Foreign Relations & International Law

Hot Commodities: A New Roundup on Energy and Security

Ellen Scholl
Thursday, October 22, 2015, 3:56 PM

Editor’s Note: Welcome to the first edition of Hot Commodities, our new roundup of news and analysis of energy and security. Please send relevant news, developments, or documents to Ellen Scholl.

Regime on the Rocks?

Published by The Lawfare Institute
in Cooperation With

Editor’s Note: Welcome to the first edition of Hot Commodities, our new roundup of news and analysis of energy and security. Please send relevant news, developments, or documents to Ellen Scholl.

Regime on the Rocks?

Experts from John Hannah at Foreign Policy to Harvard’s Niall Ferguson are fretting about Saudi stability in the context of what Hannah calls a “perfect storm”—low oil prices, regional instability, and fractures from within. While the House of Saud has weathered similar conditions before, there are a few reasons to keep a close eye on the Kingdom this time around.

As The Economist put it, “money is the glue that holds Saudi Arabia together”—and low oil prices means less glue to go around. Oil accounts for nearly 90 percent of government revenue, and the current oil price of around $50 per barrel is less than half of Saudi’s fiscal break-even oil price of around $105 per barrel. Meanwhile, the high cost of energy subsidies remains a burden on public spending. Amid rumblings of discontent within the royal family and an ongoing war in Yemen that is unpopular at home and abroad, leaked internal memos published by the Guardian indicate the public sector will be the first to feel the pain, with a freeze on projects and purchases ordered by King Salman.

Furthemore, following last November’s historic announcement that OPEC would abandon its practice of maintaining price in favor of protecting market share, the specter of Iranian production looms large. As Sunday marked the beginning of implementation of the Iran deal—and started “the clock on oil sanctions relief”—potential fallout over Iranian production could become a reality early next year. Between possessing the world’s fourth largest reserves and battling Saudi interests in battlefields from Syria to Yemen, a resurgent Iran could add fuel to the fire, so to speak, and to an already-oversupplied oil market.

To make matters still worse, the IMF’s 2015 Regional Economic Outlook for the Middle East, released on October 21, projects that the Middle East will face slow growth prospects this year thanks to the combined impact of low oil prices, increasing uncertainty, and worsening conflict. The chart on what the IMF calls the “Dramatic Deterioration” of Gulf oil exporter fiscal health is worth a look.

Ways and Means of War

Even if oil isn’t garnering as much money on the market these days, Saudi Arabia has still found a way to put it to good use—withholding it as a weapon. Saudi Arabia is persisting in a near total embargo of fuel supplies to Yemen, as the UN reports that the country received less than one percent of its commercial fuel needs last month. As Reuters reports, scarce electricity and a water supply largely reliant upon fuel-powered pumps has compounded both humanitarian suffering and instability.

While Yemen may be suffering from a lack of energy resources, ISIS is profiting from control over them. In a series of articles, the Financial Times examines the role of energy in funding—and fueling—the terrorist organization and its activities. ISIS’s control over energy networks provides a startling picture of energy as a tool, a source of leverage, and a weapon. ISIS’s control and provision of resources also lends it the trappings of statehood, enabling the group to dole out favors, employ workers, service communities, and gain—by favor or coercion—loyalty. In the context of ISIS’s aspiration to build a caliphate, this is a troubling phenomenon.

ISIS currently controls the majority of oil fields in Syria, and crude oil is the group’s largest source of revenue. The group’s oil operations run the gamut from upstream production to refineries to trucks and distribution networks necessary for transport and sale, resembling more oil cartel or state oil company than terrorist organization, what FT terms “ISIS Inc.” What is less clear is the condition of these assets, and whether individual facilities are functioning at capacity—or at all.

Meanwhile, FT reports that ISIS’ control over several Syrian power plants has led the Assad regime to find common cause with the terrorist organization. In what FT calls “joint ventures between President Bashar al-Assad’s government and the world’s most notorious jihadi group,” ISIS controls the facilities while the Syrian regime provides the companies and the know-how to run them. This leaves employees of Syria’s state-owned utilities and the private gas companies they contract with in the uneviable position of wondering who is boss, ISIS or the Syrian regime.

Make Ups and Breakups

While many analysts believed Turkish President Tayyip Erdogan and Russian President Putin were a match made in heaven, the honeymoon period has come to an abrupt end. Less than a year since the announcement of the Turkish Stream pipeline signaled a blossoming energy relationship between the two countries, Erdogan has warned that Russian intervention in Syria could derail energy cooperation. As Keith Johnson at Foreign Policy reports, Russian actions have precipitated an abrupt Turkish about face, with Erdogan threatening to look for other gas suppliers and turning to NATO and Western allies for support.

