Energy Perspectives on Singapore and the Region 9789812305794

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Energy Perspectives on Singapore and the Region

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The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional centre dedicated to the study of socio-political, security and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). ISEAS Publishing, an established academic press, has issued almost 2,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publishing works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world. ii

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IS E AS Se r i e s o n E n e r g y

Energy Perspectives on Singapore and the Region

Institute of Southeast Asian Studies Singapore

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First published in Singapore in 2007 by ISEAS Publishing Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace Pasir Panjang Singapore 119614 E-mail: [email protected] Website: All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 2007 Institute of Southeast Asian Studies, Singapore The responsibility for facts and opinions in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the publisher or its supporters. ISEAS Library Cataloguing-in-Publication Data Energy perspectives on Singapore and the region. (ISEAS energy series ; no. 1) 1. Power resources—Singapore. 2. Power resources—Southeast Asia. 3. Power resources—Asia. 4. Energy policy—Singapore. 5. Energy policy—Southeast Asia. 6. Energy policy—Asia. I. Series HD9502 S62E57 2007 ISBN 978-981-230-410-0 (hard cover) ISBN 978-981-230-579-4 (PDF) Typeset by Superskill Graphics Pte Ltd Printed in Singapore by Utopia Press Pte Ltd iv

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Contents Foreword Tommy Koh

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Preface K. Kesavapany

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The Contributors

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1.

Overview of Singapore’s Energy Situation Mark Hong

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Singapore’s Changing Landscapes in Energy Khoo Chin Hean

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3.

Singapore’s Role as a Key Oil Trading Centre in Asia Esa Ramasamy

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Large-Scale Solar PV Power Generation in Urban High-Rise Buildings in Singapore Rabi Satpathy

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The High-Carbon Story of Urban Development in Southeast Asia Geh Min and Ooi Giok Ling

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Renewable Energy and the Environment: Technology and Economic Perspectives Youngho Chang

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5.

6.

1

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7.

Delivering Results in a Booming Rig Market Choo Chiau Beng

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The Success Story of Rig Building in Singapore Ong Tian Khiam

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The Singapore Oil Situation Ong Eng Tong

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10. Singapore Petroleum Company: Adding Value to the Singapore Oil Industry Cheng Hong Kok

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11. Oil Storage: The Singapore Story Mohamed Merican

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REGIONAL and INTERNATIONAL 12. The Outlook for Energy: A View to 2030 Kwa Chong Seng

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13. India’s Energy Situation: The Need to Secure Energy Resources in an Increasingly Competitive Environment Ligia Noronha

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14. The Implications and Impacts of China’s Oil Demand on the Asia Pacific Kang Wu and Caleb R. O’Kray

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15. Energy Security Cooperation in Asia: An ASEAN-SCO Energy Partnership? Christopher Len

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16. China’s Energy Security: Geo-politics versus Interdependence Henry Leong 17. The Strategic Challenges for the United States and China in Global Energy Supply David Ernsberger

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18. China’s Coal: Curse or Blessing Michael Richardson

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19. Japan’s New Energy Strategy Hisane Masaki

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20. Who Wins in the Asian Scramble for Oil? Vincent S. Pérez

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21. New Horizons for Liquefied Natural Gas (LNG) East of Suez Karen Schneider and Allison Ball

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22. Bio and Synthetic Fuels: An Alternative for Sustainable Mobility 285 Eric Holthusen 23. Price Discovery for Middle East Refined Product Exports: A Natural Role for Dubai Tilak K. Doshi 24. The Outlook for Gas in Southeast Asia Steve Puckett

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25. Sakhalin-2 Project, a New Energy Source for the Asia Pacific: History in the Making Andrew B. Seck and Viktor Snegir

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Index

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Foreword This timely book, published by the Institute of Southeast Asian Studies, is a significant contribution to knowledge about an important sector of our economy. Energy security is one of the most important issues on the international agenda. The competition between states for access to energy resources could, potentially, be a cause for misunderstanding and conflict. In an era when oil prices are high and rising to US$78 per barrel, and when Singapore imports 100 per cent of its energy needs, it is useful to help our citizens understand the complexities of issues relating to energy. This comprehensive book includes eleven chapters on Singapore’s energy issues, four on China, one each on ASEAN, India, Japan, Middle-East, Australia and Russia. It includes a wide range of topics, including, coal, gas, oil rigs, solar power, and bio-fuels. The book also contains contributions by wellknown oil companies such as ExxonMobil and Singaporean companies such as Keppel and Sembawang, which are pre-eminent in the building of jack-up oil rigs. The diversity of views and in-depth knowledge makes it a valuable and informative guide for students and others interested in energy issues. Looking ahead, there is much work to be accomplished in the Singapore energy field. First, the Inaugural Singapore Energy Conference (SEC), held on 8–9 November 2006, sought to inform policymakers and industry leaders of the latest trends and ideas in the global energy industries. Over the years, we hope that the SEC will become a premier energy conference and position Singapore as an important thought centre on energy issues. After all, Singapore is a major oil refining and trading centre and a leading manufacturer of oil rigs in the world. Singapore acceded to the Kyoto Protocol in 2006 and as a result, it has an international obligation to reduce its carbon emissions. As our economic activities all use energy derived from fossil fuels and result in carbon emissions, ix

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we need to focus on energy efficiency and find various ways to conserve energy. We should also promote fuel-efficient vehicles, such as hybrid vehicles, vehicles powered by CNG and other non-polluting or low-polluting fuel systems. Singapore could also be a centre for research on fuel cell and solar energy. This book also touches on the important nexus between energy and the environment. We should aim for Singapore to become a centre of excellence, not only in energy studies, but also in environmental studies, just as we have become a leader in water technologies. In time, Singapore should consider setting up a think-tank or research centre on energy issues. This book can be viewed as one of the first steps in that long journey. I commend ISEAS on the hard work and vision that has resulted in this informative, useful and comprehensive book. Tommy Koh Chairman Institute of Policy Studies September 2006

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Preface The Energy Programme of the Institute of Southeast Asian Studies represents one of ISEAS’ latest initiatives. The rise of oil prices in 2005 and 2006, combined with the continuing impact of 9/11 and the search for energy security by rising powers China and India, has stimulated both scholarly and lay interest in an issue that is of not only economic but strategic importance. Although the programme began in the 1980s, it was revived in June 2004 and has been well received, with thirty-five talks or seminars organized till the end of June 2006. This book is based on a selection of the talks presented at the ISEAS Energy Forum. They range from energy conservation to oil rig manufacturing and the energy needs of India and China. While scholarly and reflective of the data and ideas presented at the forum, it is written in an accessible way so as to stimulate public awareness of key energy issues facing Singapore and the region. The writers bring to bear on the subject not just their expertise but also their ability to explain complex issues in an easily understandable manner. The Institute of Southeast Asian Studies would like to express its appreciation to the Konrad Adenauer Stiftung for its financial support. I am particularly appreciative of Mr Mark Hong who conceived and developed the energy studies programme at ISEAS. I also appreciate his help, together with that of Mr Teo Kah Beng, in editing this book. Hopefully, this book will add to the growing knowledge on a subject which is going to be of critical importance in the twenty-first century. K. Kesavapany Director Institute of Southeast Asian Studies September 2006

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The Contributors Mark Hong is a Visiting Research Fellow at ISEAS and Co-ordinator of its Energy Programme and ASEAN-Russia Programme. He obtained a Master of Science degree in International Relations from Georgetown University in Washington D.C. on a Fulbright Scholarship. He joined the Ministry of Foreign Affairs in 1969. He served at the Singapore Embassy in Phnom Penh as Charge d’Affaires (1974 to 1975), the Singapore Commission in Hong Kong as First Secretary (1975 to 1976), the Singapore Embassy in Paris as Counsellor (1982 to 1986), the Singapore Permanent Mission to United Nations in New York as Deputy Permanent Representative (1988 to 1994), and as Singapore Ambassador to Russia and Ukraine (1995–2002). He was also a Visiting Senior Fellow at the Institute of Defence and Strategic Studies, Nanyang Technological University, Singapore; and is currently a Vice-Chairman of the International Committee of the Singapore Business Federation and Vice-Chairman of the International Committee of the Port of Singapore Authority. e-mail: [email protected] Khoo Chin Hean is the Chief Executive of the Energy Market Authority, a statutory board which regulates the Electricity and Gas industry in Singapore. He is also the Deputy Chairman of the National Institute of Education Council (NIE). He joined the Ministry of the Environment in 1977 after obtaining his Bachelor of Science (Electrical Engineering) degree from the University of Alberta, Canada under the Colombo Plan Scholarship Programme. In 1983, he was awarded the UK Commonwealth Scholarship for Master of Science at the Loughborough University of Technology, UK. Later, in the Ministry of the Environment, he was made Head of the Pollution Control Department in 1987 and the Director of Environmental and Policy xiii

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Management Division in 1991. He was then seconded to Ngee Ann Polytechnic as its Principal on 1 April 1995. Next, he was appointed Chief Executive of the Public Utilities Board with effect from 15 April 2000 to 30 March 2001. e-mail: [email protected] Esa Ramasamy was previously the Director, Asian Oil Markets for Platts. He has been working as a journalist in the oil industry since 1992 and has been with Platts since 1993. He started off covering the petrochemicals market, moving on to cover petroleum products and crude oil. He has an M.A. degree in Political Science from Simon Fraser University, British Columbia, Canada. e-mail: [email protected] Rabi Satpathy has more than twenty years of professional experience in the area of renewable energy, particularly in solar photovoltaic (pv) power systems, wind power generation and others. He is an electrical engineer with a specialization in solar pv system engineering, and currently works for Shell Solar, Singapore as a senior project manager. He has been instrumental in designing and supervising the successful commissioning of solar pv power plants (10–500 kWp) in India, Malaysia, Indonesia, Thailand, Hong Kong, China and many other countries. He has published more than twenty-nine technical papers pertaining to design and application of solar pv systems and related areas. He is also the author of several solar pv systems for industrial applications such as Oil and Gas Platforms (>30) and several solar pv power plants (stand-alone and hybrid) and other applications for rural and remote areas. e-mail: [email protected] Geh Min (MBBS, FRCS, FAMS) is an ophthalmologist by profession. She is a nature lover and a committed conservationist of both the natural and manmade heritage. She is presently serving her fifth term as President of the Nature Society (Singapore) and was sworn in as a Nominated Member of Parliament on 29 November 2004; she is serving a term from January 2005 to June 2007. She is a board member of The Nature Conservancy’s Asia Pacific Council and the Water Network of Public Utilities Board. She is also on the Board of the Singapore Environment Council and heads the Environment and Health Functional Committee of the South-West Community Development Council. She was also a member of the URA Focus Group on Land Allocation for Concept Plan 2001, the URA Subject xiv

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Group on Rustic Coast Parks and Water-bodies Plan, the Air and Climate Change focus group for the implementation of the Singapore Green Plan 2012. She is also on the Resource Panel for Women’s Workgroups at Ministry of Community Development, Youth and Sports. She is a supporter of the Arts and sits on the board of many arts organizations. e-mail: [email protected] Ooi Giok Ling is Professor at the National Institute of Education, Nanyang Technological University. She works on urban and environmental studies including sustainability and cities. Her more recent books include Housing in the Capital Cities of Southeast Asia (Institute of Southeast Asian Studies) and Sustainability and Cities — Concept and Assessment (World Scientific and Institute of Policy Studies). e-mail: [email protected] Youngho Chang is Assistant Professor at the Department of Economics, National University of Singapore. He received his Ph.D. in Economics from the University of Hawaii at Manoa. His professional profile includes research work with the East-West Center between 1993 and 1995, financial planning and business analysis with American Express International Inc., and landscaping in Seoul and Riyadh. He has contributed chapters to several books and has been published in numerous journals. His area of specialization is energy security, risk management, and energy market maturity. e-mail: [email protected] Choo Chiau Beng, Chairman and Chief Executive Officer of Keppel Offshore and Marine Ltd is also the Senior Executive Director of Keppel Corporation Ltd, and Chairman of Singapore Petroleum Company Ltd, Singapore Refining Company Pte Ltd and SMRT Corporation Ltd. He was awarded the Colombo Plan Scholarship to study Naval Architecture in the University of Newcastleupon-Tyne. He graduated with a Bachelor of Science (First Class Honours) in 1970 and a Master of Science degree in Naval Architecture in 1971. He attended the Programme for Management Development in Harvard Business School in 1982 and is a Member of Wharton Society of Fellows. He sits on the Board of Directors of Keppel Land Ltd, k1 Ventures Ltd, Keppel Energy Pte Ltd and EDB Investment Pte Ltd, and is a Board Member of Singapore Maritime Foundation Limited and the Maritime and Port Authority of Singapore. He is member of the Nanyang M.B.A. Advisory Committee. He is also Chairman of Det Norske Veritas South East Asia Committee and xv

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Council Member of the American Bureau of Shipping and member of the American Bureau of Shipping’s Southeast Asia Regional Committee and Special Committee on Mobile Offshore Drilling Units. He was conferred the Public Service Star Award (BBM) in August 2004. He is Singapore’s NonResident Ambassador to Brazil. e-mail: [email protected] Ong Tian Khiam has been the Managing Director of PPL Shipyard since November 1997. Prior to that, he held positions as Deputy Managing Director, Managing Director in Sembawang Maritime and Sembawang Bethlehem respectively, and President Director of P.T. Karimun Sembawang Shipyard. Having graduated from the University of Singapore with a Bachelor’s degree in Mechanical Engineering in 1969, he joined Sembawang Shipyard as a graduate management trainee. He then moved to hold several positions at Far East Levingston Shipbuilding between 1970 and 1978 and at Promet Private Limited between 1978 and 1989, delivering twenty-nine rigs between the late seventies to mid-eighties before rejoining the SembCorp Marine Group. A veteran in the Singapore Marine industry, he currently spearheads the rig building business in PPL Shipyard and is now actively involved in the construction of eleven rigs to meet the current order book. e-mail: [email protected] Ong Eng Tong graduated with a Mechanical Engineering degree from University College, London, and a Diploma in Business Administration from NUS. He has worked for forty years in the Petroleum Industry mainly in Supply, Trading and Logistics. Currently, he is a Fuel Consultant and Far East Representative of Mabanaft International GmbH, & Co. KG, the largest independent oil company in Germany. He has represented Singapore in the ASEAN Meeting of Energy Ministers from 1985 to 1999; represented SPC in the ASEAN Council of Petroleum; and represented Singapore in the ASEAN Petroleum Security Agreement. He has also presented papers on Petroleum in Singapore, Malaysia, Thailand, Bahrain and Fujarah. e-mail: [email protected] Cheng Hong Kok obtained a Bachelor of Science (First Class Honours) Chemical Engineering, University of London; Advanced Executive Management Certificate at J.L. Kellogg Graduate School of Management, Northwestern University, USA. He was a Singapore State Scholar as well as an Eisenhower Fellow. Mr Cheng joined the Economic Development Board (Singapore) in 1964 and was Chief of Projects Division from 1968 to 1970. xvi

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He was also a Board Member of the Economic Development Board from 1987 to 1990 and a member of the Government Economic Planning Committee from 1989 to 1991. He has held various senior positions in Singapore Petroleum Company Limited (SPC) in corporate planning, finance, supply and trading and marketing and distribution from 1970 to 1980 and then became the President and Chief Executive Officer of the Company from 1981 to 1996. He was executive Director from 1991 to 1996. Through SPC, he was involved in the founding and development of the ASEAN Council on Petroleum (“ASCOPE”). After the takeover of SPC by Keppel Corporation Limited, he was reappointed as Director in 1999 and remains on the Board up to the present. In addition, he sits on the SPC Executive Committee. Currently, he is also Director of Keppel Oil and Gas Services Pte Ltd, Singapore Refining Company Pte Ltd, SPC Refining Company Pte Ltd, Orchard Parade Holdings Limited, Gul Technologies Singapore Limited, SP Corporation Ltd and GITI Tire Company Ltd. e-mail: [email protected] Mohamed Merican is now an independent energy consultant and oil historian, after having worked decades in and gained extensive experience in midstream, downstream, chemicals and specialty oils manufacture and terminalling. He has held senior executive positions in Exxon Corp (1971 to 1974); Gulf Petroleum (1974–82); Vopak (1982–98); 1999 to present as independent consultant. He also worked with Vopak Asia (1999–2000) and Bakri Asia (2001–04) as internal consultant, and has consulted for Fesharaki Associates; Tri-Zen; Singapore EDB, JTC and PSA. He is a regular speaker at industry conferences and an expert commentator on Asia-Pacific energy sectors. e-mail: [email protected] Kwa Chong Seng, Chairman and Managing Director of ExxonMobil Asia Pacific Private Limited, is currently the Lead Country Manager for the ExxonMobil Companies in Singapore. He is functionally responsible for Fuels Marketing in the Asia-Pacific region, which includes Japan, Australia, New Zealand and the Pacific Islands. He graduated as a Mechanical Engineer from the University of Singapore and joined Esso Singapore in 1969. After a stint in refinery operations where he participated in the start-up of the Singapore refinery, he had various assignments in logistics, marketing and other parts of the downstream business. He spent about nine years in various assignments outside Singapore, most of which were with the Exxon offices in New Jersey, Houston, New York and Hong Kong. These included assignments in marketing, supply, trading and investment planning. His appointments xvii

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outside of ExxonMobil include Deputy Chairman, Temasek Holdings Pte Ltd and Director, DBS Group Holdings Ltd. He also serves on the Public Service Commission and the Legal Service Commission in Singapore. He was conferred the Distinguished Engineering Alumni Award by the NUS in 1994. In 2005, he was awarded the Public Service Star. e-mail: [email protected] Ligia Noronha is a Senior Fellow at The Energy and Resources Institute (TERI) in India. Her work focuses on environmental issues and development, natural resources policy and she worked on various projects on energy in India including “Comparative Analysis of using LPG & Kerosene for Domestic Cooking”, “Contracts and Pricing Options in Oil Exploration & Development” and “Indian Upstream Hydrocarbon Sector” in Emergence of a New Giant: India’s Downstream Oil Sector to 2005. Prior to this she was also with the International Development Research Centre in Canada. She received her Ph.D. in Economics from the London School of Economics in the UK. e-mail: [email protected] Kang Wu is a Senior Fellow at the East-West Center and conducts energy and economic research activities with a focus on the Asia-Pacific region. He specializes in studies of energy policies, security, demand, supply, trade, and market developments, as well as energy-economic links, oil and gas issues, and the impact of fossil energy consumption on the environment. He is an energy expert on China and supervises the China Energy Project at the Center. He is also familiar with energy sector issues in other major AsiaPacific countries and the region as a whole. As an energy economist, his work also includes energy modelling and Asia-Pacific energy demand forecasting. Dr Wu received his Ph.D. in Economics from University of Hawaii at Manoa in 1991. He is the author and co-author of numerous journal articles, project reports, professional studies, conference papers, and other publications. He speaks frequently at international conferences, forums, workshops, and training programmes. In addition, his research works have been widely cited by press and industrial media. e-mail: [email protected] Caleb R. O’Kray is a doctoral student in Agricultural and Resource Economics at the University of Hawaii at Manoa. As a degree fellow at the East-West Center, he assists in energy economic research. He has an M.A. in International Political Economics and a B.A. in Philosophy. Research has taken him to Europe, Latin America, and Asia. He has done research on Asia and energy/ xviii

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resources issues while working for the Brookings Institution’s Center for Northeast Asia Policy Studies, Resources for the Future, and the U.S. Foreign Agricultural Service. His present research is focused on China’s natural resources and energy policy, particularly biofuels. Christopher Len is the Coordinator for the Energy and Cooperation Project at the Central Asia-Caucasus Institute and the Silk Road Studies Program, a joint research and policy centre affiliated with the Paul H. Nitze School of Advanced International Studies of Johns Hopkins University in the United States and the Department of Eurasian Studies of Uppsala University in Sweden (www.silkroadstudies.org). He is also Assistant Editor of the China and Eurasia Forum Quarterly . e-mail: [email protected] Henry Leong obtained a Master of Arts in International Affairs (First Class Honours) at The Australian National University and was awarded the Vice Chancellor’s Letter of Commendation for excellent academic performance. He also won the John Daurth award in international relations twice at ANU. Henry’s research interests are in energy security and East Asian security. He is a trained archivist and records manager by profession. e-mail: [email protected] David Ernsberger was appointed as Platts’ Editorial Director for Asia in November 2003. He oversees all Platts editorial segments in Asia — oil, power, petrochemicals and metals — and helps manage the company’s ambitious growth plans for the region. Ernsberger began his Platts career in 1996 as a metals reporter in London, rising to Managing Editor of the London metals group. In January 1999, he took on responsibility for Platts’ new European gas and electricity start-up ventures as Editor-in-Chief. In 2001, he relocated to Houston as Bureau Chief, where he managed Platts oil, gas and electricity reporting, and served as a high-level representative of Platts to the Houston energy industry. e-mail: [email protected] Michael Richardson is a veteran journalist and was former Asia Editor for the Asian Wall Street Journal. He is now a Visiting Senior Research Fellow at ISEAS, doing research into energy issues and sea-lane security in the IndoPacific region. e-mail: [email protected] xix

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Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economy. He has worked for the Japan Times, Japan’s largest English daily, for nearly twenty years. He served there as National News Editor and then as Foreign News Editor. After leaving the Japan Times, Masaki served as Director of Research at the Japan Forum on International Relations (JFIR), a leading Japanese think-tank on international affairs. At present, Masaki writes regularly for many publications, including Asia Times. He is also Japan Editor and Japan Representative of the New York-based World Security Network Foundation and an associate of Japan Focus, an electronic journal and archive on Japan and the Asia-Pacific. He also serves as Editor-in-Chief of JapanAsia Weekly, a weekly mail magazine on Japanese and Asian business news issued by a Japanese information service firm. Masaki still works for JFIR as a senior policy committee member. He graduated from Waseda University and is a professor of international politics and economy at IOND University and also teaches at several other educational institutions. Masaki holds an honorary Ph.D. in international political economics. e-mail: [email protected] Vincent S. Pérez is currently a lecturer at Yale University where he was recently a World Fellow researching on investing opportunities in renewable energy in emerging countries. He obtained an M.B.A. from the Wharton Business School of the University of Pennsylvania and a Bachelor’s Degree in Business Economics from the University of the Philippines. He has had a varied career, ranging from credit analyst, international banker, debt trader, Wall Street partner, Philippines Cabinet Minister to private equity investor. He was the youngest and longest serving Philippine Energy Secretary from June 2001 to March 2005. He played a key role in President Arroyo’s economic diplomacy, by forging strategic energy partnerships with China, India, Indonesia, Japan, Korea, Thailand, UK and the United States of America. He has chaired ASEAN and APEC energy ministers meetings. In 2005, fellow ASEAN energy ministers gave him an “Excellence in Energy Management” award. He served briefly in early 2001 as Undersecretary for Industry at the Department of Trade and Industry and as Managing Head of the Board of Investments, and led IT investment missions to Europe and the United States. e-mail: [email protected] Karen Schneider is Deputy Executive Director, at the Australian Government’s Bureau of Agricultural and Resource Economics (ABARE) in xx

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Canberra where she is responsible for managing the research programme. Previously, Karen led ABARE’s energy and minerals economics programme, with a strong focus on international energy issues. Karen has directed research on LNG issues in China, Korea, Taiwan and the overall AsiaPacific region; on developments in China’s coal market; and on alternative scenarios of Japan’s energy future. She also led research on international climate change issues, including analysis of the Kyoto Protocol and the role of advanced technologies in meeting global greenhouse gas emission abatement targets. Before joining ABARE in 1995, Karen spent eight years as an energy analyst at the International Energy Agency in Paris where she was responsible for analysing energy and related economic and environmental issues in developing economies, principally in Asia. e-mail: [email protected] Allison Ball works in the Australian Government Department of Finance and Administration as an Adviser in the Environment and Agriculture Branch. She has a Bachelor of Economics (Honours) and Bachelor of Asian Studies from the Australian National University. She was a Principal Research Economist in ABARE’s International Branch between 2002 and 2005. She has authored a number of research reports, consultancy reports and papers on a wide range of international energy and minerals issues. Topics include the outlook for liquefied natural gas in the Asia Pacific, in-depth studies of the potential for LNG in Korea, Taiwan and China, the potential for the ASEAN minerals sector, infrastructure bottlenecks to exports in Australia, and the outlook for Chinese and world coal markets. Prior to this, she was an Adviser in the Environment and Agriculture Branch of the Australian Government Department of the Prime Minister and Cabinet from 2001 to early 2002. Between 1998 and 2000, she worked as a Research Economist in ABARE’s Forestry Economics Section. e-mail: [email protected] Eric G. Holthusen serves as the Fuels Technology Manager Asia/Pacific for Shell Global Solutions and is based in Kuala Lumpur, Malaysia. He holds a Master’s Degree in Automotive Engineering. He joined Shell in 1989 in Hamburg, Germany as a Product Development Engineer after having worked in the automotive industry on diesel engine development. From 1992 he worked on lubricant development in Shell’s research centre in Grand Couronne, France. From 1995 to 2001, he worked in various functions leading Shell’s product testing activities for fuels and lubricants in Hamburg, ultimately leading the three departments for engine, emission xxi

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and road testing. In 2001 he took up the role of general manager of Shell Research Eastern in Singapore and as Fuels Technology Manager for the region. In 2004 he moved to Shell’s Asia Pacific Service Centre in Kuala Lumpur to lead the Fuel Technology Group. e-mail: [email protected] Tilak K. Doshi, Ph.D., is an industry expert with over fifteen years of international experience in leading oil and gas companies. He has been appointed by DMCC to specifically drive regional market and product development for the energy sector in the UAE. Prior to joining DMCC, he worked as a Consultant for Saudi Aramco in its crude marketing and corporate planning departments. He has also held senior positions as Director of Industry Analysis at the Atlantic Richfield Company in Los Angeles, Energy Consultant with Arthur D. Little, and Chief Energy Economist at the Unocal Corporation’s Asia office in Singapore. Prior to joining the private sector, he headed the Energy Project at ISEAS, where he wrote the first book on Singapore’s energy sector and set up the Singapore chapter of the International Association of Energy Economics as Founding Member and Secretary. e-mail: [email protected] Steve Puckett heads the Asia-Pacific energy consultancy, TRI-ZEN, and is also a partner in private equity and people development businesses. He was previously in a regional leadership role with a major energy corporation. In Singapore, he serves on the National Council of Engineering Organizations and is Chairman of the Institution of Chemical Engineers. He is a board member of the British Chamber of Commerce where he is Chairman of both the Energy and Utilities group and the Corporate Social Responsibility group. He also serves on the governing board of the AACMP and has particular interests in continuing professional development, sustainable development and corporate governance. e-mail: [email protected] Andrew B. Seck holds the position of Business Planning and Support Manager for Shell’s EP operations in the Americas. He also holds the role of VicePresident Corporate Affairs for all Shell EP Companies in the United States. He has a Ph.D. in Natural Resource Law and Policy (Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, Scotland). His doctoral thesis is entitled “Financing Upstream Oil and Gas Ventures in the Transitional Economies of the Former Soviet Union: A Study of Foreign Investment and Associated Risks”; and B.Sc. in Geological Engineering from xxii

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Queen’s University, Kingston, Ontario, Canada. Currently based in Houston, Texas, his team of planners and economists have the responsibility for developing the annual business plan for EP in the Americas (USA, Canada, Brazil, Venezuela and Argentina); strategic cost leadership; capital approvals and allocation; and strategy and management support. Prior to joining EPW, he worked for eight years in Russia, where he held various positions for Shell in Moscow and for Sakhalin Energy in Yuzhno-Sakhalinsk. Before Shell, he worked as Senior Field Engineer for Schlumberger International in various locations throughout Southeast Asia and has held several consultancy roles. e-mail: [email protected] Viktor Snegir is General Manager-Commercial, Sakhalin Energy Investment Company Ltd (Sakhalin Energy) currently based in Moscow. He graduated from Belarusian State Economic University and People’s University of China in Beijing with a degree in Economics. His areas of responsibility include marketing of LNG and negotiations of the contracts for LNG supply from the Sakhalin-2 project with customers in Asia-Pacific countries, as well as interaction with federal government of the Russian Federation and Sakhalin Oblast Administration on these issues. From July 2005 till March 2006, he was Acting Head of Moscow Representative Office. He was responsible for functioning of Moscow office and interacts with the Russian Government and various Moscow-based governmental agencies and institutions on various issues related to the project. Before joining Sakhalin Energy, Snegir worked at the Commercial Department of the British Embassy in Moscow, promoting cooperation between Russian and UK companies, was Deputy Head of Moscow representative office of Kvaerner E&C, and worked as a consultant with major Russian companies such as Norilsk Nickel, Basic Element. e-mail: [email protected]

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Overview of Singapore’s Energy Situation Mark Hong

This chapter seeks to present an overview and introduction to energy development and conservation in Singapore. In October 2002, speaking at an Energy Forum, then Deputy Minister for Trade and Industry and Foreign Affairs, Raymond Lim, stated that Singapore was adopting a three-pronged response to the challenges and opportunities in the energy industry, namely: •

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Strengthen the industry base through upgrading and greater industry integration of the oil-refining sector, as well as promoting e-business, supply-chain management, management of information science, and oil trading; Develop an innovative hub for alternative energy solutions, for example, fuel cell technology and hydrogen economy; test-bedding; manufacturing of fuel cell systems and materials market; Liberalize and improve energy efficiency and optimization. The above forms an agenda for action/wish-list on the energy sector.

In a recent speech on 8 October 2006, Minister of State for Trade and Industry, Mr S. Iswaran, delivered at the Financing Energy Projects in Asia Conference 2006, stated that natural gas had become the preferred fuel used

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in electricity generation, supplied by Malaysian and Indonesian gas pipelines. In the long run, Singapore’s electricity demand was accepted to grow at about 4 per cent per year. It would thus need more natural gas supplies. This factor has led the government to decide to meet this additional demand by importing LNG. A new LNG terminal will be built, with an annual operational capacity of 3 million tonnes. Minister S. Iswaran added that in order to better handle energy security needs, the government had set up an inter-ministry Energy Policy Group, comprising various ministries such as Trade and Industry, Environment and Water Resources, Foreign Affairs, Transport, Finance, Energy Market Authority, Economic Development Board, National Environment Agency, Land Transport Authority and the Building and Construction Authority. He emphasized the need for improving energy conservation and described various schemes to implement energy efficiency. He noted that alternative energy was an area of interest and promise for growth and investments. He stressed the need for energy partnerships between the public and private sectors. The government’s role was to create a conducive environment for energy investments. SINGAPORE’S STRATEGIC LOCATION Singapore occupies a strategic location astride the oil trade routes. With half of the global oil supply and a third of global trade passing through the Straits of Malacca and Singapore, its position as a key hub for oil and maritime commerce is both a result of geographic location and governmental determination and actions. ACHIEVEMENTS IN THE ENERGY SECTOR Singapore is small in size and has limited resources, but despite these factors, it has achieved some success in the energy sector. Some examples demonstrate this: • •

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It is a major oil refiner in the world with a current crude refining capacity at 1.3 million barrels per day (b/d). It is the world’s top bunkering port. On average, a vessel calls at Singapore for bunkering every 30 minutes; its bunker sales were more than 20.8 million tonnes in 2003. It needs up to 25 million tonnes of fuel oil to supply the bunkering sector, and so it imports fuel oil. Singapore’s main oil export markets are Malaysia, Vietnam and China. It is the world’s third largest oil trading centre, with a trade in physical oil

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products that totalled S$260 billion in 2004 or about 15 to 20 per cent of the global physical oil trade, and S$298 billion in derivatives trade; over fifty of the world’s top oil traders use Singapore as their global or Asian trading base. The oil derivatives trade in Asia in 2005 was valued at about US$300 billion. NYNEX, the world’s leading energy market, has announced plans to set up a futures energy exchange in Singapore in 2006. More than S$500 million worth of oil trade goes on every day. The Singapore Stock Exchange has set up an over-the-counter clearing facility, called the SGX AsiaClear, for oil swaps and shipping derivatives in May 2006. Singapore is now studying the development of trading in gas contracts and setting up an LNG Terminal. It is an integrated oil hub in Asia, with activities covering the entire value chain, such as regional exploration management, construction and maintenance of oil vessels, rigs and platforms and the related financing; the processing of crude oil; the storage of refined products; and the marketing and trading of energy products; The Singapore oil price sets the regional price for oil products for the Asia-Pacific region. Platts sets the oil price from Singapore, having started its operations in 1982. The key event was the implementation of the Approved Oil Traders Scheme in 1989, which offered tax breaks to oil traders if they operated from Singapore. It has a significant petrochemical industry, which accounted for 31 per cent or S$67.3 billion of Singapore’s manufacturing output in 2005. Some 3,200 vessels in 2004 carried chemicals to/from Singapore. It is the swing refiner for Southeast Asia. This occurs because of a shortage of refining capacity in countries like Indonesia. Singapore oil refiners have enjoyed high profit margins in recent years due to the strong demand for oil products in the Asia-Pacific region. Major refiners include Shell, which refines 430,00 b/d; Exxon, which refines 580,00 b/d; and SRC, which refines 285,000 b/d. Total refining capacity as of mid-2006 remains at 1.3 million b/d. Most of the Singapore refineries are running at full capacity. Most were designed to refine crude from the Middle East. But other Asian countries now have very large refining capacity, such as China (5.46 million b/d in 2005, with 1.7 million b/d new refining capacity by 2010), Japan (3 times), South Korea (2 times). India’s Reliance Petroleum Company has raised funds to build a 580,000 b/d refinery in Gujerat by 2008. Iran and Indonesia have announced plans to build a 300,000 b/d refinery by 2010. Rather than compete directly with new and large refiners, Singapore has diversified into other petrochemical

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products: Shell announced plans to build a new naphtha cracker plant, to be ready in 2009, and Exxon is studying the setting up of a new ethylene cracker. With the rapid rise of Asian oil and gas demand, Singapore is well positioned to tap this new energy trade. For instance, the announced partnership in 2005 between China Aviation Oil and Emirates National Oil Company to build a new US$135 million oil terminal in Singapore is one good example. As natural gas becomes more important, Singapore is positioning itself to be a hub in this business; the government is studying the feasibility of building an LNG terminal, in order to supplement existing pipelines from Sumatra and the Natunas. A Japanese firm, the Tokyo Gas Engineering firm, won the tender to do the S$4.8 million study, completed in 2005. Setting up an LNG Exchange will take some time because Singapore still lacks the infrastructure and capability to become an LNG trading hub. Singapore’s oil rig builders have 60 per cent of the world’s new jack-up oil rig markets. Keppel and Sembcorp have won 80 per cent of all new oil rig orders since 2003; in 2004/05, they have signed new deals worth S$8.5 billion. Some reasons why they are so competitive include their ability to customize, their expertise and their ability to outsource to foreign shipyards. Keppel’s order books in 2005 amounted to S$8 billion and Sembcorp’s order book was worth S$6.8 billion. Singapore is the regional oil storage and refining hub. It has currently 3.6 million cubic metres of oil storage outside of refinery storage. By 2008, it will add an extra 4.1 million cubic metres. Thus it will add 27 million barrels more to our current storage capacity of 88 million barrels. We need to be mindful of new storage developments in China, which could result in a reduction in demand for blending facilities in Singapore. Secondly, it was imperative to lower costs of storage space in Singapore, one of the highest priced in Asia. Its leading role in oil and petrochemicals helps to strengthen its growing status as an international maritime centre, with eighteen shipping firms specializing in tankers already set up in Singapore.

FACTORS This energy situation has been achieved despite the lack of any domestic oil or gas resources. The situation was achieved due to the following factors:

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Strategic location at the crossroads of trade routes between Suez and the growing economies of Northeast Asia, commanding the straits between the Indian and Pacific oceans. About 50,000 ships, carrying half of the global oil supply and a third of global trade, pass through the Straits of Malacca and Singapore. Singapore is perhaps the best place to bring Middle East crude for refining before shipping to the Far East. Tanker arrivals in 2005 totalled some 350 million gross tonnes. A good location was a necessary but not sufficient factor, as we can note from the map that Colombo, Penang, Subang are equally strategic in location, but have not been as successful. Royal Dutch Shell first set up a kerosene-trading firm in Singapore in 1891, already 115 years ago. Shell set up the first refinery in Singapore in 1961, four years before independence. In terms of time zones, Singapore is well situated between London and New York, which are the other two main oil centres globally. The other competitor in Asia, Tokyo suffered from being too expensive, had language constraints and so lost out to Singapore by 1990, when crude oil trading migrated to Singapore. Free market approach. Singapore was a free port from its founding, and since independence, the ruling government has maintained free trade policies and encouraged trade and FDI, with pro-business programmes; the hands-off approach of the government (which thus lets market forces determine prices and industry directions), and no preferential treatment of any national oil company, which would then introduce distortions. A well-run sea port. Singapore is the world’s busiest container port; and this facilitated the import and exports of energy products; its efficiency enables the quick turnaround of tankers and other vessels. Good governance, political stability, anti-corruption and efficiency. These factors help to lower transaction costs and attracted international oil companies to invest and locate in Singapore; all seven of the oil majors are located here. Efficient courting of energy sector investors by the Economic Development Board. These efforts have resulted in the creation of a petrochemical hub on Jurong island. Prime Minister Lee Hsien Loong announced in his May Day 2006 speech that ExxonMobil was studying the setting up of a second cracker plant on Jurong island whilst Shell was deciding whether to set up a new steam cracker plant on Bukom island. All these are multi-billion dollar investments. Singapore has the skilled labour to run these modern plants.

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Other factors. Sound financial system; sound corporate governance and strong IPR; a transparent legal system; a highly developed IT and telecoms systems; first class infrastructure; willingness to listen to industry suggestions; excellent connectivity through excellent air and seaports; skilled work force; governmental vigilance and readiness to take steps to strengthen Singapore’s leading position; the right mix of storage facilities; rule of law. However, challenges to Singapore’s pre-eminence are rising from Shanghai, Dubai, Thailand, Malaysia and India, which have plans to increase their refineries capacities. China is also expanding its refineries. Singapore also has to watch its costs as many neighbours have a cost advantage.

