The Potential Implications of US-Iranian Rapprochement on Caspian Energy Policy

Washington and Tehran's relationship appears to be thawing. President Rouhani has taken a conciliatory tone proclaiming:

"Nuclear weapons and other weapons of mass destruction have no place in Iran's security and defense doctrine, and contradict our fundamental religious and ethical convictions. Our national interests make it imperative that we remove any and all reasonable concerns about Iran's peaceful nuclear program."

He has also stated that he wants a resolution on Iran’s nuclear program reached within the next three to six months.

President Obama has stated:

"We are not seeking regime change, and we respect the right of the Iranian people to access peaceful nuclear energy."

At the moment we are looking at rhetoric. However, both countries have interests in rapprochement. Certainly Iran needs to see economic sanctions lifted or at least lessened. Though there are still issues to resolve, specifically Iran's nuclear program, the climate for discussions is favorable and both sides have incentives for pursuing détente. It is true that significant obstacles exist. Internal opposition in both countries must be overcome and US allies, such as Israel and Saudi Arabia, will not want to see closer ties between Washington and Tehran. Though the rapprochement is anything but guaranteed, an improvement in Iranian-American relations is a very real possibility and investigating some of the implications of détente is a worthwhile exercise. Despite the reality that the re-establishment of full diplomatic relations will likely take time, other forms of cooperation could occur more quickly. The transfer of oil and natural gas from the Caspian Sea is one such area.

In addition to the potential economic and security benefits that could result from improved relations with Iran, the Obama administration has an incentive to try and erode some of the gains that Russia has made since Putin came to power. When we look at international relations we constantly see situations in which one country tries to weaken another country whose interests run counter to theirs. Though the US and Russia are not enemies in the sense that they were during the Cold War, the reality is that the United States has little interest in allowing Moscow to regain the power that it had in Soviet times as Russian and American interests often do not align. One way to limit Moscow’s influence is by allowing countries such as Azerbaijan and Turkmenistan to export oil and natural gas through Iran.

Iran's geographic location makes it an ideal location for linking oil and natural gas pipelines from the Caspian Sea to the Persian Gulf. In fact oil companies such as Exxon lobbied for the construction of such infrastructure in the 1990s. These proposals never became a reality as US sanctions on Iran prevented such actions. Instead a variety of pipelines were built. Some, such as the Baku–Tbilisi–Ceyhan (BTC) pipeline bypass Russian Territory. The intent of such pipelines was to weaken Russia’s control over its former republics. Despite the efforts to undermine Russian interests Moscow still retained enough power to ensure that some lines, which passed through Russian territory, were also constructed. This afforded Moscow a great deal of control over the access to energy in its Near Abroad. The ability to control energy supplies in many of parts of the former Soviet Union has allowed Moscow to re-establish much of the influence that was lost in the 1990s. This reality has been augmented by the United States involvement in Afghanistan and Iraq which reduced Washington’s ability to counter Russia's re-emergence, a fact made clear when the US stood idly by when Russia invaded Georgia in 2008 as a response to the West supporting the independence of Kosovo (There were of course other reasons for the invasion). The message was loud and clear, "Western promises mean nothing." The development of a Customs Union composed of Belarus, Kazakhstan, and Russia (with Armenia scheduled to join) that for all intents of purpose is led by Russia indicate that the Near Abroad is listening.

Putin has demonstrated that he is not afraid to turn off energy supplies to countries whose actions displease Moscow. Ukraine, Belarus, and Georgia can attest to this. The problem is that pipelines do not end in these countries. Cutting off energy supplies to transit countries has impacted European customers which has caused concern over the reliability of Russian Energy. The Nabucco Pipeline (which was supposed to stretch from Turkey to Austria) was to bypass Russia thus addressing some of these concerns. However, the Romanians have pulled out of the proposed project, which casts a great deal of doubt as to its future. This gives Russia some breathing room and the opportunity to promote the South Stream Pipeline (the alternative to Nabucco). That said, the ability to access new energy sources, which would allow more leverage when dealing with Moscow, is a still a concern in many European capitals. The fact that we are seeing a Pro-Russian shift in Georgian leadership could in theory also impact the BTC pipeline, making an alternative route through Iran even more desirable. If the US and Iran improve relations, pipelines and related infrastructure, such as LNG facilities, could become a reality within the coming years.

