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Prepared by the
Institute for the Analysis of Global Security

January 19, 2006
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Energy Security Current Issue

Dragon at Detroitís gate
The Chinese debut at the Detroit Auto Show with Geely, a mid-sized sedan planned for sale to budget-conscious American families for less than $10,000 by 2008, should be viewed as the opening shot in what is likely to be a clash of titans between the American and Chinese auto industries, one that could send Detroit to the ropes. IAGS Co-director Gal Luft analyzes the implications.



Sino-Japanese competition for Russia's far east oil pipeline project
There are two significant energy trends underlying the competition between China and Japan for Russia's Far East oil pipeline project: the need to seek additional energy supplies and to pursue greater energy diversification. And for both China and Japan, Russian energy offers a significant additional supply source and contributes to greater diversification. But these trends in energy interests are matched by an equally dynamic and intense geopolitical rivalry, defined by a complex and contradictory set of converging and diverging national interests. Within this context, the competition between China and Japan, as well as the Russian role in exploiting this rivalry, is driven by the distinct energy interests of each country. IAGS Associate Fellow Richard Giragosian analyzes.

Sino-Japanese oil rivalry spills into Africa
China and Japan - the two giants of East Asia - are competing for energy resources around the globe. Their rivalry in the East China Sea, Russia, Central Asia and Southeast Asia has been well documented. Yet little has been written in Washington about the impact of Sino-Japanese rivalry in Africa.
With one-third of its top 15 oil suppliers in Africa, the United States ignores the challenges of this geopolitical dynamic at its peril. Joshua Eisenman and Devin T Stewart discuss.

China deals a blow to India's aspirations in Kazakhstan
The "unconditional" final ruling of October 26 2005 by the Alberta Court of Queen's Bench, Canada, in favour of China's China National Petroleum Corporation (CNPC) dealt a severe blow to the last Indian hope of acquiring PetroKazakhstan. The defeat in securing an important energy deal does not bode well for India's energy security concerns considering its growing energy needs and illustrates India's vulnerability in competing and securing depleting international energy sources. At the same time it opens up for greater debate the Indian energy minister's fervent argument that Asia's two emerging economic giants should co-operate rather than compete in securing international energy deals.

Oil puts Iran out of reach
As diplomatic rumbles regarding sanctions against Iran fill the airwaves, IAGS' Gal Luft notes that given Iran's key position as an oil supplier and the tightness of the oil market, Iran's influence on the world's economy makes it virtually untouchable.
No doubt, Iran is heavily dependent on petrodollars and denying it oil revenues would no doubt hurt its economy and might even spark social discontent. Oil revenues constitute over 80 percent of its total export earnings and 50 percent of its gross domestic product.
But the Iranians know that oil is their insurance policy and that the best way to forestall U.S. efforts in the United Nations is by getting into bed with energy hungry powers such as Japan and the two fastest growing energy consumers, China and India.
Threatening Iran with sanctions may well force it to flex its muscles by cutting its oil production and driving oil prices to new highs in order to remind the world how harmful such a policy could be.

On the technology front How utilities can save America from its oil addiction
Utility companies which have traditionally viewed themselves as providers of "power" for lighting homes or powering computers, can now break the dominance of Big Oil in the transportation energy sector and introduce much needed competition in the transportation fuel market. Gal Luft explains how.



Comparing Hydrogen and Electricity for Transmission, Storage and Transportation


Study: Coal based methanol is cheapest fuel for fuel cells
A recently completed study by University of Florida researchers for the Georgetown University fuel cell program assessed the the future overall costs of various fuel options for fuel cell vehicles. The primary fuel options analyzed by the study were hydrogen from natural gas, hydrogen from coal, and methanol from coal. The study concluded that methanol from coal was the cheapest option, by a factor of almost 50%.



Major improvement in fuel economy and range of Honda's fuel cell vehicles
The 2005 model Honda fuel cell vehicle achieves a nearly 20 percent improvement in its EPA fuel economy rating and a 33 percent gain in peak power (107 hp vs. 80 hp) compared to the 2004 model, and feature a number of important technological achievements on the road to commercialization of fuel cell vehicles.

Biodiesel fueled ships to cruise in Canada
A Canadian project will test the use of pure biodiesel (B100) as a fuel supply on a fleet of 12 boats of various types and sizes, 11 boats on pure biodiesel (B100) and one on a 5-percent blend (B5).


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Back Issues

Wrestling the Russian Bear

Russia's curtailing deliveries of natural gas to Ukraine goes far beyond the bounds of a common commercial dispute between an energy supplying and an energy consuming nation. It is indicative of Russia's foreign policy vis-ŗ-vis the Soviet Union's former allies spread across Central and Eastern Europe not to mention a warning shot across the bow of Central Asian energy exporters.

While Gazprom has a legitimate right to demand a market price for its product regardless of destination, the present dispute is lodged principally at the level of bilateral relations between Ukraine and the Russian Federation personified by the leaders of both states. Ukraine's Orange Revolution which catapulted Viktor Yuschenko to power was highly unwelcome in Moscow adding further evidence of Russia's declining influence in fully independent states it once dominated. This is contrasted by President Putin's moves to recentralize control over Russia's energy and power sectors reminiscent more so of a growing authoritarian regime rather than the expanded liberalization of a purportedly emerging democratic state.

