As HMS Argyle and the French vessel La Motte-Picquet helped to escort US carrier Abraham Lincoln through the Straits at the weekend one can easily see a conflict developing in the Gulf, almost by accident, brinkmanship can sometimes go too far, but the question is, would a conflict in the Gulf be of strategic importance to the UK?
The obvious answer is yes of course it, would with the reason being energy, oil and gas.
To put this in context it worth looking at the Department of Energy and Climate Change’s annual statutory report on Supply Security because it shows a number of trends and figures that might disprove, prove or more likely, be ambiguous about the degree of strategic UK interest in the Middle East, at least from an energy perspective.
One might think the demand for electricity is only going to increase but this is not the case. As heavy industry declines and transport becomes ever efficient they have a large impact on demand. Although car use is increasing, the efficiency per vehicle is also increasing. Both these factors point to a demand reality that might not conform the expectation of many although one would imagine the demand for diesel and aviation fuel will increase.
The National Grid estimate the UK has a steady state demand for 60 Giga Watts per year with a generating capacity of 90.2 Giga Watts (the difference being due to seasonal variations) but with the CO2 reduction legislation and impending closure of many nuclear plants there could be a reduction of in excess of 19 GW by the end of 2020.
New generating plant is scheduled to fill the gap using both gas and renewables.
Europe is also increasingly becoming connected for large volumes of electricity transfer. The latest example of this is the electricity interconnect between the UK and the Netherlands called BRITNED. This 1000MW capacity system allows electricity to be passed both ways. Increasing connectivity is not all good news because it has the ability to put everyone in the same boat.
One of the traditional problems with electricity is that one cannot store it cheaply so demand at peak always has to be closely matched to generating capacity.
This again is where international ‘connectivity’ is making the whole system much more resilient. Norway has a huge pumped storage hydro-electric generating capacity and is starting to be used a what in effect is a huge battery, charged with intermittent power from wind and used to even out the variability.
LNG is still a major part of the UK energy mix and will remain so.
Since 2005 the UK has been a net importer of oil as yields from the North Sea decline.
Imports come from a diverse range of countries, mostly Norway. Imports from OPEC countries only account for 15% and of course, no all OPEC countries are in the Middle East or directly affected by the Straits of Hormuz.
Although aggregate demand for oil products has fallen the mix has changed, less petrol and more diesel and aviation fuel. UK refining capacity has not matched this trend so we export petrol and import diesel and aviation fuel.
Aviation fuel is sourced from a wide number of countries but taking those in the Gulf region, it is over 50%. Very little diesel is imported from beyond the shores of Europe.
Emergency oil stocks are EU and IEA obligations, 67.5 days of consumption for the EU and 90 days of net imports for the IEA. At the end of 2010 the UK held stocks equivalent to about 84 days final consumption.
The North Sea may be seen as a washed out resource but there may be surprises yet, the recent discovery of the Aldous Major South field in the Norwegian area is the largest ever discovered (in the North Sea)
The Security of Supply Report suggests that market diversity and an increasing capacity in infrastructure is not vulnerable to most disruption scenarios, including one must assume, a closure of the Straits of Hormuz for a short period.
Currently, gas for power generation contributes to both base load and peak loads. Gas is sourced from dwindling North Sea fields, pipeline delivered gas from continental Europe (Norway and Russia) and ship delivered Liquefied Natural Gas (LNG) from the USA and Middle East (mostly Qatar)
In 2006 Qatar overtook Indonesia as the world’s largest exporter of LNG and its North Fieldreserve is the largest in the world with an equivalent capacity of 150 years UK peak demand. The Qatargas II supply chain is a quite staggering project, the South Hook LNG terminal in Milford Haven, 14 new LNG tankers, 30 wells, 2 onshore processing facilities and the supporting infrastructure. It is the largest LNG terminal in Europe and can satisfy 20% of the UK’s demand alone.
The agreement with Qatargas is for a 20 year, non divertable supply. Within the terms of the agreement, supply cannot be diverted elsewhere if they pay more. Nearby is the Dragon LNG terminal, similar to South Hook although smaller, there are other large terminals on Teesside and the Isle of Grain.
In addition to Qatar, the UK imports LNG from, Kuwait, Algeria and Trinidad although the UK is the largest export destination for Qatar LNG.
Major gas pipelines include the Langeled and Vesterled routes from Norway, the IUK pipeline to Belgium and BBL pipeline to the Netherlands. These pipelines link the UK to the wider European gas infrastructure and at the height of the Russian supply crisis even allowed the UK to export gas into Europe.
Despite the noise about Hormuz and Qatar, the single largest import source for gas used in the UK is Norway but LNG has rapidly increased in importance. LNG imported using ships accounts for about 40% of imported gas (about 20% of total consumption), the vast majority being from Qatar.
Advancing technology with both liquefaction and regasification have enabled the distance that LNG can be transported economically viable has increased. This increases resilience because it allows a greater range of sources to be used.