The breakup appears to be mutual; Gazprom has announced plans to cut the capacity of the pipeline by 50 percent.

Why the cold shoulder after months of courting?

Other than the Russian desire to have a free hand in propping up embattled Syrian President Bashar al-Assad, a recent Foreign Affairs article speculates that Russia is also angling for a seat at the table in the inevitable resolution of “competing gas interests” in the region when the dust settles from the Syrian war. Two other major gas producers, Iran and Qatar, are not only supporting different sides in the Syrian conflict but also have competing gas pipeline projects to Europe through Syria. Perhaps pipeline politics turned proxy war also helps explain why Gulf-backed rebel groups fighting the Assad regime have found themselves in Russian military crosshairs.

Turkey isn’t the only one with problems with Russian aggressiveness in its backyard. Tired of being on the receiving end of Russia’s energy coercion, Poland has announced the expansion of a new LNG terminal to be completed in May of 2016, a terminal which will give options to a country currently reliant on Russian gas for more than half of its supply. Polish Secretary of State, Chancellery of the Prime Minister Jakub Jarowski called the facility a “shotgun on the wall.” If there was any question as to whether the project was built for economic or geopolitical purposes, the answer seems clear.

The European Commission also announced an agreement Friday to build the first gas interconnector from Poland to Lithuania, ending the “energy isolation of the Baltic States” as Estonia, Latvia, and Lithuania currently rely on Russia for all of their gas imports. The agreement is part of the EU’s purported “Energy Union” strategy, brainchild of then-Polish Prime Minister and current European Council President Donald Tusk. Amit the Ukraine conflict, Tusk proposed the Union as a bulwark against Russian energy dominance, though not everyone agrees on this vision.

Tusk’s initial strategy was first and foremost an energy security project intended to reduce Russia’s ability and opportunity to wield energy as a weapon against EU states. However, the Union as proposed by the Commission outlines a broader set of goals beyond just security, namely decarbonization. Thus, while some European countries see Russia as the biggest energy related threat, others point to the threat—including to peace, according to French Foreign Minister Laurent Fabius—posed by climate change.

What do these differences mean for the future of the Energy Union? It means that while some countries pursue their security interests by reducing reliance on Russian gas, others do the same by pursuing it: While Poland looks to non-Russian options, Germany is set to increase its supply of gas from Russia by 55 bcm with the expansion of the Nord Stream project.

Stay tuned. Maroš Šefčovič, the European Commission’s Vice President for Energy Union will give the first State of the Energy Union Address November 18th in Brussels.

Up Next: What to Watch

National Champions

From supply route schizophrenia to financial woes incurred from weak oil prices and a weak ruble, Gazprom is in a difficult spot. In addition to the challenge of increasing production and investment under sanctions, Gazprom may also find itself facing internal challenges to its de facto title as the most prolific of the Russian energy firms.

Keep an eye out for more action on the part of Rosneft and Novatek, and for rumblings that the European Commission should scrutinize Nord Stream II for compliance with EU guidelines on competition, diversification, and security of supply. Furthermore, as Assad and Putin shake hands in Moscow, keep an eye on the reaction from Ankara—if Gazprom’s Turkish Stream isn’t already dead in the water, this might seal the deal.

OPEC eating its own

As suppliers face low oil prices and an oversaturated market, Bloomberg reports that Kuwait and Iraq have been undercutting Saudi Arabia to lure Asian buyers in the scramble for market share. But while some countries partake in the race to the bottom, others, namely Venezuela, want to go back to the good old days, where OPEC maintained price, not production. At a special OPEC meeting on October 21st, Venezuela floated a plan calling on members to band together to protect price and balance supply and demand. For now the appeal appears to have fallen on deaf ears, but the group is set to reconvene in Vienna on December 4th.

Elect(or)rical Sabotage

While many are dismissive of Venezuela’s influence on OPEC, the influence of OPEC’s decision on Venezuela is readily apparent. The country, reliant on oil for nearly all of its hard currency, is currently in the middle of what Bloomberg called the “deepest economic crisis in its history.” With elections looming, economic contraction is expected to exceed nine percent in 2015. As concerns continue to mount, Minister of Electricity Luis Motta said the country’s electrical system experienced 13 acts of sabotage this month, acts which he claims are part of an effort to destabilize the country in advance of the election. Venezuelans head to the polls on December 6th.

Ellen Scholl is a Robert Bosch Fellow currently working in Berlin, where she focuses on energy policy and security. She previously worked on energy issues for the Texas Legislature and the U.S. Congress and completed the U.S. Foreign Service Internship Program during graduate school. Ellen has an M.A. in Global Policy Studies from the LBJ School of Public Affairs and graduated with highest honors from the University of Texas at Austin with a B.A. in Government and Humanities.

Subscribe to Lawfare