Dear FDI supporters,

Welcome to the first edition of the Strategic Weekly Analysis for 2012. In the SWA this week, the Northern Australia/Energy Security Research Programme analyses the impact on Australia of the latest round of oil and gas sanctions against Iran.

Still in the Middle East, the Indian Ocean Research Programme analyses the highly uncertain future in Yemen, before considering the visit of Chinese Premier Wen Jiabao to Saudi Arabia, Qatar and the United Arab Emirates. We then move to South-East Asia to investigate the latest reforms in Burma.

Meanwhile, the Global Food and Water Crises Research Programme takes us to Canada, to analyse the implications of the Canadian withdrawal from the Kyoto Protocol. Heading to Berlin, we consider the upcoming Berlin Water Dialogues, which are attempting to find interconnected solutions to challenges running across the water, climate and food sectors.

In what will be another busy year at FDI, we will shortly hold the final in our series of research workshops investigating the interrelationship between three major powers – India, China and the United States – in the Indian Ocean region and the implications for Australia. The invitation-only workshops will be held around the country in late February and will culminate in the release of a Landmark Study.

Strategic Analysis Papers to be released over the next month include feature profiles of the Ethiopian Army and the Lord’s Resistance Army rebel movement, and examinations of the national involvement in the Indian Ocean region of Indonesia and South Korea. Also on South Korea, the Global Food and Water Crises Research Programme will investigate the future water situation in that country.

Major General John Hartley AO (Retd)

Institute Director and CEO

Future Directions International

Western Resolve to Break Iran’s Oil Shield: Implications for Australia

Background

Iran boasts ten per cent of world oil reserves and is currently the third-largest exporter. This strategic share has allowed the Islamic Republic to create an “oil shield”, protecting the government’s survival and alleged nuclear programme. Recently, however, the United States and its allies have invoked strict sanctions aimed at removing Tehran from the international oil market. The immediate impact on Australia will be negligible, although concerns linger over the implications for trade partners. Within this context, Iran’s removal as a competitor in the gas market presents opportunities for Australia to leverage these developments to its advantage. 

Comment

On inauguration, President Obama attempted to take a more conciliatory approach towards Iran than that of his predecessors, but Tehran was quick to rebuff his overtures. In the subsequent years, a right-wing, militaristic cadre has come to the fore in Iranian politics. These developments and the alleged Iranian nuclear programme have forced the President to return to the 30 year old American policy of “pressure and persuasion”, adopted following the Islamic Revolution. Intersecting trends suggest the diplomatic pivot will shift again in 2012, with the United States adopting a more austere policy towards Iran.

Last New Year’s Eve, in a sign of a more determined approach, President Obama enacted sanctions against the Iranian Central Bank, attempting to weaken that nation’s crucial oil export business. Additionally, financial institutions and businesses that have connections with the bank will be prevented from opening and maintaining operations in the United States. According to the Brookings Institute, when fully enforced the sanctions will excise Iran from the oil market, slashing its primary revenue stream. 

The growing resolve against Iran has seemingly spread across the Atlantic to the European Union. Traditionally reticent about the implementation of sanctions, press reports suggest the EU will impose an embargo on Iranian oil imports, with details due in late-January. While the United States has not imported Iranian oil since 1979, several EU countries continue to be major purchasers. Accordingly, analysts contend, countries such as Italy, Greece and Spain will resist strict adherence to the sanctions and are currently readying applications for waivers. 

The vast majority of Iranian oil flows to markets in the Indo-Pacific. Emerging markets, including China and India, and energy-poor states, such as South Korea and Japan, form Iran’s main customer base. Key US allies, Japan and South Korea have signalled their intent to reduce demand for Iranian oil. Exports to China and India are likely to continue unabated.  

Fundamentally, the latest round of sanctions is aimed at forcing Iran to curtail its nuclear ambition, while preventing an oil shock that could destabilise the world economy. 

Australian policy towards Iran largely mimics that of the United States and the EU. In early December 2011, Foreign Minister Kevin Rudd announced an expanded suite of sanctions, targeting key figures within the government and Iran’s nuclear programme. Additional sanctions are likely in 2012, to bring Australian policy into line with that of key allies.

