Center for a New American Security

On Friday, the State Department published a draft of the Supplemental Environmental Impact Statement for the proposed Keystone XL, which will inform the president’s decision later this year to approve or not approve the construction of the transboundary pipeline that could deliver an estimate 830,000 barrels a day of crude oil to the United States.

In a conference call on Friday, Assistant Secretary of State Kerri-Ann Jones noted that the EPA will officially publish the draft report in about a week for a 45-day public comment period. The president’s decision will come later this year, likely in the summer.

The 2,000-page report evaluates a number of issues, including the greenhouse gas emissions associated with Canadian oil sands and possible alternatives to the pipeline for transporting oil sands to the United States, including rail transport.  

The oil sands, referred to in the draft report as Western Canadian Sedimentary Basin crudes, “are more GHG-intensive than the other heavy crudes they would replace or displace in U.S. refineries, and emit an estimated 17 percent more GHGs on a life-cycle basis than the average barrel of crude oil refined in the United States in 2005,” according to the report. “If the proposed Project were to induce growth in the rate of extraction in the oil sands, then it could cause GHG emissions greater than just its direct emissions.”

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.

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.       

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.”

The New York Times reported on Sunday that Afghanistan’s mineral wealth could be contributing to instability in some parts of the country, particularly areas beyond Kabul’s control.

Just two years ago, Afghanistan’s mineral wealth – estimated to be worth potentially a trillion dollars –promised hope to a torpid economy plagued by generations of war. “The previously unknown deposits — including huge veins of iron, copper, cobalt, gold and critical industrial metals like lithium — are so big and include so many minerals that are essential to modern industry that Afghanistan could eventually be transformed into one of the most important mining centers in the world,” The New York Times reported in June 2010.

“But the wealth has inspired darker dreams as well,” The New York Times reported yesterday. “Officials and industry experts say the potential resource boom seems increasingly imperiled by corruption, violence and intrigue, and has put the Afghan government’s vulnerabilities on display.”  

In July, the Obama administration barred Iraq’s Elaf Islamic Bank from doing business with the U.S. banking system due to alleged ties to illegal financial transactions with Iran that threaten to undermine the effectiveness of Western sanctions against Tehran’s illicit nuclear program, according to The New York Times.

“The little-known bank singled out by the United States, the Elaf Islamic Bank, is only part of a network of financial institutions and oil-smuggling operations that, according to current and former American and Iraqi government officials and experts on the Iraqi banking sector, has provided Iran with a crucial flow of dollars at a time when sanctions are squeezing its economy,” The New York Times reported on Sunday.

Iraq and Iran have steadily increased economic ties since the U.S.-led invasion in 2003, with trade estimated at around $11 billion a year, according to The New York Times report. “Just last week, an Iraqi delegation that includes the deputy prime minister and top officials from the ministries of finance and trade and the central bank met in Tehran with their Iranian counterparts for talks about further increasing economic ties.”

According to a new study released Sunday by the journal Nature Climate Change, sea level rise is expected to affect the U.S. East Coast at a faster rate than the rest of the world. “U.S. Geological Survey scientists call the 600-mile swath [between Cape Hatteras, NC and Boston] a ‘hot spot’ for climbing sea levels caused by global warming,” The Washington Post reported on Sunday. “Along the region, the Atlantic Ocean is rising at an annual rate three times to four times faster than the global average since 1990.”

“Computer models long have projected higher levels along parts of the East Coast because of changes in ocean currents from global warming, but this is the first study to show that’s already happened,” The Washington Post added. “By 2100, scientists and computer models estimate that sea levels globally could rise as much as 3.3 feet. The accelerated rate along the East Coast could add about 8 inches to 11 inches more.”

The new study confirms findings that are well known to some East Coast communities, particularly Norfolk, Virginia, home to the world’s largest naval base. According to a report by The Washington Post last Sunday, Norfolk has spent the last several years battling storm surge made worse by sea level rise. Some have proposed buying up property in flood prone areas of the city to move people back away from the encroaching sea, while spending hundreds of millions of dollars in other parts of the city to build flood walls, tide gates, raised roads and flood pumps to protect critical infrastructure, including the Norfolk naval station.

Iran has renewed negotiations with other world powers in Moscow over its nuclear ambitions after recent talks in Baghdad failed to produce any significant progress. The negotiations, which began today, include the five permanent members of the United Nations Security Council – the United States, Russia, China, Britain and France – Germany, the European Union and Iran.

The Moscow talks come on the heels of poor economic news for Iran and just two weeks before European sanctions against Iranian oil exports go into full force on July 1. According to The Washington Post, Iran’s currency – the rial – has lost 50 percent of its value in just 10 months; oil exports have declined by 40 percent from a year ago, contributing to a loss of about $4.5 billion a month in revenue; and targeted financial sanctions against Iranian banks and industries are constricting economic flow.

Meanwhile, Iran’s oil production is outpacing the available storage, which could force the industry to scale back production. “A report last week by the International Energy Agency said Iran was storing tens of millions of barrels of unsold oil in offshore tankers and would probably soon run out of space, forcing it to drastically cut production,” The Washington Post reported.  

Japan’s Prime Minister Yoshihiko Noda cautioned on Friday that Japan could not afford to keep its nuclear reactors offline. “Cheap and stable electricity is vital. If all the reactors that previously provided 30% of Japan's electricity supply are halted, or kept idle, Japanese society cannot survive,” Noda said in a televised address.

During the 10-minute speech, Prime Minister Noda emphasized the national security concerns of relying more on imported energy to compensate for the decline of domestic power generated from its nuclear reactors. Noda said that, “Japan needed nuclear power to avoid relying too heavily on oil and natural gas from the politically volatile Middle East,” The New York Times reported.

Since last year’s Fukushima Dai-ichi nuclear accident, Japan has burned about 135.5 percent more oil, the International Energy Agency reports. The increased oil consumption has likely contributed to a greater dependence on Middle East petroleum – although imports may also be coming from Southeast Asia neighbors, like Brunei.

Iraq’s crude oil production has increased substantially this year despite sectarian violence, political infighting and modest recovery from years of war.

Increased oil production has contributed to a 20 percent rise in oil exports, bringing total exports to approximately 2.5 million barrels of oil a day, according to a report in The New York Times.  The increased production is owed largely to modest improvements in security as well as technical service contracts with experienced foreign oil companies. “The companies brought in modern seismic equipment and modern well recovery techniques to resuscitate old fields,” The New York Times reported. Baghdad claims that these production improvements will enable the country to produce an additional 400,000 barrels a day by 2013, a step on the road to an announced goal of producing 10 million barrels of oil a day by 2017.

Iraq’s resurgent oil sector is likely to have positive benefits for the country and the global oil market. On the one hand, increased oil production will provide Baghdad additional revenue to help the fledgling government strengthen its legitimacy. As The New York Times reported, “Oil provides more than 95 percent of the government’s revenues, has enabled the building of roads and the expansion of social services, and has greatly strengthened the Shiite-led government’s hand in this ethnically divided country.” Moreover, Iraq’s production increase comes as Libya’s oil production is nearing a full recovery. Last week, Libyan officials announced that oil production had reached 90 percent of pre-civil war levels, with the country producing 1.6 million barrels of petroleum a day. Taken together, Iraq’s and Libya’s oil recoveries could help offset the impact of Iranian oil sanctions that will come into full force beginning in July. This will provide the global oil market added volume to satisfy demand and insulate consumers from dramatic price spikes.