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PRINCIPLES OF ENERGY DEVELOPMENT How important are energy issues to Singapore? It has been estimated by the Ministry of Trade and Industry that for every US$10 rise in the oil price, the Singapore growth rate would decline by 0.2 per cent. If oil prices rose to US$100 (since the base price was set at US$60 per barrel), this would knock of 0.8 per cent growth accordingly, but we should also factor in inflation increases and the negative impacts on global growth and its export markets. Singapore’s Prime Minister Lee Hsien Loong stated on 20 June 2006 that he did not expect high oil prices to derail the 2006 growth forecast of about 6 per cent, but was more concerned about the impact of higher electricity prices on poor families. In view of the salience and importance of energy issues, perhaps the most striking point about Singapore is the absence of an agency specifically tasked to handle energy issues, which come under the purview of the Ministry of Trade and Industry. There is no Energy Institute as such. Ng Weng Hoong, an energy consultant/analyst, in his Singapore Oil Report of February 1996, already noted ten years ago that Singapore’s lack of institutional research into energy issues stands out as its most notable failing. The nearest equivalent is the Energy Marketing Authority (EMA), which is actually the regulator of the electricity market. No White Paper1 on energy issues has ever been issued by the government, except for a report of the Energy System Review Committee, issued in 17 March 2005, which studied the causes of a power outage which occurred in June 2004 and suggested various solutions. The committee discovered that the cause of the outage was a faulty solenoid, and recommended that it was advisable to diversify and increase the number of gas suppliers to the power stations. Another report was one prepared by the Inter-agency Committee on Energy Efficiency on

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the subject of energy efficiency and conservation. The Ministry of Environment, Water and Resources is responsible for the environmental aspects of energy. In other words, authority and responsibility over the energy issues was diffused and shared between different agencies. But the situation has now changed with the establishment in early-2006 of a high level interministry Energy Policy working group on energy issues, and more ministerial interest has been expressed. RELIANCE ON FREE MARKET MECHANISMS Thus the first principle followed by Singapore is the use of the free market and its pricing system to allocate energy resources. Singapore does not subsidize in any form the use of energy but immediately passes increased costs to the consumer, whether it is the cost of gasoline at the petrol station or the cost of electricity to households and industry. In this way, it avoids the political effects of having to reduce energy subsidies during periods of high oil prices, which had affected some neighbouring countries, such as Indonesia. There are also no price controls, which would distort market signals. Another aspect is the introduction of competition and liberalization measures, for instance, in the production of electricity and the pricing of electricity for industrial and household usage. The power outage in June 2004 has also surfaced issues of power supply security and reliability. Measures to liberalize the energy markets were taken in 1995. Under this programme, the operational parts of the electricity and gas sectors were corporatized under a new firm called Singapore Power, and the Public Utilities Board became the regulator. In year 2000, the government took further measures to restructure the power-generation industry. Generation companies and the power retail firms were formed as separate companies in order to introduce more competition. Such competition have reduced inefficiencies from the energy market, and lowered electricity prices. Greater usage of LNG will also help to increase competition, diversification of sources and more choices for the consumers. This free market approach is based on the argument that oil is a fungible commodity, and that supplies will always be available at a certain price if consumers are prepared to pay high prices. The markets thus always clear oil stocks at certain price levels. But this approach may overlook the psychological factor or the panic factor. If oil supplies are becoming limited, either due to the oil and gas fields having passed their peak, as predicted in 1956 by M. K. Hubbert, a Shell geologist, whilst consumption has soared

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due to growing economies, or to the efforts of certain countries to lock up and to assure supplies through the ownership of energy assets, then oil and gas prices will soar in response to perceptions of shortages. Energy is a highly politicized commodity, and is highly susceptible to disruptions caused by natural disasters occurring in producing areas, sabotage, terrorism, wars and civil wars, embargoes and negative political relations. All these aspects had been demonstrated during the First and Second Oil Shocks in the 1970s. Singapore’s then Foreign Minister S. Rajaratnam had visited the oil producers in the Persian Gulf to ensure that Singapore would get adequate oil supplies. There is now a strategic dimension to energy supplies: Whichever nation first escapes the energy trap will achieve economic dominance over the next era. The great power that can control the access by competing powers to global energy supplies, will be able to dictate terms about the growth and welfare of the others. That is why the great game between the powers is focused on energy. It is the reason why the United States wants to be well entrenched in Iraq and if possible, in Iran. A STRATEGIC ROLE FOR GOVERNMENTS In the light of these factors, the second principle is that the government and state must get involved in energy issues in a strategic manner, and cannot leave it strictly to market forces. It would be prudent for governments to take steps to be assured of adequate supplies. Thus the Singapore Petroleum Company, which is the nearest equivalent of a national oil company, has bought minority shares in oil and gas fields in Southeast Asia, such as in Cambodia, Vietnam and Indonesia. The SPC is following the example of Malaysia’s Petronas, which has bought oil and gas fields all over the world. One example occurred in May 2006, when the visiting Malaysian Prime Minister Abdullah Badawi, helped Petronas clinch deals for Petronas in offshore exploration and LNG supplies with Jamaica. The interesting question of course is what happens if the host country decides to nationalize such assets, perhaps during times of energy crises? This “resource nationalism” scenario happened in May 2006 in Bolivia, when President Evo Morales nationalized the natural gas fields, unless foreign owners agreed to give the Bolivian state oil firm control over production and 82 per cent of revenue. A similar action also occurred in Venezuela, where the Government voided drilling contracts with private firms in thirty-two oil fields. Whilst great powers may have the political influence and leverage to demand and obtain compensation, small states like Singapore are very

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vulnerable to such actions. There is not much they can do except to pursue international arbitration, which could take years. The changing strategic nature of energy issues has been largely impelled by the rise of India and China and their ever-increasing energy needs. This in turn has motivated large producers like Saudi Arabia to look East at Asian consumers like India and China. The rise of resource nationalism in oil producers like Venezuela may stimulate other energy producers like Bolivia to follow suit. In other words, energy then becomes highly politicized. This situation of course is not new and was seen as early as the beginnings of the petroleum era, when strategic thinkers like Winston Churchill understood the strategic importance of oil for British naval power. The German author, William Engdahl, writing in his book entitled, A Century of War (Pluto Press, 2004), on pages 62 and 63, stated: In global pursuit of major oil reserves, the policies of the British Foreign Office, the secret intelligence services and British oil interests were intermeshed in a covert and highly effective manner. Four companies played an instrumental role… Royal Dutch Shell…Anglo-Persian Oil Company…The D’Arcy Exploitation Company … British Controlled Oilfields or BCO.

On page 74, he added: By then the Anglo-American power struggle for primacy in world finance and economic affairs had been resolved. The oil wars… were finally resolved in a cease-fire, which resulted in the creation of an enormously powerful Anglo-American cartel, later dubbed The Seven Sisters. Their secret pact was formalized in 1928 as the Achnacarry agreement.

The above quotations show that as early as the 1920s, there had been attempts at cartelization, and how petroleum was regarded as a strategic resource, the lack or loss of which doomed Germany to defeats in war. The ongoing struggle between China and the United States for access and ownership of oil resources, as seen in the competition to buy up UNOCAL, is a modern phase of the same struggle. IMPLICATIONS OF THE ENERGY COMPETITION FOR SINGAPORE It is clear that international competition between nations for energy resources has intensified. As Singapore imports 100 per cent of its energy supplies, it obviously needs to study the events, trends, implications of this energy competition and learn some lessons and draw policy implications and

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recommendations. Some points shall be briefly enumerated here. Firstly, this energy competition is not a temporary phenomenon and will not dissipate shortly; it is now a permanent feature of geo-politics and geo-economics. Secondly, it keeps oil prices at high levels, and the trend will rise, not fall. The reasons are increasing demands and diminishing margins in spare capacities, falling oil reserves, tight refining capacities and political problems in oilproducing countries. So there will be much volatility in energy supplies. Oil producers have learnt their lessons and will not let oil prices sink to low levels. Thirdly, they also know now how to invest their petro-dollars in productive ways — Dubai is a prime example. All these efforts mean increased competition from oil-rich countries to Singapore. Fourthly, there are also investment opportunities for Singapore in the energy sectors, such as in building new refineries in China and India, or in buying stakes in overseas oil and gas fields. In foreign policy terms, it means that Singapore may need to pay greater attention and invest more resources in cultivating oil-producers like Russia, Kazakhstan, West and East Africa, such as in more ministerial visits, setting up embassies, and having more business and investment delegations. These oil-rich countries now have the funds to buy expertise in all sorts of areas, and Singapore has the developmental knowledge they might need. In a smart move, the government set up in July 2006 a new body called the Singapore Cooperation Enterprise to promote and export its expertise in public sector services such as transportation and education. It is a non-profit firm that aims to help Singapore companies enter foreign markets in public-private partnerships deals overseas, drawing on the knowledge of government agencies and companies. More than a hundred inquiries have been made by foreign governments in the past three years seeking to benefit from Singapore’s experience and expertise. Specifically, the tensions between the United States and China over energy supplies might spill over into their bilateral relations. Worsening U.S.-China relations will impact upon the Asia Pacific, ASEAN and Singapore. This aspect therefore deserves close monitoring, even though there is not much a small state like Singapore can do to help ameliorate poor relations between great powers, beyond the usual expressions of concern about regional stability. OIL STORAGE FACILITIES INCREASED The third principle is to set up stockpiles of oil reserves so as to ensure enough supplies to hopefully outlast the oil crisis. Singapore’s domestic requirement is relatively small, at 70,000 barrels per day, and it should be able to last one

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year, based on the oil stocks held locally. Singapore had created a stockpile during the 1970s by storing oil in a super-tanker moored in its waters. Oil storage space is essential for trading of oil products in the spot markets because traders must be able to physically deliver the oil stocks. With the shortage of oil storage space, there was concern that nearby competitors would capture Singapore’s oil business. But with the recent announcements in 2005/06 that four firms, Oiltanking, Vopak, ENOC, Hin Leong and Chemoil, would build large oil storage terminals which would double existing storage space, such concerns have eased. In 2006, there were announcements that underground storage caverns would be dug in Jurong island for oil storage. The Jurong Town Corporation announced plans to build 32 huge caverns costing about S$760 million, which will be completed by 2009, covering 80 hectares. They would store 88 million barrels. A private firm, Royal Vopak, opened its fourth petroleum and chemicals terminal in Singapore in 2006, becoming the largest independent provider of storage. Its new terminal can store 340,000 cubic metres of oil. Another firm, Hin Leong, announced plans to build a 6.3 million barrels terminal at Jurong island costing S$750 million and adding 25 per cent to the national storage capacity. The Emirates National Oil Company announced plans to build a US$200 million oil storage terminal at Jurong island, adding 5.3 million barrels, to be ready in 2006. These new oil storage facilities will help ease the shortage of oil storage and lower storage costs. There is also a view that Singapore can depend on the oil majors who store certain quantities locally, for supplies during emergencies. This would help the government to avoid incurring the heavy costs of oil storage. The oil majors have a total of 88 million barrels of oil storage capacity, whilst three independent oil storage firms, Vopak, Oiltanking and Tankstore, have a total of 28 million barrels. THE NEED FOR INTELLECTUAL CAPACITY ON ENERGY ISSUES The fourth principle is that Singapore must get involved in the international conferences and discussions about energy issues. Since energy is basic to civilization, economic growth and progress, it is highly advisable for Singapore to set up the means, facilities and experts, such as an Energy Institute, so that it can take part in a professional and informed manner in such discourses on energy. To quote an example, many regional groupings such as APEC, ASEAN, ASEAN+3, ESCAP, EAS, ACD, etc. either have, or will soon have, an energy

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component. There is also frequent mention of regional energy cooperation. Then there is the World Petroleum Congress, which Singapore has not yet joined, where much useful information and networking can be obtained. Interestingly, Singapore hosts several energy conferences, but much of the expertise on display is foreign/Western. In order for Singapore to become a player on the international energy forums, it must develop local expertise and knowledge, and take an active part in the international discourse on energy. Some progress has been made in setting up research units such as the centre set up by Nanyang Technological University with the University of Newcastle, to study sustainable energy issues. Another Centre of Offshore Research in Engineering has been set up at the National University of Singapore, jointly with the EDB. How does a state and government construct sensible and workable energy policies, in view of high oil and gas prices, concerns about the availability of energy supplies, and climate change, doubts about “peak oil”, and a desire to change to the use of non-fossil fuels? For a small and vulnerable city-state without domestic energy sources, the challenges to craft a viable energy policy are very severe, especially in an era of rising and high oil prices. The answers to these questions and the solutions are not easily found, and deserve study by energy institutes and scenario planners, and through science and technology. But the trends are clear, and point to: • • • •

A move towards renewables such as solar and bio-fuels; A long-term solution, which could be the hydrogen economy, as the technologies involved will improve; Mass usage of hybrid/electric cars; More reliance on nuclear energy in the major economies, and natural gas, as in Singapore.

Furthermore, we should have a clear understanding of what is energy security. According to Gary Dirks, British Petroleum Group Vice President/ Asia Regional President, speaking at a CIISS Energy Conference in 24 May 2006, energy security is: ensuring energy supply whenever and wherever it is needed to fuel national economic growth and social development. Energy must be made available, affordable and compatible both with consumers’ needs and with environmental requirements.

In terms of measures to achieve energy security, countries need to save energy; expand domestic energy supply; diversify energy sources; build a

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strategic petroleum reserve; develop renewable energy sources, and improve energy efficiency. Three aspects should be stressed: Diversity, openness and partnership with foreign oil companies and energy producers. For some years, Singapore was one of the few countries that did not sign the Kyoto Protocol because it did not have the resources to develop alternative energies and also because it imported a lot of energy products for its refining business. Having just signed the Kyoto Protocol in 2006, which involves energy and environment expertise in implementation, Singapore needs to also develop the expertise to engage in carbon trading, as well as to know how to achieve the technical standards set on carbon emissions. Singapore hopes to have a part of the multi-billion dollar carbon trading market share after signing the Kyoto Protocol. According to the World Bank, in 2005, the market for carbon emissions trading was worth US$10 billion. The Asian Carbon Exchange has been set up in Singapore. In July 2006, Singapore moved a step further to set up a new organization that aims to increase environmental sustainability and help strengthen activities in carbon trading. This new body is called the Sustainable Energy Association of Singapore, or SEAS. It will help to promote energy efficiency amongst industries as well as disseminate information on renewable energy technologies and services. One key aim is to turn Singapore into a centre for carbon emissions trading and a platform for investments in renewable energy projects. SEAS also hopes to foster more research in promising renewable energy technologies. Based on IEA data, Singapore was ranked forty-ninth in the world in 2002 in terms of carbon efficiency. It achieved this level because Singapore does not have pollutive industries; it does not use carbon-intensive fuels like coal but uses cleaner fuels like natural gas. Between 1990 and 2002, it managed to keep down growth in CO2 emissions to about 5 per cent per annum. Based on 1999 World Bank data, Singapore had the highest per capita electricity use and carbon emissions in the region, at 7196 kWh and 21.6 metric tonnes respectively. There has been some distortion to the statistics as Singapore imports a lot of energy products, which it later exports as refined products. In any case, in the Environmental Sustainability Index (ESI) compiled by the World Economic Forum/Yale in 2005, Singapore was not included in the main body of 146 countries ranked, but was grouped with four other small countries: Mauritius, Luxembourg, Malta, Barbados. Its ESI score of 41.84, which if included in the main list, would lie between Vietnam (Number 127), and Zimbabwe (Number 128). China ranks at Number 133. Those who have visited or lived in Singapore must surely wonder how accurate the ESI ranking is.

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In order to meet the Kyoto standards, Singapore has established various schemes to lower emissions and increase energy efficiency. Examples include the following: An energy-labelling scheme for appliances was set up in 2004. Another measure was to use natural gas in power stations to generate electricity; this step reduced CO2 emissions by 800,000 tonnes per year. As of 2004, an average of 60 per cent of electricity was generated using natural gas. Buildings are awarded the “Green Mark” for efficiency in conserving water and energy. Government ministries have signed up for energy audits to learn how to save energy. Other steps taken included: Encouraging large energy users to conduct energy audits and implement conservation measures; promoting greater use of fuel efficient and greener vehicles — 85 models of vehicles have taken part in the Fuel Economy Labelling Scheme; introducing CNG vehicles and hybrid cars, and test-bedding of hydrogen fuelled cars; voluntary labelling of household appliances like air conditioners and refrigerators; the use and testbedding of cleaner energy fuels and technology such as co-generation or combined cycle technology. Since 1990, Singapore has improved its carbon efficiency by 15 per cent and hopes to improve by another 10 per cent by 2012. ENERGY CONSERVATION Some Asian countries have adopted various laws to encourage energy conservation. There is the Energy Conservation Law of China, No. 90, dated 1 November 1997. Japan has adopted its Fundamental Law on Energy Policy Measures, dated 14 June 2002, Law No. 71. South Korea has its 1997 Basic National Energy Plan and its Action Plan for Rational Use of Energy, which encourages energy audits. In Singapore, the government set up the National Energy Efficiency Committee in April 2001. This NEEC started its work by concentrating first on businesses, which were encouraged to use energy efficiently. It promoted the use of cleaner energy sources such as natural gas and renewables, and positioned Singapore as a testing ground for pioneering energy technologies, such as fuel cells and CNG cars. In 2006, the NEEC was renamed the National Climate Change Committee, in line with Singapore’s accession to the Kyoto Protocol. The new NCCC terms of reference are to address climate change by promoting greater energy efficiency and less carbon-intensive use; raising public, and private awareness; building competencies; understanding the country’s vulnerability to climate change. Earlier, the 2000 World Competitiveness Yearbook had ranked Singapore twenty-fifth out of fortyfive countries in terms of energy intensity.

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An Inter-Agency Committee on Energy Efficiency (IACEE) was formed to study the issues affecting Singapore’s energy consumption, and to make recommendations in its report issued subsequently. It found that energy consumption took place in three main sectors: Industries (30 per cent); residential and commercial buildings (34 per cent); and transport (about 37 per cent). Airconditioning and refrigeration accounted for 33 per cent and 25 per cent respectively. The IACEE made several recommendations: Strengthen the regulatory and institutional framework; set up a Target and Review Mechanism to monitor energy efficiency; develop standards; regulate commercial and institutional buildings; study energy usage in residences; enforce green labelling for appliances; introduce of more energy efficient vehicles; impose mandatory energy audits for large energy consumers; improve the market environment; use the public sector as the leading edge; study the use of solar energy and district cooling systems. Over the years since this report was issued, various steps have been taken to implement the recommendations. Traditionally, economic development in many countries adopted what could be called a high carbon approach, which meant, for instance, that urbanization was linked to the ownership and usage of cars. But some experts argue that we should de-link urban and industrial development from high carbon pathways by investing in public transport systems, the greater use of renewable energy and the expansion of public green spaces. Singapore has managed to achieve some of these objectives and hence its people enjoy cleaner air, a garden city and a better quality of life, with less traffic jams. It has managed to strike a close integration between the environment and economic development, partly because it has only a small island to call its own and has no reserve space if some areas are polluted. What is Singapore already doing to become less carbon-intensive in power generation and to be more energy efficient? First, it has moved away from the more carbon-intensive fuel oil to the more efficient, less carbon intensive natural gas for power generation. It has increased this use of natural gas from 19 per cent in 2000 to 70 per cent in 2005. Second, the government introduced three new energy efficiency initiatives in 2005 that would reduce up to 190,00 tonnes of carbon dioxide emissions by 2012; this will help it to achieve the target of 25 per cent improvement in carbon intensity between 1990 and 2012. One of the initiatives is the S$10 million Energy Efficiency Improvement Assistance Scheme, administered by the National Environment Agency. This is a fund that helps firms that wish to engage engineering specialists to identify measures to improve energy efficiency, reduce energy costs and carbon emissions. An industry committee for energy efficiency has been set up. The second initiative is the encouragement of “energy smart”

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buildings, through the setting up of a Building Energy Efficiency Label system that measures energy efficiency and performance as well as indoor environment qualities. Renewable energy is one area that Singapore is actively encouraging. The Economic Development Board has identified alternative energy as a new growth area, focusing on solar, bio-mass, hydrogen and energy services. Scenario 1: Encouragement of Hybrid/Fuel Cell Cars The government should encourage much more the use of hybrid cars and electric vehicles, via positive taxation measures which will make it cheaper to own and operate such environmentally friendly vehicles. Of course the supporting infrastructure will need to be set up. In Singapore, Daimler Chrysler has already set up two demonstration hydrogen refuelling stations as a part of a worldwide pilot project. These supported six fuel-cell powered Mercedes Benz cars, which went on trial in 2004. A fleet of thirty petrolelectric Honda Civic cars was tested earlier in 2002. The government has doubled the tax breaks to encourage more ownership of “green cars”; a Toyota Prius hybrid car costs about S$25,000 more than an equivalent ordinary car. A positive sign was the plan by a taxi firm, called Smart Auto, to buy 500 CNG (or compressed natural gas) vehicles, which will be serviced by six CNG stations to be set up in 2006. In May 2006, a second generation Toyota Prius was introduced to Singapore, costing $85,000, whilst a Honda hybrid car costs about S$80,000. Up to August 2005, only seventy-nine green cars have been registered in Singapore; much remains to be done. This situation has now improved, and in 2006, there were more hybrid cars in Singapore, even though the numbers were still below 500. The private sector should set up a factory to make the cheap G-Whiz electric cars, so that car buyers could switch and buy these cars which cost perhaps US$12,000, and much cheaper to operate at a time of high gas prices. The government can encourage such switching by setting high car emission standards like California does. In October 2005, the government imposed the Euro 4 Emissions Standards within Singapore. Meanwhile in May 2006, a German firm, C. Melchors GmbH, had offered to retrofit Singapore cars with a conversion kit to enable them to use compressed natural gas. Scenario 2: Encourage Alternative Energy Usage Singapore should become the world’s record leader in the use of solar power for air conditioning, solar batteries, water heating and other household

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uses. It is an equatorial country, and is thus well-positioned to serve those firms and countries that would be among the first to adopt photovoltaic electricity on a commercial basis. This is because it already has a strong semiconductor industry; the production of solar panels uses similar production technology. Singapore is particularly deficient in energy resources. Even in wind power, it falls below the minimum three miles per hour wind-speed needed for wind turbines. Neither does it have geo-thermal energy, hydro-electricity or oil and gas. BIO-FUELS One area Singapore really should be active in is bio-fuels, where there are only two firms, Peter Cremer and ADM-Wilmar, set up in Jurong island to produce respectively, 150,000 and 200,000 tonnes of biofuel. Singapore is well situated to benefit from the efforts of neighbouring countries to grow crops that can be exploited for bio-fuels. Neighbouring Asian countries such as India, Malaysia, Indonesia and Thailand are researching into the energy possibilities of plants such as jatropha, sugarcane, palm oil and coconut. Now alternative fuels account for only 1 per cent of fuel usage in Asia. In Bangkok, many service stations sell gasohol, or gasoline with 10 per cent ethanol, which produces 13 per cent less greenhouse gases than fossil fuels. Meanwhile, a big U.S. firm, Archer Daniels Midland, in 2005 had announced plans to build a US$29 million plant in Singapore to produce bio-diesel. The Philippines announced in May 2006 the start of Asia’s first and largest bio-diesel plant using coconut oil. It will produce up to 60 million litres of bio-diesel. In Malaysia, some palm oil firms are planning to build three 60,000-tonne plants to produce bio-diesel. All these developments show that bio-fuels are taking off in Asia. NUCLEAR ENERGY OPTIONS LIMITED Even the use of nuclear energy is problematic within a small city-state of 700 square kilometers, for fear of nuclear accidents and fallout/ contamination, unless we have the technology to set up a ship-borne nuclear plant and moor this ship in international waters in the South China Sea, with an undersea electricity cable connection. Of course, as a partial result of high oil and gas prices, nuclear power looks increasingly attractive to many countries, with about 130 nuclear plants being built, planned or under consideration. The 440 nuclear plants existing produce about 20 per cent of the world’s electricity power.

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SOLAR POWER What Singapore has is a lot of sunshine nearly every day. With the cost of electricity produced by photovoltaic cells falling by 50 per cent in the past ten years and becoming more competitive with conventionally-produced electricity, and with oil and gas prices rising beyond US$100 per barrel, it makes sense for Singapore to pursue the solar power option as much as possible. This holds true even though solar energy now costs about 26–30 cents per kWh, whereas wholesale conventional electricity costs about 15 cents per kWh. One major reason is environmental, as well as the rising cost of oil and gas. In 2004, Singapore had only installed 80 kwp of solar power; there is a need for government subsidies to kick-start the solar power industry. But it has been pointed out that even if all public housing buildings were covered by solar panels, the electricity generated would total only 3 per cent of total electricity demand. To cover a tall building with solar panels would cost S$1.5 million without including labour and installation costs. Solar electricity in July 2004 still cost 2.5 times the cost of conventionally produced electricity. But solar power supporters argue that solar power can contribute to reduce peak demand. In January 2006, the first solar cell factory was opened by the Solar Energy Power firm. Already, Shell Solar in Singapore has done some research on solar power, as well as the local National University of Singapore, which is cooperating with the National Environment Agency on the development of a Building Energy Efficiency Label system. This system will identify “Energy Smart Buildings’, similar to schemes in the United States and EU, and aims to encourage energy efficiency. Scenario 3: Energy Efficiency Singapore should become much more energy-efficient, like Japan. Compared to many developed countries, Singapore is an inefficient consumer of energy. The IEA figures, collected before 2000, which measured in terms of the ratio of energy consumption to GDP growth, showed that Singapore’s energy efficiency was 21 per cent lower than the UK, 23 per cent below Hong Kong, 29 per cent below Japan and 66 per cent below Switzerland. The government has tried to encourage better energy efficiency by pricing electricity at high market rates, but there is still a lot of energy wastage, for instance in the use of energy-inefficient appliances; in the setting of airconditioning to very cold levels; in not switching off lights when no one is in the rooms, etc. All these bad habits could be improved by publicity campaigns

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to change mindsets and to teach people to conserve energy. In Singapore, there are already such campaigns to save water, for instance, to reduce shower times by one minute. In this area, Singapore should seriously study the example of Japan, which is now very energy-efficient. HYDROGEN ECONOMY For the long term, Singapore should consider setting up a hydrogen economy with an extensive hydrogen infrastructure and zero pollution emissions. A book recommended for those interested in hydrogen issues is The Hydrogen Economy by J. Rifkind. There is an International Partnership for the Hydrogen Economy or IPHE. Some leading countries in hydrogen issues are Japan, the United States and Germany. Because of the molecular structure of hydrogen, the infrastructure is much more energy-intensive than in an oil/gas economy. Hydrogen has to be packaged by compression or liquefaction, transported by land vehicles or pipelines, stored and then transferred to the end-user. All these processes make hydrogen a very technical subject, which was discussed by British Petroleum expert, Michael Jones, at an ISEAS Energy Forum presentation in December 2005. He stressed that hydrogen was potentially the long-term solution to reducing CO2 emissions from renewables or low carbon pathways. BP defined a hydrogen economy as one that uses hydrogen as the main energy carrier for power and transport. Hydrogen is the last stop on the road towards cleaner fuels, according to BP. When the world runs out of oil by 2025, as by then it will require about 120 million barrels per day of oil, what energy fuel will/can replace it? What is the official Singapore position on hydrogen fuel? In his speech in May 2005, Second Minister for Trade and Industry, Vivian Balakrishnan, at an LNG Conference, stated: Some research is being done into the viability of solar energy, in the form of photovoltaic cells, but at current technology levels, this will cost about five times as much in electricity tariffs. Hydrogen fuel cell technology is still at the early research stage, and will likely take many more years before becoming a viable commercial option. The likely source of hydrogen is likely to be a fossil fuel, including natural gas. Thus Singapore is studying the economic viability of LNG imports to meet future increases in gas demand. This will broaden our fuel options and encourage a more resilient and robust market.

The hydrogen economy has drawn attention as the wave of the future. One example was the declaration by Iceland in 1997 that it would become

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the first hydrogen economy by 2030. One wonders how this would be achieved, as Iceland is not the most technologically advanced country. Others like the APEC Science and Technology Ministers in March 2004, had stated: We have noted the potential of hydrogen and fuel cell technologies to improve the region’s energy, environment and economic security, and that the Energy Working group is developing a framework document on hydrogen and fuel cell technologies, as directed by APEC leaders.

Shell’s Chairman, Phil Watts, stated in October 2001 that it would spend up to US$1 billion to develop new energy businesses, mainly solar and wind energy. He noted that there could be an evolutionary progression or the socalled carbon shift, from coal to gas to renewables and nuclear. A second scenario could be the growth of a truly hydrogen economy. Whilst all this is possible, the key question is how to achieve such goals. One way is to discuss the issues and problems at conferences. Thus Singapore hosted the World Hydrogen Technologies convention in October 2005. The convention topics included hydrogen production techniques; hydrogen storage technologies; transportation and distribution; fuel cells etc. Another way is to devise programmes. Singapore launched its SINERGY programme or Singapore Initiative in New Energy Technology. This serves as a platform for local firms to collaborate in tech-development and test-bedding for automotive and stationary power applications. Thirdly, a hydrogen economy will also be a high-tech economy. The question is how to promote the necessary innovation and research. Professor Charles Zukoski, Chairman of the Science and Engineering Research Council (SERC) of the Agency for Science and Technology and Resarch, (A*STAR), in his keynote speech at the TechScan symposium delivered in August 2005, discussed the efforts to develop a knowledge economy. He noted an article by Jane Lee in the Wall Street Journal, which suggested that China might be in a unique position to leapfrog past gasoline-engine cars to hydrogen fuel cellbased cars. He also noted that A*STAR institutes acted as the interface between business and government. Such institutes helped to create a culture of tech-innovation. A similar role was played by the SERC which organized a process of Tech scans in April 2004, that engaged local researchers to conduct “foresights” of major trends and draw up scenarios for future needs of industry and society. Under the TechScan on Energy, the following areas will be studied: Renewable energy supply-non-fossil alternative energy; hydrogen economy technologies-production and storage of hydrogen; fuel cell technology-efficient and environmentally friendly energy conservation; electricity-advanced power delivery, conversion devices and technologies;

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application of IT in energy. An A*STAR institute, the Institute of Chemical and Engineering Sciences (ICES), which spearheads R&D in Singapore’s chemical industry, will study the development of effective technologies for the production of hydrogen from natural gas, via catalytic partial oxidation at low cost. The UK firm, Rolls Royce, had set up some years ago a research branch in Singapore to study the issues connected with fuel cells. All the above indicates that Singapore has done some preliminary actions like test-bedding and some preparations to examine the problems and possibility of installing a hydrogen economy, but has severe doubts about its viability, preferring the use of natural gas. There is so much to do in R&D and the public policy challenges are daunting. CONCLUSION We have briefly discussed the issues involved in Singapore’s energy development and conservation. Much more can, and probably will, be done, especially when oil prices reach above US$100 per barrel. Then there will economic incentives to look for alternative energy such as the use of bio-fuels and ethanol fuel mixes. But why wait for such crises to hit before action is taken? So far, Asian countries have coped with high oil prices by instituting curbs on energy usage and by relying on fuel-efficient technology. Secondly, there is much scope for regional countries to compare experiences and to learn energy best practices from each other. Regional countries could pool their capital and other resources to grow crops that can provide biofuels, to connect their electricity grids and share excess electricity; and to develop appliances that are not energy-wasteful. We have heard of wind-up radios that do not need batteries, for instance. Thirdly, the region should set up regional institutions that encourage the development and sharing of energy knowledge, for instance, there could be set up an Asian Institute for Energy Research, which could do energy research and disseminate this knowledge to all member countries. This would benefit small countries that do not possess the expertise and resources to conduct energy research. This could be done under the auspices of the East Asian Summit. The ACD has proposed setting up a regional oil stockpile in 2004. Another interesting idea is for Asia to develop energy infrastructure based on clean fuels like natural gas and hydrogen, which will help protect the environment. It appears to me that there is a great need for the government to invest the same strategic approach, the systematic handling and input of resources as it has shown in dealing with housing, education, health and the attraction of

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foreign direct investments. Energy issues have undergone a paradigm shift and it is now obviously a matter of high strategy amongst nations. It is now too important a matter to be left solely to the market. NOTE 1

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The 2003 UK White Paper set the following goals for Britain: Plan to cut the UK’s CO2 emissions by 60 per cent by 2050; maintain the reliability of energy supplies; promote competitive markets in UK and beyond; ensure that every home is adequately and affordably heated.

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2

Singapore’s Changing Landscapes in Energy Khoo Chin Hean

Singapore has taken various liberalization measures in its energy market, which has improved its efficiency in recent years. This chapter will highlight the energy security aspects of Singapore, including the feasibility of using alternative sources of energy. WHY COMPETITION IS NEEDED About ten years ago, there was one sole provider of utilities in Singapore, viz the Public Utilities Board (PUB). This structure served Singapore adequately for three decades. However in the mid-1990s, rising electricity prices had become a concern, as it would affect economic competitiveness. The government concluded that the regulated system should be liberalized (in a way similar to that of the telecommunications sector). It felt that competition would lead to higher efficiencies and competitive pricing for consumers. During that time, the technologies that were viable and available were limited. Singapore’s three largest generation companies were all operating oilfired steam generators. Without natural resources of its own, Singapore had to buy oil from global fuel markets. With limited choices in fuel mix, the issues then were whether Singapore was efficient as a consumer and as a producer of electricity. The costs to produce and deliver electricity are fully

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passed to consumers in Singapore. This helps to ensure that consumption is not distorted by subsidies and provides incentives for the efficient use of electricity over the long term. As for the production and delivery of electricity, the issue was whether the PUB as a monopoly provider would remain efficient as the system grows. THE ELECTRICITY INDUSTRY The first step towards liberalization of the energy market took place in 1995. The operational parts of the electricity and piped gas sectors, for example, electricity generation, gas and electricity transport and retail were corporatized under a vertically integrated monopoly, namely the Singapore Power (SP). The PUB assumed the role of the regulator of gas and electricity. At the same time, a separate generation company was also set up in 1999 to compete with SP. The government also opened the market to independent power producers (IPPs) and co-generators. No limits were placed on the number of entrants in the generating segment. However, competition did not develop due to the perception of a non-level playing field, as the vertically integrated monopoly, SP, owned and operated the entire transmission network and also participated in the competitive segments of the industry, that is, electricity generation and retail. SP had thus to be subsequently restructured to create a level playing field for competition amongst the generation companies to take place. In 2000, further restructuring took place so as to fully realize the benefits of competition. One main initiative under this round of restructuring involved the separation of the monopolistic businesses from the competitive businesses at the ownership levels. The monopolistic parts of the business, namely, the electricity and gas transport, were retained as regulated entities under SP. The other parts of the industry, namely, the generation companies and retail companies, were structured as separate entities in order to encourage them to compete with each other. For the companies in the competitive sector, market forces and market signals would determine investment decisions. The competitive parts of the market were clearly separated from the parts that constituted a natural monopoly. In this way, the monopolies would operate on open access and on equal terms with all participants in the competitive parts of the electricity and gas sectors. In 2001, the Energy Market Authority (EMA) was formed as a statutory board under the Ministry of Trade and Industry to regulate the electricity and gas industries. The restructuring of the electricity sector was completed

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in 2003 and the process of restructuring the gas sector is still in progress. A key change arising out of competition is the entry of natural gas, which enabled more efficient generation technology, known as Combined Cycle Gas Turbines (CCGT), to be used. With the availability of gas, competition removed inefficiencies from the energy market and electricity prices came down. This was evidenced by the fact that Singapore’s electricity prices in 2005 were about the same as that in 2001, even though oil prices had approximately doubled. Since the restructuring of the electricity sector, new generation and retail licensees have entered the market. There are now seven electricity generation licensees and six electricity retail licensees. SP will now remain only in the monopolistic segments of the industry, that is, in electricity transmission and gas transportation. It will also provide market support services in the electricity industry, such as meter reading and meter data management. Another major initiative was the creation of the Energy Market Company, which took over from PowerGrid the functions of market operation and administration. Power systems operation, which used to be under the purview of PowerGrid, was divested from SP and transferred to EMA under the Power System Operation Division. THE GAS INDUSTRY Competition in the electricity market has motivated generation companies to seek more efficient ways of generating electricity, such as using natural gas. Today, about 80 per cent of Singapore’s electricity demand is generated from natural gas. As gas becomes a major source of fuel for power generation, the gas industry also has to be competitive. Changes to the gas sector are also being implemented to introduce competition in gas. RESTRUCTURING THE NATURAL GAS INDUSTRY As a first step towards creating a competitive gas industry, the gas transportation business, which is a natural monopoly, is being separated from the competitive parts of the industry at ownership level so as to ensure fair competition and a level playing field. Today, PowerGas holds a licence to transport gas to consumers and is responsible for maintaining the reliability and safety of the gas transportation network in Singapore. As the gas transportation business is a natural monopoly, PowerGas will continue to be price regulated by the Energy Market Authority. PowerGas will not be allowed to participate in gas import, trading and retailing. SembCorp Gas, which currently imports,

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transports and retails natural gas, is required to transfer its onshore natural gas pipeline assets to PowerGas and exit the gas transportation business. Work to transfer SembCorp Gas’ pipeline assets to PowerGas is in progress. The gas sector will take time to develop and mature. The recent 2004 power disruption, due to a disruption in gas supply from the West Natuna gas field, renewed concerns about security and reliability. SINGAPORE’S ELECTRICITY SUPPLY IS SECURE For security, EMA requires our generation companies to stockpile oil for the oil fired steam generation plants. For the gas fired CCGTs, EMA requires the generation companies to stockpile diesel which can also be used to run the CCGTs if there is a disruption in the gas supply. The 2004 disruption in the gas supply caused some of the CCGTs to trip. When this happened, electricity wholesale market prices rose owing to the inability of supply to meet demand at that point in time. This incentivized generation companies (gencos) to turn on their more expensive generation sets, that is, peaking plants, and switch to the use of more expensive fuel, that is, diesel, to restore capacity. If their generation units should trip on switching, prices would have risen even higher to incentivize generation companies to restart their other power plants as quickly as possible. This system punishes the less reliable gencos in favour of the more reliable ones, thereby promoting greater reliability in the power system. Because the peaking plants were held in readiness for such contingencies, electricity was restored to the affected 30 per cent of demand within one-anda-half hours during the 2004 disruption. This incident proved the effectiveness of market forces in Singapore’s electricity wholesale market and Singapore’s ability to restore its electricity supply even when the gas supply was interrupted. GAS IS A KEY DRIVER OF CHANGE A properly operating market would attract more cost efficient businesses as these can take market share away from less cost efficient ones. This in turn will incentivize incumbent businesses to find ways to stay cost competitive. The outcome of such competition is downward pressure on prices over the long term. This was one of the early outcomes in the electricity market. The entry of natural gas enabled the generation companies to operate the CCGTs, which were approximately 15 per cent more cost efficient than the oil-fired steam plants. The CCGT displaced the less efficient oil-fired steam plants.

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The incumbent generation companies invested in CCGTs to remain cost competitive and to defend market share. The outcome was higher efficiency and a lower electricity price. Growing global competition for fuel, driven by growth in China and India, has caused oil prices to rise to beyond US$70/barrel. Liquefied natural gas (LNG) has become a feasible option as a result. This created the opportunity for Singapore to consider LNG as another source of energy. LNG OFFERS COMPETITIVE CHOICE Singapore’s demand for electricity is growing and it will need new capacity after 2012. It will likewise need to import more gas. Singapore’s current pipeline gas contracts expire shortly after 2020. It is not certain how much gas will be available from these piped sources thereafter. The Singapore Government is looking at the possible importation of LNG to provide an alternative supply of gas. The importation of LNG would also provide the opportunity to introduce new players in the gas market, which would enhance competition. LNG enables gas to be sourced from any source. Having more sources will also create greater competition in gas. Furthermore, LNG brings with it the promise of gas trading opportunities, which can help apply downward pressure on costs. Countries such as the United Kingdom and Japan are also diversifying their energy sources by procuring more LNG. BETTER DIVERSITY WITH GAS COMPARED TO OIL Feedback from the industry indicates that the global competition to secure fuel supplies will intensify, especially with China and India entering the league of mega energy importers and competing with the United States and Japan. This will undoubtedly drive up oil and gas prices. While an increase in price is often viewed negatively, higher prices do have a positive outcome: Fuelling growth in new areas by significantly increasing investment and turning marginal opportunities into commercial prospects. For example, the exploitation of non-traditional supplies, such as Canadian oil sands (also known as tar sands), has only now been made possible by advances in technology. However, while high prices have recently opened up a greater diversification of oil sources, the major sources of oil would still be concentrated in only a few countries, specifically in the Middle East. The sources of natural gas are better diversified over many more countries, including countries in South

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East Asia and Australia, which are geographically closer to Singapore than the Middle East. Furthermore, the outlook is that the supply of gas will be adequate, notwithstanding increasing demand from consuming countries. IS RENEWABLE ENERGY LIKELY TO TAKE ROOT? Solar power, at the current level of technological development, is more expensive than the electricity bought from the electricity wholesale market. Solar energy costs about 34 to 51 cents per kWh, whereas electricity from the wholesale market costs about 11 cents per kWh. Proponents of solar power however argue that prices of solar power generation should fall by half by around 2010. If this is true, solar technology will become a feasible source of electricity generation in the near future and will be able to enter the market viably. As for wind technology, a wind speed of close to 5 metres per second is needed to operate the wind turbine technology. The average wind speed in Singapore is below that, with the exception of the northeast monsoon months. Singapore also lacks the traditionally large “footprint” area required for wind farms. COAL Although the market price of coal is currently significantly lower than that for oil and gas, it may not necessarily be cheaper. Much depends on the relative prices of these fuels, and that could change as circumstances change. For example, when oil and gas are expensive, demand for coal will rise and this will drive up coal prices. Another factor affecting coal price is that coal is also used in other industries such as the iron and steel foundries. Demand, and therefore costs, of coal have been driven up in recent years due to China’s growing appetite for iron and steel. Apart from the cost of coal per se, externalities relating to its effects on the environment make coal even more costly. The costs of exploiting clean coal technologies, which would remove the cost of externalities from using coal as it is, are still currently prohibitive. Nuclear technology brings with it concerns about security and safety. Another aspect of nuclear energy is the high cost of wastes disposal, which are not factored into the price of nuclear energy in most countries. As for the several factors that impacted on the oil prices, these included growing demand for oil in China, speculative factors in the oil trading, seasonal demand in major oil consuming countries and dependence on the old oil plants in the Middle East. On the other hand, high oil prices provides

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incentives for oil companies to invest in developing new fields, which will eventually bring new supply to the market. It would also incentivize consumers to reduce demand by conserving or by turning to other energy sources. Eventually market forces will re-equilibrate. It would be very hard to predict oil prices. A point for countries to note in preventing excessive speculation in oil prices (which is one key factor attributing to the rise in prices today) is the importance of information. Consumer fears are often instigated by a mixture of actual disruptions and rumours that obscure reality. At such times governments and the private sector must collaborate to provide timely and accurate information. This exchange of information would help to dampen the inflation of prices and perhaps lead to a brighter (and less expensive) future for all. WHICH TECHNOLOGY? EMA ensures that the market is accessible to any technology including renewable energy. EMA has no preference with regard to technology and lets the market decide on the most efficient technology so long as they can comply with requirements laid down by other authorities — these include environmental standards and land use regulations. Entry, however, has to be on economic grounds, meaning that the new technology should be able to generate electricity at a better price than what the market is currently able to give. This ensures that Singapore’s electricity market remains competitive, hence providing an environment conducive to investments. COOPERATION WITH NEIGHBOURS Similar to the power sharing experience of Scandinavian countries, where a common power system ensured their power supply security, there is also a power sharing arrangement with Malaysia and this has worked well to the benefit of both countries. In addition, the electricity market allows the import of electricity from commercial power producers outside Singapore. However, to ensure Singapore’s power security, the amount of electricity that could be imported is limited to 600 MW. CONCLUSION Singapore’s market driven electricity industry has shown its robustness in its ability to incentivize the right behaviour in its participants — sourcing for

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the most cost efficient technologies, switching to fast-starting power plants when prices spike, and acquiring access to gas fields in the surrounding countries. There is also additional evidence, with the entrance of new generation companies like Keppel Merlimau Cogen Pte Ltd and Island Power Company Pte Ltd, that the market has worked in incentivizing the introduction of new generation companies here. Looking to the future, increasing fuel cost will make other fuel alternatives attractive, bringing the global fuel mix to a new equilibrium. Higher prices will also cause consumers to be more mindful of how much they use, leading to more efficient consumption. Put together, this would mean that we will see changing patterns in technology, one of which is to achieve more cost effective generation and the other is to achieve more efficient use of energy. EMA will keep itself abreast of market developments and ensure that the infrastructure will allow such technology and changes to be implemented.

