Sohbet Karbuz

EastMed gas in a nutshell: dizziness and headache

2017-03-07T22:17:00.001+01:00

East Mediterranean holds, without question, large hydrocarbon resources even though the countries in the region, excluding Egypt, have been quite slow in finding them. Large-scale offshore discoveries in the region since 2009 (Tamar and Leviathan in Israel, and Aphrodite in Cyprus) have paved the way for the so-called gas bonanza. When other discoveries, albeit smaller in size, are added to the above mentioned fields, total discovered natural gas resources in the Levant Basin at present amount to over 1100 bcm. Then came in 2015 a geological game changer into the picture; the giant Zohr discovery offshore Egypt.

And yet, the region remains one of the world’s most under-explored – indeed, unexplored – areas. For instance, Turkey has until today drilled 13 wells in the Mediterranean waters but no commercial quantity of hydrocarbons was discovered. In Lebanon and Syria no wells have been drilled offshore.

Two assessments by the United States Geological Survey (USGS) in 2010 – one on the Nile Delta and Mediterranean Sea sectors of Egypt, the other on the Levant Basin Province – indicated almost 10 trillion cubic meters of technically recoverable undiscovered gas potential in the region. To put this into context, Algeria’s current proven gas reserves is about half of it.

The above mentioned discoveries, the USGS assessment as well as the eye-opening resource potential estimates by Cypriot and Lebanese officials, have not only significantly augmented hopes for large natural gas potential in the East Mediterranean but also made it a fast rising favorite for international oil and gas companies. More importantly they have made everyone dizzy and maintained the hype, especially when converted into potential revenues, reaching 12-13 digit figures. Thus, the symptoms of natural gas poisoning have started, experienced to varying degrees across the countries in the region.

Cyprus has so far conducted three offshore oil and gas exploration bidding rounds, the results of the last one will soon be announced. Last year Israel launched its first offshore bid round. After years of delays, Lebanon also finally launched last month its first licensing round for offshore gas exploration.

However, discoveries make sense if reserves in discovered fields are converted into production capacity. Companies will carry on costly exploration and field development endeavors if they see the ability to commercialize their discoveries with a favorable rate of return. Much will depend on the gas price the companies will be getting by selling the gas to domestic market, availability of export options and transport means (even then, some may not be viable, either politically or commercially, for a number of reasons), stability in the countries’ regulatory, fiscal and gas policy, conflicts over the unresolved demarcation of maritime borders, as well as political atmosphere. These technical, administrative, security, legal and political challenges with geo‐political implications have created headaches, the other major symptom of natural gas poisoning.

Due to a combination of these headaches most of the discoveries could not have been converted into production capacity until today. For instance, development of the giant Leviathan field, discovered in 2010, was jeopardized by numerous obstacles and uncertainties created by changing government policies, a series of regulatory hurdles and lack of export infrastructure. The final investment decision to develop the field was finally taken in February.

Like it or not, hydrocarbons will be a dominant factor in the future of the countries of the East Mediterranean. If managed correctly, existing discoveries and the prospect of substantial hydrocarbons resources beneath the Mediterranean seabed may be a force that promotes prosperity and energy security in the region. If not, they may fuel disputes and add to the various frictions and anxieties in this already volatile region. In some cases they might even escalate into a full-scale confrontation.

As mentioned in the beginning of this article, natural gas is not a toxic substance when inhaled. However, in a political environment it can become toxic. What needed to cure this is a kind of geopolitical game changer in on word: cooperation. There is an old African proverb that says, “If you want to go fast, go alone. If you want to go far, go together.” It is up to the politicians in the region which path they will choose. For the benefit of their people, they must go far and quickly.

(This short brief of mine appeared on https://knect365.com/flame/article/6c3c2021-7896-4022-88c3-2cf8f3f6b8a5/east-mediterranean-gas-developments-in-a-nutshell-dizziness-and-headache)

A note on Turkey-Israel Gas Pipeline Project

2017-01-16T17:18:00.000+01:00

The first phase of the Leviathan field development involves an initial investment of $4 billion to produce 12 bcm of gas per year for Israel’s domestic customers and nearby markets in Jordan and Palestine. Currently the Leviathan partners are working towards raising the necessary funds for development of the field. A second phase to expand production to 21 bcm at a cost of $2.5 billion will depend on potential export deals with other market. Talks are already underway with potential buyers in those markets. This means that the production from the second phase is enough to fill a pipeline to Europe.

Two options are considered to export gas to Europe by pipeline:

One is via an undersea pipeline from the Leviathan field to Turkey's southern Mediterranean coast. An initial cost estimate of the pipeline is $2 billion by the Turkish companies dealing with the project. Once the pipeline reaches Turkey gas can either be sold to Turkish market or be sent to Europe (either by connecting to the BOTAS pipelines or to TANAP).

The other project is building a pipeline (the East Mediterranean Gas Pipeline) that would transport gas from the Leviathan and Aphrodite fields to Cyprus itself and Greece. Then, it would link up to Italy. A study conducted by IGI-Poseidon for the European Commission estimated the cost at $5.7 billion. The project is already included in the list of European projects of common interests. Senior government officials of Israel, Cyprus and Greece will hold talks in the near future with the EC to promote this project. Additional gas discoveries in Israeli and Cypriot waters will make this project attractive.

Both projects have advantages and disadvantages, as well as numerous political, technical, financial, commercial challenges. This is why it would be incorrect to say one pipeline is more feasible than the other just by looking at the construction cost. Having said that one should not forget that in pipeline business politics often comes before economics.

Consider the Israel-Turkey pipeline. It has to cross the unilaterally declared Exclusive Economic Zone of GKRY. The pipeline project has to fulfil the Submarine Pipelines Regulations of GKRY. This means a license to be granted for laying, construction, operation of the pipeline from the relevant GKRY authority; conformity with the Geological Surveys Law of GKRY and the Convention for the Protection of the Mediterranean Sea against Pollution and Related Protocols; and an environmental approval. GKRY may reject the application or terminate the license for many reasons, including national security and/or public interest. It may impose terms and conditions into the license. This means that any political friction with Turkey may have impact on the destiny of the pipeline. This is why resolving the Cyprus problem has utmost importance. However, one should also not forget that although resolving the Cyprus problem is a necessary, it is not a sufficient condition for the future of the pipeline.

Seen especially from that angle, constructing the Israeli-Turkey pipeline would require long term commitments and guarantees. No private company or a consortium of private companies would be willing to assume all those risks alone. This is why the involvement of a state-owned company seems to be best bet for its possible realization.

Moreover, pipeline should be commercially viable in order to be realized. This means the gas it will carry has to find a market and be competitively priced. I have big doubts that Turkey or Europe will need additional gas, say 10 bcm, in the future, and that the terms of gas sales through those two pipelines, including the price, can be competitive in the Turkish or in European market. Besides, neither the East-Med pipeline project nor Israel-Turkey pipeline project can compete with Russian gas in the Turkish and European markets.

The reaction of Russia to both pipelines will likely depend on the future of the Nord Stream-2 and Turk Stream pipeline projects. If the second string of Turk Stream goes ahead, Russia may try to prevent their realization. However, if Russia somehow gets involved in Cypriot or Israeli gas sector things would look different.

OPEC deal nothing more than a face-saving initiative

2017-01-01T14:59:00.001+01:00

The following article of mine first appeared at Trend News Agency, http://en.trend.az/iran/business/2694219.html on December 6, 2016

At its 171^st official meeting on November 30, OPEC announced that it will reduce oil production by 1.2 mb/d to 32.5 mb/d from reference October levels, effective for 6 months, starting from January 1, 2017.

Not many people expected that OPEC would agree to bring its crude oil supply down to 32.5 million barrels per day (mb/d) from almost 33.8 the previous month. It was because negotiations were thought to be in deadlocked over the issue of who would cut by how much. Biggest surprise was Russia which changed its position from freeze to reduce output by 300 kb/d from the 11.2 mb/d it reached in October.

Let us first put the significance or insignificance of the output cut into a perspective.

This will be OPEC’s first output cut since 2008. The oil markets reacted sharply. In the three days following the announcement of the cut, Brent crude oil price registered more than 16% increase, or $10. Because of this, we have seen many people arguing that OPEC is not dead yet, OPEC empire strikes back, OPEC is still relevant etc. In my opinion this time the so-called "deal" was a certification that OPEC has a big mouth but no teeth, low prices are hitting the economies of its members and they cannot do much about it. Remember, just 2 years ago, OPEC had decided not to cut output. At that time Ali Al-Naimi, Al-Falih's predecessor, proclaimed it was not "in the interest of OPEC producers to cut their production, whatever the price is" and that it didn't matter whether oil prices went "down to $20, $40, $50, $60 a barrel -- it is irrelevant." We all know what happened to the economies of OPEC members in the past 2 years. OPEC press release for instance says that current market conditions "threatens the economies of producing countries". So, they had no option but cut production to help push the prices upwards. In May 2016, al-Naimi has been replaced by Khalid Al-Falih. The current OPEC agreement shows that Saudi Arabia is not any more a swing producer, and that OPEC does not have any more power, or at best struggles to balance world oil supply and demand.

In Algiers meeting three months ago, OPEC ministers announced that they need to freeze daily output between 32.5 to 33 million barrels. Since then they have been working on the formulation of such a freeze and possibly a cut. It took a while because the intention was not to upset anyone. On November 30 meeting the OPEC announced that they agreed to cut daily production level from 33.7 to 32.5 million barrels per day, between January and June 2017. The best way for not upset anyone and hence come up with a reasonable agreement or face saving deal was to have proportionate cuts of 4,5% in members' output. Nigeria and Libya are exempted from the deal because they are still trying to recover from previous outages due to civil unrest and war. Angola's reference level was backdated to September 2016 in order to take account of scheduled maintenance which lowered output in October. Iran's reference level was backdated to pre-sanction period so that the country is in fact allowed to increase its output by 90 kb/d. Indonesia, currently a net oil importer, decided to suspend its OPEC membership. At the end only a few countries have pledged to cut output. At the end of the day, the deal is indeed a production freeze for some members, a cut for some others, and an increase for a few. We should keep also in mind that usually OPEC production in the first half of the year is lower than the second half.

Table: OPEC Crude oil production levels and adjustments

		Production allocations agreed in Nov 2016
	Production in Oct 2016 (OPEC MOMR)	Reference production level	Adjustment	Committed production from Jan-2017
Algeria	1088	1089	-50	1039
Angola	1586	1753	-80	1673
Ecuador	549	548	-26	522
Gabon	202	202	-9	193
Iran	3690	3975	90	3797
Iraq	4561	4561	-210	4351
Kuwait	2838	2838	-131	2707
Qatar	646	648	-30	618
S. Arabia	10532	10544	-486	10058
UAE	3007	3013	-139	2874
Venezuela	2067	2067	-95	1972
sub-total	30766	31328	-1166	29804
Indonesia	722
Libya	528
Nigeria	1628
Total	33644
Notes: Reference production levels are generally Oct 2016 from Secondary sources.
For Angola reference level is Sept 2016. Iran is given an enhanced reference production level.

The "deal" is in fact nothing more than a face saving initiative because otherwise the production cuts, to take effect from January, are largely based on what the OPEC members were producing in October 2016, reference base to crude oil production adjustments. What is the point of selecting a reference month when OPEC output was at a record high? Some key non-OPEC countries are expected to the cut their production by 600 kb/d. Half of this amount is expected to come from Russia. Russia's oil production was also at the highest in October 2016 (since the Soviet-era peak). So, the possible Russian contribution to the OPEC deal is also not a real production cut. In fact we are likely to have production freezes, not real cuts. Where the remaining part of the cut will come from is unclear. Azerbaijan, Brazil, Mexico, Oman and Kazakhstan are names as potential candidates. Except for Kazakhstan the production in those countries were expected to decline anyway.

On 30 November 2016, the day when the OPEC meeting was held, the oil market was very volatile. Combined volumes in the ICE and CME crude oil contracts on that day hit all-time high on 30 November 2016. The total amount of crude traded on both exchanges (futures+options) was around 5.3 million contracts, equivalent to 54 times the daily world oil supply.

Market fundamentals and expectations of traders about the future are reflected in the prices in the paper barrel market, where many other factors also come into play. Seen from this perspective, the recent erratic oil price dynamics are indeed due to the weighted combination of expected market fundamentals and speculation, which, again, are affected by many factors. The main driver of market sentiment should be the facts, and not fears, concerns and worries of traders against perceived risks. But since the oil market is not transparent, free and efficient market, traders' expectations will continue to put additional pressure on prices.

Look at the pathetic oil market data, especially monthly data, you will understand what I mean. World oil statistics are very far from perfect. Data on spare capacity, production, consumption and inventories are mostly estimates or best guesses, particularly for most of the non-OECD countries. Even OPEC doesn't believe what its members report to the Secretariat, which is why OPEC uses data from secondary sources to monitor the market, including production in its member countries. But where do those secondary sources get the data from is a question nobody asks. What an irony! In an environment where nobody can verify and prove the real production, cheating will prevail. This means the implementation of the deal in terms of self-compliance and the commitment to reduce production is vital for the "deal" to be successful. Production levels is said to be monitored by a committee of representatives from Kuwait, Venezuela and Algeria, plus two non-OPEC participants. I really wonder how they will monitor it. Cheating has been a common feature of the OPEC production cut decisions in the past. I don't see any reason why this tendency should change this time because of the concerns about losing or defending market shares of big producers particularly in Asia.

This brings us to another issue which is crucial for the oil market. The OPEC "deal" is supposed to remove 1,8 mb/d of oil from the market for 6 months - 1.2 mb/d from OPEC plus 0.6 mb/d from non-OPEC countries. Will we see a 1.8 mb/d cut? I don’t think so. In my opinion, OPEC will produce more oil next year than it produced this year. Besides, reducing production levels from an already high level won’t bring the oil market back into balance. But this is not too important either. In fact, the agreement, if succeeds, will remove that amount from the world oil production, not from the world oil trade. In other words, we should indeed be talking about the exports from the producer countries, rather than production. But it seems that nobody cares about that.

It is too early to forecasts how the OPEC deal will impact the global oil market. If this "deal" somehow achieves its intended aim it is highly likely that oil prices will rise, to $60 or above per barrel according to many observers. This could weaken demand growth in 2017, erasing the benefits of production cut. Moreover, price increase may accelerate the drawdown in stocks and tighten the supply/demand balance in the first half 2017. The problem is that crude inventory levels are above historical averages. This is why the question whether the inventory overhang can be brought down to historical range, and if yes, when, can still not be answered. Of course, if the OPEC deal is implemented successfully and important non-OPEC crude producers cooperate fully, we could see gradually eroding high inventories which would potentially move the market into “backwardation.” (Backwardation is a situation in which prices in the forward curve are lower than they are today; the normal state of the market, called “contango,” is when future prices are higher than today’s)

Higher prices will bring along two more crucial issues: the reactions of the Trump administration coming to power in the US in January, and the US shale oil industry which might be a big beneficiary of the OPEC deal. US crude oil supply expectations for 2017 change quite fast in relation to the price of oil. Current expectation is about 8.5 mb/d throughout 2017. In addition, shale oil production in Permian has so far been very resilient. Break-even price levels for majority of shale oil producers are estimated to range between $50-$70 per barrel. This means that cutting OPEC production and an increase in oil prices may have a double effect to open the door for shale oil producers as well as other non-OPEC producers to ramp up their output at the expense of those OPEC members who promised to cut production.

A tightening in the world oil balance will take time, surely more than 6 months what OPEC agreed for now. The production cuts are planned to last for six months. Then what? After six months OPEC will review the market fundamentals and decide at its next formal meeting on 23 May 2017 whether to extend its ill-fated policy. We can be sure that between December 2016 when OPEC plans to hold a meeting with non-OPEC countries and OPEC's next ministerial meeting on May 2017, there will be plenty of formal and informal meetings that will make oil prices a permanent item in global agenda in 2017. Whether the immediate upward push to oil prices following the OPEC meeting will be kept or lost is not easy to judge but optimism created for prices to stay well above $50 in 2017 might fade away faster than thought. The current Brent forward price curves do not show a long-term impact of OPEC deal on the oil market.

The Legal Status of the Caspian Sea

2016-10-26T17:57:00.000+02:00

The Legal Status of the Caspian Sea: Implications on Caspian Resources Development and Transport

This week deputy foreign ministers of Iran, Azerbaijan, Russia, Kazakhstan and Turkmenistan held their 47th meeting (the so-called Working Group on Determining the Legal Status of the Caspian Sea). As expected, still no concrete result.

The following article of mine (originally appeared in September 2016 issue of Energy Policy Turkey magazine, available at http://energypolicyturkey.com/wp-content/uploads/ekim/FLASH/index.html, for footnotes please see the original article) gives an overview why it is so.

1. Introduction

The Caspian Sea, the largest landlocked body of salty water in the world, is surrounded by five “Caspian States”: Russia in the north; Iran in the south; Azerbaijan in the west, and Kazakhstan and Turkmenistan in the east. Caspian Sea’s location at the crossroads of Asia, Europe, and the Middle East has kept the region’s strategic importance to international geopolitics.

Before the breakup of the Soviet Union in 1991, Soviet-Iran treaties governed the exploitation of the Caspian Sea, but since then a legislative black hole in governance and delimitation has been created. All littoral states agree that a multilateral treaty is the ideal way to resolve their dispute over the division of the sea bottom and the delimitation of surface waters.

