Emerging Threats To Energy Security and Stability PDF

Emerging Threats to Energy Security and Stability
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Series C: Environmental Security – Vol. 1

Emerging Threats to Energy
Security and Stability
edited by
Hugo McPherson
MEC International Ltd., London, U.K.
W. Duncan Wood
Institute for Applied Science, Edinburgh, U.K.
and
Derek M. Robinson
Trilateral Group Ltd., London, U.K.
Proceedings of the NATO Advanced Research Workshop on
London, United Kingdom
23-25 January 2004
A C.I.P. Catalogue record for this book is available from the Library of Congress.
ISBN-10 1-4020-3568-3 (PB)

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ISBN-13 978-1-4020-3566-1 (HB)
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CONTENTS
Workshop Contributors ............................................................................ix
Foreword.................................................................................................xiii
SECTION I - Executive Summary ........................................................1
1 A Summary of the Discussions ....................................................... 3
P Tempest
SECTION II - Prospects for The Global Energy Market .......................... 9

1 An Overview ................................................................................. 11
D Gore-Booth
2 A Political Perspective .................................................................. 13

Lord Howell of Guildford
3 An Analytical Perspective ............................................................. 19

M Smith
4 An Economic Perspective ............................................................. 33

A Sieminski
SECTION III: - National Strategic Energy Interests .......................... 51

1 Energy Security and Unresolved Conflict in the Caucasus........... 53
T Japaridze
2 Prospects for Russian Energy........................................................ 59

E Velikhov
SECTION IV - Evolving Roles of Multilateral Organisations

and the Private Sector................................................................. 65
1 Overview ....................................................................................... 67
R Priddle
2 The International Energy Forum and

Energy Security & Stability .......................................................... 71
A Walther
3 The View from Brussels................................................................ 79

A Konoplyanik
v
vi
SECTION V - Regional Challenges: The Middle East ...................... 87

1 National Strategic Energy Interests and
Creating Regional Stability in the Middle East............................. 89
R Ebel
2 Emerging Threats to Energy Security and Stability .................... 101

H Franssen
3 Iraq: A Japanese Perspective ....................................................... 125

K Katakura
SECTION VI - Regional Challenges: North Africa ......................... 127

1 Libya............................................................................................ 129
O Miles
2 The North African Challenge ...................................................... 137

F Perrin
SECTION VII - Regional Challenges: The Caucasus Region,

Caspian & Black Sea Basins ................................................... 141
1 Turkey & NATO ......................................................................... 143
D Logan
2 Prospects for the Caucasus, the corridor between

two Continents - Keynote Address.............................................. 147
T Japaridze
3 Tatarstan: Euro Islam in the Volga Region ................................. 155

R Khakimov
SECTION VIII - Critical Energy System Infrastructure (CESI) -

Emerging Threats to Shipping and Pipelines ........................ 169
1 Introduction ................................................................................. 171
J Flynn
2 Shipping: Vital, Vulnerable and Little Understood..................... 175

P Adamson
3 The Straits of Malacca: Critical Sea-Lane Chokepoint .............. 183

T Masuda
vii
SECTION IX - Background Papers on

The World Energy Market....................................................... 195
Edited by G Hancock
1 The Geo-Political Future of the Gulf........................................... 197
2 China and OPEC ......................................................................... 205
3 Egypt – A Promise yet to be fulfilled.......................................... 215
4 Egypt’s Race for Gas Export Markets......................................... 223
5 Saudi Arabia ................................................................................ 243
6 Saudi Society............................................................................... 257
7 Central Asia and The Caspian Basin ........................................... 269
SECTION X - Initiatives Emanating from the Workshop ............... 277

1 Initiative: Energy Security and Unresolved
Conflict in the Caucasus.............................................................. 279
2 Initiative on Pipelines Ports and Shipping Security -

Building Public-Private Cooperation .......................................... 281
3 Energy Security & NATO Strategic Interests After 9/11............ 283

W. D. Wood
SECTION XI - Press Coverage ........................................................... 301

1 Epolitix ........................................................................................ 303
2 Epolitix ........................................................................................ 309
3 Bloomberg News......................................................................... 313
4 The Times.................................................................................... 315

WORKSHOP CONTRIBUTORS
Workshop Co-Directors:
Sir David Gore-Booth, Chairman, Windsor Energy Group – MEC
International, UK
Dr. Evgeny Velikhov, the Russian Research Centre, Kurchatov Institute,
Russian Federation
Participants
Patrick Adamson, Chairman, Maritime Technical International Ltd, UK
HE Mr Ahmed Attaf, Ambassador to UK, Algeria
HE Mr Tarald Osnes Brautaset, Ambassador to UK, Norway
Giorgi Chanturia, President, Georgian International Oil Corporation,
Georgia
Eveline Claesson, Project Co-ordinator, MEC International, Sweden
HE Mr Timoor Ghazi Daghistani, Ambassador to UK, Jordan
John Davidson, Managing Director, Rubicon International, UK
Cem Duma, Managing Director, ABC Consultancy, Turkey
Robert Ebel, Chairman, Energy Program, Center for Strategic &
International Studies (CSIS), USA
Robert Eid, Managing Director, National Bank of Kuwait, UK
Mr. Elhoucine Fardani, First Secretary, Embassy of Morocco to UK,
Morocco
John Flynn, Adviser to Chevron and Former UK Ambassador to
Venezuela and Angola, UK
Dr Herman Franssen, Former Adviser to Omani Energy Minister,
President, International Energy Associates, Netherlands
Sir David Gore Booth, Chairman, Windsor Energy Group, UK
ix
x
Vafa Guluzade, National Security Advisor to the President, Azerbaijan

Ambassador Zurab Gumberidze, Ambassador, Embassy of Azerbaijan,
Azerbaijan
Lord David Howell, Shadow Spokesman for Foreign Affairs, Former
Secretary of Energy, UK
Mr Rafael Ibrahimov, Ambassador to UK, Azerbaijan
HE Mr Erlan Idrissov, Ambassador to UK, Kazakhstan
Tedo Japaridze, Minister of Foreign Affairs, Georgia
David Kalandadze, Head of Finance & Economics Section, Embassy of
Georgia to UK, Georgia
Prof. Anastasios Katsanos, Technical University of Crete, Chania, Greece
Dr. Rafael Khakim (Khakimov), State Counselor for Political Affairs to
the President of Tatarstan , Tatarstan - Russian Federation
Dr. Andre Konyaplanyik, Deputy Secretary-General Energy Charter
Secretariat, Russian Federation
Andrew Levi, Head of Energy, Aviation & Marine Department, Foreign
and Commonwealth Office, UK
Sir David Logan, Former British Ambassador to Turkey, UK
Teimuraz Mamatsashvili, Ambassador to UK, Georgia
Oliver Miles, Chairman, MEC International, UK
Francis Perrin, Editor, Arab Petroleum Research Center , France
Dr. Philip Petersen, Director, Institute for Applied Science, USA
Robert Priddle, Former Executive Director, International Energy Agency
(IEA), UK
HE Mr Tukhtapulat Riskiev, Ambassador to UK, Uzbekistan
Ioannis Samouilidis, Security of Supply European Commission,
Directorate-General Energy and Transport, Greece
Adam Sieminski, Director and Global Oil Strategist, Deutsche Bank, USA
Paul Simons, Deputy Assistant Secretary of State for Energy, Sanctions
and Commodities, USA
xi
Michael Smith, Head of Energy Analysis, British Petroleum, UK

Alan Stott, Head of Business Development Middle East, BG Group, UK
Konstantin Surguladze, Consul, Embassy of Georgia, Georgia
Paul Tempest, Director, Windsor Energy Group, UK
Wim Thomas, Senior Energy Consultant, Global Business Environment,
Shell International, Netherlands
Chris Trelawny, Senior Technical Officer, Maritime Security, Maritime
Safety Division, International Maritime Organization (IMO), United
Nations, UK
Dr. Anna Tsporkina, IAS Liaison to Russian Academy, Tatarstan -
Russian Federation
Dr. Evgeny Velikhov, President, The Russian Research Centre, The
Kurchatov Institute and Energy Science, Adviser to Russian Federation
President, Russian Federation
Ambassador Arne Walther, Secretary General International Energy
Forum, Riyadh, Saudi Arabia, Norway
Bob Weir, Director, SSI Consult, Canada
Dr. W. Duncan Wood, Director of Research, Institute for Applied
Science, Ireland
HE Dr Diagana Youssouf, Ambassador to UK, Mauritania
Graham Ziegler, General Manager, National Bank of Kuwait, UK
FOREWORD
January 23 to January 25, 2004, Windsor Castle, UK

This two-day NATO-sponsored workshop was organised by the
Windsor Energy Group and MEC International Ltd with support from
NATO’s Science Committee. The workshop was designed to promote a
public-private sector exchange on how best to address issues arising in
energy security at a time of growing uncertainty. In particular, it sought to
assess emerging threats to energy security and stability and discuss new
security strategies to protect global energy supplies from regional
instability and terrorism.
The format involved a wide-ranging international group of policy-
formers and advisers from NATO, Partner and other countries, in a unique
forum for intensive expert discussion.
Background
The international community is increasingly conscious of the need to
develop new energy security strategies in order to protect global energy
supplies from regional instability and terrorism.
Energy security is a vital element in international stability. However, a
variety of energy-related economic, technical, and military/political factors
pose serious challenges to the international community’s pursuit of energy
security and stability:
x The global economy is expected to continue to be largely
dependent on oil and gas for the next twenty to thirty years. Current
levels of production may need to be doubled in this period, with
most of the increment coming from the Gulf States who control
66% of global oil reserves and 40% of global natural gas reserves.
x There are forecasts of significant capacity shortfalls.
x Existing oil and gas distribution networks -- for example those
linking the Caspian, the Middle East and new markets in Asia -- are
considered to be inadequate.
xiii
xiv
x Regional instability: the impact and aftermath of the US-led

military intervention in Iraq in 2003; tensions in other oil producing
regions.
x The growth of anti-western terrorism.
Goals
x To highlight emerging threats to energy security and stability.
x To improve co-operation and information sharing between
governments, international regulatory bodies and the private sector
in the formulation and implementation of energy security strategies.
x To examine ways to strengthen international capabilities to deter
and detect terrorist threats to energy supplies.
x To develop and coordinate bilateral and multilateral energy security
and stability strategies.
SECTION I
EXECUTIVE SUMMARY
1 A SUMMARY OF THE DISCUSSIONS
Paul Tempest
Director of Windsor Energy Group and Vice President of the British
Institute of Energy Economics
An emerging energy demand/supply imbalance

The IEA expect global energy demand to rise by 66% by 2030 with
90% of the increment supplied by fossil fuels, mainly oil.
The Gulf oil producers, holding two thirds of total global proven oil
reserves, would have to account for most of this increment and for the
replacement of depleting production elsewhere.
Such a doubling or even tripling of Gulf oil production capacity would
require a massive infusion of external capital and new technology. This
looks in present circumstances to be highly unlikely, given the degree of
political turbulence in the area, the reluctance of the capital and financial
markets to take on such risks and the determination of several governments
to protect their own national companies to the point of failing to provide
adequate incentives for the international oil companies to participate fully.
“The end of cheap oil”

Competition for Gulf oil exports is therefore likely to be intense with
South-East Asia taking the bulk and an increasing share. US expectations
that US oil imports will double to 24 mbd by 2030 will further distort the
market and can only be achieved at the cost of denying supply to the
developing world.
Oil prices have remained broadly within the US$22-28 OPEC band for
the last four years and are now moving beyond the upper limit. Yet industry
3
H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 3–8.
© 2005 Springer. Printed in the Netherlands.
4
estimates of the global clearing price for oil is mainly within the US$ 16-18
range, implying that the difference is an anxiety premium caused mainly by
political turbulence in the Middle East.
Dangerous impacts on the global economy - a non-

sustainable energy prospect
Periods of high oil prices have always had adverse impacts on global
economic growth, just as low oil prices have always acted as a stimulus.
Already, continuing high oil prices are seen to be hindering growth for later
this year. Whereas the rest of OECD (Organisation for Economic
Cooperation and Development) industrialised countries are partly shielded
by the weakening of the US $, the impact on the US economy, which is
already slowing, and on most developing countries could be severe.
One quarter of the world population has no access to electricity and
many more rely on wood, residues and dung for cooking and heating. Even
on assumptions of the persistence of the average GNP growth over the last
25 years, the number of people without access to electricity is 2030 is
unlikely to be below the current level. The steeper the economic
rollercoaster caused by oil price spikes, the less chance there will be to
reach the IEA target of 75 million new connections per year and the greater
the likelihood that global energy poverty will increase rather than decrease.
Changes in oil market leadership

Russia (9.0 mbd this year) has overtaken Saudi Arabia and the USA
(each about 7.8 mbd this year) as the leader in oil production. Iraq is widely
thought to be capable of producing 4-5 mbd by 2010 and possibly 15-20
mbd by 2030. Many of the discussions pivoted around the issue of political
stability in Russia and Saudi Arabia.
Most contributors considered the IEA assumption of a rapid rise in
Saudi production to 19 mbd to be highly unlikely, and indeed, an industry
report which is soon to be published predicts the contrary: imminent
collapse. Yet the consensus view, although vigorously challenged, was that
Saudi Arabia would remain the indispensable provider of surge capacity
until 2010 at least.
5
China (5.7 mbd) has outstripped Japan as the second largest oil
consumer. Chinese oil imports are predicted to rise from 2mbd in 2003 to 6
mbd in 2010 and 15-20 mbd by 2030.
Iraq approaching “boil-over”

Despite considerable and mainly unsung progress in restoring Iraq’s
economic infrastructure over the past six months, the projected transition to
Iraqi control at mid-04 looks precarious unless the proposals are endorsed
by the 60% Shi’a majority (see Special Session C).
The possibility of a break-up of Iraq, whether sooner or later, becomes
clearer. In the light of this eventuality, a serious contingency plan is
needed.
“While there are now no known national threats to the

boundaries of the USA or Europe, there is no boundary to the
global threat of Al-Qaida and other international terrorist
organisations. Our defence forces are largely equipped for Cold
War needs, not for the rapid-response needs we now face.”
Technology transfer stifled

The International Oil Companies provide a rapid and efficient transfer
of petroleum technology and effective management where they are
permitted to operate. Many oil and gas-producing countries overprotect
their national companies to the point of denying IOC access on commercial
terms.
The Caucasus impasse

Rivalries between the USA, Russia and the EU overshadow efforts by
the Caucasus States to develop export capacity for their oil and gas.
Political meddling and attempts from outside to control the economy of the
region explain the numerous development delays.
6
North African surprises

Rapid development of North African oil and gas resources following
political détente may alleviate the competitive weakness of Europe in
securing adequate imported oil and gas. Sanctions on Libya have been easy
to impose, most difficult to dismantle. US policy is still based on a “wait-
and-see” step-by-step policy as Libya demonstrates compliance.
UK energy policy
There is little sign of contingency planning as the UK returns to net gas
import dependence (2005-6) and oil import dependence (2010) and coal
imports (currently 50% of consumption) continue to rise. Nuclear capacity
will also have run down sharply by 2010. UK Government expectations
that wind-power will be able to provide 10% of UK electricity may be
exaggerated.
Threats to ships
Shipping of crude oil and products, which are equivalent to 57% of
global oil production, is vital to the global economy, vulnerable to terrorists
and the problems are poorly understood. Some 90,000 ships move 2,000mn
tons pa.
The fleet of LNG carriers is likely to triple within 10-15 years and are
getting larger – in the next generation of carrier, they will be 150,000 tons
each. A vapour cloud from a damaged LNG vessel will, on ignition, have
the impact of detonating a hydrogen bomb.
The main hazards are:
Ship-seizure by pirates who then transfer and sell the cargo, disguise
the ship and ransom the crew. SAS simulations indicate that fewer than 8
minutes would be needed for regaining control of a captured vessel
between touching the ship’s side and taking over the bridge.
x Ramming – this mostly occurs close to shore and often causes
massive spills and pollution.
x Infiltration of Ship by terrorist cell working among crew.
7
x Actions by environmental groups (e.g. the seizure of The Brent

Spar by Greenpeace)
The four most dangerous choke-points for the oil trade are Hormuz
(15.5mbd), Malacca Straits (10.5 mbd), Bab al-Mandab (3.3 mbd) and the
Suez (0.8 mbd). Collision in congested waterways is not uncommon: in 2
months recently the IMO reported 8 collisions in the Malacca Straits which,
along with Indonesia, heads the IMO list of 445 piracy attacks in 2003.
This session examined detailed studies of the impact of a blockage of
the Malacca Straits, which might be closed from 3 weeks to 3 months
adding 3-5 days to voyage time between the Gulf and Japan.
Remedies discussed included security alert systems, electric fences
around the decks, enhanced naval protection, stricter vetting of crews and
port operatives. There is little enthusiasm for ships to carry weapons and
grenades.
Threats to ports
x Ship used as a bomb in a port city/area (e.g. Boston or Tokyo Bay)
x Inadequate Energy-Related facilities at Ports.
x Threats posed by lack of thorough inspection at international ports
(2% shipping freight is checked)
Threats to pipelines: an Iraqi case study

This session relied on up-to-the-minute reports by security forces and a
leading private security company in Iraq.
Iraq’s main 669KM oil artery, the North/South pipeline is more or less
out of action in the North on account of sabotage. The bulk of Iraqi oil
exports now run southwards through the area under British protection:
Internal resistance is driven by a complex variety of political and
personal motives. There is a general resentment of foreign occupation and
an awareness of the risks of power shifts through the period of transition.
From outside, resistance is reinforced by radicals pouring into Iraq,
many with al-Qaida support.
Urban unrest re lack of electricity, water, security etc is rising.
8
Tribal unrest on tribal boundaries is endemic.

Threats to security are becoming more diverse and complex. Without
any control or customs inspection on the Iraqi borders, al-Qaida has almost
100% freedom of movement.
Remedies include establishing tight control of the borders, introducing
more trunk-road checks, extension of the “cash-for-arms” scheme and the
building up of a network of new medical centres and hospitals, all of which
provide a stream of valuable local intelligence.
The security of the pipelines has been largely handed over to contracted
Iraqi companies who complain that the State must be active in supervising
overall responsibility, which is currently lacking.
Conclusion
The two discernible Middle East flashpoints in the year ahead are Iraq
and Saudi Arabia. There are high hopes of normalisation of relations with
Iran and Libya. Palestine remains a pan-Arab rallying cry. Oil market
leadership is entering a process of change. In the longer-term, acute
competition for Gulf oil and gas exports looks extremely likely and will
present the lead-consumer governments with new and difficult challenges.
SECTION II
PROSPECTS FOR THE GLOBAL ENERGY
MARKET
1 AN OVERVIEW
Sir David Gore-Booth KCMG KCVO

Workshop Co-Director
Chairman, Windsor Energy Group, Former Ambassador to Saudi Arabia,
Middle East Director, Foreign & Commonwealth Office, UK
The principal event of 2003 was the US/UK invasion of Iraq. I was the
only person in 2003 here at the Windsor Energy Group who said that there
would not be an invasion (mainly because I could not understand the
rationale for it and did not want to be thought to support it even by default).
I still believe it was a mistake to invade and, although not sorry to see
the back of Saddam, I believe this misadventure will cause more problems
than it solves: it has had no beneficial affect on the oil market (on the
contrary the price remains very high – not least since US reserves are at
their lowest level for 29 years).
The invasion of Iraq has had no beneficial effect on the Middle East Peace
Process. The effect, in my view, has been quite the opposite: Sharon seems
more sceptical than ever about the road map and is under no real pressure
from the US Similarly, the war has had no clear beneficial effect on “good
governance” in the Middle East: even Thomas Friedman now accepts it
will take Israeli withdrawal from the Occupied Territories to “strip the
worst Arab leaders of an excuse not to reform”. In terms of the War on
Terror, the invasion of Iraq has turned the country from a peripheral into a
central front and it has diverted attention from the War on Terror’s main
target, Osama Bin Laden. If anyone should have been discovered in a rat
hole it was him! And through all this Afghanistan remains a worry.
On a different note, increased security has become an obsession in the
US, even at the cost of civil rights. We see concrete evidence of this
11
12
manifested in new political phenomena in the US such as the Patriot Act

legislation and the construction of prison complex in Guantanamo Bay.
International organisations such as the UN, NATO and the WTO are in
a state of confusion while the EU remains under real strain over the
drawing up of the new constitution, its stability pact and the steady
appreciation in value of the Euro. Corporate governance is in difficulty
whether in Russia (Yukos), Italy (Parmalat) or UK (Shell) and the problem
is ongoing in the US.
There are, however, some reasons to be cheerful. Both India and
Pakistan have little relevance to central energy issues, a successful
rapprochement will increase both country's demands for energy. The region
will become a large energy-consumer alongside China, whose economic
growth is already boosting demand, still leading in consumption. Libya and
Iran’s entry back into the Global community is due as much to painstaking
European diplomacy as it is to knee-jerk US unilateralism.
In all, I foresee another very stressful year ahead with the approach of
the US election prompting more government by gut and gimmick than by
good sense.
2 A POLITICAL PERSPECTIVE
Lord Howell of Guildford

Conservative Foreign Affairs spokesman, House of Lords and former
Secretary of State for Energy, UK
There can be little doubt that we are entering an age of vastly increased
political risk when it comes to the world energy situation, and that this
coincides with emerging global patterns for both energy supply and
demand.
Of course the optimists hope that globalisation will bring a new
intensity of international cooperation and partnership in energy-related
projects, while the pessimists fear armed clashes, violent struggles for
control of energy resources and risks at every turn. The realists will foresee
a bit of both.
I would like to put these new patterns in some sort of perspective, but
before doing so allow me a few observations on the local British scene,
which is in some respects a microcosm of the problems and challenges that
are faced on a grander scale.
The position in the UK is that after a decade of relatively problem-free
energy flows there are now major dangers ahead on both the supply side
and on the generation and distribution sides.
For the UK the situation is about to change radically. We will shortly
become again, after many years, a net importer of both oil and natural gas,
the latter being supplied by new contracts with Norway, Russia, Algeria
and possibly Iran. This takes these aspects of energy supply right back into
the heart of international politics in the most sensitive areas on earth.
Recently the BBC ran a fictional programme describing how a raid by
Chechen terrorists on a Russian gas transmission facility had the knock-on
effect of blacking out London, via the closing down of numerous gas-fired
13
14
electricity-generating stations. The detail may have been fanciful, but the
underlying thought – that energy flows are now more interwoven and
interlinked than ever before – is correct, and even the politicians, who are
notoriously ignorant about the complexities and long-term nature of energy
projects, felt moved to ask some anxious questions in Parliament.
Meanwhile, here at home in the UK, we have to make crucial new
decisions on nuclear power. It is no longer a question of ‘keeping our
options open’ on nuclear power generation. Decisions have to be made
immediately for a decade’s time.
Investment in offshore windfarms cannot conceivably fill the gap
which will be left by any nuclear closures, quite aside from the fact that
they are about to run into environmental objections almost as fierce as
those surrounding the treatment of nuclear waste.
Finally, we now have to move towards a new generation of techniques
for conservation and low energy consumption. There is much work to be
done.
Global Demand
There is a staggering contrast here between what the more hopeful and
idealistic policy-makers and advisors say about the next 25 years and what
the hard facts suggest.
This is what you hear the more hopeful policy-makers saying about the
next ten to twenty years.
Reliance on fossil fuels will reduce, carbon emissions will drop
dramatically; demand for alternatives will expand, such as current from
wind power, tidal power and solar power, although not from nuclear power.
There will be massive conservation as a low energy future develops.
Vehicles will use much less gasoline, or dispense with gasoline altogether.
Households will adopt small-scale energy sources, oil or gas-fired home
boilers will generate their own electricity and feed it back into local grids.
The reality, however, looks quite different.
The IEA brainstorming paper of February 2003 tells us that world
energy demand will grow – by about two thirds between now and 2030.
Fossil fuels, far from phasing out, will meet 90 percent of these additional
needs. World oil consumption will rise from 77 mb/d to 122 mb/d. Nuclear
power will decline (in OECD countries to a minimum with the possible
15
exception of France). US imports will continue to rise for both oil and LNG
(note that in 1980 US net crude oil imports of 28 percent were deemed ‘far
too high’ – now the figure is 68 percent!).
By a clear margin, the biggest driver of demand expansion will be the
developing countries. China will lead as energy-thirsty nation. By 2121
China’s share of global GDP, says the World Bank, will have more than
doubled, from 3.7 percent to 8 percent. By then the Chinese, who already
consume more oil daily than Japan, could be importing 10 mb/d against the
current level of 2 mb/d plus.
Of the IEA-estimated increase in demand, one third will come from
OECD countries and two-thirds will come from the developing world.
Rose-tinted supply estimates

Now let’s turn to supply patterns – and once again, the cheerful
optimists peddle one picture, while reality dictates another.
Here’s the optimists’ rose-tinted picture: The Middle East region will
emerge possibly de-nuclearized and de-terrorised and its stability will
return. Iraq will see output soar as high as 10 mb/d. Saudi Arabia will
follow the path of gradual reform but will remain stable; the Ayatollahs in
Tehran will realise the folly of economic isolation and join in new patterns
of global responsibility; oil and gas will flow in abundance out of Russia
with the oil coming especially from the Caspian Sea basin via pipelines
through Georgia and Turkey westwards while the oil will flow eastwards to
China and possibly Japan.
A big expansion in LNG is also foreseen, so that it becomes, in effect, a
globally-traded commodity like oil while its price tracks oil closely. The
optimists also plan for cleaner coal technologies with successful carbon
capture and of course a big growth in renewable energy, hopefully on or
ahead of the EU target for renewables of 10% for 2010.
All this will require colossal and sustained investment in energy project
infrastructures – that is maintenance and development of oil and gas
production, new pipeline networks, modern refinery technologies, new
terminals and distribution systems and new storage facilities where
appropriate.
16
A Risky Reality
That is the optimist’s view. Now let us see how this Panglossian picture
collides with reality.
First, the political risks in the post Cold War e-enabled world are
getting larger and starker all the time. The Inforation Technology
revolution has empowered systems and networks for handling and trading
energy supplies beyond the dreams of thirty years ago. But it has also
empowered those with a destructive agenda on the same global scale.
Second, on a geographical plane, Iraq may or may not settle down in
due course (on the whole I am an optimist on this) but the timescale may be
much longer than first hoped and the vulnerability of Iraqi oil continues to
be demonstrated. Saudi Arabia could well drift into turbulence as the
delicate balance between religious extremists and moderate reformers
within is upset by upheaval without (especially in Iraq). Russia is stable
now but the roots of political settlement do not run deep (and anyway one
believes Russian statistics with caution). In Iran the hardline Ayatollahs are
far from defeated and the future there looks very unsettled as well.
Meanwhile Nigeria and Venezuela have already demonstrated their
political unreliability; Algeria has been under attack and looks worryingly
unreliable. Key transit countries like Georgia have also been through
paroxysms and their difficulties may not yet be over. Turkey may be
prospering and its chances for opening negotiations on EU entry may be
improving but there are risks there too as the recent hold-up of shipping in
the Bosphorus reminds us. North Sea oil output is now starting to decline
sharply.
As for nuclear power, it was once seen as the great alternative of the
future. It now remains riddled with political difficulties both with regard to
location and to the handling of nuclear waste. Moreover, over the whole
scene hangs the growing terrorist risk – poised (unless frustrated) to inflict
deadly damage on increasingly integrated and complex energy systems.
Overall, a conservative estimate is that by 2020 half the world’s oil and
gas will come from politically unreliable sources.
Furthermore, there are the more ‘normal’ investment risks that come on
top of these ubiquitous political uncertainties. The capital requirements for
underpinning a secure energy future are enormous even at the calmest of
17
times. Certain very specific conditions are required for capital to be raised
at all. They include stable Governments and governance, sustained political
commitment by the authorities concerned – which may have to stretch over
the full lifetime of the project – as well as clear and predictable regulations,
minimised corruption, respect for the rules of law, property and contract
and freedom to repatriate profits.
As energy projects become more interlinked and stretch across national
borders it becomes necessary in addition to ensure that the same rules apply
both sides of every border and fence.
Above all, energy investment demands long life and secure contracts
between suppliers and customers. Otherwise, who would want to invest
their money? Yet markets see things differently. They want maximum
flexibility to chop and change and go for the best price. The differences are
exemplified here in the Russia/EU energy dialogue. Russia wants to invest
$35bn annually in its oil industry. Who is going to stump up that kind of
money without very long-term contracts with Western European markets?
Even to recite this list of requirements shows how far most of the
energy world is from meeting them, or will be able to meet them in the
foreseeable future.
It must never happen

Finally, I want to make a general comment about broad global stability,
which is the fundamental condition for a safe and secure energy future.
We hear a good deal about the USA being ‘the only superpower’ and
being the new hegemonic empire-builder. This is a very fashionable view
in European circles.
I believe it is both dangerous and wrong. It is dangerous because it
leads straight not just to frenetic anti-Americanism but to the promotion of
Europe as a counter-weight ‘empire’ which is a sure recipe for great power
conflict, clashes of interest, rocketing defence-spending and divided
counsels in coping with terrorism and fanaticism.
It is wrong because the USA is not an imperial power, even if it suits its
enemies to depict it as one. Its interest is the interest of all free states,
which is live and let live, and it so happens that pluralism, if not some
specific democratic model, is the best guarantee that societies will remain
free and open participants in the global system. Our combined Western
18
world energies should be devoted to enabling every society, from the Asian
giants like China and India, to the Arab sheikhdoms, to the smallest Balkan
or East European state to move, at their own pace, in that direction. That is
not imperialism, it is survivalism.
I prefer to see the USA as an ‘umbrella’ state, a larger member of a
network in which the individual national interests of all, large and small,
are inextricably linked. The same can perhaps be said, or ought to be said,
of the European Union institutions which provide collective cover for, but
not interference in, the security and trade-prosperity of its numerous
member states.
For Europe and America to divide and become rival blocs would, in my
view, provide a new playground for terror and disruption. It would
guarantee that the threats to secure energy supplies, which are already
substantial, would become many times more so. I hope it never happens.
3 AN ANALYTICAL PERSPECTIVE
Michael Smith
Head of Energy Analysis, BP plc
The main areas of concern from an energy security perspective can be

summarised as follows:
x Growing (fossil fuel) import dependence in the major OECD
consuming countries/regions as well as in major Non-OECD
consumers such as China;
x Geopolitics, terrorism and the associated risk of supply disruptions,
e.g. last year’s war in Iraq or the Venezuelan general strike of Dec.
2002 – Feb. 2003;
x Finite resources and the associated concern that world production of
oil and gas could peak in the near future, leading to physical
shortages and/or spikes in energy prices;
x Barriers to investment: with the bulk of remaining fossil fuel
resources residing in Non-OECD countries, especially the Middle
East and the Former Soviet Union, doubts exist whether the
legal/commercial environments in these countries will allow for the
required level of investment needed to expand supply in tandem with
the growth in global demand;
x High and volatile energy prices, sometimes blamed on just-in-time
inventory management practices or speculators but also resulting
from reduced margins of spare capacity in global hydrocarbons
production and processing and political instability;
x Infrastructure reliability: concerns about the reliability of ageing
infrastructure and the impact of regulatory changes on the adequacy
19
20
of reserve margins – as highlighted by recent widespread power

failures in the US Eastern Seaboard, Italy and London.
Import dependence
Expressed as net fossil fuel imports as a percentage of primary energy
use, import dependence has increased in the US and China over the last
thirty years but decreased in Europe and Japan. The fall in European import
dependence occurred during the 1970s and reflected the development of
North Sea oil and gas supplies and the rapid development of nuclear power.
The fall in Japanese import dependence has been very modest and reflects
largely the growing penetration of nuclear power: domestic hydrocarbon
production has always been quite small and has been declining over the last
30 years as a whole. China has only recently emerged as a net importer of
energy on account of a rapid growth in oil consumption as the economy has
industrialised. Chinese oil production is probably approaching a peak. US
import dependence declined between 1972 and 1982 despite oil production
peaking in 1971. Oil and gas consumption was lower in 1982 than in 1972
and nuclear power expanded rapidly during this period. Declining
consumption was a function of the 1973 and 1979 oil price shocks. Since
1982, the moderation of energy prices and the return of robust consumption
growth have encouraged growing import dependence once again: net fossil
fuel imports accounted for almost 30% of US energy consumption in 2002.
All of the main countries/regions are more import dependent in the case
of oil than they are in the case of energy generally. Both the US and Europe
depend on imported oil to satisfy around 60% of consumption, whereas
Japan is close to 100%. Despite only becoming a net oil importer in 1993,
China was almost 40% dependent on oil imports in 2002 and imports grew
a further 30% in 2003. Europe has become less dependent on oil imports
over time as North Sea production continued to grow until recently.
However, with North Sea production having peaked, European oil import
dependence should increase in coming years, as in the US and China. Over
the last 30 years, the world’s energy supply has become more diverse. The
shares of oil and coal, the dominant fuels in 1972, have fallen while the
shares of gas, nuclear and hydro-electricity have grown – as has the share
of renewable energy. This trend is expected to continue, albeit more slowly,
because of a slowdown in the rate of nuclear/hydro expansion. At the same
time that oil’s share of world energy consumption has fallen, oil
consumption has become more concentrated in the transport sector, where
21
there are fewer opportunities for substitution than in industry, power and
residential/commercial use. This is potentially a negative for energy
security in that it reduces the elasticity of oil demand with respect to price.
Geopolitics & terrorism

Politics has played a large role in the market for many years but
threatens to play a growing role if production of oil and gas becomes
increasingly concentrated in politically unstable countries and regions. A
quick review of 2003 points to impacts on current and potential future
supplies of oil and gas in the following countries:
x xVenezuela – general strike;
x xColombia – ongoing terrorist attacks on pipelines;
x xBolivia – civil unrest in response to proposed LNG exports;
x xNigeria – ethnic unrest in the Delta region disrupting oil
supplies;
x xLibya – continued economic sanctions but signs of these
being lifted;
x xIran – continuing economic sanctions, risk of further action
to counter nuclear proliferation;
x xIraq – war to remove Saddam Hussein;
x xSaudi Arabia – terrorist attacks on housing compounds
raising fears of oil infrastructure sabotage;
x xYemen – terrorist attacks on foreign oil workers;
x xPakistan – terrorist attacks on gas pipelines;
x xIndonesia – Bali and Jakarta Marriott bombings, fears of
attacks on shipping in Malacca Straits;
x xRussia – impact of Khodorkovsky arrest.
The countries listed above account for around two thirds of global oil
reserves and 60% of global gas reserves.
Finite resources
The idea of resource scarcity and an imminent peaking in oil and gas
production has been around for at least 30 years and has always been
22
proved wrong. Recent high oil prices, which are attributable largely to
OPEC strategy and behaviour, have provided a backdrop for the
“depletionists” to publicise their views once again. The evidence suggests
that world oil production will continue to grow in the next decade despite
declines in mature provinces like the North Sea and the onshore USA – as
relatively immature production regions such as the Caspian and deep water
West Africa show strong growth – together with Russia, which is enjoying
a renaissance.
The world’s oil supply continues to become more diverse with more
countries experiencing material growth than those suffering material
declines. OPEC’s share of world oil production peaked at over 50% in the
early 1970s and has recently fallen below 40%, where it is expected to stay
through at least 2010.
Barriers to investment
The IEA’s recent World Energy Investment Outlook showed more than
two-thirds of oil sector investment between 2001 and 2030 needing to take
place in Non-OECD countries.
High & volatile energy prices

Oil and gas prices have been higher and more volatile in recent years
than was the case through much of the 1990s. To some extent this reflects a
deliberate strategy on the part of OPEC to keep markets tight but it also
reflects major geopolitical shocks such as 9/11, the Venezuelan general
strike and the war in Iraq. There is also a possibility that diminishing spare
production capacity could explain some of this growth in volatility.
Policy levers & trade-offs

Governments turn to a number of policy levers in an attempt to enhance
energy security. Tax breaks or import tariffs may be employed to promote
self-sufficiency. “National champions” may be encouraged to acquire
equity production overseas, as the current Chinese thrust to acquire
overseas equity. Diversification of supply sources may be encouraged by
limitations on the share of imports allowable from one country, e.g. the
60% limit on Spanish gas imports designed to prevent over dependence on
Algerian gas imports. Demand-side management, e.g. the use of efficiency
23
standards or real-time pricing, may also fit with environmental policy

goals.
In recent years, the concept of producer-consumer dialogue has
regained some currency. It appears that an understanding was reached
between the IEA and OPEC over the use of OPEC spare capacity before
resorting to the release of strategic stocks during last year’s war in Iraq.
Technology transfer and financing are tools that are not often used but
Japan is especially active in deploying the latter to advance its energy
security goals, e.g. Japanese financing of many Asian and Middle Eastern
LNG projects. OECD governments hold huge emergency oil stocks and
countries like China and India are now seeking to build their own
emergency stocks. By depriving consumers of choice and reducing
economic efficiency, policies designed to enhance energy security
generally involve some element of cost. Some policies, e.g. the promotion
of nuclear power as a quasi-domestic energy source, may also run into
barriers raised by public acceptability and safety issues. Others, e.g.
promotion of domestic coal resources, may clash with environmental goals.
Conclusions
The resource constraint is unlikely to bite in the next ten years and oil
and gas supplies are likely to become more diverse. Recent price strength
and volatility is at least partly cyclical. However, the US, Europe and
North-East Asia will become more dependent on imported energy and there
are real concerns about political stability and barriers to investment in the
Non-OECD countries that will provide a growing share of the world’s
energy. Infrastructure problems should be avoidable with appropriate
regulation. Policies to enhance energy security almost always involve
economic and environmental trade-offs.
24
Energy security: an analytical perspective

M ichael D . Sm it h
Head, Energy A nalysis, Econom ics U nit
2 3 rd January 2 0 0 4
25
Energy security concerns
• Grow ing import dependence

• Geopolitics & terrorism
• Finite resources
• Barriers to investment
• High & volatile energy prices
• Infrastructure reliability
Energy import dependence
Net fossil fuel imports as % of primary energy use

90%
1972
80%
1982
70% 1992
60% 2002
50%
40%
30%
20%
10%
0%
-10%
USA Europe Japan China
26
Oil import dependence

Net oil imports as % of oil consumption
100%
80%
60%
1972
40% 1982
1992
20% 2002
0%
2
- 0%
U
SA u
Erope J
apan China
World energy supply becoming

more diverse
Share of total primary energy use
100%
90%
80%
70%
Hydro
60%
Nuclear
50% Gas
40% Coal
Oil
30%
20%
10%
0%
1972 1982 1992 2002
27
28
Finite resources
29
OPEC sh
are of w
orld oil
roduction
p
60%
5
0%
40% OP
EC
30%
20% M iddle East OP

EC
10%
0%
00
02
04
06
08
10
0
2
4
6
8
1972
1974
1976
1978
198
198
198
198
198
190
192
194
196
198
20
20
20
20
20
20
Barriers to investment
Cumulative oil industry investment requirement 2001-2030
10%
31%
12%
OECD
FSU
Middle East
Africa
L. America
13%
Dev. Asia
16%
18%
Total: 2.84 trillion $
Source: IEA World Energy Investment

Outlook 2003 (Table 4.1)
30
igh& o
H v la
tile energy pric
es
/m
$ tu
b /b
$ rrel
a
10 40
9 rent c
B rude pric
e
3
5
8
3
0
7
6 25
5 20
4 15
3
10
2
1 5
enry H
H ubga
s pric
e
0 0
-0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-0
-1
-2
-3
eb
eb
eb
eb
eb
eb
eb
eb
eb
eb
eb
eb
eb
eb
9
0
F
World energy & oil intensity

Energy/oil use per unit of GDP (1972 = 100)
110
100
90
Energy intensity
80
70
Oil intensity
60
50
88
72
74
76
78
80
82
84
86
90
92
94
96
98
00
02
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
31
licy lev
o
P ers
• Promote self sufficiency

• Acquire equity production overseas
• Diversify supply sources
• Demand-side management
• Producer-consumer dialogue
• Technology transfer, financing
• Emergency stocks
• Market regulation
Infrastructure reliability
32
Trade offs
• Customer choice & economic efficiency

• Public acceptability & safety
• Environment
Conclusions
• US, Europe, N.E. Asia will become increasingly

dependent on fossil fuel imports
• Resource constraint not the issue in next 10 years
• Diversity of oil and gas supplies will continue to
increase in next 10 years
• Real concerns are geopolitics/terrorism and barriers
to investment in resource rich nations
• High oil & gas prices/volatility partly cyclical
• Infrastructure reliability problems avoidable
• Enhanced energy security involves trade-offs
4 AN ECONOMIC PERSPECTIVE
Adam Sieminski
Director, Global Energy Strategy, Deutsche Bank
Energy Security Considerations

in the Long Term Oil & Gas Outlook
Windsor Energy Group

January 2004
Adam Sieminski
33
34
World energy consumption by fuel in 2003

...oil dominates while coal and gas are tied for second
Renewables
& Hydro 3%
Nuclear
6%
Petroleum
39%
Coal
24%
Natural Gas
24%
Source: BP; Deutsche Bank
Oil Security: what’s it all about?
Vulnerability
Churchill’s Law – Rise in import quantity and
balance of payments / currency issues
Safety and certainty in oil
– Disruptions / market failures
lie in variety and variety alone.
– Political turmoil (ME, Africa, SA)
– Price spikes / market pressures
Thatcher’s Law – Homeland infrastructure
The unexpected happens.
You had better prepare for it.
Traditional responses to energy security
(risk management)
Palmerston’s Law – Demand restraint (security of demand?)
We have no eternal allies and no – Supply diversity
perpetual enemies. Our interests are
– Surge production (location?)
perpetual and eternal. – Strategic stocks (when to use?)
– International co-operation / IEA
– Flexible markets (futures; technology)
Source: Deutsche Bank

4
35
Oil disruptions - 1951-1991

Aug 1990-Jan 1991 Gulf Crisis
Apr 1989-June 1989 UK Cormorant Platform
Mar 1989-Apr 1989 Exx on Valdez Acc ident
Oct 1980-Jan 1981 Outbreak of Iran-Iraq War
Nov 1978-Apr 1979 Iranian Rev olution
May 1977 Damage at Saudi Oilfield
Oct 1973-Mar 1974 October Arab-Israeli War
Mar 1973-May 1973 Lebanese Political Conflict
Apr 1971-Aug 1971 Algerian/French Nationalisation Dispute
May 1970-Jan 1971 Lybian Pric e Controversy
Jul 1967-Oct 1968 Nigerian Civ il War
Jun 1967-Aug 1967 Yom Kippur War
Dec 1966-Mar 1967 Sy rian Trans it Fee Dis pute
Nov 1956-Mar 1957 Suez Crisis
Mar 1951-Oct 1954 Iranian Fields Nationalis ed
0 1,000 2,000 3,000 4,000 5,000 6,000

Gross supply los s (kb/d) Source: IEA
5
World economic growth and energy demand
Near-term Forecast Impacted by:

Global economic outlook
Energy price volatility
Geopolitics
Inventory positions
Long-term Forecast Impacted by:

Economic growth trends
Population growth
Per capita consumption
Fuel prices and substitutability
Tax and regulatory policies
Source: Deutsche Bank

6
36
Fuel market shares to 2030

…oil slips a little, gas gains a lot
Million tonnes Market share

1970 2000 2030E 1970 2000 2030E
Petroleum 2253 3518 5753 45% 39% 37%
Natural Gas 924 2199 4612 18% 24% 30%
Coal 1553 2174 3399 31% 24% 22%
Nuclear 18 585 679 0% 6% 4%
Renewables 269 616 1116 5% 7% 7%
Total 5016 9092 15559 100% 100% 100%
Source: BP; IEA; Deutsche Bank estimates
Fuel consumption by type to 2030
Percent Tonnes oil equivalent
100% 18000
15000
Hydro & Renewables
75%
Nuclear 12000
Coal
50% Natural Gas 9000
Petroleum 6000
25%
3000
0% 0
1970 2000 2030E 1970 2000 2030E
Source: BP; IEA; EIA; Deutsche Bank estimates
8
37
Total energy use and real GDP 1992-2002

…the economy is still the most important driver of demand
8%
Total Energy
Global GDP
6%
4%
2%
0%
-2 %
1970 1973 1976 1 979 1 982 1 985 1 988 19 91 19 94 19 97 20 00
Source: Exxon; BP; IMF; Deutsche Bank estimates
Energy per unit of GDP and energy per capita
0.35 1.60
0.30 1.55
Tonnes per $1000 GDP
0.25 1.50
Tonnes per Person
0.20 1.45
0.15 1.40
0.10 1.35
E/GDP
0.05 E/Capita 1.30
0.00 1.25
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003E
Source: Exxon; BP; IMF; Deutsche Bank estimates
10
38
World GDP and real oil prices
7.0 70.00
High oil prices…
6.0 60.00
low GDP
5.0 50.00
4.0 40.00
3.0 30.00
2.0 20.00
1.0 10.00
0.0 0.00
1968 1973 1978 1983 1988 1993 1998 2003
World GDP % Change (left) Real Oil Prices, 2002 $/bbl (right)
Source: IMF; EIA/DOE; Deutsche Bank estimates
11
Key countries in oil
Petroleum 2004E (mmb/d)
Producers Consumers Exporters Importers

Russia 9.0 United States 20.3 Saudi Arabia 7.1 United States 12.3
United States 7.8 China 5.7 Russia 6.2 Japan 5.2
Saudi Arabia 7.7 Japan 5.2 Norway 3.0 Germany 2.6
Mexico 3.8 Russia 2.8 Venezuela 2.7 South Korea 2.3
Iran 3.5 Germany 2.7 UAE 2.2 China 2.2
China 3.4 India 2.4 Iran 2.2 France 1.9
Norway 3.3 Korea 2.3 Iraq 1.8 Italy 1.7
Venezuela 2.4 Braz il 2.2 Nigeria 1.8 India 1.6
Million barrels per day (includes NGLs)

Source: IEA; Deutsche Bank 2004 estimates
12
39
Top reserve holders and top producers are not the same
Russia USA
Liby a Russia
Venezuela
Nigeria Saudi Arabia
Iran Mexico
China
Iran
USA
Other China
Kuw ait
Norw ay
Canada
United Arab
Emirates United Kingdom
Venezuela
Saudi Arabia Iraq

Iraq
Other
Source: Oil & Gas Journal; BP; IEA; Deutsche Bank estimates
13
OPEC growth and capacity
Current Capac ity Growth Annual %

Million b/d Capac ity 2030E Implied Growth Req'd
Saudi Arabia 10.0 16.2 6.2 1.5

Iran 3.7 7.0 3.3 2.0
Iraq 3.0 9.9 6.9 3.0
UAE 2.4 3.3 0.9 1.0

Kuwait 2.5 3.8 1.3 1.0
Qatar 0.8 2.7 1.9 5.0
Nigeria 2.8 6.4 3.6 4.0

Libya 1.6 3.6 2.0 5.0
Algeria 1.3 1.0 -0.3 0.0
Venezuela 2.4 5.4 3.0 3.0

Indonesia 1.1 0.8 -0.2 -1.0
TOTAL 31.6 60.0 28.4 2.5%
Source: Deutsche Bank estimates
14
40
Total OPEC production: IOC participation is recovering
35000
Total IOC
30000
Total NOC
Production ('000 b/ d)
25000
20000
15000
10000
5000
0
1913 1923 1933 1943 1953 1963 1973 1983 1993 2003
Source: Wood Mackenzie Consultants
15
OPEC’s market share in 2030 estimated to be 50%
60%
50%
40%
30%
20%
10%
0%
1970 1975 1980 1985 1990 1995 2000 2005E 2010E 2015E 2020E 2025E 2030E
Source: IEA and US EIA/DOE historical data; Deutsche Bank estimates
16
41
Oil imports rise sharply for the big consumers
1970 1980 1990 2000 2010E 2020E 2030E

Importers
United States 6.3 6.9 8.0 11.1 14.7 20.0 24.4
Europe 12.9 12.0 9.3 8.3 11.0 13.3 14.7
China 0.0 -0.3 -0.5 1.3 3.4 5.2 7.6
Japan 3.6 5.0 5.3 5.5 5.5 6.2 6.8
Exporters
OPEC Production 23.5 27.1 22.3 27.8 29.7 42.0 55.0
FSU Exports 2.0 3.2 3.1 4.2 10.3 11.3 8.5
Source: IEA; Deutsche Bank estimates (mmb/d)
17
Are we running out of oil?

...Hubbert curve works in the UK for 15 years, then goes seriously wrong
3000
2500
Production (thous and b/d)
2000
1500
1000
500
0
1965 1975 1985 1995 2005 2015
Total UK peak & decline
Source: Wood Mackenzie historical data, Deutsche Bank
18
42
World conventional crude oil endowment

…more left to find than Hubbert believed
3,500
3,000
732
2,500
Billion barrels
2,000 688
1,500
891
1,000
500
710
0
Cumulative Proven Reserves Discovered Undiscovered Remaining Total
Production Reserves Grow th Conventional Endow ment
Source: USGS World Petroleum Assessment 2000
19
Supply-side technological developments
x New seismic techniques

x Improving recovery ratios
x High-pressure steel pipelines
x Improved gas turbine technologies
x Improved coal mining techniques
x Carbon sequestration systems
x Better solar / renewable technologies
Source: IEA - World Energy Investment Outlook (2003)
20
43
OPEC price band

…dollar weak now but strong in 2000-2001
40
35
30
25
20
15
10 $22-28/ bbl range for the OPEC bas ket

Add about $2-3 for WTI and $0-1 for Brent prices
5
0
Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03
OPEC bas ket price US$ / bbl Euro equivalent
Source: NYMEX; Bloomberg; Deutsche Bank estimates
21
44
OECD inventories
...supply squeeze bites deep (Venezuela, Nigeria, and Iraq)
…we are looking for a recovery as Iraq exports return
m mb
2,800
2,700
2,600
2,500
2,400
2,300
Jan 1998 Jan 1999 Jan 2000 Jan 2001 Jan 2002 J an 2003 Jan 2004E
Av erage inv en tory rang e (1994-2002) Projected Ac t ual
Source: IEA; Deutsche Bank estimates
23
China's Strategic Reserve plans:

…fill targets and likely locations
TARGET: 4-6 sites and 200-350 mmb capacity

30 DAYS IM PORT COVER (75 mmb) in 2005
50 DAYS IM PORT COVER (165 mmb) in 2010
DALIAN near oil fields,
CNPC refinery
HUANGDAO m ajor oil port, 12+

m m b existing storage, refining center
ZHOUSHAN 7.5
m m b existing storage,
m ajor deepw ater port
HANGZHOU 12+ m m b existing storage,

near refinery and transport center
ZHENHAI 75 m m b under const.
China’s largest refining com plex
HUIZHOU 6 m m b existing storage

near offshore fields, refining
Source: Chinese press and government reports; Deutsche Bank estimates
24
45
Annual change in global demand
2.5
2.0
1.5
1.0
0.5
0.0
1990 1992 1994 1996 1998 2000 2002
Average 1990-96 Average 1996-03E
25
Non-OPEC supply growth linked to prices
2.0 35
1.5 30
1.0 25
0.5 20
0.0 15
-0.5 10
1995 1996 1997 1998 1999 2000 2001 2002 2003E 2004E
Non-OPEC Production Grow th

Oil Price, WTI (right scale)
Average Global Oil Demand Grow th (1995-2004)
26
46
The Russians are coming!!

