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Prime Minister Beji Caid el Sebsi 10474647 ENERGY AND DEVELOPMENT IN TUNISIA Oct. 4, 2011

This memo describes Tunisias energy situation and what challenges and opportunities it creates for Tunisias reconstruction and development. Tunisias Energy Profile Fossil fuel resources are limited in Tunisia, and we import 25% of our energy.i Still, it constitutes 10% of Tunisian GDP.ii Although the revolution early this year put a damper on economic growth, our economic growth over the last decade has driven energy demand upward and we can expect the trend to continue as the economy gets back on track. Petroleum. Tunisia has recently been able to increase its petroleum production to match petroleum demand (Figure 1). However, our refining capacity has remained at 34 thousand barrels per day for the last decade. As a result, Tunisia must export crude oil and re-import its refined petroleum product requirements (Figure 2). Natural Gas. Tunisia has met increasing gas demand and maintained level imports from 2008 to 2009 by increasing domestic natural gas production (Figure 3). Shale gas may be a promising development in Tunisia in the Ghadames basin with Cygam and other companies planning to explore the region over the next year.iii Nuclear. Tunisia has signed an agreement with France to being two nuclear power plants online by 2019 to generate up to 1 GW.iv Electricity. Electricity consumption has almost doubled in the last decade, increasing 5% per year from 1998 to 2008 (Figure 4). This has driven the increase in natural gas consumption, with 84.9% of electricity generated by natural gas. Only 14.2% of electricity is generated with oil, and a less than 1% comes from renewable sources. v The sector breakdown of electricity consumption is as follows: 45% industry; 26% residential; 22% commercial; 7% other.vi Renewable resources and North African integration with Europe. Connecting Tunisias electricity grid to Europes is a priority for European developers eager to harness North Africas solar and wind resources to supply up to 15% of European electricity demand.vii Tunisias grid is currently integrated with the greater Maghreb region, which includes Spain (Figure 6). Tunisias proximity to Sicily makes it a natural partner in integrating European and North African electricity markets.viii

Domestic and Geopolitical Realities Energy-Food Nexus. Oil and food prices are closely interconnected for two main reasons. First, agriculture is increasingly energy-intensive. Second, high oil prices make biofuels economically attractive, thereby diverting crops to biofuels rather than food markets. For these reasons, the prices of oil and food spiked in 2007-08, with crude oil doubling from $75 to $140 in one year, and the Food Price Indexix similarly spiking from roughly $160 to $225. Given that a driving factor of Arab Spring protests revolved around high cost of living and food, we cannot ignore the energy-food nexus in designing our energy policies. Energy politics of Europeans. France desires to export nuclear power to Tunisia and has been Tunisias largest trade partner and one of its largest foreign investors. Germany would like to export renewables technology to Tunisia, and is already on the ground trying to do so with Desertec. The energy paths Tunisia pursues will directly impact geopolitical relationships with influential Western powers. Free Trade with Europe. Tunisia is part of the EU free trade area and the EU accounts for over 70% of Tunisias imports and exports. As Tunisia sets up its democracy, it should take great care not to disrupt its valuable relationship with Europeans. Rentier Neighbors. Tunisia is flanked by rentier statesAlgeria and Libyathat derive significant economic rents from their fossil fuel resources. As Libya recovers from revolution, we can expect it to continue behaving like a rentier state, using fossil fuel wealth to pay-off segments of society. Tunisias ability to partner with these neighbors (e.g., on projects like Destertec) may be negatively impacted by their rentier state behaviors since their energy policies are strongly tied to domestic politics and often result in inefficient energy investments. High unemployment domestically. Although Tunisia has a relatively high per-capita GDP, is competitive in attracting international companies, and has grown significantly over the last decade, its unemployment rate stands at about 18.6%,x and its youth unemployment rate, a main cause of the Arab Spring, stands at 23% (down from 30% a year ago).xi Intelligent energy developments may be able to help lower these figures. Privatization. Tunisia has been slow to privatize state-owned enterprises. It will need to move faster to help create jobs and increase Tunisias attractiveness to foreign investors. Ease of Doing Business. Tunisia is in the top third of countries in the World Banks Ease of Doing Business ranking, however, it suffers severely from business environment inefficiencies, particularly, Dealing with Construction Permits and Closing a Business and protecting investors.xii Need for cash. With the collapse of the tourism industry, which accounted for 7% of GDP, there is an immediate need for cash.xiii

