Conference Summary

This conference focused on the geopolitics of Asia’s growing energy demand and the resulting implications for the U.S. It was predicated on the notion that Asia’s mushrooming energy demand and growing import dependence are resulting in a deepening sense of energy insecurity in the region. Key regional powers, particularly China, are responding to their growing insecurity largely with "energy nationalism" rather than with regional cooperation and markets. The growing prevalence of competition and energy nationalism increases the risk that energy will become a serious long-term source of tension and conflict in Asia with important ramifications for the U.S. given its long-term interests in a stable, peaceful Asia. Moreover, Asia’s reaching out to expand ties with key oil exporting regions seems likely to increase its diplomatic influence in the Persian Gulf, Central Asia, and Russia, particularly in the case of China. This also promises to have significant ramifications for U.S. influence in these key regions. Finally, booming electricity demand in Asia is driving the region’s powers to boost nuclear energy development and increase coal consumption, both trends that have important implications for U.S. policies on nuclear proliferation and environmental concerns.

Speakers and participants focused on several important topics. The first panel examined the national energy security policies and strategies of the key players in the region, including China, India, Japan, and South Korea. The second panel addressed Asia’s growing energy and geopolitical relations with key exporting regions, including the Middle East, Central Asia, and Russia. The third panel dealt with Asia’s long-term natural gas needs, the complex geopolitics surrounding Northeast Asian regional natural gas and oil pipeline development, and the geopolitics of Asian LNG development. The fourth panel addressed the issues involved in nuclear energy development and proliferation and the problem of growing coal consumption in Asia’s future. A final panel discussed some of the implications and issues raised during the conference. Following is a summary of the major themes that emerged from the conference. Copies of the presentations or talking points are included later in the Report.

China's Energy Insecurity, Strategies, and Future Implications

China’s leadership has become deeply concerned about its long-term rising dependence on imported oil and natural gas and the risk that future supply disruptions could undermine economic growth, job creation, and social stability. This growing sense of energy insecurity is undermining China’s traditional preference for self-sufficiency and state action. It is pursuing a "strategic approach" characterized by state ownership and control, and a focus on production rather than consumption and efficiency, which in many ways lacks coherence. The leadership generally distrusts market forces in energy security issues and tends to see energy security in zero-sum terms. Limited success in developing domestic resources is driving them to try to secure supplies internationally through equity stakes, sponsoring regional pipeline projects to diversify supply sources, and "oil diplomacy". It is pushing them towards deeper involvement in the "near exterior" in Central Asia, Russia, and the Persian Gulf.

Most participants felt that energy security policies are relatively "ad hoc" or, as one participant termed it "whack-a-mole", referring to the tendency of China’s leadership to deal with problems reactively, on a short-term basis, reflecting a fragmented policy-making system across the board. This contrasts with a "grand strategy" approach. The government appears able to execute individual energy projects, such as the West-East gas pipeline or the Sudan oilfield development, but lacks a unified long-term strategy. Most participants expected a continuation of this fragmented strategy, or "business-as-usual - BAU", in the future with the implications that policy will remain somewhat unpredictable, inconsistent, and prone toward competitive reactions to supply insecurity rather than cooperative and market solutions. It was suggested that China might move towards a "modified BAU" strategy as it moves up the learning curve and accepts a greater role for market forces and regional cooperation, as it is gradually doing in broader trade and economic policy.

China’s strategy is unlikely to increase the country’s energy security significantly and it will remain vulnerable to oil supply disruptions, price shocks, or blockades. Efforts to acquire oil fields and production capacity, control the routes of pipelines, build their own oil tankers, and increase control of sea-lanes won’t do much to reduce these risks. Further, this approach is much more expensive than cooperative, market-oriented strategies, which the Chinese largely continue to shun. For the U.S., China’s moves abroad create some significant problems for U.S. diplomacy, particularly China’s oil development efforts in Sudan and Iran. The most positive recent development is the beginning of development of a Strategic Petroleum Reserve (SPR) as a cushion against supply disruptions.

India's Emerging Energy Security Dilemma: Strategies and Prospects

Similar to China, India’s rapid economic growth is driving strong energy and oil demand growth and rising insecurity among the political leadership over securing future oil supplies. India is relatively self-sufficient in coal, which represents over 50% of total energy demand. However, India now imports two-thirds of its 2.4 MMBD oil needs, almost entirely from the Persian Gulf. Over the long-term India is likely to import 80-90% of its oil needs. Like the Chinese, the government is responding by supporting the development of a few large domestic, state-controlled companies, ONGC in oil and GAIL in natural gas, and promoting and subsidizing them to secure equity oil supplies abroad. The government hopes to raise foreign oil production from 60 MBD currently to 240 MBD by 2012. There have been recent efforts to develop a more competitive domestic market for oil and gas, but progress has been slow due to domestic political opposition. There are strong opportunities to boost imports of natural gas by pipeline from Bangladesh, Pakistan, and Iran, but proposals for large regional gas pipelines are limited by geopolitical rivalries between India, Pakistan, and Bangladesh, and U.S. efforts to isolate Iran.

