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MIDDLE EAST ECONOMIC SURVEY
MIDDLE EAST ECONOMIC SURVEY | MEES SINCE 1957 | ALL RIGHTS RESERVED | ©2010 | Published by
Volume 2 No. 3 March 2011
The Arab Awakening& Israel
Egyptian Islamic
Politics- Post Mubarak
Natural Gas: Current Pricing
& Future Trends
The Next Revolution?
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Publisher :
Dr. Saleh S. Jallad [email protected]
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CONTENTS
Comment
Israel and the Arab Awakening,
David Hirst
Forward From The Arab
Revolutions, Gerald Butt
Egypt’s Islamic Groups Future
Plans, Muhammad Karum
Algerian Attitudes To Popular
Revolution, Kamal Zait
Natural Gas Pricing: Current
Patterns and Future Trends,
James T. Jensen
Rumaila Oilfield Production,
Ahmed M. Jiyad
Water Security in the GCC,
Ramzi El-Houry
Energy Security: A Dynamic
Concept,
Leheb Ata Abdul-Wahab
IEA World Energy Outlook 2010,
Hisham Khatib
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Revolutions and protests continue in the Arab world, calling for fundamental
changes and more freedoms and justice. Where these movements will lead to is still
a fluid situation? How will these changes impact the Arab-Israeli conflict is a major
question. David Hirst addresses the issue by asking how Israel will react to the new
Arab democracies, and the fact that it is no more the only democracy in the volatile
Middle East? Will Israel continue to obstruct the peace process, as it has done over
and over again, or will it rethink its strategy and adopt a different approach to the
new Arab democracies?
Gerald Butt, former MEES editor-in-chief, asks if there is a domino effect in this
revolutionary process, and how the political parties will react to the changes. Mr.
Butt reviewed the Arab press to find answers to these questions, selecting and
translating two articles.
Algeria has been one of the countries discussed as a candidate of the opportunities
for regime change, but a column in the London-based al-Quds al-Arabi does not
think so, because the author believes that Algerians have witnessed much suffering
during the civil war in the nineties, and do not want to repeat that experience soon.
How will Islamic parties react to the changes. Al-Quds al-Arabi , also discusses this
issue by conducting interviews with several Egyptian Islamic leaders. The conclusions
are the following: Egyptian Islamic parties are aware of the opportunity the regime
change is offering them; nonetheless, the differences among these parties are such
that each one of them intends to pursue its own course of action, independent of the
others. Finally, and perhaps more importantly, the parties are ready to adopt a civic
program, along with their religious one in order to be accommodated by the new
regime, and be accepted by the youth and the public in large.
Current pricing and future trends of natural gas is analyzed by James T. Jensen,
who also reviews structural changes in the global LNG industry, their impact on
the industry, LNG trade and pricing and asks how does contract pricing adopt to
commodity competition? Meanwhile, production in Iraq’s giant Rumaila oilfield
dropped sharply, after the IOCs responsible for its development achieved the 10%
threshold over the baseline production agreed to with the Iraqi authorities.
COMMENT
5
Mr. Ahmed Jiyad examines this phenomenon based on data for the period 26
December 2010 to 27 February 2011.
The Gulf Cooperation Council (The GCC states) are rich with hydrocarbon
resources, but possess very little water. Water desalination and exhaustion of
underground water reserves are the two means available to them now to provide
for their water supplies. However, with rapidly expanding populations and rising
standards of living, as well as uneconomic farming practices that exhaust much of
the water resources without much economic return, the GCC states need to give a
higher priority to their water resources and utilization, according to Ramzi El Houry.
The term energy security covers a wide spectrum of issues. It is no surprise that
it is back in vogue these days with the protest movements and regime changes
throughout the region. Leheb Ata Abdul- Wahab reviews the various aspects of this
concept, and its many facets- old and new, concluding that producing countries,
despite their unsettling experiences, have been able to ensure sufficient oil supplies
to the markets, and that on their part, they are raising their demand for a more
transparent picture of future demand projections and policies in the consumer
countries.
The annual World Energy Outlook (WEO) published by the International Energy
Agency (IEA) has become a basic reference to the energy library. Hisham Khatib
reviews the World Energy Outlook 2010, providing a critical analysis of the various
scenarios it raises, and the new prospects it proposes.
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7
The Arab Awakening, in its great initial impulse, was all about ‘freedom and democracy,’ but that doesn’t mean it
wasn’t fuelled by other issues too; and those, mainly Israelis, who say that for once this latest, prodigious turbulence in
the world’s most turbulent region can in no way be ascribed to the Palestine problem sound a bit like Colonel Gaddafi
saying that all his woes come from al-Qaeda. The place where, after their own particular country, Arabs would now
most like to see the next uprising is Palestine. It would have a double import, being directed not just against another
Arab tyranny, the corrupt, collaborationi st Palestinian Authority, [and maybe Hamas too], but against the foreign one
too, the Israeli usurper and oppressor of an Arab land and people whose ‘liberation’ was always the pan-Arab cause
par excellence. At the very least, Arab democracy would open up whole new discourse about, and opportunities for,
collective Arab action to settle this historic confl ict once and for all.
It is ipso facto fraught with momentous possibilities for Israel too. For Uri Avneri, the veteran Israeli peace
activist, it stands at an ‘historic crossroads’ and ‘the direction we choose …will determine [our] destiny for years to
come, perhaps irreversibly.’ The right choice would be for Israel to seek its integration into the region to which it
physically belongs, and to begin that process with a declaration of ‘solidarity with the Arab masses in their struggle
for freedom, justice and dignity.’ The wrong choice would bring ‘weeping for generations, as the Hebrew saying goes.’
Besides, others say, how could the self-styled ‘only democracy in the Middle East’ possibly do other than welcome
its neighbours into the fold? Had it not constantly argued that it could only achieve true peace with a democratic Arab
world, since democracies are inherently good-neighbourly and ‘don’t make war on other democracies.’
Yet, confronted with the real, sudden, hardly imagined prospect of such a thing, Israelis took instant fright,
alarmed above all that Egypt’s Muslim Brotherhood would exploit it to set up some Taliban-like theocracy bent on
Israel’s destruction.
That would be bad for Israel. Yet even fl awless democracy would only be good for it if Israel itself enabled
it to be. One can imagine what Egyptian offi cialdom might soon be telling their Israeli counterparts: ‘Yes, for sure,
any peace you made with a democratic order would be sounder than the two you made with our dictators. But, to
ISRAEL AND THE ARAB AWAKENING
David Hirst*
* David Hirst, author, free lance journalist, and former Middle East correspondent of The Guardian.
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secure it, you’d have to pay a higher price than President Sadat
or King Hussein ever required of you. For nearly forty years now,
these dictators have shielded you from the people’s anger at your
behaviour [not to say your very existence] and the impact which, in
democracies, that would have had on their governments’ policies
towards you. Democrats are supposed to heed what their people
want, and we tell you now that, unless you change your whole
attitude towards us, ours will never let us make peace with you.
We suggest that, if you really are a democracy, you start applying
its principles not just to your Jews, but to your Palestinians, and
seek a peace with them that a real democracy would deem as
fair, and internationally lawful, as is realistically possible. And
please make haste about it because we shall now have to resume
dealing with you in the manner which, in the absence of peace,
our people will expect of us.’
It can be taken for granted that a democratic Egypt will
soon be extricating itself from the extraordinary strategic and
tactical complicities which Mubarak had forged with Israel,
and cease its all but automatic favouring of the Israel interest
over the Palestinian one in areas of common concern. The new
foreign minister has said, for example, that the Israeli - and
hitherto Egyptian-assisted - blockade of Gaza is a violation of
international law. It may or may not have been a sign of the new
times that two Iranian warships, the fi rst in 30 years, recently
passed through the Suez Canal, but the Israelis certainly feared that it was. They worry, too, about an eventual revision
or even abrogation of the Israeli-Egyptian peace treaty on the ground that Israel never honoured an integral part of
it, the formation of a ‘self-governing Palestinian authority’; secular politicians, as well as the Muslim Brothers, have
advocated that. They worry above all that the most powerful army in the Arab world, neutralized under Mubarak, will
again become a key component in the overall Arab-Israeli balance of power, and ready, in some future contingency,
to wage war against ‘another democracy’ which, in practice, it has never ceased to regard as its foremost potential
enemy.
But prospects like these seem only to be making the Israeli government, already the most extreme in the
country’s history, more extreme than ever. True, prime minister Binyamin Netanyahu is soon to announce another
‘peace plan.’ But this is expected to be no more than public relations ploy chiefl y designed to placate the West, now
more than ever persuaded of the urgency for a peace settlement, but exasperated, as Angela Merkel angrily told
him to his face, that ‘you haven’t taken a single step to advance’ one. He will, said a leading Israeli commentator,
deliberately make the Palestinians ‘an offer they cant possibly accept.’ For he has now taken to arguing that, after
the ‘earthquake’ that has hit the Arab world, Israel’s security and survival lie more than ever in ‘our strength, unity
and determination to defend ourselves’; in other words, in territorial depth and strategic dominance, not in peace-
seeking compromises that erode such assets. In effect, his critics say, he is inviting his people to join him behind
the ramparts of a garrison state that would preserve the status quo, continued settlement and all, along with its
inevitable corollary: not integration into region, but everlasting confl ict with it.
So, if Uri Avnery is right, ‘weeping for generations’ may well be where Israel is now heading; and it is an
outcome which looks all the more possible given the profound, if little-noticed, irony inherent in all its anguished
clamour about future Talibans arising on its doorstep. For what about its very own, Israeli Taliban? What about those
clerics who, like former Chief Rabbi Ovadia Youssef, say of president Mahhmoud Abbas and his negotiators that ‘all
these evil people … God should strike them with a plague, them and the Palestinians’; who preside – along with the
nationalist right - over the most dynamic and destiny-shaping force in Israel today, West Bank settlers so infl uential
within country’s body politic that no Israeli government apparently has the will or ability to rein them in; who go into
battle [Gaza, 2009] preaching ‘combat values’ – thou shalt treat the Palestinians like the Israelites did the Philistines
of yore – to the Israeli army; itself an institution, once overwhelmingly secular, in which religious, kippah-wearing
Jews now account for a good 40% of its newly graduating offi cers, and some of whom say that, in a choice between
obeying their commanders or their rabbis, they would defer to the latter. In no other Middle Eastern country, bar Iran
or Saudi Arabia, does a fundamentalist priesthood now exert such critical infl uence over state policy.
If this is what Israel’s long-established democracy has thrown up, what greater encouragement could there
be for Islamist counterparts to emulate it in the nascent Arab ones? Not that, in Netanyah’s mind, that would be an
unmitigated calamity – though of course he would outwardly excoriate what he surreptitiously celebrates as his best
of alibis for not even trying to make peace.
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In the following three articles we examine aspects of the revolutions engulfing the Middle East and North Africa. We ask: Is the region really experiencing a domino effect? Why has there been no mass uprising in Algeria of the kind its neighbors have experienced? And what are the political plans of Islamic groups in Egypt for the post-revolution era?
Arabs Are Emboldened: The Real Domino Effect
By Gerald Butt,*
The Middle East and North Africa region is experiencing its biggest shake-up in nearly a century. Not since the end
of the First World War and the collapse of the Ottoman Empire have such momentous changes occurred.
The carving up of the region into new nation states in the post-World War One era involved a number of decisions
taken on the run, and arbitrary lines drawn on maps of the area. But these were the exceptions. In general, there was
a grand design, no matter how repugnant it might appear today: Britain and France had a clear colonial vision of how
they wanted the Middle East to look and what their roles in it would be.
FORWARD FROM THE ARAB
REVOLUTIONS
* Gerald Butt, a regional analyst, is a former Editor-in-Chief of MEES.
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The big difference in 2011 is that there is no chart to follow and no action plan. Therefore, predicting what kind of
Middle East and North Africa will emerge when the dust of revolution has settled is not easy.
For a start, no single revolution has taken exactly the same form as any other. This is because the protests have
been spontaneous, led from the street where, by and large, there are no leaders. Furthermore, the pre-revolutionary
circumstances differed greatly from one state to the next.
The received wisdom is that the region is experiencing a domino-effect, as anti-regime protests spread from
country to country. But if this is indeed what is happening, then why are some countries being subsumed by revolution,
while others are not?
It is signifi cant that the most active revolutions thus far have occurred in totalitarian republics – in some cases
where the same president was in power for decades: Tunisia, Egypt, Libya (a republic, despite Colonel Qaddafi ’s
pretence that it is not) and Yemen. In such countries, the heads-of-state and their ruling cliques were recognized as
those directly responsible for all aspects of life, including the siphoning of state funds, the abuse of human rights, the
denial of free expression, and the neglect of the poor and disadvantaged.
Therefore, in such countries the target of the protesters has been clear: to remove the regime, from the president
downwards.
In monarchies, there is not such a clear focus. While monarchs like King Abdullah of Jordan and King Abdullah
of Saudi Arabia are the fi nal arbiters of power, they have a buffer in the form of prime ministers and members of
cabinet who can be replaced or reshuffl ed – as happened in Jordan in February with the appointment of Ma’ruf Bakhit
as premier – in an attempt to placate the protesters. Moves of this kind can have the useful effect (from the regime’s
point of view) of causing splits within the protest movement, leading some to demand reforms within the monarchy
system, and others wanting it scrapped.
