Geopolitics of nuclear energy in the Middle East. Istanbul, 28 November Workshop report

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1 Geopolitics of nuclear energy in the Middle East Istanbul, 28 November 2017 Workshop report On 28 November, the IISS Non-Proliferation and Nuclear Policy Programme organised a workshop as part of a Macarthur Foundation-funded project fostering dialogue among expert communities on nuclear energy and its geostrategic implications. The workshop, organised in Istanbul, brought together 21 participants from Europe, the United States, Russia, China, the Republic of Korea, Turkey, Iran, Lebanon, Jordan and Egypt. Discussions looked at the future of the nuclear energy industry, new nuclear technology suppliers and the geopolitics of nuclear energy in the Middle East. The future of nuclear energy The workshop s first session provided a global assessment of the nuclear industry today. Nuclear energy is considered to be a clean, safe and proven technology, which can be used to mitigate the effects of climate change and meet green targets. Although the pace of construction of nuclear power plants (NPP) has significantly increased in the last few years with 20 new reactors connected to the grid since 2015 and 57 reactors under construction, these changes are mostly occurring in the developing world, notably in Asia. This is not surprising given the enormous energy needs of populous countries like China and India, which are also experiencing first-hand the dangerous health effects of air pollution. The United States and Europe are conversely faced with fleets of aging nuclear reactors and, in many countries, strong political opposition towards the extension of NPPs lifecycles and the construction of new NPPs. Some have even decided to phase out nuclear power entirely. Due to concerns over safety, waste and proliferation, notably following the Fukushima accident, public confidence in nuclear energy as a technology of the future has faltered. One participant stated that these concerns were often exaggerated and biased, noting that there have been very few victims of radiation poisoning or cancer resulting from nuclear accidents in comparison with the much deadlier effects of air pollution. Nuclear waste, this participant argued, has become much safer and more efficient to manage in recent years. On the subject of proliferation risks however, various participants disagreed with claims that links between nuclear energy and nuclear proliferation were only minimal. One participant claimed that the US military and civilian nuclear programmes were closely linked while another said that 1

2 nuclear engineers in Russia are involved in both nuclear weapons development and dual-use technology. The time it takes to construct a new reactor, between 7 and 10 years on average, and the high cost, between $4 and $6 billion per unit, were also cited as key obstacles for further development of nuclear energy. The regulatory environment codifying safety and security measures is increasingly strict and the risks of delays and cost overruns add further uncertainties for prospective buyers. Traditional vendors from OECD countries were previously able to rely on banks and export agencies but the 2008 financial crisis required them to look for new sources of financing. This is a challenge, given the financial market s tendency to look for projects with short return on investments, a feature which is generally not applicable to NPPs. Russia and China, through flexible and competitive financing schemes and strong government support, have benefitted from these changes by offering new types of risk-sharing financing schemes. There has been a shift in the nuclear export market as Russia, China, and to a lesser extent South Korea, have penetrated markets previously dominated by Western firms. The US nuclear market in particular, steered by the norms of a private shareholder business model and the open market, is finding it hard to compete with government-backed entities such as Russia s Rosatom. Moreover, without lifecycle extension of existing NPPs or the construction of new reactors, nuclear electricity generation in the US is set to decline. On the export market, US firms Westinghouse and General Electric remain tied to their Japanese partners, Toshiba and Hitachi respectively, which are struggling in a post-fukushima Japan. Westinghouse filed for bankruptcy earlier this year and other players are encountering similar difficulties. France s Areva, following serious financial troubles and much-needed restructuring, is facing serious delays and cost overruns for some of its projects. Even South Korea s nuclear future is undetermined after recently elected President Moon announced a nuclear phase-out without discussing the impact on its nuclear export industry. Despite an uncertain future ahead, nuclear power is currently in the midst of a technological revolution with new designs and projects going ahead at full-speed. Third generation reactors will soon be operational; the construction of fourth generation reactors is underway; longstanding plans for floating nuclear power plants are now a reality; and the international community is closely watching the progress made on various Small Modular Reactor (SMR) projects. All these developments indicate an important technological shift in the nuclear industry, but Western players are falling behind in several of these areas. The changing civil nuclear landscape China and Russia driving nuclear technology exports Russia and China have both benefitted from the decline of traditional nuclear exporters and taken the opportunity to carve themselves a significant share of the emerging nuclear market. 2

