Asia's Energy Insecurity: Cooperation or Conflict?

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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 nationalism than with energy cooperation as they reach out to secure future supplies. The risks of terrorist attacks on vital energy infrastructure are rising, fueling fears of supply disruptions, and political instability. The United States has major strategic stakes in how Asia responds to its energy insecurity and its impact on the region and global energy geo-politics. U.S. policymakers need to recognize the growing links between Asias energy insecurity and U.S. geo-political and energy interests, and boost efforts to slow demand growth and encourage regional energy cooperation and markets over energy competition and nationalism.
Mikkal Herberg is Director of the Asian Energy Security Program at The National Bureau of Asian Research. He wishes to thank Ashley J. Tellis and Michael Wills for their helpful comments and review.
340 Strategic Asia 200405
Introduction
A wide range of indicators suggest that dramatic developments are taking place in Asian energy markets. At the center is Asias mushrooming demand 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 rapidly, particularly for oil, as governments scramble to meet booming consumption 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 sealanes and complex pipeline routes crossing several national borders. Although 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, aggravating 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 becoming too important to be left entirely to the markets, as their economic prosperity increasingly is exposed to global supply disruptions and instability in energy exporting regions. Key Asian powers are responding to their growing sense of insecurity with a broad range of strategies to guarantee greater supply and price stability. These efforts are growing in scale and scope, and they range from largely cooperative and market-oriented strategies to those that are deeply neo-mercantilist and competitive. These countries are all accelerating their efforts to gain more secure national control of overseas oil and gas supplies by taking equity stakes in overseas oil and gas fields, promoting development of new oil and gas pipelines to Asia, developing broader trade and energy ties, and following up with diplomatic ties to cement relations with the major oil and gas exporting countries.
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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 attacks 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 destabilizing the Persian Gulf and Central Asia and, consequently, increasing the risk of supply disruptions, worsening Islamic extremism, and generating 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 Persian 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 resulting impacts on regional and global energy geo-politics. Energy needs will propel China and other countries in Asia to become major players in the worlds oil and gas exporting regions and energy geo-politics. This is likely to fuel a much more complex web of diplomatic ties and alliances that could either complicate or complement the United States own energy and security interests. For example, Asias rapidly growing involvement in helping Iran develop its energy sector is already adding to U.S. frustrations in its efforts to isolate Iran. The same is true in Sudan. Moreover, Asias energy needs are inexorably drawing Russia back into Asia as a key strategic and commercial player. The long-term implications for U.S. interests in Asia and future U.S.-Russian relations are only beginning to emerge. Second, the growing potential for increasing mercantilist competition in the Asia-Pacific region over control of energy supplies and transport routes risks fueling tensions and conflict in a region where the lack of institutions to manage conflict is already an underlying structural problem. This is particularly a concern as the region faces a sensitive and dangerous transition to accommodate Chinas rising power over the next several decades.2 There are a growing number of recent examples where energy is becoming a significant source of tension among Asias major powers. Nevertheless, competition is not an inherent outcome. Some recent developments and trends suggest that energy needs may have the potential to help reinforce regional cooperation. Whether mercantilist or market impulses dominate, energy strategies in Asia will be critically important to U.S. interests. It is also important for U.S. policymakers to understand the linkages between Asias energy insecurity and a much broader range of important U.S. geo-political, energy,
and environmental interests. The goal of this chapter is to analyze Asias energy security dilemma and its impact on long-term U.S. geo-political and energy interests in the post-September 11 era.3 The discussion is divided into four sections. First will be a survey of Asias broad regional energy situation and the central elements of its growing energy insecurity. Second will be a review of the particular circumstances and concerns of each of the major Asian importers, along with the prospects for Asias current energy exporters to meet future regional needs. Third, the analysis will focus on the energy security strategies that China, Japan, South Korea, and India are pursuing and assess prospects for the balance of future cooperative or competitive efforts. The conclusion will suggest a range of potential implications for the United States in terms of the possible impact on Asias geo-political future and U.S. strategic interests in key energy exporting regions of the world.
Asias Energy Fundamentals

Energy security concerns are not new to Asia. These concerns have been around since at least the 1930s when anxieties over access to Southeast Asian oil supplies became a key reason for Japanese expansionism. Later, the first oil crisis of 197374 battered the Japanese economy and provoked major new efforts by Japan to reduce its vulnerability to oil supply disruptions. However, the scale and scope of the concerns have broadened across the region since the early 1980s as the result of Asias two decades of booming economic growth and energy intensive economic development.4 Energy demand is broadly linked to economic growth, especially in developing economies, but it is also strongly influenced by population growth, urbanization, and industrialization. In developing Asia, excluding the mature, slower growing industrial countries of Asia (such as Japan, Australia, and New Zealand), dynamic economic growth, combined with all these other factors, has driven a period of exceptionally strong energy demand growth in the past two decades. In developing Asia, total primary energy demand grew at three times the world rate over the past 20 years while electricity demand grew at two and one-half times the world average.5 Even including the more mature energy markets of industrial Asia, total primary energy demand rose 114 percent from 19802001 compared to 42 percent for the world.6 Table 1 shows Asias high demand growth rates across the fuel spectrum compared with global growth rates.
Oil
The energy demand boom has been spread across the range of primary fuels, but the implications for the regions energy security vary significantly
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Table 1. Asian Energy Demand Growth by Fuel, 19802002

1980 1990 2002 Primary energy (MTOE) 1,178 1,828 2,718 Oil (MMBD) 10,568 13,773 21,399 Gas (bcf/d) 7 16 32 Coal (MTOE) 511 867 1,184 Electricity (TWH) ... 2,472 4,658 Nuclear (MTOE) 22 65 118 Hydro (MTOE) 65 96 128
Source: British Petroleum (BP); *19902002.
Asia World Annual Avg. Annual Avg. 5.9% 1.9% 4.7% 1.0% 16.5% 3.4% 6.0% 1.5% 5.4% 2.5%* 19.8% 12.7% 4.4% 2.4%
across the spectrum, depending on resource availability, transport and infrastructure 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 accounted for two-thirds of Asias total oil consumption, with the other third made up of oil produced and consumed within the region. By 2002 the physical volume of imports substantially exceeded the import volume of either the United States or the European Union. This surge reflects the relative stagnation of regional oil production combined with strong domestic oil demand growth among Asias traditional oil exporters, which absorbed a growing share of previously exported oil. The most dramatic shift has been in China, which exported nearly 0.75 MMBD in 1985, mainly to Japan, to nearly 2 MMBD by 2002.8 By 2003 four of the worlds top nine oil importing countries were in Asia (Japan, China, South Korea, and India). Of equal importance is the origin of Asias imported oil, of which two-thirds, including more than one-half of Chinas, now come from the unstable Middle East. Only about one-quarter of U.S. and EU oil imports come from the Middle East.9 Looking ahead, Asias oil import dependence is likely to become even more acute. The U.S. Department of Energy forecasts that Asias oil imports will rise from 13 to 31 MMBD by 2025 (see Table 2).10 To put this in perspective, Asias 18 MMBD increase exceeds todays total oil exports from the entire OPEC Persian Gulf region, including Saudi Arabia, Iran, Iraq, Kuwait, the United Arab Emirates (UAE), and Qatar. By 2025 it is likely that 80 percent of Asias total oil needs will be imported, with 80 percent of imports likely coming from the Persian Gulf.11
Table 2. AsiaOil Demand and Supply (MMBD)

Demand Supply Imports 2001 21.2 8.0 13.2 2010 27.2 8.6 18.6 2020 34.8 8.5 26.3 2025 39.1 8.3 30.8
Source: Department of Energy International Energy Outlook, 2004.
Natural Gas
Asias natural gas situation is less alarming, but some of the same trends toward greater import dependence are at work over the long-term. Natural gas is relatively under-utilized in Asia, accounting for only about 11 percent of energy consumption, compared to 23 percent of consumption globally. This has been due in part to the long transport distances and to relatively low gas penetration in India and China. Nevertheless, gas consumption in Asia has been growing at a torrid pace over the past two decades at nearly five times the global growth rate, reflecting booming electricity 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-dependent for gas, with most of their needs met through large-scale liquefied natural gas (LNG) exports from Indonesia, Malaysia, and Australia. Asias natural gas demand is expected to continue growing rapidly over the next two decades to fuel power generation, reduce air pollution, and diversify the regions energy slate. Despite expected growing supply development within the region, an increasing share of gas will need to be imported from outside and from longer distances. The International Energy Agency (IEA) forecasts that Asias gas demand will roughly triple between 2000 and 2030, while gas imports will more than double.12 In 2000 gas imports from outside Asia made up roughly 25 percent of imports; by 2030 the IEA forecasts that 65 percent of Asias gas imports will come from outside the region.13 Japan, South Korea, and Taiwan will import a growing share from the Persian Gulf and Russia while China and India will join the importing club during the next several years.
Electricity, Coal, and Nuclear Power

Asias insecurity over growing dependence on imported oil and natural gas affects its options for meeting rapidly rising electricity needs. Electricity demand has been rising in Asia as a function of rapid economic growth, urbanization, and rising living standards. Total Asian demand rose 223 percent from 1980 to 2001, compared with 88 percent globally.14 Among the
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Figure 1. Projected Growth in Coal Consumption After 2001

