Foreign Relations & International Law

Hot Commodities: Things Fall Apart

Ellen Scholl
Friday, May 20, 2016, 11:56 AM

State of Emergency

Published by The Lawfare Institute
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State of Emergency

After months of teetering on the brink, Venezuela may be going over the edge. The Maduro government has declared a sixty day state of emergency, thanks in part to a drought and related food and electricity shortages so pronounced that the New York Times reports U.S. officials believe the country could be beset by street violence and rioting.

The state of emergency is accompanied by government-enacted security measures giving the military and politicians the authority—and the leeway—to take measures necessary to maintain public order and energy supply. However, having exhausted many potential (if unorthodox) remedies, it is unclear what additional measures might remain and whether they could be effective given the scope of the problem.

The Maduro government has already curtailed the public sector to a two-day work week to conserve electricity, women have been asked to forgo blow dryers, and the time zone has been changed to take full advantage of daylight. However, according to The Atlantic’s City Lab such steps are effectively a band aid on a bullet wound. Corruption, inadequate back-up power, lack of diversification, growing demand encouraged by subsidies and nonexistent investment in new supply have left the country with an outdated and insufficient power system, and the population unprepared for what is to come.

Think that maybe the Maduro government will not let a good crisis go to waste and use this opportunity to remedy shortcomings, right previous wrongs, and push through reform? Think again. Despite warnings that even Maduro’s allies are beginning to doubt his government, the President declared he would do whatever it takes to restart the economy—for example seizing production facilities—all while blaming businessmen and opposition leaders for waging economic war against him and crying coup to justify the expansion of government powers.

If that wasn’t bad enough, the country is also facing a potential default on looming debt payments in the latter half of 2016. However, in a rare bright spot, recent reports indicate the struggling oil producer has found some relief in its relationship with China. While the details are unclear, Venezuelan officials announced that the terms of the pair’s “oil for debt” deal have been revised in Venezuela’s favor, giving the country some much needed breathing room—for now.

However, as the opposition continues to call for protests and electricity remains curtailed, a bad situation may yet grow worse. The New Yorker has more on the electricity crisis and political meltdown, while the New York Times editorial board delivers a stinging rebuke of the Maduro presidency in its take on the country’s “Downward Spiral.”

Power Struggles

Venezuela isn’t the only one with power problems.

Protesters all but took over the Afghan capital of Kabul on Monday, demonstrating against proposed changes to a planned power line route. Changes to the TUTAP power line route led thousands of the Hazara ethnic group to take to the streets to protest the Afghan government’s decision to route the line through the Salang Pass instead of Bamyan, a decision they maintain is discriminatory. The Hazaras are the third-largest ethnic group in Afghanistan and are predominantly Shiite, and have suffered past discrimination, namely from the Taliban.

The project, named for the participating countries (Turkmenistan, Uzbekistan, Tajikistan, Afghanistan, and Pakistan), is part of a project funded by the Asian Development Bank to link existing electricity infrastructure and expand access to power in Afghanistan by delivering electricity from Tajikistan to ten Afghan provinces. The current Afghan power grid is not a single entity but ten separate islands—fragmentation the TUTAP project is intended to solve. The Hazara demonstrations stem from suspicion that the reroute would leave the ethnic group without adequate power, while the Afghan government argues the alternative route would cost less and still provide ample power to all ten provinces.

While the protestors were peaceful and largely mollified by a government proposal to undergo a commission-led review process in the coming ten days, the protests underscore the link between service provision and identity politics in Afghanistan—and the way the former can become a vehicle for the latter. In a country where just thirty percent of the population is connected to the (outdated) electric grid, attempts to increase access beg the question to whom, and in what order.


Afghanistan isn’t the only place where energy is exacerbating societal division.

Attacks on oil facilities in Nigeria and deteriorating security conditions in the Niger Delta have brought about the end of an era—or perhaps the return of a previous one—as Nigeria has ceded its former title as Africa’s largest oil producer to Angola.

Nigerian oil production, along with the naira, has taken a tumble in recent weeks thanks to a spate of attacks on oil production facilities and pipelines by a group calling itself the Niger Delta Avengers. According to Newsweek, Chevron shut down an offshore platform following an attack and Shell is reportedly evacuating personnel amid rising security concerns. As a result, oil production has declined by nearly 800,000 barrels per day to 1.4 million, a worrisome development given that the government’s budget is based on production of 2.2 million barrels per day—and reliant on oil for nearly three quarters of government revenue.

Dire financial straits have forced the government to take desperate measures, while the resulting frustration threatens to further divide the country along ethnic and religious lines. Government cuts to gasoline subsidies and the resulting price increases have led some labor leaders to call for widespread protests against the government, and brought into sharp relief the Avengers’ stated goal of crippling the Nigerian economy.

Much of Nigeria’s oil is produced in the southern Niger Delta, one of the poorest regions in the country despite the fact that its oil revenues account for nearly seventy percent of government revenue. This disparity, along with a history of oil-related environmental damages, sparked an insurgency during the last decade--a period Nigeria was thought to have put behind them following a 2009 amnesty agreement between the government and rebels.

