Geopolitics & Oil Dilpomacy

The Oil World A Geopolitical Warfield

EXECUTIVE SUMMARY In this project report, we have tried to study the oil world from the geopolitical viewpoint. All the major events, wars, political affairs have been covered in this report under four main regions namely the Middle East, the Caspian region, Africa and South America. The role of US in the oil geopolitics has been covered as a separate chapter. In the Middle east, all the wars with their impact analysis have been described. We have also tried to explain the internal as well as external conflicts of the Middle East region. In internal conflicts, the Shiyaa-Sunni conflict has been emphasized, keeping in mind its strategic impact. In external conflicts, the Arab-Israel conflict, which played an important role in the Middle East relationship with the western countries has been covered in detail. Also the relation between the Middles east countries with the US, China, Japan and among themselves has been covered. Moving on the Caspian region, the area being a hub of pipelines and political instability, the various clashes in the region have been included like the Nagorno-Karabakh conflict, the Chechen nationalism, the Georgian-Abhkhaz conflict have impacted the pipelines and the routes taken by the pipelines are assessed. The impact of the internal conflicts affect the oil supply, and thereby play an important role in shaping the activities that surround the production and transportation of oil from within these countries. In Africa, the importance of African oil, with special emphasis on its dependency factor is studied. The impact of oil shocks on Africa, the US politics in Africa as well as the internal conflicts of Africa has been covered. The south American region plays an important role in the western hemisphere. The economic impact of rising state control is discussed. The internal and external conflicts of south America have been studied. All the chapters have been ended with conclusion capturing the learning from the study of the respective regions. Supportive, tables, charts, figures have also been provided for a better understanding of the facts. Overall, our effort has been to give a holistic view of the geopolitical warfield.

2 | Th e Oi l Worl d – A Ge opol i ti cal Warfie l d

Table of Contents

Title

Page no.

1. INTRODUCTION

8

2. THE MIDDLE EAST

9

2.1 Importance Of Middle East Oil

10

2.2 Some Important Events of The Middle East

13

2.2.1 Suez Crisis, 1956

13

2.2.2 OPEC Formation, 1960

15

2.2.3 End of Bretton Woods, 1971

16

2.2.4 Yom Kippur War, 1973

16

2.2.5 Arab Oil Embargo, 1973

17

2.2.6 The 1973 Energy Crisis

17

2.2.7 The Irani Revolution, 1977

18

2.2.8 The 1979 Oil Crisis

20

2.2.9 Iran-Iraq War, 1980

20

2.2.10 The Oil Glut, 1980

22

2.2.11 Iran-Kuwait War, 1990

23

2.2.12 Gulf War, 1990

28

2.2.13 US Invasion of Iraq, 2003

30

2.3 Summary of the Events and its Impact

32

2.4 Internal Conflicts of Middle East

34

2.4.1 The Shia-Sunni Battle for Oil

34

2.4.2 Post Saddam Era

37

2.4.3 The War in Lebanon

39

3 | Th e Oi l Worl d – A Ge opol i ti cal Warfie l d

2.5 External Conflicts of Middle East

40

2.5.1 The Arab Israel Conflict

40

2.5.2 Saudi Arabia Relation With US

47

2.5.3 Iran US Relationship

49

2.5.4 International Pressure on Iran

51

2.5.5 Japan’s Struggle

52

2.5.6 Britain Kuwait Relationship

54

2.5.7 US Kuwait Relationship

55

2.5.8 US UAE Relationship

57

2.5.9 The Sino Saudi Relationship

57

2.6 The Choke Points Important for Middle East

63

2.6.1 The Strait of Hormuz

64

2.6.2 The Strait of Malacca

66

2.6.3 The Suez Canal

68

2.6.4 The Bab-el-Mandeb

70

2.7 CONCLUSION

72

3. CASPIAN REGION

75

3.1 Introduction

76

3.1.1

The Caspian Sea

76

3.1.2

History of Caspian

77

3.1.3 Distribution of Caspian Reserves

78

3.2 Russia

78

3.2.1

78

Introduction

3.2.2 Oil Reserves and Oil Reserves and Statistics

79

4 | Th e Oi l Worl d – A Ge opol i ti cal Warfie l d

3.3 Turkmenistan

80

3.3.1

Introduction

80

3.3.2

Statistics

80

3.3.3

Country Affairs View

81

3.4 Azerbaijan

82

3.4.1

Introduction

82

3.4.2

Statistics

82

3.4.3

Internal and Political Affairs

84

3.5 Kazhakhastan

86

3.6 Pipelines

88

2.6.1Baku-Tiblisi-Ceyhen Crude Oil

88

2.6.2Caspian Consortium Pipelines

89

2.6.3 Russian Pipelines

89

3.7 Detailed Conflicts in the Region

93

3.8 CONCLUSION

111

4. AFRICA

114

4.1 The Importance Of African Oil

115

4.2 African Economy’s Dependency on Oil

118

4.3 Impact Of Oil Shocks on African Oil

120

4.4 The US Politics In Africa

122

4.5 Internal Conflicts

124

4.6 CONCLUSION

125

5. SOUTH AMERICA

127

5 | Th e Oi l Worl d – A Ge opol i ti cal Warfie l d

5.1 Importance of South American Oil

6.

127

5.1.1 Energy Trends in the Hemisphere

127

5.1.2 The Rise in State Control

128

5.1.3 The Economic Impact of Rising State Control

128

5.2

Rise of Oil in Venezuela

130

5.3

Rise of Oil in Colombia & Ecuador

134

5.4

Rise if Oil in Brazil

136

5.5

Venezuela – Colombia Conflict

137

5.6

Venezuela-US Conflict

138

5.7 CONCLUSION

141

ROLE OF US IN OIL GEOPOLITICS

143

6.1

Introduction

143

6.2

Role in Middle East

144

6.3

Role in Africa

148

6.4

Role in Caspian Region

149

6.5

Role in South America

151

6.6

Potential of Geopolitical friction over Arctic energy

153

6.7

CONCLUSION

155

List of Exhibit 1. Middle East Statistics

156

6 | Th e Oi l Worl d – A Ge opol i ti cal Warfie l d

2. US Troops in Middle East

157

3. World Energy Statistics

157

4. Caspian Region Statistics

158

5. Caspian Region pipelines

158

References

159

1 INTRODUCTION

7 | Th e Oi l Worl d – A Ge opol i ti cal Warfie l d

No other element has shaped the history of the past one hundred years so much as the fight to secure and control the world’s reserves of petroleum. The political and the economic power around petroleum have been shaped by the control of various influences, more so by those of the English and the United States’ governments. Indeed, the world is running out of cheap oil. Like the production of most mineral commodities, the production of oil follows a bell curve. The top of the bell coincides with the point at which 50% of the known reserves of oil have been depleted. Oil fuels the industrial development of a nation, moreover, even the defense system of a country. As far as the facts go, a majority of the oil producing nations are politically unstable or at serious odds with the US. Many of such producers are members of the Organisation of Petroleum Exporting Countries (OPEC). Looking at statistics, OPEC countries produce 40% of the world’s oil and hold 80% of the proven oil reserves out of which, 85% are in the Middle East. Thus, the oil producing nations can be clubbed into two categories, those that suppress and those who can be suppressed. Those that are strong exert their policies, thereby giving rise to oil diplomacy which becomes effective as it concerns the indispensable unit, crude oil. Those who can be suppressed are targeted by influential players, mainly those who import oil, in order to access cheaper ways to import oil or to gain a strategic control over the reserves. Thereby, it gives rise to geopolitics surrounding the supply of crude in the world.

2.THE MIDDLE EAST 8 | Th e Oi l Worl d – A Ge opol i ti cal Warfie l d

2.1 IMPORTANCE OF MIDDLE EAST OIL 9 | Th e Oi l Worl d – A Ge opol i ti cal Warfie l d

Oil was first discovered in the U.S. in 1859. At the beginning of the 20th century it supplied only 4% of the world’s energy; decades later it became the most important energy source. Today oil supplies about 40% of the world’s energy and 96% of its transportation energy. Since the shift from coal to oil, the world has consumed over 875 billion barrels. Another 1,000 billion barrels of proved and probable reserves remain to be recovered. From now to 2020, world oil consumption will rise by about 60%. Transportation will be the fastest growing oil-consuming sector. By 2025, the number of cars will increase to well over 1.25 billion from approximately 700 million today. Global consumption of gasoline could double. Proved oil reserves are those quantities of oil that geological information indicates can be with reasonable certainty recovered in the future from known reservoirs. Of the trillion barrels currently estimated, 6% are in North America, 9% in Central and Latin America, 2% in Europe, 4% in Asia Pacific, 7% in Africa, 6% in the Former Soviet Union. Today, 66% of global oil reserves are in the hands of Middle Eastern regimes: Saudi Arabia (25%), Iraq (11%), Iran (8%), UAE (9%), Kuwait (9%), and Libya (2%). "It's important for Americans to remember that America imports more than 50 percent of its oil -more than 10 million barrels a day. And the figure is rising. This dependence on foreign oil is a matter of national security. To put it bluntly, sometimes we rely upon energy sources from countries that don't particularly like us." - George W. Bush, February 25, 2002 Following 9/11 and in light of the rise of radical Islam many have called for reduction of the dependency on Middle East oil. To offset the growing influence of Middle East producers, nonOPEC countries in Africa and Former Soviet Union have increased their production considerably. Many have even suggested that Russia could take on OPEC and help shift global oil supply away from the Middle East. The Washington Post even claimed that Moscow is "on its way to becoming the next Houston—the global capital of energy." And indeed, Russia’s oil production increased to the point that it became the second largest exporter behind Saudi Arabia. But Russia’s prospects of being a key player in the oil market in the long run are dim. Russia ranks seventh in proven oil reserves, holding only 5%. Its oil production peaked around 1999 and its reserves have been steadily declining since. That means that at current production rates, Russia will be out of the running by 2020. 10 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Washington's search for reliable oil suppliers outside the Middle East has brought about an oil boom in many African countries like Angola, Nigeria, Guinea and Chad. But like Russia, Africa is hardly a bonanza. Its total reserves amount to 7% and its largest producer, Nigeria, will peak by the end of the decade. Africa will be out of the running by 2025. Because reserves in non-Middle East countries are being depleted more rapidly than those of Middle East producers, their overall reserves-to-production ratio -- an indicator of how long proven reserves would last at current production rates -- is much lower (about 15 years for nonMiddle East and 80 years for Middle East producers). If production continues at today's rate, many of the largest producers in 2002, such as Russia, Mexico, U.S., Norway, China and Brazil will cease to be relevant players in the oil market in less than two decades. At that point, the Middle East will be the only major reservoir of abundant crude oil. In fact, Middle Eastern producers will have a much bigger piece of the pie than ever before. Based on projection of 2002 production levels, BP Statistical Review of World Energy projecting 2001 production levels, by 2020 83% of global oil reserves will be controlled by Middle Eastern regimes. The energy security and national security concerns that stem from reliance on a single energy resource that is unevenly distributed throughout the world will be intensified as demand for oil grows. The result will probably be: A handful of Middle East suppliers will regain the influence they had in the 1970s and once again be able to dictate the terms on world oil markets and manipulate oil prices and world politics. Middle Eastern producers will continue to use their oil revenues to increase their military expenditures, fuel an arms race and undermine regional stability. Corrupt, oppressive regimes will continue to use oil revenues as a means to maintain their power.

11 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Source: BP statistical review of world energy Wealth generated by oil rich Middle Eastern countries will continue to flow into terrorist organizations and organizations promoting radical Islam. The U.S. will need to keep increasing American military presence in the region to ensure their access to the remaining oil. This will mean further U.S. embroilment in Middle East conflicts, more anti-American sentiment, and a deepening rift between the West and the Islamic world. Tension is building between the U.S. and China due to growing Chinese intervention in the Middle East to ensure its own access to oil and Chinese arming of Middle Eastern countries hostile to the U.S. and its allies. Further, drain on economic resources caused by imports of expensive oil. Such an international system is not sustainable. We will see in the subsequent chapters how the oil has changed the world into a geopolitical warfield.

2.2 SOME IMPORTANT EVENTS OF THE MIDDLE EAST 12 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

2.2.1

Suez Crisis, 1956

The Suez Crisis of 1956, in which the Egyptian Government seized control of the Suez Canal from the British and French owned company that managed it, had important consequences for U.S. relations with both Middle Eastern countries and European allies. On July 26, 1956, Egyptian President Gamal Abdel Nasser nationalized the British and French owned Suez Canal Company that operated the Suez Canal. Nasser's decision threatened British and French stock holdings in the Company and, as the Canal afforded Western countries access to Middle Eastern oil, also threatened to cut off Europe's oil supply. The ensuing Suez Crisis threatened regional stability and challenged the U.S. relationship with two primary Cold War allies, Britain and France. Nasser nationalized the canal after the United States and Britain reneged on a previous agreement to finance the Aswan Dam project. The Aswan Dam was designed to control the Nile's flood waters and provide electricity and water to the Egyptian populace and, as such, was a symbol of Egypt's modernization. The United States and Britain withdrew their financing for the Aswan Dam after Nasser made several moves that appeared friendly to the communist block, including an arms deal with Czechoslovkaia and recognition of the Chinese Government in Beijing. Without support from the United States and Britain, Nasser needed the revenue generated from tolls collected from ships using the Suez Canal to subsidize the cost of building the dam. Although the United State was concerned about Nasser's nationalization of the canal, it sought a diplomatic solution to the problem. Britain and France, however, viewed the situation as a threat to their national interests. Accordingly, they sought a military solution that involved Israel. They secretly contacted the Israeli Government and proposed a joint military operation in which Israel would invade the Sinai and march toward the Suez Canal zone after which Britain and France would issue a warning to both Egypt and Israel to stay away from the Canal. Britain and France would then land paratroopers in the Canal Zone on the pretense of protecting it. Israel willingly agreed to this scenario since it gave Israel the opportunity to gain control of the Gaza Strip and Sinai Peninsula, end the Egyptian blockade of the Straits of Tiran, and retaliate against Egypt 13 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

over its support for Palestinian commando raids on Israel's western border during the previous two years. On October 29, 1956, Israeli forces moved across the border, defeated the Egyptian army in the Sinai, captured Sharm- al-Sheikh and thereby guaranteed Israeli strategic control over the Straits of Tiran. Britain and France issued their ultimatum and landed troops, effectively carrying out the agreed upon operation. However, the United States and the Soviet Union responded to events by demanding a cease-fire. In a resolution before the United Nations, the United States also called for the evacuation of Israeli, French, and British forces from Egypt under the supervision of a special United Nations force. This force arrived in Egypt in mid-November. By December 22, the last British and French troops had withdrawn from Egyptian territory, but Israel kept its troops in Gaza until March 19, 1957, when the United States finally compelled the Israeli Government to withdraw its troops. The Suez conflict fundamentally altered the regional balance of power. It was a military defeat for Egypt, but Nasser's status grew in the Arab world as the defender of Arab nationalism. Israel withdrew from Egyptian territory gained in the fighting but regained access to the Straits of Tiran, while the United Nations adopted a larger role maintaining a peacekeeping force in the Sinai. Britain and France lost influence in the region and suffered humiliation after the withdrawal of their troops from the Canal Zone. Moreover, relations between the United States and its British and French allies temporarily deteriorated in the months following the war. In contrast, Soviet influence in the Middle East grew, especially in Syria where the Soviets began to supply arms and advisers to the Syrian military. The United States had played a moderating role, and in so doing had improved its relations with Egypt, but the fundamental disputes between Israel and its neighbors remained unresolved. When these disagreements resurfaced, the United States would again be drawn into the conflicts.

2.2.2

OPEC Formation, 1960

14 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

The governments of Saudi Arabia and Venezuela, in accordance with the objectives of the Arab Petroleum Congress of 1959 (1378/79 AH), issued a declaration on May 13, 1960, recommending that petroleum exporting countries pursue a common policy in order to protect their rightful interests. The declaration also advanced the idea of establishing an organization to achieve this end. Nonetheless, the countries concerned did not take immediate action. It was the sudden and arbitrary decrease in petroleum prices for the second time in 1960 (1379/80 AH) that made them feel the danger which encouraged them to unite in a common front. Consequently, the major petroleum producing countries declared, after the Baghdad Conference of 10-14th August, 1960 (at which the Kingdom of Saudi Arabia, Republic of Iraq, Iran, Venezuela and Kuwait were represented), their intention to establish the organization which became known as the Organization of Petroleum Exporting Countries (OPEC). One of the major decisions of that meeting declared a cardinal objective of the organization to be the standardization of petroleum prices among its members and agreement on the best methods of protecting its individual and collective interests. As a result, OPEC was founded in September 1960.

2.2.3 End of Bretton Woods, 1971

On August 15, 1971, the United States pulled out of the Bretton Woods Accord taking the US off the Gold Exchange Standard (whereby only the value of the US dollar had been pegged to the price of gold and all other currencies were pegged to the US dollar), allowing the dollar to "float". Shortly thereafter, Britain followed, floating the pound sterling. The industrialized nations followed suit with their respective currencies. In anticipation of the fluctuation of currencies as they stabilized against each other, the industrialized nations also increased their reserves (printing money) in amounts far greater than ever before. The result was a depreciation of the value of the US dollar, as well as the other currencies of the world. Because oil was priced 15 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

in dollars, this meant that oil producers were receiving less real income for the same price. The OPEC cartel issued a joint communiqué stating that forthwith they would price a barrel of oil against gold. This led to the "Oil Shock" of the mid-seventies. In the years after 1971, OPEC was slow to readjust prices to reflect this depreciation. From 1947-1967 the price of oil in U.S. dollars had risen by less than two percent per year. Until the Oil Shock, the price remained fairly stable versus other currencies and commodities, but suddenly became extremely volatile thereafter. OPEC ministers had not developed the institutional mechanisms to update prices rapidly enough to keep up with changing market conditions, so their real incomes lagged for several years. The substantial price increases of 1973-74 largely caught up their incomes to Bretton Woods levels in terms of other commodities such as gold.

2.2.4 Yom Kippur War, 1973

On October 6, 1973, Syria and Egypt launched a military attack on Israel starting the Yom Kippur War. The latest Arab-Israeli conflict triggered a crisis already in the making. The West could not continue to increase its energy use 5% annually, pay low oil prices, yet sell inflationpriced goods to the petroleum producers in the Third World. This was stressed by the Shah of Iran, whose nation was the world's second-largest exporter of oil and the closest ally of the United States in the Middle East at the time. "Of course [the world price of oil] is going to rise," the Shah told the New York Times in 1973. "Certainly! And how...; You [Western nations] increased the price of wheat you sell us by 300%, and the same for sugar and cement...; You buy our crude oil and sell it back to us, refined as petrochemicals, at a hundred times the price you've paid to us...; It's only fair that, from now on, you should pay more for oil. Let's say ten times more." On October 17, 1973, Arab states placed an oil embargo on the United States as a punishment for its decision to resupply Israel during the Yom Kippur War (in part because of operations such as Operation Nickel Grass). The embargo was quickly extended to Western Europe and Japan.

16 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

2.2.5

Arab Oil Embargo, 1973

On October 16, 1973, OPEC cut production of oil and placed an embargo on shipments of crude oil to the West, with the United States and the Netherlands specifically targeted. The Netherlands had supplied arms to Israel and allowed the Americans to use Dutch airfields for supply runs to Israel. Also, price increases were imposed. Since oil demand falls little when the price rises, prices had to rise dramatically to reduce demand to the new lower level of supply. Anticipating this, the market price for oil immediately rose substantially, from $3 a barrel to $12. A world financial system already under pressure from the breakdown of the Bretton Woods agreement was set on a path of a series of recessions and high inflation that persisted until the early 1980s, and elevated oil prices persisted until 1986. However, the effects of the Arab Oil Embargo are clear—it effectively doubled the real price of crude oil at the refinery level, and caused massive shortages in the U.S. Over the long term, the oil embargo changed the nature of policy in the West towards increased exploration, energy conservation, and more restrictive monetary policy to better fight inflation.

2.2.6 The 1973 Energy Crisis:

The 1973 oil crisis started on October 15, 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC (consisting of the Arab members of OPEC plus Egypt and Syria) proclaimed an oil embargo "in response to the U.S. decision to re-supply the Israeli military during the Yom Kippur war." OAPEC declared it would no longer ship oil to the United States and other countries if they supported Israel in the conflict. Independently, the OPEC members agreed to use their leverage over the world price-setting mechanism for oil in order to stabilize their real incomes by raising world oil prices. This action followed several years of steep income declines after the end of Bretton Woods, as well as the recent failure of negotiations with the "Seven Sisters" earlier in the month. For the most part, industrialized economies relied on crude oil and OPEC was their predominant supplier. Because of the dramatic inflation experienced during this period, a popular economic theory has been that these price increases were to blame, as being suppressive of economic 17 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

activity. However, the causality stated by this theory is often questioned. The targeted countries responded with a wide variety of new, and mostly permanent, initiatives to contain their further dependency. The 1973 "oil price shock", along with the 1973–1974 stock market crash, have been regarded as the first event since the Great Depression to have a persistent economic effect.

2.2.7 The Irani Revolution 1977

When the Shah relaxed censorship laws in 1977, Iran erupted into a series of demonstrations and dissents. The writings of Ayatollah Khumayni began to circulate widely, and the amount of protest material in general began to flood the country. All through the 1960's and 1970's, Iranians were deeply discontent with the dictatorship of the Shah, but the flood of protest material fanned this discontent into a raging passion. People demanded more reforms, more human rights, more freedom, and more democracy. There were two distinct revolutionary movements. The first was the religious movement headed by the ulama ; this movement demanded the return to a society based on the Shari'ah and ulama administration. The second movement was a liberal movement that wanted Westernization, but also demanded greater democracy, economic freedom, and human rights. As the revolution proceeded, these two groups gradually merged to form a unified front. The spark that erupted into revolution was a protest in Qumm on January 9, 1978. A group of students protested the visit of Jimmy Carter, the American President, and the governments attacks on Ayatollah Khumayni. In particular, they demanded that Khumayni be allowed to return to the country. The police, in an ill-conceived moment, opened fire on the students and killed seventy. This set in motion an inescapable pattern that steadily destabilized the Shah's government and reduced its legitimacy in the eyes of both Iranians and the world. In Shi'a tradition, martyrdom requires a commemoration of the martyrs forty days after they have been killed. So forty days after the massacre at Qumm, Iranians took to the streets to commemorate the dead students and, by extension, to protest the government. Again, Iranian police opened fire on the crowd. Over one hundred people were killed in Tabriz on February 18, the fortieth day after the Qumm

18 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

massacre. On March 30, forty days after the massacre at Tabriz, over one hundred demonstrators were killed in Yazd. And so on. By August, demonstrations had become constant all over Iran. The Shah was losing control. He appointed a new prime minister and made an attempt to allow demonstrations to proceed without violence. But on September 8, a day Iranian historians call "Black Friday," Iranian troops fired on a Tehran demonstration and killed several hundred people. On September 9, the Shah declared martial law and imprisoned as many opposition leaders as he could lay hands on. Because of this, the revolutionaries changed tactics from demonstrations to strikes. Beginning in October, a long series of strikes, including oil-workers, began to cripple the nation. Even though the Shah convinced Iraq to evict Khumayni, when Khumayni moved to France he became more powerful than ever. He suddenly gained an international audience, and the French and British in particular sympathized with his dissent against the Shah. He spoke regularly to Iran through telephones, and these telephone "speeches" were recorded and distributed all throughout Iran. The Shah realized that he would have to let Khumayni return to the country, but Khumayni refused. Since the Shah's government was illegitimate, Khumayni declared that he would never step foot in Iran as long as the Shah was in power. In November, the Shah turned the government into a military government in order to force strikers back to work. But the worst, everyone knew, was about to come. The month of Muhurram was approaching, the month in which Shi'ites traditionally celebrates the martyrdom of Husayn. It is a passionate and highly religious month, and since the protests against the Shah were largely religious in nature, everyone knew that the country was on the verge of exploding. Muhurram began on December 2 with demonstrations, and these demonstrations would continue all throughout the month. They were massive, in the millions, and it was clear that the demonstrator, not the government, was in charge. They seized government buildings, shut down businesses with massive strikes, assassinated government officials. Iranian demonstrators knew this was the month of martyrdom and many would dress in white (the garb of martyrs) and try to provoke government troops to fire on them. On January 16, 1979, the Shah left Iran for good. On February 1, Khumayni returned to Iran to a welcoming crowd of several million people. On February 12, the Prime Minister of Iran fled. The Revolution was over and Khumayni declared a new Islamic Republic. 19 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

2.2.8 The 1979 Oil Crisis:

The 1979 (or second) oil crisis in the United States occurred in the wake of the Iranian Revolution. Amid massive protests, the Shah of Iran, Mohammad Reza Pahlavi, fled his country in early 1979, allowing Ayatollah Khomeini to gain control. The protests shattered the Iranian oil sector. While the new regime resumed oil exports, it was inconsistent and at a lower volume, forcing prices to go up. Saudi Arabia and other OPEC nations, under the presidency of Dr. Mana Alotaiba increased production to offset the decline, and the overall loss in production was about 4 percent. However, a widespread panic resulted, driving the price far higher than would be expected under normal circumstances. Price controls in the United States on domestic sources of oil also exacerbated the situation. 2.2.9 Iran – Iraq War 1980

The Iran–Iraq War, also known as the Imposed War and Holy Defense, in Iran, and , Qādisiyyat Ṣaddām in Iraq, and the First Gulf War in the Arab world (the Persian Gulf War being the Second Gulf War), was a war between the armed forces of Iraq and Iran lasting from September 1980 to August 1988. The war began when Iraq invaded Iran on 22 September 1980 following a long history of border disputes and fears of Shia insurgency among Iraq's long suppressed Shia majority influenced by the Iranian Revolution (mostly known as the Islamic Revolution). Although Iraq hoped to take advantage of revolutionary chaos in Iran and attacked without formal warning, they made only limited progress into Iran and within several months were repelled by the Iranians who regained virtually all lost territory by June 1982. For the next six years Iran was on the offensive. Despite several calls for a ceasefire by the United Nations Security Council, hostilities continued until 20 August 1988. The last prisoners of war were exchanged in 2003. The war came at a great cost in lives and economic damage - a half a million Iraqi and Iranian soldiers as well as civilians are believed to have died in the war with many more injured and wounded - but brought neither reparations nor change in borders. The conflict is often compared to World War I, in that the tactics used closely mirrored those of the 1914-1918 war, including large scale trench warfare, manned machine-gun posts, bayonet charges, use of barbed wire 20 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

across trenches and on no-man’s land, human wave attacks and Iraq's extensive use of chemical weapons (such as mustard gas) against Iranian troops and civilians as well as Iraqi Kurds. The Iran-Iraq war was extremely costly in lives and material, one of the deadliest wars since World War II . Both countries were devastated by the war's effect. It cost Iran an estimated 1 million casualties, killed or wounded, and Iranians continue to suffer and die as a consequence of Iraq's use of chemical weapons. Iraqi casualties are estimated at 250,000-500,000 killed or wounded. Thousands of Civilians died on both sides from air raids and missiles. The financial loss was also heavy, at that time exceeding US$500 billion for each (US$1.2 trillion in total), but shortly after it turned out that the economic cost of war is more profound and long-lasting than estimated right after war. Economic development was stalled and oil exports disrupted. Iraq was left with serious debts to its former Arab backers, including US$14 billion loaned by Kuwait, a debt which contributed to Saddam's 1990 decision to invade. Much of the oil industry in both countries was damaged in air raids. Iran's production capacity has yet to fully recover from the damages of the war. 10 million shells had landed in Iraq's oil fields at Basra, seriously damaging Iraq's oil production. Prisoners taken by both sides were not released until more than 10 years after the end of the conflict. Cities on both sides had also taken considerable damage. Not all saw the war in negative terms. The Islamic Revolution of Iran was strengthened and radicalized. The Iranian government-owned Etelaat newspaper wrote: "There is not a single school or town that is excluded from the happiness of waging war, from drinking the exquisite elixir of death or from the sweet death of the martyr, who dies in order to live forever in paradise." The Iraqi government commemorated the war with various monuments, including the Hands of Victory and the Al-Shaheed Monument, both in Baghdad. The war left the borders unchanged. Two years later, as war with the western powers loomed, Saddam recognized Iranian rights over the eastern half of the Arvand Rūd, a reversion to the status quo ante bellum that he had repudiated a decade earlier. Declassified US intelligence

21 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

available has explored both the domestic and foreign implications of Iran's apparent (in 1982) victory over Iraq in their then two-year old war. 2.2.10 The Oil Glut 1980 In 1980, following the Iraqi invasion of Iran, oil production in Iran nearly stopped, and Iraq's oil production was severely cut as well. After 1980, oil prices began a six-year decline that culminated with a 46 percent price drop in 1986. This was due to reduced demand and overproduction, which caused OPEC to lose its unity. Oil exporters such as Mexico, Nigeria, and Venezuela expanded production. Ending of price controls allowed the US and Europe to get more oil from Prudhoe Bay and the North Sea. The 1980s oil glut was a surplus of crude oil caused by falling demand following the 1973 and 1979 energy crises. The world price of oil, which had peaked in 1979 at over US$35 per barrel, collapsed in 1986 from $27 to below $10. The glut began in the early 1980s as a result of slowed economic activity in industrial countries (due to the 1973 and 1979 energy crises) and the energy conservation spurred by high fuel prices. The inflation adjusted real 2004 dollar value of oil fell from an average of $78.2 in 1981 to an average of $26.8 per barrel in 1986. In June 1981, The New York Times stated an "Oil glut! ... is here" and Time Magazine stated: "the world temporarily floats in a glut of oil," though the next week a New York Times article warned that the word "glut" was misleading, and that in reality, while temporary surpluses had brought down prices somewhat, prices were still well above pre-energy crisis levels. This sentiment was echoed in November 1981, when the CEO of Exxon Corp also characterized the glut as a temporary surplus, and that the word "glut" was an example of "our American penchant for exaggerated language." He wrote that the main cause of the glut was declining consumption. In the United States, Europe and Japan, oil consumption had fallen 13% from 1979 to 1981, due to "in part, in reaction to the very large increases in oil prices by the Organization of Petroleum Exporting Countries and other oil exporters," continuing a trend begun during the 1973 price increases. After 1980, reduced demand and overproduction produced a glut on the world market, causing a six-year-long decline in oil prices culminating with a 46 percent price drop in 1986.

22 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

2.2.11 Iraq-Kuwait War 1990

The Invasion of Kuwait, also known as the Iraq-Kuwait War, was a major conflict between the Republic of Iraq and the State of Kuwait which resulted in the seven-month long Iraqi occupation of Kuwait which subsequently led to direct military intervention by United States-led forces in the Persian Gulf War. In 1990 Iraq accused Kuwait of stealing Iraq's oil through slant drilling, but some Iraqi sources indicate Saddam Hussein’s decision to attack Kuwait was made only a few months before the actual invasion suggesting that the regime was under feelings of severe time pressure. The invasion started on August 2, 1990, and within two days of intense combat, most of the Kuwaiti Armed Forces were either overrun by the Iraqi Republican Guard or escaped to neighboring Saudi Arabia and Bahrain.  Causes of the conflict Kuwait was a close ally of Iraq during the Iraq-Iran war and functioned as the country’s major port once Basra was shut down by the fighting. However, after the war ended, the friendly relations between the two neighbouring Arab countries turned sour due to several economic and diplomatic reasons which finally culminated in an Iraqi invasion of Kuwait.