The Implications of Korean Reunification Part 1:

This is the first part of an analysis of the changes that we could expect to see in the event of the reunification of the Korean Peninsula. Please note that I am not arguing that reunification will occur. I am merely examining the likely outcomes of reunification and their implication on regional security and the global economy. The focus of this post is on how a united Korea could offset some of the costs of reunification. In future posts I will outline:

• China’s concerns vis-à-vis Korean reunification

• Possible scenarios for regime change in North Korea

• How reunification could impact US interests and military deployment.

• How a united Korea will impact the global economy and the interests of other key powers in the Asia Pacific region.

　

Introduction:
 
The unthinkable can occur quickly. In November 2010 who would have argued that longstanding regimes in Tunisia, Egypt and Libya would fall within the next year? On June 27^th, 1914 how many people thought that a war which would set the stage for the end of European global hegemony was imminent? The list of such events goes on and on. History has shown that the impossible can quickly become reality. Though we cannot determine the specific dates and set of circumstances that lead to such changes we can:

　

• Identify troubled areas around the world.

• Project how the problems in these regions might be resolved (by force, diplomacy or other means).

• Determine the implications of these resolutions.

　

Such exercises improve our understanding of how the world is interconnected and better equip us to contend with political changes that impact the security and economic health of a region. Those who have forecasted the implications of potential shifts in international relations have a distinct advantage over those who are still trying to determine what is happening when rapid change is occurring. There are many parts of the world where the political landscape could change quickly impacting economic, political and military relations. The Korean Peninsula is one such example.

　

Korean Interests: Security concerns between North and South Korea have persisted since the end of the Korean War. In fact both countries are still technically at war. The 1953 armistice merely means that the countries observe an uneasy truce. The potential for intra-Korean hostility has long been in the interest of both countries, the wider region, and the international community. Despite the benefits that a more stable Korean Peninsula would offer, the reality is that reunification, if it were to occur, would incur significant costs as North Korea lags far behind South Korea in terms of economic development and human capital. With that in mind it is important to examine ways in which reunification could be financed.

It has been estimated that North Korea contains up to six trillion dollars worth of mineral wealth including tungsten, magnesite, graphite and zinc. All of these minerals have important industrial applications. South Korea certainly has an interest in improved access to zinc and magnesite, as it is dependent upon imports to service its demands for these minerals. Pyongyang is currently in the process of developing better ways of exporting these resources. For example, the construction of the Jilin-Rason Highspeed Railway will have a major impact on the greater integration of the North Korean economy into China. A reunited Korea would see improved infrastructure on the peninsula as well, which would further link the North to the global economy. That said, the exploitation of these minerals will take time and their value is subject to the volatility of the commodity market. Though these resources will presumably play a crucial role in funding Korean reunification and investing in the future prosperity of the country other ways of accessing capital will likely enter into discussions between Seoul and Pyongyang if they were to pursue reunification.

North Korea’s nuclear program could offer some economic advantage. It is unlikely that North Korea’s nuclear program will be abandoned as a prerequisite for Korean reunification. That said, international pressure would make it difficult for a unified Korea to become a nuclear power. After all a nuclear armed Korea and China would push the Japanese to pursue similar capabilities. Such an action would increase tensions in East Asia which are already heightened due to Japan and China’s conflicting territorial claims to the Diaoyu Islands. This reality and the need to finance reunification would limit Korea’s ability to continue with the program. However, a reunified Korean peninsula could use the nuclear program as a bargaining chip. Essentially, we are looking at a deal that says, "We will give up our nuclear weapons if you (the international community) give us significant funding in order to offset the costs of reunification." Given that Korea could only give up the program once it is likely that the demands would be substantial.

These factors and the increased investment that a unified Korean peninsula would likely see could go a long way towards covering the trillions of dollars needed for the reunification of the peninsula. Despite the economic advantages that a unified Korea would offer, its neighbors will have concerns about such a move. In the next post we will look at some of China’s concerns regarding the Korean peninsula and examine how these concerns might be changing.