Australia is a net importer of oil, with approximately two-thirds of demand sourced from overseas markets. Vietnam, Malaysia, Indonesia, United Arab Emirates and Papua New Guinea provide the overwhelming bulk of Australia’s oil requirements. According to a Congressional Research Service report in late 2011, Australian imports of Iranian hydrocarbons, including mineral fuels, crude oil, natural gas, distillates and the like, are minor – totalling $138 million in 2010 – an insignificant statistic in comparison to key import partners.

Regardless, however, Australian energy providers must ensure due diligence and a robust framework, to ensure compliance with current and potential sanctions against Iran. Australian investors considering ventures in Iran’s energy sector should be aware that the latest embargo represents a substantial risk to commercial operations. Complementary sectors must also exercise caution, particularly logistic and shipping companies. Beyond the energy sector, Australian financial institutions, insurance companies and broker-dealers must ensure a rigorous approach to Iran; it will likely be tested in 2012 and beyond.

Given Australia’s export-focussed economy, it is vitally important to consider the implications of sanctions against commercial partners. Recalcitrance from Beijing and New Delhi will continue; their consumption of Iranian oil may even potentially increase. While both countries pursue a policy of diversification to ensure energy security, decreased demand for Iranian oil from the European Union is an opportunity neither country is likely to ignore.

While the specifics of the EU sanctions remain unknown, it is clear that members will be required to engage alternative markets. While Saudi Arabia is likely to be moderate in new contract negotiations, given its own concerns towards Iran, Russia may adopt a more opportunistic policy. To offset the loss of Iranian oil, the Organization of Petroleum Exporting Countries (OPEC) is expected to increase output. Concurrently, the EU may tap oil stocks to maintain the volume of oil available at the current level. Ostensibly, this favours a “business-as-usual” approach. The reduction in reserve capacity, however, may create uncertainty on the world market, spooking traders and creating price volatility. It is a concerning prospect, particularly given the likelihood of geopolitical shocks in other supplier states such as Iraq, Nigeria, Syria and Yemen.

Sanctions may create a minor oil imbalance, amplified due to the world economic climate. Australia will avoid significant exposure, due to guaranteed supply and increased energy security for key export markets in Asia. 

Perhaps a more pressing concern for Australia stems from Iranian statements about the closure of the Strait of Hormuz. Over 20 per cent of the global oil trade and a third of global liquefied natural gas (LNG), transits that critical chokepoint. Closure of the Strait, through an international embargo, military operation, or political decision in Iran, would cause a worldwide oil shock, comparable to the 1973 and 1979 crises. Australia would certainly not be immune to such developments. Questions remain, however, over the capability and intent of Iran to close the Strait of Hormuz.

Finally, Australia should seek to position itself as alternative market to Iran during these latest developments. While oil-poor, Australia boasts a strategic share of LNG, a commodity targeted by sanctions, yet largely ignored in the press. The reduction of Iranian gas and resulting concerns over surety of supply from other Gulf states in the event of a crisis, makes Australia an ideal candidate to play a larger role in global hydrocarbon requirements. Currently, most Australian gas projects are in the early construction phases of development, preventing Australia from capitalising on rising gas prices in the spot market. By the middle of the decade, however, Australia is expected to exploit its strategic share of LNG to become a leading global supplier. While long-term contracts currently exist, reserving significant ratios of gas for regional energy utilities, scope exists for greater exploration in existing gas basins and untapped tenements, to increase supply. Suspected shale deposits throughout northern Australia create further prospects for supply.

Australia, using its unique energy credentials, must position itself as a key alternate supplier of future gas requirements, to promote the deterrence and dissuasion elements on which the current sanctions are based. 

Liam McHugh

Manager

Northern Australia & Energy Security Research Programmes

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Yemen: A Highly Uncertain Future

Background

Despite the stated intention of the Yemeni Government to hold elections in February, and President Saleh’s agreement to stand down after that event, the country’s future is anything but clear.

Comment

None of the issues that caused the present unrest have been resolved. The alternatives of continuing unrest, a violent collapse and a peaceful transfer of power are all still possible.