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3

Singapore’s Role as a Key Oil Trading Centre in Asia Esa Ramasamy

INTRODUCTION Singapore is currently the leading oil trading centre in Asia, just as New York, Houston and London are the major trading centre of the Americas and Europe. The rapid growth of the Asian economies and its thirst for oil has led some to question the role and validity of Singapore as Asia’s leading oil trading centre. Singapore has lost its role as Asia’s leading refining centre as China, India, Malaysia, South Korea, Taiwan and Thailand, began to build up their refining capacity in the 1990s and early 2000s. Thus Singapore’s role as a swing producer began to diminish. However, it is still a swing producer, meeting the supply bottlenecks that appear at times in the Asian oil industry. Though Singapore may no longer be the refining centre of Asia, its status as Asia’s oil trading centre has gone from strength to strength. What is meant by Singapore being Asia’s oil trading centre is the use of the FOB Singapore petroleum product assessments and its trade reflecting Asia’s oil demand and supply. This chapter explains the continued role played by Singapore as Asia’s leading oil trading centre. All tables and charts that appear in this chapter were created by the author from Singapore Trade Statistics, supplied by IE

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Singapore. The map that appears in this chapter was created by the author from information supplied by Platts. WHAT IS A TRADING CENTRE? A trading centre is defined in this chapter as a place in which its over-thecounter or futures market is used to settle oil contracts, either on a spot or term basis over a larger region. A trading centre need not necessarily be a crude oil or refined petroleum production centre, nor does it need to have a large domestic market or be an exporting country. For example, in Asia, Dubai crude, the benchmark for all Persian Gulf crude exports to Asia, is traded in Singapore, but is produced in the United Arab Emirates. Brent, produced in the North Sea, is traded largely in London but is also traded electronically from any part of the world. The same applies to WTI, traded largely in New York and from other parts of the world electronically, but is physically delivered several thousand miles away in Cushing, Oklahoma. In the case of petroleum products, the FOB Singapore benchmark reflects trading conducted in Singapore. In Europe, London is the trading centre, even though most of the physical trading is done out of Amsterdam, Rotterdam, Antwerp and Italy. The key to identifying a trading centre is the location where the benchmark is traded. Tremendous improvements in communications technology have enabled the trading centres to thrive even though physical trading is conducted elsewhere. Singapore is doubly unique in the sense that it is a producer of refined petroleum products and is also the centre for oil trading. HISTORY Singapore’s role as a trade centre since its “founding” by the British in 1819 is a well established fact. The island republic’s establishment was based on the need to develop an administration that fosters trade. This tradition has been carried through various administrations since 1819. Singapore is regarded as a key entrepôt centre in Southeast Asian commerce. It is through this entrepôt model that Singapore’s reputation as the leading oil trading centre became established. Oil products from neighboring Asian countries in the first half of the twentieth century used to be shipped from its production source, stored, processed and re-exported to other parts of the world. Statistics from IE Singapore show both exports and re-exports have been on the rise.

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Figure 3.1 Total Product Exports from Singapore

18,000,000 15,000,000

MT

12,000,000 9,000,000 6,000,000 3,000,000 0 2000 Mogas

Naphtha

2001 Jet

2002 Kero

2003 Gasoil

2004 est. Fuel Oil

Oil trading in Singapore has occurred for more than 100 years. The type of trading then was more concerned about the logistics of supplying oil, namely bunker fuel to ships and to store oil.1 Today, however, oil trading in Singapore involves a host of activities, ranging from banking, insurance, legal, and the movement of oil itself. Why was it that it was Singapore and not Hong Kong or any other locations that developed as the region’s oil trading centre? Unlike Singapore, Hong Kong is, for a long period of time and even till today, mainland Chinacentric, with periods of disruption whenever political upheavals in the mainland led Hong Kong to turn its attention towards the international markets. Singapore, meanwhile, had from the beginning been more Asia-centric and integrated into the global economy from an early stage. Even though the bulk of its trade was with fellow Southeast Asian countries, Singapore for the larger part was fully integrated into the global economy because of its links with the other parts of the British Empire. In addition, with the exception of the Great Depression of the 1930s and World War II, there were no major political or economic upheavals that disrupted the Singapore economy. Even the threat of the communist insurgency in the 1950s and 1960s hardly affected the growth of the Singapore economy. The Great Depression, World War II and the communist insurgency, helped Singapore entrench itself as the leading trading centre in Asia. While

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other bigger nations were in the midst of their independent struggles or civil war, Singapore was the only country in Asia that continued to grow economically, despite some short recessions. SINGAPORE AS ASIA’S LEADING OIL TRADING CENTRE In the recent years, particularly since the mid-1990s, Singapore’s status as one of Asia’s leading refining centres has been eroded even as its trading centre status has grown. Since the mid-1990s, Asian nations, namely China, India, Indonesia, South Korea, Taiwan and Thailand have increased their refining capacity, while Singapore’s refining capacity remained largely stagnant. Singapore’s refineries, namely those operated by the majors, ExxonMobil, Shell, BP, Chevron and Singapore Petroleum Company, had met part of Asia’s demand for petroleum products. With the larger Asian neighbours increasing their refining capacity, the need to turn to Singapore to meet their spot needs gradually diminished. In addition, most of Asia’s spot demand was increasingly being met by refined products from sources that could supply them relatively cheaply than Singapore. Most of this demand was met by imports from Europe, the Persian Gulf and United States. Singapore’s status as the leading oil trading centre in Asia on the other hand, has gone from strength to strength. When Asia, as a whole, began increasing its refining capacity, many industry watchers had said that this could be the end of Singapore’s oil industry. Available evidence, however, shows that Singapore’s refiners continued to play a key role in meeting the bottlenecks that arise in the supply of refined petroleum products or as that of a swing producer. More importantly, the FOB Singapore benchmark, as published by Platts, for refined petroleum products has become entrenched. Several attempts have been made by Japan, China, Thailand and South Korea to liberalize their oil industry in an attempt to establish their own trading centres. Japan established a futures exchange, the Tokyo Commodity Exchange (TOCOM). TOCOM has developed petroleum product futures but there continues to be a thriving over-the-counter market indirectly influenced by the FOB Singapore bench market. Japanese marketing and trading houses buy transportation and heating oil fuels from the international markets, namely South Korea, on an FOB Singapore basis and re-sell these imports into the domestic market, benchmarked off published prices. In addition, the established trading and structural hindrances, and the dominance of a handful of refiners have effectively killed off any attempts to develop an infrastructure that would create the environment for open and free trade.

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China has in the past few years allowed the Shanghai Futures Exchange to begin trading fuel oil futures. The private sector in the mainland has led the way to making Guangzhou a key trading centre for fuel oil. Guangzhou, the capital of Guangdong Province, is the nerve centre for most of the fuel oil traded in southern China, being the largest fuel oil import centre. The lack of confidence and established “rules of the game” and currency controls have hindered China’s move to take part of Singapore’s oil trading activities away from Singapore. In addition, the dominance of the domestic industry by state-owned Sinopec and PetroChina and the lack of transparency did not aid China’s efforts to develop its own “trading centre”. South Korea, for its part, had introduced and eased some of its regulations to enable foreigners to participate in its domestic oil markets. Korea’s large refining capacity, about 2.4-million barrel per day (b/d), had led many to believe in the mid-1990s that it could rival and challenge Singapore. Although the legislations in name allowed foreigners’ participation in the domestic economy, the fine print, however, ensured that the existing chaebols still enjoyed total dominance. The chaebols’ total dominance only discouraged foreign participation in the Korean oil industry. In South Asia, attempts by some Indian exchanges to introduce crude oil and product futures have failed to materialize. The Indian domestic oil market with the exception of fuel oil, is still heavily regulated. The control of the domestic market by state-owned oil companies has led many potential investors to stay away from India. FACTORS AIDING SINGAPORE’S STATUS AS ASIA’S LEADING TRADING CENTRE Government Intervention The Singapore Government’s hands-off policy towards the oil industry, despite it being a critical sector of the local economy, has been a key factor in the development of the island republic as Asia’s oil trading centre. Singapore’s bureaucracy, known for its efficiency and all embracing approach, has adopted a laissez-faire approach towards the developments taking place in the Singapore oil industry. In Asia, the level of government involvement in the domestic oil industry is generally tremendous. This involvement ranges from control of stateowned oil companies, setting of domestic prices, use of fiscal policies to dictate demand and supply, and in some cases, controlling the channels of crude and petroleum product imports. All of the state-directed impediments

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to trade are absent in Singapore. One reason why the Singapore Government has avoided participation in oil trading is that it neither acts as a market maker nor taker. In other parts of Asia, the governments are mostly market takers, meaning that they are exposed to price fluctuations in the international market. These governments, because of political pressures, are forced to intervene in the oil market to keep domestic prices at artificially low levels to ensure political stability. Another factor favouring Singapore as a trading centre is the size of its domestic oil market. Though Singapore has a relatively high per capita consumption of oil — about 5.4 barrels per day — its domestic consumption of about 800,000 barrels per day2 is small compared to its Asian neighbours. Some analysts feel that this may be the reason why the Singapore Government has adopted a hands-off approach towards a critical industry. The Singapore Government’s role in the oil industry is dictated by its belief in free market economics. The lack of natural energy resources has helped the government to leave this sector to the private sector for development. Unlike its Asian neighbours, which have been endowed with large amounts of energy resources, the lack of it has made it less necessary for the Singapore Government to participate in the energy sector. The only role the government does play in the energy sector is in the development of infrastructure and provision of financial assistance in attracting investments to the island republic. Singapore’s participation in the Petrochemical Corporation of Singapore’s initial investments, the creation of the Singapore Petroleum Company and the development of Jurong island as a petrochemical hub, are examples where the government has participated in the oil industry. The absence of large state-owned oil companies, largely because of the lack of domestic energy resources, has also helped to ensure that there is very little government intervention in the oil sector. In most Asian countries, governments are forced to intervene in their oil industry to sustain and create a favourable environment for the state-owned companies to survive. These policies typically manifest themselves in the development of policies that discourage foreign participation in their domestic oil market. Singapore remains the only country in Asia where market forces are permitted to dictate the price of oil. This development has greatly helped Singapore to entrench itself as the leading trading centre in Asia. Along with a hands-off approach, the rule of law, strictly adhered to by the Singapore Government, has ensured that international trading companies can conduct their business with a large degree of certainty and confidence. One of the major concerns of international oil trading companies in Asia is

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the lack of established laws to govern commerce. This lack of laws to govern commerce in other parts of Asia is another reason why Singapore has become the oil trading centre in Asia. Development of the Asian Spot Market The concept of spot trading in Asia kicked off in the second half of the 1980s, when China began to open up and this was also the period when surplus products from the West began to arrive in Asia in search of markets. As the United States and Europe began to deregulate their markets in the early 1980s, their exposure to market forces rationalized demand in the developed economies and led to a surplus of supply. This surplus supply began to seek outlets in Asia and led to the development of the Asian spot market. As trade grew, so did arbitrage opportunities. Since Singapore at that stage was the only place in Asia where trading was being conducted, it naturally came to occupy the position as Asia’s trading centre. Market players then clamoured for increased transparency and a benchmark that would enable them to take advantage of the increased arbitrage opportunities from other parts of the globe to Asia. The presence of a large number of independent storage facilities has not only attracted the oil majors to Singapore but also independent trading houses. Independent storage facilities meant large trading houses could trade like the oil majors. They could now move oil across from various other locations, store, blend and trade these products into the different parts of Asia. Currently, Singapore has about 89.5 million barrels of storage capacity, of which about 75 per cent is owned and controlled by the oil majors; the remainder is held by independent storage companies, VoPak and Oiltanking. By the end of 2007, an additional 22.5 million barrels of storage capacity would be added to the existing capacity, which will result in about 112 million barrels of storage capacity. The interesting point about the new storage capacity is that they are being developed by trading companies or their subsidiaries. In the case of the Horizon Terminal project, the partners include the Emirates National Oil Company, SK Corporation of South Korea, IPG — a private Kuwaiti trading company, and Martank BV of Holland, an affiliate of the international trading house, Vitol, and Boreh International, an Africabased oil trading company. In the case of the Universal Terminal project, Singapore-based independent Hin Leong Trading Company and China’s state-owned PetroChina are jointly developing this project. The Singapore Government, through the JTC Corporation, is building an underground

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cavern as storage in Singapore, which is expected to be leased out to private commercial interests.3 Figure 3.2 shows the current breakdown of storage ownership in Singapore as of mid-2005.

Figure 3.2 Breakdown of Storage Ownership in Singapore (mid-2005) Shell, 24.53 (29%)

Exxon, 14.47 (16%)

Exxon (PAC), 10.69 (12%)

Independent, 19.72 (22%)

SPC (Sebarok), 1.38 (2%)

SRC, 13.21 (15%)

FAMM, 3.774 (4%)

The participation of independent and state-owned trading companies indicate that they themselves believe Singapore will continue to remain Asia’s leading oil trading centre for years to come. The importance of independent storage needs to be stressed because this is what attracts trading companies to establish their trading operations in a particular location. In Singapore, prior to the 1990s, most of the trading companies needed to load a cargo of petroleum products and ship it directly because of the lack of independent storage. During the 1990s, the expansion of independent storage facilities enabled trading houses to add value to their business. Trading houses would move fuel oil from various locations and blend them to the various specifications in Singapore and then re-export them to their destinations. Gasoline components were brought into Singapore from various locations and blended in Singapore before being re-exported to the consuming centres.

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Prior to the 1990s, most of the trading in Singapore was focused in the hands of the oil majors, but with the development of independent storage, Asian and Western trading houses were attracted to Singapore. In addition, in the early 1990s, Asia was still relying on imports to meet its product needs and most of these supplies came from the Mediterranean, Persian Gulf and the United States. A major attraction of the independent storage facilities in Singapore is the ability to use these storages to capture the “contango”. Contango is a term that refers to weak prompt prices and higher forward values. In a contango, prompt demand is weak and hence the front end of the price curve will be lower than the back end. During periods of contango, trading houses would store up products in these tanks and trade the contango and cash in when the market flips into “backwardation”, when the prompt end of the curve rises above the back end of the curve. This trading pattern enabled trading houses to buy relatively cheap oil, store it and sell it at a profit when prompt prices rise. As trading activities increased in Singapore, Platts’ FOB Singapore petroleum product price assessments came to be established as the benchmark for all FOB Singapore product trades. A benchmark for a crude or a product is established when it becomes a commodity and is free-traded. When a benchmark is traded, the only negotiation that takes place is that of price — there is usually a standard volume involved and also clearly defined specifications for petroleum products. A regional benchmark should reflect that region’s demand and supply balances, in other words, it should be an excellent sample of the broader market. In any given period, the spot market activity accounts for 10 to 30 per cent of oil traded, with the balance being exchanged through term contracts. These term contracts are settled on the basis of the spot market benchmark. This is why spot market benchmarks have grown in importance as the demand for oil increases. The role of Platts has been ignored by many reports that have been written about the Singapore oil industry. Platts4 has been publishing FOB Singapore assessments since the early 1980s. Towards the end of 1992, Platts changed its assessment methodology from the traditional mode of deciphering market developments to come up with an assessment, to one that market participants traded in a transparent fashion to establish the value of petroleum products. The key principle that Platts adhered to in this shift of methodology was that the price of oil is a function of the time it traded at. That is to say, the price of oil differs from time to time and Platts’ assessment reflects the price

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of oil at a particular period of time. Platts’ FOB Singapore assessments reflect the price of oil at 4.30p.m. Singapore time. In addition, the new Platts methodology enhanced the transparency and accountability of its assessments. These developments, by the second half of the 1990s, enhanced the market’s confidence in the Platts FOB Singapore assessments and led it to become the benchmark for products traded throughout Asia and the Persian Gulf. The Platts FOB Singapore petroleum product assessments are now not only a trading benchmark but is also used by Asian governments to set domestic pump prices, to determine their import prices and even their energy budgets. This new-found confidence in a set of Platts’ assessments had another major impact. As the confidence in the assessments grew, along with the accountability, this led to the rapid growth of the FOB Singapore over-thecounter derivatives market. The OTC FOB Singapore derivatives market is settled on the assessments published by Platts. The growth of the derivative market took off in the second half of the 1990s, when oil trading become more expensive and faced even greater risk of financial loss. As the Singapore derivative market grew, this attracted non-physical trading institutions — airlines, banks, insurance companies and ship owners — to Singapore. In addition, the derivatives market developed as traders, airlines, banks, insurance companies, ship owners and crude oil producers began to hedge, trade oil for delivery at a future date and also help finance future projects. Today, according to estimates from broking houses, about 30 million barrels of petroleum products and 20 million barrels of swaps contracts are traded daily in Singapore. WILL OR CAN SINGAPORE BE DISPLACED AS ASIA’S TRADING CENTRE? In the near future, there are very few locations in Asia that could rival and develop into a rival trading centre. However, the same factors that have helped Singapore to develop into Asia’s trading centre could over time work against it. The first factor that comes to mind is the lack of a large domestic market. The lack of a domestic market had worked in Singapore’s favour when the island republic’s oil sector was developing. However, the same lack of a domestic market could easily attract the trading community to locations with a large domestic market, plus all the characteristics of the FOB Singapore market. The logic behind this argument is that when the oil market goes into a slump, a large domestic market provides the sustenance and cushions the impact of the slump on the trading community. In the period 1997–99 when the global oil market went into a slump because of the twin effects of the

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Asian financial crisis and over-supply, several players began to question Singapore’s position as the leading trading centre. Though trading continued, the volume of trade in the over-the-counter market dwindled sharply.5 The cost of conducting business has been a core issue that faces the oil industry every day. The cost of every aspect of doing business in Singapore is at least 20–30 per cent higher than in other parts of Asia. The single most important factor is the cost of storing oil. The cost of storage is reportedly 50–60 per cent higher than in southern China, the Philippines and Thailand. Trading companies, however, noted that although on paper the cost of storing oil in these countries may seem cheaper, there are hidden costs that could at times make it more expensive than in Singapore. Traders also noted that though operating costs are higher in Singapore, the security to commerce, has led them to overlook the costs. Higher operating costs of terminals can be eased slightly by revisiting an old concept of letting Singapore’s development spill into the neighbouring Malaysian state of Johore. Costs of developing and operating storage facilities in southern Johore state are about 40–50 per cent cheaper than in Singapore. In addition, independent storages in Tanjung Pelapas and Pasir Gudang can easily supplement and further enhance Singapore’s role as Asia’s leading oil trading centre. NOTES 1

2 3 4 5

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See Daniel Yergin’s The Price: The Epic Quest for Oil, Money & Power. This book provides some background to the growth of the oil industry in Singapore in the late nineteenth and early twentieth centuries. Based on the Central Intelligence Agency’s 2005 estimates; see CIA World Factbook. Sourced from Platts news service. For a detailed history of Platts and its role in energy pricing, please go to . Based on conversations with Singapore-based over-the-counter broking houses.

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4

Large-Scale Solar PV Power Generation in Urban High-Rise Buildings in Singapore Rabi Satpathy

INTRODUCTION The present growth of energy has been the prime concern of many countries. As nations grow, so do their hunger for energy. This need is causing an imbalance between nations regarding their energy usage pattern and mix of energy sources. At present, the energy demand for Singapore is 33,100GWh per year (EMA data 2004). Thus the daily energy demand translates to 90GWh per day. To meet the Kyoto Protocol (which Singapore acceded to on 11 July 2006) and also to avoid a future energy shock (depletion of conventional energy sources combined with rising fossil fuel prices), Singapore needs to look at alternative energy sources. PRESENT ENERGY MIX AROUND THE WORLD At present the energy mix shows a variety of energy sources. Global primary energy consumption is 114,000TWh per year, with renewables comprising only 1,000TWh per year, which is less than 0.1 per cent. Solar photovoltaic (PV) contributes a mere fraction of the renewable portion, although growing fast.

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A Shell scenario of energy demand and mix up to the year 2060 notes that the contribution from renewables could be as high as 40 per cent by the year 2060, with PV alone making up 13 per cent of the total energy supply. CHOICES IN ALTERNATIVE ENERGY SOURCES FOR SINGAPORE Among the available alternate or renewable energy sources such as solar, wind, bio-mass, hydro, tidal, and ocean energy, solar is the obvious choice for countries like Singapore. The reasons for choosing solar energy are: • • • • •

Singapore’s proximity to the equator endows it with plentiful solar irradiation all year round (average of 4.5kWh/m2/day) The average wind velocity ( Tanker > Tankage”, an interesting outcome for homegrown oil trader Hin Leong is whether they will become a Hess or Reliance and expand into refining. Independent storage is undoubtedly of growing importance as a marketing tool for oil traders as well as independent and national oil companies. Table 11.3 Chronicle of van Ommeren (later Vopak): Pulau Sebarok Oil Products Storage Year

Capacity*

1983 1987 1988 1989 January 1980 1998 2003 January 2004

500,000 70,000 120,000 60,000 750,000 174,000 102,000 1,026,000

*Cbm – cubic metres (approximately 6.29 barrels)

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12

The Outlook for Energy: A View to 2030 Kwa Chong Seng

INTRODUCTION Energy is essential to our way of life, to economic progress, and to raising and maintaining living standards. The pursuit of economic growth and a better quality of life in developing countries is driving global energy demand. New supplies of reliable, affordable energy are needed. At the same time, concerns about future energy supply and climate change have heightened interest in energy supply options, energy prices and the effect of energy use on the environment. It is essential that industry plays an active role in the ongoing dialogue about the future of energy — one that is grounded in reality, focused on the long term and intent on finding viable solutions. Each year, ExxonMobil prepares a detailed, long-term outlook of worldwide economic growth and energy demand. It uses this outlook to help plan its business. In order to develop the most comprehensive and accurate outlook, it incorporates the views of organizations such as the International Energy Agency and the U.S. Department of Energy — as well as those of other leading economic and energy experts — in its research. ExxonMobil’s outlook, presented in this chapter, extends to the year 2030.

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Figure 12.1 Energy Outlook Basis

Source: ExxonMobil.

ENERGY OUTLOOK BASIS ExxonMobil assesses the energy demand outlook for nearly 100 countries, with the balance of the world covered in 15–20 country groups. To determine future demand for oil, gas, coal, electricity and more, it looks at economic drivers such as gross domestic product and population. Those factors are important because energy demand is closely linked to economic development. As societies develop, their energy needs expand as well. To develop its final conclusions, ExxonMobil applies factors for efficiency improvement, and considers current trends and future expectations in consumption patterns, including issues such as competition between fuels and availability of supply. It also evaluates the supply outlook. Working closely with experts within ExxonMobil and with external data, it establishes resource estimates for both oil and gas and model production profiles for key countries. GLOBAL POPULATION Figure 12.2 shows the distribution of global population in 2000 (left-hand bars) and the estimate for 2030 (right-hand bars). The annual percentage growth rate between 2000 and 2030 is shown above the 2030 bar.

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Figure 12.2 Global Population

--

~.2%

0.1%

••

0.1%

••

o.e o.a

OA 0.5 North Amerlc.~

-- I -0.3 0.3

Ruuia/C•Sf)IM

Europe

1.7 %

0.2 0.3

MlddteEest

•• II

0.8% .,... year

1.1%

I

Non-OECD

1.7%

0.0%

0.2 0.2 Aele Pllclflc

3.2 4.2 Aele Pllclftc

OA 0.5 Latin Americ:ll

0.5 1.3 Afrtce

8.0 B 8.0 B OECD

Wortd

Source: World

B.,.

In 2000, the world’s population was about six billion people, with 80 per cent living in non-OECD1 countries. Through 2030, the world’s population is expected to grow at just under 1 per cent per year to approximately eight billion people. However, OECD or developed countries in Europe and Asia Pacific show almost no growth, and North America grows at less than 1 per cent annually. In contrast, non-OECD or developing regions grow at a rate that is more than double that of the OECD. The most significant increases will occur in Latin America, Africa, and particularly Asia Pacific. More than 90 per cent of the world’s population growth of nearly two billion people will be in the developing world. GLOBAL GDP Because economic growth and energy demand growth are tightly linked, it is important to highlight our GDP growth assumptions. Figure 12.3 shows the real GDP levels for key regions in 2000 (left-hand bars), and projected GDP in 2030 (right-hand bars). In 2000, the world’s economy was valued at roughly US$31.5 trillion. The OECD, while accounting for only 20 per cent of the world’s population,

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Figure 12.3 Global GDP (2000 and 2030)

Source: World Bank.

accounts for more than 80 per cent of the world’s economic output. We expect the global economy to show strong sustained growth of 2.7 per cent per year. As a result, it will more than double in size to approximately US$71 trillion by 2030. While the economic output of OECD nations remains strong, the fastest growth will be in the developing countries. The rapidly expanding economies of China, India, Indonesia and Malaysia will lead to average annual growth of more than 5 per cent for non-OECD Asia Pacific, creating combined output that approaches that of Europe. This rapid growth will be a key driver of energy demand. ENERGY USE Worldwide energy demand will grow on average 1.6 per cent per year, from about 205 million barrels per day of oil equivalent (MBDOE) to nearly 335 MBDOE. In other words, we will need approximately 60 per cent more energy in 2030 than in 2000. Technology and efficiency gains will keep OECD energy demand growth relatively small. Non-OECD demand — driven especially by developing Asia Pacific, with an annual growth rate of 3.2 per cent — will move well past that of the OECD.

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Figure 12.4 Energy Use — 2000 and 2030

Source: ExxonMobil Singapore.

ENERGY INTENSITY — DECLINING TREND ACCELERATES Energy intensity measures the efficient use of energy. Figure 12.5 shows the energy required to generate US$1,000 of GDP. A downward slope with time reflects increasing energy efficiency. As Figure 12.5 illustrates, there are still significant opportunities for efficiency gains in developing nations. But OECD nations are also expected to be increasingly efficient due to the introduction and use of new technologies in a wide variety of applications including personal transportation. ENERGY DEMAND GROWS The illustration on the left of Figure 12.6 shows global energy use broken down by primary uses. The fastest-growing energy need through the year 2030 is fuel for electric power generation, which is expected to grow at 2 per cent per year. Overall transportation uses and chemical needs grow at the same 1.7 per cent rate. The heat/other category — which includes fuels for residential, industrial and commercial uses, including agriculture — will grow at 1.3 per cent per year.

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Figure 12.5 Energy Intensity — Declining Trend Accelerates

Source: ExxonMobil. Figure 12.6 Energy Demand Grows

Source: ExxonMobil.

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The illustration on the left (Figure 12.6) shows the same global demand, broken down by energy type. Through the year 2030, traditional fossil fuels will continue to supply the vast majority of energy needs. The strong demand for electricity results in natural gas and coal being expected to experience the highest rates of growth, each at 1.8 per cent annually. Much of the growth in coal will take place in Asia, where there are large supplies. Oil use will grow at 1.4 per cent annually, moderated somewhat by increasing efficiency, particularly in transportation. At the projected growth rate, oil and gas combined will represent close to 60 per cent of overall energy use, which is about the share they hold today. Other forms of energy, such as nuclear, hydro-power, wind, bio-mass and other renewables, will grow in total at 1.6 per cent annually. OIL AND GAS REMAIN PREDOMINANT Figure 12.7 reproduces (on the left) the previous oil, gas, coal and “other” energy chart (Figure 12.6). The “other” category on the left panel is shown in more detail in the middle panel.

Figure 12.7 Oil and Gas Remain Predominant

Source: ExxonMobil.

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We expect nuclear will grow on average at 1.4 per cent per year. The largest growth will be in Asia Pacific with most new builds post-2020. Hydro-power should grow at just under 2 per cent per year. Further development is expected in China, India and a few other developing countries. (The Three Gorges plant in China is in the early stages of start-up.) The next segment, bio-mass, includes for the most part traditional fuels (wood, dung) used in developing countries. In addition, this category includes the use of wood waste and garbage in developed countries. Last, we expect wind and solar growth to average about 11 per cent per year driven by subsidies and related mandates. The rapid anticipated growth of wind and solar are isolated at the right (Figure 12.7). Even with this strong projected growth, their share of total energy in 2030 will be only about 1 per cent. The largest fuel share today — and in 2030 — is oil. Figure 12.8 shows the growth in oil demand, broken down by sector, through the year 2030, with OECD nations shown on the left and non-OECD nations on the right. Oil demand in OECD countries should peak in about twenty years, due to increases in the fuel economy of personal vehicles. In non-OECD countries, oil demand will continue to increase in all end uses, although transportation is by far the largest growth segment. Fuel Figure 12.8 Oil Growth Led by Non-OECD Transport Demand

Source: ExxonMobil.

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demand for cars and trucks will drive total oil demand growth at a rate of 2.5 per cent per year. By 2030, non-OECD oil demand will be well in excess of that in the OECD countries. The light duty vehicle fleet, which consists of passenger cars and light duty trucks, is a key component of oil demand. Figure 12.9 reflects the number of vehicles in different regions over time. There are signs of vehicle saturation in most developed countries in North America and Europe. Annual growth rates are in the 1 per cent range. In Asia Pacific, however, the fleet is expected to nearly quadruple. By 2030, we expect to see hybrids in North America comprising approximately 10 per cent of the fleet, with hybrids approaching 30 per cent of all new vehicle sales in the United States and Canada. European hybrids supplement the already high share of diesel. Hybrids in Asia Pacific are mainly in the OECD countries (Japan, the Republic of Korea, Australia and New Zealand). In assessing the fuel demand for light duty cars across regions, significant improvement is foreseen in the basic efficiency of new cars, as well as growth in the numbers of hybrid and diesel vehicles. This will reduce the impact that a larger number of vehicles will have on fuel demand. For Figure 12.9 Vehicle Fleet

Source: ExxonMobil.

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Figure 12.10 Vehicle Fuels

Source: ExxonMobil.

example, North American fuel demand for light duty vehicles will likely remain the same in 2030 as it was in 2000 due to efficiencies and growth in the number of hybrids on the road. In Europe, light duty fuel demand should decline by 2030. While the Asia Pacific fleet quadruples in size, efficiency and favourable changes in fleet mix are expected to hold fuels growth to about triple 2000 levels. While global demand for oil will continue to rise through 2030, what trends can we anticipate in oil supply? Figure 12.11 shows conventional crude and condensate resources around the globe. This resource estimate is a technical assessment developed by ExxonMobil’s geo-scientists and engineers. Global conventional oil resources are estimated to total 3.2 trillion barrels (TBO), with nonconventional “frontier” resources such as oil sands bringing that total to over 4 trillion barrels. These numbers include discovered and undiscovered resource estimates. They also contain a “growth” component that reflects the well-established tendency of resource estimates to increase over time. From the beginning of its history through 2004, the energy industry has produced about 1 trillion barrels, leaving more than 2 trillion barrels of conventional resources still to be produced (shown in the darker section of

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Size: 6" x 9"

J/No: 06-13793

3/27/07, 9:42 AM

Fonts: AGara, Aurora & Helv.

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Figure 12.11 Conventional Oil Resources — 2005

Source: ExxonMobil.

the bars). Almost every region of the globe has more conventional crude and condensate remaining than what has been produced. The Middle East and the Russia/Caspian region have the largest remaining resources. Only North America is beyond the 50 per cent produced point. Figure 12.12 shows global liquids production from 1980 to 2030. The large slice at the bottom is non-OPEC crude and condensate, with nonOPEC oil sands shown by the small section at the top of this large slice. The next two layers — OPEC condensate and global natural gas liquids — will increase as natural gas production increases. The layer labelled “Other” includes volume gains in refinery processing, gas-to-liquids production and a small amount of liquids from shale and coal. The last slice, bio-fuels, is expected to increase with time. The line at the top shows total global liquids demand, with the gap in the middle representing the contribution that will need to be filled by OPEC crude oil. Today’s OPEC crude production, inclusive of Iraq, is about 30 MBD. Post-2010, the need for OPEC crude production will grow, rising to 47 MBD by 2030. It is believed that the resource base will support this increase, assuming that investments in development are made in a timely fashion.

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Figure 12.12 Worldwide Liquids Production

Source: ExxonMobil.

TECHNOLOGY ESSENTIAL TO MEET SUPPLY CHALLENGES ExxonMobil’s outlook envisions liquids production increasing throughout the next twenty-five years. The resource base will grow not only from new discoveries, but also from increases to known reserves. Technology will underpin these increases. Extended reach drilling, advanced reservoir imaging and enhanced recovery techniques enable us to find, reach and produce resources in ways not possible just a few years ago. For example, the photo in the upper left of Figure 12.13 is from Sakhalin Island in eastern Russia. The rig shown is the world’s most powerful land rig, drilling extended reach wells 5–6 miles (8–9.7 kilometres) horizontally to access oil and gas beneath the sea. One of the technical tools that allows optimum development of locations like Sakhalin is advanced reservoir imaging. The sophistication of this imaging continually improves. Finally, the graph at the lower right (Figure 12.13) shows the production history of the Means Field in Texas, a field that has produced for decades. At one time, estimated recovery was approximately 25 per cent. Enhanced recovery techniques have repeatedly stretched our assessment of Means potential — with a recovery factor of at least 40 per cent now expected.

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Figure 12.13 Technology Essential to Meet Supply Challenges

Source: ExxonMobil.

Technology has been, and will remain, essential to meeting our global supply challenges. Experience has taught us that technology evolves and reserves grow with time. GAS DEMAND — REGIONAL SPLIT Like oil, natural gas demand around the world is expected to grow at a steady pace through the year 2030. ExxonMobil believes natural gas will have on average a worldwide growth rate of 1.8 per cent per year. North American demand is expected to grow slowly at 0.5 per cent a year. Ongoing efficiency gains and competition from other fuels (coal, nuclear) will dampen growth. In the latter part of this time period, new gas developments are expected to become more challenging, further from the market and thus more costly. Because of this, coal is expected to become more competitive with gas in power generation. A re-emergence of growth in nuclear power around 2020 is also anticipated. In Europe, gas demand is expected to grow at 1.5 per cent per year, driven particularly by increases in power generation.

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Asia Pacific’s natural gas demand growth is significantly higher than that of North America and Europe. With steep increases in the use of natural gas for electric power generation and heating, Asia Pacific’s demand will grow 3.6 per cent per year. Today, Asia Pacific uses far less natural gas than North America or Europe. But by 2030, Asia Pacific’s daily natural gas needs will be on par with North America at 90 billion cubic feet per day (BCFD). As demand continues to grow, natural gas imports will become increasingly important to North America, Europe and Asia Pacific. Long-distance imports of liquefied natural gas, or LNG, will be required to bridge the gap between local supply and demand. For example, domestic production in North America is expected to decline over time. LNG imports (see Figure 12.15) are expected to increase to about 25 per cent of supply by 2030, even with additional supplies via the Alaska pipeline. Europe’s production also declines across this period, and imports increase to approximately 85 per cent of supply, with LNG making up a significant portion of those imports. Asia Pacific already relies on LNG to supplement its local gas supply. Imports remain at about one-third of supply through 2030, but volumes increase substantially with the overall growth in demand. These multiple centres of demand will be accompanied by growing diversity in LNG supplies. Figure 12.14 Gas Demand — Regional Split

Source: ExxonMobil.

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Figure 12.15 Growing Reliance on Gas Imports

Source: ExxonMobil.

COAL DEMAND — REGIONAL SPLIT Like gas, much of the increased demand for coal is related to power generation to meet growing electricity demand. In North America, coal use for electricity generation continues to grow due to favourable economics, while its use for heat continues to decline. In total, average growth of about 0.4 per cent per year is expected. In Europe, coal demand is down from the levels in the 1980s and has been relatively flat since the late 1990s. Demand is expected to remain flat, as it will continue to be very challenging to build new coal plants from a regulatory standpoint in most parts of Europe. In Asia Pacific, coal demand continues to grow rapidly, as with other energy types, at just over 3 per cent per year. This growth will be reinforced by Asia Pacific’s massive indigenous coal resources. POWER GENERATION — REGIONAL SPLIT Power generation will remain a critical driver of demand. Considerations for fuel use in power generation differ by region, but they include economics, government policy and security of supply.

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Figure 12.16 Coal Demand — Regional Split

Source: ExxonMobil.

Figure 12.17 Power Generation — Regional Split

Source: ExxonMobil.

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North American gas demand for power generation will grow through 2020, but after that, most growth will be met by coal and re-emerging nuclear power. The situation is similar in Europe, where natural gas use will grow through 2030, though more slowly post-2020 as new nuclear plants and more efficient technologies are brought online. The substantial growth in Asia Pacific’s electricity demand will result in nearly all fuel inputs increasing, but none more than coal. TECHNOLOGY CRITICAL TO EFFICIENCY IMPROVEMENTS The growth of oil, gas and coal usage around the world will lead to increases in CO2 emissions. Close to 85 per cent of the increase in CO2 emissions will come from developing countries where economic growth and improved living standards are creating huge increases in energy demand. The application of technology can create significant improvements in the way we use fuels — even traditional fuels such as gasoline. These improvements will assist in reducing demand for energy as well as reducing the level of emissions growth.

Figure 12.18 CO2 Growth — Primarily Non-OECD

Source: ExxonMobil.

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Figure 12.19 Technology Critical to Efficiency Improvements

Source: Stanford University.

Ongoing efficiency improvements are embedded in ExxonMobil’s demand forecast. One large and relatively easy to measure efficiency relates to vehicles. Advancements in internal combustion engines are assumed, as well as a significant penetration rate for higher efficiency vehicles like hybrids, which will significantly dampen demand growth. ExxonMobil’s confidence stems from its ongoing involvement in research efforts with major manufacturers to optimize the combustion process in today’s fuel and engine systems, which can significantly improve their efficiency potential. ExxonMobil is also on the forefront of developing advanced fuels that will be ideally suited to meet the needs of these advanced vehicles. In addition to its own significant research activities, it is also active in sponsoring and participating in a wide range of energy research programs at universities and other institutions. Its involvement with the GCEP initiative headed by Stanford University is just one of these important efforts. It is also involved in the U.S. Department of Energy’s Freedom Car and Fuel Partnership. THE OUTLOOK FOR ENERGY TO 2030 In summary, by 2030, global energy demand will increase close to 50 per cent versus current levels to approximately 335 MBDOE, driven by economic progress and population growth. The vast majority — approximately 80 per

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Figure 12.20 The Outlook for Energy to 2030

Source: ExxonMobil.

cent — of the increase in energy demand will occur in non-OECD nations. As demand rises, energy efficiency will become increasingly important, with the pace of improvement likely to accelerate. Oil, gas and coal will remain predominant energy sources with roughly an 80 per cent share of total energy: • • •

Oil resources are adequate with growing contributions from OPEC, Russia/Caspian. Gas resources are adequate and diverse with increasingly distant supplies driving LNG growth. Coal resources remain fundamental to support rapidly growing nonOECD needs.

Lastly, technology advances will remain critical to successfully meeting the significant energy supply and demand challenges ahead. NOTE 1

The Organization for Economic Cooperation and Development consists of Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Republic of Korea, Japan, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, the UK, and the United States.

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13

India’s Energy Situation: The Need to Secure Energy Resources in an Increasingly Competitive Environment Ligia Noronha

INTRODUCTION India is emerging as a significant economic presence in the world, and is also quickly becoming a force to contend with in world oil demand, given its needs both in terms of volumes and import dependence. The country is not self sufficient in energy, and while it has large coal resources, difficulties in access to coal reserves and low productivity have increasingly led it to import coal in recent times. Its oil dependence and the high oil prices over the last year have increasingly put energy security issues at the top of the policy agenda. This domestic priority has also tended to spill over into the foreign policy domain as it is increasingly becoming clear that securing energy requires a greater engagement with both producers and consumers of energy if energy supplies are to be augmented and an overtly competitive environment is to be avoided.

