Tag Archives: Energy Security

Asia-Pacific

The Other Deep-Water Battleground

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This article originally featured on Reuters and was republished with the author’s permission. Read it in its original form here. 

By Peter Marino 

A floating dock of the Indian navy is pictured at the naval base at Port Blair in Andaman and Nicobar Islands, India, July 1, 2015. REUTERS/Sanjeev Miglani

The Indian Ocean may be the only ocean named for a country, but it’ s still heavily contested territory. Both China and India, who have major strategic interests there, are suspicious of each other. Their struggle for leadership in the “emerging world” will play out for decades and all around the globe, but today the Indian Ocean is Ground Zero.

The South China Sea is home to overlapping claims by China, the Philippines, and other countries in the region. And the Arctic Ocean, increasingly, has seen a build-up of U.S. and Russian troops, lured by the possibility of billions of barrels of untapped oil. The Indian Ocean is significant because of its strategically important sea lanes — particularly for India and China, two of the world’s largest importers.

China imports most of its oil by sea, and 80 percent of it crosses the Indian Ocean before it passes through the Straits of Malacca, on its way to the Chinese market. Beijing is very concerned about its dependency on a waterway it does not control, and is using diplomacy, both carrots and sticks, to ensure that it can continue to access the sea lanes. As part of this effort, Xi Jinping’s “maritime silk road” program will offer cheap Chinese financing to cash-strapped governments for trade and industrial infrastructure along such routes.

China is using hard power as well. Through China’s longstanding alliance with the Pakistani government, it has funded improvements at the deepwater port of Gwadar, Pakistan, where a state-owned Chinese company now has a 40-year management contract. That agreement allowed the port to host ships owned by the People’s Liberation Army Navy, giving the Chinese a permanent, or at least semi-permanent, presence in the region.

China’s participation, since 2012, in the international anti-piracy coalition that mans the Gulf of Aden has also allowed it to operate in the Western Indian Ocean, where it is reported to be conducting studies of the sea depth, presumably to aid future submarine patrol missions.

Delhi has been paying close attention, and is mobilizing its own diplomatic and hard-power tools to shore up its influence in its home region. Indian foreign aid, while not yet on the scale of Chinese state investment, is being spread liberally to countries near the Indian Ocean, especially to Bangladesh and Sri Lanka. India’s proximity and cultural similarities give it some advantages over the Chinese efforts. Nationalist Prime Minister Narendra Modi has been notably active in this area, making the first trip by an Indian PM to Sri Lanka in 28 years as part of the push to improve bilateral relations.

Moreover, Delhi is aware of the gap between the strength of its own forces, and that of the Chinese People’s Liberation Army, which has been modernizing for 20 years. India is opening up its checkbook for better equipment, including a multi-billion-euro deal for advanced Rafale fighter jets from France to replace its aging Russian Sukhois. And it is becoming less shy about the idea that it is countering China at sea. When U.S. Secretary of Defense Ashton Carter visited Delhi in June this year, he signed early paperwork establishing a collaboration to develop India’s next generation of aircraft carriers. Because China had recently launched its first aircraft carrier, the Liaoning, and was constructing two more, the motivation behind this proposed Indo-U.S. partnership was unmistakable.

Despite these conflicting interests, China and India could still have room to collaborate on several major global issues. As two of the world’s biggest importers of agricultural goods, minerals and energy, they share an interest in working with exporters to help smooth out price volatility in commodity cycles. And as countries that will be “great powers” while still relatively poor, they should work with each other to push through reforms at the United Nations, World Bank and other international groups that were set up by the rich world. Their shared interest in a peaceful and stable Southeast Asia should contribute to their joint participation in peaceful diplomacy there, too.

But for the moment, Delhi and Beijing are mostly in a mode of competition in the Indian Ocean, and the tendrils of their struggle extend even further, across the steppes of Central Asia, to the Western part of Africa, and into the Persian Gulf, as well. The Indian Ocean is the one major ocean not bounded by one of the existing great powers, which makes it the perfect locale in which the struggle for primacy in the “emerging world” can play out. What we are seeing now is only the beginning.

Peter Marino holds an MSc in Global Politics from The London School of Economics and is a graduate of Norwich University. He lived in Shanghai from 2003 to 2008 and served as head of China development for London-based Aurigon, Ltd. He founded and sold Quaternion, a political risk startup, and is currently establishing a new Think Tank for International Affairs aimed at promoting engagement with the “Millennial Generation.” He also produces Globalogues, a video blog with commentary on global politics and economics. The views expressed in this article are his own.