　

　

　
　

　

The Geopolitical Consequences Of The Grand Ethiopian Renaissance Dam

This article was originally posted on Seeking Alpha on Oct 23, 2012.

Background: The construction of the Grand Ethiopian Renaissance Dam on the Blue Nile will likely heighten tensions in East Africa and could also lead to an increase in instability in Southwest Asia. When Egypt became preoccupied with the Arab Spring at the beginning of 2011 the East African States of the Nile River Basin took the opportunity to vocalize their claims to the water resources of the Nile. The 1959 Nile Water Agreement, a colonial era treaty, awards the vast majority of the Nile's waters to Egypt. The co-riparian countries of the Nile have always been against this treaty as the agreement was signed by foreign powers and does not protect the interests of the states in question. Despite this resentment, Egypt's relative economic and military strength and the internal stability issues in some countries made it difficult for East African countries to challenge this treaty. The current situation in Egypt has changed this.

The Nile is divided into the Blue Nile and the White Nile. Ethiopia, North Sudan, South Sudan, Egypt and Eritrea (to a minor degree) all share the water of the Blue Nile with Ethiopia's highlands providing approximately 85% of the river's water supply. In 2010 Ethiopia, Kenya, Uganda, Rwanda and Tanzania increased their efforts to divide the water resources of the River Basin more equitably and revoke Egypt's right to approve any projects on the river, such as the construction of dams, that might impact the flow of the river. Not surprisingly both Cairo opposed these measures. Given that the population in the Nile River Basin is expanding dramatically (it is expected to double by 2050) water use is on the rise, thus any cut in access to the river's resources is perceived as an existential threat. In the realm of hydropolitics violent conflicts tend to occur internally. The Nile River Basin is one the region that could see violence on an international level. Given the geography the region this could impact ships coming through the Suez Canal and stability in Southwest Asia.

For the moment lets look at the challenges that Ethiopia faces in constructing the dam, the options that Egypt has to counter Addis Ababa's actions and the concerns of North and South Sudan.

Ethiopia's Challenges: Building a large dam is neither a cheap or fast proposition. The Grand Ethiopian Renaissance Dam is supposed to be complete by 2017. That said the question of how the estimated price tag for the project of 5 Billion USD is going to be met needs to be answered. Given that the World Bank calculated Ethiopia's 2011 GDP as $31.71 billion we are looking at a project that is roughly one sixth of the countries economic output. Ethiopia started building the dam before they had secured all the necessary funding as Addis Ababa knows that it likely only as a limited time before Egypt can counter the dam's construction. It is likely that one of Cairo's key objectives will be to ensure that Addis Ababa never raises the additional funding. In theory Ethiopia could offset the cost of the project through selling hydropower but it must be noted that a theoretical deal is not a done deal. Questions remain as to how much revenue Ethiopia would be able to gain from the sale. There are also concerns as to how long it will take the reservoir of the dam to fill. There is speculation that it could take several years which would likely reduce downstream flows. In short, the faster Ethiopia wants to raise the reservoir the more down stream flows are going to be cut. That said, this dam is in the highlands which means that less water in lost to evaporation as compared to the water in Lake Nasser so it is possible that damming in Ethiopia and deconstructing the Aswan High Dam (which is contributing to soil salinization in Egypt's fertile Nile Delta) could result in more water and increased food production in the region. Despite this scenario it is unlikely that either Cairo or Khartoum would consent to policy makers in upstream countries controlling their access to the flow of the Nile.

Egypt's Concerns: Approximately 99% of Egypt's 82.54 million people lives in the Nile River Valley in an area about the size of Maryland. This population is utterly dependent upon the Nile's waters. Despite the current instability in Egypt Cairo has several strategies that it can employ:

1. Egypt could use Pakistan as a model and turn a blind eye towards parties in the region whose interests go against those of the United States and other Western powers. Such an act would likely emboldened these groups. Given Egypt's strategic location it could be used as a staging ground to cause disruptions in North Africa and Southwest Asia. Such actions could also put further strains on Egyptian - Israeli relations which would be a further issue that the United States would have to manage. This would distract Washington from other pressing issues in other parts of the world. Though this strategy would strain relations between the United States and Egypt it is unlikely that the Washington would abandoned Cairo outright. Pakistan serves as a precedent here. For these reasons the Egyptians can essentially say, "Side with us in this dispute and we will not make your life more complicated." Such a strategy could be used to ensure that Ethiopia never receives the funds necessary to complete the dam.