The most positive analysis suggests that a regime change is unlikely and that Saleh’s family and supporters will remain the dominant force. Indeed, Saleh may not have agreed to resign unless he was assured of this outcome.

Alternatively, elections could be difficult to conduct and the results might trigger further insecurity.  Nor are the fundamental concerns in any way diminished. The northern rebellion, southern separatist movement and al-Qaida’s influence have not declined. Tribal differences that caused the present situation remain unresolved.

The number of displaced people has risen to 700,000 and somewhere between five and seven million people will experience severe food and water shortages in 2012. The increase in malnutrition and communicable diseases, reduced school attendance and diminished job opportunities can only lead to increased instability.

Yemen will also continue to rely heavily on Saudi support if it is to survive economically.

On the other hand, the populist nature of the revolution appears to have largely dissipated. Youthful demonstrators have become minor players. Instead, four strongmen have emerged, all of whom support the continuation of a Saleh-type regime.

The President probably will step down after the election. He will most likely be replaced by Vice President Abdullah Hadi, who will continue the policies of the present government. Importantly, Hadi will be supported by the President’s eldest son, Ahmer Ali Saleh, who heads the Republican Guard and Special Forces.

Nor is General Ali Mohsen, a Saleh critic, likely to continue his opposition once Saleh withdraws. Mohsen has played a major role in identifying members of the newly formed military council and will receive an important position in managing Yemen’s future.

While some semblance of order may emerge, many of the long-term fundamental issues remain unresolved. The prospects for Yemen becoming a viable state, therefore, remain highly uncertain.

Major General John Hartley AO (Retd)

Institute Director and CEO

Future Directions International

 

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Chinese PM Visits Middle East as US-Iran Tensions Threaten Energy Supplies

Background

Chinese Premier Wen Jiabao is in the Middle East this week, as part of a six-day official visit to Saudi Arabia, the United Arab Emirates and Qatar, from 14-19 January 2012.

Chinese Foreign Ministry spokesman Liu Weimin said the visit would ‘promote the development of China-Arab relations and relations with the Islamic world.’The premier is also scheduled to speak at the opening ceremony of the fifth World Future Energy Summit on 16 January, where he is expected to elaborate on China’s policy toward sustainable energy development. 

Comment

Mr Wen met with senior officials from the Saudi Government on 14 January and urged the oil-rich country to open its oil and gas resources to Chinese investment. ‘China and Saudi Arabia are both in important stages of development, and there are broad prospects for enhancing co-operation,’the Chinese premier said. 

The two countries signed several agreements on Sunday,including an initial contract between state-run Saudi petrochemical giant SABIC and China’s Sinopec to build a petrochemical plant in Tianjin.

China’s visit to the Middle East comes amid increasing US pressure on China to boycott Iran’s nuclear programme by cutting oil imports.US sanctions against Iran and several Chinese petrochemical companies threaten to disrupt Iranian oil exports, leaving China anxious to secure access to oil elsewhere. China is Iran’s biggest customer, purchasing some 22 per cent of all Iranian crude exports during the first half of 2010.^[1]

Theodore Karasik, director of research at the Dubai-based Institute for Near East and Gulf Military Analysis, speculates that ‘China will try to find out what the three countries are thinking about Iran. China will want to make sure that it will receive needed energy supplies if there is a conflict.’‘The regular economic and trade relations and energy co-operation between China and Iran have nothing to do with the nuclear issue,’ Chinese deputy foreign minister, Cui Tiankai,told reporters in Beijing. ‘We should not mix issues with different natures.’^[2]

Meanwhile, Iran’s governor at the Organization of Petroleum Exporting Countries (OPEC), Mohammad Ali Khatibi, has sent a stern warning to its Gulf neighbours: ‘If the oil producing nations on the Persian Gulf decide to substitute Iran’s oil, then they will be held responsible for what happens.’^[3]

Ashley Woermann

Future Directions International Research Intern

Indian Ocean Research Programme

 

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Burma Reform Process Continues

Background

Amid uncertainty as to just how far it might be willing to travel down the path of reform, the government of Burmese president Thein Sein has, over the last week, implemented two more significant changes. In the latest round of amnesties on 13 January 2012, some 650 prisoners, many of whom were jailed for political activities, were released. The day before, the government and Karen rebels signed a ceasefire agreement, potentially ending the country’s longest-running insurgency. The government now also appears to be very close to securing a similar deal with ethic Shan rebels after the failure of an earlier ceasefire attempt. Thein Sein also seems committed to holding a number of by-elections on 1 April, in which leading opposition figure Aung San Suu Kyi will be a candidate.

