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U.S. President Donald Trump appears before workers at Cameron LNG (Liquid Natural Gas) Export Facility in Hackberry, Louisiana, U.S., May 14, 2019. REUTERS/Leah Millis

U.S. Natural Gas: Once Full of Promise, Now in Retreat

by Guest Blogger for Energy Realpolitik July 2, 2020

This is a guest post by Gabriela Hasaj, Research Associate to the Military Fellowship Program at the Council on Foreign Relations. Tessa Schreiber, intern for Energy and U.S. Foreign Policy at the Council on Foreign Relations, contributed to this blog post. Read More

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OPEC's Vienna Meeting: The Challenge of Failing National Oil Companies

As energy ministers from major oil producing countries gather in Vienna this week to discuss the stability of global oil markets, the variables that will dictate outcomes have rapidly shifted. Pre-meeting narratives that previously focused on the appropriate level of external private investment—either too much, in the case of U.S. shale producers, or too little, in the case of private sector international oil companies—look woefully inadequate to explain current oil market conditions. Instead, how to deal with the accelerating political and institutional breakdown of several national oil companies across multiple continents now stands out as a pressing structural challenge for the Organization of Petroleum Exporting Countries (OPEC) and U.S. policymakers alike. I highlighted this problem vis a vis Venezuela last March. Stated intentions to replace lost barrels from Venezuela and potentially Iran has brought acrimony back into the OPEC fray. U.S. plans to sanction Iran’s oil exports are the most recent publicly visible geopolitical irritant, but the history has shown that eliminating the endogenous geopolitical swings in the oil cycle takes more intervention and planning capability than even the most well intended partnerships can master, much less nation states whose relations have been punctuated by direct military threats or proxy wars. Talk of a sustained Saudi-Russian alliance that would be effective in eliminating the factors that could cause gyrations in oil prices seem overstated. All of OPEC’s fourteen members have flagship national oil companies (NOCs), that is, state-controlled entities that oversee their nation’s energy industry. Other important oil producing countries such as Brazil, Mexico, and Russia also have NOCs that dominate their oil and gas sectors. Many of these national firms are facing structural budgetary, corruption, or other internal political challenges, including attacks on facilities by local rebel groups, criminal gangs, terrorists, cyber hackers, and/or armed combatants in ongoing military conflicts. As a result of these ongoing NOC difficulties, supplies from several OPEC countries, Venezuela, Libya, Iraq, Iran, Nigeria, and Angola have been volatile in recent years. In particular, the collapse of Venezuela’s oil industry and a slide in deep water oil production from Angola have been more instrumental to the market success of OPEC’s agreement with Russia and other non-OPEC oil producers than the producer group’s “planned” cuts in reducing excess inventories by almost 200 million barrels since early 2017 and pushing Brent oil prices up from about $55 to $75 a barrel. Cornerstone Macro noted in a recent report that oil stocks in industrialized countries experienced a counter seasonal decline of three million barrels in April, as compared to the more customary twenty million buildup on the heels of reduced global supplies and more robust than expected U.S. and global economic growth. While Saudi Arabia, Kuwait, the United Arab Emirates, and Russia did make promised output reductions to help tighten oil supply over the course of 2017, unintended production declines continue to be more material. Not only did oil output declines from Venezuela, Algeria, Angola, Ecuador, and Gabon amount to losses of close to one million barrels a day since early 2017, according to Citibank, markets have come to expect accidental supply disruptions from conflict prone oil regions in Libya and Nigeria. That reality prompted one prominent energy columnist to conclude that OPEC has become “an increasingly unreliable supplier of an essential commodity.” Whatever the outcome of the OPEC-non-OPEC Vienna group’s deliberations this week, it could turn out to be only a temporary fix to this more structural NOC problem than generally understood. Right now, OPEC spare productive capacity is highly limited. Saudi Arabia and Russia together would probably have difficulty adding much more than 1.5 million barrels a day to markets through the end of the year. Ongoing problems in Libya and Venezuela, combined with renewed sanctions on Iran, could possibly take more than that off the market. And what if a new supply problem emerges? Saudi Arabia and Russia are discussing longer run cooperation. What would that look like in a world where uncertainty plagues many national oil companies around the world, including, perhaps, their own firms? Does budget-constrained Saudi Arabia agree to divert billions in tandem with Russian firms to expand additional oil fields’ productive capacity down the road to capture future market share that could be available as NOCs in other countries continue to fail? If Saudi and Russia make capacity expansion pushes, what becomes of OPEC as a coherent organization? Will the Vienna group need to shrink in number? Conversely, if Saudi Arabia and Russia choose to make only a quick stop-gap measure just to keep markets from overheating in the next few months and don’t invest in new capacity, will they sacrifice future revenues to private oil and gas investors who can bring on capacity more quickly if NOC capacity continues to falter? The 2014-2015 price collapse has proven that a year or two of low prices won’t be sufficient to knock out growth in U.S. tight oil. That means restarting a price war in the short run isn’t an ideal option for OPEC, especially if those flooding the market do not appear to be able to survive the prolonged revenue drop that would make a price war option an effective threat. And my guess is that low oil prices also aren’t likely to be sufficient to knock out capital investment by the major international oil companies (IOCs). Those companies have started to pivot their strategies to direct their capital spending to activities that will be more productive than those pursued over the last decade when booking new large reserves was the priority. Rather, companies are focused on spending programs that can bring higher production more quickly, such as directing capital spending to shorter cycle field extensions and satellite field developments that can bring first oil into the market rapidly within one to three years (as opposed to mega-projects that took near a decade to develop). Companies are also developing new techniques to reduce the cycle time and costs on challenging green field projects. Moreover, innovation in the private oil and gas sector is increasingly de-risking the landscape for future oil and gas investment for private investors. As technology improves, companies are going to be able to squeeze more barrels out of all kinds of existing known in place source rock, not just oil and gas from shale formations. The most recent example is the Austin Chalk where U.S. companies are rushing to test new drilling techniques to positive results. There’s an additional rub. Saudi and Russian efforts could have trouble influencing intermediate oil demand trends. Even if the Vienna group takes production increase decisions this week that staves off any economically crippling oil price shock that could have sent oil demand into a tailspin, caution signs are already emerging that oil prices even at $70 a barrel are creating some economic headwinds. Markets are already nervous about trade wars. Reports are emerging that high fuel prices are hindering economies within the Euro zone and elsewhere. Rising fuel prices are visibly creating economic and political problems in India and other developing economies. And the United States needs strong demand growth elsewhere to manage its own economic issues. In the case of an unexpected global economic slowdown, OPEC supply disruptions could take a back seat again to “lower for longer” story lines about failing oil demand (potentially in the midst of rising U.S. production in 2019), which could make any discussion of a more permanent, workable Saudi-Russia oil alliance even harder to envision.