2. Egypt could fund rebels and opposition groups in upriver states. A precedent exists here as Egypt supported both the Eritrean People's Liberation Front and Tigrayan People's Liberation Front during the 70's and 80's. Political tensions in Kenya, Uganda and Rwanda are also not exactly closely guarded secrets. Cairo might seek to exploit these divisions if its access to water is threatened. Egypt could also offer financial assistance to some of these countries in an effort to buy their support. The success of such a policy is questionable however given how firmly the upriver states have been pressing their claim to the Nile's water. Thus, it is unlikely that any of these countries would legally limit their access to the Nile's waters for any length of time let alone in perpetuity.

3. Egypt could disrupt shipping in the Suez Canal. This is the least likely scenario as it would have a major impact on the Egyptian economy. The decline in revenues from tourism would also make this approach even more economically damaging. That said access to water is literally a life or death issue. When confronted with such choices states make decisions that would, in other circumstances, be madness. Though this is the least likely scenario it is worth keeping in mind if Egypt gets desperate.

North Sudan's Concerns: Though relations between North and South Sudan have improved of late they are still strained. Khartoum will not want another challenging issue to contend with but, as in Egypt, access to water is an issue that is too big to put on the back burner. Given North Sudan's geographic location and the fact that it has a legal claim to the water resources of the Nile under the 1959 Nile Waters Agreement it tends to side with Egypt on these issues. Thus, it is likely that Khartoum will continue this trend and support Cairo's position.

South Sudan's Concerns: As the world's newest country South Sudan has a variety of concerns. Though water is one of them the country does enjoy enough rainfall to make its agricultural sector not totally dependent on irrigation. That said water is not a resource that one signs away lightly. After all South Sudan needs water for sanitation, irrigation could aid food security and the ability to impact the flow of the Nile into North Sudan and Egypt gives Juba some leverage. For these reasons is unlikely that South Sudan would sign any agreement which would limit their access to the Nile even if such a deal provided them with much needed capital.

Conclusion: Tensions in the Nile River Basin are not going to disappear anytime soon. For the reasons outlined above the region should be monitored as it could result in a humanitarian crisis either in the form of war, chronic food insecurity, inadequate sanitation or a combination of all of the above. Given the proximity of the Horn of Africa to Southwest Asia it is not impossible that instability in Africa could be exported and in turn could impact the regional interests of the United States and put pressure on Washington to intervene in conflicts that would be costly and probably not end in a conclusive manner. Given internal issues in Egypt it is unlikely that these problems will result in a conflict within the next six to twelve months but it is possible that the situation will escalate within the coming five years. An increase in stability in Egypt will have a direct effect on how forcefully Cairo challenges the actions of Ethiopia and the other upriver Nile States.

How Exchanging Water for Access to Oil Infrastructure in the Sudans Could Benefit the Nile River Basin

Update 9/6/13: This article was originally posted on Seeking Alpha on July 7^th, 2011. Though there have been tensions between North and South Sudan, full-scale hostilities have not recommenced. It is interesting to note China’s interest in the region. Though China has recently signed deals worth about $5 billion dollar in Kenya it has not provided any funding of significance to the $25.5 billion Lamu Port-South Sudan-Ethiopia Transport (LAPSSET) plan. It appears that Beijing’s preference is the development of similar facilities in Bagamoyo, Tanzania. Though there are many possible causes for this approach it is likely that China does not want to damage relations with North Sudan. In terms of logistics it would be easy for South Sudan to ship its oil out of Lamu, Kenya. This would reduce Juba’s dependency on North Sudanese infrastructure. For this reason the development of LAPSSET goes against Khartoum’s interests. Beijing presumably recognizes that supporting the project would likely interfere with the economic and political relations between China and North Sudan.


