the Soviet collapse.Drug cartels emerged as substitutesfor state authority in parts of CentralAmerica. Cold War weaponry becameavailable to stateless nations. The riseof terrorism as a form of warfareseems almost inevitable. Old 20thcentury ideologies of National So-cialism and communism gave way toreligious fundamentalism and in partsof the Muslim world became a cen-tral organizing principle, especially formasses of unemployed youths.Not all disruption is immediatelypolitical or economic. This new cen-tury brings with it the postponed costsof the industrial age. Mankind is al-tering the very climate upon which itswell-being depends. We are deposit-ing carbon in our biosphere fasterthan it can be absorbed, and we havebeen doing so for some time. Thereseems insufficient political will, par-

ticularly in the developed world, tosubstantially alter our consumptionpatterns. On top of this, the devel-oping world seeks to catch up and re-quires more carbon combustion to doso. Serious climate scientists predictrising sea levels across the globeeven as desertification brings droughtand famine inland. We have dodgedpandemic bullets with HIV and theEbola virus, but modern air travelmakes it virtually inevitable that newviral outbreaks will occur and spreadfaster than modern medicine’s abili-ty to contain and quarantine them.And few, if any nations, including theUnited States, have the personnel andequipment, including inoculations, onhand to deal with unknown viralmutations. Scientists now say that weare nearing the threshold of an age ofsynthetic biology when viruses un-known in nature can be manufacturedin small hidden laboratories and dis-persed by individuals and groups ofill-will among the healthy populationsof their enemies. The new informa-tion age carried with it magical trans-formations. Critical infrastructures—communications, transportation, fi-nancial, and energy systems—arenow all operated by computers. Butwe now know that those same mag-ical computerized operating systemsare vulnerable to state and non-statehackers and disrupters. The criticalsystems upon which the developedworld depends are now more efficient,but also more vulnerable, to the newthreat of cyber warfare. It is difficult

to imagine what might happen if in-terlocked international banking sys-tems or entire air traffic control sys-tems were suddenly disrupted orshut down. This surface sketch of therevolutions—disruptions if you will—makes the future seem grim.

Revolutions: Whatimprovements they havebroughtA fair accounting, however, must alsonote the rising standard of living, in-cluding in much of the developingworld, across the globe. Science andtechnology are bringing new de-vices such as cell phones to multi-tudes, and they make masses of peo-ple healthier and more able than everbefore to participate in local marketeconomies. Education and healthstandards are on the rise, and birthrates in many large nations are set-tling into more sustainable patterns.New sustainable sources of energy,wind and solar in particular, are in-creasingly available at the communitylevel. Major oil producing nations,including significantly Saudi Arabia,see the solar era arriving more quick-ly than they would have believed evena few years ago, and experimentswith micro-geothermal energysources are occurring in parts ofthe world. Considered cosmically, itis possible to view our age of dis-ruption as a race, a race between thedestructive forces unleashed in thepast three of four decades and theconstructive human inventive genius

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capable of avoiding natural or man-made disasters. We have science,technology, imagination, and inven-tion on our side, but we do not haveunlimited time. We are lacking instatecraft, in moral leadership, and inour appreciation for our common hu-manity. To transcend these disrup-tions, we must rethink systems ofgovernance. National and interna-tional declarations of independence,of human rights, and of democraticfreedoms are the building blocks. Butthese principles must now be put tothe service of finding new ways ofgoverning ourselves and addressingour common and universal needs.For example, we need now to thinkof the world as a Global Commons,a virtual place created out ofmankind’s universal desire for eco-nomic and physical security. No sin-gle nation or existing treaty organi-zation can stop global warming. Noregional alliance alone can stop a vi-ral pandemic. No democratic coali-tion can stamp out extremism andterrorism. These are threats requiring whole-hearted participation of all nations,ethnic groups, religions, and tribes.The Global Commons approach tothe challenges of 21st century dis-ruption is based on one central prin-ciple: all humans have more interestsin common than they have differ-ences. Those interests transcendrace, ethnicity, historic identities,political ideologies, geography, andtraditional cultures. In the arena of

international security, the core of aGlobal Commons coalition would becomposed of advanced democraciesmutually committed to collectivesecurity, suppression of terrorism,and elimination of criminal syndi-cates. Other nations committed tothe rule of law and protection of hu-man rights would be welcome underthe Global Commons security um-brella. The advantages of joining thecoalition would outweigh outmodednotions of sovereignty, and onlyrenegade nations such as North Ko-rea would remain alone and isolated.Where national sovereignty is con-cerned, it became quickly apparentto North American Treaty Organi-zations (NATO) nations at the dawnof the Cold War that they could par-ticipate fully in a collective securityalliance without sacrificing nationalauthority and sovereignty. Global-ization, information, eroding borders,and mass migrations represent threatsto the old order, but they also rep-resent opportunities for commonunderstanding. Most needed now arestatesmanship, moral authority, andleaders with courage, integrity, andvision.

The strategy is to anticipaterevolutionsIn our complex world, there will nev-er be absolute stability. But new sys-tems of governance can reduce dis-ruptions and achieve a greater degreeof stability than we are experiencingtoday. The key is anticipation rather

than reaction. Too often in the ear-ly 21st century, even the most ad-vanced nations have waited for a dis-ruptive event to occur and then re-sponded with whatever resourcesmight be at hand. Events are hap-pening faster, however. Warningtimes are shrinking as are reactiontimes. Delay and the search forremedies have become a luxury. An-ticipation and preparation have nowbecome a necessity if the world is toavoid being victimized by more dis-ruptions. Years must pass before weor future generations can adequate-ly assess the multiple epic transfor-mations we are now experiencing. Acentury ago, Joseph Schumpeterwelcomed the “gales of creative de-struction” in economic transforma-tion. Out of it, he believed, new andsometimes even better economicopportunities and economic systemsmight arise. This is the attitude wemust take about our age of disrup-tion. We may not welcome gales ofcreative disruption, but they havecome to visit us anyway. If we are ableto disenthrall ourselves from pastpolicies and programs, while main-taining our commitment to timelessprinciples, and use our collectiveimaginations to invent new systemsand policies, the 21st century mightyet emerge as one of the most en-lightened eras in human history.Disruptions must be turned to ouradvantage. We have no other choice.

11

CHANGES, CHALLENGES AND CHARGES...to opportunities

Disgregation1. THE OIL EMBARGO The 1973 energy crisiswas caused by the suspension of the flow of oilsupplies from the OPEC member nations, due tothe Yom Kippur War.2. DISSOLUTION OF THE SOVIET UNION Thisdecreed the end of the Cold War and the end ofthe bipolar world divided between democracyand communism. Since the Soviet collapse, newmafias have emerged.3. GLOBALIZATION The world has experiencedthe disintegration of national boundaries. Ineconomic terms, this phenomenon has markedthe beginning of mass migration in the south-north direction. 4. INTERNET Currently, the critical systems onwhich developing countries depend are certainlymore efficient, but also more vulnerable to thenew threat of cyberwar.5. SEPTEMBER 11 Governments’ inability toprotect their populations adequately has givenrise to a large international private securityindustry.6. CLIMATE CHANGE Because carbon is beingdeposited in the biosphere at a greater rate thancan be absorbed, we’re seeing sea levels riseand draught and famine increasing.

Growth1. EDUCATION STANDARDS According tocurrent trends, China and India will, by 2020,account for over 40 percent of young peoplewith a university diploma. However, only onequarter of young people in the European Unionwill have a degree (OCSE data).2. HEALTH Sciences makes mass populationshealthier and more capable of participating inlocal market economies.3. THE COMMUNICATION REVOLUTIONScience and technology are introducing newdevices, such as cell phones, to multitudes ofpeople, making them healthier and more capableof participating in local market economies.4. SUSTAINABLE ENERGY New sustainableenergy sources, especially wind and solarpower, are available to an increasing extent atthe community level. The main oil producingnations are witnessing the approaching era ofsolar power.


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Quantitative data/The big changes of population

Demographyand disruptionin global systems

orld population size is currently esti-mated as 7.4 billion people. It isgrowing by about one billion every 12years, and it is expected to doublefrom 4 to 8 billion between 1974 and2023 (United Nations projections). Itonly reached one billion in about 1804and took a further 119 years to reachtwo billion. Recent increases havebeen unprecedented and have raisedconcerns about their effect on the sus-tainability of social, economic and en-vironmental systems. Changes inpopulation size and structure have thepotential to disrupt global stabilityfrom the individual level, such asthe impact on intergenerational re-lations within families, to national fis-cal and to global environmental sys-tems. There are also political andstrategic implications. Even if popu-lation growth is not the prime driv-er, larger population size is likely tomagnify challenges arising from oth-er underlying causes, with varying im-pacts in different parts of the world.

Global population changeGlobal population size and structurecan change only through births anddeaths. Around 1950, life expectan-cy at birth was 47 years; by 2015 thishad increased to 71 years. At present,life expectancy is increasing at aboutthree years every decade, and this islikely to continue to increase in theforeseeable future. A woman wouldhave five children on average with thefertility rates of 1950, but that figurehad been halved by 2015. Future de-

clines are likely to be less substantial,with a value of about two children perwoman expected by 2100. Lowerfertility is associated with develop-ment, both because couples are in-creasingly able to decide on their pre-ferred number of children, and be-cause lower infant and child mortal-ity means they do not require so manybirths to reach that goal. This de-mographic transition represents aremarkable achievement and majorglobal success but have also been re-sponsible for the rapid growth inglobal population size noted above.

Regional differencesGlobal population growth has beengenerally smooth, increasing to amaximum annual rate of 0.9 percentaround 1965, before falling back to0.5 percent currently, and it is ex-pected to decline towards zero overthis century. However, these figuresmask considerable differences be-tween different parts of the World,differences that can potentially leadto major tensions. Growth rates havebeen lowest in the most developed re-gions. Initially, growth rates werehigher in all parts of the rest of theWorld, but recently growth rates inmiddle-income countries have tend-ed to converge towards those of themore developed countries (in Europe,North America, Japan and Australa-sia), with high growth being partic-ularly concentrated in the least de-veloped regions, primarily sub-Sa-haran Africa together with a small

number of other countries such asAfghanistan. In the middle of the 20thcentury, the population of Africa wasless than half the size of Europe (seegraph at page 14). By 2025, it is ex-pected to be twice that of Europe, andby 2100 there are expected to be asmany people aged 15 to 24 in Africaas the total European population. The share of the world’s population inthe more developed regions was 32percent in 1950, 17 percent in 2015and is likely to fall to 13 percent in2050, when numbers would be in ab-solute decline, as is already the case forcountries such as Japan. In contrast,the populations of the least develop-

WMICHAEL MURPHY

He is Professor of Demography at the London School of Economics and Political Science. He is a Fellow of the British Academy. He has acted as an adviser to a number of British National GovernmentDepartments, and to internationalorganisations, such as UN and OECD.

Changes in demographic size and structure have the potential to disrupt global stability on both national and international levels, with significant environmental and political repercussions

12_15_Murphy_ENG.qxp 19/08/16 11:28 Pagina 12

13


ment countries are likely to account for20 percent of the global population in2050, compared to just 8 percent in1950. The impact of a variable on theglobal system may be given by theequation I = P*A*T, where impact, I,depends on population size (P), af-fluence (A), and technology (T). Ofthese three variables, population is byfar the most predictable, for example,the 95 percent confidence interval forworld population size in 2050 is be-tween 9.3 and 10.2 billion peoplebased on United Nations probabilis-tic population projections that havebeen generally accurate at the globallevel (although less so at the national

level). Affluent nations use more re-sources for a given population sizeeven allowing for the fact that theycan deploy technologies that may mit-igate environmental and other im-pacts. For example, average CO2

emissions per person in the least de-veloped countries is only 3 percent ofthe value of a person living in anOECD country, or 4 percent of a per-son living in China in 2011 (WorldBank). This suggests that emissionswould rise at a lower rate than pop-ulation growth, which is concen-trated in countries with relativelylow emissions. However, since less af-fluent nations want to become rich-

er, additional resources will be re-quired, a need reinforced by popula-tion growth. Growing populationsplace particular pressure on resourcessuch as water for domestic use, in-dustrial expansion and for irrigationto meet additional global food needs.

Population structureIn the second half of the 20th centu-ry, the proportion of children—thoseaged under 15—fell from about 27percent to 17 percent of the total pop-ulation in the more developed re-gions, largely due to sharp drops infertility (see graph at page 15). Oth-er regions showed an initial pro-

nounced increase due to higher fer-tility and improvements in infantand child mortality in the immediatepost-war period. After that, theystarted to decline, although the yearwhen the proportion of children fallsbelow 25 percent is likely to be de-layed for 50 to 100 years. The pro-portion of the population ages 15 to64, conventionally defined as work-ing age, has been higher in more de-veloped regions, but middle-incomecountries are now catching up. A re-duction in fertility leads to a one-offincrease in the proportion of youngadults since the succeeding genera-tions will be smaller. This “demo-


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graphic dividend” increases the pro-portion of the population that iseconomically active, and that “divi-dend” helped development in Eastand South-East Asia in the 1980s. Asimilar trend is expected in the leastdeveloped countries, but the benefitswill only accrue if there are sufficientjobs available, since a large numbersof disaffected, unemployed youthmay have a negative rather than pos-itive impact on development.The proportions of older people,those aged 65 and over, are increas-ing everywhere or are very likely todo to so in future, but with a sub-stantial lag in the least developedcountries, where there is little indi-cation of population aging to date (seegraph at page 15). However, middle-income countries are starting to ageand at a faster rate than was the casefor more developed regions. Theproportions of older people, thoseaged 65 and over, are increasing inmore developed regions, although thepost-war baby boom of the 1950s and1960s led to an increase in births,which tended to offset population ag-ing in those periods. However, inmore recent decades, fertility hasdropped substantially in most parts ofthe World. In some European coun-tries such as Spain, Italy and Greece,the fertility level is below 1.4 childrenper woman, a level which if contin-ued in the absence of migrationwould mean that each generationwould be succeeded by a generationonly about two thirds its currentsize. The impact of fertility decline onpopulation aging has been reinforced

by improving longevity. The poten-tial dependency ratio, the number ofpotential workers defined as thoseaged 20-64 for each person aged 65or over, was 7.5 in the most developedcountries in 1950, but half that num-ber in 2015, and it is likely to be abouttwo by 2050. Potential support val-ues in medium-income countrieshave also fallen sharply but are aboutdouble those of the most developedcountries at each corresponding year.Aging requires additional resources tobe transferred from workers to non-workers. While the proportion ofchild dependents has fallen, resourceneeds for older people are increasingsubstantially. These resources in-clude pensions and healthcare, main-ly from the formal sector, and per-sonal care from the informal sector,especially close family members.Within the older population, the“old old,” those aged 80 and over,form an increasing fraction. Thesegroups are much heavier users ofhealth and social care services andthereby add pressure to the budgetsof these sectors. Changing populationstructures and wider social and eco-nomic trends put pressure on bothsectors. Lower fertility and changingeconomic and social systems thatrequire high geographic mobilitymean that younger relatives may nolonger live close to their parents. Tra-ditionally, women are particularlylikely to provide personal care, butmore people are childless, youngerwomen are increasingly less likely tomarry and women with formal labormarket responsibilities may be less

willing or able to provide care for par-ents-in-law. These aging trends areinexorable and highly predictable, andthe British Office for Budget Re-sponsibility identified the costs ofpopulation aging as the largest singlechallenge to the sustainability of theUnited Kingdom’s fiscal system. Pol-icy responses to population aging inhigh-income countries have beenmuted in part because they are fre-quently politically unpopular. Thesepolicy responses can include lessgenerous pension arrangements and,in particular, extension of workinglives for current workers who had ex-pected to retire from the labor forceat ages similar to their predecessors. In less developed countries, reduc-tions in mortality in the 1950s tend-ed to keep populations younger, sinceimprovements were concentratedamong infants and children. Highlyeffective public health interventionssuch as vaccinations and the treatmentof communicable diseases were rel-atively straightforward to implement.

Reduction in fertility andincrease of the olderpopulationReduction in fertility means that thenumber of young people is reduced,thereby increasing the proportion ofthe older population. Mortality im-provement is increasingly concen-trated at older ages, so the number ofolder people increasing rapidly. Thistrend reflects success in controllingboth unwanted fertility and mortal-ity. However, the sharper the declinein fertility and mortality, the more

rapid the increase in population ag-ing. As a consequence, the challengesassociated with population aging aremore substantial in medium-incomecountries where pension and health-care schemes are less developed.The implications of decisions at a par-ticular time can directly affect popu-lation trends for up to a century ormore in the future, with indirect ef-fects taking even longer. This is wellillustrated by China, a country thatexperienced a number of importantchanges, and is the largest country inthe world and thus has the greatestimpact on overall global values. Af-ter the Communist revolution in1948, the government took the viewthat people were the nation’s great-est asset and that population growthshould be encouraged by increasingfertility. Therefore, in the 1950s and1960s, the fertility rate was about sixchildren per woman, although the ef-fect on population growth was offsetto some extent by the catastrophicGreat Leap Forward of the 1960s thatled to the death of about 45 millionChinese people (estimates vary). Thegovernment reversed its pro-natalpolicy in 1980, introducing a “one-child family” policy to restrict pop-ulation growth, and fertility fell to 2.5children per woman. The Chinesegovernment was efficient in achiev-ing its objectives by mobilizing all lev-els of society, sometimes using ques-tionable methods. At the same time,life expectancy at birth had increasedby 20 years in the previous twodecades, leading to a substantial de-mographic dividend and one of the

WO

RLD

AFR

ICA

ASIA

EU

RO

PE

YEAR 1950 1975 2000 2015 2025 2050

Population in hundreds of thousands

5,267

4,775

4,393

3,714

2,378

1,349

9,725

8,142

7,349

6,127

4,061

2,525

2,478

1,504

1,186

814

416

229

707

738

738

726

677

549

1950

-210

0 As h

uman

ity g

rows


15


most rapid examples of population ag-ing ever experienced at that time.While there are currently about sev-en people aged 29 to 64 for each per-son aged 65 or over in China, com-pared with 3.5 in Europe, both are ex-pected to have a value of two by 2050. More recently, the Chinese govern-ment has recognized there are arange of problems associated with lowfertility societies. In a true one childsociety, no one has a brother, sister,aunt or uncle. With greater longevi-ty, a one–two–four system becomesestablished, with each child havingtwo parents and four living grand-parents, but no other relatives. How-ever, low fertility in China is not sim-ply a consequence of governmentpressure. It appears that Chineseparents have adapted to low fertility,which has become institutionalized,so that even though restrictions are re-laxed, they are reluctant to return toearlier patterns. In one of the most de-veloped parts of China, Shanghairegion, with a population of 30 mil-lion people, women have an averageof 0.7 children, about half the level oflow fertility parts the World such asSouthern Europe. China’s experi-ence emphasizes that demographicchanges, planned or unplanned, willhave very long-term effects. China’scurrent challenges with population ag-ing arise in part from the pro-natal-ist policies of the 1950s and 1960s(large numbers of people currently en-tering older age groups) and the1980s and 1990s (deficit of workingage people). These trends are com-pounded by the experience of mor-

tality and migration over the period.China was enormously successful inreducing mortality. Between the1950s and 2015, life expectancy atbirth increased by around 43 years,whereas its neighbor Russia increasedlife expectancy by only 11 years in thesame period. International migra-tion has not been a major factor inChinese population trends, but Chi-na experienced the largest level of mi-gration in human history. It is esti-mated that about 150 million people,mainly young adults, moved from ru-ral areas to expanding economic ar-eas around the coast starting in theearly 1980s. This left older people inrural areas, sometimes without thefamily that was their main source ofsupport, and, in any case, over timethere are increasingly fewer youngpeople to provide support.China is an extreme case, but similartrends of high fertility in the early postWorld War II period were followedby historically very low levels in thelater 20th century. These trends werealso combined with improvedlongevity and more long-distancemigration in high-income countriesas well, leading to similar but possi-bly less extreme consequences.

Strategic issuesPopulation pressure has always beena potential cause of conflict, with ex-panding populations attempting to ac-quire additional resources (some-times by appropriation of goods orland rather than by colonization).High population growth means moretroops were available, and a higherproportion of young men in a popu-lation is itself a factor associatedwith violence and conflict both in-ternally and externally. Countrieswith a perceived population deficitmay advocate pro-natalism such asFrance did following its defeat in theFranco-Prussian war, a result of fearof German expansionism followingFrance’s defeat. More recently bothTurkey and Iran have adopted pro-na-talist policies in a region of consid-erable instability. India is likely toovertake China as the World's largestcountry around 2025, near the timeChina’s population is expected tostart declining in absolute terms. In-dia already has 30 percent more menthan China aged 20 to 24, the grouplikely to be in military forces. A rapidly expanding population hasboth a greater incentive and greaterability to appropriate resources byforce, and that may in turn encour-age neighboring countries to invest inmore sophisticated arms as a re-sponse to a perceived or actual threat.Similar points hold not only for con-flict between states but also for in-ternal conflicts which form an in-creasing fraction of violence through-out the World. These challenges are

compounded when young men forma large fraction of population, espe-cially if they do not feel that theyshare improved conditions. Popula-tion pressures are particularly likelyto exacerbate tensions in areas like theMiddle East and Africa where theycan place increased demand on scarceresources such as water.

International migrationInternational migration has becomean increasing focus of the political andsocial agenda in recent years. Froma global perspective, the numbers in-volved are not large; only about 3 per-cent of the World’s population are in-ternational migrants. However, mi-gration is particularly unpopular inEuropean countries. A recent poll forthe International Organization forMigration found 7.5 percent of Eu-ropeans in favor of increased migra-tion and 52 percent in favor of re-duced migration, and this was the pe-riod before large-scale flows of mi-grants, many from Syria, Iraq andAfghanistan in 2015. Migration is alsoa source of tension in other parts ofWorld, such as South Africa, and ithas substantial potential to causedisruption. Remittances may helpto develop the local economy insending countries, but they may leadto a loss of skilled personnel. Re-mittances may also exacerbate in-equalities and be used for consump-tion rather than investment. For re-ceiving countries, while employersmay welcome sources of flexible,cheap and motivated labor, native

workers may see competition foremployment reducing their chancesand conditions. Migrants are likely tobenefit from migration, but disap-pointment is possible if they find thatthey do not quickly obtain the ex-pected benefits of movement, and/orexperience problems integrating tothe new culture.

A lack of organizationalstructureThis brief summary has not been ableto include closely related populationissues such as urbanization that willoften reinforce the potentially dis-ruptive impact of demographicchange. In addition, there are a num-ber of potentially important areas thatare very uncertain, those includinglarge-scale population displacementsdue to conflict and/or the impact ofclimate change. Attention has con-centrated on changes that are verylikely to occur. For example, every-one who reaches age 65 in the nextyear is already alive, but it is also clearthat planning for these trends hasbeen lacking. It is tempting for gov-ernments to delay unpopular meas-ures such as increasing pension ages,or for international funding to switchpriorities from areas with major long-term benefits such as family planningto areas of contemporary concernsuch as reproductive rights orHIV/AIDS. However, populationtrends will continue to have a majoreffect on global sustainability.

2075 2100

4,889

5,194

11,21

0

10,70

0

4,387

3,525

646

665

Source: ONU

45

40

35

30

25

20

30

25

20

15

10

5

15

65

60

55

TIME

LEAST DEVELOPED COUNTRIES

LESS DEVELOPED REGIONS EXCLUDINGLEAST DEVELOPED COUNTRIES

MORE DEVELOPED REGIONS

Unit

of m

easu

re: p

erce

ntag

e ov

er th

e to

tal o

f the

refe

renc

e po

pula

tion

PERCENT 0-14

PERCENT 15-64

PERCENT OVER 65

1950 2000 2050 2100

POPULATION BY AGE AND BY DEVELOPMENT OF COUNTRIES

In more developed areas, the percentage of children under the age of 15 years has dropped from 27 to 17% of the total population, for reasons related to the significant decline in fertility.

Source: data processed by the author


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Technology/Future directions from production to storage

Here comes the sun

he year was 1898 when civic plannersand engineers gathered in New YorkCity to discuss the greatest problemconfronting society: horse manure. Atthe cusp of the industrial revolution,the population was expanding, horsebuggies were the preferred mode oftransportation and horse manurewas accruing in the cities. Extrapo-lation of the transportation needs ofthe growing population yielded analarming conclusion. As Eric Morriswrites in ACCESS (no. 30 Spring2007) “The situation seemed dire”with estimates “that by 1950 everystreet in London would be buriednine feet deep in horse manure” andin New York City “horse droppingswould rise to Manhattan’s third-sto-ry windows.” Conference attendeeswere “stumped by the crisis” and ac-cordingly decided to dissolve theirten-day conference after three daysbecause “the urban planning confer-ence declared its work fruitless.” Idoubt most readers have ever heard

about the “horse manure crisis” be-cause science and engineering was de-veloping a number of technological“disruptions” that were to change thecourse of our society. By 1846, theCanadian geologist Abraham Gesnerhad discovered a distillation processthat refined kerosene from coal, andby 1856 the first oil refineries hadbeen constructed. At the same time,numerous engineers were investi-gating engines that could be fueled byhydrocarbons, and in 1885 Karl Benzdeveloped the Benz Patent Motor-wagen in Mannheim Germany, a ve-hicle acknowledged to be the firstpractical automobile powered by aninternal combustion engine. Thus by1898, when the civic planners and en-gineers from around the globe met inNew York City, they didn’t realizethat science and engineering had al-ready been set on a path of “disrup-tion” a decade earlier, disruptionthat would avoid the impending so-cietal crisis of horse manure.

The role of science and technology in our futureThe parallels between the 1898horse manure crisis and today’s dis-cussion of the energy crisis are un-canny. Today, a growing world pop-ulation, especially in the developingworld, is fueling an accelerated de-mand for energy. The global popu-lation is expected to increase fromthe current 7.3 billion to 9.7 billionby 2050, and in addition to these 2.5billion new inhabitants of the planet,3 billion people in the emergingworld seek a rising standard of living.Because energy consumption scalesdirectly with a country’s gross do-mestic product, their energy use willonly increase dramatically as theymodernize. Extrapolating the energydemand attendant to this growth inpopulation and the increase in theaspirations and needs of billions ofpeople in emerging economies, therate of worldwide energy consump-tion is predicted to double by mid-

TDANIEL NOCERA

He is the Patterson RockwoodProfessor of Energy at Harvard. He created the artificial and bionicleaves, which together perform an artificial photosynthesis that is tentimes more efficient than naturalphotosynthesis. His company SunCatalytix is now commercializing hisenergy storage technologies.

Scientists have launched a revolutionary low-carbon process based on solar power. Emerging economies may lead the way in creating the infrastructure to use it effectively

16_19_Nocera2_ENG.qxp 19/08/16 11:28 Pagina 16

century and triple by the end of thecentury. If energy need is met withour current energy infrastructure,the atmospheric carbon dioxide con-centration will likely double and eventriple within the 21st century. Notunlike the 1898 horse manure con-ference, considerable anxiety sur-rounds a decision to maintain an en-ergy path based on carbon, a paththat will result in burying ourselves,this time not in horse manure, but inCO2. While the consequences of thisincrease cannot be predicted pre-cisely, what is certain is that we aredisturbing the planet on a scale neverexperienced before. The situationseems dire. But it is not widely real-ized that once again, science and en-gineering have initiated a course of“disruption” to mitigate the im-pending societal crisis due to carbon. The scientific research communityhas set its sight on a solar-based re-newable energy supply for the glob-al future. The last decade of solar en-

ergy research and technology has de-livered astounding discoveries thatsets the stage for a paradigm shift inour global energy infrastructure.Shifts have occurred along two lines:generation and storage. With re-gard to the former, new photovolta-ic materials and processing tech-niques have led to unprecedented ef-ficiencies for the generation of elec-tricity from sunlight. Who couldhave imagined less than a decade agothat a solar photovoltaic materialoperating at efficiencies in excess of20 percent could be prepared bysimple precipitation of a semicon-ducting material from solution? Thisis indeed the case for perovskite so-lar cells that combine organic and in-organic compositions. Their highefficiency is stunning in view of howcheap they are to produce and howsimple they are to manufacture, al-though they are not without chal-lenges for implementation (the high-est efficiency materials are moisture

sensitive and rely on lead, a heavymetal). An especially impactful ad-vance in solar generation will beroll-to-roll manufacturing on flexiblesubstrates. Even here significant ad-vances have been made in recentyears with amorphous silicon (a-Si)and with the potential offered by ma-terials that combine elements fromthe periodic table in the Groups of IIIand V (commonly called “three-five”photovoltaics). Nonetheless, it is fairto say that none of these advances areessential, as none of these scientificadvances have been as disruptive asthe sea change in manufacturing.Owing to a significant Chinese com-mitment to the production of crys-talline silicon (c-Si), prices are in themid-dollar per watt range for a solarmodule. Accordingly, there has notbeen much need for discovery insolar generation, as c-Si (which hasalso had reported efficiencies of 25.6percent) is already cheap enough forthe widespread implementation of so-lar power. But that has not yet hap-pened, and the question is why. Thesimple answer, in view of the Chinesecommitment to c-Si production, isthat it is not a generation issue butrather one of storage. Once solar en-ergy is stored, it becomes a usefulcommodity. Accordingly, energy stor-age is the single most critical chal-lenge to the widespread implemen-tation of renewable energy.

The real challenge: energy storageRenewable energy storage assumesdifferent targets depending onwhether it is for transportation, and,if not, whether energy distribution iscentralized over a grid as is the casefor mature markets, or decentralized,as is more possible in emerging mar-kets. Energy storage in the trans-

portation sector has been driven bylithium-ion (Li-ion) batteries, thoughthere has been some innovation inbattery materials with the Li-ionpaired with oxides of cobalt, man-ganese or nickel (and combinations ofthese metals) or as a titanate or ironphosphate. The disruption in Li-ionhas come in a commitment to largescale manufacturing, which is havinga major impact in driving the explo-sive growth of the electric vehicle mar-ket. Often the promise of Li-ionbatteries in the electric vehicle (EV)sector is applied to large-scale sta-tionary (grid) applications, which re-quire much lower price points thanthose of the transportation sector.“Learning curve” extrapolations ap-plied to Li-ion often make it appear

17

ENERGY AND ARTThe installation “Greeting to the sun” by Nikola Basic in Zadar, Dalmatia (Croatia). 22

had enough capacity at end-2015 to meet more

than 1% of their electricity demand

of solar energy added in 2015, at global level

(REN21)

227of global Solar PV

energy capacity in 2015 (REN21)

3.8estimated direct and indirect jobs

in solar energy sector (PV and Heating/Cooking)

million

GW

countries

GW

Source: IRENA

50


to be a viable option for large-scalestorage technology. However, such ex-trapolations are likely to be overesti-mates as there will be materials lim-itations (not just in lithium but theother metal oxides as well) at largescale. A better situated technology forgrid storage are redox flow batteries(RFBs), which effectively arerechargeable “fuel cells” in which adissolved electroactive species flowsthrough an electrochemical cell thatreversibly converts chemical ener-gy directly to electricity. The RFB isa powerful technology option becauseenergy density and power density areseparated, and hence a versatile stor-age technology for the grid operator.Price points for redox flow batteriesare well below Li-ion batteries, andsome RFBs have been acquired bylarge engineering companies for com-mercial scale-up to megawatt (MW)storage capacities. At the same time,RFBs are also a viable option for en-ergy storage on microgrids in emerg-

ing energy markets. It is important torealize that RFBs have much lowercurrent and energy densities thanLi-ion—hence RFBs are confinedto large-scale stationary energy stor-age whereas Li-ion are ideal for thetransportation sector. Batteries are notwell suited for the terrawatts-equiv-alent of energy storage needed bymid-century because of their limitedenergy densities. In a battery, the elec-trons must reside on atoms, and thusthe stored energy is limited by thephysical density of materials. Withlithium as one of the lightest elementsin the periodic table, and hence withone of the lowest physical densities,stored energy in the form of electronswithin batteries has already ap-proached a ceiling. Society has in-trinsically understood this limita-tion. Although batteries were knownsince the turn of the 18th century, hy-drocarbon-based fuels were immedi-ately adopted in the 20th century topower industrialization. The energy

density of a liquid fuel is 50-100times greater than that of a battery,and consequently the future of ener-gy storage will not change as the largescale storage of energy storage willnecessarily be in the form of chemi-cal fuels. Discovery during the lastdecade has set off on a path of dis-ruption to convert a fossil fuels in-dustry to a solar fuels industry.