Blog Post by Amy M. Jaffe June 19, 2018 Energy Realpolitik

Iran

The Complicated Geopolitics of U.S. Oil Sanctions on Iran

It is often said, perhaps with some hyperbole, that Iran’s nuclear deal with world powers was the best hope for conflict resolution in the Middle East. Its architect John Kerry argues instead that the 2015 deal’s limited parameter of closing Iran’s pathway to a nuclear weapon is sufficient on the merits. The Trump administration is taking a different view, focusing on Iran’s escalating threats to U.S. allies Israel, Saudi Arabia, and the United Arab Emirates. Those threats, which have included missile, drone, and cyberattacks on Saudi oil facilities, are looming large over the global economy because they are squarely influencing the volatility of the price of oil. One could argue that the U.S. decision to withdraw from the Iranian deal, referred to as the Joint Comprehensive Plan of Action (JCPOA), has injected an even higher degree of risk into oil markets, where traders now feel that the chances of Mideast conflict resolution are lower. But, the Trump administration could argue otherwise. From its perspective, the United States extended to Iran $6 billion in frozen funds, opened the door for a flood of spare parts to be shipped into Iran’s suffering oil and petrochemical sector, and looked the other way while European companies rushed in for commercial deals. In exchange, it’s true, Iran began to implement the terms of JCPOA, but as Secretary of State Pompeo laid out in a major speech on the subject, the nuclear deal has failed to turn down the heat on the wide range of conflicts plaguing the Mideast region. Rather, Secretary Pompeo explained, Iran’s proxies have raised the stakes for U.S. allies, and regional conflicts have been dangerously escalating. U.S.-Iranian exchanges in Syria are also on the rise. The deal could still move forward, according to Secretary Pompeo, but not until Tehran addresses a laundry list of U.S. demands. Washington expects its action and rhetoric to spur more productive negotiations that would allow the United States to link restoring the nuclear deal with political negotiations to de-escalate conflicts. Since re-imposition of renewed oil sanctions doesn’t take hold for several months, wiggle room still exists for such diplomacy. But markets reflect doubt about those chances, reflecting the view of many respected commentators. Oil prices hit $80 a barrel and even the five-year forward oil price rose above $60 for the first time since the end of 2015. Speculators are still holding substantial long positions and industry has been slower to hedge, lest oil prices go higher still. In the world of oil, it’s hard to compartmentalize complex geopolitical conflicts. In condemning the Trump administration’s move, Iran’s hardliners actually accused the United States of withdrawing from the JCPOA to raise the price of oil and called on the Organization of Petroleum Exporting Countries (OPEC) to raise its production to resist the United States. In a tweet from the Iranian Oil ministry via @VezaratNaft on May 11, Iranian oil minister Bijan Namdar Zangemeh is quoted as saying “President Trump playing double game in oil market. Some OPEC members playing into U.S. hands. U.S. seeking to boost shale oil production.” Simultaneously, Iranian media promulgated a spurious rumor that Saudi leader Crown Prince Mohammed bin Salman had been assassinated. The context for both was dialogue between the United States and its regional Arab allies (kicked off by a Trumpian tweet on OPEC) on the need to cool off the overheated oil market with higher oil production to ensure that the re-imposition of sanctions did not destabilize markets further. In seeking “better terms” for the Iranian nuclear deal, the Trump administration is counting on the fact that the Iranian government faces more internal opposition from its population than it did when the deal was negotiated back in 2015. That popular discontent is palpable and explains why the Iranian rhetorical response to the U.S. withdrawal announcement has been relatively mild compared to historical precedents. But this is no cakewalk, since Iran is counting on Europe and other major trading partners to resist U.S. sanction efforts. In recent years, China has established its own networks of financial channels and institutions that could be used to allow Chinese companies to pay Iran in its currency, the yuan, in a manner that avoids the Brussels-based SWIFT financial messaging system, which can be subject to U.S. tracking and intervention. China has already tested using the yuan to pay for imports from Russia and Iran via China National Petroleum Corporation’s Bank of Kunlun. The Tehran-based business daily The Financial Tribune suggested that other countries, including Europe, could tap “alternative Chinese financial networks.” But the practicalities of China taking the lead on behalf of Tehran when other U.S.