Asia's Energy Security amid Global Market Change
In this NBR Special Report, top experts examine shifts in global oil and LNG market outlooks, the geopolitical implications for the Asia-Pacific, and options for strengthening energy and environmental policy across the region.
W ith recent major shifts in global energy markets, prospects for advancing Asia’s long-term energy security have improved dramatically. Energy security has for decades been a key strategic concern for Asia. However, from 2003 through 2013, the region faced an even more challenging period characterized by a growing sense of energy scarcity, historically high prices, and severe strategic and economic insecurity for import-dependent economies. This environment aggravated an already pronounced zero-sum atmosphere in Asia in which countries competed for control of energy supplies and both maritime and overland transportation routes, which in turn led to heightened prospects for conflict. But with the huge and unexpected rise in North American unconventional oil production since 2007, the region’s narrative of energy scarcity has changed profoundly. The continuing resilience of the United States’ unconventional oil output—along with the simultaneous return of Iranian oil, rising Iraqi oil production and exports, and modest but steady growth in global oil demand—now seems likely to herald a period of very ample global oil supplies and lead to an extended outlook of “lower for longer” oil prices. As a whole, these developments have been viewed positively among the region’s major importers from South Korea to Japan, even as they have raised new questions and challenges for exporters such as Russia.
Such a major transformation in energy security prospects goes beyond what is happening in oil markets. Markets for liquefied natural gas (LNG) have also undergone a profound readjustment from the extremely tight markets experienced in recent years. Enormous new supplies are now entering the market from rising Australian production and the advent of the United States as an emerging shale natural gas producer and exporter. Asia’s LNG markets now appear headed for a lengthy period of ample supplies and moderating prices. This has helped ease the region’s deeply ingrained concerns over future LNG supply availability and prices, which has been a major contributor to the underutilization of gas in Asia relative to other regions of the world. The new supply picture also seems likely to increase the flexibility in LNG contracts, including by reducing the emphasis on oil-linked pricing and fostering a more liquid and responsive LNG market in Asia. Overall, these shifts could strengthen the opportunity to usher in a “golden age of gas” in Asia, enabling gas to penetrate new markets, replace coal use, and help reduce air pollution and the rate of growth in carbon emissions.
This new era of energy abundance potentially brings a range of other important benefits to the region. As ample supplies bring the potential to temper the region’s competitive and nationalistic atmosphere over energy supplies and transit routes, this in turn should improve prospects for much-needed regional energy cooperation. This includes collaboration on supply development, emergency oil stockpiles, and shared energy infrastructure—areas that have long been identified as fertile ground for cooperation but that have been held back by deep insecurities. Lower oil and natural gas prices have also helped create political space for Asian governments to reduce expensive and counterproductive energy subsidies that have historically absorbed huge budgetary resources that are desperately needed for investments in infrastructure, health, and education. A number of countries, including China, India, Indonesia, and Malaysia, have already made important progress in reducing energy subsidies. An era of relative abundance, lower prices, and much-lower costs for energy imports also could help boost economic growth for countries across the region. High prices on energy imports have been a serious drag on Asian economic growth over the past decade.
Altogether, a period of abundant oil and LNG supplies could have a wide range of very important benefits for Asia’s energy outlook and security. Nevertheless, the balance sheet in the longer term is potentially much more mixed. While energy security concerns have receded somewhat for the time being, today’s favorable environment may prove temporary.
Most importantly, global investment in the development of future oil supplies has declined significantly. Planned investments worth hundreds of billions of dollars have been canceled or delayed as a result of falling oil prices. Even investment in U.S. unconventional oil has been sharply reduced, leading to a substantial drop in oil output from its peak in 2014. Declining investment globally raises the risk of a serious shortage in a few years as supply growth diminishes and demand continues to rise. Moreover, many key oil exporters are facing greater political instability in the wake of a collapse in their oil revenues, increasing the risk of supply disruptions. The Organization of the Petroleum Exporting Countries (OPEC) is under extreme pressure and is struggling to manage its own production growth and control an internal battle for market share. Hence, anxieties over energy insecurity in Asia could return soon as oil markets tighten over the next several years. Recent history suggests that this adjustment could be very sharp and destabilizing.
A prolonged period of lower oil prices also has potentially less favorable implications for Asia’s energy security goal of diversifying sources of oil imports. Low prices will dramatically slow the development of new supplies from many areas around the world on which Asia has been depending to diversify its oil imports away from the volatile Middle East. The region will likely become more dependent on the lowest-cost areas, such as the Middle East, where production can still increase at lower prices. Asian countries need to reconsider how to respond to a challenge to their efforts to reduce this dependence.
