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Round Talks:  Global Energy Outlook

“Would the ‘Arab Spring’ be a ‘Consumer’s Harsh Winter’?”

The movement originated in Tunisia in December 2010 and quickly took hold in Egypt, Libya and further spread out to Syria, Yemen, Bahrain, Saudi Arabia and Jordan. The term had been in use since early 2000’s by several political analysts and politicians to urge “Washington and Brussels to join their forces in a partnership with reformers in the Broad Middle East and North Africa region to promote democratic transformation and human development as an antidote to those radical ideologies and terrorist groups that seek to destroy Western society and values” .

Whether these had been the real and humanitarian reasons back in their mind or had it been the cover-up for their never-ending thirst to capture the rich hydrocarbon reserves of the MENA region is always a flaming heading for a passionate debate. However, since millions of innocent civilians had already been killed and more seems to be under great threat, the developments deserve much more than a debate and much more humanitarian responsibility. Innocent lives are at risk, economies and social developments of the region is under significant risk.

The Energy Dimension and Global Energy Outlook

Today, the world consumes 12,3 million tons oil equivalent of energy. In their recent work (WEO 2011) IEA estimates that the world primary demand for energy increases by 40 % between 2010 and 203 to 16.95 mtoe. Energy-related CO2 emissions will increase by 20%,. If such a development can not be avoided, the average global temperature is then expected to rise more than 3.5°C.