-China bilateral trade issues loom large is more complicated now than it was back in 2012. In 2012, China agreed to meet the Obama administration’s request that it cut its Iranian imports by the minimum 20 percent. As robust a response as the United States may now say it wants from Beijing on Iran, Washington similarly has to consider other priorities on the table with China right now, including negotiations regarding North Korea. Iran has been exporting roughly two million barrels a day (b/d) of crude oil. Europe purchases over a quarter of that volume and is—if push comes to shove—likely to go along with U.S. policy if no diplomatic progress can be made. For now, European leaders are trying diplomacy to keep the nuclear deal alive separately from the United States and to press Iran to address some of the common concerns on Secretary Pompeo’s list. Back in 2012, Europe cut virtually all of its oil imports from Iran. Japan had already conservatively lowered its purchases from Iran in March and even India’s oil giant IOC is now saying publicly that it is looking for alternative barrels to replace its 140,000 b/d of purchases from Iran, suggesting the oil will be made available to India from Saudi Arabia. South Korea is also expected to wind down its purchases from Iran given the imperative to display common ground with the United States; Seoul has already reduced purchases from 360,000 b/d last year to 300,000 b/d more recently. In sum, although Iran can conduct oil for goods barters with Russia and Turkey, it could potentially lose one million b/d of sales or more, if it the current geopolitical stalemate stands. But more is at stake for Iran than short run oil sales since Tehran has learned it can get those back eventually if the political will towards sanctions wears off over time. The curtailment again of international investment in its natural gas industry is a bigger setback for Tehran, which needs natural gas not only to inject into its oil fields to drive production but also for residential and commercial use. If the United States manages to drive French firm Total back out of the important South Pars natural gas venture, the chances of Iran reestablishing itself as a major liquefied natural gas (LNG) exporter dissipates once again, possibly this time for decades given potential U.S. exports and other market conditions. China, which is also an investor in South Pars, does not have experience developing LNG exporting projects. Unfortunately, the global natural gas stakes could make it harder to draw Russia along with any U.S.-led conflict resolution effort. Even if Tehran was willing to cooperate in Syria or Yemen, Russia—a major natural gas exporter to Europe and Asia—benefits from U.S. sanctions that block competition from Iranian exports. Motivating the Kremlin into any diplomatic deal that restores U.S.-Iranian cooperation could be a heavy lift. Russia is expected to begin supplying natural gas by pipeline to China via the Power of Siberia pipeline by late 2019 but Russia’s Gazprom has had difficulty locking down sales to China from additional pipeline routes. Successful negotiations on the Korean peninsula could help in that regard, since one potential fix to North Korea’s energy needs could be a Russian gas peace pipe. But the availability of direct natural gas exports to China and South Korea from the United States muddies the waters further. Beyond holding Iran out of the long run natural gas market, Russia could similarly be unwilling to agree to conflict resolution in Yemen and Syria because of the benefit it enjoys from keeping Saudi Arabia under financial and political pressure. Riyadh’s economic pressures, driven in part from its high military spending in Yemen, have made Saudi Arabia all the more willing to collaborate with Moscow on managing oil markets—a geopolitical reality that has strengthened Russia’s global standing significantly. It’s hard to see what would motivate the Kremlin to let Saudi Arabia off the hook given that a resumption of a tight alliance with Washington and Qatar is a material danger to Russia’s geopolitical and economic well-being, as demonstrated when the three countries collaborated in the early 2010s to weaken Moscow’s grip on European energy markets. Russia’s posture is not the only barrier, however, to conditions that would allow progress on U.S.-Iranian conflict resolution. Even if the economic penalty of the re-imposition of U.S. sanctions were sufficient to motivate Iran back to the negotiating table, it remains unclear to what extent Tehran can influence its own proxies who have independent goals that could not align fully with any conflict resolution deal Iran could strike with the United States and its allies. Moreover, it is similarly unclear whether the United States could draw Saudi Arabia into a workable political settlement for Yemen. Thus, while the United States could have a strategy in mind that could improve upon the status quo in the Middle East, a deeper dive into the energy realpolitik of the matter shows the complexities that stand in the way of progress. With so much at stake, an incredibly disciplined and patient hand will be necessary to work through the wide host of internecine, interconnected issues.