Added to the layers of complexity in the Arab revolutions are particular circumstances in different countries. So,
for example, while Algeria might have seemed ripe for the kind of mass street turmoil that other Maghreb states
have experienced, given the similarities of the ruling systems, it has not turned out this way – for reasons that are
discussed in the article that follows this one.
In Bahrain, too, there are exceptional circumstances. The revolution there – again with some voices calling for
reform, others for the end of the monarchy – has been driven by the majority Shi’a community demanding an end to
discrimination by the Sunni-dominated leadership.
Iraqis, for their part, have been holding huge protests around the country – but for better basic services and an
end to corruption, rather than regime change. Likewise, the call from protesters in Oman has been for jobs rather
than for the ousting of Sultan Qabus. The Lebanese, meanwhile, have been taking to the streets demanding an end
to sectarianism.
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So the domino effect has been somewhat erratic and unpredictable. Syria (through brutal repression), Saudi Arabia
(by severe enforcement of the ban on demonstrations) and Kuwait (the sole functioning democracy in the Gulf) are some
of the countries that have been untouched by the fi rst phase of revolutions.
But if there are clear differences in conditions and the form of the uprisings, there are also some equally clear
similarities. The fi rst is in the way that opposition politicians and political parties (Islamic as much as secular, tolerated
or banned) have played almost no part in directing the revolutions. Instead, they have had to follow the lead of the public.
In Yemen, for example, President Ali Abdullah Saleh in February rushed through measures to try to take the sting out
of opposition to his rule – announcing that he would not seek re-election in the 2013 polls. He also attempted to open up
a consultation processes with the Yemeni people. In response, the established opposition parties cooled their rhetoric.
But within days, the overwhelming tide of street protests forced them to join the demonstrations.
The other thread running through the whole protest movement, from Morocco to the Gulf, can be summed up as
disgust and anger at the contempt with which the Arab regimes (with no exception) have viewed the people they govern.
Diffi cult economic and social conditions, unemployment and feelings of helplessness about the future were merely
symptoms of that disgust and anger.
Some shrewd observers saw what was coming. An explosion of popular rage, of the sort witnessed in Tunisia, Egypt
and elsewhere was predicted six years ago by a Kuwaiti political commentator, Ahmad al-Ruba’i, after a journey across
North Africa.
“The more I wandered in these towns,” he wrote, “the more I felt that time had stopped: the same depressing streets
and the same buildings in a state of collapse. The number of beggars at the traffi c lights has increased, and children
still fi nd jobs in fi lthy workshops in order to earn a crust. Poor people are everywhere – as if it is their ultimate fate to
be this way. The people complain about corruption and the misuse of money, and about how the rich get richer and the
poor get poorer.”
Mr Ruba’i observed that the inhabitants seemed incapable of change: “The world around them changes while they
snooze obliviously. The people awake to unemployment and go to sleep with hopelessness. I will not hide from you the
fact that I fear an explosion in these Arab towns. And if, God forbid, that should happen, then it would be bigger than we
might expect, and worse than we can imagine.”
His grim prediction was unerringly accurate. The uprisings in Tunisia and Egypt, covered live 24 hours a day by
satellite news stations, emboldened Arabs everywhere to speak out against injustice for the fi rst time ever. That has
been the main domino effect in this season of Arab revolutions.
But just as there was no template that fi tted all the uprisings, so there is no ready-made pattern for the post-
revolution era. As a result, the challenges facing the Middle East and North Africa today are quite as daunting as those
that followed the First World War when Britain and France shook up the region at the start of the colonial era.
16
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Nobody faced oppression and persecution in Egypt during the era of the previous president more than the Islamic
movement. Since the fall of the regime, various Islamic groups have wasted no time in making preparations to begin
political and proselytizing activities.
A number of them have announced that they will establish political parties – foremost of which is al-Wasat [Centre]
that was proscribed in the past but is recognized today. The Ikhwan al-Muslimin [Muslim Brotherhood] has also
spoken of its determination to a form a political party, as has al-Gama’a al-Islamiya that was forbidden completely to
undertake any proselytizing or political activities. Mamduh Isma’il, the Islamic lawyer who tried in the past, without
success, to form al-Shari’a [Islamic law] party is now trying to realize his dream – but with the name of the party
changed to al-Nahda [Renaissance]. All these would be civil parties with Islamic roots. Would it not be better for
them to join forces in a single front in order to be stronger and more infl uential, rather than each group having its
own party?
What will be the relationship between them, and how will they coordinate their various positions, especially in
parliamentary elections? Or will differences between them emerge and tussles break out? If al-Gama’a al-Islamiya
failed to set up a party, would it join any of the others – especially the Ikhwan al-Muslimin, after the elimination of
many of the differences between them?
How come these movements are calling for civil parties and a civil state, whereas before they demanded an Islamic
state, and some of them – like al-Gama’a al-Islamiya – tried to impose one by force? And given the division within the
Ikhwan al-Muslimin, is it possible that part of the leadership will break away and form other parties?
The leaders of these groups answer all the above questions:
The fi rst leader we met was Dr Najih Ibrahim, a member of the Shura Council of al-Gama’a al-Islamiya. He is also the
group’s spokesman and editor of its website.
Egypt’s Islamic Groups Future Plans*
Muhammad Nasr Karum
18
Q: Why did al-Gama’a al-Islamiya decide now to establish a political party?
A: Our group wants cover under the law – civil and Islamic – so that it can work to in the service of society. Having a
political party is the best way of doing this because the civil and Islamic cover protects it and its members, and gives it
the security to enable it to impart the message of Islam to all the people. Our group has a political program involving
a civil party. We want a civil political party, but one that is steeped in Islamic culture.
Q: Only a few weeks back you announced that the idea of forming a political party was not one of your group’s priorities. Why have you now changed your mind?
A: Because in the past we were not permitted to undertake political activity. But now it is possible for many of the
Islamic groups to set up civil political parties with an Islamic background. There is nothing stopping us from forming
a party, now that the situation has changed completely and there is freedom for everyone.
Q: You also announced that your differences with the Ikhwan al-Muslimin were not fundamental and that there was a considerable rapprochement between you. Why not join the party that the Ikhwan is forming rather than establishing your own?
A: There is no fundamental disparity between us any Egyptian Sunni Islamic movement. The differences among the
Islamic movement as a whole are a matter of diversity rather than confl ict. We will try to set up a party of our own
that embraces our ideas. If we cannot do so, then it is possible that we will consider joining any political party with
an Islamic background.
Q: The parties with an Islamic background are al-Wasat Party, the one that the Ikhwan al-Muslimin is forming, and al-Nahda that Mamduh Isma’il is setting up. Which is closest to you and the one you could work with?
A: We would consider the matter, see which was closest to us and fi nd out whether or not it would allow us to join it.
If we were not allowed to join any of these parties, then it would be up to members of al-Gama’a al-Islamiya to join
any of them that had an Islamic background and work through it for the cause of Islam and strive to expound their
vision of moderate Islam.
Q: Islamists have been quick to set up political parties and there look like being four or more of them. Do you think it would be better for these various Islamic movements to unite in a single political party that would be strong and infl uential, or to continue as they are doing?
A: It is very diffi cult for these movements to unite, and it is likely that they will continue as they are. There could be
coordination between them in parliamentary elections. This is a better course of action, because diversity is inherent
in Sunni Islam and it would be diffi cult to eliminate it – diversity in Islamic jurisprudence and in politics.
It would be hard to bring these parties together and dissolve them into a single entity. For example, al-Wasat Party
has been in existence for a long time. If it had wanted to return to the Ikhwan, then it would have done so. But they do
not want this. Also, Mamduh Isma’il’s thinking differs from that of the Ikhwan. There is nothing wrong with diversity.
But what is shameful is chauvinism. If one gets rid of that, then there can be cooperation, integration and coordination
in policies and in parliament – and that is preferable.
Q: You say you want a civil state. But how can this be? You were at the forefront of those striving to set up an Islamic state, and you even tried to impose one with the use of arms?
A: The previous position of al-Gama’a al-Islamiya and their ideas in the 1970s are totally different from those of today.
We want freedom and justice for all, a civil state ruling with justice and in a fair way, providing freedom for everyone.
We are not afraid of this freedom because we are holding the strong message of Islam which has an inherent strength
that is stronger than any other idea.
From “al-Shari’a” to “al-Nahda”
Mamduh Isma’il, the Islamic lawyer, had for some years been submitting a plan for al-Shari’a Party, but failed to
establish it in the era of the deposed president. He was repeatedly imprisoned for his Islamic activities and his links
with the al-Jihad group – not to mention his political activities. He is now forming a political party with Islamic roots,
but has changed its name from al-Shari’a to al-Nahda. He was also one of those demanding an Islamic state, but
now says he wants a civil state. So why has he changed his rhetoric in this way – given that the two concepts are
incompatible? This is what he told al-Quds al-Arabi:
19
A: There is no contradiction between talking of a civil state and an Islamic state. For the state that we are asking for
and striving for is one with Islamic roots. It is a civil state because it deals with matters relating to society to and the
problems of daily life, and handles the affairs of the people. These are all civil matters. The diffi culty is with other
people understanding what a civil state is – and what connotations non-religious people and enemies of Islam bring
to use of the words religious or Islamic state.
Q: The concept of a civil state is one where is a diversity of opinions, ideas and ideologies. There is also freedom of religion and beliefs, and freedom of religious practice, with no one having a monopoly of faith – indeed, freedom for all, without exception.
A: These are American-type concepts pursued by those who want life in Egypt to take on this character. There are
many constitutions in the West stipulating that Christianity is the offi cial religion, but there are those who play around
with the wording. What they have in mind is a civil state is one where the second article of the constitution is removed.
There are also those who have cut their links with Islam and gone overboard about the Christian West to an extent
that we face an excess of would-be Americans in Egypt. A civil state has a meaning in law and in the constitution, but
those who are hostile to Islam have played around with the wording and given it a meaning that is quite different from
the legal and constitutional meaning.
Q: Al-Wasat Party with Islamic roots has been formed. The Ikhwan al-Muslimin is expected to establish a party, as is al-Gama’a al-Islamiya. Would it not be better to join together these parties with Islamic roots to form a single front that is strong and infl uential? Or will each group have its own party?
A: In Islam, there are many differences in thoughts and ideas. Democracy means diversity of opinions and accepting
the opinion of the other. In the coming phase in Egypt no one must have a monopoly and claim that he alone holds
the banner of Islam. In the past I submitted a plan to form al-Shari’a Party – the Ikhwan al-Muslimin and al-Gama’a
al-Islamiya did not submit a plan to form a political party. Al-Wasat Party was the only Sunni one to be formed before
mine. We had a plan before and submitted it in the shadow of subjugation and tyranny during the time of the former
regime. We believe we have the right to go back and renew our plan once more. As a Salafi movement we have a right
to appear on the Egyptian scene, on the political stage, with a new political vision. This does not imply differences
between us and the others but means that we will coordinate with the others. We have our own distinctive character
and vision, but we also stress that coordination is essential. I would like to point out that al-Gama’a al-Islamiya has
never claimed to have a party or a political program before, and I do not believe it has a political program now. If they
have, then they will need to examine critically their ‘concept correction’ books , because these imply attachment to
the state [of the former regime], not to the opposition. In planning a political party you have to think fi rst about being
an instrument for opposition. Also, before thinking of setting up a political party you have to have a moral platform,
or new moral and intellectual charters for a political opposition program. This would mean criticizing all or at least
some of what is contained in the concept correction books that link the group to the former state regime, heart and
soul.
Q: Do you imagine that the relationship between these parties will be one of cooperation or confrontation?
A: I believe there will be no reason whatsoever for confl ict from the perspective of our party or program, because we
want to present a distinctive vision. We will not get into any confl ict at all with anyone because Islam requires us not
to struggle with one another. We can have our differences with the others, for that is our right as individuals with a
political vision. Politics gives the right to every individual to strive for his opinion and his idea in any political matter.
But struggle and confl ict will not happen at all.
Q: Will you try to bring into your party the leadership of al-Jihad organization who have broken off from the group and those who were prevented from carrying out any activity over many years?
A: The party is open to all, and a large group of young Salafi men have joined it. The leaders of al-Jihad are our
brothers, and those of them who want to join us are unreservedly welcome. This applies to anyone who wants to serve
the nation and Islam within a political program.
Mamduh (of al-Nahda) “has not read the concept correction books”, says Dr Ibrahim
Q: Mamduh Isma’il, founder of al-Nahda Party, says that if al-Gama’a al-Islamiya wants to form an opposition party,
then it needs to re-examine critically of the concept correction books because they attach your group to the former
regime, heart and soul.
20
A: Dr Najih Ibrahim says that Mamduh Isma’il has not read all the concept correction books – which total 23. They do
not connect us to the former regime of state, because some deal with fairness, prohibition, forbidden actions, jihad,
coming out openly with the truth, calling to God. We opposed the previous regime in every way, even with arms. We did
not shrink from anyone. We opposed anyone who opposed us with our own hands. More than 100 of us were executed
and 12 of our members are still facing the death penalty. Fifty thousand were imprisoned, and many died. No party or
group faced what we did. The concept correction books meant simply abandoning violence and armed confrontation
with the state or society. They did not mean adulation of the regime or attachment to it.