The sun: A source of carbon-neutral energyThe simplest process to store solarenergy in the form of a carbon-neu-tral fuel is to use the sun to split wa-ter into hydrogen and oxygen. Re-combining the hydrogen and oxygenconverts the stored solar energy backin a useful form (electricity throughfuel cells) when and where it is need-ed. In this renewable fuels cycle, nocarbon dioxide is produced and thereis no loss of water since it is the prod-uct of hydrogen and oxygen recom-bination. In less than a decade, re-

markable advances have been made inthis area of renewable energy. Cata-lysts have been created from earthabundant elements to perform thewater splitting reaction under simplyengineered (and thus inexpensive)conditions. When integrated direct-ly with silicon (i.e., the artificial leaf)or indirectly by wiring to a siliconphotovoltaic, solar-to hydrogen effi-ciencies of greater than 10 percenthave been achieved, with 15 percentefficiencies on the horizon. Thechallenge of using hydrogen as afuel is the lack of a widespread infra-structure for its use. In this regard, therise in popularity of natural gas maywell be a driver for a hydrogen in-frastructure, as hydrogen can be gen-erated by combining natural gas withwater in a process called reforming.As natural gas becomes more preva-lent, the price of a gas gallon equiv-alent of hydrogen is approaching$1.50 USD, and point-of-use hy-drogen becomes feasible with on-site

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AN ENERGY TREEThe process for storing

and exploiting solar energy in the form of zero-emission fuel

requires the recombination of hydrogen and oxygen

to create electricity throughbatteries and fuel

(Bristol’s Energy Tree in the picture).


reforming as yet to be achieved in acost-effective way, thus alleviating theneed for a hydrogen distribution in-frastructure. It is to be noted that, inthe reforming process of natural gaswith water, carbon dioxide is pro-duced in addition to hydrogen. Thus,it is a short jump to solar-driven wa-ter splitting as the carbon neutral ver-sion of methane reforming to producehydrogen.Natural photosynthesis confrontsthe same challenges society does instoring hydrogen. Photosynthesisalso uses the sun to split water to hy-drogen and oxygen. To circumventthe hydrogen storage challenge, itcombines the hydrogen from watersplitting with carbon dioxide to pro-duce carbohydrate or some otherform of biomass. On an electronequivalency basis, the production ofthe carbohydrate stores only lessthan 1 percent more energy than wa-ter splitting. Thus, the solar energystorage in photosynthesis is achieved

by water splitting; the carbohydrateis nature’s method of storing the hy-drogen released from the water split-ting reaction. Even here, advances inscience have been astounding. Usingthe tool of synthetic biology, organ-isms have been engineered to breathein the hydrogen from water splittingand then combine it with carbon diox-ide to produce biomass in excess of10% solar-to-fuels efficiencies. Re-alizing that the best growing cropsachieves a biomass efficiency of 1 per-cent reveals the extraordinary ac-complishment of science in the lastdecade. Even more striking, the or-ganisms have been further engi-neered to bypass biomass and directlysynthesize liquid fuels at 5 to 7 per-cent efficiency. Thus, science hasshown that we, as a society, can farsurpass the solar energy process of na-ture that drives our planet.

We need a change in our energy modelA ledger of science and technologyadvances in just the last decadedemonstrates that we can generate so-lar energy in a cost effective mannerwith silicon. Batteries can store re-newable energy and meet our trans-portation and grid-based electricityneeds. The sun can be stored in theform of the chemical fuels of hydro-gen, biomass and liquid fuels, and atefficiencies that put society on agenuine path forward to a restruc-turing of a fuels industry based on fos-sil-fuels to one based on solar ener-gy. The disruption delivered by sci-ence and technology for historicchange to the global energy infra-structure now exists. So why isn’t itbeing adopted? In short, the lastcentury has seen a massive investmentin an energy infrastructure that hasbeen paid off. Thus, there is no dis-covery that can supplant this energyinfrastructure in mature markets.This is where emerging economiesoffer hope for leading global societyto a new energy infrastructure. In theabsence of massive investment, itwill be easier for emerging economiesto leap frog the established energy in-frastructure and adopt new renewableenergy innovations and technolo-gies. In either case, in emerging ormature energy markets, there must bea societal imperative for changing ourenergy infrastructure that extendsbeyond near term costs. Unfortu-nately, the price of burying ourselvesin carbon dioxide is not in society’scurrent equation for change. Whenit does become part of the equation,science and technology will be readywith the enabling and disruptive par-adigm shift to deliver the Sun to thepeople of our planet as their direct en-ergy supply.

19

LI-IONThis rechargeable battery known as a lithium ion battery (sometimesabbreviated to Li-Ion) is commonly used in consumer electronics. It is currently oneof the most common types of batteries for laptops and cell phones, as well as for some electric cars, with one of the best power/weight ratios, no memory effect and a slow loss of charge when not in use.

PEROVSKITEIts name was coined by Gustav Rose in1840 in honor of the Minister of the RussianImperial Court, Lev Perovski, a greatcollector of minerals. It refers to theopaque, cube-shaped crystals found byRose in 1839 in the Ural Mountains. Thematerial has a particular crystallinestructure, composed of a double oxide ofCa and Ti (CaTiO3). What stands out is itscharacteristic feature of being an excellentconductor, which makes it usable in newtechnologies.

AMORPHOUS SILICONKnown by its abbreviated name as “a-Si”,this is the non-crystalline, allotropic form of silicon. Amorphous silicon photovoltaictechnology with the lowest environmentalimpact is currently in the production phase.The specific production process, in whichlimited amounts of silicon are used, meansthat in approximately 2 years, each unit will have produced an amount of electricityequal to that used to produce it.

REDOX FLOW BATTERIESThis is one of the most promisingtechnologies for network storage. They are rechargeable “fuel cells” in whichan electroactive solution passes through an electrochemical cell which reversiblyconverts the chemical energy intoelectricity. RFBs provide a versatile storagetechnology for network operators.

REFORMING OF NATURAL GASThis is a process by which hydrogen can be generated by combining natural gas with water. It is a small step towardsseparating water by resorting to the sun, as an emission-free version of the reformingprocess with methane used to producehydrogen.

The latest frontier


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Brexit/The repercussions of Great Britain’s “divorce”

Short circuits across the English ChannelThe effect on the energy sector is still coming into focus. The fate of the U.K.’s participation in the Energy Union project and the liberalization of the E.U. energy market will be crucial

20_23_Betts_ENG.qxp 19/08/16 11:29 Pagina 20

he dust still needs to settle—andthis could take many more months,perhaps years—before it will be pos-sible to assess the full impact ofBritain’s decision to leave the Euro-pean Union on the U.K. economyand its all important energy sector.One thing is certain: The future willdepend on the skill of the new Con-servative government led by PrimeMinister Theresa May to negotiate anacceptable arrangement with the restof the European Union after a shortbut particularly bitter leadership con-test that has left deep scars inside theparty. The ongoing turmoil in the op-position Labor Party also risks un-settling the situation further, as doesthe attitude of Scotland, which wantsto remain in the E.U. and may seeka new referendum to split from theUK. Will many of the “Leave” vot-ers start having second thoughts

should the U.K. economy come un-der increasing pressure with the pos-sibility of falling into recession? So far,the stock market and the economyhave resisted quite well although thepound has inevitably suffered a sharpdecline against the dollar and theEuro. Mrs. May does not seem in anygreat hurry to invoke Article 50 of theLisbon treaty that would trigger thetwo year process for Britain’s exit outof the E.U. As Home Secretary (theequivalent of Interior Minister inE.U. countries), she had backed for-mer prime Minister David Cameron’sunsuccessful campaign to remain inthe EU. But she has always been tepidabout the EU. She has also appoint-ed in her government a number ofpro-Brexit influential Conservativemembers, not least one of the lead-ers of the Brexit campaign, formerLondon Mayor Boris Johnson, who

has become Foreign Secretary. Shehas underlined her commitment toBrexit, and some of her cabinet mem-bers suggested the government wasplanning to trigger Article 50 early inthe New Year after extensive consul-tations with European governments.Mrs. May has already had quite pos-itive talks with Germany’s AngelaMerkel and somewhat frosty oneswith France’s Francois Holland. Mr.Johnson has so far shown some un-expected diplomatic skills and avoid-ed the polemics for which he is wellknown. After all, he is only toopleased to have been given such a bigrole in the new government after be-ing betrayed by his closest Brexit ally,former Justice Minister MichaelGove, during the leadership contestthat followed Mr. Cameron’s resig-nation. He now has a strong platformfrom which to launch his own bid tobecome Prime Minister in the future.

An internal party showdownThe tensions and divisions within theConservative Party have shown inbroad daylight how the Brexit refer-endum was, at the end of the day, aninternal party showdown. The sadthing is that such a crucial issue as Eu-rope and the U.K.’s membership ofthe E.U. boiled down to a dirty in-ternal political squabble in the Con-servative Party as well as in theLabour Party, which was supposed tohave backed Mr. Cameron’s bid to re-main in the E.U. But the controver-sial Labour leader Jeremy Corbynmade it clear he was extremely re-luctant to back Mr. Cameron and didlittle to fire the Labour Party base tovote to remain. Indeed, the leadershipcontests in both the governing Con-servative and the opposition LabourParty have been widely compared toa political soap opera that has themakings of a big budget sequel to theblockbuster “House of Cards” tele-vision series. In fact, there are two —the first set in London and the suc-cessful American adaptation in Wash-ington D.C. These are all grippingstories of personal political ambitionand betrayal that have been played outfor real in the fallout of the unex-pected Brexit vote. Although There-sa May ultimately won the Conser-vative leadership contest with anoverwhelming majority and is gen-erally considered as “a safe pair ofhands” with considerable politicalexperience, she will still need to nav-igate difficult waters both within herown party and country and with Eu-rope. The Brexit hardliners are frus-trated that the new Prime Minister isnot an out and out pro-Brexit sup-porter, and those left out of her cab-inet will watch and wait for her to tripup. As for the Labor Party, the situ-ation is a complete shambles, and thatis no exaggeration. The vast major-

21


PAUL BETTS

He has been with the Financial Times for 36 years, of which 28 were spent as the paper’s foreign correspondent in Rome, Paris, New York and Milan. He currently works as an internationaleconomics columnist and lives in Munich.

THE NEW LADYOn July 13, Queen Elizabeth IIof England welcomed TheresaMay at Buckingham Palace toformalize her appointment asPrime Minister.

T


Energy. What changes now

?

More difficult access to loansfrom the European Investment Bank and the EU Fund

Research at riskdue to difficulties in funding research programs and collaboration in Pan-European projects

Investment riskon the part of companies, which could

postpone or cancel projectThe English Channel

agreements on the freedom of movement

under threat

Labor costsincrease in costs for European oil companies

that employ British workers

Decline in the supply of labor

bureaucratic limitations would hinder

the oil and gas industry’s access

to skilled workers

Nuclear advancement

re-launch of projects such as controversial

Hinkley Point C nuclear power station

The “green” challenge

collapse of the constraint of producing 30%

of electricity from renewable sources

£20 billion per year

over the next five years re

presents the increase

in investment infrastructure

£500 million in 2030

the demand for higher returns b

y investors

Collapse

in energ

y sec

urity

if acce

ss to

the do

mestic e

nergy

market

is lost

Increa

se in

domes

tic en

ergy b

ills

ity of Labor Members of Parliamentas well as the shadow cabinet want thecurrent party leader Jeremy Corbynto resign after his feeble support tostay in the E.U. in the recent refer-endum. He has lost a vote of confi-dence from his own parliamentarymembers, but under the arcane rulesof the Labour Party, he has resistedresigning and suggested he would sol-dier on. All this goes to show howdeeply divided are the Labour Partyand the Conservative Party, for all thecurrent efforts to rebuild party uni-ty, England and the United Kingdomas a whole. After the initial knee-jerkreaction following the largely unex-pected victory of the “Leave” camp,the financial markets have recov-ered some composure and the Bankof England has so far resisted makingan immediate interest rate cut. Themood, however, remains nervousand volatile. This is all principally dueto the uncertainty created by theU.K.’s decision to leave the E.U. thatin turn risks spreading more eco-nomic instability, and undoubtedlyweakens the U.K.’s negotiating posi-tion and, at least in the short term,discourages investment. In short, thereferendum and its outcome have in-troduced a severe source of new tur-bulence and confusion to both theU.K. and E.U. economies, not leastin the energy sector.

An unclear effect on theenergy sectorThe precise impact on the energy sec-tor is unclear at this stage. However,as the legal firm Herbert Smith Free-hills put it in a recent note: “One cer-tainty is that in the immediate futurewe are very unlikely to see any majorchanges to the current systems andregulations. The exit will take a sig-nificant amount of time to negotiateand plan, and the E.U. and the U.K.will have to decide how access to eachother’s energy markets would con-tinue, if at all.” The key issue iswhether the U.K. will be able to re-tain its access in the single marketwithout having to comply fully withthe obligation of freedom of move-ment for E.U. citizens. Migration wasfrom the very start one of the main is-sues of the referendum, and whatev-er government is formed in Londonthis autumn, migration will remain atthe top of the agenda of negotiationswith the E.U. That does not mean, asMrs. May has suggested, that the newgovernment will invoke Article 50 ofthe Lisbon Treaty straight away. Allthe signs are that the new Prime Min-ister will try to delay this until the endof the year to test the negotiating cli-mate and assess the economic envi-ronment. At present the other E.U.countries are suggesting that theU.K. would be given no favors - “nocherry picking” Mrs Merkel told

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Mrs May - and if it wants continuedaccess to the single market, it will haveto comply with the quid pro quo offreedom of movement, capital, goodsand services. This would apply in aNorwegian style solution with theU.K. remaining part of the EuropeanEconomic Area. However, negotiat-ing positions can evolve, especially asmany other E.U. countries have sim-ilar worries and domestic pressuresover controlling migrant flows thatcould lead to a broad reassessment ofE.U. migration policies. These mighthelp open the way towards a com-promise with the U.K. which wouldbe able to adopt what some com-mentators are already calling a “softBrexite” or “Brexite lite” option—theU.K. would be allowed a certaincontrol on migration through, say, aquota system, to allow its continuedparticipation in the single market.These are very early days, but ideasare already being floated about. Theyhave important implications for theU.K. and E.U. energy sector becausethey will ultimately determine theU.K.’s continued participation (or not)in the Energy Union project and itsparticipation in the liberalization ofthe European energy market. Britainhas a number of electricity and gas in-ter connectors with continental Eu-rope and is currently developingmore. This will inevitably require co-operation with the E.U. internal en-ergy market in any Brexit scenario.The U.K. is also likely to continueimplementing and backing many ofthe E.U.’s Third Energy Package giv-en the country’s commitment andtrack record in energy liberalization.

Impacts on utility bills, greenenergy and nuclear projectsThe U.K. National Grid has also al-ready warned that domestic energybills would rise and energy securitywould fall if the U.K. does not retainaccess to the Internal Energy Market(IEM) when it negotiates Brexit. Ina statement after the referendumvote, the company said: “It is vital theU.K. retains access to the IEM whichprovides stability for energy compa-nies and helps keep household billsdown. U.K. energy security dependson gas and electricity from the IEMand it is essential therefore that wetake no risks with that. The issue ofenergy needs to be treated with thehighest importance by the govern-ment as the negotiations on Britain’sexit begin.”According to an analysis from theVivid Economics research group,the cost of reduced collaborationwith Europe would be significant.“The potential impact from the IEMcould be up to £500m a year by theearly 2020s, “the group’s analystssaid, adding that further costs wouldcome from investors demanding

higher returns as the risks of newprojects rise. With dirty aging pow-er plants closing down, the U.K.now needs to invest about £20bn ayear over the next five years, says theNational Infrastructure Commis-sion. This amount would make upabout 60 percent of all planned in-frastructure spending in the UK.”Indeed, Brexit is likely to make theU.K.’s challenge to build a clean, se-cure, affordable energy system evenharder. In a Brexit scenario, Britainwould no longer be bound by theE.U. requirement to produce about30 percent of its electricity from re-newable sources. It would also givethe U.K. greater freedom to pursuenuclear projects such as the contro-versial £18bn Hinkley Point C nu-clear power station led by the Frenchstate controlled utility EDF. After thereferendum, French political leadersconfirmed they continued to supportthis project that is important forboth countries. The plant wouldprovide low carbon electricity tomeet 7 percent of the U.K.’s totalneeds from 2025 onwards while itwould help support France’s nuclearindustry that has faced increasinglydifficult times of late and is in themidst of significant restructuring.But Brexit is also likely to make itharder for the U.K. energy sector tosecure loans from the European In-vestment Bank and the EuropeanFund for Strategic Investment tohelp fund much needed new energyinfrastructure investments. The sci-entific community is also concernedabout the implications of Britainleaving the E.U. on funding researchprograms and U.K. collaboration inpan-European projects. Professor

Steve Cowley, the head of the U.K.Atomic Energy Authority, told theBBC that researchers were afraidthat annual European Commissionfunding would be withdrawn. Thisalso risks affecting the oil and gas in-dustry that has benefitted from work-ing closely with research institutionsin both the U.K. and the EU. Thiscooperation has allowed companies inthe North Sea to maintain theircompetitiveness over the years andbecome leaders in the field of new off-shore technologies. Compared tothe power utilities, the oil and gas in-dustry appears to be in a better posi-tion to weather the Brexit storm, ac-cording to industry analysts and ex-ecutives. Nonetheless , the questionof a possible second Scottish inde-pendence referendum is creatingmore uncertainty for the oil sectorand could induce companies to delayor cancel projects until the full out-come of Britain’s exit negotiations areknown.But one big worry of the multina-tional oil and gas companies is thepossible loss of cross-Channel free-dom of movement arrangements be-tween the E.U. and the UK. ManyU.K. workers employed by Europeanoil companies work in E.U. countriesand vice-versa. Non E.U. status forthese workers could increase bu-reaucracy and hence costs to em-ployers. Shell has underlined this is-sue, warning that trade barriers andmovement restrictions would nega-tively impact its U.K. operations.Such restrictions would also un-doubtedly affect the U.K.’s ability toattract highly skilled oil and gasworkers to its shores. This would rep-resent a further blow to the mature

U.K. North Sea industry that has al-ready lost 8000 jobs since 2014 as aresult of the oil price slump and has,as a result, seen a sharp rise in labortensions and strike action.

The future, looking also at the U.S.Mrs. May and her new governmenthave so far adopted a cautious, con-structive and pragmatic stance to itscommitment to take Britain out of theE.U. The question is whether the newgovernment will be able to maintainthis approach in the face of the in-evitable political and economic tur-bulence ahead. Mrs. May will hopeher opposite numbers in the E.U. alsoadopt a constructive and pragmaticapproach to exit negotiations whenthey eventually start after the U.K. in-vokes Article 50 of the Lisbon Treaty.At the end of the day, it is in both theU.K.’s and the E.U.’s long term in-terest to come to an acceptablearrangement, however long thatmight take. The outcome of theforthcoming U.S. Presidential elec-tion could make the need for such anarrangement all the greater.

23



CHANNEL AT RISKOne of the biggest concerns ofoil and gas multinationals is thepossible loss of the relevantagreements to freedom ofmovement through the Channelbetween the E.U. and the U.K.(Pictured cargo business in theChannel).


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The ups and downs of theshale revolution, the rise ofcheap natural gas, the sharpdecline in coal use, the riseof more restrictiveenvironmental regulations:America has witnesseddramatic changes over thelast ten years in the realm ofenergy, and it could see yetmore significanttransformations afterNovember’s presidentialelections. Analysis, forecasts and comments from •David Koranyi

and Madison Freeman•Molly Moore•Demostenes Floros

AMERICANPERSPECTIVE

the

24_27_Korany_ENG.qxp 19/08/16 11:30 Pagina 24

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Energy/Radical changes and future scenarios

The New AmericanRevolutionIn the U.S., coal and oil have given way to natural gas, wind and solar energy. Further transformation awaits, though the pace of change will depend on who prevails in the 2016 presidential election

uring the past decade, the energy sec-tor of the United States changed dra-matically. The period saw a funda-mental altering of energy consump-tion and production and export andimport patterns, as well as revolu-tionary developments in energy tech-nologies. This transformation of en-ergy markets and technologies islikely to continue and accelerate in thecoming decade, though the pacewith which it will happen is uncertain.Policy changes that might emanatefrom the 2016 presidential and con-gressional elections represent themost important unknown. This arti-cle provides a brief and incompleteoverview of changes during the lastdecade and looks ahead to the next.

Shifts in fossil fuelconsumptionFossil fuel consumption and pro-duction patterns have changed quitedramatically since 2005. Coal and oilhave declined in favor of natural gas.Coal, once the backbone of America’senergy mix, has witnessed a massivedecline in its role in electricity gen-eration from its peak in the late1980s, a decline that accelerated be-ginning in the mid-2000s. Generationfrom coal sources made up only 33percent of electricity production in2015, down from 50.5 percent in2005. This change was especiallypushed forward by the availability ofcheap natural gas, more affordable re-newable power, and by stricter envi-ronmental regulations. Coal pro-duction has declined to its lowestpoint in 35 years and is forecast to de-cline by a further 10 percent this yearand 12 percent in 2017. Coal con-sumption has declined even more dra-

matically, falling 13 percent in 2015,which the U.S. Energy InformationAdministration (EIA) called “thehighest annual percentage decrease ofany fossil fuel in the past 50 years.”Part of this decline in domestic con-sumption has been spurred by the in-crease in exports of coal, which havegrown from approximately 60 millionshort tons annually in 2007 to 125million in 2012. This has contributedto the significant reduction in CO2

emissions in the United States, whichhave fallen from 19.6 metric tons percapita in 2003 to 16.6 in 2013—stilltwice the European Union average.2016 is predicted to be the yearwhen natural gas replaces coal as theprimary fuel for electricity generation.Unconventional gas extraction hasskyrocketed in the last ten years,from 2 trillion cubic feet in 2005 to12.3 trillion cubic feet in 2014. Tech-nological advances in hydraulic frac-turing and horizontal drilling andmassive gains in production efficien-cy helped make gas more competitivevis-à-vis coal. These production in-creases are projected to continuethrough 2040, with swelling shale gasproduction constituting most of thisgrowth. The projected slower growthin demand provides an opportunityfor exports of natural gas to expand.Pipelines to Mexico already trans-mitted 2.9 billion cubic feet per daylast year, and this may rise to 4.4 bil-lion by 2020. The development of liq-uefied natural gas (LNG) terminalsin the Gulf of Mexico has opened newmarkets across the globe: in Asia, theMiddle East, and Latin America,where there is significant natural gasdemand growth potential, and inthe European Union, which sees

DDavid Koranyi is the director of theAtlantic Council’s Eurasian EnergyFutures Initiative. He served asundersecretary of state and chiefforeign policy and national securityadvisor to the Prime Minister of theRepublic of Hungary, Gordon Bajnai.

Madison Freeman is a researchassistant with the Eurasian EnergyFutures Initiative. She is studyingInternational Studies and Economics at the American University. Her specificinterests include Kurdish issues,Turkish politics, and the intersection ofenergy security with political stability.

DAVID KORANYI AND MADISON FREEMAN


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U.S. LNG as a potential key to its en-ergy security. Cheniere’s Sabine PassLNG terminal has been in com-mercial operation since early 2016,and four other LNG terminals arecurrently under construction in Mary-land, Texas and Louisiana. The U.S.is projected to turn into a net natu-ral gas exporter in 2017 or 2018, andLNG exports are expected to over-take pipeline and truck exports toMexico by 2019. Oil has also seen sig-nificant growth. The shale revolutionhas spurred a surge in production:from 2010 to 2015, unconventionaloil production rose sharply, with 52percent of U.S. crude oil produc-tion—4.9 million barrels a day (b/d)—coming from shale (tight) oil in 2015.Drilling productivity and enhanced oilrecovery (EOR) techniques have im-proved dramatically (the average costper well had fallen by 25 to 30 per-cent between 2012 and 2015), bring-ing down breakeven prices for shalewells across the major plays (Bakken,Eagle Ford, Niobrara, and Permian).It also pushed the U.S. crude oil im-port ratio to its lowest level (from 9.3million b/d during the first half of2010 to 7.3 million b/d during thefirst half of 2015). Looking ahead,there is considerable uncertaintyabout the future of U.S. shale oil pro-duction, as its sensitivity to externalprice shocks leaves production levelsvolatile. Forecasts put crude oil pro-duction from U.S. shale formationsbetween mid-2016 and the end of2018 at 2.4 million barrels higher peryear if the market price were $80 perbarrel than if it were $30 per barrel.Though sustained low oil prices werepredicted to devastate the industry, ithas shown unexpected resilience sofar, despite mounting financial pres-sure on many producers. The liftingof the 40-year ban on crude oil ex-ports in December 2015 will also havea marginally positive effect on pro-duction. Since the ban was lifted, ex-ports to countries other than Cana-da (which had already been excludedfrom the ban) increased seven-fold,though exports did not rise as quick-ly as experts initially predicted, large-ly as a result of the global oil glut.

Rapid rise of wind and solarFossil fuels remain the predominantsource of energy in the United States,representing 82 percent of primaryenergy consumption. In 2015, windand solar shares of total electricitygeneration capacity amounted to 6.7percent and 2.0 percent respectively,while shares of actual generation in2015 were only 4.7 percent and 0.9percent, reflecting the intermittentnature of these resources. However,the share of energy generated by re-newables is growing rapidly across theUnited States. Between 2009 and

2015, wind capacity grew by 100 per-cent and solar capacity by 900 per-cent. Nationally, wind (41 percent)and solar (26 percent) made up themajority of electric generation ca-pacity additions in 2015. A recordamount of distributed solar photo-voltaic (PV) capacity was added onrooftops throughout the country in2015. In Texas, wind has taken a se-rious place in the energy mix, nowproviding 11.7 percent of cumulativeenergy generation. On December 20,2015, wind energy provided 40 per-cent of Texas’s electricity for 17 hoursstraight. Oklahoma, one of the topnatural gas-producing states, rankedfourth in net electricity generationfrom wind in 2015, which providedalmost 17 percent of the state’s netgeneration. Kansas, another major gasproduction hub, saw 21 percent of itsnet electricity generation comingfrom wind. California alone pro-duces half of the nation’s solar elec-tricity generating capacity, with 9,976ts (MW) of total solar capacity, morethan the following 12 states com-bined. It was the first state to gener-ate at least 5 percent of its electrici-ty from utility-scale solar plants,which makes up more than two-thirds of its solar capacity. In 2015, re-newable energy made up almost allnew electric generation capacity in thestate, with wind accounting for 41percent and solar accounting for 26percent of total additions. With theincreasing competitiveness of bothwind and solar, coupled with the ex-tension of tax credits in the Decem-ber 2015 congressional budget, thisgrowth trend is likely to continue wellinto the next decade. The potential iscertainly there: the National Re-newable Energy Laboratory (NREL)estimated that the economic poten-tial of renewable energy ranges fromone third to over ten times the total2013 U.S. generation from all sources.However, in the longer run, majorquestions remain regarding priceand cost levels for competing fossil fu-els, particularly gas in the absence ofcarbon pricing, the development of

the grid so that it can accommodategrowth in renewables, the necessarypolitical and regulatory framework onnational and state levels, and ways tospread renewables beyond the elec-tricity sector.

Disruptive technologicalchangesThe United States has been at thecutting edge of energy innovationsince the birth of the country, and thespirit of Benjamin Franklin andThomas Edison lives on today in thecompetitiveness of the National Labsand Silicon Valley. Public and privateactors in the United States play a lead-ing role in technology changes in bat-tery science, information technology,and nuclear energy technology thatmay have a disruptive effect on bothenergy production and consump-tion patterns, not only domesticallybut on a global scale. By far the mostconsequential development is thebattery technology evolution spear-headed by the Department of Ener-gy’s National Labs, change increas-ingly fueled by the private sector. Af-fordable storage is key to the com-petitiveness and sustainability of ahigher share of intermittent renew-ables in energy production. Recentimprovements in battery technologyhave brought down costs of storageand are projected to continue doingso. Grid-scale energy storage costs aredeclining rapidly: by 2020, the cost oflithium-ion battery systems for thegrid may drop by 50 percent, fromabout $500 per kilowatt-hour (kWh)today to less than $230. The techcompany Tesla has built its ambitiousbusiness plan on the production oflow-cost batteries. Its Gigafactory,which is being built in Nevada, willbe able to produce enough batterypacks for 1.5 million electric vehiclesannually, and it is projected to low-er the costs of its batteries by 30 per-cent, a game-changer for electricvehicle and home renewable energyinstallation competitiveness if suc-cessful. Information technology is alsoshaping major changes in companies’

approaches to energy hardware andsupply and demand management.Utilities have been exploring ways touse big data analytics to approach animprovement of energy services, in-cluding projections of solar produc-tion and forecasts of demand. Intrying to improve efficiencies alongthe value chain, companies are con-sidering ways to capitalize on the con-cept of the internet of things. Infor-mation technology in energy hard-ware can help facilitate major changesin the approach to shifts in demandand efficiency. By adapting energy useto maximize efficiency through“smart” systems, energy companiescan change consumption patternsamong consumers. Tech giants haveplayed a pioneering role in this space:Google’s inroads to the energy sectorwith its purchase of Nest is a primeexample of spurring growth of themarket for home systems that canadapt to typical patterns of con-sumption and reduce energy use. Innuclear energy, small modular reac-tors (SMRs) may offer a possiblenew future for otherwise strugglingnuclear power generation in theUnited States. SMRs are trans-portable, small-scale reactors thatproduce less than 300 MW, as op-posed to the 1,000 produced by a typ-ical reactor. They can be mass pro-duced, assembled offsite, and caneasily change output rapidly to re-spond to fluctuations in demand.SMRs could fill energy gaps by pro-viding power in remote places or tosmall towns or buildings, and can bemore flexible, cheaper, and safer thanthe traditional model. Their flexibil-ity in responding to surges or reduc-tions in demand would allow them tocomplement renewable energy.Though the principle of economiesof scale would suggest that smaller re-actors would be less economically ef-ficient, International Atomic EnergyAgency estimates have put costs forconstruction, maintenance and op-eration far lower than traditional re-actors. Proponents argue that they area safer and more efficient model thatwould change the entire makeup ofenergy production in many regions.Though there is much promise inSMR technology, there is little im-plementation so far. The U.S. De-partment of Energy has supported theaccelerated deployment of SMRsand has promoted the NuScale SMRmodel of a lightwater reactor. TheTennessee Valley Authority submit-ted the first permit application for aSMR to the U.S. Nuclear Regulato-ry Commission in May of 2016, butthere are currently no SMRs in use inthe United States. Nuclear energy haswitnessed a general stagnation inthe percent of electricity generationit produces since the late 1980s, andwhile SMRs could help add to this,

OIL, THE COLLAPSE OF NON-OPEC PRODUCTION

TOTALOTHER NORTH AMERICA

1Q13 1Q14 1Q15 1Q16 1Q17

3.0

2.5

2.0

1.5

1.0

0.0

0.5

-0.5

-1.5

-1.0

mb/d

In 2016, much of the decline in non-OPEC oil production is attributable to North America. In 2017, estimates foresee a gradual recovery.

