Center for a New American Security

My CNAS colleagues Melissa Dalton and Nora Bensahel published a policy brief recently assessing the state of U.S. policy toward Iraq a year after U.S. military forces completed their withdrawal from the country. Although U.S. policy toward Iraq has been drifting since the withdrawal, Dalton and Bensahel argue in Revitalizing the Partnership: The United States and Iraq a Year after Withdrawal that the United States has strategic interests in a strong, unified and sovereign Iraq. 

Among some of the common interests shared by Iraq and the United States include Iraq’s continued progress in producing the country’s oil resources. According to Dalton and Bensahel:

Iraq’s substantial petroleum resources could rejuvenate the country’s economy if Iraq’s leaders can navigate the dispute between the KRG and the central government on oil-rich territory and enact critical hydrocarbon legislation. Iraq possesses an estimated 43 billion barrels of crude oil, the world’s fifth-largest oil reserves, and it surpassed Iran in terms of output in July. Iraq’s output could stabilize or agitate the global market, directly affecting the U.S. economy in the near term, although the United States may be less vulnerable to shocks as additional domestic oil resources come on line. Iraqi oil exports could help offset the negative impact on the global market of oil sanctions on Iran (as exports from Saudi Arabia have), but such exports may face stiff pressure from Iranian allies in Iraq.

Read more at CNAS.org.

Russia’s Zarubezhneft oil company has moved to shallower waters to continue drilling exploratory oil wells off Cuba’s coast, according to a report in the Washington Post on Saturday. The company’s new project comes after several failed attempts earlier this year to drill commercially-viable ultra-deep water oil wells off the Cuban coast. According to some estimates, there could be potentially 5 billion to 9 billion barrels of crude oil in deepwater off Cuba’s coast, a tenth of which may be commercially viable according to industry standards.

With fresh memories of the Gulf Coast Deepwater Horizon accident, U.S. government officials – including the U.S. Coast Guard – have been increasingly worried about offshore oil drilling in non-U.S. waters that could impact the U.S. coast if an accident occurs. Increased activity in Cuban waters is a particular concern for U.S. officials. A March 2012 The Washington Post report noted that Cuba’s capacity to respond to an offshore oil spill is extremely limited, with “only 5 percent of the resources needed to contain a spill approaching the size of the Deepwater Horizon disaster.” These concerns have also raised the question of how the United States could respond to an oil spill in Cuban waters given the state of U.S.-Cuba relations, including export restrictions that prohibit U.S. companies from providing equipment or otherwise performing response functions that could be construed as aiding the Cuban government.

In particular, the half-century old Cuban embargo obliges any company operating in Cuba to use only equipment that contains less than 10 percent U.S.-made parts in order to avoid sanctions. This means that companies operating in Cuba’s deepwater may not necessarily be using the most sophisticated or the safest tools and techniques shared by U.S. drilling companies. This might not be a concern in shallow water (several hundreds of feet deep), but in ultra deep water (depths beyond 1,500 meters), U.S. companies have a comparative advantage over many other international drilling companies. Moreover, deepwater drilling remains risky, even for U.S. companies. And while Zarubezhneft plans to drill in shallower water for its next project, it is still drilling in deep water: 6,500 meters.

The National Intelligence Council (NIC) published its Global Trends 2030: Alternative Worlds on Monday, a quadrennial analysis of the major trends shaping the global security environment. The report is intended to provide a framework for a new presidential administration to think about the threats and opportunities that lie ahead in the future security landscape.

The report examined four medgatrends that analysts believe will shape the world of tomorrow: individual empowerment; diffusion of power; demographic patterns; and the food, water, energy nexus.

The latter two trends directly affect each other. According to the NIC’s analysis, “Demand for these [food, water and energy] resources will grow substantially owing to an increase in the global population [demographics].” 