Capability Analysis, Current Operations, New Initiatives, Strategic Outlook, Tactical Concepts

Taming the East Asian Naval Race

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Note: This article was originally published in its original form in the Naval Institute’s blog and was cross-posted by permission.

On August 6th,CIMSEC ran a feature on the latest Japanese helicopter destroyer, the Izumo (DDH-183). CIMSEC contributor Miha Hribernik observed that the Izumo, which is supposedly capable of carrying an aviation squadron and boasts a 814 feet-long (248 meters) STOBAR (short take-off but arrested recovery) flight deck, is “sure to cause concern in China…[since the launching of the ship] presents a potent addition to the operational capabilities and strategic reach of the JMSDF.”

22ddh-compAccording to Business Insider, the helicopter destroyer “came in” shortly after China’s recent statement that it is in “no rush [to sign the proposed Code of Conduct] since [Southeast Asian nations involved] harbor unrealistic expectations.” Japan’s territorial row involving Diaoyu/Senkaku coupled with threats emanating from the DPRK (Democratic Republic of Korea) might have triggered increased defense spending. However, the two aims of Japan’s burgeoning defense spending, pre-emptive strike capabilities and the creation of an amphibious assault unit similar to the United States Marine Corps, have made its East Asian neighbors uneasy. As for America’s reaction, Zachary Keck believes that while it is “unclear” how the Obama Administration will respond to Japan’s pre-emptive attack on its “adversary’s bases,” the Obama Administration could become “vocal” should Japan act upon its “threats to review [its] past apologies.”
Japan's Prime Minister Shinzo Abe poses inside the cockpit of a T-4 training jet plane of the Japan Air Self-Defense Force's (JASDF) Blue Impulse flight team at the JASDF base in Higashimatsushima, Miyagi prefecture, in this photo taken by Kyodo May 12, 2013 and released on May 16, 2013. Mandatory Credit REUTERS/Kyodo

In light of the fact that the ROK (Republic of Korea), China and Japan are seeking to boost their naval capabilities in recent years, some now fear that East Asian countries may have entered into a “regional naval competition.” One explanation for the naval race, as recent territorial rows and controversies over Japan’s wartime atrocities demonstrate, is that the ongoing tension in East Asia remains rooted in historical grievances. Osaka mayor Toru Hashimoto’s remark in May that wartime brothels were “necessary…to maintain military discipline” coupled with the photo of Shinzo Abe inside the cockpit of a T-4 trainer with thenumber 731 stenciled on its fuselage seemed to evoke among the Chinese and Koreans memories of  Japan’s imperial aggression during the Pacific War. Indeed, Japan’s seemingly strident militarist overtone may have worsenedthe extant historical enmity among the three major East Asian countries.

To the historical grievances must be added another dimension—the fierce competition for energy resources. According to the National Geographic, “how much oil and natural gas is at stake, in either the South China or the East China Sea, is unclear [since] territorial disputes have prevented any reliable survey.” Nonetheless, each country’s efforts to “guarantee access to resources” will indubitably enhance its ability to “to shape international events according to a new definition of self-interest, one matching [the country’s] status.” As regards the territorial row over Dokdo/Takeshima, some aver that contradictory claims are based on “sequence of centuries-old records and half-told versions of more recent history.” To the extent that natural resources may be concerned, the Dokdo/Takeshima islets, although “poor in fresh water necessary to sustain human life,” are “abundant in fish.” Furthermore, the island is said to “contain natural gas reserves estimated at 600 million tons.” It can be argued, therefore, that in the Dokdo/Takeshima dispute, as with that of Senkaku/Diaoyu, energy security will retain “great salience” in the years, if not decades, to come.

However, one major factor that may explain the exacerbating the East Asian arms race is the recent sequestration cuts within the Department of Defense which may make it more difficult for the United States to “manage its alliances and strategic partnerships in the region.”  Keck argues that a new geostrategic environment whereby the United States increasingly desires to see its East Asian allies “shoulder more of the burden for regional security” may the create the perception that the United States presence in the region has diminished despite its commitment to the “pivot to Asia” strategy.

