Energy Security in Asia.pdf

World Energy Council 18th Congress, Buenos Aires, October 2001

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ENERGY SECURITY IN ASIA KOYAMA KEN THE INSTITUTE OF ENERGY ECONOMICS, JAPAN Introduction In the years ahead, Asian economies, recovering from the economic slowdown in the recent financial crisis, desire the achievement of sustainable economic growth, while minimising impacts on the environment. To achieve this, it will be essential to secure the necessary amounts of energy at reasonable prices. Asian economies should now pursue achieving the 3Es: Economic Growth, Environmental Protection and Energy Security in an attempt to contribute to the global economy. To achieve the 3Es simultaneously, Asian economies must take into account the following developments inherent in Asian energy markets. (a) Energy demand in Asia is expected to increase sharply with the surge of motorisation, the ongoing

transition from non-commercial energy to commercial, and rural electrification. The energy demand increase, mainly driven by the transportation sector, will result in a rise in oil imports. Judging from these situations, dependence on oil imports from suppliers outside Asia will rise considerably.

(b) The resource potential of coal and natural gas in Asia is large. Nuclear energy in some economies is under steady development.

(c) The sharp energy demand increase, mainly led by coal consumption, is expected to seriously impact on the environment by increasing emissions of CO2, NOX and SOX under the situation where there is not sufficient adoption of clean technologies.

(d) Asian energy markets face the need to find out their own optimal systems to facilitate investment and to maintain social stability simultaneously. Regulatory reform should be introduced if and when necessary.

1. Situations On Energy Security In Asia 1.1. Asias Growing Energy Demand And Oil Import Dependence In Asian developing economies, energy demand is growing rapidly along with strong economic growth. When combined, the ten major developing economies in Asia1 had their real GDP growing by 7.7% per year on average between 1990 and 1997, and their primary energy consumption, largely consisting of oil, coal, natural gas, nuclear and hydro, grew by an average 5.6% per year over the same period.2 As of 1997, primary energy consumption by the ten Asian economies altogether reached 1,659 million tonnes oil equivalent (TOE). Coal accounted for 54%, oil 35%, natural gas 7%, and nuclear 2%. At a glance, Asias energy consumption mix looks coal-dominated. But, it is because China and India, the two largest energy consumers in Asian developing economies, are heavily dependent on indigenous coal resources. With these two excluded, primary energy consumption of the remaining eight Asian economies is found to be centred on oil, the share of which stands at 60%. On the other hand, primary energy production by the ten Asian economies stood at 1,406 million TOE in 1997. Thus, taking primary energy as a whole, consumption exceeded production by 253 million TOE for the ten economies in total. Yet, situations differ greatly depending on energy sources. Namely, coal and natural gas have well balanced production and consumption within the region, but regional oil production is lower than demand, which must be covered with imports from outside the region (Figure 1). Also, historical changes in oil supply and demand in the Asian economies reveal that, while consumption grew at an annual rate of 7.6%, production increased by only 1.3% and gaps between production and consumption, import requirement from outside the region, surged greatly from 62 million tonnes in 1990 to 267 million tonnes in 1997.3

1 The ten major developing economies include China, South Korea, Taiwan, Hong Kong, Singapore, Indonesia, Malaysia, Thailand, the Philippines and India. 2 See IEA [2000]. 3 Ibid.


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Figure 1. Supply and Demand of Coal, Gas and Oil in the 10 Asian Economies (1997)

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Source: IEA, "Energy Balances of OECD Countries", "Energy Balances of Non-OECD Countries" Oil demand has increased sharply in China and India as well, whose energy consumption is still largely met with coal. China is the largest oil producer in Asia with the production level at about 160 million tonnes in the late 1990s, but growth in oil production fails to keep up with mounting oil demand. Thus, China became a net oil importer in 1993, and its oil imports kept increasing sharply afterward.4 Also, India, the third largest oil producer in Asia, became unable to satisfy growing domestic oil demand with indigenous output, and its oil import requirement swelled from 25 million tonnes in 1990 to 59 million tonnes in 1999.5 With respect to import source, Asia is dependent on oil imports from the Middle East. Oil imports by Asia-Pacific economies excluding Japan from the Middle East expanded from 154 million tonnes in 1990 to 311 million tonnes in 1997, and the dependence on the Middle East oil imports stood as high as 72% in 1997.6 These results show that growing energy imports by burgeoning Asia has become conspicuous in the form of growing oil imports from the Middle East. Though having temporarily plunged due to the economic crisis, Asias oil demand began rising in response to the economic recovery since 19997. The strong likelihood is that mirroring medium and long-term economic growth, Asias oil demand will keep growing further ahead. Indeed, the post-crisis forecasts released by various organizations indicate a considerable growth in Asias oil demand over the long run. For instance, the Asia Pacific Energy Research Centre (APERC), an APEC unit founded in 1996, included in its latest forecast of 1998 a protracted crisis scenario (PCS) in addition to a business as usual (BAU) case. Even in the PCS case, where adverse effects of the economic crisis is assumed to be bigger, oil demand of the Asian APEC members is predicted to increase from 668 million TOE in 1995 to 903 million TOE in 2010, up 2% per year on average (Figure 2).

4 Chinas crude oil imports swelled from 6 million tonnes in 1991 to 70 million tonnes by 2000. 5 See BP Amoco Statistical Review of World Energy 2000. 6 Asias reliance on the Middle East is higher than the rest of the world, including the US and Europe, where the dependence in 1997 was 18% and 39% respectively. 7 According to IEA, oil demand in Asia-Pacific region in 1999 totalled 20.2 million B/D, up 4.7% over the previous year, which outran 1997 levels. Entering 2000, the Asian economies remain strong and oil demand in Asia-Pacific reached 20.6 million B/D, exceeding 1999 records.


