Rethinking eu Energy Security Considering Past Trends and Future Prospects

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1 PERSPECTIVES ON GLOBAL DEVELOPMENT AND TECHNOLOGY 13 (2014) BRILL brill.com/pgdt Rethinking eu Energy Security Considering Past Trends and Future Prospects Mekdi P. Amineh Programme Director: Energy Program Asia (e p a ) at the International Institute for Asian Studies (ii a s ), University of Amsterdam, and Webster University(Leiden) m.p.amineh@uva.nl Wina H. J. Crijns-Graus University of Utrecht Copernicus Institute of Sustainable Development w.h.j.graus@uu.nl Abstract eu energy policy objectives are directed at three highly interdependent areas: energy supply security, competitiveness and decarbonization to prevent climate change. In this paper, we focus on the issue of energy supply security. Security of energy supply for the immediate and medium-term future is a necessary condition in the current context of the global political economy for the survival of the Union and its component member states. Since the Lisbon Treaty entered into force, energy policy no longer comes onto the agenda of the European Commission through the backdoor of the common market, environment and competitiveness. The Treaty created a new legal basis for the internal energy market. However, securing external supplies as well as deciding the energy mix, remain matters of national prerogative, though within the constraints of other parts of e u s legislation in force. Without a common defense policy, the highly import dependent Union and its members face external instability in the energy rich Arab Middle East and North Africa. Concern about energy security has been triggered by declining European energy production as well as the strain on global demand exerted by newly industrializing economies such as China and India and the Middle East, as well as the political instability in this reserve-rich part of the world. This paper explores the following two topics [1] the current situation and past trends in production, supply, demand and trade in energy in the e u, against the background of major changes in the last half decade and [2 ] threats to the security of the supply of oil and natural gas from import regions. KONINKLIJKE BRILL NV, LEIDEN, 2014 DOI /

2 758 AMINEH AND CRIJNS-GRAUS Fossil fuel import dependence in the eu is expected to continue to increase in the coming two decades. As global trends show, and despite new fields in the Caspian region and the Eastern Mediterranean, conventional fossil oil and gas resources remain concentrated in fewer geopolitically unstable regions and countries (i.e. the Middle East and North Africa (m e n a ) and the Caspian Region (cr) including Russia), while global demand for fossil energy is expected to substantially increase also within the energy rich Gulf countries. This combination directly impacts eu energy supply security. It should be noted that the trend towards higher levels of import dependence was not interrupted when the era of low energy prices, between 1980 and 2003, came to an end. Within the eu itself, domestic resistance to the development of unconventional resources is an obstacle to investment in unconventional sources in this part of the high-income world. This should therefore not put at risk investments in either renewables or alternative sources at home or conventional resources mainly in the Arab- Middle East. The situation is exacerbated by the spread of instability in the Arab-Middle Eastern countries. There are three domestic and geopolitical concerns to be taken into consideration: (1) In the Arab-Middle East, threats to EU energy supply security originate in the domestic regime of these countries. Almost all Arab resource-rich countries belong to a type of patrimonial\ rentier-type of state-society relation. These regimes rely on rents from the exploitation of energy resources and the way in which rents are distributed. Regimes of this type are being challenged. Their economies show uneven economic development, centralized power structures, corruption and poverty at the bottom of the social hierarchy. The discrimination of females is a major obstacle to the development of the service sector. At present, even the monarchies fear the spread of violent conflict. Offshoots of these consequences have proven to cause civil unrest, exemplified by what optimists have called the Arab Spring. (2) The second concern is the domestic and global impact of Sovereign Wealth Funds (swfs) managed by Arab patrimonial rentier states. SWFs have proven to be an asset in both developing and developed economies due to their ability to buffer the 'Dutch Disease, and to encourage industrialization, economic diversification and eventually the development of civil society. In patrimonial states, however, swfs are affected by corruption and the diversion of funds away from long-term socioeconomic development to luxury consumption by political elites. In fact, Arab swfs underpin the persistence of the Arab patrimonial rentier state system. (3) Finally, the post-cold War, me and cea geopolitical landscape is shifting. The emergence of China and other Asian economies has increased their presence in the Middle East due to a growing need for energy and the expansion of Asian markets. The recent discovery of energy resources in the us has led to speculation that there will be less us presence in the region. There would be a serious risk to eu energy security if

3 RETHINKING EU ENERGY SECURITY 759 emerging Asian economies were to increase their presence in the Middle East as us interests recede. Keywords EU energy policy - energy supply security - fossil fuels - unconventional fossil fuels - the Caspian Region and Central Asia - Middle East and North Africa and the Persian Gulf, China 1 Introduction Security of energy supply is an important part of the long-term development goals of the eu, as it supports key policy objectives such as competitiveness and stability. Concerns for energy security have been triggered by declining European energy production as well as the strain on global demand exerted by newly industrializing economies such as China and India and political instability in many energy producing regions such as the Middle East and North Africa (mena) and the Caspian Region including Russia ( c r ) (eea ; Amineh 8c Yang 2 010, ). Although the eu is believed to hold a significant amount of shale gas that could contribute to its supply security, the prospects for development appear bleak in a number of member states due to strong environmental opposition and uncertainty about the true extent of deposits. The entry into force of the Lisbon Treaty in 2007 created a new legal basis to eu energy policy. The Treaty legally includes solidarity in matters of energy policy within the eu. However, member states remain in control over external supply security and the domestic energy mix. Internal supply security, on the other hand, is now on the agenda of the Commission. The implication of current eu legislation is that the Union does not have an agency in charge of setting a limit to the level of import dependence. Although there is no direct common policy aimed at increasing energy security, energy supply security is linked to a wider set of policies on climate change such as the Climate and Energy Package of December 2008 (European Commission 2008) and improving competitiveness. Specific actions of the Package include increasing energy efficiency by 20 per cent and a 20 per cent share of renewable energy. An increase in renewable energy would reduce greenhouse gas emissions and reliance on imported fossil fuels. But the question is, are these policies sufficient to ensure energy supply security? Imports of fossil fuels have increased in the last decade, in spite of an increase in the use of renewable energy sources. And what contribution can the deployment

4 760 AMINEH AND CRIJNS-GRAUS of new fossil fuel technologies such as shale oil and shale gas make to energy supply? There are concerns that many decisions, e.g. on long-term oil or gas purchases or (low) levels of infrastructure funding are made primarily at a national level, leading to difficulties in ensuring a coordinated eu approach to common energy policy across multiple, potentially conflicting objectives (energy security, environmental and competitiveness) (crs 2008). This paper explores the following two topics: [1] the current situation and past trends in production, supply, demand and trade in energy in the eu, against the background of vast changes in the last half decade; and [2] threats to the security of the supply of oil and natural gas from regions of import. For the second topic two regions that include key energy suppliers are distinguished: Middle East and North Africa (mena): Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Malta, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, West Bank and Gaza, Yemen. o Of which Persian Gulf (Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates) Caspian region (cr): Azerbaijan, Kazakhstan, Turkmenistan, Iran and Russia. The paper is organized as follows. Section 2 discusses concepts and data sources used in the study. In section 3, current energy policy in the eu is discussed with a focus on the impacts of the different policies on energy supply security. Section 4 analyzes the developments in fossil fuel use and import dependence in the eu in the period as well as expected developments in the period up to These periods cover the implementation of policies aimed at reducing greenhouse gas emissions leading to increasing shares of renewable energy use and a reduction of the use of coal. Section 5 discusses developments in global energy demand and supply, in relation to the impact these may have on future energy security in the eu. Section 6 focuses on the geopolitical aspects of eu energy supply security from the Persian Gulf and CR and discusses the political economy of energy of these eu suppliers. Lastly, section 7 gives conclusions and recommendations. 2 Concepts and Data Section 2.1 outlines the definitions and concepts used in this study and section 2.2. explains the main data sources used.

5 RETHINKING EU ENERGY SECURITY Definitions In this section we give definitions for the key concepts used in the analysis of security of supply issues. These refer to energy security, geopolitics and the relationship between energy security and geopolitics and between geopolitical risks and energy security. Definitions of the concept of energy security' range from narrow issues of physical supply disruption to wider ones engaging the economy, environment and political consequences of changes in the energy market, resources and fossil reserves. According to the u n d p (2004), energy security can be defined as the availability of energy at all times in various forms, in sufficient quantities and at reasonable and/or affordable prices, without an unacceptable or irreversible impact on the environment. Energy security can be threatened by different types of scarcity, which can be affected by different types of geopolitical forces. According to Amineh and Houweling (2003, 2006, 2007), the need for energy security is enhanced by limited reserves and increasing extraction costs. The combination of increasing oil and gas consumption, diminishing reserves and geopolitical rivalry creates a setting for both the e u and other major consumer countries, such as China, that can be characterized as one of demand-induced, supply-induced and structural scarcity, or a combination thereof. We will discuss these three types of scarcity in more detail. Demandinduced scarcity, is caused by three factors. The first is population growth in consuming countries. The second is rising per capita income in high-income countries, i.e. the major per capita consumers and importers and in late industrializing economies, particularly in South and East Asia (mainly China and India), where the bulk of the world population lives. Demand-induced scarcity varies for groups at different levels of per capita income. Those who cannot afford market prices find themselves excluded without any actor deciding to exclude them. Owing to the lopsided distribution of societies, according to their level of per capita income, demand-induced scarcity will enter into high-income societies last. These are the countries that industrialized first, using cheap energy. The third is technological change. The history of technological change since the 1850s has rendered access to fossil energy more, not less, important for the production of wealth and power. Without energy, other resources cannot be mobilized or used. Technological innovation, governance, and households depend on it. Supply-induced scarcity' is caused by the dwindling of stock. In reality, demand- and supply-induced scarcity interact. Extraction costs, refining and retail plus profit mark-ups determine offer price. The intersection of demand and supply determine consumer price. However, supply-induced scarcity

6 762 AMINEH AND CRIJNS-GRAUS should be studied in its own right. One reason is that the dwindling of stock is not translated by the price mechanism into gradual price increases. However, price volatility will increase as awareness spreads that stocks are dwindling. Supply-induced scarcity, or its anticipation, may provoke a process of competitive power projection by economically as well as military capable and importdependent nations aiming to gain control over stock or territory where stocks are located either by strategic investment or force. Domestic regime strength and military capability determine the capacity of target countries to ward off unwanted cooperation by outsiders. This brings us to the third type of scarcity, called 'structural scarcity. Structural scarcity is supply-induced by the deliberate action of a major power, by non-state actors such as major oil companies or by producer cartels such as the Organization of Petroleum Exporting Countries (opec) and also powerful National Oil Companies from resource-rich countries. Past experience with creating structural scarcity is not inspiring. In the run-up to World War One, the British blocked Germany s Berlin-Baghdad rail project; during World War Two, Nazi Germany competed with the British for influence in Iraq and tried to capture Baku. Japan waged war with America to gain access to oil in the Dutch Indies. A major power that manages to gain control over conditions of access by third parties to the stock has the option of inducing scarcity for selected outsiders (see Yergin 1991; Bromley 1991). In the current unipolar military order, the us can opt to induce scarcity for allies, competitors and enemies alike by interdicting the maritime transport of oil and gas. That option, however, is available only after oil and gas have been brought to ports and ships from the territory of extraction. By extending the country s defense perimeter into the heartland of energy supply, America is equipping itself with the capacity to induce structural scarcity for contenders by diverting flows on land. This is the aim of energy foreign policy. Particular attention is given to keeping the region richest in oil, the Persian Gulf, within the American sphere of geopolitical power projection. The Russo-Ukrainian gas crisis of 2009 provides an excellent illustration of how Gazprom induced structural scarcity for 18 European countries simply by shutting down the gas pumps, which are under the control of Gazprom. In recent decades there have been many instances of structural-induced scarcity; for example, the overthrow of the Premier Muhammad Mossadeq of Iran in 1953 and the support for and alliance with Saddam Hussein in Iraq, until he invaded Kuwait (See Yergin 1991; Amineh 1999; Klare 2001; Abrahamian 2013). In this study, we will focus on the availability of oil and gas in sufficient quantities, and in particular on the risks of oil and gas supply disruptions.