 Dispute over the financial debt Kuwait had heavily funded the 8 year long Iraqi war against Iran. By the time the war ended, Iraq was not in a financial position to repay the $40 billion which it had borrowed from Kuwait to finance its war. Iraq argued that the war had prevented the rise of Iranian influence in the Arab World. However, Kuwait's reluctance to pardon the debt created strains in the relationship between the two Arab countries. During late 1989, several official meetings were held between the Kuwaiti and Iraqi leaders but they were unable to break the deadlock between the two.  Economic warfare and slant drilling Iraq tried repaying its debts by raising the prices of oil through OPEC's oil production cuts. However, Kuwait, a member of the OPEC, prevented a global increase in petroleum prices by 23 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

increasing its own petroleum production, thus lowering the price and preventing recovery of the war-crippled Iraqi economy. This was seen by many in Iraq as an act of aggression, further distancing the countries. The collapse in oil prices had a catastrophic impact on the Iraqi economy. According to former Iraqi Foreign Minister Tariq Aziz, "every US$1 drop in the price of a barrel of oil caused a US$1 billion drop in Iraq's annual revenues triggering an acute financial crisis in Baghdad." It was estimated that Iraq lost US$14 billion a year due to Kuwait's oil price strategy. The Iraqi Government described it as a form of 'economic warfare', which it claimed was aggravated by Kuwait's alleged slant-drilling across the border into Iraq's Rumaila field. The dispute over Rumaila field started in 1960 when an Arab League declaration marked the IraqKuwait border 2 miles north of the southern-most tip of the Rumaila field. During the Iran–Iraq War, Iraqi oil drilling operations in Rumaila declined while Kuwait's operations increased. In 1989, Iraq accused Kuwait of using "advanced drilling techniques" to exploit oil from its share of the Rumaila field. Iraq estimated that US$2.4 billion worth of Iraqi oil was stolen by Kuwait and demanded compensation. Kuwait dismissed the accusations as a false Iraqi ploy to justify military action against it. Several American firms working in the Rumaila field also dismissed Iraq's slant-drilling claims as a "smokescreen to disguise Iraq's more ambitious intentions".  Kuwait's lucrative economy After the Iran–Iraq War, the Iraqi economy was struggling to recover. Iraq's civil and military debt was higher than its state budget. Most of its ports were destroyed, oil fields mined, and traditional oil customers lost. Despite having a total land area 1/10th of Iraq, Kuwait's coastline was twice as long as Iraq's and its ports were some of the busiest in the Persian Gulf region. The Iraqi government clearly realized that by seizing Kuwait, it would be able to solve most of its financial problems and consolidate its regional authority. Due to its relatively small size, Kuwait was seen by Baghdad as an easy target as well as a historically integral part of Iraq separated by British imperialism.  Arab nationalism Though Kuwait's large oil reserves were widely considered to be the main reason behind the Iraqi invasion, the Iraqi government justified its invasion by claiming that Kuwait was a natural part of 24 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Iraq carved off due to British imperialism. After signing the Anglo-Ottoman Convention of 1913, the United Kingdom split Kuwait and Iraq into two separate emirates. The Iraqi government also argued that the Kuwaiti Emir was a highly unpopular figure among the Kuwaiti populace. By overthrowing the Emir, Iraq claimed that it granted Kuwaitis greater economic and political freedom. Kuwait had been part of the Ottoman province of Basra, and although its ruling dynasty, the alSabah family, had concluded a protectorate agreement in 1899 that assigned responsibility for its foreign affairs to Britain, it did not make any attempt to secede from the Ottoman Empire. For this reason, its borders with Iraq were never clearly defined or mutually agreed. Furthermore, Iraq alleged that the British High Commissioner "drew lines that deliberately constricted Iraq's access to the ocean so that any future Iraqi government would be in no position to threaten Britain's domination of the Gulf".  Alleged international conspiracy Saddam Hussein’s decision partly came as a reaction towards the alleged international conspiracy against Iraq which, in his view, was meant to weaken and destabilize the regime. Subtle shifts in the American policy together with the British and American efforts to block the export of dualuse technology to Iraq, a consequence of its nuclear program, were seen by Saddam as part of a concerted effort to build a case against Iraq. In this conspiracy theory, Kuwait was considered an accomplice of the foreign powers. In a memorandum dating from July 1990, the former Iraqi Foreign Minister Tariq Aziz accused Kuwait and the UAE of production beyond their OPEC quotas and claimed that the overproduction was synchronized with the efforts of foreign powers to denigrate Iraq. Tariq argues that the fact that Kuwait refused to negotiate with a dangerous Iraq and risked being invaded by it sustains the theory according to which Kuwait had received tacit support from the U.S. even before the war started. At the same time the Iraqi military intelligence was receiving warnings about Israeli plans to attack Iraqi nuclear, chemical and biological weapons. Saddam was convinced of the existence of a conspiracy and even described it to Wafiq al-Samara’i, deputy director of Iraqi military intelligence as follows: “America is coordinating with Saudi Arabia and the UAE and Kuwait in a conspiracy against us. They are trying to reduce the price of oil to affect our military industries and our scientific research, to force us to reduce the size of our armed forces....You must expect from another 25 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

direction an Israeli military air strike, or more than one, to destroy some of our important targets as part of this conspiracy”

Following the invasion, Saddam’s unwillingness to accept a negotiated solution to the Kuwait crisis once again sustains the hypothesis that the fear of Iraq's domestic and economic destabilization was the most important factor which contributed to his invasion decision.  Diplomatic row Post Iran–Iraq War and dispute over Rumaila oilfield, the diplomatic relations between Iraq and Kuwait deteriorated dramatically triggering several heated exchanges between Iraqi and Kuwaiti diplomats during various regional and Gulf Cooperation Council summits. According to Federal Bureau of Investigation agent Piro, Saddam stated during a conversation with Piro that the Kuwaiti emir Al Sabah told the foreign minister of Iraq during a discussion aimed at resolving some of the conflicts between the two countries that "he would not stop doing what he was doing until he turned every Iraqi woman into a $10 prostitute. And that really sealed it for him [Saddam Hussein], to invade Kuwait." On Wednesday July 25, 1990, the U.S. Ambassador in Iraq, April Glaspie, asked the Iraqi high command to explain the military preparations in progress, including the massing of Iraqi troops near the border. The American ambassador declared to her Iraqi interlocutor that Washington, “inspired by the friendship and not by confrontation, does not have an opinion” on the disagreement which opposes Kuwait to Iraq, stating "we have no opinion on the Arab-Arab conflicts". She also let Saddam Hussein know that the U.S. did not intend "to start an economic war against Iraq". These statements may have caused Saddam to believe he had received a diplomatic green light from the United States to invade Kuwait.  The invasion On August 2, 1990 at 0200 hours, Iraq launched an invasion with four elite Iraqi Republican Guard divisions (1st Hammurabi Armoured Division, 2nd al-Medinah al-Munawera Armoured Division, 3rd Tawalkalna ala-Allah Mechanized Infantry Division and 6th Nebuchadnezzar Motorized Infantry Division) and Iraqi Army special forces units equivalent to a full division. 26 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

The main thrust was conducted by the commandos deployed by helicopters and boats to attack Kuwait City, while the other divisions seized the airports and two airbases. In support of these units, the Iraqi Army deployed a squadron of Mil Mi-25 helicopter gunships, several units of Mi-8 and Mi-17 transport helicopters, as well as a squadron of Bell 412 helicopters. The foremost mission of the helicopter units was to transport and support Iraqi commandos into Kuwait City, and subsequently to support the advance of ground troops. The Iraqi Air Force (IrAF) had at least two squadrons of Sukhoi Su-22, one of Su-25, one of Mirage F1 and two of MiG-23 fighter-bombers. The main task of the IrAF was to establish air superiority through limited counter-air strikes against two main air bases, to provide close air support and reconnaissance as necessary. In spite of months of Iraqi sabre-rattling, Kuwait did not have its forces on alert and was caught unaware. The first indication of the Iraqi ground advance was from a radar-equipped aerostat that detected an Iraqi armour column moving south. Kuwaiti air, ground, and naval forces resisted, but were vastly outnumbered. In central Kuwait, the 35th Armored Brigade deployed approximately a battalion of tanks against the Iraqis and fought delaying actions near Jahra, west of Kuwait City. In the south, the 15th Armoured Brigade moved immediately to evacuate its forces to Saudi Arabia. Of the small Kuwaiti Navy, two missile boats were able to evade capture or destruction, one of the craft sinking three Iraqi vessels before fleeing. Kuwait Air Force aircraft were scrambled, but approximately 20% were lost or captured. An air battle with the Iraqi helicopter airborne forces was fought over Kuwait City, inflicting heavy losses on the Iraqi elite troops, and a few combat sorties were flown against Iraqi ground forces. The remaining 80% were then evacuated to Saudi Arabia and Bahrain, some aircraft even taking off of the highways adjacent to the bases as the runways were overrun. While these aircraft were not used in support of the subsequent Gulf War, the "Free Kuwait Air Force" assisted Saudi Arabia in patrolling the southern border with Yemen, which was considered a threat by the Saudis because of Yemen-Iraq ties. Iraqi tanks attacked Dasman Palace, the royal residence. Amir Jaber Al-Ahmad Al-Jaber AlSabah had already fled into the Saudi desert, but his private guard and his younger half brother, Sheikh Fahad Al-Ahmed Al-Jaber Al-Sabah, stayed behind to defend their home. The Sheikh was shot and killed and his body was placed in front of a tank and run over. 27 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

 Aftermath The Iraqi invasion was welcomed by the Palestinian Liberation Organization and many of the 40,000 Palestinians living in Kuwait who were displaced after the 1967 war. Alaa Hussein Ali was placed as head of a puppet government in Kuwait, prior to its brief annexation into Iraq. In February 1991, Kuwait was liberated by United Nations and Free Kuwaiti forces during Operation Desert Storm. In December 2002, Saddam Hussein apologized for the invasion shortly before being deposed in the 2003 invasion of Iraq. Two years later, Palestinian leadership also apologized for its wartime support of Saddam.

2.2.12 Gulf War 1990

The Persian Gulf War or Gulf War (2 August 1990 – 28 February 1991) was a United Nationsauthorized military conflict between Iraq and a coalition force from 34 nations commissioned with expelling Iraqi forces from Kuwait after Iraq's occupation and annexation of Kuwait in August of 1990. Though there were nearly three dozen member states of the coalition, the overwhelming majority of the military forces participating were from the United States and the United Kingdom. The invasion of Kuwait by Iraqi troops was met with immediate economic sanctions against Iraq by some members of the UN Security Council, and with immediate preparation for war by the United States of America and the United Kingdom. The expulsion of Iraqi troops from Kuwait began in January 1991 and was a decisive victory for the coalition forces, which took over Kuwait and entered Iraqi territory. Aerial and ground combat was confined to Iraq, Kuwait, and bordering areas of Saudi Arabia. Iraq also launched missiles against targets in Saudi Arabia and Israel in retaliation for their support of the invading forces in Kuwait. Shortly after Iraq's invasion of Kuwait, U.S. President George H. W. Bush started to deploy U.S. Army, Navy, Marine Corps, Air Force, and Coast Guard units to Saudi Arabia (Operation Desert Shield), while at the same time urging other countries to send their own forces to the scene. UN coalition-building efforts were so successful that by the time the fighting (Operation Desert 28 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Storm) began on January 16, 1991, twelve countries had sent naval forces, joining the regional states of Saudi Arabia and the Persian Gulf states, as well as the huge array of the U.S. Navy, which deployed six carrier battle groups; eight countries had sent ground forces, joining the regional troops of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, as well as the seventeen heavy and six light brigades of the U.S. Army and nine Marine regiments, with their large support and service forces; and four countries had sent combat aircraft, joining the local air forces of Kuwait, Qatar, and Saudi Arabia, as well as the U.S. Air Force, U.S. Navy, and U.S. Marine aviation, for a grand total of 2,430 fixed-wing aircraft. Against them, the Iraqis had only a few gunboats and small missile craft to match the coalition's armada; but on the other hand, some 1.2 million ground troops with about 5,800 tanks, 5,100 other armored vehicles, and 3,850 artillery pieces made for greater strength on the ground. Iraq also had 750 fighters and bombers, 200 other aircraft, and elaborates missile and gun defenses. Since the Iran–Iraq War of 1980–88 had been called the "Persian Gulf War" by many news sources, the 1991 war has sometimes been called the "Second Persian Gulf War", but more commonly, the 1991 war is styled simply the "Gulf War" or the "First Gulf War", in distinction from the 2003 invasion of Iraq. "Operation Desert Storm" was the U.S. name of the air and land operations and is often incorrectly used to refer to the entire conflict; although the U.S. Postal Service issued a postage stamp reflecting Operation Desert Storm in 1992, and the U.S. military awarded campaign ribbons for service in Southwest Asia. Each nation participating had its own operation name for its contribution: U.S. - Operations Desert Shield and Desert Storm; UK Operation Granby; Canada - Operation Friction, etc.

2.2.13 US Invasion Of Iraq, 2003

The Iraq War, also known as the Second Gulf War or the Occupation of Iraq, is an ongoing military campaign which began on March 20, 2003 with the invasion of Iraq by a multinational force now led by and composed almost entirely of troops from the United States and United Kingdom. Prior to the war, the governments of the U.S., U.K, and Spain claimed that Iraq's alleged possession of weapons of mass destruction (WMD) posed a serious and imminent threat to their 29 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

security and that of their coalition allies. United Nations weapons inspectors found no evidence of WMD, giving support to earlier criticism of poor intelligence on the subject. After the invasion, the U.S.-led Iraq Survey Group concluded that Iraq had ended its WMD programs in 1991 and had no active programs at the time of the invasion, but that they intended to resume production if the Iraq sanctions were lifted. Although some degraded remnants of misplaced or abandoned chemical weapons from before 1991 were found, they were not the weapons for which the coalition invaded. Some U.S. officials also accused Saddam Hussein of harboring and supporting Al-Qaeda, but no evidence of any collaborative relationship was ever found. US President George W. Bush reportedly told Palestinian officials either that God inspired him to end the tyranny in Iraq, or to hit Saddam. Other reasons for the invasion stated by U.S. officials included Iraq's financial support for the families of Palestinian suicide bombers, Iraqi government human rights abuses, and spreading democracy. Some officials said Iraq's oil reserves were a factor in the decision to invade, but other officials denied this. The invasion led to the quick defeat of the Iraqi military, and the eventual capture and execution of Saddam Hussein. The U.S.-led coalition occupied Iraq and attempted to establish a new democratic government. However, violence against coalition forces and among various sectarian groups soon led to asymmetric warfare with the Iraqi insurgency, strife between many Sunni and Shia Iraqi groups, and al-Qaeda operations in Iraq. The number of Iraqis killed through 2007 ranges from "a conservative cautious minimum" of more than 85,000 civilians to a survey estimate of more than 1,000,000 citizens. UNHCR estimates the war uprooted 4.7 million Iraqis through April 2008 (about 16% of the population of Iraq), two million of whom had fled to neighbouring countries fleeing a humanitarian situation that the Red Cross described in March 2008 as "among the most critical in the world". In June 2008, U.S. defense officials claimed security and economic indicators began to show signs of improvement in what they hailed as significant and fragile gains. In August 2008, Iraq was fifth on the Failed States Index. Member nations of the Coalition withdrew their forces as public opinion favoring troop withdrawals increased and as Iraqi forces began to take responsibility for security. In late 2008, the U.S. and Iraqi governments approved a Status of Forces Agreement effective through January 1, 2012. The pact establishes that U.S. "combat forces" will withdraw from Iraqi cities by June 30, 2009, and that all U.S. forces will be completely out of Iraq by December 31, 2011. The agreement may be renegotiated to delay withdrawal, and an Iraqi referendum 30 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

scheduled for mid-2009 may require all U.S. forces to completely leave by the middle of 2010. The pact requires criminal charges for holding prisoners over 24 hours, and requires a warrant for searches of homes and buildings that are not related to combat. U.S. contractors working for U.S. forces will be subject to Iraqi criminal law, while contractors working for the US State Department and other U.S. government agencies may retain their immunity from arrest. If members of U.S. forces commit (still unspecified) "major premeditated felonies" while off-duty and off-base, they will be subject to the still undecided procedures laid out by a joint U.S.-Iraq committee if the U.S. agrees they were off-duty. Several groups of Iraqis protested the passing of the SOFA accord, and Grand Ayatollah Ali Husseini al-Sistani expressed concern the pact did not do enough to limit occupation forces. The Iraqi Parliament also ratified a Strategic Framework Agreement with the U.S., aimed at ensuring international cooperation including minority ethnicity, gender, and belief interests and other constitutional rights; threat deterrence; exchange students; education; and cooperation in the areas of energy development, environmental hygiene, health care, information technology, communications, and law enforcement.

2.3 Year

1956

1960

SUMMARY OF EVENTS AND ITS IMPACT Event

Impact 

Altered the regional balance of power



Nasser status grew as a defender of Arab nationalism



Britain and France lost influence in the region



US improved its relation with Egypt



Cartelization of oil reach countries



Introduction of production quotas

Suez Crisis

OPEC Formation

31 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

1971

1973

1973

1973

1977

Oil emerged as a weapon of Geopolitics



Value of currencies depreciated



Less real income realized for the same price



Oil was priced against gold



This led to oil shock of 70’s



As a punishment to US for helping Israel, Arab Oil Embargo was imposed



Price of crude increased from $3 to $12



Massive shortage in US



Paved the way for energy crisis



World economies went into recession



Inflation skyrocketed



Targeted countries responded with initiatives to contain dependency



Shah left Iran and Khumayani returned to power



Declared the establishment of a new fundamentalist Islamic Republic



Drastic decline in production by British Petroleum



Paved the way for another oil crisis



Prices went very high from 13$ to 32$



Oil prices fell from 78$ to 26$



lowest price was below 10$



Iran emerged victorious



Killed millions of people



Borders remained unchanged



Financial losses of 1.2 trillion USD

End of Bretton Woods

Yom Kippur War

Arab Oil Embargo

Energy Crisis

The Iranian Revolution

1979

Oil Crisis

1980

The Oil Glut

1980



Iran-Iraq War

32 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

1990

Ira-Kuwait war

1990

Gulf war

2003

US Invasion of Iraq



Oil sector suffered huge production and monetary losses



Kuwait’s oil production came down as many wells were set fire by Iraq



Drew America and allies into war



Heavy ground and air offensive by the Allies against Iraq



Sanctions levied on Iraq Oil exports



Saddam was allowed to remain in power



Prices rose from $21 per barrel at the end of July to $28 on August 6, reaching $46 by midOctober in 1990



(Considered to be a milder Oil Shock)



End of Saddam’s regime



Formation of a new democratic government backed by US

(Prices represented in $ per barrel)

2.4 2.4.1

INTERNAL CONFLICTS OF MIDDLE EAST

Shia-Sunni Battle For Oil

Some conspiracy theorists will have you believe that everything in the Middle East is about oil, including the US invasion of Iraq. But the fact is that, six years after the invasion, the Americans have not acquired any Iraqi oilfield. Yet, in one sense the hundreds of weekly killings in Iraq are indeed about oil. This relates not to the US occupation but the Sunni-Shia struggle for controlling oil. Iraq's population consists roughly of 60% Shia Arabs, 20% Kurds and 12% Sunni Arabs (the balance being small minorities).(table 1) Iraq has for centuries been ruled by Sunnis. Democracy has now empowered the Shia majority, and Sunnis fear the consequences. The biggest oilfields in the country are in the Shia south, and the rest are in the northern Kurdish region. There is no oil in the Sunni triangle in the middle of the country. 33 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

The new Constitution of Iraq was long delayed because of heated debates on sharing oil revenue. One constitutional provision says that oil belongs to the people of Iraq in all regions. Yet, the Constitution also gives autonomy to the three regions Shia, Sunni and Kurd. This fuels Sunni fears that the other two regions will ultimately hog all the oil. Country

Total population 68.7 million 26.8 million 27.0 million 3.9 million 2.4 million 700,000 18.9 million 2.6 million

Iran Iraq Saudi Arabia Lebanon Kuwait Bahrain Syria The United Arab Emirates Qatar 890,000 Source : Nasr: ‘When the Shiites Rise’

Shia population

160,000

Shia of total (%) 90% 65% 10 % 45 % 30% 75% 1% (+15%) 6%

140,000

16%

61.8 million 17.4 million 2.7 million 1.7 million 730,000 520,000 190,000 (+2.8 million)2

It is argued that the present dynamics of the regional-level Sunni-Shia divide are reinforced and catalysed by both geopolitical considerations and the national security interests of states. History and identity alone are not sufficient to explain the logics of the divide at the regional level. The divide has the potential to become an era-defining feature of the post Saddam Middle East in the way pan-Arabism and pan- Islam have defined the past decades of the region. Many trace the source of the current sectarian strife right back to the birth of Islam and to the ‘major schism’. The separation of the Shia from mainstream Islam was, initially, a political question and only later became a question of faith. At first, the Sunni and the Shia communities were split fundamentally for political reasons and the divide was aggravated later, through centuries of warfare and fighting and by Sunni oppression of the Shia. The fact that the Shias have almost always been the oppressed and on the periphery of power in the Middle East is an important factor in the relationship between the two branches of Islam, which dates back to the first decades of the religion and has prevailed throughout history with few exceptions. In spite and because of their history of suffering, a typical characteristic of Shiism is the idea of (re)gaining power. Shiism was born as a party in a power struggle and it has never lost this original character. From a historical perspective, it therefore appears that the removal of Saddam Hussein has finally allowed the Shia, after several centuries, to get back at the Sunnis. 34 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

For most of the 20th century, Shia-Sunni relations were characterized by a relatively peaceful coexistence in the Middle East. For most of the century there was a common threat to Islam from secularism in the form of imperialism, which led to a period of Sunni-Shia harmony in the region. The Shias and the Sunnis also fought together against British colonial rule in Iraq in 1920 and aligned themselves against Israel after 1948. Despite their embrace of Arab and Iraqi nationalism, the Shias of Iraq continued to be greeted with suspicion by the Sunni leaders. The end of the century was different and, according to experts, it was marked by several clash points between the two ‘sects’. A few major developments are said to have contributed to the reemergence of the sectarian divide in the 21st century. Among them are: the Iranian Revolution in 1979, the Iran-Iraq War in 1980-1988, Saddam Hussein’s rule of Iraq, particularly in the 1990s, and finally the US-led invasion of Iraq in 2003. The middle –eastern politics can be divided into two levels of analysis: the domestic level and the regional level. Different kinds of geopolitical readjustments and power balancing take place at the two levels, on which different fault lines can be identified. At the domestic level the fault line has been and will in most cases be drawn between the ‘rulers’ (the Sunni) and the ‘ruled/oppressed’ (the Shia). Sectarian divisions appear in different forms in different states, but there are some common elements: In states ruled by Sunnis, the Shia has often been regarded as heretics, enemies of the state ideology and/or a threat to internal stability. Due to the fact that in most Arab states the Shia are a minority, the division at the domestic level manifests itself most visibly as a conflict of power between the majority and the minority. The Shia have practically always been the oppressed in Islam and, partly for this reason, are usually perceived as the more politicized of the two strands. This makes them a potential threat in the new geopolitical situation in the eyes of the Sunni Arab regimes in those countries that have a Shia population, either a minority (Lebanon, Saudi Arabia, most small Gulf states, Yemen and to some extent Jordan) or a majority (Bahrain and Iraq). To what extent this tendency will become reinforced in the near future remains to be seen. The developments in Iraq, but also the regional status and external policies of Iran, will to a large extent determine the future of Shia-Sunni relations inside Middle Eastern states. At the regional level the Sunni-ruled Arab states and Saudi Arabia in particular, are increasingly challenged by Iran in the race for regional power. A region that has traditionally been ruled by Baghdad, Damascus and Cairo sees its fate falling into the hands of Washington, Tel Aviv and Tehran. Having to choose between the United States, the current regional hegemony, and Iran, 35 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

the ‘Shi’i challenger’, the Sunni Arab states prefer the former. Sunni-led Arab states are also discovering that their security interests increasingly converge with those of Israel. Iran seeks to reduce the tensions between the Muslim countries in the region, but its recent behaviour concerning its nuclear programme; its increasing influence in Iraq and the 2006 war in Lebanon have been disadvantageous in this regard. Historians often argue that the present divisions between the Shia and the Sunnis in Iraq and beyond are still based on an ancient hatred that resurfaced after the fall of Saddam Hussein’s regime when the country’s Shia gained power. Many others, scholars as well as political leaders, stress the significance of Iran and its ‘Shia power’: threatening the current status quo in regional politics by seeking to build a radical Shia alliance and dominate the region. These experts point, either in a Constructivist or a Neoconservatist vein, to the transnational Shia identity, the close connections between Iran’s and Iraq’s Shia, to the revolutionary nature of the Iranian theocratic Shia state and Iran’s notorious nuclear programme, interpreting them as warning signs to the region’s Sunni governments of the rise of ‘a Shia full moon’. Present-day political motivations and geopolitics should not be ignored either in the analysis of what is said and written about the post-Saddam Sunni-Shia divide. According to Neorealist explanations, the sectarianization of regional politics in the post-Saddam Middle East is a product of the readjustments of power relations that are now taking place inside Iraq and in relation to Iran as a consequence of the new geopolitical situation. The sectarian discord, which seems to be growing at the level of regional politics, is thus seen as a by-product of regionallevel power balancing. 2.4.2 Post Saddam Era

In the post-Saddam Middle East, the security environment of the Persian Gulf area has undergone a profound change. This has repercussions for the entire Middle East. The disappearance of a Sunni-dominated, strong Iraq has shattered the power balance between that country, Iran and Saudi Arabia and seems to have tipped the scale in favour of Iran. The region’s powerful Sunni states are now realigning themselves in order to deal with a perceived Iranian challenge. Among the first signs of this were the formation of the Arab Quartet and the re launch of the Arab League peace initiative of 2002 in early 2007 and the Annapolis peace conference later the same year. 36 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

The removal of Saddam Hussein and the Ba’th regime shook the power balance not only at the regional level but, apparently, at the domestic level. In Iraq, the Shia’s rise to power put an end to the age-old power balance between the ‘minority’ and the ‘majority’ in a region that has seen only a few exceptions to Sunni rule in its history. The political realignment along sectarian lines applies not only to Iraq but potentially, in the future, to all states in the Middle East with a considerable Shia minority or an oppressed Shia majority. Arab states have been concerned since 1979 – if not always – about Iran becoming a regional power. It was precisely the Iranian Revolution that emboldened the Shias in the Middle East, and especially in Lebanon, and that reinforced a trend of activism which continues today. This is why Hizbollah, for example, was founded – as a result of Iran’s geostrategic considerations – and it has been supported both militarily and financially by Iran ever since. Another example is the way in which Iran’s Supreme Leader, Ayatollah Khomeini, would portray himself as the spiritual leader of the entire Muslim World, not only of the Shia. He appealed to the Arab Sunni street in the same way that Hizbollah’s current leader, Hassan Nasrallah, did after the Second Lebanon War in 2006. This led Sunni leaders in Saudi Arabia and elsewhere in the early 1980s to emphasize the sectarian and ethnic divide by employing tougher anti-Shia discourse. Saudi Arabia also began investing in fundamentalist movements, which contributed to the growth and proliferation of radical Salafi Islamist movements – including that of al-Qaida – who later turned against Saudi Arabia, the West and their old enemy, the Shia. During the Iraq-Iran War and especially after the Gulf War in 1991, a shift took place in Saddam Hussein’s rule, which was characterized by a move in image and rhetoric from Arab nationalist towards Islamic nationalist.

Simultaneously, and contradictorily, the 1990s in Iraq were

characterized by harsh anti-Shia and anti- Kurd policies. The catalyst for these policies were the popular uprisings in Northern and Southern Iraq, which were encouraged by the United States after it had successfully ousted the Iraqi army from Kuwait. The uprisings in the Southern Shia areas were brutally quashed by the army and were followed by systematic mass killings and by targeting individual Iraqi Shia clerics; these occurred, it is estimated, in a far larger scale than in the 1980s.The persecutions were felt mostly in the Shia majority Southern Iraq because the US had established safe havens only in the Kurdish areas, and they continued with varying intensity until the Second Gulf War. 37 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Finally, the United States-led invasion of Iraq in 2003 removed the Sunni Ba’th regime and brought the Shia majority into power, although nominally the government is based on a powersharing agreement. The end of Saddam Hussein’s era also brought to an end three decades of his adaptation of Iraq’s Ba’th party nationalism. The country today seems to be comprised of ‘tribes without flags’. Al-Qaida and similar groups have intentionally sought to pit the Sunni against the Shia38, and people who seek security amongst the sectarian fighting have been forced to pick sides. Most experts refer to the bombing of the al-Askari Mosque as the turning point which marked a significant increase in sectarian divisions and hostilities in the country. Nasr, in turn, has reported that the rest of Saddam’s Iraq in 2003 was actually a sectarian Iraq. This holds true in the sense that when the United States believed they were liberating Iraq, in reality they liberated Iraq’s Shias, a fact which soon became evident. The failed Iraqi ideologies – state and Arab nationalist – were replaced by ethnic and fragmented sectarian and tribal identities. The divisions in Iraq, according to Nasr, are caused by a religious identity which works as an ethnic identity.41 Indeed a division along sectarian lines – and inside and across these lines – is already perceptible in many regions, cities and places. Sectarian violence in Baghdad has forged a new pattern made up of parts of the capital that are only populated by one ‘sect’ – a pattern which is repeated in various other formerly ‘mixed’ cities. 2.4.3

The War in Lebanon: The Wake-Up Call for the Sunni States

This is an important event in the emergence of the current regional Shia-Sunni tensions. The war was seen, both in the region and outside it, as a wake-up call and a warning of major sectarian clashes to come. In fact, Lebanon itself is, much like the war itself, a microcosm of the ShiaSunni divide that is currently intensifying in the entire region. Without a doubt, in former times just as much as today, Lebanon has been the battleground when it comes to major and minor power interests in the region, the place where power politics and sectarianism in the Middle East most manifestly converge – apart from Iraq, of course. According to Gary Sick, Hizbollah’s fight against Israel was perceived in the region and outside it as an extension of Iranian power and its influence in the region, and even as an indirect battle between Iran and the United States.50 51 As a result of the war, the Shia-Sunni divide has surfaced both in Lebanon and, partly because of it, increasingly also across the Middle East. 38 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Inside Lebanon, the divisions run deep and the fault lines of foreign intervention are clear. The strongest tensions are manifest between Hizbollah with its allies under the March 8 alliance title and the Lebanese anti-Syrian factions under the March 14 alliance title. The former are openly backed by Iran and Syria and the latter by the United States, the Sunni-ruled Arab states and the European Union.

2.5 EXTERNAL CONFLICTS OF MIDDLE EAST

2.5.1

The Arab Israel Conflict

2.5.1.1 Ancient history of Israel and Palestine The ancient Jewish kingdoms of Israel and Judea had been successively conquered and subjugated by several foreign empires, when in 135 CE the Roman Empire defeated the third revolt against its rule and consequently expelled the surviving Jews from Jerusalem and its surroundings, selling many of them into slavery. The Roman province was then renamed "Palestine". After the Arab conquest of Palestine in the 7th century the remaining inhabitants were mostly assimilated into Arab culture and Muslim religion, though Palestine retained Christian and Jewish minorities, the latter especially living in Jerusalem. Apart from two brief periods in which the Crusaders conquered and ruled Palestine (and expelled the Jews and Muslims from Jerusalem), it was ruled by several Arab empires, and it became part of the Ottoman (Turkish) Empire in 1516.

39 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

2.5.1.2 The British Mandate for Palestine During World War I Great Britain captured part of the Middle East, including Palestine, from the Ottoman Empire. In 1917 the British had promised the Zionists a 'Jewish national home' in the Balfour Declaration, and on this basis they later were assigned a mandate over Palestine from the League of Nations. The mandate of Palestine initially included the area of Transjordan, which was split off in 1922.