2 ,0 0 0 2,000 1 ,8 0 0
2025 1,842
Millions Metric Tons
1 ,6 0 0 1,600 1 ,4 0 0
1,320
2015
2020
1,200 1 ,2 0 0
1 ,0 0 0
887
800 800
600 400 400
2010
493
2 0469 25 2020 2015
2010
200
125 2010 2 010
185 2015 2 015

R est o f World W o rld Rest of
279
0 0
2020 2 020
AAsia s ia
2025 2 025
Source: Department of Energy, International Energy Outlook, 2004
developing countries of Asia, electricity demand grew an even more remarkable 373 percent over that period (an annual rate of 7.7 percent), meaning 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 dependence 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 mounting 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 appears likely to continue. The U.S. Department of Energy forecasts that Asias coal consumption will nearly double by 2025 and will still account for 38 percent of the regions energy consumption. Asia alonemainly China and Indiais expected to account for 80 percent of the entire world increase in coal demand between 2001 and 2025 (see Figure 1). Many countries in the region are pursuing programs to accelerate nuclear power development as rapidly as possible, and Asia remains the only growth region globally for nuclear fuel (see Figure 2). Major expansions are planned in China, Japan, South Korea, India, Pakistan, and Taiwan, and recently even Indonesia, Vietnam, Burma, Thailand, and Malaysia have expressed interest in developing nuclear power plants. This makes Asia a critical region for concerns over nuclear proliferation, hazardous waste disposal, and the risk of accidents. Asia is also likely to rapidly boost
Figure 2. Projected Nuclear Power Production C h ar t 2 . P r o jec t e d N u c le a r P o w e r P r o d u c t io n

350 350 300 300 (G ig a w a tts )
287
287
301
301
301
301
282
282
264
264
Gigawatts
250 250 200 200 150 150 91 100 100 5 0 50 66
106
119
66
91
106
119
121
121
0 0
2001 2001 2010 2010
Asia As ia
2 015 2 020 2020 2015 Rest R e sof t World o f W o rld
2 025 2025
Source: Department of Energy, International Energy Outlook, 2004
hydroelectric power and renewable energy sources over the next two decades, but even by 2025, hydro and renewable sources are only expected to account for a fraction of Asias energy and electricity demand.
Is Asias Energy Dilemma Inevitable?

The previous analysis suggests that energy security will continue to climb on the national security agendas of the key powers of the region as continuing strong economic and industrial growth make meeting energy needs a growing challenge. The sense of vulnerability is most acute in terms of oil, but in the longer run, natural gas also will need to travel long distances from and through turbulent areas of the world, making transport routes and maritime security concerns increasingly important. And the inexorable pressure to expand the use of coal and boost nuclear capacity poses added risks of environmental degradation and nuclear proliferation. But is this inevitable? What could change this outlook significantly? Are there ways that Asia might be able to avoid this looming energy deficit? While virtually every major forecast by public and private sources broadly projects a similar energy dilemma for Asia, there are two categories of discontinuities that could fundamentally alter Asias future and reduce the scope of Asias energy security challengethe possibility that energy demand in Asia could grow much more slowly than expected. One set of possibilities revolves around the potential for much lower long-term economic growth in Asia than currently expected, which would significantly reduce energy consumption and demand. What could cause such a serious discontinuity? One possibility would be the intervention of a major geo-political crisis that has a decisive impact on the regions longterm growth. This could include a major war on the Korean Peninsula, a severe and lengthy China-Taiwan-U.S. confrontation that damages Chinas long-term growth prospects, a serious financial failure in China or Japan, or a prolonged political crisis in China.
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A second set of discontinuities revolves around the potential for a major, trend-altering slowdown in energy demand through sharp technological or policy shifts. For example, the rapid development of highly efficient transportation or fuel technology and its diffusion throughout Asias developing countries, particularly China, could deeply affect expectations for oil demand growth and alter the balance for other fuel needs as well. Alternatively, a major environmental disaster could lead to a fundamental shift in energy policies across the region, with aggressive regulatory limits on energy consumption, in much the same way the Three-Mile Island and Chernobyl nuclear accidents did to nuclear energy. A third possibility would be the development of new aggressive energy demand management policies in the region, similar to Japans policies after the first two oil shocks, which resulted in huge efficiency gains and sharply lower per-capita energy consumption. A fourth possibility would be a highly energy supplyconstrained world that would usher in an era of significantly higher world energy and oil prices, providing the incentives for massive efficiency gains in Asia as well as globally. Historically, many energy forecasts have overestimated future demand growth. However, it is difficult to alter Asias outlook for rapidly rising energy demand without assuming a very major discontinuity in Asias economic growth or a calamitous geo-political event. The range of major international forecasts varies by specific numbers but all come to the same set of conclusions: Asia will likely record a huge imbalance between regional energy supplies and booming demand that will exacerbate the regions sense of strategic and economic insecurity. U.S. policy planning for the future must take this into account.
Energy Security and the Key Asian Powers

Asias energy dilemma reflects a set of broad, consistent trends, but conditions and circumstances vary in each of the major countries depending on resources, energy policies, and historical factors. These individual circumstances and policy frameworks largely shape the evolution of the energy security strategies of each of the major countries in the region. The consistent concerns of all the major powers is that energy risks becoming a critical bottleneck to economic growth and social stability. In each country, a progressively greater share of its oil and gas needs will have to travel long distances by tanker and pipeline from distant supply regions, exposing economic prosperity to the risks of supply disruptions and instability in exporting regions. The balance that the key powers in the region choose between cooperative and competitive strategies, and how these strategies intersect with
each another and with U.S. objectives in the region, will determine whether energy becomes ultimately a stabilizing or destabilizing force in Asias outlook. These strategies will determine whether energy aggravates existing and looming rivalries or whether it reinforces impulses toward greater regional cooperation and reliance on market solutions. They will also determine 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 evolution. 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 domestic supplies of coal have dominated domestic energy use, and coal continues to account for two-thirds of Chinas overall consumption. But strong economic growth since the early 1980s has fueled oil demand, and the governments decision to expand the use of natural gas promises to boost future gas consumption. These developments will increase Chinas future import dependence and spur energy security concerns.16 China has been Asias largest oil producer since the mid-1960s, in recent years producing well over 3 MMBD. Most production has been onshore, dominated by several large northeastern fields, mainly at Daqing, Liaohe, and Shengli. Production rose strongly from the late 1960s to the early 1980s with the development of these fields, and by the mid-1980s, China was a net oil exporter, mainly to Japan. However, oil demand accelerated during the 1980s and early 1990s while oil production lagged, as the large traditional fields matured and gradually went into decline. Demand doubled between 1984 and 1995 from 1.7 to 3.4 MMBD and has continued to grow strongly since, rising to nearly 6 MMBD by early 2004. China became a net importer in 1993, and by 2003 it surpassed Japan to become the worlds second-largest oil consumer behind the United States and the fifth-largest importer. China now imports roughly one-third of its oil. Chinas leadership has responded to this historic shift with both vigorous domestic reforms and aggressive global energy security policies. Efforts are under way to maintain oil production in the traditional northeastern fields while boosting production in western China, where prospects
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for growing production are betterthe so-called stabilize the East, develop 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 offshore during the 1980s and 1990s, the offshore generally has yielded very disappointing results. The domestic oil industry also has been repeatedly restructured to try to boost competition and efficiency, and oil pricing has been brought more closely in line with global and regional oil markets. Nevertheless, given Chinas limited resource prospects and high production costs, domestic oil production is unlikely to rise significantly in the foreseeable future. At the same time, there is a consensus among energy analysts and forecasting agencies that oil demand, and therefore imports, are very likely to continue growing relentlessly. The IEA forecasts that Chinas oil imports will rise five-fold by 2030, from slightly under 2 MMBD in 2002 to 10 MMBD, when imports will account for 80 percent of Chinas total oil needs.18 The DOEs Energy Information Administration; the Asia-Pacific Energy Research Centre (an arm of the Asia-Pacific Economic Cooperation (APEC) forum); and the East-West Center Energy Program have also come to very similar conclusions.19 Chinas leadership now faces the long-term realization that oil import dependence is unavoidable. Moreover, as in the rest of Asia, China will become heavily dependent on the Persian Gulf for future supplies, and its oil will increasingly have to transit a series of vulnerable maritime choke points. The East-West Center forecasts that by 2015, 70 percent of Chinas oil imports will come from the Middle East.20 Other significant shares of Chinas oil imports will come from Russia by pipeline and rail, from Central Asia by pipeline, and from Africa. Government policies aimed at substantially increasing the use of natural gas, while indispensable in environmental terms, promise to accentuate Chinas import dependence and long-term energy security concerns. China presently uses very little natural gas, accounting for only 3 percent of overall energy consumption, all of it domestically produced. However, the government has embarked on an aggressive policy to increase gas use to help replace coal for energy generation, diversify overall energy use, and provide cleaner-burning fuel for environmental needs. Current plans call for gas to make up 8 percent of total energy demand by 2010.21 In order to boost gas use, the government is accelerating domestic natural gas exploration and development and expanding the national pipeline system to transport more gas from fields in north, central, and western China to the major cities around the east coast. A major 2,500-mile westeast pipeline is being built to move natural gas from the sparsely populated Xinjiang Uyghur Autonomous Region to Shanghai, and is scheduled
to begin operation in late 2004. The government is also working to develop gas markets by creating more effective regulatory structures and increasing flexibility in the gas pricing system. Over the long run, although gas is an important element of Chinas overall energy and environmental needs, it also will add to energy security concerns. China does have significant domestic gas reserves and recent exploration has been quite successful, but beyond 2010 demand is likely to outrun domestic production, and a growing share of gas needs will have to be met through imports. The DOE forecasts that imports will account for 40 percent of Chinas gas needs by 2025.22 Imported gas supplies will be needed both in the form of LNG and via long-distance pipeline. Significant LNG supplies will be available in the Pacific region from Australia, Indonesia, Malaysia, Brunei, and East Timor, but China will also need to have a significant portion of LNG needs supplied from Russias Sakhalin Island projects, as well as a high volume from the Persian Gulf from huge projects in Qatar, Iran, Oman, and probably Yemen. China is also likely to import gas via pipeline from Russias East Siberian Irkutsk region, which appears to have large gas reserves and where a large regional gas pipeline scheme is being planned. Consequently, a significant portion of LNG will have to be transported largely from the same volatile regions as oil imports, namely the Persian Gulf and Russia. While Chinas natural gas use will grow, rising electricity demand will also force continued growth in coal consumption as well as an expansion of nuclear and hydroelectricity production. China is the largest producer and consumer of coal in the world, and it still makes up roughly two-thirds of Chinas total energy use. Driven by relentlessly rising electricity demand, Chinas coal consumption is expected to double over the 200125 period.23 Consequently, China is also expected to account for one-quarter of the worlds CO2 emissions over that period. Although China is presently a net coal exporter, it may become a net importer of coal as early as 2015.24 Electricity needs also are motivating Chinas future nuclear power development. China has the largest planned increase in nuclear power over the next two decades, with plans to add from 24 to 32 nuclear plants by 2020a quadrupling of current capacity.25 China is currently the largest purchaser of Russias nuclear power-related equipment. Electricity demand will also drive strong hydroelectric development although ultimately this can only meet a small fraction of Chinas electricity needs.
Chinas Energy Security Strategy