7 RETHINKING EU ENERGY SECURITY 763 The research consists of two parts; a quantitative part that assesses risks to energy security based on indicators and a second part that focuses on geopolitical risks. In the first part, we identify developments for demand-induced and supplyinduced scarcity. The indicators used to analyze developments include import dependence, fossil fuel production in the eu and globally, fossil fuel reserves in the eu, shale oil and shale gas reserves and global developments in energy consumption and supply. We examine trends in the period and future predictions. In the second part, geopolitical risks are assessed through a qualitative analysis. A geopolitical risk to the security of supply of the eu is when a change or breakdown in the global system, or a part of that system, occurs (exclusivity/ discrimination, autarky, war/civil war, political boycott, failed states, terrorism, power rivalry), which results or could result in absolute or relative disruption of energy (oil and gas) flows to the eu. 2.2 Data Sources The main data sources used are described briefly below. All energy data presented in this paper is based on the lower heating value. iea Energy Balances are used for general developments in energy demand and supply (iea 2013). For import dependence the Eurostat Statistics Database (Eurostat 2014) is used. This database includes imports and exports to countries within the eu, by country of origin or destination. Conversion rates used are tj/tonne crude oil and 29.3 Gj/tonne coal. Natural gas use given in Tj-higher heating value is converted into lower heating value with a factor of 0.9. Import dependence at the eu level is calculated by dividing net imports (imports - exports) to EU countries by gross inland consumption. For exports the following data tables are used: nrg_i34a for natural gas; nrg_i33a for crude oil and nrg_i32a for solid fuels. For imports: nrg_i24a for natural gas; nrg_i23a for crude oil and nrg_i22a for solid fuels. For gross inland energy consumption and production data tables: nrgjoia for solid fuels; nrg_io2a for oil; nrg_i03a for gas and nrg_iooa for total gross inland energy consumption are used. Unless otherwise specified, the data for the eu refer to E U 28 and thereby include Croatia who joined the eu in Due to data availability, data for EU27 is also shown in a number of cases. It should be noted that the inclusion of Croatia has a very low effect on the numbers since it accounts for only 0.5 per cent of primary energy use in EU 27 in 2011 (iea 2013). PERSPECTIVES ON GLOBAL DEVELOPMENT AND TECHNOLOGY 13 ( 2014)

8 764 AMINEH AND CRIJNS-GRAUS For fossil fuel reserves the British Petrol Statistical Review of World Energy 2013 (bp 2013) is used. The conversion factors used are: one cubic foot of natural gas equals mj and one barrel of oil equivalent (boe) equals 5.4 gj (both lower heating value). Shale oil and gas reserves are based on the report 'Technically Recoverable Shale Oil and Shale Gas Resources by the us-energy Information Administration (2013). Future projections are based on a number of sources including the World Energy Outlook 2012 (iea 2012), bp Energy outlook 2030 (bp 2011, 2012), the International Energy Outlook by us eia (2012, 20i3f) and official EU projections (European Commission 2013d). 3 The European Union s Energy Security Policy Energy supply security in the eu was addressed in the green papers Towards a European Strategy for the Security of Energy Supply (European Commission 2000) and A European Strategy for Sustainable, Competitive and Secure Energy (European Commission 2006). The latter paper discusses Europe s dependence on imported energy (demand induced scarcity) and fluctuations in demand and that action is needed to ensure that there is an uninterrupted energy supply. It discusses several ways to achieve this: Opening up the markets because it is believed that it creates a stable, competitive environment that companies want to invest in. Creating a European Energy Supply Observatory to monitor the energy market and identify potential shortfalls. Re-examining the Directives on gas and electricity security of supply from the perspective of security of supply, particularly with regard to the eu s oil and gas stocks. The choices of member states for their energy mix could be reviewed at the European level by means of a Strategic eu Energy Review. This Review would offer member states a clear European framework for choosing their energy mix, which would take into account sustainability, competitiveness and security of energy in the eu. An integrated approach towards tackling climate change that involves energy efficiency improvement and renewable energy use. The green papers formed the basis of energy policy in the eu. Electricity and gas markets were liberalized in the period 1998 to 2004 and a Market Observatory

9 RETHINKING EU ENERGY SECURITY 765 for Energy was established in Strategic Energy Reviews in 2007 (com 2007/1) and 2008 (com 2008/0781) led to the European Council s agreement on energy policy targets for Europe. As a result, in December 2008, an energy and climate change package was adopted to deliver the objectives of reducing greenhouse gas emissions, increase energy efficiency and renewable energy use by 2020 (com 2008/30). Central to the strategy is a strengthening and expansion of the Emissions Trading Scheme (ets). Emissions from the sectors covered by the system will be cut by 21 per cent by 2020 compared with levels in Emissions from sectors not included in the eu ets (such as transport, housing, agriculture and waste) will be cut by 10 per cent from 2005 levels by The overall target for the eu is to reduce 20 per cent of its greenhouse gas emissions by 2020 in comparison to For renewable energy use the target is to generate 20 per cent of final energy demand with renewable energy sources by 2020, which is legislated through the re Directive (com 2008/19). The Directive establishes an overall eu binding target of 20 per cent of renewable energy sources in energy consumption, as well as binding national targets by 2020 in line with the overall target. The Directive on energy efficiency (com 2012/27) established a framework for the achievement of 20 per cent energy efficiency improvement by 2020 (measures include e.g. ecodesign, labeling, energy performance of buildings, energy efficient products and cogeneration). Lastly, the package promotes the deployment of Carbon Capture and Storage (ccs) through the CCS Directive (com 2009/31). In order to support the goals set for 2020, the European Strategic Energy Technology (set) Plan was developed. This plan aims to accelerate the development of low carbon technologies (e.g. in the area of renewable energy, energy conservation, nuclear reactors and ccs). Furthermore, it sets the ambitious target for 2050 of an per cent reduction in eu greenhouse gas emissions in comparison to 1990 levels (European Commission 2010). The energy and climate package will, in principle, have a positive impact on energy security. More use of renewable energy sources will increase the amount of indigenous energy production in the eu (with the exception of biomass imports). Energy efficiency improvement is a necessary step, if not for reducing absolute energy use, then at least for limiting the growth of energy use. Limiting energy use results in less needed energy imports in absolute terms. The implementation of carbon capture and storage also could impact energy security positively. It would allow continued use of coal, whilst still reducing greenhouse gas emissions. Since eu member states have larger reserves of coal than gas or oil this could improve security of supplies (wec 2007).

10 766 AMINEH AND CRIJNS-GRAUS The 2nd Strategic Energy Review stipulates that a number of infrastructure developments should be recognized as energy security priorities of the Community. These include: Better linking of the Baltic region with the e u, Development of a Southern Gas Corridor for supply from cr s and the Middle East s sources; Sufficient lng capacity or availability for all member states on basis of solidarity arrangements, Completion of a Mediterranean energy ring, linking Europe with the Southern Mediterranean through electricity and gas interconnections (to also help develop the vast solar and wind energy potential), Development of North-South gas and electricity interconnections within Central and South-East Europe, Development of a blueprint for a North Sea offshore grid, interconnecting national electricity grids and plugging in planned offshore wind projects, Consolidate the partnership with Russia to make it more stable, and The diversification of energy import to secure sustainable supply of oil and gas. As a follow-up, in 2008 the Commission tabled the Green paper Towards a Secure, Sustainable and Competitive European Energy Network (c o m 2008/782). It discusses the aging European energy networks and poor east-west and south-north connections. These make it more difficult for energy to move around the eu and makes some regions more vulnerable to supply disruption. With energy imports set to rise, new import routes are urgently needed to give the eu greater flexibility in its supplies. Furthermore, the paper states that a clear and stable legal framework is the main precondition for stimulating private sector investment in generation and transmission/transport. Creating this framework is one of the principal aims of the energy and climate package and the third internal energy market package on the completion of the internal gas and electricity market. The third internal energy market package (ip 2007/1361), adopted in 2009, should stimulate investments, synergies, efficiencies and innovation in energy networks. Umbach (2010) analyzed the degree to which the implemented policies contribute to ensure energy security in e u. He found that, although energy security has forced its way up the European policy agendas, the member states have largely failed to forge a coherent European energy security strategy after the Spring summit of Political solidarity has still been lacking, despite the solidarity clause in the Treaty on the Functioning of the European Union.

11 RETHINKING EU ENERGY SECURITY 767 The 2nd Strategic Energy Review of November 2008 has, on the other hand, recommended new initiatives to overcome this lack by promoting concrete infrastructure and political solidarity. If the eu is able to implement the decisions this could have beneficial impacts on energy security. The planned infrastructure developments are on their way and are aimed at diversifying primarily natural gas imports. A Southern Gas Corridor to transport natural gas from the Caspian region via Turkey to Austria are planned to be in operation by 2019 (Ratner et al. 2013). Russia s energy strategy is one of the main constrains of the project. The construction of the Russian pipeline, South Stream and the involvement of the Eastern European countries weaken, both commercially and geologically, the pipelines in the context of the Southern Gas Corridor. In this project, however, Gazprom cooperates with major western banks and European energy companies as e n i, e d f and Wintershall as shareholders. The project promises to improve gas supply to East European countries. In 2012, the Nord Stream pipeline went into operation, which directly connects Russia to Germany. The infrastructure developments are necessary to facilitate required natural gas imports and to increase the diversity of supply from different regions. However, good infrastructure opportunities might increase energy imports further and, in that way, have an uncertain impact on energy security. The Russian South Stream and Nord Stream, by illustrating the Russian determination and its strategy to control the transit routes to the Union, determine the diversification efforts of the e u. To conclude, although policies at e u level and individual member state level1will have booked some successes in the field of energy security, import fossil fuels dependence in the eu has only increased in recent years, as we will show in section 4. Furthermore, it is questionable whether the implemented policies are sufficient to change the trends in the period up to Im port Dependence in EU: Past Trends and Future Developments Due to a combination of high consumption, few resources and limited domestic production, the e u is a net importer of energy. In this section we will 1 The introduction of a mandatory and comprehensive eu energy policy was approved at the meeting of the European Council in The eu Treaty of Lisbon of 2007 legally includes solidarity in matters of energy policy within the eu. In practice, however, the implementation of energy policies remains mainly at the national member state level. Member states have implemented policies in different ways and have, in some cases, established additional policies for energy security.

12 768 AMINEH AND CRIJNS-GRAUS examine developments in import dependence in the last two decades in the eu. First, we discuss the development of total primaiy energy use and the reliance on fossil fuels (section 4.1). After that, we will assess import dependence per fossil fuel (section 4.2 for natural gas, 4.3 for crude oil and 4.4 for coal), to be followed by the overall import dependence of energy supply (section 4.5). Lastly, we discuss developments in fossil fuel production in the EU (section 4.6) and future trends (4.7). 4.1 Total Primary Energy Use Figure 1 shows the development of total primary energy supply in EU27 in the period , by energy source. A number of things are apparent when looking at the trends. First, the share of coal in the fuel mix has decreased to be replaced by a higher use of natural gas. Oil and nuclear have remained roughly the same. Second, fossil fuels are an important part of primary energy supply. Their share has slightly decreased from 83 per cent in 1990 to 79 per cent in 2000 and 75 per cent in 2011, primarily to be replaced by more biofuels/waste use, which increased from 3 per cent in 1990 to 8 per cent in 2011 (see Figure 2). The total share of renewable energy increases from 5 per cent to 11 per cent in this period. 80,000 till Other Geothermal Solar/wind/other Hydro Biofuels and waste Nuclear Natural gas 6 Oil Coal S, M ro r t LO CO t>- CO OS O M C O rj -to to C"~ 00 OS O d S' C T ) C J 3 0 g O O O O O O O O S o 2?g>c5a5oso><7>oa>o oooooooo cs figure 1 Total primary energy use in EU2j by source (based on iea, ).

13 RETHINKING EU ENERGY SECURITY % 90% g 80% 1L 70% a, S 60% S 50% 53 If 40% f 30% I 2 0 % H 10% 0% III Other Geothermal Solar/wind/other Hydro Biofuels and waste >J Nuclear Natural gas ZOIl Coal figure 2 Primary energy use in EU27 by source (based on iea, 2013). 4.2 Natural Gas Figure 3 and Figure 4 show the origin of natural gas use in the E U 28 in the period by country. The category own supply refers to natural gas that is produced and consumed within a country s border. Intra e u imports/ exports refer to natural gas that is imported and exported by countries within the E U 28. This consists for 95 per cent of natural gas exports from the Netherlands to, mainly, Germany, Italy and Belgium. The figures show that net imports of natural gas in the EU come primarily from Russia, Norway, Algeria, Qatar and Nigeria, in recent years. In the period from 1990 some shifts are visible. The contribution of Norway has increased from 7 per cent to 22 per cent. Furthermore, the entrance of Qatar is visible, starting with 1 per cent in and increasing to - 7 per cent in Total net imports for natural gas supply amount to 6 4 per cent in This is a strong increase in comparison to 1990 where net imports amounted to per cent. The difference can be explained by a decreasing share of domestic supply and an increase of imports from Norway. If we ignore Norway, which is closely related to the E U 28, the import dependence reduces to 37 per cent in 1990 and to about per cent in the years A large share of natural gas imports comes from the m e n a region (Middle East and North Africa)2 and the Caspian Sea Region.3 In 2012, these countries 2 Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Malta, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, West Bank and Gaza, Yemen. 3 Azerbaijan, Kazakhstan, Turkmenistan, Iran and Russia. PERSPECTIVES ON GLOBAL DEVELOPMENT AND TECHNOLOGY 13 ( 2014)

14 7 7 0 AMINEH AND CRIJNS-GRAUS deliver 62 per cent of natural gas imports, which is a decrease in comparison to 1990 when 85 per cent originated from these regions. This is mainly a result of the increasing share of Norway in imports. Egypt Nigeria Qatar C Algeria Norway Russia '/. Other and non-specified Intra-EU imports/exports Own supply U 2012 fig u re 3 Natural gas supply in EU28 by country (based on Eurostat, 2014). Own supply Intra-EU imports/exports Other and non-specified Egypt Nigeria Qatar C Algeria Norway Russia fig u re 4 Natural gas supply In EU28 by country as shares (based on Eurostat, 2014).