3 Russia s Rosatom, for instance, is working in 42 countries, building 34 reactors as well as other fuel cycle projects, worth a total US$133 billion. The sheer scale of these projects and investments has raised questions regarding their financial feasibility, however, seeing as most overseas projects are financed either partly or entirely by Rosatom. As a state owned corporation, Rosatom s budget is entirely linked to the state budget and to Russia s economic growth, which has just started to slowly pick up again after a two-year recession. Rosatom s dependency on the state is unlikely to change; private investments are difficult to secure given Rosatom s role in the military nuclear industry. Several participants questioned the reasoning behind Rosatom projects in countries such as Bangladesh which, given the country s political instability and environmental issues, are bound to be loss-making. One participant explained the rationale as being tightly linked to Russia s foreign policy priorities. The drive behind certain nuclear projects is based on political priorities, while financial considerations take a back seat. Furthermore, the entire Russian political system serves as the guarantor of Russian nuclear projects around the world. On the finance side, overseas nuclear projects still involve about a hundred or so Russian companies and generate revenue from taxes, which makes them worthwhile despite the likelihood of poor returns on some investments. Turkey serves as an interesting example to examine the dynamics of a Russian-sponsored nuclear project in the Middle East. In 2010, Rosatom signed a Build-Own-Operate (BOO) agreement with Turkey to construct four nuclear units at Akkuyu, which now is in the early stages. A Turkish participant highlighted several issues concerning the project. One is that although the NPP will be operated by Rosatom, Turkey will still need to ensure the capabilities of an independent regulatory agency to overlook not just the Akkuyu NPP, but also the future Sinop NPP and the potential Igneada NPP. A second issue is that while Rosatom has agreed to take back the spent fuel from Akkuyu, this is not the case for the two other projects, which will require further spent fuel management planning. This participant also questioned the difference in interests between Turkey and Russia regarding the NPP. Whereas Turkey will focus on achieving the highest construction standards, there is a risk that Russia will instead concentrate on finishing the project as soon as possible in order to start generating revenue. As the project evolves, this might become an issue. Turkish participants said that although the Akkuyu NPP has been many decades in the making, the Turkish government s lack of transparency and communication in choosing nuclear energy has an impact on public confidence in these projects. Lastly, the Akkuyu project is, to a certain extent, tied to the vicissitudes of Russia-Turkey relations. When a Turkish jet shot down a Russian plane, the project stalled, but importantly was not cancelled. Relations between Moscow and Ankara have since improved based on common objectives in Syria and in spite of political disagreements on issues relating to the Kurds. China is also emerging as a potential nuclear industry heavyweight, following a strategy of intellectual property acquisition which has enabled it to build and empower its own industry. It is now promoting the development of third and fourth generation nuclear reactors as well 3

