The Demise of Oil - Energy Security Concerns, Global Antagonism and Dilemmas

Posted in Energy Security | 29-Jan-08 | Author: Ioannis Michaletos

Current context

"Russia strives to establish a permanent political influence in Europe through the construction of a variety of pipelines."
"Russia strives to establish a permanent political influence in Europe through the construction of a variety of pipelines."
The oil era seems to be coming to an end several decades from now, whilst the world markets are experiencing an upward trend in the energy price index. Moreover, the consumption of fossil fuel is accelerating due to the growth of the Asian economies and in Eurasia, the Russian corporations are eager to control most of the energy flow to Europe.

The recent NATO Heads of State Summit that ended with internal disagreement between the participating countries illustrates once more the diverging interests between powers centered on mostly energy. Of course this was depicted on a political scale via the enlargement disagreements, albeit the core of the whole issue traces back to the ongoing triangular USA-EU-Russian relationship based on energy.

Worldwide oil consumption has increased some 25% over the past decade; more than 85 million barrels of oil are needed to meet the daily needs of the globe. With the present consumption rates, the oil era will end in less than 40 years. This can be calculated by the fact that the total known reserves amount to around 1,2 trillion barrels. Further, the reserves are distributed unequally in the different geographical zones of the earth, and this means that some countries will experience a shortage much sooner than others.

The oil price has already reached $111.5 per barrel and it remains to be seen if the price will stabilize at an even higher one. By taking into account that 40% of energy consumption derives from oil; Western governments are already predicting slower economic growth with and as much as 0.5% of GDP lost in the coming year. Moreover, the combination of increased consumption (by India and China), the upward pressure by the options and derivatives market, the weakening of the US dollar and the diminishing reserves create an explosive situation that could erupt in the future and lay the basis for a world economic crisis.

The Greater Middle East region still reigns with the largest oil fields and some other countries like Venezuela, Russia, and Nigeria can be said to form the foundation of the production markets. On the other hand, the five largest petroleum corporations (Exxon-Mobil, Shell, BP, Chevron and Total) made more than $120 billion in profits last year, of which $39.5 billion were Exxon-Mobil’s alone. Due to its immense cash-flow, the oil industry is still considered to be one of the pillars of the modern economic system, apart from its influence on major geo-strategic decisions.

The depletion of reserves

It is more than certain that the last drop of oil produced will derive from an oil well in the Middle East. According to the BP Statistical Review of World Energy 2007, the Middle East produces 31.5% of the world’s total and holds 61.5% of the known reserves.

"China’s dynamic entrance into the market assists greatly in the projection that in 20 years from now oil consumption will…
"China’s dynamic entrance into the market assists greatly in the projection that in 20 years from now oil consumption will have increased some 40% and by this time, the peak oil will not just be a term but a distressful reality."
China’s dynamic entrance into the market assists greatly in the projection that in 20 years from now oil consumption will have increased some 40% and by this time, the peak oil will not just be a term but a distressful reality. Of course, the 39-year estimation is calculated for the world total and not for every individual country. Thus the oil-rich states will further upgrade their importance since they will be the ones dictating the rules of the game during the last annum of the oil period. For instance, Iraq holds around 115 billion barrels and produces 2 million per day. This is sufficient for another 100 years or so, whilst Saudi Arabia with 264 billion barrels and 11 million barrels production per day can hold on for not more than 67 years. Iran, another key country, will have sufficient amounts for approximately another 87 years. It can be rightly stated that the main interest of the world is centered on the Middle East, because apart from other political developments, Middle Eastern countries will play a very significant role for the global economy from 2040 and beyond.

The OPEC states in general produce 45% of the global oil production and have 76% of the total reserves. The cartel is challenged only periodically by the hedge funds that profit from legal gambling on energy prices. Should the trend continue, OPEC will further empower itself, when other non-member oil producing countries such as Norway, Brazil and Russia deplete their resources (9, 18.5 & 22.5 years respectively).

The main quest for all the main energy players is to discover new oil fields or to take advantage of new technologies in order to proceed in alternative modes of extracting oil. The oil sands in Canada could prove to be a promising opportunity, worth some 165 billion barrels of oil, even though that won’t stop the peak oil reality; it will only delay the overall path a bit.

Furthermore, over the past generation there has been little investment in the refinery sector of the oil energy industry. Both the United States and Russia have neglected to invest in their refinery industries, thus contributing to the overall situation. There are also serious considerations about Russia’s ability to manage its energy know-how in order to invest in new oil fields as well. Thus, future plans relating to oil transfer and new pipelines might end up to be just pipedreams whilst the future seems bleak for a market that cannot wait for long-term investments.

