A Fracking Great Shift of Power
It has been some time since I last looked at energy and security, time for a refresh.
A Step Back in Time
The Conservative party, to their credit, highlighted the issue of energy security a number of times pre-election even though they indulged in a spot of scaremongering.
Ladies and Gentlemen. If we had another term of Labour, we’d have to get used to sitting in the dark. Because for the first time since the 1970s, the Government is expecting to resort to power cuts during the years ahead.
In October 2009 the Shadow Energy Minister, Greg Clark MP, delivered a speech on the issue titled Keeping Britain’s Lights on. For maximum showbiz effect, it started with the lights off and raised the spectre of rolling blackouts. There was also a strong inference that we were at the mercy of the Kremlin, all they had to do was turn off the taps and old ladies in bobble hats would be dropping like flies.
In 2009, in the grip of an extremely cold winter, several large industrial users faced restrictions in supply as domestic users were prioritised. These large users had signed up for interruptible tariffs in return for discount pricing so could not really complain, you pays your money and you take your chances.
This however, did not stop the bandwagon jumpers (i.e. press and opposition politicians) seizing upon the issue, evoking the famous phrase ‘keeping the lights on’ yet again.
The Conservative Party’s pre election strategy paper, A Resilient Nation, devoted a paragraph to the issue of energy security, stating
The danger that the country now faces of a real risk of the lights going out – inadequate power to keep the economy going – was entirely predictable even before Tony Blair spoke and yet his government did virtually nothing. Taken together, the lack of resilience in the UK’s stretched power generation, strained energy transmission, insecurity of energy supply and lack of emergency storage is nothing short of alarming. Forming a coherent energy policy, joining domestic with overseas factors, security with long term climate change goals and private sector investment with government policies on resilience of systems will be an urgent Conservative priority on entering office and is an example of an approach that can be applied to other essential sectors
In a supporting Annexe, the paper makes it clear that the armed forces will play a part in addressing the issue of energy security
Reflect energy security concerns in the tasking of the Armed Forces. The MoD should have regard to energy security in the tasking of our Armed Forces, for example the Royal Navy in the security of the sea lanes and the safety of maritime traffic
The 2010 Strategic Defence and Security Review (SDSR) mentioned energy fifty five times and had a whole sub section devoted to it in the Wider Security section.
We all criticise the SDSR as being an incoherent short term hack job beset with last minute shabby horse trading, woeful analysis and littered with wishful thinking but at least in referencing energy security it recognised one of the key risks the UK faces in the next several decades.
The UK faces a range of risks related to our ability to access secure, diverse and affordable supplies of energy, which are essential to economic stability and growth. These include political instability in key energy countries, insufficient investment in states that supply energy, and imperfections in the functioning of global and UK markets
As the UK’s own production falls these risks, it said, are likely to increase.
The SDSR then went on to describe what the Government would do to address the issues;
- Give energy a higher priority in foreign policy
- Help others reduce their demand
- Work with international institutions to promote price stability
- Improve early warning
- Improve the functioning of domestic markets
- Promote low carbon technologies and energy efficiency
- Establish measures to improve the resilience of energy infrastructure
- Strengthen cross government approaches
- Improve reporting
Now if that leaves you particularly underwhelmed you would not be alone, especially if one considers the scale of the problem.
Without sounding alarmist and resorting to the dramatics of Greg Clark MP I think energy security is of a greater significance than global terrorism or cyber attack.
The problem with looking at the SDSR in the context of the National Security Strategy is that the SDSR is predicated on a 5 year window, the next one being 2015.
The NSS looked at a 20 year period and mentioned the word ‘energy’ precisely eight times.
The security of our energy supplies increasingly depends on fossil fuels located in some of the most unstable parts of the planet.
The NSS assessed likelihood and impact and prioritised risks into three tiers.
Tier 1; hostile cyber attacks against the UK, international military crisis between states that draws in the UK, international terrorism affecting the UK and a major accident or natural hazard
Tier 2; CBRN attack on the UK or overseas territories, instability or insurgencies that creates an environment that can be exploited to threaten the UK, increased organised crime, disruption to satellites
Only in Tier 3 do we find disruption to oil or gas, alongside a large scale conventional military attack against the UK.