...Saudis suffer while Russia gains
10,000
Russia now top global producer
9,500
9,000
8,500
thousand b/d
8,000
7,500
Russia climbs from 2000 on low ruble costs,
7,000 high oil prices and improved political stability
6,500
6,000
After a year of 'matching barrels' w ith Russia, the Saudis
5,500 leap as Venezuela goes on strike and Iraq w ar begins
5,000
Jan-96
Jul-96
Jan-97
Jul-97
Jan-98
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Russian Crude Oil Production Saudi Crude Oil Production
Note: Saudi data includes 1/2 Neutral Zone

Source: IEA, Deutsche Bank estimates
27
47
Iraq remains a long-term key to the oil markets

TURKEY
AIN SALAH
‘Northern’ fields
BUTMAH • Produce 1m b/d from 10bn bbls
of reserves
• Dominated by Kirkuk (0.9m bbls)
1,0
‘Stabilisation’ phase BAI KIRKUK me 0 0
tres
IRAN
HASSAN • Drilling contracts w ith TPIC
CHEMCHEMAL
• Oil services onto old fields (Turkey) and Zarubezhnelt / Tat neft
SYRIA (Russia) targeting 1.1m b/d
JAMBUR
• INOC to ret ain management ….. Baiji
AL ANFAL
Russian PSAs if Saddam stays or US

players if he goes? Oil
to Ba & Gas
nias /Tr
HAMRIN
close
d April ipoli
1982
Haditha MANSURIYAH
’Southern’ fields
"S
ifa oil trate
Ha Ha pip g BAGHDAD
• Produce 1.5m b/d
s to th eli ic" Daura
ine d ida ne
s L se -F
&
Ga Clo ao EAST BAGHDAD • Dominated by Rumailah
Oil
• Zarabuzhneft and Tunisia
IRAQ
Greenfield opportunities AHDAB drilling cont racts
BUZURGAN
• TOTAL and LUKoil have key roles in
JORDAN
RAFIDAIN
super-giants…. US partners? GHARRAF AMARA
HALFAYA
• Shell, Eni, Repsol, Russians in large
TAPl
ine
- inac NASIRIYAH
tive MAJNOON
greenfields… US and UK Partners NAHR
WEST UMR
• Expect prot racted negotiations on terms QURNA Muftiah
and timing
Mina al-Bakr SUBBA
RATAWI
Basrah
LUHAIS Abadan
• 1.3m b/d monit ored by UN RUMAILAH ZUBAIR
TUBA Kuwait
• Extensive w ar damage
IPSA oil line
Oil Pipeline
to Yanbu Exxon, BP and
Gas Pipeline closed August 1990
SAUDI ARABIA KUWAIT others negotiating
0
for border fields
100 200 30 INA
" /3 CT
1" IVE
Km TA
Plin
e
29
Production is likely to be constrained by OPEC

...4 million b/d is a reasonable expectation
7,000
6,000 Iraq - Unconstrained

Production ('000 b/d)
5,000 Iran - Quota + 2%
4,000
3,000
2,000
1,000
0
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Source: Wood Mackenzie
30
48
Key countries in gas (bcf/d)
Natural Gas 2004E (bcf/d)
Producers Consumers Exporters Importers

Russia 55.3 United States 62.9 Russia 13.1 United States 9.8
United States 53.2 Russia 42.2 Canada 8.4 Japan 8.4
Canada 16.6 United Kingdom 10.7 Norway 7.7 Germany 6.9
United Kingdom 9.4 Germany 8.7 Algeria 5.1 Italy 6.8
Algeria 8.2 Japan 8.4 Indonesia 3.3 Ukraine 5.4
Norway 7.3 Italy 8.2 Malaysia 2.2 France 4.7
Indonesia 6.9 Canada 8.2 Qatar 2.0 South Korea 2.9
Iran 6.8 Iran 7.5 Netherlands 1.7 Spain 2.8
Source: IEA; Deutsche Bank 2004 estimates
31
49
LNG strongly economic $ per mmbtu Henry Hub equivalent

0.00 1.00 2.00 3.00 4.00 5.00
Trinidad Expansions 100 TCF

More cost
Nigeria Expansions 120 TCF competitive
Venezuela 120 TCF
Henry Hub Average 1993-2003

1.80 Second US LNG 4.00
First US LNG boom boom
1.60 3.50 Algeria 200 TCF
1.40 3.00
$ per mmbtu
1.20 Abu Dhabi 20 TCF

$ per mmbtu
2.50
1.00
2.00 Egypt LNG Expansion 12 TCF
0.80
1.50 Eq. Guinea Greenfield 5 TCF
0.60
0.40 1.00
Indonesia Bontang I 3 TCF
0.20 0.50
0.00 0.00 Qatar Rasgas first trains

9
5
6
Angola Greenfield 25 TCF

19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
LNG Production Cost by Train US Gas Price (Right Scale)

Henry Hub Forecast 2003-2006
Oman expansions
Nigeria Greenfield
Norw ay Snoevhit
Iran
Alaska Gas Pipeline
Upstream at 15% Pipe Plant Shipping to Lake Charles Regas.

Source: Company data; Deutsche Bank estimates
33
SECTION III
NATIONAL STRATEGIC ENERGY INTERESTS
1 ENERGY SECURITY AND UNRESOLVED
CONFLICT IN THE CAUCASUS
H.E. Tedo Japaridze

Minister of Foreign Affairs, Republic of Georgia
The Western world, and particularly the European states have long
considered the South Caucasus and the Eastern shore of the Black Sea as a
region historically, politically and psychologically separated from Europe.
Only recent global political developments made it clear that this area is
becoming an important security, political and economical component of a
wider Europe.
Developments, which have been taking place since our elections which
took place on November 2nd 2003, prove that the Georgian nation and state
have irreversibly chosen the way of democratic development. People who
had patiently endured economical problems, hardship and corruption, have
expressed their protest at the very moment when democracy was
endangered, national dignity was injured and basic constitutional rights to
vote were being ignored. Within the November 2003 revolution the
Georgian people defended the right to live in a democratic state. This right
was defended peacefully through civil protest.
I am fully aware of what the international community has done to
support fair and democratic elections in Georgia. It is deeply regrettable that
these efforts were often ignored. However the Georgian nation rehabilitated
itself through massive popular protest and now it deserves support as never
before. We are most grateful for all the assistance given to preparing the
presidential and parliamentary elections in my country, Georgia. Let me
assure you that we are ready for cooperation across the board.
I believe that the victory of democracy in my country will open the way
for the economic revival of Georgia. But we cannot do this alone – without
the close cooperation of neighbours and partners around the world. The new
Georgian administration, President-Elect Mr. Saakashvili and the Georgian
53
54
people are determined to eliminate corruption, discriminative and

contradictory laws and everything else that hinders normal development
within the country and confidence-building among our partners.
In my presentation I'll try to touch some of the aspects of why, I believe,
the South Caucasus region is to be considered an inseparable element of the
Euro-Atlantic security framework and an integral part of the EU's new
Wider Europe-New Neighbours initiative.
Nation-building and the security situation within the Black Sea-Caspian
Sea area, considered in a global context, will be determined to a large extent
by the effects of three sets of interrelated and interdependent factors:
1. Continuing political, economic and strategic influences of the European
and Euro-Atlantic institutions in the Eastern Black Sea, South Caucasus
and Caspian Sea area.
2. The continuing fight against global terrorism and the proliferation of
WMD.
3. Oil and natural gas energy policy of the region as well as influence from
energy policy abroad.
I will elaborate on the influence of all three factors.

1. Let me touch on the issue of the region’s potential role in the larger
international security community in the light of expanding security,
civil, and economic demands of European and Euro-Atlantic institutions.
The most significant step in the evolution of the strategic identity of
the South Caucasus region was the historic decision made at the Prague
Summit.
Last November in Prague, NATO completed a 53 year effort to build
a stable security system for Central and Northern Europe. We in Georgia
long for our national security to be assured within such a system. The
time has come for NATO to turn its attention to the security concerns of
Southern and Eastern parts of Europe. Having reached this decision in
Prague, NATO now embraces almost the whole Black Sea community
either through direct membership or through special relationships of the
kind enjoyed by Russia and Ukraine. This is truly a monumental shift in
NATO’s sphere of influence.
I believe that the security framework of Eastern Europe in the future
should be based on a "Three Seas Policy:" governing the Baltic, the
Adriatic and the Black Sea. As I mentioned, the Baltic and Nordic
democracies have by and large completed the construction of a durable
Baltic security system. Major efforts are already underway to ‘export’
55
the Baltic model to the democracies of the Dalmatian Coast to provide

the foundation for an Adriatic security system.
The next step in the great project of building a free Europe from the
Baltic to the Black Sea is the creation of a Black Sea security system to
include Turkey, Bulgaria, Romania, Georgia and Ukraine as NATO
members. Russia should be included as a trusted partner. This “Three
Seas” system would link the Baltic Sea security system through Ukraine
and Poland and thus delineate a comprehensive European security
framework from the Baltic to the Black Sea.
We believe that Azerbaijan should also be a member of the Black
Sea security system. The inclusion of our neighbour will open a direct
access between Caspian oil reserves and European markets, thereby
enhancing Euro-Atlantic security and bringing prosperity to the steppes
of Central Asia. Secure and reliable energy could be exported from
Azerbaijan via Georgia and Turkey to the shores of the Mediterranean
and via Georgia, Russia, Ukraine and Poland to the urban centers of
Northern Europe. The benefits of a secure and liberalized trading system
around the Black Sea for the entire Euro-Atlantic community are
considerable.
Current economic and political developments within the Black Sea
region as well as tensions demonstrated by recent dramatic events
around the Russian-Ukrainian border dispute prove that the creation of a
Black Sea security framework should be made a priority. On the one
hand, the region is eager to prove further that its potential can be
incorporated so that it, too, can play its part in establishing a
comprehensive Euro-Atlantic security system. On the other hand,
despite the fact that almost all Euro-Atlantic states restrained themselves
from any explicit involvement in this case, the potential danger coming
from the confrontation between two Black Sea states was clear.
56
2. When talking about the significance of stability in the South Caucasus

for the Euro-Atlantic area, we should not fail to note the sweeping
changes that took place in the wake of 9/11, as the Caucasus became a
frontline in the War on Terror. The region embracing the Black and the
Caspian Sea basins, the Caucasus and Central Asia, which Zbignew
Brzezinski aptly described as “the Eurasian Balkans”, is an axis on
which efforts to defeat international terrorism will pivot. Without
institutionalizing Western interests in this area and stabilising the
security situation there, it will hardly be possible to secure victory in this
War on Terror.
This stabilization should begin with taking serious steps to resolve
regional conflicts, which are often called "frozen conflicts". Personally, I
believe that this is not a correct definition and conflicts themselves are
not "frozen" - they are alive, they develop with different intensity and
bring numerous negative effects. What is "frozen", unfortunately, is the
established process of conflict resolution. It would be accurate to think
of these warring territories as “the last fragments of empire” where the
tragedies and injustices of the 20th century remain without resolution and
are played out one against another. Indeed, it is largely these kinds of
unresolved conflicts that have hampered the development of democracy
in the Adriatic and the Black Sea basins.
A Ripple Effect
Clearly, Euro-Atlantic institutions have a larger role to play in
preventing and resolving conflicts that may have begun as local affairs but
which now have the power to involve other states in their instability through
the export of crime, terror and extremism. A number of prolonged disputes
in the Southern Caucasus have the potential to threaten the European
community.
Southern Caucasus regional conflicts fuel new dangers that threaten the
nations in the Euro-Atlantic sphere as a whole. Namely these dangers are
ethnic and religious extremism, international organized crime, human
trafficking, the drugs trade, and what is particularly perilous, the existence of
uncontrolled territories, or the so-called “white spots”, which provide shelter
to international terrorists and allow them to develop relevant infrastructure.
While this assertion is essentially self-evident, I would like to demonstrate it
by drawing on some examples from Abkhazia and Chechnya.
I believe that the Chechen problem was largely facilitated by the conflict
in Abkhazia where the Chechen armed groups had what one would call a
“dress rehearsal”, in which they gained combat experience which they
57
utilized to great effect in Chechnya. Later on Chechnya, in turn, caused

instability in Daghestan, Ingushetia, the Pankisi gorge, as well as some other
territories. Thus, conflict “moved” throughout the region and inflamed
tensions wherever it was that a volatile political environment had ensured a
weakened resistance to it.
The very existence of these problems in the Abkhaz and the Chechen
regions caused instability and chaos not only in the conflict zone, but also
elsewhere in Georgia and Russia. The failure to settle the Abkhaz conflict
impedes Georgia in its efforts to become a strong and stable state. Likewise,
the unresolved Chechen conflict has largely contributed to the emergence of
terrorist enclaves that, naturally enough, attracted undesirable foreign
elements. Moreover, the conflict in Chechnya has produced the problem of
the Pankisi gorge in Georgia and if not for our efforts and American timely
assistance, Pankisi would have turned into another “nest of terrorism”.
Achieving stability in the Caucasus and the southern flank of Russia,
however, ranges beyond Georgia’s personal national agenda and capability
and is in the interests of a wider group of nations. In other words, to achieve
this stability in the Causcasus, the issues of Russian stability, the success of
the ongoing energy projects and the viability of the Eurasian corridor cannot
be ignored by Europe and the United States who are in a far stronger
position from which to address the issues.
Caucasus region energy

This is the first reason why, I believe, the South Caucasus region should
be a focus for European proaction. It is only by achieving stability, resolving
conflicts, strengthening South Caucasus states and the promotion of
democratic values in the area that we will ensure that the Euro-Atlantic
community will face no terrorist or other physical threat from its South-
Eastern periphery.
The combination of transit potential and energy resource value of the
South Caucasus is key to Europe's maintaining a balance in its energy policy
in the years ahead. I believe this is one of the primary reasons why European
interests require comprehensive stabilisation of the South Caucasus.
Located at the crossroads of Europe and Asia, the South Caucasus
represents a natural corridor between the two continents. For hundreds of
years it has served as a connecting link, a fact which has played an important
role in shaping the statehood, outlook, culture, and traditions of states in the
region.
58
At this point of history, we have entered the stage where the US-led
energy projects are finally coming to fruition. Should the South Caucasus
fall into instability again, the entire Western Caspian energy policy - let
alone investments – would come under threat. The Baku-Tbilisi-Ceyhan and
South Caucasus Pipeline projects are of vital importance to the future of the
region and are critical to the creation of the East-West energy corridor.
Therefore, all efforts must be exerted to ensure that these projects can be
established and maintained without hindrance of any kind. We are doing
everything we can to deliver these projects as a model for development.
To assess the real importance of the region’s global oil and gas
transportation projects for Europe, the figures can speak for themselves: by
2010, annual production in Azerbaijan, Kazakhstan and Turkmenistan will
be more than 170 million tons for oil and 175 billion cubic meters for natural
gas. Only Azeri, Chirag and Giuneshli oilfields located in the Azerbaijani
sector of the Caspian Sea have total estimated reserves of up to 4.3 billion
barrels.
Throughout the 40 years of the Shah Deniz natural gas project,
approximately 950 billion cubic meters of natural gas will have been
transported from the Caspian region through the territory of Georgia to
Turkey and further on to the Balkan and other European countries.
Europeans are among the major shareholders of the Project - companies
from the UK, France, Italy and Norway own 71% of total shares.
For the countries of the Black Sea and Caspian Region, due to their
geographic location, it is of strategic importance to create diversified
hydrocarbon export pipeline systems and an infrastructure directly
connecting them with the European oil and gas markets. On the other hand,
Europe, as one of the world's greatest energy consumers, has a clear interest
in meeting its demands through diversified sources and supply routes. There
is an evident commonality of interests between the two regions in this
matter.
To sum up, the Southern Caucasus has come to the crossroads. Either
our region will integrate smoothly into Europe and anchor itself into the
Euro-Atlantic security system in which it will perform the essential role of
effective barrier to the proliferation of terrorism, extremism, drug trafficking
and organized crime or we will see a wholesale deterioration of security and
a new gateway to Europe will open for ethnic conflict, terror and insecurity
for not just Europe and Euro-Atlantic Institutions but for the world. Between
the two options, for Georgians, the choice is clear.
2 PROSPECTS FOR RUSSIAN ENERGY
Dr Evgeny Velikhov
Workshop Co-Director
President, The Russian Research Centre, Kurchatov Institute, Russian
Federation
It is very interesting for me to participate in such a high-level forum –

especially because my area of interest is completely different from yours. I
am not an economist and I am not a diplomat – all my life I have spent on
the technological side. All my professional life has been spent working in
the Kurchatov Institute, which was founded for the development of nuclear
weapons but now has moved to the development of nuclear and fusion
power.
Nuclear Fusion
Today, my professional interest focuses on negotiations to build an
international experimental fusion reactor, ITER, and for ten years I was
Chairman of the Board of ITER International. Today we have six partners:
Europe; the United States; China; Japan, Korea; and Russia. Unfortunately,
Canada has now left. The situation, as far as negotiations are concerned, is
that everybody is extremely committed – and for this reason we have a very
strong collision of interests between Europe (especially France), and Japan.
The partners are divided into two factions: the United States, South
Korea and Japan itself support the Japanese side; and China, Russia and
Europe support the French. The problem is how to reach a compromise and
this is my main concern now.
I think I have spent more than 25 years on this project - it was a long-
term project which started in 1985. It started when I was with Gorbachev in
France and we described the fusion idea to Chirac and Mitterrand, and after
this we reached agreement at a Summit in Geneva with Reagan.
59
60
This just demonstrates the importance of political interference in the

development of energy - sometimes it is positive, sometimes negative, but it
is very important just the same. It looks like the turbulence is not over and
all the barriers to investment have not been overcome.
Maybe we will have a chance to build the first fusion power station
before our development of our natural gas resources are completed,
especially the Shtokman field. After this workshop I will return to this
problem.
David King, the science advisor to the UK government, proposed a so -
called “fast track” which meant the goal of building the first pilot fusion
power station in 25 years. I am not sure this is possible – maybe in 30 years -
but if we make this decision we are going in the right direction. Of course it
is of no interest to economists at the moment as it is still a purely a scientific
enterprise.
Civil Nuclear Power Generation

Another problem with which I was involved very deeply at the
Kurchatov Institute was the development of nuclear power. As far as Russia
is concerned, we have the so called Energy Plan, but of course in the current
climate the Energy Plan is not a real plan, it is not supported by economic
obligations. It is not an indicative plan, but some sort of declarative plan.
If you look at development inside Russia, today the main problem is that
we are heavily dependent, especially in electricity production, on natural gas
and the idea is to decrease this dependence and, especially, to develop
nuclear power. In the last ten years the share of nuclear power in the
production of Russian electricity rose from 30% to 60% - but without
building any new nuclear power stations. It’s similar to the United States.
We have just increased the availability factor, not to the extent that the US
did, but we still have big reserve in capability to increase our nuclear
electricity production just by increasing its availability. But our plan is to
increase the share of nuclear power by year 2030 to 33% of total electricity
production and give more emphasis to it. I am not sure we will fulfil this, but
it is the official goal.
Of course for Russia, in all its energy sectors, the goal is the export of
energy, and this is the reason why we developed fusion and why we are
supporting fission so strongly. We are, of course, looking at the possibility
of exporting fuel, and exporting nuclear power stations and I think our future
plans lie in the heavy development of this export possibility.
61
I think today the development of nuclear power depends on mainly three

factors, two of which are more or less international and one, of course, is the
importance of government support. Like in the US, the energy bill is an
attempt to increase the government support of nuclear power development.
Of the two international factors, the first is the problem of spent fuel and the
second is nuclear waste management. These are not only factors in the
development of nuclear power but are also very closely connected with the
non-proliferation program. First because it is a problem of proliferation of
nuclear material: spent nuclear material; possible sources of Plutonium,
Uranium or dirty bombs material. And second, it concerns the proliferation
of nuclear technology and especially enrichment technology.
Non-proliferation Challenges
Today we celebrate fifty years of the Atom for Peace Eisenhower
Initiative, and it looks like we need to change the focus of this because in the
current circumstances and the situation with terrorism and new nuclear
strategy, it is not very wise to promise the sharing of nuclear technology
with all countries and we need to look at controlling the development of
nuclear technology and nuclear material. And for this reason I think, the new
discussions of the possibility of international control of the fuel cycle is very
promising - such discussions started in IAEA in Vienna about two months
ago and we hope for progress in this field. And, as you know, Russia is
taking legal steps to change our legislation and to open the way for the
possible use of Russian capability to store and reprocess spent nuclear fuel,
and by this means to contribute to the possibility of international control
over nuclear fuel. We are discussing the possibility of forming the so-called
Nuclear Fuel International Organization and International Storage Centre
under international control. And this is one of the important initiatives which
may open the way for the international development of nuclear energy.
Nuclear Industry Restructuring

Another problem today is the question of private industry. What we need
is international consolidation of nuclear power because the idea of each
country building and developing its own nuclear power station does not
solve the problem, especially when one considers the capital costs of nuclear
power stations which is a major obstacle. The only way to decrease this cost
and make the nuclear industry competitive is consolidation - but it has not
yet happened. Without government intervention, the probability for
consolidation of the nuclear industry is very low. We are working on this
with our American colleagues, especially with SANDIA National
62
Laboratory. Today there is quite a big difference between the Democratic

party proposals (which are MIT proposals), and the Republican proposals
which are mostly National Labs initiatives and which look at the
development of nuclear power for the future much more optimistically. Of
course we are now interested in the development of innovative technology
which will make nuclear power more acceptable. Unfortunately for a long
period of time the priority of such development was low.
I was here in the UK in 1962, visiting the Leatherhead Centre, and forty
years ago we cooperated in the development of the Gas Cooled Reactor (the
Dragon Project) and we still cooperate today and hope to cooperate
internationally on the development of the Gas Cooled High Temperature
Helium Cooled Reactor. That’s 40 years of cooperation.
The second question is the problem of moving from the open cycle to the
closed cycle and to reprocessing. It’s still a controversial policy. I think
today Russia is the only country which commercially operates fast breeder
reactors but it seems, if you look at the real development of nuclear power in
next 20 -30 years, that we need to move to the closed cycle, to development
of the fast breeder economy, the Plutonium economy, although this raises a
challenge for non-proliferation. But it is inevitable if you wish to develop
nuclear power technology.
Oil, Gas and Coal

I have spent ten years as the Chairman of Board of ROSHELF, it was the
not very successful attempt to accelerate the development of our North
Barents Sea fields: Shtockman and the oil fields in the Pechora Sea. Our plan
was to build the first oil production offshore platform in the year 2004 and to
start development of Shtockman in 2006. It is not happening. And the
prospects are not very good, especially in today’s climate, especially in
Europe, with deregulations and with spot markets.
It is very difficult to develop long term projects in the absence of long
term contracts. It looks like this deregulation and liberalisation of the market
maybe very efficient in decreasing prices but not very effective in increasing
the security of supply and stability for the future. Shtockman, especially, is
technically and economically very attractive - 3.2 trillion cubic metres of
very good gas, but the problem is the $20 billion cost of the project.
Of course today there is another possibility – the possibility of the
development of the US market for LNG, and maybe we have similar big
fields like Shtockman on our shelf - like Leningradskaya or Rusanovskaya,
each of them being 5 Trillion cubic metres of gas, but conditions are more
difficult than in Shtockman. But they could develop like Shtockman if we
63
start to convert to LNG, but unfortunately Russia has not developed any
capacity for LNG production and it needs quite a lot of investment. But from
the point of view of transportation and security I think it is a very positive
option for the future.
I think another big option for Russia is the problem of the efficient use of
natural gas. Today 60% of our electricity is produced by natural gas but the
efficiency of this is very low because we use obsolete equipment: we use
steam turbines. General efficiency is about 27% - it is roughly two times less
than modern very well developed technology using the Combine Cycle. In
Russian conditions especially, the Combine Cycle with co generation gives
enormous potential to save natural gas for export. But unfortunately for ten
years all the attempts to introduce this technology have been unsuccessful,
mostly because of the condition of the market in Russia – with problems like
the so called ‘non-payment’ which we have overcome today. This is possibly
the cheapest way to achieve a supply of something like 200 billion cubic
metres of gas per year which is possible to save if we increase the efficiency
of production.
Another problem is that all our electricity production equipment is 50%
obsolete - it is not only technologically obsolete, it is physically obsolete.
Whatever happens we need to change this equipment and this may be the
most efficient way for international cooperation and will provide a good
market for European and American technology for gas turbine Combine
Cycle.
I am not so optimistic about the possibility of increasing the percentage
use of coal in Russia, because of the low quality of Russian coal, and the
long distance and high price for transportation and, as well, the additional
price of environmental protection. This is maybe a much less feasible option
for Russia - to substitute coal for natural gas in the production of electricity.
Of course I am not so knowledgeable about the problems of oil
development in the private sector - I was only involved in the development
of oil in the Pechora region – where possible production is about 20-30
million tonnes per year, which is not so big but is not negligible. But
unfortunately, again the problem is investment barriers. As I’ve already told
you - we tried to solve investment problems in the Prerazlomny field and we
hoped to put the first gravitational platform in the year 2004 but it looks like
it will take longer and longer because of investment problems.
In principle, both technologically and from point of view of resources,
we have very good opportunities to provide all types of energy resources
but, of course, we need to solve many diplomatic, economic and other
problems.
SECTION IV
EVOLVING ROLES OF MULTILATERAL
ORGANISATIONS AND THE PRIVATE SECTOR
1 OVERVIEW
Robert Priddle
Former Executive Director, International Energy Agency
The umbrella title for this session is “Emerging Threats to Energy

Security and Stability: the Evolving Roles of Multilateral Organisations
and the Private Sector.” That gives us scope to raise all manner of issues –
and I shall be indulgent. We are fortunate to have as our main speaker,
Ambassador Arne Walther, who has recently become the first head of the
new International Energy Forum, which is designed to give new substance
and stability to the dialogue between oil producers and oil consumers.
When I became involved in the energy sector thirty years ago:
x the UK government was an important shareholder in British
Petroleum (BP), was responsible for the appointment of two
government directors to the BP board and was shortly to create a
British National Oil Company;
x coal, gas and electricity in the UK were publicly-owned
monopolies and governments spent much time trying to create a
financial framework for these industries (including steel, for
example) which would in some way impose upon them disciplines
equivalent to those in competitive commercial markets;
x OPEC countries were newly asserting their sovereignty over their
oil resources, imposing steeply higher prices and denying supply to
countries hostile to their geopolitical objectives.
This last development, in particular, gave new priority to energy policy-
making in national administrations. This was the time when, for the US,
achieving energy independence became the “moral equivalent of war”.
New ministries were created and were devoted solely to energy questions.
67
68
New international bodies were created, like the International Energy

Agency, to deal with the perceived threat to energy security. There was a
widespread expectation that oil would become scarce by the year 2000 and
would cost around $100 per barrel.
All that totally changed in the wake of the oil price collapse of 1985
and the subsequent period of stability in the oil markets in the early 1990s
(even the Iraqi invasion of Kuwait created only short-term turbulence).
Privatising the UK Energy Sector: a Model?

Governments downgraded the importance of energy policy. Almost all
energy ministries disappeared, absorbed into wider economics or industry
ministries. The overriding objective of government policy towards the
sector became the quest for greater economic efficiency. This was to be
achieved through privatisation and the introduction of competition. The
distinction between the two was not immediately recognised. It was
assumed that changing the ownership of publicly-owned monopolies by
putting them in the hands of private owners would transform their
efficiency. What it did in effect was to make these monopolies more
efficient at exploiting their being monopolies, in the interests of the
shareholder rather than the customer. That was when governments decided
to put their faith squarely behind the achievement of competitive markets:
they broke up state monopolies and separated out functions which could
flourish in a competitive market, like power-generation, from functions
which are close to being natural monopolies, such as power-transmission.
In the UK, the British National Oil Company first saw its functions
curtailed and was then totally wound up. The government’s shareholding in
BP was sold. The coal, gas and electricity utilities were broken up and
privatised.
The same process was carried through in many other markets in the
industrialised world and spread to the economies in transition and the
developing economies. OECD countries continued to pay lip service to
energy security; but energy policy consisted primarily in applying
competitive forces to the energy sector and seeking to impose new
disciplines on the sector in the interest of curbing greenhouse gas
emissions. Save for those environmental constraints, it was widely accepted
that market forces would best resolve any conflicts between fuels,
achieving what had hitherto been the objectives of energy policy. One
69
British Minister, who subsequently became Chancellor of the Exchequer,

summed all this up by saying there is no such thing as energy policy, only
economic policy.
Learning the Lesson

So this is how we find ourselves in the UK with an energy sector
characterised by competition and private ownership, with market forces
determining the outcomes.
Well, not quite. The international oil market has never been like that.
The producers have an international cartel which attempts to regulate price
and production levels. They talk about market forces, but they do not mean
unconstrained competition in a free market – far from it. Collective
government action to determine a commodity price is not quite the same
thing as the free play of market forces. And governments are usually very
poor substitutes for those forces. In 1998, the OPEC governments
misjudged the situation by increasing their members’ oil production quotas
just as world oil demand collapsed in the wake of the Asian Financial
Crisis. The shock to producers of the resulting grave revenue loss and
national budget deficits led to a new seriousness of purpose on the part of
OPEC about market management, which is still with us.
Faith in markets has been tested elsewhere, too. Newly competitive
electricity and gas markets were found to need detailed regulation to
prevent abuse of market power. The Californian electricity crisis shook
confidence in liberalised electricity markets and later system failures in
North America, Italy and elsewhere have done nothing to reassure
customers. Gas prices in parts of North America have reached peaks which
have caused widespread dismay. The collapse of Enron (though energy
systems remained highly robust) introduced new doubts about free market
disciplines. Advocates of free markets worried increasingly about the
adequacy of incentives for long term investment in electricity and gas
supply and about the volatility of prices.
A Massive Investment
Add to this the energy preoccupation of the Bush administration and
the sense of vulnerability stemming from 9/11 and it is easy to see why
energy security finds itself squarely back on the US government’s agenda.
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Some say the Iraq war was about securing access to oil. Much remains to
be resolved about how Iraqi sovereignty over its oil resources can best be
expressed in the new circumstances. What is the validity of contracts
reached with Iraq at the time of Saddam Hussein’s regime? How should the
new Iraqi government proceed if it is to realise ambitions to raise Iraqi oil
production to 6 mb/d? More generally, how are the (relatively few) oil
resource-rich countries to finance exploitation of their resources? The oil
and gas sector as a whole will need investment of around $6 trillion in the
next thirty years if the world’s needs are to be met. Three quarters of the
investment in the exploitation of oil and gas will be needed simply to offset
the natural decline in wells in production today or due to come on stream.
Investment to meet growth in demand is additional. The electricity sector
will require $10 trillion. The greater part of this investment is required
outside the countries of the OECD, and in transmission and distribution,
not in power generation. Pricing of transmission and distribution in
developing countries is notoriously insufficient to give an adequate return
on investment.
Well, there is a perspective of change and a set of challenges certainly
sufficient to keep us busy throughout this session. To set the debate going,
we are privileged to have Ambassador Arne Walther to speak to us. I have
said little about international energy institutions. Since he has just taken
over the leadership of our newest such institution, The International Energy
Forum in Riyadh, I am confident he will cover that ground while leading us
to a better understanding of the combined role likely to be played by public
and private enterprises in meeting our energy needs in the future.
2 THE INTERNATIONAL ENERGY FORUM
AND ENERGY SECURITY & STABILITY
Arne Walther
Secretary General of the International Energy Forum (Riyadh), Norway
Last month, I moved from Vienna with leave of absence from the
Ministry of Foreign Affairs of Norway, to Riyadh to do something a little
out of the ordinary. My brief was to set up a new international entity - the
Secretariat of the International Energy Forum (IEF). The IEF is an informal
forum for global dialogue on energy at the ministerial level. It involves, at
present, some 60 countries and the relevant international organisations.
“Energy Security and Stability”, the theme for the Windsor Energy
Group this year, is the core focus of the dialogue at ministers’ level in the
IEF.
Before introducing the IEF and its Secretariat, a new kid on the energy
block, I will give you some figures and trends published by an old kid on
the block, the International Energy Agency in Paris (IEA). These are trends
and figures that I believe require consideration in our assessment of energy
security.
Rising Demand: Some Figures

The good news in the IEA’s “World Energy Outlook”, published in late
2002, is, importantly enough, that the Earth’s energy resources are
adequate to meet rising demand for at least the next three decades.
Yet there are many reasons for concern. Concern about security of
energy supplies, concern about investment in infrastructure, concern about
the threat of environmental damage caused by energy production and use,
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and also concern about the unequal access of the world’s population to
modern energy resources.
By the year 2030, world energy demand will have increased by two
thirds with an average annual growth of 1.7%. Fossil fuels will remain the
primary sources of energy and meet more than 90% of the increase in
demand.
Oil demand will rise by 1.6% a year from 75 mb/d to 120 mb/d in 2030.
Three quarters of the increase will come from the transport sector. Most of
this projected 60% increase in demand will be met by OPEC, particularly
producers in the Middle East.
Demand for natural gas will grow more strongly than for other fossil
fuels and will double in the run-up to 2030. Consumption of coal will also
grow, though more slowly than that of oil and gas. China and India will
together account for two thirds of the increase.
The role of nuclear power will peak at the end of this decade and then
decline gradually to 5% by 2030. More specifically, it will decline in
Europe and North America, but rise in some Asian countries. Some
governments find the nuclear option interesting as a means to reducing
carbon dioxide emissions and to improve security of energy supply.
Renewables will play an increasing role. Hydro-power will hold its
share in global primary energy, but see its share in electricity-generation
fall. The group of non hydro-renewables will grow faster than any other
primary energy source. Wind power and biomass will grow most rapidly.
But non hydro-renewables will still only make a small dent in global
energy demand.
More than 60% of the increase in world primary energy demand will
come from developing countries, especially in Asia, as they industrialise
with growing economies and population.
A quarter of the World’s population (1.6 billion of 6.1 billion) has no
access to electricity and two fifths rely mainly on traditional biomass for
their basic energy needs. In 2030, a projected 1.4 (of 8.3) billion people
will still be without electricity.
Global energy-related emissions of carbon dioxide will grow slightly
more quickly than primary energy demand that is to say 1.8% per year from
2000 to 2030. That is 70% more than today’s rate of increase. Two thirds of
the increase will come in developing countries.
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The geographical source of new emissions will shift substantially from

the industrialised countries to the developing world. China alone will
account for a quarter of the increase in carbon dioxide emissions bearing in
mind that the amount of her emissions will remain well below those of the
US Most OECD countries face a real challenge in meeting their Kyoto
commitments. OECD countries that have signed the protocol will be 29%
above target in 2010.
Investment to Face New Challenges

Energy trade, almost entirely in fossil fuels, will expand rapidly and
increase mutual dependence among countries. But this can also impose new
challenges. Our vulnerability to disruptions of energy supply due to
terrorist onslaught or technical mishap can increase. Maintaining the
security of international sea-lanes and pipelines will assume increasing
importance for energy security.
World Energy Demand

2000 2030
Coal 26% 24%
Oil 38% 37%
Gas 23% 28%
Nuclear 7% 5%
Hydro 3% 2%
Other Renewables 2% 4%
More good news is that total world financial resources should be

sufficient to finance the investments needed. Yet, there are challenges,
economic and political.
According to the IEA’s recently published World Energy Investment
Outlook, total investments in the range of $16 trillion are required for the
energy supply infrastructure needed to satisfy expected demand in 2030.
The electricity sector is the dominant one. Power generation,
transmission and distribution will absorb about $10 trillion of the $16 trillion
(60%). The oil and gas sectors will each exceed $3 trillion (19%) and coal
will require a mere $400 billion (2%).
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Developing countries will need almost half of the projected $16 trillion.
It is in developing countries that production and demand increase most
rapidly. $2.3 trillion is needed in China alone, 14% of the proposed total.
Russia and other ‘transition economies’ will account for 10% of global
investment.
In terms of countries the need for investment will remain largest in the
US and Canada at $3.2 trillion.
51% of the projected global investments will be needed simply to
replace or to maintain existing and future capacity. The other 49% will be
at hand to meet rising demand.
Economic and Political Challenges

The economic challenge will be to mobilise these new investments.
How will necessary investments find their way to the energy sector
considering the enormous competition for funds with other important
sectors of the economy? Who will invest how much, in what, and where, in
order to manage supply and demand for both present and future
generations?
The political challenge will be to ensure a common energy future where
energy supply and demand can be balanced in such a way as to promote,
and not jeopardise, the goal of sustainable global economic, social and
environmental development. This is a Herculean task. The issues are of
such character and importance that they must be addressed in dialogue not
only between nations at political level, but also in dialogue between
governments and industry.
The International Energy Forum

I would like to explain something of the new International Energy
Forum and its international secretariat. I will highlight how the informal
dialogue between ministers from energy-producing and energy-consuming
countries has evolved to address directly the vital issue of security and
stability in energy.
The point is that energy is crucial for economic and social
development. Energy is also a key factor in commercial and political
relations between countries. It fuels the world economy. Production and
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consumption of energy impacts the global environment. Energy influences,

and is influenced by, international politics.
The past has shown how energy, especially the strategic commodity
which is oil, and excessive market volatility, can create conflict or
exacerbate existing political tensions between countries or groups of
countries. Today we see how international dialogue and cooperation the
energy brings mutual benefits and encourages positive impulses towards
wider economic and political cooperation. Seeking to create a broader
global dialogue and a closer cooperation should continue as an energy
mantra for the future.
Yet when Norway’s former Prime Minister Dr Brundtland, in the late
1980s, called for an informal meeting between ministers of energy-
producing and energy-consuming countries, there were those who regarded
the very idea of a dialogue at political level as a non-starter. Some even
thought it dangerous. The differences and conflicts between the two groups
of countries were taken for granted. Sharply-fluctuating oil prices,
instability and insecurity were par for the course. This chaotic economic
environment adversely affected global economics and politics to a much
greater extent.
The Gulf War in 1990-91 once again highlighted the importance of oil.
A more co-operative atmosphere between producers and consumers
ensued. The process of political dialogue across earlier dividing lines could
start. The first ministerial meeting was held in Paris in 1991. It was
followed on a more or less biannual basis by meetings in Norway, Spain,
Venezuela, India, South Africa, Saudi Arabia and Japan, attracting an ever-
increasing number of ministers in what came to be called the International
Energy Forum. Discussions have focused on security of energy supply and
demand as well as on the links between energy, the environment and
economic development.
At their meeting in Japan a little more than a year ago, Ministers
endorsed the proposal of HRH Crown Prince Abdullah of Saudi Arabia to
set up an international secretariat, headquartered in Riyadh, to further
strengthen the process of global dialogue on energy at the political level.
The series of IEF ministerial meetings has contributed to a convergence
of views. The utility of global energy dialogue is no longer questioned.
Today, in our globalising world, there is a growing awareness of the simple
fact that we are all in the same boat. Greater stability and predictability in
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energy developments are increasingly seen as a shared goal that can

facilitate long-term economic planning and have a positive influence on
political developments. The mutual sense of interdependency, vulnerability
and win-win opportunity has improved the atmosphere for long-term
cooperation. And difficult short-term issues are being addressed in a more
co-operative way than before when the atmosphere was nothing short of
confrontational.
Energy Ministers from some sixty countries and heads of international
energy organisations have been invited to meet at the 9th International
Energy Forum hosted by the Netherlands in Amsterdam in May 2004.
Their main theme will be “Investing in Energy: Choices for the Future”. In
addition to plenary discussions, ministers will also address a host of other
energy-related issues in informal bilateral exchanges. They will interact
with leading CEOs in a special International Energy Business Forum
immediately preceding, and giving important input to, their own
deliberations.
The producer-consumer dialogue at political level in the IEF is unique
in its global participation and perspective. It is a meeting place not only for
ministers of IEA and OPEC countries, but also for ministers of important
countries outside these two main producer and consumer organisations;
Russia, China, India, Brazil and South Africa to name a few that already
have, and will increasingly have, substantial impact on the global energy
scenario. In the IEF, these countries can participate on an equal footing
with their peers in OPEC and the IEA.
The IEF is unique in approach. It is not a negotiating or decision-
making body. It is a forum geared to exchanging information and policy
views, as well as establishing informal contact at political level. These
exchanges have contributed to greater mutual understanding, enabling more
enlightened national decision-making and closer cooperation within and
between energy organisations.
Some main tasks of the new IEF Secretariat will be to assist countries
hosting the biannual ministerial meetings and to organise supporting
seminars and roundtable meetings at political as well as at experts’ level. It
will contribute to enhanced data collection and transparency. It will interact
with governments, industry and organisations with a view to channelling
and generating workable ideas for strengthening the global energy dialogue
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in an evolving global environment. Greater stability and security in energy

is a shared objective of both producers and consumers.
Energy Security Tools

Energy security is something that national and international leaders
should be concerned about, not only in moments of emergency, but also in
a long-term perspective context as production and consumption patterns,
and requirements for investments in infrastructure, evolve.
Energy security is a broad-based issue and is no longer focused purely
on oil. Energy efficiency, stock-holding, fuel-switching, substitution
options, diversification of resources and spare capacity are, along with
emergency responses, key concepts in traditional security of supply
thinking. Energy security policy has often been inward-looking and wary of
dependence on external sources: especially on areas of political uncertainty.
There are two sides to the energy security coin: security of supply and
security of demand. Energy importing countries want security of supply
from energy-exporting countries. Energy-exporting countries in turn want
security of energy-demand in energy-importing countries. They may in
addition need investments from abroad to develop infrastructure necessary
to produce and export their energy resources.
For both consumers and producers this implies dependency. Some
would argue that dependency on others in so important and strategic an
area as energy constitutes a political and economic risk that should be
reduced to a minimum if it cannot be avoided altogether. Others would
argue the more positive vision: such dependency can serve as a drive to
improve relations between countries and to stabilise the geopolitical
climate overall.
Energy security should not be regarded as an issue of technical
arrangements and infrastructure alone. It has also to do with economics,
politics and the environment in both a short and long-term perspective. It
has domestic and foreign policy implications. And the quest for sustainable
energy on the global scene that was highlighted at the Johannesburg
Summit, is a matter of energy security in its wider global and long-term
perspective.
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Public and Private Sector Cooperation

Let me conclude my opening remarks by describing the International
Energy Forum as an evolving international endeavour to promote an
inclusive, global dialogue on energy at the political level. Energy security
and stability are core objectives. The IEF is driven by governments at
ministerial level and recognises the need for interaction also with other
players concerned, not least private industry.
3 THE VIEW FROM BRUSSELS
Dr Andrei Konoplyanik
Deputy Director Energy Charter Secretariat, Brussels
First of all, I would like to draw your attention to diamonds. Just like a
diamond, energy security has many facets. And just like a diamond, energy
security is best appreciated when its facets come neatly in balance.
The important difference, however, is that diamonds, as you will
remember, are forever while energy security has to be maintained and
monitored on a daily basis. Once the energy is consumed it is gone forever.
Energy security is often understood as the ability to assure adequate,
sustainable supply of energy at a reasonable cost, including externalities.
One might also think about energy security as a process, an ebbing and
rising flow:
If there were to be a common denominator of the various processes that
result in the assurance of energy security, what would that denominator be?
This research workshop has chosen to look at current energy production
trends and the impact of capacity shortfalls on energy security. ‘Capacity
shortfall’ is a way to say ‘under investment in capacity’. Capacity shortfalls
could be the result of any unforeseen event including an act of terrorism.
I would like to take this as the starting point and try to demonstrate that
energy security is best understood as the continuous assurance and
maintenance of adequate, reliable supply of energy at a reasonable cost in
the short, medium and long term. This persistence of adequate and reliable
supply can only be assured in the context of the right investment decisions.
There are many facets to energy security – that’s the common thing it has
with diamonds, after all. Since it is the outcome of a continuous process
and since choices have to be made all the time on how best to assure it,
there are many preferences on how exactly it can be assured. Here are a
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few examples on the multifaceted nature of energy security from the

consumer / importer perspective and the producer / exporter perspective.
A consumer / importer perspective would be charmed by the shine on
the facets of:
x Higher domestic productive capacity;
x Less dependence on imports;
x Lower degree of import concentration;
x Higher domestic inventories relative to imports; or
x A greater diversity of energy sources in case one or more suppliers
interrupt deliveries.
I am sure you all recognise the cornerstones of the energy security
policies of the major importers.
A producer /exporter perspective would be fascinated by the facets of:
x Lower potential shortfall in one or more domestic “exportable”
energy resources;
x Lower depletion of non-renewable resources;
x Reducing the inefficient domestic use of non-renewable resources,
thus providing an alternative for increasing its export potential;
x Reducing the uncontrollable growth in domestic energy-demand,
for the same reason;
x Mitigating the potential loss of competitiveness on international
markets; or
x Reducing real or imagined environmental disasters.
At this moment, I will point out that, differing as they may be, there are
certain common aspects of the perspectives of a consumer and a producer.
The supply of energy requires the deployment of a system that relies
heavily on large-scale infrastructure which renders the supply vulnerable.
The interruption of the flow of energy in many instances will negatively
affect both the consumer and the producer. It is therefore in the best
interests of both the consumer and the producer to develop energy-supply
systems that are least vulnerable to both short and long-term disruptions.
Let me dwell for a moment on each of these two issues.
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The ‘Short-term’ is usually understood as a period of time during which

no radical change occurs in the quality of the factors deployed: pipelines
would be pipelines, tankers would be tankers, GM engines would be V-8
gas-guzzlers, and terrorists would be terrorists. A major concern related to
short-term disruptions is asymmetric/terrorist activity which targets large-
scale, centralised, vulnerable systems in particular. In the short-term, an
existing vulnerable energy-supply system, or key elements thereof, can be
destroyed. On the other hand, since it takes time between making an
investment decision and implementing it, it is indeed difficult to find a
substitute for such vulnerable systems and interrupted supplies within the
small time frame that the short-term allows.
There are of course cures for this pestilence. For example the
‘hardening’ of the vulnerable elements of such systems, the maintenance of
back-up supplies of fuels and capacity, etc. But even under the best of
circumstances, and even if all nations were to co-operate in reducing risks
of this nature, the cure cannot run any deeper than covering up the
symptoms of vulnerability: with energy systems vulnerable to asymmetric
attack there will inevitably come short-term interruptions of increasing
gravity and cost due to terrorist activities.
Suffice to say there have been over 50 incidents of sabotage and
accident on the Trans-Alaska oil pipeline alone. Terrorist attacks are the
reason behind frequent disruptions of the Oxy pipe in Colombia. But in
cases like this, a more effective solution would be to invest in meeting this
asymmetric threat and preventing blockage of flow rather than just patching
up disasters. However, while investing in the improvement of the security
of vulnerable energy systems will have its rewards there will inevitably be
a point where the law of diminishing returns sets in. In the long term many
factors can change. New technologies emerge and new types of energy
come into use. James Woolsey, former CIA Director (a person whose
expertise lies more from the “security” part of the “energy security”
formula), and Amory Lovins, a well known energy expert, write that
“Energy security starts with using less energy far more efficiently to do
the same tasks. The next step is to obtain more energy from sources that are
inherently invulnerable because they are dispersed, diverse, and
increasingly renewable”.
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This beneficial shift in the long term to better energy security will,
however, not occur without the relevant investment. It seems to me that two
major conclusions may be drawn from this:
x It is the responsibility of the producer and consumer countries to
co-operate in reducing the vulnerability of existing energy supply
systems, and thus avoid some of the costs in the future incurred
from damage to energy systems. This type of investment, while
useful in the short run, is likely to have limited returns in the long
run.
x The major long-term risk to security of energy supply lies in
making the wrong investment choices i.e. in being unable to
improve efficiency, nor diversify energy supply sources nor build
invulnerable, diversified and well-distributed future energy-supply
systems that can withstand the impact of local disruptions with
ease.
Energy consumers and producers are thus interdependent, linked
together not only by existing energy flows but also by investment flows to
develop future energy projects.
Thus energy and investment flows are closely related in shaping energy
security from an economic perspective. Investment at each stage in the
energy cycle has particular ramifications for security. In the case of
upstream projects this means:
(a) The security of up-front project expenditures which aim at obtaining
access to energy resources (so-called pre-investment stage);
(b) Security of subsequent project development and operational
activity, including the transportation of the energy produced to
markets;
(c) The environmental aspects, including the abandonment of the
depleted fields or mines, or sites, and the decommissioning of the
project infrastructure.
From this perspective, the energy cycle, whether at the level of an
individual country, a region or at the global level, includes a chain of
investment projects, of making investment decisions, with their inherent
risks and rewards. The security interests of both producers and consumers
of energy are vested in this process. From an economic viewpoint, stable
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and affordable energy supply means supply with manageable volume and
price risks. Since the 70’s, the concept of affordable and secure energy
supply implied an environmentally-sustainable supply, with environmental
costs internalised. Today this means that in order to provide competitive
energy supplies, not only must technical and financial costs be taken into
consideration, but also the environmental costs. These are facets of energy
security that have evolved over time, at the various stages of the
development of the energy markets.
Healthy Competition
And here we come to a message that I believe important in the modern
context of the global energy industry. If – as I have tried to demonstrate –
energy security and the security of investment are interrelated, and, indeed,
if the right choices have to be made at the right time by investors to assure
energy security in the long run, then the right policy is the policy in support
of competitive global energy markets. Over time, the instruments used to
provide energy security have evolved, reflecting different stages of market
development and the need to manage volume and price risks.
What we see now is something of a departure from the once-existing
direct control of supplies ‘at the wellhead’ that was typical for the
traditional concessions, including direct state participation of the
concessionaire’s home state, or, at an even earlier moment, the
establishment of colonies. Right now, a major instrument of diminishing
volume risks is the diversification of energy supply. This is obviously an
investment well made, and we at the Energy Charter support policies that
remove barriers to the flow of such investment and promote fair access to
markets. What is disturbing, however, is that even with diversification of
supply and markets, key components needed for the assurance of long-term
security of supply have yet to materialise. For example, diversification in
oil supplies does not mean diversification in energy supplies: consumers
will still be hooked on imported oil. Multiple pipelines will still carry the
same kind of energy: oil or gas. There seems to be a need on the part of
state monopolies for a departure from dependency on oil and gas and on
few suppliers which prevent competition and the establishment of free
markets.
In broader terms, there seems to be need for a departure from monopoly
dependence to eliminate the potential for abuse of any dominant position –
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in all senses. Functioning market structures and competition are a sine qua
non for providing to investors the right signals, to assure that investment
goes where it is needed, and thus to assure energy security in the long term.
Let’s step back in time again: Prior to 1970, the price risk in the oil
market was addressed by the so-called ‘posted prices’ advised by
vertically-integrated oil companies, and a cost-plus mechanism of pricing
related to a particular project. Now we have a market based on the ‘paper’
and the ‘wet’ barrel – spot, futures, options and a host of other derivatives.
Increased price volatility when it arises is shared between market
participants as a function of their individual appetite for such risks. But that
is to say that the financial markets, in addition to the diversified technical
infrastructure, are now instrumental in handling price risks and in
mitigating energy security risks. Today we have an advanced financial
market serving energy markets, along with a diversified technical
infrastructure, and that is the result of healthy market competition. The
formula might run: “Markets will find a way”.
There seem to be two dimensions of international energy security that
go beyond the problem of reducing the vulnerability of the existing supply
system by military means, including the ‘protection’ of unstable energy
exporting regions. These two dimensions are
(a) Defence against short-term shocks by the use of strategic weapons
stockpiling; and
(b) Investment in energy resource development (in underdeveloped
areas and new sources), energy efficiency, energy technology and
generally all the means needed for a transition from the current state
of the industry to the desired future, more secure and efficient, state.
That state would involve more diversified, open, transparent and
competitive energy markets. It seems, indeed, that the second dimension is
the most worrying. It was recommended recently that the G-8 should
consider ways to strengthen the legal regime for international energy
investments. In fact, this recommendation should be addressed not only to
G-8 but also to the broader international community. It underscores the
major theme of my presentation that international energy security in the
long run depends on international energy investment, and on the
management and minimising risks to such investment.
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European and Asian Markets Compared

