ENERGY SECURITY IN THE ASIA-PACIFIC:
COMPETITION OR COOPERATION?
ASIA-PACIFIC CENTER FOR SECURITY STUDIES
JANUARY 15, 1999 HONOLULU, HAWAII
 
 

Executive Summary: The Asia-Pacific Center for Security Studies held a one-day seminar on energy security in the Asia-Pacific on January 15, 1999. The specific purposes of the seminar were to assess the current and future energy outlook for the region, identify the salient factors that influence energy security, and evaluate whether new aspects of the energy scenario raise new security challenges. The seminar was organized into four sessions: "Outlook on Energy Supply and Demand in Asia," "Energy Constraints and International Politics on Key Asian States" (two case studies on China and India), "Comparative Perspectives on the Politics of Energy Resource Management in the Asia-Pacific Region," and "Concluding Discussions: Lessons Learned." This seminar report draws on the papers, presentations, and subsequent discussions held during the one-day proceedings. It also incorporates broader literature on the subject as it relates to matters discussed at the seminar. Key findings of the seminar are as follows:

Energy Itself is Not a Threat to Regional Security. Energy per se is not likely to be a source of conflict in Asia. Rather, changing patterns in trade, a greater reliance on the Middle East for oil and thus a greater reliance on open access to sea-lanes, and shifting strategic relationships are sources of conflict which may have an impact on the region’s energy security. Technological advances, diversification of energy portfolios, stockpiling, and collaborative inter-state arrangements have greatly diminished supply concerns. The notion that conflicts may arise over energy competition fueled by a perception of shortage, thus, is not the main concern of states today.

Traditional Concerns Regarding Energy Security Persist. Traditional sources of concern over energy security, such as the importance of free and secure access to sea lanes and territorial conflicts in the South and East China Seas, continue to challenge governments and security professionals. Given the trend toward greater consumption of oil in Asia, freedom of navigation remains a top priority of concern. The U.S. longstanding commitment to ensuring open sea lanes of communication remain a critical factor in regional stability as it relates to energy. Territorial disputes in the East and South China Seas were raised as continuing security concerns, but there was general consensus that energy was not at the heart of these disputes.

Natural Gas Raises New Security Challenges. Technological innovation and a more sophisticated energy market have led to newly emerging energy security questions. Natural gas, widely regarded as the most promising energy resource for the 21st century, raises a whole new set of security considerations, namely the potential competition over pipeline construction projects, the security of pipelines once they are built, and the need for multilateral and bilateral cooperation among Asian countries. Despite the more sophisticated energy market today, governments wrestle with the tensions posed by a trend toward liberalization of energy sectors and continue to express doubts about the ability of markets to supply countries with a resource considered vital to national security. 

United States Must Consider the Strategic Implications of Evolving Asia-Middle East Relations. A combination of the region’s dominant oil consumption today, its expected demand growth in the long term, and the concentrated nature of its supply source—the Middle East—poses important security considerations. Political instability in the Middle East raises the possibility of large-scale disruptions in the export supply of oil, a real energy security concern in light of Asia’s heavy reliance on the Middle East region for its oil. East Asia will likely gain greater political-economic interest in the Middle East as a natural spillover effect from this greater energy interdependence. This evolving Asian interest in the Middle East poses complicated problems for Asia’s relations with the United States; for instance, will Asia be as willing a supporter in the future of American sanctions policy in the Middle East? Complicating this equation is the fact that growing Asia-Middle East ties coincide with a decreasing American dependence on the Middle East for oil. 

States Face a Dilemma Over Trusting the Markets. There was considerable debate about whether today’s more sophisticated energy market—where privatization, competition and open markets could provide the required resources, capital, and infrastructure—would lead governments to trust the market for its energy instead of relying on traditional energy security strategies of the 70s, such as stockpiling. Governments no longer see their energy security problems from a supply shortage perspective as they once did during the oil shocks of the 70s. Rather, the effects of market competitiveness and more investment into the energy sectors have led some countries to liberalize their energy sectors. While there have been tentative moves toward liberalization, less energy self-sufficient countries like Japan and South Korea are more conservative about placing their energy security in the hands of the markets. Participants agreed that while companies may believe in the validity of markets, governments generally, but especially in the Asia-Pacific region, tend to be more reluctant about relying on the market to provide resources vital to national security.

International Institutions Could Play a Key Role in Energy Security. An apparent demand exists for international institutions to play a key role in securing energy resource stability in Asia. For instance, participants agreed that the World Bank and other international development banks could play a key role in providing financial security to countries which participate in natural gas pipeline projects by creating a disincentive for states to take negative unilateral action against a project. The active role of multilateral organizations also serves as a benchmark by which private investors measure the risk of investing in a particular country or project. In this respect, these organizations would establish and enforce norms that favor cooperation. There was consensus that establishing an institution may not necessarily foster regional cooperation on energy matters, but there is clearly a need for some kind of an organization to address a set of challenges that are widely shared within the region.


INTRODUCTION

Energy security may be achieved when a state is able to minimize vulnerability to resource supply disruptions, access reliably energy at reasonable and/or market-driven prices, and consume resources that least damage the environment and/or promote sustainable development.1  By extension of this broad definition, energy becomes a security concern when states are denied access—whether it be the actual resource itself or by way of volatile and/or unfair pricing. There exists a vast literature on the history, politics, and economics of resource consumption in the world, and how states may act in an effort to secure their needs. Relatively little is written, however, on understanding how, why, and whether energy—as the unit of analysis—triggers competition or cooperation among states at the national security level.

By 2010, energy use in developing Asia (including China and India, but excluding Japan, Australia, and New Zealand) is projected to surpass consumption of all of North America; by 2020 it is expected to exceed North American consumption by more than 36%.2   The Asia-Pacific region will consume more than half of the world’s energy supply, and will emerge as the dominant energy consumer by the early next century. Some scholars argue that the region’s growing energy needs have led to new strategic relations with other parts of the world, especially the Middle East, and have raised new questions about the reliability of the international market system in providing predictable and affordable access to energy resources. What are the pressing energy issues of the Asia-Pacific region? Do energy needs pose new challenges to Asia-Pacific security? How important is energy as a source of tension between states, or are energy security matters considered "low politics" which have a higher tendency toward resolution rather than conflict?