Since the first industrial extraction of oil in the modern era, more than 1.1 trillion barrels have been consumed. The interesting part is the acceleration of consumption during the past generation. In 1984, China required 1.7 million barrels per day; nowadays the figure has increased to 7.5 million. India consumed 0.8 million barrels and today it needs 2.6 million. Both countries are still behind the standard of living of post-industrialized Western countries and this is not reassuring given that their oil consumption rates will most likely increase further. As can be easily understood, the oil era cannot have any future judging the nature of our social system which is based on over-consumption and the eagerness of the Eastern Asian states to imitate the Western way of living.

The underlying strategic landscape

Pessimistic projections will lead to an overturn of the existing political balances across the world. Every state in need of oil will have to move fast in order to acquire new sources and be able to withstand the passage from the oil era to a new one, which is not yet well defined. It is not by coincidence that two of the most critical areas in the world are Iraq, and Iran – as they have been for many decades now. Even the former chairman of the United States Federal Reserve System (Greenspan) has implied that the war in Iraq had mainly motives that include the control of the commodity beneath its surface. The American economy, which is responsible for 25% of the world’s consumption is still very much dependent on oil, despite recent moves to initiate investment in renewable resources on a grand scale. The interest in global warming and damage to the environment have been highly elevated since 2001, mainly due to political and economic reasons that relate to the demise of the oil era and the turbulent situation in the Muslim world that controls much of this natural resource. The issue here is the high cost of using resources such as solar and wind power, since they generate low returns on investments. Actually, oil is still much cheaper than any renewable commodity; thus the main challenge will be for the US to retain its primal position in the world energy system for several decades and at the same time introduce new cost-effective technologies. In addition, the growth of renewable energy might alter the established world order by changing the importance of certain geographical regions in favor for other ones; this constitutes another strategic quest for policy planners and futurologists alike.

Due to their increasing demand for natural resources, China and India are two other power units that alter the established strategic notions. They will have to secure new energy sources; therefore, they will try to re-engineer the global power blocs to their advantage. The deals signed between Iran and China, Russia and China and African countries and China since 2001 are just a preparatory phase of what may follow next. Venezuela under Chavez’s leadership constitutes an emblem of energy nationalism which seems to become a trend in Latin America. His policies have global repercussions and an alignment of his state with the emerging giants of the East is a probable outcome in the near future.

Iraq by itself is a major issue, since oil production in this country is not sufficient enough to assure a steady flow to the markets, as it was the case before the 2003 war. For the moment, there are no signs of any positive development in that field and it should be noted that Iraq was at one time the second-largest oil producer in OPEC and its severe decline has contributed to the significant rise in oil prices. Also, terrorism – not just in Iraq - is an X-factor for oil prices. For instance, the attack on the oil industry complex in Saudi Arabia by al Qaeda in May 2004 witnessed a sudden hike in prices, despite the failure of the terrorist act. One should consider the consequences of a successful terrorist attack in an oil-producing country, a hypothesis regularly discussed by security analysts across the globe.

Lastly, Russia is a state that uses its natural resource wealth for geopolitical expansion and its main tool to re-establish the status it lost due to the breakup of the USSR and the dissolution of the Soviet Empire. Actually, when mentioning Russian diplomacy nowadays, one means energy politics. Moscow is steadily becoming the major source for the European markets and is gaining a foothold in East Asia. Simultaneously, it retains a grip on the production of Central Asian countries through signing a multitude of agreements that require the pipelines to trespass their territory in order to influence directly the production of Kazakhstan, Uzbekistan and others.

The short-term projection in relation to the strategic landscape is actually more difficult to define than the long-term one. OPEC seems to be losing the influence it has had since 1973 due to the Russian initiatives, the US control of Iraq, Venezuela’s actions and the pervasive reach of the international capital markets in the form of hedge funds. Note however that the peak oil will elevate once again OPEC holds most of the resources and certainly the Middle East can be said to represent the core of every energy related strategy in the future.

Russian expansion and European relations

Russia strives to establish a permanent political influence in Europe through the construction of a variety of pipelines transferring hydrocarbon from East to West. Nowadays at least 25% of the European Union’s energy needs in natural gas and oil are met by Russia and in some countries, such as Slovenia, this percentage reaches 60% (gas) or even 100% for Romania. Moreover, the projection for the next generation is negative for the EU since its energy dependency levels will increase from 76% (oil) to 93% in 2030 as the European Parliament Report revealed in its research on EU energy dependency rates.

