Asia's Energy Security

Energy 339
Mikkal Herberg is Director of the Asian Energy Security Program at The National
Bureau of Asian Research. He wishes to thank Ashley J. Tellis and Michael Wills
for their helpful comments and review.
ENERGY
ASIAS ENERGY INSECURITY:
COOPERATION OR CONFLICT?
Mikkal E. Herberg
ABSTRACT
Asias mushrooming energy demand is driving growing dependence on
energy imports that is likely to accelerate over the next two decades. The
result is a deepening sense of energy insecurity that promises to have
important long-term geo-political implications for the region and for the
United States. Asian powers are responding more often with energy na-
tionalism than with energy cooperation as they reach out to secure fu-
ture supplies. The risks of terrorist attacks on vital energy infrastructure
are rising, fueling fears of supply disruptions, and political instability. The
United States has major strategic stakes in how Asia responds to its en-
ergy insecurity and its impact on the region and global energy geo-poli-
tics. U.S. policymakers need to recognize the growing links between Asias
energy insecurity and U.S. geo-political and energy interests, and boost
efforts to slow demand growth and encourage regional energy coopera-
tion and markets over energy competition and nationalism.
340 Strategic Asia 200405
Introduction
A wide range of indicators suggest that dramatic developments are taking
place in Asian energy markets. At the center is Asias mushrooming de-
mand for oil, natural gas, and electricity to fuel its dynamic economic growth,
with most of this growth concentrated in developing Asia. At the same
time, Asias limited energy resource base and slow energy industry reform
have hobbled the regions ability to mobilize the supplies needed to meet
booming demand. As result, dependence on energy imports is rising rap-
idly, particularly for oil, as governments scramble to meet booming con-
sumption and try to prevent energy from becoming a critical bottleneck
undermining economic growth and social stability. Looking forward, there
is every indication that Asias import dependence will only accelerate over
the next two decades.
The result is a profound and deepening sense of energy insecurity in
Asia that promises to have important long-term geo-political implications
for the region and for the United States. In the case of oil, most of Asias
imports inevitably come from politically turbulent and unstable regions such
as the Persian Gulf, and are transported along potentially vulnerable sea-
lanes and complex pipeline routes crossing several national borders. Al-
though Asia has traditionally been largely self-sufficient in natural gas,
much of its future supply is also likely to come from the Persian Gulf, Russia,
and Central Asia. Finally, the need to satisfy relentlessly rising electricity
demandin the face of oil and natural gas supply constraintsis forcing
heavy reliance on coal and growing reliance on nuclear power, aggravat-
ing future environmental and nuclear proliferation risks.
For Asia, energy is becoming a matter of high politics of national
security and no longer just the low politics of domestic energy policy.
Governments across the region are deciding that energy security is be-
coming too important to be left entirely to the markets, as their economic
prosperity increasingly is exposed to global supply disruptions and insta-
bility in energy exporting regions. Key Asian powers are responding to
their growing sense of insecurity with a broad range of strategies to guar-
antee greater supply and price stability. These efforts are growing in scale
and scope, and they range from largely cooperative and market-oriented
strategies to those that are deeply neo-mercantilist and competitive. These
countries are all accelerating their efforts to gain more secure national control
of overseas oil and gas supplies by taking equity stakes in overseas oil
and gas fields, promoting development of new oil and gas pipelines to Asia,
developing broader trade and energy ties, and following up with diplomatic
ties to cement relations with the major oil and gas exporting countries.
Energy 341
The events of September 11, 2001, the wars in Afghanistan and Iraq,
and the war on terrorism have heightened Asias sense of insecurity and
vulnerability. Asia is increasingly worried about the risks of terrorist at-
tacks on energy infrastructure and in key maritime transit points like the
Strait of Malacca.
1
More broadly, concerns are growing in Asia that the
aggressive U.S. response to the September 11 attacks risks further desta-
bilizing the Persian Gulf and Central Asia and, consequently, increasing
the risk of supply disruptions, worsening Islamic extremism, and generat-
ing greater political instability. China has added concerns that arise from
its view of the United States as a long-term strategic competitor. The deeper
extension of U.S. military power and influence in Central Asia and the Per-
sian Gulf aggravates Chinas existing fears of U.S. hegemony and increases
the sense of vulnerability from U.S. control over oil and gas flows to China.
As the traditional guarantor of stability in Asia, the United States has
a major stake in how Asia addresses its energy insecurity and the result-
ing impacts on regional and global energy geo-politics. Energy needs will
propel China and other countries in Asia to become major players in the
worlds oil and gas exporting regions and energy geo-politics. This is likely
to fuel a much more complex web of diplomatic ties and alliances that could
either complicate or complement the United States own energy and secu-
rity interests. For example, Asias rapidly growing involvement in helping
Iran develop its energy sector is already adding to U.S. frustrations in its
efforts to isolate Iran. The same is true in Sudan. Moreover, Asias energy
needs are inexorably drawing Russia back into Asia as a key strategic and
commercial player. The long-term implications for U.S. interests in Asia and
future U.S.-Russian relations are only beginning to emerge.
Second, the growing potential for increasing mercantilist competition
in the Asia-Pacific region over control of energy supplies and transport
routes risks fueling tensions and conflict in a region where the lack of in-
stitutions to manage conflict is already an underlying structural problem.
This is particularly a concern as the region faces a sensitive and danger-
ous transition to accommodate Chinas rising power over the next several
decades.
2
There are a growing number of recent examples where energy is
becoming a significant source of tension among Asias major powers. Nev-
ertheless, competition is not an inherent outcome. Some recent develop-
ments and trends suggest that energy needs may have the potential to
help reinforce regional cooperation.
Whether mercantilist or market impulses dominate, energy strategies
in Asia will be critically important to U.S. interests. It is also important for
U.S. policymakers to understand the linkages between Asias energy inse-
curity and a much broader range of important U.S. geo-political, energy,
and environmental interests. The goal of this chapter is to analyze Asias
energy security dilemma and its impact on long-term U.S. geo-political and
energy interests in the post-September 11 era.
3
The discussion is divided into four sections. First will be a survey of
Asias broad regional energy situation and the central elements of its grow-
ing energy insecurity. Second will be a review of the particular circum-
stances and concerns of each of the major Asian importers, along with the
prospects for Asias current energy exporters to meet future regional needs.
Third, the analysis will focus on the energy security strategies that China,
Japan, South Korea, and India are pursuing and assess prospects for the
balance of future cooperative or competitive efforts. The conclusion will
suggest a range of potential implications for the United States in terms of
the possible impact on Asias geo-political future and U.S. strategic inter-
ests in key energy exporting regions of the world.
Asias Energy Fundamentals
Energy security concerns are not new to Asia. These concerns have been
around since at least the 1930s when anxieties over access to Southeast
Asian oil supplies became a key reason for Japanese expansionism. Later,
the first oil crisis of 197374 battered the Japanese economy and provoked
major new efforts by Japan to reduce its vulnerability to oil supply disrup-
tions. However, the scale and scope of the concerns have broadened across
the region since the early 1980s as the result of Asias two decades of
booming economic growth and energy intensive economic development.
4
Energy demand is broadly linked to economic growth, especially in
developing economies, but it is also strongly influenced by population
growth, urbanization, and industrialization. In developing Asia, exclud-
ing the mature, slower growing industrial countries of Asia (such as Japan,
Australia, and New Zealand), dynamic economic growth, combined with
all these other factors, has driven a period of exceptionally strong energy
demand growth in the past two decades. In developing Asia, total primary
energy demand grew at three times the world rate over the past 20 years
while electricity demand grew at two and one-half times the world aver-
age.
5
Even including the more mature energy markets of industrial Asia,
total primary energy demand rose 114 percent from 19802001 compared
to 42 percent for the world.
6
Table 1 shows Asias high demand growth
rates across the fuel spectrum compared with global growth rates.
Oil
The energy demand boom has been spread across the range of primary
fuels, but the implications for the regions energy security vary significantly
Energy 343
across the spectrum, depending on resource availability, transport and in-
frastructure costs, and government policies.
Asias oil dilemma is the most acute. In broad terms, oil makes up about
40 percent of Asias energy consumption, about the same share as the rest
of the world. Asias oil demand doubled between 1985 and 2003, while oil
imports tripled from 4.5 to 14.7 million barrels per day (MMBD), driven by
dynamic transportation and industrial growth.
7
By 2002 imported oil ac-
counted for two-thirds of Asias total oil consumption, with the other third
made up of oil produced and consumed within the region. By 2002 the
physical volume of imports substantially exceeded the import volume of
either the United States or the European Union. This surge reflects the
relative stagnation of regional oil production combined with strong domestic
oil demand growth among Asias traditional oil exporters, which absorbed
a growing share of previously exported oil. The most dramatic shift has
been in China, which exported nearly 0.75 MMBD in 1985, mainly to Ja-
pan, to nearly 2 MMBD by 2002.
8
By 2003 four of the worlds top nine oil
importing countries were in Asia (Japan, China, South Korea, and India).
Of equal importance is the origin of Asias imported oil, of which two-thirds,
including more than one-half of Chinas, now come from the unstable
Middle East. Only about one-quarter of U.S. and EU oil imports come from
the Middle East.
9
Looking ahead, Asias oil import dependence is likely to become even
more acute. The U.S. Department of Energy forecasts that Asias oil im-
ports will rise from 13 to 31 MMBD by 2025 (see Table 2).
10
To put this in
perspective, Asias 18 MMBD increase exceeds todays total oil exports
from the entire OPEC Persian Gulf region, including Saudi Arabia, Iran, Iraq,
Kuwait, the United Arab Emirates (UAE), and Qatar. By 2025 it is likely
that 80 percent of Asias total oil needs will be imported, with 80 percent of
imports likely coming from the Persian Gulf.
11
Table 1. Asian Energy Demand Growth by Fuel, 19802002
Asia World
1980 1990 2002 Annual Avg. Annual Avg.
Primary energy (MTOE) 1,178 1,828 2,718 5.9% 1.9%
Oil (MMBD) 10,568 13,773 21,399 4.7% 1.0%
Gas (bcf/d) 7 16 32 16.5% 3.4%
Coal (MTOE) 511 867 1,184 6.0% 1.5%
Electricity (TWH) ... 2,472 4,658 5.4% 2.5%*
Nuclear (MTOE) 22 65 118 19.8% 12.7%
Hydro (MTOE) 65 96 128 4.4% 2.4%
Source: British Petroleum (BP); *19902002.
Natural Gas
Asias natural gas situation is less alarming, but some of the same trends
toward greater import dependence are at work over the long-term. Natural
gas is relatively under-utilized in Asia, accounting for only about 11 per-
cent of energy consumption, compared to 23 percent of consumption glo-
bally. This has been due in part to the long transport distances and to
relatively low gas penetration in India and China. Nevertheless, gas con-
sumption in Asia has been growing at a torrid pace over the past two
decades at nearly five times the global growth rate, reflecting booming elec-
tricity demand, the rapid development of new gas supplies in the region,
and marked government policy shifts in favor of gas for environmental and
energy diversification reasons. Asia as a region has historically been largely
self-sufficient in gas, but this masks stark variations across the region.
Japan, South Korea, and Taiwan are virtually 100 percent import-depen-
dent for gas, with most of their needs met through large-scale liquefied
natural gas (LNG) exports from Indonesia, Malaysia, and Australia.
Asias natural gas demand is expected to continue growing rapidly
over the next two decades to fuel power generation, reduce air pollution,
and diversify the regions energy slate. Despite expected growing supply
development within the region, an increasing share of gas will need to be
imported from outside and from longer distances. The International Energy
Agency (IEA) forecasts that Asias gas demand will roughly triple between
2000 and 2030, while gas imports will more than double.
12
In 2000 gas im-
ports from outside Asia made up roughly 25 percent of imports; by 2030
the IEA forecasts that 65 percent of Asias gas imports will come from
outside the region.