For more than two decades the Caspian littoral states have been working on resolving the Caspian problem in numerous meetings at various levels including the summit conferences of the heads of states and governments. However, despite over 40 ad hoc working group meetings at the level of deputy foreign ministers and four Summits[i] of Caspian Sea Heads of State, they have been unable to find a solution that would satisfy all.[ii]

There are great difficulties in resolving this issue since even international laws fail to provide an adequate framework. All the treaties in the past relate to navigation and, to a lesser extent, fishing rights, but not to seabed mining. Navigation and fishing rights should not be confused with the right of using the mineral resources. With mineral resources, the seabed is taken to consideration and not the water layer. Failed consensus due to diverse motives and interests paved the way for unilateral actions, bilateral and trilateral agreements,[iii] and consequent disputes.

The legal headache of dividing up the sea continues to pose a serious obstacle to the development of several fields and blocked many projects including trans-Caspian oil and gas pipelines. After all, how the Caspian seabed is divided among the littoral states will determine which hydrocarbon fields will fall into whose sector.

2. Difficulties Inherent in Establishing a Legal Framework

Any investigation about the legal framework of the Caspian Sea should make distinction between legal status and legal regime. While the legal status, whether a particular body of water is a lake or a sea, relates to the sovereignty, the legal regime relates to using rights and obligations. In the absence of a definitive determination of such regime the Caspian Sea legal status will continue to be discussed with no end.

Can the disputes over the legal status and regime of the Caspian Sea be resolved by the international laws? Although the relevance of international maritime laws to the Caspian case is another disputed subject, the likelihood is somewhere between very difficult and impossible. All littoral states have some legal grounds for their arguments, but taking the matter to the international legal tribunal would perhaps create more problems than solutions because:

First, the real headache is the division of natural resources under the seabed and laying pipelines on it. But there has never been an agreement accepted by all the littoral states on these issues in the past.
Second, which international law would be the reference? Since the name of the Caspian is still not legally set as sea or lake, no international law is applicable. Although, the weight of historical evidence indicates the Caspian rather as an international lake, it is neither a sea nor a lake. Therefore, neither the international law of the sea nor the law of inland lakes applies directly to it.
Third, even if we set the name today its legal regime needs to be solved according to the international law which existed at the time of the problem.
Forth, how can an unsolved problem in the past between two parties (Russia and Iran) be solved today with three additional parties?
Fifth, there is the problem of the definition of these three new players. If we accept that 1921 and 1940 agreements are not anymore valid because a fundamental change in circumstances took place, then are Azerbaijan, Kazakhstan and Turkmenistan new successor states or newly independent states (vis-à-vis the 1978 Vienna Convention)? If the latter is accepted then how would it fit into the Minsk Agreement of the Commonwealth of Independent States as well as the 1991 Alma-Ata Declaration? If they are recognised as new independent states then how can they use arguments to fit into Customary International Law?^{^[iv]}
Sixth, the 1982 UN Convention on the Law of the Sea (UNCLOS) provisions regarding enclosed or semi-enclosed seas are not regarded as part of customary international law.
Seventh, the Caspian Sea does not fall clearly under the definition of enclosed, semi-enclosed, or open seas as set out in Articles 1, 2, and 122 of UNCLOS. By the way, except for Russia none of the Caspian littoral states ratified that Convention.
Eight, application of UNCLOS to the Caspian Sea would also be complicated by the sea’s dimensions.
Ninth, the entire Iran-USSR land boundary on both sides of the Caspian Sea was delimited by the agreements concluded in the mid-1950s. The 1954 Iran-USSR Agreement defined an administrative borderline (the so-called Astara-Hasankuli line[v]) between the USSR and Iran on the Western and Eastern side of the Sea. However, no provisions were made to demarcate the Caspian Sea. Interestingly, the aviation agreement concluded in 1964 between the two countries upheld this imaginary line for determining the flight information region as the marine border.
Tenth, in the early 1970s, the Soviet Ministry for Oil and Gas Industry divided the north of the Astara-Hasankuli line into four regional sectors by utilizing the modified median line principle: Russia, Azerbaijan, Kazakhstan and Turkmenistan. These Republics were also granted the right to develop the fields in their own sectors. However, this had a mere administrative value and could not be interpreted as awarding the republics any proprietary rights, since according to the Soviet constitutions exclusive ownership of all natural resources belonged to the Union.

In fact, it is because of many unique features that the Caspian Sea may need a special framework that would define its legal status and regime. This, however, would depend entirely on the unanimous agreement of all littoral states.

The littoral states have their own interpretations and views on the demarcation of the Caspian Sea. Kazakhstan and Azerbaijan were in favour of the complete division (seabed or subsoil, water layer and air space) by applying the UN Convention on the Law of the Sea of 1982 to the Caspian Sea. Russia and Iran wanted the Caspian Sea to remain a shared sea (except for 10-mile coastal zones), in which all littoral states would be equally entitled to make use of both its waters and its seabed. When its proposal for joint control over the entire Caspian by all littoral states was not accepted, Iran suggested dividing the Caspian Sea into five equal parts regardless of the length of the coastal line of each state. This means, Iran has always defended the legal status of a lake.

After offshore discoveries in its territorial waters Russia has changed or modified its opinion and has started to defend the idea of joint ownership in the undivided water layer and dividing the seabed (and the oil and gas resources underneath) into national sectors through a modified median line. This new proposal of Russia has been supported by Azerbaijan and Kazakhstan. Turkmenistan, meanwhile, has been holding a swinging and variable stance.

Table 1: Distribution of hydrocarbon reserves depending on legal status of the Caspian Sea

Source: Eugene Petrov and Nikolay Amelin (2015). Gaining a Regional Perspective Caspian. GEO ExPro. Vol. 10, No. 5.

In reality the issue is not only the partitioning of the Sea itself but also partitioning the multiple interests involved. The position of Azerbaijan, Kazakhstan and Turkmenistan has been driven first by commercial then political considerations. The positions of Iran and Russia indeed involve greater political and security components than the commercial. This is because they have much larger reserves outside the Caspian Sea. Particularly for Iran it is more of a national security issue.

In the absence of a stable legal framework, a military conflict over the disputed hydrocarbon fields and perhaps trans-Caspian pipelines cannot be downplayed. As new fields are discovered in the future, even the bilateral treaties can become a conflict issue. When the late Turkmen President Saparmurat Niyazov said in 2002 that "the Caspian smells blood” he was pointing out the possibility that territorial spats could one day get out of hand. Let us hope the future will prove him wrong.

3. Disputed Fields

All Caspian littoral states have been involved in ownership disputes over a small number of oil and gas fields. The most serious ones are between Azerbaijan and Turkmen and between Azerbaijan and Iran. The Russia-Kazakhstan dispute has been managed diplomatically when Presidents of both countries signed a protocol in May 2002 to jointly develop the three fields located on the median line between the two countries.

The first dispute between Azerbaijan and Turkmenistan concerns three major offshore fields – Azeri, Chirag and Guneshli.[vi] On 20 September 1994, Azerbaijan and a consortium of foreign oil companies signed the so-called “Contract of the Century” to develop these fields. Turkmenistan, however, claimed that Azeri and (partly) Chirag fields are indeed in Turkmen territorial waters. Turkmenistan even suggested to agree on a long-term leasing arrangement since Azerbaijan has already started work on these fields.^{^[vii]} This dispute still continues but the real dispute between Azerbaijan and Turkmenistan is indeed over another field - the Kapaz (known as Serdar in Turkmenistan) field.

When the State Oil Company of the Azerbaijan Republic signed an agreement in 1997 with Lukoil and Rosneft for joint exploration and development of the Kapaz oil field,[viii] Turkmenistan strongly reacted and declared that the field belongs to Turkmenistan. The same year, the late Azeri President Heydar Aliyev proposed to develop the field together with Turkmenistan but his offer was rejected. The relations between the two countries deteriorated so badly that the two presidents did not meet for over a decade. In 2007, the new Turkmen President Berdymukhamedov invited Chevron executives to discuss developing the field. In 2009 Azerbaijan repeated its offer to Turkmenistan to develop the field together but received no reply. Instead, in 2009 Turkmen President announced that his government would be taking Azerbaijan to the International Court of Arbitration to resolve this dispute.

Figure 1: The Uncertain Status of the Caspian Sea

Another field, Alov (called Alborz in Iran)[ix] is a dispute subject between Azerbaijan and Iran. In July 1998, a Production Sharing Agreement signed with Azerbaijan and a consortium of oil companies gave permission to the consortium to conduct seismic operations on Alov.[x] Iran strongly opposed the decision and asked Azerbaijan to stop activities until the establishment of a legal regime for the Caspian. When this call was ignored, National Iranian Oil Company formed the KEPCO (Khazar Exploration and Production Company) consortium with Shell, Lasmo plc and Weba to conduct similar studies in the same area. Azerbaijan protested that some of the studies were conducted within its territorial borders. The tone between the two states increased until an Iranian warship and two military aircraft threatened two Azeri vessels exploring the field on behalf of BP on 23 July 2001. As a result, BP suspended drilling in the area and the development of the field was frozen.

Meanwhile Iran has started its own exploration plans for Alborz. Reportedly, Iran has resumed in November 2015 talks with Brazil’s Petrobras. In 2010 Khazar Exploration & Production Company had reached an agreement with Petrobras on developing two exploration blocks in deep-water Caspian, but international sanctions forced the Brazilian major to leave Iran.

On 23 February 2016, following the visit of Azerbaijan’s president Ilham Aliev to Tehran, it was announced that Iran and Azerbaijan have agreed in principle to develop jointly this disputed field without giving any details.[xi]

4. Trans-Caspian Energy Pipelines

There have been talks in Western political and economic circles about trans-Caspian energy pipelines since the mid 1990’s - one transporting Kazakh/Turkmen gas and the other transporting Kazakh oil to Europe via the Caucasus and Turkey.

In August 2007 the US Agency for International Development awarded a $1.7 million grant to the SOCAR to conduct a feasibility study on the construction of trans-Caspian oil and natural gas pipelines. Also, during a meeting between Presidents Clinton and Niyazov on 23 April 1998 the US Trade and Development Agency awarded a $750,000 grant to conduct a feasibility study by Enron for a natural gas pipeline from Turkmenistan to Azerbaijan. But nothing concrete has happened until now.

Interests and agendas of players inside and outside the region have particularly been reflected in a series of pipeline plans. Pipelines can, in a way, be a tool to build relationships between countries. As is case in the Caspian and Black Sea regions, however, pipelines can become to symbolise political dominance over the countries rather than being just commercial outlets for hydrocarbons. When seen from a geopolitics perspective, pipelines may have a stabilising effect and can prevent wars, but they can the reason for instability, conflict and even war. To which category would a trans-Caspian pipeline fall in? This is hard to guess.

A stable and predictable legal environment that preserves corporate confidence in the legal validity of such projects is vital for the realisation of these pipeline projects. Moreover, several of the Caspian littoral states are opposed to trans-Caspian pipelines on environmental grounds, fearing that such pipelines could potentially cause an ecological disaster in the region.

a) Trans-Caspian Oil Pipeline

The idea of constructing a trans-Caspian oil pipeline goes back to the second half of the 1990s. Clinton administration's 1998 initiative for an East-West trans-Caspian energy transport corridor was foreseeing an Aktau-Baku-Tbilisi-Ceyhan oil export route stretching from Kazakhstan to the eastern Mediterranean.

On 16 June 2006 leaders of Azerbaijan and Turkmenistan signed a framework agreement to create a trans-Caspian project for sending Kazakh oil via the BTC. In April 2007 a memorandum was signed to carry oil extracted from Kashagan and Tengiz fields to Sengachal terminal near Baku through the 700 km undersea pipeline between Aktau and Baku. But after so much talk and ink the trans-Caspian oil pipeline project has not been realised due to several reasons, including political and commercial.

b) Trans-Caspian Gas Pipeline

So far three options have been considered to bring Turkmen gas to the Western markets; by pipeline, via LNG or via CNG. However, the strong Russian opposition to the concept of laying a physical pipe on the Caspian seabed based on environmental and legal grounds has made the pipeline option rather problematic. And the other two options are considered too costly when the transport volume and the distance travelled are considered.

In the early 1990s, Turkish and Turkmen leaders suggested the concept of a trans-Caspian Gas Pipeline Project, which would transit Turkmen gas westward to Baku across the Caspian Sea for transhipment further west through Georgia and Turkey. Supported by the US, this pipeline would be linked with the Baku-Tbilisi-Erzurum pipeline and through it to the Nabucco Pipeline. Gas from the Tengiz field in Kazakhstan would also link to the line at Aktau in Kazakhstan, as suggested by the US in 1997. USA and Turkmenistan signed a feasibility study agreement in 1998. Turkey and USA agreed to support the project.

In 1999, Turkey and Turkmenistan signed a 30-year agreement to export gas from Turkmenistan to Turkey. In addition, the same year Azerbaijan, Georgia, Turkey and Turkmenistan signed an Intergovernmental Declaration on laying the legal framework of the construction of the trans-Caspian pipeline.

Unfortunately, the parties failed to reach a common agreement and negotiations collapsed in 2000 – due to payment and price issues, the lack of a legal framework governing the use of the Caspian Sea, and capacity allocation among Turkmenistan and Azerbaijan. Oppositions from Russia and Iran to such a project had also impacted to the shelving of the project.

However, after the Russia-Ukraine gas disputes in January 2006 the project has started to reappear. Turkmenistan signed a memorandum of understanding in April 2008 with the EU to supply gas starting in 2009, presumably through a trans-Caspian pipeline. In December 2008, two Nabucco gas pipeline project partners, OMV and RWE established the Caspian Energy Company to assess options for the building of a trans-Caspian pipeline and to look for partners for a project which would build and operate such a pipeline.

When Turkmenistan stressed in a statement in April 2009 (following the Russia-Turkmenistan gas crisis) that it wishes to see “the shortest and most convenient routes” to market developed, hopes were raised again for revitalizing the trans-Caspian gas pipeline.

In addition, several favourable developments helped building this feeling: Turkmen gas sales to Russia ceased, sales to Iran reduced, operator of Turkmenistan's Block One fields Petronas took a 15.5% stake in Shah Deniz, high level European Commission officials paid frequent visits to Turkmenistan, and Turkmenistan involved in TAPI pipeline. The latter is significant because it meant the end of Turkmenistan’s long supported policy of not been involved in pipeline projects.

Besides, Turkmenistan and Azerbaijan have demonstrated interests to deliver their gas to Southern Gas Corridor. In May 2015, the Ashgabat Declaration[xii] brought Turkey, Turkmenistan, Azerbaijan and the EU together in a statement that recognised the importance of equal and mutually beneficial cooperation in ensuring reliable natural gas supplies from Turkmenistan to Europe but without any serious talks, let alone taking any tangible steps.

5. Concluding Remarks

The legal status and regime of the Caspian Sea was ruled by the Soviet-Iran Treaties of 1921 and 1940 until the breakup of the Soviet Union. Since then it has become a legal uncertainty and a headache, even if the past Treaties are still binding for all Caspian states (including the newly independent states).

As far as Caspian Sea’s legal status is concerned, the past Treaties do not provide any specific answer. They only mention that it is a Soviet-Iranian sea. Also, no marine boundaries or delimitation lines in the Caspian Sea between Soviet and Iranian parts are provided in any of the past Treaties.

As for its legal regime, the past treaties relate solely to regulation of navigation and fishing but do not address the issue of the seabed sovereignty or delimitation of seabed resources. The whole issue boils down to the question of how to demarcate or share the Sea among the littoral states by taking into account of the past treaties and current realities.

Although the littoral states have been discussing for two decades how the problems related to the demarcation (who gets what and how), the issue has not yet been settled. After 43 "going nowhere" sessions of the special working group and a handful of Summits the positions of the countries are very well-known. This situation has blocked many projects including trans-Caspian pipelines and many oil and gas fields situated in areas contested by neighbouring states.

When international oil companies entered the region in the early 1990s, their main worry was commercial as well as political risks and challenges they would be faced with. In less than a decade managing these risks has turned out to be only a small part of a risk chain, which is tied to the uncertain legal framework of the Caspian Sea.

It is still not clear whether trans-Caspian pipelines will ever be built. If at least one of them is built, USA and the EU will be likely to support the construction as it will boost Western influence and hence may change the balance of power in the region. That is why the Western powers speak out in favour of non-Russia and non-Iranian export outlet for Caspian hydrocarbon resources.

While the big powers such as USA/EU, Russia and China will shape the region’s geopolitical future, the regional players including Turkey and Iran will try to advance their interests. Since the players in the region have conflicting interests and priorities, the trans-Caspian pipelines are likely to ignite conflicts of interests and a geopolitical competition between the different players.

Political disagreements among the players are inevitable in the region and will surface once their interests and priorities clash. Unless military security in the Caspian basin is ensured, Iran and Russia will delay by any means the process of the resolution of the legal framework. Iran, on the other hand, is likely to delay any agreement on the Caspian Sea legal framework until its relations with the US is put on track. With sanctions being lifted on Iran, it is not yet clear what influence that might have on Tehran's position, though it is likely that Iran, which now has become a competitor, will continue to oppose the construction of any trans-Caspian pipeline.

