Intratregional Energy Cooperation
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Middle East Institute May 2016 Regional Cooperation Series Intra-Regional Energy Cooperation Unlocking the Middle East’s Potential Jean-François Seznec MEI Policy Paper 2016-3 This paper was written with the help and support of Samer Mosis, Graduate Student at Johns Hopkins School of Advanced International Studies. © 2016 The Middle East Institute The Middle East Institute 1761 N Street NW Washington, D.C. 20036 Follow MEI: @MiddleEastInst /MiddleEastInstitute /user/middleastinstitute MEI Policy Paper 2016-3 Intra-Regional Energy Cooperation Unlocking the Middle East’s Potential Jean-François Seznec Middle East Institute Regional Cooperation Series Abbreviations A.G.P. Arab Gas Pipeline B.A.S.F. Badische Anilin and Soda-Fabrik DAP diammonium phosphate G.C.C. Gulf Cooperation Council I.P.S.A. Iraqi Pipeline in Saudi Arabia J.V. joint venture MENA Middle East and North Africa L.N.G. liquid natural gas N.G. natural gas O.C.P. Office Chérifien des Phosphates SABIC Saudi Arabia Basic Industries Corporation U.A.E. United Arab Emirates U.N. United Nations Contents 1 Introduction 2 Historical Intra-Regional Cooperation 4 Present Intra-Regional Cooperation 6 Inter-Regional Commerce and its Domestic Ramifications 11 Potential for Future Cooperation 17 Conclusion 19 Endnotes Summary iven the vast quantity of energy resources in the Middle East and North GAfrica, the level of wealth distributed among most in the region is surprisingly low. The region has failed to harness its natural resource wealth to reach its full potential. Instead of cooperating to enhance the economic and industrial prowess of the region, the majority of energy-rich states have pursued a go-it-alone approach in developing their energy-export capabilities, and have mostly targeted markets outside the region. Energy expert Jean-François Seznec argues that intra-regional energy cooperation is a sorely missing aspect in the Middle East and North Africa, costing the region in terms of its economic potential. Identifying partners within the region for the trade and production of oil, natural gas, minerals, and industrial goods has the potential to reduce production costs and maximize benefits for all countries in the Middle East. Key Findings There has been very little regional cooperation on mutually beneficial energy relations, even in the richest areas of the Middle East Many attempts at energy cooperation between MENA countries have been derailed by geopolitical rivalries Remittances and other benefits of economic growth in the Gulf states have been too limited to make a significant impact on the welfare of other countries in the region There exist ample opportunities for mutually beneficial energy cooperation between Morocco and Algeria, Qatar and Saudi Arabia, and Iran and the G.C.C. that, if realized, could result in significant economic benefits for all parties Energy cooperation presents an opportunity for the countries of the Middle East to forge new partnerships and take steps toward resolving the historical differences currently inhibiting peace and prosperity Introduction or the past few generations, it has been hard to blame those pessimistic about Fthe future of the Middle East. Certainly, in early 2016, the region appears to have fallen into a state of permanent decay. On the other hand, it would be unfair to forget some of the achievements of the past 40 years, many of which have been based on the region’s natural comparative advantage of plentiful and low- cost energy. Energy in the Middle East does not consist merely of the extraction of crude oil or natural gas (N.G.), but also includes the development of large energy-based industries such as chemicals, fertilizers, cement, and metals. However, when it comes to mutually beneficial energy relations, there has been very little regional cooperation, even in the richest areas of the Middle East. Of course, the mere production of crude oil and N.G. does not necessitate much local exchange, but it should have at least encouraged substantial trade between, for example, Algeria and Morocco, Qatar and Saudi Arabia, Iraq and Kuwait, or Oman and the United Arab Emirates. Until now, however, the majority of relations between energy consumers and producers has been inter-regional in character as opposed to intra-regional, meaning it has occurred “This lack of energy and predominantly between industrial commerce between the Middle East’s energy producers and Middle Eastern countries is the industrial world’s consumers, including mostly due to political reasons.” those in Europe, North America, and the Far East. This lack of energy and industrial commerce between Middle Eastern countries is mostly due to political reasons. Countries across the Middle East and North Africa (MENA) have not developed relations based on trust, let alone resolved age-old conflicts and rivalries. Essentially, the lack of energy cooperation has been due to a lack of good