In an attempt to explore these and other questions, the Asia-Pacific Center for Security Studies held a one-day seminar on regional energy security on January 15, 1999. The specific purposes of the seminar were to assess the current and future energy outlook for the region, identify the salient factors that influence energy security, and evaluate whether new aspects of the energy scenario raise new security challenges. The seminar was organized into four sessions: "Outlook on Energy Supply and Demand in Asia," "Energy Constraints and International Politics on Key Asian States" (two case studies on China and India), "Comparative Perspectives on the Politics of Energy Resource Management in the Asia-Pacific Region," and "Concluding Discussions: Lessons Learned." This seminar report draws on the papers, presentations, and subsequent discussions held during the one-day proceedings. It also incorporates the broader literature on the subject as it relates to matters discussed at the seminar.

In short, discussions led to a general conclusion that the energy security debate of the nineties is less about energy, per se. Unlike the energy security debates of the 1970s and 1980s which focused on supply shortages as a source of conflict and competition, rivalry and competition over energy itself is a non-issue in today’s debate. In fact, some would go so far as to argue that the common challenge of greater external reliance on energy supplies among Asian states would create incentives to cooperate, not compete. The security concerns, rather, arise from issues related to the access, transportation, and reasonable prices and distribution of energy, specifically, the changing patterns in trade, a greater reliance on the Middle East for oil and thus a greater reliance on open access to sea-lanes, and shifting strategic relationships.

Overall, discussions were not pessimistic about the future of Asia’s energy security. The general sentiment seemed to be that the identified problems were not entirely unavoidable if countries applied a constructive use of diplomacy during tensions; shaped national policies based on facts—not perceptions—regarding resource potential in certain parts of the region; and made commitments to utilize relationships already in place, such as bilateral alliances, to explore energy security questions.

ENERGY OUTLOOK FOR THE ASIA-PACIFIC REGION

The financial crisis has temporarily slowed the pace of economic growth and development in much of Asia, but it has not fundamentally altered projections for Asia’s future energy needs. Long-term energy demand growth for the region is expected to surpass its own production capacity and eventually be the dominant consumers of the world’s energy supplies. The Asia-Pacific region, led by China and India, will represent the world’s largest energy market in the next decade. Technological advances and a more sophisticated energy market today have led to a growing reliance on natural gas and nuclear power relative to the region’s traditional sources of energy, coal and oil. However, coal and oil remain the region’s primary energy sources, with the rate of growth of oil demand set to increase considerably in the next decade.

Table 1. Primary Energy Consumption by Fuel in the Asia-Pacific Region,
with Figures for Total North America and Total World, 1997  

Oil

Natural Gas

Coal

Nuclear Energy

Hydro-electric

TOTAL
Australia

36.8

17.6

46.7

-

-

102.5

Bangladesh

2.9

6.8

-

-

0.1

9.8

China

185.6

17.4

681.8

3.7

16.2

904.6

Hong Kong

9.1

2.4

3.4

-

-

14.9

India

83.1

22.0

146.4

2.5

6.2

260.3

Indonesia

46.3

29.5

6.4

-

0.8

83.0

Japan

266.4

58.6

89.8

83.4

8.1

506.3

Malaysia

20.2

16.0

1.6

-

0.7

38.5

New Zealand

6.0

4.5

1.3

-

2.0

13.7

Pakistan

16.5

14.3

2.3

0.1

2.3

35.3

Philippines

18.2

<0.05

2.3

-

0.5

21.0

Singapore

29.1

1.4

-

-

-

30.4

South Korea

105.9

14.8

34.0

19.9

0.5

175.1

Taiwan

36.8

4.7

22.0

9.4

0.8

73.7

Thailand

38.5

12.0

9.0

-

0.6

60.1

Other AP

14.8

3.8

24.5

-

4.0

47.0

TOTAL ASIA PACIFIC

916.2

225.8

1071.5

119.0

44.1

2376.2

 

TOTAL N. AMERICA*

1006.2

666.2

560.9

195.0

61.9

2490.2

TOTAL WORLD

3395.5

1977.3

2293.4

617.4

225.9

8509.2

               Source: BP Statistical Review of World Energy 1998
            * Includes USA, Canada, and Mexico

Asia’s current energy mix is determined by balancing its endowment of energy resources with policies which encourage diversification of supply, development of strategic reserves, ongoing research for new domestic sources and new commercial approaches to overcoming resource constraints.3  Given Asia’s prevailing energy consumption patterns, understanding the structure of its energy mix today and for the future is a useful basis from which to assess strategic considerations regarding energy security.

Primary Energy Sources in Asia: Coal, Oil, and Natural Gas

Asia is projected to expand its overall energy consumption greatly in the next decade as particular economies enter energy-intensive stages of economic development, but a closer look at this consumption among Asian countries will reveal a "mixed" resource-use pattern. Coal, for instance, accounts for 45% of the primary energy in Asia, compared to only 20% in the rest of the world.4  When China and India are excluded from the overall Asian statistics, the Asia-Pacific region primary energy mix is sharply different; the region becomes a predominant oil consumer, 54% of its energy mix held by oil, compared to 40% of the rest of the world’s energy shares held by oil.

COAL IN ASIA

Worldwide coal consumption currently grows 1.7 times above 1995 levels, with the Asia-Pacific region’s consumption growing at a faster rate than that of any other region.5  Although the rest of Asia moves gradually toward a decrease in coal consumption as a share of primary energy needs, China and India will continue to rely on coal as the primary fuel source. Asia’s coal reserves—one-third of world coal reserves—comfortably meet the projected growth in demand for more than 100 years. Due to relatively easy transportation and domestic abundance, the region itself supplies most of the coal it consumes. Australia accounts for more than two-thirds of Asia’s coal exports. Indonesia and China, while abundant in coal, are less likely to continue as major coal exporters. Despite Indonesia’s current problems stemming from the financial crisis, the state’s projected growth in domestic coal consumption and possible limitations on the amount of export quality coal suggest a slowdown in the growth of coal exports. China’s rate of growth of exports is questionable as well due to transportation, extraction, and technological upgrade issues.

