Energy Security Policies in the Asian Economics

1. Energy Security Policies in the Asian Economics October 5, 2001 Ken Koyama, PhD General Manager, Department of Energy Intelligence & Analysis Institute of Energy Economics, Japan

2. Outline 1. Growing Oil Imports and the Oil Price Increase 2. Energy Security Policies in Asia 　　　　　　● To Limit Oil Imports 　　　　　　● To Secure Oil Imports 　　　　　　● To Enhance Emergency Preparedness 3. Implications of the policy development

3. Growing Energy Imports in Asian Developing Economies Source: Prepared from BP Statistics

4. Supply/Demand of Coal, Gas and Oil in Asian Developing Economies （2000） Source: Prepared from BP Statistics

5. Growing Oil Imports in Asian Developing Economies Source: Prepared from BP Statistics

6. Oil price (WTI) increased sharply since 1999 Source: Prepared from NYMEX data

7. Policies To Limit Oil Imports • Alternative Energy Development (Natural gas, Coal, Nuclear, etc.) • Energy Conservation • Promotion of Domestic Oil Production

8. Promotion of Natural Gas • Resource Potential in Asia • Numbers of LNG, P/L projects being examined or implemented • Advanced Technologies (CCGT) • Advantage as a “clean fuel” →Constraints are: Price competitiveness, requirement for large-scale investment in infrastructure buildup

9. Promotion of natural gas in Asia 　● China： West Gas to East Project, Shenzhen LNG project, P/L project from East Siberia (Russia), etc. are now being examined/implemented. 　● Korea：Progress in the 3rd LNG terminal and the completion of domestic trunk P/L. LNG demand is expected to increase from 12.7 million tonnes in 1999 to over 20 million tonnes in 2010. 　● Taiwan：Progress in the 2nd LNG terminal construction and Tatan LNG fired power plant. LNG demand is targeted to reach 13 million tonnes in 2010 (4.5 million tonnes in 1999). 　● India：Promotion of domestic gas production by NELP, numbers of LNG projects, P/L projects from Iran and Bangladesh. 　● ASEAN countries：Numbers of P/L projects actually being implemented.

10. Promotion of Coal • Abundant Resource Potential (China, India) • Top-class production capacity and record(China: 2nd largest, India: 4th largest producers) • Availability of Australian coal （3rd largest producer) as regional resource • Price competitiveness → Promoted as base-load power source in many economies → But environmental constraints exist (SOx、NOｘ、CO2 emission). Importance of “Clean Technology” for further promotion on coal

11. Nuclear Power Development in Asia • Stagnation in US/European market • In Asia, nuclear power is promoted as: a) quasi-domestic energy b) mainstream of oil alternative c) important source of base-load power • New plants being constructed in Korea, Taiwan, China, India (and Japan) Unit: Million ｋW

12. Promotion of Energy Conservation • Energy conservation has benefits to: a) Limit energy (oil) demand and imports b) Reduce environmental load c) Enhance economic competitiveness → Energy conservation is a top priority in many Asian economies. Governments set long-term target for energy conservation. → In reality, however, energy conservation is difficult to achieve due to the “income effects.” Energy intensity flattened out or increased in many cases

13. Promotion of Domestic Oil Production • State oil companies as the major player (China:：CNPC, SINOPEC, CNOOC;　Indonesia: Pertamina; India: ONGC; Malaysia: Petronas) • Growing role of IOCs for capital requirement and introduction of advanced technologies • Onshore/offshore opening up in China, incentive policy in the frontier areas in Indonesia, New Exploration & Licensing Policy in India, etc. • In reality, however, oil production is expected to flatten out Source: EIA, “International Energy Outlook 2001（Reference case)”

14. Outlook for Oil Imports in Asian Developing Economies Source: EIA, “International Energy Outlook 2001（Reference case)”

15. Policies to Secure Oil Import • Import source diversification • Strengthening ties with oil producers • Overseas upstream investment • Introduction of oil producers’ capital into domestic downstream market

16. Import Source Diversification • Reduce risks from over-dependence on a specific source (Disruption risk in the source, market power risk, etc.) • Constraints for diversification are: export availability and import economics of crude oil for diversification purpose (Production/export capacity, physical property, transportation costs, refining configuration, etc.) • Notable increase in crude oil imports from Africa 　However, Middle East will remain the mainstream of import source. Diversification policy has a limit.

17. Overseas Upstream Investment • Secure oil supply by enhancing access to oversea oil resource • Make full use of know-how and human resources accumulated in state oil companies • Diversification of business, improvement of portfolio, enhancement of profitability • China: CNPC in Sudan, Venezuela, Iraq, Kazakhstan, etc. SINOPEC in Iran • Malaysia: Petronas in 13 countries (Iran, Vietnam, Sudan, etc) over 30% earnings from overseas operation • India: ONGC Videsh Limited in Russia, Iraq, Venezuela, Vietnam, etc

18. Oil Producers’ Capital in the Asian Downstream Market • Secure stable oil import by strengthening capital relation • Investment burden-sharing in the case of JV refinery construction • Korea：Saudi Aramco participates in S-Oil (35%). IPIC (UAE) in Hyundai Oil (50％) • Philippines: Saudi Aramco participates in PETRON (40%) • New refinery projects, refinery expansion and upgrading, capital participation are examined in China, India, etc.

19. Current Situation of Oil Stockpile in Asia • Only Japan and Korea hold national stockpile under direct government control • Stockpile obligation to oil company exist only in Japan, Korea, Taiwan, Thailand and Indonesia • As a result, stockpile levels are low in terms of international comparison • Majority of stockpile is commercial inventories, not emergency stocks • Problems in international cooperation framework

20. Oil Stockpile level in Asia (1999) Source: Koyama, K. “Oil Supply Security Initiatives in the Asian APEC economies”

21. Moves to Stockpile buildup in Asia • Taiwan: After enactment of Petroleum Business Act, national oil stockpile is to be established • Korea: National Stockpile program in progress implemented by State KNOC. Korea joined IEA on April 2001. • Thailand: Government (NEPO) now examines stockpile build up programs • China: Government announced a plan to establish national stockpile during the 10th 5 years plan

22. Points to be considered • Despite the policy development, oil import dependence continues to rise rapidly • Constraints for further policy development are: a) Limited economic capacity b) Coordination with other policy agenda such as environmental protection, economic liberalization, etc. c) Pursuit of higher cost-effectiveness

23. Implications • In principle, pursuit of energy security by each economy can contribute to enhance regional and global energy security • However, if initiatives to enhance energy security conducted too exclusively, tensions could be generated and escalated among Asian economies, thus damaging regional energy security • Therefore, the development of energy security policy in Asia is a great concern to Japan • To enhance energy security in Asia, Japan can play an important role. With respect to Japan’s cooperation, the following points are important: making full use of Japan’s experience and know-how, focus on cost-effectiveness, prioritization, etc.