Nevertheless, it is unlikely that peace in the region can be successfully maintained without the continued American presence in the region. While it may be true that “rational trust-building” diplomatic measures among East Asian states may somewhat temper the extant tension in East Asia, at present, the basis for mutual trust among East Asian states remains flimsy at best. For this reason, the United States must learn to “lead from behind” in East Asia by demonstrating its diplomatic prowess. To that end, the United States must seek cooperation with China in order to achieve stability on the Korean peninsula and to temper the tension over Senkaku/Diaoyu. With respect to Japan and the ROK, the United States can work to defuse tension over the competing claims to the Dokdo/Takeshima islets. One way in which the United States can defuse the naval race would be to help form a combined fleet whereby the United States Navy, together with its sister East Asian navies, “may share their unique resources and cultures to develop flexible responses against future threats.”

In short,  the ongoing naval race, as represented through the launching of the Izumo, is an outcome of deep-seated historical enmity and rivalries over increasingly scarce energy resources. While some may dismiss the possibility of a regional war, slight miscalculation among East Asian state actors may indeed spiral out of control and lead to a lethal war.

Notwithstanding the substantive defense budget cuts which could hamper flexible strategic responses, the United States nevertheless has a role to play to ensure peace in East Asia. “Leading from behind” to tame the ongoing East Asian naval race just may be the most cost effective way in which to exercise influence in the region.

Jeong Lee is a freelance writer and is also a Contributing Analyst for Wikistrat’s Asia-Pacific Desk. Lee’s writings on US defense and foreign policy issues and inter-Korean affairs have appeared on various online publications including East Asia Forum, the Georgetown Journal of International Affairs, the World Outline and CIMSEC’s NextWar blog.

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NOTE: In a follow-up article entitled “More Than Meets the Eye in Asian Naval Race” published at RealClearDefense, I argue that the naval competition among the three East Asian countries is driven by each country’s desire to look after its own self-interests and not necessarily by desire for imperial expansion.

Beans Boots Bullets

The Great Oil Contango of 2008-2009 & Maritime Security: A Retrospective

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Oil storage commodities swinging at anchor in idled VLCCs.
                                                                     Fill ‘er up! 

The following article is special to our International Maritime Shipping Week. While we often discuss the threats to maritime shipping, this week looks at dangers arising from such global trade, and possible mitigations.

It sounds like a variant of a famous and complex Latin dance, but Contango is actually a financial phenomenon involving the trading of futures-based commodities. For the layman it goes like this: take a product such as crude oil. If you buy it now, you pay X, the “spot price”. Due to market conditions, you’re confident that a year from now you can sell it for a higher price of X+, the “future price”. Such a situation is a Contango. To take advantage of it you sell contracts now to purchasers willing to take the commodity at the future date, price, and quantity. You are now a speculator or “arbitraguer”. The challenge becomes storing enough of it until that time comes to deliver the agreed commodity. As long as storage and other overhead costs didn’t exceed X+ (the “spread”), you turn a profit.

Like many historical events, the so-called Oil Contango of 2008-2009 was a the result of several factors:

  • The first year of the Global Financial Crisis had passed and the effects were being felt in full, namely low consumer spending and unfavorable market conditions (sub-prime mortgages, credit collapse, etc)
  • OPEC was reluctant to reduce production rates for fear of sending the already unstable markets into free-fall – the surplus was growing at a rate of 1 to 2 million barrels daily
  • The resulting oil glut combined with low spending because of the crisis resulted in a low spot price (X), but with an expectation of a higher future delivery price (X+) as the economy slowly recovered

The key of for those willing to do business was to find storage at cheap enough prices that made large purchases of oil contracts profitable. Here’s where history becomes stranger than fiction. The glut literally overran land-based storage facilities. In the United States, a small Oklahoma town called Cushing is considered the benchmark for crude oil as traded on the New York Mercantile Exchange. It’s status is derived from being a primary hub connecting many delivery points within North America, and it’s maximum storage capability is approximately 42 million barrels (about 10% of U.S. oil production). At the time of the Contango, it cost approximately $1 a barrel per day to store crude there. But the oil glut had a big side effect – a lot of tankers were idled, and thus their operating prices declined. Around November of 2009, the daily rate for a million barrel capacity crude carrier was $10,000 a day at it’s lowest. The profit “spread” looked to be about $10 a barrel. Those market conditions made it very attractive for firms with the wherewithal to take full advantage of the Contango.

No one turns down Mr. Gere for a dance Contango.
                    Care for a dance Contango?