Gazprom controls 95% of the Russian natural gas production and its reservoirs are the largest in the world. In 2004 it produced 541 billion cubic m3 and exported 140 billion m³. By 2015, it is estimated that Gazprom could produce up to 750 billion m³. From its point of view, Moscow relied heavily on taking advantage of its tremendous natural gas infrastructure and deposits. Since 1991, it supplies its neighbors with natural gas (cheaper than international prices) in order to oversee their foreign policy ambitions and keep them in line. In cases where countries such as Ukraine showed signs of challenging Russian predominance, Moscow raised prices five-fold, in late 2005.

The pricing policy of Gazprom is strictly political, meaning that states friendly to Russia receive considerably lower prices than others. For instance in spring 2006, Byelorussia paid $45 per 1,000 m³, whilst Georgia $110 per m³. Over the past few months, Gazprom has felt confident enough to raise prices irrespective of political motives in order to gain further global financial clout.

The importance of using energy as a political instrument can be found in the dependency levels that nearby countries have on Russia. Ukraine consumes 80 billion m³of gas per year: 25 billion imported from Russia, 36 billion imported from Turkmenistan but trespass through Russia and the remaining 18 billion are produced domestically. As can be clearly shown, almost 4/5ths of Ukraine’s energy needs are essentially controlled by Russia; therefore, its past, present and future are inexorably related to Russian foreign policy and its resolutions on a variety of themes.

Russian exports to Europe operate under the commercial framework of 25-year contracts based on bilateral agreements. The European states have agreed on paying for a standard and minimal amount of natural gas; therefore, Gazprom has a long-term steady cash flow and can plan accordingly. Even if the liberalization of the European Union leads to a spot-trading practice, Gazprom will most probably retain its status because the amount imported by the EU is simply tremendous to risk a confrontation with Moscow.

The reach of Gazprom is not only related to its exports to Europe. In 1993, it signed an agreement with the German corporation Wintershall AG, by which the jointly formed WINGAS that currently owns 2,000 km of pipelines and a reservoir bunker for natural gas of 4 billion m³. Gazprom has a 35% stake and consequently a portion of the German natural gas pipeline network. Moreover, Gazprom controls large parts of the Baltic States’ natural gas companies, such as Eesti Gas, Latvijas Gase, and Lietuvos Dujos. The Baltic States have naturally imported most of their energy needs from Russia.

Furthermore, in mid-2007 an important deal was signed between the Russian energy colossus and the Italian ENI. The cooperation memorandum relays the construction of a sub-water pipeline transferring natural gas of a total distance of some 900 km from the Russian Black Sea port of Beregovaya to Burgas in Bulgaria. Afterwards, it will be divided into two “streams,” one southwest to mainland Greece and reaching to Italy via another sub-water pipeline. The other route will trespass Bulgaria, Serbia and Hungary and make its way to the Central European markets. The total network is estimated to be of 3,200 km long, able to transport around 30 billion m³ of natural gas per year and will cost 14-15 billion euros. According to official press a statements, construction is scheduled to begin in late 2008 and the multiparty negotiations are still developing.

Italy gets some 24 billion m³ from Russia and has been importing gas from Russia since 1969. Moreover, if one adds this event as well as the agreement for the Burgas-Alexandroupoli oil pipeline between Greece, Bulgaria and Russia, a new era seems to emerge for the greater Southeastern European region that mostly signals a heightened role for Russian exports. For the South Stream venture, both companies will have 50% stakes, whilst the other participating countries will arrange individual agreements in the future concerning passage dues.

Concerning the prospects of this project, Professor Jonathan Stern, Director of Gas Research at the prestigious Oxford Institute for Energy Studies, commented: “Firstly it is not quite sure that the pipeline project will go ahead after all. It is visible that the main motive behind it is to bypass the existing transit countries. Lastly, both technology and cost are the main difficulties in relation to its construction.” Regarding the source of the gas to fill the pipeline, Professor Stern estimated that “it will originate from Russia and most specifically it is the same gas currently flowing through Ukraine.”

It seems that there is a visible divergence of interests between the two superpowers involving the South Stream, mainly relating to geopolitical influence over the region known as the Balkans i.e. Southeastern Europe. Mr. Vitalii Martynyuk who is a political analyst for the Ukrainian Independent Political Research Center stated that “Russia strives to produce and transport its own gas and at the same time to control production and transportation from other countries, excluding the US-leaning Ukraine in the process.”

A latest development is the recent Bulgarian-Russian agreement for the construction of the South Stream gas pipeline, conceived by the Kremlin to undercut a prospective US and EU-backed gas pipeline and strengthen its dominance in EU energy supplies.