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This chapter briefly analyses the current and future energy situation in India, the perceptions of risk and competition that are linked to its high hydrocarbon dependence, the strategies followed to manage risks and competition, and the author’s strong recommendation that collaboration is the only way forward to create a greater global energy security. Section 2 of the chapter reviews the energy situation in India. Section 3 discusses the perception of risks and competition. Section 4 looks at the management of risks and competition, and Section 5 discusses energy collaborations as the way forward. INDIA’S ENERGY SITUATION India’s energy situation can be characterized as one with a high energyGDP elasticity, a low average per capita energy consumption relative to that of the world (one fifth), a high dependence on traditional energy resources in rural areas (up to 75 per cent), whilst in urban areas, it is lower, at 22 per cent. This dependence carries with it both environmental and health implications of using these sources. Moreover, one fifth of its population is still unserved by electricity resulting in difficulties in creating jobs, access to schooling, and low productivity. The big oil guzzler in the Indian economy continues to be the transport sector which currently consumes 46 per cent of the total oil consumption, but which is set to rise over the next thirty years, given the low policy emphasis on developing good quality public transport, and a modal preference of road over rail transport. Over 80 per cent of passengers and 60 per cent of freight were moved by road. There was personalized transport was used rather than mass transit systems. Current low vehicular and car ownership but rising aspirations of a fast growing middle class only fuel this demand further. India’s primary commercial energy mix in 2004 is divided thus: Coal provides 54.5 per cent of the national total energy requirements as domestic availability plays a key role in this high usage. Coal has an upper hand over imported fuels, and diminishes risks from fuel security and exchange rate uncertainties. However, although it in principle has large coal reserves, the bulk of these are not extractable at current technology. It is estimated that only about 20 per cent of coal reserves can actually be extracted, opening up a new front of energy insecurity. Moreover, the high ash content, the low calorific value and inadequate transport capacity are problems that are increasingly leading imported coal to become a preferred option for a number of power plants in India. Petroleum provides 31.7 per cent of the commercial energy mix. India uses more than two-and-half times as much oil as developed

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countries per unit of GDP as per the estimates of the International Energy Agency, and more than 75 per cent of oil consumed is imported. Natural gas contributes 7.7 per cent to the energy mix, but it is poised to rise in importance in the Indian energy mix, given the recent gas finds; hydroenergy supplies 5.1 per cent; and nuclear energy is only 1 per cent, but will expand given its clean image. The difficulties with nuclear energy, however, relate to the key associated issues: Safety considerations, relative economics of nuclear power, and access to fuel given that India has, for a large number of years, been the target of a global nuclear technology blockade or denial regime because of its decision not to sign on to the Non-Proliferation Treaty. Renewables contribute about 4.5 per cent of total installed capacity, of which wind power is about 2.25 per cent. Thus the Indian energy economy has in it both aspects that relate to poverty, and those that relate to growth. The former refers to its dependence on traditional bio-mass as energy sources and low access to energy services, and the latter to the dependence on hydrocarbons, and increasingly imported hydrocarbons that can serve as constraints to growth. This in turn has implications for how energy needs to be secured. Given the desired 8 per cent annual growth, energy needs must rise at 5.9 per cent annually. The investments in energy and related infrastructure would need to be 5 per cent of India’s GDP in 2003. Looking ahead, the IEA has the projected an energy mix for India for 2030 which suggests a move from coal to petroleum and natural gas, and minor shifts to nuclear and renewables. (Figure 13.1) A high dependency on oil imports is also projected. The situation thus is a difficult one that requires a careful assessment of options and planning of strategies. PERCEPTIONS OF RISKS AND COMPETITION India’s perceptions of risk and competition relating to the energy situation are linked very much to its hydrocarbon dependence and the situation that this dependence creates. On the one hand, oil demand is increasing. On the other hand, unless alternative oil sources are found, the dependence on OPEC oil from West Asia will grow considerably, so that this group of exporters would have to almost triple their supplies from the 19 million barrels per day in 2002 (IEA). This is even more likely given the decline in OECD (North Sea, Canada, Alaska) production in 2005. It is this changed supply-demand balance, along with a perception of an increasingly politically troubled West Asia, that creates a sense of urgency to control access to oil supplies, be it through supply contracts or equity oil. This section briefly discusses the hydrocarbon context within which India is making its choices.

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Figure 13.1 Looking Ahead — India’s Commercial Energy Mix in 2030

Natural Gas 14% Renewables 1%

Nuclear 2%

Oil 36%

Hydro 2%

Coal 45% Source: International Energy Agency (IEA)

•

High Oil Intensity of the Indian Economy The relative oil intensity, that is, the amount of oil used per unit GDP for India in 2002 was 288, as compared to 100 in OECD countries or Brazil, which was 142 (IEA). Relative Oil Intensity in 2002 OECD – 100 Brazil – 142 China – 232 Africa – 234 Thailand – 237 India – 288 Source: IEA

So unless this high oil intensity is tackled, increased output will be accompanied by increased needs for oil, and at rates that are higher than other countries. •

Dependence on Oil Imports India’s oil needs are increasingly coming from outside the country. While domestic production has remained constant at around 33 mmt, imports

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have been rising continously. The sharp up-turn in imports is witnessed at the turn of the millenium, and has coincided with the rise in oil prices. India’s oil import dependency in 2005 was 75 per cent; by 2030, according to IEA projections, it would be 94 per cent. This is also supported by TERI’s in-house projections in a business-as-usual situation. •

High Crude Oil Prices and the Expectations that such High Prices would Last for some Time The period since the new millennium has witnessed a sharp rise in oil prices from US$18/bbl in November 2001 to US$70/bbl at the end August 2005 and hovering at about US$67/bbl in early September 2006. This increase in prices is fuelled by an increase in the global oil demand arising from robust economic growth of countries such as the United States, China, and India. This increase in oil demand has been unmatched by an increase in supplies due to an under-investment in slack production capacity. Economic and political processes have squeezed out slack capacity, resulting in oil markets that have to operate with tighter supply margins. The Since general expectation is that prices will remain high for at least the next three years, as releases from

Figure 13.2 Production and Imports of Crude Oil over the Years 140 120 100 80 MT 60 Imports

40 20

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

1997-98

1996-97

1995-96

1994-95

1993-94

1992-93

1991-92

1990-91

0

Production

Ye a rs

Source: MoPNG (2005); TEDDY 2004–05, forthcoming.

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strategic reserves, or small increases in production from producer countries’ slack capacity may produce but small price falls. Political uncertainty may push the prices beyond what the supply and demand factors would dictate. The price situation is unclear beyond this period., There are those who argue that oil resources have peaked, and that we are witnessing an end of the oil era, while there are those who say that it is but a lack of investment in production capacity. •

Concentration of Oil Import Sources Most of India’s imported oil comes from West Asia (68 per cent), followed by 23 per cent in Africa, 4 per cent from Southeast Asia, and 4.5 per cent from Central America. Many of the countries from which India imports are faced with instability either from within or from external souces. Hence the worry that external or internal factors could result in a stoppage of oil supply holding up the country’s economic growth. The other worry is a potential choking off of India’s key transit route — the Straits of Hormuz as all of its imports through the Persian Gulf (which are about 60–70 per cent of our total imports).

•

Concentration of Oil and Gas Sources The other important aspect of energy security policy making is that most of oil and gas resources are in West Asia, followed by Russia and North Africa. Dependence on OPEC oil from the West Asia is expected to grow considerably,. This is even more likely given the decline in OECD (North Sea, Canada, and Alaska) production in 2005 . India thus sees the need to engage more proactively with countries in West Asia, and also with Russia and Central Asia. However, the issue of access to these countries with oil resources is also mired in geo-politics. The Caspian Sea is attracting major interest for both China and India for its oil and gas resources. But the region is still a difficult one to access, given the geopolitics of the region and Russia’s strategic interests in including this region into its security system; the absence of a clear international legal regime on resource ownership centred around the issue of whether it is a sea or a lake; the absence of well-developed institutions to ensure oil development is smooth and able to instill confidence in international investors. Moreover, while the newly-independent states of Kazakhstan, Azerbaijan and Turkmenistan are eager to develop resources and create international linkages for their prosperity, the region needs access routes to global markets for its energy resources. Thus, given these difficulties,

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the immediate future creates a need to continue a keen engagement with West Asian countries, while exploring for opportunities to secure oil and gas elsewhere. SUMMARY Perceptions of risk and competition are linked to the following factors: High dependence on oil imports and high oil intensity of the economy make India vulnerable to the high international oil prices; concentration of its oil import sources makes India vulnerable to geo-political factors that may be well beyond its control. The increasing difficulties of finding oil are also adding to the concerns. In addition, the choice of strategies to secure oil by oil importing countries also seem to reflect their perception of their own their political and economic vulnerability in the international context. Thus, those who feel more threatened by possibilities of embargoes, containment, blackouts, and supply disruptions are becoming more statist and inclined towards bilateral and regional alliances, ; while those less so are more market-oriented in their strategies to secure oil for the economy. India too, is responding to this mode of ensuring cover through responses that are not strictly market-oriented. A number of diplomatic and economic initiatives have been launched to address issues of energy security, strongly highlighting the links between energy security and foreign policy interests. New instruments to tide over oil insecurity in the short term include trading in oil futures, and developing strategic reserves. MANAGING RISKS AND COMPETITION Managing energy security risks have involved multiple strategies and actors (domestic and foreign). Domestically, not only have the national oil companies stepped up their activities, but the quest for engaging private players through bids under the New Exploration Licensing Policy (NELP) goes on and seems to be making some inroads. Several international as well as private players have gotten involved and are increasingly showing greater interest as some exploration successes have been achieved. Domestic strategy also focuses on the domestic potential for other energy sources; a greater focus on natural gas, coal, hydro and nuclear energy; more attention to local renewables; and reducing energy requirements. Another was a plan to set up a strategic crude oil reserve in order to provide a fifteen-day buffer. Plans are also afoot to diversify energy imports to natural gas and coal. Externally, a key measure has been strategic diversification of oil supply sources and tying up with new supplier countries. India has also been involved

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in a number of diplomatic initiatives, which have involved creating spaces for dialogues between producer and consumer countries in order to increase trust and reduce investment risks. The year has also witnessed a vigorous attempt at the acquisition of equity oil in other countries, with a view to enhancing the oil security of the country. The Government of India aims to produce 20 million barrels of equity oil and gas abroad by 2010. It has been able to establish its presence in Africa, Asia and Latin America, and is actively pursuing opportunities towards acquiring equity oil abroad in Central Asia and the Caspian Sea, Sudan, and West Africa. OVL Videsh Ltd, the overseas arm of ONGC Ltd, along with other national oil companies, such as the OIL, the IOC (Indian Oil Corporation) Ltd, and GAIL (India) Ltd, are pursuing this objective. OVL has acquired properties in Vietnam (gas field, 45 per cent share), Russia (oil and gas field, 20 per cent share), and Sudan (oil field, 25 per cent share). Production from Vietnam and Sudan is around 7.54 million standard cubic metres per day of gas. Sometimes, searches for equity oil have led India into competing against China. Examples include Angola, where China beat India in the race with offers of aid; Indonesia, when OVL lost stakes in five oil fields to China. More recently, the battle for PetroKazakhstan, where China again beat India in the final race to the post, illustrates this competition. Realizing that this competition is only pushing up the bid prices, the new mood is to work together with China. Some positive signals have also been coming from China in this regard. More broadly, energy cooperation is being perceived as part of larger strategic cooperation, involving trade and environmental issues. Pipeline diplomacy has also been in the limelight again. India has basically four trans-border pipelines that it has been interested in: The Iran-PakistanIndia pipeline, the Turkmenistan-Afghanistan-Pakistan-India pipeline, the Myanmar-Bangladesh-India and the Bangladesh-India pipelines. IRAN — PAKISTAN-INDIA PIPELINE The proposal to lay a pipeline from Iran via Pakistan to India and connect the South Pars gas field in Iran with the HBJ pipeline in India was first made in 1989 by R.K. Pachauri, director general of TERI, and A.S. Ardekani, who later became Iran’s deputy foreign minister. It is expected to run almost as a straight line through 1,100 kilometres in Iran and 760 kilometres in the state of Baluchistan in Pakistan, before it reaches the Indian border in Rajasthan. The total length is expected to be 2775 kilometres. The US$7 billion pipeline is to supply 90 million standard cubic metres of gas to India and 50 MMSCMD to Pakistan. There have been various security, political,

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and economic concerns related to the project, such as unrest in Baluchistan, high transit fees requested by Pakistan, the price of gas to be charged by Iran, and the issue of U.S. sanctions for investments in Iran. These issues are still creating difficulties for a speedy resolution of this pipeline, and the pipeline is in and out of the news in India. TURKMENISTAN — PAKISTAN-INDIA PIPELINE The Asian Development Bank is supporting and actively pursuing the development of the 1,600-kilometre pipeline to transport gas from the Daulatabad gas field. Originally, this pipeline was to end at Pakistan. However, to make the project viable, India was also asked to join in the pipeline. This pipeline is the most favoured by the United States, but it does not make good economic sense for India as compared to the Iran pipeline. MYANMAR — BANGLADESH-INDIA PIPELINE India has also been keen to import hydrocarbon resources from Myanmar and more so with the discovery of 4–6 TCF gas field in Myanmar’s Rakhine State last year in which Indian state-owned companies, Oil and Natural Gas Corporation and Gas Authority of India, have 20 and 10 per cent shares respectively. This project is bogged down due to three conditions laid down by the Bangladesh Government: The need for India to give transit facility to Bangladesh for Nepal; the access to hydro-electricity from Nepal and Bhutan; and the reduction of trade deficits between Bangladesh and India. BANGLADESH — INDIA PIPELINE Given the potentially large natural gas reserves in Bangladesh, India has been keen to source gas from Bangladesh. A pipeline from gas-rich Bangladesh to India has also been proposed. However, these plans have been stalled for the time being due to various concerns in Bangladesh about the actual size of these finds and the demand of gas in the domestic market. These pipelines have a lot going for them, not just in terms of managing energy security risks, but also in terms of the greater linkages that they create between countries in this region, and thus the potential to increase economic and political relations. The way to work around the security concerns is to increase the number of stakeholders, interlock and thus spread risks. Some ways in which this can be done are: •

Gas pipelines can and should be financed largely by international stakeholders.

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Arrangement for excess supplies; converted into LNG and supplied to Japan and Korea, making them major stakeholders. Part of the gas that is supplied to India can be used for power generation, and the electricity produced supplied entirely to Pakistan. India should pay only for the gas that is actually received. The gas supplier would then be in a position to pressure the transit country, because it would lose revenue for supplies that do not take place.

CONCLUSIONS Collaboration — the Way Forward Energy security concerns are thus linked to the need to ensure a continuous availability of energy at prices that the country can afford. These concerns are currently exacerbated by a growing sense of competition and the feeling that one needs to tie up resources as quickly as possible to ensure that the country’s needs are covered in the event of either economically or politically induced shortages. While diversifying, and especially planning for a longer-term end to the hydrocarbon domination through a greater dependence on energy efficiency and renewables in the short term, it is important to eschew energy securing strategies that are competitive. Such strategies can only bid up prices of oil properties, and even result in conflict situations, create distrust, and greater global insecurity. Energy-securing strategies should not be viewed in zero-sum terms, and preemptive actions should be avoided. Rather, transnational energy infrastructure projects should be seen as ways to strengthen bilateral economic and political ties. What is needed is collaboration and partnership, and the building of trust. It is increasingly evident that for energy-securing strategies to succeed, energy security concerns need to be integrated into foreign policy making, which in turn needs to be more imaginative and bold so as to ensure that what follows is a not greater conflicts and global insecurity. Building trust, for example, will need greater dialogues with oil producers and consumers. The former Indian Petroleum Minister, Mani Shankar Aiyar’s proposal for a panAsian gas grid, stretching from Russia and Central Asia in the West through South Asia to Japan and Korea in the East to link producers with large consuming countries, is a bold and imaginative plan that would do much to help connect the region. Beyond this, countries should share new technologies in cleaner conventional fuels and in renewables; and support policies of engagement and not isolation of countries in West Asia, given that they are the key energy providers in the short and medium term.

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Implications and Impacts of China’s Rising Oil Demand on the Asia Pacific Kang Wu and Caleb R. O’Kray

INTRODUCTION China is currently the world’s second largest energy producer and consumer after the United States. At present, the country is self-sufficient in its coal supply1 but is a large and growing oil importer. For natural gas, China started importing its first cargo of liquefied natural gas (LNG) in 2006 and the overall imports of natural gas are projected to increase steadily over the coming decade. In terms of volume and import dependence, however, the large and widening gap between the overall oil demand and its own oil supply is a much bigger energy security concern for China and a growing concern for the rest of the Asia-Pacific region as well. In this chapter, we will analyse the current situation and future prospects of China’s oil demand, and assess their implications and impacts on the AsiaPacific region. The rest of the chapter is organized as follows. Section 2 reviews the economic issues concerning China and Asia. In section 3, oil market issues in China are reviewed, where we present our views on China’s oil demand, supply, and trade. Section 4 and 5 focus on the implications and

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impacts of the Chinese oil demand on the Asia Pacific, followed by concluding remarks in Section 6. THE ECONOMY AT PRESENT China is the largest developing country in the world in terms of not only population but also its economy size. The strengths of the Chinese economy are evident in a number of areas. First of all, China’s economic growth is among the fastest in the world. Secondly, China’s foreign trade has been growing at spectacular rates over the past two decades and it continues to expand. Thirdly, China is the largest recipient of direct foreign investment in the developing world, which supports growth in its industrial and manufacturing sectors. Fourthly, China is running large foreign exchange reserves. In fact, China is surpassing Japan now to have the highest foreign exchanges reserves in the world. Last but not the least, China’s low-cost labour supply is abundant, which may help sustain the country’s long-term growth. Despite all these strengths, the weaknesses of the Chinese economy are also obvious. These weaknesses include, but are not limited to, the following areas: • •

• • • • • • •

China still has a low per capita GDP, which places the country in the “lower middle income” group by the World Bank.2 Regional inequality is rampant, with western China being far less developed. Currently the official per capita GDP in the Guizhou Province is one-tenth of Shanghai’s, and about a quarter of Beijing’s.3 Reform of state-owned enterprises needs to continue. The banking system is still very fragile. Unemployment becomes serious if the floating and under-employed rural population is considered. A functional and effective social security system needs to be established. Political reforms are needed, while China is far from completing this. Environmental and ecological problems are widespread, associated with the fast economic growth. Challenges abound in the energy sector and energy economic development.

In the Asia-Pacific region, China is the second largest economy after Japan in terms of conventional GDP (Figure 14.1).4 If the purchasingpower-parity is used for measuring GDP, the World Bank has placed China far ahead of Japan while India’s total GDP was also significantly higher (Figure 14.2). China also had the fastest growth among major Asian countries

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in 2004 (Figure 14.3). On a per capita basis, China ranks much lower on the basis of conventional GDP (Figure 14.4). While for the PPP-based GDP China’s per capita data become several times larger, it is still far below that of the developed countries and newly industrialized economies in the region (Figure 14.5). Figure 14.1 Real Conventional GDP in Selected Asian Economies, 2004 (US$ billion) Vietnam Bangladesh Philippines Pakistan Singapore Malaysia Hong Kong Thailand Indonesia Australia Korea India China Japan 0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

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5,000

Source: World Bank, World Development Indicators 2005.

Figure 14.2 PPP-Based GDP in Selected Asian Economies, 2004 (US$ billion) Singapore Hong Kong, China Vietnam Malaysia Bangladesh Pakistan Philippines Thailand Australia Indonesia Korea Rep. India Japan China

0

1,000

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Source: World Bank (2005), ibid.

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Figure 14.3 Annual Growth Rate of Real GDP in Selected Asian Economies, 2004 Japan Australia Korea Rep. Indonesia Bangladesh Thailand Philippines Pakistan India Malaysia Vietnam Hong Kong, China Singapore China

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

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Source: World Bank (2005), ibid.

Figure 14.4 Conventional Per Capita GDP in Selected Asian Economies, 2004 (US$) Bangladesh Vietnam Pakistan India Philippines Indonesia China Thailand Malaysia Korea Rep. Hong Kong, Singapore Australia Japan 0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Source: World Bank (2005), ibid.

The present population size of India (second worldwide only to China) coupled with its high population growth rate suggests that oil demand will steadily increase. China’s immense population at present coupled with its industrial growth has caused China to become the world’s second largest primary energy consumer. Although its growth rate has been down for the past few years, it will take some time for China’s population to level off.

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Figure 14.5 PPP-Based GDP Per Capita in Selected Asian Economies, 2004 (US$) Bangladesh Pakistan Vietnam India Indonesia Philippines China Thailand Malaysia Korea Rep. Singapore Japan Australia Hong Kong, China 0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Source: World Bank (2005), ibid.

An inspection of the current GDP and GDP trends also sheds light on the demand for oil in the Asia Pacific. Increased oil demand and consumption tend to accompany the escalation of living standards, as gauged by GDP growth. The fact that many of the countries are experiencing GDP growth rates above six per cent suggests that their industrial production will surge, increasing domestic oil demand. While many of the countries in the AsiaPacific region may have low GDP per capita in comparison to the rest of the world, their high growth rates have precipitated industrialization and other forms of economic expansion, bolstered principally by oil consumption. Oil may not be a sufficient cause for economic expansion, but it appears to be a necessary one in the twenty-first century. The known (and potential) stock and source of oil is a substantial factor for determining whether competition or cooperation will reign in the Asia Pacific. China already has investment interests in various regions with proven oil reserves, such as Northern Africa, Russia, Central Asia, the Middle East, and Latin America.5 It also began investment in oil-rich areas of western Canada. As demand rises in the Asia Pacific, conflicts may escalate. China is engaged in an ongoing dispute with Japan over pipeline courses in southeastern Russia and oil drilling rights in the East China Sea. As economic development continues throughout the Asia Pacific, new competition will inevitably ensue. Nevertheless, new stocks of oil and increased demand may provide incentives for cooperation.

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OUTLOOK FOR OIL DEMAND, SUPPLY, AND TRADE IN CHINA China’s oil demand has been growing rapidly, while the growth of the country’s domestic oil production has been slow. The results have been rising oil imports since the early 1990s. China’s oil production growth slowed considerably in the 1980s, followed by further stagnation in the 1990s. However, since the 2000s the production growth has been accelerated, thanks in part to higher oil prices and enhanced exploration activities in China’s west and northwest, as well as the offshore area. In 2005, China produced 3.6 million barrels per day (b/d) of crude oil, up from 2.8 million b/d in 1990 and 3.2 million b/d in 2000. Petroleum product demand in China is characterized by spectacular growth — especially since the early 1990s. China has surpassed Japan in 2003 to become the largest oil user in the Asia-Pacific region and the second largest in the world after the United States. During the past two plus decades (19802005), petroleum product demand growth averaged 5.7 per cent per annum, in which growth accelerated to 7.4 per cent per year on average since the 1990s. In 2005, China’s total oil demand reached 6.5 million b/d, up from 2.3 million b/d in 1990 and 4.7 million b/d in 2000. China’s oil demand, supply, and trade petroleum sector and oil markets are expected to change continuously over the next ten to fifteen years. On the supply side, crude production growth from within China is expected to be moderate. For oil demand, the growth will be strong. Our forecasts under the base-case scenario indicate that total oil consumption (petroleum product demand plus direct use of crude) in China will grow at an average annual rate of 5.1 per cent during the period 2005– 15 and is projected to reach 10.7 million b/d by 2015 under our base-case scenario (Figure 14.6).6 These projections are made based on the following assumptions: •

•

•

China’s overall GDP growth is projected at 7.3 per cent per annum on average between 2005 and 2015. In constant 2005 U.S. dollars, China’s real conventional GDP is expected to increase to US$4.6 trillion in 2015, up from US$2.2 trillion in 2005. China’s population growth is projected at 0.56 per cent per annum on average. By 2015, China’s total population is expected to reach 1.38 billion, up from 1.31 billion in 2005. China’s per capita GDP is forecast to reach US$3,303 in 2015 (in constant 2005 U.S. dollars), up from US$1,703 in 2003.

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Figure 14.6 Oil Demand in China: Present and the Future (’000 b/d) 12,000 10,000 8,000 6,000 4,000 2,000 0 1990

1993

1995

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2010

2015

Source: FACTS Global Energy and author’s forecasts.

• • • • •

The transportation sector will be growing fast, which will be the major driving factor for the demand growth for gasoline, jet fuel, and diesel. The petrochemical sector in China will be growing rapidly, driving the demand for naphtha. LPG consumption in China will continue to grow, with the bigger demand centres in more interior provinces. Fuel oil demand will continue to grow but at a much lower rate than the demand for other fuels. The demand for specialized petroleum products such as lubricants, asphalt, waxes, petroleum coke and others, will be strong.

The projections under the base-case scenario are sensitive to the alternative assumptions. If the above assumptions change, China’s demand for oil may grow faster or slower, but the chances for the base-case scenario are much higher than alternative ones. On the supply side, China’s upstream oil industry faces a precarious situation, as production from Daqing and Shengli oil fields is stagnating, Huabei oil production is declining, and Liaohe field production is increasing only slowly. The hope for incremental production is likely to come from the West, offshore, and other marginal fields in the South. On an overall basis, China’s crude production is projected to grow steadily but slowly, reaching 3.8 million b/d in 2010 and 3.9 million b/d by 2015. As domestic production continues to lag behind demand, China’s net oil (including both oil and products) import requirements are expected to reach 5.1 million b/d in 2010, and 6.8 million b/d by 2015 (Figure 14.7). Out of

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these imports, the role of the Middle East, which is already important, will be rising steadily. REGIONAL IMPACTS OF CHINESE OIL DEMAND China’s oil demand and its needs for imported oil are rapidly growing. The impact on the Asia-Pacific region and the rest of the world at large can be examined from a number of areas. Impact on World Oil Prices China’s increased demand for oil is one of the driving factors — but not the only one — of surging world oil prices. Their rapid economic growth has caused a demand spurt which helps elevate world prices. China is an important contributor to the future growth of oil demand. In 2004, China contributed to 27 per cent of the incremental oil demand growth worldwide, though in 2005 the share dropped to only 17 per cent.7 In addition to the impact of the real growth of oil demand, investment activities, especially those of hedge funds, can artificially raise oil prices around the world. If investors see the rising demand from China, India, and the rest of the world as an opportunity to increase their hedging activities, world oil prices may escalate further. Present oil prices are in U.S. dollars per barrel. There is speculation whether OPEC and other oil-producing nations will change their currency basis to the euro or switch to a basket of currencies. Such a switch could have

Figure 14.7 China Crude Production and Net Oil Import Requirements (’000 b/d) 6,000 4,000 2,000 0 (2,000) (4,000) (6,000)

Crude Production

Net Oil Import Requirements

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(8,000) 1990

1993

1998

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2002

2003

2004

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2007

Source: FACTS Global Energy and author’s forecasts.

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a profound impact on world oil prices. The depreciation of the dollar over the past five years has increased the nominal oil prices. For instance, between 2001 and 2005, on nominal terms the U.S. dollar depreciated against yen by 17 per cent, against sterling pound by 21 per cent, and against euro by 34 per cent.8 Whither the dollar travels depends largely on the U.S. balance of payments, which, in turn, depends substantially on China’s trade balance. One can speculate whether China’s trade balance will fluctuate due to increasing oil imports. In this vein, China can affect the world oil prices through increased demand and consumption. On the supply side, global oil production capacity is strained due to lack of investment. In pushing for overseas energy investment, China’s global search for oil may help the supply curve. However, a substantial part of China’s overseas investment has been buying into the existing projects. More importantly, the overall results of these overseas investments are mixed and the amount of oil obtained by the Chinese oil companies is far below its growth of oil imports and is tiny as compared with the global oil demand. Impact on Regional Demand China is now the fastest growing country in terms of oil demand in the Asia Pacific region. Between 1995 and 2005, China’s oil demand was up by 3.3 million b/d, accounting for nearly 60 per cent of the net growth for the Asia Pacific region as a whole. China’s share in the region’s total oil demand rose from 18 per cent in 1995 to 28 per cent. Ten years from now, it is expected that China will account for 35 per cent of the regional total demand. It is clear that China is leading Asia’s oil demand growth and turning the Asia Pacific region into the fastest growing area among the three major oil consuming centres which also include North America and Europe. Impact on Regional Oil Imports and Energy Security China is currently the largest oil producer in the region. Spurred by high international oil prices, China’s crude oil production has been increasing at rates that are faster in the 2000s (averaging 2.2 per cent per year) than the 1990s (averaging 1.6 per cent per year). However, over the next five to ten years, China’s crude oil production is expected to grow only moderately. In other words, most of China’s rising demand will be translated into net imports for the country as well as the Asia-Pacific region as a whole. In 2005, China’s net oil imports (crude oil and products combined) amounted to 19 per cent of the regional total. Back in 1993 when it became a net oil importer for the first time, the share was only less than 3 per cent.

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By 2015, we expect that China’s net imports will account for over 30 per cent of the regional total. In fact, based on these forecasts, it will account for 60 per cent of the net growth in the region’s net oil imports between 2005 and 2015. China indeed is an important driver for the future growth of the AsiaPacific region’s net oil imports. Energy security is both an old and new issue in Asia. Ever since OPEC imposed a brief embargo against the consuming countries in the 1973, the world has since entered the era of volatility for oil prices and growing concerns of oil supply security. The Asia-Pacific region has several important economies that have deep dependence on oil imports. The region as a whole has particularly high dependence on the Middle East oil supply as compared to the U.S. and Europe, where the current shares of the Persian Gulf Supply are under 20 per cent and one-third, respectively, of their imports. With the rise of China and India, the new challenges facing many Asian countries are larger dependence on imported oil and higher reliance on the Middle East. China and India, together making up 40 per cent of the world population, have witnessed a growth unprecedented in its dynamic nature and fast pace. Even if demand growth in economies such as Japan, South Korea, and Taiwan is flat or moderate, the new energy security challenge is still enormous. REGIONAL IMPLICATIONS OF CHINESE OIL DEMAND The implications of the rising Chinese oil demand and imports for the Asia Pacific region vary from sub-region to sub-region, and eventually from country to country. We can divide the region into Northeast Asia, Southeast Asia, South Asia, and Australasia for further discussion. Implications for Northeast Asia Among all sub-regions in Asia and the Pacific, Northeast Asia has the highest oil dependence. Although China itself is a giant oil producer, its demand is bigger and growing fast. More importantly, Northeast Asia is home to several economies which have total or near total dependence on imported oil — Japan, Taiwan, South Korea, and North Korea. In fact, if China were excluded, the rest of Northeast Asia would still have a very high dependence on imported natural gas and coal.9 Because of the high dependence on imported energy in Northeast Asia outside China, energy security has been a top issue for these economies for decades. Over the next ten years, the oil demand in South Korea and Taiwan will continue to grow but at moderate rates. Oil demand in Japan is likely to decline continuously while North Korea plays only a minor role. As such,

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without China, the supply situation and demand needs in these economies may not change much over the coming years. However, the continuous growth in China is likely to change the picture, leading to potential competition between China and other Northeast Asian nations, and Japan in particular. The Sino-Japan disputes in the East China Sea over oil and gas exploration and production, and their rivalry in Russian Far East over the routing of Russian oil pipelines, in Iran over oil field development, as well as in Africa, are examples of the high tensions caused in part by China’s rising demand for oil. These competitions have been augmented by the deteriorating relationship between the two countries in recent years. The quest for secured oil supply can be a complicating factor for the cross-strait relationship too between mainland China and Taiwan. On the other hand, however, as China joins the ranks of the largest oil importers and since all Northeast Asian countries are energy import dependent, there is room for cooperation. The areas of cooperation include, but are not limited to, data sharing, transparency of energy policies, joint stockpiling of crude oil and refined products, and joint exploration and development of potential oil and gas fields. Despite the difficulties facing the Sino-Japan and cross-strait relationships and the tension in the Korean peninsula, some forms of cooperation, as outlined above, have been pursued by various parties but the progress has been slow. Implications for Southeast Asia South Asia is a mixture of important oil producers such as Indonesia, Malaysia, Brunei, Vietnam, and Papua New Guinea, as well as large major importers such as Singapore, Thailand, and the Philippines. Southeast Asia lies between the oil-rich Persian Gulf and the huge consuming centre in Northeast Asia. Over the next ten years and beyond, Northeast Asia’s oil demand will continue to grow, but the growth will come almost exclusively from China. That means, because of China’s growth, the oil flows through the Strait of Malacca and the South China Sea to Northeast Asia will continue to increase. As China continues to tap into alternative routes to import oil from the Middle East, it will create opportunities for Southeast Asian countries such as Thailand and Myanmar to build more infrastructures if new pipeline and tunnel projects are implemented. In terms of international trade and port services, Southeast Asia will benefit from increased oil trade between the Middle East and Northeast Asia. In the meantime, however, the major oil importers of Southeast Asia have to compete with China to get oil from the Persian Gulf and will face high oil

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prices over the long term. Another challenge for Southeast Asia is that its major oil producer and only OPEC member, Indonesia, is already a net oil importer and the net imports are growing. Malaysia manages to ensure a positive oil production growth, but may eventually become a net oil importer after 2010. Under these circumstances, the rise of China has created both opportunities and challenges for the Southeast Asian nations. Implications for South Asia Most of Southeast Asian countries are net oil importers. Like China, the energy security concern looms high in India too. The country’s oil import dependence is higher than China and is growing higher as domestic oil production is stagnated. India is also a coal and natural gas importer at present. Unlike Northeast Asia, South Asia is close to the Persian Gulf and Africa, giving them some advantages in sourcing their oil and gas supply However, India has also an overseas investment strategy that is similar to China’s, which lead them to competition ranging from Africa to Canada. On a positive note, India and China have found out that it will be to their advantage if they cooperate in the global oil and gas investment at least in certain areas. The desire to cooperate was bolstered by both governments in early 2006, when then Indian Petroleum and Indian Natural Gas Minister, Mani Shankar Aiyar, visited China. During the visit, China and India had agreed to exchange information when bidding in the international arena. Prior to the oil minister’s visit, India’s ONGC and CNPC jointly bid for a 38 per cent stake in the Al Furat Production Company, Syria’s largest oil producer in December 2005. The deal was the first full cooperation between the Indian and Chinese national oil companies. On an overall basis, a full competition or a full cooperation are both not the right reflection of the relationship between India and China. A mixture of both with competition being more dominant will continue to exist between the two countries. For Pakistan, the direct energy linkage with China is weak at present. However, Pakistan could benefit from China’s thirst for energy if the latter proceeds with the plan to build pipelines through Pakistan to import oil from the Persian Gulf. Implications for Australasia Australia is an important oil producer but the country is a net oil importer overall, as is New Zealand. While many other smaller Pacific island nations have relatively low oil consumption, they are all fully dependent on oil imports.

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As an exporter of crude oil (though also an importer at the same time), Australia benefits from the higher oil prices. In the long run, however, Australia’s net imports will grow. Higher oil prices have now led to higher natural gas prices. Australia is currently one of the major natural gas exporters in the Asia-Pacific region in the form of liquefied natural gas (LNG). In fact, Australia will become the first country to export LNG to China in 2006 as China’s first LNG terminal in Guangdong is ready to import gas from Australia’s Northwest Shelf this year. Beyond Australia and New Zealand (which also exports small volumes of crude oil, though importing more), the Pacific island countries are all passive takers of imported oil and are subject to international oil prices. As China’s oil demand increases and international oil prices rise, these island nations will face bigger challenges and continue to be vulnerable to supply interruptions and price spikes. While China has demonstrated its willingness to enhance economic ties and increase economic aid to some of the Pacific island countries as its influence grows, it is essential for the island economies to address energy issues at an early stage. CONCLUDING REMARKS In 1985, China was one of the largest oil exporters in Asia with a combined export of some 700 thousand b/d consisting of crude and refined products. In 2005, China’s net oil imports amounted to 2.9 million b/d. The net change was 3.6 million b/d. Over the next ten years, China’s net imports are likely to increase by anywhere between 3.0 to 4.0 million b/d. This projected incremental demand alone will be larger than the actual oil consumption of any single country in Asia except for Japan. The magnitude of change in China is having and will continue to have huge impacts on the Asia-Pacific region with important implications. These impacts can be seen in the areas of global oil prices as well as regional oil demand, imports, and energy security. The implications of China’s rising demand vary from sub-region to sub-region, and from country to country. The rise of China in the energy arena has created both challenges and opportunities for the region. The Asia-Pacific region as a whole is already the largest oil consuming and most oil import dependent region of the world, ahead of the United States and Europe. The rapid changes in China are pushing the region further ahead in terms of oil consumption and imports. As the region is already dependent on the Middle East for over 80 per cent of oil import needs, the situation will be more precarious as the role of the Middle East increases over time.

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NOTES 1 2 3 4

5 6 7 8 9

Other primary energy sources, such as hydro-electricity, nuclear power, biomass, and renewable energy are largely considered indigenous. See World Bank, World Development Indicators 2005. See National Bureau of Statistics of China (NBSC), China Statistical Yearbook 2005. For Figures 14.1, 14.3, and 14.4, the source of data is World Bank (2005), ibid. In January 2006, the NBSC made an unprecedented announcement to correct historical GDP data between 1993 and 2004. For 2004, the result was an increase of the GDP by 16.8 per cent from US$1.65 trillion to US$1.93 trillion, and the growth rate from 9.5 per cent to 10.1 per cent. Source: The NBSC website . See Kang Wu and Shair Ling Han, “Chinese Companies Pursue Overseas Oil and Gas Assets,” Oil and Gas Journal, 103, no. 15 (April 2005): 18–25. The past data for Figure 14.6 comes from FACTS Global Energy, Asia-Pacific Petroleum Product Demand Databook Fall 2005, Honolulu, Hawaii. See International Energy Agency (IEA), Oil Market Report: A Monthly Market and Stocks Assessment, 11 April 2006. These assessments are based on exchange rate data available from International Monetary Fund (IMF), available at . See Kang Wu and Batsaikhan Usukh, “Energy Cooperation in Northeast Asia: Role of Mongolia”, paper presented at Conference on Northeast Asia and Mongolia: Opportunities and Challenges, 8–10 November 2005, Honolulu, Hawaii, USA.

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15

Energy Security Cooperation in Asia: An ASEAN-SCO Energy Partnership? Christopher Len

INTRODUCTION Asia, which is understood to mean Central Asia, Northeast Asia, South Asia and Southeast Asia, is as a whole, set for a period of economic, population and urban expansion and this will mean higher regional energy consumption in the years to come, especially in China and India. The International Energy Agency’s World Energy Outlook for 2004 through to 2030, indicates that energy consumption in North East Asia is expected to amount to 3.5 billion tonnes of oil equivalent by 2030, a rise of around 1.5 billion tonnes over the next twenty-five years. China is mainly responsible for this projected increase in energy consumption. East Asia’s1 consumption — excluding China, Japan and South Korea — is projected to increase to 1.4 billion tonnes in 2030. Over the same period, India’s appetite for energy is also notably increasing. It is expected to consume as much energy as Japan and Korea combined by 2030.2 The following figure (Figure 15.1) shows the growing consumption of oil equivalent within Asia in comparison with North America, the European Union and Russia.

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Figure 15.1 East Asia and the World Energy Outlook, 2002–30

Source: IEA, World Energy Outlook, 2004.3

While the supply and demand of energy resources in Asia has a direct impact on the economic and political development of the region as a whole, energy cooperation among Asian countries has thus far been limited and far from ideal. Energy security is an issue of great importance in Asia and it is increasingly influencing the behaviour of Asian governments. In Asia, the role of the governments in addressing the energy issue is especially important since governments in the region retain considerable influence over their respective energy sectors through policies, regulation, ownership or investment.4 As a result, energy security decisions have not been left to market forces alone; instead, it requires a high and concerted level of political engagement by the respective governments. Energy security is in fact lodged within a larger framework of inter-state relations. In the case of Asia, intra-regional rivalry, unresolved territorial disputes and the lack of trust among Asian states as a result of historical animosity is currently restricting Asia’s ability to address its energy challenges collectively. This rivalry and distrust is adding to Asia’s energy security vulnerability as energy security today involves the need to address a multitude of threats that requires enhanced multilateral cooperation.

