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.”

Happy Presidents' Day from the Natural Security Blog. We will be taking today off, but we look forward to returning to our regular Natural Security business tomorrow.

Photo: Mount Rushmore. Courtesy of flickr user Jvstin.

Yesterday, CNAS published a new Flashpoints Bulletin that examines the influence global energy trends have in shaping oil and gas development in the South China Sea, and, consequently, the dynamic between countries in and around the region: Finding Common Ground: Energy, Security and Cooperation in the South China Sea (PDF).

In the piece, I highlight two important trends that are worth following that could add an additional layer of complexity to the South China Sea imbroglio: energy development as an element of India’s eastward engagement (i.e., Look East Policy); and China’s advances in deepwater drilling technology.

On Monday, Quartz published a story about China’s growing foothold in Greenland and the mounting concerns about its quest to produce the semi-autonomous island’s rare earth metals. (See “China’s creep into Greenland is setting off alarm bells.”)

The New York Times reported last September that the retreating Greenland ice sheet is giving way to new opportunities for the 57,000 people living on the once sparse island. In particular, the melting ice is leading to new discoveries of mineral deposits, including rare earths. According to the report, the small Greenland town of Narsaq sits near one of the world’s largest deposits of rare earth elements – which are critical in the manufacturing of advanced technologies, from smart phones and smart bombs to wind turbines and high-end batteries. According to Greenland Minerals and Energy Ltd, the deposit could contain about 10.3 million metric tons of rare earth metals, equivalent to about 10 percent of the known global reserves (which total about 110 million metric tons, according to the U.S. Geological Survey).

Quartz reports that Western officials are particularly concerned about potential Chinese control of Greenland’s rare earth elements given that they are critical to advanced technologies and have few – if any – reliable manufacturing substitutes. (Some technologies can substitute rare earths, but they do not have the same effective properties.) Adding to the angst is the fact that China today produces about 97 percent of the world’s rare earth elements – even though it only holds 50 percent of the world’s known reserves, and that China has been limiting exports in order to satisfy its own domestic demand.

But how worried should Western officials be about China’s potential control of Greenland’s rare earths? A couple of points are worth mentioning that should help allay concerns.

First, China’s share of the rare earth market is in relative decline. Sure, China produces 97 percent of the world’s rare earth resources. But the United States has ample reserves as well; they are just not being produced – yet. According to the U.S. Geological Survey, the United States holds about 13 million metric tons of rare earths, or about 12 percent of the known global reserves. One of the largest mines is in California. While the United States used to produce these minerals, more rigorous environmental standards made it difficult for U.S. producers to compete with cheaper Chinese metals, and so U.S. producers stopped extracting them. But that is starting to change as prices rise. The market appears to be doing its thing, and the United States is ramping up U.S. rare earth production to compete with Chinese metals. Naturally this will help diversify the market. Moreover, Australia and Malaysia are also planning to increase production of their known reserves as well. Other countries are likely to follow suit, including India and other states in Central Asia.

Senator Chuck Hagel, the president’s nominee for defense secretary, was joined by Senators John Warner and Sam Nunn prior to his confirmation hearing before the Senate Armed Services Committee on Thursday.

In his responses for the record, Senator Hagel addressed two important issues relevant to DOD energy and maritime security interests.

North America’s monopoly over shale gas and tight oil production won’t last forever. But there’s good reason to believe that the rest of the world will be laggards for awhile.

Steve LeVine at Quartz writes that despite massive shale potential outside of the North America, those deposits are far from being economically viable to exploit. “[D]rillers have yet not managed to economically drill for shale deposits anywhere else,” LeVine writes. “The difference is mainly in the shale geology—drillers have vastly more data on US shale than for any other place on the planet, and have not felt confident yet in what they have found in Europe, China or elsewhere.”

LeVine is correct that economics is a major driver in whether those resources will be recovered anytime soon. But other reasons abound as well. Most of the world’s oilfield services and the physical infrastructure associated with production (pipes, drill bits and other equipment), for example, are located in North America. That is why the immediate event preceding any major shale production outside North America won’t be an announcement that a company has signed a deal to develop the resources; it will be, as LeVine writes, “a company announcing investment in actual production infrastructure.”

Of course, beyond what the industry can control, other factors play into whether shale resources will be exploitable abroad as well. Access to the water resources needed to develop them is paramount. More importantly, sustainable access to water may be difficult to come by – especially for countries rich in shale resources but water scarce, like China and Australia. It is another important example of the water-energy nexus.

So North America will continue to monopolize shale production for now. The question for foreign policy types is whether or not that is a good thing. In 2010, the State Department launched its Unconventional Gas Technical Program aimed at helping other countries develop the skills and technology necessary to safely and economically exploit their shale resources.  What other activities can or should the U.S. government be promoting? Are there public-private sector ventures worth pursuing? Or should the United States just enjoy its monopoly on shale production?