4 as SMRs, with the HPR1000 (or Hualong One) domestically designed and marketed for export. China s National Development and Reform Commission (NDRC), which sets the broad strategic guidelines for economic development, has encouraged a policy of nuclear exports, backed by political will and the provision of financial incentives. Some participants questioned the cost-effectiveness of China s first overseas nuclear reactor project to build two reactors at Chashma, Pakistan. Questions were also raised about China s financing schemes for nuclear exports. A Chinese participant noted first that nuclear projects are not just for economic benefit but are also geopolitical in essence. This echoed Russian motives for nuclear export. Second, Pakistan is a developing country with an economy that will increase gradually and, since nuclear reactors are planned with a long-term view in mind which includes maintenance and the whole supply chain there is no reason why the nuclear units would not become profitable for China. Both domestically and internationally, China is actively pursuing the development of nuclear energy and has the financial means to support such endeavours. During workshop discussions, Chinese participants painted a very optimistic picture of the future of the nuclear reactor export market, more so than those with knowledge of the Russian nuclear industry. For both Russia and China, nuclear reactor projects provide a conduit for long-term strategic goals to be achieved over the course of reactor construction and management. Flexible financial and risk-sharing schemes as well as state-support are important advantages that Russia and China make full use of on the international nuclear market. These have enabled them to sign agreements with a string of countries on several continents. In the Middle East, Rosatom is managing nuclear projects in Turkey, Iran and Jordan, and finalising a NPP deal with Egypt, whilst China is signing agreements and MoUs with these same countries, as well as actively promoting the Hualong One in the UAE and Saudi Arabia. Given the complexities of the Middle East, participants took a detailed look at the region as a market for nuclear energy and discussed the current nuclear programmes that are underway. Assessing a nuclear Middle East In the Middle East, oil still remains a key source of energy for most states and compared to Western countries, citizens voice fewer concerns about global warming, which can justify the choice for nuclear as an energy source. There is a growing need for countries in the region to diversify their energy mix, however. One participant questioned the choice for nuclear energy as part of the diversification process, given the time and cost of the construction of NPPs and the required establishment of regulatory institutions. Others argued that to fuel the Middle East s growing economies, renewables and natural gas were not sufficiently cost-efficient alternatives in the long-term. Furthermore, nuclear energy has become, for better or worse, a status symbol. States in the region pay close attention to Iran s pursuit of nuclear technology and its success in starting 4

5 up the Bushehr reactor. Saudi Arabia s current tender for the construction of a series of nuclear reactors in the next few decades is seen to be a response to Iran s nuclear progress and its growing regional presence. One participant from the region claimed that Saudi Arabia regarded the pursuit of nuclear energy as a matter of self-defence, rather than of energy need. It was suggested that the US may be able to exploit its relationship with Saudi Arabia, to compete in an upcoming tender, thereby presenting an opportunity for it to re-establish a foothold in the international civil nuclear market. What reactor technology might be on offer remains to be seen. Given the diversity of actors and ambitions in the region, the Middle East cannot be considered as a single market. Only Iran has a functioning reactor and projects elsewhere are still in various stages of construction or negotiation, with the UAE Barakah NPP s first two units nearing completion. Linking nuclear programmes in the region is difficult given the absence of dialogue or even avenues to begin discussion on these issues. Initiatives such as the Arab Atomic Energy Agency or the Arab Summit have seen little progress over the years. There is little cooperation and only one interconnected electricity grid developed by eastern GCC states. Nevertheless, as more countries in the region develop nuclear energy they will need to find common areas for coordination, especially on safety and security matters. Washington s approach to negotiating a 123 nuclear cooperation agreement with Saudi Arabia will be closely scrutinised. Although the UAE s NPP is being built by the Korea Electric Power Corp., US content required the UAE conclude a 123 Agreement with the US. The resultant agreement, which prohibited enrichment and reprocessing technologies, set the tone for regulatory standards in the region. This precondition is specific to US dealings in the Middle East, but is part of broader efforts to uphold strong non-proliferation norms. While Iran is not cooperating on nuclear energy with the US, the Joint Comprehensive Plan of Action (JCPOA), which was signed by the US, only limits Iran s domestic enrichment capabilities. Saudi Arabia and Jordan made it clear, long before the JCPOA was finalised, that they were not willing to forgo the possibility to enrich uranium and reprocess spent fuel. This stance is unlikely to change now, especially when countries such as Russia and China are willing to cooperate without such preconditions. Addressing the development of enrichment and reprocessing technologies in the region will increasingly become an issue for the IAEA and the international community at large over the next few years. Rapporteur: Névine Schepers 5