Friday, March 30, 2012

Trans – Caspian Gas Pipeline Still a Pipe Dream?

Potential major developments in the Caspian energy landscape may be underway, but laden with more doubt than certainty. Negotiations between the European Union (EU), Azerbaijan and Turkmenistan on building a much debated Trans-Caspian Gas Pipeline (TCGP) has led to an agreement in principle in March 2012. A key point is that under such an agreement, Azerbaijan and Turkmenistan would also overcome disputes over the ownership of the Kapaz/Serdar oil fields in the Caspian for the TCGP project to move forward. But TCGP’s imminence may be unrealistic for a number of reasons.

First, Azerbaijan and Turkmenistan continue to hold differing views on the sectoral demarcation of the Caspian Sea. Unless both countries reach an agreement on the disputed Kapaz/Serdar hydrocarbon deposits, there will be no TCGP. Second, while some analysts argue that legally there would not be problems if both countries sign a bilateral deal on the status of the Caspian Sea, its other littoral states are bound to disagree and protest it. Namely, Russia and Iran are against TCGP because it does not serve their commercial or geopolitical interests. They have invoked at various times the unresolved legal status of the Caspian and environmental threats in building an undersea infrastructure. Iran sent troops to the Caspian area when an attempt to begin development of a field in the so-called 'gray zone' was made in the late 1990s – early 2000s.

Meanwhile, Moscow continues to insist that only the Caspian littoral states have the right to decide on any pipeline traversing the sea. EU’s invitation of Kazakhstan to join TCGP and talks between the Austrian President Heinz Fischer and the Turkmen president Gurbanguly Berdymukhammedov in October 2012 on creating a legal framework for supplies of Turkmen gas to EU caused a bitter reaction from Russia. It is not ruled out that Russia may threaten to cut off gas supplies to the growing domestic consumption in Azerbaijan or exert pressure on Baku not to participate in the TCGP on the grounds of creating an unnecessary rival if Turkmenistan winds up supplying cheap gas to the Turkish market. In the long run, Turkmenistan and EU could agree to ship compressed natural gas via tankers, but it will depend on the availability of a pipeline to send the gas onward to European markets.

Lastly, the funding sources of TCGP are still unclear. As Rovshan Ibrahimov, head of the foreign policy department at Azerbaijan’s Centre for Strategic Studies, aptly pointed out, neither his country nor Turkmenistan would handle the risk of financing and running the project on their own. And it is doubtful that the EU would sponsor the project due to its lack of supranational mechanisms to implement a comprehensive energy agreement across several countries. It is uncertain who is willing to and can provide the guarantees to justify the risk.

Tuesday, March 20, 2012

Eastern Mediterranean: Horn of Plenty or Pandora’s Box

As the world watches the Arab Spring continue its struggle for freedom, an additional factor of instability (or an economic boon in the best case scenario) maybe unfolding before its eyes.  According to the US Geological Survey, the continental shelf in the eastern Mediterranean, which includes Cypriot, Lebanese, Israeli and Syrian waters, has an estimated 122 trillion cubic feet of gas and nearly 4 billion barrels of oil.  This relatively recent discovery has a potential to secure energy independence of its littoral states.
But because Lebanon is still in a state of war with Israel, Turkish and Greek Cypriots (including Turkey and Greece) are in a long-standing dispute over Cyprus, and the relations between Israel and Turkey are strained, exploitation of offshore natural gas is likely to open a fresh can of worms, if it is hijacked by politics.  With global majors scrambling to snatch up exploitation licenses in Cyprus and Israel, it is a crucial moment for each littoral state to define its exclusive economic zone (EEZ) before any offshore exploration and drilling activity begins.  As Nizar Abdel-Kader aptly points out, apart from establishing EEZ, “there may be a need for a regional conference sponsored by the UN with the main task of facilitating negotiations between Lebanon and Israel and between the Turks and Greek Cypriots […] to avoid future military conflict.” 

The tensions already heightened last fall in the eastern Mediterranean, when Turkey threatened to send its navy to prevent Greek Cypriots from drilling gas and to stop Israel’s unilateral exploitation of its offshore hydrocarbons.  In the wake of Israel’s gas discovery, Hezbollah issued a warning that it would defend Lebanon’s natural resources, which elicited a similar response from Israel.  It is the most opportune moment for UN’s assistance to address the maritime boundaries in the Levant Basin before a source of energy supply security turns to a source of another conflict.