No, really, check for yourself.
The Cabinet Office maintains overall responsibility for National Security issues but hasn’t published anything online since November 2011
In March 2012 the Joint Committee on the National Security Strategy issued its First Review of the NSS.
Two things happened with this review.
Number 1;The Joint Committee ripped the Government to pieces
Number 2;No one noticed and normal jogging continued
Just for completeness by the way, this review mentioned energy zero times!
One of my favourite documents is the Future Character of Conflict published by the Ministry of Defence’s Development, Concepts and Doctrine Centre (DCDC).
It looked at the drivers for future conflict and recognised energy would be of some significance.
In particular gas will be of increasing importance as states struggle to maintain energy supplies. The majority of this gas will probably come from a few regions, namely the Arctic, Central Asia, the Persian Gulf (especially Qatar and potentially Iran), Russia and Africa. Many boundary disputes, such as those in the Arctic, Gulf of Guinea and the South Atlantic will become inextricably linked to the securing of energy supplies. The UK will be critically dependent upon energy imports
So whilst these key publications recognise, to varying degrees, the importance of energy security and risk to the UK of not having it they don’t go into much practical details of what the risks are beyond vague concepts and measures to ensure supply continuity are even more vague.
It could be argued that defence actually has very little to do with energy security, hence the lack of attention to it in the SDSR.
There is of course the supply chain route protection role, especially in the maritime domain, but how much practical support the MoD can provide to the UK energy market in comparison with the protection offered by a functioning market is open to debate.
Is the problem real or imagined?
The Problem, Or Not
The UK demand for energy is only ever going to go one way, up.
Even if a collection of overly restrictive ‘green’ policies succeeds in driving heavy industry offshore, which it seems is increasingly the case, population growth and other factors will drive demand for gas and electricity up.
Whatever your feelings on nuclear, global warming, the oil industry or renewable energy, the fact is, today, the UK is a net energy importer and baring some surprise technological development is likely to remain so.
Currently, gas for power generation contributes to both base load and peak loads. Gas is currently sourced from dwindling North Sea fields, pipeline delivered gas from continental Europe (mostly Norway) and ship delivered Liquefied Natural Gas (LNG) from the Middle East (mostly Qatar)
In 2006 Qatar overtook Indonesia as the world’s largest exporter of LNG and its North Field reserve 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.
In addition to Qatar, the UK imports LNG from, Kuwait, Algeria and Trinidad.
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.
Europe is not oblivious to its dependence on Russian gas and has been doing much to ensure alternatives, or at least routes that allow it to avoid the Ukraine Russia problem. The South Stream pipeline will take a southerly route from Russia to Austria and beyond with a capacity of 63 billion cubic metres, construction has recently started
This will still leave Europe dependant on Russian gas, even if it avoids the route though Ukraine.
The North Stream is the other primary route to Europe for Russian gas.
By January 31, 2013 it is planned to sign a memorandum on creating new gas transmission facilities across the Baltic Sea to Europe. One of the strings might be intended for delivering Russian gas to the United Kingdom.
Another route will be provided by the Nabucco Pipeline
The Nabucco will connect the Caspian and Middle East regions with Europe and is intended to provide a route for gas suppliers other than Russia. As much as Russia is a major player in the gas market its behaviour with Ukraine several years ago clearly showed that Europe could not afford to be in a situation where it could be coerced by even the merest hint of a threat from Russia.
The problem with the Nabucco project though is one of simple economics, as sensible as the idea is. Its estimated cost of in excess of 10 billion Euros, in the current financial environment and potential alternative sources of supply, primarily LNG, there is some doubt whether it will ever be built. There is also the route to consider, it passing through the Kurdish areas of Sothern Turkey with its obvious threats.
Agreements between Russia and other local producing countries combined with the likely construction of a China – Central Asia gas pipeline make the full Nabucco route even less likely. A recent restructuring has seen it develop into a shorter route for Azeri gas from Turkey to southern and central Europe.
