Introduction: Revolutionizing LNG and Natural Gas in the Indo-Pacific

The Trump administration’s new “free and open Indo-Pacific” strategy is an evolution and expansion of the Obama administration’s earlier “rebalance” of the United States’ strategic focus toward the Asia-Pacific. At its core, the strategy is a response to the expanding power and influence of China across the region as it rolls out its Belt and Road Initiative (BRI), which is focused on building energy infrastructure and transportation links across Southeast Asia, South Asia, and the Eurasian continent. The concept of the Indo-Pacific developed in the Trump administration’s 2017 National Security Strategy is an ambitious expansion of U.S. strategic and economic interests in the Asia-Pacific to a broader region running all the way from the Strait of Hormuz around to Northeast Asia and the Russian Far East.[1]

From one perspective, the free and open Indo-Pacific strategy is an effort to reshape the U.S. approach to economic statecraft to promote private-sector investment and financing in developing regional economies as a strong alternative to the state-directed approach of China. As Nadège Rolland and others have detailed extensively in their analyses for the National Bureau of Asian Research (NBR), China’s approach often has strings attached and subordinates the economic interests of recipient states to Beijing’s broader strategic and economic interests in an effort to create what some have dubbed an “Indo-Pacific with Chinese characteristics.”[2] In many ways the U.S. free and open Indo-Pacific strategy is also a mercantilist strategy, aimed at better integrating economic, trade, energy, and investment objectives in order to strengthen Western power and influence to counter China’s own deeply mercantilist approach to the region.

Along with important strategic and diplomatic dimensions, a third plank of the Trump administration’s Indo-Pacific strategy envisions a major expansion of trade, economic ties, and in particular energy infrastructure investment to counter BRI’s tidal wave of investment and financing. Energy is a key priority in this strategy. Asia’s demand for energy, and natural gas in particular, will continue to grow dramatically in line with national goals for the fuel to play an important role in bolstering energy security and meeting environmental priorities, especially for improving air quality. The Trump administration believes that large-scale exports of U.S. liquefied natural gas (LNG) and oil to Asia could help diversify the region’s energy mix, reduce reliance on imports from the Middle East, strengthen energy security, and help balance growing Chinese economic and diplomatic influence. The administration thus hopes to use energy as a central instrument in defending U.S. economic and diplomatic influence in the region.

Japan is a key partner and sees even more clearly than the United States the need to expand trade, infrastructure investment, and financing in order to match growing Chinese power and influence across the Indo-Pacific. The free and open Indo-Pacific strategy aligns with Japan’s traditional emphasis on supporting economic development as a central tool of diplomacy and soft power. Japan has been by far the largest provider of infrastructure and energy investment and financing in the region and the largest source of development assistance, especially in Southeast Asia. With strong financial and diplomatic support from the government, Japanese companies have been investing in large infrastructure and energy projects throughout Southeast Asia for decades. These parallel interests of the United States and Japan have been formalized in the recent signing of the Japan-U.S. Energy Partnership aimed at expanding new Western investment in energy and LNG infrastructure across the Indo-Pacific region.

The central economic and energy dimensions of the free and open Indo-Pacific strategy focus on what Japan has termed “quality infrastructure.” Japan was able to get endorsement of this concept at the G-20 finance ministers meeting in June 2019, which supported the “G-20 Principals for Quality Infrastructure Investment as our common strategic direction and high aspiration,” as well as in the latest G-20 communiqué in September 2019. The concept denotes projects that are more transparent, with a competitive bidding process, lower interest rates, and a mix of private and public financing that is sustainable in terms of debt loads and burdens. This approach is intended to contrast with BRI, which features opaque projects with little public scrutiny that are dominated by subsidized Chinese state companies and financed by Chinese state funding, often with high interest rates and leading to unsustainable debt burdens.