Ikhwan al-Muslimin
Q: On the idea of the parties with Islamic roots uniting in a single front to be strong and infl uential on the Egyptian street, Dr ‘Issam al-‘Aryan, a leader of the Ikhwan al-Musliminand a member of its Information Offi ce said:
A: At the start any political activity after so many long years of oppression and subjugation everyone will be thirsty for
political action after it had been more or less banned before. Every movement has its particular vision and program,
and therefore each wants to set up its own party, even if they agree with one another on 70% or 80% of things. But
they do differ in one part or another of their ideas, and for that reason each group is striving to set up its own party,
representing or expressing its ideas. With the development of political life, and the pursuit of various activities,
elections and the like, movements with their own authority are starting up. As for parties joining with one another, or
talk of alliances or coordination in elections and the formation of a single front – this is something for discussion in
the future in one shape or another.
Q: Do you think the relationship between them will be one of cooperation or antagonism?
A: It ought to be a relationship of coordination and cooperation, not antagonism and confl ict, for this would be
inappropriate.
Q: If al-Gama’a al-Islamiya fails to form a political party and wanted to join the Ikhwan’s party, is it possible that this would happen, especially after the elimination of many of the differences between you?
A: It is too early to talk about this. What is important at this stage is that each movement gets its papers in order,
organizes its ranks, becomes active and forms its party. We are certain that the Egyptian revolution has led to
rapprochement among all movements. If all the movements come closer together – the Ikhwan al-Muslimin, the
liberals, the nationalists, the communists, the independents – then it is a step closer to them coming under one
authority, even if there are differences in direction.
21
Q: In other words these parties would be stronger in infl uence and popularity?
A: This is up to the public to decide. No one can predict this. For these are parties that have been formed by groups
with track records, and it is possible that they will become strong parties. It is possible that new parties will be formed
to attract young people, and they could become strong. But strength cannot be judged in one day – it has to have
staying power.
Q: There are some differences within the Ikhwan al-Muslimin. Do you expect splits to appear, with some of the leadership setting up other parties after leaving the Ikhwan?
A: The Ikhwan al-Muslimin does not force any person to remain in it. It is a society and so it will remain. As a party,
membership for individuals will be voluntary. If someone decides to leave the society, then no one will prevent him
under any circumstances whatsoever.
Al-Wasat rejects merging
Q: As for Abu ‘Ila Madhi, a founder of al-Wasat Party, he rejects the idea of parties with Islamic roots forming a united front, saying:
A: It is preferable for each Islamic movement to have its own party because there are differences between the
particular programs of each, and diversity is a part of political life, even within a particular movement. One should
have diversity in everything, even in a movement. It is a positive thing.
Q: On the relationship between these parties and coordination among them, he says:
A: I believe that there will be coordination, cooperation and integration, especially in areas like parliamentary elections.
There will certainly be coordination in terms of parliamentary seats, administrative districts and governorates, in
particular if there are shared interests between the various parties and movements. The relationship between them
will not be one of antagonism and confl ict.
Q: What if al-Gama’a al-Islamiya wanted to join the al-Wasat Party and operate through this?
A: One group joining another is not acceptable. But our party is open to all Egyptians of various affi liations. If
certain individuals in al-Gama’a al-Islamiya are convinced by our ideas and they are not linked to any other group or
organization and wanted to join us, then we would accept them like all Egyptians. But accepting a complete group or
entity is completely out of the question.
Q: Which of these parties will be the strongest in terms of popularity and infl uence?
A: The one that can prove to be the party of our time for the public at large, not the one that rules for itself. For in the
end, the public is the fi nal arbitrator on this issue.
*(al-Quds al-Arabi, 11 March 2011 – MEES translation)
22
Over the past few weeks, Algeria has experienced attempts to mobilize the public by opposition parties, and rights
associations and organizations. The latter believed that what was happening in the Arab world in the way of popular
revolutions could be transported to Algeria simply by releasing a single spark. But despite repeated efforts to get
people out onto the streets and challenge the authorities’ ban on demonstrations in the capital, the Algerian people
did not rally round the opposition or respond to their slogan of “The people want rid of the regime”.
The attitude adopted by the Algerian public prompted many questions, and a number of people have been quick to
provide explanations. Some believe the Algerians’ reluctance to take to the street stems from the fact that they staged
their own revolution in 1988; and while the popular uprising of that time was the fi rst of its kind in the Arab world, the
results did not meet the people’s aspirations.
Others take the view that the negative attitude towards demonstrations relates to a lack of trust in those groups that
have taken it upon themselves to draw up the “plan for change”. For the parties involved, in the view of Algerians
as a whole, are part of the ruling regime and were content with the prevailing system over the past years. So their
rebellion against it today can be dismissed as a case of trying to jump on the bandwagon.
The most pessimistic view is that the Algerians have become afraid of the unknown and refuse to jump into an abyss.
The terrorism that the country endured for more than 15 years has made many people hesitant, rejecting change by
means of anarchy.
It is signifi cant that even though the Algerians are not following the Egyptian and Tunisian scenario, there are
movements for change in specifi c areas. People have seen that the opportunity is right to form protest movements to
press directly for tangible demands to be met. Even though calls for democracy and change are behind attempts to
get people to demonstrate, those encouraging protests have failed to come up with a list that could be the basis for
ALGERIANS ATTITUDES
TO POPULAR REVOLUTION*
Kamal Zait
23
negotiations – because they have a single demand, which is the downfall of the regime, and it is one that the people
have not rallied around.
Many sectors have experienced extensive protests over recent days and weeks, even though these movements have
had no political coordination. For a number of weeks, thousands of students have been staging protests and fi ghting a
battle against the Minister of Higher Education, Rashid Haraobiyah, after the issuing of a presidential decree that has
decreased the value [in the workplace] of some university degrees. Students staged protests for a number of days in
front of the ministry, until security forces intervened to disperse them. They tried again a few days ago to organize a
protest in Press Freedom Square.
Most notably of all, members of the Municipal Guard [auxiliary police force] are continuing to take to the streets. Some
3,000-4,000 of them managed to break the security cordon that had been placed around Martyrs Square and held a
protest march to the parliament building where the Speaker, Abdelaziz al-Ziari, was forced to receive a delegation
from them who handed over a list of their demands.
Even though Minister of Interior Dahou Ould Kabli announced that some of the Municipal Guards’ demands would be
met, he added that others were excessive – in particular those relating to the award of a large fi nancial compensation
to each of them and early retirement.
Reacting to the minister’s response, members of the Municipal Guard threatened to take to the streets once more as
the authorities had not met all their demands, sparking a new confrontation between the authorities and the auxiliary
group. The latter sees itself as having served the country under grim circumstances, combating terrorism during one
of the most diffi cult periods in Algeria’s history. As a result it was not acceptable for their rights to be neglected in
this way.
Also, employees at the state oil company, Sonatrach, decided to begin a protest movement in their own particular
way. Thousands of workers in oil-producing regions in the south of the country went on hunger strike, protesting at
their conditions of employment and demanding an increase in the compensation that they received. They refused to
leave it to their union to negotiate on their behalf, accusing it of being in collusion with the company.
The Chairman of the Board of Sonatrach, Noureddine Cherouat, was forced to go in person to oil-producing region in
the Algerian Sahara desert to speak directly to the workers and make a commitment to respond to their demands –
as a condition for them ending their hunger strike.
Customs employees are also planning a protest movement, after the formation of a corrective movement within
their union. They accused the latter of having defended the interests of the employers more than the workers. Those
involved in the protest want the employment of customs offi cials to be covered by a special law. Under the current
deal negotiated by the union, workers and offi cers in the customs service come under the same law that covers other
groups, like the police.
24
Market Theories On Development of International Gas Pricing
The last two years have provided a market test of two theories as to how international gas pricing will ultimately
develop:
1- LNG will create a world gas market by linking previously isolated regional markets.
2- As the LNG industry likes to say: “The US is the LNG Market of Last Resort” and thus the most infl uential
market in establishing world prices.
However, the results so far raise as many questions as they provide answers. The test is the product of three
coincident events that somewhat unexpectedly created a signifi cant gas surplus.
a- The worldwide recession signifi cantly reduced demand.
b- The long-awaited surge in new LNG supply fi nally alleviated a nearly decade-long tight LNG market.
c- And, North America surprisingly developed a technology that would unlock its very large Shale Gas resource
base, not only taking North America out of its expected role as a major market for expanded LNG supply,
but sharply reducing regional gas prices.
The surplus enabled LNG to transmit the price signals that it was unable to do when markets were tight,
hence creating price competition among three somewhat incompatible cross border pricing systems that
have been able to operate independently without serious challenge.While oil is an internationally traded
commodity, the isolated nature of gas markets, coupled with heavy government intervention in gas pricing
has led to wide variations in pricing practices throughout the world. There is as yet no world gas price.
Natural Gas Pricing: Current Patterns &
Future Trends*
James T. Jensen**
* Presentation to the Beijing Energy Club, Shanghai, 18 February, 2011.** Jensen Associates, Weston, MA. USA. Website: JAI-Energy.com. Email: JAI-Energy @Comcast.net
25
Global Gas Pricing Systems
The International Gas Union attempted in a 2009 survey, to catalogue the various gas pricing systems in
operation globally. It listed the following:
1- Gas-to-Gas Competition: Gas priced in open free market trade;
2- Oil Price Indexation: Prices are set by formula under long-term contracts;
3- Bilateral Monopoly: The dominant pricing mechanism in interstate dealing in the former Soviet Union, in
Central and Eastern Europe;
4- Netback from a fi nal product: Price received by the seller refl ects the price of the fi nal product;
5- Regulation (cost of service): Prices are set to allow seller recovery of his costs and a reasonable return on
investment;
6- Regulation (social/political): Prices are set by governments taking account of buyers’ ability to pay, sellers’
costs and government revenue requirements;
7- Regulation (below cost): Government sets prices below cost to subsidize buyers, but may reimburse sellers;
8- No Price: Below cost but no reimbursement.
While the last fi ve categories represent prices that are usually priced “below market” and thus examples of “subsidy
energy pricing”, whose elimination the G-20 leaders have recommended, most of this gas is consumed locally and
does not directly affect gas trade.
However, it is the fi rst three categories that are most utilized in cross border trade. For example, North America and
the UK price gas at gas-to-gas competitive levels which infl uence their import pricing. And, the European Continent
and most of Asia still utilize oil indexed contracts for trade. Also, Russia prices gas to its non-EU customers at
government-to-government negotiated prices.
Major Regional Gas Pricing Patterns That Infl uence Most of World Gas Trade
While “bilateral monopoly” pricing depends on individual government negotiations, four major regional gas pricing
patterns infl uence most of international gas trade. These are: North America, the UK, theEuropean Continent and
Northeast Asia.
However, the four major regions differ in their sources of gas supply, their reliance on contracts, and the extent to
which they have liberalized their gas industries, factors which have had a strong infl uence on price behavior.
26
Differences In Development of Gas & Oil Industries
There are two gas industry characteristics which are largely responsible for the differences.
First, because investment in gas transportation is both highly capital-intensive and front-end loaded, it relies heavily
on debt fi nancing. This has required long-term contracts, both to guarantee debt service and to share project risk
between buyer and seller.
Second, despite the fact that petroleum exploration and development are not inherently monopolistic, gas is most
commonly transported through piping systems, which exhibit strong natural monopoly characteristics.
As a result, gas transmission and distribution have traditionally been regulated, either as public utilities as in the US
and Japan, or as government monopoly companies as in the UK or France.
For countries whose gas supply was domestic, as was the case in the US, Canada or the UK, downstream regulatory
jurisdiction at some point led to government price intervention upstream. Meanwhile, countries relying on imports
for supply had little jurisdiction over upstream pricing, and pricing terms were negotiated between buyer and seller.
It is this distinction-historic reliance on domestic sources or on imports- that defi nes current regional pricing patterns
for cross border trade.
Basically, importers have traditionally relied on long term contracts negotiated between buyer and seller; most of
these contracts still remain in force retaining take-or-pay clauses for buyers and price escalation clauses for the
sellers.
Because of the limited infl uence importing governments had over pricing, early price negotiations between buyers
and sellers established price precedents. The early Japanese Pricing clauses tied price escalation to crude oil prices-
the Japanese Customs Cleared Price for Crude Oil – JCC or “The Japanese Crude Cocktail”. This precedent was
adopted by other Asian LNG importers.
Continental European pricing precedents were effectively set by the Netherlands in its pricing policies for domestic
gas from its super giant Groningen fi eld in 1962. The Dutch Government established a policy that tied price escalation
clauses to market based percentages of three oil fuels – Gasoil, together with high and low sulfur heavy fuel oil and
then adjusted them by risk-allocating “pass through factors.” These patterns were later adopted for export contracts.
Thus, long term contracts are still common in both Asia and in Continental Europe and are still largely tied to oil
prices.
Pricing in those countries that developed their gas industries based on domestic supplies- the US, Canada and the
UK- developed in a very different way. All three governments had intervened in wellhead pricing decisions at some
point. The US experiment with wellhead price controls created severe gas shortages in the early 1970s since it
provided price signals to consumers that stimulated demand but were inadequate to provide the necessary supply.
Although the issue of price deregulation in the US was politically-charged, Congress fi nally set the country on the
course of gas industry liberalization with the Natural Gas Policy Act of 1978. This was designed to let “gas-to-gas”
market competition establish gas prices; and, market liberalization is now widely under way throughout the world.
Meanwhile, Canada adopted its liberalization policies in 1985 and the UK launched similar policies by fi rst privatizing
British Gas in 1986.
