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Lighthouse: Energy Security Thoughts & Snippets

Ukraine’s Tax Hike Will Strangle the Domestic Oil and Gas Sector

The Ukrainian government is threatening the future of its already struggling oil and gas sector by introducing new taxes. The royalty, which taxes output sales, together with the tax rates of 70% for state-owned production companies, 55% on wells under 5,000 meters depth, and 35% on wells over 5,000 meters will lead to a dramatic decrease in domestic production and increase Ukraine’s dependence on Russia. For Ukraine this is a question of survival as it cannot continue its dependence on Russian gas for geopolitical reasons and sending Western investors packing would be suicidal.

Fuel for Thought: The Importance of Thorium to China

Over the past few years China has launched efforts to develop the world's first commercial thorium - fueled reactor based on the use of liquid salt. There are a number of reasons thorium-fueled reactors, in particular the thorium molten salt reactor (TMSR), would work for China. First, nuclear fission does not produce air pollution. Second, thorium, being a by-product of rare-earth mining, is believed to be far more abundant in China than uranium. Third, it could turn thorium, currently considered a waste-by-product in the processing of rare earth elements, into something of value.
China's effort of developing a TMSR is part of a bigger program to develop both solid fueled and liquid fueled reactors.Cindy Hurst gives an overview of China's thinking in regard to thorium and the actions it is taking to develop the first thorium molten salt reactor. Read in full here.

Strategic Implications of Chinese Energy Policy

China's vast coal reserves and system of hydroelectric dams, as well as eighty nuclear reactors currently under construction or planned, will enable it to provide for its electricity needs, albeit with some non-trivial environmental consequences. Transportation fuel is a completely different story in China, as it is everywhere else. All these cars, not to mention other modes of transport (ships, trains, and planes) require gigantic quantities of oil, and China is already the world's number one importer, with 60 percent of its oil needs coming from abroad—a level of dependency almost twice as high as America’s.  Obtaining the crude will become an increasingly difficult task, considering the potential for economic growth China still harbors.  This probably means that China will be ever more willing to compromise its "peaceful rise" policy in order to meet its energy security needs. Japan went to war against the United States in 1941 largely for fear of being starved of energy. Can we learn anything from that tragedy? Read more here.

US experts: Southern Gas Corridor critically important, crucial for Europe

As the military clash in Ukraine and the conflict between Russia and the West escalates, U.S. government top energy officials and leading experts on the South Caucasus energy and politics assembled at a Washington DC conference on “Security and Energy Implications for the South Caucasus after Ukraine.” The January 28th event was cosponsored by the Kennan Institute of the Wilson Center and the newly formed Center for Energy, Natural Resources, and Geopolitics (CENRG) at the Institute for the Analysis of Global Security.


Israel’s gas dream – the end is nigh

Succumbing to populist pressure, the Israeli government today delivered a crippling blow to the country's ambition to become a regional energy player. With the decision of the Israeli Anti-Trust Authority to revoke an arrangement permitting Noble-Delek partners to develop the natural gas field Leviathan, declaring them a cartel - a move that will require the separation of Leviathan from Tamar and the sale of Leviathan to a new partnership, effectively postponing the development of Leviathan indefinitely - the scenario of “zero gas” - and perhaps even the withdrawal of Noble from Israel altogether - should be considered seriously.  The implications are profound not only for Israel but for the entire region.


Don’t get used to cheap oil

The recent slump in oil prices has sent gasoline prices below $3 a gallon, leading many Americans to believe that our energy predicament is a vestige of the past. Decades of anxiety over our dependency on Middle Eastern oil with all its economic and geopolitical trappings are giving way to a new era of complacency in our energy discourse. Such a euphoric mindset could lead to painful consequences down the road.

How East-West Competition Turned Balkan Energy into a Geopolitical Football

How East-West Competition Turned Balkan Energy into a Geopolitical Football
Energy supplies to Central and Eastern Europe, and especially the Balkans, have become a “football” in the worsening relations between Russia and the West – and the countries of the region. Natural gas, nuclear, and so forth: what is needed is dispassionate policy analysis taking into account both geopolitical and economic factors, which in this article Ariel Cohen attempts to provide. 

Beware of the Climate Trap

The recent agreement between President Xi and President Obama in which the U.S. committed to reduce greenhouse gas emissions up to 28 percent below its 2005 levels while China committed to have its emissions levels peak by 2030 was one of the trumpeted announcements of the recent APEC Summit. The details on how this will exactly be done are fuzzy and will be left to negotiations in the United Nations Climate Change Conference in Paris next year. But the 2030 goal means that in the coming months China will be subjected to international pressure to turn words into deeds by accepting CO2 reduction measures which may be detrimental to its economic development. To this it should not agree.