Comment

The quasi-military government of President Thein Sein continues to tread a path of apparent reform, granting amnesty on 13 January to some 650 prisoners. Many had been jailed for political activities and included not only those associated with the failed 1988 and 2007 uprisings, but also a former Prime Minister and chief of the Directorate of Defence Services Intelligence, General Khin Nyunt.

Sentenced to a suspended sentence of 44 years for charges of bribery and corruption in 2005, General Khin had been under house arrest. His 2003-04 premiership ended as former leader and chairman of the State Peace and Development Council, Senior General Than Shwe further consolidated his power. Khin’s vague but promising 2003 “Roadmap to Discipline-flourishing Democracy” was abandoned. Following his release, Khin wasted no time in endorsing Aung San Suu Kyi as a candidate in the 1 April by-elections.

Ms Suu Kyi has stated that she would consider taking a portfolio within the government if she were elected to parliament. Accommodating the likes of Ms Suu Kyi and the military could be the next challenge for the Thein Sein government. If Ms Suu Kyi and her National League for Democracy party are successful in the by-elections, the authorities’ response will offer the best indicator yet of the government’s commitment to deeper reform. While Thein Sein appears to be very much reform-minded – and aware of the high degree of dependence on China brought about by Burma’s international isolation – traditional hardliner Than Shwe remains highly influential behind the scenes. He may seek to alter the course of events if they are felt to be loosening the military’s control to an unacceptable degree.

If fully achieved, peace with the rebel Karen National Union, which has been fighting for an independent Karen state since Burma’s independence from the United Kingdom in 1948, offers a template for the resolution of similar insurgencies. Reports coming through from Burma late on 17 January indicated that the government was very close to securing a similar peace accord with rebels from the Shan ethnic group, potentially ending another long-running insurgency. Along with the release of all of Burma’s estimated 2,000 political prisoners, the ending of the insurgencies and the associated human rights violations would certainly boost the image of the Thein Sein government overseas and potentially offer scope for the easing of international sanctions. While the United States has emphasised the need for further reforms, Washington announced on 13 January that, on the basis of the reforms to date, it will begin the process of upgrading its diplomatic representation in Burma from Chargé d’Affaires to Ambassador.  

Leighton G. Luke

Manager

Indian Ocean Research Programme

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Legitimate Concerns in Canadian Withdrawal from Kyoto Protocol

Background

Canada’s withdrawal from the Kyoto Protocol in December 2011, in the wake of the Durban climate talks, provoked a steady stream of criticism among Canadian environmentalists and the international community. Ottawa intimated that Kyoto was not the way forward for action on climate change. Certainly not alone in its doubts – Japan and Russia refused the prospect of new commitments under the treaty in 2010 – Canada is nevertheless the only country to withdraw from the pact completely.

Comment

The warranted concerns about Kyoto and the overall process of global climate action, which helped motivate this decision, temper somewhat the charges of “irresponsibility” from abroad.

Although China’s state media portrayed the move as irresponsible, Canada does have the legal right to sever ties with the Kyoto protocol: Article 27 states that any country can withdraw three years after the protocol is in force. The announcement, by Canadian Environment Minister Peter Kent, was, in effect, a year’s notice for the country’s departure. This came a day after climate talks at the Durban conference wound down, with a mandate reached for a new climate treaty that would provide binding targets for all countries beginning from 2020. It is set to replace the Kyoto protocol provisions expiring at the end of 2012.

Kent suggested that the pull-out would save Canada US$14 billion in penalties for not reaching its Kyoto targets. With Canada’s Conservative Government protective of the nation’s booming oil sands industry, the US$14 billion figure would cover the cost of Canada purchasing carbon emissions permits from other Kyoto nations to meet its targets.