The economics of pipeline construction are very complex and I am far from an expert but it seems that because of the huge costs involved the numerous partners have to be fully engaged, economic viability is king and everyone has to have welded open wallets, this is why more get announced than built.
Although there is some measure of uncertainty surrounding many of the gas pipeline projects it is obvious that there is significant activity, the market and governments throughout Europe are responding to an obvious requirement for both supply diversity and resilience.
As UK gas production declines the UK finds itself in a reasonably good place, non divertable supplies from Qatar, a robust pipeline infrastructure in the North Sea and to Norway and a range of options for interconnect into mainland Europe for other sources, AND, to export into Europe from our LNG import infrastructure.
So maybe, from a gas perspective, those risk assessments and security strategies weren’t that badly understated after all.
However there is a home and away threat.
Although it would take an extremely sophisticated terrorist group or even state sponsored group to mount a credible attack although that is not to say it is beyond the possible.
No doubt the security of LNG terminals, pipelines and other elements of the critical national infrastructure is closely monitored and has an adaptive security posture based on national intelligence.
Beyond the occasional threat of a WWII mine, one would imagine threat levels are quite low and because of the physical size and geographic spread of the infrastructure the UK has a good level of resilience for them.
Evidently, the main threat is that of disruption closer to the point of origin.
Namely, Hormuz, Bab el-Mandab, Suez and Gibraltar
The first important thing to recognise is that the world trading system is hugely resilient; it has to be to be commercially viable.
Importers and exporters have a vested interest in making sure they can trade, it is this point that is often completely misunderstood by those seeking to scaremonger and generate a reason for continuing investment in security or military solutions.
Commercial organisations invest in resilience, supply diversity and recovery capabilities because it makes economic sense to do so, in many ways, corporates have a more mature view of strategy issues than governments, which are largely based on the immediate political horizon.
The non divertable 20 year contracts with Qatar are a great example, the private sector investing $13billion (including £1billion for South Hook at Milford Haven)
However, there are limits to what business can do and these limits are often exceeded at points of concentration; a port, a distribution point or choke point. The physical movement of gas, oil or food relies on port facilities, ships, airports, aircraft and pipelines.
Looking at the nature of UK trade it is clear that the scaremongering about maritime security if often overstated.
Although the vast majority (95%) of imports and exports by volume travel by ship it is much less by value, also, 65-70% of both imports and exports by volume are between the UK and Europe where it might be argued the greatest threat is accident, bad weather and the odd WWII sea mine. The security threats to shipping in the North Sea are self evidently different than those in the Gulf of Aden. If we consider the amount of shipping movements between the UK and North America those percentages rise even higher, again, minimal security threats exist against this traffic. Food imports are also overwhelmingly from Europe, excepting certain types of produce although as noted above, food production relies on imported products including oil and gas powered electricity production. The threat to the UK therefore, is to a small percentage of shipping that originates outside Europe and North America, about 20% by volume.
It is a fallacy to think that all the UK’s import of gas comes through the Suez Canal and Straits of Hormuz, this is simply not the case, despite that argument or inference constantly popping up. It is equally untrue to suggest that the UK is any more vulnerable to disruption to the global trading system than France, Germany, Norway or Spain. We are linked to the rest of Europe by a network of sea routes, diverse shipping providers and of course the Channel Tunnel which carried about 15 million tonnes of freight cargo last year, in an emergency, all routes could be significantly increased.
However, those LNG supplies from Qatar are a particular concern as noted above and this will increase. In May last year the UK imported more gas in the form of ship delivered LNG than it did via the pipeline(s) from Norway.
LNG ships have to transit the Straits of Hormuz, Bab el-Mandab, and the Suez Canal, all potentially hazardous locations. Because of the volatile nature of LNG extended transits via the Cape would result in higher losses and increased cost so these should concern us all.