Thursday, March 8, 2012

How Thomas Friedman Got It All Flatly Wrong on Energy

Bumping into Thomas Friedman’s visible omniscience on basically all global problems, a lingering question is whether or not his readers feel they know more about an issue thanks to him, and if so, by how much.  Personally, after being forced to read his “The Lexus and The Olive Tree” as part of a graduate school class, I swore to never waste time on his books with bumper-sticker style writing and less than deep and meaningful ideas.  It remains a mystery why New York Times keeps putting out Friedman’s mostly senseless and sloppy columns, which any moderately educated American should be able to quickly grasp.  While it is too easy to mock him, I see some friends quoting him or posting his columns on various social media sites.  Noticing his recent pieces on energy, one would hope that nobody is taking his writing on this subject matter to heart.  Here is why.
Friedman argues in his February 29, 2012, column that the U.S. should consider joining the Organization of Petroleum Exporting Countries (OPEC) because the country's oil and gas output are highest for the first time in eight years and “this transformation could make the U.S. the world's top energy producer by 2020, raise more tax revenue, free us from worrying about the Middle East, and, if we're smart, build a bridge to a much cleaner energy future.”  According to Friedman, it should be in the U.S. interests to join OPEC to sustain high oil prices.  Lobbying for high oil prices for years now, he believes that a $4 per gallon of gasoline should be a constant to “reduce our addiction to oil.”  In his April 30, 2008 column he was upset that “oil and gas kept all their credits, but those for wind and solar have been left to expire this [2008] December.” 
Based just on these points, if Friedman was in charge of energy, the U.S. would not have a functioning economy.  For the first time in two decades, the country is moving towards more energy self-sufficiency not because of a revolution in green energy, but thanks to the development of gas and oil from shale formations.  At the same time, U.S. continues to import nearly 9 million barrels per day of oil and refined petroleum products.  But for Friedman that still makes the country a very suitable to candidate for OPEC.  Moreover, it is uncertain whether the levels of production of shale gas would be maintained at the current rate.  According to Energy Information Administration’s (EIA) revised estimates of reserves, there were 482 trillion cubic feet (tcf) of available shale gas in the U.S., which is 40 percent lower from the 2011 estimate that maintained 827 tcf.  Given that there were rapid declines in several fractured shale gas wells from 50 up to 80 percent or more during the first year, there may be changes in the rates of return of shale gas wells. 
Second, as I noted in my previous blog entry, economists caution against a sudden rise in oil prices that were followed by nine out of previous 10 recessions in America. A 2000 report by the International Monetary Fund shows “a $5 permanent increase in oil prices cuts world GDP growth by 0.25 percent over the first four years. But the impact on the U.S. was a larger 0.3 percent, reflecting this country’s high per-capita energy use.”  Friedman overlooks this factor.  Oil addiction will not disappear until another cheap energy source is widely available across the economy.  A cursory review of publicly available data shows that traditional sources of energy, such as oil (36%), natural gas (25%), coal (20%) and nuclear (8%), still constitute a backbone of the economy and will remain so for years to come.  Transportation takes up about 93% of the petroleum use in the U.S. due to its outspread landscape of rural and urban areas that require driving.  Friedman fails to provide an answer how this could change and how and when these energy sources can be replaced by green energy and achieve economies of scale. 
Third, dispelling the common perception that the U.S. is so much dependent on Middle Eastern oil, the EIA data show that 52% of U.S. crude oil and petroleum products come from the Western Hemisphere, about 22% from the Persian Gulf, and 20% from Africa.  Canada (29%), followed by Saudi Arabia (14%), Venezuela (11%), Nigeria (10%), and Mexico (8%), remains the top exporter of oil to the U.S., the role of which is growing and will continue to grow in the U.S. energy market.  The concern about the Middle East is not (or at least should not be) necessarily about reducing addiction to Saudi oil, but how global markets are much more closely inter-connected and various events, such as wars, natural disasters, or rising oil demand, invariably affect the price of crude oil. 
Lastly, while Friedman was troubled in 2008 that the U.S. government was cutting support to wind and solar industries, the Obama administration in fact has bumped up subsidies to renewables, spending over $13 billion of taxpayer money by now.  But renewables still stand at only about 9% at this point.  While the oil industry has received subsidies from the government as well, the sheer economies of scale of the traditional sources of energy are incomparable to the renewables.  In short, the U.S. will be able to maintain its economic stability and growth with affordable and widely available traditional sources of energy for decades to come.  Denying it is misleading, delusional and utopian.