13
Japan, South Korea, and Taiwan will import a growing
share from the Persian Gulf and Russia while China and India will join the
importing club during the next several years.
Electricity, Coal, and Nuclear Power
Asias insecurity over growing dependence on imported oil and natural
gas affects its options for meeting rapidly rising electricity needs. Electric-
ity demand has been rising in Asia as a function of rapid economic growth,
urbanization, and rising living standards. Total Asian demand rose 223 per-
cent from 1980 to 2001, compared with 88 percent globally.
14
Among the
Table 2. AsiaOil Demand and Supply (MMBD)
2001 2010 2020 2025
Demand 21.2 27.2 34.8 39.1
Supply 8.0 8.6 8.5 8.3
Imports 13.2 18.6 26.3 30.8
Source: Department of Energy International Energy Outlook, 2004.
Energy 345
developing countries of Asia, electricity demand grew an even more re-
markable 373 percent over that period (an annual rate of 7.7 percent), mean-
ing that electricity demand grew faster than the GDP growth of 6.8 percent,
which is highly unusual over such a long period of time.
15
Future demand
will grow more slowly, but still is likely to more than double by 2025.
These high growth rates for electricity consumption have forced a
scramble by governments to find the next-generation fuels and build power
plants fast enough to avoid blackouts. Given concerns about rising de-
pendence on oil imports, high infrastructure costs, and limited availability
of gas, there have been few good choices, resulting in strong pressure to
rely heavily on coal-fired generation and nuclear power. Inevitably, this
will aggravate already severe regional environmental problems and mount-
ing nuclear proliferation risks. Relatively cheap and regionally abundant
coal accounts for 40 percent of Asias energy consumption (compared to
24 percent globally), driven by China and India, where coal accounts for
roughly two-thirds and one-half of total energy needs, respectively, and
for the majority of total electricity generation. Asias heavy coal use ap-
pears likely to continue. The U.S. Department of Energy forecasts that
Asias coal consumption will nearly double by 2025 and will still account
for 38 percent of the regions energy consumption. Asia alonemainly
China and Indiais expected to account for 80 percent of the entire world
increase in coal demand between 2001 and 2025 (see Figure 1).
Many countries in the region are pursuing programs to accelerate
nuclear power development as rapidly as possible, and Asia remains the
only growth region globally for nuclear fuel (see Figure 2). Major expan-
sions are planned in China, Japan, South Korea, India, Pakistan, and Tai-
wan, and recently even Indonesia, Vietnam, Burma, Thailand, and Malay-
sia have expressed interest in developing nuclear power plants. This makes
Asia a critical region for concerns over nuclear proliferation, hazardous
waste disposal, and the risk of accidents. Asia is also likely to rapidly boost
2 0 2 5
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Re s t o f W o rld As i a
Rest of World Asia
Source: Department of Energy, International Energy Outlook, 2004
2,000
1,600
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i
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i
o
n
s

M
e
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r
i
c

T
o
n
s
800
1,200
400
0
125
493
185
887
279
1,320
469
1,842
Figure 1. Projected Growth in Coal Consumption After 2001
2010 2015 2020 2025
hydroelectric power and renewable energy sources over the next two de-
cades, but even by 2025, hydro and renewable sources are only expected
to account for a fraction of Asias energy and electricity demand.
Is Asias Energy Dilemma Inevitable?
The previous analysis suggests that energy security will continue to climb
on the national security agendas of the key powers of the region as con-
tinuing strong economic and industrial growth make meeting energy needs
a growing challenge. The sense of vulnerability is most acute in terms of
oil, but in the longer run, natural gas also will need to travel long distances
from and through turbulent areas of the world, making transport routes
and maritime security concerns increasingly important. And the inexorable
pressure to expand the use of coal and boost nuclear capacity poses added
risks of environmental degradation and nuclear proliferation.
But is this inevitable? What could change this outlook significantly?
Are there ways that Asia might be able to avoid this looming energy defi-
cit? While virtually every major forecast by public and private sources
broadly projects a similar energy dilemma for Asia, there are two catego-
ries of discontinuities that could fundamentally alter Asias future and re-
duce the scope of Asias energy security challengethe possibility that
energy demand in Asia could grow much more slowly than expected.
One set of possibilities revolves around the potential for much lower
long-term economic growth in Asia than currently expected, which would
significantly reduce energy consumption and demand. What could cause
such a serious discontinuity? One possibility would be the intervention of
a major geo-political crisis that has a decisive impact on the regions long-
term growth. This could include a major war on the Korean Peninsula, a
severe and lengthy China-Taiwan-U.S. confrontation that damages Chinas
long-term growth prospects, a serious financial failure in China or Japan,
or a prolonged political crisis in China.
Source: Department of Energy, International Energy Outlook, 2004
Char t 2. Project ed Nuclear Power Product ion
(Gi gawatts )
121 119
106
91
66
26 4
282
30 1 3 01
287
0
50
100
150
200
250
300
350
20 01 2010 2015 202 0 2025
Asi a Rest of W orld
G
i
g
a
w
a
t
t
s
Figure 2. Projected Nuclear Power Production
350
300
200
150
100
50
0
2001 2010 2015 2020 2025
287
301 301
119
66
91
264
121
282
106
250
Rest of World Asia
Energy 347
A second set of discontinuities revolves around the potential for a
major, trend-altering slowdown in energy demand through sharp techno-
logical or policy shifts. For example, the rapid development of highly effi-
cient transportation or fuel technology and its diffusion throughout Asias
developing countries, particularly China, could deeply affect expectations
for oil demand growth and alter the balance for other fuel needs as well.
Alternatively, a major environmental disaster could lead to a fundamental
shift in energy policies across the region, with aggressive regulatory limits
on energy consumption, in much the same way the Three-Mile Island and
Chernobyl nuclear accidents did to nuclear energy. A third possibility would
be the development of new aggressive energy demand management poli-
cies in the region, similar to Japans policies after the first two oil shocks,
which resulted in huge efficiency gains and sharply lower per-capita en-
ergy consumption. A fourth possibility would be a highly energy supply-
constrained world that would usher in an era of significantly higher world
energy and oil prices, providing the incentives for massive efficiency gains
in Asia as well as globally.
Historically, many energy forecasts have overestimated future demand
growth. However, it is difficult to alter Asias outlook for rapidly rising
energy demand without assuming a very major discontinuity in Asias eco-
nomic growth or a calamitous geo-political event. The range of major inter-
national forecasts varies by specific numbers but all come to the same set
of conclusions: Asia will likely record a huge imbalance between regional
energy supplies and booming demand that will exacerbate the regions sense
of strategic and economic insecurity. U.S. policy planning for the future
must take this into account.
Energy Security and the Key Asian Powers
Asias energy dilemma reflects a set of broad, consistent trends, but con-
ditions and circumstances vary in each of the major countries depending
on resources, energy policies, and historical factors. These individual cir-
cumstances and policy frameworks largely shape the evolution of the en-
ergy security strategies of each of the major countries in the region. The
consistent concerns of all the major powers is that energy risks becoming
a critical bottleneck to economic growth and social stability. In each coun-
try, a progressively greater share of its oil and gas needs will have to travel
long distances by tanker and pipeline from distant supply regions, expos-
ing economic prosperity to the risks of supply disruptions and instability
in exporting regions.
The balance that the key powers in the region choose between coop-
erative and competitive strategies, and how these strategies intersect with
each another and with U.S. objectives in the region, will determine whether
energy becomes ultimately a stabilizing or destabilizing force in Asias
outlook. These strategies will determine whether energy aggravates exist-
ing and looming rivalries or whether it reinforces impulses toward greater
regional cooperation and reliance on market solutions. They will also de-
termine Asias inevitably growing role in the Middle East, Central Asia,
and Russia, and impact on U.S. interests in those regions.
This section focuses on China, Japan, South Korea, and India because
they represent the bulk of Asias current and future energy needs, and also
because they will be major actors in the regions future geo-political evo-
lution. While the countries of the Association of Southeast Asian Nations
(ASEAN) will also become significant importers, they will play a much
smaller role in how energy issues affect Asias geo-political future.
China
China is the second-largest energy consumer in the world after the United
States and has traditionally been largely self-sufficient in energy supplies,
a legacy from the autarkic Maoist era of the 1950s and 1960s. Large do-
mestic supplies of coal have dominated domestic energy use, and coal
continues to account for two-thirds of Chinas overall consumption. But
strong economic growth since the early 1980s has fueled oil demand, and
the governments decision to expand the use of natural gas promises to
boost future gas consumption. These developments will increase Chinas
future import dependence and spur energy security concerns.
16
China has been Asias largest oil producer since the mid-1960s, in re-
cent years producing well over 3 MMBD. Most production has been on-
shore, dominated by several large northeastern fields, mainly at Daqing,
Liaohe, and Shengli. Production rose strongly from the late 1960s to the
early 1980s with the development of these fields, and by the mid-1980s,
China was a net oil exporter, mainly to Japan. However, oil demand accel-
erated during the 1980s and early 1990s while oil production lagged, as the
large traditional fields matured and gradually went into decline. Demand
doubled between 1984 and 1995 from 1.7 to 3.4 MMBD and has continued
to grow strongly since, rising to nearly 6 MMBD by early 2004. China
became a net importer in 1993, and by 2003 it surpassed Japan to become
the worlds second-largest oil consumer behind the United States and the
fifth-largest importer. China now imports roughly one-third of its oil.
Chinas leadership has responded to this historic shift with both vig-
orous domestic reforms and aggressive global energy security policies. Ef-
forts are under way to maintain oil production in the traditional northeast-
ern fields while boosting production in western China, where prospects
Energy 349
for growing production are betterthe so-called stabilize the East, de-
velop the West policy.
17
Offshore oil development also has been a high
priority in the South and East China Seas, although with relatively modest
results. Despite a great deal of foreign investment in oil exploration off-
shore during the 1980s and 1990s, the offshore generally has yielded very
disappointing results. The domestic oil industry also has been repeatedly
restructured to try to boost competition and efficiency, and oil pricing has
been brought more closely in line with global and regional oil markets.
Nevertheless, given Chinas limited resource prospects and high pro-
duction costs, domestic oil production is unlikely to rise significantly in
the foreseeable future. At the same time, there is a consensus among en-
ergy analysts and forecasting agencies that oil demand, and therefore im-
ports, are very likely to continue growing relentlessly. The IEA forecasts
that Chinas oil imports will rise five-fold by 2030, from slightly under 2
MMBD in 2002 to 10 MMBD, when imports will account for 80 percent of
Chinas total oil needs.
18
The DOEs Energy Information Administration;
the Asia-Pacific Energy Research Centre (an arm of the Asia-Pacific Eco-
nomic Cooperation (APEC) forum); and the East-West Center Energy Pro-
gram have also come to very similar conclusions.
19
Chinas leadership now
faces the long-term realization that oil import dependence is unavoidable.
Moreover, as in the rest of Asia, China will become heavily dependent on
the Persian Gulf for future supplies, and its oil will increasingly have to
transit a series of vulnerable maritime choke points. The East-West Center
forecasts that by 2015, 70 percent of Chinas oil imports will come from the
Middle East.
20
Other significant shares of Chinas oil imports will come from
Russia by pipeline and rail, from Central Asia by pipeline, and from Africa.
Government policies aimed at substantially increasing the use of natural
gas, while indispensable in environmental terms, promise to accentuate
Chinas import dependence and long-term energy security concerns. China
presently uses very little natural gas, accounting for only 3 percent of over-
all energy consumption, all of it domestically produced. However, the gov-
ernment has embarked on an aggressive policy to increase gas use to help
replace coal for energy generation, diversify overall energy use, and pro-
vide cleaner-burning fuel for environmental needs. Current plans call for
gas to make up 8 percent of total energy demand by 2010.
21
In order to boost gas use, the government is accelerating domestic
natural gas exploration and development and expanding the national pipe-
line system to transport more gas from fields in north, central, and western
China to the major cities around the east coast. A major 2,500-mile west-
east pipeline is being built to move natural gas from the sparsely popu-
lated Xinjiang Uyghur Autonomous Region to Shanghai, and is scheduled
to begin operation in late 2004. The government is also working to develop
gas markets by creating more effective regulatory structures and increas-
ing flexibility in the gas pricing system.