Preconditions For Successful Gas Industry Liberalization
a- There must be competitive gas available to the market;
b- Customers must be free to choose among suppliers;
c- The transmission system must be open to shipment by competitive suppliers (Open” or “third party access”);
d- Pipeline access must be non-discriminatory.
All the four above steps have been achieved in the US, Canada and the UK.
In North America & The UK, Short Term Commodity Trading Has Largely Replaced Long Term Contracts
In North America, shippers can buy and sell capacity on the open access system, thus enabling them to deliver
commodity gas to customers anywhere.
The centerpiece of the pricing system is a pipeline interconnection point in Henry, Louisiana- Henry Hub- where
substantial physical trading takes place. Henry Hub is also the point for paper trading in futures contracts on the New
27
28
York Mercantile Exchange (NYMEX). It thus has both the liquidity and transparency desired for workably competitive
markets.
The Trade Press reports prices at many other locations (Hubs) throughout North America. The difference between
these prices and the Henry Hub price is referred to as their “Basis Differentials.” They commonly refl ect the
transportation cost of moving gas from the Southwest to the particular hub, but can vary with seasonal factors and
pipeline fl ow patterns.
Figure 1 illustrates how the basis differential system works. It also illustrates the economic advantage of delivering
LNG to a terminal such as Everett near Boston relative to delivering it to the Gulf Coast.
The UK has a similar trading reference point where both physical and futures trading takes place. But unlike Henry
Hub, it is a notional point on the transportation system (The National Balancing Point or NBP) which applies to gas
values anywhere on the network.
Despite its focus on contracts, the Continent is developing Hubs of its own, such as the Dutch Title Transfer Facility
(TTF).
Since the UK recovers its transportation costs through entry/exit tariffs (as does most of the Continent), basis,
differentials do not apply as they do in North America. Still in Europe, as in North America, the tariff system attempts
to recover the higher costs of moving gas over longer distances.
Traditional Long-Term LNG Contract & Fixed Destination Clauses
Traditional long-term LNG contracts specify the gas source and the buyer’s receipt terminal, and sometimes dedicated
tankers- all factors that lock buyer’s and seller’s facilities together.
29
30
But such contracts do not work very well in the gas-to-gas competitive markets of North America or the UK. A
buyer may not be able to sell oil-linked gas in a weak gas market, but the use of a gas market indicator- such as
Henry Hub or NBP- does not work very well either.
Since buyers can so easily resell unwanted volumes without loss in a liquid trading market, their risk is reduced.
The risk is migrated upstream to the sellers. The response of sellers is to take the contractual obligation on
themselves- “Self Contracting” or “Seller Aggregation” – including the supply in their destination-flexible
supply portfolios. As an example, the 1st three trains of Nigeria’s NLNG are based on traditional contracts with
European buyers. However, trains 4 & 5 have contracted with ENI, Shell and Total, partners in NLNG, who are
free to take their LNG anywhere they see fit.
While the pattern is most prevalent in the Atlantic Basin, it has spread to Asia where two of the Gorgon partners-
ExxonMobil and Shell have contracted with PetroChina.
Another source of destination-flexibility is the short term market, which accounted for 16% of trade in 2009;
and, buyers are increasingly negotiating the right to divert cargoes to other markets where they may get better
returns. As an example, Spain’s electric utility, Union Finosa, has a contract in Oman, but in 2008 it diverted most
of the volume to the overheated Japanese market. The increasing destination flexibility is what enables LNG to
shift volumes to higher-netback markets as a means of arbitraging regional prices.
Gas Market Competition Since Late 2005
There have been three distinct periods of international gas market competition since late 2005:
1- The First Period- “The Perfect Storm” – lasted from August 2005 to March 2006.
2- It was the result of Hurricane Katrina in the US, the transition of the UK from net exporter to net importer,
a hydro shortage in Spain, cold weather on the Continent and tight markets in Asia.
3- Competition for LNG cargoes was severe, driving up prices everywhere.
a- The Second Period lasted from the Spring of 2006 until the middle of 2009.
b- Atlantic Basin markets softened, but Asian markets remained very tight as supply problems in Indonesia
and a shutdown of seven nuclear reactors by Tokyo Electric drove up demand in the face of short supply.
c- Oil prices rose to record heights by the summer of 2008, dragging contract prices with them, only to
collapse shortly thereafter.
d- Asian contract prices were partially insulated from high oil prices by capping mechanisms, such as “S
Curves”, but Asia was free to drive up spot prices.
e- In 2008, every Atlantic Basin LNG supplier but Libya shipped cargoes to Japan.
a- The Third Period began in mid-2009.
b- Several developments conspired to relieve the previous shortage conditions, creating substantial
surpluses everywhere: the recession; the emergence of North American Shale Gas; and the surge in
LNG Liquefaction capacity.
c- These reversed the LNG shortage conditions that had prevailed for nearly a decade.
The three periods can be illustrated by showing the hypothetical netbacks that Qatar could have achieved
in shipping to the US, UK and Japan.
31
The growing surpluses transmitted North America’s very weak pricing to Northern Europe via LNG terminals and UK
pipeline links to the Continent. This created commodity price competition for both oil indexed and bilateral monopoly
contract transactions. As Qatar ramped up its exports, LNG deliveries into the UK and Belgium increased nearly
fi vefold in 2009 over 2008 and displaced Continental pipeline supply.
32
While the Russian price at Waidhaus on Germany’s eastern border fell 25% between 2008 and 2009, the price at the
Dutch TTF Hub on Germany’s western border fell by 49%. The Russians were very large losers and were forced to
renegotiate some of their contracts.
33
Russia also had problems with its government negotiated contracts. Unfortunately, Russia has inherited a disfunctional
gas pricing system from its command and control period. It was originally designed to encourage the use of gas to
replace coal. But the IEA in its WEO 2010 ranks Russia’s low prices as a “gas subsidy” problem second in magnitude
only to Iran’s. Russian policy now proposes an ultimate closing of the gap, but over an extended period. The low
pricing system was also applied to the Former Soviet Republics, such as the Ukraine and Belarus.
That has been the source of great friction with the European Union as Russian efforts to enforce price increases by
reducing supplies to the Ukraine has led that country to preempt Western European transit gas. This has led the EU to
try to diversify by proposing the Nabucco Pipeline fed by Caspian supply as a competitor to Russia’s Ukranian by-pass
option, Southstream. Russia has also linked Azerbaijan, Khazakstan, Turkmenistan and Uzbekistan to the Russian
pipeline grid during the Soviet era.And after their independence, gas purchase prices remained low, consistent with
Russian pricing policies. Russia’s monopsony buying position enabled it to avoid sharing its export revenues from
European sales.
Russia has a transportation cost advantage via the Ukraine and the Caspian gas suppliers are less concerned about
the Ukraine transit issue. Thus, a bargaining option for Russia in its competition for Caspian supply was a price
increase that would be diffi cult for competitors to match. This it did in 2009 just as European gas prices were falling.
The result was that during 2009, Gazprom was paying more for Caspian gas than it was selling it for at the German
border.
Market Liberalization
The theoretical ideal of market liberalization would be to let competition set regional prices and LNG arbitrage
bring the world’s regions into price equilibrium. Just how far the real world is from that idealized equilibrium was
illustrated in Figure 2.
Had a hypothetical LNG shipper in Qatar been able to realize the prices being achieved in April 2010, he would have
netted back $7.16 more in shipping to the Japanese contract market or $1.21 more to the UK than he would in
shipping to the US Gulf Coast. And, he would have done even better with a spot cargo to Japan - $9.54 more.
The Middle East, West Siberia and the Caspian Region contain the world’s largest inventory of uncommitted gas
reserves and are thus central to future gas trade patterns. The three regions sit on the geographic “seam” between
34
the major importing markets of the Atlantic Basin and the Pacifi c Basin, implying substantial transportation costs to
reach these markets.
Figure 2 illustrated the central role that the Middle East plays in world gas pricing through its ability to arbitrage
Atlantic Basin prices against Pacifi c Basin prices. Thus Qatar might be viewed as the Henry Hub of world LNG
markets, despite the fact that it does not have the trading activity, liquidity or transparency of Henry Hub. Thus one
could conceive of a theoretical international pricing system using basis differentials based on Qatar.
While LNG might be able to arbitrage prices in coastal terminals, it is less clear how it would infl uence pricing for
landlocked supples, such as those delivered from West Siberian or Caspian sources to Europe. The experience of
2009 suggests that the German market was the competitive battle ground between LNG and pipeline supplies.
Thus, a theoretical international pricing system might be based on delivering LNG to Germany through Northwest
European terminals and the netting back of the resulting prices to West Siberia or the Caspian. While it may be
unrealistic in practical terms today, such an equilibrium pricing system does indicate some of the economic pressures
on international price competition. Figure 6 provides such basis differential estimates for selected supply and market
points.
How Do North America’s Low Prices Affect Traditional Contract Pricing In The
New World Of Arbitrage?
If one really believed that “The US is the LNG market of last resort” and that there is enough surplus LNG seriously
competing for market share, the potential for a severe price collapse would be substantial. But for a number of
reasons that is unlikely to happen. Certainly the IEA in its World Energy Outlook 2010 does not seem to think it will,
since it expects a continuation of higher prices for European and Asian gas relative to that in North America.
35
Many buyers in Europe and Asia want the supply security provided by long-term contracts. And, sponsors of most new
pipeline and LNG projects want some guarantee of revenue stability to make their projects economically viable. This
is particularly true of Asia where the economics of some of the proposed new LNG projects are particularly vulnerable
to weak prices. Thus, the question becomes, “how does contract pricing adapt to commodity competition?” rather
than, “will a world commodity pricing system replace contract pricing?”
The competitive environment is much different in Europe than in Asia. The existence of gas-to-gas commodity
competition in the UK and growing liberalization (particularly third party access) on the Continent, makes it much
easier for buyers to take advantage of commodity gas pricing, thereby undermining the oil indexed pricing system.
Those conditions do not apply in the major gas importing markets in Asia and thus the same challenge to oil-linkage
does not presently exist.
How Can North American Commodity Pricing Interact With European Contract Pricing?
There are three ways to facilitate such an interaction:
In the extreme case, severe LNG competition could drive European prices to North American netback levels.
A much more likely scenario is that North America drops out of the LNG pricing system and Europe goes its own way.
But the potential for LNG surpluses to weaken Atlantic Basin pricing for European customers suggests some degree
of pricing instability for this scenario.
A third interesting scenario arises from the potential for North America to become an LNG exporter to Europe.
There is now a proposal for an LNG liquefaction plant on the US Gulf Coast. Such an export facility would not have
been competitive with the Dutch TTF price in 2009; nor would it be in 2020 if one assumes the IEA’s WEO 2010 price
projections for Europe and North America. But the US EIA has had lower US price projections than the IEA, and has
been reducing them with growing evidence of Shale Gas cost reduction. If one substitutes the EIA AEO 2011 US price
projection for the IEA WEO 2010 US projection, and uses larger Q class tankers, the project becomes competitive.
36
However, for North America to provide enough competitively priced exports to undermine the European pricing
structure seems unlikely. Therefore, the second scenario- that Europe goes its own way but that LNG surpluses
periodically weaken Atlantic Basin commodity prices- seems more likely.
Asia’s situation is much different. The impact of weak pricing on Asia’s contracted structure is more remote. Originating
as it does in North America, rather than in the Middle East. And, Asia’s major importing markets have not liberalized
so there is no way for end users to introduce commodity competition into the traditional contract structure, making
the challenge to oil indexed pricing much more diffi cult.
In some cases, the European responses to competition has been to introduce some commodity market indicators,
such as NBP or Power Pool Prices, into contract escalators.
But Asia does not have similar commodity price indicators and the use of a foreign one, such as Henry Hub, does not
refl ect Asian market conditions.
At present oil indexed pricing is being maintained, but with some competitive adjustments to the pricing formulas.
The real challenge to current pricing practices is likely to be from competitive regional export sources or possibly
from more direct North American involvement in Asian markets.
World LNG Capacity Increased By 105mn Tons (64%) Between 2005 & 2010
The Middle East accounted for 59% of that increase (49% in Qatar alone).
The fi rm planned capacity now expected over the next fi ve years will be 61mn tons, but none of that (excluding a
suspended Iranian project) is planned for the Middle East. Interest is now shifting to the Pacifi c Basin which will
account for 76% of the additions (65% in Australia). Thus the potential for increase in world LNG capacity is heavily
dependent on Australian project economics. The two principal LNG project regions in Australia are the old offshore
37
areas in Western Australia and the newer coal seam supplies in Queensland in the East. Australian costs for both
regions appear relatively high and are thus very vulnerable to severe price declines.
Figure 9 compares estimates of the economics of example projects for the offshore Pluto Train 1 and the Gladstone
LNG coal seamprojects. The estimates suggest that although both would have made a target return in 2009 at
Japanese spot price levels, neither would have at contract price levels. Figure 9 also shows the severity of the implied
price decline at North American price equilibrium levels.
One proposal for an export plant at Kitimat in British Columbia would export Canadian Horn River Shale Gas. And, the
proposed Alaska pipeline project includes an LNG option that would deliver gas to Valdez for liquefaction.
Figure 10 illustrates two project sizes – a 1bn cu ft/d line that would support a 7.8mn ton plant and a 3bn cu ft/d line
for three times that size.