Climate change is inextricably linked to the growing food, water and energy nexus. According to the report:

Demand for food, water, and energy will grow by approximately 35, 40, and 50 percent respectively owing to an increase in the global population and the consumption patterns of an expanding middle class. Climate change will worsen the outlook for the availability of these critical resources. Climate change analysis suggests that the severity of existing weather patterns will intensify, with wet areas getting wetter and dry and arid areas becoming more so. Much of the decline in precipitation will occur in the Middle East and northern Africa as well as western Central Asia, southern Europe, southern Africa, and the US Southwest.

 

We are not necessarily headed into a world of scarcities, but policymakers and their private sector partners will need to be proactive to avoid such a future. Many countries probably won’t have the wherewithal to avoid food and water shortages without massive help from outside.

Technology will play an interesting role in the future security landscape, particularly when it comes to energy, according to the NIC’s analysis. Technological breakthroughs in unconventional natural gas and oil production are contributing to an energy revolution in North America.

International trade in natural gas has been turned on its head. In 2005, the United States was on track to import nearly 20 percent of its natural gas by 2020. That forecast led to major U.S. investments in liquefied natural gas (LNG) import terminals in the American northeast, where hundreds of tankers a year were expected to offload LNG shipped from Europe and elsewhere. But the gap between U.S. consumption and production has been closing quickly as a result of hydraulic fracturing that has contributed to a glut in U.S. shale gas production. Now the United States is expected to be a net exporter of LNG by the end of the decade. And investors are looking for ways to modify the LNG terminals to reverse the flow of LNG trade that promises to usher in new opportunities for U.S. energy producers and foreign policy practitioners. [See: “The natural gas revolution reversing LNG tanker trade,” The Washington Post (December 7, 2012)]

Officials in Washington have been consumed by the question of whether or not the United States should prepare to export LNG. Policymakers are asking when and under what economic conditions would exporting LNG provide the best economic returns for the U.S. economy. A report released last week by the Department of Energy concluded that exporting LNG would help the U.S. economy across all the scenarios that economists forecasted, and that those benefits would increase as LNG exports grow in the future.

Many worry that exporting LNG could raise U.S. natural gas prices and hurt downstream consumers, like petrochemical companies and electricity consumers. But based on the models produced for the DOE study, natural gas prices are not likely to sharply increase in the near term. According to the study, “The largest price increases that would be observed after 5 more years of potentially growing exports could range from $0.22 to $1.11 (2010$/Mcf).” That would be about a 30 percent increase from today’s prices, which are around $3.70.       

India’s interest in the South China Sea is getting more attention. Last year, The Times of India reported that India’s offshore Oil and Natural Gas Corporation (ONGC) Videsh would work with Vietnam to jointly explore for oil and natural gas resources in the South China Sea. Despite warnings from China – which has made sovereign claims to the entire South China Sea and its energy resources – India and Vietnam have pressed ahead with joint development, leading to increased tensions between China, India and Vietnam.

Last Friday, Vietnam lodged a complaint with China when two Chinese fishing boats reportedly blocked a Vietnamese seismic survey vessel that caused the ship’s cables to snap. The latest episode is just another in a string of incidents where Chinese fishing boats have blocked attempts by Vietnam and other countries to survey for natural gas and oil deposits. (Track these incidents using the CNAS Flashpoint timeline feature here.) The latest incident also comes on the heels of an announcement from China’s Hainan Province last week warning that provincial police would be permitted to board and search vessels violating China’s territorial waters, including in contested areas.

In response to the most recent attempt by Chinese fishermen to block Vietnam’s seismic surveying, Vietnamese officials said that the government would step up defensive patrols, including deploying marine police, to protect against future Chinese encroachment. India seemed to respond in kind, according to a New York Times report, saying “it would consider sending navy vessels to protect its interests in the South China Sea.”

New climate data published in the journal Nature Climate Change on Sunday show that global carbon emissions hit a record high in 2011 and could increase in 2012 without a concerted international effort to reduce emissions. According to the analysis published by the study’s authors, the prospect for keeping global warming below 2 ⁰C – the threshold above which scientists expect irreversible climate change to take effect – is increasingly dim. “A shift to a 2 °C pathway requires immediate significant and sustained global mitigation, with a probable reliance on net negative emissions in the longer term,” the authors concluded.