Map of the original British Mandate for Palestine and the parts ceded to Transjordan and Syria. Jewish immigration and land purchases met with increasing resistance from the Arab inhabitants of Palestine, who started several violent insurrections against the Jews and against British rule in the 1920s and 1930s. During the Great Revolt of 1936-1939 the followers of the radical Mufti of Jerusalem Haj Amin al-Husseini (a Nazi collaborator who later fled the Nurnberg Tribunal) not only killed hundreds of Jews, but an even larger number of Palestinian Arabs from competing groups. The Zionists in Palestine (called the Yishuv) established self-defense organizations like 40 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

the Haganah and the (more radical) Irgun. The latter carried out reprisal attacks on Arabs from 1936 on. Under Arab pressure the British severely limited Jewish immigration to Palestine, after proposals to divide the area had been rejected by the Palestinian Arabs in 1937. Jewish refugees from countries controlled by Nazi Germany now had no place to flee to, since nearly all other countries refused to let them in. In response Jewish organizations organized illegal immigration (Aliya Beth), the Zionist leadership in 1942 demanded an independent state in Palestine to gain control of immigration (the Biltmore conference), and the Irgun committed assaults on British institutions in Palestine. Despite pressure from the USA, Great Britain refused to let in Jewish immigrants - mostly Holocaust survivors - even after World War II, and sent back illegal immigrants who were caught or detained them on Cyprus. Increasing protests against this policy, incompatible demands and violence by both the Arabs and the Zionists made the situation untenable for the British. They returned the mandate to the United Nations (successor to the League of Nations), who hoped to solve the conflict with a partition plan for Palestine, which was accepted by the Jews but rejected by the Palestinians and the Arab countries. The plan proposed a division of the area in seven parts with complicated borders and corridors, and Jerusalem and Bethlehem to be internationalized (see map). The relatively large number of Jews living in Jerusalem would be cut off from the rest of the Jewish state by a large Arab corridor. The Jewish state would have 56% of the territory, with over half comprising of the Negev desert, and the Arabs 43%. There would be an economic union between both states. It soon became clear that the plan could not work to the mutual antagonism between the two people. 2.5.1.3 History of the establishment of the State of Israel After the proposal was adopted by the UN General Assembly in November 1947, the conflict escalated and Palestinian Arabs started attacking Jewish convoys and communities throughout Palestine and blocked Jerusalem, whereupon the Zionists attacked and destroyed several Palestinian villages. The Arab League had openly declared that it aimed to prevent the establishment of a Jewish state by force, and Al Husseini told the British that he wanted to implement the same 'solution to the Jewish problem' as Hitler had carried out in Europe. A day after the declaration of the state of Israel (May 14, 1948) Arab troops from the neighboring countries invaded the area. At first they made some advances and conquered parts of the territory 41 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

allotted to the Jews. Initially they had better weaponry and more troops, but that changed after the first cease-fire, which was used by the Zionists to organize and train their newly established army, the Israeli Defense Forces. Due to better organization, intelligence and motivation the Jews ultimately

won

their War

of

Independence.

After the armistice agreements in 1949, Israel controlled 78% of the area between the Jordan river and the Mediterranean Sea (see map below), whereas Jordan had conquered the West Bank (until then generally referred to as Judea and Samaria) and East Jerusalem and Egypt controlled the Gaza Strip. Jerusalem now was divided, with the Old City under Jordanian control and a tiny Jewish enclave (Mount Scopus) in the Jordanian part. In breach of the armistice agreement Jews were not allowed to enter the Old City and go to the Wailing Wall. In 1950 Jordan annexed the West Bank and East Jerusalem, a move that was only recognized by Great Britain and Pakistan. A majority of the Palestinian Arabs in the area now under Israeli control had fled or was expelled (estimated by the UN about 711,000) and over 400 of their villages had been destroyed. The Jewish communities in the area under Arab control (i.a. East Jerusalem, Hebron, Gush Etzion) had all been expelled. In the years and decades after the founding of Israel the Jewish minorities in all Arab countries fled or were expelled (approximately 900,000), most of whom went to Israel, the US and France. These Jewish refugees all were relocated in their new home countries. In contrast, the Arab countries refused to permanently house the Palestinian Arab refugees, because they - as well as most of the refugees themselves - maintained that they had the right to return to Israel. About a million Palestinian refugees still live in refugee camps in miserable circumstances. Israel rejected the Palestinian 'right of return' as it would lead to an Arab majority in Israel, and said that the Arab states were responsible for the Palestinian refugees. Many Palestinian groups, including Fatah, have admitted that granting the right of return would mean the end of Israel as a Jewish state. The question of the Palestinian right of return is the first major obstacle for solving the Arab Israeli conflict.

42 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

2.5.1.4 The Six Day War and Arab rejectionism The Arab-Israeli conflict persisted as Arab countries refused to accept the existence of Israel and instigated a boycott of Israel, while they continued to threaten with a war of destruction. (There were some talks, but the Arab states all demanded both the return of the refugees and also parts of Israel in return for just non belligerence). They also founded Palestinian resistance groups which carried out terrorist attacks in Israel, like Fatah in Syria in 1959 (under the guidance of Yasser Arafat), and the PLO In Egypt in 1964. In May of 1967, the conflict escalated as Egypt closed the Straits of Tiran for Israeli shipping, sent home the UN peace keeping force stationed in 43 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

the Sinai, and issued bellicose statements against Israel. It formed a defense union with Syria, Jordan and Iraq and stationed a large number of troops along the Israeli border. After diplomatic efforts to solve the crisis failed, Israel attacked in June 1967 and conquered the Gaza Strip and the Sinai Desert from Egypt, the Golan Heights from Syria and the West Bank and East Jerusalem from Jordan (see map below). Initially Israel was willing to return most of these territories in exchange for peace, but the Arab countries refused to negotiate peace and repeated their goal of destroying Israel at the Khartoum conference.

2.5.1.5 Obstacles to peace The primary cause for the Arab-Israeli conflict lies in the claim of two national movements on the same land, and particularly the Arab refusal to accept Jewish self-determination in a part of that land. Furthermore fundamentalist religious concepts regarding the right of either side to the entire land have played an increasing role, on the Jewish side particularly in the religious settler movement, on the Palestinian side in the Hamas and similar groups. But whereas the settlers received a blow when they failed to prevent the disengagement from the Gaza Strip, Hamas won the Palestinian elections, and after their breakup with Fatah and their take-over of the Gaza Strip, they remain a dominant force capable of blocking any peace agreement. The Arab-Israeli conflict is further complicated by preconceptions and demonizing of the other by both sides. The Israelis see around them mostly undemocratic Arab states with underdeveloped economies, backward cultural and social standards and an aggressive religion inciting to hatred and terrorism. The 44 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Arabs consider the Israelis colonial invaders and conquerors, who are aiming to control the entire Middle East. There is resentment concerning Israeli success and Arab failure, and Israel is viewed as a beachhead for Western interference in the Middle East. In Arab media, schools and mosques anti-Semitic stereotypes are promoted, based on a mixture of anti-Jewish passages in the Quran and European anti-Semitism, including numerous conspiracy theories regarding the power of world Zionism. Since the Oslo peace process however, a broad consensus has been formed that an independent Palestinian Arab state should be established within the areas occupied in 1967. Polls on both sides show that majorities among Israelis and Palestinians accept a two state solution, but Palestinians almost unanimously stick to right of return of the refugees to Israel, and most Israelis oppose a Palestinian capital in the East Jerusalem. 2.5.1.6 Opportunity Cost of Conflict A report by Strategic Foresight Group has calculated the opportunity cost of conflict for the Middle East from 1991-2010 at a whopping $12 trillion. The report's opportunity cost calculates the peace GDP of countries in the Middle East by comparing the current GDP to the potential GDP in times of peace. Israel's share is almost $1 trillion. In other words, had there been peace and cooperation between Israel and Arab nations since 1991, every Israeli citizen would be earning over $44,000 instead of $23,000 in 2010.

45 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

2.5.2

Saudi Arabia Relations With US

Though Saudi Arabia and the United States obviously did not share any borders, the kingdom's relationship with Washington was the cornerstone of its foreign policy as well as its regional security policy. The special relationship with the United States actually dated to World War II. By the early 1940s, the extent of Saudi oil resources had become known, and the United States petroleum companies that held the concession to develop the oil fields were urging Washington to assume more responsibility for security and political stability in the region. Consequently, in 1943 the administration of Franklin D. Roosevelt declared that the defense of Saudi Arabia was a vital interest to the United States and dispatched the first United States military mission to the kingdom. In addition to providing training for the Saudi army, the United States Army Corps of Engineers constructed the airfield at Dhahran and other facilities. In early 1945, Abd al Aziz and Roosevelt cemented the nascent alliance in a meeting aboard a United States warship in the Suez Canal. Subsequently, Saud, Faisal, Khalid, and Fahd continued their father's precedent of meeting with United States presidents. The United States-Saudi security relationship steadily expanded during the Cold War. This process was facilitated by the shared suspicions of Riyadh and Washington regarding the nature of the Soviet threat to the region and the necessity of containing Soviet influence. As early as 1947, the administration of Harry S. Truman formally assured Abd al Aziz that support for Saudi Arabia's territorial integrity and political independence was a primary objective of the United States. This commitment became the basis for the 1951 mutual defense assistance agreement. Under this agreement, the United States provided military equipment and training for the Saudi armed forces. An important provision of the bilateral pact authorized the United States to establish a permanent United States Military Training Mission in the kingdom. This mission still operated in Saudi Arabia in 1992.

The United States-Saudi relationship endured despite strains caused by differences over Israel. Saudi 46 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Arabia had not become reconciled to the 1948 establishment of Israel in the former Arab-dominated territory of Palestine and refused to extend Israel diplomatic recognition or to engage in any form of relations with Israel. Despite this position, Riyadh acknowledged that its closest ally, the United States, had a special relationship with Israel. After the June 1967 War, however, Saudi Arabia became convinced that Israel opposed Riyadh's strong ties with Washington and wanted to weaken them. During the 1970s and 1980s, periodic controversies over United States arms sales to the kingdom tended to reinforce Saudi concerns about the extent of political influence that supporters of Israel wielded in Washington. In several instances congressional leaders opposed United States weapons sales on the grounds that the Saudis might use them against Israel. Despite assurances from Saudi officials that the weapons were necessary for their country's defense, Congress reduced or canceled many proposed arms sales. Although the debates over Saudi weapons purchases were between the United States legislature and the executive branch, these political contests embittered Saudis and had an adverse impact on overall relations. From a Saudi perspective, the public policy disputes among United States leaders seemed to symbolize a weakening of the United States commitment to defend the kingdom's security. Saudi uneasiness about United States resolve was assuaged by the United States response to the crisis unleashed by Iraq's invasion and occupation of Kuwait. In this ultimate test of the United States-Saudi security relationship, Washington dispatched more than 400,000 troops to the kingdom to ward off potential aggression. This was not the first time that United States forces had been stationed on Saudi soil. The huge Dhahran Air Base had been used by the United States Air Force from 1946 to 1962. In 1963, President John F. Kennedy had ordered a squadron of fighters to Saudi Arabia to protect the kingdom from Egyptian air assaults. In 1980 President Jimmy Carter loaned four sophisticated airborne warning and control system (AWACS) aircraft and their crews to Saudi Arabia to monitor developments in the Iran-Iraq War. However, the presence of United States and other foreign forces prior to and during the Persian Gulf War was of an unprecedented magnitude. Despite the size of the United States and allied contingents, the military operations ran relatively smoothly. The absence of major logistical problems was due in part to the vast sums that Saudi Arabia had invested over the years to acquire weapons and equipment, construct modern military facilities, and train personnel.

47 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

After the war, Saudi Arabia again faced the prospect of congressional opposition to its requests for weapons. Riyadh believed that it cooperation in the war against Iraq demonstrated the legitimacy of its defense requirements. Nevertheless, the United States informed Saudi officials that Saudi Arabia's request to purchase US$20 billion of United States military equipment probably would not win the required approval of Congress. Riyadh reluctantly agreed to an administration proposal to revise its request into two or three separate packages, which would be submitted in consecutive years. This process tended to erode the positive feelings created during the war and revive Saudi resentments about being treated as a less than equal ally.(exhibit 2) 2.5.3

Iran US Relation:

Distrust and dissension have characterized US-Iranian relations over the past 40 years. The two countries have been on a diplomatic collision course from which they can break away if the United States embraces new efforts to regain the friendship of this once strategic ally. Throughout the first decades of the 20th century, the United States enjoyed good relations with the Iranian people. The first negative shift came in 1953, when the CIA helped plan a coup against Iranian nationalist leader Mohammed Mossadeq. Ever since, Iranians have not forgotten what they perceived as the first betrayal by their ally. During the 1970s, the US relationship with Iran was further weakened by America's passive approach to the mounting political turmoil inside the country. US diplomacy towards Iran during the 1960s and 1970s suffered from a lack of effective political skills and failed to fully grasp the complex and often unpredictable Iranian power structure. During the early 1970s, a very misled US foreign policy establishment did not comprehend the significance of the rising political opposition to the Shah. While leading religious clerics, along with Iran's intelligentsia, continued to criticize the government, the United States ignored the obvious red flags on the Iranian domestic scene and maintained a steady support to the Shah. U.S. military sales to Iran amounted to $16.2 billion between 1972 and 1976. The Shah, nicknamed "the American Shah"; at the time, sought to destroy the volatile political opposition by creating a secret police force, which methodically employed torture and imprisonment against dissidents.

48 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

By the late 1970s, the Shah successfully removed all opposition operating openly in the Iranian political arena. Nonetheless, the political and social dissent that had been seemingly eliminated through the Shah's repressive tactics continued to grow. The pressure for change reached unsustainable levels between January 1978 and February 1979 and unrest swept the Iranian political system. Religious leaders who had been mobilized against what they perceived as a corrupt and ruthless regime began utilizing the broad-based support they enjoyed within Iran's villages and urban centres. In contrast, the Shah drew much of his support from the Western powers abroad, particularly the US, which further undermined his legitimacy. The US ignored the signs of growing dissatisfaction towards the regime that Iranian civil society had been sending, and thus the 19781979 revolution caught Washington by surprise. As a result, the US, without any ties to the revolutionary leaders and Iranian dissidents, was unable to consolidate a relationship with the new Iranian government. Since 1979, US policy towards the Islamic Republic has caused relations to worsen. Within the past few years, the US has missed important opportunities to foster a better relationship and utilize Iran's regional influence to its advantage. For example, in the wake of the events of September 11, 2001, the United States could have engaged the Iranian leadership, given that Iran, more than any other state in the region, could have countered the Iraqi threat. Instead, the US filled the regional political vacuum with its own military forces at great economic cost, and further alienated Iran by condemning it as part of the "axis of evil." Despite the past, America still has an opportunity to improve its relations with the Islamic Republic, which is now facing a fateful moment in its democratic development. Throughout the past several decades, each side has fundamentally misunderstood specific decisions the other has made. The gaps in US-Iranian understanding are exemplified by four questions that each of the two antagonists have asked about each other. Iranians ask: Why did the United States oppose the Iranian Revolution? Why did they passively witness Saddam Hussein's invasion of Iran in 1980? What was the real purpose of the July 1987 attack on an Iranian civilian airliner? Why is the US enforcing an economic embargo that produces great hardship and suffering to all the Iranian people? The US asks another set of questions about Iran: Why did Iran seek to build weapons of mass destruction? How does Iran justify its human rights record? Why does Iran support terrorism 49 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

across the globe? And why has Iran been unhelpful as the US seeks a solution to the PalestinianIsraeli conflict? Unanswered, these questions continue to fuel the mistrust that colours each country's perception of the other. From the US perspective, America has to overcome its prejudices towards Iran for the sake of its global interests. If the "American Giant" is to move forward with its objectives in the Middle East and beyond, it must at any cost develop a better understanding of Iranian politics and society, as well as supporting its process towards democracy. 2.5.4 International Pressure on Iran The U.S. is trying to increase its pressure on its European and Asian allies to step up cooperation to counter Iran's efforts to develop weapons of mass destruction (WMD) by limiting the access of their companies to the Iranian market. Of course, this is easier said than done. According to the American Enterprise Institute (AEI), since 2000, foreign European and Asian companies have struck deals with Iran to the tune of $135 billion. Key European and Asian allies that are critical to global efforts to weaken Iran are currently opposed to financial sanctions against their companies. European energy companies that do business in Iran, such as Royal Dutch Shell, the Spanish Rapsol, France's Total, and Italy's Ente Nazionale Idrocarburi (ENI), currently enjoy the backing of governments that view ILSA as an unlawful extension of U.S. policy beyond its borders. In 2007, Royal Dutch Shell and Rapsol announced their intent to sign a $10 billion deal for South Pars, the world's largest natural gas field. Developing Asian nations pose an even greater challenge for U.S. efforts to isolate Iran. Both the China National Petroleum Corporation and the China National Offshore Oil Corporation recently announced plans to develop major liquefied natural gas (LNG) projects, respectively in South Pars and in North Pars. China's other major oil company, Since opec, hopes to develop the Yadavaran oil field, which is expected to produce 300,000 barrels a day by 2010. The most concerning news comes out of India, a country that is actually helping Iran alleviate its gasoline problem. It not only supplies some 15 percent of Iran's gasoline imports, but an Indian business conglomerate, the Essar group, is negotiating the construction of a 300,000 barrel per day refinery in southern Iran. Two years ago, New Delhi also signed a $40 billion LNG deal with Iran. 50 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

India's domestic natural gas supply meets barely half its demand. Iran, which is geographically close to India, is a natural supplier. Tehran, which now wants to become India's exclusive natural gas supplier, is pushing for the construction of a $7 billion gas pipeline deal that would connect the two countries via Pakistan. This would make one billion Indians dependent upon one of the world's most radical regimes. Any successful U.S. effort to block international access to Iran's oil and gas resources must take into account India's and China's ravenous hunger for energy. This is why Congress and the Bush administration approved a landmark deal in 2006, giving India increased access to the global market for nuclear fuel and technologies to enhance India's civil nuclear power industry, an unprecedented departure from America's long-standing policy of non-proliferation. 2.5.5 Japan's struggle to secure future oil supply from Iran After the U.S., Japan is the world's largest oil importer. Japan imports most of its oil from the Middle East (88.4% in 2001.) In an effort to secure its energy supply, Japan has been pursuing a $2.8 billion deal with Iran to develop oil at Azadegan in the oil-rich Khuzestan Province where an estimated reserve of six billion barrels is located. Japanese officials, reported the Economist, were warned by the U.S. that Japanese consortiums might be punished with sanctions were they to sign the Azadegan deal. Richard Boucher, U.S. State Department spokesman, said this was a "particularly unfortunate time" to be striking deals with Iran. The U.S. opposes the oil deal for two reasons. First, it would strengthen Iran's economy, rolling back the efforts by local opposition to undermine the ruling clerics, whose Islamic regime is described by the State Department as the world's "most active state sponsor of terrorism." Second, oil revenues may be used for Iran's nuclear program, which the U.S. believes masks efforts to develop nuclear weapons. Just last month Iran equipped its elite revolutionary guards with a locally made ballistic missile - the Shahab-3 - capable of carrying a nuclear warhead and reaching U.S. forces stationed in Saudi Arabia and Turkey. The strong American opposition puts Japan in a delicate position. Japan is reluctant to compromise its relations with the U.S, on which it depends for both its economy and its security, by enriching a country its ally considers a threat. Japan needs the U.S. to serve as a deterrent to a nuclear armed North Korea and must be sensitive to U.S. concerns regarding Iran's nuclear capability (it's worth 51 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

noting that Iran's Shahab-3 is based on the design of North Korea's No-dong ballistic missile.) Unlike the U.S, however, Japan maintains diplomatic and economic relations with Iran - in fact, Iran is its third-largest supplier of oil. On July 1, Japan suggested a compromise aimed at securing the deal while allaying American concerns: Japan would sign the deal if Iran would sign an additional protocol to the NonProliferation Treaty allowing for surprise visits to suspected nuclear sites. Iran refused. Two days later, Japan announced the deal would be "prolonged" while concerns about Iran's nuclear program were addressed. Iran responded by playing down Japan's decision. But there are signs that due to Iran's difficult economic problems some influential Iranians are coming round to the idea of signing the additional protocol. Iranian Oil Minister Bijan Namdar Zanganeh has said Iran and Japan are close to an agreement despite U.S. objections. Were the deal to fall through, Chinese, Indian and Russian oil and gas companies would likely compete over rights to develop Azadegan. China Petroleum & Chemical Corp., known as Sinopec, has announced it is "more willing than ever before'' to enter into joint ventures with Iran. India's petroleum ministry, for its part, announced that India will be "perfectly happy" if given the field. The obstacle to its deal with Iran comes at a pivotal moment for the future of Japanese oil supply. Due to its excessive reliance on the Middle East, Japan has sought to diversify its sources of oil, looking particularly to Russia. However, Japan's Russian prospects plummeted, when China's National Petroleum Corporation (CNPC) signed a $150 billion preliminary agreement with the Russian company Yukos to pump oil from Siberia to Daqing. Japan, which had proposed a pipeline from Siberia to Nakhodka (a port in Russia's Far East,) had been competing with China for the deal. Despite initial press reports indicating that the Sino-Russian deal was final, Japan has not surrendered the field. It has continued to send officials to Moscow to plead its case, and its labors might bear fruit. Two days after CNPC and Yukos inked the deal during a state visit by Chinese President Hu Jintao to Russian President Vladimir Putin, the Russian leader emerged from a meeting with Japanese Prime Minister Junichiro Koizumi and announced that neither possibility had been ruled out. Three weeks later, Putin indicated that he actually preferred Nakhodka, because oil could be transported from there not to either China or Japan but to both, and to the entire Asia-Pacific region, as well. During a June 28 visit to Vladivostok, Japan's Foreign Minister boosted an offer 52 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

made in mid-April to help Russia develop oil fields in Western Siberia in exchange for the Nakhodka pipeline. This story continues to develop. Many opponents of an aggressive economic assault against Iran assert that efforts to cut off Iran's oil exports will disrupt global markets, cause a spike in oil prices, and hurt Western consumers. Accordingly, in December 2006, the U.N. Security Council voted to only issue limited economic sanctions against Iran, but not its energy sector. Considering the long-term risks associated with a nuclear Iran, higher prices at the gas pump should not drive any Western country's Iran policy. No doubt, if Iran's production falls, due to investors' departure or a calculated decision by Iran to use the oil weapon and cut its production, there will be economic fallout. However, Iran will be the main casualty of any disruption. Additionally, in recent years, the U.S. economy has shown remarkable resiliency in the face of mounting oil prices and can withstand even higher prices. There is also a safety net in place. Most major oil consuming countries maintain massive strategic petroleum reserves in the event of a drop in supply. The U.S. alone has some 700 million barrels of oil in reserve – two years worth of Iranian exports. To insulate the U.S. further, President Bush seeks to double the size of the American oil reserve in the coming years. The President also seeks to reduce America's oil dependence through increased efficiency and to shift to alternative fuels. Applied in unison, these tactics advance the strategic goals of reducing global energy prices, protecting the West against supply disruptions, and limiting the flow of petrodollars to Tehran. This increased pressure on the Iranian regime could, over time, generate a much desired regime change. If Washington executes this strategy with expediency and determination, this outcome could be achieved before Iran becomes a nuclear power. 2.5.6

Britain Kuwait Relationship

As the Iraqi invasion demonstrated, Kuwait's large oil revenues and inherently small defense capabilities gave it tremendous vulnerability. Historically, until the Iraqi invasion, Kuwaiti leaders had always dealt with that vulnerability through diplomacy, trying to find allies that would protect them while maintaining as much independence as possible from those allies by playing them off against each other. Historically, the most important ally was Britain. Kuwait's relationship with Britain came about at the bidding of the early Kuwaiti leader Shaykh Mubarak in an effort to deter a 53 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

still more troublesome actor, the Ottoman Empire. As one consequence of the 1899 treaty, which gave Kuwait a better status than was the case in British treaties with other possessions, the British presence remained somewhat distant, and British officials meddled less frequently in local politics. The relationship with Britain continued beyond independence on June 19, 1961, and the new agreement between independent Kuwait and Britain promised continued British protection as necessary. That protection proved necessary when Iraq, six days after Kuwait's independence, declared Kuwait a part of Iraq and sent troops toward the amirate in support of that claim. Because Kuwait's army was too small to defend the state, British troops arrived, followed soon after by forces from the League of Arab States (Arab League), in the face of which Iraqi forces withdrew. As Britain increasingly withdrew from the gulf in the 1970s and 1980s, Kuwait was forced to look for other sources of support. Although Kuwaiti leaders tried to maintain a degree of neutrality between the superpowers--Kuwait had an early and sustained economic, military, and diplomatic relationship with the Soviet Union--in the end it was obliged to turn to the United States for support. The Iran-Iraq War was the decisive factor in consolidating closer ties with the United States. Although at the outset of the war Kuwait was an outspoken critic of United States military presence in the gulf, during the war this position changed. When Kuwaiti ships became the target of Iranian attacks, Kuwait's security situation deteriorated, and Kuwait approached the Soviet Union and the United States with requests to reflag and thus protect its beleaguered tankers. As soon as the Soviet Union responded positively to the request, the United States followed. The ground was thus laid for subsequent United States support. 2.5.7 US Kuwait relationship: The United States opened a consulate in Kuwait in October 1951, which was elevated to embassy status at the time of Kuwait's independence 10 years later. The United States supports Kuwait's sovereignty, security, and independence, as well as its multilateral diplomatic efforts to build greater cooperation among the GCC countries. Strategic cooperation between the United States and Kuwait increased in 1987 with the implementation of a maritime protection regime that ensured the freedom of navigation through the 54 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Gulf for 11 Kuwaiti tankers that were reflagged with U.S. markings. The U.S.-Kuwaiti strategic partnership intensified dramatically again after Iraq's invasion of Kuwait. The United States spearheaded UN Security Council demands that Iraq withdraw from Kuwait and its authorization of the use of force, if necessary, to remove Iraqi forces from the occupied country. The United States also played a dominant role in the development of the multinational military operations Desert Shield and Desert Storm that liberated Kuwait. The U.S.-Kuwaiti relationship has remained strong in the post-Gulf War period. Kuwait and the United States worked on a daily basis to monitor and to enforce Iraq's compliance with UN Security Council resolutions, and Kuwait has also provided the main platform for Operation Iraqi Freedom since 2003. Since Kuwait's liberation, the United States has provided military and defense technical assistance to Kuwait from both foreign military sales (FMS) and commercial sources. The U.S. Office of Military Cooperation in Kuwait is attached to the American embassy and manages the FMS program. There are currently over 100 open FMS contracts between the U.S. military and the Kuwait Ministry of Defence totalling $8.1 billion. Principal U.S. military systems currently purchased by the Kuwait Defence Forces are Patriot Missile systems, F-18 Hornet fighters, the M1A2 main battle tank, AH64D Apache helicopter, and a major recapitalization of Kuwait's Navy with U.S. boats. Kuwaiti attitudes toward American products have been favourable since the Gulf War. In 1993, Kuwait publicly announced abandonment of the secondary and tertiary aspects of the Arab boycott of Israel (those aspects affecting U.S. firms). The United States is currently Kuwait's largest supplier of goods and services, and Kuwait is the fifth-largest market in the Middle East. U.S. exports to Kuwait totalled $2.14 billion million in 2006. Provided their prices are reasonable, U.S. firms have a competitive advantage in many areas requiring advanced technology, such as oil field equipment and services, electric power generation and distribution equipment, telecommunications gear, consumer goods, and military equipment.

Kuwait also is an important partner in the ongoing U.S.-led campaign against international terrorism, providing assistance in the military, diplomatic, and intelligence arenas and also 55 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

supporting efforts to block financing of terrorist groups. In January 2005, Kuwait Security Services forces engaged in gun battles with local extremists, resulting in fatalities on both sides in the first such incident in Kuwait's history. 2.5.8 U.S.-U.A.E. Relations The United States has enjoyed friendly relations with the U.A.E. since 1971. Private commercial ties, especially in petroleum, have developed into friendly government-to-government ties which include security assistance. The breadth, depth, and quality of U.S.-U.A.E. relations increased dramatically as a result of the U.S.-led coalition's campaign to end the Iraqi occupation of Kuwait. In 2002, the U.S. and the U.A.E. launched a strategic partnership dialogue covering virtually every aspect of the relationship. The U.A.E. has been a key partner in the War on Terror. U.A.E. ports host more U.S. Navy ships than any port outside the U.S. The United States was the third country to establish formal diplomatic relations with the U.A.E. and has had an ambassador resident in the U.A.E. since 1974. 2.5.9

The Sino Saudi Relationship:

China, Napoleon once remarked, is a sleeping giant, and "when it awakens the world will tremble." China is now thoroughly awake. The economy of the world's most populous country has been growing at a blistering rate of between 8 and 11 percent a year. Last year, the People's Republic of China (PRC) superseded Mexico as one of the United States' main trading partners. It also took Japan's place as, the second largest consumer of petroleum on the globe. If the world has not yet quite begun to tremble in the face of these facts, the economic and geopolitical implications of the new Chinese prosperity are nevertheless immense - and not least where energy markets are concerned. Growing wealth is prompting millions of Chinese to abandon bicycles and overcrowded mass transit in favor of private cars. Last year, China's domestic automobile sales increased by a staggering 69 percent. By 2010, the country is expected to have 90 times more cars on the road than it did in 1990; by 2030, it may have more than the U.S. Such a gigantic fleet requires fuel. But China's domestic oil production is declining. Already by 1993, after decades of self-reliance, domestic crude output was failing to meet the growing demand, 56 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

and the country became a net importer; since then, dependence on foreign oil has increased steadily. According to a conservative estimate by the U.S. Department of Energy, China's oil imports over the next two decades will grow by 960 percent. The International Energy Agency predicts that, by 2030, those imports, now at 1.9 million barrels a day, will rise to at least 10 million barrels a day, the current import level of the United States. Some Chinese oil imports come from Kazakhstan, Venezuela, the Sudan, Russia, and Indonesia. These will no doubt continue, and increase. Nevertheless, a decade hence, the lion's share of China's energy imports will almost certainly come from one source: the major oil exporters of the Middle East. China is a relative newcomer to the Middle East; unlike the other great powers, it has never played a major role in the region. During the cold war, the geographically distant Chinese preferred to stay away from the intricacies of an area so beset by instability. Until Mao Zedong's death in 1976, China had not even bothered to establish diplomatic relations with most of the local capitals. Only in the late 70's did Beijing emerge from its seclusion, forging ties with Jordan and Syria and almost all of the oil-rich states. In recent years, China has supplied ballistic missiles to Syria, provided sensitive missile and nuclear technology to Iraq, and plied Libya with missile technology. Iran, now the second largest supplier of China's oil, has become a particularly important trading partner. As relations between the two countries have expanded, the PRC has sold ballistic-missile components to Iran as well as air-, land-, and sea-based cruise missiles, giving Tehran the capability to attack U.S. naval forces in the strategically vital waters of the Persian Gulf. Even more significantly, China has provided Iran with key ingredients for the development of nuclear weapons, including reactors and significant quantities of uranium. If Iran is today well on its way toward an indigenous nuclear-weapons capacity, that is thanks in no small part to Beijing.

But the biggest prize in the region is Saudi Arabia, the country that holds a quarter of global oil 57 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

reserves, that is the world's largest exporter, and that is today China's number-one foreign supplier of crude oil. As far back as the mid-1980's, China began to engage in military commerce with Riyadh, selling it 36 intermediate-range ballistic missiles, building two missile bases south of the Saudi capital, and deploying Chinese security personnel to maintain them. Though the missiles were highly inaccurate, they endowed Saudi Arabia with a military potential its neighbors could not ignore. With a range of 1,800 miles, and capable of carrying a nuclear warhead, they could be used to strike any location between New Delhi and Tel Aviv. In the years since that early sale, Sino-Saudi relations have grown only closer, especially after the two countries established full diplomatic ties in 1990. As military cooperation has deepened, China has offered to sell the Saudis, among other things, modern, solid-fueled intercontinental ballistic missiles with a range of up to 3,500 miles. A regular series of high-level visits by Chinese leaders culminated in President Jiang Zemin's pronouncement of a "strategic oil partnership" between the two countries in 1999. Could China supplant the U.S. as a major Saudi ally? At the moment it hardly seems likely. China is still a modest force in the Middle East, while the U.S. maintains large numbers of troops and formidable amounts of equipment in bases throughout the region. But given the logic of its domestic needs, Beijing is almost certain to step up its diplomatic and military efforts. Making its path easier is the fact that this also happens to be a moment of deep tension in U.S.-Saudi relations. Ever since September 11, 2001, when it emerged that fifteen of the nineteen men who carried out the terrorist attacks on New York and Washington were Saudi citizens, the American media have been full of tales of Saudi laxity in fighting terror, not to mention complicity in funding and inciting it. Relatives of the victims of 9/11 have filed a multi-trillion-dollar lawsuit against Saudi Islamic organizations and three top members of the royal family. A widely publicized book, Sleeping with the Devil, by the former CIA official Robert Baer, trumpets the idea of simply seizing the Saudi oil fields (an idea whose strategic rationale was first adumbrated in a January 1975 Commentary article by Robert W. Tucker).