Energy security has become a central concern for Beijing, and the thrust to secure future energy supplies has taken on great urgency. Import de-
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pendence and vulnerability to global oil supply crises have acted as a catalyst to the leadership, which fears that energy shortages and volatile world energy prices could become serious impediments to economic growth and, by implication, threats to social stability.26 China has probably become the most aggressive of the Asian powers in securing its future energy supplies. Chinas strategy has become increasingly coherent and wide-ranging over the past decade and is growing in reach and sophistication. It is built on relatively tight coordination between state geo-political interests and energy interests. For Chinas leaders, energy security clearly is too important to be left to the markets, and so far its approach has been decidedly mercantilist and competitive.27 The rapid transition to oil import dependence and growing longer-term dependence both abroad and at home on imported gas has acted as a catalyst to the Chinese leadership. Globally the program has been dubbed the Going Out strategy, and is based on three major concerns. First is the fear that sudden global oil supply disruptions could trigger energy shortages and price spikes. Second, China faces a growing vulnerability for the majority of its oil needs on tanker flows from the unstable Persian Gulf and other potentially problematic exporting regions such as Central Asia and Africa. Third, China has felt increasingly threatened by U.S. strategic dominance in the Persian Gulf and other key oil-exporting regions, as well as U.S. control of critical transportation routes that enable the United States to deny vital oil supplies to China in the event of a confrontation, particularly over Taiwan. These concerns have been further aggravated by deeper extension of U.S. power into the Persian Gulf and Central Asia from the global war on terrorism. China has pursued its energy security on a wide range of fronts. First, it has sought to strengthen its supply relationships in key areas, such as the Persian Gulf, while diversifying the geographic distribution of its crude oil suppliers and transportation routes. For example, the Chinese state oil companies, CNPC and Sinopec, have broadened their crude sources by increasing imports from West Africa and even Latin America. In the Persian Gulf, the Chinese have rapidly expanded their role in various phases of Irans oil industry while boosting long-term crude supply contracts with Saudi Arabia, Oman, and Yemen.28 In the long run, China is seeking to increase pipeline supplies from Russias East Siberia and western Kazakhstan through long-distance pipeline projects, which would have the added advantage of reducing vulnerability to disruptions in tanker flows from the Persian Gulf and Africa.29 Reflecting some of the regional impact of this drive, China has become deeply embroiled in a bitter competitive dispute with Japan over the route of a proposed oil pipeline from the
Angarsk region of East Siberia via the Daqing oil region of northeastern China.30 Japan appears to have seized the inside track on the deal by offering a huge financing package to re-route the pipeline to the Pacific Coast, touching off a nasty diplomatic fight between China and Japan. Second, state oil companies CNPC, Sinopec, and CNOOC have been aggressively buying equity stakes in many existing or prospective oil fields around the world. In the mid-1990s China scrambled to buy stakes in a mixed bag of fields and countries, including Kazakhstan, Sudan, Venezuela, 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 established a very strong position in its largest foreign operation, Sudan, including oil production, exploration, pipelines, refineries, and port construction, and there are reports that 4,000 Chinese troops are stationed in Sudan to protect oil production facilities.31 China has also acquired a growing stake in oil fields in western Kazakhstan in order to build a base of production for shipment to China in a possible future Kazakhstan-China pipeline. Other small stakes have been acquired in the Caspian Sea area in Azerbaijan and Turkmenistan. Chinese energy leaders are focusing on broadening their equity stakes into North Africa, Southeast Asia, (especially Indonesia), and Latin America. Another element of Chinas energy equity strategy is to target countries subject to unilateral U.S. sanctions. This tactic improves the competitive landscape and offers China greater opportunities, but also works to undermine U.S. sanctions policies in Iran, Iraq, Sudan, and Burma.32 Current estimates reveal that the three Chinese companies have managed to establish control over about 300 thousand barrels per day (MBD) of crude production and could control up to 600 MBD by 2005.33 China has also pursued a similar equity strategy regarding natural gas imports. As the competitive price for landing large, long-term contracts to supply LNG to China, CNOOC has required LNG suppliers to sell CNOOC an equity ownership interest in the upstream natural gas field and liquefaction project. It has done so in both its initial LNG contracts with Australias Northwest Shelf consortium (to supply a Guangdong terminal beginning in 200607) and BPs Indonesian Tangguh project (to supply a new Fujian terminal in 200708). The third leg of Chinas strategy involves extensive cross-investment and commercial ties between China and major exporting countries in order to cement strong long-term ties. Chinas state oil companies, with related construction and oil services companies, have aggressively bid for oilfield
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development contracts, pipeline contracts, and refinery projects in Iran, Sudan, Kazakhstan, Kuwait, and a growing list of other countries. Conversely, the Chinese government and oil companies have invited the state oil companies in exporting countries to invest in downstream oil and petrochemical projects in China. For example, China is close to finalizing a large refining investment by ARAMCO, the Saudi national oil company, in the province of Fujian, which would be supplied with crude oil by ARAMCO and upgraded with cooperation from ExxonMobil. The fourth leg of the strategy involves Beijings active oil and gas diplomacy, strengthening oil supply contracts, equity stakes, and crossinvestments with deeper and broader diplomatic and trade ties.34 For example, President Jiang Zemin made an unprecedented state visit to Saudi Arabia in 1999 proclaiming a strategic energy partnership between the two countries. In 2001 Jiang traveled to Moscow in a major visit to cement broadening energy, trade, and military ties. Another senior-level visit to Iran also helped to cement stronger diplomatic and energy ties. China has pursued a diplomatic angle to its LNG needs, with extensive state involvement in contracts with Australia and Indonesia. Chinas leadership sees the development of broader diplomatic and trade ties and alliances as a key element in securing its access to future oil and gas supplies. This also includes military sales and cooperation, sales of nuclear equipment, and other potentially problematic trade ties. A fifth strand of the strategy has been Chinas continuing active pursuit of its territorial claims in the surrounding maritime region, both to assert sovereignty generally but also to claim control over potential oil and gas resources in these areas. China has repeatedly asserted its territorial interests in disputes over control of exploration and licensing blocks with Vietnam, Indonesia, and Japan over the past decade. Increasing Chinese military and fishing activity around the South China Sea in the Spratley and Paracel Islands is intertwined with these energy interests. China also continues to claim sovereignty over the Senkaku/Diaoyu Islands in the East China Sea against Japanese claims. While China has no blue water naval capability to militarily secure the area in the face of U.S. naval supremacy in the region, it continues to find ways to affirm its rights in the area. Finally, China has recently decided to follow the example of the industrialized countries and neighbors Japan and South Korea in beginning construction in 2004 of a strategic petroleum reserve.35 Chinas willingness to promote cooperative regional solutions to Asias energy security concerns has been very limited. Beijing has been involved in discussions with Russia and South Korea on proposals to build a large regional natural gas pipeline from East Siberia, southeast through China,
and across the Yellow Sea to South Korea to link Russian gas supplies to both markets. It also has been involved as a member of the APEC forum in recent discussions and proposals to improve Asias energy security. In sum, Chinas energy security strategy is wide-ranging and increasingly sophisticated. It is strongly statist and mercantilist, built on a common vision among senior government policymakers and Chinas state oil companies, and it is increasingly linked to broader diplomatic relations and alliances. Through its search for energy security China also is on the way to becoming a major geo-political player in the Persian Gulf, Central Asia, and Russia, with a growing capability to complement or complicate U.S. interests in these regions.
Japan
Energy supplies and energy security have been a major concern of the Japanese government since the first and second oil shocks of the 1970s. The Japanese government has worked ceaselessly since then to diversify Japans energy sources, promote domestic energy efficiency and conservation, 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 supplies are mainly nuclear electricity generation, which now accounts for 15 percent of total energy supplies, with another five percent made up mostly of hydroelectric and a tiny share of renewable resources. Therefore, Japans policy choices have focused on improving the efficiency of energy use and diversifying its portfolio of fuels and sources. In this it has been reasonably successful. First, Japan has led the industrial world in improving efficiency in energy use and has among the lowest levels of energy intensity of any OECD country.38 In terms of oil, Japan has sharply reduced the rate of growth in oil demand over the past 30 years and succeeded in reducing oils share of total energy use from an extraordinarily high 75 percent in 1973 to slightly below 50 percent by 2002.39 It did this by pioneering fuel-efficient transportation and automobile technology and by taking oil largely out of the electricity generation sector. Whereas in 1973, 75 percent of electricity generation was oil-fired, today it is only five percent. Nevertheless, Japan still imports 100 percent of its oil, and is the secondlargest oil importer in the world (behind the United States), importing over 5 MMBD; and is the third-largest consumer of oil behind the United States
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and China. Moreover, oil accounts for nearly 50 percent of energy use in Japan, which is still well above the overall industrial country average, leaving Japan relatively more exposed to oil price shocks and supply disruptions. 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 growing slowly. The IEA expects total energy and oil demand in Japan to rise by less than one percent per year through 2025, each less than one half the world average growth rates. Nevertheless, dependence on Middle East oil supplies is expected to rise toward 90 percent by 2030.40 More broadly, Japan has diversified its energy sources by rapidly expanding the use of natural gas, coal, and nuclear power. Since the early 1970s Japan pioneered the development of the LNG industry in Southeast Asia and raised natural gas to 15 percent of Japans total energy consumption 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, Indonesia, the United States, and other major exporters, and coal now accounts for 15 percent of Japans total energy use.42 The supply disruptions of the early 1970s encouraged Japan to pursue 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 production. However, serious problems with the Japanese management of the existing nuclear utilities and declining public confidence in the industry threaten to slow nuclear development in Japan. Revelations in late 2002 that Tokyos largest utility, TEPCO, was falsifying safety records led to the temporary closure of all 17 of TEPCOs nuclear plants for reinspection, about one-third of Japans nuclear plants. Tokyo was subjected to chronic blackouts and low power supplies over the summer of 2003 as a result. Combined with serious concerns about waste disposal and proposals for reprocessing waste, Japan is increasingly unclear whether nuclear power will meet a greater share of its future electricity needs.43
Japans Energy Security Strategy

