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Prepared by the
Institute for the Analysis of Global Security

November 15, 2004
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Energy Security Current Issue

Baku-Tbilisi-Ceyhan pipeline: not yet finished and already threatened
The long-delayed 1000-mile Baku-Tbilisi-Ceyhan (BTC) pipeline to transport 1 million barrels of oil a day from the Caspian to the Turkish port of Ceyhan is progressing toward completion as early as 2005. But even before the construction is finished, terrorist elements may already be planning attacks on this high quality target. IAGS' Gal Luft discusses the threats.

A strategic approach to pipeline security
Aside from BTC, a consortium of Western energy companies has already started the construction of the South Caucasus Gas Pipeline. Thus far the host countries of the pipelines along with the Western energy companies have taken responsibility for the protection of the critical energy infrastructure. Yet, it is clear that by sole attention to the military aspects of the pipeline protection it will be impossible to guarantee their full protection. The host countries can upgrade their pipeline protection units and patrol teams and purchase the most advanced technology in the world. Baku based analyst Fariz Ismailzade argues that to achieve longterm security the communities along which the pipelines will pass be must be involved in the protection process.

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.

Target: Energy
On September 27, 2004, the Institute for the Analysis of Global Security (IAGS) and the Foundation for the Defense of Democracies (FDD) hosted Target: Energy, a symposium to assess threats to the global energy system and how to address them.

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

Needed: three 1-billion-barrel oil banks
by Gal Luft
Houston Chronicle

The oil market is losing its shock absorbers.

It's too early to celebrate the recent decline in oil prices after they topped $55 a barrel. None of the reasons that created the price spike -- the strong thirst for crude in China and India, the dismemberment of the Russian oil giant Yukos, the terror strikes against oil facilities in the Middle East -- has gone away. Like the hurricane season in Florida, the oil market may be facing even more violent storms.

The lesson from the recent price jump is that the oil market has too little wiggle room to deal with supply disruptions. We have been told for years that such disruptions could be offset by the spare capacity of the 11-member Organization of the Petroleum Exporting Countries -- the ability of some producers, chiefly Saudi Arabia, to inject extra oil into the market when other suppliers falter.

This spare capacity has been the oil market's main source of liquidity.

In 2002, spare capacity amounted to nearly 10 percent of the 76 million barrel-a-day global oil market. A year later, with demand climbing to 78 million barrels, spare capacity dropped to about 5 percent. This cushion was sufficient to prevent an oil crisis when a labor strike in Venezuela, ethnic riots in Nigeria and a war in Iraq took major producers out of the market for extended periods.

Now, mainly because of an increase in demand in Asia, OPEC is called on to supply more crude than expected, biting into its spare capacity, which has dropped to the dangerous level of 2 percent.

Despite Saudi Arabia's reassurance that it possesses an immediately available spare capacity of 1.3 million barrels a day and is accelerating plans to bring new oil fields into production, this is all too little, too late. Demand for OPEC crude will rise by at least 2 million barrels a day by the end of next year, and production from new fields might take a long time to be brought online.

At the same time, no oil-producing country outside of OPEC seems to be willing to create new spare capacity by investing billions of dollars in oil infrastructure that would sit idle most of the time. At about $45 a barrel, oil countries prefer to cash in as many petrodollars by producing at full throttle.

As a result, the oil market today resembles a car without shock absorbers: The tiniest bump on the road can send a passenger to the ceiling.

Worse, seven of the world's top 14 oil-exporting countries face some degree of domestic unrest. Any disruption -- whether a terror attack against a major Saudi oil installation, sabotage operations by insurgents against Iraq's southern pipelines, a violent clash in the Niger Delta, a business scandal in Russia or a new wave of protests in Venezuela -- could send tremors through the global economy. Iran and Algeria also are considered unstable oil producers.

Even natural disasters -- such as Hurricane Ivan, which caused the evacuation of oil-drilling wells in the Gulf of Mexico and cut U.S. oil production by at least a million barrels a day -- could have a significant impact on prices in such a stretched market. [Last Thursday the federal government agreed to lend oil from the SPR to a handful of refineries to make up for the shortfall caused by Hurricane Ivan. The companies will be required to repay the reserve with oil once supply conditions return to normal].

Without liquidity, only one mechanism is left to bring the market to equilibrium: rapid and uncontrolled price increases.

But there is another way.

To compensate for the erosion in OPEC's spare capacity, major oil consuming countries should take steps to insulate their economies from supply disruptions by creating liquidity mechanisms of their own.

At its current capacity of 700 million barrels, the U.S. Strategic Petroleum Reserve, or SPR, barely suffices to tide the U.S. economy over if there is a severe disruption of oil supplies.

If a further drawdown would be required to stabilize the oil market due to additional disruptions -- only last week a rebel commander in Nigeria threatened to attack oil wells and pipelines unless the army halted an offensive there -- it might be perceived by the public in these pre-election days as a political gimmick on President Bush's part.

However, were the SPR expanded beyond its current capacity, and were Europe and Asia encouraged to establish similarly large oil banks, the SPR could serve as a liquidity mechanism to replace that of OPEC's capacity.

While certainly costly in the short term, expanding each of the U.S., European and Asian strategic reserves to contain 1 billion barrels would have the long-term benefit of keeping the market liquid. The stored oil could be released at will to compensate for supply reductions.

An expanded SPR also would signal to OPEC that the oil weapon can no longer be used against oil-consuming countries.

There is much to be done to make the world less dependent on oil originating from unstable parts of the world by building more efficient automobiles and producing next-generation fuels to power them. But this will take many years.

In the interim, the world economy should not be at the mercy of oil kamikazes determined to go for its jugular and unstable countries.

Building a robust oil bank and managing it responsibly is the only short-term mechanism to bring about stability at gas stations.

Without such a mechanism, $50 a barrel for oil could well become a fond memory.

Gal Luft is executive director of the Institute for the Analysis of Global Security (IAGS)

Copyright 2004 Houston Chronicle