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Energy Security in the 2010s

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NEW REALITIES:

ENERGY SECURITY IN THE 2010s AND

IMPLICATIONS FOR THE U.S. MILITARY

John R. Deni

Editor

February 2015

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CONTENTS

Foreword ......................................................................ix 1. The Military Implications of 21st Century

Energy Security ……….............................................1

John R. Deni

2. Russia and Energy Markets ……………………...15

Theresa Sabonis-Helf

3. The Arab Uprisings and Middle East and North

Africa Energy Producers: Heavy Costs

and Ephemeral Benefits ………………………….47

John Calabrese

4. Game Changer? The Energy Revolution

and American Policies Toward

Africa……………………….................................…75

Ian Taylor

5. The Impact of Political Instability on the

Development of Latin American

Energy Supplies …………………………..............97

David R. Mares

6. The Shale Revolution and the New Geopolitics

of Energy …………………....................................113

Robert A. Manning

7. The Security Risks and Rewards of

Renewable Energies: Implications for

the United States …………………………...........129

Karen Smith Stegen

v

8. The Evolving Global Nuclear Industry

Landscape and the Status of

the U.S. Nuclear Industry ……………………....167

Jane Nakano

9. China’s Burgeoning Demand and its

Quest for Resources …………………..................185

Michal Meidan

10. The Changing Calculus of India’s

Energy Security …………………………...........205

Tom Cutler

11. Energy Demand in the Developing World … 221

Deborah Gordon

12. New Supply Routes—New Conflicts? ……… 239

Michael T. Klare

13. The Army’s Approach to Installation and

Operational Energy Security Challenges …….275

Katherine Hammack

14. Operational Energy as a Stepping Stone

Toward National Resilience ……......................285

Paul Roege

15. Hacks on Gas: Energy, Cyber Security,

and U.S. Defense ………………….....................301

Chris Bronk

vi

16. The North Atlantic Treaty Organization’s

(Re)Engagement on Energy Security:

Managing Unmet Expectations ……………....323

John R. Deni

17. The Feasibility of Small Modular

Reactors for Military Installations...........……..343

Ronald Filadelfo

About the Contributors ...........................................357

vii

FOREWORD

Global energy markets are undergoing dramatic

shifts. Developing countries are beginning to outpace

their more developed counterparts in energy demand,

the result not simply of higher economic growth rates

in the former, but also due to increased efficiency in

the latter. Traditional producers of hydrocarbons in

places such as Latin America, Eurasia, North Africa,

and the Middle East face a host of political, economic,

technical, and societal challenges that could poten-

tially lead to major disruptions in the global energy

supply. Meanwhile, the unconventional fossil fuels

revolution has led to major changes in the flow of the

global energy supply, seemingly overnight.

All of these changes will have implications for U.S.

security generally and the U.S. military specifically.

Evolving energy-based U.S. national interests in Af-

rica or the Middle East may shape the degree to which

the U.S. military becomes involved in political or hu-

manitarian crises in those regions. Tightening energy

supplies may alter fundamentally the way in which

the United States wields military force in a contingen-

cy operation. And closer to home, increasingly vulner-

able domestic energy infrastructure may undermine

military installation operations and security.

To further investigate the changes among energy

producers and consumers and to subsequently assess

the implications for the U.S. military, the Strategic

Studies Institute—the research arm of the U.S. Army

War College—organized a conference in November

2013 entitled, “New Realities: Energy Security in the

2010s and Implications for the U.S. Military.” That

event, which included North American and Europe-

an experts from government, the military, academia,

ix

the private sector, and think tanks, was hosted by

the Reserve Officers Association in Washington, DC,

and funded through the generous support of the U.S.

Army War College Foundation. The chapters in this

edited volume are based on the presentations of those

experts at the New Realities conference, and the Stra-

tegic Studies Institute is pleased to offer them as part

of the ongoing discussion over the future of the U.S.

Army in American national security.

DOUGLAS C. LOVELACE, JR.

Director

Strategic Studies Institute and

U.S. Army War College Press

x

CHAPTER 1

The Military Implications of 21st Century

Energy Security

John R. Deni

Dr. Deni would like to thank the following individuals

for their invaluable support in organizing, enabling,

and conducting the November 2013 conference for

which the chapters of this edited book were written:

Lieutenant Colonel John Colwell, Mr. Jacques Chre-

tien, and Colonel Scott Weaver of the Strategic Studies

Institute; Mr. Bob Feidler of the Reserve Officers As-

sociation; and Ms. Ruth Collins of the U.S. Army War

College Foundation.

Global energy markets have changed significantly

in recent years. New consumers such as China and In-

dia have arrived on the scene, displacing other leading

countries, reshaping competition over limited energy

supplies, and potentially worsening human-induced

climate change. In other countries, efficiency gains,

increased reliance on renewables, and burgeoning do-

mestic production of unconventionally-sourced fossil

fuels have dramatically altered the consumption pat-

terns in much of the West. At the same time, the de-

velopment of unconventionally-sourced fossil fuels,

among other events, has also altered the production

side of the energy equation, as North America be-

comes a leading producer and exporter of oil and gas.

Moreover, declining production in Africa, renewed

instability in the Middle East, and inhibited energy

development in Latin America all reflect shifting pat-

terns of production as well.

1

These many factors on both the consumption side

and the production side of the energy equation add

up to a new energy security reality, in some ways

unexpected from what was foreseen just a few years

ago. Obviously, the implications of this new reality

are significant for the United States, especially for its

economy and the average American consumer. How-

ever, there are also some profound implications for

the U.S. military, especially as it embarks on a period

of austerity and restructuring following over a decade

of war. For example, the shale gas and tight oil revolu-

tion in North America may cause Washington to reap-

praise U.S. interests in the Middle East, resulting in

less willingness to wield military force in the Persian

Gulf. Burgeoning demand in China, India, and across

the developing world may cause oil prices to remain

stubbornly high, increasing the cost of fuel-intensive

military operations in remote, austere environments.

Decreasing oil production in Sub-Saharan Africa, cou-

pled with reduced saliency of those same resources

in America’s energy import mix, may severely limit

U.S. interests in the region while simultaneously in-

creasing the risk of socio-political instability in Africa

due to decreasing state revenues. The growing risk of

cyber attack on vulnerable energy infrastructure may

inhibit U.S. military operations conducted from instal-

lations dependent on the civilian energy grid. These

are just some of the examples of how broader energy

market issues may impact the U.S. military.

In November 2013, the Strategic Studies Institute

(SSI)—the research institute of the U.S. Army War

College—convened a conference, free and open to

the public, to address the major “new realities,” both

geographically and technologically, and some of the

related military implications. The conference—hosted

2

by the Reserve Officers Association in Washington,

DC, and funded through the generous support of the

U.S. Army War College Foundation—featured experts

from the policymaking community, academia, think

tanks, the private sector, and the military services. The

SSI gathered this diverse array of individuals together

to address the rapidly changing global energy sup-

ply situation; the social, political, and economic chal-

lenges facing consumer states; and the subsequent im-

plications for the United States generally and for the

U.S. military specifically. The chapters in this edited

volume are based on the presentations delivered at

that conference, and they offer a multitude of original,

impactful insights relevant to the Department of De-

fense (DoD) generally and the U.S. Army specifically.

The volume opens by surveying the most signifi-

cant changes among energy producers, with Dr. The-

resa Sabonis-Helf examining the role of Russia. Vladi-

mir Putin has largely succeeded in placing Russia’s

petroleum and gas sectors in service of the state and

hence of underwriting Moscow’s interpretation of its

political and economic interests. However, she ques-

tions whether the Kremlin will continue to be able to

effectively wield energy as a political tool, given sig-

nificant issues surrounding Russia’s ability to main-

tain and grow its energy exports at a reasonable price.

Western know-how and capital are necessary, particu-

larly in the petroleum sector, where the Russian state

realizes a high percentage of its revenue. In addition,

long-standing inefficiencies in production, the non-

transparency of both the petroleum and gas sectors,

limits on foreign investment, and outright corruption

all have contributed to a worsening of energy relations

between Russia and its most important market, Eu-

rope. Sabonis-Helf concludes that Moscow’s inability

3

and/or unwillingness to plan for the future has com-

mitted Russia to a questionable and likely unsustain-

able, future in terms of energy production.

In his chapter addressing the implications of po-

litical instability in the Middle East and North Africa

(MENA) on hydrocarbon production, Dr. John Cal-

abrese argues that the effects of the Arab Spring on the

region’s energy sector vary greatly by country. These

varying implications of the Arab Spring will mean

that some MENA states will continue to fill the gaps

created by drops in production by other states such

as Libya, Syria, and Iraq. In part, this explains why

the Arab Spring’s effects on MENA producers have

not substantially jeopardized U.S. energy security—at

least not yet. Even though the share of hydrocarbons

imported by the United States from the MENA re-

gion continues to decline, Washington will still have

an interest in the steady, stable flow of oil from major

production areas such as the Persian Gulf because oil

prices are set by a global oil market. This means that

instability in any region affects oil prices everywhere.

Meanwhile, just to the south of the MENA region,

Sub-Saharan Africa’s role as an energy producing re-

gion is undergoing a significant shift. Declining pro-

duction among major African hydrocarbon produc-

ers, as well as declining American demand for the

same, means that Sub-Saharan Africa is likely to see

less attention from the United States overall, argues

Dr. Ian Taylor. A rational assessment of U.S. interests

in Sub-Saharan Africa will likely lead American deci-

sionmakers to pursue very limited involvement in the

region, relying instead on the African Union and the

European Union. Nevertheless, it is possible that de-

creased hydrocarbon production and lower oil prices

might precipitate social, economic, and political in-

4

stability in Sub-Saharan African countries that were

formerly important U.S. suppliers like Nigeria and

Angola. Subsequently, this instability could lead to

humanitarian crises of varying size and form across

the continent, which a future U.S. President may con-

sider becoming involved in, militarily or otherwise.

Closer to home, Latin America has significant po-

tential, writes Dr. David Mares, in terms of both un-

conventional oil, shale gas, and renewables, but an ar-

ray of technical, market, and societal challenges within

the four largest energy producers—Venezuela, Brazil,

Argentina and Mexico—will likely prevent the region

from achieving all that it might. One of the most im-

portant challenges is the lack of incentives provided

by these countries to convince outside investors to

bring necessary capital, skills, and technology to the

region. If they wish to overcome this challenge, one

of the most significant things Latin American govern-

ments could do would be to increase capable, trans-

parent, responsive governance. On this point, the U.S.

military may have a role to play in terms of security

cooperation aimed at increasing civilian control of re-

gional militaries and educating partner militaries on

the proper role of the military in a democracy.

Meanwhile, the North American unconventional

fossil fuels revolution is the most transformative socio-

political-economic event of the last several decades,

with the possible exception of the invention of the in-

ternet, according to Mr. Robert Manning. Significant

developments in shale gas and tight oil exploitation

over the last 7 years alone have led to dramatically al-

tered energy predictions for the United States in terms

of production as well as consumption. The shale revo-

lution is creating millionaires across the United States,

turning rural villages and towns into 21st century hy-

5

drocarbon boomtowns, rearranging the politics within

the United States as Great Plains politicians focus on

energy issues unlike ever before, and keeping energy

prices relatively low as the West continues to struggle

against the aftereffects of the Great Recession. This

likely presages a period of American economic re-

surgence, and will alter fundamentally U.S. relations

with the Middle East. Nonetheless, as noted earlier,

the United States will still care about stability and se-

curity in and among traditional petroleum producing

countries, thanks to the increasingly global nature of

energy markets.

As with the shale revolution, there has been great

hope that renewable energy capabilities might ame-

liorate energy security challenges posed by U.S. and

allied reliance on conventional fossil fuels from the

Persian Gulf or elsewhere. However, Dr. Karan Smith

Stegen argues that there are significant risks associ-

ated with renewable technology, especially in terms of

the rare earth metals that constitute some of the neces-

sary components of these technologies. Indeed, rare

earth elements are critical to a wide variety of appli-

cations, such as lighting, solar panels, wind turbines,

electric vehicle motors, and batteries. The greatest of

these risks centers on the fact that a single country—

China—holds most known deposits of critical rare

earth elements as well as much of the processing ca-

pacity for the same. Unfortunately, there are limited

alternatives.

Another non-hydrocarbon energy source—nucle-

ar power—faced incredibly bright prospects just a

decade ago. But Ms. Jane Nakano argues that, since

then, several factors have served together to damp-

en prospects for nuclear power in the United States.

Domestically, the economic slowdown in the United

6

States, coupled with increased efficiency and compe-

tition from cheaper natural gas, have led to reduced

expectations for future nuclear plant construction. On

the international scene, U.S. nuclear manufacturers

have had difficulty competing with state-led compa-

nies from countries such as France, Russia, and South

Korea, some of which offer cradle-to-grave programs

that include power plant construction, operation, and

spent fuel disposal.

Following this extensive treatment of changes on

the production side of the energy equation, the vol-

ume turns next to changes on the consumption side,

as Dr. Michal Meidan examines the implications of

China’s burgeoning energy demand. She finds that,

despite efforts to spur development and production

of domestic energy sources, China is likely to remain

dependent on foreign oil and gas for the foreseeable

future. In terms of that reliance on foreign sources,

Beijing has endeavored to diversify its energy sup-

pliers, but progress here has been very limited. This

means that China will continue to rely on potentially

vulnerable sea lanes of transit for its energy needs,

and that Beijing will continue to view supply security

as a major, strategic vulnerability. In order to mitigate

this vulnerability, China will look to Southeast Asia

and the South China Sea as important transit regions

and potential sources of energy. Although its major

suppliers are found in the Middle East, past experi-

ence indicates that China is unlikely to become very

involved in the politics of the region, in part because

it lacks the tools to do so. Instead, Beijing—spurred on

by its national oil companies and the Chinese navy—

will seek to maximize Chinese leverage over energy

flowing through and from the South China Sea.

7

Just next door, India faces a series of challenges

as it pursues energy security. Mr. Tom Cutler argues

that the United States has strong interests in an energy

secure India, which has seen its demand for energy

increase dramatically over the last several years. A

variety of factors, including corruption as well as ex-

tensive domestic fuel subsidies, have prevented India

from becoming more self-sufficient in its energy con-

sumption, forcing it to look overseas for more of its

growing needs. Given its geographic position at the

heart of the east-west trade through the Indian Ocean,

India stands to play a key role as South, Southeast,

and East Asia continue to outpace other regions of the

world in economic growth. For its part, the United

States has sought greater energy cooperation with the

Indian government, including in the sphere of civil-

ian nuclear cooperation. As an emerging energy sup-

plier and as a key partner of India, the United States

is likely to forge even closer civil and military ties to

enhance mutual energy security.

The cases of China and India exemplify the growing

demand throughout the developing world. Ms. Debo-

rah Gordon argues that the most dramatic increases in

global energy demand in the coming decades will be

in non-Organization for Economic Cooperation and

Development (OECD) countries. In particular, China,

India, Brazil, Indonesia, the Middle East, and Africa

are the countries and regions that are expected to see

the highest rates of energy demand growth. One of the

most critical challenges here will be the fact that most

of that demand in the developing world will be met

with fossil fuels, exacerbating human-induced climate

change and potentially intensifying the effects of nat-

ural disasters. Additionally, as fossil fuel production

in the Western hemisphere expands exponentially,

8

there will be corresponding increases in global fossil

fuel movements—this trade may become increasingly

vulnerable to terrorism, accidents, and damage from

ever more intense natural disasters. At the same time,

more traditional state-versus-state security compe-

tition over limited fossil fuel resources may become

more pronounced among the developing countries.

Dr. Michael Klare amplifies some of these same

points in arguing that the United States is likely to be

further drawn into regional conflicts regarding en-

ergy resources, at least in the short term, as consumer

countries search for fuel supplies. Indeed, despite the

advances in technology that have led to the shale rev-

olution and expanded use of renewables, Klare argues

that conflict over energy is likely to recur so long as

major consuming states, like the United States, India,

and China, continue to rely on supplies derived from

distant and unruly areas. The dramatic expansion of

land-based energy infrastructure, the increasing mag-

nitude of the global energy sea trade, the vast distances

between producers and consumers, the development

of new energy resources where national boundaries

remain contested or unresolved, and the geographi-

cal complexity of international transit choke points all

add up to increased demands on the U.S. military to

safeguard American and allied energy security. As the

United States relies less and less on foreign sources

of energy though, it remains unclear whether the U.S.

Congress—or the American public—will remain in-

terested in underwriting the security of global energy

supply lines.

Having examined changing patterns of consump-

tion and the shifting locus of production, the volume

ends with an assessment of some specific military

issues and implications, especially in terms of op-

9

erational energy security—the energy necessary to

prepare for, deploy to, conduct, and redeploy from

military operations.

The Honorable Katherine Hammack addresses

the necessity of organizational culture change, as well

as the need to adopt new technologies and capabili-

ties, in her chapter on the progress the U.S. Army has

made to date. Such changes are neither easy nor quick

for an organization comprised of over 2 million sol-

diers, family members, and civilians, and which man-

ages one billion square feet of building space and over

100,000 military homes on its bases. In order to miti-

gate future energy security challenges at home and

abroad such as those outlined previously, the Army is

focusing on turning its installations into platforms of

stability, resiliency, and endurance, and on leveraging

innovations that reduce fuel demand and resupply

requirements in the field in order to increase mission

effectiveness. Microgrids allow Army installations

the ability to combine on-site energy generation

and storage with the ability to manage local energy

supply and demand. At the same time, the Army is

working to integrate efficient vehicles, renewable en-

ergy, and backup generators into the energy manage-

ment systems at contingency locations and forward

operating bases.

Dr. Paul Roege provides some key context in point-

ing out that operational energy security emerged as

a result of rapidly intensifying military technologies

and public attention drawn by the longest historical

American conflict. Although the average American

Soldier is now far more effective than he was in World

War II or the Korean War, he uses correspondingly

more energy per capita. Trying to sustain the energy

requirements in remote and often austere environ-

10

ments proved extraordinarily costly in blood and

treasure. As a result, the U.S. Department of Defense

(DoD) has tried to develop concepts that enable it to

utilize energy in flexible ways in order to optimize

mission effectiveness. One of the greatest challenges

within DoD, though, remains changing existing en-

ergy-related paradigms held by individuals. In spite

of this and other challenges, Roege maintains that, as

DoD works to achieve progress, it can play the role of

exemplar, helping to transform the American energy

posture toward one of resilience, which will ultimate-

ly best strengthen U.S. security.

As the Army and the rest of DoD rely increas-

ingly on computers and technology to manage and

use energy, the risk to operational energy security

posed by cyber attack also increases. In his chapter

examining the intersection of cyber and energy secu-

rity, Dr. Chris Bronk argues that the ever increasing

use of computers in the energy industry, as well as

the significant advances in computing technology that

have enabled hydraulic fracturing to revolutionize the

American energy sector, mean that energy security is

more susceptible today to cyber attack than ever be-

fore. Bronk sees vulnerabilities for the U.S. military in

at least three areas—cyber attack against the electrical

grid upon which military facilities rely, hacking of the

oil and gas supply system, and cyber attacks against

major producers or suppliers that would result in sig-

nificant supply disruptions or price increases. Some

of these vulnerabilities are difficult to avoid, though,

so Bronk posits that resiliency and recovery are the

key mitigation strategies for DoD and Army energy

systems that increasingly rely on unclassified infor-

mation technology.

11

The North Atlantic Treaty Organization (NATO)

may prove a useful venue for developing and sharing

lessons learned on resiliency and recovery. To date,

the Alliance has certainly raised awareness of energy

issues affecting the security of member states, and it

has clearly stated its interest in becoming engaged in

energy security, including in the protection of critical

infrastructure. However, Dr. John R. Deni argues that

NATO has achieved little in terms of practical accom-

plishments—and this despite some significant energy

related crises in Europe in 2006 and 2009. Where the

Alliance has seen practical progress has been in terms

of some key operational energy security initiatives, in-

cluding the establishment of an Energy Security Cen-

ter of Excellence in Vilnius, Lithuania. In spite of such

limited successes to date, Deni argues that the United

States can and should leverage NATO to strengthen

operational energy security as well as broader energy

security for itself and its allies.

Finally, Dr. Ronald Filadelfo examines the feasibil-

ity of strengthening military installation energy secu-

rity through the use of small modular nuclear reactors

(SMRs). Similar in some ways to Dr. Roege’s argu-

ment earlier, Filadelfo argues that DoD could serve

as a test bed for the fielding of SMRs. Cost effective-

ness is critical in developing SMRs, and given the high

first-of-a-kind expenses, some combination of Depart-

ment of Energy, vendor, and direct congressional sup-

port would be necessary to make SMRs realistic for

any particular U.S. military installation. If DoD could

tap into other funding sources for the first-of-a-kind

expenses, then Filadelfo argues that SMRs could be a

cost effective source of electricity in about one-third

of the states, where average prices of electricity per

kilowatt hour exceed the cost of electricity produced

by operating an SMR.

12

The energy security challenges facing DoD at the

installation level, in the conduct of contingency opera-

tions, and beyond are significant. The chapters in this

volume attempt to draw out some of the major trends

occurring among producers and consumers of energy,

and to assess some potentially significant implications

for the U.S. military. Simply treating energy security

as an “emerging” issue on the fringes of America’s

national security radar, or perhaps believing that the

energy self-sufficiency created by the shale gas revo-

lution will allow the United States to stop caring about

events in the Persian Gulf, for example, is naïve. The

new realities of energy security demand increased

attention, objective analysis, and creative insights.

13

CHAPTER 2

RUSSIA AND ENERGY MARKETS

Theresa Sabonis-Helf

The views expressed in this chapter are those of the

author and do not reflect the official policy or position

of the National Defense University, the Department

of Defense, or the U.S. Government. Many thanks to

those who have been especially helpful in the devel-

opment of this chapter, particularly National War Col-

lege colleagues Dr. Lena Kovalova and Colonel Rob

Timm, and Christian von Celsing, a graduate student

at Georgetown University.

Energy is a centerpiece of Russian foreign policy,

but it is also a very important Russian domestic issue

as well. Understanding the sectors, and how they are

managed within Russia, offers a clear sense of Rus-

sia’s options—and limits—in using energy as a tool

of “hard power.” This chapter will examine the oil

and gas sectors, and the regional and international

relations that revolve around these sectors. Although

Russia is trying to innovate within these sectors and

trying to leverage its power in international relations,

Russia’s energy “power” is visibly in decline.

Russian domestic energy politics revolve around

the level of control the state retains in various energy

sectors. One goal of Vladimir Putin’s administration

has been to reconsolidate Russian state power, using

the natural resources of Russia, with priority given to

the needs and interests of the state, rather than the indi-

vidual enrichment of elites. This was, in part, the topic

of Putin’s dissertation, and to a remarkable extent, Pu-

tin has succeeded in this goal, reclaiming the natural

15

resource wealth of Russia from the oligarchs whose

power in the 1990s was nearly unchecked. Putin’s suc-

cess in oil and gas, however, may be time limited. The

government has not proven itself a good steward of

the resources. Oil and gas each pose substantial chal-

lenges to governance in Russia, even as the Russian

style of energy management poses challenges to the

supply of gas and oil. In some ways, the challenges of

the two sectors are similar. In other ways, however,

they diverge significantly. Oil is a more important eco-

nomic commodity to the Kremlin, while natural gas is

the more important political commodity; but Russia is

losing ground in both.

Russian international energy politics revolve

around the tension between the interests and priori-

ties of a large supplier and the interests of its transit

states and markets. Tensions over Ukraine exacerbat-

ed some long evident trends in energy. For 2 decades,

Russia skeptics in the European Union (EU) have been

caught between two very different fears. One fear is

that Russia will continue to play hardball politics with

its energy resources, and develop more skill and savvy

with experience. The other fear is that Russia will con-

tinue to get the economics of energy so wrong at home

that in a medium-term future, the resources it has

available to sell to Europe will decline. Although both

fears have legitimate historical bases and although

the battle for Ukraine has focused international at-

tention on the political impact of Russia deliberately

withholding energy, the choices currently being made

seem to push Russia more toward the medium-term

inability to produce for Europe than toward the abil-

ity to increasingly manipulate Europe. This chapter

will begin with an examination of the two key energy

export sectors (gas and oil). It will then review Rus-

16

sia’s domestic energy challenges, its energy relations

with Europe, its relations with its own neighborhood,

and its emerging energy relationship with China.

RUSSIAN GAS SUPPLY

The state-run company, Gazprom, which currently

produces 74 percent of Russia’s total natural gas out-

put,1 by law has enjoyed a monopoly on Russian gas

exports. Russia’s primary gas market is Western Eu-

rope—an estimated 76 percent of Russian natural gas

exports go to Western Europe, with Germany, Turkey,

Italy, France, and the United Kingdom (UK) being the

largest customers by volume.2 Russian gas to Europe

is supplied via pipeline, with Ukraine and Belarus

serving as the key transit states. The newest Russian

pipeline to Europe, Nord Stream, connects Russia di-

rectly to Germany via an undersea route through the

North Sea.

Although statistically second to the United States

in production and second to Iran in proven reserves

(see Table 2-1), Russia is likely to continue to be the

most important global player in natural gas markets

for the foreseeable future: The United States remains

a net importer of natural gas, while Russia has long

exported in significant volumes. In addition, Rus-

sia’s more favorable ratio of reserves-to-production (a

measure of how long a nation could supply at its cur-

rent rate without new discoveries or new technology)

suggests that Russia should be able to continue to pro-

duce at its current rate for 50 years longer than can the

United States.3 Russia’s advantage over Iran’s greater

proven reserves is that it already has substantial ex-

isting markets, infrastructure, and technology, while

Iran remains under sanction and has production laws

17

in place that would be discouraging to potential inves-

tors even if sanctions were lifted.4

Country

Reserves

Reserves

Percent of Total

Percent of Total

(trillion cubic

(trillion cubic 2013 World

2013 World

meters or tcm)

feet or tcf)

Proven Reserves Production*

Iran

33.8 tcm

1192.9 tcf

18.2 percent

4.9 percent

Russia

31.3 tcm

1103.6 tcf

16.8 percent

17.9 percent

Qatar

24.7 tcm

871.5 tcf

13.3 percent

4.7 percent

Turkmenistan

17.5 tcm

617.3 tcf

9.4 percent

1.8 percent

USA

9.3 tcm

330 tcf

5 percent

20.6 percent

Saudi Arabia

8.2 tcm

290.8 tcf

4.4 percent

3.0 percent

UAE

6.1 tcm

215.1 tcf

3.3 percent

1.7 percent

Nigeria

5.1 tcm

179.4 tcf

2.7 percent

1.1 percent

Algeria

4.5 tcm

159.1 tcf

2.4 percent

2.3 percent

Australia

3.7 tcm

129.9 tcf

2.0 percent

1.3 percent

Uzbekistan

1.1 tcm

38.3 tcf

0.6 percent

1.6 percent

* excludes gas that is flared or reinjected.

Table 2-1. Natural Gas World Proven Reserves

and Production 2013.5

In addition to its own natural gas, Russia has in-

tegrated the “near abroad” closely into its production

system. In 2013,6 Russia moved nearly 30 billion cu-

bic meters (bcm) of gas from other post-Soviet states

across its territory, including 9.9-bcm from Turkmeni-

stan.7 Turkmenistan, which ranks fourth in the world

for proven reserves, continues to expand its export via

new pipelines to China, but still exports substantial

volumes through Russia (24 percent in 2013).8

Russia, although primarily an exporter of natural

gas via pipelines to Europe, has expanded into liq-

uefied natural gas (LNG) in recent years, exporting

18

14.2-bcm as LNG in 2013 (2 percent of its production

that year), mostly to Japan.9 The Sakhalin Energy LNG

plant responsible for that export has been in operation

since 2009 and serves the Asian market under long-

term contracts.10 LNG is an area of expected future

innovation, as Russia has established a goal of dou-

bling its share of global LNG trade by 2020. In sup-

port of this goal, the Duma adopted a December 2013

law allowing established companies that meet certain

criteria to sell LNG to global markets, removing Gaz-

prom’s export monopoly. The criteria in the law favor

Novatek (Russia’s largest independent gas producer)

and Rosneft (the state oil company).11

In spite of gains in LNG, Russia’s overall gas trade

has fluctuated. Trade was down in 2012 relative to

2011, due to lower European demand.12 Demand rose

again in 2013, but the gains were in pipeline deliver-

ies (Europe) rather than LNG (Asia).13 The temporary

lower demand from Europe was linked to the global

economic downturn and the high price, and recov-

ered as European economies recovered. Because of the

regional nature of the gas market (gas remains a re-

gional rather than a global market because the price of

transporting gas typically exceeds the cost of getting

it out of the ground, and because most international

gas trade is via pipeline), the shale gas-related price

collapse in North America did not have an equal im-

pact on European prices (at the end of 2013, the price

for a million British thermal units (BTUs) was $3.71 in

the United States, and $10.72 in Germany).14 The Rus-

sian price remains high, governed by long-term con-

tracts, and is only slowly de-linking from the price of

oil. Because gas is more difficult to store than oil and

pipelines cannot be rapidly replaced, Europe has been

compelled to continue to pay high prices. LNG (be-

19

cause it is more flexible than pipelines) may eventu-

ally help reduce the price differences between regions,

but the costs and timelines involved in a shift from

pipelines to LNG are considerable. In economic terms,

the World Bank maintains that pipelines are more eco-

nomical than LNG up to distances of 3,500 kilometers

(km).15 The International Energy Agency expects dif-

ferences in price across regions to narrow, but remain

large through 2035.16

The relationship between the Russian state and the

industry is stronger in natural gas than in any other

sector. The Russian state remains the major sharehold-

er in Gazprom, holding slightly over 50 percent of

shares since September 2002.17 By tradition, the Chair-

man of Gazprom is also a currently serving or former

high-ranking member of the Government of the Rus-

sian Federation (prior to becoming Prime Minister,

Dmitri Medvedev was simultaneously Chairman of

Gazprom and First Deputy Head of the Government).

In spite of the political emphasis on the importance of

natural gas, the international revenue gas provides for

Russia is actually less than what Russia receives from

oil, a world market in which Russia is a less power-

ful player. The close relationship between the Kremlin

and Gazprom will be tested in the coming years, as

Gazprom loses its monopoly on exports, and the LNG

innovators increase their market share.

RUSSIAN OIL SUPPLY

Shortly before its collapse, the Soviet Union was

the largest oil producer in the world, extracting 12

million barrels of oil a day (bbls/day), 11 million of

which were from Russia.18 The oil industry in Russia

has never quite recaptured this height. After a free-fall

20

in the early post-Soviet years, production has recov-

ered steadily since 1998, in every year since 2008, and

in some quarters Russia has produced more oil per

day than Saudi Arabia. The increase in production has

slowed despite high prices, rising less than 0.2 million-

bbls/day between 2011 and 2012, and again less than

0.2 million-bbls/day between 2012 and 2013, to a level

of 10.5 million-bbls/day. 19 The United States replaced

Russia as the world’s second largest producer in 2012.

There is no single oil company comparable to Gaz-

prom in the Russian market. Although the state retains

a strong hold on the oil pipeline system (Transneft,

owned by the state, transports 88 percent of all crude

oil and 27 percent of oil products),20 and has reassert-

ed control over the sector in recent years, a range of

domestic companies (many paired with multinational

companies) produce Russia’s oil. Russia exported ap-

proximately 7.2 million-bbls/day in 2012.21 Because

oil is more easily transported than gas, producers

can readily diversify output: In addition to the pipe-

line system, exports via rail and sea (using 18 differ-

ent ports) continue to increase.22 As the number three

producer of oil in the world, Russia unquestionably

has some impact on the world oil market. However,

the ease of transport, ease of storage, and the well-de-

veloped nature of the market which leads to a global

price of oil (in contrast to the regional price of natural

gas), make it more difficult for Russia to exert tight

domestic control over the oil, or international political

leverage with that oil.23

Oil, therefore, is politically less instrumental to

Russia than natural gas, but it is economically more

essential. A downward shift in oil prices would be

more damaging to Russia than a shift in gas prices.

Energy scholar Thane Gustafson offers two persua-

21

sive reasons for this: Oil yields more value per calorie

than gas, and Russia exports three-quarters of its oil

production, while only exporting one-third of its gas

production.24 World oil demand is expected to con-

tinue to grow significantly, which should keep prices

trending slowly upwards even as new exporters en-

ter the market. Mainstream forecasts suggest a price

somewhere between $128 per barrel in 2012 dollars by

203525 and $163 per barrel by 2040.26 This is good news

for Russia, which cannot afford a low price. Russia is

extremely sensitive to any drop in the price, due to

some persistent domestic challenges.

THE DOMESTIC CHALLENGES

IN OIL AND GAS

Cost of production in Russia is (in all but future

Arctic locations) lower than Canada’s oil sands pro-

duction costs,27 but remains much higher than the

Middle East cost of production: $15-20 per barrel for

Russia versus $4-6 for Saudi Arabia.28 The cost of pro-

duction is only one component of Russian concern

about oil price. Other components include the exten-

sive programs oil revenue is expected to fund; prob-

lems of Soviet legacy; and the need for recapitaliza-

tion of the energy industry, which is made difficult by

Russian policies that affect both domestic and interna-

tional investors.

In 2012, the Russian government’s overall tax reve-

nues from oil amounted to about $70 per barrel.29 This

high level of revenue has been built into state budget-

ing expectations for the future. At a production cost

of at least $15/barrel, the minimum price to meet cost

and budget expectations has been $85 per barrel—and

that is without profit or recapitalization. In the first

22

quarter of 2013, the Kremlin’s official budget projec-

tions for oil dropped to $93 (down from $119 in 2012).30

In principle, the Russian government could cut back

on the subsidies and supports it offers to the citizens,

but in his 2012 campaign, President Putin promised

more, not less, state largess.

Within the oil and gas industry, there are problems

with Russia’s unrealistic expectations. In essence,

Russia has been enjoying high returns for little invest-

ment, and has not focused on maintaining the indus-

try. Thane Gustafson has documented key anomalies

that allowed Russia a decade of unusually high profit:

infrastructure already in place, an overhang of discov-

ered but unexploited fields,31 and a rise in the price of

oil that outpaced the rise in the price of materials after

the 1998 crash.32 Each enabled Russia to succeed dra-

matically in the short term without substantial invest-

ment. These trends, however, have created dangerous

assumptions within Russia about the future. As Gus-

tafson argues, “Russia is not running out of oil, but it

is running out of cheap oil.”33

Following in Soviet tradition, the current structure

of investment in Russia remains focused on mature

fields. Gustafson estimates that slowing the decline of

mature oil fields currently takes up about $20 billion

per year, about four-fifths of upstream capital spend-

ing in oil.34 Little has been spent on new fields, even

though the old ones are well-known to be past peak

performance. When Russia does pursue the green

fields, much of the new oil will cost more to produce,

in addition to the costs of exploration, as most under-

developed oil is further north. Arctic oil is expected

to cost somewhere between $40 to $140 per barrel to

develop (depending on which field and which expert

you ask),35 making commercial developments prob-

23

lematic, and putting state-supported development

even further out of range.

The economic “legacy” problems inherent in

natural gas are even harder to solve than those of

oil, which is likely why the Duma began liberalizing

LNG. Gazprom is believed to be facing a steep rise in

production costs: The bulk of gas production comes

from three super-giant fields, which have been in de-

cline at a rate of 20-bcm/year for 10 years.36 Arguably,

Russia cannot afford even existing production. As late

as 2008, Gazprom was arguing that they were actually

losing money on every cubic meter of gas sold domes-

tically. Gazprom is required by law to provide some

70 percent of its production to the Russian domestic

market, which means that the company was trying to

keep afloat and make investments for the future on

less than 30 percent of its product.37 Achieving cost

recovery in gas was one of the prerequisites for the

EU approving Russia’s accession to the World Trade

Organization (WTO), and from 2008 to 2013 (with a

brief hiatus for the global economic downturn), Rus-

sian domestic prices rose incrementally. Upon joining

the WTO in August 2012, Russia made a commitment

that natural gas would operate “on the basis of normal

commercial considerations based on recovery of costs

and profit.”38 The Russians now argue that they have

achieved cost recovery. However, the assumptions in-

corporated into the cost estimate are much disputed:

Since Soviet-era facilities and pipelines are still in use,

and carry no debt, it is tempting to make estimates for

the domestic market purely based on the cost of get-

ting gas out of the ground, discounting any capital cost

involved in domestic transit. Russia’s heavy reliance

on gas makes reallocation of price especially difficult.

Opening of the gas export market to companies will-

24

ing to innovate in LNG is evidence of the Kremlin’s

concern about how to encourage the future of gas.

Across both sectors, it is clear that oil and gas are

increasingly suffering from a lack of investment. The

International Energy Agency, which seeks to ensure

stability in energy markets through policies, has al-

ready expressed concern that some $11 billion/year

is needed to help meet the projected growing demand

for Russian energy, and although Gazprom promised

in 2005 to increase investment to $10.8 billion/year,

it appears to continually prioritize foreign acquisi-

tion and export infrastructure over needed upstream

investments.39 Even if Russian government policies

become more welcoming to international investment,

current shifts in global markets make it difficult for

Russia to compete. Further, it is not clear that the Rus-

sian government will conduct a sustained effort to

attract the needed investment. The Russian response

to Ukraine related sanctions has been consistent with

efforts to disengage, not re-engage, global markets.

Even before Ukraine, Russia was uneven in its pursuit

of international investment. According to the Organi-

zation for Economic Cooperation and Development’s

(OECD) Global Forum on international investment,

windfall profits had allowed the Russian government

to avoid seeking outside investment through 2008,

but the state-controlled companies in oil and gas are

not well-adapted to respond to growing demand or

difficult production conditions.40 The OECD report,

written prior to the global economic crisis (and the

further-expanded role for the state in Russian compa-

nies that resulted) noted the urgency of public sector

reform, stating that, in spite of the perception that en-

ergy investors could tolerate low regulatory quality,

“the lack of policy predictability, inefficient regula-

25

tions and corruption-prone administration exert un-

questionably a strong deterring effect.”41

In addition to the problems of capitalization, Rus-

sia has a significant domestic consumption problem.

The Russian government itself notes that it extends the

largest energy subsidy in the world, which it estimated

at $40 billion per year in 2005. Efficiency scholars esti-

mate that Russia could reduce its primary energy use

at home by one-third if it achieved efficiencies compa-

rable to OECD states, but to date Russia has only man-

aged annual reductions in energy intensity of about

3.4 percent per year since 1990.42 Russian overall effi-

ciencies could be dramatically improved, but the slow

progress in energy reform could harm Russia’s ability

to export natural gas in the medium term. Even the

energy system itself is strikingly inefficient. For ex-

ample, due to the remoteness of oil facilities, tensions

between the oil and the gas sectors, the domestic price

of gas and government policies that make pipeline ac-

cess difficult, Russia remains the largest flarer of natu-

ral gas in the world, flaring an estimated 37.4-bcm in

2011,43 in spite of years of policies designed to reduce

the practice. In addition, the unusually high levels of

leakage from pipeline systems and fuel gas use in the

transmission process further reduce the amount of

Russian gas that makes it to world markets.44 Well-

known inefficiencies, the nontransparency of the sec-

tors, the visible underinvestment and poor capitaliza-

tion, and the problematic relations with neighboring

states have all contributed to a worsening of energy

relations between Russia and its most important

market, Europe.

Dependence on gas and especially oil revenues

has security implications for Russia. In 2012, oil and

gas revenues accounted for 52 percent of federal rev-

26

enues.45 The evidence suggests, however, that military

spending will not decrease when revenues fall. Russia

is more likely to shift revenues away from other pri-

orities, as it has done over the past several years. Rus-

sia ranks third globally on military spending, which

has been increasing since 2009 even in spite of slowed

economic growth. In 2013, the military budget com-

prised 4.1 percent of gross domestic product (GDP), a

higher percentage than the United States for the first

time in 10 years.46 As the Ukraine crisis was unfolding

in early April, the Russian Federal Treasury made the

announcement that expenditure on national defense

would increase by 18 percent in 2014, bringing the

level to a 92.3 percent increase in nominal terms since

2010.47 Jane’s Defence Weekly estimates that over 20

percent of government spending goes to national de-

fense, with another 16.5 percent toward “national se-

curity and law enforcement.” Combined defense and

security spending has risen from less than 25 percent

of the total state budget in 2010 to 33 percent in 2014.48

RELATIONS WITH THE EU

European energy security concerns do not focus on

oil, but rather on natural gas, for which the market

is less flexible. Overall European dependence on Rus-

sian natural gas averages 34 percent,49 but this depen-

dence is not evenly spread, as Table 2-2 demonstrates.

Both percentages of dependence and market size are

each significant, so both are presented when available.

Germany, for example, is only 39.9 percent reliant on

Russian natural gas, but imports the largest volume

of any state in the EU. But Russia is also dependent—

Europe constitutes its largest markets for oil and gas

exports.50

27

European

Percent of Natural

Total Volume of

Nation

Gas Imported from

Natural Gas

Russia 2012

Consumed 2012*

Bulgaria

100 percent

2.7-bcm

Estonia

100 percent

N/A

Finland

100 percent

3.1-bcm

Latvia

100 percent

N/A

Lithuania

100 percent

3.3-bcm

Czech Republic

80.5 percent

8.2-bcm

Turkey

70.0 percent

46.3-bcm

Slovakia

63.3 percent

6.0-bcm

Slovenia

57.4 percent

N/A

Greece

54.8 percent

4.2-bcm

Poland

54.2 percent

16.6-bcm

Austria

52.2 percent

9.0-bcm

Hungary

49.5 percent

9.7-bcm

Belgium

43.2 percent

16.9-bcm

Germany

39.9 percent

75.2-bcm

Croatia

37.1 percent

N/A

*Those states whose volumes are not represented are very small

markets.

Table 2-2. European Dependence on Russian

Natural Gas, 2012. 51

It is possible that Russo-European energy relations

will be transformed by the Ukraine events of 2014. It is

also possible that they will not be. The history of Rus-

so-European energy relations has been often fraught

over the decades, with Europe frequently revisiting

the balance of risk and price that their relationship

with Russia offers.

28

The history of European reliance on Russian gas

dates to the Cold War. European states (over the strong

objection of the Reagan administration) cooperated

with the Soviet Union to complete the Trans-Siberian

pipeline in 1984. The debate between the United States

and Europe on this issue was, essentially: Is it more

dangerous to rely on Middle Eastern oil for electric-

ity, or to substitute gas imported from the Cold War

adversary? Europe concluded that diversifying its

portfolio of risk was essential, but the European al-

lies planned that they would not import more than

30 percent of their supply from the Union of Soviet

Socialist Republics (USSR). The USSR proved to be a

reliable supplier throughout the Soviet period to full

price paying European customers. The stability of So-

viet supply, coupled with the advantages of using gas

as a fuel,52 led Europe to turn more and more toward

gas in its supply mix. With the increase in demand

over time, and the inclusion of the Eastern Bloc after

the Soviet collapse, Europe found itself well over the

notional 30 percent dependence rate.

Soviet energy behavior toward full paying Euro-

pean customers contrasted starkly with its treatment

of Soviet bloc countries for which the subsidized

gas in the Soviet era was very influenced by politics.

Maintaining a customer base that was partially subsi-

dized and part full price paying became increasingly

difficult in the post-Soviet era. Tensions between Rus-

sia and transit states (especially Ukraine) after the fall

of the USSR made it more difficult for Russia to serve

its paying customers reliably. In March 2005, Janu-

ary 2006, January 2007, and December 2008, disputes

between Russia and Ukraine over debt, gas prices,

and gas storage led to brief temporary gas reductions

in supply to the gas grid on which Europe relied.

29

When New Year’s Eve negotiations on December 31,

2008, broke down and Russia cut back gas supply by

Ukraine’s share on three major pipelines, a major crisis

resulted. Ukraine took its usual amount of gas, and 12

countries in Europe were left without power (tempo-

rarily), while six were affected by reductions in heat-

ing.53 It took 21 days of negotiation to restore the gas

supply fully, and by the time the issue was resolved,

European-Russian energy relations were transformed.

Russian-EU tensions after December 2008 came to

reflect an energy security dilemma in which European

states sought to secure future supply by containing

Gazprom’s power and diversifying suppliers as much

as possible. European measures, in turn, caused Rus-

sia to feel that its security of markets and security of

transit were threatened. By the spring of 2009, the EU

was actively seeking ways to use the Energy Charter

Treaty (which had entered into force in April 1998) to

compel more transparency in Russian energy behav-

ior. Although Russia originally had signed the Energy

Charter Treaty, President Medvedev announced in

April 2009 that Russia would not ratify the Energy

Charter and that Russia “does not consider itself to be

bound by these decisions.”54 After Russia’s departure

from the Treaty, the EU proceeded with expanding

regulations associated with the Energy Charter, in-

cluding the Third Energy Package.

The Third Energy Package pushes EU countries

to unbundle their energy sales, meaning that nations

are encouraged to separate production, transit, and

distribution of energy, in order to increase transpar-

ency in energy markets shared between the EU and

Russia. The Third Energy Package was applied early

to electricity but was not immediately enforced with

respect to natural gas. The policies enshrined in the

30

Third Energy Package, however, gave member states

political and legal tools with which to reduce Gaz-

prom’s dominance of their supply chains.55 Lithu-

ania, during its 2013 presidency of the EU, prioritized

implementation in the gas sector. Russia argues that

Lithuania and Latvia have taken on particularly strin-

gent definitions of how to implement the requirement

to unbundle, choosing the most aggressive approach

and trying to force sale of Gazprom assets. In both

states, Russia owns portions of the entire system. Gaz-

prom advocates argue that Lithuania and Latvia’s cur-

rent approach amounts to nationalization, and is not

in conformity with existing international obligations

and bilateral agreements. This has led to a series of im-

passes in contracting. Gazprom has pushed for a 20-

year exemption from the Third Energy Package, while

some EU nations have pushed for a shorter period of 5

years. In the interim, Gazprom is seeking agreements

on specific pipelines, particularly the Ostsee-Pipeline-

Anbindungsleitung (OPAL) pipeline which is fed by

Nord Stream.56 Prior to the events in Ukraine, Russia

was already organizing to dispute the Third Energy

Package in the WTO. On April 30, 2014, the Russian

Federation requested a consultation with the WTO re-

garding the Third Energy Package. A request for con-

sultation is the method for formally initiating a dispute

within the WTO. Russia has filed the complaint that

the EU and its member states, through the Third En-

ergy Package, are taking measures inconsistent with

EU obligations under the WTO.57 Under WTO rules,

the EU and Russia have 2 months in which to consult,

after which Russia may call arbiters to consider the

lawsuit.58

Unbundling the gas sector would have both eco-

nomic and political consequences for Russia, and Rus-

31

sia’s resistance to this approach is felt keenly in the

former Soviet region. According to Russian energy

scholars, the final price of gas in the EU market is

comprised of 34 percent taxes, 44 percent distribution,

and only 22 percent to Gazprom.59 Given this config-

uration, Gazprom recognizes that access to the final

customer is very desirable and has made it a priority

to increase its ownership of that end of the business—

but such expansion is illegal under the Third Energy

Package. Critics of Gazprom estimate that since 20-40

percent of its revenues are lost to corruption and in-

efficient practices, Gazprom is ill-suited to capture a

larger share of the downstream market in Europe. 60

Not all of Russian-European energy relations have

soured. Ukraine’s conflicts with Russia over energy

in the previous decade became Europe’s concern in

part because of Ukraine’s ability to “pass the pain” of

energy disputes to Europe. The development of Nord

Stream, an undersea natural gas pipeline connecting

Russia directly to Germany through international

waters was, in part, the Russian-European response.

Nord Stream, the construction of which was begun in

April 2010, is now a twin system with the transport ca-

pacity of 55-bcm/year.61 Its ownership structure satis-

fied EU rules, and its construction diversified Russia’s

export options to Europe, and established Germany

as a transit state. Russia proposes that a southern

route would serve a similar purpose, and is strongly

supporting South Stream, an undersea pipeline that

would bypass Ukraine and Turkey by traversing un-

der the Black Sea to Bulgaria and on through Serbia,

Hungary and Slovenia to Austria. This pipeline is still

in negotiation and unlikely to progress, due to the Eu-

ropean Commission’s call for the suspension of South

Stream due to pressures associated with the 2014

32

Ukraine crisis, and concerns about the ways in which

it would violate the Third Energy Package.

Alternate routes do not resolve the problem of

dependence on Russia as a supplier, but as Europe

continues to develop a pipeline system that has more

interconnectors between European states, more dun-

dancy, and more capacity to switch the direction of

flow in an emergency, both security of supply and

security of market are partially ensured. Radical

changes in European gas markets—including making

destination clauses illegal and gas pricing more dy-

namic—will also enhance European energy security

in the medium term. This diversification may help

ensure European security, but its impact on Russia’s

neighbors is less clear.

RUSSIAN ENERGY RELATIONS WITH

THE FORMER USSR

Events in Ukraine cast into high relief some of the

tensions between Russia’s notion of energy security

and that of the EU. They also shed light on Russia’s

idea of appropriate relations with the territory once

called its “near abroad”—that is, the states that were

formerly part of the USSR. Ukrainian accession to the

Free Trade Agreement with the EU was strongly op-

posed by the Kremlin in part because it would make

Ukraine subject to the Third Energy Package, it would

provide cover for Ukraine to ensure that Gazprom’s

efforts to buy portions of its transit assets are thwart-

ed, and in particular because it would prevent Gaz-

prom from purchasing storage assets it has long pur-

sued. From the Russian perspective, the infrastructure

it inherited from the Soviet Union, and the Soviet

transit infrastructure which it re-acquired as transit

33

states traded debt for equity, are critical elements of

state power and prosperity. Enforcement of the Third

Energy Package is interpreted by the Kremlin as “ex-

propriation,” and is being fought as such. Ukrainian

President Viktor Yanukovych’s refusal to sign the

Free Trade Agreement led to his ouster. President Pet-

ro Poroshenko, elected in May 2014, signed the Free

Trade Agreement on June 27, 2014.62 Ratification by

the Ukrainian parliament is expected in spite of the

Kremlin’s objections. If Russia chose to eliminate its

transit routes across Ukraine, it would also lose a very

important market: Ukraine purchased 25.1-bcm of gas

from Russia in 2013, making it Russia’s second largest

customer after Germany.63

Nord Stream does reduce Ukraine’s leverage with

Russia and with Europe, but does not take it away en-

tirely. Russia continues to use existing infrastructure:

In 2013, 82.3-bcm of gas flowed through Ukraine to

Europe, 49 percent of the gas Europe imported from

Russia.64 Even if existing lines are used less, Ukraine

will retain importance because of its underground

natural gas storage facilities, which have a total ca-

pacity of about 30-bcm, and are critical for managing

fluctuating demand.65 Prior to the conflict in Eastern

Ukraine, Ukraine had been trying to engage both EU

and Russian investment in the storage. Since the con-

flict began, Ukraine has asked the EU to assist in mon-

itoring its gas storage. Ukraine now participates in

regular reporting of the storage levels, a measure that

increases European confidence.66 For its part, Russia

is diversifying, pursuing construction of new, smaller

storage facilities in Belarus.67

Tensions in Ukraine in 2013-14 helped speed the

progress of at least one alternative pipeline. After

years of hope and skepticism about the ambitious Na-

34

bucco pipeline, Azerbaijan invested in a more mod-

est pipeline, the Southern Gas Corridor. This pipeline,

currently under construction, will link Azerbaijan via

Georgia to Turkey and on to Greece, Albania, and

Italy. The pipeline is currently designed for less than

20-bcm/year, but regarded as politically important

since it secures a new non-Russian supply and offers a

possible future route to Europe for Iraqi gas. Progress

on this pipeline also led to renewed negotiations be-

tween the EU and Turkmenistan regarding a possible

Trans-Caspian pipeline. Meanwhile, Russia is pursu-

ing agreements for development of South Stream, a

63-bcm/year pipeline that would connect Russia di-

rectly to Europe via Bulgaria under the Black Sea. The

EU maintains that the pipeline will violate the Third

Energy Package and should not be built, but Russia

has succeeded in signing agreements with most of the

transit states, and with Austria (the pipeline’s final

destination) in spite of European objections. Forward

progress on the pipeline will most likely depend on

the WTO ruling regarding the Third Energy Package.

While Ukraine and Belarus both serve as Russia’s

transit states, Russia is itself an importer and a transit

state, purchasing gas from Kazakhstan, Uzbekistan,

and Turkmenistan. Russia’s reputation as a transit

state is badly damaged. Turkmenistan was entirely

reliant on Russian transit in the 1990s and 2000s, dur-

ing which time Russia forced Turkmenistan to be a

swing supplier of gas to Europe, limiting its access to

the pipelines when demand was low. Following years

of frustration, Turkmenistan signed a deal with China

in 2007, and now operates the 1,833-km Central Asia-

China pipeline connecting Turkmenistan to China via

Uzbekistan and Kazakhstan.68 Russia is no longer a

transit state for the majority of Turkmen gas: In 2012,

35

Turkmenistan exported 52 percent of its gas to China,

22 percent to Iran, and only 24 percent to Russia.69

Kazakhstan and Uzbekistan, also formerly reliant en-

tirely on Russia, are building their own export capac-

ity in cooperation with China. China has contracted

with both to better-connect their supply of natural gas

to their urban centers, and in return both will begin

exporting to China by the end of 2015.70 Russia had

two small victories in these events. One is that Ka-

zakhstan and Uzbekistan intend to continue selling

natural gas to Russia (about 20-bcm/year combined).

The other is that new Central Asian gas is traveling

East, rather than encroaching on Russia’s European

customer base.

Russia has strengthened its energy relationship

with Belarus through the purchase of 50 percent of the

shares of the Beltransgaz network,71 and through con-

struction of new gas storage. In all other post-Soviet

states that export oil and gas, Russia has either lost

ground, or must now contend with other competitors.

In spite of recent victories in Ukraine, overall trends

suggest a decline in Russian control of energy re-

sources in its near abroad, largely due to a failure of

Russia to capitalize or to act in good faith. In an era

of low prices, Russia was able to acquire natural gas

from Central Asia at lower risk and more cheaply than

investing in further development of its own territory,

and it did so without substantial investment. In an era

of higher prices and Chinese interest, however, the

Central Asian states found new markets and pursued

new options.

36

RUSSIA’S “NEW FRONTIER” WITH CHINA

While Europe seeks new supply, Russia has begun

work on seeking new demand. In addition to the liber-

alization of laws governing LNG development, Russia

also, in the midst of the Ukraine crisis in May 2014,

signed a long-awaited agreement with China regard-

ing the construction of a new pipeline. The $400 bil-

lion deal is based on a pipeline proposed to supply 38-

bcm per year.72 This level of supply represents about

20 percent of Russia’s gas volume to Europe.

The new deal does not represent a wholesale shift

away from Europe. Rather, it is evidence of Russia

rationally developing some flexibility in terms of its

market. China’s reluctance to pay high prices for its

gas, coupled with the long delivery chains involved,

suggest that Russia will capture less profit for export-

ing toward the East than toward the West. Russia’s

choice to keep the pricing agreement secret reinforces

the industry’s assumption that China was successful

in defending its preferences in the negotiations.

CONCLUSION

Energy, and in particular natural gas, may have

served as useful tools of statecraft for Russia in past

years. As markets shift, however, Russia’s energy

dependence may come to represent vulnerability.

Although the crisis in Ukraine in 2014 was not solely

about energy, a significant role was played by natural

gas and its politics. In Europe’s eagerness to include

Ukraine in European business practices and increase

transparency of supply, and in Russia’s willingness to

subsidize insurgency on its border, all the players had

an energy angle. The energy lessons drawn from the

37

conflict by both sides are similar: Russia will seek new

markets and more redundancy, and Europe will seek

new suppliers and more redundancy. There may be

some cold winters for Ukraine and parts of Europe in

the interim, but in the end, Russia’s ability to use en-

ergy as a tool of statecraft will be sorely limited by its

need to use energy as a source of revenue.

The trend of states dependent on Russia for supply

or transit choosing to diversify is pervasive. As Central

Asia sought to limit Russian influence on its energy,

Russia remained focused on the Western market, only

to discover that Europe would also develop interest in

other options, if the price remained high enough (and

especially in a climate of high political uncertainty).

High domestic dependence on subsidized gas and on

oil revenues has made it difficult for Russia to think

in the long term, to the detriment of both the indus-

tries and the state. Even as the economic returns of

oil and gas remain high, Russia’s political returns are

declining, and the inability to capitalize for the future

commits Russia to a path of dependence more than its

customers or international suppliers.

ENDNOTES - CHAPTER 2

1. U.S. Energy Information Administration (EIA), “Russia

Analysis Brief,” revised March 12, 2014 and accessed July 14,

2014, available from www.eia.gov/countries/cab.cfm?fips=RS (henceforth “EIA Russia Analysis Brief”).

2. Ibid.

3. According to the BP Statistical Review of World Energy, proven reserves of natural gas in the Former USSR declined measur-

ably from 2011 to 2012. Even so, the former Soviet Union (FSU)

reserves-to-production ratio now stands at 71 years, in stark con-

trast to North America, where the reserves-to-production ratio is

38

below 20 years. See BP Statistical Review of World Energy June 2013, tables on reserves-to-production ratios, p. 21.

4. Mehdi Hosseini, an advisor to the Iranian Oil Minister, stat-

ed to the press that Iran would reveal details in March 2014 of an

effort to attract $100 billion in investment over the next 3 years,

offering new forms of contracts to international companies. See

Nijmeh Bozorgmehr, “Iran tries to lure back western oil groups,”

Financial Times, October 28, 2013. No such tenders were offered in March 2014.

5. Data from BP Statistical Review of World Energy June 2014, British Petroleum, tables on Natural Gas Proven Reserves (at end

of 2013) and Natural Gas Production (at end of 2013) in trillion

cubic meters and trillion cubic feet, p. 20.

6. EIA Russia Analysis Brief.

7. BP Statistical Review of World Energy June 2014, “Trade

Movements 2013 by Pipeline,” table, p. 28.

8. Ibid.

9. BP Statistical Review of World Energy June 2014, “Trade

Movement 2013-Liquefied Natural Gas,” table, p. 28; and Natural

Gas Production table, p. 22.

10. EIA Russia Analysis Brief.

11. Kathrin Hille, “Russia Paves Way for Limited Liberaliza-

tion of LNG Exports,” Financial Times, November 22, 2013.

12. BP Statistical Review of World Energy June 2012, “Gas trade in 2011 and 2012,” table, p. 29.

13. Ibid.

14. Based on the U.S. Henry Hub price compared to the Aver-

age German Import price. See BP Statistical Review of World Energy June 2014, “Natural Gas Prices” charts and tables, p. 27.

39

15. Venkataraman Krishnaswamy, “Potential and Prospects

for Regional Energy Trade in the South Asia Region,” Document

41582, Washington, DC: World Bank, Sustainable Development

Department, South Asia Region, June 2007, p. 17.

16. International Energy Agency, “World Energy Outlook

[WEO] 2013 Executive Summary,” Paris, France: OECD/IEA,

2013, based on the WEO’s central scenario for projections to 2035,

p. 2 (henceforth “IEA-WEO 2013”).

17. For details, see Theresa Sabonis-Helf, “Power and Influ-

ence: Russian Energy Behavior in Central Asia,” Competition and

Change, Vol. 11, No. 2, June 2007, pp. 199-219.

18. See Ed Chow, “Russian Pipelines: Back to the Future?”

Georgetown Journal of International Affairs, Winter/Spring 2004, pp. 27-33.

19. Data from Energy Information Administration, “Overview

Data for Russia, ‘Russia Total Oil Production (1992-2013)’,” Wash-

ington, DC: U.S. Department of Energy, accessed July 14, 2014,

available from www.eia.gov/countries/country-data.cfm?fips=RS#pet.

20. EIA Russia Analysis Brief.

21. Ibid.

22. Ibid.

23. See Adam Stulberg, Well-Oiled Diplomacy: Strategic Manip-

ulation and Russia’s Energy Statecraft in Eurasia, Albany, NY: State University of New York Press, 2007, for an excellent discussion of

Russia’s variable leverage across energy sectors.

24. See Thane Gustafson, Wheel of Fortune: The Battle for Oil and Power in Russia, Cambridge, MA: Belknap Press/Harvard University Press, 2012, p. 3.

25. World Energy Outlook (WEO) projections suggest that

China, India and the Middle East will drive global energy use

one-third higher by 2035. This is the basis for their price projec-

tions. See IEA-WEO 2013, pp. 1, 3.

40

26. International Energy Outlook 2013, July 2013, DOE/EIA-

0484, Washington, DC: U.S. Energy Information Administration,

2013, p. 2.

27. U.S. Energy Information Administration, “Canada Analy-

sis Brief,” estimates break-even prices for new in situ projects are $40-70 per barrel, while new surface mining projects are $80-100.

See Canada Analysis Brief, last revised December 10, 2012, ac-

cessed January 2014, available from www.eia.gov/countries/analy-

sisbriefs/Canada/canada.pdf.

28. Saudi Arabian crude oil is the cheapest in the world to ex-

tract. Estimate for Saudi Arabian cost from “Factbox: Oil Produc-

tion Cost Estimates by Country,” Reuters, July 28, 2009, accessed January 2, 2014, available from www.reuters.com/article/2009/07/28/

oil-cost-factbox-idUSLS12407420090728. The Saudi estimate in-

cludes capital expenditure and operating costs. The Russian esti-

mate is based on conversations with Cambridge Energy Research

Associates.

29. Based on conversations with Cambridge Energy Research

Associates.

30. See “The Past, Present and Future of Russian Energy

Strategy,” Stratfor Geopolitical Weekly, February 12, 2013.

31. Gustafson attributes this to exploration being indepen-

dently funded and conducted by the Ministry of Geology in So-

viet times. Over-exploitation of existing fields allowed Russia to

come out of the Soviet period with a long list of undeveloped,

known fields, but that surplus was exhausted by the end of the

2000s. See Gustafson, Wheel of Fortune, p. 197.

32. Ibid.

33. Thane Gustafson, “Putin’s Petroleum Problem: How Oil is

Holding Russia Back—and How It Could Save It,” Foreign Affairs,

Vol. 91, No. 6, November-December 2012, p. 85.

34. Gustafson, Wheel of Fortune, p. 459.

41

35. Based on conversations with Cambridge Energy Research

Associates.

36. “Optimising Russian Natural Gas: Reform and Climate

Policy,” (in Support of the G8 Plan of Action), OECD-IEA, Wash-

ington, DC: International Energy Agency, 2006, p. 15.

37. As late as 2005, the domestic price for gas remained be-

tween 36 percent and 46 percent of regional price. For a detailed

discussion of Gazprom and pricing, see T. Sabonis-Helf, “Power

to the Producers,” Chap. 6 in Brenda Shaffer and Taleh Ziyadov,

eds., Beyond the Resource Curse, Philadelphia, PA: University of Pennsylvania Press, 2012, particularly pp. 187-190.

38. See Ilaria Espa, “The Appellate Body Approach to the Ap-

plicability of Article XX-g of the GATT in the Light of China-Raw

Materials: A Missed Opportunity?” Journal of World Trade, Vol. 46, No. 6, 2012, pp. 1399-1424.

39. “Optimising Russian Natural Gas: Reform and Climate

Policy,” p. 16.

40. OECD Global Forum on International Investment, “OECD

Investment Policy Review of the Russian Federation: Russia’s En-

ergy Investment Policy,” Session 2.3 of the Global Forum on In-

ternational Investment VII, March 27-28, 2008, p. 3, available from

www.oecd.org/investment/gfi-7.

41. Ibid., p. 22.

42. See World Bank, “Energy Efficiency in Russia: Untapped

Reserves,” Document 46936, prepared in cooperation with Cen-

ter for Energy Efficiency and International Finance Corporation,

Washington, DC, 2006. For a discussion of Russian efforts at ener-

gy reform, see also Sabonis-Helf, “Power to the Producers,” Chap.

6 in Shaffer and Ziyadov, eds., Beyond the Resource Curse.

43. Global Gas Flaring Reduction Initiative, World Bank, 2011

estimated flares from satellite data, available from web.worldbank.

org/WBSITE/EXTERNAL/TOPICS/EXTOGMC/EXTGGFR/0,,conte

ntMDK:22137498~menuPK:3077311~p.PK:64168445~piPK:6416830

9~theSitePK:578069,00.html.

42

44. “Optimising Russian Natural Gas: Reform and Climate

Policy,” p. 17.

45. EIA Country Report.

46. Thomas C. Frohlich and Alexander Kent, “Countries

Spending the Most on Military,” USA Today, July 12, 2014, in an analysis of most recent Stockholm International Peace Research

Institute data.

47. Craig Caffrey, “Russia Commits to 18 Percent Budget

Rise,” IHS Jane’s Defence Industry, April 4, 2014.

48. Ibid.

49. Michael Ratner et al., “Europe’s Energy Security: Options and Challenges to Natural Gas Supply Diversification,” Washington, DC: Congressional Research Service, August 20, 2013, p. 5.

50. Eighty-four percent of Russian oil exports and 76 percent

of Russian natural gas exports went to European customers in

2012. See EIA Russia Analysis Brief.

51. Total volumes from BP Statistical Review of World Energy

June 2012, “Consumption BCM,” table, p. 23. EU percentages imported from Russia, from Ratner et al., p. 10, Figure 2. Turkey percentages calculated by the author from BP data.