Japan has pursued a combination of collaborative and mercantilist strategies to enhance its energy security. Through its involvement in the IEA, Japan has helped coordinate member-country responses to global oil supply disruptions and strategic stockpile releases. It is also involved with
APEC energy monitoring efforts, which are headquartered in Tokyo. Japan has developed a large strategic stockpile of oil, equivalent to 120 days of import supplies, as part of its commitments with the IEA. Under the direction of MITI (now METI),44 Japan established the Japan 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 companies, including Inpex and Japex, were funded by JNOC to secure new oil supplies globally. The results have been disappointing as the government has spent in excess of $40 billion (1995 dollars) with very little to show for it. Japanese oil companies lagged behind comparatively in exploration and production, and could not compete with foreign oil companies. The largest position acquired during this period was Japans Arabian Oil Companys Neutral Zone concessions in Saudi Arabia and Kuwait, which Japan lost recently when these long-term contracts expired. Barely ten percent of Japans oil imports are supplied by Japanese equity ventures overseas; after 30 years of effort and enormous cost, Japan still depends on the Persian Gulf for 80 percent of its oil. JNOCs performance has been so dismal that the government is dismantling it over the next year and reorganizing 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 recently has made progress on two large oil deals.46 In Iran, Japan recently completed four years of negotiations to get exclusive developments rights for a very large oil field, Azadegan, in partnership with Irans National Oil Company NIOC.47 The field has several billion barrels of reserves and is expected to reach a peak production of 250-300 MBD by the end of the decade. Japan sealed the deal despite pressure and loud protests from the United States over Irans suspected nuclear weapons development and the U.S. unilateral embargo on Iran, and only went ahead with the deal after Iran signed additional inspection commitments with the International Atomic Energy Administration (IAEA). Ironically, Japan already had a separate deal through Japex as a partner with Shell to redevelop two Iranian oil fields, Soroush and Nowruz. In Russia, Japan has also displayed aggressiveness in securing access to oil. China had been negotiating with Yukos, the largest Russian oil company, for several years to build a large oil export pipeline to bring oil from the East Siberian region of Angarsk to connect into northeastern Chinas oil infrastructure at Daqing. The project made good commercial sense and was sized at roughly 400600 MBD. In late 2003 Japan stepped in with a huge competing $7 billion offer to finance construction of a larger
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and longer pipeline from Angarsk to the Pacific coast at Nakhodka, along with financing for field development in the Angarsk region. The pipeline would allow oil exports to all of Asia, including, most importantly, Japan. Russia has been equivocal about a decision but appears to be leaning toward the Japanese proposal.48 However it turns out, the situation has turned into a nasty diplomatic episode between China and Japan.49 Meanwhile, Japan has managed to acquire a number of other fairly modest equity oil supplies elsewhere, including a share in the ExxonMobil Sakhalin 1 project in Russia through the Japanese consortium Sodeco; an approximate 100 MBD share for Inpex in Indonesia; and 200 MBD for the Japanese consortium Jodeco in the United Arab Emirates. Despite a poor record for gaining national control over oil production abroad, Japan seems to be stepping up its efforts to compete with Chinas increasingly active efforts in the region and overseas. Japan has been more successful at securing its access to overseas natural gas through the global reach of its large trading companies and utilities, in tandem with METI. Mitsubishi, Mitsui, Marubeni, and other trading companies pioneered the development of the LNG business in the 1970s and today are partners in most of the large LNG projects that already 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 Japan, 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 longterm involvement with LNG in the UAE.
South Korea
South Koreas energy dilemmas closely resemble those of its neighbor Japan. Korea lacks indigenous energy resources and is highly dependent on energy imports. This dependence rose sharply until the onset of the Asian financial crisis in 1997. Similar to Japan, South Korea imports 80 percent of its energy.50 South Korea is now the seventh-largest oil consumer in the world, with recent demand running near 2.3 MMBD, and the fourth-largest oil importer, importing virtually 100 percent of its oil. Oil makes up a high share of total energy demand, even after a number of years of efforts to improve efficiency in oil use. Koreas oil demand skyrocketed during the late 1980s and early 1990s, quadrupling from 1987 to 1997, from 0.62 to 2.4 MMBD.
This extraordinary growth was driven by the convergence of the economic and industrial boom, increasing transportation demand, and the appreciation 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-intensive 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 include gas, coal, and nuclear. In 1986 Korea received its first tanker load of LNG, and by 2001 Korea had become the worlds second-largest importer of LNG after Japan.54 Virtually all of its gas needs are imported, mainly from Qatar, Indonesia, Malaysia, and Oman, and gas now makes up ten percent of Koreas energy mix, for use mainly in power generation.55 The state gas monopoly KOGAS has two large receiving terminals at Pyongtaek and Inchon and is building a third terminal at Kwangyang in partnership with Mitsubishi Corporation and the Pohang Iron and Steel Corporation. Korea has also boosted its coal demand, again virtually all imported from mainly Australia and China, and coal now makes up 21 percent of total energy needs. Finally, South Korea has an active effort to boost nuclear energy. Nuclear already accounts for nearly 40 percent of Koreas electricity production, and there are plans to more than double nuclear capacity by 2030, rising from todays 14 gigawatts (GW) capacity to 31 GW.56
South Koreas Energy Security Strategy