Another serious concern revolves around the potentially negative impact of a period of fossil fuel abundance and moderate prices on Asia’s progress toward a cleaner and more sustainable energy mix. As the largest source of future growth in energy demand and therefore carbon emissions, the region is crucial to meeting global climate goals; indeed, the Asia-Pacific already accounts for five of the world’s top-ten carbon emitters (or six, if you include the United States—the world’s largest emitter per capita and second-largest emitter overall). Abundant oil supplies and moderating prices have the potential to accelerate already rapidly rising oil demand in the region and slow the development and deployment of cleaner transportation technology. Lower coal prices also have the potential to slow Asia’s transition from coal to natural gas, renewables, and nuclear energy. These trends could risk reducing the urgency of the region’s commitments to slowing the growth in carbon emissions and meeting the targets set at the 21st Conference of the Parties (COP21) in Paris.
Hence, Asia’s policymakers need to avoid complacency in their efforts to shift toward a cleaner energy mix and act quickly to take advantage of the current favorable environment. The window of opportunity for building stronger regional energy governance, strengthening energy markets, and pursuing key energy reforms may begin closing relatively soon.
In view of these complex, crosscutting implications of a new era of energy abundance and opportunity, the National Bureau of Asian Research (NBR) convened its 2016 Energy Security Program under the theme “Asia’s Energy Security amid Global Market Change.” Each year this program examines a major development in Asian energy markets and considers how regional policymakers should respond to the environmental and geopolitical implications of relevant market and policy changes. The 2016 program focused on a range of issues, with key themes including the prospects for global and Asian oil markets, the geopolitical implications of the major shifts in global energy markets, the outlooks for Asia’s LNG and natural gas markets, and options for addressing environmental and climate policy goals.
To explore these issues, NBR commissioned four essays by authors with expertise on oil and LNG markets, geopolitics, and Asian environmental policy. Their preliminary findings were discussed in detail at a high-level workshop in Washington, D.C., on July 8, 2016, featuring senior representatives from the U.S. and foreign policymaking communities, research specialists, and leading industry and geopolitical specialists. The authors then incorporated the feedback they received at the workshop to further strengthen their essays, which are published collectively here for the first time.
In the opening essay, Antoine Halff from the Center on Global Energy Policy at Columbia University analyzes the short- and longer-term impact of low oil prices on Asian countries and assesses the risks to regional energy security. He suggests that the recent shifts in oil markets are unprecedented in scope and duration and reflect deep structural changes in the oil industry as a result of the advent of shale oil. However, while lower prices have brought some benefits to Asia, the overall impact has been a mixed blessing of stronger oil demand and relatively limited economic benefits. Halff focuses on the risks that reduced oil investment will limit future growth in global oil production capacity and concentrate Asia’s oil dependence on the Middle East. He recommends that Asian countries implement policies to build stronger strategic petroleum reserves, including more transparency and regional coordination, domestic energy policy reforms to enhance competitiveness and lower energy costs in domestic oil markets, the reduction of costly energy subsidies, and measures to strengthen Asia’s leadership on regional and multilateral energy cooperation.
In the second essay, Meghan L. O’Sullivan from Harvard University’s Kennedy School examines the geopolitical implications of the new energy environment. She argues that this new era of energy abundance has profound effects on the way Asian countries interact both with one another and with the rest of the world. She contends that this new environment has undermined Russia’s pivot to Asia, has strengthened a broader Chinese approach to foreign policy that goes well beyond scarce resources, and will tie Asia and the Middle East more closely together. From this, O’Sullivan suggests that Asian oil importers must come to terms with the need for more active engagement in the Middle East in the interest of achieving greater regional stability and energy security. She also contends that Russia and China’s increasingly robust energy engagement will likely be transactional rather than strategic in this new environment. Finally, she argues that the new environment will strongly influence China’s approach to either accepting or seeking to remake the international order.