The problem with Alaskan LNG export projects has always been the scale economies required to reduce pipeline
costs lead to very large LNG projects. The gas value utilized in this estimate is based on the opportunity cost of what
Alaskan gas might netback from a full scale pipeline to the lower 48 states.
If the present diffi culty of introducing commodity competition Into Asian Markets Persists and If the cost structure
tends to support higher price levels, what is the prospect of reducing Asian prices? Oil linkage is not oil parity and the
competitive climate can alter the oil-gas formula relationships. It happened before when the Guandong and Fujian
projects entered the market during a period of surplus and it happened in reverse when tight markets and high oil
prices led to contract renegotiations.
The most common Asian LNG contract is based on the Japanese Customs Cleared Price for crude oil and has
38
the form of P=Slope x JSC + Constant, where JSC is in $/B and the Constant is in $/mn BTU. As the competitive
environment changes it is possible to alter the Slope or Constant or introduce capping mechanisms such as Curves.
Changing the Slope has a bigger impact than changing the Constant.
Figure 10 illustrates the way in which the oil/LNG price relationship varies as a function of changes in these formula
elements. Of course, there are other non-price ways of refl ecting competitive markets and these are being used
in Asia- greater contract fl exibility, rights of the buyer to divert cargoes to other markets and participation in the
production venture itself.
3939
China has a special problem as it begins to import pipeline gas. Most of its potential suppliers are members of the
Former Soviet Union, whose approach to contract pricing has been what the International Gas Union describes as
“Bilateral Monopoly” – That is negotiated government prices.
One of the lessons of the 2009 market has been the great volatility and uncertainty associated with this approach to
contract pricing. And it is not clear how this will ultimately be resolved.
Conclusion
The fundamental confl ict between gas-to-gas commodity pricing for Atlantic Basin LNG and oil indexed contract
pricing for Continental Europe and Asia was fi nally joined in 2009.
Europe is presently struggling for ways to resolve this issue, but so far Asia has only been indirectly affected.
China has an additional problem in that its pipeline suppliers are Former Soviet Union “Bilateral Monopoly” sellers
and it is not obvious how price negotiations with them are infl uenced by LNG competition. But what is clear is that
uncertainties surrounding international gas pricing have never been greater.
40
Recent data on Rumaila production for the period 26 December 2010 to 27 February 2011 indicates that after achieving
the 10% threshold over the baseline production, daily production dropped sharply to the extent that in a few days,
production levels were even lower than the baseline production.
The purpose of this intervention is to provide a few comments on the issue, taking into consideration the related
provisions of the contract.
1. The contract provides that the contactors (BP/CNPC +SOMO) are entitled to begin recovering the cost and
remuneration fee once they achieved 10% over the contracted baseline production for 30 consecutive days.
2. For Rumaila the contracted baseline production is 1.066million barrels per day (mn b/d), and hence the threshold
for commencement of cost and remuneration fee is 1.172,600mn b/d (the red line in the following chart).
3. The actual payment to the contractor is limited to 50% of the “deemed revenues” for petroleum cost and
remuneration fee, and 10% of the “deemed revenues” for the supplementary cost.
COMMENT ON RUMAILA OILFIELD
PRODUCTION
Ahmed Mousa Jiyad*
* Mr. Jiyad is an independent Consultant, Scholar and Associate with the Centre for Global Energy Studies (CGES). He was formerly a senior economist with the Iraqi National Oil Company and the Ministry of Oil, Chief Expert with UN organizations in Uganda, Sudan & Jordan. He is now based in Norway. Email: [email protected]
41
4. Daily production data from Rumaila seems to satisfy the condition of 10% over the contacted baseline production
for 30 consecutive days until 31st January 2011, as shown by NO (daily production rate) curve in the chart. Hence
the contractor is entitled to apply the cost recovery modality. Average price for Basra crude during January was
$93.37 (assumed to be the FOB price), which gives a total of $151.7 million as cap for payment to the contractor
from the deemed revenues of the incremental production for the period 11 to 31 January (for which the daily
productiondata are offi cially available). If one assumes average daily production for the fi rst 10 days in January is
equal to the daily average of the remaining days of January, then the contractor share for the whole of January
would be ca. $224 million for remuneration fees and cost recovery. Total incremental production (over the baseline
production) during January is estimated to be 3997524 barrels, giving BP/CNPC a maximum remuneration fee
of $3897586 (after deducting SOMO’s share and the income taxes). The remaining amount of ca. $223 million
represents 14.9% or 13.1% of the budget for 2010 work programme, which was reported to be $1.5 or $1.7 billion.
5. During February, daily production fl uctuated with 12 days below the 1.172,600 barrels threshold including 4 days
with daily production even lower than the baseline production itself, while the remaining 15 days are above this
threshold. However, since the downward production was deep, the average daily production in February was
1155593 barrels, which is only 8.4% over the baseline production. Even if we apply the contracted annual decline
of 5% per annum, this would not make for the difference of 1.6% for February underperformance. This implies that
the IOCs have failed to sustain the 10% over the contracted baseline production, and this disqualifi es IOCs from
recovering their cost and remuneration.
6. It appears, as anticipated by many including myself, that IOCs would attain the 10% threshold over baseline
production to invoke cost and recovery fees without ensuring sustainability of the increase by applying short terms
mechanical or technical modalities instead of the advanced enhance recovery methods. BP/CNPC uses contract
for the supply and servicing of Electrical Submersible Pumps (ESP), which was split between two companies,
Baker Hughes gets 60% of the work while Saudi Al-Khorayef Petroleum Co., has the remaining 40%. ENI, last year
had done some debottlenecking (at Zubair oilfi eld), reducing pressure here, re-perforating there; it is not really
sustainable – they have some work to do (as Thamir Ghadhban said to IOR on 9 December 2010)
7. The Ministry of oil, SOC and Iraqi oil technical/professionals are expected to address this issue openly, accurately
and professionally as the problems of the concluded contracts began to surface loud and clear, and remedial
prompt and effective actions are required. It is vital that an annual report on Rumaila, and for that matter on all
other contracted fi elds, is published and posted on the websites of MoO and SOC (and other ROCs) to outline what
has happened to the Work Program and its Budget. Oil and Energy Committee in the Parliament should also have
its say on such matters.
42
43
Speakers IncludeJasem Ali Al Sayegh, General Manager, TAKREER
Jean Jacques Mosconi, Senior Vice President, Strategy, TOTAL
Solomon Mirza, Vice President, Strategic Planning and Capital Allocation, SHELL DOWNSTREAM
Bakhit Al Rashidi, Deputy Managing Director for Planning and Local Marketing, KUWAIT NATIONAL PETROLEUM COMPANY (KNPC)
Dr. Partha Maitra, President, Petroleum Business, RELIANCE INDUSTRIES
MEDW 2011 Includes12th Middle East Refi ning Conference
5th Middle East Fuels Symposium
Site visit to TAKREER’s Ruwais Refi nery
Axens Middle East Refi ning Seminar
Downstream Integration Workshop
How to confi rm your place and SAVE 10%Readers of Energy & Geopolitical Risk are entitled to a 10% discount on MEDW. Please quote code EGR10 when registering your place. Confi rm your attendance online today at: www.wra-medw.com
Or email Dominica Andrews: [email protected] or call +44 (0)20 7067 1800 / +971 50 264 1202
Abu Dhabi UAE · 8-11 May 2011اسبوع الشرق األوسط لصناعة النفط والغاز
MEDW 2011 – Bridging the gap between strategy and technology
EVENT CO-HOST EVENT ORGANISEREVENT SPONSORS
44
The specter of an impending water crisis is growing slowly in the Gulf region.It is becoming increasingly
apparent, as local populations increase rapidly and economic development soars, that solely relying on revenues
from hydrocarbon exports to invest in SCORES of desalination plants, while at the same time pouring even more
capital into subsidizing households and agriculture is not a sustainable policy in the mid to long term. Leaders in the
GCC are slowly coming to terms with this fact. One indication of this came on December 7, 2010, when the United
Arab Emirates (UAE) Minister of Foreign Affairs, Sheikh Abdullah bin Zayed Al Nahyan, warned at the closing session
of the Annual Summit of the Supreme Council of the Gulf Cooperation Council (GCC) that the member states needed
to take “serious and rapid steps towards a long-term comprehensive Gulf strategy for water.”1 Sheikh Al Nahyan’s
announcement, labeled ‘The Abu Dhabi Declaration,’ put the issue of water security at the forefront of the GCC policy
agenda for the fi rst time, and highlighted the need to take immediate action. And while this may not seem to be an
imminent problem to the populations of the GCC since governments can rely on vast oil and gas revenues to stave
off crisis in the short-run, pertinent questions regarding agriculture, conservation, and security need to be asked to
confi rm that governments are not being too shortsighted in their policies.
WATER SECURITY FOR THE GCC
Ramzi El Houry*
1 AkkadaDaroorat al-RabitBaynaAmn Al MiyahwaTatwee‛Masader al-TaqawalAmn al-Ghatha’I, I‛lan Abu Dhabi Yuwasi bi StratijiyaKhaleejiyaShamilaBa‛eeda al-Mudda bi Shu’n al-Miya (Stressing the Need to Link Water Security, Diversifying Energy Sources, and Food Security, The Abu Dhabi Declaration Recommends a Long-Term Strategy on Water), Al-Ayam. December 8, 2010.
http://www.alayam.com/Articles.aspx?aid=54310
* Mr. El Houry is a Doctorate candidate at the Environmental Policy Research Center at the Free University of Berlin, Germany.
45
The region comprising the GCC states, which includes Saudi Arabia, Kuwait, the UAE, Bahrain, Oman, and Qatar, is
among the most arid in the world, consisting of no rivers or lakes, and experiencing rainfall between the range of
70mm/yr to 130mm/yr, with the exception of some areas in southwestern Saudi Arabia and southern Oman.2 Most of
the natural water supply is available in groundwater and in shallow or deep aquifers. Yet this water is being extracted
at a rate far outpacing its natural replenishment. While the recharge of aquifers in the GCC takes place at an annual
rate of 4.8 million cubic meters (mn cu ms), the amount extracted by GCC countries in 2007 was around 19.5mn cu
ms, used almost exclusively for agriculture.3 The agriculture sector in the GCC is only made feasible through a policy
of intensive subsidization. However, measures to prop up this sector to achieve some measure of food self-suffi ciency
have largely been unsuccessful, and have resulted in the depletion of much of the region’s existing aquifers and
groundwater sources.
Furthermore, the agriculture sector has proven to be not only disastrous to the environment, but a drain on the
economy as well. Agriculture accounts for roughly 80%-90% of total fresh water use and yet contributes an average
of 2.3% of regional GDP (0.4% for Kuwait, 5.1% for Saudi Arabia, and 3.6% for the UAE)4 . Governments, however, have
begun to realize in recent years that this strategy is unsustainable. Saudi Arabia, where the agriculture issue is most
pronounced, began scaling down its water-intensive wheat production sector in 2009, and is planning a complete halt
in production by 2016.5 But while this is a step in the right direction, authorities in the GCC need to turn even more
to the import of ‘virtual water’, a term coined by the scholar Tony Allan to refer to the amount of water needed to
produce a commodity.6 By increasing the import of water-intensive products, rather than investing in growing them
domestically, countries in the GCC can go a long way in reducing water demand. And while relying more on global
trade for food would expose consumers to the vulnerabilities of market price fl uctuations, it is still a more favorable
option than completely exhausting all of the region’s natural water resources.
Domestic Demand
On the domestic side as well, almost completely subsidizing the expensive process of desalination for households
has led to the GCC experiencing the highest per capita water consumption in the world. The average resident in the
UAE consumes 550 liters of water/day, the highest in the world, as compared to the world average of 250 liters/day.
And the per capita amount used in Kuwait has now doubled that of the United States.7 This degree of wastefulness
is both costly and environmentally dangerous. Governments need to tackle this through a comprehensive strategy
of increasing awareness, introducing measures for conservation (such as fi lters on faucets or dual fl ushing of
toilets), and should even consider the introduction of water meters or tariffs for households that exceed a certain
rate of consumption. Some governments, such as those in Abu Dhabi and Qatar, have started to address the issue
of conservation, and Abu Dhabi plans to have water fi lters installed throughout the Emirate by 2013, which would
enable consumers to reduce water consumption by up to 50%.8 Asking the population to pay for its water, however,
could prove to be a tricky measure, as it shakes the ‘rentier’ foundation upon which the Gulf political system is based.