Japan's Energy Angst and Outlook

Japan’s energy insecurity has been a long-standing feature of its energy and foreign policy. It has one of the lowest energy self-sufficiency ratios among the industrial countries and is the world’s second largest oil importer and largest LNG importer. As a result, Japan has pursued an integrated and strategic approach to its energy needs. Energy investment and policy have reflected a tight alliance between the state, mainly METI, and the private sector in the form of the large power and utility companies, together with the large trading, steel, and construction companies. The successes of these policies have been in developing one of the most diversified and efficient energy sectors in the world and a large strategic petroleum stockpile. Internationally, Japan’s energy security strategies have been less effective. Its efforts to secure oil production abroad have been very unsuccessful, even as it continues to promote this policy, as in the recent deal with Iran to develop the large Azadegan oil field. It has been more successful in securing global LNG supplies. Japan’s expertise on energy efficiency and oil stockpile development could be very important in encouraging more market-oriented policies by China and other regional oil and gas importers, but regional political rivalries have limited Japan’s ability to influence China’s energy policies. For the U.S., Japan’s growing involvement in Iran directly undermines U.S. efforts to isolate Iran.

South Korea's Energy Strategies and Prospects

South Korea is similar to Japan in its lack of energy resources and heavy reliance on oil and natural gas imports, especially from the Middle East. Oil is still the predominant energy source representing 50% of total energy use. South Korea has a very well-developed gas industry based almost entirely on imported LNG. Korea’s energy security strategy has been driven less by efforts to gain control over foreign oil and gas production than Japan, China, or India. It has focused mainly on improving efficiency, diversifying the fuel supply toward nuclear power, coal, and natural gas, and recent efforts promoting regional energy cooperation in oil, gas, and electricity. In terms of regional cooperation, Korea is a key sponsor of a Northeast Asia natural gas pipeline from East Siberia, as well as promoting development of a regional electricity grid in Northeast Asia. It is also a key supporter of recent APEC and ASEAN+3 energy security initiatives.

The Asia and the Middle East Nexus and Implications

The Asian states recognize that they will become increasingly dependent on the Middle East for their crude oil imports and, later, for LNG imports. As a result, they are broadening their energy involvement in the region and developing stronger diplomatic ties. At the same time, the U.S. is deepening its involvement in the region through the invasion of Iraq and maintaining historic alliances with Saudi Arabia and the other small Gulf producers. The Persian Gulf states, particularly Iran, are looking to diversify their diplomatic and economic bases of support and see Asia, particularly China, as a potential counterweight to U.S. power and hegemony in the region. China is strengthening its ties to the region, particularly with Iran, but is also concerned about not antagonizing the U.S., with whom it needs good relations and open markets for its exports. The Saudis, although traditionally dependent on the U.S. for security, are seeking to diversify their support and build stronger ties with China and Asia through diplomatic efforts as well as stronger energy link-ups, in the form of cross investments in refineries and natural gas. Japan is not taken seriously by Saudi Arabia or Iran because of its lack of "hard power", i.e. military strength. But Iran sees Japan as an important source of low-cost investment. There is a significant potential for growing competition between China and India for Gulf oil and gas supplies, along with diplomatic influence.

Russia's Shifting Energy Policies and its Energy Role in Asia

Russian oil and gas policy is shifting rapidly as the state takes a stronger role and seeks to restructure the oil and gas industry, highlighted by the campaign against Yukos. The move against Yukos is an initial effort to roll back the clock to a state oil company. Putin and his supporters want to re-establish control of oil as they have maintained control of gas through Gazprom. Private companies will increasingly follow state direction and the foreign investment environment will, therefore, weaken. Efficiency and good management are likely to decline as informal state planning becomes increasingly important. Russia is benefiting from the competition between China and Japan over pipelines and supplies. The Chinese Daqing oil pipeline proposal makes better commercial sense, as the volumes are smaller, roughly 500 MBD, while the potential cost of the Japanese Nakhodka pipeline to the Pacific coast has mushroomed from $6 billion to $16 billion. Further, there are not enough reserves for the 1 MMBD volume needed to make the pipeline more commercially attractive. Russia is leaning toward the Japanese proposal anyway, due to the attractive financing. Gazprom is likely to force itself into Sakhalin II in the near future. Russia is a latecomer to the Asian gas market, but Gazprom is now interested in taking part in BP-TNK’s Kovytka pipeline and also is increasingly excited about LNG in Sakhalin I and II.

