For many Americans and foreign alumni who’ve passed through the American university system, the month of March is known as March Madness. It is a month that basketball fans are glued to their televisions following the college basketball championship round-robin.
Elsewhere around the world March Madness in 2014 took on a much more sinister character. Russia’s take-over of Crimea is only the latest in a long series of bullying incursions that the world’s largest country has taken over smaller regional ones. Abkhazia in Georgia and Transnistria in Moldova jump to mind as the manifestation of Russian mingling in the affairs of states under former Soviet and now Russian influence.
In the past disputes between Russian nationalists, lead by Prime Minister Vladimir Putin, and its Ukrainian neighbor have been obscured through the fish-eyed lens of energy issues where Russia’s displeasure of Ukrainian independence was blurred and marginalized along the lens’ convex periphery allowing energy disputes to dominate the main field of vision. Russia’s march into Crimea has dispelled this vision once and for all. The Russian President aka Emperor has been portrayed in the past as a shirtless fly-fisherman the image of which is presumably to his liking. This time Vladimir may lose his pants, and if he is not careful he and his country will lose their shorts, and will be left standing before the international community as a naked and brazen symbol of brutality.
Energy in Ukraine
Ukraine's geographic position and proximity to Russia explain its importance as a natural gas and petroleum liquids transit country both for Russia as well as for Ukraine’s downstream neighbors across Europe. The configuration of Ukraine’s pipeline infrastructure and its dependence on the Russian Federation for the majority of gas that traverses the country east to west (and the gas it consumes domestically) is attributable to its legacy as part of the former Soviet Union’s pipeline network. Since Ukraine’s Orange Revolution in 2004 and the election of Ukrainian President Viktor Yushchenko (who was poisoned incidentally during the election campaign) over his Russian-backed opponent (the recently ousted Ukrainian President Viktor Yanukovych) the price the Ukraine has paid for its gas has been proportionally higher than the more distant Germany pays for its own Russian gas (the Baltic nations are in largely the same unenviable position as Ukraine).
While a subsidy agreement had been struck by Russian backed Yanukovych that gave temporary reprieve to the troubled Ukrainian economy, on April 1st (and this is no April fool’s joke) Russia’s Gazprom again jacked up prices by 40% to some $385 per thousand cubic meters. In deference to an EU loan bailout package of some $27 billion and to a pending loan package from the IMF, the Ukrainian government has stated it will increase by 50% the cost of gas to its residential consumers. Presumably Gazprom will be pleased with a portion of the EU loan proceeds that will go towards retiring what it claims is $1.7 in arrears for 2013 gas deliveries. It sees such arm twisting as righteous and effective in further economically destabilizing a Ukraine it supposedly longs after. By weakening the Ukraine economically through the energy subterfuge, Putin & Co. hope to maximize their influence over those in the Ukrainian public who find or feel themselves disenfranchised and who long for the good ole-bad ole days.
To be realistic there is very little in the short term that Ukraine can do to break away from dependence on Russian gas. In fact, the Ukraine has been trying to buy cheaper gas on the European market which raised the ire of Russian gas lobbyists in Brussels but due to a lack of west-east pipeline capacity there simply isn’t enough throughput capacity to supplant Russian gas deliveries today. Regardless, the bottom line in Ukraine-Russia relations is that the legacy and current disputes in this bilateral relationship are not energy driven. This is about a revengeful Russian power grab.
The Emperor has no clothes
For years Vladimir Putin’s Russia has put on a dog-and-pony show to depict itself as a modern state worthy of equal treatment and respect by countries of a greater economic or military magnitude than itself. Russia’s procession of kennel-events from its hosting a G-8 summit back in 2006 to the 2014 Sochi Winter Olympics has been window-dressing for a state swimming upstream to create a stable middle-class against the flow of its own internal corruption. What Putin has put to the test is the loyalty of Russia’s own middle class to continue to support him as Western sanctions begin to bite. On top of this is the fact that the Russian banana-republic’s economy, as dependent as ever on its oil and gas commodity exports for funding its national budget, its military build-up (which lead to the departure of the respected Russian Finance Minister Alexander Kudrin back in 2011) and its corrupt kleptocracy has a weakening economic base to pillar-on.