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Figure 2. Oil Demand Projection for Asian APEC Economies

Looking at oil production in Asia, domestic oil development in this region has been carried out under the management of national oil companies, like CNPC, SINOPEC and CNOOC of China, PERTAMINA of Indonesia, and PETRONAS of Malaysia. Recently, efforts for output increases have been made by advancing foreign capital introduction to capture both advanced technologies and investment funds.8 However, many forecasts assert that oil production in Asia grows slower than demand does. As a result, Asia, already dependent on imports from outside, is expected to face inevitable mounting oil imports, mainly from the Middle East. 1.2. The Energy Security Risks In Asia Faced with the growing energy demand and oil import dependence, various kinds of energy security risks and difficulties are being perceived as a threat to the Asian economies. The risks are broadly divided into: contingent risks and structural risks. Contingent risks include: (a) Political and military risks in main energy supply areas; (b) Accidents in energy production facilities and energy transportation route. Structural risks include: (a) Market power of energy suppliers/exporters; (b) An Asian Premium placed on oil and natural gas prices due to the over-dependence on oil imports

from outside the region; (c) Environmental impacts; (d) Constraints on energy supply potential due to insufficient infrastructure development. Contingent risks, namely unpredictable events such as political upheavals, accidents, etc. have been perceived as a serious threat to security of supply. This type of risk has been highly perceived for oil supplies from the Middle East in particular. This was mainly because of the recognition that there actually happened such events as the regional wars, and the Iranian Revolution that affected the oil supplies from the region. Recently such new elements as structural problems for oil revenue dependent domestic economy, successions problems for political leaders in the region, criticism against US military presence in the Gulf, etc. were pointed out as a source for potential instability. In this context, the contingent risks will remain as a serious threat to security of supply perception in Asia, and efforts are being made to reduce these risks through energy diversification, enhancement of emergency preparedness, etc. As for structural risks, the risk of the producers embargo was regarded as a very serious threat to security of 8 For instance, with the three state-run oil companies at centre stage, China is attempting to stabilize production at Daqing and other leading oilfields in the eastern part of the country, and increase oil production from the western frontiers, typically the Tarim basin, while trying to increase output from offshore oilfields. To this end, in addition to the policy approach taken to offshore oilfields since the 1980s, China has encouraged international bidding to develop onshore oil fields in three rounds since 1993 in order to attract foreign capital. Indonesia is also trying to increase oil production by luring more foreign capital. The government introduced incentives to prompt exploration and development of its eastern frontier areas in 1988 and reviewed it in 1994. See Koyama [2000].

(Source)APERC, "APEC Energy Demand and Supply Outlook updated September 1998."

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supply in the 1970s, when memories of the Arab oil embargo were still fresh. Later, however, there emerged a growing perception that the effectiveness and probability of the embargo is limited, based on the recognition of such factors as financial situation of the oil producers, competition among oil producers to secure market for their oil, the flexibility of the world oil market to reallocate supplies, etc. Market power of producers, in particular of OPEC, was also regarded as a very serious problem in the 1970s and 1980s. It was argued that the supply strategy of OPEC was a principal cause for sharp price increase at the time of the first and second oil crisis, as well as for maintaining high prices in the early 1980s. Concentration of oil production was pointed out as an important factor to enhance market power of OPEC. After the late 1980s, however, many people began to argue that the threat of OPEC market power should not be regarded as very serious, taking account of the structural changes in the marketplace. The argument was based on the understanding of such factors as rising non-OPEC production, deteriorated financial situation and urgent revenue need for OPEC, shift in control of oil price determination from OPEC to the oil futures market, impacts of advanced technologies both to reduce oil production costs and to limit growth in oil demand. However, it is interesting to note that the recent sharp increases in oil prices after 1999 became a factor to arouse public attention to the influence of OPEC in oil price determination. At the same time, the existence of the so-called the Asian premium in Middle East crude oil prices9 began to attract attentions in energy industries and governments in Asia amid strengthening global economic competition. In this regard, reducing structural risks is also considered to be an important common objective in Asia to strengthen the Asian industrys global competitiveness and to ensure sustainable economic growth. To overcome structural risks, energy diversification, in terms of energy source as well as supply area, and efficient use of energy will become essential factors. These will contribute to the reinforcement of the bargaining power of Asian economies in energy markets and lower the environmental impacts in Asia. 2. Measures To Overcome The Problems 2.1. Measures For Energy Source Diversification And Curbing Oil Imports 2.1.1. Natural Gas Development A noted trend is that many Asian economies are now committing to the promotion of natural gas development as one of preferential options to diversify energy source and curb oil imports. By economy, major moves are summarized below. China: The State Council approved in late 1999 the first LNG import project (3 million tonnes per year, in operation from 2005 onward) for the southern coastal area of China.10 In the northern part, an import plan is under consideration, to bring gas from the Kovykta gas fields in East Siberia, Russia, through a cross-border pipeline. In March 2000, the State Council approved a 4,200 km-long natural gas pipeline project to connect the gas fields in the Tarim basin with Shanghai.11 South Korea: The plan is to encourage greater natural gas use, particularly in the industrial sector, through a nationwide trunk pipeline network to be completed by 2002 at the latest. The South Korean government predicts, in its outlook, that LNG demand will grow from 12.66 million tonnes in 1999 to 20.97 million tonnes by 2010. Taiwan: The National Energy Conference in 1998 hammered out a policy to expand natural gas use and called for increasing LNG demand from 3.50 million tonnes in 1997 to 13.00 million tonnes by 2010. To this end, infrastructure projects are under way, including capacity expansion at existing LNG import terminals, construction of new import terminals, and installation of undersea pipelines to power plants. Singapore: In 1992 the first 160 million cubic feet per day (CFD) gas imports commenced from Malaysia to supply local power plants. By January 1999, a long-term gas import contract was signed under which 325 million CFD would be piped from West Natuna, Indonesia. The gas importation started in January 2001. Later, in February 2001, another long-term gas import contract was concluded, under which 350 million CFD at maximum would be piped from South Sumatra, Indonesia. Thailand: Two pipeline gas import projects (Yadana, Yetagun) from Myanmar are under way, one 9 According to Ogawa [2000], the Middle East crude oil was in average priced at 1.0-1.5 $/B higher in the Asian market than that of the US/European market during 1990-1999. 10 In March 2001, BP was selected as a foreign partner to participate in the LNG project. 11 In February 2001, 19 international energy companies submitted applications for the tender to construct the natural gas pipeline.