Source: IEA Oil Market Report (july 2016)


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there is considerable political difficultyin rolling out new reactors that maysignificantly retard their adoption.The United States also plays a lead-ing role in trying to advance and com-mercialize carbon capture and stor-age, the only technology to capture90 percent or higher of the emissionsfrom existing fossil fuel infrastructure.The Kemper project – though strug-gling with major delays and costoverruns – aims to gasify low calorif-ic value lignite. The resultant syn-gas is burned to generate electricitywith considerably lower amounts ofCO2 and other emissions, and theelectricity can then be captured andsold or stored. The technique—if itproves to be technologically andcommercially viable—could providea longer term climate friendly futurefor coal from Poland, South Africa,India and China. The United Stateshas also made measurable improve-ments in energy efficiency, but gainshave been slow so far, due to poor in-sulation and low efficiency in trans-

portation in the United States. Trans-portation’s low efficiency is especiallydue to heavy reliance on single-rid-er transit and the low growth inpublic transit, trends that undo thebenefits from significant improve-ments in corporate average fuel econ-omy standards, particularly since2010.

Accelerated transformationamidst policy uncertaintiesThe major trends identified in this ar-ticle—revolutionary realignment infossil fuel consumption patterns, rap-id growth of renewables albeit froma low base, and potentially game-changing developments in energytechnology—together point to the ac-celeration of the energy transition toa lower-carbon economy in the com-ing decade. The continued decline ofcoal looks certain, and oil consump-tion will likely stagnate or further de-crease in light of stricter fuel econo-my standards and the spread of elec-tric vehicles. The future of cleaner

burning natural gas looks brighter, atleast as long as it replaces coal,though significant uncertainties existin the longer run, as many dispute thebridge fuel role for natural gas.Though the shifts of the last decadeappear to be principally market-dri-ven, public policies play a major rolein the development and early de-ployment of new, disruptive tech-nologies such as unconventional oiland gas or batteries. The professedgoals in the United States intendednational determined contributions(INDCs) in the United NationsFramework Convention on ClimateChange (UNFCCC) process andparticularly the long term decar-bonization goals will also requiremore robust public policies to fast-track the energy transition. As theU.S. presidential and congressionalelections approach, there are con-siderable uncertainties about theU.S. climate and energy policiespost-November 2016. One can onlyspeculate about the election out-

comes and corresponding policy di-rections. A Democratic win in the2016 elections may put more em-phasis on supporting renewablesthrough either a continued regulatoryapproach (along the lines of theClean Power Plan) or—in case ofDemocratic control of both chambersor bipartisan support—legislative ac-tion (e.g., in the form of a carbon taxor a cap-and-trade system). While aRepublican win may slow progress inreducing carbon emissions in theenergy sector, technological and mar-ket trends will make it hard to cementa fossil-fuel based economy in themedium- and long-run.

UP&DOWN 2.0Trillion cubic feet20

05

12.3Trillion cubic feet20

14

33.0%of total production20

15

54Million ton20

07

113Million ton20

12

16.6Ton per capita20

13

GASPRODUCTION

COALPRODUCTION

COALEXPORT

CO2EMISSIONS

50.5%of total production20

05 19.6Ton per capita20

03

Gas production has surgedconsiderably in recent years.Energy from coal production, on the other hand, has declinedsignificantly over the pastdecade, though exports havesoared. CO2 emissions are also down significantly.




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Elections/The energy position of the candidates for the White House

Black, blue or green?How will America prioritizebetween oil, gas and renewables in the years to come? November’s presidential electionwill play a big part in determining the answer

he projections for America’s energyfuture could not be more starkly di-vergent than the campaign posi-tions offered up by Democrat HillaryClinton and Republican DonaldTrump. There is hardly an energy is-sue on which they agree. Under a Clinton administration, theU.S. would slash the country’s re-liance on oil, dramatically expand in-vestments in renewable energy andwage all-out war on climate change.A Trump administration would ad-vocate opening tens of thousands ofnew acres of federal land to oildrilling and exploration, abolishingthe Environmental ProtectionAgency and pulling the U.S. out ofthe Paris climate agreement.

Environment or not, that is the questionTrump says he would dismantledecades-old environmental protec-tions and fossil fuel industry regula-tions—many of which were put inplace by past Republican presidents.His positions cater to the most anti-environment, pro-industry stances inhis party, taking no account of thegrowing number of moderate Re-publicans who have moved out of cli-mate change-denier territory. TheRepublican Party platform disdainsthe environmental movement as a“self-serving elite.” Clinton, on theother hand, views climate change asone of the nation’s and the world’smost pressing issues, would move theU.S. energy focus to renewablesources, would strengthen regulationson clean air and water and toughen

standards for hydraulic fracking andfossil fuel emissions. Regardless ofparty, however, the next president willlikely find it difficult to implementmany of their election-year plat-forms. Clinton’s ambitious plans forcleaning up the environment, wean-ing the country off fossil fuels andboosting the conversion to renewablesources will hit many of the same po-litical roadblocks President BarackObama confronted with a Congressso deeply divided that he was forcedto rely on executive orders to im-plement most of his energy policy. As for Trump’s promises to forge full-steam ahead on fossil fuels and dumpthe EPA and the Paris climate agree-ment, he will be up against a rapid-ly changing marketplace, new sus-tainability demands by consumersand corporate boards, and the redtape involved in battling and un-ravelling behemoth bureaucracies.For the next administration, energypolicy may be driven as much byglobal market trends, domestic con-sumer demands and changing pub-lic attitudes as by the positions of wholives in the White House. In recentyears, the rise of hydraulic frackingand other oil and gas field tech-nologies combined with plunging oilprices have upended the best effortsof U.S. experts to accurately projectthe nation’s energy future. Even so,it is clear that the U.S. energy and en-vironmental policies and actions willbe affected dramatically by this year’spresidential election. As U.S. votershead to the ballot boxes in Novem-ber, here are the candidates’ dia-

TMOLLY MOORE

She is a senior vice president of Sanderson Strategies Group, a Washington, D.C. media strategies firm, and a former Washington Post foreign correspondent.

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• Provisions of the Clean Power Plan of the Obamaadministration which involves a 32 percent reduction in pollutionfrom carbon dioxide linked to energy production, comparedwith 2015 levels. Within the same deadline, the plan also includes a 90 percentreduction in sulfur dioxide and a 72 percent reduction in nitrousoxides from power plantscompared with 2005 levels.

• Supporting the Oil&Gasindustry, the coal industry, the nuclear industry and curbing incentives for the spread of renewable energy.Expansion of oil drilling rights.

• Revision of commitmentsto reduce emissions undertaken by the United States duringCOP21 and elimination of subsidies.

• Suspension of the programto decommission/dismantle the most obsolete coal-firedelectricity generating plants.

• Greater recourse to naturalgas, produced domestically, for the production of electricity and for transportation.

• Lifting of any type ofmoratorium on the use of fracking.

• Reduction in the powersof guidance and control ofenvironmental regulation agencies.

Energy highlights

metrically opposing views—in theirown words and in their party plat-forms—on some of the greatest en-ergy and environmental issues ofthe campaign.

Different positions on climate changeTrump says, “I am not a great be-liever in man-made climate change.”He has gone so far as to declare,“The concept of global warmingwas created by and for the Chinesein order to make U.S. manufacturingnon-competitive.” The party’s offi-cial platform maintains that climatechange is not a proven science and“climate change is far from this na-tion’s most pressing national securi-ty issue.” Clinton states on her website and re-peats frequently in speeches: “Cli-mate change is an urgent threat anda defining challenge of our time.”Her goal is to reduce greenhouse gasemissions more than 80 percent be-low 2005 levels by 2050 and to meetcurrent U.S. pledges under the ParisAgreement. Trump has vowed to pullout of the Paris Agreement and will“forbid the Environmental Protec-tion Agency to regulate carbon diox-ide.”

Less oil & gas for Dems, oil independence for GOPThe Democrats’ campaign platformcalls explicitly for “eliminating spe-cial tax breaks and subsidies for fos-sil fuel companies” and calls for thecountry to be running entirely onclean energy by midcentury. De-mocrats advocate “closing the Hal-liburton loophole that stripped theEPA of its ability to regulate hy-draulic fracturing and ensuring toughsafeguards are in place.” The partyopposes the Keystone XL pipeline.Clinton also opposes drilling in theArctic and off the Atlantic coast andwants to “phase down extraction offossil fuels from public lands.” Shealso would support tougher regula-tions for hydraulic fracking andwould ensure communities and stateshave the right to ban fracking. Trumpand the Republican party platform,in contrast, say, “We support the de-velopment of all forms of energy thatare marketable…without subsidies,including coal, oil, natural gas, nu-clear power and hydropower.” Trumpsays private capital, not governmentmoney, should pay for developingwind, solar, biomass, biofuel, geot-hermal and tidal energy. The Re-publican platform supports openingpublic lands and the outer continentalshelf “to exploration and responsibleproduction” and will push Congressto give states the authority to man-age energy resources on federal landswithin their borders. Trump says hewould do away with the EPA’s Clean


31


• Extension of the Clean PowerPlan and the launch of a $60 billioninitiative (Clean Energy Challenge)which will involve the States, cities andrural communities in the developmentof renewable energy through a taxrelief system.

• Transition from coal to natural gas.

• Replacement of coal-fired electricpower plants with combined gas cycleturbine plants (CCGT).

• Support to states, urban centersand farming communities toencourage the replacement of oil andcoal-fired heating systems with moreefficient gas systems.

• Distribution of natural gas as thefuel for transportation through thecreation of the conditions for thedevelopment of gas mobility.

• Greater and more stringentenvironmental controls on the use of fracking.

• More space for renewableenergy, which will transform the U.S.into the clean energy superpower ofthe 21st century.

Energy highlights

Power Plan, which Republican’s de-scribe as “the President’s war oncoal.” Trump says he intends to fin-ish the Keystone XL Pipeline, butraised concerns among energy com-panies when he said he would turnover “a significant piece of the prof-its” to American citizens. He also ad-vocates ending prohibitions on U.S.energy producers from exporting toforeign markets.

For Trump, goodbye EPA;for Clinton, more incentivesfor the “green”Clinton said her policies would make“the United States the clean energysuperpower of the 21st century,”including generating enough re-newable energy to power every homein America. The Democratic Partyplatform advocates “defending andextending tax incentives for energyefficiency and clean energy.” Trumphas written: “There has been a bigpush to develop alternative forms ofenergy—so-called green energy-from renewable sources. That’s a bigmistake.” He went on to describe re-newable energy as “just an expensiveway of making tree-huggers feelgood about themselves.” He wouldeliminate all subsidies for alternativeforms of energy, except nuclear.Trump’s Republican platform calls fortransforming “the EPA into an in-dependent bipartisan commission,similar to the Nuclear RegulatoryCommission.” He would strip thefederal government of authority overenvironmental regulation and turn itover to the states. He would also di-minish the reach of the EndangeredSpecies Act, which is designed to pro-tect vulnerable species, and oftenleads to major battles between con-servationists and businesses trying tooperate in areas where those specieslive. While the oil and gas industrysupports many of Trump’s positions,it also is skeptical of some of hisproclamations. “We will becomeand stay independent of any need toimport energy from the OPEC car-tel,” Trump has declared. “Under mypresidency, we’ll accomplish a com-plete American energy independence.Complete.” Many industry analysts

say that policy would likely onlydamage U.S. economic interests,prompting increases in oil and gasprices if the country were to cut offall foreign imports. Some of Trump’spositions have the ring of political ex-pediency to placate the most ex-tremist wings of his party. At thesame time he calls climate change ahoax, Trump has asked Ireland forpermission to build a multi-milliondollar seawall to protect his oceansidegolf course in County Clare, TrumpInternational Golf Links & HotelIreland. In his application to Ireland,Trump’s company wrote: “If thepredictions of an increase in sea lev-el rise as a result of global warmingprove correct, however, it is likelythat there will be a corresponding in-crease in coastal erosion rates not justin Doughmore Bay but around muchof the coastline of Ireland. In ourview, it could reasonably be expect-ed that the rate of sea level risemight become twice of that present-ly occurring.” Trump has also madethe oil and gas industry nervous. De-spite his latest declarations of support,in the past he described the industryas “a special interest” group and al-leged that his former GOP primarycompetitor, Ted Cruz, was “totallycontrolled by the oil companies."U.S. presidential nominees use theirparty conventions to lay out their vi-sions and plans for the countryshould they be elected. Both Trumpand Clinton used their speeches to tietheir energy and environment posi-tions to jobs and the economy.

Latest news from thenational conventionsTrump told Republicans in Cleve-land: “We are going to lift the re-strictions on the production of Amer-ican energy. This will produce morethan USD 20 trillion in job creatingeconomic activity over the next fourdecades.” In Philadelphia, Clintontold the Democratic convention: “Ibelieve in science. I believe that cli-mate change is real and that we cansave our planet while creating mil-lions of good-paying clean energyjobs.” The differences in approach toenergy and environmental issueshave never been more dramatic in aU.S. presidential election. Trump hastaken Republican positions to newextremes and Clinton—egged onby the popular support of her formerDemocratic opponent, SenatorBernie Sanders—has expanded theDemocratic platform to even moreforcefully embrace curbing climatechange and protecting the environ-ment. Either way, U.S. energy andenvironmental policies are in forbig change in the next four years.


BIG CHANGE IN THE NEXT FOUR YEARSThe differences in approach toenergy and environmental issueshave never been more dramaticin a U.S. presidential election.Trump has taken Republicanpositions to new extremes and Clinton has expanded the Democratic platform to evenmore forcefully embrace curbingclimate change and protectingthe environment.


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Markets/The decline in U.S. tight oil output has limited the Brent-WTI spread

The American “counter-revo l

uring the first half of 2016, North SeaBrent Crude and West Texas Inter-mediate reached their lowest levels,respectively, on January 20 at $27.81per barrel and February 11 at $27.23per barrel. The highest levels, on theother hand, were reached on June 8:The European benchmark reached$52.72, while the North Americanbenchmark reached $52.08. In Aprilalone, prices increased by approxi-mately 20 percent, recording thegreatest monthly increase comparedwith the same period of the previousyear. This upward trend has indeedcharacterized the entire month, bothprior to the Doha meeting and in thedays following the failure of the sum-mit between the main oil producers,held in the capital of Qatar. In thewake of an increase of approximate-ly $4 for both grades that occurred inMay, not even the inability to reachan agreement regarding the freezingof production or, at least, the restor-ing of a production ceiling by OPECmember countries reversed the trend

of oil prices. On the contrary, pricesreached the highest levels since thebeginning of 2016, precisely in thedays following the Vienna conferenceon June 2. The Leave victory in theBritish referendum led to an imme-diate reduction in oil prices by almost$3.5, which was almost completely re-absorbed by the end of the month.The fall in oil prices that occurred, onthe other hand, during July seems tobe the direct result of the accumula-tion of refined products in the U.S.rather than crude oil, in addition tothe role played by speculation: In fact,on the NYMEX in particular, whereWTI is traded, short positions (sell-ing) have almost tripled comparedwith the end of May, from 53 to 141million barrels.According to the IEA’s Oil MarketReport, the global oil supply was at$95.4 million per day in May, downby 590,000 barrels compared with thesame period last year. This is the firstsignificant drop in production sincethe beginning of 2013. That mainly

concerned the output of non-OPECcountries, starting with Canada –the fourth largest extractor in theworld with approximately 4 millionbarrels per day, of which 2.2 millionof oil sands, and the United States’ topsupplier, with 3,169 million barrelsper day in 2015 – which was strug-gling with severe forest fires. Sec-ondly, the decline has affected theproduction of U.S. crude oil which,after having reached its peak of 9.7million barrels in April 2015, cur-rently stands at around 8.622 million.With regards to the OPEC membercountries, in May, supply fell slight-ly by 110,000 barrels per day to32.61 million. Nigeria’s significantlosses due to continuous sabotagesand, more generally, the political in-stability that the country is facing,were substantially offset by the con-stant, and unexpected, increase inIran’s production, of around 3.8 mil-lion barrels per day (+700,000 sincethe start of 2016). The latter figurepartly contradicts the claims made in

DDEMOSTENES FLOROS

A geopolitical analyst, he is professor of the master’s program in InternationalRelations, Italy—Russia, at theUniversity of Bologna, as well as beingthe head and professor of the thirdcourse in Geopolitics, established at the Open University of Imola (Bologna).He collaborates with the EnergyInternational Risk Assessment (EIRA)and geopolitical magazine Limes.

In the first two months of 2016, oil prices reached their lowest levelssince November 2003. Since then, oil prices have almost doubled,despite the negative outcomes of the Doha meeting and Brexit

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o lution” and the oil recoveryMarch by the Vice President ofLukoil, Leonid Fedun. “Iran” hesaid “will not be able to significant-ly increase its output without moreforeign investment. Also, Iran’s do-mestic demand is very high given itslarge population. Consequently, thecountry may place 300,000-400,000more barrels on the market: a mar-ginal amount”.On an annual basis, while OPEC’soutput has increased by 500,000 bar-rels per day, non-OPEC output, de-spite the Russian Federation havingincreased its extractions, has fallen by1.3 million barrels. In 2016, it is es-timated that the latter will drop by 0.9million barrels per day, of which500,000 barrels are due to U.S. tightoil. In the first half of 2016, demandgrew by approximately 1.6 millionbarrels per day, increasing from 93.62million to 95.17 million, mainly as aresult of the greater energy demandof the emerging economies. In thewhole of 2016, it is expected thatglobal demand will increase by 1.3million barrels per day. In 2017, it willreach 97.4 million.These figures confirm the slow, butsteady, decline in excess supply: fromthe 1.5 million barrels per day in Jan-uary 2016, the excess is estimated ataround 800,000 barrels per day as acombined effect of an initial slow-down in output – which then turned

into a decline in May – and a more ro-bust increase in demand for blackgold. If the next estimates confirm thetendential rebalancing of the oil mar-ket, this will no doubt act as a sup-porting factor for prices during thesecond half of the year. Currently,June forecasts show an increase inglobal oil supply amounting to600,000 b/d for an overall outputwhich reached 96 million b/d while,in the second quarter of 2016, de-mand increased by 1.4 million b/dcompared with the same period lastyear.

The American dream of energy independence is fading In 2015 alone, forty U.S. companiesresorted to ‘Chapter 11’ bankruptcyproceedings, despite American frack-ers being able, at the same time, to re-duce extraction costs by 40 percentand increase the productivity of wellsby 48 percent. According to theforecasts of Wolfe Research, ap-proximately one third of U.S. com-panies involved in the extraction ofcrude oil by means of the unconven-tional method could resort to Chap-ter 11 by the middle of 2017 if per-barrel prices do not remain at aroundat least $50. Other analysts, howev-er, believe this threshold to be too lowto continue to pump. For instance,

Fadel Gheit, Senior Oil and GasAnalyst at Oppenheimer & Co, toldthe CNBC that “half of the currentproducers need the barrel to be at $70to survive and, therefore, have no le-gitimate right to remain in a businesswhere the price forecasts, albeit re-covering, fluctuate between $50 and$60”. According to a report by Gold-man Sachs, although “limited storagecapacity and a still significant excesssupply will continue to fuel thevolatility and instability of pricesover the coming months”, the oilmarket is slowly rebalancing in par-allel to the decrease in non-OPECproduction and, specifically, that ofthe U.S. “No matter what OPECdoes, supply will fall due to the declinein U.S. production. The latter will notstop the fall provided prices stand ataround $45-50 per barrel, and atthat point it will only stabilize”,Roland Morris, Commodities Strate-gist at the VanEck center, told theWall Street Journal. On May 24, theprice of WTI reached $49.04 per bar-rel, temporarily exceeding that ofBrent (at $49.01) for the first timesince September 2010. According tothe U.S. Energy Information Ad-ministration, during this period oftime, the spread between the twogrades of crude oil incorporated theexcess supply at the Cushing termi-nal, in turn due to the fracking rev-

olution and to Canadian Oil Sands,in addition to the dollar trend and thegeopolitical instability of North Africaand the Middle East which had in-fluenced Brent more than WTI.The current fall in American un-conventional production has signif-icantly limited this spread. Accordingto Bloomberg, U.S. oil & gas pro-ducers will announce losses totalingover $15 billion in 2015 alone. If thisis the case, the hope is that NourielRoubini was wrong when he said thatthe new global financial crisis couldarise from the bankruptcies of com-panies involved in extracting oil andgas from shale. The impression,however, is that the dream of energyindependence founded on the tech-nical revolution of fracking is slow-ly fading, and not only due to theproblems of water pollution and theincrease in earthquakes. It is quitelikely that the next president of theUnited States will have to implementa future policy strategy in a nationalenergy context that is no longer as fa-vorable as it was in the last decade.

Monetary policy, the dollar and the euroThe euro/dollar exchange rateopened 2016 at 1.086. On June 23,the euro stood at $1.142. As a resultof the electoral outcome regardingBrexit, the common European cur-


rency immediately depreciated on thedollar to drop below 1.10, while theBritish pound reached its lowest lev-el since September 1985 at $1.32. Theeuro/dollar exchange rate thereforeclosed the first half at 1.11 (1.108 €/$at the end of July).During this period, the dollar thenpartially depreciated against the euro(lowest level at 1.1569 €/$ on May 3)despite, on March 10, the EuropeanCentral Bank having cut the entire tri-lateral structure of interest rates,having increased the so-called corri-dor, and brought the amount of itsQuantitative Easing program from€60 billion to €80 billion. In view ofthe inverse relationship that usuallyexists between the performance of thedollar and the price of the barrel, theweakening of the former could, to acertain degree, support the increaseof the latter. Previously, on Decem-ber 16, 2015, the Federal Reserve hadalready decided to increase interestrates by 25 basis points for the firsttime since the start of the financial cri-sis. The latter, in fact, stood at 0-0.25percent from December 16, 2008. Inaddition to the end of the Quantita-tive Easing program, many analysts– wrongly believed that this optionwould be the first of a long series ofrate increases by the FED that wouldhave led to a phase characterized byan appreciation of the dollar. In fact,in the days following the decision ofthe Central Institute, the dollarreached its highest level over the euroat 1.0742 (January 6, 2016). Why didthe Federal Reserve stop the launchof a generally restrictive monetarypolicy, despite the position taken bythe Presidents of the FED of Atlanta,Dennis Lockhart, and of San Fran-cisco, John Williams? In actual fact,Janet Yellen, head of the U.S. FederalReserve, subsequently decided not toincrease rates, both during the meet-ing of the Federal Open MarketCommittee (FOMC) of March 16,and during the meeting of June 15, al-though market expectations werethat they would increase as demon-strated by the temporary appreciation

of the dollar in February and, espe-cially, in May. It is worth notingthat during these two months, therewas no corresponding fall in the costof the barrel.The main reason for the interruptionto the new monetary course of theFED lies in the data derived from theU.S. labor market, which have notbeen entirely comforting.In April, only 160,000 new jobs werecreated, much less than the 200,000plus expected on average by analysts,while the Labor Department reviseddownwards the number of newlyemployed recorded in the previousmonth. Despite an unemploymentrate remaining unchanged at 5 per-cent, the expanded unemploymentrate – which includes the underem-ployed and forced part-time em-ployed – is at 9.7 percent, althoughdown from 9.8 percent in March,while the rate of participation in theworkforce fell again to 62.8 percent(from 63 percent), the lowest levels inalmost forty years.The first estimates for May, howev-er, only indicate 38,000 new jobs, thelowest level in six years and against ex-pectations for 160,000. Therefore,one should not be misled by the fallin the unemployment rate to 4.7percent, given the simultaneous fur-ther decrease in the rate of partici-pation in workforce at 62.6 percent.In truth, the possibility that the Fed-eral Reserve should review the mon-etary policy program – which initiallyincluded four increases in interestrates during 2016 – was already clear-ly explained by the Vice President ofthe FED directorate, William Dud-ley, who had justified this by referringto the worsening of the U.S. macro-economic context. Some macroeco-nomic data that seem to support theconcerns of W. Dudley are outlinedbelow. According to estimates record-ed by the Bureau of Economic Analy-sis, the second reading of the real U.S.Gross Domestic Product showed a0.8 percent growth in the first quar-ter of 2016, up from the 0.5 percentpreviously calculated. In 2015, over-

all growth stood at 2.4 percent, iden-tical to 2014 and next to the disap-pointing average of 2.1 percentrecorded in the entire post-recessionphase, from 2009 to date. Undoubt-edly, these figures are more positivethan those of the Eurozone, but theycast some shadows. On November 13,2015, the U.S. Department of Com-merce stated that the relationship be-tween stocks and sales was at itshighest level since 2009, precisely at1.38: against warehouse goodsamounting to $1,800 billion, some-thing that, in itself, could overestimatethe calculation of the GDP, sales un-til October amounted to $1,300 bil-lion.Is the United States also facing an-other crisis of over-production? Ac-cording to the data provided by theU.S. Treasury Department, the Fed-eral government debt – estimated ataround $10.6 trillion when BarackObama assumed the office of Presi-dent – officially reached $19 trillion.Considering that the 2015 output wasat 17.9 trillion, the Public Debt/GDPhas currently exceeded 106 percent.According to the estimates of theCongressional Budget Office, the$8 trillion record of further debt islikely to continue to increase in thenear future. After the war (1952), $1.3of debt created $1 of GDP, while in2014 the ratio increased to 3.5:1. Thatis, the United States creates $3.5 ofdebt for $1 of additional gross do-mestic product. The deficit of U.S.current accounts further increased by$13 billion during the third quarterof 2015, reaching a total of $124.1 bil-lion. Finally, however, we cannotrule out that during the meeting inShanghai in February, the main Cen-tral Banks worldwide did not secret-ly decide to avoid a sharp apprecia-tion in the dollar given the negativeconsequences that this would causethe global economy, mitigating thatcurrency war which saw the FED asthe temporary winner, a fact that alsobenefitted China’s economy. Theimpression is that the euro/dollar ex-change rate is moving away from thatequally assumed as imminent in No-vember 2015. Moreover, as regardsthe future prospects of the U.S.monetary policies, J. Yellen herselftook a partial backward directionwith respect to her statements of May27, in which she defined a move bythe FED as early as in the followingmonths as “likely,” arguing, just 10days later, that interest rates will riseonly gradually, avoiding any referenceto a possible date. The monetary poli-cies outlined and the effects thatthey could have on the dollar, suggestthat they may take on a beneficial rolein maintaining current per-barrelprices. That said, it can certainlynot be ruled out, in the medium term,that the effects that Brexit may as-

sume, conversely, a countertrendrole.

The geopolitics of energybetween strategies and negotiationsOn April 17, the negotiations un-derway between major oil producers,with the aim of freezing produc-tion, failed after Saudi Arabia, Qatarand the United Arab Emirates refusedto reach an agreement that did not in-clude Iran. In fact, Tehran had ex-pressed its intention to increase itsproduction up to same level as priorto the start of the sanctions, equiva-lent to 4 million barrels per day wellbefore the meeting, in order to be ableto gain an advantage from the liftingof the same following the agree-ment on the nuclear issue. The rea-sons for oil price increases during thesecond half of April could be as fol-lows:The Russian Federation, Saudi Ara-bia and Iraq, the second largestOPEC producer, were producing ata very high speed, both in January2016 and in the first quarter of thisyear. Had an agreement been reachedin Qatar, the Russians would have had

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TOWARDS A NEW BALANCE

1Q13 3Q14 1Q16 3Q17

100 3.5

2.5

1.5

0.5

-0.5

-1.5

-2.5

98

96

94

92

90

DEMAND SUPPLY

mb/d mb/d

IMPL. STOCK CH.&MISCH [RHS]Sorurce: IEA Oil Market Report (june 2016)

The oil market should achieve a stable equilibrium towards themiddle of 2017. The growth in demand and declining production are helping to reduce the excess supply recorded since 2014.


to freeze their output at 10.99 millionbarrels per day (record level since theend of the Soviet Union), the Saud-is at 9.95 million and the Iraqis at 4.46million, one of the highest levelssince the post-Saddam Hussein era.Financial investments from hedgefunds, whose total exposure of spec-ulative buying conditions, both onBrent and WTI, had reached 656 mil-lion barrels per day, approximately 7times the global daily oil production,have meant that paper bets on barrelswould promote the rise of the realbarrel. The maintenance of interestrates at 0.25-0.50 percent announcedby the Federal Reserve on April 27,which followed the weak growth ofU.S. GDP during the first quarter of2016 (+0.5 percent) as well as the de-cline in North American unconven-tional production, did not promotethe strengthening of the dollar. Incontrast, Chinese demand—reaching7.7 million barrels per day in March,up by 22 percent compared to thesame month the preceding year —hasdriven prices up. The strategy of Sau-di Arabia and its allies within OPEC– Kuwait, Qatar, and the UnitedArab Emirates – to push prices down

and to defend their own marketshare thanks to lower productioncosts, certainly obtained significant re-sults: data reported on non-OPECoutput speak clearly. This risky strat-egy also acted explicitly against the in-terests of one part of the Cartel, butwithout succeeding in the main goalto weaken Iran. It also had seriousconsequences on the national budg-ets of all OPEC members, who suf-fered the first substantial losses for 18years, as demonstrated by the CurrentAccount deficit of $99.6 billion com-pared with the surplus of $238.1 bil-lion in 2014. This leads us to believethat Riyadh is reaching only a part ofits goals and not as fast as previous-ly thought.From a strictly military point ofview, we cannot help but observe thatin Syria, the Saudis and their allies –except for Turkey – are the sameOPEC member states that are suc-cumbing against the loyalist army ofthe Arab Republic, the Russian Fed-eration, Iran and Hezbollah.Sooner or later, will the Wahhabi andShiite Iran petro-monarchy have tocome to an agreement? Tehran –which, if it actually comes out the

winner of the conflict in Syria, wouldincrease its political and economic in-fluence in the entire Middle East – isnot far from reaching 4 million bar-rels per day. As suggested by DavideTabarelli, President of Nomisma En-ergia, “at the next meeting on No-vember 30, 2016, the Iranians mightactually accept a limit to production,while the Saudis, having found thatproduction outside of the Cartel isfalling, might renounce the marketshare strategy at all costs to damageIran, rather as happened as of June2014.”In March 2016, U.S. crude oil im-ports reached 8.042 million barrelsper day compared with 7.910 millionin February and 7.675 million b/d inJanuary. The last time the UnitedStates had imported more than 8 mil-lion barrels per day was in August2013. Taking into account that, in2015, U.S. crude oil imports stood at7.351 million barrels (7.344 millionb/d in 2014), the real risk is that thetrend in demand is rising and thattherefore the United States will needmore crude oil imports from abroad,despite the figures for April indicat-ing a decrease in imports to 7.637 mil-

lion b/d (although higher than the2015 average). As for monetary poli-cies, even all of these geopolitical con-siderations lead us to believe that it isunlikely, in the second half of 2016,that the barrel will sink back to thelow levels of January. However, dur-ing the OPEC summit of June 2 inVienna, the member states failed toreach an agreement on the freezingof production and on the return to aproduction ceiling. Brexit, therefore,dollar and speculation permitting.

35

Read on www.abo.netthe articles by Molly Mooreand Nicolò Sartorion the same subject.


PERSPECTIVESAUDIthe

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On April 25, 2016 Riyadh approved Saudi Vision 2030, a plan which, in the next 14 years, should ensure the Kingdom greater economic

diversification and reduce its dependence on oil. The debate between four analysts with a deep knowledge of the country:

•Bassam Fattouh and Amrita Sen •Paul Sullivan •Eric Watkins

36_41_Fattouh_su6_ENG.qxp 19/08/16 11:32 Pagina 36

50%

75GW

7%11.6%2016

2030

30m8m

ANNUAL UMRAH VISITORS

2016

2030

30%22%

FEMALE LABOUR FORCEPARTICIPATION

2016

2030

43.5bn dollars

2016

2020

57GW

NON-OIL GOVERNMENTREVENUES

2016

2030

16% 2016

2030

NON-OIL EXPORTS AS % OF GDP

65%40% 2016

2030

1,866bndollars

160bn dollars 2016

2030

PUBLICINVESTMENTFUND ASSETS

PRIVATE SECTOR CONTRIBUTION TO GDP

UNEMPLOYMENT RATE

POWER GENERATION CAPACITY

266.6bn dollars

37


Scenarios/Economic and energy repercussions of the new strategy

n late April, the Council of Ministersin Saudi Arabia approved an ambi-tious new strategy for the kingdom,known as Vision 2030. The vision isbased on three main pillars, whichare intended to help transform theSaudi economy and society by 2030. • | The central role that Saudi Arabia

plays in the Islamic and the Arabworld.

