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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Age of Gas to Result in Oil and Natural Gas Price Collapse

Politics / Natural Gas Aug 27, 2010 - 02:05 AM GMT

By: OilPrice_Com

Politics Best Financial Markets Analysis ArticleMajor new energy issues are about to transform still further the strategic balance of the Horn of Africa and the Red Sea, with foreseeable consequences for the global energy market over the coming decade. Soon-to-be-evident new wealth in the Red Sea/Horn of Africa region will transform the intensity of conflict there, which in turn will affect not only the region, but the world’s most important trading route: the Red Sea/Suez sea line of communication (SLOC).

Much of the anticipated change is developing around the flood of new discoveries and exploitation of natural gas fields in the Indian Ocean region, particularly extending through Ethiopia, Egypt, and other countries of the Red Sea region. Apart from the impending influx of new energy wealth into the region, facilitating new levels of confidence and capability in the security environment, the boom of the “Gas Age” also seems set to promise — within a decade — an oversupply of gas to the world market, almost certainly precipitating a collapse in price for gas and petroleum.

The strategic balance in the Horn of Africa, and reaching through the Red Sea to Egypt and the Mediterranean, is changing rapidly — and in many respects is becoming more unstable — as political, geopolitical, economic, and ideological issues begin to clash. The war over the reunification of Somalia, incorporating both the old Italian Somaliland (now Somalia) and the Republic of Somaliland, has now become indisputable, and nominally-moderate Egypt has come down firmly on the side of reunifying the area under the clear dominance of an Islamist-dominated but anomic — essentially lawless — Somalia.

Egypt — with its unstable political transition underway at the same time as the discovery of increasing quantities of natural gas — has been covertly supporting a wide range of radical actions along the Red Sea littoral and in the Horn with the sole goal of ensuring that Ethiopia does not use its traditional heartland strength to be able to revive its dominance of the Red Sea and the sea lane which links to Egypt’s Suez Canal.

In the process, however, the Egyptian Government has given support to the same radical jihadist groups which fundamentally oppose Egyptian secular governance, which support Iranian expansion into the Red Sea/Africa framework, and which have transformed a strategically benign Ethiopia into one which must now accept confrontation with Egypt and its regional allies.

This situation has been compounded by the recent Islamist/pan-Somalist success in winning power in Somaliland, but of equal importance has been the first quiet stage of the transformation of Ethiopia into an energy exporting power. Ethiopia’s natural gas reserves which the US Energy Information Agency (EIA) in 2009 rated as zero and in early 2010 at one-trillion cubic feet (TCF), now have been demonstrated to be significant, and gas exports will begin within five years.

Malaysian State-owned oil and gas company Petroliam Nasional Bhd (Petronas) has now proven as much as four TCF of gas in its reserves in the Ogaden basin region of Ethiopia. Petronas is one of about 85 companies which have oil and gas exploration licenses in Ethiopia, but the Malaysian company is the first to begin its production phase, which should see a gas treatment plant and a gas pipeline from the Ogaden to Djibouti (at a total cost of $1.9-billion) on-line within five years. Estimated Ethiopian gas reserves, as of 2010 (not “proven reserves”), were reported at 12.46 TCF, but this figure was likely to be expanded frequently as new discoveries are reported.

Significantly, although the externally-supported and -armed Ogaden National Liberation Front (ONLF) has continued to sustain sporadic armed contact with Ethiopian security forces into August 2010, the second week of August saw the senior ONLF leadership in Washington, DC, meeting secretly (under US sponsorship) with representatives of the Ethiopian Government. Just days before that, representatives of the Oromo Liberation Front (OLF) also met in Washington, DC, with senior Ethiopian Government officials. Both the OLF and the ONLF have been receiving extensive logistical support, weapons, training, and funding from Eritrea, supported directly or indirectly by both Egypt and Iran.

It is now apparent to both the ONLF and OLF that their foreign patrons have been waging a losing battle against the Ethiopian Government, and that, with the growing strength and wealth of the Ethiopian Government, now is the time to consider coming to terms with Addis Ababa.