South Korea has also pursued a mix of cooperative and mercantilist energy security strategies. Among the cooperative efforts, South Korea has recently joined the IEA and has taken on the commitments to coordinate oil supply efforts with other industrial countries in the event of a supply disruption. It has also built a strategic oil stockpile equivalent to 90 days of import supplies, in line with its IEA commitments. This more cooperative approach to energy security is also evident in South Koreas leadership in forwarding proposals for a large regional gas pipeline to bring Russian gas to China and South Korea and possibly even Japan. Broadly speaking, South Korean officials have been more deeply involved in discussions in APEC and elsewhere to broaden regional energy cooperation, and it frequently makes regional cooperation a key theme of its rhetoric.
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Nevertheless, the oil and gas industry in South Korea remains heavily dominated by the state. Largely through the state-owned Korea National Oil Company (KNOC) but also in cooperation with several of the large privately-owned chaebol, the government continues to pursue a mercantilist agenda of acquiring overseas equity stakes in oil exploration and production. The government has charged KNOC with the goal of providing ten percent of South Koreas oil by 2010, estimated at roughly 270 MBD. KNOC has developed stakes in Yemen, Indonesia, Burma, Vietnam, Argentina, 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 developed strong ties diplomatically and through a number of large crude supply contracts and industrial and service contracts with the major Persian Gulf oil producers and has been involved in a number of construction projects from power plants, refineries, and chemical plants in the region. It is also beginning to broaden its industrial and diplomatic contacts in Central Asia and the Caspian region to support its long-term oil supply interests. On the natural gas front, through KOGAS, the state natural gas monopoly, and several of the large chaebol, South Korea has taken major equity stakes in a number of the large LNG projects in the Asian region and in the Persian Gulf region in order to gain stronger control over longterm supplies of LNG.
India
India has been among the fastest-growing economies in Asia and the world, growing at over six percent since the countrys economic and financial crisis of 1991. Parallel to this, energy demand has been rising at equally high rates, averaging 6 percent annually which, combined with limited domestic energy reserves (outside of coal), are driving India toward membership in the Asian club of huge energy importers.58 India is now the sixth-largest energy consumer in the world. Coal dominates energy consumption in India, accounting for 51 percent of total energy use. Most of the coal is for electricity production, for which demand has grown at extremely high rates. India has large indigenous supplies of coal, most of it relatively low in heat value and high in sulfur and ash, and given the limited domestic availability of oil and natural gas, coal is likely to remain the dominant fuel in the economy for the foreseeable future. The U.S. Department of Energy expects Indian coal consumption to rise by 70 percent, or 2.2 percent annually, over the next 25 years to meet demand for electricity that is expected to rise by 150 percent. India is likely to account for over ten percent of the worlds increase in coal consumption.59
As in the rest of Asia, oil is the major import concern for India. Oil accounts for 34 percent of Indias energy use, somewhat lower than world average of 40 percent, but consumption is rising and has overrun domestic resources. Oil demand in India grew by over six percent annually during 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. Consequently, imports jumped from 500 MBD to 1.3 MMBD, or from 42 to 62 percent of total consumption. Roughly half of Indias current oil imports come from the Middle East. Over time Indias import dependence will grow due to limited prospects for new oil exploration and production. Both the U.S. Department of Energy and the IEA expect Indian oil demand to be among the fastest-growing in the world at nearly four percent annually to 2025. Combined with essentially flat or declining oil production, imports will account for 85 percent of total oil demand by 2025, most of which will have to come from the Middle East, Central Asia, and Africa.60 India has historically been self-sufficient in natural gas, but limited domestic gas resources and rising demand will lead to change in the future.61 Gas makes up only about ten percent of Indias energy consumption, but demand is expected to continue increasing, making India a major importer in the form of LNG and possibly pipeline supplies. The DOE expects 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 terminal, Petronet, a joint venture between Indias state oil and gas companies ONGC, GAIL, and IOC, along with Gaz de France, began operation in late 2003 and is importing gas from Qatar. Another Shell-sponsored terminal is planned for 2005 in Gujarat to bring LNG from Oman.63 In all, the government has approved plans for 12 possible import terminals in the future.64 It is also possible that India will be importing gas by pipeline in line with a series of proposals to bring gas from Turkmenistan, Iran, Pakistan, and Bangladesh, all of which have potential large exportable supplies. However, each of these proposals has serious geo-political problems, and the outlook for pipeline supplies will depend on resolving key regional geopolitical rivalries and constraints. The large majority of Indias future gas imports will necessarily come from the Persian Gulf, with lesser amounts possible from Central Asia and neighbors Pakistan and Bangladesh. Like the other Asian energy importers, India is also looking to nuclear power development as an important source of electricity generation. Nuclear
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now accounts for less than five percent of electricity needs in India, but five to eight new plants are planned, which would triple nuclear generation 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 catalyzed 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 international 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 partnership 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 percent share of the ExxonMobil-led Sakhalin 1 project for $1.7 billion. ONGC also is moving rapidly in West Africa with the purchase this year of a 50 percent stake for $600 million in Angolas Greater Plutonia offshore project.68 In May 2004 Indias petroleum minister said India will invest $1 billion per year for the next ten years to acquire equity stakes in overseas fields.69 ONGC is also beginning to source large supplies of LNG from the Persian Gulf through deals coming online with Qatar and Oman. ONGC recently signed a preliminary deal with Iran to buy LNG later in the decade for which ONGC would get the option to develop a large Iranian oil field (similar to a deal offered to Chinas Sinopec).70 Indias OVL now has an equity stake in a large gas discovery offshore Burma in partnership with South Koreas Daewoo International. OVL has also been bidding for Cairn Energy assets in Bangladesh; has been awarded exploration blocks in Syria; and has been negotiating with Iraq, Libya, Kazakhstan, and the United States for exploration blocks. With more than 50 percent of its total oil supplies now sourced from the Middle East, India has announced plans for a strategic oil stockpile, but it has not moved very far in doing so yet.
Asias Oil and Gas Exporters

While demand in developing Asia for both oil and natural gas are to boom over the next two decades, Asias prospects for supplying a significant share of its own needs from within the region vary considerably according to different resource endowments, production potential, and government policies. Prospects for future oil production and exports from within the region look relatively bleak while prospects for natural gas production and exports look far better.
The outlook for oil suggests that most of Asias current oil exports are likely to be absorbed over time by rising domestic demand in those countries and by limited oil production potential. Indonesia, Malaysia, and Australia have been the main oil exporters in the region in recent years. In Indonesia, oil production peaked at 1.7 MMBD in 1991, but by 1998 had drifted down to 1.5 MMBD when production began to decline more rapidly, falling below 1.2 MMBD in 2003.71 Declines are due to aging fields and a lack of new investment in exploration and development which, in turn, reflects relatively unattractive terms, limited geologic prospects for large new fields, and serious political and oil policy uncertainty arising from Indonesias political instability. At the same time Indonesias domestic oil demand has been rising rapidly with economic growth, interrupted briefly during the financial crisis of 199798, and subsidized domestic oil prices, which have further contributed to the rise in oil demand. In fact, by mid2004, Indonesia became a net oil importer on a monthly basis as overall crude and oil product imports outran overall oil exports.72 With limited geologic prospects and continuing confusion over oil investment policies and conditions, production is unlikely to rise in the foreseeable future, while demand can be expected to grow. The IEA forecasts that Indonesia is likely to become a significant oil importer over the next two decades.73 Indonesia is staking its energy export future on natural gas largely in the form of LNG. For Asia, the outlook for growing new supplies of LNG over the next two decades will limit the gradual rise in Asias natural gas imports from outside the region. Indonesia is the worlds largest exporter of LNG, having pioneered that industry in partnership with Japan in the mid-1970s. Indonesia exported 23 million metric tons (MMT) of LNG in 2002, about 20 percent of global LNG exports, with 70 percent of that going to Japan, 20 percent to South Korea, and the remainder to Taiwan.74 In the future LNG exports are likely to grow with new projects such as BPs Tangguh project in West Papua and expansions of the Bontang complex in East Kalimantan more than offsetting gradually declining volumes from the nearly 30-year-old ExxonMobil Arun project in North Sumatra. Indonesia recently won a large contract to begin supplying LNG to Chinas Fujian province in 2007 or 2008.75 Malaysia has also been a significant oil exporter, but its long-term oil export potential is also somewhat clouded by limited geologic prospects and a growing emphasis on LNG exports. Oil production in recent years has risen gradually to about 800 MBD but domestic demand has also been rising with Malaysias strong economic growth so that exports have largely plateaued at around 300 MBD. Malaysias oil exports are unlikely to rise significantly in the future and could very well decline. As with Indonesia,
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Malaysia is increasingly shifting its energy export future on LNG. LNG exports were 15.6 MMT in 2002, making Malaysia the third-largest global exporter after Indonesia and Algeria, with most of that going to Japan, and some going to South Korea and Taiwan.76 Further expansions of the three existing large LNG projects in Malaysia assure that Malaysia will be a continued supplier of LNG to Northeast Asia and China. Australia has occasionally been a modest oil exporter to Asia, but its production and export prospects also appear limited. It too is counting on LNG exports for energy earnings. Australia exported nearly 8 MMT of LNG in 2002, mainly to Japan, and future expansions of its large Northwest Shelf project, the new ChevronTexaco-led Gorgon project, and projects in the Timor Sea region promise to make Australia a major LNG exporter in the future.77 The Northwest Shelf project won the first major contract to supply LNG to Chinas Guangdong province beginning in 2007.78
Regional Implications
Several basic trends can be seen across Asia that have important strategic, environmental, and energy implications for the region. Prospects are extremely poor for large new oil supplies within Asia. The existing exporters oil prospects look poor, and they are shifting investment priorities toward LNG exports. Consequently, barring a major political or economic discontinuity in the region, rising oil demand in Asia will translate directly into deepening dependence on oil imports from outside the region. By far the largest proportion of this will imported oil will come from the Persian Gulf, but it will also be sourced in Russia, the Central Asia/ Caspian Sea region, and Africa. These regions have the large reserves to meet rising global oil demand over the next 25 years. The IEA estimates of global incremental sources of new oil production between 2000 and 2030 will be overwhelmingly dominated by OPEC and the Persian Gulf. Table 3 breaks down Russia, Central Asia, and the Persian Gulf, and indicates that these three sources are likely to account for roughly 7080 percent of the net global increase in oil production to 2030. The case of natural gas is somewhat less acute insofar as Asias supplies and prospective development of new LNG and pipeline exports is likely to grow strongly in the future. Nevertheless, gas demand in Asia is also likely to outstrip regional supplies beyond 2010 meaning that a growing volume of Asias gas will have to be imported from outside the region beyond 2010. Table 4 summarizes the IEAs forecast of the likely sources of Asias gas imports and shows the extent to which Asia is likely to become more dependent on gas imports from the very same regions that it will depend on for oil imports.79
Table 3. Oil ProductionCumulative Future Growth (MMBD)

