“THE OIL ERA: EMERGING CHALLENGES”
16th Annual Energy Conference
Emirates Centre for Strategic Studies and Research , Abu Dhabi, UAE
8-10 November 2010
What better place to discuss the “Emerging Challenges of the Oil Era” than in the Gulf? Vital as the oil resources of the Gulf are for global energy security. And vital as the geopolitics of oil are for countries in the region, where national economies rely so much on producing and exporting this valuable, strategic commodity.
Let me commend the Emirates’ Centre for Strategic Studies and Research” on convening yet another prestigious Annual Conference. And let me thank the Centre for inviting me to share some thoughts on “The Geopolitics of Oil and Global Energy Security”.
Geopolitics are one of several factors, sometimes the wildcard factor, that pop up when pundits explain unforeseen fluctuations in the price of oil. But what exactly are they? We know geopolitics when we see them in play when nations shift alliances, flex political, economic and military muscle and when they project power. In peace and in conflict and war. What is more difficult to see and understand in a world of shifting power dynamics is under-the-surface play of geopolitics. How geopolitical perception and psychology make nations do this or that, or make them refrain from doing this or that, when pursuing their national interests.
The oil era is far from over. There definitely is something that we can call “The Geopolitics of Oil” when oil impacts geopolitics and when oil is impacted by geopolitics, while energy security remains a national imperative in our energy-hungry world.
Drawing on experience from working for and with international energy organizations as well as from serving as an energy diplomat of a major oil-exporting country, I will, on a personal basis, suggest some challenges and uncertainties that underpin the need for global dialogue on oil and other forms of energy. And since oil goes to the very core of national interests, add a word on energy nationalism and energy security, before concluding on the need for better global energy governance in a multi-polar world of increasing interdependencies. Coming from a major oil-exporting country very close to the North Pole, I will also take you to the Arctic, a potential new area of play for the geopolitics of oil as its ice continues to melt due to climate change.
A Means - not an End
But first, why should we be concerned about “The Geopolitics of Oil and Global Energy Security”? Extracting oil merely for the sake of oil can surely not be a societal goal in itself. Governments need oil and other forms of energy as a means for the economic and social development of their countries. And citizens of both energy-exporting and energy-importing countries expect their Governments to provide the benefits of their domestic energy resources, as well as the benefits of energy resources imported from abroad, for the betterment of their lives. The fulfillment or not of public energy expectations can boil down to the very political survival of governments in their domestic contexts.
Oil in an Evolving Energy Scenario
Oil has long been a driver of politics and economic developments. Many would say it has a license to drive. But oil is also being driven by politics and economic developments. Politics of international competition and conflict as well as politics of international co-operation. There are a variety of front and back seat drivers putting their hands on the steering wheel, creating some uncertainty and discussion as to the road ahead. And thus, uncertainties also for any discussion of the “Geopolitics of Oil and Global Energy Security”.
This road ahead will have its occasional pot hole and traffic coming against oil as we increasingly will have to meet to interlinked geo-political, geo-economic and geo-environmental challenges. And for good measure, we should also allow space for a variety of known and unknown future game-changers. And with an increasing numbers of drivers and passengers wanting their legitimate say, calls for more transparency in decision-making and better energy governance will be an additional name of the game. What then, if I may suggest, are some trends and challenges, present and emerging, that would influence, and be influenced by, the geopolitics of oil?
- Global energy demand will grow with oil and other fossil fuels remaining paramount for quite some time. Thus, we need large scale commercialization of cleaner fossil fuel technologies, such as carbon capture and storage, to reduce the global carbon footprint.
- Environmental and climate change concern will grow, not least in the public domain, and impact energy decision-making. Increasing attention will be paid to renewable alternatives, such as solar, wind, tide and bio-fuels, as well as to nuclear.
- Increasing energy demand increases the need to conserve energy and to improve efficiency in energy production, transport and consumption. We need to develop smarter and more cost-efficient technologies.
