Why ECO countries could become energy-dependent? 1

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1 Why ECO countries could become energy-dependent? 1 Mathias Reymond LAMETA Université de Montpellier 1 mathias.reymond@univ-montp1.fr Draft paper (August 31, 2014) Abstract: The ECO countries are net exporters of energy. If Azerbaijan, Iran and Kazakhstan are oil exporters, Turkmenistan and Uzbekistan sell natural gas. The arrival on the scene of nonconventional gas, known as shale gas or firedamp which has long remained unexploited due to cost and technical inaccessibility should soon revolutionise the various gas and oil markets. And ECO countries are dependent on consumption strategies of their customers. Indeed, when countries seek to diversify their energy suppliers to reduce their vulnerability, exporters must also develop other energy strategies: diversify energy choices, increase customers, reduce CO2 emissions... In this paper we propose to make an inventory of the energy situation in the ECO countries and we suggest some ways to facilitate their transition energy and diversify their exports. Keywords: fossil fuel; vulnerability; ECO countries 1 Some of the information came from U.S. Energy Information Adminsitration (EIA). This is indicated by the reference: EIA,

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3 Kyrgyzstan and Tajikistan) export natural resources. Their proximity to the Caspian Sea allows them to benefit from that area s reserves. However, the economies of the most prosperous countries are vulnerable: they are dependent on their poorly diversified exports, are not immune to the emergence of unconventional gas and will have to address their CO2 emission levels in the medium term. This article begins by presenting the fossil fuel geopolitics of the ECO countries and then examines vulnerability criteria for these countries. The fourth section discusses solutions available to ECO countries in order to reduce their vulnerability, and the fifth sets out the conclusions. 2. Energy geopolitics in ECO countries Three ECO countries are not included in our analysis: Afghanistan, Kyrgyzstan and Tajikistan. We have insufficient data on Afghanistan. Kyrgyzstan and Tajikistan are small countries (5.5 and 7 million inhabitants) producing little fossil fuel energy, importing small amounts and mainly using hydro energy. Table 1 summarizes the situation in terms of oil, natural gas and coal production and consumption in the other countries. It also shows the quantity of primary energy consumed in the country. Primary energy includes the consumption of the three hydrocarbons as well as that of other energy sources (such as hydro, nuclear and renewable energy) which are not included here as they are used in very small amounts. 3

4 Oil Natural Gas Coal Primary energy Production Consumption Production Consumption Production Consumption Consumption Azerbaijan 46,2 4,6 14,5 7, ,7 Iran 166,1 92,9 149, ,5* 0,7 243,9 Kazakhstan 83,8 13,8 16,6 10,3 58,4 36,1 62 Pakistan 3,5* 22 34,7 34,7 1,5 4,4 69,6 Turkey 2,3* 33,1 0,6* 41,1 13, ,8 Turkmenistan 11,4 6,3 56, ,3 Uzbekistan 2,9 3,3 49,7 40,7 1,4* 1,2 47,8 Table 1. Consumption and production of fossil fuels in ECO countries in 2013 (BP, 2014) * Source: IEA data (2011) Two groups of countries can be identified: net exporters (Azerbaijan, Iran, Kazakhstan, Turkmenistan, Uzbekistan) and net importers (Turkey, Pakistan). 2.1 Net exporters Azerbaijan Oil and natural gas production and export are central to Azerbaijan's economic growth (see Ciarreta and Nasirov, 2012). The country is one of the Caspian region's most important strategic export routes to the West (EIA, 2014). Oil production in Azerbaijan has increased by more than 300% in less than 10 years (going from 15.4 mtoe in 2003 to 46.2 in 2013). This increase has reduced the reserves-to-production ratio (which has fallen to 20 years at the current production level) 2. The same thing has happened with gas following the discovery and exploitation of the Shah Deniz field in the Caspian Sea: its production has increased 3.5 fold in ten years but, at 54.3 years, its ratio is more comfortable than in the case of oil. Azerbaijan exports its gas and oil mainly to Russia and Turkey from where it is transported to Europe by tankers.natural gas accounted for about 67% of Azerbaijan's total domestic energy consumption in Oil 2 See Ciarreta et Nasirov (2012) 4