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originating from domestic gas fields under development in the Gulf of Thailand. Also in progress is a pipeline gas import project from a joint development area (JDA) with Malaysia. According to the Thai government, gas demand is likely to increase from 1.87 billion CFD in 1999 to 3.32 billion CFD by 2010. The Philippines: A pipeline project is under way to supply gas to a power plant in Batangas City from the offshore Kamago and Malanpaya gas fields, the former discovered in 1989 and the latter in 1992. Gas supply is projected to start by 2002. Right now little gas is available in the Philippines (with only 120 million cubic feet consumed in 1997), but, upon its completion, the project is expected to supply 400 million CFD of natural gas to the power plants. There are many factors behind moves to promote natural gas development and use. First, the natural gas resource potential in and around the Asian region is high.12 Second, large numbers of natural gas development projects (LNG projects, etc.) have already gone ahead to tap local resources. Third, efficient natural gas utilization technology, typically combined cycle gas turbines (CCGT), have been developed and are becoming popular. In addition, natural gas use is welcomed because of lesser environmental loads (lower SOx, NOx and CO2 emissions than other thermal options). A disadvantage of natural gas, particularly for importing economies, is that it is often more expensive than rival energy sources13. Yet, with this disadvantage more than offset by the aforementioned merits, natural gas introduction is actively planned, or under way, in each of the Asian economies. In the promotion of natural gas development, a crucial factor is the construction of the necessary infrastructure (such as LNG import terminals, cross-border and local pipelines) for transporting natural gas from the supply sources to consuming areas, or final users. At this point in time, all Asian economies are making positive commitments to natural gas infrastructure projects. Under the circumstances, natural gas development and use is expected to progress rapidly. Also, to help improve price competitiveness against rivalling energy sources, some governments are considering, or already taking, such policy measures as tariff cuts for natural gas14. 2.1.2. Coal Utilization Despite the heavy environmental load (higher SOx, NOx and CO2 emissions) in comparison with natural gas, coal development and use is being actively promoted by many Asian economies. Coal, abundant at local and regional levels, can be mined and delivered to markets economically, and so has become the principal energy source for many economies, backed by excellent production capacity and output records15. As a domestically or regionally produced energy resource, coal not only satisfies demands for stable supply, but also has a price advantage over rival energy sources. For these reasons, many economies are expanding the use of coal by positioning it as a base load power source. With respect to the expansion of coal use, management of the heavy environmental loads holds the key to its future. For many Asian economies, potential global warming caused by CO2 emissions is a long-range issue, but air pollution and acid rain are causing real and serious problems, which require immediate remediation. From this standpoint, the top priority is given to the promotion and dissemination of clean coal technologies to enable efficient coal use, particularly in China, the largest coal producer and consumer. With current electricity demand stagnating due to the recent economic crisis, and future growth projections revised downwards, fuel shifts from coal to natural gas and other alternatives are taking place in the power generation sector. This may pose a constraint on the future expansion of coal use. 2.1.3. Nuclear Power Development Another noteworthy point of alternative energy development among the Asian economies is the promotion of nuclear power generation. In many Western economies, nuclear power development has slowed due to mounting anti-nuclear public pressure and the effects of electricity liberalization and deregulation. In Asia, however, nuclear power is regarded as a quasi-indigenous energy, and has been chosen as one of the principal alternatives, with nuclear plant construction actively continuing to date. The Asian economies with nuclear power plants in operation, as well as specific construction plans under way, are Japan, China, South Korea and Taiwan. Indonesia, Thailand and the Philippines consider nuclear power as a possible long-range energy planning option. 12 According to BP Statistics, the Asia-Pacific region holds 363 TCF of proved natural gas reserves. The Reserves/Production ratio of natural gas is 40.4. 13 Taking South Korea as an example, LNG (in burner chip price) reportedly costs 2.5 times higher than coal. 14 Taiwan is carrying out a step-by-step reduction in LNG import tariffs, and a special consumption tax cut. 15 According to BP Amoco Statistical Review of World Energy 2000, proven coal reserves of China and India are at 114.5 billion tons and 74.7 billion tons respectively.


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As in the West, objections to nuclear plant construction are intensifying gradually in South Korea, Taiwan and Japan, where construction of additional capacity may slow in the years ahead. When combined, the four East Asian economies (Japan, South Korea, Taiwan and China) have a total nuclear power plant capacity of 21 GW under construction, compared with 64 GW already installed at 1999 yearend. If those being planning are included, the total capacity will nearly double from the present level and reach 123 GW 127 GW (Table 1).

Table 1. Nuclear Power Development in the Asian Economies (As of the end 1999) 2.1.4. Renewable Energy Commitments to new and renewable energy developments vary among Asian economies depending on their energy resource availability. Resource-rich economies take unique approaches. For example, hydro-rich China is advancing hydro development with the worlds largest hydro project, the Three-Gorges Dam as the centrepiece. The Philippines intends to promote further hydro and geothermal power generation16. On the other hand, in resources-poor economies, such as South Korea and Taiwan, new and renewable energies hold very limited shares in total primary energy. To expand the share of renewable energy for these economies considerably in the future could be difficult17. 2.1.5. Energy Conservation With respect to policy measures to curb oil demand and imports, common to the Asian economies is a trend of promotion of energy conservation. Energy conservation, if successfully encouraged, not only contributes to slashing oil imports, but also produces such merits as alleviating environmental loads and strengthening the international competitiveness of industry, thanks to lesser energy use. For this reason, individual economies are positively unfolding pro-conservation policies, including setting specific targets for energy conservation18 and enacting energy conservation laws.19 Even if positively called for as a policy target, the reality is that energy conservation can never be achieved easily. This is because in developing Asian economies with high sustained economic growth rates, rising per capita income levels lead to an increasing number of energy-consuming appliances in use and hence higher per capita consumption of energy. Brisk industrial activity, particularly by energy-intensive sectors, considerably boosts energy consumption as well. These factors, among others, can often offset micro level conservation effects, typically the higher efficiency of individual energy-consuming appliances. Actually, energy intensity data (energy consumption per real GDP) reveal that since the 1980s energy intensity levels in all economies, except for China, remained virtually flat or deteriorated in some cases (Table 2). China, where energy intensity had been very high by international standards, has undergone a dramatic decline in energy intensity over the last decade. Given the long-term energy supply and demand outlooks prepared by individual governments, as well as the economic growth rates assumed in preparing the outlooks, energy intensity is expected to level off or rise slightly in all Asian economies but China20. Thus, it is indicated that energy conservation is in reality difficult to achieve.