15 RETHINKING EU ENERGY SECURITY Crude Oil Figure 5 shows the development of crude oil use in EU28 by country of origin, in the period There is a growing trend for crude oil supply up to 2005; thereafter oil use decreases and seems to stabilize in Both in an absolute and a relative sense there is a strong increase of crude oil supply from Russia, from 1 e j in 1990 to 7 e j after 2002, with an increasing share from 5 per cent to 30 per cent after 2004 (see Figure 6). Import dependence of oil has increased from per cent in the period to per cent in the period Excluding Norway, these figures reduce to 60 per cent in the Nineties and around 75 per cent in Domestic and intra e u supply have decreased from 20 per cent in 1990 to 12 per cent in Intra e u imports and exports consist mainly of oil supply from u k and Denmark to the Netherlands, Germany, Sweden and France. Like natural gas, a large share of oil imports originate from the m e n a and Caspian Sea region, corresponding to 72 per cent in Contrary to natural gas, this is an increase in comparison to the 1990 level when the share of imports from these regions was 66 per cent. Own supply = Intra-EU imports/exports Other and non-specified INI Iran Algeria Azerbaijan Iraq I Kazakhstan Nigeria V. Libya Saudi Arabia Norway I I I I I I I 1990 * Russia figu re 5 Crude oil supply in EU28 by country o f origin (based on Eurostat, 2 014). PERSPECTIVES ON GLOBAL DEVELOPMENT AND TECHNOLOGY 13 ( )

16 772 AMINEH AND CRIJNS-GRAUS 90% 80% 70% ir 60% 50% 40% 30% u 100% 20% 10% 0% Own supply = Intra-El) import/export Other and non-specified 11! Iran Algeria Azerbaijan Iraq Kazakhstan Nigeria f t Libya Saudi Arabia Norway Russia figu re 6 Crude oil supply to EU28 by country o f origin as shares (based on Eurostat, 2014). 4.4 Coal The development of coal supply in the eu clearly shows the impact of the economic crisis, with a sharp decrease of coal supply in 2009 and an increasing trend thereafter (see Figure 7). As was the case for natural gas and crude oil, Russia is also the biggest supplier of coal to the e u. Its share increased in the period from 4 per cent to 13 per cent; after that it stayed fairly constant (see Figure 8). The second source of coal is from Colombia, which contributed 12 per cent in 2012, followed by the United States with 12 per cent and Australia with 4 per cent. Other countries have fairly small shares. The contribution of South Africa slowly decreased from 12 per cent in the early 2000s to 3 per cent in Overall import dependence on coal increased sharply from 21 per cent in 1990 to 51 per cent in Notable is the increase of the United States in coal imports in 20:1. As a result of the shale gas revolution, the us has increased the level of its coal exports ( e u is s 2013). Coal production in the e u amounted to nearly 7 e j in 2012 of which about 1 e j was exported to countries outside the e u (mainly Bosnia and Herzegovina, Norway, Turkey and Switzerland), leaving about 6 e j for domestic use and 6 ej of imported coal (Eurostat 2014).

17 RETHINKING EU ENERGY SECURITY ,000 a , , Own supply III Intra-EU import/export Other and non-specified Ukraine N Canada Indonesia South Africa O Australia United States Colombia Russia T I figure 7 Coal supply in EU2& by country o f origin (based on Eurostat, 2014). c Si fi o Own supply lltl Intra-EU import/export Other and non-specified Ukraine Canada Indonesia South Africa Australia United States Colombia Russia figure 8 Coal supply in EU28 by country o f origin as shares (based on Eurostat, 2 014). 4.5 Total Primary Energy Supp ly Security Table 1 summarizes net import rates per fossil fuel source in e u. While looking at the trends in imports of the different fossil fuels, we saw that crude oil and natural gas have the highest import rates of 88 per cent and 65 per cent in 2012, respectively. Excluding Norway, these figures decrease to 78 per cent and

18 774 AMINEH AND CRIJNS-GRAUS 40 per cent, respectively. The import rate for coal is 51 per cent in 2012 and thus comparable to the natural gas import rate excluding Norway. All fossil fuels show increasing rates of import dependence in the period The share of natural gas imports increased from 46 per cent to -65 per cent, crude oil from per cent to per cent and coal from 21 per cent to 51 per cent. The overall import dependence for total primary energy supply in the eu amounts to 53 per cent in 2012, coming from 43 per cent in Excluding Norway, these shares were 39 per cent in 1990 and 47 per cent in t a b l e 1 Net import rate in e u perfossilfuel source (share o f energy use in E U 2 8 that is net imported) Coal 21% 25% 36% 45% 44% 47% 51% Natural gas 46% 44% 49% 59% 63% 67% 64% Oil 80% 75% 76% 82% 85% 86% 88% Total primary 43% 43% 46% 52% 52% 54% 53% energy use Source: Based on Eurostat (2014). 90,000 8o,oco cu Is oh 60.0 co Coal imports 13 Natural gas imports H Crude oil imports Intra eu H Own supply f i g u r e 9 Total primary energy use in E U 2 8 by type o f origin (based on Eurostat, 2014).

19 RETHINKING EU ENERGY SECURITY 775 Figure 9 shows the development of total primary energy use in the eu, broken down by the origin of the energy. The category own supply includes energy supply coming from fossil fuel production, renewable energy and nuclear energy use within e u countries. Intra e u refers to supply from other e u countries inside the e u and consists mainly of natural gas supply from the Netherlands and oil supply from the UK. The figure shows that of fossil fuel imports, crude oil is highest in an absolute sense, followed by natural gas imports. Figure 10 shows a breakdown of primary energy supply by country of origin. All countries supplying more than 1 e j of fossil fuels to the e u in 2011 are included. Two main countries can be identified as sources of fossil fuel: Russia and Norway. Their shares have increased from 8 per cent in 1990 to 18 per cent in 2012 for Russia and from 4 per cent to 9 per cent for Norway. The remaining imports are coming from a number of countries, such as Algeria (natural gas), Saudi Arabia (oil) and Columbia (coal). The share of m e n a and the Caspian Sea Region in total imports equated to 62 per cent in 2012, which is the same level as in % ^ 90% l 80% g 7 0 % S' co g 60% E a* "g 50% o H 40% 30% 2 0% 10% 0% Other C Iran Azerbaijan III Qatar Kazakhstan United States Colombia S Saudi Arabia Algeria Nigeria ' / a Norway Russia EU28 f ig u r e 10 Total primary energy use in EU28 by country o f origin as shares (based on Eurostat, 2014). PERSPECTIVES ON GLOBAL DEVELOPMENT AND TECHNOLOGY 13 ( )

20 776 AMINEH AND CRIJNS-GRAUS 4.6 Production of Fossil Fuels in the e u and Reserves In the sections we discussed decreasing amounts of own supply of fossil fuels within the eu. In this section we will discuss production and reserves of fossil fuel sources in comparison to consumption. Figure 11 shows fossil fuel production in 2012 by country. More than 70 per cent of fossil fuel production in the eu occurs in only four countries: the UK, Germany, Poland and the Netherlands. The remaining countries have an overall low fossil fuel production. Of fossil fuel production, coal is the largest with 43 per cent, followed by natural gas with 38 per cent and oil the remaining 18 per cent in Figure 12 shows the trend of fossil fuel production in the eu in the period 1990 to In comparison to 1990, oil production in the eu has decreased by 43 per cent in 20x2, natural gas by 19 per cent and, most notably, coal by 55 per cent. In the last 20 years, many coal mines in Europe were closed, mainly under the influence of cheaper imported coal. In 2008, the European Commission paid 3 billion Euros in state aid to mines (Euroserver 2010). By 2018, subsidies to coal mines will end and loss making coal mines will be closed by 2014 (Hrushka 2010). Further decreases in coal production are therefore to be expected. y y</ ^ / / # S' ^ a t? " i f & <r figure 11 Fossil fu e l production in EU28 by country in 2012 {based on Eurostat, 2014).

21 RETHINKING EU ENERGY SECURITY 777 figure 12 Fossilfuel production in BU28 in period tggo to 2 on (based on Eurostat, 2014). table 2 Consumption, production and reserves perfossilfuel source in 2012 in ej and between brackets global share Unit: ej in 2012 Oil Natural gas Coal Consumption 2 6 ( 1 5 % ) 1 8 ( 1 4 % ) 1 2 ( 4 % ) Production Reserves 3 (2%) 3 7 ( 0. 4 % ) 6 ( 5 % ) 6 0 ( 1 % ) 7 (3%) ( 7 % ) Source: bp (2013). Table 2 shows how consumption, production and reserves of fossil fuels in the eu compare and what their global share is. In 2012, oil consumption amounted to 26 ej in the e u, equal to about 15 per cent of global consumption. This represents a 4.6 per cent decrease compared to 2011 and interrupts a longstanding rising trend. Oil production has declined over the last year and now stands at approximately 3 ej per year, or 2 per cent of global production. Even worse for

22 778 AMINEH AND CRIJNS-GRAUS future prospects are the eu s oil reserves, which currently stand at 37 ej, a staggeringly low 04 per cent of global reserves and declining (bp 2013).4 The statistics on natural gas are not much more optimistic. In 2012, gas consumption stood at 18 ej, or 14 per cent of total world consumption, which is a 2 per cent decrease from the year before and again interrupts an overall increasing trend. At the same time, gas production in 2012 fell 7 per cent on the previous year to 6 ej (Eurostat 2014), continuing the decreasing trend and making eu production 5 per cent of global production. Again, the state of the reserves further aggravates the problem, with the current standing at 60 ej or 1 per cent of global reserves and decreasing (bp 2013). In other words, the eu possesses insufficient natural gas and oil reserves to meet future demand. For coal the situation is different, mainly in terms of reserves. Coal consumption is somewhat lower in comparison to natural gas and oil with 12 ej, representing 4 per cent of global consumption. Coal production, on the other hand, is higher with 7 ej in 2012, equivalent to 3 per cent of global coal production. Most notable, however, are coal reserves, which are much higher, representing 7 per cent of global reserves with 1629 Ej, sufficient to meet more than 100 times coal consumption in the eu in These data include conventional fossil fuel production and reserves, but what about unconventional resources? Table 3 shows estimated reserves for shale oil and shale gas in the eu by country. Clearly these are higher than conventional reserves of oil and gas with 70 ej for shale oil and 462 ej for shale gas, equivalent to 3.7 per cent and 6.6 per cent of global shale oil and gas reserves, respectively. Shale oil reserves are thereby limited in comparison to consumption and would barely be sufficient for three years. Shale gas reserves, on the other hand, would cover nearly 30 times the 2012 consumption. However, countries in the Middle East, North Africa and Russia are estimated to have large reserves of shale gas (-1400 ej) and shale oil (-700 Ej) (derived from us eia 2013a). So, local shale gas production might compete with importing (cheaper) shale gas. This section clearly showed the decreasing fossil fuel production in the eu and increasing import dependence in the last two decades. In terms of reserves, only coal and shale gas production are options for larger scale fossil fuel production within the eu, sufficient to cover demand for a couple of decades. However, with the trend of mine closure due to cheaper imports, tapping the coal reserves would be an unlikely development, at least in the short term. The production of shale gas, on the other hand, is under discussion 4 Conversion factors used: natural gas: 35 m j per cubic meter, oil: 5.4 Gj per barrel of oil, coal: 29 Gj per tonne.

23 RETHINKING EU ENERGY SECURITY 779 table 3 Unproved technically recoverable shale gas and shale oil in the European Union In ej Shale oil Shale gas Bulgaria 1 17 Denmark 0 31 France Germany 4 17 Netherlands Poland Romania 2 50 Spain 1 8 Sweden 0 10 United Kingdom European Union 70 ( 3.7%) 462 (6.6%) Source: us EIA (2013a). Note: Conversion factors: 1 cubic foot natural gas = mj (lower heating value). 1 boe = 5.4 gj (lower heating value). and drilling tests are being conducted in many eu countries. In the us, shale gas contributes to 34 per cent of total natural gas production in 2011 (us eia 2013b). It seems likely that (some) eu countries will follow sooner or later. Furthermore, it is apparent that for oil both global reserves and own eu reserves look bleak. The combination of renewables and electric transport would therefore be a way to enhance energy security. The combination might also be beneficial to help balance the supply and demand of electricity, for example, charging electric cars at night when electricity demand is low, but wind production may be comparatively high. In terms of import dependence, the large share of Russia and Norway in fossil fuel imports is noticeable. Natural gas production in Norway is still increasing, but natural gas reserves are exploited at a rapid pace (Soederbergh et al. 2009). After 2020, decreasing production is expected, leading to a possibly lower role of Norway in gas supply. 4.7 Trends towards Fossil Fuel Import Dependence in E u Expectations are that the eu s dependence on fossil fuel imports will continue to grow. The European Commission has repeatedly warned since 2000 (Green Paper) that the eu s net energy import dependency will rise from 51 per cent in 2005 to 70 per cent of the eu s total energy requirements by PERSPECTIVES ON GLOBAL DEVELOPMENT AND TECHNOLOGY 13 ( )

24 780 AMINEH AND CRIJNS-GRAUS Moreover, in 2011, 40 per cent of the e u s oil imports originate from m e n a countries; by 2030 this figure will reach 90 per cent. The situation for gas is similar. In 2012, 35 per cent of the e u s gas imports came from Russia, 34 per cent from Norway and 15 per cent from Algeria. According to the European Commission, by 2030, this is expected to be 60 per cent from Russia and an 80 per cent overall import dependency (bp 2012). It is a particular cause for alarm that the e u s import dependency on gas from Russia is likely to grow and that gas is increasingly replacing oil as the main energy source. The Energy and Climate package is expected to have a positive impact on energy security. But what will the impact of the targets be on import dependence? The document e u Energy, Transport and g h g Emissions Trends to 2050 (European Commission 2013d) presents a reference scenario that includes the expected impacts of these policies. In this scenario, eu primary energy use decreases from at 74 ej in 2010 to about 68 ej in the period In spite of the implementation of energy efficiency and renewable energy, net imports increase from 53 per cent in 2012 to 57 per cent in 2030 and 59 per cent in This is mainly related to decreasing eu fossil fuel production, which is partly compensated for by increasing renewable energy supply. Fossil fuel production within the e u decreases from 18 ej in 2010 to 11 ej in 2030 and 6 ej in 2050, whereas renewable energy supply increases from 6 ej in 2010 to 12 ej in 2030 and 15 ej in 2050 (see figure 13). Net natural gas imports, as share of natural gas consumption, increase from 64 per cent in 2012 to 72 per cent in 2030 and 83 per cent in Oil imports increase from 88 per cent in 2012 to 90 per cent in 2030 and 97 per cent in Lastly, coal imports reduce slightly from 51 per cent in 2012 to 49 per cent in 2030 and to 44 per cent in To conclude, trends predict a growing import dependence in the e u, but it is only one of the factors that influence energy security. The importance of import dependence for energy security within e u will depend largely on global developments in the field of energy supply and demand. Therefore, in section 5 we will examine expected developments in the field of energy demand, on the one hand, (section 5.1) and energy supply (section 5.2), on the other hand. 5 Developments in Global Energy Demand and Supply 5.1 Developments in Global Energy Demand Global primary energy demand, according to the International Energy Agency World Energy Outlook 2012 (iea 2012), is projected to increase by over one third over the period 2012 to 2035, although this is greatly dependent on, among other things, the level of economic growth until then. Sixty per cent of this growth is expected to be underpinned by rising living standards in

25 RETHINKING EU ENERGY SECURITY 781 figure 13 Production and net imports in EU in period in reference scenario (based on EU, 2013). China, India and the Middle East. Meanwhile, there is a pronounced shift away from oil, coal (and, in some countries, nuclear) towards natural gas and renewables. The growth of demand in industrialized or Organization for Economic Cooperation and Development (oecd) countries, such as eu member states and the us, will be more modest, given that they already have high levels of per capita use. As a result, it is predicted that in 2035 more than 30 per cent of world energy demand will come from developing countries and specifically from China, which is now the largest leading global energy consumer.