Looking Forward The Arab Spring has emphasized that the development of the Tunisian people must be the governments unwavering priority. The new government should investigate the following in developing an energy strategy that advances Tunisian development goals writ large. Establish a multi-ministry commission on energy development. It should consider energy in the broader context of economic, political and human development. It should be a prominent, heavyweight team equipped to answer questions about where best to make energy investments base note simply on financial ROI but development impact. Focus on renewable energy development as a collaborative regional effort. Intra-North African cooperation to introduce renewable energy to the region has the potential to shift the balance of energy power from the Gulf to North Africa.xiv We should not only investigate what renewable energy makes the most sense for Tunisia but also what concessions we can get from developed countries in using their technology to develop renewable resources in Tunisia. These concessions might be used to help satisfy our urgent cash needs. Require IOCs to make investments in human capital. IOCs should be required to hire Tunisians where possible and should also be required to fund retraining programs to bring other Tunisians to the level of competence where IOCs could hire them. Promote regional electricity grid cooperation. Continuing to integrate the power grids of Tunisia and neighboring countries, including Italy, can hold a couple of key benefits. First, it could help optimize capital investments by sharing excess generation capacity across grids and increasing location options for building new plants (e.g., renewables in the desert). Second, it would foster collaborative relations in North Africa. Third, it could help set the stage for projects like Desertec that will require integration in the future. Address the impending energy-food price spikes. Tunisia should investigate policies and mechanisms that might help decouple domestic food prices from international oil prices (e.g., creation of special national buffer accounts). Invest in domestic natural gas exploration and petroleum refining capability. This would limit the amount of value that Tunisia is currently transferring to foreign refineries. Remove bureaucratic barriers to developing new energy resources. Tunisia has been a blueprint for regime change; how Tunisia handles its energy situation in its reconstruction could also be a model for the region.

APPENDICES Figure 1: Tunisian Petroleum Production/Consumption (Thousand Barrels per Day)

100 90 80 70 60 50 40 30 20 10 0 2000

2002

2004

2006

2008

2010

Total Oil Production Total Petroleum Consumption Crude Oil Distillation Capacity

Data Source: www.eia.gov Figure 2: Tunisian Petroleum Import/Exports (Thousand Barrels per Day)
90 80 70 60 50 40 30 20 10 0 2000

2002 2004 2006 2008 2010 Imports of Crude Oil Imports of Refined Petroleum Products Exports of Crude Oil Exports of Refined Petroleum Products

Data Source: www.eia.gov

Figure 3: Tunisian Natural Gas Production/Consumption and Import/Export (Billion Cubic Feet)
180 160 140 120 100 80 60 40 20 0 2000

2002 2004 2006 2008 2010 Dry Natural Gas Production Dry Natural Gas Consumption Imports of Dry Natural Gas Exports of Dry Natrual Gas

Data Source: www.eia.gov Figure 4: Net Electricity Generation/Consumption in Tunisia 1998 2007 2008 Net Generation 8.56 13.78 14.40 (billion kWh) Net Consumption 7.58 11.88 12.49 (billion kWh) Installed Capacity 2.08 3.20 3.50 (GWe) Source: www.eia.gov Figure 5: Sources of electricity production in Tunisia (12 Nov 2009)

Source: Wikipedia, http://en.wikipedia.org/wiki/File:Energy_tunisia.svg, accessed 3 Oct 2011. 5

Figure 6: The Maghreb Countries Interconnection

Source: Arab Fund for Economic and Social Development Website, http://www.arabfund.org/default.aspx?pageId=454, accessed 3 Oct 2011. M. Marktanner, L. Salman, Economic and geopolitical dimensions of renewable vs. nuclear energy in North Africa, Energy Policy 39 (2011) 44794489. ii IEA African Economic Outlook 2011. iii International Energy Outlook 2011, US Energy Information Administration, online at http://www.eia.gov/forecasts/ieo/index.cfm, accessed 3 Oct 2011. iv http://uk.reuters.com/article/2009/04/23/idUKLN941296 v M. Marktanner, L. Salman, Economic and geopolitical dimensions of renewable vs. nuclear energy in North Africa, Energy Policy 39 (2011) 44794489. vi www.eia.gov vii E.g., Dii and Desertec. viii Paul van Son, CEO of Dii: The plans to link Tunisia with Sicily with a submarine cable and thereby connect it with the European energy market are an important step for the future energy partnership between Europe and North Africa. (Dii March 2011 Newsletter) ix The UN Food and Agriculture Organizations Food Price Index represents the price of a bundle of staples that cost $100 in 2002-04. x http://www.state.gov/r/pa/ei/bgn/5439.htm xi Economist 14 Jul 2011; Economist 30 Sep 2010. xii Doing Business 2011, World Bank, accessed online at http://www.doingbusiness.org/data/exploreeconomies/tunisia/, 3 Oct 2011. xiii Economist 7 Apr 2011 xiv M. Marktanner, L. Salman, Economic and geopolitical dimensions of renewable vs. nuclear energy in North Africa, Energy Policy 39 (2011) 44794489.
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