23 Nov Digital and Oil Geopolitics
Oil is used by some nations to project influence and power, and is a national security concern for most others. How does digital innovation alter the oil-infused geopolitical landscape?
The first version of this post was published on November 19 of 2019, around US Thanksgiving, and it seemed timely to reprise.
It’s useful from time to time to view the decisions that OECD nations are making that impact the energy security profile of consumer nations, and the risks of future man-made catastrophic supply disruption, such as what we narrowly avoided in the pandemic. Digital issues creep into this kind of analysis, which gives rise to the question: how does digital innovation play into the geopolitics of the global oil industry?
If you don’t pay that much attention to the shadowy world of oil politics, here’s a short primer of the kinds of things that international oil analysts consider.
OPEC, that club of oil exporting countries, is a major player in the world of oil, shipping some 24m barrels every day. Volumes are down from 31m in 2018 because of the pandemic slowdown. Their share has drifted down to 26% of global supply, far from the heady days when 2/3 of every mile driven was supplied by the cartel.
OPEC has had a tough 2020. In economic terms, the loss of volume (I estimate at 6m barrels of oil per day since end of April, or about US$58b in lost revenue), must be hurting the national treasuries of many members. An unfortunately timed volume war with Russia at the start of the pandemic has swelled inventories throughout the supply chain, and months on, are still weighing on markets.
Because of OPEC’s importance to global oil markets, most nations treat OPEC countries with a good deal of latitude.
Over the years, Russia hasn’t hesitated to use its immense gas supply as a geopolitical tool. Gazprom has repeatedly cut off gas supply to Europe because it objects to the trade practices of the transit nation, Ukraine. Germany is highly dependent on Russian gas supply and has signed long gas supply contracts which sometimes makes it difficult for Germany to oppose with vigour some of Russia’s adventures.
Starting in 2017, Russia, along with nine other oil producing nations not part of OPEC, began to operate in concert with OPEC (creating OPEC+), a nifty trick since, in theory, Russia’s oil companies are supposed to be independent of the Kremlin. With Russian production at 11m barrels, OPEC+ is more like 50% of global production, and therefore of considerable influence in global markets. With its increased geopolitical heft (OPEC has Russia’s back), Russia can more effectively apply pressure on its customers to agree to its policies and actions (such as military intervention in neighboring nations), and agree to not intervene or criticize the behaviour of its partners in exchange for favourable trade terms.
Rising US production
The explosive growth of new US oil supplies from previously untamed shale has shifted the US, in the short span of just 5 years, from importer dependent on global oil supplies to the world’s largest single oil producer nation and a major oil exporter. US demand for oil has been flat for years, despite annually adding 15m new drivers to its market (that’s testament to the deep shift towards a fuel light service economy, the efficiency of engine technology, and changing consumer behaviour).
This shift in fortunes reduces the ability of oil supplier nations to the US from applying pressure on the US political system. It also means that US sanctions applied to nations like Iran do not sting the US domestic economy as much, which is better insulated from the global oil market.
BP’s excellent energy stats highlight the flat demand in the OECD economies in addition to the US. So where is all the growth? China and other growing Asian economies. Supplier nations are all effectively fighting over the very large and attractive Chinese marketplace. Paradoxically, China’s government has made it clear their intent to move away from fossil fuels for energy to clean up their air (and as a side measure, reduce their dependency on US currency markets).
China, as a big oil importer but with a strong industrial policy towards clean energy, will be able to seek favourable trade deals with exporters, in exchange for market access.
On the horizon is the shift to new drivetrain technology for mobility. Every week now seems to bring a fresh announcement about future bans of internal combustion engine cars.
Historically, US dependence on imported oil translated into large defence expenditures to police global trade routes through the Gulf, the canals of Suez and Panama, the straits around Singapore and the South China Sea. That warm defence blanket helps Taiwan to keep its independence, Japan to maintain only a defensive military, Israel to thrive, the Philippines to grow, and South Korea to hum along. With the US now relatively oil independent (it’s not completely independent since many of its coastal refineries are dependent on tidal crude), the defence industry needs a new foe. Enter China, stage Far East, and repeated sanctions programs.
Disciplining Rogue Nations
A good way, some say, to bring rogue nations to their senses is to impose sanctions on them that deny access to international banking or markets for their products. This cuts off access to hard currency, and with nations like Iran highly dependent on its oil exports, a ban on Iranian oil really hurts. Conveniently, if you’re in the market to export oil, as is the US, sanctions are also good for domestic exporters who are able to step into markets suddenly vacated.