Here are the other important outcomes/predictions of the study :
• “The dynamics of energy markets will be determined more and more by the emerging economies. Over the next 25 years, 90% of the projected growth in global energy demand comes from non-OECD economies; China alone accounts for more than 30%, consolidating its position as the world’s largest energy consumer. China will be consuming 70% more energy than the U.S. in 2035.
• The rates of growth in energy consumption in India, Indonesia, Brazil and the Middle East are even faster than in China.
• Emerging economies will dominate the expansion of supply: The world will rely increasingly on OPEC oil production as it grows to reach more than half of the global total in 2035. Non-OECD countries account for more than 70% of global gas production in 2035, focused in the largest existing gas producers, including Russia, the Caspian and Qatar.
• World demand grows for all energy sources. The share of fossil fuels in global primary energy consumption falls slightly from 81% in 2010 to 75% in 2035. Natural gas is the only fossil fuel to increase its share in the global mix over the period to 2035. Absolute growth in natural gas demand is similar to that of oil and coal combined. Oil demand increases by 15% and is driven by transport demand. Coal demand, dictated largely by emerging economies, increases for around the next ten years but then stabilises, ending around 17% higher than 2010. Oil demand increase will be 18%.
• Oil demand rises from 87 million barrels per day (mb/d) in 2010 to 99 mb/d in 2035, with all the net growth coming from the transport sector in emerging economies. The passenger vehicle fleet doubles to almost 1.7 billion in 2035. Alternative technologies, such as hybrid and electric vehicles that use oil more efficiently or not at all, continue to advance but they take time to penetrate markets.
• In the power sector, nuclear generation grows by about 70%, led by China, Korea and India. Within primary energy consumption nuclear’s share very modestly grows from 5,8% in 2010 to 7,1% in 2035 mainly with an impact of Fukushima.
• Renewable energy technologies, led by hydropower and wind, account for half of the new capacity installed to meet growing demand. Renewables increase from 13% of the mix today to 18% in 2035; the growth in renewables is underpinned by subsidies that rise from $66 billion in 2010 to $250 billion in 2035, support that in some cases cannot be taken for granted in this age of fiscal austerity. By contrast, subsidies for fossil fuels amounted to $409 billion in 2010.
• $38 trillion in global investment in energy-supply infrastructure is required from 2011 to 2035, an average of $1.5 trillion per year. Two-thirds of this is required in non-OECD countries. The power sector claims nearly $17 trillion of the total investment. Oil and gas combined require nearly $20 trillion, increasing to reflect higher costs and a need for more upstream investment in the medium and long term. Coal and biofuels account for the remaining investment.
• The energy world becomes more inter-connected and more focused on Asia. More than half of world oil consumption is traded across regions in 2035, increasing by around 30% in absolute terms compared with today. Trade in natural gas nearly doubles, with gas from Russia and the Caspian region going increasingly to Asia.
• India becomes the largest coal importer by around 2020, but China remains the determining factor in global coal markets.
• On planned policies, rising fossil energy use will lead to irreversible and potentially catastrophic climate change.
• Policy action to curb demand for energy-security and climate reasons, and the ability to develop new supplies, will be critical to the long-term outlook for international oil and gas markets.
• Global oil production (net of processing gains) reaches 96 mb/d in 2035, a rise of 13 mb/d on 2010 levels. A growing share of output comes from natural gas liquids and unconventional sources. Crude oil supply increases marginally to a plateau of around 69 mb/d (just below the historic high of 70 mb/d in 2008) and then declines slightly to around 68 mb/d by 2035.
• Nonetheless, gross capacity additions of 47 mb/d – twice current OPEC Middle East production are needed just to compensate for declining production at existing fields. Non-OPEC production falls marginally, while OPEC’s market share expands from 42% in 2010 to 51% in 2035. Increasing reliance on imports in the importing non-OECD regions, notably Asia, will inevitably heighten concerns about the cost of imports and supply security.
• In a Deferred Investment Case, we examine the implications of upstream investment in the Middle East and North Africa running one-third below the level in the New Policies Scenario in 2011 to 2015. MENA production is, as a result, more than 6mb/d lower by 2020; prices jump to $150/barrel, before falling back as production rises. MENA exporters earn more in the near term, thanks to higher prices, but less in the longer term, as they lose market share.
• Short-term pressures on oil markets are easing with the economic slowdown and the expected return of Libyan supply. But the average oil price remains high, approaching $120/barrel (in year-2010 dollars) in 2035. Reliance grows on a small number of producers: the increase in output from Middle East and North Africa (MENA) is over 90% of the required growth in world oil output to 2035. If, between 2011 and 2015, investment in the MENA region runs one-third lower than the $100 billion per year required, consumers could face a near-term rise in the oil price to $150 per barrel.
• Oil demand rises from 87 million barrels per day (mb/d) in 2010 to 99 mb/d in 2035, with all the net growth coming from the transport sector in emerging economies. The passenger vehicle fleet doubles to almost 1.7 billion in 2035. Alternative technologies, such as hybrid and electric vehicles that use oil more efficiently or not at all, continue to advance but they take time to penetrate markets.
• In the New Policies Scenario, world demand increases to 4.75 tcm in 2035 at an average rate of 1.7% per year. Global gas consumption almost catches up with coal consumption by 2035.
• Non-OECD countries account for 81% of global gas demand growth. A major expansion of gas use in China pushes domestic demand above 500 bcm by 2035, from 110 bcm in 2010.
• By sector, power generation is the leading contributor to the global increase in gas demand.
• Unconventional gas – tight gas, shale gas and coalbed methane – is set to play an increasingly important role. It accounts for roughly half the estimated global resource base of over 800 tcm; its share in output rises from 13% in 2009 to above 20% in 2035 on the assumption that the industry is successful in dealing with environmental challenges.
• Gas demand rebounded strongly in 2010, helping Russia regain its position as the worlds largest producer, which it maintains throughout the Outlook, with output reaching nearly 860 bcm in 2035; it makes the largest single contribution to total gas supply growth over the projection period.
• The energy-policy choices of Russia – a key player in global energy – in the coming years will shape the prospects for Russia’s own economic development, but will also have important implications for global energy security and environmental sustainability. The energy intensity of Russian GDP has improved in recent years but, even allowing for Russia’s industrial structure and harsh climate, energy use in Russia is still highly inefficient.
• New energy-efficiency policies and price reforms in the New Policies Scenario start to tap into this energy-savings potential, dampening overall increases in demand.
• Russia has world-class energy resources sufficient to underpin its continuing role as a major producer and exporter through the projection period and beyond.
• Russian oil production plateaus at around 10.5 mb/d over the coming five years before starting a slight decline to 9.7 mb/d in 2035 in the New Policies Scenario. Oil exports decline from 7.5 mb/d in 2010 to 6.4 mb/d in 2035. There is a shift to new, higher-cost production areas in Eastern Siberia, the Caspian and the Arctic, but the key to Russia’s oil outlook remains the incentives for investment in the core region of Western Siberia.
• Gas production is projected to increase from 637 bcm in 2010 to 860 bcm in 2035. Total gas exports rise substantially, from 190 bcm to close to 330 bcm.
• Total Russian revenues from the export of fossil fuels is expected to rise from $255 billion in 2010 to $420 billion (in year-2010 dollars) in 2035.