Blog Post by Amy M. Jaffe May 25, 2018 Energy Realpolitik

Venezuela

Why Oil Sanctions Against Venezuela No Longer Make Sense

This post is co-written by David R. Mares, the Institute of the Americas chair for Inter-American Affairs and professor for political science at the University of California San Diego and the Baker Institute scholar for Latin American energy studies at the James A. Baker III Institute for Public Policy at Rice University. Venezuelans are due to go to the polls on May 20, in an election that is seen as problematical for the largest members of the Organization of American States (OAS). Last month’s OAS summit was inconclusive on how to respond to the deepening humanitarian crisis inside Venezuela that has spurred 230,000 refugees to cross the border to Colombia and oil workers to abandon their posts. This week’s news included an announcement that Chevron was withdrawing executives in light of the arrest of two company employees who were arrested for refusing to participate in official corruption. Chevron’s announcement follows the exit of major U.S. oil drilling service companies. Oil production from areas such as Chevron’s operations were a bright light in a rapidly declining sector. As the Venezuelan oil industry collapse accelerates under the rule of Major General Manuel Quevedo, oil production is likely to continue to crater, perhaps at a faster rate. Eventually, the industry’s performance will be so debilitated that it will render the option of U.S. sanctions against Venezuelan oil exports less relevant. The prospects that General Quevedo will run Venezuela’s oil industry into the ground raises the specter that the ranks of the country’s military could consider a coup against President Nicolas Maduro. That will present a different kind of challenge for the United States and the OAS. Opening Pandora’s Box – Again? The U.S. government’s response to Venezuela’s situation will complicate a broader Latin American response. Former President Barack Obama’s designation of Venezuela as a threat to U.S. national security alienated most of Latin America with its harkening back to Cold War unilateralism. The recent thinly veiled calls by high U.S. officials including Senator Marco Rubio—chairman of the subcommittee on the Western hemisphere—for a military coup to oust President Maduro raises fears of a return to Latin American militaries as the arbiters of politics. The fact that some members of the Venezuelan political opposition also support the call for the country’s military to intervene is also troubling, as significant minority opinions in Latin America’s past supported military coups that were followed by severe repression and suspended democracy for years. A Checkered History of Efforts to Defend Democracy in Latin America Latin America has committed itself in multiple international fora to defending democracy. In the twenty-first century they have acted in concert multiple times to isolate governments that came to power through irregular or highly questionable means (e.g., Venezuela 2002 and Honduras 2009) or to effectively mediate government-opposition conflicts (e.g., Bolivia 2007-2008). But today Latin America is divided regarding how to respond to the political, economic, and humanitarian crisis engulfing Venezuela. The Lima Group of fourteen countries (including Canada, Guyana, and Saint Lucia as non-Latin American members) is pressuring the government of Nicolás Maduro for credible commitments to free elections and reforms, but several members of the OAS call for a hands off approach. Even the Lima Group is divided regarding how much to pressure Maduro: Peru told Maduro that he was not invited to the 2018 Summit of the Americas, but Chile publicly stated that all governments were invited to the inauguration of President Sebastián Piñera. The reasons for this disunity are not simply ideological disagreements, dependence on Venezuelan oil, or kowtowing to Washington. Rather, they are rooted in the region’s history of political instability, frustrated social change, and experience with the heavy and clumsy hand of the United States, all of which have led to the region prizing sovereignty and generally opposing interference by other nations in domestic affairs. Drawing the Line - Where? OAS leadership, both the current Secretary General Luis Almagro and the former Secretary General Jose Miguel Insulza, have sought to make the organization live up to its responsibilities under the 2001 Inter-American Democratic Charter, and to critique the intransigence of the Maduro government. The United States, Brazil, Colombia, and Argentina all supported this approach at the OAS summit last month in Lima. But the OAS has not been effective in delivering a clear and consistent pro-democratic message for complex reasons. First, there is no