5 accounted for 30% of total energy use, and hydropower contributed a marginal amount (EIA, 2014). Electricity is produced mainly from natural gas (89%). Iran Because of international sanctions, oil production in Iran has been decreasing since 2010 having risen continuously previously. The country still exports a substantial amount towards Asia (China 22%, India 13%, Japan 14%, South Korea 10%), Europe (18%) and Turkey (7%). The country is practically self-sufficient in natural gas: it consumes what it produces and exports scarcely anything. In winter it imports from Turkmenistan and 90% of its very limited exports go to Turkey. Since 2010, it has been estimated that Iranian gas reserves are the largest in the world, ahead of Russia (18.2% of world resources vs 16.8%). Consequently, its ratio of proven reserves to production is currently in the order of several centuries Natural gas is the country's primary fuel source to generate electricity, accounting for almost 70% of total generation in (EIA, 2014) Kazakhstan Coal is the main source of primary energy in Kazakhstan (64% vs 19% for oil and 14% for gas). The country is an important oil producer (3% of world reserves) with substantial exports towards Europe (Italy(26%), Netherlands (12%), Austria (9%), France (9%)) and China (16%) 3. A high proportion of produced gas is used in oil production. The country exports (60% to Russia and also to Turkmenistan and Uzbekistan) but also imports gas in order to stabilize consumption. As the only large-scale coal producer in the area, the country exports principally to Russia (15 mtoe) but also to Ukraine. Turkmenistan 3 See Kaiser and Pulsipher (2007) 5

6 Turkmenistan is home to the fourth largest proven natural gas reserve in the world after Iran, Russia and Qatar but it only produces moderate amounts (56.1 mtoe in 2013) and exports towards China (24.4 mtoe), Russia and Iran. Its proven reserves have increased by almost 272% in ten years (IFP, 2014, Short-term trends in the gas industry, Panorama, 2014). The country also exports small amounts of oil (mainly towards neighbouring countries in the Caspian Sea) but has very low proven reserves (7 years). Uzbekistan The energy sector in Uzbekistan revolves around natural gas. Blessed with huge reserves, the country produces (49.7 mtoe) and consumes (40.7) large quantities of gas but exports very little (towards Russia and its neighbours). Despite having considerable, but unexploited, reserves, since 2004 the country has been importing the little oil that it consumes Net importers Pakistan Le Pakistan est auto-suffisant dans sa consommation de gaz naturel : sa production est égale à sa consommation. Toutefois la demande n'est pas satisfaite et le pays souhaiterait importer du gaz mais n'a pas d'infrastructures adaptées. Les autorités envisagent donc de construire des usines de regazéification de gaz naturel liquéfié. Le Pakistan est ensuite fortement dépendant des importations de pétrole (22 mtoe consommées contre 3,5 produites) et, dans une moindre mesure, de charbon. Turkey Turkey is a major consumer of hydrocarbons. It produces 10% of its oil consumption and skilfully diversifies its imports (Iran, Iraq, Saudi Arabia, Russia, Kazakhstan ). Turkey depends 6

7 mainly on Russian imports for natural gas (56% of its consumption). Given its geographical position, the country has been a major transit point for seaborne-traded oil and is gaining importance for pipeline-traded oil and natural gas (EIA, 2014). Turkey produces and imports coal which is used mainly for electricity production. 3. Energy vulnerability of ECO countries 3.1 Relative dependency of consumers Although importer countries (Pakistan and Turkey) are de facto dependent on their imports, it is easy to argue that Turkey is better off for three reasons: its central position makes it a kind of regional hub for the transport of resources; the country has diversified its primary energy consumption (33.1 mtoe of oil, 41.1 mtoe of gas, 33 mtoe of coal in 2013) and finally it has also diversified the source of its oil imports. Its only weakness is a lack of geographical diversity in its gas imports (over half come from Russia). As regards the other countries studied, not all resources are exported (except in the case of Kazakhstan) and the main clients are generally China and Russia, followed by Turkey and Europe. Finally, some countries, such as India, the ECO countries themselves and Japan, also import resources from the Caspian Sea and its surrounding areas. 7

8 Oil Natural Gas Coal Production exports Production exports Production exports Azerbaijan 46,2 41* 14,5 6,7 0 0 Iran 166,1 73,2 149,9 ns 0,5* 0 Kazakhstan 83,8 71,4 16,6 9,8 58,4 20* Turkmenistan 11,4 ns 56,1 40,1 0 0 Uzbekistan 2,9 0 49,7 12* 1,4* 0 Table 2. Production and exports in exporters countries * estimation ns : no significative China and Russia, who are among the most important clients of ECO countries, are not vulnerable (China diversifies its import sources and Russia exports fossil energy) and are not therefore particularly dependent on imports from the Caspian Sea countries. Oil Natural Coal Nuclear Hydro Renew- Total Gas Energy electric ables EU Cons 605,2 394,3 285,4 198,5 81,9 110,6 1675,9 Prod 68,4 132,0 151,9 Russia Cons 153,1 372,1 93,5 39,1 41,0 0,1 699,0 Prod ,3 165,1 China Cons 507,4 145,5 1925,3 25,0 206,3 42,9 2852,4 Prod , Table 3. Consumption and production in imports countries. - China, which imports gas from Turkmenistan and oil from Kazakhstan and Iran, enjoys a very favourable situation. Although it consumes high levels of primary energy (2,852 mtoe in 2013), China is diversifying its resources and increasing the number of suppliers. A net oil importer (378 mtoe in 2013), it draws on many suppliers (Middle East, West Africa, Russia, 8

