Emerging Threats to Energy Security and Stability: Proceedings of the NATO Advanced Research Workshop on Emerging Threats to Energy Security and Stability, ... Security Series C: Environmental Security)

Emerging Threats to Energy Security and Stability

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Series C: Environmental Security – Vol. 1

Emerging Threats to Energy Security and Stability edited by

Hugo McPherson MEC International Ltd., London, U.K.

W. Duncan Wood Institute for Applied Science, Edinburgh, U.K. and

Derek M. Robinson Trilateral Group Ltd., London, U.K.

Proceedings of the NATO Advanced Research Workshop on Emerging Threats to Energy Security and Stability London, United Kingdom 23-25 January 2004 A C.I.P. Catalogue record for this book is available from the Library of Congress.

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CONTENTS Workshop Contributors ............................................................................ix Foreword.................................................................................................xiii SECTION I - Executive Summary ........................................................1 1 A Summary of the Discussions ....................................................... 3 P Tempest

SECTION II - Prospects for The Global Energy Market .......................... 9 1 An Overview ................................................................................. 11 D Gore-Booth

2 A Political Perspective .................................................................. 13 Lord Howell of Guildford

3 An Analytical Perspective ............................................................. 19 M Smith

4 An Economic Perspective ............................................................. 33 A Sieminski

SECTION III: - National Strategic Energy Interests .......................... 51 1 Energy Security and Unresolved Conflict in the Caucasus........... 53 T Japaridze

2 Prospects for Russian Energy........................................................ 59 E Velikhov

SECTION IV - Evolving Roles of Multilateral Organisations and the Private Sector................................................................. 65 1 Overview ....................................................................................... 67 R Priddle

2 The International Energy Forum and Energy Security & Stability .......................................................... 71 A Walther

3 The View from Brussels................................................................ 79 A Konoplyanik

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SECTION V - Regional Challenges: The Middle East ...................... 87 1 National Strategic Energy Interests and Creating Regional Stability in the Middle East............................. 89 R Ebel

2 Emerging Threats to Energy Security and Stability .................... 101 H Franssen

3 Iraq: A Japanese Perspective ....................................................... 125 K Katakura

SECTION VI - Regional Challenges: North Africa ......................... 127 1 Libya............................................................................................ 129 O Miles

2 The North African Challenge ...................................................... 137 F Perrin

SECTION VII - Regional Challenges: The Caucasus Region, Caspian & Black Sea Basins ................................................... 141 1 Turkey & NATO ......................................................................... 143 D Logan

2 Prospects for the Caucasus, the corridor between two Continents - Keynote Address.............................................. 147 T Japaridze

3 Tatarstan: Euro Islam in the Volga Region ................................. 155 R Khakimov

SECTION VIII - Critical Energy System Infrastructure (CESI) Emerging Threats to Shipping and Pipelines ........................ 169 1 Introduction ................................................................................. 171 J Flynn

2 Shipping: Vital, Vulnerable and Little Understood..................... 175 P Adamson

3 The Straits of Malacca: Critical Sea-Lane Chokepoint .............. 183 T Masuda

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SECTION IX - Background Papers on The World Energy Market....................................................... 195 Edited by G Hancock

1 The Geo-Political Future of the Gulf........................................... 197 2 China and OPEC ......................................................................... 205 3 Egypt – A Promise yet to be fulfilled.......................................... 215 4 Egypt’s Race for Gas Export Markets......................................... 223 5 Saudi Arabia ................................................................................ 243 6 Saudi Society............................................................................... 257 7 Central Asia and The Caspian Basin ........................................... 269 SECTION X - Initiatives Emanating from the Workshop ............... 277 1 Initiative: Energy Security and Unresolved Conflict in the Caucasus.............................................................. 279 2 Initiative on Pipelines Ports and Shipping Security Building Public-Private Cooperation .......................................... 281 3 Energy Security & NATO Strategic Interests After 9/11............ 283 W. D. Wood

SECTION XI - Press Coverage ........................................................... 301 1 Epolitix ........................................................................................ 303 2 Epolitix ........................................................................................ 309 3 Bloomberg News......................................................................... 313 4 The Times.................................................................................... 315

WORKSHOP CONTRIBUTORS Workshop Co-Directors: Sir David Gore-Booth, Chairman, Windsor Energy Group – MEC International, UK Dr. Evgeny Velikhov, the Russian Research Centre, Kurchatov Institute, Russian Federation

Participants Patrick Adamson, Chairman, Maritime Technical International Ltd, UK HE Mr Ahmed Attaf, Ambassador to UK, Algeria HE Mr Tarald Osnes Brautaset, Ambassador to UK, Norway Giorgi Chanturia, President, Georgian International Oil Corporation, Georgia Eveline Claesson, Project Co-ordinator, MEC International, Sweden HE Mr Timoor Ghazi Daghistani, Ambassador to UK, Jordan John Davidson, Managing Director, Rubicon International, UK Cem Duma, Managing Director, ABC Consultancy, Turkey Robert Ebel, Chairman, Energy Program, Center for Strategic & International Studies (CSIS), USA Robert Eid, Managing Director, National Bank of Kuwait, UK Mr. Elhoucine Fardani, First Secretary, Embassy of Morocco to UK, Morocco John Flynn, Adviser to Chevron and Former UK Ambassador to Venezuela and Angola, UK Dr Herman Franssen, Former Adviser to Omani Energy Minister, President, International Energy Associates, Netherlands Sir David Gore Booth, Chairman, Windsor Energy Group, UK ix

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Vafa Guluzade, National Security Advisor to the President, Azerbaijan Ambassador Zurab Gumberidze, Ambassador, Embassy of Azerbaijan, Azerbaijan Lord David Howell, Shadow Spokesman for Foreign Affairs, Former Secretary of Energy, UK Mr Rafael Ibrahimov, Ambassador to UK, Azerbaijan HE Mr Erlan Idrissov, Ambassador to UK, Kazakhstan Tedo Japaridze, Minister of Foreign Affairs, Georgia David Kalandadze, Head of Finance & Economics Section, Embassy of Georgia to UK, Georgia Prof. Anastasios Katsanos, Technical University of Crete, Chania, Greece Dr. Rafael Khakim (Khakimov), State Counselor for Political Affairs to the President of Tatarstan , Tatarstan - Russian Federation Dr. Andre Konyaplanyik, Deputy Secretary-General Energy Charter Secretariat, Russian Federation Andrew Levi, Head of Energy, Aviation & Marine Department, Foreign and Commonwealth Office, UK Sir David Logan, Former British Ambassador to Turkey, UK Teimuraz Mamatsashvili, Ambassador to UK, Georgia Oliver Miles, Chairman, MEC International, UK Francis Perrin, Editor, Arab Petroleum Research Center , France Dr. Philip Petersen, Director, Institute for Applied Science, USA Robert Priddle, Former Executive Director, International Energy Agency (IEA), UK HE Mr Tukhtapulat Riskiev, Ambassador to UK, Uzbekistan Ioannis Samouilidis, Security of Supply European Commission, Directorate-General Energy and Transport, Greece Adam Sieminski, Director and Global Oil Strategist, Deutsche Bank, USA Paul Simons, Deputy Assistant Secretary of State for Energy, Sanctions and Commodities, USA

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Michael Smith, Head of Energy Analysis, British Petroleum, UK Alan Stott, Head of Business Development Middle East, BG Group, UK Konstantin Surguladze, Consul, Embassy of Georgia, Georgia Paul Tempest, Director, Windsor Energy Group, UK Wim Thomas, Senior Energy Consultant, Global Business Environment, Shell International, Netherlands Chris Trelawny, Senior Technical Officer, Maritime Security, Maritime Safety Division, International Maritime Organization (IMO), United Nations, UK Dr. Anna Tsporkina, IAS Liaison to Russian Academy, Tatarstan Russian Federation Dr. Evgeny Velikhov, President, The Russian Research Centre, The Kurchatov Institute and Energy Science, Adviser to Russian Federation President, Russian Federation Ambassador Arne Walther, Secretary General International Energy Forum, Riyadh, Saudi Arabia, Norway Bob Weir, Director, SSI Consult, Canada Dr. W. Duncan Wood, Director of Research, Institute for Applied Science, Ireland HE Dr Diagana Youssouf, Ambassador to UK, Mauritania Graham Ziegler, General Manager, National Bank of Kuwait, UK

FOREWORD Emerging Threats to Energy Security and Stability January 23 to January 25, 2004, Windsor Castle, UK This two-day NATO-sponsored workshop was organised by the Windsor Energy Group and MEC International Ltd with support from NATO’s Science Committee. The workshop was designed to promote a public-private sector exchange on how best to address issues arising in energy security at a time of growing uncertainty. In particular, it sought to assess emerging threats to energy security and stability and discuss new security strategies to protect global energy supplies from regional instability and terrorism. The format involved a wide-ranging international group of policyformers and advisers from NATO, Partner and other countries, in a unique forum for intensive expert discussion. Background The international community is increasingly conscious of the need to develop new energy security strategies in order to protect global energy supplies from regional instability and terrorism. Energy security is a vital element in international stability. However, a variety of energy-related economic, technical, and military/political factors pose serious challenges to the international community’s pursuit of energy security and stability: x The global economy is expected to continue to be largely dependent on oil and gas for the next twenty to thirty years. Current levels of production may need to be doubled in this period, with most of the increment coming from the Gulf States who control 66% of global oil reserves and 40% of global natural gas reserves. x There are forecasts of significant capacity shortfalls. x Existing oil and gas distribution networks -- for example those linking the Caspian, the Middle East and new markets in Asia -- are considered to be inadequate. xiii

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x Regional instability: the impact and aftermath of the US-led military intervention in Iraq in 2003; tensions in other oil producing regions. x The growth of anti-western terrorism. Goals x To highlight emerging threats to energy security and stability. x To improve co-operation and information sharing between governments, international regulatory bodies and the private sector in the formulation and implementation of energy security strategies. x To examine ways to strengthen international capabilities to deter and detect terrorist threats to energy supplies. x  To develop and coordinate bilateral and multilateral energy security and stability strategies.

SECTION I EXECUTIVE SUMMARY

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A SUMMARY OF THE DISCUSSIONS

Paul Tempest Director of Windsor Energy Group and Vice President of the British Institute of Energy Economics

An emerging energy demand/supply imbalance The IEA expect global energy demand to rise by 66% by 2030 with 90% of the increment supplied by fossil fuels, mainly oil. The Gulf oil producers, holding two thirds of total global proven oil reserves, would have to account for most of this increment and for the replacement of depleting production elsewhere. Such a doubling or even tripling of Gulf oil production capacity would require a massive infusion of external capital and new technology. This looks in present circumstances to be highly unlikely, given the degree of political turbulence in the area, the reluctance of the capital and financial markets to take on such risks and the determination of several governments to protect their own national companies to the point of failing to provide adequate incentives for the international oil companies to participate fully.

“The end of cheap oil” Competition for Gulf oil exports is therefore likely to be intense with South-East Asia taking the bulk and an increasing share. US expectations that US oil imports will double to 24 mbd by 2030 will further distort the market and can only be achieved at the cost of denying supply to the developing world. Oil prices have remained broadly within the US$22-28 OPEC band for the last four years and are now moving beyond the upper limit. Yet industry 3 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 3–8. © 2005 Springer. Printed in the Netherlands.

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estimates of the global clearing price for oil is mainly within the US$ 16-18 range, implying that the difference is an anxiety premium caused mainly by political turbulence in the Middle East.

Dangerous impacts on the global economy - a nonsustainable energy prospect Periods of high oil prices have always had adverse impacts on global economic growth, just as low oil prices have always acted as a stimulus. Already, continuing high oil prices are seen to be hindering growth for later this year. Whereas the rest of OECD (Organisation for Economic Cooperation and Development) industrialised countries are partly shielded by the weakening of the US $, the impact on the US economy, which is already slowing, and on most developing countries could be severe. One quarter of the world population has no access to electricity and many more rely on wood, residues and dung for cooking and heating. Even on assumptions of the persistence of the average GNP growth over the last 25 years, the number of people without access to electricity is 2030 is unlikely to be below the current level. The steeper the economic rollercoaster caused by oil price spikes, the less chance there will be to reach the IEA target of 75 million new connections per year and the greater the likelihood that global energy poverty will increase rather than decrease.

Changes in oil market leadership Russia (9.0 mbd this year) has overtaken Saudi Arabia and the USA (each about 7.8 mbd this year) as the leader in oil production. Iraq is widely thought to be capable of producing 4-5 mbd by 2010 and possibly 15-20 mbd by 2030. Many of the discussions pivoted around the issue of political stability in Russia and Saudi Arabia. Most contributors considered the IEA assumption of a rapid rise in Saudi production to 19 mbd to be highly unlikely, and indeed, an industry report which is soon to be published predicts the contrary: imminent collapse. Yet the consensus view, although vigorously challenged, was that Saudi Arabia would remain the indispensable provider of surge capacity until 2010 at least.

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China (5.7 mbd) has outstripped Japan as the second largest oil consumer. Chinese oil imports are predicted to rise from 2mbd in 2003 to 6 mbd in 2010 and 15-20 mbd by 2030.

Iraq approaching “boil-over” Despite considerable and mainly unsung progress in restoring Iraq’s economic infrastructure over the past six months, the projected transition to Iraqi control at mid-04 looks precarious unless the proposals are endorsed by the 60% Shi’a majority (see Special Session C). The possibility of a break-up of Iraq, whether sooner or later, becomes clearer. In the light of this eventuality, a serious contingency plan is needed. “While there are now no known national threats to the boundaries of the USA or Europe, there is no boundary to the global threat of Al-Qaida and other international terrorist organisations. Our defence forces are largely equipped for Cold War needs, not for the rapid-response needs we now face.”

Technology transfer stifled The International Oil Companies provide a rapid and efficient transfer of petroleum technology and effective management where they are permitted to operate. Many oil and gas-producing countries overprotect their national companies to the point of denying IOC access on commercial terms.

The Caucasus impasse Rivalries between the USA, Russia and the EU overshadow efforts by the Caucasus States to develop export capacity for their oil and gas. Political meddling and attempts from outside to control the economy of the region explain the numerous development delays.

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North African surprises Rapid development of North African oil and gas resources following political détente may alleviate the competitive weakness of Europe in securing adequate imported oil and gas. Sanctions on Libya have been easy to impose, most difficult to dismantle. US policy is still based on a “waitand-see” step-by-step policy as Libya demonstrates compliance.

UK energy policy There is little sign of contingency planning as the UK returns to net gas import dependence (2005-6) and oil import dependence (2010) and coal imports (currently 50% of consumption) continue to rise. Nuclear capacity will also have run down sharply by 2010. UK Government expectations that wind-power will be able to provide 10% of UK electricity may be exaggerated.

Threats to ships Shipping of crude oil and products, which are equivalent to 57% of global oil production, is vital to the global economy, vulnerable to terrorists and the problems are poorly understood. Some 90,000 ships move 2,000mn tons pa. The fleet of LNG carriers is likely to triple within 10-15 years and are getting larger – in the next generation of carrier, they will be 150,000 tons each. A vapour cloud from a damaged LNG vessel will, on ignition, have the impact of detonating a hydrogen bomb. The main hazards are: Ship-seizure by pirates who then transfer and sell the cargo, disguise the ship and ransom the crew. SAS simulations indicate that fewer than 8 minutes would be needed for regaining control of a captured vessel between touching the ship’s side and taking over the bridge. x Ramming – this mostly occurs close to shore and often causes massive spills and pollution. x Infiltration of Ship by terrorist cell working among crew.

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x Actions by environmental groups (e.g. the seizure of The Brent Spar by Greenpeace) The four most dangerous choke-points for the oil trade are Hormuz (15.5mbd), Malacca Straits (10.5 mbd), Bab al-Mandab (3.3 mbd) and the Suez (0.8 mbd). Collision in congested waterways is not uncommon: in 2 months recently the IMO reported 8 collisions in the Malacca Straits which, along with Indonesia, heads the IMO list of 445 piracy attacks in 2003. This session examined detailed studies of the impact of a blockage of the Malacca Straits, which might be closed from 3 weeks to 3 months adding 3-5 days to voyage time between the Gulf and Japan. Remedies discussed included security alert systems, electric fences around the decks, enhanced naval protection, stricter vetting of crews and port operatives. There is little enthusiasm for ships to carry weapons and grenades.

Threats to ports x Ship used as a bomb in a port city/area (e.g. Boston or Tokyo Bay) x Inadequate Energy-Related facilities at Ports. x Threats posed by lack of thorough inspection at international ports (2% shipping freight is checked)

Threats to pipelines: an Iraqi case study This session relied on up-to-the-minute reports by security forces and a leading private security company in Iraq. Iraq’s main 669KM oil artery, the North/South pipeline is more or less out of action in the North on account of sabotage. The bulk of Iraqi oil exports now run southwards through the area under British protection: Internal resistance is driven by a complex variety of political and personal motives. There is a general resentment of foreign occupation and an awareness of the risks of power shifts through the period of transition. From outside, resistance is reinforced by radicals pouring into Iraq, many with al-Qaida support. Urban unrest re lack of electricity, water, security etc is rising.

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Tribal unrest on tribal boundaries is endemic. Threats to security are becoming more diverse and complex. Without any control or customs inspection on the Iraqi borders, al-Qaida has almost 100% freedom of movement. Remedies include establishing tight control of the borders, introducing more trunk-road checks, extension of the “cash-for-arms” scheme and the building up of a network of new medical centres and hospitals, all of which provide a stream of valuable local intelligence. The security of the pipelines has been largely handed over to contracted Iraqi companies who complain that the State must be active in supervising overall responsibility, which is currently lacking.

Conclusion The two discernible Middle East flashpoints in the year ahead are Iraq and Saudi Arabia. There are high hopes of normalisation of relations with Iran and Libya. Palestine remains a pan-Arab rallying cry. Oil market leadership is entering a process of change. In the longer-term, acute competition for Gulf oil and gas exports looks extremely likely and will present the lead-consumer governments with new and difficult challenges.

SECTION II PROSPECTS FOR THE GLOBAL ENERGY MARKET

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AN OVERVIEW

Sir David Gore-Booth KCMG KCVO Workshop Co-Director Chairman, Windsor Energy Group, Former Ambassador to Saudi Arabia, Middle East Director, Foreign & Commonwealth Office, UK

The principal event of 2003 was the US/UK invasion of Iraq. I was the only person in 2003 here at the Windsor Energy Group who said that there would not be an invasion (mainly because I could not understand the rationale for it and did not want to be thought to support it even by default). I still believe it was a mistake to invade and, although not sorry to see the back of Saddam, I believe this misadventure will cause more problems than it solves: it has had no beneficial affect on the oil market (on the contrary the price remains very high – not least since US reserves are at their lowest level for 29 years). The invasion of Iraq has had no beneficial effect on the Middle East Peace Process. The effect, in my view, has been quite the opposite: Sharon seems more sceptical than ever about the road map and is under no real pressure from the US Similarly, the war has had no clear beneficial effect on “good governance” in the Middle East: even Thomas Friedman now accepts it will take Israeli withdrawal from the Occupied Territories to “strip the worst Arab leaders of an excuse not to reform”. In terms of the War on Terror, the invasion of Iraq has turned the country from a peripheral into a central front and it has diverted attention from the War on Terror’s main target, Osama Bin Laden. If anyone should have been discovered in a rat hole it was him! And through all this Afghanistan remains a worry. On a different note, increased security has become an obsession in the US, even at the cost of civil rights. We see concrete evidence of this

11 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 11–12. © 2005 Springer. Printed in the Netherlands.

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manifested in new political phenomena in the US such as the Patriot Act legislation and the construction of prison complex in Guantanamo Bay. International organisations such as the UN, NATO and the WTO are in a state of confusion while the EU remains under real strain over the drawing up of the new constitution, its stability pact and the steady appreciation in value of the Euro. Corporate governance is in difficulty whether in Russia (Yukos), Italy (Parmalat) or UK (Shell) and the problem is ongoing in the US. There are, however, some reasons to be cheerful. Both India and Pakistan have little relevance to central energy issues, a successful rapprochement will increase both country's demands for energy. The region will become a large energy-consumer alongside China, whose economic growth is already boosting demand, still leading in consumption. Libya and Iran’s entry back into the Global community is due as much to painstaking European diplomacy as it is to knee-jerk US unilateralism. In all, I foresee another very stressful year ahead with the approach of the US election prompting more government by gut and gimmick than by good sense.

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A POLITICAL PERSPECTIVE

Lord Howell of Guildford Conservative Foreign Affairs spokesman, House of Lords and former Secretary of State for Energy, UK

There can be little doubt that we are entering an age of vastly increased political risk when it comes to the world energy situation, and that this coincides with emerging global patterns for both energy supply and demand. Of course the optimists hope that globalisation will bring a new intensity of international cooperation and partnership in energy-related projects, while the pessimists fear armed clashes, violent struggles for control of energy resources and risks at every turn. The realists will foresee a bit of both. I would like to put these new patterns in some sort of perspective, but before doing so allow me a few observations on the local British scene, which is in some respects a microcosm of the problems and challenges that are faced on a grander scale. The position in the UK is that after a decade of relatively problem-free energy flows there are now major dangers ahead on both the supply side and on the generation and distribution sides. For the UK the situation is about to change radically. We will shortly become again, after many years, a net importer of both oil and natural gas, the latter being supplied by new contracts with Norway, Russia, Algeria and possibly Iran. This takes these aspects of energy supply right back into the heart of international politics in the most sensitive areas on earth. Recently the BBC ran a fictional programme describing how a raid by Chechen terrorists on a Russian gas transmission facility had the knock-on effect of blacking out London, via the closing down of numerous gas-fired 13 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 13–18. © 2005 Springer. Printed in the Netherlands.

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electricity-generating stations. The detail may have been fanciful, but the underlying thought – that energy flows are now more interwoven and interlinked than ever before – is correct, and even the politicians, who are notoriously ignorant about the complexities and long-term nature of energy projects, felt moved to ask some anxious questions in Parliament. Meanwhile, here at home in the UK, we have to make crucial new decisions on nuclear power. It is no longer a question of ‘keeping our options open’ on nuclear power generation. Decisions have to be made immediately for a decade’s time. Investment in offshore windfarms cannot conceivably fill the gap which will be left by any nuclear closures, quite aside from the fact that they are about to run into environmental objections almost as fierce as those surrounding the treatment of nuclear waste. Finally, we now have to move towards a new generation of techniques for conservation and low energy consumption. There is much work to be done.

Global Demand There is a staggering contrast here between what the more hopeful and idealistic policy-makers and advisors say about the next 25 years and what the hard facts suggest. This is what you hear the more hopeful policy-makers saying about the next ten to twenty years. Reliance on fossil fuels will reduce, carbon emissions will drop dramatically; demand for alternatives will expand, such as current from wind power, tidal power and solar power, although not from nuclear power. There will be massive conservation as a low energy future develops. Vehicles will use much less gasoline, or dispense with gasoline altogether. Households will adopt small-scale energy sources, oil or gas-fired home boilers will generate their own electricity and feed it back into local grids. The reality, however, looks quite different. The IEA brainstorming paper of February 2003 tells us that world energy demand will grow – by about two thirds between now and 2030. Fossil fuels, far from phasing out, will meet 90 percent of these additional needs. World oil consumption will rise from 77 mb/d to 122 mb/d. Nuclear power will decline (in OECD countries to a minimum with the possible

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exception of France). US imports will continue to rise for both oil and LNG (note that in 1980 US net crude oil imports of 28 percent were deemed ‘far too high’ – now the figure is 68 percent!). By a clear margin, the biggest driver of demand expansion will be the developing countries. China will lead as energy-thirsty nation. By 2121 China’s share of global GDP, says the World Bank, will have more than doubled, from 3.7 percent to 8 percent. By then the Chinese, who already consume more oil daily than Japan, could be importing 10 mb/d against the current level of 2 mb/d plus. Of the IEA-estimated increase in demand, one third will come from OECD countries and two-thirds will come from the developing world.

Rose-tinted supply estimates Now let’s turn to supply patterns – and once again, the cheerful optimists peddle one picture, while reality dictates another. Here’s the optimists’ rose-tinted picture: The Middle East region will emerge possibly de-nuclearized and de-terrorised and its stability will return. Iraq will see output soar as high as 10 mb/d. Saudi Arabia will follow the path of gradual reform but will remain stable; the Ayatollahs in Tehran will realise the folly of economic isolation and join in new patterns of global responsibility; oil and gas will flow in abundance out of Russia with the oil coming especially from the Caspian Sea basin via pipelines through Georgia and Turkey westwards while the oil will flow eastwards to China and possibly Japan. A big expansion in LNG is also foreseen, so that it becomes, in effect, a globally-traded commodity like oil while its price tracks oil closely. The optimists also plan for cleaner coal technologies with successful carbon capture and of course a big growth in renewable energy, hopefully on or ahead of the EU target for renewables of 10% for 2010. All this will require colossal and sustained investment in energy project infrastructures – that is maintenance and development of oil and gas production, new pipeline networks, modern refinery technologies, new terminals and distribution systems and new storage facilities where appropriate.

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A Risky Reality That is the optimist’s view. Now let us see how this Panglossian picture collides with reality. First, the political risks in the post Cold War e-enabled world are getting larger and starker all the time. The Inforation Technology revolution has empowered systems and networks for handling and trading energy supplies beyond the dreams of thirty years ago. But it has also empowered those with a destructive agenda on the same global scale. Second, on a geographical plane, Iraq may or may not settle down in due course (on the whole I am an optimist on this) but the timescale may be much longer than first hoped and the vulnerability of Iraqi oil continues to be demonstrated. Saudi Arabia could well drift into turbulence as the delicate balance between religious extremists and moderate reformers within is upset by upheaval without (especially in Iraq). Russia is stable now but the roots of political settlement do not run deep (and anyway one believes Russian statistics with caution). In Iran the hardline Ayatollahs are far from defeated and the future there looks very unsettled as well. Meanwhile Nigeria and Venezuela have already demonstrated their political unreliability; Algeria has been under attack and looks worryingly unreliable. Key transit countries like Georgia have also been through paroxysms and their difficulties may not yet be over. Turkey may be prospering and its chances for opening negotiations on EU entry may be improving but there are risks there too as the recent hold-up of shipping in the Bosphorus reminds us. North Sea oil output is now starting to decline sharply. As for nuclear power, it was once seen as the great alternative of the future. It now remains riddled with political difficulties both with regard to location and to the handling of nuclear waste. Moreover, over the whole scene hangs the growing terrorist risk – poised (unless frustrated) to inflict deadly damage on increasingly integrated and complex energy systems. Overall, a conservative estimate is that by 2020 half the world’s oil and gas will come from politically unreliable sources. Furthermore, there are the more ‘normal’ investment risks that come on top of these ubiquitous political uncertainties. The capital requirements for underpinning a secure energy future are enormous even at the calmest of

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times. Certain very specific conditions are required for capital to be raised at all. They include stable Governments and governance, sustained political commitment by the authorities concerned – which may have to stretch over the full lifetime of the project – as well as clear and predictable regulations, minimised corruption, respect for the rules of law, property and contract and freedom to repatriate profits. As energy projects become more interlinked and stretch across national borders it becomes necessary in addition to ensure that the same rules apply both sides of every border and fence. Above all, energy investment demands long life and secure contracts between suppliers and customers. Otherwise, who would want to invest their money? Yet markets see things differently. They want maximum flexibility to chop and change and go for the best price. The differences are exemplified here in the Russia/EU energy dialogue. Russia wants to invest $35bn annually in its oil industry. Who is going to stump up that kind of money without very long-term contracts with Western European markets? Even to recite this list of requirements shows how far most of the energy world is from meeting them, or will be able to meet them in the foreseeable future.

It must never happen Finally, I want to make a general comment about broad global stability, which is the fundamental condition for a safe and secure energy future. We hear a good deal about the USA being ‘the only superpower’ and being the new hegemonic empire-builder. This is a very fashionable view in European circles. I believe it is both dangerous and wrong. It is dangerous because it leads straight not just to frenetic anti-Americanism but to the promotion of Europe as a counter-weight ‘empire’ which is a sure recipe for great power conflict, clashes of interest, rocketing defence-spending and divided counsels in coping with terrorism and fanaticism. It is wrong because the USA is not an imperial power, even if it suits its enemies to depict it as one. Its interest is the interest of all free states, which is live and let live, and it so happens that pluralism, if not some specific democratic model, is the best guarantee that societies will remain free and open participants in the global system. Our combined Western

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world energies should be devoted to enabling every society, from the Asian giants like China and India, to the Arab sheikhdoms, to the smallest Balkan or East European state to move, at their own pace, in that direction. That is not imperialism, it is survivalism. I prefer to see the USA as an ‘umbrella’ state, a larger member of a network in which the individual national interests of all, large and small, are inextricably linked. The same can perhaps be said, or ought to be said, of the European Union institutions which provide collective cover for, but not interference in, the security and trade-prosperity of its numerous member states. For Europe and America to divide and become rival blocs would, in my view, provide a new playground for terror and disruption. It would guarantee that the threats to secure energy supplies, which are already substantial, would become many times more so. I hope it never happens.

