Home The Washington Diplomat December 2013 Experts Debate Mideast’s Future As Worldwide Energy Supplier

Experts Debate Mideast’s Future As Worldwide Energy Supplier

Experts Debate Mideast’s Future As Worldwide Energy Supplier

How relevant will OPEC be 10 years from now? Does the rapid expansion of new technologies like fracking threaten the future of eco-friendly energy alternatives such as wind and solar energy? And would the possible lifting of sanctions against Iran depress oil prices enough — at least in the short term — to hurt the many Arab states that depend on petroleum exports for revenue?

These are among the key issues facing politicians, pundits and corporate bigwigs throughout the Middle East — and all were fodder for discussion during the 22nd Annual Arab-U.S. Policymakers Conference hosted by the National Council on U.S.-Arab Relations (NCUSAR) and held at the Ronald Reagan Building and International Trade Center.

An energy panel held on the first day of the Oct. 22-23 event brought together five experts: Herman Franssen, executive director of the Energy Intelligence Group; Sarah Ladislaw, co-director of the Energy and National Security Program at Washington’s Center for Strategic and International Studies; Thomas Graham, executive chairman of the board of directors of Lightbridge Corp.; Shihab Kuran, president of SunEdison Advanced Solutions; and Kevin Book, co-founder of ClearView Energy Partners LLC.

The panel was moderated by Randa Fahmy Hudome, general counsel for the American Egyptian Strategic Alliance and former U.S. associate deputy secretary of energy.

Photo: National Council on U.S.-Arab Relations
From left, Herman Franssen, executive director of the Energy Intelligence Group; Shihab Kuran, president of SunEdison Advanced Solutions; Randa Fahmy Hudome, former U.S. associate deputy secretary of energy; Thomas Graham, executive chairman of the board of directors of Lightbridge Corp.; Sarah Ladislaw, co-director of the Energy and National Security Program at the Center for Strategic and International Studies; and Kevin Book, co-founder of ClearView Energy Partners LLC, participate in a panel on U.S.-Arab energy cooperation at the 22nd Annual Arab-U.S. Policymakers Conference hosted by the National Council on U.S.-Arab Relations.

“This month, we marked the 40th anniversary of the Arab oil embargo,” said Fahmy Hudome. “What has happened since then with U.S. energy policy vis-à-vis the Arab world? Not much, except for this past year. We are now witnessing the most profound changes in energy production and relationships since 1973 — not only in the U.S.-Arab relationship but across the world.”

Franssen agreed with that assessment.

“In the United States, we have made enormous progress that would have been thought impossible 10 years ago. The technology that already existed was perfected, and prices of $100 a barrel made shale gas possible. Today, more than a fourth of our gas production is shale gas,” said the Dutch energy expert, a former adviser to Oman’s minister of petroleum and minerals. “We are now in a situation where the United States — instead of being a massive importer of liquefied natural gas — will most likely be an exporter of LNG, perhaps even a very large one. We could even rival Qatar.”

For a “very long time to come,” said Franssen, the United States will be self-sufficient in gas and will be able to produce it at relatively low prices compared to many of its rivals. That’s quite a switch from 40 years ago, when American consumers were literally at the mercy of the Arabs and the multinationals that did business with them.

“Prior to 1973, two-thirds of global oil reserves were in the hands of seven giant energy conglomerates known as the ‘seven sisters.’ The events that took place in 1973 and ’74 led to a complete revolution,” Franssen said, referring to the Arab oil embargo sparked by U.S. support of Israel during the Yom Kippur War of October 1973.

The Organization of the Petroleum Exporting Countries (OPEC) called off the embargo in early 1974, but things were never the same again.

“By then, Middle East oil producers and other OPEC countries had nationalized their resources, so instead of two-thirds of all oil in the hands of the seven sisters, two-thirds were now controlled by national oil companies. That marked the emergence of OPEC as a real power,” Franssen said.

Yet whether the 12-member OPEC is still a “real power” four decades later is debatable.

As Amy Myers Jaffe and Ed Morse wrote in Foreign Policy, the 1970s politicized the oil market and witnessed “a profound and unprecedented transfer of wealth” to the Middle East that continues to reverberate today — fueling democracy movements, terrorism and civil wars.

“The region’s leaders failed to set up long-term mechanisms to distribute the benefits of that wealth transfer broadly to their populations and to establish an equitable stake in governance of resource proceeds that would have brought a newfound stability to the region,” the authors argued. “For decades, they squandered the opportunity to use oil wealth to modernize their societies and train their populations for future global economic competition. The result — unfolding not just in the Middle East but in other oil-producing countries as well — is a crisis of governance that is itself triggering a round of oil-supply disruptions.”

