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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.

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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


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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 Introduction 78

3.2.2 Oil Reserves and Oil Reserves and Statistics 79

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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

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5.1 Importance of South American Oil 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

6. 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


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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

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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

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2.1 IMPORTANCE OF MIDDLE EAST OIL

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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, non-
OPEC 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.

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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 non-
Middle 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.

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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

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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

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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

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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
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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 inflation-
priced 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.

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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

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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

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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.
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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
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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

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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 over-
production, 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.

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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

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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 Iraq-
Kuwait 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

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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 al-
Sabah 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 dual-
use 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
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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.
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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 Al-
Sabah 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.
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 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 Nations-
authorized 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
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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
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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
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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 SUMMARY OF EVENTS AND ITS IMPACT

Year Event Impact

 Altered the regional balance of power

 Nasser status grew as a defender of Arab


1956 Suez Crisis nationalism

 Britain and France lost influence in the region

 US improved its relation with Egypt

1960 OPEC Formation  Cartelization of oil reach countries

 Introduction of production quotas

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 Oil emerged as a weapon of Geopolitics

 Value of currencies depreciated

 Less real income realized for the same price


1971 End of Bretton Woods
 Oil was priced against gold

 This led to oil shock of 70’s

 As a punishment to US for helping Israel, Arab


1973 Yom Kippur War
Oil Embargo was imposed

 Price of crude increased from $3 to $12

1973 Arab Oil Embargo  Massive shortage in US

 Paved the way for energy crisis

 World economies went into recession

 Inflation skyrocketed
1973 Energy Crisis
 Targeted countries responded with initiatives to
contain dependency

 Shah left Iran and Khumayani returned to power

 Declared the establishment of a new


The Iranian fundamentalist Islamic Republic
1977
Revolution
 Drastic decline in production by British
Petroleum

 Paved the way for another oil crisis

1979 Oil Crisis  Prices went very high from 13$ to 32$

 Oil prices fell from 78$ to 26$


1980 The Oil Glut
 lowest price was below 10$

1980 Iran-Iraq War  Iran emerged victorious

 Killed millions of people

 Borders remained unchanged

 Financial losses of 1.2 trillion USD

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 Oil sector suffered huge production and
monetary losses

 Kuwait’s oil production came down as many


wells were set fire by Iraq

1990 Ira-Kuwait war  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

1990 Gulf war  Prices rose from $21 per barrel at the end of
July to $28 on August 6, reaching $46 by mid-
October in 1990

 (Considered to be a milder Oil Shock)

 End of Saddam’s regime

 Formation of a new democratic government


2003 US Invasion of Iraq
backed by US

(Prices represented in $ per barrel)

2.4 INTERNAL CONFLICTS OF MIDDLE EAST

2.4.1 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.

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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 Shia population Shia of total


population (%)
Iran 68.7 million 61.8 million 90%
Iraq 26.8 million 17.4 million 65%
Saudi Arabia 27.0 million 2.7 million 10 %
Lebanon 3.9 million 1.7 million 45 %
Kuwait 2.4 million 730,000 30%
Bahrain 700,000 520,000 75%
Syria 18.9 million 190,000 (+2.8 million)2 1% (+15%)
The United 2.6 million 160,000 6%
Arab Emirates
Qatar 890,000 140,000 16%
Source : Nasr: ‘When the Shiites Rise’

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.

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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 re-
emergence 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,
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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 regional-
level 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.

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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.
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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 power-
sharing 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 Shia-
Sunni 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.

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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.

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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

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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
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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.

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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

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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

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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.

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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

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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.

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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.

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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 1978-
1979 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
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across the globe? And why has Iran been unhelpful as the US seeks a solution to the Palestinian-
Israeli 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.
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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
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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 Non-
Proliferation 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

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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

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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

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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, AH-
64D 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

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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,
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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

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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).

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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

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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 Sino-
Saudi-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.

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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

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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: Babel-
Mandab 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

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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

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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.

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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

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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.

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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

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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

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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
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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

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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

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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.
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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

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.

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
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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
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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
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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

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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 State-
mandated 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.

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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
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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 Nagorny-
Karabakh, within the borders of and completely surrounded by Azerbaijan, which is predominantly

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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

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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

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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

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“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

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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
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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
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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
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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 Tyumen-
Pechora 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.

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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

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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

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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

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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

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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.

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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

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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 much-
needed 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

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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.

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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
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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.

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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

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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

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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

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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,

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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 co-
chaired 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

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specific agreement and action.

An earlier Crisis Group report explored how the Armenian and Azeri communities of Nagorno-
Karabakh 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 OSCE-
led 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.

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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

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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

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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
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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

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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 Nagorny-
Karabakh. 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

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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

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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

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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
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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

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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

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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

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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 oil-
fevered 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
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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

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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.

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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 safe-
haven 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

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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

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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

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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.

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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

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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.

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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.

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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.

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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

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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
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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 right-
wing 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 six-
year 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

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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

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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

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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

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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
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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.

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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
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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

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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
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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

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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

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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

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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
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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 Abdel-
Nasser, 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.
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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 re-
evaluation of forces in the most fragile area under U.S. control—Iraq. The confessional and

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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

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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

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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.

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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 seven-
day 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

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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

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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

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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
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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
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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

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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
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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

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