16 China plans to boost its hydro generating capacity from the present 70 GW to 150 GW by 2015. The Philippines is expected to increase its hydro generating capacity 4.30 GW by 2008, up from 2.30 GW in 1998. 17 For example, South Korea set forth that 2% of its primary energy should be met by renewable energy by 2006, and Taiwan did 1% by 2010. 18 For example, South Korea plans to achieve 10% of energy conservation by 2006, and the Philippines has set a target to trim its energy use by 9.89 million barrels oil equivalent by 2008 19 For example, China, which clearly conceded the importance of energy conservation in its ninth five-year plan (1996 2000), enforced the Energy Conservation Act in 1998. 20 See Koyama and Kawasaki [1999, p15].

Unit: Million kWIn operation Under construction Planed TotalNumbers of plant Capacity Numbers of plant Capacity Numbers of plant Capacity Numbers of plant Capacity

Korea 14 12.0 6 5.7 10 11.2 30 28.9

Taiwan 6 5.1 2 2.7 8 7.8

China 3 2.1 8 6.6 11.3 20.0

Japan 51 44.9 5 6.1 15-19 66-70

Total 74 64.2 21 21.1 38-42 123-127Source: Prepared by IEEJ based on overseas interview results, etc.


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Table 2. Energy GDP Intensity in the Asian Economies

As discussed so far, enhanced development and use of alternative energy resources, particularly natural gas, and stepped-up energy conservation efforts are expected to help Asian economies dampen their oil demand growth to some extent. Yet, even with such policy efforts, absolute oil demand will keep growing strongly, reflecting strong economic growth and advancing motorization. According to the latest outlook of the U.S. Energy Information Administration (EIA)21, Asia Pacific oil demand will keep growing by an average 3.4%/year from 13.8 million barrels per day (B/D) in 1990 to 27.9 million B/D in 2010, and 37.4 million B/D in 2020. 2.1.6. Domestic Oil Development As a policy measure to trim oil imports, the promotion of domestic oil development is also important. The Asian region contains major oil-producing economies, like China, Indonesia and Malaysia, where domestic oil has been developed under the control of the governments in question and such state-run oil companies as CNPC, SINOPEC and CNOOC of China, PERTAMINA of Indonesia and PETRONAS of Malaysia. A characteristic in recent years has been that the state-run oil companies, though remaining in the drivers seat, have positively encouraged foreign capital so that they can acquire advanced technologies and managerial know-how as well as necessary funds. Good examples of such actions recently taken by the oil-producing economies include the 1st3rd rounds of international bidding for onshore blocks in the western region in China, and the incentives for frontier area development offered by Indonesia. Also, oil-producing economies started restructuring state-run oil companies in the hope of strengthening their corporate capability. China, for instance, carried out a restructuring to create two vertically integrated oil companies, namely the CNPC group and the SINOPEC group, by reallocating their upstream and downstream assets. The Chinese government also planned and carried out listing of the oil companies on the New York and other stock markets.22 Indonesia also considered plans to improve the management efficiency of PERTAMINA by breaking up its monopoly and introducing competition. Despite the initiatives mentioned above, as of now, the strong likelihood is that Asian oil production may increase only modestly. For example, in China, under the policy to bolster stabilize East and develop West, oil flows from the principal oilfields in the east, typically Daqing, are expected to level off. But, thanks to moderately growing production from western onshore oilfields, including the Tarim, Junggar and Turpan Hami, as well as from offshore oilfields, Chinas total oil production could undergo a slight increase. Meanwhile, Indonesia is likely to experience mildly declining production over the long run, though foreign capital introduction, and other initiatives is currently assisting the country to retain its oil output at present levels (about 1.5 million B/D). On these accounts, it appears reasonable to conclude that the Asian region as a whole cannot expect a major increase in regional oil production. Thus, the Asian economies are trying to curb oil demand growth through alternative energy development and conservation efforts and slash oil imports by promoting domestic oil development. Nonetheless, because oil demand is growing strongly and because domestic oil production growth remains modest both at local and regional levels, swelling oil imports from outside appear unavoidable. The latest EIA outlook predicts that the Asia Pacifics net oil imports will more than quadruple from 7.1 million B/D in 1990 to around 30 million B/D by 2020.

21 US. DOE/EIA, International Energy Outlook 2001. 22 CNPC (PetroChina), SINOPEC and CNOOC implemented IPO on April 2000, October 2000 and March 2001 respectively. Total amount of the IPO were estimated at 2.9 billion $, 3.5 billion $ and 1.5 billion $ respectively.