The numbers have been challenged by opposition politicians in Canada. They make a valid point: beyond international diplomatic censure, the punishment for non-compliance in meeting Kyoto targets is essentially nil. This is an apt reminder of the fragility inherent in such mandates. Canadian New Democrat MP, Megan Leslie, argued that the pullout was orchestrated by the Conservatives to avoid admitting failure in reaching the Kyoto targets.

But this would deny underlying concerns that pervade the entire global climate debate. ‘The Kyoto protocol does not cover the world's largest two emitters, the United States and China, and therefore cannot work,’ Kent said. ‘It's now clear that Kyoto is not the path forward to a global solution to climate change. If anything, it's an impediment.’

Kent went on to note that while the Kyoto protocol originally covered the countries generating almost 30 per cent of global emissions, that had fallen to 13 per cent and Canada produced ‘barely two per cent’ by itself. Restructuring these inequities in fresh global mandates has to be an issue for countries like Canada, while mega-emitters, such as the United States and China, refuse to tie themselves to legally-binding targets.

Meanwhile, the source of concern for developing economies, such as India and China, is whether the concept of differentiation between past and future emitters, found in the Kyoto protocol, will be retained in new climate treaties.

Tim Thomas

Future Directions International Research Intern

Global Food and Water Crises Research Programme

 

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Broadened Focus the Challenge of Berlin Water Initiative

Background

From 20-21 January 2012, the second Berlin Water Dialogues will be held in the city’s fairgrounds. It will be an extension of the Bonn2011 Nexus conference held last November, convened by the German Federal Ministry of Economic Co-operation and Development, which focussed on integrated solutions ‘for the Green Economy’. To go one step further, the Dialogues aim to approach the twin challenges of water and food security from different angles, with a host of international representatives taking part.

Comment

Coinciding with International Green Week Berlin, the world’s largest fair for agriculture, food and horticulture, and the launch of the Global Forum for Food and Agriculture, a global political platform for agricultural policymakers, the second Berlin Water Dialogues are poised to act as yet another signpost on the path to the United Nations’ Rio+20 Conference on Sustainable Development in June 2012. Attempting to garner political will for the cause of what has been called the “green economy”, is not an unusual pursuit. The unique aspect of these conferences is their recognition of a need for interconnected solutions in challenges arising between and amongst the water, climate and food sectors. This is an overdue framing of the continuing debate.

When it was held in November, Bonn2011 came under criticism from certain quarters, including the Institute for Agriculture and Trade Policy, for the high percentage of private sector representatives involved in the conference. At the heart of this concern is the precedent it set in downplaying the importance of government responsibility and corporate accountability in future debates. The other criticism was over a perceived lack of Southern Hemisphere participants. The Berlin Water Dialogues will seek to tackle this issue, however, with a focus on including experts from across the world.

Resource efficiency – the business of doing more with less – will probably be the major thrust of discussion once more, with impressive panels expected on topics such as genetically modified crops and nanotechnology. But if the rallying cry of Bonn2011 was ‘putting people and their basic human rights at the centre of the nexus’, then doing so would mean looking closely at the oft-ignored impact of food distribution, particularly in the developing world. As noted in the Future Directions International publication, An Overview of Global Food Loss and Waste, published in November 2011, this impact cannot be overlooked, as almost a third of the food produced globally for human consumption is either lost or wasted.

Hopefully, a broader approach in Berlin will dispel any lingering issues from Bonn2011. Identifying constructive ways in which tangible solutions can be applied to managing a green economy future, is a crucial task. Obtaining such outcomes from Rio+20 will depend on how effectively those solutions can be crafted.

Tim Thomas

Future Directions International Research Intern

Global Food and Water Crises Research Programme

 

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What’s Next?

 

• United States Senate Minority Leader Senator Mitch McConnell today concludes his visit to Burma, where he met with opposition leader Aung San Suu Kyi and President Thein Sein.

• French Foreign Minister Alain Juppé will host his Australian counterpart, Kevin Rudd, at a working lunch in Paris on 19 January.

• Indonesia and Pakistan are to sign a preferential trade agreement in Jakarta on 19 January.

• Iranian Foreign Minister Ali Akbar Salehi will visit Turkey on 19 January.

 

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Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

 

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