And what a list of arbitrage firms there were – Citibank, Morgan Stanley among them. While banks are typically loath to touch anything but paper instruments of commodities (i.e. not purchase the assets themselves), here they were directly chartering any decent-sized vessel capable of holding a million barrels or more. These were some of the very same institutions that took it on the chin during the Global Financial Crisis, and had every incentive to make up for their losses.

The result is a sweeping trend of world-wide seaborne oil-storage. In the end, all the tankers that the various arbitrage players could get their hands on could have formed a 26-mile long convoy of Very Large Crude Carriers (VLCC), totaling about 130 million barrels, or a little over 12 times what would normally be found at sea at any given time in recent history. All of it swinging at anchorage in major ports around the globe, for a year or more. The maritime security implications are numerous, and represent challenges for consideration.

With that much crude afloat and idle, the period of The Great Oil Contango presented one of the largest and most tempting targets for terrorist and other actors to strike and prolong what was already an immensely unstable global financial crisis. The risk potential was heightened by the fact that the glut easily overwhelmed the best efforts of ashore storage locations such as Cushing to supplement their capacity, adding anywhere from 5-to-10 million barrels of space.

The second-order effects are worth noting too: First, the chartering frenzy impacted not only the industries that used crude carriers, but spilled over to other sectors as firms moved beyond floating tankers and hired other types of ships for their storage capacity. Second, oil refineries eventually had to shut down or reduce shifts as OPEC and other oil producing concerns acknowledged market forces and cut back production output.

The potential environmental and safety impacts of that much oil afloat is staggering. As a comparison, the worst spill in modern history is the Deepwater Horizon well disaster – which sent about 90 million barrels into the Gulf of Mexico, devastated the U.S. southern coastline and surrounding waters, and required two years to complete major cleanup operations. The number of ships filled to the brim also increases the risk of partial spills and fire/collision hazards during the offloading, such as ship-to-ship transfers.

The Contango also caused an unintended and negative effect on the Strategic Petroleum Reserve (SPR) – several countries released their SPRs because of the market’s perception that there wasn’t enough oil in distribution – that was true – to the extent that much of it was being set aside by the arbitrageurs. While the SPR technically increased the amount of oil available on the market, it also further drove down the Spot Price (X), thereby increasing the “spread” or price differential of the Futures Price (X+). Therefore, there the incentive for abitrageurs to release any of the oil they already had was further reduced. In fact, by releasing the SPR, those nations put at risk their capability to respond to a crisis such as a wartime footing where energy to power the military is most needed.

Historically, the Contango ended, or more accurately declined, when too many arbitrageurs entered the market and wiped out the remaining availability of product, driving up prices. By doing so, they reduced the price “spread.” Additionally, the particularly harsh winter of 2010 made it attractive to unload stockpiles and cash-in as fuel demands were at an all-time high. Finally, a regulatory investigation by the U.S. Commodities Futures Trading Commission (CFTC) on practices such as the oil-storage trade convinced investments firms and traders to move on to greener pastures.

Lessons Learned: the vagaries and complexities of the modern financial market have many effects, most of them unpredictable, especially when dealing with energy supplies. In 2008-2009, several factors came together that not only artificially imposed limitations upon the world’s oil supply, but had indirect effects upon world shipping and national petroleum reserves. What was also interesting to note is that as instability began to threaten traditional supplies of oil (say the Libyan Uprising), the market price spread started to narrow as consumers were more than willing to pay an elevated spot price for energy now. The Contango also highlighted the growing influence of non-state actors such as corporations and financial firms to indirectly influence the availability and price of oil. Previously, the oil commodity market was a reasonable reflection of global supply and demand, the presence and practices of OPEC notwithstanding.

Surprisingly, for the time period during and shortly after, there wasn’t a lot of open-source intelligence or even published articles on the strategic and security implications of The Great Oil Contango. Everyone appeared to be focused on the monetary and market impact, but little else. It behooves us as industry professionals and observers to be aware of these developments and understand better the linkages to strategic security and public policy. One future trend we can expect is the greening of major navies as nations seek to minimize energy supply impacts to their foreign policy and military capabilities.

Juramentado is the pseudonym for Armando J. Heredia, a civilian observer of naval affairs. He is an IT Risk and Information Security practitioner, with a background in the defense and financial services industries.  The views and opinions expressed in this article are those of the author, and do not necessarily represent the views of, and should not be attributed to, any particular nation’s government or related agency.