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While the Asian governments recognize the need to establish a multilateral energy security network to address Asia’s energy woes, many of the proposals have as yet to be implemented as it requires a concerted effort by all governments in order to make it work. Unfortunately, the lack of finance and the existing inter-state rivalry is an obstacle to such cooperation. A way to overcome the existing inaction would be to tap into existing institutions and expand their commitment to energy security and cooperation and to stimulate greater intra-regional cooperation through them. The two organizations suggested for such a task are the Association of Southeast Asian Nations (ASEAN) and the Shanghai Cooperation Organization (SCO). Both organizations can come together to form an ASEAN-SCO Energy Partnership. ASIA’S ENERGY SECURITY VULNERABILITIES Ironically, Asia’s ongoing quest for energy security is fuelling greater insecurity and uncertainty in the region. There has been increasing rivalry to secure energy supplies among the energy importing countries, the ones with the most significant regional repercussions being major net energy-importing countries, namely China, and increasingly India and Japan, all of which regard secure access to oil and gas as matters of national strategic consideration. Russia and the Central Asian states, on the other hand, have a significant proportion of the world’s primary energy resources and want to increase such exports; however, their use of such resources for geo-political leverage and hedging has also contributed to Asia’s security uncertainty. Asia’s energy security vulnerability is complex and wide-ranging. It extends beyond inter-state competition over resources to include other issues such as supply-chain vulnerabilities, questions on sustainable development and alternative energy strategies and over-dependence on Middle Eastern energy resources. Specifically, there are concerns about the long Sea Lanes of Communication (SLOC) in Asia — from the vast Indian Ocean to the Straits of Malacca and the South China Sea — that tankers transit to bring Middle Eastern oil and gas into Asia. Besides concerns about disruption of the supply route as a result of inter-state war,5 Asians also have to consider non-traditional threats such as terrorist attacks along the SLOCs or the disruption of maritime trade as a result of instability in Southeast Asia. On a related maritime issue, it should also be noted that some of the most serious territorial disputes in Asia are over offshore territories which are valued not only as Exclusive Economic Zones (EEZ) but because of large untapped oil and gas resources that are said to lie underneath the sea bed. Notable unresolved disputes where energy resources appear as a significant factor include the division of the

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Caspian Sea among Russia, Iran, Turkmenistan, Azerbaijan and Kazakhstan, and the East China Sea, between China and Japan, and the South China Sea, which is disputed between various countries. In Asia, growing energy demand, compounded by high energy prices, created new challenges for the governments struggling to maintain economic growth while preventing social and political unrest. Throughout Asia, there has also been growing interest in the use of nuclear energy as a source for generating electricity, but questions have been raised about the associated risks, such as nuclear proliferation, management of nuclear wastes and safety and management issues. Except for Japan, South Korea and Taiwan, oil stockpiling in the region is far from ideal and this affects the ability to weather sudden disruptions to oil imports. There is a lack of a collective petroleum reserve or stockpiling mechanism for the region, thus making Asia vulnerable in the event of a sudden constriction of supply, particularly from the Middle East, from where Asia imports most of its oil. Pollution stemming from the use of coal, oil as well as gas, is already recognized as a major environmental issue. There is also the issue of the “Asian premium” whereby an automatic surcharge of between US$1–US$2 is automatically levied on Asian importers by Middle Eastern oil producers, particularly Saudi Arabia. In addition, the Middle East is recognized as a volatile region and there are constant fears that supplies from the region could be disrupted as a result of inter-state war or terrorist attacks. One could note the multi-faceted nature of the energy security challenges facing Asia and how they are embedded within the larger Asian security framework encompassing geopolitics, economic, social and environmental policies. The growing uncertainty arising from Asia’s energy security stems from the following: the lack of coordination among governments on energy security issues, which is worsened by the zero-sum approach towards energy security by governments; competition over strategic resources within the region, especially between China, Japan, India and Russia; the lack of integration of the energy market in the region, even within sub-regions; the failure to develop quickly enough sustainable, efficient and environmentallyfriendly energy supply systems; over-reliance on oil and gas from the volatile Middle East; the vulnerability of the long sea lines of communication and lack of emergency preparedness in case of a sudden energy crisis. In sum, individual Asian governments, not to mention the region as a whole, are generally unprepared to meet tomorrow’s energy security challenges. This dismal condition can to a large extent be attributed to the lack of institutionalized cooperation among Asian governments in dealing with the region’s rising demand in energy consumption.

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BENEFITS OF A MULTILATERAL ENERGY SECURITY NETWORK IN ASIA Having mentioned energy security repeatedly, it is now important to define what this term means in the Asian context before proceeding further. There are in fact many different interpretations of what energy security refers to. At the basic level, it typically entails two concepts: availability (of supply and demand) and pricing.6 For exporting countries, energy security translates into the certainty of market demand in terms of quantity at predictable prices. For import countries, energy security can be understood as the availability of energy at all times, in sufficient quantities, and at affordable prices.7 However, such definitions denote energy security within the narrow prism of the market where energy resources are treated as mere commodities. Therefore, it is increasingly inadequate within the Asian context as it fails to reflect the strategic importance Asia governments attach to energy resources and the growing need for cooperation among Asia’s energy-hungry states, as well as with and among Asia’s energy exporting states. Thus, a broader definition is necessary in examining Asia’s energy policy within the context of security. Energy security in Asia is better defined as a stable, cost effective and sustainable supply of energy based on an efficient and environmentallyfriendly energy supply system, emergency preparedness and international cooperation.8 While such a definition reads like an antithesis of Asia’s present energy security situation, it nevertheless provides a suitable framework for addressing Asia’s regional energy security woes as it underlines the need for Asia to devise structural and technological responses, not to mention greater inter-governmental cooperation as the way to address its existing energy vulnerabilities. Ultimately, an Asian energy network should be supported because of the economic and security benefits it could bring. From an economic perspective: (1) it would reduce dependence on the Middle East and cut down on additional costs of the Asian premium; (2) it could facilitate higher levels of financial investment on energy projects in Asia while attaining better economies of scale because of better multilateral coordination and planning; (3) investors would regard the energy market potential from a wider regional perspective, rather than being restricted to the assessment of individual countries. This would draw more capital for the creation of an energy network. From a security point of view, there are significant potential benefits to be derived from multilateral energy cooperation due to the special nature of energy cooperation:9 (1) the construction of emergency stocks and the development of sharing mechanisms and information system for oil supply

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crises provide regional stability to the benefit of all; (2) the advancement of mechanisms to develop resources jointly in disputed waters and for deposits which straddle defined borders (for instance in the East China Sea and the Caspian Sea) would create norms for subsequent territorial settlements; (3) cooperation between states and civil societies to reduce the environmental impact of energy production and usage through the joint development on energy efficient and environmentally-friendly technologies and jointly addressing regional environmental issues relating to energy such as nuclear waste, acid rain, marine and river pollution and the emission of carbon dioxide (which leads to global warming), this would help facilitate exchanges leading to greater socialization; (4) the need to safeguard the energy infrastructure against terrorist attacks could enhance greater understanding and foster goodwill among the militaries of the various states; (5) energy cooperation would entail long-term commitments between governments underpinned by legally binding agreements which require closer and more frequent contacts between government officials on all levels, resulting in enhanced interaction. ATTITUDES TOWARDS REGIONAL ENERGY COOPERATION IN ASIA There is in fact already broad recognition among Asian governments that the region needs an energy cooperation network. In January 2006, India’s Minister for Petroleum and Natural Gas, Mani Shankur Aiyar, gave a speech in Beijing arguing that “Asian countries should speed up the establishment of an Asian Energy Community” and that it would contribute towards the establishment of an Asian Economic Community.10 At the roundtable for energy ministers11 organized by the Indian Ministry of Petroleum and Natural Gas in New Delhi, India in November 2005, the South Korean Minister of Commerce, Industry and Energy, Hee Beem Lee, was quoted as saying: “The work that is urgently needed is a master plan that links all the points in Asia through what can be called the ‘Inter-Asia Oil and Gas Transportation System’ ”.12 At the same event, participants endorsed a proposal to study the possibility of networking the countries of Central, South and East Asia and elsewhere through the Japanese initiative to promote a Sustainable and Flexible Energy System (SAFE).13 In fact, Japan already had preliminary thoughts about transporting gas from Turkmenistan in Central Asia, through China, into Japan as early as 1992,14 although it was later shelved.15 In April 2004, Japan also presented a concept for an “Asian Energy Partnership” through its Ministry of Economy,

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Trade and Industry (METI). This was aimed at developing cooperation among Asian countries in tackling common energy challenges — namely, a chronic lack of oil stockpiles, uncertainty of energy supplies, volatile prices, environmental challenges and energy efficiency, resource development and transportation — and serves as a main pillar of Japan’s strategy for international partnership on energy up to 2030.16 As for the Chinese, Exxon and China National Petroleum Corp (CNPC) announced in 1995 a joint study on the feasibility of building gas pipelines from Turkmenistan, across China into South Korea, ending in Japan.17 China in 1996 in fact developed a strategy for energy security called the Pan-Asia Continental Oil Bridge involving the Middle East, Central Asia, Russia, South Korea and Japan. The plan is to establish gas and oil pipelines between Asia and the Middle East, with China serving as an energy hub linking Middle Eastern and Central Asian supplies to East Asian consumers.18 In 2004, an “Asia Energy Cooperation Forum” was proposed at the Third Asian Cooperation Dialogue (ACD) held in Qingdao, China. At the Fourth ACD in 2005 in Islamabad, China’s Foreign Minister Li Zhaoxing indicated China’s willingness to host the third ACD Working Group Meeting on Energy Security to discuss how to enhance Asia’s energy cooperation.19 Similarly, at the second summit of the Conference on Confidence-Building Measures in Asia (CICA) held in June 2006, Chinese President Hu Jintao delivered a speech that called for Asian nations to look into economic synergy and to actively enhance cooperation in various fields, including energy.20 ASEAN ENERGY COOPERATION Energy cooperation also features within the ASEAN network. The organization started a comprehensive six-year plan of action, the ASEAN Plan of Action for Energy Cooperation 1999–2004 (APAEC) beginning from 1999 which for the first time involved the participation of all ten ASEAN countries in Southeast Asia.21 The First ASEAN+3 Oil Stockpiling Forum was held in Bangkok, Thailand in 2003, with the aim of strengthening the oil stockpiles of the ASEAN+3 regions.22 In 2004, the first session of energy ministers within the ASEAN+3 (China, Japan and South Korea) framework called the ASEAN Ministers of Energy Meeting + 3 (AMEM+3) announced a joint declaration to strengthen energy infrastructure-building in the region.23 The Second AMEM+3 held in July 2005 was titled “Promoting Greater Energy Stability, Security and Sustainability through ASEAN+3 Energy Partnership”.24 In December 2005, the first ASEANRussian Federation Summit in Kuala Lumpur, Malaysia, ended with a joint

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statement stressing the need to “undertake collective initiatives to ensure stable energy supplies through large scale development of alternative and renewable energy sources, intensifying oil and gas exploration and the promotion of energy conservation and energy efficiency.”25 RUSSIAN ENERGY From the supplier’s side, Russia, being abundant in oil and gas is well placed to serve Asia’s energy consumers. It is increasingly keen to focus on the new energy markets in Asia as laid out in “The Energy Strategy of Russia up to 2020”, which was finalized in May 2003. At the 2006 Shanghai Cooperation Organization (SCO) Summit, President Vladimir Putin also called for the formation of an energy club in Asia, using the SCO — which consists of China, Russia Kazakhstan, Uzbekistan, Tajikistan and Kyrgyzstan — as a vehicle to further develop economic relations with China and the four Central Asian states.26 Russia is keen to export electricity to China and the Koreas in Northeast Asia.27 In addition, Russia is keen to sell its oil and gas to Asia as the market is perceived to be increasingly more attractive than the European market. Firstly, Russia is trying hard to reduce dependence on transit routes as it does not want to pay additional fees to transit oil via connecting countries into Europe; the recent gas pricing dispute with Ukraine also underlines the difficulties of dealing with transit countries.28 Secondly, Europe is said to be saturated with Russian oil and Russia loses approximately US$1 per barrel through a kind of “European discount” which adds up to billions of dollars in lost revenues annually. Furthermore, oil from Siberia is mixed with oil from the Volga area to produce what is referred to as the “Urals” blend, which is priced lower compared with most other oil blends supplied to European markets.29 The Europeans’ fear of over-dependence on Russian oil and gas has also affected Russia’s plan to expand further into the European market.30 Thus, the Asian market, because of geographical proximity of its oil and gas fields in the Far East to Asian importers, and the willingness of China, Japan and South Korea to increase Russian imports and pay more than the European makes Russia’s interest in helping to develop the Asian energy sector a rationale choice. As of the end of 2005, 90 per cent of Russia’s energy supplies went to Europe, but the share of Russia oil exports is expected to grow from 3 per cent to 30 per cent [100 million tonnes] in 2020 and natural gas from 5 per cent to 25 per cent [65 billion cubic metres].31 In late April 2006, Russia started construction of the first Pacific-bound oil pipeline outside Taishet in the Irkutsk region as a means to increase exports to

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Northeast Asia. The trans-Siberian pipeline will be 4,100-kilometre long and be able to carry 80 million tonnes of crude a year, with 30 million tonnes going to China and 50 million tonnes to be shipped from Russia’s Pacific coast to Japan and other Asian buyers.32 CENTRAL ASIA Central Asia’s primary target for energy exports was until a few years ago thought to be Europe.33 However, the oil and gas rich Central Asian states, namely Kazakhstan, Turkmenistan, and Uzbekistan, are now keen to diversify away from their traditional pipeline export routes into Europe via Russia; and Asia is increasingly regarded as an important part of this diversification strategy. This measure also reflects a general political shift away from engagement with the West towards engagement with Asia, especially China. There is, in addition, growing appreciation of the need to start a cooperative structure that would take into account the needs of all actors, starting from the source to the consumer. It is thought that Central Asian oil and gas could better service the East Asian market, especially if Iran,34 which neighbours Central Asia, could be part of such a network.35 Among the Central Asian states, Kazakhstan is the most active in exporting to Asia, namely China, and recognizes the significance of the Chinese energy market.36 Turkmenistan has also recently agreed on a deal to sell China its natural gas and to build a pipeline to deliver it.37 ChinaUzbek cooperation over energy has also picked up in recent years. For instance, in June 2004, Chinese President Hu Jintao, visited Uzbek President Islam Karimov in Tashkent during which they signed documents to further their cooperation in the oil and gas sector, while China’s Sinopec signed a cooperation agreement with Uzbekistan’s national oil and natural gas company.38 In July 2006, the Chinese oil and gas corporation, the China National Oil and Gas Exploration and Development Corporation, (CNODC) and Uzbekneftegaz, an Uzbek national holding, signed an agreement on joint prospecting and exploration of oil and gas deposits in Uzbekistan.39 Besides fueling the China market, there have also been plans to connect Turkmenistan’s gas with South Asia. India recently raised the possibility of using natural gas supplied through the proposed TurkmenistanAfghanistan-Pakistan (TAP) gas pipeline that already has the support of the Asian Development Bank.40 With India’s participation, the project would be renamed the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline project.41

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AN ASEAN-SCO ENERGY PARTNERSHIP? While there is broad recognition of the need to construct a framework of energy cooperation and joint research within Asia42 to alleviate the energy security vulnerability, progress towards a pan-Asian energy cooperation network remains slow and at times, not taken seriously because of the lack of finance and geo-politicking among the key actors. Many ideas remain on the drawing board and there is more discussion than concrete activity. Furthermore, there is the daunting challenge of initiating a new pan-Asia energy network from scratch. While there may be general recognition of the potential for a more closely integrated Asian energy network, the process of starting a new Asian energy institution is likely to be extremely slow as there are so many actors involved. Inevitably, there are worries that it would end up as nothing more than another glorified talk-shop. A more practical strategy would be to tap into existing institutions and expand their commitment to energy security and cooperation and to stimulate greater intra-regional cooperation through them. Specifically, ASEAN and the SCO are two organizations that should be able to complement each other well in consolidating Asia’s multilateral security mechanisms. Contact between ASEAN and the SCO remains limited to date. This is due to two main reasons: First, SCO only came into existence in 2001 and has focused its efforts thus far in consolidating its position in Central Asia. The second reason is due to mutual ignorance, with both sides not being able to share a common understanding of Asian history, let alone a common regional identity. Fortunately, awareness is increasing and the exchange thus far indicates the willingness of both organizations to expand relations. During the Third Meeting of the ASEAN-Russia Joint Cooperation Committee (ARJCC) held in September 2002 in Moscow, ASEAN and Russia agreed to explore cooperation between ASEAN and the SCO and the Special Envoy of the President of Russia was slated to visit the ASEAN Secretariat to brief the Secretary-General of ASEAN on the SCO and its activities, and to identify possibilities for collaboration between the two organizations.43 Last year, in 2005, the ASEAN and the SCO Secretariats met and signed a Memorandum of Understanding at the ASEAN Secretariat in Jakarta, paving way for both sides to initiate substantive cooperation.44 The main focus is on transnational crime, including terrorism since this is currently the most notable area of cooperation between SCO members. Nevertheless, energy cooperation, especially hydro-electric power and biofuels

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was mentioned as well indicating the willingness of both sides to boost energy cooperation. At the first ever ASEAN-Russia Summit held in Kuala Lumpur in December 2005, Philippines President Gloria Macapagal Arroyo, whose country will host the 2006 ASEAN summit, proposed an AntiTerrorist Cooperation Agreement between the ASEAN Anti-Terrorism pact signatories and the SCO as a way to strengthen relations between Russia and the Central Asian states. She also touched on the need to enhance ASEAN-Russia partnership in energy security, stating that resource-rich Russia could help ASEAN in this area.45 The SCO and its respective members are on their part keen to further develop relations with ASEAN and its member states. The SCO issued a joint communiqué at the end of the 2006 SCO Summit pledging closer cooperation on the world stage and welcomed the signing of cooperation documents between ASEAN and the SCO.46 At the latest 2006 SCO Summit, Chinese President Hu Jintao also stated that China will join hands with fellow SCO member countries to push forward substantial cooperation with its Asian neighbours, including ASEAN.47 Kazakhstan has also expressed interest in ASEAN previously, going as far as declaring its interest in becoming a full member of ASEAN back in 2003 during the Sultan of Malaysia’s visit to the Central Asian state.48 Similarly, Uzbekistan is seeking to expand ties with ASEAN member states — Uzbek President, Islam Karimov visited Malaysia back in 2005 to enhance trade, including in the energy sphere. It was stated that one of his purpose is to enhance relations with other ASEAN states through Malaysia.49 Intention alone does not provide the necessary conditions for intraorganizational cooperation. What is more important is that synergies are found and mutual interests enhanced. In the case of ASEAN and the SCO, they have complementary characteristics. To begin with, the breadth and profile of ASEAN and the SCO’s memberships and their respective external networks mean that energy cooperation would be able to include most of the Asian states. ASEAN which has strong ties with East Asia could draw on its relations with its Northeast Asian partners China, Japan and South Korea. Meanwhile, China and Russia have ties in Greater Central Asia (which includes Mongolia, Iran and Afghanistan) and South Asia. Thus, the SCO could be the grouping to consolidate relations with India, Pakistan, Mongolia, and perhaps even Iran, all of which are already SCO observers, as well as Afghanistan, which has ties with SCO in the form of the SCOAfghanistan Contact Group. Table 15.1 provides a list of Asian countries and an overview of membership status and affiliation within the two organizations. If all ASEAN

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and SCO members and affiliates are willing to cooperate on the energy issue on the same platform, the plan for a truly Asian energy network could be a step closer to reality. Countries that are neither affiliated with ASEAN Table 15.1 List of Asian Countries and Affiliation with ASEAN and the SCO Asian Countries

ASEAN

SCO

Southeast Asia Cambodia Brunei Darussalam Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam

Member Member Member Member Member Member Member Member Member Member

— — — — — — — — — —

ASEAN + 3 / ASEAN-China ASEAN + 3 / ASEAN-Japan ASEAN + 3 / ASEAN-Korea — ASEAN-Russia

Member

— — — — — — — —

Contact Group Member Member Member — Member Observer Observer

— — ASEAN-India — ASEAN-Pakistan —

— — Observer — Observer —

ASEAN-United States

—

Northeast Asia China Japan South Korea North Korea Russia Greater Central Asia Afghanistan Kazakhstan Kyrgyzstan Tajikistan Turkmenistan Uzbekistan Iran Mongolia South Asia Bangladesh Bhutan India Nepal Pakistan Sri Lanka Others United States

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Remarks

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nor the SCO — namely, North Korea, Turkmenistan, Bangladesh, Sri Lanka, Bhutan and Nepal — would in most likelihood, be drawn to participate in what could be termed the “ASEAN-SCO Energy Partnership”. The reason being that this partnership, if realized, would most likely become the de facto Asian initiative on energy cooperation since it involves all the Asian major importers and exporters. BENEFITS OF AN ASEAN-SCO PARTNERSHIP The economic and security benefits of a pan-Asian energy network have already been discussed earlier so this author will focus primarily on the benefits of an ASEAN-SCO Energy Partnership for energy cooperation. Besides membership and network profile, there are other qualities that make this partnership worth considering. Three important ones will be discussed here. First, the rise of the SCO has been viewed with suspicion, particularly in the West. There are concerns that China and Russia are seeking to dominate the region and that SCO’s formation augments the rise of a hostile, antiAmerican, Eurasian bloc that seeks to displace America’s status as a super power.50 Similarly, there have also been discussions about the growing potential of the Chinese threat to the United States, as well as Russia’s attempts to assert itself using energy as a weapon in the global diplomatic stage. A way for SCO and its leading partners — China and Russia — to improve their image would be to encourage ties with ASEAN, especially in the field of energy cooperation. This would go some way to dispel the notion that the SCO is a “rogue organization” that seeks hegemony in Eurasia and monopoly over Central Asia’s energy resources. A partnership with ASEAN would be regarded by many as a commendable effort to contribute to Asia’s overall regional security architecture and promote the reputation of China and Russia as responsible regional actors. The United States could also draw comfort from such an arrangement, since the threat of the Chinese-led SCO in the region would most likely be diffused within an ASEAN-SCO Energy Partnership and reduce the likelihood of a “sinocization” of Asia at the expense of U.S. influence in the region. In fact, the United States can play a special role to play within the ASEAN-SCO Partnership since it has a stake in Asia’s energy security development as well. Second, Central Asia is likely to orientate towards East Asia in the long run when the ASEAN-China Free Trade Area (ACFTA)51 fully takes effect. When completed, ACFTA will be the biggest free trade area in terms of population size and servicing 1.7 billion consumers. The regional Gross

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Domestic Product (GDP) is estimated to be about US$2 trillion and a total trade at approximately US$1.23 trillion. In such a case, there will definitely be trade opportunities for Central Asia as well.52 The formation of an ASEANSCO Energy Partnership would definitely enhance trade to the benefit of SCO member states as well since it provides greater security for the Asian region, leading to a better investment climate. In addition, closer and regular contacts between ASEAN and SCO government officials at all levels will likely lead to the acceleration of trade ties between ASEAN and the SCO member states and affiliates. Third, as a partner, ASEAN could serve as a role model to SCO. The SCO has been described as an “ASEAN for Central Asia” and like ASEAN, “the SCO began as a state-centric fraternal association of neighbouring nations in a developing region, collectively concerned about internal disruption and possible mutual friction. Thus a friendship grouping built on dialogue was formed, emphasizing security cooperation and economic development among members.”53 Since the creation of ASEAN, no Southeast Asian country has gone to war with another. This is mostly attributed, by the Southeast Asian governments themselves, to the “ASEAN Way” of cooperation and consensus building, and the members’ adherence to the 1967 Bangkok Declaration and the Treaty of Amity and Cooperation (TAC), which enshrines the principles of mutual respect, non-interference, and the peaceful settlement of disputes and effective cooperation. At the 2003 Summit in Bali, Indonesia, ASEAN set out a plan of action with the target of becoming a security community by 2020.54 The “ASEAN Way” is in many ways, similar to the SCO’s “Shanghai Spirit” of mutual trust and benefit, equality, consultation, respect for different civilizations, and common prosperity. While Central Asia continues to be plagued by economic, political and social instability, and subject to great power rivalry in the region, one also needs to appreciate the giant steps attained by China, Russia and their Central Asian neighbours in fostering greater regional stability. It started in 1996 with the formation of the Shanghai Forum (or the “Shanghai Five”), which was set up to demarcate China’s borders with Russia, Kazakhstan, Tajikistan and Kyrgyzstan. The process of socialization created a basis for subsequent accelerated cooperation between formerly antagonistic countries — Russia and China — in a relatively short period of time. It also established diplomatic norms among the members that subsequently developed into a nascent but promising Central Asian regional identity, at least among the current political elite.55 ASEAN, being one of the most successful and oldest regional groupings of developing nations in the world, is well placed to provide assistance and share its experience with one

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of the youngest developing Asian sub-regions to surface in the post-Soviet era. ASEAN can play a larger role in the development of Central Asia, transforming it from being an area of concern to one of stability and confidence. This process can be carried through further interaction and joint projects management within the energy partnership framework. SCO could draw from ASEAN’s experience in consensus building, security cooperation and economic development as a mean to foster peace and prosperity. CONCLUSION Closer cooperation is required among Asian governments to devise both structural and technological responses in order to attain energy security. The pairing of ASEAN and the SCO in the field of energy security cooperation serves to facilitate greater cooperation among Asia’s energy-hungry states, as well as with and among Asia’s energy exporting states. Realistically speaking, this idea is a preliminary one and it will take some time before a blueprint for such a partnership can be realized. This is because the SCO is still in a process of consolidation and its future geo-political characteristics remains unclear. The Central Asian states also remain preoccupied with their domestic political, economic and social problems. In the meantime, it would be useful if ASEAN and the various member states can increase the level of interaction with the SCO and its members so as to strengthen relations. NOTES 1 IEA’s definition of “East Asia” as reflected in Figure 15.1 consists of data from: Afghanistan, Bhutan, Brunei, Chinese Taipei, Democratic People’s Republic of Korea, Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. It excludes China, South Korea and Japan. However, it also includes additional countries, namely, Fiji, French Polynesia, Kiribati, Maldives, New Caledonia, Papua New Guinea, Samoa, Solomon Islands, and Vanuatu. Nevertheless, these additions will not skew the data significantly since their energy consumption is generally low due to their small populations. 2 Peter Drysdale, “The Establishment of an Energy Security System in East Asia”, presentation at the Asia Energy Forum, hosted by Institute of Energy Economics of Japan at Keidanren Kaikan, Tokyo, 25 November 2005, p. 3. (Last accessed 1 July 2006). 3 Figure is extracted from: Peter Drysdale, “The Establishment of an Energy Security System in East Asia”, presentation at the Asia Energy Forum, hosted by Institute of Energy Economics of Japan at Keidanren Kaikan, Tokyo, 25 November 2005, p. 4.

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4 Philip Andrews-Speed, “Energy Security in East Asia: A European View”, presented at the Symposium on Pacific Energy Cooperation 2003, 12–13 February 2003, p. 7. (Last accessed 1 July 2006). 5 China in particular is worried that its energy supplies would be disrupted if the US blockade or the Straits of Malacca or South China in the event of a conflict over Taiwan. There is also growing concern among Chinese strategists about the growing influence of the Indian navy in the Indian Ocean. In essence, the Chinese feel vulnerable for not being able to protect the vital SLOC between the Middle East and China. Bernard D. Cole, China Naval Modernization and Energy Security, prepared for the Institute for National Strategic Studies, National Defense University, 2006 Pacific Symposium, 20 June 2006. (Last accessed 10 July 2006). 6 This applies to both supply and demand. On the exporter’s side, high demand and the inability to deliver supplies to the market leads to high prices, while this generates higher revenues in the short term, it would bring about a world economic slump, leading to a sharp drop in energy demand. On the part of the importers, they need certainty of supply at an affordable price level. It is safe to say that both exporters and importers prefer stability over volatility in the energy market. 7 Philip Andrews-Speed, op. cit., p. 2. 8 Definition adopted from: Kim Hyun-Jae and Shim Sang-Yul, “Operation and Support of the SOM and Conference for Energy Cooperation in Northeast Asia”, KEEI, March 2004, p. 9. 9 Philip Andrews-Speed, op. cit., pp. 6–8. 10 Mani Shankar Aiyar, “Asia’s Quest for Energy Security”, The Hindu 23, no. 3 (2006). 11 Participants consists of Ministers and Heads of Delegation from the principal Asian oil and gas producing countries — the Russian Federation, Kazakhstan, Uzbekistan, Turkmenistan and Azerbaijan — met with the principal Asian oil and gas consuming countries — Japan, South Korea, China, Turkey and India at the invitation of Mani Shankar Aiyar, Minister of Petroleum and Natural Gas, India, in New Delhi on 25 November 2005. “Roundtable of Asian Oil Ministers — Summary of Conclusions”, Press Information Bureau, Government of India, 25 November 2005. (Last accessed 1 July 2006). 12 The South Korean Minister was further quoted as saying: “To solidify this effort [Inter-Asia Oil and Gas Transportation System], I propose that a working group be established with all the countries in Asia represented, and its first meeting be held in the first half of next year in Korea. North and Central Asia, which includes Russia and the Caspian Sea region, were increasingly important to global oil supply. Large oil fields with pipelines are being developed, and with it Central Asia is emerging as a major oil resource region.” Siddharth Srivastava,

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13 14

15

16

17 18 19

20 21

22

23

“The Foundations for an Asian Oil and Gas Grid”, Asia Times, 1 December 2005. (Last accessed 1 July 2006). See note 12 above; also Srivastava, ibid. Mehmet Ögütçü, “Eurasian Energy Prospects and Politics”, Cemoti 19 (Janvier Juin 1995), p. 23, (16 September 2005); “Mitsubishi to Study Gas Pipeline for Central Asia”, Yomiuri News Service, 28 December 1992. Christopher Len, “Japan’s Central Asian Diplomacy: Motivations, Implications and Prospects for the Region”, China and Eurasia Forum Quarterly 3, no. 3 (November 2005): 127–49. (Last accessed 1 July 2006). “METI Reveals ‘Asian Energy Partnership’ ”, METI, 12 April 2004. (Last accessed 1 July 2006); Richard Hanson, “Asians fighting the next Asian energy crisis”, Asia Times, 16 April 2004. (Last accessed 1 July 2006). Daojiong Zha, Vladimir I. Ivanov, Shoichi Toh, “China, Japan and Russia: Towards a New Energy Security Nexus”, ERINA Report 62 (March 2005): 5. (Last accessed 1 July 2006). Jonathan Standing and Steve Stroth, “Exxon, Others to Study Asian Pipeline Project”, The Houston Chronicle, 23 August 1995, p. 1. Gaye Christoffersen, “Problems and Prospects for Northeast Asian Energy Cooperation”, paper presented at IREX, 23 March 2000, p. 2. “Li Zhaoxing Addresses the Fourth Asia Cooperation Dialogue (ACD) Foreign Ministers Meeting”, Ministry of Foreign Affairs of the People’s Republic of China, 6 April 2005. (1 July 2006). “President Hu calls for building harmonious Asia”, XinHua, 17 June 2006. (Last accessed 1 July 2006). 17th ASEAN Ministers on Energy Meeting (AMEM) Joint Press Statement, 2 July 1999. (Last accessed 1 July 2006). Summary Record of the First ASEAN+3 Stockpiling Forum, 14 November 2003, Bangkok, Thailand. (Last accessed 1 July 2006). An Fengquan, “Brief Analysis of Cooperation Prospect on Oil and Gas Industry of China, Japan and South Korea”, The Institute of Energy Economic, Japan (IEEJ), October 2005, p. 3. (Last accessed 1 July 2006); 22nd Joint Ministerial Statement ASEAN, China, Japan and Korea Energy Ministers Meeting (Manila AMEM+3), 9 June 2004, p. 6. (Last accessed 1 July 2006).

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24 Chairman’s Statement of the Second ASEAN, China, Japan and Korea Ministers on Energy Meeting (2nd AMEM+3) Siem Reap, Cambodia, 13 July 2005. (Last accessed 1 July 2006). 25 Chairman’s Statement of the First ASEAN-Russian Federation Summit, Kuala Lumpur, 13 December 2005. (Last accessed 1 July 2006). 26 Valeria Korchagina, “Putin Calls for Energy Club in Asia”, The Moscow Times, 16 June 2006, p. 5. (Last accessed 1 July 2006). 27 James Brooke, “Let a Hundred Russian Kilowatts Bloom”, New York Times, 23 March 2004, Reproduced at (Last accessed 1 July 2006); Won-Cheol Yun and ZhongXiang Zhang, “Electric Power Grid Interconnection in Northeast Asia”, East-West Center Working Papers, Environmental Change, Vulnerability, and Governance Series, no. 63, March 2005. (Last accessed 1 July 2006). 28 “Russia Cuts Ukraine Gas Supplies”, BBC News, 1 January 2006. (Last accessed 1 July 2006). 29 Vladimir Ivanov, “Russia’s Energy Politics: Focusing on New Markets in Asia”, REITI, 13 October 2005. (Last accessed 1 July 2006); “Russia Should Cut Oil to Europe, Cut Discounts on Urals Crude — Transneft”, MosNews, 24 April 2006. (Last accessed 1 July 2006). 30 Igor Torbakov, “Russia, Europe Draw Battle Lines in their Dispute over Energy”, Jamestown Foundation, 26 May 2006. (Last accessed 1 July 2006). 31 Vladimir Radyuhin, “Russia Sees Energy as Key to Unlock Asian Doors”, The Hindu, 19 December 2005. < www.hindu.com/2005/12/19/stories/ 2005121901731000.htm> (Last accessed 1 July 2006). 32 Vladimir Radyuhin, “Russia’s Energy Diversification Moves”, The Hindu, 4 May 2006. (Last accessed 1 July 2006); “Russia Starts Work on East Asia Pipeline”. Gulf Times, 29 April 2006. (Last accessed 1 July 2006). 33 Kang Wu and Fereidun Fesharaki, “Managing Asia Pacific’s Energy Dependence on the Middle East: Is there a Role for Central Asia?” Analysis from the East West Center, no. 60 (June 2002). (Last accessed 1 July 2006). 34 Both China and Japan have considerable stakes in Iran’s oil and gas fields while India is looking into the possibility of importing Iranian gas through the IranPakistan-India (IPI) route. 35 Niklas Swanström, “An Asian Oil and Gas Union: Prospect and Problems”,

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36

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China and Eurasia Forum Quarterly 3, no. 3 (November 2005): 91–95.

(Last accessed 1 July 2005). Mevlut Katik, “Kazakhstan has ‘Huge Plan’ to Expand Energy Links with China”, Eurasianet, 13 March 2006. (Last accessed 1 July 2006); Marat Yermukanov, “Beijing Moves to Increase Influence in Central Asia”, Jamestown Foundation, 2, no. 131 (July 2005). (Last accessed 1 July 2006). “China, Turkmenistan Agree on Gas, Pipeline”, Associated Press, 4 April 2006. (Last accessed 1 July 2006). “Uzbekistan, China Ink Oil and Gas Prospecting Deal”, RIA Novosti, 12 June 2006 (Last accessed 1 July 2006). “China, Uzbekistan Sign Documents to Cement Cooperation”, People’s Daily, 16 June 2004. (Last accessed 1 July 2006). “Turkmenistan-Afghanistan-Pakistan Natural Gas Pipeline Project”, Asian Development Bank, June 2003. (Last accessed 1 July 2006); “The Asian Development Bank’s Role In Promoting The Turkmenistan — Afghanistan-Pakistan Gas Pipeline”. Speech by E. H. Hassing, Principal Project Officer Infrastructure Division, East and Central Asia Department, Asian Development Bank”, May 2003.

(Last accessed 1 July 2006). “India to Join Turkmenistan-Afghanistan-Pakistan Gas Pipeline”, Alexander’s Gas and Oil Connections 11, no. 5 (March 2006). (Last accessed 1 July 2006). The APEC Energy Working Group (EWG) is actually notable in the discussion of Energy Cooperation in the Asia Pacific region but it is not entirely suitable here since its research is not purely Asian centric — it extends to countries on the other side of the Pacific such as the United States, Canada, Chile and Peru — and because it does not cover Central Asia. One analyst has gone as far as to describe the APEC Energy Working Group as being somewhat obsolete. Refer to Swanström, op. cit., p. 93. Third Meeting of the ASEAN-Russia Joint Cooperation Committee, Moscow, 20 September 2002 < www.aseansec.org/12606.htm> (Last accessed 1 July 2006). Memorandum Of Understanding between The Secretariat of The Association Of Southeast Asian Nations (ASEAN Secretariat) and The Secretariat Of The Shanghai Cooperation Organization (SCO Secretariat), 21 April 2005 (Last accessed July 01 2006).

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45 “Asean-Russia Cooperation Set to Soar to New Heights”, Bernama, 13 December 2005. (Last accessed 1 July 2006). 46 “Full Text of Joint Communique of 2006 SCO Summit”, People’s Daily, 15 June 2006. < http://english.people.com.cn/200606/15/eng20060615_274367.html> (Last accessed 1 July 2006). 47 “Hu Proposes Lasting Good Neighborhood Convention within SCO”, XinHua, 15 June 2006 (Last accessed 1 July 2006). 48 “Kazakhstan Wants to Join ASEAN”, RFE/RL, 15 September 2003. (Last accessed 1 July 2006). 49 “Uzbekistan-Malaysia: New Cooperation Horizons”, 11 October 2005. (Last accessed 1 July 2006). 50 Ariel Cohen, “The U.S. Challenge at the Shanghai Summit”, The Heritage Foundation, 13 June 2006. (Last accessed 1 July 2006). 51 Sheng Lijun, “China-ASEAN Free Trade Area: Origins, Developments and Strategic Motivations”, ISEAS Working Paper, International Politics and Security Issues Series no. 1 (2003). (Last accessed 1 July 2006). 52 Raul L. Cordenillo, “The Economic Benefits to ASEAN of the ASEAN-China Free Trade Area (ACFTA)”, ASEAN Secretariat, 18 January 2005. (Last accessed 1 July 2006). 53 Bunn Nagara, “An ‘Asean’ for Central Asia?” The Star, 18 June 2006. (Last accessed 1 July 2006). 54 ASEAN Security Community Plan of Action, (Last accessed 1 July 2006); Rodolfo C. Severino, “Towards an ASEAN Security Community”, ISEAS, Trends in Southeast Asia Series: 8(2004) (Last accessed 1 July 2006). 55 For a constructivist write up on the formation of The Shanghai Five and the Shanghai Cooperation Organization by the author, refer to: Christopher Len, “Anarchy and the Barriers to Community: Regional Cooperation in the PostCold War Era — The Shanghai Cooperation Organization”, Department of Peace and Conflict Research, Uppsala University (Sweden), June 2004. (Last accessed 1 July 2006).

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16

China’s Energy Security: Geo-politics versus Interdependence Henry Leong

China has followed the rules of international oil market in its oil interactions and that China has no intention to scramble for world energy supply with other countries. — Chinese President Hu Jintao (People’s Daily, 31 August 2005)

INTRODUCTION Since the loss of its energy self-sufficiency in 1993, China’s thinking and practice of energy security has evolved from one of primarily unilateral acquisition of oil to one of greater inter-dependence on the global energy market, characterized by bilateral and multilateral cooperation and the increasing emphasis, domestically, on sustainable energy usage and efficiency. This chapter examines this shift in Chinese energy thinking by analysing three related sets of development. First, the constraint and limitations that China face in its oil diplomacy of domestic petroleum exploration and equity purchase overseas. Second, the domestic pressures in China that are influencing the government to align its energy policy in line with the practices of more

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established economies. Third, arising from the influences of the two sets of forces, China has become increasingly more receptive towards greater cooperation bilaterally and multilaterally, as evidenced in various initiatives towards sustainable energy development. GROWING DEMAND, STAGNATING SUPPLY China is an energy-thirsty and an energy-dependent country. Its rapid economic growth during the past two decades has fuelled an insatiable demand for energy that has outstripped domestic sources of supply. As Michael Klare (2004, p. 161) notes, “China is a rising power, and its surging economy is generating an ever-expanding thirst for imported energy.” China is the world’s sixth largest economy with a GDP of US$1,932 million in 2005, surpassing the economies of Italy and Spain, and will overtake France and the United Kingdom in the near term (World Bank 2005).1 In 1993, China reached a turning point when it lost its selfsufficiency in energy to become the second largest net oil importer after the United States. China’s communist leadership has already sought to maximize the country’s economic self-reliance. But this situation reflects profound political and economic challenges, in that China will not be able to sustain its high level of economic growth and personal enrichment — on which the government rests its continued claim to legitimacy — without obtaining additional petroleum resources (Klare 2000, p. 167). However, local production is unable to keep pace with its booming demands, notably from the transportation and manufacturing sectors. Table 16.1 indicates that China will account for a quarter of global energy consumption, in keeping with one of the highest sustained growth averaging 7.2 per cent in the next two decades (Table 16.2). To sustain this demand, China’s net oil imports, primarily from the Middle East and African markets, will double from 26 to 52 million barrels per day, which constitutes a 100 per cent increase (Table 16.3). To meet this substantial energy requirement, China will have to import more oil since domestic production has generally been stagnating. As Mehmet Ögütçü (2003, p. 7) notes, “there appears to be little prospects of increasing crude oil production from the ageing fields in China’s eastern region, the main source of indigenous supply.” Production in the largest and oldest fields in northeast China has also declined in recent years, as seen in Table 16.4. These declines are only slightly offset by increases from offshore and the western areas (Lewis 2002, p. 3). For example, the giant Daqing field, the fourth largest producing field yielded 1.1 million barrels per day (mb/d) in

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Table 16.1 Increment in World’s Primary Energy Consumption

Source: Naitoh, M. “Long Term Energy Perspective and Challenges for Japan and East Asia”. Keynote address at World Energy Council Asia Pacific Forum, 27 June 2005. Table 16.2 Global Annual Growth Rate

Source: Naitoh, M. “Long Term Energy Perspective and Challenges for Japan and East Asia”. Keynote address at World Energy Council Asia Pacific Forum, 27 June 2005.