52. Natural gas has a lower local environmental footprint, as

well as producing less CO2 per unit of energy than other fossil

fuels. In addition, in a climate of uncertain demand, natural gas

is a lower risk source of power for investors, since the plant can

operate at a profit across a wide range of electricity generation,

while sources such as coal or nuclear lose money if not operated

close to capacity.

53. Liz Hazelton, “EU to Strike a Deal with Russia to Moni-

tor the Return of Gas to Europe,” The Daily Mail, January 8, 2009, available from www.dailymail.co.uk/news/article-1107297/EU-strie-deal-Russia-monitor-return-gas-Europe.html.

43

54. “Russia: Don’t Oppose the Energy Charter, Help to Adapt

It,” Petroleum Economist, July 2009, available from LexisNexis Academic, January 2, 2014.

55. See “Lithuania Pushes Back on Russian Energy Domi-

nance,” Stratfor Analysis, February 5, 2013.

56. Rosemary Griffin, “Russia, EU Agree on Terms of OPAL

Pipeline Use,” Platt’s Oilgram News, Vol. 91, No. 185, September 19, 2013, available from LexisNexis Academic.

57. See Dispute DS476, Russia vs. the European Union, “Euro-

pean Union and its Member States—Certain Measures Relating to

the Energy Sector,” July 2014, dispute summary accessed on the

World Trade Organization website, available from www.wto.org/

english/tratop_e/dispu_e/cases_e/ds476_e.htm.

58. Taras Fomchenkov and Yevgeniy Shestakov, “Can Bul-

garia’s Word Be Believed?” Rossiyskaya Gazeta, June 10, 2014, as reported by BBC Monitoring on June 19, 2014.

59. Author’s notes, “International Conference: Russia-US-EU

in the Age of Uncertainty,” MGIMO University conference, June

27, 2013 (conference co-sponsored by Georgetown University).

60. See “The Past, Present and Future of Russian Energy Strat-

egy,” Stratfor Geopolitical Weekly, February 12, 2013.

61. See Nord Stream company website, information in Eng-

lish, available from www.nord-stream.com/pipeline.

62. Robin Emmott and Justyna Pawlak, “EU Signs Trade Pact

with Ukraine, Ceasefire Extended by 72 Hours,” Reuters, June 27, 2014.

63. BP Statistical Review of World Energy June 2014, “Trade

Movements 2013 by Pipeline,” table, p. 28.

64. “Facts in Brief: Russia, Ukraine, Europe, Oil & Gas: 4

March 2014,” Washington, DC: International Energy Agency, ac-

cessed July 17, 2014, available from www.iea.org/media/news/20140

304UkraineRussiaEuropegasoilfactsheet.pdf.

44

65. See “Russia’s Strategic Search for Natural Gas Storage,”

Stratfor Analysis, May 28, 2013.

66. Carlos Pascual, Office of Energy Diplomacy, Department

of State, in presentation at a Kennan Institute/Wilson Center dis-

cussion on “Russia, Ukraine and Energy Security,” July 1, 2014.

67. “Russia’s Strategic Search for Natural Gas Storage,” May

28, 2013.

68. U.S. Energy Information Administration, “Turkmenistan

Analysis Brief,” (updated January 2012), p. 8, accessed January

3, 2014, available from www.eia.gov/countries/analysisbriefs/cabs/

Turkmenistan/pdf.pdf.

69. U.S. Energy Information Administration, available from

www.eia.gov/countries/country-data.cfm?fips=TX&trk=m.

70. U.S. Energy Information Administration, “Kazakhstan

Analysis Brief,” (updated October 28, 2013), accessed January 3,

2014, available from www.eia.gov/countries/cab.cfm?fips=KZ.

71. Kwok W. Wan, “Russia Piles Gas Pressure on Ukraine,”

Petroleum Economist, October 2011.

72. Erica Downs, “In China-Russia Gas Deal, Why China

Wins More,” Fortune, June 20, 2014.

45

CHAPTER 3

THE ARAB UPRISINGS AND MIDDLE EAST

AND

NORTH AFRICA ENERGY PRODUCERS:

HEAVY COSTS AND EPHEMERAL BENEFITS

John Calabrese

The hydrocarbon resources of the Middle East

and North Africa (MENA) region play a vital role in

the global energy market.1 The oil and gas sector is

also of central importance to the economies of MENA

countries themselves, whether or not they are major

producer-exporters.

While it is too early to say how the social and po-

litical forces unleashed by the Arab Spring will ulti-

mately resolve themselves, the uprisings that began

in December 2010 have already profoundly affected

the countries in which they have occurred and have

reverberated throughout the region. This chapter ex-

amines the effects of the Arab Spring on five Middle

East producers:

1. Egypt, where the euphoria accompanying the

initial stage of the revolution gave way to deep disil-

lusionment and an acute economic crisis;

2. Libya, where government authority has disinte-

grated, and crude oil production has plunged;

3. Syria, where the scramble for control of oil in

the context of protracted conflict has become both a

symptom and a cause of the country’s fragmentation;

4. Iraq, where instability elsewhere in the region has

helped fuel the resurgence of the oil industry, while at

the same time contributing indirectly to heightened

sectarian tension and worsening violence; and

47

5. Saudi Arabia, which has profited financially

from sustained high oil prices but at the cost of greater

dependence on government spending, as well as in-

creased friction with some of its neighbors and with

the United States.

EGYPT―REVOLUTION DERAILED

Although Egypt is not a major oil or gas exporter,

oil, and increasingly gas, production has been of criti-

cal importance in helping meet the country’s growing

domestic energy demand and in generating valuable

export earnings. The impact of the political upheaval

in Egypt on production and consumption has been

mixed. Oil and gas fields were not attacked during the

uprising in January and February 2011 that toppled

President Hosni Mubarak, as most of Egypt’s produc-

tion is offshore. However, key energy transportation

arteries―the North Sinai gas pipeline, the SUMED

oil pipeline, and the Suez Canal―have either been at-

tacked or threatened.

At the first signs of widespread unrest, the Egyp-

tian military deployed along the 320 kilometer (km)

SUMED oil pipeline that runs from the Ain Sukh-

na terminal on the Gulf of Suez to offshore Alexan-

dria. As a result, the pipeline was spared any damage.

However, reports that a plan to attack a container ship

transiting the Suez Canal was foiled this past Sep-

tember (2013) have raised concerns that these arteries

are being targeted. In response, the Egyptian military

again has tightened security along the pipeline and

the Suez Canal.2

Unlike the SUMED pipeline and Suez Canal, the

North Sinai gas pipeline has suffered over a dozen at-

tacks, which interrupted exports to Jordan and Israel

48

in 20113 and subsequently halted the flow of supplies

for nearly a year. Though the pipeline reopened in

March 2013, attacks resumed just a few months later

amid a new wave of violence in the Sinai Peninsula

following the ousting of Mohamed Morsi’s govern-

ment in July.4 Ansar Bayt al-Maqdis, a group believed

to be comprised mostly of local Bedouins, had claimed

responsibility for previous attacks on the pipeline,5

though not for this one. In fact, there are a number

of militant groups now operating in the Sinai. Conse-

quently, it is difficult to determine which, if not all of

them is responsible for the wave of attacks. It is also

difficult to assess whether such violence can be con-

tained, much less quelled.

The resumption of attacks on the North Sinai pipe-

line, coupled with the diversion of gas destined for

export to local markets in order to bridge the energy

deficit, have caused Egypt’s exports to once again de-

cline sharply.6 The attacks have also interrupted the

flow of gas to the national Egyptian Electricity Hold-

ing Company (EEHC), forcing its gas-fired power

plants to switch to heavy oil for energy generation in

the interim.

Additionally, Egypt faces other complications. For

instance, natural gas output and prospects for expand-

ed production have declined. In recent years, despite

having significant natural gas reserves and promising

new discoveries, Egypt has been struggling to boost

production in order to fulfill export commitments and

meet soaring local consumption needs. As it happens,

gas shortages have been as much a cause as a conse-

quence of the political upheaval in Egypt.7

To cope with these shortages, Egypt has been

forced to import gas for the first time. Short-term re-

lief was provided in the form of gas swap deals with

49

Qatar8 whereby Egypt was able to allocate the Qatari

liquefied natural gas (LNG) cargoes it received to for-

eign partners, freeing up more of its own gas for the

domestic market. Doha agreed in May 2013 (before

the Morsi government was ousted) to donate five car-

goes of LNG, and initial talks were held for Egypt to

buy at least 13 more.9 Egypt has also sought to diver-

sify its gas supply sources with spot imports of LNG―

a costly option. It is unclear whether these stop-gap

measures will be sufficient or even sustainable over

the longer term.

The fiscal situation has worsened in Egypt as well.

Due to the fact that Egypt is a net importer of oil prod-

ucts, it incurs fiscal losses from buying at international

prices and selling domestically at a discounted rate.10

The Arab Spring uprisings, by having contributed to

high prices, have put additional strain on Egypt’s fis-

cal situation.

Moreover, electricity blackouts have persisted. In-

termittent transportation fuel supply shortages and

electricity outages (especially in the peak summer sea-

son) ignited popular frustration with the Morsi gov-

ernment. Even though Morsi was deposed, chronic

power outages have persisted.11 Although Saudi Ara-

bia has announced plans to export electricity to Egypt

in order to ease shortages, this project, if implemented,

is estimated to take another 3 years.12

As a result of these and related domestic economic

challenges, the planned reduction of energy subsidies

has been delayed. Between 1999 and 2009, Egypt’s

fuel subsidies increased ten-fold. According to interim

Prime Minister Hazem El-Beblawi, fuel subsidies cur-

rently consume about 25 percent of the state budget.13

Egypt has been discussing for years the phasing-out

of fuel and electricity subsidies to private consumers

50

and industry. In fact, prior to the uprising, the govern-

ment had planned to slow the rapid increase in energy

consumption by gradually reducing subsidies. Given

the public anger over high prices, it is highly unlikely

that reforming energy prices will be a major priority

for the new leaders in Cairo.

Efforts to reschedule foreign debt and to attract

foreign investment in the energy sector have been

stymied. Prior to the Arab Spring, Egypt had been

struggling to break out of the cycle of overdue pay-

ments and delayed or canceled investments. Egypt’s

indebtedness to foreign oil companies such as BP, Eni,

and Edison is estimated to be as much as $6 billion.14

The political upheaval has slowed efforts to renegoti-

ate these debts.

The Egyptian government had also been trying

to attract foreign investments to increase exploration

and production as well as to expand refining capac-

ity. But securing these investments requires a stable

economic and political environment and improved

internal security. In light of the political upheaval

in Egypt, foreign companies have been reassessing

their commitments.15 Apache, a foreign oil producer

operating in Egypt, recently reduced its footprint in

the country, selling a 33 percent minority stake in its

Egyptian assets to China’s Sinopec Group.16 Shortly

thereafter, Chevron announced the sale of its network

of gasoline and fuel stations in the country.

LIBYA―IMPLOSION

Libya, which holds 3.4 percent of the world’s

proven oil reserves,17 produces high-quality low-sul-

fur oil which is relatively easy and cheap to supply to

the nearby European market.18 Oil is the mainstay of

51

the national economy. According to the International

Monetary Fund (IMF), oil export revenues account for

about 95 percent of the country’s currency earnings

and more than 70 percent of Libya’s gross domestic

product (GDP).19 Since mid-2013, the interim govern-

ment, which has failed to revive the moribund econo-

my, has been struggling to hold together the country

in the face of intractable strikes at oil fields, refineries,

and export terminals, as well as growing intra-militia

violence and jihadist attacks in the east.

Of Libya’s six main terminals, at least two of them,

Es Sider and Marsa el Brega, were heavily damaged

in 2011 during the civil war.20 Production stoppages

resulting from the conflict were severe. Although Lib-

yan oil production recovered rapidly,21 the country’s

oil industry is currently in crisis. Between May and

October 2013, oil production and exports slumped by

70 percent.22 Striking workers, angry about govern-

ment corruption and low wages, have seized facilities.

In fact, strikes in July 2013 closed all of the country’s

oil terminals except Zawiya.23 There have also been

instances in which army units have seized the very oil

fields they were charged with protecting.24

Oil infrastructure has been subject to attacks as

well. Exports from Mellitah and Zawiya dried up in

late-August 2013 when the pipeline linking them to

the main producing fields in western Libya was at-

tacked and closed.25 In late-September 2013, the Zintan

tribal militia reopened a critical pipeline between the

El-Sharara and El-Feel oil fields in the western part

of the country. But there has been no indication of a

similar breakthrough in the east, where a welter of

well-armed groups—ranging from the Libya Shield

Force and Islamist elements drawn from anti-Gad-

dhafi forces to the Zintan tribal militia (secular Bed-

52

ouins from the desert interior)—are vying for control

and where two-thirds of the nation’s oil production is

concentrated.26

Providing a glimmer of hope, acting Prime Minis-

ter Abdullah Al-Thinni announced in July 2014 that

the government had reached agreement with brigade

commander Ibrahim Jafran to reopen the Ras Lanuf

and Es Sider oil terminals in eastern Libya. However,

damage to the facilities sustained during the year-long

blockade and persistent political disputes and disrup-

tions suggest that the oil crisis has not yet ended.27

Insecurity has resulted in the scaling back of foreign

involvement in the Libyan energy sector. The current

climate of insecurity makes the mobilization of for-

eign investment in the oil sector unlikely, a problem

compounded by the lack of a long-term strategy for its

development.28 OMV, an Austrian oil company that is

a major producer in Libya, announced that it was sus-

pending production. BP, which re-entered the country

in 2007, has continually postponed offshore drilling.

Mediterranean International, an oil service company

that withdrew from Libya during the fighting in 2011,

has not yet returned.29 Exxon Mobil said it was cutting

back its staff and operations in the country because

of the security situation.30 Although Libyan officials

had planned to hold an auction for exploratory rights

this year, the bidding has been postponed indefinitely

(that is, until such time as a permanent government

is in place and new draft oil laws are crafted).31 Even

then, it is unclear whether the security situation will

substantially improve and thus provide the reassur-

ance needed to attract foreign investors.

Libya is saddled with payment of risk premiums

and thus with especially high levels of public expen-

ditures. Reported as far back as December 2012, Libya

53

is paying significant risk premiums on its imports of

staple foods, which in the case of wheat accounts for

75 percent of its needs. As a result, Libya is burdened

by a higher level of public expenditures than the coun-

try can sustain over the longer term. According to the

IMF, “Although Libya can afford elevated levels of

current expenditures in a transitional period, the in-

crease in wages and subsidies is eroding fiscal buffers

and undermining prospects for fiscal sustainability.”32

Political upheaval has delayed policy reform. En-

ergy prices are heavily subsidized in Libya, as else-

where in the region. The IMF has estimated that the

low price of fuel and electricity cost Libya 12 percent

of its GDP in 2012. The political upheaval in Libya,

however, has delayed subsidy reform.33

SYRIA―ANARCHIC STRUGGLE

Oil, along with agriculture and tourism, has been

the pillar of the Syrian economy. Although Syria’s oil

production has fallen steadily since its 1990s peak, pri-

or to the conflict, proceeds from oil exports had con-

stituted the country’s main source of hard currency

and accounted for about a third of its export revenue.

On the eve of the conflict, with Syrian oil production

continuing to decline due to geological depletion,

Damascus was making preparations to start auction-

ing exploration rights for development of offshore

oil reserves and marketing the country as a potential

regional oil transit hub.

The combination of international sanctions and

the damage to energy infrastructure by armed groups

has resulted in a reduction in the government’s capac-

ity to produce and refine oil. The sanctions have also

led to a shortage in diesel and fuel gas for home use

54

and to a sharp increase in the prices of oil derivatives.

Until recently, rebel groups for the most part had re-

frained from launching attacks on the country’s ener-

gy infrastructure.34 Consequently, the government has

managed to keep a limited supply of oil flowing to the

country’s main refineries for domestic consumption.

As the conflict has dragged on, however, reports sug-

gest an increased frequency in the number of attacks

on electricity and energy infrastructure, with conflict-

ing accounts of who is responsible for them.35

The Syrian population has experienced great hard-

ship. Attacks on oil pipelines and infrastructure have

caused shortages for Syrians throughout the upris-

ing. People wait for hours in lines to fill their vehicles’

gas tanks, and hours of electricity cuts every day are

common because of the difficulty of supplying power

stations with fuel. The coping strategies devised to

obtain fuel, particularly the use of small-scale wildcat

refineries employing primitive techniques, have led to

a number of injuries and deaths as well as long-term

health hazards due to soil and water contamination.

Parties to the conflict are vying for control of oil.

Most of Syria’s oil fields are situated in the eastern or

northeastern part of the country—specifically in Has-

sakeh, Deir al-Zour, and Raqqa provinces. Oil supplies

transported from fields to refineries and from there to

consumers must traverse multiple battle lines.

The proliferation of rebel groups and the fragmen-

tation of the country are reflected in the competition

for control of oil. Internal supply routes are hindered

by hostilities between Kurdish and Arab factions.36

However, a number of oil wells have been looted, and

smuggling of diesel fuel along the Syrian-Turkish bor-

der has surged.37 It has also been reported that some

rebel forces, relying on intermediaries trusted by both

55

sides, have allowed oil to flow to government-operat-

ed refineries in order to serve the communities in ar-

eas they control. In Deir al-Zour, for example, the Free

Syrian Army accepted an arrangement whereby gas is

shipped to the Syrian government, which distributes

it throughout the country and pays the salaries of gas

plant employees.38

Rebel infighting and numerous localized conflicts

have made the situation murky. Initially, Jabhat al-

Nusra, having wrested control of territory from Sunni

tribes, reportedly had controlled most oil wells in Deir

al-Zour province and had also seized control of other

fields from Kurdish groups in Hassakeh governor-

ate.39 Over the past 6 months, however, the conflict

has mutated, with months-long battles resulting in

the Islamic State of Iraq and al-Sham (ISIS) making

huge inroads into the northern and eastern provinces

and gaining control of oil fields with which to support

their operations. By July 2014, ISIS, which now calls

itself The Islamic State, had seized the majority of the

oil fields in Raqqa and Deir Ezzor provinces.40 Clearly,

all sides regard oil, and have been using it, as a vital

strategic resource in waging war.

Localized clashes over oil41 are also part of the

battle for hearts and minds. The Islamic State, Jabhat

al-Nusra and other jihadist groups, for example, have

reportedly used money generated by oil sales to pro-

vide services to the communities in areas they have

captured, such as Raqqa city. It is possible the Euro-

pean Union’s (EU) easing of sanctions in April 2013

could have, or has already had, the perverse effect of

further fueling the struggle among rebel groups for

control of oil.

When the EU prohibited member states from

importing oil from Syria in mid-November 2011, it

56

stopped short of imposing a ban on investment by

European companies in the Syrian energy sector.42

However, companies such as Shell, Total, and Gulf-

sands Petroleum, nonetheless declared force majeure

and pulled out of their contracts with the state-owned

Syrian Petroleum Company.

Efforts to capitalize on Syria’s location to make the

country an energy transit corridor have been delayed

indefinitely. Prior to the outbreak of conflict, Damas-

cus had been pitching the idea of a “four seas strat-

egy,” which would connect the Persian Gulf and the

Black, Caspian, and Mediterranean seas via pipelines

and other infrastructure through Syria. To be sure,

this was a grandiose idea. Yet, it is not far-fetched to

contemplate Syria serving as a conduit for crude oil

and natural gas supplies from Iraqi fields.43 In fact, a

tripartite agreement was signed between Iran, Iraq,

and Syria in May 2011, which aims to transport Irani-

an gas through Iraq to Syria. However, ventures even

this limited in scope are on hold for the foreseeable

future.

IRAQ―PRECARIOUS REVIVAL

According to the BP World Energy Statistical Review,

Iraq holds 9 percent of global proven oil reserves. Yet,

as important as Iraq’s role and potential are to the

global energy market, oil export income is vital to

Iraq’s economic recovery and future prosperity. Oil’s

crucial importance to the Iraqi economy is illustrat-

ed by the fact that in 2012 crude oil export earnings

accounted for more than 90 percent of government

revenue.44

Ten years after the U.S.-led invasion swept Sad-

dam Hussein from power, the Iraqi oil sector has

57

experienced a revival. The huge contracts signed in

2009 with some of the world’s largest firms (Malaysia

Petronas, Russia Lukoil, and Royal Dutch Shell) have

borne fruit. Iraq is now the Organization of Petroleum

Exporting Countries’ (OPEC) second largest exporter

after Saudi Arabia. According to the Integrated Nation-

al Energy Strategy (INES) unveiled in June 2013, Iraq

plans to invest $620 billion in the oil sector over the

next 2 decades in an effort to boost living standards

and employment levels.45 Given Iraq’s abundant en-

ergy assets and recent success in exploiting them, the

country is in a far better position than Egypt, Libya,

or Syria.

Yet, the fact that there is no agreed legal frame-

work to guide investment in the oil and gas sector

casts doubt as to whether Iraq’s oil revival can be sus-

tained and its ambitious plans realized.46 The relative-

ly peaceful protests that erupted in Fallujah and other

towns and cities in Iraq in December 2012 seemed at

the time to echo the uprisings that had toppled other

regimes in the region. However, far from heralding an

“Iraq Spring,” they occurred alongside a persistent in-

surgency that has taken the lives of hundreds of Iraqis

and has shown no signs of abating.

Damage to Infrastructure and Disruption to

Production.

The political upheaval in the region, if anything,

benefited Iraq and the global energy market, as in-

creasing production helped to replace some lost Lib-

yan barrels. According to OPEC, Iraqi oil production

reached 3.2 million barrels per day at the end of 2012.47

However, the revival of Iraq’s oil industry slowed in

2013, as infrastructure and security problems have

58

kept production below targets. Repeated attacks and

leaks from aging Iraqi pipelines have disrupted north-

ern export flows.48

Long-running disputes over oil revenues have fur-

ther complicated the situation. A wide-ranging energy

partnership between Turkey and the Kurdistan Re-

gional Government (KRG) includes plans to construct

a gas pipeline from Kurdistan’s fields that will bypass

Iraq’s federal pipeline network—a development that

is sure to intensify the struggle between Baghdad and

the KRG. In another illustration of the battle for con-

trol of the country’s oil wealth, the Governor of pre-

dominantly Sunni-populated Ninevah Province was

granted authority by local councils to sign deals with

foreign firms independently of Baghdad.49

The conflict in Syria has had the most immediate,

deleterious spillover effects on Iraq. In some ways, the

border region between Iraq and Syria has become a

single battlefield. ISIS has, in fact, framed the conflict

in Syria exactly that way. The incidence of cross-bor-

der violence has increased. What had been a conduit

for arms, al-Qaeda fighters and Iraqi refugees in the

aftermath of the U.S.-led invasion of Iraq in 2003, is

now a corridor for smugglers, insurgents, and dis-

placed Syrians.

The conflict in Syria has also undermined Iraq’s se-

curity by contributing, if only indirectly, to rising sec-

tarian tension and violence. The successes and resil-

ience of the Syrian rebels have reinforced Sunni Iraqis’

perception of their own marginalization and perhaps

given them the confidence to challenge what they be-

lieve to be systematic discrimination and intimidation.

It may also have fed the belief that if a Sunni-led gov-

ernment were to come to power in Damascus, their

own position would be strengthened. Conversely, the

conflict in Syria stoked fears among some Iraqi politi-

59

cal leaders, especially Prime Minister Nuri al-Maliki,

that the insurgency in Syria helped revitalize, materi-

ally and ideologically, Sunni militants in Iraq based in

Anbar province.50 Such fears provided a justification,

or a pretext, for repression.

Since early 2014, the deteriorating domestic politi-

cal situation in Iraq, coupled with the spillover effects

of the Syrian conflict, have resulted in an explosion of

violence. In fact, as discussed earlier, the war in Syria

and the insurgency in Iraq have become tightly inter-

twined―with ISIS opportunistically feeding off and

fueling the ideological and sectarian tensions, and the

scramble for oil emerging as part of the broader trans-

national conflict. Indeed, oil has played a prominent

role in, and has underscored the transnational char-

acter of the conflict. Not only have the proceeds from

the smuggling of oil become a key revenue stream for

ISIS, but they have been garnered by tankers carrying

oil from ISIS-controlled territory in Syria to middle-

men in Iraqi Kurdistan.51

Specifically with respect to Iraq, the worsening

security situation has jeopardized the recovery and

expansion of the oil sector, if not its very survival as a

unitary state. Although the insurgency has not erased

the gains that Iraq has made in reviving the energy

sector, it has imposed significant costs. Attacks on the

Kirkuk-Ceyhan pipeline have resulted in estimated

monthly losses of $1.5 billion, thereby increasing the

budget deficit.52 In July 2014, Kurdish Peshmerga forc-

es took control of two oil fields near Kirkuk―a move

defended by the KRG as a measure aimed at protect-

ing vital infrastructure from terrorists, but one which

is bound to affect adversely relations with Baghdad.53

A month after Iraq’s largest oil refinery (Baiji) had

been besieged by militants and shut down, the battle

for control of the facility was still being fought.

60

The fact that most of Iraq’s major oil fields are lo-

cated in the south has made them difficult to target

and, therefore, their output has been largely unaf-

fected. Baghdad has taken precautions so as to ensure

that production is not disrupted.54 Nevertheless, the

escalating violence has delayed the much anticipated

modernization of these fields and the development of

other upstream projects.

SAUDI ARABIA―BUYING TIME

As the world’s largest oil producer and exporter,

Saudi Arabia plays an enormously important role in

the global energy market. Oil―accounting for 80 per-

cent of Saudi budget revenues, 45 percent of GDP, and

90 percent of export earnings―is the lifeblood not only

of the House of Saud and the Kingdom’s economy,

but also of the country’s power and influence within

and beyond the MENA region.

Saudi Arabia has thus far managed to avoid the ma-

jor political upheaval and violence that has convulsed

Egypt, Libya, and, most tragically, Syria. In fact, Saudi

Arabia has reaped a windfall, capitalizing on the high

oil prices which regional instability has helped to sus-

tain. Record oil revenues have enabled the Saudi lead-

ership to buy social acquiescence. According to OPEC,

Saudi Arabia—filling the gap caused by the loss of

Libyan supplies and offsetting the drop in Iranian oil

exports due to sanctions―has increased its oil output

to about 10.2 million barrels per day, a rise of over 10

percent since the beginning of 2013 and the highest

level since 1980.55 Besides boosting Riyadh’s hard cur-

rency reserves to more than $500 billion, record oil

receipts have helped to provide the wherewithal for

a $130 billion spending program that includes raising

61

civil servants’ salaries and increasing the number of

public sector jobs.56 Oil revenues have also enabled

Saudi Arabia to raise its 2013 expenditure target by

almost a fifth in an effort to move ahead with plans to

expand non-oil industries.57

Windfall oil receipts have also enhanced Saudi

Arabia’s ability to pursue aggressively its regional

strategic goals. Saudi Arabia has sought to advance its

strategic goals by employing aid and oil as diplomatic

tools in an effort to sustain its regional allies. Saudi

Arabia has shown unwavering support for the interim

government in Egypt and an apparent commitment to

prevent at all costs the Muslim Brotherhood’s return

to power. Saudi Arabia has joined the United Arab

Emirates (UAE) and Kuwait in providing a financial

lifeline to Cairo, pledging $5 billion in aid to shore

up Egypt’s faltering economy, including $2 billion

worth of oil products (i.e., diesel, fuel, and gasoline

shipments).58 Riyadh has made large-scale financial

commitments to Bahrain, Oman, Jordan, Yemen, and

Morocco as well.

Nevertheless, Saudi Arabia faces challenges on all

fronts, most notably its fierce rivalry with Iran. To the

north, neighboring Bahrain is a divided country with

a disaffected Shia majority. To the south, Yemen’s new

leadership is struggling to cope with Houthi rebels,

al-Qaeda-linked Islamists, high unemployment, and a

stagnant economy. In Syria, unrelenting violence has

already exacerbated region-wide sectarian tensions

and raised the risk of further destabilization.

Indeed, the post-Arab Spring MENA region has

become a fractured and competitive regional environ-

ment marked by shifting alliances. Saudi Arabia has

sought to maneuver its way through these turbulent

circumstances by leading, however reluctantly at first,

62

a counter-revolution against the forces that initially

swept some of its key regional allies from power and

threatened the rest. This has involved positioning it-

self as protector of all Sunni Muslims, casting popular

uprisings as having been chaos-inducing or counter-

productive, and in a practical sense, investing in the

post-Morsi Egyptian government and banking on the

Syrian opposition.

Saudi Arabia’s objectives in Syria appear to be to

contain the unrest, break the alliance with Iran, oust

Assad, and check Hezbollah. Riyadh has pursued

these objectives by arming Syrian rebel groups (in-

cluding furnishing support for the Free Syrian Army

through Jordan)59 and, more recently, by reportedly

trying to consolidate local Salafist rebel groups in an

effort to thwart the expansion of al-Qaeda’s influ-

ence.60 Yet, by seizing the opportunity to detach Syria

from Iran, Saudi Arabia has run the risk of transform-

ing the country into a proxy battleground.

The sectarian dimension of regional power poli-

tics has intensified, as has intra-Gulf rivalry and U.S.-

Saudi friction. The Arab uprisings, coupled with Ri-

yadh’s assertive regional posture in response to them,

have exposed and sharpened the policy divergences

between Saudi Arabia and some of its neighbors,

and have badly strained relations with Washington.61

Though Saudi Arabia and Turkey are united against

the Assad regime, Riyadh has allegedly been sup-

porting Salafi-leaning rebel groups, while Ankara, in

collaboration with Qatar, has been backing Free Syr-

ian Army brigades close to the Muslim Brotherhood.

These differences are also apparent in the case of

Egypt, with Saudi Arabia, Kuwait, and the UAE op-

posing the Morsi government, endorsing its removal

and stepping in to shore up its successor, and Tur-

63

key and Qatar having been staunch supporters of the

Brotherhood-dominated government in Cairo.

CONCLUSIONS

The time when the major powers were determined

and seemed capable of decisively shaping, or at least

containing, developments in the MENA region is over.

Today, contending local and regional actors are driv-

ing events in a region marked by many moving parts.

Looking at the direct and indirect losses sustained

by three countries which, 4 years after the Arab Spring

protests began are still experiencing political turmoil

and/or conflict―Egypt, Libya, and Syria―and two

countries which appear to have benefited from the re-

gion-wide upheaval―Iraq and Saudi Arabia―several

things are clear: First, the effects of the Arab Spring

on the MENA region’s energy sector vary greatly by

country. Second, there are no clear “winners” and

“losers,” nor are all of the setbacks and bottlenecks

directly attributable to the Arab Spring. Third, on bal-

ance, the Arab Spring’s effects on MENA producers

have not substantially jeopardized U.S. energy secu-

rity―at least not yet.

The disruptions to oil/gas production―wherever

they have occurred and whatever their causes―have

undermined the ability of producers to meet export

commitments and fulfill rapidly rising domestic con-

sumption requirements; worsened their fiscal situ-

ations by depressing export earnings and increasing

domestic public expenditures; impeded their ability

to maintain and/or expand production capacity; fur-

ther delayed fuel subsidy reforms; and spurred intra-

regional energy realignments.

64

At the same time, the Arab Spring uprisings have

been a major factor sustaining high oil prices. This has,

in turn, fueled GDP growth in Saudi Arabia, the rest

of the countries that comprise the Gulf Cooperation

Council (GCC) and Iraq. This financial windfall has

enabled Saudi Arabia, in particular, not just to con-

tain domestic political pressure but to conduct a much

more assertive regional foreign policy―sustaining

Sunni allies and supporting proxies. However, a num-

ber of risks and costs offset such gains, including the

spillover effects of the conflict in Syria, the question of

whether/for how long such high levels of expenditure

can be sustained, the strain placed on intra-regional

relationships and the possibility of “blowback.”

Shale technology and renewable energy provide

the United States with the opportunity to further

reduce its reliance on imported oil. However, even

before the Arab Spring and the shale revolution, the

United States had not been dependent on the Gulf for

the physical supply of oil. Rather, it depended—then,

now, and in the future—on the Gulf for price stabil-

ity. A strong U.S. commitment to Gulf security will

remain essential to oil market stability for the foresee-

able future. Neither the Arab Spring nor the promise

of “energy independence” appears to have eroded

Washington’s willingness to fulfill that commitment

or the GCC countries’ need for it.

The United States was spared the worst case of a

post-Arab Spring “price shock,” partly as the result of

its own soaring production, coupled with the record-

high production levels achieved by Saudi Arabia, Ku-

wait, the UAE, and Qatar. These same supply-side fac-

tors afforded the United States the strategic flexibility

needed to push for the tightening of sanctions on Iran.

65

Nevertheless, there are a number of “over the

horizon” risks and uncertainties, including the pos-

sible spread of unrest to/within the GCC sub-region,

whether Iraq can overcome the political and other chal-

lenges that imperil the resurgence of its energy sector,

when and under what circumstances Iranian supplies

fully return to the market, and the policy choices that

China and other major Asian energy consumers adopt

in order to ensure that their needs are met.

ENDNOTES - CHAPTER 3

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spective Government Faces Daunting Energy Subsidies Reform,”

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think Commitment to Egypt,” Financial Tim es, August 26, 2013

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Torn Egypt,” Houston Business Journal, August 30, 2013,

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apache-partners-with-chinas-sinopec.html (accessed September

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ment,” Washington, DC: International Monetary Fund, March 6,

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68

20. Javier Blas, “Lost in the Sands—Libya’s Oil Industry; the

Uprising Has Taken a Heavy Toll on an Industry Crucial to a Post-

Gaddafi Revival,” Financial Times, September 20, 2011 (retrieved October 6, 2013, from LexisNexis Academic database).

21. Adal Mirza, “Libya, Reports 2012 Export Figures,” Middle

East Economic Digest, February 22, 2013, (retrieved October 14, 2013, from Business Source Premier database).

22. Adal Mirza, “Insecurity Takes Toll on Libya Oil Output,”

Middle East Economic Digest, September 6, 2013 (retrieved October 14, 2013, from Business Source Premier database).

23. Mariam Sami, “Libya Says Oil Terminals Except Zawiya

Shut Amid Protests,” The Washington Post, July 31, 2013 (retrieved September 21, 2013, from LexisNexis Academic database).

24. “Libya in Crisis as Armed Groups Throttle Oil Supplies,”

UPI.com, September 4, 2013, available from www.upi.com/Business_News/Energy-Resources/2013/09/04/Libya-in-crisis-as-armed-

groups-throttle-oil-supplies/UPI-73641378323425/ (accessed October 6, 2013).

25. Paula Van Laningham et al., “Libya NOC Declares Force

Majeure on Three More Oil Ports,” Platts, September 12, 2013 (retrieved September 21, 2013, from LexisNexis Academic database).

26. Clifford Krauss, “Pipeline Reopens in Libya, Bolstering

Production,” The New York Times, September 20, 2013, available from www.nytimes.com/2013/09/21/business/global/pipeline-reopens-in-libya-bolstering-oil-production.html?ref=oilpetroleumandgasoline

&_r=0 (accessed October 6, 2013).

27. See, for example, Benoit Faucon, “Cracks Start Showing in

Libya’s Oil Recovery,” The Wall Street Journal, July 14, 2014, available from blogs.wsj.com/frontiers/2014/07/14/cracks-start-showing-in-libyas-oil-recovery/.

28. “Oil Strategy Still Lacking in Libya,” Middle East Economic

Digest, March 15, 2013 (retrieved October 14, 2013, from Business Source Premier database).

69

29. Clifford Krauss, “In Libya, Unrest Brings Oil Industry to

Standstill,” The New York Times, September 12, 2013, available from www.nytimes.com/2013/09/13/world/africa/in-libya-unrest-brings-oil-industry-to-standstill.html?_r=0 (accessed October 6, 2013).

30. Krauss, “Pipeline Reopens in Libya, Bolstering Pro-

duction.”

31. Daniel J. Graeber, “Libya Hopeful about Its Oil Sector,”

United Press International, May 30, 2014, available from www.

upi.com/Business_News/Energy-Resources/2014/05/30/Libya-hopeful-

about-its-oil-sector/6991401457204/.

32. IMF Staff Visit Concluding Statement, New York: In-

ternational Monetary Fund, May 4, 2012, available from https://

www.imf.org/external/np/ms/2012/050412.htm (accessed October 13, 2013).

33. IMF Country Report, No. 13/151, New York: International

Monetary Fund, May 2013, available from www.imf.org/external/

pubs/ft/scr/2013/cr13151.pdf.

34. Josh Wood, “Syria’s Factions Scramble to Establish Claims

on Oil Riches,” International Herald Tribune, March 21, 2013 (retrieved September 21, 2013, from LexisNexis Academic database).

35. “Syria Unrest: Oil Pipeline Attacked Near Homs,” BBC

News, December 8, 2011, available from www.bbc.co.uk/news/world-middle-east-16094818 (accessed October 18, 2013); “Much of Syria Blacked Out by Rebel Attacks on Pipeline,” Reuters, October 23, 2013, available from www.reuters.com/article/2013/10/23/us-syria-crisis-blackout-idUSBRE99M13320131023 (accessed October 25,

2013).

36. Andrea Giloti, “Syrian Oil Becomes Fault Line in War,”

Al-Monitor, May 16, 2013, available from www.al-monitor.com/

pulse/tr/contents/articles/opinion/2013/05/syria-oil-kurds-pyd-eu.html (accessed September 26, 2013).

37. Alaa Halbi, “Syria’s Oil Producing Regions Suffer from

Theft, Pollution,” Assafir, October 29, 2013, available from assa-fir.com/MulhakArticleList.aspx?EditionId=2614&MulhakId=6921” ; 70

“In Eastern Syria Oil Smugglers Benefit from Chaos,” Reuters, available from www.reuters.com/article/2013/05/10/us-syria-crisis-oil-tribes-insight-idUSBRE94905Y20130510; Ziad Haidar, “Syrian Oil Sector Suffers Disastrous Losses,” Al-Monitor, April 4, 2013, available from www.al-monitor.com/pulse/security/2013/04/syria-oil-well-destruction.html (accessed November 9, 2013).

38. Zakaria Zakaria and Paul Raymond, “Nusa Front Mi-

litia’s Control of Syrian City Gives It Economic Clout,” Mc-

Clatchy, September 11, 2013, available from www.mcclatchy-

dc.com/2013/09/11/201816/nusra-front-militias-control-of.html

(accessed October 12, 2013).

39. Julian Borger and Mona Mahmood, “Bonanza for Syria’s

Islamists . . .,” The Guardian, May 20, 2013 (retrieved September 21, 2013, from LexisNexis Academic database).

40. Sam Dagher, “Militants Seize Oil Field, Expand Syrian Do-

main,” The Wall Street Journal, July 3, 2014, available from online.

wsj.com/articles/islamic-state-militants-seize-oil-field-expand-syrian-domain-1404407709; Ma’ad Fayad, “ISIS in Control of 60 Percent of Syrian Oil,” Asharq Al-Awsat, July 11, 2014, available from www.

aawsat.net/2014/07/article55334174.

41. James Gavin, “Oil Turf War Benefits Regime,” Middle East

Economic Digest, May 31, 2013; David Butter, “Oil Output Re-

duced to a Trickle,” Middle East Economic Digest, August 2, 2013

(retrieved October 14, 2013, from Business Source Premier data-

base).

42. Robert Perkins and Stuart Elliott, “New EU Sanctions on

Syria Prompt Shell Exit,” Platts Oilgram Price Report, December 11, 2011 (retrieved September 21, 2013, from LexisNexis Academic

database).

43. David Unger, “Syria: The Energy Crossroads that Never

Was,” The Christian Science Monitor, September 10, 2013, available from www.csmonitor.com/Environment/Energy-Voices/2013/09

10/Syria-The-energy-crossroads-that-never-was (accessed September 26, 2013).

71

44. Mark Watts, “Turning Failure into Prosperity,” Middle

East Economic Digest, March 15, 2013 (retrieved October 14, 2013, from Business Source Premier database).

45. “Iraq: Gulf Giant Emerges Slowly,” Middle East Economic

Digest, October 6, 2013 (retrieved October 14, 2013, from Business Source Premier database); “Iraq to Get $6 Trillion from Energy

in New Strategy,” Agence France-Presse, June 12, 2013 (retrieved September 24, 2013, from LexisNexis database). See also Asa Fitch

and Hassan Hafidh, “Iraq to Turn Up Oil Tap This Year,” The Wall Street Journal, September 24, 2013, available from online.wsj.

com/article/SB10001424052702303759604579095003846747922.html

(accessed October 6, 2013).

46. In the absence of this framework, the relationship between

Turkey and the KRG has markedly improved, both at the politi-

cal level and in the energy sphere. Common concerns about the

course of the Syrian conflict is one of several factors responsible

for progress in the development of a comprehensive energy part-

nership between Erbil and Ankara, including possible construc-

tion of a second oil pipeline as well as a gas line from northern

Iraq to Turkey. These energy links would reduce Kurdish and

Turkish dependence on a potentially unfriendly or unstable gov-

ernment in Baghdad. However, these otherwise positive develop-

ments could further inflame tensions between Erbil and Baghdad

and undermine efforts by Ankara and Baghdad to patch up their

differences. See, for example, Humeyra Pamuk and Oran Coskun,

“Turkey, Iraqi Kurdistan Clinch Major Energy Pipeline Deals,”

Reuters, November 6, 2013, available from uk.reuters.com/article/2013/11/06/uk-turkey-iraq-kurdistan-idUKBRE9A50HN20131106

(accessed November 7, 2013).

47. Ola Galal, “Iraq Daily Output Exceeds 3.2 Million,” Bloom-

berg, December 22, 2012, available from www.bloomberg.com/

news/2012-12-22/iraq-daily-oil-output-exceeds-3-2-million-barrels-minister-says.html (accessed September 28, 2013).

48. “Iraq Exports to Turkey Halted by Pipeline Attacks,”

Al-Arabiya, August 21, 2013, available from english.alarabiya.net/

en/business/energy/2013/08/21/Iraq-oil-exports-to-Turkey-halted-by-pipeline-attacks.html (accessed October 6, 2013); Kamaran Al-Najar and staff, “New Pipeline Bombing Adds to Kirkuk Field Woes,”

72

Iraq Oil Report, September 18, 2013, available from www.iraqoil-report.com/security/energy-sector/new-pipeline-bombing-adds-kirkuk-field-woes-11329/ (accessed September 24, 2013).

49. Ziad al-Sinjary, “Iraq Province Empowers Governor

to Sign Oil Deals without Baghdad,” The Daily Star, Septem-

ber 19, 2013, available from www.dailystar.com.lb/News/Middle-

East/2013/Sep-19/231877-iraq-province-empowers-governor-to-sign-

oil-deals-without-baghdad.ashx#axzz2gyCJycxq (accessed October 6, 2013).

50. Lauren Williams, “Iraq Tensions Rise as Syria Crisis Deep-

ens,” The Daily Star, November 28, 2012, available from www.dailystar.com.lb/News/Middle-East/2012/Nov-28/196348-iraq-tensions-

rise-as-syria-crisis-deepens.ashx#axzz2gar6R16s (accessed October 3, 2013).

51. See, for example, Damien McElroy, “Iraq Oil Bonanza

Reaps $1 Million a Day for Islamic State,” The Telegraph, July 11, 2014, available from www.telegraph.co.uk/news/worldnews/middleeast/iraq/10962160/Iraq-oil-bonanza-reaps-1-million-a-day-for-Islamic-State.html.

52. “Iraq Loses $1.5 Billion Monthly as Oil Exports Decrease,”

Daily Sabah, July 17, 2014, available from www.dailysabah.com/mid-east/2014/07/17/iraq-loses-15-billion-monthly-as-oil-exports-decrease.

53. Sarah Kent, “Kurdish Forces Seize Control of Two Key

Iraqi Oil Fields,” July 11, 2014, The Wall Street Journal, available from online.wsj.com/articles/kurdish-forces-seize-control-of-two-key-iraqi-oil-fields-1405087193.

54. “Iraq Deploys Drones to Protect Southern Fields,” The Dai-

ly Star, July 17, available from www.dailystar.com.lb/News/MiddleEast/2014/Jul-17/264125-iraq-deploys-drones-to-monitor-southern-oil-fields.ashx#axzz37jgKhkk2.

55. “Saudi Pumps Record Amount of Oil,” The Oil and Gas

Week, September 25, 2013, available from www.theoilandgasweek.

com/fromthefield.html (accessed September 28, 2013).

73

56. Neil MacFarquhar, “In Saudi Arabia, Royal Funds

Buy Peace for Now,” The New York Times, June 8, 2011, avail-

able from www.nytimes.com/2011/06/09/world/middleeast/09saudi.

html?pagewanted=all (accessed October 6, 2013).

57. Glen Carey, “Saudi Arabia Boosts Spending Goal by

Fifth in Record Budget,” Bloomberg, December 29, 2012, avail-

able from www.bloomberg.com/news/2012-12-29/saudi-arabia-boosts-

2013-spending-in-record-budget-state-tv.html (accessed October 21, 2013).

58. Egypt Gets Saudi Oil Shipments, Rebuffs IMF Aid at the

Moment,” Zawya, September 15, 2013, available from www.zawya.

com/story/Egypt_gets_Saudi_oil_shipments_rebuffs_IMF_aid_at_the_

moment-ZAWYA20130915035632/ (accessed September 23, 2013).

59. Ann Barnard, “Syrian Rebels Say Saudi Arabia is Step-

ping Up Weapons Deliveries,” The New York Times, September 12, 2013, available from www.nytimes.com/2013/09/13/world/middleeast/syrian-rebels-say-saudi-arabia-is-stepping-up-weapons-deliveries.

html?_r=0 (accessed October 12, 2013).

60. Khaled Yacoub Oweis, “Saudi Arabia Boosts Salaf-

ist Rivals to Al Qaeda in Syria,” Reuters, October 1, 2013, available from uk.reuters.com/article/2013/10/01/uk-syria-crisis-jihadists-insight-idUKBRE9900RW20131001; “Saudis Bankroll New

Rebel Force to Fight Own War on Assad,” UPI.com, October 8,

2013, available from www.upi.com/Top_News/Special/2013/10/08/

Saudis-fund-new-rebel-force-to-fight-own-war-on-Assad/UPI-

14171381256329/?spt=hs&or=tn (accessed October 12, 2013).

61. See, for example, Michael Gordon, “Criticism of United

States’ Mideast Policy Increasingly Comes from Allies,” The

New York Times, October 23, 2013, available from www.nytimes.

com/2013/10/24/world/middleeast/kerry-reassures-israel-on-iran-but-divisions-remain.html?_r=0 (accessed October 24, 2013).

74

CHAPTER 4

GAME CHANGER?

THE ENERGY REVOLUTION AND

AMERICAN POLICIES TOWARD AFRICA

Ian Taylor

Since the end of the Cold War, American poli-

cies toward Africa have been grounded on two main

goals: to advance global economic integration under

conditions of neo-liberalism, and to counter perceived

threats to American security interests. In 1997, then-

Assistant Secretary of State for African Affairs Susan

Rice spelled out this twin-track approach by asserting

that the United States had:

two clear policy goals: a) integrating Africa into the

global economy through promotion of democracy,

economic growth and development, and conflict reso-

lution; and b) combating transnational security threats,

including terrorism, crime, narcotics, weapons prolif-

eration, environmental degradation, and disease.1

Even with the securitization of many government

policies under the George W. Bush administration,

and in the context of a post-September 11, 2001 (9/11)

world, Washington’s approach toward Africa was al-

tered little. Indeed, a renewed focus on the continent

post-9/11 by Washington meant, in fact, a continu-

ation of well-established policies that pre-dated the

Bush government’s tenure.2

It is in policy domains deemed to be particularly ap-

posite to American national interests where Africa has

enjoyed a resurgence of attention from Washington.3

As one commentator noted, post-9/11, “Africa has as-

75

sumed a new, strategic place in U.S. foreign policy and

in the definition of vital U.S. national interests.”4 This

may be linked to two related factors: oil and potential

terrorist threats. Consequently, with regard to coun-

terterrorism, military training and policing, American

interests and involvement have multiplied post-9/11,

with the U.S. Africa Command (AFRICOM) being but

one example of this new redefinition of the strategic

place Africa occupies in American policy-making cal-

culations. Yet, referring back to Susan Rice’s comments

in 1997, it is apparent that Washington’s assessments

of the main challenges to American-defined interests

that Africa presents has remained, at least up till now,

largely unchanged. However, a new development, the

“energy revolution” of shale gas and tight oil, means

that a reappraisal of Washington’s approach to Africa

is now urgent.

AFRICA’S OIL AND THE UNITED STATES

The overwhelming dependency of the U.S. econo-

my on oil is well known. In the 2006 State of the Union

address, Bush famously asserted that “America [was]

addicted to oil, which is often imported from unstable

parts of the world.” The inherent security threat this

posed to American interests was intrinsic to the Presi-

dent’s demand that the United States “replace more

than 75 percent of our oil imports from the Middle

East by 2025 . . . and make our dependence on Middle

Eastern oil a thing of the past.”5 Apart from the poten-

tiality of new energy technologies to help break this

dependency, locating alternative sources of oil sup-

plies other than those found in the Persian Gulf were

central to Bush’s message. Africa fits neatly into this

energy-security nexus, and indeeed has been, “central

76

in its efforts to reduce [American] dependency” on oil

from the Middle East.6

Early on in the post-9/11 environment, Assistant

Secretary of State for Africa Walter Kansteiner had

asserted in mid-2002 that, “African oil is of strategic

national interest to us,” and this reality would only

“increase and become more important as we go for-

ward.”7 Later that year, a New York Times article stated

that, “Africa, the neglected stepchild of American diplo-

macy, is rising in strategic importance to Washington

policy makers, and one word sums up the reason—oil.”8

Yet, such pronouncements were not simply a counter-

reaction to the Arab-originated attacks on 9/11. Re-

ducing a dependency on oil from the Middle East was

viewed as vital to American national interests prior

to the calamitous events of 9/11. For instance, in May

2001, the National Energy Policy Development Group,

chaired by Vice President Richard Cheney, character-

ized America’s reliance on imported oil as a major na-

tional security issue, stating that the “concentration of

world oil production in any one region of the world,”

was a “challenge” and that the American economy’s

reliance on Middle Eastern oil fostered “a condition

of increased dependency on foreign powers that do

not always have America’s interests at heart.”9 In this

sense, 9/11 merely propelled and speeded up policy

calculations that had been made before the attacks.

How and why Africa fits into the previous calcula-

tions was directly related to contemporary estimates

that West Africa would supply 25 percent of imported

oil to the United States by 2015 (up from 14 percent in

2000).10 As a result, “there [was] a greater recognition

that Africa matters to the United States as an impor-

tant and growing source of non-Gulf oil.”11 The grow-

ing abundance of oil supplies in the Gulf of Guinea

77

is congruent with American policies to diversify oil

supplies. Yet, this provided a challenge to American

policies, given that West Africa was only in the initial

stages of an:

extended oil boom that [would] significantly enhance

the global position of Nigeria and Angola and bring

greater attention to emergent, unstable producers’

such as Chad, Equatorial Guinea, and São Tomé and

Príncipe.12

Trying to promote stability and governance in such

states would not be easy.

As noted earlier, the Cheney Report issued its fi-

nalized findings in May 2001, fully 4 months before

9/11. It can therefore be asserted that, although 9/11

intensified American efforts to diversify supplies and

consequently place even stronger weight on sourcing

African oil, it was not 9/11 specifically that gener-

ated a change in American energy diplomacy. Rather,

9/11 and the clamor to further lessen dependence on

oil from the Persian Gulf merely provided another, if

particularly compelling, reason why Africa’s energy

fields should be accorded a greater priority in Wash-

ington’s policy considerations and why American oil

companies were particularly encouraged to explore

opportunities there.

Clearly, in today’s globalized world economy, oil

provides the foundation for commerce and industry,

the means for transportation, and provides the abil-

ity to wage war. It is the prize to capture.13 In recent

times, there was a growing international interest in

Africa as a source for such a vital resource. So much

so, that there was talk of a “scramble for Africa’s oil,”

redolent of the 19th century’s Scramble for Africa.14 It

is important to remember that, though this unprec-

78

edented attention was relatively new, the presence of

oil in Africa was not; oil extraction on the continent be-

gan in the 1950s, while exploration was started much

earlier.15 Yet, Africa emerged as a hugely important

source of oil in the global economy. This was largely

due to new discoveries—“in the years between 2005

and 2010, 20 percent of the world’s new production

capacity [was] expected to come from Africa.”16

These and other factors resulted in major oil corpo-

rations from around the world increasingly focusing

their attention toward diversifying oil supplies and

looking toward sub-Saharan Africa. An identifiable

configuration emerged whereby American oil corpo-

rations largely controlled the oil fields of those econo-

mies that had recently discovered oil reserves, such as

Equatorial Guinea and São Tomé and Príncipe, while

British and American oil interests dominated Nige-

ria and French companies dominated in Gabon and

Congo-Brazzaville. Chinese corporations dominated

the oil sector in Sudan. Meanwhile, actors from Brazil,

India, Japan, Malaysia, South Korea, and other loca-

tions were aggressively competing and seeking access

across the continent.

In a report from the mid-2000s, the U.S. Department

of Energy estimated that the combined oil output by

all African producers was projected to rise by 91 per-

cent between 2002 and 2025 (from 8.6 to 16.4 million

barrels per day).17 Thus, within oil circles, there was

growing excitement about the, “alluring global source

of energy in Africa.”18 Indeed, as the only region in

which oil production was actually rising, Africa was

identified as the “final frontier” in the quest for global

oil supplies.19

79

The burgeoning oil fields in sub-Saharan Africa,

particularly in the Gulf of Guinea, became of major

geo-strategic importance to the oil-dependent indus-

trialized economies. In fact, it could be stated that the

United States did not just buy oil from Africa, but,

“in many ways it [was] dependent on African oil.”20

As Assistant Secretary of State for Africa Walter Kan-

steiner noted, “African oil is critical to us, and it will

increase and become more important as we go for-

ward.”21 Thus African oil became a “matter of US na-

tional strategic interest,” granting the Gulf of Guinea,

“major strategic relevance in global energy politics.”22

To the American Ambassador to Chad’s surprise, “for

the first time, the two concepts—‘Africa’ and ‘U.S. na-

tional security’—[were] used in the same sentences in

Pentagon documents.”23

Concomitantly, Africa emerged as a major site for

competition between various oil corporations from

diverse nations. In the mid-2000s, three of the world’s

largest oil corporations (Shell, Total, and Chevron)

targeted 15 percent, 30 percent, and 35 percent re-

spectively, of their global exploration and production

budgets on Africa.24 Meanwhile, it was estimated that

Sub-Saharan economies would gather over $200 bil-

lion in oil revenue income over a 10-year period.

THE NATURE OF THE SCRAMBLE

At the global level, there was mounting anxiety

that future oil supplies would not meet global de-

mand, particularly within a wider context where

emergent economies such as Brazil, China, and India

were rapidly increasing oil consumption to feed their

growing economies. The gap between global supply

and demand was predicted to be met as early as 2025,

according to some analyses.25 Although the actual

80

quantity of African oil reserves was low in compari-

son to those found in the Middle East, in a context that

was marked by deep anxiety over future supplies, Af-

rica’s reserves (roughly 9 percent of the world’s total)

were deemed extremely significant.26

Another characteristic of the “scramble” was that

while it was not solely a race between Chinese and

American corporations, the dynamics were heavily

influenced by the roles and activities of actors from

these two states.27 Policymakers in both nations had

identified African oil as vital to their national inter-

est, albeit for different motives. It was apparent that

policy analysts in Beijing saw the broader global polit-

ical milieu as being intrinsically linked to Chinese en-

ergy security and felt that in the current environment

China was vulnerable until and unless it could diver-

sify its oil sourcing and secure greater access to the

world’s oil supplies.28 Between 2002 and 2025, it was

estimated that Chinese energy consumption would

rise by 153 percent and China became the second larg-

est consumer of oil globally, after the United States.29

In order to fuel such a growing demand, Chinese oil

corporations entered into the competition for African

oil. In the mid-2000s, 85 percent of Chinese African

oil imports came from the oil-rich states of Angola,

Sudan, Equatorial Guinea, the Democratic Republic of

the Congo, and Nigeria.30

From the American perspective, the, “war on ter-

rorism and preparations for war against Iraq . . . enor-

mously increased the strategic value of West African

oil reserves.”31 The high level of interest from such

major importers certainly raised the level of competi-

tion over Africa’s oil. While corporations headquar-

tered in other states—Britain, Brazil, France, India,

and Malaysia, for example—were playing important

81

roles in the ongoing scramble and equally striving to

build up their oil portfolios in Africa, it was the os-

tensible Sino-American competition for oil on the con-

tinent that grabbed the most headlines: “There [was]

little doubt that the interest in Africa’s oil and gas

resources . . . spurred a rivalry between international

actors in Africa, notably the American and Chinese

governments.”32

Apart from the objective amount of new oil dis-

coveries being revealed in Africa on a regular basis,

there were a number of factors that made the conti-

nent particularly attractive to oil corporations and to non-African political policymakers. Technically, what

has made African oil of particular interest to the oil

industry is the quality of African crude oil, known as

“sweet” crude, which is comparatively unproblematic

to refine and lessens the costs involved in the refin-

ing process. Most of Africa’s crude oil is high quality

and has a light, low sulfur grade. This is highly val-

ued thanks to its high gasoline content and relatively

cheap processing outlay—particularly attractive to

corporations headquartered in the West, where envi-

ronmental regulations make it problematic to refine

heavier crude without running up relatively high

expenditures. In a profit-driven industry, African oil

makes commercial sense.

The second factor in Africa’s attractiveness to the

global oil industry was the geographic nature of the

continent—entirely enclosed by water, Africa’s loca-

tion reduces transportation costs and time necessary to

ship supplies to the prime global markets, with well-

developed sealanes readymade for facilitating haul-

age. The Gulf of Guinea in particular benefits from a

favorable geographical position from the perspective

of oil companies as it consists of a large maritime area

82

lacking in shipping chokepoints, i.e., narrow transport

routes, such as those found in the Persian Gulf, that

are vulnerable to blockade and flashpoints for trouble.

Third, Africa provided a relatively favorable en-

vironment vis-à-vis contractual agreements. In an

environment where local technical expertise and the

capital investment required to extract the oil are of-

ten lacking, foreign oil companies enter into produc-

tion sharing agreements. Under a production shar-

ing agreement, the contractor (that is, the foreign oil

company) carries the whole cost and risk of explora-

tion, and is rewarded only if exploration is success-

ful. If there is a commercial discovery, the contractor

regains its expended costs through the allocation of

oil, what is known in the trade as “Cost Oil.” Produc-

tion for royalties is also recovered, after which the

rest of any production, “Profit Oil,” is shared as per

the agreement. In Nigeria, for example, oil companies

pay a flat 50 percent tax on petroleum profits, and the

installations continue to be assets of the government

during the contract.33 Production sharing agreements

are attractive to foreign oil corporations as they create

conditions where lucrative profits can be made in ex-

change for relatively low upfront costs. Furthermore,

such agreements are far more attractive than having

to work with state owned oil companies in joint ven-

tures, where the local national oil corporation invari-

ably has a monopoly, including in the distribution of

petroleum.

A fourth plus point for Africa in the eyes of foreign

oil companies was that, with the exceptions of Angola

and Nigeria, sub-Saharan African oil-producing coun-

tries were not members of the Organization of Petro-

leum Exporting Countries (OPEC). OPEC membership

places stringent measures on member states regard-

ing output as a means to maintain an artificially high

83

oil price. This is why, “both the United States and oil

companies operating in Nigeria have been pressuring

the Nigerian government to pull out of OPEC to avoid

production quotas imposed by the organization.”34

Equally, this is why the emergence of major sources

of oil from non-OPEC states was seen by strategists

in London and Washington as positive since, with the

increase in non-OPEC oil states, which may produce

and export at maximum output, it weakened OPEC’s

ability to keep the price of oil unnaturally high.

Another attraction for corporations investing in Af-

rican oil was the fact that most of the oil reserves were

offshore. The development of new technology within

the oil industry opened up deep water and ultra-deep

water reserves (5,000 to 10,000 feet) throughout the

Gulf of Guinea, making them commercially feasible.

Offshore locations obviously lessen the possibility

that violence, civil strife, and other crises may inter-

rupt production.35 This was hugely desirable from

the standpoint of the corporations, given the ongoing

onshore situation in the Niger Delta, where oil com-

panies must deal with large-scale illegal bunkering,

kidnapping, and violence that has created a situation

where:

A presidential committee report says Nigeria lost at

least $28 billion to oil theft and sabotage in the first 9

months of 2008. Some 1,000 lives were lost within the

same period. Bombings of oil pipelines and kidnap-

pings of oil workers by armed gangs in the creeks of

the Niger Delta, home to Africa’s biggest oil and gas

industry, have cut Nigeria’s crude oil output sharply

over the past 3 years.36

Offshore locations also of course avoid the “two-

speed problem,” that is, pipelines and offshore plat-

forms can be built much more quickly than competent

84

states. Clearly, offshore fields, often far from the po-

litical instability and conflict found onshore, could be

more easily insulated from the endemic turmoil that

characterizes many African states.37 Related to this

relative safety (from the perspective of the oil compa-

nies), Africa was increasingly viewed more favorably

than the Middle East, where anti-American sentiment

is high, and where the perennial problem of Palestine

generates perpetual tensions.

The previous factors illustrate why Africa emerged

as a prime site of global interest in terms of oil explo-

ration and production, including for American policy-

makers. However, new developments in energy tech-

nology and extraction may radically reshape such a

scenario.

THE “ENERGY REVOLUTION”

In the past few years, a radical change in the fore-

casts for growth in American oil production and oil

reserves has taken place. This has sprung from light

tight oil (LTO ). LTO includes both crude oil and con-

densate in all tight formations, including shale basins.

Currently, the oil industry is considering LTO’s poten-

tial and its likely implications for global oil supply and

demand. This is important, given the fact that over the

past decade, as noted earlier, the demand from non-

OECD countries such as China and India expanded at

an unparalleled rate and compelled these countries to

seek new oil sources, Africa included. This was at the

root of the so-called (and possibly short-lived) new

scramble for Africa. Recently, however, this has be-

gun to change as oil companies have started to devel-

op unconventional hydrocarbons, successfully bring-

ing to the market several large and under-exploited

85

oil and natural gas liquid resources. American shale/

tight oil, Canadian tar sands, Venezuela’s extra-heavy

oil, and Brazil’s pre-salt oil are the main examples.

This has meant that the fear of a decline in oil supplies

(the “peak oil” thesis), which would then prompt con-

cerns about energy shortages and propel oil prices up-

wards, possibly leading to “oil wars” has been quietly

shelved. There is now little doubt that unconventional

resources through the “energy revolution” will satis-

fy global demand. Instead, the debate now revolves

around the speed and price at which these resources

can be extracted.

The energy revolution derives from technological

innovations in horizontal drilling and hydraulic frac-

turing (or “fracking”). The U.S. Department of Energy

forecasts U.S. production of crude and other liquid

hydrocarbons will average around 11.4 million barrels

per day (bpd) by 2014, which would place the United

States just below Saudi Arabia’s expected output for

2013 of 11.6 million-bpd. Several forecasts put Ameri-

can production at between 13-15 million-bpd by 2020,

with the International Energy Agency (IEA) suggest-

ing that the United States may supplant Saudi Arabia

as the world’s largest producer. It should be said at

this juncture that Saudi oil is cheaper to tap than tight

oil, and LTO needs a price above $70 per barrel to be

profitable (break-even prices of most tight oil are in

the range of $40- $60 per barrel). However, the recent

turnaround in the United States’ crude oil production

is extraordinary and will have major implications for

Africa (and the world). As the United States meets

more of its current and future demand for oil from

indigenous supplies, imports from traditional suppli-

ers will inevitably fall (see Table 4-1). This has already

started to happen in dramatic fashion.

86

2010

2011

2012

Algeria

186,019 130,723

88,487

Angola

143,512 126,259

85,335

Cameroon

19,728 13,921

12,356

Chad

11,312 18,473

11,004

Congo-B

26,276 19,275

11,341

DRC

3,225 3,999

137

Eq. Guinea

21,063 8,500

15,100

Gabon

17,022 12,557

15,886

Ghana

215 3,832

313

Ivory Coast

17,022 12,557

15,886

Liberia

- 20

1

Libya

25,595 5,542

22,281

Nigeria

373,297 298,732

161,558

Source: U.S. Energy Information Administration, International

Energy Outlook 2013, DIE/EIA-0484, July 2013.

Table 4-1. U.S. Imports of Total Crude Oil and

Products from Africa, 2010-2012

(in thousands of barrels).