According to the ‘shadow G-8’, a great deal has been done in this area
over last 15 years. Further progress is needed as most of the energy-rich
regions are plagued with defective governance and especially defective
security for investments, which especially hinders the flow of foreign
investments. The US favours bilateral approaches as well as a regional
scheme that would be part of the Free Trade Area of Americas (FTAA).
The Energy Charter Treaty (ECT), the only multilateral energy-specific
international law instrument, already has 52 signatories and will perhaps
incorporate more in the near future. However, the US, by far the largest
‘exporter of energy capital’ has not signed it. The entire G-8 should
endorse the Energy Charter Treaty process and encourage its enlargement
to both new capital-importing and capital-exporting countries.
To this ‘perspective from the West’, let me add a ‘perspective from the
East’. If we look at a map of the Eastern hemisphere in energy terms, we
see Asia as a major market dependent on external supplies. The European
market is mature but the Asian markets are still growing.
It is the Asian markets that offer greater opportunity for energy trade
and investment. But by which principles will the integrated pipelines and
electricity grids in Asia be regulated? What investment rules will be
implemented in the countries of the broader Eurasian energy market? Will
China evolve along the same historic path as the US? If yes, will we live in
a sustainable energy future? The ECT is the only international instrument
containing a set of common rules for energy-related trade and investment.
It is not surprising that governments in Asia are, admittedly cautiously,
approaching the ECT. China became an observer in 2001, Iran and South
Korea in 2002, ASEAN as a group in 2003. Energy markets have generally
evolved from being monopoly-led to competition-driven. The driving force
in this development is the need to assure incentives to investments. Both
producer and consumer nations are looking at investment protection and
stimulation measures, as instruments in improving their energy security.
The process also demands the development, commercialisation and transfer
of energy-efficient and environmentally-friendly technology, the adoption
of coherent labour and environmental standards and, most importantly, the
establishment of competitive markets that help minimise investment-related
risks. Diversification of supplies within the existing energy supply system
(multiple suppliers, multiple pipelines, interconnections, etc.) and
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maintaining stocks of various energy materials and an excess capacity are

adequate tools to handle potential threats to energy security in the existing
context of the industry. As I have explained, they are not very helpful in the
long run.
Winds of Change
The ‘hardening’ of the vulnerable centralised systems, the proactive
handling of various sources of threats and instability on a global scale are
also beneficial in the short/medium run. However, in the long run these
energy security instruments, while useful, will probably not be sufficient.
There is a need to use tools to minimise risks related to energy
investments (thus minimising financial cost), to provide the right signals at
the right time to investors. Times change: once upon a time, such signals
used to be provided via the concessionary system, i.e. individual project-
related agreements between the investor and the host state.
Ninety years ago the British government supported and directly
participated in the D’Arcy concession in Persia at the whim of Lord
Churchill, to assure Britain’s energy security, and indeed its national
security, when the Royal Navy switched to relying on oil instead of coal.
Nowadays, we witness a variety of bilateral and multilateral
intergovernmental undertakings. International law instruments are one of
the most efficient ways in providing the basics of energy security. At the
Seminar on ‘Global security and Natural Resources’ held in September
2002 in Moscow, former UK Foreign Minister Lord Owen mentioned,
“transparency is the best chance for stability”. Stability, proper public and
corporate governance, and transparency are nowadays key components of
energy security.
The creation of a level playing field and establishing rules that apply to
all adds to transparency of investments and trade and helps minimise
investors’ risks. The development of open and competitive markets in our
global economy is key to the stability of international energy flows, and
indeed to the assurance of adequate supplies of energy at reasonable cost.
This is, in my economist’s view what energy security is all about. As
Marilyn Monroe so beautifully put it in her song, “There may come time
when a lass needs a lawyer but diamonds are a girl's best friend”. With
energy supplies secure, we may enjoy the brilliance of diamonds forever.
SECTION V
REGIONAL CHALLENGES:
THE MIDDLE EAST
1 NATIONAL STRATEGIC ENERGY
INTERESTS AND CREATING REGIONAL
STABILITY IN THE MIDDLE EAST
Robert Ebel
Director of Energy programme,
Centre for Strategic and International Studies
In my remarks to you this afternoon I will take a look at Saudi Arabia

and growing publicity related to cresting the petroleum peak. And I will
also touch on US strategic energy interests and the Russian oil sector.
Let me begin by noting that the accepted growing US dependence on
foreign oil and the need to assure that this oil will be available in the
volumes required has led to US strategic energy interests being viewed
quite differently outside the US than we perhaps perceive them at home.
The growing US dependence on foreign oil is clearly no secret. For
example, in 1983 just 28.5% of the crude oil processed at our refineries was
foreign in origin. Last year, the share of foreign crude had risen to 62.9%.
How can we assure ourselves that our economy will have the oil it
needs? Do we expand domestic supply, as the Republicans advocate, or do
we make better use of what we do consume, that is, the Democratic
approach? Or, do we seek control over foreign supply, by whatever the
means?
While our administration and politicians in Congress may worry about
this dependency and seek to reduce it, what about the American public? Do
they lay awake at night because so much of the oil we consume comes from
nations whose national interests may not, and often do not, coincide with
ours?
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Of course not. The American consumer has just two concerns: price
and availability. Where the oil comes from to make the gasoline or diesel
fuel that he buys does not matter. But price and availability do, and these
two factors make up the consumer definition of security of supply. I
suspect that consumers everywhere are no different.
The foreign view of US strategic interests is one of using military force
to lock up the oil we will need. And this view also springs from a
conviction, by some at least, that a peaking of world oil production is not
far away, at least in relative terms, to be followed by a slow but steady
decline.
Let me cite several headlines I came across in recent readings:
x “Plan now for a world without oil,” found in the January 5, 2004
issue of The Financial Times, and
x “Bottom of the barrel: the world is running out of oil so why do
politicians refuse to talk about it?” in the Guardian of December 2,
2003.
If the headline admonishes us to plan for the day when oil production
peaks, what can we do, given the importance of oil to the normal
functioning of our economy, and given our dependence on foreign
suppliers to meet our oil needs? The Guardian provided an answer: Bush
and Blair have been making plans for that day by seeking to secure the oil
reserves of other nations, such as Iraq. The Financial Times observed that
the growing US need for imported oil drives an integrated oil and military
policy. And the question not posed is: who is next, after Iraq… Iran? Syria?
The political newsletter Counterpunch went into further depth, in a
recent issue and drew upon a recently-released book Oil, Power and
Empire. It noted that, “controlling Persian Gulf oil and dominating world
energy markets has been a prime US strategic objective for over 60 years.”
Professor Michael Klare, who teaches at several New England colleges,
points out that the National Energy Policy, formulated by Vice President
Cheney in 2001, assumes the US dependence on foreign oil will continue to
expand, and calls on the US government to take whatever steps are
necessary to promote enhanced US access to foreign oil. However, a minor
point of order: the Cheney report does not contain this recommendation.
In remarks at a conference in Paris in May of last year, Professor Klare
noted that the US efforts to acquire more oil from the exporting countries
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will entail the increased presence of US military forces in the area and
periodic military intervention. Indeed, he added, the requirement for
increased military action in support of US foreign energy policy is one of
the driving factors behind the administration’s military buildup.
The release earlier this month of a letter, written in 1973 by the then-
British ambassador to Washington and based on a conversation he had had
with James Schlesinger, then US Secretary of Defence, can only give
additional sustenance to those who see a clear linkage between US military
and oil policies. The letter in effect led British intelligence to believe that
the United States was prepared to use force to seize the Middle East
oilfields—read Saudi Arabia—in the wake of the Yom Kippur war and oil
embargo.
Should circumstances arise that again might jeopardise the timely and
adequate flow of oil out of Saudi Arabia, undoubtedly there are individuals
in Washington who would come to the same conclusion that Secretary of
Defence Schlesinger did some 30 years ago.
Been There Before

It is perhaps not too difficult to set aside those worries about oil
peaking. After all, we have been there before.
Some 26 years ago, the president of the United States, Jimmy Carter,
addressed the nation, in what he defined as “an unpleasant talk…about a
problem that is unprecedented in our history.” I am sure some of you must
remember that event. This was his famous, or perhaps infamous, speech
where he called for the “moral equivalent of war” in response to the
problems he laid out. Unfortunately, the acronym of the “moral equivalent
of war” is MEOW, which fell considerably short of a call to arms he was
asking for.
He made several points in his broadcast. Let me repeat them for you.
x “The oil and natural gas that we rely on for 75 percent of our
energy are simply running out.
x “Each new inventory of world oil reserves has been more
disturbing that the last. World oil production can probably keep
going up for another 6 to 8 years. But sometime in the 1980s, it
can’t go up any more. Demand will overtake production. We have
no choice about that.”
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What stood behind this assessment? What were his advisors looking at
when this message was being put together?
One document in particular stood out. In the latter 1970s we had bought
into the belief that the Soviet Union would soon be running out of oil. That
belief grew out of the CIA finding published in April 1977 that had
concluded “that during the next decade, the USSR may well find itself not
only unable to supply oil to Eastern Europe and the West on the present
scale, but also having to compete for OPEC oil for its own use.”
But that document by itself would not have warranted a presidential
address to the nation.
I poked around in my files the other day and found an interesting report
on Saudi Arabia, dated April 1979, two years after President Carter’s
broadcast, and prepared by the staff of the Subcommittee on International
Economic Policy, Committee on Foreign Relations, the US Senate. In the
summary, this statement was made: “Based upon information collected by
the Committee staff over the past year, it seems evident that the United
States should not base its energy plans on the premise that Saudi Arabia, as
residual supplier, will produce enough oil to supply the needs of the United
States or the world economy over the next two decades at the anticipated
rates of consumption.”
It is probable that the Senate staff had passed on to the White House at
least their preliminary evaluation of the Saudi oil sector and that evaluation,
combined with the CIA judgment on Soviet oil, helped convince President
Carter to take to the air. In reality, though, it was a classified report put
together by the CIA on problems at the Saudi oilfields that most likely was
the deciding factor.
Yet the passing of time proved the CIA to be wrong in its assessment of
the Soviet Union’s oil capability, and the Senate Committee on Foreign
Relations to be wrong in its assessment of Saudi Arabian oil.
It is difficult to believe that we will be any more successful in the future
in our attempts to judge how oil supply scenarios will play out than we
have been in the past.
Russian Roulette?
Where are we today with regard to the Soviet Union, or rather Russia,
and Saudi Arabia?
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We no longer ask ourselves, will Russia be running out of oil anytime

soon? Rather, we are now trying to judge for how long and to what extent
Russian oil production and exports will continue to grow. In other words,
we have an opportunity to be wrong once again. Two possible paths
emerge for Russian oil: one, the oil sector is successful in maintaining its
growth trend; or two, problems arise that temper that growth trend.
Russian oil production averaged a bit above 8.4 mb/d in 2003, a gain of
more than 800,000 b/d over the 2002 level but still 3 mb/d below its peak
in mid-1988. With domestic needs placed at not much more than 2.2 mb/d
that provides an exportable surplus in excess of 6 mb/d.
The importance to the Russian economy of a continuing high oil price,
in conjunction with steadily increasing exports, cannot be understated.
Could the economy withstand a price decline? Russian officials say yes,
even a decline to $18 per barrel.
Nor should we ignore the expanding use of trade in oil and natural gas
to re-establish a dependency between most of the former Soviet republics
and Russia, a dependency that contains future, if not current, political
implications.
When the United States looks north we see Canada, our leading
supplier of oil and natural gas. When China looks north it sees Russia as a
source of oil and natural gas supplies to cover the growing gap between
supply and demand. Some people say we should foster that Sino-Russian
energy relationship as a way of reducing the Chinese presence as a
competitor in the Gulf and as a way of expanding world oil and gas
supplies.
The tradeoff being, of course, that close political linkages likely will
follow close energy interdependencies. Would that be in our interests?
In the continuing US search for oil supplies outside the Gulf, might
some kind of arrangement be struck with Russia? President Putin, playing
to the security concerns of the United States, has said that Russia would
like to secure 10% of the US market. But the US will not set aside that
10%. Russia will have to earn it, through the workings of the world oil
market.
Will last year’s absolute growth be repeated in 2004? No it will not, at
least in the judgment of the Energy Ministry, which in early January was
forecasting an output averaging 8.68 mb/d for the year. But I would draw
your attention to a caveat. The Ministry invariably has been on the low side
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when it comes to forecasting next year’s production and more recently was
predicting a 6.6% growth in production for the first quarter of 2004.
There are constraints to consider: export pipeline limitations, taxation
levels, and the impact of the Khodorkovsky affair. Nonetheless, I would
judge that the growth anticipated for the first quarter could be extrapolated
for the year as a whole, providing an increment of roughly 500,000 b/d,
still very much worrisome for OPEC, in that most of these incremental
barrels will be available for export.
Pessimists at Work
As a pessimist, I can see a Russian oil industry with certain of the same
characteristics today that caused the CIA to render its 1977 prediction of
troubles ahead.
Is the sector sufficiently transparent to provide us with what we really
need to know, if we are to be able to make reasoned judgments? Are the
oilfields being pulled too hard to take advantage of high prices? Is
sufficient new investment being made? Are the production gains just one-
time gains deriving from the application of western technology and
managerial know-how? Where are the new discoveries needed both to
offset declines at the older fields and to provide for continued growth?
Yukos, the leading Russian producer, points to benefits derived from
horizontal drilling and water flooding, raising average well production rates
across the board. All well and good, but does this translate into faster
depletion rates? Quite probably.
The over-arching Yukos corporate strategy is that of maximising
income. The growth demonstrated by Yukos to date has been based largely
on increasing efficiency in old fields. Corporate strategy also indicates that
exploration in new areas will probably not be a primary factor in the near
term.
An Optimist’s Opinion
Now, to balance our story, we should put to work the crystal ball set
aside for optimists. What do we find? Are there answers to the questions,
can the growth in oil production be sustained beyond the near term? Could
Russian oil be restored to its glory days of the 1980s?
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The geologic potential is there, although much of this remaining

potential is found in very inhospitable areas.
Ray Leonard, a Yukos official, and an American geologist with good
international credentials, following considerable investigation, has placed
Russian proven reserves at between 97 to 119 billion barrels, roughly
double that level generally accepted and matching those of Iraq.
The answer is yes, if Russian oil companies do not repeat the mistakes
of their Soviet predecessors.
The answer is yes, if Russia improves its investment climate, and that
means ‘the rule of law’ must be firmly in place.
The answer is yes, if foreign oil investors respond, and that means the
world oil market must be of sufficient attraction to offset the risks of doing
business in Russia.
Equally important, the state of relations between Russia and the US will
have much to say about the presence in Russia of foreign oil companies and
in turn the acceptance by Russia of these investors.
Two Guidelines
There are two guidelines we can draw upon in our attempts to judge
future Russian oil production and export levels.
First, we can look to the recently approved national energy strategy that
takes the country out to the year 2020. Two scenarios have been set out, an
optimistic case and a moderate case. Looking at the optimistic case for
2010, we find that production hits about 9.8 mb/d, with exports coming in
at under 5.6 mb/d. The moderate case has production slightly exceeding 8.9
mb/d, and exports just under 5 mb/d. Exports for both cases relate just to
crude oil, and do not include petroleum products.
The optimistic case for the year 2020 shows minimal growth for both
production and exports and does not return Russia to its peak of 11.4 mb/d
in 1988.
The second guideline, and the one I prefer, comes from an internal
study carried out by Yukos.
Yukos, in its study, also projected production out to the year 2020, and
found that:
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x Oil production will peak by the year 2010, somewhat exceeding 10

mb/d.
x It will hold at that level until the year 2015 at which point a very
slow decline sets in
x dropping production to just below 10 mb/d by the year 2020.
The two leading oil producing regions—West Siberia and the Urals-
Volga—will both peak in 2010, as will Timan-Pechora.
So where will the growth come from?
East Siberia, which produced just 40,000 b/d in 2001, is to expand to
1.34 mb/d by 2020. Beyond 2010, all the growth is to be provided by
undiscovered fields.
The Russian Shelf, also having produced just 40,000 b/d in 2001, will
also be producing in excess of 1.3 mb/d by 2020. All of the growth beyond
2015 is to be provided by undiscovered fields.
Without these two regions, Russian oil production would be around 7
mb/d by 2020.
Crude oil exports likely will expand as production expands but, given
that refining capacity likely will not be measurably enlarged, petroleum
product exports could be expected to decline.
Accepting either of these guidelines tells us that for Russia the current
decade is a decade of growth, but the next decade is part constancy, part
slow decline. Current production levels do not define the future; reserves in
the ground do. And where are the oil reserves concentrated today? In the
Gulf. OPEC need only be patient this decade, while realising the next
decade is theirs.
Saudi Arabia: Back to the Future

Questions are being raised again about Saudi oil production. Are the
major oilfields in decline? Might we expect Saudi oil to peak anytime
soon?
This time, however, it is not an agency of the US government or a
Congressional Committee sounding the alarm. Rather, it is a respected US
investment banker, Matt Simmons, who has concluded, after a detailed
review of several hundred technical papers stored in the library of the
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Society of Petroleum Engineers—many of which papers had been authored

by Aramco geologists and engineers—that Saudi Arabia has likely already
peaked in its sustainable oil production. Mr. Simmons recognises that he is
not a reservoir engineer and has requested a number of individuals
experienced in the operation of oilfields around the world, but especially in
Saudi Arabia, to review and comment on his draft report.
I have not yet seen any of these reviews, but the judgment of Mr.
Simmons is already finding its way into the media: it makes for a headline-
grabbing story.
We need not dwell on the importance of Saudi oil, either to the US or to
the world oil market. Saudi Arabia is the leading crude oil supplier to the
US market—and the US is the leading buyer of Saudi oil—and the Saudis
very much want to keep it that way, although in terms of US imports of
both crude oil and petroleum products, Canada is number one supplier.
There is not an explicit dependency between Saudi Arabia and the US, for
the world oil market is open to both buyer and seller. Yet, there is a
commonality of interests to be served in maintaining what we have.
The importance of Saudi oil is based as much on its spare producing
capacity as it is on its position as an oil exporter; even more so in times of
supply disruptions, such as the military intervention in Iraq that took Iraqi
oil off the market. Saudi Arabia told the United States that its spare
capacity would be put to work, to offset the loss of Iraqi oil, and therefore
the US need not tap into its Strategic Petroleum Reserve.
They did, and we didn’t.
Iraq: the New Kid on the Block

Who might ever rival Saudi Arabia, in terms of production, exports and
most importantly, spare capacity? Not Russia, for it is unlikely ever to
deliberately develop spare producing capacity.
But Iraq could replace Saudi Arabia, at least in the minds of the Iraqis I
have met. A broad and successful exploration and development program,
plus raising the depletion rate, currently around 1%, to 4% to 5%, would do
it, so they say, taking Iraqi oil to as much as 12 mb/d.
But when could this happen? Certainly not this decade, and not without
foreign investment.
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Iraq today is a mixture of successes and of promises unfulfilled. Where

does Iraq stand today? Crude oil production averaged 2.3 mb/d during
December and exports, all from the south, averaged about 1.6 mb/d. In the
north, some 200,000 b/d are being reinjected, largely because sabotage has
taken much of the northern infrastructure is out of operation. To the best of
my information, not a single saboteur has yet been caught. And when might
the saboteur move south, where facilities reportedly are even more
vulnerable than in the north? That would be disastrous.
Yet, on balance, the situation continues to improve, although
performance to date has been far below predictions offered by the Bush
administration immediately following the occupation of Iraq. Vice
President Cheney, among others, had been quoted as saying that by end of
the year, Iraq would be exporting as much as 3 mb/d. Reality soon set in.
Thamir al-Ghadban, in mid-June, thought that year-end output would be 2
mb/d, quite close to what was achieved.
Iraqi oil ministry officials now anticipate that prewar level production
of 2.5 mb/d should be regained this Spring, perhaps as early as April, and
then pause at that level for some time.
There seems to be a growing consensus that by the end of 2004 Iraq
might be producing as much as 2.8 mb/d and exporting 2.3 to 2.4 mb/d, but
only if sufficient export pipeline capacity is available.
Exports out of the south are approaching the system’s capacity. Does a
return to prewar levels imply the line to Ceyhan will be returned to
operation? But saboteurs don’t blow up empty lines, do they? The export
terminal at Khor-al-Amaya will add another 200,000 b/d of capacity, but
beyond that, what?
I would guess that by the end of this decade we might anticipate Iraqi
oil output on the order of 4 to 4.5 mb/d, below the 6 mb/d often mentioned
as a goal for that year. Nonetheless, even this lower effort would exceed by
1 mb/d the previous country high of 3.5 mb/d, reached in 1979.
The fixation on returning Iraqi oil production and exports to their pre-
war levels may well turn to be a serious misstep. Unfortunately, the Iraqi
oil ministry and the CPA have yet to take the decision to first, assess the
health of the oil reservoirs and second, to introduce good reservoir
management techniques. Former oil minister Issam al-Chalabi and Bob
McKee, then senior oil advisor to the CPA, have noted that maximising oil
production may damage the reservoirs and that present production levels
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cannot be maintained without reservoir maintenance. Yet no funding has

been provided in support of this effort. The larger question then in all this
is: are production levels sustainable?
Let me conclude with this thought. The worry about problems in the
Saudi oil sector comes down to this. If these problems are real and, among
other things, translate into the prospect of a loss of spare producing
capacity, then the world vulnerability to supply interruptions is measurably
enlarged. There is no substitute for Saudi oil, not today, not tomorrow.
To conclude, when Matt Simmons goes public with his story, and that
will be quite soon, then US military strategy and securing access to oil will
become even more linked in the public mind.
2 EMERGING THREATS TO ENERGY
SECURITY AND STABILITY
Creating Regional Stability in The Middle East
Dr Herman Franssen
Former Adviser to the Omani Energy Minister and Energy Consultant,
USA
Let me open my remarks with two interesting tables. First, some 65 %

of global oil reserves are located in the Middle East:
Global Oil Reserves, 1973 – 2000 (bbl)
1973 2000
OECD 68 (10%) 58 (6%)
Middle East 350 (55%) 684 (65%)
Other 217 (35%) 304 (29%)
Total 635 1046
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But the Middle East is a region which produces only about 30 % of

global oil production.
Global Oil Production, 1973-2000 (mb/d)
1973 2000
US/ Canada 13.0 (23%) 10.5 (14.6%)
W. Europe 0.5 (1%) 6.7 (9.2%)
Middle East 23.7 (41%) 23.1 (31%)
Other 20.5 (35%) 31.2 (45.2%)
Total 57.7 74.5
The reason for the disparity between Middle East oil reserves and
production is that most Middle East oil producers belong to OPEC, the
organisation which has played a dominant role in the management of global
oil markets since the mid 1970s. It has left the countries of the Persian Gulf
with some 685 billion barrels of oil (or 90 years’ worth at the current level
of production) compared with only 55 billion barrels (or 10 years at current
rates of production) for the entire OECD region.
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2002 Global Oil Reserves by Size of Reserves (bbl)

Size Reserves R/P Ratio
Global Reserves 1048 40
OECD 55 10
Russia 60 22
China 18 15
Nigeria 24 33
M. East & N. Africa 728 90
Saudi Arabia 262 86
Iraq 112
Iran 89 74
UAE 98
Kuwait 97
Qatar 15 57
Libya 29 59
Caspian region 17
For most of the past thirty years OPEC has contributed to intelligent
management of global oil supplies, helping to maintain sustainable oil
prices. Whenever this proved impossible (in the early 1980s for example),
OPEC in the end adjusted the group’s production and returned to
production volumes leading to sustainable oil prices. Saudi Arabia, and to a
lesser degree Kuwait and the UAE, maintained spare capacity to moderate
oil prices whenever the market called for it (i.e. in case of supply
disruptions). Saudi spare capacity and the country’s willingness to use this
capacity, has been one of two major pillars of global oil supply security for
a quarter of a century. The other pillar is the IEA’s strategic storage of 1.4
billion barrels.
OPEC’s ability to influence global oil prices has been moderated by a
steady increase in non-OPEC oil production. Whenever OPEC (or market
forces) pushed prices too high, non-OPEC E&P activities rose and, with a
lag of a few years, production growth would follow, creating downward
pressures on oil prices. In the past, a low oil price environment created the
opposite effect.
The two pillars of oil supply security, i.e. Saudi Arabia and the IEA’s
strategic stocks, have worked so well that despite wars and tension in the
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Middle East, the last major oil shock causing considerable harm to the
global economy, took place as long ago as 1979/80. There are some signs
of concern, however, about the future of oil supply security. Some of it is
related to technical issues; other to socio-economic and political
developments in the Middle East.
Technical Issues: The Future

Over the next 25 years, the share of oil in OECD and non-OECD
primary energy is not expected to change much but there are some
indications of potential future problems.
x Only IEA member countries maintain significant strategic stocks
(at least 90 days of forward consumption); most others do not. The
share of non-IEA oil consuming countries as a percentage of the
global oil market has risen from 18% to 28% between 1973 and
2002 and is expected to rise further to 39% in 2015 and 43% in
2025. Unless these countries build strategic stocks and co-ordinate
withdrawal policy with the IEA, the IEA’s ability to manage the
global oil market in case of a major supply disruption will be
weakened over time.
x Over the past thirty years since the 1973 oil shock, the share of
Middle East oil as a %age of global oil production has fallen. There
is an emerging consensus that non-OPEC production may peak
early into the next decade and that gradually the share of Middle
East oil production will rise close to 40% by 2025.
x OECD oil import dependence fell sharply between 1973 and 1985.
Dependence on imported oil has steadily risen in the US since 1985
and, with North Sea production flattening out, Europe’s oil import
dependence will rise as well. Japan has done a remarkable job
reducing the share of oil in the energy mix but the country remains
almost 100% dependent on imported oil. By 2025, US and
European dependence on imported oil may reach 70%. Outside the
OECD there is China, a net oil exporter until the mid 1990s which
has turned into the fifth largest oil importer and, oil imports in other
Asian countries are also rising steadily.
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World Oil Production and Oil Imports 1973-1990

(in mb/d)*
1973 1979 1985 1990
World Oil Production 57.7 65.7 57.7 64.9
“Free World” Oil 48.1 51.4 42.6 49.9
Production
of which Middle East 21.1 21.9 10.9 17.2
(37%) (30%) (26%) (34%)
2002 2015 2025

World Oil Production 73.9 103.3 124.5
of which Middle East 20.9 35.0 47.9
(28%) (34%) (38%)
(Source: 1973-2002 date BP. 2015-2025 Forecast: EIA/DOE)
NB Middle East share of “free world” 2002: 33%; 2015: 35%; 2025: 43%
There is no doubt that improved market transparency since the 1970s,

the emergence of futures markets and the development of large strategic
stocks, have improved the ability of industrial countries to cope with oil
supply disruptions. Saudi Arabia has been willing and able to increase oil
production in case of major oil supply disruptions on noticeable occasions:
the Iran-Iraq war, the Gulf war 1991 and during the recent events in 2003
when first a Venezuelan oil stoppage and later the allied invasion of Iraq
caused major supply disruptions). Saudi Arabia’s flexibility in this matter
has in fact been the first line of defence against global oil supply
disruptions since the Iran revolution of 1979.
Current Perceptions of Oil Supply Security

IEA strategic oil supplies and the ability and willingness of Persian
Gulf producers and in particular Saudi Arabia to maintain spare capacity
and use it in case of supply disruptions, has provided adequate global oil
supply security to cope with all but the worst oil supply disruptions.
Cooperation between the IEA Secretariat and Saudi Arabia during the
Venezuelan production stop in early 2003 avoided panic in the market and
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solved global supply problems without the US or the IEA having to resort
to releasing strategic stocks.
Let us look quickly at the IEA and its SPR:
x IEA was established in November 1974 to take effective measures
to meet any oil supply emergency and over the long term to reduce
dependence on oil.
x Participating countries hold oil stocks equivalent to 90 days of net
oil imports of the previous calendar year. Initially rather rigid rules
on use of IEA stocks – over time adjusted to become more flexible.
x Size of emergency stocks: 1.3 billion barrels (out of a total of 4
billion public and private stocks)
x Drawdown rates: maximum 12.9 mb/d for one month – 8 mb/d for
three months – 3 mb/d for five months.
x Largest historical supply disruptions: 1978/79 – 5.6 mb/d for 6
months; 1973/74 – 4.2 mb/d for 5 months; 1990/91 Gulf war – 4.2
mb/d for 6 months.
x IEA stockdraw system adequate to cope with largest historical
supply disruption.
x Jan. 1991 activated IEA Contingency Plan – 2.5 mb/d made
available.
The devastating impact of the two oil shocks of the 1970s have largely
been forgotten and recent supply disruptions caused by the Gulf War, for
example, proved to be manageable and caused no serious damage to the
global economy.
Let us look for a moment at some differences between the Oil shocks of
the 1970s and the current climate concerning oil supply security:
In the 1970s:
x There was no experience with supply disruptions
x Limited market transparency – scramble for oil
x No futures market
x No SPR
x No IEA in 1973
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x Two massive oil shocks in same decade, increasing oil prices from
about $ 2.50 to $ 35 per barrel
x Global economy already overheated; oil large part of GDP
x Oil dominant fuel in most sectors of the energy economy in most
OECD economies
x Tight oil market; no spare capacity
x Excellent US-Saudi relations
Currently:
x There is considerable experience with management of oil crises
x Excellent market transparency
x Futures market to lay off risks
x Large US SPR of 640 million barrels
x Total IEA strategic stocks of 1.4 billion barrels – tested IEA
response mechanism
x Better relations between IEA and key OPEC players
x Middle East market share lower than in 1970s
x Oil’s market share (% of TPE) much lower than in 1970s
x Oil’s share of GDP much lower – low inflation environment
On the negative side:

x IEA’s market share declining
x Deteriorating US-Saudi relations and deteriorating geopolitical
situation in much of the Middle East
x Commercial stocks low by historical comparison
Despite these negative points, most policy-makers and energy experts

assume that both pillars of oil supply security, i.e. Saudi Arabia’s spare
capacity and IEA strategic stocks will always be there to solve oil supply
disruptions and prevent oil prices from rising to a level where they could
cause damage to the global economy. Industrial oil users feel confident to
such a degree that they have allowed commercial stocks to be drawn down
close to minimum operating levels. Similarly, governments and the private
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sector appear to have complete confidence in the two pillars of oil supply
security.
Wasting Time Worrying?

The combination of a total supply disruption from Iraq in April of 2003
on top of a supply disruption from Venezuela a few months earlier, caused
oil prices to rise but throughout the period of oil supply disruptions there
was no sign of buyer panic or a scramble for oil. Saudi Arabia with some
support from other OPEC members with excess capacity soon came to the
rescue of a tight oil market and supply problems were solved without the
release of SPR oil or other IEA emergency stocks. Oil prices remained high
throughout the year but no apparent damage was done to the global
economy from the oil supply disruptions of 2003. Once again, the use of
one of the two pillars of oil supply security (Saudi Arabia) came to the
rescue while the other pillar (IEA emergency stocks) was ready to be used,
if necessary.
However, the fact that once again in 2003, significant oil supply
disruptions did not result in an oil price explosion does not mean that we
can rest assured that no matter what happens, we will be spared the
economic consequences of a major oil supply disruption. Events in 2003
showed that the global oil supply system is quite resilient but, it is not
immune to future disruptions. In the short term, acts of sabotage and
political developments in the Middle East could result in a major oil supply
disruption with a potentially major adverse impact on the world economy.
In the longer term, rising dependence of industrial and industrialising
countries on imported oil and natural gas from less politically-secure areas
in the world will leave them vulnerable to oil and natural gas supply
disruptions either resulting from acts of sabotage or major political
developments in the Middle East and, to a lesser extent, the FSU.
To break it down:
x We can expect political and regional geopolitical developments
leading to supply disruptions like we witnessed in 2003.
x Saudi Arabia with some support from other OPEC producers with
excess capacity came to the rescue and neither SPR or the IEA
emergency supply system were used.
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x In the medium term there are numerous potential internal and

external disturbances in the Middle East, parts of Africa and South
America as well as in the FSU which could result in supply
disruptions. The IEA can cope with disruptions of the size and
duration of past disruptions.
x The nature, size, timing and response by the Saudis, the US SPR
and the IEA, will determine the impact on prices.
x Unless Asian countries build sizeable strategic stocks, the impact of
future IEA intervention could be seriously weakened.
x There is no substitute for Saudi Arabia; a total halt of Saudi exports
for a period of several months would spell disaster.
The Non-OPEC Outlook

The steady growth in non-OPEC incremental production since the
supply disruptions of the 1970s has come largely from secure sources of
supply such as Alaska, Canada, Mexico, the North Sea, and more recently
offshore East Africa and the US Gulf of Mexico. While production in some
of these areas is still expanding others have peaked and some are declining.
A careful look at projected incremental non-OPEC production over the next
five years suggests that almost two thirds of supply is projected to come
from Russia and the Caucasus. Export routes of Caspian oil are far from
secure and medium to long term internal political and geopolitical
developments in the region are at best uncertain. While some political
leaders in the West believe that the Russian Federation is moving towards
Western-style democracy with free markets for oil and gas, recent events in
Russia suggest that Russian oil and gas supplies cannot be taken for
granted. The imprisonment of Yukos’ CEO Khordokoski, back taxes on
Yukos, apparent central government pressure to undo the Yukos-Sibneft
merger, reluctance to allow any infringement of the Transneft pipeline
monopoly and talk about new oil taxes, suggest the Central authorities are
showing renewed interest in wresting control over oil and gas resources
from the oligarchs. It is still possible, even probable, that Russian oil
production and exports will rise in the years ahead but the recent
interventions have raised some doubts about possible Russian government
intervention with oil and gas production and exports.
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x Until the autumn of 2003 it appeared that Russian oligarchs were in

full control of the Russian oil industry. Their aim: maximize
production and seek foreign partners. Russian production forecasts
very bullish (FSU share of incremental non-OPEC production of
next 5 years estimated at about 70%)
x Imprisonment of CEO Yukos; back taxes; new oil taxes; undoing
of Yukos-Sibneft merger signs of Russian intervention from the
top. Will the Kremlin take control?
x Is it in Putin’s interest to control oil and gas industry and let OPEC
keep prices high? Russia will follow Russian interest.
x Iraq: Serious problems getting Iraqi oil exports up to pre-war level
mainly due to lack of security. Problems are expected to continue
for a long time; Iraq unlikely to get anywhere near its production
potential in this decade.
x Reliance on the sole Saudi pillar will continue.
The Middle East: An Overview

Middle East oil represents about one third of global production and its
share of the global market is likely to grow in the next decade, in particular
if non-OPEC production were to peak. The IEA projects demand for
Middle East oil to rise from 26 mb/d in 2003 to 35 mb/d in 2015 and 48
mb/d in 2025. It is not clear if the higher number is technically possible
but, even if it were, the production plateau may be too short for it to make
economic and political sense for countries as dependent on oil income as
the producers of the Middle East since diversification of their economies
away from oil and gas has not progressed much in the past 25 years. Over
the same period, the EIA projects OECD oil import dependence to increase
to about 70% for the US and the EU, to remain at 100% for Japan and to
grow to 80% for Asia as a whole.
Global dependence on the Middle East will rise (source of 65% of
global oil reserves), in particular when non-OPEC incremental oil
production begins to slow and plateau, perhaps as early as the first half of
the next decade. It does not really matter how much of the OECD’s
imported oil will come from the Middle East because oil is fungible, i.e.
market forces will move oil to those willing to pay for the oil.
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Immediate Concerns
Of most immediate concern is restoring security in Iraq to allow the
country to return to its pre-war production capacity of some 3 mb/d and
export capacity of 2.5 mb/d. Production capacity has surpassed 2 mb/d but
exports have remained below 1.8 mb/d largely because the Kirkuk-Ceyhan
pipeline is blown up continuously. It has a production capacity of 1 mb/d.
Instead, all oil is exported from Mina al-Bakr in the South. Additional
export capacity is being developed at Khor al-Amaya which had been
destroyed during the Gulf war. Various reports have indicated that oil
production in 2004 is unlikely to surpass an average of 2.5 mb/d.
Unfortunately, there is little coordination between oil market analysts
who are calculating future Middle East production prospects and regional
specialists who are concerned with long-term political trends in the region.
Most long-term oil market analysts project oil demand out into the future
(10, 15, 25 years) then deduct what they expect non-OPEC production will
be in each year. The residual number is usually listed as ‘call on OPEC’.
They then maximize what they perceive as the possible production plateaux
in OPEC countries outside of the Middle East. Finally, the residual factor is
listed as ‘call on Middle East OPEC’. Little is known about actual reserves
and the resource base of Middle East oil producing countries and even less
about production capability of major oilfields. Since the Middle East oil
production number is a residual factor, few oil analysts consider the
technical, economic and political constraints on increasing production to
the level deemed necessary to meet perceived global demand for oil at
fairly stable or slightly rising real oil prices.
So, will the Middle East be able to meet the long-term global demand
for oil?
x Technically there is no problem for Middle East producers to meet
projected demand for Middle East oil this decade and well into the
next decade.
x Non-OPEC production may peak sometime in the next decade
(estimates differ), leaving it up to Middle East producers to meet
rising demand. EIA ‘call on Middle East OPEC’ rising from about
26 mb/d in 2003 to 35 mb/d in 2015 and 48 mb/d in 2025. May not
be physically possible and may not make economic and political
sense.
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x EIA projects US import dependence to rise gradually to 70% by

2025 (EU 66% and Japan 100%). It does not matter where oil
comes from – oil is fungiable – supply disruption price impact is
global.
x Making long-term supply analyses, policy-makers should consider
the possible political make-up of the Middle East in 2025.
x Short and medium term: there will be internal political and regional
geopolitical problems
Iran: Reforms or Revolt?

Country and regional specialists examine underlying economic and
political trends in the region and individual countries and assess the
potential for change, including the risk of violent change. In the past major
regime changes have frequently not been detected until the changes had
actually occurred. President Jimmy Carter met with the Shah of Iran on 31
December 1977 (less than a year before serious internal trouble engulfed
Iran) and called Iran an island of stability in an ocean of turmoil. Until a
few weeks prior to the 1979 Iran revolution the US embassy in Tehran still
reported that the Shah was in full control of his country.
Serious problems in Iran began when the economy showed signs of
serious overheating in 1976-77, causing labour unrest. The Shah was
actively pursuing reforms (and in fact wrote to King Faisal that Saudi
should do like Iran and bring reforms to their country). Reforms backfired,
student protests grew louder and the powerful bazaar merchants turned
increasingly against the Shah while Shia clerics strongly opposed his
efforts to westernize Iran and allow the introduction of western morals.
Throughout 1978 opposition to the Shah’s policies grew. There were more
strikes and riots and both the Shah and his main ally, the US, wavered in
their reactions to the turmoil and by 1979 the Shah’s government fell and
Khomeini took over.
The impact of the Iran revolution on global oil markets was profound.
The global economy had only just recovered from the 1974/75 oil shock,
which tripled oil prices when the second oil shock occurred. Occasional
strikes in the oil sector had reduced Iran’s production from 5.7 mb/d in
1977 to an average of 5.3 mb/d but, following the revolution production
averaged 3.2 mb/d in 1979 and 1.5 mb/d in 1980. By 1989, ten years after
the revolution, Iran’s production had risen to only 50 % of pre-war
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production. Throughout the 1990s, Iran’s oil production averaged only 3.5
mb/d, a level considerably below the pre-revolution production of
approximately 6 mb/d. Loss of experienced petroleum executives, political
interference and ejecting foreign companies all contributed to Iran’s
collapse in oil production.
In the 1990s Iran selectively re-opened the petroleum sector again to
foreign investors under the so called buyback schemes. By this, Iran
initially guaranteed foreign investors a certain return on their investments.
In recent years, however, contracts offered to foreign companies under the
buyback system have been far less attractive to foreign companies.
In the political arena, efforts by reformers, including President
Khatami, have continued to meet resistance from the conservative clergy.
The government is faced with a poorly-performing economy, rising
unemployment and little progress in the area of socio-economic and
political reforms. Recent action by the appointed conservative Council of
Guardians, disqualifying some 3000 people from running for seats in the
Parliament (including many actual parliamentarians) has created a chaotic
situation in Iran just months prior to the parliamentary elections. More than
100 reformist parliamentarians including the brother of President Khatami
have resigned their seats in parliament, creating near chaos in the country.
What will happen in the future? Will people vote in controlled elections or
will those supporting reformers abstain and no longer attempt to reform the
country from inside? One thing is for certain, intensification of
confrontation between the reformers and the conservatives is unlikely to
have a positive impact on the investment climate in the petroleum sector.
x Impact of Iran Revolution on Oil markets: oil prices tripled
between 1979 and 1980 – serious OECD recession.
x Iran production prior to revolution was 6 mb/d – first decade after
the revolution: 2.5 mb/d average – second decade after the
revolution: 3.5 mb/d
x Internal struggle about the role of foreign oil companies – upstream
terms generally considered poor by oil industry
x A need to change terms to attract foreign investors – ageing
oilfields
x A great need for technical and financial help in the form of foreign
investors – investments also hurt by US sanctions
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x Political future uncertain. Regime has not been able to deliver on

reform program – economy in poor shape – rising unemployment
x Will reformers be allowed to stand for Majlis elections? Will
people vote to keep Khatami as president? Real power continues to
be held in the hands of unelected officials
x A very uncertain future – will the future bring reforms or revolt?
Iraq: Great Potential

Iraq undoubtedly has the second largest oil reserves in the world after
Saudi Arabia. It has the added advantage that most of its discovered
oilfields have never produced oil and hence will not suffer from the
problems facing older fields in the Middle East. Iraq never produced more
than 3.5 mb/d due to wars, revolutions and sanctions but has the potential
to more than double the pre-war production level under the right
conditions.
For the moment, however, the Iraqi National Oil Company (INOC) is
preoccupied with providing security to refineries, pipelines and crews
working in the oilfields. Oil-rich Iraq is still importing petroleum products
half a year after the end of the war and exports are still limited to about 1.7
to 1.8 mb/d due to pipeline constraints (Kirkuk-Ceyhan pipeline with 1
mb/d capacity being blown up time and again). There are still problems
related to water-injection in southern Iraqi oilfields. Due to pipeline
constraints and some downhole problems, average Iraq oil production may
not surpass 2.5 mb/d this year.
There are no technical reasons why Iraqi production capacity cannot
increase to 3.5 mb/d or more over the next few years but terrorism and
political instability may make this target difficult to achieve. Future Iraqi
oil production will very much depend on political developments in the
country.
What kind of Iraq will emerge after power is transferred to Iraqis on
June 30? The current situation is very tense. The Shia majority wants
democratic elections soon to guarantee the full impact of their population
size; the Kurds want autonomy; and the people in the Sunni Triangle feel
that they have little to gain from a democratic Iraq in which they are going
to be a minority.
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We can only guess what the structure of Iraq will look like in the
future. Suffice to say that there are a number of plausible options, i.e.:
1. A unitary state, developing into a workable democracy;
2. A workable Federation, providing for partial regional autonomy but,
with defence, foreign policy and the oil sector controlled from the
Centre;
3. Chaos, perhaps even civil war, leading to a new strongman;
4. Break-up of Iraq into three different states, in the process creating new
internal and regional tensions and grave instability impacting on oil
supply security.
The Neocon blueprint for building a new Jeffersonian democracy
between the Tigris and the Euphrates, with free markets and a break-up of
INOC into private oil companies and Iraq leaving OPEC, appears to be an
idea dead on arrival.
x Iraq has the second largest oil reserves in the world and has the
potential to rival Saudi oil production capacity. One of the oldest
Middle East oil producers – has never produced more than 3.5
mb/d (wars, revolutions, sanctions)
x Prior to 2003 war produced 2.8 mb/d. Saddam regime planned to
invite International oil companies and bring production up to 5-6
mb/d by 2010
x Post-war: current exports 1.7 mb/d (still down from 2..2 in 2002) –
industry plagued by security problems (blowing up pipelines) and
infrastructure and down-hole repairs. Sustained production in 2004
may not surpass 2.5 mb/d
x Technically, production capacity can rise to 3.5 mb/d or more in
five years but, terrorism and political instability may fail to even
reach this production level. Future oil production will largely
depend on future political developments in the country
Saudi Arabia: The Lynchpin

Saudi Arabia, with 25% of global oil reserves, 11% of world oil
production and two thirds of global spare capacity, has been and still is the
linchpin of global oil supply security. If all Saudi oil production collapsed
(like Iran’s did in 1979) even the IEA strategic stocks could not help the
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market overcome the psychological impact of an 11% cut in global

production and unless Saudi production could come back on line within a
few months, the world would suffer from a prolonged major oil supply
crisis: a major blow to the global economy.
In the past 60 years there has been a special relationship between the
US and Saudi governments. Saudi Arabia maintained a steady supply of oil
to the global market at reasonable prices and the US, in turn, protected
Saudi national security.
Circumstances have changed both inside the Kingdom and in its
relationship with its principle Western ally. Saudi internal problems are
related to demographics, socio-economic and cultural issues which are
increasingly plaguing Saudi society. Some 50% of the population is under
fifteen years of age. This youthful society poses a growing difficulty
providing the growing population with healthcare and education. The
educational system, in turn, has failed to meet private sector job
requirements. Dr. Joseph Kechichian recently wrote that the fact that
perhaps only two percent of Saudi university graduates are fully qualified
to assume demanding private sector posts and an estimated 50% drop out
of primary school severely limits the available labour core for business.
x Internal Saudi problems (UNDP 2002 report)
x Demography: 50% of population under 15 years of age
x Health and education infrastructure cannot keep pace
x Failure to diversify economy away from oil and gas sector
x Mounting unemployment despite the fact that 5 million out of 22
million people living in Saudi Arabia are expats, who occupy
perhaps as much as 90% of the private sector jobs.
x Educational system has failed to meet private sector requirements J.
Kechichian writes that perhaps only 2% of Saudi university
graduates are fully qualified to assume demanding private sector
posts and an estimated 50% drop out of primary school, severely
limiting the available recruitment pool for business (Gulf News
8/01/2004).
Poor quality of education and the availability of a vast source of cheap

and in part well-educated South and East Asian labour force, has left the
country with mounting unemployment and underemployment. It is not a
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healthy situation for any country that some thirty years after the huge oil
income flow began some five million expatriates (out of a population of 22
million and potential local workforce of perhaps 6 million) occupy perhaps
as much as ninety percent of the private sector jobs. Job creation has also
proven difficult because the Saudi economy failed adequately to divert
away from the capital-intensive petroleum sector, which does not create
many jobs. Perhaps the fact that there are no GCC regional rules and
regulations for hiring conditions of expatriate labour has added to the
problem. Locals cannot work under the working conditions and salaries of
Asian expatriate labor but unless there are GCC rules, the relative
competitive position of local industries can be seriously impaired if actions
are taken only at the local level.
Aside from the demographic, employment and educational issues, the
Kingdom suffers from very poor income distribution (made worse by virtue
of the tax regime: there is no income tax) and considerable waste of public
resources. Finally, the struggle between reformers and the conservative
clergy and their followers on many social issues is becoming more intense.
Since Saudi Arabia has the least-developed system of political
participation in the GCC, there is limited room to express grievances other
than perhaps in the mosque and blame the outsider for most social and
regional wrongs.
The future of Saudi society is highly uncertain. It is clear that the
country simply does not have the economic resources to support a rapidly
growing population without a freer and more diversified economy and an
educational system preparing young people for meaningful jobs in the
private sector. Saudi Arabia has suffered from violent unrest against the
ruling elite in the past (1979 attack by Islamists on the Grand Mosque and
the 1995 terrorist attacks) but not on the scale of recent months.
x Attitudes towards work and productivity of locals versus expats –
no GCC rules on conditions for hiring expats.
x Past huge waste of public funds (defence and land deals)
x Major income gap between rich and poor (no income tax)
x Struggle between traditional conservative Wahabi clergy and
followers and reformers
x Almost no political participation (compare other GCC)
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x Prospects of reformers versus traditionalists

x Saudi Arabia has known violent unrest before (1979 attack by
Islamists on Grand Mosque; 1995 terrorist attack) but not on the
current scale and in the current internal and external environment
(media impact).
Changing Attitudes
There is no doubt that the media have had a major impact on the call
for change in recent years. Until the mid-1980s, news was broadcast
through government-controlled papers, radio and TV stations. Gradually,
satellite dishes were introduced and by the mid 1990s much of the
population of Saudi Arabia and other GCC countries had access to 24-hour
television news from Arab TV stations such as Al Jazeera and later Al
Arabia. These stations are free to criticise the outside world (and behave
pretty much like the Fox channel in the US) but are not allowed to take on
local governments directly.
There is no doubt that reforms are being pursued all over the Gulf,
including in Saudi Arabia. Many Western observers return from the
Kingdom praising the reforms which are slowly but steadily being
implemented. Others believe that reforms are coming too little too late and
that there are forces at work which in time could create serious trouble for
the ruling elite.
A well-known moderate Middle East journalist recently said: “Many
have predicted time and again the demise of the monarchy and the
crumbling of the country, but never has the Kingdom been at a cross roads,
certainly not on the shaky grounds as it is today…I think what we are
seeing today are visible cracks and those in opposition to the monarchy – to
a large extent the Islamist Saudis living in exile in London, the followers of
Bin Laden and those who call themselves jihadis – want to capitalise on
differences in the leadership”.
Add to these difficult domestic problems a sequence of external
problems facing Saudi society such as the realisation (by no means by all)
that the misdeeds of 9/11 were perpetrated largely by Saudi citizens led by
a Saudi (of Yemeni background) and financed largely with Saudi money.
The 9/11 attacks were directed as much against the Saudi royal family as
they were against the US
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Finally, the relationship with the US has taken a major turn for the
worse. According to a recent Pew Foundation poll, more than 95% of
Saudis hate the American government for reasons related to the US
position on Palestine and the invasions of Afghanistan and more recently
the Iraq war.
While the US looks at these wars as ways to rid the world of terrorists,
most Saudis blame the US for following a biased policy in Palestine and
many see the wars in Afghanistan and Iraq as attacks on Islam.
These perceptions of the US were strengthened by the less-than-
flattering description of the Prophet Mohammed by well-known evangelic
preachers in the US on television and by the well- documented writings of
the Neo-Conservatives. It is no secret to the Saudis that well-known Neo-
Conservatives have publicly spoken about the need for ‘regime change’ in
many countries in the Middle East, including Saudi Arabia. Saudi Arabia, a
close ally traditionally of the US was described as the ‘kernel of all evil’ in
a presentation before the Defence Planning Board and since 9/11, Neo-
Conservative circles have let no opportunity pass to blame the Saudi
government for promoting the radicalism that led to 9/11.
x Most Western observers still believe that reforms will be
implemented steadily but carefully, leaving the current regime in
place indefinitely.
x Growing school of observers disagree. Represented in a quote from
the well-known journalist Massoud Derhally
x External problems: Impact of US invasion of Afghanistan and Iraq;
strained US-Saudi relations – Palestine – Impact of Neocons – US
perceived to be against Islam
While the war against Saddam Hussein was justified on the basis of the
assumed presence of WMD creating an immediate danger to US national
security and the perceived existence of close ties between Saddam’s regime
and Al-Qa’ida, the oil issue was occasionally mentioned. Neo-Conservative
writings expressed a need to reduce the oil power of the Kingdom (and thus
the revenue flow which helps finance terrorism abroad) by replacing Saudi
Arabia as the only major oil power with Russia and Iraq.
The perception was to promote major development of the Russian oil
and gas sector and the rapid build-up Iraq’s oil production capacity with
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weakening oil prices and reducing Saudi oil power a central aim. President
Putin’s recent action against some of the Russian oligarchs has raised
questions about future Russian oil policy and failure to secure the Iraqi oil
infrastructure has severely curtailed the ability of the Iraqi National Oil
Company to export oil. The outcome of the post-June 30th transfer of power
in Iraq is so uncertain that even the greatest optimist no longer believes that
Iraq will be able to build its oil sector to challenge Saudi dominance over
the oil market.
Saudi Arabia has already done a great deal to curb financial flows to
known terrorist organisations and to the greatest extent possible is taking
action on a large scale against the clergy who are preaching violence. The
ruling family is squeezed between the demands of an impatient and vocal
US and its own conservative population which is at odds with some of the
foreign demands imposed on them. The net result has been growing anti-
Americanism in Saudi Arabia. The Saudi ruling elite does not comprehend
the actions undertaken against its citizens, maintaining that they are as
much the target of Al-Qa’ida as the US.
Confronted by strong internal anti-Americanism and by US actions,
Saudi society is turning away from the US. Bilateral trade is down and visa
applications are less than 20% of what they used to be prior to 9/11.
Former US ambassador Chas Freeman recently said that Aramco is
now sending almost all its trainees to countries other than the US and Saudi
business is turning away from the US towards European and Japanese
business. Referring to the declining presence of the US in Saudi Arabia,
Ambassador Freeman said, “…we Americans are finding ourselves
increasingly displaced, in both the cultural and commercial realms, by our
competitors, and the American community in Saudi Arabia has shrunk to a
mere fraction of what it was before”. One of the major tests of what is left
of the relationship will become apparent when Saudi Arabia issues the next
major tender for military purchases. If the Saudis turn to European, Russian
or Chinese defence contractors one of the most lucrative defence equipment
markets could be closed to the US. The days are gone when a mere
telephone call by President Clinton guaranteed that Saudi Airlines would
opt for Boeing aircraft exclusively.
If Bin Laden’s purpose was to remove the US from Saudi Arabia,
weaken the ruling family and the relations between the US and Saudi
Arabia, he appears to have met with some considerable success. The
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mutual trust which existed between the US and Saudi Arabia for some 60
years, has been irreparably damaged.
Impact on Oil Markets

As for oil policy, the Saudi government is unlikely to be as
accommodating to the US as before on oil pricing. In need of foreign
exchange, the Saudi government is likely to defend the current high oil
prices as long as they believe the market can bear these prices. In the past
complains by senior US officials that high prices would damage the global
economy, were taken into consideration. Today, the Saudis are more likely
to follow their own enlightened self interest.
Saudi Aramco has announced future spending on exploration and
development to keep current oil production capacity of some 10 mb/d. It is
not clear if Saudi Arabia will add spare capacity once demand for its oil
reached current capacity early in the next decade. If it does not, the Saudi
pillar of global oil supply security will have been weakened and it is
unlikely that any other country will or can duplicate past and current Saudi
policy on spare capacity.
Acts of terrorism have so far been largely against soft targets in Saudi
Arabia. One can no longer take for granted that oil infrastructure will not
become targets in the future. At times when oil markets are tight, a Saudi
partial supply disruption could have a damaging impact on the global
economy (some of the equipment is custom-made for Saudi Aramco and
can take months to replace).
The nightmare scenario, seldom discussed openly in oil policy circles,
would be the implosion of the Saudi regime. In the short term there is no
substitute for the House of Saud and most likely chaos would reign for
some time. If it ever were to happen, it is not clear at all which groups
would resume power and what impact this would have on Saudi society
nor, ultimately, the oil sector.
x Breakdown of mutual trust between old allies US and Saudi
x Saudi oil policy to reflect Saudi perceived national interests
(income maximisation versus market share) – reduced concern
about US desire to keep oil prices low
x Doubts about Saudi willingness to keep spare capacity once
demand for Saudi oil reaches current capacity
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x Potential supply disruptions if terrorists turn against sensitive oil

and natural gas infrastructure.
x Nightmare scenario: Saudi regime implodes – chaos reigns. Under
this scenario, oil production could fall sharply or cease all together.
x Succession: A reformist moderate government could be counted on
to follow a responsible oil policy but, what would happen if
Islamists were to take control?
x Some Neocons are playing with a scenario of occupying the
Eastern provinces (in case of serious oil supply disruption in Saudi)
where all Saudis oil is located and appointing a Shia Amir under
US protection.
Conclusion
The United States emerged from the Second World War as the
dominant global power. The US economy accounted for more than 50% of
global GDP fueled exclusively by domestic coal, oil and natural gas. In the
Middle East the US had developed strong alliances with Iraq, Iran and
Saudi Arabia, three countries with huge oil reserves. Today, the US is again
the only military superpower and its economy is still about 25% of global
GDP but far more dependent on foreign trade to maintain its global
economic position. Oil imports are 60% of consumption (and rising) and
natural gas imports are still a modest 5% but rising steadily.
There is little concern in the West about the growing dependence on oil
and natural gas imports in part because the memory of the disastrous
impact of the oil shocks of the 1970s on the global economy has largely
been erased. Moreover, the twin pillars of oil supply security of the past
three decades, the IEA and Saudi Arabia, have performed well in case of
crises (2003 is a good example) and have proven to be able to deal with any
crisis of the magnitude and duration of past oil shocks.
However, rising OECD oil (and natural gas) import dependence,
coupled with the rising oil import share of non-IEA oil consuming
countries may weaken the ability of the IEA in the future to intervene
effectively in case of a major supply disruption.
Non-OPEC oil production may peak sometime after 2010 leading to
rising dependence on OPEC and in particular on the oil producers of the
Middle East. It is not clear what the Middle East will look like politically in
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the future and hence policies towards oil production and pricing are not
predictable.
What is clear is that the region is perhaps undergoing the biggest
change since the dissolution of the Ottoman Empire after the First World
War. The ruling elites are confronted with the highest population growth in
the world, among the lowest economic growth, major socio-economic
problems, internal and external political friction and, in some countries
confrontation between reformers and their opponents. It is impossible to
predict the outcome of the internal struggles in each country, gradual
reforms or revolutionary change. It is almost certain that in the process
Middle East oil supplies will be disrupted but the timing, nature, location
and magnitude is unpredictable.
Small supply disruptions of limited duration can be solved with the
proven mechanisms of the IEA and (at least for the time being) Saudi spare
capacity. The other extreme, a major and lasting supply disruption in Saudi
Arabia raises the spectre of the devastating impact of the supply disruptions
of the 1970s.
To reduce the impact, IEA members ought to increase emergency
stocks along with their rising oil imports and urge developing countries to
build similar emergency stocks and manage those stocks in close
cooperation with the IEA. The US, which has done much less then Europe
or Japan to improve transportation fuel use efficiencies, ought to pursue
fuel savings strategies. Development of either gasoline or perhaps diesel
hybrid SUVs and RVs might be a move in the right direction instead of
focusing primarily on long term solutions such as hydrogen-fueled
vehicles.
3 IRAQ: A JAPANESE PERSPECTIVE
Ambassador Kunio Katakura

Professor and Former Japanese Ambassador to the UAE, Iraq and Egypt
I would like to give a Japanese view of developments in Iraq. At the

time of the first Gulf Crisis, Japan, which depended on the Gulf oil
producers for 90% of its imported oil, became a target of international
criticism as a free-rider in oil security. It was taken for granted that Japan at
that stage with its post-war constitutional restraint and deep-rooted
peacenik sentiment could not send its defence forces overseas. Instead it
made its financial contributions to removing Saddam from Kuwait in
stages. These contributions amounted to some $18 billion. The
international media coined a sarcastic nickname for Japan – calling her an
‘ATM’ with which to sneer at her non-committal ‘chequebook diplomacy’.
Despite not becoming embroiled militarily with the US/UK coalition,
Japan suffered alongside the UK, US and other Western countries by
having hundreds of nationals taken hostage by Saddam’s regime. The
kidnappings were in retaliation for our punctual and uncompromising
commitment to join in imposing economic and military sanctions on Iraq
after its invasion and annexation of Kuwait.
That was then. Let us compare notes with what is happening now.
Under pressure from the US administration, as well as guarding against the
trauma of playing the role of thankless ATM for a second time, the
Japanese Government responded with decisiveness to the US call for men
on the ground. There is no denying that there was, in Japan too, deep
controversy over the legitimacy (both legal and constitutional) of using
force against Iraq which was already being subjected to UN and IAEA
inspections. I think that this decision to send troops from the outset was
prompted by those Japanese Government leaders who were obsessed with
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the need for much closer US-Japan cooperation now in order to bolster
confidence later when Japan will face a more immediate threat from her
neighbour, North Korea.
According to a Tokyo spokesman, Japanese units at the moment are to
be despatched to the southern part of Iraq not to fight but to assist in post-
war rehabilitation and reconstruction and to work specifically for
improving standards in both water supplies and in hospital wards. No
matter their non-combatant role – it is all too clear that they are viewed by
the Iraqi people as a part of the foreign occupation authorities and as a
result are targeted by local resistance groups or terrorists. After all, since
the US and her allies launched military operations without any clear-cut
blueprints regarding a post-war, post-Saddam regime, we are looking at the
mosaic of Iraq’s fragile ethnic and religious factions shattering…with
disastrous consequences.
Forgetting the controversy at home surrounding our involvement in the
coalition in Iraq for a moment, we Japanese are now closely following
developments in Iraq while wondering with concern how soon it will be
before the ‘sovereignty’ of Iraq will be transferred from the CPA to the
Iraqi people. We ask ourselves at the same time - “How soon will Japan’s
defence forces be wearing blue berets under a new UN-led command?”
SECTION VI
REGIONAL CHALLENGES - NORTH AFRICA
1 LIBYA
Oliver Miles
Chairman MEC International and Former Ambassador to Libya, UK
I'm going to use the time available to talk about Libya. Libya is in the
news, and although it is not in the top range as an oil and gas producer, it is
a substantial player. Moreover the present developments are not important
for Libya alone but, not for the first time, may turn out to be significant
more widely as well.
WMD
The announcement just before Christmas that Libya was giving up its
weapons of mass destruction took everybody by surprise. I suspect that the
actual timing of Qadhafi's announcement on the afternoon of 19 December
2003 took even the British and American governments by surprise.
Certainly, Tony Blair's announcement shows signs of hasty drafting — for
example, he forgot to mention biological weapons, although both Qadhafi
and Bush make it clear that they are part of the deal.
However, the surprise was in a sense only tactical, and the Libyan
decision fits into a pattern of steps towards normalisation which began
probably in the mid-1990s, so nearly ten years ago. I won't say much about
Libyan weapons of mass destruction, because neither I nor I suspect anyone
else except the UN, British and American inspectors who have visited
Libyan sites during these last weeks and months knows much about them. I
will merely comment that Qadhafi, Bush and Blair have a shared interest in
representing this as a development of the first importance. It's not perhaps
surprising that comments from Mohammed el-Baradei have not suggested
that the weapons programme was quite so substantial. Any way, it's good
news.
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Normalisation: Any Progress?