According to the Associated Press, "Bulgaria's interests are fully protected, because the company which will be set up to construct and run the pipeline on Bulgarian soil will have 50% Bulgarian and 50% Russian ownership," as stated by Prime Minister Sergei Stanishev during a visit by Russian President Vladimir Putin.

Moreover, Serbia agreed to endorse a deal with Russia in relation to the South Stream. Russia promised to extend the pipeline into Serbia and build a huge gas storage facility there, to turn the Balkan nation into a major hub for Russian energy supplies to Europe. Also, 51% of the Serbian oil monopoly NIS was sold on January 2008 to Gazprom for 600 million euros and 765 million euros of proposed investments. This event further dashes the EU's hopes of reducing its growing energy reliance on Russia.

The aforementioned culminations can be said to be the main causes for the sudden resignation of Nicholas Burns, the high-level career diplomat of the US State Department. The Russian energy advancement proved to be irresistible, in light of the ongoing antagonism between Washington and Moscow over the status of Kosovo and the final agreement for the Burgas-Alexandroupoli pipeline that was secured in Sofia between Greece, Bulgaria and Russia.

Gazprom has grown to become a corporate emblem of modern-day Russia and an eminence of the importance of energy as exercised by the Kremlin. Despite the vast amounts of investments, Russia is still considerably dependent on Europe for its economic renewal through the steady flow of energy exports. Even if Russia fully constructs an export policy with China and Japan, Europe will form a large segment of its revenues and it is a geopolitical unit that is not interested in gaining political advances against Russia. Thus, the role of Europe is integral and could facilitate Russian economic expansion over the long-term.

Overall it should be noted that the main element that has assisted to a great extent the ability of Russia to present a dynamic role on the international stage is an amalgamation of high energy prices, the West vs. Islamic terrorism and the economic expansion of the East being fuelled by the globalization process.

The only stable parameter nowadays is the continuation of US-Russian rivalry that will lead to a peripheral shift of balances (i.e. Balkans, Caucasus, Iran) and the diverging interests of the EU member states due to their dependence on Russian natural gas. The role of the countries in the midst of the antagonisms, such as Poland, the Baltic States, Turkey, Greece, Bulgaria, Georgia and Ukraine will shed light for the mid- to long-term consequences of Russia’s energy expansion.

The quest for alternative production

"There is a quest for alternative energy in order to ease the world's dependence on oil and gas"
"There is a quest for alternative energy in order to ease the world's dependence on oil and gas"
The presentation of the aforementioned challenges and events already sweeping across the world has activated a quest for making use of any type of material possible in order to both ease dependency on oil and gas along with the political implications that this implies. The Shell Research and Development sector has transmitted in the media that there is a great chance of making use of a Kerogene mixture of organic chemical compounds found in sedimentary rocks. A region in the US that contains large amounts is a 17,000 square-mile one between Utah and Colorado. It is guessed that approximately 800 billion barrels of retrievable oil could be extracted here - an amount three times that of Saudi Arabia’s reserve. The area mentioned is named Green River and can produce up to 5 million barrels of oil per day, which is 17% of the present daily consumption. Shell expects to receive the appropriate license to begin using a new method to extract oil from there, and this revolutionary development might alter the future of oil politics. It has to be noted that there are not any clear projections on the financial viability of this investment, something that will be ascertained in the future.

Notable deposits of Kerogene can also be found in Brazil, China, Jordan, Israel, Thailand, Russia and Korea. In total, at least 3 trillion barrels of oil can be retrieved which is almost 3 times the currently assessed petroleum reserves. A drawback of the Kerogene extraction process is the use of excessive amounts of water, something that might hinder the ability to use this technology in desert regions lacking water. Shell has invested US $855 million in Kerogene research in 2006 and according to Fortune magazine, the corporation has dedicated over $200 million per year over the past 28 years in this project. Certainly this might be a future solution that will have its ramifications on energy security politics.

The International Energy Agency predicts that by 2030, world energy needs will increase at least 60% due to the growth of China, India and the other booming developing economies. This means that in the next generation or so, the countries in the OECD alone should develop new energy resources of as much as 2,000 GW. It also means that renewable energy production should be introduced in any case regardless of the discovery of new modes of producing hydrocarbon.

Photovoltaic energy is being viewed as a promising renewable energy resource that has a number of advantages. It is a clean mode of producing electricity without emissions; it doesn’t involve substantial operational costs and can provide a durable and trustworthy production. For example, Germany produced 3,063 MWp in 2006 and has about 50% of the global market.

Wind energy is another resource that has gained popularity and promises clean energy and energy security at the same time. According to the World Wind Energy Association, worldwide wind power generation more than quadrupled between 2000 and 2006. At the end of 2006, worldwide capacity of wind-powered generators was 73.9 GW. The main producers are: Denmark (19% of its electricity production), Spain and Portugal (9%), Germany & Ireland (6%).