On July 9^th South Sudan will become the world’s newest country. As oil provides the majority of Juba’s budget, the ability to sell it is essential to the country’s development. However, disputes between North Sudan and South Sudan over the division of oil revenues has caused Khartoum to publicly threaten to refuse Juba access to Northern Sudanese infrastructure, which is currently the most feasible means to get Southern Sudanese oil to the market. Despite this set back Juba has several important factors working in its advantage that could reduce the likelihood of inter state conflict:

• The other East African States have a vested interest in seeing South Sudan develop.
• Juba has the ability to reduce the supply of the White Nile’s water to North Sudan.
• Egypt, who would also be impacted, is going through a period of instability. This unrest   weakens Cairo’s capacity to prevent such an action.
• International agribusiness is buying up large swathes of the Nile River Basin to provide food for much more powerful countries complicating the distribution of water resources.

Clearly, all the countries in the region have a stake in ensuring that South Sudan develops. Effective diplomacy backed by guaranteed access to resources could result in a beneficial compromise rather than a war. Such an agreement would ideally lead to greater regional cooperation in managing the Nile which would ensure more water for all parties. Though violence is still a possibility and historical animosity in the region could derail negotiations, an agreement can still be reached if the aforementioned factors are addressed.
 

Culturally speaking, Southern Sudan is related to East African countries. Development in South Sudan could provide employment for the large pool of unemployed labor in East Africa. This group includes highly skilled professionals such as teachers and civil servants who lack opportunities at home. Therefore, countries such as Uganda and Kenya have an economic interest in seeing South Sudan thrive as remittances would benefit their economy while fewer unemployed people will reduce social instability. The challenge here is that this development needs to be funded by revenue from oil. Since South Sudan is currently dependent on North Sudanese pipelines Khartoum has the power to devastate the South Sudanese economy. Juba has the ability to counter this threat by reducing North Sudan’s water supply from the White Nile, which provides a significant portion of the Nile’s flow during the dry season. Usually, this option would not be feasible as such an action would impact Egypt’s water supply which is a threat to the country’s national security. As Egypt is far and away the most powerful country in the region and Cairo has threatened violence in the past if its access to water is impacted, Egyptian concerns are usually taken quite seriously. This reality has been weakened as the current domestic unrest has limited Cairo’s capacity to respond leading the upstream Nile States (Ethiopia, Eritrea, Kenya, Uganda, Burundi, Tanzania, Rwanda and the DRC) to challenge the 1929 and 1959 Nile Water Agreements. These treaties gave Egypt and Sudan the rights to the vast majority of the Nile’s water. Though there is no guarantee that Egyptian instability has led many of the upstream Nile Basin Counties to sign the Nile Cooperative Framework Agreement (CFA) which seeks to replace the Nile Water Agreements, the timing is suspect. This action could be perceived as an admission by East African states that they feel that Egypt is too weak to stop them from demanding more water.
 

The countries of the Nile River Basin are poor and many have problems ensuring that their populations are fed. Complicating this is the fact that agribusinesses from richer states like Saudi Arabia, South Korea and China are buying land in countries such as Ethiopia and South Sudan. Though the sale of this land provides much needed revenue it also diminishes food supplies for the local, rapidly growing, population of the region. Essentially, what is happening is that economic reality is forcing countries that can barely feed themselves to sell off their capacity to produce food to interests who are too powerful to easily doublecross. If these sales are to stop, countries such as South Sudan must develop to the point where such transactions are no longer necessary. For this reason Egypt and Sudan have an interest in allowing South Sudan to develop. Both of these countries, though poor, are far richer than their southern neighbors and, as they are in a very arid region, need to import a significant portion of their food. It is feasible that Egypt and North Sudan could strike a deal with South Sudan whereby they provide developmental assistance and access to their infrastructure in return for long term guaranteed supplies of food at subsidized prices. After all, water security is linked to food security which is a driving reason why Cairo and Khartoum are so intent on preserving their access to the Nile’s waters. If another country could grow food more effectively and sell it to Egypt and North Sudan at a guaranteed price this could go a long way to appeasing the two countries. Since North Sudan would be a direct beneficiary of such a deal, access to North Sudanese roads and Red Sea ports should be relatively easy to negotiate.
 