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Table 16.3 World Energy demand for 2004 and 2030 (million barrels per day)

North America Latin America Europe Russia and Caspian Region China Japan Africa Middle East India Rest of Asia Pacific Total

2004

%

2030

%

Increase

55 13 39 20 26 11 12 11 11 22 220

25.0 5.9 17.7 9.1 11.8 5.0 5.5 5.0 5.0 10.0 100.0

69 24 46 28 52 12 19 18 29 38 335

20.6 7.2 13.7 8.4 15.5 3.6 5.7 5.4 8.7 11.3 100.0

25 85 18 40 100 9 58 64 164 73 52

Source: ExxonMobil, 2004. Cited in Bustalo, P. “China and the Geopolitics of Oil in the Asian Pacific Region”. Elcano Royal Institute Working Paper no. 38/2005, 5 September 2005, p. 8.

2001, roughly a third of total Chinese output. Daqing has been in production since the 1960s and its output is in decline. Although the country has many prospective and unexplored areas, both onshore and offshore, only 28 per cent of land petroleum and 6 per cent of natural gas had been explored, which according to Ögütçü (2003, p. 7), is far below the world exploration rate. For those fields that have been explored partially, the oil yield has been modest. For example, Chinese hopes to exploit more substantial fields of oil will depend largely on developing the remote, inhospitable Tarim basin in the northwest.2 However, getting the oil out of Tarim and into domestic markets will involve building a 4,200-kilometre pipeline system capable of delivering 20 metric tonnes (Mt) annually from Xinjiang to southwestern and eastern China. The estimated construction costs will exceed US$1.2 billion and the Tarim project will remain a vision although CNPC has proceeded to build parts of the energy grid (Ögütçü 2003, p. 7).3 It is very clear this oil with be “high cost” oil even with a significant yield from the Tarim basin: Extracting oil from this inhospitable region and processing it across long distances will make it more costly to deliver it to the Chinese market. The situation for offshore oil exploration and yields has been similar to the modest results onshore. Joint Chinese and foreign energy exploration have been adding marginally to China’s onshore discoveries in the last three years. More than a billion barrels of oil have been discovered in China’s eastern Bohai Bay,4 Pearl River Delta in the south and the Beibu Gulf. In

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Province

Heilongjiang Jilin Liaoning

Shandong Henan Hebei Henan Hebei

Jiangsu Hubei Anhui

Gansu Shaanxi Gansu

Field/Region

Northeast Daqing Jilin Liaohe

North Shengli Zhongyuan Dagang Henan Jidong

180

East/Yangtze Jiangsu Jianghan Anhui

Northwest Changqing Yanchang Yumen CNPC CNPC CNPC

Sinopec Sinopec Sinopec

Sinopec Sinopec CNPC Sinopec CNPC

CNPC CNPC CNPC

Company

121.9 81.4 32.5 8.0

41.8 25.1 15.1 1.6

745.3 531.0 78.0 86.5 37.1 12.7

1493.2 1133.9 80.8 278.5

1998

137.9 87.6 42.3 8.0

41.8 25.1 15.1 1.6

713.2 509.0 72.0 82.5 37.1 12.6

1462.2 1109.5 77.4 274.3

1999

144.0 94.5 41.3 8.2

51.7 30.9 19.2 1.6

722.3 519.0 73.0 80.5 36.9 12.9

1424.1 1079.0 76.4 268.7

2000

4.1

1.4

25.3

50.8

1998 % Total

4.8

1.7

24.3

47.9

1.181 1.160 1.270 1.025

1.236 1.231 1.271 1.000

0.969 0.977 0.935 0.930 0.994 1.015

0.953 0.951 0.945 0.964

2000 % Total 2000/1998

Table 16.4 Daily Production in Chinese Major Oil Fields by Region, Province and Chinese Company, as Reported by Field Administration and Company, 1998–2000 (’000 b/d)

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South South East

Offshore Nanhai East Nanhai West Bohai CNOCC CNOCC CNOCC

CNPC Sinopec

CNPC CNPC CNPC CNPC Sinopec

2934.5

170.9 105.5 20.3 45.1

5.3 4.3 1.0

356.1 178.5 78.8 63.6 35.2 0.0

2929.1

168.3 88.0 35.1 45.2

5.1 4.0 1.0

400.6 184.1 85.7 63.6 38.0 29.2

2968.5

200.1 90.0 46.4 63.7

4.6 4.0 0.6

421.7 188.5 89.0 61.5 40.0 42.7

100.0

5.8

Diversification of the Fuel Pool

I

I 5&11 OUIDI sorutL;;.

Figure 22.11 FAMEs in Diesel: Fuel Design

• FAMEs a re all broadly compatible with diesel which make them attractive options as diesel blending components • There are however characteristic dilfecences relatina to their oorent oil source which must be evaluated, understood and addressed to achieve a seamless introduction to the marlcet. Singapore diesel

RME

SME

POME"

CME

0.84 3.6

0.88 4.2-4.5

0.88 4.2

0 .88 5.7

0 .87 2.7

Cloud Point, ·c

8

-4 to -5

-1

13

Celone Number Net Heating Value, MJ/kg

53

54-55

55

62

65

43

37-38

37

38

38

Typical Values Density, g/cm 3 Viscosity @ 40"C, mm2

"G.H.- etai."Viiitaae~l~~~=4-32.t~

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Figure 22.12 Ethanol from Non-food Sources

Figure 22.13 Synthetic Fuel from Gas, Coal, and Bio-mass

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Similarly, Shell has developed technology to produce bio-diesel by converting bio-mass, coal or gas into synthetic gas (or syngas) and subsequently transforms them into liquid fuel using the Fisher-Trope process. Importantly, Shell places considerable attention on the development of second generation bio-diesel as it is expected that diesel will be the dominant fuel for the transport sector, owing in large part to its increased efficiency over gasoline engines and associated CO2 emission limitation. These second generation bio-diesels currently developed by Shell are referred to as synthetic fuels or Shell XTL since synthesizing is integral to the process of fuel production. Synthetic fuels can be produced by three ways, depending on the choice of feedstock. Synthetic fuel derived from natural gas, also known as gas-to-liquids (GLT), is produced when natural gas is converted into syngas through the Shell gasification process. This syngas is then turned into liquid fuel using the Fischer-Trope process. Synthetic fuel derived from biomass, also known as bio-mass-to-liquids (BTL), is prepared by gasifying bio-mass using the CHOREN process. The CHOREN process Figure 22.14 Comparison fo Energy Cycles

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Figure 22.15 Advantages of BTL Fuel

transforms bio-mass into syngas using the Carbo-V method by which the natural process of crude oil creation spread over 400 million years gets compressed into a 24-hour procedure. Besides gas and bio-mass, synthetic fuel derived from coal, referred to as coal-to-liquids (CTL), has to undergo the Shell coal gasification process to become syngas and is then turned into liquid fuel. CTL holds much promise for countries with abundant coal reserves, such as China, though it needs careful consideration of CO2 sequestration processes. Synthetic fuels offer varied advantages. In particular, they score over first generation bio-fuels by being much more environmentally friendly. BTL, for instance, can reduce GHG emissions on a life-cycle basis by nearly 90 per cent compared to conventional diesel. Further they provide for a much greater fuel yield than first generation bio-fuels. The bio-fuel yield of RME from 1 hectare per annum is 1,520 litres, the yield of bio-ethanol is 1,670 litres, and of eco-ethanol is 2,320 litres per hectare/annum. However, the yield of synthetic fuels like BTL is a substantially higher 3,900 litres. Thus, while first generation bio-diesel from food crops are generally suitable, it is the second generation of bio-diesels that must be pursued strongly as they are more efficient, fully compatible with diesel and offer

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Figure 22.16 GTL Capacity and Emissions

Figure 22.17 Bio-fuels Options for Diesel

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significant environmental benefits. However, these latest bio-diesels will take their time to become widely used, and it is hoped that with technological changes, they will become more affordable. CURRENT TRENDS IN GLOBAL BIO-FUEL USAGE Bio-fuels have been increasingly used in Europe, North America and Southeast Asia. The Americas are the leading producers and users of ethanol. North America uses ethanol in blends of E10 and E85 while Brazil in South America, the world’s leading and most experienced ethanol producer, uses E20 and E100 blends. Europe, by contrast, leads in the production of biodiesel. Blends like B5-B20 are used here (and in North America too) while B100 is sold in Germany and Austria. Europe has a clear roadmap for bio-fuels, and this is evidenced from its recent Bio-fuels Directive. The directive called for the use of at least 2 per cent of bio-fuels to meet transport fuel needs by last year (2005), and aims to increase this usage to 5 per cent by 2009. It also mandates a 1/1.75 per cent bio-fuel blending in gasoline and diesel by 2009/2010. It states that alternative fuels should comprise 20 per cent of fuels use by 2020.

Figure 22.18 European Bio-Fuels Directive

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SOUTHEAST ASIA Southeast Asia has emerged as a growing producer and user of bio-fuels, even though the approach to bio-fuels is not as coordinated as in Europe. Ethanol has been particularly successful in the case of Thailand where E10ULG95 is widely used and where this blend has been mandated for 2007. “Gasohol” — a blend made from 10 per cent ethanol and 90 per cent gasoline — enjoys a tax exemption that has reduced its retail price by 7 per cent. The current market share of “Gashol 95” is about 50 per cent in the Thai ULG95 market, and the demand for ethanol in Thailand has been so overwhelming that the country has had to import ethanol from other countries Brazil to meet its demand. The Philippines has been developing its own ethanol programme with the aid of Thai expertise and the introduction of an E10 blend hashas been started. proven popula Bio-diesel too has a growing presence in this region: Philippines has mandated the use of B1 bio-diesel based on CME for government vehicles, Thailand has started the use of B10, Malaysia has started the use of B5 on a trial basis and a B5 trial is in preparation in Singapore.

Figure 22.19 FAMEs for Diesel

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Figure 22.20 Fuel Design of FAMEs in Diesel

DETERMINING THE UTILITY OF BIO-FUELS: WELL-TO-WHEEL ANALYSIS Not all bio-fuels are necessarily useful or beneficial. The logic behind using bio-mass to fuel energy needs can have some inadvertent consequences that can challenge the supposed environmental and economic benefits of using them. Perhaps the most important means of assessing the utility of bio-fuels is by employing the Well-to-Wheel analysis, which can offer a more accurate reading of the real environmental benefits of using bio-fuels. This analysis takes into account not only the emissions from burning the bio-fuel but also the emissions that are incurred while producing it in the first place. In the case of bio-fuels, this method calculates the total carbon dioxide emissions that can be attributed to bio-fuels — from the cultivation of bio-mass feedstock in fields to the point where they are burned as fuels. “Well-toWheel” is a standard way of assessing the environmental balance of crude oils in the oil industry. In the case of bio-fuels, bearing in mind the unique nature of source material and process, the concept has been referred to differently by some as the “Fields-to-Wheel” analysis. Shell has carried out studies to determine the Well-to-Wheel analysis for varied bio-fuels. In the case of ethanol, it has been calculated that the carbon

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Figure 22.21 WTW Analysis of RME

Figure 22.22 GHG Emissions from Ethanol Production

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dioxide balance, while using ethanol is always positive, even if crude gasoline or renewable energy is used in producing it, as shown by an MEO study. It, as shown by a MEO study. However, the carbon emissions from using gasoline are considerably high and can be reduced by using renewable energy, and still better by using the second-generation IOGEN enzyme process. The Well-to-Wheel analysis can also be applied to assess the environmental utility of FAMEs (bio-diesels). Shell’s study of RME, using this analysis, has concluded that its energy balance is positive. In fact RME gives twice as much energy as that required to produce it. While the GHG emissions of bio-diesels is positive, there are still a number of caveats that must be factored into account. The use of nitrogen fertilizers while growing bio-mass, for instance, increases the “greenhouse effect” raises carbon emissions by nearly twenty times. Further, one could include the energy required to build agricultural machinery and processing plants needed to make fertilizers, even though this has not been calculated in the Shell study. A more important aspect that must be considered is whether the cultivation of bio-fuel crops has involved the clearance of forest land. Shell studies show that the carbon deficit from clearing land for cultivating bio-fuel crops can nullify the gains from using bio-fuels. Figure 22.23 Comparative Fuel Costs

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Figure 22.24 Well-to-Wheel Analysis of FAMEs

Figure 22.25 Liquid Bio-Fuels Yields

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CONCLUSION Sustainable development is about balance and integration and bio-fuels must be sustainable too. In order to realize this sustainability bio-fuels must make sense on economic, ecological, social and technological grounds. Using the Well to Wheel analysis is thus just one aspect of assessing the sustainability of a bio-fuel. The development of bio-fuels is promising but it cannot be assumed at this stage that they will fully substitute for crude fossil fuels. Indeed, the use of 100 per cent ethanol or bio-diesels would require changes in the existing engine and transport infrastructure, and the prospect of such a radical overhaul seems unlikely in the near future. Instead, bio-fuels will continue to expand their reach with greater technological developments in the way we produce them that will make these m fuels more competitive in relation to highly priced crude-derived fuels.

Figure 22.26 Advanced Bio-fuels and CO2 Emissions

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Figure 22.27 New Focus of Well-to-Wheels Approach

Figure 22.28 Life Cycle Analysis of Greenhouse Gases

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Figure 22.29 Sustainable Bio-Fuels

• Sustainablg [)gvglopmGnl is about balancg and integration. • Integrating the economic, social and environmental aspects of everything we do and balancing short-lerm wants with long-term needs.

A bio-fuel must make sense on economic, social and technological grounds in order to be truly sustainable. • Bio-fuels increase security of supply and reduce imports ·but volumes. may need to be ~igntf1cont, and mtemotionoltrading may occur • A Well to Wheel Analysis approach is a useful tool for mak1ng

. ...

overall energy cmd greenhouse gas emission assessments.

---------------IEI SiooiOw..l~.._

NOTE All the figures reproduced in this chapter are sourced from Shell Global Solutions.

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23

Price Discovery for Middle East Refined Product Exports: A Natural Role for Dubai Tilak K. Doshi

INTRODUCTION This chapter argues that the current techniques of oil price assessments have long ceased to serve the Arabian Gulf ’s urgent need for an efficient and transparent pricing system, and that existing practices of refined oil product pricing in the Gulf are in need of fundamental reform. Dubai is now an emerging key player in the business of Middle East energy flows and the setting of oil prices. The recent establishment of the Dubai Multi Commodities Centre (DMCC) and the Dubai Gold and Commodities Exchange (DGCX), the Middle East’s first commodity derivatives exchange, are a reflection of Dubai’s emergence as a commodity trading hub for the Gulf region. DMCC’s ambition of setting up an energy futures market is based on the argument that futures contracts serve as both efficient and transparent instruments for price discovery. A robust futures market in the region would enable more efficient risk management for those who are producers, traders or end-users of refined oil products.

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THE LOGIC OF PRICE DISCOVERY Located among the world’s most prolific oil and gas fields, Dubai is at the heart of global energy flows. According to the latest BP Statistical Review of World Energy, the oil industry’s pre-eminent annual data source, the Middle East accounts for over 740 billion barrels of crude oil reserves, accounting for almost 62 per cent of the world’s total in 2005. The region produced over 30 per cent, while consuming some 7 per cent, of the world’s total output of oil in 2005. The region’s exports, amounting to over 17 million barrels per day (b/d), constituted over 45 per cent of the world’s total exports of crude oil last year. The Gulf region of the Middle East is not only the source of much of the world’s exports of crude oil, but remains a major exporter of refined oil products. This role will undoubtedly expand as the Gulf remains a focus of investments in the oil refining sector. While domestic demand for refined products in the Middle East is expected to grow strongly, reflecting both rapid economic growth and domestic retail pricing subsidies, exports of refined products from the region are expected to expand as well. From an estimated 2.5 million b/d of refined products (excluding LPG) exports in 2005, the Middle East is forecast to export over 3 million b/d in 2007 and 3.5 million b/d by 2010. Yet it is odd that prices for the Middle East’s refined product exports are determined by a complex process of price assessments in Singapore, an island-state some 3,500 miles (2,200 kilometres) to the southeast. Why is this so? To an economist, this process of price discovery is simply explained as the result of the “interaction between demand and supply”. Given that most of the Middle East’s refined product exports head to the major oil consumers in Asia, the prices of these products are simply the conjunction of prices at which consumers in Asia are willing to pay for oil and at which suppliers in the Middle East are willing to accept. This “conjunction of prices” happens to be “discovered” in Singapore, the traditional hub of the Far East oil trade.1 And how are these prices discovered? Unfortunately, given the complexities of refinery production schedules, the logistics of transport, storage, blending (for various specification requirements) and distribution, and the time lags involved, there are no simple processes of daily auctions where prices can collectively emerge in any transparent way. Trades are carried out in informal markets by telephone, telex and fax, and there is no central authority collecting price information. As a result, price assessment agencies have evolved various means which seek to report essentially unobserved prices.

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So, one might then ask, what is the price received by the typical Middle East supplier of refined products? In short, the answer is the “netback” price: A price assessed at the point of consumption minus the cost of transportation between the production point and the point of consumption. In other words, price assessments of Middle East product exports typically use Singapore as the basis for price reference, and “price discovery” in the Middle East usually means nothing more than Singapore prices minus the cost of freight for the Arabian Gulf-Singapore route. In the specific case of motor gasoline, however, the Middle East as a region is a net importer, primarily as the result of Iran’s huge imports of the product. Given that the “netback” methodology is irrelevant in the case of refined products in which the Middle East is a net importer,2 there is a mix of pricing references, sometimes using a Mediterranean pricing reference, sometimes an Arab Gulf naphtha quote, itself a “netbacked” price from the Japanese naphtha market. There are, however, several factors that have made the “netback” pricing methodology inadequate to the Gulf region’s requirements for an efficient and transparent pricing of its oil exports. In recent years, several critical developments in regional fundamentals have led to opportunities for the development of derivatives trading which will better meet the need of the region’s national oil companies and international oil companies which export crude oil and petroleum products. Investments in the region’s refining sector, increased price volatility, and the emergence of Dubai as an energy hub for the Gulf region are among the key factors that make the establishment of viable energy futures market in the Emirate a logical, and indeed, an inevitable development. MIDDLE EAST REFINING: INCREASED EXPORTS AND MORE COMPLEX TRADE FLOWS From an estimated 6 million b/d of crude and condensates processed in 2005, it is forecast that total crude and condensate processed will hit 9 million b/d, an increase of 3 million b/d over seven years or an average of about 450,000 b/d per year (see Figure 23.1). All countries in the region are engaged in expanding refining facilities and working to improve the quality of their refined products. This reflects higher demand for lighter products, in particular for high quality transport fuels. Net Middle East imports of gasoline, dominated by Iran’s estimated current imports of 150,000 b/d, might temporarily see a substantial decrease in 2008–10 (see Figure 23.2). However, this depends on whether Iran

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Figure 23.1 Middle East Refining Outlook

Figure 23.2 Middle East Product Exports Outlook

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successfully brings on-stream its planned condensate splitters. Net exports of LPG and naphtha will expand strongly, as will those of middle distillates. The quality of refined products produced in the region is expected to improve. In particular, middle distillate hydro-desulphurization capacities are being expanded aggressively. Catalytic reforming for premium and lead-free grades of gasoline will also expand. While these investments will improve the quality of domestic fuels, in some cases products will meet EURO and U.S. standards. The Middle East has long been perceived in the “East of Suez” oil markets as a mere supply spigot for Singapore-destined refined petroleum products. Yet, Middle-East oil products increasingly trade into newly important consuming areas such as East Africa, Pakistan, and the West Coast of India, where Singapore-based price references do not reflect regional demand-supply balances. Furthermore, the region’s new and upgraded refineries will expand high-specification light and middle distillate exports which can trade into Europe and the United States as well as its more traditional export markets in the Far East. In other words, the region’s export flows of refined products will grow in complexity. The improved quality of Middle-East refined products would result in a more sophisticated role for the region, as the direction of regional exports will be determined by product quality and arbitrage values reflecting fluctuating price differentials among different geographical areas. Furthermore, the United Arab Emirates are emerging as an important storage, blending and trans-shipment centre for the region, with the ports of Fujairah and Jebel Ali as the focus of increasing investments in storage, blending and tanker berthing infrastructure for the oil trade. Major integrated oil companies and oil trading houses are increasing their Dubai-based staff, as are banks with energy desks, energy media companies, oil quality inspection companies, and a host of other companies affiliated to the oil business. RISK MANAGEMENT IN AN ERA OF INCREASED PRICE VOLATILITY: THE EXAMPLE OF FUEL OIL Fuel oil prices, like other nominal prices in the oil complex, are now significantly higher then any time in the past decade (Figure 23.3). Given the greater weight of higher energy prices on company bottom lines, no business can take fuel costs for granted. Utilities, bunker suppliers and shipping companies who use fuel oil as a major input need to consider the impact of higher absolute prices on their balance sheets. Those who trade fuel oil, buying it from the major suppliers in the Middle East and selling it into Fujairah, Singapore or other Asian countries such as China, are exposed to significant price risks.

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Figure 23.3 The Importance of Managing Risk

High Absolute Prices of Fuel Oil Prices

Not only are absolute prices higher, but volatility has also increased significantly, as seen in the example of fuel oil (Figure 23.4). Given absolutely higher prices, and higher volatility, the risks faced by those companies who buy and use fuel oil or those who buy and then sell it onwards to other endusers pose serious concerns for the projected cash flows and margins of market participants. At US$300/tonne, a typical 80,000 tonne cargo of fuel oil would cost some US$24 million. Given a standard deviation of say US$50/tonne, any cargo could gain or lose some US$4 million per transaction, just on the basis of price volatility. Given this price risk, the ability to hedge the price risk of fuel oil cargoes plays a critical role for fuel oil traders. Given the volatility of freight rates in recent years (Figure 23.5 shows the volatility in the costs of freight between the Middle East and Singapore for 80,000-tonne tankers which are typically used for transporting fuel oil cargoes), the MOPS (Mean of Platts Singapore)-MOPAG (Mean of Platts Arab Gulf ) price differential has also been volatile. Anyone buying a cargo based on a quoted MOPAG basis and attempting to sell it into the Singapore or other Far East markets based on a MOPS reference price obviously faces the risk that the actual freight cost incurred in transporting the cargo may be quite different from the assessed freight rates used to derive the netback MOPAG price.

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Figure 23.4 The Importance of Managing Risk

Highly Volatility in Recent Years

Figure 23.5 80KT ME-SIN Freight Rates (Weekly)

Increased Volatility in Freight Rates

Source: Reuters.

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FREIGHT CONSIDERATIONS Given that freight assessments can differ from actual costs of freight incurred (as assessments are an average measure derived from informal polls), there is a significant basis risk exposure for those trading fuel oil cargoes. As can be seen, the spot Worldscale rates (that is, spot freight rates) do not perfectly correlate with the MOPS-MOPAG differential. Up to 30 per cent of the changes in the Singapore-AG price differential cannot be explained by changes in spot freight rates. There is a further aspect to the basis risk faced by fuel oil traders who need to hedge cargoes. Given the lack of a fuel oil futures contract in the East of Suez region (Singapore’s HSFO contract failed in the early 1990s after just a few years of operation), the only instrument available for hedging fuel oil cargoes is the “over-the-counter” (OTC) swap contract.3 The most liquid swap contract is the 180 CST Singapore fuel oil swap contract. The volatility in the price differential between the two major grades of fuel oil in Singapore has increased in recent years. The viscosity (or “visc”) spread trade in the differentials between 180 CST and 380 CST fuel oil swaps is not always liquid, and bids and offers can be quite wide apart. Therefore, a trader with a 380 CST cargo bought on a MOPAG basis who attempts to hedge using Singapore 180 fuel oil swap faces two sources of basis risk: Firstly, the difference between actual freight cost incurred and the assessed freight cost used in deriving the netback price; and secondly, the difference between the relatively illiquid 180 CST and 380 CST fuel oil swap prices in the Singapore-based OTC market. Given these basis risks, many traders have ceased to attempt hedging, or have resigned themselves to hedges that are highly unsatisfactory, with deleterious consequences for managing their fuel oil business. Oil traders in the Arabian Gulf frequently complain of fuel oil being “stuck” in the region, constrained by the current pricing conventions from placing their cargoes in the Far East. Ship owners and other end-users are price takers with no ability to manage the price risk between input cost and sales revenues. FUTURES CONTRACTS AND FUTURES EXCHANGES Futures contracts are the most efficient and transparent instruments that markets can provide for price discovery. Unlike swaps in the OTC markets, futures contracts are derivatives traded in regulated, centralized exchanges where trades are margined and parties do not face counter-party credit risks.4 DGCX, a DMCC-partnered joint venture and the first commodities futures exchange in the Middle East, located in Dubai, plans to promote a range of

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energy futures contracts including a fuel oil futures contract planned for launch in late 2006. With a proposed contract lot size of 100 tonnes, the 380 CST High Sulphur Fuel Oil contract will be based on physical delivery in Fujairah, the world’s second largest bunkering centre. Such energy derivative contracts will promote transparent price discovery and resolve the inadequacies of netback price assessments. This will allow far more efficient risk management for those who are producers, traders or end-users of refined oil products.5 IMPACT ON SINGAPORE What are the implications of a successful futures exchange in Dubai on Singapore? Contrary to common belief, economic activity is not primarily one where one’s gain is another’s loss (often termed as a “zero-sum game”). The success of Dubai, thus, should not be at the cost of Singapore, as the latter will continue to play its critical role as an oil trading hub for Far East markets. Nor does the success of a futures market inherently imply a reduced role for OTC markets, as attested to by the long co-existence of both futures and swaps contracts in the Rotterdam and New York Harbour markets. In fact, the highly liquid trade in spreads between futures and swaps contracts underlie the complementarities between the two markets in the global oil trade. In short, a more efficient system of price discovery in Middle East oil markets does not detract from Singapore’s role in the oil business. Indeed, by making producers, traders and consumers better off, more efficient price discovery and increased liquidity in trade is analogous to higher productivity, an improvement to be welcomed by industry and governments across the “East of Suez” region. NOTES 1

2

The reach of Singapore-based oil pricing reference in Asia has been constricted on its western flank by India’s West Coast, where the impact of Reliance’s major refinery has led to increased net refined product exports and a greater integration of South Asia to the Gulf region and beyond; on its eastern flank, the South China oil trade will likely become the centre for a Northeast Asia-focused oil price benchmark, especially if China’s regulatory structure for the oil trade becomes more transparent and permissive for the regional trade, storage and trans-shipment of oil products by international oil companies. In a net-importer case, the symmetric “netforward” price could be Singapore plus freight. However, for this to be correct, Singapore would have to be the marginal exporter of gasoline to the region. This may not be the case, as much

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3

4

5

of the gasoline imported into the Gulf region is sourced from the Mediterranean and, more recently, India. The simplest “plain vanilla” swap is essentially a bilateral exchange of a floating price risk for a fixed price over an agreed time-period, leading to a purely financial transaction equal to the difference between the fixed and floating price between two parties; there is no physical transfer of oil involved. For an extensive though somewhat dated discussion of oil swaps and futures contracts in Asia, see Oil in Asia: Markets, Trading, Refining, & Deregulation by Paul Horsnell, Oxford University Press, 1997. The fulfilment of futures contracts is backed by margin deposits from each member of the exchange, and guaranteed by an independent clearing house, which takes over all financial commitments on to its own account at the close of each trading day; every contract to accept or deliver not offset by a reverse transaction is with the clearing house, no longer between the buyers and sellers of the contracts who originally agreed on the price for each contract (See, for instance, J.E. Hartshorn, Oil Trade: Politics and Prospects, Cambridge: Cambridge University Press, 1993, pp. 206–11). Another Government of Dubai venture, the Dubai Mercantile Exchange (DME), has also announced intentions to launch a sour crude oil futures contract in late 2006.

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24

The Outlook for Gas in Southeast Asia Steve Puckett

INTRODUCTION Southeast Asia is diverse, including countries such as Indonesia — a large and resource rich developing country of some 13,000 islands stretching across 5,000 kilometres, Singapore — a highly developed city-state economy that imports all its energy resource needs, Cambodia — a country with low energy intensity developing from a very low economic base and Vietnam which, while still at an early stage of economic development, is experiencing doubledigit growth in its energy demand and has a strong appetite for gas. In many Southeast Asian economies, urbanization is occurring rapidly and several countries are building manufacturing bases and looking to develop industries, all of which results in more gas being required to supply power demand, city gas and industrial gas applications. Natural gas fulfils about one quarter of the primary energy needs in the region. Gas consumption in Southeast Asia was about 127 billion cubic metres (bcm) in 2005 and the majority of the gas consumed in the region, of the order of 54 per cent, was used for power generation. Regional gas consumption is expected to increase to more than 200 bcm over the next ten years, with the proportion of gas used for power expected to increase steadily from current levels. Gas offers a clean, flexible and often economic fuel option.

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In addition to the growing use of gas for power generation, countries such as Thailand and Indonesia are also growing their industrial and city gas markets, while in Brunei, the Philippines and Vietnam, gas is used almost entirely for power. Malaysia has grown its gas-fired power generation and now about 70 per cent of power is generated from gas and it has constructed a Peninsular Gas Utilization grid to extend gas supply to industry and commerce. In Indonesia there is potential for significantly increased demand for gas beyond what it is currently able to supply. Indonesia is at a critical point where more gas is required to support both domestic development for power and industrial use and to maintain its liquefied natural gas (LNG) exports. To meet Indonesia’s needs, it will be necessary to progress the development of gas projects. The region has significant potential to develop its gas pipeline infrastructure which is limited when compared to the extensive pipeline grids of North America and Europe. Southeast Asia has a limited but growing commercial cross-border trade of pipeline gas. Singapore receives gas supply from Indonesia and Malaysia. Thailand receives gas from Myanmar to supplement its domestic production and gas is supplied to Malaysia from the joint Thai-Malaysia development area. In several countries, the demand for gas for power is growing strongly, and Thailand and Singapore are among a number of countries in the region that are considering future LNG imports to supplement pipeline supplies. A critical factor in the growth of gas for power will be that gas remains affordable while pricing structures should recognize the importance of attracting the necessary investment to develop gas and power infrastructure. In some countries in the region, the pricing of gas and power is an issue, in that the low level of pricing does not meet the necessary thresholds to sustain profitability and encourage investment. A balance needs to be achieved which both maintains the affordability of gas to consumers and satisfies growing demand, while at the same time prices gas at a level which encourages investment. Investment in gas and power projects continues to be a challenge in countries where policy or regulatory issues have yet to be clarified and where off-takers are unable to maintain commitments or meet the expected levels of creditworthiness. Clear and integrated energy policies and solid commercial frameworks are essential to attract private and institutional funding that could be used to meet the requirements for investment in gas and power. Gas needs to compete with alternative energy sources. Indonesia and the Philippines have abundant coal reserves and several other countries have developed hydro-electric power. These alternatives however are unable to

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combine both the flexibility and efficiency of gas with its clean fuel characteristics. Coal is the dominant fuel competing with gas and coal fired power generation will remain an economic alternative for those areas where supply is readily available. Clean coal technology and bio-fuels have yet to establish a significant presence in the region and could feature in the future. Laos generates hydroelectric power for export to Thailand; however hydroelectric power has to overcome major capital investment, environmental and social hurdles. Geo-thermal power is a further, somewhat country-specific, alternative energy source that is being developed in the Philippines. The region is resource rich, with significant gas reserves. Southeast Asia and Australia together have proven gas reserves of about 9 trillion cubic metres (tcm) concentrated in Indonesia, Malaysia, Brunei and Australia. Current annual production from Southeast Asia and Australia is about 230 bcm, while consumption in 2005 was 157 bcm. Much of the production is exported outside the region as LNG and currently about 83 bcm goes mostly to Japan, Korea and Taiwan. The Philippines has brought in offshore Malampaya gas to fuel power generation, but beyond this the country needs further investment to develop gas reserves and to build gas and power infrastructure. Independent Power (IPP) is making a return to the region. Several countries in the region had success in the 1990s in attracting private investment and independent operation of power generation facilities. These programmes stalled during the financial crisis of 1997/98 and are now once more being encouraged and attracting interest, particularly in countries such as Thailand and Vietnam where demand is surging ahead and where past issues arising during the crisis were well managed. A further outcome of regional growth in gas and power has been in interest among countries, particularly within the ASEAN framework, to cooperate either bilaterally or as a group to develop both power transmissions and gas pipeline infrastructure. The growing demand for gas has prompted the development of ambitious plans to link most of the gas-producing and -consuming countries in ASEAN by pipeline. A regional initiative has also been developed for an ASEAN power grid. Progress on these initiatives requires the commitment to overcome the many inter-country barriers that exist. OUTLOOK The countries of Southeast Asia are expected to experience robust economic growth and are planning to utilize natural gas increasingly to meet a

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significant proportion of their fast growing energy and power generation needs. Natural gas provides both a readily available and a clean energy source to meet the region’s long-term needs for increased energy consumption. The majority of the growth in gas demand and increased gas usage will be for power generation. Over the next ten years, both overall gas demand and gas consumption in power generation in Southeast Asia is expected to increase by about 80 per cent. Currently gas-consuming countries in the region use indigenously produced, or imported pipeline supplied gas, for their domestic needs. Several countries are also LNG exporters, mostly to countries in North Asia. Gas usage is expected to grow significantly over the coming years, with some countries considering beginning LNG imports to meet their future increased gas requirements, though they will have to compete for supplies with the established North Asia markets and the emerging U.S. West Coast and China markets. A critical issue driving demand will be affordability of gas; however some countries in the region will also be driven by a desire to diversify supply sources in order to increase their security of supply and to secure long-term reliable energy supply at a reasonable cost. The critical issues driving supply are the development of gas resources, the development of infrastructure for gas delivery and power generation, and in some countries the enhancement of Figure 24.1 Power Generation Growth 2004 vs 2015 350

300

250

TWh

200

150

100

50

0

Australia

Indonesia

Malaysia

New Zealand 2004

Philippines

Singapore

Thailand

2015

Sources: BP Statistical Review; country forecasts, TRI-ZEN projections.

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Vietnam

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regulatory and commercial frameworks and conditions that will attract the necessary investment across the gas to power value chain. GAS DEMAND Gas currently represents about a quarter of primary energy demand in the region. The main use for gas is power generation, while in some countries, such as Brunei, the Philippines and Vietnam, gas is used almost solely for power. Demand growth is particularly strong in countries such as Thailand, which in addition to gas for power, is also developing its industrial markets for gas. In Indonesia, gas demand for power, industrial gas consumption and city gas is growing strongly. •

•

Indonesia’s gas consumption and power generation is concentrated in Java and consumption, as in several countries in the region, is constrained by supply. About 14 per cent of total gas consumption is for power generation, and gas represents about 12 per cent of the overall power generation fuel mix. Indonesia commissioned the first section of the gas Integrated Transmission System (ITS national gas distribution grid) in 1998 and is currently constructing the South Sumatra to West Java pipeline which is proceeding in phases, with the first phase due for completion in 2006. Other sections of the ITS will be built between 2006 and 2010 but the most ambitious is the plan to extend its pipeline system with a 1200 km long connection from East Kalimantan to Java, eventually to supply some 10 bcm of gas a year to meet Java’s increasing demand. Elsewhere in Java various schemes have been suggested for the construction of LNG and Compressed Natural Gas (CNG) receiving terminals. There is emerging demand for CNG as a clean transport fuel in major cities, such as Jakarta, and CNG is also being reviewed for power generation in Bali and Sulawesi. Malaysia continues to experience robust growth and has constructed a 1,700-kilometre Peninsular Gas Utilization grid to extend gas supply to industry and commerce. The country relies heavily on natural gas for power generation and the proportion of gas being supplied for power generation has risen over recent years to more than 50 per cent of total consumption to about 70 per cent of the power generation fuel mix. The government has now adopted a policy to increase the share of generation that is fuelled by coal. Gas consumption in power generation is expected to continue to grow however, albeit at a lower rate than previously experienced. Malaysia’s large gas reserves and steadily increasing production

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•

•

•

•

and its position as a major LNG exporter have contributed to its key role in the region. Current gas developments include the promising MalaysiaThailand Joint Development Area. The Philippines successfully launched its gas industry with indigenous gas from Malampaya to Batangas in Luzon. It is now developing plans to build onshore pipelines to supply gas to Manila and Bataan. It is now also considering importing LNG to Luzon, the main island, where a number of locations have been proposed for a prospective LNG receiving terminal. Enhancement of the regulatory environment and the general level of creditworthiness of potential off-takers would be necessary before an LNG receiving terminal could be financed and built. Singapore receives pipeline gas supply from Indonesia at 6.15 bcm and Malaysia at 1.6 bcm a year, which has replaced oil in power generation. Gas pipeline imports were supplying fuel for about 80 per cent of Singapore’s electricity generation needs by the end of 2005 and it is now conducting a feasibility study to review the options for importing LNG. In addition to providing diversity and security of supply in meeting Singapore’s future gas needs, the storage of LNG for possible re-export is being considered. Thailand is a major consumer of gas and imports 20 per cent of its needs from Myanmar. Over the next ten years, gas is expected to increase from 31 per cent to 36 per cent of the primary energy mix. PTT currently operates the offshore and onshore gas transmission network and a second pipeline from Myanmar is planned. PTT is planning to expand gas production in the Gulf of Thailand and is constructing a third submarine pipeline to transport gas to Rayong. Currently about 80 per cent of gas consumed is used for power generation and gas-fired power represents about 70 per cent of the generation mix. Much of the additional 20 GW of power generation planned over the next ten years will also be gas-fired. Thailand is investigating LNG imports which it may need to supplement the supply of gas it from its pipeline supply program. Thailand is also upgrading its power transmission systems and continuing to progress its interconnections with neighbouring countries. Thailand takes 7.5 bcm of gas from Myanmar in a typical cross-border transaction resulting from bilateral agreements to jointly develop fields to supplement its domestic production. Vietnam expects power demand growth of 12–15 per cent, which would require the addition of up to 1.5 GW of generation capacity per year over the next five years, much of which demand will be met by gas-fired

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power. In the Phu My area, new power plants will be supplied by gas from the Nam Con Son basin, while the South West basin is being developed to supply projects in that area. Vietnam has substantial hydroelectric potential and is developing both large- and small-scale projects. It also has substantial coal reserves which it intends to develop for power. Vietnam is also building a national power transmission and distribution system and expects to complete a national grid by 2020. In several countries there will be significant growth in gas for power, while in some countries such as Indonesia and Thailand, there is also potential for significantly increased demand for gas to industry and city grids, beyond what it is currently able to supply. Indonesia is at a critical point where more gas supply is required to support both domestic development and to maintain LNG exports and Malaysia might possibly face similar issues in future years. To meet these needs it is essential that the development of gas supply projects progresses. The overall regional pattern of gas supply and demand is expected to evolve over the next ten years, with countries continuing to develop their gas markets based on domestic and joint development area gas, plus pipeline imports from nearby countries, for example from Myanmar to Thailand. There is also potential for countries such as Thailand and the Philippines to begin importing LNG, should it be considered affordable, though they would have to compete with established LNG markets. LNG to Singapore is expected to proceed within the next ten years given its diversity and security of supply drivers. GAS SUPPLY Southeast Asia has proven gas reserves of about 6.8 tcm, concentrated in Indonesia, Malaysia, Brunei. Australia has an additional 2.5 tcm. Current annual production in South East Asia is about 190 bcm, while regional consumption is 127 bcm. Much of the production is exported outside the region as LNG, most of which goes to customers in Japan, Korea and Taiwan. Production is increasing across most of the region. The Philippines has brought in offshore Malampaya gas, but beyond this the country needs further investment in exploration and production and gas pipeline infrastructure investment to significantly increase gas supply. Proven reserves have grown dramatically since 1980 and Australia, Indonesia and Malaysia have reserves of about 2.5 tcm each. In addition to the countries shown, Myanmar has reserves of some 0.5 tcm.