Over the long run, although gas is an important element of Chinas
overall energy and environmental needs, it also will add to energy security
concerns. China does have significant domestic gas reserves and recent
exploration has been quite successful, but beyond 2010 demand is likely
to outrun domestic production, and a growing share of gas needs will have
to be met through imports. The DOE forecasts that imports will account
for 40 percent of Chinas gas needs by 2025.
22
Imported gas supplies will
be needed both in the form of LNG and via long-distance pipeline. Signifi-
cant LNG supplies will be available in the Pacific region from Australia,
Indonesia, Malaysia, Brunei, and East Timor, but China will also need to
have a significant portion of LNG needs supplied from Russias Sakhalin
Island projects, as well as a high volume from the Persian Gulf from huge
projects in Qatar, Iran, Oman, and probably Yemen. China is also likely to
import gas via pipeline from Russias East Siberian Irkutsk region, which
appears to have large gas reserves and where a large regional gas pipeline
scheme is being planned. Consequently, a significant portion of LNG will
have to be transported largely from the same volatile regions as oil im-
ports, namely the Persian Gulf and Russia.
While Chinas natural gas use will grow, rising electricity demand will
also force continued growth in coal consumption as well as an expansion
of nuclear and hydroelectricity production. China is the largest producer
and consumer of coal in the world, and it still makes up roughly two-thirds
of Chinas total energy use. Driven by relentlessly rising electricity demand,
Chinas coal consumption is expected to double over the 200125 period.
23
Consequently, China is also expected to account for one-quarter of the
worlds CO
2
emissions over that period. Although China is presently a net
coal exporter, it may become a net importer of coal as early as 2015.
24
Electricity needs also are motivating Chinas future nuclear power de-
velopment. China has the largest planned increase in nuclear power over
the next two decades, with plans to add from 24 to 32 nuclear plants by
2020a quadrupling of current capacity.
25
China is currently the largest
purchaser of Russias nuclear power-related equipment. Electricity demand
will also drive strong hydroelectric development although ultimately this
can only meet a small fraction of Chinas electricity needs.
Chinas Energy Security Strategy
Energy security has become a central concern for Beijing, and the thrust
to secure future energy supplies has taken on great urgency. Import de-
Energy 351
pendence and vulnerability to global oil supply crises have acted as a
catalyst to the leadership, which fears that energy shortages and volatile
world energy prices could become serious impediments to economic growth
and, by implication, threats to social stability.
26
China has probably become the most aggressive of the Asian powers
in securing its future energy supplies. Chinas strategy has become in-
creasingly coherent and wide-ranging over the past decade and is grow-
ing in reach and sophistication. It is built on relatively tight coordination
between state geo-political interests and energy interests. For Chinas lead-
ers, energy security clearly is too important to be left to the markets, and
so far its approach has been decidedly mercantilist and competitive.
27
The rapid transition to oil import dependence and growing longer-term
dependence both abroad and at home on imported gas has acted as a
catalyst to the Chinese leadership. Globally the program has been dubbed
the Going Out strategy, and is based on three major concerns. First is
the fear that sudden global oil supply disruptions could trigger energy
shortages and price spikes. Second, China faces a growing vulnerability
for the majority of its oil needs on tanker flows from the unstable Persian
Gulf and other potentially problematic exporting regions such as Central
Asia and Africa. Third, China has felt increasingly threatened by U.S. stra-
tegic dominance in the Persian Gulf and other key oil-exporting regions,
as well as U.S. control of critical transportation routes that enable the United
States to deny vital oil supplies to China in the event of a confrontation,
particularly over Taiwan. These concerns have been further aggravated
by deeper extension of U.S. power into the Persian Gulf and Central Asia
from the global war on terrorism.
China has pursued its energy security on a wide range of fronts. First,
it has sought to strengthen its supply relationships in key areas, such as
the Persian Gulf, while diversifying the geographic distribution of its crude
oil suppliers and transportation routes. For example, the Chinese state oil
companies, CNPC and Sinopec, have broadened their crude sources by
increasing imports from West Africa and even Latin America. In the Per-
sian Gulf, the Chinese have rapidly expanded their role in various phases
of Irans oil industry while boosting long-term crude supply contracts with
Saudi Arabia, Oman, and Yemen.
28
In the long run, China is seeking to
increase pipeline supplies from Russias East Siberia and western
Kazakhstan through long-distance pipeline projects, which would have the
added advantage of reducing vulnerability to disruptions in tanker flows
from the Persian Gulf and Africa.
29
Reflecting some of the regional impact
of this drive, China has become deeply embroiled in a bitter competitive
dispute with Japan over the route of a proposed oil pipeline from the
Angarsk region of East Siberia via the Daqing oil region of northeastern
China.
30
Japan appears to have seized the inside track on the deal by offer-
ing a huge financing package to re-route the pipeline to the Pacific Coast,
touching off a nasty diplomatic fight between China and Japan.
Second, state oil companies CNPC, Sinopec, and CNOOC have been
aggressively buying equity stakes in many existing or prospective oil fields
around the world. In the mid-1990s China scrambled to buy stakes in a
mixed bag of fields and countries, including Kazakhstan, Sudan, Venezu-
ela, Iraq, and Peru. Inexperience led to gross over-payments in some cases,
but buying has recently become more selective and competitive. CNPC was
the first foreign company to sign a large field development contract in Iraq
in 1997, contingent on the lifting of the UN sanctions. CNPC is now trying
to revive the deal with the new interim Iraqi government. China has estab-
lished a very strong position in its largest foreign operation, Sudan, in-
cluding oil production, exploration, pipelines, refineries, and port construc-
tion, and there are reports that 4,000 Chinese troops are stationed in Sudan
to protect oil production facilities.
31
China has also acquired a growing stake
in oil fields in western Kazakhstan in order to build a base of production
for shipment to China in a possible future Kazakhstan-China pipeline. Other
small stakes have been acquired in the Caspian Sea area in Azerbaijan and
Turkmenistan. Chinese energy leaders are focusing on broadening their
equity stakes into North Africa, Southeast Asia, (especially Indonesia), and
Latin America. Another element of Chinas energy equity strategy is to target
countries subject to unilateral U.S. sanctions. This tactic improves the
competitive landscape and offers China greater opportunities, but also
works to undermine U.S. sanctions policies in Iran, Iraq, Sudan, and Burma.
32
Current estimates reveal that the three Chinese companies have managed
to establish control over about 300 thousand barrels per day (MBD) of
crude production and could control up to 600 MBD by 2005.
33
China has
also pursued a similar equity strategy regarding natural gas imports. As
the competitive price for landing large, long-term contracts to supply LNG
to China, CNOOC has required LNG suppliers to sell CNOOC an equity
ownership interest in the upstream natural gas field and liquefaction
project. It has done so in both its initial LNG contracts with Australias
Northwest Shelf consortium (to supply a Guangdong terminal beginning
in 200607) and BPs Indonesian Tangguh project (to supply a new Fujian
terminal in 200708).
The third leg of Chinas strategy involves extensive cross-investment
and commercial ties between China and major exporting countries in order
to cement strong long-term ties. Chinas state oil companies, with related
construction and oil services companies, have aggressively bid for oilfield
Energy 353
development contracts, pipeline contracts, and refinery projects in Iran,
Sudan, Kazakhstan, Kuwait, and a growing list of other countries. Con-
versely, the Chinese government and oil companies have invited the state
oil companies in exporting countries to invest in downstream oil and pet-
rochemical projects in China. For example, China is close to finalizing a
large refining investment by ARAMCO, the Saudi national oil company, in
the province of Fujian, which would be supplied with crude oil by
ARAMCO and upgraded with cooperation from ExxonMobil.
The fourth leg of the strategy involves Beijings active oil and gas
diplomacy, strengthening oil supply contracts, equity stakes, and cross-
investments with deeper and broader diplomatic and trade ties.
34
For ex-
ample, President Jiang Zemin made an unprecedented state visit to Saudi
Arabia in 1999 proclaiming a strategic energy partnership between the
two countries. In 2001 Jiang traveled to Moscow in a major visit to cement
broadening energy, trade, and military ties. Another senior-level visit to
Iran also helped to cement stronger diplomatic and energy ties. China has
pursued a diplomatic angle to its LNG needs, with extensive state involve-
ment in contracts with Australia and Indonesia. Chinas leadership sees
the development of broader diplomatic and trade ties and alliances as a
key element in securing its access to future oil and gas supplies. This also
includes military sales and cooperation, sales of nuclear equipment, and
other potentially problematic trade ties.
A fifth strand of the strategy has been Chinas continuing active pur-
suit of its territorial claims in the surrounding maritime region, both to as-
sert sovereignty generally but also to claim control over potential oil and
gas resources in these areas. China has repeatedly asserted its territorial
interests in disputes over control of exploration and licensing blocks with
Vietnam, Indonesia, and Japan over the past decade. Increasing Chinese
military and fishing activity around the South China Sea in the Spratley
and Paracel Islands is intertwined with these energy interests. China also
continues to claim sovereignty over the Senkaku/Diaoyu Islands in the East
China Sea against Japanese claims. While China has no blue water na-
val capability to militarily secure the area in the face of U.S. naval supremacy
in the region, it continues to find ways to affirm its rights in the area.
Finally, China has recently decided to follow the example of the indus-
trialized countries and neighbors Japan and South Korea in beginning
construction in 2004 of a strategic petroleum reserve.
35
Chinas willingness to promote cooperative regional solutions to Asias
energy security concerns has been very limited. Beijing has been involved
in discussions with Russia and South Korea on proposals to build a large
regional natural gas pipeline from East Siberia, southeast through China,
and across the Yellow Sea to South Korea to link Russian gas supplies to
both markets. It also has been involved as a member of the APEC forum in
recent discussions and proposals to improve Asias energy security.
In sum, Chinas energy security strategy is wide-ranging and increas-
ingly sophisticated. It is strongly statist and mercantilist, built on a com-
mon vision among senior government policymakers and Chinas state oil
companies, and it is increasingly linked to broader diplomatic relations and
alliances. Through its search for energy security China also is on the way
to becoming a major geo-political player in the Persian Gulf, Central Asia,
and Russia, with a growing capability to complement or complicate U.S.
interests in these regions.
Japan
Energy supplies and energy security have been a major concern of the
Japanese government since the first and second oil shocks of the 1970s.
The Japanese government has worked ceaselessly since then to diversify
Japans energy sources, promote domestic energy efficiency and conser-
vation, and secure supplies abroad.
36
While it has succeeded in many ways,
Japan remains deeply vulnerable to global oil or gas supply disruptions,
and energy security remains a key element of the national security agenda.
37
At the root of Japans dilemma is the lack of domestic energy resources.
Japan has virtually no supplies of conventional oil or gas, and its coal
resources are insignificant. Consequently, the country currently imports
80 percent of its total energy needs. Domestically produced energy sup-
plies are mainly nuclear electricity generation, which now accounts for 15
percent of total energy supplies, with another five percent made up mostly
of hydroelectric and a tiny share of renewable resources. Therefore, Japans
policy choices have focused on improving the efficiency of energy use
and diversifying its portfolio of fuels and sources. In this it has been rea-
sonably successful. First, Japan has led the industrial world in improving
efficiency in energy use and has among the lowest levels of energy inten-
sity of any OECD country.
38
In terms of oil, Japan has sharply reduced the
rate of growth in oil demand over the past 30 years and succeeded in re-
ducing oils share of total energy use from an extraordinarily high 75 per-
cent in 1973 to slightly below 50 percent by 2002.
39
It did this by pioneer-
ing fuel-efficient transportation and automobile technology and by taking
oil largely out of the electricity generation sector. Whereas in 1973, 75 per-
cent of electricity generation was oil-fired, today it is only five percent.