Not so, if the Avengers are to be taken seriously. President Buhari has deployed troops to the region and promised to give the group the Boko Haram treatment. While not much is known about the group, some speculate the group’s members are supported by southern politicians who back President Buhari’s rival (and former President) Goodluck Jonathan. Either way, these developments make clear that much more at stake than an oil production title.

...and Down on their Luck

The Islamic State claimed responsibility for Sunday’s attack on Iraq’s Taji gas facility in which at least 14 people were killed and storage tanks were set ablaze. While the attacks failed to disrupt production, they come on the heels of attacks on the Khabaz oilfields earlier this month. Perhaps more worryingly, they are seen as part of a trend that some are identifying as a tactical shift by the terrorist group to increase the deployment of suicide bombers against civilian targets, including energy facilities.

Many are warning that while such attacks may not directly impact oil production, the deteriorating security environment is making investment in the Iraqi energy sector increasingly less attractive at the same time that low oil prices are further constraining already-strapped budgets. According to Reuters, this has led to a temporary standoff between the Iraqi government and international oil companies operating in Iraq as the former has asked the latter to further cut their operating budgets.

Thus far, the companies have not agreed to the proposal, leading to temporary production delays and prompting some companies to warn they will be unable to continue operations in Iraq under such conditions. A stalemate could further deprive the government of cash, and further exacerbate ongoing political tensions, which boiled over in recent weeks with the storming of the Green Zone by followers of Moqtada al-Sadr. As the government continues to fight the Islamic State on the battlefields (and the oilfields of West Qurna), negotiate with the oil companies, and tussle amongst themselves, winning on multiple fronts could be a tall order.

What to Watch

With Friends Like These

Suffering under sanctions and low oil prices, Russia has been looking east, searching for sympathy and support for planned but largely postponed large-scale energy projects. Thanks to China, Russia has found the latter in what the Wall Street Journal called “a hard-fought victory over Western sanctions”, securing two loan agreements worth $12 billion with Chinese state banks for its inaugural liquified natural gas (LNG) project.

Plans to move the Yamal LNG facility, Russia’s first LNG project, have been complicated by U.S. sanctions against Russian energy firms. However, Russia’s new partners, the Chinese Ex-Im Bank and Development Bank, provided the financing necessary to get the project off the ground—and the proof, according to some, that Russia can survive Western sanctions.

Russia’s foray into LNG comes amid speculation that its eastern European customers may be looking for new providers (like the U.S.) who are not prone to aggression in their backyard. As Russia’s customers contemplate new providers, the partnership with Chinese banks is a step forward in Russia’s attempted courtship of new customers.

However, while Russia may be comfortable with a closer Chinese embrace, India is nervously evading Chinese advances. From the New Silk Road to Chinese behavior on the high seas, India is less certain whether a relationship with China is an opportunity or a threat—and may be hedging their bets.

In the Financial Times, Amy Kazmin argues that the Indian government is anxiously eyeing the Chinese “One Belt, One Road” initiative, an effort to expand trade and energy ties along the ancient trading route. What China promotes as economic integration is seen by some in India as a master plan for eminence in Asia. Meanwhile, Dan de Luce and Keith Johnson argue in Foreign Policy that increased wariness of Chinese aggression in the South China Sea and expansion in the Indian Ocean may even cause India to draw closer to Washington.

While there are many motivations driving China’s efforts to establish itself as a both a land and naval power, the Strait of Malacca looms large. Positioned between the Indian and Pacific Ocean, the Strait not only is the shortest route linking Asian consumers to Middle Eastern energy producers, it is one of the world’s most critical oil chokepoints. It could also take center stage in the event of an increasing competition between China and India, and as Indian anxiety increases along with Chinese influence, this picture will only grow more complicated.

Vision or Nightmare

At the end of last month, Saudi Arabia announced its Vision 2030, a new economic plan designed to wean the Kingdom off of its oil revenue habit. While much of the focus in the intervening weeks has been on whether the plan is an overhaul or a facelift, meaningful or a mere gesture, the country continues the oil price struggle that necessitated the vision to begin with.

In an effort to get its fiscal house in order (and amid reports that the Kingdom is offering to pay contractors with IOUs in order to preserve precious cash), the Saudi government has cut spending in a number of areas. While necessary, such cuts have consequences. In response to the Binladen construction group’s layoffs of between 40-50,000 workers, workers set fire to buses in a rare eruption of public protest. The construction group was forced to scale back on large scale construction projects normally sponsored by the Saudi government. Less funding means fewer jobs to go around.

This could be a harbinger of troubles ahead. While public funding is the indirect source of many jobs, the government is the direct employer of nearly seventy percent of the Saudi population. Continued low oil prices and reduced spending could spell more pain for workers, and reduce society’s tolerance for reforms ranging from the gradual removal of energy subsidies to the introduction of a value-added tax (albeit on luxury goods).

All eyes remain on the Kingdom, as only time will prove either the promise of preparations for Saudi Arabia’s life beyond oil or substantiate premonitions of “the dangers of fanciful vision”.

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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