• | An aim to transform Saudi Arabiainto a global investment power-house.

• | Exploiting Saudi Arabia’s keystrategic location to turn thecountry into a global trade hubconnecting the three continentsof Asia, Europe and Africa.

The vision does not contain specificdetails about implementation, but isbuilt around three general themes—a vibrant society, a thriving econ-omy, and an ambitious nation. A keygoal of the thriving economy themeis to build a well-diversified economywhich is less dependent on oil. Toachieve this, Vision 2030 focuses ondeveloping human capital throughbetter education, particularly earlychildhood education. Another tar-get is to boost the role of small andmedium enterprises (SMEs) and toincrease their contribution to theeconomy. Another key element ismaximising the country’s investment

IThe main goals of the Saudi

Vision 2030 development plan.

A plan to “break free” from oilThe new strategy aims to diversifythe Kingdom’s economy. Thedevelopment of gas will accelerate,while renewables will continue to account for a small part of theenergy mix. Proceeds from blackgold will still remain central

Bassam Fattouh is the Director of the Oxford Institute for EnergyStudies and Professor at SOAS (Schoolof Oriental and African Studies),University of London.

Amrita Sen is the co-founder and ChiefOil Analyst at Energy Aspects. Amrita’sspecialism is in energy commodities,particularly oil and oil products.

BASSAM FATTOUH AND AMRITA SEN

Source: Kingdom of Saudi Arabia


capabilities, which involves restruc-turing the Public Investment Fund(PIF) and transferring the owner-ship of Saudi Aramco to the PIF,with the aim of creating the largestsovereign wealth in the world. It alsoinvolves the privatisation of govern-ment services such as healthcare andeducation, with the government in-creasingly playing the role of theregulator. Through these and otherinitiatives, Saudi Arabia aims toachieve some very ambitious goalsincluding:• | Moving the economy from the

current position as the 19th largesteconomy in the world into thetop 15.

• | Increasing the private sector’scontribution from 40 percent to65 percent of GDP.

• | Raising the share of non-oil ex-ports in non-oil GDP from 16percent to 50 percent.

• | Increasing non-oil governmentrevenue from Saudi Arabian Riyal(SAR) 163 billion to SAR 1 tril-lion.

• | Expanding the local share of oiland gas sector activity from 40percent to 75 percent.

• | Growing PIF assets, from SAR600 billion to over 7 trillion.

• | Increasing foreign direct invest-ment from 3.8 percent of GDP to5.7 percent.

Vision 2030 recognises that in orderto achieve these goals, a major insti-tutional shake-up is needed. TheSaudi government therefore has, inparallel, announced a set of pro-grammes, which include the Na-tional Transformation programme,the programme for StrengtheningPublic Sector Governance, the Pri-vatisation programme, the Public In-vestment Fund Restructuring pro-gramme and the Saudi AramcoStrategic Transformation pro-gramme. The details of each of theseprogrammes are only slowly emerg-ing, with the National Transforma-tion programme approved in earlyJune, providing more informationon the implications for the energysector.

A more credible strategythan in the pastWhile such broad visions are hardlynew (in 2005 Saudi Arabia publishedthe Long-Term Strategy 2025,which included various goals includ-ing reducing the dependency of theeconomy on oil revenues) and diver-sification has been at the centre ofeach successive five-year develop-ment plan since the 1970s, there ismuch optimism that this time, theplan will be implemented (at leastpartially). The huge concentrationof economic power in the hands ofthe Deputy Crown Prince Mo-hammed bin Salman, his willingness

to take risks, the breadth of the re-forms announced, and an effectivecommunication campaign havegiven Vision 2030 more credibilitythan previous initiatives. Thus, it is no surprise that the an-nouncement of Vision 2030 managedto capture the imagination of globalmarkets. For many oil analysts, thereplacement of veteran oil ministerAli Al-Naimi by Khalid Al-Falih, thecreation of the enlarged Ministry ofEnergy, Industry and Mineral Re-sources, and the announcement ofthe Saudi Aramco Strategic Trans-

formation programme and plans topublicly list a minority stake in SaudiAramco were taken as clear signs of adrastic shift in energy policy. One ef-fect of the recent announcements hasbeen to introduce much greater un-certainty about the foundations anddirection of Saudi oil policy, withmany analysts arguing that SaudiArabia would abandon its policy ofmaintaining spare capacity and boostits output. This would put a cap onoil prices in the near-term while itwill increase its oil productive capac-ity which is bearish in the long-term,

especially given that this may betaken as a signal that Saudi Arabia ismoving beyond oil and rushing tomonetize its reserves in a carbon con-strained world. While the recent organisationalchanges are substantial, the impacton oil policy and the energy sector islikely to be more subtle than cur-rent expectations, not least as the lastfew years have already seen somedeep transformations in the energysector, including initiatives to gener-ate more value added through invest-ing in downstream assets and inte-

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grating refineries with petrochemi-cals, increasing the role of gas in theenergy mix, deploying renewablesinto the power system, improving ef-ficiency in energy use, and more re-cently increasing domestic energyprices.

Changing the oil ministerdoes not imply a change in oil policyTo begin with, the replacement ofAli Al-Naimi as oil minister repre-sents a change of personnel but notof policy. The current policy is

based on a fundamental principle:Saudi Arabia will not act unilaterallyto rebalance the market. Since 1986,Saudi Arabia has refused to act uni-laterally (in 1998, it cut in agree-ment with OPEC and non-OPEC,and in 2008, it agreed to cut collec-tively with other OPEC members inthe face of a financial market shock).Al-Falih has reiterated this position,arguing that Saudi Arabia “is notgoing to withdraw production tomake way for others. If other pro-ducers are willing to collaborate,Saudi Arabia is willing to collabo-rate. But Saudi Arabia will not ac-cept the role, by itself, of balancinga structural imbalance”. In the ab-sence of an agreement on collectivecut, Saudi Arabia has opted for amarket share strategy with the aimof pushing out high-cost producers.The output freeze deal discussed inDoha in April—which was per-ceived as a departure from this pol-icy—is the source of much of themarket’s confusion. Doha matteredbecause it signalled a potential shiftin tactic, which, if it had succeeded,could have been the start of morecooperation between producers.The Doha agreement failed for avariety of reasons, but this did not

prevent the Saudis from participat-ing in efforts to reach an agreementon a collective production ceiling atthe June OPEC meeting. The lat-est OPEC meeting also confirmedthe view that the kingdom is notabout to destabilise the market andincrease production to flood themarket regardless of the demand forSaudi crude. Al-Falih went as far asto state categorically in a press in-terview that “[t]here is no reason toexpect that Saudi Arabia is going togo on a flooding campaign”.

Oil revenues will remaincentral to Saudi Arabia’seconomyDuring an interview with westernmedia outlets, MbS alleged that theKingdom is indifferent to whetherthe price of oil is $30 or $70. Not sur-prisingly, this was interpreted asmeaning Saudi Arabia no longercares about oil prices and its outputpolicy is no longer tied to a desire tomaximise revenues. An extreme in-terpretation was that Saudi Arabiamight even welcome a low price en-vironment, as that would make it eas-ier to push through the substantialreforms contained in Vision 2030. Yet, the fact remains that the Saudi

39


SWING PRODUCER

ALGERIA 1.0%ANGOLA 0.7%

ECUADOR 0.7%

IRAN13.1%

IRAQ 11.9%

KUWAIT 8.4% LIBYA 4.0%NIGERIA 3.1%QATAR 2.1%

SAUDIARABIA

UNITEDARAB EMIRATES8.1%

VENEZUELA 24.9%

OPEC1,206billion barrels

81%

NON-OPEC286.9

billion barrels

19%

WORLD CRUDE OIL RESERVES

2014

22.1%OPEC PROVEN

CRUDE OIL RESERVESAT END OF 2014(billion barrels,OPEC share)

Saudi Arabia, which alone holdsover a quarter of OPEC oilreserves and produces almost10 million barrels per day, hasabdicated its traditional role as‘swing producer’ within theOrganization. Riyadh does not,in fact, intend to cut its crudeoil reserves to offset themarket imbalances, unlessother producers do the same.

Source: OPEC Annual Statistical Bulletin 2015


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economy, including the non-oil pri-vate sector, still relies heavily ongovernment spending that is fueledby oil revenues. Furthermore, polit-ical stability is directly linked to theability of the government to distrib-ute rent to the population, includingcreating jobs in the public sector. Asrecently emphasised by the Saudienergy minister Khalid Al-Falih, theobjective of reducing reliance on oil“does not mean that the kingdom'sopportunities of optimising its ben-efits from its natural resources, in-cluding oil, will receive less atten-tion in the current economic phasethan in previous phases. Increasingour oil revenues will help us to builda range of other economic sectors inthe Kingdom, besides internationalinvestments.”Despite the size of its fiscal buffers,low oil prices have been painful forthe kingdom. Saudi Arabia has beendrawing down on its foreign re-serves, increasing its borrowing, ex-ploring schemes to increase taxesincluding VAT, rationalising gov-ernment spending, cutting energysubsidies and scaling back spendingon capital projects. These adjust-ments are already having their im-pact on the economy with growthslowing down, stock markets fallingfrom their high levels, the SaudiRiyal peg coming under pressure,and households’ adversely affectedby the rise in energy prices andhigher inflation.One also cannot assume that fur-ther reforms such as entirely re-moving energy subsidies will notrisk strong public opposition. In-deed, the recent increase in watercharges is a case in point, as the wa-ter and electricity minister was firedfollowing public complaints over asurge in prices, with MbS describingthe ministry’s implementation of thenew water tariff as ‘unsatisfactory’. Itis true that the implicit social con-tract has proved to be elastic andsufficiently malleable to accommo-date the recent energy price in-creases. However, it may not provesufficiently resilient to accommo-date further price increases. TheSaudi government is already re-thinking the subsidy reform pro-gramme and has plans to introducecompensatory schemes to offset theloss of income for households inlow-income brackets to gather sup-port for the reforms.

There are no plans yet toincrease productive capacityClosely linked to the swirling ex-pectations of a big increase in Saudioutput has been the belief the King-dom is preparing to increase pro-ductive capacity. But even if SaudiArabia were to decide to expand ca-pacity, this is expensive and takes

time and requires massive invest-ment in calibrating the whole sys-tem, including increasing the capac-ity of processing plants, buildingstorage facilities and pipelines. Toput things in perspective—in 2004,when Saudi Arabia had a produc-tive capacity of 11 mb/d, Al-Naimiannounced the ministry had devel-oped plans to gradually increaseSaudi Arabia’s sustainable produc-tion capacity to 12.5 mb/d. The ex-pansion of 1.5 mb/d took six years,and was completed in 2010. Backthen, Al-Naimi also said that sce-narios to raise the capacity to 15mb/d had been studied and couldbe set in motion if global demandrequired it. But given the large un-certainty engulfing oil markets,Saudi Arabia will exercise the op-tion to wait and not invest. In fact,the recently approved NationalTransformation programme statedthat capacity would stay at 12.5mb/d through 2020.In an environment of high uncer-tainty about global oil demand dueto climate change policies, manyhave argued that Saudi Arabia willbe keen to run down its oil reservesrapidly. While this is certainly a con-cern for a country like Saudi Arabiagiven its massive reserve base, thereis a general belief that barring tech-nological breakthrough, oil will bein demand for decades to come as atransport fuel and as a feedstock forpetrochemicals. But even in carbon-constrained world, Saudi Arabia willbe able to compete, given the lowcost of its oil reserves and given itsstable economic and political envi-ronment and the competence ofAramco to develop these reserves.However, this strategy of increas-ing production to capture largermarket share from a declining piedoes not compensate for the loss ofrevenue from lower oil prices, andtherefore overall Saudi revenues willmost likely fall in a carbon-con-strained world.There have also been suggestionsthat in this new global oil order,Saudi Arabia has no incentive tokeep its official policy of maintain-ing spare capacity. But there may bea strong case for Saudi Arabia toplay a more proactive role on theupside. One of the lessons for SaudiArabia policy makers of the latestcycle is that a high oil price envi-ronment will accelerate supply anddemand responses, especially as en-vironmental concerns intensify, andtherefore in the long-term, it is inthe kingdom’s interest to preventprices from rising to high levels,putting a cap on the oil price. Toachieve this, Saudi Arabia wouldneed to maintain healthy spare ca-pacity and develop market tools tohelp influence the price on the up-

side. So far, there is no indicationwhatsoever that Saudi Arabia hasabandoned its policy of maintainingspare capacity, which is still consid-ered to be a cornerstone of world oilmarket stability.

The focus on developingnatural gas reserves willaccelerate Another area of policy continuity isthe goal of using more natural gas do-mestically rather than liquid fuels.The share of natural gas in total do-mestic energy consumption has risenfrom 23 percent in 1980 to over 41percent last year. One of the key ob-jectives is to increase the share of nat-ural gas to more than half of total pri-mary energy demand to satisfy the in-creasing demand from the new petro-chemical plants and to reduce crudeburn in the power sector, to free upcrude oil for exports by mainly de-veloping its domestic reserves with-out excluding the possibility of im-porting gas. According to the Na-tional Transition programme, the tar-get for dry gas production capacity isan almost 50 percent increase to 17.8bcf/d by 2020.

Renewable energy will be avery small part of the Saudienergy mixThe Vision 2030 reiterated SaudiArabia commitment to renewableswith plans to add 9.5 GW of re-newable energy by 2023. However,no legal and regulatory frameworksfor the deployment of renewableenergy have yet been established.Even if the Kingdom achieves thenew ambitious target, it is importantto put things in perspective. Thecountry has a meager 25 MW of re-newable-energy generation capacity(mostly solar photovoltaic) installedas per the end of 2015 and even withthe newly announced target, renew-ables would constitute just 5 percentof the country’s electricity con-sumption, as demand continues togrow too. For the foreseeable future,the rise in electricity in demand willbe met mainly by oil- and gas-firedpower plants.

The drive for downstreamintegration will continueTurning from the power sector tothe downstream, Saudi Arabia hasbeen increasing its refining capacitysignificantly in recent years. Manyfactors can account for this drive.The most important motivation isthat Saudi Arabia has been forced toimport expensive petroleum prod-ucts, as domestic demand has out-stripped refining capacity in certainpetroleum products such as gasolineand diesel. Investment in refining isalso still considered by many policy-makers as a key step towards creating

The men of renewal

CHANGE OF MINISTER, BUT NOT OF STARTEGY In May, Khalid Al-Falih succeededAli al-Naimi as leader of the SaudiOil Ministry. The succession, whichtook place after 21 years, will notinvolve any change of route in the policies of Riyadh.

THE POWER OF THE VICEPRINCEThe huge concentration ofeconomic power in the hands of the Deputy Crown PrinceMohammed bin Salman, hiswillingness to take risks and aneffective communication campaignVision 2030 have given greatercredibility than previous initiatives.

SAUDI ARAMCO TO THECENTER OF THE WORLDMARKETThe CEO of Saudi Aramco, NasserAmin, arrived in May to take theplace of Al-Falih. It confirms that theSaudi state energy companyintends to maintain its presence inthe global oil market. The company,for the CEO hand, has plans toexpand internationally.


41


added value by converting crude oilinto refined products and establish-ing the link between the upstreamsector and petrochemicals, which inturn provides opportunities for di-versification and downstream inte-gration into the full value chain, in-cluding the development of newindustries. Saudi Arabia has been in-creasingly encouraging their petro-chemical industries to diversify thefeedstock mix away from ethane to-wards refined products such as naph-tha, butane, and propane. In additionto increasing feedstock availability,the use of refined products providesopportunities to produce more so-phisticated petrochemical productsthat are needed to extend the valuechain and generate employment op-portunities. Finally, the limited avail-ability of gas for use in the powersector and infrastructure issues haveresulted in continued reliance on liq-uid fuels for power generation, fur-ther increasing domestic demand forliquid products.

Saudi Aramco IPO will facemany hurdlesWhile many of these themes repre-sent a continuation, and perhaps ac-celeration, of existing policy objec-tives, one new element of Vision2030 caused a significant stir—thepublic listing of Saudi Aramco. Noexact timeline has been announced,but 2017 has been mentioned as adesired target. The potentiallybiggest IPO in history is likely to befraught with challenges.Saudi Aramco does not own the re-serves; it has the monopoly to pro-duce from reserves. Thus, any valu-ation will not be based on the valueof the reserve base, but most likelyon the discounted cash flows intothe future, which depends on theprofit per barrel and the quantity ofoil produced. The profit per barrelwill depend on the level of taxes androyalties Saudi Aramco pays back tothe government; if the taxes and roy-alties that go to the finance ministryare high (as they currently are), thenthe valuation will be low. The factthat the government can increasetaxes on Saudi Aramco also intro-duces ‘sovereign risk’, and hence thecomparisons with private companiessuch as ExxonMobil do not hold, asone cannot apply the same discountrate to Aramco’s cash flows given thehigher level of risk. But the hurdles don’t stop here.Given the size of the IPO, a listing inforeign exchange may be required, asthe small size of the Saudi stock ex-change can’t absorb such a highvalue IPO. However, listing outsidethe kingdom would raise the possi-bility of ‘frivolous lawsuits’ againstthe kingdom. Also, as Saudi Aramcoloses the status of a ‘national oil com-

pany’, it could be subject to anti-trust suits. In many ways, the question is lessabout how much cash the IPO raises,but whether the IPO will result in ashift in the fundamental behaviour ofthe Kingdom. Shareholders do notvalue spare capacity and would en-courage faster development of re-serves than a government. Given theIPO will put less than 5 percent ofthe company in the public, the mi-nority shareholder will likely haveno influence over such key decisions.Also, it is obvious that the separationof Aramco from the energy ministryis hardly simple. In fact, there was anattempt earlier to separate the twoby removing Al-Naimi as the Chair-man of Saudi Aramco, but we areback to the old system now with Al-Falih as the Chairman of the Aramcoboard and the energy minister, high-lighting the complexities in separat-ing the two.

Change but a slow andbumpy oneThis point about complexity isbroadly true for almost all of the top-ics explored above. However, these

immense challenges don’t mean thatthere would be no change in SaudiArabia. Structural reforms are muchneeded to shift the economy to amore sustainable path and even ifonly a small part of the vision is be-ing implemented, the Saudi econ-omy will look very different in 2030than it is now. In this transition, theenergy sector will continue to play akey role. But amidst all the excite-ment, one also needs to be aware ofthe challenges ahead and the time ittakes to implement such changes,particularly in a conservative societyand in an oil-based economy wherethe sense of entitlement among cit-izens is high and institutional capac-ity to undertake deep reforms is low.Furthermore, structural reform israrely a linear process, and there willbe bumps on the way. Transformingthe economy doesn’t just create win-ners; there will also be losers whoneed to be protected by the govern-ment to maintain public support forthese reforms. This is key to ensur-ing a smooth transition to the ‘vi-brant’ economy.


THE LARGEST IPO IN HISTORYThe arrival on the stockexchange of Saudi Aramco, the Saudi state-owned oilcompany, could be the largestlisting ever. The transactionwhich, as desired by thegovernment, should take placein 2017, promises, however, to be very complex.


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The price trap

108.12$/b

JAN 2014 109.54$/b

MAY 2014

97.09$/b

SEP 2014

47.76$/b

JAN 2015

64.08$/b

MAY 2015

The push for reform embodied in SaudiVision 2030 could weaken if oil returns to over $70 per barrel. That level would ensure a balanced budget under the assumption that recent spending cuts willhold. Another challenge could come from the conservative nature of Saudi culture

PERSPECTIVESAUDIthe

Markets/What changes if prices vary

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audi Arabia is the world’s 19th largesteconomy. It is the largest exporter ofoil, the most important source of oilto the big Asian economies and an im-portant source of oil for Europe, theU.S. and many other parts of theworld. It has the largest convention-al oil reserves known, at about 800 bil-lion barrels in place with about 266billion barrels in proved reserves,depending on the price of oil.Islam started in what is now SaudiArabia, and millions visit the countryfor the Muslim pilgrimages of theUmrah and the Hajj. There are 1.6billion Muslims worldwide who prayto Mecca 5 times daily.Saudi Arabia is also a major support-er of the linchpin states of Egypt andJordan. Saudi Arabia is in the midstof complex and expensive conflicts inYemen, Syria and elsewhere. SaudiArabia is the anchor for the Gulf Co-operation Council, the GCC, whichis not just an economic grouping, butalso a defensive one. These are just afew of the many reasons why SaudiArabia is an important country.

Internal and external threatsSaudi Arabia has had major problemswith terrorism on its own soil, andthere have been numerous attacks onthe country from various extremistgroups in recent years, including themultiple attacks in the country just re-cently. Contrary to the prevailing nar-rative, the Saudis are doing a lot tocounter terrorism. If Saudi Arabiaever faces an existential threat fromISIS or another terror group, the en-tire world would face a major strate-gic calamity. Not only would SaudiArabia be at threat, but also the U.S.5th Fleet’s base in Bahrain and themassive Al Udeid Air Base in Qatarwould be at risk. The UAE, Qatar,Bahrain, Iraq, Jordan, Iran, and manymore places would be threatened ifSaudi Arabia fell to extremists. Inshort, the global impact would behuge if such a regional calamity tookplace. Saudi Arabia’s most important glob-al concerns include its reliance on theprice of oil and the effects of globalfinancial markets, perceived threatsto its security from various global ac-tors and relations between the Mus-lim and non-Muslim worlds. Itsmost important regional concerns in-clude the security and prosperity ofthe GCC and other allies and part-ners, such as Egypt, Jordan, andMorocco. These concerns also in-clude the direct perceived threats thatissue from Yemen, Syria, Iraq, and,most particularly, Iran. Some of itsmost important domestic concernsinclude domestic threats from terrorcells and potential instability in itsEast Province, where the Shia are themost highly concentrated in thisSunni dominated state. The Saudis

are concerned about Iran stirring upfurther trouble in that part of theircountry, home to most of its oilproduction. Other domestic con-cerns include unemployment andunderemployment and their actualand potential social and security im-plications.

Economics and nationalsecurity Like all countries, Saudi Arabia needsa healthy, stable and growing econ-omy to support its global, regionaland domestic concerns. Unemploy-ment in Saudi Arabia is on averageabout 11.2 percent, but underem-ployment is much higher. Both un-employment and underemploymentare sources of personal stress and po-tential social stress and instability. Fur-ther, the unemployment rate forpeople from 15 to 30 years old is, onaverage, 35 percent. For those aged15 to 19, it is close to 50 percent. Afull 60 percent of Saudis are under 30.And their job prospects seem limit-ed. Women are a massively under-utilized resource as they have a verylow labor participation rate, at about20 percent, and very high unem-ployment for those trying to partic-ipate, at about 30 percent. And theyare half the population. Most employed Saudis work in thepublic sector in jobs that pay on av-erage about 70 percent more than theprivate sector, but the public sector isoften far less productive than the pri-vate sector. Public sector compensa-tion is a huge part of the governmentbudget, and it has been growing rap-idly since the “Arab Spring” shockedthe region and the world. Unfortu-nately, while compensation has risen,productivity has been stagnant. Most of those who work in the pri-vate sector are expatriates from SouthAsia, Southeast Asia and the Arabworld. They are usually on shortterm, and often tenuous, contracts,whereas many of the government jobsare long term, if not for life. MovingSaudis from the public sector to theprivate sector will be difficult, butevery time there is downward volatil-ity in the price of oil, there are pres-sures to do just this. There is a big disconnect between theSaudi education system and the sortsof employees they need. The primaryeducation system is not performingup to the standards the previousKing had hoped for when he pouredmoney into education. The second-ary schools are not up to internationalstandards. Even with the growth ofthe number of universities and uni-versity students in the past fewdecades, not enough has been doneto get Saudi students up to speed forthe work force. Sadly, about 50 per-cent of Saudi college students dropout. There need to be far more busi-

47.62$/b

SEP 2015

30.70$/b

JAN 2016

70$/b

SAUDI ARABIA’SFISCAL BREAKEVEN PRICE

SPAUL SULLIVAN

Professor of Economics, NationalDefense University adjunct professor,Security Studies at GeorgetownUniversity (Washington DC). He is internationally recognized as an expert on issues related toenergy and water security, US-Arabrelations, the politics and economics of North Africa and the Middle East.

FAR FROM BREAKEVENThe fall in oil prices over the last two years has resulted in a drastic reduction in Saudi oil revenue, and, therefore, a rising budget deficit. The austerity policies implemented by the government have not been enough to cover the rapid collapse of oil prices.

According to analysts, in order for the Kingdom’s budget to break even, crude oil prices would need to remain at around $70 per barrel. Source: Deutsche Bank


2012 2013 2014 2015 2016 2017

Nominal GDP(€ M)

GDP real growth rate(%)

GDP per capitapurchasing power parity($)

Unemployment(%)

Public Debt(% GDP)

Inflation(%)

Change in volumeof importsof goods and services(%)

Population(million)

12.211.6

11.211 10.8 10.5

9.5 9.4 9.214.8

31.837.6

2.8

3.5

2.7

2.2

3.94.6

7.7

3.7

11.3

5.2

1.9 2.2

5.4

2.7

3.6 3.4

1.9 2

646,680

655,750 664,120

575,400584,830

657,520

29.2

30

30.831.4

32 32

50,655

52,512

54,17955,202 55,365 55,793

ness, engineering, science, entrepre-neurship and other university andtraining courses to connect Saudi stu-dents to the needs of their country. For many decades, oil has dominat-ed the economy and has been relat-ed to changes in the economy. Oil isroughly 35-45 percent of the GDP ofSaudi Arabia, while oil exports areabout 30-40 percent of GDP. Oil ex-ports make up roughly 75-80 percentof all exports. Oil revenues are about80-90 percent of all revenues. Thelower percentages apply at times oflow oil prices. There is a distinct cor-relation between the changes in theprice of oil and the changes in theGDP of Saudi Arabia—the curvesnearly shadow each other. When the price of oil increases, Sau-di Arabia has responded with in-creases in government expenditures:money dedicated to large construc-tion projects, ambitious plans fornew cities, infrastructure and more.When the price of oil drops, SaudiArabia responds with cutbacks ongovernment expenditures and otherdevelopment plans. Saudi Arabia has massive social con-tract programs, which can include freeeducation, free health care, and oth-er social benefits. It also has consid-erable military programs and re-cently has been involved in expensiveconflicts. When oil times are good,the Saudi government is flush withfunds. When oil times are bad, Sau-di Arabia has had to dig deep into itsfinancial reservesSaudi fiscal balances have been in-creasingly in the negative rangesince the recent drop in oil prices. Atpresent, Saudi Arabia has a small for-eign debt, but it could grow muchlarger if oil prices remain low. Re-cently, they have been going to in-ternational financial markets forbond issues. This has all happenedbefore, but it is time to stop this dis-ruptive cycle.

The disruptive changes of Vision 2030 The challenges that Saudi Arabia istaking on with its Vision 2030 arebreathtaking. They want to reduce of-ficial unemployment from over 11percent to about 7 percent. This ispossible. They want to increasewomen’s participation in the econo-my from about 20 percent to 30percent. This is technically and eco-nomically possible, but socially thismay create strains and cause pushbackfrom ultra-conservatives.They want to increase non-oil rev-enues to about 7 times what they arenow. Success on this will depend onhow taxes are increased, how otherfees are increased, and how the coun-try moves toward a more diversifiedset of industries and services. Thereare ambitious goals for tourism,

which are technically and economi-cally possible, but socially they couldraise real issues. Saudi Arabia wantsto drastically increase the impor-tance of the private sector, includingsmall to medium sized industries andnon-profits. It also wants to attractlarger amounts of foreign direct in-vestment and to considerably in-crease domestic savings. It wants tostart the privatization of health care,increase renewable power (althoughlately some of these goals have beencut back), and make big changes inother parts of its energy sector. Sau-di Arabia wants to be far more com-petitive and be one of the top logis-tics countries in the world. Saudi Ara-bia wants to reform its defense sectorand start developing a viable defenseindustry of its own. The leadershipwants to make its government one ofthe most effective in the world. Saudi Arabia wants to modernize itseducation and training systems, as thisis vital if other parts of this programare to work. If education and train-ing do not keep up with and enableneeded changes, Vision 2030 is indeep trouble. There will also need tobe a change in behavior towards tak-ing private sector jobs, and workethics and behaviors will have tochange among some workers. En-trepreneurship and the entrepre-neurial spirit will need to be devel-oped quickly.

The Aramco IPO, the PIFand other sources of fundingSaudi Arabia is developing ideas foran IPO for Aramco, and it will haveto make public a lot of data on thismassive company and its subsidiaries.There is no accurate, audited valua-tion of the company, and thereseems to be a lot of guesswork aboutits valuation. The most commonguess is about $2.5 trillion, butguesses range from $2 trillion toabout $12 trillion. Data and analysessupporting any of these guesses arenot public and may not actually ex-ist in a cogent form. Figuring out thepresent value of its massive andcomplex assets could take consider-able time and effort, so an accurateestimation will not appear tomorrowor even in the next few months if itis done properly. The planned Aramco IPO seems tobe for only 5 percent of the compa-ny, a figure that may increase later.Which 5 percent of Aramco will besold off and to whom is not clear atall. What the value of that 5 percentmay be is not clear, but the numbersmost commonly used for the 5 per-cent are between $135 billion and$150 billion. The Saudi governmenthas publicly stated that the incomefrom the IPO will be put into its Pub-lic Investment Fund (PIF). Aramcowould be transitioned into a holding

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Source: Prepared by the Italian Embassy based on EIU and IMF data. N.B.: for the year 2017, EIU forecasts are given


company with an independent boardand maybe other changes in leader-ship structures and strategies.Other assets, such as the financial cen-ter of Riyadh, would also be movedinto the PIF. Funds will also comefrom a reduction in some subsidies,a change in the economic social con-tract of the country, and some taxchanges, all of which do not seemfirmly set yet. Saudi Arabia still hasmassive financial reserves, consider-able mineral and other resources, andespecially human resources that haveyet to be fully tapped. However,there are some serious questionsabout how long it can continue todrain its reserves and continue onsimilar economic paths. It is vital thatthe right decisions be made withthis money.

Hopes and worriesIf the oil price shoots up to $70, $100or even $150 per barrel, then this maytake the edge off the need for a Vision2030. Saudi Arabia can get oil out ofthe ground for an average total costof about $10 per barrel, but it needsover $70 a barrel to get to a break-even government budget given theimportance of oil revenues to thebudget. So the $70 and $100 targetsare something to keep an eye on. Ifthe coffers of the reserves in SAMA(the Saudi Arabian Monetary Agency)and others start to fill up quickly andthe budget pressures are dissipated,then there may be social and leader-ship pressures to move away from thedisruptive changes that Vision 2030would bring. This would be a shortrun view that could prove dangerous.If Saudi Arabia brings back its previ-ous expenditure levels or more, thenthe breakeven budget could be evenhigher. Oil prices can drop again. There

could be new huge finds in tight oilfields globally that could see the in-crease in non-Saudi oil production,much like what happened in theU.S. in the last few years. There islikely to be greater global emphasison a movement toward electric, nat-ural gas and far more efficient trans-portation vehicles. Globally trans-portation vehicles are now fueled 95percent by oil-based products, andabout 65 percent of global oil use isfor transportation. Other uses of oil,such as in industrial processes, chem-icals, and more, could also begin tomove further from oil-based feedstockif there is yet another upward oil priceshock. There is increasing pressure to movefrom fossil fuels for environmentalreasons as the threat of global climatechange gets closer and more pro-nounced. If many countries enact reg-ulations and laws to respond to per-ceived and actual climate changethreats, the oil markets could sufferfrom those changes. The recentCOP21 meetings in Paris could be astrong indicator of where this mightbe going. The conservative nature of Saudisociety could bring challenges to Vi-sion 2030. One must consider whathappened to Saudi Arabia’s rival Iranin the 1970s when the Shah tried tomove the economy and the societyforward too quickly. The Vision 2030program, even with its breathtakingambitiousness, is far more realisticthan the Shah’s program. However,there are still possible problems withhow well Saudi culture can absorb thechanges that Vision 2030 entails.This may be especially so in thechange to the ratio of the public to theprivate sector and in the greater in-corporation of women into the laborforce, and hence into public life.