In its Medium-Term Oil Market Report for 2013, the

IEA asserted that LTO and other aspects of the energy

revolution will act as a “supply shock” to the global

oil market, that will be, “as transformative to the [en-

ergy] market over the next five years as was the rise of

Chinese demand in the last 15 years.”38 Exports of Ni-

gerian oil to the United States almost halved between

2011 and 2012. In the late-2000s, Nigeria was regularly

exporting around one million barrels a day of crude

to the United States, but by the end of 2012, that num-

ber was just 405,000 barrels a day. Nigeria has expe-

87

rienced difficulties in finding alternative destinations

for its crude, and it has had to cut prices. Indeed, at the

start of 2013, weak demand forced Nigeria to sell some

cargoes of its oil below the official selling price. This

would see Nigeria lose $380,000 on a typical cargo.39

Such a scenario is obviously very serious for Nige-

ria. Addressing the Nigeria Economist’s Group Sum-

mit in May 2013, Minister of Petroleum Resources

Diezani Alison-Madueke gave a rather pessimistic

outlook for the future. In her speech, Alison-Madueke

asserted that:

U.S. dependence on oil imports is expected to contin-

ue declining over the next 10 years reaching a share of

about 43 percent of total oil consumption by 2020 from

67 percent in 2005. . . . Between 2007 and 2011, U.S.

shale gas share of total gas supply increased from 8

percent to 32 percent; consequently pipeline and LNG

import share of total gas supply declined from 16 per-

cent and 3 percent in 2007 to 12 percent and 1 percent

respectively. As a result of shale gas production, it is

projected that United States will become a net exporter

of natural gas in the year 2020. This is already evident

in the decline of Nigeria’s LNG exports to the United

States from 12 percent in 2007 to 1 percent in 2011.”40

Consequently, “unprecedented growth in U.S.

gas reserves inevitably eliminates the United States

as a destination for Nigerian gas.”41 In addition, the

growth in gas reserves helps re-establish the United

States as a major producer of industries such as petro-

chemicals and fertilizer, in effect slashing the market

options for such products from Nigeria.

As a result of such developments, Edward Morse,

the head of commodities research at Citigroup Global

Markets, has predicted that, “sometime before mid-

2014, the United States and Canada will stop import-

88

ing crude from West Africa altogether.”42 Indeed, the

Philadelphia Refinery and the Trainer Refinery (both

in Pennsylvania) are likely to no longer import sweet

crude from Nigeria once the Keystone Pipeline Sys-

tem transporting oil sands from Alberta, Canada, and

crude oil from the northern United States becomes op-

erational. This is, it should be noted, ignoring the fact

that Texan oil production will, by late-2014, surpass

the 2.7 million-bpd mark, and push Texas’ production

above that of Nigeria (2.524 million-bpd), Venezuela

(2.489 million-bpd), and Algeria (1.875 million-bpd).43

IMPLICATIONS FOR U.S. POLICY

According to Soares de Oliveira, “the catapulting

of the Gulf of Guinea from strategic neglect to geopo-

litical stardom in the last few years is illustrative of

how space is easily re-conceptualized by capital and

politics.”44 With the upsurge of interest in oil by in-

dustrialized and emerging economies, there was the

very real possibility that African elites would chose to

ignore blandishments about the necessity to practice

good government (however defined). As one analysis

remarked on Angola, but which is equally applicable

to all oil-rich states in sub-Saharan Africa:

Interest in engaging with the transparency rhetoric

may already have peaked amidst all-time high oil

prices and a new business partner, China, which has

essentially replaced conditionality-ridden OECD do-

nors and Bretton Woods institutions as the source of

credit for Angola’s ‘reconstruction,’ and is unruffled

by fashionable Western good governance agendas.45

While one should by no means overestimate how

serious the international financial institutions have

been in promoting good governance, the sort of dy-

89

namics unleashed by the resurgence of interest in Af-

rica cannot be a good thing in such circumstances.

Kleptocratic and authoritarian trends historically

have been tolerated by external players, the United

States included. The political make-up of the external

actor makes very little concrete difference in engage-

ment with oil-rich African spaces and the need for

oil accelerated a long-existent trend of forgetting the

rhetoric about good governance in favor of naked geo-

politics.46 As Condoleezza Rice admitted, “nothing has

really taken me aback more as secretary of state than

the way that the politics of energy [are]—I will use the

word ‘warping’—diplomacy around the world.”47

Of prime concern was that this new interest in Af-

rican oil would reify in Africa what one analysis has

termed the phenomena of a successful failed state.48

These entities would, by any normal measure of a

state’s capabilities and performance, be considered as

failed, in that there are chronic leadership standards

and poor governance, weak and undiversified econo-

mies, fragile institutions, and low levels of human de-

velopment. Yet while being marginalized by the rest

of the world, oil-rich states are inherently engaged

with it. While possessing the attributes of a failed/

failing state, there persists a paradoxical sustainability

where the presence of oil maintains the interest and

attention of the international community that upholds

relationships with such states, granting them (or rath-

er, their elites) legitimacy.49 This “legitimacy” not only

can serve to play out in domestic terms, but also at the

global level. In such circumstances, when a state’s suc-

cess was determined by its international legitimacy,

recognized sovereignty and the ability to interact at

the global level (rather than how it serves its citizen-

ries), then the presence of oil granted success to some

90

fundamentally dysfunctional African states. Angola,

Equatorial Guinea, Nigeria, and Sudan all spring to

mind at this juncture.

Will this change if the United States no longer

needs African oil? It is probably unlikely to make a

major difference, although freeing Washington from

reliance on oil from some of the more odious regimes

has to be a good thing per se. But it is unlikely that U.S.

security concerns in Africa vis-à-vis energy supplies

will totally decline. Other issues will likely develop

which will require continued attention. The new U.S.

oil glut and resulting suppressed demand for African

oil could cause a fall in prices to $70-$90 per barrel

by 2020 from current levels of $90-$120 per barrel.

In fragile African states that depend highly upon oil

revenue, a price collapse could engender far-reaching

economic instability. Nigeria, for instance, already

plagued by Boko Haram and continuous tensions in

the Niger Delta, could be seriously affected. Similarly

Chad, already vulnerable to the spread of al-Qaeda in

the Sahel is exposed. So, while energy security will be

less of a reason for a U.S. military presence, broader

U.S. interests will remain. While there has been a game

change in U.S. sourcing of oil from Africa, a develop-

ment that has not yet played its course, strategic inter-

ests in Africa dictate that Washington remain engaged

with the continent.

ENDNOTES - CHAPTER 4

1. Susan Rice, “The Clinton-Gore Administration Record in

Africa: Remarks to the Foreign Affairs Braintrust Annual Con-

gressional Black Caucus,” Washington, DC, September 15, 2000.

2. Raymond W. Copson, The United States in Africa: Bush Policy

and Beyond, London, UK: Zed Books, 2007.

91

3. James J. Hentz, “The Contending Currents in United States

Involvement in Sub-Saharan Africa,” Ian Taylor and Paul Wil-

liams, eds., Africa in International Politics: External Involvement on the Continent, London, UK: Routledge, 2004.

4. Africa Policy Advisory Panel, “Rising US Stakes in Africa:

Seven Proposals to Strengthen US-Africa Policy,” Washington

DC: Center for Strategic and International Studies, 2004, p. 2.

5. “We Strive to Be a Compassionate, Decent, Hopeful Soci-

ety,” transcript of President George W. Bush’s 2006 State of the

Union address as printed in The New York Times, January 31, 2006.

6. Donald Rothchild and Nikolas Emmanuel, “United States:

The Process of Decision-Making on Africa,” Ulf Engel and Gorm

Rye Olsen, eds., Africa and the North: Between Globalization and Marginalization, London, UK: Routledge, 2005, p. 79.

7. Daniel Volman, “The Bush Administration and African Oil:

The Security Implications of US Energy Policy,” Review of African Political Economy, Vol. 30, No. 98, 2003, p. 574.

8. James Dao, “In Quietly Courting Africa, White House Likes

Dowry,” The New York Times, September 19, 2002.

9. Volman, “The Bush Administration and African Oil: The

Security Implications of US Energy Policy,” p. 574.

10. Padraig Carmody, “Transforming Globalization and Se-

curity: Africa and America Post-9/11,” Africa Today, Vol. 52, No.

1, 2005, p. 100.

11. House Committee on International Relations, “Africa and

the War on Global Terrorism,” Hearing before the Subcommit-

tee on Africa of the Committee on International Relations, 107th

Cong., 1st Sess., Washington, DC: U.S. House of Representatives,

2001, p. 2.

12. Africa Policy Advisory Panel, p. 6.

13. Daniel Yergin, The Prize: The Epic Quest for Oil, Money and

Power, New York: Simon and Schuster, 1991.

92

14. See Michael Klare and Daniel Volman, “The African ‘Oil

Rush’ and U.S. National Security,” Third World Quarterly, Vol. 27, No. 4, 2006; Michael Watts, “Empire of Oil: Capitalist Disposses-sion and the Scramble for Africa,” Monthly Review, Vol. 58, No.

4, 2006; John Ghazvinian, Untapped: The Scramble for Africa’s Oil, London, UK: Harcourt, 2007; and Duncan Clarke, Crude Continent:

The Struggle for Africa’s Oil Prize, London, UK: Profile Books, 2008.

15. Ricardo Soares de Oliveira, Oil and Politics in the Gulf of

Guinea, London, UK: Hurst and Company, 2007.

16. Ghazvinian, p. 12.

17. Klare and Volman, “The African Oil Rush and U.S. National

Security,” p. 611.

18. Nicholas Shaxson, Poisoned Wells: The Dirty Politics of

African Oil, Basingstoke, UK: Palgrave, 2007, p. 24.

19. Klare and Volman, “The African ‘Oil Rush’ and U.S. Na-

tional Security.”

20. Sandra Barnes, “Global Flows: Terror, Oil and Strategic

Philanthropy,” Review of African Political Economy, Vol. 34, No.

104/5, 2005, p. 236. Emphasis added.

21. Cyril Obi, “Globalization and Local Resistance: The Case

of Shell Versus the Ogoni,” Louise Amoore, ed., The Global Resis-

tance Reader, London, UK: Routledge, 2005, p. 39.

22. Ibid., p. 38; and Abiodun Alao, Natural Resources and Conflict in Africa: The Tragedy of Endowment, Rochester, NY: Rochester University Press, 2007, p. 168.

23. Volman, “The Bush Administration and African Oil,”

p. 576.

24. Ghazvinian, p. 7.

25. Klare and Volman, “The African ‘Oil Rush’ and U.S. Na-

tional Security,” p. 609.

93

26. Oil and Gas Journal, Vol. 106, No. 48, December 22, 2008.

27. Jedrzej George Frynas and Manuel Paulo, “A New Scram-

ble for African Oil? Historical, Political, and Business Perspec-

tives,” African Affairs, Vol. 106, No. 423, 2007, p. 230.

28. Ian Taylor, “China’s Oil Diplomacy in Africa,” Internation-

al Affairs, Vol. 82, No. 5, 2006, p. 937.

29. Michael Klare and Daniel Volman, “America, China and

the Scramble for Africa’s Oil,” Review of African Political Economy, Vol. 33, No. 108, 2006.

30. Ian Taylor, “‘Advice is Judged by Results, Not by Inten-

tions’: Why Gordon Brown is Wrong about Africa,” International

Affairs, Vol. 81, No. 2, 2005.

31. Stephen Ellis, “Briefing: West Africa and its Oil,” African

Affairs, Vol. 102, No. 406, 2003, p. 135.

32. Frynas and Paulo, p. 230.

33. Ian Taylor, “China’s Relations with Nigeria,” Round Table:

The Commonwealth Journal of International Affairs, Vol. 96, Issue 392, 2007, p. 635.

34. Dena Montague, “Stolen Goods: Coltan and Conflict in

the Democratic Republic of Congo,” SAIS Review, Vol. 22, No. 1, 2002, p. 2.

35. Ghazvinian, p. 4.

36. Voice of America, Abuja, April 25, 2009.

37. Damian Ondo Mañe, “Emergence of the Gulf of Guinea in

the Global Economy: Prospects and Challenges,” panel presenta-

tion before the U.S. Congress Members held by the Congressional

Black Caucus, Washington, DC: U.S. Congress, 2005, p. 7.

38. Medium-Term Oil Market Report, Paris, France: Internation-al Energy Agency, 2013.

94

39. Sarah Kent, “Nigeria Bearing Brunt of U.S. Shale-Oil

Boom,” The Wall Street Journal, March 6, 2013.

40. Diezani Alison-Madueke, “The Future of Nigeria’s Petro-

leum Industry,” ministerial keynote address by Diezani Alison-

Madueke, Honorable Minister, Ministry of Petroleum Resources

at the Nigeria Economist’s Group Summit, Abuja, Nigeria, May

24, 2013.

41. Ibid., emphasis added.

42. Matthew Philips, “Falling U.S. Oil Imports Will Reshape

the World Crude Market,” Bloomberg Businessweek, January

16, 2013.

43. John Daly, “Texas 2014 Oil Output to Surpass Some OPEC

Members,” Oilprice.com, December 14, 2013, available from oilprice.com/Energy/Crude-Oil/Texas-2014-Oil-Output-to-Surpass-

Some-OPEC-Members.html.

44. Soares de Oliveira, Oil and Politics in the Gulf of Guinea, p. 5.

45. Ricardo Soares de Oliveira, “Business Success, Angola-

style: Postcolonial Politics and the Rise of Sonangol,” African

Affairs, Vol. 45, Issue 4, 2007, p. 613.

46. Peter Schraeder, “Forget the Rhetoric and Boost the Geo-

politics: Emerging Trends in the Bush Administration’s Policy To-

wards Africa, 2001,” African Affairs, Vol. 100, No. 400, 2001.

47. Steven Mufson, “As China, U.S. Vie for More Oil, Diplo-

matic Friction May Follow,” The Washington Post, April 15, 2006.

48. Soares de Oliveira, Oil and Politics in the Gulf of Guinea.

49. Ibid.

95

CHAPTER 5

THE IMPACT OF POLITICAL INSTABILITY

ON THE DEVELOPMENT OF

LATIN AMERICAN ENERGY SUPPLIES

David R. Mares

Latin America was once a major energy provider

to world markets and has the potential to become a

major exporter of oil and natural gas in the next de-

cade. Latin American energy resources could help di-

versify world energy markets away from the turbulent

Middle East, contribute to world economic growth by

stabilizing and lowering international energy prices,

and help mitigate climate change by supporting the

turn to cleaner natural gas. The impact of Latin Amer-

ican energy supplies on the United States is indirect—

via global energy markets and Western Hemisphere

geopolitics.

But translating that international potential into re-

ality requires significant investments in exploration

and production, the development of efficient and ef-

fective energy markets at home, and a significantly

improved distribution of rents associated with hydro-

carbon production within Latin American societies,

not just between Latin American governments and

public and private international oil and gas compa-

nies. These are significant challenges, and of the four

major Latin American energy producers (Venezuela,

Mexico, Argentina, and Brazil), only in Brazil do they

appear likely to be successfully addressed, although

even there the challenges are significant. Fortunately,

on the other hand, guerrilla insurgencies and criminal

organizations are not a major challenge for develop-

ing Latin American supply.

97

This chapter has four parts. The first presents the

region’s potential in conventional and unconventional

oil and gas, and renewables. The second examines the

competing demands between energy security at home

and exports. The third assesses the four major chal-

lenges (investment, human capital, environment, and

property rights [spanning contracts, communities,

and cultures]) that must be addressed if developing

those resources is to be successful. The fourth turns

to the source of political instability around the oil and

gas sector—the distribution of the wealth generated

by these resources. The conclusion notes that these

challenges are not unique to Latin America, but that

the region historically has had a difficult time success-

fully addressing them because of its underdeveloped

but participatory political systems.

POTENTIAL

Latin America’s share of total world petroleum

proven reserves was 12.9 percent in 2000 and in-

creased to 20.4 percent in 20111—of course, these fig-

ures cannot reflect the impact of technological change

that could add significant new reserves in the region,

and particularly as shale oil potential is explored.2 Re-

cent discussions3 of world energy markets enthusiasti-

cally have forecast a shift in the geopolitical center of

energy back to the Western Hemisphere as early as the

2020s, and Latin America is an important part of that

forecast. The hemisphere had dominated oil markets

up to World War II after which cheap, plentiful, and

high quality Middle Eastern oil became the epicenter

of the geopolitics of energy. Though oil (including tar

sands in Canada, heavy oil in Venezuela, pre-salt oil

in Brazil, and shale oil in the United States) continues

98

to lead the discussion, the share of natural gas in total

energy is projected to equal that of oil by 2030, at 28

percent.4

Venezuela’s proven oil reserves of 296.5 billion

barrels places it first in the world (17.9 percent of

global reserves), and it has been among the top three

exporters to the United States for decades. Mexico was

among the top producers in the world and is the sec-

ond most important source of U.S. oil imports. Brazil’s

recent discoveries in the pre-salt layer allowed it to

significantly increase production, from 4.8 billion bar-

rels in 1991 to 15.1 billion barrels in 2011, surpassing

Mexico’s 11.4 billion barrels that same year.5 But in or-

der to meet the projections of increasing production,

Latin American energy policies will need to provide

incentives for exploration and production. For in-

stance, Mexico’s proven reserves fell from 50.9 billion

barrels in 1991 to 18.8 in 2001 and 11.4 in 2011, but

it has a significant unexplored potential in the Gulf

of Mexico. BP puts Venezuela’s 2011 production 12

percent below that of 2001, and Venezuela’s proven

reserves indicate that there are no geological reasons

for the decline. (See Tables 5-1 and 5-2.)

99

Share of

1991

2001

2010

2011

Global

Total

Mexico

50.9

18.8

11.7

11.4

0.7%

Argentina

1.7

2.9

2.5

2.5

0.2%

Brazil

4.8

8.5

14.2

15.1

0.9%

Colombia

1.9

1.8

1.9

2.0

0.1%

Ecuador

1.5

4.6

6.2

6.2

0.4%

Peru

0.8

1.0

1.2

1.2

0.1%

Venezuela

62.6

77.7

296.5 296.5

17.9%

Source: BP Statistical Review, June 2012, p. 6.

Table 5-1. Proven Reserves

(Billion barrels at end of Year).

Share of

2004 2005 2006 2007 2008 2009 2010 2011

Global

Total

Mexico

3,830 3,766 3,689 3,479 3,165 2,978 2,958 2,938

3.6%

Argentina

754

725

716

699

682

676

652

607

0.8%

Brazil

1,542 1,716 1,809 1,833 1,899 2,029 2,137 2,193

2.9%

Colombia

551

554

559

561

616

685

801

930

1.2%

Ecuador

535

541

545

520

514

495

495

509

0.7%

Peru

94

111

116

114

120

145

157

153

0.2%

Venezuela

2,817 3,003 2,940 2,960 2,985 2,914 2,775 2,720

3.5%

Total

12.9%

Source: BP Statistical Review, June 2012, p. 8.

Table 5-2. Production

(Thousand barrels daily, 2011).

100

Latin America also has potential to become an im-

portant producer and supplier to the world market of

natural gas. Latin America appears to be rich in shale

gas, according to a study commissioned by the U.S.

Energy Information Administration (EIA).6 The dark

colors in Figure 5-1 are preliminary indicators of the

location of major basins with shale gas potential that

were examined in the study. One can see the unique

situation of the Western Hemisphere (though most of

the basins in the world have not yet been explored),

and within Latin America of Argentina, Mexico,

Brazil, and Paraguay.

Figure 5-1. Location Indicators of Major Basins

with Shale Gas Potential.

Table 5-3 presents a deeper cut into Latin Amer-

ica’s natural gas potential with figures on proven

conventional natural gas reserves and the estimated

technically recoverable7 shale gas, organized by major

countries. Venezuela, with 179 trillion cubic feet (tcf)

of proven conventional gas, ranks second in the West-

ern Hemisphere to the United States and eighth in the

world. No other Latin American country holds major

101

reserves of conventional gas. When we turn to shale

gas, the picture is dramatically different. Column four

in the Table shows Argentina with 774-tcf of technical-

ly recoverable gas from its shale deposits, far outdis-

tancing Venezuela and second among potential shale

gas reserves in the EIA study (now that U.S. reserves

have been re-evaluated significantly downward).

Mexico also dwarfs Venezuela and ranks third in the

EIA study, with 681-tcf of technically recoverable gas.

Brazil also has the potential to become a major player

in gas in addition to its likely weight in oil markets

once the pre-salt fields begin producing; its technically

recoverable shale gas reserves are estimated at 226-tcf.

Paraguay, with minimal internal demand, could also

produce significant quantities of shale gas and gener-

ate significant exports. In short, Latin America has the

potential to be floating in a vast supply of natural gas.

Country

Conventional

Potential Shale

Technically

Recoverable Shale

Mexico

12

2,366

681

Colombia

4

78

19

Venezuela

178.9

42

11

Bolivia

26.5

192

48

Brazil

12.9

906

226

Paraguay

--

249

62

Uruguay

--

83

21

Argentina

13.4

2,732

774

Chile

3.5

287

64

Source: Jeremy Martin and Vanessa Orco, “Shale Gas en America

Latina” (Shale Gas in Latin America”), available from energiaade-

bate.com/shale-gas-en-america-latina/.

Table 5-3. Natural Gas Potential in Latin America

(tcf, 2011).

102

Until significant exploration is undertaken, how-

ever, it remains unknown how much shale gas exists

and is potentially recoverable under current economic

and technological conditions. Even in the United

States, where shale gas exploration and production

have been underway for several years, estimates of

reserves have been revised downward dramatically.

In 2012, the EIA’s estimate of shale gas reserves was

cut from 827-tcf to 482-tcf, and in the prolific Marcel-

lus Shale basin, the EIA revised the estimated reserves

downward by 66 percent, from 410-tcf to 141-tcf.8

The pace of exploration in Latin America, as well

as subsequent production and development of the

infrastructure needed to deliver the gas to the mar-

ket, will be influenced significantly by each country’s

politics and its public policies on the domestic energy

market, the environment, and indigenous rights. The

experience of the past decade suggests that the condi-

tions needed for the shale gas revolution to take off in

Latin America will vary by country.

Latin America is a major user of hydropower, with

65 percent of all electricity in the region generated in

this fashion. The largest users in the region are Bra-

zil, Chile, and Colombia, but in terms of percentage

of total domestic electricity production, Brazil is the

second largest producer in the world (83.8 percent)

and Venezuela is third (72.8 percent). Brazil has the

world’s second largest hydropower complex in the

world (Itaipú on the border with Paraguay) and is

building the third largest (Bello Monte in the Ama-

zon), as well as a number of others. But large dams

have been stymied in Chile and are the targets of en-

vironmentalists and indigenous peoples throughout

the region, so their future contribution to power gen-

eration is uncertain. A significant failure here will put

103

more pressure on domestic consumption of natural

gas for electricity.

Biofuels is the other major renewable—including

traditional sources such as firewood and grass and

modern industrialized forms including sugarcane and

other soures of ethanol—and accounted for 62 percent

of renewable energy in 2006.9 The former are not envi-

ronmentally favorable or sustainable, and their use is

declining, though still important. Industrialized bio-

fuels have grown in importance but generate contro-

versy regarding both their contribution to greenhouse

gasses and their impact on food production.

The region is well-endowed with sustainable and

more environmentally favorable renewable energy

sources. Solar, wind, and wave potential exist, but

technology for commercial use lags for the latter and

government policies to promote all of them are in

their infancy. Some countries provide credit subsidies

and reserve grid capacity for solar or wind sources.

For 2011, total primary energy consumption in Cen-

tral and South America was 642.5 million tons of oil

(MTOE) equivalent, but only 11.3-MTOE was generat-

ed by renewables excluding hydropower. Mexico was

the worst performer, with 173.7-MTOE total primary

energy consumed, and only 1.8-MTOE of that from

non-hydro renewables.10

THE CHALLENGE OF ENERGY SECURITY

Both producing and consuming countries are con-

cerned with “energy security.” The basic goal of en-

ergy security is to minimize the adjustment costs that

a reduction in volume or an increase in price has on

the national economy. Those adjustment costs are not

simply economic, but also include social dislocations

104

as jobs, consumption, and investment are impacted,

as well as the political fallout that follows a major

social and economic adjustment process. The means

of achieving energy security also vary. Market forces

such as price incentives lead previously unexploited

resources to become productive or consumers to re-

duce demand. In contrast, government regulation of

national energy markets include subsidies to stimu-

late domestic supplies, price controls to reduce infla-

tionary pressures, and trade restrictions to increase

domestic supply. In either case, the pursuit of energy

security implies a subordination of other policy goals

to mitigating the impact of rising prices for energy.

The United States has export controls on oil and gas

to ensure domestic supplies at politically acceptable

prices. Even in today’s era of low natural gas prices,

gas export permits are only available to countries with

which the United States has Free Trade Agreements.

Given the underdeveloped natural gas markets in Lat-

in American producing countries except Argentina, it

seems reasonable to expect domestic political pressure

to limit exports (as we have seen in both Peru and

Bolivia) until the domestic market is developed and

supplied at politically acceptable prices. The concept

of “politically acceptable prices” is addressed below,

but it is worth noting here that energy security also

requires efficient use of oil and gas, as well as an effec-

tive national production strategy. But in many Latin

American countries, corruption, political payoffs, and

investment restrictions make it difficult to develop an

effective and efficient national power grid or gas pipe-

line system, thus undermining energy security. Where

state-owned enterprises (SOEs) have privileged roles

in the energy sector, the governments that starve their

SOEs of financial and human capital (such as Venezu-

105

ela and Mexico) contribute to the problem of develop-

ing efficient and effective domestic energy markets.

THE CHALLENGES FOR PRODUCTION

Production requires financial capital, human re-

sources, and “property rights,” which essentially

means the stability of contracts between the govern-

ment and both investors and local communities. In-

vestors focus on the impact of the government on the

market conditions expected when the contracts were

negotiated and the legal sanctity of signed contracts.

Communities look to their rights as citizens and of-

ten as legally protected distinct indigenous cultures to

expect that the government will adhere to its social

contract with them in a democratic context. This sec-

tion will address investors, and the next will turn to

the politics of the social contract.

Empirically, one can divide Latin America’s eight

major oil and gas producers into two groups. The

group that allows market incentives to play an impor-

tant role includes Peru, Colombia, and Brazil. Another

group consisting of Argentina, Bolivia, Ecuador, and

Venezuela has an extremely heavy government hand

in the sector but does not exclude the private sector

or other countries’ SOEs. Mexico has just reformed its

constitution to break its SOEs’ monopolies, but until

legislation is implemented, it is difficult to know into

which camp it will fall.

Peru has the most market-oriented energy sector. It

has auctioned off a significant portion of its oil and gas

blocks, permits up to 100 percent private operation in

a block, and has an independent regulator that does

not favor the national oil company (NOC), Petroperu.

As a result, output of Peruvian oil and gas liquids

106

reached a 24-year high in November 2012. Although

there has been concern about supplying the domestic

market, the government’s response has been to pro-

mote more exploration and production rather than

limit exports. Indigenous groups in the Amazon and

environmentalists oppose these plans, but the Peruvi-

an courts have found no legal reason to stop explora-

tion in the largest producing area, Camisea. Colombia

has a minor resource base but investor-friendly poli-

cies. Oil production in 2013 was expected to increase

16.5 percent to 1.1 million barrels per day (bpd), con-

tinuing a steady rise since 2007.

Gas reserves in Venezuela and Argentina remain

underdeveloped because of the lack of incentives for

investors and the significant deterioration of Ven-

ezuela’s NOC, PDVSA, resulting from government

policies that redistribute earnings away from sectoral

needs and into opaque expenditures and social pro-

grams. But both economies are reeling—Venezuela’s

currency was devalued by 32 percent in 2013, and

inflation that year reached 50 percent in Venezuela

and 27 percent in Argentina—so expectations are that

the governments will need to find ways to increase

production. Ecuador has moderate reserves, but its

decision to turn all oil contracts into service contracts

(which decouples investors from the oil produced)

provides a significant disincentive to investors.

Mexico’s 2008 energy reform created service con-

tracts to permit private and foreign firms to enhance

Pemex’s oil recovery in older wells. But there were

few takers, and they did not make a significant im-

pact on reserves or production levels. The constitu-

tional reforms at the end of 2013 have not yet been

implemented, so we cannot know if the government

will adopt policies to encourage the investment and

107

human capital necessary to explore and develop its re-

sources. Brazil is encountering significant difficulty at-

tracting investors to its pre-salt fields under the terms

that require its NOC Petrobras to operate the field and

require an important level of local content throughout

the operations. In 2013, the government auctioned the

first field but only received one bid. Petrobras, mean-

while, is selling international assets and bringing hu-

man capital back to Brazil in an insufficient attempt to

help bring these vast resources into production.

THE CHALLENGE OF SPREADING THE

WEALTH AT HOME

Latin American governments face the same chal-

lenges as governments everywhere natural resources

are abundant: There are many priorities, and trade-

offs need to be made among them. The specific way in

which these trade-offs are addressed in Latin America

is affected by three factors: subsoil resources belong

to the nation (this is true for all countries in the world

except the United States and some parts of Canada);

governments historically have had a poor record of

living up to their contract obligations to investors

(thus most investors in the region want more profit up

front); and the region has the most unequal distribu-

tion of wealth in the world (thus citizens are skeptical

about government contracts with investors).

The commodity boom of the past decade in gen-

eral, not just in hydrocarbons, has benefited govern-

ments financially. Some nationalists believe this is the

best means to judge whether a country benefits from

its natural resource wealth. But the major issue for

natural resource production when one is dealing with

democracies is the distribution of wealth within the

108

country. Unfortunately, corruption and inefficiencies

in government services abound, leading to a waste of

resources. Citizens who do not receive benefits from

natural resource production either believe investors

are getting too high a share of the profits or rebel at the

ballot box or in the streets against their government;

either way, investors will find the country to be a risky

site for business and either demand higher returns or

go elsewhere.

To use its hydrocarbon resources effectively for

national development, therefore, Latin America needs

to bring its political systems into the 21st century. De-

mocracy in the developing world today means much

more than the right to vote; it requires transparency

in government behavior, accountability of elected of-

ficials, and citizen empowerment. Only by developing

these elements of their democracies can governments

convince citizens that the social contract is operative, a

contract in which citizens support government policy

and governments use their legal power and the na-

tion’s wealth for the benefit of national (not elite- or

sector-specific) development.

CONCLUSION: THE POLITICS OF ENERGY

Hydrocarbon energy resources will remain im-

portant sources of energy for decades to come, and

the role of cleaner-burning natural gas will increase

as coal and oil succumb to environmental pressures

for lower emissions. This developing energy scenario

can be extremely favorable for Latin America and the

world. The region is potentially rich in unconvention-

al oil and shale gas resources, as well as renewables.

These resources can fuel domestic growth because of

their abundance and their ability to have a significant

109

impact on poverty by boosting power generation and

employment and by making national economies more

cost competitive. The world will also benefit as the

significance of oil resources in the volatile Middle East

declines leading to a restructuring of the geopolitics

of energy. (U.S. and Canadian production of conven-

tional and nonconventional oil and gas also contribute

substantially to this shift.)

The development of Latin America’s potential,

however, faces significant challenges, and it is not

clear that the region will address them successfully.

To varying degrees, the politics of hydrocarbon pro-

duction is problematic in the major Latin American

countries. Though Latin America is quite diverse, and

some smaller producers (Colombia and Peru) have

policies that encourage exploration and production,

conditions in the big four countries (Venezuela, Bra-

zil, Argentina, and Mexico) raise significant obstacles

to achieving the levels of production that would usher

in this new regional and global context. The essential

challenge for Latin America to meet its hydrocarbon

potential is crafting stable domestic political coalitions

that see the benefit of providing incentives for foreign

investors to bring the requisite capital, skill, and tech-

nology to the region. Historically, Latin American de-

mocracies do not have a stellar record in providing

such incentives when they perceive that they have an

asset that others desire. Unless resource nationalism

can be made compatible with providing incentives

for significant foreign participation, it may be far too

early to start trumpeting a bonanza for Latin America

and a shift in the geopolitical center of energy toward

the Western Hemisphere.

110

ENDNOTES - CHAPTER 5

1. BP Statistical Reviews, 2000 and 2012, pp. 4 and 6,

respectively.

2. Leonardo Maugeri, “Oil: Never Cry Wolf—Why the Petro-

leum Age is Far from Over,” Science, May 2004.

3. Cf., Daniel Yergin, “Oil’s New World Order,” The Washing-

ton Post, October 28, 2011; Amy Meyers Jaffe, “The Americas, Not the Middle East, Will Be the World Capital of Energy,” Foreign

Policy, September-October 2011.

4. BP Energy Outlook 2030, London, United Kingdom, Janu-

ary 2011, p. 18, available from www.bp.com/liveassets/bp_internet/

globalbp/globalbp_uk_english/reports_and_publications/statistical_en-ergy_review_2011/STAGING/local_assets/pdf/2030_energy_outlook_

booklet.pdf.

5. BP Statistical Review of World Energy, June 2012, p. 6.

6. Vello Kuuskraa, et al., World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States, Arlington, VA: Advanced Resources International, Inc. April 2011.

7. According to the Energy Information Agency (EIA),

The estimates of technically recoverable shale gas resources for

the 32 countries outside of the United States represents a mod-

erately conservative ‘risked’ resource for the basins reviewed.

These estimates are uncertain given the relatively sparse data

that currently exist and the approach the consultant has em-

ployed would likely result in a higher estimate once better

information is available. The methodology is outlined below

and described in more detail within the attached report, and

is not directly comparable to more detailed resource assess-

ments that result in a probabilistic range of the technically

recoverable resource.

World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States, April 5, 2011, available from www.eia.gov/

analysis/studies/worldshalegas/.

111

8. AEO2012 Early Release Overview, Washington, DC: US En-

ergy Information Administration, available from www.eia.gov/

forecasts/aeo/er/pdf/0383er(2012).pdf.

9. Energy Balances of Non-OECD Countries, Paris, France: In-

ternational Energy Agency, 2006, Online Data cited by Federico

Barraga Salazar, “Renewable Energy Policies in Latin America:

The Role of the State,” MA Thesis, The Diplomatic Academy of

Vienna, University of Vienna, June 2008.

10. BP Statistical Review of World Energy June 2012, p. 41,

available from bp.com/statisticalreview.

112

CHAPTER 6

THE SHALE REVOLUTION AND THE

NEW GEOPOLITICS OF ENERGY

Robert A. Manning

Still in its early stages, the shale revolution has

already had a profound multidimensional impact,

redrawing the U.S. and global energy landscape and

beginning to reshape global geopolitics. Shale holds

promise to enhance substantially U.S. global economic

competitiveness and U.S. foreign policy leverage. But

it is worth recalling just how recent a phenomenon it

is. It should also be kept in mind the continued ques-

tions about environmental impact that may limit or

even undermine the future of shale gas and tight oil.

In 2008, the shale boom was in its infancy. Most

forecasters failed to anticipate its stunning rise. Still

more remarkable is the fact that, despite its impact

already, only a fraction of its potential in both the

United States and worldwide, has been realized. Yet,

after the information technology revolution over the

last 2 decades, shale may be the most transformational

technological change so far in the 21st century. This

chapter argues that shale gas and tight oil have:

• begun to radically shift global energy markets

and redraw the global energy map, 40 years af-

ter the Arab oil embargo;

• dramatically shifted the outlook for U.S. energy

security and our national strategic calculus;

•

altered global geopolitics, as the Western

Hemisphere—especially Canada, the United

States, Mexico, and Brazil—has the potential to

become the new center of gravity of oil and gas

113

production, as David Mares points out in part

in Chapter 5 of this volume;

• turned the debate on the future of oil on its

head—the debate about whether we have

reached “peak oil” is over, and now the issue is

whether we are approaching “peak demand”;

• strengthened the U.S. economy, positioning the

United States for a resurgence as industry is re-

locating to take advantage of cheap gas prices;

and,

• potentially repositioned the United States vis-

à-vis the Middle East and Asia.

For many years, the notion that we have reached

“peak oil”—that recoverable oil reserves had reached

their maximum point and would begin a terminal

decline—was a central issue of debate among geolo-

gists and oil analysts. But developments over the past

couple of decades have exposed a major flaw in the

argument: Geologists failed to factor in technology.

This has been demonstrable as the technology for

fracking and also for ever deeper offshore-sea drill-

ing has become widely deployed. Indeed, the world

supply of proven oil reserves has increased from 683

billion barrels in 1980 to 1.69 trillion barrels by 2012,

largely the result of technology innovation in deep sea

oil drilling and the shale revolution.1 This despite a 16

million barrel per day (m/bd) increase in production

over that period to the current 89-m/bd level.

Now, some analysts contend that we are reaching

“peak demand,” possibly by the end of this decade,

as a Citigroup analysis has argued.2 Projections for

future global oil demand by 2030 range from 92-m/

bd to 110-m/bd or higher. In the developed countries

of the Organization for Economic Cooperation and

114

Development (OECD), particularly the United States

and Europe, demand has been declining, a trend that

is projected to continue. More stringent Corporate Av-

erage Fuel Economy (CAFE) standards, mandated to

increase to 54.5 miles per gallon by 2025 and the grow-

ing electrification of transport (for example, plug-in

hybrid and electric vehicles) lead to some projections

of a 4-6-m/bd decline in U.S. oil consumption by 2030.

Such a scenario could impact prices as well as carbon

dioxide (CO2) emissions and the U.S. trade deficit.

One important caveat must be pointed out: There

are continuing legitimate environmental concerns—

methane flaring, methane leaks, and water pollu-

tion—that could undermine the shale revolution, and

severely limit its further development. This has con-

strained the development of major shale gas deposits

in New York, Colorado, and California, all of which

have yet to approve fracking. Such concerns have also

restrained numerous countries around the globe from

developing their respective shale reserves. However,

recent studies suggest that environmental concerns

are manageable if best practices are widely adopted

as norms by energy companies.3 One problem is a con-

flicting welter of differing state regulatory policies,

which continue to evolve.

Moreover, in the long term, the principal energy

challenge remains the environmental imperative

to move decisively toward a more resilient post-pe-

troleum-centered energy system. Gas should still be

viewed as a critical bridging technology—though the

bridge appears longer than previously thought. Low-

cost U.S. gas is not only triggering a shift from coal to

gas for electricity production, it is also changing the

economics of nuclear power as well as that of solar

and wind energy. All appear less cost-competitive

115

in the near-term, even as costs for solar and wind

continue to fall.

This long-term challenge is made more poignant

when one considers the demand growth for energy

services as the global middle class grows to as many

as 4 billion of the 8 billion people estimated to be on

this planet by 2030. The International Energy Agency

(IEA) projects global energy demand to increase by

35-46 percent from 2010-35.4 The overwhelming ma-

jority of that increased demand will come from out-

side OECD countries, principally from China, India,

and the rest of developing Asia and Latin America.

Whether the emerging middle class in China, India,

and Southeast Asia are driving electric cars and get-

ting electricity from sources other than coal will, to a

large degree, determine the extent of global climate

change.

THE SHALE REVOLUTION: U.S. ENERGY

RENAISSANCE

The combination of computer-aided horizontal

drilling and hydraulic fracturing (known as “frack-

ing”) technology has boosted enormously both U.S.

production and reserves of tight oil and gas. The

United States has already become the world’s largest

producer of oil and gas hydrocarbons, is projected to

surpass Saudi Arabia as the world’s top oil produc-

er by 2017, and is likely to become a net exporter by

2030.5 Oil production is now 7.32-m/bd, the highest

since 1994 and is projected to reach 8-m/bd in 2014.6

Natural gas production is 72 billion cubic feet per day

(b/cfd), 40 percent of which is from shale.

116

There are currently ample natural gas reserves

to meet current U.S. demand for the next century.

While the shale gas phenomenon, like the internet,

is now taken for granted, the rapidity of its increase,

since roughly 2008, is a useful reminder of both how

protracted is the process of commercializing technol-

ogy and how swiftly innovation can transform reality

when it achieves a sort of commercial critical mass.

Though shale gas and tight oil production ramped

up from roughly 2007-08, the technology had existed

for nearly a century. It was the combined public/

private partnership of government-funded research

and development (R&D) from the 1970s and creative

wildcatting entrepreneurs aided by tax credits and oil

prices in the $85-$100 per barrel range that developed

commercially viable hydraulic fracturing, directional

drilling, and other gas recovery technologies that

scaled up the technology and took off.7

Moreover, estimates of recoverable shale gas and

shale/tight oil are continuing to be revised upwards:

The EIA has increased its estimate of recoverable shale

gas reserves from 6.2 trillion cubic feet (tcf) in 2011 to

7.3-tcf in 2013, and revised its estimate of recoverable

tight oil by 1,000 percent, from 32 to 345 billion bar-

rels.8 It is also important to note that shale technol-

ogy is not static: It continues to improve, with recent

developments cutting required amounts of water in

half, improving knowledge of shale composition, and

increasing the production of shale gas and tight oil.9

Some analysts suggest that the amount of recoverable

reserves may be substantially larger by an order of

magnitude.

The net effect of the shale revolution is that the cen-

ter of gravity of world energy markets is shifting from

the Persian Gulf to the Western Hemisphere (specifi-

117

cally, the United States, Canada, Mexico, and Brazil).

This shift has already reduced U.S. dependency on oil

imports from 60 percent in 2005 to 39 percent in 2013,

with prospects for U.S. self-sufficiency on the hori-

zon.10 The bulk of U.S. imports are from the Western

Hemisphere, only about 10 percent from the Persian

Gulf. Moreover, North America—the United States,

Canada, and Mexico—is an increasingly integrated

market. Mexico’s recent landmark energy reform leg-

islation is likely to increase dramatically its offshore

oil and gas potential as well as its shale gas reserves if

effectively implemented.11

Indeed, by the end of the decade, investments in

the Gulf of Mexico, off the coasts of West and East Af-

rica, in Central Asia, and in the waters of East Asia

will likely see non-OPEC (Organization of Petroleum

Exporting Countries) production attain new levels

and dilute OPEC’s ability to dictate prices. Despite

moves toward self-sufficiency, it is a mistake, and

certainly an overstatement, to talk of U.S. energy in-

dependence. It is and will remain a global market for

oil, with disruption anywhere impacting prices every-

where. But steadily declining U.S. oil and gas imports

will enhance U.S. freedom of action. Another issue

this trend raises is the future of the Strategic Petro-

leum Reserve (SPR). If the United States is less reliant

on imports and less vulnerable to disruptions, the role

of the SPR may change: It may become useful as a tool

to set a ceiling for prices. In any case, the role of the

SPR merits a serious policy review.

In fact, if OPEC has leverage in the future, it is

likely to be mainly with Asian consumers. The long-

term trend is for a growing Middle East-Asia-Pacific

nexus with some 70 percent of Middle East exports

going to Asian consumers, principally China, India,

118

and Southeast Asia, and some 75 percent of Asian oil

imports coming from the Middle East. One potential

concern is that America’s Asian allies and partners

may be pressured in regard to their support for U.S.

Middle East policies.

STRATEGIC IMPLICATIONS OF SHALE GAS

The strategic implications of the shale revolu-

tion begin at home and strengthen the case for U.S.

resilience, bolstering the U.S. economy and the envi-

ronment in important ways. The falling price of U.S.

natural gas to roughly $4-b/cf has led to a shift from

coal-fired to gas-fired power plants. Prior to the shale

boom, coal accounted for 50 percent of U.S. electricity,

but plants have increasingly shifted to gas, with coal

dropping to roughly 39 percent of U.S. electricity pro-

duction and gas growing to 32 percent.

This has added a new dimension to U.S. economic

competitiveness and to U.S. comprehensive national

power, reinforcing the U.S. capacity for global lead-

ership. Energy-intensive industries such as chemical,

petrochemical, cement, and steel have resulted in a

new “in-sourcing” trend. American firms are relocat-

ing industry back into the United States, and many Eu-

ropean firms are also opening new plants in the United

States, catalyzing a revival of U.S. industry (in Europe

average gas prices are about $10-b/cf, and in Japan

$16-b/cf).12 For example, BASF, the German chemical

firm, has earmarked $1 billion a year to 2017 to invest

in factories in the United States.13 A Citibank analysis

estimated that increased gas and oil production could

add 2-3 percent to U.S. gross domestic product (GDP)

by 2020.14

119

An additional and unexpected benefit has been

that of a drop in U.S. greenhouse gas emissions. The

shift from coal to shale combined with the economic

slowdown has led to a 12 percent drop in emissions

since 2007, a 20-year low, achieving roughly 70 per-

cent of Kyoto treaty goals, even though Washington

has not ratified the treaty.15 The possibility of convert-

ing transport, particularly trucking and car fleets to

natural gas from oil, something already beginning to

occur, could further accelerate this trend.

GEOPOLITICAL RISKS AND BENEFITS

Globally, the shale revolution is beginning to put

the United States in a position to challenge OPEC’s

control of oil markets. As mentioned earlier, the SPR

could become an instrument of leverage on global oil

prices. More generally, the shale revolution is enhanc-

ing Washington’s freedom of action and policy choic-

es in the world. The shale revolution already has had

a broad foreign policy impact. It is doubtful whether

it would have been possible to impose oil export sanc-

tions on Iran without oil prices skyrocketing and de-

stabilizing a fragile global economy absent the surge

in U.S. oil production. More broadly, oil production

disruptions from the Arab Awakening would almost

certainly have driven prices significantly higher, were

it not for the boom in U.S. oil production.

Importantly, the shale gas boom has also freed

up liquefied natural gas (LNG) that the United States

was projected to import from markets in Europe and

Asia. This has increased gas options for the European

Union (EU), reducing Russian leverage and Moscow’s

ability to use energy as an instrument of foreign pol-

icy. It has also provided Asian LNG importers with

increased available supply.

120

But the most intriguing potential benefits likely

to unfold over the coming decade will flow from the

real possibility of the United States becoming a ma-

jor LNG exporter and building global LNG markets.

At present, LNG only accounts for about 16 percent

of internationally traded gas. The majority of gas ex-

ports is via pipelines, most under fixed, long-term

contracts. There are 22 LNG terminals in the United

States, which were built to receive imports and are in

the process of being re-engineered to convert to LNG

exports. The U.S. Department of Energy (DOE) has

approved licenses for four of them to date, with some

15 pending. This prospect of LNG exports is now be-

ing debated in Congress. For some 20 countries with

which the United States has a free trade agreement

(FTA), such as Korea, LNG exports are necessarily in-

cluded. Other key trading partners, like Japan, must

get DOE approval. Given the magnitude of shale gas

reserves, concerns about the impact of exports on the

domestic price of gas are overblown. A 2012 study

done for DOE concluded that gas exports would have

only a modest impact on prices.16

Energy exports would strongly reinforce the U.S.

position in Asia. Presently, Japan, South Korea, and

Taiwan are major gas importers, and China is also

becoming a major importer. Strategically, gas exports

would bolster the U.S. “rebalance” in Asia. Energy se-

curity in Asia is widely viewed as a priority strategic

issue. The U.S. ability to bolster the energy security of

Asian allies and partners would reinforce perceptions

of U.S. reliability and presence as an Asia-Pacific pow-

er. Since Australia, a close U.S. treaty ally, is another

major source of Asian gas exports, the combination of

U.S. and Australian gas as underpinning East Asian

energy security would be an important new strategic

121

reality. Moreover, China currently imports roughly

30 percent of its natural gas, and demand projections

suggest China may import 50 percent of its gas by

2025. U.S. gas exports to China would add a dimen-

sion of economic and strategic interdependence to the

Sino-American relationship.

The diffusion of fracking technology globally to ar-

eas such as China, Australia, Central Europe, and Lat-

in America over the coming decade may further trans-

form the energy landscape and significantly reduce

C02 emissions. China, for example, depends on coal

for roughly 70 percent of its electricity. This has been

the case for the past quarter-century despite massive

investments in renewable energy technologies. Yet,

China holds larger recoverable shale gas reserves than

the United States, though difficult geology and water

resource factors may limit its development. Further

suggesting the notion of North and South America as

the new center of gravity of hydrocarbons, Argentina,

Mexico, and Brazil, all possess substantial recoverable

shale gas resources, and Venezuela possesses large-

scale tar sands.17

For Europe, LNG exports and (over the longer

term) shale gas production could reduce its depen-

dence on Russia. Poland and Ukraine have significant

shale deposits and have signed exploration contracts

with major U.S. firms to develop them. If Ukraine

can produce shale gas, it could free Kiev from Rus-

sian pressure and facilitate its integration with the EU.

However, the potential of Ukrainian or Polish shale

gas production will likely not be clear before the end

of this decade. Beyond Central Europe, the United

Kingdom (UK) is the only European nation that has

thus far made a policy choice to develop shale gas.

122

An intriguing question is how the shale revolu-

tion will impact Russia’s future. Moscow’s ability to

use its energy resources as an instrument of coercive

diplomacy will almost certainly begin to decline. The

larger question is in regard to Russia itself. With an

economy still heavily dependent on oil and gas re-

sources—30 percent of its GDP, 70 percent of its ex-

ports, and 50 percent of its growth since 2000—shale

gas could impact Russia in different ways. Already,

though oil is in the $100-brl range, Russian economists

forecast only 1.2 percent growth over the next several

years. One scenario is shale leading to increasing pres-

sure on Moscow to reform, diversify and modernize

its economy to become less dependent on energy re-

sources. Another possibility is that Russia, which has

substantial shale resources of its own, becomes more

of a petro-state, developing its shale resources (if it

can create incentives for U.S. firms with state of the art

technology to invest) and using its large conventional

gas resources to move away from “pipeline politics”

toward building its own LNG markets. Russian firms

are building two large LNG facilities in the Russian

Far East aimed at exporting to Asian markets.

GEOPOLITICAL CHALLENGES

For major gas exporters Qatar and Iran as well as

Russia, U.S. shale gas may also complicate or diminish

prospects for further development. In the case of Iran,

the U.S. shale revolution will complicate its efforts to

develop its large gas reserves.18 To date, close U.S.-

Saudi relations and a sense of antagonism has pre-

cluded cooperation between Russia and OPEC oil and

gas producers. A weakening of the U.S.-Saudi bond

resulting from increased U.S. energy self-sufficiency

123

and divergent interests in the on-going Sunni-Shia

conflict in the Islamic world could create a different

set of circumstances. However, Russian support for

Bashar al-Assad in Syria puts Moscow on the other

side, as the Saudis and Gulf Cooperation Council

(GCC) states have backed the Syrian opposition, sug-

gesting a Russian-GCC energy coalition remains a

distant prospect.

Coming at a historic juncture when the U.S. public

is weary after a decade of, at best, inconclusive wars

in Iraq and Afghanistan and as the Barack Obama

administration has refocused U.S. strategic priorities

on the Asia-Pacific, the shale revolution may presage

a rethinking of the U.S. role in the Middle East. The

U.S. role as security guarantor in the Persian Gulf and

guardian of the vital shipping lanes from the Strait of

Hormuz to the Straits of Malacca has shaped the re-

gion’s strategic landscape for more than half a century.

This U.S. role has meant other major oil consum-

ers have been largely free-riding on the U.S. provided

public good of stability and sea lane security. This

is especially true of China, which is in the midst of

building a blue water maritime capacity. One key

question is whether the combination of redefined U.S.

interests, the reality of a growing Middle East-Asian

energy nexus, and new or enhanced naval capabili-

ties of China, India, Japan, the Republic of Korea, and

other actors results in burden-sharing in regard to the

security of sealanes. A key policy question is wheth-

er the United States and China can cooperate in the

Middle East or whether a more assertive China will

become a new source of tension. Another factor that

could reduce the U.S. role in the Middle East is a po-

tential rapprochement with Iran, although that still re-

mains problematic. In any case, China is likely to play

124

a larger role in the Middle East, as it already has in

Central Asia.

One new phenomenon in this regard is the unprec-

edented maritime cooperation in the Horn of Africa

among all the countries mentioned earlier in response

to the threat of piracy. In peacetime, piracy and terror-

ism are the principal threats to the security of energy

flows in the Gulf. Whether the antipiracy cooperation

in the Horn of Africa is an anomaly or a precedent

remains to be seen. But more maritime security coop-

eration is something to be seriously explored.

CONCLUSION

There are clearly more questions than answers in

regard to the strategic consequences of the shale revo-

lution. While much attention has been focused on the

economic and environmental impact of the revolu-

tion, comparatively little thought has been given to

the national security consequences. The U.S. energy

situation has been transformed with ramifications rip-

pling across the American economy. The shale revolu-

tion opens up a range of new choices for U.S. foreign

policy. Certainly, the growing move toward self-suf-

ficiency gives the U.S. more flexibility in its foreign

policy choices.

The new energy realities the United States has cre-

ated could lead American foreign policy in different

directions. One path is more isolationist, pulling back

from current global responsibilities and focusing in-

ward on American renewal. But the increase in U.S.

national power could also lead to a more intervention-

ist international posture. The current national mood,

as reflected in a number of opinion polls is, if not isola-

tionist, certainly one for more cautious engagement.19

125

It is difficult not to conclude that support for greater

U.S. involvement in a Middle East enmeshed in what

will be generations-long turmoil in its quest for mo-

dernity is greatly diminished. This may be reflected in

the Obama administration’s cautious approach to the

unfolding events in Egypt, its reticence to intervene in

Syria, and its approach toward Iraq’s civil strife.

It will likely lead to a process of situation-specific

trial and error as Washington adapts to the new re-

alities shaped by the shale revolution. It will require

discerning where newfound American leverage can

usefully be applied, and where the limits of U.S. in-

fluence lie. But over the coming decade, as indicated

earlier, the shale revolution is likely to impact U.S.

relations with Russia and also to reinforce the U.S.

“rebalance” in the Asia-Pacific. Over time, the shale

revolution may well be viewed as an inflection point

for where the “post-Cold War” era became something

else, one that could well be marked by an American

resurgence.

ENDNOTES - CHAPTER 6

1. BP Statistical Review of World Energy, 2013.

2. See the Economist, August 3, 2013, the case for peak de-

mand; see also Edward L. Morse, “Energy Outlook 2013,” New

York: Citigroup, November 2012.

3. See for example, “The Future of Gas,” interdisciplin-

ary study, Cambridge, MA: MIT, March 2011, available from

mitei.mit.edu/publications/reports-studies/future-natural-gas. See also Grant McDermott, “Hydraulic Fracking and Water Pollution,” The Energy Collective, April 30, 2013. On earthquakes, see Sharon Begley, “Study Raises New Concern about Earthquakes

and Fracking Fluids,” Reuters, July 12, 2013, available from www.

reuters.com/article/2013/07/12/us-science-fracking-earthquakes-idUS-BRE96A0TZ20130712.

126

4. International Energy Agency, World Energy Outlook 2012.

5. Elisabeth Rosenthal, “US to World’s Top Oil Producer in 5

Years, Report Says,” The New York Times, November 12, 2012.

6. Ibid.

7. For a detailed analysis of the U.S. Government’s role in the

shale revolution, see Michael Shellenberger et al., Where the Shale Gas Revolution Came From, Oakland, CA: Breakthrough Institute, May 2012.

8. Energy Information Administration, Technically Recoverable

Shale Oil and Shale Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States, Washington, DC: U.S. Department of Energy, 2013.

9. See “New Fracking Technology to Bring Huge Supplies

of Oil and Gas to the Market,” Oilprice.com, January 16, 2012, available from oilprice.com/Energy/Natural-Gas/New-Fracking-Tech

nology-to-Bring-Huge-Supplies-of-Oil-and-Gas-to-the-Market.html.

10. See Energy Information Administration, “Energy in Brief,”

Washington, DC: Department of Energy, May 10, 2013, available

from www.eia.gov/energy_in_brief/article/foreign_oil_dependence.cfm.

11. See David L Goldwyn, “Mexico Rising: Comprehen-

sive Energy Reform at Last?” Atlantic Council, Washington, DC, December 2013.

12. See for example, Steven Mufson, “The New Boom: Shale

Gas Fueling an American Industrial Revival,” The Washington

Post, November 14, 2012.

13. William Boston, “BASF Steps Up Investment in US,” The

Wall Street Journal, December 17, 2013.

14. See Edward L. Morse, “Energy 2020: the U.S., the New

Middle East?” GPS powerpoint presentation, New York,

Citibank, March 20, 2013.

127

15. See Andrea Thompson, “US Gas Emissions Drop 3.8% in

2012,” Yahoo News, October 22, 2013. See also Julie M. Carey, “Surprise Side Effect of Shale Gas Boom: A Plunge in US Greenhouse

Gas Emissions,” Forbes online, December 7, 2012. See also the 2013

EIA report, available from www.eia.gov/environment/emissions/

carbon/.

16. See the DOE website for report conclusions, available

from www.eia.gov/analysis/requests/fe/.

17. See Energy Information Administration assessment, avail-

able from www.eia.gov/todayinenergy/detail.cfm?id=11611.

18. For a discussion of geoeconomic and geopolitical shifts

driven by the shale boom, see Amy Myers Jaffe and Ed Morse,

“The End of OPEC ,” Foreign Policy, October 16, 2013.

19. See for example, a recent Pew/Council on Foreign Rela-

tions poll, available from www.people-press.org/2013/12/03/public-sees-u-s-power-declining-as-support-for-global-engagement-slips/.

128

CHAPTER 7

THE SECURITY RISKS AND REWARDS

OF RENEWABLE ENERGIES:

IMPLICATIONS FOR THE UNITED STATES

Karen Smith Stegen

INTRODUCTION

During the days following the first U.S. bombing

raids on Iraq in 1991, protestors gathered outside the

Standard Oil Building in downtown Chicago, IL—

known as the Amoco Building—and chanted, “Hell

no, we won’t go, we won’t fight for Amoco!”1 Con-

sidering that Amoco was not operating in either Iraq

or Kuwait in 1991, one might conclude that the pro-

testors were misinformed. However, the protest was

not against Amoco per se, but against the notion of

the United States fighting a war to protect U.S. oil in-

terests. This raison d’être for the war was specified in

Vice President Dick Cheney’s statements to the Senate

Armed Services Committee on September 11, 1990,

when he expressed concern about the deleterious ef-

fect of the Iraq invasion of Kuwait on energy security,

specifically, the risk of Saddam Hussein dictating “the

future of worldwide energy policy” and having “a

stranglehold on our economy.”2

As exemplified by Cheney’s statements—and by

the many other military and political activities the

United States pursues to protect global energy mar-

kets—the reliance of the United States and other im-

porting countries on foreign sources of energy renders

the importers vulnerable to economic disruption and

shapes their foreign policy aims and options.3 How

129

can this link be decoupled? Some observers might ad-

vocate greater hydrocarbon independence; but, as this

chapter argues, a more lasting and efficacious solution

is offered by replacing hydrocarbon sources of energy

with renewable energies.

Beyond outlining the security benefits of renew-

able energies, this chapter also delineates some of the

associated security risks—under the guiding principle

that policymakers and security specialists can only

prepare for and ameliorate the potential risks of re-

newable energies if they are aware of them. Special

emphasis will be placed on the question of rare earth

elements (REEs), owing to their criticality for many

renewable energy technologies. The chapter begins

by detailing the security risks posed by heavy depen-

dence on foreign sources of energy and how renew-

able energies militate against those risks. In the next

sections, the potential risks of various forms of renew-

able energies are presented, organized according to

how they are deployed, either in the transportation

or power generation sector. The chapter concludes by

reviewing recent U.S. Government activities vis-à-vis

REEs and proposes several policy initiatives.

THE SECURITY RISKS OF OIL AND GAS

DEPENDENCE AND THE REWARDS OF

RENEWABLE ENERGIES

Reliance on foreign sources of energy indirectly

and directly affects geopolitical configurations of pow-

er and the foreign policy options of individual states.

First, oil revenues empower producer countries and

facilitate their ability to adopt policies inimical to con-

sumer state interests. For example, energy revenues

facilitated Iran’s ability to pursue its nuclear program

130

and have bolstered the Russian government’s increas-

ingly authoritarian tilt. Second, oil dependence weak-

ens strategic partnerships and collaborative efforts as

states may be reluctant to challenge producing states

upon which they are heavily reliant. Third, protecting

energy interests may result in a disproportional build-

up of military capabilities. As observed in a Council

on Foreign Relations (CFR) independent task force

report chaired by John Deutsch, James R. Schlesinger,

and David G. Victor, “U.S. strategic interests in reli-

able oil supplies from the Persian Gulf are not pro-

portional with the percent of oil consumption that is

imported by the United States from that region.”4 The

implications are that either defense spending could be

reduced, or the military could use those funds else-

where; in other words, protecting sea lanes and other

forms of military engagement on behalf of energy may

carry opportunity costs. Fourth, energy dependence

may make states vulnerable to “energy weapon” ma-

nipulation by producer states.5 Fifth, oil revenues may

have a destabilizing effect on producer countries, by

encouraging rent-seeking and thereby undermining

good governance in fragile states, such as Nigeria.6

In addition to constraining and shaping foreign

policy, oil dependence also increases “stranglehold on

our economy” risks. Moreover, such risks arise not only

from the degree or quantity of U.S. oil dependence,

but from our concern about the global importance

of oil. In 1990, for example, oil from Iraq comprised

only 3 percent of U.S. consumption, and imports from

Kuwait even less, only 0.47 percent.7 However, U.S.

energy interests are not just about protecting direct

U.S. supplies, but also about stabilizing global energy

supplies and reducing the risk of oil volatility. For this

reason, the United States has encouraged and sup-

131

ported the flow of global oil, even when that oil is not

exported to the United States. Examples include U.S.

support for Russia or the Caspian states as oil produc-

ers. Economists have found that oil volatility is more

economically damaging than high oil prices because

price volatility creates uncertainty,8 which in turn in-

vites a vicious circle dynamic: Investors curtail invest-

ment, consumers reduce consumption, and economic

signals point downwards. Because oil prices are set on

the international market, U.S. oil prices are not immune

to the deleterious effects of global events and price

fluctuations.

In sum, the more dependent a state is on oil, the

more it exposes itself to economic and political con-

straints. One of the main security rewards of renew-

able energies is decoupling this link, which would give

the United States greater leeway in its international

affairs. Other potential rewards, for the United States

and other countries, include diversifying the energy

mix, easing water shortage tensions through desali-

nation (for example, with concentrated solar power

technologies), and increasing regional independence

(which strengthens prospects for democratization).9

The security rewards of renewable energies are mani-

fold—for the United States as well as for other coun-

tries around the world—and far outweigh the risks.

However, risks do exist. Policymakers should be both

aware of these risks and proactive about addressing

them. The risks vary according to the technologies

and the energy sector under discussion.

Transportation Risks.

For the transportation sector, there are three pri-

mary methods for deploying renewable energies: (1)

replacing gasoline or diesel with biofuels; and replac-

132

ing combustion motors with electric motors, powered

either by (2) hydrogen fuel cells or (3) rechargeable

batteries. Each of these presents its own unique port-

folio of risks.

Biofuels.

For domestically sourced biofuels, the disruption

risks include those of any other crops (for example,

detrimental weather and reliance on water, arable

land, fertilizers, and pesticides). In a number of coun-

tries, protests have emerged against biofuel planta-

tions. Biofuel producers must also compete for crops

against other industries, such as food, clothing, or

chemicals. Second generation biofuels are made either

from nonfood plants or are the residual byproducts of

crops cultivated primarily for nonenergy uses (such

as food, energy, and chemicals). Thus, an additional

risk for second generation biofuels is reliance on suf-

ficient demand for the primary crop. Adding biofuels

to a country’s energy mix reduces economic exposure

to oil volatility, but, unlike most renewable energy

sources, biofuels are potentially subject to price varia-

tions: Unlike the wind, crops are not free.

Imported biofuels are vulnerable to the same

problems as for domestically sourced biofuels, but

pose additional risks—namely, risks either the same

or similar to those posed by imported hydrocarbons.

In short, what are the reliability considerations associ-

ated with the supplier? For long-term contracts, the

supplier must manage its crops/forests in such a way

that it can reliably deliver biofuels per pre-established

delivery schedules. Additional factors include: Where

is the supplier located? Is it an area prone to weather

events? How long are the delivery routes? How stable

is the supplier’s political regime?10

133

Fuel Cells.

For years, fuel-cell vehicles have been off-and-on

promoted as the solution for sustainable transpor-

tation, but each hype has ended in disappointment.

However, several manufacturers recently displayed

fuel-cell cars at international automobile shows, and

Toyota projects it will have volume production of a

fuel-cell car by the end of 2015. Other manufactur-

ers, such as General Motors, have also announced

the near-term introduction of fuel-cell vehicles. What

makes this recent round of fuel-cell excitement more

plausible is that recent technological advancements

have led to reduced vehicle cost, greater efficiency,

and increased driving range.11 Even if fuel cell vehicles

become more competitive, other challenges remain,

such as resolving hydrogen storage issues and devel-

oping the infrastructure for supplying hydrogen (for

example, in the United States only 10 supply stations

are currently available). Once resolved, however, nei-

ther storage nor infrastructure would pose a risk in

terms of energy security. The primary “risk” confront-

ing low-temperature fuel cells—which are used in

vehicles—stems from the need for a catalyst. At the

moment, platinum is the catalyst of choice; but, it is

also one of the rarest metals on earth and correspond-

ingly expensive.