What is fascinating, and what the international media have largely
missed, is the changes in Libya which preceded and accompanied it.
The normalisation process first showed itself in Libya’s relations with
the outside world, and the first step was in the mid-1990s, when Libya
ceased to harbour or support extremist groups. Libya patched up its
differences with Britain, in particular abandoning support for the IRA and
coming to terms over the murder of Woman Police Constable Fletcher. The
first steps towards a Lockerbie settlement led to the reopening of
diplomatic relations with Britain. Interestingly, Qadhafi had tried for some
years to convince the British and US governments that an acceptable
compromise would be handing over the Lockerbie suspects to be tried in a
Scottish court sitting in the Netherlands. London rejected this outlandish
idea, until eventually it was brought round, mainly by persuasion from
Nelson Mandela and Prince Bandar of Saudi Arabia. Normalisation was
enshrined in the Anglo-Libyan joint statement on the opening of diplomatic
relations in 1999: “…putting aside the negatives of the past [the UK and
Libya] look forward to the development of a full range of contacts and
cooperation between the two countries, and their authorities and peoples.”
Trade including trade in oil had never ceased, but trade relations were
given a boost, and contacts did in fact develop and become more normal.
Since the announcement on WMD, Jack Straw has given Libya fulsome
praise, going so far as to use the word "statesmanlike" of Qadhafi.
The normalisation process was not confined to relations with Britain. A
settlement was also reached with France, although it turned out to be
problematic. Most important of all, the negotiations with Britain and the
USA led in 2003 to a settlement of demands made on Libya through the
Security Council concerning Lockerbie. Libya agreed to pay compensation
on an unprecedented scale, larger by a factor of more than 50 than, for
example, the settlement which had been reached with the French over a
similar airliner disaster.
This led to the lifting of UN sanctions, and a return of more or less
normal dealings between Libya and the rest of the world. The European
Parliament, for example, has adopted a resolution inviting the European
Commission to initiate cooperation programmes with Libya and to
welcome Libya in the Barcelona Process, a framework between Europe and
North African countries along the Mediterranean coast that aims to address
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terrorism, organised crime and illegal immigration. Prodi has invited

Qadhafi to establish better relations with the EU. Italy is particularly
concerned at the flow of refugees from North Africa which Libya does not
have the technical capability to stem. A security cooperation accord
between Italy and Libya was signed in July which paves the way for joint
naval patrols in the southern Mediterranean. Italy has even suggested some
relaxation of the European ban on arms sales to Libya. Libya continues to
trade and deal with countries such as Russia, Ukraine, Canada, Brazil, and
notably with China and India.
Relations with the Region

Qadhafi’s relations with the Arab League, however, remain in
permanent crisis; currently there are tiffs with Egypt and Morocco. Libya
has ‘frozen’ its dealings with the League because of disagreements
primarily about Israel, though there are also practical difficulties such as
embarrassingly large population movements. In recent years Qadhafi has
tried to re-orient Libyan foreign policy away from the Arab world towards
Africa.
This month, in a new development, meetings are reported to have taken
place between Israelis and Libyans, one between Qadhafi's son Saif al-
Islam and a member of the Knesset from the secularist Shinui party, the
other between an Israeli foreign ministry official and an unidentified
Libyan. Qadhafi himself speaking to the General People's Committee for
Justice and Security on 4 January said that Libyan Jews whose property
had been confiscated at the time of the revolution should be compensated.
The Libyan regime is secular in nature and has clashed with Islamic
fundamentalists. Qadhafi himself has been murderously attacked by Al-
Qa’ida, and issued a warrant through Interpol for the arrest of Bin Laden
two years before the Americans. Qadhafi's reaction to 9/11 was as positive
as could be asked for, and led to a series of meetings between Libya, the
UK and US at which intelligence on Islamic extremism was exchanged.
Perhaps surprisingly Libya was omitted from President George W Bush’s
‘Axis of Evil’ speech. I will come back to the key issue of relations with
the US in a moment.
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Inside Libya: Changes and Challenges

I'm not going to take up very much time here with an analysis of
internal developments in Libya. But I would just like to say that in the last
year or so they have been as exciting as the external developments I have
mentioned. What is of particularly interest to this audience is that the move
towards economic reform, which has been visible for four years or more,
seems to be acquiring more substance. There have been some
achievements, most notably the abolition of the old multiple exchange rate,
which had such a distorting and frustrating effect on foreign trade. The
appointment of Shukri Ghanim, seen both inside and outside Libya as a
champion of reform, first as Minister of the Economy and then as Prime
Minister, has put reform on the front foot. He has for example spoken in
rather precise terms about plans for privatisation, which even a couple of
years ago was a taboo subject.
At the same time, though I do not want to exaggerate, there have been
important changes in matters affecting the freedom and well-being of
Libyans, including a substantial relaxation of the state control of
information, greater freedom to travel and even an attempt to address the
oppressive instruments of the state. Qadhafi’s son Saif al-Islam has been
outspoken in his criticism of corrupt elements within the revolutionary
committees, the hardline core of the regime who can be compared to the
Ba'ath party cadres in Iraq or Syria. Recently his criticism has been echoed
both by ministers in the government, by Qadhafi himself, and even in the
press which has in the past been tightly controlled by the revolutionary
committees.
Saif al-Islam gave a long TV interview on 27 December 2003 which
summed up the normalisation process I have been describing. Perhaps the
most interesting part is a historical account, for which he must surely be
indebted to his father, explaining why it seemed sensible in the seventies
and eighties for Libya to be armed to the teeth when it was in warlike
confrontation with Reagan, and with the French in Chad, and was
supporting a supposed Arab military alliance against Israel. All that is now
history. The whole Green Book business – the unique Jamahiriya structure
of committees, assemblies and so on – is politely consigned to history as
well. There is also a lot of hard-hitting stuff reinforcing what Saif al-
Islam’s charitable foundation has been doing for several months on human
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rights in Libya, addressing difficult issues such as disappearance, torture

and imprisonment without trial.
Clarity of Confusion
I want to turn for a moment to the important subject of what I will call
the American exception. As late as November 2003, US policy refused to
acknowledge change in Libya. It was succinctly restated by Assistant
Secretary of State William Burns in a letter to a new anti-Qadhafi group in
the US: “Despite the recent lifting of UN sanctions, US bilateral sanctions
remain in place and will remain in place until Libya addresses our serious
concerns with respect to its pursuit of WMD and means of delivery, human
rights, terrorism, and its destructive role in African conflicts."
There has in fact been progress on all the topics listed by Burns. It
would be a mistake to think that all the normalisation that I have described
has been directed towards re-establishing good relations with Washington,
but this has certainly been a major if not the major objective. Qadhafi, with
good reason, has always taken his relationship with Washington very
seriously. More generally, Libya is a pro-American country, and it comes
naturally to Libyans to speak warmly about the USA. For example, Saif al-
Islam in the television interview to which I have referred spoke warmly
about the employment practices of US oil companies compared with
European oil companies. Saif is too young to have any direct knowledge of
the subject, and must be reflecting what he has heard from his elders. Libya
hopes to profit from being on the right side of America, and has repeatedly
expressed a willingness to improve relations with the US and welcome US
businesses to operate in the country again.
So far US sanctions remain in place, including a general ban on US
travel to and business with Libya, as well as the Iran-Libya Sanctions Act
(ILSA), designed to punish US and foreign companies investing in Iran and
Libya’s petroleum sector. These sanctions are still actively enforced. Only
two weeks ago, the US ambassador in Zagreb issued a statement saying
that he had asked the Croatian government to postpone repair work on a
Libyan ship, a nasty blow to the Croatian dockyard and to the economy.
Until now, US Congress has solidly opposed any deal with Libya, but there
are now pressures the other way. US oil companies such as Marathon,
ConocoPhillips, Amerada Hess and Occidental who have long wished to
return to Libya, where their assets await them frozen for so many years,
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will now be reinforced by the Lockerbie victims’ families; they have each
received the initial $4m of the Lockerbie compensation settlement and
stand to receive $6m more (less the lawyers’ 30%) if US sanctions are
ended and Libya’s name removed from Washington’s list of state sponsors
of terrorism by a deadline spring 2004. The talk of private contact between
Israel and Libya has made it more difficult for the usual pro-Israeli voices
to denounce any dealings. Two separate groups of congressmen are
travelling to Tripoli this weekend, the first such visits for nearly forty years,
reportedly one of them with and the other without the blessing of the State
Department.
To be blunt, US policy in the new situation is confused. Washington is
notoriously good at imposing sanctions, but bad at lifting them. The State
Department spokesman has done wonders referring correspondents back to
the text of what President Bush has said about Libya, which is little
enough. According to Colin Powell, speaking on Abu Dhabi television,
once it is verified that the WMD programmes have been eliminated the U.S
is prepared to review the situation. She would enter into a political dialogue
with Libya about all the matters of interest to Libya: sanctions, investment
in Libya, or a variety of things to improve the lives of the Libyan people
and to put relations with Libya on a more normal track.
Meanwhile the US is preparing to dispatch up to a dozen diplomats and
intelligence officers to Libya to establish a US mission that will oversee the
dismantling of WMD, but we are told "this will not be an embassy."
Ironically, this echoes what happened in 1980, when, so far as I can
establish, the US never formally broke off diplomatic relations with Libya,
but simply slipped out shortly before the embassy building was sacked and
burned. So perhaps now they will not formally re-establish relations either!
This is no joking matter, however. It is the most important question
about Libya today. There is still a real possibility that reactionary forces
inside Libya will derail the process of normalisation. It is in all our interests
that Libya should have an incentive to behave properly. Up to now, I'm
afraid, British policy has provided such an incentive, but US policy has not.
Oil and Gas

Before concluding with some remarks about the global significance of
Libya, let me say something very brief about Libya's significance for
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energy and energy security, although most of you will be much better
versed in this than I am.
Libya's production of oil has stagnated for more than twenty years at
around 1.4 million barrels per day, making Libya today number 5 in the
region with about 5% of OPEC’s total. Production facilities suffered in the
period of sanctions, when the American and international companies which
had built up Libya's oil production withdrew, and Libya was prevented
from buying the material needed to develop her oilfields even if she had
had all the necessary technical ability. The result is that the oilfields are in
poor shape. However, only something like a quarter of Libya's territory has
been even reasonably thoroughly explored for oil, and there is every reason
to think that new productive fields can be found. That is one reason why
the industry has consistently voted Libya one of the most attractive
territories for upstream operations worldwide. The other is that the
production sharing agreements on offer are theoretically attractive,
however difficult they may be to negotiate in practice.
There is therefore every reason to think that if the normalisation
process bears fruit Libya will become a more significant oil producer, all
the more so because Libyan crude is of good quality and Libya's location
makes her a natural supplier of the European markets. Not that this location
makes Libya unattractive to others, and as an example the Chinese National
Petroleum Company has been particularly active in the last two years,
following a visit in 2002 by the Chinese President.
Libya's gas is also significant. The quoted figure for reserves, 1.3
trillion cubic metres, is under one third of Algeria’s and one tenth of
Qatar’s, but the figure must surely be on the conservative side. Proximity to
Europe is even more important for gas than for oil, and the new West Libya
Gas Project is due to put around 8 billion cubic metres per year into the
Italian pipeline system by 2006, roughly 12% of Italy’s consumption and
so a very real contribution to the diversification and hence the security of
Europe's gas supplies.
Mending Fences
Libya played an important part in the revolution which transformed
relations between the international oil companies and the governments of
the producing countries in the seventies, although a less likely double act
than Qadhafi and the late Shah would not be easy to imagine. If the
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production-sharing agreements which Libya is now seeking turn out to be

successful, who knows whether Libya may again play a disproportionately
important role in changing conditions for the whole region.
We are all familiar with the point of view that US and international
policy towards the Middle East is dictated by nothing more than greed for
oil. I have always found it a source of amusement that Libya can be quoted
as proof of the opposite. For years, Washington has faced heavy pressure
from the US oil industry to mend fences with Libya, and has refused to do
so. Maybe that period is coming to an end – I for one hope so, as I have
explained.
Lastly, as a Brit, it is nice for me to be able to point to one area of
policy where we are definitely not Washington's poodle. London and
Washington have been pursuing contrary policies over Libya for nearly ten
years. The funny thing is that nobody seems to mind.
2 THE NORTH AFRICAN CHALLENGE
Francis Perrin
Editorial Manager, Arab Oil and Gas, Arab Petroleum Research Centre,
France
I will talk about the status of security of oil and gas supply from North
Africa which is made up of Algeria, Egypt, Libya, Morocco and Tunisia.
We must take note because Morocco is not an oil producer and Tunisia is a
small producer. This analysis will be focused mainly on Algeria, Libya and
Egypt and will cover a 10-15 year period from now. These three countries
are currently producing about 3.3 mb/d.
Stability and Terrorism

Two of these three countries, Egypt and Algeria, have in the past faced
and are currently facing serious terrorist threats. These threats are now less
acute than in the 1990s and fortunately they have had no serious impact on
the oil and gas industry. Algeria succeeded in reaching all its main
objectives as far as energy policy is concerned despite tens of thousands of
deaths linked to the dirty war of the 1990s (as forecasted its gas exports
reached 60 billion cubic meters – bcm – per year at the end of the last
decade and its oil production and exports increased over the same period).
Similarly, Egypt’s gas production and exports are increasing. Its oil
production is stable or slightly declining but this trend has nothing to do
with politics.
As Oliver Miles has mentioned, Libya has been suffering from UN and
US sanctions and their impact on the energy sector was much stronger than
terrorism’s effects on the sector in Algeria. Libya was not able to increase
its oil production capacity throughout the 1990s despite its important
potential. But UN sanctions have been lifted and US sanctions will be, at
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the very least, relaxed. The future return of US oil companies will result in
an increase in Libyan oil capacity.
Political constraints will not prevent North African countries from
increasing their energy supplies in the future.
Oil and Gas Potential

North African countries have the potential to increase significantly their
oil and gas exports. They are also willing to do so. Algerian and Egyptian
reserves were strongly revised upwards.
Algeria’s gas exports will increase from around 60 bcm/year today to
85 bcm/year by 2010 and will probably reach 110-120 bcm/year by 2015-
2020. Oil production capacity will go up to 1.5 mb/d very soon and then to
2 mb/d by 2010 as against about 1.15 mb/d today.
On the other hand, Libya’s oil production will reach 2 mb/d in a first
stage as against 1.45 mb/d today. The country will significantly increase its
gas exports thanks to the West Libya Gas Project (WLGP) through which
liquefied gas will be exported to Italy).
Egypt holds great potential for exporting gas with several liquefied
natural gas (LNG) projects in the pipeline or already underway.
All these forecasts are fairly reasonable in terms of potential.
Projects and Infrastructure

Algeria: the 2010 targets for oil and gas will definitely be reached on
time because the corresponding projects (upstream and transport) are well
advanced. For natural gas the main projects are the start-up of the Ohanet
fields (BHP Billiton, 2003), In Salah fields (BP, Statoil, Sonatrach, 2004)
and In Amenas fields (same partners, 2005). For oil, the ROD project
developed by BHP Billiton will come on stream at mid-2004 and Sonatrach
will increase output at Hassi Messaoud, Algeria’s biggest oil field.
Developments underway on Blocks 208 (operator: Anadarko Petroleum)
and 405 (Burlington Resources). For transport, the capacity of the oil
terminals is being increased and two new gaslines to Europe should be built
(Medgaz between Algeria and Spain and Galsi between Algeria and Italy).
Libya’s Elephant field came on stream in February 2004 and Tripoli is
waiting for the return of US oil companies. The government is also trying
to award new exploration permits. The WLGP is under development and
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will start up at the end of 2004. It will help Italy meet its growing gas
needs.
Egypt has shown significant progress in laying the foundations for gas
projects. A liquefaction plant is being built at Idku by Egyptian LNG while
another LNG plant is under construction in Damietta. Further gas
developments are being explored by Apache Corporation both in the
Western Desert and offshore (West Med). Offshore gas developments
continue on the West Delta Deep Marine permit. Construction is underway
on the so-called Arab Gasline.
Development and transport projects are being implemented more or
less on schedule. A good exploration potential and a high success rate
imply that many discoveries will be made in the future.
Foreign Companies Get Involved

There is no doubt that foreign oil corporations will be getting involved.
These three countries have worked with many international oil companies
(IOCs) for a long time and foreign interest will increase over time for these
reasons:
x Potential is there.
x Good crude quality (Algeria and Libya).
x Proximity vis-à-vis the European market.
x Better political outlook.
x Lifting of sanctions against Libya.
OPEC: a Help or a Hindrance?.

The OPEC production ceiling covers crude oil only, not gas and not
other liquids (condensate, LPG, refined products). It is certain that OPEC
quotas will increase as these countries grow to cover a great part of the rise
in world oil demand. Algeria and Libya both have good reason to maintain
higher quotas (a rising oil capacity for Algeria and the impact of lifting
sanctions from Libya). OPEC has not yet replied to Algeria’s request for a
higher quota but Algeria is producing much more anyway and OPEC is
looking elsewhere.
NB Egypt is not an OPEC member
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A Forecast
Over the next ten years or so:
x Political issues will not prevent North African countries from
increasing their production and exports of oil and gas. The potential
is definitely there: the political willingness to increase oil and gas
exports is there and projects are being designed, financed and
implemented at a good pace. Foreign oil companies clearly have
North Africa on their radar screen. OPEC constraints are
manageable in the short term and will disappear over the long term.
x The views expressed here are very realistic but refer only to the
issue of security of supplies. It does not of course mean that all will
be quiet on the political, economic and social fronts in these three
countries over the next 10-15 years. But that is another story.
SECTION VII
REGIONAL CHALLENGES - THE CAUCASUS
REGION - CASPIAN & BLACK SEA BASINS
1 TURKEY & NATO
Sir David Logan

Former British Ambassador to Turkey
This morning‘s topic is “Emerging Regional Threats”. But many threats

are no longer regional, they are global. Besides, the nature of the threats
themselves has changed.
Take the UK as an example. After the demise of the Soviet Union, it is
impossible to think of a geographically-based, or regional, threat to this
country. There are now no threats to our boundaries.
On the other hand, there are no boundaries to the nature of the threats
against us. Conventional threats have been replaced by truckloads of
explosives (as against the British consulate in Istanbul), suicide bombers
(as regularly in Israel) and aircraft hijacked and crashed into public
buildings (as in New York). We can conceive of many more
unconventional threats; water supplies poisoned; power supplies cut off;
nuclear power plants subjected to missile attack; poison gas diffused in
enclosed spaces.
So many regional threats are not regional but global, and threats are
unprecedented, and hard to predict.
I would like to give a small illustration of the challenge which the new
security age means for NATO’s member states. A large part of the surface
assets of the British Navy, the largest such force in NATO Europe, consists
of ASW frigates. Yet, inventive though Al-Qa’ida may be, it is hard to
conceive that a naval force configured for anti-submarine warfare will be
much use against a terrorist attack. The same question of relevance to the
new security order applies to aircraft such as the Typhoon and to Main
Battle Tanks. The challenge to the armed forces of NATO to evolve so that
they can credibly deter non-traditional/asymmetric threats is enormous.
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Another problem is the inability of the West to deal with the threat
from Islamic fundamentalism in a way which does not insult and alienate
ordinary Muslim members of society. It is sometimes argued that there is a
seamless link between the mountain fortresses of Al-Qa’ida and, for
example, the North African slums of Paris. It is clearly not an entirely
vacuous proposition. But which western government has acted decisively
to break whatever link there might be, through positive acts of reassurance
to their Muslim fellow country people? A British minister remarked
recently that British Muslims must demonstrate their commitment to
democracy and rejection of violence. He then had to withdraw his remarks.
But in Britain‘s second city, where I work, and where in ten years’ time a
majority of the population will be Muslim, damage was done. Western
Europe and the US need to recognise that one part of dealing with
contemporary threats is to ensure that our Muslim populations are included,
not alienated, by our response to these threats.
I would like now to turn to Turkey, which illustrates what I have been
saying in some ways but which potentially confronts at least one threat of a
more traditional sort.
First, Turkey has a lot of neighbours, not all of them well-disposed. But
are any of them threats? That old foe, Russia, is no longer a neighbour and
is otherwise preoccupied. The Syrians were faced down four years ago. The
present Greek government want Turkey to join the EU, calculating that its
problems with the Turkey are more likely to be susceptible to resolution if
Turkey is inside the tent rather than out. Yet Turkey maintains enormous
conscripted armed forces which are largely irrelevant to the modern
security era. If the British have a lot of irrelevant ASW frigates, what price
Turkey‘s enormous and ageing fleets of tanks?
Turkey is a secular Muslim country, with few fundamentalists, which
reacted with outrage to the attacks on British targets in Istanbul last
November. I believe that since Turkey is both Muslim and moderate, she is
better equipped than, say, France or the UK, to deal with the challenge
which extremism represents to society. As I have said, Western
democracies seem to have no policies with which to counter the damage
done by Islamic extremism to the coherence of their societies. On the
contrary, by failing to take positive steps to reassure and to integrate their
Muslim fellow-country people, they seem willing to accept the risks of
polarisation and alienation. This is, inherently, not a failure which a
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Muslim state like Turkey can make. Turkey is, moreover, a society
sufficiently successful to make extremism attractive only to a very small
minority.
Turkey may, however face a trans-boundary threat, not quite of the old-
fashioned sort, but one which is a consequence of the ‘coalition’s invasion
of Iraq. This turns on the future nature of the Iraqi state, and in particular
the risk of its break-up. Through the 1990s, the Turkish attitude towards
Northern Iraq became steadily less intrusive as the PKK were defeated and
as Ankara established a modus vivendi with the PUK and KDP. In the
recent war, in spite of dire predictions to the contrary, the Turks did not
invade. But in the future they may be faced with the prospect of an
independent or virtually independent Kurdish state in Northern Iraq. One
consequence would be to bring Ankara, Tehran and Baghdad, faced with a
similar threat to national integrity, into a closer relationship. Another might
be a reversion to the habits of the Turkish army in the mid-1990s, when
massive incursions into Northern Iraq were commonplace. This is
speculative stuff, but it raises important questions about Ankara‘s
relationship firstly with Turkey’s own Kurds, where real progress is
currently being made; secondly with the US, given its stake in the future
both of Iraq and Iraq‘s Kurds; and finally with the European Union,
accession negotiations with which Turkey is intent on starting at the
beginning of 2005.
2 PROSPECTS FOR THE CAUCASUS, THE
CORRIDOR BETWEEN TWO
CONTINENTS - KEYNOTE ADDRESS
Tedo Japaridze
Minister of Foreign Affairs, Republic of Georgia
Thank you for the honor of inviting me to address this distinguished

gathering. I admit, I have almost messed up the schedule and do certainly
owe an apology to the organizers of the workshop. But after all, it occurs to
me that we, Georgians, also deserve a measure of forbearance with our
unique capability of organizing elections and revolutions almost
simultaneously, as follow-up events. This may be considered Georgia’s
contribution to the democracy; to have elections on Sundays and peaceful
revolutions on Tuesdays. I think this could be a good pattern for some, at
least in our part of the world. If you ask the Georgians, "why have you
done this Revolution of Roses in November?" They will tell you that had it
happened later, then roses would have been in a short supply…
Mr. Chairman: A few words about the Revolution of Roses. It is true,
that the problems of victory are more agreeable than the problems of
defeat, but they are no less difficult. We are aware that it will take a lot of
hard work and the moral stamina in order to persevere, while our society
has long been assailed by doubt. The sense of victory and its far-reaching
implications still stir our souls and warm our hearts. But it also demands of
us a realism and pragmatism that are rock-hard, clear-eyed, steady and sure,
a realism and pragmatism that understand that Georgia is not yet united and
her very statehood is still at stake. The most difficult phase of any
revolution is the very first day after it, when you need to solve the ‘bread
and butter’ issues for those who energetically demonstrated for you during
the revolution.
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With the demise of the Soviet Union, more than a decade ago, Georgia
dared to dream again innocent dreams, to believe in independence and
democratic ideals with innocent trust. Yes, we endured serious setbacks,
but celebrated significant accomplishments as well. Georgia adopted a new
Constitution, introduced its own currency, promoted the functioning of
democratic institutions and free media, sought to strengthen the elements of
civil society. In retrospect, we could have accomplished much more. But in
these 12 years too many dreams have been shattered, too many promises
have been broken, too many lives have been lost. The country plunged
headlong into a rampant corruption. The humiliating sense of abject
poverty, despair, uncertainty and deep frustration was prevalent. The mass
and widespread falsification of the parliamentary elections was the last
straw, prompting an unprecedented public outrage and the subsequent
resignation of President Shevardnadze.
We are grateful and profoundly touched by the tremendous support the
democratic community has afforded us in the time of hardship. It instilled
the hope and inspired many, many thousands of our citizens, who struggled
for identity, progress and dignity.
Georgians easily let bygones be bygones. I come before you this
evening preoccupied with peace and with the strongest assurances that
Georgia has irreversibly marked out her democratic future. The rationale is
the conventional wisdom, voiced out by one prominent Englishman, that
democracy is the worst form of government except all those others that
have been tried from time to time. I think we have tried enough and made
our choice for good.
I rarely speak in hyperbole, but if you let me invoke Theodore
Roethkes one short verse, I think you will agree, that it fits Georgia's
current state perfectly well:
I wake to sleep, and take my waking slow,
I feel my fate in what I cannot fear;
I learn by going where I have to go.
Indeed, if we want our dreams to come true, we have got to stay awake
and learn not to waste no more moment in our noble quest for the path to
the sacred prize – our path to Europe.
I am confident, that our shared values – respect for human rights of all,
for tolerance, for entrepreneurship, and for international standards of
conduct – can unite us in a partnership for democratic peace. Yes,
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sometimes, Georgian democratic experience may look to an outsider like a

sausage-making process: making is ugly but end-result is supposed to be
tasty.
Let me briefly outline some aspects that lend to this democratic
partnership the overriding importance.
There is no doubt that in the 21st century our security will be
challenged by international terrorism. It is a grave misconception to see this
dangerous phenomenon as only a problem of individual states. Indeed, it’s
a clear and present danger to tolerant and open societies and innocent
people everywhere. Therefore fighting international terrorism is not simply
an American or British responsibility. Rather, it is the world's
responsibility.
After the horrors of 9-11, Georgia became an active participant of the
US led global campaign against international terrorism and has contributed
at her capacity to counter-terrorism activities.
With the help of our friends we launched a comprehensive anti criminal
and anti terrorist operation in then infamous Pankisi Gorge (which by the
way is wonderful mountainous area of Georgia and I visited that place so
many times during that operation) and within some 12 months managed to
cleanse the region of criminals and terrorists, both homegrown and alien.
The work has not been accomplished yet, the operation is still going on in a
low intensity scale and our friends may rest assured that Georgia has at its
disposal enough resources and qualified personnel to continue this
operation to the very end. At the same time we should not forget that the
effective closure of the Georgian-Russian border from the both sides is
critical to restoring law and order in the Pankisi Gorge. Nor should we be
oblivious as to what created this problem in the first place - the war in
Chechnya.
Our success in Pankisi, however, would not have been possible without
the help and unequivocal support offered by the United States and other
western partners. The American Train and Equip program, has clearly been
the key to our success. Three battalions trained under this program are
already fully operational, capable of carrying out their professional duties.
I need to admit, the elements of cooperation with certain Russian
services, especially with border guard, but this framework needs to be
formalized and institutionalized. I think Russia and Georgia along with
other international institutions have full resources to do that.
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But in expressing our special appreciation to the United States

Government for the invaluable assistance, I also hold out hope that this
cooperation will continue in the future.
Ladies and Gentlemen: We are confident that Georgia has a role to play
in a broader international security dimension. The crucial step in defining
Georgia's strategic identity was the historic announcement at the Prague
Summit about our resolve to seek the full membership in the Euro-Atlantic
alliance. Let me put this momentous decision in context.
Last November in Prague, NATO allies completed a 53 yearlong effort
to build a stable and peaceful security system for Central and northern
Europe. No one will ever ask again will we have to die for Danzig? And it
applies to any German or Polish or Baltic city. The Prague Summit was
truly an exceptional accomplishment, the magnitude of which is yet to be
determined.
We believe that we must now focus our attention on Southern and
Eastern parts of Europe in order to make the European Union consummate.
The invitation extended to Romania and Bulgaria to join NATO and
subsequently the European Union, instills us with hope that the final phase
of building of a truly unified Europe has begun in earnest. With the Prague
decision, NATO now virtually embraces the entire Black Sea community
either through direct membership or through special relationships of the
kind enjoyed by Russia and Ukraine.
As the original alliance between the United States and Western Europe
was built on the wartime Atlantic Alliance and post-war responsibilities in
the Mediterranean, I believe that the future security architecture of Europe's
East will be based on the "Three Seas". The Baltic, the Adriatic and the
Black Sea. As I mentioned, the Baltic and Nordic democracies have largely
completed the construction of a durable Baltic security system. Major
efforts are already underway to "export" the Baltic model to the
democracies of the Dalmatian Coast to provide the foundation for an
Adriatic security system.
The next step of the scheme that President Bush expounded in his
Warsaw speech, is the creation of the Black Sea Security system to include
Turkey, Bulgaria, Romania, Georgia and Ukraine as members of Euro-
Atlantic structures, and Russia as a special and trusted partner. This Third
Sea system would be linked with the Baltic Sea security system through
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Ukraine and Poland and thus delineate a comprehensive European security

architecture from the Baltic to the Black Sea.
We firmly believe that Azerbaijan should also be a member of the
Black Sea security system. The inclusion of our neighbor will open direct
access between Caspian oil reserves and European markets, thereby
enhancing Euro-Atlantic security and bringing prosperity to the steppes of
Central Asia. Secure and reliable energy could be exported from
Azerbaijan via Georgia and Turkey to the shores of the Mediterranean and
via Georgia, Russia, Ukraine and Poland to the urban centers of northern
Europe. The benefits of a secure and liberalized trading system around the
Black Sea for the entire Euro-Atlantic community are simply incalculable.
We need to incorporate Armenia in the regional cooperation framework.
Peace and security are indivisible in our region. One can not be stable and
peaceful at the expense of others, turbulences and unresolved problems.
The unique transit potential and energy resources of the South
Caucasus are key to Europe's energy security in the years ahead. I believe,
this is one of the primary reasons why European interests require
comprehensive stabilization of the South Caucasus.
Located at the crossroads of Europe and Asia, South Caucasus
represents a natural corridor between the two continents. For hundreds of
years it has served as a connecting link, a fact which has played an
important role in shaping statehood, outlook, culture, and traditions of
regional states.
At this point of history, we have entered the stage when the energy
projects planned with strong western support have entered their final phase
of fruition. Should South Caucasus fall into instability again, the entire
Western Caspian energy policy - let alone investments - could come under
threat. The Baku-Tbilisi-Ceyhan and South Caucasus Pipeline projects are
of vital importance to the future of the region and are critical to the creation
of the East-West energy corridor. Therefore, all efforts must be exerted to
ensure that these projects can be constructed and operated without
hindrance of any kind and we are doing everything we can to deliver these
projects as a model for development.
Ladies and Gentlemen: The main obstacle to the development of all of
Europe's new democracies, whether along the Adriatic or the Black Sea, is
clearly the regional instability.
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It is spawned by terrorism, trafficking, trans-national crime and by

unresolved conflicts to name a few. In an OSCE parlance these conflicts
are referred to as "Frozen Conflicts" and apply to South Ossetia and
Abkhazia in Georgia, Nagorno-Karabakh, and Tranthesnistria.
I believe that the OSCE has coined a rather inadequate idiom, for the
simple reason that these conflicts are not frozen at all. On the contrary, they
are alive, brewing, draining our resources, obstructing the development
plans and deteriorating our relations with neighbors. What is frozen indeed,
is the peace process, which perpetuates the existence of absolutely
uncontrolled territories that easily become the safe haven for terrorists and
criminals.
We believe that the Euro-Atlantic institutions should be more actively
injected in the peace process. Otherwise, the conflicts I mentioned above
may well degenerate into a larger conflagration and pose a serious threat to
the Euro-Atlantic community.
Ladies and Gentlemen: President-elect Saakashvili has more than once
reiterated a long held premise that Georgia is inexorably moving towards
Europe. Indeed our plans for reintegration go way beyond Georgia's
membership in NATO. This organization is only one important pillar of the
European structure. Our strategic plans include further cooperation with the
Council of Europe and the implementation of comprehensive reforms to
meet the standards for membership in the European Union.
While doing all in our power to integrate in European structures and to
find our deserved place in the family of nations, we should make similar
efforts not to distance ourselves from Russia and to establish civilized and
good neighborly relations with this great nation.
There is no doubt that the stable, prosperous, democratic Russia is a
factor of world scale and significance. Free people, whose governments rest
on the consent of the governed, do not wage war on their neighbors. Free
people, blessed by economic opportunity and protected by laws that respect
the dignity of the individual, are not driven towards the domination of
others. We hold out hope that Russia, may be grudgingly, but is still
moving in this direction.
Regrettably, the past decade of the Georgian-Russian relations have
been marred by mutual recriminations, mistrust and jealousy. The tensions
had, at times nearly spiraled out of control and put the two countries on the
verge of the open confrontation. And I need to admit that the mistakes have
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been made from both sides. We cannot allow this to continue. The world’s
one of the most important region cannot become hostage of treacherous
political games and parochial interests on both sides.
We expect that the Russian policy-makers will come to treat Georgia as
an independent, sovereign state and resume negotiations in good faith on all
burning issues. Georgia is open for partnership and full cooperation with
Russia. But let not this create an impression that Georgia will ever
compromise its political stand, freedom, sovereignty and independence.
We offer our Russian colleagues a full measure of cooperation on a
range of important questions, including those of regional security. Georgia
accepts with understanding Russia’s legitimate interests in Georgia and
attaches overriding importance to eliminating any threat to Russia’s
security from the Georgian territory. But our Russian colleagues should
also realize, that terrorists do not appear in Georgia out of the blue…
The presence of the Russian military bases in Georgia is nothing but an
anachronism and, in my opinion serves no security interests of Russia.
Some in Moscow may think that their presence in Georgia is the leverage
to promote Russia’s influence. It’s an absolutely wrong approach.
Dilemma, that some Russian policy makers confront and confuse, is
connected with the two definitions: influence and interests. Influence and
control are about the zero sum game that contradicts Russia’s interests in
the region, on the contrary, promotion of Russia’s economic, commercial
interests should be beneficial for Russia and the entire region. So the vital
question what’s in the interest of Russia to have a bank or a tank in Georgia
is still unanswered. However, the new Georgian leadership is set out to
approach this question with understanding and expresses readiness to
renew negotiations on this important issue with common sense and
determination. The role of the United States and of the whole CFE
community in this process will be important if not crucial, especially when
it comes to financial requirements for the withdrawal.
We believe, that the way the Russian leadership chooses to handle these
problems will be a serious test of Russia's adherence to its international
commitments.
Ladies and Gentlemen: Georgia's transition from lawlessness to real
independence and democracy is both an exhilarating and a difficult task.
For the men and women of Georgia, this is a time of great hope, and great
difficulty – A time for national pride as well as national reconciliation. It
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occurs to me that there is no purpose nobler for us to sustain and preserve

our small nation in a turbulent world. That is what we must do now. We
have no higher duty, no greater cause as humans. And may god bless our
efforts.
3 TATARSTAN: EURO ISLAM IN THE
VOLGA REGION
Dr Khakimov
Counsel to the President of Tatarstan, Russia
Editor’s Note: Tatarstan is one of the leading oil producing areas in

the Russian Federation. Situated on the Volga, its energy markets have, to
a large extent, been developed via the Caspian. The Republic of Tatarstan
has successfully developed its own international energy export market:
currently producing 29 million tons of oil per annum for markets within the
Russian Federation, as well as other countries including Ukraine, Turkey,
the Netherlands and Switzerland. Tatarstan operates its own tanker fleet
and also its own refining operations both in Tatarstan and in Turkey. The
Republic estimates that its oil and gas reserves will last up to 170 years at
current production rates.
The success of the Tatarstan energy economy is significant for two
reasons:
1) It indicates progress towards healthy regionalization of the once highly
centralized Former Soviet Union’s energy policy.
2) Tatarstan serves as a model to the region and the wider international
audience for the successful coexistence of Islam and other religions.
I would like to talk about the concept of Euro-Islam in the Volga

region. Tatarstan is a region of Russia where half of the population belongs
to the Muslim culture and an almost equal number of Russians adhere to
the Orthodox traditions. Despite the uneasy years of perestroika
(reorganisation) that caused a great number of conflicts in post-Soviet
Russia, there is peace and general consent among people in the republic.
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Sociological research shows stability in ethnic relations, a high level of

mixed marriages (about one third) and the absence of tensions both at the
political and household level. The tragedy of Bosnia has not affected
Tatarstan. One of the reasons for stable Muslim-Christian relations is the
policy of observance of the balance of interests. At the same time this
peaceful situation can be explained by examining ‘Tatar’ Islam, which
underwent reformation in the 19th and early 20th centuries.
Some Background
Islam was accepted as the state religion in the territory of Tatarstan in
922, half a century before Russia officially accepted Orthodoxy. Thus, for
Russia, Islam is not an externally introduced element. Its spread was
seriously influenced by Uzbek Khan’s “Islamic revolution” of 1312. Uzbek
Khan opposed Genghis Khan’s Code of Laws (Yasa), which recognised
equality of all religions, and accepted Islam as a state religion of the
Golden Horde. It was not a reform, but a bloody revolution, which
suppressed the opposition of Murzas (nobility). These events did not affect
Russians who remained Orthodox. After the disintegration of the Golden
Horde, Islam remained an official religion of the Kazan khanate.
Ivan the Terrible’s assault on the capital of the Kazan Khanate in 1552
began the epoch of Christianisation of the region accompanied by the
physical destruction of the Tatars, their exile from places of residence and
the creation of stimulus for the conversion of Muslims to Orthodoxy. In the
13th century, after a whole series of revolts with obvious religious motives,
Catherine II issued an edict on religious tolerance, starting the revival of
Islam in Russia. Nevertheless, up to the beginning of the twentieth century,
the Tatars had limitations concerning certain professions, the right of
ownership and business activity in the sphere of industry and secular
educational institutions.
At the dawn of the nineteenth century, the theologian Kursavi urged the
Tatars to modernise Islam. This initiated the movement, which was named
Jadidism from the Arabic al-jadid (meaning ‘renovation’ or ‘reform’).
Kursavi wrote: “You are not true and devout Muslims. You have receded
from the Qur’an of Allah and legends of the Prophet.” He rejected mazhabs
and offered to address the Sacred Book for critical evaluation of the
existing traditions. In the opinion of his contemporaries, following taqlid
(authority) was not a method of redemption; an independent search –
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ijtihad was necessary. Thus, Kursavi did not consider public opinion as a
true criterion. He believed that a scientist convinced in the truth of his
reasoning and its correspondence to “the true way” could himself be
considered jama’at (society of Muslims), and thus had the right to follow
his own judgment even if his act was condemned by most people. A
person, who asserts the truth, is equal to his community. This idea became
revolutionary for Tatar theology. Kursavi’s ideas were succeeded by
brilliant Tatar theologians.
Jadidism mainly struggled against taqlid for critical thinking, for the
high education of Muslims, and the equality of men and women, tolerance
towards other religions and openness to the cultural achievements of
Europe. All modern Tatar culture is rooted in Jadidism. After the revolution
of 1917 Jadidism showed itself in the theory of “Islamic socialism”
founded by Mirsaid Sultangaleyev. Bolsheviks could not comprehend it,
but it proliferated in the Arabic world.
The Soviet period had most serious consequences for the religion. The
clergy was destroyed physically, the system of Islamic education was
liquidated and the religion itself was actually forbidden.
Perestroyka prompted the revival of mosques, madrasahs, and the
Muslim press. At the same time, Russia attracted numerous missionaries
who brought with them the traditions of their countries, Saudi Arabia,
Egypt, Jordan and others. Today the Republic of Tatarstan is restoring the
system of religious education and searching for a ‘faith formula’ to satisfy
the modern world.
It is impossible to repeat Jadidism literally as the situation has changed.
The Tatars have gained statehood in the form of a republic. The society has
become more secular, and the educational system and economy have
changed. All this imposes new requirements on Islam as well.
An Islamic Sub-Civilisation in Tatarstan

There is a Muslim ummah which, as a civilization, unites people of a
common belief system. But there are also different nations with their
national sovereignty. The first does not absorb and does not nullify the
second. Each nation has specific living conditions - climate, environment
and local needs. The Tatars were destined to be the northernmost outpost of
Islam; they are on the border of the West and the East not only
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geographically, but also culturally. This, in many respects, explains the

features of the Islamic sub-civilisation in the Republic of Tatarstan.
Russia is a secular country with a Christian Orthodox majority. At the
same time, for the Muslims the Russian cultural and social conditions are
not alien. Tatars are not compelled to follow any specific tradition. They
were born in this country and they consider it theirs. This country is no
worse and no better than Muslim states; it is simply different. Tatarstan
may not be guided by Saudi Arabia and will hardly ever become similar to
Christian Europe.
Millions of Muslims in Russia have grown to believe that they live and
should live in a secular country, living in the culture which developed over
several centuries. The post-reorganisation period showed a burst of interest
in religion that has now more or less stabilised. Thus we are able to speak
about the general religious preferences and practices in Tatarstan today.
Polls show that over 80% of the Tatar youth consider themselves Muslims,
but only 2% attend mosque at least once a week, and 4% attend just once a
month. In Tatarstan, less than 1% of the population is atheist, but some of
them observe all religious practices. Very few people (1-3%) attend classes
on the basics of religion (Islam and Orthodoxy).1
The Tatar youth aim to attend modern universities, and many prefer
European educational institutions, while they prefer English to other
foreign languages. It helps in business, politics and science. 13% of Tatars
living in towns and 25% of Tatars living in villages like their children to
know the Arabic language; 10% (town) and 19% (village) are focused on
Turkish, and 74% (town), 33% (village) choose Western European
languages. The last figure is even higher among the Tatar youth than
among their parents. Arabic tends to become a ritualistic or a purely
professional language, while English has turned out to be the most popular
among foreign languages.
The role of religion outside of the republic is more significant, as it
performs a function of association and preservation of the Tatar
community. Religious attitudes outside Tatarstan are more traditional. The
Republic has no problems with those institutions which preserve Tatar
culture, and therefore discussions appear to focus not on the preservation of
culture, but mainly on its adaptation to the process of globalisation.
Tatarstan manufactures hi-tech products which necessitates the
development of its own scientific schools and systems of higher education.
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The main competitors in this sector to Tatarstan are in the West; this is the
reason why Tatarstan must introduce standards close to those of Europe.
Islamic countries as Sudan, Pakistan, Iran or Saudi Arabia cannot guide
Tatarstan. They do not make heavy trucks, planes or helicopters. They are
not the manufacturers, but the consumers of these products. Therefore, they
cannot help Tatarstan to become more competitive.
All these factors create conditions for developing an Islamic sub-
civilisation of Tatarstan. Although Europe is the main competitor in several
sectors of the Tatar economy, Tatars do not consider it an alien or hostile
civilisation. Instead they look to Europe to gain technological information
that can be utilised as a reference point from which to improve standards
and increase interest in education and culture.
As the world becomes more religiously and culturally blended, what in
Tatarstan may be viewed currently as deviation from pure Islam, in the
future could become the norm for most countries. Nobody can create an
isolated and purely Islamic environment. And there is no need to aspire to
such an ‘ideal’ because Islam does not deny Christianity or a different way
of life for other people. To the contrary, it teaches how to reach an
understanding with them.
Pluralism in Islam: The Need for Rational Interpretations