What strikes me more about events of the last few weeks is the evidence that Iran has once again tried to play in the big leagues with threats about closing the Straits of Hormuz but this time has found that the rules have changed, the opposing teams, grounds and even the home fans have changed a great deal since the last time.
Those changes have culminated in a very harsh lesson in energy politics being meted out to Iran, a lesson she would do well to heed. That lesson has nothing at all to do with how many carriers are in the area, whether a submarine or speedboat will be effective or even the aftermath of such an action.
Iran, as incredible as it might seem, is wholly reliant on imports of refined oil products, its creaky infrastructure, restrictive business environment and basket case economy would be dealt a severe blow by a shooting war, one which it might not recover from for a long time. Those in charge might hold a grip over the population now but a wholesale reduction in electricity generation, fuel for vehicles and other products would no doubt see yet more internal strife that may be successful this time.
It has even got to the point where the government is urging people to drive less, ride the train and convert cars to LNG. A recent parliamentary bill paves the way for a raft of measures that taken together will reduce imports of oil products. Iran for many years has heavily subsidised petrol prices which has encouraged inefficiency and encouraged smuggling to neighbouring countries. Fill up your car, drive it over the border and double your money on an industrial scale. It is hard to pull back from this.
Iran has the third largest oil reserves in the world but its poor management of this resource means its economy remains weak and vulnerable, exports, whilst large, are small in comparison with other countries.
Iran actually has a relatively weak military capability, despite all the flashy ostentatious parade ground displays, formation speedboat manoeuvres and photoshopped images of rockets being launched there is not a great deal of depth, certainly not against punitive strikes from her much better equipped neighbours, particularly Saudi Arabia.
The Gulf States have been on a prolonged weapons shopping spree and if their prosperity is threatened or an attack is launched against the oil and gas production facilities things would very quickly resolve themselves.
A prolonged period of disruption is not likely when income is threatened.
China has in the last few weeks been very visibly making supply agreements with Saudi Arabia which sends a strong message to the Iranian leadership; patience is beginning to get threadbare. Carry on your nonsense and we will shop elsewhere. This might be a simplistic view, China has a very complex and deep rooted relationship with Iran, but the signs of impatience are there.
Speaking a couple of days ago after a visit to the region the Chinese premier Wen Jiabao said;
China has normal trading relations with Iran, but will not bargain away its principles. We support the UN resolutions related to the Iranian nuclear issue. Iran would not have wanted China to make this statement, but Iran must understand that if it comes down to a choice China will not alienate itself from the rest of the world for the sake of single country
Whilst Iran may be all bluff and bluster, as they edge closer to being a global ‘billy no mates’ sense does seem to be prevailing with signs of a gradual stepping away from the hard lines.
Many interpret the recent softer tones coming from Iran as a direct response to the US carrier but I find this unconvincing, China and the realities of energy economics seem to have a much greater impact, although let’s not dismiss completely the sobering thought of a US carrier battle group and attendant UK/French naval vessels in the area.
Oil and gas are global commodities and whatever local arrangements are in place a global price increase would affect everyone.
Except would it?
The UK’s commercial gas contracts for example, are a mix of divertible and non-divertible at agreed prices. There are people who think disruption in the Gulf would increase oil and gas prices beyond the short term but others point to the global economic downturn and EU problems depressing the market, keeping prices down and supply outstrips demand.
A sustained price increase as a result of disruption in the Gulf is certainly not a foregone conclusion.
Normally, price increases would be in the interests of Iran but as they run out of customers they might find that an increase in prices is not offset by a reduction in sales volume.
Predicting energy prices is difficult at the best of times and there are very few certainties.
The very simple long term option is to relegate the whole area to a backwater of strategic irrelevance.
Take the heat out of the situation, remove the tension and avoid the problem.
The only way the West can do this is to remove its dependence on Middle East oil and gas.
So that was Monday, what would we do on Tuesday!
It doesn’t need saying that is easier said than done and if there is one positive to come from the whole climate change debate it is a renewed vigour on the quest for alternative and renewable energy.
Perhaps this is a better argument for renewables than CO2 reduction and man-made climate change, certainly less divisive and a lot more clear cut.
If one follows the energy technology news there is activity every single day, new technologies, new applications, means of reducing demand and a whole load of creative thinking. I am more optimistic for the long time than many, if the human race has shown anything it is a knack for adapting and overcoming big challenges.
Long term there is no alternative, although hydrocarbons will be continually extracted in one form or another for some time to come, and again, we seem to be able to tackle the increasing difficulty in extraction, the future clearly is wind, wave, hydrothermal, shale gas, underground coal gasification, hydrogen, various forms of nuclear and solar.
The UK is well blessed for some of these, particularly wave and tidal but there is a long way to go before we can stop sucking on the teat of Middle East oil and gas, particularly gas.
This is not an overnight option and therefore the issue of Iran has to be addressed.
The best option for Iran is for Iran to stop being an arsehole and reconnect with the world.
Economic prosperity, with its attendant power are easily within the reach of Iran and her people.