- The challenges of energy security and climate change are increasingly interlinked. Measures to meet the climate change challenge should not jeopardize energy security. And policies and measures for energy security should not exacerbate climate change.
- More predictable and equitable investment conditions should be facilitated. We were recently reminded how failure to invest when oil prices are low inevitably spike prices when demand picks up.
- We will see increasing trade due to the geographical mismatch between centres of oil production and centres of consumption.
- We must consider vulnerability of energy production and supply to politically motivated disruption, terrorist attack, technical mishap and forces of nature.
- Competition for oil will increase, as will competition from other energy resources. Perhaps even scrambles for resources with geopolitical consequence.
- New sets of co-operative relationships between national and international oil companies are in the making. It has also geopolitical implication that governments and their national oil companies now control some 90% of proven oil reserves.
- New patterns of bilateral and regional co-operation among nations are emerging. Nations are opting for policies of energy interdependence or energy independence for their energy security. We see China and others increasingly offering great infrastructure packages to countries on other continents in return for secure access to oil.
- Energy poverty must be dealt with forcefully. It is unfair and a geopolitical time bomb that a quarter of the world’s population continues to lack access to electricity. They need access to the modern commercial energy that could lift them out of poverty.
- The shift to Asia of global economic gravity, spearheaded by an ascendant China and India, will have long-term geopolitical and energy implications. Even now China and India displaying an economic growth that is supporting the global economy at a time of sluggishness in the USA, Europe and Japan. Yesterday’s “Financial Times” put figures on the Chinese shopping spree for oil and natural gas abroad – one fifth of all global deal activity in this sector so far this year.
Uncertainties and vulnerabilities
The economic downturn has prompted countries and groups of countries to re-think fundamental energy security policies. Governments are painting their economic stimulus packages in various shades of “green” opting for a future “low-carbon-emissions” society. The policy tuning of one country to meet new challenges and to reduce its particular energy uncertainties can in itself exacerbate existing uncertainties or create new ones for others.
In our policies to deal with oil and energy uncertainties, we must not forget to also expect the unexpected. While we identify and attempt to deal with the many “known unknowns”, we have little choice but to let the “unknown unknowns” come. If shale gas is a “game changer” within the family of fossil fuels, what other expected and unexpected “game changers” inside and outside that family will appear in the years ahead? It would be good to know when and where they would appear.
In this picture, we will see new patterns of energy co-operation shaping new geopolitical realities. But we will also see established geopolitical realities raising stumbling blocks for wise and sustainable new patterns of energy co-operation. Will new geopolitical realities, stand alone, merge or collide with longstanding ones? And how will new spheres and tools of power projection in space and cyber-space affect our notion of geopolitics?
Going back to square one, one thing is certain. The world will need more and cleaner energy, used in a more efficient way, accessible and affordable to a larger share of the world’s population.
Energy Security and Interdependence
A mantra from Ministers in the International Energy Forum is that security of energy supply and security of energy demand are two sides of the same energy security coin. Energy security is a shared producer-consumer responsibility. And when energy is traded from one country to another through a third country, transit countries have their interests and importance within a wider shared responsibility as well.
“Diversity” is the concept widely seen as key to policies for energy security. Diversity of suppliers and in energy-mix for energy-importing countries. Diversity of markets for energy-exporting countries. Energy security is more than an issue of technical arrangements and infrastructure. It has also to do with geopolitics, economics and the environment. A truly multi-dimensional challenge for which there is no quick and lasting fix. Energy security has to be nourished in on-going process, where catchwords are availability, stability, predictability, sustainability and sheer trust. As are holistic approaches. Energy dialogue can chart realistic road maps for resource availability and market demand that would give useful guidance for the investment decisions needed to secure adequate energy supplies for sustainable development.