OIL IN ASIA

Consumption of oil, however, is likely to remain steady at—or perhaps increase beyond—about 37% of Asia’s energy mix. In 1997, the Asia-Pacific region consumed 19,525 thousand barrels of oil per day, or 27% of the world total.6   Although worldwide growth in oil demand is expected to raise oil prices over the next two decades (from US$11 per barrel in 1999 to over US$22 per barrel in 2020), oil prices are expected to stay relatively low.7  The main reason for such a forecast is that non-OPEC oil-producing countries will be able to continue to expand their export capacities through improvements in oil technology. If the price of oil remains relatively low, oil’s share of primary energy in Asia could increase by as much as four percentage points, from 37-41% by 2020. By 2000, Asia’s oil demand alone will account for more than 50% of the global increase. China’s oil consumption is expected to increase 2.6 times, while India’s and the rest of developing Asia’s is expected to double.8  As economic growth revives in ASEAN countries hit by the current financial crisis, oil demand growth in this subregion is expected to accelerate to 6% annually. Between 1996 and 2010, Asia will require as much as 40 million additional barrels per day (b/d) during the same period in which Asia’s productive capacity of crude oil is rapidly declining.9

NATURAL GAS IN ASIA

Many resource experts claim that natural gas will serve as the critical primary energy source for the world in the 21st century. Some even refer to the new era as the "Gas Century." Of all other primary energy sources, the worldwide use of natural gas is expected to grow most rapidly, by 3.3% annually over the next 25 years.10   Natural gas has fewer negative environmental effects than other fossil fuels and is considered a highly efficient fuel for generating electricity. In fact, much of the future growth in gas demand will be for electricity generation, as combined-cycle gas-fired generators require shorter construction periods and are more efficient than fossil fuel generators or nuclear power plants.

Natural gas today provides 9% of Asia’s total energy needs; when China and India are excluded, Asia consumes 15% of natural gas as a share of its primary energy sources. Currently, the world relies much more on natural gas to meet its total energy requirements (29%) than does the Asia-Pacific region, but that is likely to change given that Asia’s natural gas market is rich in reserves and as yet largely underdeveloped or untapped. Natural gas consumption in Asia is projected to grow at a rate of 5-6% per year between 1998 and 2020, assuming a regional gas network is established in the medium term.11

The lack of regional pipelines and the infrastructure necessary to transport natural gas to markets remain major obstacles to rapid, short-term consumption of natural gas. A number of pipeline proposals are under consideration by private investors and governments. Rich in oil and natural gas, the newly independent Central Asian states and Russia—the world’s largest gas exporter—are likely to become major sources of energy for Asian markets such as China, Korea, and Japan through a proposed network of pipelines connecting Siberia with Northeast Asia. The more ambitious projects propose to deliver gas from Central Asia through Afghanistan into Pakistan and India. There are currently about nine or ten pipeline proposals that are routed eastward, each project ranging in price between US$1.2-20 billion. Of the proposals under consideration, it is highly unlikely that more than one or two will actually be built. Given the difficulties of extracting and transporting natural gas to the market, this resource alternative still holds more promise for future energy needs than meeting the energy requirements of today.

Figure 1. Primary Energy: Regional Consumption Pattern, 1997

Source: BP Statistical Review of World Energy 1998

The overall trend in energy resources is toward lower long-term prices, and a more reliable flow of energy supplies. The overall energy mix of the Asia-Pacific region is weighted toward coal due to large coal reserves in Asia and heavy reliance on coal in China and India; crude oil remains the primary energy source for Asia when China and India are excluded. Over the next ten to twenty years, however, Asia’s energy mix is likely to shift toward greater consumption of natural gas if a regional pipeline network is in place. The potential for alternative hydrocarbon fuel resources such as coalbed methane is high in the region, particularly in China, Australia, and India, but the relatively high costs associated with developing commercial coalbed methane projects make it unlikely to serve as a major resource by 2020.12

ENERGY SECURITY ISSUES AMONG KEY STATES: CHINA, INDIA, JAPAN

Trends in the intensity of energy use, measured by the way in which energy demand evolves relative to a country’s GDP over time, are critical factors in assessing a country’s long-term energy demand. While historical data show that industrialized countries’ energy demand growth trails behind economic growth, developing countries’ energy demand growth tends to "track" the rate of economic expansion.13   For instance, in advanced industrialized countries, per capita energy use is relatively stable. Thus, changes in energy demand in advanced economies would tend to track employment and population growth. However, in developing countries, factors such as improving lifestyles (due to rising personal incomes) and the composition of industrial activity drive the rate of growth of energy consumption. For example, in South Korea, Thailand, India and China, growth rates for automobile ownership have exceeded 10% in recent years.14   With most of the Asia-Pacific region in an energy-intensive stage of economic development, led by China and India, energy demand growth rates in the region will be fueled by rapid industrialization and improved standards of living.

CHINA

Arguments asserting that energy poses prospective security challenges in Asia rest in large part on the scope of the PRC’s future energy demands. After more than thirty years as a net exporter of oil to the world, rapid economic growth and concomitant increases in energy demand led China to become a net importer in 1993. As economic growth continues to be the top priority of the Chinese government, energy security ranks as a top political and economic concern. China is determined to ensure its energy security for the future by developing energy links with its neighbors in the region. China’s future energy demand is based on an expected economic growth rate of about eight percent per year until 2010, with a GDP per capita of about US$800 in 2000 and US$1500 by 2010. The financial crisis in Asia has somewhat dampened China’s rate of economic growth due to slowed export growth, but it appears likely that long-term Chinese energy demand will continue to be strong.