The Russian economy was barely growing before the imposition of sanctions (1.3% in 2013 reportedly its lowest growth rate in 13 years barring a downturn in 2009) and it continues to deteriorate. Capital outflows are accelerating (more in the first 3 months of 2014 than in all of 2013), the currency has taken a 10% devaluation hit since its Ukrainian incursion leading to higher capital costs for lenders and borrowers alike. If the crisis worsens, the World Bank estimates the economy could move into negative growth territory in 2014 and beyond. Already the World Bank notes, Russia’s recent growth-holding cetiris paribus oil and gas prices - have been consumer driven and consumer spending is down. In the immediate short term Emperor Putin can probably bank on continued middle class support but we are only at the beginning and not at the end of Russia’s devolution backwards to some vain and imaginary glorious past. How long his bread-and-butter contingency will tolerate the economic costs of expansionism at the price of the Russian empire he already controls is anyone’s guess. One thing for certain is that further Russian incursions into the Ukraine and elsewhere can only lead to furthering damaging the nascent Russian economy and plunge it backwards towards a recession, or worse, that Russians themselves do not want. The other side of this coin is how much the rest of the world, particularly Russia’s biggest EU trade partners, are willing to sacrifice to make a point about justice for Ukraine and Russia’s unprecedented modern military build-up adjacent to the EU’s and NATO’s eastern European border.
In the end, Russia has again shot itself in the foot. Mr. Putin’s leadership is as starkly threatening as past Soviet regimes which should come to no one’s surprise. Russia’s foreign and energy policy behavior further signal the extent to which it is willing to return to its former glory days at any price. European policy makers could accelerate decoupling the EU from Russian energy supplies; American policy makers have already called on the EU to energize moves towards their own shale oil and gas revolution, which if launched, could further nibble-away at Gazprom’s European market share; a middle-to-long term decline in Gazprom’s export position could lead to a gas-rich but market dry Russian gas industry. In the meantime, world observers will necessarily re-assess Russia as an upstanding and predictable state worthy of respect in global affairs. The G8 is now the G7 (Mr. Putin says he could careless), NATO will reassess its posture vis-à-vis its old-new adversary (probably the biggest unforeseen favor Mr. Putin has given the Alliance in many a day) and trade agreements and regimes may be reviewed which can’t be good for inward Russian foreign investment and trade. In the end, the Ukraine-Russia crisis is not about energy. This is about power. US President Obama correctly downgraded Russia as a ‘regional’ power over its smaller or weaker regional neighbors. Once again the Russian emperor has no clothes. A half naked Putin is hard enough to look at. Don’t make things worse Vlad. We don’t want to go there.
On March 26th, European leaders asked US President Obama to help in licensing the export of US derived shale gas to the continent. Such a request comes at a difficult time for all concerned. Tough and potentially costly decisions will have to be made in terms of directing America's natural gas to its best end-use. Gal Luft points out there has been an absence of significant discussion about how America's shale gas revolution can benefit one of the US economy's most important sectors-transportation.
A team of researchers lead by mathematician Dr. Rui Carvalho at the Centre for Mathematical Sciences, University of Cambridge, have come up with a model that demonstrates how Europe can bolster its natural gas resiliency through cooperation and access to each others’ energy markets. Natural gas pipelines, and moreover the networks they create, are expensive to build and even more so to operate if not utilized at or near capacity. Therefore these researchers set about the task of calculating how in times of conflict or crisis European economies could weather a major disruption in gas supplies without adding new capacity. The result was the publication this month of their research in a report entitled, “Resilience of natural gas networks during conflicts, crises and disruptions.”
Recent and ongoing security breaches at companies operating critical energy infrastructure have everyone concerned. There is a long way to go towards harmonizing and regularizing network security protocols across industries as Dr. Vincent Berk, CEO of FlowTraq a network security solutions provider, recently pointed out in an interview concerning cybersecurity with the Journal of Energy Security.