Some would argue that dependency on others on something so important and strategic as oil constitutes a political and economic risk that should be reduced to a minimum, if it cannot be avoided altogether. Others would argue that energy dependency is not only inevitable and makes sense in a globalizing world, but that it also ties countries closer together economically. And that again can have the spill-over effect of improving political relations between countries and the overall geopolitical climate. For energy interdependence to be good and sustainable, it has to be mutually beneficial – win-win.
Energy Nationalism
The variety and importance of core national interests will continue to define what is possible in broader international efforts to meet the global challenge of energy security. Core national interests of energy-importing as well as energy-exporting countries, industrialized as well as developing countries.
When oil prices are high, we hear complaints from oil-importing countries about the “energy nationalism” of oil-exporting countries, a label used by some for what they see as wicked and unjust policies of greedy resource owners out to harm economically or pressure politically countries dependent on energy imports.
“Energy nationalism” has been around for quite some time. As long as there are nation states to call the energy shots, we should expect it to remain so. It should not surprise us that governments see a political imperative in making the most out of their particular national and natural endowment for the social and economic development of their countries and welfare of their people.
But I would not limit the concept of “energy nationalism” to resource host countries. Even countries that lack sufficient indigenous energy resources pursue, in my view, policies of “energy nationalism”. In the sense that they seek the energy resources of others, as cheaply and as reliably as possible, for their own domestic social and economic development.
And here, just as those countries that are blessed with energy resources would use their position of resource advantage to pursue wider economic and political objectives, so would also countries that lack such resources use their position of advantage in other areas to pursue their wider economic and political objectives. And the latter would include policy measures to secure their energy supply as cheaply as possible and in a way that necessarily will affect the vital interests of energy-exporting countries.
I would also include national policies of energy independence under the label of “energy nationalism”.
The “energy nationalism” of both energy-exporting and energy-importing countries – as any other natural resource nationalism - is natural. It can be either good or bad. It is good when it is win-win, benefiting the social and economic development of the host country concerned, while also benefiting the interests of co-operating countries and companies. It is bad when it is win-lose – benefitting one, but detrimental to vital interests of the others. Global dialogue can identify short and long term win-win opportunity. It can preempt misunderstandings that could otherwise lead to conflict.
Arctic and High North
Let me now take you to the Arctic, where the ice sheet is melting at an alarming rate, being reduced by an area some six times that of the United Arab Emirates per decade.
As the ice sheet is getting smaller and smaller due to climate change, international interest in the Arctic is getting bigger and bigger. Energy security concern has attracted petroleum political and industry attention. More than a fifth of the yet-to-be-discovered reserves of oil and natural gas in the world could be found in the Arctic. State-of-the-art technology is called for in this challenging and high-cost environment. Norway is already producing and exporting oil and natural gas from her part of the Arctic. The Norwegian flagship company Statoil is in partnership with Russian GAZPROM and French Total to develop the enormous Shtokman gas field on the Russian Arctic continental shelf.
While conflict and political unrest may characterize many of the other petroleum provinces of the world, the Arctic stands out as a stable and peaceful region. This above-ground factor increases interest in the below-ground petroleum promise of the High North and Arctic, where both onshore and offshore petroleum developments are expanding into new areas. The biggest concentration is in the Russian part of the Barents Sea.
Melting of Arctic ice can also open new routes for maritime transport that will substantially shorten sailing routes between Asia and Europe. This also has geopolitical and security policy implications as it connects the North Atlantic area to North East Asia. Not surprisingly, Arctic developments are receiving increasing attention also in China, Japan and South Korea, wanting to take active part.
We recall the planting of Russia’s flag on the seabed of the North Pole three years ago. Some speculation followed of an alleged race to the Arctic and scramble for its resources on a “first come first serve” basis with an inevitable clash of national interests in a “no-man’s land” outside the reach of international agreements.
Rather than anticipating a modern day Klondike and free-for-all-scenario with legal disputes and increased military activity to extend or protect national interests, it is important to note that all land in the Arctic already belongs to established nation states.