26 782 AMINEH AND CRIJNS-GRAUS According to b p, China has already overtaken the us as the world s biggest energy user since 2010, with a total share of energy consumption of 22 per cent in 2012, compared with 18 per cent for the us (bp 2013). Over the next two decades, oil is expected to remain the main fuel for industries and households, accounting for about 40 per cent of global energy consumption. It is expected that global oil demand will increase by 33 per cent from 171 e j in 2010 to 227 ej in 2040 (see table 4). The us e i a (20i3f) anticipates an even higher growth for the global demand of natural gas during the period of 63 per cent, from 111 to 181 e j. Gas import dependency will increase substantially in all major consumer markets, except for East and Southeast Asia, where import dependency is already very high. Table 4 shows that in most industrialized countries, total oil demand is expected to decline as natural gas use increases. High annual growth rates are estimated for natural gas use in China (5.3 per cent) and Africa (3.1 per cent). For oil, highest annual growth rates are expected for India (3.1 per cent) and China (2.5 per cent). tab l e 4 Projected global oil and natural gas consumption Region/country EJ Oil Annual average growth <%) Natural gas Annual average growth (%) North America us o e c d Europe Industrialized Asia i.3 Japan i 1.0 South Korea Non-OECD Europe and Eurasia5 Russia Central Eurasia: Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgystan, Tajikistan, Turkmenistan and Uzbekistan.

27 RETHINKING EU ENERGY SECURITY 783 Region/country Oil Natural gas EJ Annual average growth (%) Annual average growth (%> Developing Asia China India ' 2.0 Central and South America M iddle East Africa i W orld Total Source: based on EIA-Intemational Energy Outlook (2013), table A5 and A6, pp Note: Conversion factors: 1 cubic foot natural gas = mj (lower heating value). 1 boe = 5.4 gj (lower heating value). 5.2 Developments in Global Energy Supply In section 5.1 we saw that substantial increases are expected for natural gas and oil demand (45 per cent increase in the period for oil and gas together). However, in the period to 2035, global oil and gas supplies are predicted to originate in fewer countries than today ( i e a 2012). This is due to the fact that proven oil and gas reserves are unevenly distributed in the world and that only a few countries are surplus producers. We will therefore examine the situation for oil and gas reserves in more detail (5.2.1) and look at developments in production thereafter (5.2.2) Oil and Gas Reserves In section 4 we discussed oil and gas reserves in the eu and found them to be small. But what about global reserves and how are they divided over countries? Table 5 shows proven oil and natural gas reserves in the world and for key countries located in m e n a and the Caspian region including Russia, in The total global oil stock at the end of 2012 was estimated to be 9,000 ej proven reserves, of which as much as 73 per cent was in located in o p e c (b p 2013). Fourteen countries account for 90 per cent of the total global proven oil reserves: Saudi Arabia, Iraq, United Arab Emirates (u a e ), Kuwait, Iran, PERSPECTIVES ON GLOBAL DEVELOPMENT AND TECHNOLOGY 13 ( 2014)

28 784 AMINEH AND CRIJNS-GRAUS table 5 Proven oil and natural gas reserve in the Caspian Sea Region, Europe, us, Persian Gulf Region and North Africa, 2012 Proven oil reserve (ej) Proven natural gas reserve (ej) Caspian Sea Region[ 1 ] Azerbaijan Kazakhstan Turkmenistan Iran [2] Russia Persian Gulf Region 0 0 United Arab Emirates Iraq Kuwait Oman Saudi Arabia North Africa 0 0 Algeria Egypt Libya Tunisia 2 u s E U W orld Total Source', bp (2013). Notes-. [1] The Caspian Sea Region refers to Azerbaijan, Kazakhstan, Turkmenistan, Iran and Russia; Persian Gulf region countries refer to Iran, Iraq, Kuwait, Oman, Saudi Arabia and United Arab Emirates. [2] Iran is member of both regions, the Middle East and the Caspian Region. Venezuela, Russia, Mexico, us, Libya, China, Nigeria, Norway and the u k. Just five countries (Saudi Arabia, Iraq, u a e, Kuwait, Iran) hold almost one-half of the world s total proven oil reserves. Global natural gas reserves at the end of 2012 were estimated to be about 6500 e j. Proven gas reserves are slightly less concentrated than oil reserves. Over 70 per cent of natural gas reserves are located in the Persian Gulf region and Sea region. The proven gas reserves for Azerbaijan, Turkmenistan, Kazakhstan, and Iran are estimated to be 3100 e j, which is almost as much as the combined proven gas reserves in Europe, the us and the Middle East.

29 RETHINKING EU ENERGY SECURITY 785 The Middle East has substantial gas reserves, but they remain largely untapped. This is due to the difficulties and costs involved in developing and bringing these gas reserves to market. Compared to the international oil market, the international gas market is still very much a regional one, divided into Asia s lng market, the Russian-European market and the North American market. The Caspian Sea region holds one of the world s largest oil and gas reserves, making them very significant in global markets. Iran and Russia are the two main powers in terms of oil and gas reserves in the Caspian region and have the largest energy reserve in the world (36 per cent of global natural gas reserves and 15 per cent of oil reserves). Iran is the world s largest owner of proven natural gas reserves and ranks fourth in world proven oil reserves. Russia ranks eighth in the world for proven oil reserves and is second for proven gas reserves Oil and Gas Production, Consumption and Net Exports Table 6 shows oil production, consumption and net exports for the years 2002, 2007 and 2012 in key oil and gas producer countries. It shows the development of production, consumption and the resulting exports in the last decade. In comparison to 2002, the increased net exports of the Caspian Sea Region are clearly visible. These increases occur mainly due to increased production in Azerbaijan, Kazakhstan and Russia. Furthermore, increases in United Arab Emirates, Iraq, Kuwait and Saudi Arabia are notable. The largest oil exporting countries in 2012 were Saudi Arabia and Russia, together supplying 25 per cent of oil consumption. To meet growing global oil and gas demands, iea projections indicate that world oil supply from outside the opec, which was less than 97 ej in 2011, will reach its plateau, up to more than 105 ej per year, in the mid-2020s and then drop back to 99 ej by 2035 (iea 2012). The increase is mainly expected to come from a surge in unconventional energy production in the us and Canada and deepwater production offshore Brazil. It is expected that a large share of the Middle East s oil export in 2035 will reorient towards newly industrializing Asian countries, mainly China (iea 2012). Nonetheless, the market share of opec countries in oil supply is expected to increase from 43 per cent in 2012 to 46 per cent in 2030, and continues a longstanding growth trend (bp 2012). According to iea (2012), Iraq is an important resource-rich country that can become a geopolitical issue in the oil market. Iraq s projected oil production will rise from 6 ej in 2012 to 12 ej in 2020 and to over 16 ej in This would mean exports of over 8 ej in 2020 and of over 12 ej in 2035, up from more than 4 ej in 2012.

30 786 AMINEH AND CRIJNS-GRAUS table 6 Caspian Sea Region, Persian Gulf Region and North Africa oilproduction, consumption and exports Country EJ Production Production 2002 Production 2007 Production 2012 Consumption Consumption Caspian Sea Region Azerbaijan Kazakhstan Turkmenistan Iran 7-i Russia o Persian Gulf Region United Arab Emirates Iraq * Kuwait Oman 1.8 i * Saudi Arabia North Africa Algeria Egypt i Libya o 0-5* Tunisia * World Total Sources: Based on data from us eia (20x3c), * based on data from bp (2013). Iran, on the other hand, shows decreasing levels of oil production. For the past several years, Western governments have imposed economic sanctions on the Iranian regime designed to pressure Iran s ruling elite into giving up its uranium enrichment program. Until 2012, these sanctions were not targeted at Iran s petroleum sector, which accounted for well over 70 per cent of Iran s government revenues during the past decade. Reasons can be found in the reliance by some European and Asian countries on Iranian oil supplies, investment by international oil companies in Iran s oil and gas sector, and the role of Iranian oil production in an era of rising emerging market demand and slow non-opec supply growth. This began to change in 2012, when relatively low global oil demand growth and strong increases in non-opec liquids production

31 RETHINKING EU ENERGY SECURITY 787 N e t e x p o r t * i m p t i o n C o n s u m p t i o n 2012 N e t E x p o r t s N e t e x p o r t s N e t E x p o r t i -5 i i * 1.5* * 0. 3 * i o i * 0.3 * i 2. 6 * 0.2 * created an opportunity for the international community to tighten sanctions targeting Iran s oil sector. As a result of stronger sanctions implemented by the United States and many of its eu member states allies, Iran s oil production fell to 6 ej, its lowest level since 1989 (bp 2013). New us sanctions, which took effect in February 2013, are likely to begin removing additional Iranian barrels from the market soon. However, the window of opportunity in which the market can comfortably withstand the loss of additional Iranian oil while minimizing oil price volatility and damage to the global economy is small, extending no farther than mid While non-opec supply growth in 2014 is currently expected to meet or exceed growth in 2013, global oil demand will likely accelerate, leading to a tighter oil market. For example, while an estimate

32 788 AMINEH AND CRIJNS-GRAUS table 7 Caspian Sea Region, Persian Gulf Region and North Africa natural gas production, consumption and exports Country EJ Production* Production 2002 Production 2007 Production 2012 Consumptior Consumption Caspian Sea Region Azerbaijan Kazakhstan Turkmenistan Iran Russia Persian Gulf Region United Arab i -5 i i -3 Emirates Iraq Kuwait Oman o Saudi Arabia North Africa Algeria Egypt Libya Tunisia World Total# Sources: * bp, 2013 and us eia, 2013c. is not yet available, the eia-doe currently expects global demand to grow by 2.6 ej in 2014 compared to 2.0 ej in The presence of a nuclear Iran in a Middle East region already fraught with instability will likely lead to long-term risks to oil markets and costs for the United States and the global economy. Table 7 shows natural gas production, consumption and net exports for the years 2002,2007 and Russia is currently the world s second largest natural gas producer, after the United States (bp 2013). In terms of net exports, Russia is largest, supplying 20 per cent of world natural gas consumption. Non-OECD Europe, Eurasia and the Middle East accounted for approximately 40 per cent of global natural gas production in 2012 (bp 2013). These

33 RETHINKING EU ENERGY SECURITY 789 N e t e x p o r t * u m p t i o n C o n s u m p t i o n 2012 N e t E x p o r ts N e t e x p o r t s N e t E x p o r t i - 5 i o regions are expected to account for 80 per cent of the increase in production between 2005 and 2030 ( b p 2011). At the same time, o e c d countries will see a decline in their share of global natural gas production from 39 per cent to 27 per cent. Hence, it is estimated that by 2030 supplies of gas to the world market will originate in fewer countries than today because some of the existing sources will dry up. To conclude, import dependence in the e u is expected to further increase in the coming two decades. However, global trends show that fossil fuel production is likely to be more concentrated in fewer countries, while at the same time global demand for energy is expected to substantially increase. PERSPECTIVES ON GLOBAL DEVELOPMENT AND TECHNOLOGY 13 ( )

34 790 AMINEH AND CRIJNS-GRAUS This combination could impact energy supply security severely in the eu, depending on the situation in supplying countries and geopolitical factors. We will examine these issues in section 6. 6 eu Energy Security and Geopolitics As shown in sections 5-7, global oil and gas markets look bleak as a result of ever-growing energy consumption, an increasing exhaustion of conventional reserves and an increasing geographical concentration of production. Against this background, it is likely that state and corporation actors will assign more significance to economic and resource concerns and energy relations will increasingly politicize. On the one hand, the growing energy imports of countries such as China and India can be added to those of the eu and the US. In addition, the anticipation of future supply disturbances is reflected in generally rising oil and gas prices and, in particular, their increasing volatility and the inelastic demand by major consumers. On the other hand, based on the location and increasing scarcity of world oil and gas reserves, a geographical concentration of energy supplies is expected to materialize in the politically unstable countries of the Persian Gulf and the Caspian Region. This section provides an overview of the main domestic and geopolitical factors that threaten energy supply security for the European Union with a primary focus on the Persian Gulf resource-rich countries. In relation to the eu s Energy supply security, there are three concerns to be taken into consideration: 1. A main domestic concern is the way in which the state and connecting society is constructed and led. Almost all Arab resource-rich countries belong to a type of patrimonial rentier-state and society. Following Weber (1968), this regime type has the following characteristics: i) personalistic rule based on loyalty to an individual: governments do not have a professional, career-oriented view; ii) loyalty based on bonds between persons at different levels of power in a network of patron-client relations determine the distribution of rents; iii) personal authority of individual leaders by virtue of traditional status. These types of state and society rely on the surplus of natural resources. This results in poor and uneven economic development, a centralized power structure, corruption and violent conflict. Offshoots of these consequences have proven to cause civil unrest, such as the Arab Spring and pose future threats to the Persian