Asia-Central Asia/Caspian Energy Connections, Issues, and Implications

China is playing its traditional role in Asia in its relationships with Russia and the Caspian/Central Asia region, and should not be viewed by the U.S. as a new and dangerous element. Whether or not China has an energy relationship with Russia, it wants to maintain a stable strategic relationship, so energy acts as a bargaining chip. However, Russia is becoming an unreliable partner for China, as evidenced by Putin’s reneging on the Daqing pipeline. China has a strong interest in Kazakhstan, and the region as a whole is becoming more important to China. Energy is a factor in these relationships but does not drive them. China sees Japan’s bid to take the oil pipeline deal as "strategic denial" and a growing cause for concern. China does not necessarily care who sponsors the pipeline, but is concerned it will not be built at all. The Kazakh-China oil pipeline makes reasonable commercial sense and is good strategically for Kazakhstan as an alternative export outlet from the west. Energy for China is increasingly seen as a "zero-sum game" and China views the U.S. as playing a "spoiler" role; even normal U.S. actions are viewed as antagonistic by Beijing. China’s exclusion from the Kashagan consortium aggravated China’s sense of exclusion by the international majors and may provoke the Kazakh government to step in and direct the oil to China. The U.S. is far enough removed from the region to be viewed as friendly to all but U.S. actions appear to be an attempt to block China’s room for maneuver in the region.

Asia's Natural Gas Outlook: Supply, Demand, and Imports

The Asia-Pacific region is the major player in the global gas market, accounting for nearly two-thirds of the world’s LNG demand. Declining LNG costs, efforts at energy diversification, environmental pressure, and stagnant domestic gas supplies in Asia are expected to drive dynamic LNG demand growth over the next 10 years, raising demand from 84 MMTY in 2003 to 137 MMTY in 2015. Japan, Korea, and Taiwan are considered "existing buyers", while China and India are considered "new buyers". Other possible buyers include the Philippines, Indonesia, and Thailand, and the U.S. is likely to become a significant LNG market over the next decade, possibly changing the dynamics of the Pacific Basin LNG market. Japan is a mature market with slow LNG demand growth likely. However, the dimming outlook for nuclear power growth may result in faster LNG demand growth, despite slow economic growth and increasing utility competition. A large number of long-term contracts will expire over the next decade, and Japanese buyers will demand more flexible contracts and lower prices. Korea is likely to experience the largest volume growth over the next decade, with KOGAS likely to continue dominating Korean purchases. China’s LNG development will be driven by power demand as well as household use. Two re-gasification terminals are being developed in Guangdong and Fujian, with more planned further north along the coast in the future. LNG growth along the northern coast will partly depend on domestic and Russian gas pipeline developments. The near-term LNG market in Asia is likely to be a buyer’s market, but could shift sharply to a seller’s market if U.S. LNG demand grows quickly.

The Geopolitics of Northeast Asian Gas Development

Northeast Asia’s gas demand is likely to grow rapidly between now and 2020 driven largely by China’s booming demand growth. While Chinese authorities have emphasized developing gas pipeline supplies from Russia - both East and West Siberia - recent plans by CNOOC, Sinopec, and Petro-China suggest that LNG imports could play a bigger role than planned due to the problems of developing transnational pipelines. Also, LNG costs are considerably lower than pipeline gas from Russia or Western China and therefore are undercutting pipeline gas projects. The Kovytka East Siberian gas pipeline proposal is being held up by several issues. First, Gazprom is designated as the sole coordinator of gas exports to Asia, but BP-TNK owns the Kovytka gas project. Second, Gazprom is seeking much higher gas export prices from China than BP-TNK feels are realistic in light of potential competition from lower LNG prices. Third, Gazprom and BP-TNK disagree on the pipeline route. Another problem is that South Korea’s KOGAS has become frustrated by Gazprom’s delays on the pipeline and is moving instead to buy LNG, which undermines the volumes needed to make the Kovytka pipeline economic. Difficulties in finalizing the pipeline route and prices are likely to fuel LNG growth in China and push back by years the completion of the Kovytka gas line.

