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
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
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.
Investments in Africa
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
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.
Unconventional Resource Potential, by Region (%)
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