The climate data were released as international delegates meet for four final days of negotiations at the UN Framework Convention on Climate Change (UNFCC) Conference of Parties 18 in Doha, Qatar. According to a report from The New York Times on Monday, those negotiations are not expected to result in meaningful international progress: “Their agenda is modest this year, with no new emissions targets and little progress expected on a protocol that is supposed to be concluded in 2015 and take effect in 2020.”

The executive secretary of the UNFCC Christiana Figueres said in an interview that countries need to do more at the domestic level in order to build momentum toward a comprehensive global agreement. “We won’t get an international agreement until enough domestic legislation and action are in place to begin to have an effect,” Figueres said in an interview, according to The New York Times. “Governments have to find ways in which action on the ground can be accelerated and taken to a higher level, because that is absolutely needed.”

Last week the Department of Energy (DOE) announced its decision to award the first company to receive government funding in support of commercializing Small Modular Reactors (SMR), a new generation of nuclear power plants. Funds were awarded to a consortium of companies responding to a funding announcement in March 2012; the consortium is led by Babcock & Wilcox (B&W) in conjunction with the Tennessee Valley Authority and Bechtel. The Department of Energy established the Small Modular Reactor Licensing Technical Support Program to provide federal support of up to $450 million to expedite the licensing process of SMRs Originally, two projects would receive funding; so far only one has, leaving other initiatives such as Westinghouse, NuScale and the Holtec HI-SMUR out of luck for now.

The SMR initiative is part of the Obama administration’s efforts to have low-carbon nuclear energy play an important part of America’s energy future. SMRs are defined as having power outputs of up to 300 megawatts of electricity, according to the International Atomic Energy Agency. They are touted for their compact scalable designs that offer a host of safety, construction and economic benefits. According to Energy Secretary Steven Chu, SMRs have the potential to create new export and job opportunities for many Americans as the world is increasingly demanding nuclear energy to fulfill its energy needs, despite recent retreat from nuclear power by some countries. Developing countries that do not have the capacity or expertise are looking for more modular and cost effective power sources and SMRs may be an increasingly attractive option.

SMRs also present a unique opportunity for the United States to restore leadership in the global nuclear energy market. As U.S. SMR businesses grow the share of the market, the United States is positioned to play a leading role in future negotiations on nuclear reprocessing and spent fuel. More countries will be eager to reinstate 1-2-3 negotiations and the United States will have subsequently more leverage in these discussions. U.S. leadership in the nuclear energy markets can go a long way in ensuring safeguards can go in place of nuclear stockpiles which are critical to non-proliferation goals.

While SMRs could usher in a new wave of nuclear renaissance, many hurdles still lie ahead. First, the Nuclear Regulation Commission (NRC) still has to approve all of the design certifications before any nuclear reactor becomes operational. The NRC hasn’t issued a license for a full-scale nuclear reactor since 1976, which is in part a reason the U.S. influence in the nuclear energy market has eroded. The NRC has more experience and familiarity with large light water reactors and has thus taken a more cautious role in studying the safety of SMRs. This presents a problem for manufacturers because the uncertainties of NRC regulations make it so they won’t invest in SMR production. Whether the Small Modular Reactor Program established by the DOE will be able to overcome NRC licensing costs is still unclear as negotiations for the exact cost of its partnership with B&W is still being negotiated.

Some have argued that the Department of Defense (DOD) would be a unique testing ground for an SMR demonstration. While this might be true, there does not appear to be enough political will for using the DOD as a site for energy experimentation. A DOD SMR program might also entail high political costs due to the larger defense cut negotiations that are taking place in Congress as part of the fiscal cliff.

The bottom line: the administration’s recent moves are a sign that SMRs are poised to play a large role in any nuclear energy future. 

Territorial claims over the South China Sea took an interesting turn last week.  

According to a report from Reuters, China’s new passports have raised the eyebrows of several South China Sea claimants: the country’s microchip-equipped passports contain a map of China’s claim over the South China Sea – represented by the country’s disputed nine-dash line.