Multidimensional aspects of a legal framework in terms of theoretical and practical basis require the political will of the key players for a consensus. As Vladimir Putin stated in 2002, the future of the Caspian – whether it is a sea of cooperation or a clash of interests – will depend on how the littoral states untangle the tight Caspian knot of problems. Although some argue that a five-way treaty currently seems highly unlikely, there is still hope.

The general consensus so far is that the seabed (and the oil and gas resources underneath) should be divided into national sectors and the sea’s surface and water layer should be shared. But how this division may be accomplished still remains a challenge.

A Comparison of Energy Outlooks for Oil and Gas

2016-10-17T18:15:00.000+02:00

(co-authored by Bruno Castello, the article below appeared at GEM, September 2016)

Although nobody can know what the future holds, many institutions try to appraise the possible trends of the different fuels in the next decades. The main reason is that energy is at the heart of the world economy and even if forecasts won’t match reality, they are an essential tool to activate today’s key policy changes.

The energy world has seen many changes in the past and many others can be expected in the future. In order to see if common/divergent trends emerge in the future we looked in this article at forecasts from five reputable institutions/companies:

· World Energy Outlook 2015 (New Policies Scenario) of the International Energy Agency (IEA);
· International Energy Outlook 2016 (Reference Case) of the US Energy Information Administration (EIA);
· Statoil Energy Perspectives 2016 (Reform scenario);
· BP Outlook 2016;
· ExxonMobil Outlook 2016.

Looking into the future, or at least trying to do so, is obviously an intellectual work, hence outcomes below must be taken with prudence. Comparing different data sets from different sources is a difficult exercise. Each institution has its own definition, methodology, geographic coverage and often report data in different units. We harmonized all the data series to the largest extent possible. Although differences remained, they were not seen too big to result in dramatically different analysis/conclusions.

Prospects for Oil and Gas Demand

All institutions/companies listed above agree that global energy use will maintain a solid upward trajectory in the next 25 years with fossil fuels remaining dominant in the overall energy mix.

Despite a spectacular increase of non-fossil fuels use (nuclear and renewables energy), the share of fossil fuels will only slightly decrease to at least three quarters of the global primary energy demand by 2040. It had remained broadly constant above 80% over the last 25 years.

They all agree that oil will remain the single largest fuel in the energy mix throughout the projection period. Although oil demand will continue rising, its share in total energy demand will decrease to about 30% in most scenarios.

Demand for natural gas will grow faster than that of any other fossil fuels. Share of gas in total energy demand is expected to slightly increase to about 25% by 2040.

Share of oil and gas in global energy demand for the World

* to 2035 for BP.

Source: OME based on IEA, EIA, BP, ExxonMobil, and Statoil.

However, there are some divergences between the outlooks with regards to the scale of the future oil demand growth. With an average rate of only 0.4% per year, the IEA and Statoil envisage a sharp slowdown in oil demand growth in the next 25 years, while BP and ExxonMobil foresee an average annual growth of around 0.7% per year. In contrast, the US EIA, forecasts an oil demand growth above 1% per year on average.

Past and future average annual growth rate for oil and gas demand in the World

Source: OME based on IEA, EIA, BP, Statoil and ExxonMobil. * to 2035 for BP.

The EIA is the most enthusiast for natural gas demand growth as well. It projects a maintained solid pace in gas demand growth in the future compared to the recent past. According to the US administration, the share of gas in total electricity generation could further increase to 28% (from around 22% today). Conversely, the other institutions expect a strong deceleration of the natural gas demand growth around 1.5% per year on average. The IEA is the only one anticipating that consumption of natural gas will not surpass the level of coal within the projection period, in energy-equivalent terms. In addition, according to the IEA, the share of gas in total electricity generation will merely gain one percentage point compared to today’s level. Statoil scenarios, however, differ from the others. Its Reform and Rivalry scenarios see continued growth in demand (1.1% per year) whereas the third scenario, Renewal, is characterized by stagnant demand or zero growth.

When looking at oil and gas forecasts of the different scenarios by region, we see a clear shift of the centre of gravity of oil and gas markets from the OECD to the non-OECD. If OECD used to represent main oil and gas consumers in the world, this is no longer the case. Demand for oil and gas in non-OECD countries today is already higher.

Non-OECD countries are taking over and leaving behind OECD countries as the main oil and gas consumers in the world. Population and GDP growths remain clear markers of the future trends of global oil and gas demand. Europe, in contrast, is an isolated island in this oil and gas world.

In the future almost all the growth in gas demand, all in oil demand is expected to come from non-OECD countries. With much faster rates of economic and population growth than OECD countries, non-OECD countries are expected to use all possible means, including fossil fuels, to satisfy their strong demand growth in energy while OECD countries will increasingly replace fossil fuels with low-carbon fuels in their energy mix.

World oil and gas demand by region and by scenario

Source: OME based on IEA, EIA, BP and ExxonMobil.

Share of non-OECD countries in global oil and gas demand is projected to reach about 65% and above 60% by 2040 (by 2035 for BP) respectively.

IEA, EIA, BP and ExxonMobil all agree that oil needs in non-OECD countries will increase significantly in the future; by as much as 50% for the IEA, BP and ExxonMobil, and by almost 70% for the US EIA. Consensus is less obvious with regards to future oil demand in OECD countries. While the EIA expects consumption of oil to remain stable in the next 25 years (only -0.2% from today to 2040), the IEA forecasts a drop of about 30%.

In the case of future natural gas demand, the EIA again is more optimistic. The EIA projects the gas needs in non-OECD countries to double and increase by one-third in OECD countries by 2040. Others are somewhat more “moderate” and expect non-OECD gas demand to increase by about 70%. For OECD, the growth rates in gas demand are different and range between 13% (IEA) and 27% (ExxonMobil).

Forecasts Are Not Set in Stone

Every institution makes revisions to forecast due to several reasons, such as better knowledge of market trends, better available data, changing policies and priorities. This is why it is also instructive looking at future oil and gas demand forecasts through another angle: release date.

In order to show an example, we looked at the evolution throughout the years of the different World Energy Outlook (WEO) New Policies scenarios of the International Energy Agency for oil and gas. We narrowed our analysis to OECD Europe only to check if some comparisons can be drawn with the revisions of OME for the Mediterranean region. The IEA does not propose an aggregate with Mediterranean countries but parallels exist between this aggregate and OME sub-region, North Mediterranean.

Since at least 2011, the IEA has revised its future OECD Europe oil demand mostly downward. It is worth noting that between World Energy Outlook (WEO) 2010 and 2015 releases, the IEA revised oil needs in OECD Europe for 2035 downward by 20%. In volume, the magnitude of the revision was 2.2 million barrels per day. Just between the last two editions, OECD Europe oil demand by 2040 was reduced by a stunning -10% or 800 thousand barrels per day.

WEO revisions to OECD Europe gas demand

Source: OME based on IEA (WEO 2010 to 2015, New Policies Scenario).

Revisions in WEO editions are even larger in the case of future OECD Europe natural gas demand. While consumption of gas in Europe keeps declining since the late 2000s, naturally, gas demand forecasts were revised accordingly. In its last edition (WEO 2015, released in November 2015), the IEA anticipated OECD Europe gas demand at about 530 billion cubic metres (bcm) by 2035. This is 100 bcm less than the demand forecast in the 2010 edition, and about 140 bcm less than those in the 2011 edition when the question of a world entering a golden age of gas was first asked.

In only five years, between WEO-2010 and WEO-2015 editions, gas demand for OECD Europe for 2020, the closest term in the projection period, has been revised downward by almost 90 bcm; and by about 130 bcm when we compare 2011 and 2015 editions. The gap for the year 2040 between OECD Europe gas demands in the last two WEO releases is more than 80 bcm.

IEA analysis reflects the fast-increasing uncertainty that is observed by all analysts about future European fossil fuels needs, in particular for natural gas. Now, there is a strong belief that gas use in the region already peaked and will stagnate in the next decades.

While the future for natural gas looks still bright in the rest of the world with a sound increase of demand repeated from one update to the other, the future of gas in Europe is to some extent questioned. The strong post-crisis recovery of the gas demand in Europe in the beginning of the 2010s was short-lived. Among others, main culprits were a disappointing growth path and sluggish electricity demand, a certain degree of vagueness with regards to the EU energy strategy and the place of natural gas in future energy mix.

Comparison of EU Natural Gas Production Forecasts

Modest and delayed economic recovery in several European countries as well as the policy push for more green energy future makes the place of natural gas in the long term energy mix rather fuzzy. This would surely make the long term forecasts very uncertain. In contrast, long term gas production forecasts are usually expected to be less uncertain, at least in theory.

It is perhaps due to this reason that OME was criticized heavily for its gas production forecasts for the EU in 2007.[1] OME forecasts at that time, and also in the following few years, were considered to be very pessimistic, especially compared to the forecasts from the EC and the IEA, as can be seen in the chart below.

Comparison of EU natural gas production forecasts for 2030

Source: OME, IEA, EC.

Almost 10 years later, we see that OME forecasts in 2007 are still remarkably close to reality.

In 2013 there was a considerable hype about the shale gas production in the EU. This was reflected in the upward revisions by the EC and the IEA to the future EU gas production. In 2013, OME also made a revision to its 2007 forecasts in order to incorporate the expectations concerning the shale gas developments in the EU.

Comparison of OME forecasts with actual realisation

Source: OME based on IEA, Eurostat, BP data (past), OME (forecasts).

Compared to the EC and the IEA, OME’s estimate for shale gas production at that time was rather pessimistic. Nevertheless, they naturally caused a shift in OME’s forecast to future EU gas production. Even then, OME’s forecasts for future EU gas production are still much lower than those of the EC and the IEA.

Gas production is on a downward trend for almost a decade and still upstream development plans, whether conventional and/or unconventional, face strong public but also political rejection in many countries. The contribution of unconventional supply to the domestic European gas production is expected to remain modest within the next 15 years. It is perhaps due to this expectation that in its WEO-2015 the IEA lowered, for the first time since 2011, its future EU gas production by 13% compared to the previous edition.

Concluding Remarks

The review of the different scenarios of the IEA, US EIA, BP, ExxonMobil, Statoil and OME confirm that future energy mix will likely remain to be dominated by oil and gas.

Who is right is not the point we want to raise here. Instead we would like to draw attention to the fact that the energy scene is moving permanently, sometimes with full of surprises. Who anticipated the shale boom in the US, its consequences (the US will become a net exporter of LNG in 2016!), and the sudden drop in oil prices since 2014?

Nobody knows what the next major changes in the energy world will be. We can only be sure that reality will be different from the ones forecasted. Place your bets!

[1] OME, Natural Gas Supply and Market Security Issues: Europe and Its Suppliers, June 2007.

The Geopolitics of EastMed Gas

2016-06-28T16:04:00.000+02:00

The following article first appeared on http://caspiandc.org/energy/the-geopolitics-of-eastern-mediterranean-gas-an-overview/ (24 June 2016)

The Geopolitics Of Eastern Mediterranean Gas: An Overview Gas: An Overview

Natural gas is not a toxic substance when inhaled. However, exposure to high levels depletes the body’s oxygen levels, leading to cognitive problems. During the early stages, you may experience dizziness, headaches and blurred vision. Continued exposure may result in memory loss, disorientation and poor judgment, and in severe cases, hallucinations. This list of symptoms also serves as an apt description of reactions to the natural gas developments in the Eastern Mediterranean since January 2009, following a series of major offshore natural gas discoveries by Israel and Cyprus.
Large gas discoveries and the prospect of substantial hydrocarbons resources beneath the Eastern Mediterranean seabed have sparked major international interest.

Three large-scale discoveries in the region (Israel’s Tamar and Leviathan offshore fields, and Aphrodite field off the coast of southern Cyprus) have opened up a new deepwater exploration province province, paving the way for this so-called gas bonanza. The giant Zohr discovery in a deep offshore zone of the Mediterranean came next, in 2015. But despite these discoveries, the region remains one of the world’s most under-explored – indeed, unexplored – areas, despite its prospects for additional gas and potentially oil reserves. A recent assessment confirms this.

Two assessments by the United States Geological Survey in 2010 – one on the Nile Delta and Mediterranean Sea sectors of Egypt, the other on the Levant Basin Province – indicated nearly 9800 billion cubic meters (bcm) of technically recoverable undiscovered gas potential in the region. To put this into context, Algeria’s current proven gas reserves is about half of it.

When converted into potential revenues, reaching 12-13 digit figures, this situation has naturally given rise to dizziness. Thus, the symptoms of natural gas poisoning have started, experienced to varying degrees across the countries in the region. In Lebanon, it has even led to hallucinatory effects. Extensive seismic research conducted over 80% of the country’s exclusive economic zone shows promising prospects, between 700 to 2800 bcm, depending on whom you ask. Although no wells have been drilled yet, billboards on Beirut streets eagerly promised a modern army, high-speed rail network, free healthcare and education – all because “Lebanon now has oil”. The importance of aphorisms such as “don’t count your chickens before they hatch” immediately springs to mind.

Lebanon launched its first licensing round for offshore gas exploration in May 2012, but the tender was put on hold due to the absence of a functioning government and political vacuum in the country. The parliament could not ratify two constitutional decrees related to the number of blocks for exploration and the model Exploration and Production Agreement. As a result, the initial excitement has dimmed.

Syria is also considered as frontier exploration area, given that so far, no wells have been drilled. The country announced an offshore exploration licensing round for three blocks in March 2011 with a closing date of December 2011. No bids were submitted due to the ongoing crisis in the country. In December 2013, the Syrian government signed a 25-year agreement with SoyuzNefteGaz, assigning the Russian company an exploration license for Block 2. With the conflict still raging, no progress has been registered.

In Cyprus the dizziness began with the discovery of Aphrodite field by Noble Energy on 28 December 2011. In 2012, the Republic of Cyprus (RC)^{^[1]} opened a second round of exploration and production bidding round for 12 offshore blocks. The authorities awarded five blocks to French, Italian and Korean companies in early 2013. But then came the bad news: Eni/Kogas consortium drilled two dry wells and Total announced that it had not found any targets in Blocks 10 and 11 to justify drilling. Total relinquished Block 10, but agreed to extend its presence in the country to conduct geological and geo-chemical surveys in and around Block 11. The Zohr discovery in Egypt, just 6 km from Block 11, motivated RC to open the third round of licensing with a deadline of 22 July 2016. Three Blocks (6, 8 and 10) are currently being offered.

Since no drilling is planned in Cyprus until 2017, all eyes turned to the Aphrodite field. BG (now Shell) bought 35% stake in the field in January. Political headaches aside, the exploitation of the Aphrodite field may be a significant step towards the monetization of the natural resources for domestic use as well as exports. The problem is that lack of gas infrastructure makes this very challenging. Downward revisions to Aphrodite’s resource base and the disappointing developments mentioned above caused the LNG dreams to fade away.

Israel never lost hope of finding hydrocarbon reserves, even after more than six decades of fruitless searching costing hundreds of millions of dollars. This persistence finally yielded results with the discovery of two large gas fields (Tamar in 2009; Leviathan in 2010). These and other discoveries, albeit small in size, combined with announcements for further large prospects, have made everyone dizzy and maintained the hype. Tamar field came on-stream in March 2013, and produced 2.2 bcm of natural gas and 104,000 barrels of condensate in the first quarter of 2016. Development of the Leviathan field, however, was jeopardized by numerous obstacles and uncertainties created by changing government policies and a series of regulatory hurdles.

Two recent developments are expected to remove these obstacles and uncertainties. First, the new gas framework deal acceptable to companies and government in Israel was finally agreed in May. Second, the settlement of the arbitration dispute between Egypt and Israel. A $1.7 billion fine for terminating gas sales was imposed by the International Court of Arbitration. Egypt and Israel agreed to halve the amount to be paid by Egypt to Israel Electric Cooperation and the payment schedule .

Negotiations for the sale of Israeli gas to Egypt’s domestic market or to international markets through the LNG plants in Egypt is expected to intensify. This time; however, price will remain a challenge because the gas framework does not allow gas to be sold to Egypt at a lower price than to the customers in Israel. Note that in the first quarter of 2016, the average gas sales price to the customers in Israeli was $5.2/MMBtu, which is higher than the current LNG import price, which is likely to remain rather stable and low over the next five years.

The Leviathan and Tamar partners signed several agreements to export gas to Egypt, Jordan, and Palestine. The consortium holding Block 12 and the RC have also been exploring development options for the Aphrodite field that would enable gas to be exported to Egypt. Egypt has been the prime target for two main reasons. First of all, the country desperately needs gas. Second, Egypt’s two LNG plants in Idku and Damietta have lain idle due to lack of gas. Exports from the region could also significantly change the energy map in the wider Mediterranean region. For instance, importing gas from EastMed could offer supply diversity, help lessen the dependence of Russian gas, and thus contribute to the EU’s energy union goals.

On the other hand, the discovery of Zohr as well as fast track developments in Egypt may complicate all these export plans. By the time Leviathan or Aphrodite start producing, Egypt may no longer require gas imports for domestic use. What is more, Egypt may start exporting gas again in the early 2020s when production catches up with demand. Natural gas production could very well double in Egypt over the next five years.

Timing is critical for EastMed gas developments. Given the expected developments in LNG markets in the next five years, the difficulty of exporting gas from the region to international markets will increase with every passing year. In addition, EastMed gas may not compete with Russian pipeline gas because the cost, excluding profits, of producing and transporting Cypriot and Israeli gas to LNG plants in Egypt, liquefying it, shipping it to the EU, and re-gasifying it may not be competitive.