Cyber War, Future War

Highlighting Catastrophic Threats

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Catastrophic Threats

Earlier this month the Federation of American Scientists held its annual Symposium on Catastrophic Threats and Awards Ceremony at the National Press Club in Washington, D.C.  The date – November 9th – was chosen to coincide with the November U.S. presidential election and provide a forum for policy recommendations to a newly elected administration.  The symposium provided a wonderful venue for the discussion of the most-pressing threats facing the U.S.  Panelists called for steps to prevent catastrophic events, and increase response planning and preparation to those possible dangers.  These recommendations were published in a booklet, available electronically.

Because science plays such a critical role in underlying U.S. policies, from disaster preparation to farm subsidies, leaders must be armed with a science-based knowledge of the risks and opportunities policy choices present.  To this end, the symposium featured moderated discussions of four-to-five distinguished experts, grouped into related threat-areas: Nuclear Weapons; Biological, Chemical, Conventional, and Cyber Threats; and Energy and Infrastructure.

The session devoted to nuclear threats reiterated the group’s long-held goals of stockpile reduction and eventual total disarmament.  Senior FAS Fellow Charles Blair emphasized that the U.S. must start differentiating violent non-state actors in terms of their ability to pose a bona fide radiological or nuclear (R/N) threat, rather than treating all threats as possessing equal capabilities.  Proper identification of the threat will allow targeted policies and avoid wasteful expenditures of time and resources on groups that do not pose significant R/N threats.  Another FAS Fellow, Dr. Robert Norris, proposed that a fundamental alteration of Cold-War era nuclear doctrine is a prerequisite for arms reduction, with a minimal deterrence mission the only necessary use for the U.S. nuclear arsenal.

Lengthy discussions of biological-, chemical-, and conventional-weapons threats highlighted the need for increased accountability and controls, which are scarcer outside the United States.  Perhaps the most significant threat in the chemical and biological weapons fields stems from the fact that there is a growing dearth of technical experts in the former Soviet Union to handle existing stockpiles of agents. Without the incentives of prestige and financial rewards available during the years of the thriving Soviet weapons programs, even fewer personnel with the requisite training will be available to handle and safeguard stockpiles in the future. 

Those barrels full of chemicals looks safe to me!

The energy and infrastructure panel spoke in favor of nuclear energy with reminders that natural gas does not eliminate greenhouse gas production.  They also reminded attendees that the U.S. will likely import oil from Canada long after it frees itself of overseas imports.  Dr. Steven Koonin, of NYU, called for increased funding for alternative energy research and a reorganization of the Department of Energy to enable better understanding of markets and business policies.  Notably absent from the discussion was an in-depth assessment of the impact that the Fukushima Daiichi incident will generally have on nuclear power endeavors in the future, and in Japan specifically.

One subject that stood out for immediate attention is developing a framework for rules and definitions in cyber security and warfare.  The United States is ill-prepared to respond to a major denial of service attack aimed at critical infrastructure, especially in the cyber realm.  Dr. Kennette Benedict, from the Bulletin of Atomic Scientists, explained that the field lacks clarity on responsibilities and acceptable scope for security.  Increasingly sophisticated attacks on private and public networks demand a robust effort to ensure reliability and freedom from interference.  While the private sector has tremendous incentives to shore up defenses against intrusion and would benefit from federal support in defending network architecture, transparency and trust are in short supply at this time.

As an illustration, were a major electrical grid or other critical infrastructure component attacked, resulting in losses of life and industrial output, how would the United States respond?  Would this be defined an act of terror an act of war?  Would the response be treated like a natural disaster?  No clearly defined roles have been established for preventing and/or prosecuting major acts of cybercrime.  No public forum exists to discuss the norms associated with cyber warfare, define acceptable measures that may be taken against individual or state-sponsored actors, or set limits to intrusion that occurs under the guise of security.

We can’t be hacked if we unplug it from the grid, right?

Not only will clarifying these issues benefit the private sector, but transparency will also pay major dividends in foreign policy negotiations.  As with any new weapon, uncertainty will lead to mistrust and fear, which often precipitate wasteful arms races.  U.S. leaders must come to the table with candor in order to develop policies that promote security with minimal interference for all.  A massive blackout or disruption of services would be devastating for everyone; CIMSEC could be the group that suggests a way forward.

More information about the event can be found at the Federation of American Scientists’ website: www.fas.org

LT Drew Hamblen is a naval aviator in the U.S. Navy and graduate of Georgetown University. The opinions and views expressed in this post are his alone and are presented in his personal capacity. They do not necessarily represent the views of U.S. Department of Defense or the U.S. Navy.