By stopping the pursuit of nuclear weapons, sanctions would soon disappear.
This would then put Iran on normal trading relations with the rest of the world and if it could then reform its poor economic management and business environment inward investment into its shockingly poor refining and exploration infrastructure would follow.
Net result, buyer meets seller and everyone concentrates on making money, talk of sanctions and air strikes become a thing of the past, Gucci handbags and internet access all round.
We should therefore be investing time, energy, creativity and resources in five areas;
Remind Iran of the Consequences of Continued Shenanigans
This does not need overt brinkmanship, cruising around the Gulf in carrier battle groups edging closer to the inevitable, but it does need a concerted and determined effort to remind Iran that whilst we wish to de-escalate and avoid confrontation if it wants a fight it is going to be the loser. Appearing weak and divided is the very last thing we should be doing but let’s not be throwing petrol on the fire either.
The Gulf States need to get off the fence as well; it is their region and their economies that would be disrupted. We should be clear that we are committed to supporting them but they need to be equally committed, no sitting on the side lines, no conditional access. If we are to be engaged so must they, if they cannot find justification for regional conflict then why should we?
To support his, any mission must be focussed laser like on maintaining the free flow of goods through the area, nothing more, nothing less. However, the tactics to ensure this free flow must be flexible enough to be effective.
Having made the point, Western forces should rapidly wind down their major naval presence in the area i.e. carriers should not be in the Gulf beyond the next few weeks.
Reduce Vulnerability to Supply Disruption
As the report referred to above shows, the UK has an extremely flexible and diverse gas and oil supply infrastructure and equally flexible trade and regulation environments but with a few hot spots, with over 50% of imported aviation fuel and over 20% (and rising) of imported natural gas coming from the region. We must understand, despite these relatively high figures, they represent yearly figures, would not be overly vulnerable to short term disruption and could be replaced with other sources.
This may be optimistic so security of supply regulation should examine means of reducing vulnerability to medium term disruption by investing in greater refining capability, especially for aviation fuel, and LNG storage, an area in which, despite recent improvements, we lag far behind other nations with lower gas dependence.
Vulnerability to supply disruption applies both home and away.
There is no reason why the extensive pipeline network in the Middle East cannot be expanded with inward investment from the UK to the region. Investment in pipelines based on the simple premise of increasing infrastructure resilience and diversity whilst reducing vulnerability to single points of risk concentration I.e. the Straits of Hormuz would not be a bad use of public money.
There are already extensive gas storage facilities with three more under construction in Cheshire and more awaiting planning consent. Gas storage is a strategic issue and planning processes should be streamlined/barged through depending on your view. These storage facilities allow us to build extensive reserves which compensate for supply disruption and increasing winter demand. Import rates continue at a steady pace with more than is needed during the summer and less than is needed during winter, with the storage taking up the slack.
An overall increase in storage is another wise investment for the UK to compensate for supply side disruption to availability and subsequent price fluctuations.
Who would pay for this increasing infrastructure diversity is an easy question to answer, everyone, but then that is the price to pay for resilience.
Help Regional Partners with Their Security
We already do this superbly well, the MCM task force in the Gulf, as supplemented by survey, RFA and a small number of frigates or destroyers do a magnificent job with little public acknowledgement or resource. Building relations, developing regional capabilities and demonstrating a publicly visible commitment do more for regional security and the security of the UK than wading in all guns blazing.
The other two services also have a role, although necessarily different.
It is ‘forward presence’ personified and quite simply we should do more.
Invest in Diplomacy and Intelligence
The current belligerent stance simply makes no sense for Iran, the challenge for Western and regional diplomats are to make them realise it. At every opportunity we should be talking, showing their people and leaders alike how they can prosper with a more engaged approach with world affairs. To do this we need to develop a much greater understanding of their issues and this can only come from overt and covert intelligence gathering and engagement.
China, India, Russia and Japan need to play a greater role and the West needs to put efforts into finding common ground and common approaches with them.
Reduce demand for Middle East Oil and Gas
It’s a bit of a no brainer this one and should go hand in hand with whatever policy direction we take in the CO2 reduction space. I tend to find myself increasingly unconvinced by the argument for manmade global warming but a increasingly convinced by the need for the UK to take energy security more seriously than it does.
Our increasing reliance on imported gas can only lead to strategic vulnerability
Take you pick from a cast of many technologies, until we find the most promising, investment diversity makes sense. We have intelligent and enterprising engineers and scientists, lots of natural resources and it is about time the government got to grips with coordinating this effort at a national level.
So we can see that although there are hot spots, the UK is not wholly vulnerable to disruption in the area and it would be a folly to think otherwise or use it as an excuse to push one agenda or another.
Finally, we must ask the basic question, is Iran a threat and if so, why?
Maybe the answers to those questions might be a little uncomfortable for those marching us to war.
Another question to ponder is, would a nuclear armed Iran necessarily be a bad thing, would it temper Israel’s power and maybe bring about a maturing of relationships and attitudes?