One of the least explored but increasingly important areas of critical energy infrastructure protection concerns offshore oil and gas installations. The international regulatory framework provides a number of countervailing measures that can be used by states to protect offshore installations and respond to attacks and security incidents involving these installations. Mikhail Kashubsky who is with the Centre for Customs and Excise Studies in Australia explores the international regulatory aspects of offshore installations security in the second part of a three-part series for the Journal of Energy Security.
Ambassador Gábor Iklódy, NATO Assistant Secretary General for Emerging Security Challenges
The Atlantic Alliance is at a historical watershed. The financial crisis is affecting Allied defence budgets in unprecedented ways. Shrinking defence budgets are threatening to compromise our ability to shape the strategic environment in line with our interests and values. If we do not adopt new ways of doing business, we will risk losing our military edge. Given the many threats and challenges of a globalized world, we simply cannot afford to let this happen.
Luckily, there are ways and means to help maintain NATO’s military competence. Enhancing the energy efficiency of our armed forces is one such area where major opportunities are waiting to be exploited. New energy-saving technologies, ranging from smart grids in deployable base camps to fuel cells and Light Emitting Diodes offer not only a reduction of fuel costs, but also enhance NATO’s operational effectiveness and reduces the risk for soldiers who protect supplies. At the same time, employing energy-saving technologies and procedures helps demonstrating environmental awareness.
This special issue of the “Journal of Energy Security” provides a sample of what NATO and industry are capable of if they embrace energy efficiency as a strategic objective. The collection of articles demonstrates the enormous potential inherent in new energy-saving approaches and procedures. Above all, they demonstrate that the goals of saving money, enhancing our military effectiveness, and saving lives, are not mutually exclusive, but can be achieved together. If NATO acts in line with this logic, it can confidently meet the challenges of an age of austerity.
Whether it’s called ‘Green Energy’, ‘Smart Energy’, or ‘Operational Energy’ NATO Member and Partner States have learned a lot about the implications of rising power and energy demands in military operations and how emerging technologies can make the warfighter more effective and efficient. This complex endeavor ranges across a wide range of fields from battery technologies, electric vehicles, and improving the built environment for the solider just to mention a few working examples. This article discusses the role of the NATO Science and Technology Organization in leading this effort, what they are looking at today, in providing scientific and technological leadership for tomorrow.
NATO forces have advanced operational energy capabilities over the past several years including development of alternative and more efficient energy technologies, and basic energy system analysis. Solar panels, insulated shelters, more efficient generators and air conditioners, and electrical power networks all have been recognized for reducing energy logistic demand where deployed. However, mitigating required fuel delivery requirements is only part of the operational energy opportunity, especially as energy contributions to operational capability continue to expand far beyond the traditional mobility focus. Operational technologies such as sensing, computing, communicating and networking depend, in turn, on such energy attributes as reliability, quality, density, flexibility, and interoperability for their effectiveness. We therefore must better define those dependencies, and develop effective models to balance the multitude of energy attributes and their impacts, if we seek to achieve the greatest net operational benefit – the ultimate goal of “energy-informed operations.”
Within the next six months, Algeria will be facing its next round of presidential elections. The stakes are high for incumbent President Abdelaziz Bouteflika and even higher for this hydrocarbon nation. The country's energy future is dominated by Sonatrach its national energy champion that has struggled in recent years to keep its oil and gas flowing at rates that can sustain economic growth, exports, and steadily increasing domestic demand for natural gas that powers Algeria's electricity grid. 2013 has not been kind to this North African country, surrounded by instabilities in Mali, Tunisia, Libya and further afield in Egypt. First there was the attack at the In Amenas gas facility that caused the international community to pause and ponder, however briefly, security in this vast state. But fundamental changes in energy markets are also challenging the country to develop its own significant reserves of shale gas, tight oil, and above all sunshine which if captured could secure Algeria's energy future for decades to come.