LNG requires timely distribution because of evaporation, the natural gas is compressed to form a liquid and although modern LNG carriers have onboard boil off regasification plants, a significant volume is still lost (although some of this is used to power the ship, a neat trick)
Straits of Hormuz; About 15 million barrels of oil per day flow through the Straits of Hormuz, and its 2 mile wide shipping channel, between Iran and Oman. Volume through the Straits has declined in recent years as pipeline build outs continue but it is still the world’s most vital chokepoint. On average 13 tankers per day pass through the straits on their Eastbound route, with a corresponding empty traffic going the other way. It should be noted that more than 75% of export traffic through the Straits is destined for Asian markets. If the Straits were closed the existing pipeline routes would have to cope but these already carry a significant volume. The East West Pipeline pair from the East of Saudi Arabia to Yanbu on the Red Sea is rated at just under 5 million barrels of oil per day and 0.3 million barrels per day of liquid gas. The Habshan-Fujairah pipeline is about to commission and this will transport oil from Abu Dhabi to another of the seven emirates of the UAE, Fujairah, on the East shores of the Strait. At about 1.5 million barrels per day capacity this will provide a greater level of security for the oil trading nations on the South coast of the Persian Gulf. With Iraq returning to some semblance of normality it is quite possible that existing and new pipelines would see greater utilisation, especially through Turkey. As can be seen from the map below a network of gas pipelines also exist in the area although there would need to be significant investment in compression and storage facilities if Qatar LNG were to be transported in this manner.
Bab el-Mandab; The Bab el-Mandab is a chokepoint between the horn of Africa and the Middle East, and a strategic link between the Mediterranean Sea and Indian Ocean. It is located between Yemen, Djibouti, and Eritrea, and connects the Red Sea with the Gulf of Aden and the Arabian Sea. Most exports from the Persian Gulf that transit the Suez Canal and SUMED pipeline also pass through the Bab el-Mandab. About 1.8 million barrels per day of oil is moved through the area on its way to Suez and the SUMED pipeline, most destined for the USA and Europe. If it were effectively closed it would place greater pressure on the Saudi East West pipeline.
Suez Canal; The Suez Canal is accompanied by the SUMED pipeline which runs parallel to it. It connects the Red Sea and Gulf of Suez in the Eastern Mediterranean with a length of nearly 120 miles. LNG represents about 11% of tonnage and 5% of ships but this is growing especially for Belgian, Italian and UK bound traffic. Because the canal cannot handle the very largest tankers they unload their liquid cargo which is then transited by the 2.3 million barrel per day SUMED pipeline and loaded again at the other end. Closure of the Suez canal and/or SUMED pipeline would require a 6,000 mile, 15 day diversion. This extra journey time would reduce throughput by tying up a finite number of tanks and ultimately drive up costs.
When looking at realistic threats to these three vital chokepoints it is important to consider that the UK is not alone in having a strategic interest. Traffic is two way and concerns not only the consumer countries but also those producing the oil, gas or other products. If there were a disruption to any one or all three, the UK would not stand alone in efforts to resolve the situation.
The Straits of Hormuz are under an obvious threat from Iran, this is clearly why the UK and other nations have such an interest in the area and maintain a range of forces there.
As Yemen increasingly descends into ‘potential failed state’ and the continued lawlessness in north east Africa continues this is another source of concern.
The Red Sea is less of a security concern but continuing insecurity in Egypt and surrounding areas combined with an obviously Islamist Egyptian government puts the final chokepoint (barring Gibraltar) into a category of ‘concerning’
There is a difference between vulnerability to disruption and likelihood of it happening.
If Suez were closed, commercial shipping would simply go around the long way, yes this would add time and cost but in what circumstances would this happen anyway. Who is going to block the canal and who is going to keep it blocked?
About 1,500 vessels per month pass through the Suez and provide Egypt with in excess of $5 billion foreign currency revenue per year. Along with energy and tourism it is the largest source of income for the country so any political party that decides to deny itself the two largest revenue sources, for tourism would surely follow any disruption to the Suez, plus the likely suspension of foreign inward development investment is not likely to last long as it finds itself unable to pay its own people. A more credible scenario is that of terrorism, either attacking the fabric of the canal or ships in transit.
