Foreign Relations & International Law

Hot Commodities: One Step Forward, Some Steps Back

Ellen Scholl
Wednesday, July 13, 2016, 1:18 PM

Fits and Starts

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Fits and Starts

Nigeria received some welcome news last Friday, as Shell resumed exports of Bonny light crude following two months of force majeure, or the cessation of production without breach of contract. Exports had been halted as repairs were made to fix a leak in the trunk line. The resumption of an estimated 210,000 barrels per day is much needed in Nigeria, where crude exports have dropped precipitously in recent months, reaching thirty year lows earlier this year.

However, the news was a rare bright spot as other operators remain at a standstill thanks to continued attacks on the hydrocarbon sector by militants in the Niger Delta. Last week, Reuters reported the militants targeted an energy hub owned by Eni, an Italian oil firm, and Aiteo, a Nigerian energy firm, in a spate of attacks.

To make matters worse, Nigeria’s oil union went on strike at the end of last week, with the government warning against panic-induced petrol purchases. The government, union leaders, and oil executives are reportedly in talks this week over long-discussed but yet to be enacted reforms in the sector. While the government has reportedly promised that these issues will be addressed as part of a larger Petroleum Bill, the dispute highlights the difficult task of both reforming the industry from within while also protecting the industry from external threats.

For more on where things stand in Nigeria, Platts talks oil prices and tomatoes (yes, tomatoes), the Washington Post provides the need-to-know details, and Reuters explains how the situation in Nigeria could stoke political discontent in neighboring Ghana.

Meanwhile, Nigeria isn’t the only one on the continent celebrating the resumption of (some) oil exports.

Bloomberg reports that Libya anticipates it will resume oil exports from the Es Sider and Ras Lanuf oil ports (two of the country’s largest) within a week. Both ports, which together at one point accounted for two-thirds of Libya’s oil exports, have been closed since 2014. The resumption of operations would provide much needed revenue for Libya’s still-nascent Government of National Accord, or unity government.

The announcement was made by the Petroleum Facilities Guard, the group responsible for protecting the facilities and credited with ousting the Islamic State from towns in the area, enabling the safe operation of the previously-shuttered facilities. The announcement came on the heels of an agreement reached in Ankara to bring the national oil company (NOC) under unified management.

Following Gaddafi’s ouster, the country—and the governance of the oil sector—fractured. The agreement would bring together the eastern and western NOC administrations under a single management structure, headed by Mustafa Sanalla from the Tripoli-based NOC but located in Benghazi. However, while a successful merger and renewed exports would certainly count as successes in the revitalization of Libya’s oil sector (and potential contribute to political stability), Stratfor points out that challenges still remain, and an agreement now doesn’t necessarily mean that groups won’t continue to try and leverage the resource for political purposes.

Addicts and Enablers

While instability and sabotage can wreak havoc on energy supplies, maybe the decline of the age of oil and the rise of renewables means we can worry less about developments like these? That’s wishful thinking, according to International Energy Agency (IEA) Chief Fatih Birol.

Low prices appear to be putting a damper on our desire to curb oil consumption, and thus our addiction to oil (and reliance on those who produce it) is not abating—and may even be growing. According to the Financial Times, IEA Director Birol said that rhetoric promoting the rise in American oil production and related decline in the relevance of Middle Eastern producers (and thus of geopolitical concerns) is misplaced—and in fact quite the opposite could be true.

In reality, Middle Eastern producers—namely Saudi Arabia and Iran—“have the biggest share of world oil markets since the Arab fuel embargo of the 1970s.” As the Financial Times puts it, this should serve as a reminder that the world is still vulnerable to an oil price shock—and that political developments in regions plagued by pervasive security threats are just as relevant now as they were decades ago.

Furthermore, it underscores the serious domestic political challenges facing some of these producers, namely Saudi Arabia, as they attempt to reform and restructure their economies. On the one hand, if consumers around the globe (or even just in China and the U.S.) continue to buy bigger cars in lieu of increasing efficiency, it could undermine motivation like Saudi Arabia’s Vision 2030 to move the economy away from oil—a move made less urgent if consumers continue to demand it.