In 2012, platinum was mined in South Africa

(128,000 kilograms [kg]), Russia (26,000-kg), Zimba-

bwe (11,500-kg), Canada (6,500-kg) and the United

States (3,700-kg) with other countries producing the

remaining 3,160-kg. Global sales of platinum in 2012

were 250,000-kg, with the United States consuming

167,000-kg (37 percent more than 2011), 40 percent

of which went to the automobile industry, primarily

134

for diesel catalytic converters. The difference between

the mining and consumption figures is the amount

of platinum gained through recycling, which ac-

counts for a significant portion of supply each year. In

2012, for example, 35,100-kg were recovered globally

from catalytic converters.12 Global demand for plati-

num outstripped supply in 2012 and 2013, and 2014

is expected to be another deficit year.13 Meanwhile,

supplies from two of the three top producers, South

Africa and Zimbabwe, are considered potentially un-

stable because of socio-economic and political risks.14

The bright side for the United States is that, according

to an expert on platinum at the U.S. Geological Sur-

vey (USGS), future prospects for domestic mining are

promising.15

The United States currently has two operating plat-

inum mines, the Stillwater and East Boulder mines,

both located in Montana and owned by the same com-

pany, Stillwater Mining Co. (SMC). SMC is planning

three production increases, scheduled to take effect by

2015, 2016, and 2017. Moreover, the Duluth Complex

in Minnesota, home to the Twin Metals project and

owned by Duluth Metals Limited (DML), has poten-

tial to become a major source of platinum; the most

recent estimates of Twin Metals’ platinum-group met-

als (PGMs) deposits indicate they are among the larg-

est outside of South Africa, with indicated resources

of platinum at 174,000-kg. In January 2014, DML re-

ported that it hopes to achieve a pre-feasibility study

and technical report by mid-year 2014, but provided

no dates for when commercial mining might begin.16

According to a top hydrogen scientist, three op-

tions exist for reducing the risk of potential platinum

shortages or disruptions: (1) using less platinum

for the same purpose; (2) finding substitutes; or (3)

135

switching to high temperature fuel cells.17 At the mo-

ment, progress has primarily been made with regard

to the first two risk reductions. In recent years, for ex-

ample, the quantity of PGMs used in fuel cells has de-

creased dramatically.18 Researchers are also working

on developing substitutes. Platinum is considered an

ideal catalyst because it can mediate any kind of reac-

tion. Because a hydrogen-powered fuel cell has only

one reaction, however, an all-purpose catalyst is un-

necessary and research is being conducted on possible

replacements. High temperature fuel cells might do

away with the need for a catalyst at all, but these are

currently only used for stationary applications. If they

were to be used for transportation, then concerns re-

garding safety and public acceptance of vehicles run-

ning with motor temperatures of 800 Celsius/1,470

Fahrenheit would have to be addressed.19

Electric Batteries.

The third primary method is replacing combustion

motors with electric motors. The main risks associated

with electric vehicles are the same as those for many

of the renewable energies used for electric power gen-

eration and will be covered in the next section.

Power Generation and Battery-Electric

Transportation.

The primary supply risk associated with many re-

newable energy technologies, regardless of whether

they are used for power generation, heating, lighting,

or transportation, is reliance on materials that either

currently or potentially face availability challenges.20

To establish which materials are “critical” or “near

136

critical” for renewable energy technologies, the U.S.

Department of Energy (DOE) assesses two dimen-

sions: (1) the importance of a material to renewable

energy, and (2) the supply risks.21 The most recent as-

sessment was conducted in late-2011 and, for both the

short- (0-5 years) and medium-term (5-15 years) peri-

ods, DOE’s analysis indicated that the same five mate-

rials are critical: dysprosium, used in permanent mag-

nets for wind turbines and in electric vehicle motors;

neodymium, used in permanent magnets for wind

turbines and electric vehicle motors, but also used in

electric vehicle batteries; and europium, yttrium, and

terbium, which are used in lighting applications. All

five of these critical materials are considered REEs,

which are sometimes also referred to as rare earth

metals (REMs).

Rare Earths and Supply Risks.

REEs comprise 17 metals, the 15 chemical elements

with the atomic numbers 57 through 71, known as the

lanthanoides, plus two additional metals with similar

properties that are often found with the lanthanoi-

des. Rare earths are actually not “rare,” but are found

throughout the earth’s crust. However, a deposit must

contain a sufficiently high density of rare earths for

extraction to be economically feasible. The term “rare”

refers to the difficulties in isolating the individual ele-

ments; rare earths are not found in pure form, but are

chemically bound to the host rock. Separating the rare

earths into their individual streams is a costly, com-

plex, and difficult set of processes—and potentially

environmentally damaging. Indeed, many rare earths

and the radioactive elements thorium and uranium

are found together, and most rare earth mining, pro-

cessing, and separating produces radioactive waste.

137

Rare earths are categorized as light or heavy; the

light REEs (LREEs) are more easily processed and

separated, and the most critical of these for renewable

energy applications are neodymium and europium.

The heavy RREs (HREEs) are more difficult to sepa-

rate and are less common, found in only about one

to two percent of all known deposits.22 Of the heavy

rare earths, the most critical for renewable energies

are dysprosium, yttrium and terbium. One of the

primary uses of rare earths is in permanent magnets.

Rare earth magnets can withstand high temperatures,

are resistant to demagnetization, and are lighter and

smaller than other types of magnets, which facilitates

miniaturization and reduces costs by reducing the

amount of other components.23 In addition to perma-

nent magnets, rare earths are used in many other ap-

plications in the “aerospace, automotive, electronics,

medical and military” sectors.24

Many countries have abundant reserves of rare

earths, including the United States; however, as indi-

cated in Table 7-1, only a handful of countries have

mining operations. Even fewer countries have pro-

cessing and/or separating capacities, and only China

has a complete “mine-to-magnet” supply chain.

138

2011 Production 2012 Production

Reserves

United States

--

7,000

13,000,000

Australia

2,200

4,000

1,600,000

Brazil

250

300

36,000

China

105,000

95,000

55,000,000

India

2,800

2,800

3,100,000

Malaysia

280

350

30,000

Other Countries

NA

NA

41,000,000

World Total (rounded)

111,000

110,000

110,000,000

Table 7-1. World Mine Production and Reserves,

in metric tons of rare-earth oxide content,

USGS, Mineral Commodity Summaries,

January 2013.

Each rare earth deposit is unique, and the extrac-

tion process must be “custom built” to match the

specific mineralogical characteristics of the deposit.

Developing rare earths mines is thus technologically

challenging, time consuming, and costly. It takes

roughly 12 to 13 years to develop an underground

mine from the initial exploration to actual produc-

tion.25 As Table 7-1 indicates, China produces most of

the world’s rare earths; even more important, howev-

er, is China’s dominance in processing and separation,

in particular for the more valuable heavy rare earths.

There is reportedly only one full spectrum processing

facility outside of China that could isolate dysprosi-

um, Rhodia’s La Rochelle plant in France (Rhodia is a

subsidiary of the Solvay Group). The Rhodia plant is

supposedly being reactivated and, if it was operation-

al, could process 9,000 tons per annum (t/a) of rare

earths, some of which would be heavy rare earths. But

139

9,000-t/a of rare earths would be insufficient to sup-

ply global demand.26

Mining, mineral processing (beneficiation and

leaching), and separating are only part of the supply

chain for permanent magnets. After the rare earths are

separated, the next steps include refining the elements

into metals; making the metals into alloys; and using

the alloys to produce permanent magnets.27 While

companies conducting these activities exist outside of

China, they rely on China for supplies. Thus, a com-

plete, China-independent supply chain does not ex-

ist—and will take many years to create.

To achieve “safety and certainty in oil,” Winston

Churchill famously said, the answer lies “in variety

and variety alone.”28 This axiom still holds true; not

just for oil (and gas), but for any critical commodity,

such as rare earths. Thus, the rare earth supply prob-

lem is not just that China’s reliability has come into

question in recent years, but that the United States –

and other countries – are so reliant on a sole supplier.

China as Supplier.

In 1984, the Mountain Pass rare earth mine in Cali-

fornia was the world’s largest REE mine and produced

60 percent of global output. However, as China’s pro-

duction increased, prices fell, and the Mountain Pass

mine eventually closed. Global dominance in the rare

earth market shifted to China, which now produces

more than 95 percent of the world’s rare earths29 and

80 percent of its permanent magnets.30 For many

years, China was considered a reliable REE supplier,

but more recently problems have emerged, ranging

from severe catastrophic damage from lax regulation

to rogue production and smuggling to soaring domes-

140

tic demand. For these reasons, among others, in 2009

the Chinese government began reducing its export

quotas, causing a worldwide shockwave and skyrock-

eting prices. Prices have since stabilized, but have not

returned to pre-crisis levels.

The issues enumerated previously could be inter-

preted as justifiable reasons for China to exert control

over its exports. However, Chinese officials have also

admitted that the export quotas were implemented

in order to attract end-use industries to relocate their

manufacturing to China to bypass the export quotas.

In 2010, the global rare earth industry was estimated

to be worth $1.3 billion, but the industries using rare

earths were valued at $4.8 trillion.31

In September 2010, concerns about China’s reli-

ability as a supplier were exacerbated when China

halted rare earth deliveries to Japan to exert political

pressure in a dispute.32 The reactions of importing

countries to the quota reductions (and the political

manipulation) fall into two categories: (1) filing World

Trade Organization (WTO) complaints—in 2011, the

United States, Japan, and the European Union (EU)

filed a complaint—and (2) pursuing alternatives, in-

cluding joint activities. In the fall of 2010, the United

States, the EU, and Japan held a series of joint “Tri-

lateral Conference on Critical Materials” workshops

to discuss how to overcome potential shortages.33 The

conclusions were that non-China mining would be the

quickest fix, and that research should be undertaken

to find substitutes for REEs.

141

COPING WITH REE SHORTAGES AND SUPPLY

CHAIN CONSTRAINTS

At least six approaches exist for addressing rare

earth and supply chain constraints: (1) new mining

outside of China; (2) capturing REEs from factory resi-

due and consumer end-user products (recycling); (3)

finding substitutes; (4) reducing the REE content; (5)

stockpiling; and (6) establishing supply chains inde-

pendent of China. As the DOE’s analysis indicates,

five REEs are considered “critical” for the next 15

years. Due to space constraints, only the material con-

sidered the most critical, dysprosium, will be used in

specific examples.

New Mining.

In the few years since China’s reliability became

questionable, a global search for new sources of rare

earths has been underway. Mining companies have

sprung up and announcements of new finds, rang-

ing from deposits in the seabed of Japan34 to deposits

located 150-km north of Pyongyang, North Korea,35

seem to occur on a quarterly or even monthly basis. As

rare earth mining has become a “hot” investment top-

ic, some of these announcements should be taken with

a grain of salt. Scientists have been aware of Japan’s

seabed deposits, for example, for decades. Moreover,

discovery of deposits does not mean that the ore con-

tains sufficient quality or quantity to be considered

economically feasible. Even if the ore is promising, ap-

proximately 12 to 13 years is required to construct an

underground mine. Open pit mines require less time,

but pose greater environmental challenges.36

142

Mining Overseas and Offshore.

The quickest way to produce rare earths is to re-

open closed mines. Thus, just as the Mountain Pass

mine was re-opened, the Mount Weld mine in Austra-

lia was re-opened. However, its output was stockpiled

for several years, until 2013,37 when its sister process-

ing and separating facility in Malaysia received a tem-

porary processing license. The plant in Malaysia has

encountered numerous problems, ranging from pub-

lic opposition to the radioactive waste38 to the death of

an engineer in a work accident.

In terms of potential future sources, exploration

and development assessments are underway in nu-

merous countries, including Australia, Brazil, Canada,

China, Finland, Greenland, India, Kyrgyzstan, Mada-

gascar, Malawi, Mozambique, South Africa, Sweden,

Tanzania, Turkey, and Vietnam.39 Another potential

source of rare earths is seabed mining,40 but this is de-

cades away from becoming a supply source.

Mining in the United States.

The United States has several sources, existing

and potential, of both light and heavy rare earths.

At the moment, the Mountain Pass mine in Califor-

nia (owned by Molycorp) is the only mine producing

REEs. Molycorp re-opened the mine in 2012 and has

built a new separation plant.41 Mountain Pass has a

current capacity of 15,000-million tons/annum (mt/a)

with a target capacity of around 20,000-mt/a. Accord-

ing to a rare earths expert based in Washington, DC,

although Mountain Pass reports its current capacity

as 15,000 tons, no one external to the company knows

their actual production; but, by interpreting the data

143

Molycorp does release, the expert estimated that in

2013 Molycorp’s actual production was approximate-

ly 5,000-mt.42

Molycorp’s main production will be four of the

light rare earths—cerium, lanthanum, praseodymi-

um, and neodymium—in addition to smaller amounts

of samarium (LREE), gadolinium (LREE), europium

(LREE), yttrium (a non-REE associated with the REEs),

terbium (HREE), and dysprosium (HREE).43 A 2013

report from the Congressional Research Service also

indicates Molycorp will produce erbium (HREE).44

Although the Mountain Pass facility has the ca-

pacity to separate LREEs, it cannot separate HREEs,

which Molycorp has been presumably stockpiling un-

til it attains separation capacity.45 Molycorp, however,

recently purchased a company with HREE separation

technologies, but as the company’s CEO concedes, its

HREE production occurs in China. The CEO further

elaborated that the company would like to open a

processing plant outside of China, potentially in the

United States: “The location(s) for this processing will

naturally follow growth in manufacturing demand,

but my hope is that it can be located in the U.S.”46 Mo-

lycorp has announced it will eventually produce 7-t/a

of dysprosium, which is exactly the amount needed

to supply the U.S. military’s demand for permanent

magnets (the U.S. military needs 160-t/a of perma-

nent magnets, which requires 7-t/a of dysprosium).47

The implication is that other sources of demand for

dysprosium, such as clean energy applications, cannot

be supplied from Mountain Pass.

In addition to Mountain Pass, there are about 100

other sites in the United States in which rare earth

mineralization has been found. However, the pres-

ence of REEs is far removed from a commercially

144

feasible deposit. For example, in the late-2000s, the

Great Western Minerals Group conducted extensive

exploration and drilling at the Deep Sands site in Utah

and concluded that the deposit was not economically

feasible.48 One should approach the seemingly high

number of “100” with caution and be wary of claims

that sites are “promising.” As Great Western Miner-

als Group found, deeper analysis may lead to disap-

pointment. With these caveats in mind, we turn to the

handful of projects in the United States that geologists

and investors consider among the most promising:

Bokan Mountain, Alaska; Pea Ridge, Missouri; and

Bear Lodge, Wyoming.

The Bokan Mountain site is rich in rare earths in-

cluding heavy rare earths and dysprosium. Construc-

tion of the mine is expected to start in 2014, and pro-

duction is projected to begin in 2017. Bokan Mountain

could produce 120-t/a of rare earths; however, the

dysprosium is found in hard rocks, from which there

has been no production anywhere in the world up to

now.49 A second potential source of rare earths, in-

cluding dysprosium, is from the closed Pea Ridge iron

mine. The third location is Bear Lodge, which prelimi-

nary investigation indicates could have equivalent or

greater resources than Mountain Pass.50 In late-2013,

new drilling found areas with high concentrations of

heavy rare earths, including dysprosium.51 Other sites

in the United States that are under exploration include

the Powderhorn, Iron Hill and Wet Mountains prop-

erties in Colorado; the Thor REE Project Area in Ne-

vada; and the Elk Creek Project in Nebraska.

As Molycorp has stated, a drop in global prices—

caused, for example, by “predatory pricing behavior”

by “competitors, primarily various Chinese produc-

ers”—could “materially adversely affect our profit-

145

ability.”52 Presumably, lower global prices would

be disastrous for the completion or survival of the

Mountain Pass mine, and this would hold most likely

true for the other rare earth mines, both in the United

States and abroad. Could China cause a dramatic drop

in prices? Some consider it unlikely as China’s own

prices are rising due to higher environmental, social,

and labor costs as well as higher internal consump-

tion.53 Whereas China used to consume 60 percent of

its REE production, it now consumes more than 80

percent.54 However, according to Dr. Michael Bau, a

geologist specializing in rare earths, China has exten-

sive stockpiles and could flood the market for a few

years before it risked jeopardizing domestic demand.

If prices dropped it would, as Molycorp warned, ren-

der non-Chinese mining uncompetitive and thereby

encourage shifting of more of the $4.8 trillion rare

earth-related manufacturing to China.55

In sum, concerns about Chinese supply of rare

earths have stimulated exploration of other resources

around the world and the re-opening of a few mines.

However, optimism should be tempered, for several

reasons. First, the time it takes from initial exploration

of a site to the opening of an underground mine is 12 to

13 years.56 Second, even if the mines in Australia and

the United States begin extracting dysprosium in the

near-term, the DOE estimates that their output would

only increase supply by 10 percent, whereas demand

is expected to rise substantially beyond 10 percent.57

Third, where are rare earths from the new mines sup-

posed to go? Processing is still a problem, as is finding

metal and alloy makers:

Therefore, even the HREE producers coming on

stream in the next 2 years will have little choice but to

146

sell their products to Chinese or Japanese rare-earth

metal and alloy producers. There is no other location

for them to go.58

Thus, in addition to new mining, other approaches

must be pursued to address potential shortages.

Recycling.

In addition to finding new geological sources of

REEs, recycling is the other method for generating

additional supplies of raw materials. As the platinum

discussion indicated, recycling valuable materials

can contribute significantly to compensating for min-

ing shortfalls. However, recycling rare earths is far

more complicated than recycling platinum, as rare

earths are, “deeply embedded into other products,”

which means that, “physical extraction often yields

a small return on substantial effort.”59 Moreover, as

rare earths are chemically alike, a similar separation

challenge emerges for recycling as for the initial post-

mining processing.

Although there is not yet a “standard method of re-

cycling rare earths,”60 research is producing incremen-

tal improvements that may lead to efficient recovery

processes. In 2012, for example, DOE’s Ames Labora-

tory announced it had found a new way to isolate rare

earths from magnets. But where can vast quantities of

reclaimable rare earths be found? The best candidates

are the large permanent magnets used in wind tur-

bines; for example, a GE turbine uses 200-kg of neo-

dymium and 40-kg of dysprosium per megawatt.61

A major drawback is that this scale of rare earths is

used in the more recent generations of wind turbines,

which will not be ready for recycling for many years.

147

In sum, despite DOE’s success and breakthroughs in

other laboratories, recycling is not yet considered a

commercially viable alternative for substantially in-

creasing rare earth stocks.

Stockpiling.

Although it is not a method for producing new

supplies of rare earths, stockpiling has gained traction

as a method for at least ensuring supplies in emergen-

cies. In recent years, the U.S. Department of Defense

(DoD) as well as the EU have begun stockpiling. As

it is only useful for short-term shortages and cannot

provide a continuous source of raw materials, stock-

piling should not be considered a favored approach

for addressing longer-term shortages.

Substitution.

The search for substitutes and alternatives is rela-

tively new; for decades the focus in magnet research

was on improving the efficiency of permanent magnets

rather than developing new magnets. Also, rare earth

magnets offer certain ideal characteristics and compa-

rable substitutes have not been found. As DOE reports,

“Magnet research has not achieved a commercially

significant breakthrough innovation in high-energy

permanent magnets since the advent of neodymium-

iron-boron [permanent magnets] in the early 1980s.”

For example, terbium is, “the only known substitute,”

for dysprosium in permanent magnets, but it is, “even

rarer and historically more expensive.”62

148

Reducing Content.

To address shortages, one of the favored options

is developing alternative technologies that reduce the

content of critical materials or eliminate the need for

them altogether. Manufacturers are seeking alterna-

tive technologies, but so are government entities, such

as DOE and Japan’s Ministry of International Trade

and Industry.63As opposed to substitution research,

new developments in reduction and elimination are

announced on what seems like a relatively frequent

basis. For example, Toyota has announced the devel-

opment of a motor for hybrid cars that does not require

dysprosium or neodymium and General Motors has

announced it has reduced the quantity of dysprosium

needed for the Chevy Volt.64 Mitsubishi Electric Corp

has also announced the creation of a dysprosium-free

electric vehicle motor, but “concedes that the new

motor is less efficient than conventional ones during

acceleration but performs comparably after reaching

what it calls stable speed.”65

In sum, despite the research that has been invested

into finding substitutes or reducing or eliminating

critical materials, none of these options offer a com-

mercially viable alternative that will be available on a

mass scale in the foreseeable future. As one industry

report indicates:

While every effort should be expended to find new

and better materials and machine designs, this is a

lengthy process. Invention defies mandated timelines.

The process of discovery, scale-up and commercializa-

tion can easily consume 5 to 10 years.66

Considering the need for rare earths in many of the

advanced technologies upon which the U.S. economy

149

depends and the lack of readily available alternatives,

supply diversification will require exploiting non-

Chinese deposits of rare earths—whether from the

United States or other reliable suppliers. However,

as has been argued, developing new sources of rare

earths is only part of the solution. In addition to non-

Chinese rare earths, non-Chinese permanent magnet

supply chains must also be developed.

Supply Chain Development.

At the moment, the United States lacks the ability to

produce sufficient permanent magnets to supply do-

mestic consumption, a situation which the U.S. Mag-

netic Materials Association (USMMA) has described

as a “silent crisis.” But this was not true 2 decades ago.

Until the 1960s, permanent magnets were a combina-

tion of iron, cobalt, and nickel. In the 1960s, U.S. re-

searchers developed the first rare earth magnets. At

its apex in the late-1980s and early-1990s, 6,000 people

were employed in the U.S. permanent magnet indus-

try; that number is now 600. Of the $8 billion global

magnet industry, the United States has a tiny portion67

and a handful of companies. In mid-2013, the USM-

MA released a comprehensive, but not exhaustive, list

of the key players in the global rare earth supply chain

from rare earth oxides, representing mining, to mag-

nets. For the “oxides” category, only one U.S. compa-

ny appears—Molycorp. Under the category “Metals,

Alloys and Powders,” two U.S. firms are listed—Great

Western Technologies Inc./Less Common Metals and

Molycorp’s recent acquisition, Magnetic Material &

Alloys. Under magnet manufacturers, only four U.S.

firms are indicated—for samarium cobalt magnets,

Electron Energy Corporation and Arnold Magnetic

150

Technologies; and for NdFeB magnets, Hitachi Metals

and Thomas and Skinner.68

Several recent reports and commentaries, by the

USMMA and other concerned experts as well as by

U.S. Government agencies, have drawn attention to

the fact that even if rare earths are mined in the United

States, China still plays an integral role in the produc-

tion of permanent magnets used here. The crisis may

no longer be as silent, but it is still a crisis. The ques-

tions are: Should the United States develop its own

supply chain? Should this supply chain be completely

domestic/North American, or can non-North Ameri-

can companies be involved? What should be the role

of government versus the role of the private sector in

developing a strong U.S. supply chain?

China does not have vertically integrated “mine-

to-magnet” companies, but it has had decades in

which numerous companies comprising the different

facets of the supply chain have become established.

How can the United States compete with such a head

start? Some western companies, such as Molycorp and

Great Western Minerals, are acquiring companies in

an attempt to create vertical integration. Although the

wisdom of such an approach has been questioned,69

this might be one of the few ways of quickly creating

non-Chinese supply chains.

U.S. Government Activities.

In addition to filing WTO complaints and conven-

ing the Trilateral Conference, the U.S. Government

has slowly begun to turn its attention to the risk of rare

earth shortages. The Department of the Interior and

DoD intensified their engagement; the White House

Office of Science and Technology Policy established

151

an Interagency Working Group on Critical and Strate-

gic Minerals Supply Chains; and DOE established the

Critical Materials Institute (CMI), which is DOE’s fifth

Energy Innovation Hub.70 The CMI is spearheaded by

the Ames Laboratory and integrates experts from aca-

demia, national laboratories, and the private sector,

and will focus on a range of topics “from mining to

separations, alloy formulations, component and sys-

tems development, and materials recycling.”71

Policymakers in the U.S. Congress have also be-

come active, and since 2009, 18 bills have been intro-

duced. However, aside from the rare earth elements

mentioned in the annual National Defense Autho-

rization Acts, which are not counted among the 18,

no other bills regarding REEs have been signed into

law. In the 113th Congress, the following bills were

introduced:

1. H.R. 761, the National Strategic and Critical

Minerals Production Act of 2013, focuses on mine

development, streamlining of permitting, and envi-

ronmental protection. Last action: referred to Senate

Committee and referred to Committee on Energy and

Natural Resources, September 19, 2013.72

2. H.R. 981, the Resource Assessment of Rare

Earths (RARE) Act of 2013. Requires the Department

of the Interior (DOI) and the U.S. Geological Survey

(USGS) to report on REE resources, future global sup-

ply, and on the REE “supply chain and associated

processes and products, including mining, process-

ing, separation, metal production, alloy production,

and manufacturing of products sold to end users.”73

On May 15, 2013, the House Subcommittee on Energy

and Mineral Resources approved the bill and sent it

back to the House.

152

3. H.R. 1063, National Strategic and Critical Miner-

als Policy Act of 2013. Similar to H.R. 981, the Secretary

of the Interior is required to conduct a Global Mineral

Assessment of current and future mineral demand,

including an analysis of the “critical minerals supply

chain and associated processes and products….” The

USGS is tasked to coordinate this assessment “with the

heads of foreign geologic surveys when possible.”74

The last action on H.R. 1063 was March 12, 2013, when

it was referred to the House Committee on Natural

Resources.

4. H.R. 1022, Securing Energy Critical Elements

and American Jobs Act of 2013. Provides support for

“new or significantly improved technologies” for the

various components of the supply chain, including (1)

separation; (2) “The preparation of rare earth materi-

als in oxide, metal, alloy, or other forms needed for

national security, economic well-being, or industrial

production purposes”; and (3) the application of REEs

in the production of magnets, batteries and other end-

use products. In March 2013, this bill was referred to

the House Subcommittee on Energy.75

5. H.R. 1960, National Defense Authorization Act

for FY2014. Focus on military access to critical mate-

rials, including rare earth substitutes. This bill was

passed by the House in June 2013 and received in the

Senate in July 2013.76

6. S. 1600, Critical Minerals Policy Act of 2013. Per-

haps more than any other piece of legislation, this Act

is directly concerned with “critical mineral manufac-

turing,” which includes many of the steps identified

elsewhere in this chapter as the manufacturing weak-

nesses of the United States, specifically, the Act refers

to “the production, processing, refining, alloying,

separation, concentration, magnetic sintering, melting

or beneficiation of critical minerals within the United

153

States.”77 In October 2013, this bill was introduced and

referred to the Committee on Energy and Natural Re-

sources.

Prior to 2013, the bills primarily dealt with pro-

moting mining and exploration and conducting as-

sessments. As the short descriptions of the 2013 bills

indicate, the focus is not just on exploration and min-

ing, but also on improving the U.S. supply chain.

This indicates that the silent crisis is indeed becoming

less silent.

CONCLUSION

The main objective of this chapter was to delin-

eate the risks and rewards of renewable energies. The

chapter began by explaining how replacing hydro-

carbon sources of energy with renewables could help

grant the United States greater freedom of movement

in international affairs. From a security perspective,

this is the prime reward of renewable energies. The

security risks arise from potential supply disruptions,

ranging from the political instability of foreign sup-

pliers (biofuels and platinum for fuel-cell vehicles) to

inclement weather (biofuels) to foreign monopolies of

critical material supply chains (rare earths and perma-

nent magnets).

Because of the importance of rare earths and rare

earth permanent magnets to a wide variety of appli-

cations, such as lighting, solar panels, wind turbines,

electric vehicle motors and batteries, an additional ob-

jective of this chapter was to clarify several misconcep-

tions that have contributed to widespread muddled

thinking by the media, policymakers, and analysts

about the “rare earth problem.”

154

First, not all rare earths are the same: Some, such

as dysprosium, are more valuable and difficult to pro-

duce, than others. Thus, when one speaks of changes

in demand for rare earths, one should be very careful

about which rare earths one is speaking. Second, de-

spite the focus on finding new deposits of rare earths,

new sources would solve neither short- nor medium-

term shortages; the time required from initial explora-

tion to production of an underground mine is roughly

12 to 13 years. Third, research into recycling, substitu-

tion, and content reduction is still in its infancy and,

thus far, no silver bullets have been found. Fourth, as

long as one country, China, possesses the only com-

plete “mine-to-magnet” supply chain—processing,

separating, metal making, alloy making, and magnet

manufacturing—rare earths mined elsewhere must be

imported into China before they can be used. Fifth, in

addition to not having a complete supply chain, the

United States lacks adequate infrastructure, intellec-

tual capital, and technological know-how.78

By misunderstanding the nature of the problem,

the extent of our reliance on one supplier and the lack

of alternatives, one risks either ignoring the problem

or chasing the wrong solutions. A January 2014 ar-

ticle in The Wall Street Journal titled “How the Great

Rare-Earth Metals Crisis Vanished”79 exemplifies the

former. The author seems to think the problem is not

a lack of diversification and reliance on one supplier,

but the potential for China to use rare earths as stra-

tegic pressure. Even more troubling, however, are the

author’s assertions that demand is declining and that

new exploration combined with new developments

in recycling and content reduction have resolved the

crisis. As this chapter demonstrated, it is important

to know which rare earths are in greater demand or

155

are more critical and to be aware of the time factor.

Exploration, recycling, and content reduction might

eventually help diversification, but when? Most likely

not within the short- (0-5 years) to medium-term (5-15

years) time periods of criticality identified by DOE.

As this chapter outlined, U.S. policymakers and

government departments have become more active

on the rare earths front—perhaps they are awakening

to the extent of U.S. vulnerability and the complexity

of the issue. However, the measures pursued seem too

meager and none of the proposed legislation, aside

from the annual National Defense Authorization Acts,

has heretofore been signed into law. Clearly, legisla-

tion supporting the U.S. rare earth industry needs

stronger advocacy. Exploration and mining needs to

be supported – but so do the industries in the rest of

the permanent magnet supply chain. Furthermore, the

country’s intellectual capital needs to be improved. In

short, the United States needs to educate and train a

new generation of scientists, engineers, and techni-

cians, who could be encouraged through measures

such as scholarships and rewards.

The U.S prosperity has, in large part, been built on

its technological prowess. Without realizing it, howev-

er, the United States has become heavily reliant on one

country, China, for materials that are critical for many

advanced technologies in a wide variety of industries.

Now that China’s supply situation has changed, the

United States must also change. In addition to miti-

gating risks, the United States could accrue additional

benefits. If the United States could offer more of the

rare earth value chain, then it might be able to attract

some of the rare earth-related manufacturing, valued

at $4.8 trillion, which China seems to be targeting by

restricting rare earth exports. If the United States does

156

not act, it loses this opportunity. Moreover, the crisis

might not just be silent, but also disastrous.

ENDNOTES - CHAPTER 7

1. From author’s archives.

2. Dick Cheney, quoted in Michael Klare, Rising Powers,

Shrinking Planet: The New Geopolitics of Energy, New York: Holt Paperbacks, 2008, pp. 180-181.

3. See John Deutsch, James R. Schlesinger and David G. Vic-

tor, “National Security Consequences of U.S. Oil Dependency,”

Independent Task Force Report 58, New York: The Council on Foreign Relations (CFR), 2006.

4. Items 1 through 3 are found in Ibid., p. 29.

5. Karen Smith Stegen, “Deconstructing the ‘Energy Weapon’:

Russia’s Threat to Europe as Case Study,” Energy Policy, Vol. 39, No. 10, October 2011, pp. 6,505-6,513.

6. Deutsch, Schlesinger and Victor, p. 28.

7. Author’s calculation based on “Crude Oil Imports into U.S.,

by Country of Origin,” The United States Census Bureau, avail-

able from www.allcountries.org/uscensus/957_crude_oil_imports_

into_u_s.html (accessed February 10, 2014).

8. Raphael Sauter and Shimon Awerbuch, Oil Price Volatil-

ity and Economic Activity: A Survey and Literature Review, IEA Research Paper, Paris, France: IEA, August 2003, p. 1.

9. For more on the political and security rewards of renew-

able energies, see Samantha Ölz, Ralph Sims, and Nicolai Kirch-

ner, Contribution of Renewables to Energy Security, IEA Information Paper, Paris, France: OECD/IEA, April 2007; REN21, Renewables

2007 Global Status Report, Paris, France: Renewable Energy Network for the 21st Century, March 2008; David Criekemans, “The

Geopolitics of Renewable Energy: Different or Similar to the

Geopolitics of Conventional Energy?” paper delivered at the ISA

Annual Convention, March 2011.

157

10. For more on biofuels, please see Ölz, Sims and Kirchner;

REN 21, “Global Status Report”; Nicolas Gerber, “Bioenergy and

Rural Development in Developing Countries: A Review of Ex-

isting Studies,” ZEF Discussion Papers on Development Policy,

Bonn, Germany: ZEF, June 2008, available from www.zef.de/filead-

min/webfiles/downloads/zef_dp/zef_dp_122.pdf (accessed January 29, 2014); Dan Van der Horst and Saskia Vermeylen, “Spatial Scale

and Social Impacts of Biofuel Production,” Biomass and Bioenergy, Vol. 35, pp. 2,435-2,444; and Alexander Mirtchev, “The World

Turned Upside Down: The Impact of Renewable Energy on

Geopolitical Complexities,” online publication at The Singapore

International Energy Week (SIEW) website, June 12, 2013, avail-

able from siew2013.uat1.globalsignin.com/world-turned-upside-down-impact-renewable-energy-geopolitical-complexities (accessed January 29, 2014).

11. Bradley Berman, “Fuel Cells at Center Stage,” The New

York Times, November 22, 2013.

12. Telephone interview with USGS expert on platinum,

January 10, 2014.

13. Neil Hume, “ETF Demand sends Platinum to Big Deficit,”

Financial Times, November 12, 2013.

14. See Massachusetts Institute of Technology, “Platinum

Group Elements: Supply and Demand,” report published at Mis-

sion 2016: The Future of Strategic Natural Resources, available

from web.mit.edu/12.000/www/m2016/finalwebsite/problems/pge.html

(accessed January 29, 2014); and Patricia J. Loferski, “Platinum-

Group Metals,” USGS Survey Minerals Yearbook 2012, Reston, VA: U.S. Department of the Interior, U.S. Geological Survey, August

2013, available from minerals.usgs.gov/minerals/pubs/commodity/

platinum/myb1-2012-plati.pdf (accessed January 29, 2014).

15. Telephone interview with USGS expert on platinum,

January 10, 2014.

16. Duluth Metals Limited, “Duluth Metals Provides Twin

Metals Minnesota Project Pre-feasibility Update,” News Releases,

January 7, 2014, available from www.twin-metals.com/duluth-met-

als-provides-twin-metals-minnesota-project-pre-feasibility-update/ (accessed January 13, 2014).

158

17. Dr. Thomas Heine, Interview, January 7, 2014.

18. U.S. Department of Energy, Fuel Cell Technologies Mar-

ket Report, Washington DC: U.S. Department of Energy, October 2013), available from www1.eere.energy.gov/hydrogenandfuelcells/

pdfs/2012_market_report.pdf (accessed January 29, 2014).

19. Heine interview.

20. “Dependent on Rare Earths,” Karen Smith Stegen inter-

view by Kurt de Swaaf, Der Standard, May 29, 2012.

21. Critical Materials Strategy, Washington DC: U.S. Depart-

ment of Energy, December 2011, p. 3, available from energy.gov/

sites/prod/files/DOE_CMS2011_FINAL_Full.pdf (accessed January 29, 2014).

22. Peter C. Dent, “Rare Earth Elements and Permanent Mag-

nets,” Journal of Applied Physics 11107A721, 2012, available from www.usmagneticmaterials.com/documents/Rare-earth-elements-and-permanent-magnets.pdf> (accessed January 29, 2014).

23. Ibid.

24. Ibid.

25. United States Environmental Protection Agency (EPA),

Rare Earth Elements: A Review of Production, Processing, Recycling and Associated Environmental Issues, EPA 600/R-12/572, Cincinna-ti, OH: Office for Research and Development, December 2012, pp.

3-12, available from www.miningwatch.ca/sites/www.miningwatch.

ca/files/epa_ree_report_dec_2012.pdf (accessed February 10, 2014).

26. See “The Only Five Rare Earth Elements that Matter,” Jack

Lifton interview by The Critical Metals Report, June 19, 2012, available from www.theaureport.com/pub/na/the-only-five-rare-earth-elements-that-matter-jack-lifton (accessed January 29, 2014); and Jack Lifton, “Where Are The Non-Chinese Heavy Rare Earths Going

To Come From And Who’s Going To Buy Them?” News Analy-

sis, Rare Earths, Technology Metals Research, September 16, 2012, available from www.techmetalsresearch.com/2012/09/where-are-the-non-chinese-heavy-rare-earths-going-to-come-from-and-whos-going-to-buy-them/ (accessed February 10, 2014).

159

27. For more on permanent magnet supply chains, see Jack

Lifton, “Molycorp Mired in Mud: Perhaps a Domestic ‘American’

Total Rare Earth Supply Chain should be a Collaborative Project,”

Jack Lifton’s Instablog, November 9, 2012, available from seekingal-pha.com/instablog/65370-jack-lifton/1255621-molycorp-mired-in-the-mud-perhaps-a-domestic-american-total-rare-earth-supply-chain-

should-be-a-collaborative-project (accessed January 29, 2014); Jack Lifton, “Decoupling the Rare-Earth Junior-Mining Market from

Emphasis on Molycorp and Lynas,” Jack Lifton’s Instablog November 26, 2011, available from www.techmetalsresearch.com/2011/11/

decoupling-the-rare-earth-junior-mining-market-from-emphasis-on-

molycorp-and-lynas/ (accessed January 29, 2014); Marc Humphries,

“Rare Earth Elements: The Global Supply Chain,” CRS Report for

Congress, Washington, DC: Congressional Research Service, De-

cember 16, 2013, available from www.fas.org/sgp/crs/natsec/R41347.

pdf (accessed January 29, 2014); and “REE Processing Cycle,” Sas-katoon, Saskatchewan, Canada: Great Western Minerals Group,

December 7, 2012, available from www.gwmg.ca/about-rare-earth-

elements/ree-applications/ree-processing-cycle (accessed January 28, 2014).

28. Daniel Yergin, “Ensuring Energy Security,” Foreign Af-

fairs, Vol. 85, No. 6, pp. 69-82.

29. Dr. Michael Bau, interview February 7, 2014; and EPA,

“Rare Earth Elements Review,” 2012, p. 5-1.

30. Eric Hannis, “Are We Losing the Race for Rare Earths?”

U.S. News & World Report, November 20, 2012, available from www.

usnews.com/opinion/blogs/world-report/2012/11/20/the-us-needs-rare-earth-independence-from-china (accessed January 29, 2014).

31. John Seaman, “Rare Earth and Clean Energy: Analyzing

China’s Upper Hand,” IFRI Working Paper, 2010, available from www.ifri.org/downloads/noteenergieseaman.pdf (accessed January 29, 2014).

32. For a detailed explanation of this dispute, see Michael

Klare, “Rare Earths and Other Critical Minerals,” in Michael

Klare, The Race for What’s Left: The Global Scramble for the World’s Last Resources, New York: Metropolitan Books, 2012, pp. 152-182.

160

33. For more information, see Dennis Normile, “Haunted by

‘Specter of Unavailability,’ Experts Huddle Over Critical Materi-

als,” Science Magazine, Vol. 330, No. 6011, December 2010, p. 1,598, available from www.sciencemag.org/content/330/6011/1598.full (accessed February 10, 2014); and “Japan, the U.S. and the European

Union Agreed to Continue the Trilateral Cooperation on Efficient

Management of Critical Materials,” News Release, The Ministry of

Economy, Trade and Industry of Japan, available from www.meti.

go.jp/english/press/2013/0709_06.html (accessed February 10, 2014).

34. Ambrose Evans-Pritchard, “Japan Breaks China’s Stran-

glehold on Rare Metals with Sea-mud Bonanza,” The Telegraph,

March 24, 2013, available from www.telegraph.co.uk/finance/com-

ment/ambroseevans_pritchard/9951299/Japan-breaks-Chinas-strangle-

hold-on-rare-metals-with-sea-mud-bonanza.html (accessed January 29, 2014).

35. Frik Els, “Largest Known Rare Earth Deposit Discovered

in North Korea,” Mining.com, available from www.mining.com/

largest-known-rare-earth-deposit-discovered-in-north-korea-86139/

(accessed January 29, 2014).

36. Bau.

37. Geoscience Australia website, available from www.ga.gov.au (accessed January 29, 2014).

38. “The Only Five Rare Earth Elements that Matter,” Jack Lif-

ton’s interview in The Critical Metals Report, June 19, 2012, available from www.theaureport.com/pub/na/the-only-five-rare-earth-elements-that-matter-jack-lifton (accessed January 29, 2014).

39. U.S. Department of the Interior, Mineral Commodity Sum-

maries 2013, Reston, VA: U.S. Geological Survey, January 2013, p. 129, available from minerals.usgs.gov/minerals/pubs/mcs/2013/

mcs2013.pdf (accessed January 29, 2014).

40. James R. Hein, Kira Mizell, Andrea Koschinsky, and Trac-

ey A. Conrad, “Deep-ocean Mineral Deposits as a Source of Criti-

cal Metals for High- and Green-Technology Applications: Com-

parison with Land-based Resources,” Ore Geology Reviews, Vol.

51, 2013, pp.1-14.

161

41. Humphries.

42. Rare earth expert based in Washington, DC, interview,

January 17, 2014.

43. Molycorp, “Year in Review: 2012,” Annual Report, avail-

able from www.molycorp.com/wp-content/uploads/Molycorp-Year-

End-Reivew-2012.pdf (accessed February 10, 2014).

44. Valerie Bailey Grasso, “Rare Earth Elements in National

Defense: Background, Oversight Issues, and Options for Con-

gress,” CRS Report for Congress, Washington, DC: Congressional Research Service, December 23, 2013, p. 26, available from www.

fas.org/sgp/crs/natsec/R41744.pdf (accessed January 29, 2014).

45. Rare earth expert interview.

46. Mark Smith, “Heavy Rare Earth Rhetoric Translated to To-

day’s Reality,” Molycorp.jp, October 22, 2012, available from www.

molycorp.jp/heavy-rare-earth-rhetoric-translated-to-todays-reality/ (accessed January 20, 2014).

47. Lifton, “The Only Five Rare Earth Elements that Matter.”

48. EPA, “Rare Earth Elements Review,” 2012, pp. 3-8.

49. The most recent estimate provided by Ucore is 2017, avail-

able from www.infomine.com/index/pr/PB398890.pdf (accessed January 29, 2014). For additional information on Bokan Mountain,

see Lifton, “The Only Five Rare Earth Elements that Matter.”

50. EPA, “Rare Earth Elements Review,” pp. 3-9.

51. Rare Element Resources Ltd, “Rare Element’s 2013 Drill

Program Further Expands Bear Lodge Rare Earth Resource,”

News Release, December 19, 2013, available from www.rareelemen-tresources.com/investor-information/news-releases/2013/12/19/rareelement’s-2013-drill-program-further-expands-bear-lodge-rare-earth-resource#.Ut0-Sk0wcdU (accessed January 29, 2014). See also Jack Lifton, “The Only Five Rare Earth Elements that Matter.”

162

52. Molycorp, “Year in Review: 2012,” p. 10.

53. Humphries.

54. Jack Lifton, “A Radical Solution for the Rare Earth Supply

Crunch,” The Critical Metals Report, June 19, 2012, available from www.theaureport.com/pub/na/a-radical-solution-for-the-rare-earth-supply-crunch-jack-lifton (accessed January 29, 2014).

55. Bau.

56. EPA, “Rare Earth Elements Review,” p. 3-12.

57. DOE, Critical Materials Strategy, p. 91.

58. Lifton, “Where Are the Non-Chinese Heavy Rare Earths

Going.”

59. Dent.

60. Christian Bonawandt, “Recycling Rare Earth Metals Pres-

ents Challenges, Opportunities,” Thomasnet.com, May 7, 2013,

available from news.thomasnet.com/IMT/2013/05/07/recycling-rare-

earth-metals-presents-challenges-opportunities (accessed January 29, 2014).

61. Bau.

62. DOE, “Critical Materials Strategy Report,” p. 150.

(emphasis added)

63. Dent.

64. 24/7 Wall St. Corporation, available from 247wallst.com

(accessed February 10, 2014).

65. Robin Bromby, “Japanese work to bypass Dysprosium,”

Investorintel.com, January 1, 2012, available from investorintel.

com/rare-earth-intel/japanese-work-to-bypass-dysprosium/#sthash.

tRFU8G0u.4yUOnUzJ.dpuf (accessed December 18, 2013).

163

66. Steven Constantinides, “The Important Role of Dysprosi-

um in Modern Permanent Magnets,” Arnold Magnetic Technolo-

gies, January 17, 2012.

67. Dent.

68. Rare Earth Supply Chain, available from www.usmagnetic-

materials.com/documents/Rare-Earth-Supply-Chain-Chart.pdf (accessed January 29, 2014).

69. Lifton, “A Radical Solution.”

70. Humphries.

71. “Ames Laboratory to Lead New Research Effort to Ad-

dress Shortages in Rare Earth and Other Critical Materials,”

Energy.gov, January 9, 2013, available from energy.gov/articles/

ames-laboratory-lead-new-research-effort-address-shortages-rare-earth-and-other-critical (accessed January 8, 2014).

72. U.S. Government Information, H.R.761, Washington,

DC: U.S. Government Printing Office, September 19, 2013, avail-

able from www.gpo.gov/fdsys/pkg/BILLS-113hr761rfs/pdf/BILLS-

113hr761rfs.pdf (accessed January 15, 2014).

73. U.S. Government Information, H.R.981, Washington, DC:

U.S. Government Printing Office, March 6, 2013, available from

www.gpo.gov/fdsys/pkg/BILLS-113hr981ih/pdf/BILLS-113hr981ih.pdf

(accessed January 15, 2014).

74. U.S. Government Information, H.R.1063, Washington,

DC: U.S. Government Printing Office, March 12, 2013, available

from beta.congress.gov/113/bills/hr1063/BILLS-113hr1063ih.pdf (accessed January 15, 2014).

75. U.S. Government Information, H.R.1022, Washington, DC:

U.S. Government Printing Office, March 6, 2013, available from

www.gpo.gov/fdsys/pkg/BILLS-113hr1022ih/pdf/BILLS-113hr1022ih.

pdf (accessed January 15, 2014).

76. U.S. Government Information, H.R.1960, Washington, DC:

U.S. Government Printing Office, July 8, 2013, available from www.

164

gpo.gov/fdsys/pkg/BILLS-113hr1960pcs/pdf/BILLS-113hr1960pcs.pdf

(accessed January 15, 2014).

77. U.S. Government Information, S.1600, Washington, DC:

U.S. Government Printing Office, October 29, 2013, available from

www.gpo.gov/fdsys/pkg/BILLS-113s1600is/pdf/BILLS-113s1600is.pdf

(accessed January 15, 2014).

78. For more on this topic, see Katherine Bourzac, “Can the

U.S. Rare-Earth Industry Rebound? The U.S. Has Plenty of the

Metals that Are Critical to Many Green-Energy Technologies, but

Engineering and R&D Expertise Have Moved Overseas,” MIT

Technology Review, October 29, 2010, available from www.technolo-gyreview.com/news/421472/can-the-us-rare-earth-industry-rebound/

(accessed February 10, 2014).

79. Joseph Sternberg, “How the Great Rare-Earth Metals Cri-

sis Vanished,” The Wall Street Journal, January 8, 2014, available from online.wsj.com/news/articles/SB10001424052702303848104579

308252845415022 (accessed January 26, 2014). Sternberg refers to a recently published “Pentagon report” stating that reliance on

China’s rare earths is declining. Sternberg is possibly referring

to DoD’s October 2013 “Annual Industrial Capabilities Report to

Congress,” which makes such a claim on pp. 25-26; however, in

section B-56, the report raises concerns about shortages, particu-

larly of the heavy rare earths yttrium and dysprosium. Indeed,

the report concedes that “U.S. supply of these materials is and

will continue to be limited.”

165

CHAPTER 8

THE EVOLVING GLOBAL NUCLEAR

INDUSTRY LANDSCAPE

AND THE STATUS OF THE U.S. NUCLEAR

INDUSTRY

Jane Nakano

Only a decade ago, the nuclear industry in the

United States was buoyant about what appeared to

be the imminent onset of a nuclear renaissance in the

country and around the world. As recently as 2009,

one industry estimate suggested that the world would

build 180 nuclear power reactors by 2020—a signifi-

cant increase over the approximately 40 reactors that

had been built between 1999 and 2009.1 However, a

combination of the availability of low priced natural

gas, the weak energy demand due to the economic

slowdown, and the fierce competition in the post-Fu-

kushima global nuclear marketplace have dampened

commercial prospects for the U.S. nuclear industry.

The state of the industry may also render some na-

tional security implications for the U.S. Government.

OVERVIEW OF THE GLOBAL

NUCLEAR POWER CAPACITY

Today, there are roughly 440 nuclear power gen-

erating reactors around the world, providing 370

gigawatts (GWe)—equivalent to 14 percent of the

world’s electricity supply. According to the forecast

by the International Atomic Energy Agency (IAEA),

the forecast future share of nuclear power in the to-

tal power generation has been declining since before

167

the 2011 Fukushima accident (Figure 8-1), where the

earthquake-triggered massive tsunami incapacitated

the power supply and led to core melt-downs in three

of the four operational reactors at the Fukushima Dai-

ichi Nuclear power station.

Publication Year

2030

2050

Low

High

Low

High

2005

418-GW 640-GW

(8.0%)

(8.9%)

n/a

n/a

2010

546-GW 803-GW

590-GW

1,415-GW

(8.5%)

(10.4%)

(5.0%)

(11.9%)

2012

456-GW 740-GW

469-GW

1,137-GW

(4.7%)

(6.2%)

(2.3%)

(5.7%)

2013

435-GW 722-GW

440-GW

1,113-GW

(4.5%)

(6.2%)

(2.2%)

(5.6%)

Source: IAEA data as organized by the author.

Figure 8-1. IAEA Forecast for Nuclear Generation

Capacity Growth (in gigawatts) through

2030 and 2050 and their Shares (in percentage) of

Total Electricity Generation.

Although the same IAEA forecast indicates that the

Fukushima accident has put downward pressure on

the pace of forecast generation capacity growth—that

is, the capacity growth in 2030 has been revised from

546-GWe in the 2010 forecast to 435-GWe in the 2013

forecast,2 the 2013 forecast level is still clearly higher

than the generation capacity today. In fact, nuclear en-

ergy is still projected to be one of the fastest-growing

sources in the global primary energy consumption

mix between 2010 and 2040 (Figure 8-2).3

168

Source: U.S. Energy Information Agency, Washington, DC.

Figure 8-2. World Energy Consumption

by Fuel Type, 1990-2040.

Much of the capacity growth in the coming de-

cades will come from developing economies, espe-

cially those experiencing rising energy consumption

driven by economic and population growth as well

as modernization and/or urbanization trends. In fact,

developing countries will lead the total global energy

consumption growth in the coming decades. For ex-

ample, the energy consumption by countries that are

not part of the Organization of Economic Cooperation

and Development (OECD) will grow at 90 percent

through 2040; in contrast, the energy consumption by

OECD countries is at 17 percent and the global aver-

age is at 56 percent.4 Not surprisingly, most current

reactor construction and planned expansions in the

near future are occurring in non-OECD countries, es-

pecially in non-OECD Asia and Eastern Europe. For

169

example, 40 percent of the approximately 60 nuclear

reactor construction projects are in China today, fol-

lowed by Russia and India (Figure 8-3). Both China

and Russia have ambitious plans for the expansion

of their nuclear power programs. For example, China

plans to expand its installed capacity to 58-GWe by

2020, up from 13-GWe today. As for Russia, where 10

reactors are currently under construction, the country

plans to increase the nuclear power generation capac-

ity by 50 percent by 2020, bringing the share of nuclear

energy in the total electricity supply to between 23 and

25 percent.5 Meanwhile, uncertainty is on the horizon

for the South Korean nuclear power program. In the

wake of a scandal that involved falsification of safety

certificates for nuclear reactor parts, which led to the

indictment of over 100 people in October 2013, the

Korean government revised down the targeted share

of nuclear power in the country’s power generation

capacity mix, from 41 percent to 29 percent by 2035.6

Source: World Nuclear Association data as organized

by the author.

Figure 8-3. Global Nuclear Reactor Construction.

170

Nuclear energy may remain viable even in Western

Europe, but mainly through the extension of opera-

tional life for existing nuclear reactors. For example, in

2012, Hungary’s nuclear regulatory agency approved

a 20-year extension of reactor lifespan.7 Also, French

state-controlled utility EDF is lobbying for the regu-

latory approval to extend the lifespan of its reactors

beyond 40 years.8 Additionally, in Belgium, which in

the aftermath of the Fukushima nuclear accident de-

cided to begin phasing out nuclear power, the govern-

ment is reportedly considering extending the lifespan

for one of its reactors in efforts to mitigate potential

power supply shortage.9

As for Japan, the Fukushima nuclear accident has

drawn scrutiny to the state of its nuclear power sector

governance, including the soundness of the country’s

regulatory system generally, and the crisis manage-

ment capability of the central government. This has

led all of the nuclear reactors in the nation to remain

offline as of December 2013, as local government lead-

ers have not allowed plants shut for routine mainte-

nance to reopen for business. The Basic Energy Plan,

issued by the Japanese government in April 2014,10

recognized the importance of nuclear energy in the

national energy mix, but its pre-Fukushima vision

to rely on nuclear energy for roughly half of the to-

tal power generation by 2030 has become anything

but realistic.

THE STATE OF THE U.S. NUCLEAR INDUSTRY

Euphoria surrounding the coming onset of the

nuclear renaissance has since been significantly toned

down in the United States. There have been, however,

some positive developments for the U.S. nuclear sec-

171

tor in the recent years. First, in February 2012, the U.S.

Nuclear Regulatory Commission (NRC) issued the

first combined construction and operation license since

the major regulatory reorganization several decades

ago following the Three Mile Island nuclear accident

in 1979. The license issuance for the construction of

two Westinghouse AP-1000 reactors at the Vogtle site

in Georgia was quickly followed by the licensing for

two more AP-1000 reactors at the V.C. Summer site

in South Carolina. Combined with the Watts Bar 2 in

Tennessee, the nation now has five nuclear reactors

under construction. The four AP-1000 reactors—each

expected to cost between $5 billion and $7 billion11—

are scheduled for completion between 2016 and 2019.

All of the stakeholders in the nation’s civilian nuclear

energy program—ranging from policymakers, reactor

component manufactures, and environmental organi-

zations—are carefully watching whether the projects

will be completed on schedule and under budget. The

Vogtle and V.C. Summer projects will indeed serve as

a litmus test for the viability of the U.S. nuclear indus-

try in the coming decades.

Second, the Obama White House support for the

development and deployment of small modular nu-

clear reactors (SMRs) remains intact despite the Fu-

kushima nuclear accident. SMRs refer to a category

of nuclear reactors whose power generation capacity

is generally smaller than 300 megawatts (MWe), but

its technologies are otherwise diverse, including light

water reactors, high-temperature reactors, as well as

fast reactors. Because SMR parts can be built at various

factories across the country or around the world, and

brought to the site for assembly, SMRs are believed to

have a smaller up-front capital requirement and thus

economic advantage over conventional size reactors.

172

The size of the upfront investment is particularly ap-

pealing to U.S. utilities. Unlike cohorts in many other

countries, the U.S. power sector is comprised of over

3,000 electric utilities and their average financial ca-

pacity is quite small—certainly not large enough to

comfortably undertake the nearly $10 billion commit-

ment commanded by the construction of an average

1,000+ MWe nuclear reactor.

The U.S. nuclear industry is now focused on SMRs

as a pathway to reverse its declining fortunes and to

maintain its global competitiveness. Of the few U.S.

manufacturers working to develop SMRs today, the

mPower design by Babcock & Wilcox (B&W) (180-

MWe pressurized water reactor [PWR]) and NuScale

SMR design by NuScale (45-MWe PWR) both won a

public-private cost-sharing grant from the U.S. De-

partment of Energy (DOE). The $452 million grant,

announced in January 2012, aims to help support the

development, design certification, and licensing pro-

cess for up to two SMR designs over 6 years. In its Fis-

cal Year (FY) 2014 budget request, DOE asked for $70

million, $3 million above the FY2013 funding level, to

provide technical support for SMR licensing.12 B&W

has thus far received $101 million for the mPower

project, including an initial grant of $79 million.13 As

for NuScale, the amount of the DOE grant is still to be

negotiated out of the $452 million fund (as of Decem-

ber 2013). Moreover, DOE supports SMR demonstra-

tions by essentially providing venues for demonstra-

tion reactors. In March 2012, DOE signed agreements

to allow three companies to build demonstration reac-

tors at DOE’s Savannah River site in South Carolina:

a 25-MWe fast reactor by Hyperion, a 140-MWe PWR

by Holtec, and a 45-MWe PWR by NuScale.

173

Some industry observers caution that the lower

cost is only an estimate and unproven, and note that

SMRs may not necessarily be cheaper unless they

are produced and deployed in significant quantities.

Others also note that there are many regulatory un-

certainties and security considerations, such as the re-

quirement for operational room design and staffing as

well as physical protection requirements for multiple,

smaller reactors at one site.

Meanwhile, the U.S. nuclear industry faces two

critical challenges. First, the management of high-

level spent nuclear fuel continues to be a key concern

in the Congress and in the White House. The United

States is essentially committed to an open fuel cycle—

that is, no reprocessing of spent fuel—without politi-

cal consensus on the permanent repository location.

In order to manage the country’s growing stockpile of

nuclear waste, Congress passed in 1982 the Nuclear

Waste Policy Act (NWPA) to establish a statutory ba-

sis for DOE to dispose of highly radioactive nuclear

waste. According to the NWPA, DOE would remove

spent nuclear fuel from commercial nuclear power

plants, collect a fee from nuclear power providers,

and transport it to a permanent geologic repository or

an interim storage facility before permanent disposal.

Following the designation of Yucca Mountain in Ne-

vada as the sole candidate site for the repository in

1987, DOE has performed detailed site characteriza-

tion studies and issued a formal finding of suitability

for the site in 2002.

In 2008, DOE submitted a license application for

a high-level waste repository to the Nuclear Regu-

latory Commission (NRC). Under the administra-

tion of President Barak Obama, however, the Yucca

Mountain project has been deemed unviable for the

174

permanent storage of nuclear waste. No funding was

provided for continued work on design and develop-

ment of the repository at Yucca Mountain in FYs 2011,

2012, and 2013. Nor was there funding requested for

FY2014 to continue NRC licensing of the Yucca Moun-

tain repository.14 Following the federal court order in

early-2013 that DOE halt collecting nuclear waste fees

from utilities that aimed to build a disposal facility site

for highly radioactive nuclear waste in the absence of

active pursuit of the siting effort, DOE suspended the

collection in May 2014. The fund had collected about

$30 billion to date. Spent fuel management continues

to be a highly political and divisive issue.

The second key challenge to the U.S. nuclear power

sector is the availability of competitively priced natu-

ral gas due to the successful development of shale gas

resources. A confluence of factors—including technol-

ogy advancements, expertise, infrastructure, invest-

ments and property/mineral rights—unlocked the

commercial potential of what had been long known

to exist underground. Shale gas production increased

at an average annual rate of 48 percent between 2006

and 2010, and growing shale gas production has es-

sentially reversed the declining level of U.S. domestic

natural gas production. Today, shale gas accounts for

about one-third of domestic natural gas output in the

United States (Figure 8-4). Various forecasts suggest

that the share may grow to about 50 percent by 2040.

175

U.S. Dry Gas Production, Trillion Cubic

Feet per Year.

Source: Annual Energy Outlook, Washington, DC: U.S. Energy

Information Administration, 2013.

Figure 8-4. Growing Share of Shale Gas

in U.S. Natural Gas Production.

Natural gas has become a base-load fuel for elec-

tricity production in the United States, and is begin-

ning to challenge the economic viability of nuclear

power as well as coal power generation. In 2013, four

U.S. nuclear reactors permanently closed: Crystal

River Unit 3 in Florida, Kewaunee plant in Wisconsin,

and San Onofre Units 1 and 2 in California. The factors

that drove the early retirement of the Kewaunee plant

which in 2011 had its operational license renewed

for additional 20 years, included low natural gas and

regional electricity prices. The additional early retire-

ments that loom large include the Vermont Yankee

plant that is licensed to operate until 2032 but is now

scheduled to shut down in 2014, and the Oyster Creek

176

plant in New Jersey that has an operational license un-

til 2029 but is now expected to retire by 2019. Both re-

tirement decisions cited to a varying degree the com-

petition from natural gas. In the most recent forecast

by the U.S. Energy Information Administration, the

share of nuclear energy will decline from 19 percent

in 2012 to 16 percent in 2040 in the total U.S. power

generation mix.15

RISING COMPETITION IN THE GLOBAL

NUCLEAR MARKETPLACE

There are several key trends globally that of-

fer continual challenges for the U.S. nuclear indus-

try. In addition to shifting interest in nuclear power

generation from mature to developing economies,

as illustrated in the last section, several trends in the

supply side of the global nuclear industry point to a

competitive landscape for the U.S. nuclear industry.

The first is the emergence of several new suppliers.

The global supplier landscape was shaken up when

the South Koreans won a contract to supply four re-

actors to the United Arab Emirates (UAE) in Decem-

ber 2009. The UAE tender had been viewed as a test

case for nuclear energy expansion in the Middle East

and the South Korean consortium competed fiercely

for a contract alongside major suppliers from France,

Japan, and the United States. Against expectations

on the part of most market analysts that the contract

would be awarded to AREVA of France, the Korean

consortium landed the deal, dealing a major blow

to its more established competitors. With assistance

from its subsidiaries and other Korean companies like

Doosan Heavy Industries, Samsung, and Hyundai,

the Korea Electric Power Company significantly un-

177

derbid its competitors, in the estimated range of $20

to $30 billion.16 The offer entailed a full scope of work

and services, including engineering, procurement,

construction, nuclear fuel and operations, and main-

tenance support.17 The Korean offer strongly implied

that longer-term commercial interests, as opposed

to more immediate financial gains, drove the bid

formulation.

Another rising nuclear reactor supplier today is

China. As part of its latent civilian nuclear power pro-

gram development,18 China has emphasized building

capabilities to establish a fully integrated domestic

supply chain—including “indigenous” nuclear fuel

fabrication, self-reliance on design, and project man-

agement—with the objective of exporting next-gen-

eration nuclear technologies to a global marketplace.

However, the technological reality has long lagged

behind such aspiration. Prior to the Fukushima nu-

clear accident, reactors of older designs accounted for

roughly half of the units under construction and many

on order in China.19 While the design itself may not be

deficient, the older models lack many advances that

now come with newer generation reactors—the so-

called Generation III or III-plus—that are being built

by western suppliers today. If deployed today, the

Generation II reactors developed in the 1960s would

be about a century behind leading technologies. In

fact, the Chinese projects at the Chashma site in Paki-

stan involve Generation II reactors.

The 2007 purchase of Westinghouse AP-1000 reac-

tors significantly boosted the technology base for the

Chinese nuclear reactor industry. The sale of AP-1000

reactors included a technology transfer agreement

that has allowed China’s State Nuclear Power Tech-

nology Corp (SNPTC) to acquire over 75,000 technol-

178

ogy transfer documents.20 Bilateral commercial coop-

eration between the United States and China seems

to be on the rise. For example, SNPTC and Shanghai

Nuclear Engineering Research & Design Institute are

now developing an AP-1000-based reactor with West-

inghouse; the Chinese are eager to begin exporting

these advanced PWRs later this decade.21 Additional-

ly, in May 2013, Westinghouse and SNPTC announced

a joint venture to develop and deploy Westinghouse

technology-based SMRs. Reportedly, the first over-

seas sale of the advanced Chinese reactor design is on

the horizon. China is believed to be in the final phase

of negotiating a sale of two ACP-1000 reactors to Paki-

stan, considered Generation III and said to be devel-

oped independently by Chinese suppliers.22

Another key trend is that successful export deals

increasingly include features such as fuel provision,

plant operation, and spent fuel management. A case in

point is Russia’s successful effort to win the contract to

build Vietnam’s first commercial nuclear power plant

at Phuoc Dinh. The Russian bid included a guaranteed

loan for the construction, the nuclear fuel, and the re-

moval of spent fuel for reprocessing. Another creative

marketing deal by Russia is its 2010 agreement with

Istanbul to build, own, and operate four reactors at the

Akkuyu site in Turkey, which is another new entrant

into the world of nuclear power generation. Although

the spent fuel take-back is not without controversy

among the Russian public, export models like “build-

own-operate” are reportedly peaking interest among

Chinese suppliers. The trend to offer nearly a com-

plete chain of nuclear power generation business—or

the so-called “cradle-to-grave” approach—is a direct

reflection of the lack of various capacities among new

entrants. The pursuit of a nuclear power program

179

requires more than the acquisition of hardware like

nuclear reactors or the ability and means to procure

fuels. These creative export deals attempt to compen-

sate for new entrants’ lack of such key capacities as

regulatory and operational expertise, and spent fuel

management.

In this regard, the absence of a spent fuel solution

has handicapped the U.S. ability to expand its busi-

ness in emerging markets. Additionally, in countries

like France, Russia, and South Korea, where the do-

mestic nuclear sector has one dominant manufacturer

and utility, the nuclear export business is closely incor-

porated into industrial policy and government export

advocacy carries a stronger undertone of sovereign

guarantee. The notion of sovereign guarantee is par-

ticularly attractive to new entrants as nuclear power

generation requires much more than reactor construc-

tion, such as the uninterrupted access to nuclear fuels.