58 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Public anger at the Saudis has also begun to be reflected in the workings of the U.S. government. Under new immigration guidelines, the expedited entry procedures of the pre-9/11 era have been eliminated, and Saudi males seeking to enter this country are subject to special scrutiny. In 2002, the Pentagon's Defense Policy Board heard a RAND Corporation expert describe Saudi Arabia as the "kernel of evil" and, like Baer, advance the notion of seizing and occupying oil fields in the country's eastern province. Anti-Saudi sentiment in Congress is also running high, and there has been a steady drumbeat of opposition to the presence of American forces on the Saudi peninsula. In 2003, following the defeat of Saddam Hussein, the Bush administration responded to this pressure by withdrawing the bulk of those forces, relocating them in nearby Qatar. Though it was done quietly, the American military departure may turn out to be a major strategic turning point. It certainly has created new opportunities for both the Saudis and the Chinese. In Saudi Arabia itself, growing U.S. animosity has fed doubts about America's dependability as an ally, if not outright fears of Washington's long-term intentions. Many worry, with reason, that the liberation of Iraqi Shiites from Saddam Hussein's oppressive rule may ignite discontent among the kingdom's own Shiites, who happen to be situated geographically atop the largest oil fields. Equally disturbing for many Saudis is the American effort to revive Iraq's shattered oil industry. The infusion of an additional 6 million barrels per day into world oil markets will inevitably mean fewer petrodollars for the economically stretched kingdom. No wonder, then, that Saudi newspapers and officials alike have taken to deriding harshly what they call the American "pressure campaign" against their country. For the first time since 1973, according to the New York Times, some have even spoken openly about cutting off oil supplies unless Washington alters direction. At the very least, the Saudi government appears to recognize that it can no longer depend on the U.S. as the guarantor of its security, and that it is time to diversify the kingdom's portfolio. The internal politics of the Saudi royal family are notoriously difficult to decipher. The kingdom's de-facto ruler, Crown Prince Abdullah, heads what constitutes the pro-American faction, which has always stressed the high quality of U.S. military equipment and the reliability of U.S. logistical support. But there is increasing opposition to this view. In particular, the minister of defense, Prince 59 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Sultan (who is the father of the current Saudi ambassador to the U.S., Prince Bandar), has been enthusiastically promoting expanded Sino-Saudi relations as a hedge against American fickleness. As the Saudis watch opinion shift against them in Washington, and as fears develop that Congress may block transfers of sophisticated weaponry, the pro-Chinese element is gathering strength. There are some particularly alarming scenarios to consider here. If the Saudis were to begin worrying seriously about a future American seizure of their oil fields, they might well seek ways to deter it. Given the weakness of their own military, one option would be to acquire nuclear weapons. Although talk of a nuclear-armed Saudi Arabia may, at this juncture, seem farfetched, it is not beyond the realm of possibility. Saudi Arabia could break its military dependence on the U.S. either by entering into an alliance with some other existing nuclear power or by acquiring its own nuclear capability. In either case, China would play a crucial role. If the Saudis opted to acquire their own bomb, they would likely become the first nuclear power to have bought one off the shelf. Were this to happen, it would represent the culmination of a SinoSaudi-Pakistani nuclear project that began in May 1974 when, following India's ascension to the nuclear club, China sent scientists to assist Pakistan in developing that country's own nuclear program. Even if Saudi Arabia does not pursue nuclear status, however, it has abundant reasons for looking east to China both for markets and for military assistance, just as China has abundant reasons for looking west to Saudi Arabia for continued access to Middle Eastern oil. And aside from these mutual interests, an alliance with China would hold other attraction for the Saudis. Unlike the U.S., the Chinese do not aspire to change the Arab way of life, or impose freedom and democracy on regimes that view such ideas with skepticism and fear. Indeed, Chinese attitudes toward the open societies of the West are markedly similar to those of the Arab despotisms themselves. The Chinese also have at their disposal immense reserves of manpower, which they can deploy to protect the oil resources of any new allies they acquire. Thousands of Chinese soldiers disguised as oil workers, for example, are used today to guard petroleum facilities in Sudan. With 11 million men reaching military age annually, China could easily replicate this elsewhere. Finally, while the U.S. is continually castigated by the Arabs for its closeness to Israel, China's ties with Jerusalem have never risen above the level of indifference.

60 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Of course, many other factors must be weighed in the balance. The Chinese may well find fishing in Middle Eastern waters to be a risky business, entailing high costs in relations with other powers, and in particular with the U.S. Already there are signs of growing disquiet in Washington over China's role in the Middle East. The U.S.-China Economic and Security Review Commission, a group created by Congress to monitor relations between the two countries, issued a warning in 2002 over China's provision of "technology and components for weapons of mass destruction and their delivery systems" to such Middle Eastern states as Iran, Syria, Libya, and Sudan. This was characterized as "an increasing threat to U.S. security interests." Significantly, the report took special notice of China's growing dependence on imported oil, calling it a "key driver" impelling relations with "terrorist-sponsoring governments" in the region. If such concerns continue to mount, China could find itself gaining in one region only to lose in another. The Chinese economy may be heavily dependent on Middle Eastern oil, but it is also heavily dependent on trade with the U.S. The shelves of Wal-Mart alone account for 10 percent of China's exports to the U.S. and 1 percent of China's GDP. Whether and under what circumstances the U.S. would ever choose to exercise its leverage is another matter. Right now, any collision over Middle Eastern oil is more a potential than an actual threat. Besides, if predicting the future is risky at all times, the present moment makes the exercise almost foolhardy. That the Middle East is in an exceptionally volatile condition goes without saying. And as for China, its astonishing economic growth may yet turn out to be a bubble; if it pops, so will its high rates of energy consumption. Then, too, even if stellar economic growth continues, the Chinese may find attractive alternatives to oil: the country is extremely rich in coal and natural gas, and, since it has not yet invested heavily in an expensive petroleum infrastructure, it could develop ways to harness fuels produced from coal and biomass (both of which it has in abundance) and thus overcome its dependence on imported oil altogether. Still, it is worth bearing in mind that the U.S., which has been trying for three decades to break its addiction to Middle Eastern oil, has only become more dependent with each passing year. Whether the Chinese can do better remains at best an open question. For the time being, the trend lines are 61 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

what they are: oil reserves elsewhere are being depleted faster than in the Middle East, and before too long that region will contain the last remaining reservoir of cheaply extractable crude. If each barrel the U.S. needs is also sought after by China, a superpower conflict in the world's most unstable region can once again become an omnipresent danger. At that point, as Napoleon foresaw, the world will surely tremble.

2.6 THE CHOKE POINTS IMPORTANT FOR MIDDLE EAST Chokepoints are narrow channels along widely used global sea routes. They are a critical part of global energy security due to the high volume of oil traded through their narrow straits. The Strait of Hormuz leading out of the Persian Gulf and the Strait of Malacca linking the Indian and Pacific Oceans are two of the world’s most strategic chokepoints. Other important passages include: BabelMandab which connects the Arabian Sea with the Red Sea; the Panama Canal and the Panama Pipeline connecting the Pacific and Atlantic Oceans; the Suez Canal and the Sumed Pipeline linking the Red Sea and Mediterranean Sea; and the Turkish/Bosporus Straits joining the Black Sea and the Caspian Sea region to the Mediterranean Sea. In 2007, total world oil production amounted to approximately 85 million barrels per day (bbl/d), and around one-half, or over 43 million bbl/d of oil was moved by tankers on fixed maritime routes. The international energy market is dependent upon reliable transport. The blockage of a chokepoint, even temporarily, can lead to substantial increases in total energy costs. In addition, chokepoints leave oil tankers vulnerable to theft from pirates, terrorist attacks, and political unrest in the form of wars or hostilities as well as shipping accidents which can lead to disastrous oil spills.

The following are the 4 main choke points of the Asia through which major flow of Persian Gulf oil and gas occurs: 1. The strait of Hormuz

62 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

2. The strait of Malacca 3. The Suez Canal 4. Bab-el-Mandeb

2.6.1 The strait of Hormuz

Location: Oman/Iran; connects the Persian Gulf with the Gulf of Oman and the Arabian Sea Oil Flows : 16.5-17 million barrels per day (b/d) Destination of Oil Exports: Japan, United States, Western Europe Issues and concerns: Located between Oman and Iran, the Strait of Hormuz connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. Hormuz is the world's most important oil chokepoint due to its daily oil flow of 16.5-17 million barrels (first half 2008E), which is roughly 40 percent of all seaborne traded oil (or 20 percent of oil traded worldwide). Oil flows averaged over 16.5 million barrels per day in 63 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

2006, dropped in 2007 to a little over 16 million barrels per day after OPEC cut production, but rose again in 2008 with rising Persian Gulf supplies. At its narrowest point the Strait is 21 miles wide, and the shipping lanes consist of two-mile wide channels for inbound and outbound tanker traffic, as well as a two-mile wide buffer zone. The majority of oil exported through the Strait of Hormuz travels to Asia, the United States and Western Europe. Currently, three-quarters of all Japan’s oil needs pass through this Strait. On average, 15 crude oil tankers passed through the Strait of Hormuz daily in 2007, along with tankers carrying other petroleum products and liquefied natural gas (LNG). Implications on blockage: Closure of the Strait of Hormuz would require the use of longer alternate routes at increased transportation costs. Alternate routes include the 745 miles-long Petroline, also known as the East-West Pipeline, across Saudi Arabia from Abqaiq to the Red Sea. The East-West Pipeline has a capacity to move five million-bbl/d. The Abqaiq-Yanbu natural gas liquids pipeline, which runs parallel to Petroline to the Red Sea, has a 290,000-bbl/d capacity. Other alternate routes could include the deactivated 1.65-million bbl/d Iraqi Pipeline across Saudi Arabia (IPSA), and the 0.5million-bbl/d Tapline to Lebanon. Oil could also be pumped north to Ceyhan in Turkey from Iraq.

64 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

2.6.2 The Strait of Malacca

Location: Malaysia/Singapore; connects the northern Indian Ocean with the South China Sea and the Pacific Ocean. One-third of the world's ships sail through the Strait of Malacca and the nearby Straits of Sunda and Lombok. Because of the large volume of cargo that flows through this narrow shipping lane, it is a key Southeast Asian Chokepoint . Oil Flows : 15 million b/d Destination of Oil Exports: Japan, other Pacific Rim countries Main Concerns: The Strait of Malacca, located between Indonesia, Malaysia, and Singapore, links the Indian Ocean to the South China Sea and Pacific Ocean. Malacca is the shortest sea route between Persian Gulf suppliers and the Asian markets –notably China, Japan, South Korea, and the Pacific Rim. Oil shipments through the Strait of Malacca supply China and Indonesia, two of the world’s most populous nations. It is the key chokepoint in Asia with an estimated 15 million bbl/d flow in 2006. At its narrowest point in the Phillips Channel of the Singapore Strait, Malacca is only 1.7 miles wide 65 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

creating a natural bottleneck, as well as potential for collisions, grounding, or oil spills. Recent reports by the International Chamber of Commerce show that piracy, including attempted theft and hijackings, are a constant threat to tankers in the Strait of Malacca. Implication on blockage: Over 50,000 vessels transit the Strait of Malacca per year. If the strait were blocked, nearly half of the world's fleet would be required to reroute around the Indonesian archipelago through Lombok Strait, located between the islands of Bali and Lombok, or the Sunda Strait, located between Java and Sumatra. Malaysian, Indonesian and Saudi companies signed a contract in 2007 to build a $7 billion pipeline across the north of Malaysia and southern border of Thailand to reduce 20 percent of tanker traffic through the Strait of Malacca.

66 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

2.6.3 The Suez Canal

Location: Egypt; connect the Red Sea and Gulf of Suez with the Mediterranean Sea Oil Flows: 4.5 million b/d (0.8 million b/d through Suez Canal, 2.1 million b/d through Sumed Pipeline) Destination of Oil Exports: Europe, United States Main Concerns: The Suez Canal is located in Egypt, and connects the Red Sea and Gulf of Suez with the Mediterranean Sea. The Canal is one of the world’s greatest engineering feats covering 120 miles. Oil shipments from the Persian Gulf travel through the Canal primarily to European ports, but also to the United States. In 2006, an estimated 3.9 million bbl/d of oil flowed northbound through the Suez Canal to the Mediterranean, while 0.6 million bbl/d travelled southbound into the Red Sea. Over 3,000 oil tankers pass through the Suez Canal annually, and represent around 25 percent of the Canal’s total revenues. With only 1,000 feet at its narrowest point, the Canal is unable to handle large tankers. The Suez Canal Authority (SCA) has discussed 67 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

widening and deepening the Canal to accommodate VLCCs and Ultra Large Crude Carriers (ULCC). The 200-mile long Sumed Pipeline, or Suez-Mediterranean Pipeline, also provides a route between the Red and Mediterranean Seas by crossing the northern region of Egypt from the Ain Sukhna to the Sidi Kerir Terminal. The pipeline provides an alternative to the Suez Canal, and can transport 3.1 million bbl/d of crude oil. In 2006, nearly all of Saudi Arabia’s northbound shipments gfvvvvv

(approximately 2.3 million bbl/d of crude) were transported through the

Sumed pipeline. The pipeline is owned by Arab Petroleum Pipeline Co., a joint venture between EGPC, Saudi Aramco, Abu Dhabi’s ADNOC, and Kuwaiti companies. Closure of the Suez Canal and the Sumed Pipeline would divert tankers around the southern tip of Africa, the Cape of Good Hope, adding 6,000 miles to transit time.

Sumed Pipeline

2.6.4 Bab-el-Mandeb 68 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Location: Djibouti/Eritrea/Yemen; connects the Red Sea with the Gulf of Aden and the Arabian Sea Oil Flows : 3.3 million b/d Destination of Oil Exports: Europe, United States, Asia Main Concerns: The Strait of 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. Exports from the Persian Gulf must pass through Bab-el-Mandab before entering the Suez Canal. In 2006, an estimated 3.3 million bbl/d flowed through this waterway toward Europe, the United States, and Asia. The majority of traffic, around 2.1 million bbl/d, flows northbound through the Bab el-Mandab to the Suez/Sumed complex. Bab el-Mandab is 18 miles wide at its narrowest point, making tanker traffic difficult and limited to two 2-mile-wide channels for inbound and outbound shipments. Closure of the Strait could keep tankers from the Persian Gulf from 69 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

reaching the Suez Canal or Sumed Pipeline, diverting them around the southern tip of Africa. This would effectively engage spare tanker capacity, and add to transit time and cost. The Strait of Bab el-Mandab could be bypassed through the East-West oil pipeline, which crosses Saudi Arabia with a 4.8 million bbl/d capacity. However, southbound oil traffic would still be blocked. In addition, closure of the Bab el-Mandab would block non-oil shipping from using the Suez Canal, except for limited trade within the Red Sea region. Security remains a concern of foreign firms doing business in the region, after a French tanker was attacked off the coast of Yemen by terrorists in October 2002.

2.7 CONCLUSION

After looking at the affairs of Middle East, we can conclude that one factor has been common in all the wars Middle East has faced till now and the word is OIL. Be it Iran revolution or US invasion of Iraq oil has been the common factor in all the events of the region. Much blood has been spilled in 70 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

its name. It has also fueled the global struggle for political and economic primacy through the ages. There would be no exaggeration in calling this age the oil age. Starting from the Suez crisis which actually was the beginning of a series of wars in the region, to the US invasion of Iraq, the region has seen many blood sheds internally as well as externally. It has been the cynosure of all the oil hungered eyes through decades. The fight for oil is not only between Middle East and the rest of the world but also within Middle East itself. Conventional wisdom, says that ownership of oil is meaningless, that it does not matter much if most of the world’s oil is owned by one regime or the other. But in the case of the Middle East resource ownership does matter. The region is riddled with deepening ethnic and political tensions, terrorism, corruption and authoritarianism. In addition, there are problems that have no solution in sight and that will no doubt directly affect the supply of energy from the Middle East, among them a growing rift between Sunnis and Shiites, tension between the West and an increasingly radicalized Muslim world, increasing terrorist activity against oil facilities, protectionism, lack of investment, unresolved border disputes and the growing uncertainty about the political stability of key energy producers like Saudi Arabia, Iran, and Iraq. Historically, wars among Muslim countries in the Middle East have caused far bigger losses in terms of both blood and treasure. Such conflicts have been a destabilizing factor for the global energy market. Both the Iran-Iraq War and the 1990 Iraqi invasion of Kuwait caused energy crises which were followed by recessions. In such a combustible environment feeble and insecure regimes flush with petrodollars feel the need to arm themselves to the teeth, fueling a regional arms race which only contributes to the general sense of insecurity. This problem is now being exacerbated by the deepening rift between Sunnis and Shiites as it expresses itself in Iraq. A second destabilizing factor with certain impact on the oil market is the looming crisis with Iran. While the U.S. and the European Union are trying to forge a diplomatic strategy to halt Iran’s nuclear program, Iran seems determined to pursue its nuclear ambitions. In an effort to foil Western attempts to isolate it diplomatically, Iran strengthened its relations with Russia and other energy producing Central Asian countries and it has also utilized its energy resources to purchase diplomatic protection from China and India, a third of the human race. Tehran’s diplomatic dance with China, the number one oil and gas importer from Iran, is the one Iran counts on most. The two countries are bound by energy deals reaching a total value of roughly $100 billion, guaranteeing that 71 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

China will use its veto power to block any American effort to impose strong economic sanctions against Iran in the UN Security Council. Iran’s continuous defiance could produce two undesirable outcomes. In the near term it could escalate to a military confrontation between Iran and the U.S., an eventuality that will no doubt disrupt the free flow of oil through the Strait of Hormuz and send oil prices to unprecedented level. If Iran does succeed in becoming a nuclear power, the long run consequences could be far more severe. A nuclear Iran will not only be a threat to the region—Iran’s President Mahmoud Ahmadinejad is a strong advocate of the destruction of Israel—but it also guarantees that other Middle Eastern countries follow suit. Some predict that the nuclearization of the Middle East could result in a more restrained behavior by its countries as was the case of the balance of power between the U.S. and the Soviet Union during the Cold War years. But considering the history of miscalculations and erratic behavior by some of the Middle East’s regimes, it may be a leap of faith to expect the same composure and restraint that was exhibited by the great powers. Hence, a nuclear Iran enabled by the new energy reality and in particular the Chinese and Indian dependence on its energy should be perceived as one of the most destabilizing developments. As nations become increasingly dependent on oil, it becomes strategically imperative for them to secure their access to the Middle East. This means building strong alliances with the region’s suppliers, providing them with diplomatic support and military aid and often turning a blind eye to their human rights transgressions. Throughout the Cold War years, the Pax Americana in the Middle East was rarely challenged. The Soviets had strategic interests in the region but being oil rich their economy was hardly dependent on Middle Eastern oil. All this is going to change with the economic ascendance of oil poor China and India. In the coming decades, the Middle East will turn increasingly to Asia to market its oil and gas. By far the most important growth market for countries like Iran and Saudi Arabia is China, which is today the world’s second largest oil consumer and which by 2030 is expected to import as much oil as the U.S. does today. To fuel its growing economy, China is following America’s footsteps, subjugating its foreign policy to its energy needs. China attempts to gain a foothold in the Middle East and build up long-term strategic links with the region’s producers. Since September 11, tension in U.S.-Saudi relations has provided the Chinese with an opportunity to win the heart of the House of Saud. As mentioned before, to Washington’s dismay, China has also set its sights on Iran, announcing that it will not support sanctions against Iran in the UN Security Council. 72 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

No doubt that as China’s oil demand grows so wills its involvement in Middle East politics. China is likely to provide the region’s energy exporters not only with diplomatic support but also with weapons, including assistance in the development of WMD. India is no less of a challenge. Unlike China whose geography allows oil imports from neighboring Russia, India’s only nearby source of oil and gas is the Middle East. In recent years, India has grown increasingly interested in signing energy deals with Iran, Saudi Arabia and the UAE. Just like China’s, India’s engagement with Iran provides the Islamic Republic an economic lifeline at a time when the West is trying to isolate it. Such growing bonds have already compromised India’s relations with the U.S. All this means that in the long run, as China and India’s dependence on the Middle East grows, they are likely to increasingly challenge U.S. policy in the Middle East, turning the region from a unipolar region in which the U.S. enjoys a near uncontested hegemony into a multipolar system in which more and more global powers vie for influence. Overall, it seems that, at least in the foreseeable future, energy security will require careful management of the relations with the Middle East and the geopolitics in the region will continue to affect the affairs of the world.

3. CASPIAN COUNTRIES

73 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

.

1 INTRODUCTION 3.1.1 The Caspian Sea The Caspian sea basin has a stretch of 700 mile, surrounded by countries like Azerbaijan, Turkmenistan, Kazakhstan, Russia and some part of Iran (Maps Exhibit 1). Iran is a member of the Organization of Petroleum Exporting countries (OPEC), rest of the countries form a part of the 74 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Former Soviet Union (FSU), after the split of the Soviet Union in 1996. Russia, Kazakhstan, Azerbaijan form a part of the Non-Opec and Non-Organisation for Economic Co-operation and Development (OECD) group alongwith Latin America, Africa and China. FSU contributes 11.60 million barrels per day of crude oil production in the group.

3.1.2 History of the Caspian The Caspian Sea has had a history of oil production right from the start. It had taken the perception of a modern El Dorado with the discovery of oil reserves. Oil, since as early as 2600 years ago, was used to scar the enemy fleets. The record of oil being extracted dates back to the 7 th century. Long back, primary methods were used to extol the western shores of the Caspian (Baku), with the first well being drilled at Bibi-Aybat in 1846. During the period of 1850 to 1891, the production of oil had risen to 22.5 billion tons from 300 million tons. This enhancement in the activity of the Black Gold had increased the inflow of expertise and labour into the Caspian countries. The oil industry 75 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

had begun to develop, with the entrants of players, the Nobel Brothers starting the Nobel Oil Extraction Company in 1873. The year saw the launch of the first oil tanker in 1877, The Zoroaster. After that, pipelines were laid for the transport of oil to western markets which cut down costs to about one-fifth of the total. New players like Rothschild Company and Shell had entered the market in the Caspian, altering the face of the oil industry by the introduction of transportation means like railways and more of major pipelines.

As a block stone, the Russian revolution nationalized the oil industry in 1920. Owing to the Communist protests, Shell and Rothschild retreated from the countries, draining the aid to the industry. However, due to the find of oil in Russia, it became the second largest oil producing nation in the world. This facilitated a flow of cheap oil in the world, thus lowering fuel prices. The OPEC was formed by the Middle East as a revolt to the Soviet expansion. In a response to the formation, the Soviet oil industry started its own downfall, with the short term accomplishment of objectives leading to an improperly planned utilization of reserves, mindless drilling of wells terminating slowly the chances of the Soviet to achieve and be successful in the long run. Further on, the collapse of the Soviet Union led to the extended decline owing to the drop in the economy of the region.

3.1.3 Distribution of the Caspian Reserves Statistics The Caspian Basin has a potential of huge reserves, deduced from the fact that some of the major oil companies have large stakes in the region (The Caspian Reserves- Exhibit 2). Much of the reserves have not yet been explored and those are predicted to be much larger than the amount estimated. It is said that an additional 184 million barrels of oil are possible from the basin. The gas to oil ratio for the Caspian is much higher as compared to the Middle East. As far as projections go, by 2010, the oil production would double and the gas reserves would be those in the double as compared to that 76 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

of Saudi Arabia. However, owing to the economic scene in the region, the ability of the region to develop those reserves depends on how well they develop relations with the energy companies. The Caspian is in a dilemma of being classified as a lake or a sea. But this might seem small in front of the issue of dividing the reserves, both on the sea bed and the shore, among the surrounding countries. Efforts to reach a multilateral agreement have failed, leading to the formation of a Special Working Committee to help reach an agreement over the Sea. Russia seems to have taken the lead in forging individual agreements, in absence of a multilateral agreement. Russia, Kazakhstan and Azerbaijan have signed an agreement among themselves in order to divide the resources as per the agreement. The hydrocarbon fields falling on the line of divide, Median delimitation line, are settled between the concerned nations on basis of mutual decisions (3 disputed fields between Russia and Kazakhstan). However, the lines of agreement are only applicable to the seabed resources.

3.2 RUSSIA 3.2.1 Introduction Russia is the largest country bordered by Kazakhstan, Ukraine,Iran. Russia is a major player in world energy markets. It has more proven natural gas reserves than any other country, is among the top ten in proven oil reserves, is the largest exporter of natural gas, the second largest oil exporter, and the third largest energy consumer. Energy exports have been a major driver of Russia’s Economic growth over the last five years, as Russian oil production has risen strongly and world oil prices have been very high. This type of growth has made the Russian economy dependent on oil and natural gas exports and vulnerable to fluctuations in oil prices.

3.2.2 Oil Reserves And Statistics Most of Russia’s 60 billion barrels of proven oil reserves are located in Western Siberia, between the Ural Mountains and the Central Siberian Plateau (Russian Oil reserves- Exhibit). This ample endowment of this region made the Soviet Union a major world oil producer in the 1980s, Reaching production of 12.5 million barrels per day (bbl/d) in 1988. Roughly 25% of Russia’s oil reserves] and 6% of its gas reserves are on Sakhalin Island in the far eastern region of the country, just north 77 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

of Japan. Russian oil production, which had begun to decline before the Soviet Union dissolved in 1991, fell more steeply afterward — to less than six million bbl/d in 1997 and 1998.3 Statemandated production surges had accelerated depletion of the large Western Siberian fields and the Soviet central planning system collapsed. Russian oil output started to recover in 1999. Many analysts attribute this to privatization of the industry, which clarified incentives and shifted activity to less expensive production. Increases in world oil prices, application of technology that was standard practice in the West, and rejuvenation of old oil fields helped boost output. After-effects of the 1998 financial crisis and subsequent devaluation of the ruble may well have Contributed. After reaching about nine million bbl/d in 2004 depending upon the estimating source, Russian oil production continued to rise in the first several months of 2005, but only slightly. Roughly 25% of Russia’s oil reserves are on Sakhalin island where several consortia have begun producing and exporting oil (mainly to East Asia at present). They also plan to export gas to the United States via pipelines to the Siberian mainland and liquefied natural gas (LNG) terminals. With about 1,700 trillion cubic feet (tcf), Russia has the world’s largest natural gas reserves. In 2004, it was the world’s largest natural gas producer and the world’s largest exporter. However, its natural gas industry has not done as well as its oil industry in recent years, as production has increased only a little and exports only have re-attained their level of the late 1990s. Growth of Russia’s natural gas sector has been impaired by ageing fields, near monopolistic domination over the industry by Gazprom (with substantial government holdings), state regulation, and insufficient export pipelines. Gazprom, Russia’s state-run natural gas monopoly, holds more than one-fourth of the world’s natural gas reserves, produces nearly 90% of Russia’s natural gas, and operates the country’s natural gas pipeline network. The company’s tax Payments account for around 25% of Russian federal tax revenues. Gazprom is heavily regulated, however. By law, it must supply the natural gas used to heat and power Russia’s domestic market at government-regulated below-market prices. Potential growth of both oil and natural gas production in Russia is limited by the lack of full introduction of the most modern western oil and gas exploration, development, and production technology. 78 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

3.3 TURKMENISTAN 3.3.1 Introduction Turkmenistan has approximately 300,000 miles of sub-tropical desert, surrounded by Kazakhstan and Uzbekistan to the north, Afghanistan to the southeast; and Iran to the south. With Iran it controls the southern end of the Caspian Sea shore. It has a population of about 5 million, predominantly Sunni Muslims. The reserves of Turkmenistan are modest in terms of oil, but fifth largest in terms of oil. 3.3.2 Statistics Oil projects in Turkmenistan are significantly smaller and much less developed than those in Azerbaijan and Kazakhstan. Since independence, regional natural gas production in Turkmenistan has been characterised by a dramatic collapse then partial recovery. These fluctuations occurred because, after 1991, natural gas from the Caspian Sea region, mostly from Turkmenistan, went into competition with Gazprom, the Russian state natural gas company. Since all the pipelines connecting the region to world markets were owned by Gazprom and routed through Russia, Turkmen natural gas became relatively uncompetitive in market terms and, consequently, Turkmenistan had little incentive for increasing its production of natural gas. The country’s output fell throughout the 1990s, from 2.02 tcf in 1992 to only 466 bcf in 1998 when the country was engaged in a pricing dispute with Russia over the export of its natural gas. In 1999, a Turkmen-Russian agreement came into effect, and in 2000 production increased to 1.6 tcf rising to 1.8 tcf in 2003. In April 2003, Turkmenistan signed new agreements with Uzbekistan and Russia to increase its exports to both countries over the next 25 years. After a further pricing dispute which halted Turkmenistan’s natural gas exports in late 2004, Turkmenistan re-negotiated the quantities and prices of its natural gas exports to Russia and Ukraine. The recent Turkmen agreement with Russia guarantees natural gas exports of 2.8 tcf per annum from until 2028. Turkmenistan is also supplying Ukraine with up to 1.2 tcf per annum until 2006 and there are plans to extend the agreement until 2016. 3.3.3 Country Affairs View Turkmenistan has found adaptation to post-communist conditions difficult, and has suffered a 79 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

decline in the economy. Widespread internal poverty, foreign debt, and a command-style economy persist, and Turkmenistan has extensive debts which energy and cotton sales have failed to eliminate. Its economic figures are thought to be unreliable. The entire oil and gas industry is said to be in state’s hands. Turkmenistan’s gas options have also been hampered by the United States which has attempted to prevent a Turkmen gas line being built into Iran. The American company Unocal, which was interested in developing a route from Turkmenistan to India via Afghanistan and Pakistan, withdrew from the Central Asian Gas consortium for political reasons in 1998.