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AN ANALYTICAL PERSPECTIVE

Michael Smith Head of Energy Analysis, BP plc

The main areas of concern from an energy security perspective can be summarised as follows: x Growing (fossil fuel) import dependence in the major OECD consuming countries/regions as well as in major Non-OECD consumers such as China; x Geopolitics, terrorism and the associated risk of supply disruptions, e.g. last year’s war in Iraq or the Venezuelan general strike of Dec. 2002 – Feb. 2003; x Finite resources and the associated concern that world production of oil and gas could peak in the near future, leading to physical shortages and/or spikes in energy prices; x Barriers to investment: with the bulk of remaining fossil fuel resources residing in Non-OECD countries, especially the Middle East and the Former Soviet Union, doubts exist whether the legal/commercial environments in these countries will allow for the required level of investment needed to expand supply in tandem with the growth in global demand; x High and volatile energy prices, sometimes blamed on just-in-time inventory management practices or speculators but also resulting from reduced margins of spare capacity in global hydrocarbons production and processing and political instability; x Infrastructure reliability: concerns about the reliability of ageing infrastructure and the impact of regulatory changes on the adequacy

19 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 19–32. © 2005 Springer. Printed in the Netherlands.

20

of reserve margins – as highlighted by recent widespread power failures in the US Eastern Seaboard, Italy and London.

Import dependence Expressed as net fossil fuel imports as a percentage of primary energy use, import dependence has increased in the US and China over the last thirty years but decreased in Europe and Japan. The fall in European import dependence occurred during the 1970s and reflected the development of North Sea oil and gas supplies and the rapid development of nuclear power. The fall in Japanese import dependence has been very modest and reflects largely the growing penetration of nuclear power: domestic hydrocarbon production has always been quite small and has been declining over the last 30 years as a whole. China has only recently emerged as a net importer of energy on account of a rapid growth in oil consumption as the economy has industrialised. Chinese oil production is probably approaching a peak. US import dependence declined between 1972 and 1982 despite oil production peaking in 1971. Oil and gas consumption was lower in 1982 than in 1972 and nuclear power expanded rapidly during this period. Declining consumption was a function of the 1973 and 1979 oil price shocks. Since 1982, the moderation of energy prices and the return of robust consumption growth have encouraged growing import dependence once again: net fossil fuel imports accounted for almost 30% of US energy consumption in 2002. All of the main countries/regions are more import dependent in the case of oil than they are in the case of energy generally. Both the US and Europe depend on imported oil to satisfy around 60% of consumption, whereas Japan is close to 100%. Despite only becoming a net oil importer in 1993, China was almost 40% dependent on oil imports in 2002 and imports grew a further 30% in 2003. Europe has become less dependent on oil imports over time as North Sea production continued to grow until recently. However, with North Sea production having peaked, European oil import dependence should increase in coming years, as in the US and China. Over the last 30 years, the world’s energy supply has become more diverse. The shares of oil and coal, the dominant fuels in 1972, have fallen while the shares of gas, nuclear and hydro-electricity have grown – as has the share of renewable energy. This trend is expected to continue, albeit more slowly, because of a slowdown in the rate of nuclear/hydro expansion. At the same time that oil’s share of world energy consumption has fallen, oil consumption has become more concentrated in the transport sector, where

21

there are fewer opportunities for substitution than in industry, power and residential/commercial use. This is potentially a negative for energy security in that it reduces the elasticity of oil demand with respect to price.

Geopolitics & terrorism Politics has played a large role in the market for many years but threatens to play a growing role if production of oil and gas becomes increasingly concentrated in politically unstable countries and regions. A quick review of 2003 points to impacts on current and potential future supplies of oil and gas in the following countries: x x x x

xVenezuela – general strike; xColombia – ongoing terrorist attacks on pipelines; xBolivia – civil unrest in response to proposed LNG exports; xNigeria – ethnic unrest in the Delta region disrupting oil supplies; x xLibya – continued economic sanctions but signs of these being lifted; x xIran – continuing economic sanctions, risk of further action to counter nuclear proliferation; x xIraq – war to remove Saddam Hussein; x xSaudi Arabia – terrorist attacks on housing compounds raising fears of oil infrastructure sabotage; x xYemen – terrorist attacks on foreign oil workers; x xPakistan – terrorist attacks on gas pipelines; x xIndonesia – Bali and Jakarta Marriott bombings, fears of attacks on shipping in Malacca Straits; x xRussia – impact of Khodorkovsky arrest. The countries listed above account for around two thirds of global oil reserves and 60% of global gas reserves.

Finite resources The idea of resource scarcity and an imminent peaking in oil and gas production has been around for at least 30 years and has always been

22

proved wrong. Recent high oil prices, which are attributable largely to OPEC strategy and behaviour, have provided a backdrop for the “depletionists” to publicise their views once again. The evidence suggests that world oil production will continue to grow in the next decade despite declines in mature provinces like the North Sea and the onshore USA – as relatively immature production regions such as the Caspian and deep water West Africa show strong growth – together with Russia, which is enjoying a renaissance. The world’s oil supply continues to become more diverse with more countries experiencing material growth than those suffering material declines. OPEC’s share of world oil production peaked at over 50% in the early 1970s and has recently fallen below 40%, where it is expected to stay through at least 2010.

Barriers to investment The IEA’s recent World Energy Investment Outlook showed more than two-thirds of oil sector investment between 2001 and 2030 needing to take place in Non-OECD countries.

High & volatile energy prices Oil and gas prices have been higher and more volatile in recent years than was the case through much of the 1990s. To some extent this reflects a deliberate strategy on the part of OPEC to keep markets tight but it also reflects major geopolitical shocks such as 9/11, the Venezuelan general strike and the war in Iraq. There is also a possibility that diminishing spare production capacity could explain some of this growth in volatility.

Policy levers & trade-offs Governments turn to a number of policy levers in an attempt to enhance energy security. Tax breaks or import tariffs may be employed to promote self-sufficiency. “National champions” may be encouraged to acquire equity production overseas, as the current Chinese thrust to acquire overseas equity. Diversification of supply sources may be encouraged by limitations on the share of imports allowable from one country, e.g. the 60% limit on Spanish gas imports designed to prevent over dependence on Algerian gas imports. Demand-side management, e.g. the use of efficiency

23

standards or real-time pricing, may also fit with environmental policy goals. In recent years, the concept of producer-consumer dialogue has regained some currency. It appears that an understanding was reached between the IEA and OPEC over the use of OPEC spare capacity before resorting to the release of strategic stocks during last year’s war in Iraq. Technology transfer and financing are tools that are not often used but Japan is especially active in deploying the latter to advance its energy security goals, e.g. Japanese financing of many Asian and Middle Eastern LNG projects. OECD governments hold huge emergency oil stocks and countries like China and India are now seeking to build their own emergency stocks. By depriving consumers of choice and reducing economic efficiency, policies designed to enhance energy security generally involve some element of cost. Some policies, e.g. the promotion of nuclear power as a quasi-domestic energy source, may also run into barriers raised by public acceptability and safety issues. Others, e.g. promotion of domestic coal resources, may clash with environmental goals.

Conclusions The resource constraint is unlikely to bite in the next ten years and oil and gas supplies are likely to become more diverse. Recent price strength and volatility is at least partly cyclical. However, the US, Europe and North-East Asia will become more dependent on imported energy and there are real concerns about political stability and barriers to investment in the Non-OECD countries that will provide a growing share of the world’s energy. Infrastructure problems should be avoidable with appropriate regulation. Policies to enhance energy security almost always involve economic and environmental trade-offs.

24

Energy security: an analytical perspective M ichael D . Sm it h Head, Energy A nalysis, Econom ics U nit 2 3 rd January 2 0 0 4

25

Energy security concerns • Grow ing import dependence • Geopolitics & terrorism • Finite resources • Barriers to investment • High & volatile energy prices • Infrastructure reliability

Energy import dependence Net fossil fuel imports as % of primary energy use 90% 1972

80%

1982

70%

1992

60%

2002

50% 40% 30% 20% 10% 0% -10% USA

Europe

Japan

China

26

Oil import dependence Net oil imports as % of oil consumption 100% 80% 60% 1972 1982

40%

1992 2002

20% 0% 2 - 0% U SA

u Erope

J apan

China

World energy supply becoming more diverse Share of total primary energy use 100% 90% 80% 70%

Hydro

60%

Nuclear

50%

Gas

40%

Coal

Oil

30% 20% 10% 0% 1972

1982

1992

2002

27

28

Finite resources

29

OP EC sh are of w orld oil roduction p 60% 5 0%

OP EC

40% 30% 20%

M iddle East OP EC

10%

00 20 02 20 04 20 06 20 08 20 10

20

196 198

194

6

8 190 192

198

4

198

2

198

0

198

198

1978

1976

1974

1972

0%

Barriers to investment Cumulative oil industry investment requirement 2001-2030 10%

31%

12%

OECD FSU Middle East Africa L. America Dev. Asia

13% 16%

18%

Total: 2.84 trillion $ Source: IEA World Energy Investment Outlook 2003 (Table 4.1)

30

igh& o H v la tile energy pric es /m $ tu b

/b $ rrel a

10

rent c B rude pric e

9

40 3 5

8 3 0 7 6

25

5

20

4

15

3 10 2 5

1

enry H H ubga s pric e

F eb 0 -3

F eb 0 -2

F eb 0 -1

F eb 0 -0

F eb 9 -9

F eb 9 -8

F eb 9 -7

F eb 9 -6

F eb 9 -5

F eb 9 -4

F eb 9 -3

F eb 9 -2

F eb 9 -1

0 F eb 9 -0

0

World energy & oil intensity Energy/oil use per unit of GDP (1972 = 100)

110 100 90 Energy intensity

80 70 Oil intensity

60

19

72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02

50

31

licy lev o P ers • Promote self sufficiency • Acquire equity production overseas • Diversify supply sources • Demand-side management • Producer-consumer dialogue • Technology transfer, financing • Emergency stocks • Market regulation

Infrastructure reliability

32

Trade offs • Customer choice & economic efficiency • Public acceptability & safety • Environment

Conclusions • US, Europe, N.E. Asia will become increasingly dependent on fossil fuel imports • Resource constraint not the issue in next 10 years • Diversity of oil and gas supplies will continue to increase in next 10 years • Real concerns are geopolitics/terrorism and barriers to investment in resource rich nations • High oil & gas prices/volatility partly cyclical • Infrastructure reliability problems avoidable • Enhanced energy security involves trade-offs

4

AN ECONOMIC PERSPECTIVE

Adam Sieminski Director, Global Energy Strategy, Deutsche Bank

Energy Security Considerations in the Long Term Oil & Gas Outlook Windsor Energy Group January 2004

Adam Sieminski

33 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 33–49. © 2005 Springer. Printed in the Netherlands.

34

World energy consumption by fuel in 2003 ...oil dominates while coal and gas are tied for second

Nuclear 6%

Renewables & Hydro 3% Petroleum 39%

Coal 24%

Natural Gas 24%

Source: BP; Deutsche Bank

3

Oil Security: what’s it all about? „

Churchill’s Law Safety and certainty in oil lie in variety and variety alone.

Thatcher’s Law The unexpected happens. You had better prepare for it. „

Palmerston’s Law We have no eternal allies and no perpetual enemies. Our interests are perpetual and eternal.

Vulnerability –

Rise in import quantity and balance of payments / currency issues

–

Disruptions / market failures

–

Political turmoil (ME, Africa, SA)

–

Price spikes / market pressures

–

Homeland infrastructure

Traditional responses to energy security (risk management)

–

Demand restraint (security of demand?)

–

Supply diversity

–

Surge production (location?)

–

Strategic stocks (when to use?)

–

International co-operation / IEA

–

Flexible markets (futures; technology)

Source: Deutsche Bank 4

35

Oil disruptions - 1951-1991 Aug 1990-Jan 1991 Gulf Crisis Apr 1989-June 1989

Exx on Valdez Acc ident

Oct 1980-Jan 1981

Outbreak of Iran-Iraq War

Nov 1978-Apr 1979

Iranian Rev olution

May 1977

Damage at Saudi Oilfield

Oct 1973-Mar 1974

Lebanese Political Conflict

Apr 1971-Aug 1971

Algerian/French Nationalisation Dispute

Jul 1967-Oct 1968

1,000

2,000 3,000 4,000 Gross supply los s (kb/d)

5,000

October Arab-Israeli War

Mar 1973-May 1973

May 1970-Jan 1971

0

UK Cormorant Platform

Mar 1989-Apr 1989

Lybian Pric e Controversy Nigerian Civ il War

Jun 1967-Aug 1967

Yom Kippur War

Dec 1966-Mar 1967

Sy rian Trans it Fee Dis pute

Nov 1956-Mar 1957

Suez Crisis

Mar 1951-Oct 1954

Iranian Fields Nationalis ed

6,000

Source: IEA

5

World economic growth and energy demand Near-term Forecast Impacted by: Global economic outlook Energy price volatility Geopolitics Inventory positions Long-term Forecast Impacted by: Economic growth trends Population growth Per capita consumption Fuel prices and substitutability Tax and regulatory policies Source: Deutsche Bank 6

36

Fuel market shares to 2030 …oil slips a little, gas gains a lot

Million tonnes 1970 2000 2030E 2253 3518 5753 924 2199 4612 1553 2174 3399 18 585 679 269 616 1116 5016 9092 15559

Petroleum Natural Gas Coal Nuclear Renewables Total

Market share 1970 2000 45% 39% 18% 24% 31% 24% 0% 6% 5% 7% 100% 100%

2030E 37% 30% 22% 4% 7% 100%

Source: BP; IEA; Deutsche Bank estimates

7

Fuel consumption by type to 2030

Percent

Tonnes oil equivalent

18000

100%

Hydro & Renewables

75%

Nuclear Coal Natural Gas

50%

Petroleum

15000 12000 9000 6000

25% 3000

0%

0

1970

2000

2030E

1970

2000

2030E

Source: BP; IEA; EIA; Deutsche Bank estimates

8

37

Total energy use and real GDP 1992-2002 …the economy is still the most important driver of demand

8%

Total Energy Global GDP 6%

4%

2%

0%

-2 % 1970

1973

1976

1 979

1 982

1 985

1 988

19 91

19 94

19 97

20 00

Source: Exxon; BP; IMF; Deutsche Bank estimates

9

0.35

1.60

0.30

1.55

0.25

1.50

0.20

1.45

0.15

1.40

0.10

E/GDP E/Capita

0.05 0.00

1.35

Tonnes per Person

Tonnes per $1000 GDP

Energy per unit of GDP and energy per capita

1.30

1.25 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003E

Source: Exxon; BP; IMF; Deutsche Bank estimates

10

38

World GDP and real oil prices

7.0

70.00

High oil prices… low GDP

6.0

60.00

5.0

50.00

4.0

40.00

3.0

30.00

2.0

20.00

1.0

10.00

0.0

0.00 1968

1973

1978

1983

World GDP % Change (left)

1988

1993

1998

2003

Real Oil Prices, 2002 $/bbl (right)

Source: IMF; EIA/DOE; Deutsche Bank estimates 11

Key countries in oil

Petroleum 2004E (mmb/d) Producers

Consumers

Russia 9.0 United States 7.8 Saudi Arabia 7.7

Exporters

United States 20.3 China 5.7 Japan 5.2

Importers

Saudi Arabia Russia Norway

7.1 6.2 3.0

United States 12.3 Japan 5.2 Germany 2.6

Mexico Iran

3.8 3.5

Russia Germany

2.8 2.7

Venezuela UAE

2.7 2.2

South Korea China

2.3 2.2

China Norway Venezuela

3.4 3.3 2.4

India Korea Braz il

2.4 2.3 2.2

Iran Iraq Nigeria

2.2 1.8 1.8

France Italy India

1.9 1.7 1.6

Million barrels per day (includes NGLs) Source: IEA; Deutsche Bank 2004 estimates

12

39

Top reserve holders and top producers are not the same

Russia Venezuela

USA Russia

Liby a Saudi Arabia

Nigeria Iran

Mexico

China Iran USA China

Other

Kuw ait

Norw ay Canada

United Arab Emirates

United Kingdom Venezuela

Iraq

Iraq

Saudi Arabia Other

Source: Oil & Gas Journal; BP; IEA; Deutsche Bank estimates

13

OPEC growth and capacity Current Capac ity

Capac ity 2030E

Growth Implied

Annual % Growth Req'd

Saudi Arabia Iran Iraq

10.0 3.7 3.0

16.2 7.0 9.9

6.2 3.3 6.9

1.5 2.0 3.0

UAE Kuwait Qatar

2.4 2.5 0.8

3.3 3.8 2.7

0.9 1.3 1.9

1.0 1.0 5.0

Nigeria Libya Algeria

2.8 1.6 1.3

6.4 3.6 1.0

3.6 2.0 -0.3

4.0 5.0 0.0

Venezuela Indonesia

2.4 1.1

5.4 0.8

3.0 -0.2

3.0 -1.0

TOTAL

31.6

60.0

28.4

2.5%

Million b/d

Source: Deutsche Bank estimates 14

40

Total OPEC production: IOC participation is recovering

35000

Total IOC Production ('000 b/ d)

30000

Total NOC

25000 20000 15000 10000 5000 0 1913

1923

1933

1943

1953

1963

1973

1983

1993

2003

Source: Wood Mackenzie Consultants

15

OPEC’s market share in 2030 estimated to be 50%

60%

50% 40%

30%

20%

10%

0% 1970

1975

1980

1985

1990

1995

2000 2005E 2010E 2015E 2020E 2025E 2030E

Source: IEA and US EIA/DOE historical data; Deutsche Bank estimates

16

41

Oil imports rise sharply for the big consumers

1970

1980

1990

2000

2010E

2020E

2030E

Importers United States

6.3

6.9

8.0

11.1

14.7

20.0

24.4

12.9

12.0

9.3

8.3

11.0

13.3

14.7

China

0.0

-0.3

-0.5

1.3

3.4

5.2

7.6

Japan

3.6

5.0

5.3

5.5

5.5

6.2

6.8

23.5

27.1

22.3

27.8

29.7

42.0

55.0

2.0

3.2

3.1

4.2

10.3

11.3

8.5

Europe

Exporters OPEC Production FSU Exports

Source: IEA; Deutsche Bank estimates (mmb/d)

17

Are we running out of oil? ...Hubbert curve works in the UK for 15 years, then goes seriously wrong 3000

Production (thous and b/d)

2500

2000

1500

1000

500

0 1965

1975

1985 Total UK

1995 peak & decline

2005

2015

Source: Wood Mackenzie historical data, Deutsche Bank

18

42

World conventional crude oil endowment …more left to find than Hubbert believed 3,500

3,000 732

Billion barrels

2,500

2,000

688

1,500 891 1,000

500 710 0 Cumulative Production

Proven Reserves

Reserves Grow th

Discovered Undiscovered Conventional

Remaining

Total Endow ment

Source: USGS World Petroleum Assessment 2000

19

Supply-side technological developments

x New seismic techniques x Improving recovery ratios x High-pressure steel pipelines x Improved gas turbine technologies x Improved coal mining techniques x Carbon sequestration systems x Better solar / renewable technologies

Source: IEA - World Energy Investment Outlook (2003) 20

43

OPEC price band …dollar weak now but strong in 2000-2001 40 35 30 25 20 15 10

$22-28/ bbl range for the OPEC bas ket Add about $2-3 for WTI and $0-1 for Brent prices

5 0 Jan-00

Jul-00

Jan-01

Jul-01

Jan-02

OPEC bas ket price US$ / bbl

Jul-02

Jan-03

Jul-03

Euro equivalent

Source: NYMEX; Bloomberg; Deutsche Bank estimates

21

44

OECD inventories ...supply squeeze bites deep (Venezuela, Nigeria, and Iraq) …we are looking for a recovery as Iraq exports return m mb 2,800 2,700 2,600 2,500 2,400 2,300 Jan 1998

Jan 1999

Jan 2000

Jan 2001

Jan 2002

Av erage inv en tory rang e (1994-2002)

J an 2003

Jan 2004E

Projected

Ac t ual

Source: IEA; Deutsche Bank estimates 23

China's Strategic Reserve plans: …fill targets and likely locations TARGET: 4-6 sites and 200-350 mmb capacity 30 DAYS IM PORT COVER (75 mmb) in 2005 50 DAYS IM PORT COVER (165 mmb) in 2010 DALIAN near oil fields, CNPC refinery

HUANGDAO m ajor oil port, 12+ m m b existing storage, refining center

ZHOUSHAN 7.5 m m b existing storage, m ajor deepw ater port

HANGZHOU 12+ m m b existing storage, near refinery and transport center

ZHENHAI 75 m m b under const. China’s largest refining com plex

HUIZHOU 6 m m b existing storage near offshore fields, refining

Source: Chinese press and government reports; Deutsche Bank estimates 24

45

Annual change in global demand

2.5 2.0 1.5 1.0 0.5 0.0 1990

1992

1994

1996

1998

Average 1990-96

2000

2002

Average 1996-03E

Source: IEA; Deutsche Bank estimates 25

Non-OPEC supply growth linked to prices

2.0

35

1.5

30

1.0

25

0.5

20

0.0

15

-0.5

10 1995

1996

1997

1998

1999

2000

2001

2002

2003E 2004E

Non-OPEC Production Grow th Oil Price, WTI (right scale) Average Global Oil Demand Grow th (1995-2004) Source: IEA; Deutsche Bank estimates 26

46

The Russians are coming!! ...Saudis suffer while Russia gains 10,000 Russia now top global producer

9,500 9,000

8,000 7,500 Russia climbs from 2000 on low ruble costs, high oil prices and improved political stability

7,000 6,500 6,000

After a year of 'matching barrels' w ith Russia, the Saudis leap as Venezuela goes on strike and Iraq w ar begins

5,500

Russian Crude Oil Production

Jul-03

Jan-04

Jul-02

Jan-03

Jul-01

Jan-02

Jul-00

Jan-01

Jan-00

Jul-99

Jul-98

Jan-99

Jul-97

Jan-98

Jul-96

Jan-97

5,000 Jan-96

thousand b/d

8,500

Saudi Crude Oil Production

Note: Saudi data includes 1/2 Neutral Zone Source: IEA, Deutsche Bank estimates

27

47

Iraq remains a long-term key to the oil markets TURKEY

‘Northern’ fields

AIN SALAH

• Produce 1m b/d from 10bn bbls of reserves

BUTMAH

‘Stabilisation’ phase

• Dominated by Kirkuk (0.9m bbls)

1,0 me 0 0 tres

KIRKUK

BAI HASSAN

IRAN

• Drilling contracts w ith TPIC (Turkey) and Zarubezhnelt / Tat neft (Russia) targeting 1.1m b/d

CHEMCHEMAL

• Oil services onto old fields SYRIA JAMBUR

• INOC to ret ain management ….. Russian PSAs if Saddam stays or US players if he goes?

AL ANFAL

Baiji

Oil to Ba & Gas nias /Tr close d April ipoli 1982

HAMRIN

Haditha

Oil

s to ine d s L se Ga Clo &

ifa Ha

Ha th

Daura

• Produce 1.5m b/d

BAGHDAD

• Dominated by Rumailah

EAST BAGHDAD

IRAQ

Greenfield opportunities

’Southern’ fields

MANSURIYAH "S oil trate pip g eli ic" ne ida -F ao

• Zarabuzhneft and Tunisia drilling cont racts

AHDAB BUZURGAN

JORDAN • TOTAL and LUKoil have key roles in super-giants…. US partners?

RAFIDAIN AMARA

GHARRAF

TAPl • Shell, Eni, Repsol, Russians in large ine - inac tive greenfields… US and UK Partners

HALFAYA

NASIRIYAH

MAJNOON

Mina al-Bakr

LUHAIS RUMAILAH

IPSA oil line to Yanbu closed August 1990

Oil Pipeline

100

Km

SAUDI ARABIA 200

ZUBAIR TUBA

• Extensive w ar damage Gas Pipeline

Muftiah Basrah

SUBBA RATAWI

• 1.3m b/d monit ored by UN

0

NAHR UMR

WEST QURNA

• Expect prot racted negotiations on terms and timing

30 "

/3 1"

INA CT IVE TA Plin e

KUWAIT

Abadan

Kuwait Exxon, BP and others negotiating for border fields

29

Production is likely to be constrained by OPEC ...4 million b/d is a reasonable expectation

Production ('000 b/d)

7,000 6,000

Iraq - Unconstrained

5,000

Iran - Quota + 2%

4,000 3,000 2,000 1,000 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Source: Wood Mackenzie

30

48

Key countries in gas (bcf/d)

Natural Gas 2004E (bcf/d) Producers

Consumers

Russia 55.3 United States 53.2

United States 62.9 Russia 42.2

Canada 16.6 United Kingdom United Kingdom 9.4 Germany Algeria 8.2 Japan Norway 7.3 Italy Indonesia 6.9 Canada Iran

6.8

10.7 8.7 8.4 8.2 8.2

Iran 7.5

Exporters

Importers

Russia 13.1 Canada 8.4 Norway Algeria Indonesia Malaysia Qatar

7.7 5.1 3.3 2.2 2.0

Netherlands 1.7

United States 9.8 Japan 8.4 Germany Italy Ukraine France South Korea

6.9 6.8 5.4 4.7 2.9

Spain 2.8

Source: IEA; Deutsche Bank 2004 estimates

31

49

LNG strongly economic

$ per mmbtu Henry Hub equivalent 0.00

1.00

Trinidad Expansions 100 TCF

2.00

3.00

4.00

5.00

More cost competitive

Nigeria Expansions 120 TCF Venezuela 120 TCF Second US LNG boom

1.80

First US LNG boom 1.60

2.50

1.00 2.00 0.80 1.50

0.60

3

4

Abu Dhabi 20 TCF Egypt LNG Expansion 12 TCF Eq. Guinea Greenfield 5 TCF Indonesia Bontang I 3 TCF Qatar Rasgas first trains

5 20 0

20 0

20 0

9

9

0 20 0

6

4

4

LNG Production Cost by Train

19 9

19 9

19 9

19 9

19 9

19 8

19 8

19 8

19 7

9

0.00

2

0.00

3

0.50

9

0.20

7

1.00

5

0.40

$ per mmbtu

3.00

1.20

19 7

$ per mmbtu

Algeria 200 TCF

3.50

1.40

19 6

Henry Hub Average 1993-2003

4.00

US Gas Price (Right Scale)

Angola Greenfield 25 TCF Henry Hub Forecast 2003-2006 Oman expansions Nigeria Greenfield Norw ay Snoevhit Iran Alaska Gas Pipeline Upstream at 15%

Pipe

Plant

Shipping to Lake Charles

Regas.

Source: Company data; Deutsche Bank estimates 33

SECTION III NATIONAL STRATEGIC ENERGY INTERESTS

1

ENERGY SECURITY AND UNRESOLVED CONFLICT IN THE CAUCASUS

H.E. Tedo Japaridze Minister of Foreign Affairs, Republic of Georgia

The Western world, and particularly the European states have long considered the South Caucasus and the Eastern shore of the Black Sea as a region historically, politically and psychologically separated from Europe. Only recent global political developments made it clear that this area is becoming an important security, political and economical component of a wider Europe. Developments, which have been taking place since our elections which took place on November 2nd 2003, prove that the Georgian nation and state have irreversibly chosen the way of democratic development. People who had patiently endured economical problems, hardship and corruption, have expressed their protest at the very moment when democracy was endangered, national dignity was injured and basic constitutional rights to vote were being ignored. Within the November 2003 revolution the Georgian people defended the right to live in a democratic state. This right was defended peacefully through civil protest. I am fully aware of what the international community has done to support fair and democratic elections in Georgia. It is deeply regrettable that these efforts were often ignored. However the Georgian nation rehabilitated itself through massive popular protest and now it deserves support as never before. We are most grateful for all the assistance given to preparing the presidential and parliamentary elections in my country, Georgia. Let me assure you that we are ready for cooperation across the board. I believe that the victory of democracy in my country will open the way for the economic revival of Georgia. But we cannot do this alone – without the close cooperation of neighbours and partners around the world. The new Georgian administration, President-Elect Mr. Saakashvili and the Georgian

53 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 53–58. © 2005 Springer. Printed in the Netherlands.

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people are determined to eliminate corruption, discriminative and contradictory laws and everything else that hinders normal development within the country and confidence-building among our partners. In my presentation I'll try to touch some of the aspects of why, I believe, the South Caucasus region is to be considered an inseparable element of the Euro-Atlantic security framework and an integral part of the EU's new Wider Europe-New Neighbours initiative. Nation-building and the security situation within the Black Sea-Caspian Sea area, considered in a global context, will be determined to a large extent by the effects of three sets of interrelated and interdependent factors: 1. Continuing political, economic and strategic influences of the European and Euro-Atlantic institutions in the Eastern Black Sea, South Caucasus and Caspian Sea area. 2. The continuing fight against global terrorism and the proliferation of WMD. 3. Oil and natural gas energy policy of the region as well as influence from energy policy abroad. I will elaborate on the influence of all three factors. 1. Let me touch on the issue of the region’s potential role in the larger international security community in the light of expanding security, civil, and economic demands of European and Euro-Atlantic institutions. The most significant step in the evolution of the strategic identity of the South Caucasus region was the historic decision made at the Prague Summit. Last November in Prague, NATO completed a 53 year effort to build a stable security system for Central and Northern Europe. We in Georgia long for our national security to be assured within such a system. The time has come for NATO to turn its attention to the security concerns of Southern and Eastern parts of Europe. Having reached this decision in Prague, NATO now embraces almost the whole Black Sea community either through direct membership or through special relationships of the kind enjoyed by Russia and Ukraine. This is truly a monumental shift in NATO’s sphere of influence. I believe that the security framework of Eastern Europe in the future should be based on a "Three Seas Policy:" governing the Baltic, the Adriatic and the Black Sea. As I mentioned, the Baltic and Nordic democracies have by and large completed the construction of a durable Baltic security system. Major efforts are already underway to ‘export’

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the Baltic model to the democracies of the Dalmatian Coast to provide the foundation for an Adriatic security system. The next step in the great project of building a free Europe from the Baltic to the Black Sea is the creation of a Black Sea security system to include Turkey, Bulgaria, Romania, Georgia and Ukraine as NATO members. Russia should be included as a trusted partner. This “Three Seas” system would link the Baltic Sea security system through Ukraine and Poland and thus delineate a comprehensive European security framework from the Baltic to the Black Sea. We believe that Azerbaijan should also be a member of the Black Sea security system. The inclusion of our neighbour will open a direct access between Caspian oil reserves and European markets, thereby enhancing Euro-Atlantic security and bringing prosperity to the steppes of Central Asia. Secure and reliable energy could be exported from Azerbaijan via Georgia and Turkey to the shores of the Mediterranean and via Georgia, Russia, Ukraine and Poland to the urban centers of Northern Europe. The benefits of a secure and liberalized trading system around the Black Sea for the entire Euro-Atlantic community are considerable. Current economic and political developments within the Black Sea region as well as tensions demonstrated by recent dramatic events around the Russian-Ukrainian border dispute prove that the creation of a Black Sea security framework should be made a priority. On the one hand, the region is eager to prove further that its potential can be incorporated so that it, too, can play its part in establishing a comprehensive Euro-Atlantic security system. On the other hand, despite the fact that almost all Euro-Atlantic states restrained themselves from any explicit involvement in this case, the potential danger coming from the confrontation between two Black Sea states was clear.