35 RETHINKING EU ENERGY SECURITY 791 Gulf s oil-producing countries (Anderson & Slahsen 2012; Meissner 2010; Ross 2001,2011; Schwarts 2008). 2. The second concern is the Sovereign Wealth Funds (swfs) managed by patrimonial rentier state systems with domestic and global impacts. swfs have proven to be an asset in both developing and developed economies that manage these assets by applying them to buffer the Dutch Disease or to encourage industrialization, economic diversification and eventually the development of civil society. In patrimonial states, however, swfs are undermined by corruption and the diverting of assets away from long-term socioeconomic development to benefit political elites. In fact, Arab swfs are now a source of the persistence of Arab patrimonial rentier state system. 3. Finally, the post-cold War, me and cea geopolitical landscape is shifting. The emergence of China and other Asian economies has increased their presence in the Middle East due to a growing need for energy and the expansion of Asian markets. The recent finding of energy resources in the US has led to speculation that there will be less us presence in the region. This would pose serious risks to eu energy security if Asian emerging economies were to increase their presence in the Middle East as us interests recedes. This has long been a concern to their allies in the European Union and Asia. These three domestic and geopolitical issues potentially threaten eu energy supply security as well as overall trade and investment in me and cea. The following three sections will discuss and outline the risks associated in dealing with mainly patrimonial resource-rich states and societies. Lastly, we discuss structural challenges for enhancing energy security in eu in section The Patrimonial Rentier State and Society Patrimonial Power Structures Patrimonialism is a type of absolute authority in which all power flows directly through the leader and the ruling elites. The Arab rentier states located in the Persian Gulf belong to this type of (semi) traditional power. In such a state type, the ruler exercises his power without restraint and at his own discretion. The binding norms and relations of bureaucratic administration are constantly subverted by personal and arbitrary decisions by the ruler, who does not feel constrained in ideological terms. In some respects, the organization of power and the staff of the ruler is similar to traditional patrimonialism as described by Max Weber (1968). Society in a patrimonial rentier state

36 792 AM IN EH AND CRIJNS-GRAUS is demoralized and unproductive for a number of reasons. Emancipation of society against the state is no variable for growth when a public is stripped of power. Arab Patrimonial rentier states have agreements with society in which the state provides material benefits for a less or non-democratic structure; the prevailing governance structures in the Arab resource-rich states have led to two mutually reinforcing processes: no public accountability of the state and an ever increasing concentration of political and economic power in the hands of few (see undp 2011). The ultimate risk of such a policy is that it paves the way for gradual social uprising and civil unrest. The lack of jobs, current demographic shift and a growing population of educated youth, among others, has caused revolts and regime changes and civil unrest and war in other Arab states in the so-called Arab Spring The Resource Curse Arab resource-rich countries in the Middle East can be classified as a type of patrimonial rentier state or states in which the economy is dependent on the export of natural and mineral resources. In the Arab resource-rich countries, oil-led economic growth has led to premature de-industrialization and reinforced the subordinate position of the region in the global economy. According to the UNDP Arab Development Challenges Report, this economic structure is responsible for the failure of the Arab region to generate decent and productive jobs for its people (undp 2011). An alternative to this structure would be diversified economic sectors emphasizing occupational specialization that produces a more autonomous workforce equipped with specialized skills. This would ideally enhance bargaining power against ruling elites and form a setting that allows self-regulating interest groups (Mahdavy 1970; Schwartz 2008; Ross 2001,2011; Carlos 2013). The Dutch Disease, as it is called, attracts policy to one sector of a lucrative economy. In this case, the focus is resources, while attention is lacking in other sectors like agriculture, non-oil manufacturing and services. The problem with depending too much on the resources sector is that the commodity is increasingly volatile. In the case of the resource-rich Arab patrimonial states of the Persian Gulf, organized at the Gulf Cooperation Council (gcc): Saudi Arabia, United Arab Emirates (uae), Kuwait, Qatar, Oman, and Bahrain, the economy has been shaped by the exportation of oil and gas. Table 8 illustrates the dependence of state revenues as well as gdp on exports of oil and gas in Arab resource-rich countries of the Persian Gulf. Despite the volatility, fuel exports comprise more than 80 per cent of merchandise exports in many of these resource-rich states, making their economies dangerously fragile without support from other sectors.

37 RETHINKING EU ENERGY SECURITY 793 table 8 Export Earnings and State Budget based on Oil and Gas in GCC-countries (%) Export earnings (%) State Budget (%) GDP (%) Bahrain Kuwait Oman Qatar Saudi Arabia UAE Source4. Martin Hvidt (2014) The Lack of Economic Diversification As discussed above, a rentier economy is limited in supporting multiple economic sectors due to the reliance on marketing resources. Non-oil sectors are underdeveloped, and even those sectors become inherently linked to resources; construction and services, for instance, are dependent on oil revenues in most Arab Middle East countries because these funds shape the building of infrastructure (undp 2011). Other manufacturing categories like rubber, plastic, chemicals and food are also volatile due to the strong connection to petroleum (undp 2011). Innovation and industrial capacities are underdeveloped and the current path leads to a more rudimentary economic structure relative to what one would expect for the level of gdp per capita (undp 2011). In other words, the gdp per capita is high, but in no way reflects the modernization of industry. Keeping in mind the high gdp per capita is the price regimes pay in order to keep society out of policymaking and eliminate most accountability for regimes. It is therefore a misleading generalization to use when judging the condition of the economy. Table 9 indicates the strength of per capita gdp in the region and is linked to the resource exports in table 8. The following numbers are therefore a response to resource export earnings and are thus as precarious as the commodity these high figures rely on. Despite the numbers above, the Arab states in the Middle East (not exclusive to resource-rich states) have been described as the least industrialized region in the world, which is confounding considering the wealth some of these states have at their disposal to increase growth in agriculture, manufacturing and services (Looney 1994; Shochat 2008; Hvidt 2014; see also Karshenas & Hakimian. 2005). These economies could have a head start in modernizing

38 794 AMINEH AND CRIJNS-GRAUS table 9 GDP Per Capita (usd) B a h ra in 8,538 8, , ,4 6 7 K u w a it 2 0, , , ,4 9 7 O m a n 5, ,455 9, ,1 3 3 Q a ta r 34,990 15, , ,7 3 6 S a u d i A ra b ia 1 6, , , ,4 1 6 UAE 4 2, , , ,0 5 8 Source-. World Bank (2013) their economic structure but have so far chosen not to; political elites are overwhelmingly concerned with personal power rather than strengthening the overall structure of their economies. With a lack of investment in socioeconomic development as a condition for an emerging civil society, the risk of social revolts and revolutions will increase. The majority of Arab regimes, mainly the patrimonial rentier states, have failed to develop and diversify their economies and develop human capital (accompanied by democratization of domestic societies and institutions). Consequently, government budgets rely too heavily on oil and gas income, leaving the countries vulnerable to fluctuations in global oil prices. Before the Libyan uprisings, which began in February 2011, the share of income from oil exports contributed to 70 per cent of the country s g d p and about 85 per cent of government revenues. Moreover, as a result of declining oil prices, funding for social welfare programs in the region is diminishing. This long-term reality could well result in permanent political unrest in the region (Heritage 2011; Amineh & Yang 2012; see also table 1). Large-scale oil income generates multiple political incentives that affect an authoritarian regime type and its domestic and foreign policy. At least four distinct incentives can be identified (see Amineh 2010; Colgan 2011). First, oil generates financial resources that can be used to finance military capabilities and campaigns. Second, oil income generates significant financial incentives to avoid any international conflict that would interrupt the state s oil export sales.

39 RETHINKING EU ENERGY SECURITY 795 Third, oil income increases a state s propensity to use financial resources to achieve foreign policy objectives, such as providing direct foreign aid for allies, support for foreign insurgents, and funding for ideological instruments such as religious or educational institutions. Saudi Arabia, Iran and Russia are three concrete examples of this phenomenon. The fourth and perhaps most subtle of the political incentives generated by oil income is that it encourages leaders to take risks. A significant body of existing research illustrates how an authoritarian resource-rich economies can have negative political consequences (Karl 1997; Ross 2001,2010; Hertog 2010). The ruling elites of the resource-rich authoritarian regimes often have a high degree of political autonomy, and thus a low risk of being removed from office by risky and potentially unpopular actions. The ruling elite of oil-based authoritarian regimes can use the state s oil income to purchase political support, thereby allowing for significant risks, including those involved in aggressive foreign policy adventurism. The oil revenues also enable a number of authoritarian resource-rich regimes to finance the stateled industrial development (see Amineh 2010) Economic Structure of Rentier States in the Middle East Whereas exports from the region are quite limited in category, the variety and magnitude of imports here are overwhelming. From manufacturing, services and agriculture, an unbalanced amount of goods are depended on from other states. This signifies the inability to standalone in certain sectors of the domestic economy. In the world market, patrimonial resource-rich Arab states have been predominantly asked for one commodity, energy. Table 10 indicates the versatility and magnitude of goods that these states import, including everything from computers, cars, foods, textiles and luxuries. The use of imports is unsteady, contributing to over half of each respective state s amount of consumption. As diversified industrial sectors in most resource-rich Arab countries are non-existent, any attempt to immerse into the global economy benefited mostly industries with static comparative advantage, particularly those linked with petroleum (u n d p 2011). While the services sector has blossomed in other developing economies in Asia, it has done little to benefit the Middle East economies where services fall at the low end of the value chain, contribute little to local knowledge development and lock countries into inferior positions in global markets (Looney 1994; see also Karshenas & Hakimian 2005; Shochat 2008; Hvidt 2014). Unguided sectors have been left to weaken.

40 796 AMINEH AND CRIJNS-GRAUS TABLE 10 GCC Imports of Goods and Services, iggo-2010 Average Country Percent of gdp Percent of Consumption Bahrain Kuwait Oman Qatar Saudi Arabia 3 i 56 UAE GCC Average Source: IMF Middle East and Central Asia Department (2011) Including food, other non-durable consumption goods, intermediates, and durables Domestic Challenges and Political Risks for Investment in Resource-Rich Arab States Future involvement in the region does not come without increasing obstacles. A primary problem with investing here is the volatility of resources. A social aspect to consider is the instability in these countries due to the persistence of a patrimonial rentier system and a lack of a role for civil society. The growing younger populations may not be as easily bought as older generations, as we have experienced in the Arab revolutions in Currently, patrimonial states have the capabilities to buy-out or suppress dissatisfied populations, but for how long is uncertain. Political motives are yet another consideration. The region does not exist without corruption and it should be considered that ruling political elites will primarily benefit from the existing policies. The future, therefore, is unpromising. Rentier states lead to backward development and cover their shortcomings by constructing modern metropolises and concealing poverty, which does nothing more than distract observers from a weakened economic structure. Perhaps making it worse, there are no current actions being taken to remedy a problem of such magnitude. State-sponsored terrorism is another unattractive feature for these countries. These states have funded terrorist groups: Qatar was accused of funding Islamic fundamentalism in Mali; Saudi Arabia was quoted in a secret memo exposed by WikiLeaks as being a significant financial supporter of Al-Qaeda and other terrorist groups (Walsh 2014).

41 RETHINKING EU ENERGY SECURITY 797 Adding to these concerns is another form of regime empowerment. One of the temporal reasons for the persistence of such states and societies is the control of huge wealth collected in the so-called Sovereign Wealth funds (s w f s) through oil surpluses. These assets will be discussed in more detail in the following section. 6.2 sw fs and the Persistence o f the Arab Patrimonial Rentier State System s w f s are powerful political tools existing in global markets. These funds allot assets to meet different criteria according to the interest of the state possessing them, s w f s have existed in one form or another for the last two centuries, developing from banking systems that were created to lend finances for economic development. Such funds are state-run investment pools funded by foreign exchange assets. Depending on the source of assets, they can be divided into commodity funds mainly oil funds and non-commodity funds. In March 2014, the total of financial assets stored within these s w f s is estimated to amount to u s d 6,357 trillion of which u s d 3,808 trillion or 59 per cent is oil and gas related (Bahgat 2009:283; sw f Institute 2014). Table 11 illustrates the strength of oil and gas based funds and the array of actors directing them related to the Middle East and Central Eurasian resource-rich countries. Currently, the s w f s of Gulf Cooperation Council s (g c c ) countries hold about u s d 2 trillion in assets, accounting for approximately one third of the total global s w f assets. Within the GCC, the Abu Dhabi Investment Authority has secured u s d 773 billion in assets and manages the largest s w f. Abu Dhabi is followed by s a m a Foreign Holding of Saudi Arabia and Kuwait, which controls an investment pool of u s d billion and u s d 410 billion, respectively. Arab resource-rich countries form a large part of the top ten of the biggest s w fs in the world. As Herman Schwartz (2012) points out, sw fs fall into three categories: 1. In the first category, s w f s serve as a buffer to the problems that occur in resource-rich exporting states that are threatened by an undiversified economy and the Dutch Disease. 2. The second type of sw fs are implemented to finance industrial development as well as the private sector with related forces. 3. Finally, s w f s can be used as a means of patrimonial rent extraction via political capitalism (Schwartz 20x2). Individuals seeking personal gains are in control of s w f s in this category, directing finances back towards political elites.