agreement in Latin America beyond periodic elections on what constitutes “democracy,” and therefore it is diplomatically difficult to get agreement on where the Maduro government sits on the spectrum where beyond which politics is no longer democratic. Second, the great discrepancies in political and social inclusion that remain in Latin America reproduce the domestic political polarization and instability at the regional level. Populist governments in Ecuador and Nicaragua still support the Venezuelan government. Worse still, Latin American governments agree that if the military participates in an overthrow—even if asked by governing institutions to do so (e.g., Honduras)—that it is a coup against democracy. But if riots in the street seek to force a president to resign and thus impose the vocal minority’s will over the results of elections, Latin American consensus breaks down with governments that favor the opposition calling for mediation and those sympathetic to the government supporting the electoral calendar. Similar divisions reveal themselves when one branch of government uses its constitutional powers to remove the leadership of another branch or stop a proposed policy (e.g., Paraguay, Brazil, Venezuela in 2015). This pattern suggests that Latin America’s defense of democracy is not a mature process tied to law and institutions, but still rooted in individuals, ideology, and politics. Looking for Clean Hands Who has the standing to critique Venezuela? Maduro’s popularity in Venezuela is far greater than President Michel Temer’s in Brazil where few voters likely believe that Temer and his administration are more honest than Luiz Inácio Lula da Silva or Dilma Rousseff who are under investigation. Among the mediators selected by the opposition is Mexico—a country with the highest murder rate for journalists, where the government is suspected by international NGOs of being involved in much of the violence against citizens and wallowing in corruption. Colombia is one of the leading voices for sanctioning Venezuela’s government, but Colombia’s bona fides are compromised by the fraying of the peace agreement and the lack of security for FARC candidates in elections. Peru’s President just resigned in the face of serious financial and political corruption scandals. All this makes the U.S. decision making about Venezuela extremely difficult. If the goal of U.S. intervention is to restore democracy to Venezuela, imposing U.S. sanctions against the country’s oil exports could be overkill, given the decline coming to the country’s oil sector in any case. Targeted sanctions against the Venezuelan military would have limited real effects given Russia and China’s commitment to the current regime and would only reinforce officers who hold anti-U.S. nationalist views. The U.S. government should consider two major points in preparing for the next stages in the evolution of the Venezuelan crisis. First, if the United States is seen as taking the lead in bringing about the collapse of the Maduro government, it will discredit the democratic transition in the eyes of significant segments of Venezuelan and Latin American public opinion. Secondly, United States credibility for providing reconstruction aid and supporting an open and non-discriminatory transition process is low in the region. With these points in mind, there are some efforts the United States could make in a supporting role to the Lima Group. Colombia has called for a reconstruction plan for Venezuela; the United States should encourage a Latin American conference to develop that plan with clear U.S. commitments. The United States also needs to adopt an active and visible role assisting Brazil and Colombia to deal with the refugees. This would not only be in line with U.S. disaster relief efforts in the past but could constitute a way of getting humanitarian aid to Venezuela, bypassing the government, if enough aid is provided by the United States, the Lima Group, and the EU to enable people to bring some back into Venezuela. While not the ideal means to provide humanitarian aid inside Venezuela, smuggling is a well-established activity and effectively closing the border to the influx of such aid would significantly add to the discredit of the Maduro government. The United States also needs to consider how it would respond to a sudden military take-over and change of leadership. In this case, the United States should coordinate with Latin American governments in an immediate call for a firm date for the restoration of freely organized elections and in which chavismo, minus government officials implicated in corruption and abuse of power, would be free to compete. Only a stable democratic Venezuela will be able to utilize its vast oil and gas resources for the benefit of its people and global energy markets.