More to the point, this continued dependency also means that the success of such reforms, and the political stability of producers, is not something the rest of the world can ignore.

What to Watch

Blurred Lines

The New York Times reports that the Permanent Court of Arbitration, an international tribunal located in the Hague, ruled Tuesday on China’s territorial claims in the South China Sea in a case brought by the Philippines. The tribunal rejected China’s territorial claims, finding no legal basis for China’s maritime claims based on the “nine-dash line” nor to the resources located in those waters.

The Chinese Foreign Ministry declared the ruling invalid and stated the country does not intend to abide by it. The strident response was perhaps unsurprising given that the government had previously boycotted the tribunal claiming it lacked jurisdiction.

While China’s response to the ruling raises larger questions of whether China aims to assert itself by participating in and cooperating with existing international institutions or by flouting them, the ruling itself could have implications for other countries warily eyeing Chinese activities in nearby waters. Though the case was a specific dispute brought against China by the Philippines, the latter requested the court review the validity of China’s broader claims to nearly the entire South China Sea, claims which overlap with those of many other countries.

Like Indonesia.

Late last month, Indonesian President Joko Widodo called for a ramping up of oil and gas exploration and production efforts off his country’s coast, in particular in the waters surrounding the Natuna Islands. (If you need some geographical assistance placing the Natuna, BBC has you covered.)

The government wants to ramp up production and turn the area into a hydrocarbon hub, particularly for gas processing and transport. Many see the call as a step in the country’s growing efforts to assert sovereignty over the island chain and the surrounding waters, which are believed to be rich in hydrocarbons—and also claimed by China. The area is also a popular fishing spot, and a crucial component of Indonesia’s growing desire to assert itself as a naval power. Writing in Foreign Policy, Keith Johnson has more on the contours of the dispute and what he calls Indonesia’s newly assertive stance.

For more on the area’s hydrocarbon potential (and thus potential for conflicting claims to escalate), the Economist has the bigger picture.

Breakups and Makeups

While the Egypt-Israeli relationship has been rocky in the years following the Arab Spring, recent developments, namely pledges of mutual security cooperation (including Egyptian-approved, Israeli-conducted drone strike in the Sinai) and offers by Egypt to revive a moribund Israeli-Palestinian peace process, indicate the two countries may be reconciling their differences—or at least agreeing on their common interests.

Meanwhile, the Israelis have also made up with another former regional ally turned foe. Turkish President Erdogan has been making amends and repairing relationships, including the normalization of ties with Israel after years of dispute following the 2010 Mavi Marmara flotilla raid. He followed this up by penning a letter of apology to Russian President Putin over the death of the pilot brought down by Turkish forces late last year.

While security appears to be the key factor driving the reconciliation in all cases, many also point to another driving factor: energy.

As Bloomberg reports, Israel and Egypt have been working behind the scenes “laying the legal groundwork for a multi-billion dollar energy contract.” Israel needs customers for its offshore gas projects to be economically viable, while Egypt needs supplies to feed domestic demand until it can develop its own domestic resources.

Meanwhile, Turkey is also hungry for energy, eager to serve as an energy hub, and keenly aware of the benefits of having options. For Israel, Turkey could be another, more long-term customer, as Egypt plans to rely on domestic production from the Zohr field for its future gas consumption. The two countries announced their intentions to hold energy talks in the future, paving the way for a potential energy trade relationship.

In this context, Erdogan’s apology letter to Putin could be an attempt by Turkey to seek normalcy and repair a friendship (choose your term) at a time when it sorely needs both. But that doesn’t mean the move is not also part of a strategy to diversify energy supply options and restart stalled Russian energy projects, an opportunity to play suppliers against each other in the hopes of extracting more beneficial terms of trade, and a key component of Turkey’s dream of becoming an energy crossroads.

However, all the actors can well remember how quickly a friendship can become fraught, and it remains to be seen whether the warm fuzzy feelings will outlast the current security dynamics driving these frenemies back together.

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.

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