While the study reflects several “scenarios” based on certain assumptions, and one can rightly react and say that these are only “possible” and not certain outcomes, there is no doubt that, such “scenarios” help us to fine tune our current strategies (if we have any).

“Arab Spring” and It’s Impact on Energy Supply Security and Prices

Within the world total primary energy demand, total stake of fossil fuels (oil, gas and coal) add up to 87,1% while oil contributed a 33,1 percent and followed by coal (30,1%) and gas (23,7 %) in 2011 . As seen from thes figures, fossil fuels dominate the overall energy supply today and are expected to continue their dominance with some decrease (74,7%) through 2035.

World oil and gas reserves are unevenly distributed and Middle East holds the lion’s share of those proven/recoverable reserves. Out of the 1483,3 billion barrels of proven oil reserves 48,1 % is in the M. East. Africa holds 8% while 7,7% is in the CIS region. Middle East and Africa (MENA) region holds 56,1% of total proven oil reserves with very significant additional untapped potential.

M. East is also the primary region for the world recoverable gas reserves (38,4 of the world total: 80 tcm of 208,4 tcm). Russia holds 21,4% of the proven gas reserves while Iran has 15,9% and Qatar 12% of the total. MENA region in total, holds 45,4% of the total gas reserves.

The so-called Arab Spring already changed several regimes in the MENA region to include Tunisia, Egypt, Libya and there is an on-going and growing instability in Syria, Yemen, Bahrain and to a certain extent in Jordan and S. Arabia.

Iraq has a longer and destructive history. Iraq oil production peaked at 3,6 million barrels a day in 1979 before the Iran-Iraq war. “The loss of production from the combined effects of the Iranian revolution and the Iraq-Iran War caused crude oil prices to more than double. The nominal price went from $14 in 1978 to $35 per barrel in 1981” . Iraqi oil production was 2,6 million b/d (mmbd) before Saddam was overthrown. Mainly due to Iraqi instability and with the contribution of several other factors like the Venezuellan strike, more than expected Asian demand growth and weaker dolar, oil prices climbed from less than $40 up to $90 levels in a few years. Today, Iraqi production hardly had been restored to pre-2003 levels and there is a serious risk of growing instability between the Northern Regional Government and the Central Authority. This is an open threat for future oil supply security since Iraq is one of the most promising supply source for the coming decades.

Iran’s oil production peaked at 6,7 mmbd in 1976 while today it is 4,3 mmbd.

Iraq holds 8,7% of the world proven reserves while S. Arabia has 16,1%, Iran 9,1% and Libya 2,9%.

There is no doubt that, at the very outset “Arab Spring” had a negative impact on the oil production and thus caused an increase in the oil prices and discouraged future investments due to increasing instability and risks.

Just before Mohammed Bouazizi burned himself to protest the bad treatment of the Tunisian police , the price of Brent oil was $ 85 per barrel and it sharply has increased to $ 114 in March 2011. In such a short period, the $ 29 increase came mainly as a consequence of a series of similar discontents and upheavals in Egypt, Yemen and Bahrain.

The physical interruption of oil and gas flow due these events is part of the story, while growing risks are further threatening the supply security and therefore urging the prices upward.