Turkmenistan, lead by its ever eager President Berdymukhamedov, forged ahead in October with its plans to put itself at the center of the energy security debate in Central Asia. It first hosted a meeting with the OSCE in the capitol city Ashgabat as another step to put itself front and center on security discussions within a UN context. Turkmenistan’s Deputy Prime Minister Rashid Meredov in September proposed not one but five meetings in 2014 to cover energy (and other issues like transport) explaining, “[energy security] is one of the most important components of stable world economy, its protection against distortions and disruptions," and further proposed the establishment of a new UN "universal international law tool kit" to form the legal basis for the international supplies of energy resources with a corresponding UN structure to enforce implementation of these provisions. Realistically the proposed efforts can also be seen as a flanking maneuver to ward off Russia’s ongoing influence in the republic and as a push-back to growing Chinese influence over its gas resources as contributor Anthony Rinna details in the following article.
When energy forecasters talk about future energy production and prices, people listen, especially if the modelers come from or represent vaunted organizations such as the International Energy Agency or the US Energy Information Administration. Although these are learned, serious people, relying on their long term forecasts - projections going out 10 or 20 years - is largely a mistake because they are almost always wrong, as suggested by a comparison of the Department of Energy’s 2005 forecasts to the actual outcomes. The piece offers explanations for why such forecasts are mistaken and explores the implications of society’s over-reliance on them.
Militarizing oil interests and assets is not something that oil companies openly attest or subscribe to based on their interests in maintaining their public, reputational value. However actions speak larger than words. The government of Ecuador has an interesting relationship with foreign oil companies as JES contributor Nicolai Due-Gundersen points out in his analysis of Iraq’s oil law and the potential inroads this law could provide to private military contractors (PMCs) in continuing their security activities in Iraq. In the meantime, Iraq has created an ‘oil police’ that Due-Gundersen maintains is the key to limiting the latitude of PMCs working in the Iraqi oil sector.
The Republic of Cyprus’ aspirations for a gas bonanza presently hang with pending developments of their Aphrodite natural gas field and the exploratory drilling that will take place there shortly. However the unknowns in the development path Cypriot gas will take to bring it ultimately to market appear as complex as the geopolitics of the region. Professor Theodoros Tsakiris deconstructs the landscape for us with a view towards grounding the reader with a solid understanding of what ultimately is at stake for Cyprus, the eastern Mediterranean and the European Union in building a more robust and secure energy supply infrastructure.
Providing safe and reliable electricity while incorporating generated power from renewable and sustainable resources is a major challenge for the world’s transmission operators. Recently the JES had an opportunity to exchange some questions and answers with Mr. Terry Boston, president of GO15, an association representing 70% of delivered power worldwide. Mr. Boston, during his day-job, has been CEO of PJM Interconnection, a regional transmission organization that controls the movement of wholesale electricity in all or part of 13 US states in addition to the District of Columbia, for the past four years. He is a US vice president of the International Council of Large Electric Systems and vice president of the Consortium for Electric Reliability Technology Solutions.
One of the least explored but increasingly important areas of critical energy infrastructure protection concerns offshore oil and gas installations. The threat environment encompasses potential attacks from terrorists and other disgruntled groups to sabotage carried out by employees of oil and gas companies themselves. Mikhail Kashubsky who is with the Centre for Customs and Excise Studies in Australia explores the threat environment for these installations in the first past of a three-part series for the Journal of Energy Security.
Paradigm shifts in thinking and innovation may be brought about by design or disaster; remember the adage ‘disaster is the mother of invention.’ In this article, contributor Michael Hallett calls on us to re-examine the panoply of threats and challenges to national electricity grids (the paradigm) and to make a pro-active paradigm shift today before disaster happens. Specifically the paradigm shift Hallett asks the reader to consider is the utility of parallel compressed natural gas (CNG) networks-in a world increasingly awash in gas-for bolstering electricity supply security that concurrently could keep the lights on and provide fuel diversity in transportation markets.