DIGITAL AND GEOPOLITICS
Digital innovations will increasingly play a role in the geopolitical world of oil and with unpredictable effects.
Boosting Resource Understanding
Digital tools are proving effective in helping resource owners improve their understanding of their reserves. Cloud computing environments are able to conduct multiple parallel interpretations of subsurface data, speeding up resource planning, to crowd-source interpretation support, and to bundle resource data from several sources. Cloud technology is now a minimum mandatory for any business aiming to participate in the economy of the future.
However, it might not be in the best interests of national oil companies and governments to have their resource data accessible in cloud environments. That data has strategic value in situations where nations are potentially competing for market access or capital. For example, Australia, a major gas exporting nation, does not have a national database of subsurface information (resources being a state responsibility). A state actor, such as China, could gain strategic insight because of its ability to take a position in each of the oil and gas projects underway.
Monitoring Assets on the Move
Digital technology is enabling far better surveillance of oil assets from afar. Crude oil ships may all look alike to the untrained human eye, but with enough data to work with, artificial intelligence can learn to distinguish between crude carriers, whether loaded or unloaded, and based on speed and track, likely destinations. A common tactic to avoid sanctions is to turn off vessel tracking devices. However an artificial intelligence machine consuming the overnight satellite video feed and identifying the ghost ships makes such moves less effective. Sanctions will take on a whole new level of enforcement.
Similarly, the presence of construction equipment, such as cranes, or greatly increasing cars on site, or buses at facilities, detectable by satellite data interpretation, could signal expansion or a turn around, the ideal time to apply trade pressure.
Enabling Technology Transfer
As more and more technology becomes cloud enabled and digital, that technology is more easily transferred or sold over networks without a trace, in violation of trade rules that may prohibit such sale and transfer. Eventually, blockchain solutions that enable tracking of digital assets will make it easier to detect such illegal activity. Other clever mechanisms could include a ‘call home’ feature for all software to secure a constantly changing secret code that unlocks the software.
Fuelling Cyber Incidents
The digital underworld has many markets for buying and selling hacks, identities, malicious code, Trojan horses and other bits of nefarious technology. This market activity provides another inexpensive toolset to enable geopolitical actors to press their advantage. Imagine a scenario where an oil exporting state actor hacks into its customers’ oil infrastructure. Monitoring customer product volumes can enable advantageous trade strategies. At another extreme, a state actor could disrupt power energy infrastructure and force its customer to purchase more expensive oil, a kind of ransom.
In the case of environmental activism, hackers could break into plant infrastructure, distort data flows from key sensors, and fool systems and human operators into taking incorrect actions. As infrastructure fails, regulators respond with more stringent supervision that ultimately blocks legitimate investments and prevents economically valuable projects from proceeding.
Shifting Currency Away from the Greenback
An intriguing digital innovation would be the adoption of a non-sovereign digital currency or stable coin to serve as the settlement currency for oil. This digital innovation could permanently shift the global reliance on the US dollar and the US banking system away to a neutral market participant. It might neuter the ability of the US government to apply oil trade sanctions to nations.
That is the concept behind the Venezuelan Petro, a crypto currency backed by Venezuela’s oil assets. Unfortunately, Venezuela has not engendered the kind of trust that is necessary to overhaul oil pricing and trade, but the possibility that China could help create such a currency should not be ignored.
Crude oil has no DNA, but crude oil cargos often contain unique biological traces that contain DNA. These genetic markers can sometimes precisely identify the exact source and field from where the crude oil was pumped. Coupled with new digital tools that can rapidly process crude assays, and blockchain for recording the assays and originating cargos on a secure registry, oil can suddenly be traced through its lifecycle, much like how Walmart tracks pork in China.
Digital solutions may make it increasingly difficult for oil customers to purchase crude oil from states under sanction by removing the cloud of mystery around oil source.
The digital tools to provide full traceability of oil are well under development. The Department of Homeland Security is running pilots involving Canadian cross border oil movements using blockchain technology. The administrative costs to Canada and the US (audits, penalties, tariff over payments, compliance administration) amounts to more than $1b per year, which could be substantially reduced or eliminated through this innovation.
More importantly, the work is firming up the potential for blockchain tools to trace crude barrels and finished products well beyond the friendly Canada-US border and into international product movements. Another tool in the sanctions toolbelt is at hand.
The politics of oil will go on forever, so long as there’s a market. However, digital innovations will trigger adjustments in the geopolitical arena.
Check out my book, ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, available on Amazon and other on-line bookshops.
Take Digital Oil and Gas, the one-day on-line digital oil and gas awareness course on Udemy.
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