Sharp and fast economic changescan also produce unexpected socialdislocations. The Shah did not have a project tomove away from oil, but he hadmassive ambitions for his country, am-bitions that contributed to shatter-ing Iran’s economy as roads andports clogged, inflation and unem-ployment skyrocketed, and the coun-try’s economy literally choked onthe changes. Iranian society also re-acted badly to his societal and eco-nomic “modernization” plans andtheir effects. Vision 2030 focuses mainly on eco-nomic change, without much plan-ning for political or social change, butwith more and more women enteringthe labor force, some social changewill occur. When there is a majormovement from the public to the pri-vate sector, work behaviors will haveto change. Moving away from oil, arentier commodity that has allowedSaudi Arabia to grow and develop bypumping it out of the ground and sell-ing it, to the complexity of more man-ufacturing, service, and value-addedand more competitive industries andprojects could also bring socialchanges. Many of these changescould be an improvement for someSaudis, but some others may object.Also, many government jobs are farless stressful and demanding thanthese new and different private sec-tor jobs. An entrepreneurial classwould have to be enlarged from whatexists now. The pressures of beingsuccessful in the private sector couldbring significant changes to someSaudi lifestyles. Saudi Arabia has come a very longway since the days when the Kinglived in a fairly small earthen palaceor a tent, and his treasury could fitinto a camel bag – and when the King

was more interested in finding waterthan oil because there were few usesfor oil during those early times. TheSaudi Arabia of today is astonishing-ly different from what it was in 1940,1950 or even 1990. Saudi Arabia hasexperienced economic and otherchanges in its past, but there has beennothing as substantial as what isplanned in Vision 2030 in speed,depth and breadth. If they get thisright, they could save themselvesfrom political, economic and re-source troubles coming their way, andpossibly help stabilize the region. Ifthey fail to diversify, change and useand develop their resources and peo-ple better, and with Saudi societymoving smoothly with these changes,we will all be in trouble. The real problems with such ambi-tious and disruptive programs are of-ten found in the details. What Sau-di Arabia says it wants today for2030 may not be what happens by2030. Expectation management willbe vital, most particularly for Saud-is under 30, who represent about 60percent of the population and agrowing labor pool in need of manyjobs and a lot of economic hope.

45


25% Militaryand Security

23% Education22% BudgetSupport Provision

12% Healt and Social Development

9% Economic Resouces

3% Infrastructure and Transport

3% Public Administration

3% Municipality Services

SAUDI 2016 BUDGET ALLOCATION

billion US$

0

50

100

150

200

250

300

350

2014

279 293

162

260

137

224

2015 2016[ESTIMATES]

TOTAL EXPENDITURETOTAL REVENUE

SAUDI BUDGET REVENUE AND EXPENDITURE

In 2014, with oil at $110 per barrel, the Saudi deficit amounted to $14 billion. In 2016, despite a substantial cut in public spending,the gap rose to $87 billion.

The distribution of the Saudi budget for the year 2016. The mainshare is absorbed by military spending, followed by education.

Source: Saudi Ministry of FinanceSource: Saudi Ministry of Finance

Read on www.abo.net, the articlesby Giuseppe Acconcia, Paul Bettsand Yao Jin on the same subject.


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audi Arabia’s former oil ministerSheikh Zaki Yamani thought he sawthe handwriting on the wall years ago.In remarks that have now become al-most legendary, Yamani said in theyear 2000 that “Thirty years fromnow there will be a huge amount ofoil—and no buyers. Oil will be left inthe ground. The Stone Age came toan end, not because we had a lack ofstones, and the oil age will come toan end not because we have a lack ofoil.” Yamani believed that advancingtechnology would eventually satisfyglobal demand for energy and wouldthereby render oil redundant, a ref-erence to stranded assets long beforethe phrase became popular or evenknown.

Yamani’s bête noirThere could be no greater bête noirthan Yamani’s vision for anyone in theoil industry, but especially for SaudiArabia, whose national income is 90percent dependent on oil revenues. Ashard to imagine as Yamani’s visionmight be for many people in the oilindustry, today’s government in Sau-di Arabia seems to have taken it veryseriously. Indeed, it can hardly be anaccident that Saudi Arabia’s ambitiousplan for the future coincides with thedate seen by Yamani as marking theend of the oil era: Vision 2030. How-ever, even as Saudi leaders may ac-knowledge the vision of Yamani, itdoes not follow that they share his vi-sion. To the contrary, as will be arguedhere, Saudi leaders have developedtheir own vision of 2030 to prolongthe oil era, not to mark its demise.Saudi Arabia’s Vision 2030 was un-veiled in April 2016 amid an eco-nomic downturn that had seen in-ternational oil prices drop by morethan 50 percent since June 2014. Giv-en that international collapse in oilprices and the attendant drawdown ofSaudi financial reserves, many pun-dits saw Vision 2030 as a reactive ef-fort by Saudi leaders to begin shoringup the country’s finances and diver-sify the economy away from its neardependence on oil. Bloomberg Newsprovided a clear example of that at-titude in a story carrying the headline“The $2 Trillion Project to Get Sau-di Arabia’s Economy Off Oil.” In the story, Bloomberg writersopined that there was “near-panic”among Saudi advisers as they dis-covered the country was “burningthrough” its foreign reserves at a fasterpace than anyone knew, “with insol-vency only two years away.” The sto-ry went on to intone that, “Plum-meting oil revenue had resulted in analmost $200 billion budget shortfall—a preview of a future in which theSaudis’ only viable export can nolonger pay the bills, whether be-cause of shale oil flooding the mar-ket or climate change policies.” Pub-

lished four or five days before the un-veiling of Vision 2030, the Bloombergstory was almost sensational enoughto short-circuit critical thinking intothe belief that Saudi Arabia is look-ing to abandon oil altogether in itsrush to an economic model basedmore on investment income than onits highly developed petroleum in-dustry. A few days after the an-nouncement of Vision 2030, TheEconomist magazine added its ownsensationalism to the prevailing view,stating that Muhammad bin Salman,Saudi Arabia’s 30-year-old deputycrown prince, unveiled “a string ofcommitments to end the kingdom’sdependence on oil by 2030.” It is hardto understand how the normallystaid Economist could have missed akey point in Vision 2030, whichclearly states that, “We will continueto manage effectively oil productionto ensure a rewarding flow of oil rev-enue and reinvestment.”

Oil essential to the Saudi VisionOil is and will remain very much atthe heart of the Saudi economy bothnow and in 2030. That point wasmade clear by Khalid Al-Falih, thecountry’s recently appointed ministerof petroleum and mineral resources.According to Al-Falih, “nobody hasthe intention of turning off the oileconomy in Saudi Arabia.” To thecontrary, Al-Falih said, Saudi officialsbelieve global economic growth willsupport rising energy demand ofabout 1.5 million barrels a day (b/d)of oil for the foreseeable future. Tohelp meet that demand, as well as dis-ruptions of supplies if other produc-ers falter, the Saudis are investingheavily in their spare production ca-pacity. Al-Falih was also sanguine about theplace of oil in the face of competitionfrom other sources such as renewableenergy. “We’re not afraid of it, butwe’re also realists and we know thatoil will be a significant part of the en-ergy mix for decades to come,” Al-Falih said. “Even if the share of oilgoes down from, say, 30 to 25 percent,25 percent of a much bigger globaldemand means a much higher ab-solute number of barrels that will bein demand by 2030 or 2040.” Even as the Saudis are trying tobuild up the country’s oil sector, Al-Falih nonetheless hoped that, “thenon-oil economy will grow evenfaster.” That fits with the thinking be-hind Vision 2030 where a partialsell-off of Saudi Aramco is destinedto play a key role in helping the non-oil sector grow. With the Saudi firmvalued at $2-$3 trillion, the pro-posed sale of five percent would gen-erate income of $100-$150 billion andprovide funding for investmentabroad as well as in the Saudi private

SERIC WATKINS

He is a political risk analyst specializingin oil, shipping and security. He wasrecently Visiting Fellow at the KingAbdullah Petroleum Studies andResearch Center in Riyadh.

The main objective of thedocument is not to make theSaudi economy independent from oil, but to protect the oil sector and to try to offset the loss of revenue for the state coffers resulting from the “price war”


sector, both key aims of Vision 2030.From the standpoint of investors, op-timistic observers say the sell-offcould provide “access to one of theKingdom’s prized industries” andpave the way for greater interna-tionalization of the Saudi economy.” That appears to be wishful thinkingas it is not yet clear what investorscould expect from a stake in SaudiAramco. But they are unlikely to haveanything like control or even accessto the company’s inner workings,much less the entire Saudi economy.According to Al-Falih, even after aninitial public offering, the Saudi gov-ernment will continue to make sov-ereign decisions on the firm’s oilproduction and spare capacity. Al-Fal-ih said that is something that “in-vestors are going to have to accept”as “part of the package of buying intothe lowest-cost producer.” In fact, as suggested in Vision 2030,stakes purchased in Saudi Aramcomight well have nothing to do withthe oil industry at all. “We believe thatSaudi Aramco has the ability to leadthe world in other sectors besides oil,and it has worked on a sweepingtransformative program that will po-sition it as a leader in more than onesector,” the document states. In aword, investors might find them-selves holding shares in an Aramcosubsidiary working on projects out-side of the oil industry altogether. Nor is there any timetable for an IPO.According to Al-Falih, an initial pub-lic offering of Saudi Aramco wouldrequire “extensive rewiring of our fi-nancials and the relationship with thegovernment.” And that, he said,“would require a significant amountof time.”

Vision 2030 aims to prolongthe oil eraInstead of a document aimed atweaning the Saudi economy off oilanytime soon, Vision 2030 representsan effort to protect and prolong thecountry’s petroleum industry in theface of an extended and expensive bat-tle for market share. While Vision2030 clearly does not share Yamani’sapocalyptic vision of an oil industryin demise, the Saudi document mustbe understood in the context of thekinds of technological advances Ya-mani felt would make the industry re-dundant by 2030. Not least, Vision2030 needs to be understood in thecontext of the current struggle overclimate change and renewable ener-gy. The most visible sign of that strug-gle came over a year ago in Paris atthe UNESCO Business and ClimateSummit. At the time, Saudi Arabia’sformer oil minister, Ali I. Al-Naimi,made news by announcing his coun-try’s seeming desire to switch pro-duction from its vast petroleum re-sources to solar power. “In Saudi Ara-

bia, we recognize that eventually,one of these days, we’re not going toneed fossil fuels,” he said. “So we haveembarked on a program to developsolar energy ... Hopefully, one of thesedays, instead of exporting fossil fuels,we will be exporting gigawatts of elec-tric power.” As with Vision 2030, world reactionwas immediate and sensationalistic.“Saudi oil minister: ‘Fossil fuelsdoomed, we’re switching to solar’,”said one headline. “Saudi Arabia’s so-lar-for-oil plan is a ray of hope,” saidanother. Similar headlines appeareda few weeks later, when Al-Naimi toldreporters ahead of an OPEC meet-ing that solar energy represents an op-portunity for everybody. “At OPECthe Saudi Oil Minister Mainly Wantsto Discuss Solar Power,” read oneheadline, which also ran the subhead:“What does it say about oil when Sau-di Arabia embraces solar?”.

Postponement of the solarprogramPace headline writers, Saudi Arabia,which holds at least 260 billion bar-rels of conventional oil reserves, theearth’s largest, has no plans to droppetroleum for solar power or any oth-er form of renewable energy. Saudileaders may recognize that oil is a fi-nite resource and that a new era of en-ergy may eventually arrive, but theyare staving off that era as long as pos-sible. “I see renewable energy sourcesas supplementing existing sources,helping to prolong our continued ex-port of crude oil. And this is why weare investing in solar energy,” Al-Nai-mi once said. At the UNESCO meet-ing in Paris, Al-Naimi acknowledgedSaudi plans for solar energy, but re-jected the idea that solar energycould replace oil as an affordable fuelany time soon. He suggested that so-lar energy is a luxury that can be af-forded by developed nations but notby developing ones. “We can affordto go after solar, but many people inAsia and many people in Africa can-not afford that. They’re still burningdung and wood and what have you forenergy,” he said. Then he summed upthe Saudi position: “Let us focusour attention on how can we manageemissions so that we can continue us-ing fossil fuels until we are able to de-velop the alternatives that we areworking for: solar, wind, renew-ables—whatever.” Saudi Arabia has abundant supplies ofthe cheaper alternative in its 260 bil-lion barrels of crude reserves—apoint the minister underscored inParis by asking fellow panelists if theworld was ready for him to end hiscountry’s oil production. “Can you af-ford that today? What will happen tothe [oil] price, if today I remove 10million barrels per day off the mar-ket?” It was a rhetorical question but

one that made his point. For now, thewidespread use of solar and otherforms of renewable energy has beendelayed while oil continues as the af-fordable choice. Saudi Arabia has played a key role increating that affordable choice. TheUNESCO Summit came amid aglobal price war that saw oil pricesdropping by 40-50 percent over thepreceding year—a price regime thatcontinues today. During all of thistime, more than two years, Saudi Ara-bia has refused to cut production andhas successfully urged OPEC to dolikewise, preferring to see prices fallthan to lose its market share. At thetime, Al-Naimi put it in a very clearmanner: “If I reduce, what happensto my market share? The price will goup and the Russians, the Brazilians,U.S. shale oil producers will take my

share.” He might have added that re-newable energy producers also wouldlike to take his share.

The Saudi’s competitiveadvantageSaudi Arabia’s influence on world en-ergy markets rests on its ability to pro-duce some 10 million barrels of oil aday at $4-$5 a barrel. That’s a com-petitive advantage that no other en-ergy producer can match, especiallysince Saudi reserves enable it to sus-tain production of ten million barrelsof oil a day for the next seventyyears or more. That’s more efficientand long lasting than any other pro-ducer on earth, and it explains whySaudi Arabia can rock—or stabi-lize—world energy markets. Saudi Arabia’s strategy for marketshare affects all higher-priced pro-

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ducers of energy, including solar.That was evident in January whenplans to implement a $190 billion so-lar energy program in Saudi Arabiawere delayed from 2032 to 2040 orlater. The plan, which aimed at cre-ating electricity from solar energy tooffset domestic demand for oil, wasdelayed because of the low petrole-um prices, which weakened near-termincentives to save oil for export. Asshown by this delay in its own solarprogram, Saudi efforts on the marketcan slow the transition to renewableenergy by making it less affordablethan oil. Saudi leaders may acknowledge thatthe world is in transition from the eraof oil to another yet to come. Theymay even concede that the oil era willend because technological advanceswill introduce a new form of energy,

not because oil will be depleted.New technological advances are athand, and they may recognize thatpotential. But the Saudis are notprepared to cede their country’s pre-dominant position on energy justyet. It comes down to the price war,and their policy on producing abun-dant low-cost supplies is currentlywinning the war for oil’s marketshare and for Saudi Arabia’s share ofthe oil market.

Vision 2030 offsets highcosts of market shareYet, this battle for market sharecomes at a high cost to the Saudieconomy, and that is precisely whereVision 2030 comes in. As Saudi cof-fers deplete due to the prolonged bat-tle over market share, a battle thatcould extend years into the future,

there are potentially fewer fundsavailable to cover the subsidies thatSaudi citizens have long enjoyed. Asa result, a new policy has to be de-veloped that will make a virtue of thatfinancial necessity. A new policy hasto be developed that will enable theSaudi government to compensatefor a potentially long-term period ofreduced income that could create un-rest among its populace. That poli-cy is Vision 2030—a policy that seesinflows of private foreign capital as ameans of filling any shortfalls thecountry may experience due to thecontinuing struggle for its share of theenergy market as a whole and the oilmarket in particular. Vision 2030 isnot Yamani’s apocalyptic vision from16 years ago. Unlike Yamani, Vision2030 does not see the end of the oilera as inevitable. To the contrary, Vi-

sion 2030 sees the oil era as elastic, asa period of time that can be stretchedinto the future as long as Saudi Ara-bia has low-cost oil to be producedand sold. Vision 2030 implicitly rec-ognizes that high oil prices actuallywork against Saudi market share bymaking high-priced producers of en-ergy more competitive. To reduce thatcompetition and maintain its ownshare of the energy and oil markets,Vision 2030 recognizes that SaudiArabia may have to settle for lowerprices for an indeterminate future. Asthat means potentially fewer funds forpublic subsidies, Vision 2030 extolsthe virtues of private foreign capitalas closing the potential gaps betweenthe country’s oil earnings and its so-cial expenditures.

49


2,9072,2023,1637,153

988

9,713

CRUDE OIL PRODUCTION [1,000 b/d]

REFINERY CAPACITY [1,000 b/cd]

OUTPUT OF REFINED PETROLEUM PRODUCTS [1,000 b/d]

OIL DEMAND [1,000 b/d]

CRUDE OIL EXPORTS [1,000 b/d]

EXPORTS OF PETROLEUM PRODUCTS [1,000 b/d]

Oil:record numbers

Source: OPEC


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Iran/Meeting the world after sanctions

Between Europe and the Asian Giants

Oil production has returned to pre-embargo levels with surprisingspeed. Facing re-election, PresidentRouhani has tacked between theworld’s major economies; he mustnow find a way to cement dealsmade with Europe while continuingto develop relationships with Asia

50_52_Geranmayeh_ENG.qxp 19/08/16 11:35 Pagina 50

51


he cornerstone of President HassanRouhani’s mandate has been thereintegration of Iran into globaleconomic and political platforms. Histenure has so far focused on reach-ing a nuclear deal that rolls back sanc-tions, reaping the economic dividendsfrom that deal and on distancing Iranfrom its pariah status. Tehran has sofar used the positive momentumfollowing the nuclear talks to re-en-gage with Europe after a period ofpolitical hiatus and to deepen its pre-existing economic ties with its neigh-bors in Russia and Asia. Now, a yearafter the Joint Comprehensive Planof Action (JCPOA), Iran has in-creased its oil exports close to their2011 pre-sanctions level and begunto put in place deals with a range ofinternational investors. However,Iran has been disappointed with theslow pace at which preliminary agree-ments put in place with Europe overthe past year have moved forward. Inthis light, and given Iran’s immedi-ate and strategic priority to boost itseconomy and create job growth,Tehran is hedging its bets betweenEurope and the big Asian economies.

Opening with Europe Rouhani’s election and the process ofdiplomacy over the nuclear issuecreated the political space needed forEurope to begin a détente processwith Iran. Over the past three years,foreign ministers from almost allE.U. members states have visitedIran, accompanied by trade ministersor large business delegations. Justdays after the JCPOA entered im-plementation day in January of 2016and sanctions were eased, Rouhanivisited Italy and France, marking thefirst official European visit by an Iran-ian president in over fifteen years.During these visits, Iran signed arange of political, cultural, and highprofile trade deals to signal that Iranis back in business. In Italy, theIranian delegation signed deals in-volving the mining, shipbuilding,energy and infrastructure sectorstotaling roughly $18.4 billion. Dur-ing Rouhani’s visit to France, Iranagreed on more than 20 contractswith French companies estimated tobe worth over $40 billion in the en-ergy, auto and aviation sectors. Themost publicized deal was one reachedbetween Iran and Airbus for thesale of 118 planes worth $27 billion.Shortly after, the Greek and ItalianPrime Ministers became the firstWestern leaders to visit Iran in overa decade. During the visit, Italy an-nounced it was extending a €5 bil-lion credit line to facilitate Italiantrade with Iran. This was followed inApril by a visit to Tehran by the E.U.High Representative FedericaMogherini and seven E.U. Com-missioners to start a formalized and

structured dialogue between theE.U. and Iran. Stacks of preliminarycontracts have been signed betweenIran and Europe, ranging from smallto major deals. So far, though, manyof these, including the Airbus deal,have been unable to move forwardprimarily due to problems with se-curing necessary banking and finan-cial support or the necessary U.S.Treasury OFAC authorization. Thelarge European financial institutionsneeded to transact such volumes ofbusiness are either unwilling (due toa mix of political risk in doing busi-ness with Iran and the perceived un-predictability of future U.S. sanctionson Iran), or unable (given their highexposure to the U.S. market and riskof falling foul of U.S. primary sanc-tions) to do so. There is a growingperception amongst Iran’s politicaland economic leaders that Europehas been overcautious and slow at re-entering the Iranian market to regainits place as the top trade partner. TheRouhani administration wishes to al-low more time to test a Europeancomeback, but simultaneously thegovernment has welcomed greaterinvestment from the likes of Russia,China, India and South Korea, coun-tries that have shown both strong in-terest and a greater ability to enlargetheir presence in the Iranian market.

Iran’s Asia pivot? Iran has long been doing businesswith Asian countries; even through-out sanctions, many Asian companieswere given special exemption by theU.S. Treasury to continue dealingswith Iran, particularly to meet theirenergy needs. China perhaps profit-ed the most during the decade longsanctions on Iran’s nuclear program.During this period, China overtookEurope as Iran’s top trading partnerwith roughly $52 billion worth oftrade in 2014. In January 2016, Pres-ident Xi Jinping was the second P5member, after the Russian Presi-dent, to visit Tehran specifically toensure that China remained a fron-trunner in the Iranian economy. Xiand Rouhani agreed on a 25-yearroadmap for developing relationsbetween their nations, including 17agreements focused on energy andinfrastructure. Based on this, they es-timated that bilateral trade would riseto $600 billion in the next decade.Iran is assured that China has boththe financial capacity to invest in Iranand the need for Iranian energy re-sources. While China also dependson Saudi Arabia for its oil (and in-deed Xi’s visit to Iran marked the fi-nal leg of his Middle East tour), Iranhas an added advantage given its ge-ographical positioning, which makesit an important player in China’s OneBelt One Road initiative.South Korea has also re-entered the

TELLIE GERANMAYEH

She is a policy fellow for the MiddleEast and North Africa Programme at the European Council on ForeignRelations (ECFR). She focuses on European foreign policy in relation to Iran. Geranmayeh closely followedand advised on the nuclearnegotiations between Iran and world powers from 2013-2015.

STILL IN THE RACEHassan Rouhani, the currentmoderate President of Iran, is a candidate for the nextPresidential elections, to be held May 19, 2017. In the photo, Rouhani poses for photographers at the airport of Ramsar, Iran.


Iranian market in a big way. Duringa visit by President Park Geun-hyeto Tehran in May, the two countriesagreed on a financial package pledgeby South Korea to cover deals withIran worth an estimated $25 billion.Iran is expected to plan for LNG ex-ports to South Korea (having alreadysigned a memorandum of under-standing to this effect in May).Another significant and emergingeconomic partner for Iran is India.During Prime Minister NarendraModi’s visit to Tehran in May, a tri-partite deal was reached between In-dia, Iran and Afghanistan for the con-struction of Chabahar port in south-ern Iran. Under this deal, India hasagreed to contribute $500 million tofinance the development and pledged

to invest $16 billion in a free tradezone around the port. The deal alsosets in motion a transit agreement fornew railroads and roads connectingChabahar to Afghanistan, with theobjective of creating direct traderoutes connecting India to CentralAsia. If these agreements were im-plemented, it would enable India tobypass Pakistan’s rival Gwadar portwhen transiting goods to landlockedAfghanistan. In April, India’s energyminister signed contracts for devel-oping Iran’s Farzad-B gas field andincreasing export of Iranian oil to In-dia. This deal in effect mitigatessome of the profit Iran has lost as aconsequence of a largely failed “peacepipeline” agreement with Pakistan,one intended to create a transit route

for export of Iranian gas to Pakistan.Discussions for this project began in1994, and various complicationshave delayed the completion of thePakistani segments. While Pakistanis a significant economy in Asia, itcarries more geostrategic than eco-nomic importance for Iran, as signi-fied in Rouhani’s official visit toPakistan, where the roadmap forcooperation focused more on secu-rity issues. Another important deal inwhich India plays a key role forIran, and which is perhaps the biggestgame-changer for regional trade,will be the North-South Corridorproject, connecting St. Petersburg toMumbai, with Iran as the transit hub.This development has been under-way for a number of years and part-

ly stalled when Iran came under nu-clear related sanctions. Completionof this project is estimated in the nextfive years and will provide Russia withaccess to the sea via the Persian andOmani Gulf. This reduces the needto carry goods via the expensiveSuez Canal and is estimated to cutcargo transport times in the regionby 50 percent. Once complete, thecorridor links Russia, India, Iranand Central Asia and will carry withit huge geopolitical ramifications.

Year ahead Iran, like the United States, has en-tered a presidential election year inwhich the nuclear deal will becomeone of the litmus tests for judgingcandidates. The stakes are high forRouhani, who is expected to stand forre-election in Spring 2017. Duringhis previous election campaign, heprioritized economic growth forIran and promised Iranians an end tosanctions and isolation in addition toreintegrating the country into theglobal political and commercial plat-forms. In the run-up to the presi-dential race, Rouhani will be judgedfirst and foremost on his record of de-livery on the economy. His admin-istration has targeted European tradeand investment as a major part of itsplans for Iran’s economic revitalisa-tion. Iran always recognized thegrowing technological advantage ofWestern goods, but the period ofsanctions provided clarity that Iran’smost profitable industries could notachieve their full potential withRussian or Chinese investment. Overthe summer, Iran will focus its po-litical weight on resolving the exist-ing deadlocks for access to global fi-nancial networks and to find path-ways to execute the high profiledeals it has negotiated with Europeancompanies. At the same time, Iran isincreasing efforts to update its bank-ing sector with assistance from theInternational Monetary Fund. How-ever, if European companies continueto face hurdles in re-entering theIranian market, it seems unlikelythat Tehran can look to Europe foran immediate economic boost.Therefore, the Rouhani adminis-tration has pragmatically hedged itsbets with Asian countries, notablyChina, India and South Korea, whichmay prove to have greater econom-ic maneuverability for trade and in-vestment with Iran.

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million barrels per day

million barrels per day

BEFORE-SANCTIONS 20162015

EXPORT

PRODUCTION

2.1/2.3period

April-May

1.32.5

3.8estimates

2.74.0

Oil b

efor

e, du

ring

and

afte

rsan

ction

s

Source: Reuters / Iranian Oil Ministry


53


n the heart of the United Arab Emirates, a few kilometers awayfrom the big city of Abu Dhabi, the low-carbon city has beendesigned and conceived: Masdar City. Its name literally me-ans “Source City,” because the entire project was thought ofas a “source” of alternative energy, allowing the city to fuelitself. The idea, launched in 2008, immediately captivated theentire world: a city in the middle of the desert, which has be-come the center of the most innovative technological prin-ciples of environmental sustainability. The global crisis hascertainly led to the redefinition of the city’s development mo-del, in order to involve investors from third parties. This hasled to delays in funding and deadlines. However, accordingto Yousef Baselaib, Executive Director of Sustainable Real Esta-te of Masdar City, the goal of making the project a sustaina-ble development model is near: “In April, we announced theapproval of the detailed Master Plan by the Urban PlanningCouncil, which has paved the way for a major expansion. Thiswill allow us to reaffirm our desire once again to provide amodel of sustainable development of our cities now and in thefuture. Masdar City aspires to achieve the 4 Pearls Communityrating of the “Estidama” project and would be the first in theUnited Arab Emirates to so so.”

What is the idea behind the Masdar City project?Masdar City broke ground in 2008 to build a template, or “gre-enprint.” for sustainable urban development and to promotean innovation hub in the emirate of Abu Dhabi. Today, the cityis growing as a thriving community and a genuine innovationecosystem that has already made great strides in connecting edu-cation, R&D, technology and business opportunity. The city

is a living demonstration of thepotential of clean energy de-ployment, clean-tech inno-vation, sustainable urban de-velopment, and human capi-tal creation. There is a wealthof clean energy pilot projectsaround the development; forexample, in solar energy, elec-tricity storage, biofuels, districtcooling, and sustainable ar-

chitecture. Masdar’s approach to urban development is basedon the three pillars of sustainability—social, economic, envi-ronmental—to attract investment and encourage entrepre-neurship, improve quality of life, and limit the carbon footprintof our towns and cities. The innovation we have overseen is sup-porting the deployment of clean energy in the U.A.E., the re-gion and overseas, and the realization of future projects and thecommercialization of new technologies. Over the next five ye-ars, Masdar City’s footprint will increase nearly fourfold as wedevelop its education facilities and apply research projects evenfurther, enhance the services and infrastructure of its business

A model environmental city

In Abu Dhabi, a plan to build “the world’smost sustainable eco-city” is taking shape,implementing cutting-edge technology to simultaneously facilitate rapidurbanization and reduce energy and water use

Masdar City/Interview with Yousef Baselaib, Executive Director of Sustainable Real Estate

ISIMONECANTARINI[AGENZIA NOVA]

Yousef BaselaibHe is Executive Director of Masdar’s Sustainable Real Estate divisionand its flagship project Masdar City, a ‘greenprint’ for the sustainabledevelopment of our future cities. He is responsible for driving the overall growth and direction of Masdar City’s initiatives,and developing future opportunities in sustainableurban development in the MENA region and beyond.

A journalist, has covered the MiddleEast and North Africa for the lastseven years. In 2010, he began tocover Libya, writing articles andanalyses in economic and socialfields. He moved to Agenzia Novain 2014 and continues to deal withwith Middle Eastern issues, payingparticular attention to the energyand defense industries.

53_55_Masdar_su3p_ENG.qxp 19/08/16 11:36 Pagina 53

and investment free zone, and continue to build new commercialand office space and residential communities.

What does the creation of a “zero emissions city2”represent for an oil-producing country, which is also heavilydependent on hydrocarbons?

First of all, I should mention that Masdar City is “low carbon”as opposed to “zero carbon.” Minimizing the development’scarbon footprint is an ongoing process. With each new buil-ding or phase of the development, we try to push the enve-lope further. Masdar City is designed to consume 40 percentless energy and water than built-up environments of a com-parable size. Our vision remains “zero carbon.” However, nozero-carbon urban development exists today. Although theU.A.E. is seen as a country dependent on hydrocarbons, the-re is a strong rationale for building a sustainable city that canlead the drive towards the greater use of renewables and cle-an technology. We live in one of the harshest desert climatesin the world, and keeping cool in the summer months is ener-gy intensive. However, the U.A.E. is aware of its energy ne-eds and its environmental impact. That’s why we’re doing so-mething about it, as there are tangible benefits from investingin and generating renewable energy in the U.A.E. Diversifyingthe global energy mix is critical if we’re to meet rising powerdemand, address energy security and build a sustainable fu-ture. It will help reduce our natural gas imports, diversify ourenergy sector and increase the security of our energy supply.Investing in renewable energy also supports Abu Dhabi’s goalof transitioning from an economy based on exporting natu-ral resources to one based on knowledge capital.Renewable energy is part of the future, and the U.A.E. is poi-sed to maintain its leadership in the energy sector because werecognize the economic, social and environmental benefits ofdeploying sustainable forms of energy. Seeking additional se-cure sources of power also boosts our national energy secu-rity because oil and gas are commodities that are naturally sub-ject to price variations due to the volatility of international mar-kets. The use of oil as a fuel for power generation has decreasedsubstantially in recent years. Today, it accounts for under 5 per-cent of the global electricity supply (down from 25 percentin 1973) and hence, a decrease in oil prices does not sub-stantially alter renewable energy competitiveness within thepower sector. In contrast, renewable energy costs are pre-dictable and provide a hedge against this volatility, as they arebased on technological development. That is one reason whymore and more countries are investing increasingly in rene-wable energy.

In your opinion, how important is this project to the otherGulf countries, those currently struggling with ambitiousprograms in order to change their economic policystrategies?