Similarly, a pipeline link from Leviathan and possibly Aphrodite to Greece and onward to Italy would be very costly. This means that within the next five years, EastMed gas is unlikely to be cost competitive. It might later become more competitive, but access to LNG plants in Egypt could be an issue because Egypt would be needing them to export its own gas.

This is not necessarily a bad news. Indeed, it would potentially create a new window of opportunity for exporting gas to Turkey.

Several Turkish companies have shown interest in buying gas from the Leviathan field, and building a pipeline from the Leviathan field (possibly with a link to the Tamar field) to the southeastern Mediterranean coast of Turkey, either directly or indirectly (via Cyprus). At first glance, this option appears to be a cost-effective and attractive option; any mix of Israeli and Cypriot gas could target the Turkish market or feed into the Trans Anatolia Natural Gas Pipeline (TANAP), which will bring Azeri gas to the Turkey-Greece border.

However, the Turkey option may not be viable, either politically or commercially, for a number of reasons. Even if we assume that Turkey may need additional gas in the next decade, the construction of an Israel-Turkey gas pipeline faces two major political hurdles: the resolution of the Cyprus problem and the normalization of the frosty Turkey-Israel relations.

It is highly likely that Turkey-Israel political relations will normalize sometime in the future, but a precise timeline is hard to project. Similarly, while there are big hopes for a settlement of the decades-long dispute in Cyprus in the very near future, potential timing remains unclear. In any case, the Cyprus dispute will remain an obstacle until Turkey and (unified) Cyprus can reach agreement on the Exclusive Economic Zone, particularly in offshore areas located to the west and southeast of the island.

Despite all the rhetoric about being a regional and global leader, Turkey is becoming increasingly isolated in the region. Turkey’s souring relations with regional countries, especially Israel, have contributed to new alliances in the name of energy cooperation. Greece and RC have started to implement a pro-Israel shift in their foreign policies, despite having traditionally followed pro-Arab tendencies and maintained a fairly successful balance between the EU, the US and Russia.

In the past few years, two tripartite alliances have emerged. One is between Greece, RC and Egypt, and the other is between Greece, RC and Israel. At the same time, relations between Egypt and Turkey have deteriorated, while relations between Egypt and Israel have improved. High-level political and technical meetings have reinforced tripartite summits bringing top officials from Greece and RC together with their Israeli and Egyptian counterparts.

Deepening relations among Greece, Greek Cypriots, Israel and Egypt may create a bloc that could jeopardize Turkey’s interests in the region and change the regional balance of power at Turkey’s expense. Turkey’s worsening relations with Russia since November 2015 and the recent rapprochement between Israel and Russia could add a new dimension to the regional power balance, and might even bring Russia into this quartet. Will Russia enter into the RC and/or Israeli gas sector? What would happen if it did? These questions are open-ended; all we know is that a zero sum-game in the region will lead nowhere.

Recent natural gas discoveries and the prospect of substantial hydrocarbon resources beneath the Mediterranean seabed offer major opportunities in terms of energy security, economic prosperity and regional cooperation. The exploitation and export of these resources present numerous technical, administrative, security, legal and political challenges. Unless these resources are developed for the benefit of all the countries in the region, they may fuel disputes and add to the various frictions and anxieties in this already volatile region. In some cases they might even escalate into a full-scale confrontation.

Natural gas is not a toxic substance when inhaled. However, in a political environment it can become toxic. Whether natural gas will lead to greater harmony or increased conflict is hard to predict. But if these resources not managed carefully and wisely, the current myopic policies of the countries in question, and the levels of mutual distrust, will present further obstacles to development.

An Arab proverb says, “Four things come not back: The spoken word, the sped arrow, the past life, the neglected opportunity.” What is needed now is a balanced but pragmatic approach, enacted through a constructive and frank dialogue.^. A robust mechanism that would lead to joint exploitation of hydrocarbons resources may offer an interim solution, creating interdependencies that pave the way for regional cooperation. This could, potentially, redraw the whole political and economic map of the region in a way that benefits all parties. However, unless the actors in the region talk to each other, these opportunities will be lost, and substantive compromises are unlikely to be reached.

There is an old African proverb that says, “If you want to go fast, go alone. If you want to go far, go together.” It is up to the politicians which path they will choose. For the benefit of their people, they must go far and quickly.

^{^[1]} Unless stated otherwise the word “Cyprus” in this article refers to the name of the Island. The Republic of Cyprus, which is not recognized by Turkey, is usually mentioned by Turkish officials as the Greek-Cypriot Administration (GCA). The Turkish Republic of Northern Cyprus, which is only recognized by Turkey, is mentioned as TRNC or KKTC.

Dumping petrodollars

2016-06-24T14:06:00.001+02:00

The following article appeared on Trend News Agency on 20 June 2016. http://en.trend.az/iran/business/2548216.html

Dumping petrodollar, switching to petro-euro may be way out for Iran

After a couple of months since lifting sanctions on Iran, the country still faces a challenge in trade with the international markets, especially the oil markets, which deal with USD-based deals and payments.

Iran's Oil Minister Bijan Namdar Zanganeh announced June 17 that the country sells its crude oil to international markets only through euro.

The announcement came after a US court blocked $2 billion of Iranian assets. The US Supreme Court ruled in April that the assets must be turned over to American families of people killed in the 1983 bombing of a U.S. Marine Corps barracks in Beirut and other attacks blamed on Iran.

The restrictions imposed by the US treasury on the use of USD by Iran continues, while the process of freeing of the dollar-denominated assets (blocked during the sanctions era) of Iran, has faced delays.

Iran has previously considered abandoning use of petrodollars, so the idea is nothing new.

Sohbet Karbuz, Director of Hydrocarbons, France, Mediterranean Energy Observatory (OME) told Trend June 20 that the motive behind the idea of selling oil in euros was to end the petrodollar's hegemonic status as the monopoly oil currency and hence challenge the U.S. dollar supremacy.

"In a way, this would have major impact on the macroeconomics of 'petrodollar recycling'. However, it has long been debated what the alternative oil currency could be. Some have proposed euo, others have proposed gold or gold dinar."

The idea of selling oil in euros was first introduced in 2000. In November 2000 Iraq's former president Saddam Hussein demanded Euros for his oil.

In 2001, Venezuela started to speak about switching to euro for all their oil sales. In 2003 Iran required payments in euro for its European and Asian exports. A year later Iran announced intentions to create an Iranian oil bourse using a euro-based international oil-trading mechanism.

Karbuz added that the Tehran oil bourse was scheduled to open in 2005.

"In 2006 Russian president Vladimir Putin announced that an oil and gas stock exchange will be created in Russia that would trade in rubles. In 2007, Tehran failed to persuade OPEC members to switch away from the US dollar but at the end of 2007 Iran stopped selling oil in U.S. dollars. Libya has also been urging that oil be priced in other currencies rather than the US dollars," he said.

"Since Kaddafi was attempting to create a pan-African gold standard, he was urging African oil producers to abandon the petro-dollar, and demand gold payment for oil/gas. In 2010 Libya proposed a new currency called the Gold Dinar to replace the dollar for oil sales".

Iran's oil exports increased from around 1 million barrels per day (mb/d) in sanctions era to about 2.1 mb/d in May. Iran says its June exports soared to above 2.3 mb/d. The country's oil production also increased from 2.8 mb/d in 2015 to about 3.7 mb/d in May.

Karbuz said that from a purely economic and logical perspective, switching oil sales to euros makes sense if oil exporters’ biggest trading customers use euro. It is the case with Iran.

"If large oil and gas exporters made the switch together from the US dollar to euros, the dollar would take a hit. Perhaps this would not cause real damage to the US dollar and the US economy but if other nations follow and dump their US dollar holdings rapidly by replacing it with euro, then the result would cause an economic meltdown," he explained.

"This could happen if a coordinated large scale conversion takes in place shortly. A smaller scale and individual cases such as Syria switching all of the state's foreign currency transactions to euros from dollars in 2006 would not make a remarkable impact".

Karbuz said that now, perhaps, a more important issue that sticks out in the above given short summary, is what happened to the countries or leaders attempting to move away from the US dollar in selling their hydrocarbons.

Upstream cooperation possible between Israel and Russia

2016-06-19T22:27:00.001+02:00

My views on why Russia and Israel can cooperate in upstream sector as part of Israel's aim to attract new investors: Expert, appeared at http://aaenergyterminal.com/news.php?newsid=8651628 on June 17, 2016. The following is the edited version.

Russia and Israel's relations can develop in hydrocarbons sector, said director of hydrocarbons at the Paris-based Mediterranean Energy Observatory on Friday.

"Regulatory problems [in Israel] were removed three weeks ago, and now Israel plans to attract new investors to its natural gas sector. So an energy-oriented cooperation between Russia and Israel especially in upstream operations is possible in the eastern Mediterranean. some gas fields such as the Tanin and Karish fields might be sold to Russian companies, or Russia's Gazprom can become a new partner in the Leviathan field," director Sohbet Karbuz told Anadolu Agency in an exclusive interview.

The Leviathan field partners, consisting of U.S. Noble and Israel's Delek and Ratio Oil, may make a final investment decision soon. However, they need another partner to finance the development of the natural gas field because they alone are unable to finance it, according to Karbuz.

Therefore, Gazprom's partnership in the Leviathan may become on the agenda again, but the current financial status of Russia and Gazprom is weakening this possibility, Karbuz said.

He also highlighted the increasing presence of Russia in the east Mediterranean, and said that its position in the eastern Mediterranean is strengthening, while there is a strong possibility that the country will also participate in the Greek Cypriot administration's unilateral offshore natural gas licensing bid this summer.

According to Karbuz, Egypt and Lebanon will also hold new licensing tenders in the future in which Russia will avail of the opportunity to participate.

Russian Rosneft started to sell LNG to Egypt last month. Russian billionaire Mikhail Fridman's company, DEA, has a 35 percent stake in the country's biggest natural gas project - the West-Nile Delta Project which is worth $12 billion, Karbuz explained.

He said that a scenario in which Russia has strong energy-based cooperation in the eastern Mediterranean with Israel, Egypt, the Greek Cypriot administration and Lebanon, may put Russia into a dominant position in which it can decide the amount, direction and timing of natural gas trade from the region to other markets. He added that this would easily negatively affect the supply security of both Turkey and Europe.

According to Karbuz, the Israeli Prime Minister Benjamin Netanyahu's efforts to boost relations with Russia may have also political and security dimensions; which could be interpreted as kind of Israel's desire to fall under Russia's protection.

"In the eastern Mediterranean, an attack from Palestine, Syria or Lebanon to an energy infrastructure in which Russia has a partnership, is next to impossible," he said.

Russian President Vladimir Putin and Israeli PM Benjamin Netanyahu met four times in the past nine months, Karbuz explained.

"Netanyahu may be considering filling the power vacuum U.S. created in the region with Russia's influence for a while and send a message to the Obama administration.

Israel is also looking for Russia's support on several issues involving Golan Heights, Hezbollah, the problems with State of Palestine in UN Security Council, as well as Russia’s mediation with some of Israel’s adversaries Karbuz said.

EDITED VERSION in Turkish

appeared at http://uzmanpara.milliyet.com.tr/haber-detay/gundem/-304srail-abdnin-bo-351lu-287unu-rusya-ile-dolduracak/50307/

İsrail ABD'nin akdenizdeki boşluğunu Rusya ile dolduracak

ANKARA (AA) - Akdeniz Ülkeleri Enerji Şirketleri Birliği Hidrokarbon Kaynakları Müdürü Dr. Sohbet Karbuz, İsrail ile Rusya'nın doğalgaz sektöründe işbirliği yapabileceğini belirterek, "Düzenleyici anlamdaki sorunların ortadan kalkmasının ardından İsrail'in şimdiki amacı İsrail sularındaki doğalgaz arama ve üretim çalışmaları için yabancı yatırımcı çekmek olacak" dedi.

Karbuz, doğu Akdeniz'deki doğalgaz çalışmalarının geleceği ile Türkiye, Rusya ve İsrail arasındaki ilişkilerle ilgili AA muhabirine değerlendirmelerde bulundu.

Önümüzdeki dönemde Rusya - İsrail enerji ilişkilerinin upstream denilen arama ve üretim faaliyetinde yoğunlaşabileceğini kaydeden Karbuz, "İsrail'deki enerji düzenlemesi konusundaki problemler nihayet çözüldüğünden, İsrail'in şimdiki amacı İsrail sularında doğalgaz arama ve üretim çalışmaları için yabancı yatırımcı çekmek olacak" ifadelerini kullandı.

- "Tanin ve Karish sahaları Ruslara satılabilir

İsrail ve Güney Kıbrıs Rum Yönetimi'nin (GKRY) bölgedeki doğalgaz çalışmalarında destek bulabilmek için Rusya'yı bölgeye taşımaya çalıştığına dikkati çeken Karbuz şunları kaydetti:

"Ruslar İsrail gaz sektörüne yıllardır girmek istiyordu ama somut bir aşama kaydedememişlerdi. Şimdi ise İsrail, Rusya'ya birkaç arama parseli verebilir, belki de Tanin ve Karish sahaları (İsrail açıklarındaki) Ruslara satılır. Hatta daha öncede dile getirildiği gibi Leviathan sahasına ortak edebilirler. İsrail'in amacı kendi arama ve üretim sektöründe Rus şirketi de var demek olabilir, Ruslar GKRY'nin tek taraflı açtığı 3'üncü uluslararası arama ihalesine de büyük olasılıkla girecekler. Eğer orada yer alırlarsa İsrail'de de olmaları Ruslar için iyi olur. Rusya illaki Lübnan'da ileride açılacak ihalede de yer almaya çalışacaktır. Bu arada Ruslar Mısır’ın enerji sektöründe de yayılmaya başlayacaklar"

“Hatırlamak gerekirse Putin ve Sisi geçen sene Mısır’ın ilk nükleer santralini yapma konusunda anlaşma imzalamıştı. Rus şirketleri Mısır’ın doğal gaz sektöründe de söz sahibi olamaya başladığını göz ardı etmemek gerekir. Rosneft Mısır’a geçen Aydan itibaren LNG satmaya başladı. Rus milyarder Mikhail Fridman’ın sahibi olduğu LetterOne Group geçen sene DEA ‘yı satın almıştı. DEA Mısır’ın en büyük doğal gaz projesi olan ve BP’nin operatörlüğünü yaptığı 12 milyar dolarlık West Nile Delta projesinde %35 paya sahip. Gazprom dahil diğer Rus şirketlerinin Mısır’ın yakında açacağı uluslararası ihaleye katılması da son derece olası” dedi.

“Eğer bu bahsettiğim senaryo gerçekleşir yani Rusya İsrail, Mısır, Lübnan, Güney Kıbrıs ve Suriye doğal gaz sektörüne girerse, bölgedeki her ülkede faaliyet gösteren tek ülke konumuna gelecek. Bunun jeopolitik yansıması bir kenara, bölgeden doğal gaz ihracatının yönünü, zamanlamasını ve miktarını belirleyebileceğinden Avrupa ve Türkiye dahil gerek doğal gaz arz güvenliği gerekse uluslararası gaz piyasalarına etkisini gelin siz düşünün” diye ekledi.

İsrail'de doğalgaz sahalarının ticarileştirilmesini geciktiren Yargıtay kararının hükümetin hazırladığı düzenlemeyle kalkmasının ardından Leviathan sahasında çalışan uluslararası şirketlerin önümüzdeki aylarda nihai yatırım kararı almasının olası olduğunu belirten Karbuz, "Ancak finansman temin etmek için gaz satım anlaşmaları imzalamaları gerekir, çünkü ortaklar saha geliştirme masraflarını tek başlarına finanse edemezler" dedi.

Saha geliştirme sürecindeki finansman ihtiyacının kaşılanması için Rus Gazprom'un sahaya ortak edilmesinin tekrar gündeme gelebileceği öngörüsünde bulunan Karbuz, Gazprom'un ve Rusya'nın şu andaki mali durumunun ise böyle bir olasılığı ticari açıdan zorlaştırdığını kaydetti.

- Netanyahu'nun siyasi amaçları bağlamında İsrail - Rusya ilişkileri

İsrail Başbakanı Netanyahu'nun Rusya ile yakınlaşma çalışmalarının amacının ise daha ziyade politik olduğunu belirten Karbuz, "Netanyahu, koltuğunu kaptırmamak icin her çareye başvuran biri, Rusya yanlısı ve Türk düşmanı olan Liberman’ı savunma bakanı yapması bunun en güzel örneği. Israil icin Rusya ile iliskileri geliştirme kapsamında enerji boyutu olmazsa olmazlardan ancak bunun formatının nasıl olacağını belirlemek için yeterli veri yok. Şunu da belirtmek gerekir ki Rusya’nın ortak olduğu veya yönettiği bir gaz sahası veya boru hattı bir altyapı projesine Filistin, Suriye ve Lübnan’dan bir saldırı düzenlenmesi olasılığı nerdeyse sıfıra yakınlaşacağından İsrail bir şekilde güvenlik baş aşrısını da azaltmış olacak."

Geçen 9 ay içinde Putin ve Netanyahu'nun 4'üncü kez görüşmesinin çok dikkat çekici olduğunu kaydeden Karbuz, bu görüşmelerde Netanyahu'nun asıl amacının ABD'nin bölgede oluşturduğu boşluğu bir süreliğine Rusya'yla doldurarak çıkarlarını geliştirmeye çalışmak olduğunu belirtti.