Nuclear export is hardly a purely commercial en-

deavor. Aside from nonproliferation considerations

that are by definition not commercial, many coun-

tries weigh noncommercial factors like geopolitics

in reviewing tenders. For example, energy security

through fuel and supplier diversification was one of

the key drivers for Lithuania’s interest—pre-Fukushi-

ma, that is—in a U.S.-Japan tender, since Vilnius had

long sought to reduce its significant reliance on Rus-

sian natural gas. Also, the Czech consideration of both

the U.S.-Japan and Russian tenders for the Temelin

project carried some geopolitical undercurrent in that

the Czech public generally favors the Westinghouse

bid due to continued animosity toward Russia and out

of reluctance to raise its energy dependence on Rus-

sia; meanwhile, the Czech business community was

inclined to favor the Russian bid due to its promise of

greater use of local content and labor force.23

180

CONCLUSION

The onset of competitively priced natural gas and

declining domestic energy consumption, driven in

part by a slowing economy and rising energy effi-

ciency, have increased the difficulties the U.S. nuclear

industry faces in its domestic market. Additionally,

its prospects for overseas expansion are just as chal-

lenged, given the emergence of new suppliers and the

growing synergy between the needs of new market

entrants and the nuclear export features that are more

readily possible in state-led export business models.

Some questions loom large for national security poli-

cymakers as the U.S. nuclear industry may continue

to struggle. First, will the stagnant industry base for

manufacturing and exporting reactors and compo-

nents diminish the relevance of the U.S. voice at in-

ternational nonproliferation fora and institutions? In

other words, is there a correlation between the com-

petitiveness of the U.S. nuclear industry and the U.S.

Government’s ability to set the agenda and lead efforts

in the area of nuclear nonproliferation? Second, does

the struggling U.S. nuclear industry negatively affect

the ability of the U.S. military to recruit talent for its

nuclear-related programs? In other words, to what

extent do job prospects in the civilian nuclear power

sector influence one’s occupational decision-making

in the military services? Finally, what is the net impact

of the emerging commercial engagement between The

United States and China? Technology cooperation be-

tween the United States and China, two countries that

have nuclear weapons, may not directly constitute a

proliferation concern since China is a nuclear weap-

ons state. Also, technology cooperation may help ad-

vance the safety standards for reactor operations in

181

China. Meanwhile, aside from the high eventuality

of intense commercial competition between the U.S.

and Chinese nuclear industries, may the technology

cooperation and/or transfer inadvertently undermine

U.S. national security objectives? Will China demand

of potential supplier countries the high level of safety

and security commitments the United States does?

Neither answers nor solutions seem readily in sight

for these questions.

ENDNOTES - CHAPTER 8

1. Robin Pagnamenta, “Areva Rushes to Hire Workers as De-

mand for Nuclear Reactors Explodes,” The Times (UK), September 28, 2009.

2. Energy, Electricity and Nuclear Power Estimates for the Peri-

od up to 2050, 2013 Ed., New York: International Atomic Energy Agency, 2013.

3. International Energy Outlook, Washington, DC: U.S. Energy

Information Administration, July 25, 2013.

4. Ibid.

5. “Plans for New Reactors Worldwide,” London, United

Kingdom (UK): World Nuclear Association, updated March 2013,

available from www.world-nuclear.org/info/Current-and-Future-

Generation/Plans-For-New-Reactors-Worldwide/.

6. “Nuclear to remain Korean mainstay,” World Nuclear News,

December 10, 2013.

7. “Nuclear Power in Hungary,” London, UK: World Nuclear

Association, updated October 2013, available from www.world-

nuclear.org/info/Country-Profiles/Countries-G-N/Hungary/.

8. “EDF May Extend Nuclear Plant Depreciation—Paper,”

Reuters, November 12, 2013, available from www.reuters.com/

article/2013/11/12/edf-nuclear-proglio-idUSL5N0IX24520131112.

182

9. “GDF Suez Says Belgian Nuclear Power Plant Extensions

Must Be for 10 Years,” Platts, July 3, 2012, available from www.

platts.com/latest-news/electric-power/london/gdf-suez-says-belgian-nuclear-power-plant-extensions-8464160.

10. This Basic Energy Plan was first issued in 2003. The April

2014 version is the fourth plan, and the first version to be issued

since the Fukushima nuclear accident.

11. Mark Holt, “Nuclear Energy Policy,” RL33558, Washing-

ton, DC: Congressional Research Service, September 19, 2013, p. 1.

12. Ibid., p. 28.

13. “U.S. Department of Energy Provides Additional Funding

to Support B&W Power Project,” Charlotte, NC: B&W, August

27, 2013, available from www.babcock.com/news-room/Pages/U.S.-

Department-of-Energy-Provides-Additional-Funding-to-Support-

W-mPower-Project.aspx (accessed December 17, 2013).

14. Holt, p. 1.

15. “Annual Energy Outlook 2014 Early Release Overview,”

Washington, DC: U.S. Energy Information Administration, p. 14.

16. Amena Bakr and Cho Mee-young, “South Korea Wins

Landmark Gulf Nuclear Power Deal,” Reuters, December 27, 2009, available from www.reuters.com/article/2009/12/27/us-emirates-korea-nuclear-idUSLDE5BQ05O20091227.

17. “UAE Picks Korea as Nuclear Partner,” London, UK:

World Nuclear Association, December 29, 2009, available from

www.world-nuclear-news.org/NN_UAE_picks_Korea_as_nuclear_

partner_2812091.html.

18. Although the Chinese government approved the coun-

try’s first nuclear power plant decades ago in 1982, the sector only

began to see dramatic acceleration during the 10th Five-Year Plan

(FYP, 2001-05), when China launched a concerted expansion of its

nuclear sector and constructed four reactors.

183

19. China’s post-Fukushima safety plan calls for new reactors

being built to meet safety standards of “third-generation” reac-

tor technology, and the much stricter standards for new nuclear

construction under the latest nuclear safety plan may accelerate

interest in switching its fleet profile away from older designs to

next-generation designs.

20. “Westinghouse Electric gives reactor documents to

China,” E&E Wire, November 24, 2010.

21. “CAP1400 Test Facility under Construction,” World Nucle-

ar News, April 4, 2012.

22. “Contracts for New Pakistan Reactors,” World Nuclear

News, September 10, 2013, available from www.world-nuclear-news.

org/NN-Contracts_for_new_Pakistan_reactors-1009134.html.

23. “US and Russian Geopolitical Battle will Decide Fate of

Czech Nuclear Power Plant,” OilPrice.com, January 10, 2013,

available from oilprice.com/Alternative-Energy/Nuclear-Power/US-

and-Russian-Geopolitical-Battle-will-Decide-Fate-of-Czech-NuclearPower-Plant.html. In April 2014, Czech utility CEZ cancelled the procurement process for two new reactors at Temelin, reportedly

due to growing interest in renewable energy power generation.

“CEZ Cancels Temelin Expansion Tender,” World Nuclear News,

April 10, 2014, available from www.world-nuclear-news.org/NN-

CEZ-cancels-Temelin-expansion-tender-1004144.html.

184

CHAPTER 9

CHINA’S BURGEONING DEMAND AND

ITS QUEST FOR RESOURCES

Michal Meidan

Since its reform and opening up in 1978, China’s

economic growth has skyrocketed on the back of sus-

tained industrialization and urbanization, leading to

a highly resource-intensive growth pattern. Govern-

ment intervention in pricing and resource allocation

has created imbalances in supply and demand and al-

lowed for wasteful consumption that has also taken

a high environmental toll on the country. Moreover,

politically powerful energy conglomerates operating

in a fragmented bureaucratic framework have shaped

the contours of China’s energy policy, both internally

and overseas.

The Chinese government clearly recognizes that

China’s growth model must change, but under the

leadership of President Xi Jinping and Premier Li

Keqiang, policies to accelerate change in the economic

growth model and resource allocation have risen to

the top of the political agenda: Environmental deg-

radation has become a growing source of public con-

sternation and a potential political liability, leading

Premier Li Keqiang to declare a “war on pollution”

in March 2014. As a result, the government is look-

ing to reduce emissions from power generation and

transportation—the main culprits of China’s “airpoca-

lypse”—by replacing coal and oil with gas.

China’s continued dependence on oil and rising

demand for gas, that it will be incapable of supply-

ing wholly from domestic sources, will sustain a high

185

dependence on imported resources. With China’s

domestic oil production stagnating, the International

Energy Agency (IEA) expects its import dependence

ratio to reach 80 percent in 2030.

Over the past 2 decades, Beijing has made efforts

to diversify its sources of imported oil, but it has only

managed to tinker at the margins with its heavy re-

liance on the Middle East and Africa. As demand

for imported oil and gas continues to grow, China’s

global exposure will also increase, and supply secu-

rity will remain a prominent feature of China’s energy

strategy and its foreign policy calculus. Yet, China has

neither the intention nor the capacity to safeguard its

interests worldwide. Moreover, China is not ready to

assume the U.S. role as provider of public goods such

as freedom of navigation in international waters, or to

secure the stability of producer countries. This chapter

will assess these evolutions and their implications for

the U.S. military.

CHINA’S ENERGY SECTOR: UNSUSTAINABLE

AND UNCOORDINATED

Since the beginning of reforms and opening up

in 1978, China’s economy has grown at a staggering

pace, with annual average rates of 10 percent. With in-

dustry and construction representing the lion’s share

of growth, China’s economic rise has been highly

energy-intensive.1 In absolute terms, this has meant

a six-fold increase in total energy consumption in

China, from just over 400 million tons oil equivalent

(MTOE) in 1980 to over 2,800-MTOE in 2013, as well

as a substantial increase in China’s share of global en-

ergy demand. In 2013, China accounted for almost a

quarter of global energy demand, up from a mere 6

186

percent in 1980. Its share of Asian demand has also in-

creased considerably, from 35 percent in 1980. In 2013,

China accounted for more than half of Asia’s energy

consumption.2

On the eve of China’s 12th Five-Year Plan (FYP,

2011-15), China had already become the world’s larg-

est energy consumer. It was also the world’s largest

coal producer and consumer, accounting for half of

global coal consumption. While this has allowed Bei-

jing to maintain a high degree of energy self-sufficien-

cy, it has also afforded it a prominent position in the

global ranking of carbon dioxide (CO2) emitters. Since

2009, Beijing has also become the world’s second larg-

est oil consumer, behind the United States, with oil

consumption growth accounting for a third of global

demand growth in 2013.3

China also has the second largest gas reserves in

the Asia-Pacific region. But demand growth has al-

ready outstripped production and China became a

net natural gas importer for the first time in almost 2

decades in 2007. Imports have increased dramatically

in the past few years, jumping from a 12 percent share

of total gas consumption in 2010 to 30 percent in 2013.4

Despite the growing importance of energy issues,

the country’s bureaucracy has consistently lacked

the capacity to manage the energy sector effectively.

China’s energy administration has undergone numer-

ous waves of reshuffling that resulted in authority

being carved up between multiple institutions, most

of which are understaffed and underfunded. In the

absence of a strong regulatory institution, coordina-

tion across industries and ministries has been spotty,

frustrating the formulation, implementation, and en-

forcement of energy policies.5 This has also resulted in

an outsized role for China’s state planning agency, the

187

National Development and Reform Council (NDRC)

as well as for the national oil companies (NOCs) in

policymaking.

Despite various attempts to administer the sector,

China’s NOCs retain considerable power and avenues

to influence policymaking. Their political power is

derived from their origins as government ministries

and the influence those ministries once held over the

policymaking process, and, as a result, the general

managers of China’s NOCs also have direct access to

the country’s senior leadership.6 There are also per-

sonal connections and strong patronage ties linking

the heads of the oil companies to ministers and Polit-

buro members7 that China’s new leadership is trying

to sever with high-level anti-corruption campaigns

involving the energy sector.8

The Chinese leadership is acutely aware of the

problems plaguing the Chinese energy system. Re-

forms over the years have included pricing schemes,

changes in the bureaucratic makeup, ministerial re-

shuffles, and attempts to rein in the power of the oil

companies.9 Yet, many of these inefficiencies remain

unresolved, and the adaptation of the policy frame-

work continues. In line with this, the FYP aims to ad-

dress the imbalances and inefficiencies of the energy

system and the Chinese economy more broadly.

THE FYP: A NEW ENERGY MODEL?

The FYP lays out ambitious targets aimed at reduc-

ing China’s reliance on coal, cutting greenhouse gas

emissions, and mitigating severe environmental deg-

radation. The plan includes targets of reducing energy

intensity per unit of gross domestic product (GDP) by

16 percent, cutting carbon intensity per unit of GDP

188

by 17 percent (40 to 45 percent by 2020), and having

nonfossil fuels account for 11.4 percent of the primary

energy mix (15 percent by 2020).10

The government is making progress on boosting

industrial efficiency and implementing more stringent

environmental standards that will, nonetheless, lead

to slower economic growth rates. But Beijing’s assess-

ment that the cost of inaction is higher than the risks

associated with reform has led it to introduce a more

aggressive environmental agenda11 and expedite in-

dustrial consolidation plans in the aluminum, steel,

and construction sectors in a bid to reach China’s FYP

goals.12

As Beijing looks to cap coal consumption, de-

mand for renewable energy will increase in the me-

dium to long term, but until the government sources

enough renewable energy to manage this transition,

gas demand will continue to rise. Beijing is looking

to increase the share of gas in the country’s energy

mix from 3.9 percent in 2010 to 8.3 percent in 2015.13

In order to supply this projected increase in domestic

demand, the government plans to spur production

of unconventional gas, especially shale gas and coal-

bed methane (CBM). But this is a long-term endeavor

and in the coming 5 to 7 years, China will still rely

heavily on imported gas.14 As a result, in 2015, even

as China’s energy mix will likely comprise a greater

share of renewable energy and coal, imported oil and

gas will become increasingly significant contributors

to China’s overall energy use.

While projections of China’s economic growth

rates and energy demand vary widely, most “business

as usual” scenarios, which assume relatively strong

economic growth rates of roughly 7 to 8 percent and

significant energy efficiency gains, suggest China will

189

remain a major contributor to global energy demand.15

BP estimates that over the next 20 years, China and

India combined will account for all the net increase

in global coal demand, 94 percent of net oil demand

growth, 30 percent of gas, and 48 percent of the net

growth in nonfossil fuels.16 Gradually, nuclear and re-

newable energy will take up market share from coal in

China. BP’s estimates suggest that in 2030, coal’s share

of the total energy mix will fall from 70 percent to 55

percent as a result of the maturing industrial struc-

ture. But oil’s share of consumption will remain flat at

18 percent in China. As overall energy consumption

continues to rise, albeit at a slower pace, the Interna-

tional Energy Agency (IEA) expects China’s total oil

demand to rise to 12 million barrels per day (mbpd) in

2020 and 15-mbpd in 2030, up from 10-mbpd in 2011.17

Output from China’s domestic oil resources is

stagnating, and in 2012 the country reached a 56 per-

cent import dependency ratio.18 The IEA expects this

ratio to reach 80 percent in 2030.19 China will there-

fore remain heavily dependent on Middle Eastern and

African oil transiting through the Straits of Malacca.

Moreover, China’s dependency on foreign gas is also

set to increase in the coming 5 to 10 years, despite the

country’s promising shale potential and political com-

mitment to developing it.

OIL INSECURITY VS. GAS INDEPENDENCE?

Already, China’s ravenous demand for oil imports

has gone from a mere 60,000 barrels per day (bpd) in

1993, to 5.6-mbpd in 2013, with roughly two thirds

coming from the Middle East and Africa.20 Indeed,

despite Beijing’s efforts to diversify its sources of im-

ported oil, it has only managed to tinker at the mar-

190

gins with its heavy dependence on the Middle East

and Africa and remains dependent on six countries

for the bulk of its supplies: Saudi Arabia, Angola, Iran,

Russia, Oman, and Sudan. Ongoing efforts to upgrade

China’s refining capacity will allow it to gradually

process a larger variety of crudes domestically and

increase its intake of oil supplies from a wider num-

ber of countries, including heavy oil from Ecuador,

Venezuela, and Canada as well as a greater variety of

Middle Eastern crudes.

In the future, China’s shale potential could alter

the country’s energy landscape, akin to the U.S. shale

revolution, but in the short and medium term, pros-

pects for significant shale output in China remain

dim.21 In the meantime, demand for imported oil and

gas will continue to grow, and supply security will

remain a prominent feature of China’s energy strat-

egy and its foreign policy calculus. Consequently,

Beijing has been looking for ways to mitigate the risk

associated with heavy dependence on global markets

and use it as an opportunity to propel its oil compa-

nies to become internationally competitive firms. See

Figure 9-1.

191

Source: Chinese customs.

Figure 9-1. Chinese Oil Imports by Country.

Alongside growing import demands, Chinese

firms have increased their investments in the global

oil upstream. Promoted by their desire to become in-

ternationally competitive and save their profits from

hefty domestic taxation and from losses incurred in

the domestic downstream due to price controls, Chi-

na’s national oil companies have ventured overseas.22

Their quest for equity oil around the world was only

cautiously approved initially, but after 2 decades of

overseas investments, it is now supported and en-

couraged by various government organs.23

CHINA’S GLOBAL ENERGY FOOTPRINT

Since the 1990s, China’s international energy pro-

file has changed significantly. It is now a major factor

for global markets with variations in demand growth

in China having ripple effects around the world. Chi-

na is an important actor in the international upstream.

Its appetite for producing assets, even in politically

192

volatile countries, has raised concerns about its de-

sire to work with unsavory governments, but has

at the same time, generated more output. Linkages

with other producers and consumers are also rapidly

evolving. With a more diverse economy, rising envi-

ronmental constraints, and new supplies available,

Chinese investments in upgrading its downstream

creates opportunities for the biggest producers within

the Organization of Petroleum Exporting Countries

(OPEC), which are gradually looking to China as their

largest future growth market. As China hopes to se-

cure supplies, global oil producers are also looking to

secure demand and are becoming increasingly drawn

to China’s insatiable appetite for oil.

But Beijing’s interactions with the global markets

have not placated decisionmakers that the markets

will ensure supplies. Beijing still views supply secu-

rity as a major strategic vulnerability, a point that it

has been reminded of all too often over the last de-

cade, from the Iraq war in 2003 that Beijing believed to

be a pure and simple quest for resource hegemony by

the United States, to the Arab Spring and the turmoil

in Libya in 2011 that led China to airlift home tens of

thousands of Chinese workers. Aware of the numer-

ous vulnerabilities it is exposed to, Beijing is trying

to diversify its supply sources as well as its supply

routes. It is hoping to reduce its dependence on mari-

time transportation by building cross border pipe-

lines: An oil pipeline through Burma, that is expected

to become operational in May 2013, will allow Beijing

to reduce oil flowing through the Straits of Malacca.

Additional pipelines from Central Asia and Russia are

also conducive to Chinese efforts to hedge the risk of

concentration.24

193

CHINA’S ELUSIVE SUPPLY

SECURITY STRATEGY

Despite this, the IEA estimates that by 2030, China

will be highly dependent on Iraq for oil imports,25 and,

while the Chinese government recently issued a goal

of capping import dependency at 61 percent of total

oil consumption,26 there is an implicit recognition that

China’s oil security is inherently linked to the avail-

ability of global supplies. Moreover, pipelines through

Myanmar, Central Asia, and Russia will reduce the

amount of oil shipped by sea, but will not offset the

fundamental reality that the Straits of Malacca will

remain a potential choke point for Chinese imports.27

For China’s oil companies, this presents an op-

portunity. With the leadership still concerned about

supply security, the strategic need to gain access to re-

sources tallies well with the NOCs’ desire to become

globally competitive firms, to gain access to knowhow

and technologies, and acquire new assets in order to

offset their declining assets at home.28 Initially, in the

early stages of China’s global oil hunt, the “going out”

policy, the government approved overseas invest-

ments reluctantly. But over time, the idea of creating

national enterprises that could be competitive inter-

nationally gained ground. This coincided with grow-

ing concern about rising oil imports, and resulted in

an expression of support for what the NOCs were al-

ready engaged in.

Government attitudes shifted from reluctant to

approval to active support of overseas investments

which involved supporting deal-making through

high level visits, extending credit lines to the NOCs, or

simplifying approval procedures for investments. Yet,

the NOCs’ overseas ventures have had limited success

194

when measured both in commercial terms (profitabil-

ity) and in political terms (supply security).29 Indeed,

Chinese sources estimated that, by the end of 2010,

roughly two-thirds of Chinese oil companies’ $70 bil-

lion in overseas investments were loss making. More-

over, only five million tons (100,000-bpd), one-twelfth

of its overseas output, was shipped back to China,

suggesting that these ventures did not afford Beijing

greater security.30

The only example of state support to overseas

deals that also resulted in supply security is China’s

energy-backed loans. While the NOCs expanded their

investments into Bolivia, Brazil, Ecuador, Kazakh-

stan, Turkmenistan, and Venezuela, they also secured

long-term oil and gas supplies through the loans-for-

resources deals, backed by Chinese policy banks.31

Moreover, these investments diversified the NOCs’

supply sources outside of Africa, though they failed to

reduce meaningfully China’s reliance on the Middle

East.Some of the efforts by the NOCs to acquire produc-

ing assets overseas have, however, been successful.

By acquiring Addax in June 2009, Sinopec was able to

add producing assets and reserves in West Africa and

Northern Iraq’s Kurdish region. But each of these deals

also exposed the NOCs’ weakness in assessing politi-

cal risk, as the acquisition had the additional result of

irking Baghdad and preventing Sinopec’s access to the

Iraqi market.32 Sinopec’s peer and rival, CNPC, man-

aged to establish a foothold in Iraq, with support from

the government. Since 2009, it has won three contract

bids and gained rights to develop the Rumaila and

Halfaya areas with international partners such as BP,

TOTAL, Turkish Petroleum, and Petronas. In 2008,

CNPC also successfully resumed a contract for devel-

195

oping the Al-Ahdab oil field, which it had negotiated

in 1997 under the pre-war Saddam Hussein regime.

CNPC is the only NOC or international oil company

(IOC) to have managed this renegotiation.33

Over the years, the Chinese NOCs have found

themselves on a steep learning curve overseas: They

have faced issues related to worker safety (in Nigeria,

Ethiopia, and Sudan), political risk (CNOOC’s failed

takeover of Unocal and its highly contentious bid for

Nexen), and regime change. When competing over-

seas, without the oligopoly status they have in China,

they must operate more like IOCs. Backing from the

Chinese government is not a universal solution to the

problems of investing in other countries. Cooperation

with other NOCs or IOCs has proven to be crucial for

the NOCs to enter into many unfamiliar host coun-

tries and to reduce risks in their investments. This

was particularly the case in 2009 when Chinese NOCs

joined with other partners to participate in bidding

rounds in Iraq. Bidding in partnership diversified

the risk for each company in a highly risky and po-

litically unstable country. Moreover, partnering with

IOCs has allowed them to gain technical know-how

and streamline their managerial capacity. China’s

NOCs have pursued expertise in deep-water explora-

tion and in liquefied natural gas (LNG) through such

partnerships.

When seeking new sources of supply close to home

that will allow China to fill its ravenous appetite for

energy, the South China Sea is becoming an increas-

ingly attractive potential resource. As Chinese firms

gradually acquire more sophisticated deep-water ex-

ploration know-how, their ability to explore for oil

and gas in the South China Sea increases. Moreover,

the NOCs now have a political window of opportu-

196

nity to place exploration in the South China Sea on

the political agenda, as tensions in Asia mount and

there is greater willingness in Beijing to defend more

assertively the country’s diplomatic and economic

interests. In the context of President Barack Obama

administration’s “pivot” to Asia and its reaffirma-

tion of the U.S. economic and security commitment to

Asia, Asian governments from Manila to Hanoi have

become more willing to push China on long-standing

territorial disputes in the South China Sea. China has

tended to respond very forcefully to such provoca-

tions,34 thereby strengthening Southeast Asian states’

desire to reinforce Washington’s strategic presence

in the region and their security alliances with the

United States.35

Beijing’s top leadership likely seeks to avoid any

confrontations or instability in the South China Sea

throughout sensitive leadership transition periods.

But Beijing must balance its desire for stability on the

one hand with its need to maintain credibility on sov-

ereignty issues in the face of increasingly hawkish and

nationalistic voices on foreign policy on the other. On-

going negotiations over a joint code of conduct in the

South China Sea are unlikely to rectify these dynamics.

Meanwhile, increasingly nationalistic sentiment in all

the countries involved makes any real concessions that

could pave the way for a long-term solution difficult

in the short and medium terms. Even though China’s

new leadership is in the initial stages of consolidating

power, these dynamics seem unlikely to change. The

statements made in November-December 2012 were

likely to have been approved, if not endorsed, by the

incoming leadership. Moreover, Xi Jinping has, re-

portedly, since September 2012, been guiding China’s

maritime more closely.36

197

IMPLICATIONS FOR THE U.S. MILITARY

China’s new leadership, under the guidance of

the 12th FYP, is working to change China’s energy

consumption model and reach ambitious energy ef-

ficiency and carbon reduction goals. But even if they

meet their targets, oil and gas are still likely to account

for roughly a quarter of Chinese energy consumption.

With declining domestic oil output and a shale revo-

lution that is likely to take over a decade to emerge,

China will remain dependent on imported oil and

gas. For all its attempts to purchase assets, “lock in”

resources, reduce reliance on maritime transports, or

secure sea lanes of transportation, no strategy, as Bei-

jing and its companies are learning, is infallible. The

reality remains that much of the oil and gas that is

vital to China’s economic growth will continue to be

produced in volatile countries, traded on international

markets, and flow through the Straits of Malacca.

Even as traders in China may become increasingly

savvy with global trading mechanisms, some lead-

ers’ hawkish views of supply insecurity, especially in

light of the mistrust between Washington and Beijing,

will continue to justify state support for energy secu-

rity. The NOCs, as well as the Chinese navy, that seek

additional financial support for their own parochial

goals, will continue to feed these perceptions.

Southeast Asia inevitably finds itself in the midst

of these dynamics. The South China Sea will become

increasingly important in the Chinese calculus both as

a transit point and as a source of oil and gas, espe-

cially since the NOCs do not need to pay royalties for

resources produced there. While Beijing is unlikely to

endorse unilateral exploration activities in contested

areas, the recent geopolitical dynamics do not bode

198

well for a negotiated code of conduct, and tensions

could remain high.

Greater quantities of LNG will also transit through

Southeast Asia, and, as the Asian gas market develops

and becomes more liquid, Singapore could become

an important regional trading (and pricing) hub. So

while energy trade dynamics could very well bring

Southeast Asia and China closer together, geopoli-

tics will continue to drive a wedge between them. As

China’s neighbors look with growing concern at Bei-

jing’s growing assertiveness, they will seek to deepen

and bolster their ties with Washington in pursuit of

implicit or explicit military guarantees.

Further afield, as Chinese energy imports link it

more closely to the Middle East, the country will be

drawn into the complexities of regional geopolitics.

Energy ties with Saudi Arabia, Iraq, and Iran, com-

bined with competition from other oil producers for

shares of the Chinese market (such as Kuwait and the

United Arab Emirates) could lead to deeper engage-

ment across the region. Israeli gas exports to Asia

(an unlikely scenario at this point) could add another

energy partner into the mix.

But China has extremely limited incentives to get

more involved in regional politics. Looking back at the

past 2 decades of its involvement in the Middle East,

Chinese diplomacy has been skillful at avoiding the

pitfalls of power politics and maintaining commercial

ties, thereby also reaching consensus and catering to

the interests of numerous Chinese stakeholders. A re-

assessment of China’s Middle East policy is probably

already underway, but this is in response to increas-

ing economic risk more broadly and not just energy

security. The Arab Spring, the conflict in Libya, and

the need to airlift Chinese citizens, combined with the

199

subsequent criticism of this move in China, probably

provided the main trigger for this reassessment. The

outcome of the internal debate is therefore likely to

factor in all of China’s economic interests in the re-

gion, as well as its long-standing political connections

and will probably include a desire for greater scrutiny

over outbound investments and better mechanisms

to deal with risk. Put simply, it will generate cau-

tion rather than boldness. Those hoping to see Beijing

shoulder more of the burden in the Middle East will

be disappointed by an increasingly cautious Chinese

foreign policy there.

ENDNOTES - CHAPTER 9

1. Mark Levine, David Fridley, Hongyou Lu, Cecilia Fino-

Chen, Key China Energy Statistics 2012, Berkeley, CA: Lawrence Berkeley National Laboratory, May 2012, available from china.lbl.

gov/sites/all/files/key-china-energy-statistics-2012-june-2012.pdf.

2. BP Statistical Review, 2014.

3. Ibid.

4. “China Country Analysis,” Washington, DC: U.S. Energy

Information Administration, available from www.eia.gov/coun-

tries/cab.cfm?fips=CH.

5. For more details on these institutional constraints, see Erica

Downs, “China’s ‘New’ Energy Administration,” China Business

Review, November-December 2008; Erica Downs, China: The Brookings Foreign Policy Studies Energy Security Series, Washington, DC: The Brookings Institution, December 2006; Michal Meidan, Philip

Andrews-Speed, and Ma Xin, “Shaping China’s Energy Security:

Actors and Policies,” Michal Meidan, ed., Shaping China’s Energy

Security: The Inside Perspective, Paris, France: Asia Centre, 2008; Bo Kong, An Anatomy of China’s Energy Insecurity and Its Strategies, report PNNL-15529, Richland, WA: Pacific Northwest Laboratory,

December 2005.

200

6. Downs, China: The Brookings Foreign Policy Studies Energy

Security Series; Erica Downs and Michal Meidan, “Business and Politics in China: The Oil Executive Reshuffle of 2011,” China Security, No. 19, September 2012.

7. Ibid.

8. “Power Struggles: Seeing China’s Anti-Graft Drive in a

Different Light,” The Wall Street Journal, June 27, 2014, available from blogs.wsj.com/chinarealtime/2014/06/27/power-struggles-seeing-chinas-anti-graft-drive-in-a-different-light/.

9. Some of the most complete overviews of reforms include:

Erica Downs, China: The Brookings Foreign Policy Studies Energy Security Series; Meidan, Andrews-Speed, and Ma Xin, “Shaping

China’s Energy Security: Actors and Policies”; Julie Jiang and Jon-

athan Sinton, “Overseas Investments by Chinese oil Companies:

Assessing the Drivers and Impacts,” IEA information paper, February 2011; Bo Kong, An anatomy of China’s energy insecurity and

its strategies, Pacfic Northwest Laboratory, Report PNNL-15529, December 2005; Dan Rosen and Trevor Houser, China Energy: A

Guide for the Perplexed, Washington, DC: Peterson Institute for International Economics, 2007.

10. Clear Air Alliance of China, “Twelfth Five-Year Plan on

Air Pollution Prevention and Control in Key Regions,” China

Clean Air Policy Briefings, April 2013, available from www.epa.gov/

ogc/china/air pollution.pdf.

11. See the Ministry of Environmental Protection’s air pol-

lution plan, available from english.mep.gov.cn/News_service/

infocus/201309/t20130924_260707.htm.

12. Wei Tian, “Ministry Proposes More Mergers in Key Indus-

tries,” China Daily, January 23, 2013.

13. Song Yen-Ling, “China’s Foreign Oil Dependence to Rise,

But 2015 Limit Set at 61 Percent of Needs,” Platts, January 24, 2013.

14. “China Says Gas Output from S China Sea to Reach 15

bcm by 2015,” Reuters, December 3, 2012, available from www.

reuters.com/article/2012/12/03/china-naturalgas-southchinasea-

idUSL4N09D1L720121203.

201

15. See IEA World Energy Outlook for the previous years, Ji-

ang and Sinton; BP Energy Outlook, 2030. China’s energy companies also have projections, although these are not made public.

16. BP Energy Outlook, 2030.

17. IEA World Energy Outlook, 2010.

18. Song Shengxia, “Foreign Crude Oil Hits 56 Percent of

Consumption,” Global Times, February 5, 2013, available from www.globaltimes.cn/content/760164.shtml.

19. Jiang and Sinton.

20. BP Statistical Review, 2014.

21. Ella Chou, “Shale Gas in China—Development and Chal-

lenges,” Cambridge, MA: Harvard Law University, July 11, 2013,

available from blogs.law.harvard.edu/ellachou/files/2013/07/ShaleGas-in-China-Draft.pdf.

22. Downs, China: The Brookings Foreign Policy Studies Ener-gy Security Series; Bo Kong, China’s International Petroleum Policy, Santa Barbara, CA: Praeger Security International, 2010; Julie

Jiang and Jonathan Sinton, “Overseas Investments by Chinese

Oil Companies: Assessing the Drivers and Impacts,” IEA informa-

tion paper, February 2011, available from www.iea.org/publications/

freepublications/publication/overseas_china-1.pdf; Ma Xin and Philip Andrews-Speed, “The Overseas Activities of China’s National Oil

Companies: Rationale and Outlook,” Minerals and Energy, Vol. 21, No. 1, 2006.

23. OECD, “Investment Policy Reviews, China,” Paris, France:

OECD, 2008.

24. Jiang and Sinton, “Overseas Investments by Chinese Oil

Companies.”

25. Li Xiang and Du Juan, “China to Be Main Buyer of Iraqi

Oil by 2030, Says IEA,” China Daily, November 13, 2012.

202

26. Song Yen-Ling.

27. Chen Shaofeng, “China’s Self-Extrication from the ‘Ma-

lacca Dilemma’ and Implications,” International Journal of China Studies, Vol. 1, No. 1, January 2010, pp. 1-24.

28. Chen Shaofeng, “Motivations behind China’s Foreign

Oil Quest: A Perspective from the Chinese Government and the

Oil Companies,” Journal of Chinese Political Science, Vol. 13, No. 1, 2008, pp. 79-104; Ma Xin and Philip Andrews-Speed, “The Overseas Activities of China’s National Oil Companies: Rationale and

Outlook,” Minerals and Energy, Vol. 21, No. 1, 2006.

29. Yu Hongyan, “Oil Majors See Losses in Overseas Invest-

ment,” China Daily, July 19, 2011.

30. Ibid. Other sources may cite different figures, but also agree that roughly 10 percent of China’s equity output is actually

shipped back to China. See Zha Daojiong, “China’s Energy Secu-

rity: Domestic and International Issues,” Survival, Vol. 48, No. 1, 2006, pp. 179-190.

31. Jiang and Sinton, “Overseas Investments by Chinese oil

Companies”; Erica Downs, Inside China, Inc.: China Development

Bank’s Cross-Border Energy Deals, John L. Thornton China Center Monograph Series, No. 3, Washington, DC: The Brookings Institution, John L. Thornton China Center, March 2011.

32. “Sinopec’s Access Dilemma in Iraq,” Caijing, Octo-

ber 26, 2009, available from hmagazine.caijing.com.cn/2009-10-

25/110293857.html.

33. Jiang and Sinton, “Overseas Investments by Chinese oil

Companies.”

34. Michael D. Swaine and M. Taylor Fravel, “China’s Asser-

tive Behavior—Part Two: The Maritime Periphery,” China Leader-

ship Monitor, No. 35, 2011; Bonnie Glaser and Brittany Billingsley,

“US Pivot to Asia Leaves China off Balance,” Comparative Con-

nections, Center for Strategic and International Studies/Pacific Forum, January 2012, available from csis.org/files/publication/1103qus_

china.pdf.

203

35. Keith B. Richburg, “U.S. Pivot to Asia Makes China Ner-

vous,” The Washington Post, November 16, 2011.

36. Linda Jakobson, “China’s Foreign Policy Dilemma,”

Lowy Institute Analysis, Sydney, Australia: Lowy Institute,

February 2013.

204

CHAPTER 10

THE CHANGING CALCULUS OF INDIA’S

ENERGY SECURITY

Tom Cutler

India’s growing demand for energy and its quest

for energy security impact U.S. national interests in a

variety of ways, ranging from energy policy to trade

and investment, to clean energy technology and cli-

mate change, and to geo-politics and military strategy.

Energy considerations were at the center of the trans-

formation of the Indo-U.S. strategic relationship in

2005 with the announcement of the civil nuclear deal

and its signing after 3 years of negotiation in 2008, and

since then, cooperation in clean energy has been a driv-

ing force in taking the Indo-U.S. energy relationship

to a new level. Looking ahead, it appears that Indian

concerns about its energy security, including its desire

to import U.S. liquefied natural gas (LNG), will come

to the forefront as its growing import dependence and

America’s growing energy self-sufficiency change

the calculus of India’s energy security. This chang-

ing calculus will have important implications for U.S.

military planners.

Although slowing, India’s annual economic growth

rate of around 8 percent in recent years has fueled dra-

matic increases in its demand for energy. Even though

its per capita energy consumption is only about one-

third of the global average, India is now the world’s

fourth largest energy consumer.1 India’s demand for

energy is expected to double over the next 20 years,

supplied by growing consumption of high-ash, coal-

fired power and increased imports of oil, natural gas,

205

coal, and uranium. Given the sheer scale of India’s

energy needs—based in part on the fact that it will

become the world’s most populous nation sometime

in the 2020s—it seems inevitable that India’s grow-

ing demand will have regional and global impacts of

military significance.

The Asian Development Bank (ADB) projects In-

dia’s economy to grow at a rate of 5.7 percent annu-

ally through 2035, while energy demand will grow at

a much slower rate, 2.7 percent per year. Most of this

demand will be driven by the transport sector, which

relies on oil for 93 percent of its total energy needs.

However, coal will remain the dominant fuel in India,

accounting for a 43 percent share of all energy used by

2035. Oil will have a 25 percent share while the biggest

jump will be for natural gas, growing at 4.8 percent an-

nually to reach an 11 percent overall share of demand

by 2035. Meanwhile, hydro-power will be about 2

percent and nuclear just under 4 percent, with renew-

ables accounting for the rest of commercial demand.

Although noncommercial fuels such as firewood and

animal waste have long been a staple of India’s actual

overall consumption of energy, the migration of the

country’s population from rural areas to urban cities

and other factors will lessen its share over time.

During this time frame, imports of oil, gas, and

coal will increase significantly as domestic produc-

tion fails to keep up with demand. India’s import de-

pendence from 2010 to 2035 for each of the primary

fossil fuels is as follows: Dependence on coal doubles

from 16 percent to 33 percent, oil jumps from 76 per-

cent to 92 percent, and gas, mostly LNG, grows from

20 percent to 36 percent.2 Most of these imports will

come by sea, which adds naval dimensions to India’s

supply vulnerability, and is the crux of India’s energy

security challenge.

206

OIL IMPORT VULNERABILITY CENTRAL TO

ENERGY SECURITY

The Middle East accounts for about two-thirds of

India’s oil imports, with Saudi Arabia having the larg-

est share at around 20 percent. New Delhi is making

efforts to diversify its supply sources and has reached

out to countries such as Angola, Nigeria, and Vene-

zuela for supplies despite the much greater distance.

Another aspect of its supply security strategy is for

Indian state oil companies to acquire equity stakes in

overseas production projects on the premise that this

will provide a reliable supply stream. Meanwhile,

sanctions against Iran have proven to be a dilemma for

Indian refiners as they are a natural market for Iranian

crude. However, they have taken steps to reduce their

off take and have been able to obtain waivers from the

United States to purchase lower volumes and still be

in compliance with U.S. law.

The International Energy Agency (IEA) forecasts

that India’s demand for oil will grow faster than that of

any other nation between now and 2035, and its mar-

ket size will exceed that of Japan’s before 2020.3 In an

effort to increase its domestic production of oil from

current levels of around 850,000 barrels per day (b/d)

to satisfy consumption of about 3.5 million-b/d, In-

dia has courted large American oil and gas companies

to invest in its upstream oil sector. But for the most

part, the companies have shied away from bidding on

Indian exploration blocks due mainly to uncertainty

about price controls and government supply alloca-

tion, concerns that were reinforced by the experience

of Reliance in marketing natural gas from its huge dis-

covery in the Krishna-Godavari basin off India’s east

coast in 2002.

207

Downstream, India’s refinery sector took on new

significance in 2011 when it became a major net prod-

uct exporter. Large refinery complexes have been con-

structed, notably the Reliance refinery at Jamnagar,

Gujarat, which is conveniently located near crude sup-

pliers in the Persian Gulf. Mostly privately owned, the

refining sector is a major foreign currency earner for

India and includes some world-class facilities whose

market reach has included providing gasoline to the

U.S. East Coast. India is well positioned to be a sup-

plier of fuel to the U.S. military, which could shorten

supply lines and minimize the oil supply vulnerabil-

ity of U.S. forces deployed in the region.4 However, it

should be pointed out that India’s growing appetite

for oil will likely relegate it to being a net product im-

porter in the next decade or so.

A most important step in safeguarding India’s oil

security was the decision in 2005 to establish a stra-

tegic petroleum reserve, initially 37 million barrels at

three locations to provide a few weeks supply.5 The

U.S. Department of Energy (DOE) provided some

technical assistance during this process as did the IEA

whose out-reach program to nonmember countries

such as India and China has played an important role

in helping assure global cooperation in the event of

an oil market emergency. Although India is not eli-

gible to become a member of the IEA because it is not

a member of the Organization for Economic Coopera-

tion and Development (OECD), it is in the U.S. interest

that, as an emerging major oil importer, its actions be

coordinated with the IEA in the event of an emergen-

cy, including oil stock drawdowns and implementa-

tion of the IEA’s oil sharing scheme. To that end, India

and the IEA have conducted a number of joint activi-

ties, including seminars on oil stocks and joint emer-

208

gency response simulation exercises, and in October

2011, they signed a Memorandum of Understanding

(MOU) for “Cooperation in Oil and Gas Security.”

These efforts will enable the development of Indian

policy doctrine governing the deployment of its stra-

tegic stockpile to be informed by IEA principles.

WHAT THE GOLDEN AGE OF GAS MEANS

FOR INDIA

India’s natural gas demand has nearly doubled

from 2004 to 2011, as gas is seen as a clean alternative

to coal in the power sector. Natural gas plants account

for 10 percent of India’s total electricity generation ca-

pacity, but many of them sit idle due to nonavailability

of gas. A further 8,000 megawatts (MW) of newly com-

pleted gas-fired power plants are not being commis-

sioned due to the gas shortage. While the demand for

gas depends upon the financial viability of the power

sector to pay for the fuel, efforts to secure affordable

gas from proposed gas pipeline projects from Bangla-

desh and Iran have floundered for political reasons. At

present, India is pursuing possible gas supplies from

the proposed Turkmenistan-Afghanistan-Pakistan-

India (TAPI) pipeline project. New Delhi signed gas

supply contracts with Turkmenistan in May 2012, but

it is unclear if the project will come to fruition.

India began to import LNG in 2004, even though it

was more expensive than domestically produced gas.

It currently has three receiving terminals in operation

and plans are moving forward to bring more facilities

on stream and to import increasing amounts of LNG.

India currently gets most of its LNG from Qatar, and

beginning in 2014 from Australia, plus purchases on

the spot market. Access to American-sourced LNG

209

has emerged as a top priority for the Indian govern-

ment as evidenced at the June 2012 meeting of the

U.S.-India Strategic Dialogue when the Indian gov-

ernment made a high-level formal request for guar-

anteed supplies of LNG. Although U.S laws regulat-

ing the approval process for LNG exports to non-Free

Trade Agreement countries such as India could not be

changed without an act of Congress, the DOE export

review process has produced positive results. India’s

Gas Authority of India, Ltd. (GAIL) already has gas

supply contracts in place for two of the first four LNG

export projects which have received conditional ap-

proval by DOE—the Cheniere Sabine Pass project and

Dominion Resource’s Cove Point project.

India has also been moving to exploit its uncon-

ventional gas reserves, but there is no expectation that

shale gas will be the game changer it has become in

the United States. Nevertheless, firms such as Reliance

and GAIL have invested in U.S. firms exploring and

producing unconventional gas to acquire technology

and expertise.

New Delhi’s quest for natural gas supply security

also includes encouraging increased U.S. LNG exports

in general on the premise that relatively inexpensive

U.S. gas might result in lower world LNG prices. In

April 2013, Indian Ambassador to the United States

Nirupama Rao wrote an op-ed in The Wall Street Jour-

nal that concluded that increased U.S. LNG exports

and Indian investment in the U.S. shale gas sector

“will further consolidate our strategic ties.”6

COAL IS STILL KING

Despite the growth in natural gas use, coal is still

king in India. Coal accounts for half of India’s energy

consumption and is the energy source for two-thirds

210

of its generation of electricity. Nevertheless, in spite

of having the fifth largest coal reserves in the world

and being the world’s third largest producer, India

imports increasing amounts of coal. This trend is add-

ing a new dimension to India’s energy security.

The inability of state-run Coal India Ltd., to operate

efficiently and an assortment of regulatory obstacles

and environmental hurdles have meant there is not

enough domestic coal to satisfy demand. Domestic

price controls force the state coal monopoly to sell coal

below market prices and deter additional production.

Rail and other infrastructure bottlenecks cause delays

and shortages. Government controlled electricity pric-

es force many coal-fired power plants to operate at a

reduced capacity using domestic coal supplies, or at a

loss using expensive imported coal. Insurmountable

political resistance to opening up the sector to private

firms has left India no choice but to import increasing

amounts of higher priced foreign coal, about 142 mil-

lion metric tons in 2012. Indonesia and South Africa

are primary sources, while the United States exported

nine million tons of coal to India last year. This trend

reinforces the notion that importing energy fuels from

the United States is becoming an increasingly impor-

tant component in the formulation of Indian energy

security.

THE CRISIS IN POWER PERSISTS

India will never become a global superpower so

long as it is beset by persistent shortages of electricity.

An estimated 25 percent of its population lives with-

out any access to electricity and lifting these hundreds

of millions of people out of poverty is a major national

priority. India has set ambitious targets for additional

211

power generation capacity from fossil, nuclear, and

renewable sources but the country currently has a

10 percent peak load deficit, fuel shortages, and high

transmission losses. The Indian government has made

slow progress in getting new power plants built or up-

grading the grid as the sector is not financially viable.

Indian politicians win votes by offering free electric-

ity to farmers and low-income citizens, forcing state-

owned electricity distribution companies to absorb

over $37 billion in losses per year, leading to power

cuts and blackouts during peak demand.

To meet growing demand, India is trying to in-

crease its renewable power generation capacity. Plans

call for additional hydropower plants (currently 21

percent of total capacity), and nuclear plants (current-

ly about 3 percent of total capacity). India’s Jawaharlal

Nehru National Solar Mission hopes to add 20,000-

MW of on-grid solar and 2,000-MW of off-grid capaci-

ty by 2022. India’s installed wind capacity was 14,158-

MW in 2011, and there is still considerable room for

growth as the country has an estimated onshore wind

potential of 65,000-MW. However, one of the setbacks

in promoting wind power has been market-distorting

government tax incentives that rewarded investment

in wind power but not its actual operation.

Although renewables will never play a big enough

role in India’s energy mix to make it energy self-suf-

ficient, improved energy efficiency could make a big

difference. As the Indian economy continues to de-

velop, there is tremendous potential for game chang-

ing savings to be realized through improved energy

efficiency, especially in buildings.

To realize this potential and other opportunities

on both the supply and demand sides of the equation,

the ADB estimates that India will need $2.3 trillion in

212

investment in its energy sector by 2035.7 However, In-

dia will have to improve its investment climate and

do a better job of applying market-based pricing in its

energy sector if it is to attract the capital it needs. This

will be hard to accomplish. Plus, as the sector is mod-

ernized new energy security threats will emerge. For

example, the deployment of smart grid technologies

will only heighten the risk of cyber threats to the reli-

ability of its energy infrastructure.

TOO MANY KEY PLAYERS IN INDIAN

ENERGY POLICYMAKING

India’s approach to energy governance relies upon

a decentralized institutional structure that can com-

plicate policy formulation and render policy imple-

mentation difficult. The IEA recommends that “India

should overhaul its current patchwork of energy poli-

cies in favor of a comprehensive clear-cut policy,” as

there is no central Ministry of Energy at the national

level.8 Instead, there are five main separate ministries

with primary energy responsibilities: the Ministry of

Power, the Ministry of Coal, the Ministry of Petroleum

and Natural Gas, the Ministry of New and Renewable

Energy, and the Department of Atomic Energy. In ad-

dition, the Ministry of Environment and Forests has

a major impact upon the energy sector because it can

block or delay energy projects, while the Ministry of

External Affairs has its own energy security division.

The high level Planning Commission is also a key

player. It plays an overarching role in energy policy-

making, among its other economic policy responsi-

bilities and seeks to facilitate coordination among the

various ministries. The Planning Commission pre-

pares the Integrated Energy Policy and the Five Year

213

Plans that are the key policy frameworks used by the

Government of India. There is also the National Ac-

tion Plan on Climate Change, which is composed of

eight “Missions,” including the Jawaharlal Nehru Na-

tional Solar Mission and the National Mission for En-

hanced Energy Efficiency. However, implementation

of these and other energy policies frequently depends

upon actions by the states which have important legal

authorities and jurisdictions, especially in relation to

electric power, and this adds another layer of politics

to India’s energy landscape.

U.S.-INDIA CLEAN ENERGY COOPERATION:

A BRIGHT SPOT

Energy cooperation between the United States and

India has evolved significantly over the years. One

key development in recent years has been the U.S.-In-

dia Energy Dialogue, led on the U.S. side by the DOE

and on the Indian side by the Planning Commission.

This Dialogue functions as a coordinating mechanism

for cooperation designed to enhance energy security,

promote increased energy trade and investment, fa-

cilitate the deployment of clean energy technologies,

and support the safe use of civil nuclear power. Activ-

ities involving a number of different U.S. Government

agencies have included energy resource assessments;

technical exchanges regarding civil nuclear power;

site visits to the U.S. Strategic Petroleum Reserve;

and workshops on clean coal technology, fiscal and

regulatory regimes for oil and gas exploration, the de-

ployment of renewables, energy efficiency programs,

and scientific research on gas hydrates oil stock. This

cooperation rose to a new level in November 2009

when Prime Minister Manmohan Singh met President

214

Barack Obama in Washington, and the two leaders

signed an MOU between the Government of India

and the Government of the United States of America

to Enhance Cooperation on Energy Security, Energy

Efficiency, Clean Energy, and Climate Change.

Out of this MOU was borne a new initiative to ad-

vance clean energy research and deployment entitled

the Partnership to Advance Clean Energy (PACE). It

is implicitly based on the premise that if two countries

cannot agree on the politics of climate change then

perhaps they can at least cooperate in the science of

clean energy. PACE includes a research component

featuring the establishment in November 2010 of a

Joint Clean Energy Research and Development Cen-

ter, which is a 5-year, $125 million initiative to spon-

sor joint research in solar energy, energy efficiency in

buildings, and second generation biofuels.9

Amid all this positive collaboration is the festering

issue of India’s Local Content Restrictions on import-

ed solar photovoltaic cells and modules, which, if not

properly managed, could escalate into a mini-trade

war. This state of affairs, where there is joint scientific

research simultaneous with trade frictions in the area

of solar power, is one of several ironies and paradoxes

in U.S.-India energy relations.

THE UPS AND DOWNS OF U.S.-INDIAN

CIVIL NUCLEAR COOPERATION

India’s civil nuclear sector has 19 reactors operat-

ing which provide just under 4 percent of the nation’s

power supply. Although it was the U.S. Agency for

International Development (USAID) that helped India

build its first commercial reactor at Tarapur in 1969,

India has since developed an essentially indigenous

215

program that has become a source of great pride after

having been ostracized following its first test of a nu-

clear weapon in 1974. Although it has modest reserves

of uranium, India has large reserves of thorium, and

so it has embarked upon a long-term, three-stage pro-

gram using indigenous pressurized heavy water reac-

tors and foreign supplied light water reactors with the

goal of developing a thorium fuel cycle for advanced

reactor designs, including Fast Breeder Reactors. De-

spite the nuclear power plant disaster at Fukushima,

India is soldiering onward in its nuclear develop-

ment to increase its generating capacity from about 5

gigawatts (GW) now to 60-GW by 2030, and has sev-

eral reactors under construction of both domestic and

Russian design.

Because it is not a signatory to the Nuclear Non-

Proliferation Treaty, a key development for India

was the signing of the Peaceful Uses of Nuclear Tech-

nology Agreement (123 Agreement) in 2008, known

as the Hyde Act. This led to India’s acceptance into

the Nuclear Suppliers Group restrictions in 2008, es-

sentially based upon an exception whereby it would

separate its military weapons programs from its civil

nuclear activities. However, if the measure of success

is genuine commercial opportunities for U.S. firms,

then the civil nuclear deal has yet to fulfill its expecta-

tions. Although India has designated sites in Gujarat

for Westinghouse and in Andhra Pradesh for George

Eastman House, a key obstacle to commercial prog-

ress has been its lack of clear liability laws for nuclear

damage consistent with the Convention on Supple-

mentary Compensation.

Other problems in administering provisions of the

123 Agreement, in nuclear security cooperation, and in

other areas of scientific collaboration, have contribut-

216

ed to a high level of frustration, with the United States

feeling certain segments of the Indian establishment

are trying to undermine the deal, while some in India

feel the United States has shifted the goal posts. What

both sides do agree on is that India has not been a pro-

liferator of nuclear materials, and that there is a desire

for nuclear peace amid their frictions with neighbor-

ing—and nuclear weapons capable—Pakistan.

SOUTH ASIA REGIONAL ENERGY

INTEGRATION CRUCIAL TO FUTURE

ENERGY SECURITY

India’s energy footprint dominates South Asia,

where the considerable potential for intraregional

trade in natural gas, hydro-power, and electricity re-

mains unrealized. The precarious state of Pakistan’s

energy sector represents an unpredictable threat to

India’s interests if Pakistan were to destabilize under

the weight of its energy woes.10 In his assessment of

South Asia’s looming energy crisis, Charles Ebinger

has warned:

The region’s governments can no longer solve their

energy problems in isolation. There is no choice but to

look outward for much of the energy their countries

will need over the coming decades. To that end, the

most egregious decision by governments throughout

the region has been their willingness to allow politi-

cal disputes and rivalries to overshadow the potential

‘win-win’ economic benefits of energy collaboration.

Long term energy security is simply unattainable

without intraregional and interregional cooperation.11

The U.S. Government has recognized this need

and sought to bring the parties together to promote

217

greater regional integration and cross-border trade,

notably through USAID’s South Asia Regional Initia-

tive-Energy. Looking outward from South Asia, one

cannot ignore India’s geographic location astride the

sea lanes in the Indian Ocean, where 70 percent of the

world’s oil trade, 60 percent of LNG, and 70 percent of

coal trade is transported, and where some predict the

United States, India, and China will inevitably com-

pete for blue water dominance.12 Indeed, the most im-

portant military implication of India’s growing energy

needs is its increased reliance upon sea borne trade in

energy and uncertainties regarding the future U.S role

as a guarantor of safe passage.

CONCLUSION

It is in the U.S. interest for India to be energy se-

cure. But India faces many difficult challenges and its

leadership will be under increasing pressure to satisfy

its growing energy needs.13 There are issues where the

United States can be helpful and issues where it can-

not. Many of the solutions to India’s energy challenges

require domestic political will on the part of policy-

makers in New Delhi. Controversial issues such as the

adoption of true market pricing and privatization of

key energy para-statals are all subject to the vagaries

of India’s vibrant democratic process. But as imports

rise, India can no longer insulate itself from the sup-

ply fluctuations and price volatility of world energy

markets, and it will need to develop strategic align-

ments and expand its universe of international coop-

eration to ensure its energy security. As an emerging

energy supplier and as a key partner of India with a

number of proven bilateral mechanisms for energy co-

operation already in place, the United States is poised

218

to forge even closer civil and military ties to enhance

mutual energy security.

ENDNOTES - CHAPTER 10

1. International Energy Outlook, Washington, DC: U.S. Energy

Information Administration (EIA), 2013. The EIA’s reference case

forecasts 2013 consumption to rise from 26 quadrillion British

thermal units (BTUs) to 49 quadrillion BTUs in 2035.

2. See “Asian Development Outlook 2013: Asia’s Energy

Challenge,” Manila, The Philippines: Asian Development Bank,

2013, pp. 261-267.

3. World Energy Outlook, Paris, France: International Energy

Agency, 2013, p. 504.

4. Sourcing fuel from U.S. territory is not always the best way

to secure supplies for U.S. forces operating in distant regions. See

Tom Cutler, “Myths of Military Oil Supply Vulnerability,” Armed

Forces Journal, July 1989.

5. India is setting up strategic crude reserves at three loca-

tions—Visakhapatnam, Mangalore, and Padur. Although the

existing sites have yet to become operational, India has already

announced plans to expand these reserves significantly. See “In-

dia Country Analysis,” Washington, DC: U.S. Energy Information

Administration, March 18, 2013.

6. Nirupama Rao, “India is Ready for U.S. Natural Gas,” The

Wall Street Journal, April 8, 2013.

7. As quoted in The Economic Times of India, October 14, 2013.

See also “Energy Outlook for Asia and the Pacific,” Manila, The

Philippines: Asian Development Bank, October 2013, pp. 261-267.

8. Sun-Joo Ahn and Dagmar Graczyk, “Understanding En-

ergy Challenges in India: Policies, Players and Issues,” Paris,

France: International Energy Agency, 2012, pp. 7-9.

219

9. There is also a major PACE program in deployment. See

Progress Report on the “U.S.-India Partnership to Advance Clean

Energy (PACE): An Initiative of the U.S.- India Energy Dialogue,”

Washington, DC: U.S. Agency for International Development

(USAID), June 2013.

10. Michael Kugelman, “Pakistan’s Energy Crisis: From Co-

nundrum to Catastrophe?” Seattle, WA: National Bureau of Asian

Research, March 13, 2013.

11. Charles Ebinger, “Energy and Security in South Asia: Co-

operation or Conflict?” Washington, DC: Brookings Institution

Press, 2011, p. 11.

12. Robert Kaplan, Monsoon: The Indian Ocean and the Future of

American Power, New York: Random House, 2010, pp. 5-11.

13. India defines its energy security in two main ways: af-

fording access to energy for the hundreds of millions of impov-

erished people who do not have access to electricity; and in terms

of security of supply, especially imports. The environment and

the energy-water nexus are also concerns. The ADB developed an

Energy Security Index based upon 20 indicators across a range of

energy factors; India ranked second worst out of 18 Asia-Pacific

countries, ranking only above Myanmar. “Asian Development

Outlook 2013,” p. 64.

220

CHAPTER 11

ENERGY DEMAND IN THE

DEVELOPING WORLD

Deborah Gordon

The 2010s generally found energy demand level-

ing off in developed countries and taking off in the

developing world. Between 1970 and 2010, global en-

ergy demand doubled and shifted from the developed

to developing regions. The aggregate share of energy

consumption in the countries that comprise the Orga-

nization for Economic Cooperation and Development

(OECD) shrank significantly from 60 percent to 41

percent, off a much larger base, as seen in Figure 11-

1. The countries and regions that grew their energy

consumption the most over the past 40 years included

China, the Middle East, Asia, and Africa.

Figure 11-1a. Global Energy Consumption.

221

Source: 2013 Key World Energy Statistics, Paris, France: International Energy Agency (IEA), available from www.iea.org/publica-

tions/freepublications/publication/KeyWorld2013_FINAL_WEB.pdf.

Figure 11-1b. Global Energy Consumption.

Future growth trends are expected to continue in

this direction, with energy demand expanding faster

in the developing world. This should not be surpris-

ing. The OECD nations ranked well above average in

global per capita energy demand and most of the de-

veloping nations are situated below the bar as seen in

Figure 11-2. This creates a powerful impetus for less-

developed nations to catch up. As the citizens in the

developing world become more affluent this will drive

greater modernization and mobility. These trends, in

turn, will increase energy consumption more rapidly

in developing nations.

222

Source: Author’s image; IEA, 2013 Key World Energy Statistics.

Figure 11-2: Per Capita Primary Energy

Consumption, 2011.

PROJECTING FUTURE TRENDS

According to the International Energy Agency

(IEA), between 2011 and 2035, world primary energy

demand is projected to increase at an average annual

rate of 1.3 percent. The OECD countries are expected

to grow more slowly than the rest of the world, as seen

in the annualized growth rates noted earlier, each of

the bars in Figure 11-3. While the OECD countries cur-

rently consume more energy than the countries of any

other region, starting in 2025, it is anticipated that Asia

in its entirety (including China) will demand more

energy than the OECD nations combined. The global

share of energy consumed in the OECD is projected to

contract from 40 percent to 32 percent through 2035,

223

continuing a downward trend that began in the later

part of the 20th century. China, India, Brazil, Indone-

sia, the Middle East, and Africa are among the devel-

oping nations and regions that are expected to experi-

ence the most rapid growth in energy demand in the

years ahead.

Source: Author’s image; IEA, 2013 Key World Energy Statistics.

Figure 11-3: Growth in Primary Energy Demand,

by Region, 2011-35.

Disaggregating demand by energy sources indi-

cates significant changes ahead. Looking out to 2035,

non-OECD nations are projected to dominate energy

consumption across the board—except for nuclear

power, as seen in Figure 11-4. The majority of future

energy demand in fossil and nonfossil fuels is expected

to occur in China, India, Africa, and other non-OECD

224

regions. While the story of China’s massive energy de-

mands is not particularly novel, in reality other non-

OECD nations could collectively consume one-half of

tomorrow’s oil, gas, and renewables.

Source: Author’s image; IEA, World Energy Outlook, 2012,

Appendices.

Figure 11-4. Projected Energy Demand Growth,

by Source and Region, 2010 vs. 2035

(million tons oil equivalent [MTOE]).

225

ELECTRIC POWER

Electricity generation, powered by renewable re-

sources and natural gas, is projected to increase in

the OECD countries, especially in all developing re-

gions. A projected 50 percent growth spurt in future

electricity generation will create both challenges and

opportunities. Electricity generated with fossil fu-

els, especially coal and residual oil, will exacerbate

air pollution and climate change concerns. As the

OECD’s coal consumption declines, China, India, and

non-OECD Asia are projected to increase their use.

By contrast, future electricity demands in emerging

economies could ramp up consumption of renewable

and distributed, small-scale nuclear and other cleaner

energy sources, creating economies of scale for alter-

natives to fossil fuels.

FOSSIL FUELS

Moving beyond fossil fuels will be no small feat,

however. Oil, gas, and coal consumption are projected

to expand to comparable levels—4,000-Mtoe each—

by 2035. More fossil fuels will flow to the develop-

ing world than to the OECD countries. Natural gas

demand is expected to ramp up fastest. While gener-

ally cleaner, the potential to pollute with natural gas

through excessive venting and flaring is a mounting

concern. Many of the air quality and climate problems

that natural gas could address run the risk of mak-

ing environmental matters worse in emerging nations

if best practices, strict regulations, and tight enforce-

ment are not enacted.

If emerging nations continue to motorize follow-

ing patterns established in the countries of the OECD,

226

oil consumption will expand across the board in all

developing regions. Heavier oils in Venezuela, Can-

ada, Saudi Arabia, and elsewhere that are not suited

for transportation fuels increasingly could be used to

generate power, fuel maritime movements, and serve

as industrial inputs. As oil use grows in emerging na-

tions, the OECD countries are expected to reduce col-

lective oil demand by an estimated 25 percent, largely

due to advances in vehicle fuel efficiency. High global

oil prices will encourage these automotive trends in

affluent nations while dampening auto ownership

and use in less-affluent regions. Compact urban de-

velopment, especially in the world’s expanding mega-

cities, could also help emerging nations contain their

oil demand in the years ahead.

NUCLEAR

Nuclear energy is the only source that is expected

to remain dominated by the countries of the OECD

in 2035. Outside the OECD countries, only China is

expected to witness future growth in nuclear power.

But even in the United States, where nuclear power

increased 25 times from 1970 to 2003 before leveling

out, this source seems to have turned a corner. For the

first time in 15 years, operating U.S. nuclear plants are

being forced to close, and energy companies are scut-

tling plans for new plants and upgrades to existing

ones. This is due to cheap natural gas alternatives, flat

energy demand, and renewed safety and regulatory

concerns, especially after the 2011 Fukushima nuclear

accident. It is unclear how these nuclear trends will

extend beyond the United States. Nevertheless, nucle-

ar is expected to have the smallest increase in energy

demand in 2035 compared to all other sources.

227

ENERGY-RELATED SECURITY

IMPLICATIONS BEYOND THE 2010s

All of these changes in energy consumption pat-

terns will play out against the larger backdrop of

increasingly dynamic energy supplies, with massive

new resources being unlocked in the Western hemi-

sphere. Geographic imbalances between supply and

demand will lead to increased global fossil fuel move-

ments. A significant portion of the projected 2,750-

Mtoe increase in fossil fuel demand in 2035 will cir-

cumnavigate the globe as it moves from producers to

manufacturers and on to consumers.

While this growth of energy trade could increase

worldwide economic integration, it could also inten-

sify global risks from terrorism, accidents, and dam-

ages wrought by climate change. Looking ahead, it is

important to understand what these energy demand

trends may imply for developing countries and for

global energy self-sufficiency and energy security.

ELUSIVE ENERGY SELF-SUFFICIENCY

Overall, the developing world is projected to be-

come less energy self-sufficient in the decades to

come.1 The developing countries are planning to in-

vest an estimated $23 trillion (in 2011 dollars) on ener-

gy infrastructure through 2035, nearly twice as much

as OECD nations.2 Oil investments are projected to be

distributed across all developing countries, while gas,

coal, and power investments will be centered largely

in Asia’s developing nations. These infrastructure

investments will likely lock in energy consumption

patterns through the middle-to-end of the century. Se-

228

lecting energy investments wisely will be critical. But

it will also be difficult.