Russia Central Asia/Caspian Region OPEC Middle East World Total Three Regions combined Middle East OPEC share Three Region share 2010 2.1 2.5 5.5 13.8 10.1 40% 73% 2020 2.5 3.3 16.8 29.0 22.6 58% 78% 2030 3.0 3.8 30.4 45.0 37.2 68% 83%
Source: International Energy Agency, World Energy Outlook, 2002.
Third, driven by rising demand for electricity, there will be a continuing and growing reliance on coal as the only domestically plentiful power generation fuel, particularly in China and India. Finally, across the region nuclear power is being boosted rapidly to help meet rising electricity needs. Asia is the globes growth area for nuclear development and, consequently, a serious and growing concern as a potential source of nuclear technology proliferation, safety problems, and waste disposal challenges.
Asias Strategic Suppliers

Asian powers are scouring the globe in an increasingly mercantilist drive to secure access to oil and gas supplies and are building broader diplomatic and trade ties that serve to strengthen these energy links. Their most important efforts have been focused largely on key petroleum-rich regions of the Persian Gulf, Russia, and Central Asia. Growing energy ties in these regions will have a significant impact on future geo-political developments. Not surprisingly the primary area of focus for all the Asian importers is the Persian Gulf. The region holds two-thirds of the worlds proven oil reserves. It already accounts for two-thirds of Asias oil imports and in the longer run is likely to account for 80 percent of Asias oil imports and 50 percent of its natural gas imports. It is also one of the most chronically unstable and violent regions of the world. In the past 30 years the region has been rocked by a series of wars, revolutions, and political events that have caused enormous disruptions in global oil supplies. The list includes the 1973 Middle East War that provoked the Arab oil embargo against the West, leading to a quadrupling of oil prices from $3 to $12 per barrel; the 1979 Iranian Revolution, combined with the outbreak of the Iran-Iraq War, which led to a tripling of oil prices from $12 to $36; the Iran-Iraq Tanker War of the mid-1980s, which threatened oil flows during much of the mid1980s; and Iraqs 1990 invasion of Kuwait provoking the first Gulf War, the destruction of Kuwaiti oil fields, and the resulting decade-long global embargo on Iraqi oil. The current Gulf crisis, continuing uncertainty about
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Table 4. Asian Natural Gas Imports, 20002030 (BCM)

Southeast Asia to Northeast Asia Persian Gulf to Northeast Asia Alaska to Northeast Asia Southeast Asia to China Persian Gulf to China Persian Gulf to India Russia to Northeast Asia Russia to China Total of which Persian Gulf Russia Southeast Asia
Source: IEA, World Energy Outlook, 2002.
2000 60 21 2 0 0 0 0 0 83 21 0 60
2030 52 60 0 10 13 27 8 25 195 100 33 62
the Iraq situation, and escalating terrorism and threats of attacks on oil facilities in the region take these supply disruption risks to new heights. Insurgents in Iraq have caused major damage to Iraqs oil production and export pipeline infrastructure in an attempt to undermine the new Iraqi regime. Militants have now targeted Saudi Arabias oil industry (which provides 12 percent of the worlds oil supplies), adding a new risk premium on global oil prices. Although Saudi oil facilities are tightly guarded, these groups have taken to attacking the compounds of Western expatriates working for ARAMCO, hoping to provoke an exodus of Western expertise and to gradually cripple the Saudi oil industry. As the war on terrorism expands, terrorist groups have begun threatening to attack major energy infrastructure and transit choke points, including the Strait of Malacca, in order to disrupt the global economy. Despite the chronic risks of disruption to oil production and exports from the Persian Gulf region, the region is so central to future production capacity needed to meet the worlds growing oil needs that it will remain the key focus point for the globes oil importers. Consequently, the Asian powers are seeking long-term energy ties but also are rapidly building diplomatic, trade, and military relationships to support those ties. The main focus so far has been on Iran and, to a lesser extent, Saudi Arabia. Irans appeal reflects its growing need to attract foreign investment to help develop its oil and gas industry and greater opportunities presented by the U.S. embargo and the resulting reduced competition. All four Asian players are developing strong positions in Iran. Saudi Arabia has been a focus mainly for long-term crude supply contracts, since private investment has
not been possible until the recently, but China is quickly broadening its large crude supply relationship with cross investments between ARAMCO and Sinopec for refining and a new Sinopec involvement in the Strategic Gas Initiative.80 All the players are focused on Iraq and its enormous potential for the future, with both China and Japan pursuing sizeable oil and gas exploration and development deals.81 The rapid development of ties between Asia and the Persian Gulf is a two-way street, and Asia is taking on great importance from the perspective 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 perennial Asian Premium in oil prices compared to the west of Suez markets.82 The nexus of diplomatic, trade, and military ties with Asia also appeals 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 transport routes is vitally important to China, Japan, India, and South Korea. Japan and India have big positions in the two large Sakhalin Island projects currently under way to bring oil and LNG to Asia. At the same time, China, Japan, and South Korea are deeply involved in proposals to bring East Siberia oil and gas supplies longer-term. All the Asian states are busy upgrading and broadening their political ties with Russia to support future energy ties. This complementarity extends to the Russian side as well. President Vladimir Putin and the Kremlin would like to diversify Russias growing energy export base away from total dependence on European markets for both oil and gas exports. The Kremlin has become quite explicit (under Putins newly statist orientation toward the energy export sector) about its desire to use oil and gas as strategic, diplomatic, and commercial levers to gain regional influence. The third key area of energy resource competition and growing ties and where the geo-political overlay is likely to take on increasing impor-
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tance is in the Central Asia and Caspian Sea region. Central Asia and the Caspian have been somewhat later in moving into Asias focus because of the high and uncompetitive cost of transporting oil and gas to Asia from the region. The costs of proposed pipelines to move oil or gas to Asia are very high, and there are many barriers to transporting oil or gas to coastal locations where it could be loaded onto Asian-bound tankers. Nevertheless, the attraction for the major energy importers of Asia of diversifying imports away from the Persian Gulf and toward overland pipeline 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 government 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 become a very large producer and exporter of both oil and gas.
Implications for the United States