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Figure 24.2 Evolution of Proven Gas Reserves 1980 vs 2004 1980 3.00

2004

2.50

Tcm

2.00 1.50 1.00 0.50 0.00 Australia

Brunei

Indonesia

Malaysia

Thailand

Vietnam

Source: BP Statistical Review of World Energy.

Indonesia, Malaysia and Australia currently dominate gas production in the region, and the bulk of the gas produced is marketed as LNG. Brunei is also a significant LNG producer and exports to Japan and Korea. Vietnamese production started up in 1983 and is continuing to increase, mostly being consumed as gas for power domestically. Significant growth in gas production has been seen in Thailand, where production has doubled between 1995 and 2005. Regional commercial cross border trade of gas is currently limited. Singapore receives supplies from Indonesia and Malaysia, the volume of which currently stands at 6.15 bcm a year from Indonesia and 1.6 bcm a year from Malaysia. Thailand takes 7.5 bcm of gas from Myanmar in a crossborder transaction typical in the region, resulting from bilateral agreements to jointly develop fields. Such agreements are seen in the Thailand-Malaysia Joint Development Area (JDA), the Thai-Myanmar JDA, and the MalaysiaIndonesia agreement to develop West Natuna. Malaysia receives supplies from the JDA with Thailand. Natuna gas is currently supplied to Malaysia, Singapore and Indonesia, with tentative plans to also supply to Vietnam and Philippines. Southeast Asia’s pipelines grids are much less extensive than pipeline grids in North America and Europe, and significant potential exists for increased development of natural gas distribution in the region.

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Figure 24.3 Natural Gas in South East Asia and Australasia (2005) COUNTRY

PROVEN RESERVES Tcm

PRODUCTION

CONSUMPTION

Bcm

Bcm

Brunei Indonesia Malaysia Myanmar Philippines Singapore Thailand Vietnam

0.34 2.76 2.48 0.50 0.11 0 0.35 0.24

12.0 76.0 59.9 13.0 3.0 0 21.4 5.2

1.7 39.4 34.9 5.5 3.0 7.8 29.9 5.2

South East Asia

6.78

190.5

127.4

Australia

2.52

37.1

25.7

Total

9.30

227.6

153.1

Source: BP Statistical Review of World Energy.

Over the next ten years, most of the increased production and supply of gas in the region is expected to come from Australia, mostly marketed as LNG. Malaysia is increasing production from MLNG II and will be Asia’s largest exporter until production begins from Tangguh, while Indonesia remains challenged to meet both its growing domestic needs and its commitments to LNG supply contracts. Increased LNG production in Malaysia, Brunei and Australia, which is due to come on stream in the coming years, will continue to supply the traditional LNG markets of Japan, Korea and Taiwan while also supplying the emerging markets of China and the U.S. West Coast. The emerging potential markets for LNG in Southeast Asia, for example, Thailand, Singapore and the Philippines, could likely face strong competition for future LNG supplies. AFFORDABILITY A critical factor in the growth of gas for power will be that gas remains affordable, while also recognizing that investment will need to be encouraged to develop gas and power infrastructure. In some countries in the region, the pricing of gas and power is an issue, in that the low level of pricing does not meet thresholds to sustain profitability and encourage investment. A balance needs to be achieved which both maintains the affordability of gas to consumers

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and satisfies growing demand, while at the same time prices gas at a level which encourages investment. Southeast Asia has three types of markets for gas — firstly, its domestic markets; secondly, pipeline exports between individual countries; and thirdly, LNG exports. It also has three distinct pricing structures. Southeast Asia’s domestic markets are generally regulated with long-term fixed contract prices at “locally affordable” pricing levels. For pipeline exports, market structures range from controlled, as part of bilateral trade arrangements, to fully market related. For example, Singapore buys pipeline gas from Indonesia and Malaysia on long-term contracts for supply to power consumers at prices linked to the fuel oil that the gas replaces. The bulk of the export market for LNG exports is to North Asia where pricing is typically based on a contract formula linked to the price of oil. However, the emerging markets in China and the U.S. West Coast (with its linkage to U.S. Henry Hub pricing) will have an impact on this. In some markets in the region, there are limits to the affordability of natural gas versus competing fuels, such as coal and geo-thermal. This is particularly relevant for LNG that is being considered for Southeast Asian markets, where LNG will need to be priced at a level where its premium over alternative fuels is considered of value for the flexibility and efficiencies associated with clean gas. Domestic gas and electricity pricing are regarded as critical to national development in gas producing countries, such as Indonesia and Malaysia, where pricing below current international market levels contributes to maintaining the continued competitiveness of the industry and agriculture within the countries. Electricity markets in some parts of the region are undergoing a gradual transition from controlled, cost-based regulated pricing to market-based pricing. Currently many markets remain integrated monopolies, such as those in Brunei, Indonesia, Malaysia and Vietnam, while some are transitioning, such as the Philippines and Thailand, while Singapore has introduced competition in its wholesale markets. POLICY ISSUES The region does not have a single common energy policy and those agreements which are in place tend to be mostly bilateral government-togovernment understandings. In most countries in the region, gas remains a developing sector, unlike the mature markets of Europe for example, where policy tends to focus on regulation and encouraging competition. In

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Southeast Asia, policy tends to focus on encouraging some degree of diversity in fuels and encouraging foreign participation and investment. Clear and integrated energy policies, which take into account the various energy alternatives of gas, oil, coal and hydro-electricity, are essential for strong commercial development, particularly if it is hoped to attract private investment and institutional finance. Those countries most in need of investment, such as Indonesia, have the greatest degree of uncertainty surrounding current and future policies and their implementation. Well established and consistently maintained market rules are essential in order to attract long-term investment interest. The use of gas as a fuel for power generation has been broadly welcomed and encouraged by governments throughout the region, without the adoption or implementation of specific incentives. In those countries with access to ample gas supplies and well-developed pipeline infrastructure for gas delivery, such as Malaysia, Thailand and Singapore, the uptake of gas as a fuel for power has reached levels of 60–80 per cent of the overall fuel mix. Malaysia has a national fuel policy to promote consumption of indigenous gas and the utility TNB is focused on growing efficient gas-fired generation. The strategic focus is now on improving generation efficiencies by conversion or adoption of combined-cycle generation in place of open-cycle gas turbines. Thailand is committed to a programme of gas as fuel for power. It has seen steady high growth in gas-fired power generation and is now turning its attention to using gas within the industrial and transport sectors. In order to enhance energy supply security and maintain low cost-efficient gas supplies, Thailand is focused on developing bilateral supply arrangements with neighbouring countries. Singapore’s major energy concern is security of supply and, with its recent increased dependence on gas for power generation and a number of instances of interrupted pipeline supply in past years, it has embarked on detailed studies for the import of LNG as an alternative source of gas supply. Policy in the Philippines in recent years has been to expand its use of natural gas for power. However this has to be set against the relatively high cost and limited supply of gas and the low regulated tariffs for power. Exploration for gas and the development of “stranded” gas supplies in the Philippines is predicated on its eventual use and monetization in power generation. Indonesia faces a number of challenges, largely related to limited gas supply availability and infrastructure for delivery. However, new policies allowing flexible negotiations for gas producers and World Bank financial support, part of which is allocated for the provision of technical assistance to

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restructure the gas and power industries, are addressing some of the key issues. Further, the development of independent power projects is again being actively encouraged. Vietnam has opened its energy sectors to foreign participation to attract investment and to encourage development. It has extensive and ambitious plans for gas-fired power to match its projections for high levels of economic growth. Certain countries have also adopted policies to promote particular fuels in order to ensure an adequate degree of diversification of fuels and to avoid over dependency on any particular source. Malaysia, for example, has a fivefuel policy which seeks to maintain a balance between hydro, coal, oil, gas, and more recently, renewable energy. It is aiming to generate 5 per cent of the country’s electricity from “renewables”. However, little progress has been made to date. Thailand is also promoting some fuel diversification, with efforts focused on environmentally friendly “renewables” such as solar energy. While some countries within the region recognize the Kyoto and Montreal accords, most countries are considered to be emerging economies and as such CO2 emissions will unlikely be a factor in their energy investment policies. However recognizing the importance of limiting emissions, some countries have begun converting public transport in major cities to run on gas, such as in Bangkok and Jakarta. ENVIRONMENTAL IMPACTS Gas is a clean and efficient fuel, particularly for power generation. Gas-fired power has generally lower emissions than equivalent coal-fired power. Lower emissions of particulates reduce the incidence of health effects. Lower emissions of nitrogen oxide and sulphur dioxide reduce the potential for regional production of acid rain. Lower emissions of carbon dioxide reduce greenhouse gases and potential global warming. However, while many of the countries of Southeast Asia are signatories to the Kyoto Accord, CO2 emissions have yet to feature significantly in the debate in the region over the choices available for gas and power infrastructure development. Power grid inter-connections and increased electricity trade among countries with different energy resources, can offer benefits for the environment. Hydro-electric power has lower emissions of atmospheric pollutants than fossil-fuelled power. Hydro-electric power generation in Laos has been constructed specifically for export to neighbouring Thailand; however hydro-electric power brings its own environmental concerns, due in part to the destruction of eco-systems and the displacement of natural habitats.

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Except where dictated by policy and where “clean-coal” technology is adopted, coal-fired electricity generation growth is expected to attract growing concerns over emissions. Generation from natural gas and renewable energy is increasingly preferred, where the option is available. TECHNICAL PROGRESS The increasing use of gas for power generation has been due in part to continued advances in gas turbine and generator design, which have led to highly energy-efficient gas-fired power generation, with a minimal footprint for land requirements and flexible operability. Older coal-fired power plant technologies may produce high amounts of particulates. However, in modern coal plants, particulates and sulphur dioxide can be minimized, while nitrogen oxides are also substantially reduced. The net environmental benefits of displacing coal-fired power with gas-fired or renewable power depend on the technology assumed for new coal plants. In general, emissions reductions can be achieved through a combination of reductions in energy demand, shifts from coal-fired electricity generation to natural gas and renewable generation, and by employing additional emissions control technology. TRENDS AND ISSUES Investment In Southeast Asia, ownership of gas pipeline and power generation facilities is largely with government-owned or -controlled companies. Several countries are looking for resurgence in private investment in independent power development IPPs to match the interest that was shown in the early 1990s. Thailand and Vietnam in particular benefitted in the past from private investment in the power sector before the Asian financial crisis of 1997/98 and now, with economies having recovered, they are again looking for private investment. In Indonesia, a considerable amount of private and foreign investment went into the power generation sector in the early 1990s, prior to the 1997/98 financial crisis. However, the fallout from the crisis, which resulted in backtracking on, or re-negotiation of, commercial agreements with the private power producers, caused a severe loss of investor confidence. Commitment to allow PLN to restructure and raise tariffs sufficiently to allow the elimination of subsidies and to secure its financial viability longterm has yet to be seen. Investor concerns remain in spite of new legislation

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to reform the industry, and no significant new private investment has been made in the power sector. One of the largest factors influencing development and investment in the region is the process of privatization. Privatization had a degree of momentum some ten years ago and opened up opportunities for investment at that time. The process has advanced only slowly however, and at differing speeds and levels of success. Before this effort, in many countries, government-owned monopolies controlled the whole of the electricity industry, with the entire flow, beginning from fuel supply to generation and ending at metered billing, controlled by state monopolies. Further privatization and increased transparency in regulations and tariff structures would significantly encourage investment. DRIVERS FOR GAS •

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Power is the largest and most readily monetized market for gas throughout the region, whether it is gas for domestic generation of power, or gas for export to neighbouring countries in the region for power generation, or gas as LNG exports to North Asia and the emerging U.S. West Coast market. Power demand, and particularly gas-fired power demand, is growing strongly in many of Southeast Asia’s developing nations and there remains substantial potential for further increases in the use of gasfired power in the region. Energy resources, such as oil, gas and coal, are indigenous to Southeast Asia. While gas has been available to fuel the growing demands of power generation, more is needed. Currently developed gas reserves are insufficient to meet the regions long-term needs. Governments and industry in the region are cooperating to develop reserves, but this needs to be accelerated. Efficiencies and the flexibility associated with gas-fired power contribute to its economic attractiveness. Continued advances in generator design have led to highly energy-efficient installations, with a minimal footprint for land requirements and flexible operability. The handling of gas versus alternative fuels is also more efficient and flexible. Environmental benefits of clean burning gas are an increasing driver in the region. Not only is gas-fired generation preferred to coal and oil, because of its lower emissions, particularly when located in the vicinity of urban areas, there is increasing awareness of the environmental and social costs associated with alternatives such as large hydro-electricity generation projects.

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Barriers to Gas •

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Developing economies, such as those of several of the countries in the region, have unfulfilled demands for electricity and limited infrastructure. Investment is therefore needed at all value chain stages to implement gas for power generation, whether it is for gas transportation, power generation, transmission or distribution. Security of supply of gas is becoming less of a barrier to development as more pipelines are constructed. However, latent demand for gas exists in several countries and several gas markets are supply constrained. Diversity of fuels for power is a policy requirement in some countries which have a strategic requirement to use indigenous fuels and maintain a degree of diversity. This is not, however, expected to have a significant impact on the continued uptake of gas. Affordability of gas will be required to maintain growth. Currently, gas for domestic consumption and power generation in the region is priced in most countries at levels significantly below what might be achieved at export market prices, if the gas was exported. At current export market prices, gas would lose its attractiveness for domestic consumption versus alternative fuel options. Pricing of gas and power is an issue in parts of the region, not because the price is currently unaffordable or prohibitively high, rather that the low level of pricing does not meet threshold to attract investment or sustain profitability in some of the countries where investment is most in need. Policy and regulatory issues, or rather the lack of a clear and integrated energy policy with well established regulation and the appropriate economic drivers in place, is a significant barrier to the private investment and institutional investment that is needed to promote growth in several countries in the region. Financing of gas and power projects continues to be a challenge in countries where policy or regulatory issues have yet to be resolved and where creditworthy off-takers are unable to make commitments.

OTHER FUELS — NUCLEAR, CLEAN COAL AND RENEWABLES Nuclear •

Southeast Asia has yet to embrace nuclear-fuelled power; however several countries have active research programmes.

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Indonesia and Vietnam have developed plans for commercial reactors for power generation. Indonesia has three research reactors and the government has plans to commission commercial facilities from 2015. Vietnam has a research reactor and has outlined plans for commercial development. Thailand has a single research reactor and a second one under construction and is considering a commercial programme. Malaysia and the Philippines at this stage have research programmes. While countries in the region are preparing for future nuclear power, it remains a long-term option and is not expected to feature in the foreseeable outlook.

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Rising energy prices have brought renewed emphasis on coal. Coal meets much of Asia’s primary energy demand and coal will remain dominant in the energy mix for a long time. While technological advances have made coal fired power more environmentally acceptable, coal gasification projects have emerged as viable alternatives in recent years. Coal gasification is the cleanest and most efficient method available to produce synthesis gas for use in fertilizer or clean fuels production. It brings emission levels of key pollutants down near to natural gas utilization levels. Coal gasification also provides an option for producing hydrogen, and it also opens the possibility for coal utilization without emission of carbon dioxide to the atmosphere because it offers a cost-effective way of capturing CO2.

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Hydro-electric power is already well established in some countries and interest in renewable energy, in the form of bio-mass, wind power and geo-thermal energy, is growing in various parts of the region. Wind power is being developed in Malaysia and the Philippines. There are many emerging initiatives for bio-mass in Southeast Asia’s agricultural economies in countries such as Malaysia, Indonesia, the Philippines and Vietnam. These provide energy, often in the form of gas and often on a small scale; however, larger industrial applications are also being developed for co-generation from bio-waste fuel, for example, in the sugar plants in the Philippines. Geo-thermal energy is being utilized for power in the Philippines, where it is believed potential might exist ultimately to tap up to 5 GW of geothermal fuelled power. The Philippines expects to become the world’s largest producer of geo-thermal power in future years.

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REGIONAL INITIATIVES The use of natural gas is expanding rapidly in South East Asia, particularly for electricity generation. A result of this has been the development of plans for liberalization or privatization to make both gas and power markets more competitive. A further outcome of the rapid development of electricity and gas consumption has been in interest among countries to cooperate, either bilaterally or as a group, to develop both power transmission and gas transportation infrastructure. Power Grids As in most developing regions, demand for power in Southeast Asia has outpaced the development of transmission grids. Well-developed electricity power grids can improve power supply reliability, lower electricity costs, and reduce environmental impacts. Power grids improve supply reliability by enabling the system to cope better with the outage of specific generating units or types of generating units, and by limiting the scope of power outages. Power grids can lower fuel costs by allowing generation from hydro- and coal-fired power plants to displace higher cost generation. In Southeast Asia, gas-fired power from Indonesia and Malaysia could displace oil-fired power elsewhere. Hydro-power from China and Laos could reduce emissions from fossil-fuelled generation in Thailand and Vietnam. Thailand is already supplied with hydro-power from Laos. In Southeast Asia, the development of gas and electric transmission capacity is an issue for Brunei, Indonesia and Malaysia, which are major exporters of gas and could be linked by both the ASEAN Power Grid and the proposed Trans-ASEAN Gas Pipeline. A comprehensive plan for power grid inter-connections in Southeast Asia has been developed under the direction of ASEAN. The plan includes fifteen cross-border projects, supported by national power utilities. While transmission links are already successfully in operation bilaterally to bring, for example, hydro-electricity from Laos to Thailand, the Power Grid Master Plan is ambitious when compared to the current transmission capacity. The proposed 700 MW link between Singapore and Peninsular Malaysia, planned for 2010, will complement an existing 500 MW link. The planned inter-connections between Thailand and Laos, 2,015 MW of transmission capacity in 2008 and another 1,578 MW in 2010, will build on earlier links of 75 MW in 1972, 45 MW and 214 MW in 1998 and 126 MW in 1999.

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Figure 24.4 Potential ASEAN Power Inter-connects

Source: ASEAN Centre for Energy. Figure 24.5 Interconnection Projects 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Thailand – Laos 2,015/1,578 MW, 2008/2010 Thailand – Myanmar 1,500 MW, 2013 Thailand – Cambodia 300 MW, 2016 Laos – Vietnam 1,887 MW, 2007/2016 Vietnam – Cambodia 80/120 MW, 2003/2006 Peninsular Malaysia – Sumatra 600 MW, 2008 Peninsular Malaysia – Singapore 700 MW, 2012 Sumatra – Singapore 600 MW, Planned 2014 Batam – Singapore 200/200/200 MW, 2014/15/17 Sabah/Sarawak – Brunei Darussalam 300 MW, 2019 Sarawak – W. Kalimantan 300 MW, 2007 Thailand – Peninsular Malaysia, Speculative Peninsular Malaysia – Sarawak, Speculative Sabah – Philippines, Speculative Laos – Cambodia, Speculative

Source: ASEAN Centre for Energy.

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The expansion of power transmission grids is usually more cost-effective than expansion of gas pipeline grids, unless large volumes of gas are being moved. Gas pipelines have relatively high fixed costs and relatively low operating costs per kilometre, or cubic metre. GAS GRIDS The growing demand for gas in Southeast Asia for power generation has prompted the development of ambitious plans to link most of the gasproducing and -consuming countries in the region. There are currently six bilateral agreements for the supply of gas between countries. The first of these was between Malaysia and Singapore in 1992. Myanmar has two pipelines to supply Thailand. Indonesia has two pipelines to supply Singapore, while a third pipeline supplies Malaysia. Indonesia has plans for pipelines to transport gas from South Sumatra and East Kalimantan to Java. The development of the ASEAN gas grid has been discussed for many years. Although the number of pipelines in Southeast Asia is increasing,

Figure 24.6 Southeast Asia’s Current and Planned Gas Pipeline Infrastructure

Sources: ASEAN Centre for Energy and TRI-ZEN.

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most are designed to supply gas from one location to another, without onward transmission. There remain a number of substantial practical constraints to completing a gas grid. Many of the pipelines are designed for a specific volume, based on a long-term contract of generally twenty years between a single supplier and off-taker. Thus, the pipelines generally do not have extra capacity to allow for additional hook-ups. Further issues include: • • • • •

Limited commercial incentive to “fill in the gaps”, for example, the pipeline to the Philippines; Lack of open access agreements; Absence of common agreements among national legal and regulatory frameworks, as well gas pricing schedules; Absence of common technical standards; An assumption that Indonesia will be the major supplier into the grid.

ASEAN is working on these issues. However, it may be much longer than the projected ten years before an effective commercial ASEAN gas grid is established. NOTE This chapter by Steve Puckett has been adapted from a study originally commissioned by Shell Gas & Power for the International Gas Union and published at “World Gas Conference 2006” with additional research contributed by A.P. Regan and J. Morris .

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Sakhalin-2 Project, a New Energy Source for the Asia Pacific: History in the Making Andrew B. Seck and Viktor Snegir

HISTORY IN THE MAKING It is not often in either one’s professional career or personal life that we are afforded the opportunity to be part of history — everyday we learn of history unfolding in some corner of the world via the 24-hour electronic media, but that is not being part history, that is only observing history in the making from the sidelines. However, we personally have had the great fortune to be part of history — the development of what is probably the single largest integrated oil and gas project ever undertaken. As both current and former representatives of the Commercial Department of Sakhalin Energy Investment Company Ltd (otherwise known as Sakhalin Energy and the operator of the Sakhalin-2 Project), we have had the great pleasure and challenge of contributing to Russia’s leading oil and gas export project in the Russian Far East — the building of Russia’s first liquefied

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natural gas (LNG) plant. The world is witnessing the birth of a new oil and gas province off the continental shelf of Sakhalin island. An oil and gas province similar in size to that of the North Sea that is located on the doorstep of the Asia Pacific. It will alter the energy dynamics of this region with far-reaching geo-political implications for Russia’s relations with its Northeast Asian neighbours. Russia has a long history of being a stable supplier of oil and gas to Europe. Though Russian policymakers recognize the importance of the Asian energy market — as reflected in the government’s Energy Strategy for Russia to 2020 — this coveted market has remained beyond its reach until recently. If there were any doubts of Russia’s ambitions towards the East, then these were surely put to rest when President Vladimir Putin clearly articulated Russia’s aspirations at the APEC Summit in Bangkok on 19 October 2003: Russia is … prepared to make its contribution to creating a new energy configuration in the Asian and Pacific Region. This will allow consumers of energy resources, which are widely represented in the APEC, also bearing in mind the prospects of economic growth of these countries, to diversify deliveries of energy resources, and, which is especially important, to ensure their safety…

The G-8 Summit, led by the Russian Federation, which took place in St. Petersburg in July 2006, once again confirmed the high potential of such projects as Sakhalin-2. The international declaration on global energy security, approved by the G-8 Summit, repeatedly highlights the need to encourage substantial investment and innovative technologies in the oil and gas sector. Development of the global LNG market is defined as one of the priorities for world energy policy. Russian Federation Minister of Industry Khristenko, spoke at the summit of the importance of the Sakhalin-2 Project. Russia is not a player on the world LNG market yet, but the construction of the Russia’s first LNG plant under this project will provide the requisite conditions for globalization, said the minister. The next several pages will provide a brief overview of the Sakhalin-2 Project, some of the challenges faced and explain how the Sakhalin-2 Project extends Russia’s role in the Asia Pacific. BIRTH OF THE SAKHALIN-2 PROJECT Typical of most large scale upstream oil and gas ventures, the Sakhalin-2 Project has had a long lead time. It was back in May 1991 that the government of the USSR invited international oil companies to tender for the right to conduct a feasibility study for the development of the Piltun-Astokskoye and

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Lunskoye licence blocks. The combined recoverable reserves of these two fields is over 150 millions tonnes of oil and 500 billion cubic metres (bcm) of natural gas. This programme became known as the Sakhalin-2 Project. A feasibility study was completed at the end of 1992 and approved by the Russian Federation in 1993. The following year the consortium of investors formed a company called Sakhalin Energy. Sakhalin Energy went on to sign Russia’s first ever Production Sharing Agreement (PSA) on 22 June 1994, which guarantees the project a long-term stable legal and fiscal framework. In 2000, Shell acquired Marathon’s interest, as well as assuming the position of majority shareholder, leading to the current shareholding structure of Shell (55 per cent), Mitsui (25 per cent) and Mitsubishi (20 per cent). These are shareholders, who have an unrivalled track record in developing LNG projects worldwide. The respect all signatories have shown to the sanctity of this contract over the years cannot be understated. For it gave the investors the confidence to proceed with Russia’s largest foreign direct investment project at a time when much of Russia’s general legislation, in particular tax legislation, was in constant state of flux, and oil and gas prices were not particularly robust. The PSA has thus far survived periods of both low and high oil prices, successive changes in Russian administrations, and more recently, an emerging global trend of resource nationalism in this current period of very high oil prices. Because all signatories to the Sakhalin-2 PSA have such a vested interest in the project’s success, we have every confidence that the Sakhalin-2 PSA will continue to be the governing mechanism of this project. Representatives of the Russian Federal Government and the Sakhalin Oblast Administration oversee the development of the Sakhalin-2 Project via a supervisory board, which also contains representatives of Shareholders and the Company. The Supervisory Board reviews and approves all annual work plans and budgets, and also approves any of our long-term gas sales agreements. PHASE 1 The Sakhalin-2 Project has rightly become known as a project of many firsts. Not only did Russia sign its first PSA, under Phase One it also concluded its first non-recourse project financing and achieved Russia’s first offshore oil production when the Piltun-Astokhskoye field came onstream in 1999. Oil production of approximately 11,100 cu. m/d (approximately 80,000 b/d) is carried out on a seasonal basis during the ice-free period between May and December at the Vityaz production complex, which is built around the Molikpaq platform (see Figure 25.1).

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Figure 25.1 The Molikpaq Platform

The Molikpaq was previously based in the Canadian Beaufort Sea as an ice class drilling rig before being converted, at first by a Russian and then a Korean shipyard, for use as a production and drilling platform. Oil is transported by sub-sea pipeline from the Molikpaq to a single anchor leg mooring buoy (SALM) and floating storage and offloading (FSO) unit, where it is then transferred to shuttle tankers for sale to Russia’s customers. In the summer of 2005, Sakhalin Energy offloaded its 100th oil cargo and during the course of the 1999–2005 production seasons, has produced over 73 millon barrels of crude oil. To date, Sakhalin Energy has sold its sweet, high quality crude oil to customers in Japan, Korea, China, Taiwan, Thailand, Philippines and the U.S. West Coast. To allow the platform to continue to work all year round under the second phase of development in July 2006, two Molikpaq Tie-In Modules, each the size of a ten-storey apartment block, were successfully installed on the platform. They will link the platform to the pipeline system which runs to the coast and then down the spine of the island onshore. While at present Sakhalin Energy is only a niche player in the Asia Pacific crude market due to its seasonal production, Phase One has brought tremendous value to the project as a whole. Quite apart from the obvious

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revenue generated from such sales, Phase One has demonstrated to the world that Sakhalin Energy could develop a world-class project in the Russian Far East. Despite the many uncertainties of this frontier development, it proved possible for Sakhalin Energy to produce Russia’s first offshore oil under a PSA regime. Through sales of crude oil, Sakhalin Energy has built energy bridges with customers throughout the Asia-Pacific and hence has increased the brand awareness of Sakhalin Energy and its credibility in the marketplace. This is true not only for its crude oil customers, but also for its LNG customers in Phase Two of the project. Most of the major LNG customers in the Asia-Pacific have travelled to Sakhalin at one time or another to see for themselves the progress. As it ramps up to year round oil production in late 2007 under Phase Two of the project, Sakhalin Energy will move from being a niche player to a significant supplier of crude. Moreover, when one considers the combined forecast of Sakhalin-2 Project’s crude exports with that of the Sakhalin-1 Project (>420,000 bopd), the potential for a new Russian marker crude in the Asian-Pacific marketplace is not unreasonable, especially if additional projects materialize as well. PHASE 2 ENGINEERING MARVELS The key highlight of 2003 for Sakhalin Energy and its shareholders was the announcement of the Declaration of Development Date for the Lunskoye field on 15 May 2006. This decision to move ahead with Phase Two of the project made the Sakhalin-2 Project the largest single foreign investment project in Russia. It is Russia’s first LNG project and will have a capacity of 9.6 million tonnes per annum (mtpa) of LNG. The key features of Phase Two are outlined in Figure 25.2. • •

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A second platform on the Piltun-Astokhskoye field in addition to the Molikpaq; Conversion of the existing seasonal operations of the Molikpaq platform to year-round production via a tie-in to the new Phase Two pipeline infrastructure; A platform on Lunskoye, capable of producing up to 17 bcmpa of natural gas; An onshore processing facility to take the gas and condensate from the Lunskoye field; Parallel gas (1,220 mm dia.) and oil (610 mm dia.) pipelines laid down the spine of the island to the south to Prigorodnoye at Aniva Bay; An oil export facility capable of year round operation; and A two-train LNG plant of 4.8 mtpa per train.

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Figure 25.2 Map of Sakhalin-2 Project

Installation of two additional offshore platforms, construction of an LNG plant and onshore processing facility, as well as the installation of the sub-sea and onshore pipelines under the Sakhalin-2 Project, Phase Two — are all technically complex projects and represent new engineering marvels in the Russian Far East, and the oil and gas industry as a whole. For example, the innovative nature of Sakhalin Energy’s design allowed it to successfully install the topside of the Lun-A gas platform offshore in northeastern Sakhalin in June 2006. This operation set several new world records in the oil and gas industry and required a long period of best-inclass engineering and preparation: •

Construction of two concrete gravity base structures (CGBS) — the first of their kind built in Russia — was completed in 2004/05 in a specially built dry dock in Port Vostochny, in the Primorskiy Krai. The fact that these were built in record time, with 96 per cent levels of Russian content and to world-class quality, is testament to the success of the multitude of

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international and Russian companies and thousands of Russian workers who worked on this project. In the summer of 2005, the two CGBS were towed out and delivered to their locations. The Lun-A CGBS, for example, covered a distance of 1,765 kilometres before it was set on the sea floor in a water depth of 48 metres. This is a gigantic structure, consisting of a caisson base and four cylindrical legs. It has a total weight of 103,000 tonnes. The base is 105 metres by 88 metres and 13.5 metres high. The diameter of each leg measures more than 20 metres and they are some 56 metres high. The total height of the entire structure is 69.5 metres. The Lun-A topside was manufactured by Samsung Heavy Industries at their yard on Geoje in South Korea. The company is currently completing the PA-B platform topside. Huge purpose-made hydraulic jacks were used to lift the Lun-A topside to a height of 25 metres and to place it on a gigantic loading frame. That was a world record-breaking heavy lift operation among similar types of operations. Then a specially built barge was used to safely carry the huge topside and the loading frame to its final destination. The successful “mating” of the platform’s topsides to the four concrete legs of the base, previously placed on the seabed. The installation barge carrying the topsides was carefully towed between the legs of the concrete gravity base structure (CGBS), and then lowered into place using the socalled “float-over” technique by ballasting down the T-shaped barge. Legmating units were pre-installed in each of the CGBS legs to centralize the topsides during the lowering process, and to act as shock absorbers during the initial contact. Given the total weight of the topsides, this installation broke the world record for open-sea operations of this type (see Figure 25.3).

The construction and installation of the Lunskoye platform is but one of the many engineering marvels under Phase Two of the project. Sakhalin Energy’s decision to locate our LNG plant in the far south of the island was driven by several factors, but most of all by the fact that Aniva Bay remains largely ice-free year round, and thus from Prigorodnoye, it is able to assure its customers of a stable supply of LNG even during the winter months. LNG tankers loading cargoes at Prigorodnoye will only require some minor ice strengthening. In fact, a number of key customers have travelled by ship to Aniva Bay in the depths of the Sakhalin winter, and have been pleasantly disappointed to see how little ice there is. Construction of the Russia’s first LNG plant is now over 90 per cent complete and first LNG deliveries are scheduled for 2008.

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Figure 25.3 Sakhalin-2 Project Offshore Activities

BREAKTHROUGH LNG SALES FOR RUSSIA Sakhalin Energy’s shareholders have long recognized that LNG is inherently more flexible than pipelines as it allows it to reach more markets in more countries and so to achieve an economically robust project. Sakhalin Energy’s first contract was signed with Tokyo Gas on 12 May 2003. It was a significant step forward in the strengthening of economic ties between Russia and Japan, which would significantly enhance the political dialogue between Moscow and Tokyo. Japan for the first time believed in and trusted Russia to play an active long-term role in Japan’s energy security — a true accolade for the progress Russia has made since the break-up of the former Soviet Union in 1991. Even though the demand for gas in Asia is forecast to grow strongly over the next two decades, there is no doubt that the Asian-Pacific gas market is a very competitive place. Sakhalin Energy has been and will continue to be successful in securing LNG markets as a strategic new energy supplier for Asia, as it develops individual customer value propositions for each of its customers, which builds on the unique proposition of the Sakhalin-2 Project:

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Proximity to the market. Sakhalin Energy is the closest source of LNG to key markets of Northeast Asia (for example, its sailing time to Japan is only one to three days and only two to three days to Korea). Northern LNG — winter biased seasonality. This is particularly important for those markets which experience a high degree of seasonality due to city gas usage in the winter (for example, Korea). Sakhalin Energy’s LNG plant will produce 20 per cent more LNG in winter than in summer. Security of supply. Sakhalin LNG represents a new source of energy diversification for the Asia-Pacific market.

Today, when most of the LNG, which will be produced by Sakhalin Energy’s first two trains is already sold, its sense of historical significance for Russia back in 2003 has been confirmed: •

•

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The list of Sakhalin Energy’s Japanese customers now consists of all major utility companies in Japan, including Tokyo Gas, Tokyo Electric, Chubu Electric, Kyushu Electric, Tohoku Electric, Toho Gas, Hiroshima Gas. Sakhalin-2 LNG will be the first Russian gas to be supplied to North America. An agreement signed in October of 2004 calls for supply of 37 million tonnes of LNG over a twenty-year period to LNG receiving terminal in Baja California, Mexico. Finally, a contract for supply of 1.5 mpta signed in July 2005 with “Kogas” — Korean Gas Corporation — is the first long-term agreement for supply of energy between the Russian Federation and the Republic of Korea.

PROJECT BENEFITS The project’s benefits are multi-faceted. On the one hand, the state stands to gain an estimated US$50 billion (assuming forward oil price of US$34/barrel) over the project’s life-time through royalties, production share and income tax. On the other hand, there are the thousands of jobs which will be created by this project. Currently, on Sakhalin island over 17,000 people are working on the project — and each one of them is adding to the local economy through consumption of goods and services and payment of taxes. However, from a Russian Government’s perspective, they are also keenly interested in the percentage share of goods and services which are supplied to the Sakhalin-2 Project by Russian companies and nationals.

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RUSSIAN CONTENT The use of Russian industrial and human resources, known as “Russian Content” in application to PSA projects in Russia, is a key commitment of the Sakhalin-2 development. It is an important measure of the project’s overall success, and remains a major benefit that the Sakhalin-2 development can bring to Sakhalin island and the Russian Federation, throughout the life of the project. A significant challenge that Sakhalin Energy faced in the early days of the project was the capability of Russian enterprises to deliver on-time quality products and services, and at the same time stimulate, and quite often demand, our foreign contractors to develop local partnerships. In the Sakhalin-2 PSA, Sakhalin Energy undertook the commitment to achieve a level of 70 per cent Russian content (including labour, materials, equipment and contract services) over the life of the entire Sakhalin-2 Project, subject to Russian enterprises meeting the price, quality and delivery timing requirements of the project. Sakhalin Energy currently exceeds the 70 per cent Russian content requirement in terms of man-hours of services and volumes of materials and equipment. Since 1996, over 100 million Russian man-hours of services were expended, representing some 72 per cent of the total, and material and equipment supply exceeded 6.2 million tonnes, some 89 per cent of the total by the end of 2005. Out of all people working currently on Sakhalin-2 project, over 70 per cent are Russian nationals. To ensure sustained Russian content development throughout the life of the Project, Sakhalin Energy has developed a new strategy which focuses on proactive, longer-term planning of contracting and procurement activities and earlier identification of opportunities for Russian content. Sakhalin Energy continues to cooperate actively with the Russian Federation Government and Sakhalin Oblast Administration to develop Russian content through the auspices of a Joint Committee. The objective of this committee is to identify Russian businesses and industry that are capable of undertaking contracts for the Sakhalin-2 Project. This committee is also advised of all contract awards and ensures that the procurement procedures used by Sakhalin Energy have been applied in a fair, transparent and consistent manner. PROJECT CHALLENGES Apart from the sheer technical and logistical challenges of building the world’s largest integrated oil and gas project in the frontier region of the

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Russian Far East, a new project of this size is bound to attract its fair share of controversy and debate. But being a leader is about facing these challenges in an open and transparent fashion and seeking compromise solutions where problems arise. In addition to the challenge of Russian content mentioned above, three other areas have attracted a fair amount of attention. Two are environmental in substance — Western Gray whales and river crossings — and the third is related to increased project costs. We shall briefly touch on these three issues. WESTERN GRAY WHALES Sakhalin island’s northeast coast is rich with marine life and is a summer feeding area for the critically endangered Western Gray whale. As an independent step, Sakhalin Energy asked the World Conservation Union (IUCN) to convene an independent scientific review panel (ISRP) to evaluate the science underlying the assessment of potential impacts on the whale and the effectiveness of the company’s planned mitigation measures. The ISRP’s Report called for a conservative risk management approach. To reflect this, in March 2005 Sakhalin Energy decided to re-route its offshore pipelines twenty kilometres further to the south to help protect the Western Gray whale. As a follow-up to the independent review process led by the World Conservation Union (IUCN) that started in 2004, Sakhalin Energy set up a round of consultations with independent scientists to discuss and propose improvements to our monitoring and mitigation strategy. Based on these discussions, it adopted a revised real-time monitoring and mitigation strategy that was successfully implemented. To date, no discernable impacts have been observed on whale abundance, distribution or behaviour. Additionally, during the installation of the CGBS in the summer of 2005, so as to minimize the risk of vessel collision with whales, Sakhalin Energy developed and implemented a set of measures that included the establishment of protection zones, navigational corridors, speed limits and the presence of patrolling Marine Mammal Observers (MMO) on vessels. These MMOs keep a continuous watch on the marine mammals to ensure compliance with the company’s commitment to marine mammal protection. Sakhalin Energy is determined to ensure that the Sakhalin-2 Project can be developed in line with international environmental standards, and the company is committed to reducing potential impacts as far as is practicable — not just to the Western Gray whale, but to the island as a whole.

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RIVER CROSSINGS Once Sakhalin Energy’s offshore pipelines make land-fall, the two oil and gas pipelines will each cover a distance of approximately 800 kilometres down the spine of the island (a combined distance of 1,600 kilometres) and will cross more than 1,000 watercourses. These mostly comprise small brooks and streams, but also include rivers with economically significant salmon fisheries and a small number of rivers that possibly contain Red Book (Sakhalin endangered) fish species. Commercial fishing is the island’s second most important industry after oil and gas development and as such, Sakhalin Energy recognizes the importance of these watercourses to the ecology and local economy of the island — particularly in terms of the salmon fisheries — and is committed to ensuring that the impact of river crossings during construction and operation of the pipelines will have only a minor short-term effect on the environment. Sakhalin Energy has spent more than five years undertaking surveys to collect environmental baseline data along the onshore pipeline route to assess the potential impact of pipeline crossings on the environment, in particular on salmon streams. The research has enabled Sakhalin Energy to apply assessments to each river or stream, to determine how and when a river is best crossed to minimize the ecological and soil impact. Rivercrossing timing and construction methods for each river and stream is approved by the relevant Russian Federation regulatory agencies and Sakhalin Energy’s strategy has also been reviewed by experts from potential lenders to the project, and approved as fit for purpose at the end of 2005. Construction of pipeline crossings on rivers identified as important to salmon spawning and those which may contain Red Book Species will be carried out during the winter months. This is typically from December to April when many of the rivers and riverbanks are frozen. This minimizes silt generation and transport during construction and after the spring thaw. This winter period is also outside the salmon spawning season, thereby limiting physical disturbance to the river and virtually eliminating the impact of construction activities on these fish. Environmental monitoring is conducted to measure the actual impact. In addition, teams of external and independent observers attend all the winter crossing pipeline installations. Their role is to assess if the construction of the crossings is done in compliance with the declared standards. Some 1,400 kilometres of pipelines have already been welded and the plan is to complete the remaining river crossings in the next winter season.