It is equally important to note that the area surrounding the North Pole is not land. Under the ice is sea. We already have a robust international legal regime governing the sea here as well, the core of which is the United Nations Convention on the Law of the Sea (UNCLOS). It stipulates that a coastal state has sovereign rights on its continental shelf, including the exclusive right to explore for and exploit its natural resources. Centre stage in the Arctic off shore are the five coastal states - Norway, Russia, the USA, Canada and Denmark because of Greenland - who enjoy the same rights and responsibilities there as nation states enjoy elsewhere in accordance with international law.
For Norway, the High North and Arctic is the most important area of our strategic focus in the years ahead, on land and on our offshore continental shelf. Our policy is one of dialogue with the states that have interests in the region. It is a policy of strengthening institutionalized multilateral co-operation, such as that we have in the Arctic Council. Our policy underscores the importance of intensified co-operation with Russia. We have now reached agreement with Russia on the delimitation of our continental shelves in the Barents Sea and the Arctic – dividing fifty-fifty, and allowing for petroleum activity in, a formerly disputed offshore area twice the size of the Emirates.
Global Energy Governance
Globalization, economic downturn and the ascent of Asia in an evolving world order are redefining geopolitics and challenge the institutional architecture for international co-operation in energy as in other areas. For example, we see that from the economic and financial downturn that we are still struggling to get out of, the G20 has emerged as an interesting new forum for shaping coordinated economic policies. Including all the BRICs and other important and emerging economies, the G20 enjoys broader legitimacy than the G8. But with many, many more countries outside than inside, the G20 still lacks the global legitimacy of the United Nations system. A G20 Summit convenes in Seoul the day after tomorrow.
France is preparing to take over the G20 presidency from South Korea. It is interesting to note the joint statement from President of China Hu Jintao’s visit to President Sarkozy of France last week. They agreed among other things on the need to address in the G20 the question of volatility in commodity prices and the reform of global governance. Time will show what that would mean for oil and its geopolitics.
Myriad institutions deal with energy issues – global ones, regional ones and national ones. Some have limited membership. Some are open-ended. Some are decision-making. Some are not. Most address only certain types of energy and not others. Some have a dramatic political backdrop. New institutions of limited energy scope and country membership are being added to the plethora of existing ones. As for example here, in Abu Dhabi, with the establishment of IRENA, the International Renewable Energy Agency. There are also many institutions, such as financial and environmental institutions, set up to deal with other issues than energy, where decisions of consequence to energy policies and markets are made.
There is today no global, intergovernmental institution with supranational decision-making power to deal comprehensively with all forms of energy. Given the strategic importance of energy to the national interests of each and every country, it hardly seems realistic to expect one in any near future, in which national decision-making would be relinquished and replaced by legally binding global energy governance.
What we do have is a “global energy policy interrelationship”. A comprehensive network of inter-governmental energy institutions and co-operative contacts among countries at political and technical level, on bilateral, regional and global basis. An interrelationship, where international organizations and financial institutions along with other stakeholders have their role to play in addition to governments. And not to forget that core to all this is the energy industry itself, not least the oil industry, doing the actual work of finding, producing and bringing much-needed oil and energy to the consumer.
To make this interrelationship more effectual, new institutions and processes, as well as established ones, must take account of an evolving world order and its geopolitics, where the emerging economies assume their increasing and rightful say. In this wider global picture, oil produced, transported and used effectively and in the best possible environmental way, can definitely continue to serve as a forceful engine for the global economic growth needed to fulfill political and social ambition in a sustainable world order.
Economic development, environment and energy security concern along with higher oil prices have made oil and energy, and their geopolitics, a focus factor for Heads of Government in their domestic and foreign policies. More and more drivers of oil want their say for very different reasons. Perhaps the time has come for Prime Ministers to meet together on energy to sort out the various trade-offs in our globalizing world of increasing and more complex interdependencies? To inspire and guide the development of a “new global energy consensus” in a better organized world.