2 Raouf, Mohamed A. “Water Issues in the Gulf: Time for Action” The Middle East Institute, Policy Brief No. 22, January, 2009, pg. 1
3 Russel, James A. “Environmental Security and Regional Stability in the Persian Gulf” Middle East Policy, Vol. XVI, No. 4, Winter 2009. p 91
4 Bazza, Mohamed. “Policies for Water Management and Food Security under Water-scarcity Conditions: The Case of GCC Countries” Food and Agriculture Organization of the United Nations, Nov, 2005. p 3
5 England, Andrew. “Water Fears Lead Saudis to End Grain Output” Financial Times, February 27, 2008. http://www.ft.com/cms/s/0/f02c1e94-e4d6-11dc-a495-0000779fd2ac.html#axzz1GrpabHGG
6 Allan, Tony. Facing Global Environmental Change: Environmental, Human, Energy, Food, Health and water Security Concepts Vol. 4. (Berlin: Springer-Verlag) 2009, p 575
7 Alterman, Jon B. &Dziuban, Michael.“Clear Gold: Water as a Strategic Resource in the Middle East” Center for Strategic and International Studies, December 2010, p 3.and Ghazal, Rym. “Water is the greatest gift in the Desert” The National, December 11, 2010. http://www.thenational.ae/thenationalconversation/comment/water-is-the-greatest-gift-in-the-desertand “Gulf Embraces Recycling Water” MEED Issue 22, May 28-June 3, 2010
8 “Kludi RAK’s water-saving system for faucets to complement Abu Dhabi’s ambitious water conservation drive” AME Info. June 16, 2010. http://www.ameinfo.com/235436.html
46
National Security
At the same time, while populations grow and demand
continues to surge, experts forecast the need to increase
desalination capacity by 90% before 2019.9 Such a high
dependence on desalination adds another dimension to the
task of ensuring water security. Guaranteeing supply in the
case that one or more of the desalination plants should break
down is being recognized by some in the region as being a
signifi cant matter of national security. Political instability
(such as war or terrorism), environmental catastrophes (such
as cyclones or red tide), or even calamities that one would
not consider possible today but may be a possibility in the
future (such as a leak from a nearby nuclear reactor), could
temporarily or permanently disable desalination capacity,
and thus are all scenarios that require a contingency plan.
Abu Dhabi has addressed this threat by announcing that it
will construct an underground artifi cial water reserve. The
strategic reserve, for which construction started earlier this
year, will increase Abu Dhabi’s reserve capacity from the three
days (the current reserve capacity), to 90 days.10 The reserve
is essentially a man-made aquifer, storing desalinated water
deep underground in an economical and environmentally
sound manner, to be used in case of emergency. Experts
in Kuwait have recommended a similar strategy, especially
since the water security strategy envisioned in the 1980s of
carrying water by pipeline from Shatt al Arab in Iraq to Kuwait
has had its political liabilities exposed since then.11
Recommendations
What the Gulf countries need is a broad strategy for addressing water security without simply relying on energy
export revenues that can only postpone taking action. And in any case, taking policy measures to improve demand
management would free up more oil and gas for export, as less would be needed to power desalination plants. And,
while creating a more conscientious society through awareness campaigns and education programs is a long-term
project that may not bear fruit immediately, there is no reason not to expect that the environmental and social
awareness held by the populations in, Sweden for example, cannot be instilled in Arab populations as well. More
concretely, investment in water recycling for irrigation and municipal use presents great opportunities for reducing
demand for desalinated water. Kuwait has been a pioneer in this fi eld, targeting the use of 100% of its treated
sewage effl uent by this year.12 Furthermore, research and development in renewable and even nuclear technology for
desalination may provide solutions in the long-term. Other creative solutions include the construction of dams that
would improve rain capture and groundwater recharge; and even the use of cloud seeding to enhance rainfall.13 While
there may be no quick fi x, and despite the fact that some resistance to change may be encountered as societies are
forced to alter their comfortable and wasteful lifestyles, a competent strategy to tackle water security from both the
supply and demand side is necessary for ensuring that the economic development that has defi ned this region in the
previous decades continues for decades to come.
9 “Gulf Embraces Recycling Water” MEED Issue 22, May 28-June 3, 2010 10 Carlisle, Tamsin. “Abu Dhabi Prepares Strategic Water Reservoir” The National, December 6, 2010.http://www.thenational.ae/business/abu-dhabi-prepares-strategic-water-reservoir
11 Al-Otaibi, Abdulhadi& Abdel-Jawad, Mahmoud. “Water Security for Kuwait” Desalination, Vol. 214,Issues 1-3, August 15, 2007, p 304and Hamoda, Mohamed F. “Desalination and water resource management in Kuwait” Desalination, Vol. 138, Issues 1-3, September 20, 2001, p 386
12 “Gulf Embraces Recycling Water” MEED Issue 22, May 28-June 3, 2010
13 Murad, Ahmed A., & Al Nuaimi Hind, & Al Hammadi, Muna. “Comprehensive Assessment of Water Resources in the United Arab Emirates (UAE)”Water Resources Management Volume 21, No. 9, 2007, p 1461
47
Introduction
A watershed in the history of evolving energy security issues can be traced way back to the eve of the First World War when Winston Churchill, then the First Lord of the Admiralty, changed the power source of the British navy’s fl eet from coal to oil. The decision to rely on insecure oil supplies from what was then Persia was taken in the hope of making the British Navy faster than its German counterpart. Therefore, energy security became a question of national strategy.
Since Churchill’s decision energy security has repeatedly emerged as an issue of great importance, as it has once again today. The current focus on energy security is partly driven by an exceedingly tight oil market and high oil prices. However, it is also fueled by instability in some oil exporting nations, geopolitical rivalries and countries’ fundamental need for energy to power their economic growth. Events during the past few years have raised several new issues that have highlighted the importance of energy security. First, the Russian–Ukrainian natural gas dispute temporarily cut supplies to Europe. Secondly, the on-going saga over Tehran’s nuclear program has allowed threats from hardliners in Iran, the second-largest OPEC producer, to wreak havoc on international oil markets. Thirdly, persistent attacks by militants in the Niger Delta on Nigeria’s oil facilities have drastically depleted its oil exports especially to the United States.
The recent turmoil in Libya has caused a sharp increase in oil prices due to fears that the unrest could spread to larger oil producing nations and disrupt supplies. Before the unrest, prices were already increasing with Brent crude hitting almost $120 a barrel at the end of February 2011, its highest since August 2008.
ENERGY SECURITY:
A DYNAMIC CONCEPT
Leheb Ata Abdul-Wahab*
* Iraqi Energy Analyst
48
Libya holds the largest proven oil reserve in Africa. It is the world’s 12th largest exporter of crude oil (believed to be approximately 1.5mn b/d) of which most of its output goes to Europe.
Libyan oil is generally light (high API gravity) and sweet (low sulfur content), which makes it highly appealing to oil refi neries in the industrialized west. The news that oil fi rms, such as Total, ENI, and the Spanish oil fi rm Repsol, have suspended production will not bode well with its European customers.
49
Furthermore, growth in the energy trade has highlighted the issue of oil transit chokepoints and routes, which are a critical part of global energy security due to the high volume of oil traded through narrow straits. In 2009, total world oil production was approximately 84mn b/d, about half of which was moved by tankers using fi xed maritime routes.
The Strait of Hormuz
The Strait of Hormuz, is by far the world’s most important chokepoint with an oil fl ow of between 16.5-17mn b/d. Oil
fl ow through the Strait accounts for more than 17 percent of global oil trade, of which over 75 percent of crude exports
are bound for Asian markets, with Japan, India, South Korea and China topping the list. Closure of the Strait could
seriously result in much damage to the global economy.
Contingency plans are being put into action in the eventuality of this happening. They include the construction of a
new bypass across the UAE, which is expected to be completed in 2011. This 1.5mn b/d pipeline will cross the emirate
of Abu Dhabi starting at Habshan and ending at the port of Fujairah just south of the Strait.
With the climate of political upheaval and unrest engulfi ng Egypt, maritime
and shipping companies have been tightly scrutinizing the possible closure
of the Suez Canal. The Canal spans 120 miles and connects the Red Sea
and the Gulf of Suez with the Mediterranean Sea. From Year –to-date
until November 2010 petroleum (both crude and refi ned products) and
liquefi ed natural gas (LNG) accounted for 13 and 11 percent of Suez cargos,
respectively. Total petroleum transit volume was close to 2mn b/d or, just
below 5 percent of seaborne oil trade in 2010.
Closing the Suez Canal and SUMED (Suez-Mediterranean) Pipeline, would
force oil tankers to be diverted around the southern tip of Africa, the Cape
of Good Hope, which would add 6000 miles (10,000 km) to their journeys
and increase shipping costs and time. According to a report released by
the International Energy Agency (IEA), shipping around Africa would add
50
15 days to the journey to Europe and approximately 8 to 10 days to the United States. Furthermore, the continuous
standoff between different factions vying for power, notwithstanding other factors, has recently caused the price of
Brent oil to breach the 100-dollar barrier
Source: Suez Canal Authority, converted with EIA conversion factors.
Other important passages include the Strait of Malacca linking the Indian and Pacifi c Oceans, Bab el-Mandab, which
connects the Arabian Sea with the Red Sea, and the Turkish/Bosporus Straits, which join the Black Sea and the
Caspian Sea region to the Mediterranean Sea.
Another facade of energy security worth pondering on includes new technological breakthroughs in the fi eld
of pipelines. For years the idea that Europe might secure gas from the Caucasus and beyond and break Russia’s
monopoly on the east-west pipeline seemed more or less wishful thinking. This is no longer the case.
The Nabucco Project, which is also known as the Turkey-Austria gas pipeline, is moving forward. This was seen
with the recent signing of a $5bn loan from the World Bank, the European Investment Bank and the European Bank
for Reconstruction and Development. The pipeline, which is 4,042 km long, is expected to be operational by 2015
and to carry 31 billion cubic meters of natural gas per year. The project aims to improve connections between the
European Union and natural gas sources in the Caspian Sea and the Middle East. The decision to build the pipeline
is an attempt to lessen European dependence on Russian energy, with Russia currently the biggest supplier of gas
51
to Europe. Russian-Ukrainian gas disputes have been one of the factors driving the search for alternative suppliers,
sources and routes.
1. Energy security, geopolitics and dependency on Middle East oil supplies: myth or reality?
Through a geological coincidence, the Middle East has been endowed with the majority of the world’s discovered oil
reserves. This stood at 754 billion barrels at the end of 2009 and accounts for 57 percent of the global total, which
amounts to 1,333 billion barrels.
It is also responsible for a large share of total oil production, which stood at 24.5 million barrels per day (b/d) according
to the latest BP Statistical Review of World Energy published in June 2010. This accounted for more than 30 percent
of global production at the end of 2009.
Against this backdrop, the security of Middle East oil supplies has become central to the oil security debate, with
reducing dependency on what is claimed to be an unstable region back in vogue!
Readers may recall the State of the Union Address in 2004 and President George W. Bush’s statement that “America
is addicted to oil, which is often imported from unstable parts of the world.” He also argued that technological
breakthroughs would help the US reach another great goal “to replace more than 75 percent of our oil imports from
the Middle East by 2025”.
The concept of oil dependency is at the root of oil security concerns. According to the 2010 BP Statistical Review, global
oil consumption in 2009 was dominated by the US (18.6mn b/d, accounting for 21.7 percent of global consumption),
China (8.6mn b/d, accounting for 10.4 percent), and Japan (4.3mn b/d, accounting for 5.1 percent). Although some of
these countries are important oil producers, domestic production falls far short of their aggregate consumption. This
means they have to rely on oil imports to fi ll the gap. Trade movements in 2009 show that the Middle East exported
more than 18.4mn b/d accounting for 34.8 percent of total trade. Europe, Japan and the US imported more than
29mn b/d during the same period. The dependency of these countries, which possess less than 10 percent of proven
global oil reserves, on oil imports sees no sign of abating in the foreseeable future. This is despite major attempts to
conserve energy and increasing reliance on renewable energy resources.
The fact that high dependence on Middle East oil creates serious grounds for concern should not raise many eyebrows.
Signifi cant levels of disruption in the region have seriously affected oil supplies, as seen after the Iraqi invasion of
Kuwait that led to a cumulative loss of 420 million barrels between 1990 and 1991.
The region has witnessed wars, civil confl icts, invasions and revolutions. The list usually includes potential sources
of instability, such as the Arab-Israeli confl ict, which, despite many unsuccessful initiatives and unfulfi lled promises,
shows so no sign of ending or of creating a viable Palestinian State able to live in peace with its neighbors.
Despite these various sources of instability it has not been all gloom and doom when it comes to the security of the
Middle East oil supplies. The Middle East, especially the Gulf States of the GCC, continues to act as the main supplier
of oil to global markets. Time and time again, the region has played the role of a ‘Swing Producer’ absorbing supply
shocks from within and outside the region. For example, Saudi Arabia’s swift and prompt reaction to offset the loss of
more than 5mn b/d by unleashing its available spare capacity. This demonstrates the willingness and determination
of the oil producers in the Gulf to react in the face of adversity and keep the market well supplied.
It is worth noting here that major disruptions to the oil supply over the last decade or so originated from OPEC
members outside the Middle East.
For example, in Venezuela in 2002 nearly half of Petroleos de Venezuela S.A (PDVSA) employees walked out of work in
protest against the rule of President Chavez. Their actions caused permanent damage to the country’s oil production.
In Nigeria there have been successful militant attacks on oil installations led by the Movement for the Emancipation
of the Niger Delta (MEND), and there have been strained relations with importing countries such as the Russian
Federation.
The current energy security system started as a response to the 1973 Arab oil embargo. It aimed to ensure coordination
among the industrialized countries in the event of a disruption in oil supply and it encouraged collaboration on energy
policies. Its key advocate is the Paris based International Energy Agency (IEA) that acts as energy policy advisor to the
governments of its 28 member countries and aims to promote reliable, affordable and clean energy for the world’s
consumers. To ensure they are prepared for an emergency, IEA member countries hold oil stocks equivalent to at
least 90 days of net oil imports.
52
Time and time again Middle East oil producers have shown that they are reliable oil suppliers, contrary to the
stereotype frequently circulated by the Western media that oil and gas supplies from the Gulf are ‘intrinsically
insecure’.