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2. When talking about the significance of stability in the South Caucasus for the Euro-Atlantic area, we should not fail to note the sweeping changes that took place in the wake of 9/11, as the Caucasus became a frontline in the War on Terror. The region embracing the Black and the Caspian Sea basins, the Caucasus and Central Asia, which Zbignew Brzezinski aptly described as “the Eurasian Balkans”, is an axis on which efforts to defeat international terrorism will pivot. Without institutionalizing Western interests in this area and stabilising the security situation there, it will hardly be possible to secure victory in this War on Terror. This stabilization should begin with taking serious steps to resolve regional conflicts, which are often called "frozen conflicts". Personally, I believe that this is not a correct definition and conflicts themselves are not "frozen" - they are alive, they develop with different intensity and bring numerous negative effects. What is "frozen", unfortunately, is the established process of conflict resolution. It would be accurate to think of these warring territories as “the last fragments of empire” where the tragedies and injustices of the 20th century remain without resolution and are played out one against another. Indeed, it is largely these kinds of unresolved conflicts that have hampered the development of democracy in the Adriatic and the Black Sea basins.

A Ripple Effect Clearly, Euro-Atlantic institutions have a larger role to play in preventing and resolving conflicts that may have begun as local affairs but which now have the power to involve other states in their instability through the export of crime, terror and extremism. A number of prolonged disputes in the Southern Caucasus have the potential to threaten the European community. Southern Caucasus regional conflicts fuel new dangers that threaten the nations in the Euro-Atlantic sphere as a whole. Namely these dangers are ethnic and religious extremism, international organized crime, human trafficking, the drugs trade, and what is particularly perilous, the existence of uncontrolled territories, or the so-called “white spots”, which provide shelter to international terrorists and allow them to develop relevant infrastructure. While this assertion is essentially self-evident, I would like to demonstrate it by drawing on some examples from Abkhazia and Chechnya. I believe that the Chechen problem was largely facilitated by the conflict in Abkhazia where the Chechen armed groups had what one would call a “dress rehearsal”, in which they gained combat experience which they

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utilized to great effect in Chechnya. Later on Chechnya, in turn, caused instability in Daghestan, Ingushetia, the Pankisi gorge, as well as some other territories. Thus, conflict “moved” throughout the region and inflamed tensions wherever it was that a volatile political environment had ensured a weakened resistance to it. The very existence of these problems in the Abkhaz and the Chechen regions caused instability and chaos not only in the conflict zone, but also elsewhere in Georgia and Russia. The failure to settle the Abkhaz conflict impedes Georgia in its efforts to become a strong and stable state. Likewise, the unresolved Chechen conflict has largely contributed to the emergence of terrorist enclaves that, naturally enough, attracted undesirable foreign elements. Moreover, the conflict in Chechnya has produced the problem of the Pankisi gorge in Georgia and if not for our efforts and American timely assistance, Pankisi would have turned into another “nest of terrorism”. Achieving stability in the Caucasus and the southern flank of Russia, however, ranges beyond Georgia’s personal national agenda and capability and is in the interests of a wider group of nations. In other words, to achieve this stability in the Causcasus, the issues of Russian stability, the success of the ongoing energy projects and the viability of the Eurasian corridor cannot be ignored by Europe and the United States who are in a far stronger position from which to address the issues.

Caucasus region energy This is the first reason why, I believe, the South Caucasus region should be a focus for European proaction. It is only by achieving stability, resolving conflicts, strengthening South Caucasus states and the promotion of democratic values in the area that we will ensure that the Euro-Atlantic community will face no terrorist or other physical threat from its SouthEastern periphery. The combination of transit potential and energy resource value of the South Caucasus is key to Europe's maintaining a balance in its energy policy in the years ahead. I believe this is one of the primary reasons why European interests require comprehensive stabilisation of the South Caucasus. Located at the crossroads of Europe and Asia, the South Caucasus represents a natural corridor between the two continents. For hundreds of years it has served as a connecting link, a fact which has played an important role in shaping the statehood, outlook, culture, and traditions of states in the region.

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At this point of history, we have entered the stage where the US-led energy projects are finally coming to fruition. Should the South Caucasus fall into instability again, the entire Western Caspian energy policy - let alone investments – would come under threat. The Baku-Tbilisi-Ceyhan and South Caucasus Pipeline projects are of vital importance to the future of the region and are critical to the creation of the East-West energy corridor. Therefore, all efforts must be exerted to ensure that these projects can be established and maintained without hindrance of any kind. We are doing everything we can to deliver these projects as a model for development. To assess the real importance of the region’s global oil and gas transportation projects for Europe, the figures can speak for themselves: by 2010, annual production in Azerbaijan, Kazakhstan and Turkmenistan will be more than 170 million tons for oil and 175 billion cubic meters for natural gas. Only Azeri, Chirag and Giuneshli oilfields located in the Azerbaijani sector of the Caspian Sea have total estimated reserves of up to 4.3 billion barrels. Throughout the 40 years of the Shah Deniz natural gas project, approximately 950 billion cubic meters of natural gas will have been transported from the Caspian region through the territory of Georgia to Turkey and further on to the Balkan and other European countries. Europeans are among the major shareholders of the Project - companies from the UK, France, Italy and Norway own 71% of total shares. For the countries of the Black Sea and Caspian Region, due to their geographic location, it is of strategic importance to create diversified hydrocarbon export pipeline systems and an infrastructure directly connecting them with the European oil and gas markets. On the other hand, Europe, as one of the world's greatest energy consumers, has a clear interest in meeting its demands through diversified sources and supply routes. There is an evident commonality of interests between the two regions in this matter. To sum up, the Southern Caucasus has come to the crossroads. Either our region will integrate smoothly into Europe and anchor itself into the Euro-Atlantic security system in which it will perform the essential role of effective barrier to the proliferation of terrorism, extremism, drug trafficking and organized crime or we will see a wholesale deterioration of security and a new gateway to Europe will open for ethnic conflict, terror and insecurity for not just Europe and Euro-Atlantic Institutions but for the world. Between the two options, for Georgians, the choice is clear.

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PROSPECTS FOR RUSSIAN ENERGY

Dr Evgeny Velikhov Workshop Co-Director President, The Russian Research Centre, Kurchatov Institute, Russian Federation

It is very interesting for me to participate in such a high-level forum – especially because my area of interest is completely different from yours. I am not an economist and I am not a diplomat – all my life I have spent on the technological side. All my professional life has been spent working in the Kurchatov Institute, which was founded for the development of nuclear weapons but now has moved to the development of nuclear and fusion power.

Nuclear Fusion Today, my professional interest focuses on negotiations to build an international experimental fusion reactor, ITER, and for ten years I was Chairman of the Board of ITER International. Today we have six partners: Europe; the United States; China; Japan, Korea; and Russia. Unfortunately, Canada has now left. The situation, as far as negotiations are concerned, is that everybody is extremely committed – and for this reason we have a very strong collision of interests between Europe (especially France), and Japan. The partners are divided into two factions: the United States, South Korea and Japan itself support the Japanese side; and China, Russia and Europe support the French. The problem is how to reach a compromise and this is my main concern now. I think I have spent more than 25 years on this project - it was a longterm project which started in 1985. It started when I was with Gorbachev in France and we described the fusion idea to Chirac and Mitterrand, and after this we reached agreement at a Summit in Geneva with Reagan. 59 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 59–63. © 2005 Springer. Printed in the Netherlands.

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This just demonstrates the importance of political interference in the development of energy - sometimes it is positive, sometimes negative, but it is very important just the same. It looks like the turbulence is not over and all the barriers to investment have not been overcome. Maybe we will have a chance to build the first fusion power station before our development of our natural gas resources are completed, especially the Shtokman field. After this workshop I will return to this problem. David King, the science advisor to the UK government, proposed a so called “fast track” which meant the goal of building the first pilot fusion power station in 25 years. I am not sure this is possible – maybe in 30 years but if we make this decision we are going in the right direction. Of course it is of no interest to economists at the moment as it is still a purely a scientific enterprise.

Civil Nuclear Power Generation Another problem with which I was involved very deeply at the Kurchatov Institute was the development of nuclear power. As far as Russia is concerned, we have the so called Energy Plan, but of course in the current climate the Energy Plan is not a real plan, it is not supported by economic obligations. It is not an indicative plan, but some sort of declarative plan. If you look at development inside Russia, today the main problem is that we are heavily dependent, especially in electricity production, on natural gas and the idea is to decrease this dependence and, especially, to develop nuclear power. In the last ten years the share of nuclear power in the production of Russian electricity rose from 30% to 60% - but without building any new nuclear power stations. It’s similar to the United States. We have just increased the availability factor, not to the extent that the US did, but we still have big reserve in capability to increase our nuclear electricity production just by increasing its availability. But our plan is to increase the share of nuclear power by year 2030 to 33% of total electricity production and give more emphasis to it. I am not sure we will fulfil this, but it is the official goal. Of course for Russia, in all its energy sectors, the goal is the export of energy, and this is the reason why we developed fusion and why we are supporting fission so strongly. We are, of course, looking at the possibility of exporting fuel, and exporting nuclear power stations and I think our future plans lie in the heavy development of this export possibility.

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I think today the development of nuclear power depends on mainly three factors, two of which are more or less international and one, of course, is the importance of government support. Like in the US, the energy bill is an attempt to increase the government support of nuclear power development. Of the two international factors, the first is the problem of spent fuel and the second is nuclear waste management. These are not only factors in the development of nuclear power but are also very closely connected with the non-proliferation program. First because it is a problem of proliferation of nuclear material: spent nuclear material; possible sources of Plutonium, Uranium or dirty bombs material. And second, it concerns the proliferation of nuclear technology and especially enrichment technology.

Non-proliferation Challenges Today we celebrate fifty years of the Atom for Peace Eisenhower Initiative, and it looks like we need to change the focus of this because in the current circumstances and the situation with terrorism and new nuclear strategy, it is not very wise to promise the sharing of nuclear technology with all countries and we need to look at controlling the development of nuclear technology and nuclear material. And for this reason I think, the new discussions of the possibility of international control of the fuel cycle is very promising - such discussions started in IAEA in Vienna about two months ago and we hope for progress in this field. And, as you know, Russia is taking legal steps to change our legislation and to open the way for the possible use of Russian capability to store and reprocess spent nuclear fuel, and by this means to contribute to the possibility of international control over nuclear fuel. We are discussing the possibility of forming the so-called Nuclear Fuel International Organization and International Storage Centre under international control. And this is one of the important initiatives which may open the way for the international development of nuclear energy.

Nuclear Industry Restructuring Another problem today is the question of private industry. What we need is international consolidation of nuclear power because the idea of each country building and developing its own nuclear power station does not solve the problem, especially when one considers the capital costs of nuclear power stations which is a major obstacle. The only way to decrease this cost and make the nuclear industry competitive is consolidation - but it has not yet happened. Without government intervention, the probability for consolidation of the nuclear industry is very low. We are working on this with our American colleagues, especially with SANDIA National

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Laboratory. Today there is quite a big difference between the Democratic party proposals (which are MIT proposals), and the Republican proposals which are mostly National Labs initiatives and which look at the development of nuclear power for the future much more optimistically. Of course we are now interested in the development of innovative technology which will make nuclear power more acceptable. Unfortunately for a long period of time the priority of such development was low. I was here in the UK in 1962, visiting the Leatherhead Centre, and forty years ago we cooperated in the development of the Gas Cooled Reactor (the Dragon Project) and we still cooperate today and hope to cooperate internationally on the development of the Gas Cooled High Temperature Helium Cooled Reactor. That’s 40 years of cooperation. The second question is the problem of moving from the open cycle to the closed cycle and to reprocessing. It’s still a controversial policy. I think today Russia is the only country which commercially operates fast breeder reactors but it seems, if you look at the real development of nuclear power in next 20 -30 years, that we need to move to the closed cycle, to development of the fast breeder economy, the Plutonium economy, although this raises a challenge for non-proliferation. But it is inevitable if you wish to develop nuclear power technology.

Oil, Gas and Coal I have spent ten years as the Chairman of Board of ROSHELF, it was the not very successful attempt to accelerate the development of our North Barents Sea fields: Shtockman and the oil fields in the Pechora Sea. Our plan was to build the first oil production offshore platform in the year 2004 and to start development of Shtockman in 2006. It is not happening. And the prospects are not very good, especially in today’s climate, especially in Europe, with deregulations and with spot markets. It is very difficult to develop long term projects in the absence of long term contracts. It looks like this deregulation and liberalisation of the market maybe very efficient in decreasing prices but not very effective in increasing the security of supply and stability for the future. Shtockman, especially, is technically and economically very attractive - 3.2 trillion cubic metres of very good gas, but the problem is the $20 billion cost of the project. Of course today there is another possibility – the possibility of the development of the US market for LNG, and maybe we have similar big fields like Shtockman on our shelf - like Leningradskaya or Rusanovskaya, each of them being 5 Trillion cubic metres of gas, but conditions are more difficult than in Shtockman. But they could develop like Shtockman if we

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start to convert to LNG, but unfortunately Russia has not developed any capacity for LNG production and it needs quite a lot of investment. But from the point of view of transportation and security I think it is a very positive option for the future. I think another big option for Russia is the problem of the efficient use of natural gas. Today 60% of our electricity is produced by natural gas but the efficiency of this is very low because we use obsolete equipment: we use steam turbines. General efficiency is about 27% - it is roughly two times less than modern very well developed technology using the Combine Cycle. In Russian conditions especially, the Combine Cycle with co generation gives enormous potential to save natural gas for export. But unfortunately for ten years all the attempts to introduce this technology have been unsuccessful, mostly because of the condition of the market in Russia – with problems like the so called ‘non-payment’ which we have overcome today. This is possibly the cheapest way to achieve a supply of something like 200 billion cubic metres of gas per year which is possible to save if we increase the efficiency of production. Another problem is that all our electricity production equipment is 50% obsolete - it is not only technologically obsolete, it is physically obsolete. Whatever happens we need to change this equipment and this may be the most efficient way for international cooperation and will provide a good market for European and American technology for gas turbine Combine Cycle. I am not so optimistic about the possibility of increasing the percentage use of coal in Russia, because of the low quality of Russian coal, and the long distance and high price for transportation and, as well, the additional price of environmental protection. This is maybe a much less feasible option for Russia - to substitute coal for natural gas in the production of electricity. Of course I am not so knowledgeable about the problems of oil development in the private sector - I was only involved in the development of oil in the Pechora region – where possible production is about 20-30 million tonnes per year, which is not so big but is not negligible. But unfortunately, again the problem is investment barriers. As I’ve already told you - we tried to solve investment problems in the Prerazlomny field and we hoped to put the first gravitational platform in the year 2004 but it looks like it will take longer and longer because of investment problems. In principle, both technologically and from point of view of resources, we have very good opportunities to provide all types of energy resources but, of course, we need to solve many diplomatic, economic and other problems.

SECTION IV EVOLVING ROLES OF MULTILATERAL ORGANISATIONS AND THE PRIVATE SECTOR

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OVERVIEW

Robert Priddle Former Executive Director, International Energy Agency

The umbrella title for this session is “Emerging Threats to Energy Security and Stability: the Evolving Roles of Multilateral Organisations and the Private Sector.” That gives us scope to raise all manner of issues – and I shall be indulgent. We are fortunate to have as our main speaker, Ambassador Arne Walther, who has recently become the first head of the new International Energy Forum, which is designed to give new substance and stability to the dialogue between oil producers and oil consumers. When I became involved in the energy sector thirty years ago: x the UK government was an important shareholder in British Petroleum (BP), was responsible for the appointment of two government directors to the BP board and was shortly to create a British National Oil Company; x coal, gas and electricity in the UK were publicly-owned monopolies and governments spent much time trying to create a financial framework for these industries (including steel, for example) which would in some way impose upon them disciplines equivalent to those in competitive commercial markets; x OPEC countries were newly asserting their sovereignty over their oil resources, imposing steeply higher prices and denying supply to countries hostile to their geopolitical objectives. This last development, in particular, gave new priority to energy policymaking in national administrations. This was the time when, for the US, achieving energy independence became the “moral equivalent of war”. New ministries were created and were devoted solely to energy questions. 67 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 67–70. © 2005 Springer. Printed in the Netherlands.

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New international bodies were created, like the International Energy Agency, to deal with the perceived threat to energy security. There was a widespread expectation that oil would become scarce by the year 2000 and would cost around $100 per barrel. All that totally changed in the wake of the oil price collapse of 1985 and the subsequent period of stability in the oil markets in the early 1990s (even the Iraqi invasion of Kuwait created only short-term turbulence).

Privatising the UK Energy Sector: a Model? Governments downgraded the importance of energy policy. Almost all energy ministries disappeared, absorbed into wider economics or industry ministries. The overriding objective of government policy towards the sector became the quest for greater economic efficiency. This was to be achieved through privatisation and the introduction of competition. The distinction between the two was not immediately recognised. It was assumed that changing the ownership of publicly-owned monopolies by putting them in the hands of private owners would transform their efficiency. What it did in effect was to make these monopolies more efficient at exploiting their being monopolies, in the interests of the shareholder rather than the customer. That was when governments decided to put their faith squarely behind the achievement of competitive markets: they broke up state monopolies and separated out functions which could flourish in a competitive market, like power-generation, from functions which are close to being natural monopolies, such as power-transmission. In the UK, the British National Oil Company first saw its functions curtailed and was then totally wound up. The government’s shareholding in BP was sold. The coal, gas and electricity utilities were broken up and privatised. The same process was carried through in many other markets in the industrialised world and spread to the economies in transition and the developing economies. OECD countries continued to pay lip service to energy security; but energy policy consisted primarily in applying competitive forces to the energy sector and seeking to impose new disciplines on the sector in the interest of curbing greenhouse gas emissions. Save for those environmental constraints, it was widely accepted that market forces would best resolve any conflicts between fuels, achieving what had hitherto been the objectives of energy policy. One

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British Minister, who subsequently became Chancellor of the Exchequer, summed all this up by saying there is no such thing as energy policy, only economic policy.

Learning the Lesson So this is how we find ourselves in the UK with an energy sector characterised by competition and private ownership, with market forces determining the outcomes. Well, not quite. The international oil market has never been like that. The producers have an international cartel which attempts to regulate price and production levels. They talk about market forces, but they do not mean unconstrained competition in a free market – far from it. Collective government action to determine a commodity price is not quite the same thing as the free play of market forces. And governments are usually very poor substitutes for those forces. In 1998, the OPEC governments misjudged the situation by increasing their members’ oil production quotas just as world oil demand collapsed in the wake of the Asian Financial Crisis. The shock to producers of the resulting grave revenue loss and national budget deficits led to a new seriousness of purpose on the part of OPEC about market management, which is still with us. Faith in markets has been tested elsewhere, too. Newly competitive electricity and gas markets were found to need detailed regulation to prevent abuse of market power. The Californian electricity crisis shook confidence in liberalised electricity markets and later system failures in North America, Italy and elsewhere have done nothing to reassure customers. Gas prices in parts of North America have reached peaks which have caused widespread dismay. The collapse of Enron (though energy systems remained highly robust) introduced new doubts about free market disciplines. Advocates of free markets worried increasingly about the adequacy of incentives for long term investment in electricity and gas supply and about the volatility of prices.

A Massive Investment Add to this the energy preoccupation of the Bush administration and the sense of vulnerability stemming from 9/11 and it is easy to see why energy security finds itself squarely back on the US government’s agenda.

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Some say the Iraq war was about securing access to oil. Much remains to be resolved about how Iraqi sovereignty over its oil resources can best be expressed in the new circumstances. What is the validity of contracts reached with Iraq at the time of Saddam Hussein’s regime? How should the new Iraqi government proceed if it is to realise ambitions to raise Iraqi oil production to 6 mb/d? More generally, how are the (relatively few) oil resource-rich countries to finance exploitation of their resources? The oil and gas sector as a whole will need investment of around $6 trillion in the next thirty years if the world’s needs are to be met. Three quarters of the investment in the exploitation of oil and gas will be needed simply to offset the natural decline in wells in production today or due to come on stream. Investment to meet growth in demand is additional. The electricity sector will require $10 trillion. The greater part of this investment is required outside the countries of the OECD, and in transmission and distribution, not in power generation. Pricing of transmission and distribution in developing countries is notoriously insufficient to give an adequate return on investment. Well, there is a perspective of change and a set of challenges certainly sufficient to keep us busy throughout this session. To set the debate going, we are privileged to have Ambassador Arne Walther to speak to us. I have said little about international energy institutions. Since he has just taken over the leadership of our newest such institution, The International Energy Forum in Riyadh, I am confident he will cover that ground while leading us to a better understanding of the combined role likely to be played by public and private enterprises in meeting our energy needs in the future.

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THE INTERNATIONAL ENERGY FORUM AND ENERGY SECURITY & STABILITY

Arne Walther Secretary General of the International Energy Forum (Riyadh), Norway

Last month, I moved from Vienna with leave of absence from the Ministry of Foreign Affairs of Norway, to Riyadh to do something a little out of the ordinary. My brief was to set up a new international entity - the Secretariat of the International Energy Forum (IEF). The IEF is an informal forum for global dialogue on energy at the ministerial level. It involves, at present, some 60 countries and the relevant international organisations. “Energy Security and Stability”, the theme for the Windsor Energy Group this year, is the core focus of the dialogue at ministers’ level in the IEF. Before introducing the IEF and its Secretariat, a new kid on the energy block, I will give you some figures and trends published by an old kid on the block, the International Energy Agency in Paris (IEA). These are trends and figures that I believe require consideration in our assessment of energy security.

Rising Demand: Some Figures The good news in the IEA’s “World Energy Outlook”, published in late 2002, is, importantly enough, that the Earth’s energy resources are adequate to meet rising demand for at least the next three decades. Yet there are many reasons for concern. Concern about security of energy supplies, concern about investment in infrastructure, concern about the threat of environmental damage caused by energy production and use,

71 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 71–78. © 2005 Springer. Printed in the Netherlands.

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and also concern about the unequal access of the world’s population to modern energy resources. By the year 2030, world energy demand will have increased by two thirds with an average annual growth of 1.7%. Fossil fuels will remain the primary sources of energy and meet more than 90% of the increase in demand. Oil demand will rise by 1.6% a year from 75 mb/d to 120 mb/d in 2030. Three quarters of the increase will come from the transport sector. Most of this projected 60% increase in demand will be met by OPEC, particularly producers in the Middle East. Demand for natural gas will grow more strongly than for other fossil fuels and will double in the run-up to 2030. Consumption of coal will also grow, though more slowly than that of oil and gas. China and India will together account for two thirds of the increase. The role of nuclear power will peak at the end of this decade and then decline gradually to 5% by 2030. More specifically, it will decline in Europe and North America, but rise in some Asian countries. Some governments find the nuclear option interesting as a means to reducing carbon dioxide emissions and to improve security of energy supply. Renewables will play an increasing role. Hydro-power will hold its share in global primary energy, but see its share in electricity-generation fall. The group of non hydro-renewables will grow faster than any other primary energy source. Wind power and biomass will grow most rapidly. But non hydro-renewables will still only make a small dent in global energy demand. More than 60% of the increase in world primary energy demand will come from developing countries, especially in Asia, as they industrialise with growing economies and population. A quarter of the World’s population (1.6 billion of 6.1 billion) has no access to electricity and two fifths rely mainly on traditional biomass for their basic energy needs. In 2030, a projected 1.4 (of 8.3) billion people will still be without electricity. Global energy-related emissions of carbon dioxide will grow slightly more quickly than primary energy demand that is to say 1.8% per year from 2000 to 2030. That is 70% more than today’s rate of increase. Two thirds of the increase will come in developing countries.

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The geographical source of new emissions will shift substantially from the industrialised countries to the developing world. China alone will account for a quarter of the increase in carbon dioxide emissions bearing in mind that the amount of her emissions will remain well below those of the US Most OECD countries face a real challenge in meeting their Kyoto commitments. OECD countries that have signed the protocol will be 29% above target in 2010.

Investment to Face New Challenges Energy trade, almost entirely in fossil fuels, will expand rapidly and increase mutual dependence among countries. But this can also impose new challenges. Our vulnerability to disruptions of energy supply due to terrorist onslaught or technical mishap can increase. Maintaining the security of international sea-lanes and pipelines will assume increasing importance for energy security. World Energy Demand 2000 Coal 26% Oil 38% Gas 23% Nuclear 7% Hydro 3% Other Renewables 2%

2030 24% 37% 28% 5% 2% 4%

More good news is that total world financial resources should be sufficient to finance the investments needed. Yet, there are challenges, economic and political. According to the IEA’s recently published World Energy Investment Outlook, total investments in the range of $16 trillion are required for the energy supply infrastructure needed to satisfy expected demand in 2030. The electricity sector is the dominant one. Power generation, transmission and distribution will absorb about $10 trillion of the $16 trillion (60%). The oil and gas sectors will each exceed $3 trillion (19%) and coal will require a mere $400 billion (2%).

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Developing countries will need almost half of the projected $16 trillion. It is in developing countries that production and demand increase most rapidly. $2.3 trillion is needed in China alone, 14% of the proposed total. Russia and other ‘transition economies’ will account for 10% of global investment. In terms of countries the need for investment will remain largest in the US and Canada at $3.2 trillion. 51% of the projected global investments will be needed simply to replace or to maintain existing and future capacity. The other 49% will be at hand to meet rising demand.

Economic and Political Challenges The economic challenge will be to mobilise these new investments. How will necessary investments find their way to the energy sector considering the enormous competition for funds with other important sectors of the economy? Who will invest how much, in what, and where, in order to manage supply and demand for both present and future generations? The political challenge will be to ensure a common energy future where energy supply and demand can be balanced in such a way as to promote, and not jeopardise, the goal of sustainable global economic, social and environmental development. This is a Herculean task. The issues are of such character and importance that they must be addressed in dialogue not only between nations at political level, but also in dialogue between governments and industry.

The International Energy Forum I would like to explain something of the new International Energy Forum and its international secretariat. I will highlight how the informal dialogue between ministers from energy-producing and energy-consuming countries has evolved to address directly the vital issue of security and stability in energy. The point is that energy is crucial for economic and social development. Energy is also a key factor in commercial and political relations between countries. It fuels the world economy. Production and

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consumption of energy impacts the global environment. Energy influences, and is influenced by, international politics. The past has shown how energy, especially the strategic commodity which is oil, and excessive market volatility, can create conflict or exacerbate existing political tensions between countries or groups of countries. Today we see how international dialogue and cooperation the energy brings mutual benefits and encourages positive impulses towards wider economic and political cooperation. Seeking to create a broader global dialogue and a closer cooperation should continue as an energy mantra for the future. Yet when Norway’s former Prime Minister Dr Brundtland, in the late 1980s, called for an informal meeting between ministers of energyproducing and energy-consuming countries, there were those who regarded the very idea of a dialogue at political level as a non-starter. Some even thought it dangerous. The differences and conflicts between the two groups of countries were taken for granted. Sharply-fluctuating oil prices, instability and insecurity were par for the course. This chaotic economic environment adversely affected global economics and politics to a much greater extent. The Gulf War in 1990-91 once again highlighted the importance of oil. A more co-operative atmosphere between producers and consumers ensued. The process of political dialogue across earlier dividing lines could start. The first ministerial meeting was held in Paris in 1991. It was followed on a more or less biannual basis by meetings in Norway, Spain, Venezuela, India, South Africa, Saudi Arabia and Japan, attracting an everincreasing number of ministers in what came to be called the International Energy Forum. Discussions have focused on security of energy supply and demand as well as on the links between energy, the environment and economic development. At their meeting in Japan a little more than a year ago, Ministers endorsed the proposal of HRH Crown Prince Abdullah of Saudi Arabia to set up an international secretariat, headquartered in Riyadh, to further strengthen the process of global dialogue on energy at the political level. The series of IEF ministerial meetings has contributed to a convergence of views. The utility of global energy dialogue is no longer questioned. Today, in our globalising world, there is a growing awareness of the simple fact that we are all in the same boat. Greater stability and predictability in

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energy developments are increasingly seen as a shared goal that can facilitate long-term economic planning and have a positive influence on political developments. The mutual sense of interdependency, vulnerability and win-win opportunity has improved the atmosphere for long-term cooperation. And difficult short-term issues are being addressed in a more co-operative way than before when the atmosphere was nothing short of confrontational. Energy Ministers from some sixty countries and heads of international energy organisations have been invited to meet at the 9th International Energy Forum hosted by the Netherlands in Amsterdam in May 2004. Their main theme will be “Investing in Energy: Choices for the Future”. In addition to plenary discussions, ministers will also address a host of other energy-related issues in informal bilateral exchanges. They will interact with leading CEOs in a special International Energy Business Forum immediately preceding, and giving important input to, their own deliberations. The producer-consumer dialogue at political level in the IEF is unique in its global participation and perspective. It is a meeting place not only for ministers of IEA and OPEC countries, but also for ministers of important countries outside these two main producer and consumer organisations; Russia, China, India, Brazil and South Africa to name a few that already have, and will increasingly have, substantial impact on the global energy scenario. In the IEF, these countries can participate on an equal footing with their peers in OPEC and the IEA. The IEF is unique in approach. It is not a negotiating or decisionmaking body. It is a forum geared to exchanging information and policy views, as well as establishing informal contact at political level. These exchanges have contributed to greater mutual understanding, enabling more enlightened national decision-making and closer cooperation within and between energy organisations. Some main tasks of the new IEF Secretariat will be to assist countries hosting the biannual ministerial meetings and to organise supporting seminars and roundtable meetings at political as well as at experts’ level. It will contribute to enhanced data collection and transparency. It will interact with governments, industry and organisations with a view to channelling and generating workable ideas for strengthening the global energy dialogue

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in an evolving global environment. Greater stability and security in energy is a shared objective of both producers and consumers.