At the same time, growth in renewable energy is expected to rise by more than 40 percent over the next five years, according to the International Energy Agency, which says that power generated from hydro, wind, solar and other renewable sources worldwide will outstrip gas and nuclear energy by 2016 (though renewables will still lag behind oil and coal).

In addition, technological advances such as horizontal drilling and hydraulic fracturing — commonly known as “fracking” — have allowed the United States to boost production of shale oil and gas from places like North Dakota and Pennsylvania. In fact, this October marked the first time in nearly two decades that the United States produced more crude oil than it imported, partly because of fracking but also because consumption has dipped. Meanwhile, abundant U.S. natural gas is spawning new American-designed technologies to readily use natural gas as a fuel in trucks, trains and ships, ending oil’s monopoly in transport.

So, is OPEC “over a barrel,” as a recent Bloomberg article put it?

Absolutely, writes the article’s author, Meghan O’Sullivan, who says OPEC’s most powerful members have neither the desire nor the ability to cause huge spikes in oil prices or inflict shocks on the world as they once did.

“[M]ost OPEC countries today need all the revenue they can get to meet their budgets. In the wake of the Arab revolutions, governments are wary of measures that would require reining in the generous social and other expenditures seen as necessary to stave off political unrest,” she wrote, adding that “OPEC has no self-interest in tanking the fragile economic recoveries of today with high oil prices — or in further catalyzing the already vigorous pursuit of non-oil energy sources.”

And that subject is of major concern to the Arab world, which is why energy was the focus of the first panel at last month’s Arab-U.S. Policymakers Conference.

“The world is moving to a low-carbon framework, complicating oil, gas and coal,” explained Ladislaw of the Center for Strategic and International Studies. “We are currently living through the spectrum of this unconventionals revolution. This has reordered the global landscape for new energy investments.”

One of the biggest questions, she said, is how governments around the world will respond to domestic economic difficulties as a result of such a massive shift in the global oil market. “A lot of countries are reassessing their own ability to insulate themselves and become more resilient to a wider array of potential energy futures,” Ladislaw said.

Another paradigm shift: In 1973, OPEC exported two-thirds of its total oil production to Europe and North America. Today, two-thirds of its exports go to Asia — mainly China.

“But the very fact that 50 percent of the world’s oil is in the Middle East — and that it’s the only region in the world with the ability to export most of what it produces — makes it the most important region for the oil industry. It will not be replaced in that role, no matter what we do in North America,” said Franssen.

“The Saudis and others remain the key element in the world of oil. What we are achieving now depends on a number of things,” he added. For example, oil must be priced at a minimum of $80 a barrel for “unconventional” oil to be profitable. Secondly, the technology used by the United States must continue to be stable (and already there’s been pushback against fracking by local communities concerned about its environmental effects).

Indeed, while some experts are busy declaring OPEC dead, others warn that America’s supposed energy boom might not be as explosive as conventional wisdom suggests.

For one thing, Saudi Arabia, which produces roughly 10 million barrels of crude oil a day, is still able to dictate the average price of crude. Energy independence is largely a myth in an interconnected global oil market. Even if the United States does become a major energy exporter, the price of oil would remain vulnerable to external shocks.

Those shocks come in many shapes and sizes. At the moment, Iran is the biggest question mark. Book, a member of the National Petroleum Council, spoke of a “possible pivot to Persia” — a reference to what might happen if Congress imposes even more stringent sanctions against Iran in an effort to force the regime in Tehran to abandon its nuclear program.

Photo: Larry Luxner
Workers repair a valve at Libya’s Faregh gas complex near Jalu, deep in the Sahara Desert. Despite Libya’s tremendous energy potential, ongoing instability since the 2011 revolution, including groups targeting oil and gas infrastructure, has severely limited the country’s output.

Book said that in the event Congress passes a measure that imposes economic sanctions against the remaining buyers of Iranian oil — China, South Korea, Japan and India — roughly 1 million barrels would be removed from the world market, pushing up prices to around $114 a barrel from the current $100. On the other hand, he pointed out that oil production in Iraq has skyrocketed by nearly 40 percent since the end of the Iraq War and could reach 6 million barrels a day by 2020, adding to a potential oil glut. And Iraq can produce oil at a far lower cost than unconventional oil anywhere in North America.

“We can benefit as a producer nation, but we stand to suffer far more than we benefit,” Book warned. “As a result, we are ill positioned for all this loose talk about energy independence, in my view. Think about what the world will look like when you yank out 10 million barrels of production a day?”

Still, Arab countries know their black gold will run out some day and have already begun looking for alternative energy supplies for their own rapidly growing populations. Two options being aggressively pursued are nuclear and solar power.