Major Disruptions To World’s Oil Supply
2. Oil Supply “hiatus” due to confl icts: a historical perspective
The EIA and IEA concur on six armed confl icts that caused major disruptions to oil supply:
the Suez Crisis, the Six Day War, the 1973 War, the Iraq-Iran War, and the Iraqi invasion of Kuwait.
Of these fi ve, the fi rst two (the Suez Crisis and the Six-day War) affected oil supply primarily to the closure of the
former for a short period, and the latter for a longer period. The Suez Canal was closed to maritime vessels, including
oil tankers, from the summer of 1967 until 1976 when it was reopened for shipping. The remaining confl icts that we
will examine include the Iran-Iraq War and the Iraqi invasion of Kuwait.
The Iraq-Iran War (the First Gulf War)
The Iraq-Iran War (1980-1988), set a precedent because it included two major Gulf oil producers. Given the signifi cance
of oil to the two states, it comes as no surprise that the two countries attempted to abort each other’s oil exports.
What is remarkable is the failure of both of them to fulfi ll that goal. Meanwhile, all major OPEC producers suffered
a considerable drop in their production levels in response to a decline in OPEC’s share of the global market, rather
than because of the war. Export fi gures pre-dating the Iranian Revolution (1970-1978) indicate that: Iran exported on
average 4.625mn b/d, Iraq 1.908mn b/d, and Saudi Arabia 6.525mn b/d. The impact of the war on the oil exports of the
two belligerent countries only appears to be signifi cant between 1980-1982 when there was a drastic decline in their
exports, while Saudi Arabia was pumping at full thrust.
At the outset of the war, Iran attacked the Iraqi-Turkish pipeline system . However, by the end of November 1980,
Iraq resumed its exports via Turkey at an estimated level of 400,000 b/d. Iraq retaliated by attacking Iranian oil
installations, causing considerable damage. However, within a month, Iran was back on its feet producing oil to the
tune of 3.400mn b/d.
53
The Iraq- Iran War showed that:
(a) Overland transportation via pipelines is more resilient to attacks than maritime outlets.
(b) While the Iranian oil terminal at Kharg Island remained in operation, albeit far below its maximum capacity, its
air defense system was unable to prevent it suffering substantial damage. In fact, after the end of the war it became
clear that, short of physically occupying the wells, there is little an attacker can do to permanently halt an enemy’s
oil exports.
(c) The Iraq-Iran war remained confi ned to its neighboring countries and did not turn into an arena for superpower
rivalry. One explanation for this is that the confl ict occurred at a time when oil markets were awash with crude
supplies, the so-called oil glut era, and there was no serious threat or shortage. As events unfolded, the resilience of
the oil export system became increasingly manifest. Therefore, there was never a time during the war when the West
saw its vital interests being directly or immediately threatened.
The Iraqi invasion of Kuwait (the Second Gulf War)
The Iraqi invasion of Kuwait on 2 August 1990 led to a total collapse in oil production from the two major oil producers
to the tune of 5mn b/d. However, damage was done to Kuwaiti oil installations by the deliberate sabotage of more than
600 Kuwaiti oil wells by the retreating Iraqi troops.
The war was important for several reasons. First, it showed that the international community, led by the United States,
would not sit back and do nothing when confronted with a major revision of the region’s political map, which was drawn
up by the British at the end of the First World War. Secondly, it illustrated that the only way extensive damage can be
infl icted on oil installations is if there is a physical military presence on the ground to undertake the destruction .
Lessons to be learned?Oil and gas installations appear to be much more resilient to armed confl ict than conventional wisdom suggests. The
majority of the damage seems to occur when hostilities take place in the immediate vicinity of the installations, or
when one side is in control of the installations and decides to sabotage them, as was the case with MEND in Nigeria,
but this is rare.
(3) Security of Demand
Since it was established in Baghdad in 1960 OPEC has attached great importance to become a frontline energy
source by working to ensure a stable, secure and well-managed oil sector. Over the past 50 years the oil market has
remained adequately supplied and OPEC has responded to market developments and unforeseen events as and when
necessary.
When OPEC was set up in 1960, many observers were ready to write its obituary and predicted its demise! Looking
ahead, OPEC remains committed to ensuring stable, secure, and reasonably priced supplies of crude oil to the market
at all times. In the medium-term, there are signifi cant investment pledges both for the upstream and downstream
sectors. According to the Arab Petroleum Investment Cooperation (APICORP), actual capital energy investment
requirements in the MENA Region between 2011-2015, could total to more than $478 billion, two thirds of which will
be located in fi ve countries: Saudi Arabia, Iran, the UAE, Qatar, and Algeria.
With such costly planned undertakings, security of supply needs to go hand-in-hand with security of demand. Hence,
it is important that consuming countries be more transparent with their future energy policies. The producers are
willing to go the extra mile to ensure the world has suffi cient oil supplies and that there is a balanced and stable
market supplying oil at prices that are acceptable to all parties. Nowadays, oil producers seem to be seeking to
maintain the price of oil in the range of $75 to $85/B. This would suit the budget requirements of the majority of the
Gulf Countries and the investment requirements of international oil companies (IOCs), as well as investments in
alternative energy sources.
(4) The way ahead: from confrontation to cooperation
For decades up until the late 1980s, consumer countries have blamed oil producers for any turbulence in the market,
be it a supply crunch or oil price volatility. However, since the 1990s, this has been supplanted by a serious dialogue
that led to the establishment of the International Energy Forum (IEF) with a secretariat based in Riyadh, the capital of
Saudi Arabia. The IEF aims to foster and in roads between the major oil importers and oil exporters in the international
oil arena.
54
1- Introduction
The International Energy Agency’s (IEA) annual World Energy Outlook (WEO) goes beyond a mere energy report or outlook, in that it interacts with the global economic and social issues, as well as future environmental and developmental considerations. One of the document’s strengths is in its annual revisions. Instead of adhering to a predetermined dogma, the WEO’s predictions respond to changing global economic developments and new technologies.
Each year, the IEA introduces new energy topics into its review, this year being no exception. In addition to the year’s standard fossil and non-fossil energy issues; and future environmental, demographic and economic outlooks, the 2010 edition of the WEO introduced three new sections covering the ‘Caspian Energy Scene’ and its prospects, ‘Energy Poverty,’ and ‘Global Fossil Fuel Subsidies.’
The latest edition of the WEO is still regarded as a controversial report on the grounds that it still promotes a 450 Scenario which, according to many, has already become out of reach. Prepared by IEA, the WEO2010 edition merits both considerable analysis and critical evaluation. Yet this is not intended to summarize the WEO 2010, as that is comprehensively covered in its “Executive Summary”, available on the IEA website (www.iea.org), but instead to highlight some of the main issues and to point controversial outlooks and views.
IEA WORLD ENERGY OUTLOOK 2010
-Review
Hisham Khatib*
* World Energy Council, P. O. Box 410, Amman 11831, JordanEmail: [email protected]
55
2. WEO 2010 Scenarios
The world future energy outlook is projected through different scenarios. The report rightly recognizes that
it is government policies which are going to chart future energy sector performance. Different assumptions
about these polices led the IEA to use three scenarios:
1. New Policies Scenario: Presented for the first time, it takes account of the broad policy commitments
that have already been announced and assumes cautious implementation of national pledges to reduce
greenhouse-gas emissions by 2020 and to reform fossil-fuel subsidies.
2. Current Policies Scenario: Takes into consideration only those policies that had been formally adopted
by mid-2010, in essence, making it the business as usual scenario.
3. The 450 Scenario: Assumes the implementation of high-end national pledges and stronger policies after
2020, including the near-universal removal of fossil-fuel consumption subsidies to achieve the objective
of limiting the long term concentration of greenhouse gases in the atmosphere to 450 parts per million
of CO2 equivalent in an effort to prevent the Earth’s temperature from rising more than 2° C.
I shall start by arguing that the 450 Scenario is no longer feasible. Realities on the ground coupled with the
performance of national governments have already rendered such a scenario unrealistic. The concentration
of all long-lived greenhouse gases in the atmosphere has already reached 455 ppm in 2005 (IPCC, 2007),
and greenhouse-gas emissions are continuing to grow year after year. World energy-related CO2 emissions
in 2020 are likely to exceed 35 gigatons (Gt) compared to 22 Gt in 1990. The 450 Scenario – aimed at
stabilizing CO2 equivalent concentrations at 450 ppm by 2150 – therefore, has to be replaced by a more
realistic scenario. I believe that the most ambitious scenario that we could hope to achieve is the New
Policies Scenario which puts us on a long-term path that is consistent with the atmosphere’s concentration
of carbon dioxide equivalent reaching around 650 ppm in 2120. The Current Polices scenario however, which
is business as usual, could lead to concentrations exceeding 1000 ppm after 2100.
It has to be realized that energy growth is now almost exclusively concentrated in non-OECD countries
as these countries are expected to account for over 93% of the world’s projected increase in energy
consumption in the coming years. Non-OECD countries seem to be more concerned with economic growth
and public welfare than with anything else. They are also eager to utilize local resources whenever available
and economical. If this means more emissions, so be it. Their primary concern is short-term economic
development rather than long term environmental considerations – which are both unclear and difficult
to ascertain, and while carbon pricing does not seem to be on their agenda, the main challenge for these
countries is the gradual phase out energy subsidies. Hence, it is the actions of these non-OECD countries
– primarily China – that are going to decide the future global CO2 equivalent emissions in the atmosphere
for decades to come.
These trends were clear in the United Nations Framework Convention on Climatic Change (UNFCCC) in
Copenhagen in December 2009, where negotiations were seen to suffer their biggest setback; and in Cancun
in December 2010, where precious little was achieved besides the pledging of renewed efforts on the part
of the participating delegations. The modest success of Cancun was in promises, namely those of the Green
Fund; the prevention of further deforestation; the monitoring of carbon emissions; and the consensus on
how to simulate international co-operation on developing and disseminating low-carbon technologies. But
most of these remain a wish-list of commitments – and inadequate commitments at that (Dickson, 2010).
There is uncertainty regarding the future of the Kyoto Process itself, and the reluctance of the world’s biggest
emitters – the United States and China in particular – to make substantial concessions and commitments,
and apply them within the next few years. All of this makes me believe that the 450 Scenario is one that is
out of reach.
Still, a substantial part of WEO 2010 is devoted to this 450 Scenario, which plays a part in moving the reader
away from the realities of the actual path that the global energy scene is taking. The New Policies Scenario
introduced by the IEA in 2010 therefore, may be the best that we can realistically aspire to. It is my hope that
future editions of the World Energy Outlook will come up with outlooks of a more realistic nature.
One further comment regards the issue of the atmospheric heating implications of greenhouse gas
concentrations. The IEA chose to safely adopt the Intergovernmental Panel on Climate Change (IPCC)
predictions of a 2° Celsius increase in the atmospheric temperature under the 450 Scenario and an increase
of more than 3.5° Celsius under the New Policies Scenario. With the climate predictions and atmospheric
temperature implications of CO2 concentration still proving controversial, hesitancy in globally adopting
binding commitments is on the rise (Gillis, 2010).
56
3. Energy subsidies
The WEO 2010 devotes a complete section to the subject of energy subsidies. This is an important issue that was shied
away from in the past, but came into the forefront after a call from G-20 Leaders at the Pittsburgh Summit in 2009.
The IEA defi nes an energy subsidy as “any government action directed primarily at the energy sector that lowers
the cost of energy production, raises the price received by energy producers or lowers the price paid by energy
consumers”. The WEO 2010 rightly points out that fossil-fuel subsidies result in an economically ineffi cient allocation
of resources and market distortions, while often failing to meet their intended objectives. Subsidies that artifi cially
lower energy prices are seen to encourage wasteful consumption; exacerbate energy-price volatility by blurring
market signals; incentivize fuel adulteration and smuggling; and undermine the competitiveness of renewables and
more effi cient energy technologies. For importing countries, subsidies often impose a signifi cant fi scal burden on
state budgets, while for producers they quicken the depletion of resources, thereby reducing export earnings over the
long term. No more is this evident than in the Middle East.
The WEO 2010 estimated fossil-fuel consumption subsidies at around $312 billion in 2009, with the vast majority
being implemented in non-OECD countries. Subsidies are mainly put in place in oil producing countries that sell oil
and electricity to its residents at less than the world opportunity cost of this material. In some cases, electricity is
even provided free of charge. The world’s highest subsidies are distributed in Iran, the total of which reached $66
billion, followed by Saudi Arabia with $35 billion, and Russia with a very similar fi gure. The value of Iran’s subsidies
amounted to an astronomical 20% of its country’s GDP in 2009. On realization of this, by the end of 2010 the Iranian
government took the decision to start dealing with these grave subsidies in a fi rm manner, which is a positive
development. The subsidy reform plan calls for the subsidies on fuel, electricity, and certain other goods to be cut
over the course of the next fi ve years. The administration has decided to pay cash subsidies for an undetermined
period of time to compensate low-income families for the infl ationary repercussions of the plan (MEES, 2010). It is
hoped that Iran’s initiative will be replicated by other countries in the Middle East where energy subsidies dominate.
Subsidies in the power sector come next to oil in the proliferation of energy subsidies. In some countries of the Gulf,
not only is electricity cheaply available, but it is also provided at no cost to citizens. Nothing can be more wasteful than
this. In the Middle East, electricity demand is growing at rates of 6-8% annually in every country in the region, mainly
on account of subsidies. This is three times the world’s average growth, and is causing many countries in the region
to burn valuable crude or oil products to keep up with this accelerating demand. Not only is this increasing emissions,
but it is also depleting the fi nancial resources of these countries in having to build capital intensive facilities for
electricity generation and fuel provisions which could easily be saved through tariff reforms.