42 798 AMINEH AND CRIJNS-GRAUS table ll Top 20 oil and gas related Sovereign Wealth Funds, 2014 Country Sovereign W ealth Fund Assets $Billion Inception Origin UAE-Abu Dhabi Abu Dhabi Investment $ Oil Authority Saudi Arabia sa m a Foreign Holdings $676 n/a Oil Kuwait Kuwait Investment Authority $ Oil Qatar Qatar Kuwait Investment $ Oil & Gas Authority Russia National Wealth Fund $ Oil Russia Reserve Fund $ Oil Algeria Revenue Regulation Fund $ Oil & Gas UAE-Dubai Investment Corporation of $ Oil Dubai Kazakhstan Kazakhstan National Fund $ Oil Libya Libyan Investment Authority $ Oil UAE-Abu Dhabi International Petroleum $ Oil Investment Company Iran National Development Fund $ Oil & Gas of Iran UAE-Abu Dhabi Mubabala Development $ Oil Company Azerbaijan State Oil Fund $34-i 1999 Oil Kazakhstan National Investment $ Oil Corporation Iraq Development Fund for Iraq $ Oil UAE-Federal Emirate Investment Authority UAE Oil Oman State General Reserve Fund $ Oil Oman Oman Investment Fund $ Oil Saudi Arabia Public Investment Fund $ Oil Source-. Sovereign Wealth Fund Institute,

43 RETHINKING EU ENERGY SECURITY 799 Although the label of s w f s is used to explain these three types, it can be argued that the motives behind these assets are not always similar First Two Types of Sovereign Wealth Funds: Buffer for Resource Export and Strategy for Economic Development There are valuable uses of s w f s that help aid developing- or advanced economies. In resource-rich states, the task of the first type of s w f is to avoid the resource curse and prevent the Dutch Disease. These include single-sector economies facing rising exchange rates and poor competition in an undiversified market. According to Schwartz (2012), s w f s can aid in economic diversification and they can also assist in preventing the Dutch Disease by sterilizing sudden increases in export revenues. The Netherlands (hence the name, the Dutch Disease) relied heavily on newfound gas reserves in the second half of the twentieth century and quickly found that their reliance on a single-sector/market was volatile and weakened the structure of the economy. Norway s exploitation of oil since the 1960s has benefited the Norwegian economy, but the government used s w f s to ensure this was the case, becoming an exemplary case in how to manage these assets. Instead of using finances procured from oil to further produce it, assets can be placed in s w f s in the hopes of more dependable returns. The method involves keeping finances offshore instead of holding them idly or investing locally. This, Schwartz (2012) claims, raises the political and economic salience of the raw materials sector and it diversifies a country s income sources outside of that country and away from concentrated local risks. In support of the claim that s w f s are by no means a new idea, s w f s working historically in developmental states have taken over the role of international and state-owned banks or the old development banks sailing under new colors (Schwartz 2012). In this second category of s w f s, developing economies such as China, now, or Germany and Japan in the nineteenth century and the Four Asian Tigers (Hong Kong, Taiwan, South Korea and Singapore) in the second half of the twentieth century, are prevalent examples of exploiting assets for the state-led industrial development. States therefore work in ways to develop the economy and activate the business class. Therefore, developmental states are ideally working to develop their civil society with related forces through industrialization and institution-building Third Type of s w f s : Patrimonial Ruler Due to the incomplete separation of the state budget from the private wealth of rulers, the combination of patrimonial rentier power structures and s w f s

44 8oo AMINEH AND CRIJNS-GRAUS lacks transparency and the motives are often questionable and corrupt. Patrimonial rentier states are independent of society, and thus direct finances to benefit political elites with little emphasis on structural economic development. This makes up the third and by far the most effective type of Sovereign Wealth Fund. One third of the world s Sovereign Wealth Funds (swfs) are controlled by the Arab Gcc-patrimonial rentier states. The question is, do swfs play a role in economic development and the diversification of the rentier based state and economy in these countries? Theoretically, all these states agree by investing oil revenues both in local or international industries. The gcc countries could convert the volatile and exhaustible oil incomes into a more stable financial stream of wealth that could be used to develop and diversify their economy in the long term (El-Kharouf et al. 2010). A lack of long-term economic development strategy in patrimonial rentier states, however, hampers the restructuring of an oil dependent state-society and economy. From table 10 it is obvious that, after nearly forty years of diversification policies, the contribution of the oil and gas sectors to the gcc economies remains almost the same. The Arab gcc s ruling elites have been involved with some domestic and, more recently, cross-border economic activities. According to the IMF, between 2000 and 2009, financial services, construction services, non-hydrocarbon manufacturing and tourism increased in the region (2011). Financial institutions and banking investment have increased their presence and no longer rely on the West to watch resource revenues. Furthermore Qatar, Dubai and Abu Dhabi hold percentages of the London Stock Exchange, nasdaq and Citigroup, respectively, and in 2009 Saudi Prince Alwaleed Bin Talal became the single biggest shareholder in Citigroup (Harris 2009; see also Bernstein, Lemer & Antoinette Schoar 2009). Resource-rich Arab states have met some success in other areas, such as commercial and public transport and transportation hubs by air (United Arab Emirates, Qatar Airways, Etihad) and sea (Gulf shipping lanes and ports). Other categories trending in terms of diversification include healthcare; in early 2014 the Dubai Health Authority (dha) aimed to become one of the top destinations for medical tourism in the world (Saberi 2014). World Sports like motor racing, professional golf and tennis competitions and the 2018 Fifa World Cup in Qatar will continue to promote the region to visitors with the hope of attracting future investment or other global interests. Sport, alas, offers only temporary operations, and even Qatar is importing labor to build the stadiums hosting the World Cup. Despite all the attempts of these states, they have failed to transfer from a rentier state, economy and society. Data shows that the countries remain in a position

45 RETHINKING EU ENERGY SECURITY 801 where the oil sector continues to dominate the economy. So, the gcc states continue to be in the situation where they sell their oil and gas on the world market and use the proceeds to import almost all of their living requirements and large parts of their labor force (see Looney 1994; escw a 2001; Belawi 2011). The impact of the emergence of swfs on a domestic level presents an interesting paradox. As we have discussed above, in theory, the swfs in resource-rich countries in the Persian Gulf and the Caspian region can be used to put some assets aside to counter the negative effects of the resource curse and volatile oil prices, or to invest in domestic social-economic development programs. Oil wealth could be used to ensure the economic development and political stability (and thus enhance the legitimacy of the regimes) as well as to preserve the prosperity of future generations, even after the depletion of the existing resources (Baghat 2009; Amineh 2010; Karshenas & Hakimian 2005). The way swfs are managed in patrimonial states, however, with great involvement of ruling elites can undermine sustainable economic development and growth, as well as the establishment of an autonomous business class and a strong civil society. Berstein, Lemer & Schoar (2009) argue that the swfs politically motivated investment strategy in these countries leads to misguided policy attempts to support underperforming but politically connected local industries rather than build a savings buffer for the long run. Thus, the wealth accumulated in the swfs creates political lineages between the political leaders already involved in leading the swfs and the investment targets of the funds on the domestic level. The establishment of an autonomous business class, focused on economic success instead of political motivations, is thus undermined (see Chang 2002; Hinnebusche 2006; Kamrava 2007; Amineh 2010). swfs in no way signify the transformation of patrimonial rentier states into sustainable development and political stability based on democracy. Instead, swfs contribute to strengthening the patrimonial rulers and the rentier system while the resource curse remains unaddressed, swfs are not being proactive, in which case they could offer stability through buffering, diversification of economy, and/or developing civil society forces. In the case of patrimonial societies, swfs act alone and mainly in the interest of ruling elites. This is merely a supplement that seeks to strengthen and maintain regimes and to further empower the political elites of these states. The system is perceptive to the formula that those who control the money control the power, swfs are just another means of perpetuating a damaging patrimonial state system for rentier states in the Arab Gulf region.

46 802 AMINEH AND CRIJNS-GRAUS 6.3 Energy and Geopolitics in the Middle East In the last decade the resource-rich countries of the Middle East and Central Eurasia have been gradually transforming their political, economic and security relationship from the West towards Asia in general and China in particular. China is emerging as a potential geopolitical actor beside the United States in the me and cea. Several crucial political and economic developments have paved the way for this geopolitical shift: (a) economic globalization (mainly the transnationalization of finance and manufacturing and the internationalization of the function of the states (Cox 1987; Ikeda 1996: Hoogvelt 1998; Nayyar 1998). (b) The nationalization of oil companies in the Middle Eastern resource-rich countries (Yergin 1991; Diwan, 2007). (c) the rise and transnational activities of Asian industrializing countries accompanied by the decline of the American hegemony (Ramu 1995; Chang 2002; Schwartz 1994: Ramu & Shiva 1995; Chang 2002; Chin- Chiuan, Hsin-Yi 2010; Victor, et al. 2011). (d) the victory of the Iranian Islamic Revolution in 1979, and (e) the disintegration of the Soviet Union (Castells 1997: Cox 1998). These political and economic developments are transforming the patterns of economic interdependence including the energy sector across Asia. Complementary political, economic and (even security) networks through transcontinental trade and investment, especially in the energy sector, have intensified to a remarkable level (see Calder 2012: Jiang & Sinton 2011: Dannreuther 2011; Downs 2009; Leung 2011; Dittmer & Yu 2010; Victor et al. 2011). The rising oil and gas demand in the Asian industrializing countries, mainly China and India, and the lack of hydrocarbon energy sources, means that resource-rich countries of me/cea will continue to be an important partner in the energy activities of these countries. At the same time, emerging China forms a serious strategic competitive force to the interests of the European Union and the us in these regions. In the following sections we discuss the geopolitical implications of US- China involvements in the Middle East and the impact on EU-energy supply security The United States Hegemony and the Middle East The new global politics that have emerged in the post-cold War era is characterized by unipolar (us) military power, economic tri-polarity, bound together by triadic activity of multinationals, including tnoc and state-owned oil

47 RETHINKING EU ENERGY SECURITY 803 companies (i.e. North America, the European Union and Southeast Asia). Since the dissolution of the Soviet Union, the United States has remained the main geopolitical military actor in the Middle East, while at the same time reducing its energy imports from the Gulf. In this part of the world, the us pursues three primary strategic, geopolitical and geo-economic priorities: (a) (b) (c) The first interest is continued support of their greatest strategic ally in the region, Israel. Second to this is the long relationship that the us has with the Arab main resource-rich countries located around the Persian Gulf. And lastly, their geostrategic efforts to contain the emerging contender states, including China, Russia, Iran and India, much how the u s contained the former Soviet Union, including the creation of energy connections between c a and Afghanistan, bypassing Iran. The us aims to create its own silk road on the Northern Distribution network, bypassing Russian territory in its Southern part through Uzbekistan, Kazakhstan, the Caspian Sea, Azerbaijan and Georgia. The relationship between the us and the Middle East has not proven to be effortless (Anderson 1981; Pollack 2002; Bromley 2005; Haass & Indyk 2009; Roy 2009; Stokes & Raphael 2010; Lesch & Haas 2011; Michaels 2011; Atlas 2012; Byman 2012). In the post-cold War era, American activities in the region have intensified and have created some serious problems for us interests. America supported Saddam Hussein in its long war against the Islamic Republic of Iran during the 1980s. Afterwards, the us sought the expulsion of Iraq from Kuwait in This led to an impoverishment of the Iraqi people and a diminution of the Iraqi state s ability to serve as a buffer against future Iranian influence in the Middle East. Furthermore, the US-led invasion of Iraq in 2003, while toppling the Saddam Hussein regime, impoverished Iraq and gave Iran an even stronger strategic advantage in the Middle East. During the 1980s, the United States armed, equipped and trained Sunni Islamic forces to fight the Soviet army in Afghanistan. Amongst these was Osama bin Laden. The United States welcomed the Taliban to power in Afghanistan in On the one hand, the United States hoped that the Taliban regime could contain the influence of the Shi ite-based Islamic Republic of Iran in the region. On the other hand, it hoped that it would open the way for a centralized government in Afghanistan crucial to the CentGas consortium (Pipeline News, October 1996; see also Amineh & Houweling 2003; see further Callari 2002; Almaty, Financial Times, 25 December 2001). After the war in Afghanistan and the expulsion of the Taliban regime at the end of 2001, the Bush administration discussed the composition

48 804 AMINEH AND CRIJNS-GRAUS of a new Afghan government. Oil diplomacy and company interests largely answer to whoever will govern the Afghans (The New York Times, 15 December 2001; see also Rashid 2000). Thus, sponsoring the Mujahedin in Afghanistan in the 1980s against USSR intervention transformed into a cause for a us invasion in 2011 of Afghanistan that will predictably leave it in the same condition as Iraq, which has now become an ideal setting for Islamic extremists to operate in. At the same time, the war against Iraq and Afghanistan had made it possible for the us to create a long-term military presence in the Persian Gulf. Whether or not the us succeeds, its effort is including responses from other actors both near and far. If it is successful, a long-term American military presence will open the door to American (as well as their allies) enterprise and (non-)faithbased non-governmental organizations to gain a foothold in the region, which might empower the us to shape its host societies and set conditions for outside access to the region s oil and gas. This, in turn, would give the us indirect control over the economic and technological development of potential contenders such as China, India, Russia and even Iran. Despite its position of global military dominance since the Soviet collapse and its expanded powerbase in the region, the us has so far failed to realize its policy power projection in me and cea in general and victory in the global War on Terror in particular. The lack of policy success in the region has no doubt damaged the American image of competence and credibility as a hegemonic power The Arab Spring and the us Interests in the Region During the Arab Spring in 2011 the United States watched authoritarian regimes they viewed as allies fall from power one after another, leaving the us to quickly decide on new actors they would prefer filling the vacated political positions. Such replacement actors included the controversial Muslim Brotherhood in Egypt, (see for instance Salloukh & Bassel 2013; Bassam 2013; Burnell 2013; Mitchell et al. 2013; Byman 2012; Brown 2013; Bayat, 2013). With Morsi behind bars, the us found a new liberator friend in the person of dictator Sisi. Syria has especially complicated the region because of a drawn-out civil war; it has not been atypical when considering the relatively express regime changes in Egypt or Libya. Furthermore, the situation in Syria has essentially revealed the role of the us being one of fickle observers in contrast to the active involvements of Iran and Russia to support al-assad. The region is tumultuous and unrest has invited some potentially undesirable actors in future relations. The American allies Arab resource-rich countries, i.e. Saudi Arabia, Qatar, uae, are becoming uneasy with us policy (see Blanchard 2012). These states have been witness to the civil implosions in the region around them involving monumental social movements and regime changes. So far, the Arab