Asias response to its deepening energy insecurity has important implications for the United States across a range of geo-political, energy, and environmental issues. First, as a major stabilizing and balancing force in Asia, the United States has a vital stake in how energy insecurity impacts Asias future geopolitical architecture, either aggravating regional tensions and rivalries or providing a platform for greater regional cooperation. The foregoing analysis suggests that on balance Asias powers are showing a marked inclination toward a relatively narrow, zero-sum, mercantilist approach to energy security that has the potential to be a major source of future tension and conflict in the region. The key Asian powers increasingly compete in the same producing areas and countries, and examples of state owned or sponsored Asian oil companies going head-to-head to control the same large fields and supplies are growing daily. Moreover, Asian governments are largely choosing bilateral approaches that link energy, trade, strategic, and
often military cooperation rather than multilateral, regional, and market approaches to linking energy and security interests. A type of energy nationalism appears to be setting in, with head-tohead competition to control regional energy supplies on the rise. This will have a growing potential to aggravate key regional rivalries. The ChinaJapan 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 continental shelf defines the zone, therefore extending its EEZ much closer to Japans coast. This has quickly escalated to the point where Chinese gunboats 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 between 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 development inevitably raises suspicions in China that the two are conspiring to contain China by denying it vital oil and gas supplies. Energy also risks aggravating another long-term regional rivalry in Asia between China and India. Chinas strategists are increasingly concerned about Indias naval power and its capacity to interfere with oil flows through the Indian Ocean to China, while India is concerned with Chinas growing ties with Burma and its efforts to extend its naval and other capabilities to the Indian Ocean. Energy nationalism would also be likely to spill over into maritime control of sea lanes and transport routes through the South China Sea, Strait of Malacca, Indian Ocean, and East China Sea. Although a serious naval arms race has yet to develop, resorting to competitive and confrontational means to ensure control over sea lanes would very likely contribute to a future naval arms race. This would play directly into regional fears in Japan, Southeast Asia, and India over Chinas intentions for its longterm naval development while at the same time fanning Chinese fears over Japans naval capability and future development. Nationalist and competitive attitudes also risk spilling over into disputes about control over potential energy resources in disputed areas such as the Senkakus, Spratleys,
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the South and East China Seas, such as we are currently witnessing in the China-Japan dispute over the East China Sea gas field. This is not to say that there are no examples in the region that suggest a potential for energy insecurity to encourage regional cooperation and greater reliance on markets. In the war on terrorism there is a strong potential for the Asian powers to work together with the United States to prevent terrorist attacks on energy infrastructure, and the United States is already initiating discussions on this issue. Efforts to pioneer a large regional 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 system. 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 management 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 cooperation 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 regions. That their role will increase is inevitable given Asias growing dependence on these regions; the only question is what it will mean for U.S. interests and influence. First and foremost is the Persian Gulf and Middle East. The general view has been that as its dependence on Persian Gulf oil grows, Asias interests in political stability in the region will increasingly converge with U.S. interests. Consequently, it would seem unlikely that any of the Asian states, including China, would risk actions that might further destabilize the region, such as stepping up arms and missile sales or contributing to nuclear proliferation. The Asian states would be more likely to free ride on U.S. efforts to maintain stability in the region. Moreover, while the conservative Persian Gulf states may welcome the opportunity to diversify their strategic, energy, and trade relationships through the presence of the Asian players; only the United States can provide the military and strategic umbrella to protect them from threats in the region and provide the strategic naval and air power projection to protect vital tanker routes and choke points like the Straits of Hormuz. From
this perspective, it seems unlikely that the United States will see a wholesale challenge to its traditional military hegemony in the Persian Gulf. However, within this broad setting there is plenty of range for conflicting visions over the conditions in the Gulf that are conducive to longterm stability. It is here where Asias growing presence, particularly Chinas, is likely to introduce a more complex and challenging situation for the United States. One telling example is the willingness of all the key Asian states, including strategic ally Japan, to become deeply engaged with Iran in energy and broader economic and diplomatic ties despite the U.S. contention 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 supporting the U.S. war in Iraq, and the war was opposed by China. Depending 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 involvement in the region and growing capability to influence governments there), it seems inevitable that the range of potentially significant disagreements 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 regarding U.S. energy diplomacy and influence in the Caspian Sea/Central Asia region, but they do not look to be as pointed as is the case in the Persian Gulf. In many ways, U.S. and Asian energy interests in the region converge more closely. The United States has three key energy objectives in the region, two of which converge reasonably well with Asian interests. First, both the United States and Asia have an interest in ensuring that Caspian and Central Asian oil and natural gas supplies are developed and exported on a large scale to global markets in order to diversify global supplies and reduce global market dependence on OPEC and the Middle East. In this context, the United States fully supports Chinas plans to build an oil export pipeline from western Kazakhstan east to China, although it would oppose the use of huge subsidies necessary to make the project feasible. Second, Washington is determined to prevent Russia from being able to control the export of energy from the region. Since this mostly af-
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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, howeverto 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. sanctions. Arms control is another area where U.S. interests could be compromised; there is potential for oil-for-arms trade to develop between Asia and the oil exporters, particularly missiles and nuclear technology in the Middle East and Persian Gulf. Another area of concern involves the potential for Asia to aggravate instability in global oil markets and prices due to the lack of adequate preparation for oil supply disruptions. Asia lacks the regional institutions to manage supply crises on a regional cooperative basis, and key buyers in the region are prone to panic buying during crises, fueling market instability. Both China and India were key actors in panic buying in the run-up to the Iraq war in January and February of 2003. The lack of effective policies makes Asia a potential source of instability in global oil markets. It is also quite apparent that Asias growing consumption of coal and significant increases in transportation have grave environmental implications for Asia in terms of air quality, health, and global warming. Concerns over long-term global carbon emissions simply cannot be effectively addressed without greater involvement from China and India. This needs to
be addressed both on the demand side, by slowing the rise in electricity demand growth in Asia, as well as by making improvements in clean coal technology and government policies regarding the preparation, handling, and transportation of coal. A final serious and obvious area for concern is the growing role of nuclear energy in the Asian region and the resulting nuclear proliferation and safety issues. This trend will create strong pressures for improving the global regime to contain proliferation and for expanding research on improving safety and disposal technology. As in the case of coal, the need to make demand and pricing reforms that would slow the rate of growth in electricity use are vital. It is far less expensive to slow consumption than to manage the environmental and proliferation risks inherent in Asias burgeoning coal and nuclear use. In conclusion, Asias growing energy insecurity and rising energy nationalism have broad ramifications for the region and for the United States across a wide range of issues, geo-political, energy, and environmental. It is vitally important that U.S. policymakers understand that energy is a central pivot influencing a series of otherwise apparently unrelated strategic, 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 looming 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 exporting regions, U.S. anti-terrorism policies may inadvertently be fueling the competitive and mercantilist character of Asias energy strategies. The deepening U.S. presence in the Persian Gulf and Central Asia is also heightening Chinas insecurity over its future access to energy supplies and is certain to make energy an increasingly important potential source of tension. Strengthened U.S. efforts to help Asia solve its energy problems could pay huge dividends along a broad range of larger geo-political and environmental issues.
Endnotes
1
The two major choke points for Asias supplies are the Straits of Hormuz exiting the Persian Gulf and the Strait of Malacca between Indonesia and Malaysia. More than 50 percent of Asias daily oil supplies must transit the narrow Strait of Malacca. See Energy Information Administration, World Oil Transit Chokepoints, U.S. Department of Energy, April 2004.
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7 8 9 10
11 12 13 14 15
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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. There has been an ongoing debate on this. One pole of the debate is defined by Kent Calder in Pacific Defense: Arms, Energy, and Americas Future in Asia, New York: William Morrow and Company, Inc., 1996, who argues that energy is likely to become a serious source of conflict in the region. On the other side see Robert Manning, The Asian Energy Factor: Myths and Dilemmas 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. On Asian energy and oil development see John V. Mitchell, The New Geopolitics 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 Studies, Oxford University Press, 1997, pp. 1232; Keun-Wook Paik, Gas and Oil in Northeast Asia: Policies, Projects and Prospects, The Royal Institute of International Affairs, 1995, pp. 172. Energy Information Administration, World Energy Use and Carbon Dioxide Emissions, 19802001, U.S. Department of Energy, April 2004, pp. 13, 51. Energy Information Administration, International Energy Outlook 2004, U.S. Department of Energy, GPO, March 2004. BP Statistical Review, 2004. BP Statistical Review, 2004. BP Statistical Review, 2004. Energy Information Administration, International Energy Outlook, 2004 Other forecasts come to similar conclusions. For example, the IEA forecasts Asian oil imports of 35 MMBD by 2030. See International Energy Agency, World Energy Outlook, 2002, Paris: OECD, 2002, pp. 107. U.S. Department of Energy, International Energy Outlook, 2004 International Energy Agency, World Energy Outlook, 2002 International Energy Agency, World Energy Outlook, 2002 U.S. Department of Energy, International Energy Outlook, 2004 Energy Information Administration, World Energy Use and Carbon Dioxide Emissions, 19802001 On Chinas energy and oil needs, see Manning, The Asian Energy Factor , pp. 85118; Horsnell, Oil in Asia , pp. 3365; Paik, Gas for Power in Northeast Asia , pp. 11245. For a discussion of Chinas 1990s oil and energy development strategies, see Kang Wu and Binsheng Li, Energy Development in China: National Policies and Regional Strategies, Energy Policy, vol. 23, no. 2 (1995), pp. 16971. International Energy Agency, World Energy Outlook, 2002
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24 25
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See U.S. Department of Energy, International Energy Outlook, 2004 ; AsiaPacific 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. Kang Wu, The Refining Outlook in Asia and the Middle East, presentation at the Oil & Money Conference, November 45, 2003, London. 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. U.S. Department of Energy, International Energy Outlook, 2004 ; other forecasts vary but reach similar conclusions. The IEA forecasts a 30 percent import 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 . U.S. Department of Energy, International Energy Outlook, 2004; International Energy Agency, World Energy Outlook, 2002 Wu, The Outlook for Energy and Economic Development in China . James P. Dorian, Emerging Russia-China Energy Relations: Will Needs be Met by Supplies, presentation at a conference on Russia in AsiaAsia in Russia: Economy, Economics, and Regional Relations, Kennan Institute, Woodrow Wilson Center, Washington, DC, July 23, 2004. 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. The next several paragraphs draw on a substantial literature on Chinas energy security concerns. See Philip Andrews-Speed, Xuanli Liao, and Ronald Dannreuther, The Strategic Implications of Chinas Energy Needs, Institute for International Strategic Studies, Adelphi Papers no. 346, Oxford University Press, 2002; Erica Strecker Downs, Chinas Quest for Energy Security, Santa Monica: RAND, MR1244AF, 2000; Downs, Chinas Energy Security, unpublished dissertation, Princeton University, 2004; Felix K. Chang, Chinese Energy and Asian Security, Orbis, vol. 45, no. 2 (Spring 2001); Joe Barnes, Slaying the Dragon: The New China Threat School, in China and LongRange Asia Energy Security: An Analysis of the Political, Economic and Technological Factors Shaping Asian Energy Markets, Baker Institute for Public Policy, April 1999; International Energy Agency, Chinas Worldwide Quest for Energy Security, Paris, 2000; U.S.-China Economic and Security Review Commission, Chinas Energy Needs and Strategies, Washington, DC, October 30, 2003; Ross H. Munro, Chinese Energy Strategy, in Energy Strategies and Military Strategies in Asia, report for the Office of Net Assessment, Department of Defense, 1999. See Edward L. Morse, Amy Myers Jaffe, and Nawad E. Obaid, The SinoSaudi Energy Rapprochement: Implications for U.S. National Security, report for the Office of Net Assessment, Department of Defense, 2002; John
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31 32
33
34
35
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40 41
42 43
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 University, September 2002. On ties with Central Asia see Gaye Christoffersen, Chinas Intentions for Russia and Central Asia Oil and Gas, NBR Analysis, vol. 9, no. 2 (March 1998); Philip Andrews Speed and Sergei Vinogradov, Chinas Involvement in Central Asian Petroleum, Asian Survey, vol. 40, no. 2 (March/April 2000). 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. Chinese in Sudan, Washington Times, March 5, 2004. China Emerging as Important Energy Partner to Iran, OPECNA News Service, August 28, 2003; Sinopec Says Its Close to Iran Oil and Gas Deals, WMRC, June 25, 2004; 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. See Amy Myers Jaffe and Steven T. Lewis, Beijings Oil Diplomacy, Survival, vol. 44, no. 1 (Spring 2002), China Steps Up Efforts in Oil Reserves Building, Peoples Daily, January 21, 2003. See Ken Koyama, Oil Supply Security in Asian EconomiesGrowing Oil Imports and Their Response Measures, Energy in Japan, no.149 (January 1998); Inoguchi Takashi, Japans Response to the Gulf Crisis: An Analytic Overview, Journal of Japan Studies, vol. 17, no. 2 (1991), pp. 25773. On Japan energy and oil, see Manning, The Asian Energy Factor , pp. 143 68; Horsnell, Japan: The Re-Emergence of Market Forces, in Horsnell, Oil in Asia , pp. 6689; Paik, Gas and Oil in Northeast Asia , pp. 171205. In 2001 Japan consumed 7,013 BTUs (British Thermal Units) per 1995 dollar of GDP (PPP), compared to nearly 11,000 BTUs for the United States and an OECD average of roughly 8,000. See Energy Information Administration, Japan: Environmental Issue, Country Analysis Brief, U.S. Department of Energy, January 2004. International Energy Agency, Energy Policies of IEA Countries: Japan, 2003 Review, Paris, 2003, p. 19; also Energy Information Administration, Japan Country Analysis Brief, U.S. Department of Energy, January 2004. International Energy Agency, World Energy Outlook, 2002 . On Japans natural gas development see Akiro Miyamoto, Natural Gas is Japan, in Wybrew-Bond and Stern, Natural Gas in Asia , pp. 10687. Japan closed its last remaining coal mine in 2001. Japans Energy Crisis: Darkness Falls in Tokyo, Economist, July 17, 2003.
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51 52 53 54
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59 60 61
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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. Brown and Wu, Key Players in the Asia Pacific Oil Market , pp. 4143. For a good recent discussion of Japans recent policies, see Kent Calder, Japans Energy Angst and the Caspian Great Game, NBR Analysis, vol. 12, no. 1 (March 2001); Japanese Energy Security and Changing Global Energy Markets: An Analysis of Northeast Asian Energy Cooperation and Japans Evolving Leadership Role in the Region, The James A. Baker III Institute for Public Policy, Rice University, May 2000. Japan Signs Oilfield Development Deal with Iran Despite Opposition from U.S., Financial Times, February 19, 2004, p. 9. The pipeline decision has been held up by a number of factors. Proven oil reserves in the Angarsk region are presently only sufficient to support the 400600 MBD volume agreed to with the Chinese. The longer Japanese line would require a volume of 1 MMBD to be commercially viable. Second, control over the pipeline decision has shifted as the Kremlin moves to assert greater control over the Russian oil industry and export revenues. Edward C. Chow, Russian Pipelines: Back to the Future? Georgetown Journal of International Affairs, vol. 5, no. 1 (Winter/Spring 2004), pp. 3031. 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 Northeast Asia , pp. 171205. BP Statistical Review, 2004. U.S. Department of Energy, International Energy Outlook, 2004 . See Korea, in World Energy Outlook, IEA, p. 228. On Korean gas development see Keun-Wook Paik, Natural Gas Expansion in Korea, in Wybrew-Bond and Stern, Natural Gas in Asia , pp. 188229. 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. Korea, in World Energy Outlook, IEA, pp. 233. Brown and Wu, Key Players in the Asia Pacific Oil Market , p. 47. On Indian energy and oil development, see Manning, The Asian Energy Factor , pp. 11942; Horsnell, Oil in Asia , pp. 9099. U.S. Department of Energy, International Energy Outlook, 2004 . U.S. Department of Energy, International Energy Outlook, 2004 . For a discussion of Indian gas development, see Najeeb Jung, Natural Gas in India, in Wybrew-Bond and Stern, Natural Gas in Asia , pp. 66105. U.S. Department of Energy, International Energy Outlook, 2004 . Middle East to Play Large Role in Gas Supply to China, India, Oil and Gas Journal, June 7, 2004. FACTS: Indias Long-Term Gas Supply Outlook Bright, Oil and Gas Journal, December 8, 2003. U.S. Department of Energy, International Energy Outlook, 2004 .
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Brown and Wu, Key Players in the Asia Pacific Oil Market , p. 43. Asian Firms Drill Deeper into Sudan, Petroleum Intelligence Weekly, July 5, 2004, pp. 45. OVL to Buy Shells Stake in Angola Oilfield, Times of India, April 10, 2004. South Asia: The Powerhouse Moves Abroad, Petroleum Economist, July 13, 2004, pp. 1316. 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. BP Statistical Review, 2004. Energy Intelligence Group, Indonesia Becomes Net Oil Importer, Insists Switch is Temporary, Oil Daily, May 21, 2004. International Energy Agency, World Energy Outlook, 2002 . Energy Information Administration, The Global Liquefied Natural Gas Market: Status and Outlook, U.S. Department of Energy, December 2003, pp. 10 11. LNG: ChinaFools Rush In, Petroleum Economist, July 13, 2004, pp. 24. The Global Liquefied Natural Gas Market , pp. 1011. The Global Liquefied Natural Gas Market , pp. 1011. Energy Intelligence Group, Australian Government Helps Competing LNG Projects, World Gas Intelligence, April 19, 2004. See Jonathan Stern, Russian and Central Asian Gas Supply for Asia, and Ian Wybrew-Bond, Middle East and South East Asia: Gas-Exporting Regions to Asian Markets, both in Wybrew-Bond and Stern, Natural Gas in Asia , pp. 23076 and pp. 27798 respectively. In late 1998 Saudi Arabia invited foreign oil companies to invest in large natural 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. 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. For many years now Asia has paid a slightly higher price than the U.S. or Europe, varying in the range of $12 per barrel, for comparable oil supplies due to higher transportation costs and limited supply options. This is the Asian Premium. See Kang Wu and Fereidun Fesharaki, Managing Asia Pacifics Energy Dependence on the Middle East: Is There a Role for Central Asia, Asia Pacific Issues Paper, no. 60, June 2002. See Kathleen A. Collins and Willian C. Wohlforth, Defying Great Game Expectations, in Richard Ellings and Aaron Friedberg, eds., Strategic Asia 200304: Fragility and Crisis, The National Bureau of Asian Research, 2003, pp. 30406. China and Japans Oil Rivalry Unavoidable, China Daily, July 13, 2004; China, Japan at Odds Over Offshore Gas Project, Asahi Shimbun, June 23, 2004; China Rejects Japanese Gas Field Claims, WMRC, June 28, 2004; China Warns Japan Over Gas Field Claims, WMRC, June 29, 2004.
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Sources: BP, 2004; International Energy Administration, World Energy Outlook , 2002
Central Asia
2 2 0 19 46 2
Pakistan
Korea
Japan
10
China
Middle East
India
0 5 8
Africa
Southeast Asia
Indonesia
Imports or exports in millions of barrels/day during year: 2000 2030
Exports Imports
Asias Growing Oil Import Dependence