Energy Security Tools Energy security is something that national and international leaders should be concerned about, not only in moments of emergency, but also in a long-term perspective context as production and consumption patterns, and requirements for investments in infrastructure, evolve. Energy security is a broad-based issue and is no longer focused purely on oil. Energy efficiency, stock-holding, fuel-switching, substitution options, diversification of resources and spare capacity are, along with emergency responses, key concepts in traditional security of supply thinking. Energy security policy has often been inward-looking and wary of dependence on external sources: especially on areas of political uncertainty. There are two sides to the energy security coin: security of supply and security of demand. Energy importing countries want security of supply from energy-exporting countries. Energy-exporting countries in turn want security of energy-demand in energy-importing countries. They may in addition need investments from abroad to develop infrastructure necessary to produce and export their energy resources. For both consumers and producers this implies dependency. Some would argue that dependency on others in so important and strategic an area as energy constitutes a political and economic risk that should be reduced to a minimum if it cannot be avoided altogether. Others would argue the more positive vision: such dependency can serve as a drive to improve relations between countries and to stabilise the geopolitical climate overall. Energy security should not be regarded as an issue of technical arrangements and infrastructure alone. It has also to do with economics, politics and the environment in both a short and long-term perspective. It has domestic and foreign policy implications. And the quest for sustainable energy on the global scene that was highlighted at the Johannesburg Summit, is a matter of energy security in its wider global and long-term perspective.

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Public and Private Sector Cooperation Let me conclude my opening remarks by describing the International Energy Forum as an evolving international endeavour to promote an inclusive, global dialogue on energy at the political level. Energy security and stability are core objectives. The IEF is driven by governments at ministerial level and recognises the need for interaction also with other players concerned, not least private industry.

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THE VIEW FROM BRUSSELS

Dr Andrei Konoplyanik Deputy Director Energy Charter Secretariat, Brussels

First of all, I would like to draw your attention to diamonds. Just like a diamond, energy security has many facets. And just like a diamond, energy security is best appreciated when its facets come neatly in balance. The important difference, however, is that diamonds, as you will remember, are forever while energy security has to be maintained and monitored on a daily basis. Once the energy is consumed it is gone forever. Energy security is often understood as the ability to assure adequate, sustainable supply of energy at a reasonable cost, including externalities. One might also think about energy security as a process, an ebbing and rising flow: If there were to be a common denominator of the various processes that result in the assurance of energy security, what would that denominator be? This research workshop has chosen to look at current energy production trends and the impact of capacity shortfalls on energy security. ‘Capacity shortfall’ is a way to say ‘under investment in capacity’. Capacity shortfalls could be the result of any unforeseen event including an act of terrorism. I would like to take this as the starting point and try to demonstrate that energy security is best understood as the continuous assurance and maintenance of adequate, reliable supply of energy at a reasonable cost in the short, medium and long term. This persistence of adequate and reliable supply can only be assured in the context of the right investment decisions. There are many facets to energy security – that’s the common thing it has with diamonds, after all. Since it is the outcome of a continuous process and since choices have to be made all the time on how best to assure it, there are many preferences on how exactly it can be assured. Here are a 79 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 79–86. © 2005 Springer. Printed in the Netherlands.

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few examples on the multifaceted nature of energy security from the consumer / importer perspective and the producer / exporter perspective.  A consumer / importer perspective would be charmed by the shine on the facets of: x x x x x

Higher domestic productive capacity; Less dependence on imports;  Lower degree of import concentration; Higher domestic inventories relative to imports; or  A greater diversity of energy sources in case one or more suppliers interrupt deliveries. 

I am sure you all recognise the cornerstones of the energy security policies of the major importers. A producer /exporter perspective would be fascinated by the facets of: x Lower potential shortfall in one or more domestic “exportable” energy resources;  x Lower depletion of non-renewable resources;  x Reducing the inefficient domestic use of non-renewable resources, thus providing an alternative for increasing its export potential;  x Reducing the uncontrollable growth in domestic energy-demand, for the same reason;  x Mitigating the potential loss of competitiveness on international markets; or  x Reducing real or imagined environmental disasters.  At this moment, I will point out that, differing as they may be, there are certain common aspects of the perspectives of a consumer and a producer. The supply of energy requires the deployment of a system that relies heavily on large-scale infrastructure which renders the supply vulnerable. The interruption of the flow of energy in many instances will negatively affect both the consumer and the producer. It is therefore in the best interests of both the consumer and the producer to develop energy-supply systems that are least vulnerable to both short and long-term disruptions. Let me dwell for a moment on each of these two issues.

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The ‘Short-term’ is usually understood as a period of time during which no radical change occurs in the quality of the factors deployed: pipelines would be pipelines, tankers would be tankers, GM engines would be V-8 gas-guzzlers, and terrorists would be terrorists. A major concern related to short-term disruptions is asymmetric/terrorist activity which targets largescale, centralised, vulnerable systems in particular. In the short-term, an existing vulnerable energy-supply system, or key elements thereof, can be destroyed. On the other hand, since it takes time between making an investment decision and implementing it, it is indeed difficult to find a substitute for such vulnerable systems and interrupted supplies within the small time frame that the short-term allows. There are of course cures for this pestilence. For example the ‘hardening’ of the vulnerable elements of such systems, the maintenance of back-up supplies of fuels and capacity, etc. But even under the best of circumstances, and even if all nations were to co-operate in reducing risks of this nature, the cure cannot run any deeper than covering up the symptoms of vulnerability: with energy systems vulnerable to asymmetric attack there will inevitably come short-term interruptions of increasing gravity and cost due to terrorist activities. Suffice to say there have been over 50 incidents of sabotage and accident on the Trans-Alaska oil pipeline alone. Terrorist attacks are the reason behind frequent disruptions of the Oxy pipe in Colombia. But in cases like this, a more effective solution would be to invest in meeting this asymmetric threat and preventing blockage of flow rather than just patching up disasters. However, while investing in the improvement of the security of vulnerable energy systems will have its rewards there will inevitably be a point where the law of diminishing returns sets in. In the long term many factors can change. New technologies emerge and new types of energy come into use. James Woolsey, former CIA Director (a person whose expertise lies more from the “security” part of the “energy security” formula), and Amory Lovins, a well known energy expert, write that “Energy security starts with using less energy far more efficiently to do the same tasks. The next step is to obtain more energy from sources that are inherently invulnerable because they are dispersed, diverse, and increasingly renewable”.

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This beneficial shift in the long term to better energy security will, however, not occur without the relevant investment. It seems to me that two major conclusions may be drawn from this:  x It is the responsibility of the producer and consumer countries to co-operate in reducing the vulnerability of existing energy supply systems, and thus avoid some of the costs in the future incurred from damage to energy systems. This type of investment, while useful in the short run, is likely to have limited returns in the long run. x The major long-term risk to security of energy supply lies in making the wrong investment choices i.e. in being unable to improve efficiency, nor diversify energy supply sources nor build invulnerable, diversified and well-distributed future energy-supply systems that can withstand the impact of local disruptions with ease. Energy consumers and producers are thus interdependent, linked together not only by existing energy flows but also by investment flows to develop future energy projects. Thus energy and investment flows are closely related in shaping energy security from an economic perspective. Investment at each stage in the energy cycle has particular ramifications for security. In the case of upstream projects this means: (a) The security of up-front project expenditures which aim at obtaining access to energy resources (so-called pre-investment stage); (b) Security of subsequent project development and operational activity, including the transportation of the energy produced to markets; (c) The environmental aspects, including the abandonment of the depleted fields or mines, or sites, and the decommissioning of the project infrastructure. From this perspective, the energy cycle, whether at the level of an individual country, a region or at the global level, includes a chain of investment projects, of making investment decisions, with their inherent risks and rewards. The security interests of both producers and consumers of energy are vested in this process. From an economic viewpoint, stable

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and affordable energy supply means supply with manageable volume and price risks. Since the 70’s, the concept of affordable and secure energy supply implied an environmentally-sustainable supply, with environmental costs internalised. Today this means that in order to provide competitive energy supplies, not only must technical and financial costs be taken into consideration, but also the environmental costs. These are facets of energy security that have evolved over time, at the various stages of the development of the energy markets.

Healthy Competition And here we come to a message that I believe important in the modern context of the global energy industry. If – as I have tried to demonstrate – energy security and the security of investment are interrelated, and, indeed, if the right choices have to be made at the right time by investors to assure energy security in the long run, then the right policy is the policy in support of competitive global energy markets. Over time, the instruments used to provide energy security have evolved, reflecting different stages of market development and the need to manage volume and price risks. What we see now is something of a departure from the once-existing direct control of supplies ‘at the wellhead’ that was typical for the traditional concessions, including direct state participation of the concessionaire’s home state, or, at an even earlier moment, the establishment of colonies. Right now, a major instrument of diminishing volume risks is the diversification of energy supply. This is obviously an investment well made, and we at the Energy Charter support policies that remove barriers to the flow of such investment and promote fair access to markets. What is disturbing, however, is that even with diversification of supply and markets, key components needed for the assurance of long-term security of supply have yet to materialise. For example, diversification in oil supplies does not mean diversification in energy supplies: consumers will still be hooked on imported oil. Multiple pipelines will still carry the same kind of energy: oil or gas. There seems to be a need on the part of state monopolies for a departure from dependency on oil and gas and on few suppliers which prevent competition and the establishment of free markets. In broader terms, there seems to be need for a departure from monopoly dependence to eliminate the potential for abuse of any dominant position –

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in all senses. Functioning market structures and competition are a sine qua non for providing to investors the right signals, to assure that investment goes where it is needed, and thus to assure energy security in the long term. Let’s step back in time again: Prior to 1970, the price risk in the oil market was addressed by the so-called ‘posted prices’ advised by vertically-integrated oil companies, and a cost-plus mechanism of pricing related to a particular project. Now we have a market based on the ‘paper’ and the ‘wet’ barrel – spot, futures, options and a host of other derivatives. Increased price volatility when it arises is shared between market participants as a function of their individual appetite for such risks. But that is to say that the financial markets, in addition to the diversified technical infrastructure, are now instrumental in handling price risks and in mitigating energy security risks. Today we have an advanced financial market serving energy markets, along with a diversified technical infrastructure, and that is the result of healthy market competition. The formula might run: “Markets will find a way”. There seem to be two dimensions of international energy security that go beyond the problem of reducing the vulnerability of the existing supply system by military means, including the ‘protection’ of unstable energy exporting regions. These two dimensions are (a) Defence against short-term shocks by the use of strategic weapons stockpiling; and (b) Investment in energy resource development (in underdeveloped areas and new sources), energy efficiency, energy technology and generally all the means needed for a transition from the current state of the industry to the desired future, more secure and efficient, state. That state would involve more diversified, open, transparent and competitive energy markets. It seems, indeed, that the second dimension is the most worrying. It was recommended recently that the G-8 should consider ways to strengthen the legal regime for international energy investments. In fact, this recommendation should be addressed not only to G-8 but also to the broader international community. It underscores the major theme of my presentation that international energy security in the long run depends on international energy investment, and on the management and minimising risks to such investment.

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European and Asian Markets Compared According to the ‘shadow G-8’, a great deal has been done in this area over last 15 years. Further progress is needed as most of the energy-rich regions are plagued with defective governance and especially defective security for investments, which especially hinders the flow of foreign investments. The US favours bilateral approaches as well as a regional scheme that would be part of the Free Trade Area of Americas (FTAA). The Energy Charter Treaty (ECT), the only multilateral energy-specific international law instrument, already has 52 signatories and will perhaps incorporate more in the near future. However, the US, by far the largest ‘exporter of energy capital’ has not signed it. The entire G-8 should endorse the Energy Charter Treaty process and encourage its enlargement to both new capital-importing and capital-exporting countries. To this ‘perspective from the West’, let me add a ‘perspective from the East’. If we look at a map of the Eastern hemisphere in energy terms, we see Asia as a major market dependent on external supplies. The European market is mature but the Asian markets are still growing. It is the Asian markets that offer greater opportunity for energy trade and investment. But by which principles will the integrated pipelines and electricity grids in Asia be regulated? What investment rules will be implemented in the countries of the broader Eurasian energy market? Will China evolve along the same historic path as the US? If yes, will we live in a sustainable energy future? The ECT is the only international instrument containing a set of common rules for energy-related trade and investment. It is not surprising that governments in Asia are, admittedly cautiously, approaching the ECT. China became an observer in 2001, Iran and South Korea in 2002, ASEAN as a group in 2003. Energy markets have generally evolved from being monopoly-led to competition-driven. The driving force in this development is the need to assure incentives to investments. Both producer and consumer nations are looking at investment protection and stimulation measures, as instruments in improving their energy security. The process also demands the development, commercialisation and transfer of energy-efficient and environmentally-friendly technology, the adoption of coherent labour and environmental standards and, most importantly, the establishment of competitive markets that help minimise investment-related risks. Diversification of supplies within the existing energy supply system (multiple suppliers, multiple pipelines, interconnections, etc.) and

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maintaining stocks of various energy materials and an excess capacity are adequate tools to handle potential threats to energy security in the existing context of the industry. As I have explained, they are not very helpful in the long run.

Winds of Change The ‘hardening’ of the vulnerable centralised systems, the proactive handling of various sources of threats and instability on a global scale are also beneficial in the short/medium run. However, in the long run these energy security instruments, while useful, will probably not be sufficient. There is a need to use tools to minimise risks related to energy investments (thus minimising financial cost), to provide the right signals at the right time to investors. Times change: once upon a time, such signals used to be provided via the concessionary system, i.e. individual projectrelated agreements between the investor and the host state. Ninety years ago the British government supported and directly participated in the D’Arcy concession in Persia at the whim of Lord Churchill, to assure Britain’s energy security, and indeed its national security, when the Royal Navy switched to relying on oil instead of coal. Nowadays, we witness a variety of bilateral and multilateral intergovernmental undertakings. International law instruments are one of the most efficient ways in providing the basics of energy security. At the Seminar on ‘Global security and Natural Resources’ held in September 2002 in Moscow, former UK Foreign Minister Lord Owen mentioned, “transparency is the best chance for stability”. Stability, proper public and corporate governance, and transparency are nowadays key components of energy security. The creation of a level playing field and establishing rules that apply to all adds to transparency of investments and trade and helps minimise investors’ risks. The development of open and competitive markets in our global economy is key to the stability of international energy flows, and indeed to the assurance of adequate supplies of energy at reasonable cost. This is, in my economist’s view what energy security is all about. As Marilyn Monroe so beautifully put it in her song, “There may come time when a lass needs a lawyer but diamonds are a girl's best friend”. With energy supplies secure, we may enjoy the brilliance of diamonds forever.

SECTION V REGIONAL CHALLENGES: THE MIDDLE EAST

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NATIONAL STRATEGIC ENERGY INTERESTS AND CREATING REGIONAL STABILITY IN THE MIDDLE EAST

Robert Ebel Director of Energy programme, Centre for Strategic and International Studies

In my remarks to you this afternoon I will take a look at Saudi Arabia and growing publicity related to cresting the petroleum peak. And I will also touch on US strategic energy interests and the Russian oil sector. Let me begin by noting that the accepted growing US dependence on foreign oil and the need to assure that this oil will be available in the volumes required has led to US strategic energy interests being viewed quite differently outside the US than we perhaps perceive them at home. The growing US dependence on foreign oil is clearly no secret. For example, in 1983 just 28.5% of the crude oil processed at our refineries was foreign in origin. Last year, the share of foreign crude had risen to 62.9%. How can we assure ourselves that our economy will have the oil it needs? Do we expand domestic supply, as the Republicans advocate, or do we make better use of what we do consume, that is, the Democratic approach? Or, do we seek control over foreign supply, by whatever the means? While our administration and politicians in Congress may worry about this dependency and seek to reduce it, what about the American public? Do they lay awake at night because so much of the oil we consume comes from nations whose national interests may not, and often do not, coincide with ours?

89 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 89–99. © 2005 Springer. Printed in the Netherlands.

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Of course not. The American consumer has just two concerns: price and availability. Where the oil comes from to make the gasoline or diesel fuel that he buys does not matter. But price and availability do, and these two factors make up the consumer definition of security of supply. I suspect that consumers everywhere are no different. The foreign view of US strategic interests is one of using military force to lock up the oil we will need. And this view also springs from a conviction, by some at least, that a peaking of world oil production is not far away, at least in relative terms, to be followed by a slow but steady decline. Let me cite several headlines I came across in recent readings: x “Plan now for a world without oil,” found in the January 5, 2004 issue of The Financial Times, and x “Bottom of the barrel: the world is running out of oil so why do politicians refuse to talk about it?” in the Guardian of December 2, 2003. If the headline admonishes us to plan for the day when oil production peaks, what can we do, given the importance of oil to the normal functioning of our economy, and given our dependence on foreign suppliers to meet our oil needs? The Guardian provided an answer: Bush and Blair have been making plans for that day by seeking to secure the oil reserves of other nations, such as Iraq. The Financial Times observed that the growing US need for imported oil drives an integrated oil and military policy. And the question not posed is: who is next, after Iraq… Iran? Syria? The political newsletter Counterpunch went into further depth, in a recent issue and drew upon a recently-released book Oil, Power and Empire. It noted that, “controlling Persian Gulf oil and dominating world energy markets has been a prime US strategic objective for over 60 years.” Professor Michael Klare, who teaches at several New England colleges, points out that the National Energy Policy, formulated by Vice President Cheney in 2001, assumes the US dependence on foreign oil will continue to expand, and calls on the US government to take whatever steps are necessary to promote enhanced US access to foreign oil. However, a minor point of order: the Cheney report does not contain this recommendation. In remarks at a conference in Paris in May of last year, Professor Klare noted that the US efforts to acquire more oil from the exporting countries

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will entail the increased presence of US military forces in the area and periodic military intervention. Indeed, he added, the requirement for increased military action in support of US foreign energy policy is one of the driving factors behind the administration’s military buildup. The release earlier this month of a letter, written in 1973 by the thenBritish ambassador to Washington and based on a conversation he had had with James Schlesinger, then US Secretary of Defence, can only give additional sustenance to those who see a clear linkage between US military and oil policies. The letter in effect led British intelligence to believe that the United States was prepared to use force to seize the Middle East oilfields—read Saudi Arabia—in the wake of the Yom Kippur war and oil embargo. Should circumstances arise that again might jeopardise the timely and adequate flow of oil out of Saudi Arabia, undoubtedly there are individuals in Washington who would come to the same conclusion that Secretary of Defence Schlesinger did some 30 years ago.

Been There Before It is perhaps not too difficult to set aside those worries about oil peaking. After all, we have been there before. Some 26 years ago, the president of the United States, Jimmy Carter, addressed the nation, in what he defined as “an unpleasant talk…about a problem that is unprecedented in our history.” I am sure some of you must remember that event. This was his famous, or perhaps infamous, speech where he called for the “moral equivalent of war” in response to the problems he laid out. Unfortunately, the acronym of the “moral equivalent of war” is MEOW, which fell considerably short of a call to arms he was asking for. He made several points in his broadcast. Let me repeat them for you. x “The oil and natural gas that we rely on for 75 percent of our energy are simply running out. x “Each new inventory of world oil reserves has been more disturbing that the last. World oil production can probably keep going up for another 6 to 8 years. But sometime in the 1980s, it can’t go up any more. Demand will overtake production. We have no choice about that.”

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What stood behind this assessment? What were his advisors looking at when this message was being put together? One document in particular stood out. In the latter 1970s we had bought into the belief that the Soviet Union would soon be running out of oil. That belief grew out of the CIA finding published in April 1977 that had concluded “that during the next decade, the USSR may well find itself not only unable to supply oil to Eastern Europe and the West on the present scale, but also having to compete for OPEC oil for its own use.” But that document by itself would not have warranted a presidential address to the nation. I poked around in my files the other day and found an interesting report on Saudi Arabia, dated April 1979, two years after President Carter’s broadcast, and prepared by the staff of the Subcommittee on International Economic Policy, Committee on Foreign Relations, the US Senate. In the summary, this statement was made: “Based upon information collected by the Committee staff over the past year, it seems evident that the United States should not base its energy plans on the premise that Saudi Arabia, as residual supplier, will produce enough oil to supply the needs of the United States or the world economy over the next two decades at the anticipated rates of consumption.” It is probable that the Senate staff had passed on to the White House at least their preliminary evaluation of the Saudi oil sector and that evaluation, combined with the CIA judgment on Soviet oil, helped convince President Carter to take to the air. In reality, though, it was a classified report put together by the CIA on problems at the Saudi oilfields that most likely was the deciding factor. Yet the passing of time proved the CIA to be wrong in its assessment of the Soviet Union’s oil capability, and the Senate Committee on Foreign Relations to be wrong in its assessment of Saudi Arabian oil. It is difficult to believe that we will be any more successful in the future in our attempts to judge how oil supply scenarios will play out than we have been in the past.

Russian Roulette? Where are we today with regard to the Soviet Union, or rather Russia, and Saudi Arabia?

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We no longer ask ourselves, will Russia be running out of oil anytime soon? Rather, we are now trying to judge for how long and to what extent Russian oil production and exports will continue to grow. In other words, we have an opportunity to be wrong once again. Two possible paths emerge for Russian oil: one, the oil sector is successful in maintaining its growth trend; or two, problems arise that temper that growth trend. Russian oil production averaged a bit above 8.4 mb/d in 2003, a gain of more than 800,000 b/d over the 2002 level but still 3 mb/d below its peak in mid-1988. With domestic needs placed at not much more than 2.2 mb/d that provides an exportable surplus in excess of 6 mb/d. The importance to the Russian economy of a continuing high oil price, in conjunction with steadily increasing exports, cannot be understated. Could the economy withstand a price decline? Russian officials say yes, even a decline to $18 per barrel. Nor should we ignore the expanding use of trade in oil and natural gas to re-establish a dependency between most of the former Soviet republics and Russia, a dependency that contains future, if not current, political implications. When the United States looks north we see Canada, our leading supplier of oil and natural gas. When China looks north it sees Russia as a source of oil and natural gas supplies to cover the growing gap between supply and demand. Some people say we should foster that Sino-Russian energy relationship as a way of reducing the Chinese presence as a competitor in the Gulf and as a way of expanding world oil and gas supplies. The tradeoff being, of course, that close political linkages likely will follow close energy interdependencies. Would that be in our interests? In the continuing US search for oil supplies outside the Gulf, might some kind of arrangement be struck with Russia? President Putin, playing to the security concerns of the United States, has said that Russia would like to secure 10% of the US market. But the US will not set aside that 10%. Russia will have to earn it, through the workings of the world oil market. Will last year’s absolute growth be repeated in 2004? No it will not, at least in the judgment of the Energy Ministry, which in early January was forecasting an output averaging 8.68 mb/d for the year. But I would draw your attention to a caveat. The Ministry invariably has been on the low side

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when it comes to forecasting next year’s production and more recently was predicting a 6.6% growth in production for the first quarter of 2004. There are constraints to consider: export pipeline limitations, taxation levels, and the impact of the Khodorkovsky affair. Nonetheless, I would judge that the growth anticipated for the first quarter could be extrapolated for the year as a whole, providing an increment of roughly 500,000 b/d, still very much worrisome for OPEC, in that most of these incremental barrels will be available for export.

Pessimists at Work As a pessimist, I can see a Russian oil industry with certain of the same characteristics today that caused the CIA to render its 1977 prediction of troubles ahead. Is the sector sufficiently transparent to provide us with what we really need to know, if we are to be able to make reasoned judgments? Are the oilfields being pulled too hard to take advantage of high prices? Is sufficient new investment being made? Are the production gains just onetime gains deriving from the application of western technology and managerial know-how? Where are the new discoveries needed both to offset declines at the older fields and to provide for continued growth? Yukos, the leading Russian producer, points to benefits derived from horizontal drilling and water flooding, raising average well production rates across the board. All well and good, but does this translate into faster depletion rates? Quite probably. The over-arching Yukos corporate strategy is that of maximising income. The growth demonstrated by Yukos to date has been based largely on increasing efficiency in old fields. Corporate strategy also indicates that exploration in new areas will probably not be a primary factor in the near term.

An Optimist’s Opinion Now, to balance our story, we should put to work the crystal ball set aside for optimists. What do we find? Are there answers to the questions, can the growth in oil production be sustained beyond the near term? Could Russian oil be restored to its glory days of the 1980s?

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The geologic potential is there, although much of this remaining potential is found in very inhospitable areas. Ray Leonard, a Yukos official, and an American geologist with good international credentials, following considerable investigation, has placed Russian proven reserves at between 97 to 119 billion barrels, roughly double that level generally accepted and matching those of Iraq. The answer is yes, if Russian oil companies do not repeat the mistakes of their Soviet predecessors. The answer is yes, if Russia improves its investment climate, and that means ‘the rule of law’ must be firmly in place. The answer is yes, if foreign oil investors respond, and that means the world oil market must be of sufficient attraction to offset the risks of doing business in Russia. Equally important, the state of relations between Russia and the US will have much to say about the presence in Russia of foreign oil companies and in turn the acceptance by Russia of these investors.

Two Guidelines There are two guidelines we can draw upon in our attempts to judge future Russian oil production and export levels. First, we can look to the recently approved national energy strategy that takes the country out to the year 2020. Two scenarios have been set out, an optimistic case and a moderate case. Looking at the optimistic case for 2010, we find that production hits about 9.8 mb/d, with exports coming in at under 5.6 mb/d. The moderate case has production slightly exceeding 8.9 mb/d, and exports just under 5 mb/d. Exports for both cases relate just to crude oil, and do not include petroleum products. The optimistic case for the year 2020 shows minimal growth for both production and exports and does not return Russia to its peak of 11.4 mb/d in 1988. The second guideline, and the one I prefer, comes from an internal study carried out by Yukos. Yukos, in its study, also projected production out to the year 2020, and found that:

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x Oil production will peak by the year 2010, somewhat exceeding 10 mb/d. x It will hold at that level until the year 2015 at which point a very slow decline sets in x dropping production to just below 10 mb/d by the year 2020. The two leading oil producing regions—West Siberia and the UralsVolga—will both peak in 2010, as will Timan-Pechora. So where will the growth come from? East Siberia, which produced just 40,000 b/d in 2001, is to expand to 1.34 mb/d by 2020. Beyond 2010, all the growth is to be provided by undiscovered fields. The Russian Shelf, also having produced just 40,000 b/d in 2001, will also be producing in excess of 1.3 mb/d by 2020. All of the growth beyond 2015 is to be provided by undiscovered fields. Without these two regions, Russian oil production would be around 7 mb/d by 2020. Crude oil exports likely will expand as production expands but, given that refining capacity likely will not be measurably enlarged, petroleum product exports could be expected to decline. Accepting either of these guidelines tells us that for Russia the current decade is a decade of growth, but the next decade is part constancy, part slow decline. Current production levels do not define the future; reserves in the ground do. And where are the oil reserves concentrated today? In the Gulf. OPEC need only be patient this decade, while realising the next decade is theirs.