Any thought that the pan-Somalists, who have recently scored a major success in winning the Presidency of the Republic of Somaliland, can effectively make headway in the ethnically-Somali Ogaden region of Ethiopia have been quashed by the effective military action by the Ethiopian Defense Force (EDF) in its combat contacts with the pan-Somalists. The EDF units involved were almost entirely ethnically Somali (officers and men), and yet acted decisively to quash the Somalian forces fighting them.

Fighting around July 12, 2010, in the el-Dibir area of the Somaliland-Ethiopian border was largely credited in the media with being an EDF attack on civilians, but in fact it involved a clash with Islamist forces that were routed by the EDF, which seized 120 of the Islamists’ trucks and took them to the Ethiopian city of Jijiga.

At the core of all of this has been the proxy war waged by Iranian-backed Islamists, supported by the secular governments of Eritrea and Egypt, to keep Ethiopia landlocked. When the Ethiopian Government, some two years ago, began having an inkling that it might soon be in the gas exporting business, it started negotiations to build a pipeline to the Somaliland port of Berbera.

When it became clear that the UDUB Government of Somaliland was not well-prepared to contest the Presidential elections — which resulted in a pan-Somalist Islamist taking power in July 2010 — Ethiopia was forced to turn back to Djibouti as the only available seaport for the export of Ethiopian gas.

This is not an ideal situation for Ethiopia, given that Djibouti has traditionally held Ethiopia to ransom — given that it has, once again, a monopoly on Ethiopian trade imports and exports — but it is nonetheless viable for both countries.

At present, the Petronas plans to be exporting natural gas from the Ethiopian Ogaden basin within five years highlight the reality that Ethiopia will soon be in a position to compete economically against Egypt and Eritrea, which have been struggling to keep Ethiopia landlocked. Egypt’s strategic motive, expressed constantly by Cairo, has been to keep Ethiopia — which is vastly more fertile than Egypt and which controls the headwaters of the Blue Nile, which provides Egypt (and Sudan) with most of its water — from posing a strategic threat to Egypt by, potentially, cutting off the flow of Blue Nile waters. In fact, the policy has only served to make the Egyptian fear a reality.

Egyptian Foreign Minister Ahmed Aboul Gheit and Prime Minister Ahmed Nazif, speaking at the African Union summit in Kampala, Uganda, on July 27, 2010, appeared to strike a conciliatory note on the contentious issue of Nile water usage, but Foreign Minister Ahmed Aboul Gheit slipped into his speech that Egypt sought a “re-unification” of Somalia, bringing Somaliland back into the union with Somalia, something which is clearly tantamount to bringing Somaliland back into civil war and crisis, rather than helping the entire Somali population. Significantly, this was a blow directed directly at Ethiopia and at the West which seeks stability in the Horn of Africa.

Egypt, pointedly, would rather have chaos on the Horn so that it could be the master of the Suez/Red Sea SLOC all the way through the Bab el-Mandeb adjacent to Somaliland, at the entrance to the Indian Ocean. This pointedly, also, meant that Egypt supported constraining Ethiopia from easy access to the Red Sea, which had once been dominated, at its lower reaches, by the Ethiopian Navy. Following the fall of the Dergue control of Ethiopia, Eritrea was encouraged by Ethiopia to declare its independence from Ethiopia in 1993. It did so, taking not only the historical geographic area of Eritrea (the onetime Bar Negus: Kingdom of the North), but also the coastal part of Ethiopia adjacent to Djibouti, and containing the Ethiopian port of Assab, which had never been part of traditional Eritrea, but had been part of the modern administrative zone of Eritrea under the Empire.

The result was that Ethiopia lost its access to the Red Sea, and had anticipated a friendly trading path through “new” Eritrea to the sea, because of the friendly separation of the territories. This was not to be, and Eritrea began making unacceptable demands on Ethiopia, which ultimately led to war, and to the inability of Ethiopia to use the ports of modern Eritrea. The result is that Eritrea is now economically destitute, and Eritrean Pres. Isayas Afawerke is under increasing pressure to see the Ethiopian Government fail.

