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Geo-Politics and Energy Industry, Shri Mrinal Madhav, Officer, Hindustan Petroleum Corporation Limited (HPCL)

Geo Politics, Energy Security, Oil Diplomacy, $200 USD / Barrel Oil, these are some of the eye catching words in hydrocarbon industry today.

Since the evolution of Planet Earth and mankind, the geopolitics of energy - (Supplier) who supplies it, and securing reliable access to those supplies (Consumer) - have been a driving factor in global prosperity and security. In the coming future, energy politics and the impact of geopolitical relation will determine the survival of the planet. The supplier and the consumer relation have become even more complex with growing concern towards environment and inclusion of climate change policy of governments.

Nearly two billion people were affected by climate related disasters in the 1990s and that rate may double up in the next decade.

To counter these issues, there is an urgent need to carefully understand the fragile and complex relation of various stakeholders, i.e., hydrocarbon rich countries and developing countries. It will be apt to mention here that with the maturity of time, the diplomatic relations will decide mergers and acquisitions in the hydrocarbon sector. The recent deals across the globe are testimony to this. The silence of India in Myanmar, massive loan to Brazil by China for its energy security, no progress on IPI (Iran-Pakistan-India) pipeline are just some of the glaring examples of the impact of oil diplomacy and geopolitical relations in the hydrocarbon sector.

We are also living in an age where economic rationale of any deal has to pass through the acid test of international relations, compounded with political relationship of various countries. And much to our dismay, the economics are often compromised due to the impact of GeoPolitics.

Oil Demand and Supply

The figure above clearly depicts that since early 2006 oil inventories have begun reducing. Inventories also tend to build up when we expect the future price of oil to rise.

China has acquired exploration and production assets in Kazakhstan, Russia, Venezuela, West Africa, Saudi Arabia and Canada. As the major portion of its oil imports are from the Middle East, China has made strategic progress in boosting its relationship with countries in the Middle East in order to safeguard its future energy requirements. Saudi Arabia, with nearly a quarter of the world's oil reserves, is China's largest supplier. China's largest oil refiner, Sinopec, has recently signed an agreement with the Kuwait Oil Corporation to build oil and gas rigs in Kuwait. The governments of Kuwait and China have signed a deal to construct a $9 billion refinery project in China. China's recent agreements with Kuwait range from co-operation on trade, energy resources to education. China's Sinopec has also taken over Canada's Tanganyika Oil Company, which will reinforce Sinopec's upstream earnings.

The need for a sustained supply of oil is very well recognised by China, and as a result, the Chinese government encourages long term contracts to buy large quantities of oil from producers around the world. It also leads to preferential relationships. The Chinese diplomats also tend to cultivate friendly relationships with the governments of oil producing nations. It comes in very handy in the oil industry because in many countries it is the government companies which control the fields. The friendly countries can then be persuaded to sell/give the stakes at lower than the market rate.

Chinese Investments in Africa

Energy Choke points

Apart from the demand and supply scenario, the oil industry also faces grave danger from external factors like rebels in West Africa to terrorists targeting Saudi Arabia, sabotage of oil pipelines, etc. Smallest disruptions of such nature have the potential to cause big swings in prices of oil, endangering the growth of the industry. Russians have not hesitated to brand and use energy as a weapon against other countries. Iraq, being the world's third-largest holder of conventional oil reserves, has immense potential to alter the geo-political relationships.

Security of transit through choke points creates vulnerabilities not only for security of energy supplies, but also for the environmental safety.

Nearly 25 percent of the world oil exports pass through the Strait of Hormuz, nearly 15 percent through the Strait of Malacca and about five percent through Babel-Mandeb, the narrow strait connecting the Red Sea and the Gulf of Aden.

Iran, Russia and Venezuela, impact and play a very critical role in oil market politics. The nuclear programme of Iran is being developed in spite of the UNSC restrictions. Though several countries opposed Iran's nuclear programme, yet it can easily rely on Russia and China, which will block any serious sanctions coming towards it. It will be mainly due to either commercial interests of Russia and China in Iran or resisting UN's move to scrutinise individual nation's security issues.

Any terrorist attack at the oil tanker at one of the oil shipping choke points might push the world to the brink of economic crisis. A handful of oil choke points are of strategic importance for the global energy supply. Geographical constraints make them vulnerable to the terrorist attack. However, should any of these events happen, the price of oil will jump above $200 a barrel.

In current scenario, any discussion on Geo-Politics in the energy industry will not be complete without mentioning Shale Gas. Shale gas is the new buzz word in the energy industry, amongst policy makers and energy security experts. There is more to shale gas than commercial value or being an alternate source of energy. The successful development of Shale gas in Europe alone has the potential to change the equations of Russia and Europe or the world at large. Since a long time, Europe's gas demands were being provided for by Russia and this led to a near monopoly situation for Russia and made Europe highly dependent on Russia for its energy demand. But this equation may soon see an end in case of successful Europe Shale Gas development. There has been increased exploration in various parts of the world (Canada, Europe, Asia and Australia) after the success of shale gas in the USA. Though, environmental concerns, compounded with the use of water, remain an issue in the successful use of this technology.

Global, Unconventional Resource Potential, by Region (%)

(Source: IEA)

It's no longer the age of cheap oil. Today, there is a higher cost to energy and hydrocarbon assets are up for sale at a premium.

However, in future, these energy assets might not be available even at a premium. The need of the time is better international relations and greater political understanding. The energy security in future will be much guided by Geo-Politics.

(The author is an MBA in Oil &Gas and is currently pursuing Law & Diplomacy. He can be reached at mrinalmadhav@gmail.com)