Asian Gas and LNG: Cooperation or Conflict

Global gas consumption is rising faster than any other primary fuel, resulting in booming global gas trade and new future supplies from remote areas. Asia’s gas demand will increasingly outrun regional supplies after 2010, leading to a rising share of Asia’s gas coming from the Persian Gulf, Russia, and Central Asia. This will raise the importance of the geopolitics of gas supply and aggravate Asia’s energy security concerns. By 2030, Asia’s gas imports are likely to double, while imports from outside the region will rise by 500%. Nevertheless, gas supply insecurity is likely to be less critical than for oil. Asia’s import dependence on oil will be much higher than for gas in 2030 (80% vs. 16%), and gas has substitutes like coal, nuclear, and hydro. Further, there is a looming overhang of LNG in Asia, LNG costs are declining, and there is no OPEC gas cartel. However, gas does present important energy security issues. Asia will depend largely on the same unstable regions and vulnerable transit routes for gas as for oil. Russia’s role in gas is likely to be important, but Russian gas policy is increasingly politicized and capricious. Even intra-Asian LNG supplies face uncertainty in Indonesia and concerns resulting from clashes in the South and East China Seas about sovereignty over offshore gas fields. Mistrust is slowing development of the Southeast Asian Gas Pipeline Grid and tensions and rivalries in South Asia are preventing gas supplies from moving out of Bangladesh, Turkmenistan, Iran, and Pakistan to India where they are needed. China’s gas development is also vexed by geopolitical issues. The new West-East gas pipeline is driven primarily by domestic supply security advantages rather than economics. Also, Russia’s potential gas supplies are being held up partly by Chinese fear of relying too heavily on Russia.

Nuclear Power Generation in Asia and Proliferation Issues

Although nuclear power is not currently the largest power source in Asia, it is seen as important for the diversification of energy needs and energy security, with important environmental side-benefits. Asia has a large base of nuclear power generation, mainly in Japan and South Korea, and over the next decade Asia will be the only region substantially boosting its nuclear energy generation and building dozens of new plants. Rising concerns over this prospect are driven by a variety of worries, including North Korea’s withdrawal from the NPT, Pakistan’s rogue nuclear black market activities, poor physical security of nuclear materials in much of the region, the risk of terrorism, and regional rivalries driving the militarization of nuclear materials. These issues are driving concerns over the potential development of weapons and the presence of fissile materials in unstable countries, the risk that proliferation goals may be sacrificed to energy security goals, and the risk of "loose" nukes and terrorism. In response, the U.S. needs to accept further nuclear development, but provide support for proliferation-resistant technologies, improve export controls, increase cooperation on the physical security of nuclear materials, support the Global Threat Reduction Initiative, encourage better Asian regional cooperation, foster clean energy and non-nuclear projects, and monitor energy competition among China, India, and Japan for signs of nuclear related tensions and other proliferation precursors.

The Outlook for Coal in Asia

Coal will continue to be crucial to the regional energy system in Asia and central to the key countries energy security strategies. Asia is more reliant on coal than any other region, with coal accounting for nearly 40% of total energy supplies. China currently uses one-third of the world’s coal and, along with India, is a major driver of global coal demand. Coal use in Asia is growing more similar to use in the industrial countries due to rising incomes and urbanization, meaning less direct consumer use of coal and greater use in transformation, mainly for electricity production. Coal’s attractiveness in Asia is a function of low investment costs and abundant supply. Despite the environmental problems associated with coal use, urbanization, rising per capita incomes, and rapid population and economic growth are likely to foster the continued rising use of coal in Asia. Growing coal use in Asia could be moderated by the implementation of better end-use technologies, greater use of natural gas, nuclear, and hydro-power, better land-use planning, and improved efficiency in coal intensive industries such as steel, cement, and power generation. Concerns in Asia about energy security will tend to favor coal use unless the definition of energy security is expanded to include the environment and the concept of "sustainability" of the energy mix. China and India are the keys to slowing growth of coal use in Asia.

U.S. Security and Energy Policy Implications

The overall shape of global energy geopolitics is changing rapidly due to U.S. policies attempting to fundamentally redraw the map in Iraq and the Middle East, along with the emergence of major new consumers in Asia and the emergence of Russia as a major new oil supply superpower. The U.S. is the only state that both has the power and is a large enough oil producer and consumer to be the main driver in reshaping global energy geopolitics. But, in light of how fragmented U.S. energy policymaking is, it is not clear what the U.S. really wants, beyond a total reconfiguring of Iraq and the Middle East. China and India are rising powers on the consumption side of the oil market but are struggling to find a strategy to deal with their growing import dependence. They both are inclined to go it alone and pursue bilateral ties to producers rather than regional or global cooperative efforts. The U.S. and other industrial countries in the IEA have no strategy on how to incorporate them into the global emergency management system. In effect, the IEA has become "mismatched" with global energy security needs. A new system needs to be created that brings China and India into the system and also links the Asian importers in some regional cooperative sharing arrangement. There are a number of options for overhauling the system. These include 1) enhancing and enlarging the IEA, 2) regional consumer cooperation, and 3) regional producer-consumer arrangements. In any event, management of large SPRs in the U.S. and other IEA states in Asia (Japan and South Korea) needs to be revamped creatively to help address the supply security concerns of China and India. Russia and Saudi Arabia can possibly play important roles in this transformation by helping create large regional SPRs, perhaps located in Russia and Saudi Arabia, or located regionally in Asia.

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