Turkmenistan requires fundamental reforms to be implemented in the state, for its economy to develop. Moreover, the higher cost of exporting natural gas as compared to oil hits the economy of Turkmenistan. Turkmenistan declared “permanent neutrality” in 1995, a position recognised by the UN. It has an unhealthy relation with its neighbors, opposing to regional co-operation. Prior to 11 September 2001, the Turkmen government worked closely with the Taliban government and was developing a cross-border trade with Afghanistan. President Niyazov refused to allow US forces to use its territory when Afghanistan was attacked in 2002, at a time when US bases were being established in Uzbekistan to the east. Criticism floats around for the approaches of both, the United States and the Soviet Union, the former “perhaps due to an unwillingness to jeopardize the corridor to Afghanistan and flyover rights granted by Turkmenistan; while Russia, which enjoys a great deal of influence over Turkmenistan through economic leverage, softened its criticism of Niazov’s regime. 3.4 AZERBAIJAN 3.4.1 Introduction The state of Azerbaijan is surrounded by Russia, Georgia, Armenia and Iran, with a relatively small Caspian coastline. The country has two anomalous geographical areas: the Nakhichevan Autonomous Republic (population 295,000), which is separated from the bulk of Azerbaijan by southern Armenia giving Azerbaijan a tiny border with Turkey; and the ‘enclave’ of NagornyKarabakh, within the borders of and completely surrounded by Azerbaijan, which is predominantly 80 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Armenian-populated. 3.4.2 Oil Reserves And Statistics Azerbaijan has considerable proven reserves of oil and natural gas. Oil production in Azerbaijan reached 500,000 barrels per day during the Second World War. In the post-war period, the state never regained its production capacity, and in 2002, the oil production in Azerbaijan was slightly in excess of 300,000 bpd. From 1987 to 1995, Azerbaijan’s oil production declined at a rate of 5.4%. The contract signed between Azerbaijan and eleven international companies in 1994 helped to halt this decline, principally by developing the Azeri, Chirag and Gunashli (ACG) fields, and by establishing the Azerbaijan International Oil Company (AIOC). Since 1997, oil production in Azerbaijan has been increasing on average by 10.2% per annum, and the country is expected to exceed oil production of 500,000 bpd by 2007. The ACG fields alone produced 140,000 bpd in early 2004, increasing to 400,000 bpd in 2005 and reach a peak of 1 million bpd in the next decade. According to the US Energy Information Administration, Azerbaijan’s oil production averaged 327,700 bpd in 2003, of which, approximately 320,000 bpd was crude oil, building on five consecutive years of growth. During the first half of 2004, oil production increased by almost 2,000 barrels per day to an average of 324,000 bpd compared to the same time period in 2003. Domestic petroleum consumption in Azerbaijan has fallen since independence, resulting in additional opportunities to encourage petroleum exports. Azerbaijan exported approximately 214,000 bpd in 2003, most of which was to Russia, Turkey, and Italy. Estimates of Azerbaijan’s proven crude oil reserves range between 7 and 13 billion barrels. The State Oil Company of the Azerbaijan Republic (SOCAR) estimates proven reserves at 17.5 billion barrels, which may include reserves that are either not viable or not fully proven. The country’s largest hydrocarbon structures are located offshore in the Caspian Sea and account for most of the country’s current petroleum production. The majority of Azerbaijan’s oil output (61% in 2003) originates with SOCAR. Azerbaijan has proven natural gas reserves of roughly 30 tcf, and there are potentially larger reserves. However, because there is insufficient infrastructure to deliver Azerbaijan’s natural gas from offshore fields, the source for the majority of its production, natural gas has tended to be ‘flared off’ rather than being piped to markets. Almost all of Azerbaijan’s 81 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

natural gas is produced by SOCAR from offshore fields. The Bakhar oil and gas field, is located off the southern tip of the Absheron Peninsula and currently accounts for slightly over one-half of the country’s natural gas output. Recently, output at Bakhar has been declining and, according to press reports, SOCAR has begun efforts to develop a new deposit, known as Bakhar-2 located adjacent to Bakhar. SOCAR reportedly has plans to utilize some of the Bakhar-2 natural gas production for export in the near future. SOCAR recently completed construction of a $29 million Bakhar-Neftyaniye Kamni pipeline which it anticipates will help double gas transport from the Gunashli field by 2010. Planned capacity is approximately 194 million cubic feet/day (mcf/d). The Gunashli field accounts for approximately 67% of the oil and 50% of the natural gas produced in the country. Future increases in Azerbaijan’s natural gas production are expected to be delivered by the development of the Shah Deniz offshore natural gas field. Shah Deniz is located in the Caspian Sea, approximately 60 miles southeast of Baku, and is being developed by the Shah Deniz consortium whose members include BP, Statoil, SOCAR, LukAgip, NICO, TotalFinaElf, and TPAO. Some estimates show that Shah Deniz is one of the world’s largest natural gas field discoveries in the last 20 years and contains natural gas reserves of between 14 and 35 trillion cubic feet. Despite the large Shah Deniz natural gas field, Azerbaijan is currently a net natural gas importer. Azerbaijan produced 200 billion cubic feet (bcf) of natural gas in 2003, while it consumed approximately 280 bcf. The majority of Azerbaijan’s natural gas imports currently originate in Russia. The Russian company, Gazprom, started to supply gas to Azerbaijan in early 2004 and had done so till the end of 2008. The contract supplied Azerbaijan with up to 159 bcf of natural gas per year. 3.4.3 Internal And Political Affairs Nagorny-Karabakh is the country’s biggest internal political problem, but it has wider implications. Completely within Azerbaijan, the region has historically been a centre of Armenian settlement, but it is also regarded by Azeris as a cradle of their culture. The two peoples have different languages, religion and culture. Following an outbreak of hostilities in 1988 Armenians fled from the cities of Azerbaijan and Azeris from Armenia and the area around Karabakh. The conflict resulted in around 82 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

20,000 deaths. A cease-fire came into force in 1994 but the refugee problem which was created and the imposition of an Armenian buffer zone around the enclave are sources of great tension and further potential violence.

The principal forum for negotiating the dispute has been the “Minsk Group” co-chaired by Russia, the United States and France, under the aegis of the OSCE. In March 1999 the Minsk Group put forward proposals for the establishment of a “common state” with Nagorny-Karabakh and Azerbaijan forming two equal entities. The plan was dismissed by the Azerbaijan government as being unacceptable. A fresh attempt to push the process forward began in July 1999 with talks in Geneva between the respective presidents (Heydar Aliyev and Robert Kocharian) but this process was disrupted by the assassination in late October 1999 of the Armenian Prime Minister, Vazgan Sarkisian, and other politicians. Although the assassins made no explicit linkage to the talks, some commentators suspected that the intention was to sabotage the negotiations. Talks between July 2000 and October 2002 talks failed to resolve the problem. In 2004 a series of meetings in Prague between the Foreign Ministers of Armenia and Azerbaijan initiated the "Prague Process" with US, Russian, and French mediators. The United States supports the territorial integrity of Azerbaijan and “holds that the future status of Nagorno-Karabakh is a matter of negotiation between the parties.

Traditionally the United States has been pro-Armenian. In 1992 the US included in their Freedom Support Act a section (907) which prohibited certain types of direct U.S. assistance, including military aid, to Azerbaijan as a result of the dispute over Nagorny- Karabakh.25 However, after 11 September, 2001 the US Congress approved presidential authority to waive Section 907. That waiver has recently been renewed. The influential Armenian lobby in America believes the exercise of this waiver “sends the dangerous signal to Azerbaijan that the U.S. will not respond decisively to renewed aggression against Karabakh or Armenia. In recent years, Azerbaijan has benefited economically while Armenia’s fortunes have declined. Azerbaijan is the lead country in the Baku-Tbilisi-Ceyhan pipeline route which avoids crossing Armenia (the shorter route to the Mediterranean). Thomas de Waal believes that Armenia faces a 83 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

“bleak future” if peace is not reached. “It is unlikely to collapse – its friends in Russia and the United States are too powerful to let than happen. BTC is the linchpin of this renewed interest in Azerbaijan energy. The 1000-mile pipeline will extend from Azerbaijan’s off-shore Caspian oil wells, via Georgia, to Ceyhan on the Turkish Mediterranean coast. BP has invested nearly $8bn in Azerbaijan, which includes the development of a major field and the BTC pipeline consortium. In addition to US humanitarian and developmental assistance,27 and trade and investment agreements, ChevronTexaco has $3.2bn invested in oil interests, according to John Donaldson writing for Jane’s Intelligence Review, while “more recent estimates suggest that ExxonMobil might have upwards of $25bn invested in Azerbaijan's offshore fields. Russia, which supports Iran and is wary of the US presence in the former Soviet Union, will watch these developments closely. Azerbaijan will have to balance relations with the US and Russia, since both countries have similar, albeit sometimes conflicting, interests in the south Caucasus (namely, regarding oil and the possibility of a terrorist presence). Both countries have been competing to gain a stronger foothold in the region. Azerbaijan has already attempted to ensure that it remains on good terms with Russia. In March Mr [Heydar] Aliyev and his Russian counterpart, Vladimir Putin, signed a declaration reaffirming a 1997 Friendship and Co-operation Treaty, as well as the Baku Declaration on Principles of Security and Co-operation in the Caucasus, which was signed in 2001. The BTC pipeline also faced a number of environmental concerns and oppositions.

3.5 KAZAKHSTAN Kazakhstan is the ninth largest country in the world and shares a border with both Russia and China, and has considerable oil and gas reserves, which it has developed with mainly American investment, but its relationship with the west and the USA in particular is, unlike Azerbaijan across the Caspian Sea, somewhat equivocal. Economically, Kazakhstan is one of the most successful of the former Soviet Central Asian states. It has adapted well to a market economy and introduced fiscal and monetary reforms; it was able to 84 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

repay its debt to the International Monetary Fund ahead of schedule, and is gradually reducing its ratio of foreign debt to its Gross Domestic Product. This success must, in part, be attributable to the considerable assistance from the USA since 1991 when Kazakhstan became independent. In the ten years to 2001 the United States provided “roughly $874.3 million in technical assistance and investment support in Kazakhstan.

3.5.1 Oil Reserves And Statistics It holds the largest recoverable crude oil reserves in the Caspian Sea region. Kazakhstan produces approximately 1 million bpd, around two-thirds of the region’s total Production. Kazakhstan’s combined onshore and offshore proven hydrocarbon reserves have been estimated between 9 and 17 billion barrels, comparable to OPEC members Algeria and Qatar respectively. Kazakhstan produced approximately 1 million bpd of oil in 2003 and consumed just 165,000 bpd, resulting in net exports of 865,000 bpd. Between 1999 and 2003, Kazakhstan’s oil production grew year-on-year by approximately 14%, resulting in a doubling of oil production since independence. Conversely, its other major economic indicators declined markedly during the decade after independence, notably GDP, and the production and consumption of natural gas, coal, and electricity. Increased oil production has been generated through an influx of foreign investment into Kazakhstan’s oil sector. International projects have typically taken the form of joint ventures with KazMunaiGaz (formerly Kazakhoil), the national oil company, as well as production-sharing agreements (PSAs) and exploration/field concessions. Independent analysts expect production levels of 4 million bpd, and the Kazakh government estimates production levels of around 8 million bpd by 2020. Most of this growth will be generated from three large oil fields – Tengiz, Karachaganak, and Kashagan. Despite the abundance of oil reserves, the country remains a steady exporter of natural gas. In 2003, Kazakhstan produced approximately 490 bcf and consumed 560 bcf of natural gas, resulting in net imports of approximately 70 bcf. Most of Kazakhstan’s natural gas imports originate in Uzbekistan and are destined for the south of the country. Under a 15-year strategy adopted by the Kazakh Ministry for Energy and Mineral Resources, the Kazakh government plans to increase the country’s natural gas production to 1.66 tcf by 2010, and to 1.84 tcf by 2015. Kazakhstan is the biggest recipient of US investment, with US companies holding an estimated 64 85 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

per cent of overall investment in its hydrocarbon sector and 37 per cent of participation in actual production. California-based ChevronTexaco has the largest single US interest, holding 50 per cent interest in a 40-year, 20bn dollar relationship with Kazakhstan to develop the massive onshore Tengiz oil field. Started in 1993, the TengizChevrOil consortium also includes Dallas-based ExxonMobil, which has a 25 per cent stake. ExxonMobil and ConocoPhillips are part of a consortium with Kazakhstan's state. If expansion of oil production and development of new fields goes ahead as planned, it is estimated by International Petroleum Encyclopaedia 2004 that Kazakhstan will be among the world's top 10 oil-producing nations. Kazakhstan is connected to the Black Sea by the Caspian Pipeline Consortium(CPC); however the transport of its gas reserves is still relatively undeveloped and the country imports gas from neighbouring countries. ExxonMobil and ConocoPhillips are part of a consortium with Kazakhstan's state-owned KazMunaiGaz to explore the huge Kashagan offshore oil field. The BG (British Gas) Group and Shell from the UK also have interests in the Kashagan field. BG has one of its three largest overseas investments in the Karachaganak gas condensate field.

3.6 PIPELINES Pipelines form an important part in delivering the oil and gas productions of the Caspian to the western market. (Caspian Pipelines- Exhibit). The two important pipelines are CPC and BTC. 3.6.1 Baku-Tiblisi-Ceyhan Crude Oil Pipeline The greatest single investment project in the Caspian is being made in the Baku-Tiblisi- Ceyhan crude oil pipeline (BTC). It starts at the Caspian Sea port of Baku (capital of Azerbaijan) and passes through Tibilisi (Georgia) to the deep water port of Ceyhan on Turkey’s Mediterranean coast, avoiding Russia, the Bosphorous and Dardanelles – and the politically sensitive Nogorny-Karabakh and Armenia. BTC is backed by a consortium of Western oil companies led by BP. Georgia’s internal problems with seperatist groups could cause disruption to the BTC. The Ajari separatists’ successful blockade of the Georgian port of Batumi in March 2004 caused gridlock in 86 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

the transport of Azerbaijani oil onto the Black Sea and consequent loss of revenues. The security of the pipeline by state forces (Georgian and Azerbaijani) is likely to be supplemented by private contractors, and critics suggest that the BP consortium have effectively been given control over a corridor of territory along the pipeline. Kazakhstan on the opposite shore of the Caspian would like to join up with the BTC pipeline via a sub-sea pipeline across to Baku; however Kazakh oil and gas currently travels across Russia and Kazakhstan has been reluctant to lose support from the Russian government. Turkmenistan, after much delay, has entered into a Trans-Caspian Gas Pipeline scheme which will carry 1 trillion cubic feet of gas per year between Turkmenistan and Turkey. Around one-half of the natural gas is expected to be consumed in Turkey with the remainder exported to Europe. 3.6.2 Caspian Pipeline Consortium (CTC) One of the major current routes for transporting Caspian oil and gas westward is a network of pipelines ending at the Russian port of Novorossiysk on the Black Sea from where it is shipped via Turkey’s congested straits. This Caspian Pipeline Consortium (CPC) network is Kazakhstan’s major western outlet for its huge resources, but gives Russia control of the resources crossing its territory. The pipeline from Kazakhstan’s Tengiz oilfield to the Black Sea is 1,000 miles long, and Kazakhstan has so far resisted the temptation to develop an alternative route by joining up with the BTC pipeline via the Caspian Sea to Baku and onward to the Mediterranean. Investors in CPC include Chevron (15 per cent); ExxonMobil (7.5 per cent); and Oryx (1.75 per cent). CPC is the only pipeline on Russian territory that is not controlled by the state-owned company Transneft. 3.6.3 Russian Pipelines – Extended And Proposed There are a number of proposals to build new or to expand existing Russian oil and natural gas export pipelines and related facilities. Some proposals are contentious and, while the Russian government perceives a need to expand its oil and gas export capacity, it has limited resources. With a 1.2-1.4 million bbl/d capacity, the 2,500-mile Druzhba line is the largest of Russia’s oil pipelines to Europe. It begins in southern Russia, near Kazakhstan, where it collects oil from the Urals and the Caspian Sea. In Belarus, it forks at Mozyr. After Mozyr, one branch runs through Belarus, Poland, and Germany; and the other through Belarus, Ukraine, Slovakia, the Czech 87 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Republic, and Hungary.

Work has begun to increase capacity between Belarus and Poland. An extension to Wilhelmshaven (Germany) would reduce Baltic Sea tanker traffic and allow Russia to export oil to the United States via Germany. The Baltic Pipeline System (BPS) carries crude oil from Russia’s West Siberian and TyumenPechora oil provinces westward to the newly completed port of Primorsk on the Russian Gulf of Finland. Throughput capacity at Primorsk has been raised to around one million bbl/d, and, pending government approval, will be expanded to 1.2 million bbl/d. The BPS gives Russia a direct outlet to northern European markets, reducing dependence on routes through the Baltic countries. The re-routing of Russian crude through the BPS has incurred considerable cost to those countries. Russian authorities have stated that precedence will be given to sea ports in which Russia has a stake over foreign ones.

88 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Proposed lines would carry oil from Russia’s West Siberian and Tyumen- Pechora basins west and north to a deepwater terminal at Murmansk or Indiga on the Barents Sea. This would enable 1.6-2.4 million bbl/d of Russian oil to reach the United States via tankers in only nine days, much quicker than from the Middle East or Africa. Liquefied natural gas facilities at Murmansk and Arkhangelsk also have been suggested, possibly allowing for gas exports to American markets. The Indiga route would be closer to the Tyumen-Pechora oil fields and shorter; also Transneft’s CEO has said that the Murmansk project is not economically feasible. However, in contrast with Murmansk, the port of Indiga ices over during the winter, a disadvantage that may be reduced or eliminated if Arctic ice melting continues. The prospective large Chinese market for oil has led to serious consideration of building a pipeline from the Russian city of Taishet (northwest of Angarsk) to Nakhodka (near the Sea of Japan) or to Daqing, China. Both routes pass close to Lake Baikal — a site with environment-related obstacles. The Nakhodka route would provide a new Pacific port from which Russian oil could be shipped by tanker to Japan and other Asian markets and possibly to North America. Japan has offered $5 billion 89 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

to finance construction and $2 billion for oil field development. The Daqing option is favored by China, although China could obtain exports via the Nakhodka route. China has pledged to invest US$12 billion in Russia’s infrastructure and energy sector by 2020.15 From Russia’s point of view, the Nakhoda route would offer access to multiple markets, whereas a terminus at Daqing would give China control.

The 750-mile Blue Stream natural gas pipeline, 246 miles of which is underneath the Black Sea, connects the Russian system to Turkey. In February 2003, natural gas began flowing through the pipeline, which has a design capacity of 565 billion cubic feet annually. In March 2003, Turkey halted deliveries through Blue Stream, invoking a clause in the contract allowing either party to stop deliveries for six months. Turkish leaders reportedly were unhappy with the price structure. Other factors also may have come into play, including the fact that Turkey had over committed itself to gas supplies compared with its domestic consumption and agreements to transship gas to other countries. The two sides came to an agreement in November 2003 and the natural gas flow to 90 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Turkey resumed in December 2003.

3.7 DETAILED CONFLICTS IN THE CASPIAN REGION 3.7.1 The Georgian-Abkhaz Conflict: Past, Present, Future The Georgian-Abkhaz conflict is one of the bitterest ethnopolitical conflicts in the former USSR, that between Georgia and the Abkhaz separatist movement. Since the Georgian-Abkhaz war of 1992-93 a stalemate has prevailed. No progress toward a political settlement has been detectable. What brings the issue again to the fore at this point in time is a change in leadership on both sides. Last November the "Rose Revolution" swept Shevardnadze out of power in Tbilisi and in January President Mikheil Saakashvili was inaugurated. Within a few months Abkhazia too will have a new president. The arrival of new leaders naturally inspires hope that a real peace process may finally get underway. Rachel Clogg of the British conflict mediation NGO Conciliation Resources (CR) analyzes what grounds there may be for such hope. I am also including a press release from CR about the latest in the series of unofficial Georgian-Abkhaz dialogues that they have organized. We cannot of course ignore Russia's continuing role in Georgian as well as Abkhazian affairs. Independent analyst Irina Isakova discusses the approach that the Russian government is taking toward a settlement of the conflict. 3.7.1.1 Historical Synopsis The first united Georgian state was created in the year 978: the Kingdom of the Abkhazians and the Kartvelians. It disintegrated when the Mongols conquered the region about the year 1150. For several centuries Georgia was divided among a dozen or so warring local principalities, including Abkhazia and neighboring Mingrelia. Eastern Georgia was annexed by the Russian Empire in 1800. Abkhazia was annexed in 1810 with the help of Mingrelian troops and a puppet prince installed. Armed Abkhaz resistance to Russian rule was finally crushed at the time of the Russo-Turkish war 91 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

of 1878. Mass deportations of Abkhaz to Turkey followed, leaving almost half of Abkhazia uninhabited. The empty lands were resettled by Russians, Armenians, and Greeks from other parts of the empire and by land-hungry peasants from Mingrelia. In 1918, after the Russian revolution, Georgia acquired independence. In 1921 it was occupied by the Red Army and forcibly incorporated into the USSR. During the early years of Soviet rule, Abkhazia and Georgia were separate and equal union republics. In 1931 Abkhazia was forced to join Georgia, but it retained some autonomy until 1936, when Abkhaz leader Lakoba was poisoned by Georgian party boss Beria. From 1937 until Stalin's death in 1953 Abkhazia was subjected to forced Georgianization. More Georgians were settled in Abkhazia and Abkhaz children were punished for speaking their native language. In the post-Stalin period Abkhaz rights were partly restored. Relations between Georgians and Abkhaz remained tense at all levels of society. There were waves of popular Abkhaz protest in 1957, 1965, 1967, and 1978. The 1978 protests led to substantial concessions by Georgian party leader Shevardnadze. More Abkhaz were appointed to leading positions, television broadcasts in Abkhaz began, and an Abkhaz State University was established. This in turn led to counter-protests by Georgians. Perestroika created conditions for the rapid growth of both Georgian and Abkhaz nationalist movements. The Popular Forum of Abkhazia was formed in December 1988 under the leadership of Ardzinba and became the main vehicle of Abkhaz separatism. In the late 1980s frequent rival mass meetings and demonstrations raised tensions higher and higher. The first violent clashes between Georgians and Abkhaz occurred in Gagra (northern Abkhazia) in March 1989. The first large-scale clashes followed in July in Sukhum(i), sparked by a dispute over the reorganization of the Abkhaz State University. As Georgian nationalist militias entered Abkhazia, an emerging anti-Abkhaz pogrom was halted by the intervention of Soviet interior ministry troops

92 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

from Russia. The Supreme Soviet of Abkhazia (SSA) adopted a declaration of state sovereignty. Pro-Georgian deputies left for Tbilisi, where they constituted a rival SSA in exile. Between August 1991 and March 1992, as the Soviet Union unraveled, the SSA asserted control over economic, security, and other government institutions in Abkhazia. However, the Abkhaz leadership reached a deal with Georgian president Gamsakhurdia. In late 1991 new elections to the SSA were held on the basis of ethnic quotas. In December 1991 Gamsakhurdia was overthrown in an intra-Georgian civil war. The new military junta in Tbilisi invited Shevardnadze to return to head the State Council. He did so in March 1992. The scene was now set for war. Georgian troops invaded Abkhazia from sea and land on August 14, 1992. Sukhum(i) was occupied and the separatist leadership retreated to Gudauta. With aid from Chechen and other sympathizers from the North Caucasus as well as the Russian military, the Abkhaz separatists eventually gained the upper hand. They expelled the last Georgian forces from Abkhazia in September 1993. Virtually the entire Georgian population of Abkhazia fled with them and became refugees. A peacekeeping force of Russian troops (formally under CIS control) was deployed in a border zone along the River Inguri. UN observers were sent to monitor their activity. 3.7.1.2 Current Situation Over ten years have passed since the signing of a ceasefire that marked an end to large-scale hostilities in the Georgian-Abkhaz conflict. Yet a lasting peace settlement remains a distant prospect, and ongoing conflict continues profoundly to affect political and economic development in the region. Large numbers of people, many of whom are displaced, continue to live a precarious existence. Positions remain intransigent, insecurity and lack of trust continue to underpin attitudes, and belligerent rhetoric reinforces a conflict dynamic that leaves little room for engagement with the other side, let alone compromise. 93 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

In spite of this, it is unhelpful to talk of the Georgian-Abkhaz conflict as Œfrozen¹. The fragile status quo has been subject to constant fluctuations in tension, including major outbreaks of violence in 1998 and 2001 that threatened to trigger a resumption of hostilities. And, particularly over the last year, the region has witnessed dramatic political fluidity has inevitable implications for the peace process. While there has been slow progress in the official negotiations under the auspices of the United Nations, a new dynamism has been evident on the part of the international community recently. As yet, there has been little to suggest readiness on the part of the political leaderships in Georgia and Abkhazia, for different reasons, to engage anew with the basic issues that underlie the conflict or and take the risks necessary to create fresh possibilities in the peace process. 3.7.1.3 Georgia – after the aftermath In November 2003, though few would have predicted it, President Shevardnadze exited the political stage in Georgia amid scenes of widespread public support for change. If the public were largely mobilized around disillusionment in Shevardnadze¹s leadership, his successor, Mikheil Saakashvili, was quick to make capital from this. The figurehead of the so-called Rose Revolution, he was elected as Georgia¹s third post-independence president in January 2004 with a resounding majority from a high turnout. The wave of optimism and sense of popular empowerment following the November events has carried over into an endorsement of his agenda for change. These are early days to judge whether Saakashvili will live up to the expectations of his fellow citizens, and indeed of many in the international community. Without doubt he has a serious reform agenda, and he has been proactive in setting out to prove that Georgia is serious about democratization and reviving the economy and public service provision. Yet the new president and his National Movement were ill-prepared for such a sudden rise to power. There are few signs of a comprehensive strategy on the part of the new government, which is predominantly young and inexperienced. And crucially, the myriad problems that led to such widespread dissatisfaction with Shevardnadze remain. The first major test to Saakashvili¹s leadership has been the situation in Ajara. This predominantly Muslim region on the southeast Black Sea coast was for years semi-independent of Tbilisi under its charismatic autocrat Aslan Abashidze. In an attempt to assert his authority, Saakashvili confronted 94 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Abashidze head on, challenging his control over the electoral process in Ajara. Saakashvili stated in no uncertain terms that Œin case of a threat to Georgia¹s territorial integrity, we will use force without hesitation.¹ He appealed to parliament for authorization to disarm Œillegal armed groups,¹ leading to speculation about possible military intervention. In the event, Abashidze relinquished his control and left for Russia, and serious violence was averted.

The stand-off is illustrative of Saakashvili¹s leadership style. He projects the image of a strong leader backed by a loyal army and with Georgian unity at the heart of his political agenda. This image is certainly in keeping with the steps that Saakashvili has taken to shore up presidential power since his election. With surprisingly little consultation he has introduced constitutional changes that ensure the president a disproportionate degree of power and greatly diminish parliament¹s role. He has also postponed local elections until 2005 and preserved a system whereby heads of local government are appointed by the president, arguing the need for a temporary consolidation of central control. The results of the March parliamentary elections, in which the National Movement won the majority of seats, fuel fears that democratic institutions are growing weaker under Saakashvili. His approach to the corruption issue has also been telling. While decisive and bold in tackling this muchneeded reform, Saakashvili has been willing to turn a blind eye to the rule of law: a number of prominent officials have been arrested in the glare of media publicity and with little regard for due process. An emotive and populist politician, who tends to be swayed by what his audience would like to hear, Saakashvili has been liberal with his promises. As the dust settles following the euphoria of last November, many are now beginning to ask whether he can deliver. Hardly surprisingly, cracks are appearing between Saakashvili and his prime minister, Zurab Zhvania, and the parliamentary election turnout may indicate that public support is beginning to wane. Certainly, the new president faces an uphill struggle in addressing the challenges of governing Georgia, and the next six months will be crucial in determining the direction his leadership will take. 3.7.1.4 Abkhazia – It is said to be an end of an era

95 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

The government of Abkhazia has been keeping a watchful eye on the developments in Tbilisi and sizing up the new president. Shevardnadze¹s departure and the avoidance of major instability and violence in Tbilisi were greeted with relief but also wariness. Shevardnadze was a known quantity; Saakashvili is far from predictable. Adding to this sense of nervousness is the anticipation of significant internal political change in Abkhazia, which though unrecognized by the international community has now enjoyed de facto independence for ten years. This autumn, presidential elections will mark the end of Vladislav Ardzinba¹s term in office and the first change in the Abkhaz leadership since the collapse of the Soviet Union. In a region in which personalities continue to dominate politics, the succession will be key in determining Abkhazia¹s future direction. In anticipation of the election, political debate has grown increasingly vibrant over the last year. A change of government in 2003 brought a number of younger politicians to the fore. Yet tensions within the executive, exacerbated by the president¹s chronic ill-health, have led to a degree of paralysis in the system of governance. Demands that Ardzinba step down were largely articulated by Amtsakhara, one of the larger political movements. These have now abated, and it is likely he will serve out his term. Tensions between the executive and legislative branches of power have also become more evident as parliament seeks to assert its power. In February this year a law was finally passed on a mechanism for amending the constitution. This had essentially been vetoed by the president for some time - and may have a significant impact on the forthcoming election campaign. One element of the presidential election law currently being debated involves a clause in the constitution requiring any candidate to have been resident in Abkhazia for five years preceding the election. If the restriction is removed, this would open the way for candidates from among the Moscow diaspora and would widen the race. Also controversial has been debate on a draft language law. As in Georgia, there are tensions between promoting an ethno-national agenda (particularly in the face of the perceived threat to Abkhaz language and identity) and democratic reform. Since a significant proportion of the population is non-Abkhaz speaking (including many of the large Armenian community in Abkhazia), talk of introducing wider use of the language has prompted fierce debate.

96 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Candidates for president will be formally announced when the election date is set later this month. Eight to ten individuals are currently in the running, though the number may decrease with the emergence of a new political movement, United Abkhazia, that brings together several potential candidates with the aim of fielding only one of them. Others that may put forward candidates include Aitaira, the first explicitly oppositional movement with a liberal-democratic reform agenda; Akhiatsa, a broadly centrist movement; and Amtsakhara, a movement that initially grew out of a concern for the social rights of ex-combatants. The intense political debates of recent years have been taking place against the backdrop of ever closer relations with Russia. In spite of the fact that many feel uncomfortable doing so, significant numbers of the current population of Abkhazia have taken Russian passports in order to be able to travel to Russia and beyond. Increasingly, in spite of official Russian support for the CIS trade restrictions, Abkhazia has been drawn further into Russia¹s economic orbit. Abkhazia's infrastructure is weak, the majority of the population have no sources of income, and Russian investment has been welcomed. There are politicians and public figures who argue that perpetual isolation is dangerous for Abkhazia and that it is necessary to build a state worthy of the respect of the international community. Yet because of its unrecognized status Abkhazia has few ties apart from its link with Russia. The CIS peacekeeping force that patrols the ceasefire zone is made up entirely of Russian Federation soldiers. To many (though by no means all) in Abkhazia, Russia is perceived as the one source of military and economic security to which they can appeal. Recently there have again been calls for associative status with Russia in order to institutionalize the link. This only fuels Georgia¹s fears that Abkhazia is drifting further from its sphere of influence and suspicions that the Abkhaz are necessary to Russia as a means of leverage on Georgia. Saakashvili has shown himself willing to try to engage in a more constructive relationship with Russia, which will in the long run be important for Georgia. Yet Russia is unlikely to relinquish its influence over Abkhazia in the near future. Russia will hardly recognize Abkhazia's independence (nor would any other internationally recognized state unless Georgia took the lead). Neither, however, is Russia likely to strike a deal with Georgia that would lead to a renewal of bloodshed and instability in Abkhazia. Meanwhile, most people on both sides of the conflict are weary of the ongoing instability, economic 97 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

hardship, and restricted opportunities of the last decade. The status quo plays into the hands of the various criminal groups that have a vested interest in its preservation. And there is a sense among many Abkhaz that their aspirations are met better by the current situation than by any alternatives they could envisage. But time is on the side of neither Georgia nor Abkhazia. If widespread emigration, infrastructural demise, and social disintegration continue neither will be able to shape the sort of communities and societies they ultimately want to create.

3.7.1.5 Russia's overall approach Since the very beginning, Russia has never changed its official position on the settlement of the Georgian-Abkhaz conflict or its support for the territorial integrity of Georgia. Representatives of the Russian Federation at the highest level have constantly expressed their hope for a peaceful political settlement of this regional conflict. In several international forums Russia has promoted a policy of engagement with Abkhazia in the context of normalization of relations within the wider Caucasian region. Russia has always stressed that the problems of the North and South Caucasus need to be tackled jointly in order to reach long-term stability in the region. This was and is an essential difference between Russia's approach to this regional problem and that of its Western partners. However, taking into consideration the role of external factors and players (neighboring states and international institutions) in the Georgian-Abkhaz settlement, Russian policy makers assert the importance of addressing the issues within an even wider regional context. For instance, General Andrei Nikolayev, who was formerly chairman of the State Duma Defense Committee and commander in chief of Border Troops, stated some time ago in his capacity as a parliamentarian that the situation in Abkhaz -Georgian relations should be viewed as part of developments within several overlapping regional security complexes, such as the Caucasus and Caspian regions and the regions around the Caspian and Black Sea basins, where demands for stability of energy and resource supplies, regional security, proper governance and antiterrorist cooperation came together.