U nit: TO E/M illion U SD (1995)

1980 1985 1990 1995 1996 1997 1998C hina 2,512 1,886 1,655 1,218 1 ,160 1,064 913India 575 619 637 672 652 644 625Indonesia 347 366 419 369 366 341 392M alaysia 328 340 353 411 392 427 437Phillip ines 236 258 277 328 336 347 355S ingapore 227 217 247 257 273 277 247T hailand 232 232 260 302 323 340 351(S ource)IEA S ta tis tics


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2.2. Measures To Secure Stable Oil Imports 2.2.1. Growing Non-Middle East Oil Imports As A Means Of Diversification Diversification of oil import sources is a policy designed to secure stable oil supply by reducing, or curbing, the risks (disruption from a particular supply source, weak bargaining power in price or sales negotiations, etc.) that can arise from excessive dependence on a particular import source. But, the strong likelihood is that the extent of the diversification of crude oil import sources will be limited, or even capped, by the factors described below. Constraining factors include: the production and export capacities of alternative sources of supply; crude oil quality; transport distance and freight costs; and the refining capacity makeup of importing countries. In short, the quality, availability and economics of imports are the keys to diversification of crude oil import sources. With all these elements taken into account, West African crude oil has attracted attention as a major diversification source for Asian economies since the 1990s. In the background, are the following factors. (a) In Nigeria and Angola and other African producers, crude oil production capacity has been expanding

thanks to a series of big discoveries particularly in deep coastal waters, reflecting massive foreign capital investments in offshore blocks largely by the international oil companies.

(b) Most of the West African crude oil is low-sulphur. (c) Many refineries in the Asian economies are designed to process locally produced low-sulphur crude oil,

whose regional production and exports have stagnated. (d) The Asian economies have their product demand mix increasingly dominated by white oil products

like gasoline, naphtha and diesel oil. Upgrading of product specifications, in particular sulphur content reduction is also in progress.

(e) Imports from Africa are disadvantaged in terms of freight costs. Yet, because the prices of African crude oil is linked to the North Sea Brent, the narrowing BrentDubai differentials in the 1990s have contributed to improve economics of the African crude oil imports.

As a result of the advantages of Africa as an alternative source of crude, West African crude oil imports by Asian economies have soared from a mere 42,000 B/D in 1990 to 765,000 B/D by 1997 an 18 fold increase (Figure 3). The share of African crude oil in total Asian crude oil imports jumped from a scant 0.6% to 6.6% over the same period. Of African crude oil exports in 1997, over 60% went to China, South Korea and Taiwan. With India included, the four Asian economies alone were responsible for nearly 90% of crude oil exports from Africa. Figure 3. African Crude Oil Imports by the Asian Economies

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Entering the second half of the 1990s, the Asian economies have seen new diversification sources emerging in addition to Africa. These include Alaskan crude oil shipments to Asia, which began when the U.S. government lifted the ban on exports in 1995, and Sakhalin oil production that started in August 1999. In this way, Asian APEC economies have managed to somewhat diversify their oil import sources. Even so, the Asian economies should take heed that Africa and other newly emerging suppliers have limits to their surplus export capacity. This means they wont be able to cover growing demands from Asian oil importers. In short, despite utmost efforts to expand imports from diverse sources, the Asian economies remain largely dependent on Middle East oil imports. The U.S. DOE/EIAs outlook published in 199923 predicted that the Asia Pacifics crude oil imports would increase from 11.8 million B/D in 1995 to 23.2 million B/D in 2020. With the portion imported from the Middle East jumping from 8.7 million B/D to 20.1 million B/D over the same period, the regions dependence on the Middle East was projected to rise from 74% to 87%. Economics is an extremely important element in selecting crude oil import sources, as already mentioned. On this point, very noteworthy is that South Korea is subsidizing freight costs for crude oil imports as a policy measure to help import source diversification. This system is designed to encourage crude oil imports from non-Mideast sources. South Korean oil companies, who import crude oil from Africa and Latin America based on term contracts with a state-run oil companies, are entitled to receive a subsidy to make up a freight gap from crude oil shipments from the Middle East. However, given that the total budget for this special account is capped (at 4.5 billion Korean Won for 2000), and that the subsidy is applicable only to term contracts with the state-run oil companies, this system appears to have only a limited effect on diversification efforts. 2.2.2. Oil Transportation Route Diversification Also, as part of oil import diversification efforts, a plan to diversify the oil transit route from the Middle East is now being considered by some Asian economies. To help solve the problem of heavy oil tanker traffic through the Strait of Malacca from the Middle East to Asia, which will be aggravated by Asias growing oil imports, there is a proposal to build a pipeline across the Malay Peninsula. Two pipeline projects are independently under examination. They include a pipeline running through the southern territory of Thailand, and a pipeline crossing the two countries of Thailand and Malaysia. The principal project organizers are the state-run oil companies of the economies involved (PTT of Thailand, PETRONAS of Malaysia) and a Japanese consortium (consisting of trading houses, engineering firms, etc.). No doubt these projects have the potential to ease the various problems arising from intensifying tanker traffic congestion in the Malacca Strait, for example, growing risks of accidents and environmental pollution. Yet, the greatest question is the economics of these projects. The pipeline tariffs, set under the present project scheme by taking reasonable returns on investment into account, can make the projects difficult in economic terms, as compared with normal tanker transportation costs via the Malacca Strait or Lombok Strait. The economics could be improved by further cost reduction efforts made by the participating parties. But, unless significant financial assistance is provided, as a result of drastically changing perceptions of all those who are involved in the traffic through the Malacca Strait both at government and corporate levels, there is only a slim chance that these projects to get advanced rapidly in the near term. 2.2.3. Overseas Upstream Investment Next discussed are the policy measures to secure stable oil imports by strengthening relations with oil-producing countries outside the region, particularly those in the Middle East. Amid various efforts to deepen political and economic ties, and fortify overall trade and investment relations24, the moves aiming at closer ties through greater investments in the oil sector are particularly worthy to note. One such move is the investment by many state Asian oil companies in the upstream sector in oil-producing countries outside the region. The aims of prompting overseas investments in the upstream oil sector can be numerous. They include the strengthening of overall economic relations through direct investments, the securing of access to oil resources (particularly by investing in the upstream sector), and full utilization of the human and technological resources of the state-run oil companies. While many Asian economies are encouraging investments in the upstream oil sector overseas, China and 23 US. DOE/EIA, International Energy Outlook 1999. 24 A typical example is the visit of President Jiang Zemin of China to Saudi Arabia in OctoberNovember 1999.


