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Prepared by the
Institute for the Analysis of Global Security

January 24, 2005
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Energy Security Current Issue

Iran-Pakistan-India pipeline: the Baloch wildcard
A few days after Iranís Oil Minister Bijan Namdar Zanganeh arrived in New Delhi to discuss the future of the pipeline, terrorists in Pakistan blew up two gas pipelines sending a message to all parties involved that the "pipeline of peace" might be anything but peaceful.

Terrorism Goes to Sea
New evidence suggests that piracy is becoming a key tactic of terrorist groups. In light of al Qaeda's professed aim of targeting weak links in the global economy, this new nexus is a serious threat: most of the world's oil and gas is shipped through pirate-infested waters. In a recent Foreign Affairs article, IAGS' Gal Luft and Anne Korin analyze the situation and recommend policies to mitigate the risk.

Radical Islam and LNG in Trinidad and Tobago
Trinidad and Tobago alone account for 80% of all U.S. LNG imports. Security analyst Candyce Kelshall warns that Islamist terrorist groups are active on the island and might find LNG shipping an attractive target.

Chinese Quest for Crude Increases Focus on Africa
Leading oil sector analysts have warned of growing conflict between Western and Asian countries as they seek to outbid each other for key hydrocarbon assets in Africa. These forecasts have been largely based on the expectation that China will become the major player in nontraditional oil and gas producing regions on the continent. IAGS Associate Fellow Cyril Widdershoven discusses.

Terror's Big Prize
Since September 11, pipelines, tankers, refineries and oil terminals have been attacked frequently. Except for a sharp increase in maritime insurance premiums in these regions these attacks had marginal strategic consequences. But in at least two cases oil terrorism could have rattled the world.

Needed: Three 1-billion-barrel oil banks
The lesson from the recent oil price jump is that the oil market has too little wiggle room to deal with supply disruptions. It's time for consuming nations to think about providing their own liquidity mechanisms.

On the technology front

Fuel Cell power plant installed at NJ College
The fuel cell will provide 250 kilowatts of electric power as well as heat, to several buildings on the campus.

Biomass-to-Ethanol Progress
The enzyme costs of converting cellulosic biomass into sugars for fuel ethanol production have been reduced approximately twenty-fold with technology developed by the National Renewable Energy Laboratory (NREL) and Denmark based Novozymes, biotech-based leader in enzymes and microorganisms.

EU study: Methanol from biomass - competitive with gasoline
A study of a new patented Swedish technology concluded that the alchohol fuel methanol can be produced from biomass via black liquor gasification at a cost competitive with that of gasoline and diesel.

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Back Issues

Will North Africa learn from the oil curse?

Although not all OPEC countries are corrupt, an historical symbiosis exists between oil and corruption. Oil, corruption and failed states seem to be synonymous. However, some countries have been able to address this threat; most of them are located in North Africa. Producing countries such as Algeria, Egypt, Tunisia and even in some respects Libya, have managed to resist the temptation of sleaze. While temptation may have been countered by most North African producers, the threat of falling into the same trap remains.

Oil (and increasingly natural gas) is both the greatest strength and the biggest weakness of the North African region. As has been obvious for decades, revenues generated by these two hydrocarbon based resources still account for the vast bulk of economic activity, particularly in Algeria and Libya. The oil windfall has prevented the development of more broad-based economies and has created an industry that does not require mass employment.

However, the revenues of a hydrocarbon based economy are not exceptionally well equipped to support sustainable and supra-sectoral economic growth. While the growing importance of the gas sector in recent years has provided a welcome element of diversification, it too fails to provide the jobs that the people of North Africa seek.

To some extent, oil revenues drive the economies of all parts of the Middle East and North Africa (MENA) region. While the biggest oil producers are concentrated in the Gulf, North African states such as Algeria and Libya are heavily dependent upon oil income. Even modest producers such as Egypt rely on oil output to generate export revenues, while Tunisia's limited oil production allows the country to avoid a heavy fuel import bill. At the same time, much of the investment in the region's non-oil producers is provided by companies and financial institutions based in hydrocarbon-rich states which have benefited from oil revenues.

