Oil Assurance: A National Security Dilemma

1. Oil Assurance:A National Security Dilemma By:Gen(r)Chuck Wald6 Sept 2007

2. Benefits of Past Cooperation Arc of Stability • NATO provided security and stability to Europe • The Marshall Plan created the conditions for economic recovery in Europe • Where do we go from here…?

3. Projecting Stability Homeland Security Demographic decline The West Madrid Darfur AQNA Africa Child Soldier Liberia AIDS HIV/AIDS Gulf Of Guinea Unclassified Caucasus/Black Sea Arc of Stability Nagorno- Karabakh Hydrocarbons Beslan Arc of Instability Afghanistan Middle East Iran Israel Iraq

4. Oil Trends • Global oil trends: • Rising consumption • Reduced spare capacity • Instability in key oil-producing countries • The energy debate suggests a profound misunderstanding of the dynamics. • Oil is a fungible, global commodity. • World price shocks are a function of the amount of oil consumed… not the ratio of “domestic” to “imported” product. • Two ways to reduce vulnerability to oil price volatility and source disruptions: • Decreasing demand and/or increasing supply (develop alternatives). • Protecting/defending the global supply chain.

5. World Oil Demand Projections (EIA) 118 M bbl/day 98 M bbl/day 87 M bbl/day Current Capacity 2015 2030 Crude Oil Prices 2004-2006 Share of Global Reserves 83% $78 NYMEX Light Sweet 71% +110% MidEast N. Africa 29% 17% Rest of World $37 Current 2020 Interruptions could increase costs greatly. Islamic States control oil. Oil Facts Largest Oil Reserves Most are adversarial to the US. US strategic interests are very much at risk.

6. No Free Market For Oil Supply • By some estimates 90% of all oil and gas reserves are held by national oil companies… • …that are either partially or fully controlled by governments. • Only one out of the World’s top 10 oil and gas firms is privately owned… Exxon Mobile at #9

7. Geo-strategic Importance of Energy • Oil is the lifeblood of the American economy: • 40% of all energy consumed in the U.S. • 97% of the energy used for transportation. • Oil dependence exposes Americans to risk: • Oil prices have risen from the $37/bbl to $78/bbl within two years. ($60/bbl today) • Oil prices could rise to $100/bbl to $200/bbl if major disruption occurs. • Oil assurance is a national security issue: • Feeds Islamist terrorism. • Provides vast amounts of money to unstable, undemocratic governments. • Increases the likelihood of international conflict. • Puts American troops in harm’s way. • The world, needs a new energy security model: • Today, oil companies alone are expected to secure their assets unless under extreme duress when the US military often becomes involved. • Tomorrow, oil assurance and security is the responsibility of industry, military, law enforcement and government officials worldwide. America’s extreme dependence on oil is an unacceptable threat to national security and prosperity.

8. America’s Dependence On Foreign Oil • U.S. uses 25% of global daily demand, (approximately 22 million barrels per day). • U.S. oil imports account for 58% of total domestic consumption. • Transportation accounts for 68% of U.S. oil consumption. • 97% of transportation in the U.S. is fueled by oil, with few or no substitutes. • By 2025, U.S. demand is expected to grow 23% (from 22 MBD to 27 MBD) • World demand is projected to increase 25% (from 88 MBD to 110 MBD). • Demand in China and India will increase 92% during this period. 2006 2006 - 1 million barrels per day spare production capacityAny major disruption could be catastrophic to the US economy and way of life.

9. US Oil Suppliers • 11 million barrels per day imported, half of daily consumption of 22 million bbl/day. • 9 out of 15 of our major importers are unstable/hostile to the US. • Experts predict that a 10-15% oil shortfall is enough to shatter an oil-dependent economy. • The 1970s oil 5% production shortfall caused the price of oil to quadruple. • Oil shortfalls impact virtually every area of the economy. Oil assurance is perhaps more critical than the physical terrorist threat.