Karbuz İsrail'in Rusya görüşmelerindeki diğer amaçlarını ise şöyle sıraladı:

"Suriye'de askeri ve istihbarat işbirliğini arttırmak, İranla ilgili çekincelerini paylaşmak, Golan Tepeleri konusunda Rusya'nın ses çıkarmamasını sağlamak, Hizbullah konusunda destek aramak, Filistin Devleti konusunda BM Güvenlik Konseyi'nde güçlü bir desteği arkasına alma arzusu, ABD Başkanı Obama'ya mesaj vermek, Suudi Arabistan ve Mısır'la olan iyi ilişkilerini kullanarak bölgede arabuluculuk oynamak ve İsrail'deki Sovyet Rusya kökenli yahudilerin oylarını almak"

Karbuz, uzun vadede Türkiye'nin Rusya ve İsrail'le ilişkilerinin düzeldiği bir senaryoda, doğu Akdenizde Rusya gibi bir aktörün olmasının, Rusya'yı bölge ülkeleri arasındaki politik sorunların çözülmesinde bir aktör konumuna getirebileceği ve bölgedeki önemini arttırabileceği değerlendirmesinde bulundu.

Missing barrels phenomenon

2016-03-24T16:03:00.001+01:00

A recent piece by Platts asks whether the hoo-ha over the 800,000 b/d “missing barrels” in 2015 flagged by the International Energy Agency in its March Oil Market Report (OMR) gone a bit too far.

The “missing barrels” is the uncertainty in the supply/demand balance, or the difference between the IEA’s estimate of daily global oil supply and demand.

In its March OMR, the IEA said this: “We have also re-analysed our data for floating storage and oil in transit and further reduced the uncertainty in the supply/demand balance that is described as “missing barrels”. The figure usually described as such is now 0.8 mb/d, well within the normal range considering the vagaries of oil data.

“According to the revised Miscellaneous to balance line, non-OECD stocks could have added up to 1.1 mb/d in 4Q15. Following a revision to quarterly floating storage and oil in transit data, it has been discovered that a portion of these volumes were misallocated in 2015 only. Consequently, the quarterly floating storage and oil in transit data for 2015 (the misallocation did not affect annual volumes) have been revised with implications for the Miscellaneous to balance line item.”

A bit background from my September 13, 2005 post: Missing Barrels are Back

Once upon a time there was a "missing barrels" story. The story goes back to 1998/1999 when the Oil Market Report (OMR) of the IEA was blamed for the reason of price panics of 1999. The report became under attack when it showed almost 2 Mb/d stock built and miscellaneous to balance for the year 1998 in its Annual Statistical Supplement - the perceived existence of ‘missing barrels.

Several speculations have been made about ‘missing barrels.’ Mabro stated that there was an upward bias in IEA’s production estimates. Horsnell claimed that ‘missing barrels’ were almost certainly comprised of firstly an underestimation of World oil demand, and secondly an overestimation of OPEC supply. Matt Simmons emphasized that ‘missing barrels’ simply cannot be true because it is not possible to hide that much oil even though there exists many off-shore storage facilities, meaning something is wrong with the data.

The IEA broke down 2 Mb/d “missing barrels” into its components and reduced it to 1.6 Mb/d. Later on, the case was closed.

We witness another price panic in 2005. This time, the prices go up. Apparently, supply cannot meet ever increasing demand, because Chinese are drinking oil! Therefore, the IEA and all others demand production increases.

The August 2005 issue of OMR shows that in the 2Q2005, some 2.7 Mb/d is “missing,” the biggest ever “missing barrel” reported in the OMR, if I am not wrong. If 2.7 Mb/d produced oil is somewhere out there, why the prices are going up? Is it that easy to stock that much oil, as Simmons once argued? If yes, why are we crying for more oil? Or am I missing something?

On May 24, 2006 I wrote again on Missing Barrels (What Oil Market Fundamentals?or see http://dev.energybulletin.net/node/16745 )

The Oil Market Report of the IEA was blamed for the reason of price panics of 1999. The report became under attack when it showed 1.9 Mb/d stock built and miscellaneous to balance for the year 1998 in its Annual Statistical Supplement - the perceived existence of ‘missing barrels.’ Recently, those “missing barrels” came back on the world oil balances and yet nobody makes any comment. In fact, there has never been “missing barrels,” there has been missing statistics! Or bad statistics.

On January 29, 2015 I wrote another piece: Interesting things in world oil balance tables

There I underlined that: conversion factors (from metric ton to barrels) are the Achilles' heel of the world oil supply-demand tables. Note that the figures in the IEA’s oil supply-demand tables are expressed in thousand (or million) barrels/day which are converted from metric ton using volume to mass ratios in barrels/ton. OECD Member countries report their oil statistics in metric tons. All those figures are then converted to barrels at the IEA by using…, well that’s the main problem.

AND I have written several times on my blog that the US military oil consumption abroad does not appear (missing) in world oil supply balance sables, including Table 1 of the IEA. My estimates are given in the Table below.

So, everybody must get the statistics right before blaming the IEA!

Post-Sanctions Iran and Oil Markets

2016-02-02T14:32:00.001+01:00

I wrote the following piece originally for IRNA, the official news agency of the Islamic Republic of Iran, on 22 January 2016.

Since the end of 2015, both international crude oil benchmark prices, US West Texas Intermediate and UK Brent, lost more than 20% and expectations are that this decline will likely continue at least until mid this year because of a simple reason. Severe oversupply and weak demand unite to reduce oil prices.

In its latest oil market report on 19 January 2016, the International Energy Agency said the world could face an estimated excess 1.5 million b/d (barrels per day) of crude supplies in the first half of 2016. The same day the International Monetary Fund revised its global growth forecast downwards by 0.2 percentage point, to 3.4% for 2016, due mainly to a weaker pickup in emerging market economies and a weaker-than-expected US expansion than was forecast in October 2015. This means that supply demand imbalance can be expected to widen. In other words, the excess could be even more than what the IEA estimates. In its report the IEA’s answer whether the oil price could continue to fall was “an emphatic yes”. Today, it would perhaps use a stronger phrase.

Already weakened markets cannot absorb new supplies. Iranian exports will most likely add to already oversupplied world oil markets. The US and EU lifted key sanctions against Iran in January, removing constraints that have capped Iran’s oil exports at 1 million b/d over the past four years. Iran’s return to the oil market brings three main questions forward: Quality, quantity and timing of oil that Iran can and will offer to the market.

How much Iran can ramp up its production and export is a debated issue. It is yet to be seen whether Iran will boost its output by an immediate 500 kb/d plus an additional 500 kb/d within six months as was proclaimed by Iranian officials. What is clear so far is that Iran will have to reduce its big piles of condensates stored at sea. This might be not as easy as thought previously because current market conditions may make it difficult to market.

In fact the delicate issue is not so much about the quantity of additional Iranian oil could be flowing to world markets or the quality of it, but what kind of policy Iran will be aiming for inside OPEC and in international markets.

Inside OPEC Iran, who was the second largest producer inside the organization before sanctions, may fight for its desired place in terms of production capacity and quota. This would create another tension between Saudi Arabia and Iran who are already not in good terms due to their contrasting policies in the region. This means that Saudi Arabia and Iran will unlikely to agree on anything within OPEC.

It seems that Iran will try to regain its market share in Euro-Mediterranean market by offering attractive terms if necessary and hence compete directly not only with Saudi, Iraqi and Russian oil but also with the US oil. It should be noted that after restrictions were lifted on the US crude exports, now US crude will compete with others. The first US oil tanker arrived in Europe on January 20.

On the demand side, growth has remained fragile because of weak economic sentiment in major emerging markets as well as in some advanced economies, the expectation of rising interest rates in the US dampened indirectly economic growth and slowed the increase in oil consumption, mild winters in major oil consumers which undercut seasonal demand for heating oil, shrinking subsidies in some markets which sharply increased fuel prices, and a strong US dollar which has also exerted downward pressure on crude oil.

A combination of new supplies to already oversupplied market and weakened markets due to sluggish demand growth will lead to an increasing inventory builds and hence put more pressure on prices to go down. At least this is the case for the physical barrel market. Current market fundamentals and expectations of traders about the future are reflected in the prices in the paper barrel market, where many other factors which are not directly related to oil market fundamentals come into play. When looked at this angle, it would not be surprising that oil prices declined along with declining stock market indexes worldwide. The daily average traded volume during December in Nymex WTI and ICE Brent crude futures was equivalent to around 1.5 billion barrels, 16 times more than the daily world oil production. Currently the paper barrel market is in contango (whereby near-month futures are cheaper than those expiring further into the future).

So, what should Iran do in this highly volatile price environment? Flood the market with additional oil which makes the over-supply situation worse, and let the oil prices, which trade near a 12 year low, slide further? Insist on bringing an extra 1 million barrel per day of oil into the market within this year, and hence cause further irritation in the paper barrel market?

Maybe the first thing Iran should do is to avoid aligning with the Saudi oversupply strategy. That strategy was supposed to pressure Russia and other OPEC members, cause delays in large conventional upstream projects, crowd out higher-cost producers from the market and at the same time preserve its market share even with low prices. Instead, it helped brining the oil prices below $30 per barrel. Seen from this perspective, what Iran should not do is to significantly increase its production before selling its stored oil and get into a price war with Saudi Arabia.

It is better for Iran to think long term: invest today in future production capacity and aim to sell the oil at the highest possible price possible. In the short term this translates into increasing oil production only gradually and giving priority to the stored oil for exports. Equally important Iranian officials should speak with one voice, and avoid making statements that would create further negative sentiment in oil markets. Last but not least, time has come for Iran to be more active inside OPEC. Iran should help setting a new course for the organization which is in danger of becoming irrelevant.

3 Elephants, 3 Monkeys and COP21

2015-12-10T10:54:00.001+01:00

A tweet from the IEA on December 9, 2015 says that ‘without addressing the energy sector, we have zero chance of reaching our climate change goals”. In fact, with ignoring three big elephants we already have a zero chance! And people in COP21 are playing the three monkeys!

The elephants are:

· International Marine Bunkers

· International Aviation Bunkers

· Military Energy Use (Abroad)

Aviation and maritime bunker fuels are not included in national emissions totals, hence excluded from emission reduction commitments.

Emissions from aviation and marine bunkers were respectively 90% and 64% higher in 2013 than in 1990. In 2013, they represented 3.4% of the world’s CO2 emissions, according to the IEA. In absolute values, CO2 emissions from Int’l aviation and marine bunkers were 1099 Mt in 2013, equivalent to those of the African continent!

2015 Edition of the IEA’s CO2 EMISSIONS FROM FUEL COMBUSTION says” It is interesting to note that despite efforts to limit emissions from international transport, emissions from marine and aviation bunkers, 64% and 90% higher in 2013 than in 1990 respectively, grew even faster than those from road.” (Page 11). It will surely grow fast also in the future.

Int’l Aviation and Maritime emissions were omitted from national commitments under the 1997 Kyoto Protocol, which ceded control to the UN agencies responsible for the sectors, the International Civil Aviation Organisation (ICAO) and the International Maritime Organization (IMO). But their performance have long been criticised my many. The Clean Shipping Coalition has been calling on countries participating in the Paris Climate Change Conference (COP21) to agree that the International Maritime Organisation (IMO) should set targets and agree emissions reduction measures. See also, http://www.elephantsintheroom.eu/, The Elephants in the Room, and http://www.aircrap.org/2015/11/15/jet-pollution-exempted-from-paris-climate-agreement/

In the latest COP21 draft climate agreement int’l aviation and shipping emissions do not appear.

According to a Reuters article: Officials from Europe, which has pushed particularly hard for a reference to the sectors, said they hadn't given up. "I don't know who got it out but we are fighting for it to be put back in," EU Energy and Climate Commissioner Miguel Arias Canete told Reuters. He said not having shipping and aviation in the new text was a "a step backwards".

Armed forces are large contributor to global greenhouse gases emissions

Let’s go back again to the IEA’s book on CO2 emissions statistics. It says: “The IEA has found that in practice most countries consider information on military consumption as confidential and therefore either combine it with other information or do not include it at all.” (Page 21).

I don’t know all the militaries but what I know is that the US military emissions abroad are exempt from national reporting requirements under U.S. law and the U.N. Framework Convention on Climate Change.

Many other people, except perhaps for those in COP21, know that too.

The extensive global operations of the US military (wars, interventions, and secret operations on over one thousand bases around the world and six thousand facilities in the United States) are not counted against US greenhouse gas limits military emissions.

“The Pentagon has a blanket exemption in all international climate agreements,” says Sara Flounders, at http://www.iacenter.org/environment/pentagon-climate091614/ See also http://www.truth-out.org/news/item/3181:the-military-assault-on-global-climate#3, http://sandiegofreepress.org/2014/11/the-us-military-is-a-major-contributor-to-global-warming/

In per capita bases, the US military is the largest emitter of Greenhouse Gases

Note: The data refers to 2012. OECD US military. OECD GHG emissions are from https://stats.oecd.org/Index.aspx?DataSetCode=AIR_GHG . The DOD GHG emissions are taken from the US DOE Comprehensive Annual Energy and Water Use Reports at http://ctsedwweb.ee.doe.gov/Annual/Default.aspx?ReturnUrl=%2fAnnual%2fReport%2fReport.aspx. The US military manpower (active duty and civilians) are taken from DMDC https://www.dmdc.osd.mil/appj/dwp/dwp_reports.jsp (sept 2012)

Most people will tell you that the US military energy consumption is only a tiny part of the overall US energy consumption. True, but in absolute values. In per capita bases? See the chart below, which compares the DOD GHG emissions with OECD countries, and tell me!

DoD Energy Usage 2015 Update

2015-07-14T00:20:00.000+02:00

The US Energy Information Administration reported (for the first time) on February 5, 2015 that the US Defense Department (DoD) energy use fell to 0.75 quadrillion British thermal units (Btu) in fiscal year (FY) 2013, the lowest recorded level since at least FY 1975. In fact in FY 2014 it fell further, to 0.73 QBtu. Energy costs, however, increased from 11 billion USD ((in Adjusted Constant FY 2014 Dollars) to almost 19 billion USD over the same period. The reason? Oil prices!

Source: karbuz@blogspot.com, based on data from U.S. Department of Energy Federal Energy Management Program

Energy usage within DoD is divided into two areas: installation energy and operational energy. Installation energy is the energy required to run and operate military installations, which is mainly energy used in buildings but also energy used by vehicles not on combat missions. Operational energy is the energy required for transporting, training, and sustaining personnel and weapons specifically for military operations.

Between 1975 and 2001, Operational energy accounted for (in general) 70% of total DoD energy use. After 2001, its share exceeded 70%. The reason? Global War on Terror, as once called. The US war machines run oil. This is why the share of operational energy costs in total DoD energy costs also increased substantially, due to both the amount of oil consumed and the increase in oil prices.

Source: karbuz@blogspot.com, based on data from U.S. Department of Energy Federal Energy Management Program

Operational energy costs have declined in the past couple of years thanks to declining oil consumption and particularly falling oil prices in 2014. Despite that the DoD consumed AT LEAST 95 million barrels of oil (about 260,000 barrels per day) in 2014 at a cost of 15 billion dollars. Yes, AT LEAST, because I do not believe that oil consumed by the US military overseas is properly counted. I am ready to challenge any one, including the DoD officials, on this issue.

The DoD's Annual Energy Management Report (latest one is for FY2013) estimates energy consumption across almost 300,000 buildings worldwide from more than 500 installations. Overall, the U.S. Army uses the largest portion of installation energy (34%), while the US Air Force uses the largest portion of operational energy (53%), mostly jet fuel.

Source: FY 2013 Department of Defense Annual Energy Management Report, FY 2013 Department of Defense Operational Energy Annual Report

DLA Fact book for 2014 shows that the ranking of operational energy use (virtually all is oil) among DoD services has not changed much in 2014: Air Force (53%), Navy and Marines (30%), Army (16%), and other defense services (1%).

Interesting things in world oil balance tables

2015-01-29T22:36:00.000+01:00

“Great part of the information obtained in War is contradictory, a still greater part is false, and by far the greatest part is of a doubtful character” - Carl von Clausewitz.

If Clausewitz were alive, he would perhaps say the same thing for world oil statistics. In my previous post I tried to demonstrate that you can come up with a completely different picture if you take world oil supply estimates from one source and world oil demand figures from another. In this post I would like to draw your attention to some interesting things in world oil balance tables.

One of the strangest items in the IEA’s OMR is “Miscellaneous to balance” that appears at the IEA’s famous Table 1- WORLD OIL SUPPLY AND DEMAND. The footnote on the table defines it as “Includes changes in non-reported stocks in OECD and non-OECD areas.” It was 1.0 mbd in 2Q14 (oh well, also -1.4 mbd in 3Q13). 1 million barrels per day of unknown oil (to me) in 2Q14 but nobody talks about it.

Do you remember the “missing barrels” phenomenon (try a Google search you will understand what I mean)? The late Matthew R. Simmons had written a few good articles (including this one). (See also my posts on May 24, 2006 What Oil Market Fundamentals? And Missing Barrels are Back on 13 Sept 2005.)

At that time I was working at the IEA and I was asked to investigate the reasons. I came up with some reasons and suggestions. They were simple. This is why they were mostly rejected. One of those was on conversion factors. It was ignored at that time but was partially applied years later.