governance. Energy Cooperation 1 Naturally, if this trend of little cooperation and subpar governance continues, we will see more of the same. MENA countries, and in particular those of the Gulf, will compete not only among themselves, but also with other world producers such as Russia and now the United States, for their share in global crude oil and N.G. markets. Better-endowed countries with a vision to develop industrial downstream ventures, in particular the U.A.E., Qatar, and Saudi Arabia, will move away from their dependence on energy sales and start investing their resources into downstream, value-added products, most notably petrochemicals and fertilizers.1 However, without intra-MENA cooperation, these industries will find themselves in a familiar predicament, competing with each other for limited markets. Indeed, this is “The majority of relations between already occurring. energy consumers and producers Large Saudi chemical, fertilizer, has been inter-regional in character and aluminum production is as opposed to intra-regional.” competing with similar products from Kuwait, Morocco, Algeria, and Qatar, in markets across China, the United States, Europe, and even India. This condition of counterproductive competition does not have to continue. With some global vision by the region’s leaders, we could see cooperative arrangements between neighbors that would minimize their respective production costs, maximize their production levels, and allow all to compete with the world’s major producers of advanced goods. Historical Intra-Regional Cooperation Admittedly, there have been myriad attempts by regional powers to cooperate on energy issues. Yet, as history shows, many of these have been wrecked by political differences and regional conflict. Decades ago, Iraq and Syria started cooperating on a mutually beneficial pipeline connecting the Kirkuk oil fields in northern Iraq to the Syrian port terminal of Banias on the Mediterranean. 2 Seznec Brought online in 1952, the Kirkuk-Banias pipeline marked a significant point of evolution for Iraq’s oil industry. It also provided Syria with preferentially priced oil for domestic use, thus allowing Syria’s own oil production to be exported at advantageous market prices. The arrangement, however, would prove to be short-lived. In 1956, when the pipeline was still under Anglo-French ownership, Syrian forces attacked and badly damaged it in response to the British and French invasion of the Sinai Peninsula, as well as Iraq’s acceptance into the Baghdad Pact. While it would come back online shortly thereafter, operations were halted once again in 1972 over tariff disputes, effectively putting the pipeline out of use until 2001. It was then that Saddam Hussein used the pipeline to bypass export- crippling U.N. sanctions, a practice that ended when the pipeline became a target “This condition of of U.S. airstrikes during the counterproductive competition 2003 invasion.2 It was in response to the does not have to continue.” 1970s and 1980s Iraq-Syria tariff disputes, as well as concerns over export security arising from the Iran-Iraq war, that Iraq’s Hussein initiated a concerted effort to diversify his country’s export routes. One such initiative was the construction of a pipeline through Saudi Arabia to the Red Sea port of al-Muajjiz near Yanbu, known as the I.P.S.A. Ironically, the Saudis shut down this attempt at export security in retaliation for Iraq’s 1990 invasion of Kuwait, once again demonstrating how geopolitical rivalries supersede economic cooperation. The I.P.S.A. has been upgraded and operated by Saudi Arabia for domestic use ever since.3 Similarly, the Trans-Arabian Pipeline (known as the Tapline), which had transported oil from Saudi Arabia through Lebanon and Jordan to the Mediterranean Sea and provided revenue for Jordan, Syria, Lebanon, and Saudi since 1950, was also closed by Saudi Arabia in response to Jordan’s support for Iraq after the latter’s invasion of Kuwait.4 Admittedly, the Tapline had increasingly grown out of favor starting in 1975 partially due to the growth of supertanker trade, but also due to transit fee disputes emanating from Syria and Lebanon. Energy Cooperation 3 Present Intra-Regional Cooperation Presently, upon this checkered background of cooperation exist a number of intra-regional energy projects in various stages of success and failure. The prime example of success among these is the Dolphin Gas Project. Conceived in 1999 and becoming operational in 2007, the project involves the transportation of natural gas from Qatar’s North Field in Ras Laffan to the U.A.E. and Oman. Costing over $7 billion and holding an export capacity of 3.2 billion standard cubic feet per day, the Dolphin Pipeline is the Gulf’s first cross-border gas project. However, the project was delayed for several years by Saudi Arabia’s steadfast opposition. The Saudi objections were based on the fact that the pipeline would traverse Saudi territorial waters, a claim that the U.A.E. never accepted.