Nevertheless, Japan still imports 100 percent of its oil, and is the second-
largest oil importer in the world (behind the United States), importing over
5 MMBD; and is the third-largest consumer of oil behind the United States
Energy 355
and China. Moreover, oil accounts for nearly 50 percent of energy use in
Japan, which is still well above the overall industrial country average, leav-
ing Japan relatively more exposed to oil price shocks and supply disrup-
tions. Japan depends on the Persian Gulf for 80 percent of its total oil
supply. In the future, given the maturity of Japans economy and efficiency
in energy use, combined with relatively slow long-term economic growth
expectations, oil consumption and import needs are likely to continue grow-
ing slowly. The IEA expects total energy and oil demand in Japan to rise
by less than one percent per year through 2025, each less than one half
the world average growth rates. Nevertheless, dependence on Middle East
oil supplies is expected to rise toward 90 percent by 2030.
40
More broadly, Japan has diversified its energy sources by rapidly ex-
panding the use of natural gas, coal, and nuclear power. Since the early
1970s Japan pioneered the development of the LNG industry in Southeast
Asia and raised natural gas to 15 percent of Japans total energy consump-
tion from zero, mainly for power generation. Japan is by a large margin the
worlds largest buyer of LNG.
41
Japan has also raised coal consumption for
electricity generation, virtually all of which is imported from Australia, In-
donesia, the United States, and other major exporters, and coal now ac-
counts for 15 percent of Japans total energy use.
42
The supply disruptions of the early 1970s encouraged Japan to pur-
sue nuclear energy options; it now represents over 30 percent of the
countrys electricity generation needs and 15 percent of total energy use.
Moreover, there are plans to build 1013 new nuclear plants by 2010, which
would increase nuclear production to 41 percent of total electricity pro-
duction. However, serious problems with the Japanese management of the
existing nuclear utilities and declining public confidence in the industry
threaten to slow nuclear development in Japan. Revelations in late 2002
that Tokyos largest utility, TEPCO, was falsifying safety records led to
the temporary closure of all 17 of TEPCOs nuclear plants for reinspection,
about one-third of Japans nuclear plants. Tokyo was subjected to chronic
blackouts and low power supplies over the summer of 2003 as a result.
Combined with serious concerns about waste disposal and proposals for
reprocessing waste, Japan is increasingly unclear whether nuclear power
will meet a greater share of its future electricity needs.
43
Japans Energy Security Strategy
Japan has pursued a combination of collaborative and mercantilist strate-
gies to enhance its energy security. Through its involvement in the IEA,
Japan has helped coordinate member-country responses to global oil sup-
ply disruptions and strategic stockpile releases. It is also involved with
APEC energy monitoring efforts, which are headquartered in Tokyo. Japan
has developed a large strategic stockpile of oil, equivalent to 120 days of
import supplies, as part of its commitments with the IEA.
Under the direction of MITI (now METI),
44
Japan established the Ja-
pan National Oil Company (JNOC) in 1967, which in the wake of the 1970s
oil shocks, rapidly boosted JNOCs efforts to gain control of overseas oil
supplies for Japan. A number of smaller Japanese oil exploration compa-
nies, including Inpex and Japex, were funded by JNOC to secure new oil
supplies globally. The results have been disappointing as the government
has spent in excess of $40 billion (1995 dollars) with very little to show for
it. Japanese oil companies lagged behind comparatively in exploration and
production, and could not compete with foreign oil companies. The largest
position acquired during this period was Japans Arabian Oil Companys
Neutral Zone concessions in Saudi Arabia and Kuwait, which Japan lost
recently when these long-term contracts expired. Barely ten percent of
Japans oil imports are supplied by Japanese equity ventures overseas;
after 30 years of effort and enormous cost, Japan still depends on the
Persian Gulf for 80 percent of its oil. JNOCs performance has been so dis-
mal that the government is dismantling it over the next year and reorganiz-
ing its activities into a smaller, more competitive company.
45
Nevertheless, Japan has recently become more aggressive in seeking
equity oil supplies abroad, largely under the direction of METI, and re-
cently has made progress on two large oil deals.
46
In Iran, Japan recently
completed four years of negotiations to get exclusive developments rights
for a very large oil field, Azadegan, in partnership with Irans National Oil
Company NIOC.
47
The field has several billion barrels of reserves and is
expected to reach a peak production of 250-300 MBD by the end of the
decade. Japan sealed the deal despite pressure and loud protests from the
United States over Irans suspected nuclear weapons development and the
U.S. unilateral embargo on Iran, and only went ahead with the deal after
Iran signed additional inspection commitments with the International Atomic
Energy Administration (IAEA). Ironically, Japan already had a separate deal
through Japex as a partner with Shell to redevelop two Iranian oil fields,
Soroush and Nowruz.
In Russia, Japan has also displayed aggressiveness in securing ac-
cess to oil. China had been negotiating with Yukos, the largest Russian oil
company, for several years to build a large oil export pipeline to bring oil
from the East Siberian region of Angarsk to connect into northeastern
Chinas oil infrastructure at Daqing. The project made good commercial
sense and was sized at roughly 400600 MBD. In late 2003 Japan stepped
in with a huge competing $7 billion offer to finance construction of a larger
Energy 357
and longer pipeline from Angarsk to the Pacific coast at Nakhodka, along
with financing for field development in the Angarsk region. The pipeline
would allow oil exports to all of Asia, including, most importantly, Japan.
Russia has been equivocal about a decision but appears to be leaning
toward the Japanese proposal.
48
However it turns out, the situation has
turned into a nasty diplomatic episode between China and Japan.
49
Meanwhile, Japan has managed to acquire a number of other fairly
modest equity oil supplies elsewhere, including a share in the ExxonMobil
Sakhalin 1 project in Russia through the Japanese consortium Sodeco; an
approximate 100 MBD share for Inpex in Indonesia; and 200 MBD for the
Japanese consortium Jodeco in the United Arab Emirates. Despite a poor
record for gaining national control over oil production abroad, Japan seems
to be stepping up its efforts to compete with Chinas increasingly active
efforts in the region and overseas.
Japan has been more successful at securing its access to overseas
natural gas through the global reach of its large trading companies and
utilities, in tandem with METI. Mitsubishi, Mitsui, Marubeni, and other
trading companies pioneered the development of the LNG business in the
1970s and today are partners in most of the large LNG projects that al-
ready or plan to serve the Asian LNG market, including partnerships in
two large Sakhalin Island projects. Mitsubishi and Mitsui have a large stake
in Sakhalin 2, led by Shell, which is one of the largest single LNG projects
globally. A consortium led by JNOC also has a significant stake in Exxons
Sakhalin 1 project, that is currently exporting oil to Asia, particularly Ja-
pan, and which aims eventually to ship natural gas to Asia, either via a
pipeline to Japan or as LNG. Japan has now has become involved in new
Persian Gulf LNG projects in Qatar and possibly Iran, following on its long-
term involvement with LNG in the UAE.
South Korea
South Koreas energy dilemmas closely resemble those of its neighbor
Japan. Korea lacks indigenous energy resources and is highly dependent
on energy imports. This dependence rose sharply until the onset of the
Asian financial crisis in 1997. Similar to Japan, South Korea imports 80 per-
cent of its energy.
50
South Korea is now the seventh-largest oil consumer in the world, with
recent demand running near 2.3 MMBD, and the fourth-largest oil importer,
importing virtually 100 percent of its oil. Oil makes up a high share of total
energy demand, even after a number of years of efforts to improve effi-
ciency in oil use. Koreas oil demand skyrocketed during the late 1980s
and early 1990s, quadrupling from 1987 to 1997, from 0.62 to 2.4 MMBD.
This extraordinary growth was driven by the convergence of the economic
and industrial boom, increasing transportation demand, and the apprecia-
tion of the won, which coincided with the 1986 collapse in oil prices to
drive down the real won cost of oil. In the wake of the financial crisis, oil
demand dropped back to 2.0 MMBD and only by 2003 did it return to the
peak level reached in 1997.
51
Future demand growth is likely to be more
modest as the Korean economy matures and takes on the less energy-in-
tensive characteristics of an industrial country. Oil demand is expected to
grow by only 1.3 percent annually (versus a world average of nearly two
percent annually) and reach 2.9 MMBD by 2025.
52
Nevertheless, South
Korea is and will remain highly dependent on imports from the Middle East,
which accounts for 75 percent of its oil supplies.
53
Like Japan, South Korea has worked to diversify its energy mix to in-
clude gas, coal, and nuclear. In 1986 Korea received its first tanker load of
LNG, and by 2001 Korea had become the worlds second-largest importer
of LNG after Japan.
54
Virtually all of its gas needs are imported, mainly from
Qatar, Indonesia, Malaysia, and Oman, and gas now makes up ten percent
of Koreas energy mix, for use mainly in power generation.
55
The state gas
monopoly KOGAS has two large receiving terminals at Pyongtaek and
Inchon and is building a third terminal at Kwangyang in partnership with
Mitsubishi Corporation and the Pohang Iron and Steel Corporation. Korea
has also boosted its coal demand, again virtually all imported from mainly
Australia and China, and coal now makes up 21 percent of total energy
needs. Finally, South Korea has an active effort to boost nuclear energy.
Nuclear already accounts for nearly 40 percent of Koreas electricity pro-
duction, and there are plans to more than double nuclear capacity by 2030,
rising from todays 14 gigawatts (GW) capacity to 31 GW.
56
South Koreas Energy Security Strategy
South Korea has also pursued a mix of cooperative and mercantilist en-
ergy security strategies. Among the cooperative efforts, South Korea has
recently joined the IEA and has taken on the commitments to coordinate
oil supply efforts with other industrial countries in the event of a supply
disruption. It has also built a strategic oil stockpile equivalent to 90 days
of import supplies, in line with its IEA commitments. This more coopera-
tive approach to energy security is also evident in South Koreas leader-
ship in forwarding proposals for a large regional gas pipeline to bring
Russian gas to China and South Korea and possibly even Japan. Broadly
speaking, South Korean officials have been more deeply involved in dis-
cussions in APEC and elsewhere to broaden regional energy cooperation,
and it frequently makes regional cooperation a key theme of its rhetoric.
Energy 359
Nevertheless, the oil and gas industry in South Korea remains heavily
dominated by the state. Largely through the state-owned Korea National
Oil Company (KNOC) but also in cooperation with several of the large
privately-owned chaebol, the government continues to pursue a mercan-
tilist agenda of acquiring overseas equity stakes in oil exploration and
production. The government has charged KNOC with the goal of provid-
ing ten percent of South Koreas oil by 2010, estimated at roughly 270 MBD.
KNOC has developed stakes in Yemen, Indonesia, Burma, Vietnam, Argen-
tina, Peru, and the UK, and it has been involved in field development in
Venezuela and Libya.
57
It has also been involved in exploration in Angola,
Algeria, Indonesia, Surinam, Ghana, and China. South Korea has devel-
oped strong ties diplomatically and through a number of large crude sup-
ply contracts and industrial and service contracts with the major Persian
Gulf oil producers and has been involved in a number of construction
projects from power plants, refineries, and chemical plants in the region. It
is also beginning to broaden its industrial and diplomatic contacts in Cen-
tral Asia and the Caspian region to support its long-term oil supply inter-
ests. On the natural gas front, through KOGAS, the state natural gas mo-
nopoly, and several of the large chaebol, South Korea has taken major
equity stakes in a number of the large LNG projects in the Asian region
and in the Persian Gulf region in order to gain stronger control over long-
term supplies of LNG.
India
India has been among the fastest-growing economies in Asia and the world,
growing at over six percent since the countrys economic and financial crisis
of 1991. Parallel to this, energy demand has been rising at equally high
rates, averaging 6 percent annually which, combined with limited domestic
energy reserves (outside of coal), are driving India toward membership in
the Asian club of huge energy importers.