Current high crude oil prices, which additionally have had their positive implications for natural gas exports too, have brought oil revenue of almost unknown historical levels. Most Middle East producers have had the wisdom or prudence to base their budgets on a barrel price of US$22 (Kuwait's is as low as US$15), resulting in unbudgeted and very welcome massive revenues surpluses. Only Saudi Arabia is stated to be still in the minus, due to its increased spending programs, but most of the other countries are reaping the rewards of the current US$40-US$50 level their crude oil basket is generating. In contrast to prior decades, most of the massive surplus will undoubtedly be channelled into other investment sectors, such as power, infrastructure and immense construction projects. Some producers also operate special oil funds to act as a counterweight to fluctuating prices (excess revenues are paid in when prices are high and can be drawn upon when prices are depressed.) Yet if prices remain high, new investment funds are certain to be made available.

Still, one major economic fact of life has not been learned yet. State-run or owned enterprises are counterproductive in setting up a new and competitive economy. State-dominated economies have intrinsic and very dangerous weaknesses. Rentierism in most Gulf based economies, except maybe Dubai, also called Dubai Inc, is still a fact of life, and is not producing the targeted results at all.

State control does permit the cross subsidisation of surplus oil profits from hydrocarbon parastatals to other ventures. If the current oil boom is sustained, or even if prices merely remain above the US$30 per barrel level, further investment in oilfield development is likely. When prices remained within OPEC's US$22-28 basket range, most Middle Eastern members of the oil cartel possessed excess production capacity that was not being utilised. This obviously depressed investment in exploration and the development of new fields. Now most are producing at full capacity and so both private and state-owned oil companies will be keen to bring online new fields in order to reap the benefits of high oil prices.

Some North African countries may reap additional rewards from the current crude oil prices. High prices make it increasingly profitable to develop the large amount of marginal fields, where production costs are high, such as onshore Western Desert, Egypt, or even Morocco's mountain range reserves. Most of North Africa's immense reserves with low production costs are concentrated in two countries: Algeria and Libya. With higher crude oil prices, the other Arabic-speaking countries will be able to compete with Siberia, Nigeria, Sao Tome & Principe, Angola or even Sudan, in attracting increased foreign direct investment for infrastructure in the near future. The growing discrepancies between the OPEC producers claimed reserves - largely based on state provided figures - and true levels may also begin to play a major role.

In contrast to Persian Gulf-based producers, North Africa has become an oasis of transparency. The current North African regimes have been able to address the necessary changes in their state-run economies needed to attract the international investment that is so badly needed. The enormous accounting scandals in the West (Enron, WorldCom) have shaken the investment sectors on Wall Street and London City, and the call for transparency and accountability has resonated within the oil sector as well. The immense reserve debacle of Royal Dutch/Shell, the Russian oil farce surrounding Yukos and other events have pushed forward increased openness worldwide. Investors and operators, forced by their shareholders and institutional investors (especially pension funds,) will ask for more transparency before investments are granted. North African countries have heard the message and acted accordingly. Algeria, Egypt, Tunisia and even Libya, are leading the way in this respect. Saudi Arabia's unwillingness to open its reserve archives and databanks for international scrutiny could become a blessing to North African producers.

The fear among analysts is that of renewed rentierism, that is, an economy based on revenues from natural resources without more diversified income sources. It is hoped that Libya and Algeria have learned from past mistakes. While petroleum-based revenue sources will be a major part of their economies for decades the role of the sector should change. Rentierism should not figure in governmental strategy. Revenues should be used for diversification, not only to strengthen the overall economic basis of a country but also to establish the means by which employment can be increased. The immense population booms experienced in countries such as Egypt, where there are more children born every year than official employment figures are able to cope with, is undermining the economic situation. As long as oil producing countries are struggling to keep up GDP per capita, even during high revenue scenarios, worrying times are ahead.

International operators and investors have a role to play in addressing these issues, not only in developing the communities in which they are working but also preventing unwanted socio-economic effects from generating conflict on a supraregional level. The call for the end of rentier states, especially in North Africa, is based on two premises: the development of local economies and the stabilisation of the respective regions. North Africa has been given a great chance to secure its future. Let us hope the governments in the region will not squander it.

Cyril Widdershoven is an Associate Fellow at the Institute for the Analysis of Global Security (IAGS).