10. Top 20 Oil & Gas Countries *174 B bbls oil sands in development Politically and economically, Iran is an energy powerhouse.

11. Global Energy Security Risk Areas Today's oil supply is vulnerable to disruption.

12. All Other 20% Hormuz 44% Suez 4% Malacca 32% Share of Global Oil Trade Key Choke Points Suez Canal Strait Of Hormuz Strait Of Malacca % Muslim 100% to 50% 50% to 10% 10% to 5% 80% of the global oil trade routes flow through unstable countries, like Iran

13. Implications Of Possible Extremist Control • By 2020, 83% of all oil producers will be in Islamic countries. • 25% of US imports are from the Middle East. • Most of our closest allies are dependent on Middle East oil. Implications: • Oil as a weapon against the West. • Oil revenues funding radical Islamic elements. • Iran and others are using oil to place a wedge between US/China and US/Russia relations. • Middle East regimes friendly to the US, are increasingly at risk from terrorists. The DoD is needed to protect oil infrastructure and our coalition partners.

14. Videotape Iran’s Maritime Military Capability Cruise Missiles Fighter Aircraft Mines Submarines Iranian Weapons To Close The Straits Of Hormus Fast Attack Boats Underwater Missiles $200/barrel oil could devastate economies and change the balance of power.

15. Limburg Oil Tanker Attack – June 10, 2002 • French oil tanker in international waters. • Speed boat attack similar to the USS Cole attack Nov. 2000. • Al-Qaeda claimed responsibility. One supertanker can carry over two million barrels of oil.

16. Protecting Critical Assets Vulnerable critical infrastructure includes more than just ships.

17. Caucasus Hydrocarbon Security Initiative Baku-Tbilisi-Ceyhan Pipeline (2005) • 25% world’s production growth 05-09 • Estimated total income • Azerbaijan: $30-65 Billion • Georgia & Turkey: $2.4 Billion • South Caucasus Pipeline (2006) • Reduces Georgia’s dependency on Russian gas • Reduces Europe’s dependency on Russian gas • EUCOM Task: • To work with key Caucasus states to build their capabilities to secure Caspian oil and gas pipelines to the West. • Program Elements: • Maritime security • Support to civil authorities • Communications • Crisis response/consequence management • Non-traditional security partners and enabling states Goal is for DoD to protect critical petroleum assets and infrastructure.

18. C F E CENTCOM EUCOM EUCOM CENTCOM Gas pipeline Caspian Guard Initiative • $300M US government investment • Capabilities • Counter-proliferation • Counter-terrorism • Counter-narcotics • Hydrocarbon security • Program Elements • Integrated airspace • Maritime surveillance • Command and control • Reaction forces • Border control • Status • Naval exercises conducted • SOF training complete • Familiarization visits to US • Command centers in development • Radars and network operational Kazakhstan Azerbaijan Caspian Guard was a combined and joint force endeavor.

19. Gulf of Guinea Initiative Gulf of Guinea could supply 25-40% of US oil and gas imports by 2015. • Concept: • Unhindered production and transport of hydrocarbons. • Protection of oil storage and distribution facilities and assets. • Maritime surveillance to detect and deter illegal activities. US direct investment in Gulf of Guinea is projected at $10B/year for ten years. MEND Militia Africa and its oil resources are becoming increasingly important to the US.

20. Bonny, site of one of Shell's main oil facilities in Nigeria. Stark contrast of poverty and wealth.

21. A trash-strewn community on the edge of Port Harcourt in the Niger Delta. Little of the area's billions in oil money has found its way to the people of the region.

22. The militant group MEND that has destroyed oil facilities and kidnapped foreign oil workers. In what MEND says is a fight to re-distribute oil wealth.