Over the last decade, Masdar and Masdar City have grownfrom a bold idea into an innovative global brand at the cen-ter of clean energy and sustainable development. Masdar hasled the adoption of technically and commercially viable re-newable energy in the Gulf and the Middle East and NorthAfrica region (MENA) region. We are proud to have actedas a catalyst for our industry in the Arab world: the result isthat Abu Dhabi is recognized today as a hub for sustainabi-lity and a global platform for policy debate and business op-portunity. Clean Energy does not only embrace our capa-bilities as a developer and operator of renewables-based uti-lities. It also includes the emerging technologies and appliedresearch that are bringing about the renewable energy andwater solutions of the future as required by all of our GulfCooperation Council (GCC) neighbors and further afield inthe wider MENA region. Masdar will continue to performa critical role in cultivating an environment where renewa-ble energy is a viable and cost effective part of the energy-mix. Today, the MENA region is set to attract USD 35 bil-lion worth of renewable energy investments every year by2020 (Source: IRENA), with governments increasinglyprepared to engage with the market to ensure success. Wefeel that Masdar has played a critical role in helping to makethis happen.

What is the status of the Masdar City development andwhat is the financial impact of the project? Could you tellus how many companies are involved?

After the global economic downturn in 2008, Masdar City’sdevelopment model was redefined to include third-party in-vestors. Since Masdar City is no longer only self-developed,providing a meaningful estimate of costs and output is verydifficult. Masdar City is a business unit of Masdar, which isa subsidiary of Mubadala Development Company PDJC, aninvestment vehicle of the Government of Abu Dhabi. Onlythe self-developed parts of Masdar City are government fun-ded. The rest will be managed through third-party investmentand joint venture development which will be the majority ofthe overall investment, according to sustainability guideli-nes drawn up by Masdar City and the development objec-tives of the Abu Dhabi Urban Planning Council. In April,we announced the approval of the Urban Planning Coun-cil of the Detailed Master Plans for Phase 2 and Phase 5 of

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62% Residential

10% Community facilities

10% Offices, 4% Retail

7% Research & Development

4% Light Industrial

3% Hotel & Serviced Apartments

Institutional

Mosque

Park and Open Spaces

Utilities

Metro Line

Light Rail Transit

Group Rapid Transit

Personal Rapid Transit

Personal Rapid Transit EXTN

Public Bus Routes

LEGEND

Three eco-friendly buildingsMASDAR&IRENA GLOBAL HQThis building, one of the most advanced and environmentally-friendly multifunctional complexes in the United Arab Emirates, is the headquarters of Masdar City and of IRENA, the International Renewable Energy Agency. The structure, measuring 32,000m2, comprises three individuals blocks joined by a roof composed entirely of photovoltaic panels that generate over 340,000 kWh per year.

INCUBATOR BUILDINGThis building provides “flexible” office space (with panels that modify the spaces as needed) and mainly serves business men and scholars working in partnership with the Masdar Institute, located nearby. Built around a courtyard, with access provided by shaded walkways, the building uses an innovative design, high-performance facades and smart shading strategies that reduce solar radiation by almost 40%.

SIEMENS BUILDINGThis office building is a model of sustainable engineering, and ensures a high level of energy efficiency over a surface area of 20,000 m2. It is also the first LEED Platinum certified building in Abu Dhabi. The structure has 9 lobbies, built to provide natural light to all work spaces inside the building.

1

2

3

ENERGYDEMAND

REDUCTION(1)

ENERGYDEMAND

REDUCTION(ASHRAE

STANDARD 90.1-2007)

ANNUALENERGY

CONSUMPTION/M2 GFA

SOLARHOT WATER

GENERATION ON SITE

(1) ENERGY AND WATER BASELINE AND RESOURCE CONSERVATION MEASURES’, MARCH 2010, ARUP GULF LTD.

121 42% 64% 75% kWh/m2/yr of Hot Water

of Hot Water

of Hot Water125 45% 62% 75%

kWh/m2/yr

109.5 46% 67% 75% kWh/m2/yr

2

3

1

Source: Masdar City


the City, paving the way for major expansion. This will al-low us to further demonstrate our ambition to provide a tem-plate for the sustainable development of our cities now andin the future. Masdar City aspires to be a 4 Pearl EstidamaCommunity, the first in the U.A.E. Around 35 percent of theplanned built-up area will be completed over the next fiveyears, and 30 percent has already been committed to, includingprivate homes, schools, hotels and more office space. At pre-sent, more than 370 companies from six continents opera-te from Masdar City, from start-ups to multinationals, in-cluding the Middle East headquarters of Siemens, Lockhe-ed Martin, GE, Mitsubishi Heavy Industries, and SchneiderElectric. The City also hosts the International RenewableEnergy Agency (IRENA), the first intergovernmental or-ganization to be located in the Middle East. The offices ofEmirates Nuclear Energy Corporation (ENEC) recently re-located to the City, bringing more than 700 full-time staff.A division of Etihad Airways has also just moved into the City,with the addition of a further 550 full-time staff.

Do you think that the project will have a positive effect onEmirates economy in term of growth? Do you have anyestimate?

We believe that innovating and commercializing new rene-wables technologies will have a demonstrable impact on thelocal economy. Although Masdar is not solely responsible formeeting the U.A.E’s clean energy targets, it is committed toworking with the Abu Dhabi utility sector to ensure that itis met. The U.A.E. aspires to meet 24 percent of its electri-city needs from alternative energy sources by 2021. Our ef-forts to support the Abu Dhabi government include the de-livering of 10 MW at Masdar City and the 100 MW Shams1 solar power project inaugurated in 2013. These and otherprojects have already proved the viability of solar energy inthe U.A.E. A Masdar-led consortium is also the selected bid-der to develop the third phase of the Mohammed Bin RashidAl Maktoum Solar Park in Dubai, involving the developmentof an 800 MW photovoltaic array, the largest of its kind inthe region. At Masdar, we understand that bringing about asustainable future is not only about investment. It is also a mixof innovation, knowledge transfer, research & development,and awareness building. The Masdar Institute of Science andTechnology, the nucleus of Masdar City, is teaching and men-toring the next generation of leaders in renewable energy andclean-tech through its world-class curriculum. In addition, Ma-sdar is the Middle East’s largest exporter of renewable ener-gy and has the potential to export our expertise in urban su-

stainable development to other parts of the U.A.E., the re-gion and overseas.

What are the opportunities of the project in terms ofinnovation, especially for energy consumption and thepossibility of reducing energy dependence from fuels?

Diversifying the global energy mix is critical if we’re to meetrising electricity demands, address energy security and builda sustainable future. Renewable energy is part of the future, andthe U.A.E. is poised to maintain its leadership in the energysector. In fact, we recognize the economic, social and envi-ronmental benefits to developing and deploying renewable ener-gy. The world will continue to rely on fossil fuels for the fo-reseeable future—but balancing the energy mix and introdu-cing cleaner forms of power is necessary to enhance our ener-gy security and to promote sustainable development. MasdarCity uses clean energy generated on site from rooftop solar pa-nels and a 10 MW solar power plant supplying the national grid.The plant produces 17,500 MWh of clean electricity annual-ly—enough to power more than 1,000 homes—and diverts15,000 tons of carbon emissions per year. Pilot research pro-jects located at Masdar City, many of them led by or closelyinvolving Masdar Institute scientists and students, are accele-rating the acquisition of scientific knowledge in the clean-techindustry and paving the way towards the development of real-world commercial applications.

Do you think that Masdar City project will be exportedabroad in the future, i.e. to highly polluted areas such asWestern and Asian cities?

Masdar has been a global flagship for Abu Dhabi and theU.A.E. We have achieved ten years of innovation, and this in-spires us to set our sights even higher for the next ten. Thedesign and innovation process applied at Masdar City to de-velop a city with a low carbon footprint could be applied inmany other locations around the world. With more than halfof the world’s population (of 7.3 billion) already living in townand cities, and with the total population expected to reach 9billion by 2030, Masdar is applying technologies and solutionsaimed at minimizing the environmental impact of urban com-munities and providing a viable template, or “greenprint,” toaccommodate greater urban population density more su-stainably. We hope to inspire and help others.

• Eco-Villa prototype, anadvanced design that will beoffered either as a ‘standard’design using only 97 KWH persquare meter per year, or in a ‘NetZero Energy’ format that deploys80 state-of-the-art PV panels togenerate 40,000 KWh ofrenewable energy each year –thereby enabling this villa design toachieve a net zero energy annualperformance;

• The Masdar Solar HubPhotovoltaic Test Centre, whichprovides independent andaccurate measurement of theperformance, reliability anddurability of PV modules, thecoatings of PV modules and otherPV related equipment;

• The Masdar Solar Hub: CPVTesting Facility, an initiativetesting of CPV systems under AbuDhabi’s environmental conditionsto facilitate the design of futureCPV technology and deploymentof CPV technology in the widerMiddle East region;

• The Electric Energy StorageSolutions Hub, a projectdeveloping Redox Flow Batteries(RFBs) that will offer more effectiveelectrical energy storage aschemical energy which could thenbe converted back into electricalenergy when needed;

• The Smart Home EnergyManagement System for theMasdar City Eco-Villa, a projectdeveloping intelligent controlalgorithms to help ensure optimalenergy use for the benefit of homeoccupants;

• The Masdar Institute forScience and Technology FieldStation, an advanced, stand-alonebuilding facility with advancedwater-cooled chiller and a doubleenthalpy wheel air-handlingsystems; day-lighting systemsusing two sun-tracking daylightcollectors on the roof that collectsunlight, and building-integratedPV panels;

• Research into the feasibility ofDistrict Cooling Powered byGeothermal Energy for MasdarCity, involving into systems withinwhich cold water produced bycooling systems can be stored andreused to help cool a buildingduring high-usage periods.

Workin progress

55

Masdar City new researchcentre incorporating MasdarInstitue of Science andTechnology for developingclean and renewable energyin Abu Dhabi (U.A.E.).


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Africa/Governments and institutions working for changing energy future

A virtuous commitment

e are suffering from a crisis thatshook the global economy and isleading the world towards a “disrup-tion,” a change of course that involvesmany individuals and industries. Thisdisruption is caused by many inter-related factors tied to the processes oftechnological, political and econom-ic change sweeping over the world ofenergy. In this article, I will proposethat future energy is not only affect-ed by climate change and resourcescarcity. Rather, there are other ele-ments that contribute to “disrup-tion,” elements that involve changesin technology , demographic and so-cial change, shifts in global econom-ic power, and rapid urbanization.The era of the non-renewable, ex-traction-resource-based energysources will not end solely because theworld is running out of petroleum andnatural gas. Rather, this era will endbecause of the implemention of su-perior technologies and innovationsthat are more efficient and environ-mentally friendly. The disruption tak-ing hold in the power sector is just thestart of an energy transformation; ac-

cordingly, international organiza-tions and companies need to fully fac-tor into their strategic planning themegatrends and changes that mighttake place in this sector. Climatechange and resource scarcity are con-sidered the main ingredients thatshape power market policy. The en-ergy sector as a whole is responsiblefor about two thirds of global green-house emissions, with just over 40 per-cent of this stemming from powergeneration. Accordingly, a growingemphasis on renewables is a responseto both climate change and securityof supply concerns. Currently, thereare many countries shifting theirpower supplies into a more eco-friendly renewable energy sources; forinstance, in the U.S. alone, over 30percent of new electricity generationcapacity added in 2010–2013 in-volved solar and wind power. Solarphotovoltaic (PV) is now utilized inmore than 1.2 million Australianhomes. In Germany, renewables ac-counted for 24 percent of gross elec-tricity consumption in 2013, placingthe country slightly above the growth

trajectory needed to reach its 2025 tar-get of 40 to 45 percent. All these trans-formations clearly justify the disrup-tion now taking place that focuses onshifting our energy resources intomore renewable ones. Unfortunate-ly, this transformation is more diffi-cult for developing countries, many ofwhich face the triple challenge ofmeeting existing demand for elec-tricity while at the same time facinghuge demand growth and the need toextend access to those who don’thave electricity. Consequently, tech-nological advances are critical forenabling this response as well as con-sidering approaches for expandingpower in ways that can leapfrog thetraditional grid evolution route.

Demographics andtechnology: the factors thatwill make the differenceTechnological breakthroughs are atthe heart of the changes occurring inthe power sector. Some componentsof the old incorporated frameworkare becoming stranded, and it’s nec-essary to locate advanced alterna-

WATEF MARZOUK

Head of Unit of the Energy Departmentof the Infrastructure and EnergyCommission of the African Union sinceNovember 2015, Marzouk waspreviously Senior Policy Officer at theDepartment of Renewable Energies forinfrastructure and energy as part of theAfrican Union Commission.

The countries of the continentmust create a moderninfrastructure network andincrease their use of renewablesto expand access to electricity.This is a hard challenge, because they are simultaneouslyattempting to meet rising demand and extend energy to those who don’t yet have it

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57

tives that recognize and utilize bettertechnology. In numerous situations,renewable energy is supplanting fos-sil fuel generation due to the factthat transformative technologicalbreakthroughs are being taken moreand more seriously. Smart grids areleading to better interactivity withcustomers. Different advancements,prominently the blend of the inter-net, cell phones, information inves-tigation and cloud computing withsmart grids and smart metering,present open doors for service or-ganizations to get nearer to theclient, play an improved ‘energypartner’ part, and present adventuredata opportunities. Analytics capa-bilities should be a central concern iforganizations are to fight off rivalryfrom new participants who havethese capacities at the heart of theirbusiness.Demographic changes are stongly in-fluencing energy transformation. By2025, the world will have added an-other billion individuals to reach a to-tal of eight billion. Unstable popula-tion increases in some regions set

against decreases in others contributeto different power market develop-ment potential in various parts of theworld. Africa’s population is expectedto increase twofold by 2050, whileEurope’s is projected to shrink. De-spite the fact that the prize for powercompanies that serve growing popu-lations is a major one, the infrastruc-ture challenge in numerous nations iscolossal, and not all growth marketsare promptly open to worldwide ex-tension. Companies trying to modelthemselves on the policies of faster-growth nations will need a clear un-derstanding of the influence of en-ergy transformation on these nations.The possibility of bypassing the gridand jumping to new local circulatedinnovations and business sector mod-els is not implausible if the pace oftechnological advance increases andcost decreases continue.

The role of the internationalcapitals and the newurbanization Energy disruption can also be tracedto a shift that has taken place in

global growth that has resulted in ashift in economic power. We are al-ready witnessing significant east-west and east-south venture streamsin the power markets, ones involvingboth financial investors and powersector corporate investors. For in-stance, Chinese state-owned powerand utilities companies have beendynamic in their search for interna-tional power utility and grid invest-ment opportunities. Europe, SouthAmerica, Australia and parts of Asiahave all been targets for develop-ment. Sovereign wealth funds andpension fund investments in the sec-tor have also become multi-direc-tional. The challenge for manypower companies is to access scarcecapital from this worldwide streamof capital, minimizing the risk ofstranded investments, and lookingfor imaginative methods to secureinvestment in replacement assets.Last but not least, urbanization willincrease over the next few decades.By 2050, the world’s urban popula-tion will have grown to no less than2.5 billion, 66 percent of the world-

2014 2015

0.6%

-22.6%

-0.9%

0%

2.3%

1.8%

-17.6%

-0.3%

-2.0%

-4.1%

0.6%

% CHANGEPROVEN CRUDE OIL RESERVES [million barrels]

ACTIVE RIGS

CRUDE OIL PRODUCTION [1,000 b/d]

REFINERY CAPACITY [1,000 b/d]

OIL DEMAND [1,000 b/d]

CRUDE OIL EXPORTS [1,000 b/d]

IMPORTS OF CRUDE OIL [1,000 b/d]

PROVEN NATURAL GAS RESERVES [bn standard cu m]

MARKETED PRODUCTION OF NATURAL GAS [m standard cu m]

NATURAL GAS EXPORTS [m standard cu m]

NATURAL GAS DEMAND [m standard cu m]

127,334 128,049

265 205

801.5 660.7

215,420.7 211,146.4

14,705.2 14,665.5

6,071.4 6,178.1

3,490.8 3,490.8

3,904.2 3,992.7

129,146.5 129,864.6

89,437.0 85,769.4

7,135.6 7,072.8

OIL

GA

S

African oil&gas

Source: OPEC


2013

2030

MODERNRENEWABLEENERGY

MODERNRENEWABLEENERGY

Modern renewable energy usein 2013 (above) and 2030 (below)

4 9

Traditionaluse of biomass

1.111.8

Traditionaluse of biomass

EJ/yr EJ/yr

EJ/yrEJ/yr

10 20 30 40 50 60 70GW

2013

20132030

20132030

2013

2013

2030

NorthAfrica

WestAfrica

EastAfrica

CentralAfrica

SouthernAfrica

MOROCCO42%

CABO VERDE50%

LESOTHO35%

GHANA10%

SOUTH AFRICA13%

EJ = exajoules yr = year

Investment billion USD (2015 – 2030)

ALL GENERATION

LARGE HYDRO

OTHER RENEWABLEST&D

342

89

32

72

145

681

2

36

13

36

18

106

218

31

17

21

94

381

186

52

14

49

74

375

Cumulative investment needs between 2015 and 2030

NorthAfrica

WestAfrica

EastAfrica

CentralAfrica

SouthernAfrica

Total

Capacity development of REmap Options in 2030The REmap 2030 is the Renewable Energy Map, a report drafted by IRENAwith forecasts on the scenario of renewables to 2030

wide populace. Quick urban expan-sion introduces a challenge and anopen opportunity for power utilitycompanies. The pace of urbangrowth will put a huge strain on in-frastructure development. However,power companies can play a vitalpart in guaranteeing future urban ar-eas get to be ‘urban brilliant’ as op-posed to ‘urban sprawl,” They canpossibly be lead players in the devel-opment of future city infrastructure;however, this will require a newmindset, another outlook, and thedevelopment of new partnerships.

Energy developmentprograms in AfricaIn the past, the energy needs inAfrica have grown relatively slowlycompared to the rest of the world,but now, due to the modernization ofAfrica’s economies coupled with so-cial progress, energy demand inAfrica is growing fast, at an averageof 5.7 percent annually. The conti-nent’s per capita energy consump-tion is expected to rise to 1,757 kWhper capita by 2040. This translates toan unprecedented 3.7 percent in-crease per year. Accordingly, Africa isnow undertaking a major challengein terms of financial and technicalcapacity to achieve this level of de-velopment. Another challenge is tomeet the continued and increasingdependence on petroleum productsfrom continental resources throughthe development of refineries sup-plied by African crude oil and theinstallation of pipelines to transportthe increased volume of petroleumproducts. The biggest challenge in the energysector is how to accelerate access tosustainable modern energy servicesin Africa where there are numerousbarriers that include: • Inconsistent levels of political will

across countries, • Lack of effective policy, regula-

tory and institutional frameworks • Unattractive energy market to po-

tential investors due to poverty, • High investment costs, • Low technical skills and imple-

mentation capacity, • Inefficient databases and informa-

tion systems at different levels ofmember states, RECs and thecontinent.

The main issue in the energy sectoris how Africa can convert its hugeenergy resources into sustainable andmodern energy services to meet ba-sic human needs and other produc-tive uses. The African Union Com-mission (AUC) is taking steps toincrease the access to modern en-ergy services through several initia-tives that include:

1 | The Program for InfrastructureDevelopment in Africa (PIDA),

which is a consolidated conti-nental program of the partner-ship between AUC, the AfricanDevelopment Banks (AfDB) andNEPAD-NPCA dedicated to fa-cilitating continental integrationthrough improved regional infra-structure. The implementationof PIDA is prioritized and di-vided into three phases: Short-term (2012-2020); Medium(2020-2030); and Long-term(2030-2040). The PIDA programcovers four sectors that includeEnergy, Transport, Information& Communication Technology(ICT) and Water (Trans-bound-ary). Priority Action Plans(PIDA-PAP) for this programhave been developed, which workon quick-win projects that are tobe implemented in the short-term. PIDA was approved by theAfrican Union (AU) Assemblyduring the eighteenth ordinarysession of the AU held in AddisAbaba, Ethiopia, in January 2012with the objective to transformthe infrastructure landscape ofAfrica and contribute to thebuilding of the African EconomicCommunity outlined in the 1991Abuja Treaty. The PIDA-PAPhas 15 Energy programs/projectsincluding nine hydropower proj-ects to generate the required en-ergy and to increase access toelectricity, four regional trans-mission power lines to connectthe continent’s power pools andpermit a large increase in inter-regional energy trade and coop-eration, one oil pipeline and onegas pipeline.

2 | The Geothermal Risk MitigationFacility (GRMF), which was es-tablished by the African UnionCommission (AUC), the GermanFederal Ministry for EconomicCooperation and Development(BMZ), and the EU-Africa Infra-structure Trust Fund (EU AfricaITF) in cooperation with theGerman government-owned de-velopment bank KFW. The over-all objective of the GRMF is toencourage public and private sec-tor developers by providinggrants for partial financing forsurface studies and drilling forreservoir confirmation in orderto mitigate the risk associatedwith geothermal resource explo-ration. The GRMF project phase1 targeted five pilot countries thatinclude Uganda, Kenya, Tanza-nia, Ethiopia, and Rwanda. Thesecond phase, announced lastyear, increased the number ofcountries to include Burundi, Co-moros, Eritrea, The DemocraticRepublic of Congo (DRC), Dji-bouti and Zambia.

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Africa green


2020

2010

n.a.

2011

2012

2013

2014

2015

2016

2017

2018

2019

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Geothermal powerFirewood (used in efficient cookstoves)

1%

Hydropower 28%

50%

Firewood (used in efficient cookstoves)

43%

Biomass power 3%Residue (industry) 10%Solar thermal 1.5%Briquettes (used in cookstoves) 1%Ethanol (used in cookstoves) 1.2%

0.2%Wind 1%

Charcoal(used in efficient cookstoves)

4%

Charcoal(used in efficient cookstoves)

5%

Ethanol (used in cookstoves)1%

Power

Heat

32%

68%

Briquettes (used in cookstoves) 2%

Residue (industry) 4%Biofuels transport 2%Biomass power 2%

Hydropower 14%

Wind 11%Solar PV 4%

5.6%Geothermal power 1%

Power

Transport 2%

37%

Heat61%

7%Solar thermal (buildings+ind.)

80 90 100 110 120

2030

2030

GABON80%

ERITREA50%

EGYPT14%

LIBYA10%

MADAGASCAR54%

MALAWI7%

MALI15%

MAURITANIA20%

NIGER10%

BURUNDI2.1%

ALGERIA40%

TUNISIA25%

SEYCHELLES15%

CÔTE D’IVOIRE20%

NIGERIA20%

KENYA5000 MW

Renewableenergytargets

of Africancountries

Share of total energy

Share of electricity

Planned capacity

MAURITIUS35%

GUINEA8%

SENEGAL15%

ZIMBABWE10%

ETHIOPIA6810 MW

NAMIBIA40 MW

GUINEA-BISSAU2%

DJIBOUTI30%

UGANDA61%

MOZAMBIQUE6000 MW

and others

geothermal

Biomass

Hydro

Solar PV

Wind

Geothermal

Small Hydro

Dist. solar PV

WEST AFRICAEAST AFRICA

CENTRALAFRICA

SOUTHERNAFRICA

NORTH AFRICA

CSP (Concentrating Solar Power)



59


Source: IRENA


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3 | The African Bioenergy PolicyFramework and Guidelines is ajoint initiative of the AfricanUnion Commission (AUC) andthe United Nations EconomicCommission for Africa (UN-ECA), which was initiated in 2010to enhance energy security andaccess, as well as rural develop-ment in Africa. This Initiativeaims to provide principles andguidelines for RECs and Africancountries to guide policies andregulations that promote a viablesustainable bioenergy sector. Thisproject has now reached a levelwhere the following is going totake place:

• To publish and launch the AfricanBioenergy Policy Framework andGuidelines;

• To organize a workshop to main-stream gender issues in the Pol-icy Framework and Guidelines;

• To build capacities of governmentsand RECs; and

• To identify high priority bioen-ergy programs in Africa to be de-veloped to bankable level.

4 | The Program for Solar EnergyDevelopment in Africa was man-

dated to the AUC at the 14th AUSummit to prepare a study for ex-ploitation of solar energy poten-tial in the Sahara Desert. The firstphase of the study for the Saharaand Shale region was completed,validated and adopted at the AUJanuary 2011 Summit. The sec-ond and third phases of the studyare on-going for the Kalahari andOgden deserts, respectively.

5 | The Hydropower Program iswhere the AUC has carried out astudy aimed at stimulating the de-velopment of major hydropowerprojects on the continent. Underthis program, the AUC organizeda training workshop specificallyfor the Inga III project on how tomodel a Public-Private-Partner-ship for the Ministry of Energyand the Power Utility (SNEL).Now the government of DRC isfollowing this model to negotiatewith three private sector entitiesto develop the project.

6 | The Africa-EU Energy Partner-ship (AEEP) is one of the eightpartnerships of the EU-AfricaJoint Strategy with focuses on

three areas of energy access: En-ergy security, renewable energyand energy efficiency with the fol-lowing indicators:

• Bringing access to modern andsustainable energy services to atleast an additional 100 millionpeople.

• Increasing the energy security bydoubling the capacity of crossborder electricity interconnec-tions; and doubling the use of nat-ural gas in Africa, as well as dou-bling African gas exports toEurope.

• Increasing renewable energy by10,000MW of new hydropower,at least 5,000MW of wind power,500MW of solar energy; andtripling other renewable energysources such as geothermal en-ergy and modern biomass, andimproving energy efficiency in allsectors. The current status report showsthat the targets will be achieved asindicated through the ongoingprojects and also projects in thepipeline that have 25,230MW ofhydroelectric power, 3,490MWof wind power, 3,100MW of solarpower, 4,570MW of geothermal

and 4,780MW of other sourceslike bioenergy. Both the Euro-pean and the African entities areheavily involved in delivering onthese developments with the Eu-ropean Investment Bank and theAfrican Development Bankamong those committed to pro-viding more resources.

7 | Other Initiatives Supporting theEnergy Sector and InvolvingAUC include:

• Sustainable Energy for All(SE4ALL), whose objectives in-clude ensuring universal accessto modern energy services by2030, doubling the rate of im-provement in energy efficiency,and doubling the share of renew-able energy in the global energymix. The AUC is actively in-volved in this Initiative as part ofthe Africa Hub on SE4ALLagenda in Africa.

• Regional Power Pools initiated bythe RECs to develop integratedregional energy infrastructure andmarkets.

• Energy Expansion Agenda fromMember States who have pro-grams and projects aimed at im-proving energy access in the ur-ban and rural areas.

• Power Africa Initiative, which is aprogram from the USAID thatstarted in 2013 and is in its earlystages of preparing to work withEthiopia, Ghana, Kenya, Liberia,Nigeria and Tanzania with thetarget to add more than10,000MW of clean, efficientelectricity generation capacityand to make electricity accessavailable for 20 million peopleand commercial entities.

• International Renewable EnergyAgency (IRENA), which has aprogram on Clean Energy Corri-dor for the Eastern and SouthernPower Pools that started in 2013and intends to accelerate the pro-duction of electricity from re-newable energy source in Africawith the intention to expand tothe rest of the African regionalpower pools. They also have aprogram of Global Atlas for Re-newable Energy that is collabo-rating with AFREC in mappingout the energy resources on thecontinent.

• The World Bank development inthe Great Lakes Region, togetherwith the RECs, is supporting re-gional infrastructure and catalyz-ing economic development; ini-tiatives include energy projects ofthe Ruzizi Hydroelectricity proj-ect and the East African oilpipelines.

THE POWER OF WATEROne of the measures taken by the

African Union Commission(AUC) to increase

access to modern energy services, is the “Hydropower”

program, aimed at drivingthe development of major water

projects in the continent.The photo shows a hydroelectric

dam in South Africa.


61

China/Lingering questions about the transition to renewables

The Dragon’sskepticism

he oil price war, which began at theend of 2014, initiated the decline ofthe entire oil industry, and China,India and other consumer countrieshave benefitted from lower crude oilprices. China, for example, importsapproximately 7 million tons ofcrude oil every day; so whenever oilprices drop $10, the country savesCNY 400 million. In the future, theAsian region will continue to de-velop energy sources, with the resultthat the previous model of “compe-tition for energy in East Asia” willweaken. Cooperation in the energyindustry in northeast Asia or in theentire continent offers important op-portunities for funding and re-sources. Natural gas consumption isincreasing in most Asian countries,but many gas fields are located inremote locations, and for this reasonIran find itself in a uniquely advan-tageous position. If Iran manages torapidly enter the Asian natural gasmarket, the prospects for coopera-tion between Asia and the MiddleEast will increase.

The effects of the globaleconomic crisis on China’sdevelopment The slowdown in the growth ofChina’s GDP has not only affectedthe performance of the entire coun-try’s real economy but has alsocaused turmoil in global financialmarkets. In the first quarter of 2016,the increase in China’s GDP was 6.7percent, down from 6.8 percent in

TLIFAN LI

He is Associate Research Professor at the Shanghai Academy of SocialSciences and Secretary General of the Center for Shanghai CooperationOrganization Studies.

Beijing may focus in the near term on making the current system moreefficient rather than taking definitivesteps toward transitioning tosustainable energy


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+14.5 % +6.4 % 0.0 %

HYDROPOWERTOT. RENEWABLES ENERGY*

MARINE ENERGY

454,007 MW

519,748 MW

301,830 MW

321,230 MW

4 MW

4 MW

% CHANGE+14.5 %

7 MW

+6.4 %

W

the fourth quarter of 2015, and sucha low increase had not been recordedsince the first quarter of 2009. Thegrowth rate of China’s GDP for thewhole of 2015 was 6.9 percent. Un-til the development of China’s in-dustrial manufacturing sector, therehad been a positive trend, althoughthe use of raw materials, machines,and other factors were equally high.In contrast, with the slowdown ofthe national economy, imports fromChinese companies have started todecline. In April this year, Chineseimports fell by 10.9 percent, to$127.2 billion, a significant drop of30.6 percent when compared withthe peak of March 2013. The de-cline in Chinese demand has con-tributed to the decline in exports ininternational markets. The phe-nomenon is particularly evident inthe Chinese energy sector, sincecrude oil imports account for 6 per-cent of the country’s total imports.According to data from the EnergyInformation Administration, crudeoil imports from OPEC account for58 percent of total Chinese crude oilimports. Of these, most come fromSaudi Arabia, amounting to 16 per-cent. Following the collapse inprices, the proceeds of Saudi Ara-bia’s oil industry have seen a sharpdecline, forcing the government tomake cuts to public spending. Cur-rently, with the Chinese economy’stransition towards the tertiary sector,the growth in energy demand is indecline overall. Added to this are theresearch and development of renew-able energy sources worldwide,which will further increase crude oilconsumption in China. Beijing isalso promoting the diversification ofimport sources, a further challengefor oil producers in the Middle East.The country has already replaced itssupply from Sudan, Iran and Syria byboosting its oil trade with Russia. Inthe future, the share of crude oil im-ported from Saudi Arabia, Angolaand Oman will be reduced to someextent, always to Russia’s benefit. Al-though the lower oil prices could en-courage a significant increase toChina’s consumption, in the firstquarter of 2016, Saudi exports toChina increased by only 7.3 percent.In the future, OPEC member coun-tries and non-OPEC countries suchas Russia, Kazakhstan and Iran willcontinue to compete with each other

for Chinese market share. With thestart of 2016, China increased its im-ports of cheap energy from Iran, fur-ther influencing the internationalcrude oil market, and the competi-tion for the Chinese market couldundermine the cohesion of OPECcountries.The oil and gas industry countries inChina and abroad are taking steps toadapt to the new situation and ad-dress the serious problem of the pro-longed fall in international oil prices.Their actions include “completeprograms to optimize resources, re-duce costs and increase efficiency,”by lowering the cost of suppliesthrough the revision of contracts, re-ducing staff to control labor costsand fees for executives, and initiatingprograms to improve production ef-ficiency. At the same time, in orderto cut costs and improve efficiency,the industry’s foreign companies areimplementing the “second use” ofoil fields, effectively reducing the de-cline in productivity of old oil fields,increasing the recovery rate in theconcession period and aiming formaximum production efficiency.Prospecting activities abroad focusedon highly efficient oil fields, and on-going oil and gas research lead tomany new discoveries. Foreign com-panies in the oil and gas industry ini-tiate cooperation projects, whichminimize the work required, theprospecting period, and the extent ofthe research. Exploration is focusedon the rapid exploitation of oil fields,such as those in Africa, and the num-ber of high-risk geological projects isbeing reduced, especially as regardsinvestment projects in the MiddleEast. To lessen the volatility of in-ternational crude oil prices, Chineseenergy companies (mainly CNPC,SINOPEC and CNOOC) havelaunched the “Go Out Policy” strat-egy, by increasing mergers with andacquisitions of foreign energy com-panies. In 2015, CNPC boasted over90 oil & gas cooperation projects inover 30 countries and has supportedprojects for new gas pipelines be-tween Iraq and Central Asia and be-tween China and Myanmar. TheSINOPEC group operates in 27countries worldwide, with 53 coop-eration and investment projects inthe six major oil and gas field re-gions: Africa, America, Middle East,Russia, Central Asia and Asia-Pa-

cific. It is also cooperating with Rus-sia’s Rosneft in two oil and gas fieldsin Russia, with a 49 percent stake inthe companies. CNOOC’s foreignactivities account for 39 percent ofthe company’s assets; its oil and gasproduction for abroad accounts for42.3 percent of this total and thecompany has signed 206 coopera-tion agreements with 79 oil compa-nies in 21 countries and regions.