Next, Leslie Palti-Guzman from the Rapidan Group examines the vital issue of Asia’s changing LNG market in the context of recent shifts in pricing and the demand environment brought on by an increasingly abundant supply outlook. She argues that current and potentially sustained low prices will stimulate demand for LNG in developing Asia and temper the decline in demand from more mature importers such as Japan and South Korea. Both countries will have a strategic interest in ensuring that LNG is priced competitively and transparently for a whole range of important economic, security, and environmental reasons. China, India, and other South and Southeast Asian importers will see competitively priced LNG as a new opportunity to reduce coal use, particularly in the power sector, and meet goals for reducing both air pollution and carbon emissions. This expansion of the LNG market would be very good news for achieving the region’s environmental and energy security goals.
Finally, Cecilia Tam and Muhamad Izham Abd. Shukor from the Asia-Pacific Economic Cooperation (APEC) Energy Research Center consider one of the region’s most pressing issues for its efforts to achieve the goals outlined in the Paris climate accord: whether the current environment of lower energy prices risks slowing Asia’s progress toward a cleaner and lower-carbon energy mix. They argue that at present most APEC economies have aspirational or firm targets for energy efficiency and renewable energy, but the specific goals are still insufficient to meet targets for environmental sustainability and energy security. While near-term momentum on clean-energy transitions is likely to remain strong, the longer-term picture is more mixed, given concerns over cataclysmic air pollution and impacts on public health, especially if policymakers do not begin to take greater action now. This new era of lower energy prices will require governments to strengthen their regulations and policies to encourage consumers to make the right choices. If Asia is to meet its goal of doubling the share of renewable energy in the energy mix by 2030, countries need to introduce additional incentives for renewables and work more diligently to limit the inefficient use of fossil fuels. The good news is that developments in renewable energy technology are dramatically reducing costs and making wind and solar increasingly competitive in power generation, while more efficient end-use technologies are helping lower overall growth in energy demand. Accelerating the further development of energy technology will be critical to meeting environmental and security goals.
This group of essays provides a clear vision for how the new era of energy abundance is altering energy markets, with geopolitical implications for energy security in Asia and beyond. Shifting oil markets require Asian governments to bolster their regional and global energy cooperation efforts and prepare for potential new supply shocks in the not-too-distant future. This new environment has the potential to reduce the politicization of energy markets and relationships while intensifying pressure on Asia’s big oil importers to deepen their engagement with the Middle East. Lower LNG prices likewise could help reduce carbon emissions and air pollution as they facilitate wider use of natural gas throughout coal-intensive Asia. Finally, the advances in renewable energy technology, and the resulting lower costs, are likely to support the efforts in the region to strengthen energy and environmental policies and achieve more ambitious targets, even in an era of lower prices for fossil fuels.
NBR’s Energy Security Program owes its ongoing success to the efforts of many participants, partners, and collaborators. First and foremost, we are grateful for the sponsorship of the Asian Development Bank, Chevron, ConocoPhillips, ExxonMobil, the Korea Energy Economics Institute, and the Center for Energy Governance and Security at Hanyang University. Their generous support has enabled us to address some of the most critical energy security challenges facing the Asia-Pacific—and to do so in a comprehensive, integrated manner that brings together the region’s leading experts from the research, business, and policy communities. We are also grateful to our co-host of this year’s Energy Security Workshop, the Woodrow Wilson International Center for Scholars, and to Michael Kugelman, whose insights on South Asia contributed immensely to these critical discussions. NBR’s own Andy Nguyen also played a critical role in synthesizing this year’s final recommendations. We appreciate his tireless efforts in strengthening both our program agenda and the report’s final essays.
Next, we would like to extend our deep appreciation to all the current and former senior U.S. government representatives who participated in our 2016 program. Of these individuals, we would like to extend special thanks to Paula Gant, principal deputy assistant secretary of the Office of International Affairs at the U.S. Department of Energy, and Melanie Nakagawa, deputy assistant secretary for energy transformation in the Bureau of Energy Resources at the U.S. Department of State. Their in-depth remarks offered invaluable perspectives on the role of and need for U.S. leadership in an era of energy abundance, and we are grateful for their willingness to share their expertise.
Finally, we are deeply indebted to all our program authors and panelists. Many of them literally traveled across the country or around the world to join in these discussions, and we appreciate the time, effort, and critical eye that they lent to testing and debating the core findings and recommendations in the report. Ultimately, this year’s program was able to convene more than 150 senior stakeholders representing a wide range of perspectives, countries, and professional backgrounds. We hope that you find the results as immensely rewarding as we do.
Mikkal E. Herberg
Research Director of the Energy Security Program
The National Bureau of Asian Research
Senior Director of Trade, Economic, and Energy Affairs
The National Bureau of Asian Research