However, it is also clear that Eritrea can no longer afford to militarily challenge Ethiopia, at least directly. Its military successes against Ethiopia in the 1998-2000 fighting can now not be replicated, given the declining economic fortunes of Eritrea and the rising fortunes of Ethiopia.

Moreover, the prospect of considerable income from gas exports begins to elevate Ethiopia into a new class of military capability. So if Eritrea can no longer directly attack Ethiopia militarily, it must be forced to re-double its proxy warfare, and yet even in this area Ethiopia now seems poised to be able to achieve settlements with the ONLF and OLF, two of the main proxy forces financed by Ethiopia and its allies.

And yet Ethiopia finds itself still restricted in its ability to satisfactorily control its export logistics, other than at the goodwill of Djibouti. Some Ethiopian sources have been saying that should Eritrea again provoke a war, then Ethiopia should sieze back the ports in independent Eritrea which were once Ethiopian ports, particularly Assab, which was never part of “traditional” Eritrea.

Moreover, in the South-Eastern part of modern Eritrea, the area around Assab, there is already great local hostility to being under control of Asmara (the Eritrean capital), and the Eritrean Government of Isayas Afewerke. This hostility takes the form of armed insurrection by ethnic Afars. The Afar Revolutionary Democratic Union (ARDU) has engaged in combat operations since 1993 against the Eritrean Government. They have commanded the attention of brigade-sized Eritrean Government forces, which have unsuccessfully attempted to curb the ARDU. ARDU itself is part of the Alliance of Eritrean National Forces (AENF), an umbrella for opposition groups, mostly Muslim, fighting the Isayas Government.

Ethiopia has, like Eritrea, used proxy forces against its adversarial neighbor. The predominantly Muslim Eritrean Liberation Front (ELF) has been based out of Addis Ababa since Eritrean independence, and continues to fight the Isayas Government in Asmara. But the scale of Ethiopian proxy warfare against Eritrea is nothing like Eritrea’s use of all available proxy resources against Ethiopia. The radical Islamist forces operating in Somalia have long been supported by Eritrea, along with their support from Iran, Egypt, and Libya, as a means of tying down Ethiopian forces and promoting secessionist moves by ethnic Somalis and Oromos in Ethiopia.

Now, unlike a year or two ago, Eritrea recognizes that it can no longer give Ethiopia a pretext to go to war, because it would lose that conflict. On the other hand, Ethiopia’s need for the recovery of its Red Sea access may well have been forced by the combined efforts which recently resulted in, effectively, the loss of access through the Republic of Somaliland, which has succumbed, with broad Eritrean, Iranian, and other aid, to pan-Somalist, Islamist governance. So Ethiopia must bow to whatever demands Djibouti may make on it, in order to use the port of Djibouti, or else Addis Ababa must find a way to take back its territory in the south-eastern, Afar, area of what is the modern Eritrean state.

It would be logical, then, to assume that Addis Ababa would find ways to promote the demands for independence or separation from Eritrea made by ARDU and others. Success, or momentum, by these anti-Isayas forces could eventually trigger Ethiopian military support.

Egypt, however, has been using Eritrea as its own proxy, and such a development might cause Cairo to openly support Eritrea in a military confrontation with Ethiopia, or else face the prospect of a revived Ethiopian naval presence in the Red Sea, and growing Ethiopian wealth and confidence to challenge Egypt and Sudan on the question of the use of Blue Nile waters.

In all of this, the stability of the Red Sea/Suez global SLOC is threatened, and no end is yet to be seen in the anomie — the lawlessness — of Somalia, now being broadened to include Somaliland. As well, the mounting pace of natural gas discovery and exploitation in the region (and more broadly) will — contrary to conventional linear extrapolations of energy market trends — transform global energy markets, and bring about a major shift toward the use of gas, probably to the point of a supply-dominated marketplace causing price falls within a decade.


This article was written by Gregory Copley of GIS/ISSA for with focus on Fossil Fuels, Alternative Energy, Metals, Crude Oil Prices and Geopolitics. To find out more visit their website at:

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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