Many emerging nations have a long history of

massively subsidizing fossil fuel consumption. In

2011, these subsidies topped $0.5 trillion, with the

majority in the Middle East, North Africa, and Asia.3

These expenditures amounted to six times the level of

support to renewable energy. The IEA estimates that

15 percent of global carbon dioxide emissions cur-

rently receive an incentive of $120 per ton in the form

of fossil-fuel subsidies, while only 8 percent of emis-

sions are subject to a carbon price.4 Growing budget

pressures strengthen the case for fossil-fuel subsidy

reform worldwide. While G20 and Asia-Pacific Eco-

nomic Cooperation (APEC) countries are moving to

phase out subsidies, Middle East and African nations

will need to follow suit.

Taken together, oil and gas are expected to con-

tinue to dominate energy demand into the future.

Increasing consumption will be met by an increas-

ing array of unconventional hydrocarbon resources.

Transportation costs, surprisingly, are a not a major

part of energy supply chain economics because they

currently use inexpensive residual oil (bunker fuel).5

While their transport is highly polluting, fossil fuels

move around the globe with relative ease and afford-

ability. These dynamics will invite more suppliers to

vie for market share in a world that becomes increas-

ingly energy interdependent. While greater competi-

tion for oil and gas trade could increase risks of price

volatility and short-term fossil fuel supply interrup-

tions, it could also promote energy alternatives.

229

ROLE OF DISTRIBUTED, RENEWABLE

ENERGY GENERATION

As electricity demand explodes, especially in

emerging countries, renewables are expected to meet

nearly half of the net increase.6 With China in the lead

and non-OECD Asia, Africa, and Latin America at

their side, growth in hydroelectric power, wind, and

other renewables is projected to be more than double

that in the OECD, as seen in Figure 11-5. But to realize

these gains, the conditions will have to be right.

Source: IEA, World Energy Outlook, 2013.

Figure 11-5. Growth in Electricity Generation

from Renewables, 2011-35.

Financial support to renewable sources of energy

totaled $101 billion compared to over five times that

amount for fossil fuels in 2012.7 The expansion of non-

hydroelectric renewables, however, depends on sub-

sidies that more than double to 2035.8 This requires

230

significant changes to existing policies and social con-

tracts. Moreover, additions of wind and solar will have

implications for power market design and costs that

must be managed under new regimes that differ from

those governing fossil fuel power generation. Today’s

share of fossil fuels in the global mix, at 82 percent,

is the same as it was 25 years ago. The strong rise of

renewables only reduces this to around 75 percent in

2035.9 In other words, while critical, renewable ener-

gy will be necessary but not sufficient to stem global

energy security implications in the future.

STRUGGLES WITH ENERGY SECURITY

Energy demand in the 2010s and beyond will have

significant impacts on the U.S. military. As energy

trade continues to globalize, it will take more resourc-

es to maintain energy and economic stability through-

out the world. Leadership will remain critical. At the

same time, America will need to play an increasingly

discerning, collaborative, and nuanced role in its dy-

namic and interdependent energy future.

The importance of the Middle East and North Af-

rican oil producing countries will not fade despite ris-

ing North American oil and gas supplies. Non-OECD

Asia is projected to become the unrivaled center of

global oil trade through the limited number of stra-

tegic transport routes. Asian fossil fuel deliveries are

projected to come not only from the Middle East and

Africa, but also from Russia, the Caspian area, Latin

America, and Canada.

Geographic choke points for fossil fuel trade are

not expected to ease in the future, as seen in Figure

11-6. If anything, they could become even more con-

cerning. Oil will move as raw crude and petroleum

231

products and natural gas will be moved by pipeline

over land and increasingly liquefied and moved by

maritime shipping from continent to continent. By

2035, for example, a significantly increased amount

of oil and gas could be moving through the Straits of

Malacca and Hormuz.10 The Singapore Strait will be

another potential problem area, given the amount of

fossil fuels destined for Asia in the decades ahead.

Source: Energy Geopolitics, available from energeopolitics.files.word-press.com/2012/09/international-maritime-route.png.

Figure 11-6: Mapping of Global Maritime

Transit Density with Select Choke Points.

CHALLENGED BY CLIMATE SECURITY

The energy sector is the key to limiting climate

change but the trends are headed in the wrong direc-

tion, especially in emerging nations. Non-OECD coun-

tries now account for 60 percent of global emissions,

up from 45 percent in 2000.11 As such, India, China,

232

Russia, and the Middle East are far more energy inten-

sive than the United States, the EU, and others in the

OECD, as seen in Figure 11-7.

Source: World Energy Outlook Fact Sheet, Paris, France: IEA, June 2013.

Figure 11-7. Carbon Dioxide Intensity in Selected

OECD and Non-OECD Regions, 2010-35.

With more fossil fuels destined for emerging na-

tions in the decades ahead, these areas are walking a

tight rope. They will drive the very changes to the cli-

mate that they are least prepared to deal with, includ-

ing increased droughts and water scarcity, reduced

agricultural yields and food shortages, greater disease

and morbidity, heightened storm intensity and infra-

structure vulnerability, and dislocation and violence.

The IEA forecasts that global carbon dioxide emission

intensity will have to be halved to meet the 450 parts

per million emissions target. But this burden will not

be born equally. Emerging nations will require the

most significant reductions in climate intensity for

environmental and economic reasons.

233

While climate change alone is currently considered

unlikely to be a primary cause of conflict, it is thought

to be an important secondary cause, as shown in Fig-

ure 11-8. Hence, the governments and militaries in 110

countries have identified climate change as a threat to

their security. Ultimately, however, the security con-

sequences of climate change will likely be determined

by how rising global temperatures affect and interact

with local political, social, and economic conditions as

much as by the magnitudes of the climatic shift itself.12

Source: American Security Project, available from american

securityproject.org/issues/climate-energy-and-security/climate-change/

impacts/.

Figure 11-8. Global Risks from Climate Security.

TOWARD A GLOBAL ENERGY POLICY

The global energy paradigm is shifting. As the

Western hemisphere taps into unconventional oil and

gas resources, overall energy demand is growing rap-

234

idly in emerging countries in the Eastern hemisphere.

But the more energy market fundamentals change, the

more the underlying energy situation is expected to

remain the same. Fossil fuels are expected to meet the

bulk of tomorrow’s energy needs absent public poli-

cies that correct market failures associated with these

utilization patterns. Continuing to extract, convert,

and combust dirtier hydrocarbons—especially extra-

heavy oils, gas-to-liquids, coal gasification, coal lique-

faction, methane hydrate extraction, and oil liberated

from carbonates—will, in turn, exacerbate pollution

and drive climate change. China, with its choking

smog, is starting to witness firsthand the dangerous

consequences that fossil fuels bring.

An increasingly affluent world desires—and de-

serves—universal access to cleaner energy. According

to the IEA, an estimated $1 trillion in cumulative in-

vestment is needed (primarily in emerging nations) to

achieve universal energy access by 2030. In addition

to serving the energy impoverished, energy invest-

ments upward of $40 trillion will be required over the

next 2 decades to expand global energy supply capac-

ity and replace obsolete energy equipment.13 Given

the long lifetimes of energy infrastructure, it will be

critical that, over the long term, both consumers and

producers must be able to live safely side-by-side with

the energy systems they ultimately choose to invest in.

Significant challenges lie ahead. There are barriers

to change, and laissez faire systems encourage the en-

ergy status quo. It is entirely rational for the current

fossil fuel based energy enterprise to endeavor to play

a significant role in meeting growing demands, and for

good reason. Energy is an extremely vital and hugely

profitable endeavor. International corporations and

nationalized oil companies along with wildcatters and

235

Wall Street are all eager to claim a stake in tomorrow’s

emerging energy market.

The economy and energy are so intertwined that

it will take a delicate balancing act to manage them,

especially in the context of growing globalization. Fu-

ture global energy policy will have to address mount-

ing market failures. The asymmetry of information

that impedes competition must be combated with

expanded, standardized, verifiable, and transparent

global energy data collection. Environmental exter-

nalities, including climate change and the pollution

of air, water, and land must be internalized in energy

pricing. Only the most robust global energy policies

hold out hope of changing course to deliver more ef-

ficient energy markets for tomorrow’s global citizens.

ENDNOTES - CHAPTER 11

1. World Energy Outlook 2012, Paris, France: International Energy Agency (IEA), Figure 2.15.

2. Ibid., Table 2.5.

3. Ibid., Figure 2.13.

4. Redrawing the Energy-Climate Map, Paris, France: IEA, June 2013, available from www.iea.org/publications/freepublications/publication/WEO_Special_Report_2013_Redrawing_the_Energy_Climate_

Map.pdf.

5. The economics of LNG transport are less favorable due to

increased cost for liquefaction, regasification, and the need for special shipping containers that can carry cryogenic LNG.

6. World Energy Outlook, Fact Sheet, Paris France: IEA, 2013, available from www.worldenergyoutlook.org/media/weowebsite/

factsheets/WEO2013_Factsheets.pdf.

236

7. Ibid.

8. World Energy Outlook 2013, London Release, Paris, France:

IEA, November 12, 2013, available from www.worldenergyoutlook.

org/media/weowebsite/2013/LondonNovember12.pdf.

9. Ibid.

10. World Energy Outlook 2012, Figure 2.18.

11. IEA, June 2013.

12. Andrew Holland and Xander Vagg, “American Security

Project: Preliminary Results,” The Global Security Defense Index

on Climate Change, March 21, 2013, available from americansecu-rityproject.org/ASP%20Reports/Ref%200121%20-%20Global%20

Security%20Defense%20Index%20P-Results.pdf.

13. World Energy Outlook 2012.

237

CHAPTER 12

NEW SUPPLY ROUTES—NEW CONFLICTS?

Michael T. Klare

Access to vital sources of energy has been a source

of conflict throughout modern history. This is so be-

cause an adequate supply of energy is essential for the

functioning of all large economies and because many

countries cannot satisfy their energy needs from do-

mestic reservoirs but must rely, at least in part, on

energy acquired from foreign sources—in some cases,

from reserves located in unstable or unfriendly coun-

tries. Because of the importance accorded to the acqui-

sition of these supplies, energy-importing states have

often employed military means to safeguard their ties

with overseas energy suppliers and to deter (or re-

pel) attacks on critical foreign reserves.1 While energy

technology is constantly changing, conflict over ener-

gy is likely to recur so long as major consuming states

continue to rely on supplies derived from distant and

unruly areas.

The use of force to ensure the safety of overseas

energy supplies is often associated with efforts by

the major energy-consuming states to establish domi-

nance over key energy producing areas and to protect

friendly producing countries against external and in-

ternal attack. This was, for example, the principal mo-

tive for British involvement in the Persian Gulf area

following the discovery of oil in southwestern Persia

(later Iran) in the early years of the 20th century, and

for U.S. involvement in the same area after World

War II.2 But military operations have also been tak-

en to protect the supply lines that connect the major

239

energy-producing areas to major consuming nations.

These supply lines are often at risk of attack from in-

surgents, terrorists, pirates, and other violent parties,

and so pose a distinct security problem for the energy-

importing countries.

The disruptive consequences of any significant

interruption in the delivery of foreign energy sup-

plies became painfully evident in 1973-74, when Arab

members of the Organization of Petroleum Export-

ing Countries (OPEC) imposed an embargo on pe-

troleum shipments to the United States in retaliation

for U.S. aid to Israel during the 1973 Arab-Israeli war.

The embargo produced a severe shortage of oil in the

United States, leading to long lines at gasoline filling

stations and a slowdown in the economy as a whole.3

Although not caused by an attack on supply lines per

se, the 1973-74 “oil shock” exposed the nation’s vul-

nerability to disruptions in the global flow of energy

and sparked vigorous efforts to minimize these vul-

nerabilities, in part through “diversification” of the

nation’s sources of imported oil and in part by devot-

ing greater military effort to the protection of global

supply lines. “I’m determined that our nation will

never be held captive,” to another such interruption

in supply, President Ronald Reagan declared in May

1987, when ordering U.S. warships to protect Kuwaiti

oil tankers in the Persian Gulf against Iranian attack.

“We will not return to the days of gas lines, shortages,

economic dislocation, and international humiliation.”4

As will be shown, the United States has devoted

enormous effort to fulfilling this promise. But the

problem of ensuring the safety of the world’s energy

supply lines is becoming increasingly difficult due

to the magnitude of the global energy trade, the vast

distances covered, and the geographic complexity of

240

international transit routes involved. Some impres-

sion of this challenge can be gleaned by examining the

tables, charts, and maps provided by energy giant BP

in its Statistical Review of World Energy, published an-

nually. In 2012, for example, international shipments

of oil amounted to 55.3 million barrels per day (mbd),

or 62 percent of total world oil consumption of 89.8-

mbd; shipments of natural gas in 2012 totaled 1,033

billion cubic meters, about two-thirds of which were

delivered by pipeline and one-third in the form of liq-

uefied natural gas (LNG). Not only are these volumes

substantial, but they also represent significant growth

over previous years: According to BP, international oil

shipments rose by 27 percent between 2002 and 2012,

while LNG shipments rose by 119 percent.5

As shown by the maps provided by BP, these ship-

ments of oil and gas are conducted via a complex net-

work of international trade flows. The 2012 oil map,

for example, shows supply lines radiating outward

from the Middle East to the rest of the world, carrying

3.5-mbd to Japan, 2.9-mbd to China, 2.5-mbd to India,

2.3-mbd to Europe, 2.1-mbd to the United States, and

5.5-mbd to other countries in Asia and the Pacific.6

Similar lines extend outward from Russia, West Af-

rica, and other key producing areas. (See Table 12-1.)

241

From

To

So/

USA

Cent.

Europe

China

India

Japan Singapore Other Asia/ Rest of World-

Am

Pac

World

Total

United

States

-

934

601

125

18

102

122

23

756

2,680

So. &

Cent. Am.

1,978

-

424

636

455

33

226

45

36

3,834

Canada &

Mexico

3,986

25

243

52

75

13

2

1

25

4,422

Europe

555

165

-

21

6

18

225

283

901

2,174

Former

Soviet

545

27

5,792

1,215

49

187

141

367

274

8,597

Union

Middle

East

2,163

124

2,261

2,900

2,474

3,543

1,119

4,518

598

19,699

North

Africa

341

88

1,577

221

89

18

8

94

166

2,604

West

Africa

861

192

1,313

1,033

548

98

2

434

84

4,564

Other

suppliers

158

248

277

959

157

731

1,118

2,448

643

6,739

Total

imports

10,587

1,803

12,488

7,162

3,871

4,743

2,963

8,213

3,483

55,313

Source: BP, Statistical Review of World Energy, June 2013, p. 18.

Table 12-1. Inter-Regional Oil Trade Movements,

2012 (in millions of barrels per day).

A quick glance at the maps in the Statistical Review

tells another important story about these international

trade flows: Many pass through or near areas of insta-

bility and conflict. The largest flows of oil for example,

pass from perennial conflict zones in North Africa and

the Middle East to Europe and East Asia, often travel-

ing through narrow “chokepoints” that have proved

powerful magnets for insurgents, terrorists, and pi-

rates. The Energy Information Administration (EIA)

242

of the U.S. Department of Energy has identified seven

such chokepoints, including the Strait of Hormuz

(between the Persian Gulf and the Indian Ocean), the

Straits of Malacca (between the Indian Ocean and the

South China Sea), and the Bab el-Mandab (between the

Red Sea and the Arabian Sea). Together, these three

passageways carried approximately 35.6 million bar-

rels of oil per day in 2011, or the equivalent of about 40

percent of total world oil consumption.7

These supply lines have come under attack—or the

threat of attack—from a variety of actors, each pursu-

ing its own particular agenda. Nations at war have on

occasion attacked oil shipping as a way of punishing

their adversaries or their adversaries’ allies. During

the Iran-Iraq War of 1980-88, for example, both sides

targeted their opponent’s oil tankers to deprive them

of vital oil income, while the Iranians also attacked

Kuwaiti and Saudi tankers to punish those countries

for giving loans to the Iraqis.8 (It was these attacks

that prompted President Ronald Reagan to authorize

the “reflagging” of Kuwaiti tankers with the Ameri-

can ensign and authorized their protection by U.S. air

and naval forces.) Attacks on Persian Gulf shipping

have also been mounted by al-Qaeda, in retaliation for

what are seen as Western crimes against Islam. “Do

your best to prevent [the Western powers] from steal-

ing our oil,” Osama bin Laden declared in 2004. “Fo-

cus your operations on it, especially in Iraq and the

Gulf.”9 For pirates, the motive is more pecuniary: Oil-

laden tankers are seen as a particularly valuable prize,

worth many millions of dollars in ransom payments.10

Although the nature and the geography of the

threats to the world’s energy supply lines are likely

to be modified in the future, they are not likely to de-

cline in frequency and severity. If nothing else, the

sheer increase in global energy shipments—and their

243

extension to ever more remote corners of the globe—

is bound to attract the attention of pirates, terrorists,

and others with a predatory interest in impeding (or

exploiting) these deliveries. It is likely, moreover, that

the intrusion of pipelines, electric pylons, and other

energy infrastructure into new areas will be seen as

an incitement to attack by militant groups with an

anti-government, anti-Western, or anti-globalization

agenda.11

THE UNITED STATES AND THE PROTECTION

OF ENERGY SUPPLY LINES

As a major energy importer itself and as one of

the leading guarantors of the international order, the

United States has long assumed responsibility for

maintaining the security of the world’s energy supply

lines. Although the extent of U.S. reliance on imported

oil has fluctuated over the years—it was 58 percent in

2002 and 47 percent in 201212—it has remained sub-

stantial. Given the importance of these imports to the

effective functioning of the U.S. economy, American

officials—like Reagan—have consistently spoken of

the need to ensure their unimpeded delivery. But in

addition to guarantying the safety of America’s own

energy imports, U.S. leaders have also perceived an

enduring responsibility to protect those of its friends

and allies—and, in the process, to help assure the sta-

bility of the global economy. “As the world’s only su-

perpower, [the United States] must accept its special

responsibilities for preserving access to worldwide

energy supply,” a group of senior officials, includ-

ing former Secretary of Defense James Schlesinger,

declared in November 2000.13

244

The United States first assumed significant respon-

sibility for protecting overseas oil supply lines near

the end of World War II, when President Franklin D.

Roosevelt met with King Abdul Aziz of Saudi Arabia

and promised to protect the Kingdom in return for

exclusive U.S. access to Saudi oil. In establishing this

relationship, Roosevelt sought to acquire a reliable

supplement to America’s own petroleum reserves—

which he believed were being depleted at a rapid

pace—and to obtain oil for America’s allies in Europe

and Asia. To help ensure the safety of both Saudi Ara-

bia and the supply lines stretching from that country

to the United States and its allies, Roosevelt and his

successors approved the establishment of the first U.S.

military bases in the region, the air base at Dhahran,

and the naval base at Bahrain.14

At first, the United States assumed a relatively low

profile in the Persian Gulf area, content to allow Great

Britain—then the dominant Western power in the re-

gion—to carry the major burden of regional security.

When British forces were withdrawn from the Gulf in

1972, Washington again chose to assume a low profile

by relying on Iran—then headed by the pro-Western

Shah—to serve as a regional “gendarme.”15 But when

the Shah was overthrown by anti-American Islamic

clerics in January 1979, and the Soviet Union followed

11 months later with its invasion of Afghanistan, this

hands-off stance no longer appeared tenable; from

then on, American leaders concluded, the security of

the Persian Gulf oil flow would have to be assured by

the United States itself.16

The result was the “Carter Doctrine” of January 23,

1980, the most explicit statement of America’s com-

mitment to the safety of global oil shipments. Incorpo-

rated into President Jimmy Carter’s State of the Union

address for that year, the statement began by high-

245

lighting the strategic threat posed by the Soviet inva-

sion. “The Soviet Union is now attempting to consoli-

date a strategic position . . . that poses a grave threat

to the free movement of Middle East oil,” he warned.

Declaring that any hostile attempt to impede this flow

would be regarded “as an assault on the vital interests

of the United States of America,” Carter pledged that

“such an assault will be repelled by any means neces-

sary, including military force.”17

To implement this edict, Carter acquired additional

basing facilities in the Persian Gulf area and assembled

the nucleus of what was to become, under President

Reagan, the U.S. Central Command (CENTCOM).18

In consonance with the Carter Doctrine, Reagan also

authorized the use of force to protect Kuwaiti oil tank-

ers when they came under attack by Iranian gunboats

during the Iran-Iraq War of 1980-88. “The use of the

sea lanes in the Persian Gulf will not be dictated by

the Iranians,” he declared in 1987. “The Persian Gulf

will remain open to navigation by the nations of the

world.”19 Three years later, when Iraq invaded and oc-

cupied Kuwait, President George H. W. Bush again

authorized the use of force to protect the safety of oil

supply lines, citing Iraq’s threat to Saudi Arabia and

the entire Gulf region.20

Although the United States is no longer as reliant

on oil imports from the Persian Gulf as once was the

case, American leaders have continued to reaffirm the

U.S. commitment to ensuring the safety of oil ship-

ping through the Strait of Hormuz. This is so because

many of America’s key allies, including Japan and

the European North Atlantic Treaty Organization

(NATO) powers, continue to rely on Middle Eastern

oil for a large share of their energy requirements, and

also because the stability of the world economy rests,

to a considerable degree, on the uninterrupted flow of

246

oil shipments from the Gulf. “We will ensure the free

flow of energy from the region to the world,” Presi-

dent Barack Obama told the United Nations (UN)

General Assembly on September 24, 2013. “Although

America is steadily reducing our own dependence on

imported oil, the world still depends on the region’s

energy supply, and a severe disruption could destabi-

lize the entire global economy.”21

U.S. SUPPLY-LINE PROTECTION

BEYOND THE GULF

The Persian Gulf, therefore, remains a major focus

of U.S. efforts to ensure the safety of global energy

flows. But U.S. leaders have also extended such efforts

to other areas of the world that have come to play a

significant role in satisfying the world’s energy needs.

This is due, in large measure, to the strategy of “di-

versification” adopted by Presidents Bill Clinton and

George W. Bush in response to what was perceived

as excessive reliance on Persian Gulf oil. By increas-

ing reliance on other areas of the world, they argued,

the risk of a disruption in energy supplies caused by a

major flare-up in the Gulf area could be diminished.22

“Diversity is important not only for energy security,

but also for national security,” Bush affirmed in May

2001. “Over-dependence on any one source of energy,

especially a foreign source, leaves us vulnerable to

price shocks, supply interruptions, and, in the worst

case, blackmail.”23

To implement this policy, both Clinton and Bush

sought to expand U.S. energy ties with other oil-pro-

ducing areas, especially the Caspian Sea region and

West Africa. These two areas appealed to Washing-

ton because they harbored large untapped reserves of

hydrocarbons and because their leaders, for the most

247

part, were eager to improve relations with Washing-

ton. But while attractive as alternatives to the Gulf,

these areas contain their own sources of conflict and

instability, and U.S. policy has been aimed not only

at securing access to Caspian gas reserves but also

at ensuring the safety of whatever supply lines have

developed out of these ties.24

The Caspian Sea states first attracted significant

U.S. interest in the early-1990s, following the col-

lapse of the Soviet Union. Until then, oil and natural

gas production in the Caspian region was under the

control of government officials in Moscow, leaving

little space for participation by international compa-

nies. After the breakup of the Union of Soviet Social-

ist Republics, however, the energy-rich states of the

region—Azerbaijan, Kazakhstan, Turkmenistan, and

Uzbekistan—opened their oil and gas fields to for-

eign investment, usually in conjunction with newly

established state-owned companies.25 Despite keen

international interest in these prospects, however, the

exploitation of Caspian energy has posed substantial

obstacles to the companies involved. To begin with,

the Caspian Sea possesses no outlet to international

waters, and so all oil and gas exiting the region must

be carried by pipeline. In addition, most of the exist-

ing pipelines traveled through Russia on their way to

international markets—a rather unappetizing feature

for most Western companies. In order to transport

Caspian oil and gas to foreign markets, therefore,

international firms have had to build new pipelines

across the Caucasus to the Black Sea or the Mediter-

ranean; this, in turn, has posed a whole host of addi-

tional problems, as many of the trans-Caucasus routes

pass through or near major areas of conflict, including

Chechnya, Nagorno-Karabakh, and South Ossetia.26

248

In consonance with the strategy of diversification,

American leaders have sought to facilitate the con-

struction of new pipelines across the Caucasus and,

in recognition of the turmoil there, have taken steps

to bolster the military capabilities of transit countries,

especially Azerbaijan and Georgia. This effort began

under President Bill Clinton, who took a personal in-

terest in the funneling of Caspian energy to Western

markets. By engaging in such efforts, he told Presi-

dent Heydar Aliyev of Azerbaijan at a White House

reception in 1997, “We not only help Azerbaijan to

prosper, but also help diversify our energy supply

and strengthen our nation’s security.”27 In line with

this outlook, Clinton played a direct role in negotia-

tions leading to the construction of one of the new en-

ergy arteries, the Baku-Tbilisi-Ceyhan (BTC) pipeline,

which extends from Baku on Azerbaijan’s Caspian Sea

coast to the Georgian capital and thence to Ceyhan on

Turkey’s Mediterranean coast.28

Having assumed a significant role in the con-

struction of the BTC pipeline, the United States has

also sought to help ensure its safety by bolstering the

military capabilities of the nations through which it

passes, especially Azerbaijan and Georgia. Beginning

with President Clinton and continuing under his suc-

cessors, the United States has been a major source of

military aid and training to these two countries.29 In

requesting $108 million in military aid for Georgia for

Fiscal Year 2005, for example, the Bush administra-

tion affirmed that by agreeing to host the BTC pipe-

line, Georgia would “become a key conduit through

which Caspian basin energy resources will flow to the

West, facilitating diversification of energy sources for

the United States and Europe.”30 Sustained U.S. mili-

tary aid over the ensuing years undoubtedly helped

enhance the combat capabilities of Georgia’s armed

249

forces, but it may also have had the unintended conse-

quence of encouraging President Mikhail Saakashvili

to assume a more belligerent stance toward Russia re-

garding the contested territory of South Ossetia, help-

ing to spark the Russia-Georgia War of August 2008.31

The strategy of diversification has also driven

increased U.S. interest in the oil-producing areas of

West Africa. Keen to reduce U.S. reliance on the Per-

sian Gulf area and to increase drilling opportunities

for American oil firms, the Bush administration placed

particular emphasis on increased U.S. energy opera-

tions there. “African oil is of national strategic interest

to us,” Assistant Secretary of State Walter Kansteiner

declared in 2002, “and it will increase and become

more important as we go forward.”32 But while West

Africa harbors significant reserves of oil and natu-

ral gas, it, too, is prone to conflict and instability. To

ensure the safety of African production and exports,

the U.S. Government has stepped up its military as-

sistance to friendly governments in West Africa, espe-

cially Nigeria—the leading producer in the area and

the site of recurring anti-government violence.33

As in the Caspian area, much of U.S. military aid

to African states is aimed at improving the combat ca-

pabilities of local powers and enhancing their capacity

to protect pipelines, oil terminals, offshore platforms,

and other production infrastructure. However, in rec-

ognition of the growing threat to oil shipping in the

Gulf of Guinea from pirates, insurgents, and other

predators, the United States has also increased its air

and naval presence in the region. In May 2003, for ex-

ample, NATO Supreme Commander General James

Jones declared that the carrier battle groups under his

command would be shortening their future visits to

the Mediterranean and “spend half their time going

down the west coast of Africa.”34 Although Jones’ suc-

250

cessors may have announced other priorities for the

deployment of carrier battle groups, there has been a

marked increase in U.S. naval exercises and training

missions in the Gulf of Guinea.35

NEW CONSUMERS, NEW SUPPLY ROUTES

Many of the initiatives undertaken by American

leaders since 1945 to ensure the safety of energy sup-

ply lines remain in effect today. But the global en-

ergy security equation is now experiencing dramatic

change, leading to significant shifts in both the direc-

tion of trade flows and the identities of the key actors

involved in protecting these flows. Among the most

important of these developments are:

1. A shift in the center of gravity of world oil con-

sumption from the older industrialized nations of the

Organization for Economic Cooperation and Devel-

opment (OECD) to the developing nations of Asia,

especially China and India.

2. The assumption of an increased role in protect-

ing energy supply lines by China, India, and other

major energy consumers in the developing world.

3. A shift in import dependence from existing re-

serves of oil and gas to newly-developed deposits in

“frontier” regions, such as Siberia, Central Asia, the

Arctic region, and deep-offshore areas.

Each of these developments has profound impli-

cations for the future of the global energy supply

picture, and so deserves close attention.

251

Shift in the Center of Gravity of Global

Oil Consumption.

For most of the period covered by this chapter, the

bulk of energy imports was consumed by the Western

industrialized nations, the members of the OECD. In

2000, for example, the OECD countries accounted for

approximately 60 percent of global energy consump-

tion. The further we look into the future, however, the

greater the degree to which world energy consump-

tion will be dominated by the developing nations of

Asia, especially China and India. In 2040, the Energy

Information Agency (EIA) predicts, non-OECD na-

tions will account for approximately 65 percent of

world energy demand, reducing the OECD share to

a mere 35 percent. China alone will account for about

27 percent of world energy demand in 2040, and 25

percent of world oil consumption. (See Table 12-2.)36

This shift in the center of gravity of world energy

consumption from West to East will have profound

consequences for the global economy, for world af-

fairs, and not least for the global flow of energy sup-

plies. Whereas previously the bulk of traded oil and

gas used to flow in a westerly direction, from the Mid-

dle East and Africa to Europe and the United States, it

will now mainly flow in an easterly direction, toward

India, Southeast Asia, and East Asia. As a result, the

sea lanes and pipeline routes over which these east-

erly flows will travel—the Indian Ocean and South

China Sea in the case of tankers, Central Asia in the

case of pipelines—will acquire added geopolitical im-

portance. “The new geography of supply and demand

means a re-ordering of global oil trade toward Asian

markets,” the International Energy Agency (IEA)

252

2010

2040

Countries and Regions

Consumption,

Imports or

Consumption,

Imports or

mbd

(Exports), mbd

mbd

(Exports), mbd

OECD, total

46.0

24.6

46.4

21.6

-United States

18.9

9.5

18.6

6.9

-OECD Europe

14.8

10.2

14.4

10.5

-Japan

4.4

4.4

3.9

3.9

-Russia

3.0

(7.1)

3.9

(7.7)

Middle East

6.7

(18.7)

9.9

(26.9)

Non-OECD Asia

19.8

11.6

39.0

30.3

-China

9.3

5.0

19.8

14.2

-India

3.3

2.4

8.2

7.1

Africa

3.4

(7.5)

4.5

(8.9)

South & Central America

6.0

(1.4)

8.2

(5.8)

Total for all import-reliant

countries

65.8

36.2

85.4

51.9

mmb = million barrels per day

OECD = Organization for Economic Development and

Cooperation

Source: U.S. Energy Information Administration, International Energy Outlook 2013, Tables A5, G1.

Table 12-2. Oil Consumption and Imports

in Selected Countries and Regions, 2010 and 2040.

observed in 2013, “with implications for coopera-

tive [and, conceivably, competitive] efforts to ensure

oil security.”37

The Growing Role of China and India.

The obvious question arising from this shift is: To

what degree will China and India assume some of the

burden long carried by the United States in ensuring

253

the safety of these shifting supply lines? At present, it

would be premature to say that either China or India

possesses the formal intention of replacing the United

States as the leading protector of the world’s energy

supply lines, or even of assuming a significant share

of the burden. However, it is also evident that officials

of both countries are inclined to enhance their nation’s

capacity to perform a significant protective role as

their reliance on imports grows and doubts arise over

the future reliability (or impartiality) of America’s

commitment in this regard.

China, which is soon expected to overtake the Unit-

ed States as the world’s leading importer of oil, cur-

rently relies on imports for approximately 70 percent

of its oil supply.38 In 2012, according to BP, it obtained

the largest share of its imports (about 40 percent) from

the Middle East; other large contributions were ob-

tained from West Africa, the former Soviet Union, and

South America.39 Chinese officials have worked very

hard to establish close ties with their Middle Eastern

oil suppliers, especially Iran and Saudi Arabia, and

continue to pursue close relations with the major Gulf

producers.40 But, like the United States, China also

seeks to diversify its sources of supply, both to min-

imize the risk of disruption in deliveries due to the

perennial disorder in the Gulf and to reduce reliance

on shipments through the Strait of Hormuz—which

is heavily patrolled by the U.S. Navy and so could, in

some hypothetical future crisis, be closed to Chinese

oil vessels.41

To reduce its reliance on the Middle East, China,

too, has turned to suppliers in the Caspian Sea basin

and West Africa. The Caspian basin is of particular

interest to Beijing because local rulers have shown a

willingness to allow participation by Chinese energy

254

firms in the development of their countries’ oil and gas

reserves and because the region’s energy exports can

be carried by pipeline directly to the Chinese border.

This will eliminate the need for reliance on tankers

that would have to travel through waters patrolled by

the U.S. Navy. To establish such links, Chinese leaders

have provided their Caspian and Central Asian coun-

terparts with substantial development aid and show-

ered them with diplomatic attention. Building on this

foundation, China’s state-owned energy companies

have acquired significant shares in Caspian energy en-

terprises and built new pipelines across Central Asia

to Xinjiang in Western China.42

As is true of pipelines extending westward from

the Caspian Sea, across the Caucasus to the Black Sea

and the Mediterranean, pipelines heading eastward

across Central Asia toward China pass through areas

of ethnic unrest and terrorist violence. Kyrgyzstan,

Tajikistan, and Uzbekistan have all been roiled in re-

cent years by internal conflict of some sort, and this

unrest has sometimes spilled over into neighboring

states. China, for example, is particularly concerned

over support allegedly provided by militant groups

in Central Asia to Uighur separatists in Xinjiang. To

combat insurgency and separatism throughout the re-

gion and, at the same time, help ensure the safety of

vital energy infrastructure, China has invested heav-

ily in the Shanghai Cooperation Organization (SCO), a

body originally intended to foster border security and

counterterrorism in Central Asia, but now devoted to

a wide range of missions, including energy security.43

Under the SCO’s auspices, China has provided arms

and military assistance to its member states—Kazakh-

stan, Kyrgyzstan, Tajikistan, and Uzbekistan—and

participated with them in joint military maneuvers.44

255

Africa is attractive to China as a source of energy

because local governments are generally agreeable to

increased Chinese involvement and because the West-

ern presence—though substantial—is less substantial

than in the Persian Gulf area. Resource flows from Af-

rica to China also bypass the Strait of Hormuz, thus

avoiding the risk of disruption from conflict there or

possible interference by the ever-present U.S. Navy.

In order to cultivate ties with African oil producers

and allow for increased participation in their extrac-

tive operations by Chinese firms, Beijing has provided

them with substantial economic aid and invited their

leaders to diplomatic extravaganzas like the Forum on

China-Africa Cooperation. These efforts have resulted

in a significant increase in Chinese involvement in

African oil production, especially in Angola, Nigeria,

and Sudan. As in Central Asia, moreover, China has

provided friendly African governments with various

forms of military assistance.45

Although attractive to Beijing in many respects,

increased Chinese reliance on African energy has also

raised security concerns of one sort or another. Chi-

nese oil-production personnel have been kidnapped

or attacked by rebel groups in Ethiopia and Sudan,

and Chinese shipping—like that of other oil-importing

countries—has been put at risk by pirate activity in the

Gulf of Guinea and waters off Somalia. In response to

these threats, the Chinese have taken a variety of steps

to enhance the safety of their resource operations in

Africa, ranging from increased support to the security

forces of friendly governments (for example, in Nige-

ria and Sudan), participation in UN peacekeeping op-

erations (South Sudan), and involvement in antipiracy

operations.46 China’s engagement in antipiracy opera-

tions in waters off Africa is especially noteworthy, as

256

it has provided the Chinese People’s Liberation Army

Navy (PLAN) with considerable experience in com-

plex, “blue water” (deep sea) naval operations. “Over

4-plus years,” Andrew Ericson and Andrew Strange

wrote in 2013, the PLAN “has deployed 34 warships

with 28 helicopters in 14 task forces, safely shepherd-

ing more than 5,000 commercial vessels” in these op-

erations. “Nearly 10,000 select personnel have sharp-

ened their skills, improved coordination mechanisms,

and tested new platforms and technologies.”47

China’s growing reliance on imported energy and

concern over the safety of its international supply

lines has also added to tensions in the South China

Sea, through which much of the country’s oil and

LNG imports travel on their way to receiving termi-

nals in southern China. The tensions in this maritime

area have largely been fueled by other (if somewhat

related) issues: a set of disputes over the ownership

of the Spratly and Paracel Islands, two groups of

atolls and islets that are believed to sit astride large

undersea oil and gas reserves. China and Taiwan,

citing historical precedents, claim all of the islands;

Brunei, Malaysia, the Philippines, and Vietnam each

claim some of them.48 These ownership disputes have

triggered a series of confrontations and shooting in-

cidents in recent years, and remain one of the most

significant sources of friction between China and the

Southeast Asian countries.49 At the same time, China’s

increasing assertiveness in pushing its claims to these

islands has increased anxiety about the safety of in-

ternational shipping in the South China Sea, and this

has drawn the United States into the matter. Although

professing neutrality on the issue of the islands’ sov-

ereignty, Washington has affirmed that it will take

whatever steps are necessary to ensure the freedom of

257

navigation in the South China Sea, just as it has in the

Persian Gulf.50

All of this has put a bright spotlight on the Chinese

navy and raised critical questions about Beijing’s ulti-

mate intentions regarding the use of military power to

protect its global supply lines and otherwise advance

its national interests. Although reticent to speak too

openly on this topic, Chinese naval officials have be-

come increasingly outspoken on China’s need to en-

hance its ability to safeguard its supply lines. “With

the expansion of the country’s economic interests, the

navy wants to better protect the country’s transporta-

tion routes and the safety of our major sea lanes,” Rear

Admiral Zhang Hua-chen declared in 2010. “In order

to achieve this, the Chinese Navy needs to develop

along the lines of bigger vessels and with more com-

prehensive capabilities.”51 Recent comments by Presi-

dent Xi Jinping suggest that top government officials

share this outlook: According to one account, Xi told

a Politburo meeting in 2013 that China must become

a “maritime strong power.”52 China is also acquiring

new warships, including an aircraft carrier, and is un-

dertaking more deep-sea naval maneuvers like those

in the Gulf of Aden.53 It remains unclear, however, if

China aims to acquire a full-scale global fleet like that

possessed by the United States, or seeks something

more modest.54

India, although trailing China in terms of national

wealth and industrial might, is also experiencing a

period of sustained growth and an accompanying

need for added energy. According to the EIA, India’s

net energy demand will jump from 24.4 quadrillion

British thermal units in 2010 to 55.0 quadrillion in

2040—at which point its consumption will exceed that

of every nation except China and the United States.55

258

Like China, moreover, India must rely on imports for

an ever-increasing share of its energy requirements.

Again using EIA projections, India’s oil import re-

quirement will climb from 2.4-mbd in 2010 to 7.1-mbd

in 2040, about the same amount as that needed by

the United States.56 Although a relatively minor actor

today, India is destined to emerge as a major player

in the global competition for access to the world’s

tradable energy supplies. 57

Much like their Chinese counterparts, India’s lead-

ers are well aware of the strategic implications of their

country’s growing reliance on imported energy sup-

plies and are determined to take steps to enhance the

security of their vital supply lines. For India, the geo-

graphic challenge is somewhat less complicated than

it is for China, as it obtains most of its energy imports

by sea from nearby suppliers in Africa, Southeast Asia,

and the Middle East. As these imports travel by ship

across the Indian Ocean—a body of water considered

by Indian elites to be a natural extension of India’s stra-

tegic space—India has sought to bolster its sea-control

capabilities in this maritime region. “India’s economic

resurgence is directly linked to her overseas trade and

energy needs, most of which are transported by sea,”

a 2007 strategic blueprint released by the Indian Navy

declared.

The primary task of the Indian Navy towards national

security is, therefore, to provide insulation from ex-

ternal interference, so that the vital tasks of fostering

economic growth and undertaking developmental ac-

tivities can take place in a secure environment.58

In consonance with this policy, India is steadily

enhancing its deep-sea naval capabilities—focusing

in large part on the Indian Ocean, but also extending

259

to neighboring bodies of water like the South China

Sea. Much speculation has thus arisen over whether

these efforts will, at some point, produce a clash of

some sort with China—which also perceives a vital in-

terest in maintaining a degree of control over supply

lines in these areas. Such a clash was one of several

hypothetical scenarios incorporated into the National

Intelligence Council’s 2025 assessment of the future

world strategic environment, Global Trends 2025. (In

this scenario, India cooperated with the United States

in imposing an arms embargo on Iran, precipitating

a naval clash with China when the latter attempted

to supply anti-ship cruise missiles to Tehran in viola-

tion of the sanctions.59) More recently, the potential for

a Sino-Indian naval clash has arisen over a decision

by an Indian state-owned energy firm, ONGC Videsh

Limited, to join with state-owned Petro-Vietnam in

developing offshore oil blocks in waters of the South

China Sea claimed both by China and Vietnam. Indian

officials have promised to defend India’s economic in-

terests in the area, while China has threatened to expel

foreign energy vessels and personnel from areas of the

South China Sea it says are under Chinese control.60

New Supply Zones.

The challenge of ensuring the safety of global ener-

gy supply routes is further complicated by the emer-

gence of new oil and natural gas producing zones,

made possible by the utilization of new extraction

technologies. As reserves in older production areas

have become depleted—a natural consequence of the

intense production we have witnessed over the years

since World War II—energy firms are being forced to

rely on ever more remote and hard-to-exploit depos-

260

its. Through the development of advanced extractive

technologies, however, many such regions—notably

the Arctic, northern Siberia, and the deep oceans—

have now become accessible to drilling.61 But this, in

turn, has introduced new wrinkles into the problem of

protecting global supply routes.

The prospect of expanded drilling in the Arctic re-

gion has sparked particular interest. This region, en-

compassing the northern reaches of Alaska, Canada,

Norway, and Russia plus the Arctic Ocean itself, occu-

pies but 6 percent of the Earth’s surface but is believed

to house approximately 30 percent of the world’s un-

discovered gas reserves and 13 percent of its undis-

covered oil.62 Until now, the Arctic’s harsh weather

conditions and ice cover have made it extremely dif-

ficult for energy companies to operate in this area; as

a result of climate change, however, these firms are

now finding it easier to drill in the region. With sea

ice now vastly reduced in summer months, the drill-

ing season is being extended and drilling platforms

can operate further north. To take advantage of these

conditions, oil companies are stepping up their efforts

to exploit the Arctic’s energy resources.63 Royal Dutch

Shell is attempting to drill in areas of the Beaufort and

Chukchi Seas off Alaska, while Statoil is extracting gas

from Norway’s sector of the Barents Sea and Russia’s

Gazprom is preparing to drill in the Pechora Sea, off

northern Siberia. Many other such endeavors, includ-

ing a collaborative effort between Exxon and Rosneft

to exploit oil reserves in the Kara Sea, are likely to get

under way in the years ahead.64

Although promising as a fresh source of energy,

the development of the Arctic’s oil and gas reserves

is likely to spark new geopolitical tensions. This is so

because of the region’s immense resource potential

261

and the fact that disputes have arisen over the loca-

tion of offshore boundaries in the Arctic Ocean—and

thus over the ownership of certain promising energy

reserves. The United States, for example, has a bound-

ary dispute with Russia in the Bering Sea and with

Canada in the Beaufort Sea; Canada has a dispute of

its own with Greenland over their mutual bound-

ary, while Greenland has one with Iceland.65 These

disputes would not provoke much concern in the ab-

sence of major energy deposits in the region, but take

on increased significance when the states involved

hope to procure significant economic benefits from

the disputed areas. As noted by Secretary of Defense

Chuck Hagel in November 2013, “a flood of interest in

energy exploration [in the Arctic] has the potential to

heighten tensions over other issues.”66

The risk of tension and conflict in the Arctic is fur-

ther exacerbated by the determination of key regional

policymakers to rely on military power to reinforce

their claims to prized Arctic real estate. Although the

Arctic states have pledged to refrain from the use of

force in asserting their claims, most have taken steps

to enhance their capacity to engage in combat opera-

tions in the area.67 Russia, for example, has announced

plans to establish new bases in the Arctic and to de-

ploy specially equipped combat forces there. This

buildup, said President Vladimir Putin, “will make it

possible to substantially strengthen our military and

border security and also increase the effectiveness

of the protection of natural resources.”68 Canada has

also taken steps to bolster its presence in the Arctic,

establishing a new base at Resolute Bay on Cornwallis

Island and ordering a new fleet of ice-hardened patrol

ships.69 Norway, which shares a border with Russia in

its far north, has relocated its combined military head-

262

quarters to Boda, above the Arctic Circle, and taken

other steps to bolster its Arctic combat capabilities.70

All this has also underscored the importance and

sensitivity of disputes over the control of the maritime

trade routes that traverse the Arctic region. If the Arc-

tic and northern Siberia are to play a significant role

in satisfying the world’s future oil and natural gas re-

quirements, energy firms will require assurance that

their production and delivery vessels will be immune

from interference. But doubt has arisen about the legal

status of the Arctic’s two major shipping routes: the

Northwest Passage, from the North Atlantic to the Pa-

cific via waters off northern Canada and Alaska; and

the Northern Sea Route, from the Barents Sea to the

Pacific via waters off northern Siberia. Canada insists

that the Northwest Passage lies almost entirely within

its inland waters, while Russia claims that the North-

ern Sea Route lies within its territorial waters; both

also insist that they, and they alone, possess the right

to patrol these waters and ensure their security. These

claims are not, however, universally accepted. The

United States, for example, does not accept Canada’s

claim to sovereignty over the Northwest Passage but

says it crosses through internationals straits.71 How all

this will play out cannot be foreseen, but the Arctic

and its supply routes are certain to attract increasing

attention from strategic planners in the years to come.

CONCLUSION: THE UNCERTAIN PATH AHEAD

For decades, the safety of the world’s energy sup-

ply lines has been a major concern of the United States

and its allies. As America’s reliance on imported oil

increased, this country devoted considerable effort to

the protection of the maritime trade routes connecting

263

overseas energy suppliers to U.S. ports. In its role as a

leading guarantor of the stability of the international

system, moreover, the United States also assumed

responsibility for protecting the routes on which its

friends and allies relied. For most of this time, the ma-

jor focus of U.S. protective efforts was the Persian Gulf

and the Strait of Hormuz; under the strategy of import

“diversification,” Washington extended such efforts

to other oil-producing areas, including the Caspian

Sea area and the Gulf of Guinea. Although America’s

reliance on imported oil is declining, the United States

appears—at least for now—committed to retaining its

role as the principal protector of the world’s energy

trade routes.

Looking toward the future, this picture is likely to

undergo dramatic change. To begin with, the magni-

tude of international energy shipping and diversity of

global supply routes is growing, posing new threats

to the safety of energy deliveries. With many exist-

ing oil and natural gas reservoirs in decline, the major

energy-consuming states must rely increasingly on

supplies derived from ever more distant (and often

problematic) locations. At the same time, the center

of gravity of world energy demand is shifting from

West to East, adding to the level of energy shipping

in eastern waters—the Indian Ocean, the South China

Sea, and the Western Pacific—and raising questions

about the future role of China and India in protecting

their growing energy imports. From all that can be as-

certained, these countries are determined to enhance

their capacity to defend their sea lines of communica-

tion—thus increasing the potential for future clashes

between the two of them, and between China and the

United States.

264

Among the big unknowns is the degree to which

increased oil production in the United States and

Canada will erode Washington’s continued deter-

mination to serve as the world’s leading protector of

energy supply routes. By applying advanced extrac-

tive technologies—notably horizontal drilling and hy-

draulic fracturing (“fracking”)—to hydrocarbon-rich

shale formations, U.S. energy firms have succeeded

in significantly boosting U.S. oil output.72 According

to the latest projections from the EIA, domestic U.S.

oil output will jump from 5.7-mbd in 2011 to 9.0-mbd

in 2025—a remarkable increase for a country long

thought to be in decline.73 At the same time, increas-

ingly stringent vehicle fuel-efficiency standards are

resulting in diminished U.S. oil demand. With Canada

expected to supply an ever-increasing share of Amer-

ica’s reduced import demand, the United States will

need less and less oil from Africa, South America, and

the Middle East.

With America’s reliance on extra-hemispheric im-

ports in decline, should we expect a decline in Ameri-

ca’s willingness to bear the burden of protecting glob-

al energy supply lines? At this point, it is too early to

make any firm predictions in this regard. As noted ear-

lier, President Obama has said that the United States

will not abandon its commitment to protect the free

flow of oil through the Strait of Hormuz. Retaining a

robust naval presence in the Persian Gulf and adjacent

waters would also provide the United States with a

distinct advantage in any future crisis or confronta-

tion with China—which, of course, is precisely what

Beijing fears. Nevertheless, it is hard to imagine that

American taxpayers and members of Congress will be

inclined to continue subsidizing America’s role as the

world’s supply-line protector when the United States

no longer relies on imported oil.

265

Either outcome—a diminished or undiminished

U.S. role as the world’s paramount protector of global

supply lines—will have a profound impact on world

affairs. If the United States were to diminish its role,

China, India, Russia, and perhaps other powers are

bound to assume an increased role, producing great

anxiety in Washington, Tokyo, Riyadh, and most Eu-

ropean capitals. If, however, the United States chooses

to retain its protective role, we can expect growing

friction with China and Russia, along with recurring

involvement in local conflicts and upheavals. Clearly,

this is one of the most important strategic issues the

United States will face in the years ahead, and one de-

serving close leadership attention.

ENDNOTES - CHAPTER 12

1. Much of this history is recounted in Daniel Yergin, The

Prize, New York: Simon and Schuster, 1991.

2. The author first laid out this argument in Michael T. Klare,

Blood and Oil: The Dangers and Consequences of America’s Growing Dependency on Imported Petroleum, New York: Metropolitan Books, 2004.

3. For background on these events, see Yergin, The Prize,

pp. 588-632.

4. Statement by President Ronald Reagan, Current Documents,

No. 262, Washington, DC: U.S. Department of State, May 29, 1987.

5. 2012 data from BP, Statistical Review of World Energy, June

2013, London: BP, 2013, pp. 18, 28; 2002 data from BP, Statistical Review of World Energy, June 2003, London: BP, 2003, pp. 18, 28.

6. BP, Statistical Review of World Energy, June 2013, pp. 19, 29.

7. “World Oil Transit Chokepoints,” Country Analysis Brief,

Washington, DC: U.S. Energy Information Administration (EIA),

266

August 22, 2012, available from www.eia.gov/countries/regions-topics.cfm?fips=wotc&trk=p3.

8. For background, see Michael A. Palmer, Guardians of the

Gulf, New York, Free Press, 1992, pp. 128-49.

9. From a taped audio address released on Islamic websites

on December 16, 2004, as transcribed and posted at www.jihadun-

spun.com on December 24, 2004.

10. See, for example, Chip Cummins, “Pirates Snatch a Super-

tanker, Its Crew and $100 Million in Oil,” The Wall Street Journal, November 18, 2008.

11. For discussion of the growing threat to established insti-

tutions and infrastructure posed by alienated youth around the

world, see Global Trends 2030: An Altered World, Washington, DC: National Intelligence Council (NIC), December 2012.

12. BP, Statistical Review of World Energy, June 2013, pp. 9, 18; 2003, pp. 9, 18.

13. James Schlesinger and Sam Nunn, Co-Chairs, The Geopoli-

tics of Energy into the 21st Century, Report of the Center for Strategic and International Studies (CSIS) Strategic Energy Initiative, Vol. 1, Washington, DC: CSIS, 2002, p. 30.

14. For background on these developments, see David S.

Painter, Oil and the American Century, Baltimore, MD: Johns Hop-kins University Press, 1986; and Michael B. Stoff, Oil, War, and

American Security, New Haven, CT: Yale University Press, 1980.

15. For background on these developments, see Michael T.

Klare, American Arms Supermarket, Austin, TX: University of Texas Press, 1985, pp. 108-126.

16. For background on these developments, see Palmer,

pp. 52-106.

17. Jimmy Carter, State of the Union Address, Washington,

DC, January 23, 1980, available from millercenter.org/president/

speeches/detail/3404.

267

18. For background, see Palmer, pp. 101-11.

19. Statement by President Reagan, May 29, 1987.

20. For background, see Palmer, pp. 112-92.

21. The White House, Office of the Press Secretary, “Remarks

by President Obama in Address to the United Nations General

Assembly,” United Nations, New York, September 24, 2013, avail-

able from www.whitehouse.gov/the-press-office/2013/09/24/remarks-

president-obama-address-united-nations-general-assembly.

22. This was a major objective of the energy policy adopted by

the Bush administration in 2001. See National Energy Policy De-

velopment Group, National Energy Policy, Washington, DC: White House, 2001, Chap. 8.

23. Speech by President George W. Bush at the River Centre

Convention Center, St. Paul, MN, May 17, 2001, from the tran-

script in The New York Times, May 18, 2001.

24. For background on these developments, see Klare, Blood

and Oil, pp. 113-45.

25. For background on these developments, see Michael

T. Klare, Resource Wars, New York: Metropolitan Books, 2001,

pp. 81-108.

26. For background, see Klare, Resource Wars, pp. 84-92.

See also Daniel Yergin, The Quest, New York: Penguin, 2011,

pp. 43-79.

27. White House Press Office, “Visit of President Heydar Ali-

yev of Azerbaijan,” August 1, 1997, available from library.white-

house.gov on March 2, 1998.

28. See Michael T. Klare, Rising Powers, Shrinking Planet, New York: Metropolitan Books, 2008, pp. 124-125.

29. See Klare, Blood and Oil, pp. 132-139.

268

30. Congressional Budget Justification: Foreign Operations, Fiscal Year 2005, Washington, DC: U.S. Department of State, 2004, p. 363.

31. On Georgia’s role in precipitating the conflict, see Charles

King, “Clarity in the Caucasus? The Facts and Future of the 2008

Russian-Georgian War,” ForeignAffairs.com, October 2011, available from www.foreignaffairs.com/articles/65469/charles-king/clarity-in-the-caucasus.

32. As quoted in Mike Crawley, “With Mideast Uncertain-

ty, U.S. Turns to Africa for Oil,” Christian Science Monitor, May 23, 2002.

33. See Lauren Ploch, Africa Command: U.S. Strategic Interests

and the Role of the U.S. Military in Africa, Congressional Research Service Report for Congress, Washington, DC: Congressional Research Service, March 22, 2011, pp. 19-25.

34. As quoted in Jim Lobe, “U.S. Military ‘Footprint’ Extends

to Africa,” OneWorld.net, May 9, 2003, available from www.com-mondreams.org/headlines03/0509-10.htm.

35. See, for example, Donna Miles, “Africa Partnership Sta-

tion Promotes Security Cooperation,” American Forces Press

Service, June 29, 2012, available from www.africom.mil/Newsroom/

Article/9056/africa-partnership-station-promotes-security-coope.

36. International Energy Outlook 2013, Washington, DC: EIA,

2013, Tables A1, A5, pp. 179, 184.

37. World Energy Outlook 2013, Paris, France: IEA, 2013, p. 27.

38. BP, Statistical Review of World Energy, June 2013, pp. 9, 18.

39. Ibid., p. 18.

40. For background, see Klare, Rising Powers, Shrinking Planet, pp. 194-201.

41. For background, see Philip Andrews-Speed, Xuanli Liao,

and Roland Dannreuther, The Strategic Implications of China’s Ener-gy Needs, Adelphi Papers No. 346, Oxford, United Kingdom (UK): 269

Oxford University Press and London, UK: International Institute

for Strategic Studies, 2002; and Erica Strecker Downs, China’s

Quest for Energy Security, Santa Monica, CA: RAND, 2000.

42. For background on these developments, see Klare, Rising

Powers, Shrinking Planet, pp. 132-37. See also Jane Perlez, “China Looks Westward as it Bolsters Regional Ties,” The New York Times, September 8, 2013.

43. For background on the SCO, see Bates Gill and Mat-

thew Oresman, China’s New Journey to the West, Washington, DC: CSIS, 2003.

44. Ibid., p. 20. See also “The 9 Joint Military Exercises under SCO Framework,” PLA Daily of the People’s Liberation

Army, June 12, 2012, available from eng.chinamil.com.cn/special-

reports/2012-06/12/content_4892903.htm.

45. See Klare, Rising Powers, Shrinking Planet, pp. 164-171, 214.

46. See David Shambaugh, China Goes Global, Oxford, UK, and

New York: Oxford University Press, 2013, pp. 298-305.

47. Andrew S. Erickson and Austin M. Strange, “Learning the

Ropes in Blue Water: The Chinese Navy’s Gulf of Aden Deploy-

ments Have Borne Worthwhile Lessons in Far-Seas Operations—

Lessons that Go Beyond the Antipiracy Mission,” U.S. Naval In-

stitute Proceedings, April 2013, pp. 34-38.

48. For background on these claims and the region’s oil and

gas reserves, see “South China Sea,” Country Analysis Brief, Washington, DC: IEA, February 7, 2013, available from www.eia.gov/

countries/analysisbriefs/South_China_Sea/south_china_sea.pdf.

49. For background on these disputes, see International Crisis

Group (ICG), Stirring Up the South China Sea, Asia Report, No. 223, April 23, 2012, Brussels, Belgium: ICG, 2012. See also Marvin C.

Ott, “Deep Danger: Competing Claims in the South China Sea,”

Current History, September 2011, pp. 236-241.

270

50. The official U.S. view on the South China Sea was ar-

ticulated by Patrick Ventrell, Acting Deputy Spokesperson, U.S.

Department of State, on August 3, 2012:

As a Pacific nation and resident power, the United States has

a national interest in the maintenance of peace and stabil-

ity, respect for international law, freedom of navigation, and

unimpeded lawful commerce in the South China Sea. We

do not take a position on competing territorial claims over

land features and have no territorial ambitions in the South

China Sea; however, we believe the nations of the region

should work collaboratively and diplomatically to resolve

disputes without coercion, without intimidation, without

threats, and without the use of force.

Available from www.state.gov/r/pa/prs/ps/2012/08/196022.htm.

51. Rear Admiral Zhang Hua-chen, as quoted in Edward

Wong, “Chinese Military Seeks to Extend Its Naval Power,” The

New York Times, April 24, 2010.

52. As quoted in Jane Perlez, “Chinese Leader’s Rise Came

with New Attention to Dispute with Japan,” The New York Times, December 3, 2013.

53. For background, see Bernard D. Cole, The Great Wall at Sea,

Second Edition: China’s Navy in the Twenty-first Century, Annapolis, MD: Naval Institute Press, 2010.

54. For discussion, see ibid. See also James R. Holmes and

Toshi Yoshihara, Chinese Naval Strategy in the 21st Century: The Turn to Mahan, Oxford, UK: Routledge, 2007.

55. International Energy Outlook 2013, EIA, Table A1, p. 179.

56. Ibid., Tables A5, G1, pp. 184, 247.

57. For background on India’s energy needs and policies, see

“India,” Country Analysis Brief, EIA, March 18, 2013, available from www.eia.gov/countries/analysisbriefs/India/india.pdf.

271

58. Integrated Headquarters Ministry of Defence (Navy), Free-

dom to Use the Seas: India’s Maritime Military Strategy, New Delhi, India, May 2007, p. 10.

59. Global Trends 2025: A Transformed World, Washington, DC:

NIC, 2008, pp. 76-79.

60. For background on this dispute, see Subhash Kapila,

“South China Sea: Indian Defence Minister Makes Strong Asser-

tions,” South Asia Analysis Group, paper No. 5496, May 20, 2013, available from www.southasiaanalysis.org/node/1277; and Dean

Nelson, “China Warns India on Oil Exploration,” The Telegraph, December 6, 2012.

61. For background on these developments, see Michael T.

Klare, The Race for What’s Left, New York: Metropolitan Books, 2012, pp. 41-99.

62. “Circum-Arctic Resource Appraisal: Estimated of Undis-

covered Oil and Gas North of the Artic Circle,” U.S. Geological

Survey (USGS), Sheet 2008-3049, Washington, DC: USGS, 2008.

63. For background, see Ronald O’Rourke, Changes in the Arc-

tic: Background and Issues for Congress, Congressional Research Services (CRS) Report for Congress, Washington, DC: CRS, August

8, 2013. See also Philip Budzik, “Arctic Oil and Natural Gas Po-

tential,” Office of Integrated Analysis and Forecasting, EIA, Oc-

tober 2009, available from www.eia.gov/oiaf/analysispaper/arctic/pdf/

arctic_oil.pdf.

64. For background on these endeavors, see Klare, The Race for

What’s Left, pp. 70-93. See also Clifford Krauss, “Exxon and Russia’s Oil Company in Deal for Joint Projects,” The New York Times, April 16, 2012.

65. For background on Arctic boundary disputes, see Regi-

nald R. Smith, “The Arctic: A New Partnership Paradigm of the

Next ‘Cold War’?” Joint Forces Quarterly, No. 63, 3rd Quarter 2011, pp. 117-124. See also O’Rourke, Changes in the Arctic, pp. 15-16.

66. Speech by Chuck Hagel at Halifax International Security

Forum, Halifax, Nova Scotia, November 22, 2013, available from

www.defense.gov/speeches/speech.aspx?speechid=1821.

272

67. For background, see Heather Conley and Jamie Kraut,

U.S. Strategic Interests in the Arctic, Washington, DC: CSIS, 2010; and Smith.

68. As quoted in Jacob Kipp, “Russian Strategic Interests

Expand in the Arctic,” Eurasia Daily Monitor, Washington, DC: Jamestown Foundation, September 21, 2011, available from www.

jamestown.org. For background on Russian military initiatives in the Arctic, see Conley and Kraut, pp. 23-25.

69. See Conley and Kraut, pp.17-18.

70. Ibid., pp. 21-23.

71. For background on these issues, see Scott G. Borgerson,

“Arctic Meltdown: The Economic and Security Implications of

Global Warming,” Foreign Affairs, Vol. 87, No. 2, March-April 2008, p. 63.

72. For background on these technologies and their applica-

tion in the United States, see Michael Levi, The Power Surge, Oxford, UK, and New York: Oxford University Press, 2013, pp. 1-80.

73. “Annual Energy Outlook 2014, Early Release Overview,”

Washington, DC: EIA, December 16, 2013, available from www.

eia.gov/forecasts/aeo/er/pdf/0383er(2014.pdf.

273

CHAPTER 13

THE ARMY’S APPROACH TO INSTALLATION

AND OPERATIONAL ENERGY

SECURITY CHALLENGES

Katherine Hammack

The United States is facing significant challeng-

es, including those of a political nature, as it strives

to maintain energy security. A recent White House

Champion of Change recipient stated that veterans

voicing their concern over clean energy and climate

change might help the country rise above the politi-

cal divide of these issues being right or left, politically

speaking, and make sure they are instead American

issues. Indeed, all Americans must act as catalysts for

the change that is necessary for a sustainable future.

To this end, the U.S. Army has taken a number of

significant steps. Before outlining them though, it is

important to place the Army’s energy use in perspec-

tive. The U.S. Army manages almost one billion square

feet of building space. It has over 100,000 homes on its

bases that are utilized by 2.2 million Soldiers, fami-

lies, and civilians. U.S. Army installations and posts

around the world are comparable to 152 small cities.

With this amount of people and infrastructure, the U.S.

Army has the distinct privilege of being the largest fa-

cility energy consumer in the Federal government, at a

cost of $1.3 billion dollars in Fiscal Year (FY) 2012. The

Army spent another $3.5 billion in FY12 on liquid fuel

to support overseas contingency operations. In addi-

tion to being one of the U.S. top consumers of energy,

the Army supply chain requires a significant amount

of water and generates a significant amount of waste.

275

The Army cares about its sizable energy footprint

because its ability to accomplish its mission depends

on secure, uninterrupted access to energy, water, and

other natural resources, both at home and abroad. En-

ergy supply shortfalls and power distribution failures

represent a strategic vulnerability—increasing risk to

specific missions, the U.S. Government’s pocketbook,

and the Army’s reputation. Ensuring energy security

through increased efficiencies and diligent manage-

ment of resources reduces this vulnerability.

Today, the U.S. Department of Defense (DoD) fac-

es multiple threats and nontraditional challenges, all

of which jeopardize the future security environment.

The Army’s intelligence community reports that the

key element of the complex future operating envi-

ronment will be the “Lack of Governance or Rule of

Law.” Driving this breakdown in governance will be

an increasing, world-wide demand for scarce resourc-

es. The rise of oil prices, scarcity of water, unstable

weather conditions, and effects of climate change will

increase global tensions.

Climate change will also have physical effects

on military installations through sea level rise and

drought. It impacts soldiers by constraining training

options and increasing safety and occupational health

risks. The increase in natural disasters will translate

into more missions for soldiers at home, especially

those in the National Guard and Army Corps of Engi-

neers. Whether it is Army Soldiers or a joint effort, the

Army frequently provides support to civil authorities

in emergency response and recovery operations, for

example by evacuating residents from the Colorado

floods, supporting tornado relief and reconstruction

efforts in Oklahoma and Illinois, and assisting the

Hurricane Sandy victims all along the East Coast.

276

Climate change has also increased the number of hu-

manitarian missions overseas. For example, the U.S.

military recently distributed over 650,000 pounds of

critical supplies to survivors of Typhoon Haiyan in

the Philippines.

In response to these threats, DoD is working to build

a resilient Army that can adapt rapidly to change. A

more flexible and adaptable Army is more capable of

performing its mission in a resource-constrained envi-

ronment. Army installations will become platforms of

stability, resiliency, and endurance. These platforms

will promote highly-efficient electricity usage, on-site

power and water generation, and integrated “smart”

microgrid infrastructure.