The Nile River Basin countries face numerous challenges. Formal peace between states does not equate true peace as inter-ethnic violence due to conflicting interests and historical animosity still is possible. The climate of the region means only certain areas have a sufficient amount of arable land. The populations are rising dramatically while standards of living are not. There is a strong probability that the Nuba in Kordofan could face persecution comparable to Darfur. And, social factors can lead nations to act in a manner contrary to their rational political and economic interests. Despite these challenges, finding a deal which guarantees Juba the right to use Northern Sudanese infrastructure in return for food supplies for North Sudan and Egypt could benefit everyone. South Sudan could develop without being sabotaged by its northern neighbors. Egypt and North Sudan’s food concerns would be addressed. And, the East African States would benefit by securing employment for their large pool of unemployed labor and collecting remittances. Such a deal will be difficult to negotiate but when all parties have interests that can be met, an agreement can be reached. After all, a war is far more costly.

　

Signs of a Construction Boom in Southern Africa

Update 9/4/13: This article was originally posted on Seeking Alpha in January of 2011. Since then the Lobito Refinery (now called SonaRef) is expected to start producing 120,000 barrels per day (b/d) in the first quarter of 2017 and increase production up to 200,000 b/d by the third quarter of 2018. The Angolan state owned Oil Company SONANGOL is the majority owner. SONANGOL has stated that, "This project origin was the need to aggregate value to the acidic heavy crude and from it produce high quality transportation fuel. As well as to reduce import of oil products like gasoline and diesel. The other two purposes of SonaRef are to control 50% of regional market and to increase exportation to international markets." This indicates that a significant amount of petroleum products are earmarked for the regional development of Southern Africa.

A construction boom, far larger and more sustained than the work done during the build up to the World Cup, could be coming to Southern Africa. A major indicator of this boom will be if South Africa makes a significant investment in the oil refinery in Lobito Angola. The reason we should be paying attention to this deal is because the bulk of the refined oil is supposedly going to be reserved for developing Southern Africa, rather than for foreign markets. China was initially planning to fund the project, but pulled out when Angola refused to guarantee that 80% of the refined oil would be reserved exclusively for foreign markets. If it is true that the bulk of the oil is reserved for the region, this deal could be viewed as a first step in a process of shifting from an economy relying solely on primary commodities to one which has a manufacturing base as well. After all, a reliable supply of oil is essential for economic development in Southern Africa. If South Africa partners with Angola on this project it will be more than a business deal. It will be a concrete effort to fundamentally change the regional economy.

Angola needs South Africa, not just as an investor, but also as a distributor. Despite the fact that Lobito is an excellent port, much of Angola’s infrastructure is in poor condition, thus the ability to ship oil to South Africa, which has much better infrastructure both internally and linking it to other countries in Southern Africa, is important. As Southern Africa has a temperate to arid climate there is less strain on infrastructure than one would encounter in tropical environments. The region also lacks barriers, such as the Sahara Desert and the Congo Rainforest, which facilitates construction (admittedly the Kalahari is there but it is far more manageable than its Northern cousin). Expanding roads and railways in the region will create numerous opportunities for engineering and construction firms in the region.

Though the estimated 9 billion dollar price tag is significant the 200,000 barrels per day (BPD) of refined oil that Lobito is projected to produce dwarfs the 40,000 BPD (rough estimate) that Angola’s only mainland refinery currently produces. That oil would be instrumental in stimulating development in the region, however South Africa will not fund such a project unless it is sure that it will get a significant return on investment. Politically and economically speaking, there are factors which indicate that this is indeed the case. Building infrastructure will employ the estimated 54,000 construction workers who lost their jobs after the World Cup and create new manufacturing and transport jobs. As unemployment is one of the major problems in South Africa, President Zuma will likely be inclined to boost his political capital by creating jobs. If South Africa is going to make a significant investment in the refinery, Pretoria will want to see South African companies awarded a significant portion of the contracts. A likely winner is the engineering contractor Murray & Roberts. Internationally, they are best known for helping build the Burj Al Arab Dubai and the Gautrain around Johannesburg. Though the company has taken a hit recently due to the drop in work after the World Cup’s successful conclusion, problems procuring land for Gautrain and from difficulties obtaining payment from clients in Dubai, the company is still well placed to take advantage of the growing interest of investment in Southern Africa. Suffice it to say, the Lobito refinery could be a major indicator of things to come.