Joint Stockpiling and Emergency Sharing of Oil: Lessons and Prospects for Northeast Asia

1. Joint Stockpiling and Emergency Sharing of Oil: Lessons and Prospects for Northeast Asia Asian Energy Workshop May 11-14, 2004 Beijing, China Eui-Soon Shin Department of Economics Yonsei University

2. APEC Vulnerability to Oil Security • APEC region consumed 62 % of global oil in 2000 • By 2020, seven of top ten oil consumers in the world would be APEC members • APEC region is a net oil importer, and will import 54 % of oil supply from outside sources by 2020 • OECD Pacific countries (i.e., Japan, Korea, Australia, New Zealand) depend 90 % of their oil to imports, and import dependency will increase to 94 % by 2030 • Import dependency of East Asia will increase from the current 30 % to 74 % in 2030 • ASEAN will import 74 % by 2030 from the current 30% • Indonesia and Malaysia will become net importers in a few years • China’s import will increase from the current 34 % to 82 % in 2030 • Most of additional oil required will come from the politically unstable Middle East

4. Oil Security Policy Measures • Long-Term • Diversify oil import sources • Improve oil use efficiency • Develop alternative fuels to oil • Cooperation with oil producing and consuming countries • Short-Term • Mandatory restraining of oil consumption during emergency • Fuel switching • Disseminate accurate oil market information to discourage hoarding or panic purchase • Drawdown of emergency oil stocks

5. Emergency Stockpile Options • Public and Private Stockholding • U.S. SPR is financed entirely by federal government • Japan uses a small portion of oil tax revenue to cover the cost of stockholding by JNOC • There are other varieties in Europe • Crude Oil and Petroleum Products • U.S. holds only crude oil • Small countries hold only petroleum products • Most countries hold both crude and products • Japan and ROK set separate reserve requirement for LPG • Joint and Individual Stockpiling • EU members are allowed for joint stockholding within EU and outside the member states by the EU Directive • However, joint stockholding among EU member countries has not yet been widely observed

6. Lessons from ORNL Cooperative Stock Analysis • All the oil consuming regions in the world remain quite vulnerable to supply disruptions • Oil stockpiling provides benefits not only to the stockpiling economies but also to other economies with no stake in the stockpile • This public good aspect of stockpiling justifies collaborative initiatives in oil stockpiling • All oil consuming regions could benefit from more stockpiling • Collective groups of countries sharing a reserve prefer larger size and achieve greater benefits than the sum of individual countries acting alone • Asia-Pacific study shows sharply increasing benefits from the expansion of collective reserve size

7. APEC Policies on Emergency Oil Stocks • Different policies and measures are taken by 21 APEC economies • U.S., Canada, Japan, Australia, New Zealand, and ROK are IEA members and are obligated to carry oil emergency stocks equivalent to 90 days of net imports • Taiwan and Indonesia maintains independent oil stocks • China and India are establishing (or considering to build) strategic oil stocks • ASEAN signed the ASEAN Petroleum Security Agreement (APSA) to establish the ASEAN Emergency Petroleum Sharing Scheme for crude oil and/or petroleum products in terms of both shortage and over supply

8. Economics and Size Analysis of APEC Emergency Oil Stock (major recommendations) • Separation of emergency stocks from commercial stocks • Minimum holding of 30 days of net import level as a first step toward building emergency stocks • Emergency stocks could be jointly held by several economies in order to reduce the cost of stockpiling • Temporary lease of facilities in the industrialized economies by developing economies will alleviate the burden of stockpiling cost • Cooperation among oil producing, importing, and international organization would be beneficial

9. Impacts of Oil Crises to the Korean Economy Measures taken after the two worldwide oil crises • Establish the KNOC (Korea National Oil Corporation) • Began strategic oil stockpiling • Established the oil buffering fund • Established the three-phase contingency plan as a short-term emergency measure