49 RETHINKING EU ENERGY SECURITY 805 patrimonial resource-rich states have been able to pay-off their societies in order to prevent such unrest and revolts. The us understands it cannot please one party without harming the other. Take Bahrain, for example. The regime has the support of Washington (in cooperation with Saudi Arabia and the gcc), which negatively impacts the protestors. Additionally, it offers support to the Muslim Brotherhood in Egypt, which both Saudi Arabia and the uae see as a political threat. Perhaps most importantly, as the United States stood by and watched ally-dictators fall, other Gulf resource-rich countries who appear to be mounting a counter-revolution against the Arab revolts to their west and south consider the possibility of it happening to their regimes. These episodes reflect the US policy failure mainly in the me Speculation of Dissolution of American Hegemony The deposit, extraction and export of me and cea energy resources are the primary economic sources of interest to the major state powers and corporations. American hegemony might decline further due to their uncertain future reliance on oil in the Middle East (see Mercill 2008). Despite the so-called American shale energy revolution, which predicts that the United States will become the largest global oil producer by 2020 and be fully energy selfsufficient by 2035, the US will remain dependent and the protector of oil from the region for both themselves and their allies, mainly the European Union. All us presidents since Roosevelt agreed that the policy of domestic energy security of America extends beyond the legal borders of the country. Between the end of the 1960s and the oil price hike of 1973, energy security moved to the top of the American agenda. At that time, oil prices had become volatile after decades of stable and low prices. American oil production from us legal territory reached its peak in 1970, with the number of drilling rigs down to one third of its 1955 level (Deffeyes 2001). Up to that time, us domestic high-cost producers had been able to get protection by quotas against low-cost site producers operating abroad (Yergin 1991). In the early 1970s, a buyer s market had turned into a supplier-dominated market. In April 1973, Nixon cancelled the quota system of imports: the United States consumer had made its entry into the world oil market. The US also entered as a strategic actor, overruling domestic interest groups that, in the past, had succeeded in getting protection from political entrepreneurs against low-cost foreign producers. As we have discussed above in all industrial economies, gdp growth and fossil energy consumption are strongly correlated. That is still true today. The global business revolution has not changed that. However, due to outsourcing parts of industrial manufacturing to late-industrializing countries, the contribution of energy use to gdp growth in high-income economies has substantially decreased.

50 8o6 AMINEH AND CRIJNS-GRAUS Some concluded that America can finally leave the Persian Gulf, but it is far more complex than merely vacating the Middle East. The importance of oil, among others, will continue to play a key role in the us power projection towards the Greater Middle East (Amineh 2007; Haass & Indyk 2009) and the Persian Gulf region in particular. Despite the shale energy revolution in the United States, which led to a dramatic change in the us domestic energy landscape, the country remains, and will remain, far from energy independent. According to the e ia -ie o 2014, over the next two decades, as shale oil production peaks, the us will still import over 25 per cent of its total oil consumption. As result of the shale oil surge us oil import dependence has enormously reduced over the last five years, from 56 per cent in 2008 to 32 per cent in 2013 (us e ia 2014). Although the huge increase in Canadian oil imports from 16 per cent in 2004 to 32 per cent in 2013 has significantly altered the composition of the us imports portfolio, Saudi Arabia and the wider Persian Gulf today still contribute around 20 per cent of us oil imports. Increased shale oil production, together with increasing imports from both Canada and Mexico, will lead to the relative reduction of the Persian Gulf oil supply in the mediumterm, but as the shale oil surge is expected to decline in the second half of the next decade this supply will rebound. Even during this medium-term downturn the Persian Gulf will remain one of u s top three oil suppliers. The costprice benefit that the Persian Gulf suppliers enjoy means that there will always be a significant market for their oil in the us. These trends have prompted speculation about future us military behavior in the Persian Gulf and what it could mean for energy supply security for the e u. The e u will continue to rely on energy from the region. Despite breakthroughs in domestic supplies at home, the us will not completely disengage from the Middle East. Even if Washington chooses to import little or no oil from the region, there is still the matter of energy supply for allies, counterterrorism and nuclear proliferation. If, however, us military presence in the region is downgraded, Beijing (and perhaps India and Japan) could see their countries assuming larger roles in securing their own energy interests. This would involve removing any threats they see against their energy security. Current bilateral agreements between China and Russia, China and Iran, and Russia and Iran, but also regional cooperation such as the Shanghai Cooperation Organization (sco),6 are stepping-stones to such a development. The rift between the us, on the one hand, and China and Russia, on the other, 6 The member countries of the sco are Russia, China, Kazakhstan, Kyrgyzstan and Tajikistan. Iran, India and Pakistan have observer status in the organization.

51 RETHINKING EU ENERGY SECURITY 807 is set to become the main geo-strategic reality in Central Asia, with the e u, Japan and India having a secondary role. The SCO is well on its way to becoming an integrated Asian economic, political, military and energy network capable of counterbalancing us regional influence. It must be borne in mind, though, that energy is not the only determinant of geopolitical relations, and that the pursuance of other vital interests will also impact energy relations around the world. For instance, the Cold War has been a dominant factor in international relations and in the way certain regions were approached in the past. During the Cold War period, the Soviet gas campaign met with substantial resistance from the us, which feared Europe s vulnerability as a result of such structural import dependence. Similar dependencies on other suppliers did not meet with this kind of resistance. Indeed, geopolitics is a multifaceted arena in which energy is only one of the many political, military, economic, and ideological agendas pursued. The objective of us policymakers is not only to obtain oil and gas from m e and ce a but also to control its flow to oil and gas markets in the West and in Southeast Asia, us economic interests are combined with strategic interests to weaken China s, Russia s and Iran s influence in the region and also to ensure better control over both resources and the shipping lanes in the Persian Gulf. The us reflects its current interest in the region by its continued control of the Straits of Hormuz an avenue that boasts 20 per cent of all oil trade. The us supplies the majority of military assets that allow the free flow of ships through the straits. 85 per cent of this trade travels to Asian markets, while only 10 per cent is directed to the us (see US e ia 2013d). Thus, American security presence in the region will continue as long as threats are perceived. One of the major obstacles and concerns for the us and their hegemony are the increasing influence of a number of contender states, mainly China, Russia and Iran in m e and c e a. American priority in the region is to ensure Iran does not develop a nuclear weapon and its geopolitical ambitions, which includes supporting Israel. The role the us takes in this is detrimental to global 011 trade because US-led sanctions intended to cripple Iran end up disrupting oil for other actors. China is the largest global energy consumer and currently imports the majority of its oil from the Middle East. Recently, Russian influence is increasing in the region. In 2013, the Russian Federation calmed an increasingly tense situation in Syria regarding the use of chemical weapons. Russia s diplomatic mediation prevented u s and NATO military intervention in Syria by establishing an agreement to put the disputed weapons under international control. This move empowered the influence of Russia and undoubtedly prevented the us from further involvement in a predicament that Washington created (see Ghil&s 2013).

52 8o8 AM IN EH AND CRIJNS-GRAUS The main strategic concern for us hegemony and its global interest is China. To secure its increasing energy needs China must also increase presence and influence in the region. China is now one of the key geopolitical actors in the me and cea and the main consumer of Persian Gulf s crude oil. China s diplomatic, economic and even security relationship to the key regional resourcerich countries increasingly threatens the position of the us in the region China s Oil Dependency and its Geopolitical Implications Rapid capitalist state-led industrial development in China created as in other advanced and emerging economies in particular a dual result: it generates, on the one hand, increasing wealth and power and, on the other, domestic resource scarcity and the social pressure of unfulfilled energy demands. These developments create a condition for China s cross-border economic activity to get access to resources and markets beyond state borders (see the first chapter of this special issue). As discussed in section 5, global primary energy demand, according to the International Energy Agency-World Energy Outlook 2012, is projected to increase by over one third over the period 2012 to Sixty per cent of this growth is expected from rising living standards in China, India and the Middle East. According to bp (2013), it is predicted that in 2035 more than 30 per cent of world energy demand will come from developing countries and specifically from China, which is now the largest leading global energy consumer. China has already overtaken the us as the world s biggest energy user since 2010, whose total share of energy consumption is 22 per cent in 2012, compared with 18 per cent of the us (bp 2013). Table 12 highlights China s increasing dependence on the supply of oil from resource-rich countries. Approximately half of their imports in 2013 are from the resource-rich countries of the Persian Gulf. In the last ten years, the Middle East is the main supplier of oil and gas to China. This puts China in the role of one of the main strategic competitive forces for the us and eu energy supply security from this region. The Chinese state class and their state-led companies, mainly the Chinese National Overseas Oil Company (cnooc), and other large Chinese companies (including PetroChina parent Chinese National Petroleum Company, cnpc, and Sinopec parent China Petrochemical Corporation, cpc) are engaged with the oil and gas reserves of research-rich countries of the Middle East and Central Eurasia. It is therefore no longer a question of whether and when China s global expansion transforms into a formidable presence in the Middle East; the question now is what role China will play in the region in the future. China s growth is dependent on securing resources and Washington s hegemony is contested. The current rate of growth in trade places China ahead of the us and the eu.

53 RETHINKING EU ENERGY SECURITY 809 table 12 China s crude oil imports by source, 2005 & 2013 Oil exporting states Year China Persian gulf 42% 5 1 % Saudi Arabia 19% 19% Kuwait < 0.5% 3 % Iran n % 8 % Iraq 0.8% 8 % Oman 10% 9 % UAE < 0.5% 4% O ther countries 5 8 % 49% Angola 14% 14% Russia 7% 9% Sudan 5 % < 0.5% Yemen 5 % < 0.5% Republic of Congo 4% 2% Indonesia 3 % < 0.5% Kazakhstan 1 % 4% Venezuela < 0.5% 6 % Brazil < 0.5% 2% Other countries 18% 12% Source-. The Observatory of Economic Complexity, The Massachusetts Institute for Technology Media Lab. (results 2005); eia u.s. Energy Information Administration (2013d) u s, e u Concern for China s Activities in the Middle East At the moment, the e u depends on oil and gas imports mainly from Russia and, to a lesser extent, from the Caspian Region (see section 4). Thus, non-russian resources are crucial for the e u in order to balance energy dependence by not relying heavily on a politically unreliable Russia. China, together with other Asian industrializing countries, form a new competitive geopolitical force for the European Union energy supply security. China is on the path to becoming an even stronger economic partner for the me and cea. China s diplomatic, political and economic activities in the Middle East as well as in Central Eurasia have underscored China s increasing presence in the vast area stretching mainly from Kazakhstan to the Persian Gulf. In turn, with China s stature in the region growing, some m e and c e a countries are

54 8io AMINEH AND CRIJNS-GRAUS responding by looking East for alternative alliances. The increased Chinese footprint gives smaller regional powers an additional partner to their traditional ties with the United States and European Union and their major member states. In this context, China has rapidly expanded its diplomatic, political and economic ties with the resource-rich countries of the Caspian- and the Persian Gulf countries. Between 2005 to 2009, China s total trade volume with the Middle East increased 87 per cent to $100 billion and reached about $222 billion in In 2010, China surpassed the United States as the main destination for the Middle East s exports (Chen 2011; Wood 2014). Figure 7 illustrates the rapid growth in oil trade occurring between China and the Persian Gulf Region, which can be perceived as a threat to both us and e u regional interests, considering the totals for each of the regions and the growth occurring between , where China s trade surpassed both the us and e u. As mentioned above, the main global oil and gas reserves are concentrated in a few geopolitically unstable regions and countries mainly in the Middle East and the Caspian Region. China focuses especially on four key resource-rich UAE S> Saudi Arabia Qatar Oman Kuwait Iraq O Iran Bahrain Union figure 14 Total GulfOil-Trade-Comparison (in usd millions): China, us, eu. Note: data for the e u for Qatar, Bahrain and UAE is not available. Source: u.s. Census Bureau: U.S. Bureau o f the Economic Analysis; National Bureau o f Statistics of China; E l A; European Commission, Market observatoryfor Energy, Registration o f Crude Oil Imports and Deliveries in the European Union e u 27

55 RETHINKING EU ENERGY SECURITY 8ll TABLE 13 Total Oil-Trade of selected resource-rich countries- Comparison (in millions of dollars) Key resource-rich China us The European countries Union-27 Y ear I r a n 2, , , I r a q , , , ,2 4 0 S a u d i A r a b ia , , ,1 5 1 K a z a k h s ta n N A N A N A N A 1 0, ,9 3 2 T o ta l N A N A N A N A 4 8, ,9 6 0 Source', us Census Bureau: us Bureau of the Economic Analysis; National Bureau of Statistics of China; El a ; European Commission, Market observatory for Energy, Registration of Crude Oil Imports and Deliveries in the European Union EU 27. countries: Saudi Arabia, Iran, Iraq and Kazakhstan in the Middle East and Central Eurasia. In 2013, these countries accounted for 35 per cent of the total oil export to China. Saudi Arabia and Iran are the main oil suppliers to China, but much of China s existing and expanding role in the region is linked to Iran and its larger geopolitical importance. Saudi Arabia has been of great political value to the us, but China has proven to measurably benefit from Saudi Arabia s resources. Table 13 highlights the comparison of the total oil trade of selected key resource rich countries for this study: Iran, Iraq, Saudi Arabia and Kazakhstan with China, us and eu. Figure 15 and table 14 measure the magnitude of trade growth for China and the Middle East key energy partners. These illustrate that China rose to one of the main trading partners in all four countries, reflecting its trade and economic involvement with m e and c e a countries. China s growing need for resources are seen to have multiplied five times from the period of to In table 14, China s growth has led it into the top two slots for imports from selected countries. Note China's position leading the us in each one except for Saudi Arabia, where it is only marginally behind the level of us imports from the country.