Renewables: Beijing’s new passionMoreover, following the climateconference in Paris, China continuesto pursue “South-South Coopera-tion” projects. The country hassigned a bilateral memorandum ofunderstanding with Egypt and Iranand has begun a program that do-nates material and ecological andsustainable devices to various coun-tries. Also, in the period 2016-2017,it will continue to organize coursesrelated to climate change by provid-ing training centers in developingcountries. In the meantime, the“Chinese Fund for the South-SouthCooperation on Climate Change”has already started. Through thetraining of staff on climate monitor-ing, this fund promotes green tech-nologies in underdeveloped coun-tries, in the islands, in Africancountries and in other developingcountries. In order for the great Chi-nese energy transformation to be re-alized, it is essential that China con-trols the production of electricityfrom coal and improves the regula-tory framework on energy efficiencyby optimizing its policies to the“level of demand.” By 2025, Chinawill have to improve its subsidiespolicy by gradually reducing fundingfor fossil fuels, increasing incentivesfor renewable energy consumption,establishing reasonable quantitativeindicators for amounts, and manag-ing the efficiency of renewable ener-gies. At a later stage, between 2025and 2035, the country will have tostrengthen and enhance its objec-tives related to the amount of re-newable energy, further promote thedevelopment of sustainable energy,and, in areas where conditions areparticularly favorable, reach an elec-tricity supply of at least 60 percentfrom renewable energy. In the thirdstage, between 2035 and 2050, it willbe necessary to continue to promote

the development of renewable en-ergy, strengthen and improve energyefficiency standards, and apply low-carbon green technologies on a largescale. This is how the great energytransformation will be achieved inChina. Clean energy devices repre-sent one of the main directions forthe development of energy equip-ment. The full exploitation of specialconstruction funds for energy cre-ation, of the investment fund for theadvanced manufacturing industry,and of the national venture capitalfund for emerging industries willsupport the research, industrializa-tion and improvement of conditionsfor producing essential technologies.By 2020, the energy equipment pro-duction industry will become a newdriving growth factor for Chineseindustry. The technological level andcompetitiveness of electrical equip-ment and of other high-tech sectorswill ensure international leadership,leading to the formation of groups ofmanufacturing businesses with theownership of intellectual propertyrights and characterized by greatercompetitiveness.The decisive development of the“energy transition” focused on al-ternatives to fossil fuels and the re-duction of carbon emission, thanksto renewable energy sources alreadyat the center of many national en-ergy policies. In China, however, thecurrent conflict between the “need”and the “economic feasibility” of thedevelopment of renewable energies,the obstacles to this developmentcreated by interest groups for tradi-tional energies, and the disagree-ments on the development pathmake a program for replacing fossilfuels with renewable energy difficultto effect. There has always been aparadox in the country regarding en-ergy transition. On the one hand,there is an emphasis on the develop-ment of renewable energy at a theo-retical level, and policies continue tobe introduced to support renewableenergy. On the other hand, there arequestions about how to change theexisting energy system and to whatextent the national energy structure,focused on coal, will be able to ac-cept the challenge, and when thecountry will cease to provide subsi-dies for natural gas.Changes to policies are a subject ofenormous resistance and pressure,

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ChinaGreen20142015% CHANGE 2014-2015


0.0 %+26.6 % +53.5 % +8.9 %

WIND ENERGY

SOLAR ENERGY

BIOENERGY GEOTHERMAL

114,604 MW

145,104 MW

28,061 MW

43,062 MW

9,480 MW

10,320 MW

27 MW

27 MW

+26.6 %

ENERGY

114,604 MW

+53.5 %

OLAR ENERGY

28,061 MW

3,062 MW

+8.9 %

W * The renewable power capacity data shown in these tables represents the maximum net generating capacity of power plants and other installations that use renewable energy sources to produce electricity.

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and the obstacles to reform are asfollows:1 | The issue of China’s energy tran-

sition is managed by various min-istries and commissions, and eachministry autonomously estab-lishes, within its area of compe-tence, priorities, orientation andtimes. The trend and effects ofthe policies relating to the energytransition are not subject to anymacro-level analysis or scientificassessment. Numerous policieshave been introduced, and thereare many problems related to theenergy transition, but no ministryis able to come forward to correctand resolve the situation.

2 | The current reform of the energysystem does not reflect the orien-tation and needs of the energytransition. The problem involvingthe failure to open the market inthe Chinese energy system, basedon poor distribution efficiency, isextremely serious. The vigorouspromotion of greater openness isalready the goal and requirementof energy system reform.

3 | The traditional energy giants (i.e.the various interest groups) can-not pursue the advancement andprocesses of the energy transition.The traditional energy giants areof course the key players in theenergy transition, but the direc-tion and progress of the transfor-mation cannot be dictated by theelectrical companies and by othertraditional fossil fuel giants, asthey can derive economic benefitsfrom slowing down the transitionprocess. Only if the transforma-

tion is led and pursued by thestate, with the adoption of frame-work laws and policies in supportof energy transition, will it bepossible to prevent the advance-ment and pace of the energy tran-sition from being dictated and un-dercut by the traditional fossil fuelgiants.

4 | Investments in the energy sectormust go beyond the pursuit of“short-term effects” or the“change of pace but not of sub-stance.” The energy system of thenext 50 years depends on today’sinvestments. The global economyis, overall, unstable: economic re-covery seems a utopia and, at thisstage, further investment seemsunfeasible. Current investmentsin the energy sector must meetthe needs of the energy transi-tion, and errors can not be al-lowed. Otherwise, in the future,the costs of the energy systemtransformation will be muchhigher.

Although the direction of the en-ergy transition is similar in everycountry, the availability of energy re-sources and the political structurechange and determine the differ-ences at a national level. Therefore,it is necessary to pay attention to thedevelopment problems of the transi-tion to renewable energies in China:First, there is a huge gap between theneed and the urgency of the devel-opment of renewable energies andthe economic feasibility of the tran-sition. The plans of use and energytransition are a product of marketcompetition. Currently, the transi-

tion to renewable energies, on aglobal level, is taking place in thewake of the new international guide-lines that require China to addressclimate change and the policies on“carbon emissions” approved by thewestern countries. The replacementof fossil fuels with renewable ener-gies is taking place in an environ-ment that still has great potential forimproving the efficiency of fossil fu-els. Since the replacement of high-density energy with a low-densityenergy for “decarburization” is ableto grow the economy, there must beclear differences between developedand developing countries in termsof transition levels and rate of effi-ciency.Moreover, is the reform of the cur-rent energy systems capable of ac-quiring new “suitable” features interms of the development of renew-able energies? The large-scale pro-duction, consumption and transportof traditional fossil fuels are closelyrelated to the high energy density,storage possibilities and uneven dis-tribution that characterize them,while the wide distribution, low en-ergy density and impossibility ofstoring wind and solar energy willensure that local production andconsumption models represent thebest choice. In China, the currentenergy systems, fully correspondingto the features of fossil fuels, cannotconsciously transform into energysystems adapted to the features ofrenewable energies, since traditionalenergy companies often voluntarilyhinder this process in favor of theirown short-term interests.

Still, how can we scientifically definean indexing system for the new en-ergy sources? The definition of en-ergy indicators is a complex scientificand political process. China needsto assume clear assessment criteria,especially for investments in cleanenergy. It is necessary to understandthat the actual value of the invest-ment in renewable energy must notexceed the cost. It is also necessary topay attention to political objectives,that is, external dependence. Also,as regards the physical indicators ofefficiency, the physical efficiency islower than that of developed coun-tries, and in many cases the energysavings will not be reasonable. Thesame applies to the indexing system.Finally, there is no single type of re-newable energy, such as hydropower,wind power, solar power or biomass,that has the potential to become themain energy source. The transitionto renewable energies requires thecombination of many different ele-ments. The technological featuresof the various types of renewable en-ergies are not exactly the same: hy-dropower is essentially compatiblewith the current energy systems;wind power and solar power aremore suited to a wide distribution oflow-power systems; while biomasscan be distributed or centralized. Inorder to bring these energy ex-ploitation technologies into a “new”organic energy system, a large num-ber of complex technical, organiza-tional and institutional issues stillneed to be addressed.As a responsible major power, Chinamust adapt to the international eco-nomic situation, to the new featuresand changes of the energy market,by reducing costs and the loss of in-terest deriving from the energy tran-sition. This transformation willbring with it some collateral damage,but the gradual introduction of newenergies will open up the path to arevolution and profound changes forthe entire Chinese industry, and willencourage the emergence of innova-tive sectors and modern productionprocesses.

Biomass Heat/DistrictHeat Buildings 18%

Biomass Heat/DistrictHeat Buildings 7%

Solar Thermal Heat 20%

Solar ThermalHeat 12%

Geothermal Heat 2%

Traditionaluses of biomass 45%

Geothermal Power 0.1%Wind 2%

Biomass Power 3%

Biomass Power 1%

Biofuels Tranport 4%

Biofuels Tranport<1%

Biomass Heat Industry 1%Biogas Power 1%Biogas Industry

Buildings 4%

Solar PV 6%

Wind 17%

Hydroelectricity21%

Biomass Heat Industry 7%

Power49%

TransportFuels4%

Transport Fuels<1%

Heat47%

Power29%

Heat70%Po

wer se

ctor

End-use sector

Powe

r sec

tor

End-use sector

Geothermal Heat 2%

*EJ = exajoule

RE map 2030 - 23 EJ*2010 - 7.5 EJ*

CSP (Concentrating Solar Power) <1%

CHINA, RENEWABLE ENERGY USE 2010 AND REMAP 2030

Source: IRENA

Source: IRENA


he Americas, North and South, con-centrate the largest hydrocarbon re-source endowment outside of theMiddle East. The Western Hemi-sphere has 33 percent of the world’sproved oil reserves, while the Mid-dle East holds 47 percent. The geo-logical potential is enormous, but theremaining resources are largely un-conventional (shale and extra-heavyoil) or in deep waters, so costs andrisks are higher and tech nol ogy/knowhow more crucial. In the U.S. and Canada, which hold13 percent of the world’s proved oilreserves, high oil prices fueled an en-ergy revolution with substantial in-creases in oil and gas production.During the last ten years, oil pro-duction increased 73 percent, from9.9 million barrels a day (mbd) in2005 to 17.1 mbd in 2015. In con-trast, in Latin America, with 20 per-cent of the proved oil reserves, oilproduction declined 7.2 percent,from 11.1 mbd to 10.3 mbd, and theregion lost more than two percent-age points of the world market share.

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FRANCISCO J. MONALDI

He is the Baker Institute Fellow in LatinAmerican Energy Policy at RiceUniversity in Houston. Founding Director of the Center on Energy and the Environment at IESAin Venezuela. He is also Belfer CenterAssociate at Harvard University and Non-Resident Fellow at theTecnologico de Monterrey in Mexico.

The area, which has alwayspossessed a huge energypotential, has in recent yearsexhibited a disappointingperformance, especially in termsof production of crude oilproduction. The true growthopportunity is in a clearadministration, efficient and based on strengthening investment

Latin America/The potential for a bright future of the oil industry

The true flywheel will be a new policy

T

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That is a remarkably poor perform-ance, given that it happened duringthe largest oil price windfall in history.Using alternative measures of re-source endowments, the same in-escapable conclusion arises: the re-gion’s oil industry generally wasted atremendous opportunity to grow. Latin America’s striking underper-formance was largely the result ofproduction declines in three coun-tries: Mexico, Venezuela, and Ar-gentina, and was partly compensatedfor by production increases in Braziland Colombia. However, even Brazil,the star performer of the last twodecades, has recently underper-formed, and its national oil companyis in a serious predicament. The recent oil bust has hit the Lat-in America oil industry very hard;both investment and production havebeen falling rapidly throughout theregion. The decline in production in2016 could reach as high as 400 to500 thousand barrels a day, a dramatic4 to 5 percent fall in just one year,with Venezuela and Mexico again the

highest drops. However, it is impor-tant to stress that even though thetroubles in the Latin American oil in-dustry were made much worse by thecollapse in oil prices in 2014, theproblematic trends predate it. The oilprice boom had been hiding unsus-tainable trends that are now painful-ly clear.If its geology is so attractive and priceswere so favorable for more than adecade, what has been the source ofthe region’s oil industry blues? Theanswers lie in the dysfunctional pol-itics of oil, the cycles of resource na-tionalism, and the mismanagement ofnational oil companies. The cycles of short-sighted resourcenationalism have been a recurrent fea-ture of the oil industry in the region,damaging the long term potential ofthe sector. During the boom years,2003-2014, Argentina, Bolivia,Ecuador, and Venezuela, forcefullyrenegotiated contracts and/or na-tionalized the oil sector. Mexico re-mained a closed and inefficient statemonopoly, missing a great opportu-

nity to attract private investment toits oil industry. Although Brazil didnot change contracts retroactively, itmade future deep-water projectsmuch less attractive. Even in Colom-bia, the only relevant oil producer thatdid not worsen contract conditions,the overall policy environment turnedless welcoming to oil investors. Thus,to an extent, foreign investors werevictims of the price boom and theirown success in increasing productionand reserves, particularly in oil ex-porters.In turn, as a result of the problemat-ic trends facing the oil industry in theregion, a new wave of liberalizationbegan to surface even before the oilprice collapse; and as expected, thesetrends significantly strengthened withthe financial troubles faced by coun-tries and their NOCs after the bust.However, the reputational costs of thehighly volatile institutional frame-works would make it even harder toattract investment and develop the re-gion’s full potential.Another key reason for the region’s

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underdeveloped oil industry has to dowith the inefficiency, underinvest-ment, and corruption which haveplagued its dominant players: thenational oil companies (NOCs).Brazil, Mexico and Venezuela produce3 out of 4 barrels in the region andcontain more than 90 percent of itsreserves, so what happens in thesethree countries is crucial for under-standing the future of the world oilsupply. Their NOCs are the largestin the region and among the largestin the world. PDVSA (Venezuela),Pemex (Mexico), and Petrobras(Brazil) are currently in deep finan-cial trouble, made worse by the oilprice fall, but they were all on an un-sustainable path long before it hap-pened. PDVSA was gutted by HugoChávez after he fired most of its sen-ior management and technical staff.Since then, production has been de-clining, despite having by far thelargest oil reserves in the region.Pemex, until recently an oil monop-oly, underinvested for decades, whichled to a sharp reserve decline and

AN ENERGY EXAMPLEBrazil has performed well in oilproduction over the last twodecades, enough to be considered a model for regulatorypolicies of oil. In the photo, a view of Ipanema andCopacabana, Rio de Janeiro.

MEXICO-21%reserves of oil equivalent (13.02 million barrels in 2014/ 10.24 million barrels in 2015) Source: National Hydrocarbons Commission

VENEZUELA-50%values of petroleum exports 2015/2014(35,802 million USD in 2014/ 71,731 million USD in 2015) Source: Opec

BRAZIL-3.8%GDP growth rate 2015 Source: World Bank

ARGENTINA+23%estimated increase of oil production by 2015 (from 531,000 bbl/d – 2015 to 653,000 bbl/d – 2015) Source: IEA


eventually to a production collapsestarting in 2005. Overstaffing, cor-ruption, and politicization have beenhistorical problems for Pemex, as theyare now, to an unparalleled extent, forPDVSA. Petrobras long a symbol ofnational pride for Brazil, one of thefew NOCs capable of operatingdeep-water projects, has been in-volved in a spectacular corruptionscandal that has rocked the country’spolitical system.

VENEZUELA.The colossal basket caseIn Venezuela, a successful opening ofthe oil sector paradoxically helped tocreate the conditions that led to oilnationalization; while the stagnationof the industry, in turn, is restoringpragmatism to deal with the decline.In the 1990s, facing low oil prices, re-current fiscal crises, and significant in-vestment needs, Venezuela openedthe oil sector to private investment inthe riskier and less profitable projects.This was a major departure from thenationalization in 1975, which hadmade state-owned PDVSA the mo-nopoly producer. The opening at-tracted significant investments bymajor international players, includingExxon, Shell, BP, Chevron, Total, andEni, leading to a substantial increasein production of more than one mil-lion barrels per day (equivalent tomore than 40 percent of currentproduction levels). In 1998, Hugo Chávez was electedpresident with a resource nationalistrhetoric, just when prices bottomedout, but he did not change the exist-ing oil deals until 2005, after all ma-jor investments had been made andprices had swung up significantly.The protracted and confrontationalexpropriation process that ensued sig-nificantly increased the government-take on profits. It also affectedVenezuela’s reputation and attrac-tiveness, delaying all major new in-vestments and generating very highopportunity-costs in terms of fore-gone future production. Lately, asproduction faltered and the regimebecame desperate for more revenues,realism pushed the government to of-fer investors better terms and guar-antees. Although investors continuedto be very cautious, the change in theVenezuelan government’s attitudewas palpable. The pragmatism—better described now as despera-tion—has become more obvious af-ter the price collapse because of theurgent need to increase investmentand production. PDVSA, which had been consid-ered one of the best run NOCs in theworld, suffered a massive setback in2003 when Chávez fired most of itsmanagement and technical staff, as aresult of a power struggle that led toa massive oil strike. Since then, the

company has never fully recovered. Ithas a limited pool of qualified humanresources and was able to avoid pro-duction collapse by relying heavily onforeign contractors and joint-venturepartners in a favorable price envi-ronment. Nevertheless, the numberof employees grew three-fold, whilethe production per-employee rapid-ly fell to its lowest level in history (tolevels similar to Pemex’s). Moreover,production operated alone by Pdvsahas collapsed by more than half sinceits peak in 1998, and has only beenpartly compensated by the JVs withforeign partners. The government has over-extractedresources from PDVSA. The com-pany’s financial debt increased from$3 billion in 2006 to $44 billion to-day and debts with suppliers areabove $20 billion. The company hasalso been borrowing heavily from theCentral Bank to cover operational ex-penses in domestic currency. Overall,the situation of PDVSA—criticaleven before the price collapse—is nowdesperate, unless oil prices go back up.Only a major overhaul of the com-pany and an intensive use of part-nerships with the private sector canreverse its decline.

MEXICO. Productioncollapse brings reform, pricecollapse accelerates itMexico was an exception to the lib-eralizing trend in the 1990s. Histor-ical and ideological reasons can helpexplain this exceptionalism, but themajor factor behind the lack of reformis that Mexico’s production kept in-creasing without significant new in-vestments. The giant oil field ofCantarell, which produced morethan two million barrels a day at itspeak (or close to two thirds of thecountry’s production), allowed thegovernment to over-tax and concealthe significant inefficiencies of the na-tional oil monopoly, Pemex. Thefuture costs of the lack of investmentwere not perceived by the politicalleadership and even less by the gen-eral public, so there was no rush forreform. Once Cantarell’s production startedto collapse in 2005, the need for re-form became clearer, but high oilprices made it initially less urgent.However, as Pemex capital expendi-tures increased five-fold but barelyslowed declining output, the casefor reform became much stronger.Cantarell’s production has declinedmore than 85 percent from its peak.With Peña Nieto’s election, institu-tional gridlock eased, and reformwas finally passed. Mexico, asVenezuela in the past, is opening theriskier and/or marginal projects,some of which require large invest-ments and complex technology. Pe-mex kept most of the proved reserves

and all the high rent low risk areas,and so far, the first bidding round ofoil areas has had limited impact.Few attractive areas have been as-signed, and some bids have beenunrealistically high, generating un-certainty over the magnitude of in-vestments that will actually materi-alize. In December of 2016, the auc-tion of deep-water areas is set to takeplace. This would be by far the mostrelevant event yet in the oil opening;there are high expectations that theupstream reform would finally provemeaningful with the allocation of ar-eas with high potential to major oilcompanies. In contrast to Venezuela, Mexico isbuilding a much more robust insti-tutional framework to support reform.It is also much more integrated intothe world economy than its SouthAmerican neighbors. These factorsmight deliver a longer life for the in-vestment cycle. However, if the in-centives for expropriation appear inthe future, high oil prices, majordiscoveries, and high sunken invest-ments; one cannot discard the possi-bility of a partial reversion to reform,especially given the enduring strengthof nationalistic ideology in Mexico. Infact, the popular leftist presidentialcandidate Lopez Obrador has threat-ened to halt the reform if elected in2018. In 2015, Pemex for the first time hada loss before taxes, and it had tomassively cut investments. As an in-dication of the extent of the cut, thenumber of oil rigs in operation fellfrom 44 in January 2015 to just 16 inJuly 2016 (a 64 percent decline). Rat-ing agencies downgraded Pemex debt,and the government had to inject cap-ital to Pemex to enable pay for sup-pliers and pensions. It also improvedits fiscal regime to limit further fi-nancial strain and changed the lead-ership of the company with a mandateto cut costs, sell assets, and partnerwith private companies. The newCEO Jose A. Gonzalez Anaya, ahighly respected economist, hasmoved swiftly to take advantage of theopportunities given by the new legalframework and move the reform fur-ther than initially planned, concen-trating Pemex’s limited investment ca-pacity in the most profitable areas,while partnering, transferring, orselling non-core assets. However, thechallenges of Pemex reform remainformidable, particularly for a weaklame-duck president like Peña Nieto.

BRAZIL. Still the country of the future?Even though Brazil is still a net im-porter of oil, it has increased its pro-duction more than fourfold over thelast two decades, matching the pro-duction levels of Mexico andVenezuela. That success is in large

part the result of the liberalization ofthe oil industry in the 1990s, whenPetrobras, the national oil company,was partially privatized and the pe-troleum sector opened to foreigninvestment. As a net importer, thecountry was eager to maximize itsproduction and, until recently, did notfocus on extracting fiscal rents. How-ever, the discovery of massive deepoffshore reserves, began to changegovernmental incentives. In contrastto its South American counterparts,Brazil did not nationalize or forcecontract renegotiations. However, itdid increase the government takefor future offshore projects. It re-quired Petrobras to be the operatorand established an ambitious policyof increasing the local content of in-vestments. Moreover, the participa-tion of private shareholders in Petro-bras was diluted when the govern-ment exchanged oil reserves for eq-uity in the company, in a move thatmany analysts considered a form ofexpropriation. Thus, even though Brazil had beenconsidered a model of oil regulatorypolicy, the effects of its success and theprospect of becoming a net oil ex-porter also induced a milder version

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U.S. & CANADAVS LATIN AMERICA In the United States andCanada, over the past tenyears, oil production increasedby 73 percent from 9.9 millionbarrels per day (mb/d) in 2005to 17.1 in 2015. In contrast, in Latin America production fell by 7.2 percent, from 11.1 mb/d to 10.3 mb/d.

THE THREE BIG COUNTRIES Brazil, Mexico and Venezuelaaccount for three out of every four barrels produced in the region and hold over 90 percent of reserves. The fall in Latin America’s oilproduction was largely causedby the declines in Mexico and Venezuela and was partlyoffset by growth in Brazil.

Developmentsof oil production


of resource nationalism. This hasalready had negative implicationsfor investment and production, whichhave not reached their targets duringthe last few years. Petrobras invest-ment plan of 2014 forecasted pro-duction at 4.2 million barrels a day by2020. The last investment plan re-duced that forecast to 2.8 million bar-rels a day, and it may have to reviseit down further. The corruption scandal involvingPetrobras dealings with its contrac-tors, a result of the politicization ofthe local content program, has beena big blow for the company and forthe government, which still is havingsignificant consequences related to in-vestment. Most of the main local con-tractors were involved. In early 2016,Petrobras’ market capitalization col-lapsed to less than 10 percent of itspeak value in 2008. There were some mild signs that theRouseff administration was movingback to a more pragmatic stance, par-ticularly after the lack of investors’ in-terest in the last offshore auction andgiven the recent oil price collapse. Af-ter the Rouseff impeachment processstarted, the interim president MichaelTemer signaled that he will support

a reform of the legislative frameworkto give a larger role to the private sec-tor in deep-waters and revise localcontent rules. Still, as Brazil be-comes a net exporter and the feder-al and regional governments face a fis-cal crisis, the risks of fiscal pressureover the oil sector might increase.

The future of the LatinAmerican oil industryLatin America has been more proneto cycles of resource nationalism andliberalization than other regions in theworld, possibly due to the combina-tion of factional democracies, weakrule of law, and high inequality. Giv-en the right circumstances, resourcenationalistic ideologies could comeback. After a cycle of significant in-vestment that adds substantial pro-duction and reserves, changing therules may become tempting again.Conversely, a prolonged period of lowoil prices could induce further prag-matism and liberalization. In gener-al, net importers or countries thathave both declining production or re-serves and a portfolio of high-riskprojects would be pressed to be moreopen. Institutions that encouragegovernments to take longer-term

approaches, which limit their abilityto opportunistically renege on deals,could moderate the effects of suchvolatile incentives. Independent reg-ulatory agencies, as well as progres-sive and effective fiscal and contrac-tual regimes that properly tax wind-fall profits, would be helpful to attractprivate investment. A pragmatic na-tionalist perspective requires sub-stantial participation of the privatesector to help develop the frontier andunconventional resources, utilizing astrong regulatory framework thatboth captures rents and provides in-centives to develop the sector to itsfull potential. NOCs are likely to remain majorplayers in the region, as they are in al-most all significant oil producing de-veloping countries; but if they are notsignificantly reformed, the region’s po-tential will remain underdeveloped.They have to be restructured to con-centrate on the lower risk profitableupstream areas and partner, or exit al-together, non-core areas and frontierdevelopments. Their corporate gov-ernance has to be strengthened, pro-viding them with financial and oper-ational autonomy, but guaranteeingmore accountability and the exis-

tence of a hard budget constraint.Having private shareholders is not apanacea, as the Petrobras case shows,but it could still be a useful mechanismto discipline management and limitpoliticization. The oil industry in Latin Americacould have a bright future, giventhat it has the largest resource baseoutside of the Middle East, but in ad-dition to dysfunctional policies, thereare other risks to consider. In theshort term, the key risk is a contin-ued low oil price environment thatmakes high cost projects uncompet-itive. In the longer term, the region-al oil industry, along with the rest ofthe world, faces the risks generated byclimate change and the policies tomitigate it, as well as the potential dis-placement of oil as the lead trans-portation fuel. Oil dependent coun-tries, like Venezuela and Ecuador,could face an existential challenge ifthey do not change path. Othercountries like Argentina, Brazil,Colombia and Mexico, although lessaffected, also might suffer due to theeconomic importance of the oil sec-tor and their NOCs.

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USA+CANADA

LATIN AMERICA

2000

1990

-7.2%

+73%

2005

2015

2015

MEXICO

BRAZILVENEZUELA

Source: BP Statistical Review of World Energy 2016


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Arctic/The potential of a strategic area for transport and for energy

Oil and new shipping lanesDue to climate change and the progressivemelting of ice, superpowers are increasinglyinterested in the North Pole, which will becrossed by future sea motorways. The regionholds considerable hydrocarbon reserves

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n June 17, 2016, Russia launched atthe construction sites of Baltijskj Za-vod, in St. Petersburg, the largest andmost powerful icebreaker in theworld. It was named Artika: A hugesteel leviathan measuring 173 meterswide and 34 meters long, with aprow like the snout of a shark. It ispropelled by two nuclear enginespowerful enough to break up sheetsof ice up to four meters thick. Its en-try into service in the seas surround-ing the North Pole is planned for2017. It is the first of three similarunits, the last of which will be deliv-ered in 2020. The value of the agree-ment is 85 billion rubles, approxi-mately $1.3 billion. That is roughlyone-third the cost of the even largericebreakers, though that cost has yetto be determined, to be built by theUnited States, as announced by Pres-ident Barack Obama. Each will cost$1 billion. The U.S. already hasthree nuclear icebreakers, only two ofwhich are operational. These are ev-idently not enough, as Obama oftenemphasized during his visit to Alas-ka in September last year: “Ice-breakers are one of those things thatcannot be postponed,” he said, be-cause they serve “to protect the na-tional interests and the managementof natural resources.” The Chinesealso agree. For some time, the Chi-na Shipbuilding Industry Corp., oneof the two leading Chinese ship-building companies, has said thatone of its research centers has ob-tained government approval andfunding to launch the study of nuclearpropulsion, with the aim of buildinga nuclear icebreaker entirely throughdomestic production.It is obviously the gradual melting ofpolar ice that draws the interests ofthe superpowers to the most inhos-pitable region of the globe. Since theage of specific satellite detection in thelate seventies, Arctic ice has lost halfof its volume, and the trend does notseem to be lessening. The ice in thisregion is melting at twice the speedof that in most of the rest of theworld, albeit with fluctuations that cli-matologists are still evaluating, insearch of a model that may explainand, above all, predict future melting.

The two routes that crossthe Arctic OceanIn 2007, the European Space Agency(ESA) declared that the so-called“Northwest Passage,” the route con-necting the Atlantic to the Pacificpassing through the Canadian Arc-tic Archipelago, which historicallyhas been blocked by ice, is now to-tally passable. The first ship transitedin 2008 and, in 2013, the first com-mercial freighter passed through. Itis now a summer destination fortourist cruises. The situation of the “Northeast

OSEBASTIANO FUSCO[AGENZIA NOVA]

A journalist for over 40 years, he mainlyworked on foreign policy and relatedissues in energy, defense and geopolitics, collaborating to newspapers, agencies print,magazines and broadcasters radio and television. Currently, he is directorresponsible for Agenzia Nova.

THE CONQUEST OF POLEThe world’s major powers—Russia, the U.S. and China—areinvesting billions of dollars toacquire icebreaking ships. TheRussian Artika, a giant steelship measuring 173 meters inlength and 34 meters in width,was launched on June 17 oflast year. The progressive icemelting drives a growinginterest in the North Pole.