98 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Following the 'Rose Revolution' of November 2003, the presidential and parliamentary elections of early 2004, and the establishment of a new system of governance, tensions have recently started to rise once again in Georgia. This has drawn the attention of the international community to the importance of reaching a settlement of the Georgian-Abkhaz conflict. Georgian president Mikheil Saakashvili came to power with the mission of reunifying Georgia. On many occasions he has confirmed his determination to bring Abkhazia under Tbilisi's control. Abkhazia proclaimed independence from Georgia in 1994 and has not participated in any recent Georgian elections or other political events. The new tensions have reconfirmed Russia's approach to this regional conflict and its intention to comply with the solutions provided within the United Nations framework. On April 4-6, 2004 UN Secretary-General Koffi Annan visited Moscow, accompanied by special representative of the UN Secretary-General for a Georgian-Abkhaz settlement Heidi Tagliavini. They held intensive talks on the developments in the region. 3.7.1.6 Security concern of the area The priority interest of the Russian government has always been to prevent spillover effects from Chechnya to other regions of the country as well as to prevent any attempts of support from abroad to the Chechen separatists. This consideration applies to other regional conflicts, including the one between Georgia and Abkhazia. Cooperation between the Russian and Georgian security services in joint border control and the exchange of operational information between the two countries' border guards were considered exceptionally important results of the normalization of bilateral relations between Tbilisi and Moscow. This was to affect developments in Abkhazia as well. Russia also acted as mediator between Georgia and Abkhazia in the talks on regional security that were resumed after militant Chechen intrusions into Abkhazian territory from Georgia in autumn 2003. According to Abkhazian sources, the military formation of the Chechen warlord Gelayev contained some representatives of the Georgian special forces. The talks took place in late January 2004 under the supervision of the UN mission with observers from the CIS peacekeeping 99 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

headquarters. The discussion focused on security measures in the Gali district. The January meeting was part of the second round of talks, the first round having taken place in October 2003 soon after border incidents in the district. (3) This framework was an important element of Russian bilateral agreements with Georgia. The sides confirmed their intention to strengthen antiterrorist cooperation and prevent use of their territory by terrorists fleeing Russian military operations as well as by others trying to use Georgian territory as a corridor into Chechnya. Addressing a meeting in Essentukhi (Stavropol region) of heads of regional offices of the Ministry of Internal Affairs of Russia's Southern Federal District on March 24, President Putin stressed the necessity of improving interdepartmental cooperation, and especially cooperation with the security services of neighboring CIS states, in dealing with new security challenges in the region. Among Russia's natural concerns is the preservation of the military- strategic balance in the region. Russian officials welcomed the promise of Georgian president Mikheil Saakashvili, made after his election, that no other foreign bases would be allowed in after the Russian bases were withdrawn from Georgia. Originally Russia had four bases in Georgia. Two of them (in Gudauta, Abkhazia, and the airbase at Vasiani) were closed in accordance with the requirements of the CFE (4) Adaptation Treaty. The base at Gudauta has been converted into a deployment facility for the Russian peacekeepers as part of the UN stabilization mission in Abkhazia. The status and redeployment of forces in the remaining two bases, at Batumi and Akhalkalaki, are to be renegotiated bilaterally between Russia and Georgia. 3.7.2 the Kurds, and Turkey’s problems 3.7.2.1 Introduction Turkey’s strategic location, The CIA World Fact Book says, is at the straits linking the Black Sea and the Aegean. Such has been the case for more than two hundred years, since Imperial Russia began sending its navy through the straits into the Mediterranean. The Bosphorus and Dardanelles remain strategically sensitive, if only because of the passage they provide for oil tankers. On this western end of its territory, Turkey also faces a hostile Greece and Greek Cyprus. However, the 100 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

eastern borderlands of Turkey are of strategic interest, too. On both sides of the frontier, forces are in motion that raise questions about the political future of Turkey and carry weighty implications for a good part of the Middle East. At the root of these questions, and the responses to them of neighboring Iran, Iraq and Syria, are two perennial neuralgic points within the Turkish body politic. One is Islam, the other is the Kurds. 3.7.2.2 Military and political problems In Turkey, however, the government is burdened militarily with an expensive effort to suppress a Kurdish insurgency that has lasted 14 years. Politically it has to cope with a policy, born with the Turkish Republic itself, that the national population has a single identity, that of Turks. This policy is contradicted by a considerable part of the population which refuses to surrender their sense of a Kurdish identity. The other policy, also fundamental to the original concept of the republic, is the pursuit of secularism with a concomitant denial of a political role for Islam. After three-quarters of a century, a great many Turks wish precisely for Islam to have a political role. The Gulf War in 1990-91 was a critical catalyst for Turkey's reentry into the Middle East. Against the advice of many of his advisers and of the Turkish military, President Turgut Özal threw Turkey's full support behind the U.S. military campaign to drive Iraq out of Kuwait. He enforced United Nations sanctions by cutting off the flow of Iraq's oil exports through Turkish pipelines, deployed 100,000 troops along the Iraqi-Turkish border, and allowed the United States to fly sorties into Iraq from Turkish bases. Özal saw the war as an opportunity to demonstrate Turkey's continued strategic importance and cement closer defense ties with the United States. He hoped that Turkey's support would strengthen its "strategic partnership" with the United States and enhance its prospects of joining the European Community (as the eu was then called). 3.7.2.3 Getting oil to market Mingled with these domestic questions are important external issues. One is the oil fields being developed in the Caspian Basin and how to bring that oil to market. Proposals are being considered for various new pipelines. One, if it is ever built, would pass through or close to Turkish Kurdistan, carrying oil from Azerbaijan and other Caspian oil producing countries of the FSU to a terminal at the Turkish city of Ceyhan near the eastern end of the Mediterranean. 3.7.2.4 Bone of contention 101 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Ceyhan is evocative. Readers will remember it is as a town struck, with its bigger neighbor, Adana, by a severe earthquake in June 1998. Both places have a large population of Kurds, migrants from villages in close by Kurdistan proper. Both cities are on the Iskenderun Korfezi, the Bay of Alexandretta. Iskenderun was the principal town of an Ottoman sanjak (district) of the same name . After a local plebiscite, the French, who held Syria under a League of Nations mandate, transferred the sanjak to Turkey in 1939. It now forms the Turkish province of Hatay. Syria has never accepted this and Iskenderun is a bone of contention between Damascus and Ankara. It is one of the reasons that Syria, until October 1998, supported the PKK (Partiya Karkaren Kurdistan, Kurdistan Workers Party), the Maoist- guerrillas fighting the Ankara government. 3.7.2.5 Lose one, find one Until very recently, the PKK has had Syria and so the bases from which it infiltrated units into Turkey, but it has found another Arab friend, Saddam Hussein. In May 1998, the Iraqi army presented PKK representatives in Iraq with heavy machine guns, sniper’s rifles and the ammunition to go with them. Next, Baghdad announced the opening of PKK offices there and in two cities on the edge of Iraqi Kurdistan, Kirkuk, a major center of the oil industry, and Mosul, the most important city in the north of Iraq. 3.7.2.6 Economic growth In economic terms, according to Norman Stone, the eminent historian who is familiar with the country, Turkey will on present trends overtake a number of middle-sized members of ‘Euroland’ in a few years. Whether those in the club will at that point welcome such a new member is moot. A settlement of the Islamic and Kurdish questions in keeping with the norms of liberal Western societies would greatly assist if Turkey still wishes to press its application to become fully recognized as a ‘European’ country. 3.7.3 Nagorno-Karabakh region Settlement of the long running Nagorno-Karabakh conflict -- the most significant obstacle to stability in the South Caucasus -- remains elusive, despite more optimistic noises recently from Azerbaijan and Armenia. Eleven years after the 1994 ceasefire, burgeoning defence budgets, 102 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

increasing ceasefire violations, and continuing demonisation by each side of the other side are ominous signs that time for a peace agreement is running out. But a compromise can now be constructed around an approach that, while addressing all the matters in dispute, leaves the core issue of Nagorno-Karabakh's ultimate status open for later resolution, after other measures have been put in place. Key elements of that proposed settlement package include the withdrawal of the Armenia-backed Nagorno-Karabakh forces from the occupied districts of Azerbaijan surrounding the entity; the renunciation by Azerbaijan of the use of force to reintegrate the entity; the deployment of international peacekeepers; the return of displaced persons; and the re-opening of trade and communication links. Nagorno-Karabakh's status should ultimately be determined by an internationally sanctioned referendum with the exclusive participation of Karabakh Armenians and Azeris, but only after the above measures have been implemented. Until then Nagorno-Karabakh would remain part of Azerbaijan, though in practical terms it would be self-governing and enjoy an internationally acknowledged interim status. Today Armenia and Azerbaijan remain divided on vital points. Azerbaijan does not accept any compromise of its territorial integrity, nor does it agree that Nagorno-Karabakh's population alone can vote on determining its final status. Armenia is not willing to support withdrawal from the seven occupied districts around Nagorno-Karabakh, or allow the return of Azerbaijan internally displaced persons (IDPs) to Nagorno-Karabakh, until the independence of Nagorno-Karabakh is a reality. There has been tentative discussion of a possible plebiscite to determine the entity's final status, but with none of the necessary detail agreed as to who would vote on what, when and how, nor any agreement as to what other settlement conditions would create the context for such a vote. The Minsk Group of the Organisation for Security and Cooperation in Europe (OSCE), currently cochaired by France, Russia and the U.S., has been facilitating negotiations since 1994. After a decade of fruitless talks, a new format of meetings, the Prague Process, involving direct bilateral contact between the foreign ministers of Armenia and Azerbaijan was initiated in 2004. During the past twelve months the participants and OSCE co-chairs alike have publicly expressed optimism that a deal can be reached soon. But there is an urgent need to translate that generalised optimism into very

103 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

specific agreement and action. An earlier Crisis Group report explored how the Armenian and Azeri communities of NagornoKarabakh and the surrounding districts live today and view resolution of the conflict. Against that background, this report examines the causes of the Nagorno-Karabakh conflict, analyses the OSCEled negotiations process as it has evolved since 1992, and identifies the necessary elements of a workable and achievable peace plan.

3.7.4 Chechen Nationalism and the Tragedy of the Struggle for Independence 3.7.4.1 Introduction The conflict in Chechnya has attracted world attention. The Chechens are a nation in a region of many nations. Moscow views Chechen independence as a geopolitical “domino” threatening Russia’s disintegration. Chechens call for national self-determination and Islamic revival. The conflict pits the warriors of a small but proud and warlike nation against the regular troops and paramilitary formations of a great state struggling to redefine itself after seven decades of Communism. At the heart of the struggle remain Russia’s relations with those nations brought into the tsarist empire by force and subjected to totalitarian repression. Hostilities continue as the Chechens cannot expel the Russians and the Russians cannot prevent Chechen raids and terrorist actions. Following a long tradition, the Russian government has defined the conflict as a struggle against banditry and terrorism—much as it did in Central Asia in the 1920s and early 1930s, and in Afghanistan in the late 1970s and 1980s. This legitimizes Russia’s course of actions, however ruthless the means, as a police function in the name of public order. The Chechens, meanwhile, refer to their war as a “struggle for national and political liberation” and an Islamic holy war, or jihad. Neither side sees the conflict as a civil war. Russia will not honor the Chechens with that political legitimacy, and Chechens refuse to accept the idea that they were ever voluntarily a part of the Russian Empire, Soviet state, or Russian Federation.

104 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

This struggle is a manifestation of what Samuel Huntington described as a “clash of civilizations.” Like other such conflicts it has its roots in the history of the interactions between the protagonists. Chechens have embraced an Islamic revival to foster internal solidarity and to mobilize a broader struggle across the region. The region itself defines the clash. 3.7.4.2 Disputed Territory and a Clash of Civilizations Steppe and mountain, Cossack and mountaineer, Christian and Muslim, soldier and warrior, oppressor and bandit—these dichotomies describe the conflict between Russians and Chechens. Chechen President Aslan Maskhadov, a colonel who served in the Soviet Army, described the current war as the continuation of a four-century struggle. This is no exaggeration, since the struggle between Russians and Muslims of the Caucasus began in the seventeenth century. The unequal and bitter struggle has had a profound impact on the character of the Chechen nation, its social organization, and self-perceptions. Clan loyalty and personal freedom defined a Chechen warrior culture quite distinct from that of the Cossack settlers north of the Terek River. Like most of the peoples of the Caucasus other than the Georgians and Armenians, the Chechens converted to Islam by the eighteenth century. Islamic faith linked Chechen culture to a greater identity, and provided the basis for alliances with other Islamic peoples of the region in their struggle with Orthodox Russia. Clan life in a Chechen mountain village revolved around raising sheep and raiding. The clans practiced the blood-vendetta where no offense against clan honor could go unpunished, and feuds could go on for generations. To supplement their meager existence, Chechen warriors frequently raided north of the Terek, carrying off goods, animals, and slaves from Cossack settlements.

3.7.4.3 Chechnya: From War to War Following the initial battle for Grozny and other cities, the war in Chechnya became a classic insurgency. The Chechens fell back to the hills south of the Terek to conduct partisan operations against Russian columns and garrisons. Russian forces occupying the villages of the south were 105 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

undisciplined and quickly fostered a spirit of resistance among the civilian population. Russia found itself in a protracted and unpopular war. The Yeltsin government failed to develop a convincing case for the war and was embarrassed by the ability of the Chechens to mount raids into Russian territory. With his popularity at rock bottom in a presidential election year, Boris Yeltsin needed to defuse the war in Chechnya. He negotiated a cease fire in the spring of 1996. When assured of re-election, Yeltsin renewed the fighting and promptly lost Grozny. This led to an internal debate in Russia, weighing the continuing damage to the army in continuing the conflict against the possibility of national dismemberment if the Chechens were allowed to secede. The peacemakers won, and the Russian Army withdrew, signing the Khasavyurt Accords on August 31, 1996.

Chechen military and political success strengthened the political hand of Colonel Aslan Maskhadov, who engineered the victory in Grozny. Maskhadov was elected President of Chechnya in early 1997, but his power base was quite limited. Personal and ideological/religious conflicts projected an image of a bandit republic with no one in charge. Law and order collapsed, and kidnapping and extortion became widespread. Varying Islamic factions produced further splits among the Chechen leadership. For its part, the Russian government proved utterly incapable of developing a coherent political strategy regarding Chechnya. Some Russians wanted revenge or had personal reasons to stoke the fires of ethnic hatred with a well-financed media campaign. Even Russian moderates came to view Chechnya as a criminal land and a source of chaos. By 1998, both sides were preparing for a confrontation. 3.7.4.4 War Renewed without Decision Events in the spring and summer of 1999 encouraged the resumption of hostilities. The NATO intervention in Kosovo, which bolstered the separatist Kosovo Liberation Army, disheartened the Russians and emboldened the Chechens. In August 1999, the Chechen military, with or without the support of President Maskhadov, led formations into Dagestan to ignite an Islamic insurgency. The Russian government moved to counter the insurgency. Yeltsin fired his latest prime minister, Sergei

106 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Stepashin, and replaced him with the new head of the Security Council, Vladimir Putin. A series of bomb blasts in Russian apartment buildings brought the war home to the Russian people. Putin took the war deep into Chechnya, seeking to overthrow the Maskhadov government, vowing to eliminate the bandits/terrorists wherever they were found. Later, in London in March 2000, Putin cast the conflict as a fight against radical Islamic terrorism. He claimed that the West should support Russia. After a deliberate advance to the Terek a well-prepared Russian assault took Grozny once again, but only after flattening much of the city with air, artillery, and rocket strikes. The Chechen resistance was forced from the city. The war reverted to insurgency. The longer the war in Chechnya, the greater is the risk of the territorial expansion of the conflict, and of external intervention. The war is a profound tragedy for Russian democracy and for Chechen nationalism. Violence drives out any chance for dialogue and compromise. General Alexander Lebed, a veteran of Afghanistan and one-time head of the Security Council, once remarked: “I have had occasion to see a lot of combat, and I affirm this fact: There are enough scoundrels in war on both sides—rape and sadism—all of this is present on both sides.” 3.7.4.5 Future Prospects for Chechnya Prudence suggests leaving predictions to tarot card readers, but one can forecast four alternative futures for the Russian-Chechen imbroglio: Chechnya and Russia separate; Russia continues to prosecute a protracted guerrilla war; Russia goes for the knock-out punch expanding the war beyond the borders of Chechnya; or Russian and Chechen leaders seek grounds for a compromise solution that leaves Chechnya autonomous but inside a federated Russia. Should Russia and Chechnya agree to go their separate ways and Chechnya attains her full independence, Chechnya is likely to revert to the same situation that plagued the land between the 1996 cease fire and the current fighting. Russian intervention is the single unifying factor among most Chechens, and in the absence of a Russian threat, the various Chechen clans will re-establish control over their traditional territory and clash violently over disputed areas. Criminalization of the state and the great game developing over Caspian oil and gas will make foreign intervention more 107 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

likely. Russia, on the other hand, will discover if there is truth to the domino principle: that other peoples will take Russia’s defeat as a sign to secede as well. The potential dismemberment of Russia would precipitate a major Eurasian crisis that would inevitably draw in neighboring nations and provoke other realignments of peoples and clans. Should Russia continue to stay and fight it out, she may eke out a costly win. Despite the massive efforts required to win the war and rebuild the area, the Russians may have to re-fight the independence-minded Chechens in fifty years or so. Fighting a civil war over decades will recast the Russian state, society, and armed forces, giving greater power to organs of internal security. Faced with these two gloomy futures, the Russian leadership might consider expanding the war to inflict a decisive defeat on the Chechen resistance. Chechens now cross into Russian Dagestan and Ingushetia and independent Georgia for medical treatment and supplies. The Chechens currently receive foreign aid (money, weapons, supplies, and warriors) from outside (predominately Islamic) countries. Russia might interfere significantly in the internal affairs of its own republics of Dagestan and Ingushetia by imposing martial law. Russia has conducted air strikes and hot-pursuit ground penetrations on Georgian territory, and could consider mounting a major incursion into Georgia in an attempt to wipe out the Chechen resistance. Such a move might blow the top off the entire region. Outside assistance could mount. Neighboring nations could react militarily and economically to an attack on a sovereign state. Russians and Chechens deserve a better future. The best possible answer is a political settlement based on the limited ability of each side to impose its will upon the other. However, having mobilized their public opinion against the “enemy,” neither leadership now is in a position to engage in serious negotiations. Unfortunately, at this juncture, it doesn’t seem to be in the cards. 3.8 CONCLUSION The stability of the region and the development of the Caspian oil and gas reserves are interrelated. Clearly a peaceful region is in the interests of the developers and customers of the natural energy resources, and finding routes through which to transport oil and gas which avoid troublespots, can be 108 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

protected in the event of conflict and are not subject to political interference underlies the planning of the transport infrastructure. Internal Conflicts The end of the Soviet era was accompanied by a parallel rise in internal instability in the successor states, including separatist movements in Georgia (as in Ajara, Abkhazia and South Ossetia), the Russian Federation (Chechnya), and the dispute between Azerbaijan and Armenia over NagornyKarabakh. The overall effect of these conflicts has been to produce what one source calls a “confluence of separatist rebellions, border disputes and flawlessness. Chechen refugees and some insurgents have sought refuge in Georgia including some foreign militants with possible links to the al-Qaeda network; and the US anti-terrorism response has resulted in a US military presence there. In addition, Russia has a military peace-keeping presence in Abkhazia under a UN Observer Mission, and bases in South Ossetia, a legacy of Soviet military policy. In mid-February 2005, the UN Under-Secretary-General for Peacekeeping Operations visited Georgia to assess the Georgia-Abkhazia situation and the United Nations Observer Mission there. Talks are planned for the spring in Geneva. As has been described, Georgia, one of the parties in the BTC pipeline project now approaching completion, plays a crucial role in the Caspian region’s prospects.As regards the Azerbaijan-Armenian conflict over Nagorny-Karabakh, the consequences of negotiations failing may be a new phase of military escalation. Azerbaijan may seek to regain territory by military force, as Croatia did with Krajina in 1995, with the consequent movement of hundreds of thousands of internally displaced persons, and even, it is agued a conflict involving Russia on Armenia’s side and Turkey on Azerbaijan’s. Terrorist Activities It is suggested that regional and international terrorism poses a threat to the Caspian energy infrastructure, particularly after the terrorist attacks on the United States on 11 September 2001. In January 2003 sabotage of the oil pipeline from Baku to the Georgian Black Sea port of Supsa caused a spill of between 60 and 150 tons, and the Chechen conflict has demonstrated how effective use can be made of pipeline sabotage by insurgent groups. There is a general expectation that the region will attract ideologically motivated violence but from whom the threat might come and the nature of a terrorist network is debatable. Energy Bulletin addressed the possibility of Islamic fundamentalist attacks on world oil 109 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

supplies in an article in February 2005: Even if it were possible to secure the world's major processing and shipping facilities, there is no way to secure the tens of thousands of miles of aboveground pipelines that traverse every major oil producing country, from the Gulf states to Uzbekistan to Nigeria. The aortic imagery often found in jihadist communiqués about oil—"The artery of the life of the crusader's nation!"—is both a strategic insight for jihad and a physical description of oil's role in the global economy. The “Al-Qaeda franchise” groups pose more of a practical threat to energy supplies in the region. One potential target region is Caspian Sea oil -- particularly from Kazakhstan and Azerbaijan. This production is well within the "easy" zone of operations of active GG [Global Guerrilla] groups (particularly Chechen mercenaries). Increased production from the Caspian Sea area is a critical part of the plan to meet the world's ravenous demand for oil. As a result, these pipelines offer extremely attractive targets for global guerrilla operations in central Asia. The potential of millions of barrels a day of production from the region has led to several major pipeline projects (new and upgraded pipelines to the north and west). Unfortunately, complex geopolitical and geographical hurdles make transporting this oil to major markets extremely difficult. For example: pipeline projects to China and through Afghanistan have been put on hold. These considerations have narrowed the list of active targets and simplified the problem for GG : Isolate, Control, and Profit Given this sparse and undefendable network, the potential for GG control of oil production from the Caspian region is extremely likely. There is also the potential for cascading failures with the right analysis. Growth in the global demand for oil (particularly from China) and the ongoing disruption of Iraq's oil has reduced excess global production to less than 750,000 barrels a day. This makes even small disruptions in production extremely potent as a means of controlling oil prices. Here's the dominant strategy: Isolate the Caspian region from the Samara connection to the Russian pipeline grid (Transneft) through continuous attacks (akin to the attacks on the Kirkuk pipelines in Iraq). Given Transneft's limited transportation capacity (only 4 million barrels a day), it is possible that attacks on any major east-west pipeline will bump production from the Caspian. Control : Conduct regulated attacks against the BTC (Caspian to the Mediterranean) and CPC (Kazakhstan's Tengiz oil field to the Russian Novorossiisk port) to control transport of oil to global markets. The key to maintaining the effectiveness of these attacks is to use them sparingly (a lesson 110 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

drawn from Lawrence of Arabia's campaign). Extended shutdowns aren't necessary to exercise, control and increase the potential of the development of alternative pipelines (ie. through Iran). If done correctly, these attacks alone will have the potential to turn participating GG groups into a "shadow" OPEC, with a pricing power akin to Saudi Arabia. In a nutshell, the Caspian regions, with their oil reserves and strategic pipelines, form a place of political interest which is further fuelled and driven by the political instability of the region, which makes it easier for external influences to exploit the resources and manipulate them according to one’s own benefit.

4.AFRICA

111 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

4.1 The Importance of African Oil Africa has long been known to be rich in oil, extracting it hadn't seemed worth the effort and risk until recently. But with the price of Middle Eastern crude skyrocketing, and advancing technology making reserves easier to tap, the region has become the scene of a competition between major powers that recalls the 19th-century scramble for colonization. Already, the United States imports more of its oil from Africa than from Saudi Arabia, and China, too, looks to the continent for its energy security. Does Africa measure up to the hype? After all, the entire continent is believed to contain, at best, 10 percent of the world's proven oil reserves, making it a minnow swimming in an ocean of seasoned 112 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

sharks. Africa is unlikely ever to "replace" the Middle East or any other major oil-producing region. The answer has very little to do with geology. Africa's significance as an oil "play," to borrow the industry lingo, lies beyond the number of barrels that may or may not be buried under its cretaceous rock. Instead, what makes the African oil boom interesting to energy-security strategists in both Washington and Europe (and, increasingly, Beijing) is a series of serendipitous and unrelated factors that, together, tell a story of unfolding opportunity. To begin with, one of the more attractive attributes of Africa's oil boom is the quality of the oil itself. The variety of crude found in the Gulf of Guinea is known in industry parlance as "light" and "sweet," meaning it is viscous and low in sulfur, and therefore easier and cheaper to refine than, say, Middle Eastern crude, which tends to be lacking in lower hydrocarbons and is therefore very "sticky." This is particularly appealing to American and European refineries, which have to contend with strict environmental regulations that make it difficult to refine heavier and sourer varieties of crude without running up costs that make the entire proposition worthless. Then there is the geographic accident of Africa's being almost entirely surrounded by water, which significantly cuts transport-related costs and risks. The Gulf of Guinea, in particular, is well positioned to allow speedy transport to the major trading ports of Europe and North America. Existing sea-lanes can be used for quick, cheap delivery, so there is no need to worry about the Suez Canal, for instance, or to build expensive pipelines through unpredictable countries. This may seem a minor point, until you look at Central Asia, where the Baku-Tbilisi-Ceyhan pipeline, stretching from Azerbaijan through Georgia and into Turkey, and intended to deliver Caspian crude into the Mediterranean, had to navigate a minefield of Middle East politics, antiglobalization protests, and red tape before it could be opened. African oil faces none of those issues. It is simply loaded onto a tanker at the point of production and begins its smooth, unmolested journey on the high seas, arriving just days later in Shreveport, Southampton, or Le Havre. A third advantage, from the perspective of the oil companies, is that Africa offers a tremendously favorable contractual environment. Unlike in, say, Saudi Arabia, where the state-owned oil company Saudi Aramco has a monopoly on the exploration, production, and distribution of the country's crude oil, most sub-Saharan African countries operate on the basis of so-called production-sharing agreements, or PSAs. In these arrangements, a foreign oil company is awarded a license to look for petroleum on the condition that it assume the up-front costs of exploration and production. If oil is discovered in that block, the oil company will share the revenues with the host government, but 113 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

only after its initial costs have been recouped. PSAs are generally offered to impoverished countries that would never be able to amass either the technical expertise or the billions in capital investment required to drill for oil themselves. For the oil company, a relatively small up-front investment can quickly turn into untold billions in profits. Yet another strategic benefit, particularly from the perspective of American politicians, is that, until recently, with the exception of Nigeria, none of the oil-producing countries of sub-Saharan Africa had belonged to the Organization of Petroleum Exporting Countries (OPEC). Thus they have not been subject to the strict limits on output OPEC imposes on its members in an attempt to keep the price of oil artificially high. The more non-OPEC oil that comes onto the global market, the more difficult it becomes for OPEC countries to sell their crude at high prices, and the lower the overall price of oil. Put more simply, if new reserves are discovered in Venezuela, they have very little effect on the price of oil because Venezuela's OPEC commitments will not allow it to increase its output very much. But if new reserves are discovered in Gabon, it means more cheap oil for everybody. But probably the most attractive of all the attributes of Africa's oil boom, for Western governments and oil companies alike, is that virtually all the big discoveries of recent years have been made offshore, in deepwater reserves that are often many miles from populated land. This means that even if a civil war or violent insurrection breaks out onshore (always a concern in Africa), the oil companies can continue to pump out oil with little likelihood of sabotage, banditry, or nationalist fervor getting in the way. Given the hundreds of thousands of barrels of Nigerian crude that are lost every year as a result of fighting, community protests, and organized crime, this is something the industry gets rather excited about. Finally, there is the sheer speed of growth in African oil production, and the fact that Africa is one of the world's last underexplored regions. In a world used to hearing that there are no more big oil discoveries out there, and few truly untapped reserves to look forward to, the ferocious pace and scale of Africa's oil boom has proved a bracing tonic. One-third of the world's new oil discoveries since the year 2000 have taken place in Africa. Of the 8 billion barrels of new oil reserves discovered in 2001, 7 billion were found there. In the years between 2005 and 2010, 20 percent of the world's new production capacity is expected to come from Africa. And there is now an almost contagious feeling in the oil industry that no one really knows just how much oil might be there, since no one's ever really bothered to check. All these factors add up to a convincing value proposition: African oil is cheaper, safer, and more 114 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

accessible than its competitors, and there seems to be more of it every day. And, though Africa may not be able to compete with the Persian Gulf at the level of proven reserves, it has just enough up its sleeve to make it a potential "swing" region—an oil province that can kick in just enough production to keep markets calm when supplies elsewhere in the world are unpredictable. Diversification of the oil supply has been a goal—even an obsession—in the United States since the Arab oil embargo of the 1970s. Successive U.S. administrations have understood that if the world is overly reliant on two or three hot spots for its energy security, there is a greater risk of supply disruptions and price volatility. And for obvious reasons, the effort to distribute America's energy-security portfolio across multiple nodes has taken on a new urgency since September 11, 2001. In his State of the Union address in January 2006, President Bush said he wanted to reduce America's dependence on Middle East crude by 75 percent by 2025.

4.2 African Economy’s Dependency on Oil According to the 2007 African Economic Outlook (AEO) , a publication of the African Development Bank (AfDB), African countries have been able to sustain an average GDP growth rate of 5.4 percent over the past five years. This growth has been largely driven by a surge in prices extractive resources, especially aluminum, copper, gold and crude oil. However, political stability, good economic management policies and an improved institutional environment, have catalyzed the growth process in some countries. In spite of all these economic growth trends, the scourge of poverty is still having a major impact on the African continent. The prospects of achieving the Millennium Development Goals (MDGs) in Sub-Saharan Africa by the target year 2015 remain bleak. Africa is by far the poorest region of the world. There are some 400 million people who live on less than $2 a day, and this figure is expected to rise to some 600 million by 2015. Approximately 210 million people live on less than $1 a day . Seismic tests have suggested that São Tomé and Principe, two tropical rocks off the coast of West Africa with a population of 199,000, might be sitting on billions of barrels of oil. For the last few years, the islands have been buzzing with the hope that it will make millionaires of them all and transform a nation where the average annual income is $390. "This is a very poor country," says Luis Alberto Praxeres, executive director of São Tomé's National Petrol Agency. "Oil could solve all 115 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

our problems." It hasn't done so yet. In January this year, Chevron said it had not found enough oil to make a well economically viable at the first of its two drill sites off São Tomé. Exxon Mobil, too, has said that it will not, for now, be pursuing exploration off the island, though it retains its drilling rights there. Praxeres, however, still dreams his dreams, and his little country continues to attract a stream of oilfevered visitors from overseas: this year alone, officials have arrived from the U.S., the U.K., Germany and Japan. But even if São Tomé and Principe were sitting on as much oil as Saudi Arabia, there would be no guarantee that the black gold would deliver happiness and prosperity to its people. On the contrary, if history is any guide, vast caches of oil can cause developing nations as many problems as they solve. São Tomé and Principe is part of a string of countries on the Gulf of Guinea, the right angle in Africa's west coast, which is the oil industry's new El Dorado. By some estimates, Africa holds 10% of the world's reserves, but that figure belies the importance West Africa has already achieved as a source of energy. According to Poisoned Wells, a new book on African oil by Nicholas Shaxson, an associate fellow with international affairs institute Chatham House in London, the U.S. imported more oil from Africa than from the Middle East in 2005, and more from the Gulf of Guinea than from Saudi Arabia and Kuwait combined. Nigeria, the giant of the region, supplies 10-12% of U.S. oil imports. "There's a huge boom across the region," says Erik Watremez, a Gabon-based oil and gas specialist for Ernst & Young. "Exploration, drilling, rigs, pipes. It's exploding." Ann Pickard, Shell's regional executive vice president for Africa, agrees: "The Gulf of Guinea is an increasingly important place." Indeed, says Daniel Yergin, chairman of Cambridge Energy Research Associates, West Africa is "only going to get hotter. It has the location and the resources; the technology is now there to develop them; and companies from all over the world want to be in on the action." Rising demand from India and China and worries over instability in the Middle East have fueled higher oil prices, and those in turn have precipitated a new scramble for energy — oil rigs worldwide now have to be rented a year in advance. There are several reasons why the Gulf of Guinea is a key focus of this rush. African oil is high quality, with a low sulfur content that requires little refining to get it to the pump. The Gulf is relatively close to the U.S., cutting shipping costs to the world's biggest oil 116 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

consumer, and most of the reserves are out to sea — which means there's no need to construct pipelines through different nations to get the stuff to market. Equally important: unlike some other oil-rich countries, African nations welcome foreign companies to their oil fields, as there are no indigenous African oil majors. Security is a crucial part of the attraction. West Africa may have a history of political instability, but most of its oil is offshore, and the assets of international companies have so far not been prone to the sort of nationalist expropriation common in oil's history from Mexico in the 1930s to Russia today. And although there have been attacks on oil installations in Nigeria, the region does not experience the sort of out-of-control violence that now plagues Iraq. Such factors make "West Africa of great interest and great significance," says a senior American diplomat in the region. In fact, five years ago the U.S. State Department declared West African oil a "strategic national interest." The National Intelligence Council, a U.S.-government think tank, predicts that the Gulf of Guinea will supply 20-25% of total U.S. imports by 2020, but Americans are not alone in their mounting dependence upon West Africa. Angola is now China's top oil supplier. Gabon is a key supplier of France. Oilmen from countries as diverse as Russia, Japan and India are showing up in places like Equatorial Guinea, Cameroon, Chad — even perennial war zones like the Democratic Republic of Congo. With all that interest, Paul Lubeck, Michael Watts and Ronnie Lipshutz of the Center for International Policy, a U.S. think tank, calculate that the Gulf of Guinea will earn $1 trillion from oil by 2020 if the price stays above $50 a barrel. That's roughly double all the post-colonial aid to Africa since independence. 4.3 Impact of Oil Shocks on African Oil  Arab-Israeli war It was a first oil shock for Africa which affected Africa’s economy very badly it can also be said that it was catalysed by the Arab-Israeli war, which resulted in various Arab oil-producing nations placing an embargo on oil exports to the Unites States and the Netherlands, which were seen as strongly pro-Israel. In addition, the Organisation of Petroleum Exporting Countries (OPEC) asserted its oligopolistic power in the oil market by colluding on reduced production volumes and 117 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

collectively setting the price. The oil price rose by a factor of nearly four, from about $3 per barrel prior to the war to around $11.50 per barrel in 1974.This shock had severe repercussions for many of the advanced industrial economies, including sharply rising prices – which induced a wage-price spiral – and a recession; hence the term ‘stagflation’ entered the lexicon. Subsequently, developing countries suffered from the decline in world trade and as primary commodity prices fell. In response to inflation and international monetary instability, the average gold price rose 66 percent from 1973 to 1974. However, the following year the gold price stagnated and by 1977 it had made a partial retreat. Dagut claims that governments forced down the price of gold to bolster faith in the value of currencies and to restore stability to the financial markets. From 1974 to 1976, South Africa’s merchandise import bill rose on average by 13.82 percent per annum. The overall terms of trade received an initial boost from the rise in the gold price, but this was followed by a marked deterioration, especially in 1975. The rand/dollar exchange rate also weakened, and the inflation rate climbed from mostly single digits in 1972 to an annualised high of 17.8 percent in the final quarter of 1974, before easing again somewhat. More seriously, the GDP growth path altered, with the rate of growth in the three years following the oil shock averaging 1.73 percent, compared to an average of 5.32 percent in the preceding 19 years. According to Dagut (1978: 32), the “main lesson of the energy crisis is that the adjustment process is a slow one”, which is an important point to bear in mind for the present situation.