Appropriately managing resources and consump-

tion is a challenge the Army has been addressing

through technologies, policies, and programs, such as

the Net Zero Initiative. Since 2011, this initiative has

been the cornerstone of Army energy security and

sustainability efforts. Through the principles of inte-

grated design, the Net Zero strategy strives to bring

the overall consumption of energy, water, and waste

on Army installations down to an effective rate of

zero. The Army defines a Net Zero Energy Installa-

tion as an installation that reduces overall energy use,

maximizes efficiency, implements energy recovery

and cogeneration opportunities, and then offsets the

remaining demand with the production of renew-

able energy from on-site sources. A Net Zero Energy

Installation produces as much energy as it uses over

the course of a year. Army installation energy man-

agers understand that achieving Net Zero requires a

systems-of-systems, holistic approach. Therefore, Net

Zero efforts include water and waste because it takes

energy to pump, treat, distribute, collect, and dispose

277

of water resources; and it takes energy to transport

and properly dispose of waste.

Sharing lessons learned from several test-bed pilot

installations is important because the Army is plan-

ning to eventually expand the Net Zero challenge to all

permanent installations and forward operating bases.

Best practices include conducting thermal building

envelope analysis, implementing leak detection on

the potable water distribution system, and improving

purchasing practices to reduce or eliminate waste at

the source. In the coming years, the Army’s collective

challenge will be to adopt and embed these types of

best practices into all the Army does.

The success of the Net Zero Initiative will be based

on collaboration. Partnering with third parties has

contributed to the Army’s reduction in energy use

intensity and allowed the Army to focus on its core

competencies. Many Federal agencies, small business-

es, and innovators have contributed to the progress

to date. Partnering helps the Army improve energy

security. Installations and surrounding communities

have experienced increased power outages due to a

vulnerable electric distribution system. In the last 10

years, the Army has seen over a four-fold increase

in power interruptions on its bases. Due to the need

for expansive maneuver areas, Army installations

are typically isolated and at the end of utility lines.

By reducing consumption and increasing renewable

energy projects, the Army increases energy security;

reduces vulnerability in the event of power outages;

and reduces utility bills that increase much faster than

inflation.

In an environment of declining budgets, it is the

Army’s responsibility to stabilize and/or reduce its

energy costs. Every project must have a positive eco-

278

nomic benefit over the course of its life-cycle. Each of

the military services has committed to generate one

gigawatt of renewable energy on military installations

by 2025. This is equivalent to the electricity needed

to power over 750,000 U.S. homes. To achieve this

end, the Army established the Energy Initiatives Task

Force (EITF). The EITF serves as the central manag-

ing office to plan and execute large-scale, renewable

energy projects greater than 10 megawatts on Army

installations. The EITF leverages private-sector financ-

ing and expertise to gain access to up-front capital in-

vestments in return for a long-term power purchase

agreement.

In support of the EITF, the U.S. Army Corps of En-

gineers initiated a Multiple Award Task Order Con-

tract (MATOC) to identify a pre-approved list of proj-

ect developers in four technology areas: geothermal,

solar, wind, and biomass. The total contract ceiling

across all four technologies is $7 billion and allows for

maximum flexibility for use by other military Services

and Federal agencies. The MATOC is one of the con-

tract vehicles and procurement options that will help

the Army in its efforts to plan and execute a cost-effec-

tive portfolio of renewable energy projects. While the

MATOC was in the procurement process, the Army

has moved forward on seven projects. These projects

represent more than 175 megawatts of power, which

is almost 20 percent of the Army’s goal, and many of

them began implementation in 2014.

Behind the initial EITF project releases, the Army

has a pipeline of four gigawatts of potential projects

that it is currently assessing or validating. Some of

these projects may be halted or delayed due to market

conditions or as a result of further critical analysis. As

projects are validated and advance through the pipe-

279

line, new opportunities are selected from the Army

enterprise to begin initial assessment.

In addition to utilizing renewable energy, im-

proving energy security begins with improving en-

ergy efficiency. The U.S. Army is leveraging limited

budget dollars with private sector funding through

energy savings performance contracts (ESPCs) and

utilities energy services contracts (UESCs) to imple-

ment energy conservation measures on Army bases.

Performance-based contracting enables the Army to

partner with Energy Service Companies and utilities,

which finance efficiency projects and are repaid from

the value of energy savings realized from their invest-

ment over the life of the contract.

In 2011, President Barack Obama issued a perfor-

mance contracting challenge, which directed the Fed-

eral Government to award $2 billion in new ESPCs

and UESCs over a 25-month implementation period,

ending December 31, 2013. During that time frame the

Army was the only Federal entity to exceed its goal

significantly. The Army executed and awarded $498

million in contracts, which was 29.7 percent above its

$384 million goal. The projects are projected to save

1.396 trillion British Thermal Units per year through

such measures as lighting upgrades and controls,

building envelope improvements, central energy

plant upgrades, and modifications to energy intensive

process equipment. Building on success, President

Obama has issued a second challenge to all federal

agencies, and the Army continues to leverage alterna-

tive means of financing to help overcome budgeting

uncertainties.

Microgrids are an innovative solution to improv-

ing energy security and resiliency on Army installa-

tions. The combination of on-site energy generation

280

and storage, together with a microgrid’s ability to

manage local energy supply and demand, allows in-

stallations to shed nonessential loads and maintain

mission-critical loads if the electric grid goes down.

The Army has invested in a smart-charging microgrid

outside the headquarters of Wheeler Army Airfield in

Hawaii. The system consists of 25 kilowatts of solar

power, 200 kilowatt-hours of battery storage, and four

plug-in electric vehicle charging stations. The system

can power electric vehicles and has the ability to pro-

vide instant backup power to support three buildings

for 72 hours. These buildings are able to operate to-

tally independent of the commercial power grid.

Fort Carson, Colorado, is home to another mi-

crogrid, which includes a bidirectional vehicle-to-

grid pilot project. The bidirectional charging units

are capable of providing up to 300 kilowatts of power

to plug-in electric vehicles and can also discharge a

similar amount of stored energy from the vehicle bat-

teries to the grid or microgrid. Power stored in the ve-

hicle batteries provides energy security and increases

transmission efficiency from the local utility through

a power correction factor.

In addition to integrating vehicles, renewable en-

ergy, and backup generators into the energy manage-

ment systems at permanent installations, the Army

is also working to integrate such technologies and

capabilities at contingency locations and forward op-

erating bases (FOBs). On the battlefield, the Army is

partnering with the other military services to ease the

aggregate burden of powering the tactical edge, while

still providing the amount of power and resources re-

quired by soldiers. Fuel and water comprise 70 to 80

percent of ground resupply convoys, by weight, and

represent significant risks to Army missions and U.S.

281

Soldiers. Resource-informed principles, such as Net

Zero, become particularly important at contingency

bases where operations emanate from austere envi-

ronments and are supported by extended supply lines

traveling through hostile terrain.

For example, a U.S. FOB in Afghanistan was receiv-

ing a regular aerial resupply that consisted of 70 per-

cent fuel and water. Every 3 days, American Soldiers

needed to stop their primary mission, and come down

out of their secure mountaintop location to establish

an area for the air-drop. They then had the task of tak-

ing the supplies back up into their protected operating

base. The Army sent an operational energy team in for

30 days to examine the base’s fuel and water usage,

and, with the team’s recommendations, the Army was

able to get that base down to one resupply every 10

days, with 30 percent fuel and water. By enhancing

mission effectiveness in this way, the Army helped to

ensure its Soldiers are less vulnerable, that they are

exposed to less risk, and that they are able to focus on

their primary mission.

New technologies are being tested at home and

in combat theaters that will increase mission agility

through better power management and more flexible

power sourcing. The Army has been able to establish

tactical microgrids, new and more efficient genera-

tors, and onsite renewable power at combat outposts

and FOBs due to the type of testing and evaluation

that takes place at the Base Camp Integration Lab at

Fort Devens, Massachusetts. Soldiers now carry 9.7

pounds of rechargeable batteries, as compared with 14

pounds with back-ups, for a 72-hour load. Innovation

that reduces fuel demand and resupply requirements

undoubtedly increases mission effectiveness.

282

Despite these successes, there are ongoing chal-

lenges from the financial, technical, and social stand-

points. DoD has had to work under continuing resolu-

tions for at least some portion of each fiscal year for

the past several years. This funding uncertainty makes

investment decisions much more difficult.

Additionally, there are challenges in terms of how

to value energy security. Installing energy efficient

products and microgrids reduces risks and vulner-

abilities, but comes with a tradeoff and cost. Tradi-

tional cost-benefit analyses can help assess an energy

project; however, quantifying the risks involved with

failures to energy supply and power distribution sys-

tems requires nonmarket valuation. This is beyond the

scope of traditional cost-benefit analyses and proves

to be a challenge in the budget appropriation process

because of competing priorities.

President Theodore Roosevelt stated, “Far and

away the best prize that life has to offer is the chance

to work hard at work worth doing.” The U.S. Army

will continue to work hard to build financial and

technical partnerships with third parties and defense

communities, because this will help it remain “Army

Strong” despite the many energy security challenges

facing it today.

283

CHAPTER 14

OPERATIONAL ENERGY AS

A STEPPING STONE TOWARD

NATIONAL RESILIENCE

Paul Roege

Operational Energy (OE) is an emergent approach

to managing energy in its various forms and attributes

to maximize its value for military purposes. The dis-

cipline has gained attention and support in large part

because of the logistic challenges associated with pro-

jecting U.S. force into Southwest Asia during the ear-

ly-21st century. Hundreds of analyses, briefings, and

articles—including the February 2008 Defense Science

Board Report entitled, “More Fight—Less Fuel”—have

highlighted estimates that energy and water collec-

tively represented at least 70 percent of ground logis-

tics in Iraq and Afghanistan.1

This dramatic statistic has had real and significant

implications to military reach and sustainability, and

ultimately motivated the emergent focus on energy

associated with military operations. At times, U.S.

forces in Afghanistan have relied almost entirely upon

ground resupply lines extending thousands of kilo-

meters through former Soviet states to deliver fuel.2

During the initial phases of Operations ENDURING

FREEDOM (OEF) and IRAQI FREEDOM (OIF), en-

ergy was a recognized logistic challenge, but no more.

As the operations ground on, that logistic challenge

turned into a significant tax on operational resources,

driving eventual investments in efficient shelters and

air conditioners, renewable energy, and microgrid

systems, which collectively returned dramatic reduc-

tions in fuel consumption.3

285

More substantially, OE now is being institutional-

ized across the services, from establishment of a Sen-

ate-confirmed Assistant Secretary of Defense position

down to deployment of energy advisors embedded

in field units. As the U.S. military and national foci

shift from deployed operations in Southwest Asia, the

opportunity exists to build off of OE insights gained

to date, reinforced by a growing popular interest in

energy, to improve the nation’s economic and security

posture.

ENERGY-INFORMED CONCEPT

Congress defined OE as, “the energy required for

training, moving, and sustaining military forces and

weapons platforms for military operations. The term

includes energy used by tactical power systems and

generators and weapons platforms.”4 For purposes

of capability development and management, the U.S.

Army expanded its operating definition to include

management not only of the energy itself, but also the

associated information systems and processes.5 In an

initial exercise to develop a foundational strategy,6

an Army working group surveyed and characterized

the variety of ways in which energy attributes influ-

ence military capabilities and performance. One im-

portant conclusion was that the interrelationships are

complex—from power capacities that support sensor

precision and range to energy density associated with

platform mobility and endurance, to efficiency, im-

pacting cost, logistic effort, and ultimately force vul-

nerability. The team concluded that it had to supplant

the traditional commodity view of energy with one

that balances multiple attributes toward the ultimate

goal of providing the greatest net operational benefit.

286

Moreover, the team recognized that ground opera-

tions are entrepreneurial in nature.

Every Soldier or Marine deploys with some level

of training, equipment, and leadership. Nevertheless,

each individual—whether assigned to small units or

a large headquarters—invariably faces unanticipated

situations and demands. These unforeseen challenges

require troops to draw upon their arsenal of energy-

enabled capabilities and adapt to achieve the mission

as safely as possible. Recognizing the overwhelming

importance of informed behaviors and decision pro-

cesses, the Army’s strategy team advanced a guiding

concept of “Energy-Informed Operations.” This prin-

ciple calls upon Soldiers, leaders, and organizations

at all levels, to understand energy implications within

their span of influence and act (expertly) to achieve

the greatest net operational benefit.

Armed with this fundamental emphasis on opera-

tional outcomes, the Army and Marine Corps set out

collaboratively to develop concepts and capability re-

quirements that would maximize the contributions of

energy in the field. The Army started with a Concept

of Operations document,7 which established an ana-

lytical taxonomy based upon dismounted, mounted

and air maneuver; and contingency base sustainment.

The next step was development of the system-level

“Initial Capabilities Document for Sustained Ground

Operations,” which identified functions and capabil-

ity gaps across the maneuver domains and prioritized

needs such as networking and energy management.

Figure 14-1 provides a visual depiction of the concep-

tual overview. In a parallel and collaborative effort,

the Marine Corps focused on the specific operational

challenges of forced entry from the sea. The joint out-

come was a pair of documents: one addressing energy

287

requirements in a specific operational context; the oth-

er describing an overall system architecture and cross-

cutting capability needs. These approved documents

constituted a watershed step by establishing energy

as a bona fide component of operational capability—

in the process, enabling energy solutions to compete

for resources on that basis, not purely as cost-saving

measures.

Figure 14-1: Army Operational Energy

Concept Overview.

Some would note that this conceptual evolution is

following the example of the information domain in

military operations. As late as the early-1980s, infor-

mation was valued largely in terms of quantity. More

288

was better, as soldiers and commanders were starved

for information, which was difficult to manipulate and

share. Today, information is plentiful and fungible; its

value depends upon its applicability and contribution

to important outcomes. Flexibility, concision, and ef-

fectiveness now overshadow quantity as measures of

utility, and everyone in the formation has become a

savvy user.

CULTURE CHANGE

Since 2010, each of the services has aggressively

advanced OE doctrine, plans, technology investment,

and institutional management integration. The Secre-

tary of the Army explicitly added energy to the port-

folio of his assistant responsible for installations and

environment, and assigned army staff responsibility

for OE to the Director of Logistics, G-4. Meanwhile,

Training and Doctrine Command (TRADOC) as-

signed proponency for respective OE capability devel-

opment domains to the Maneuver, Aviation, Contin-

gency Basing and Sustainment Centers of Excellence.

In Fiscal Year 2012, the Secretary established an Army

Campaign Plan objective to “achieve energy informed

operations,” in turn providing senior-level visibility

on progress through the enterprise Strategic Manage-

ment System. The ultimate goal of this exercise was

to institutionalize OE across organizational boundar-

ies and to instill the characteristic OE outcome focus

throughout Army business processes and initiatives.

Campaign-level performance metrics emphasizing

operational outcomes were established, for example,

maximizing dismounted agility and endurance as

represented by reductions in the weight that carried

power adds to an average dismounted soldier’s load

for a 72-hour operation. Such high-level lagging indi-

289

cators would move slowly, but they would provide

for relevance and alignment of subtasks and more

leading indicators.

While campaign plans, performance management

systems, and investment decision tools represent im-

portant steps toward long-term organizational change,

the Army—as well as the other services—recognizes

individual behavior as the most important determi-

nant of collective performance. At the October 2012

Association of the U.S. Army (AUSA) Symposium,

the Secretary of the Army announced a new initia-

tive to achieve an “Energy-Informed Culture,”8 which

unleashed a flurry of initiatives and communications

targeting the total Army, including civilians and fami-

lies. The Army is populating a library of resources

from pamphlets and videos to reports and magazine

articles, many of which are available online.9

Given demonstrable senior-level support, the next

step is to understand that culture comprises more

than individual attitudes. A simplistic view concludes

that, “if they cared about energy, we would automati-

cally achieve our goals.” Alternatively, the Army has

adopted a more holistic model that recognizes the in-

teraction of human factors, information, hardware/

software tools, and techniques to achieve informed

outcomes. In the tactical environment, a truck driver

must choose energy-related behaviors based upon

personal values, training, and unit leadership, su-

perimposed with information about the mission and

operational situation. This means balancing fuel con-

sumption (endurance), speed (mission requirements),

and route alternatives (risk) based upon such indica-

tors as fuel gauge, speedometer, and location of re-

fueling points. That same driver must be prepared to

make split-second decisions based upon new infor-

290

mation—for example, accelerating out of an ambush

zone. Regardless of the scenario, the goal is to use

energy to the greatest net benefit.

EXPANDING PERSPECTIVE

Nearly every military role, from the lowest ranking

enlisted soldier to the Chairman of the Joint Chiefs,

must take energy implications into account as they

fulfill their responsibilities. Tactical use cases are easy

to visualize, involving dismounted soldiers and ve-

hicle drivers. Operational and strategic-level consid-

erations and decisions are somewhat more complex.

In 2009, the President ordered a build-up of forces in

Afghanistan. Energy was a significant consideration

for military leaders faced with balancing strategic

goals, cost and risks associated with force projection

into a land-locked country surrounded by rugged ter-

rain. Later, energy supply routes became an important

factor in negotiations with Pakistan. Meanwhile en-

ergy factored into operational plans, impacting force

sustainability, flexibility, simplicity, and cost, even as

it also played an important role in building local, re-

gional, and national stability through measures which

included local energy resource development and

improvements to the national grid.

The significant role of energy in stability opera-

tions has received inordinately little attention in Army

doctrine and requirements domains, despite repeated

lessons. In 2004, then Major General Peter Chiarelli

made headlines when he described how his 1st Caval-

ry Division had observed and leveraged a correlation

between improvements in energy and other essential

services, and local stability—in turn supporting oper-

ational outcomes.10 Many others have recognized this

291

connection, and energy continues to be an important

component of U.S. national strategy in Afghanistan,

and as well as in Africa.11 Despite this significance to

stability operations and the implications to national

military strategies, Army doctrine and training re-

main largely silent with respect to energy solutions

and their contributions toward stability operations

goals.

To date, OE efforts have focused on the context

of deployed maneuver operations, with Afghanistan

and Iraq at the center of attention. Fortunately, the

high operational tempo brought to the forefront mili-

tary capabilities of agility, endurance, and effective-

ness and, in turn, their dependence upon such energy

attributes as density, flexibility, and conversion effi-

ciency. Moreover, the new energy-informed concept

seeks to mature the energy exercise from an algebra of

“using less” to the calculus of “being more effective.”

Unfortunately, the remote nature of these conflicts has

enabled a persistent and comfortable mental separa-

tion between domestically-based activities, in which

consumers continue to seek energy minimization, and

“operational” thinking with its more complex focus on

national security outcomes. For example, the military

has formalized and strongly delineated “installation”

and “operational” energy concepts, procedures, and

authorities. As the operational tempo subsides and at-

tention returns to enduring operations, this artificial

distinction is becoming problematic.

THE INSTALLATION ENERGY DILEMMA

Even before OE became a recognized concept, mili-

tary energy requirements were diverse and decentral-

ized, as were management processes. Cost control and

292

environmental concerns motivated various executive

orders and laws, in turn forming the basis for broad

energy sustainability goals. Mission assurance and

critical infrastructure programs developed separately

to address concerns about potential interruptions to

energy supply and their disproportionately negative

impacts to ongoing missions—especially given the

growing potential for adversaries to trigger such dis-

ruptions through asymmetric physical or cyber attack.

Energy sustainability goals, tracked through installa-

tion management chains, focused upon minimiza-

tion while critical infrastructure programs, managed

within operational channels, justified incremental ex-

penditures necessary to add layers of protection. As

energy performance responsibilities have aggregated

within each service to a single authority, those leaders

now face a confusing dilemma as they wrestle with

apparently competing demands of minimization, per-

formance, and risk management.

Meanwhile, the current taxonomy of “operational”

versus “installation” energy is less of a logical anoma-

ly than “mixing apples and oranges”—it is rather like

comparing apples to eating. OE relates requirements

to the nature of activities—the verb of the military—

which range from ground maneuver to sustainment,

intelligence, network, and space operations. Installa-

tions, on the other hand, are the noun; the enduring

locations that, in fact, support diverse operations as

well as “force generating” functions, such as educa-

tion and family support. One obstacle to progress is

the common presumption that it would be necessary,

but confusing or disruptive to reshuffle organization-

al authorities, and especially to change the account-

ing of energy that is already tracked through different

reporting systems. This notion, however, ignores the

293

true nature of OE concepts and defers progress to-

ward a unified approach; one that would universally

embrace the concept of energy as a component of op-

erational success. Deriving and implementing opera-

tionally-based energy capability and performance re-

quirements for activities on fixed installations would

no more require a transfer of authority than does the

implementation of safety or anti-terrorism standards

in those same facilities.

The 2010 Quadrennial Defense Review recognized

that energy is important to national security, not only

at a tactical level but in light of strategic issues and

long-term impacts.12 Local or regional availability of

energy supplies and force flexibility, for example,

can impact national options to project force. Climate

changes could impact not only sustainment of future

operational capabilities, but regional stresses and con-

flict. Moreover, many argue that economic stability is

the strongest underpinning for national security, and

that the heretofore growing dependence upon im-

ported fossil resources, financed by foreign debt, has

steadily undermined America’s security posture. With

energy in the forefront, military energy leaders are

seeking ways to reconcile everyday budget challenges

with tactical concerns about cyber attack and natural

disasters, meanwhile seeking ways to strengthen the

U.S. domestic energy posture. The United States mili-

tary must apply “energy-informed” thinking to recon-

cile these complex sets of issues and time frames.

RESILIENCE AS THE FUTURE DIRECTION

Fortunately, analysts across a number of commu-

nities have identified a common language that prom-

ises to provide a unifying framework for the panoply

294

of energy concerns. Forward-thinking leaders are con-

verging on resilience as a concept to guide us toward a

more robust future in the face of growing uncertainty

and change. Resilience is rapidly gaining attention in

the form of books and even dedicated research centers

at Northeastern University, the University of Toronto,

and Stockholm University. It is becoming a consis-

tent theme within national security guidance, includ-

ing presidential guidance on the National Response

Framework13 and climate change.14

A recent National Academies of Science report

describes resilience as the ability of a system to per-

form four functions with respect to adverse events:

planning and preparation, absorption, recovery, and

adaptation.15 This concept is scalable in extent and

time. Organisms and devices may be deemed resil-

ient, while the newly-formed President’s task force

on climate change is considering much broader and

longer-range issues. Resilience goals seek to reinforce

a system’s capacity to achieve important outcomes

under a broad range of changing conditions. Resilient

design postures for the unexpected by ensuring that

underlying systems are robust and by eliminating

vulnerable relationships, rather than simply protect-

ing them against predicted threats. More importantly,

promoting resilience naturally aligns efforts, such as

cyber security or sustainability, that otherwise might

seem unrelated or even in conflict. (See Figure 14-2.)

295

Figure 14-2. Resilience Fills the Solution Gap.

Resilience is naturally aligned with energy-in-

formed thinking. The latter challenges each person

to understand how energy supports the operational

objective—not just by using less of a commodity, but

by balancing complex factors to achieve desired out-

comes under a range of conditions. The human factor

is also common, as the resilience of human organiza-

tions invariably depends most heavily upon the pos-

ture of the population. Tornado-prone communities

in Kansas exhibit resilience, not because they have

well-established “911” networks, but because citizens

emerge from their cellars after the storm with first aid

kits, food, and water to help their neighbors. They

work together to clean-up, rebuild, and support each

other as they grieve their losses.

296

Transforming the nation from its trendy concern

about the “threat of the day” will require yet another

adjustment. The February 2008 Defense Science Board

report triggered a flurry of interest in establishing ca-

pabilities to “island” military installations in the event

of extensive power grid outages. Subsequent initia-

tives have advocated for additional actions that target

specific vulnerabilities, such as large power transform-

ers (pre-stage spares) and specific cyber exploits. Pro-

tecting against known threats is a logical complement

to resilient design, but such narrow solutions will

not sustain social order, economic health, and mili-

tary capabilities under a broad range of conditions.

In simplest terms, few U.S. military installations are

“islandable.” Instead, they share essential capabilities

with their surrounding communities. Food, water,

transportation, communications, health care, law en-

forcement, and emergency response represent just an

abbreviated list of services for which military instal-

lations rely upon civilian capabilities. Building resil-

ience would necessarily entail collaboration across a

community and even a region.

CONCLUSION

Energy no longer can be treated simply as a com-

modity to be minimized. Like information, energy is a

multi-attribute entity whose net contribution to capa-

bilities and performance depends upon how it is man-

aged. OE has emerged as a model to enable informed

use of energy to achieve the greatest net value for a

given situation. Implementing this energy-informed

concept, though, requires individual and organiza-

tional understanding of the business or operational

objectives, the various effective energy contributions

297

and liabilities, and tools to manage energy use in the

application at hand. This new concept has led each of

the military services to undertake “energy culture”

initiatives with heavy emphases on education and

training, but balanced with investments in enabling

technologies.

Although focus to date has been on deployed op-

erations, the energy-informed approach to OE applies

equally to global operations at all levels—tactical to

strategic. This suggests the need to engage operational

communities such as space, network, and intelligence

operations that have not yet been central to service

OE efforts. This expanding perspective will bring ad-

ditional challenges. First, many of these operations in-

volve more complex technologies and systems, there-

by complicating the challenge of sorting out energy

implications and decisions. As with most changes,

organizational aspects promise to be the greater chal-

lenge. To date, OE principles have been implemented

within deployed operations, but largely ignored in

installation energy management programs. Apply-

ing energy-informed principles to missions projected

from enduring infrastructure will require reconcilia-

tion of the multi-attribute OE capability and perfor-

mance model with existing installation management

processes, in which energy currently is treated essen-

tially as a commodity.

Ultimately, OE offers a prospective platform from

which to launch a broader resilience thrust across mil-

itary communities and beyond. Resilience provides

not only a means to relate energy to outcomes; it also

represents a useful model to address uncertainty and

change in a dynamic, globalized world. Adoption of

resilience principles will require a difficult mental

transition from traditional methodologies that seek to

298

quantify and definitively disposition risk, yielding to

more fundamental systems analyses and collaborative

processes which, in turn, posture the overall system to

perform well under a broad range of conditions. This

adjustment inevitably will be uncomfortable for some,

but most will quickly recognize that military opera-

tions are not self-reliant; that nearly every essential

service depends upon nonmilitary partners. Team-

ing for energy resilience is simply a next logical step,

building upon such existing community partnerships

as those in health care and law enforcement. Energy

is a key element in U.S. economic success, social or-

der, and national security. OE and its natural out-

growth of resilience offer important pathways to align

each of these concerns through mutually-supporting

objectives.

ENDNOTES - CHAPTER 14

1. More Fight - Less Fuel, Washington, DC: Defense Science

Board, February 2008.

2. Gregory Derek, “Supplying War in Afghanistan: The Fric-

tions of Distance,” Open Democracy, June 11, 2012, available from www.opendemocracy.net/derek-gregory/supplying-war-in-afghanistan-frictions-of-distance, accessed November 18, 2013.

3. Office of the Secretary of Defense, Fiscal Year 2012 Opera-

tional Energy Annual Report, Washington, DC: Department of Defense (DoD), September 2013.

4. Public Law 112-81 Section 2821(a), FY-2012 National Defense

Authorization Act, December 2011.

5. U.S. Army Training and Doctrine Command (TRADOC),

Initial Capabilities Document for Sustained Ground Operations, Washington, DC: DoD, April 2012.

299

6. TRADOC, Power and Energy Strategy White Paper, April

2010, Washington, DC: DoD, available from www.arcic.army.

mil/app_Documents/ARCIC_WhitePaper_Power-and-Energy-

Strategy_01APR2010.pdf.

7. TRADOC, Operational Energy Concept of Operations, Wash-

ington, DC: DoD, November 2010.

8. “The Power is in Your Hands,” brochure issued by Secre-

tary of the Army, September 2012.

9. Army Releases Operational Energy Video and 8 Power Tips—

LTG Mason to Discuss Initiatives at AUSA, October 2013, available from www.army.mil/article/113506/Army_Releases_Operational_En-ergy_Video_and_8_Power_Tips_LTG_Mason_to_Discuss_Initiatives_

at_AUSA/.

10. Neil Shea, “Stacking the Decks,” Atlantic Monthly, August 2008, available from neilshea.net/index.php/work/stacking_the_decks/.

11. Fact Sheet: Power Africa, Washington, DC: The White House, available from www.whitehouse.gov/the-press-office/2013/06/30/factsheet-power-africa.

12. Office of the Secretary of Defense, Quadrennial Defense Re-

view Report, Washington, DC: DoD, February 2010.

13. Presidential Policy Directive 8, National Preparedness, Washington, DC: The White House, March 2011.

14. Executive Order—Preparing the United States for the Impacts

of Climate Change, Washington, DC: The White House, November

2013.

15. Disaster Resilience: A National Imperative, The U.S. National Academy of Sciences, Washington, DC: The National Academies

Press, 2012.

300

CHAPTER 15

HACKS ON GAS:

ENERGY, CYBER SECURITY, AND U.S. DEFENSE

Chris Bronk

Cyber security in the energy sector can trace its

start to an account (that may or may not be true) about

U.S. involvement in a computer based attack on the

energy infrastructure of the Soviet Union during the

Cold War. Elements of the incident are described in

the memoir of Thomas C. Reed, an official in the ad-

ministration of President Ronald Reagan and a former

National Reconnaissance Office director.

The incident, part of what is known as the “Fare-

well Dossier,” involved Soviet Secret Police (KGB) of-

ficer Vladimir Vetrov’s service to French intelligence

from 1981-82. Vetrov is alleged to have provided key

Soviet technologies for both military and civilian ap-

plications, including computers used for process

control in industrial technology. As the story goes,

Vetrov’s alleged counterintelligence work eventually

led to the delivery of a faulty computer design to the

Soviets. Designed to fail, the device allegedly caused a

massive pipeline explosion in 1982, but there are dif-

fering accounts and disputes on the details. However,

according to the Central Intelligence Agency’s (CIA)

Center for the Study of Intelligence, the United States

supplied flawed technologies to the Soviet Union

through the KGB’s “Line X” intelligence effort.

The CIA and the Department of Defense (DoD), in

partnership with the Federal Bureau of Investigation,

set up a program to do just what was mentioned pre-

viously: Modified products were devised and “made

301

available” to Line X collection channels. The CIA proj-

ect leader and his associates studied the Farewell ma-

terial, examined export license applications and other

intelligence, and contrived to introduce altered prod-

ucts into KGB collection. American industry helped in

the preparation of items to be “marketed” to Line X.

Contrived computer chips found their way into Soviet

military equipment, flawed turbines were installed on

a gas pipeline, and defective plans disrupted the out-

put of chemical plants and a tractor factory.1

Exactly what wound up where and produced what

particular outcome is subject to debate. Jeffrey Carr,

a security blogger and author, asserts that the Fare-

well cyber incident is no more than an “oft-repeated

rumor” that has been generally accepted as fact. He

asserts that the real cause was a pipeline operator ig-

noring warnings and allowing pressure to build, caus-

ing the catastrophic blast.2

While it is unclear if a major Siberian blast took

place in 1982, operator error was likely to blame for

an explosion in 1989, when natural gas liquids leaked

adjacent to the Kuybyshev Railway near Ufa, Russia,

and passing trains ignited the resulting gas cloud.

The major detonation killed more than 500 people.3

In remarks to the Soviet Congress of People deputies,

Mikhail Gorbachev attributed the explosion to pipe-

line operators miles away who, after noticing a drop

in gas pressure, simply turned up the pumps rather

than investigate the issue.4

CYBER INSECURITY AND ENERGY SECURITY

Cyber security has grown to be a preeminent con-

cern for the national security organs of the U.S. Gov-

ernment.5 Within certain circles, one need only say

302

“cyber” to indicate the topic of cyber security. It has

become an area of great interest, but in cyber security,

there is also tremendous ambiguity. How great is the

threat to the United States? Its overseas interests? The

U.S. economy or armed forces? Cyber security prac-

titioners and experts have some idea, but there is a

degree of hyperbole surrounding the issue and some

heads in the sand as well.

How cyber security issues fit into energy puts some

boundaries on the problems faced, but it is important

to consider what is meant by “energy security.” Writ

large, energy security for the United States is the ca-

pacity for U.S. consumers—be they individuals, orga-

nizations, corporations, or government agencies—to

gain access to the energy supplies they need or want.6

Foreign embargos, tropical cyclonic activity, mid-

stream plant disasters, and military action are all po-

tential threats to energy security for the United States.

Energy production in the United States is chang-

ing, however, and affecting how America meets its

energy needs.

We cannot consider threats to energy security with-

out acknowledging the rise of oil and gas production

in the United States over the last decade. Computer-

aided, horizontally drilled, hydraulically fractured

oil and gas drilling has produced a dramatic rise in

domestic production, now totaling some seven mil-

lion barrels of oil per day7 and 2.1 million cubic feet of

natural gas per month.8 U.S. production gains provide

a degree of security from disruptions in international

supply, but it is necessary to acknowledge that oil is

traded on a global market, and regional gas markets

may increasingly become interlinked over time. Thus

a disruption in the Persian Gulf, East Asia, or Africa

does not insulate prices paid for oil or even gas in the

United States.

303

In addition to the supply of energy, including coal,

nuclear power, and other sources (each with its own

environmental issues), there are the matters of pro-

cessing and distribution. This represents the remain-

der of the energy supply chain, which, among other

items, includes gas, coal, and nuclear power stations;

electricity grids; oil and gas refineries; and pipelines.

We should be concerned with cyber security in energy

because, as with other areas of the global economy,

computing has been widely adopted in the energy in-

dustry. Supercomputing is a key component to seis-

mic analysis. Refineries are increasingly driven by

Supervisory Control and Data Acquisition (SCADA)

systems. The U.S. electrical grid has incorporated

“smart” elements, including digital sensors, meters,

and monitoring systems. The ubiquitous Internet Pro-

tocol interconnects many of these computers.

If there were no networked computers in the en-

ergy supply chain (from exploration to the pump or

outlet), discussion of cyber security issues would be

moot. But for decades, computation has been deeply

incorporated into energy exploration, production, dis-

tribution, and consumption, as well as into the corpo-

rate and managerial activities supporting these func-

tions. Thus, cyber security is an issue for the energy

industry. While many scenarios posit a massive hack

of the electricity system and its catastrophic failure,

there are plenty of other more likely and less spectacu-

lar energy cyber security issues.

Three major cyber concerns in the oil and gas sec-

tor have been identified9: (1) theft of core intellectual

property; (2) disruption or destruction of a physical

plant and other points of capital investment; and, (3)

compromise of communications by executive deci-

sionmakers regarding key business decisions. Cyber

304

security research related to energy is punctuated by

breaches that align, to some degree, with the potential

incidents we can imagine. It is important to remem-

ber that the Stuxnet worm (a piece of self-propagating

malicious software) was ostensibly aimed at an energy

target—the Iranian nuclear enrichment infrastructure.

Another worm, Shamoon, spread rapidly across the

personal computers of Saudi Aramco at an incred-

ible speed, deleting the contents of perhaps as many

as 30,000 hard drives and also impacting systems at

other companies.10

What such cyber attacks mean to U.S. energy se-

curity and the security of energy needed by DoD re-

quires some consideration. At a global level, we need

to consider how likely an oil or gas disaster produced

or facilitated by cyber means actually is and what can

be done to mitigate that threat. For DoD, important

questions need to be raised about the security of com-

puter systems employed in the distribution of electric-

ity and fuels from major bases to forward deployed

elements in contact with hostile forces.

There are likely three major areas of energy related

cyber vulnerability that are relevant to the U.S. Army:

(1) the provision of electricity to bases and facilities

by the electrical grid, both in the United States and

abroad; (2) the distribution of fuels to forces often

operating some distance from major logistical hubs;

and (3) major cyber attacks against suppliers of fuels

that would result in a significant disruption of sup-

ply or a rise in price. Other scenarios of attack are

no doubt possible and are limited only by vulner-

ability, technical know-how, and imagination. This is

very much a ranked order, however, as cyber attacks

against the grid are alarming and potentially achiev-

able. Cyber attacks against Army logistics should be

305

taken as a given, and a massive cyber attack against

the oil and gas industry would be of great concern far

beyond DoD.

CYBER ATTACK AGAINST THE

ELECTRICITY SYSTEM

In a 2008 report, the Defense Science Board (DSB)

stated, “critical national security and Homeland de-

fense missions are at an unacceptably high risk of ex-

tended outage from failure of the grid.” In 2006, DoD

consumed some 3.8 billion kilowatt-hours (kWh) of

electricity and spent $3.5 billion for energy to fixed

installations. Electricity services for DoD are sourced

overwhelmingly from the private sector. “About 85

percent of the energy infrastructure upon which DoD

depends is commercially owned, and 99 percent of the

electrical energy DoD installations consume originates

outside the fence.” The electricity grid is characterized

by the DSB as, “fragile, vulnerable, near its capacity

limit, and outside of DoD control.”11

Threats to the stable operation of the grid include

overload, natural phenomena such as earthquakes or

storms, physical acts of sabotage, and cyber attack.

The broad impact of major outages and prolonged dis-

ruption to the electrical grid have been felt by many

in the United States. A blackout in the northeast on

August 14, 2003, affected as many as 50 million Amer-

icans and Canadians. Hurricane Sandy, which struck

the New York City metropolitan area late in autumn

2012 at Category 3 force, left as many as 7.9 million

customers without power, many for a week or more.

Before delving into hypothetical cyber attacks on

the electrical grid, it is important to note how an elec-

trical grid can fail, as well as the problems faced in

306

restoring electrical service. In the 2003 blackout, the

cause was improper trimming of trees near a power

line, which led to a series of cascading failures. It is

necessary to emphasize the relevance of these cascad-

ing failures, and the amplified butterfly effect of one

small disruption potentially triggering a major fault

in the system. When the grid overloads, electricity

production is taken offline until the load can be suc-

cessfully rebalanced. The restoration process may be

hampered by damage to key components for which

spare inventories are generally scarce and producers

are few.12

This system—one that is highly dynamic, but

needing to remain in equilibrium between supply and

demand; prone to cascading failures; and posing sig-

nificant difficulty in repair—is why there is great con-

cern in policy and cyber security circles regarding its

vulnerability to cyber attack. The grid is also changing

rather rapidly. Among the most visible manifestations

of this change were utility company deployments of

smart grid technologies funded with $11 billion under

the American Recovery and Reinvestment Act of 2009

and by private investments.13

Smart grid technologies are intended to bring com-

putational resources to the management of the electri-

cal grid. While the most common and visible pieces of

the smart grid systems being deployed in the United

States are digital meters appearing where spinning

dial analog meters once resided, smart grid activi-

ties are designed to do much more than change the

measurement vehicle for billing. A smart grid imple-

mentation should offer enhanced reliability, increased

efficiency, and load adjustment, as well as the capacity

to incentivize use of electricity outside of peak use pe-

riods. An additional argument for a smart grid, falling

307

under the category of “reliability,” is the potential to

better observe damage to the physical infrastructure

through the deployment of sensors throughout.

It is this deployment of computer-driven sensors

and other devices designed to change the state of the

electrical grid that is of concern with regard to cyber

security. SCADA systems in electricity are an ongoing

activity, as in all manner of other sectors from manu-

facturing to water distribution. What is relatively new

is the networking of these SCADA devices together.

Deployment of SCADA devices and other pieces of

computing hardware into the electrical grid expands

its notional attack surface.14

How much this attack surface is exposed to un-

authorized users and vulnerable to manipulation is

the key question. Setting aside the worst case, such as

scenarios of a massive disruption bringing down the

grid for weeks or months, there are many unanswered

questions about how we can measure the degree to

which deployment of computing throughout the grid

has made its ongoing operation riskier. But we know

from attempted and successful physical attacks on the

grid that there are vulnerabilities.

In April 2013, an assailant(s) fired more than 100 ri-

fle rounds into a Pacific Gas and Electric substation in

San Jose, California, severing nearby fiber optic cables

in the process.15 On August 21, 2013, power transmis-

sion lines were severed in Central Arkansas. Two days

later, a fire was set at an Extra High Voltage switching

facility nearby.16 The alleged assailant in the Arkansas

cases was apprehended and indicted, and disruption

in both incidents was fairly minimal.

A widely confirmed, well-documented cyber at-

tack against the electrical grid that definitively dem-

onstrated a disruption of service has not occurred.

308

Rumors abound, but reliable evidence is scant. The

Idaho National Lab did stage a cyber attack on a

generator, causing it to self-destruct in 2007. On the

matter, known as Aurora, security technologist Bruce

Schneier commented:

I haven’t written much about SCADA security, except

to say that I think the risk is overblown today but is

getting more serious all the time—and we need to deal

with the security before it’s too late. I didn’t know

quite what to make of the Idaho National Laboratory

video; it seemed like hype, but I couldn’t find any

details.17

Several years later, such an attack remains largely

hypothetical, although the Stuxnet cyber attack against

the Iranian nuclear program’s enrichment facilities

demonstrated the viability of a cyber attack against a

SCADA system in an energy facility. In the wake of

Stuxnet, the North American Electric Reliability Cor-

poration (NERC) published a major cyber attack task

force review providing guidance to the electricity sec-

tor beyond the cyber elements of its NERC–Critical

Infrastructure Protection (NERC-CIP) standards.18

Beyond NERC, Congress has taken up the issue

of electricity vulnerability to cyber attacks. In 2013,

Edward Markey, then a U.S. Representative from

Massachusetts, and Representative Harvey Waxman

released a report based on surveys sent to over 150

utilities and other providers of electricity in the United

States. The report concluded that utilities are regular

cyber attack targets, and that, while they comply with

mandatory standards, they often do not implement

voluntary NERC recommendations. What remains

unclear is how often the electrical sector is attacked

in a manner that directly targets SCADA systems im-

pacting production or distribution of electricity.

309

While actors in the electricity sector may be “at-

tacked,” the definition of a cyber attack is broad, so

that anything from viruses to email phishing cam-

paigns is counted as an attack. However, the security

of relevance to national security is an attack against

the computing infrastructure directly involved in get-

ting power to customers.

While discussion on electricity and cyber security

is largely focused upon disruption via compromise of

SCADA systems, some have pointed out that energy

demand reported from the grid by computerized sen-

sors could be replaced with false information.19 Such

activity could then be used to subvert the function of

the pricing market for electricity. While this repre-

sents a hypothetical vulnerability, informal reporting

from electricity distributors indicates that, if anything,

deployment of smart grid sensing facilitates rapid de-

tection of electricity theft. We can assume that where

such theft occurred by cyber means without swift

remedy, it might go undetected for some time.

Clearly, cyber security and electricity in the Unit-

ed States and abroad present many issues of concern.

DoD would be well served to carefully engage in ef-

forts similar to those undertaken by the Department

of Homeland Security to improve the cyber defenses

of industrial control systems deployed in electricity.

Exactly how DoD would do this in an atmosphere

charged by the Eric Snowden leaks and valid industry

concerns of onerous and imprecise federal regulations

on cyber security is to be determined. Nonetheless,

there is a real threat, and the most significant issues

likely remain either unknown or unreported. This is

likely also the case in oil and gas production as well.

310

HACKING THE OIL AND GAS SECTOR AND

THE DOD ENERGY SUPPLY CHAIN

Cyber threats to energy production in the oil and

gas sector are of rising concern to industry and gov-

ernment. Like participants in other major industries,

oil and gas firms are frequently targets of espionage

activity, which has heavily migrated online. But a less

generic concern is the targeting of critical infrastruc-

ture employed to produce, transport, refine, and dis-

tribute oil and gas. This issue was summarized in a

2013 report by the Council on Foreign Relations:

[A] major risk facing the oil and gas industry is the

disruption of critical business or physical operations

by attacks on networks. As information technology’s

role in all phases of oil and gas production—from

exploration and production to processing and de-

livery—expands, the vulnerability of industry op-

erations to cyberattacks increases. A hacker with the

right tools, access, and knowledge could, for instance,

identify the Supervisory Control and Data Acquisition

systems (SCADA) and industrial control systems (ICS)

used to operate critical infrastructure and facilities in

the oil and gas industry and that are connected to the

Internet.20

Much like electricity, there is reason for significant

concern about cyber attacks against the infrastructure

of the oil and gas industry. SCADA systems abound

in production and refining operations, and there is

valid concern that a compromise of such a system

could produce a major spill or explosion. Security of

SCADA computing is the primary mission of the U.S.

Department of Homeland Security’s Industrial Con-

trol System–Cyber Emergency Response Team (ICS-

CERT). ICS-CERT’s core mission is to provide the op-

311

erators of SCADA systems with warnings of threats or

compromises that would damage business operations

or the public at large.

The Shamoon malware incident of August 2012

was perhaps the most significant cyber attack to be

directed against the oil and gas industry. Delivered

to the computer network of Saudi Aramco, likely by

insertion upon a computer inside a company facil-

ity, Shamoon significantly impacted the computer

network and computing infrastructure of the com-

pany. According to Aramco officials, it did not impact

production by the Saudi national oil company. What

Shamoon did do was to delete the digital contents

of computer hard drives, very quickly.21 Perhaps as

many as 30,000 computers were affected at Aramco,22

plus additional machines at RasGas, a joint venture of

QatarGas and Exxon-Mobil. Because Shamoon was a

piece of self-propagating software, concern over its

spread leapt beyond Aramco, which was the osten-

sible target, to companies providing services to Ar-

amco, and quite possibly to almost any organization

interfacing with the Aramco network.

According to Aramco, Shamoon did not impact oil

and gas production, indicating that it did not jump

to computers involved in that production. Fear of a

cyber attack able to impact computers responsible for

driving physical infrastructure is a foremost concern

in the oil and gas sector, both as a security and safety

issue. A related concern is the compromise of process

control computing in the petrochemical industry.

While it may be routine to hear of Cyber Pearl Har-

bor scenarios, there is the potential for considerable

loss of life or environmental damage from a “Cyber

Bhopal” event.

312

Ralph Langer, who contributed heavily to the re-

verse engineering of the Stuxnet malware, made im-

portant points on this oft-neglected area for concern.

In an interview with former National Security Agency

(NSA) general counsel and Department of Homeland

Security (DHS) official Stewart Baker, he stated:

Chemical plants run on industrial control systems;

they could be remotely instructed to release gases that

will kill the people in surrounding neighborhoods in a

Cyber Bhopal scenario. That’s a huge problem because

there are several thousand potential chemical targets

in the U.S alone.23

While the possibility of subverting the systems of

the petrochemical industry remains a hypothetical

scenario, the response to such an event would most

certainly require intervention of federal agencies. This

is an obvious homeland security concern, and one that

will require diligence from the petrochemical industry

as well as the intelligence community. Broader con-

cern about a massive hack disabling the oil and gas

sector should be bounded by an understanding of

what can be attacked and how.

The probability of a massive cyber attack dis-

abling the oil and gas industry’s production, refining,

and distribution likely is very low, as each piece of

infrastructure is generally constructed with comput-

ing components available at the time of construction,

possesses a far more limited feature set, and is usu-

ally designed to perform a single function. An at-

tack like Shamoon was able to be significant because

it compromised a massive number of homogenous

computer systems designed to run a fairly broad set

of applications. Achieving the same impact against a

313

massive number of programmable logic controllers

across multiple facilities is a far more difficult task to

accomplish.

For DoD, vulnerability exists in the distribution of

fuels, where there are also likely issues of cyber attack

and disruption. Much like other large organizations,

DoD has adopted networked computers for all man-

ner of administrative and logistical activity. The De-

fense Logistics Agency (DLA) holds the mandate for

fuels provision for the armed services and has devel-

oped enterprise computing tools to perform its fuels

supply mission.

Since the 1990s, DoD has built upon the Fuels Auto-

mated System (FAS) a variety of applications that now

fall under the label of the Enterprise Business System

(EBS).24 DoD fuels management is paperless, and uti-

lizes Windows-based client-server applications and

Web-based applications where data is entered and

received via an Internet browser. Rather than develop

an entirely bespoke fuels management system, DLA

has deployed an Enterprise Resource Planning (ERP)

software package including commercial, off-the-shelf

technology, including components from SAP, the

self-described market leader in enterprise application

software.25

Employment of commercial software allows it to

be run on commodity computer hardware, such as In-

tel-based personal computers and servers running the

Windows operating system. This has been done for

economic reasons, as the Windows-Intel platform has

grown to near ubiquity in the U.S. Government and

throughout corporations in the United States. DLA’s

EBS Energy Convergence program will deploy further

SAP elements designed to function easily with oil and

gas industry standards and practices.26

314

Regarding cyber security of fuels data, a sophis-

ticated attacker is likely aware that DoD is running

SAP products on DoD’s Non-classified Internet Pro-

tocol Router Network (NIPRNet), which includes

connectivity to the public Internet. While some other

DoD networks are protected by an air gap, a complete

physical disconnect from networks connected to the

Internet, the logistical activities of DoD are primarily

unclassified and Internet-connected so as to benefit

from automation in business processes accepted as

proper practice in logistical activities. This is not aber-

rant behavior, as maintaining a classified computing

environment to manage fuel acquisition and distribu-

tion with private sector organizations would be tech-

nically infeasible and uneconomical.

The question then turns to how secure the sys-

tems employed in managing fuels for DoD may be.

Evidence of the level of cyber security on DoD fuels

systems is fairly scant, with the exception being a 2006

DoD Office of Inspector General audit on information

security controls in the DLA’s business systems mod-

ernization. It noted a number of Internet technology

(IT) security problems in the EBS modernization, in-

cluding: incomplete system certification and accredi-

tation; failures in addressing security weaknesses;

incomplete user management procedures; inconsis-

tency of security training; and out-of-date continuity of

operation plans.27

The EBS audit results, however, do not necessarily

reflect upon the capacity of DLA’s software to stand up

to a cyber attack; rather, they highlight organizational

shortcomings in meeting cyber security requirements

spelled out in the provisions of the 2002 Federal Infor-

mation Security Management Act (FISMA). In 2006,

the Office of Management and Budget (OMB) gave

315

DoD a failing grade for its FISMA report. But OMB’s

measurement of cyber security efforts, and, indeed,

any relation between FISMA scores and maintenance

of an effective cyber security effort at an agency level,

has been questioned. Richard Bejtlich, a well-regarded

cyber security expert, expressed his opinion of the pro-

cess when the 2006 scores were released. He argued:

Agencies with high scores are no more secure than

agencies with low scores. High-scoring agencies just

write good reports, because FISMA is a giant paper-

work exercise that makes no difference on the security

playing field.28

That DLA has difficulty meeting all of the require-

ments of FISMA in deploying computer systems

should be no surprise. What is important, however,

is the capacity for resilience, which ensures continuity

of operations for DoD and Army fuels logistics. This

appears to be a rising trend in cyber security, as the

mindset shifts from a network defense model in which

the goal is to keep intruders out, to one where resil-

iency and recovery are embraced as core objectives.

CYBER AND ENERGY: SOME PRESCRIPTIONS

Some time ago a colleague asked a well-regarded

cyber security analyst for some guidance on a mes-

sage for top corporate leaders regarding the problems

faced by their IT security staff. He offered the follow-

ing: “The Chinese are on your network and you prob-

ably know about it; the Russians are on it and you

probably don’t know about it; and give up.” While the

U.S. Army clearly cannot give up on cyber security,

an acceptance of cyber vulnerability is required with

regard to its computer systems and those upon which

it depends to perform its missions.

316

In coping with cyber security issues as they pertain

to energy security matters, it is worthwhile to consider

several items moving forward.

• Recognize that cyber incidents, like safety or

disruption events, are not just organizational is-

sues, but also issues of potential concern across

an extensive, interconnected energy supply

chain.

• Develop trusted third party and clearinghouse

relationships aimed at developing better cyber

intelligence and analysis.

• Produce and constantly refine models of cyber

risk intelligence, merging the valuation of as-

sets/processes, threats, and reasons for poten-

tial compromise.

• Consider the cyber security ramifications as the

Internet expands to cover more and more in-

frastructure, including hundreds of millions of

energy-related computing devices.

• Connect the spheres of geopolitics and the tech-

nical aspects of cyber security to develop ho-

listic models for coping with the cyber security

problem.

These recommendations represent an initial thrust

of activity, but instituting them will require difficult

shifts in behavior for government and industry. Ad-

ditionally, it is worth considering how cyber incidents

can play out very quickly. For instance, the compro-

mise of the Associated Press’s Twitter feed by the Syr-

ian Electronic Army and its transmission of a bogus

tweet regarding an attack on the White House led

to the issuance of a high volume of sell orders in the

New York Stock Exchange (NYSE) due to trading al-

gorithms that “read” the tweet. In less than 2 minutes,

317

the value of the NYSE fell by roughly $136 billion. The

index recovered quickly, but there were both winners

and losers on the deal. Although the energy industry

may not hold a similar sort of vulnerability, we must

assume that foreign adversaries, including states and

transnational actors, will target it. Deep analysis not

only on vulnerability, but also on the resiliency of

the energy supply chain to cyber attack is therefore

necessary.

ENDNOTES - CHAPTER 15

1. Gus Weiss, “The Farewell Dossier: Duping the Soviets,”

Studies in Intelligence, Vol. 39, No. 5, 1996, historical document posted online at the Center for the Study of Intelligence on April

14, 2007, available from www.cia.gov/library/center-for-the-study-of-intelligence/csi-publications/csi-studies/studies/96unclass/farewell.htm.

2. Jeffrey Carr, “The Myth of the CIA and the Trans-Siberi-

an Pipeline Explosion,” Digital Dao, June 7, 2012, available from jeffreycarr.blogspot.com/2012/06/myth-of-cia-and-trans-siberian-pipeline.html.

3. Bill Keller, “500 on 2 Trains Reported Killed By Soviet Gas

Pipeline Explosion,” The New York Times, June 5, 1989.

4. Bill Keller, “Gas Blast and Uzbek Rioting Preoccupy Sovi-

ets,” The New York Times, June 6, 1989.

5. Executive Office of the President of the United States, “The Comprehensive National Cybersecurity Initiative,” Washington,

DC: The White House, available from www.whitehouse.gov/issues/

foreign-policy/cybersecurity/national-initiative, accessed January 27, 2014.

6. For discussion on energy security as it applies to civil se-

curity, see Philip Cornell, “Energy Security as National Security:

Defining Problems Ahead of Solutions,” Journal of Energy Security, February 2009.

318

7. Asjylyn Loder, “Fracking Pushes U.S. Oil Production to

Highest in 20 Years,” Bloomberg, January 9, 2013, available from www.bloomberg.com/news/2013-01-09/fracking-pushes-u-s-oil-production-to-highest-level-in-20-years.html.

8. “U.S. Natural Gas Marketed Production,” Washington, DC:

U.S. Energy Information Agency, October 31, 2013, available from

www.eia.gov/dnav/ng/hist/n9050us2m.htm.

9. Chris Bronk and Adam Pridgen, “Policy Report 53—Cy-

bersecurity Issues and Policy Options for the U.S. Energy Indus-

try,” Houston, TX: James A. Baker Institute III for Public Policy,

Rice University, September 2013, available from bakerinstitute.

org/research/baker-institute-policy-report-53-cybersecurity-issues-and-policy-options-for-the-us-energy-industry/.

10. Chris Bronk and Eneken Tikk-Ringas, “The Cyber Attack

on Saudi Aramco,” Survival: Global Politics and Strategy, Vol. 55, No. 2, 2013.

11. Report of the Defense Science Board Task Force on DoD Energy

Strategy, Washington, DC: U.S. Department of Defense, Defense Science Board, May 2008, p. 18.

12. Gal Luft, “Ten years after the Northeast Blackout: How

secure is our grid?” Journal of Energy Security, August 2013.

13. “Recovery Act: Smart Grid Investment Grants,” Washing-

ton, DC: U.S. Department of Energy, available from energy.gov/

oe/technology-development/smart-grid/recovery-act-smart-grid-investment-grants, accessed January 27, 2014.

14. Kim Zetter, “Researchers Uncover Holes That Open Pow-

er Stations to Hacking,” Wired, October 16, 2013, available from www.wired.com/threatlevel/2013/10/ics/.

15. “Vandalism at San Jose PG&E Substation called ‘sabo-

tage,’” CBS, April 16, 2013, available from sanfrancisco.cbslocal.

com/2013/04/16/gunshots-cause-oil-spill-at-san-jose-pge-substation/.

16. “Federal Grand Jury Returns 8-count indictment Against

Jason Woodring,” Little Rock, AR: U.S. Attorney’s Office, No-

319

vember 6, 2013, available from www.fbi.gov/littlerock/press-releas-es/2013/federal-grand-jury-returns-eight-count-indictment-against-jason-woodring, accessed January 15, 2014.

17. Bruce Schneier, “Staged Attacks Causes Generator to Self-

Destruct,” Schneier on Security, October 2, 2007, available from www.schneier.com/blog/archives/2007/10/staged_attack_c.html.

18. North American Electric Reliability Corporation, “Cyber

Attack Task Force Final Report,” May 9, 2012. See also NERC

and NERC-CIP guidance at “CIP Standards,” Atlanta, GA: North

American Electric Reliability Corporation, available from www.

nerc.com/pa/Stand/Pages/CIPStandards.aspx.

19. Le Xie, Yilin Mo, and Bruno Sinopoli, “False Data Injec-

tion Attacks in Electricity Markets,” presentation at the First IEEE

International Conference on Smart Grid Communications, Gaith-

ersburg, MD, October 4–6, 2010. These authors build upon work

by Yao Liu, Peter Ning, and Michael Reiter, “False Data Injection

Attacks against State Estimation in Electric Power Grids,” ACM

Transactions on Information and System Security, Vol. 14, No. 1, May 2011.

20. Blake Clayton and Adam Segal, Addressing Cyber Threats

to Oil and Gas Suppliers, New York: Council on Foreign Relations, June 2013.

21. John Roberts, “Cyber Threats to Energy Security, as Ex-

perienced by Saudi Arabia,” Platts, November 27, 2012, available from blogs.platts.com/2012/11/27/virus_threats/.

22. Elinor Mills, “Saudi Oil Firm Says 30,000 Computers

Hit by Virus,” CNET, August 27, 2013, available from news.cnet.

com/8301-1009_3-57501066-83/saudi-oil-firm-says-30000-computers-

hit-by-virus/.

23. Stewart Baker, “Cyberwar and Industrial Controls: A Con-

versation with Ralph Langner,” The Volokh Conspiracy, November 18, 2012, available from www.volokh.com/2012/11/18/cyberwar-and-industrial-controls-a-conversation-with-ralph-langner/.

320

24. “DoD Programs: Fuel Automated System (FAS),” FY 2002

Annual Report, Washington, DC: U.S. Office of the Director, Op-

erational Test and Evaluation, available from www.dote.osd.mil/

pub/reports/FY2002/pdf/dod/2002FAS.pdf.

25. “Enterprise Business System (EBS),” Ft. Belvoir, VA: De-

fense Logistics Agency, available from www.dla.mil/informationop-

erations/pages/EBS.aspx, accessed January 28, 2014.

26. Michael Broderick, “Energy Business System Energy Con-

vergence,” PETRO Conference, May 2012.

27. “Information Technology Management: Review of the In-

formation Security Operational Controls of the Defense Logistics

Agency’s Business Systems Modernization-Energy,” D-2006-079,

Washington, DC: Department of Defense, U.S. Inspector Gen-

eral, April 24, 2006, available from www.dodig.mil/Audit/reports/

FY06/06-079.pdf.

28. Richard Bejtlich, “FISMA 2006 Scores,” Tao Security, April 12, 2007, available from taosecurity.blogspot.com/2007/04/fisma-2006-scores.html.

321

CHAPTER 16

THE NORTH ATLANTIC TREATY

ORGANIZATION’S (RE)ENGAGEMENT

ON ENERGY SECURITY:

MANAGING UNMET EXPECTATIONS

John R. Deni

The author is indebted to several anonymous inter-

view subjects who gave generously of their time. Ad-

ditionally, the author would like to thank the Heidel-

berg University Center for American Studies (HCA) in

Heidelberg, Germany.

The role of the North Atlantic Treaty Organiza-

tion (NATO) in energy security has been growing in

recent years in practical terms and certainly rhetori-

cally. However, the results of NATO’s efforts have

been decidedly mixed. On the one hand, the Alliance

has clearly become engaged in what appears to many

member states as a compelling security issue. As early

as 2006, and arguably since the 1999 strategic concept,

the Alliance has recognized that it may have a role to

play in energy security, particularly beyond the tradi-

tional realm of energy in a logistical military context,

or operational energy security.1

On the other hand, though, there remains a rather

conspicuous lack of progress or activity much beyond

the realm of operational energy security. This some-

what ironic outcome reflects the lack of consensus

within the Alliance on granting any further authority

or responsibility to NATO for broader energy security

issues, despite the Kremlin’s use of energy as a po-

litical weapon against European countries. As a result,

and despite the often expansive rhetoric used by Alli-

323

ance leaders and in official declarations, the practical

outcomes and related implications of NATO’s efforts

have been quite limited. Nevertheless, there are steps

the United States can take, including leveraging the

role of NATO, to enhance energy security for all of

the allies.

NATO’S (LATEST) ARRIVAL ON THE ENERGY

SECURITY SCENE

In 2005, Gazprom, the Russian natural gas monop-

oly noted for its heavy-handed negotiating tactics and

for essentially functioning as an arm of the Kremlin,2

informed leaders in Kyiv, Ukraine, that it “would de-

mand higher gas prices from Ukraine in 2006.” Spe-

cifically, Gazprom sought to increase the rate paid

by Ukraine in 2006 from $50 per 1,000 cubic meters

to $220-$230 per 1,000 cubic meters, or roughly what

the countries of Western Europe were charged.3 Cer-

tainly not by coincidence, these demands were leveled

just months after the Kremlin’s preferred presidential

candidate in Ukraine, Victor Yanukovich, had lost in a

rerun of a November 2004 election, which was marred

by extensive fraud.4 The government of Ukraine’s

new, more Western-leaning president, Victor Yush-

chenko, naturally could not afford to pay Western

rates, and so negotiations remained stuck through the

end of 2005.

Subsequently, on January 1, 2006, Gazprom

made good on its threats and cut off all gas supplies

to Ukraine. Although Gazprom claimed it was still

sending natural gas to its other European customers

through pipelines that cross Ukrainian territory and

Ukraine claimed it was not siphoning off gas to which

it was not entitled, falling pressures and/or nondeliv-

324

ery of gas were reported by European gas companies

in Austria, France, Germany, Hungary, Italy, Poland,

Romania, and Slovakia.5

The cutoff lasted only a few days, and following a

preliminary agreement that provided some reasonable

stability in prices through mid-2006, the gas supply to

and through Ukraine was resumed. Nevertheless, the

lesson for many in Europe was clear—Russia had the

willingness and ability, through Gazprom, to employ

energy as a political weapon. Given the dependence of

many Eastern European members of NATO on Rus-

sian energy supplies, it came as little surprise, then,

to see that NATO would address energy security in

some form at its next summit, in Riga, Latvia, just a

few months later.6

During the Riga summit meeting, in November

2006, the Alliance declared its support for a coordi-

nated, international effort to assess risks to energy in-

frastructures and to promote energy infrastructure se-

curity. More broadly, the member states directed the

international staff at NATO headquarters in Brussels,

Belgium, to consult on the most immediate risks in the

field of energy security. The purpose of these consul-

tations would be to define those areas where NATO

could add value to safeguard the security interests

of the allies and, when requested, assist national and

international efforts. None of these planned activi-

ties—“consultations,” “assessments,” coordination of

“efforts”—were particular earth-shattering in terms

of their practical implications. Nevertheless, in sum,

the Alliance had clearly decided to take a limited but

decisive step into the realm of energy security.

However, the Alliance’s response at Riga to the

2006 Ukraine-Russia gas dispute was not the first

time NATO had expressed interest in energy security.

325

During the Cold War, the Alliance’s concerns over

energy security primarily focused on operational en-

ergy security—that is, the energy needed for allied

military forces to operate effectively. As a result, the

Alliance tended to think about energy from a logis-

tical perspective, and it focused on initiatives such

as the NATO Pipeline System (NPS), a collection of

military fuel storage and distribution systems.7 To-

day, the NPS consists of eight national pipeline net-

works—in Greece, Iceland, Italy, Norway, Portugal,

Turkey (two separate systems—east and west), and

the United Kingdom (UK)—as well as two multina-

tional pipeline systems—the North European Pipeline

System (NEPS) located in both Denmark and Germa-

ny, and the Central Europe Pipeline System (CEPS) in

Belgium, France, Germany, Luxembourg, and the

Netherlands.

The 2006 summit declaration represented a serious

shift to consider energy security beyond the realm of

fuel handlers and supply chains. Nevertheless, it was

still unclear following the Riga summit just how far

NATO’s energy security focus would grow beyond

logistics to perhaps address critical energy infrastruc-

ture protection or even the impact of energy short-

ages or price hikes on economic growth and societal

stability.8

The Alliance attempted to refine its approach

through 2007, the result of not simply guidance from

the Riga summit but also continued pressure from

allies such as Poland and the challenges brought on

by increasing energy prices around the world.9 As a

result, during the April 2008 Bucharest, Romania,

summit, the Alliance declared its intent regarding en-

ergy security somewhat more concretely. That is, the

Alliance agreed to take several steps in the realm of

energy security:10

326

1. Engaging in energy security-related information

and intelligence fusion and sharing;

2. Projecting stability;

3. Advancing international and regional coop-

eration;

4. Supporting consequence management;

5. Supporting the protection of critical energy in-

frastructure; and,

6. Continuing to consult on the most immediate

risks in the field of energy security.