23. A MEND militant. Painted in symbols the MEND believe shields them from bullets.

24. Oil Gas Region Billion Barrels Trillion Cubic Feet Middle East 743 2,565 Africa 103 486 North America 39 265 Central & South America 103 251 Western Europe 15 189 Eastern Europe & Former FSU 79 1,965 Asia & Oceania 36 392 African Energy • The US imports more oil from the continent of Africa than any single importing country. • Nigeria is the US’s 5th largest oil importer • Algeria is the US’s 6th largest oil importer • Angola is the US’s 7th largest oil importer • Libya and Nigeria, have as much oil as the US. African oil will become more critical to the US economy.

25. Chinese Engagement In Africa • Sino-Africa summit - Beijing November 2006 • Leaders from 48 Africa countries attended • A China-African action plan was developed – plan contained the following specifics: • Joint economic development and information sharing on energy and resources exploration and exploitation while promoting environmental protection. • Cooperate on combating terrorism. • Promoting a voluntary nuclear free zone in Africa. • Supporting a major humanitarian de-mining operations, refugees, displaced persons, natural disasters, drug smuggling and communicable diseases. • Build 100 schools and send 4,000 scholars to Chinese universities. • Build 60 hospitals and medical centers in 3 years. • Create learning centers for Chinese culture and language. • Expand Chinese tourism and donor assistance to Africa. China’s Premier Jiabao proposed China and Africa fully tap cooperation potential.

26. National Commission On Energy Policy • National Commission On Energy Policy (NCEP) is bipartisan group of energy experts from the highest ranks of industry, government, academia, labor, consumer and environmental protection. www.energycommission.org • NCEP Addresses: • Changing landscape of energy needs, vulnerabilities, and opportunities • Stability of the Middle Eastern energy supplies • New energy technologies/alternative energy resources • Global climate change • Commission Focus: • Oil security • Energy infrastructure adequacy and siting • Climate change • NCEP identifies and addresses political and analytical barriers to energy policy reform and conducts extensive outreach to government, business, NGO and other communities. NCEP seeks to build on and distinguish itself from past energy policy efforts.

27. Securing America’s Future Energy (SAFE) • SAFE - an action-oriented, nonpartisan organization • Aims to reduce America's dependence on oil. • Addresses: business, technology, politics, advocacy, public education and media. www.secureenergy.org • Why Securing America's Future Energy will make an impact: • SAFE - is educating and uniting the business and technology communities on the economic and national security threat posed by supply interruption, and the benefits of increased use of alternatives energy sources. • SAFE - is building strong alliances with politicians, policy makers, and political groups. • SAFE - is raising public consciousness regarding the national security aspect of the issue and near term practical solutions towards oil independence. “Current events only serve to confirm the unacceptable security risks created by our extraordinary level of oil dependence.” General (ret.) P.X. Kelley, Co-Chairman

28. SAFE’s Energy Security Leadership Council Frederick W. Smith - CEO, FedEx Corp. (co-Chair) General (Ret.)P.X. Kelley - former Marine Corps Commandant (co-Chair) Admiral (Ret.)Dennis Blair - former Commander-in-Chief, United States Pacific forces Adam M. Goldstein - President, Royal Caribbean International General (Ret.)John A. Gordon - former Homeland Security Advisor to the President Maurice R. Greenberg - CEO, C.V. Starr & Co. Admiral (Ret.) Gregory G. Johnson - former Commander, U.S. Naval Forces, Europe Robert D. Hormats - Vice Chairman, Goldman Sachs International Herbert D. Kelleher - Chairman, Southwest Airlines Dr. John Lehman, Jr. - Chairman, J. F. Lehman & Company Andrew N. Liveris - CEO, Dow Chemical Company Michael E. Ryan - former Chief of Staff US Air Force David P. Steiner - CEO, Waste Management, Inc. General (Ret.) Charles F. Wald - former Deputy Commander, U.S. European Command. Council includes preeminent American business and retired military leaders.