Russia unwisely chose the eve of its assuming the leadership of the G8 to exercise energy brinksmanship while concurrently insisting on fair and competitive market practices in the energy trade which if pursued would in and of themselves promote Russia's competitive advantage as Europe's most significant provider of energy resources. With Russian influence smoldering in Georgia in the wake of President Shakashvili's assumption of power, and in view of the growing independence of Azerbaijan as a small but not insignificant competitor not only for Russian oil to the West but also as a viable and vital transit state for Central Asian energy resources, Gazprom decided to draw the line in Kiev. Russia insisted that as of January 1, 2006 Ukraine begin paying market prices for its gas effectively quadrupling the $60 per 1000 c/m price it had been paying under the terms agreed to by former Ukraine President Kuchma whose political persuasions were far more acceptable in Moscow than those of the present Ukraine administration. This price increase must be seen against the backdrop of Gazprom's prices to states across the neighboring Caucasus region: $64 per 1000 c/m to Georgia and reportedly $56 to Armenia. The rouge regime in Belarus, under the tutelage of Lukashenko, finds its price for Russian gas even more advantageous at $50 per 1000 c/m despite the fact that the Belarussian president has long refused to relinquish state control over that state's branch of the former Soviet northern Druzhba pipeline, a key asset for the transit of Russian gas to its downstream European customers. And while the price charged to Georgia appears inconsistent with its democratization movement, a closer look at that situation reveals considerable downstream investment by Russian RAO UES in Georgia's electricity network which depends on imported Russian gas to power their turbines coupled with Russian interest in gaining control over Georgia's main gas pipeline which, if it occurred, would tie Russia directly to its strongest Caucasus ally Armenia.

In the interim, the international community appears dumbstruck by this flurry of activity as if the issue of energy security remains a back-burner issue traditionally relegated to individual states and entirely disconnected from national security concerns. The fact is that energy security is not only a pressing issue for each and every sovereign nation, but because of the interdependencies that transborder energy transit generate energy security is a regional if not global defense-security concern. The United States knows this only too well, but NATO has yet to respond to this challenge. It should. And on this note, Russia should be held accountable for its destabilizing actions not only in Ukraine but also in its present leadership role of the elite G8 where it has already placed energy at the top of its agenda.

Having said this, productive negotiations in the run-up to the St. Petersburg Summit can occur based on known modalities that work. The OECD's process of peer-to-peer dialogue to promote open markets, financial transparency, and respectable competition policy should be the basis for discussion. Hence, a first step in avoiding the unnecessary destabilization of one state by another purportedly over a disagreement in the price charged for energy would be a frank discussion on leveling the playing field in the energy sector itself. Insistence on the principle of developing alternative energy transit routes and corridors unencumbered by the overt foreign policy interests of one state over the national security interests of another would be one step forward. This discussion could easily accommodate and recognize national interests in retaining control over vital critical energy infrastructure as a national security priority and concurrently insist on transparency in the privatization of energy infrastructure so often opaque and shrouded in mystery throughout Central and Eastern Europe. This plays to the interests of both energy producers and consumers.

Second, aligning to world energy prices - as abhorrent as one or another state might find them - is a reasonable rule to which all states need to be persuaded to aspire. Accepting this unpalatable medicine is the most efficient catalyst for diversifying primary energy supply by both country of origin and energy source. Finally, doing so would energize the development of alternative fuels and efficiency alternatives which have been long standing back burner issues not only for the countries of the G8 but for China, India, and the developing world as well.

Third, in particular the EU, the United States and Japan need to stop cowering under the fear of Russia as an energy giant. Russian oil reserves represent %6 of proven world resources at best. While Russian gas is much more pronounced hovering around %30 of proven reserves, gas is becoming a fungible commodity with the development of transportable LNG making alternative suppliers like Oman a major competitor for Russian gas in European, Japanese, and American markets discounting in the longer term the present strategic importance of land-based pipeline systems. While the price differential between Russian and Middle Eastern gas is pronounced introduction of some competition may be the only solution for taming the Russian bear and in doing so bring some stability to the European gas market. In short, Russia needs to begin treating their clients including the Ukraine like customers not as subservient to their pronounced national resource endowments. For their part, the G7 should begin to speak to Russia as it often speaks to them: bluntly and to the point.

Finally, NATO needs to continue to transform and to address present and future risks to state stability in the Euro-Atlantic region. The NATO-Russia Dialogue is partly designed for this purpose. Without undue exaggeration NATO's credibility rests on its ability to address in real terms those risks and challenges to its members' and partners' national security. Energy is the lifeline that binds all of these states together as an essential life support system for the civilian populations that have placed their trust in an Alliance that has successfully secured the peace in Europe for more than 40 years. It is obvious that peace and stability cannot be achieved in the Euro-Atlantic region without the cooperation of the Russian Federation. This is particularly true in the energy sphere. And while Gazprom may have drawn the line in Kiev, it is appropriate that the Alliance now draws its own line unless similar instabilities are allowed to be perpetrated elsewhere.

Dr. Kevin Rosner is a Senior Fellow at the Institute for the Analysis of Global Security (IAGS) and director of the upcoming NATO Forum on Energy Security Technology.

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