European Energy Security: An American Responsibility?

When the Ukraine crisis broke out threatening to compromise Europe's energy supply from Russia, many American politicians and pundits called for the United States to expedite exports of liquefied natural gas, or LNG, to help bolster European energy security. Never mind that the United States won't have its first LNG export terminal in operation until late 2015 at the very earliest; that much of its approved gas exports are already committed to long-term contracts in Asia; and that Ukraine as well as most European countries under the Kremlin's boot do not have the terminals for receiving LNG. The United States is under no obligation to bolster Europe's energy security just because Europe, in its fixation on climate change, has for years undermined its own energy security and brought upon itself its current predicament. Gal Luft elaborates.

Building an Asian Energy Buyers' Club

Asia's energy landscape today is a cluster of segregated markets. A change may be in order. With the backdrop of this week's meeting of Asia-Pacific energy ministers in Beijing Gal Luft elaborates.


Arbitrage will be pursued (Iranian edition)

When something is subsidized, people use more of it....and smuggle/sell it elsewhere to cash out on the subsidy. Case in point, fuel in Iran.

The Economist reports "An estimated $40-100 billion is paid every year to keep Iranians, poor and rich, supplied with cheap energy, water, fuel and basic food. Consumption has soared. Shopkeepers in Tehran spray their verandas to drive away the dust. Cars clog the country’s roads. Iran’s energy consumption is reckoned to be 80% above the Middle East’s average. Worse, billions of dollars are squandered every year by smugglers taking Iran’s cheap fuel across borders to Iraq and Pakistan."

The subsidies have just been reduced but are still substantial...."On April 28th President Hassan Rohani raised petrol prices by 75%, from 4,000 to 7,000 rials ($0.16 to $0.28) per litre."

Caspian Gas, TANAP and TAP in Europe’s Energy Security

Russia’s occupation of the Crimea and possible incorporation of Eastern Ukrainian regions has demonstrated Europe’s vulnerability to Gazprom’s energy power. Whatever the EU’s reaction, diversification of energy supply to diminish Russia’s market share is likely to be one of them. The Trans Adriatic Pipeline (TAP) is one step towards the strategic goal of diminishing Gazprom’s huge presence in Europe. but in view of the proposed construction of the Russian South Stream pipeline, how can Central Europe, and especially Bulgaria, Romania, Austria and Lithuania, ensure energy diversification? What next for the Southern Corridor? Is Russia going to accept and tolerate infrastructure growth of the Caspian and other competitors south of its borders? Dr. Ariel Cohen, an Advisor to the Institute for the Analysis of Global Security, has just written an extended piece on these issues published by the Italian Institute of International Affairs.  Click here to view the entire article. 

The Federal Government’s Track Record on Cybersecurity and Critical Infrastructure

The Washington Post reports on a new report prepared for the Senate Homeland Security and Governmental Affairs Committee:

"The report draws on previous work by agency inspectors general and the Government Accountability Office to paint a broader picture of chronic dysfunction, citing repeated failures by federal officials to perform the unglamorous work of information security. That includes installing security patches, updating anti-virus software, communicating on secure networks and requiring strong passwords. A common password on federal systems, the report found, is “password.”....The report levels particularly tough criticism at the Department of Homeland Security, which helps oversee cybersecurity at other federal agencies. The report concluded that the department had failed even to update essential software — “the basic security measure just about any American with a computer has performed.”.....Higher up the chain of command, agency directors are rarely held accountable for security failures, experts said, because it is often unclear who is responsible. No penalties are mandated by law."

Some examples from the report relevant to the energy sector:

"The Nuclear Regulatory Commission stored sensitive cybersecurity details for nuclear plants on an unprotected shared drive, making them more vulnerable to hackers and cyberthieves."

"Last January, hackers gained access to U.S. Army Corps of Engineers computers and downloaded an entire non-public database of information about the nation’s 85,000 dams — including sensitive information about each dam’s condition, the potential for fatalities if breached, location and nearest city."


Europe links power markets

Bloomberg:  "Power markets across 15 European nations from the U.K. to Finland are linked from today in their biggest transformation since liberalization in the 1990s.  Network operators and energy exchanges for the first time held a single auction at noon Paris time to determine next-day power prices across countries that account for 75 percent of Europe’s electricity supply. The move is intended to smooth price differences between nations through better control of cross-border flows, the Agency for the Cooperation of Energy Regulators, or ACER, said Jan. 30.
The process, known as market coupling, is the biggest step in a push to integrate electricity markets by the end of this year across the 28-nation European Union, which forced utilities to open up their business to competitors in the 1990s. Linking supply and demand through trading may save consumers as much as 4 billion euros ($5.4 billion) a year by enabling electricity to flow efficiently to markets where it is most needed, according to the European Commission, the bloc’s regulator."