56 812 AMINEH AND CRIJNS-GRAUS figu re 15 Trend, trade relations o f Iran, Iraq, Kazakhstan, Saudi Arabia with China: Note: slight differences might occur due to rounding. Source: The Observatory of Economic Complexity, Massachusetts Institute for Technology (m it) Media lab table 14 Top five export destinations and import origins o f case countries Countries Top 5 export Top 5 export Top 5 import Top 5 import destination destination origin origin Iran Japan 15.0% China 17.5% Germany 11.6% China 16.3% China 12.0% Japan 13.29% China 10.6% UAE 13.6% India 6.55 India 12.2% UAE 9.9% Germany 10.5% Italy 6.2% South Korea 7.3% South Korea 6.2% South Korea 7.2% South Korea 5.9% Italy 4.8% Italy 5.0% Italy 5.2% Iraq USA % USA 30.1% Turkey 23.0% Turkey 23.6% Italy 11.3% India 16.0% uae 19.7% China 11.8% India 10.8% Italy 9.6% Iran 16.1% UAE 8.1% South Korea 5.4% South Korea 9.0% USA 8.51% Germany 4.12% China 2.3% China 8.2% China 5.7% USA 4-1% Kazakhstan Italy 11.9% China 15.3% Russia 36.3% Russia 29.3% Russia 11.5% Russia 8.2% China 9.5% China 14.3% China 11.5% France7-9 % Germany 7.6% Germany 7.3% France 9.6% Italy 7.2 % USA 5.5% Ukraine 5.31% Netherlands 4.3% Netherlands 5.7% Ukraine 4.0% USA 4.85%

57 RETHINKING EU ENERGY SECURITY 813 Countries Top 5 export destination Top 5 export destination Top 5 import origin Top 5 import origin Saudi Arabia USA 14.6% Japan 7.9% USA % USA H. 0 5 % Japan 14.5% USA 7.4% Germany 8.3% China 10.6% South Korea 8.3% China 6.2% Japan 7.8% Germany 5.2% China 6.3% South Korea 5.5% China 7.9% Japan 6.8% India 5.7% India 3.7% UK 5.0% India 4.6% Source: The Observatory of Economic Complexity, China s Prospect in the Middle East Between 2005 and 2009, China s investment in the Middle East grew tenfold, respectively from $1 billion to $110 billion. China s investment between 2005 and 2012 in Iran, Saudi Arabia, Iraq and Kazakhstan were respectively estimated to be $18.6 billion, including $13.9 billion in the energy sector; $17.3 billion including $6.8 billion in the energy sector; $14.5 billion including $14.0 billion in energy sector and $21.8 billion, including $19.7 in the energy sector. Thus, China became the largest foreign investor in these four resource-rich countries (Heritage Foundation 2012). The Chinese National Oil Companies largest upstream projects in the Middle East and the Caspian regions are in Iraq, Iran and Kazakhstan. China s noc s have signed sendee contracts to develop several large oilfields in these countries (these include al-ahdab, Halfaya and Rumaila in Iraq and Azadegan and Yadavaran in Iran). Recently, China s projects in Iraq have progressed much quicker than the projects in Iran, cnpc, which moved quickly to develop a foothold in the post-war Iraqi oil industry, is one of the largest foreign companies in terms of production operating in Iraq. One of the crown jewels of cnpc s international upstream portfolio is Iraq s Rumaila oilfield, which cnpc is developing in partnership with bp. Last year, Rumaila accounted for more than one third of Iraq s oil output. It was also cnpc s top-producing overseas project, accounting for almost half of cnpc s net overseas oil and natural gas production (see International Oil Daily, 18 January 2013). In contrast, the upstream activities of cnpc and its domestic peers in Iran have decreased in recent years. The Iranians suspended the contract of cnooc for the development of the North Pars natural gas field in 2011 for lack of progress, and cnpc withdrew from developing phase 11 of South Pars, the world s largest natural

58 814 AMINEH AND CRIJNS-GRAUS gas field in 2012 (after the Iranians threatened to void cnpc s contract for lack of progress), cnpc is behind schedule in developing the Azadegan oilfield, and Sinopec s work on the Yadavaran oilfield reportedly has suffered delays (see Downs 2013; International Oil Daily, 1 April 2013; International Oil Daily 24 June 2012; Platts Oilgram News, 2 May 2012). One benefit for China in dealing with Iran is to exploit its favorable geographic location. Bordering the Caspian Sea and the Persian Gulf, Iran can serve as an inevitable geographical bridge for China s efforts to secure energy resources in Central Asia and the Middle East, which Kaplan (2012) calls the Iranian pivot. China imports a large amount of its energy, both oil and gas, from the Caspian Sea to reduce its dependence on oil from the Persian Gulf nations. As an active participant in the Caspian Sea oil and gas projects, China has brought and channeled energy through the long pipelines that fan out east from the Caspian Sea and snake through Turkmenistan, Uzbekistan and Kazakhstan into Xinjiang and the rest of China (Fazilov & Chen 2013). China s ambition to secure more Central Asian oil has been facilitated by the Neka pipeline in northern Iran, constructed by a consortium of Chinese oil companies including both cnpc and sinopec in The reasons for the shrinking presence of China s oil companies in Iran include sanctions that have made it difficult for China s oil companies to secure equipment and technologies needed to operate in Iran, unhappiness with contract terms, uncertainty about whether Iran s nuclear program will spark a military conflict, and reported guidance from China s leadership to move slowly in Iran. It seems the China-Iran energy cooperation will be improved as a result of current negotiation on Iranian nuclear program with the us and/or 5+1 countries. In the 2000s, China s nocs were happy to negotiate contracts for projects that would almost certainly have been awarded to major international oil companies in the absence of sanctions. However, they have not been in any rush to actually invest large sums of money into Iran. At the same time, China is looking to raise crude oil imports from Iran that could cause more tension with the United States. In addition, China s state-owned Zhuhai Zhenrong Corp, which was sanctioned by Washington in early 2012 to supply gasoline to Iran, has begun talks with the National Iranian Oil Company (nioc) for a new contract. 6.4 Structural Challenges o f European Union Energy Supply Security from the ME The European Union energy supply security mainly from the Middle East faces a number of challenges:

59 RETHINKING EU ENERGY SECURITY Persistence of the Arab patrimonial rentier states and societies, which are a domestic and geopolitical source of permanent political instabilities, conflict and tension. 2. The Asian emerging economies, mainly China, and their involvements and impacts on the post-cold War geopolitical shift underway in the Middle East and CEA. The structure of power in the patrimonial rentier states and societies have inarguably created a condition for permanent tension, conflict and instability at domestic and regional levels. The course the ruling elites of these states have so far chosen and the lack of sustainable development and political democratization has created a chronic developmental crisis in these regions and countries. That is a mutually reinforcing combination of a deep economic crisis and cultural frictions, which become entrenched in the public domain, leading to militant confrontations between cultural groups within the [state and] society [as well as between states and societies]. This crisis is the consequence of failed attempting at nation-state-building, sustainable development and democratization (see Amineh 2007, Ch 1; 2010; see also Berger 2011). The population of patrimonial rentier states of the Persian Gulf is supported by finances earned through resource exports in exchange for keeping quiet in state affairs. Weak civil society with related forces, institutions and organizations as a result of failed development contribute to the survival and dominance of patrimonial regimes in resource-rich Arab Middle East. At the same time, Arab resource rich countries swfs have been contributing to further persistence of the existing patrimonial based rentier state system, swfs are not acting as tools to implement in restructuring and diversifying economic sectors, as experienced in some other developing countries, but further reflect the problem of a detached state-society system in which the regimes continue to treat the economy like their personal cash machine. The threats to eu supply security increase when the geopolitical shift underway in the region is added. It is impossible to predict what will happen in the coming decades. It is certain, however, that the Asian emerging economies, mainly China, involved in me and cea will influence the future geopolitical and geoeconomic directions. These states rely on more resources to encourage domestic development. The oil-rich countries in the Middle East have long been a destination of acquiring such resources. To conclude, the increasing diplomatic, economic and even security relations between me and cea resource-rich countries will influence the eu energy supply security. Patrimonial state structure, volatility of resources and

60 8i6 AMINEH AND CRIJNS-GRAUS emerging economies to compete against the region will not be a welcome supply of energy without the eu s preparedness in responding to these future threats. 7 Conclusions As one of the world s largest importers of oil, gas and coal, the eu is a major player on the international energy market. However, it remains a dwarf on the political stage as member states keep the upper hand on foreign policy. It has been argued that the energy challenges facing Europe need a coherent external policy to enable Europe to play a more effective international role in tackling common problems with energy partners worldwide. It would allow the eu to speak with one voice in their external relations towards common foreign policy energy security. Currently, the eu is still wrestling with the establishment of a common energy policy. Although the European Commission laid down clear priorities, overlapping competences of policymaking institutions within the eu and its member states, complex government-business ties and competing energy priorities all hamper the effective establishment and execution of a common energy policy. Finally, distrust among member states about which interests will prevail has led to caution, hindering the formulation and implementation of coherent strategies that the common external energy policy should focus on in pursuit of the Commission s goals. The last two decades showed decreasing fossil fuel production in eu (from 28 EJ in 1990 to 16 ej in 2012) and increasing import dependence (from 43 per cent of energy use in 1990 to 53 per cent in 2012). Main countries where energy sources are derived from are Russia and Norway, followed by Algeria (natural gas), Saudi Arabia (oil) and Columbia (coal). The share of Middle East and North Africa (mena) and the Caspian Sea Region in total imports equaled 62 per cent in Import dependence in the eu is expected to further increase in the coming two decades to 57 per cent in Proven oil and gas reserves in eu are very limited. Estimated shale gas reserves would cover nearly 30 times the 2012 natural gas consumption, and might contribute temporarily to security of natural gas supply. It is apparent that for oil, however, both global reserves and own eu reserves look bleak. At the same time, global trends show an increasing demand for energy in the coming two decades, mainly concentrated in developing countries and specifically China, which is the largest leading global energy consumer at

61 RETHINKING EU ENERGY SECURITY 817 the moment. Fossil fuel production, on the other hand, is likely to be more concentrated in fewer countries. The Caspian Sea region and the Persian Gulf area hold one of the world s largest oil and gas reserves, which will make them increasingly significant in global markets. The combination of increasing oil and gas consumption, diminishing reserves and geopolitical rivalry creates a setting for the eu that can be characterized as one of demand induced, supplyinduced and structural scarcity. The global demand for oil and gas, rising political instability in many producer countries and the approaching peak-oil situation ( ) are beginning to change the overall balance of power in the relationship between energy producer and consumer states in a way that strengthens the first. The European Union energy supply security, mainly from the Middle East, faced a number of domestic and geopolitical challenges: 1. Persistence of the Arab patrimonial rentier states and societies, which are a domestic and geopolitical source of permanent political instabilities, conflict and tension. 2. The Asian emerging economies, mainly China, and their involvements and impacts on the post-cold War geopolitical shift underway in the Middle East and Central Eurasia (cea). The structure of power in the patrimonial rentier states and societies have inarguably created a condition for permanent tension, conflict and instability at domestic and regional levels. The course the ruling elites of these states have so far chosen and the lack of sustainable development and political democratization has created a chronic developmental crisis in these regions and countries. That is a mutually reinforcing combination of a deep economic crisis and cultural frictions, which become entrenched in the public domain, leading to militant confrontations between cultural groups within the [state and] society [as well as between states and societies]. This crisis is the consequence of failed attempts at nation-state-building, sustainable development and democratization. The population of patrimonial rentier states of the Persian Gulf is supported by finances earned through resource exports in exchange for keeping quiet in state affairs. Weak civil society with related forces, institutions and organizations as a result of failed development contribute to the survival and dominance of patrimonial regimes in resource-rich Arab Middle East. At the same time, Arab resource rich countries Sovereign Wealth Funds (swfs) have contributed to further persistence of the existing patrimonial based rentier state

62 8i8 AMINEH AND CRIJNS-GRAUS system, swfs are not acting as tools to implement in restructuring and diversifying economic sectors, as experienced in some other developing countries, but further reflect the problem of a detached state-society system in which the regimes continue to treat the economy like their personal cash machine. The threats to eu supply security increase when the geopolitical shift underway in the region is added. It is impossible to predict what will happen in the coming decades. It is certain, however, that the Asian emerging economies, mainly China, involved in the me and cea will influence the future geopolitical and geoeconomic directions. These states rely on more resources to encourage domestic development. The resource-rich countries in the Middle East have long been a destination of acquiring such resources. To conclude, the increasing diplomatic, economic and even security relations between me and cea resource-rich countries will influence the eu energy supply security. Patrimonial state structure, volatility of resources, and Asian emerging economies to compete against the region will not be a welcome supply of energy without the eu s preparedness in responding to these future threats. Abbreviations BP CCS CR CEA CNOOC CNPC CPC EIA EU GDP GCC IEA MENA NOC OPEC SCO SWFS SET British Petroleum Carbon Capture and Storage Caspian region Central Eurasia Chinese National Overseas Oil Company Chinese National Petroleum Company China Petrochemical Corporation Energy Information Administration European Union gross domestic product Gulf Cooperation Council International Energy Agency Middle East and North Africa National Oil Companies Organization of Petroleum Exporting Countries Shanghai Cooperation Organization Sovereign Wealth Funds Strategic Energy Technology

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