As a matter of fact, energy subsidies extend beyond fossil fuel and electricity subsidies. Theft and non-payment
of electricity bills that are sometimes overlooked, is not uncommon in some countries, which tends to only add to
subsidies and waste. There is the belief, in some oil exporting countries, that their petroleum wealth is a heavenly
57
endowment which can be freely utilized by its citizens. Also, that the opportunity cost of natural gas is zero, because
it is abundantly available. Although such views can be convincingly dismissed, I would like to point out that fuel
constitutes only one third to one half of the cost of electricity production. The bulk of the cost is set aside for the
operations; amortization and servicing of the investments in equipment and installations, all of which are capital
intensive, bar the operational and maintenance costs. These all are expenses which should be paid for.
There are also calls for the need to provide electricity in a subsidized manner to certain low income consumer groups
as well as industries. If there is a real need for this, then the subsidy should be made in cash and not in the form of
electricity bills. Electricity subsidies lead to ineffi cient use and waste. Correspondingly it is essential to charge a fair
price for electricity that covers the actual costs so as to avoid waste. Subsidizing the industry and economy can be
done in cash payments or other fi scal means if need be – such as the Iranian initiative.
But subsidies are not restricted to fossil fuels. OECD countries have introduced production subsidies (otherwise
known as support programs) to aid the diffusion of mainly renewable energy. Although such support undoubtedly
helps the country to move to cleaner forms of energy, the main incentive is for the most part, energy security. At
present, OECD countries are seen to be anxious to subsidize expensive local resources (renewables, nuclear, biofuels,
etc.) to improve their energy security prospects.
The WEO 2010 estimates that government support for electricity from renewables, and biofuels in OECD countries
amounted to $57 billion in 2009, up from $44 billion in 2008 and $41 billion in 2007. This support is forecast to grow to
$205 billion by 2035 in the New Policies Scenario, or 0.17% of global GDP. Between 2010 and 2035, 63% of the support
is projected to go to renewable electricity and 37% to biofuels. Large-scale government support is needed to make
renewables more cost competitive in relation to other energy sources and technologies, and to stimulate the required
technological advance. But it is subsidies all the same that end up adding to the consumers’ cost.
I argue that many, if not most, of the renewable energy programs in OECD countries are not feasible without these
subsidies, and with some phasing out taking place in recent months, this is likely to slow new renewable energy
programs in OECD countries.
4. Electricity, nuclear and renewables
Electricity is versatile, clean to use, easy to distribute. What is just as important is that it has now established that
electricity is more effi cient in many applications than most other energy forms. All this has led to the wider utilization
of electricity, and its role in replacing other forms of energy for many different uses. Globally, demand for electricity
is now growing at a rate higher than that of economic growth and, in many countries, at almost 1.5-2 times that of
demand for primary energy sources. Discounting the transport sector, electricity can satisfy most human energy
requirements and therefore it is expected that, by the middle of the 21st century, almost 70% of energy needs in some
industrialized countries will be satisfi ed by electricity (Khatib 2003).
In the WEO 2010, it is predicted that fi nal electricity consumption, according to New Policies Scenario, will increase at
an average annual rate of 2.2%, compared to a rate of 1.2% in the case of primary energy consumption, indicating the
growing role of electricity in meeting fi nal energy demand. It also has to be realized that electricity is the only practical
energy carrier to transfer new renewables, hydro and nuclear into fi nal consumption. With the ever increasing share
of these resources in the energy supply chain, the role of electricity is destined to strengthen year after year.
In the New Policies Scenario, global electricity generation grows by 75% over the 2008-2035 periods, rising from
20,183 terawatt-hours (TWh) in 2008 to 27,400 TWh in 2020, and 35,300 TWh in 2035. Coal continues to be the main
source of electricity generation, despite the fact that its share in the world’s mix declines from 41% in 2008 to 32%
by the year 3035. In contrast, the share of electricity generation from non-hydro renewable energy sources – such as
wind, biomass, solar, geothermal and marine – increases more than fi ve-fold, from 3% in 2008 to 16% by the year
2035. Electricity production from natural gas maintains a constant percentage of global generation at about 21%; and
similarly, the shares of hydro and nuclear also stay relatively fl at at 16% and 14%, respectively. Coal therefore, remains
the dominant fuel source in the power sector with coal use in China expected to dominate world coal consumption by
2035, rising to almost 50% of coal use for global power generation.
The WEO 2010 predicts a signifi cant improvement in the outlook for both renewables and nuclear energy. This growth
over the past few years has been remarkable, mainly driven by feed-in tariffs in OECD countries trying to attain
better energy security prospects and promote a cleaner environment. In the environmentally driven New Policies
Scenario, the share of renewables will increase from 19% in 2008 to 32% in 2035, while nuclear energy will continue
to contribute 14% of total electricity consumption throughout this period. In absolute terms, renewables-based
electricity generation triples between 2008 and 2035, and almost catches up with coal-fi red generation by the end
58
of the projection period (11,200 TWh). For most renewables-based technologies in most regions, direct government
incentives are the main driver of growth, rather than the carbon markets – as is the case in the New Policies Scenario.
A signifi cant feature of WEO 2010 is the improved outlook for nuclear. This was not the case in earlier reports,
particularly the 2009 edition of the WEO. Encouraged by signifi cant nuclear startups in China, the Middle East and
other parts of the world, nuclear electricity output is expected to grow year after year matching global electricity
generation growth at 2.2% annually while signifi cantly contributing towards the abatement of emissions. But the
nuclear outlook for the United States does not seem to be that promising. The rising cost of nuclear energy is going
to limit its investments, and its estimated installed capacity of 10% in 2009, may drop to 3% in 2035 (EIA, 2011), a
discouraging prospect. [Both the Report and the Review were written before the recent Japanese nuclear disaster,
which has obliged many countries to review their nuclear power policies, hence slowing the growth of nuclear power-
Editor]
5. Oil Resources and oil peak
The WEO 2010 makes three important highlights concerning the future oil market outlook.
• In the New Policies Scenario, demand continues to grow steadily, reaching about 99mn b/d (excluding
biofuels) by 2035 – 15mn b/d higher than in 2009. All of the growth comes from non-OECD countries, with 57% coming
from China alone, driven mainly by the rising use of transport fuels; while demand in the OECD countries falls by over
6mn b/d.
• Global oil production reaches 96mn b/d in the New Policies Scenario, with the balance of 3mn b/d coming
from processing gains. Crude oil output reaches a plateau of around 68-69mn b/d by 2020 – marginally below the all-
time peak of about 70mn b/d reached in 2006, while production of natural gas liquids (NGLs) and unconventional oil
grows strongly.
• Total OPEC production rises continuously through to 2035 in the New Policies Scenario, with its share of
global output increasing from 41% to 52%. Total non-OPEC oil production is broadly constant to around 2025, as rising
production of NGLs and unconventional production offsets a fall in that of crude oil. Thereafter, production starts
to drop. Increased dependence on a small number of producing countries would intensify concerns regarding their
infl uence over prices.
This means that conventional crude oil production, as we know it, peaked at 70mn b/d in 2006. The difference between
oil demand and conventional crude availability is covered by the production of NGL and non-conventional oil, both of
which are expected to grow steadily to make up for crude oil production of less than 70mn b/d.
This is an important consideration for future oil pricing, because the output of cheap conventional crude oil is steadily
falling short of rising world oil demand. The remainder is set to be satisfi ed by the more expensive sources of NGL
and non-conventional oil, including tar sands, heavy oils, etc.
The WEO 2010 points out the growing insensitivity of both oil demand and supply to price. On the one hand, oil import
prices could reach $113/b in 2035 (in 2009 dollars) in the New Policies Scenario. On the other hand however, they
could exceed $135/b in 2035 under business as usual considerations. The obvious conclusion is that oil prices and
cost of transport are going to increase in both nominal and real terms in the coming few years.
6. Energy Poverty
In a world in which the availability of electricity and commercial fuels are taken for granted, there are still 1.4 billion
people that lack access to electricity. Also with 2.7 billion people today still relying on biomass, the fi gure is likely to
increase to 2.8 billion by 2030 according to the WEO 2010, and it is this energy poverty that remains one of the big
tragedies of our universe. Until now, more than 40% of the world’s population relies on non-commercial fuels in the
form of biomass, waste, trees, dung, etc. to provide them with the necessary energy for both cooking and heating.
The detrimental air pollution brought about from the use of biomass in ineffi cient stoves, according to the WHO, could
lead to over 1.5 million premature deaths per year in 2030. Availability of modern fuels and electricity is essential not
only for health but also for human development.
On realization of this the WEO 2010 introduced what it called the ‘Energy Development Index (EDI)’ in order to measure,
and better understand the role that energy plays in human development.
59
The EDI is calculated in such a way as to mirror the UNDP’s Human Development Index and is composed of the
following four indicators, each of which captures a specifi c aspect of potential energy poverty.
• Per-capita commercial energy consumption: which in the 2010 WEO’s view, serves as an indicator of the
overall economic development of a country.
• Per-capita electricity consumption in the residential sector: which serves as an indicator of the reliability of,
and the consumer’s ability to pay for electricity services.
• Share of modern fuels in total residential sector energy use: which serves as an indicator of the level of
access to clean cooking facilities.
• Share of population with access to electricity.
A separate index is created for each indicator, using the actual maximum and minimum values for the developing
countries covered. Performance in each indicator is expressed as a value between 0 and 1 and calculated using the
formula below. The EDI is then calculated as the arithmetic mean of the four values for each country.
actual value – minimum value
Indicator =
maximum value – minimum value
The EDI is quite useful, although not ideal in measuring energy poverty. By including per-capita electricity consumption
in the residential sector, the indicator rewards those developing countries that are subsidizing electricity tariffs and
fuel prices thus encouraging overuse and waste.
Correspondingly, it is not surprising that wasteful countries like Libya, Iran and Venezuela top the list of countries
with the highest Energy Development Index, while countries in Sub-Saharan Africa are rightly down at the bottom of
the Index. I hope that with time, the IEA will refi ne the EDI to become more indicative of the true energy development
of nations and their real energy poverty.
7. Abatement
The WEO 2010 continued to concentrate more on the 450 Scenario as the pathway to reach ideal emissions target,
instead of discussing more realistic possibilities. I reproduced the following fi gure from the Outlook to compare world
energy related CO2 emission savings by policy measures in the 450 Scenario with that of the Current Policies and
New Policies Scenario.
60
From the fi gure it is clear that energy related CO2 emissions of 43 GT in the business as usual scenario (Current
Policies Scenario) can be reduced to about 36GT in 2035 by adopting the New Policies Scenario, and about 22 GT
in the 450 Scenario. Effi ciency is the most important factor in abatement strategies, followed by increasing use of
renewables, biofuels and nuclear. To fulfi ll the 450 Scenario, CCS fi gures out prominently at 26% of the total abatement
achievements. Realizing the modest progress in CCS technologies until now, this only adds to the impracticability in
achieving anything near to the 450 Scenario targets in 2035. It is mainly in improving effi ciency in electricity generation
and energy use (in industry, buildings as well as transport) that signifi cant abatement measures can be achieved. It is
better to concentrate on this than to hope for unrealistic achievements in other quarters such as CCS, or continued
subsidies and support for renewables through feed-in tariffs which have become a common source of complaint in
some OECD countries and unwelcome in non-OECD countries.
It is in Chapter 7, in the Power Sector Outlook, that the WEO 2010 charts a more realistic outlook for improving
effi ciency. As highlighted earlier, fi nal energy use is becoming more electricity intensive and improvements in the
power sector can lead the way to less CO2 intensity. This is achieved not only by increasing the share of renewables
and nuclear, but also by improving the effi ciency of electricity generation and by increasing the share of natural gas
and CCGT high effi ciency plants. The New Policies Scenario points out that for improvements in the average effi ciency
of the world coal fi red fl eet to reach above 40% in 2035, up from 35% today, mainly through super critical plant and
ultra super critical plants, with gas fi red generation rising by almost 77%. CCS technologies are expected to have
a modest but realistic share of 1.5% in 2035. Meanwhile, globally, the shift to low carbon technologies in the New
Policies Scenario causes the CO2 intensity of power generation to fall by 34%, from 536g of CO2 per KWh today, to
less than 360g of CO2 per KWh in 2035. This is the way forward.
References
• IPCC (Intergovernmental Panel on Climate Change) (2007), “Climate Change 2007: Synthesis Report”, IPCC,
Geneva.
• Dickson, D. (2010), “Cancun Climate Talks Prove Skeptics Wrong, But There is Still a Long Way to Go”, Oilprice.
Com, 25/12/2010.
• Gillis, J. (2010), “A Scientist, His Work and a Climate Reckoning”, TheNew York Times, 22/12/2010.
• MEES (2010), Middle East Economic Survey, 27 December 2010, p 18, Nicosia.
• Khatib, H. (2003), “Economic Evaluation of Projects in the Electricity Supply Industry”, Institution of Electrical
Engineers, 2003, London.
• EIA (2011), “Annual Energy Outlook 2011” U.S. Energy Information Administration, Washington DC (forthcoming),
EEnergy Informer, January 2011.
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