10. History of Strategic Oil Stockpiling Plan in ROK

11. Current Status of Strategic Oil Stockpiling in ROK • The ratio of cavern to tank is about 80 % to 20 % because the maintenance cost of cavern is much cheaper • The usual capacity per each site is 20 to 40 MMB • The stockpiling project is entirely funded by ‘The special accounts for energy and resources related projects’ raised by imposing dues on all imported petroleum

12. Oil Stock Level as of Sep. 2002 (ROK) • Started government strategic oil stockpiling from 1980 • Started mandatory stockpiling of private petroleum enterprises from 1992 (40 days of domestic sale volume to crude oil refiners and oil products importers; 30 days requirement to LPG importers and petrochemical enterprises) • As of September 2003, there are 107 days of oil stocks which account for 49 days of strategic and 58 days of private stocks (based on IEA standards) • Target for strategic oil stockpiling: 141 million barrels of oil stocks by 2007 and 146 million barrels of storage facilities by 2008

13. Joint Oil Stockpiling: the case of ROK <Basic concepts> • KNOC leases unfilled storage facilities to petroleum producing countries • KNOC holds the preemptive right to purchase the stored crude oil in case of emergency <Diverse benefits> • Improve the ability to cope with the oil crisis • Increase the volume of stockpile • Contribute to diversify supply source • Decrease the financial burden of oil stockpiling • Petroleum producing countries can develop or expand market share in Northeast Asia

14. Lease Contract with Statoil • July 1999: Started the joint stockpiling business with Statoil (Norway’s state oil company) • July 2000: Expanded the contract volume • (8 MMB  11.3 MMB)

15. China’s Strategic Oil Stockpiling Plan • Tenth Five-year Plan for National Economic and Social Development put forward the establishment of Strategic National Oil Reserve • Established the National Oil Reserve Office under the newly-established Energy Bureau, NDRC • NDRC is responsible for the formulation and implementation of the National Oil Reserve Program • Gradually increase the reserve scale, finally to meet the standard of IEA and other countries • Started to build oil reserve base in Zhenghai, Zhejiang province

16. Cooperative Oil and Gas Security Measures in Northeast Asia • Joint development of oil and natural gas in East Siberia and Russian Far East to enhance regional energy security • Expedite the construction of crude oil and natural gas pipelines among NEA countries • Joint oil stockpiling among NEA countries • Establish NE Asian Energy Charter Treaty

17. References • APERC, “Emergency Oil Stocks and Energy Security in the APEC Region”, Tokyo, March 2000. • Ehara, Norio, “Recent Developments in Stockholding by Non-Member Countries”, IEA Seminar on Oil Stocks and New Challenges in the Oil Market”, Berlin, 9th September 2003. • Houssin, Didier, “Emergency Stock Holding and Oil Stocks in France”, IEA Seminar on Oil Stocks and New Challenges in the Oil Market”, Berlin, 9th September 2003. • Iwahara, Tatsuya, “Topics of operational aspects of Japan’s emergency stockpiling”, ‘APEC Joint oil Stockpiling Workshop’ Seoul, 2nd December 2003. • KNOC, “Korea’s Strategic Oil Stockpiling”, IEA/China Oil Stocks and Emergency Response Seminar, Beijing, 9-10 December 2002. • KNOC, “Need for Launching Joint Stockpiling to Enhance the Oil Security in the APEC region”, December 2003. • Kurumada, Naoaki , “Outline of Petroleum Stockpiling and Emergency Response in Japan”, IEA/China Oil Stocks and Emergency Response Seminar, Beijing, 9-10 December 2002. • Leiby, Paul N. , “Economics of Energy Security Policy – Oil Shocks and Strategic Oil Stocks”, USAEE Policy Symposium – Energy (in)Security in the 21st Century, MIT, 4th December 2003. • LIU, Xiaoli and ZHANG, Yousheng, “China Petroleum Security and Regional Cooperation”, ‘International conference on Cooperative Measures Enhancing Oil Security in Northeast Asia’, Seoul, 6th September 2003. • MOCIE, “Korea’s Emergency Response Measures in Perspective: short-term vs. mid & long-term energy security policy and programs”, IEA/ASEAN Workshop, September 2003.