Blog Post by Amy M. Jaffe and Guest Blogger for Energy Realpolitik April 27, 2018 Energy Realpolitik

Mexico

The Coming Presidential Elections in Mexico: Will López Obrador maintain the Lead?

This is a guest post by Isidro Morales, a professor of the School of Government at Tecnológico de Monterrey, Santa Fe (Mexico City) campus. On Sunday April 22, the first of three presidential debates took place in Mexico City, gathering the five candidates out of which three are sponsored by their respective political parties, and two are running as independent contenders. Slightly more than two months ahead of election day on July 1, polling indicates the choice will be between Andrés Manuel López Obrador and Ricardo Anaya Cortés. López Obrador is sponsored by Morena, the political party he founded himself, in coalition with two other parties, the center-left Partido del Trabajo (PT) and the center-right Partido Encuentro Social (PES). Anaya is supported by the center-right Partido Acción Nacional (PAN), in coalition with two center-left parties, Partido de la Revolución Democrática (PRD) and Movimiento Ciudadano. A few days before the first debate took place, Reforma, a Mexican leading newspaper, published a poll showing a major lead by López Obrador on electoral preferences: 48 percent, while Anaya held 23 percent of the preferences and Jose Antonio Meade, the Partido Revolucionario Institucional (PRI) candidate, only 14 percent. The polarization in voting preferences is not surprising. López Obrador has been successful in exploiting the frustration and disaffection of most parts of the Mexican population against the PRI, the party which lost the presidential election in 2000 after ruling Mexico for more than seventy years and which came back to power in 2012, with Enrique Peña, whose presidential term became highly disappointing. Indeed, the presidential election of July 1, will take place in a country in which public safety is fragile, political corruption is widespread (various PRI’s former governors are either prosecuted or law fugitives), and NAFTA is being renegotiated with uncertain outcomes. The backdrop on energy issues is that oil production continues to fall while gasoline prices increase, in spite of a major energy reform which opened to private participation (national and foreign) to all production chains of the industry. The first presidential debate did not cover the energy issue, which is slated for later sessions focused on economic issues. However, the energy reforms have not been successful enough to help the PRI with its reelection. With a historically low record of popularity reached by Peña’s administration, it looks difficult for Meade, the current PRI candidate. In spite of his good record as a public administrator, he seems unlikely to narrow the gap he still has vis-à-vis Anaya. Despite the widely touted energy reforms, the Mexican oil industry still faces a host of challenges, not the least of which is increasing theft and violence against oil facilities that have endangered the lives of oil workers. Announcements to begin developing Mexico’s vast shale resources in the state of Tamaulipas have also been greeted with some skepticism since the region is dominated by the Zetas and Gulf drug cartels and it is unclear how the government would address any security issues that could plague drillers. While the margin is still large between López Obrador and Anaya, it could eventually be narrowed and eventually reversed, depending on how electors scatter their choices among the independent runners, and how the two major contenders attract or disappoint their respective constituencies. The outcome of the first debate, for example, seems to have played to the benefit of Anaya, at least this is what another survey published by Reforma shows slightly after the debate was over, including the opinion of leading voices from academia, politics, business, and civil society. Indeed, López Obrador was vague on critical issues during the debate while Anaya was assertive and specific in his attacks regarding important proposals and against some controversial members included in Lopez Obrador’s party (i.e., Manuel Barlett, blamed for being the orchestrator of an electoral fraud favoring the PRI during the 1988 elections, when he was Secretary of Government). Two contentious issues of the debate are particularly salient to Mexican voters. The first one is the amnesty previously announced, while campaigning, by López Obrador to Mexican drug barons in case he becomes president, as a means to end the “war on drugs” initiated by former president Felipe Calderón, in 2006. Anaya and most of the other candidates have rejected this possibility, highly sensitive in a country in which more than 120,000 people have lost their lives since the armed confrontation against drug traffickers started. During the debate, Anaya confronted his rival on the issue, asking him whether he continues to support the amnesty. López Obrador rather provided for a diffuse answer, suggesting that organized crime activities is the result of social and economic conditions prevailing in the country, and that the final decision will be taken after consulting a group of experts. The second hot confrontation in the debate was on the means for making more transparent and accountable Mexico’s public policy, including the performance of the Presidency. Anaya was clear in advancing his proposal for creating an independent prosecutor, elected not by the president in power (as it is currently the case) but by the congress, with the mandate to prosecute the corruption of public officials, including the president. According to rules still prevailing in the country, the president cannot be impeached, unless there is an alleged cause of “treason to the Nation”. The proposed change would make impeachment by mismanagement possible for all public officials, if the Mexican Constitution is changed and an independent prosecutor is established. By contrast, López Obrador calls for abating corruption and tackling government accountancy by putting himself as the model of good governance when he arrives to the presidency. He promises to rule with austerity and transparency, by emulating the political and social performance of past national heroes—such as Benito Juárez, the president who repelled a French intervention; Francisco Madero, the president who restored democracy after the fall of the Diaz dictatorship; and Lázaro Cárdenas, the president who nationalized the oil industry in 1938—and putting in place a sort of referendum, every two years, in order to ask the electorate whether the president should continue in power or step down. The first debate also revolved around security and political issues, while coming debates will deal with economic, social, and foreign policy aspects. However, the electorate is already anxious to know, whether López Obrador will remain vague and diffuse as he was in this first debate, concerning other controversial issues of his campaign. A critical question is his ultimate position on the reversal of the energy reform incepted by the current administration, which needed a constitutional amendment requiring at least two thirds of the votes of the legislators and the support of at least half of the state congresses. According to Alfonso Romo, the would-be chief of staff in the case that López Obrador becomes president, the reform will remain in place and contracts signed by the current administration with private companies will not be cancelled. However, according to Rocío Nahle, current leader of Morena in the Chamber of Deputies, and potential secretary of energy if López Obrador becomes president, the reform could be revisited and private contracts cancelled in case evidence of corruption is found. Will López Obrador call for a group of experts once he is in power in order to decide the future of his energy policy, as he said he will do for confronting organized crime? If he does, how will the group of experts be formed? It is up to López Obrador and his team to clarify their position in this hot issue during the following two months of the presidential campaign. If the ambiguity is maintained, López Obrador risks losing part of his constituency to the benefit of the rest of the candidates.