Today, I say it again: conversion factors (from metric ton to barrels) are the Achilles' heel of the world oil supply-demand tables. Note that the figures in the IEA’s oil supply-demand tables are expressed in thousand (or million) barrels/day which are converted from metric ton using volume to mass ratios in barrels/ton. OECD Member countries report their oil statistics in metric tons. All those figures are then converted to barrels at the IEA by using…, well that’s the problem.

Crude oil barrel-ton conversion factors usually vary by country but interestingly not by year (except for some rare exceptions). See oil documentation. For instance, crude oil production in Norway and UK go down but barrel-ton conversion factor has always been constant (7.37). Anyone in oil business knows that oil gets heavier especially during the post peak period.

Barrel-ton conversion factor may not be too important. What I have been saying for more than a decade now is that it is chemical and statistical crime to keep barrel-ton conversion factors constant for all years and for all countries (there are very few exceptions).

Coincidentally I found out that in the 2014 Edition of the IEA’s Energy Statistics barrel-ton conversion factor for Motor Gasoline is different from the previous edition. Motor Gasoline here refers to gasoline excluding biofuels. Previously it was 8.25 for almost all OECD countries and 7.93 for nearly all non-OECD countries. This means 1 metric ton of gasoline equals to 8.25 barrels in OECD and 7.93 barrels in non-OECD countries. In the 2014 Edition this factor was changed to 8.53, for most of the countries in the world, OECD and no-OECD alike. In other words the conversion factor was increased by %3 to 7%. (I skip here why and whether it makes sense).

Since the gasoline consumption by country in metric tons hasn’t changed in the IEA’s energy statistics database, consumption figures in barrels should have changed by the same magnitude of the change in conversion factor. According to my rough calculations world gasoline consumption in terms of barrels should have been increased by around 5%. This was not the case, however. World gasoline consumption in barrels remained the same. The reason? I don’t know. I use metric ton figures for my work anyway. So, no impact on my work. But it is highly likely that the IEA’s energy statistics (hence OMR) understates the world gasoline demand in barrels, and hence the world total liquids demand by around 5%. Yes, small in percentage but it makes around 1.5 mbd. Maybe I am doing something wrong. Please correct me.

Now let me jump to another issue: Processing Gains. Compared to the year 2000, in 2013 an additional amount of some14 mbd of petroleum products were produced in the refineries globally. But over the same period the refinery (or processing) gains increased by only 0.4 mbd (from 1.8 mbd in 2000 to 2.2 mbd in 2013). Refinery gains worldwide in 2013 are shown as 2.1 or 2.2 mbd in OPEC and IEA oil balance tables. We know that in 2013 the processing gain in the US was 6.9% or 1.07 mbd for total net refinery production of 12.1 mbd. This means that the US accounts for half of the global processing gains despite the fact that only 15% of world refined products are produced in the US. Does this make sense? Not to me.

Conversion factors affect the US EIA and OPEC as well. Remember, not all countries in the world report their oil supply and demand figures in barrels. The original unit must be converted into barrels. Processing gains is also another item both EIA and OPEC should look into very carefully, and stop copying the IEA’s figures.

If you are interested in conversion factors see for instance an article I wrote 11 years ago (Conversion factors and oil statistics, Energy Policy, Jan 2004).

In sum, oil industry needs good data. This requires putting more money and resources on statistics. Scrapping the budgets in national statistics offices may lead to the erosion of data quality and coverage, particularly on oil demand.

Sad Situation of World Oil Markets

2015-01-16T19:24:00.002+01:00

There are 3 most important information sources about the developments in the world oil markets: IEA’s Oil Market Report (IEA OMR), OPEC’s Monthly Oil Market Report (OPEC MOMR) and the US EIA’s reports, particularly Short Term Energy Outlook (STEO). Everyone who follows the oil markets closely read at least one of those resources, particularly the world oil supply-demand balance tables those reports, regularly. Each institution produces those tables in a different format but they basically contain the similar flows.

To me the best and most comprehensive source of data is the IEA, at least for the OECD countries because all the energy statistics are submitted to the IEA by the governments (legally binding). Quality and definition of the data coverage vary among those sources.

All the 3 sources mentioned above provide monthly production data, which are relatively easy to find. Demand data, however, are provided (usually) quarterly despite more than half of the countries in the world do not collect quarterly oil demand statistics. For many countries in the world we do not have yet (as of January 2015) even the oil demand data for the year 2013. Therefore, whatever you see in those 3 sources for 2013 (logically also for 2014) world oil demand is not more than an estimate. Then how come we have quarterly or monthly demand figures for 2014? Good question. God and the people who make up those numbers only know where they originate from!

Let me put bluntly: analysts try to interpret the daily sings in oil prices based on available estimates for oil production in previous month (in poor quality and revised very frequently) and guesstimates for oil demand in previous quarters. Data for stock changes in most non-OECD countries, if you believe me, are one of the wildest guesses that appear in oil supply-demand balance tables. Isn’t that great?

And yet, we have been hearing, reading, listening in the media since July last year that the price of oil continues to collapse as rising supplies collided with weak demand growth, or prices plunge as oversupply weighs on market. Is that really so? How do you know? Well, yes, the world oil supply-balance tables indicate so! But at least half of the numbers in those tables for 2014 are estimates, no?

Let us look at summary world oil supply-demand balance tables of the IEA, EIA and OPEC, all released in January 2015. Note that I re-arranged the tables in order to have a kind of similar main aggregates. I focus only in 2014.

Table: Comparison of World Oil Supply Demand Estimates

There are a few quite close matching rows. The first one is OECD demand. Why? Because the source is the same and IEA data for OECD oil demand, in my opinion, is next to impossible to challenge. Non-OECD oil demand figures vary as much as 1 mbd (million barrels per day).

Total supply figures sometimes do not show processing gains and biofuels production separately. Therefore you cannot make one-to-one comparison for OECD. But if you include all biofuels production and processing gain figures into the OECD line, you get make a rough comparison. What else you can compare is the OPEC figures. But they do not match at all. Sure, why should they? Even OPEC uses secondary sources in its world oil supply-demand tables. (Note: According to secondary sources OPEC crude oil production in 2013 was 30.198 mbd. But it was 31.599 according to the direct communication of OPEC with its members. See pages 61 and 62 in OPEC MOMR Jan2015. Funny, no?).

Which supply-demand numbers should we believe? Well, if you take one source alone, you will see excess supply for each quarter in 2014. BUT if you think that IEA is the most reliable for world oil demand and OPEC for world oil supply, then you would get the pink shaded area as balance, i.e., demand is in excess of supply.

Chart: Comparison of World Oil Supply Demand Estimates

This chart in fact summarizes the situation of the world oil statistics. How sad!

In the next post, I will dig a bit deeper to show some funny things.

The US military and biofuels, again

2014-05-11T13:04:00.000+02:00

I am back, kind of.

After reading two recent reports on the US military and biofuels I felt obliged to write again and continue my criticisms.

The first report provides a solid background: Federal Activities Support Development and Usage, but Long-term Commercial Viability Hinges on Market Factors, GAO-14-407, May 7, 2014.

It reminds us the U.S. Navy’s aim of using about 336-million gallons of alternative fuels annually by 2020. And the Air Force’s goal of increasing the use of drop-in alternative jet-fuel blends for non-contingency operations to 50 percent of total consumption by 2025 (it currently consumes more or less 2.5 billion gallons of jet fuel each year).

It also states that the US Department of Defense purchased about 1.5-million gallons of alternative jet fuels to conduct the department’s testing and approval activities from fiscal years 2007 to 2013 at a total cost of almost $40 million (In fact, the correct number is more than $70 million, not adjusted for inflation).

More money will be spent in the future. USDA, DOE, and the Navy intend to contribute $170 million each over 3 years, for an aggregate total of $510 million for biofuel efforts. DOD plans to issue solicitations in 2014 for the purchase of about 80-million gallons of any combination of jet and marine diesel fuels in 2015 that are blended with at least 10 percent alternative fuels. USDA will contribute up to about $161 million.

The second report is titled “Green Peace: Can Biofuels Accelerate Energy Security?” (JFQ 73, 2nd Quarter 2014), by Commander John E. Gay, Deputy Public Affairs Officer of United States Fleet Forces Command, USN.

A well written article (despite some outdated data and missing facts) criticizing the US military’s biofuels efforts. It is very unfortunate that he does not mention at all any article of Captain T.A. ‘Ike’ Kiefer, for instance, Energy Insecurity: The False Promise of Liquid Biofuel. (see a summary at my blog Twenty-First Century Snake Oil and also here).

Commander Gay reiterates that “it is unlikely that the costs of biofuels will ever become more competitive than fossil fuels. Biofuels do not offer the same energy density as petroleum-based fuels. Ethanol contains 33 percent less energy per gallon than gasoline and biodiesels contain about 8 percent less energy than petroleum-based diesel fuels. Lower energy density has a direct negative effect on battlefield energy security. That means operational vehicles using biofuels will travel less distance per tank of fuel, thus requiring more fuel to accomplish the same mission. This results in additional logistics requirements in the form of more fuel that will have to be delivered to the troops.”

He argues that biofuels are counterproductive to national energy security for four primary reasons. (1) the cost of biofuels is directly linked to the cost of petroleum. (2) they are not currently available in the quantities needed to meet military demand and it is unlikely the industry will ever be capable of producing a sufficient supply. (3) their energy density is significantly less than fossil fuels, and less energy density means less fuel efficiency. Less fuel efficiency means more fuel convoys will be needed to meet the military’s mission, increasing costs and risks to Service members.(4) the greater demand for biofuels feedstock will foster global threats and as a result may increase the likelihood that the US may have to deploy forces to new threat areas.

He also poses a good question “should the military—the branch of government responsible for national security—be responsible for investing its limited resources as a venture capitalist to jumpstart a biofuels industry and be forced to purchase fuels at 10 times the cost of readily available petroleum-based fuels? Not only does this not make good economic sense, but it also puts our national security at risk.”

We already have heard plenty of times these sorts of questions. What happened? Nothing! It seems that something making economic sense is often considered nonsense by the DoD. Examples are many. For instance, the US armed forces spent billions of dollars on military uniforms (around $300 million on camouflage uniforms in 2011 alone). The Economist published a nice article on 12 April 2014 with subtitle “expense and stupidity too big to camouflage”. Are biofuels much different?

How Much Energy Does the U.S. Military Consume? – An Update

2013-08-05T22:33:00.003+02:00

Since the beginning of the 20th century energy has been a critical factor for armed forces worldwide. From the end of the Cold War to the first year of the 21st century, the U.S. Department of Defense’s (DoD) energy consumption dropped by some 40 percent, but with the Global War on Terror it has started increased again.

The US Department of Defense Energy Consumption

In fiscal year 2012, the DoD consumed 827 trillion Btu of site delivered energy at a cost of 20.4 billion dollars. While consuming that amount of energy, DoD emitted 70 million metric tons of CO2. And yet, total DoD energy use and costs are higher than those given above simply because the energy use and costs arising from the contractors to support military operations both domestically and abroad are not included in DoD’s data.

The US Department of Defense Energy Consumption, Costs, and CO2 Emissions in FY 2012

The DoD accounted for around 1 percent of the US energy consumption and 80 percent of the federal government energy consumption. Although this may seem small, the fact is that the Pentagon is the largest single consumer of energy in the World. Nigeria, with a population of more than 160 million, consumes as much energy and emits as much CO2 as the US military.

Operational energy use (the energy required for training, moving, and sustaining military forces and weapon platforms) have accounted for three quarters of the DoD’s total energy use over the past two decades. Oil accounts for virtually all of DOD operational energy consumption. The Air Force is the largest operational energy consumers, accounting for half of the DoD’s total operational energy consumption. It is followed by the Navy (33%) and Army (15%).

Facility energy use (the energy needed to power fixed installations and non-tactical vehicles) has made up the rest. Electricity and natural gas accounts for over 80% of DOD installation energy consumption, mirroring that of the US commercial sector energy supply mix. With its share of 37%, Army is the largest consumer of facility energy, followed by the Air Force (30%) and the Navy (28%).

The U.S. is the strongest military power in the world and just like any other military in the world, energy, in particular energy derived from oil, is at the heart of that power. Oil accounted for almost 80% of total DoD energy consumption, followed by electricity, natural gas and coal in 2012. DOD pays immense effort for reducing its dependency on conventional oil and seeks ways to use alternative and renewable energy sources. Despite all these efforts, only negligible share of the DoD’s total energy consumption comes from renewable sources.

The DoD Energy Consumption 2012

The DoD runs on oil. Despite its daily oil consumption has been declining from almost 400,000 barrels in 2004 to less than 350,000 barrels in 2012, the DoD is still the single largest oil consumer in the world. There are only 35 countries in the world consuming more oil than DoD. The U.S. Air Force is the largest oil consumer within the DoD services.

The US Department of Defense Oil Consumption and Costs

The military is aware of its dependence on energy in general, and oil in particular. This dependence can lead to financial, operational, and strategic challenges and risks. This is why, energy is considered one of the DoD’s top transformational priorities, and 2010 Quadrennial Defense Review addressed energy for the first time as a strategic issue.

The US military has emerged as the World’s one of the biggest adopters of clean technologies. Although the DoD has already become a leader and promoter in some areas of renewable energy, it is yet to be seen whether it will be able to reduce its energy use, create viable alternatives and wean itself off oil. All the DoD services have already put in place numerous energy related goals, initiatives and strategies, which also pose several potential policy and oversight issues for Congress.

However, in my opinion the most urgent issue the DoD must tackle urgently is the degrading data quality concerning where, how much, what type of energy is consumed; their costs as well as environmental footprint. Until and unless this issue (especially on operational energy) is seriously handled all the DoD efforts on energy and environment are not more than a big empty rhetoric.

Future of Biofuels in the Pentagon

2013-05-08T23:22:00.000+02:00

On 27 February 2013 Chuck Hagel has become the 24th Secretary of Defense. Before and after that day there has been much discussion about his possible position vis-à-vis energy in general and biofuels in particular.

Many agreed that Secretary of the US Department Defense Hagel suggests vague support for continued military use of biofuels, reported Grist, an environmental news website, in January 2013. Similar conclusion was reached by others as well, i.e., Hagel backs Pentagon’s biofuels program, ban on dirtier fuels, Pentagon nominee Hagel endorses ban on high-carbon defense fuels. If someone is politician it is usually impossible to understand where she/he really stands. Hagel is not an exception.

Let me provide a small background about Hagel and energy.

Hagel listed seven principles in his article A Republican Foreign Policy appeared in the July/August 2004 issue of Foreign Affairs. Number 2 was on energy:[1]

2) Do Not Ignore Global Energy Security: “Discussions of U.S. energy policy are often detached from economic and foreign policy. The United States has an interest in assuring stable and secure supplies of oil and natural gas."

Hagel believes that climate change is a national security threat. "I don’t think you can separate environmental policy from economic policy or energy policy," Hagel told Grist in a 2005 interview.

In September 2007 Chuck Hagel (then Republican Senator from Nebraska) told to law students of Catholic University what he thinks about the war in Iraq: "People say we're not fighting for oil. Of course we are... They talk about America's national interest. What the hell do you think they're talking about? We're not there for figs."

In the spring of 2010, Chuck Hagel was nominated to serve on the Board of Directors of Chevron. He seems to be a realist. You decide where he stands by looking at his voting record on energy and environment.

General expectation was that the Pentagon’s biofuels program will remain strictly a research-and-development effort. Sharon Burke also said that the Pentagon does not plan to buy massive quantities of biofuels until their prices are comparable to petroleum products.

But, in March 2013, Gevo entered into a contract with the Defense Logistics Agency to supply the U.S. Army with 3,650 gallons of renewable jet fuel to be delivered by the second quarter of 2013. This initial order may be increased by 12,500 gallons. All shipments will be at a fixed price of $59 per gallon during the initial testing phase. These shipments are in addition to the renewable jet fuel supplied to the U.S. Air Force (USAF) and the U.S. Navy (USN).

This contract is indeed contradicting what Hagel was arguing so far. But he cannot be blamed because the contract was perhaps agreed before his nomination. He seems to be a pragmatic man. We will see whether he will get the biofuels from bio fools or not.

I repeat, I am not against biofuels or biofuels technologies. I am against picking specific winners in energy technology instead of leaving the decision to the market, pushing to create an industry with taxpayer guaranteed loan, and prematurely spending millions of dollars to bring unworkable and uneconomic programs.

Biofuels Waste Encouraged by Angels

2013-04-02T22:46:00.001+02:00

In my previous post and in many others I have been saying that it is not the US Defense Department’s job to push an uncompetitive industry with tax payers’ money, especially at a time of fiscal cliff.

On 14 March 2013, U.S. Senator Pat Toomey (Pennsylvania Republican) filed two amendments that aim to slash biofuel spending from H.R. 933, a military appropriations bill (Department of Defense, Military Construction and Veterans Affairs, and Full-Year Continuing Appropriations Act, 2013).

One amendment offered by Sen. Toomey would transfer $60 million in funding currently allocated for the DOD biofuel program under the heading for advanced drop-in biofuel production, and reassign it to support military operation and maintenance expenses of the DOD in connection with programs, projects and activities. The second amendment would reduce the amount of funding allocated to the military’s alternative energy research by a total of $114 million. The funding would also be reallocated for operation and maintenance expenses.