Lastly, the coal storage techniques that have been introduced by BP, Total, Duke Energy, RWE, Vattenfal and others might revive coal as a clean energy resource, although the whole process is under scientific review and the commercial results will be seen in a decade from now. Most of these projects are underway and approximately 10 billion euros have been invested in the above projects.

What lies ahead?

The synthesis between the energy security quest by Western countries and the demise of the oil era, leaves no other option but for the use and deployment of new technologies and techniques in the field of alternative energy. Despite the fact that they are presently less cost-effective, they have the crucial advantage of relieving the world from the perils of environmental destruction, although the current projections by concerned citizens and NGOs portray a much worse depiction of what the reality is - a hotly debated subjected suitable for another discourse.

In the meantime, before the demise of oil and the introduction of renewable energy, new methods have to be used in order to ease the transformation, especially in the countries most greatly affected. Furthermore, the ongoing research on the use of hydrogen power is bearing fruits, even though it has to be noted that for the mid-term and possibly until the end of the first centenary of the 21st Century, hydrogen production will rely on the use of natural gas as a cost-effective and reliable method. A latest development here is the effort by the Abu Dhabi Emirate to invest $15 billion in order to construct the largest hydrogen production facility in the world. This will constitute the first phase of a gigantic project that will use natural gas as a production commodity, a material in abundance in that country. Nevertheless, this will not solve the issue of energy dependency of Western states on the gas producers, notably Russia and the Middle East. Thus it is probable that for political reasons solar, wind, wave and other forms of renewable energy will enter the market with a greater role, until technological advancements can solve the complex issue of hydrogen production.

Technology and energy security considerations go hand-in-hand in the peak oil era that has to be managed skillfully by the political establishments across the globe in order not to experience a looming crisis that will certainly erupt into a military one and will visualize the Armageddon perhaps as envisaged in the Apocalypse. Energy is the blood of the global system since the period when man became dependent upon machinery for his own needs. This will continue in the future and this century seems to be a pivotal age for the human race to enter a new stage, shedding the hydrocarbon one. The decisions made by politicians in the near future will dictate more of what is at stake than can be assumed at first glance.

Recommendations

1) Europe should aim to create a balanced triangular relationship with Russia (Central Asia), North Africa and the Middle East. This can be achieved through the combination of both political and economic incentives, especially by the three leading industrial states, namely Germany, France and Italy.

2) Europe as well as other countries should invest heavily in renewable resources and new technologies that will facilitate the era when oil becomes a rare commodity. This includes solar, wind, wave, geothermic, and bio-fuel production.

3) It will be vital to look into the future age of hydrogen by creating a research complex within the EU that will promote academic and industrial research. Moreover, funds should be appropriated to small- and middle-sized corporations (90% of the EU economy) in order to invest in that field, possibly through the use of cooperatives and corporation unions, so as to split costs.

4) There needs to be conclusive discourse and negotiations between Washington, Brussels, Moscow and the European capitals regarding the pipeline networks. This is needed in order to foresee possible geopolitical antagonism that will lead to a future conflict. There must also be an official and binding agreement for the secure transfer of oil and gas from Eurasia to the European markets. This can be achieved through a series of guarantees from one side to another. An international treaty could also be a point of future discussion.

5) Energy efficiency is related to energy security. Over-consumption is a negative aspect of today’s economic growth; thus, measures aiming to curb consumption can be beneficial. Moving to a new age based in post-industrial production needs no excessive hydrocarbon emissions, for the good of the environment and the market.

6) Long-term contracts regarding energy imports to Europe are better than spot-trading. It enables the creation of a secure political and economic climate and assists in the interdependence of the significant producers and importers. Of course this needs to be taken under consideration by the policy makers taking into account all possible angles.

7) Lastly, regions of great interest for energy security concerns, such as the Gulf, Nigeria, Venezuela and North Africa should be closely monitored in order to predict and analyze any future trends leading to destabilization. Consequently, international bodies like the EU and NATO can improvise plans and techniques to prevent conflicts and conduct peacekeeping and peacemaking operations, with respect to the delicate balances that this might entail.

Reserves (in billions of barrels) Years until oil depletion
United States 30 12
Venezuela 80 78
Kazakhstan 40 77
Russia 80 22,5
Iran 137 87
Iraq 115 100
Kuwait 101 100
Saudi Arabia 265 67
UAE 98 90
Libya 41,5 62
Nigeria 36 40
Source: BP Statistical Review of World Energy 2007

Share

Comments