Saudi Arabia: Back to the Future Questions are being raised again about Saudi oil production. Are the major oilfields in decline? Might we expect Saudi oil to peak anytime soon? This time, however, it is not an agency of the US government or a Congressional Committee sounding the alarm. Rather, it is a respected US investment banker, Matt Simmons, who has concluded, after a detailed review of several hundred technical papers stored in the library of the

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Society of Petroleum Engineers—many of which papers had been authored by Aramco geologists and engineers—that Saudi Arabia has likely already peaked in its sustainable oil production. Mr. Simmons recognises that he is not a reservoir engineer and has requested a number of individuals experienced in the operation of oilfields around the world, but especially in Saudi Arabia, to review and comment on his draft report. I have not yet seen any of these reviews, but the judgment of Mr. Simmons is already finding its way into the media: it makes for a headlinegrabbing story. We need not dwell on the importance of Saudi oil, either to the US or to the world oil market. Saudi Arabia is the leading crude oil supplier to the US market—and the US is the leading buyer of Saudi oil—and the Saudis very much want to keep it that way, although in terms of US imports of both crude oil and petroleum products, Canada is number one supplier. There is not an explicit dependency between Saudi Arabia and the US, for the world oil market is open to both buyer and seller. Yet, there is a commonality of interests to be served in maintaining what we have. The importance of Saudi oil is based as much on its spare producing capacity as it is on its position as an oil exporter; even more so in times of supply disruptions, such as the military intervention in Iraq that took Iraqi oil off the market. Saudi Arabia told the United States that its spare capacity would be put to work, to offset the loss of Iraqi oil, and therefore the US need not tap into its Strategic Petroleum Reserve. They did, and we didn’t.

Iraq: the New Kid on the Block Who might ever rival Saudi Arabia, in terms of production, exports and most importantly, spare capacity? Not Russia, for it is unlikely ever to deliberately develop spare producing capacity. But Iraq could replace Saudi Arabia, at least in the minds of the Iraqis I have met. A broad and successful exploration and development program, plus raising the depletion rate, currently around 1%, to 4% to 5%, would do it, so they say, taking Iraqi oil to as much as 12 mb/d. But when could this happen? Certainly not this decade, and not without foreign investment.

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Iraq today is a mixture of successes and of promises unfulfilled. Where does Iraq stand today? Crude oil production averaged 2.3 mb/d during December and exports, all from the south, averaged about 1.6 mb/d. In the north, some 200,000 b/d are being reinjected, largely because sabotage has taken much of the northern infrastructure is out of operation. To the best of my information, not a single saboteur has yet been caught. And when might the saboteur move south, where facilities reportedly are even more vulnerable than in the north? That would be disastrous. Yet, on balance, the situation continues to improve, although performance to date has been far below predictions offered by the Bush administration immediately following the occupation of Iraq. Vice President Cheney, among others, had been quoted as saying that by end of the year, Iraq would be exporting as much as 3 mb/d. Reality soon set in. Thamir al-Ghadban, in mid-June, thought that year-end output would be 2 mb/d, quite close to what was achieved. Iraqi oil ministry officials now anticipate that prewar level production of 2.5 mb/d should be regained this Spring, perhaps as early as April, and then pause at that level for some time. There seems to be a growing consensus that by the end of 2004 Iraq might be producing as much as 2.8 mb/d and exporting 2.3 to 2.4 mb/d, but only if sufficient export pipeline capacity is available. Exports out of the south are approaching the system’s capacity. Does a return to prewar levels imply the line to Ceyhan will be returned to operation? But saboteurs don’t blow up empty lines, do they? The export terminal at Khor-al-Amaya will add another 200,000 b/d of capacity, but beyond that, what? I would guess that by the end of this decade we might anticipate Iraqi oil output on the order of 4 to 4.5 mb/d, below the 6 mb/d often mentioned as a goal for that year. Nonetheless, even this lower effort would exceed by 1 mb/d the previous country high of 3.5 mb/d, reached in 1979. The fixation on returning Iraqi oil production and exports to their prewar levels may well turn to be a serious misstep. Unfortunately, the Iraqi oil ministry and the CPA have yet to take the decision to first, assess the health of the oil reservoirs and second, to introduce good reservoir management techniques. Former oil minister Issam al-Chalabi and Bob McKee, then senior oil advisor to the CPA, have noted that maximising oil production may damage the reservoirs and that present production levels

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cannot be maintained without reservoir maintenance. Yet no funding has been provided in support of this effort. The larger question then in all this is: are production levels sustainable? Let me conclude with this thought. The worry about problems in the Saudi oil sector comes down to this. If these problems are real and, among other things, translate into the prospect of a loss of spare producing capacity, then the world vulnerability to supply interruptions is measurably enlarged. There is no substitute for Saudi oil, not today, not tomorrow. To conclude, when Matt Simmons goes public with his story, and that will be quite soon, then US military strategy and securing access to oil will become even more linked in the public mind.

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EMERGING THREATS TO ENERGY SECURITY AND STABILITY

Creating Regional Stability in The Middle East

Dr Herman Franssen Former Adviser to the Omani Energy Minister and Energy Consultant, USA

Let me open my remarks with two interesting tables. First, some 65 % of global oil reserves are located in the Middle East: Global Oil Reserves, 1973 – 2000 (bbl) 1973 2000 OECD 68 (10%) 58 (6%) Middle East 350 (55%) 684 (65%) Other 217 (35%) 304 (29%) Total 635 1046

101 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 101–123. © 2005 Springer. Printed in the Netherlands.

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But the Middle East is a region which produces only about 30 % of global oil production. Global Oil Production, 1973-2000 (mb/d) 1973 2000 US/ Canada 13.0 (23%) 10.5 (14.6%) W. Europe 0.5 (1%) 6.7 (9.2%) Middle East 23.7 (41%) 23.1 (31%) Other 20.5 (35%) 31.2 (45.2%) Total 57.7 74.5 The reason for the disparity between Middle East oil reserves and production is that most Middle East oil producers belong to OPEC, the organisation which has played a dominant role in the management of global oil markets since the mid 1970s. It has left the countries of the Persian Gulf with some 685 billion barrels of oil (or 90 years’ worth at the current level of production) compared with only 55 billion barrels (or 10 years at current rates of production) for the entire OECD region.

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2002 Global Oil Reserves by Size of Reserves (bbl) Size Reserves R/P Ratio Global Reserves 1048 40 OECD 55 10 Russia 60 22 China 18 15 Nigeria 24 33 M. East & N. Africa 728 90 Saudi Arabia 262 86 Iraq 112 Iran 89 74 UAE 98 Kuwait 97 Qatar 15 57 Libya 29 59 Caspian region 17 For most of the past thirty years OPEC has contributed to intelligent management of global oil supplies, helping to maintain sustainable oil prices. Whenever this proved impossible (in the early 1980s for example), OPEC in the end adjusted the group’s production and returned to production volumes leading to sustainable oil prices. Saudi Arabia, and to a lesser degree Kuwait and the UAE, maintained spare capacity to moderate oil prices whenever the market called for it (i.e. in case of supply disruptions). Saudi spare capacity and the country’s willingness to use this capacity, has been one of two major pillars of global oil supply security for a quarter of a century. The other pillar is the IEA’s strategic storage of 1.4 billion barrels. OPEC’s ability to influence global oil prices has been moderated by a steady increase in non-OPEC oil production. Whenever OPEC (or market forces) pushed prices too high, non-OPEC E&P activities rose and, with a lag of a few years, production growth would follow, creating downward pressures on oil prices. In the past, a low oil price environment created the opposite effect. The two pillars of oil supply security, i.e. Saudi Arabia and the IEA’s strategic stocks, have worked so well that despite wars and tension in the

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Middle East, the last major oil shock causing considerable harm to the global economy, took place as long ago as 1979/80. There are some signs of concern, however, about the future of oil supply security. Some of it is related to technical issues; other to socio-economic and political developments in the Middle East.

Technical Issues: The Future Over the next 25 years, the share of oil in OECD and non-OECD primary energy is not expected to change much but there are some indications of potential future problems. x Only IEA member countries maintain significant strategic stocks (at least 90 days of forward consumption); most others do not. The share of non-IEA oil consuming countries as a percentage of the global oil market has risen from 18% to 28% between 1973 and 2002 and is expected to rise further to 39% in 2015 and 43% in 2025. Unless these countries build strategic stocks and co-ordinate withdrawal policy with the IEA, the IEA’s ability to manage the global oil market in case of a major supply disruption will be weakened over time. x Over the past thirty years since the 1973 oil shock, the share of Middle East oil as a %age of global oil production has fallen. There is an emerging consensus that non-OPEC production may peak early into the next decade and that gradually the share of Middle East oil production will rise close to 40% by 2025. x OECD oil import dependence fell sharply between 1973 and 1985. Dependence on imported oil has steadily risen in the US since 1985 and, with North Sea production flattening out, Europe’s oil import dependence will rise as well. Japan has done a remarkable job reducing the share of oil in the energy mix but the country remains almost 100% dependent on imported oil. By 2025, US and European dependence on imported oil may reach 70%. Outside the OECD there is China, a net oil exporter until the mid 1990s which has turned into the fifth largest oil importer and, oil imports in other Asian countries are also rising steadily.

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World Oil Production and Oil Imports 1973-1990 (in mb/d)*

World Oil Production “Free World” Oil Production of which Middle East

World Oil Production of which Middle East

1973 57.7 48.1

1979 65.7 51.4

1985 57.7 42.6

1990 64.9 49.9

21.1 (37%)

21.9 (30%)

10.9 (26%)

17.2 (34%)

2002 73.9 20.9 (28%)

2015 103.3 35.0 (34%)

2025 124.5 47.9 (38%)

(Source: 1973-2002 date BP. 2015-2025 Forecast: EIA/DOE)

NB Middle East share of “free world” 2002: 33%; 2015: 35%; 2025: 43%

There is no doubt that improved market transparency since the 1970s, the emergence of futures markets and the development of large strategic stocks, have improved the ability of industrial countries to cope with oil supply disruptions. Saudi Arabia has been willing and able to increase oil production in case of major oil supply disruptions on noticeable occasions: the Iran-Iraq war, the Gulf war 1991 and during the recent events in 2003 when first a Venezuelan oil stoppage and later the allied invasion of Iraq caused major supply disruptions). Saudi Arabia’s flexibility in this matter has in fact been the first line of defence against global oil supply disruptions since the Iran revolution of 1979.

Current Perceptions of Oil Supply Security IEA strategic oil supplies and the ability and willingness of Persian Gulf producers and in particular Saudi Arabia to maintain spare capacity and use it in case of supply disruptions, has provided adequate global oil supply security to cope with all but the worst oil supply disruptions. Cooperation between the IEA Secretariat and Saudi Arabia during the Venezuelan production stop in early 2003 avoided panic in the market and

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solved global supply problems without the US or the IEA having to resort to releasing strategic stocks. Let us look quickly at the IEA and its SPR: x IEA was established in November 1974 to take effective measures to meet any oil supply emergency and over the long term to reduce dependence on oil. x Participating countries hold oil stocks equivalent to 90 days of net oil imports of the previous calendar year. Initially rather rigid rules on use of IEA stocks – over time adjusted to become more flexible. x Size of emergency stocks: 1.3 billion barrels (out of a total of 4 billion public and private stocks) x Drawdown rates: maximum 12.9 mb/d for one month – 8 mb/d for three months – 3 mb/d for five months. x Largest historical supply disruptions: 1978/79 – 5.6 mb/d for 6 months; 1973/74 – 4.2 mb/d for 5 months; 1990/91 Gulf war – 4.2 mb/d for 6 months. x IEA stockdraw system adequate to cope with largest historical supply disruption. x Jan. 1991 activated IEA Contingency Plan – 2.5 mb/d made available. The devastating impact of the two oil shocks of the 1970s have largely been forgotten and recent supply disruptions caused by the Gulf War, for example, proved to be manageable and caused no serious damage to the global economy. Let us look for a moment at some differences between the Oil shocks of the 1970s and the current climate concerning oil supply security: In the 1970s: x x x x x

There was no experience with supply disruptions Limited market transparency – scramble for oil No futures market No SPR No IEA in 1973

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x Two massive oil shocks in same decade, increasing oil prices from about $ 2.50 to $ 35 per barrel x Global economy already overheated; oil large part of GDP x Oil dominant fuel in most sectors of the energy economy in most OECD economies x Tight oil market; no spare capacity x Excellent US-Saudi relations Currently: x x x x x x x x x

There is considerable experience with management of oil crises Excellent market transparency Futures market to lay off risks Large US SPR of 640 million barrels Total IEA strategic stocks of 1.4 billion barrels – tested IEA response mechanism Better relations between IEA and key OPEC players Middle East market share lower than in 1970s Oil’s market share (% of TPE) much lower than in 1970s Oil’s share of GDP much lower – low inflation environment

On the negative side: x IEA’s market share declining x Deteriorating US-Saudi relations and deteriorating geopolitical situation in much of the Middle East x Commercial stocks low by historical comparison Despite these negative points, most policy-makers and energy experts assume that both pillars of oil supply security, i.e. Saudi Arabia’s spare capacity and IEA strategic stocks will always be there to solve oil supply disruptions and prevent oil prices from rising to a level where they could cause damage to the global economy. Industrial oil users feel confident to such a degree that they have allowed commercial stocks to be drawn down close to minimum operating levels. Similarly, governments and the private

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sector appear to have complete confidence in the two pillars of oil supply security.

Wasting Time Worrying? The combination of a total supply disruption from Iraq in April of 2003 on top of a supply disruption from Venezuela a few months earlier, caused oil prices to rise but throughout the period of oil supply disruptions there was no sign of buyer panic or a scramble for oil. Saudi Arabia with some support from other OPEC members with excess capacity soon came to the rescue of a tight oil market and supply problems were solved without the release of SPR oil or other IEA emergency stocks. Oil prices remained high throughout the year but no apparent damage was done to the global economy from the oil supply disruptions of 2003. Once again, the use of one of the two pillars of oil supply security (Saudi Arabia) came to the rescue while the other pillar (IEA emergency stocks) was ready to be used, if necessary. However, the fact that once again in 2003, significant oil supply disruptions did not result in an oil price explosion does not mean that we can rest assured that no matter what happens, we will be spared the economic consequences of a major oil supply disruption. Events in 2003 showed that the global oil supply system is quite resilient but, it is not immune to future disruptions. In the short term, acts of sabotage and political developments in the Middle East could result in a major oil supply disruption with a potentially major adverse impact on the world economy. In the longer term, rising dependence of industrial and industrialising countries on imported oil and natural gas from less politically-secure areas in the world will leave them vulnerable to oil and natural gas supply disruptions either resulting from acts of sabotage or major political developments in the Middle East and, to a lesser extent, the FSU. To break it down: x We can expect political and regional geopolitical developments leading to supply disruptions like we witnessed in 2003. x Saudi Arabia with some support from other OPEC producers with excess capacity came to the rescue and neither SPR or the IEA emergency supply system were used.

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x In the medium term there are numerous potential internal and external disturbances in the Middle East, parts of Africa and South America as well as in the FSU which could result in supply disruptions. The IEA can cope with disruptions of the size and duration of past disruptions. x The nature, size, timing and response by the Saudis, the US SPR and the IEA, will determine the impact on prices. x Unless Asian countries build sizeable strategic stocks, the impact of future IEA intervention could be seriously weakened. x There is no substitute for Saudi Arabia; a total halt of Saudi exports for a period of several months would spell disaster.

The Non-OPEC Outlook The steady growth in non-OPEC incremental production since the supply disruptions of the 1970s has come largely from secure sources of supply such as Alaska, Canada, Mexico, the North Sea, and more recently offshore East Africa and the US Gulf of Mexico. While production in some of these areas is still expanding others have peaked and some are declining. A careful look at projected incremental non-OPEC production over the next five years suggests that almost two thirds of supply is projected to come from Russia and the Caucasus. Export routes of Caspian oil are far from secure and medium to long term internal political and geopolitical developments in the region are at best uncertain. While some political leaders in the West believe that the Russian Federation is moving towards Western-style democracy with free markets for oil and gas, recent events in Russia suggest that Russian oil and gas supplies cannot be taken for granted. The imprisonment of Yukos’ CEO Khordokoski, back taxes on Yukos, apparent central government pressure to undo the Yukos-Sibneft merger, reluctance to allow any infringement of the Transneft pipeline monopoly and talk about new oil taxes, suggest the Central authorities are showing renewed interest in wresting control over oil and gas resources from the oligarchs. It is still possible, even probable, that Russian oil production and exports will rise in the years ahead but the recent interventions have raised some doubts about possible Russian government intervention with oil and gas production and exports.

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x Until the autumn of 2003 it appeared that Russian oligarchs were in full control of the Russian oil industry. Their aim: maximize production and seek foreign partners. Russian production forecasts very bullish (FSU share of incremental non-OPEC production of next 5 years estimated at about 70%) x Imprisonment of CEO Yukos; back taxes; new oil taxes; undoing of Yukos-Sibneft merger signs of Russian intervention from the top. Will the Kremlin take control? x Is it in Putin’s interest to control oil and gas industry and let OPEC keep prices high? Russia will follow Russian interest. x Iraq: Serious problems getting Iraqi oil exports up to pre-war level mainly due to lack of security. Problems are expected to continue for a long time; Iraq unlikely to get anywhere near its production potential in this decade. x Reliance on the sole Saudi pillar will continue.

The Middle East: An Overview Middle East oil represents about one third of global production and its share of the global market is likely to grow in the next decade, in particular if non-OPEC production were to peak. The IEA projects demand for Middle East oil to rise from 26 mb/d in 2003 to 35 mb/d in 2015 and 48 mb/d in 2025. It is not clear if the higher number is technically possible but, even if it were, the production plateau may be too short for it to make economic and political sense for countries as dependent on oil income as the producers of the Middle East since diversification of their economies away from oil and gas has not progressed much in the past 25 years. Over the same period, the EIA projects OECD oil import dependence to increase to about 70% for the US and the EU, to remain at 100% for Japan and to grow to 80% for Asia as a whole. Global dependence on the Middle East will rise (source of 65% of global oil reserves), in particular when non-OPEC incremental oil production begins to slow and plateau, perhaps as early as the first half of the next decade. It does not really matter how much of the OECD’s imported oil will come from the Middle East because oil is fungible, i.e. market forces will move oil to those willing to pay for the oil.

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Immediate Concerns Of most immediate concern is restoring security in Iraq to allow the country to return to its pre-war production capacity of some 3 mb/d and export capacity of 2.5 mb/d. Production capacity has surpassed 2 mb/d but exports have remained below 1.8 mb/d largely because the Kirkuk-Ceyhan pipeline is blown up continuously. It has a production capacity of 1 mb/d. Instead, all oil is exported from Mina al-Bakr in the South. Additional export capacity is being developed at Khor al-Amaya which had been destroyed during the Gulf war. Various reports have indicated that oil production in 2004 is unlikely to surpass an average of 2.5 mb/d. Unfortunately, there is little coordination between oil market analysts who are calculating future Middle East production prospects and regional specialists who are concerned with long-term political trends in the region. Most long-term oil market analysts project oil demand out into the future (10, 15, 25 years) then deduct what they expect non-OPEC production will be in each year. The residual number is usually listed as ‘call on OPEC’. They then maximize what they perceive as the possible production plateaux in OPEC countries outside of the Middle East. Finally, the residual factor is listed as ‘call on Middle East OPEC’. Little is known about actual reserves and the resource base of Middle East oil producing countries and even less about production capability of major oilfields. Since the Middle East oil production number is a residual factor, few oil analysts consider the technical, economic and political constraints on increasing production to the level deemed necessary to meet perceived global demand for oil at fairly stable or slightly rising real oil prices. So, will the Middle East be able to meet the long-term global demand for oil? x Technically there is no problem for Middle East producers to meet projected demand for Middle East oil this decade and well into the next decade. x Non-OPEC production may peak sometime in the next decade (estimates differ), leaving it up to Middle East producers to meet rising demand. EIA ‘call on Middle East OPEC’ rising from about 26 mb/d in 2003 to 35 mb/d in 2015 and 48 mb/d in 2025. May not be physically possible and may not make economic and political sense.

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x EIA projects US import dependence to rise gradually to 70% by 2025 (EU 66% and Japan 100%). It does not matter where oil comes from – oil is fungiable – supply disruption price impact is global. x Making long-term supply analyses, policy-makers should consider the possible political make-up of the Middle East in 2025. x Short and medium term: there will be internal political and regional geopolitical problems

Iran: Reforms or Revolt? Country and regional specialists examine underlying economic and political trends in the region and individual countries and assess the potential for change, including the risk of violent change. In the past major regime changes have frequently not been detected until the changes had actually occurred. President Jimmy Carter met with the Shah of Iran on 31 December 1977 (less than a year before serious internal trouble engulfed Iran) and called Iran an island of stability in an ocean of turmoil. Until a few weeks prior to the 1979 Iran revolution the US embassy in Tehran still reported that the Shah was in full control of his country. Serious problems in Iran began when the economy showed signs of serious overheating in 1976-77, causing labour unrest. The Shah was actively pursuing reforms (and in fact wrote to King Faisal that Saudi should do like Iran and bring reforms to their country). Reforms backfired, student protests grew louder and the powerful bazaar merchants turned increasingly against the Shah while Shia clerics strongly opposed his efforts to westernize Iran and allow the introduction of western morals. Throughout 1978 opposition to the Shah’s policies grew. There were more strikes and riots and both the Shah and his main ally, the US, wavered in their reactions to the turmoil and by 1979 the Shah’s government fell and Khomeini took over. The impact of the Iran revolution on global oil markets was profound. The global economy had only just recovered from the 1974/75 oil shock, which tripled oil prices when the second oil shock occurred. Occasional strikes in the oil sector had reduced Iran’s production from 5.7 mb/d in 1977 to an average of 5.3 mb/d but, following the revolution production averaged 3.2 mb/d in 1979 and 1.5 mb/d in 1980. By 1989, ten years after the revolution, Iran’s production had risen to only 50 % of pre-war

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production. Throughout the 1990s, Iran’s oil production averaged only 3.5 mb/d, a level considerably below the pre-revolution production of approximately 6 mb/d. Loss of experienced petroleum executives, political interference and ejecting foreign companies all contributed to Iran’s collapse in oil production. In the 1990s Iran selectively re-opened the petroleum sector again to foreign investors under the so called buyback schemes. By this, Iran initially guaranteed foreign investors a certain return on their investments. In recent years, however, contracts offered to foreign companies under the buyback system have been far less attractive to foreign companies. In the political arena, efforts by reformers, including President Khatami, have continued to meet resistance from the conservative clergy. The government is faced with a poorly-performing economy, rising unemployment and little progress in the area of socio-economic and political reforms. Recent action by the appointed conservative Council of Guardians, disqualifying some 3000 people from running for seats in the Parliament (including many actual parliamentarians) has created a chaotic situation in Iran just months prior to the parliamentary elections. More than 100 reformist parliamentarians including the brother of President Khatami have resigned their seats in parliament, creating near chaos in the country. What will happen in the future? Will people vote in controlled elections or will those supporting reformers abstain and no longer attempt to reform the country from inside? One thing is for certain, intensification of confrontation between the reformers and the conservatives is unlikely to have a positive impact on the investment climate in the petroleum sector. x Impact of Iran Revolution on Oil markets: oil prices tripled between 1979 and 1980 – serious OECD recession. x Iran production prior to revolution was 6 mb/d – first decade after the revolution: 2.5 mb/d average – second decade after the revolution: 3.5 mb/d x Internal struggle about the role of foreign oil companies – upstream terms generally considered poor by oil industry x A need to change terms to attract foreign investors – ageing oilfields x A great need for technical and financial help in the form of foreign investors – investments also hurt by US sanctions

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x Political future uncertain. Regime has not been able to deliver on reform program – economy in poor shape – rising unemployment x Will reformers be allowed to stand for Majlis elections? Will people vote to keep Khatami as president? Real power continues to be held in the hands of unelected officials x A very uncertain future – will the future bring reforms or revolt?

Iraq: Great Potential Iraq undoubtedly has the second largest oil reserves in the world after Saudi Arabia. It has the added advantage that most of its discovered oilfields have never produced oil and hence will not suffer from the problems facing older fields in the Middle East. Iraq never produced more than 3.5 mb/d due to wars, revolutions and sanctions but has the potential to more than double the pre-war production level under the right conditions. For the moment, however, the Iraqi National Oil Company (INOC) is preoccupied with providing security to refineries, pipelines and crews working in the oilfields. Oil-rich Iraq is still importing petroleum products half a year after the end of the war and exports are still limited to about 1.7 to 1.8 mb/d due to pipeline constraints (Kirkuk-Ceyhan pipeline with 1 mb/d capacity being blown up time and again). There are still problems related to water-injection in southern Iraqi oilfields. Due to pipeline constraints and some downhole problems, average Iraq oil production may not surpass 2.5 mb/d this year. There are no technical reasons why Iraqi production capacity cannot increase to 3.5 mb/d or more over the next few years but terrorism and political instability may make this target difficult to achieve. Future Iraqi oil production will very much depend on political developments in the country. What kind of Iraq will emerge after power is transferred to Iraqis on June 30? The current situation is very tense. The Shia majority wants democratic elections soon to guarantee the full impact of their population size; the Kurds want autonomy; and the people in the Sunni Triangle feel that they have little to gain from a democratic Iraq in which they are going to be a minority.

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We can only guess what the structure of Iraq will look like in the future. Suffice to say that there are a number of plausible options, i.e.: 1. A unitary state, developing into a workable democracy; 2. A workable Federation, providing for partial regional autonomy but, with defence, foreign policy and the oil sector controlled from the Centre; 3. Chaos, perhaps even civil war, leading to a new strongman; 4. Break-up of Iraq into three different states, in the process creating new internal and regional tensions and grave instability impacting on oil supply security. The Neocon blueprint for building a new Jeffersonian democracy between the Tigris and the Euphrates, with free markets and a break-up of INOC into private oil companies and Iraq leaving OPEC, appears to be an idea dead on arrival. x Iraq has the second largest oil reserves in the world and has the potential to rival Saudi oil production capacity. One of the oldest Middle East oil producers – has never produced more than 3.5 mb/d (wars, revolutions, sanctions) x Prior to 2003 war produced 2.8 mb/d. Saddam regime planned to invite International oil companies and bring production up to 5-6 mb/d by 2010 x Post-war: current exports 1.7 mb/d (still down from 2..2 in 2002) – industry plagued by security problems (blowing up pipelines) and infrastructure and down-hole repairs. Sustained production in 2004 may not surpass 2.5 mb/d x Technically, production capacity can rise to 3.5 mb/d or more in five years but, terrorism and political instability may fail to even reach this production level. Future oil production will largely depend on future political developments in the country

Saudi Arabia: The Lynchpin Saudi Arabia, with 25% of global oil reserves, 11% of world oil production and two thirds of global spare capacity, has been and still is the linchpin of global oil supply security. If all Saudi oil production collapsed (like Iran’s did in 1979) even the IEA strategic stocks could not help the

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market overcome the psychological impact of an 11% cut in global production and unless Saudi production could come back on line within a few months, the world would suffer from a prolonged major oil supply crisis: a major blow to the global economy. In the past 60 years there has been a special relationship between the US and Saudi governments. Saudi Arabia maintained a steady supply of oil to the global market at reasonable prices and the US, in turn, protected Saudi national security. Circumstances have changed both inside the Kingdom and in its relationship with its principle Western ally. Saudi internal problems are related to demographics, socio-economic and cultural issues which are increasingly plaguing Saudi society. Some 50% of the population is under fifteen years of age. This youthful society poses a growing difficulty providing the growing population with healthcare and education. The educational system, in turn, has failed to meet private sector job requirements. Dr. Joseph Kechichian recently wrote that the fact that perhaps only two percent of Saudi university graduates are fully qualified to assume demanding private sector posts and an estimated 50% drop out of primary school severely limits the available labour core for business. x x x x x

Internal Saudi problems (UNDP 2002 report) Demography: 50% of population under 15 years of age Health and education infrastructure cannot keep pace Failure to diversify economy away from oil and gas sector Mounting unemployment despite the fact that 5 million out of 22 million people living in Saudi Arabia are expats, who occupy perhaps as much as 90% of the private sector jobs. x Educational system has failed to meet private sector requirements J. Kechichian writes that perhaps only 2% of Saudi university graduates are fully qualified to assume demanding private sector posts and an estimated 50% drop out of primary school, severely limiting the available recruitment pool for business (Gulf News 8/01/2004). Poor quality of education and the availability of a vast source of cheap and in part well-educated South and East Asian labour force, has left the country with mounting unemployment and underemployment. It is not a

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healthy situation for any country that some thirty years after the huge oil income flow began some five million expatriates (out of a population of 22 million and potential local workforce of perhaps 6 million) occupy perhaps as much as ninety percent of the private sector jobs. Job creation has also proven difficult because the Saudi economy failed adequately to divert away from the capital-intensive petroleum sector, which does not create many jobs. Perhaps the fact that there are no GCC regional rules and regulations for hiring conditions of expatriate labour has added to the problem. Locals cannot work under the working conditions and salaries of Asian expatriate labor but unless there are GCC rules, the relative competitive position of local industries can be seriously impaired if actions are taken only at the local level. Aside from the demographic, employment and educational issues, the Kingdom suffers from very poor income distribution (made worse by virtue of the tax regime: there is no income tax) and considerable waste of public resources. Finally, the struggle between reformers and the conservative clergy and their followers on many social issues is becoming more intense. Since Saudi Arabia has the least-developed system of political participation in the GCC, there is limited room to express grievances other than perhaps in the mosque and blame the outsider for most social and regional wrongs. The future of Saudi society is highly uncertain. It is clear that the country simply does not have the economic resources to support a rapidly growing population without a freer and more diversified economy and an educational system preparing young people for meaningful jobs in the private sector. Saudi Arabia has suffered from violent unrest against the ruling elite in the past (1979 attack by Islamists on the Grand Mosque and the 1995 terrorist attacks) but not on the scale of recent months. x Attitudes towards work and productivity of locals versus expats – no GCC rules on conditions for hiring expats. x Past huge waste of public funds (defence and land deals) x Major income gap between rich and poor (no income tax) x Struggle between traditional conservative Wahabi clergy and followers and reformers x Almost no political participation (compare other GCC)

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x Prospects of reformers versus traditionalists x Saudi Arabia has known violent unrest before (1979 attack by Islamists on Grand Mosque; 1995 terrorist attack) but not on the current scale and in the current internal and external environment (media impact).