He proposed these amendments after learning that the Tobyhanna Army Depot plans to lay off 418 civilian contract employees. “it makes little sense to waste money on inefficient, overpriced energy sources when we could use those same funds to help support critical maintenance services for the warfighter,” he said in the statement on his website. (Sen. Toomey Offers Amendment Supporting Military Installations In Pennsylvania And Nationwide).

But the Senate defeated his amendment that would have transferred money from the Navy’s biofuels program to increase the DOD’s operations and maintenance funding. On March 20, 2013
Sen. Toomey Disappointed that his amendment failed. He said that " it's very disappointing that a number of my colleagues would rather spend taxpayer dollars on more wasteful biofuel subsidies than support essential maintenance operations for our military."

President of advanced biofuels company Novozymes, naturally, praised the Senate for continuing its support of the Navy’s advanced biofuels program. “Every day we import oil, we’re putting our troops, families and country at needless risk. We can reduce that risk with a secure energy supply, including renewable fuels.”

Similarly, Secretary of the Navy Ray Mabus and his congressional advocates have long argued that conventional fuels make the military vulnerable to oil market price shocks, which can force the DOD to take money from training and spend it on fuel.

I guess people who use these kinds of arguments do not follow at all what is happening in the US oil market. Monthly crude oil production in the United States is expected to exceed the amount of U.S. crude oil imports later this year for the first time since February 1995. The gap between monthly U.S. crude oil production and imports is projected to be almost 2 million barrels per by the end of next year, according to Energy Information Administration.

By the way, defenders of DOD’s biofuels program should with nonsense argument that the biofuel spending is only a small portion of the DOD Budget. If you want something look small, then use ratios, like the share of the national security budget in the US GDP. Right only around 5%, and yet we are talking about over $600 billion, or a trillion dollars, which is as much as the total net oil export revenues of OPEC members.

So, focusing on the angel side of biofuels is not a right thing to do. A more cautious view is necessary, as does the U S Air Force.

The new Air Force Energy Strategic Plan states that USAF is certifying its aircraft to fly on different alternative fuel blends, including biofuel blends to ensure that it “will be ready for whatever private industry is able to bring to market. “ This is a clever approach than the Navy. Be ready to what industry can bring, but don’t push the industry to deliver something expensive.

One of the goals of USAF is to increase use of alternative aviation fuels. The objective is to increase use of cost-competitive drop-in alternative aviation fuel blends for non-contingency operations to 50% of total consumption by 2025. Another clever approach, “cost-competitive.” Even for the ground vehicles it states the objective very clear: ” Use alternative fuels 100% of the time when alternative fuels are available and cost effective.

Lawrence P. Farrell Jr of the National Defense Industry Association says that “Washington cannot control its finances and balance its budget (…) trillion-dollar deficits can’t continue indefinitely. It is also a fact that the nation has spent too much, promised too much and borrowed too much." Although he is talking about the US, it is true for the Defense Department’s biofuels program so far.

Twenty-First Century Snake Oil

2013-02-15T21:28:00.001+01:00

The title of this post is from a recent paper: Captain T.A. ‘Ike’ Kiefer, Twenty-First Century Snake Oil: Why the United States Should Reject Biofuels as Part of a Rational National Security Energy Strategy, Waterloo Institute for Complexity & Innovation Occasional Paper No.4, January 2013.

The paper argues that biofuels do more to harm the causes of national and global security than to help them. To reach this conclusion he looks in depth at factors such as energy return on investment (EROI), energy density, power density, water footprint, food competition, environmental damage, land confiscation, and lifecycle greenhouse gases emissions.

I personally would not expect a uniformed officer from an operational background to dig into these details. But this was not the first time I have been surprised. In the past, I had the pleasure to share my views with a few military officers doing research for their thesis. This is once again a proof that the US Department of Defense employs plenty of bright people but (unfortunately) it doesn’t consult them. Instead, it pays plenty of money to private consultancy companies for subjects that could well be done by its own personnel.

Back to Capt Kiefer’s paper. The concept of Energy Returned on Energy Invested (EROI) is not much investigated by the DoD’s green lovers. Capt Kiefer makes a very good point: “Accelerating the use of fossil fuels by foolishly and wastefully using them to make much lower EROI biofuels brings any day of future fossil fuel scarcity that much closer and is completely counterproductive to every “clean” and “green” energy goal. Applying ammonia fertilizer to any crop intended for biofuel is an indefensible waste of energy.”

In discussing markets and price volatility he points out something which is largely ignored by the DoD’s greens: “Deriving fuel from farming does not liberate it from petroleum dependence or oil market price volatility, but rather increases price volatility by adding an additional linkage to global agricultural commodities markets.” He adds later on that “Converting fossil fuel hydrocarbons into plant carbohydrates and then back into hydrocarbon fuels is a futile attempt at perpetual motion in chemistry.”

He demonstrates elegantly the point I have been trying to do on my blog for years: “The civilian leadership of the US Navy is often heard quoting the statistic that a $1 rise in the cost of a barrel of oil increases annual fuel costs by $31 million. Yet, the cheapest price the Navy has paid for any biofuel to date is $1,080.66 per barrel ($25.73 per gallon). Since 2007, the military has spent $67.8 million on 1.35 million gallons of biofuel, averaging more than $50 a gallon or $2,100 a barrel, and costing the taxpayers $60 million more than if conventional fuel had been purchased. This does not include more than $47 million paid for pure research on alternative fuels. "

By the way, do not forget that since 2007, DoD has paid less than $4 per gallon of conventional petroleum derived fuel. Because of this fact, he adds towards the end of his paper that “Regardless of this, it is logically indefensible to buy a $30.00 per gallon fuel over worries about the price volatility of a $3.00 per gallon fuel.To dig up with these numbers is not easy, believe me. You can see here the Table he meticulously researched (On Page 30). (I had given up a similar effort last year).

If the DOD had added the external cost of producing and transporting biofuels in its Fully Burdened Cost of Fuel methodology the dark side of biofuels for the US military would have been more dramatic.

Let me now quote some bitter truths from Capt Kiefer’s paper:

“Imagine if the US military developed a weapon that could threaten millions around the world with hunger, accelerate global warming, incite widespread instability and revolution, provide our competitors and enemies with cheaper energy, and reduce America's economy to a permanent state of recession. What would be the sense and the morality of employing such a weapon? We are already building that weapon—it is our biofuels program. We need to quit the moonshine and face the sober facts. The DoD should pivot away from biofuels in its own energy strategy and the federal government should recraft its overall national energy strategy to be compatible with physics and biology and economics for the sake of national and global security.

…The US government should not push to commercialize any energy candidate until it has demonstrated lifecycle performance at competitive EROI without subsidy……The government should end subsidies and market-distorting policies that encourage low-EROI energy sources over high-EROI sources.

…The US military and federal government need to rationally and authoritatively define “renewable,” “sustainable,” and “green,” and enforce empirical standards for meeting these criteria based upon rigorous lifecycle and opportunity cost analyses.

…Sound decisions cannot be made based solely upon popular opinion, personal opinion, orthodox worldviews, or even common sense. Wise leaders must have "uncommon sense" founded upon a broad and deep education, and keen insight achieved through thorough study of the science and the empirical evidence of the issue at hand. National energy strategy is nothing less than national survival strategy. Those who would craft such strategy or advise policy-makers need to be well-grounded in chemistry, thermodynamics, biology, and economics, so they might discern the difference between promising avenues of research and perpetual motion schemes that defy physical laws and waste our nation’s time and treasure. Trying to biofuel our way to energy independence is like medieval physicians trying to bleed their patients back to health. It is time to stop the bleeding.”

Wow, bravo. The US Navy Secretary Ray Mabus must read Capt Kiefer’s paper before giving the next speech on the “great benefits” of biofuels for the US military.

Meanwhile, the biofuels comedy continues in the US. You know that the Environmental Protection Agency announced in January that it would be increasing the mandated amount of cellulosic biofuel refineries must purchase in 2013 to 14 million gallons. Let’s put this into context. How much cellulosic biofuel is produced today in the US? Zero! To meet the EPA’s mandate, refiners are simply forced to purchase biofuel credits for cellulosic biofuel. Well, capitalism always finds options. See, especially this: The Biofuels Train To Nowhere: No Government Schemes That Cannot Be Scammed

DOD Top Energy Issues 2013

2012-12-29T01:44:00.001+01:00

Reliable, affordable and uninterrupted supply of energy to run the American war machine is crucial for ensuring mission capabilities and effectiveness of the US military. Therefore, incorporating energy security considerations at the strategic, tactical, and operational levels is imperative.

In Its Top Issues 2012, the National Defense Industrial Association places “Promote Energy Security While Reducing Costs” as the most important challenge for the defense industry.

“The past decade has witnessed a transformation of philosophy within the military for energy security and reliability. The change emerged internally and pragmatically from field commanders’ needs for combat effectiveness, a reliable supply of fuels and force protection.. Each service has embraced and fielded innovative renewable and alternative energy production technologies, and has invested resources to find and apply energy efficiencies in infrastructure and standard practices..”

Efforts of the Department of Defense have had plenty of media coverage: Recent examples include: Aljazeera TV channel news piece on the US military love with alternative energy sources, Army Scientists Improve Garbage-to-energy Prototype, Affordable Naval biofuel: First comes the feedstock, etc.

The concern of the US military is twofold: electrical grid security and oil supply security. In other words, vulnerabilities in both the liquid fuels for operational use as well as the grid that supplies electrical power at installations both domestically and overseas. Progress so far on those issues has showed its good, bad and ugly sides.

It is true that much has been done to assure military energy security but as the NDIA mentions “Nonetheless, some critical work to achieving energy security remains to be done.”

· Utilizing Nuclear Power Technology (small modular reactors).

· Open the Door to Cost-Effective Section 526 Opportunities (Section 526 of The Energy Independence and Security Act of prevents federal agencies from contracting to purchase liquid coal and other “dirty fuels,” such as tar sands and oil shale, that produce more global warming pollution than conventional gasoline. NDIA supports DoD’s efforts that will lead to cost-effective biofuel alternatives to traditional fuels in the coming decade without overlooking other paths to achieve performance engineered fuels to meet military requirements.

· Energy efficiency must be given prevalent consideration throughout the entire acquisition process from the analysis of alternatives to production and life cycle sustainment, and be part of the DoD lexicon considered by everyone—developers through the soldier-- that ultimately uses the system.

For oil supply security the DOD services have aggressively promoted biofuels. But as the June 2012 issue of the Air Force Magazine questions it neatly what if the US need for oil simply fades away. In the last six years, overall US imports fell by 33 percent. Foreign oil, 60 percent of US usage in 2005, is now 45 percent. New forecasts project imports will decline or flatten out for another two decades.

In their article entitled “The Folly of Energy Independence”, Gal Luft and Anne Korin rightly state that the problem is not about supply but about price. They say that a country can reduce oil imports but end up paying a much higher oil import bill. This is the reason why US foreign oil expenditures almost equaled the defense budget. The inability to keep the price of oil at bay, not the volume of imports, is the crux of America’s vulnerability. In another version of that article Gal Luft repeats what every person in oil business knows “The reason is that oil is a fungible commodity whose price is being determined in the world market on a minute-by-minute basis. A price of a barrel of oil is more or less equal to every consumer, and when the price spikes, it does so for everyone regardless of where their supply comes from.” This is why the move towards greater self-sufficiency does not necessarily lead to cheaper oil prices.

As Admiral (ret) Gary Roughead and the other authors of the Hoover Institution’s Powering the Armed Sources report lay out the DoD’s focus should be on strategic needs, not arbitrary numerical targets. When it comes to developing and commercializing energy products, the military should be concerned only with immediate and critical needs.

As for electricity supply security the progress has good, bad and ugly sides as well. Reliance on sun and wind in the name of electricity supply security is one of the ugly sides.

Therefore my recommendation to DOD is to have the following Top Issues for 2013 into consideration:

1. Development and deployment of small nuclear reactors for installation electricity security

2. Prioritizing gas to liquid and coal to liquid technologies rather than biofuels

3. Bringing operational energy and installation energy management under one umbrella

4. Moving to Jet-A1 and slowly reducing the single battle fuel concept

5. Paying more attention to energy culture and behavior change

6. Promoting efficient use of energy and energy conservation (in other words eliminating the wasteful use of energy) more than energy efficiency

7. Achieving a functioning energy data and cost management

8. Reformulating energy acquisitions by taking energy into account

9. Revisiting Spartan efforts by adding Spartan conditions into the equation (for Navy and Marines)

10. Educating senior DOD officials on energy and especially functioning of oil markets.

I wish you all a healthy and prosperous new year!

Biofuels are not the cure

2012-12-05T00:54:00.001+01:00

At the end of November 2012, the United States Senate voted in favor of repealing a section of the Defense Appropriations Bill that would have blocked the DOD from purchasing biofuels if they cost more than conventional fuels.

I see that the amendment created again such unjustified hopes that only an uninformed person would believe. Supposedly biofuels investments (largely funded by taxpayers money) will give a push for clean energy investment which will create so many jobs. What more is that investment in biofuels will supposedly help reduce the Pentagon’s dependence on foreign oil, protect the fuel budget against oil price volatility and encourage the commercialization of advanced biofuels.

The American Fuel & Petrochemical Manufacturers responded quite good: “While there may be a place for biofuels in the U.S. military’s future, the decision to invest in those fuels should be based on sound economic judgment, and not political pandering that does nothing to advance national security.”

Senator James Inhofe (R-OK) unfortunately lost the battle. He was right that the added expense of biofuels was wasteful at a time when the DOD is being forced to cut significant its budget and faces the looming sequestrations cuts of the fiscal cliff.

Ray Mabus, Secretary of the Navy, should be congratulated for winning the battle, not because he was right but because he was able to convince people based on twisted or half truths. Although he still hasn’t understood the difference between aviation gasoline and jet fuel I congratulate him sincerely for one thing: He changed the way we the DOD thinks about energy. This culture change about energy in the Navy went so far that for fiscal year 2014, the officer selection boards will give “special consideration for promotion of those men and women who’ve made energy resource management a priority and who have excelled at it.”

To the Secretary Mabus and all those who amended the Bill, I repeat some hard facts:

U.S. crude oil production (including lease condensate) averaged almost 6.5 million barrels per day in September 2012, the highest volume in nearly 15 years.

The US dependence on foreign oil has declined since peaking in 2005. Canada is the leading supplier of crude oil to the United States. In 2011, the US was a net exporter of petroleum products. Over 50% of U.S. crude oil and petroleum products imports came from the Western Hemisphere (North, South, and Central America, and the Caribbean) during 2011. About 22% of US imports of crude oil and petroleum products came from the Persian Gulf.

Whether the US will surpass Saudi Arabia’s oil production by 2020 as claimed by the International Energy Agency or not, the real issue is that the oil prices will not drop significantly because oil is a global commodity and oil prices are largely set by international market forces.

So, instead of focusing on the oil availability and dependence, the DOD should better focus on the costs. Afterall, oil will always be available to DOD, where it needs and how much it needs. The real question is: at what cost?

Finally, even if (next to impossible) the US military becomes independent on imported oil and procures its (domestically produces) oil at reasonable costs, the US will continue to spend over $80 billion a year protecting maritime oil transit routes and infrastructure around the world. The US military runs on oil and will continue to fight for oil.

DOD Needs to be More Transparent on its Energy Initiatives

2012-08-24T00:19:00.001+02:00

Back in February 2008, Defense Science Board Task Force on DoD Energy Strategy released a report entitled More Fight - Less Fuel. In it the Task Force recommends the DoD “invest in basic research to develop new fuels technologies that are too risky for private investments and to partner with private sector fuel users to leverage efforts and share burdens.”

The Defense Department went even further; it wishes to create an industry. As I mentioned in my previous post, the real reason is the escalating oil prices since the early 2000s ( DOD’s Oil Use and Its Costs).

This focus on energy prices in the past decade has missed a point: declining energy consumption of the Defense Department since the end of the cold war, until the start of the global war on terror. (see the chart below). It went down about 40%.

This was mainly due to reduction in oil consumption over the mentioned period. (see the chart below).

But, increasing oil prices and to a lesser extent the “war on terror” have overshadowed this trend.

Instead of finding ways of increasing oil production from conventional sources as well as proven commercial unconventional ones (such as coal to liquids or gas to liquids technologies) the DOD has picked biofuels.

The Defense Science Board Task Force report I mentioned above went so far to argue that “Synfuel production technologies that can be adapted to forward deployed locations using local materials (such as bio-waste) would be valuable because it would directly reduce the amount of fuel that would have to be moved and protected in theater.” In simple terms this means, the DOD should find ways to produce alternative fuels where it fights. Add to this all the other proclaimed benefits of biofuels (see any speech of the Secretary of the Navy where he mentions energy. In fact he mentions it almost all the time).

I am not against biofuels or biofuels technologies. I am against picking specific winners in energy technology instead of leaving the decision to the market, pushing to create an industry with taxpayer guaranteed loan, and prematurely spending millions of dollars to bring unworkable and uneconomic programs.

In my opinion, instead of “More Fight - Less Fuel” the DoD should better try “Less Fight-Less Fuel”, get rid of its obsession with biofuels, and be more transparent.

And when talking about alternatives, especially on biofuels, instead of empty rhetoric the DOD should start talking with numbers. With numbers I particularly mean the costs. Look at the following table (incomplete but not bad).