Like a horse race, the thoroughbred first out of the gate isn’t necessarily the first to cross the finish line. So it goes with the Israeli government’s treatment in the development of its Eastern Mediterranean natural gas fields that have turned a thoroughbred into a nag. The government has vacillated on issues such as how much of Israeli reserves can be exported, and how much to tax developed product so much so that it has dried up inward forward investment in what could be a potential game changer for resource import-dependent Israel. It’s anyone’s guess where things are headed but what’s at stake for Israel, foreign investors, and those who pine for new sources of natural gas in Europe and beyond are covered in the following article.
Recent development in the U.S. of technologies for extracting oil and natural gas from shale formations are changing the global energy landscape. Thanks to hydraulic fracturing or fracking U.S. oil imports have dropped to the lowest level in 20 years and the U.S. is well on its way to become a major player in the global market for liquefied natural gas (LNG). But this so called energy revolution has been received in China with perplexity and trepidation. Many Chinese officials believe that U.S. self-sufficiency in energy, should it come to pass, would weaken U.S. interest in the Persian Gulf, leading to a military withdrawal from the region. This could in turn compromise China’s energy security. Others see a U.S. energy transition as an American plot to de-industrialize China by luring industrial production from the mainland to the U.S., where natural gas prices are cheap.
None of these concerns are grounded in reality. Chinese need not fear the new energy architecture. In fact, they are only likely to benefit from it.
It is time to put to rest the myth that U.S. presence in the Persian Gulf is tied to its dependence on imports of the region's oil. It isn’t. In fact, this has never been the case. Today only nine percent of U.S. oil consumption originates from the Middle East. The highest it has ever been was fifteen percent. While the U.S. is not dependent on the Gulf for the physical supply of oil, it is dependent on the region for price stability. Oil is a global commodity with global price so when the region becomes unstable and oil prices spike, the U.S. is impacted by the hike just like any other nation regardless of how much of its crude comes from the Persian Gulf.
Because the U.S. economy is highly sensitive to oil shocks – Almost every recession since the Second World War was preceded by a spike in oil prices – it would not withdraw from the Persian Gulf even if its imports from the region dropped to zero. U.S. interests in the tumultuous Middle East are complex and transcend oil. Just like China Washington desires Middle East stability, and it will therefore continue to be the guarantor of the region’s security for many years to come.
Cheap natural gas will surely revive America’s industrial sector, creating new jobs and investment opportunities. In fact, some global manufacturers have already announced their plans to set up plants in the U.S. to take advantage of its cheap energy. But this should not be viewed as a threat to ...
"The coming American oil boom is bad news for Saudi Arabia. How the kingdom responds could very well determine if it survives. Current trends in the global energy market don't look good for Saudi Arabia. First, the International Energy Agency projected in November 2012 that the United States will surpass the Gulf petrogiant as the world's top energy producer by 2020. Then, last week, it revealed that North America, buoyed by the rapid development of its unconventional oil industry, is set to dominate global oil production over the next five years. These unforeseen developments not only represent a blow to Saudi Arabia's prestige but also a potential threat to the country's long term economic well-being -- particularly in the post-Arab Spring era of elevated per-capita government spending. Saudi Arabia's response, to drill or not to drill, will also have major repercussions for a world economy which remains tied to the oil drum.
"But if the kingdom's outlook is decidedly bleak, its official response has been muddled. In an April 25 speech at Harvard University, Prince Turki al-Faisal, a former head of Saudi Arabia's top intelligence agency and the current chairman of the King Faisal Center for Research and Islamic Studies, announced that the kingdom is set to increase its total production capacity from 12.5 million barrels per day (mbd) today to 15 mbd by 2020, an amount that would easily make it the world's top oil producer once again. But five days later, in a speech at the Center for Strategic and International Studies in Washington, DC, Saudi Arabian Minister of Petroleum and Mineral Resources Ali al-Naimi conveyed an entirely different message, rejecting Turki's statement out of hand. "We don't see anything like that, even by 2030 or 2040," he said. "We really don't need to even think about 15 million.""
So what are we to make of this 2.5 mbd discrepancy? To find out read the rest of Dr. Gal Luft's article in Foreign Policy .