Changing Attitudes There is no doubt that the media have had a major impact on the call for change in recent years. Until the mid-1980s, news was broadcast through government-controlled papers, radio and TV stations. Gradually, satellite dishes were introduced and by the mid 1990s much of the population of Saudi Arabia and other GCC countries had access to 24-hour television news from Arab TV stations such as Al Jazeera and later Al Arabia. These stations are free to criticise the outside world (and behave pretty much like the Fox channel in the US) but are not allowed to take on local governments directly. There is no doubt that reforms are being pursued all over the Gulf, including in Saudi Arabia. Many Western observers return from the Kingdom praising the reforms which are slowly but steadily being implemented. Others believe that reforms are coming too little too late and that there are forces at work which in time could create serious trouble for the ruling elite. A well-known moderate Middle East journalist recently said: “Many have predicted time and again the demise of the monarchy and the crumbling of the country, but never has the Kingdom been at a cross roads, certainly not on the shaky grounds as it is today…I think what we are seeing today are visible cracks and those in opposition to the monarchy – to a large extent the Islamist Saudis living in exile in London, the followers of Bin Laden and those who call themselves jihadis – want to capitalise on differences in the leadership”. Add to these difficult domestic problems a sequence of external problems facing Saudi society such as the realisation (by no means by all) that the misdeeds of 9/11 were perpetrated largely by Saudi citizens led by a Saudi (of Yemeni background) and financed largely with Saudi money. The 9/11 attacks were directed as much against the Saudi royal family as they were against the US

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Finally, the relationship with the US has taken a major turn for the worse. According to a recent Pew Foundation poll, more than 95% of Saudis hate the American government for reasons related to the US position on Palestine and the invasions of Afghanistan and more recently the Iraq war. While the US looks at these wars as ways to rid the world of terrorists, most Saudis blame the US for following a biased policy in Palestine and many see the wars in Afghanistan and Iraq as attacks on Islam. These perceptions of the US were strengthened by the less-thanflattering description of the Prophet Mohammed by well-known evangelic preachers in the US on television and by the well- documented writings of the Neo-Conservatives. It is no secret to the Saudis that well-known NeoConservatives have publicly spoken about the need for ‘regime change’ in many countries in the Middle East, including Saudi Arabia. Saudi Arabia, a close ally traditionally of the US was described as the ‘kernel of all evil’ in a presentation before the Defence Planning Board and since 9/11, NeoConservative circles have let no opportunity pass to blame the Saudi government for promoting the radicalism that led to 9/11. x Most Western observers still believe that reforms will be implemented steadily but carefully, leaving the current regime in place indefinitely. x Growing school of observers disagree. Represented in a quote from the well-known journalist Massoud Derhally x External problems: Impact of US invasion of Afghanistan and Iraq; strained US-Saudi relations – Palestine – Impact of Neocons – US perceived to be against Islam While the war against Saddam Hussein was justified on the basis of the assumed presence of WMD creating an immediate danger to US national security and the perceived existence of close ties between Saddam’s regime and Al-Qa’ida, the oil issue was occasionally mentioned. Neo-Conservative writings expressed a need to reduce the oil power of the Kingdom (and thus the revenue flow which helps finance terrorism abroad) by replacing Saudi Arabia as the only major oil power with Russia and Iraq. The perception was to promote major development of the Russian oil and gas sector and the rapid build-up Iraq’s oil production capacity with

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weakening oil prices and reducing Saudi oil power a central aim. President Putin’s recent action against some of the Russian oligarchs has raised questions about future Russian oil policy and failure to secure the Iraqi oil infrastructure has severely curtailed the ability of the Iraqi National Oil Company to export oil. The outcome of the post-June 30th transfer of power in Iraq is so uncertain that even the greatest optimist no longer believes that Iraq will be able to build its oil sector to challenge Saudi dominance over the oil market. Saudi Arabia has already done a great deal to curb financial flows to known terrorist organisations and to the greatest extent possible is taking action on a large scale against the clergy who are preaching violence. The ruling family is squeezed between the demands of an impatient and vocal US and its own conservative population which is at odds with some of the foreign demands imposed on them. The net result has been growing antiAmericanism in Saudi Arabia. The Saudi ruling elite does not comprehend the actions undertaken against its citizens, maintaining that they are as much the target of Al-Qa’ida as the US. Confronted by strong internal anti-Americanism and by US actions, Saudi society is turning away from the US. Bilateral trade is down and visa applications are less than 20% of what they used to be prior to 9/11. Former US ambassador Chas Freeman recently said that Aramco is now sending almost all its trainees to countries other than the US and Saudi business is turning away from the US towards European and Japanese business. Referring to the declining presence of the US in Saudi Arabia, Ambassador Freeman said, “…we Americans are finding ourselves increasingly displaced, in both the cultural and commercial realms, by our competitors, and the American community in Saudi Arabia has shrunk to a mere fraction of what it was before”. One of the major tests of what is left of the relationship will become apparent when Saudi Arabia issues the next major tender for military purchases. If the Saudis turn to European, Russian or Chinese defence contractors one of the most lucrative defence equipment markets could be closed to the US. The days are gone when a mere telephone call by President Clinton guaranteed that Saudi Airlines would opt for Boeing aircraft exclusively. If Bin Laden’s purpose was to remove the US from Saudi Arabia, weaken the ruling family and the relations between the US and Saudi Arabia, he appears to have met with some considerable success. The

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mutual trust which existed between the US and Saudi Arabia for some 60 years, has been irreparably damaged.

Impact on Oil Markets As for oil policy, the Saudi government is unlikely to be as accommodating to the US as before on oil pricing. In need of foreign exchange, the Saudi government is likely to defend the current high oil prices as long as they believe the market can bear these prices. In the past complains by senior US officials that high prices would damage the global economy, were taken into consideration. Today, the Saudis are more likely to follow their own enlightened self interest. Saudi Aramco has announced future spending on exploration and development to keep current oil production capacity of some 10 mb/d. It is not clear if Saudi Arabia will add spare capacity once demand for its oil reached current capacity early in the next decade. If it does not, the Saudi pillar of global oil supply security will have been weakened and it is unlikely that any other country will or can duplicate past and current Saudi policy on spare capacity. Acts of terrorism have so far been largely against soft targets in Saudi Arabia. One can no longer take for granted that oil infrastructure will not become targets in the future. At times when oil markets are tight, a Saudi partial supply disruption could have a damaging impact on the global economy (some of the equipment is custom-made for Saudi Aramco and can take months to replace). The nightmare scenario, seldom discussed openly in oil policy circles, would be the implosion of the Saudi regime. In the short term there is no substitute for the House of Saud and most likely chaos would reign for some time. If it ever were to happen, it is not clear at all which groups would resume power and what impact this would have on Saudi society nor, ultimately, the oil sector. x Breakdown of mutual trust between old allies US and Saudi x Saudi oil policy to reflect Saudi perceived national interests (income maximisation versus market share) – reduced concern about US desire to keep oil prices low x Doubts about Saudi willingness to keep spare capacity once demand for Saudi oil reaches current capacity

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x Potential supply disruptions if terrorists turn against sensitive oil and natural gas infrastructure. x Nightmare scenario: Saudi regime implodes – chaos reigns. Under this scenario, oil production could fall sharply or cease all together. x Succession: A reformist moderate government could be counted on to follow a responsible oil policy but, what would happen if Islamists were to take control? x Some Neocons are playing with a scenario of occupying the Eastern provinces (in case of serious oil supply disruption in Saudi) where all Saudis oil is located and appointing a Shia Amir under US protection.

Conclusion The United States emerged from the Second World War as the dominant global power. The US economy accounted for more than 50% of global GDP fueled exclusively by domestic coal, oil and natural gas. In the Middle East the US had developed strong alliances with Iraq, Iran and Saudi Arabia, three countries with huge oil reserves. Today, the US is again the only military superpower and its economy is still about 25% of global GDP but far more dependent on foreign trade to maintain its global economic position. Oil imports are 60% of consumption (and rising) and natural gas imports are still a modest 5% but rising steadily. There is little concern in the West about the growing dependence on oil and natural gas imports in part because the memory of the disastrous impact of the oil shocks of the 1970s on the global economy has largely been erased. Moreover, the twin pillars of oil supply security of the past three decades, the IEA and Saudi Arabia, have performed well in case of crises (2003 is a good example) and have proven to be able to deal with any crisis of the magnitude and duration of past oil shocks. However, rising OECD oil (and natural gas) import dependence, coupled with the rising oil import share of non-IEA oil consuming countries may weaken the ability of the IEA in the future to intervene effectively in case of a major supply disruption. Non-OPEC oil production may peak sometime after 2010 leading to rising dependence on OPEC and in particular on the oil producers of the Middle East. It is not clear what the Middle East will look like politically in

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the future and hence policies towards oil production and pricing are not predictable. What is clear is that the region is perhaps undergoing the biggest change since the dissolution of the Ottoman Empire after the First World War. The ruling elites are confronted with the highest population growth in the world, among the lowest economic growth, major socio-economic problems, internal and external political friction and, in some countries confrontation between reformers and their opponents. It is impossible to predict the outcome of the internal struggles in each country, gradual reforms or revolutionary change. It is almost certain that in the process Middle East oil supplies will be disrupted but the timing, nature, location and magnitude is unpredictable. Small supply disruptions of limited duration can be solved with the proven mechanisms of the IEA and (at least for the time being) Saudi spare capacity. The other extreme, a major and lasting supply disruption in Saudi Arabia raises the spectre of the devastating impact of the supply disruptions of the 1970s. To reduce the impact, IEA members ought to increase emergency stocks along with their rising oil imports and urge developing countries to build similar emergency stocks and manage those stocks in close cooperation with the IEA. The US, which has done much less then Europe or Japan to improve transportation fuel use efficiencies, ought to pursue fuel savings strategies. Development of either gasoline or perhaps diesel hybrid SUVs and RVs might be a move in the right direction instead of focusing primarily on long term solutions such as hydrogen-fueled vehicles.

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IRAQ: A JAPANESE PERSPECTIVE

Ambassador Kunio Katakura Professor and Former Japanese Ambassador to the UAE, Iraq and Egypt

I would like to give a Japanese view of developments in Iraq. At the time of the first Gulf Crisis, Japan, which depended on the Gulf oil producers for 90% of its imported oil, became a target of international criticism as a free-rider in oil security. It was taken for granted that Japan at that stage with its post-war constitutional restraint and deep-rooted peacenik sentiment could not send its defence forces overseas. Instead it made its financial contributions to removing Saddam from Kuwait in stages. These contributions amounted to some $18 billion. The international media coined a sarcastic nickname for Japan – calling her an ‘ATM’ with which to sneer at her non-committal ‘chequebook diplomacy’. Despite not becoming embroiled militarily with the US/UK coalition, Japan suffered alongside the UK, US and other Western countries by having hundreds of nationals taken hostage by Saddam’s regime. The kidnappings were in retaliation for our punctual and uncompromising commitment to join in imposing economic and military sanctions on Iraq after its invasion and annexation of Kuwait. That was then. Let us compare notes with what is happening now. Under pressure from the US administration, as well as guarding against the trauma of playing the role of thankless ATM for a second time, the Japanese Government responded with decisiveness to the US call for men on the ground. There is no denying that there was, in Japan too, deep controversy over the legitimacy (both legal and constitutional) of using force against Iraq which was already being subjected to UN and IAEA inspections. I think that this decision to send troops from the outset was prompted by those Japanese Government leaders who were obsessed with 125 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 125–126. © 2005 Springer. Printed in the Netherlands.

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the need for much closer US-Japan cooperation now in order to bolster confidence later when Japan will face a more immediate threat from her neighbour, North Korea. According to a Tokyo spokesman, Japanese units at the moment are to be despatched to the southern part of Iraq not to fight but to assist in postwar rehabilitation and reconstruction and to work specifically for improving standards in both water supplies and in hospital wards. No matter their non-combatant role – it is all too clear that they are viewed by the Iraqi people as a part of the foreign occupation authorities and as a result are targeted by local resistance groups or terrorists. After all, since the US and her allies launched military operations without any clear-cut blueprints regarding a post-war, post-Saddam regime, we are looking at the mosaic of Iraq’s fragile ethnic and religious factions shattering…with disastrous consequences. Forgetting the controversy at home surrounding our involvement in the coalition in Iraq for a moment, we Japanese are now closely following developments in Iraq while wondering with concern how soon it will be before the ‘sovereignty’ of Iraq will be transferred from the CPA to the Iraqi people. We ask ourselves at the same time - “How soon will Japan’s defence forces be wearing blue berets under a new UN-led command?”

SECTION VI REGIONAL CHALLENGES - NORTH AFRICA

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LIBYA

Oliver Miles Chairman MEC International and Former Ambassador to Libya, UK

I'm going to use the time available to talk about Libya. Libya is in the news, and although it is not in the top range as an oil and gas producer, it is a substantial player. Moreover the present developments are not important for Libya alone but, not for the first time, may turn out to be significant more widely as well.

WMD The announcement just before Christmas that Libya was giving up its weapons of mass destruction took everybody by surprise. I suspect that the actual timing of Qadhafi's announcement on the afternoon of 19 December 2003 took even the British and American governments by surprise. Certainly, Tony Blair's announcement shows signs of hasty drafting — for example, he forgot to mention biological weapons, although both Qadhafi and Bush make it clear that they are part of the deal. However, the surprise was in a sense only tactical, and the Libyan decision fits into a pattern of steps towards normalisation which began probably in the mid-1990s, so nearly ten years ago. I won't say much about Libyan weapons of mass destruction, because neither I nor I suspect anyone else except the UN, British and American inspectors who have visited Libyan sites during these last weeks and months knows much about them. I will merely comment that Qadhafi, Bush and Blair have a shared interest in representing this as a development of the first importance. It's not perhaps surprising that comments from Mohammed el-Baradei have not suggested that the weapons programme was quite so substantial. Any way, it's good news. 129 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 129–136. © 2005 Springer. Printed in the Netherlands.

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Normalisation: Any Progress? What is fascinating, and what the international media have largely missed, is the changes in Libya which preceded and accompanied it. The normalisation process first showed itself in Libya’s relations with the outside world, and the first step was in the mid-1990s, when Libya ceased to harbour or support extremist groups. Libya patched up its differences with Britain, in particular abandoning support for the IRA and coming to terms over the murder of Woman Police Constable Fletcher. The first steps towards a Lockerbie settlement led to the reopening of diplomatic relations with Britain. Interestingly, Qadhafi had tried for some years to convince the British and US governments that an acceptable compromise would be handing over the Lockerbie suspects to be tried in a Scottish court sitting in the Netherlands. London rejected this outlandish idea, until eventually it was brought round, mainly by persuasion from Nelson Mandela and Prince Bandar of Saudi Arabia. Normalisation was enshrined in the Anglo-Libyan joint statement on the opening of diplomatic relations in 1999: “…putting aside the negatives of the past [the UK and Libya] look forward to the development of a full range of contacts and cooperation between the two countries, and their authorities and peoples.” Trade including trade in oil had never ceased, but trade relations were given a boost, and contacts did in fact develop and become more normal. Since the announcement on WMD, Jack Straw has given Libya fulsome praise, going so far as to use the word "statesmanlike" of Qadhafi. The normalisation process was not confined to relations with Britain. A settlement was also reached with France, although it turned out to be problematic. Most important of all, the negotiations with Britain and the USA led in 2003 to a settlement of demands made on Libya through the Security Council concerning Lockerbie. Libya agreed to pay compensation on an unprecedented scale, larger by a factor of more than 50 than, for example, the settlement which had been reached with the French over a similar airliner disaster. This led to the lifting of UN sanctions, and a return of more or less normal dealings between Libya and the rest of the world. The European Parliament, for example, has adopted a resolution inviting the European Commission to initiate cooperation programmes with Libya and to welcome Libya in the Barcelona Process, a framework between Europe and North African countries along the Mediterranean coast that aims to address

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terrorism, organised crime and illegal immigration. Prodi has invited Qadhafi to establish better relations with the EU. Italy is particularly concerned at the flow of refugees from North Africa which Libya does not have the technical capability to stem. A security cooperation accord between Italy and Libya was signed in July which paves the way for joint naval patrols in the southern Mediterranean. Italy has even suggested some relaxation of the European ban on arms sales to Libya. Libya continues to trade and deal with countries such as Russia, Ukraine, Canada, Brazil, and notably with China and India.

Relations with the Region Qadhafi’s relations with the Arab League, however, remain in permanent crisis; currently there are tiffs with Egypt and Morocco. Libya has ‘frozen’ its dealings with the League because of disagreements primarily about Israel, though there are also practical difficulties such as embarrassingly large population movements. In recent years Qadhafi has tried to re-orient Libyan foreign policy away from the Arab world towards Africa. This month, in a new development, meetings are reported to have taken place between Israelis and Libyans, one between Qadhafi's son Saif alIslam and a member of the Knesset from the secularist Shinui party, the other between an Israeli foreign ministry official and an unidentified Libyan. Qadhafi himself speaking to the General People's Committee for Justice and Security on 4 January said that Libyan Jews whose property had been confiscated at the time of the revolution should be compensated. The Libyan regime is secular in nature and has clashed with Islamic fundamentalists. Qadhafi himself has been murderously attacked by AlQa’ida, and issued a warrant through Interpol for the arrest of Bin Laden two years before the Americans. Qadhafi's reaction to 9/11 was as positive as could be asked for, and led to a series of meetings between Libya, the UK and US at which intelligence on Islamic extremism was exchanged. Perhaps surprisingly Libya was omitted from President George W Bush’s ‘Axis of Evil’ speech. I will come back to the key issue of relations with the US in a moment.

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Inside Libya: Changes and Challenges I'm not going to take up very much time here with an analysis of internal developments in Libya. But I would just like to say that in the last year or so they have been as exciting as the external developments I have mentioned. What is of particularly interest to this audience is that the move towards economic reform, which has been visible for four years or more, seems to be acquiring more substance. There have been some achievements, most notably the abolition of the old multiple exchange rate, which had such a distorting and frustrating effect on foreign trade. The appointment of Shukri Ghanim, seen both inside and outside Libya as a champion of reform, first as Minister of the Economy and then as Prime Minister, has put reform on the front foot. He has for example spoken in rather precise terms about plans for privatisation, which even a couple of years ago was a taboo subject. At the same time, though I do not want to exaggerate, there have been important changes in matters affecting the freedom and well-being of Libyans, including a substantial relaxation of the state control of information, greater freedom to travel and even an attempt to address the oppressive instruments of the state. Qadhafi’s son Saif al-Islam has been outspoken in his criticism of corrupt elements within the revolutionary committees, the hardline core of the regime who can be compared to the Ba'ath party cadres in Iraq or Syria. Recently his criticism has been echoed both by ministers in the government, by Qadhafi himself, and even in the press which has in the past been tightly controlled by the revolutionary committees. Saif al-Islam gave a long TV interview on 27 December 2003 which summed up the normalisation process I have been describing. Perhaps the most interesting part is a historical account, for which he must surely be indebted to his father, explaining why it seemed sensible in the seventies and eighties for Libya to be armed to the teeth when it was in warlike confrontation with Reagan, and with the French in Chad, and was supporting a supposed Arab military alliance against Israel. All that is now history. The whole Green Book business – the unique Jamahiriya structure of committees, assemblies and so on – is politely consigned to history as well. There is also a lot of hard-hitting stuff reinforcing what Saif alIslam’s charitable foundation has been doing for several months on human

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rights in Libya, addressing difficult issues such as disappearance, torture and imprisonment without trial.

Clarity of Confusion I want to turn for a moment to the important subject of what I will call the American exception. As late as November 2003, US policy refused to acknowledge change in Libya. It was succinctly restated by Assistant Secretary of State William Burns in a letter to a new anti-Qadhafi group in the US: “Despite the recent lifting of UN sanctions, US bilateral sanctions remain in place and will remain in place until Libya addresses our serious concerns with respect to its pursuit of WMD and means of delivery, human rights, terrorism, and its destructive role in African conflicts." There has in fact been progress on all the topics listed by Burns. It would be a mistake to think that all the normalisation that I have described has been directed towards re-establishing good relations with Washington, but this has certainly been a major if not the major objective. Qadhafi, with good reason, has always taken his relationship with Washington very seriously. More generally, Libya is a pro-American country, and it comes naturally to Libyans to speak warmly about the USA. For example, Saif alIslam in the television interview to which I have referred spoke warmly about the employment practices of US oil companies compared with European oil companies. Saif is too young to have any direct knowledge of the subject, and must be reflecting what he has heard from his elders. Libya hopes to profit from being on the right side of America, and has repeatedly expressed a willingness to improve relations with the US and welcome US businesses to operate in the country again. So far US sanctions remain in place, including a general ban on US travel to and business with Libya, as well as the Iran-Libya Sanctions Act (ILSA), designed to punish US and foreign companies investing in Iran and Libya’s petroleum sector. These sanctions are still actively enforced. Only two weeks ago, the US ambassador in Zagreb issued a statement saying that he had asked the Croatian government to postpone repair work on a Libyan ship, a nasty blow to the Croatian dockyard and to the economy. Until now, US Congress has solidly opposed any deal with Libya, but there are now pressures the other way. US oil companies such as Marathon, ConocoPhillips, Amerada Hess and Occidental who have long wished to return to Libya, where their assets await them frozen for so many years,

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will now be reinforced by the Lockerbie victims’ families; they have each received the initial $4m of the Lockerbie compensation settlement and stand to receive $6m more (less the lawyers’ 30%) if US sanctions are ended and Libya’s name removed from Washington’s list of state sponsors of terrorism by a deadline spring 2004. The talk of private contact between Israel and Libya has made it more difficult for the usual pro-Israeli voices to denounce any dealings. Two separate groups of congressmen are travelling to Tripoli this weekend, the first such visits for nearly forty years, reportedly one of them with and the other without the blessing of the State Department. To be blunt, US policy in the new situation is confused. Washington is notoriously good at imposing sanctions, but bad at lifting them. The State Department spokesman has done wonders referring correspondents back to the text of what President Bush has said about Libya, which is little enough. According to Colin Powell, speaking on Abu Dhabi television, once it is verified that the WMD programmes have been eliminated the U.S is prepared to review the situation. She would enter into a political dialogue with Libya about all the matters of interest to Libya: sanctions, investment in Libya, or a variety of things to improve the lives of the Libyan people and to put relations with Libya on a more normal track. Meanwhile the US is preparing to dispatch up to a dozen diplomats and intelligence officers to Libya to establish a US mission that will oversee the dismantling of WMD, but we are told "this will not be an embassy." Ironically, this echoes what happened in 1980, when, so far as I can establish, the US never formally broke off diplomatic relations with Libya, but simply slipped out shortly before the embassy building was sacked and burned. So perhaps now they will not formally re-establish relations either! This is no joking matter, however. It is the most important question about Libya today. There is still a real possibility that reactionary forces inside Libya will derail the process of normalisation. It is in all our interests that Libya should have an incentive to behave properly. Up to now, I'm afraid, British policy has provided such an incentive, but US policy has not.

Oil and Gas Before concluding with some remarks about the global significance of Libya, let me say something very brief about Libya's significance for

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energy and energy security, although most of you will be much better versed in this than I am. Libya's production of oil has stagnated for more than twenty years at around 1.4 million barrels per day, making Libya today number 5 in the region with about 5% of OPEC’s total. Production facilities suffered in the period of sanctions, when the American and international companies which had built up Libya's oil production withdrew, and Libya was prevented from buying the material needed to develop her oilfields even if she had had all the necessary technical ability. The result is that the oilfields are in poor shape. However, only something like a quarter of Libya's territory has been even reasonably thoroughly explored for oil, and there is every reason to think that new productive fields can be found. That is one reason why the industry has consistently voted Libya one of the most attractive territories for upstream operations worldwide. The other is that the production sharing agreements on offer are theoretically attractive, however difficult they may be to negotiate in practice. There is therefore every reason to think that if the normalisation process bears fruit Libya will become a more significant oil producer, all the more so because Libyan crude is of good quality and Libya's location makes her a natural supplier of the European markets. Not that this location makes Libya unattractive to others, and as an example the Chinese National Petroleum Company has been particularly active in the last two years, following a visit in 2002 by the Chinese President. Libya's gas is also significant. The quoted figure for reserves, 1.3 trillion cubic metres, is under one third of Algeria’s and one tenth of Qatar’s, but the figure must surely be on the conservative side. Proximity to Europe is even more important for gas than for oil, and the new West Libya Gas Project is due to put around 8 billion cubic metres per year into the Italian pipeline system by 2006, roughly 12% of Italy’s consumption and so a very real contribution to the diversification and hence the security of Europe's gas supplies.

Mending Fences Libya played an important part in the revolution which transformed relations between the international oil companies and the governments of the producing countries in the seventies, although a less likely double act than Qadhafi and the late Shah would not be easy to imagine. If the

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production-sharing agreements which Libya is now seeking turn out to be successful, who knows whether Libya may again play a disproportionately important role in changing conditions for the whole region. We are all familiar with the point of view that US and international policy towards the Middle East is dictated by nothing more than greed for oil. I have always found it a source of amusement that Libya can be quoted as proof of the opposite. For years, Washington has faced heavy pressure from the US oil industry to mend fences with Libya, and has refused to do so. Maybe that period is coming to an end – I for one hope so, as I have explained. Lastly, as a Brit, it is nice for me to be able to point to one area of policy where we are definitely not Washington's poodle. London and Washington have been pursuing contrary policies over Libya for nearly ten years. The funny thing is that nobody seems to mind.

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THE NORTH AFRICAN CHALLENGE

Francis Perrin Editorial Manager, Arab Oil and Gas, Arab Petroleum Research Centre, France

I will talk about the status of security of oil and gas supply from North Africa which is made up of Algeria, Egypt, Libya, Morocco and Tunisia. We must take note because Morocco is not an oil producer and Tunisia is a small producer. This analysis will be focused mainly on Algeria, Libya and Egypt and will cover a 10-15 year period from now. These three countries are currently producing about 3.3 mb/d.

Stability and Terrorism Two of these three countries, Egypt and Algeria, have in the past faced and are currently facing serious terrorist threats. These threats are now less acute than in the 1990s and fortunately they have had no serious impact on the oil and gas industry. Algeria succeeded in reaching all its main objectives as far as energy policy is concerned despite tens of thousands of deaths linked to the dirty war of the 1990s (as forecasted its gas exports reached 60 billion cubic meters – bcm – per year at the end of the last decade and its oil production and exports increased over the same period). Similarly, Egypt’s gas production and exports are increasing. Its oil production is stable or slightly declining but this trend has nothing to do with politics. As Oliver Miles has mentioned, Libya has been suffering from UN and US sanctions and their impact on the energy sector was much stronger than terrorism’s effects on the sector in Algeria. Libya was not able to increase its oil production capacity throughout the 1990s despite its important potential. But UN sanctions have been lifted and US sanctions will be, at 137 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 137–140. © 2005 Springer. Printed in the Netherlands.

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the very least, relaxed. The future return of US oil companies will result in an increase in Libyan oil capacity. Political constraints will not prevent North African countries from increasing their energy supplies in the future.

Oil and Gas Potential North African countries have the potential to increase significantly their oil and gas exports. They are also willing to do so. Algerian and Egyptian reserves were strongly revised upwards. Algeria’s gas exports will increase from around 60 bcm/year today to 85 bcm/year by 2010 and will probably reach 110-120 bcm/year by 20152020. Oil production capacity will go up to 1.5 mb/d very soon and then to 2 mb/d by 2010 as against about 1.15 mb/d today. On the other hand, Libya’s oil production will reach 2 mb/d in a first stage as against 1.45 mb/d today. The country will significantly increase its gas exports thanks to the West Libya Gas Project (WLGP) through which liquefied gas will be exported to Italy). Egypt holds great potential for exporting gas with several liquefied natural gas (LNG) projects in the pipeline or already underway. All these forecasts are fairly reasonable in terms of potential.

Projects and Infrastructure Algeria: the 2010 targets for oil and gas will definitely be reached on time because the corresponding projects (upstream and transport) are well advanced. For natural gas the main projects are the start-up of the Ohanet fields (BHP Billiton, 2003), In Salah fields (BP, Statoil, Sonatrach, 2004) and In Amenas fields (same partners, 2005). For oil, the ROD project developed by BHP Billiton will come on stream at mid-2004 and Sonatrach will increase output at Hassi Messaoud, Algeria’s biggest oil field. Developments underway on Blocks 208 (operator: Anadarko Petroleum) and 405 (Burlington Resources). For transport, the capacity of the oil terminals is being increased and two new gaslines to Europe should be built (Medgaz between Algeria and Spain and Galsi between Algeria and Italy). Libya’s Elephant field came on stream in February 2004 and Tripoli is waiting for the return of US oil companies. The government is also trying to award new exploration permits. The WLGP is under development and

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will start up at the end of 2004. It will help Italy meet its growing gas needs. Egypt has shown significant progress in laying the foundations for gas projects. A liquefaction plant is being built at Idku by Egyptian LNG while another LNG plant is under construction in Damietta. Further gas developments are being explored by Apache Corporation both in the Western Desert and offshore (West Med). Offshore gas developments continue on the West Delta Deep Marine permit. Construction is underway on the so-called Arab Gasline. Development and transport projects are being implemented more or less on schedule. A good exploration potential and a high success rate imply that many discoveries will be made in the future.