As mentioned above, it is not in Egypt’s interests to allow canal traffic to be reduced and if shipping owners thought there a realistic threats they would carry the additional risk until it became more economic to re-route, at which point Egypt would have to do something. A scuttled or sunk ship at certain points would be a serious impediment to traffic but due to the vast size of the canal it is actually not that vulnerable to sustained denial with such pin prick attacks. Unless multiple attacks succeeded it is not likely that any damage would be enduring. That said, the threat of maritime terrorism remains credible and an attack would cause oil price fluctuations if not the closure of the canal.
The Bab el-Mandab is a different prospect, Yemen remains a fragile state and unlike Egypt, has no skin in the game when it comes to revenues from the area. Although it is a much larger geographic area and therefore harder to deny it would be feasible to create the conditions where commercial shipping owners decide the long way around is the preferred option, although I am sure Egypt, having just lost all its SUMED and Suez Canal revenue might have something to say about the matter. Disruption would not be allowed to continue indefinitely.
The Straits of Hormuz is an intriguing prospect because the most likely suspect, Iran that is, getting up to mischief by making threats or actually carrying out real interdiction of shipping would be playing a dangerous game of brinkmanship.
Iraq, Kuwait, Bahrain, the UAE and Saudi Arabia would all be drawn into any conflict, as would the Western nations in support, China might even get its sleeves rolled up because 75% of traffic through the straits is Eastbound and given that much of Iran’s foreign income generation activity also relies on the Straits any action would necessarily have to be short term.
Because of their economic mismanagement Iran has to import food and even petroleum products, they rely on a small number of refineries and in reality, if they attempted to shut the Straits they would suffer a very serious reprisal and any disruption would be over in 2 weeks, move along here, nothing to see, oh, except the Iranian economy in tatters.
It would not be sensible for Iran to carry out its sabre rattling threats because in reality the sabre rattling occurs in front of a mirror.
Logic does not always come into it though so we should never discount the actions of Iran, they remain a threat (hence pipeline building)
A much more likely threat is that to individual Gulf nations and facilities but again, this risks a wider conflagration and ignores the continuing efforts of everyone in the region to negate the strategic importance of the Straits by busily building pipelines. In fact, with sufficient investment in pipelines it is possible that the most vulnerable nation to blocking the Straits of Hormuz would be Iran itself.
Perhaps we should threaten them with closing the Straits!
So do we have a problem or not?
In the ‘doom and gloom’ corner we have an increasing dependence on gas, reducing domestic extraction capacity and two of our three principal suppliers, Russia and Qatar, have a range of complicated geopolitical and security baggage.
In the ‘oh I dunno, it’s not that bad’ corner is the fact that there is a diverse global market, the UK has some storage capacity, the security threats may well be overblown and in any case, we have a diverse supply base backed off to a resilient infrastructure.
It’s difficult to have a definitive position because the issue is continually changing.
Whether you or I think we have a problem or not or whether the threats are exaggerated or not the simple fact is energy from the Middle East has been at the core of UK (and Western) foreign policy for several decades.
With a Christmas image from the MoD, the defence rests
OK, it was taken in August, but the point remains!
Shale and Hydraulic Fracturing
Since I started Think Defence I have been itching to get the words paradigm shift into a post, it is after all, worth 10 points on the Bullshit Bingo Scorecard.
But that is exactly what the shale/fracking revolution is going to cause, if not already.
Shale gas is not new; it was first captured in 1821 in Fredonia the USA and in 1875 the UK even had a shale gas explosion in Sussex.
Shale gas is often seen as a by-product of shale oil and into the mix is also coal bed methane.
Without getting into the technical details, because I am not a mining engineer or geologist, it should be obvious that the shale revolution is going to turn many of our assumptions about energy security on their heads and produce a global power shift the likes of which have not been seen since the end of the Cold War.
There are two issues to consider with shale gas, what happens if the UK can develop its own shale gas resources and what will happen if and when everyone else does.
Rest of the World
The US is currently experiencing an energy revolution as it increasingly exploits onshore resources.
The report summarises all manner of issues but says of US shale gas;
Energy developments in the United States are profound and their effect will be felt well beyond North America
By 2020, the period in which the fruits of the 2010 SDSR will be borne, the US will likely become the largest oil producer in the world, larger than Saudi Arabia and will become a net exporter in 2030, the time period in which the NSS is framed.