Investments totalling $38 trillion are needed to meet projected global energy demand through 2035, and unrest in the Middle East and North Africa may disrupt this spending, according to the International Energy Agency (IEA) . In October 2011, Fatih Birol, the chief economist of the IEA said “energy supplies may be threatened if unrest in energy-producing countries curbs oil and gas projects”. He added that “If the investments doesn’t come through (as was expected) in the MENA region, this will have major implications on international oil prices since MENA countries will account for 90 percent of crude production growth in the next 10 years”.

The IEA foresees a $16.9 trillion expenditure on power- generation infrastructure through 2035, or 45 percent of the total investment required to meet energy demand. That compares with $10 trillion on oil, $9.5 trillion on natural gas, $1.1 trillion on coal and $300 billion on biofuels.

There are more optimistic views however, like those of Paolo Scaroni of ENI. He claims that “it was not easy to assess the potential impact of Arab Spring on energy security however, there are reasons to be optimistic” . To justify his optimism he said “the way the crisis went in Libya was an exception and claimed that Egypt and Tunisia ‘managed’ things without loosing a single barrel of production”. He further claimed that “Libya very quickly returned to the global market and his company resumed production and started to export gas”. Finally he said that “Iraq offers a great potential and he expected 12 mmbd production by 2017”. These are his main points and reasons for optimism.

Scaroni seems to be over-optimistic in his views. First, we have to note that Egypt produces 735,000 b/d -0,3% of world total - while Tunisa produces only 75,000 b/d meaning that their total contribution is rather insignificant in the global scale .

Libyan situation is also not that much promising an instability is even increasing. The U.S. Energy Department's Energy Information Administration reported that Libyan oil production rebounded to 1,4 million bpd in April 2012 , however it was 1,8 million bpd in 2008. But a much more critical indication of instability and threat is the most recent killing of the US ambassador to Libya and three other embassy officials with a rocket attack . The U.S. mission in Egypt was also attacked on 12 September 2012 similarlay in response to the film depicting the prophet Mohammed as a child molester, womanizer and ruthless killer . Therefore, the future of Libyan oil and gas production is not that easy to predict and therefore to count on for short term global supply security.

Finally, Scaloni’s views on Iraqi oil production also seem “wishfull thinking” since everyday bombs are exploding and tens of lives are being lost in suicide attacks. Ethnic and religious conflicts are being ignited. The conflicts are growing between the Regional Government in the northern part of Iraq and the Central Government of Iraq. There is a significant problem of exports since export routes are exclusively under the control of Maliki government.

Growing instability is discouraging and delaying new investments and adding risk premium which in turn increases the cost of oil development and limiting the export potential. Even existing infrastructure like Kirkuk – Ceyhan (Iraq – Turkey) Crude Oil Pipeline is frequently being attacked and oil flows are continously interrupted . Turkey has lost more than $ 1 billion for unpaid transit fees due to interrupted flows. According to the related agreement, Iraqi side has guaranteed at least the transportation of 35 million tons of Iraqi crude oil per annum (half the capacity of the pipeline) while during Saddam period, this fulfillment was satisfied. However, after the invasion in 2003, endless attacks made the pipeline almost idle. Therefore, before talking about new investments, we should try to operate the existing infrastructure in an uninterrupted manner. The risks are not imaginative but actual and the impact is factual.

There is an additional risk associated with the impact of “Arab Spring” which may cause a further increase in the oil price. That is the “natural” protectionist reaction of regimes like Saudi Arabia, Jordan, Bahrain, United Arab Emirates and Iran. Watching the regime changes in Libya, Tunisia and Egypt, those states are diverting more and more of their oil export revenues to social expenditures for trying to stop the unrest among their populations. As a result of the Arab awakening and the Arab street’s disaffection with its rulers, which spread last year from Tunisia to Libya, Egypt, Bahrain, the Yemen and Syria, the Saudi government decided to head off trouble within the Kingdom by boosting civil servants’ salaries and by spending lavishly on defence, education and manpower development, health and social services, municipal services etc .