The future of natural gas in Europe is a conundrum. While natural gas demand is soaring in the US and across Asia, demand has actually declined in Europe. Will a turn-away from natural gas dampen the EU's appetite for modernizing its critical energy infrastructure? Is Europe turning to coal to displace gas in power generation and if so is the European Carbon Market actually contributing to this fuel switch? First time contributor to the Journal of Energy Security, Jozef Badida, examines Europe's gas future within this complex context.
Germany has slowly but surely pursued a policy of energiewende (energy turn or transformation) since the 1980s, when the plan to move away from fossil fuels and toward renewable energy sources was first conceived. The plan was made policy in 2000 with the Renewable Energy Act, and by 2010 40% of Germany’s power generation came from either renewable (17%) or from nuclear energy (23%) and the plan to cut greenhouse gas emissions by 40% in 2020 and 80% by 2050 seemed a realistic goal. In 2011, however, in response to the post-tsunami nuclear disaster in Fukushima, Japan, German Chancellor Angela Merkel announced that eight of Germany’s oldest nuclear plants would be shut down immediately and all of the remaining plants would be decommissioned by 2022. Now, Germany finds itself pursuing ambitious clean energy goals without its biggest source of low-carbon emission energy.
ITER, with its nuclear license granted by the French nuclear authorities, with its headquarters inaugurated and over 80% of its procurements signed off on, is a nuclear fusion project well underway. In a few weeks from now the first test convoy for the heavy-lifts and exceptional size components which are currently being manufactured around the world will roll from the industrial port of Fos-sur Mer near Marseille, France to the ITER construction site in Cadarache, France some 80 kilometers further north. Here, the footprint of the largest fusion machine ever built is already clearly visible and some 3000 personnel will arrive on site in the course of then next months to erect the infrastructure that is necessary to conduct one of the most ambitious scientific endeavors mankind has ever undertaken.
The importance of what we term OPEC's "break even price of oil" was a key message in our recent book, Petropoly: the Collapse of America's Energy Security Paradigm. The break even price is the price of oil required to balance the budget of Saudi Arabia and other OPEC countries.
If you've read Petropoly you were thus not surprised by recent reporting that the price of oil Saudi Arabia needs to balance its national budget is $94 per barrel, while Iran requires $125, nor by comments by Ali Aissaoui of the Arab Petroleum Investments Corp that "OPEC will definitely need to cut production to shore up prices as they can't produce at prices close to their break-even level."
As we explain in Petropoly, when non-OPEC countries drill more, if the slack isn't taken up by developing world growth in consumption, OPEC drills less in order to tighten the supply/demand relationship and send prices back up, and for the same reason when we use less, OPEC also drills less.
America is facing an energy-security paradox. Our domestic oil production is on the rise; the cars that roll onto our roads are more efficient than ever, and net oil imports are at their lowest level since the days when President George Herbert Walker Bush lived in the White House. Yet none of this has reined in the price of gasoline. This runs counter to U.S. conventional wisdom over the past forty years, touted by every president since Richard Nixon. Read more of Gal Luft's article on the energy security paradox.
How oil is priced and who pays what price has long been a matter of concern to consumers around the world. Historically, Asian oil importers have believed that they pay an 'Asian price premium' for oil over the price consumers in Europe and North America pay for the same commodity. This article explores whether an Asian premium is in fact a reality or whether price differentials between what consumers of Middle Eastern oil pay in Asia as compared to other regions are attributable to other factors. This outstanding article lifts the lid on how oil is priced on international markets and provides a studied analysis for explaining regional oil price differentials using time series analysis.
"Remarkable collection spanning geopolitics, economy and technology. This timely and comprehensive volume is a one stop shop for anyone interested in one of the most important issues in international relations."
U.S. Senator Richard G. Lugar
"A small masterpiece -- right on the money both strategically and technically, witty, far-sighted, and barbeques a number of sacred cows. Absolutely do not miss this."
R. James Woolsey, Former CIA Director
"The book is going to become the Bible for everyone who is serious about energy and national security."
Robert C. McFarlane, Former U.S. National Security Advisor
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