Blog Post by Guest Blogger for Energy Realpolitik April 25, 2018 Energy Realpolitik

Iran

Energy Intelligence Briefing: Automated Warfare, Asymmetric Risks, and Middle East Conflicts

Geopolitical risk is always a major feature of global oil and gas markets, but the interplay of wars without end, powerful non-state actors, and the proliferation of new weapons technologies across the globe is raising that risk. Energy Realpolitik sits down with Council on Foreign Relations (CFR) National Intelligence Fellow Michael Dempsey to discuss a host of risks that might impact the energy sector in the coming years. Topics are drawn from recent discussions by CFR fellows at Columbia University's Center for Global Energy Policy. What are some broad trends that could influence the energy sector’s outlook in the next few years? Mike Dempsey: First, it’s clear that the underlying conditions that brought us the Arab Spring in 2011 have not been resolved. Just consider, according to the most recent Arab youth survey, youth unemployment remains at around 30 percent in the Middle East, and countries in this region by 2025 are projected to have a population of nearly 60 million between the ages of 15-24. That’s a sizeable slice of the region’s population, and one-third of them are likely staring at long-term unemployment, especially if regional growth rates stay mired in the 1 to 3 percent range. The young are not only restive, they are connected. So, during Iran’s protests in January, Iranians used forty-eight million iPhones to spread the word, and the protests spread to more than eighty cities across the country. In 2009, estimates are that 15 percent of Iran’s population had iPhones; today it’s about half. Just ask yourself, would we have imagined last December that protests in countries as diverse as Tunisia and Iran would be sparked by many of the same underlying conditions? That’s not, of course, to say that there aren’t some positive trends in the Middle East (the increasing influence of women, a renewed focus on education and technology, etc.) but the negative trends are still dominant, in my view, and are likely to trigger rapid, unexpected crises in the future of the sort that we’ve experienced in recent years. Second, a more serious debate is underway in the Middle East and beyond about the future of Political Islam. This issue is obviously being discussed in Saudi Arabia—with some encouraging signs, but also concerns—and is playing out in different ways in Egypt, Iran, and across the globe from parts of Africa to Indonesia, Malaysia and beyond. How this debate is resolved will obviously have profound implications for future political stability. Third, if evolving economic and religious trends are shaping global stability, so too is technology. I won’t go into detail on all of the widely recognized positives that flow from recent advances in technology—energy experts certainly know the effects on the sector better than I do—but there are emerging risks that also have to be considered. Recall on the security front: a decade ago, the U.S. military was the only country operating armed drones over Iran and Syria. Today, there are more than a dozen countries and non-state actors such as ISIS and Hezbollah that are doing so. In fact, during the U.S.-backed coalition advances on both Raqqa and Mosul, ISIS used armed drones against U.S. forces. And consider press accounts concerning armed drones being used in Syria only three months ago. During the evening of January 5 and into the next day, the Russian military reportedly faced two separate swarm attacks using miniature drones against two of its bases. In total, thirteen drones were used by the attackers, each carrying ten bomblets; ten drones targeted the Russian airbase in Latakia, three the Russian naval base in Tartus. According to press accounts, the drones each carried an explosive charge weighing about one pound, and included strings of metal ball bearings that were intended to harm individuals in the open. There are reports that several Russian fighter jets were damaged on the ground, though Moscow denies this. Most of the individual components in the drones, including the motors, are commercially available. The drones used an onboard GPS system for navigation, but again, this technology is easily available for purchase online. So, is it really hard to imagine in the next few years that similar attacks will be launched at other bases or sensitive oil infrastructure facilities around the world? And here is the final kicker to the Russian story. To this day, it’s impossible based on open source information to determine who conducted the attack. So, how attractive could this type of plausibly deniable operation be to terrorists or even criminal elements in the future? One final word on drones, if you’ve ever seen drone races you’ll know that the tiny drones used fly at great speeds—more than 150 mph—and with incredible maneuverability. That type of speed and maneuverability already poses a clear and present threat to those charged with protecting important government and commercial facilities. And while we are discussing security threats, consider that in Yemen, as many of you are well aware, the Houthis within just the past few months have struck a Saudi tanker in the Bab-al-Mandeb Strait and fired drones and missiles of increasing accuracy and range into Saudi Arabia, producing the first casualty in Riyadh. So, how different would the global energy outlook be tomorrow if a barrage of Houthi missiles hits Riyadh? Would that not trigger a broader regional conflict? Or how about if Houthi missiles penetrate Saudi air defenses and strike Aramco? I don’t mention these threats because I think they will happen, but I, unfortunately, absolutely believe they could. I could go on about other threats, including cyber intrusions and the long-term threat posed by autonomous weapons, but here is the bottom line: technology is going to make working in the energy sector in the future much