The simple reality of this is that the US will no longer have to worry about its energy coming from the unstable Middle East but in the same period China and Asia will. The IEA predicts that by 2035, 90% of Middle East energy exports will be going to Asia, yes, 90%.
Instead of the Great/Little Satan having troops, aircraft and ships in the region to secure energy supplies, China will have to pick up the slack.
If that isn’t a massive geopolitical change I don’t know what is.
Of course the USA will still be impacted by global energy markets, no matter how self-sufficient they are, but to a much lesser extent. Many also think that this self-sufficiency will not last long and the US will go back to importing but I think it should be at a much lower level and if electric vehicle and renewable energy technology continues its rapid advances this may also influence the end state of US energy independence.
China is also reported to have significant shale gas reserves and this would consign the Middle East to even greater irrelevance but the areas in which China has its reserves are also the same areas that have significant water scarcity and this water scarcity will reduce China’s ability to exploit those reserves.
Biofuels and renewables will also have a huge impact on the European energy picture but Russian gas will continue to be an issue.
The report also points out that energy efficiency has the largest potential for reductions in energy consumption.
The Department of Energy and Climate Change have recently released the UK Gas Generation Strategy which has effectively signalled a ‘dash for gas’ with approximately 40 new gas fired power stations coming online between now and 2030 to replace coal and nuclear so that we can both keep the lights on and meet our emission targets. It even announced a new ‘Office for Unconventional Gas’
i.e. Shale Gas
Some have suggested that we have enough for hundreds of years and some have said the exact opposite.
The environmental movement are all over shale gas because of the perceived damage to the environment, subsistence and the temptation to indulge in an orgy of fossil fuels just when they thought they had weaned us all off it.
Many think that the economically extractable figure is much less than being reported but there are so differing views from so many experts it is hard to separate fact from hype when it comes to UK shale gas.
The geology is different in Europe than it is in the US with a reportedly greater concentration of clay which makes hydraulic fracturing much less effective so technical barriers do exist.
UK shale seems far from assured but if there is one thing that seems certain, at least to me, is that if there is an economic case, obstacles, whatever they are, will be overcome.
Whether UK shale gas can compete with cheap US LNG, Russian, Norwegian or Qatari LNG is yet to be seen but I think we should be pushing hard to find out.
Read more at a couple of excellent reports;
So What Does it All Mean
First, the predictions about shale into the 2020’s and beyond might not come to pass, they are predictions after all so there has to be some hedging, balancing risks and keeping ones options open.
But if they are true the current role of India and China is securing their own energy route security, that is, little or nothing, will have to change.
Their free ride is over.
Because the US in unlikely to completely pull away from the Middle East there might even be a situation where the US, India and China join forces.
Russia stands to lose the most. we need to manage that carefully.
Through an orgy of corruption and excess it has squandered its good fortune in the global energy market and failed to transfer the benefits to its economy and population. If shale gas and oil reduces its dominance in the European market it will have to try and reform its corrupt economy and political infrastructure in the absence of the lakes of cash to do so.
If US gas gets compressed to LNG in any of the 15 LNG terminals in the planning stage, sent over the Atlantic and distributed using the pan European pipeline infrastructure at a cost lower than Russia can supply times will indeed be interesting.
And that is before we even factor in the potential for European shale gas production and the increasing impact of renewables in Europe.
West Africa is set to become a significant gas exporter which could be an even more convenient source of supply for Europe.
If the UK wants to have its own shale revolution it needs to do much more that open a new government office and actually invest in the science.
From a defence and security perspective, the SDSR 2015, the National Security Strategy and even the Future Character of Conflict are going to have to be either re written or take into consideration the significant impacts of shale gas on the global geopolitical landscape and the role which the Uk armed forces will play in this new reality.
If SDSR 2015 and supporting processes do not pay heed to shale it will be yet another failed document.
The work on SDSR 2015 should have already started.
My question to the readers of this post is this, what do you think the SDSR 2015 should include as it recognises the two most important words in the next few years