58
India is now the sixth-largest energy consumer in the world. Coal domi-
nates energy consumption in India, accounting for 51 percent of total en-
ergy use. Most of the coal is for electricity production, for which demand
has grown at extremely high rates. India has large indigenous supplies of
coal, most of it relatively low in heat value and high in sulfur and ash, and
given the limited domestic availability of oil and natural gas, coal is likely
to remain the dominant fuel in the economy for the foreseeable future. The
U.S. Department of Energy expects Indian coal consumption to rise by 70
percent, or 2.2 percent annually, over the next 25 years to meet demand for
electricity that is expected to rise by 150 percent. India is likely to account
for over ten percent of the worlds increase in coal consumption.
59
As in the rest of Asia, oil is the major import concern for India. Oil
accounts for 34 percent of Indias energy use, somewhat lower than world
average of 40 percent, but consumption is rising and has overrun domes-
tic resources. Oil demand in India grew by over six percent annually dur-
ing the past decade, more than three times the world average, but at the
same time oil production rose barely at all, from 700 to 800 MBD. Conse-
quently, imports jumped from 500 MBD to 1.3 MMBD, or from 42 to 62
percent of total consumption. Roughly half of Indias current oil imports
come from the Middle East. Over time Indias import dependence will grow
due to limited prospects for new oil exploration and production. Both the
U.S. Department of Energy and the IEA expect Indian oil demand to be
among the fastest-growing in the world at nearly four percent annually to
2025. Combined with essentially flat or declining oil production, imports
will account for 85 percent of total oil demand by 2025, most of which will
have to come from the Middle East, Central Asia, and Africa.
60
India has historically been self-sufficient in natural gas, but limited
domestic gas resources and rising demand will lead to change in the fu-
ture.
61
Gas makes up only about ten percent of Indias energy consump-
tion, but demand is expected to continue increasing, making India a major
importer in the form of LNG and possibly pipeline supplies. The DOE ex-
pects Indian gas consumption to triple from 0.8 trillion cubic feet (TCF) in
2001 to 2.5 TCF by 2025, driven by the demand for electricity and the need
to substitute for dirty coal.
62
At the same time domestic gas production is
likely to rise more slowly to only 1.5 TCF, meaning that 40 percent of Indias
gas needs are likely to be imported by 2025. India is already moving to
develop the infrastructure to boost imports. Indias first LNG import termi-
nal, Petronet, a joint venture between Indias state oil and gas companies
ONGC, GAIL, and IOC, along with Gaz de France, began operation in late
2003 and is importing gas from Qatar. Another Shell-sponsored terminal is
planned for 2005 in Gujarat to bring LNG from Oman.
63
In all, the govern-
ment has approved plans for 12 possible import terminals in the future.
64
It
is also possible that India will be importing gas by pipeline in line with a
series of proposals to bring gas from Turkmenistan, Iran, Pakistan, and
Bangladesh, all of which have potential large exportable supplies. How-
ever, each of these proposals has serious geo-political problems, and the
outlook for pipeline supplies will depend on resolving key regional geo-
political rivalries and constraints. The large majority of Indias future gas
imports will necessarily come from the Persian Gulf, with lesser amounts
possible from Central Asia and neighbors Pakistan and Bangladesh.
Like the other Asian energy importers, India is also looking to nuclear
power development as an important source of electricity generation. Nuclear
Energy 361
now accounts for less than five percent of electricity needs in India, but
five to eight new plants are planned, which would triple nuclear genera-
tion from three to nine gigawatts (GW). Even so, nuclear will only be able
to meet a small fraction of Indias energy and electricity needs.
65
Indias Energy Security Strategy
Indias growing dependence on imported oil supplies has recently cata-
lyzed an aggressive strategy to secure supplies overseas. India seems to
be emulating China in its overseas energy security strategy.
66
ONGC, Indias
major state-owned oil exploration and production company, is beginning
to stake out new overseas oilfield investment plans through its interna-
tional subsidiary ONGC Videsh Ltd. (OVL). Indias largest oil stake to date
is its 25 percent share in the Greater Nile Oil Project in Sudan in partner-
ship with Chinas CNPC, which it bought into for $750 million and which it
continues to expand along with CNPC.
67
India also has bought a 20 per-
cent share of the ExxonMobil-led Sakhalin 1 project for $1.7 billion. ONGC
also is moving rapidly in West Africa with the purchase this year of a 50
percent stake for $600 million in Angolas Greater Plutonia offshore project.
68
In May 2004 Indias petroleum minister said India will invest $1 billion per
year for the next ten years to acquire equity stakes in overseas fields.
69
ONGC is also beginning to source large supplies of LNG from the Per-
sian Gulf through deals coming online with Qatar and Oman. ONGC re-
cently signed a preliminary deal with Iran to buy LNG later in the decade
for which ONGC would get the option to develop a large Iranian oil field
(similar to a deal offered to Chinas Sinopec).
70
Indias OVL now has an
equity stake in a large gas discovery offshore Burma in partnership with
South Koreas Daewoo International. OVL has also been bidding for Cairn
Energy assets in Bangladesh; has been awarded exploration blocks in Syria;
and has been negotiating with Iraq, Libya, Kazakhstan, and the United
States for exploration blocks. With more than 50 percent of its total oil
supplies now sourced from the Middle East, India has announced plans
for a strategic oil stockpile, but it has not moved very far in doing so yet.
Asias Oil and Gas Exporters
While demand in developing Asia for both oil and natural gas are to boom
over the next two decades, Asias prospects for supplying a significant
share of its own needs from within the region vary considerably according
to different resource endowments, production potential, and government
policies. Prospects for future oil production and exports from within the
region look relatively bleak while prospects for natural gas production and
exports look far better.
The outlook for oil suggests that most of Asias current oil exports
are likely to be absorbed over time by rising domestic demand in those
countries and by limited oil production potential. Indonesia, Malaysia, and
Australia have been the main oil exporters in the region in recent years. In
Indonesia, oil production peaked at 1.7 MMBD in 1991, but by 1998 had
drifted down to 1.5 MMBD when production began to decline more rap-
idly, falling below 1.2 MMBD in 2003.
71
Declines are due to aging fields
and a lack of new investment in exploration and development which, in
turn, reflects relatively unattractive terms, limited geologic prospects for
large new fields, and serious political and oil policy uncertainty arising from
Indonesias political instability. At the same time Indonesias domestic oil
demand has been rising rapidly with economic growth, interrupted briefly
during the financial crisis of 199798, and subsidized domestic oil prices,
which have further contributed to the rise in oil demand. In fact, by mid-
2004, Indonesia became a net oil importer on a monthly basis as overall
crude and oil product imports outran overall oil exports.
72
With limited
geologic prospects and continuing confusion over oil investment policies
and conditions, production is unlikely to rise in the foreseeable future, while
demand can be expected to grow. The IEA forecasts that Indonesia is likely
to become a significant oil importer over the next two decades.
73
Indonesia is staking its energy export future on natural gas largely in
the form of LNG. For Asia, the outlook for growing new supplies of LNG
over the next two decades will limit the gradual rise in Asias natural gas
imports from outside the region. Indonesia is the worlds largest exporter
of LNG, having pioneered that industry in partnership with Japan in the
mid-1970s. Indonesia exported 23 million metric tons (MMT) of LNG in 2002,
about 20 percent of global LNG exports, with 70 percent of that going to
Japan, 20 percent to South Korea, and the remainder to Taiwan.
74
In the
future LNG exports are likely to grow with new projects such as BPs
Tangguh project in West Papua and expansions of the Bontang complex in
East Kalimantan more than offsetting gradually declining volumes from the
nearly 30-year-old ExxonMobil Arun project in North Sumatra. Indonesia
recently won a large contract to begin supplying LNG to Chinas Fujian
province in 2007 or 2008.
75
Malaysia has also been a significant oil exporter, but its long-term oil
export potential is also somewhat clouded by limited geologic prospects
and a growing emphasis on LNG exports. Oil production in recent years
has risen gradually to about 800 MBD but domestic demand has also been
rising with Malaysias strong economic growth so that exports have largely
plateaued at around 300 MBD. Malaysias oil exports are unlikely to rise
significantly in the future and could very well decline. As with Indonesia,
Energy 363
Malaysia is increasingly shifting its energy export future on LNG. LNG
exports were 15.6 MMT in 2002, making Malaysia the third-largest global
exporter after Indonesia and Algeria, with most of that going to Japan, and
some going to South Korea and Taiwan.
76
Further expansions of the three
existing large LNG projects in Malaysia assure that Malaysia will be a
continued supplier of LNG to Northeast Asia and China.
Australia has occasionally been a modest oil exporter to Asia, but its
production and export prospects also appear limited. It too is counting on
LNG exports for energy earnings. Australia exported nearly 8 MMT of LNG
in 2002, mainly to Japan, and future expansions of its large Northwest Shelf
project, the new ChevronTexaco-led Gorgon project, and projects in the
Timor Sea region promise to make Australia a major LNG exporter in the
future.
77
The Northwest Shelf project won the first major contract to sup-
ply LNG to Chinas Guangdong province beginning in 2007.
78
Regional Implications
Several basic trends can be seen across Asia that have important strate-
gic, environmental, and energy implications for the region. Prospects are
extremely poor for large new oil supplies within Asia. The existing export-
ers oil prospects look poor, and they are shifting investment priorities
toward LNG exports. Consequently, barring a major political or economic
discontinuity in the region, rising oil demand in Asia will translate directly
into deepening dependence on oil imports from outside the region.
By far the largest proportion of this will imported oil will come from
the Persian Gulf, but it will also be sourced in Russia, the Central Asia/
Caspian Sea region, and Africa. These regions have the large reserves to
meet rising global oil demand over the next 25 years. The IEA estimates of
global incremental sources of new oil production between 2000 and 2030
will be overwhelmingly dominated by OPEC and the Persian Gulf. Table 3
breaks down Russia, Central Asia, and the Persian Gulf, and indicates that
these three sources are likely to account for roughly 7080 percent of the
net global increase in oil production to 2030.
The case of natural gas is somewhat less acute insofar as Asias sup-
plies and prospective development of new LNG and pipeline exports is likely
to grow strongly in the future. Nevertheless, gas demand in Asia is also
likely to outstrip regional supplies beyond 2010 meaning that a growing
volume of Asias gas will have to be imported from outside the region
beyond 2010. Table 4 summarizes the IEAs forecast of the likely sources
of Asias gas imports and shows the extent to which Asia is likely to be-
come more dependent on gas imports from the very same regions that it
will depend on for oil imports.
79
Third, driven by rising demand for electricity, there will be a continu-
ing and growing reliance on coal as the only domestically plentiful power
generation fuel, particularly in China and India. Finally, across the region
nuclear power is being boosted rapidly to help meet rising electricity needs.
Asia is the globes growth area for nuclear development and, consequently,
a serious and growing concern as a potential source of nuclear technol-
ogy proliferation, safety problems, and waste disposal challenges.
Asias Strategic Suppliers
Asian powers are scouring the globe in an increasingly mercantilist drive
to secure access to oil and gas supplies and are building broader diplo-
matic and trade ties that serve to strengthen these energy links. Their most
important efforts have been focused largely on key petroleum-rich regions
of the Persian Gulf, Russia, and Central Asia. Growing energy ties in these
regions will have a significant impact on future geo-political developments.