The Prophet Mohammed said: “Truly, Allah in the beginning of each
century will send to the ummah a person to renew religion.” Islam appeared
to lead the Arabs out of barbarism, as a way to convert peoples into
civilised advanced nations. The Prophet Mohammed’s precept is the basis
for constant modernisation of Islam.
The 10th century witnessed a phenomenon in Muslim theology referred
to as ‘closing the doors to ijtihad’. Critical and analytical thinking was
forbidden. It was considered that theologians had already developed
everything necessary. Modern Turkish scientist Haydar Bash writes: “The
fact that for centuries the ummah without any doubt has followed and been
guided by mazhabs and mashrabs, and for centuries the imams of these
mazhabs and mashrabs have remained indisputable authorities is a
historical proof that mazhabs and mashrabs have revealed the validity of
their approach and represented the truth.”2 It is a sample of thinking which
denies the modernisation of Islam. If mankind was guided by a similar
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logic, it would still explain the solar system composition according to the
theory of Ptolemy, instead of Copernicus.
The founders of Muslim mazhabs disagreed even concerning the true
number of original hadiths, which are known to be the second important
source of Shariat or Islamic Law. According to Ibn-Khaldun, Imam Abu
Hanifa used only seventeen hadiths, whereas Malik, another founder of a
mazhab, gave the number of three hundred. The well-known Abu Abdallah
Muhammad ibn Ismail, the composer of the best-known collection of
hadiths, led this figure up to seven thousand, and Imam Ahmad ibn Hanbal
considered that there were fifty thousand hadiths. What today looks
incontestable, in those times was a subject of ijtihad. Four mazhabs were
developed from the 10th to the 13th centuries, but remain basic in Shariat
understanding up to now.
The struggle of reformers against medieval traditions cannot be
represented as a struggle of ‘true’ Muslims with adherents of innovators or
heretics. It is a struggle of progress against backwardness, for in the Qur’an
one finds verses in favour of both positions.
In the Meccan period, when the Prophet was writing the first ayats of
the Qur’an, the verses of the Qur’an were addressed to all people. It is
written: “O you men! We have created you of a male and a female, and
made you tribes and families that you may know each other.” [49:13]*
Clearly this passage proposes no distinction in rights between men and
women. It prohibits coerced conversion to Islam and clearly expresses
tolerance towards people of other religions.
In the later Medinan period, ayats were addressed primarily to the
Arabs at the time and gave them the order concerning the pagans: “And kill
them wherever you find them, and drive them out from whence they drove
you out.” [2:191] With regard to women, a number of ayats were
introduced, which rendered them unequal to men. It said: “Men are the
maintainers of women because Allah has made some of them to excel
others and because they spend out of their property.” [4:34] Indeed, there
are historical explanations for this, but inequality is inequality; and the
Qur’an calls for justice.
Contradictions between the verses of the Meccan and Medinan periods
are too obvious and it is impossible to reconcile them – they deny each
other. Therefore, the Muslim jurists considered the ayats of the Meccan
period cancelled as the elder. However, the date of revelation is not a
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criterion according to which one may put some ayats above others. If they
had really cancelled each other out, the Prophet himself would not have
included the ‘cancelled’ ayats in the text of the Qur’an. As everybody
knows, the main teachers of the Qur’an were prepared under his direct
control and he was very attentive to the accuracy of the suras or chapters.
Several instructions of the Qur’an are formulated very strictly, in
explicit form, but sometimes are not applicable in specific conditions. It is
written: “Eat and drink until the whiteness of the day becomes distinct from
the blackness of the night at dawn; then complete the fast till night.”
[2:187] How can anyone living near the polar circles, where the sun does
not rise, follow these instructions? Musa Bigiyev, one of the most profound
Tatar theologians, perfectly understanding both the letter, and the spirit of
the Qur’an offered an explanation for this situation. He analysed another
ayat: “Fasting is prescribed for a certain number of days” [2:184] in which
he sees the instruction for those who live in such geographical latitudes,
where it is impossible to distinguish between day and night. In his book,
Fast in Long Days, he writes: “According to the obvious instruction of the
Sacred Qur’an, the fast in such regions is never obligatory. For the fast is
imposed as such only for a certain number of days, that is, where days and
nights are comparable with each other on longitude. And at the poles,
where a year consists of a day and a night or in cold areas near the polar
circle, where days and nights last for weeks and months, the fast, due to its
time limitation in days, is, indeed, excluded from the life of the people.
This results from the features of geographical region.”
The point is not to declare that some ayats are cancelled, and others are
valid, but to understand that they are addressed to different audiences, in a
different epoch. Such distinctions and interpretations of ayats are extremely
important from the point of view of modernity. Wahhabism is guided by
violence in its struggle against other religions and even against trends
within Islam. Calling for ‘purity’ in Islam, it actually follows the mazhab
hanbali to an extreme and does not allow for ijtihad rationalism – with the
belief that the Qur’an is allegedly impossible to understand: it is possible
only to believe in it. Thus, Wahhabism asserts a traditionalism which does
not recognise any new phenomena. For Wahhabism, life stopped in Arabia
in the 10th century. But times and circumstances change and so the suras of
the Qur’an require a modern interpretation.
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For example, jihad as a war with the unbelievers was quite

understandable in the Middle Ages because then the politics of power was
common. But after World War II, when at the introduction of the nuclear
bomb, the means of war became so advanced that they threatened the very
existence of mankind, it became necessary to place conflict regulation
through international law above the use of force.
The Prophet distinguished between small jihad (jihad al-sagheer) with
the use of force and supreme jihad (jihad al-kabeer), which assumes a
peaceful path of progress for Islam with the help of the Qur’an. It is
written: “Do not follow the unbelievers, and strive against them the mighty
striving with it.” [25:52] The Small jihad was necessary when Muslims
were threatened by other states or when Islam conquered new territories in
the medieval epoch. But today, issues of war and peace are regulated
differently. Therefore, jihad should be understood according to its literal
meaning as a “striving” or struggling with the “dunya” (the material world)
for a spiritual basis and overcoming infidelity in oneself. It is, however,
expressly right and just, under authority from both the Qur’an and
international law, to declare small jihad in self-defence, against violence
and tyranny.
In The Prophet Mohammed’s times, there were no weapons of mass
destruction. Appeals for struggle with the unbelievers then suggested
something completely different. Today, Muslims should be guided by the
eternal idea of common solidarity granted in the Meccan period, for
mankind striving towards good is one of the manifestations of Allah.
Euro Islam: Key Concepts

We should understand the term ‘Euro Islam’ as a modern form of
Jadidism. The theological component of Jadidism was not uniform – some
theologians adhered to the positions of renovation of Islam: some were
quite moderate, such as Gataulla Bayazitov, and some were rather radical
reformers like Musa Bigiyev.
Euro Islam mostly reflects cultural aspects of Islam, rather than its
ritualistic aspects, the latter being left to one’s own personal judgment. The
key focus of Euro Islam is on ijtihad (again, a method of critical personal
judgment) as a basis for a modern interpretation of the Qur’an.
Traditional theologians are afraid of ijtihad/rationalism, believing it
might negate faith. Well-known Malaysian theologian Seid Muhammad
163
Nakyb al-Attas considers intuition the supreme form of perception. “We

recognise,” he writes, “the existence of one more level different from the
rational truth: a supra-rational or transcendental level of existence
accessible only to the prophets and the saints, and also to acute minds
which possess the deepest knowledge.” In this form, interpretation of Islam
becomes the destiny of an elite and is completely inadmissible to an
ignorant crowd.3 Egyptian scholar Yusuf al-Kardavi, calling for ijtihad, at
the same time writes: “It is impossible to tolerate such a state of affairs
when each interested person would have an access to ijtihad, for this will
result in anarchy and distemper.”4 He believes that there are those
deserving of ijtihad and those who are not deserving of it. Theologians
refer to outstanding thinkers of the middle ages, who limited the circle of
people with the right to ijtihad. This was due to the educational level of the
population. At that time many people were illiterate and therefore they
were unable to go into reflections on theological themes. Today general
literacy and a greater availability of higher education has changed the
situation - almost everyone can study the Qur’an independently and in
one’s native language.
Islam and the Qur’an is gradually being translated into more and more
languages and this must be correct, for God listens to our hearts, not to our
words. Seid Muhammad Nakyb al-Attas introduced the concept of Muslim
language, which he understands as “the introduction of the base dictionary
of the Muslim terminology in the languages of peoples practicing this
religion.”5 Indeed, the Tatar language is rich in Arabic grammatical
constructions, which quite sufficiently reflects the Muslim terminology and
actually makes the knowledge of the Arabic language unnecessary for the
broad circle of believers. Linguistic nationalisation of Islam seems
inevitable in the 21st century.
Islam was sent down to earth to protect people from ignorance and set
them on the straight path to justice. Following Taqlid and the ways of the
mazhabs only stagnates thought. It is ijtihad that provides an entrance to
the path for progress.
Islam is a culture which unites religious and secular spheres. One of the
miracles is that God created numerous peoples, each with their own
language. The Qur’an says: “And of His signs is the creation of the heavens
and the earth and the diversity of your tongues and colours; most surely
there are signs in this for the learned.” [30:22] If God had chosen to do so,
164
he could have created one Arabic-speaking people. However, he made

many different peoples each with their own lives, habits and cultural
climates.
Islam puts a significant emphasis on rituals. The rituals themselves
performed an important social function most especially at the time of
medieval Arabia. The rituals accustomed relatively uncivilised tribes to
more civilised behaviour in such matters as diet and hygiene, for example.
These attributes became universal long ago. Today, in modern civilisation,
moderation both in diet and consumption of alcoholic drinks is strongly
recommended in addition to observing proper hygiene. Islam, also through
its rituals, is a method of personal liberation. It says that the Prophet
“removes from them their burden and the shackles that were upon them.”
[7:157]
However, God does not demand blind worship. The Prophet
Muhammed said: “Allah does not like unnecessary fanaticism and extremes
in demonstration of faith.” He did not approve of monasticism and did not
demand the observance of ceremonies beyond one’s abilities.
Many historical norms have lost their importance today. For example,
the prohibition to photograph a person was connected to the period in
formation of Islam, when it was necessary to struggle against idol worship.
But today it is not necessary to destroy the statues of Buddha as the Taliban
did in Afghanistan to prove their faithfulness. Wild conduct and Islam are
incompatible. It is through Faith that people become civilised, cultivated
and educated.
The Prophet Mohammed also said: “Everything has its way. It is
knowledge that opens the way to paradise.” The acquisition of knowledge
is the main duty for Muslims. It is a categorical imperative. A true Muslim
is an educated person who respects and pursues the sciences. The aspiration
to come to know oneself, one’s environment and the universe is the real
perception of truth, i.e. Allah. The Qur’an says: “Allah indeed encompasses
all things in His knowledge.” [65:12] Allah encompasses all things because
He is the Universe. Attaining knowledge of science or knowledge of any
kind is a step towards God, who waits not for blind worship, but for the
good results of man’s activity. The Prophet Mohammed advised: “He who
learns sciences with the purpose to teach others will receive the redemption
of seventy saints from God.”
165
Islam is a religion of a free individual. The Qur’an implies that the

faithful cannot be slaves to Allah because they have chosen of their own
free will to practice Islam.
The Prophet said: “The whole world has been created as a place for
prayer.” There is no mediator between man and God. The clergy and
community are only assistants or teachers, no more than that. When God
calls on the Day of Judgement, there will be no imam, mufti or community.
There will be no lawyers. The Qur’an says: “And be on your guard against
a day when one soul shall not avail another in the least, neither shall
intercession on its behalf be accepted, nor shall any compensation be taken
from it, nor shall they be helped.” [2:48] On the way to truth in this world,
the clergy carry out the function of ‘highway signs’, but they should not be
sleeping policemen.
Rituals may not be the criterion, according to which it is possible to
distinguish between believers and non-believers. The term ’ibadah
(worship) comprises the entirety of worship, and at its final, supreme stage
’ibadah acquires the meaning of knowledge – ma’rifah. Thus it would be
wrong to reduce worship to ceremonies alone. All it takes is for a man to
say “There is no God, except for Allah, and Mohammed is His Prophet,”
for him to be a believer. Rituals and ceremonies strengthen his belief but
they do not determine it.
Religion is a private matter. At one time religion was a structured social
phenomenon. Now religion is becoming a more and more intimate,
spiritual and particularly personal affair. People do not like interference in
their life and they do not tolerate external dictatorship; they prefer a free
internal choice. The prophet said: “Truly, religion is easiness, and if anyone
overdoes it, he will lose. So keep to the right course, approximate to
perfection, rejoice!”
Islam calls for justice, which is impossible without equality between
man and woman. Verses of the Qur’an in suras “Women”, “Light” and
“Companion” provide justification for the inequality of women. They are
written in the Medinan period. In that epoch, the Shariat positions
concerning the rights of women were the most advanced in world
legislation. But today they look like an anachronism. Turkish theologian,
Haidar Bash, considered it senseless to discuss an issue of women’s rights:
“Discussing such problems as women’s rights and even granting her rights
is ridiculous in its very basis, for nobody may grant a woman her rights.
166
She receives them by birth. Every person has the right to life, property,
honour and dignity by birth.”6 According to the Qur’an, however, there
may be slaves; the Shariat treats them as property of a status equal to a
camel. These norms, as well as women’s rights, in my view, require
revision.
The Qur’an admits supremacy of man above woman provided that a
man provides safety of a woman and maintains her [4:34]. In countries
where women are economically independent there is no basis for such
supremacy. Women required guardianship in medieval society, when hard
physical labour fell on men’s shoulders. The division of labour according
to sex today no longer exists.
Polygamy as well as the women’s unequal right of inheritance and
arcane procedures for divorce permit women’s inequality with men, and
justice is impossible without equality. All people are free and equal by birth
regardless of sex, race or religion.
The Qur’an’s verses, granted in Mecca, were intended for all of
mankind for eternity without distinctions between men and women. This is
what should become the main principle of the Shariat in the 21st century.
The more perfect and sound women’s rights are, the stronger society must
be.
Islam is a tolerant religion. According to the Qur’an, there is only one
God, but different religions, and distinctions are most obvious in
ceremonies. If we do not to take into account the ayats which were revealed
in the Medinan period; a time when it was necessary to create an Islamic
community within a hostile environment; in all other respects the Qur’an is
tolerant to all people who do good deeds. It says: “Surely those who
believe, and those who are Jews, and the Christians, and the Sabians,
whoever believes in Allah and the Last Day and does good, they shall have
their reward from their Lord, and there is no fear for them, nor shall they
grieve.” [2:62] To be faithful is preferable to God, but it is not a categorical
requirement. To do good deeds for people is an unconditional instruction of
Allah.
The Prophet Mohammed continued a rich train of monotheistic
tradition and inspired respect for followers of other religions. Islam does
not claim that divine blessings belong only to its followers. God’s blessings
are granted to all nations and people without exception, for Allah is
gracious and merciful. Therefore Musa Bigiyev declared: “For none of the
167
unfortunate people to be deprived of this boundless mercy and for the gates
of His boundless mercy to be open wide to the people, I declare that all
mankind will be saved.” It was he who developed the theory of “Absolute
Divine Mercy” according to which divine grace embraces all His creations,
no matter what religion they adhered to during their lifetime. The Qur’an
says: “Our Lord! Thou embracest all things in mercy and knowledge.”
[40:7] This short verse shows perfectly that God’s mercy embraces not
only Muslims, but everybody without exception. Our life is only an instant
compared to eternity. And if God subjects non-Muslims, i.e. the majority of
mankind, to eternal tortures of his divine anger, then anger will be high
above his divine mercy.
At one time in history, all religions were characterised by mutual
belligerence. Muslims, with sword in hand, created caliphates; Christians of
Europe waged crusades; Catholics and Protestants were at violent wars
with each other. But now swords are sheathed. Today it is important to see
in each religion a call for good deeds and mercy. This is the fabric of the
ummah for all mankind. Today it is futile to speak about ijma (consensus)
in the framework of the Muslim community alone. International norms
have come to be of higher importance than the interests of separate states
and communities, likewise the Shariat must be properly amended to suit a
modern context as well.
Non-Muslims should not be declared enemies in the belief that it
pleases God. This only serves to please extremists who have not penetrated
deep enough into the meaning of the Qur’anic verses. God will accept man
if he is good. And if he believes, he is especially pleasing to Allah. The
Qur’an says: “Whoever shall do of good deeds and he is a believer, there
shall be no denying of his exertions, and surely We will write (It) down for
him.” [21:94]Mankind travels from dissociation to unity and solidarity,
which is expressed in the creation of universal institutes, international law
and universal morals.
Conclusion
The concept of Common Globalisation runs side by side with the
Islamic concept of globalisation through the broadening of the umma which
gradually spreads both to the East and the West. After September 11 2001,
Islamophobia has grown in strength though terrorism, the root of this
phobia, has nothing to do with the religion of Islam. The world has broken
168
up into Christians, Jews and Muslims, creating a gap which may become an
abyss. Only new values common to all can now unite this broken world.
They can not be purely liberal, as they can not be traditionally Islamic.
Ijtihad brings together the East and the West; it is the very beginning of
liberal thinking. The concept that a free individual must be allowed to
strive for education and progress in society is quite acceptable to both
Western and Islamic cultures.
Islam was introduced to the world for the sake of progress, which saved
man from slavery and bondage. It embodies justice, freedom of spirit and
aspiration to acquire knowledge. Islam calls for tolerance and condemns
violence and it is versatile enough to answer new challenges.
END NOTES
1
R.N.Musina. Ethnoconfessional processes in the Republic of Tatarstan. - In:
Islam and Christianity in the dialogue of cultures on the turn of centuries.
Kazan, 2001, p.261-264.
2
Haydar Bash. Makalat. Islam: secret of formation. – Yaroslavl. DIA-press,
2000, p. 161.
*
Square brackets refer to the number of sura and ayat of the Qur’an.
3
Ibidem, p.37.
4
Yusuf al-Kardavi. Modern ijtihad: from disorder to order. – “Iman”, Kazan,
2001, p.67.
5
Seid Muhammad Nakyb al-Attas. Introduction to metaphysics of Islam –
statement of fundamental elements of Muslim ideology. – M. – Kuala Lumpur,
2001, p.36.
6
Khaidar Bash. Right of woman in Islam. – Kazan, 2001, p.16.
SECTION VIII
CRITICAL ENERGY SYSTEM
INFRASTRUCTURE (CESI) - EMERGING
THREATS TO SHIPPING AND PIPELINES
1 INTRODUCTION
John Flynn
Adviser to Chevron and Former Ambassador to Venezuela and Angola, UK
Threats to energy supplies have been around a long time. The 11th
September introduced a new dimension, a step shift in vulnerability.
Pipelines have been ruptured for all sorts of reasons: economic warfare as
in Colombia; in Nigeria for community fuel theft, illegal trade on a gigantic
scale, or for blackmail against the oil majors or the local government.
Piracy goes back thousands of years. We thought it had been brought
under control until fairly recently. It is now a common occurrence where
sea lanes pass through straits next to fragile states. Large companies now
try to mitigate the threat from piracy in such areas by concealing their true
name or cargo in open communications from everyone other than
government authorities.
The increase in the vulnerability of oil and, increasingly, gas supplies in
the vicinity of latent or overt hostile groups has pushed companies to look
towards Atlantic resources. Governments were slower to pick this up. In
the US it was not until early 2002 that Congress took an interest in an area
that until then, for many, had been off the political map: West Africa. The
offshore oil assets in one part of the region had earlier received no more
than hostile political attention from rightwing politicians fired by the
shocking image, partly mythical, of a US oil company’s production facility
guarded by Cuban troops from attack by a US-supported and US-funded
guerrilla movement. Even after Angola gave up its attempt to impose
Marxism it was still considered unattractive due to its long-running civil
war, and after that ended, to its supposedly notorious corruption.
That same area is now looked upon as one of the most valuable energy
assets of the US. Its value lies in its relative security from threat. The sea
171
172
lanes between Angola or the Niger Delta to the markets of North America
and Western Europe do not pass through or near vulnerable straits. The
producer countries themselves are still near-fragile in their statehood but
their fragility is so basic that the risk of threat from hostile organised
militant movements is remote. Any serious attack on shipment or
production would bring down massive retaliation from the local
government supported by Western governments. Even in the Niger Delta
the highly-organised gangs take care not to provoke too much.
One aspect of West African oil development injected into the
discussion in Washington in early 2002 with US politicians and their
advisers was that there was little question of these new assets competing
with assets in the Arabian Gulf. Just ask the oil companies how much it
costs them to drill in the ultra-deep blocks off the Angolan coast… West
African resources should be seen as complementing the resources in the
Gulf. Indeed, in the context of the struggle against international terrorism
the advantage of new development in West Africa, and in other non-Gulf
areas is that it reduces the attraction for terrorists to attack production in the
Gulf. The less the Gulf region figures as the single major source of energy
the less point there is in threatening it.
On the other side of the Atlantic the oilfields of Latin America share
the West African advantage of routes straight up and down or across
between the producers and the consumers. Piracy, however, does exist.
There was one incident off Venezuela in the past year. Nevertheless, the
main threat to supply in Latin America is local and man-made. Even where
there is no war political tension is never far below the surface, take
Colombia as an example, as rival groups well-disguised as political parties,
vie for control of the energy wealth. In Venezuela, the biggest producer
with vast reserves, the country is split down the middle. But even during
the long and damaging general strike at the turn of last year the leftist
government ensured that although their own state company was on strike,
there was no interference in the operations of foreign companies which
continued to produce from the so-called marginal fields. Need for revenue
always overcomes politics. I was interested yesterday to hear mention of
the issue of oil being seen as a blessing or a curse. At the start of the oil era
in Venezuela a common phrase was “sow i.e. plant the oil” to build up
other sectors of the economy. This injunction was followed to some extent
under the brief period of military rule but under civilian administration
173
since then most of the revenue was wasted or used to buy real estate in
Florida.
In the last resort, assurance of supply depends on adequate security
which in turn depends on cost, which can be calculated. What companies
hate is the incalculable, the imponderable major factors that keep CEOs
awake at night thinking “What if……” These are, so far, absent from the
West African and Latin American producing countries. It sounds unusual,
no doubt, to say that about regions where, as we used to say about Africa,
“one should always expect the unexpected”.
2 SHIPPING: VITAL, VULNERABLE AND
LITTLE UNDERSTOOD
Patrick Adamson
Chairman MTI Network
Within the general topic of this conference ‘Emerging threats to Energy

Security and Stability’, I would like to put shipping in perspective by
looking at three specific areas. One, the vital role shipping plays. Two, its
vulnerability to attack and misadventure and, three, something which
applies not only to shipping but to all aspects of the energy chain: the need
for relevant public information.
Well before the current and present danger of terror became part of all
our lives, the sea was, at times, a most dangerous and inhospitable place.
Huge seas, winds and tides have been a part of seafarers’ lives since the
first boats went to sea. Today, we have the more contemporary threats of
pilots taking tankers onto the rocks instead of into port, other vessels
navigating seemingly without radar or lookouts, helmsmen falling asleep
during long nights at sea - all with disastrous results.
More recently, of course, the security position and threat of terrorism
has brought a new perspective to those who earn their livelihood either at
sea or on-shore working to safeguard the movement of energy and
manufactured products from areas of production to those of consumption.
Initially we thought military targets would be hit but then the Limburg was
attacked off the coast of Yemen.
But how reliant are we on the sea to secure our energy supplies and
feed the powerhouse of growth – oil, gas and chemicals?
175
176
The figures speak for themselves.
A staggering 1,608 million tonnes of oil was transported by tankships in the

year 2000. More than 1,800 million were transported if we include refined
products.
This adds up to some 8074 billion tonne-miles covered.
2001
Total Trade: 8,074 billion tonne-miles prepared by fearnresearch

177
And the ships that carry over these distances are around 3500 large
tankers with an average size of some 88,000 dead weight tonnage. What
does all this mean in terms of providing the world with energy? In 2002 it
is estimated that some 57% of the world’s oil consumption (crude oil and
refined products) was carried by tankers: a huge percentage.
Growth in tanker numbers

4,000 110,000
100,000
3,500
90,000
3,000 80,000
average dwt
2,500 70,000
no of ships
60,000
2,000
50,000
1,500 40,000
30,000
1,000
20,000 no. of ships
500 10,000 average dwt
0 0 Source: SSY Consv

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Very simply, without sea-transportation of crude oil and refined

petroleum products, chemicals and gas, the world as we know it would
stop. The lights would, after a short while, simply go out. So sea-borne
transportation of energy must be secured at all cost.
But what impedes us from achieving this goal of securing the safe
passage of some 3500 large tankships that are working on the oceans every
day of the year?
First, let us look at shipboard security itself.
178
The Threats
There are a number of enticing opportunities for the would-be terrorist
to cause an upset.
x To board a ship, take it over, take it into a Port City and blow it up.
x To board a vessel and cause it to collide with a large passenger
vessel resulting in a massive inconvenience to the shipping industry
(not to mention a considerable loss of life)
x To use a ship for hostage-taking, publicity and blackmail; we saw it
with the Achille Lauro.
x To board a ship that is used to carry weapons of war, bio-chemical
or other dangerous substances.
x Ships could have a terrorist cell implanted on-board: the threat
from within.
Any combination of these options is possible too.

We must not forget the environmental cost of a terrorist attack on
tankshipping. Massive pollution to the oceans is caused by an explosion or
sinking.
Given the number and nature of threats involving ships, just how secure
is a ship or how secure can it be made? And how secure are the ports which
they serve?
While the list of potential courses of action may be long, in practice,
sadly, they are not reliable.
In port, many of the responsibilities for ship-security fall to the various
individual terminals as well as to the central Port Authority.
Both parties can heighten security in ports through introducing:
x Designated Secure Areas
x Additional lighting and shore patrols
x Gangway Security and additional deck patrols
x Speedy access to security forces and police
x Surveillance cameras
x Security training etc
179
Security at sea follows much the same lines. Shipping companies can
introduce:
x Designated security officer on-board
x Security awareness training e.g. identifying possible threats.
x Security procedures established
x Sealed entry locations
x Secure locations
x Radio contact procedures with security forces
x GPS alerts, etc
But what does it all add up to? The answer is that for the trained and
determined terrorist or pirate it amounts to very little.
Security at sea in particular remains difficult. Current thinking says
there should be no firearms on board as these lead to a greater escalation of
violence. There are currently no electrified fences around the deck although
there are some advocates of such arrangements. The crew cannot be
expected to have advanced Karate training and are aware that they are very
vulnerable to attack.
But on the positive side, the seafarers will most probably have just
enough time to secure a position for long enough to alert the authorities and
obtain support of one kind or another depending on position and
circumstances. There is, after all, little point for the terrorists in hijacking a
ship hundreds of miles offshore and giving the authorities days to decide
what to do.
I would now like to come on to speak about an indirect threat to the
security of energy supply: that which comes from a lack of understanding
about the importance and nature of shipping from the public, the media and
some politicians. As a combination, they are most dangerous.
Large scale accidents or damaging crises, including attacks or
threatened attacks by terrorists almost always have extreme reactions and
extreme consequences for the public and from those who rely on their votes
- the politicians.
The reason for this is simply that in our media-driven world, the public
demand answers and affirmative action when things go badly wrong. The
ability and training of those who are directly involved in handling the
180
situation correctly in the public domain, has a direct and important bearing
on future events and consequences for the organisation concerned, for the
industry itself and for the supply chain.
The Exxon Valdez oil spill in St Rupert Sound on March 24 1989
deposited 1 million barrels of oil onto the Alaskan coastline but left the
local manager to deal with the hundreds of assembled journalists. The lack
of a caring response or the presence of the CEO led critics to suggest the
company was indifferent to environmental issues.
The Oil Pollution Act of 1990 which followed in the US created a
whole new industry of responders, manual-writers, bureaucracy and cost
which for a time threatened to bring the transport of crude oil to its knees.
While Exxon is still fighting its corner 14 years later, in this case the
legislation appears to have worked and oil spills in the US have been
reduced dramatically.
The Greenpeace attack on the Brent Spar oil platform resulted in the
firebombing of European gas stations and a serious impact on the
reputation of the oil company concerned. The Brent Spar was never
dumped in the ocean, as it should have been.
The sinking of the Erika and the Prestige off the coast of France and
Spain brought outrage from public and politicians alike while a whole raft
of draconian legislation had to be amended when it was realised that if
pursued in its entirety, the lights would go out in Europe.
In both these sinkings, the total inability of those involved to handle
themselves or the event successfully in the public domain was one of the
most important contributory factors to the disastrous outcome. It has cost
one oil company hundreds of millions of dollars, ruined many reputations
and faced many of the participants with criminal charges which they are
still dealing with today. It has, in other words, been devastating to stability
within the oil sector.
9/11 and the ensuing escalation of terrorism has spawned the
International Ship and Ports Security Code (ISPS). Again a whole new
industry has been created to address this issue of security but largely
because politicians, fuelled by media coverage, do not believe that the
shipping industry can police itself adequately.
This lack of confidence in shipping is reflected in the growing trend for
criminal activity in the shipping sector. The complex structure of the
industry with flags of convenience, single-ship companies and with ships
181
generally registered at an offshore regime leads to accusations of

unaccountability and a lack of transparency. This makes the public and the
media suspect they cannot get to the truth. When something goes wrong,
therefore, the media attack and the politicians follow and the enforcement
officials, in their turn, follow their political masters. All around the world,
owners, charterers and seafarers face criminal charges, much of which is
the result of poor, or non-existent transparency and inadequate media
response.
It is a question of perception versus reality, and perceptions of the
shipping industry are at best, poor. So what has this got anything to do with
securing supplies of energy in today’s world? My view is that to
underestimate the power of public opinion and the strength of the media
especially when something has gone badly wrong is disastrous and can lead
to a whole range of unforeseen consequences.
Knowledge dispels fear and if all those involved in the production and
supply chain take opportunities to consider the need for “Accountability,
Responsibility and Transparency” in all they do, and well before things
have gone wrong, then the opportunities to take the right steps to counteract
threats and ensure our essential energy supplies will be much improved.
Reputation Management is more of an art than a science but it is of
critical importance nevertheless especially in a sector like shipping which
remains vital – but vulnerable.
3 THE STRAITS OF MALACCA:
CRITICAL SEA-LANE CHOKEPOINT
Tatsuo Masuda
Vice President, Japan National Oil Corporation, Japan
The Straits of Malacca:

Critical Sea-Lane Chokepoint
183
184
Contents
V Sea-lane chokepoints in the world
V The Straits of Malacca and its diversion routes
V Collisions
V Piracy and armed robbery
V Oil, LPG and LNG imports in East of Malacca
V Expected tanker traffic through the Straits of Malacca
V Key findings
Sea-Lane
185
Sea-Lane in South East Asia
R
G
O
P
T
AYP
H
6
By Captain MATHEW Mathai
186
MALACCA SINGAPORE STRAITS
MALAYSIA
SINGAPORE
INDONESIA
By Captain MATHEW Mathai 8
SINGAPORE STRAITS
Malaysia
Singapore
Batam Bintan Is.
Black Areas show depths

Of Less than 10 metres

187
SHIPS AND THEIR CARGOES
MALACCA STRAITS Passage
ALL SHIPS PASSING MUST MAINTAIN 3.5

METRES UNDERKEEL CLEARANCE (UKC)
12
188
MALACCA AND SINGAPORE STRAITS,

Narrow Straits & Strong Tides
Tidal ‘tail’ of over

5 kilometer/hour !
Eight Collisions In Two Months

189
The Evoikos
Ship was 285
metres long, laden
with 120,000 tonnes
of marine fuel oil.
Oil Spill
A big hole !!
Almost 28,500
tonnes spilled into
the Straits !!
21
The Lula 1 - Graceous collision
Rainy morning on 19 October 1999.

Each of these ships nearly 300 metres long
West bound empty tanker LULA 1 (GT 62031) in wrong lane.
East bound bulk carrier GRACEOUS (GT 85695) in wrong lane.
LULA 1 incorrectly identifies GRACEOUS on the radar.
23
190
Piracy and Armed Robbery at Sea,

Actual and Attempted Attacks
1996 1997 1998 1999 2000 2001 2002 2003

**
Malacca
Straits 3 0 1 2 75 17 16 24
Singapore
Straits 2 5 1 13 5 7 5 0
** 2003 from January-September 2003 or roughly one attack every 10 days!!

46
CO-ORDINATED ANTI-PIRACY EXERCISE
Held 5 –7 March 2002 in Jakarta

Attended by 14 Asian Nations
Joint anti-piracy exercise with Coast Guards of
Indonesia and Japan
57
191
Oil Import in East of Malacca

PL O % '
, PSRU W HU ([SRU W HU
2W KHU V

6( $VL D $I U L FD
( $VL D 2W KHU

$VL D

&KL QD

-DSDQ
0 (DVW

By Dr. Yoshiki OGAWA
LPG Import in East of Malacca

PL O 7RQ <HDU
, PSRU W HU ([ SRU W HU

6( $VL D
( $VL D 2W KHU
$I U L F D
&KL QD $VL D

-DSDQ
0 (DVW

192
LNG Import in East of Malacca

(1 mil. Ton/Year)
Importer Exporter
110.5
SE Asia
Australia
E Asia
Other
73.0
China
Asia
E Mallaca
39.1
Japan
27%
W Malacca 22%
M East
6%
Summary Table of East of Malacca

Demand Import Import ME Share No. of No. of
mil. B/D mil. B/D Share Inc. ships/day Ships/day
or mil. ton or mil. ton Africa from ME Total
Oil 1990 10.5 7.9 71% 73% 15.0 20.6
2000 15.4 11.5 75% 80% 36.2 45.2
2010 18.9 15.1 80% 85% 50.4 59.3
LPG 1990 28.0 18.6 66% 78% 3.2 4.1
2000 44.9 26.2 58% 85% 4.8 5.7
2010 60.5 34.3 57% 94% 7.1 7.5
LNG 1990 39.1 39.1 100% 6% 0.3 4.3
2000 73.0 73.0 100% 22% 1.8 8.0
2010 110.5 110.5 100% 27% 3.3 12.1
*Ships from ME to increase: 19 (1990)Æ43 (2000)Æ61 (2010)

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Key Findings on The Straits of Malacca

V Very shallow and only 500m wide at the narrowest point
V Very congested with 170 ships (over 300 gross ton) per day
V Oil flow of 10.5mb/d plus LPG, LNG and other cargoes
V Serious accidents with possible environmental impact:oil spill
V Frequent piracy and armed robbery, and risk of terrorism
V Ongoing cooperation among Indonesia, Malaysia and Singapore
for regional maritime safety and security assisted by
NGOs:mandatory ship reporting, continuous radar coverage, oil
spill contingency plans, joint anti-sea robbery patrolling etc.
V Coordinated anti-piracy exercise:5-7 March 2002 in Jakarta
attended by 14 Asian Nations
V The Straits of Sunda and Lombok: The diversion routes of Malacca
ൺ extra 3 to 5 daysൺ urgent needs for navigational aid upgrading
SECTION IX
BACKGROUND PAPERS
ON THE WORLD ENERGY MARKET
Edited by Geoffrey Hancock

MEC International
1 THE GEO-POLITICAL FUTURE OF THE
GULF
Formation of the UAE

When the United Arab Emirates was formed over 30 years ago, most
experts at the time thought it could not last more than a couple of years.
The failure to include Qatar and Bahrain in the project meant that the future
of those tiny emirates hardly looked secure either. And I recall taking a bet
in the early 1980s with an American diplomat that Kuwait could not
survive another 5 years. Yet over the years they have all shown remarkable
resilience. Kuwait has survived invasion and occupation, with a little help
from her friends, and even internal coups in some of these small states have
had no impact on their stability.
Today, all these states face a new set of threats. What are the chances of
seeing these largely defenceless monarchies survive into the next decade?
Four key problems

I have identified four key problems the Gulf States now face and which
I think will determine their ability to survive. The states are all quite
different in character, and even though the threats they face are common, I
would not expect them all to tackle them in the same way.
The first and most dangerous threats would come from any increased
instability in one or more of the three large neighbours, Iran, Iraq and Saudi
Arabia. I will not add to the analyses you have already had about Iraq and
Saudi Arabia. On Iraq, the advantages of a successful transfer of power to a
single Iraqi state by the Americans would be an enormous boost. In
domestic political terms it would vindicate their longstanding close
political relations with the West. A democratic and stable Iraq would show
their people that the Americans can sometimes practise what they preach
and would boost hopes that they might apply the same energies to solving
the Palestine issue. Arabia will be watched with the greatest unease. At a
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Strategic level, there would also be relief that a strong Iraq would again be
a counterweight to Iran, whose shadow looms over all the Gulf states. Only
in Kuwait might an American success be received with mixed feelings,
since they fear, rightly, that at some stage in the future, when the American
protective shield has gone, a single Iraqi state will probably revive its
claims to Kuwait.
At the other extreme, American failure, caused by exiting too fast and
opening the door for civil war and intervention by Iraq’s neighbours would
be very dangerous indeed. Interfaith violence could spread, especially in
Bahrain with its majority Shia population under a Sunni government. The
Ruling Families’ links with a discredited US policy will come under
increasing fire. And the knock-on effect on Saudi will be appreciable.
Stability in Saudi Arabia is of equal concern. At present Saudi Arabia
exercises a generally malign but manageable influence over its small
neighbours. It makes clear its dislike of political progress among the
neighbours which might show up Saudi in a bad light. When Kuwaitis
debate giving women the vote, they look over their shoulder at what the
Saudis might think as much as what they themselves want. The Saudis
meddle too in border disputes, and keep close links with malcontents in the
different monarchies. What I think most of the Gulf States would like to see
is continued stability, whether or not it is accompanied by political reform.
They would fear most the replacement of the present regime by a more
militant Wahhabist regime which sets out to export its hard-line creed to
the neighbours. They would also of course fear any internal break-up in
Saudi Arabia because of the high risks any regional instability brings. They
may not much like Saudi Arabia, and have no faith in its ability to protect
them from any threats they might face, but they probably prefer the status
quo to anything other than the most gentle pace of change.
Iran poses no immediate threat. Even with the reformists losing out in
the last elections, there seems little likelihood of Iran changing its
essentially opportunistic policies in the region. It may even be the case that
it will be easier for a hard-line regime in Iran to re-establish relations with
Washington. We see signs of cooperation with the US – mostly by proxy
via the British – over southern Iraq. And internally, if the hardliners fail to
deliver economic reform, which essentially means economic liberalisation
and opening up to more foreign investment, they could have a revolution
on their hands from the increasingly impatient younger generation. What
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makes the Gulf States nervous is the realisation that if Iran develops the
economic and political muscle to go with its population (already more than
Iraq and the Arabian peninsula) they will seek to exert their influence over
their smaller neighbours in a way which would reduce further their already
limited freedom of political manoeuvre.
The second threat

The second threat facing these countries is how to handle their own
young people. The two recent reports on Arab Human Development,
produced for the UN by Arabs, has drawn attention, among other things, to
the acute educational deficit in the Arab world. In a region with massive
population growth, where typically half the population will still be at
school, demands for employment are going to be huge. In the oil rich states,
expectations among the young of the kind of employment to expect, and
the kind of salaries and benefits they should command are unrealistically
high. Managing these expectations and preparing people for a wider range
of jobs within the workforce should be the first priority of all governments
in the region. It is simply unsustainable to have high and growing numbers
of expatriate workers combined with unemployment among young
nationals. In all countries the public sector is saturated with overpaid and
underemployed nationals. The private sector will not take on nationals,
when they are unsackable, several times the price, and a fraction of the
productivity of third country nationals. Qatar is now making a huge effort
to tackle this problem, and Bahrain and Oman, with their more limited oil
wealth, are also pushing hard. But the others duck the difficult decisions
every time the oil price bounces up.
The consequence of allowing this to continue will be increased
alienation of the young, leading some to the vices of drink or drugs, but
many more towards religious fundamentalism.
Fundamentalism
Fundamentalism is the third of the threats facing the Gulf States. By
fundamentalism, I am referring to those groups who wholly reject close
relations with the we stand any political, social and even economic reform
which they see as western inspired. I do not include Islamist groups which
are quite clear about the importance of their country’s religious identity, but
see no conflict in working with the rest of the world and are prepared to
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make pragmatic compromises over modernisation in the wider interests of

their country. These are the majority. Fundamentalists are a small minority,
and those who would back terrorism a smaller minority still. But they have
a disproportionate influence in a region and are a dangerous attraction to
the young. It is important to remember that one of their primary targets is
always the Ruling Families in the Gulf, generally because of their
perceived greed, corruption, decadence or otherwise straying from the
fundamentalists own narrow interpretation of Islam. States in the region
have generally dealt with them through a mixture of suppression and
appeasement. This has kept the lid on the problem, but often at the expense
of the state as a whole. In Kuwait, which has a thriving democracy largely
ignored by the West because the franchise excludes women, these issues
are fiercely debated in the Parliament. Fundamentalists there have
successfully blocked decision taking by the Government, usually by raising
corruption charges against Ministers, and constantly press for what they see
as proper Islamic practice, such as segregated universities (regardless of
cost and efficiency) or the full implementation of Sharia law. The
Government either gives way, or sets up committees to study the issue
further in the hope that the problem will go away. At the same time Kuwait
tries to crack down on extremists provoking violence. They were shaken
from a certain complacency by a series of attacks on coalition forces in the
run up to war last year, and tougher security measures are now a central
part of their response to extremism. By contrast, the Amir of Qatar has long
believed that fundamentalism is created by suppression. One of his first
acts as Ruler was to abolish censorship – indeed he did away completely
with the Ministry of Information which in all other Arab States is a key
element of internal control. He also funded al Jazeera, the first Arab TV
channel not to have state control. Qatar is a very conservative society,
closely linked to Saudi Wahhabism. Yet, even with the US having their
regional military headquarters based quite openly in Qatar there has been
remarkably little dissent, because the people have the safety valve of free
speech.
Pressure from the USA

As if this pressure was not enough, the Arab world as a whole is facing
equal pressure, as they see it, from the Americans to conform to some
American ideal of democracy and to do it fast. This is a threat which is
taken more seriously in the region than we might expect. They see that the
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US has very powerful levers to use against them. As I have said, the Gulf
States cannot defend themselves against any serious external aggression.
As Kuwait discovered in 1990, they cannot rely on their Arab neighbours
or brothers in time of trouble. Therefore the US has to be the guarantor of
their survival (although we can be reasonably sure incidentally, that the US
would not have come to Kuwait’s aid, unless George Bush senior had not
been under intense pressure from Margaret Thatcher to do so). Against this,
it would be hard to exaggerate the depth of anti American feeling among
ordinary Arabs throughout the region because of what they see as the
hypocrisy of US foreign policy. So, keeping the Americans sweet without
too obviously rolling over on their backs for them is a challenge all the
governments in the region face.
Dilemmas for all Gulf States

So how are the various governments handling these opposing
pressures? This is clearly the biggest dilemma in Saudi Arabia, but it also
poses problems in Kuwait, for example. Votes for women is the touchstone
there, because it is a fundamental issue for both the US and the Islamists in
the Parliament. Next time it comes up for a vote I think the Kuwait
Government, which genuinely wants it to happen anyway, will have to
summon up the courage to make it happen: in their case the perceived
pressure from the US is the greater threat. Curiously, when a Parliamentary
committee rejected vote for women for municipal elections, the Islamist
dominated committee argued that they did so because it did not appear that
the government had a serious and coherent strategy for extending the
franchise to women. Apart from votes for women, Kuwait is well ahead of
the rest of the Gulf on democracy as the vigour of their public debates both
in the Parliament and in other fora shows. The back marker is the UAE
which has shown not the slightest interest in serious democratic reform and
has been under no domestic pressure to move either. But the other states are
moving well down the road. In Bahrain this was a necessary move because
of the challenge of handling a generally disaffected Shia majority, but in
Oman and Qatar reform has been driven from the top at a slow pace, but
one which the rulers judge the people and their traditional, tribal way of life
can absorb safely. The question now will be whether the Americans can
accept this gradualist approach or whether they will demand more radical
and faster change to demonstrate the success of their drive for a new
democratic order in the Middle East. Gulf rulers already resent the
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implication that the steps they are now making towards democracy are an
American imposition following the call of Washington neoconservatives
for the democratisation of the Middle East: all the processes in the Gulf
have been around or in gestation for years. And they will I think resist US
pressure now to accelerate the process, because too fast a process would
threaten stability.
Challenging times ahead

So are the Gulf States well equipped to face these challenging times
ahead? Unless we get some of the worst-case scenarios emerging in Iraq
and Saudi Arabia, they should manage. The experts have given their views
on those two key states already. My own view is that the US just cannot
afford the worst case scenario for Iraq to develop. Despite many mistakes
they have shown that they can change direction when heading for a brick
wall, and I would expect them to be able to contain Iraq’s problems with a
reasonable degree of success, at least for the next couple of years. That they
may fall a long way short of the neo con dream of a pro-western
Government, part of an ‘axis of good’ with Turkey and Israel would
probably come as a relief to the rest of the Gulf. A stable Iraq might well
push for membership of the Gulf Cooperation Council. The GCC resisted
this in the Saddam era, but may find it harder this time, especially if the
Americans press the case hard. The need for economic convergence would
buy time, but eventually, a GCC embracing both Iraq and Yemen might be
a better balanced economic and political grouping than the present GCC.
It is harder to be confident that the House of Saud will get it right. But
you have to go with the form book and expect them to muddle through
intact, but possibly even more inward looking and awkward as a neighbour
than they are today.
Leadership and wealth

Whether the Gulf States do more than just survive, depends on how
well they can adjust to the growing demands of their young people. Over
the next ten years there is no reason to suppose that demand for oil from the
region will dry up. If oil production is at a peak now as some claim, prices
may even rise in real terms, allowing the Gulf States to put off the difficult
adjustment processes where they lack the leadership to push for
uncomfortable change. But in most cases they at least know what they
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ought to be doing. All are increasing the pace of economic liberalisation;

Kuwait is talking about a tax regime; Qatar allows its nationals to be fired
for poor performance; and Omanis and Bahrainis are taking on an
increasing range of jobs. And everywhere there is a drive towards skills
training. Those that adapt fastest will prove the most successful in keeping
potentially explosive social problems at bay. Those who can manage the
trick of developing the most open societies without abandoning traditional
values will have the best chance of handling simultaneously the problems
of fundamentalism and an overbearing United States. It is not going to be
easy, but it is hardly impossible either given the great wealth in the region
and the tiny populations and infrastructure demands they have to cater for.
Performance will vary, with leadership rather than wealth being the
element that will separate the winners from the losers. But compared with
the rest of the Arab world I expect the Gulf States to be looking fairly
healthy ten years down the road.
2 CHINA AND OPEC
Summary
The subject of this paper is the relationship of the key oil producers to
the future No 1 Pacific Basin Importer - China
Within the context of the political relationship between the Gulf oil and
gas producing states and the oil and gas consumers of the Pacific Basin,
this paper focuses on China, its people, institutions, markets and commerce
and, above all, on the Chinese and Arab governments and their opinions
and attitudes.
My underlying premise is that China - with close to one-fifth of the
global population - will together with the United States be one of the two
key economic drivers in the global system within twenty years and that the
Gulf states currently accounting for two-thirds of proven global oil reserves
and almost one-third of proven global natural gas reserves will remain the
principal key to global political stability, enhanced development and
economic growth. So here we have two global economic giants – their
evolving relationship will be of considerable significance to the rest of the
world and nowhere is it likely to be tested more than in their rivalry to
secure access to the oil and natural gas of the Gulf states.
Both China and the six key Gulf members of OPEC (Saudi Arabia,
Iran, Iraq, Kuwait, Qatar and the United Arab Emirates) have their own
deeply embedded culture which has proved vigorous and robust in the face
of an accelerating pace of change and the challenge of western values and
technology. China may not appear to have much in common with the lead
oil-producers, but it shares many pan-Asian values and can often find
problem-solving routes to effective partnership which lie beyond the range
of practice in the competitive, highly privatised capitalist economies of
North America and Western Europe.
At stake is the fragile and vulnerable symbiosis of interest between the
United States and Saudi Arabia which has been used most effectively as an
economic regulator in the oil market for the past quarter-century. Whenever
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the Americans felt that the oil price was getting too high, Saudi Arabia has
been ready to utilise spare capacity, increase production and damp down
the price. Conversely, whenever the oil price collapsed, as in 1986 and
briefly in 2001, Saudi Arabia has responded to US requests to cut
production sharply in order to bring the market back to equilibrium within
a tacitly agreed range of price.
China, as explained here, is the new main-player in this global energy
market. One thing is certain. China will not be willing to accept the current
rules of the game and will thereby change the rules to accommodate its
own underlying national interest. Where will this leave the United States
and Europe? And where will that leave Saudi Arabia and the rest of the
OPEC countries? And how about Japan, that other crucial player in the
currently intensifying struggle for access to the cheapest global energy
resources?
The China Mega-Economy

Let us start with China, an economic firework display which today
none of us can afford to ignore. This is no longer a side-show. It is already
at present becoming the second largest economy on earth. Within 25 years,
its economy is likely to match that of North America and most probably to
be well ahead of Europe and dominant throughout South-East Asia. At that
point in 2030 when the mature markets of North America, Japan and
Western Europe have reached higher levels of consumer saturation, lower
levels of long-term investment and severe constraints in access to natural
resources, China, the world’s largest market, is likely to be bursting with
energy, mobilising effectively its huge population and deriving immense
political and trading benefit from a modern economic and industrial
infrastructure. It will already be beginning to exploit its competitive
advantage by exporting its latest advanced technology.
Today, for example, China is only on the brink of a leap in vehicle
numbers on the Chinese roads – about to increase say five-fold, perhaps
ten-fold in 25 years as new production plants designed and serviced by
western automobile companies come into operation and road construction
and improvement keeps pace with the widely expressed desire of the
population that each family and working individual should be able to own
their own vehicle.
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By 2030 China will be on the brink of another massive economic leap

forward: its new high-technology, high-volume motor industry will have
undercut the dominant truck and automobile exporting manufacturers
elsewhere and begun to capture their export markets world-wide one by
one. By 2050 the roads of Africa and Latin America, not to mention
Eastern Europe and South East Asia, will be filling with Chinese (and
hopefully Indian) trucks, service vans and cheap automobiles, all well-
adapted to local needs and aspirations, no longer the hand-you-downs of
Western affluence and much more appropriately the practical, less
sophisticated hand-you-ups of a highly successful sector of the two new
leader-states of the developing world, China and India.
A Political Giant in Asia

There is, in my view, relatively little likelihood of China fragmenting
or even splitting on a North/South divide: it would be foolish for the rest of
the world to plan on that assumption. A federalist internal structure is likely
to emerge and new institutions will gradually appear and will help to
cement the country together.
Equally, the probability of a debilitating confrontation with another
super-power is very slight. Russia no longer poses the main threat and the
possibility of a renewed communist-western democracy conflict is steadily
diminishing and has probably reached the point of no return.
The rest of South-East Asia is already coming to terms with Chinese
political and economic dominance. Concern is expressed widely; yet wiser
counsels express great hope for an expanding tidal wave of economic
growth and political stability. In my view, the hopes far outweigh the fears.
We are not here faced with a hostile aggressor intent on colonisation,
on seizing mineral wealth and other natural resources and enslaving whole
populations as cheap labour. This has been repeatedly the model of the past
in Asia. It is a model which demonstrates lack of long-term vision, results
in intense misery (and early death for) many millions of people and
constitutes a vicious stifling of human freedom, inventiveness and
creativity. It is also a model which has always failed. Even within the
lifetime of the older people of China, the experience of civil war,
occupation, revolution and oppression is still keenly felt and transmitted to
younger generations. I see therefore no popular support at present for the
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dominance of the military or for overt plans for acquisition of territory

(apart from the recovery of Taiwan).
The Overseas Chinese

We need to look carefully, in addition and by contrast, at the large,
stable expatriate Chinese populations some established for many centuries
throughout South-East Asia and round the Pacific Rim. The Chinese
diaspora has some key features:
x The Chinese way of life and culture has been largely preserved
intact;
x Links with the towns and roots of the ancestors in mainland China
have been carefully preserved and cherished;
x The Chinese communities have flourished by focussing on local
and international trade
x They are generally tolerated and valued by the indigenous
population. While here and there their enterprise and affluence
arouse envy and provoke expropriation, they only rarely suffer
outright expulsion.
This network of Chinese expatriate communities with its highly-
developed family inter-communication stimulates much trade between the
various centres. As mainland China emerges more and more from self-
imposed isolation, the expatriate communities are likely to be a source of
considerable strength and a new vehicle for extending trading influence
throughout the region. Already the flow of investment in Mainland China
from Taiwan and other expatriate Chinese business interests has been a
significant factor in sustaining high economic growth over a long period.
“Buy your second home in this province!” is an advertisement greeting the
thousands of overseas Chinese visitors on their arrival, many now for the
first time, at the airport in Mainland China.
The Lessons of the Spratlys

The Spratly Islands lie just about at the centre of the South China Sea.
The states of Vietnam, Thailand, Cambodia, Malaysia, Brunei and the
Philippines as well as China have a strong interest in the freedom of
navigation in these waters, which also embrace significant oil and gas
offshore (and onshore coastal) development and production.
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The recent Chinese military occupation of these tiny deserted islands,

hitherto only inhabited from time to time by mainly Philippino and
Vietnamese fishermen, set off alarm bells all around the South China Sea.
The new China mega-state was clearly flexing its muscles and testing the
reactions of its neighbours. Yet the latest developments also carry a clear
message. China and the Philippines have signed quite amicably an
extensive inter-government agreement on the joint administration of the
Spratlys. China is now signalling thereby both its wish and need to be
involved in the whole region, but also its friendly and peaceful intentions.
I will not be surprised if the psychology and motivation behind these
actions is not in due course applied to the leading oil and gas producers of
the Gulf and I suspect that the depth and subtlety of the ensuing
collaboration may come as something of a surprise to the USA and Europe.
Coal in China
One question-mark in this mainly optimistic vision of the future is
where and how is China going to obtain adequate energy to fuel this
buoyant and sustained economic growth.
China is still essentially a coal economy. In 1960 coal accounted for
95% of China’s needs for primary energy. It still accounts for almost 70%
of the energy mix today and this share will only decline quite slowly.
Mainly of poor quality and highly sulphurous, and with mining mainly
concentrated far from the high-growth areas of the country, the Chinese
coal industry presents formidable transportation and environmental
challenges.
China’s coal production is 29.5% of the global total; coal consumption
is 27.9% of the global total. The indigenous resource is abundant: 11.6% of
the global total of proved coal reserves, giving a reserve/production ratio of
82 years. Moreover there are further ample and cheaply produced resources
available in the Pacific Basin area, most notably in Australia, Indonesia and
the Eastern Siberia region of Russia.
The profile of recent coal production in China is curious. It built up
strongly year-by-year to 1996. Then under environmental pressure and
Government determination to close down inefficient fields and regions,
production fell by almost one-third in three years. However, production
then rose sharply and surpassed the 1996 peak in 2002, while consumption
in the same year was over 40% higher than two years previously. These
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massive swings have been examined by the International Energy Agency,

the World Bank and others and it appears that some of the statistics for
1997-2000 may have been exaggerated by including government targets
rather than the hard statistics of production output. In any case, the
conclusion is clear: China cannot do much without a lot of coal.
Coal is two-and-a-half times the weight of oil in the Chinese energy
mix. No other leading state has such a high dependence on coal. Coal
therefore remains central to the energy strategy of the government and
presents large-scale challenges in the mobilisation of adequate investment
in mining and transportation infrastructure.
Oil Production Successes

The economic awakening of China is generally dated from the
accession of Deng Xiaoping in 1979. Like most developing countries,
China began by liberalising other sectors of the economy first and by
keeping tight hold of almost all parts of the oil industry. As a net exporter
of oil into world markets, the Chinese output generated significant volumes
of hard currency, otherwise at that time in very short supply.
China at that time knew that it had adequate reserves of oil to remain
self-sufficient but it failed to calculate the impacts of very high rates of
economic growth. Demand for oil rose faster than production and by 1993
China had become a net importer of oil.
Considerable effort was expended to boost domestic production; when
this failed to meet the government targets, there was in 1994 a distinct
change of direction. Major multinationals were encouraged to invest and
bring with them the latest technology. This process had only mixed results
as some of the companies were disappointed with the terms of the contracts
proposed and the low prospectivity of the fields offered to them.
Oil production continued to rise until it peaked in 2000-2003 at 3.4
mbd, putting China into the No.6 ranking in global oil production.
This looks like the limit of production growth and China is unlikely to
displace Iran and Mexico to reach No. 4 ranking behind the three oil
production giants, Russia (9.0mbd); USA and Saudi Arabia (both 7.8 mbd).
Indeed China will find it hard work to replace many old depleting fields
with oil from new fields to maintain the present level of production.(Table 1).
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Table 1: Oil Consumption and Production in 2002 (mbd)

Consumption Production Shortfall(-) / Surplus (+)
USA 19.7 7.7 -12.0
China 5.7 3.4 - 2.3
Japan 5.3 - -5.3
Saudi 1.4 8.7 +7.3
Arabia
Iran 1.1 3.4 +2.3
Oil Consumption – Sustained Growth Likely

In terms of national oil consumption, China at 5.7 mbd has already
displaced Japan (5.2 mbd) as the second largest oil consumer in the world.
Although well behind the United States (20.3 mbd), China is expected to
gradually close the gap as the Chinese economy continues to expand
vigorously (Table 1).
Oil Imports - Increasing relentlessly

With oil consumption rising strongly and oil production expected to be
flat or in slow decline, oil imports are rising fast. Currently ranked at No.5
among global importers of oil, China ( 2.4 mbd in 2004) is now expected to
displace South Korea (2.3 mbd) this year, Germany (2.6 mbd) next year
and Japan (5.2 mbd) by 2010.
Table 2: PTA estimates of global oil trade in 2025 (mbd)

Major Net Importers Major Net Exporters
USA 15-22 Gulf 21-24
Europe 15-18 FSU 7-9
Japan 7-9 West Africa 5-7
China 10-18 Mexico/Venezuela 6-7
In the period to 2030, oil demand in the United States and China is
expected by the IEA and World Bank to increase by about 10 mbd each. In
each case it can only be satisfied by increased imports. The IEA wording
for Chinese imports is “up to 10 mbd”, reflecting Chinese political
sensitivities, but their numbers and economic analysis point to a higher
number.
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Where will the incremental oil come from?