However, while the United States has begun to put the Indo-Pacific at the center of its foreign policy, the administration is still grappling with how to best develop and then ultimately deploy the necessary tools for implementing this vision, particularly the energy strategy. Among the key components now in place is the Better Utilization of Investments Leading to Development (BUILD) Act, which would more than double the capacity of the U.S. government to $60 billion to support overseas strategic private investment. Other government efforts, such as the administration’s Asia Enhancing Development and Growth through Energy (EDGE) initiative, focus on increasing U.S. LNG exports to the Indo-Pacific by promoting public-private partnerships, fostering relationships between U.S. and Asian businesses, and assisting partner governments with establishing market-based energy policies. But to date, several of the initiative’s envisioned constituencies—within both Asia and the United States—have raised questions and expressed their own uncertainties about what a robust and comprehensive execution of the initiative will look like, particularly given the many agencies involved that will need to wrestle with their capabilities and coordination. Thus, a natural question is whether the U.S. government can get its act together quickly enough to present any real challenge to China’s growing economic and infrastructure expansion in the Indo-Pacific.

Three other key challenges loom over the success of U.S. and Japanese efforts to promote growing U.S. LNG exports to and necessary infrastructure in the region. First, the ability of Asia’s gas markets to actually absorb the huge volume of new LNG supplies will in many countries depend greatly on reforming and opening up their domestic gas markets. Many gas markets are monopolized by state-owned enterprises, while others have introduced greater competition and open access to infrastructure. Although some Asian markets have moved toward greater deregulation and liberalization, potential reforms face significant barriers in the form of political opposition from powerful state enterprises and domestic vested interests, bureaucratic resistance, and potential domestic social backlash over increases in gas and electricity prices. There are enormous challenges to boosting gas demand, bringing gas infrastructure to scale, and effectively mobilizing financing, especially in Southeast Asia. How can stakeholders across the region work together to accelerate the pace of capacity building and market reform? While the Indo-Pacific strategy is designed to operationalize U.S. commitments to play a more direct and substantial role in strengthening regional energy security, its success will depend heavily on the pace of gas market reforms in Asia. What do the examples of Japan and South Korea suggest for the region? What are the tools and policies available to U.S. policymakers to promote a huge expansion in gas use?

A second key challenge is whether U.S. LNG will be competitive and affordable in developing countries. For many newly emerging markets, especially in Southeast Asia, the long-term affordability of LNG is highly uncertain. Regional policymakers are planning for the possibility that it may continue to be a premium-priced fuel, especially relative to cheap, abundant coal supplies where necessary infrastructure for coal-fired power is already in place or costs less to stand up. In some areas, wind and solar costs have fallen rapidly and are competitive with or cheaper than the cost of new natural gas. Is it reasonable to expect U.S. LNG to be both affordable and sustainable, and if so, under what conditions? If not, what are the implications for the United States’ Indo-Pacific energy strategy?

A third key challenge will be building on the successful template and foundation suggested by the Japan-U.S. Energy Partnership in ways that effectively integrate other regional partners into a strategy for energy and environmental security that spans the entire Indo-Pacific. As NBR previously found in a major study of the shale revolution’s implications for Asian energy security, joint U.S.-Japan leadership has (and will continue to play) an important role in strengthening regional approaches to bolstering energy security.[3] Yet to be truly successful, a region-wide energy strategy—and particularly one that envisions having LNG at its core—needs to fully engage a broad spectrum of major gas consumers and producers. This includes not only working with stakeholders in established markets such as South Korea, Singapore, and Australia but also finding ways to better engage with emerging market stakeholders in South and Southeast Asia—and doing so in ways that advance shared ambitions for more secure, open, and effective gas markets. Who are the natural and necessary partners of a successful Indo-Pacific energy security strategy, and how can we further deepen collaboration in ways that bring in a range of critical actors in government, the private sector, and civil society? And what specifically is the distinctive and desired enabling role of the U.S. government as a stakeholder in this process?

Given the important questions that remain about the actual implementation and potential for success of the energy dimension of the United States’ Indo-Pacific strategy, the theme of NBR’s 2019 Energy Security Program is “Revolutionizing LNG and Natural Gas in the Indo-Pacific.” For fifteen years this program has provided an assessment of a major development in Asian energy markets and geopolitics to assist policymakers in better understanding and responding to the implications for energy and environmental security in the region. The 2019 program focused on a range of critical issues, including how LNG and energy fit into the free and open Indo-Pacific strategy, whether the region’s emerging energy markets are likely to be able to absorb large new gas and LNG supplies, and the prospects for U.S. LNG to be affordable and sustainable in the face of competition from other energy supplies such as coal and renewables.