Imports into China, particularly of oil and liquefied natural gas, will rise steadily. China currently consumes about 4 million barrels of oil per day, equivalent to 20% of Asia’s total consumption and 5.5% of the world’s total oil consumption.15   Some estimates suggest that China’s oil imports could rise from 720,000 barrels of oil per day to 3 million b/d by 2010. In 1997, China imported over 432 million barrels of oil, mainly from the Middle East. Few doubt this upward trend for four reasons.16   First, Chinese growth will likely outpace the rest of Asia due to the huge potential for more efficient use of key factors of production. Second, the composition of industrial activity in China for the near to medium term is expected to play a critical role in fueling China’s energy demand growth. For instance, China is the world’s largest producer of iron, steel, and cement—industries required for building domestic infrastructure throughout the country. These industries are particularly energy-intensive even with the use of most modern production technology.17   Third, poor infrastructure, which makes it difficult to bring relatively plentiful coal resources in the northern and western provinces to the rapidly growing southern coastal areas, assures that future energy needs in the most rapidly growing parts of China will be supplied heavily by imports. Finally, China’s growth prospects may be better than other Asian countries given its potentially huge domestic market and relative insulation from global financial pressures due to remaining economic controls. (Some participants cautioned, however, against an overly optimistic view of China’s long-term economic growth. In addition to the uncertain prospects of successful privatization of China’s state-owned enterprises, massive debts held by public corporations, and growing human capital problems, the penetration of modern economic growth into China’s inland areas remain a fundamental question for assessing long-term scenarios for growth in China).

Despite China’s rising consumption of oil and gas, coal remains China’s primary energy source, accounting for fully 75% of the nation’s energy consumption.18   China’s verified coal reserves rank third in the world, behind the United States and Russia, with about 115 billion tons, or one-ninth of the world’s total.19    China surpassed Russia in 1989 to become the world’s largest coal producer. China’s main coal exporter, the China National Coal Import and Export Corp. (CNCIEC) exported a record 29.25 million tons of coal in 1998, shipping 13 million tons to Japan, 6.5 million tons to South Korea, 7 million tons to Southeast Asia, and 2 million tons to Europe.20   CNCIEC plans to increase its exports to 40 million tons in 2000, which are about 80% of China’s total planned coal exports.21  Ironically, despite China’s ample coal reserves, the government may become a coal importer by 2000. An inadequate road network and already heavy burdens placed on Chinese railroads pose virtually insurmountable transportation problems between the coal-rich northern provinces and the large coal-consuming southern provinces, forcing the government to consider importing coal to meet the needs of its growing coastal areas.22

Mechanization of coal extraction in the late 1970s drastically improved the efficiency of China’s coal output. However, even with technological innovations, China’s large-scale coal mining lags greatly behind average international standards in output.23   The inefficiency of these coal mines have implications which extend beyond productivity levels or rates of output; work safety and environmental concerns are serious problems. Extensive destruction of arable and grazing land, accelerated erosion of exposed topsoils and increasing air and water pollution are examples of the environmental consequences of coal extraction. The average sulfur content of major Chinese coal deposits, about 1.2%, is not high by international standards, but some southern coal, notably from Sichuan and Yunnan, have unusually high sulfur contents. Sulfur dioxide from burning coal totals 23 million tons annually, about 30 times Japanese levels.

 Table 2. Coal Consumption Among Top Five AP Countries, 1987-1997 (in million tonnes oil equivalent)  

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1997 Share of Total 

China

460.2

484.9

522.7

533.6

534.9

549.5

570.3

606.4

635.7

676.9

681.8

29.7%

India

88.6

96.2

99.3

103.1

111.0

116.6

120.5

123.6

131.0

138.3

146.4

6.4%

Japan

69.4

76.2

75.6

76.0

79.0

78.0

79.2

82.0

86.2

88.3

89.8

3.9%

Australia

41.4

36.1

38.3

39.5

37.4

39.0

36.4

38.7

41.2

43.9

46.7

2.0%

Korea

23.6

25.2

24.5

24.4

24.5

23.6

25.9

26.7

28.1

32.2

34.0

1.5%

Total AP

740.7

778.8

824.7

839.1

849.4

870.1

897.2

940.5

987.7

1048.8

1071.5

46.7%

             Source: BP Statistical Review of World Energy 1998

Current emissions in parts of southern China—a direct cause of 40% of all acid rain that falls on Japan and Korea—has raised questions regarding environmental and health concerns not only in Beijing but also in Tokyo and Seoul. In the next 100 years, China will acquire the world’s largest concentrations of coal-fired power plants whose emissions will continue to travel eastward toward Korea and Japan. Gas desulphurization techniques are one method of reconciling China’s high reliance on coal with the need for environmental protection, but currently, large-scale desulphurization is an extremely expensive option.24  With current technology, desulphurization increases both capital and operating costs by 20%. In response to these growing environmental problems associated with future coal use in China, Japan’s Environmental Agency will play a key role in establishing a multilateral network to monitor acid rain—and measure the damages caused—in East Asia. For instance, the Japanese government is already working with the Guiyang Environment Protection Bureau in Guizhou Province to improve its sulfur dioxide emissions. Coal accounts for 94% of Guiyang’s total energy consumption. Along with Dalian and Chongqing, Guiyang is part of a larger Japan-China environmental cooperation program which—through financial support from Japan—aims to improve environmental conditions in poorer, industrial cities throughout China which are notorious for having the worst air pollution in the country.25

Building Energy-Strategic Relationships: China’s interest in expanding its resource linkages with Central Asia, Russia, and the Middle East will be better integrated. The government plans to promote market penetration into these areas in an effort to secure oil supplies. Given the political environment of the Persian Gulf, China plans to choose and develop better relations with "niche markets" such as Iran and Iraq while maintaining traditional relationships with other markets such as Sudan and Nigeria. The Chinese government has also enhanced its relations with Arab producers in the Gulf and North Africa, where approximately 36% of the world’s oil reserves are located. In order to gain access to the Arab market, Chinese oil construction services and technical support units have been expanded in Kuwait, Iraq and several other Arab countries. At the same time, Arab producers are encouraged to enter Chinese offshore upstream and downstream projects. In the future, China plans to establish new linkages with Arab producers which comprise sea shipments, land pipelines, and other investments.

China’s past reluctance to see Russian resource development in Eastern Siberia has changed with its growing interest in the resources of Eastern Siberia and the Russian Far East region. Beijing expects gas imports from Eastern Siberia to double by 2010. Efforts toward building a strategic partnership between China and Russia have led to signed commitments in 1996 for major oil and gas pipelines projects with over US$20 billion in investment requirements. Sino-Russian relations remain complicated, however, by political and diplomatic uncertainties. Some participants expressed concern that a Sino-Russian confrontation could emerge in the long-term as pipeline projects routed east-west from Central Asia to China may undermine Russia’s historical authority and control over resources in the region. Others raised the specter of possible competition among the United States, EU interests, China, and Russia over control of resources in the Central Asia/Caspian Basin area.