9 South America etc.). The country imports its natural gas which represents a very small share of its primary energy consumption (only 5%) from Turkmenistan, Qatar, Australia, Malaysia and, in the future, Russia. China's vast coal resources enable the fuel to remain the mainstay of the country's energy sector and allow it to be a key driver of massive economic growth over the past decade (EIA, 2014). Electricity is mainly produced from coal (66%) followed by hydro (22%). Having long been an exporter, the country began importing coal in Once again, its suppliers are diverse (Australia, Indonesia, Vietnam ). Thus China is not only sitting on huge hydrocarbon reserves, it is also not vulnerable in terms of energy especially as its market is attractive to foreign investors. - Russia is a net exporter of hydrocarbons, mainly to Europe but also to Asia. The ECO countries cannot rely on its custom in the long term as its imports from Turkmenistan, Kazakhstan and Azerbaijan are only at the margin or in transit. - Europe is a major energy consumer, importing large quantities of hydrocarbons, which makes it very vulnerable, although, for the time being, it benefits from a large portfolio of suppliers. Iran and Kazakhstan supply oil to Europe, but in small amounts (see 4.2) Unconventional gas Long unexploited for technical and cost reasons, so-called "unconventional" gas (mostly located in clay areas or adjacent to coal deposits, and including shale and colliery gas) is proving to be a new resource for industrial gas companies and for nation states. The reduction in extraction costs and the increase in the number of drilling zones are progressively changing the global gas market. According to the International Energy Agency, gas is the energy source that is most likely to develop significantly in the next 35 years thanks in particular to unconventional gas. 9

10 This new development may undermine the international trade of natural gas by reducing the dependence of importer countries. For instance, in the United States, unconventional gas represented half of the gas production in 2009 and since then the United States has become the leading gas producer in the world, ahead of Russia. In Europe, gas and oil companies are undertaking exploration and drilling operations. Liquefied natural gas (LNG) which is based on short-term contracts and has long been perceived as the future for natural gas transportation has become the first victim of this new relative energy autonomy of importer countries. The volume of LNG imported by the United States for example dropped from 21.8 billion m3 in 2007 to 2.7 in 2013 (BP, 2014). China, which imports gas from some ECO countries is sitting on very large unconventional gas reserves (1115 trillion cubic feet). Pakistan and Turkey also have unexploited gas reserves, although to a lesser extent. The exploitation of these reserves would lead to reduced gas exports towards these countries. 3.3 The CO2 emission issue According to the Global Carbon Project, MtCO2 were emitted in the world in Among the largest emitters in the ECO countries are Iran (603 MtCO2), Turkey (311 MtCO2) and Kazakhstan (292 MtCO2). The latter is the only one that is planning to reduce its greenhouse gas emissions, setting up an Emissions Trading System (ETS) for CO2 in The national objective is to reduce greenhouse gases (GHG) by 5% in 2020 compared with In 2013, the pilot year began with no obligation for sites to be brought into line. Phase 1 will start in Its duration is undetermined but the market will continue until The annual quota is MtCO2 in 2013, 57% of which concerns the energy sector and 13.4% the oil and gas sector. From 2013, some 178 plants are involved. (IFPEN, 2014). This concerns 77% of Kazakhstan GHG emissions. The question remains as to how neighbouring countries will react and whether this policy will be implemented. 10

11 4. New political options We have seen that exporter ECO countries trade with each other and have a limited customer base (China, Russia, Europe). Furthermore, the energy-consuming countries (particularly those consuming gas) are sitting on unconventional gas reserves and could reduce their hydrocarbon imports. It is therefore important for Turkmenistan, Kazakhstan, Azerbaijan, Uzbekistan and Iran to implement new energy policies New markets The first option open to exporter countries is to diversify their customers and to target lucrative markets. Pakistan has a demand for natural gas but lacks the infrastructure required to transport it. The Pakistani government supports the construction of the Turkmenistan-Afghanistan- Pakistan-India (TAPI) and Iran-Pakistan (IP) natural gas pipelines. The TAPI pipeline has the multilateral agreements and financial support necessary to move forward. According to Platts, the construction of these three terminals will allow Pakistan to import, store, and regasify up to 620 Bcf of LNG by The first LNG terminal is scheduled to be completed in December (EIA, 2014) India is an importer. The country is a major consumer of coal, which it has been importing for around 20 years although in large volumes only for the past five years. Kazakhstan, which exports mainly to Russia and is targeting Ukraine and China, should not neglect this potential customer. India also imports oil and gas in large quantities from the Middle East, South America and Africa. The development of pipelines from the Caspian Sea will provide an incentive to use new suppliers. 11