In global terms, incremental demand for oil has to come mainly from
the Gulf states, where two thirds of global proven oil reserves are located.
The IEA’s expectation that Gulf output will double to satisfy this
incremental demand and compensate for depleting production elsewhere
looks highly dubious. Continuing political turbulence in the Middle East is
likely to continue to deter investment and a tightening market will deliver
higher prices and enhanced government revenue to the producers, without
having to go to the trouble of mobilising vast new investment funds both
internally and by drawing on the global capital market.
China and the USA as oil import rivals

The US complacency in this matter is based on the assumption that the
economic weight of the US (25% of global energy consumption) operating
in an open world market for oil will ensure that it can outbid its competitors
for available supply. The US also has a wider strategy to protect its national
interest: its Strategic Petroleum Reserve can be used to meet any temporary
shortfall and a strong naval and military presence in the Gulf will be ready
to restore any interruption to supply and to redirect the remaining supply as
needed.
The US may find, however that China has cemented its relations with
the Gulf states in a manner which will virtually guarantee adequate oil
supply to China. One aspect of this for example, lies in the latest Liquefied
Natural Gas (LNG) contracts currently under negotiation. Unlike crude oil
and product which is fungible and freely tradable on world markets once it
is loaded and on the high seas, LNG supply depends on long-term take-or-
pay contracts with specific consumers who are in control of adequate
supply networks to power stations, to industrial and commercial consumers
as well as to the domestic sector. The gas producer and consumer are
locked in by contract to a bilateral arrangement over a period of 15-20
years at a time. China and other Asia Pacific gas consumers are actively
exploring how to extend this relationship to guarantee at least part of their
oil supply.
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Chinese Relations with OPEC

So far as I am aware, China has made very little impact so far on the
OPEC Secretariat in Vienna. Unlike Russia and Japan, who keep a close
eye on what is going on, coverage by China at the diplomatic and press
level is limited. The main thrust of China’s interest in supply from the West
has been directed at Kazakhstan and other Central Asian/Caspian states and
at Saudi Arabia and Iran.
Of the non-Gulf OPEC members, China has very strong interests in
Indonesia, quite strong interests in Algeria, Libya and Nigeria and less
strong interests in Venezuela.
Among the Gulf OPEC members, relations with Iran are close
including agreements to share nuclear and weapons technology. Iraq today
has become a major opportunity for China but so far in the hand-over
transition phase, there is little evidence apart from increasing flows of
Chinese goods into the blossoming Iraqi market. Kuwait and UAE rank
China high in the list of imported manufactures and both have offered the
Chinese opportunities to invest in equity in the oil and gas sector. In Qatar
there is lively interest by China in new LNG contracts. A 51-person
Chinese delegation visited Qatar in December 2003 to view the new Qatar
LNG export facilities.
All this does not add up to very much compared with Saudi Arabia
where the China-Saudi Joint Commission is well-established under the
joint chairmanship of Ali Naimi, Saudi Minister of Energy (and former
President of Saudi Aramco, the largest oil-producing company in the
world) and Dr Wang Tao, Adviser to the Council of Ministers (and former
President of China National Petroleum Corporation which at that time had
a total work-force numbering 1.7 million).
3 EGYPT – A PROMISE YET TO BE
FULFILLED
Introduction - Political and economic overview

Egypt commands attention for many reasons. It occupies over a million
square kilometres at the vital strategic junction where Europe, Asia and
Africa meet, the land bridge between Africa and the rest of the Eastern
Hemisphere. It owns the Suez Canal, which also brings substantial regular
income. Cairo’s population of over 17 million makes it the largest city in
Africa.
Egypt is the centre of the Arab world, geographically as well as
culturally and politically. It has awkward neighbours: Libya to the West,
Sudan to the South and the Occupied Territories, Israel and the Red Sea to
the East. Its population of nearly 70 million makes it the largest Arab
country: every third Arab is an Egyptian. Egypt sends skilled professionals
to work throughout the region, and plays a central role in Arab media and
cultural life: its film industry supplies the entire Arab world.
In religious terms. It is a leading Muslim (mostly Sunni) country,
having become progressively Islamized since the Arab invasion of the
seventh century, though a Coptic Christian community some 5 million
strong still survives. The Al-Azhar mosque and university is an
internationally respected centre of Sunni Islamic orthodoxy, which is
traditionally moderate, tolerant and non-threatening in colour.
If all that is not enough, it also has 7000 years of civilisation behind it,
and is one of the world’s most attractive tourist destinations. The largest
annual contingent of tourists normally comes from the UK: some 368,000
British nationals visited Egypt in 2003, about 10% of the total.
Politically, Egypt’s regional weight, gateway role to the oil-rich Arab
countries, consistently moderate policies amid the tensions of this
particularly tense region and not least its rank as a leading Islamic power
make it a key partner both for its neighbours and for the international
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216
community at large, notably the United States and the member states of the
European Union.
History
The regime was autocratic (Pharaonic) from the fourth to the first
millennium BC. Then came the Persians, the Greeks, Romans and
Byzantines. By 641 AD, the Muslim Arabs had conquered the whole
country. The Fatimids from Morocco invaded in 969 AD, founding the city
of Cairo (Al-Qahira – the Conqueror) and establishing the Al-Azhar
University. Subsequent rule by Salah Al-Din (Saladin) and the Mamluk
Sultans was ended by the Ottoman occupation of 1517 AD.
In the mid-19th century, Muhammad Ali’s dynasty oversaw the
westernisation of Egypt, the building of the Suez Canal and the
colonisation of the Sudan. In 1882, British forces occupied Cairo and the
British Consul-General became the effective ruler. Egypt profited from the
two World Wars. Britain recognized Egyptian independence in 1936. But
Arab nationalism and defeat in the 1948 Arab-Israeli war discredited the
(Ottoman-descended) monarchy, and on 23 July 1952 the Free Officers
seized power, sending King Farouk into exile.
First, briefly, Neguib, and then Nasser took over, the latter soon
becoming an iconic figure of Arab nationalism. Israel, Britain and France
launched their ill-fated 1956 attempt to seize the Suez Canal; Egypt and
Syria enjoyed a short-lived union, the United Arab Republic (1958-61); and
after the disastrous Arab-Israeli War of June 1967, Israel occupied the
entire Sinai. Yet Nasser’s death in 1970 was mourned throughout the Arab
countries.
His successor, Anwar al-Sadat, expelled the 15,000 Soviet military
advisers (1972); launched the October 1973 War (a partial triumph for
Egypt) and the economic Infitah (or opening up); promoted improved
relations with the USA; and made a bilateral peace with Israel following
US-brokered talks at Camp David. This in turn caused Egypt's expulsion
from the Arab League and on 6 October 1981 Islamists assassinated Sadat
at a military parade.
Vice-President Hosni Mubarak took over as president. He abandoned
many of the unpopular features of Sadat's domestic policies, condemning
privilege, ostentation and profiteering, and placing new emphasis on
economic reform (but see below).
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The current situation

Since his accession, Mubarak's Egypt has played a pivotal role in the
Middle East Peace Process, and has been rewarded for this by substantial
international support, mainly from the US. Mubarak oversaw the return of
Egypt to the Arab League in 1991. In the same year, Egypt joined the
international coalition which drove Iraqi occupying forces out of Kuwait.
The Peace Process is now apparently in serious crisis: but this is not for
lack of Egyptian goodwill and effort. Internally, Mubarak is unchallenged,
and on 26 September 1999 was re-elected for a fourth six-year presidential
term, the constitution having twice been specially amended to allow this to
happen.
The internal political and economic scene is less positive. Political
stagnation, lack of democracy and occasional low-level violence have led
to loss of direction and a sense of stagnation. Against a background of
continuing rapid population growth, poverty and inadequate public
services, poor political and economic management and excessive
bureaucracy have allowed social problems to accumulate and multiply and
have failed to allow the economy to develop or to deliver adequate
improvements in living standards.
The Egyptian Parliament is bicameral: the People’s Assembly (PA) is
the main legislative body with the Shura Council (SC) providing an
oversight mechanism. Egyptian democracy has long been paralysed by a
sclerotic system of patronage and client networks, which serves the regime
and has worked until now as a factor for stability and continuity. The ruling
National Democratic Party (NDP) dominates the PA, holding over 80% of
the seats. Disaffection with its performance, has however been increasing,
particularly amongst the young, making political reform a key requirement
for Egypt’s further development.
Formally, the People's Assembly has important powers. Elections are
held every five years: 444 deputies are elected and 10 more appointed by
the President. The Shura Council has 176 elected members and 88
presidential appointees. But the influence of the Parliament in Egyptian
political life should not be over-estimated. Key regime interests are ‘off
limits' to deputies. The National Democratic Party (NDP) has however
been in nominal power since its formation by President Sadat in 1978 and
still dominates the People's Assembly. At present, since the elections of
2000, the NDP holds 388 seats, independent candidates 20, the Muslim
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Brotherhood 17 (nominally as independents) and 4 assorted opposition

parties between them the remaining 17. The NDP's majority conceals the
fact that in the elections, only 178 official NDP candidates won an
Assembly seat under the NDP banner. Their numbers were boosted by 210
“independents” who then joined the party. The electoral process in Egypt is
clearly subject to considerable outside influence. But it was interesting that
the regime failed to prevent the 17 Muslim Brotherhood deputies from
winning their seats, despite harassment of candidates and manipulation of
the voting process.
Spurred on by its poor performance in 2000, the NDP has since
embraced wide-reaching personnel and structural changes and adopted a
number of key policy papers – on Education, Healthcare, Economic Policy,
Youth, Women and Foreign Policy. Leading old guard figures were
sidelined, and Gamal Mubarak – the President’s younger son - appointed
Secretary for Political Affairs, a new post giving him effective day-to-day
control of NDP policy formulation. This shifted the balance of power in
favour of Gamal’s progressive/reformist group, and he is said to be well
placed (though far from certain) to succeed his father one day.
But in reality, if not constitutionally, the power of the President is
supreme. President Husni Mubarak, who succeeded President Sadat in
October 1981, began a fourth term in October 1999 after 93.97% of voters
nominally approved his candidacy. In practice he relies on his control of
the power-broking elite, including mainly the military and security
apparatus. There is no obvious successor to President Mubarak, not least
because he has continually refused to appoint a vice-president who could
take over his post if and when he left. Whoever does succeed him will be
chosen on the basis of his acceptability to the military and security,
presumably on their view of his ability to maintain stability in the country.
Reform must therefore come from the top down, and there are some
limited signs that this is happening. The NDP held its first ever Annual
Conference (one of the structural reforms agreed at a 2002 General
Congress) in Cairo on 26-28 September 2003, under the slogan "New
Thinking and Citizens' Rights”. In his speech, President Mubarak
announced the abolition of military decrees, except those relating to
national security, which had been issued under the State of Emergency,
now in force for over 20 years.
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The main, though still limited, real opposition to the Government

comes from the Muslim Brotherhood, which has spent 50 years promoting
its agenda of islamising politics through peaceful means. It has 17 PA seats
and growing support – thousands of supporters attended the funeral in
Cairo of the Brotherhood’s Supreme Guide in January 2004. Its non-
political work (e.g. in parallel social services such as subsidising schools
and hospitals) is also popular. But like other opposition parties, its activities
are closely monitored and controlled by the Government, which has a deep
aversion against legitimising any form of “political Islam”.
The Islamic factor

Formally, the Muslim Brotherhood and other Islamist organisations are
banned. But as already noted, they are a factor to be reckoned with. The
Egyptian government also faces a sporadic threat from Islamic extremism.
Since 1992 the Egyptian authorities and militant Islamic groups have
continued a low intensity conflict against each other, mainly in Upper
Egypt. Islamic militants have targeted foreigners, killing several foreign
tourists (including eight Britons).The worst attack, on 17 November 1997,
was in the hitherto relatively unaffected area of Luxor, when 58 tourists, six
of them British, were murdered. UK official travel advice currently warns
travellers to be vigilant and respect any advice from the local security
authorities: but tourism continues on a large scale, carefully protected by
the authorities.
Over the past decade, hundreds of suspected militants and police have
been killed and there have even been assassination attempts on President
Mubarak (most recently in September 1999 in Port Said) and key
Ministers. The authorities have contained the threat but have yet to
eradicate it. Human rights organisations, including the United Nations,
have accused the security forces of human rights violations in their
response.
Human Rights
Egypt has ratified the six core UN human rights conventions and
guarantees certain basic human rights (e.g. religious freedom) in its
constitution. But there are concerns about individual cases of human rights
abuse, but also positive developments in recent years in Egypt's human
rights record. For example, where outsiders have had concerns about
220
alleged widespread use of torture by the Egyptian security forces, the

authorities have taken steps to clamp down and a number of police officers
have been convicted for torture offences.
Human rights is naturally a sensitive area for the Egyptians, as for other
North Africans. They see policing/security issues as a domestic matter
integral to their fight against terrorism. However, on 19 January 2004, the
Egyptian Parliament approved the establishment of a 26 member National
Council for Human Rights (headed by the former UN Secretary-General
Boutros Boutros Ghali) and abolished seven of the eleven military decrees
issued since the State of Emergency was declared in 1981.
Economy
Basic statistics:
x GDP: $268 billion (2002, est.)
x GDP per head: $3900 (2002 est.)
x Inflation: 4.3% (2002)
x Major Industries: Agriculture, Manufacturing, Services
x Major trading partners: EU, Middle East, USA
x £1 = 9.75 Egyptian pounds $1 = 6.22 Egyptian pounds)
The performance of the Egyptian economy has fallen well below its
potential. The regional tensions and conflicts of the past fifty years (notably
Suez 1956, Sinai 1967 and the October war of 1973) have made things
difficult. Egypt has advantages: regular hard-currency earnings from Suez
Canal dues, tourism (terrorism permitting), US subsidies as part of their
financial support of Israel, other foreign contributions, increasing oil
revenues, foreign investment, a large internal market and a thriving and
dynamic entrepreneurial class, many of outstanding ability. and a large,
willing and reasonably educated workforce.
The government led by Prime Minister Mr Atef Obeid (since 5 October
1999) is considered liberal and business-oriented. The Minister of
Economy, the Coptic Dr Yousuf Boutros-Ghali, formerly of the IMF, is a
star economist by any standards.The Egyptian Government is addressing
the need for economic reform to address some of the underlying causes of
extremism, with measures to privatise some of the large public sector and
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attract foreign investment. A stand-by agreement has been agreed with the
International Monetary Fund and the stock market has grown impressively.
But political reform has been slower in coming. The existing political
and economic systems, dominated by security concerns and characterised
by heavy central controls, have so far not allowed the country free rein to
develop. The current Western occupation of Iraq and the international
efforts to contain terrorism are complicating factors. The principal obstacle
to progress lies however in the persistent stresses of the Arab/Israel dispute.
A settlement of that conflict would revolutionise the economic prospects
for the whole region.
In trade, Egypt is heavily import-dependent. Exports include
oil/petroleum, cotton and textiles. A significant proportion of foreign
currency earnings come from service industries, mainly tourism, and
migrant workers' remittances. But economic policy often has to be
subordinated to social issues such as poverty and inequality. The
government's tight monetary stance makes its aim of 7% annual growth
unlikely in the short term.
The prospects for the medium-term, supported by the regular sources of
external income and other assets mentioned above, seem however more
promising. The UK is at present the largest Western investor in Egypt,
ahead of the US and all other EU member states: only Saudi Arabia and
perhaps Kuwait have a larger stake in Egypt. UK investments are currently
estimated at $18 billion, with a further $7 billion due in next 5 years from
BP Shell and British Gas. Other UK investments in Egypt are in financial
and business services, tourism, pharmaceuticals, textiles and consumer
goods.
Conclusion
Like other countries of this region, Egypt is much more than the sum of
its current political and economic policies and problems. In this part of the
world, culture and identity, education and religion, human attributes, must
all be taken into account. Human contacts are often decisive in business
success. Personal attributes and traditional behaviour patterns, including
such qualities as entrepreneurial flair, profound tolerance, work discipline,
ability to confront and surmount problems and readiness to welcome and
work with foreigners, (all extensively tested over the past two centuries and
more) mean that Egyptians are likely to be co-operative and reliable
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partners in business ventures in the Middle eastern region. As the title of

this session implies, Egypt is a promise waiting to be fulfilled.
4 EGYPT’S RACE FOR GAS EXPORT
MARKETS
Introduction
Following strong growth in the late 1990’s, Egypt’s economic growth
has slowed in recent years. Real GDP growth registered just 3.2% in 2002,
compared with 5.9% in 2000. Nevertheless attempts to stabilise inflation
have been successful with average annual inflation of 2.4% in 2002, down
from 7.3% in 1996.
The price of consumer imports, along with staples like bread, rice and
sugar, soared after the government moved in January 2003 from fixed
exchange rates to a free float against the dollar, which led to a 26%
devaluation of the Egyptian pound. Mindful of past bread riots, the
government boosted subsidies, but at a heavy cost to the budget. The
devaluation increased export earnings, but not enough to cover foreign
exchange shortages, sparking a request in March 2003 for a $1.5 bn World
Bank loan.
Table One – Key economic indicators.
1996 1997 1998 1999 2000 2001 2002
Real GDP Growth (%) 5.0 5.3 4.1 5.4 5.9 3.4 3.2
Average annual inflation (%) 7.3 6.2 3.8 3.8 2.8 2.4 2.4
Unemployment rate (%) 9.2 8.8 8.8 8.1 7.7 8.3 9.0
Fiscal deficit (% of GDP) 1.3 0.9 1.0 3.0 3.9 5.5 5.8
Current account (% of GDP) (0.3) 0.2 (2.9) (1.9) (1.2) (0.04) (0.01)
Foreign debt (% of GDP) 45.9 36.7 33.2 31.2 28.2 28.5 32.6
Total debt (% of exports) 203.6 173.5 180.2 182.4 156.0 141.5 176.3
Exports
Petroleum (US$m) 2,226 2,578 1,728 1,000 2,273 2,632 1,904
Other exports (US$m) 2,383 2,768 3,400 3,445 4,115 4,446 4,740
Sectoral Output
Petroleum products (% of GDP) 6.9 7.1 6.1 6.0 5.5 5.3 5.2
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Investments
Petroleum products (%) - 14.8 10.4 12.9 10.4 11.6 11.7
GDP per capita (US$) 1,116 1,274 1,392 1,431 1,550 1,250 1,276
Source: Egyptian Ministry of Finance, Ministry of Planning, Central Bank of Egypt as at

31 December 2002.
Egypt’s sources of hard currency, particularly tourism, have been

negatively affected by increased regional tensions and fears of war and
terrorism. Notably Egypt’s other main sources of hard currency have also
been affected, chiefly oil exports and Suez Canal revenues. In the longer
term, macro-economic prospects are more favourable although it is clear
that structural reforms are a necessity. The principle challenge lies with
employment, where unofficial figures put the unemployment rate at
approximately 20.0%, double the official unemployment rate quoted above.
As a result Egypt is seeking foreign investment in order to maintain a high
GDP growth rate and satisfy the annual increase in demand for jobs.
In order to achieve this the government intends to accelerate its
privatisation programme, though restrictive labour laws are seen as
prohibitive. Notably while petroleum products represented just 5.2% of
GDP in 2002 investment into the sector lies at 11.7% of total investment. In
the coming years the government intends to target the telecommunications
and utilities sectors for privatisation, though there are is no intention to
privatise the Egyptian General Petroleum Corporation (EGPC) or the new
natural gas entity Egypt Gas (EGAS). It is here that Egypt’s future lies.
While oil exports have been declining as production at mature fields
continues to fall and domestic demand continues to increase; natural gas
exports are expected to become a major source of hard currency revenues
over the next decade.
Egypt’s oil industry

Sameh Fahmi, Egypt’s Petroleum Minister, is responsible for
implementing Egypt's new integrated petroleum strategy to the year 2020.
He was one of the experts behind the previous strategy for natural gas to
2017. Immediately as he became minister, he got the government to
endorse plans to export gas in LNG form and by pipeline and in January
2000 submitted to President Mubarak a new plan to 2020 which was much
225
bolder and focused on natural gas exports. Egypt’s oil production during
2002 was approximately 631,00 bbl/d, down from 748,000 bbl/d in 2000
and 922,000 bbl/d from its peak in 1996.
Demand for petroleum products has declined slightly since 1998 after
rapid growth in the previous 5-years, as a result of the removal of state
subsides and an increase in the use of compressed natural gas. Egypt hopes
that exploration activity, particularly in virgin territories, will discover
sufficient oil to slow the decline in output. Egypt's consumption of primary
energy has risen from less than 22m tons/year of oil equivalent in the early
1980s to over 50.7m t/y in 2003. The government has been focusing on
accelerated efforts since the late 1990s to curb local oil demand and boost
gas consumption. Oil consumption now is limited to 575,000 b/d, having
risen moderately from 440,000 b/d in 1988. Gasoline consumption is 3.2m
t/y compared to 2.08m t/y in 1997.
Egypt's oil production has been falling steadily since the third quarter
of 1995 when it peaked at 950,000 b/d. Output recently has been
approximately 700,000 b/d, but it is expected to fall in the coming months
and the 2004 average might be as little as 650,000 b/d. Most of Egypt's
oilfields are declining due to reserves depletion and a resultant fall in
reservoir pressure.
Egypt’s oil production currently come from four key areas, the Gulf of
Suez, the Western Desert, the Eastern Desert and the Sinai Peninsula. Oil
from the Gulf of Suez basin is produced mainly by Gupco (Gulf of Suez
Petroleum Company), a joint venture between BP and the Egyptian General
Petroleum Corporation. Production in the Gupco fields, with most wells in
operation since the 1960s and 1970s, has fallen in recent years. Gupco is
attempting to slow the natural decline in its fields through significant
investments in enhanced oil recovery as well as increased exploration. BP
is undertaking a program to invest $450m over six years (starting in 1999)
in technology to prolong the productive life of Gulf of Suez fields.
The Gulf of Suez Petroleum Co. (GUPCO), a 50-50 JV between EGPC
and BP with the latter being the operator, is Egypt's biggest oil producer.
But its GOS output has fallen to 215,000 b/d, compared to 280,000 b/d in
early 2000, 310,000 b/d in early 1998, 430,000 b/d in 1992 and 500,000 b/d
in the 1980s. GUPCO's crude oils make up the Suez Blend, 32 deg. API
which is Egypt's main export crude oil. Its output in the Western Desert has
declined to 20,000 b/d. But GUPCO's GOS output is to rise in the coming
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months with the development of oilfields found in the past two years.
GUPCO has more than 38 offshore fields in the GOS, which include
Morgan, July, October, Ramadan, Ras Shukheir, Sidki, Shoab Ali, Badri
and East Tanka Asl. From 1990, Amoco acquired additional blocks in the
GOS, because its fields then were 25-37 years old and most of them were
declining. Since its absorption of Amoco, BP has acquired several other
blocks in the region. The latest were four blocks which BP got in April
2003, three in the GOS - East Morgan Block 2, North Ghara Block 4 and
East Warda Block 35 - and one in the northern Red Sea covering Blocks
12/13.
Morgan, a giant and Amoco's first oil find in 1965, has been in decline
since the late 1980s. Despite the tie-in of small fields later found nearby,
Morgan's capacity now is less than 40,000 b/d, compared to 120,000 b/d in
late 1995. Morgan's life was extended by 30 years, but at a relatively low
capacity, with the completion of a water injection system in May 1997. The
field's remaining recoverable reserves were thus doubled to 230m barrels.
Before work on the $450m modernisation programme began in late 1999,
the field had 160 production and water injection wells hooked up to 24
platforms.
October, found in 1978, is BP's biggest field with extensions
discovered in recent years, including one in 1994. October and its satellites,
including major northern extensions developed in the late 1980s and early
1990s, now produce 85,000 b/d, compared to 180,000 b/d in late 1995.
Ramadan, Amoco's third major discovery in 1974, and satellite fields
produce 20,000 b/d of 30-31.7 deg. oils from the Lower Cretaceous at a
depth of 11,400 ft, down from 40,000 b/d in early 1998.
Egypt's second largest oil producer is Petrobel, which is a joint venture
between EGPC and Agip of Italy. Petrobel operates the Belayim fields near
the Gulf of Suez, and is similarly undertaking an upgrade program to stem
declining production. GOS/South Sinai - Belayim Petroleum Co.
(Petrobel), EGPC-Agip (locally known as Int'l Egyptian Oil Co. - IEOC), is
Egypt's second largest oil producer and for many years has been the biggest
gas producer operating both in Sinai and the GOS. Its main gas production
is in the Nile Delta and the Mediterranean.
Petrobel's oil output has fallen to less than 190,000 b/d, compared to
210,000 b/d in early 1998 and a peak of 240,000 b/d in 1993. Petrobel has
several fields, including the onshore/offshore Belayim system consisting of
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Belayim Marine and Belayim Land in Sinai and Ras Gharrah in the GOS.
After an agreement in early May 2000 with EGPC, IEOC launched a
$450m programme to stabilise its oil production at 200,000 b/d over a five-
year period. But since then the fields have declined at a rapid rate and
Petrobel's production has fallen, despite several discoveries.
Other major companies in the Egyptian oil industry include Badr el-Din
Petroleum Company (EGPC and Shell); Suez Oil Company (EGPC and
Deminex); and El Zaafarana Oil Company (EGPC and British Gas - BG).
While production from these joint ventures has been steadily declining,
new output from independent producers such as Apache has helped to slow
the decline. Many of these fields are located in the Western Desert and
Upper Egypt. Crude oil production in the Qarun block in southern Egypt
reached around 60,000 bbl/d by early 2000, but has since fallen to 36,000
bbl/d. Apache has developed the Beni Suef IX field in the East Beni Suef
concession in Upper Egypt, which produces over 5,000 bbl/d. The field is
said to contain around 100m barrels of crude oil. A joint venture between
EGPC and Agip also is producing about 50,000 bbl/d from an area in the
Qattara Depression in the Western Desert, in the Meleiha and West Razzaq
blocks.
Tanganyika Oil announced its scheduled work program for the West
Gharib Block in Egypt in February 2004. The West Gharib Block in Egypt
is a 1,898 sq.km concession flanking the Gulf of Suez. The block contains
the producing Hana field as well as numerous exploration prospects.
Production from the Hana field in Egypt has remained steady due to regular
and ongoing well workover and water shutoff programs throughout the
year. Tanganyika has a 70% participating interest in the West Gharib block
and is the operator.
Offshore oil production is a possibility with the largest concession
awarded to Shell, in February 1999, for a large deepwater area off Egypt's
Mediterranean coast. BP Amoco and TotalFinaElf were also awarded a
large offshore block in the same bidding round. A smaller offshore
concession was awarded to Italy's ENI-Agip. While most discoveries
offshore from the Nile Delta have been natural gas, it is believed that there
may also be large quantities of oil in the area. Shell reportedly is optimistic
about the prospects for its North East Mediterranean Deepwater (NEMED)
concession.
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Suez Canal / Sumed Pipeline

Egypt’s role within the oil industry is more significant for its operation
of the Suez Canal and the Suez-Mediterranean Pipeline, and therefore its
partial control over the export of Persian Gulf oil. Nevertheless revenues
have been declining over the last ten-years due to increased competition
from alternative routes. To try and offset this decline the Suez Canal
Authority (SCA) published a new tariff in 1999, offering a 35% discount to
both oil and LNG tankers.
To accommodate the very large crude carriers (VLCC’s) and LNG
tankers the SCA continues to enhance and enlarge the canal. The SCA
currently offers incentives for tankers to off-load a portion of its cargo
through the Sumed, allowing for passage through the canal, and reloading
at the other end of the pipeline.
The Sumed pipeline is an alternative to the Suez Canal for transporting
oil from the Persian Gulf region to the Mediterranean. The 200-mile
pipeline runs from Ain Sukhna on the Gulf of Suez to Sidi Kerir on the
Mediterranean. The Sumed's original capacity was 1.6m bbl/d, but with
completion of additional pumping stations, capacity has increased to 2.5m
bbl/d. The pipeline is owned by the Arab Petroleum Pipeline Company
(APP), a joint venture between Egypt (50%), Saudi Arabia (15%), Kuwait
(15%), the UAE (15%), and Qatar (5%) .
Egypt’s natural gas industry

In the last few years natural gas has become the most likely source of
revenue for Egypt’s energy sector. Active exploration led by foreign oil
companies has led to major recent discoveries and a steady increase in
Egypt’s total recoverable natural gas reserves. Significant natural gas
deposits have been discovered in the Nile Delta and in the Western Desert.
Major foreign companies involved in natural gas exploration and
production in Egypt include BG, BP, Eni, and Shell. Apache also produces
gas from its concessions in the Western Desert.
As a consequence of these discoveries Egypt’s natural gas industry is
expanding rapidly with production having doubled between 1999 and 2002.
Natural gas production in Egypt stood at about 3.0 bcf/d in late 2002, and is
expected to rise to around 5.0 bcf/d by 2007, with much of the increased
volume being exported as LNG. The Egyptian government formed a new
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state-owned entity in 2001 to manage the natural gas sector, Egyptian

Natural Gas Holding Company (EGAS), separating those assets out from
EGPC.
Under the terms of Egyptian production sharing agreements, EGAS has
the right to acquire gas for its domestic network, which is being expanded
to cope with rising domestic demand for feedstock power generation and
industrial use. The two liquefied natural gas (LNG) plants being developed
at Idku and Damietta are also driving the impetus for gas exploration, as is
the Egypt-Jordan regional gas pipeline, for which the second phase of
expansion has been launched. However, government guidelines rule that
export commitments cannot exceed a third of proven gas reserves.
Estimates of proven natural has reserves are currently in the region of
58Tcf, though probable reserves are likely to be double this figure. The
Nile Delta in particular has emerged as a world-class natural gas basin,
with recent offshore field developments including Port Fuad, South
Temsah, and Wakah. In the Western Desert, the Obeiyed Field is an
important natural gas area currently under development.
The International Egyptian Oil Company (IEOC), a subsidiary of Italy's
Eni, is presently Egypt's leading natural gas producer, operating in the Gulf
of Suez, the Nile Delta, and the Western Desert regions. In co-operation
with BP Amoco, IEOC has been concentrating its natural gas exploration
and development efforts in the Nile Delta region.
On November 4, 1997, BP (along with its partners EGPC and IEOC)
announced plans to develop the giant Ha'py gas field in the Ras el-Barr
concession of the Nile Delta region at an estimated cost of $248m. The
field came onstream in February 2000, and has reached an output of 280
mcf/d. In September 1997, IEOC tested the Temsah gas field (located
offshore from the Nile Delta) at 11.6 mcf/d. In October 1998, BP (25%
owner) and Eni signed a natural gas sales agreement with EGPC (50%
owner) and IEOC (25% owner) for Temsah. Temsah's gas reserves are
estimated at 3.9 Tcf, and the gas sales agreement was for 35 mcf/d initially
in 2000, increasing to 480 mcf/d by 2003.
Eni reported another find in its East Delta Deep Marine concession,
which may hold as much as 1 Tcf of additional reserves. Canadian
independent Centurion Energy reported a new discovery in the El Manzala
concession, onshore in the Nile Delta, in August 2001. Centurion signed a
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contract in October 2002 with the Egyptian government to begin natural

gas deliveries from El Manzala of 35 mcf/d in mid-2003.
Two areas in the Western Desert, Obeiyed and Khalda, have shown
great potential for increasing Egypt's natural gas production in the near
future. Obeiyed is producing 300 mcf/d, after the completion of a pipeline
linking it to Alexandria. Production in the Khalda concession is currently
around 200 mcf/d. Apache reported another gas discovery at Khalda in
August 2001. Output from Obeiyed and Khalda is transported to
Alexandria by a 180-mile pipeline.
Several major new natural gas finds are currently under development in
the Nile Delta region. In May 1999, the Italian firm Edison and the BG
Group made a large find (Scarab/Saffron) in their West Delta Deep Marine
concession, which tested at 45 mcf/d, followed by another (Simian) which
tested at 44 mcf/d in October 1999. The two companies announced in July
2000 that their second and third wells at the field also had tested
successfully at a similar flow rate, which was constrained by the capacity
of the equipment.
The Scarab/Saffron finds are currently under development, with
commercial production of 600 mcf/d to begin in 2003. Bids were solicited
in November 2002 for the development of the Simian field, which is to link
into the same pipeline to the Egyptian coast as the Scarab/Saffron fields.
BP Amoco and Shell also have concessions offshore from the Nile Delta,
and initial seismic survey work and exploratory drilling has indicated
significant probable reserves. Shell has announced that probable reserves in
its Northeast Mediterranean (NEMED) concession are 15 Tcf. ExxonMobil
also holds a 25% stake in this concession. BP and the IEOC also are
preparing to bring several fields off the Nile Delta coast into production.
BP reported a new find estimated at 500 Bcf in the offshore North
Alexandria Concession Area in July 2001.
Formed in 1997 to develop and market gas from the offshore Rosetta
block, Rashpetco is a JV of ENGHC (50%), British Gas (operator with
20%), Shell Egypt (10.2%), Shell Austria (9.8%) and Edison Int'l (10%).
Edison is a US unit of Italy's Montedison chemical group. Rosetta block,
north of the Delta town of Rasheed, lies between Abu Qir to the west and
Baltim to the east and has a giant gas field found in April 1997 with
important extensions found subsequently and proven reserves estimated at
2 TCF. The first find was in 200 ft of water 48 km north-east of Alexandria
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in three net gas zones of over 460 ft of sandstone at about 6,000 ft and
tested 60 MCF/d. The second, Rosetta 5, in Nov. 1997 tested over 90
MCF/d which was the highest rate in any gas find made in Egypt. Also in
Nov. 1997 Rosetta 6 tested 40 MCF/d. These and subsequent finds in
Rosetta went on stream on Jan. 31, 2001. BG says the Rosetta gas is of
very high quality with less than 0.5% impurities.
In Oct. 1997 Rashpetco signed with EGPC a 20-year take-or-pay
contract whereby EGPC (now ENGHC) was committed to buy 250 MCF/d
of Rosetta. The field now produces 275 MCF/d. The $330m field
development consists of six wells tied to a platform with a 66 km
gas/condensate pipeline to an onshore terminal near Idku, about 50 km east
of Alexandria. After processing at an onshore plant, the gas is delivered to
the national grid. The condensate is exported by pipeline to a gathering
centre at Abu Qir, 15 km east of Alexandria.
Shell announced two ultra-deepwater hydrocarbon discoveries in the
company's North East Mediterranean Deepwater Concession (NEMED) off
the Egyptian coast in February 2004. Shell stated that the discoveries in
two locations in the south-west part of the concession have demonstrated
that the concession is a rich hydrocarbon province. Shell and its partners,
Petronas Carigali Overseas and the Egyptian Natural Gas Holding
Company, will now evaluate the data before moving forward with phase
two of the exploration project ahead of commercialising the finds.
Bids are due on 15 April 2004 for six offshore blocks in the
Mediterranean covering a total area of 7,250 sq.km. As part of the same bid
round, Egyptian Natural Gas Company (EGAS) in late January 2004
received bids for two onshore concessions in the Nile Delta area, the 1,928
sq.km West El-Manzala block and the 1,294 sq.km West El-Qantara block.
A further bid round has also been muted for later in 2004. Five of the new
offshore blocks, El-Burg, North El-Burg, Burullus, West Burullus and
Northwest Sapphire, are 1,250-1,450 sq.km in size, while the West El-
Tabya block covers 581 sq.km.
The new acreage is expected to draw a strong response from
international oil companies due to the quantity and high quality of 3D
seismic data gathered by the government since 1992, which has meant that
the Mediterranean and Nile Delta regions have enjoyed a high exploration
success rate. The last five years of exploration have resulted in the
discovery of at least 33 major fields.
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Domestic demand for natural gas

Under the terms of Egyptian production sharing agreements, EGAS has
the right to acquire gas for its domestic network, which is being expanded
to cope with rising domestic demand for feedstock power generation and
industrial use. The two liquefied natural gas (LNG) plants being developed
at Idku and Damietta are also driving the impetus for gas exploration, as is
the Egypt-Jordan regional gas pipeline, for which the second phase of
expansion has been launched. However, government guidelines rule that
export commitments cannot exceed a third of proven gas reserves.
Natural gas demand has grown rapidly in Egypt as thermal power
plants, which account for about 65% of Egypt's total gas consumption, have
switched from oil to gas. Domestic natural gas consumers are to be served
by several private distributors, franchises which were awarded in late 1998.
One of the franchises, awarded to a team headed by BG and including the
Egyptian construction firm Orascom and Edison of Italy, is developing
distribution infrastructure in Upper Egypt as far south as Asyut, where no
piped natural gas had been available. After the initial phase, valued at
$220m, a possible later phase may extend the natural gas grid south to
Aswan.
Gas consumption has risen to 3,800 mcf/d, compared to 2,300 mcf/d in
early 2000. Marketed gas production has risen to about 4,000 mcf/d from
1,700 mcf/d in early 1998, compared to 1,600 mcf/day in mid-1996, 1,500
mcf/day in late 1995 and a mere 4.5 mcf/d in 1974.
Natural gas exports

The rapid rise in natural gas reserves has led to a search for export
options, which has become particularly important to Egypt's future
international balance of payments due to the decline in oil exports. In late
1999, the Egyptian government stated that natural gas reserves were more
than sufficient for domestic needs, and that foreign firms producing gas in
Egypt should seek export customers. In early 2000, the government
announced a moratorium on new purchase agreements by EGPC for
domestic consumption, as previously signed agreements will meet
projected demand over the next several years. It also announced in
September 2000 a new pricing policy which includes ceiling and floor
prices, designed to protect both consumers and producers from the risks of
prices indexed to oil.
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The idea of exporting natural gas to Israel has been under discussion for
several years, but appeared by mid-2001 to have been sidelined for the time
being by the deterioration in Egyptian-Israeli relations as a result of
renewed violence between the Palestinians and Israel. The most ambitious
version of the scheme would have involved the construction of an offshore
pipeline from El-Arish in Sinai up the coast of Israel, with a possible
extension onward to Turkey. The East Mediterranean Gas Company (a
consortium of EGPC, Merhav of Israel, and Egyptian businessman Hussein
Salem) had been set up to pursue the project. ENI completed a pipeline up
Egypt's Mediterranean coast to El-Arish, which could have served as a
starting point for the export pipeline.
Egas, as part of the East Mediterranean Gas (EMG) consortium is
continuing discussions with state Israel Electric Corp. over supplying 1.7
bcm/yr over 15 years. Israel selected EMG, backed also by private
Egyptian investors and Israel's Merhav Group, as a second gas supplier in
August 2003. But controversy over a $200-300m bank guarantee demanded
by the Egyptian government to cover the cost of financing a pipeline from
Egypt to the Israeli border threatens to delay a final deal. Although Israel
Electric reportedly agreed to provide the bank guarantee, its board refused
to approve such terms.
A smaller export pipeline to Jordan has been constructed from a pre-
existing pipeline terminus at El-Arish to Aqaba in Jordan, with a sub-sea
section in the Gulf of Aqaba bypassing Israeli waters. First gas from the
Arab Gas Pipeline started flowing from El Arish in Egypt to a power
station in Aqaba, Jordan, in August 2003, and in January 2004 interested
parties agreed to extend the pipeline 370 km north to a second power
station in Jordan. The 370-km pipeline from Aqaba to northern Jordan is to
be built in 30 months. Construction is to begin shortly. The gas will fuel
other power plants and industry in Jordan. The $250m pipeline will be built
on BOOT for an Egyptian group called EPEG comprising Egas, Gasco,
pipeline contractor and EGPC/Egas affiliate Petrojet, and EPC contractor
Engineering for the Petroleum & Process Industries (Enppi) which is
another affiliate of EGPC and Egas.
Egypt, Jordan, and Syria agreed in principle in early 2001 to extend the
pipeline into Syria, with eventual natural gas exports to Turkey, Lebanon,
and possibly Cyprus. The feasibility of this option is questionable, though,
as Turkish demand probably would not support another source of piped gas
234
(beyond existing agreements in place with Russia, Azerbaijan, Iran and

Iraq).
The Palestinian Authority is reportedly due to sign an agreement with
Egypt for the purchase of 300 mcm/y of natural gas. The gas will be
delivered by pipeline and used to fuel a power plant in the Gaza Strip. Al-
Shawa said the pipeline would be constructed at an estimated cost of $15-
20m. The pipeline would be financed by the Palestinian Investment Fund.
The Palestinian Authority had hoped to fuel the plant on gas from the
Marine field, off the Mediterranean coast of the Gaza Strip, but the UK's
BG Group failed to reach a supply agreement with Israel making
development of the field unfeasible.
Egyptian LNG
Egypt's other option for exports is LNG. Two LNG projects are
currently underway. The Spanish firm Union Fenosa is building a two-train
liquefaction facility at Damietta, which is scheduled to begin commercial
production in late 2004. Unlike most previous LNG projects, this one is not
tied in directly with upstream natural gas production. Union Fenosa has
contracted with EGAS for the supply of natural gas from its distribution
grid, and will take all of the LNG output itself for use at the company's
power plants and distribution to other users in Spain and elsewhere in
Europe. Eni also has become involved in the project recently, having
purchased a 50% stake in Union Fenosa's natural gas business in December
2002.
With several projects now ongoing, state Egyptian Natural Gas Holding
Co. (Egas), established in late 2001, is emerging as a gas seller in its own
right. Egas is marketing LNG expected late 2004 from Spanish Egyptian
Gas Co.'s (Segas) first train, which at 7.6 bcm/y will briefly be the world's
largest. Segas is 80% owned by Spain's Union Fenosa Gas -- itself 50%
owned by Italy's Eni -- and 20% by state Egyptian General Petroleum Corp.
and Egas.
The second LNG export project, at Idku, is to be built by BG in
partnership with Edison of Italy. The project is tied in to natural gas
reserves from BG's Simian/Sienna offshore fields, and is scheduled to
begin production in 2005. Gaz de France is to be the main off -taker for the
Idku LNG project, having signed a contract in October 2002 for 127 Bcf
per year beginning in 2005.
235
BG Group, having made the biggest gas discoveries in Egypt since

1996, is to turn Idku (just east of Alexandria) into one of five gas hubs it is
developing around the world. BG is aiming to turn itself into an integrated
energy giant delivering gas and power directly to customers. It is targeting
attractive markets in southern Europe, America, and Asia.
BG signed the final deal for the Idku LNG venture, called Egyptian
LNG (ELNG), with EGPC (now Egas) in April 2001. The first of its LNG
trains will on stream in September 2005 with a capacity of 3.6m t/y. The
second 3.6m t/y train will be on stream in April 2006. Now BG and its
partners are discussing a third train. Idku, meanwhile, is being developed to
site six LNG trains which, in BG's impressive model, could catapult Egypt
into the top rank of world LNG exporters. Each train will have its own
venture company, with a different ownership structure from the others as it
will include a main buyer of the liquefied methane.
The Idku liquefaction centre is being modelled after Atlantic LNG of
Trinidad & Tobago in which BG is the leader and largest shareholder
(26%). Like that plant and its three additional trains, Egyptian LNG will
use the optimised cascade process developed by Phillips Petroleum of the
US (now ConocoPhillips). The FEED work for ELNG has been done by
Bechtel which has the $900m EPC contract for Train 1 and the $550m EPC
job for Train 2. Bechtel, the main contractor for the Atlantic LNG venture,
has been part of the project management team for the development of the
Scarab/Saffron fields in the WDDM block.
On September 25th, 2003, the Train 2 partners signed the sale and
purchase agreements (SPAs) for the sale of the entire 3.6m t/y output of
Train 2 to BG Gas Marketing. This will be supplied from April 2006 to BG
LNG Service for the Lake Charles import terminal in Louisiana. The SPAs
provide for LNG volumes to be switched in 2007 to a 6m t/y import
terminal in Brindisi (Italy) on the Adriatic which is being built as a 50-50
venture for BG and the Italian power utility Enel. BG now is on the look
out for firm buyers to take LNG from the third train. The Italian market
will need 30 bcm/y of additional gas within the next eight years.
British Petroleum, for years the biggest oil producer in Egypt and the
second biggest gas producer next Agip of ENI group, was until a few years
ago leading the first LNG project ever to be conceived in Egypt. But this
project has been stalled for lack of sufficient gas being produced by the
major for export. BP's planned gas production of 1,200 MCF/d in 2004 is
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locked into Egypt's domestic market. It may take a few more years for BP
to revive the LNG project. (BP is the main investor in Egypt's petroleum
sector, with most of the money having been spent over the past 42 years by
Amoco, the biggest oil producer in Egypt which was absorbed by BP in
1999).
Each of BP, ENI (through its local unit IEOC) and Gasco has a third
share in a two-train NGL plant being built in Damietta which will cost
more than $310m. To be on stream in the third quarter of 2004, the plant
will process 1,100 MCF/d of gas to produce 330,000 t/y of LPG, 280,000
t/y of propane and 1m t/y of condensates. Most of the gas liquids will be
consumed locally, where demand for LPG and other liquids has risen
rapidly. In late January 2001, when the JV agreement for this plant was
signed, it was reported that Egypt was importing 800,000 t/y of LPG at the
cost of $200m per annum.
The gas for this plant will be produced by the Mediterranean Gas Co.
(MGC) which was formed in 1997 as a joint venture between EGPC (now
Egas), Agip (IEOC) and BP to develop big gas fields in four offshore
blocks: Temsah and East Delta Deep Marine blocs operated by Agip
(IEOC), and Baltim and Ras El Barr blocks operated by BP. Gas
production from the four blocks will reach more than 1,200 MCF/d by end-
2004. BP-led GUPCO operates a $138m LPG plant in Ras Shukhair which
went on stream in October 2001. This is processing 280 MCF/d of gas to
produce over a 15-year period 1.1m tons of LPG, 3.9m tons of propane and
14m barrels of condensate, with the liquids also being consumed by the
local market.
Petrochemicals
The petrochemical sector in Egypt, having grown rapidly in recent
years, has been elevated to the top tier of the industrial hierarchy. The state
entity in charge of this is the Egyptian Petrochemicals Holding Co.
(Echem) which, as one of three strategic pillars in parallel with the
Egyptian General Petroleum Corp. (EGPC) and the Egyptian Natural Gas
Holding Co. (Egas), are answering directly to the Ministry of Petroleum.
Echem is executing a 20-year, $10 bn Petrochemical Master Plan (PMP) to
2020, adopted in late 2000, to raise the country's production of
petrochemicals to 15 million tons per annum for the local market and for
237
export, with new ventures to involve both the private sector and state
companies of strategic importance.
The increasing availability of natural gas has been the key factor behind
the expansions and the PMP. Based mostly on recommendations made in
September 2000 by Chem Systems, the plan calls for 24 petrochemical
complexes to be built in big industrial zones along the Mediterranean and
Suez/Red Sea coastlines. They will create 100,000 new jobs.
The future for Egypt’s gas industry

Recent discoveries and burgeoning reserves mean Egypt's already well-
developed gas programme will soon get bigger. The current speculation is
an indication of how far the local gas industry has come in such a short
space of time. The gas industry has proved to be the silver lining to the
cloud that has hung over the Egyptian economy over the past four years.
Egypt's proven reserves of natural gas have been estimated at 60 tcf,
ranking them 18th in the world in terms of natural gas reserves, worth
$232bn and proven reserves of crude oil was set at 3.7bn barrels worth
$97bn.
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Chart One. Egypt’s natural gas reserves relative to key

competitors.
Due to its diverse industrial base and the rapid expansion of local
power production capacity, Egypt already boasts one of the most extensive
gas distribution networks in the region. The local market for natural gas
will continue to growth at a rapid pace in the coming years. In 1997, the
transport and distribution of gas were opened up to the private sector under
Investments and Incentives Law No. 8. But the overwhelming impetus
behind the development of the gas industry remains the government's
hunger for export revenues. Egypt is already exporting natural gas by
pipeline to Jordan, and further increases in capacity are expected when the
regional network is expanded to Syria.
The chief focus is now on liquefied natural gas (LNG) projects. BP's
announcement in early November 2003 that it had made another major gas
find in its West Mediterranean offshore concession triggered fresh
speculation in the industry about a possible revival of the country's third
LNG complex, which has been on hold since it was licensed in 2000. Any
revival of the scheme is likely to wait on an assessment of market
239
conditions after the two existing projects, at Damietta and Idku, come on
stream in November 2004 and in late 2005 respectively.
The signing in late December of the $950 million debt financing for the
first train of the Egyptian LNG project at Idku - the largest ever project
financing in Egypt - indicates the confidence that has been placed by
foreign investors in the local gas industry and its prospects. Plans for a
second train are well advanced, with Bechtel of the US mandated to
conduct an early works programme, and marketing for a third train in its
early stages.
Chart Two. Egyptian LNG exports and key competitors.
The biggest challenge for Egypt would seem not to be a lack of gas
reserves, but the fierce competition which it faces from other established
gas producers in delivering its gas to consumers. The lucrative market of
Turkey had been suggested but this already appears over-subscribed. Initial
gas sales agreements with Spain and France appear to be encouraging but
once again there is fierce competition from Libya and Algeria for piped gas
and Qatar, Oman and Algeria for LNG. The chart above indicates the
expected level of Egyptian LNG exports in 2005 and 2008.
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LNG exports will increase rapidly by 2008 as BG’s two-train 7.2bcm/y

plant at Ikdu comes onstream. Similarly Union Fenosa’s plant at Damietta
will add an additional 15.2 bcm/y to capacity by 2007-2008. Nevertheless
the key for Egypt lies in BG’s ambitious plans to make Egypt one of five
natural gas hubs it is planning around the world. A third train is already
under discussion with the Ikdu site expected ultimately to deliver six LNG
trains. Significantly these plans are dependent on finding consumers for
Egypt’s natural gas. What is clear is that Algeria and Nigeria, both of
whom have expansion plans of their own, already have established sales
and marketing channels with European gas consumers.
Chart Three. LNG imports by country.
It is clear that Egypt faces fierce competition in its race to market its
gas reserves. The Asian market is already over-subscribed, with LNG
imports from Indonesia, Malaysia, Australia, Brunei, Oman and Qatar.
Nevertheless there is considerable expected demand growth in Spain,
France, Italy, UK and US, and it is these markets that the Egyptian
authorities should be targeting.
241
The chart below illustrates the current magnitude of the LNG market by
region. While Asia dominates the import of LNG, it is not here that the
fastest growth is anticipated. On a global basis the global LNG market is
expected to grow by 10% to 2008. However, it is the US market which
appears set to be the most lucrative for LNG exporters, with anticipated
growth of 28% over the period to 2008.
Chart Four. Global LNG growth (2003-2008).
Notwithstanding the pressures faced by the Egyptian authorities in

seizing market share, LNG exports are set to grow. This will have a
positive impact on Egypt’s economy from 2005, though given continued
difficulties it is unlikely to be dramatic. Real GDP is expected to grow at
2.9% in fiscal 2004, up from an estimated 1.9% in fiscal 2003. The pick-up
in growth during 2004 will be led by exports of goods and services.
Tourism, by far Egypt ’s most important export industry, has recovered
extremely strongly since the downturn caused by the US-led attack on Iraq,
partly because of government support and partly because of the
depreciation of the pound, which allows Egypt to undercut regional rivals
in terms of price.
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Table Two. Economic forecasts to 2008.