NBR commissioned essays by four scholars with expertise on these issues. The preliminary results were discussed at a workshop in Washington, D.C., on May 29, 2019, which NBR was pleased to once again co-host with the Woodrow Wilson International Center for Scholars. Participation in the meeting came from senior representatives from the U.S. government and foreign policymaking communities as well as leading industry and geopolitical experts. The authors have drawn on feedback they received at the workshop to strengthen their research and findings.

In the opening essay, Nikos Tsafos from the Center for Strategic and International Studies (CSIS) situates the role of LNG in U.S. foreign policy, discusses how this role has evolved under the Trump administration and the new Indo-Pacific strategy, and offers some sage advice about the limits of LNG as a diplomatic tool in the region. He argues that under the Trump administration LNG has been elevated to a key role in the U.S. geoeconomic strategy. This fits the administration’s preference for a transactional approach to foreign policy, desire to promote U.S. exports and private industry, and focus on competing directly with China’s BRI. More overtly political is the administration’s use of language promoting LNG exports to “punish bad actors,” no doubt referring to Russia’s use of energy and gas for geopolitical purposes. New policy tools such as the BUILD Act and Asia EDGE are likely to provide an important toolkit to help support LNG exports and facilitate investment in gas and LNG infrastructure. Yet it is also important to recognize that the private sector and markets will largely dictate how much LNG the United States will produce and where it will go. Finally, Tsafos cautions against overly politicizing LNG, which risks reducing confidence in the market and perversely may lead some countries to limit rather than expand their reliance on U.S. LNG.

In the second essay, Jeanne Choi from NBR considers Japan’s and South Korea’s experience with gas market reform to illustrate the imposing political challenges of reform and liberalization that many developing countries in the Indo-Pacific are facing as they pursue market reform. She focuses on critical issues in the liberalization process, including the privatization of state-owned companies, the dismantling of monopolistic market sectors, unbundling and open-access regimes, and the roles played by the national pipeline network, labor movements, and U.S. diplomatic pressure. Choi finds that overcoming resistance from existing monopolistic state-owned energy companies is a key hurdle to the necessary privatization of the industry, which is often opposed by labor unions and powerful political interest groups as well. The reform process also crucially requires sustained political commitment over many years. Public opinion can be critical in either supporting market reform or coalescing major opposition to further liberalization. Given the potential for higher energy prices, especially for electricity, to provoke opposition, policymakers must commit to the process or risk being derailed. Open-access regimes for infrastructure are likewise crucial to increasing market competition, bringing in new entrants, and dismantling inefficient and unreliable monopolistic market systems.

The third essay by Riley Smith from the US-ASEAN Business Council explains the challenges of gas market reform and the potential for growth in LNG use in Southeast Asia by examining the cases of Vietnam, Indonesia, and the Philippines. Three important factors in expanding LNG use are accelerating the buildout of natural gas infrastructure, incentivizing new exploration and development of domestic natural gas supplies, and building the political will to overcome resistance to market reforms. Smith finds that new floating LNG import terminals are key to scaling up gas demand by sharply reducing LNG import and operating costs. Mechanisms that improve currency convertibility for very large gas and infrastructure projects can enhance their attractiveness to investors. There is thus an urgent need for more standardized contractual frameworks to accelerate the necessary infrastructure buildout. As the United States proceeds to try to refine and implement the Asia EDGE initiative, a key pillar of its energy strategy, it should work with Southeast Asian countries to address these obstacles to gas market reform.