Foreign Companies Get Involved There is no doubt that foreign oil corporations will be getting involved. These three countries have worked with many international oil companies (IOCs) for a long time and foreign interest will increase over time for these reasons: x x x x x

Potential is there. Good crude quality (Algeria and Libya). Proximity vis-à-vis the European market. Better political outlook. Lifting of sanctions against Libya.

OPEC: a Help or a Hindrance?. The OPEC production ceiling covers crude oil only, not gas and not other liquids (condensate, LPG, refined products). It is certain that OPEC quotas will increase as these countries grow to cover a great part of the rise in world oil demand. Algeria and Libya both have good reason to maintain higher quotas (a rising oil capacity for Algeria and the impact of lifting sanctions from Libya). OPEC has not yet replied to Algeria’s request for a higher quota but Algeria is producing much more anyway and OPEC is looking elsewhere. NB Egypt is not an OPEC member

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A Forecast Over the next ten years or so: x Political issues will not prevent North African countries from increasing their production and exports of oil and gas. The potential is definitely there: the political willingness to increase oil and gas exports is there and projects are being designed, financed and implemented at a good pace. Foreign oil companies clearly have North Africa on their radar screen. OPEC constraints are manageable in the short term and will disappear over the long term. x The views expressed here are very realistic but refer only to the issue of security of supplies. It does not of course mean that all will be quiet on the political, economic and social fronts in these three countries over the next 10-15 years. But that is another story.

SECTION VII REGIONAL CHALLENGES - THE CAUCASUS REGION - CASPIAN & BLACK SEA BASINS

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TURKEY & NATO

Sir David Logan Former British Ambassador to Turkey

This morning‘s topic is “Emerging Regional Threats”. But many threats are no longer regional, they are global. Besides, the nature of the threats themselves has changed. Take the UK as an example. After the demise of the Soviet Union, it is impossible to think of a geographically-based, or regional, threat to this country. There are now no threats to our boundaries. On the other hand, there are no boundaries to the nature of the threats against us. Conventional threats have been replaced by truckloads of explosives (as against the British consulate in Istanbul), suicide bombers (as regularly in Israel) and aircraft hijacked and crashed into public buildings (as in New York). We can conceive of many more unconventional threats; water supplies poisoned; power supplies cut off; nuclear power plants subjected to missile attack; poison gas diffused in enclosed spaces. So many regional threats are not regional but global, and threats are unprecedented, and hard to predict. I would like to give a small illustration of the challenge which the new security age means for NATO’s member states. A large part of the surface assets of the British Navy, the largest such force in NATO Europe, consists of ASW frigates. Yet, inventive though Al-Qa’ida may be, it is hard to conceive that a naval force configured for anti-submarine warfare will be much use against a terrorist attack. The same question of relevance to the new security order applies to aircraft such as the Typhoon and to Main Battle Tanks. The challenge to the armed forces of NATO to evolve so that they can credibly deter non-traditional/asymmetric threats is enormous. 143 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 143–145. © 2005 Springer. Printed in the Netherlands.

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Another problem is the inability of the West to deal with the threat from Islamic fundamentalism in a way which does not insult and alienate ordinary Muslim members of society. It is sometimes argued that there is a seamless link between the mountain fortresses of Al-Qa’ida and, for example, the North African slums of Paris. It is clearly not an entirely vacuous proposition. But which western government has acted decisively to break whatever link there might be, through positive acts of reassurance to their Muslim fellow country people? A British minister remarked recently that British Muslims must demonstrate their commitment to democracy and rejection of violence. He then had to withdraw his remarks. But in Britain‘s second city, where I work, and where in ten years’ time a majority of the population will be Muslim, damage was done. Western Europe and the US need to recognise that one part of dealing with contemporary threats is to ensure that our Muslim populations are included, not alienated, by our response to these threats. I would like now to turn to Turkey, which illustrates what I have been saying in some ways but which potentially confronts at least one threat of a more traditional sort. First, Turkey has a lot of neighbours, not all of them well-disposed. But are any of them threats? That old foe, Russia, is no longer a neighbour and is otherwise preoccupied. The Syrians were faced down four years ago. The present Greek government want Turkey to join the EU, calculating that its problems with the Turkey are more likely to be susceptible to resolution if Turkey is inside the tent rather than out. Yet Turkey maintains enormous conscripted armed forces which are largely irrelevant to the modern security era. If the British have a lot of irrelevant ASW frigates, what price Turkey‘s enormous and ageing fleets of tanks? Turkey is a secular Muslim country, with few fundamentalists, which reacted with outrage to the attacks on British targets in Istanbul last November. I believe that since Turkey is both Muslim and moderate, she is better equipped than, say, France or the UK, to deal with the challenge which extremism represents to society. As I have said, Western democracies seem to have no policies with which to counter the damage done by Islamic extremism to the coherence of their societies. On the contrary, by failing to take positive steps to reassure and to integrate their Muslim fellow-country people, they seem willing to accept the risks of polarisation and alienation. This is, inherently, not a failure which a

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Muslim state like Turkey can make. Turkey is, moreover, a society sufficiently successful to make extremism attractive only to a very small minority. Turkey may, however face a trans-boundary threat, not quite of the oldfashioned sort, but one which is a consequence of the ‘coalition’s invasion of Iraq. This turns on the future nature of the Iraqi state, and in particular the risk of its break-up. Through the 1990s, the Turkish attitude towards Northern Iraq became steadily less intrusive as the PKK were defeated and as Ankara established a modus vivendi with the PUK and KDP. In the recent war, in spite of dire predictions to the contrary, the Turks did not invade. But in the future they may be faced with the prospect of an independent or virtually independent Kurdish state in Northern Iraq. One consequence would be to bring Ankara, Tehran and Baghdad, faced with a similar threat to national integrity, into a closer relationship. Another might be a reversion to the habits of the Turkish army in the mid-1990s, when massive incursions into Northern Iraq were commonplace. This is speculative stuff, but it raises important questions about Ankara‘s relationship firstly with Turkey’s own Kurds, where real progress is currently being made; secondly with the US, given its stake in the future both of Iraq and Iraq‘s Kurds; and finally with the European Union, accession negotiations with which Turkey is intent on starting at the beginning of 2005.

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PROSPECTS FOR THE CAUCASUS, THE CORRIDOR BETWEEN TWO CONTINENTS - KEYNOTE ADDRESS

Tedo Japaridze Minister of Foreign Affairs, Republic of Georgia

Thank you for the honor of inviting me to address this distinguished gathering. I admit, I have almost messed up the schedule and do certainly owe an apology to the organizers of the workshop. But after all, it occurs to me that we, Georgians, also deserve a measure of forbearance with our unique capability of organizing elections and revolutions almost simultaneously, as follow-up events. This may be considered Georgia’s contribution to the democracy; to have elections on Sundays and peaceful revolutions on Tuesdays. I think this could be a good pattern for some, at least in our part of the world. If you ask the Georgians, "why have you done this Revolution of Roses in November?" They will tell you that had it happened later, then roses would have been in a short supply… Mr. Chairman: A few words about the Revolution of Roses. It is true, that the problems of victory are more agreeable than the problems of defeat, but they are no less difficult. We are aware that it will take a lot of hard work and the moral stamina in order to persevere, while our society has long been assailed by doubt. The sense of victory and its far-reaching implications still stir our souls and warm our hearts. But it also demands of us a realism and pragmatism that are rock-hard, clear-eyed, steady and sure, a realism and pragmatism that understand that Georgia is not yet united and her very statehood is still at stake. The most difficult phase of any revolution is the very first day after it, when you need to solve the ‘bread and butter’ issues for those who energetically demonstrated for you during the revolution. 147 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 147–154. © 2005 Springer. Printed in the Netherlands.

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With the demise of the Soviet Union, more than a decade ago, Georgia dared to dream again innocent dreams, to believe in independence and democratic ideals with innocent trust. Yes, we endured serious setbacks, but celebrated significant accomplishments as well. Georgia adopted a new Constitution, introduced its own currency, promoted the functioning of democratic institutions and free media, sought to strengthen the elements of civil society. In retrospect, we could have accomplished much more. But in these 12 years too many dreams have been shattered, too many promises have been broken, too many lives have been lost. The country plunged headlong into a rampant corruption. The humiliating sense of abject poverty, despair, uncertainty and deep frustration was prevalent. The mass and widespread falsification of the parliamentary elections was the last straw, prompting an unprecedented public outrage and the subsequent resignation of President Shevardnadze. We are grateful and profoundly touched by the tremendous support the democratic community has afforded us in the time of hardship. It instilled the hope and inspired many, many thousands of our citizens, who struggled for identity, progress and dignity. Georgians easily let bygones be bygones. I come before you this evening preoccupied with peace and with the strongest assurances that Georgia has irreversibly marked out her democratic future. The rationale is the conventional wisdom, voiced out by one prominent Englishman, that democracy is the worst form of government except all those others that have been tried from time to time. I think we have tried enough and made our choice for good. I rarely speak in hyperbole, but if you let me invoke Theodore Roethkes one short verse, I think you will agree, that it fits Georgia's current state perfectly well: I wake to sleep, and take my waking slow, I feel my fate in what I cannot fear; I learn by going where I have to go. Indeed, if we want our dreams to come true, we have got to stay awake and learn not to waste no more moment in our noble quest for the path to the sacred prize – our path to Europe. I am confident, that our shared values – respect for human rights of all, for tolerance, for entrepreneurship, and for international standards of conduct – can unite us in a partnership for democratic peace. Yes,

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sometimes, Georgian democratic experience may look to an outsider like a sausage-making process: making is ugly but end-result is supposed to be tasty. Let me briefly outline some aspects that lend to this democratic partnership the overriding importance. There is no doubt that in the 21st century our security will be challenged by international terrorism. It is a grave misconception to see this dangerous phenomenon as only a problem of individual states. Indeed, it’s a clear and present danger to tolerant and open societies and innocent people everywhere. Therefore fighting international terrorism is not simply an American or British responsibility. Rather, it is the world's responsibility. After the horrors of 9-11, Georgia became an active participant of the US led global campaign against international terrorism and has contributed at her capacity to counter-terrorism activities. With the help of our friends we launched a comprehensive anti criminal and anti terrorist operation in then infamous Pankisi Gorge (which by the way is wonderful mountainous area of Georgia and I visited that place so many times during that operation) and within some 12 months managed to cleanse the region of criminals and terrorists, both homegrown and alien. The work has not been accomplished yet, the operation is still going on in a low intensity scale and our friends may rest assured that Georgia has at its disposal enough resources and qualified personnel to continue this operation to the very end. At the same time we should not forget that the effective closure of the Georgian-Russian border from the both sides is critical to restoring law and order in the Pankisi Gorge. Nor should we be oblivious as to what created this problem in the first place - the war in Chechnya. Our success in Pankisi, however, would not have been possible without the help and unequivocal support offered by the United States and other western partners. The American Train and Equip program, has clearly been the key to our success. Three battalions trained under this program are already fully operational, capable of carrying out their professional duties. I need to admit, the elements of cooperation with certain Russian services, especially with border guard, but this framework needs to be formalized and institutionalized. I think Russia and Georgia along with other international institutions have full resources to do that.

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But in expressing our special appreciation to the United States Government for the invaluable assistance, I also hold out hope that this cooperation will continue in the future. Ladies and Gentlemen: We are confident that Georgia has a role to play in a broader international security dimension. The crucial step in defining Georgia's strategic identity was the historic announcement at the Prague Summit about our resolve to seek the full membership in the Euro-Atlantic alliance. Let me put this momentous decision in context. Last November in Prague, NATO allies completed a 53 yearlong effort to build a stable and peaceful security system for Central and northern Europe. No one will ever ask again will we have to die for Danzig? And it applies to any German or Polish or Baltic city. The Prague Summit was truly an exceptional accomplishment, the magnitude of which is yet to be determined. We believe that we must now focus our attention on Southern and Eastern parts of Europe in order to make the European Union consummate. The invitation extended to Romania and Bulgaria to join NATO and subsequently the European Union, instills us with hope that the final phase of building of a truly unified Europe has begun in earnest. With the Prague decision, NATO now virtually embraces the entire Black Sea community either through direct membership or through special relationships of the kind enjoyed by Russia and Ukraine. As the original alliance between the United States and Western Europe was built on the wartime Atlantic Alliance and post-war responsibilities in the Mediterranean, I believe that the future security architecture of Europe's East will be based on the "Three Seas". The Baltic, the Adriatic and the Black Sea. As I mentioned, the Baltic and Nordic democracies have largely completed the construction of a durable Baltic security system. Major efforts are already underway to "export" the Baltic model to the democracies of the Dalmatian Coast to provide the foundation for an Adriatic security system. The next step of the scheme that President Bush expounded in his Warsaw speech, is the creation of the Black Sea Security system to include Turkey, Bulgaria, Romania, Georgia and Ukraine as members of EuroAtlantic structures, and Russia as a special and trusted partner. This Third Sea system would be linked with the Baltic Sea security system through

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Ukraine and Poland and thus delineate a comprehensive European security architecture from the Baltic to the Black Sea. We firmly believe that Azerbaijan should also be a member of the Black Sea security system. The inclusion of our neighbor will open direct access between Caspian oil reserves and European markets, thereby enhancing Euro-Atlantic security and bringing prosperity to the steppes of Central Asia. Secure and reliable energy could be exported from Azerbaijan via Georgia and Turkey to the shores of the Mediterranean and via Georgia, Russia, Ukraine and Poland to the urban centers of northern Europe. The benefits of a secure and liberalized trading system around the Black Sea for the entire Euro-Atlantic community are simply incalculable. We need to incorporate Armenia in the regional cooperation framework. Peace and security are indivisible in our region. One can not be stable and peaceful at the expense of others, turbulences and unresolved problems. The unique transit potential and energy resources of the South Caucasus are key to Europe's energy security in the years ahead. I believe, this is one of the primary reasons why European interests require comprehensive stabilization of the South Caucasus. Located at the crossroads of Europe and Asia, South Caucasus represents a natural corridor between the two continents. For hundreds of years it has served as a connecting link, a fact which has played an important role in shaping statehood, outlook, culture, and traditions of regional states. At this point of history, we have entered the stage when the energy projects planned with strong western support have entered their final phase of fruition. Should South Caucasus fall into instability again, the entire Western Caspian energy policy - let alone investments - could come under threat. The Baku-Tbilisi-Ceyhan and South Caucasus Pipeline projects are of vital importance to the future of the region and are critical to the creation of the East-West energy corridor. Therefore, all efforts must be exerted to ensure that these projects can be constructed and operated without hindrance of any kind and we are doing everything we can to deliver these projects as a model for development. Ladies and Gentlemen: The main obstacle to the development of all of Europe's new democracies, whether along the Adriatic or the Black Sea, is clearly the regional instability.

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It is spawned by terrorism, trafficking, trans-national crime and by unresolved conflicts to name a few. In an OSCE parlance these conflicts are referred to as "Frozen Conflicts" and apply to South Ossetia and Abkhazia in Georgia, Nagorno-Karabakh, and Tranthesnistria. I believe that the OSCE has coined a rather inadequate idiom, for the simple reason that these conflicts are not frozen at all. On the contrary, they are alive, brewing, draining our resources, obstructing the development plans and deteriorating our relations with neighbors. What is frozen indeed, is the peace process, which perpetuates the existence of absolutely uncontrolled territories that easily become the safe haven for terrorists and criminals. We believe that the Euro-Atlantic institutions should be more actively injected in the peace process. Otherwise, the conflicts I mentioned above may well degenerate into a larger conflagration and pose a serious threat to the Euro-Atlantic community. Ladies and Gentlemen: President-elect Saakashvili has more than once reiterated a long held premise that Georgia is inexorably moving towards Europe. Indeed our plans for reintegration go way beyond Georgia's membership in NATO. This organization is only one important pillar of the European structure. Our strategic plans include further cooperation with the Council of Europe and the implementation of comprehensive reforms to meet the standards for membership in the European Union. While doing all in our power to integrate in European structures and to find our deserved place in the family of nations, we should make similar efforts not to distance ourselves from Russia and to establish civilized and good neighborly relations with this great nation. There is no doubt that the stable, prosperous, democratic Russia is a factor of world scale and significance. Free people, whose governments rest on the consent of the governed, do not wage war on their neighbors. Free people, blessed by economic opportunity and protected by laws that respect the dignity of the individual, are not driven towards the domination of others. We hold out hope that Russia, may be grudgingly, but is still moving in this direction. Regrettably, the past decade of the Georgian-Russian relations have been marred by mutual recriminations, mistrust and jealousy. The tensions had, at times nearly spiraled out of control and put the two countries on the verge of the open confrontation. And I need to admit that the mistakes have

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been made from both sides. We cannot allow this to continue. The world’s one of the most important region cannot become hostage of treacherous political games and parochial interests on both sides. We expect that the Russian policy-makers will come to treat Georgia as an independent, sovereign state and resume negotiations in good faith on all burning issues. Georgia is open for partnership and full cooperation with Russia. But let not this create an impression that Georgia will ever compromise its political stand, freedom, sovereignty and independence. We offer our Russian colleagues a full measure of cooperation on a range of important questions, including those of regional security. Georgia accepts with understanding Russia’s legitimate interests in Georgia and attaches overriding importance to eliminating any threat to Russia’s security from the Georgian territory. But our Russian colleagues should also realize, that terrorists do not appear in Georgia out of the blue… The presence of the Russian military bases in Georgia is nothing but an anachronism and, in my opinion serves no security interests of Russia. Some in Moscow may think that their presence in Georgia is the leverage to promote Russia’s influence. It’s an absolutely wrong approach. Dilemma, that some Russian policy makers confront and confuse, is connected with the two definitions: influence and interests. Influence and control are about the zero sum game that contradicts Russia’s interests in the region, on the contrary, promotion of Russia’s economic, commercial interests should be beneficial for Russia and the entire region. So the vital question what’s in the interest of Russia to have a bank or a tank in Georgia is still unanswered. However, the new Georgian leadership is set out to approach this question with understanding and expresses readiness to renew negotiations on this important issue with common sense and determination. The role of the United States and of the whole CFE community in this process will be important if not crucial, especially when it comes to financial requirements for the withdrawal. We believe, that the way the Russian leadership chooses to handle these problems will be a serious test of Russia's adherence to its international commitments. Ladies and Gentlemen: Georgia's transition from lawlessness to real independence and democracy is both an exhilarating and a difficult task. For the men and women of Georgia, this is a time of great hope, and great difficulty – A time for national pride as well as national reconciliation. It

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occurs to me that there is no purpose nobler for us to sustain and preserve our small nation in a turbulent world. That is what we must do now. We have no higher duty, no greater cause as humans. And may god bless our efforts.

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TATARSTAN: EURO ISLAM IN THE VOLGA REGION

Dr Khakimov Counsel to the President of Tatarstan, Russia

Editor’s Note: Tatarstan is one of the leading oil producing areas in the Russian Federation. Situated on the Volga, its energy markets have, to a large extent, been developed via the Caspian. The Republic of Tatarstan has successfully developed its own international energy export market: currently producing 29 million tons of oil per annum for markets within the Russian Federation, as well as other countries including Ukraine, Turkey, the Netherlands and Switzerland. Tatarstan operates its own tanker fleet and also its own refining operations both in Tatarstan and in Turkey. The Republic estimates that its oil and gas reserves will last up to 170 years at current production rates. The success of the Tatarstan energy economy is significant for two reasons: 1) It indicates progress towards healthy regionalization of the once highly centralized Former Soviet Union’s energy policy. 2) Tatarstan serves as a model to the region and the wider international audience for the successful coexistence of Islam and other religions. I would like to talk about the concept of Euro-Islam in the Volga region. Tatarstan is a region of Russia where half of the population belongs to the Muslim culture and an almost equal number of Russians adhere to the Orthodox traditions. Despite the uneasy years of perestroika (reorganisation) that caused a great number of conflicts in post-Soviet Russia, there is peace and general consent among people in the republic. 155 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 155–168. © 2005 Springer. Printed in the Netherlands.

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Sociological research shows stability in ethnic relations, a high level of mixed marriages (about one third) and the absence of tensions both at the political and household level. The tragedy of Bosnia has not affected Tatarstan. One of the reasons for stable Muslim-Christian relations is the policy of observance of the balance of interests. At the same time this peaceful situation can be explained by examining ‘Tatar’ Islam, which underwent reformation in the 19th and early 20th centuries.

Some Background Islam was accepted as the state religion in the territory of Tatarstan in 922, half a century before Russia officially accepted Orthodoxy. Thus, for Russia, Islam is not an externally introduced element. Its spread was seriously influenced by Uzbek Khan’s “Islamic revolution” of 1312. Uzbek Khan opposed Genghis Khan’s Code of Laws (Yasa), which recognised equality of all religions, and accepted Islam as a state religion of the Golden Horde. It was not a reform, but a bloody revolution, which suppressed the opposition of Murzas (nobility). These events did not affect Russians who remained Orthodox. After the disintegration of the Golden Horde, Islam remained an official religion of the Kazan khanate. Ivan the Terrible’s assault on the capital of the Kazan Khanate in 1552 began the epoch of Christianisation of the region accompanied by the physical destruction of the Tatars, their exile from places of residence and the creation of stimulus for the conversion of Muslims to Orthodoxy. In the 13th century, after a whole series of revolts with obvious religious motives, Catherine II issued an edict on religious tolerance, starting the revival of Islam in Russia. Nevertheless, up to the beginning of the twentieth century, the Tatars had limitations concerning certain professions, the right of ownership and business activity in the sphere of industry and secular educational institutions. At the dawn of the nineteenth century, the theologian Kursavi urged the Tatars to modernise Islam. This initiated the movement, which was named Jadidism from the Arabic al-jadid (meaning ‘renovation’ or ‘reform’). Kursavi wrote: “You are not true and devout Muslims. You have receded from the Qur’an of Allah and legends of the Prophet.” He rejected mazhabs and offered to address the Sacred Book for critical evaluation of the existing traditions. In the opinion of his contemporaries, following taqlid (authority) was not a method of redemption; an independent search –

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ijtihad was necessary. Thus, Kursavi did not consider public opinion as a true criterion. He believed that a scientist convinced in the truth of his reasoning and its correspondence to “the true way” could himself be considered jama’at (society of Muslims), and thus had the right to follow his own judgment even if his act was condemned by most people. A person, who asserts the truth, is equal to his community. This idea became revolutionary for Tatar theology. Kursavi’s ideas were succeeded by brilliant Tatar theologians. Jadidism mainly struggled against taqlid for critical thinking, for the high education of Muslims, and the equality of men and women, tolerance towards other religions and openness to the cultural achievements of Europe. All modern Tatar culture is rooted in Jadidism. After the revolution of 1917 Jadidism showed itself in the theory of “Islamic socialism” founded by Mirsaid Sultangaleyev. Bolsheviks could not comprehend it, but it proliferated in the Arabic world. The Soviet period had most serious consequences for the religion. The clergy was destroyed physically, the system of Islamic education was liquidated and the religion itself was actually forbidden. Perestroyka prompted the revival of mosques, madrasahs, and the Muslim press. At the same time, Russia attracted numerous missionaries who brought with them the traditions of their countries, Saudi Arabia, Egypt, Jordan and others. Today the Republic of Tatarstan is restoring the system of religious education and searching for a ‘faith formula’ to satisfy the modern world. It is impossible to repeat Jadidism literally as the situation has changed. The Tatars have gained statehood in the form of a republic. The society has become more secular, and the educational system and economy have changed. All this imposes new requirements on Islam as well.

An Islamic Sub-Civilisation in Tatarstan There is a Muslim ummah which, as a civilization, unites people of a common belief system. But there are also different nations with their national sovereignty. The first does not absorb and does not nullify the second. Each nation has specific living conditions - climate, environment and local needs. The Tatars were destined to be the northernmost outpost of Islam; they are on the border of the West and the East not only

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geographically, but also culturally. This, in many respects, explains the features of the Islamic sub-civilisation in the Republic of Tatarstan. Russia is a secular country with a Christian Orthodox majority. At the same time, for the Muslims the Russian cultural and social conditions are not alien. Tatars are not compelled to follow any specific tradition. They were born in this country and they consider it theirs. This country is no worse and no better than Muslim states; it is simply different. Tatarstan may not be guided by Saudi Arabia and will hardly ever become similar to Christian Europe. Millions of Muslims in Russia have grown to believe that they live and should live in a secular country, living in the culture which developed over several centuries. The post-reorganisation period showed a burst of interest in religion that has now more or less stabilised. Thus we are able to speak about the general religious preferences and practices in Tatarstan today. Polls show that over 80% of the Tatar youth consider themselves Muslims, but only 2% attend mosque at least once a week, and 4% attend just once a month. In Tatarstan, less than 1% of the population is atheist, but some of them observe all religious practices. Very few people (1-3%) attend classes on the basics of religion (Islam and Orthodoxy).1 The Tatar youth aim to attend modern universities, and many prefer European educational institutions, while they prefer English to other foreign languages. It helps in business, politics and science. 13% of Tatars living in towns and 25% of Tatars living in villages like their children to know the Arabic language; 10% (town) and 19% (village) are focused on Turkish, and 74% (town), 33% (village) choose Western European languages. The last figure is even higher among the Tatar youth than among their parents. Arabic tends to become a ritualistic or a purely professional language, while English has turned out to be the most popular among foreign languages. The role of religion outside of the republic is more significant, as it performs a function of association and preservation of the Tatar community. Religious attitudes outside Tatarstan are more traditional. The Republic has no problems with those institutions which preserve Tatar culture, and therefore discussions appear to focus not on the preservation of culture, but mainly on its adaptation to the process of globalisation. Tatarstan manufactures hi-tech products which necessitates the development of its own scientific schools and systems of higher education.

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The main competitors in this sector to Tatarstan are in the West; this is the reason why Tatarstan must introduce standards close to those of Europe. Islamic countries as Sudan, Pakistan, Iran or Saudi Arabia cannot guide Tatarstan. They do not make heavy trucks, planes or helicopters. They are not the manufacturers, but the consumers of these products. Therefore, they cannot help Tatarstan to become more competitive. All these factors create conditions for developing an Islamic subcivilisation of Tatarstan. Although Europe is the main competitor in several sectors of the Tatar economy, Tatars do not consider it an alien or hostile civilisation. Instead they look to Europe to gain technological information that can be utilised as a reference point from which to improve standards and increase interest in education and culture. As the world becomes more religiously and culturally blended, what in Tatarstan may be viewed currently as deviation from pure Islam, in the future could become the norm for most countries. Nobody can create an isolated and purely Islamic environment. And there is no need to aspire to such an ‘ideal’ because Islam does not deny Christianity or a different way of life for other people. To the contrary, it teaches how to reach an understanding with them.

Pluralism in Islam: The Need for Rational Interpretations The Prophet Mohammed said: “Truly, Allah in the beginning of each century will send to the ummah a person to renew religion.” Islam appeared to lead the Arabs out of barbarism, as a way to convert peoples into civilised advanced nations. The Prophet Mohammed’s precept is the basis for constant modernisation of Islam. The 10th century witnessed a phenomenon in Muslim theology referred to as ‘closing the doors to ijtihad’. Critical and analytical thinking was forbidden. It was considered that theologians had already developed everything necessary. Modern Turkish scientist Haydar Bash writes: “The fact that for centuries the ummah without any doubt has followed and been guided by mazhabs and mashrabs, and for centuries the imams of these mazhabs and mashrabs have remained indisputable authorities is a historical proof that mazhabs and mashrabs have revealed the validity of their approach and represented the truth.”2 It is a sample of thinking which denies the modernisation of Islam. If mankind was guided by a similar

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logic, it would still explain the solar system composition according to the theory of Ptolemy, instead of Copernicus. The founders of Muslim mazhabs disagreed even concerning the true number of original hadiths, which are known to be the second important source of Shariat or Islamic Law. According to Ibn-Khaldun, Imam Abu Hanifa used only seventeen hadiths, whereas Malik, another founder of a mazhab, gave the number of three hundred. The well-known Abu Abdallah Muhammad ibn Ismail, the composer of the best-known collection of hadiths, led this figure up to seven thousand, and Imam Ahmad ibn Hanbal considered that there were fifty thousand hadiths. What today looks incontestable, in those times was a subject of ijtihad. Four mazhabs were developed from the 10th to the 13th centuries, but remain basic in Shariat understanding up to now. The struggle of reformers against medieval traditions cannot be represented as a struggle of ‘true’ Muslims with adherents of innovators or heretics. It is a struggle of progress against backwardness, for in the Qur’an one finds verses in favour of both positions. In the Meccan period, when the Prophet was writing the first ayats of the Qur’an, the verses of the Qur’an were addressed to all people. It is written: “O you men! We have created you of a male and a female, and made you tribes and families that you may know each other.” [49:13]* Clearly this passage proposes no distinction in rights between men and women. It prohibits coerced conversion to Islam and clearly expresses tolerance towards people of other religions. In the later Medinan period, ayats were addressed primarily to the Arabs at the time and gave them the order concerning the pagans: “And kill them wherever you find them, and drive them out from whence they drove you out.” [2:191] With regard to women, a number of ayats were introduced, which rendered them unequal to men. It said: “Men are the maintainers of women because Allah has made some of them to excel others and because they spend out of their property.” [4:34] Indeed, there are historical explanations for this, but inequality is inequality; and the Qur’an calls for justice. Contradictions between the verses of the Meccan and Medinan periods are too obvious and it is impossible to reconcile them – they deny each other. Therefore, the Muslim jurists considered the ayats of the Meccan period cancelled as the elder. However, the date of revelation is not a

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criterion according to which one may put some ayats above others. If they had really cancelled each other out, the Prophet himself would not have included the ‘cancelled’ ayats in the text of the Qur’an. As everybody knows, the main teachers of the Qur’an were prepared under his direct control and he was very attentive to the accuracy of the suras or chapters. Several instructions of the Qur’an are formulated very strictly, in explicit form, but sometimes are not applicable in specific conditions. It is written: “Eat and drink until the whiteness of the day becomes distinct from the blackness of the night at dawn; then complete the fast till night.” [2:187] How can anyone living near the polar circles, where the sun does not rise, follow these instructions? Musa Bigiyev, one of the most profound Tatar theologians, perfectly understanding both the letter, and the spirit of the Qur’an offered an explanation for this situation. He analysed another ayat: “Fasting is prescribed for a certain number of days” [2:184] in which he sees the instruction for those who live in such geographical latitudes, where it is impossible to distinguish between day and night. In his book, Fast in Long Days, he writes: “According to the obvious instruction of the Sacred Qur’an, the fast in such regions is never obligatory. For the fast is imposed as such only for a certain number of days, that is, where days and nights are comparable with each other on longitude. And at the poles, where a year consists of a day and a night or in cold areas near the polar circle, where days and nights last for weeks and months, the fast, due to its time limitation in days, is, indeed, excluded from the life of the people. This results from the features of geographical region.” The point is not to declare that some ayats are cancelled, and others are valid, but to understand that they are addressed to different audiences, in a different epoch. Such distinctions and interpretations of ayats are extremely important from the point of view of modernity. Wahhabism is guided by violence in its struggle against other religions and even against trends within Islam. Calling for ‘purity’ in Islam, it actually follows the mazhab hanbali to an extreme and does not allow for ijtihad rationalism – with the belief that the Qur’an is allegedly impossible to understand: it is possible only to believe in it. Thus, Wahhabism asserts a traditionalism which does not recognise any new phenomena. For Wahhabism, life stopped in Arabia in the 10th century. But times and circumstances change and so the suras of the Qur’an require a modern interpretation.