Grumbles in the Magic Kingdom

The Economist re Saudi Arabia:  "[the Saudi] kingdom has sold the rest of the world around $1 trillion-worth of oil in the past three years alone, accumulating a hoard of sovereign assets nearly as big as its GDP of $745 billion......“The government keeps people quiet with money, and in the rare cases where that doesn’t work, with threats,” says a diplomat in Riyadh. “But this is not a happy place.” For one thing, ordinary Saudis have no say in where the money is spent. All too often what they see, following the much-trumpeted princely opening of each new project, is vast empty buildings and unused facilities. What they hear is tales of which privileged courtier or business mogul has pocketed how much.....the kingdom’s leadership is adrift. King Abdullah, now at least 90, is seen as beholden to a small circle of advisers and sons, with rival courts surrounding the 83-year-old crown prince, Salman, and other contenders for the succession....
Saudi Arabia’s neighbours and allies, too, are increasingly wary. Their concern is not just about internal strains. In recent years Saudi foreign policy has grown both more assertive and more erratic."

The Economist: Polish Energy - Going Nuclear

Excerpt: "DONALD TUSK, the prime minister, and his cabinet finally adopted the Polish nuclear power programme on January 28th, giving the green light to construction of the country's first nuclear-power plant. A state-owned energy company, PGE, is managing the project, which will cost an estimated 40-60 billion zloty ($13-19 billion).....The government wants the first plant, capable of producing 3,000 megawatts of electricity per year, to be operational by 2024. The programme outlines plans to build a second plant by 2035.....Mr Tusk’s government first signalled its commitment to develop a nuclear energy programme in 2009, with the publication of a plan to diversify the country’s energy mix. It estimates that nuclear energy will supply 17% of the country’s electricity by 2030. Currently, hard coal and lignite are used to produce roughly 88% of the electrical grid. Dependence on Russian gas imports, and pressure from Brussels to reduce carbon emissions by 2020 beyond the 20% level previously already agreed, have pushed the government to look for alternatives." Source.

Smogagedon in China

Many of us have nostalgic memories of waking up on winter mornings to welcome news of a snow day, allowing us to skip school or stay under the blanket for a few more precious hours. As temperatures drop in the Chinese mainland, schoolchildren there have become acquainted with their own version of a snow day: The smog day, which occurs when schools and workplaces shut down due to hazardous levels of pollution and heavy haze. But you can't make smog angels. Indeed, citizen discontent at China's off-the-charts environmental degradation is quickly growing into a potential menace to the ruling Communist regime. Issues like unmet demand for political rights are no longer the party's only existential threat -  See more here.

Korin on OPEC

Turkey Adds to Complex 'Tapestry' of Oil Risks'

CNBC reports:

An escalation in Turkey's most violent anti-government protests in years may complicate an already tense backdrop for energy security in the Middle East, possibly adding to the risk premium in benchmark oil prices, strategists told CNBC this week. 

Although Turkey produces only negligible quantities of oil and natural gas, the country represents an "energy crossroad" – Russian energy exports from the Black Sea port of Novorossiysk flow though the strategic Turkish Straits to markets in Europe and the U.S. Turkey is also an important conduit for oil transported via pipeline from northern Iraq.

Approximately three million barrels a day of crude oil and refined fuels flow though the Bosporus and the Dardanelles Straits "so any disruption of traffic would mean losing the equivalent of Nigeria or Venezuela," said Gal Luft, co-director at the Institute for the Analysis of Global Security (IAGS) [which is publisher of the Journal of Energy Security].

"The market will surely keep a close eye on the developments in Istanbul, which sits on the Bosporus, and the Kirkuk-Ceyhan pipeline which carries 330,000 barrels a day of Iraqi oil from Kurdistan to the Mediterranean," he added.

For more complete coverage of this developing story, including Luft's comments, go to CNBC.    



To Drill or Not to Drill: How Will Saudi Arabia Respond to the American Oil Boom?

"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 Break Even Price of Oil

The Break Even Price of Oil

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. 

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US Energy Security Council RT discussion

New Books

Petropoly: the Collapse of America's Energy Security Paradigm
Energy Security Challenges for the 21st Century

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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
Russian Coal: Europe's New Energy Challenge