The fourth essay by Leslie Palti-Guzman from GasVista assesses the prospects for the competitiveness of U.S. LNG in developing Asian markets and the potential role of the Asia EDGE initiative. She argues that U.S. LNG has specific competitive advantages in these markets, but cautions that there are no guarantees. U.S. LNG will face intense competition from rival suppliers, such as Australia, Qatar, and Russia, that are closer geographically and can offer more attractive pricing. Accessing smaller emerging markets in South and Southeast Asia will be especially challenging for various reasons, including their poor credit ratings, lack of infrastructure, and relatively small, fragmented markets. Palti-Guzman suggests that the goal of Asia EDGE to spur greater private investment in gas infrastructure across the region is especially timely and could bring real results through tools like public-private partnerships, government guarantees, and flexibility of capital. The Asia EDGE initiative will be a critical component of the U.S. government’s push under the Indo-Pacific strategy to open new LNG demand centers in Asia through commercial advocacy and energy diplomacy. However, this initiative remains in its infancy, and the U.S. government will need to rapidly clarify its concrete plans for implementation and capacity building, with Palti-Guzman offering several potential paths forward here.

Collectively, these essays paint a much clearer and revealing portrait of the United States’ free and open Indo-Pacific energy strategy, its vision, its goals, its challenges, and its prospects for success, with respect to LNG in particular. But their analysis also suggests that there is much more work to be done if the Indo-Pacific strategy is to move from offering a broad vision for the region’s future to providing a specific and executable roadmap that can effectively engage critical stakeholders in government, the private sector, and civil society. Meanwhile, U.S. and Asian policymakers will also need to act while grappling with the inherent complexity and often uncertainty that continues to characterize Asian energy demand and market outlooks. As essays in this report note, there are serious challenges looming in trying to promote more open, efficient natural gas and LNG markets and build out gas infrastructure in the developing economies in the region.

Meanwhile, as delegates noted in the program’s workshop, the ability of U.S. LNG to compete over the longer term with other, often cheaper fuels such as coal and increasingly renewables will also be a challenge and require innovative LNG contracts, transportation technologies, and import infrastructure. Ultimately, for the Indo-Pacific strategy’s vision for energy security to be effectively executed, U.S., Japanese, and other like-minded government partners, along with industry and multilateral partners, will need to get their act together quickly to offer an alternative to China’s enormous tidal wave of capital and regional engagement. But doing so will also require decision-makers to make difficult choices, including when and how to expend limited resources and political capital. And even well-resourced efforts in individual countries may nonetheless struggle to be effective if not matched by extensive, multilateral coordination.

The 2019 program would not be possible without the tremendous support, guidance, and dedication of a number of organizations and individuals whose efforts are particularly worthy of recognition. First, we are grateful to Chevron and ConocoPhillips for their ongoing sponsorship of this initiative; their contributions make the program’s activities and research possible. Second, over the past several months we have received comments from numerous U.S. and Japanese government officials on how they are framing their own policy priorities on LNG in the Indo-Pacific, including Assistant Secretary of State Francis Fannon of the U.S. State Department; Takeshi Soda of Japan’s Ministry of Economy, Trade and Industry; and Jeff Phillips of the U.S. Trade and Development Agency. We were pleased to host these officials in our formal programming, in addition to meeting throughout the year with representatives of the U.S. Departments of Energy and State, Congress, and foreign governments to hear their perspectives. Behind the scenes, Ashley Johnson, Jeanne Choi, Audrey Mossberger, and Nicholas Hunnewell of NBR worked tirelessly to further strengthen the program and refine the policy discussions, as did Michael Kugelman and the team at the Wilson Center in support of the May workshop. This report is the product of their hard work, as well as the efforts of numerous others. We hope that you enjoy it as much as we enjoyed working on it.

Endnotes

[1] White House, National Security Strategy of the United States of America (Washington, D.C., December 2017), 45–47.

[2] Nadège Rolland, ed., “Securing the Belt and Road Initiative: China’s Evolving Military Engagement Along the Silk Roads,” NBR, NBR Special Report, no. 80, September 2019; and Rory Medcalf, “Indo-Pacific Visions: Giving Solidarity a Chance,” Asia Policy 14, no. 3 (2019): 85.

[3] Mikkal E. Herberg, “U.S., Japanese, and Asian Energy Security in a New Energy Era,” NBR, NBR Special Report, no. 51, April 2015.

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Mikkal E. Herberg is a Senior Advisor to the National Bureau of Asian Research and Research Director of NBR’s Energy Security Program. He is also a Senior Lecturer on international and Asian energy at the Graduate School of International Relations and Pacific Studies, University of California, San Diego.