INDIA

Coal and oil constitute India’s primary energy sources. Figures for 1997 indicate that the share of coal in total primary energy consumption was about 56.2% and the share of oil was about 32%, making up almost 90% of India’s total energy needs.26   Energy consumption has kept up with the pace of economic growth of about 6% since the post-reform period beginning in 1991. After the oil shocks of 1973, India’s energy sector became heavy controlled by the state. A number of foreign companies were nationalized, and a number of public sector undertakings started in the coal, oil, and electricity sectors.27   However, rapidly growing energy demand outpaced the public sector’s ability to provide adequate supplies. In an effort to attract foreign investment in the energy sector, the Indian government in 1991 began loosening state control over the energy sector by implementing phased programs for deregulating coal, oil and gas prices by 2002-2003. Progress in India’s liberalization of its energy sector has been mixed, however. Multinational corporations still consider the transaction costs in India’s energy sector to be too high.

Coal and oil remain India’s primary energy source. Coal consumption has steadily increased in the last decade; India used 283 million metric tons (MMT) of coal in 1997/1998, or 6.5% of the world’s total consumption of coal.28   India’s coal usage is expected to double from 405 MMT per year in 2001 to over 800 MMT by 2010.29   While India will continue to rely heavily on coal, its consumption of oil will steadily rise. India’s oil demand currently exceeds 1.75 million b/d, and is the fourth largest oil consumer in the region after Japan (5.78 million b/d), China (4.01 million b/d), and South Korea (2.25 million b/d).30  Similar to energy patterns in the rest of Asia, India will consume a predominant amount of oil in the medium to long term. India imports about 700,000 barrels of the 1.7 million barrels it currently consumes per day. Imports are likely to increase to 1.5 million b/d by 2010, most from Russia, Iran, Saudi Arabia, Iraq, and the United Arab Emirates (UAE). The bulk of its oil imports will continue to come from the Middle East.

 Table 3. Oil Consumption Pattern Among Top Five AP Countries, 1987-1997 (in thousand barrels per day)  

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1997 Share of Total 

Japan

4500

4805

5005

5305

5410

5540

5455

5760

5805

5830

5785

7.8%

China

2110

2210

2260

2255

2410

2660

2915

3180

3430

3725

4010

5.5%

India

975

1070

1165

1210

1235

1295

1315

1415

1535

1665

1750

2.4%

Korea

620

740

855

1040

1255

1520

1675

1840

2010

2145

2250

3.1%

Indonesia

500

525

560

645

675

730

785

775

825

900

970

1.4%

Total AP

11310

12185

12930

13730

14305

15280

15940

17070

18030

18845

19525

27.0%

Total World

61455

63230

64490

65465

65555

66040

65795

67160

68180

69895

71670

100%

     Source: BP Statistical Review of World Energy 1998

Natural gas is a distant third in terms of India’s current energy use, accounting for only a 8.5% share of the country’s primary energy needs. Natural gas, however, could become a potentially important resource in the future. For instance, it is estimated that India faces a shortfall of 50,000 megawatts in power generation by 2000, but the country will continue to turn to traditional options to fuel its power stations, namely coal, oil, and hydroelectric power. LNG is not more amply used in India for two reasons: it is a scarce domestic commodity and its transportation methods over the mainland are poor.31   Forecasts of growth in demand suggest that 20-25 million tons per year of LNG could be imported into India by 2010, limited mainly by the lack of import terminals to receive LNG shipments.32   A large factor in predicting growing future consumption of LNG, however, is India’s close proximity to some of the world’s largest gas reserves, namely in Yemen, Qatar, Oman, Yemen, Indonesia, and Malaysia. Any growth in India’s share of LNG consumption will depend on the coordination of various agencies in India such as the state maritime boards, the Finance Ministry, port authorities, the Ministry of Petroleum, the Ministry of Power, the state electricity boards, national and state grids and India’s financial institutions.33

India’s Energy Security and Strategic Relations: Given India’s energy interests in the Middle East, India has often taken positions contrary to the United States on Middle East issues.34   For instance, U.S. sanctions have delayed initiatives to import gas and oil from Iran and Iraq; but it is in India’s interest to support the lifting of sanctions. Longstanding difficult relations with its neighbors also complicate India’s energy security. For instance, the Oman-India deep sea pipeline project, which needed to avoid the territorial waters of Pakistan, required the pipeline to be laid out at technologically infeasible depths. Another gas project, which would deliver gas from Iran through Pakistan to India, was cancelled because Pakistan would not permit pipelines to be laid on its territory or through the EEZ. Improvement in India-Pakistan relations is critical if huge gas reserves in the Middle East and Central Asia are to reach either country. However, persistent problems in this bilateral relationship have led India to adopt more costly alternatives for importing natural gas.

India expects no major or sudden changes in its energy needs in the near future, assuming steady economic growth and successful completion of its liberalization program in its energy sector.  However, given India’s increasing dependence on foreign sources for energy resources such as oil and gas, the government is concerned about several potential developments that could affect India’s access to resources. Political instability in the Middle East, possible conflict between India and Pakistan, or potential tensions with China are all liable to negatively impact India’s access to foreign supplies. Given the political uncertainties, India seeks an adequate emergency response capability to possible disruptions in energy supplies, a well-functioning international oil market, and a regional forum for cooperation on energy matters. India supports the creation of a regional version of the International Energy Agency (IEA) with the specific goal of improving states’ emergency response capabilities to possible future disruptions in supply. Views were mixed about whether an energy-specific regional organization would be feasible; more skeptical participants argued that such cooperation seemed ambitious given that more immediate inter-state security issues remained unresolved between India and its neighbors. Situated adjacent to the world’s largest oil reserves in West Asia and along the route of the bulk of international oil trade moving from the Persian Gulf to East Asia and the Pacific, however, India is well-placed to play a key leadership role in enhancing the "collective energy security" of the Indian Ocean Rim (IOR).35