Not surprisingly the primary area of focus for all the Asian importers
is the Persian Gulf. The region holds two-thirds of the worlds proven oil
reserves. It already accounts for two-thirds of Asias oil imports and in the
longer run is likely to account for 80 percent of Asias oil imports and 50
percent of its natural gas imports. It is also one of the most chronically
unstable and violent regions of the world. In the past 30 years the region
has been rocked by a series of wars, revolutions, and political events that
have caused enormous disruptions in global oil supplies. The list includes
the 1973 Middle East War that provoked the Arab oil embargo against the
West, leading to a quadrupling of oil prices from $3 to $12 per barrel; the
1979 Iranian Revolution, combined with the outbreak of the Iran-Iraq War,
which led to a tripling of oil prices from $12 to $36; the Iran-Iraq Tanker
War of the mid-1980s, which threatened oil flows during much of the mid-
1980s; and Iraqs 1990 invasion of Kuwait provoking the first Gulf War, the
destruction of Kuwaiti oil fields, and the resulting decade-long global
embargo on Iraqi oil. The current Gulf crisis, continuing uncertainty about
Table 3. Oil ProductionCumulative Future Growth (MMBD)
2010 2020 2030
Russia 2.1 2.5 3.0
Central Asia/Caspian Region 2.5 3.3 3.8
OPEC Middle East 5.5 16.8 30.4
World Total 13.8 29.0 45.0
Three Regions combined 10.1 22.6 37.2
Middle East OPEC share 40% 58% 68%
Three Region share 73% 78% 83%
Source: International Energy Agency, World Energy Outlook, 2002.
Energy 365
the Iraq situation, and escalating terrorism and threats of attacks on oil
facilities in the region take these supply disruption risks to new heights.
Insurgents in Iraq have caused major damage to Iraqs oil production and
export pipeline infrastructure in an attempt to undermine the new Iraqi re-
gime. Militants have now targeted Saudi Arabias oil industry (which pro-
vides 12 percent of the worlds oil supplies), adding a new risk premium on
global oil prices. Although Saudi oil facilities are tightly guarded, these
groups have taken to attacking the compounds of Western expatriates
working for ARAMCO, hoping to provoke an exodus of Western expertise
and to gradually cripple the Saudi oil industry. As the war on terrorism
expands, terrorist groups have begun threatening to attack major energy
infrastructure and transit choke points, including the Strait of Malacca, in
order to disrupt the global economy.
Despite the chronic risks of disruption to oil production and exports
from the Persian Gulf region, the region is so central to future production
capacity needed to meet the worlds growing oil needs that it will remain
the key focus point for the globes oil importers. Consequently, the Asian
powers are seeking long-term energy ties but also are rapidly building dip-
lomatic, trade, and military relationships to support those ties. The main
focus so far has been on Iran and, to a lesser extent, Saudi Arabia. Irans
appeal reflects its growing need to attract foreign investment to help de-
velop its oil and gas industry and greater opportunities presented by the
U.S. embargo and the resulting reduced competition. All four Asian play-
ers are developing strong positions in Iran. Saudi Arabia has been a focus
mainly for long-term crude supply contracts, since private investment has
Table 4. Asian Natural Gas Imports, 20002030 (BCM)
2000 2030
Southeast Asia to Northeast Asia 60 52
Persian Gulf to Northeast Asia 21 60
Alaska to Northeast Asia 2 0
Southeast Asia to China 0 10
Persian Gulf to China 0 13
Persian Gulf to India 0 27
Russia to Northeast Asia 0 8
Russia to China 0 25
Total 83 195
of which
Persian Gulf 21 100
Russia 0 33
Southeast Asia 60 62
Source: IEA, World Energy Outlook, 2002.
not been possible until the recently, but China is quickly broadening its
large crude supply relationship with cross investments between ARAMCO
and Sinopec for refining and a new Sinopec involvement in the Strategic
Gas Initiative.
80
All the players are focused on Iraq and its enormous po-
tential for the future, with both China and Japan pursuing sizeable oil and
gas exploration and development deals.
81
The rapid development of ties between Asia and the Persian Gulf is a
two-way street, and Asia is taking on great importance from the perspec-
tive of the Gulf oil and gas exporters. Currently nearly two-thirds of the
Gulfs oil exports go to Asia, as demand there rapidly absorbs a growing
share of the Gulfs output due to lower transportation costs and a peren-
nial Asian Premium in oil prices compared to the west of Suez mar-
kets.
82
The nexus of diplomatic, trade, and military ties with Asia also ap-
peals to the Gulf producers, who are looking to broaden their economic
and geo-political base beyond traditional dependence on the U.S. and
European markets and diplomatic relationships. All these trends suggest
that energy will propel Asia into becoming a major player in the Persian
Gulf and broader Middle East in the future.
Russia is the second key area where the Asian powers are competing
in earnest for positions and where energy will have important geo-political
implications. The natural complementarity between Russias huge surplus
supplies of oil and gas and Asias huge deficit contains the seeds of a
significant set of energy, trade, and geo-political relationships. Russias
importance to Asia arises from its potential to partly offset Asias overall
growing reliance on the Persian Gulf and its concern about the reliability
of tanker supplies. The ability to diversify supply sources as well as trans-
port routes is vitally important to China, Japan, India, and South Korea.
Japan and India have big positions in the two large Sakhalin Island projects
currently under way to bring oil and LNG to Asia. At the same time, China,
Japan, and South Korea are deeply involved in proposals to bring East
Siberia oil and gas supplies longer-term. All the Asian states are busy
upgrading and broadening their political ties with Russia to support future
energy ties. This complementarity extends to the Russian side as well.
President Vladimir Putin and the Kremlin would like to diversify Russias
growing energy export base away from total dependence on European
markets for both oil and gas exports. The Kremlin has become quite ex-
plicit (under Putins newly statist orientation toward the energy export
sector) about its desire to use oil and gas as strategic, diplomatic, and
commercial levers to gain regional influence.
The third key area of energy resource competition and growing ties
and where the geo-political overlay is likely to take on increasing impor-
Energy 367
tance is in the Central Asia and Caspian Sea region. Central Asia and the
Caspian have been somewhat later in moving into Asias focus because of
the high and uncompetitive cost of transporting oil and gas to Asia from
the region. The costs of proposed pipelines to move oil or gas to Asia are
very high, and there are many barriers to transporting oil or gas to coastal
locations where it could be loaded onto Asian-bound tankers.
Nevertheless, the attraction for the major energy importers of Asia of
diversifying imports away from the Persian Gulf and toward overland pipe-
line supplies is irresistible.
83
China is in the best geographical position to
benefit and is pushing hard to make Kazakhstan a key oil supply source
for the future through its equity investments in oil fields in western
Kazakhstan. China has also promised to build a long-distance pipeline from
western Kazakhstan to western China, but the economic viability of such
a pipeline remains uncertain. A pipeline would give the Kazakhstan gov-
ernment incentives to help stabilize the potentially restive Islamic region
along Chinas border, something that China is concerned about in the wake
of Islamic unrest in Xinjiang. As part of this effort, China has been active
in developing broader diplomatic alliances with Kazakhstan and the other
countries of Central Asia. The Shanghai Cooperation Organization, which
China has spearheaded to build broader ties with Central Asia and Russia,
is also clearly aimed at boosting energy cooperation.
84
Japan and the other
Asian importers are also beginning to increase activities in the Caspian
region, including Turkmenistan and Azerbaijan, which is destined to be-
come a very large producer and exporter of both oil and gas.
Implications for the United States
Asias response to its deepening energy insecurity has important implica-
tions for the United States across a range of geo-political, energy, and
environmental issues.
First, as a major stabilizing and balancing force in Asia, the United
States has a vital stake in how energy insecurity impacts Asias future geo-
political architecture, either aggravating regional tensions and rivalries or
providing a platform for greater regional cooperation. The foregoing analy-
sis suggests that on balance Asias powers are showing a marked inclina-
tion toward a relatively narrow, zero-sum, mercantilist approach to energy
security that has the potential to be a major source of future tension and
conflict in the region. The key Asian powers increasingly compete in the
same producing areas and countries, and examples of state owned or spon-
sored Asian oil companies going head-to-head to control the same large
fields and supplies are growing daily. Moreover, Asian governments are
largely choosing bilateral approaches that link energy, trade, strategic, and
often military cooperation rather than multilateral, regional, and market
approaches to linking energy and security interests.
A type of energy nationalism appears to be setting in, with head-to-
head competition to control regional energy supplies on the rise. This will
have a growing potential to aggravate key regional rivalries. The China-
Japan relationship, in particular, is facing strains in the competition for
energy supplies, such as the dispute over the East Siberian oil pipeline,
discussed previously. Another example is a growing dispute between China
and Japan over offshore natural gas fields that lie in disputed waters in
the East China Sea and also near the disputed Senkaku/Diaouyu Islands.
China is developing a significant new gas field, the Chunxiao field, that
lies very close to the median line between Japan and China, which Japan
demarcates as an Exclusive Economic Zone (EEZ). China claims its conti-
nental shelf defines the zone, therefore extending its EEZ much closer to
Japans coast. This has quickly escalated to the point where Chinese gun-
boats were used to force Japanese seismic ships away from the area.
85
The
gas field demarcation issue draws in the heated Senkaku Islands issue due
to its proximity, and raises serious risks of a major diplomatic dispute be-
tween Japan and China.
Another particularly critical dimension is how Russias potential for
aggravating energy competition could impact relations between China and
Japan, arguably the most important relationship in East Asias long-term
geo-political future. Russian collaboration with Japan on energy develop-
ment inevitably raises suspicions in China that the two are conspiring to
contain China by denying it vital oil and gas supplies. Energy also risks
aggravating another long-term regional rivalry in Asia between China and
India. Chinas strategists are increasingly concerned about Indias naval
power and its capacity to interfere with oil flows through the Indian Ocean
to China, while India is concerned with Chinas growing ties with Burma
and its efforts to extend its naval and other capabilities to the Indian Ocean.
Energy nationalism would also be likely to spill over into maritime
control of sea lanes and transport routes through the South China Sea,
Strait of Malacca, Indian Ocean, and East China Sea. Although a serious
naval arms race has yet to develop, resorting to competitive and confron-
tational means to ensure control over sea lanes would very likely contrib-
ute to a future naval arms race. This would play directly into regional fears
in Japan, Southeast Asia, and India over Chinas intentions for its long-
term naval development while at the same time fanning Chinese fears over
Japans naval capability and future development. Nationalist and competi-
tive attitudes also risk spilling over into disputes about control over po-
tential energy resources in disputed areas such as the Senkakus, Spratleys,
Energy 369
the South and East China Seas, such as we are currently witnessing in the
China-Japan dispute over the East China Sea gas field.
This is not to say that there are no examples in the region that sug-
gest a potential for energy insecurity to encourage regional cooperation
and greater reliance on markets. In the war on terrorism there is a strong
potential for the Asian powers to work together with the United States to
prevent terrorist attacks on energy infrastructure, and the United States is
already initiating discussions on this issue. Efforts to pioneer a large re-
gional gas pipeline linking Russia, China, South Korea, and Japan is an
important example. There are also ongoing discussions in Southeast Asia
for developing an integrated Southeast Asian Natural Gas pipeline sys-
tem. Recent efforts within APEC and ASEAN to promote regional energy
cooperation and security suggest the potential for developing regional
energy security institutions similar to the IEA. The IEA itself needs to think
about revamping its organization to include the major developing Asian
states, particularly China, directly into IEA emergency oil supply manage-
ment process. Steps by China and India to build strategic petroleum stocks,
while not directly collaborative efforts, are vital measures to help reduce
the risks of a competitive regional scramble for oil supplies in the event of
a global oil supply shock. These developments all are important and should
be encouraged. Nevertheless, to this point the evidence suggests that co-
operation is falling behind competition in the search for energy security in
the region.
A second set of issues for the United States concerns the impact of
the long-term role of the Asian states in the key oil and gas exporting re-
gions. That their role will increase is inevitable given Asias growing de-
pendence on these regions; the only question is what it will mean for U.S.
interests and influence. First and foremost is the Persian Gulf and Middle
East. The general view has been that as its dependence on Persian Gulf oil
grows, Asias interests in political stability in the region will increasingly
converge with U.S. interests. Consequently, it would seem unlikely that
any of the Asian states, including China, would risk actions that might
further destabilize the region, such as stepping up arms and missile sales
or contributing to nuclear proliferation. The Asian states would be more
likely to free ride on U.S. efforts to maintain stability in the region.
