asia’s energy insecurity: cooperation or conflict?

7/29/2019 ASIAS ENERGY INSECURITY: COOPERATION OR CONFLICT?

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Energy 339

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-

t li Th i k f t i t tt k it l i f t t


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340 Strategic Asia 200405

IntroductionA 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-

i t i t t t b l ft ti l t th k t th i i


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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, increasingthe 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 couldeither 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 andfuture 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-


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and environmental interests. The goal of this chapter is to analyze Asiasenergy 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 theprospects 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 FundamentalsEnergy 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 indeveloping 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


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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 thirdmade 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 hasbeen 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

Table 1. Asian Energy Demand Growth by Fuel, 19802002Asia 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.


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Natural GasAsias 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 d 2030 hil i t ill th d bl 12 I 2000 i

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.


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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-

lik l t ti Th U S D t t f E f t th t

2 0 2 5

2 0 2 02 0 1 52 0 1 0

2 0 2 5

2 0 2 0

2 0 1 5

2 0 1 0

0

2 0 0

4 0 0

6 0 0

8 0 0

1, 000

1, 200

1, 400

1, 600

1, 800

2, 000

2 0 1 0 2 0 1 5 2 0 2 0 2 0 2 5

R e s t o f W orld A s iaRest of World Asia

Source: Department of Energy, International Energy Outlook, 2004

2,000

1,600

MillionsMetricTons

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


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hydroelectric power and renewable energy sources over the next two de-

cades, but even by 2025, hydro and renewable sources are only expectedto 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 needsa 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-

Source: Department of Energy, International Energy Outlook, 2004

Chart 2. Pr ojected Nuclear Power P roduction(Gigawat ts )

1 211 191 0 6

9 1

6 6

2 6 42 8 2

3 0 13 0 12 8 7

0

50

1 00

1 50

2 00

2 50

3 00

3 50

2 0 0 1 20 1 0 2 01 5 2 0 2 0 2 02 5

As ia R e s t o f W o rld

Gigawatts

Figure 2. Projected Nuclear Power Production

350

300

200

150

100

50

02001 2010 2015 2020 2025

287301 301

119

6691

264

121

282

106

250

Rest of WorldAsia


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Energy 347

A second set of discontinuities revolves around the potential for amajor, 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 fundamentalshift 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 risingenergy 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 futuremust take this into account.

Energy Security and the Key Asian PowersAsias energy dilemma reflects a set of broad, consistent trends, but con-


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each another and with U.S. objectives in the region, will determine whetherenergy 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 coalcontinues 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,


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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 hasbeen 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 forecaststhat 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 nowfaces 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 fromRussia 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


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to begin operation in late 2004. The government is also working to developgas 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 likelyto 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 tohave 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 willhave 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 producerand consumer of coal in the world, and it still makes up roughly two-thirdsof 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 CO2emissions over that period. Although China is presently a net


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Energy 351

pendence and vulnerability to global oil supply crises have acted as acatalyst 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 acatalyst 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 CentralAsia 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 Asiafrom 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


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Angarsk region of East Siberia via the Daqing oil region of northeasternChina.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 amixed 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. Othersmall 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 alsoworks 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


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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 byARAMCO 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 thetwo 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 akey 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 andgas 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


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and across the Yellow Sea to South Korea to link Russian gas supplies toboth 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 andalliances. 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.

JapanEnergy 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 15percent 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-


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Energy 355

and China. Moreover, oil accounts for nearly 50 percent of energy use inJapan, 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 IEAexpects total energy and oil demand in Japan to riseby 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 early1970s 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


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APEC energy monitoring efforts, which are headquartered in Tokyo. Japanhas 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 CompanysNeutral 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 OilCompany 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


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Energy 357

and longer pipeline from Angarsk to the Pacific coast at Nakhodka, alongwith 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 fairlymodest 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 activeefforts 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.


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This extraordinary growth was driven by the convergence of the economicand 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 andInchon 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


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Energy 359

Nevertheless, the oil and gas industry in South Korea remains heavilydominated 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 PersianGulf 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 majorequity 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


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As in the rest of Asia, oil is the major import concern for India. Oilaccounts 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 62percent 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, importswill 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 majorimporter 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


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Energy 361

now accounts for less than five percent of electricity needs in India, butfive 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 peryear 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 anequity 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 blocksin Syria;and has been negotiating with Iraq, Libya, Kazakhstan, and the United


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The outlook for oil suggests that most of Asias current oil exportsare 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 fieldsand 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


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Energy 363

Malaysia is increasingly shifting its energy export future on LNG. LNGexports 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 itsproduction 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


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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 regionnuclear 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 SuppliersAsian 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

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.


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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 andexport 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.

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.


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not been possible until the recently, but China is quickly broadening itslarge 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 atwo-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,


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Energy 367

tance is in the Central Asia and Caspian Sea region. Central Asia and theCaspian 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 ofdiversifying 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 StatesAsias response to its deepening energy insecurity has important implica-

tions for the United States across a range of geo-political, energy, and

environmental issues.


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often military cooperation rather than multilateral, regional, and marketapproaches 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


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Energy 369

the South and East China Seas, such as we are currently witnessing in theChina-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 isalready 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


32/40


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 Asianstates, 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


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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

372 St t i A i 2004 05


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be addressed both on the demand side, by slowing the rise in electricitydemand 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

Energy 373


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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 thatenergy 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 Instituteof 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

BP Statistical Review, 2004.9 BP Statistical Review, 2004.

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,

374 StrategicAsia2004 05


36/40


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 inRussia: 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 RonaldDannreuther, 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-

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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, NBRAnalysis, 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 (January1998); 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

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376 Strategic Asia 2004 05

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, NBRAnalysis, 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 the400600 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 BP Statistical Review, 2004.5 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.

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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 BP Statistical Review, 2004.7 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. 1011.7 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, andIan 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


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Middle East

4619

China102

Japan76

Pakistan20

Southeast Asia

60

Africa85

India51

Korea32

Indonesia10

Russia54

Central Asia41

20302000

Exports

Imports

Asias Growing Oil Import DependenceOil Imports/Exports for Selected Countries, Regions, 2000-2030

Imports or exports in millionsof barrels/day during year:

Sources:BP,2004;InternationalEnergyAdministration,World

EnergyOutlook,2002

asia’s energy insecurity: cooperation or conflict?

Documents