“In the past, there’s been virtually no use of peaceful nuclear power in the Middle East,” said Graham of Lightbridge Corp, whose company is based in McLean, Va. “Egypt flirted with the idea, and Turkey twice asked for bids to build nuclear power plants, only to have the bidding process fail. Recently, Turkey went ahead and signed an agreement for Russia to build the plant with no money up front, and operate the reactor for 30 years.”

In addition, Jordan, which is completely dependent on oil and gas imports, just announced a $10 billion deal with a Russian firm to build two nuclear reactors in the desert east of Amman. Saudi Arabia has also indicated that it might build a few reactors, but the United Arab Emirates appears to be the most advanced country in the region when it comes to pursuing a nuclear-fueled future.

Yet efforts by the UAE to join the nuclear power club were frustrated by a controversy that erupted back in 2006. That year, Dubai Ports World was set to take over managing major port facilities in several U.S. cities. However, once the transaction became public, members of Congress questioned the deal on the grounds it could make the United States more vulnerable to terrorism. DP World eventually backed off, transferring operations to an unspecified American entity.

“It was a short-term political firestorm, and it left its mark,” said Graham. “This outcome was wrong and unfair, and was profoundly embarrassing to the UAE — to the point where even though the UAE believed that nuclear energy must be in its future, it proceeded very cautiously down that road, in the wake of Dubai Ports World controversy, knowing that eventually the program would end up being reviewed by Congress.”

The next time around, the UAE was better prepared. The oil-rich Persian Gulf nation wooed U.S. policymakers with a slick lobby campaign that touted the UAE’s friendship with the U.S. and willingness to abide by international nonproliferation standards (to allay concerns, it agreed not to enrich uranium or reprocess spent nuclear fuel for plutonium, which is used in nuclear bombs). The UAE also said it could serve as a model of a peaceful civilian nuclear energy program in the region, a direct reference to Iran.

The UAE’s charm offensive worked and it signed a landmark “123 Agreement” to receive sensitive information and materials from the United States to help create the Arab world’s first civilian nuclear power industry.

As a senior diplomat, Graham helped negotiate every major arms control and nonproliferation agreement from 1970 to 1997 in which the United States was involved. In 2009, he was appointed to the International Advisory Board of the United Arab Emirates. He said the UAE deserved the 123 Agreement — and that if the United States had backed out of the deal, it would’ve bolstered the Iranian charge that Washington wants to prevent Middle Eastern states from accessing peaceful nuclear energy.

He noted that the UAE established a regulatory agency in 2009 and “staffed it with real experts.” Soon after, it awarded a consortium led by Korea Electric Power Corp. a $20 billion contract to build the first four nuclear power plants, with a commitment of having the first plant operational by 2017.

Despite the setbacks to the global nuclear industry that followed Japan’s 2011 Fukushima disaster — the world’s worst nuclear accident since the 1986 meltdown at Chernobyl — Graham insists the mammoth project will pose no threat whatsoever.

“The UAE is the first newcomer country for nuclear power generation in the last three decades,” he said. “It has persevered despite the shadow of Dubai Ports World. It is delivering its reactors on time and on budget. It is committed to the highest standards of safety, security and nonproliferation.”

Yet in the long term, a far cheaper and safer alternative may be solar energy.

Last year, Kuran, president of SunEdison Advanced Solutions, founded a company that installed solar panels on 20,000 rooftops throughout Jordan. He also launched the innovative Smart City project in Bahrain.

“Solar energy is one of the fastest-growing sectors in energy today, along with wind,” he said. “The solar industry will receive over $1 trillion in the next seven to eight years, so it’s a massive growth area for us.”

One of solar’s biggest advantages over oil, gas, coal and nuclear energy is that the fuel itself — sunshine — is free.

“But the bulk of the investment is your upfront capital costs, so you have to ensure that you have a long-term view — modeling the megatrends in oil prices and geopolitical stability. With all these arguments for and against solar,” he said, “solar happens to be one of the biggest job generators on a per-megawatt basis.”

Kuran added: “When you look at oil production, the number of jobs are limited. And with nuclear, if you build a nuclear plant in a place like Jordan or Qatar, most likely you will have to import the technology. But with solar, you can build a factory in six to nine months. For a country like Jordan that imports 96 percent of its energy, it’s a straightforward case. You want to be energy independent? Solar is the answer.”

For full coverage of the National Council on U.S.-Arab Relations’ 22nd Annual Arab-U.S. Policymakers Conference, visit http://ncusar.org/auspc/.

About the Author

Larry Luxner is news editor of The Washington Diplomat.