Moreover, while the conservative Persian Gulf states may welcome the
opportunity to diversify their strategic, energy, and trade relationships
through the presence of the Asian players; only the United States can
provide the military and strategic umbrella to protect them from threats in
the region and provide the strategic naval and air power projection to pro-
tect vital tanker routes and choke points like the Straits of Hormuz. From
this perspective, it seems unlikely that the United States will see a whole-
sale challenge to its traditional military hegemony in the Persian Gulf.
However, within this broad setting there is plenty of range for con-
flicting visions over the conditions in the Gulf that are conducive to long-
term stability. It is here where Asias growing presence, particularly Chinas,
is likely to introduce a more complex and challenging situation for the
United States. One telling example is the willingness of all the key Asian
states, including strategic ally Japan, to become deeply engaged with Iran
in energy and broader economic and diplomatic ties despite the U.S. con-
tention that Iran is a major source of support for regional terrorism, nuclear
weapons development, and a threat to its neighbors. China has become a
major arms supplier to Iran over the past decade, conducting potentially
destabilizing missile sales, to the chagrin of Washington. Even strong U.S.
allies like Japan and South Korea were less than enthusiastic about sup-
porting the U.S. war in Iraq, and the war was opposed by China. Depend-
ing on how the Iraq post-war transition proceeds, there may be huge new
and potentially divisive issues regarding how to deal with an unstable and
potentially fractured Iraq. Historically, Asia has hardly been supportive of
U.S. policy in the Palestinian-Israeli conflict. As the Asia-Middle East nexus
of ties grows rapidly over the next two decades (particularly Chinas in-
volvement in the region and growing capability to influence governments
there), it seems inevitable that the range of potentially significant disagree-
ments over how to ensure the stability of the Gulf region will grow, and
with it will grow the complications for U.S. policy in the region. While the
U.S. military dominance in the Persian Gulf will remain unchallenged, the
same cannot be said for its diplomatic power and influence.
There is potential for the development of some of the same issues re-
garding U.S. energy diplomacy and influence in the Caspian Sea/Central
Asia region, but they do not look to be as pointed as is the case in the
Persian Gulf. In many ways, U.S. and Asian energy interests in the region
converge more closely. The United States has three key energy objectives
in the region, two of which converge reasonably well with Asian interests.
First, both the United States and Asia have an interest in ensuring that
Caspian and Central Asian oil and natural gas supplies are developed and
exported on a large scale to global markets in order to diversify global
supplies and reduce global market dependence on OPEC and the Middle
East. In this context, the United States fully supports Chinas plans to build
an oil export pipeline from western Kazakhstan east to China, although it
would oppose the use of huge subsidies necessary to make the project
feasible. Second, Washington is determined to prevent Russia from being
able to control the export of energy from the region. Since this mostly af-
Energy 371
fects the potential for oil and gas to move west toward European markets,
it is not an issue of great concern to Asia. The third U.S. policy goal, how-
everto prevent any export of oil or gas through Iranis a potentially
major source of future disagreement. The most commercially viable means
to get Caspian and Central Asian oil and natural gas to Asia is by pipeline
south through Iran or through Afghanistan and Pakistan to the coast. U.S.
opposition prevents the Iranian option, while political conditions preclude
near-term development of an Afghan pipeline.
For Asia, Central Asian/Caspian oil represents a potentially important
alternative to Persian Gulf oil, although it would still have to move by tanker.
Consequently, it is not hard to imagine future circumstances under which
the United States and Asia could come to loggerheads over moving oil or
gas south through Iran. In fact China has already been instrumental in
building pipeline infrastructure that currently allows oil swaps to occur
between Turkmenistan and Iran, effectively allowing exports through Iran.
A broad range of other U.S. foreign policy goals are likely to be more
difficult to achieve as the result of Asias energy security strategies. For
example, Asian energy involvement in a number of rogue states has
helped undermine U.S. sanctions policies repeatedly. Iran has already been
mentioned but a similar situation exists in Sudan, where China, India, and
Malaysia are the key partners in expanding Sudans oil development. Prior
to Libyas reversal on nuclear weapons development, China and other
countries in Asia were looking for opportunities in Libya despite the U.S.
embargo. China and Malaysia are also involved in Burma despite U.S. sanc-
tions. Arms control is another area where U.S. interests could be compro-
mised; there is potential for oil-for-arms trade to develop between Asia and
the oil exporters, particularly missiles and nuclear technology in the Middle
East and Persian Gulf.
Another area of concern involves the potential for Asia to aggravate
instability in global oil markets and prices due to the lack of adequate prepa-
ration for oil supply disruptions. Asia lacks the regional institutions to
manage supply crises on a regional cooperative basis, and key buyers in
the region are prone to panic buying during crises, fueling market instabil-
ity. Both China and India were key actors in panic buying in the run-up to
the Iraq war in January and February of 2003. The lack of effective policies
makes Asia a potential source of instability in global oil markets.
It is also quite apparent that Asias growing consumption of coal and
significant increases in transportation have grave environmental implica-
tions for Asia in terms of air quality, health, and global warming. Concerns
over long-term global carbon emissions simply cannot be effectively ad-
dressed without greater involvement from China and India. This needs to
be addressed both on the demand side, by slowing the rise in electricity
demand growth in Asia, as well as by making improvements in clean coal
technology and government policies regarding the preparation, handling,
and transportation of coal.
A final serious and obvious area for concern is the growing role of
nuclear energy in the Asian region and the resulting nuclear proliferation
and safety issues. This trend will create strong pressures for improving
the global regime to contain proliferation and for expanding research on
improving safety and disposal technology. As in the case of coal, the need
to make demand and pricing reforms that would slow the rate of growth in
electricity use are vital. It is far less expensive to slow consumption than
to manage the environmental and proliferation risks inherent in Asias
burgeoning coal and nuclear use.
In conclusion, Asias growing energy insecurity and rising energy
nationalism have broad ramifications for the region and for the United States
across a wide range of issues, geo-political, energy, and environmental. It
is vitally important that U.S. policymakers understand that energy is a
central pivot influencing a series of otherwise apparently unrelated strate-
gic, economic, and environmental interests. There is a high degree of
interconnectedness between energy and these other issues, suggesting
that the United States needs to develop aggressive efforts to reduce Asias
underlying energy insecurities. This would have a positive impact over a
wide range of other geo-political, energy, and environmental issues loom-
ing in Asias future. Moreover, there are important linkages between the
global war on terrorism and the U.S. wars in Iraq and Afghanistan and
Asias rising concerns about the security of their future energy supplies.
By aggravating Asian fears over the long-term stability of key energy ex-
porting regions, U.S. anti-terrorism policies may inadvertently be fueling
the competitive and mercantilist character of Asias energy strategies. The
deepening U.S. presence in the Persian Gulf and Central Asia is also height-
ening Chinas insecurity over its future access to energy supplies and is
certain to make energy an increasingly important potential source of ten-
sion. Strengthened U.S. efforts to help Asia solve its energy problems could
pay huge dividends along a broad range of larger geo-political and envi-
ronmental issues.
Endnotes
1
The two major choke points for Asias supplies are the Straits of Hormuz
exiting the Persian Gulf and the Strait of Malacca between Indonesia and
Malaysia. More than 50 percent of Asias daily oil supplies must transit the
narrow Strait of Malacca. See Energy Information Administration, World Oil
Transit Chokepoints, U.S. Department of Energy, April 2004.
Energy 373
2
I use the term mercantilism here in the same way as Robert Gilpin does,
describing policies driven by economic nationalism in which governments pursue
economic goals as part of the effort to build national political and strategic
power. Robert Gilpin, U.S. Power and the Multinational Corporation, New
York: Basic Books, 1975, p. 25.
3
There has been an ongoing debate on this. One pole of the debate is defined
by Kent Calder in Pacific Defense: Arms, Energy, and Americas Future in
Asia, New York: William Morrow and Company, Inc., 1996, who argues that
energy is likely to become a serious source of conflict in the region. On the
other side see Robert Manning, The Asian Energy Factor: Myths and Dilem-
mas of Energy, Security, and the Pacific Future, New York: Palgrave, 2000,
who argues that markets and cooperation are more likely to dominate responses
in the region. For other examples of this view see Daniel Yergin, Dennis Eklof,
and Jefferson Edwards, Fueling Asias Recovery, Foreign Affairs, vol. 77,
no. 2 (Mar/Apr 1998); and Michael May, Energy and Security in East Asia,
Asia-Pacific Research Center, Stanford University, 1998.
4
On Asian energy and oil development see John V. Mitchell, The New Geopoli-
tics of Energy, The Royal Institute of International Affairs, 1996, pp. 93124;
Manning, The Asian Energy Factor , pp. 5984; Paul Horsnell, Oil in Asia:
Markets, Trading, Refining & Deregulation, Oxford Institute for Energy Stud-
ies, Oxford University Press, 1997, pp. 1232; Keun-Wook Paik, Gas and
Oil in Northeast Asia: Policies, Projects and Prospects, The Royal Institute
of International Affairs, 1995, pp. 172.
5
Energy Information Administration, World Energy Use and Carbon Dioxide
Emissions, 19802001, U.S. Department of Energy, April 2004, pp. 13, 51.
6
Energy Information Administration, International Energy Outlook 2004, U.S.
Department of Energy, GPO, March 2004.
7
BP Statistical Review, 2004.
8
9
1 0
Energy Information Administration, International Energy Outlook, 2004
Other forecasts come to similar conclusions. For example, the IEA forecasts
Asian oil imports of 35 MMBD by 2030. See International Energy Agency,
World Energy Outlook, 2002, Paris: OECD, 2002, pp. 107.
1 1
U.S. Department of Energy, International Energy Outlook, 2004
1 2
International Energy Agency, World Energy Outlook, 2002
1 3
1 4
U.S. Department of Energy, International Energy Outlook, 2004
1 5
Energy Information Administration, World Energy Use and Carbon Dioxide
Emissions, 19802001
1 6
On Chinas energy and oil needs, see Manning, The Asian Energy Factor ,
pp. 85118; Horsnell, Oil in Asia , pp. 3365; Paik, Gas for Power in
Northeast Asia , pp. 11245.
1 7
For a discussion of Chinas 1990s oil and energy development strategies, see
Kang Wu and Binsheng Li, Energy Development in China: National Policies
and Regional Strategies, Energy Policy, vol. 23, no. 2 (1995), pp. 16971.
1 8
1 9
See U.S. Department of Energy, International Energy Outlook, 2004 ; Asia-
Pacific Economic Forum, Energy Demand and Supply Outlook, 2002, Tokyo:
APEC; Kang Wu, Outlook for Energy and Economic Development in China,
hearings before the Commission on U.S.-China Economic and Security Review,
October 30, 2003.
2 0
Kang Wu, The Refining Outlook in Asia and the Middle East, presentation
at the Oil & Money Conference, November 45, 2003, London.
2 1
For an excellent discussion of Chinas potential gas development, see David
Fridley, Natural Gas in China in Ian Wybrew-Bond and Jonathan Stern, eds.,
Natural Gas in Asia: The Challenges of Growth in China, India, Japan and
Korea, Oxford University Press, 2002, pp. 564.
2 2
U.S. Department of Energy, International Energy Outlook, 2004 ; other fore-
casts vary but reach similar conclusions. The IEA forecasts a 30 percent im-
port dependence by 2030 while the East-West Center Energy Program expects
gas import dependence to reach 30 percent by 2015 and 40 percent by 2020.
See International Energy Agency, World Energy Outlook, 2002 , and Wu,
The Outlook for Energy and Economic Development .
2 3
U.S. Department of Energy, International Energy Outlook, 2004; Interna-
tional Energy Agency, World Energy Outlook, 2002
2 4
Wu, The Outlook for Energy and Economic Development in China .
2 5
James P. Dorian, Emerging Russia-China Energy Relations: Will Needs be
Met by Supplies, presentation at a conference on Russia in AsiaAsia in
Russia: Economy, Economics, and Regional Relations, Kennan Institute,
Woodrow Wilson Center, Washington, DC, July 23, 2004.