29. SAFE Policy Proposals • Primary Recommendations • Reduce oil consumption • Provide alternatives • Expand supply • Manage risks

30. Steps advocated by ESLC • Improve vehicle efficiency. • Increase supply. • Accelerate near term alternative energy (e.g. GTL). • Conduct vulnerability analysis of supply chain: • Appoint a “Senior” DoD Energy Security Officer: • Pass appropriate legislation with timely and achievable milestones. • Foster security arrangements on a multilateral, regional and bilateral basis. • Reassess the multiple dimensions of the strategic reserve policy. A comprehensive multifaceted approach to oil assurance involving top government, military and industry officials must start now.

31. Energy Security Leadership Council Goals • SAFE’s Energy Security Leadership Councilis developing bipartisan support for a comprehensive energy security policy proposal. • Comprehensive policy will: propose dramatic reductions in demand, increased natural gas and oil supply, alternative energy sources, and define measurable national goals. • SAFE’s Council members are: • Speaking out publicly • Educating lawmakers about the “real-world” business implications • Taking a leading role in adopting solutions to reduce oil dependence. Primary goal is to advance a national energy strategy to reduce oil dependence.

32. Shale Oil Oil Sands Alternative Fuel Sources 2030 EIA: IEO2006 • Alternative fuels development must be accelerated. • Fischer Tropsch technology can exploit existing petroleum infrastructure. • For example, by 2010 with USG support, Alchem’s micro-refineries (shown) should be able to produce 1.5 M bbl/day (8% of daily US consumption). 3 ? 2 Million bbl/day 2005 1 0 Coal-to- Liquid Bio-to- Liquid Gas-to- Liquid Fischer Tropsch Technology The US has several alternative energy technologies that are grossly underfunded.

33. Oil Sands (Canada) • Alberta oils sands fields are about as large as Saudi oil reserves. • Oil production is estimated to grow to 4.5M/bpd by 2015. • The new “black gold rush” will have a dramatic impact on the entire northwest. • Investments are approaching $100 billion. U.S. will benefit from Alberta’s good fortune.

34. Coal-to-Natural Gas • US abundant lignite is a great source for synthetic fuel. • The Great Plains Synfuel plants produce more than 54 billion cubic feet of natural gas per year. • US Synthetic Natural Gas supply thousands of homes and businesses in the eastern US. • The plant also produces fertilizers, solvents, phenol, carbon dioxide, and other chemicals.

35. Biomass-To-Liquid (BTL), Ethanol • US’s rich harvests of soybeans, canola and corn can be turned into economically-feasible sources of ethanol. • US’s has the capacity to produce as much as 336+ million gallons of ethanol. • SAFE ESLC recommends 30B/gal per year.

36. Natural Gas-to-Liquid (GTL) • Natural gas can be easily converted to liquid fuel at a Plant or Micro-unit. • Liquid natural gas can be derived from coal, natural gas, and biomass products. • US’s coal resources make building GTL plants attractive. • Micro-units produce diesel fuel at the well-head. • There are 10’s of thousands of sequestered wells that can be tapped for liquid fuel. Micro-units are ideal for small business operations.

37. Securing America’s Future Energy (SAFE) • Current status • Presented findings to National Security Council and National Economic Council. • Presented study and recommendations to President George W. Bush – Jan. 2007 • Treasury Secretary Paulson and Energy Secretary Bodman endorsed the findings of the study – Jan. 2007 • President Bush endorsed recommendations in the State of the Union speech – Feb. 2007 • Majority and Minority leadership in the House and Senate support initiatives – Feb. 2007 • Sen. Dorgan (ND-D) & Sen. Craig (ID-R) introduced legislation – Mar. 2007

38. Conclusion • The United States security is vulnerable to energy disruption. • The majority of World’s energy supply is in unstable/unfriendly regions. • Global energy demand will continue to increase dramatically. • Conventional energy supply is finite. • The time has come for…… America to develop a comprehensive energy plan to reduce oil dependence.

39. Questions?