JAPAN

Japan, the world’s second largest—and Asia’s most powerful—economy, remains highly dependent on foreign suppliers for its energy resources. Japan’s primary energy sources today are oil, coal, and gas. Although Japan was heavily dependent on oil during the 1970s—its share of oil consumption exceeded 70% at times during this decade—it pioneered trade in liquefied natural gas (LNG), sharply increasing the share of natural gas in the country’s primary energy supply from 5% in 1980 to 12% in 1998.36   Today, Japan is the world’s largest importer of LNG, accounting for 61.2% of total global LNG imports in 1996.37   Despite the rise in LNG consumption, Japan’s primary energy source is oil, which accounts for about 53% of its total energy needs, followed by coal (18%), nuclear energy (16%), natural gas (12%), and hydroelectric fuel (2%).38   Japan’s energy mix remains heavily oil-dependent because it possesses only incidental indigenous fossil fuel reserves and production.39  Its heavy reliance on oil is due to direct burning of crude for power generation. In terms of the outlook for Japan’s resource needs, the share of oil is expected to decrease while that of natural gas will increase, with the role of nuclear power remaining uncertain.40   Although electricity generation will be increasingly met by LNG imports, Japan’s consumption of oil is predicted to rise significantly, and a much greater amount of the resource will travel by sea, primarily from the Middle East. While still heavily reliant on oil, Japan in recent years has dramatically reduced its dependency from 77.4% in 1973 to 55.8% in 1995.41   Nevertheless, Japan remains concerned about the safety of shipping lanes.

TRADITIONAL AND NEWLY EMERGING REGIONAL SECURITY CONCERNS

Access to energy sources is a critical security issue for the Asia-Pacific region given the structure of its energy needs and expected future consumption patterns. Governments and security professionals continue to wrestle with traditional energy security concerns such as safe access to sea-lanes, reliable transportation, territorial conflicts, and attendant environmental security issues such as pollution. New sources of energy, such as natural gas, a more sophisticated and integrated energy market, and newly emerging strategic relationships have introduced new energy security considerations in the Asia-Pacific. This section reviews the salient security concerns associated with energy.

Traditional Concerns Persist: South China Sea, Protection of Sea-Lanes

Although the pattern of energy needs in Asia is changing, traditional energy security concerns persist. As long as oil remains a primary resource for Asia, resource-dependent states such as Japan, South Korea, and Taiwan will continue to require safe and open access to sea-lanes. The territorial conflict in the South China Sea remains unresolved, but some participants felt conflict over the Senkaku/Diaoyutai Islands in the East China Sea could pose a greater threat to regional security because of the involvement of two major regional powers, China and Japan. Regarding tensions which persist over the ownership of these disputed islands, there were differing views on whether these tensions are due to energy resources or broader strategic and defense issues.

Sea Lanes Remain a Vital Security Issue: Given the dominance of oil as the energy source of choice and Asia’s rising dependence on the Middle East for oil—open access to sea lanes from the Persian Gulf to East Asia remains more critical than ever before. (As natural gas consumption rises in Asia, however, the security concern of sea-lanes may diminish somewhat. This argument is discussed in greater detail later in this report). Asian states have benefited from the longstanding US commitment to assure freedom of navigation in the region. Participants pointed out that regional security would be affected if the U.S. naval presence in the region were to diminish, or if other states were to exert a stronger presence in the area. Domestic instability could also raise concerns regarding the security of sea-lanes. For instance, domestic stability in Indonesia and Malaysia—on both sides of the Straits of Malacca—is critical to the security of these lanes. With a U.S. naval presence in the region, however, issues of domestic instability were not considered priority threats to sea-lanes. Participants agreed that while territorial disputes in both the East and South China Sea are potentially serious security challenges, energy per se was not at the heart of the security problem. Participants agreed that the geostrategic issues related to open access to sea-lanes were the core security concern. Few predicted a country other than the United States being pre-eminent in the key sea-lane areas in the foreseeable future.

South and East China Seas Pose Security Concerns and Opportunities for Cooperation: About 70% of the oil supply to Japan, Taiwan and Korea passes through the Spratly Islands waterways. The majority of the shelves along the South China Sea are not in dispute. Areas in dispute, however, are in the deeper waters beyond each claimant’s exclusive economic zone (EEZ) of 200 nautical miles determined under the UN Law of the Sea Convention (UNCLOS). Although there are no studies that conclusively demonstrate a major source of oil and gas supplies in this area for the next two decades, the perception of resource-rich seabeds prevents a speedy resolution of the competing claims over territory. Participants generally agreed that while skirmishes and/or minor conflicts could not be ruled out in the future, an all-out conflict over the South China Sea was unlikely. Since key claimants have signed and ratified the UNCLOS, most participants were confident that, in the longer term, dispute settlement provisions under UNCLOS could resolve most of the territorial disputes. Resource exploitation in the areas that are still in dispute would require such exorbitant amounts of capital, technology, and infrastructure that cooperation would be required before any claimant alone is able to enjoy the benefits.

Although territorial disputes in the South China Sea are complicated due to the number of claimants, participants debated whether the East China Sea is potentially a more dangerous zone of confrontation. Conflict in the East China Sea, in particular the Diaoyutai/Senkaku Islands dispute, is potentially more serious because of rich undersea resources and the involvement of two major powers in the region, China and Japan. Whether it is the South or East China Seas, however, some scholars argue that resources are not necessarily the only driving force behind current tensions in these areas. Disputes are fueled in part by resource potential, but they also remain unresolved because of the perceived strategic significance of these islands and a resurgent nationalism reinforcing symbolic sovereignty claims.42   Some claimants of the Spratlys consider the islands as strategic bases for sea-lane defense, interdiction, and surveillance. If these are the primary concerns driving conflict in the South and East China Seas, however, these are not energy-related concerns as much as they are traditional inter-state security matters.