 Iranian revolution, 1979-80 The second oil shock occurred in the wake of the Iranian Revolution in 1978-79 and the subsequent war between Iraq and Iran in 1980, which caused Iranian oil exports to dry up altogether. As in the previous oil crisis, the magnitude of the price hike (almost a three-fold increase) was driven to a large extent by panic reactions and hoarding behaviour; on this occasion OPEC did not play a primary role. This oil shock gave rise to another bout of serious inflation internationally, and many central banks – notably the US Federal Reserve Bank – raised interest rates sharply in response. This action contributed to a severe international recession. Worsening inflation and uncertainty gave rise to a massive increase in the gold price; however, as in the previous case, this proved unsustainable. 118 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Van der Merwe and Meijer note that the “gold price increases effectively cushioned the adverse effects of the first two oil price shocks on the balance of payments and the ‘real’ economy”, but that “these gold price surges inspired unduly optimistic views of the long-term prospects for the price of gold”. Similarly, the average world prices of coal and uranium, two important energy-export commodities for South Africa, initially rose in response to the first two oil shocks, but soon retreated as a result of the induced supply response as well as falling demand from stagnating industrialised economies. South Africa’s terms of trade – with or without gold exports – worsened considerably in the wake of the second oil crisis. The rate of consumer price inflation ratcheted up to double figures and became much more volatile between 1979 and 1981. Boosted by gold, real GDP grew robustly in 1980(6.6%) and 1981 (5.4%), but declined precipitously thereafter, culminating in a severe recession in 1983. Once again, therefore, the lesson is that the South African economy is not immune to oil shocks once the adjustment process takes its course.  Iraqi invasion of Kuwait, 1990 The third oil price shock was triggered by the Iraqi invasion of Kuwait in August 1990. As a consequence of fear-driven stockpiling, and the elimination of Iraq and Kuwait’s approximately 7 percent share of daily world oil production following the imposition of United Nations sanctions, the price of oil climbed by a factor of about two from $17 per barrel in July 1990 to an average of $35 per barrel in October. However, the shock proved to be short-lived, with the price dropping to below $20 per barrel by February 1991. This was thanks mainly to the rapid deployment of US and allied military forces and their subsequent victory in the Gulf War in early 1991, which prevented the crisis from spreading and calmed sentiments in the oil market. Again, this price spike demonstrated the importance of expectations in determining the level of the price in the oil market. Some major industrialised nations suffered a fairly severe recession around this time, which was exacerbated by – but not entirely due to – the oil spike. In contrast to the two previous shocks, the gold price did not react sharply to the oil price spike in 1990, rising less than 10 percent and subsequently retracting partially. Van der Merwe and Meijer (1990: 14) attribute this to gold’s diminished status as a safehaven during the1980s, and consequently cautioned against reliance on gold to offset the higher oil import bill. At the time of this third oil shock, South Africa was already in the early stages of a downturn in economic activity as a result of several factors. These included, inter alia, weak 119 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

international demand for our exports coupled with sanctions, the early stages of an intensive domestic drought, a tightening monetary policy stance, and political jitters following the unbanning of the African National Congress early in 1990. Thus it is difficult to determine precisely the separate impact of the oil spike, although its transitory nature seems to have resulted in muted effects on the South African economy relative to the earlier shocks. 4.4 The US Politics In Africa The challenge posed by neoliberal policies to Africa will be aggravated by the militarization of globalization, with the doctrine of ‘pre-emptive strike’ adopted by the Bush Administration. One of the tragic illustrations of this doctrine is the illegal aggression and occupation of Iraq with the numerous crimes against Humanity committed by the occupying forces the world has been witnessing since the invasion. Another illustration of that doctrine is the threat of war against other sovereign countries, like iran, north korea and seria.These aggressions and threats are part of what the US imperialism calls 'war on terror'. The Bush Administration is attempting to draw African countries into that strategy, which poses an even greater threat to Africa’s security and development. Since 2002, the US government has put together a special program, named “PanSahel”, whose stated objective is to train the armed forces of the countries involved to enable them to track down groups supposed to be linked to al qaida. The recent announcement of the creation of a US military command for Africa - Africa Command (AfriCom) - is a major step toward expanding and strengthening the US military presence in Africa through more aggressive policies to enlist support from African countries for its 'war on terror'. According to George W. Bush, 'the new command will strengthen our security cooperation with Africa and create new opportunities to bolster the capabilities of our partners in Africa. In reality, the objectives of the Africa Command are to be found in the US drive for global dominance and its growing appetite for Africa’s oil. US imperialism seeks to protect oil supply routes and American multinational corporations involved in oil and mineral extraction. In fact, several studies have forecast that the United States may depend for up to 25% of its needs on crude oil from Africa over the next decade or so. One clear sign of this trend is that several US oil companies are investing billions of dollars in oil-producing countries, notably in the Gulf of Guinea region. Thus, oil is one the main driving forces behind the US activism on the continent. It has 120 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

nothing to do with Africa’s ‘security’ Therefore, the US strategy aims to secure strategic positions in Africa by using the threat of “terrorism” to gain military facilities and bases to protect its interests. The countries which accept to cooperate with the US may become more and more dependent on the US and inevitably on NATO for their “security”. They will be forced to provide military bases or facilities for US forces and serve as a canon fodder in the US ‘war on terror’, as Ethiopia has done in Somalia. The US strategy will sow more divisions among African countries and undermine the goal of African Unity. 4.5 Internal Conflicts As indicated above, the neoliberal policies imposed by the IMF and World Bank and the violence of corporate-led globalization have further weakened Africa. The principal characteristic of the continent is its weakness and divisions, despite the foundation of the African Union and the adoption of the New Partnership for Africa’s Development (NEPAD). The divisions are ideological and political. Neo-colonial ties are still strong with former colonial powers. There are still many foreign military bases and facilities on the continent. Several countries still depend on western countries for their “security”. France is intervening in the Central African Republic in an attempt to help the government push back attacks by rebel groups . A similar operation took place a few months ago to help the Chadian government repel a rebel attack that threatened some parts of the capital. These countries are home to foreign military bases and have signed defense agreements with their ‘protectors’. These military bases are also used to launch criminal aggressions against other African countries, as the United States did when it launched air strikes against innocent civilians in Somalia from their air base in Djibouti! France is using its military bases in West Africa – Senegal and Togo- to destabilize Cote d’Ivoire. These examples underscore the vulnerability of the continent and the fragile nature of many States, some of which have all but collapsed, in large part as a result of structural adjustment policies. Africa’s vulnerability is also reflected in the widespread poverty affecting its population, in the 121 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

deterioration of the health and educational systems and in the inability of many States to provide basic social services for their citizens. Poverty is the result of policies imposed by the IMF and World Bank, using the pretext of the illegitimate debt with the complicity of African governments. This has aggravated economic, financial, political dependence on western countries and multilateral institutions. Food dependency has dramatically increased. According to the FAO and other UN agencies, more than 43 million Africans suffer from hunger, which kills more people than HIV/AIDS, malaria and tuberculosis combined! As a result, Africa spends billions of dollars in food imports, paid for by credits and ‘aid’ from western countries and multilateral institutions. The external dependency and the extreme vulnerability of the continent are also reflected in the surrender of economic policies to the World Bank. 4.6CONCLUSION we have tried to review the challenges facing Africa in its attempt to build the United States of Africa. External factors, such as the high costs of neoliberal globalization and the US ‘War on Terror’, are likely to hamper African efforts at unity and independence. These external factors take advantage of Africa’s internal weaknesses and tend to aggravate them . But does the current African leadership have the capacity and will to overcome the internal and external challenges in the process of building the United States of Africa? It is doubtful. Most of current African ‘leaders’ take their orders from western capitals and have surrendered their policies to the IMF, the World Bank and the World Trade Organization. In the words of the late Professor Joseph Ki-Zerbo (1995), these are ' "leaders" with frightened minds' who can only 'imitate” their western masters. How can anyone trust such ‘leaders’, some of whom contemplate providing military

bases

to

the

United

States

in

the

name

of

fighting

'terrorism'?

The building of the United States of Africa requires a new leadership with the political will to follow through their commitments. This means promoting a new type of leadership in Africa, imbued with the ideals of Pan Africanism, genuinely dedicated to the unity, independence and sovereignty of the continent and to promoting the welfare of their citizens. It is a visionary leadership, like Nkrumah and others of his generation. A leadership who refuses Africa’s enslavement and will never accept that others speak or define policies for Africa.

122 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

So, building the United Sates of Africa requires a different kind of leadership with decolonized minds, who are willing to stand up to foreign domination, who would listen to their own citizens and promote policies aimed at recovering Africa’s sovereignty over its resources and policies. In other words, the success of such undertaking requires a leadership imbued with the values and ideals of Pan Africanism and genuinely committed to the unity, independence and sovereignty of Africa.

5. SOUTH AMERICA

123 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

5.1 Importance of South American Oil South America is a strategic region for oil geopolitics considering its vast proven and probable oil reserves and the huge discoveries in the recent times in Brazil. The hemisphere is democratic, with one notable exception. In the energy sphere, the hemisphere provides the US with a large portion of diversity of oil and gas supply. Latin America is far closer to the US market than the Middle East. While the investment climate in key Latin American countries is deteriorating as state control increases, even in Venezuela access to exploration acreage remains superior to that in the Middle East. Additionally, the non-OPEC producers in this region exert counter-pressure on OPEC’s monopoly power. 124 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

South American nations delivered nearly 8.5% of global oil production in 2007(according to BP statistical survey), and possess approximately 9.5% of global oil reserves, with 6.5% in Venezuela and 1.1% in Mexico alone. The region is also a major refining center, with nearly 9.2% of the world’s refining capacity. Regional refineries are designed to serve the specialized needs of US markets. The most important exporters, Venezuela and Mexico, consistently rank in the top four sources of US oil supply along with Canada and Saudi Arabia. Venezuela averaged 1.29 million barrels per day (m/bpd) in 2007; Mexico averaged 1.59 m/bpd. 5.1.1 Energy Trends in the Hemisphere In Latin America today we see two trend lines. One trend is towards rising state control of energy resources – in Venezuela, Argentina, Bolivia and Ecuador in particular. The concern here is that this trend will limit the growth of global supplies of oil and gas by undermining the value of existing investments, discouraging future investment or barring foreign investment altogether. The economic consequence of these trends is that the hemisphere will contribute less to the diversification of oil supply, thereby increasing the importance of OPEC supply and over time undermining economic development in the region. The political consequences of these trends in the short run are the decline of US influence in the region to competing ideologies and the erosion of democratic structures. A second trend is toward creative fiscal regimes that welcome foreign investment and require state owned companies to compete with international companies, with independent regulators that promote fair and efficient regulation. Countries observing this model are increasing production or stalling the decline of existing reserves. Brazil, Colombia, Trinidad and Tobago and Peru are key examples of this creative model. When we consider that Mexico so far continues to bar foreign investment in its upstream oil and gas sector, and the size of the reserves and production of the countries practicing the resource nationalism model, the net effect is negative. Foreign investment in the oil sector is shifting away from South America to North America, particularly to Canada’s oil sands. When we compare 2005 to 2004, only Brazil and Trinidad managed to increase production significantly, while other countries faced decline or very modest gains.

125 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

5.1.2 The Rise in State Control Venezuela and Mexico are the most important oil exporters in the hemisphere. While Brazil, Colombia, Ecuador, and Argentina are important destinations for foreign investment, and helpfully produce enough oil to meet their own domestic needs and make some contribution to the global export market, they are not strategic suppliers to the global market at this time. Only Mexico, Brazil and Venezuela produce more than a million barrels per day. Bolivia has enormous gas reserves, but exports mostly to Brazil and modestly to Argentina. Only Trinidad and Tobago is a key supplier to the world gas market. From those countries now committed to increasing state control, the US faces two key challenges: the loss of production growth and diversity of supply from the region if new economic frameworks are unattractive to foreign investors and, most critically, the loss of US influence from well financed political competition. 5.1.3 The Economic Impact of Rising State Control The recent wave of changes in contractual terms and dramatic changes in tax regimes in Venezuela, Bolivia, Ecuador and in recent years Argentina, threatens to slow new investment and eventually deepen instability and poverty in these nations as well as destroy shareholder value for the companies invested there. The deterioration in the investment climate for energy in these countries is primarily an economic threat, helping to lock in constrained supply and high prices. We are seeing the revision of economic terms at a time when producers rather than companies hold more market power. Venezuela passed a hydrocarbons law that mandated a 51% share by the national oil company and a higher royalty rate. Operations, such as those under Operating Service Agreements, which may have stretched the legal interpretation of the law when they were begun, were subject to a strict and adverse legal interpretation when they appeared to be poor earners for the government. Taxes once renounced, like the export tax, have been revived so that the government can earn, in essence, a fixed 33.33% royalty. The impact, according to expert analysts like Deutche Bank and Wood Mackenzie, is a massive flight of investment capital from Venezuela’s heavy oil sector to Canada’s oil sands, effectively freezing development of the hemisphere’s largest oil reserves during one of the greatest oil booms in history. 126 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

In Bolivia President Evo Morale’s May 1, 2006 decree declared that the state would take control of all gas fields. Royalty payments to the Bolivian government at the largest gas fields, including San Alberto and San Antonio, will now increase from 50% to 82%. All producers are obliged to sell at least 51% of their holdings to the Bolivian government, with the value of that share to be assessed by audit and negotiation. The state will take 60% of production from other fields. Bolivia has left itself an open door through which it can compromise or retreat: details of new contracts are to be worked out on a case-by-case basis. But companies were given only six months to renegotiate contracts or be expelled. In Ecuador President Palacios seeks to increase windfall revenues from 30% to 50% and to renegotiate production sharing contracts, while still embroiled in disputes over company claims for refunds of value added tax payments denied by the government. Ecuador has now seized and will attempt to operate an oil field developed by Occidental Petroleum. Argentina reversed a successful fiscal regime by imposing export taxes and other restrictions which have returned it to being a net oil importer. The net effect of these developments is that new investment in these countries is virtually frozen at a time when prices should be driving new exploration and production. It is notable that even China, which is aggressively competing for exploration acreage worldwide, is not a major player in the hemisphere. China holds less than 10% of upstream assets in the hemisphere, primarily recent acquisitions of Western assets in Ecuador and Peru, and enjoys no preferential access in Venezuela at this time. No new investment has been made under Venezuela’s 1998 Hydrocarbons law. New investment is unthinkable in Bolivia until existing companies can determine the extent of their losses. Ecuador’s investors are mulling legal action for expropriation and suspension of existing investments. The future growth potential of the hemisphere is being undermined and the region’s economies risk a major contraction if oil prices drop significantly anytime over the next decade. 5.2 Rise of Oil in Venezuela After several unsuccessful uprisings, the country won independence from Spain in 1821, under the 127 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

leadership of Simon Bolivar. Venezuela, Colombia, Panama, and Ecuador, were part of the Republic of Gran Colombia until 1830, when Venezuela broke-off to become and independent state. The dictatorship of Juan Vincente Goméz, between 1909 and 1935, was a period of rapid economic development. This was largely driven by the exploitation of the country’s substantial oilfields, which began in 1918. Venezuela is now essentially an oil economy and the national producer, PDVSA, is one of the world’s largest companies. In 1936 and 1937, Venezuela held democratic elections for the Presidency and National Assembly for the first time but the experiment in pluralism lasted only until 1945. The first of a rapid succession of military dictatorships lasted until 1961. That year, the current Venezuelan constitution came into force. From then until the 1990s, Venezuelan politics were dominated by the struggle between the Partido Social Cristiano, known as COPEI, and the social democratic Acción Democrática (AD). Following the 1973 price hike, Venezuela had enjoyed the benefits of large oil revenues accruing throughout the 1970s, and ran up a substantial overseas debt (although not on the scale of those burdening other Latin American countries). The country’s oil wealth was far from evenly distributed – a relatively small section of the population enjoyed the benefits, while the vast majority was excluded. In the 1980s, successive Governments struggled to stabilize the country and the economy in the face of persistent social and labor unrest, as well as external pressure from creditors pursuing scheduled loan repayments. At the turn of the 1990s, the Government’s opponents found support from sections of the army who considered themselves ill-equipped and badly paid. In February 1992, a number of army units launched a completely unexpected military coup. It was suppressed by loyal army units but the Perez Government was fatally undermined and it was little surprise when Perez was removed from office by Congress the following year, before completing his term. Elections at the end of 1993 resulted in Rafael Caldera, who had served as President in the mid-1970s, assuming the post once again. Meanwhile, the leader of the 1992 coup attempt, Colonel Hugo Chavez, was seeking to establish himself as a national political figure, drawing on the support of millions of disaffected poor people, who had been disregarded during the oil boom. The established parties, dominated by wealthy and increasingly corrupt interests, held little attraction for them. In 1997, Chavez announced the formation of his own party, the Movimiento Quinta República (MVR, the Fifth Republic 128 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Movement), and his candidacy at the 1998 Presidential election. He won, while his party – with the support of other smaller groupings – was able to take control of the National Assembly. Further polls in July 2000 secured his position and, de facto, an endorsement of the constitutional changes that he planned to increase Presidential powers . Chavez’s problems now began in earnest. Always a controversial figure, as a result of the 1992 coup attempt and his courting such Heads of State as Iraq’s Saddam Hussein and Cuba’s Fidel Castro, Chavez has attracted powerful enemies both inside and outside Venezuela. In April 2002, a rightwing alliance of dissident military officers and prominent businessmen led by Pedro Carmona failed in a coup attempt against Chavez. Many believe that the United States had a hand in the plot: while that remains unproven, there is no doubt that the Bush administration would be happy to see the back of Chavez. The Government was certainly shaken by the coup. The economy was in serious difficulty following a currency collapse in February 2002. In December 2002, the opposition tried a different strategy. With the support of key union leaders, especially in the all-important oil industry, Venezuela was brought to a virtual standstill by a general strike. However, after more than two months, the strike petered out. The anti-Chavez alliance now turned to a constitutional device, exploiting a clause which allows for a referendum requiring a Presidential election, before the end of the normal sixyear term, on the basis of a petition signed by at least 20 per cent of the electorate (about 2.5 million people). Such a petition was submitted in August 2003 but controversially rejected by the national electoral commission. A second petition was drawn up in December 2003, containing 3.4 million signatures. This tension culminated in clashes in between opponents and supporters of Chavez in March 2004. A referendum was triggered in August 2004, which Chavez won, with 59 per cent of people agreeing that he should serve out his remaining two-and-a-half years of term. The opposition is driven exclusively by its dislike of Chavez: with his removal, the alliance of business, unions, the old political parties (COPEI and AD) and assorted interest groups will fragment. However, for now, Chavez's future is secured. In the 2005 parliamentary elections, Chavez's party won 114 seats in the 167-seat National Assembly. Voter turnout was low and the main opposition parties boycotted the elections, protesting against what they saw as a biased electoral board. However, despite the 129 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

opposition's doubts regarding the election's legitimacy, a two-thirds majority in parliament now paves the way for Chavez to alter the constitution, which currently limits a President to two terms in office. 5.2.1-Government A ‘national constitutional assembly’ was convened in July 1999 to rewrite the country’s constitution. Executive power is vested in the President, who is popularly elected for a six-year term. The legislature is the unicameral Asemblea Nacional, whose 165 members are directly elected to serve a five-year term.

5.2.2-Economy Venezuela was a primarily agricultural country until the discovery and extraction of oil began in the 1920s. Oil is now dominant, providing 50% of government revenue and 70% of export earnings. The national oil corporation, PDVSA, is one of the world’s largest oil companies. Venezuela has some of the largest known reserves in the world. There are long-term plans to introduce greater diversity into the economy but little change in its basic structure may be expected in the near future due to overdependence on oil and gas sector for majority of revenue generation and sustainability. As well as oil, Venezuela has substantial deposits of iron and aluminum ores, plus gas, coal, diamonds, gold, zinc, copper, titanium, lead, silver, phosphates and manganese. The processing of these ores and the country’s agricultural products account for the bulk of the industrial sector. However, over-dependence on oil income has meant that Venezuela’s industries are suffering from a historic failure to modernise. Venezuela was a prominent founding member of the Organization of Petroleum Exporting Countries (OPEC) and the current president, Hugo Chávez, has played a leading role in the revival of the organization’s fortunes since the late 1990s. Since the beginning of 2002, Venezuela’s recent economic performance has been severely affected by the turbulent political situation. After the currency crisis of February 2002 came an attempted coup. That December large parts of the economy (including the all-important oil industry) were 130 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

affected by a two-month-long strike. This had a devastating impact: the economy is believed to have contracted by around 10% during 2003. In 2004, the decline was reversed with a growth rate of 17.4%. The economy then grew by around 9% in 2005.Venezuela belongs to the Asociación Latinoamericana de Integración (ALADI), which seeks to promote a common market for Latin America, and to the Inter-American Development Bank. Continued instability in Venezuela has had serious implications for the country's energy sector, its state oil company, Petróleos de Venezuela (PdVSA), and world oil markets. Venezuela is home to the Western Hemisphere's largest oil reserves, and its economy is extremely oil-dependent, despite efforts at diversification. Prior to the December 2002 oil strike, Venezuela was producing around 3 million bbl/d of crude oil and lease condensates. In December 2002 and January 2003, Venezuela's production fell to 1 million bbl/d and 630,000 bbl/d, respectively, with a recovery to around 2.6 million bbl/d by April. Overall, in 2002, Venezuela produced 2.9 million bbl/d of total oil, and exported around 2.4-2.5 million bbl/d, including around 1.4 million bbl/d to the United States). In the past, Venezuela was widely considered one of OPEC's main "over-producers," but in recent years appears to have adhered more closely to its OPEC production limits. 5.3 Rise of Oil in Colombia & Ecuador Colombia, a significant oil producer and exporter, faces serious problems, including left-wing guerrilla groups (FARC, ELN) active in the country for the past three decades and now in control of large swaths of the country; right-wing paramilitary groups; a major illicit drug trade; large fiscal deficits; and high unemployment. The country also has an extremely high violent crime rate, including kidnappings of both Colombians and foreign nationals, and oil workers have been specifically targeted. In 2002, a reportedly 3,500 Colombians were killed and an additional 2,000 kidnapped by guerrilla forces, including former presidential candidate Ingrid Beancourt. Both FARC and ELN (Colombia's second-largest rebel group) oppose foreign energy investment, and have attacked oil and power infrastructure. In April 2002, ELN declared that oil companies working in the country were military targets, specifically naming Occidental, Repsol-YPF, and Ecopetrol. ELN and FARC bombed the Cano Limón pipeline a record 170 times (about 14 times per month) in 2001, holding in more than 24 million barrels of crude oil, according to Ecopetrol 131 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

estimates. Bombings in 2002 fell to 41, allowing for increased exports of Cano Limón crude to the U.S. Gulf Coast. Aid in the form of money and military training from the U.S. government helped decrease the number of attacks on pipeline during 2002. In February 2002, Occidental (which ELN considers a "legitimate military target") declared "force majeure" on production at the Cano Limón field. Besides Cano Limón, there have been attacks on the Transandino and Ocensa pipelines, and also on power transmission infrastructure. The BP Cusiana/Cupiagua complex's Ocensa pipeline is by far a less frequent target for bombings. While it carries more oil than the Cano Limón pipeline, more of it is underground. The company's wells are attacked occasionally, but the pipeline has fared far better than the Cano Limón. The TransAndino is subject to more bombings than the Ocensa, but fewer than the Cano Limón. In addition to pipeline bombings, security problems also are responsible for labor unrest. Ecopetrol strikes have followed disappearances of oil union officials. An estimated 165 union members were killed in Colombia in 2001. Right-wing paramilitary organizations have claimed responsibility for abductions of oil union (USO) members, charging those abducted with ELN affiliations. Strikes in February, March, and April 2002 protested abduction and killings of oil union workers. Recently in May 2003, rebels shot hostages, including former defense minister Gilberto Echeverri and a state governor, when the government attempted to rescue them. On February 20, 2002, Colombian President Andres Pastrana broke off peace talks with FARC and ordered the Colombian army to reenter FARC's demilitarized area. President Pastrana took this action after FARC guerrillas had hijacked an aircraft carrying 34 people and kidnapped Senator Jorge Gechem, president of a Senate peace talks committee. On May 25, 2002, Alvaro Uribe Velez was elected the new president of Colombia. Uribe, who was sworn in on August 7, 2002, promised to try to end Colombia's conflict with two guerrilla groups, and to provide greater security for energy infrastructure so as to attract more foreign investment. Among other measures, Uribe initially declared a 90-day state of emergency and levied an emergency tax to raise $778 million toward building up the military to fight off the rebels. Colombia’s oil production in 2002, at 591,000 bbl/d, was down about 228,000 bbl/d from its all-time high of 819,000 bbl/d reached in 1999. Production has fallen in part due to attacks against the Cano 132 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Limón pipeline, in part due to "natural decline," and in part due to a lack of needed foreign investment. Colombia exported 260,000 bbl/d of oil to the United States in 2002, down from 342,000 bbl/d in 2000 and 468,000 bbl/d in 1999. For the first 4 months of 2003, Colombia's production and oil exports to the United States fell even further, to 567,000 bbl/d and 204,000 bbl/d, respectively. Besides affecting Colombia directly, instability there has spilled over into several neighboring countries, including Ecuador, which is a significant oil producer (around 400,000 bbl/d in 2002) as well. In particular, criminal activity, kidnappings, and threats to oil operations have increased in the border region between Ecuador and Colombia. On June 27, 2002, an Ecuadorian military outpost in Ecuador's northern Carchi province was destroyed when fighting between FARC and Colombian armed forces spilled over the border. The outpost, located just over the border, was mistakenly fired upon by Colombian military forces who believed they were firing on FARC. In early October 2002, a British oil worker was kidnapped near the village of Sardinas, 60 miles southeast of Quito. Also, in December 2002, indigenous groups in Pastaza province of the Amazon region took hostage nine oil workers from Argentina's CGC. The groups are demanding that CGC halt work in the area, specifically on Block 23. Ecuador held national elections in October 2002, with a runoff on November 24, and elected leftist former army colonel Lucio Gutierrez as president. Among other things, Gutierrez -- Ecuador's fifth president since 1997 -- has promised to implement "war economy" measures: expanding social programs, creating jobs, redistributing wealth, ending political corruption, ending many free-market policies, and increasing the state's role in the economy. In June 2003, Petroecuador oil employees went on strike to protest plans for increased private involvement in the country's oil sector, causing a temporary reduction in flows through Ecuador's main oil export pipeline. On June 16, the pipeline reportedly resumed pumping at an estimated 200,000 barrels per day -- half of its normal capacity. Ecuador’s state oil company, Petroecuador, had declared force majeure late on June 13 owing to the strike. 5.4 Rise of Oil in Brazil The Brazil state oil company, Petrobras announced on November 8 2007 that they held around 5 billion to 8 billion barrels of crude oil and natural gas in Tupi field. The announcement has everyone 133 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

in the region, and beyond, taking notice. A field that size — the biggest in the world since a discovery in Kazakhstan in 2000 — is a potential political game-changer for Brazil. Brazil could move ahead of Mexico and Canada in total oil reserves, becoming second only to Venezuela and the United States in the energy pecking order of the Americas. There is little doubt that the find gives Brazil new influence against energy players like Bolivia and Venezuela, and not just in the economic competition among energy suppliers, but in the political arena as well. Petrobras has soon pulled out of a natural gas project with Venezuela, citing “technical and economic reasons.” It denied the pullout had anything to do with the Tupi discovery. The turnabout is dramatic. Just two years ago Mr. Morales(Bolivian President) announced the nationalization of his nation’s energy reserves. The step was a firm slap to Brazil, which had invested in Bolivia. Now analysts expect the new field will allow Brazil to take a tougher stand in its negotiations with Bolivia over new gas contracts and investments in Bolivia’s nationalized gas sector. It has also raised hopes of easing the energy crisis among Brazil’s neighbors, notably Argentina and Chile, which have been struggling with a lack of natural gas of their own. Argentina has consistently cut off the flow of gas to Chile for the past two winters, causing Chile to scramble to find supplies elsewhere, and Bolivia’s nationalization has raised doubts about its ability to supply its neighbors’ growing energy demand. Brazil recently had declined the offer from Saudi Arabia to join OPEC Brazilian energy officials say they have declined an invite from Saudi Arabia to join OPEC, explaining that Brazil plans to refine, not export, crude oil from recently discovered deep water reserves.