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Malaysia above all are making particularly aggressive moves.25 In the case of China, the state-run CNPC began active investment in the second half of the 1990s in such target countries as Iraq, Venezuela, Kazakhstan and Sudan.26 CNPCs crude oil production capacity abroad reached 13.5 million tonnes and the companys equity crude oil imports reached 5 million tonnes in 2000. In Malaysia, the state-run PETRONAS is moving actively into the upstream oil sector overseas. In the face of depleting oil resources at home, PETRONAS is strengthening its overseas business operations to advance management diversification and secure and improve earnings. As of late 1999, the Malaysian oil company is in operation in 13 countries, including Iran (Sirri A/E oilfields, South Pars gas field for Phases 2 and 3 development), Vietnam, Sudan and Chad. PETRONAS set a target, as part of its management strategy, that 30% of its total earnings would be earned from overseas business operations by 2005. When closing the FY1999 accounts, PETRONAS had already achieved the target with 32% of its earnings gained from overseas operations. Thus, backed by their solid basis for oil production at home, including accumulation of know-how, technology and manpower, some Asian oil companies run by oil-producing governments have been aggressively launching into upstream operations overseas. 2.2.4. Introduction Of Oil Producers In Domestic Downstream Sector The second of the measures to secure oil imports by strengthening investment relations for the Asian economies is to allow the Middle Eastern oil producers to invest in their downstream oil sector. This approach has become increasingly popular since the early 1990s. By now, refiners in South Korea and the Philippines, among others, have accepted capital from oil-producing countries. First, in South Korea, Ssangyong Oil Refining accepted equity participation of 35% by Saudi ARAMCO in July 1991. After the equity participation, Ssangyong Oil Refining whose refining capacity stands at 440,000 B/D has 8090% of its crude oil needs supplied by Saudi ARAMCO under a long-term contract27. Also, in October 1998, Hyundai Oil announced that the company sold 50% of its shares to IPIC, an investment firm of the UAE28. In this way, restructuring of the South Korean oil industry has urged two of its four oil companies (SK, LG-Caltex, Hyundai and Ssangyong) to enter equity ties with oil-producing countries. In the Philippines, too, the government accepted in December 1993, when privatizing PETRON (a refining and marketing unit of the state-run PNOC), equity participation of 40% shares in PETRON by Saudi ARAMCO. As in the Korean case, PETRON whose refining capacity stands at 170,000 B/D has 80 90% of its crude oil needs supplied by Saudi ARAMCO under a long-term contract29. Besides, though still remaining at the planning stage as of now, China is also considering the possibility of accepting capital inflows from oil-producing countries into its downstream sector. China has had a few joint projects with the Saudis emerging since entering the 1990s. One is a joint venture project between the state-run SINOCHEM and Saudi ARAMCO to build a new refinery in Qingdao. The state-run SINOPEC and Saudi ARAMOCO also jointly planned capacity expansion of the Maoming Refinery in the Guangdong Province. But, these moves have halted partly because the Chinese government froze new refinery projects in the middle of 1990s. More lately, however, a new development has been noted, in which Saudi ARAMCO and ExxonMobil agreed to participate, on equal footing, in a feasibility study on a project to increase the capacity of Fujian Refinery, Fujian Province. To follow up the agreement, President Jiang Zemin, who visited Saudi Arabia in November 1999, signed a Memorandum of Understanding (MOU) on the Fujian Refinery project and expressed that China recognized the importance of strategic investment relations with the Saudis. Thus, in the Asian economies, moves to secure stable oil imports include moves to improve direct access to oil resources by building up investment relations in the oil sector. The Asian economies capable of 25 Recently India also became very active for overseas upstream investment. ONGC Videsh Limited (OVL), an affiliate of the state ONGC, is embarking on upstream investment in the Middle East, Russia, Viet Nam, etc. In February 2001, OVL agreed to take 20% of equity share in Sakhalin 1 project in Russia. 26 For example, oil production in Sudan, initiated in the summer of 1999, is expected to increase to 250,000 B/D within a few years. 27 After the economic crisis broke out in Korea, the Ssangyong group, a parent company of Ssangyong Oil Refining, sold in October 1999 the management right of Ssangyong Oil Refining to a ARAMCO-led consortium as part of the so-called Big Deal to restructure Chaebols, the Korean conglomerates. 28 IPIC, International Petroleum Investment Company, is an international investment firm incorporated as a subsidiary jointly by ADNOC, an oil company run by the Abu Dhabi government, and Abu Dhabi Investment Corporation at equal footing. 29 Entering 1999, the supplies to PETRON from Saudi ARAMCO were reduced to around 60% of its needs.


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launching into the overseas upstream sector, as well as those capable of opening an attractive downstream market for oil-producing countries, are encouraging reciprocal investments in the oil sector as a response measure that can help bolster bilateral relations with oil-producing countries and contribute to the security of oil imports. 2.3. Measures To Strengthen Emergency Preparedness 2.3.1. Oil Stockpile Build-up As A Measure For Emergency Preparedness There are various policy options to deal with such emergencies as disruption of oil supply from the major oil-producing countries. They include the establishment of an oil stockpiling system, policy actions to dampen oil demand for market stabilization, to keep and increase fuel-switching capacities, and to make use of surge production capacity, output increases from a surplus crude oil production capacity. But, judging from such standpoints as effectiveness and potential practicability, the establishment of an oil stockpiling system can be counted as the principal policy instrument particularly viable for the oil-importing economies. Oil supply disruption, if it occurs, is likely to be caused mainly by accidental mishaps. In this context, a widely accepted view nowadays is that preparedness for emergencies is a matter of increasing importance among oil security measures. Thus, for oil consuming economies heavily dependent on oil imports, the establishment of a stockpiling system appears a crucial task. In reality, however, the Asian economies have the following problems with the oil stockpiling system. First, few Asian economies have government oil stockpiles, which are under direct government control, and are particularly effective in market stabilization, if swiftly drawn down at the time of oil supply disruption. As of now, aside from Japan, South Korea is the only Asian economy with a government oil stockpile, amounting to 53 million barrels (47 million barrels of crude oil and 6 million barrels of products) at 1999 yearend. It is equivalent to 23 days of net oil consumption. Second, except for Japan, the Asian economies having mandated oil stockpiling by oil companies are limited to South Korea, Taiwan, Thailand and Indonesia. The required stockpiling levels are 30 days of net consumption in South Korea, 60 days in Taiwan, approx. 22 days in Thailand, and 34 days in Indonesia30. Mandatory oil stockpiling systems are absent in the rest, namely China, India, Malaysia, the Philippines and Singapore31. Third, the oil stockpiling levels of Asian economies are low by international standards (Figure 4). Figure 4. Oil Stockpile Level (Day Cover) in the Asian Economies

30 Despite the mandatory requirement for stockpiling 34 days of net requirements, Indonesia reportedly has only about 2025 days of reserves.