easier, but also, in some ways, perhaps much harder. Fourth, while I am always worried about sudden country-specific crises that could influence the energy market, I’m frankly also concerned about a growing number of transnational challenges and their potential to trigger broader instability. Some of these challenges include the rapid spread of preventable diseases, as well as today’s unprecedented human displacement crisis. Today, more than sixty-seven million people (or one of every 110 or so humans on the planet) is a displaced person, which is fueling instability in countries from the Middle East to Western Europe. I fear we are losing entire generations of young people in countries such as Syria, and the long-term effects on regional and international stability will be profound. This trend is especially worrisome because it’s largely owing to the international community’s inability to end the conflicts that are driving instability and displacement—witness our seventeenth year of conflict in Afghanistan, seventh in Syria, and fourth in Yemen. So, conflicts and threats that should be preventable or bounded, now seem to grind along into deeper crises with pernicious effects that we often don’t recognize until it’s too late. Just recall how the flow of people fleeing violence in Afghanistan, Libya, and Syria have affected Western Europe’s political landscape. This challenge is made even more difficult by the inward turn of Western states. In my view, this is an especially problematic time for the West to retreat from the world stage and to turn its focus inward. A fifth trend that will certainly affect the energy sector surrounds issues of transparency and corruption. The push for greater transparency around the globe is a hugely positive development, in my view, that could eventually increase business and government efficiency, improve governance at many levels, and deepen public confidence in both government and business. As you know, the pernicious effects of corruption are well documented. For example, the IMF estimates that the cost of bribery alone (one subset of corruption) costs between $1.5 and $2 trillion a year, equal to about 2 percent of global GDP. This cost has been evident in many countries for some time. Venezuela is a good example of this, where PDVSA has been raided for years both to pay for government expenses and as a patronage cash cow, all while the company’s infrastructure was neglected. Indeed, the fight against corruption is now a first-tier issue in countries of significant importance to global energy markets, from Brazil to Mexico and from Nigeria to India. In the short-term, the anti-corruption fight could generate increasing political instability, but if it eventually leads to more transparent and better governance in these countries, I’m certain that it will invariably help their economic performance in general, and the energy sector in particular. So, in my view, these are five critical trends that will influence the world’s energy market in the coming years. Are there any current developments that you are following that could influence energy prices in the near-term? MD: Sure. These include the outlook for the Iran nuclear deal after May 12, the prospects for the upcoming U.S.-North Korea Presidential Summit, Libya’s lack of progress toward political reconciliation and the recent terrorist activity against the country’s energy industry, and the ongoing negotiations concerning the global trade agenda, especially the near-term outlook for NAFTA. How do you then view geo-strategic trends and the likely effects on global energy prices over the next year or two? MD: I’d say the geo-strategic backdrop for the near-term leans heavily toward increased risk, with the potential for worrisome surprises—and potential oil flow disruptions—across a range of countries including Iran, Libya, Nigeria, Venezuela, and Saudi Arabia. But I hope I’m wrong! Do you have any final advice/tips for energy analysts or those tracking the industry? MD: Yes. In my view, the international environment is quite fraught at the moment, which means it would be a good time to: Routinely challenge your underlying assumption about the energy market. There are enough gathering threats (from simmering regional conflicts that have the potential to spike on short notice to asymmetric threats such as cyber and other non-traditional weapons) that this isn’t a good time for analytic complacency. Think deeply about the quality of leadership and governance in the countries you’re following. It’s always amazing, after the fact, to examine how signals were missed and how seemingly stable countries (and companies) can experience unexpected periods of profound turmoil. As a useful exercise in humility, for example, it’s worth going back and reviewing the leading investment banks’ economic forecasts in 2006-2007, right on the eve of the Great Recession. In both the intelligence and business sectors, then, it’s worth remembering that it’s easy to develop analytic blind spots, fall victim to straight-line analysis, discount worrisome alternative scenarios, and underestimate critical drivers of change. Along these lines, I really would encourage everyone to look hard at physical and data security issues and to constantly re-evaluate how they are postured against the next generation of challenges. And finally, I would urge folks to think broadly and systemically about the issue of risk. Is protecting one particular company good enough today? Or do industry leaders need to cooperate more in protecting the whole system they operate in? For example, if a cyber attack cripples one energy company, isn’t it possible that attackers will learn from that experience and attack others, and that the public’s confidence will be undermined in all parts of the industry? The issues we face today are less about competitive advantage than about preventing systemic risk or failure.

Blog Post by Guest Blogger for Energy Realpolitik April 24, 2018 Energy Realpolitik