5.5 Venezuela – Colombia conflict: George Bush waded into the growing inter-governmental crisis in Latin America on 1 st march 2008 by expressing the US’s unqualified support for the Colombian president Alvaro Uribe. The Colombian army attacked and killed a group of Farc (Revolutionary Armed Forces of Colombia) guerrillas camped in Ecuador. One of those killed was Raul Reyes, a long time leading member of Farc, who is reported to have been in the middle of negotiations to free a number of high profile hostages that Farc is holding.The governments of Venezuela and Ecuador responded to the attack by cutting off diplomatic relations with Colombia and sending troops to the border. 134 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Venezuelan president Hugo Chavez stopped most trade along the border with Colombia. He said on Wednesday that Colombian firms in Venezuela could be nationalised. Meanwhile Ecuador’s president Rafael Correa has been touring countries in Latin America to build up support in the row with Colombia. Uribe’s police chief responded by alleging that laptops taken from the Farc camp “prove” that Chavez is funding Farc – an allegation denied by Chavez. Farc is the oldest of several guerrilla groups in Colombia. It emerged in response to state violence and has fought successive corrupt and repressive governments. Attempts by Uribe and Bush to portray Farc as an Al Qaida style terrorist group ignore the fact that it has a degree of popular support. Chavez has played a key role over the past year in negotiating the release of a number of Farc hostages. He has also called on the Colombian government to enter serious peace talks with Farc – a proposal that has been roundly rejected by Uribe’s government. Instead, Uribe continues an approach of brutal armed repression – not just against suspected Farc members, but also against many other opposition forces and individuals. Colombia is currently one of the most dangerous places in the world to be a trade unionist – with disappearances, murders, imprisonment and intimidation common. The state also allows right wing paramilitaries to operate within the country. Colombia is the US’s key ally in Latin America and seen by Bush as an important bulwark against the radical anti-US governments of Venezuela and Bolivia. This is why Chavez recently called Colombia the “Israel of Latin America”. Bush gave Colombia over $750 million last year. More than 80 percent of this was directly for military and police programmes. Bush has also used the current crisis to try to push a controversial free trade agreement with Colombia through congress. For many years Farc has been locked into a bloody guerrilla war that has claimed many lives and shows no sign of winning against one of the most militarised countries in Latin America. An alternative left strategy is beginning to emerge in Colombia. Despite the constant threat of repression, the trade union and social movements continue to grow and to challenge the militarism and neoliberalism of Uribe’s government. 5.6 Venezuela – US conflict Since Venezuela is a major supplier of foreign oil to the United States (the fourth major foreign 135 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

supplier in 2007, after Canada, Mexico, and Saudi Arabia), providing about 11.5% of U.S. crude oil imports, a key U.S. interest has been ensuring the continued flow of oil exports. Some 68% of Venezuela’s oil exports are destined for the United States, highlighting the dependency of Venezuela on the U.S. market, and oil exports account for the overwhelming majority of Venezuela’s exports to the United States. In 2007, Venezuela’s total exports destined for the United States amounted to $39.9 billion, with oil products accounting for almost 96% of the total. The December 2002 strike orchestrated by the opposition reduced Venezuela’s oil exports, but by May 2003, Venezuelan officials maintained that overall oil production returned to the pre-strike level. Venezuela’s state-run oil company, PdVSA, owns CITGO, which operates three crude oil refineries and a network of some 14,000 retail gasoline stations in the United States. The Chávez government has benefitted from the rise in world oil prices, which has increased government revenues and sparked an economic boom. As a result, Chávez has been able to increase government expenditures on anti-poverty and other social programs associated with his populist agenda. In April 2008, the government approved a measure that taxes foreign oil companies 50% when crude oil is $70 a barrel, and 60% when oil exceeds $100 a barrel. Under President Chávez, the Venezuelan government has moved ahead with asserting greater control over the country’s oil reserves. By March 2006, it had completed the conversion of its 32 operating agreements with foreign oil companies to joint ventures, with the Venezuelan government now holding a majority share of between 60-80% in the ventures. In 2007, the government completed the conversion of four strategic associations involving extra-heavy oil Orinoco River Basin projects.Six foreign companies had been involved in the projects — U.S.-based ConocoPhillips, Chevron, and ExxonMobil, Norway’s Statoil-Hydro, Britain’s BP, and France’s Total. In the conversion to Venezuelan government majority ownership, Chevron and BP maintained their previous investments, Total and Statoil-Hydro reduced their holdings, while ConocoPhillips and ExxonMobil chose to leave the projects. However, Statoil-Hydro, Total, and Italy’s Eni subsequently signed agreements that could result in additional investments in the Orinoco Belt projects.Other stateowned oil companies, such as Iran’s Petropars, the China National Petroleum Corporation, Cuba’s Cupet, as well as Russian companies such as Gazprom, TNKBP, and Lukoil have also signed 136 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

agreements for exploration in the Orinoco region. ExxonMobil has been in a high-profile dispute with the Venezuelan government over compensation to be paid by Venezuela for its oil investments in the country. The company filed a request in 2007 for arbitration with the World Bank-affiliated International Center for Settlement of Investment Disputes. ExxonMobil initially won a UK court order in January 2008 freezing as much as $12 billion in Venezuelan oil sector assets, but this was overturned by a UK High Court order on March 18, 2008.ExxonMobil, however, also previously had won court orders in the Netherlands and Netherlands Antilles freezing up to $12 billion in Venezuelan assets, and in February 2008, a U.S. federal court in New York upheld a freeze of $300 million in PdVSA assets. According to some critics, majority state ownership in the oil sector has reportedly slowed the rate of foreign investment. Production also has reportedly not been able to recover from the firing of some 18,000 PdVSA employees in early 2003 and from continued underinvestment in maintenance and repairs. PdVSA announced in early April 2008 that it would raise output to 3.5 million barrels a day (mbd), up from 3.15 mbd in 2007, but other sources, including the International Energy Agency, put 2007 production at far less, just 2.4 million mbd Some oil analysts also question whether PdVSA is prepared to take over operation of the heavy oil fields in the Orinoco. Despite notable frictions in bilateral relations, Venezuela continues to be a major supplier of oil to the United States. Even though Venezuela opposed the U.S. war in Iraq, the Chávez government announced before the military conflict that it would be a reliable wartime supplier of oil to the United States. On numerous occasions, however, Chávez has threatened to stop selling oil to the United States. In February 2006, he asserted that the “U.S. government should know that, if it crosses the line, it will not get Venezuelan oil.” In April 2006, he warned that his government would blow up its oil fields if the United States ever were to attack. In November 2006 (amid Venezuela’s presidential election campaign), President Chávez asserted that Venezuela would “not send one more drop of oil to the U.S.” if the United States or its “ lackeys” in Venezuela try a “new coup,” fail to recognize the elections, or try to overthrow the oil industry. Many observers believe Chávez’s threats have been merely part of his rhetoric that is designed to bolster his domestic political support. Venezuela’s 137 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Ambassador to the United States asserted in July 2006 that oil-cutoff comments by Venezuelan officials, including President Chávez, only reflect what would be Venezuela’s response against aggression initiated by the U.S. government. Once again in February 2008, President Chávez once again threatened to stop oil exports to the United States, this time if ExxonMobil was successful in freezing billions in Venezuela oil assets in a dispute over compensation for its Orinoco oil investments. State Department officials played down the threat, pointing out that Chávez has made the same threat in the past, but has never cut oil.A week later, on February 17, Chávez said that he would only stop sending oil if the United States attacked Venezuela. Because of these comments, however, some observers have raised questions about the security of Venezuela as a major supplier of foreign oil. There are also concerns that Venezuela is looking to develop China as a replacement market, although Venezuelan officials maintain that they are only attempting to diversify Venezuela’s oil markets. In June 2006, the Government Accountability Office (GAO) issued a report, requested by Senate Foreign Relations Committee Chairman Richard Lugar, on the issue of potential Venezuelan oil supply disruption. The GAO report concluded that a sudden loss of all or most Venezuelan oil from the world market could raise world prices up to $11 per barrel and decrease U.S. gross domestic product by about $23 billion. It also concluded that if Venezuela does not maintain or expand its current level of oil production, then the world oil market may become even tighter than it is now, putting pressures on both the level and volatility of energy prices. 5.7 CONCLUSION On February 15 2009, 6,319,636 Venezuelan citizens voted in favor of amending Venezuela’s constitution to eliminate the two-term limit on all elected offices, and 5,198,006 voted against the proposal. This paved the way for Hugo Chavez to remain in power as long as he wish to continue now. This is surely a very big setback for U.S. diplomacy in this region. President Hugo Chávez, buffeted by falling oil prices that threaten to damage his efforts to establish a Socialist-inspired state, is quietly courting Western oil companies once again. Until recently, Chávez had pushed foreign oil companies here into a corner by nationalizing their oil fields, raiding their offices with tax authorities and imposing a series of royalties increases. But faced with the plunge in prices and a decline in domestic production, senior officials have begun 138 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

soliciting bids from some of the largest Western oil companies in recent weeks — including Chevron, Royal Dutch/Shell and Total of France — promising them access to some of the world's largest petroleum reserves. Also, Russia is slowly trying to make its presence felt in this region after the end of the cold war. Gazprom has recently signed a major agreement with Venezuela for the exploitation of two of its gas fields in the Caribbean Sea. At that same time of the signature, a Russian navy squadron visited the Venezuelan coast, among which was the famous Peter the Great ship. This is the first time since the Cuban missile crisis that Russian navy ships have entered American waters. This must be seen as part of the growing military cooperation between the two countries as well as Russian arms sales to Caracas. There are now serious talks of joint military exercises between the Russian and Venezuelan armies in the near future. This partnership between Moscow and Caracas is but one part of Russia's growing influence in Latin America. It must be included into a broader vision of cooperative relationships with Bolivia, Cuba and Nicaragua. Gazprom is also negotiating several gas exploitation projects in Bolivia and aims at replacing US energy companies that were displaced by President Evo Morales' nationalization of natural resources policies. Bolivia has the third largest natural gas reserves in Latin America after Venezuela and Trinidad and Tobago.

6.ROLE OF USA IN OIL GEOPOLITICS 6.1 Introduction More than any other mineral in the 20th century, crude oil has been central to the shifting distribution and balance of global power. The importance of oil was known to every major and presumptive power ever since the invention of the internal combustion engine allowed the conversion of merchant and military fleets from coal to diesel from the 1890s onwards. The race for oil was a fact of international geopolitics in the interwar years and was deemed to be of sufficient significance for the post-Second World War era that Roosevelt took a secret detour after meeting 139 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Stalin and Churchill at Yalta in 1945 to rendezvous with Ibn Saud in the Suez Canal. There, the two leaders discussed the terms of an enduring grand bargain Washington was to strike with Saudi Arabia involving oil and security. Whenever there were shortages or huge increases in price, legislators and officials tended to introspect about the nature of America’s international oil policy. The first full-blown international oil crisis of 1973-4 triggered an inquiry by the Senate Foreign Relations Committee (SFRC) into the history and operations of the multinational oil companies. The question the committee asked was why the U.S. — which was the world’s major domestic producer of oil and oil products — had ended up with an apparent shortage of the resource despite the global involvement and reach of its oil MNCs. And the answer they came up with was that the U.S. lacked a coherent and aggressive oil policy. Later on, U.S. foreign oil policy had been remarkably coherent and aggressive over a long period of time. This is not to say there had not been pushes and pulls in different directions at different times. One fault line in the policy matrix was between the U.S. government and American corporations. Another was between laissez-faire bureaucrats and statist policymakers like Harold Ickes, who oversaw the Petroleum Administration for War and later the short-lived Petroleum Reserves Corporation. Ickes believed that the purely free-enterprise approach to foreign oil development was inadequate to securing America’s interests abroad. In institutional terms, he lost the debate, but the rise of a new global adversary in the form of the Soviet Union by the end of World War II saw the barriers between private enterprise and state initiative — if ever they existed in a serious form at all — dissolve at least as far overseas oil interests were concerned. American foreign oil policy always emphasised three goals: •

The acquisition of foreign petroleum reserves,

•

The breaking down of traditional spheres of interest of competing international powers,

•

The containment of nationalism in the oil producing states.

Here, there was remarkable continuity between the administrations of Wilson, Coolidge, Hoover and Roosevelt in the interwar years. The same pattern persisted throughout the Cold War and broadly speaking, one could argue that U.S. oil policy continues to be animated by these three concerns 140 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

today. The US maintains 737 military bases in 130 countries under cover of the "war on terror" to defend American economic interests, particularly access to oil. The principal objective for the continued existence and expansion of Nato post-cold war is the encirclement of Russia and the pre-emption of China dominating access to oil and gas in the Caspian Sea and Middle East regions. It is only the beginning of the unannounced titanic global resource struggle between the US and China, the world's largest importers of oil (China overtook Japan in 2003). Islam has been dragged into this tussle because it is in the Islamic world where most of these resources lie, but Islam is only a secondary player. 6.2 Role in Middle East Dominance over the Arab world is of particular interest to the United States. It is a region composed of 22 states and 300 million people, extending from the Arabian Gulf to the Atlantic Ocean, sharing a common language, culture and aspirations for unity. After World War I and even more so after World War II, the United States emerged as a primary superpower. It wanted to secure its economic and political interests. Oil and geostrategic landmasses were at the top of these concerns. At the same time, the importance of the Arab Gulf region and the Arab world was mounting in view of its huge newly discovered energy resources. This region possess vital geostrategic interests to U.S. imperial designs. In addition to the regions’ vast energy reserves and productivity, these interests include valuable contiguous landmasses, airspace and waterways without which U.S.-European-Asian trade would be severely restricted and the ability of U.S. military maneuvering would be significantly hampered. For example, the Suez Canal, which connects the Red Sea to the Mediterranean Sea through Egypt, plays a vital role in U.S. military and economic designs. It has shortened the distance of a maritime journey from London to Bombay by 41 percent and from London to Shanghai by 32 percent. In the year 2000, 62 percent of the canal’s shipping was from the United States and Europe. Only 11 percent of the shipping was African, 20 percent Asian, and 7 percent Arab. The majority of Asian shipping was in reality trading with Europe and the United States . Vast U.S. military forces also pass through the Suez Canal and other vital waterways such as the Bab 141 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Al Mandeb and the Strait of Gibraltar. The United States has three major naval fleets between East and South Asia and the Middle East, including the Sixth Fleet, which roams the Mediterranean Sea. Lack of control over these water pathways would significantly choke U.S. ability to maneuver, particularly in the event of a rapid forward strike . With regards to energy, eight of the largest 20 energy-producing countries are Arab, including the top three; 14 are in Asia and Africa; and only three are Western—Norway, United States, and Canada.

The United States, in conjunction with France and Briain, launched a number of projects to secure their colonial interests in the area. In 1948, Israel was established, comprising over 78% of Palestine and sending 75% of the Palestine people into exile. This created a permanenet forward military deterent force in the heart of the Arab world. In 1953, the CIA overthrew Mohammed Mossadeq, prime minister of Iran, after he nationalized Iranian oil. This sent a signal that any shift in economic policies from dependency to independence by the emerging liberation movement would not be tolerated by the United States. The same policy was carried out against Egypt in 1956 when it nationalized the Suez Canal. Britain, France, and Israel attacked Egypt to quell the rapid emergence of the popular leader Gamal AbdelNasser, then president of Egypt. Egypt nationalized the canal to fund the building of the Aswan High Dam, after funding by the World Bank and the United States was rejected. The Aswan Dam remains a key factor in modernizing and strengthening Egypt as a whole.A year before, in 1955, the United States and Britain formed the Baghdad Pact with Iraq, Turkey, Iran and Pakistan to oppose the emergence of the non-aligned movement after the 1955 Bandung Conference in Indonesia. The Bandung Conference had posed a serious challenge to colonial powers, uniting historic leaders like Nehru of India, Nasser of Egypt, and Sukarno of Indonesia. In 1957, the Eisenhower Doctrine was issued declaring the “right” and intent of the United States to intervene in the Middle East. In 1958, U.S. marines from the Sixth Fleet landed in Lebanon in an attempt

to

prevent

the

advance

of

the

revolutionary

movement

in

Iraq.

142 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

The escalating U.S. pressure on Syria and Iran is part of an overall long-term policy aimed at dominating the geo-strategic, political and economic assets of the Middle East. It is part of a systematic policy that has historical origins, and is an extension of the U.S. occupation of Iraq and Afghanistan. To achieve its goals towards Syria and Iran, the United States is advancing two simultaneous strategies: exacerbating competing interests and fragmenting potential consensus. It is fanning sectarian sentiments along religious and ethnic lines, all while forcing alliances of interests between emerging entities to arrive at a decentralized Iraqi state—and is possibly attempting the same with Syria and Iran. The United States is making charges against Iran on the issue of nuclear power production and against Syria on the assassination of former Lebanese Prime Minister Rafiq Hariri and Jubran Twaini, editor of An-Nahar and Lebanese parliament member. But in reality these charges are a cover for U.S. attempts to manipulate these countries’ sphere of regional and internal power politics with the aim of tipping the scale towards U.S. allies and proxy forces in the region and within Iran and Syria themselves. The formation and eventual promotion of the Ahmed Chalabi and Hamid Karzai puppet leader phenomenon in both of these states is underway. In the Syrian case, it is partially entering through the Lebanese gate, where the long defeated and silenced pro-U.S. forces have recently gained momentum. The direct military intervention used in Iraq and Afghanistan would be more difficult to achieve in the case of Iran and Syria. Iraq had been significantly weakened by years of sanctions and internal U.S.-supported opposition. Afghanistan was never a match for U.S. military might, particularly after years of underdevelopment. Syria, on the other hand, is relatively intact internally, despite political opposition. It has not suffered the same years of military weakness, as did Iraq, nor has it been isolated from the international community and Arab states. Additionally, Syria enjoys the support of significant resistance movements in both Lebanon and Palestine, so that an attack on Syria will likely further jeopardize regional stability in Lebanon, Palestine and even Jordan. Forces severely critical of the United States and Israel are the primary anchors of the fragile stability of the Lebanese government.

Instability in Iran will significantly exacerbate U.S. alliances in Iraq, and will likely lead to a reevaluation of forces in the most fragile area under U.S. control—Iraq. The confessional and 143 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

sectarian card played in Iraq requires acquiescence on the Iranian front. For a variety of reasons, a serious destabilization in Syria and Iran will likely lead to a shift in power politics within the Palestinian Authority, where Mahmud Abbas enjoys a fragile grip not only on his political party, Fateh, but also on other political formations and in the West Bank and Gaza as a whole. The presence of a large number of Palestinian refugees in Lebanon, Syria and Jordan will likely have a direct impact on the Palestinian political landscape if their refugee status is significantly altered. For instance, an attempt to disarm the Lebanese resistance movement would also require disarming the Palestinians in the refugee camps—a condition certain to return Lebanon to its civil war years, this time with the Palestinian movement entering the fight for its very existence. And although the Palestinian resistance movement is significantly weaker than it was decades ago, the Lebanese resistance is significantly stronger and more entrenched in the state apparatus and everyday life, particularly in the south of Lebanon . On the flip side, an attempt to force the Palestinians to be granted citizenship in either Syria or Lebanon—“Tawteen” in Arabic—a step considered vital to the U.S. plan to preserve Israel’s U.S.dependent, Jewish-only character, will result in a backlash from the very allies the United States is attempting to prop up, particularly right-wing Lebanese forces. These allies, too, are opposed to a major shift in the demographics of their respective states. Although the imposed decentralized model followed in Iraq is being played to its ultimate by the United States, the same model will likely create a schism with some of the closest U.S. allies, like Turkey. For instance, although the United States encouraged and supported Kurdish separatists in northern Iraq, the same policy does not apply to eastern and southeastern Turkey. That is, the potential Kurdish factor that was used in Iraq and, to a lesser extent, which is being encouraged in Syria and Iran has the unintended result of destabilizing Turkey, one of the strongest U.S. allies in the region These factors combined pose a challenge to U.S. policy in the region, particularly since it is engaged in a losing and increasingly costly battle in Iraq. Yet the strategic importance of Syria, Iran, Palestine and Lebanon for full U.S. hegemony in the region has caused the reigning neo-conservative wing of U.S. policy makers to seek all existing options short of military engagement, full scale or limited. It 144 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

is these diplomatic and saber-rattling destabilizing options that we are witnessing. Both Syria and Iran recognize that the quagmire in Iraq is partially weakening any intentions that the United States has for military intervention. 6.3 Role in Africa During the cold war, the United States viewed Africa as a major battleground with the Soviet Union and poured billions of dollars of economic and military aid into the continent. After the collapse of Communism, though, American interest waned. in 1995, a Pentagon report concluded that the United States had "very little traditional strategic interests in Africa." But during the past few years, Africa has become a growing source of American oil imports-especially West Africa, which in oil parlance is considered to include Angola as well as Nigeria, Congo Republic, Gabon, Cameroon and now Equatorial Guinea. The United States already buys 15 percent of its oil fromWest Africa- nearly as much as comes from Saudi Arabia-a figure expected to grow to 20 percent within the next five years and' according to the National Intelligence Council, to as high as 25 percent by 2015. The ex- president Bush Administration's national energy policy, released last May, predicted that West Africa would become "one of the fastest growing sources of oil and gas for the American market." The year before, Paul Michael Wihbey of Washington's Institute for Advanced Strategic and Political Studies described West Africa as "an area of vital US interest" in testimony before Congress. He proposed the creation of a new South Atlantic Military Command that would "permit the US Navy and armed forces to more easily project power to defend American interests and allies in West Africa." There's been virtually no public discussion or debate about America's growing appetite for West African oil, though it has significant economic, military and geopolitical implications. While these countries are not Islamic regimes-a fact frequently emphasized by American strategists-US allies in West Africa are not especially attractive. In Angola, petroleum revenues have allowed the government of Jose Eduardo dos Santos to build a vast military and internal security apparatus. Other than oil, Angola produces little besides artificial limbs for war victims, but dos Santos has become by some estimates one of the world's fifty richest people. Nigeria, though it formally made the transition from military dictatorship to democratic rule in 1999, is also a disaster. The army has committed several massacres of civilians since President Olusegun Obasanjo took power, and a 145 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

parliamentary report recently accused his administration of corruption and ineptitude. "The Middle East presents a number of problems, but most West African regimes are neither stable nor democratic," says Terry Karl, a professor of political science at Stanford University and author of The Paradox of Plenty: Oil Booms and Petro-States. "Oil development in that context is likely to buffer authoritarian rule and foster corruption, instability and environmental destruction." 6.4 Role in Central Asia U.S. policy for the development of oil and gas reserves in Central Asia is predicated on the use of best commercial standards and transparency to ensure that energy resources are developed efficiently and for the benefit of the countries concerned. U.S.A. has pursued a policy of encouraging multiple pipelines to afford the countries of the region options for export of their oil and gas. The completion of the Caspian Pipeline Consortium (CPC) pipeline from Kazakhstan to Novorossiisk on the Black Sea in Russia and the inauguration of the Baku-Tbilisi-Ceyhan (BTC) pipeline from Azerbaijan to Turkey are signal successes of this policy. BTC in particular represents a new environmental, social, and design benchmark for energy transport worldwide. The construction of the South Caucasus Pipeline will bring Azerbaijani natural gas to European markets and, ultimately, Turkmen and Kazakhstani gas may cross the Caspian and share this route. United States welcomed the June 16, 2008 signing by Azerbaijan and Kazakhstan of an agreement to facilitate access of Kazakhstani oil to the BTC pipeline. Such an agreement provides Kazakhstan additional capacity to export the large volumes of crude that will need to reach markets starting in 2009-10, when the Kashagan field is slated to come on stream. U.S. firms are among the biggest investors in Central Asia's energy sector, and this is a welcome development in many ways. Major U.S. oil and gas firms such as Chevron, ConocoPhillips, and ExxonMobil have extensive investments in the Tengiz, Karachaganak, and Kashagan fields. In addition, U.S. oil services companies and equipment providers such as Parker Drilling, McDermott, and Baker Hughes Services International have found promising opportunities. When speaking of oil and gas development, it must be kept in mind that regionally Kazakhstan and Turkmenistan hold the largest reserves. Kyrgyzstan and Tajikistan have significant hydroelectric resources, but little oil and gas. Uzbekistan is largely closed to Western companies and has more limited potential.

146 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

The extent of Turkmenistan's gas reserves remains unclear, and Turkmenistan is completely dependent on the Russian pipeline system to bring its gas to market. A proposed trans-Caspian pipeline foundered in 2000 when the parties could not reach an acceptable commercial agreement, and little has changed since then. Given the scope of the energy supply and demand challenges U.S.A. faces today and in years ahead, Kazakhstan can play a very helpful role in addressing the energy needs. Kazakhstan and the entire North Caspian region have tremendous resources. At Tengiz, Kashagan, and other fields, nearly 30 billion barrels of reserves are proven; there is potential for up to 100 billion barrels. Natural gas reserves generally range from 65-70 trillion cubic feet, and could be as high as 100 trillion cubic feet. U.S. energy companies and their international partners are now focused on ramping up production and improving transportation to markets. U.S. energy companies were among the first non- CIS foreign investors in Kazakhstan

6.5 South America Cooperation on energy policy has fostered U.S. relations with Latin America. When the Memorandum of Understanding (2007) was signed by Secretary of State Condoleezza Rice and Brazil Foreign Minister Celso Amorim, for example, President George Bush embarked on a sevenday tour of Latin America, making stops in Brazil, Uruguay, Guatemala, Colombia, and Mexico. The Domestic Offshore Energy Security Act of 2008, also known as the DOES Act, was introduced by Sen. Larry Craig (ID) in May 2008 and referred to the Committee of Energy and Natural Resources. The bill urges the authorization of travel-related transactions for travel to, from, or within Cuba in relation to the exploration or research of hydrocarbons. The act would provide American companies with the opportunity to explore Cuban waters alongside Canada, India, China, Norway, Spain, and Brazil, who are already purchasing off-shore leases for water exploration. Across the board, U.S. ties with Latin America and the Caribbean run broad and deep. From 1996 to 147 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

2006, total U.S. merchandise trade with Latin America grew by 139 percent, compared to 96 percent for Asia and 95 percent for the European Union. In 2006, the United States exported $223 billion worth of goods to Latin American consumers (compared with $55 billion to China). Fifty-one percent of U.S. energy imports originate from Canada, Mexico, Venezuela, Ecuador, Colombia, and Brazil. US imports over 50 percent of its oil from the Western Hemisphere, with 34 percent coming from Latin America and the Caribbean in 2005 – outweighing the 22 percent imported from the Middle East. Colombia’s eastern neighbour Venezuela is an especially vital source of oil for the United States, providing around 12 percent of annual US oil imports. Venezuela’s contribution is exceeded only by that of Mexico, Saudi Arabia and Canada. Since 2002 the Bush administration had embarked upon a new strategy each year to oust and/or destabilize the democratically elected government of Venezuela. In 2002, the US Administration supported a military coup that briefly ousted the democratic government; in 2003 it used an economic sabotage campaign; in 2004 it supported the political strategy of the referendum; and in 2005 it waged a diplomatic battle. since 2002 the Bush administration has embarked upon a new strategy each year to oust and/or destabilize the democratically elected government of Venezuela. In 2002, the US Administration supported a military coup that briefly ousted the democratic government; in 2003 it used an economic sabotage campaign; in 2004 it supported the political strategy of the referendum; and in 2005 it waged a diplomatic battle. In 2002, the Bush administration knew that a coup against Chavez was in the offing before it happened, including the fact that dissident military officers would “try to exploit unrest stemming from opposition demonstrations slated for later this month or ongoing strikes at the state-owned oil company PDVSA.” They also knew about the coup in advance because the US government was funding many of the groups that took part in the coup. In fact, grants by the National Endowment for Democracy (NED) and USAID to opposition groups skyrocketed right before the coup. Instead of abating in the post-coup period, US government collusion with anti-democratic forces continued during the following year. Groups such as NED and USAID actually continued to fund groups that had participated in the coup. This includes some groups that organized an 148 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

insurrectionary managers’ strike at the end of 2002 and beginning of 2003 that cost the Venezuelan economy about $10 billion, resulting in a severe economic contraction and putting millions of workers and thousands of small businesses out of their jobs. The strikers’ goal was maintaining control over the national oil company so they could keep the wealth to themselves, and getting Chávez out of office. They lost, and Venezuela’s oil wealth now benefits the entire country instead of a traditional elite. Bush seemed so irrationally focused on antagonizing an economic ally and democratic neighbour: in essence, because of the neocons’ unwavering ideological commitment to a corporate-oriented global economy dominated by US strategic interests. Chávez seeks to challenge that vision, and build a more balanced geopolitical map. And to the chagrin of the Bush administration, his vision met with tremendous support both within Latin America and globally.

6.6 Potential of Geopolitical Friction over Arctic Energy There is a rapidly growing body of knowledge regarding the size and extent of large potential hydrocarbon resources throughout the Arctic region. Increased attention to the region is driven by a combination of factors including: the melting of the Arctic ice cap enabling ease of access to formerly difficult operating areas, the need for new sources of energy due to geopolitical issues such as difficulties in the Middle East, the depletion of existing hydrocarbon resources and the significantly increased demand for existing resources brought on by the energy needs of China and India which have become major importers of energy. The melting of the Arctic ice cap in combination with developments elsewhere concerning future energy security are creating scenarios that range from low level friction to potential conflict between the eight nations surrounding the Arctic region. Russia and the US, the two most powerful regional military powers in the Arctic, view the Arctic as 149 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

an area of the highest geostrategic importance for their future national security. Canada therefore cannot afford to be either slow or late in ensuring that its national security concerns are well known to all concerned and well represented through increased presence and capability in the region. There has already been oil, coal and gas deposits found and to some degree developed in the Mackenzie Delta and Western Arctic Islands of the Canadian Arctic. The potential for finding new deposits of natural gas and oil in these areas is quite high. Canada, the largest external supplier of oil and petroleum products to the US, exports approximately 2 million barrels per day of crude oil to the US, which is between 10% and 15% of US requirements. In all there are eight countries that have lands within the Arctic region. They have formed the Arctic Council, an intergovernmental forum for addressing common concerns and challenges faced by the Arctic countries, namely: Canada, Denmark (including Greenland and the Faroe Islands), Finland, Iceland, Norway, the Russian Federation, Sweden and the United States of America. These countries have together sponsored the International Polar Year (IPY), a major Arctic and Antarctic science research initiative that ends in March 2009 (the Arctic Energy Summit forms part of IPY). In order to address the issue of energy security in the Canadian Arctic the Canadian government is developing policies and programs that try to meet some of the challenges. At present these involve: - mapping the Canadian Arctic and adjacent seabed areas in detail so as to be prepared for international disputes regarding boundaries and sovereignty issues; - shipbuilding projects for both the Navy and the Coast Guard so as to ensure presence and sovereignty, especially with respect to the proposed increased use of the Northwest Passage, both for transport of any oil and gas but also any other shipping using the route; - participating in circumpolar gatherings aimed at discussing Arctic issues; and - funding research into the effects of climate change, for example the impact of melting permafrost, as well as the effect of economic development such as through extraction of oil and gas on the Arctic environment. Canada is undertaking, sometimes in cooperation with adjacent countries such as the US, a major hydrographical project aimed at mapping Arctic coastlines and the adjacent seabed. This is a highly expensive effort involving the use of aircraft, ships, satellites and autonomous underwater vessels 150 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

that can operate over long distances under the ice and out into the Arctic Ocean as well as the Beaufort Sea. The Canadian government assesses that territorial claims will be resolved based on hard mapping data that can be presented in international courts. Canada has had good results in the past in resolving such disputes in a similar manner with France over territorial claims surrounding the islands of St Pierre and Miquelon south of Newfoundland. That said Russia has already indicated that they may not agree with following such a course of action as they planted a Russian flag on the seabed at the North Pole and claim that the Lomonsov Ridge, which leads there, is an extension of their territory.

6.7 CONCLUSION This section of the report deals with the importance of U.S.A. in the oil geopolitics arena of the world. U.S.A. being the largest consumer of petroleum products has always taken steps to protect its interest of energy security. Its intention of Iraq war is quite clear today with American companies stating getting contracts for oilfield development there. American presence in Middle East and Central Asia are also a part of its long term policies of securing its interests in major oil producing countries. The long presence of American forces in Kuwait and Saudi Arabia are clear indications of this. The Iranian policy of America has always been under scrutiny as they accuse Iran of producing nuclear weapons with IAEA making no such findings in its report. It is assumed worldwide that America has eyes on vast oil and gas reserves of Iran and wants a supportive government like that of Iraq to exploit it. The recent ties of ex-USSR states with NATO and America are indications of shifting U.S. focus towards Central Asian oil and gas reserves. America also backed Georgia politically in the Russia-Georgia conflict last year and provided a lot of humanitarian aid to Georgia. American companies are also funding a lot of pipeline projects in central Asia to gain access to this 151 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

part of the world. America also has been focussing a lot on its African policy recently because of the increasing discoveries of oil in Western Africa. This part is very close to America and can supply energy demands of America for long. The South American policy of America is a mix bag with very good ties with Columbia and Brazil and its long sour relations with Venezuela, one of the major exporters of oil to America. The inclination of Hugo Chavez towards Russia and the growing influence of Russia in South America is really a reason for worry for America in terms of energy security. This can inflate the tensions that prevailed during the cold war. Overall, the political policies of America are more of energy policies and act as mechanisms of energy security for the country

EXHIBITS Exhibit 1: Statistics of Middle East

152 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

Saudi Arabia Iran Iraq Kuwait UAE

Oil reserves(mb) 264.2 138.4 115.0 101.5 97.8

Total share(%) 21.3 11.2 9.3 8.2 7.9

R/P ratio 69.5 86.2

91.9

153 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d

154 | T h e O i l W o r l d – A G e o p o l i t i c a l W a r f i e l d