Note 1: Numbers in the figure shows oil stockpile level in terms of day-cover for previous year's consumption.

Number for OECD is for next year's consumption

Note 2: Numbers for Taiwan and Indonesia are mandatory requirement.

Source: Prepared by IEEJ based on Oil Market Report(IEA), Sekiyu Shiryo Geppo(Petroleum Association

of Japan) and overseas interview results.

81

169

56 6044

36 40

2034

0

20

40

60

80

100

120

140

160

180

OECD Japan Korea Taiwan Singapore Thailand Phillipines Indonesia China


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Fourth, a closer examination of the oil stockpiles held by oil companies reveals that the majority of stocks are inventory or working stocks, kept at hand by the oil companies for their regular business and plant operations. It is estimated that, of the stockpiling levels specified in Figure 5, working stocks account for the whole held by Indonesia, Singapore, the Philippines and China, respectively. In South Korea, the portion held by oil companies (about 30 days of net consumption) is counted as working stocks. In Taiwan, the 3040 days of stockpile are working stocks. In this context, it appears reasonable to conclude that emergency oil stockpiles available in the Asian developing economies are very limited. However, in recognition of the lack of an oil stockpiling system at present and growing oil imports expected ahead, some of the Asian economies have made commitments to oil stockpiling. First, in South Korea, concrete stockpiling plans are actually in progress. The government oil stockpile program, carried out primarily by the state-run KNOC, completed its first phase and has begun entering the second phase. After the second phase is over, the third phase will start32. As of 2006, when the third phase is complete, South Korea is expected to have a government oil stockpile of 163 million barrels, equivalent to 62 days of requirements. Adding the mandatory oil company stockpiles to the government ones amounts to more than 90 days of net oil requirements. Therefore, after meeting the requirement for joining the IEA33, the South Korean government can seek membership. It is also noteworthy that, on top of enhanced stockpiling efforts by South Korea, new developments of stockpiling build-up have been noted recently in Thailand, Taiwan and China. After being hit by the economic crisis, Thailand eased in December 1997 the stockpiling requirement for private oil companies, from 5% of the amount they refined and sold annually, to 3% (equivalent to 22 days consumption) in order to alleviate their stockpiling burdens. Beside the mandatory stockpiles, the Thai oil companies hold working stocks of around 1015 days of requirements. Yet, because the mandatory and working stocks are stored jointly in tanks on the same site, the segregation of the two has been physically difficult. Under such circumstances, the Thai government is considering how to implement a three-phase stockpiling build-up program with the National Energy Policy Office as the main coordinating agency. According to the specific program drafted in late 1999, it is planned for the first phase to install a system that can segregate the mandatory and working stocks physically, while the mandatory stockpiling level is left unchanged. During the second phase, the mandatory stockpiling level will be raised to the originally required 5% (equivalent to 36 days consumption). During the third phase, the program calls for the construction of an independent government oil stockpile to increase oil stockpile level from 36 days consumption to 51 days consumption, by considering the possibility of international cooperation and joint operation in the hope of taking advantage of economies of scale. In Taiwan, along with the moves to privatize and deregulate the oil industry, restructuring of the oil stockpiling system is being considered. Currently the state-run CPC alone is required to have oil stockpile equivalent to 60 days of domestic needs. Given on-going liberalization of the refining and marketing sectors and greater liberalization of petroleum product imports ahead, the Petroleum Business Act, currently being debated in the Taiwan parliament, is likely to impose the same stockpiling requirement as now on all market players, including those newly entering into the Taiwanese oil industry. Moreover, after the Petroleum Business Act is enforced, Taiwan hopes to initiate the construction of a government oil stockpile equivalent to 30 days of requirements in a relatively short period under control of the Energy Commission, a unit of the Ministry of Economy. In the face of swelling oil imports after becoming a net oil importer in 1993, China has come to recognize the importance of an oil stockpiling system, which should be prepared in order to deal with its ever-rising dependence on oil imports. Particularly since 1998, there have been growing concerns over the need for oil stockpiling even at the top government level34, and an examination of a government oil stockpiling program was initiated. A survey on candidate sites for the planned government oil stockpile terminal was conducted 31 Singapore requires its oil-fired power plants to stockpile 60 days of requirements of heavy fuel oil onsite. 32 For the second phase program, the construction work was over in June 1999, with the oil-in slated to complete by 2003. For the third phase, after construction work is to be finished in 2004, oil-in will complete by 2006. 33 An applicant for the IEA membership is required to hold oil stockpile equivalent to its 90-day net oil imports in the previous year. 34 Prime Minister Zhu Rongji reportedly instructed the State Development and Planning Commission in 1998 to examine preparation of oil stockpiling system.