Center for Global Energy Studies (CGES) calculates “the OPEC Basket price needed by Saudi Arabia (to cover its planned expenditure in 2011) to be around $90 per barrel. According to CGES, other OPEC countries need even higher prices .

A Chattam House Report states that; “the kingdom becoming increasingly dependent on debt to support government spending at home and to pay for imports – or having to make some drastic spending cuts. Facing a rapidly growing population of 27 million (including some eight million expatriates), a third of the population under the age of 14 and high unemployment (officially 10,5–11% of the Saudi labour force, unofficially anything between 20% and 30%), the need to diversify the economy and create jobs is paramount. If this is not done fast enough – and the signs are it is not – the subsequent fiscal squeeze would have serious political consequences.”

Finally, it should be not be unrealistic to expect the “new regimes” replacing the old ones will try to take position in favour of higher oil prices. To satisfy their people’s expectations, they also would like to divert greater shares of the oil revenues to them. This will no doubt cause a rise in the prices.

Combined effect of these developments which all are the inevitable consequence of the “Arab Spring” will create a significant overburden on oil and gas importing countries.

Current spare oil capacity which is around 4 million barrels a day, strategic reserves of oil importing countries, IEA member states’ emergency stock liabilities, ongoing economic stagnation and lower demand than expected as a result of it may work in the reverse direction (to decrease the prices) however all those factors have limited capacities when compared with the impact of recent and ongoing geopolitical developments.

A Case in Point: Turkey’s Energy Import Dependency May Further Hurt

Turkey consumed 114 million tons of oil equivalent (mtoe) equivalent (mtoe) from primary energy sources in 2011. In the same year, electricity consumption reached 229 billion kWh, marking a significant rise (9,9%) from the previous year. Dependency on energy imports is rising and reached 72% in 2011, while the percentage was 52% in 1990 and 67% in 2000.

The share of fossil fuels in Turkey’s total primary energy consumption is as high as 89,3%. Despite claims to the contrary, dependency on both fossil fuels and imports tend to continue or even rise since the Energy Market Regulatory Authority (EMRA) has already issued new and additional gas and imported coal fired plant licences exceeding Turkey’s existent installed generating capacity.

The total share of oil and gas within Turkey’s total energy consumption reached 62% in 2011. Almost all of these fossil fuels are imported. Turkey imports 92% of its oil and 98% of its gas, which causes significant vulnerability in both economic and geopolitical terms. Turkey spent U.S. $54 billion on oil and gas imports in 2011. This figure is almost 22% of Turkey’s total import expenditures. Such a large burden on the budget is not sustainable however is even growing.

Turkey imported 18,1 million tons of crude oil from eight countries in 2011. The biggest exporter to Turkey was Iran, with 51% of the total (9,3 million tons). The other suppliers were Iraq (17%), Russia (12%), Saudi Arabia (11%), Kazakhstan (7%), Syria and Italy (1% each) and Azerbaijan, which contributed just 81.000 tons. Turkey also imports oil products (unleaded gasoline, fuel oil, diesel, off-road diesel and jet fuel) which totalled approximately 8,6 million tons in 2010.

Natural gas is imported from five different countries and also from spot markets (in the form of LNG) in minor volumes. Natural gas consumption in Turkey reached 44,5 billion cubic meters (bcm) in 2011. Of the 43,68 billion cubic meters (bcm) imported, Russia supplied 57% (25,38 bcm), Iran supplied 18% (8,19 bcm), Algeria and Azerbaijan supplied 9% and Nigeria supplied 3%. Local production made a minor 2% contribution to the total amount of gas consumed in 2011, and spot LNG had a similar stake. Turkey also exported 710 million cubic meters (mcm) of gas to Greece.