New Energy Security Issues: Asia-Middle East Relations, Pipelines Security, States v. Markets

In addition to territorial disputes and insecurities about sea lanes of communication, participants identified a new set of potential concerns related to energy security in Asia. First, Asia’s new relationship with the Middle East—largely based on Asia’s growing energy requirements and the Middle East’s ability to supply them—raises a host of significant considerations. Second, technological innovations and successful private and public sector initiatives have led to improved prospects of natural gas becoming a larger energy resource for Asia in the future. Some participants argued that a greater reliance on natural gas may somewhat alleviate the pressure to maintain open access to sea lanes. On the other hand, it was noted that the transportation of natural gas—pipelines which must route through at least two countries—raise security concerns of its own. Lastly, a lively debate ensued over the growing efficiency and sophistication of the international energy market, and whether states would rely more on markets to provide their energy resources.

Strategic Implications of Asia-Middle East Relations: As noted earlier, in the coming years, Asia’s rapid economic growth and industrialization will bring about an increasing dependence on the Middle East to supply Asia’s oil needs. Already, Northeast Asia imports over 70% of its crude oil from the Middle East. Japan’s dependence on the Middle East is likely to rise from 78% today to 90% by 2010.43   Middle Eastern oil producers and exporters are also increasingly dependent on Asia for their volume growth. From a political and security perspective, a combination of the region’s dominant oil consumption today, its expected demand growth in the medium to long term, and the concentrated nature of its supply source—the Middle East—poses at least four important considerations.

First, is it in Asia’s energy security interest to rely primarily on Middle Eastern oil? The history of political instability in the Middle East raises the possibility of large-scale disruptions in the export supply of oil. While Asian states have diversified their energy portfolios in terms of both energy sources and their suppliers, trends illustrate a continuing heavy reliance on the Middle East for supplying the region’s oil needs.

Second, Asia’s increasing dependence on the Middle East heightens the strategic importance of sea lanes from the Persian Gulf across the Arabian Sea and the Indian Ocean, through the Straits of Malacca and nearby waterways, and finally across the South and East China Seas to China, Japan, and Korea.44   Currently, the U.S. naval presence in and around these waters ensures safe and open access to these sea lanes, demonstrating not only the importance of a U.S. role, but also underscoring the vulnerable status of energy-poor economies like Japan and Korea to any blockage of these waterways.

Third, East Asia will likely gain a greater political-economic interest in the Middle East (and vice versa) as a natural spillover effect from this greater energy interdependence. China’s deepening energy ties with Iran, and Japan’s moves toward warmer relations with Abu Dhabi and Saudi Arabia are examples of a newly emerging Asia-Middle East relationship.45

Fourth, the upward trend in the Asia-Middle East energy nexus occurs during a time when the United States is decreasing its dependence on the Middle East as a major source of oil, mainly due to the rise of oil producers in Latin and North America, among others. U.S. dependence on Middle Eastern oil is predicted to fall from 19% today to less than 10% by 2010. From a geopolitical perspective, strengthening Asia-Middle East ties over energy implies new strategic interests for Asia in the Middle East, which may conflict with American interests in the Asia-Pacific region (not to mention the Middle East). Participants expressed concern that the newly emerging Asia-Middle East relationship could create frictions in U.S.-Asia relations. A future scenario in which Asia is less readily supportive of the United States and Europe in employing economic sanctions or embargoes to influence political behavior in the Middle East is quite possible.

In conclusion, there is little doubt that Asian states have a growing interest in the Middle East. Less clear, however, are the implications of this trend for the United States and the West. Although some scholars argue that an emerging Asia-Middle East relationship could complicate US-Asia cooperation on certain political initiatives vis a vis the Middle East, others argue that greater Asian interest in the Middle East could have positive implications. For instance, Asian states with a vested interest in a stable Middle East may reconsider the merits of massive arms sales to rogue states. The seminar discussions underscored the fact that the emerging Asia-Middle East relationship and possible strategic implications for the United States warrants greater study and analysis by security professionals.

Natural Gas Brings Promise, But Also Its Own Set of Concerns: Participants weighed the merits of arguments which depict the 21st Century as the "Gas Century." The potential for new gas resources and markets within Asia is much greater than recently believed, especially with the abundant gas supplies found in Central and Southeast Asia. With one quarter of global gas reserves, Russia clearly has the capacity for major energy supply to Asia. Advances in technology have raised the possibility of natural gas becoming a major energy source for the region in the future. The security implications of Asia’s greater reliance on gas and the diminished role of oil were also debated. For example, participants argued that if natural gas becomes the primary energy source for Asia, the region will become less dependent on oil, thus somewhat alleviating the importance placed on sea lanes as the lifeline to key economies such as China, Japan, and Korea.

Natural gas, however, poses its own set of security concerns. High start-up costs and political risk hamper exploitation. Pipelines and other infrastructure will be necessary in order to deliver the gas to markets, and this would require both bilateral and multilateral cooperation among countries whose perceptions of one another are mixed with suspicion on the one hand and a desire to cooperate for mutual benefits on the other. Participants noted that tensions are minimized and strategic rationale greatest when a pipeline project involves two contiguous states, such as Japanese-Russian cooperation in the "4 M" Sakhalin gas project or the China-Russia project to exploit Irkutsk-Baikal gas. The greater the number of countries a pipeline must pass through, the greater the likelihood for contention and even possibly conflict, and the less likely the pipeline will be built. Conflict could arise over competition among countries regarding several issues: given the exorbitant costs associated with building a pipeline (estimated at $1.2-2 billion each), which of the many projects will get built? Who will pay? How will the pipelines be routed? Who will build them? Failure to achieve an accommodation regarding these and other issues could slow down progress at best, and create conflict at worst, among countries involved in key pipeline projects.

States’ Dilemma Over Trusting the Markets: There was considerable debate about whether today’s more sophisticated energy market—where privatization, competition and open markets could provide the required resources, capital, and infrastructure—would lead governments to trust the market for its energy instead of relying on traditional energy security strategies of the 1970s. Governments no longer consider national energy security from the "dirigiste strategies of supply security" which emerged after the oil shocks in the 1970s.46   Rather, the effects of market prices, the flow of resources across borders, trade liberalization, the desire for national competitiveness and more investment and capital into the energy sectors have led some countries to liberalize their energy sectors. For example, Japan, Korea, the Philippines and Thailand have moved slowly toward liberalization of their oil industries. Both in India and China, where energy activities have been heavily government controlled, there has also been a move towards market-based energy sectors.