So far CRS, GAO, several NGOs and private companies as well as individuals produced numerous reports on the DODs biofuels initiatives but unfortunately none has provided any complete table with total and unit costs. Please do let me know if you know of any. I would be happy if you could at least (this is a question to the DOD officials) tell me total cost of the awards to “PM Group” in Sept 2009 and “Sasol Oil” in June 2008.

DOD’s Oil Use and Its Costs

2012-08-19T01:51:00.001+02:00

The U.S. military consumed almost 500 thousand barrels per day of oil at the end of the Cold War. In FY 2011, its oil consumption was down to 355 thousand barrels per day despite increasing activity in Iraq, Afghanistan and elsewhere. And yet, military oil consumption has become a strategic vulnerability, an operational Achilles’ heel, and a readiness challenge, only in the past decade. Why?

Remember, in March 2003, Lt General James Mattis (former commander of the 1st Marine Division, during the drive to Baghdad) called on the DOD to "unleash us from the tether of fuel." Former Air Force Secretary Michael Wynne spearheaded the DOD’s push into alternative fuels in 2005 by creating a task force. Then came in 2006 Maj. Gen. Richard Zilmer's operational request from Anbar Province for a "self-sustainable energy solution." This was followed by the January 2007 SOTU address of the former US President Bush, who said "For too long our nation has been dependent on foreign oil. And this dependence leaves us more vulnerable to hostile regimes and to terrorists who could cause huge disruptions in oil shipments, raise the price of oil and do harm to our economy." Repeating what Bush has said in 2007, Ray Mabus, Secretary of the Navy, has taken the lead since 2009 for pushing biofuels as a remedy to the DoD’s dependence on oil. Why?

Forget all the talks about becoming green military, security threat of climate change etc, the real reason is the DoD’s increasing fuel costs.

Just look at the chart below, between 2003 and 2011, the DOD’s oil consumption decreased 10%. And yet its fuel costs tripled and reached $19 billion.

The reason is the increasing oil price of course.

When we look at the fuel costs by DOD services, we see the biggest increase in the Army (9 times), followed by Air Force, Marines and Navy (less than 3 times).

Between June 2007 and June 2012, the DOD services purchased more than 15 million gallons of alternative fuels for testing and certifying efforts (in tactical vehicles). Army’s share is less than 3 percent. The rest is by the Air Force and Navy. So, why does the Army play such a low profile despite a hefty fuel bill and while the others are always in the news headlines? Why?

As the saying goes, facts are many but the truth is one. The truth is that the US military will continue to run on conventional oil and neither biofuels nor technology can change it at least in the next 2 decades. Better to accept this reality and spend the hard earned taxpayers money wisely.

Mabus Chokes Navy's Politically Toxic Biofuels

2012-08-06T21:53:00.000+02:00

On 24 July 2012, the Pew Project on National Security, Energy, and Climate released a letter signed by some 400 veterans, including retired generals and admirals, as well as former Armed Services Committee chairmen Sen. John Warner and Rep. Ike Skelton, urging the president and Congress to support the Pentagon’s initiatives to deploy clean energy technology to reduce dependence on fossil fuels.

Although many parts of the letter are flawed (on oil) it doesn’t say anything against the worries expressed by the Congress as was argued in many papers. (For instance, an article in The Guardian argues that the letter urges “Congress to drop plans to bar the navy from research on biofuels, or from buying fuels which cost more than traditional diesel or jet fuel.” Similarly a Reuters article says U.S. biofuel advocates urge Congress to continue Pentagon funding. This is not true. I really wonder whether the reporters really read the letter!)

Yes, the Congress voiced concern about the price of biofuels not being competitive with conventional petroleum. As a result, Senate and House amendments to the Fiscal Year 2013 National Defense Authorization Act seeks to limit the DOD’s authority to purchase biofuels in large quantities for operational use until they become cost competitive with conventional oil. SO, it is not against R&D. This issue is still confused in media.[1]

On the same day (24 July), Senator Jim Inhofe (R-Okla.), a member of the Senate Armed Services Committee, issued a letter to Secretary of the Navy Ray Mabus requesting a detailed report on the cost of the U.S. Navy’s “Green Fleet” demonstration and overall alternative energy program. On 2 August 2012 he sent a second letter to Sec. Mabus because Mabus’ answer to Inhofe was not satisfying.

Why? Because, Mabus always repeats himself. Check all his speeches you will understand what I mean. See for instance, Remarks by Ray Mabus Secretary of the Navy at the Global Conference on Oceans, Climate and Security: Making the Connections Boston, Mass. (22 May 2012).

Mabus (again) argues that “how we power our ships, our aircraft, our ground vehicles is a military vulnerability” but fails to underline the fact that powering the war machines by biofuels will not make them less vulnerable. On the contrary, lower energy density of biofuels will require frequent refueling which means higher vulnerability.

It is good to see that Mabus finally understood that “oil is a global commodity. It is traded very often on rumor and speculation.» But he still fails to understand that the price of biofuels will not be competitive with conventional petroleum in the foreseeable future. He says: “In just the test amounts of biofuels we’ve bought, we’ve seen the price come down dramatically.” True, per gallon price declined in the past few years but still per gallon price of the last procurement was still 10 times more than conventional fuel.

According to a RAND Corporation report in June 2012, energy purchases made by the U.S. Department of Defense do not influence world oil prices, making cutting fuel use the only effective choice to reduce what the Pentagon spends on petroleum fuels. The report adds that biofuels are likely to remain far more expensive than conventional petroleum products absent a technological breakthrough. God knows if and when this technological breakthrough will take place. Until then the US military should better focus its attention on conservation and efficient use of conventional fuel.

Many people ask why the Congress pushes poor Secretary Mabus to the corner for advocating biofuels? Eric Beidel sums it well in his article appeared in National Defense Magazine: “Military leaders like to say that their aircraft, ships and personnel can’t tell the difference between petroleum and biofuel. But their budgets can.”

People criticize the Navy’s efforts not because it is buying biofuels that cost more but because paying much more for something that brings insignificant advantages is nonsense.

Friends of the Earth reported in July 2012 (White House pushes risky biofuels for military) that Secretary of Agriculture Tom Vilsack noted that in the past three years alone, USDA has spent over $1 billion trying to jump start the advanced biofuels industry. However, despite their funding, a federal mandate, and decades of additional government subsidies, not a single gallon of cellulosic biofuels has been commercialized or is ready for sale. In fact, the entire advanced biofuels industry has continuously under-produced for the last seven years. Moreover, a recent study commissioned by the Department of Defense actually notes that biofuels will offer the military almost no competitive advantage in spite of their exorbitant cost to taxpayers.

On top of their lack of return on investment, many advanced biofuels also pose serious risks to the environment. A recent National Academy of Sciences study has found that bringing many advanced biofuels to commercial scale could actually increase air pollution, drive soil erosion, degrade water sources, and damage biodiversity.

Mabus argues that [most of the time to promote biofuels] “We’re doing it all for one underlying reason. We’re doing it to be a better military. We’re doing it to be better war fighters. » I really don’t get it. Does using biofuels make ships and aircraft go faster and farther? Does it require less transport logistic? Does it save any lives? The answers to all those questions are: NO!

Oh yes, sometimes biofuels advocated also argue that biofuels create jobs. Well, I can show many reports claiming otherwise. For instance, House Energy and Commerce Committee Republicans, in a June 2012 report states that “The European nations that once were ahead of the U.S. in adopting green jobs programs are now ahead of the U.S. in abandoning them. It is time for America to do the same.

It is strange that someone (guess who) who doesn’t know the difference between Avgas and jet fuel still staunchly insists that biofuels is the magic cure.

On 17 July 2012 the Wired article entitled How the Navy’s Incompetence Sank the ‘Green Fleet’ ends with the following sentence: “the first voyage of the Great Green Fleet may well be the last”. He may be right. More importantly, toxic biofuels may cost Mabus his job. It is time for Congress to demand an audit for DOD’s biofuels activities with full cost details.

As Senator McCain rightly argues investment in biofuels represents a case of “misplaced priorities” for the DOD simply because it is not a core defense activity. Instead of biofuels the DOD could spend that money on more pressing issues, such as creating jobs and providing housing for veterans.

According to the Bureau of Labor Statistics unemployment for those veterans who served post-September 2001 was 12 percent in 2011, higher than general unemployment. The National Coalition for Homeless Veterans points out that “over 67,000 veterans are homeless on any given night. Nearly one-fifth of the homeless population are veterans.

You decide what is the most important. Spending tax-payer money for a possible creation of a biofuels industry in the very long run OR honoring and taking care of those who served their country today?

[1] To understand this issue better, see for instance an article appeared in Journal of Energy Security (Did the House bar the Dept. of Defense from purchasing biofuels? Not quite) for a quick read OR the June 2012 Congressional Research Service report (The Navy Biofuel Initiative Under the Defense Production Act) for a comprehensive overview.

Navy’s Great Green Flop

2012-07-18T22:02:00.000+02:00

Let me start with the official story: In 2009, Secretary of the Navy Ray Mabus announced five aggressive energy goals to reduce the Department of Navy’s consumption of energy, decrease its reliance on foreign sources of oil, and significantly increase its use of alternative energy. The purpose of these energy goals is to improve our combat capability and to increase our energy security by addressing a significant military vulnerability: dependence on foreign oil.

One of the five energy goals is to demonstrate and then deploy a “Great Green Fleet” a Carrier Strike Group fueled by alternative sources of energy. The demonstration takes place off Hawaii during the Rim of the Pacific Exercise (RIMPAC), the world's largest international maritime exercise, which has started on July 17^th. The demonstration is intended to evaluate the performance of “drop-in replacement” advanced biofuel blends and certain energy efficient technologies in an operational setting. A larger strike group of 11 ships will follow in 2016.

The ships and aircraft will be powered by alternative fuel, either nuclear or advanced biofuel blends. The biofuel blends are 50-50 mixtures of biofuel (made from used cooking oil and algae) and petroleum-based marine diesel or aviation fuel.

For this purpose, some 450,000 gallons of 100% “neat” biofuel were purchased in November 2011 from Dynamic Fuels, LLC (a joint venture between Tyson Foods, Inc. and Syntroleum Corporation) at a cost of $12 million, the single largest purchase of biofuel in government history.

· Navy surface ships are powered using 350,000 gallons of hydroprocessed renewable diesel (HRD-76) blended with an equal amount of marine diesel (F-76).
· Navy aircraft burn 100,000 gallons of hydroprocessed renewable jet fuel (HRJ-5) blended with aviation fuel (JP-5).

Both the Navy and the Air Force have been investing hundreds of millions of dollars to test alternative fuel mixes in several types of ships and aircraft for the past several years. The biofuels enthusiasm has slowly faced increasing criticism, including this blog you are reading. Below I would like to list several reasons.

Groundless arguments: We read or hear the following statements all the time:
“DOD wants to wean itself off of fossil fuels and foreign oil.” “This fuel often comes fom foreign countries that are hostile to our way of life.” “Investments in an alternative to foreign sources of fuel will help the Navy and the US become less dependent on foreign oil, and less subject to volatility in oil prices.” “Developing these alternatives is the only way that the U.S. can get rid of our dependence on oil.”

“This is putting our troops in harm’s way to defend oil interests overseas.“ “The U.S. spends between $67 billion and $83 billion each year to defend shipping lanes [according to estimates from RAND Corporation] in hostile waters, so we can protect our access to foreign oil.”

Now let’s look what the authorities say. The U.S. dependence on imported oil has declined since peaking in 2005. According to Annual Energy Outlook 2012 of the Energy Information Administration U.S. imports of liquid fuels is expected to continue to decline due to increased production of gas liquids and biofuels as well as greater fuel efficiency. This means that U.S. dependence on imported petroleum will decline.

Note that Canada is the United States' leading oil supplier. If Obama administration were smart and serious about reducing imports from unfriendly nations, they would do something about the Keystone XL pipeline, remove restrictions and prohibitions put on offshore (recent weeks there is progress on this front, including a House bill and a program), and develop shale gas to liquids industry among others. And for the US military should reconsider using commercial jet fuel (like Jet A1 instead of JP-8 in USAF aircraft and diesel instead of JP-8 in ground vehicles and generators).

Mixing oranges with apples: Admiral Cullom argues that “think back to the price tag on the first Blue Ray player you saw just a few short years ago. When introduced in 2006, those devices sold for about 500 dollars. Today they sell for well under 100 dollars. The same can be expected to happen with some biofuels and other forms of alternative energy.” In fact, everybody agrees that the price of biofuels will drop. But they will far more expensive than petroleum-based fuels in the foreseeable future. Besides, as Cliff Claven reminds us “It takes more than twice as much fossil fuel to make a gallon of biofuel than a gallon of gasoline, and the price of biofuels (e.g., bio-ethanol) is more volatile with respect to both sugar prices and oil prices than is gasoline (check the markets). “

Misinterpreted Congress decision: In early May 2012, the U.S. Senate and House of Representatives have recently made moves to prevent the Department of Defense from purchasing advanced biofuels. They regard the DOD’s push for biofuels as wasteful and disconnected from military needs. See my previous blog highlighting part of it. But the House and Senate bill is mostly misunderstood by many (for instance see, US warplanes can fly faster, carry additional weapons load using advanced fuels and biofuels: new data, MILITARY LEADERS URGE SENATE COMMITTEE TO SUPPORT ALTERNATIVE FUEL USE, House Armed Services Committee Threatens Shut Down of Successful Biofuel Development). Did they really read all the House and Senate Bill text?

Biofuels and a few extra cents: Some people argue that this [House and Senate decision on the DoD’s biofuel use] is a misguided attempt to save the few extra cents per gallon that biofuels cost over petroleum-based fuels and an irresponsible use of public policy. Well, DoD paid $26.7 a gallon for biofuels to burn during the RIMPAC exercise, almost 10 times the average price of petroleum-based commercial jet fuel nowadays. Effective July 1, 2012, DLA Energy price for JP-5 is $2.33 a gallon. Do the math: If the Navy used conventional oil instead of biofuels during the RIMPAC, it would have spent $1.2 million, and not $12 million. Is the difference ($10.8 million) a few extra cents? This is indeed irresponsible use of public money.

Twisting the truth: Navy news reports that “This fuel was blended with equal amounts of conventional petroleum-based fuel, producing a total of 900,000 gallons of a 50/50 alternative fuel blend. When the fuel was blended with equal amounts of conventional fuel, the cost of the 50/50 blends amounted to approximately $15 per gallon, less than half the cost of the advanced biofuels purchased in 2009.” The math is above. You decide.

“Alternative fuels for the Navy is not about being green, it’s about combat capability,” said Navy Cmdr. James Goudreau, director of the Navy Energy Coordination Office.

Here is a reader comment (by Cliff Claven) on National Defense Magazine: Combat capability is not improved by spending 10, 20, or 200 times more for fuel. You do the math: The Navy bought 20,055 gallons of Solazyme HRD-76 diesel oil for $8,574,022 = $427.53 a gallon or $17,956 a barrel. Go to fbo.gov and search the archives for "Solazyme" and "BAA040008." Don't forget that DOE also chipped in $210M to Solazyme for a refinery. Dilute it with regular fuel all you want, one gallon of biofuel still only displaces one gallon of regular fuel and any rational person will realize the price per gallon is not reduced by mixing.

Biofuels and oil price volatility: Deputy Assistant Secretary of the Navy for Energy Tom Hicks argues that investments on biofuels “will help the Navy and the nation become less dependent on foreign oil, and thus less subject to volatility in oil prices that directly affect our readiness." Any person who makes such kind of claims should know a bit how oil market functions.

Biofuels and DOD’s priorities: In May, Sen. John McCain told National Journal Daily that “adopting a ‘green agenda’ for national defense of course is a terrible misplacement of priorities.” Well, it depends what he means with green agenda. Better use or less use of energy is in my book not a green agenda. But expensive biofuels are. Therefore, I completely agree with Kevin Geiss, the Air Force’s Deputy Assistant Secretary for Energy, who stated in a Wired article that “The challenge with petroleum fuels is that it’s a commodity. You’re trying to jump into a commodity market.” That’s not a place for the government to be.”

Exaggerated claims as a scare tactic: In an op-ed piece in The Christian Science Monitor Lt. Gen. Norman Seip, US Air Force (retired) says that “cutting investments in long-term solutions like alternative fuels and energy efficiency will cost the military and all of us dearly in the future – in money and in lives.” Energy efficiency maybe, but the part on biofuels has nothing to do with saving lives. The convoys in Afghanistan will still be attacked whether they carry biofuels or conventional oil. The US Department of Defense can meet its fuel supply needs more effectively by using petroleum products more efficiently and protecting major transit corridors than by embracing synthetic fuels, the RAND researchers concluded in the June 19 report.

The list goes on but this article has become too long. So, I stop here. To be continued, perhaps.

By the way, in early July 2012, USAF A10 Test Flight Powered by Gevo Inc’s (, a Colorado biofuels company) Alcohol-to-Jet Fuel came with a price tag of $59 a gallon. 11,000 gallons purchased were so expensive because they were from a small demonstration plant which only produces 7,500-8,000 gallons a month. For some, only a few cents extra!

As I repeatedly argued on my blog the US military should get its energy priorities right. As far as biofuels are concerned it might be doing the right thing but unfortunately for wrong or unjustifiable reasons at a wrong time with too much money.