Energy and geopolitics
A little less than two years ago, the Center on Global Energy Policy was founded at New Yorks’s Columbia University, under the direction of Jason Bordoff, a former energy consultant to President Obama. This center soon became one of the world’s frontrunners among thinktanks, as it was able to utilise the peculiar New York advantages of connecting research and politics with the leading financial institutions and their analysts. A further reason for this rapid success is the formation of the Fellows of this center, to whom belong, among others, Obama’s former security advisor, Thomas Donilon, and as of September of last year, also Carlos Pascual.
Pascual had been brought by Secretary of State Hillary Clinton to the State Department in 2011 as the foremost US diplomat on questions of energy security, in order to create a department for energy diplomacy. This department, according to recent figures of the New York Times, has 85 members. In one of her farewell speeches at Georgetown University in Washington D.C., Clinton had this to say about the move: „Energy cuts across the entirety of U.S. Foreign policy. It's a matter of national security and global stability. It's at the heart of the global economy. ...it rests at the core of geopolitics, because fundamentally, energy is an issue of wealth and power, wich means it can be both a source of conflict and coöperation.“
A year before Pascual joined Bordoff’s team, he had offered a very thought provoking statement during a presentation at Columbia University that went largely unnoticed by the media: „Today we have a changing environment. It puts us into an interesting situation, that China's ability to satisfy its demand becomes in the national security interest of the US.“
Does this sound as if there might be, after all, a completely new kind of understanding on foreign and domestic policy as regards energy security? ENERGLOBE met with Carlos Pascual and asked about:
China as a factor in US national security
“My point is that the energy markets world wide are interconnected”, says Pascual. According to him, China has the biggest and fastest growing energy market in the entire world. That being the case, Chinese demand would have the greatest rôle in establishing international energy prices, especially the price of oil. “That has a direct impact on the economic growth in the US.” For Pascual however, that would be only one aspect - and that based on pure self interest, as he says.
For him, a further aspect is based on the decisions that China makes about its future investments and the composition of its energy mixes. Even if China is planning investments in renewable energies, the investments in coal are greater by far. China’s future energy mix would also have decisive importance for world wide climate policy. For that reason, the agreement concluded last year between the US and China is so crucial: according to the agreement, China would no longer increase its CO2 emissions after 2030.
“The political significance of this agreement is however much more important than the concrete climate goals”, Pascual emphasizes, because for the first time, China will have recognized in official talks that its energy policy is of critical importance for climate change world wide. With that, China will have given up its long standing distinction from developing and industrial countries, because everyone would have to be a part of the solution.
In a few days, US President Obama will return the visit of India’s prime minister Narendra Modi in Washington D.C. last year. Asked whether India would come under pressure after the agreements between China and the US, Pascual answers that he considers India’s decisions about its future energy policy just as decisive as those of China. For the simple reason that in the near future, India will consume more coal than China.
“A decisive difference however, is that the energy and economic decisions in China are determined by central state planning, while in India they are determined by the private sector, for which politics only provide the framework”, says Pascual. In India the private economy decides which forms of energy should be invested in. For this reason, talks with the Indian government would have a different character from those with the Chinese government. With India, you would have to consider which political conditions might guide the private financial and energy sector in its investment decisions.
The oil price battle – survival of the fittest
On his way back from New Delhi from talks preparing for Obama’s visit, US Secretary of State John Kerry met a few days ago with his Iranian counterpart, Mohammad Zarif, in the framework of continuing the E3+3 talks between the USA, France, Great Britain, Russia, China, Germany and Iran.
In November of last year, Israel’s energy secretary Silvan Shalom had pointed out in a conversation with ENERGLOBE, that in his opinion concerning the E3+3 talks, it is not only a matter of preventing Iran from acquiring nuclear weapon capability, rather also the question of who would control the energy reserves in the coming decades in the Middle East.
Asked for his opinion of this assessment, Pascual points to the shifting global framework of world energy markets. “We are entering a period of escalating world competition among the oil producing countries. Currently, there is much speculation about the expected ‘ups and downs’ of the price of oil. I am convinced that in this period, the price of oil will remain flat......at least this year”, Pascual predicts. The oil production in the US is not only strong, rather will become more efficient and consolidated. This development would lead to a situation where, opposed to any attempt to force the US out of the market with the falling price of oil, the less efficient oil producers world wide would be forced out of the market.
Of course, two divergent risk factors for price sructure would remain, says Pascual. On the one hand is the uncertainty about future oil production in Iraq, Lybia, and Nigeria. On the other hand there’s the question of the return of producing countries like Iran - a question that did not exist at all in previous years.
If you look at the whole situation in the eyes of the producers, Asia is for them the only growing energy market world wide. Therefore, we would be entering an era in which the competition among the oil producing countries will be much harder and more intensive. “In this competition on the other hand China can use its consumer power and its interest in a diversification of its oil imports to attain favorable contracts and prices”, says Pascual. For him, these international market developments would be more in the forefront than, for example, the question of whether sanctions against Russia or Iran would play both countries into China’s hands.
Iraq: The need of new contracts
But Pascual emphasizes that of decisive importance for the entire Middle East and beyond, is the future of Iraq and the struggle against ISIS. Both are closely interconnected with the country’s oil production. For this reason, these questions were allowed broad room during the Atlantic Council Energy Summit in Istanbul last November.
According to Pascual, the point of departure is that the formation of ISIS is a direct result of Iraqi policy under former prime minister Nuri al-Maliki to exclude the Sunni population from the advantages of the oil export. That had called into life a movement which is determined to take power in Syria and Iraq - ISIS. What makes this movement so dangerous is its interconnection with the Sunni parts of the population.
Now it would depend on credibly assuring the Sunni population of fair participation in projects coming from the profits of export. To that end, Iraq’s current oil production could be increased from the current 3 million to over 4 million barrels a day. “To reach this level, massive investments by the companies active in Iraq would be required”, says Pascual, “because it is no longer a question of extending present sources, rather of opening new fields.” For that, an investment not of 3 or 4 billion dollars would be necessary, rather 30 to 40 billion dollars per field.
For that, Pascual continues, you need both stable political conditions and new types of contract that facilitate more international financial credits and the assurance of those credits, because up to this point, Iraq has been paying its obligations for the oil business mostly with oil. A continuation of this practice however, would prevent the income necessary for projects of development, education and infrastructure. „The challange in Iraq is going to be how to change the nature of the contractional relationships with energy companies in a way that creates a commercial climate to allow Iraq to make these additional massive investments“.
Ambassador Carlos Pascual is Senior Vice President at IHS and Fellow at the Center on Global Energy Policy. Pascual served as U.S. Ambassador in Mexico (2009-2011) and Ukraine (2000-2003). As Special Envoy and Coordinator for International Energy Affairs, Pascual established and directed (2011-2014) the State Department’s Energy Resources Bureau and was the senior advisor to the Secretary of State on global energy diplomacy.