12 4.2. Export to Europe Europe is potentially an important customer for the four exporter countries in the zone studied. Europe imports natural gas mainly from Norway (outside the EU), Algeria, Qatar and in particular Russia (Reymond, 2007). Its dependence on the latter poses transportation problems and the recent conflicts between Russia and Ukraine have not helped. Moreover, continental reserves are declining and at current production rates Norway has only 19 years of gas reserves left. Europe is therefore seeking to develop its own unconventional gas reserves and to diversify its suppliers (Bilgin, 2009). Gas producers could benefit from the construction of the pipeline coming from Iran and going through Turkey 4.3. Explore the Iranian sub-surface 4 Iran's oil production has declined substantially over the past few years, and natural gas production growth has slowed, despite the country's abundant reserves. International sanctions have stymied progress across Iran's energy sector, especially affecting upstream investment in both oil and natural gas projects. The sanctions have prompted a number of cancellations and delays of upstream projects, resulting in declining oil production capacity. Virtually all western companies have halted their activities in Iran, although there are some Chinese and Russian companies that are still participating The most significant energy development project in Iran, the South Pars field, accounted for nearly 40% of Iran's gross natural gas production in 2012 and holds 40% of Iran's total proved natural gas reserves. Discovered in 1990 and located 62 miles offshore in the Persian Gulf, South Pars has a 24-phase development scheme. The total cost is expected to exceed $100 billion, which excludes downstream facilities, according to Arab Oil and Gas Journal. The entire project is managed by Pars Oil & Gas Company (POGC), a subsidiary of NIOC. Each of the 24 phases has a combination of natural gas with condensate and/or NGPL production. Production from phases 1 to 10 was originally designed to be allocated for the domestic market for consumption and reinjection. Production from the remaining phases is planned 4 This section contains several paragraphs of the report by the US IEA (2014). 12

13 for export via pipelines and as liquefied natural gas (LNG) and/or used for proposed gas-toliquids (GTL) projects. Currently, phases 1 to 10 and phase 12 are producing natural gas. Phase 12 is the most recent to come online in February 2014, although it is not expected to reach its full capacity of 3 Bcf/d of natural gas and 120,000 bbl/d of condensate until Phases 15 and 16 are the next phases planned to come online in 2015, eventually reaching full capacity of 2 Bcf/d of natural gas and 80,000 bbl/d of condensate a year following its start Common projects (competition vs cooperation) Game theory has repeatedly shown that in trade, cooperation is often better than competition: the profitability of co-operating firms is greater than those engaging in price wars. Fossil fuel exporter countries could therefore establish a kind of OPEC of the Caspian Sea. Such a union would only be efficient if several criteria were met: - Market share must be significant, or to put it another way there must be a captive demand that cannot switch to other producers. - In order to limit the costs of cartel creation and increasing control costs, few countries should be involved. - To enhance understanding, it is essential that there is a homogeneous product and a relative similarity between producers. - In order to affect prices more easily, a high degree of vertical integration in the energy sector will simplify concentration. There are many advantages to such a union as participants can: determine prices and production quotas; build pipelines together; exploit sub-surface resources together. 13

14 5. Conclusion At a time of globalisation and regional rapprochement, at present there is no homogeneity in the strategic and political choices of ECO countries. On these points, it would seem that the option selected by some countries is the opposite of what happens in Europe (deintegration of historical monopolies, liberalisation of the energy sector ). Venezuela, for example, has opted for cooperation rather than competition by launching the creation of regional initiatives in the Caribbean (Petrocaribe) and with the countries from South America (Petrosur) (see Reymond, 2012). The objective was to develop Venezuelan oil with collective investments and a preferential price for partner countries in return. The same project is possible with ECO countries. 14

15 References Bilgin, M. (2009), Geopolitics of European natural gas demand: Supplies from Russia, Caspian and the Middle East, Energy Policy, 37, British Petroleum (BP), (2014), BP Statistical Review of World Energy of 2013, Ciarreta, A., Nasirov, S. (2012), Development trends in the Azerbaijan oil and gas sector: Achievements and challenges, Energy Policy, 40, Energy Information Administration (EIA), (2014), Global Carbon Atlas (2014), IFP énergies nouvelles (2014), Panorama des nouveaux marchés carbonne à l'international, Panorama International Energy Agency (IEA), (2013), Key world energy statistics, OECD/IEA, Kaiser, M., Pulsipher, A. (2007), A review of the oil and gas sector in Kazakhstan, Energy Policy, 35, Reymond, M. (2007), European key issues concerning natural gas: dependence and vulnerability, Energy Policy, 35, Reymond, M. (2012), Measuring Vulnerability to Shocks in the Gas Market in South America, Energy Policy, 48,