2003F 2004F 2005F 2006F 2007F 2008F
Real GDP growth (%) 1.9 2.9 3.7 4.3 4.9 5.2
Consumer price inflation (%) 4.4 5.1 4.1 3.4 3.1 3.3
Budget balance
-6.4 -7.3 -6.9 -5.8 -5.4 -5.4
(as % of GDP)
Current account balance
4.3 2.5 1.0 0.7 -0.8 -1.4
(as % of GDP)
Source: Shine Solutions / World Bank.
By fiscal 2005 , Egypt will benefit from increased revenues from LNG
exports, leading to real GDP growth of approximately 3.7%. While LNG
exports are set to diversify Egypt’s economy, oil export revenues are likely
to fall as a consequence of an anticipated fall in oil prices from their current
highs. As a consequence by 2005 the current-account surplus will likely fall
to about 1.0% of GDP, due largely to a growth in imports.
By 2007-2008 LNG revenues will be significant and have a greater
impact on real GDP growth. However LNG exports of c.22 bcm/y will not
catapult Egypt into the world’s elite. However, the government’s ultimate
ambition to export 50 bcm/y by 2015 could significantly impact the
economic situation in Egypt. What remains to be seen is in the face of the
fierce competition, whether Egypt can deliver on its bold plan.
5 SAUDI ARABIA
Introduction
The Kingdom of Saudi Arabia has just undergone two of its two most
tumultuous years in which its international relations have been threatened
with radical change by one of its closest allies and the domestic scene has
suffered violent disruption, whilst its economy has continued to be highly
sluggish, despite of the success of its oil price policies within Pectin part, of
course, these events reflect the new international agenda of the Bush
administration, although this is not as radical a departure from American
policy as it appears to be. And, of course, the more extreme rhetoric of the
post-September 11, 2001 period has now been tempered in Washington by
a more sober realisation of the underlying strengths and importance of the
alliance.
They also reflect, however, the culmination of internal contradictions
inside the Saudi system that can no longer be ignored. In short, the old
implicit contract between ruler and ruled, whereby authority was bargained
against benefit is being called into serious question and now faces an
independent ideological challenge. The same is true of the three century-
old normative relationship between the Wahhabi movement and the al-
Saud family, for that is under challenge from the al-Islah reform
movement, a challenge that might enjoy some tacit support from within the
ruling family itself.
Indeed, all these factors have been intensified by the fact that the
leadership of the state continues to be in an ambiguous condition because
of the incapacity of the king. The result of this is that Crown Prince
Abdullah, now in effect, in charge of government, is not able to exercise his
authority without a constant awareness that the Sudairi Seven – his half
brothers – can always exercise a restraining influence upon him by recourse
to the vestigial authority of the king himself. This has been significant until
recently, for it has meant that the bolder initiatives that the Crown Prince
might have wished to introduce have been hampered by the conservatism
243
244
of his normative partners in power. He appears, however, to have

successfully exploited the new crises that the Kingdom faces to force
through radical initiatives – of a kind that the al-Islah movement would
approve – that were not possible before, although recent arrests have called
his apparent achievement into question.
The Key Relationship

Saudi Arabia’s relationship with the United States continues to be the
essential bedrock upon which the Kingdom’s foreign policy rests, despite
the vicissitudes of the past two years. That relationship has been
profoundly threatened by a series of factors but, despite that, continues to
be essential to both partners. Despite the abuse heaped upon the Kingdom
in the United States – which has had a real effect on the relationship, with
Congress now holding up a contract, worth nearly $1 billion to re-supply
the Saudi National Guard, as part of a wider programme to modernise the
defence forces, and threatening an accountability act of the kind recently
passed against Syria – Washington knows that the Kingdom is essential to
its plans to ensure moderation in oil prices and continuity of oil supply.
The problems in the relationship go back to September 11, 2001, when
it was revealed that 15 of the 19 hijackers responsible for the attacks on the
World Trade Centre and the Pentagon were Saudi nationals. The following
year, families of the victims of the destruction of the World Trade Centre
sued both the leaders of the al-Qa‘ida organisation and leading Saudi
officials within the Royal family, including Turki al-Faisal, Sultan bin
Abdelaziz and Muhammad al-Faisal, in addition to leading charities and
banks, for $1 trillion because of their alleged involvement in the incident.
The Bush administration formally disavowed such attacks against Saudi
Arabia but did little to assert its alliance with the Kingdom.
The apogee was reached on July 10, 2002 when a Rand analyst of
French origin with links to the Larouche organisation who had previously
worked for the French Ministry of Defence, Laurent Murawiec, launched a
bitter attack against Saudi Arabia at a semi-private meeting organised by
the Defense Policy Board at the Pentagon. In contradistinction to the
conventional view, Saudi Arabia was portrayed as a threat to American
security because of its clandestine involvement with Islamic terrorism,
“active at every level of the terror chain”. Saudi Arabia should be told to
245
eliminate its links with terrorism or face the annexation of its oil fields, the
analyst proposed.
With the advent of the war against Iraq in March 2003, Saudi Arabia
once again became important to American strategy because of the facilities
established there in the wake of the 1991 war against Iraq after its
occupation of Kuwait. Although the Kingdom, because of domestic
opinion, was not prepared to openly participate in the operation or to
formally allow American commanders to use the command-and-control
facilities or the airfields on its territory, it quietly did nothing to prevent
their use in practice. Nevertheless, in the wake of the war, one of the major
bones of contention between the two states –the American military
presence since the end of the war against Iraq in Kuwait in 1991 – was
removed when the United States announced that it would re-base its forces
at Camp Doha in Qatar.
In reality, the United States cannot abandon its links with Saudi Arabia
which now go back to the period immediately before the Second World
War and are predicated on its influence over the Kingdom and interests in
the Saudi oil industry. Saudi Arabia produces 36 per cent of Opec output
and 12 per cent of global output. In 1997 it generated 18.6 per cent of
America’s imported oil and, in August 2003, it was still generating 14.5 per
cent of American imports. It has been a loyal American ally inside Opec for
many years, despite the events of 1973 and its nationalisation of Aramco at
that time. It has ensured oil price stability in recent years and, despite the
resentments of the neo-conservative wing in the United States, this role has
been appreciated by subsequent administrations. Indeed, the Kingdom has
been vital to the longstanding American dream of controlling the Gulf
region, a concern that goes back to 1945, when it was first articulated in a
State Department report.
It has also, since 1990, been the main bulwark of American interests in
the Gulf region, despite its obvious misgivings about the implications of
American policy elsewhere – over the Palestinian issue, for example, where
Crown Prince Abdullah initiated a separate initiative at the Arab League in
March 2002, or over Iran, where Saudi Arabia has enjoyed good relations
and cooperation within Opec since 1998. In short, despite American
suspicions, the relationship continues to be essential to both parties and,
since the defeat of Iraq and the transfer of American forces to Qatar, the
relationship has been publicly reinforced. However, outside the formal
246
diplomatic sphere, suspicions still remain, within Congress and in the

domain of public opinion in the United States. Nor, indeed, have the key
Administration concerns been forgotten.
Insurgency?
These revolve around the role of the Kingdom within the activities of
trans-national terrorism, particularly that connected with Usama Bin Ladin
and the al-Qa‘ida organisation and thus the role it can play within the “war
on terror”. There are some rather rich ironies in this for the current wave of
terrorism results from a Saudi decision, with American support, to fund and
provide personnel to the Afghan mujahidin at the beginning of the 1980s.
America provided material support from 1984 onwards, so that the al-
Qa‘ida phenomenon finds its origins in American geo-strategy, supported
by Saudi Arabia, at that time.
Furthermore, once Usama Bin Ladin had been dispossessed of his
citizenship in 1991 and his personal funds had been blocked in 1994,
funding sources for the movement, which had received official support up
to 1991, inevitably depended on those of like mind – in Saudi Arabia,
Kuwait and the UAE – who accepted the concept of jihad developed by
Abdullah Azzam in Peshawar in the late 1970s and popularised by the
mujahidin during the 1980s, resulting in the “nomadic jihad” of the 1990s
in Bosnia, Kosovo and Chechniya. They, for ideological reasons connected
with the radical interpretation of Islam developed during the Afghan war,
were prepared to fund the new trans-national movements, a procedure
which, until the United States became the victim of terrorism in the late
1990s, had been internationally acceptable, particularly where charities
were concerned .
In effect, therefore, the Kingdom was condemned for not having
anticipated this development or being aware of the close links between
Wahhabism and the neo-Salifiya movement that informed the trans-
national terrorist movements. This was compounded by the refusal of the
Royal Family to recognise that the United States had determined a close
linkage between the funding of Islamic charities and al-Qa‘ida and
considered the Saudi insouciance over the issue as being close to formal
culpability. This was intensified by the refusal of the Kingdom to accept
that terrorist networks existed within the Kingdom, formed from
disaffected Saudi nationals.
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The ultimate irony is that it was only when the Kingdom suddenly
realised the degree of alienation within the population and the potential
danger that the Saudi system faced in May 2003, that formal relations with
the United States government improved, even if relations with Congress
remained tense, as the Congressional report on September 11, 2001
demonstrated last September. Cooperation over intelligence-sharing
dramatically increased as the Saudi authorities rounded up over 300 people
accused of involvement with al-Qa‘ida and similar groups, as they had to
deal with two major bombings of domestic compounds in Riyadh –in May
and November – and repeated discoveries of arms and explosives caches,
often involving pitched battles with hostile groups. Over 12,000 nationals
are said to have been interrogated by the authorities in connection with the
violence
One consequence of this has been a willingness to clamp down on
private funding for suspect Islamic charities and another has been to
recognise the role of radical ‘ulama and other religious figures in
promoting support for the neo-Salafiyyists, now often referred to as the
salafi-jihadi movement. As a result, after a fatwa condemning the violence
was issued in mid-August, the most outspoken members of this group – up
to 700 in number – have been dismissed, whilst a further 1,500 have been
banned from preaching and an additional 500 have been called in for re-
education. In addition, much more care has been exercised in controlling
the weekly Friday khutba. The Family is now in no doubt about the
problem it faces, not just from the violent extremists, feeding on
unemployment and declining living standards, but also from the growing
alienation of the professional classes, not to speak of the wider population,
as average incomes fell from close to $20,000 per year in the 1980s to
around $7,000 today and the consequent increase in support for the al-Islah
movement. The ruling elite has reacted to this, not just by repression but
also by being willing, albeit reluctantly, to contemplate reform.
The Reform Programme

It is clear that Crown Prince Abdullah has been prepared to take
advantage of the current crisis, both in relations with the United States and
within the Kingdom, to persuade his more conservative fellows within the
family, particularly within the Sudairi Seven, to accept that change was
inevitable. He signalled the way as early as January 2003, with his “Arab
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covenant” proposal. The domestic political crisis has been one driver for
this view, the worsening employment situation for Saudi nationals has been
another. Perhaps the most intractable has been the deplorable state of the
Saudi educational system, for here reform would touch upon religious
sensibilities and interests. The problem is that it is not clear that these
issues can be effectively addressed because of the essentially conservative
nature of Saudi society, particularly in the religious and political elites. The
encouraging feature is that an attempt to achieve change is really under
way.
As far as liberalisation is concerned, three petitions have been
presented to the King, the last of them being signed by 300 persons,
including 50 women – an unprecedented event. Indeed, in the light of the
way in which earlier petitioners were treated – they were arrested – the fact
that three petitions in as many months should have been presented without
the repression of those involved is a sure pointer towards the willingness of
the authorities to listen to constructive protest. There are, however, strict
limits to this, for a demonstration in Riyadh in mid-October, coinciding
with the first human rights conference held in the country, was suppressed
by police with 50 of the 200 demonstrators being arrested. Demonstrations
called for the next week end in Jiddah, Dammam and elsewhere were foiled
by widespread arrests.
Quite apart from the fact that the demonstrations were amongst the first
signs of peaceful protest ever seen in Saudi Arabian cities, they were
probably also suppressed because of their provenance. They had been
called by the exiled, London-based Harakat al-Islamiyyah li’l-Islah (the
Islamic Movement for Reform).This movement is run by Sa‘d al-Faqih
who originally participated in the Committee for Legitimate Rights (Lajnat
Difa‘‘an al-Huquq al-Shar‘ia) in the mid-1990s – a movement inspired by
moderate Islamist archetypes and linked to the two petitions presented to
the King in 1993 and 1994. He had originally been a close collaborator
with Dr Muhamad al-Mas‘ari but, after a split engineered by the Saudi
embassy in London, Sa‘d Faqih continued alone. It is clear, however, that
the authorities in Riyadh, whilst prepared to contemplate change, will not
entertain contacts with what they feel is a discredited exiled opposition.
Ironically enough, five days before the demonstrations took place, the
Saudi cabinet announced the first cautious steps towards political reform.
At some point in the future, half the seats on the recently restructured
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fourteen municipal councils are going to be open to election. Nor has the
basis of the electoral franchise been made public, although the fact that the
announcement referred to voters as “citizens” lends credence to the view
that women may also benefit from the franchise. Many commentators
inside the Kingdom believe that the elections will take place before 2010
and some hope that they could occur as early as 2005. Indeed, the
government has suggested that partial municipal elections could take place
even earlier, with a census to precede them and to provide the basis for
electoral lists. The caution is quite typical and reflects both the need to
achieve consensus within the elites –particularly in persuading the religious
Wahhabi elite to fall into line – and anxieties about too precipitate an
electoral process which might give rein to tendencies within the population
that the authorities wish to exclude.
Eventually, of course, the electoral process, if successful, will extend to
include a directly elected Consultative Council (majlis ash-shura ).This
would then bring Saudi Arabia to a position between the radical
liberalisation seen in Bahrain, for example, or the practice in Kuwait, where
the elected assemblies have direct executive power and the conservatism of
the Kingdom itself in the past where the Council only ever exercised a
consultative role. Interestingly enough, many Council members
increasingly feel that they have a de facto executive role as they are
brought into a consultative process with government and can see concrete
evidence of their suggestions within legislation and executive practice.
There is no doubt that the reforms announced by the Saudi authorities
have gone a long way to calming official American suspicions, even if
popular and Congressional suspicion remains. There are still, however,
many uncertainties about the way ahead, although the evidence suggests
that the proposed reforms are quite genuine and are intended to mark the
beginning of a genuinely liberalising process. Given the dimensions of the
domestic political crisis facing the regime, it could be argued that the
caution exhibited in planning the reform programme and the slow rate on
introduction could vitiate the attempt. Then again, it is not clear to what
degree, if any, the House of Saud will implicate itself within the liberalising
process.
The greatest challenge, however, is what is to be done about the Saudi
education system, for it is here that the malaise that has struck the Kingdom
is in large part located. Up to 30 per cent of young Saudis are
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unemployable in the modern economy that Saudi Arabia has been trying to
create, largely because of the way in which they have been educated, for
educational system lays greater weight on conformity with Wahhabi
doctrine than with international standards of intellectual competence. This
has meant that many Saudis simply cannot compete within the private
sector and thus plans for the Saudisation of the economy, with a consequent
reduction of dependence on immigrant expertise are already facing
difficulties. This, incidentally, is nothing new, other countries in the Gulf
region that have tried to indigenise their labour forces have also discovered
that legislation cannot compensate for inappropriate educational systems.
The real danger, however, is that a marginalised and discontented
youth, educated within the tenets of Wahhabism with its implicit critique of
temporal authority, may become disaffected from the regime and turn to
more radical alternatives. Indeed, this has probably already happened,
given the surprisingly wide range of opposition that the Saudi government
is now facing, with armed clashes occurring all over the country as police
investigations continue. The problem is, however, quite how educational
reforms can be carried out, given the sensitivity of the religious authorities
about its implications and the widespread conservatism of Saudi society.
This is a crucial concern because one aspect of educational reform will
involve dealing with the status of women, both within the economy and
within society. So far, no details have emerged as to what will be included
in any reform programme but the Saudi authorities are fully aware that the
United States has its own reform agenda for the Middle East, not least over
the question of educational reform and the emancipation and empowerment
of women.
The Saudi government, therefore, faces a major problem of how it can
reconcile competing pressures over educational reform. On the one hand, it
may outrage American concerns by being too cautious and conservative.
On the other, there is the danger of conservative religious opposition within
the Wahhabi elite. Then there are the aspirations of the moderate reform
groups, as well as competing pressures from more extreme salafi-jihadi
circles. Finally the more secular professional groups look for rapid
liberalisation and access to the economy, including the empowerment of
women. It is extremely difficult to see how the Family will cope with these
competing pressures, although it is aware of the general direction that
reform will have to take. Indeed, the recent arrests of eight intellectuals
involved in the petition movement is a depressing reminder of the intense
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conservatism of leading figures in government, particularly amongst the

Sudairi Seven, with the defence minister, Prince Sultan and the interior
minister, Prince Nayyaf, in the lead It is, however, an unavoidable issue
that can no longer be postponed because of the implications it has for
economic development as well as political stability.
The Economy
With population growth at 3.3 per cent per year and 45 per cent of the
population under 14 years old, the Saudi government cannot afford to allow
its economy to stagnate in the way in which it has for the past decade. The
simple result of that has been massive unemployment amongst Saudi
nationals – partly because of inappropriate educational policies – and a
significant decline in per capita incomes. It is calculated that, today,
average per capita income is around $7,000, compared with levels close to
$20,000 in the 1980s. The consequence of that has been a growing
disaffection with the Saudi regime, particularly with the 5,000-to-8,000-
strong privileged royal family. The old system whereby political
acquiescence was bought through public munificence and a complex
system of patronage no longer guarantees the social peace of the past, even
when supported by judicious, albeit ruthless repression.
Oil continues to be the driver of the Saudi economy, generating 90 per
cent of export revenues and contributing 30 per cent to GDP. Since the low
point of 1998, in the wake of the Asian economic crisis, Saudi Arabia’s
cooperation in Opec’s policies of sustaining oil prices within a band of
between $22 and $28 per barrel has ensured stable oil income. Indeed, this
has been buttressed by the continuing uncertainties in Iraqi oil exports as a
result of the war in early 2003 and the continuing crisis inside the country
ever since which, through persistent sabotages, has effectively removed
Iraq from the oil export scene – a situation which is likely to persist into
2004. However, the consequent high oil prices, which reached $32 per
barrel in the first quarter of 2003, is unlikely to persist and prices are
expected to resume their secular decline next year, despite the Kingdom’s
willingness to cut back production from an average of 8.6 million b/d (7.9
million b/d in 2001 and 7.5 million b/d in 2002) to below its new quota of
7.96 million b/d from the start of November 2003.
Nonetheless, the prolonged period of high oil prices has created a much
more encouraging picture for the Saudi economy over the past year.
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Exports rose by a striking 21 per cent in 2003 to $94 billion, far

outstripping the budget predictions of $32.8 billion and guaranteeing a
trade surplus of $56.8 billion. Even though exports will decline somewhat
next year and imports will rise to around $39.8 billion, there should still be
a comfortable trade surplus. And, now that the first upstream gas
development contracts have been awarded to Royal Dutch Shell in the Rub
al-Khali, gas will soon begin to buttress oil revenues through its
contribution to the petrochemicals sector. These developments, however,
cannot conceal the fact that oil still dominates the Saudi economy, with the
non-oil economy, for example, only contributing $12 billion (SR45 billion)
to budget revenues, compared with the massive $48 billion – 80 per cent of
the total – that is generated by oil. And oil and gas do not generate
employment!
The windfall in oil revenues, however, has meant that Saudi Arabia has
generated its first budget surplus for the past decade, alongside a current
account surplus expected to be equivalent to 10 per cent of GDP. Although
small at an expected $3 billion (1.5 per cent of GDP), it should be
compared with the government’s prediction of a $10 billion deficit,
equivalent to 5.6 per cent of GDP. It should also be borne in mind that the
habitual budget deficits of the past have been borne by an increase in
domestic debt, now about 100 per cent of GDP (an expected 91.5 per cent
in 2003) .Ironically enough, the government actually controls its own debt
for those institutions which fund the budget debt are largely effectively
controlled by government! It can, therefore, easily roll over debt, a facility
that discourages basic reform. The public sector continues to dominate the
economy with the private sector contributing only 30 per cent to GDP – a
level that has remained unchanged for years, despite all official attempts to
stimulate its growth. Now the Kingdom is to join the World Trade
Organisation in the hope that this will stimulate both non-oil trade and
private sector growth. It has up to the end of 2005 to complete the process
but must still pass a series of trade-related laws to comply with the
Organisation’s basic requirements.
Indeed, it could be argued that the Kingdom might do better to promote
its relations with its neighbours inside the Gulf Cooperation Council, where
it is the dominant economy and can now benefit from the new unified tariff
structures that have come into operation after years of discord, with the
Kingdom reducing its external tariff from 12 to 5 per cent last year.
Otherwise it should look to improving its relations with the European
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Union, its major trader partner, despite American offers of a free trade area
agreement – in return for educational reform, empowerment of women and
democratic government – which could not come into operation until 2005
at the earliest. These measures, however, will only improve the macro-
economy and will do little to deal with the most pressing demand, the need
to create employment opportunities for the burgeoning population.
In the meantime, Saudi Arabia will have to prepare itself for less
advantageous conditions in the future, as oil prices come under sustained
pressure when the Iraqi oil industry recovers from the years of sanctions
and the recent war. Then the anticipated 4 per cent growth in the Saudi
economy this year will be replaced by far lower levels of growth, so that
budget deficits return and current account surpluses decline, with
consequent lower returns to the Kingdom’s foreign currency reserves.
Commentators expect GDP growth to drop to around 2.5 per cent per year
up to the middle of the decade, compared with an average of 3.3 per cent
for the first three years of the new century – solely as a result of stable and
high oil prices. Ironically enough, it will be the private sector that will
suffer most, largely because of regional uncertainties, and is expected to
show growth of only 2 per cent this year, compared with over 4 per cent
last year.
In other words, Saudi Arabia has still not resolved the three major
problems facing its economic future – employment generation for the
national population, diversification away from oil and gas, and expansion
of the private sector. In part, this is a consequence of its massive oil and gas
reserves, for the difficulties created by “oil curse” are peculiarly intractable.
However, government must also bear much of the responsibility. For the
decade of the 1990s, it fuelled growth through defence spending at 33 per
cent of budget expenditure and spending on human resources (27.5 per
cent) and health (11 per cent).It has also prioritised spending on social
provision recently –these sectors saw expenditure on them rise by 22 per
cent last year – and cut back on public administration. The problem is not,
however, how much it spends on these essential demands but how it spends
it – and that is an issue which, for domestic political reasons, it has only
just begun to address.
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Conclusion
Despite the hackneyed quality of the phrase, the Kingdom really does
now stand at a cross-road. The problems of the economy, now reaching
back for three decades, still remain to be resolved as the Kingdom’s
dependence on oil begins to create a political and social resonance. The
declines in per capita income have destroyed the old political and social
consensus in what has always been a conservative society. Behind this lies
the frustration of an increasingly young society as unemployment mounts
and immigrants drain off available jobs, largely because of a religiously
and politically correct but economically and socially inappropriate
educational system. The emergence of a dynamic ideological alternative
threatens the Saudi-Wahhabi political hegemony, whilst the growth of
domestic violence can now no longer be denied.
Coupled to this has been a massively disrupting and disruptive
relationship with the Kingdom’s major international ally, the United States.
Despite the fact that the neo-conservative ideology of the Bush
administration, coupled with the implications of the events of September
11, 2001 for the Kingdom, precipitated the crisis, the underlying factors
had had a long gestation and would eventually have risen to the surface.
The United States would eventually have lost patience with the Kingdom’s
refusal to recognise the involvement of its nationals in the new wave of
trans-national terrorism and would have had to redeploy its forces because
of the deteriorating relationship over their presence in the Kingdom.
Similarly, increasing American reliance on energy imports was bound to
encourage increasing diversification. In other words, the specific role of the
neo-conservatives in Washington merely accelerated existing tendencies.
The explosion of violence inside the Kingdom has now forced the royal
family to reconsider its status and legitimacy. Despite the normative and
traditional reliance on the Wahhabi connection, new ways of authenticating
its leadership role is now necessary – hence the very cautious steps towards
reform. If the reforms are carried through – and here Crown Prince
Abdullah seems sincere and appears to have the reluctant support of his
colleagues in government and in the family – they will certainly recover the
waning support of the professional groups inside the Kingdom. They will
not, of themselves, however, deal with the far greater gap between the
massive of disadvantaged Saudis, now aware of their disadvantage and of
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the alternatives offered to them, which they may reject for its violence but
accept in terms of its critique.
Their support can only be recovered if they can be fully integrated into
the economic life of the Kingdom and into the cultural mainstream of the
Middle East. The two problems are linked through the issue of education
and it is here that real long-term reform is essential. Without a dramatic
change in the Saudi educational system, so that it can produce young
Saudis equipped to deal with a modern, technological and globalised world,
the alienation and marginalisation of the population will increase and
vitiate reform in all other sectors. And, without a restructuring of the
economy away from oil dependence and towards job creation, the
marginalisation will persist, even if educational reform is successful. The
problem is that such reforms touch at the very heart of the Saudi-Wahhabi
bargain and it is not yet clear that those involved are prepared for its own
transformation!
6 SAUDI SOCIETY
Introduction
The current state, formed by conquest in the early 20th century, is the
third Saudi realm. The first Saudi Kingdom was established in the mid 18th
century and was built on an alliance between the Al Sa’ud family and
Muhammad Abdul Wahab, the founder of the Wahabi school of Islam. The
Al Sa’ud were able to mobilise tribal power inspired by the puritanical and
fundamentalist teachings of Abdul Wahab to conquer much of the Najd
region in central Arabia and set up a state that lasted until the early 19th
century when it declined in the face of internal rivalries and Ottoman
power. The second Saudi Kingdom (sometimes called the Golden Era) was
set up on similar lines in the mid 19th century until it too fell away towards
the end of the century.
Modern Saudi Arabia was the creation of King Abdul Aziz Ibn Sa’ud
who from exile in Kuwait in 1899 took over the Najdi capital and quickly
established his control over the Najd and adjoining areas of Qasim and
Hail. He conquered Hasa (the Eastern Province) and annexed Jauf in the
north and then Asir in the south on the border with Yemen. In the 1920s he
took over the Kingdom of the Hijaz, which included Mecca, Medina and
Jeddah. The country became known as Saudi Arabia in 1932 and acquired
more territory in war with Yemen in the early 1930s and has since
remained within its current borders. The Al Sa’ud gradually consolidated
their rule and was able to exploit their control of the country’s oil wealth
from the 1950s onwards to centralise the state and greatly extend their own
powers.
Saudi society is thus heavily influenced by regional, Islamic and tribal
factors and the changes forced through the modernisation of the state.
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Regional Factors
The Al Sa’ud were a Najdi family who first imposed their
dominance on tribes in their own region and gradually extended this
to other parts of the peninsula, which had not previously been under
Saudi or Wahabi influence. The Al Sa’ud used largely Najdi tribal
soldiers and then Najdi officials to run their government and even
today Najdis are a majority of the senior ministers, civil servants and
military officers. Some Saudis even refer to the process of governing
as Najdasation of the rest of Saudi Arabia.
The key regions are:
x The old Hijaz. This had been a semi-independent state for centuries
and had a more open and international attitude than the Najdis. The
Hashemite rulers of the Hijaz had been protectors of the holy places
of Mecca and Medina and had organised the Hajj. Hijazis regarded
themselves as more liberal and sophisticated than the Najdis. Even
today there is a distinct difference in the atmosphere between
Riyadh and Jeddah. Hijazis will complain about some
discrimination against them and are more critical of government
policies.
x The Eastern Province (Hasa or Ahsa), too, has a more liberal
tradition and is the home of the country’s Shi’a minority. It has
much more in common with other Gulf States and the long-term
presence of Aramco has helped foster greater openness. We will
discuss the Shi’a issues later.
x The Asir in the south west has more in common with Yemen than
Najd. Resentment of Saudi rule is strongest here - which is also one
of the poorest parts of Saudi Arabia. Many young Asiris were
attracted to Osama bin Laden.
x Qasim and Hail were early conquests of Ibn Saud from his main
tribal rivals and quickly became ardent Wahabis. But Qasim, in
particular, has not benefited from Saudi rule in the same way as
Najd and there is considerable poverty here. Islamic extremism is
stronger there than elsewhere.
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x Jauf, which has much in common with southern Jordan, has a

strong tribal tradition and the rule of the Al Sa’ud is exercised
lightly though the Sudeiri branch of the family.
Regionalism is not normally a problem and there are no separatist
movements. But it is there beneath the surface: for the last year, for
example, in London Hijazis have been producing their own journal which
is highly critical of the regime. It can be a factor in the approach to certain
markets – with different arrangements in Riyadh, Jeddah and the Al
Khobar/Dammam/Dhahran region.
The Wahabi movement

The Wahabi movement helped inspire the previously warring tribes of
the Najd region of Saudi Arabia to unite under the Al Sa’ud. The Al Sa’ud
have always been dominant and, for example, were able to break up the
Ikhwan – the fanatical tribal troops in the 1930s – used in the conquest of
the other regions. The relationship between the Al Sa’ud and the Wahabi
Ulama (senior clerics) is crucial to the Saudi state.
There are several elements to this:
(a) The King as Imam appoints the top Ulama who come together in the
Council of Senior Ulama. Though the influence of the Al Shaikh
family has declined the Ulama remain amenable to the wishes of the
King/Crown prince. Indeed they are often regarded as apologists for
the regime. The understanding is that the Al Sa’ud put Wahabi
tenets at the heart of the state and take into account the views of the
Ulama when making decisions. He usually does so. The country
remains deeply Islamic and conservative.
(b) The Council for the Preservation of Virtue and the Suppression of
Vice (which controls the religious police) has had offices or people
since the 1920s in all settlements. It has helped keep the Wahabi
message pristine and prevented the evolution of more tolerant and
less fanatical views.
(c) Much of Saudi Arabia before the 1920s was not Wahabi or even
Hanbali (the most puritanical of the four schools of Islam from
which Wahabism derived)). The Al Sa’ud imposed wahabism on the
conquered regions such as the Hijaz. Even today nearly all mosque
officials are wahabis from the Najd. Hijazis sometimes claim, for
example, that there is not a single Hijazi mosque official.
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(d) For decades the Al Shaikh and the senior Ulama controlled the
ministry of education and thus the curricula and text books. Even in
the 1980s and 1990s the major Islamic universities expanded at
three times the rate of secular universities and still have greater
resources per student.
Whilst the senior Ulama may be responsive to the commands of the Al

Sa’ud there is a large body of Islamic opinion that the Al Sa’ud must take
into account in policy and decision making. In recent years it has become
clear that there are significant gaps between the senior Ulama and a large
section of Wahabi Islam. There are some 58,000 mosques in Saudi Arabia
and probably around 100,000 clerics of one sort of another. There is no
formal hierarchy and until very recently little control of what went on in
mosques and what clerics preached. This gap was shown in 1979 when a
group of fanatics seized the Grand Mosque in Mecca and held it for some
weeks until it was retaken with considerable loss of life.
The response was for the regime and the Ulama to adopt more extreme
positions. Combined with the Soviet invasion of Afghanistan and the
Iranian revolution in the 1970s there was also a great upsurge in the flow of
Saudi money and clerics to Islamic institutions abroad and of course the
fight against the Russians which helped breed Osama bin Laden. Many of
the problems of the 1990s and today are a result of these developments in
the late 1970s.
Since 9/11 and more particularly since 5/12 (the day of the attacks in
2003 on the three compounds in Riyadh the Saudis have taken a number of
measures to eliminate what they call extremism:
(e) A number of the senior Ulama have been replaced
(f) There have been efforts to control mosques by dismissing and re-
educating some 3 -4 per cent of mosque officials, seeking to impose
standard sermons and by fostering moderation.
(g) The curricula of universities and schools have been revised as have
text books.
(h) Restrictions have been placed on the religious police.
(i) Encouragement of a national dialogue which has so far concentrated
on recommending other measures to foster moderation
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It will take time for these measures to work. There is a reaction.

University lecturers talk about dissident students retreating to certain
mosques and private houses or even going off into the desert. The caution
over the reform programme and the careful construction of government
statements and action show that the regime remains deeply concerned.
There are almost weekly examples of the government reacting first to a
need for reform and then the need to placate the Ulama.
Tribal Factors
Much of Arabian society was based on tribes and the major tribes
remain important. Educated liberal Saudis will today deny the existence of
tribalism but the evidence outside the major towns does not support this.
King Abdul Aziz pursued a policy of inducing tribal leaders to support his
cause in exchange for government funds and favours. He consolidated this
through marriage - he married into many of the main tribal families - and
binding them into the regime in other ways. This continued under his
successors and today in the more remote areas the government often acts
through tribal leaders in handling local affairs. Tribal elements provide the
basis of the Saudi National Guard. This defends the regime whilst the army
defends the borders – it should be noted that the army is deployed well
away from the main urban centres of Saudi Arabia whilst the National
Guard is located close to the cities. Tribal factors are particularly important
in the Najd and in the north where there are large tribes like the Shammar
that have significant territories, people and influence in Iraq, Jordan and
Syria. One interesting recent development since the 12th May attack on
three western compounds is a move by the Al Sa’ud to cultivate tribal
leaders much more openly than normal. If tribal factors have declined
Saudi society remains based on the extended family – with the Al Sa’ud
being a prime example.
Elites
The large Najd families and their allies are the backbone of support for
the regime and today they play the dominant role. Although families from
the old Hijaz and Ahsa resent the Najdi dominance they also have much in
common in subscribing to a moderate reformist agenda and the further
modernisation of Saudi society.
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These groups have vested interests in the status quo as they have
largely benefited from the inflow of oil wealth, the spread of education and
the opportunities for employment in the government, Aramco and the
military. Today they provide the ministers, members of the Consultative
Council, civil servants and military leaders. They make up the bulk of the
business community, which is still largely organised in family firms. These
people are usually associated with the modernising and liberal
establishment in Saudi Arabia but this can be misleading. Important
religious figures are also drawn from the same group – though largely
Wahabi families from the Najd. It is unwise to assume that the wealthy
Saudi families and businessmen are all liberals and modernists – far from
it.
The poorer Saudis

There are no reliable statistics to measure the degree of poverty or
relative poverty. Poverty is visible in areas like Asir in the south west,
towns and villages in parts of Jauf and Qassim as well as districts of the
major cities. The Shia in the Eastern province suffers both from poverty
and discrimination. Poverty is eased by the cradle to grave welfare system
and a range of subsidies on food, utilities and internal transport. But Saudis
outside the elites, which are very small group, feel they are getting poorer.
The few studies that have been done tend to support this conclusion.
Research shows that the young do not expect to achieve the same living
standards as their parents. There is growing resentment of the differences in
wealth, the claims of corruption and the Al Sa’ud. University lectures note
that though many of the middle class Saudis are politically apathetic there
is a sense of growing disenchantment. It is unorganised and inchoate but it
no doubt fuels the appeal of extremist ideas to some. It will get worse. The
Saudi government understands that it must eliminate the causes of social
alienation as part of the counter-terrorist strategy but, as the section on the
economy will show, there is a very long way to go and progress so far has
been at best fitful.
The Economy
The Saudi regime must greatly increase GDP growth over the next ten
years to provide the jobs for its youthful population sustain expectations of
living standards and enhance and develop its infrastructure. On the face of
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it the economy has been doing well recently with high rates of growth, the
start of an ambitious reform programme and good marks from the rating
agencies. But the economy is too dependent on oil and gas which
contribute 90%-95% of total Saudi export earnings, 70% of state revenues,
and around 35%-40% of GDP, more if the downstream petrochemical
sector is counted. It has the capacity to produce around 10.5 million b/d but
normally keeps production to around 8 million b/d – although it has been
well over 8 million b/d since the start of the Iraq crisis. GDP growth and
government income thus depend very largely on the oil price and the quota.
It has not yet built up other sources of income.
Saudi Arabia usually struggles to keep its budget out of deficit. As a
rough rule of thumb; Saudi Arabia needs an oil price of around $25 per
barrel from just over 8 million b/d of oil to meet its current consumption
and investment needs. It is earning over that currently but very few believe
that this price level can be sustained. In addition to this it will need
substantial sums to invest to repair and update its infrastructure. One
economist has estimated that Saudi Arabia will need at least $200 billion to
finance its needs for power and water over the next 20 years. Rate of
capital formation of the economy at present suggests that this will be a
formidable task.
Government economists believe that the economy has a potential
growth rate of over 7 per cent but this requires measures to persuade Saudi
businessmen to invest in their country (estimates of the amount held by
Saudi private investors abroad range from $200 billion to $600 billion),
persuade foreign companies to invest and find ways of employing male
Saudis and engaging more of the female population in the work force. It
must remove the many internal obstacles to growth such as the bureaucratic
procedures and lack of incentives, ensure greater competition and increase
transparency. Thus most private economists assume a maximum growth
rate of 2-3 per cent – that is not enough.
In the early 1980s Saudi GDP was over US$17,000 per capita. It is now
under US$8,000. It may well fall further.
x Population growth in Saudi Arabia is very high: some 50 per cent
of Saudis are under 18.
x Around 58 per cent of the population is in the economically active
age group of 15-64 but only 33 per cent of Saudis actually work –
which creates a very high dependency ratio.
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x There is a cradle to grave welfare system and a range of subsidies

on food, utilities and internal transport
x There is no income tax
x Heavy defence needs – defence and security absorb around 40 per
cent of government revenue.
x A very large state sector (60 per cent of the budget goes on wages
and salaries).
There is an urgent need to create jobs to meet the rising number of new
entrants to the labour market each year: some 100, 000 at present.
Unemployment among Saudis is well over 10 per cent and is rising rapidly
particularly among people in their early 20s. The educational system is not
able to produce sufficient qualified graduates, nor can the secondary
schools. In the period 1980-2000 the number of engineering graduates has
increased by 20 per cent and the number of graduates in Islamic-related
subjects by 300 per cent.
The high dependency ratio is putting heavy demands on services and
increasing the cost of subsidies. Saudi Arabia has thus experienced budget
deficits in most of the last ten years, which it has covered through domestic
borrowing. Domestic debt is close to 100 per cent of GDP – and in the
1990s grew faster than GDP. Saudi Arabia has not borrowed abroad – it
has always rejected the concept of sovereign debt and of opening up its
books to ratings agencies and the like – but the Saudi institutions and banks
covering the debt have been forced to draw on their foreign deposits to
meet it, with a significant impact on the Saudi balance of payments.
Oil and gas

The main lines of Saudi Arabia’s oil policy have not changed recently
and can be summarised as follows:
x Managing where possible the price of oil through OPEC. Saudi
Arabia has played a key role in seeking consensus among OPEC
members and the Oil Minister has played the central role in this;
x Understanding and acting to assist the needs of the market – the
USA in particular.
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x Maintaining sufficient capacity to be able to cope with a short-term

need to increase production;
x Keeping foreign oil companies out of upstream oil;
x Using gas for domestic energy needs and encouraging foreign
companies to explore for gas
x Development of the downstream to produce jobs for the Saudi
economy;
x Downstream investments abroad to get the most out of Saudi oil
income.
Economic reform
Prince Abdullah has been pushing hard for reform since 1995 and has
made some headway through:
x Establishing rigorous control on spending via the tough and able
Finance Minister
x Re-organising decision-making in the economic sector so that the
Crown Prince can drive it through the Supreme Economic Council
which he chairs;
x Setting up the Saudi Arabia General Investment Authority
(SAGIA) to act as a one-stop shop and general supporter of
investment. This, in turn, has been run by an able and energetic
Saudi Prince fully committed to opening up the country;
x Bringing incentives to investing in Saudi Arabia to be competitive
with other similar economies;
x Opening up state sector to private capital mainly through allowing
private companies to take over the management of ports, for
example, and providing services;
x Indicating that it will privatise some state corporations;
x Launching the gas initiative;
x Reorganising the power sector and paving the way for private
financing of power projects;
x Saudi Arabia should join the WTO in late 2004.
x However, there is always opposition from:
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x Vested interests within the Al Saud. A large slice of Saudi income

is “off budget” and is used to finance some military spending and
spending on security and intelligence. An unknown slice of it goes
into providing stipends for virtually all the male Princes. Many of
the senior Princes are involved in business. An absence of
transparency.
x The deep conservatism within the state structures.
x The social costs of reducing subsidies and welfare benefits at a time
of rising unemployment are unacceptable;
x Resistance to the changes e.g. Aramco’s attitude to the upstream
gas initiative.
There has been a noted change of pace and urgency since 9/11. There
has been a great deal of intense discussion about the need to increase
Saudisation and provide jobs for the growing army of young men. It is
recognised now that greater resources must be devoted to secular and skills
education. This needs to be combined with reforms that will eventually
reduce the number of Islamic graduates. Much more needs to be done to
attract back Saudi private funds and bring in external funds.
There is still much more talk than action. This is partly because the
decision-making process – or the consensus building process – is slow and
cumbersome. Apologists for the system will say Saudi Arabia has always
been like this. The process goes through the increasingly over crowded
programme of the Majlis al Shoura and then through cabinet. The general
trends are clear but there is too much hype. There is no doubt that the
Crown Prince and his allies want to get across the message that reform is
now unstoppable. In particular they have talked up the following:
x Expanding the list of sectors that are open to foreign investment.
x Pushing through a new capital markets law and an insurance law. A
labour law will follow
x Opening up the electricity, telecom and other sectors to private
capital.
x Introducing income tax for foreigners.
x Introducing the new laws that will provide the legislative
framework to give investors confidence in the country.
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x Introducing more technology and IT courses into the Islamic

Universities - i.e. changing them from within.
x Greater transparency in decision-making.
x Steps to bring about clarity over dispute settlement
Regulators have been appointed to the electricity and telecoms sectors

and moves are being made to find ways of bringing private capital into
power generation. However, it is important to recognise that much of this is
still at the proposal stage and that implementation will take a lot longer
than the government would like westerners to believe. There is no doubt
that the Crown Prince is committed but the need is to balance against these
claims the following factors:
x Look at the gas negotiations. The oil companies are getting
increasingly frustrated and there is a rumour that one may pull out.
x Educational reform has started but is not going fast enough. The
Ulama no longer have control of the ministry. Islamic Universities
are now teaching a few more technical subjects. There are plans to
set up private universities. It will take time to introduce the
facilities to increase the technical and engineering content. It will
happen but not yet.
x Progress on every key reform is painfully slow.
x Resignation last week of the Head of SAGIA – frustrated at the
difficulties in getting the system to respond.
There have been moves over the last ten years to reduce the cost of the
subsidies to the Ministry of Finance. Electricity and water prices have been
increased, as have domestic airfares. But this has not yet been harsh enough
to cause any difficulties. There is no talk of introducing income tax or of
paying for education and health. It is highly unlikely anything will be done
in these areas in the short term – the government is clearly worried about
the impact on domestic opinion. It thus seems unlikely that there will be
serious action to tackle the issue of subsidies.
There are at least four million expatriate workers in Saudi Arabia – and
thus in theory four million jobs that the Saudis could take. The government
is committed to Saudisation. It has now barred non-Saudis from taking
some jobs. It has set targets for some sectors and made it more difficult for
companies to employ foreigners. There is no doubt that this pressure will
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increase. In March the Saudi travel industry was virtually brought to a halt
as the government tried to enforce it to Saudise.
Conclusions
There has been a distinct change of pace since 9/11 but it still lacks the
sense of urgency that the growing problems demand. As one of the leading
Saudi economists said recently that it might take “greater social problems”
before the urgency will be injected. The old men at the top – as is the wont
of old men – do make haste slowly. Saudi problems may not wait for them
but they have to get worse before drastic action will be taken. The time
available to the regime is running out. It has not used the last ten years to
good effect. The reform process is gathering momentum but is still moving
far too slowly. Saudi Arabia will remain dependent on oil prices and output
for most of the next ten years. Although Saudisation will help absorb new
entrants to the labour market the signs are that demographic growth will
continue to outstrip GDP growth for the next ten years. This will almost
certainly mean that poverty in places like Asir and Qasim where most
radicals are bred will not be alleviated significantly. Political apathy among
the young will change quickly when they cannot afford to get married, get a
house or build a middle class life.
The key to Saudi stability lies in how the leadership can bring the
various elements of Saudi society into a consensus for reform – economic
followed by political. Octogenarians are not the ideal people to do this.
Much will depend on how soon the country moves to a newer generation of
leaders who have the vision, energy and personality to tackle the problems.
Benign neglect will no longer suffice.
7 CENTRAL ASIA AND THE CASPIAN BASIN
Relations with Russia and Opec
Summary
In 50 years’ time, statesmen and businessmen may well look at a much
more highly integrated global market for goods and services and ask
themselves why the integration of energy supply has lagged behind and
placed a brake on economic growth.
Once the expanded network of oil and gas pipelines and electricity
connections has begun to deliver enhanced energy supply security through
the entire Euro-Asian region and the benefits of much larger economies of
scale and load-sharing are apparent, the Central Asian and Caspian states
will be at the heart of the system and in a strong position to stimulate the
development of their own limited resources for export and domestic use.
Until then, we are likely to witness a prolonged competitive squabble with
much more damaging intervention from outsiders.
This paper looks first at the current levels of production within the four
leading states of the Central Asian and Caspian area in the light of their
resource base and domestic needs. It then considers the underlying
economic and political interests of Russia to the North and the Gulf oil and
gas producers to the South, and also reviews the aspirations of Europe to
the West and China to the east – a likely source of unending rivalry and
conflict. In this diplomatic global game of energy chess, the Central Asian
states and the Caspian Basin states are at present no more than pawns with
little weight of their own. The reason why they attract so much attention, is
the central ground which they occupy and their own policy priorities in
transport infrastructure to enable their energy surpluses to access hard-
currency markets.
Will China outwit the United States in the global race for incremental
oil and gas from the Gulf? – probably! Will the West be able to play Russia
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off against OPEC as global oil supply begins to tighten? – probably not!
The Central Asian and Caspian states may be a long way down in the
production league tables but this does not mean that they will be able to
keep out of the broader, long-term economic war going on all around them.
Small populations in a vast area

The area of the four lead-states under review is 14% larger (Table 1)
than that of India whose population is fourteen times that of the four states.
Translated into population density statistics, these are some of the emptiest
states on earth. Kazakhstan has roughly 17 people per square mile strung
across a state which is 1800 miles from West to East and 900 miles from
North to South: compare this with India which has 788 inhabitants per
square mile or China with 965.
Table 1: Population Density

Population Area Population Density
Million Square Miles Persons per square mile
Azerbaijan 9 33,000 272
Kazakhstan 18 1,049,000 17
Turkmenistan 4 188,000 21
Uzbekistan 25 173,000 145
Total 76 1,443,000 53
Source: Times World Atlas, 1995
NOTE ON THE TABLES: The individual country numbers are rounded to one point of
decimals. The totals here are merely the totals of these roundings. If you wish to have more
accurate figures and roundings, take the numbers in the BP Statistical Review, apply all the
appropriate conversion factors listed on the inside back cover and calculate the precise
totals.
It is not surprising therefore that aggregate domestic energy demand for

the four states is very low (Table 2), about 1% of global energy demand
and over half of that is accounted for by gas in Uzbekistan and coal in
Kazakhstan.
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Table 2: Consumption of Primary Energy, 2002 (Mbdoe)

Oil Gas Coal Nuclear Hydro Total
Azerbaijan 0.1 0.1 - - 0.1 0.3
Kazakhstan 0.1 .02 0.4 - - 0.7
Turkmenistan 0.1 0.2 - - - 0.3
Uzbekistan 0.1 0.9 - - - 1.0
Total 0.4 1.4 0.4 - 0.1 2.3
Source: BP Statistical Review of World Energy, June 2003
The four states produce just about double the energy they need (Table
3). The three main export surpluses are Kazakh oil (0.9 mbdoe) and coal
(0.4 mbdoe) and Turkmenistan gas (0.7 mbdoe). In total energy production
they account for 2.5% of the global total (188 mbdoe). The great success
story in this picture is Kazakh oil production which doubled between 1997
and 2002 to reach close to 1mbd (Table 4).
Table 3: Production of Primary Energy, 2002 (Mbdoe)

Oil Gas Coal Nuclear Hydro Total
Azerbaijan 0.3 0.1 - - 0.1 0.5
Kazakhstan 1.0 0.2 0.8 - - 2.0
Turkmenistan 0.2 0.9 - - - 1.1
Uzbekistan 0.2 1.0 - - - 1.2
Total 1.7 2.2 0.8 - 0.1 4.8
Table 4: Oil Production 1992-2002 (Mbdoe)

1992 1997 2002
Azerbaijan 0.2 0.2 0.3
Kazakhstan 0.5 0.5 1.0
Turkmenistan 0.1 0.1 0.2
Uzbekistan 0.1 0.2 0.2
Total 0.9 1.0 1.7
For the scale of production and consumption, the four states have ample
proven resources in aggregate (Table 5), but varying reserve/production
ratios for the individual states. In the oil sector they range from a very high
62.5 years in Azerbaijan to rather low ratios in Turkmenistan (8.3 years)
and Uzbekistan (11.3 years).
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Table 5: Share of Global oil, gas and coal reserves, 2002

Oil Reserves Gas Reserves Coal Reserves
Azerbaijan 0.7% 0.5% -
Kazakhstan 0.9% 1.2% 3.5%
Turkmenistan 0.1% 1.3% -
Uzbekistan 0.1% 1.2% -
Total 1.8% 4.2% 3.5%
Global politics repeatedly intrude