The Philippines and Vietnam have condemned the Chinese passports, worrying that accepting the documents could legitimize China’s diplomatic claim over the sea. According to Reuters, “The map means countries disputing the Chinese claims will have to stamp microchip-equipped passports of countless visitors, in effect acquiescing to the Chinese point of view.”                              

"The Philippines strongly protests the inclusion of the nine-dash lines in the e-passport as such image covers an area that is clearly part of the Philippines' territory and maritime domain," Philippine Foreign Secretary Albert del Rosario said last week, according to Reuters.

China’s Foreign Ministry responded to questions about the passports, stating, "The passports' maps with their outlines of China are not targeting a specific country. China is willing to actively communicate with the relevant countries and promote the healthy development of Sino-foreign personnel exchanges.”

The International Energy Agency (IEA) published its new World Energy Outlook on Monday, projecting the United States to become the world’s largest oil producer as early as 2020, overtaking Saudi Arabia and Russia for the top spot. According to the IEA’s analysis, the United States may even become a net exporter of oil by 2035. The American energy revolution is driven in part by technological developments that have bolstered shale gas and tight oil production, as well as decreased demand for oil due to higher fuel efficiency standards in U.S. vehicles, according to the IEA.

The analysis should be taken with a grain of salt, as it is difficult to project as far forward as 2035 with any meaningful amount of certainty. For example, some of the tight oil projects in the United States may depend on a global price of $70 a barrel in order to remain economically viable. Some analysts are projecting prices to fall as low as $50 a barrel, which could drive developers away from investing in projects that require $70 a barrel to breakeven, upsetting some of the oil production estimates.

Nevertheless, it is possible to make some reasonable assumptions about what the American energy revolution could mean for U.S. policymakers charged with navigating this complex and ever-changing landscape. Here are a couple of things to watch for, in no particular order:

The pace of tight oil production will continue to be dynamic. U.S. tight oil production may speed up or slow down depending on the U.S. energy market. There is some reason to believe that tight oil production is moving faster in the United States than some expected because of depressed natural gas prices. Low natural gas prices have contributed to poor returns on investment for some shale gas producers, with some producers choosing to develop tight oil deposits instead of expanding shale gas production in order to earn a profit. If natural gas prices rebound in the near term though, tight oil production could slow down as development shifts back to a more profitable natural gas sector.

Yesterday, Iran’s Oil Minister Rostam Qasemi told an audience at the World Energy Forum in Dubai that the Iranian government would halt all of its oil exports if the United States and other western powers strengthened their antinuclear sanctions against Tehran. “If you continue to add to the sanctions, we will stop our oil exports to the world,” Qasemi told a news conference, according to Bloomberg News, adding, “The lack of Iranian oil in the market would drastically add to the price.”

In the past, that kind of announcement might have made oil traders nervous, raising global prices. But since the international sanctions have been in place, Iranian oil exports have shrunk considerably, from 2.2 million barrels a day in 2011 to 860,000 barrels a day in September 2012. Iran’s shrinking share of the global oil market – and rising production in places like Saudi Arabia, Iraq and the United States that is offsetting supply shortages – has weakened Tehran’s ability to wreak havoc in the global oil market. That’s why oil prices fell to a three-month low, according to The New York Times: “On the New York Mercantile Exchange, the price of the benchmark grade fell $1.98 a barrel or 2.3 percent to $86.67, the lowest closing price since July 12.”

Most experts agree that Iran is unlikely to halt its oil shipments to those countries that currently have exemptions to the oil embargo, like India. The sanctions have already taken a toll on the economy. Iran’s currency has lost 40 percent of its value and sanctions against the country’s central bank prevent it from shoring up its currency with foreign reserves. Iran cannot afford to stop exporting its oil without further weakening its economy.

But even while Iran may not have as much direct influence in the global oil market, there is always the possibility that Tehran will try to indirectly raise global oil prices through more brazen efforts, like threatening or actually attempting to close the Strait of Hormuz through which 20 percent of the world's oil is shipped, which would raise global oil prices by as much as 50 percent in a few days. In that sense, Iran can still wreak havoc in the global oil market and onlookers should keep a watchful eye towards Tehran’s behavior.