However, there was still some glaring vagueness

in this agenda, such as projecting stability. Just 2 years

later though, in 2010, NATO adopted energy security

in its Strategic Concept. In that document—essentially

the Alliance’s strategy or mission statement—NATO

declared that communication, transport, and tran-

sit routes on which energy security depends require

greater international efforts to ensure their resilience

against attack or disruption. The Alliance then re-

solved to develop the capacity to contribute to energy

security, including through protection of critical en-

ergy infrastructure and transit areas and lines, coop-

eration with partners, and consultations among allies.

To summarize, during the second half of the last

decade, NATO took some significant steps toward be-

coming more involved in energy security, compelled

in part by Russian policies toward several of its Eur-

asian gas customers and subsequently by the some-

what predictable reactions of Poland and other newer

members of the Alliance. The Alliance did so with an

eye toward moving beyond the more rudimentary

focus on logistical supply chains and toward protec-

tion of critical infrastructure and the safeguarding of

broader member state energy interests. Unfortunate-

327

ly, the Alliance’s plans to move beyond operational

energy security, into what might be thought of as the

traditional energy security sphere, have proven diffi-

cult to implement.

NATO STUMBLES

Since the release of the 2010 Strategic Concept and

the initiation of NATO’s efforts to move into the more

traditional energy security realm, the Alliance has

struggled to get beyond the conceptual. This is rather

ironic, given the Alliance’s clearly expressed intent

in both summit statements and strategic plans. It is

also rather surprising considering that in early-2009,

Russia instigated another natural gas crisis in Eastern

Europe. This time, Bulgaria, Romania, Poland, Slova-

kia, and Hungary were among those most affected

by the inability of officials in Ukraine and Russia to

come to agreement on energy prices and Moscow’s

subsequent cutoff of gas supplies to the West, which

lasted 2 weeks in January 2009. Indeed, the 2009 crisis

further spurred the European Union (EU) to pursue

increased internal market integration and to promote

greater diversification of supplies.11 Given that most

EU members are also members of NATO, it would

seem natural for Alliance member states to accept a

growing role for NATO in energy security as well.

However, the primary reason why the Alliance

has failed to make progress in the broader, traditional,

energy security realm—beyond operational energy

security—is because there remain fundamental divi-

sions within the Alliance in terms of attitudes toward

energy security. Many states in the Alliance want en-

ergy security writ large on the agenda, and the other

half is largely ambivalent. Complicating matters is the

328

fact that, in some limited cases, there are some mem-

ber states that are actually hostile to including energy

security in NATO’s portfolio.

Those that want the Alliance to adopt a broader

approach to and be more involved in energy security

include, but are not necessarily limited to, most of the

newer Alliance members in Eastern and Central Eu-

rope. For these countries, vivid memories of life under

Soviet domination continue to color most aspects of

their relations with Russia, especially in policy areas

where Moscow seemingly holds more cards.12 As the

Ukrainian-Russian gas dispute of 2005-06 gave way

to other, similar disputes between Russia and Azer-

baijan, Belarus, and Georgia, the newer NATO allies

of Eastern and Central Europe became increasingly

frustrated by the lack of an EU-wide approach toward

energy, especially in the face of increasingly aggres-

sive Russian tactics.13 As a result, within the halls of

NATO, these Eastern and Central European countries

have become adamant supporters of including energy

in the Alliance’s portfolio, and these same countries

were then largely responsible for forcing energy se-

curity onto the agenda at the Riga summit.14 Unfor-

tunately, they did so without much of a long-term,

practical roadmap for what NATO would do specifi-

cally in this issue area, or for how they would reverse,

overcome, or merely co-opt the ambivalence or hostil-

ity of other Alliance members toward securitizing the

energy sphere. As a result, the NATO energy security

agenda may appear to lack consistency or even much

substance beyond the official declarations.

At the other extreme are some members that re-

main hostile toward Alliance involvement in this issue

area, for a variety of reasons. Some in this camp ar-

gue, not incorrectly, that critical energy infrastructure

329

protection is a national responsibility and/or a com-

mercial matter, and so, for them, NATO involvement

is an anathema.15 Given the fact that energy security

is increasingly taking on strategic importance for de-

veloped countries—as well as developing countries,

particularly China and India as discussed in other

chapters of this edited volume—it is perhaps under-

standable that Alliance members are reluctant to de-

volve too much sovereignty and decisionmaking to an

intergovernmental organization, even one as success-

ful as NATO, preferring instead to split responsibility

and authority between national capitals and the EU.16

Some members believe NATO’s engagement in en-

ergy security unnecessarily militarizes a nonmilitary

sphere.17 Indeed, precisely because the EU has become

more involved in energy security issues—in a policy

space where it, and not NATO, has clear purview—

many in the Alliance believe that NATO’s presence

in this realm is unnecessary, and even unwelcome.

The negative consequences for Europe of appearing

to militarize the energy realm may be to discourage

investments in energy exploration and infrastructure,

place relations with producers on a confrontational

footing, and generally increase political-military

risks at a time when most in Europe are pursing the

opposite.18

Finally, some believe NATO involvement in this

issue area would offend Russia too greatly, potentially

upsetting the delicate economic and trade interdepen-

dency that continues to develop between Russia and

the rest of Europe. This group tends to include coun-

tries such as Germany and France, as well as some

of the older allies. In Germany in particular, interest

groups in the energy sector as well as several politi-

cians argue that Russia remains a reliable energy part-

330

ner, if only because Russia needs Europe—or at least

the parts of Europe, such as Germany, that provide

Russia with critical manufactured goods, advanced

technology, and knowledge—as much as Europe

needs Russia.19 The degree of interconnectedness is no

accident, and is indeed a product of purposeful post-

Cold War German policy aimed at modernizing and

democratizing Russia by cooperating with Moscow

across a range of issue areas.20 Today, the web of in-

terconnectedness—especially in energy and energy-

intensive industry—between Germany in particular

and Russia is unprecedented since the end of the Cold

War. Those who seek to protect and promote it be-

lieve that giving NATO too great a role in broader en-

ergy security issues beyond the very delimited issue

area of operational energy security, a subject clearly

within the Alliance’s purview, risks upsetting that

delicate web.

As a result, the Alliance has been unable to make

much headway in implementing any significant en-

ergy security agenda. The Kremlin-instigated energy

crises of 2006 and 2009, as well as Moscow’s threats

to cut off gas to Ukraine (and perhaps other parts of

Europe) in 2014 have not resulted in a groundswell of

support across the entire alliance for the collective en-

ergy security policy preferences of the Eastern Euro-

pean members of NATO. Certainly Russia’s invasion

and annexation of Crimea in 2014 have made it more

difficult for members of the Alliance such as Ger-

many, France, and Italy to give Moscow the benefit

of the doubt and deny that the Kremlin continues to

employ energy as a political weapon.21 However, the

continuing lack of a real consensus across the entire

alliance means that NATO’s energy security agenda

remains limited.

331

THE SILVER LINING

Ironically, even though the Alliance has made lit-

tle progress in terms of expanding its energy security

portfolio beyond operational energy security, it is in

the rather limited realm of the latter where NATO has

actually added some value in recent years and where

it might continue to do so in the coming decade. How-

ever, in this rather limited area of overall energy se-

curity, the Alliance’s efforts are really a work in prog-

ress, as NATO attempts to build a coherent agenda. In

particular though, there have been two key develop-

ments for NATO to date.

The first significant development in terms of the Al-

liance’s work in operational energy security is the cre-

ation of a Smart Energy Team (SENT), which consists

of representatives from six NATO allies, including the

United States, and two partner nations.22 This effort

was launched in late-2012 by NATO’s Emerging Secu-

rity Challenges Division, and is funded by the NATO

science program. The team of experts examines prom-

ising energy-related technologies and helps to formu-

late standardization agreements, which ultimately

promote interoperability among the military forces of

the allies. For example, in February 2013, SENT visited

an “energy camp” established by Defence Research

and Development Canada to survey energy efficiency

applications in cold weather environments.23 The team

is also examining, “more efficient energy solutions for

cooling and heating tents, including adjustable load

generators, heat pumps, floor heating, and materials

for insulation and for storing generated energy and

solar energy.”24 In the short run, SENT is looking pri-

marily for high impact, low cost projects and appli-

332

cations in order to show political leaders within the

Alliance that savings can be generated immediately.

Ultimately though, SENT will develop a package of

proposals for concrete Smart Defence projects and

NATO science program activities.25 In the meantime,

their work helps to propagate operational energy se-

curity issues and to expose members of the alliance to

potential smart energy solutions.

The second significant development in the Alli-

ance’s work on operational energy security has been

the establishment of an Energy Security Centre of Ex-

cellence in Vilnius, Lithuania. Originally formed as

an Energy Security Center operating under the Lithu-

anian Ministry of Foreign Affairs, the government of

Lithuania offered the center as a contribution to NA-

TO’s efforts in energy security in 2012. In response,

the North Atlantic Council approved the establish-

ment of a NATO Energy Security Centre of Excellence

(ENSEC COE) during its May 2012 Chicago summit—

the center was then accredited in October 2012, and it

officially opened in September 2013.26

At the ceremony marking its opening, NATO’s

Secretary General Anders Fogh Rasmussen implicitly

recognized the ongoing debate among member states

over the Alliance’s role in energy security, and spe-

cifically the concerns some members have over the

potential militarization of energy security: “I strongly

believe that most resource issues will be settled by the

power of the market, not by the power of guns. En-

ergy security is not a call to arms.”27 Nevertheless, the

Secretary General expressed his view that the ENSEC

COE would add value to NATO’s efforts by providing

analyses on energy developments, creating new op-

portunities for training and education, and improving

operational energy efficiency.

333

Since its opening, the ENSEC COE has been en-

gaged in commissioning several studies on opera-

tional energy issues, developing an operational en-

ergy concept in conjunction with Allied Command

Transformation in Norfolk, VA, and crafting training

programs on operational energy security. The ENSEC

COE also plays an important role as co-director (along

with the Joint Environment Department of the Swed-

ish Armed Forces) of NATO’s SENT, mentioned ear-

lier, its activities are governed by a steering committee

comprised of Estonia, France, Italy, Latvia, Lithuania,

and Turkey. Although not yet members of the steering

committee, Sweden, the UK, and the United States are

reportedly interested in joining as well.

So far, the ENSEC COE and SENT remain the

only two significant accomplishments for NATO in

the realm of energy security. Certainly the alliance

deserves some credit for the positive role that Opera-

tion OCEAN SHIELD has played in safeguarding the

transit of energy supplies, principally petroleum, in

the Gulf of Aden and off the Horn of Africa. However,

this mission, ongoing in various forms since late-2008,

was not and still is not devoted to energy security per

se. Instead, it began by focusing on the security of

shipments under the auspices of the United Nations’s

(UN) World Food Programme, and today it is focused

on combating piracy broadly, not on energy transit

explicitly.

LESSONS TO BE LEARNED . . . AND APPLIED

The reason why NATO’s success in the energy se-

curity realm has been largely limited to the two ini-

tiatives outlined previously, is because they both fit

more squarely within NATO’s traditional focus. That

334

is, they both emphasize the operational efficiency and

effectiveness of Alliance member state military forces.

Herein lies the primary lesson to be learned from NA-

TO’s otherwise unsuccessful foray into energy secu-

rity—when alliance-wide initiatives fit into NATO’s

traditional realm of the military and defense, progress

is likely to be easier and the odds of substantial con-

tributions to collective security increase. This means,

for instance, that Alliance efforts to develop training

courses on operational energy security issues offered

in NATO schoolhouses are likely to meet with little re-

sistance from member states and hence are more likely

to succeed and ultimately have a positive impact.

This conclusion, as well as insights gleaned from

observing NATO’s efforts to date in the realm of ener-

gy security, leads to several recommendations about

the way ahead both for NATO and for the United

States as it seeks to leverage the Alliance. First, the

United States, and the Department of Defense (DoD)

in particular, should aggressively pursue increased

collaboration through NATO on operational energy

security because of the broad strategic benefits that

accrue to the United States. As the United States has

stated many times in various national security and de-

fense strategies over the last decade or more, America

prefers to fight in coalitions, and it prefers to have its

closest, most capable allies in Europe as members of

those coalitions.28 If that continues to be the case—and

it appears so, at least judging from the most recent of

those strategies, the 2014 Quadrennial Defense Review

(QDR) report29—then the United States will need

partners that are not simply willing but also able to

deploy and fight side-by-side with American forces.

By collaborating on operational energy projects, exer-

cises, and other activities with those partners through

335

NATO, the United States can help both itself and its

partners reduce operational costs while increasing

operational capacity and combat capability through

greater energy efficiency. Ultimately, this will make

it easier—that is, more affordable—for the political

leaders of allied and partner countries to join in U.S.-

led coalition operations as well as to lead such opera-

tions themselves.

Second, although the United States does more than

other allies in terms of operational energy security re-

search, development, testing, and procurement, there

are indeed prospects for the U.S. military to learn

more from its allies, and Washington should more

aggressively pursue transatlantic technology transfer

and development in operational energy. British devel-

opment of intelligent power storage and management

systems, Dutch development of photovoltaic solar

panels and light-emitting diode lamps, and German

work on hydrogen fuel cell technology all represent

potential areas where the United States could stand

to learn more about what the allies are developing

and producing. In some instances, the U.S. military

services have engaged foreign partners in cooperative

research and development efforts, but there is only

limited recognition of the importance or potential role

of allies in operational energy security efforts in the

DoD Operational Energy Strategy and the DoD Op-

erational Energy Implementation Plan. The former

merely acknowledges that the United States can learn

from its allies just as American allies may learn from

it, and the latter somewhat vaguely posits that the

United States can use operational energy capabilities

and technologies to “enhance partnerships” with al-

lies and partners.30 As for the more recently released

“DoD Energy Policy,” there is no reference whatsoev-

er to U.S. military interaction with allies or partners.31

336

Third, Washington should strongly leverage the

ENSEC COE as well as the Norfolk-based Allied

Command Transformation to more vigorously pro-

mote interoperability in energy-efficient technologies,

platforms, and systems. Working through and with

NATO provides the United States with an echo cham-

ber of sorts, a means of propagating and amplifying

best practices and promising technologies. This will

become increasingly important in the years ahead, as

the Alliance will struggle to maintain interoperabil-

ity in the absence of an operational requirement like

the International Security Assistance Force.32 NATO

as a vehicle for testing and spreading operational en-

ergy security technologies and practices will make it

easier for all of the allies, including the United States,

to maintain operational and tactical interoperability

moving forward.

Fourth, the United States should focus its opera-

tional energy security cooperation within NATO on

those allies with larger militaries and larger deploy-

able forces. NATO is after all an alliance of 28 coun-

tries, among which there are various levels of military

capability. In an era of increasingly limited fiscal or

budgetary resources, the United States must more

shrewdly prioritize where and how it will expand

those resources. The allies most interested in contrib-

uting to operational energy security efforts are those

for which the costs of fuel are a significant deterrent

to deploying their forces. Those member states that

want to increase energy-related savings and reduce

the logistical tail are more likely to be up to the task

of carrying the burden in this issue area. For this rea-

son, American efforts are more likely to result in suc-

cess with these allies. Even among this group of al-

lies though, military practitioners must be cognizant

337

of what political scientists call two-level games—that

is, the interaction between domestic and international

politics. In some cases, domestic political, electoral,

or economic considerations may complicate efforts to

cooperate at the international level, through NATO,

despite agreement among international interlocutors.

Finally, the United States should place increased

effort on conducting demonstration events and exer-

cises with its NATO allies. The reason is that what is

otherwise a good news story—the coming end of the

alliance’s decade-long involvement in Afghanistan—

presents member state militaries with a significant

challenge in terms of having an operational require-

ment to spur innovation and drive change in opera-

tional energy security. The only way to make up for

the lost impetus of extant operations is to exercise rig-

orously, and to include operational energy scenarios,

or “injects,” in the language of the military trainer,

into those exercises. So far, if largely because of Rus-

sia’s aggression against Ukraine in 2014, both NATO

and the administration of President Barack Obama

appear committed to increasing the scope and number

of exercises and training events between the United

States and its allies following the end of NATO’s ma-

jor combat role in Afghanistan. The critical question

moving forward though is whether and how funding

resources will be identified and sustained over time.

In sum, although NATO’s attempt to take on an

increased role in energy security has met with only

limited success, there are compelling reasons for the

United States to seek to undergird and leverage the

Alliance’s achievements to date. A North Atlantic alli-

ance engaged in energy security can benefit collective

security today as well as into the future, when circum-

stances compel a NATO-centered, coalition response

338

to Western security. Focusing efforts where appropri-

ate, remaining cognizant of domestic politics within

member states, and not aiming too high in terms of

objectives and goals will together yield positive re-

sults for both Washington and its allies.

ENDNOTES - CHAPTER 16

1. Thierry Legendre, “The North Atlantic Treaty Organiza-

tion’s Future Role in Energy Security,” The Whitehead Journal of

Diplomacy and International Relations, Summer/Fall 2007, pp. 1-7.

2. Stefan Hedlund, “Economic Reform under Putin 2.0: Will

Petrodollars Suffice to Keep the Ship Afloat?” Stephen J. Blank,

ed., Politics and Economics in Putin’s Russia, Carlisle, PA: Strategic Studies Institute, U.S. Army War College, December 2013,

pp. 98-99.

3. Andrew E. Kramer, “Dispute Over Natural Gas Prices in

Ukraine,” The New York Times, December 16, 2005.

4. “Russia Is Saying . . . If You’re in the Russian Sphere of In-

fluence You Get Cheap Energy; If You Aren’t, You Don’t,” Com-

ments attributed to Christopher Weafer in Andrew E. Kramer,

“Putin Presses Ukraine to Pay Market Price for Natural Gas,” The

New York Times, December 9, 2005.

5. Jonathan Stern, “The Russian-Ukrainian Gas Crisis of Janu-

ary 2006,” Oxford, UK: Oxford Institute for Energy Studies, Janu-

ary 16, 2006, pp. 8-9, available from www.oxfordenergy.org/wpcms/

wp-content/uploads/2011/01/Jan2006-RussiaUkraineGasCrisis-Jona-

thanStern.pdf.

6. Legendre, p. 2.

7. See www.nato.int/cps/en/natolive/topics_56600.htm.

8. For a discussion on the differences between what he terms

the three levels of energy security risks—military functionality,

critical domestic services, and economic vitality—see Phillip E.

339

Cornell, “Energy and the Three Levels of National Security—Dif-

ferentiating Energy Concerns within a National Security Con-

text,” The Quarterly Journal, Fall 2009, pp. 63-81.

9. Jaap de Hoop Scheffer, “Poland Has Been Instrumental in

Putting another Emerging Challenge on NATO’s Agenda, which

Is Energy Security,” in “NATO’s Bucharest Summit—Transfor-

mation of the Alliance and Polish and Regional Perspectives,”

keynote speech in Warsaw, Poland, March 13, 2008, available

from www.nato.int/docu/speech/2008/s080313a.html.

10. “Bucharest Summit Declaration,” issued by the Heads of

State and Government participating in the meeting of the North

Atlantic Council in Bucharest, April 3, 2008, para. 48.

11. Tomas Maltby, “European Union Energy Policy Integra-

tion: A Case of European Commission Policy Entrepreneurship

and Increasing Supranationalism,” Energy Policy, Vol. 55, 2013, pp. 435–444. Maltby argues that the EU’s increased involvement

in energy security resulted not simply from gas supply disrup-

tions like that of 2009 and 2006—which he argues created a “pol-

icy window” for the EU to exploit—but also from the inclusion

of more energy import dependent states in the EU and a trend of

increasing energy imports and prices.

12. Legendre, p. 3.

13. Phillip Cornell, “Regional and International Energy Secu-

rity Dynamics: Consequences for NATO’s Search for an Energy

Security Role,” Geneva, Switzerland: Geneva Centre for Security

Policy, January 2012, p. 16.

14. Interview with a European expert on NATO’s role in

energy security, November 1, 2013.

15. Carlo Frappi, “Transformation and Enlargement: Chal-

lenges for NATO in the Wider Black Sea Area,” Andrea Carati and

Carlo Frappi, eds., NATO in the 60th Anniversary of the North Atlantic Treaty: Challenges and Strategic Divergences from National Perspectives, Milan, Italy: FrancoAngeli, 2009, p. 56. See also Paul Taylor,

“Ukraine Gas Crisis Spurs EU Energy Policy,” Reuters, January 13, 2009, available from blogs.reuters.com/great-debate/2009/01/13/

ukraine-gas-crisis-spurs-eu-energy-policy/.

340

16. Even on this point, European states remain divided. Some,

such as Germany, Italy, France, and Austria, remain reluctant to

cede too much sovereignty in energy issues to the EU.

17. Michael Ruehle, “NATO and Energy Security: From Phi-

losophy to Implementation,” John R. Deni and Karen Smith Ste-

gen, eds., Transatlantic Energy Relations: Convergence or Divergence, Abington, UK: Routledge, 2013.

18. Cornell, “Regional and International Energy Security Dy-

namics: Consequences for NATO’s Search for an Energy Security

Role,” p. 30.

19. Andrew McKillop, “Germany Marches East—Russia

Moves West, Putins Energy Diplomacy,” Natural Gas Europe,

March 13, 2012.

20. Stefan Meister, “Reframing Germany’s Russia Policy—An

Opportunity For the EU,” European Council on Foreign Relations

Policy Brief, London, UK: European Council on Foreign Rela-

tions, April 2014.

21. Interview with a European expert on NATO’s role in en-

ergy security, July 15, 2014.

22. The six Allies are Canada, Germany, Lithuania, the Neth-

erlands, the UK, and the United States, and the two partners are

Australia and Sweden.

23. “SENT Explores Energy Efficiency for the Military

in Cold Climates,” NATO Press Release, February 19-21,

2013, available from www.nato.int/cps/en/natolive/news_99173.

htm?selectedLocale=en. Defence Research and Development Can-

ada is an agency of Canada’s Department of National Defence.

24. Elizabeth Cutright, “The Best Defense Is a Smart Of-

fense,” Business Energy, July 9, 2013, available from www.distribute denergy.com/DE/Blogs/The_Best_Defense_Is_a_Smart_Offense_1723.

aspx.

25. “NATO Smart Energy Team Started Its Activities,” NATO

Energy Security Center of Excellence press release, January 25,

341

2013, available from www.enseccoe.org/en/news/archive/p60/nato-

smart-energy-v2ym.html. Smart Defence is a NATO initiative to encourage allies to cooperate in developing, acquiring, and maintaining military capabilities.

26. “Chicago Summit Declaration,” Brussels, Belgium: North

Atlantic Council, May 20, 2012, para. 52, available from www.nato.

int/cps/en/natolive/official_texts_87593.htm?mode=pressrelease.

27. Anders Fogh Rasmussen, remarks at the opening of the

NATO Energy Security Centre of Excellence, Vilnius, Lithuania,

September 10, 2013, available from www.nato.int/cps/fr/natohq/

opinions_102854.htm.

28. John R. Deni, “The Role of Europe in American Defense

Strategy,” War on the Rocks, April 23, 2014, available from waron-therocks.com/2014/04/the-role-of-europe-in-american-defense-strategy/.

29. Quadrennial Defense Review Report, Washington, DC: U.S.

Department of Defense, 2014.

30. Energy for the Warfighter: Operational Energy Strategy, Washington, DC: U.S. Department of Defense, May 2011, available from

energy.defense.gov/Portals/25/Documents/Reports/20110614_Opera-

tional_Energy_Strategy.pdf; Operational Energy Strategy: Implementation Plan, Washington, DC: U.S. Department of Defense, March 2012, p. 22, available from energy.defense.gov/Portals/25/Documents/

Reports/20120306_OE_Strategy_Implementation_Plan.pdf.

31. DoD Directive 4180.01, DoD Energy Policy, Washington,

DC: U.S. Department of Defense, April 16, 2014.

32. John R. Deni, “Maintaining Transatlantic Strategic, Opera-

tional and Tactical Interoperability in an Era of Austerity,” International Affairs, Vol. 90, No. 3, May 2014, pp. 583-600.

342

CHAPTER 17

THE FEASIBILITY OF SMALL MODULAR

REACTORS FOR MILITARY INSTALLATIONS

Ronald Filadelfo

Even as the U.S. national defense posture is in

transition, reorienting toward a more Pacific-based

strategy and facing a period of declining budgets, cli-

mate change, energy, and their relations to our secu-

rity and defense remain important issues for the De-

partment of Defense (DoD). This chapter will briefly

review how the United States arrived at this point,

and how this subsequently led to a consideration of

placing nuclear reactors on military installations. The

chapter will then discuss the results of a recent Center

for Naval Analyses (CNA) study on the feasibility of

this concept, in terms of contribution to mission and

economic viability.

CLIMATE CHANGE AND ENERGY

ON THE DOD’s AGENDA

Although the warfighting implications of energy

use and supply have long been known to military

planners, the emergence of climate change and energy

as more strategic issues on DoD’s agenda began just a

few years ago. In the summer of 2006, when the fun-

damental existence of human-caused climate change

was still being debated in the United States, CNA was

the first to take a serious look at climate change im-

plications from a national security perspective.1 This

was done by assembling a panel of respected recently

retired military leaders who would have expertise in

343

security issues in various parts of the world, be above

partisan politics, and have credibility with Congress

and with the American public.

A critical aspect of this effort was that it was not

intended to weigh in on any scientific debate concern-

ing climate change or its causes. The panel of military

leaders, known as the Military Advisory Board, made

very clear that they were not climate scientists and

would not take any position on the science, the causes

of, or the expected severity of climate changes. Rather,

their position was as follows: If the predicted changes

occur, this is how they would affect world geo-politics

and thus the security interests of the United States.

Therefore, they kept assumptions regarding the ex-

pected severity of climate change fairly general and

did not tie their findings to any particular level of tem-

perature change or sea level rise.

The military panel came up with five broad recom-

mendations:

1. Climate change should be considered in U.S. na-

tional security planning.

2. The United States should make more of a com-

mitment to greenhouse gas reductions and climate

stability.

3. The United States should engage on the inter-

national level to help ensure that less developed na-

tions will be prepared to cope with expected changes

in climate.

4. DoD needs to look out for itself and assess the

potential impacts of climate change— to include ris-

ing sea levels—on military installations worldwide.

5. And most importantly for the current discus-

sion, DoD could serve as a test bed to help lead the

way for national energy efficiency and development

of alternative energy sources and a smart energy

future for the country.

344

These have all been, for the most part, acted upon

by the defense and national security communities—

particularly the first recommendation, as evidenced

by the inclusion of climate change and energy promi-

nently into the subsequent Quadrennial Defense Review.2

Following the CNA report, the National Intelligence

Council released a National Intelligence Assessment

on this same issue, and came to the same general con-

clusions with more specific findings, including the

identification of specific countries that could poten-

tially become unstable from climate change.

In 2007-08, a confluence of events, including the

opening of a passage across the Arctic in the fall of

2007, and prominent studies, really thrust climate

change front and center on DoD’s agenda. At the same

time, the United States began to realize dramatic in-

creases in energy costs. In 2008, the price of oil rose

to roughly $140 per barrel, and fuel prices became so

high that the U.S. Navy wondered if it would have

to cut back at sea training. Also in 2008, the Defense

Science Board (DSB) put out a very influential— and

blunt—report on DoD’s energy posture.3 Three of the

DSB’s findings particularly resonated throughout the

Department:

1. DoD is very energy inefficient, particularly on

the operational side, and the warfighting vulnerability

this results in is often unappreciated.

2. DoD was largely unaware of the huge financial

costs of its fossil fuel requirements in systems and

platforms, and in general was not adequately consid-

ering it in procurement decisions.

3. DoD’s shoreside installations were overly reliant

on the country’s very fragile electric grid.

345

All of this led to a 2010 Memorandum of Under-

standing (MOU) between DoD and the Department of

Energy (DOE), to collaborate on research and explore

ways to use military installations as test beds for de-

velopment of new energy sources and technologies.4

The goal of this agreement was twofold: to help DoD

meet its energy challenges; and to consider the use

of the innovation and buying power of DoD to help

jump-start markets for new technologies. As noted in

the MOU:

DoD aims to speed innovative energy and conserva-

tion technologies from laboratories to military end

users, and it uses military installations as a test bed

to demonstrate and create a market for innovative

energy efficiency and renewable energy technologies

coming from the DOE labs and other sources.

With growing concerns about climate change and

national fossil fuel use, with the idea of the military

as an innovator and a test bed in leading the country

toward a smart energy future, and with the military’s

own need to ensure a reliable energy source for mili-

tary bases separate from the fragile grid, the stage was

set for consideration of nuclear power for military

installations.

CONGRESSIONAL TASKING TO DOD

Largely due to climate change concerns, but also

for economic reasons, the last several years have seen

a renewed interest in nuclear power in the United

States. However, because large commercial scale giga-

watt (GW)-sized plants require such large up-front

investment, and face sometimes daunting licensing

and siting hurdles that could easily take a decade or

346

more to resolve—issues are outlined in greater detail

in Jane Nakano’s Chapter 8 in this volume—there is

particular interest in small modular reactors (SMRs).

In section 2845 of the 2010 National Defense Autho-

rization Act (NDAA), Congress tasked DoD to study

the feasibility of powering military bases with small

modular reactors.5 The belief was that military instal-

lations could serve as a test-bed for this technology

and perhaps help jump-start an American SMR indus-

try. Of course, DoD has also been investing in other

energy sources like solar, wind, and geothermal, and

faces various mandates and goals for use of renew-

ables. However, in this case, Congress was specifically

interested in trying to help jump-start a U.S. SMR in-

dustry, one in which the United States could possibly

be a world leader.

The Center for Advanced Energy Studies of DOE’s

Idaho National Laboratory and several universities

have studied the domestic economic impact of SMR

manufacture and deployment.6 Total economic benefit

depends on the degree of market penetration of nucle-

ar energy in general and of SMRs in particular, and it

is therefore impossible to predict with any precision.

However, that study concluded:

The annual operation of each 100 MW SMR unit is

estimated to create about 375 jobs and generate $107

million in sales, $68 million in value-added, $27 mil-

lion in earnings (payroll), and $9 million in indirect

business taxes.

So in response to the Congressional tasking, the

Office of the Deputy Undersecretary of Defense, In-

stallations and Environment (DUSD-I&E) asked CNA

to conduct a study. This was to be a short duration

study, overseen by a steering group consisting of rep-

347

resentatives from DUSD-I&E, DOE, the Nuclear Reg-

ulatory Commission, DOE National Labs, and each of

the military departments.

The purpose of the study was simply to determine

whether DoD should be willing to further explore this

idea and be willing to consider specific proposals. The

study’s purpose was not to state categorically whether

DoD should or should not build an SMR, much less

where to locate one if DoD should decide to do so.

Much more information and study would be needed

before those decisions could be made.

The CNA Feasibility Study.

In assessing the feasibility of SMRs to power mili-

tary installations, an obvious first question was: How

do the power outputs of these reactors fit the energy

needs of military installations? Commercial plants are

on the order of a gigawatt or more in output. SMRs

generate between about 30 and 300 megawatts (MW),

and as the term “modular” in the name implies, mod-

ules can be added to meet power demands as needed.

Figure 17-1 shows a distribution function for pow-

er demand of U.S. military installations. Specifically, it

shows the plant size required, assuming a 90 percent

capacity factor, to meet the energy demands of U.S.

military installations based on average installation en-

ergy use for fiscal years 2008 and 2009. Overall, about

60 percent of the installations could be supported

with a plant of about 20-MW, and 90 percent could

be supported with a plant of 40-MW. Thus, SMRs are

adequate in power output for the vast majority of U.S.

military installations.

348

Figure 17-1. Plant Size Requirements for

DoD Installations.

Given that these plants are the appropriate size

to meet the needs of DoD installations, the feasibility

analysis then focused on three questions: (1) Would

an SMR contribute to the DoD mission? (2) What are

the licensing issues and timelines? and, (3) Would an

SMR be cost effective for a DoD installation?

Regarding contributions to the DoD mission, the

issue is not primarily about the warfighting mission.

Rather, it relates to supporting stateside installations,

and helping DoD meet various energy and environ-

mental goals. Using nuclear power from small modu-

lar reactors located on or near military installations

would contribute to DoD missions by:

• Providing electric energy assurance for critical

military facilities (more reliably at more stable

cost);

• Helping DoD address mandates to reduce reli-

ance on fossil fuels for electricity; and,

349

•

Helping DoD address mandates to reduce

greenhouse gas emissions.

Obviously, nuclear power will not help DoD with

its mandates for renewable energy generation, such

as the requirement to meet at least 20 percent of its

energy demand with renewables by 2020. Similarly,

SMRs will not necessarily help DoD fulfill its mandate

to reduce overall energy use, specifically, to decrease

its energy use per square foot of building space by 30

percent from 2003 levels, by 2015.

Safety, certification, and licensing are major issues

that will need to be dealt with before any project can

go forward. Whenever considering a nuclear reactor,

safety is always the first concern. Commercial nuclear

power has an excellent safety record in this country,

and most evidence appears to indicate that SMRs are

designed to be even safer. They are smaller, placed

in the ground, and have many new passive safety

features. Despite this, before the first of these can go

forward, certification, and licensing issues have to be

worked out, and that will take about 10 years. Even

if it is agreed that this concept is feasible and worth

exploring, finding a specific site will be very challeng-

ing, and consideration of impact on base function will

also have to be addressed.

Cost effectiveness is by necessity a major part of

any feasibility study. Because SMRs currently are not

in operation, the first-of-a-kind expenses (FOAK) will

be substantial, perhaps as high as $800 million. FOAK

expenses include final detailed engineering for certi-

fication; resolving licensing issues; and manufactur-

ing engineering, tooling, and facilities.7 However, it is

unlikely that a military installation taking on an SMR

project will have to pay these costs. The envisioned

350

model for this concept is that FOAK expenses will be

paid by some combination of DOE, vendors, and di-

rect congressional funding.

The CNA study calculated that if FOAK expenses

are excluded, an SMR could produce electricity at a

cost of about 8 cents per kilowatt hour (kWh). With

FOAK included, the cost becomes over 20 cents per

kWh. Although 8 cents per kWh is higher than the na-

tional average price industrial users pay for electric-

ity, it could be cost effective in many areas. Figure 17-2

shows what the prices calculated above imply about

ultimate cost effectiveness. The Industrial curve shows

the distribution function for state average prices that

industrial users pay for electricity. Prices in about 30

percent of states are more than 8 cents per kWh, which

means that SMRs may be cost effective for many

installations.

Figure 17-2: Distribution Function for Electricity

Process in the 50 States and the District of

Columbia, Industrial Users and all Sectors.

351

However, very few states show average prices

greater than 20 cents per kWh, so an SMR project

would generally not be cost effective if the installation

had to pay FOAK costs. Therefore, economic viability

depends on DoD not having to pay FOAK expenses.

Further examination of the findings appeared to indi-

cate that they are robust to any reasonable variation in

input variables.

How do these prices compare to those of renew-

ables, which DoD is also pursuing for its installations?

CNA recently performed a study that looked at the

economics of wind and solar photovoltaic (PV) ener-

gy at Department of Navy installations in the United

States.8 In that study, CNA used the National Renew-

able Energy Laboratory’s System Advisor Model to

calculate costs from these two sources at 87 stateside

installations. In no cases, did solar PV have a cost as

low as 8 cents, and at 12 installations, wind came in

at this price or lower, suggesting the economics for

SMR-generated electricity are generally favorable

compared to renewables.

SUMMARY

As both DoD, and the United States as a whole,

address energy challenges, it is generally believed that

DoD can use its tradition of innovation and its large

buying power to help lead the country toward energy

efficiency and toward a sustainable energy future. In

tasking DoD to examine the feasibility of siting small

modular reactors to provide power to military instal-

lations, Congress appears to have an interest in jump

starting a U.S. small modular reactor industry. To

summarize the results of the feasibility study in terms

of the three questions posed previously:

352

• SMRs could help DoD in terms of energy secu-

rity for its installations, as well as with various

energy and greenhouse gas reduction goals.

• Even if a decision is made to proceed with SMR

deployment, it will take about 10 years before

one of these could be producing electricity.

There are many issues that remain to be worked

out, including the effect a nuclear power plant

could have on the function of the installation.

• Finally, an SMR could be cost effective for a

DoD installation if some other entity picks up

the FOAK costs.

Although these findings suggest that the SMR idea

is worth examining further and perhaps entertaining

specific proposals, they do not imply that DoD should

build an SMR at a specific location. Many criteria need

to be met before that can occur, and it remains to be

determined if DoD will ever find a location that meets

all the criteria. The feasibility study simply concluded,

as was its tasking, that SMR deployment on military

installations is worth further examination.

Of course, major potential obstacles also exist.

Waste disposal is a major issue that remains to be

solved before DoD, or the country as a whole, can

make a serious commitment to nuclear power in any

form, be it commercial-scale or small modular reac-

tors. Security is sometimes mentioned as a benefit of

locating an SMR on a military base. However, nuclear

facilities already employ a great deal of security and

access control, and although location on a military in-

stallation provides some additional security, in reality

it is just another “fence line,” and not a major consid-

eration. Compatibility with installation missions is a

major concern for DoD. For example, how far from a

353

base housing complex will a nuclear facility have to be

situated? Although nuclear facilities are not built ad-

jacent to airports, would the same necessarily apply at

military air stations? What about ordnance facilities,

or ranges where ordnance is used?

Since completion of the feasibility study, DoD has

not pursued any SMR projects, although the depart-

ment has not ruled this out for the future. Meanwhile,

DOE is partnering with the Tennessee Valley Author-

ity (TVA) and Babcock & Wilcox mPower, Inc. (B&W)

to undertake a project at the Clinch River site in Oak

Ridge, with DOE paying about half of the design and

licensing costs.9 This will be a 180-MW installation,

and could be operational by 2022. If completed, this

would be the nation’s first operational small modular

reactor. This project is still in its early stages, and it is

still far from certain that it will proceed to completion.

B&W must still obtain Nuclear Regulatory Commis-

sion certification for its reactor design, which it hopes

to have by 2016. At that point, the TVA will decide

whether it wants to proceed with construction of the

site. It is likely DoD will monitor the DOE-TVA project

before moving on its own. Given this timeline, DoD is

unlikely to move forward on SMRs for several years,

at a minimum.

ENDNOTES - CHAPTER 17

1. National Security and the Threat of Climate Change, Arlington, VA: Center for Naval Analyses, April 2007, available from www.

cna.org/sites/default/files/news/FlipBooks/Climate%20Change%20web/

flipviewerxpress.html.

2. Quadrennial Defense Review Report, Washington, DC: U.S.

Department of Defense, July 2010, available from www.defense.

gov/qdr/images/QDR_as_of_12Feb10_1000.pdf.

354

3. Defense Science Board Task Force on DoD Energy Strat-

egy, “More Fight—Less Fuel,” Washington, DC: U.S. Department

of Defense, February 2008, available from www.acq.osd.mil/dsb/

reports/ADA477619.pdf.

4. “DOD and DOE Sign MOU on Clean Energy and Energy

Security,” FedCenter.Gov, August 2, 2010, available from www.

fedcenter.gov/Announcements/index.cfm?id=15876&pge_id=1606.

5. 111th Cong., Public Law 84, “National Defense Authoriza-

tion Act for Fiscal Year 2010,” Washington, DC: U.S. Government

Printing Office, available from www.gpo.gov/fdsys/pkg/PLAW-

111publ84/content-detail.html.

6. “Economic and Employment Impacts of Small Modular Re-

actors,” Chicago, IL: Energy Policy Institute, June 2010, available

from epi.boisestate.edu/media/3494/economic%20and%20employment

%20impacts%20of%20smrs.pdf.

7. Marcus King, LaVar Huntzinger, and Thoi Nguyen, Fea-

sibility of Nuclear Power on U.S. Military Installations, Alexandria, VA: Central for Naval Analysis, March 2011, available from

www.cna.org/sites/default/files/research/Nuclear%20Power%20on%20

Military%20Installations%20D0023932%20A5.pdf.

8. LaVar Huntzinger, et al., Department of the Navy Installation

Energy Strategy, Alexandria, VA: Central for Naval Analysis, September 2011.

9. Ed Marcum, “TVA, B&W Poised to Put Small Modular Re-

actors to the Test,” Knoxville News Sentinel, April 7, 2013, available from www.knoxnews.com/news/2013/apr/07/tva-to-put-small-

reactors-to-the-test/.

355

ABOUT THE CONTRIBUTORS

THERESA SABONIS-HELF is a Professor of Nation-

al Security Strategy at the National War College in

Washington, DC, where she has taught since 2001. She

is also an Adjunct Professor at Georgetown in the Sci-

ence, Technology, and International Affairs program.

She was Energy and Environment Policy Advisor for

projects based in Central Asia managed by the Har-

vard Institute for International Development. She has

worked as a Visiting Fellow at the U.S. Agency for In-

ternational Development, and as a Policy Analyst for

think tanks in the United States and Russia. Dr. Sab-

onis-Helf has lived and worked in seven countries of

the former USSR, and she has published and lectured

extensively on climate change policies, post-Soviet

energy and environmental issues, regional energy

trade, and the politics of electricity.

JOHN CALABRESE teaches U.S. foreign policy at

American University in Washington, DC. He also

serves as a Scholar in Residence at the Middle East In-

stitute (MEI) where he directs a project on The Middle

East and Asia. Dr. Calabrese is the Book Review Edi-

tor of The Middle East Journal and General Series Editor

of MEI Viewpoints. He is the author of China’s Chang-

ing Relations with the Middle East and Revolutionary

Horizons: Iran’s Regional Foreign Policy. He has edited

several books and written numerous articles on the

international relations of the Middle East, especially

on the cross-regional ties between the Middle East

and Asia.

357

IAN TAYLOR is Professor in International Relations

and African Politics at St. Andrews in Scotland and

Chair Professor in the School of International Stud-

ies, Renmin University of China. He is also Professor

Extraordinary in Political Science at the University of

Stellenbosch, South Africa; an Honorary Professor at

the Institute of African Studies, China; and a Visiting

Scholar at Mbarara University of Science and Tech-

nology, Uganda. Focusing largely on sub-Saharan Af-

rica, Dr. Taylor has authored eight academic books,

edited another eight, and has published over 60 peer-

reviewed scholarly articles.

DAVID MARES holds the Institute of the Americas

Chair for Inter-American Affairs at the University of

California, San Diego. He has been Professor of the

Centro de Estudios Internacionales at El Colegio de

Mexico; Fulbright Professor at the Universidad de

Chile; and Visiting Professor at FLACSO-Ecuador.

Dr. Mares is the author or editor of eight books, and

his publications have appeared in English, Spanish,

French, Portuguese, Italian, and Chinese journals.

ROBERT A. MANNING is a senior fellow with the

Brent Scowcroft Center on International Security at

the Atlantic Council. He formerly served as senior

strategist, National Counterproliferation Center from

2010 to 2012, and as Director, Long-Range Energy and

Regional/Global Affairs, U.S. National Intelligence

Council, Strategic Futures Group, from 2008 to 2010.

From 2005 to 2008, he served as a member of the secre-

tary’s Policy Planning Staff, Department of State, and

from 2001 to 2005, he was Senior Counselor, Energy,

Technology and Science Policy, Department of State.

358

KAREN SMITH STEGEN is the KAEFER Professor

of Renewable Energy and Environmental Politics at

Jacobs University, Bremen, Germany. She began her

energy career over 2 decades ago in the international

affairs department of a major U.S. energy company.

Dr. Smith Stegen’s publications have appeared in a

wide variety of journals, including Energy Policy, En-

ergy Conversion and Management, Journal of Transatlan-

tic Studies, International Journal of Emerging Markets, Risk Management, and the Journal of Eurasian Studies.

Dr. Smith Stegen is a featured speaker at numerous

industry and academic conferences.

JANE NAKANO is a senior fellow in the Energy and

National Security Program at the Center for Strate-

gic and International Studies (CSIS). Her research

focus includes energy security issues in Asia, global

nuclear energy trends, and global natural gas market

dynamics. Prior to joining CSIS in 2010, Ms. Nakano

served with the U.S. Department of Energy (DOE)

and worked as the lead staff on U.S. energy engage-

ments with China and Japan. She was responsible for

coordinating DOE engagement in the U.S.-China Stra-

tegic Economic Dialogue, U.S.-China Energy Policy

Dialogue, and U.S.-Japan Energy Dialogue.

MICHAL MEIDAN is an Associate Fellow in Chatham

House’s Asia Program, and the Director of China Mat-

ters, an independent consultancy that provides analy-

sis on the politics and geopolitics of the Chinese ener-

gy industry for corporate, financial, and government

clients. She previously worked as a Senior Analyst

focusing on Asia for the Eurasia Group, with particu-

lar attention on China’s energy policies. Dr. Meidan

has published in Asian Perspectives, China Perspectives, 359

China Security, and the Journal of Contemporary China.

Additionally, she is a regular commentator in interna-

tional media including The New York Times, The Wall

Street Journal, and on broadcast media such as Bloom-

berg TV, CNBC, and BNN.

TOM CUTLER is currently President of Cutler Inter-

national, LLC., and has nearly 40 years’ experience in

international energy affairs including a 36-year career

at the U.S. Department of Energy (DOE). As Director

of DOE’s Office of European and Asia Pacific Affairs,

he played a key role in the launch of a number of new

initiatives in Europe and Asia until his retirement

from DOE in July 2013. Previously, Mr. Cutler man-

aged DOE energy policy dialogues with a number of

countries including Indonesia, India, China, Japan,

Korea, Australia, Pakistan, Bangladesh, Norway, and

the United Kingdom. He served as the Chairman of

the North Atlantic Treaty Organization’s Petroleum

Planning Committee from 1983 to 1987. Mr. Cutler

authored the book The Military Demand for Oil in 1989.

DEBORAH GORDON is the Director and a senior

associate in the Energy and Climate Program at the

Carnegie Endowment for International Peace (CEIP),

where her research focuses on oil and climate issues in

the United States, China, and globally. She has served

on National Academy of Sciences committees and the

Transportation Research Board Energy Committee,

lectured widely and given keynote speeches, and been

featured on radio, television, and in print media. Ms.

Gordon’s recent book, Two Billion Cars (with Daniel

Sperling), provides a fact-based case and roadmap for

navigating the biggest global environmental challenge

of this century—cars and oil.

360

MICHAEL KLARE is a professor of peace and world

security studies, and director of the Program in Peace

and World Security Studies at Hampshire College.

He has written widely on U.S. military policy, inter-

national peace and security affairs, the global arms

trade, and global resource politics. Dr. Klare published

several books, including The Race for What’s Left, and

his articles have appeared in many journals, includ-

ing Arms Control Today, Bulletin of the Atomic Scientists, Current History, Foreign Affairs, Harper’s, The Nation, Scientific American, and Technology Review.

THE HONORABLE KATHERINE HAMMACK has

been the Assistant Secretary of the Army for Instal-

lations, Energy, and Environment since June 28,

2010. She is the primary advisor to the Secretary of

the Army and Chief of Staff of the Army on all Army

matters related to installation policy, oversight, and

coordination of energy security and management. She

is responsible for policy and oversight of sustainabil-

ity and environmental initiatives; resource manage-

ment, including design, military construction, opera-

tions, and maintenance; base realignment and closure;

privatization of Army family housing, lodging, real

estate, and utilities; and the Army’s installations safe-

ty and occupational health programs.

PAUL ROEGE is a lifelong energy aficionado who fo-

cuses on the role of energy in building resilience at the

community and regional levels. He recently spent 4

years on active military duty to establish the Army’s

operational energy concepts and strategies, seeking to

use energy most effectively toward operational out-

comes. He substantially influenced the Army’s and

other military energy strategies, including adoption

361

of a concept for “Energy-Informed Operations.” Lieu-

tenant Colonel (U.S. Army Retired) Roege also guided

Army energy research and development thrusts to-

ward more integrated, network foci, and advocated

for the emergent shift toward resilience as an over-

arching concept for energy security.

CHRISTOPHER BRONK is Assistant Professor of

Computer and Information Systems at the University

of Houston. He holds additional appointments at the

Baker Institute Center for Energy Studies, Rice Uni-

versity’s Department of Computer Science, and the

University of Toronto’s Munk School of Global Af-

fairs. Dr. Bronk’s research focuses on cyber geopoli-

tics with additional work in innovation, knowledge

management, international politics, and policy relat-

ed to intelligence and international security. In addi-

tion to significant work in the cyber security area, he

has published on a broad range of issues, including

broadband and Wi-Fi policy, information technology

sector energy consumption, intelligence and informa-

tion sharing issues, U.S.-Mexico policy, and digital

diplomacy.

JOHN R. DENI is a Research Professor of Joint, Inter-

agency, Intergovernmental, and Multinational Securi-

ty Studies at the Strategic Studies Institute, U.S. Army

War College. He previously worked for 8 years as a

political advisor for senior U.S. military command-

ers in Europe. While working for the U.S. military

in Europe, Dr. Deni was also an adjunct lecturer at

Heidelberg University’s Institute for Political Science

where he taught graduate and undergraduate courses

on U.S. foreign and security policy, the North Atlantic

Treaty Organization (NATO), European security, and

362

alliance theory and practice. He is the author or edi-

tor of three books, including Alliance Management and

Maintenance: Restructuring NATO for the 21st Century,

as well as several peer-reviewed monographs and

journal articles.

RONALD FILADELFO serves as Leader of the Envi-

ronment and Energy Research Group at the Center

for Naval Analyses (CNA). The group’s current re-

search focus includes the relationship between climate

change and national security, and installation and op-

erational energy issues for the military. In 2007, Dr.

Filadelfo led the analysis and writing team that sup-

ported the CNA Military Advisory Board study of the

effects of climate change on national security. He was

recently a member of a National Academy of Sciences

Naval Studies Board that examined the implications

of climate change for U.S. Naval forces.

363

U.S. ARMY WAR COLLEGE

Major General William E. Rapp

Commandant

*****

STRATEGIC STUDIES INSTITUTE

and

U.S. ARMY WAR COLLEGE PRESS

Director

Professor Douglas C. Lovelace, Jr.

Director of Research

Dr. Steven K. Metz

Editor

Dr. John R. Deni

Editor for Production

Dr. James G. Pierce

Publications Assistant

Ms. Rita A. Rummel

*****

Composition

Mrs. Jennifer E. Nevil

New Realities: Energy Security in the 2010s & Implications for the U.S. Militar New Realities:

Energy Security in the 2010s

and

Implications for the U.S. Military

John R. Deni

Editor

FOR THIS AND OTHER PUBLICATIONS, VISIT US AT

http://www.carlisle.army.mil/

U.S. ARMY WAR COLLEGE

UNITED STATES

ARMY WAR COLLEGE

PRESS

Carlisle Barracks, PA

and

y

John R

. Deni, Editor

This Publication

SSI Website

USAWC Website

Document Outline

- NEW REALITIES: ENERGY SECURITY IN THE 2010s AND IMPLICATIONS FOR THE U.S. MILITARY

- CONTENTS

- FOREWORD

- CHAPTER 1 - The Military Implications of 21st Century Energy Security, John R. Deni

- CHAPTER 2 - RUSSIA AND ENERGY MARKETS, Theresa Sabonis-Helf

- RUSSIAN GAS SUPPLY

- Table 2-1. Natural Gas World Proven Reserves and Production 2013.

- RUSSIAN OIL SUPPLY

- THE DOMESTIC CHALLENGES IN OIL AND GAS

- RELATIONS WITH THE EU

- Table 2-2. European Dependence on Russian Natural Gas, 2012.

- RUSSIAN ENERGY RELATIONS WITH THE FORMER USSR

- RUSSIA’S “NEW FRONTIER” WITH CHINA

- CONCLUSION

- ENDNOTES - CHAPTER 2

- CHAPTER 3 - THE ARAB UPRISINGS AND MIDDLE EAST AND NORTH AFRICA ENERGY PRODUCERS: HEAVY COSTS AND EPHEMERAL BENEFITS, John Calabrese

- EGYPT―REVOLUTION DERAILED

- LIBYA―IMPLOSION

- SYRIA―ANARCHIC STRUGGLE

- IRAQ―PRECARIOUS REVIVAL

- Damage to Infrastructure and Disruption to Production.

- SAUDI ARABIA―BUYING TIME

- CONCLUSIONS

- ENDNOTES - CHAPTER 3

- CHAPTER 4 - GAME CHANGER? THE ENERGY REVOLUTION AND AMERICAN POLICIES TOWARD AFRICA, Ian Taylor

- AFRICA’S OIL AND THE UNITED STATES

- THE NATURE OF THE SCRAMBLE

- THE “ENERGY REVOLUTION”

- Table 4-1. U.S. Imports of Total Crude Oil and Products from Africa, 2010-2012 (in thousands of barrels).

- IMPLICATIONS FOR U.S. POLICY

- ENDNOTES - CHAPTER 4

- CHAPTER 5 - THE IMPACT OF POLITICAL INSTABILITY ON THE DEVELOPMENT OF LATIN AMERICAN ENERGY SUPPLIES, David R. Mares

- POTENTIAL

- Table 5-1. Proven Reserves (Billion barrels at end of Year).

- Table 5-2. Production (Thousand barrels daily, 2011).

- Figure 5-1. Location Indicators of Major Basins with Shale Gas Potential.

- Table 5-3. Natural Gas Potential in Latin America (tcf, 2011).

- THE CHALLENGE OF ENERGY SECURITY

- THE CHALLENGES FOR PRODUCTION

- THE CHALLENGE OF SPREADING THE WEALTH AT HOME

- CONCLUSION: THE POLITICS OF ENERGY

- ENDNOTES - CHAPTER 5

- CHAPTER 6 - THE SHALE REVOLUTION AND THE NEW GEOPOLITICS OF ENERGY, Robert A. Manning

- THE SHALE REVOLUTION: U.S. ENERGY RENAISSANCE

- STRATEGIC IMPLICATIONS OF SHALE GAS

- GEOPOLITICAL RISKS AND BENEFITS

- GEOPOLITICAL CHALLENGES

- CONCLUSION

- ENDNOTES - CHAPTER 6

- CHAPTER 7 - THE SECURITY RISKS AND REWARDS OF RENEWABLE ENERGIES: IMPLICATIONS FOR THE UNITED STATES, Karen Smith Stegen

- INTRODUCTION

- THE SECURITY RISKS OF OIL AND GAS DEPENDENCE AND THE REWARDS OF RENEWABLE ENERGIES

- COPING WITH REE SHORTAGES AND SUPPLY CHAIN CONSTRAINTS

- New Mining.

- Mining Overseas and Offshore.

- Mining in the United States.

- Recycling.

- Stockpiling.

- Substitution.

- Reducing Content.

- Supply Chain Development.

- U.S. Government Activities.

- Transportation Risks.

- Power Generation and Battery-Electric Transportation.

- Rare Earths and Supply Risks.

- Table 7-1. World Mine Production and Reserves, in metric tons of rare-earth oxide content, USGS, Mineral Commodity Summaries, January 2013.

- CONCLUSION

- ENDNOTES - CHAPTER 7

- CHAPTER 8 - THE EVOLVING GLOBAL NUCLEAR INDUSTRY LANDSCAPE AND THE STATUS OF THE U.S. NUCLEAR INDUSTRY, Jane Nakano

- OVERVIEW OF THE GLOBAL NUCLEAR POWER CAPACITY

- Figure 8-1. IAEA Forecast for Nuclear Generation Capacity Growth (in gigawatts) through 2030 and 2050 and their Shares (in percentage) of Total Electricity Generation.

- Figure 8-2. World Energy Consumption by Fuel Type, 1990-2040.

- Figure 8-3. Global Nuclear Reactor Construction.

- THE STATE OF THE U.S. NUCLEAR INDUSTRY

- Figure 8-4. Growing Share of Shale Gas in U.S. Natural Gas Production.

- RISING COMPETITION IN THE GLOBAL NUCLEAR MARKETPLACE

- CONCLUSION

- ENDNOTES - CHAPTER 8

- CHAPTER 9 - CHINA’S BURGEONING DEMAND AND ITS QUEST FOR RESOURCES, Michal Meidan

- CHINA’S ENERGY SECTOR: UNSUSTAINABLE AND UNCOORDINATED

- THE FYP: A NEW ENERGY MODEL?

- OIL INSECURITY VS. GAS INDEPENDENCE?

- Figure 9-1. Chinese Oil Imports by Country.

- CHINA’S GLOBAL ENERGY FOOTPRINT

- CHINA’S ELUSIVE SUPPLY SECURITY STRATEGY

- IMPLICATIONS FOR THE U.S. MILITARY

- ENDNOTES - CHAPTER 9

- CHAPTER 10 - THE CHANGING CALCULUS OF INDIA’S ENERGY SECURITY, Tom Cutler

- OIL IMPORT VULNERABILITY CENTRAL TO ENERGY SECURITY

- WHAT THE GOLDEN AGE OF GAS MEANS FOR INDIA

- COAL IS STILL KING

- THE CRISIS IN POWER PERSISTS

- TOO MANY KEY PLAYERS IN INDIAN ENERGY POLICYMAKING

- U.S.-INDIA CLEAN ENERGY COOPERATION: A BRIGHT SPOT

- THE UPS AND DOWNS OF U.S.-INDIAN CIVIL NUCLEAR COOPERATION

- SOUTH ASIA REGIONAL ENERGY INTEGRATION CRUCIAL TO FUTURE ENERGY SECURITY

- CONCLUSION

- ENDNOTES - CHAPTER 10

- CHAPTER 11 - ENERGY DEMAND IN THE DEVELOPING WORLD, Deborah Gordon

- Figure 11-1a. Global Energy Consumption.

- Figure 11-1b. Global Energy Consumption.

- Figure 11-2: Per Capita Primary Energy Consumption, 2011.

- PROJECTING FUTURE TRENDS

- Figure 11-3: Growth in Primary Energy Demand, by Region, 2011-35.

- Figure 11-4. Projected Energy Demand Growth, by Source and Region, 2010 vs. 2035(million tons oil equivalent [MTOE]).

- ELECTRIC POWER

- FOSSIL FUELS

- NUCLEAR

- ENERGY-RELATED SECURITY IMPLICATIONS BEYOND THE 2010s

- ELUSIVE ENERGY SELF-SUFFICIENCY

- ROLE OF DISTRIBUTED, RENEWABLE ENERGY GENERATION

- Figure 11-5. Growth in Electricity Generation from Renewables, 2011-35.

- STRUGGLES WITH ENERGY SECURITY

- Figure 11-6: Mapping of Global Maritime Transit Density with Select Choke Points.

- CHALLENGED BY CLIMATE SECURITY

- Figure 11-7. Carbon Dioxide Intensity in Selected OECD and Non-OECD Regions, 2010-35.

- Figure 11-8. Global Risks from Climate Security.

- TOWARD A GLOBAL ENERGY POLICY

- ENDNOTES - CHAPTER 11

- CHAPTER 12 - NEW SUPPLY ROUTES—NEW CONFLICTS? Michael T. Klare

- Table 12-1. Inter-Regional Oil Trade Movements, 2012 (in millions of barrels per day).

- THE UNITED STATES AND THE PROTECTION OF ENERGY SUPPLY LINES

- U.S. SUPPLY-LINE PROTECTION BEYOND THE GULF

- NEW CONSUMERS, NEW SUPPLY ROUTES

- Shift in the Center of Gravity of Global Oil Consumption.

- Table 12-2. Oil Consumption and Imports in Selected Countries and Regions, 2010 and 2040.

- The Growing Role of China and India.

- New Supply Zones.

- CONCLUSION: THE UNCERTAIN PATH AHEAD

- ENDNOTES - CHAPTER 12

- CHAPTER 13 - THE ARMY’S APPROACH TO INSTALLATION AND OPERATIONAL ENERGY SECURITY CHALLENGES, Katherine Hammack

- CHAPTER 14 - OPERATIONAL ENERGY AS A STEPPING STONE TOWARD NATIONAL RESILIENCE, Paul Roege

- ENERGY-INFORMED CONCEPT

- Figure 14-1: Army Operational Energy Concept Overview.

- CULTURE CHANGE

- EXPANDING PERSPECTIVE

- THE INSTALLATION ENERGY DILEMMA

- RESILIENCE AS THE FUTURE DIRECTION

- Figure 14-2. Resilience Fills the Solution Gap.

- CONCLUSION

- ENDNOTES - CHAPTER 14

- CHAPTER 15 - HACKS ON GAS: ENERGY, CYBER SECURITY, AND U.S. DEFENSE, Chris Bronk

- CYBER INSECURITY AND ENERGY SECURITY

- CYBER ATTACK AGAINST THE ELECTRICITY SYSTEM

- HACKING THE OIL AND GAS SECTOR AND THE DOD ENERGY SUPPLY CHAIN

- CYBER AND ENERGY: SOME PRESCRIPTIONS

- ENDNOTES - CHAPTER 15

- CHAPTER 16 - THE NORTH ATLANTIC TREATY ORGANIZATION’S (RE)ENGAGEMENT ON ENERGY SECURITY: MANAGING UNMET EXPECTATIONS, John R. Deni

- NATO’S (LATEST) ARRIVAL ON THE ENERGY SECURITY SCENE

- NATO STUMBLES

- THE SILVER LINING

- LESSONS TO BE LEARNED . . . AND APPLIED

- ENDNOTES - CHAPTER 16

- CHAPTER 17 - THE FEASIBILITY OF SMALL MODULAR REACTORS FOR MILITARY INSTALLATIONS, Ronald Filadelfo

- CLIMATE CHANGE AND ENERGY ON THE DOD’s AGENDA

- CONGRESSIONAL TASKING TO DOD

- The CNA Feasibility Study.

- Figure 17-1. Plant Size Requirements for DoD Installations.

- Figure 17-2: Distribution Function for Electricity Process in the 50 States and the District of Columbia, Industrial Users and all Sectors.

- SUMMARY

- ENDNOTES - CHAPTER 17

- ABOUT THE CONTRIBUTORS

Table of Contents

NEW REALITIES: ENERGY SECURITY IN THE 2010s AND IMPLICATIONS FOR THE U.S. MILITARY

CONTENTS

FOREWORD

CHAPTER 1 - The Military Implications of 21st Century Energy Security, John R. Deni

CHAPTER 2 - RUSSIA AND ENERGY MARKETS, Theresa Sabonis-Helf

RUSSIAN GAS SUPPLY

Table 2-1. Natural Gas World Proven Reserves and Production 2013.

RUSSIAN OIL SUPPLY

THE DOMESTIC CHALLENGES IN OIL AND GAS

RELATIONS WITH THE EU

Table 2-2. European Dependence on Russian Natural Gas, 2012.

RUSSIAN ENERGY RELATIONS WITH THE FORMER USSR

RUSSIA’S “NEW FRONTIER” WITH CHINA

ENDNOTES - CHAPTER 2

CHAPTER 3 - THE ARAB UPRISINGS AND MIDDLE EAST AND NORTH AFRICA ENERGY PRODUCERS: HEAVY COSTS AND EP

EGYPT―REVOLUTION DERAILED

LIBYA―IMPLOSION

SYRIA―ANARCHIC STRUGGLE

IRAQ―PRECARIOUS REVIVAL

Damage to Infrastructure and Disruption to Production.

SAUDI ARABIA―BUYING TIME

CONCLUSIONS

ENDNOTES - CHAPTER 3

CHAPTER 4 - GAME CHANGER? THE ENERGY REVOLUTION AND AMERICAN POLICIES TOWARD AFRICA, Ian Taylor

AFRICA’S OIL AND THE UNITED STATES

THE NATURE OF THE SCRAMBLE

THE “ENERGY REVOLUTION”

Table 4-1. U.S. Imports of Total Crude Oil and Products from Africa, 2010-2012 (in thousands of barr

IMPLICATIONS FOR U.S. POLICY

ENDNOTES - CHAPTER 4

CHAPTER 5 - THE IMPACT OF POLITICAL INSTABILITY ON THE DEVELOPMENT OF LATIN AMERICAN ENERGY SUPPLIES

POTENTIAL

Table 5-1. Proven Reserves (Billion barrels at end of Year).

Table 5-2. Production (Thousand barrels daily, 2011).

Table 5-3. Natural Gas Potential in Latin America (tcf, 2011).

THE CHALLENGE OF ENERGY SECURITY

THE CHALLENGES FOR PRODUCTION

THE CHALLENGE OF SPREADING THE WEALTH AT HOME

CONCLUSION: THE POLITICS OF ENERGY

ENDNOTES - CHAPTER 5

CHAPTER 6 - THE SHALE REVOLUTION AND THE NEW GEOPOLITICS OF ENERGY, Robert A. Manning

THE SHALE REVOLUTION: U.S. ENERGY RENAISSANCE

STRATEGIC IMPLICATIONS OF SHALE GAS

GEOPOLITICAL RISKS AND BENEFITS

GEOPOLITICAL CHALLENGES

CONCLUSION

ENDNOTES - CHAPTER 6

CHAPTER 7 - THE SECURITY RISKS AND REWARDS OF RENEWABLE ENERGIES: IMPLICATIONS FOR THE UNITED STATES

THE SECURITY RISKS OF OIL AND GAS DEPENDENCE AND THE REWARDS OF RENEWABLE ENERGIES

COPING WITH REE SHORTAGES AND SUPPLY CHAIN CONSTRAINTS