Oil Imports/Exports for Selected Countries, Regions, 2000-2030

Asia's Energy Insecurity: Cooperation or Conflict?

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Energy

ASIAS ENERGY INSECURITY: COOPERATION OR CONFLICT?

340 Strategic Asia 200405

342 Strategic Asia 200405

Asias Energy Fundamentals

Table 1. Asian Energy Demand Growth by Fuel, 19802002

344 Strategic Asia 200405

Table 2. AsiaOil Demand and Supply (MMBD)

Source: Department of Energy International Energy Outlook, 2004.

Electricity, Coal, and Nuclear Power

Figure 1. Projected Growth in Coal Consumption After 2001

Millions Metric Tons

2 0469 25 2020 2015

125 2010 2 010

185 2015 2 015

Source: Department of Energy, International Energy Outlook, 2004

346 Strategic Asia 200405

Figure 2. Projected Nuclear Power Production C h ar t 2 . P r o jec t e d N u c le a r P o w e r P r o d u c t io n

250 250 200 200 150 150 91 100 100 5 0 50 66

2 015 2 020 2020 2015 Rest R e sof t World o f W o rld

Source: Department of Energy, International Energy Outlook, 2004

Is Asias Energy Dilemma Inevitable?

Energy Security and the Key Asian Powers

348 Strategic Asia 200405

350 Strategic Asia 200405

Chinas Energy Security Strategy

352 Strategic Asia 200405

354 Strategic Asia 200405

Japans Energy Security Strategy

356 Strategic Asia 200405

358 Strategic Asia 200405

South Koreas Energy Security Strategy

360 Strategic Asia 200405

Indias Energy Security Strategy

Asias Oil and Gas Exporters

362 Strategic Asia 200405

364 Strategic Asia 200405

Table 3. Oil ProductionCumulative Future Growth (MMBD)

Source: International Energy Agency, World Energy Outlook, 2002.

Asias Strategic Suppliers

Table 4. Asian Natural Gas Imports, 20002030 (BCM)

2030 52 60 0 10 13 27 8 25 195 100 33 62

366 Strategic Asia 200405

Implications for the United States

368 Strategic Asia 200405

370 Strategic Asia 200405

372 Strategic Asia 200405

374 Strategic Asia 200405

376 Strategic Asia 200405

Imports or exports in millions of barrels/day during year: 2000 2030

Asias Growing Oil Import Dependence

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