ARCTIC OCEAN

ARCT I C C I RC L E

NORWEGIANSEA

GREENLANDSEA

SIBERIANSEA

BEAUFORTSEA

LABRADORSEA

BAFFINBAY

HUDSONBAY

BERINGSEA

CHUKCHISEA

NORTH POLE NORTH POLE

ALASKA[UNITED STATES]

ICELAND

NORWAY

FAER ØERISLANDS

GREENLAND[DENMARK]

Northwest Passage

PACIFIC OCEAN

ATLANTIC OCEAN

ATLANTIC OCEAN

Bottlenecks to be avoided

The Strait of Malacca, which is still infested by pirates

CHINA

INDONESIA

MALAYSIA

EGYPTPANAMA

The China Sea, a politically unstable area

The Suez Canal, subjectedto expensive freight charges

The Panama Canal, subjectedto expensive freight charges

Passage” is slightly more complex.This route to the Pacific Oceanstarts from the North Sea and con-tinues in the Arctic Ocean along theSiberian coast, then crosses theBering Strait and Bering Sea toreach the eastern coasts of Asia. Itwas, until recently, considered adangerous route due to the presenceof ice and icebergs, and was not in-cluded in the ordinary trade routesbetween China and Europe. In thelast 50 years however, due to glob-al warming, the temperature in theareas surrounding the North Polehas risen almost four degrees, andfor certain months of the year, icedoes not form. From July to No-vember, navigation is now also pos-sible for merchant ships, with greatadvantages for commercial compa-nies that transport goods from Chi-na to Europe. On September 10,2013, a 19,000-ton Chinese freighter,the Yong Sheng, reached Rotterdamafter having left on August 8 fromthe port of Dalian on the Yellow Sea.Travelling along the northeast route,it took 35 days instead of the 48 re-quired by the usual southern route,which passes through the ChinaSea, the Straits of Malacca, the In-dian Ocean, Suez, the Mediter-ranean, Gibraltar and along Eu-rope to cross the English Channel.Not only did it save time and fuel,but it also avoided the expensivefreight passage fees for crossing theSuez Canal. It is still too early to saywhether the northeast route willbecome the preferred route for Bei-jing’s goods transported by sea to Eu-rope, but the Chinese freighter wasthe first to demonstrate its feasibil-ity, with advantages, at least in thesummer months, and it is a feasibil-ity set to expand. According to cli-

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• In 2007, the EuropeanSpace Agency (ESA) declaredit fully passable.

• In 2008, it was firstcrossed by ship.

• In 2013, it was crossed bythe first commercial freighter.

• Now, in the summer, it is a destination for touristcruises.

NORTHWEST PASSAGE


BARENTSSEA

KARASEA

LAPTEVSEA

RUSSIA

FINLAND

SWEDEN

Northeast Passage

13%

30%

of all conventional oil reserves are enclosed in the Arctic

of all conventional gas reserves are enclosed in the Arctic

Pobeda: The largest offshore oil field in Western Siberia, in the Kara Sea, is potentially equivalent to that of Saudi Arabia.

matologists, if global warming con-tinues at the current rate, between2030 and 2050 the Northeast Pas-sage will be navigable in completesafety all year round. Quite a longtime ahead, but not so much that thenations bordering the Arctic, whichclaim their rights on the surround-ing seas, will give up defendingtheir interests.

Who do the routes throughthe ice concern?For obvious reasons of strategic con-flict, the nations most affected are theUnited States and Russia which,among other things, have their ownunique geographical point of contactprecisely in the Arctic: the BeringStrait. The two superpowers reveal adifferent approach, linked to the ap-proaches that, historically, are theirvocations in terms of military strat-egy. Russia is investing in icebreak-ers and the deployment of permanentbases in the Arctic, while the U.S. isrelying on technologically advancedsystems, such as nuclear submarinesand stealth aircraft. Moscow focuseson icebreakers to create, in the eventof conflict, routes in the pack ice thatcan move faster than their navalunits. Washington relies on sub-marines to counter enemy ships andto serve as platforms to operate inArctic expanses. For this reason, thenew military strategy document ap-proved by the Kremlin emphasizesthe need to deny the Atlantic Alliancedominance of “deep waters,” from theMediterranean to the extreme north.Within twenty years, those routescould become the main navigableroutes of the globe, avoiding dan-gerous bottlenecks such as the Straitof Malacca, which is still infested bypirates; politically unstable areas orareas of dispute, such as the ChinaSea; routes subjected to expensivefreight charges, such as the Suezand Panama Canals; and routes withshorter sailing times.Beyond the effort to control thehighway future of the sea, there is an-other factor that is rapidly making theNorth Pole one of the most impor-tant regions on the planet in terms ofgeopolitics. According to estimatesdating back a decade ago, the Arcticcontains 30 percent of all conven-tional gas reserves, 13 percent ofwhich are oil, and large depositscontaining a variety of minerals suchas uranium, gold and tungsten. Esti-mates are certainly tentative becausethere are no precise analyses due tothe lack of explorations. In this sense,the country most interested in know-ing the true situation is Russia, whichalready obtains 15 percent of itsGDP from resources located be-yond the Arctic Circle. On June 15,the CEO of Rosneft, Igor Sechin, saidthat the potential of the largest off-

shore oil field in Western Siberia, inthe Kara Sea, is equivalent to that ofthe whole of Saudi Arabia. “Thecompany is consolidating its positionin the Arctic region. Eighteen monthsago, we discovered the Pobeda oil andgas field in the Kara Sea, as a resultof explorations in the extreme northof the Russian Federation,” explainedSechin. The Kara Sea is part of theArctic Ocean, located between the60th and 90th meridian east, bor-dered to the west by the island of No-vaja Zemlja, which separates it fromthe Barents Sea. In this latter sea, ata point located 85 kilometers fromthe northern coast of Norway, thereis someone who is already extractingoil. On March 13, 2016, Eni an-nounced the start of production of theGoliat oil field, in License 229, in anice-free zone. Goliat, the first oil fieldto enter into production in the Bar-ents Sea, was developed through thelargest and most sophisticated float-ing production and cylindrical stor-age unit in the world, which has a ca-pacity of one million barrels of oil andwhich was constructed with the mostadvanced technologies to deal withthe environmental and technicalchallenges linked to operations in theArctic environment. Daily productionwill reach 100,000 barrels of oil perday (65,000 of which by Eni). Ac-cording to estimates, the oil field con-tains reserves of approximately 180million barrels of oil. Productionwill take place through an underwa-ter system comprising 22 wells (17 al-ready completed), of which 12 areproduction wells, seven serve to in-ject water into the oil field and threeinject gas. Goliat also uses advancedtechnological solutions to minimizeenvironmental impact. It receiveselectricity from the ground by meansof underwater cables, which allows fora 50 percent reduction in CO2 levelscompared with other approaches,while the water and gas produced arere-injected into the oil field. Thelaunching of Goliat is an importantmilestone in Eni’s growth plan andwill significantly contribute to gen-erating cash flow. Eni holds a 65 per-cent share in License 229, whileNorway’s Statoil owns the remaining35 percent. Beyond the financialconsiderations linked to oil prices,what is important in such an invest-ment is the technological suprema-cy achieved with the construction ofthe northernmost mining structure inthe world. When the Arctic seas aremore accessible and climate condi-tions are less prohibitive, what willcount, more than dollars, will be theexperience gained from working inextreme conditions, in the north-ernmost well that has ever been ex-ploited.

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• Until recently, it wasconsidered a dangerous routedue to the presence of iceand icebergs.

• With global warming andthe consequent melting ofice, navigation is nowpossible from July toNovember, even for normalcommercial vessels.

• On September 10, 2013, aChinese freighter reachedRotterdam in 35 days insteadof the 48 days required forthe usual southern route.

• According toclimatologists, if globalwarming continues at thecurrent rate, between 2030and 2050 the NortheastPassage will be navigable incomplete safety all yearround.

NORTHEAST PASSAGE



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Alessandro Grassani(b.1977, Italy) is a storytellerwho uses photography and

video as his main form ofexpression. His job brought

him around the worldcovering international events

and stories about socialthemes in more than 30

countries in the world. Heworks, among others, with

The New York Times,National Geographic and

l’Espresso.He has won numerous

awards including Sony WorldPhotography Awards, Days

Japan InternationalPhotojournalism Awards andPremio Luchetta International

Award and his works havebeen exhibited at festivals

and galleries worldwideincluding the United Nations

and the Royal GeographicSociety in London.

Changing route is poss

Samsø is an islandlocated in the Strait of

Kattegat betweenSweden and Denmark’s

Jutland peninsula. Itssmall population—fewerthan 5,000 inhabitants—

nonetheless dream tochange the world. Thenews is that they have

succeeded. Since 1997,the island has been

liberated fromdependence on fossil

fuels: its energy is cleanand generated on site by

wind turbines, solarpanels and geothermal

heat pumps. It has 100%renewable energy, which

completely covers thedomestic demand andwhich produces, every

year, millions of kWh ofsurplus electricity sold to

Denmark. The turbineshave revived the local

economy and stoppedthe emigration of young

people.

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Samsø is one of the three ecological islands in the world.The others are King Island in Australia and Utsirein Norway. It has an area measuring 114 Km2, of which8,100 hectares are cultivated. Agriculture is traditionallyits main activity, along with fishing. In the homessurrounded by greenery, all domestic appliances run onwind energy, and heating is provided by the sun. Boilersand pellet stoves are fired by biomass chips and straw,and heat pumps are fueled by geothermal probes.The island’s wind farm is impressive: 10 offshore plants operate off the North Sea coast and 11 operate on themainland, having become part of the landscape.The goal of the government of the island is to be CO2 free by 2030.

s ible

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Are robots the future? The prospects of artificial intelligence

Sergio Romano was Italy’srepresentative to NATO andAmbassador to the SovietUnion from 1985 to 1989. Afterhis diplomatic career, hetaught in Italian and foreignuniversities. He has writtenbooks on history and politics, and is a columnist for Corriere della Sera.

SERGIOROMANO

not been a World War IIweapon and the Cold Warhad not channeled resourcesto space research. We wouldnot have the internet if theU.S. armed forces had notneeded an extensive andrapid “command and control”network.Are there currently otherareas in which war canproduce equally importantcontributions? The mostinteresting areas areautomation and artificialintelligence. Since its firstappearance in literature and cinema, the robot has stimulated our fantasiesand occupied our dreams.Research on the constructionof humanoids began severalyears ago, and one of themost promising laboratoriesis that of the Italian Instituteof Technology in Genoa.There are already productson the market scheduled forrelatively simple functions—for example, vacuumcleaners and machines forcleaning swimming pools.However, the nextgeneration’s leap forward willlikely be due to the militaryuse of robots. Drones hitenemies from the sky and arevulnerable, but their pilots aresituated beyond the oceanand wear a white coat. Thereis no other weapon that soplastically represents thefeatures of an asymmetricalwar in which western power

should, as far as possible,prevent the deaths of its ownsoldiers, but which often hits,along with the target, thosewho are unfortunately nearby.No less controversial is the robot-bomb with whichthe Dallas police killed an African-American formersoldier who had killed 5 policemen, purportedly to revenge the many blackyouths killed by the Americanpolice in previous months.

Automation poses legal and moral issues

The major advances inautomation will likely be inthe field of communicationsand transport. The route ofan aircraft or ship is alreadygoverned by a computer.How much time will beneeded before cars will notneed a driver? Of course, itwill be necessary to preparethe artificial intelligence of a car to deal with all of thesituations that may occuralong the way. In their bookUmani e Umanoidi: Viverecon i robot (Humans andHumanoids: Living withRobots”), Roberto Cingolaniand Giorgio Metta, scientists

at the Italian Institute ofTechnology, write that there is a fundamental differencebetween man and robot. Aman has qualities (elasticity,strength, deformability andrelativity) that allow him to“develop strategies to adaptthe body, in real time, to itsneeds, situations andchanges, greatly reducing the need to calculate what it needs to do each time.” In the robot, on the otherhand, the brain is separatedfrom the body and “anintelligence that directs a body is something verydifferent from a synergisticbody and mind.”Alongside the technicalproblems, there is a need toface legal and moral issues,to write codes that grant the owner of a robot theresponsibility for its errors, to change urban planningand to resolve the plight of all those who will be maderedundant due toautomation. In the lateeighteenth century inEngland, workers destroyedthe mechanical structuresthat were “stealing” theirwork. The phenomenon wasknown as Luddism, namedafter a young man (NedLudd) who had set theexample, and it recursregularly on the occasion of other innovations. Will wesee Luddism appear againstrobots? How would we reactto the use of police robots to restore order?

The recent death ofAlvin Toffler, authorof Future Shock,which sold a fewmillion copies in

the 1970s, reminds us that itwas the time when futurologybecame one of the favoriteexercises of scholars andintellectuals. However, the riskof forecasting error is alwaysvery high. Even when thereare economic and technicalconditions ripe for a particulardiscovery, it is not uncommonto find that laboratoriessuddenly abandon onesubject to focus on another.The reason is almost alwayseconomic, as discoveries aregenerally costly and thechoice of a goal can dependon the amount of moneyavailable. Although highlymotivated by their owninterests, scientists often end up discovering what is requested by a lender.

The main factorof technologicalinnovation is war

The factor that has mostinfluenced our existence andwhich has radically modifiedour traditions is war. The“patrons” that enable greatchanges are very often themilitary policies ofgovernments and armedforces. The development ofcivil aeronautics would havebeen much slower if the airforce had not, in the twowars of the twentieth century,made great strides. Wewould not have built the firstcomputers if intelligenceservices had not needed a large calculator to decryptcodes. We would not haveconquered space, with thecascade of resultinginventions, if the missile had

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The geopolitics of energy innovation

Technologicalinnovation in theenergy industryis distorting the traditional

approach of governments,industry and citizens to energy issues. In the hydrocarbons sector,for example, theunconventional revolution in progress in the UnitedStates, the expansion of the LNG market and the progressive globalizationand commoditization ofnatural gas have profoundimplications for traditionalproducers–—OPEC, firstand foremost—and for theirrelations with consumercountries. However, the bulk of thischange is yet to come, and this change will bedetermined by the rapid and disruptive deploymentof renewable energies andlow-carbon technologies on a global scale. Theacceleration in the fightagainst climate changedetailed in the ParisAgreement is underscoredby ambitious strategies andtechnological innovationprocesses introduced bymajor international players(both public and private),innovation capable ofdistorting the way in whichenergy is produced,managed and consumed on both the global and locallevel.

The United States andthe unconventionalrevolution

Within a year and a half, the price of crude oil fellfrom $114 per barrel in June2014 to $27 per barrel inFebruary 2016. This dropcan be mainly attributed to the decision of the Saudiroyal family to challengeU.S. shale producers, who,thanks to the introductionand progressiveimprovement oftechnologies such as

hydraulic fracking andhorizontal drilling, managedto bring U.S. production to over 9 million barrels perday in 2015, almost doublethat of 2010.Equally in the natural gassector, the boom in U.S.production, accompaniedby the expansion of globalliquefaction capacity and thereduction in LNG transportcosts, has had a strongimpact on regional andglobal market dynamics.They have contributed to a fall in gas prices, anincreasing convergence ofcosts on the Asian marketand in the main Europeanhubs, and a destabilizingimpact on the strategies of weaker players and lesscompetitive projects.

China leads the boom in renewables

Despite the collapse incrude oil prices, 2015 was a record year for thedevelopment of renewableenergies. Global investmentsin the industry reached $286billion, with a growth of 5percent in 2014 and sixtimes that since 2004.Moreover, for the first timeever, renewables contributedover half the new installedelectricity generationcapacity worldwide (53percent), for a total of 118GW compared to 94 GW the previous year.The emerging economiesare the focus of this

phenomenal growth, withtotal investments amountingto $156 billion (+19 percentcompared with 2014),against the $130 billioninvested by industrializedcountries (-8 percentcompared with the previousyear). China alonecontributes over one third($103 billion, 36 percent) of the global investments,posting a national annualincrease of +17 percent,ahead of India, Brazil, SouthAfrica and Chile, whosecombined investmentsreached almost $30 billion.Because of the collapse in oil and gas prices, eventhe main hydrocarbonproducers in the Middle Easthave launched significantreforms in their energyindustries. In absolute terms,the figures are lowcompared with those of themajor emerging economiessuch as China and IndiaHowever, in the MiddleEast/Africa, annualinvestment growth inrenewables has increased58 percent, the highestglobal figure. Particularlyactive are the governmentsof the Gulf CooperationCouncil (GCC) which,distancing themselves fromthe current economic modelbased on oil revenues, arepromoting ambitious policiesboth to reduce energysubsidies and to encouragethe penetration ofrenewables such as solarand wind.

Global upheavals

These trends will havesignificant implications, bothinternationally and locally. In the hydrocarbons sector,change is related to theredefinition of marketfundamentals, the Americanliberation from Persian Gulfoil, the state of confusionwithin OPEC, Russia’sfinancial difficulties, andgrowing European energysecurity thanks to low gas

prices and the expansion of the LNG market.Even more significant maybe the spread of low-carbontechnologies at an intra-state level, especially in theoil producing countries ofthe Middle East and NorthAfrica and the developingcountries of Sub-SaharanAfrica. Technologicalprogress in the energyindustry will not only be akey driving force to promotefair and sustainableeconomic development in large areas of the globe,but it also has the potentialto irreversibly alter powerrelations and socio-politicaldynamics. The massive penetration of technologies for theproduction, distribution anddecentralized consumptionof energy can makeobsolete the top-downmodel based on energysupplies ensured by a publicauthority free frominterference by thepopulation. Thedemocratizing effect of thespread of new technologiesin the energy industry andthe growing activism ofprivate players in an industrythat, in the past, wasstrongly harnessed by publiccontrol mechanisms maylead to extraordinaryupheavals in the economic,political and social arena,upheavals not foreseen evenby the parties involved.

Nicolò Sartori is Senior Fellowand Head of the EnergyProgram of the IAI, where he coordinates projects on the issues of energysecurity, with a focus on theexternal dimension of Italianand European energy policy.ce

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The Internet revolution and the “simple promises”of technology

As is true forother areas, for energy “theconnection” is the most

profound change in recentyears. The technologicalbreak brought about bymicroprocessors, whichhave become increasinglysmaller, has enabled anexplosion of informationand, at the same time, its exponential diffusionthrough a network to whicheveryone is connected. Cellphones have within a fewyears become mobilecomputers, workstationsfrom which billions ofpeople share news from an enormous number and a huge variety of sources.However, many positiveaspects of this processhide the low scientificreliability of much of thecirculating information, asusers are willing to navigatethe surface withoutsufficiently analyzing topicsthat, given their complexity,require more time andeffort.

Climate change:Between scientificevidence andconspiracy theories

When people turn on lights,make coffee, take the car,or catch a flight, theyusually know that theconsumption of energy,especially from fossilsources, pollutes andcauses the CO2 emissionsthat lead to climate change.The topic is a constantsource of news, debateand discussion,communication that oftensuggests that climate

change, caused by energy,is a planetary emergency.An enormous flow ofinformation circulates onthe Internet, but the mostcommonly foundinformation there is theeasiest and most trivial,while the credibility of science is too oftenquestioned. The news thatcaptures attention isnegative, certainly notpositive, and those whoproduce it must exaggerateto get clicks on the pagewhere the advertisementsare placed and for whichthe author gets paid.Conspiracy theories,frequently present indebates, spread and gaincredibility from those whobrowse on the surface andare captured by apocalypticscenarios and simpleaccusations.Renewables are unfairlycontrasted with fossil fuels,as if they are the onlysolution, forgetting thatthey themselves will beproblematic in the future.The technical difficulties of renewables, theirintermittence,unpredictability, andstorage difficulties, are

complex issues that requirestudy. People prefer to commit themselves to simple technological“promises”, such as long-lived batteries for theelectric car. Answers arepromised within a fewmonths, but thesepromises are constantlypostponed.

Responsible financeand the energy market

In the economic arena, themost profound influence isthe financialization relatedto energy. The companiesthat supply traditionalenergy are constantly underpressure from the financialcommunity, which, alsoinfluenced by the internet,wants change to savehumanity’s future. Unlike inthe past, investors controlhuge capital stakes which,thanks to technology, movequickly from one company

to another, often based on judgments related to the environmental profile of projects. A responsiblefinance has grown, one thatis sensitive to ethical issuessuch as sustainability, andone that requires thiscommitment becauseinvestors, connected to the Internet, demand it.Meanwhile, in the U.S., the fracturing of rocks or the processing of hugeamounts of data related to the subsoil aretechnological innovationsthat are less discussed and often criticized on the internet. Yet these veryissues are the ones thatenable the global energysupply to grow more thandemand and bring neededenergy to billions of peopleat lower prices.

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Davide Tabarelli, president of Nomisma Energy since1990, was director of the RIE, where he worked on researchprojects on the electricalindustry and environmentalpolicies. He publishes major magazines devoted to energy issues.


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Donald Trump’sRepublicannominationseems to replaya film that has

already been seen in therace for the U.S. presidency.On one side is HillaryClinton, who represents the more “governmental”Democratic party and mustmediate Bernie Sanders’proposals. On the other sideis the champion of theRepublicans, who defendsthe tougher positions of hisparty which, from anideological point of view, has its roots in the so-called“Tea Party” and also looksbackwards to rural Christianfundamentalism.Most newspapers in recentmonths have compared therelationship between Trumpand the party leadership to the battle between BarryGoldwater and NelsonRockefeller in 1964 whereGoldwater presented atough vision of U.S. politicalconservatism. But is thisreally a valid comparison?Although we are certainlynot in the times of RonaldReagan, with his supportfrom Jerry Falwell and the Moral Majority,“fundamentalism” still has a significant meaning to theRepublican ranks, especiallyfor its new internationalimplications which seem a difficult issue for Trump to handle.

An idea of freedomthat embracesintegralism

It is, in fact, at theinternational level that “madein the U.S.A.”fundamentalism seems to

represent a new “evilempire” reminiscent ofReagan’s critique of theSoviet Union. Trump willhave to come to terms withthat ironic problem whileholding on to the votes of “his” fundamentalists at the same time thatfundamentalism is easier for a Democratic and“liberal” candidate to handle,because they don’t rely onfundamentalists for theirvotes. In fact, the episodesof violence that haveoccurred in the UnitedStates, especially thoselinked to individuals whoburst into schools or otherpublic places and shootwildly, recall fundamentalismof various origins, therebycontributing to cultural andpolitical confusion. Thecultural attitudes of OmarSeddiqqe Mateen, theIslamic fundamentalist whoinstigated the tragic attacksin Orlando, are comparableto those of ultra-nationalistChristian fundamentalists inthe southern United States,rather than something that is foreign to U.S. history and culture. Mateen railedagainst multiculturalism,LGBT rights, and socialpolicies and civil libertiesguaranteed by theConstitution and Americanlaw. The fact that he hadsworn allegiance to ISISadds an element of contextbut does not change thereality that a different culturalbackground, with its ownroots, has managed tointegrate itself perfectly with many values ofChristian fundamentalism in the southern UnitedStates. The challenge now is to determine whetherRepublican political battles,rather than the typicalAmerican roots oftenreferred to, manage to serveas a breeding ground,perhaps unconsciously orinvoluntarily, for the spreadof anti-state sentiment. The

common belief that localland and homes, far fromthe “sinful” Sodom andGomorrah calledWashington, are morevirtuous affects Trump’s“anti-caste” and populistpolicy. The relationship withfundamentalism has beenpresent in the Republicanparty since its origin, but itspositions were not soimportant in the country untilthe 1930s, during theopposition to Roosevelt andthe New Deal. In the 1950sand 1960s, the movementprovided an organizationalstructure which explodedwith Jerry Fallwell during theReagan period. It becamean essential element for the political construction of Reagan’s “evil empire”theory, which was applied to communism. The culturalcontribution of Christianfundamentalism to politicsremained high even after theReagan presidency, despitethe advent of the “Tea Party”as an attempt to steertowards a more presentable,mainly economic, liberalconservatism. Karl Rove, a strategist in the electioncampaign that saw GeorgeW. Bush junior becomepresident, resorted to thekey idea of “Salvation andRebirth”; this applied to apolitician considered a non-ideologist, a culturally weakman and and one who hada history of problems withmany vices such as drugsand alcohol. It was preciselythe weakness inherent in the candidate that becamethe strength of that electoralcampaign. Bush’s “Axis of Evil” would also signal

a focus on a traditionalfundamentalist dichotomy of good/evil.

The crisis of Christianfundamentalism

At present, Christianfundamentalism certainlyhas a much smallerinfluence in terms of mediapresence or self-representation than it didduring the Reagan yearsdue to two main factors: therisk of becoming a breedingground for some sort of“heterodoxy of purpose”and mutual weakening, bothin polemics and challenge,with the Tea Party. Theresult is a Republicancandidate who is littleinclined to yield to electoralpressure, having been freedby both his distance fromvalues and proclamationsand enabled to focus onmatters more congenial to him such as major energychoices, or an interest (or lack thereof) jn climatetreaties. Donald Trump is a free man, despite thecoarseness and vulgarity heexhibits, but he is certainlynot a classic Republicanleader, dependent onreligious fundamentalismand values. This “break” can definitely change theGrand Old Party.

Roberto Di Giovan Paolo, a journalist, has written for,among others, ANSA, Avvenireand Famiglia Cristiana. He wasSecretary General of the ItalianAssociation for the Council ofEuropean Municipalities andRegions, and he is a lecturer atthe University of InternationalStudies of Rome.

The Trump enigmaand the resurgence of fundamentalism

ROBERTO DI GIOVAN PAOLO


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Obstacle course for recoveryMARKET DEVELOPMENTS

Brent, having reached its lowestlevel in the last 12 years inJanuary, is recovering and

approaching a $50 per barrel price, a ceiling that is still difficult to exceed.The meeting in Doha (April 17) thathad fueled expectations of anOPEC-non-OPEC agreement to freeze production ended instalemate. Despite the rebalancing of fundamentals, this price levelcontinues and is accelerated bystrong demand in the first part of theyear and, especially, by a decisivedownsizing in supply. The surplussupply of the last eight quarters isbeing reabsorbed and, in the secondquarter, the surplus settled at just 0.2Mb/d, partly due to a disruption thatin May alone withdrew approximately1.5 Mb/d from the market. Inaddition to temporary reductions in supply, the consequences of thecapex cut are beginning to emerge,especially for higher-cost non-OPECproduction. In July, U.S. tight oil hasreturned to the lower levels of twoyears ago, and in June production ofChinese crude oil reached the lowestlevel of the last three years. Thisreadjustment process could beundermined by a price recovery,although there are factors that do notallow for a rapid regeneration insupply, such as the crisis inVenezuela, which has deep politicaland economic roots. Financial operators are returning tobet on a price rise; net long positionsin ICE Brent are growing, while inMay short positions were at theirlowest levels for the year. In June, the Brexit effect, the peak in OPECproduction and the fear of U.S. tightoil recovery intervened to curboptimism. Operators are freezingtheir positions and remaining onstand-by.Brexit, in particular, raisesuncertainties regarding globaleconomic growth, this shown inrecent IMF revisions. Two days afterthe “leave” victory, Brent lostapproximately $4 per barrel per day,and it continues below the thresholdof $50 per barrel. But analysts agreethat the rebalancing process isunderway, and the surplus will tendto be reabsorbed by the end of theyear, although the rise in prices maybe bumpy.

Following an increase to $50 per barrel due to disruptions, Brexit cools the marketsè OIL PRICES

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-1.0

0.0

1.0

2.0

3.0

88.0

90.0

92.0

94.0

96.0

98.0

1Q20

13

2Q20

13

3Q20

13

4Q20

13

1Q20

14

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

Mb/d Mb/d

Surplus/Deficit Supply Demand

BRENT PRICE

SUPPLY/DEMAND BALANCE

Source: EIA-DOE, Europe Brent Monthly Spot Price FOB

Source: Eni’s elaboration on IEA data

Prepared by Market Scenarios and Long-Term Strategic Options – Oil (SMOS/OIL) – Eni

78_79_Data_ENG.qxp 19/08/16 12:45 Pagina 78

79

In the first half of 2016, global oildemand showed strong growth(+1.5 Mb/d) encouraged by the

sharp fall in prices. Growth remainsdriven by non-OECD Asia, but in thesecond quarter, Europe also standsout. Thanks to relatively low pricesand the improvement of themacroeconomic context, demandreached 13.8 Mb/d (+0.24 Mb/d),the highest level since Q3 2015.Also increasing is OECD America,thanks to record-high consumptionof gasoline in the U.S. (9.7 Mb/d in June) and to the decreased dropin diesel consumption which, in thefirst quarter, had suffered a collapsedue to a mild winter, the weakeningof the manufacturing industry andreduced drilling activity in the oil &gas industry. In OECD Asia, weakconsumption is mainly linked todecline in Japan, where thedisplacement of fuel oil forthermoelectric power plantscontinues due to the reopening of part of nuclear capacity. Non-OECD Asia experienced aslowdown between the first andsecond quarter (+0.9 Mb/d in Q2 vs +1.4 Mb/d in Q1), one linked toreduced consumption in China and

Saudi Arabia. Asia remains the areaof greatest growth, with +0.8 Mb/din Q2 (vs +1 Mb/d in Q1) this partlydue to India, which became the topcountry in terms of increasedconsumption, surpassing China(+0.34 Mb/d in India vs +0.23 Mb/din China in 1H16). Chinese demandis affected by its reduced economicgrowth compared to the recentpast, with the lowest growth rates

since the recession of 2009. TheChinese economy is in transitionfrom an export-oriented modeldriven by heavy industry to onemore focused on domesticconsumption, driven by the servicesindustry, and one with a negativeimpact on demand, mainly on oilproducts for industrial use. Oildemand in the Middle Eastdecreased in the second quarter

(-0.1 Mb/d vs Q2 2015) while itremained positive in the first quarter(+0.1 Mb/d vs Q1 2015). Theremoval of fuel subsidies for thetransport industry and the negativeimpact of lower oil revenues oneconomic growth weighed heavilyon oil consumption in Saudi Arabiawhich, in Q2, recorded the biggestreduction on a quarterly basis in thelast three decades.

In the second quarter of 2016, theglobal oil supply fell below 96 Mb/d,with a significant cut in production

concentrated in the non-OPEC area.After four years of continuous growth,for the first time since 2011, theproduction of non-OPEC crude oilretreated (-1.5 Mb/d in Q2 vs 2015). In the first half of the year, U.S.production fell by 0.5 Mb/d comparedwith 2015, a reaction to lower crude oilprices and a sharp decline in thenumber of oil rigs. In May, a fire inCanada led to the evacuation of manyof the oil sands fields in Alberta and a1.0 Mb/d collapse in output; however,the business should be back up tospeed by July. Throughout the first partof the year, Russia totaled over 10.8Mb/d (0.2 Mb/d vs 2015) due to the fallin costs linked to the devaluation of theruble; the country, after the failure ofDoha, declared that it does not wish to cooperate in any cuts in production.China is affected by the cut in capeximplemented by the major companiesand average losses in the first sixmonths of over 0.2 Mb/d (vs 2015).Production in Colombia is penalized bycontinuous rebel attacks. OPEC is not

changing its policy following the meetingof June 2. Production in the first half ofthe year grew by 1 Mb/d vs 2015 led bythe Middle East due to the rapid post-embargo recovery of Iran, the increasein Iraqi production and the continuousgrowth of Saudi Arabia which, in his“Saudi Vision 2030,” Prince Mohammedbin Salman sanctions his country’s

changing role. On the other hand, somecountries are entering a very criticalphase. The severe energy crisis inVenezuela is the tip of a deeper problemin the country which, in the secondquarter, saw a doubling of the decreasein production. In Libya, despite progresson the political side, production remainsat around 0.3 Mb/d. The situation in

Nigeria, however, is even more serious,due to the continuous attacks of therebel militia in the Niger Delta. In May,output fell to the lowest levels since1989. In the coming months, supply,although recovering from temporarydisruptions, will not have additionalcapacity to reverse the trend alreadystarted.

€ OIL DEMAND

€ OIL SUPPLYMb/d

OPEC Crude NON OPEC Crude Total Crude

-2.0

-1.0

0.0

1.0

2.0

3.0

1Q20

13

2Q20

13

3Q20

13

4Q20

13

1Q20

14

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

3.0

2.5

OECD Americas OECD Europe China Non-OECD Americas Middle East WorldIndia Other Asia

Mb/d

1Q20

13

2Q20

13

3Q20

13

4Q20

13

1Q20

14

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

ANNUAL DEMAND CHANGE BY SELECTED AREAS

ANNUAL CRUDE SUPPLY CHANGESource: Eni’s elaboration on IEA data, annual change

Source: Eni’s elaboration on IEA data, annual change

78_79_Data_ENG.qxp 19/08/16 12:45 Pagina 79

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