As President Obama begins his second term, there is no shortage of recommendations for how he should prioritize and shape his agenda moving forward.

Two new publications from the Brookings Institution and the Carnegie Endowment for International Peace offer sensible recommendations for how the administration should take advantage of the opportunities and confront the challenges of America’s windfall production in unconventional hydrocarbons – principally shale gas and tight oil. Both hark on the need for a balanced approach that would allow the United States to reap the energy and economic benefits from increased domestic energy production while seriously addressing the climate consequences of continuing to burn petroleum.

In their piece, “Energy and Climate: Black to Gold to Green,” Charles K. Ebinger and Kevin Massy of the Brookings Institution write that the United States can take advantage of oil and gas exports to energy hungry Asia while using the revenue from those exports to fund two potentially transformative technologies that are essential to reducing greenhouse gas emissions – carbon capture and sequestration technology and advanced batteries.

In a World Politics Review article published last Friday, I wrote that despite record low ice melt last year, the Arctic’s harsh environment is not giving way to commercial growth as quickly as some may expect. For example, after a hopeful summer, Shell suspended its oil and gas exploratory drilling in part because its equipment kept getting damaged by dangerous ice floes and strong ocean currents. Operations are expected to resume this summer. 

As a result, U.S. policymakers charged with safeguarding America’s interests in the Arctic should continually recalibrate their expectations for commercial and other activity in the region in order to enhance their planning efforts. After all, the kinds of resources that the U.S. Coast Guard and other federal agencies will need to bring to bear in the Arctic are linked to the pace and development of activity in the region. And while the Arctic may one day be buzzing with eco-tourists, oil and gas drillers and deep sea fishers, it may fall short of our expectations and we should plan accordingly.

Read the full piece on World Politics Review here. 

The Shell drilling rig that ran aground off the Alaskan coast on New Year’s Eve was secured on Monday, officials said. The drilling rig Kulluk, pictured here on January 3, ran aground near an uninhabited island after a winter storm caused it to break free from the tug boat cables used to tow the vessel to Seattle. The grounding is the most recent in a string of setbacks for Shell’s Arctic drilling efforts and has given more evidence to critics charging that Shell and other international drilling companies are not yet Arctic ready.

The prospect of slower commercial activity in the Arctic should give pause to U.S. policymakers making plans for the Arctic. In particular, the resources necessary to protect U.S interests in the region – such as Coast Guard search and rescue and spill response assets – will depend in part on the pace of commercial activity in the region. These recent Arctic incidents should encourage policymakers to recalibrate their assumptions about activity in the region.

Photo: On January 3, the Kulluk remained grounded 40 miles southwest of Kodiak City, Alaska. Courtesy of the U.S. Coast Guard. 

Natural resource trends topped international headlines in 2012 – from illicit resource trade in Afghanistan to energy competition in the South China Sea. Which ones should readers track in 2013? Here’s a list of the five international trends I’ll be watching in 2013, in no particular order.

1. China’s technological development in deepwater drilling. China made great strides in strengthening its technological edge in deepwater drilling last year. In May 2012, the state-run China National Offshore Oil Company, CNOOC, began operating the country's first deepwater drilling rig, putting CNOOC in a position to transform its reach by moving away from solely shallow water operations to new depths, including deepwater blocs of the South China Sea. (Chinese estimates place 70 percent of recoverable natural gas and oil deposits in deepwater of the South China Sea.)
   
   In December 2012, the Canadian government paved the way for CNOOC to acquire the Calgary-based energy giant, Nexen Inc., including the company’s high-tech ultra deepwater drilling technology, which would add to CNOOC’s technological edge in deepwater drilling. The deal still faces some scrutiny from the U.S. Congress over Nexen's Gulf of Mexico assets. Regardless though, as China continues to develop its edge in deepwater drilling technology, it could speed up the country’s efforts to unilaterally drill in deepwater blocs of the South China Sea.
2. An increasing focus on energy development in the South China Sea as part of India’s “Look East Policy.” India shares many of the same energy vulnerabilities as other countries in East Asia, particularly a growing reliance on petroleum imports from the Middle East and North Africa. Those same vulnerabilities have contributed to New Delhi’s interest in exploring for energy in the South China Sea, which some countries, including China, view as a potential “second Persian Gulf.” 
   
   India’s foray into the South China Sea has drawn China’s ire, which has protested India’s recent joint ventures with Vietnam. In December 2012, Chinese fishing boats blocked a Vietnamese seismic vessel, causing the ship’s cables to snap. The episode provoked a response from the Indian government, which said it would “consider sending navy vessels to protect its interests in the South China Sea.” This may lay the groundwork for a greater Indian naval involvement in the South China Sea in 2013; it is something worth watching. 

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.