Foreign policy is one of the most important areas that directly relates to Turkey’s energy policy. Turkey has a strategic geographic location. It can be classified as a Middle Eastern, Caucasian, European or Balkan country. It is a natural bridge between countries that have rich hydrocarbon resources and countries with energy thirsty markets. It is a relatively stable country in the region, and has a relatively advanced legal framework. Nevertheless, Turkey’s strategic position also makes it vulnerable to potential geopolitical and economic risks. Turkey has common borders and history with many unstable countries in the region, such as Iran, Syria and Iraq.

Turkey is over-dependent to Russia for energy imports and mainly for gas imports. Iran is the next most important supplier of energy to Turkey. In 2011, 58% of Turkey’s gas imports and 12% of its oil imports came from Russia, while 51% of the oil and 18% of the gas it consumed came from Iran.
On the one hand, with every $10 increase in oil import price will add approximately $2billion to Turkey’s oil import bill. Additionally, since gas import prices (with current agrrements) are linked to several oil products, Turkey’s gas import bill will also increase. Hence, the so-called Arab Spring will directly and negatively effect Turkey’s already vulnerable economy since it most probably will trigger the oil prices significantly upwards.

However, this is not the only problem. Turkey’s foreign policy choices is another big headache creating instability. With recent steps, Turkey is recieving reactions from three of its neighbours namely Iran, Syria and Iraq. Russia is another uncomfortable actor from which 58% of Turkey’s gas imports comes. Turkey imports 12% of its oil also from Russia.

Turkey’s hostile policy towards Syria has created significant reaction both in Russia and Iran. Iran is the closest regional ally of embattled Syrian President Bashar al-Assad, but has also striven to keep good relations with Turkey. A strong reaction came from Iranian side stating that "Any attack on Syrian territory will meet with a harsh response, and the Iranian-Syrian mutual defence agreement will be activated," according to Al-Watan newspaper .

As stated before, Turkey imports 51% of its oil and 18% of its gas from Iran. It should not be a surprise if Turkey faces with gas supply interruptions in the coldest days of winter possibly due to “technical” problems. Iran has a track record which increases such possibility.

“Ankara and Moscow have adopted dramatically divergent positions on how to deal with the crisis, with Turkish leaders publicly calling for Syrian leader Bashar al-Assad to step down, and Turkey serving as a staging ground for the Syrian opposition. Russia, on the other hand, has emerged as the Assad regime’s most significant international backer” . London’s Sunday Times went further to claim that Russian technicians helped Syria shoot down Turkish plane to warn Turkey and NATO. The Syrian airspace is defended by air defense systems from Russia, and defined to be a reliable guarantee for the sovereignty of the country .

Divergency between Turkey, Russia and Iran is not limited with their Syrian policies. Turkey agreed to host a missile shield in Malatya-Kürecik in September 2011 as part of NATO’s missile defense system aimed at countering ballistic missile threats from neighboring Iran. Ankara claimed that the shield doesn’t target a specific country . The Iranian reaction came from different centers while General Amir Ali Hajizadeh, the head of the Guards' aerospace division, said “Iran will target NATO's missile defense installations in Turkey if the US or Israel attacks the Islamic Republic. ”

Turkey’s economy is already vulnerable to Russia. In addition to its over-dependency for gas imports and overall trade , Turkey’s first nuclear plant has been decided to be constructed, operated by Russian Rosatom which means Turkey’s dependency to this country will furthen deepen. Under such circumstances and with a possibility of increasing oil and gas prices Turkey will be more vulnerable to Russia.

To conclude;

Arab Spring has a potential of creating a significant but mostly an adverse effect on Turkey’s already vulnerable economy and foreign relations.

Turkey should radically re-evaluate its foreign policy choices together with its energy policy. It has significant indigenous energy resources most of them being renewable. Turkey consumed 229 billion kwh electricity in 2011 while the still unused indigenous sources offer more than 750 billion kwh. Adding the energy efficiency recovery potential on top of this figure creates an alternative to current import dependent energy policy.

Turkey deserves a much prosperous, independent and sustainable future.

Ahmet Necdet Pamir







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Last modified: July 13, 2016


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