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For example, jihad as a war with the unbelievers was quite understandable in the Middle Ages because then the politics of power was common. But after World War II, when at the introduction of the nuclear bomb, the means of war became so advanced that they threatened the very existence of mankind, it became necessary to place conflict regulation through international law above the use of force. The Prophet distinguished between small jihad (jihad al-sagheer) with the use of force and supreme jihad (jihad al-kabeer), which assumes a peaceful path of progress for Islam with the help of the Qur’an. It is written: “Do not follow the unbelievers, and strive against them the mighty striving with it.” [25:52] The Small jihad was necessary when Muslims were threatened by other states or when Islam conquered new territories in the medieval epoch. But today, issues of war and peace are regulated differently. Therefore, jihad should be understood according to its literal meaning as a “striving” or struggling with the “dunya” (the material world) for a spiritual basis and overcoming infidelity in oneself. It is, however, expressly right and just, under authority from both the Qur’an and international law, to declare small jihad in self-defence, against violence and tyranny. In The Prophet Mohammed’s times, there were no weapons of mass destruction. Appeals for struggle with the unbelievers then suggested something completely different. Today, Muslims should be guided by the eternal idea of common solidarity granted in the Meccan period, for mankind striving towards good is one of the manifestations of Allah.

Euro Islam: Key Concepts We should understand the term ‘Euro Islam’ as a modern form of Jadidism. The theological component of Jadidism was not uniform – some theologians adhered to the positions of renovation of Islam: some were quite moderate, such as Gataulla Bayazitov, and some were rather radical reformers like Musa Bigiyev. Euro Islam mostly reflects cultural aspects of Islam, rather than its ritualistic aspects, the latter being left to one’s own personal judgment. The key focus of Euro Islam is on ijtihad (again, a method of critical personal judgment) as a basis for a modern interpretation of the Qur’an. Traditional theologians are afraid of ijtihad/rationalism, believing it might negate faith. Well-known Malaysian theologian Seid Muhammad

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Nakyb al-Attas considers intuition the supreme form of perception. “We recognise,” he writes, “the existence of one more level different from the rational truth: a supra-rational or transcendental level of existence accessible only to the prophets and the saints, and also to acute minds which possess the deepest knowledge.” In this form, interpretation of Islam becomes the destiny of an elite and is completely inadmissible to an ignorant crowd.3 Egyptian scholar Yusuf al-Kardavi, calling for ijtihad, at the same time writes: “It is impossible to tolerate such a state of affairs when each interested person would have an access to ijtihad, for this will result in anarchy and distemper.”4 He believes that there are those deserving of ijtihad and those who are not deserving of it. Theologians refer to outstanding thinkers of the middle ages, who limited the circle of people with the right to ijtihad. This was due to the educational level of the population. At that time many people were illiterate and therefore they were unable to go into reflections on theological themes. Today general literacy and a greater availability of higher education has changed the situation - almost everyone can study the Qur’an independently and in one’s native language. Islam and the Qur’an is gradually being translated into more and more languages and this must be correct, for God listens to our hearts, not to our words. Seid Muhammad Nakyb al-Attas introduced the concept of Muslim language, which he understands as “the introduction of the base dictionary of the Muslim terminology in the languages of peoples practicing this religion.”5 Indeed, the Tatar language is rich in Arabic grammatical constructions, which quite sufficiently reflects the Muslim terminology and actually makes the knowledge of the Arabic language unnecessary for the broad circle of believers. Linguistic nationalisation of Islam seems inevitable in the 21st century. Islam was sent down to earth to protect people from ignorance and set them on the straight path to justice. Following Taqlid and the ways of the mazhabs only stagnates thought. It is ijtihad that provides an entrance to the path for progress. Islam is a culture which unites religious and secular spheres. One of the miracles is that God created numerous peoples, each with their own language. The Qur’an says: “And of His signs is the creation of the heavens and the earth and the diversity of your tongues and colours; most surely there are signs in this for the learned.” [30:22] If God had chosen to do so,

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he could have created one Arabic-speaking people. However, he made many different peoples each with their own lives, habits and cultural climates. Islam puts a significant emphasis on rituals. The rituals themselves performed an important social function most especially at the time of medieval Arabia. The rituals accustomed relatively uncivilised tribes to more civilised behaviour in such matters as diet and hygiene, for example. These attributes became universal long ago. Today, in modern civilisation, moderation both in diet and consumption of alcoholic drinks is strongly recommended in addition to observing proper hygiene. Islam, also through its rituals, is a method of personal liberation. It says that the Prophet “removes from them their burden and the shackles that were upon them.” [7:157] However, God does not demand blind worship. The Prophet Muhammed said: “Allah does not like unnecessary fanaticism and extremes in demonstration of faith.” He did not approve of monasticism and did not demand the observance of ceremonies beyond one’s abilities. Many historical norms have lost their importance today. For example, the prohibition to photograph a person was connected to the period in formation of Islam, when it was necessary to struggle against idol worship. But today it is not necessary to destroy the statues of Buddha as the Taliban did in Afghanistan to prove their faithfulness. Wild conduct and Islam are incompatible. It is through Faith that people become civilised, cultivated and educated. The Prophet Mohammed also said: “Everything has its way. It is knowledge that opens the way to paradise.” The acquisition of knowledge is the main duty for Muslims. It is a categorical imperative. A true Muslim is an educated person who respects and pursues the sciences. The aspiration to come to know oneself, one’s environment and the universe is the real perception of truth, i.e. Allah. The Qur’an says: “Allah indeed encompasses all things in His knowledge.” [65:12] Allah encompasses all things because He is the Universe. Attaining knowledge of science or knowledge of any kind is a step towards God, who waits not for blind worship, but for the good results of man’s activity. The Prophet Mohammed advised: “He who learns sciences with the purpose to teach others will receive the redemption of seventy saints from God.”

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Islam is a religion of a free individual. The Qur’an implies that the faithful cannot be slaves to Allah because they have chosen of their own free will to practice Islam. The Prophet said: “The whole world has been created as a place for prayer.” There is no mediator between man and God. The clergy and community are only assistants or teachers, no more than that. When God calls on the Day of Judgement, there will be no imam, mufti or community. There will be no lawyers. The Qur’an says: “And be on your guard against a day when one soul shall not avail another in the least, neither shall intercession on its behalf be accepted, nor shall any compensation be taken from it, nor shall they be helped.” [2:48] On the way to truth in this world, the clergy carry out the function of ‘highway signs’, but they should not be sleeping policemen. Rituals may not be the criterion, according to which it is possible to distinguish between believers and non-believers. The term ’ibadah (worship) comprises the entirety of worship, and at its final, supreme stage ’ibadah acquires the meaning of knowledge – ma’rifah. Thus it would be wrong to reduce worship to ceremonies alone. All it takes is for a man to say “There is no God, except for Allah, and Mohammed is His Prophet,” for him to be a believer. Rituals and ceremonies strengthen his belief but they do not determine it. Religion is a private matter. At one time religion was a structured social phenomenon. Now religion is becoming a more and more intimate, spiritual and particularly personal affair. People do not like interference in their life and they do not tolerate external dictatorship; they prefer a free internal choice. The prophet said: “Truly, religion is easiness, and if anyone overdoes it, he will lose. So keep to the right course, approximate to perfection, rejoice!” Islam calls for justice, which is impossible without equality between man and woman. Verses of the Qur’an in suras “Women”, “Light” and “Companion” provide justification for the inequality of women. They are written in the Medinan period. In that epoch, the Shariat positions concerning the rights of women were the most advanced in world legislation. But today they look like an anachronism. Turkish theologian, Haidar Bash, considered it senseless to discuss an issue of women’s rights: “Discussing such problems as women’s rights and even granting her rights is ridiculous in its very basis, for nobody may grant a woman her rights.

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She receives them by birth. Every person has the right to life, property, honour and dignity by birth.”6 According to the Qur’an, however, there may be slaves; the Shariat treats them as property of a status equal to a camel. These norms, as well as women’s rights, in my view, require revision. The Qur’an admits supremacy of man above woman provided that a man provides safety of a woman and maintains her [4:34]. In countries where women are economically independent there is no basis for such supremacy. Women required guardianship in medieval society, when hard physical labour fell on men’s shoulders. The division of labour according to sex today no longer exists. Polygamy as well as the women’s unequal right of inheritance and arcane procedures for divorce permit women’s inequality with men, and justice is impossible without equality. All people are free and equal by birth regardless of sex, race or religion. The Qur’an’s verses, granted in Mecca, were intended for all of mankind for eternity without distinctions between men and women. This is what should become the main principle of the Shariat in the 21st century. The more perfect and sound women’s rights are, the stronger society must be. Islam is a tolerant religion. According to the Qur’an, there is only one God, but different religions, and distinctions are most obvious in ceremonies. If we do not to take into account the ayats which were revealed in the Medinan period; a time when it was necessary to create an Islamic community within a hostile environment; in all other respects the Qur’an is tolerant to all people who do good deeds. It says: “Surely those who believe, and those who are Jews, and the Christians, and the Sabians, whoever believes in Allah and the Last Day and does good, they shall have their reward from their Lord, and there is no fear for them, nor shall they grieve.” [2:62] To be faithful is preferable to God, but it is not a categorical requirement. To do good deeds for people is an unconditional instruction of Allah. The Prophet Mohammed continued a rich train of monotheistic tradition and inspired respect for followers of other religions. Islam does not claim that divine blessings belong only to its followers. God’s blessings are granted to all nations and people without exception, for Allah is gracious and merciful. Therefore Musa Bigiyev declared: “For none of the

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unfortunate people to be deprived of this boundless mercy and for the gates of His boundless mercy to be open wide to the people, I declare that all mankind will be saved.” It was he who developed the theory of “Absolute Divine Mercy” according to which divine grace embraces all His creations, no matter what religion they adhered to during their lifetime. The Qur’an says: “Our Lord! Thou embracest all things in mercy and knowledge.” [40:7] This short verse shows perfectly that God’s mercy embraces not only Muslims, but everybody without exception. Our life is only an instant compared to eternity. And if God subjects non-Muslims, i.e. the majority of mankind, to eternal tortures of his divine anger, then anger will be high above his divine mercy. At one time in history, all religions were characterised by mutual belligerence. Muslims, with sword in hand, created caliphates; Christians of Europe waged crusades; Catholics and Protestants were at violent wars with each other. But now swords are sheathed. Today it is important to see in each religion a call for good deeds and mercy. This is the fabric of the ummah for all mankind. Today it is futile to speak about ijma (consensus) in the framework of the Muslim community alone. International norms have come to be of higher importance than the interests of separate states and communities, likewise the Shariat must be properly amended to suit a modern context as well. Non-Muslims should not be declared enemies in the belief that it pleases God. This only serves to please extremists who have not penetrated deep enough into the meaning of the Qur’anic verses. God will accept man if he is good. And if he believes, he is especially pleasing to Allah. The Qur’an says: “Whoever shall do of good deeds and he is a believer, there shall be no denying of his exertions, and surely We will write (It) down for him.” [21:94]Mankind travels from dissociation to unity and solidarity, which is expressed in the creation of universal institutes, international law and universal morals.

Conclusion The concept of Common Globalisation runs side by side with the Islamic concept of globalisation through the broadening of the umma which gradually spreads both to the East and the West. After September 11 2001, Islamophobia has grown in strength though terrorism, the root of this phobia, has nothing to do with the religion of Islam. The world has broken

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up into Christians, Jews and Muslims, creating a gap which may become an abyss. Only new values common to all can now unite this broken world. They can not be purely liberal, as they can not be traditionally Islamic. Ijtihad brings together the East and the West; it is the very beginning of liberal thinking. The concept that a free individual must be allowed to strive for education and progress in society is quite acceptable to both Western and Islamic cultures. Islam was introduced to the world for the sake of progress, which saved man from slavery and bondage. It embodies justice, freedom of spirit and aspiration to acquire knowledge. Islam calls for tolerance and condemns violence and it is versatile enough to answer new challenges.

END NOTES 1 R.N.Musina. Ethnoconfessional processes in the Republic of Tatarstan. - In: Islam and Christianity in the dialogue of cultures on the turn of centuries. Kazan, 2001, p.261-264. 2 Haydar Bash. Makalat. Islam: secret of formation. – Yaroslavl. DIA-press, 2000, p. 161. * Square brackets refer to the number of sura and ayat of the Qur’an. 3 Ibidem, p.37. 4 Yusuf al-Kardavi. Modern ijtihad: from disorder to order. – “Iman”, Kazan, 2001, p.67. 5 Seid Muhammad Nakyb al-Attas. Introduction to metaphysics of Islam – statement of fundamental elements of Muslim ideology. – M. – Kuala Lumpur, 2001, p.36. 6 Khaidar Bash. Right of woman in Islam. – Kazan, 2001, p.16.

SECTION VIII CRITICAL ENERGY SYSTEM INFRASTRUCTURE (CESI) - EMERGING THREATS TO SHIPPING AND PIPELINES

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INTRODUCTION

John Flynn Adviser to Chevron and Former Ambassador to Venezuela and Angola, UK

Threats to energy supplies have been around a long time. The 11th September introduced a new dimension, a step shift in vulnerability. Pipelines have been ruptured for all sorts of reasons: economic warfare as in Colombia; in Nigeria for community fuel theft, illegal trade on a gigantic scale, or for blackmail against the oil majors or the local government. Piracy goes back thousands of years. We thought it had been brought under control until fairly recently. It is now a common occurrence where sea lanes pass through straits next to fragile states. Large companies now try to mitigate the threat from piracy in such areas by concealing their true name or cargo in open communications from everyone other than government authorities. The increase in the vulnerability of oil and, increasingly, gas supplies in the vicinity of latent or overt hostile groups has pushed companies to look towards Atlantic resources. Governments were slower to pick this up. In the US it was not until early 2002 that Congress took an interest in an area that until then, for many, had been off the political map: West Africa. The offshore oil assets in one part of the region had earlier received no more than hostile political attention from rightwing politicians fired by the shocking image, partly mythical, of a US oil company’s production facility guarded by Cuban troops from attack by a US-supported and US-funded guerrilla movement. Even after Angola gave up its attempt to impose Marxism it was still considered unattractive due to its long-running civil war, and after that ended, to its supposedly notorious corruption. That same area is now looked upon as one of the most valuable energy assets of the US. Its value lies in its relative security from threat. The sea 171 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 171–173. © 2005 Springer. Printed in the Netherlands.

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lanes between Angola or the Niger Delta to the markets of North America and Western Europe do not pass through or near vulnerable straits. The producer countries themselves are still near-fragile in their statehood but their fragility is so basic that the risk of threat from hostile organised militant movements is remote. Any serious attack on shipment or production would bring down massive retaliation from the local government supported by Western governments. Even in the Niger Delta the highly-organised gangs take care not to provoke too much. One aspect of West African oil development injected into the discussion in Washington in early 2002 with US politicians and their advisers was that there was little question of these new assets competing with assets in the Arabian Gulf. Just ask the oil companies how much it costs them to drill in the ultra-deep blocks off the Angolan coast… West African resources should be seen as complementing the resources in the Gulf. Indeed, in the context of the struggle against international terrorism the advantage of new development in West Africa, and in other non-Gulf areas is that it reduces the attraction for terrorists to attack production in the Gulf. The less the Gulf region figures as the single major source of energy the less point there is in threatening it. On the other side of the Atlantic the oilfields of Latin America share the West African advantage of routes straight up and down or across between the producers and the consumers. Piracy, however, does exist. There was one incident off Venezuela in the past year. Nevertheless, the main threat to supply in Latin America is local and man-made. Even where there is no war political tension is never far below the surface, take Colombia as an example, as rival groups well-disguised as political parties, vie for control of the energy wealth. In Venezuela, the biggest producer with vast reserves, the country is split down the middle. But even during the long and damaging general strike at the turn of last year the leftist government ensured that although their own state company was on strike, there was no interference in the operations of foreign companies which continued to produce from the so-called marginal fields. Need for revenue always overcomes politics. I was interested yesterday to hear mention of the issue of oil being seen as a blessing or a curse. At the start of the oil era in Venezuela a common phrase was “sow i.e. plant the oil” to build up other sectors of the economy. This injunction was followed to some extent under the brief period of military rule but under civilian administration

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since then most of the revenue was wasted or used to buy real estate in Florida. In the last resort, assurance of supply depends on adequate security which in turn depends on cost, which can be calculated. What companies hate is the incalculable, the imponderable major factors that keep CEOs awake at night thinking “What if……” These are, so far, absent from the West African and Latin American producing countries. It sounds unusual, no doubt, to say that about regions where, as we used to say about Africa, “one should always expect the unexpected”.

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SHIPPING: VITAL, VULNERABLE AND LITTLE UNDERSTOOD

Patrick Adamson Chairman MTI Network

Within the general topic of this conference ‘Emerging threats to Energy Security and Stability’, I would like to put shipping in perspective by looking at three specific areas. One, the vital role shipping plays. Two, its vulnerability to attack and misadventure and, three, something which applies not only to shipping but to all aspects of the energy chain: the need for relevant public information. Well before the current and present danger of terror became part of all our lives, the sea was, at times, a most dangerous and inhospitable place. Huge seas, winds and tides have been a part of seafarers’ lives since the first boats went to sea. Today, we have the more contemporary threats of pilots taking tankers onto the rocks instead of into port, other vessels navigating seemingly without radar or lookouts, helmsmen falling asleep during long nights at sea - all with disastrous results. More recently, of course, the security position and threat of terrorism has brought a new perspective to those who earn their livelihood either at sea or on-shore working to safeguard the movement of energy and manufactured products from areas of production to those of consumption. Initially we thought military targets would be hit but then the Limburg was attacked off the coast of Yemen. But how reliant are we on the sea to secure our energy supplies and feed the powerhouse of growth – oil, gas and chemicals?

175 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 175–181. © 2005 Springer. Printed in the Netherlands.

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The figures speak for themselves.

A staggering 1,608 million tonnes of oil was transported by tankships in the year 2000. More than 1,800 million were transported if we include refined products. This adds up to some 8074 billion tonne-miles covered.

2001

Total Trade: 8,074 billion tonne-miles

prepared by fearnresearch

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And the ships that carry over these distances are around 3500 large tankers with an average size of some 88,000 dead weight tonnage. What does all this mean in terms of providing the world with energy? In 2002 it is estimated that some 57% of the world’s oil consumption (crude oil and refined products) was carried by tankers: a huge percentage.

Growth in tanker numbers 4,000

100,000 90,000

3,000

80,000

2,500

70,000 60,000

2,000 1,500 1,000

50,000 40,000 30,000 20,000

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average dwt

no of ships

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110,000

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0 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

no. of ships average dwt Source: SSY Consv

Very simply, without sea-transportation of crude oil and refined petroleum products, chemicals and gas, the world as we know it would stop. The lights would, after a short while, simply go out. So sea-borne transportation of energy must be secured at all cost. But what impedes us from achieving this goal of securing the safe passage of some 3500 large tankships that are working on the oceans every day of the year? First, let us look at shipboard security itself.

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The Threats There are a number of enticing opportunities for the would-be terrorist to cause an upset. x To board a ship, take it over, take it into a Port City and blow it up. x To board a vessel and cause it to collide with a large passenger vessel resulting in a massive inconvenience to the shipping industry (not to mention a considerable loss of life) x To use a ship for hostage-taking, publicity and blackmail; we saw it with the Achille Lauro. x To board a ship that is used to carry weapons of war, bio-chemical or other dangerous substances. x Ships could have a terrorist cell implanted on-board: the threat from within. Any combination of these options is possible too. We must not forget the environmental cost of a terrorist attack on tankshipping. Massive pollution to the oceans is caused by an explosion or sinking. Given the number and nature of threats involving ships, just how secure is a ship or how secure can it be made? And how secure are the ports which they serve? While the list of potential courses of action may be long, in practice, sadly, they are not reliable. In port, many of the responsibilities for ship-security fall to the various individual terminals as well as to the central Port Authority. Both parties can heighten security in ports through introducing: x x x x x x

Designated Secure Areas Additional lighting and shore patrols Gangway Security and additional deck patrols Speedy access to security forces and police Surveillance cameras Security training etc

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Security at sea follows much the same lines. Shipping companies can introduce: x x x x x x x

Designated security officer on-board Security awareness training e.g. identifying possible threats. Security procedures established Sealed entry locations Secure locations Radio contact procedures with security forces GPS alerts, etc

But what does it all add up to? The answer is that for the trained and determined terrorist or pirate it amounts to very little. Security at sea in particular remains difficult. Current thinking says there should be no firearms on board as these lead to a greater escalation of violence. There are currently no electrified fences around the deck although there are some advocates of such arrangements. The crew cannot be expected to have advanced Karate training and are aware that they are very vulnerable to attack. But on the positive side, the seafarers will most probably have just enough time to secure a position for long enough to alert the authorities and obtain support of one kind or another depending on position and circumstances. There is, after all, little point for the terrorists in hijacking a ship hundreds of miles offshore and giving the authorities days to decide what to do. I would now like to come on to speak about an indirect threat to the security of energy supply: that which comes from a lack of understanding about the importance and nature of shipping from the public, the media and some politicians. As a combination, they are most dangerous. Large scale accidents or damaging crises, including attacks or threatened attacks by terrorists almost always have extreme reactions and extreme consequences for the public and from those who rely on their votes - the politicians. The reason for this is simply that in our media-driven world, the public demand answers and affirmative action when things go badly wrong. The ability and training of those who are directly involved in handling the

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situation correctly in the public domain, has a direct and important bearing on future events and consequences for the organisation concerned, for the industry itself and for the supply chain. The Exxon Valdez oil spill in St Rupert Sound on March 24 1989 deposited 1 million barrels of oil onto the Alaskan coastline but left the local manager to deal with the hundreds of assembled journalists. The lack of a caring response or the presence of the CEO led critics to suggest the company was indifferent to environmental issues. The Oil Pollution Act of 1990 which followed in the US created a whole new industry of responders, manual-writers, bureaucracy and cost which for a time threatened to bring the transport of crude oil to its knees. While Exxon is still fighting its corner 14 years later, in this case the legislation appears to have worked and oil spills in the US have been reduced dramatically. The Greenpeace attack on the Brent Spar oil platform resulted in the firebombing of European gas stations and a serious impact on the reputation of the oil company concerned. The Brent Spar was never dumped in the ocean, as it should have been. The sinking of the Erika and the Prestige off the coast of France and Spain brought outrage from public and politicians alike while a whole raft of draconian legislation had to be amended when it was realised that if pursued in its entirety, the lights would go out in Europe. In both these sinkings, the total inability of those involved to handle themselves or the event successfully in the public domain was one of the most important contributory factors to the disastrous outcome. It has cost one oil company hundreds of millions of dollars, ruined many reputations and faced many of the participants with criminal charges which they are still dealing with today. It has, in other words, been devastating to stability within the oil sector. 9/11 and the ensuing escalation of terrorism has spawned the International Ship and Ports Security Code (ISPS). Again a whole new industry has been created to address this issue of security but largely because politicians, fuelled by media coverage, do not believe that the shipping industry can police itself adequately. This lack of confidence in shipping is reflected in the growing trend for criminal activity in the shipping sector. The complex structure of the industry with flags of convenience, single-ship companies and with ships

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generally registered at an offshore regime leads to accusations of unaccountability and a lack of transparency. This makes the public and the media suspect they cannot get to the truth. When something goes wrong, therefore, the media attack and the politicians follow and the enforcement officials, in their turn, follow their political masters. All around the world, owners, charterers and seafarers face criminal charges, much of which is the result of poor, or non-existent transparency and inadequate media response. It is a question of perception versus reality, and perceptions of the shipping industry are at best, poor. So what has this got anything to do with securing supplies of energy in today’s world? My view is that to underestimate the power of public opinion and the strength of the media especially when something has gone badly wrong is disastrous and can lead to a whole range of unforeseen consequences. Knowledge dispels fear and if all those involved in the production and supply chain take opportunities to consider the need for “Accountability, Responsibility and Transparency” in all they do, and well before things have gone wrong, then the opportunities to take the right steps to counteract threats and ensure our essential energy supplies will be much improved. Reputation Management is more of an art than a science but it is of critical importance nevertheless especially in a sector like shipping which remains vital – but vulnerable.

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THE STRAITS OF MALACCA: CRITICAL SEA-LANE CHOKEPOINT

Tatsuo Masuda Vice President, Japan National Oil Corporation, Japan

The Straits of Malacca: Critical Sea-Lane Chokepoint

183 H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 183–193. © 2005 Springer. Printed in the Netherlands.

184

Contents V

Sea-lane chokepoints in the world

V

The Straits of Malacca and its diversion routes

V

Collisions

V

Piracy and armed robbery

V

Oil, LPG and LNG imports in East of Malacca

V

Expected tanker traffic through the Straits of Malacca

V

Key findings

Sea-Lane

185

Sea-Lane in South East Asia

R G O P T AY P H

By Captain MATHEW Mathai

6

186

MALACCA SINGAPORE STRAITS

MALAYSIA

SINGAPORE INDONESIA By Captain MATHEW Mathai

8

SINGAPORE STRAITS Malaysia

Singapore

Batam

Bintan Is.

Black Areas show depths Of Less than 10 metres

By Captain MATHEW Mathai

9

187

SHIPS AND THEIR CARGOES

By Captain MATHEW Mathai

MALACCA STRAITS Passage

ALL SHIPS PASSING MUST MAINTAIN 3.5 METRES UNDERKEEL CLEARANCE (UKC)

By Captain MATHEW Mathai

12

188

MALACCA AND SINGAPORE STRAITS, Narrow Straits & Strong Tides

Tidal ‘tail’ of over 5 kilometer/hour !

By Captain MATHEW Mathai

Eight Collisions In Two Months

By Captain MATHEW Mathai

13

189

The Evoikos ™Ship

was 285 metres long, laden with 120,000 tonnes of marine fuel oil. Oil Spill

™

A big hole !!

Almost 28,500 tonnes spilled into the Straits !!

™

By Captain MATHEW Mathai

21

The Lula 1 - Graceous collision

™ ™ ™ ™ ™

Rainy morning on 19 October 1999. Each of these ships nearly 300 metres long West bound empty tanker LULA 1 (GT 62031) in wrong lane. East bound bulk carrier GRACEOUS (GT 85695) in wrong lane. LULA 1 incorrectly identifies GRACEOUS on the radar. By Captain MATHEW Mathai

23

190

Piracy and Armed Robbery at Sea, Actual and Attempted Attacks 1996 1997 1998 1999 2000 2001 2002 2003 **

Malacca Straits

3

0

1

2

75

17

16

24

Singapore Straits

2

5

1

13

5

7

5

0

** 2003 from January-September 2003 or roughly one attack every 10 days!! By Captain MATHEW Mathai

46

CO-ORDINATED ANTI-PIRACY EXERCISE

Held 5 –7 March 2002 in Jakarta Attended by 14 Asian Nations Joint anti-piracy exercise with Coast Guards of Indonesia and Japan

By Captain MATHEW Mathai

57

191

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By Dr. Yoshiki OGAWA

LPG Import in East of Malacca   PL O   7RQ