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in the summer of 1999, and the preparation of necessary laws for establishing the government stockpiling system and mandating oil company stockpiling is under examination as a long-range subject. 2.3.2. International Cooperation To Cope With Emergency As demonstrated in the wake of the Gulf crisis, international cooperation is a matter of crucial importance in effectively implementing emergency responses, like jointly releasing oil stockpiles. No Asian economies, other than Japan are currently members of the IEA, an organization established for the purpose of international cooperation to combat oil supply disruption. South Korea is still at the stage of considering a membership in the IEA to be sought after achieving the stockpiling requirement, as detailed before. The ASEAN members have a cooperative accord entitled the ASEAN Petroleum Security Agreement35. But, given that its oil-producing members are expected to become oil importers in the long run, and that the importing members have concerns over oil supply conditions during an emergency many doubt the effectiveness of the agreement. Thus, in addition to the absence of an effective oil stockpiling system, the Asian economies apparently have a critical defect in their emergency preparedness in terms of a cooperative international system. Conclusion Various commitments made unilaterally by the individual Asian economies can improve energy security of this region as a whole, which, in turn, can basically work favourably for the improvement of each economys energy security. Diversification of energy sources, encouragement of energy conservation and promotion of domestic energy resource development can contribute to curbing the growth of oil imports. Efforts to diversify import sources can lead to dispersion of risks and stronger bargaining power of oil-importing economies in a sense that such endeavours can lower excessive dependence on particular supplying areas and/or suppliers. Also, the moves to establish or bolster the oil stockpiling system, currently seen among some of the Asian economies, can lead to better emergency preparedness, which remains poor right now. Now that the oil market is a global market, these response measures taken by individual economies within this region can consequently contribute to improving regional and world oil supply security. It is essential to secure and expand investments needed to implement the measures mentioned above. Therefore, it is important to design a system that encourages investment. However, each economy should design a system on their own initiative with careful handling, by taking into account the following points: advantage of market mechanism; market maturity; social stability and national interests. On these accounts, it is recommended that Japan should assist the Asian developing economies make the necessary commitments by offering as much cooperation as possible. In doing so, on top of technical and other cooperation in conventional forms, new approaches, like joint study implementation on common subjects and joint participation in a particular project, are worthy for consideration. As the overall economy and energy markets are undergoing liberalization and deregulation in Japan, and in many Asian economies, even the implementation of measures to improve energy security are subject to the demands for higher efficiency and improved cost-benefit36. From this standpoint, before committing to any measures and/or international cooperation, it is essential to scrutinize their cost-benefits, and exercise a strategic priority allocation. Also to be heeded is that, though basically working positively as discussed so far, unilateral commitments made by the Asian economies can work negatively on the improvement of region-wide energy security on specific occasions. Namely, energy security efforts made independently by individual Asian economies can result in a conflict of interests. For instance, the struggle for resource development and maintenance of security of oil supply could escalate into serious confrontations and conflict between the Asian economies37. Unilateral commitments, if becoming too exclusive, can consequently increase tensions within the region

35 The agreement, concluded in 1986, provides that, if oil supplies to importing members decline below 80% of domestic needs, the exporting members will preferentially supply oil to the importing members. However, because the supply price is set at the market price, the importing members have stated that they cannot afford such supplies when the price is soaring. If priced at market levels, it would be the same as importing from non-ASEAN producing countries. 36 For detailed discussions on this point, see Koyama and Kawasaki [1999, pp26 29]. 37 At present, over the sovereignty of the Spratly Islands, China, Malaysia, the Philippines and Vietnam are in tense relations. The disputes can be attributed, not merely to the potential availability of rich oil resources there, but to importance of this area as a strategic oil transportation route or the sea lane for transit of vital resources like oil.


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and lead to impairing the energy security of the region as a whole. For this reason, common recognition of the importance of improving regionwide energy security should be established. In this regard, Japan should take actions to foster such a common recognition. As part of such actions, efforts to establish a system to collect and share accurate and current data and information on regional oil and energy markets is essential so that a common understanding of market development can be fostered among all Asian economies. A common understanding of energy markets is very important at the time of supply disruption to avoid such behaviour as panic buying without correct information on market conditions. In hopes to help improve energy security of the Asian economies, it appears significant for Japan to strongly call for data and information construction and sharing on the regional oil market. Asian economies, possessing high quality human capitals as well as abundant natural resources, should make the best use of these to ensure energy security, and to assist in the economic development of the region. Given the above considerations, it is very important to design an appropriate market system. In addition, inter-economy regional cooperation should be promoted for the benefit of regional and global economic development and prosperity. References Asia Pacific Energy Research Centre (APERC). (1998). APEC Energy Demand and Supply

BP Amoco plc. (BP). BP Amoco statistical review of world energy. Annuals.

International Energy Agency (IEA). (2000). Energy Balances of OECD Countries 1997-1998.

International Energy Agency (IEA). (2000). Energy Balances of non-OECD Countries 1997-1998.

International Energy Agency (IEA). Monthly Oil Market Report. Various issues.

Koyama, K. (1998). Oil Supply Security in Asian Economies. IEEJ. Energy in Japan. January issue.

Koyama, K. (2000). Oil supply security policy initiatives taken by the Asian APEC economies. IEEJ. IEEJ website homepage (http://eneken.ieej.or.jp/). August.

Koyama, K. and Y. Kawasaki. (1999). Asias Growing Oil Imports Dependence Its Response Measures: An Examination on Japanese Leadership Potential. IEEJ. Energy in Japan. November issue.

Middle East Economic Survey (MEES). Middle East Petroleum and Economic Publication. Cyprus. Various issues.

Ogawa, Y. et al. (2000). Changes in the flow of crude oil to the West and Asia and the issue of the higher prices of eastbound Middle East crude. IEEJ. IEEJ website homepage (http://eneken.ieej.or.jp/). August.

Tanimoto, S. (1998). Nishi Africa genyu no kaihatsu oyobi Asia heno yushutu doko (Trends of West African Crude Oil Development and Exports to Asia). IEEJ. Kokusai enerugi doko bunseki (International Energy Analysis). April issue.

US. Department of Energy/Energy Information Administration (EIA). (1999). International Energy Outlook 1999. Washington, D.C.

US. Department of Energy/Energy Information Administration (EIA). (2001). International Energy Outlook 2001. Washington, D.C.
http://eneken.ieej.or.jp/http://eneken.ieej.or.jp/

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Energy Security in Asia.pdf