On the eve of World War I (WWI), Winston Churchill, as the first lord of the Admiralty, converted the Royal Navy from coal to oil. As a result, a shift emerged in the imported fuel dependency, from Welsh Coal to Iranian oil. Then Churchill declared, “Safety and certainty in oil lie in variety and variety alone”. In modern parlance this attitude denotes diversification of energy supplies.
BY FAIG GALIB ABBASOV | June 2012
- Theoretical analysis: Diversification Gospel
Diversification of energy supplies, both in terms of supply sources and transit routes is at the heart of consumers’ energy strategy, as it ensures security of supply, resilience against disruptions and has a downward pressure on the prices by facilitating competitiveness in energy markets. In this sense, multiplicity of energy supplies is the best recipe for a mid-term and even possibly long-term energy security for the consumer states.
From the producers’ perspective energy security holds to a similar principle, but at the opposite end of the spectrum. As the single biggest source of income for the most of the hydrocarbon producers, energy security entails continuous sales of their energy resources at the highest possible prices. Disruptions of energy exports will deprive the governments from substantial national income and destabilize the economy. In modern gas market diplomacy, on the other hand, the best commercial conditions to retain and increase the market share have become a new criterion for the energy security of the producer countries. This is especially important in Europe, where the bulk of the imported natural gas is supplied based on long-term pay or take commercial contracts. Therefore, the revenues of the energy producers, especially, Europe’s non-European gas suppliers are highly dependent upon their ability to acquire as big as possible market share under favorable commercial conditions. In turn, the best market conditions and the continuous flow of energy exports can be assured via, inter alia, security of demand. Thus, security of demand constitutes the bedrock of energy security of hydrocarbon producing states.
Accordingly, the security of demand is contingent upon the producers’ ability to increase the number of their buyers and access various markets simultaneously. Branching out of energy exports safeguards producers from disruptions in a particular market, whether it is caused by technical difficulties or as a result of diminished demand.
Secondly, security of demand necessitates diversification of export routes, as over-dependence upon a single route/infrastructure and disruptions thereof will stymie their exports reaching the necessary markets. This, in turn, will have deleterious effect on their revenues, as well as a blow on their reputation as a reliable supplier. In this sense, from suppliers’ perspective happiness in energy security lies in multiple pipelines and multiple clients.
The third facet of energy security is the concept of affordability. However, affordability entails different assumptions for producer and consumer states. If from an importer’s perspective, affordability equals to continuous supply of energy resources at lowest possible prices, from a producer perspective it means continuous demand at the highest possible price. ii Therefore, the diverging perceptions of energy security by consumers and producers lead to everyone expanding their energy relations and partners. Efforts by consumers, but also producers to diversify their energy supplies and markets, have given rise to what Luft and Korin call “a new breed of countries”, i.e. transit countries of energy relations and trade.