The Central Asian and Caspian Basin states face many obstacles in
attempting to secure access to the rich, hard-currency markets of Europe:
All the states have inherited the dilapidated remnants of the integrated
Soviet Energy System designed, constructed and run with the interests of
Russia/ The Soviet Union in mind and not for the benefit of individual
states.
The Soviet system pointed energy exports to markets within the Former
Soviet Union, not towards Europe or China or Southwards towards Turkey
or Iran or India or Pakistan.
The energy system in the area has been very slow to change.
Many of the former Communist governments and ministers are still in
power and have no intention of handing the energy sector over to free
market forces.
As an example, when I was over there recently trying to work out why
some energy transfers from certain producer states to neighbours, originally
part of the Soviet economic plans, had become so sluggish, a friendly
minister took me quietly on one side:
“You do realise, Paul,” he said, “No one has ever paid cash for that
exported gas and electricity for years and years. They would not know how
to do it.”
So, as everywhere in the Former Soviet Union, you discover running
beneath the surface, a secret submerged system based on extremely
inefficient ad hoc barter – gas for agricultural produce, oil for arms, coal
for cotton etc – trades which are firmly in the hands of powerful trans-
border mafia groups, some brand-new, some which have been prospering
continuously for fifty years without a single published annual report to
show for it.
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On the surface you have national taxation laws and inter-government

trade contracts perfectly formulated by some passing World Bank mission,
excellent legislation drafted by a bevy of Wall Street and Cheapside
lawyers, and glossy PR from the Ministry of Foreign Affairs. But the
reassuring clink of real coin in the coffers of the Ministry of Finance is
often characterised by its complete absence. This is why the so-called new
“free” market economies frequently fail to produce what the economy
needs or what the population wants. At its worst, the distribution policy is
simply to take all surpluses at knock-down prices and dump them on the
public or that of neighbouring states at inflated prices – whatever the
market will bear. How the profits of this trade are raked off is not always
clear but a small number of entrepreneurs rapidly become multi-
millionaires.
Various large Western companies have rushed in to offer to build new
oil and gas production facilities and pipelines, always with an eye to
ultimate link-up with the European energy market. They have usually run
immediately into collision with state-promoted resource-based energy
industry projects, whose enthusiasm for cash injections of any kind are
sometimes dampened only by their unwillingness to accept independent
auditors or complete transparency of pricing or outside managerial control
of the new technology. Production Sharing Agreements on the model
popular in the Russian Federation were until quite recently supposed to
have got round these inhibitions and anomalies but many of these joint
operations have proved hopelessly uncompetitive and in need of further
injections of government subsidies or capital mobilised by the international
agencies.
Russia resists
In the case of the major planned pipeline outlets to Europe and China,
all essential decision-making rests with governments and the process of
agreement is highly politicised. Russia is determined not to lose influence
in any part of the Former Soviet Union and talks to a listening Russian
electorate of re-establishing effective control and thereby eliminating the
rebels as in Chechnya. The USA, now with a commercial and industrial
foothold in the Caspian area and a military foothold in Uzbekistan and
Tajikistan, based on supply routes to Afghanistan, also will not give up
easily.
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The interests of the Gulf

Today, attention turns towards Iraq and the Gulf states. If Iraqi oil
production recovers quickly or new Western technology rescues many of
the depleting older fields in Iran, we are likely to see oil prices falling and
less interest in Caspian oil and gas, where external investment can only be
attracted in a high-price and/or supply interruption environment.
Conversely, if the oil market becomes preoccupied with the political
instability of Iraq and Saudi Arabia, it will be clutching at straws of
comfort in the Caspian. In this global market, accelerated Caspian
production might just tip the balance whereas it is difficult to see the other
central Asian states making much difference.
What is of greater relevance is the stance of Saudi Arabia and Iran
operating through the OPEC quota mechanism. We need to ask ourselves
what are the long-term and short-term interests of OPEC.
In the short-term, OPEC looks for the highest price (and therefore oil
export revenue) for its members which is compatible with maintaining
market-share. The lesson of the seventies, when the two big oil-price hikes
of 1973/4 and 1979/80 greatly stimulated the development of the North Sea
and other non-OPEC sources of energy and in the eighties led to a collapse
of OPEC market-share and of revenue has not been lost on OPEC. The
question is frequently asked, particularly in the USA, whether the Caspian
might be the new North Sea and a new means of restraining OPEC power
and influence in the market-place. It is an attractive hypothesis for
Pentagon strategists, who have their own agenda in Central Asia, but
carries little serious weight within the global oil and gas industry.
OPEC’s long-term strategy is to hold on to the centre-stage in global
supply and demand. This embraces tacit agreement with the key consumers
on what range of price the oil market can bear. Within this broader horizon,
there is little OPEC enthusiasm and no OPEC capital available for helping
neighbouring supply competitors such as the Caspian states.
In political terms, the OPEC interest is in economic and trading
stability – containing dissent within their own economies and minimising
external interference and threat. They need secure supply lines to their lead
customers and recognise that they are dependant on others, particularly the
United States and Japan to police the choke points such as the Straits of
Hormuz and the Straits of Malacca and to keep piracy and terrorism in
check.
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Only in the very long-term is OPEC aware that oil and gas pipeline
access from the Gulf to Europe (as in the pre-1979 Iranian IGAT 2 project)
would be of immense benefit to Gulf producers and could give them even
more leverage in the market. The same visionaries see similar benefits in
Gulf oil and gas being added to the planned gas and oil lines from Central
Asia to China and to supply Japan.
Russia and OPEC

One major recent strategic alliance has attracted the attention of
OPEC. The recent buoyancy of Russian oil production, recapturing the
global lead position from Saudi Arabia and the US President’s enthusiasm
for projects to bring new Russian oil exports to the US raises the question
of whether the USA can use Russia as a counterweight to OPEC
OPEC has, of course, in the late eighties courted Russia to become a
member. Indeed an association of sympathetic non-OPEC producers, IPEC,
the Independent Petroleum Exporting Countries, led by Russia and
supported by Norway, Malaysia and Mexico emerged for a short while at
that time before it dawned on these governments that they could reap the
economic benefits of OPEC confrontation with western consumers without
the political opprobrium of being seen to break ranks with their OECD
partners. Support for Russia quickly evaporated.
Neither the oil and gas industry multinationals nor the lead-western
governments can keep up with the current helter-skelter of Russian
economic and industrial restructuring. Russia has proved extremely
unpredictable as an economic ally. In any contingency positioning to
absorb the next set of surprises from the Middle East in the light of the
transition in Iraq to Iraqi democratic government, the mood is one of
caution and wait-and-see.
Summary
Russia, at the end of the day, is so politically different from Wahabi
Saudi Arabia and fundamentalist Iran that it is very hard to see those three
forming an effective alliance and it is equally unlikely that the USA will be
able to manipulate Russian oil policy to diminish OPEC power in the
market.
SECTION X
INITIATIVES
EMANATING FROM THE WORKSHOP
1 INITIATIVE: ENERGY SECURITY AND
UNRESOLVED CONFLICT IN THE
CAUCASUS
279
H. McPherson et al. (eds.), Emerging Threats to Energy Security and Stability, 279.
2 INITIATIVE ON PIPELINES PORTS AND
SHIPPING SECURITY - BUILDING
PUBLIC-PRIVATE COOPERATION
1.30pm - 6pm 29th July 2004
Foreign and Commonwealth Office, Indian Office Council Chamber,
London
Summary
This half-day workshop builds on the NATO-sponsored workshop in
January held by Windsor Energy Group that looked at scope for greater
public and private cooperation with regard to energy security.
Participants
The meeting brings together operators, energy companies, governments
and international agencies to discuss how such cooperation can better
address the asymmetric threat of terrorism.
Scope
The discussion will focus on:
x current examples of public-private cooperation
x improving an exchange of risk assessments and information
x reviewing best practice for security audits
x assessing technological advances in screening and protection
x identifying scope for greater public and private cooperation
x reducing insurance costs through best practice
x meeting international legal requirements.
Outcome
The one-day workshop will create a network for exchange of news and
developments and provide an international framework for cooperation.
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282
Organisation
The meeting will be convened by the Windsor Energy Group, a forum
that seeks to build bridges between public and private sector with regard to
the geopolitics of energy. The group is chaired by Sir David Gore-Booth, a
former British ambassador to Saudi Arabia who is also adviser to the
chairman of HSBC. The group’s director is Paul Tempest, vice-president of
the British Institute of Energy, and former adviser to the chairman of Shell.
The secretariat is provided by MEC International – a London-based
company with extensive experience of the Middle East.
To find out more contact the WEG Secretariat at on
[email protected] or call 020 7591 4816.
3 ENERGY SECURITY & NATO STRATEGIC
INTERESTS AFTER 9/11
Towards a NATO Energy Security Support Capability.
Dr W. Duncan Wood
Director of Research, Institute for Applied Science
Abstract
This presentation offers a NATO context for the energy security issues
discussed in this workshop. First, it highlights the actions taken by NATO
and its Partners since the Al-Q’aeda terrorist attacks of September 11,
2001. Second, it underlines the emerging energy security threats that have
been raised in the course of this workshop. Third, it looks at various energy
security solutions put forward in the workshop and outlines how the
working group established by this workshop can serve as the basis for a
NATO Energy Security Support Capability. The creation of such a
capability is clearly in line with NATO’s new asymmetric threat mission,
and it also reflects the new defense against terrorism focus of NATO’s
science program under whose aegis this workshop has been conducted.
Background
The Al Q’aeda terrorist attacks against the United States on September
11, 2001, which killed more than 3,000 people led to an immediate
collective response by NATO’s 19 member countries. For the first time
ever, NATO invoked Article 5 of the 1949 North Atlantic Treaty and
declared that the attacks constituted an attack against all the countries
within NATO.1 Moreover, the 27 NATO Partner countries reinforced this
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position using the forum provided by the Euro-Atlantic Partnership Council

(EAPC) to condemn the attacks on Washington DC and New York and to
issue a joint pledge to combat terrorism.
The consequences of these decisions still have not been fully
appreciated in the member countries: in effect, since 9/11, NATO has
transformed its mission: -- from protecting its members against aggression
by other states -- into an alliance which has triggered its collective self-
defense obligation against a non-state actor and totally reorganized its
operations in order to counter asymmetric warfare threats.
Understandably, the events of September 11, 2001 and the subsequent
wars in Afghanistan (2001) and Iraq (2003) also have great implications for
the NATO alliance’s strategic thinking with regard to energy security. The
September 11 attacks demonstrated the success that could be achieved with
asymmetric warfare using commercial aircraft with full loads of jet fuel as
highly destructive weapons of mass terror. The September 11 terrorist
attacks also demonstrated the potential vulnerability of energy supply both
in terms of the immediate vulnerability of physical energy infrastructure,
and more broadly, in terms of the potential for geo-political and economic
instability. Furthermore, the prominent role of Osama Bin Laden and other
Saudi Arabian Al-Q’aeda militants in the terrorist attacks have inevitably
led to concern about the political stability of the Gulf States who control
66% of known global oil reserves and 40% of known global natural gas
reserves. Consequently, both NATO and the wider international
community need to develop new energy security strategies in order to
protect global energy supplies from regional instability and terrorism.
1 The Transformation of NATO since 9/11
1.1 The NATO Prague Summit, November 2002

9/11 has accelerated and expanded the transformation of the NATO
alliance. In the Cold War, NATO’s mission was primarily understood as
defending the West against the threat of invasion by the Soviet Bloc. Now
NATO is being transformed to meet new asymmetric warfare threats,
terrorism and the proliferation of weapons of mass destruction. By
invoking Article 5 in response to the 9/11 attacks, NATO identified
terrorism and the proliferation of weapons of mass destruction as two of its
principal challenges, and made clear that it would invoke the right of
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collective self-defense against non-state actors. In addition, by sending

troops to Afghanistan to fight Al Q’aeda and the Taliban NATO also
underlined that its collective self-defense responsibilities now extend
globally.
At the Prague Summit, November 21-23, 2002, NATO issued
invitations to seven new states – Bulgaria, Estonia, Latvia, Lithuania,
Romania, Slovakia and Slovenia -- thereby expanding the alliance to 26
Member states. But in the aftermath of 9/11, NATO has made clear that
adding seven new countries to the alliance is only a part of a much broader
transformation strategy which views enlargement of the alliance as a means
to create a common security space capable of responding to the
international security challenges posed by terrorism and proliferation of
weapons of mass destruction.
1.2 The Prague Summit Declaration, November 2002:

Article 1 of the declaration states:
“We, the Heads of State and Government of the member
countries of the North Atlantic Alliance, met today to enlarge our
Alliance and further strengthen NATO to meet the grave new threats
and profound security challenges of the 21st century. Bound by our
common vision embodied in the Washington Treaty, we commit
ourselves to transforming NATO with new members, new capabilities
and new relationships with our partners. We are steadfast in our
commitment to the transatlantic link; to NATO’s fundamental security
tasks including collective defence; to our shared democratic values;
and to the United Nations Charter.” 2
The Prague declaration announces several concrete steps to transform
NATO for its new focus on countering terrorism and the proliferation of
Weapons of Mass Destruction:
1.3 Military Concept for Defense Against Terrorism:

Article 4d of the Prague Declaration identifies terrorism as a “grave and
growing threat” to the Alliance and endorses a new concept for defense
against terrorism developed by the NATO Military Authorities in response
to the 9/11 terrorist attacks. The Concept uses NATO’s Threat Assessment
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on Terrorism as the basis for its organization. The Threat Assessment

identifies three main elements of the terrorism threat:
x Although religious extremism is likely to be the source of the most
immediate terrorist threats to the Alliance, other motivations for
terrorism could emerge from economic, social, demographic and
political causes derived from unresolved conflicts or emerging
ideologies.
x In addition, although state sponsorship of terrorism is currently in
decline, political circumstances could lead to its rise, providing
terrorists with safe havens and considerable resources.
x Although the predominant form of terrorist attack remains the
creative use of conventional weapons and explosives, terrorist
groups are expected to strive for the most destructive means
available, including Weapons of Mass Destruction.
Based on this threat assessment, the Military Concept for Defense
Against Terrorism defines four roles for NATO’s military operations for
defense against terrorism:
Anti-Terrorism
x Sharing of intelligence.
x NATO-wide standardised threat warning conditions and defensive
procedures
x Assistance in air and maritime protection.
x Assistance to a nation wishing to withdraw its citizens or forces
from an area of increased terrorist threat.
Consequence Management
NATO defines “Consequence Management” as the use of reactive
measures to mitigate the destructive effects of terrorism. The Alliance can
provide a wide range of support:
x Robust planning and force generation processes to rapidly identify
and deploy the necessary specialist assistance. This could include,
for example, the immediate assistance to civil authorities in the
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areas of: Chemical Biological, Radiological and Nuclear defence;

engineering; and management of Displaced Persons.
x The creation of an Alliance Registry of capabilities which are
available at short notice to support national efforts.
x The establishment of a training and exercise co-ordination
capability for development of multi-national response capabilities.
x The Euro-Atlantic Disaster Relief Co-ordination Cell could provide
the necessary nucleus to enhance co-ordination between NATO and
affected nations.
Counter-Terrorism
Offensive military actions designed to reduce terrorist capabilities to be
undertaken as joint operations with NATO in either a lead or support role.
Military Cooperation
The Concept emphasizes that military operations should be coordinated
and implemented in a coherent manner with diplomatic, economic, social,
legal and information initiatives. Furthermore, it underlines the importance
of ensuring international cooperation with the relevant civil authorities,
such as the police, customs and immigration authorities, finance ministries,
interior ministries, intelligence and security services. The Concept states
that NATO needs to harmonize its procedures and efforts with civil
authorities within nations, in order to maximise its effectiveness against
terrorism.
1.4 The NATO Response Force (NRF)

NATO has undertaken to:
“Create a NATO Response Force (NRF) consisting of a
technologically advanced, flexible, deployable, interoperable and
sustainable force including land, sea, and air elements ready to move
quickly to wherever needed, as decided by the Council. The NRF will
also be a catalyst for focusing and promoting improvements in the
Alliance’s military capabilities.”
This force is planned to be 21,000-strong, and ready to deploy
anywhere in the world within five days to tackle the full range of military
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missions – including, nuclear, chemical and biological threats. The NRF

will reach full capability by October 2006.
1.5 Streamlined NATO Military Command

A leaner, more efficient, effective and deployable military command
structure.
“There will be two strategic commands, one operational, and one
functional. The strategic command for Operations, headquartered in Europe
(Belgium), will be supported by two Joint Force Commands able to
generate a land-based Combined Joint Task Force (CJTF) headquarters and
a robust but more limited standing joint headquarters from which a sea-
based CJTF headquarters capability can be drawn. There will also be land,
sea and air components. The strategic command for Transformation,
headquartered in the United States, and with a presence in Europe, will be
responsible for the continuing transformation of military capabilities and
for the promotion of interoperability of Alliance forces, in cooperation with
the Allied Command Operations as appropriate.”
1.6 The Prague Capabilities Commitment (PCC)

This initiative is designed to improve and develop the military
capabilities of the individual member states with regard to modern
asymmetric warfare in a high threat environment. Individual Allies have
committed to improve their capabilities in eight broad areas: (1) chemical,
biological, radiological, and nuclear defense; (2) intelligence, surveillance,
and target acquisition; (3) air-to-ground surveillance; (4) command,
control and communications; (5) combat effectiveness, including precision
guided munitions and suppression of enemy airs; (6) strategic air and sea
lift; (7) air-to-air refuelling; and (8) deployable combat support and
combat service support units.
1.7 Defense Against Weapons of Mass Destruction

NATO endorsed five WMD defense initiatives: (1) a Prototype
Deployable NBC Analytical Laboratory; a Prototype NBC Event Response
team; a virtual Centre of Excellence for NBC Weapons Defence; a NATO
Biological and Chemical Defence Stockpile; and a Disease Surveillance
system.
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1.8 Partnership Action Plan on Terrorism

The Action Plan preamble declares that the 46 member states of the
Euro-Atlantic Partnership Council will:
“…make all efforts within their power to prevent and suppress
terrorism in all its forms and manifestations, in accordance with the
universally recognised norms and principles of international law, the
United Nations Charter, and the United Nations Security Council
Resolution 1373”. In this context, they will “find ways of intensifying
and accelerating the exchange of operational information, especially
regarding actions or movements of terrorist persons or networks", and
"emphasise the need to enhance co-ordination of efforts on national,
sub-regional, regional and international levels in order to strengthen a
global response to this serious challenge and threat to international
security.” 3
The Action plan identifies a series of specific action items related to
information exchange and enhanced international cooperation to counter
terrorism. They include:
x political consultations;
x information sharing;
x border control cooperation;
x scientific cooperation;
x civil-emergency planning cooperation;
x joint force planning.
1.9 NATO Science Program Refocused

At the 2002 Prague Summit, the NATO science program changed its
mission to “Security Through Science” in order to focus on developing
international dialogue about the new asymmetric threats and challenges
facing NATO. The program’s post 9/11 priorities include: collaboration
for defense against asymmetric threats and challenges; collaborations to
counter other threats to security; technology sharing and transfer. The
Science Committee also acquired a potentially significant new formal role
as the science advisor to the North Atlantic Council on security issues.
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2. EMERGING THREATS TO ENERGY SECURITY

AND STABILITY
Energy security is vital for international stability. NATO member
states are major energy consumers and are highly dependent on energy
imports. Despite being the world’s second largest producer of oil, the
United States is also the world’s leading importer of oil, while NATO
countries - Germany, France and Italy - are respectively third, sixth and
seventh in the list of top oil importers.
The security of energy supply has always been important to NATO, but
9/11 and the Alliance’s new out-of-area mission with regard to asymmetric
warfare, terrorism and WMD proliferation have necessarily increased the
energy security challenges which NATO faces. At the same time, the
NATO Prague Declaration of November 2002 provides a great opportunity
to establish the sort of close international cooperation that NATO needs in
order to recognize and cope with emerging threats to energy security. For
example, the Prague Capabilities Commitment requires member states to
develop their own asymmetric warfare capabilities, while the Partnership
Action Plan Against Terrorism calls for increased coordination between
Member and Partner states at all levels and explicitly identifies the need for
activities such as political consultations, information sharing, border
control cooperation, scientific cooperation and civil-emergency planning
cooperation.
The presentations in this workshop identify a variety of energy-related
economic, technical, and political/military factors that pose serious
challenges to the international community’s pursuit of energy security and
stability. In particular:
Economic Challenges
x The global economy is expected to continue to be largely
dependent on oil and gas for the next twenty to thirty years.
x The International Energy Agency expects global energy demand to
rise 66% by 2030.
x Current levels of production may need to be doubled or even tripled
in this period, with most of the increment coming from the Gulf
States who control 66% of global oil reserves and 40% of global
natural gas reserves.
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x There are forecasts of significant capacity shortfalls. The

anticipated shortfalls are primarily due to:
1. Difficulties associated with increasing Gulf oil production—
which will require external capital and technology investment
in a region with high levels of terrorism and political unrest.
2. Depletion of production in areas such as the USA and the
North Sea.
3. Overstating of reserves by major oil companies: In late 2002,
it was found that Shell considerably overstated its reserves;
and at the workshop it was suggested that Aramco, Saudi
Arabia’s national oil company has massively overstated its
own reserves.
4. Inadequate capital investment: The energy market is efficient
in terms of providing cheaper energy to consumers but it
deters long-term energy investment projects which could
improve the security and stability of energy supply.
x The emergence of new energy markets in Asia is expected to lead
to increased competition for Gulf and Caspian oil with China and
South-East Asia taking the majority of the oil. China has already
overtaken Japan to become the second largest oil consumer (5.7
million barrels/day) in the world and Chinese imports are predicted
to rise from 2 million barrels/day to 15-20 million barrels/day by
2030.
x Rising oil prices caused by: increased competition from China and
South East Asia for Gulf and Russian oil; capital markets anxiety
about political unrest in the Middle East; and the potential for
downward revisions of Aramco and other international oil
companies reserves.
x Nuclear power faces rising security and environmental challenges
which will raise the costs associated with the leading alternative to
fossil fuels.
Infrastructure Challenges
x Existing oil and gas distribution networks -- for example those
linking Asian and Western markets to the Russian Federation, the
Caspian, the Middle East – are considered to be inadequate.
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x The obsolescence of electricity generation equipment in the

Russian Federation is causing huge inefficiencies in production.
x Infrastructure investment and technology upgrades available from
commercial oil companies are frequently stifled by protectionist
government policies designed to support national oil companies.
Political/Military Challenges
x Energy Market Leadership Changes:
1. On the supply side, Russia (9 millions barrels per day) has
overtaken Saudi Arabia ( 7.8 million barrels per day ) and the
USA (7.8 million barrels per day) to become the leading oil
producer in the world. Russia is also a leading producer of
natural gas and nuclear power. Although Saudi Arabia is still
considered to be the prime provider of surge capacity, the role
of Russia as an energy super is growing.
2. On the consumer side, China with 5.7 million barrels/day has
overtaken Japan (5.2 million barrels/day) to become the
second largest oil consumer behind the United States (20.3
million barrels/day).
x Regional instability:
1. The US-led military intervention in Iraq in 2003 has ended the
regime of Saddam Hussein but it has also led to increased
terrorism in the Gulf states, concern about the possible break-
up of Iraq into several states, and uncertainties about the
overall reliability of supply from the Gulf – a region which
accounts for 4 of the world’s top ten oil exporters (Saudi
Arabia 7.1 mmb/d; UAE 2.2 mmb/d; Iran 2.2 mmb/d; and Iraq
1.8 mmb/d);
2. Unresolved conflicts in the Caucasus pose challenges for the
security of supply from Russia and the Caspian Basin.
3. Continuing tensions in other oil producing regions such as
West Africa pose challenges for efforts to increase the
diversity of supply.
x The global spread of anti-western terrorism post 9/11.
x Technical Security Shortfalls:
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1. Critical Energy System Infrastructure – oil and gas wells,

pipeline networks, ports, refineries, power plants and
electricity grids are extremely vulnerable to terrorist attack and
any interruption in supply can have severe economic
consequences.
2. Despite major shipping and port security initiatives, the sheer
amount of shipping and pipeline networks means that these
two elements of energy infrastructure will remain equally vital
and vulnerable:
i) Shipping snapshot: 3,500 large tankers, 1,800 million
tons crude and refined oil/per annum accounting for 57%
of world oil consumption.
ii) Pipeline snapshot: 62,000 km oil and gas pipeline
network in the Former Soviet Union alone.
x Commercial nuclear power proliferation risk: The nonproliferation
regime and the Atoms for Peace program which have provided the
basis for the international development of commercial nuclear
power for the last fifty years are widely considered to be in need of
reform. The risks associated with sharing nuclear technology and
nuclear material under the program in its current form are generally
considered to be too high - given the increased threat of
radiological terrorism, proliferation of nuclear weapons and the
high incidence of attempts to smuggle nuclear or radiological
material.
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3 ENERGY SECURITY SOLUTIONS

The NATO Advanced Research Workshop program was created not
only to identify challenges facing NATO but also as a forum to bring
together member and partner countries to work out solutions for the
shortfalls identified. With this goal in mind, the NATO Windsor Energy
Security Workshop was designed not only to highlight emerging threats to
energy security and stability, but also:
1. to identify promising energy security developments and initiatives;
2. to serve as the basis for an ongoing forum for international energy
security cooperation.
A variety of promising regional developments and energy security
strategies have been put forward in the course of the Windsor workshop.
Furthermore, the workshop has itself led directly to the creation of new
international energy security initiatives.
Towards an Energy Security Support Capability

The NATO Windsor Energy Security Workshop can be used as the
foundation for a new Energy Security Support Capability designed for
NATO’s post-9/11 focus on asymmetric threats. Doing so would help
NATO to meet its new Prague Declaration commitments to expand
international security cooperation through the Security Through Science
program and the Partnership Action Plan on Terrorism.
The workshop forged a valuable public-private sector strategic
partnership of energy security experts drawn from NATO, Partner and key
producer and transit states. The workshop organizers are committed to the
ongoing development of the working group’s activities and the workshop
has already resulted in two new energy security initiatives: (1) on energy
security in the Caucasus, and (2) on protection of critical energy system
infrastructure.
The Energy Security Support Capability would establish a knowledge
resource comprised of prominent public and private sector policy-makers
and energy security experts from the leading producers, consumers and
transit states.
In establishing the Energy Security Support Capability, the energy
security working group would work closely with interested parties from
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NATO and Partner countries. A working relationship with the US

government’s National Security Support Capability initiative already
exists. The US National Security Support Capability program is being
developed under the aegis of the FBI and other US agencies and seeks to
establish national and international security support and training
capabilities, covering a range of asymmetric security threats, in cooperation
with other countries and international organizations.
The Energy Security Support Capability would serve the following
functions:
1. Provide NATO with a structured process for identifying decision paths
and their potential outcomes in the formulation of energy security
policy.
2. Develop a NATO energy security strategy that takes into account the
political, economic and military challenges of the post-9/11
environment. National energy planning tends to be overly declarative,
so the goal here is to develop energy security strategy based on a more
neutral and scientific analysis.
3. Develop indicators and warnings of energy security vulnerabilities. To
develop standard indicators and warnings of energy security problems,
multidisciplinary experts would be brought together to participate in
real and hypothetical energy security scenarios. These scenarios will
use advanced simulation technology and existing public and private
sector knowledge bases. The US National Security Support Capability
has already developed a process to make the knowledge base smarter
“as different groups run through a variety of simulations.”
4. Prevent energy security problems escalating into crises through
mitigation strategies. The Energy Security Support Capability would
feature sectoral and country teams to “red team” potential crises and
recommend mitigating strategies.
5. Enhance operational responses to high consequence energy security
events including major safety crises and attacks by states or terrorist
organizations. Using the working group’s core energy security
expertise and archived scenarios, teams of public and private sector
policymakers and issue experts can provide a structured process for
identifying decision paths and their potential outcomes.
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The Caucasus Energy Security Initiative

Demonstrating its ongoing capabilities, the forum provided by the
NATO Windsor Energy workshop has already led directly to the
establishment of a new international initiative to enhance energy security in
the this key transit region for oil and gas from the Caspian. The
Government of Georgia has undertaken to host a conference to launch this
initiative in Tblisi later this year. According to the Georgian Minister of
Foreign Affairs:
“At the highest levels, the Georgian Government is committed to using
this initiative to encourage Georgia’s political and economic development
particularly in regard to joining European economic, political and security
institutions.
As we conceived it, the Tblisi conference should serve the broader
regional economic and security interests of the South Caucasus and its
neighbors. The conference will be used to motivate a continuing process,
featuring a variety of working groups focused on key issues, dedicated to
increasing regional stability, predictability, western integration and full
normalization of relations with the Russian Federation.”
Critical Energy Infrastructure Protection

Another initiative created at the NATO Windsor Energy Workshop is
an ongoing dialogue on Pipelines, Ports and Shipping Security. Building on
the critical infrastructure session at Windsor, the workshop organizers have
established a new working group of shipping and pipeline operators, energy
companies, governments and international agencies to coordinate public-
private sector security cooperation in countering the asymmetric security
threats. The UK Foreign & Commonwealth Office hosted a kick-off
workshop for this initiative in July 2004.
Other promising developments identified at the workshop

The Windsor workshop put forward a variety of other promising
regional developments and energy security strategies outlined below.
Oil and Gas: Reliability Through Diversification

A key principal of energy security for the NATO states is to achieve
reliability of supply through diversification.
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In this regard, the USA is pursuing a strategy of regional diversification

to lessen its dependence on Gulf oil, and sees positive potential for the
Caspian, Russia, North and West Africa, and even North America, which
all have the potential to provide expanded oil and gas production for NATO
states.
Another key element in establishing Reliability Through
Diversification is to encourage capital markets to provide infrastructure
investment for long-term energy projects by reducing the political risk
associated with energy investment through financing and insurance
programs such as the USA’s Eximbank and OPIC.
Nuclear Power: Increased power generation from existing reactors.

In the near-term, despite major security and environmental challenges,
nuclear power has considerable potential for improving energy security
simply by increasing the amount of electricity generated at existing civil
reactors. Although on a world-wide basis nuclear energy accounts for only
6% of energy needs, in fact nuclear power plays a much more vital role in
electricity generation in several NATO and Partner countries. In NATO,
nuclear energy accounts for 80% of domestic electricity generation in
Lithuania, 78% in France, 57% in Belgium, 30% in Germany, 20% in the
US and 13% in Canada. With regards to Partner countries, nuclear power
provides 45% of domestic electricity generation in Ukraine, and 16% in
Russia.
In the medium-term, support for spent fuel reprocessing, in tandem
with the development of Fast Breeder Reactors by several countries,
including France, Russia and Japan holds out the prospect of sustainable
nuclear power production. However, Fast Breeder Reactors are a cause for
major nonproliferation concerns because they produce more fissionable
nuclear material than they use.
In the long-term, perhaps the most interesting prospect is the ITER
project to develop nuclear fusion as a commercially viable, virtually
inexhaustible energy source. The ITER project ( Latin for “the way”) is
based on the Tokamak Reactor design which essentially captures and
recreates the power of the sun through high temperature magnetic
confinement of the readily available hydrogen isotopes - tritium and
deuterium for fuel within a toroidal (donut-shaped) reaction chamber. The
ITER project was initiated in 1985 by the US and the Soviet Union as an
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East-West technology partnership and currently has five international

partners: China, the European Union, Korea, the Russian Federation and
the USA. Various experimental Tokamak reactors have already succeeded
in generating limited amounts of fusion power; now, under the aegis of the
International Atomic Energy Agency, the partners are moving forward on
the establishment of the International Fusion Organization and site
selection for a 500 megawatt reactor scheduled to begin operation in 2014.
The Russian Federation – Energy Partner

The Russian Federation (formerly NATO’s main military-strategic
opponent) is now increasingly important to NATO’s energy security in its
role as an energy superpower and major supplier to many NATO countries.
Russia is the world’s leading oil producer with 9 million barrels per day
and the world’s second largest oil exporter. It is also increasing the amount
of electricity it generates from existing nuclear plants – currently 16% of
domestic electricity is generated from nuclear - the Russian government
plans for 33% of electricity to be produced by nuclear power by 2030. In
addition, Russia has considerable excess oil and gas capacity in its off-
shore Arctic fields in the Barents Sea and other areas. Fields such as the
Shtockman gas field are being successfully developed with western
involvement and many other fields have been identified in the Arctic but
not yet developed. The workshop presentation on Tatarstan highlighted the
fact that despite concerns about the openness of the Russian energy market,
progress has been made in developing healthy regional energy economies.
In the case of Tatarstan, the Republic has developed its own international
export market, complete with its own tanker fleet and overseas refinery
capabilities.
North Africa – Good Prospects for Increasing Capacity

One of the key developments identified in this region is the
normalization of relations with Libya. This will encourage exploration and
investment in Libya’s oil and gas fields which have suffered from lack of
infrastructure investment due to international sanctions. Libya currently
produces 1.6 million barrels of oil per day and has gas reserves
conservatively estimated at 1.3 trillion cubic metres. Libya’s oil and gas
fields are in close proximity to Europe and the West Libya Gas Project will
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provide Italy with 8 billion cubic metres per annum by 2006 which will
constitute approximately 12% of Italian consumption.
End Notes
1 Article 5, The North Atlantic Treaty, Washington D.C. - 4 April, 1949:
”The Parties agree that an armed attack against one or more of them in Europe or
North America shall be considered an attack against them all and consequently
they agree that, if such an armed attack occurs, each of them, in exercise of the
right of individual or collective self-defence recognised by Article 51 of the
Charter of the United Nations, will assist the Party or Parties so attacked by
taking forthwith, individually and in concert with the other Parties, such action as
it deems necessary, including the use of armed force, to restore and maintain the
security of the North Atlantic area.
Any such armed attack and all measures taken as a result thereof shall
immediately be reported to the Security Council. Such measures shall be
terminated when the Security Council has taken the measures necessary to restore
and maintain international peace and security.”
2 For the full text of the Prague Summit Declaration, November 2002, see:
http://www.nato.int/docu/pr/2002/p02-127e.htm
3 See Prague Summit, Partnership Action Plan on Terrorism:
http://www.nato.int/docu/pr/2002/p02-127e.htm
SECTION XI
PRESS COVERAGE
1 EPOLITIX
Interview: Tedo Japaridze - Georgian Foreign

Minister
Saturday January 31, 2004 By Chris Smith. Epolitix.com
Question: Should Britain have done more to help the Georgian people
during the recent crisis?
Tedo Japaridze: It's more appropriate to talk about how Britain helped Georgia
get its independence back. We valued the help from the UK and other Western
countries. The first on that list is the United States whose help was absolutely
immeasurable.
From this perspective I would say the UK has done a lot for Georgia
but as well as a lot for the Caucuses.
We wish for this support to be bigger than it used to be. It's practical
things. It's time to speak about specifics, about bringing some things to
reality.
We're talking about a state building process in Georgia. It's what the
Brits are quite experienced at.
It's about the optimisation of government structures, different elements
inside government. Scaling down bureaucracy. These are powerful,
sensitive issues to deal with. If we do not change we will remain a failed
state.
Britain is quite well engaged in the region but if they look at Georgia as
part of the region of the South Caucasus, Georgia may be really attractive
in the context of regional security.
In this context, Britain and other European countries and America can
help Georgia.
There is no doubt that what we experienced was not good but there was
an appearance of 'Georgia fatigue' among friends. I heard so many times
when I said help us: 'help yourself' meaning 'take care of your problems'.
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304
Question: The downfall of Shevardnadze was dramatic. Is the situation

still difficult?
Tedo Japaridze: The most difficult day is the first day of the
revolution and helping the new leader understand it is not going to be about
nice slogans but the daily management of government. Taking care of those
who helped us. It's about daily needs like electricity.
Question: EU foreign policy chief Javier Solana was in Georgia just

last week. How did it go?
Tedo Japaridze: He visited us and we had a long conversation about
the EU and a lot of issues like democratisation. But it's not just about the
EU help and joining the EU but - for example - the British helping Georgia
to reform institutions or Germany helping reform border guards. It's very
interesting.
He's a very knowledgeable, high-level professional and a friend of
Georgia, first of all. We talked about Georgia's perspective of how we
integrate into Europe. We talked about the agenda we need to accomplish
this. It's very complex.
We need to reform inside but outside help will matter in achieving
reform. But it has to be done by us. Friends can help but the main job has to
be done ourselves. Mr Solana mentioned this question himself. We know
we have our friends in Europe but at the same time we see we need to
deliver on some complex issues.
Mr Solana said the EU is ready to help Georgia in different areas. We
will identify a package of issues and work together - on things like customs
reform - to make Georgia a functioning state.
Question: What steps are being taken by the new regime to push
through economic and political reforms and to fight against
corruption?
Tedo Japaridze: We were talking for years about corruption but in the
first week we arrested the most famous corrupted people in Georgia.
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I need to admit that there were a lot of things that were achieved in the
early days, the constitution, the currency, democratic institutions and a free
press. But democracy has not become a way of life in Georgia.
At the same time there are a lot of things that we could have
accomplished during those 10 years. Corruption became a way of life.
From this perspective, there are a lot of things to do. It takes hard work.
Democracy and democratic government demands equality. It's a two way
street.
We're making some preliminary planning to reform government
structures. There's a lot of advanced work on the ground taking place.
Question: You've been visiting the UK for the NATO Windsor Energy
Security Workshop. Is oil the driving interest for the West in Georgia
above anything else?
Tedo Japaridze: It is a factor. Georgia functions as a transitory
country in the East-West corridor - it makes us attractive. But it's about
Georgia's geographical position.
There are other routes through countries like Uzbekistan and
Azerbaijan. Or the only other access to the European markets is through
Iran, China and Russia. Georgia is the shortest way to get goods through to
market.
If we continue in the way we used to work, cargos will go a different
way. They will prefer to use longer routes that are security guaranteed.
To make Georgia attractive for business we need to reform Georgia
from the inside. Unless Georgia becomes a strong state it will diminish and
events determined by outside factors will create a bottleneck.
How successful we are depends on how we deal with the problems we
have talked about.
Question: Tony Blair sees Britain as a bridge between Europe and

America. Can Britain be a bridge between Europe and Russia?
Tedo Japaridze: It's a very interesting approach. We see ourselves as a
bridge between the South Caucuses and Europe. We can play this function
if Georgia becomes a strong state.
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We have still to reform our relationship with Russia and there is the
debate about that. We need to have Russia as a neighbour and engage with
Russia. But our Russian friends need to understand that if Georgia remains
a weak state, not economically reformed, it will create problems for Russia.
Some think if we remain in that condition it's better for Russia. It's
about political and security issues. It's not, you know, a zero sum game.
This should be a win-win situation for everybody.
Given the good relations between President Putin and Tony Blair,
Britain can be some sort of bridge to make Georgia and Russia understand
each other. It's got to be about making Russia understand that it's only
through co-operation, national understanding and communication that we
can solve our problems.
Question: Georgia is supporting the coalition effort in Iraq. When do

you think there should be elections?
Tedo Japaridze: We ourselves have been through a period of elections
and revolutions. In this case we are unique with elections on Saturdays and
revolutions on Tuesdays. There is no need to hold elections for the sake of
elections.
Security should be the top priority. Iraq has gone through a very
powerful phase. For different states to dictate on nation building will not
help.
I think as soon as the people of Iraq themselves will find it appropriate
to have elections they should take place. It is not for any country to come
and say to Iraq 'it is time to hold an election'. It's a very complex issue for
them.
Of course somebody can ask me 'why does he care about elections in
Iraq?' It's because our countries are close to each other. It takes two hours
to fly to Baghdad. Anything that happens in Baghdad matters to Georgia.
When Condoleezza Rice speaks about the wider Middle East it impacts
on Georgia. That's why we wish them a re-normalised situation.
Question: The NATO Energy Security Workshop that you are

attending is part of a larger security agenda which includes this year's
International Approaches to Nuclear and Radiological Conference co-
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hosted by the US and Russian governments. How does Georgia intend

to contribute to the global fight against terrorism?
Tedo Japaridze: That's an issue, being part of the anti-terror coalition.
We need to continue to take on some sort of function to contribute to
fighting globally. We have committed resources to Iraq.
We've had a problem of our own. We had some problems in Georgia,
near the border with Chechnya with international terrorism.
We continue anti-terrorism work in this region. We had help from the
international community - including Russia - but most of the work was
done by us.
Question: Does the new Georgian administration have closer ties to

Washington or the EU?
Tedo Japaridze: We're not choosing. We want to be integrated into
Europe as a natural, historical and economic European country. It's not
about a wish as a foreign minister or president. It's the will of the Georgian
people which was identified years ago to come back to Europe.
But at the same time we're not going to do this on behalf or at the
expense of relations with Russia. And America? We survived as a country
for 10 years because of American assistance. But we are part of Europe.
Again, it's not about a zero sum game. Everybody should win and that
includes Russia and other neighbouring countries.
Question: The EU is in the process of defining its negotiating strategy

with Russia. Do you think it should take a tougher stance with Moscow
than it has in the past?
Tedo Japaridze: It's not about, you know, making some message or
demand to Russia because it always backfires.
Georgia needs to be equal in the dialogue with Russia. It's to make the
Russians understand they can gain 10 hundred times more out of a peaceful
Georgia. The message should come to us that we should benefit from
engagement.
The message for Europe that should be delivered to Russia - as a friend
- is that Russia cannot be a democratic, market-orientated country, speaking
308
about its relations with other countries and still be imperialist in dealing
with countries like Georgia.
Russia should be dealing with all countries. The only other alternative
will be counter-productive and against the interests of Russia.
It's within everybody's interests to have a vibrant Russia. It's a large
piece of the world community and they will better promote their interests
that way.
Georgia cannot be secure and stable as a country if Russia is insecure.
It's inter-connected. The regional security of the South Caucuses is inter-
linked. Russia, Azerbaijan, Armenia, Georgia; they all belong to the world
community.
It's in the interests of Europe, America and Britain. It's not about sitting
down and dictating to Georgia because the security of the UK, the US and
Europe will be better if the South Caucuses are secure and stable.
2 EPOLITIX
Blair urged to act on Russia-Georgia relations

Saturday January 31, 2004 By Chris Smith. Epolitix.com
Tony Blair has been urged to act as a

bridge between Russia and Georgia.
In an interview with ePolitix.com, Georgia's new foreign minister Tedo
Japaridze called on the prime minister to use his influence with Russia's
president to help build strong relations between the two countries.
"Given the good relations between President Putin and Tony Blair,
Britain can be some sort of bridge to make Georgia and Russia understand
each other," he said.
"It's got to be about making Russia understand that it's only through co-
operation, national understanding and communication that we can solve our
problems."
Japaridze became foreign minister following the dramatic fall of
President Eduard Shevardnadze in the "velvet revolution" of November last
year.
Russia and Georgia have been in dispute over Russia's backing of
separatists in the region of Abkhazia and Chechen rebels in Georgia's
Pankisi Gorge.
Japaridze explained relations between the two countries need to
improve.
"We have still to reform our relationship with Russia and there is the
debate about that. We need to have Russia as a neighbour and engage with
Russia," he told ePolitix.com.
"But our Russian friends need to understand that if Georgia remains a
weak state, not economically reformed, it will create problems for Russia.
Some think if we remain in that condition it's better for Russia. It's about
political and security issues. It's not, you know, a zero sum game."
309
310
He praised the UK's work in Georgia and the Caucuses but urged the
government to step up its support.
"We wish for this support to be bigger than it used to be. It's practical
things," he said. "We're talking about a state building process in Georgia.
It's what the Brits are quite experienced at."
The foreign minister also pledged that the country would get tough on
corruption and accelerate vitally needed reforms.
"There are a lot of things to do. It takes hard work," he said. "We're
making some preliminary planning to reform government structures.
There's a lot of advanced work on the ground taking place."
"There were a lot of things that were achieved in the early days; the
constitution, the currency, democratic institutions and a free press. But
democracy has not become a way of life in Georgia.
"At the same time there are a lot of things that we could have
accomplished during those 10 years. Corruption became a way of life."
International political and economic focus has been on the strategically
important Baku-Tbilisi-Ceyhan oil pipeline, which will take Caspian Sea
oil from Azerbaijan to the Turkish Mediterranean coast.
Japaridze, who visited the UK for the NATO-Windsor Energy Security
Workshop, explained the strategic importance his country has.
"Georgia functions as a transitory country in the East-West corridor - it
makes us attractive," he said.
"There are other routes through countries like Uzbekistan and
Azerbaijan. Or the only other access to the European markets is through
Iran, China and Russia. Georgia is the shortest way to get goods through to
market. Unless Georgia becomes a strong state it will diminish and events
determined by outside factors will create a bottleneck."
Georgia, which is two hours' flight from Baghdad, is part of the
coalition in Iraq and Japaridze argued outside pressures should not decide
when elections should take place.
"Iraq has gone through a very powerful phase. For different states to
dictate on nation building will not help," he said.
"I think as soon as the people of Iraq themselves will find it appropriate
to have elections they should take place. It is not for any country to come
311
and say to Iraq 'it is time to hold an election'. It's a very complex issue for
them."
The foreign minister said Georgia would be pressing for EU
membership but would not choose between Brussels, Moscow and
Washington.
"We want to be integrated into Europe as a natural, historical and
economic European country," he said.
"It's not about a wish as a foreign minister or president. It's the will of
the Georgian people which was identified years ago to come back to
Europe.
"But at the same time we're not going to do this on behalf or at the
expense of relations with Russia. And America? We survived as a country
for 10 years because of American assistance. Again, it's not about a zero
sum game."
3 BLOOMBERG NEWS
Georgia to Crack Down on Corruption,

Foreign Minister Says
2004-01-22 09:01 (New York)
Jan. 22 (Bloomberg) -- Georgia's new government plans to crack down
on corruption by arresting businessmen who break the law, Georgian
Foreign Minister Tedo Japaridze said.
President-elect Mikhail Saakashvili will take immediate steps to
enforce corruption laws, as well as shrink the size of government to
"improve the country,'' Japaridze told Bloomberg News in an interview in
London.
It will also seek to dispel its image as a conflict-ridden state by signing
a treaty formalizing its relations with Russia, Georgia's largest neighbor, by
the end of March, Japaridze said. "Democracy is all very well but it doesn't
work without the rule of law," he said. The government will ensure "that
people who break the rules are punished," he said.
"We will not hesitate in making arrests," said Japaridze, who's in
London for a North Atlantic Treaty Organization meeting on energy
security. "Improving respect for the law and security in Georgia is the key
in establishing good relations with its neighbors, including Russia."
Saakashvili, a Columbia University-educated lawyer, has vowed to
fight corruption and lawlessness. Two of the country's regions, Abkhazia
and South Ossetia, are controlled by separatist rebels.
Saakashvili was elected on Jan. 4 after street protests led to the ousting
of President Eduard Shevardnadze, whose government Saakashvili
denounced as corrupt. The new president will be inaugurated Sunday.
UN, Soros Funds

The United Nations Development Fund and Hungarian-born billionaire
George Soros are today expected to announce they will commit funds to
313
314
support the government, including wages for officials, Saakashvili said at a

press conference at the World Economic Forum in Davos, Switzerland.
Russian President Vladimir Putin also welcomed the change of
government in Georgia, sending Saakashvili a telegram congratulating him
on his election.
Georgia is seeking to mend relations with Russia after years of friction.
Russia has about 3,000 soldiers in the country, forming a peacekeeping
force in Abkhazia and at military bases in South Ossetia and the port of
Batumi in the Ajaria region. Last week, Putin said any action against
soldiers would be severely punished, after Nodar Natadze, a Georgian
nationalist leader, threatened to attack Russian bases.
Saakashvili and Japaridze are planning a meeting with Putin and
Russian Foreign Minister Igor Ivanov immediately after Saakashvili's
investiture to discuss their agreement, the first of its kind between the two
countries.
"We have set this deadline to put an end to years of dispute between
our countries," Japaridze said, to help convey a more "positive image" of
Georgia.
4 THE TIMES
Interview with Georgian Foreign Minister

By Richard Beeston, Diplomatic Editor, The Times January 24, 2004
Mikhail Saakashvili, Georgia's newly-elected president, will be sworn
into office this weekend amid hopes that Europe's youngest leader can pull
the country out of a decade of political turmoil and economic collapse.
But as foreign dignitaries, including Colin Powell, the US Secretary of
State, set off for the inauguration ceremony tomorrow (Sunday) in Tbilisi,
Georgia’s new leadership warned it faced huge challenges at home and
abroad and would need outside help to overcome them.
Mr Saakashvili, aged 36, swept to power virtually unopposed earlier
this month after his predecessor Eduard Shevardnadze was forced to resign
in the face of peaceful mass demonstrations that became known as the
"Rose Revolution".
"The most difficult phase of any revolution is the day after," said Tedo
Japaridze, the Georgian Foreign Minister, during a visit to London
yesterday (Friday). "It is like waking up with a hangover. We had a lot to
drink -- now we need to address the simple demands of the people who
demonstrated in the revolution."
He said the "bread and butter issues" included providing basic services,
like electricity, to the Georgian people, who have grown tired of regular
power cuts. It means cracking down on official corruption, which has
become rampant in the 12 year's since Georgia won independence with the
break-up of the Soviet Union. Ultimately it also means uniting a country,
which is already fractured by three breakaway autonomous regions.
"Our absolute top priority is to implement domestic reforms and to
make Georgia a strong and modern state," Mr Japaridze told The Times.
"When we have achieved that it will be much easier to resolve foreign
policy issues."
The Georgians are hoping that the completion next year of a second
pipeline over its territory, carrying oil from the Caspian Sea to the Black
Sea, will help revitalise the economy and attract further foreign investment.
315
316
On Wednesday Mr Saakashvili told world leaders meeting at the

economic forum in the Swiss resort of Davos that he would certainly need
outside help, particularly from the West, to prevent Georgia sliding back
into chaos.
"Georgia is a net contributor to European stability but could also
become a major risk for instability because the Caucasus has a much wider
potential for conflict than the Balkans," he said.
His fears are well-founded. The region is still suffering from conflicts
in Chechnya and between Armenia and Azerbaijan over Nagorno-
Karabakh.
Georgia finds itself in the uncomfortable position of being caught in a
tug of war between America and Russia, both of whom exert huge
influence on the country. To the dismay of the Georgians the Russians still
keep thousands of troops at bases in the country, in spite of promises to
remove them. The Russians are also accused of backing breakaway
movements inside the country. Mr Powell is likely to raise the issue when
he travels to Moscow on Monday for talks at the Kremlin.
For its part Moscow regards Georgia and the Caucasus as its
"backyard". It resents the arrival of US military advisers in Georgia and
harbours suspicions that Tbilisi offers sanctuary to Chechen separatist
rebels fighting Russian troops just over the border.

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Emerging Threats to Energy Security and Stability

NATO Security through Science Series

A. Chemistry and Biology (Springer Science and Business Media)

Series C: Environmental Security – Vol. 1

ISBN-10 1-4020-3568-3 (PB)

Printed on acid-free paper

All Rights Reserved

Printed in the Netherlands.

SECTION II - Prospects for The Global Energy Market .......................... 9

2 A Political Perspective .................................................................. 13

3 An Analytical Perspective ............................................................. 19

4 An Economic Perspective ............................................................. 33

SECTION III: - National Strategic Energy Interests .......................... 51

2 Prospects for Russian Energy........................................................ 59

SECTION IV - Evolving Roles of Multilateral Organisations

2 The International Energy Forum and

3 The View from Brussels................................................................ 79

SECTION V - Regional Challenges: The Middle East ...................... 87

2 Emerging Threats to Energy Security and Stability .................... 101

3 Iraq: A Japanese Perspective ....................................................... 125

SECTION VI - Regional Challenges: North Africa ......................... 127

2 The North African Challenge ...................................................... 137

SECTION VII - Regional Challenges: The Caucasus Region,

2 Prospects for the Caucasus, the corridor between

3 Tatarstan: Euro Islam in the Volga Region ................................. 155

SECTION VIII - Critical Energy System Infrastructure (CESI) -

2 Shipping: Vital, Vulnerable and Little Understood..................... 175

3 The Straits of Malacca: Critical Sea-Lane Chokepoint .............. 183

SECTION IX - Background Papers on

1 The Geo-Political Future of the Gulf........................................... 197

2 China and OPEC ......................................................................... 205

3 Egypt – A Promise yet to be fulfilled.......................................... 215

4 Egypt’s Race for Gas Export Markets......................................... 223

5 Saudi Arabia ................................................................................ 243

6 Saudi Society............................................................................... 257

7 Central Asia and The Caspian Basin ........................................... 269

SECTION X - Initiatives Emanating from the Workshop ............... 277

2 Initiative on Pipelines Ports and Shipping Security -

3 Energy Security & NATO Strategic Interests After 9/11............ 283

SECTION XI - Press Coverage ........................................................... 301

2 Epolitix ........................................................................................ 309

3 Bloomberg News......................................................................... 313

4 The Times.................................................................................... 315

Vafa Guluzade, National Security Advisor to the President, Azerbaijan

Michael Smith, Head of Energy Analysis, British Petroleum, UK

Emerging Threats to Energy Security and Stability

January 23 to January 25, 2004, Windsor Castle, UK

x Regional instability: the impact and aftermath of the US-led

An emerging energy demand/supply imbalance

“The end of cheap oil”

Dangerous impacts on the global economy - a non-

Changes in oil market leadership

Iraq approaching “boil-over”

“While there are now no known national threats to the

Technology transfer stifled

The Caucasus impasse

North African surprises

x Actions by environmental groups (e.g. the seizure of The Brent

Threats to pipelines: an Iraqi case study