Participants agreed that while companies may believe in the validity of markets, governments generally, but especially those in the Asia-Pacific region, tend to be more reluctant about relying on the market to provide resources vital to national security. Authoritarianism, post-colonial statehood and a tendency for governments to view the world from a more realpolitik conception of security may explain Asia’s particular reluctance to trust institutions or systems that weaken the control of the state. Although there was general consensus about capital-poor states like China, India, and some ASEAN states adopting more market-based solutions for their energy needs, skepticism persists regarding the possibility of a rapid, regionwide trend toward liberalization of energy sectors. Japan understands the potential benefits of deregulating less efficient parts of its energy sector and allowing for greater competition within its energy industry. However, states like Japan—which depend almost completely on foreign suppliers for energy resources—also struggle to reconcile their naturally conservative inclination to avoid placing too much control in a non-state system such as the international market—which is at times volatile and unpredictable—with its tentative movements toward market-based energy solutions. In essence, those economies that are most resource-dependent on foreign sources are more inclined to be reluctant about market-based solutions, yet these are the states that would benefit most from liberalization and deregulation. Participants agreed that these different levels of trust toward the markets among governments might suggest a potential role for regional institutions to mediate between governments and the market, ensuring a reliable supply of energy at reasonable prices to meet countries’ growing demands. However, the limits of Asia’s regional institutions are also recognized, especially in the wake of their weak response to Asia’s financial crisis.

CONCLUSION

Although traditional energy security concerns persist, seminar discussions identified newly emerging problems that require closer attention by policy officials and scholars. One of the key findings to emerge from the seminar is that energy per se is not likely to be a source of conflict in Asia. Rather, changing patterns in trade, a greater reliance on the Middle East for oil and thus a greater reliance on open access to sea-lanes, and shifting strategic relationships are sources of conflict which may have an impact on the region’s energy security. The energy security calculus today is very different from that of the 1970s and 1980s, when oil shocks and the fear of global supply shortages determined government resource policies. Technological advances, diversification of energy portfolios, stockpiling, and collaborative inter-state arrangements have greatly diminished supply concerns. The notion that conflicts may arise over energy competition fueled by a perception of shortage, thus, is not the main concern of states today. In fact, some would argue that because Asian states face the common challenge of external reliance on energy supplies, these states have incentives to cooperate.

From a broad security perspective, the seminar discussions indicated most concern about the implications of emerging Asia-Middle East relations just as U.S. oil dependence on the Middle East is decreasing, and potential implications for future U.S.-Asia relations regarding Middle East developments. Future U.S.-imposed economic sanctions on Middle East countries, for example, may not receive support from Asia. On the other hand, Asia’s increasing reliance on the Middle East suggests a regional incentive for stability in the Middle Eastern region. This incentive may encourage Asian countries to behave in ways that ensure stability, e.g. China may reconsider selling arms to non-status quo powers in the Middle East.

Overall, discussions were relatively optimistic about the future of Asia’s energy security. Participants were keen to illuminate potential problems in a number of areas, from both a security standpoint and an economic-political standpoint. However, there was general sentiment that these problems were avoidable if countries applied constructive diplomacy during tensions, shaped national policies based on facts—not perceptions—regarding resource potential in certain parts of the region, and made commitments to utilize relationships already in place, such as bilateral alliances, to explore energy security questions.

Participants also agreed that, given unresolved conflicts in the South and East China Seas, and the high priority placed on access to sea lanes, U.S. engagement is critical to regional security generally, and energy security specifically. Given that oil will remain a primary energy source for the region in the future, the U.S. naval presence in and around the South and East China Seas and its strong support for the freedom of navigation for the region is vital to national security among key Asian states. Although open access to sea-lanes is not a major security issue today, participants foresaw problems if the United States were to change its presence given its decreasing reliance on Middle Eastern oil.

Lastly, it is clear that an apparent demand exists for international institutions to play a key role in securing energy resource stability in Asia. Participants agreed that the World Bank and other international development banks (IDBs) could play a key role in providing financial security to countries which participate in pipeline projects by creating a disincentive for states to take negative unilateral action against a project. When a government takes unilateral action against an IDB funded project, it jeopardizes funding for all projects in that country.47  Furthermore, a withdrawal of World Bank/IDB funding could lead to weakened private sector interest and commitments, as a project’s lack of IDB funding raises the risk of investment for commercial actors. In this respect, the World Bank and IDBs establish and enforce norms that favor cooperation. Until regional institutions are created to address energy security concerns specifically, these international lending organizations may meet some of the demands posed by new challenges in the energy security arena. There was consensus that the establishment of an institution may not necessarily foster regional cooperation on energy matters, but there is clearly a need for some kind of an organization to address a set of issues which are widely shared within the Asia-Pacific region.

This report was authored by Jin Song, Research Fellow of the Asia-Pacific Center for Security Studies. For more information, please contact her at 808-971-8959.


PARTICIPANTS

Dr. Kent Calder
Princeton University

Dr. James Dorian
Hawaii State Department of Business, Economics and Tourism

Dr. Lee Endress
Asia Pacific Center for Security Studies

Col. Robert Forte
Asia Pacific Center for Security Studies

Lt. Col. Charles Gross
Asia Pacific Center for Security Studies

Dr. Charles Johnson
East-West Center

Mr. Christopher Johnstone
Asia Pacific Center for Security Studies

Dr. Satu Limaye
Asia Pacific Center for Security Studies

Prof. Michael Montesano
Asia Pacific Center for Security Studies

Dr. Ardhendu Sen
Tata Energy Research Institute, India

Ms. Jin Song
Asia Pacific Center for Security Studies

Dr. Xu Xiaojie
Petroleum Economic Research Center
People’s Republic of China


Jin Song is a research fellow with the Asia-Pacific Center for Security Studies in Hawaii.  She specializes in political and security issues of Northeast Asia, with an emphasis on the Korean Peninsula.  She received a B.A. from Columbia University and a M.P.A. from the Woodrow Wilson School of Public and International Affairs of Princeton University.