2 6
The global oil shocks of 197374 and 197980 were major factors in the two
worst global economic recessions since the 1930s. See The Impact of Higher
Oil Prices on the Global Economy, IMF Research Paper, December 8, 2000.
2 7
The next several paragraphs draw on a substantial literature on Chinas energy
security concerns. See Philip Andrews-Speed, Xuanli Liao, and Ronald
Dannreuther, The Strategic Implications of Chinas Energy Needs, Institute for
International Strategic Studies, Adelphi Papers no. 346, Oxford University
Press, 2002; Erica Strecker Downs, Chinas Quest for Energy Security, Santa
Monica: RAND, MR1244AF, 2000; Downs, Chinas Energy Security, un-
published dissertation, Princeton University, 2004; Felix K. Chang, Chinese
Energy and Asian Security, Orbis, vol. 45, no. 2 (Spring 2001); Joe Barnes,
Slaying the Dragon: The New China Threat School, in China and Long-
Range Asia Energy Security: An Analysis of the Political, Economic and Tech-
nological Factors Shaping Asian Energy Markets, Baker Institute for Public
Policy, April 1999; International Energy Agency, Chinas Worldwide Quest for
Energy Security, Paris, 2000; U.S.-China Economic and Security Review Com-
mission, Chinas Energy Needs and Strategies, Washington, DC, October 30,
2003; Ross H. Munro, Chinese Energy Strategy, in Energy Strategies and
Military Strategies in Asia, report for the Office of Net Assessment, Depart-
ment of Defense, 1999.
2 8
See Edward L. Morse, Amy Myers Jaffe, and Nawad E. Obaid, The Sino-
Saudi Energy Rapprochement: Implications for U.S. National Security, re-
port for the Office of Net Assessment, Department of Defense, 2002; John
Energy 375
Calabrese, China and the Persian Gulf: Energy and Security, Middle East
Journal, vol. 52, no. 3 (Summer 1998) pp. 35166; Steven W. Lewis, Chinas
Oil Diplomacy and Relations with the Middle East, and Xiaojie Xu, Chinas
Oil Strategy Toward the Middle East, working papers, Post September 11
Update Report, The James A. Baker III Institute for Public Policy, Rice Uni-
versity, September 2002.
2 9
On ties with Central Asia see Gaye Christoffersen, Chinas Intentions for
Russia and Central Asia Oil and Gas, NBR Analysis, vol. 9, no. 2 (March
1998); Philip Andrews Speed and Sergei Vinogradov, Chinas Involvement in
Central Asian Petroleum, Asian Survey, vol. 40, no. 2 (March/April 2000).
3 0
Russia Plays Off Energy-Hungry Japan vs. China for Siberian Oil, Agence
France-Presse, October 10, 2003; Russia Leaning Towards Oil Pipeline Route
to Japan Rather than to China, World Markets Research Centre (WMRC),
February 24, 2004; China Fears Over Siberian Pipeline, BBC, February 24,
2004; Russia Split Over Asia Resource Exports, Asia Times, September 15,
2003.
3 1
Chinese in Sudan, Washington Times, March 5, 2004.
3 2
China Emerging as Important Energy Partner to Iran, OPECNA News Ser-
vice, August 28, 2003; Sinopec Says Its Close to Iran Oil and Gas Deals,
WMRC, June 25, 2004;
3 3
Jeffrey Brown and Kang Wu, Key Players in the Asia Pacific Oil Market,
East-West Center Working Papers, Economics Series no. 55, May 2003, pp.
2728.
3 4
See Amy Myers Jaffe and Steven T. Lewis, Beijings Oil Diplomacy, Sur-
vival, vol. 44, no. 1 (Spring 2002),
3 5
China Steps Up Efforts in Oil Reserves Building, Peoples Daily, January
21, 2003.
3 6
See Ken Koyama, Oil Supply Security in Asian EconomiesGrowing Oil
Imports and Their Response Measures, Energy in Japan, no.149 (January
1998); Inoguchi Takashi, Japans Response to the Gulf Crisis: An Analytic
Overview, Journal of Japan Studies, vol. 17, no. 2 (1991), pp. 25773.
3 7
On Japan energy and oil, see Manning, The Asian Energy Factor , pp. 143
68; Horsnell, Japan: The Re-Emergence of Market Forces, in Horsnell, Oil
in Asia , pp. 6689; Paik, Gas and Oil in Northeast Asia , pp. 171205.
3 8
In 2001 Japan consumed 7,013 BTUs (British Thermal Units) per 1995 dol-
lar of GDP (PPP), compared to nearly 11,000 BTUs for the United States
and an OECD average of roughly 8,000. See Energy Information Administra-
tion, Japan: Environmental Issue, Country Analysis Brief, U.S. Department
of Energy, January 2004.
3 9
International Energy Agency, Energy Policies of IEA Countries: Japan, 2003
Review, Paris, 2003, p. 19; also Energy Information Administration, Japan
Country Analysis Brief, U.S. Department of Energy, January 2004.
4 0
International Energy Agency, World Energy Outlook, 2002 .
4 1
On Japans natural gas development see Akiro Miyamoto, Natural Gas is
Japan, in Wybrew-Bond and Stern, Natural Gas in Asia , pp. 10687.
4 2
Japan closed its last remaining coal mine in 2001.
4 3
Japans Energy Crisis: Darkness Falls in Tokyo, Economist, July 17, 2003.
4 4
Japans bureaucratic agency for guiding Japanese industrial policy since 1949
has been the Ministry of International Trade and Industry (MITI), known as
Ministry of Economics, Trade, and Industry (METI) since 2001. Throughout
the period it has been the key architect of Japans energy security policies.
4 5
Brown and Wu, Key Players in the Asia Pacific Oil Market , pp. 4143.
4 6
For a good recent discussion of Japans recent policies, see Kent Calder,
Japans Energy Angst and the Caspian Great Game, NBR Analysis, vol. 12,
no. 1 (March 2001); Japanese Energy Security and Changing Global Energy
Markets: An Analysis of Northeast Asian Energy Cooperation and Japans
Evolving Leadership Role in the Region, The James A. Baker III Institute for
Public Policy, Rice University, May 2000.
4 7
Japan Signs Oilfield Development Deal with Iran Despite Opposition from
U.S., Financial Times, February 19, 2004, p. 9.
4 8
The pipeline decision has been held up by a number of factors. Proven oil
reserves in the Angarsk region are presently only sufficient to support the
400600 MBD volume agreed to with the Chinese. The longer Japanese line
would require a volume of 1 MMBD to be commercially viable. Second, con-
trol over the pipeline decision has shifted as the Kremlin moves to assert greater
control over the Russian oil industry and export revenues.
4 9
Edward C. Chow, Russian Pipelines: Back to the Future? Georgetown Jour-
nal of International Affairs, vol. 5, no. 1 (Winter/Spring 2004), pp. 3031.
5 0
On South Korea energy and oil, see Manning, The Asian Energy Factor ,
pp. 143168; Horsnell, Oil in Asia , pp. 99108; Paik, Gas and Oil in North-
east Asia , pp. 171205.
5 1
5 2
U.S. Department of Energy, International Energy Outlook, 2004 .
5 3
See Korea, in World Energy Outlook, IEA, p. 228.
5 4
On Korean gas development see Keun-Wook Paik, Natural Gas Expansion in
Korea, in Wybrew-Bond and Stern, Natural Gas in Asia , pp. 188229.
5 5
Korea National Oil Company (KNOC) inaugurated Koreas first natural gas
production from the offshore Donghaa-1 field in November 2003, but this will
meet just 2 percent of Koreas gas use. Energy Information Administration,
Korea Country Analysis Brief, U.S. Department of Energy, December 2003.
5 6
Korea, in World Energy Outlook, IEA, pp. 233.
5 7
Brown and Wu, Key Players in the Asia Pacific Oil Market , p. 47.
5 8
On Indian energy and oil development, see Manning, The Asian Energy Fac-
tor , pp. 11942; Horsnell, Oil in Asia , pp. 9099.
5 9
6 0
6 1
For a discussion of Indian gas development, see Najeeb Jung, Natural Gas in
India, in Wybrew-Bond and Stern, Natural Gas in Asia , pp. 66105.
6 2
6 3
Middle East to Play Large Role in Gas Supply to China, India, Oil and Gas
Journal, June 7, 2004.
6 4
FACTS: Indias Long-Term Gas Supply Outlook Bright, Oil and Gas Jour-
nal, December 8, 2003.
6 5
Energy 377
6 6
Brown and Wu, Key Players in the Asia Pacific Oil Market , p. 43.
6 7
Asian Firms Drill Deeper into Sudan, Petroleum Intelligence Weekly, July 5,
2004, pp. 45.
6 8
OVL to Buy Shells Stake in Angola Oilfield, Times of India, April 10, 2004.
6 9
South Asia: The Powerhouse Moves Abroad, Petroleum Economist, July
13, 2004, pp. 1316.
7 0
India LNG Deal Eased with Kushk-Husseinieh Oil Offer, WMRC, June 4,
2004; and Iran Ties Oilfield Development Projects with LNG Offtake,
WMRC, March 3, 2004.
7 1
7 2
Energy Intelligence Group, Indonesia Becomes Net Oil Importer, Insists
Switch is Temporary, Oil Daily, May 21, 2004.
7 3
International Energy Agency, World Energy Outlook, 2002 .
7 4
Energy Information Administration, The Global Liquefied Natural Gas Mar-
ket: Status and Outlook, U.S. Department of Energy, December 2003, pp. 10
11.
7 5
LNG: ChinaFools Rush In, Petroleum Economist, July 13, 2004, pp. 24.
7 6
The Global Liquefied Natural Gas Market , pp. 1011.
7 7
The Global Liquefied Natural Gas Market , pp. 1011.
7 8
Energy Intelligence Group, Australian Government Helps Competing LNG
Projects, World Gas Intelligence, April 19, 2004.
7 9
See Jonathan Stern, Russian and Central Asian Gas Supply for Asia, and
Ian Wybrew-Bond, Middle East and South East Asia: Gas-Exporting Regions
to Asian Markets, both in Wybrew-Bond and Stern, Natural Gas in Asia ,
pp. 23076 and pp. 27798 respectively.
8 0
In late 1998 Saudi Arabia invited foreign oil companies to invest in large natu-
ral gas developments in Saudi Arabia, the first opening to foreign involvement
in oil and gas since the nationalization of the 1970s. The opening came to be
called the Strategic Gas Initiative.
8 1
Japan Oil Group in Talks Over Iraq Energy, Financial Times, June 4, 2004,
pp. 16; Despite Hostage Killing, Korea Seen Pursuing Iraq in Long-Term,
International Oil Daily, June 23, 2004.
8 2
For many years now Asia has paid a slightly higher price than the U.S. or
Europe, varying in the range of $12 per barrel, for comparable oil supplies
due to higher transportation costs and limited supply options. This is the
Asian Premium.
8 3
See Kang Wu and Fereidun Fesharaki, Managing Asia Pacifics Energy De-
pendence on the Middle East: Is There a Role for Central Asia, Asia Pacific
Issues Paper, no. 60, June 2002.
8 4
See Kathleen A. Collins and Willian C. Wohlforth, Defying Great Game
Expectations, in Richard Ellings and Aaron Friedberg, eds., Strategic Asia
200304: Fragility and Crisis, The National Bureau of Asian Research, 2003,
pp. 30406.
8 5
China and Japans Oil Rivalry Unavoidable, China Daily, July 13, 2004;
China, Japan at Odds Over Offshore Gas Project, Asahi Shimbun, June 23,
2004; China Rejects Japanese Gas Field Claims, WMRC, June 28, 2004;
China Warns Japan Over Gas Field Claims, WMRC, June 29, 2004.
Middle East
46 19
China
10 2
Japan
7 6
Pakistan
2 0
Southeast Asia
6 0
Africa
8 5
India
5 1
Korea
3 2
Indonesia
1 0
Russia
5 4
Central Asia
4 1
2030 2000
Exports
Imports
Asias Growing Oil Import Dependence
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