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349

COST INCREASES Following a thorough analysis of the estimated project costs, it became apparent that the project budget had become higher than was originally expected and a respective announcement of the cost increase to US$20 billion was made in July 2005. These are the total costs for the project until 2014. The reasons for the cost increase lie in a complex combination of multiple factors, among which are: Inflation, excavation of prices for materials, equipment and labour; challenging frontier nature of this mammoth undertaking; improved technical and scientific understanding, etc. Despite the cost increase, it is still a very competitive project in the industry, with development cost in the region of US$5/bbl/oil equivalent. The Russian Government is obviously quite sensitive to this cost increase as all project costs are reimbursable out of future proceeds of hydrocarbons sale under the Sakhalin-2 PSA, but it is important to keep in perspective that while costs have doubled, oil prices since the declaration of commerciality have almost tripled. Sakhalin Energy, its shareholders and the Russian Party through developing Russia’s first LNG project in a frontier region have learned a great deal, knowledge which in hindsight would have been very valuable in developing our initial plans. As Russia seeks to unlock other large-scale hydrocarbon resources of its Arctic or Far East, similar levels of development costs will be encountered. Everybody knows Russia is rich in hydrocarbons, but many still do not appreciate the true costs that will be required to develop these fields and deliver the products to market. Sakhalin Energy has just been at the forefront of this learning curve and has hence attracted a lot of attention. ROLE OF THE RUSSIAN GOVERNMENT The role of the host government — otherwise referred as the “Russian Party” with regard to Sakhalin Energy’s project — in supporting the successful implementation of the project, can not be under-estimated. There are many things within the framework of the Sakhalin-2 Project which have never been done before in Russia. LNG is a new technology and product for Russia and quite often, standards for equipment and processes of such nature have not hitherto been developed in Russia. Together, practices and procedures are being created that will be used for future LNG developments in Russia. Sakhalin Energy has enjoyed great support from the federal government and Sakhalin Oblast Administration in the marketing efforts of its project.

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Their participation in marketing trips to customers in Japan, Mexico/United States, Korea and China; receiving our customers in Moscow and on Sakhalin island; their attendance at key conferences to promote the Russian LNG; inter-governmental commissions with Asia-Pacific countries within the framework of APEC; have all played a crucial role in the marketing success of Sakhalin-2 LNG. Government representatives and Sakhalin Energy have learned together and created a long-term partnership based on trust. The government’s long-term vision on the future expansion of LNG production in Sakhalin is reflected in its Programme on Single Natural Gas Production, Transmission and Supply System in Eastern Siberia and Far East with regard to exporting natural gas to the markets of China and other Asia-Pacific countries. This programme is now being further developed by an Interdepartmental Working Group set up by the Ministry of Industry and Energy in partnership with input from the private sector, including Sakhalin Energy. Sakhalin Energy has had its differences of opinion with the Russian Party at one time or another, but such differences of opinion are par for the course throughout the world when such large-scale investments are concerned — any host government after all is the guardian of the state’s benefits and is naturally looking out for its interest. Perhaps the most contentious debate to date has been the increase in project costs since our Declaration of Development Date for the Lunskoye field. But we are confident that even this issue will be resolved satisfactorily. Neither Sakhalin Energy, its shareholders nor the Russian Party will allow the Sakhalin-2 Project to fail. In time the world will come to see the Sakhalin-2 Project as one of the greatest energy projects of all time. CONCLUSION The Sakhalin-2 Project’s achievements and impact on the Asia-Pacific market place cannot be under-estimated. Its impact will go well beyond the absolute volumes of oil and gas that will be produced by ourselves and delivered to our customers. Many countries are now actively seeking and competing for access to Russian energy resources throughout the entire Russian Far East. Russia’s competitors are fully cognizant of the growing importance of Russian energy supply in the region. But it is Sakhalin Energy’s contracts which have given the market confidence to pursue additional sales of Russian natural gas in the Asia Pacific. As to the future of new PSAs in Russia, that is for the Russian Government to decide. But the Sakhalin PSAs now stand out as a tried and tested mechanism to attract large-scale investments into Russia’s hydrocarbon sector

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Figure 25.4 Sakhalin Energy’s Export Markets

and are particularly well suited to high-risk greenfield projects in frontier regions. True, the PSA is not without its critics in Russia, but without it, the development of Sakhalin’s offshore oil and gas deposits would not be where it is today. Moreover, Russia would not have become a player in the AsiaPacific gas market. We believe the Sakhalin-2 Project is leading the way in establishing a new energy configuration in Asia by extending the global reach of Russia’s energy resources (see Figure 25.4). History will once again be made in 2008 when its first deliveries of LNG are expected. NOTE All figures in this chapter are provided by the Sakhalin Energy Investment Company Ltd.

25 EnergyPersp Ch 25

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180

11 Population of Msia Biblio

POPULATION OF MALAYSIA

180

1/30/07, 9:47 AM

Index

353

Index A A*STAR, 20, 21 A Century of War, 9 Abdullah Badawi, 8 ACD, 11 ADM-Wilmar, 17 advanced reservoir imaging, 124 Africa, 220–27 African oil transportation to China, 221 air pollution, 53 air quality emission data, 54 Alberta, 255 Alexander’s Gas & Oil Connections, 183 Al Furat Production Company, 153 alternative fuel Thailand, 258 alternative energy generation, 264 alternative energy use encouraging, 16, 17 alternative energy sources, 43 Amoco, 98, 99 passive shareholder in SPC, 100 Amsterdam, 32 Angola, 210 annual growth rate global, 178

26 EnergyPersp Index

353

Antwerp, 32 APEC, 11 APEC Energy Working Group (EWG), 174 APEC Science and Technology Ministers, 20 Arab oil embargo, 99 arbitrage opportunities, 37 A.S. Ardekani, 139 ASEAN+3, 11 ASEAN+3 Oil Stockpiling Forum, 162 ASEAN energy cooperation, 162–63 gross domestic product, 169 ASEAN Anti-Terrorism pact, 166 ASEAN-China Free Trade Area (ACFTA), 168 ASEAN for Central Asia, 169 ASEAN Ministers of Energy Meeting+3 (AMEM+3), 162 ASEAN Plan of Action for Energy Cooperation (1999–2004), 162 ASEAN Security Community Plan of Action, 175 ASEAN Way, 169 ASEAN-Russia Joint Cooperation Committee, 174 ASEAN-Russia Joint Cooperation Committee (ARJCC), 165

3/21/07, 9:05 AM

Index

354

ASEAN-Russia Summit, 166 ASEAN-SCO Energy Partnership, 156–75 benefits, 168–70 Asia energy security vulnerability, 158–59 growing energy demand, 159 regional energy cooperation, 161–62 reliance on imports, 38 scramble for oil, 249–65 Asia Energy Forum, 170 Asia Pacific, 266 Asia Pacific region demand for natural gas, 126 dependence on oil, 151 Asia-Pacific Partnership Group, 190 Asian Carbon Exchange, 13 Asian countries affiliation with ASEAN and SCO, 167 Asian Economic Community, 161 Asian Energy Partnership, 161 Asian financial crisis, 41, 48 Asian oil companies cooperation, 262 Asian oil industry, 31 Asian premium, 159 Asian Spot Market development of, 37–40 Asian economies annual growth rate of real GDP, 145 conventional per capita GDP, 145 PPP-based GDP, 144 PPP-based GDP per capita, 146 real conventional GDP, 144 Asian financial crisis, 100 Asset Based Storage, 111 Association of Southeast Asian Nations (ASEAN), 157 Atomic Energy Commission of Japan, 233 Australia, 28, 103, 153

26 EnergyPersp Index

354

impact of China’s demand for oil, 153 exporter of crude, 154 LNG exports, 274 LNG projects, 275 Azadegan project, 243 Azeri-Chirag-Guneshli fields, 242

B backwardation, 39 Baker Marine design, 84 Baker Marine Pacific Class 375 Jackup rig, 76 Baku-Tblisi-Ceyhan pipeline, 242 Bahrain, 245 Balakrishnan, Vivian, 19 Bangkok Declaration, 169 Bangkok Metropolitan Area, 50 Bangkok Metropolitan Region, 51 Bangladesh-India pipeline, 140–41 Beibu Gulf, 179 Beijing Energy Efficiency Centre, 192 Bethlehem, 67 Bethlehem Steel, 81, 82 bio-diesel FAMEs for, 299 second generation, 296 bio-fuels, 17, 285–91 advantages, 288 compared with carbon emissions, 304 cooperation between governments, 165 determining utility of, 300 global trend in usage, 298 options for diesel, 297 overview, 289 production paths, 289 second generation, 292, 296, 298 sustainable types, 306 types, 288 bio-mass fuel, 332 bio-mass-to-liquids, 295

3/21/07, 9:05 AM

Index

355

Bohai Bay, 179 Bolivia, 8 Boreh International, 37 BP, 35, 99, 102 BP Statistical Review of World Energy, 308 Bracken, Rob, 251 breaking of bulk, 107 British naval power importance of oil, 9 Brent crude, 31 Brent crude oil, 204, 214 British Nuclear Fuels, 237 British Petroleum Group, 12 Browse project, 276 Brunei, 152 BTL fuel advantages, 296 Building Energy Efficiency Label, 18 Building Energy Efficiency Label system, 16 Bukom Island, 5 bunker fuel, 33 bunkering port Singapore, 2 Bush, George W., 215, 247, 256

C Caltex, 99, 106 Cambodia, 8, 104, 317 Canada, 207 Canadian oil sands, 27 cantilever, 77 carbon dioxide emissions, 51, 59, 62 non-OECD countries, 129 Carter, Jimmy, 189 Caspian Sea, 139, 161, 171 Cedigaz World LNG Trade Outlook, 270 Central Asia, 164 energy supplies, 242 preoccupation with domestic politics, 170

26 EnergyPersp Index

355

Centre of Offshore Research in Engineering 12 Cepu oil field, 257 chaebols, 35 Chang, 61, 63 Chang, Benety, 84 Changi Airport, 100 Chavez, Hugo, 240 Chemoil, 11, 95 Chernobyl incident, 237 Chevron, 34, 259, 263 Chiangmai, 51 Chiles, 67 China, 27, 34, 35, 103, 161, 166, 250 abundant supplies of coal, 221 alternative energy, 217, 218 choice of CTL technology, 226 coal, 220–27 coal into transport fuel, 220 coal reserves, 226 coal to oil projects, 187 demand for oil, 148 domestic petroleum exploration, 176 domestic pressures for energy sustainability, 183, 186, 187– 88 drilling licences in Nigeria, 240 economy, 143–46 exporter of oil, 154 foreign trade, 143 fuel for transportation, 251 energy conservation law, 14 energy demand, 200–09 energy security, 176–96 energy SLOCs, 213 Five-Year Plans see Five-Year Plans gasoline from, 94 global energy supply, 197–218 greater energy cooperation, 188–90 growing demand, 177–82 growing economy, 85 gross domestic product, 143

3/21/07, 9:05 AM

Index

356

impact on regional demand, 150 leading oil supplier, 208 LNG, 142 local production, 177 low-cost labour supply, 143 loss of energy self-sufficiency, 176 Ministry of Energy, 192 Ministry of Science and Technology, 217 moderating destabilizing tendencies, 188 National Development & Reform Commission (NDRC), 225 natural gas, 142 need to import, 177 net exporter of oil, 212, 221 offshore oil exploration, 179 oil contracts with Saddam Hussein, 252 oil demand, 142, 146, 151–52 oil diplomacy, 176, 182, 183, 253– 54 oil diplomacy with Philippines, 254 oil production, 221 outlook for oil demand, 147 overall GDP growth, 147 overseas equity purchases, 176 overseas energy investments, 254 petrochemical sector, 146 phenomenal rise of, 48 population, 145 potential oil reserves, 254 production of major oil fields, 180, 181 regional impact of oil demand, 149–51 regional oil imports and energy situation, 150 stagnating supplies, 177–82 State Economic and Trade Commission (SETC), 192 State Environmental Protection Agency, 222

26 EnergyPersp Index

356

supply side, 182 support for certain regimes, 207 top suppliers to, 209, 210 value added tax exemption, 189 wind power, 187 China Aviation Oil, 4 China National Petroleum Corp (CNPC), 162, 254 China National Offshore Oil Company (CNOOC), 254, 239, 252, 259, 500 China National Oil & Gas Exploration and Development Corporation (CNPC), 184, 211 China Oil and Gaz Exploration and Development Cooperation (CNODC), 164 China National Petroleum Corp, 240 China/Taiwan Cross Straits flow, 97 China-US Energy Policy Dialogue, 189 China-Uzbek cooperation, 164 Chinese Academy of Science, 217 Chinese refineries expansion, 215, 216 Chinese State Oil companies projects and contracts, 184 Chongqing, 215 Churchill, Winston, 9 CIISS Energy Conference, 12 clean coal, 332 Clean Fuels Project, 104 climate change, 60 CNOCC International Limited, 185 CNOOC-Unocal saga, 206 coal, 28, 29, 319 China, in, 220–27 demand for, 127, 128 India, in, 133 pollution from, 222 coal gasification, 217 coal liquefaction, 220, 225 coal to liquid method, 224 coal to liquid projects, 223

3/21/07, 9:05 AM

Index

357

coal to liquids technology (CTL), 187 coal-to-liquids, 296 Coastal, 109 coconut, 17 coconut oil as source of bio-fuel, 288 Combined Cycle Gas Turbines (CCGT), 25, 26 communist insurgency, 33 complementary storage, 107 Concorde Energy, 91 Conference on Confidence-Building Measures in Asia, 162 conservation efforts, 59 encouragement for, 65 consumer practices, 54–56 consumer preferences irrational, 54 contango, 39, 95 Cremer, Peter, 17 crude oil benchmark price, 39 oil prices, 102, 136 production and imports, 136 top class, 204 crude refining Singapore, 2

D Daimler Chrysler, 16 Dalian, 215 Daqing oil field, 148, 179 Darfur region genocide, 211 Deng Xiaoping, 189, 192 derricks, 76 Development Bank of Singapore, 79, 98 dimethyl ether, 225 diesel FAME in, 293 diesel subsidy Thailand, in, 258

26 EnergyPersp Index

357

Dirks, Gary, 12 distribution role of independent oil terminals, 107 draw-works, 76 drill floor, 77 drill string, 77 drill-pipe, 77 drillships, 68, 74 Dubai, 10, 214, 307–16 Dubai Crude oil, 32 prices, 250 Dubai Mercantile Exchange (DME), 316

E EAS, 11 East Asia energy consumption, 156 energy outlook, 157 East Africa, 10 East Asian Summit, 21 East China Sea, 161 Sino-Japanese tensions, 241 East Timor Greater Sunrise project, 261 economic development, 15 Economic Development Board, 5, 79 economies of scale, 160 Eleventh FYP, 186 emergency stocks construction of, 160 electricity from renewable energy, 63–65 electricity, sharing of excess, 21 electricity prices rising, 23 electric power generation growth in demand, 117 Emirates National Oil Company, 4, 11, 37 emissions costs, 287 energy increasing efficiency of using, 59

3/21/07, 9:05 AM

Index

358

outlook to, 130–31, 2030 relationship environment, 58–61 energy conservation, 14–17 Energy Conservation Law of China, 14 energy consumption global primary, 42 increment, 178 energy demand growth in, 117–19, 118 world, 179 energy development Singapore, of, 6, 7 energy diplomacy challenges for, 201 energy efficiency increasing, 117 Energy Efficiency Improvement Assistance Scheme, 15 Energy Forum, 1 energy infrastructure need to safeguard, 161 Energy Institute, 11 energy intensity declining trend, 118 Energy Market Authority, 24, 25 Energy Market Authority (EMA), 29 Energy Market Company, 25 Energy Marketing Authority (EMA), 6 energy outlook, 114 energy resources impact on economy, 157 energy security challenges, 159 definition, 160 importance, 157 network in Asia, 160–61 energy situation, 151 energy supplies collective initiatives to stabilise, 163 endogenous substitution, 61 Energy System Review Committee, 6 energy use, 116

26 EnergyPersp Index

358

energy-importing countries, 158 Engdahl, William, 9 enhanced recovery techniques, 124 ENOC, 11 environment protection of, 59, 60, 61–63 environmental pollution global trend to reduce, 104 environmental protection, 61–63 Environmental Sustainability Index (ESI), 13 Erdos City, 225 ESCAP, 11 Esso, 99, 106 ethanol, 290 from non-food sources, 294 GHG emission from production, 301 promotion of, 216, 217 ethanol-blended gasoline, 217 Euro IV standards Euro 4 Emissions Standards, 16, 104 Europe, 34 bio-fuels directive, 298 growth in natural gas use, 129 light duty feul demand, 122 production decline, 126 extended reach drilling, 124 European Union, 156, 189 Exclusive Economic Zones (EEZ), 158, 241 Exxon, 3, 162 ExxonMobil, 5, 34, 91, 113, 114, 124, 215, 257 demand forecast, 130

F Falcon, 67 Far East Levingston Shipbuilding, 67 Far East Levingston Shipyard, 81 Far Western Basin, 191 fatty acid methyl esters (FAME), 288, 290

3/21/07, 9:05 AM

Index

359

Federation of Electric Power Companies of Japan, 234 Financing Energy Projects in Asia Conference, 1, 2006 Fischer-Tropsch, 224 first oil crisis, 106 Five-Year Plans eleventh, 186 emphasis on energy sustainability, 187 Ford, Henry, 216 fossil fuels, 59 supplying energy needs, 119 fossil-fuel generation plants types, 64 free market mechanisms Singapore, 7, 8 Friede Goldman Halter, 68 fuel global competition for, 27 fuel costs comparisons, 302 fuel demand projection of, 287 fuel design FAME in diesel, 293 fuel types development of, 286 Fujian, 215 futures contracts, 314 fulfilment of, 316 futures exchanges, 314

G gas affordability, 325–26 barriers to usage, 331 cross border trade, 324 demand for, 321–23 driver of change, as, 26, 27 environmental impacts, 328–29 factors driving growth, 330 investment in, 329, 330 outlook for, 319, 320

26 EnergyPersp Index

359

policy issues, 326–28 supply, 323–25 technical progress, 329 gas demand regional, 125, 126 gas grids, 335–36 gas-to-liquids, 295 capacity and emissions, 297 gaseous fuels, 286 general circulation models (GCM), 61 geo-thermal energy, 332 geo-thermal power, 319 Germany, 45 global competition, 27 global economy sustained growth, 116 global mean surface temperature, 61 Global Nuclear Energy Partnership (GNEP), 247 global population, 114 Gorgon project, 276 governments long-term commitments, 161 strategic roles, 8, 9 Great Depression, 33 Greater Jakarta, 50 Greater Sunrise project East Timor, 261 green buildings, 55 green cars, 55 greenhouse effect, 302 greenhouse gases life cycle of, 305 gross domestic product effect on, 62 Guangdong Province, 190 Guangzhou, 35, 215 Gulf of Mexico, 199, 204 Gulf of Thailand, 261 Gulf of Thailand Agreement, 262 Gulf Oil, 109 transportation of, 221 Gulf states, 245–46, 308

3/21/07, 9:05 AM

Index

360

H Hainan, 215 Heglig oil field, 211 Heilongjiang, 217 helipad, 77 high carbon approach, 15 Hin Leong, 11, 95, 111 Hinomaru oil Japan, 238–39 Hitachi Zosen Robin Dockyard, 80 historical animosity, 157 Hokuriku Electric Power’s Shika nuclear plant, 236 Honda Civic, 16 Hong Kong, 100 Horizon, 95 Horizon Research Group, 190 Horizon Terminal project, 37 Houston, 31 Hu Jintao, 240, 252 Huabei oil production, 148 Hubbert, M.K., 7 Huizhou, 215 hull, 77 Hurrican Katrina effect on energy prices, 47 hybrids, 55, 121 hybrid/fuel cell cars, 16 hydro-cracker, 100 hydro-electric power, 332 cooperation between governments, 165 hydro-power, potential, 120 hydrogen fuel, 217

I independent oil products storage first in Singapore, 109 independent oil terminals functions, 107 Independent Power, 319 independent power producers, 24

26 EnergyPersp Index

360

independent storage operators, 109 independent trading houses, 37 India, 27, 101, 103, 152, 256, 257 access to coal reserves, 132 commercial energy mix, 135 concentration of oil import sources, 137 dependence on hydrocarbons, 134 domestic oil market, 35 energy situation, 132–41 energy-securing strategies, 141 high energy-GDP elasticity, 133 hydrocarbon dependence, 133 Minister for Petroleum and Natural Gas, 161 managing risks and competition, 138–39 need for collaboration, 141 oil and gas sources, 137 perceptions of risk and competition, 134–38 Petroleum Minister, 141 petroleum usage, 133 refining capacity, 97 Reliance Petroleum Company, 3 significant economic presence, 132 transportation, 133 Indian Oil and Natural Gas Corporation, 256 Indonesia, 8, 103, 108, 152, 257–58, 318, 321 energy supplies, 244 LNG supply issues, 279 producer of natural gas, 2 infrastructure reduction of wasteful energy consumption, 53 Inner Mongolia, 225 Inpex Corp, 228, 243 Inpex Holdings, 239 Institute of Chemical and Engineering Sciences (ICES), 21 Institute of Energy Economics of Japan, 170

3/21/07, 9:05 AM

Index

361

Inter-agency Committee on Energy Efficiency, 7 Inter-governmental Panel on Climate Change, 62 inter-state rivalry, 156 International Energy Agency (IEA), 113, 134, 222, 231 defintion of East Asia, 170 forecast for LNG, 281 World Energy Outlook for 156, 2004 International Finance Corporation, 224 International Monetary Fund World Economic Outlook, 200 International Partnership for the Hydrogen Economy, 19 IOGEN, 292 IPG, 37 Iran, 210, 211, 242–44, 277 Iran-Pakistan pipeline, 139, 140 Iraq, 8 Iraq War, 249 ISEAS Energy Forum, 19 Ishikawajima-Harima Heavy Industries, 80 Islam Karimov President of Uzbekistan 164, 166 Island Power Company, 30 Isthmus of Kra, 258 Itochu Oil Exploration, 242

J Jabotabek, 50 jack-up rigs, 68, 74, 75 components, 76, 77 delivery against oil prices, 82 numbers delivered, 83 worlwide numbers, 86 Jakarta, 51 Jamaica, 8 Japan, 27, 34, 44, 45, 100, 156, 166, 255–56

26 EnergyPersp Index

361

Agency for Natural Resources and Energy, 232, 233, 239 Cool Biz campaign, 232 encouraging domestic producers, 238–39 energy competition with China, 239–41 Energy Conservation Law, 232 energy efficiency, 230 ethanol, 231, 232 free trade agreements, 228 free trade agreements drive, 244 gross domestic product, 230 helping other nations, 232–33 Ministry of Economy Trade and Industry (METI), 162, 228 negotiating FTAs with ASEAN members, 246 new energy strategy, 228–48 New National Energy Strategy, 228, 231, 233, 238, 246 nuclear energy, 233–37 oil crisis, 229–30 oil stockpiling, 159 securing stable energy supplies, 248 short-term flashpoints, 243 structural factors, 231 supplies from Brunei, 246 supplies from Indonesia, 244 Sustainable and Flexibile Energy System (SAFE), 161 uranium supplies, 237–38 Japan Atomic Energy Agency, 233, 237 Japan Atomic Energy Research Institute, 233 Japan Bank for International Cooperation, 238 Japan Business Federation, 245 Japan National Oil Company, 255 Japan Nuclear Fuel Ltd, 234 Japan Nuclear Cycle Development Institute (JNC), 233

3/21/07, 9:05 AM

Index

362

Japan Oil Development Co., 239 jatropha, 17 Jeruk field, 104 Johore, 41 Jones, Michael, 19 Junichiro Koizumi, 241 Jurong Island, 5, 11 Jurong Town Corporation (JTC), 11, 37

K Kakap PSC, 101 Kashagan oil field, 242 Kazakhstan, 10, 164, 166, 260 Keppel, 4, 72 Keppel, 101 Keppel FELS, 67, 70, 71, 84, 90 Keppel Merlimau Cogen Pte Ltd, 30 Keppel Offshore & Marine, 71 Keppel Shipyard, 71, 79 Keppel Singmarine, 71 KOGAS, 279 Korea, 156, 257 Action Plan for Rational Usage of Energy, 14 Basic National Energy Plan, 14 Korea Gas (Kogas), 257 Korean National Oil Company (KNOC), 257 Korla, 191 Kuala Lumpur, 51 Kuwait, 245, 255 Kyoto Protocol, 13, 14, 42, 44–46, 63, 64, 236 importance of, 47 Kyoto standards, 14 Kyrgystan, 191

L Lee Hsien Loong, 5, 6 legs oil rig, of, 77

26 EnergyPersp Index

362

less carbon-emitting resources switching to, 65 light duty vehicle fleet, 121 Lim, Raymond Lim, 1 Liaoning province, 217 Libya, 243, 255 light crude, 204 light sweet crude oil, competition for, 214 living quarters on oil rigs, 77 liquefied natural gas (LNG), 8, 126, 154, 266–84 Asia Pacific imports, 268, 270 Asia Pacific market, 283 Australia exports, 274, 275 competitive choice, 27 supplies with East Asian countries, 244 expenditure on projects, 281 export capacity, 268 export capacity increased, 267 globalizing market, 282 growth in existing markets, 269 growth in imports, 267–68 import prices, 280 labour and capital requirements, 280, 281 new regional markets, 271, 272 new sources, 278 outlook for regional exporters, 276– 78 outlook for regional supply, 278, 279 outook for regional trade, 269 prices, 279, 280 shipping trends, 283 short-term trading, 282 uncontracted demand, 273, 274 liquid bio-fuels yields, 303 LNG Conference, 19

3/21/07, 9:05 AM

Index

363

LNG export projects construction, 266 LNG Terminal, 3 London, 31 low sulphur crude oil, 204

M Malaysia, 29, 103, 152, 258, 321 supplier of natural gas, 2 Malaysia-Thailand Joint Development Area, 322 Mani Shankar Aiyar, 141, 153, 161, 256 manpower challenges in, 89 MARKAL-MACRO (MM) model, 64 Marc Rich, 109 marine life protection measures in Sakhalin project, 347 Martank BV, 37 Marthon Letourneau, 67, 81, 82 Maruzen Oil, 99 Means Field Texas, in, 124 Mediterranean, 38, 108 mega-urban region, growth rate, 51 Memorandum of Understanding between ASEAN and SCO Secretariat, 174 Menninger, Dave, 252 Mercedes Benz, 16 Metro-Manila, 50, 51 methyl-tertiaary-butyl ether, 216 Mexico, 207 outlook for gas demand, 272 middle distillates, 108 Middle East, 27, 28, 92, 93, 99, 108, 123, 202, 256 imports of gasoline, 309 LNG supplies from, 278 outlook on refining business, 310

26 EnergyPersp Index

363

over dependence on, 158 products exports outlook, 310 refined products exports, 307–16 refined products price assessment, 308 reducing dependence on, 160 Middle East refining impact on Singapore, 315 increased exports, 309–11 Middle Eastern crude, 92 Midland, Daniels, 17 Mihama Nuclear Power Plant, 236 Mitsui & Co, 71 Mobil, 99 Mobil Oil, 260 modern lube oil blending plant, 100 Monju FBR, 233 multilateral coordination, 160 Myanmar, 261, 318 Myanmar-Bangladesh-India pipeline, 140

N Nahodka, 260 Naoki Kuroda, 239 Nanyang Technological University, 12 National Environment Agency, 15, 18 National University of Singapore, 12, 18, 46 Natunas, 4 natural gas, 25, 26, 59, 101 importance to Singapore, 4 preferred fuel, 1, 2 regional initiatives, 333 Southeast Asia and Australasia, in, 325 use in Singapore, 45 netback methodology, 309 netforward price, 315 New Exploration Licensing Policy (NELP) India, 138

3/21/07, 9:05 AM

Index

364

New York, 31 New Zealand, 153, 154 Nigeria, 207 civil unrest, 102 drilling licences in, 240 Ningxia region, 223 Nippon Steel, 71 nitrogen fertilizers use of, 302 Ng Weng Hoong, 6 non-OECD countries, 115 demand for oil, 120 non-OECD demand, 116 non-OPEC crude, 123 non-OPEC oil sands, 123 Non-Proliferation Treaty, 134 North America, 156 gas for power generation, 129 light duty vehicles, 122 North Sea, 32 North West Shelf Train, 274 Northeast Asia energy consumption, 156 impact of Chinese oil demand, 151 Northern Palawan, 261 Norwegian investors, 68, 85 nuclear fuel cycle, 235 nuclear energy, 331, 332 growth in, 125 potential, 120 nuclear Non-Proliferation Treaty, 236 nuclear proliferation, 159 nuclear technology, 28

O Oceanic Petroleum, 98 oil, 59 demand linked to GDP growth, 249 oil and gas predominance, 119–23 Oil & Natural Gas Corp, 240 oil companies Asian, 262

26 EnergyPersp Index

364

oil crisis, 108 oil derivatives, 3, 4 oil embargo, 82 oil fields China, 180, 181 oil futures trading of, 35 oil majors role in Asia, 262–63 oil markets extreme volatility, 102 oil prices, 68 decline in, 84 freight considerations, 314 high, 249–50 risk management in period of volatility, 311, 312, 313 speculation over, 29 upward trend, 103 world, 149, 150 oil refining profit margins, 103 oil rigs, 67–72 design of, 86 oil resources global conventional, 122 oil to coal projects China, in, 187 oil stockpiling, 159 oil storage, 4, 106–12 oil storage facilities capacity owned by oil companies, 109 increase in, 10, 11 oil trading, 32, 107 prior to 1990s, 39 Singapore, in, 33 oil-fired steam generators, 23 oil-fired steam plants, 26 Oiltanking, 10, 37, 95, 111 Oman, 209, 245, 257 Oman crude oil, 214 Organizaion of Petroleum Exporting Countries (OPEC), 231

3/21/07, 9:05 AM

Index

365

crude production, 123 dependence on, 134 oil embargo, 82 Organization for Economic Cooperation and Development (OECD), 115, 131, 222 decline in production, 134 OTC FOB Singapore derivatives market, 40 OVL Videsh Ltd, 139 Oyong field, 104

P Pacific island nations, 153 Pakistan, 153 Paktank, 110 palm oil, 17 Papua New Guinea, 152 Pasir Gudang, 41 Pearl Energy, 263 Pearl River Delta, 179 Peninsular Gas Utilization grid, 318 Persian Gulf, 8, 34, 39, 152, 220 crude exports to Asia, 32 Pertamina, 257 Peru, 277 Petrochemical Corporation of Singapore, 36 petrochemical products Singapore, 3, 4 PetroChina, 35, 37, 185 Petron, 259 Petronas 8, 259, 260 PetroKazakhstan, 239, 254 PetroVietnam, 261 Phibro, 109 Philips Petroleum, 191 Philippines, 152, 259, 322 hydo-electric power potential, 318 Philippines National Oil Company, 254, 259 Pilbara LNG project, 276 “plain vanilla” swap, 316

26 EnergyPersp Index

365

Platts, 31 new methodology, 40 role of, 39 Platts 2005c, 282 Platts’ FOB Singapore petroleum product price assessments, 39, 40 pluthermal plants, 235 policymakers effect of high prices of crude oil, 205 problems facing, 204 political engagement energy security, 157 pollution use of coal, 159 power generation natural gas for, 15 regional demand, 127, 128, 129 power grids, 333–35 Port of Sudan 211 PowerGas, 26 PowerGrid, 25 Power Reactor and Nuclear Fuel Development Corp (Donen), 233 PPL Shipyard, 84 Premcor, 215 Promet, 84 Public Utilities Board, 7, 23 Pulau Bukom, 106 Pulau Busing, 110, 111 Pulau Merlimau, 99 Pulau Sebarok, 100, 109 purchase/maintenance costs, 287 Putin, Vladimir, 163, 241, 261 Putrajaya, 51

Q Qatar, 245, 257 Qingdao, 215

R radio wind up, 21 Rajaratnam, S., 8

3/21/07, 9:05 AM

Index

366

rapeseed oil, 288 bio-diesel production, 285 Reading and Bates, 67 refineries total refining capacity, 3 refining capacity Singapore, of, 91–92 refining hub, 4 Reliance Petroleum Company, 3 remote microwave repeater stations, 44 renewable energy, 28, 58–66, 253–54, 332 switching to, 61–63 renewable energy industry value added tax exemption, 188 Renewable Energy Sourced-Electricity (RES-E), 63 Renewables Portfolio Standard (RPS), 63 reports and government papers, 57 residue catalyctic cracker, 100 rig building boom period, 85 challenges, 89–90 challenges facing, 70 future of, 88–89 partners, 72 reasons for Singapore’s success, 87– 89 rig building projects time sensitive, 69 R.K. Pachauri, 139 RME WTW analysis of, 301 Robin and Promet (PPL), 67 Rolls Royce, 21 Rotterdam, 32 Roumasset, 61, 63 Royal Dutch Shell PLC, 222 Russia, 10, 123, 156, 169, 210, 257, 260 breakthrough LNG sales, 344–45 energy supplies, 241

26 EnergyPersp Index

366

LNG projects, 276, 277 Yukos problem, 102 Russian energy, 163, 164 Russian oil, 259

S S. Iswaran, 1, 2 Sadam Hussein oil contracts with China, 252 Sampang Production Sharing Contract, 104 Sampang PSC, 101 Sakhalin, 277 Sakhalin Energy export markets, 351 Sakhalin Energy Investment Company Ltd, 337 Sakhalin-2 Project, 337–51 achievements impact Asia-Pacific market, 350 birth of project, 338–39 challenges, 346–47 costs escalation, 349 engineering marvels, 341–43 phase 1, 339, 340, 341 pipelines across river crossings, 348 project benefits, 345 protection to marine life encountered, 347 role of Russian government, 349–50 Russian industrial and human resources, 346 salmon species protected, 348 salmon species, protection for, 348 Sasol, 223, 224 Saudi Arabia, 9, 207, 245 Crown Prince Abdullah’s visit to US, 208 Scanoil, 109 Science and Engineering Research Council, 20 SCO-Afghanistan Contact Group, 166

3/21/07, 9:05 AM

Index

367

Sea Lanes of Communications (SLOC) Asia, in, 158 need to protect, 171 SeaDrill, 70 second oil crisis, 108 Sedco, 67 Sedco Forex, 84 Sembawang Shipyard, 79, 80 Sembcorp, 4 SembCorp Gas, 25, 26 SembCorp Marine, 90 rig building, 84–85 SembCorp Marine Ltd, 67 semi-submersible rigs, 68, 70, 76 SGX AsiaClear, 3 Shah of Iran overthrow of, 99 Shanghai Cooperation Organization Summit, 163 Shanghai Cooperation Organization (SCO), 157 Shanghai Futures Exchange, 35 Shanghai Spirit, 169 Shanshan, 191 sharing mechanisms, 160 Shell, 3, 35, 43, 91, 99, 110, 223, 255, 259, 292 first bunker oil tanker, 106 Singapore, in, 108 Shell Solar, 18 Shengli oil field, 148 Shenhua, 223 Shenhua Group Corp, 222 Shikoku Electric Power, 237 Siberia oil from, 163 simple processing, 107 SINERGY programme, 20 Singapore, 1–22, 48, 152, 322 achievements in energy sector, 2–4 American rig builders, 80, 81, 85 Approved Oil Traders Scheme, 3

26 EnergyPersp Index

367

Asia’s trading centre, 40, 41 Biopolis building, 46 Building and Construction Authority, 2 bunker trade, 110 bunkering centre, 33 bunkering port, 94 car ownership, 54 case for higher prices, 30 challenges, 6 challenges in energy industry, 1 changing landscape in energy, 23– 30 cooperation with neighbours, 29 courting of energy sector investors, 5 crude import, 92, 93 curb on energy usage, 21 dependence on natural gas, 4 Deputy Minister for Trade and Industry and Foreign Affairs, 1 diversification, 3 Economic Development Board, 2, 5 electricity industry, 24, 25 electricity supply, 26 encouraging renewable energy, 16 energy consumption, 49 energy demand growth, 2 energy development and conservation, 21 energy efficiency, 18 Energy Smart Buildings, 18 export of oil to China, 94 factors affecting, 35–40 factors affecting energy situation, 4–6 financial capabilities, 97 free market approach. 5 Fuel Economy Labelling Scheme, 14 future role of solar PV, 44 gas industry. 25, 26 gas supply, 318

3/21/07, 9:05 AM

Index

368

good governance. 5 government intervention, 35, 36–37 Green Mark for buildings. 14 growth in energy demand, 42 history, 32–34 hydrogen as alternative fuel. 19–21 IEA data, 13 implications of energy competition, 9, 10 imports energy supplies, 9 integrated oil hub, 3 Inter-Agency Committee on Energy Efficiency (IACEE), 15 investment opportunities in energy sector, 10 Kyoto Protocol, 44–46 lack of state-owned oil companies, 36 Land Transport Authority, 2 leading oil trading centre, 34, 35 LNG terminal, 2 marine roots, 78, 79 maritime history, 78 Ministry of Manpower, 89 Minister for State for Trade and Industry, 2 Ministry of Trade and Industry, 6, 24 Ministry of Environment, Water and Resources, 7 National Climate Change Committee, 14 National Energy Efficiency Committee, 14 need for intellectual capacity, 11–14 nuclear energy not an option, 17 oil export data, 95 oil product balance, 94 oil refining hub, 103 oil stockpile, 11 oil storage facilities increased, 10, 11 oil trading, 31–41

26 EnergyPersp Index

368

outlook for, 96, 97 ownership of oil storage terminals, 38 Pearl Energy, 263 per capita electricity use, 13 petrochemical products, 3, 4 political stability, 5 power security, 29 price assessment of refined products from Middle East, 308 principles of energy development, 6, 7 product storage, 95 re-export of fuel, 38 refined petroleum products, 32 refining capacity, 91–92 regional oil storage hub, 4 regional refining hub, 4 reliance on free market mechanisms, 7, 8 restructuring of energy sector, 24, 25 role as trade centre, 32–34 sea port, 5 semiconductor industry, 17 sound financial system, 6 solar power, 42–46 strategic location, 2, 5 storage ownership, 38 strategic position, 92 strategic storage, 96 third largest oil trading centre, 2 threats to position, 40, 41 top bunkering port, 2 total area, 44 total product exports, 33 unique position, 56 use of solar power, 1, 19 Singapore Cooperation Enterprise, 10 Singapore government role of, 79, 80 Singapore Initiative in New Energy Technology, 20

3/21/07, 9:05 AM

Index

369

Singapore oil price, 4 Singapore Oil Report, 6 Singapore Petroleum Company, 8, 34, 36, 98–105 acquisitions, 101, 102 beginnings, 99 bunkering business, 100 diversifying market, 99 exploration and production initiatives, 104 first refinery, 99 jet fuel supplier at Changi Airport, 100 joint venture with Caltex and BP, 99 oil storage terminal, 100 ranked top-quartile refinery in Asia, 100 setting up SRC, 99 shareholder control, 101 Singapore Power, 7, 24, 25 Singapore Refining Company (SRC), 3, 99 Clean Fuels Project, 104 Singapore Stock Exchange, 3 Singapore Trade Statistics, 31 Singapore-based oil pricing, 315 SingPower use of natural gas, 45 Sino-American rapprochement, 188 Sino-Japan disputes, 152 Sino-Japanese tensions East China Sea, 241 Sino-US energy cooperation, 189 Sinochem, 185 Sinopec, 35, 185, 255 Sinvest, 70 SK Corporation, 37 solar energy, 28 Solar Energy Power firm, 18 solar power, 16, 18, 19 solar photovoltaic (PV), 42 state of art, 43, 44

26 EnergyPersp Index

369

solar Photovoltaic (PV) panels, 64 solar power, 42–46 potential for growth, 120 solar PV, 45, 64 enabler of commercial infrastructure, 44 solar PV market financial incentives offered, 45 growth in Singapore, 46 solar PV modules, 44 solar water heaters, 43 Solid Oxide Fuel Cell technology (SOFC), 64 Solomon Associates, 100 Sonat, 67 South Africa, 220, 224 South Asia, 35 impact of China’s demand for oil, 153 South Caspian Sea, 242 South China Sea 213 South Korea, 34, 100, 101, 103, 166 Minister of Commerce, Industry and Energy, 161 oil stockpiling, 150 Southeast Asia, 28 bio-fuel producer, 299 carbon emissions, 49 electricity use, 49 energy consumption, 48–50 gas reserves, 323 impact of China’s demand for oil, 152, 153 outlook for gas, 317–36 population, 50 swing refiner 3 urban development, 47–57 urban economy, 50 urbanization, 48–50 soya as source of bio-fuel, 288 Soviet Union, 203, see also Russia speculation, 107

3/21/07, 9:05 AM

Index

370

spot market benchmarks, 39 spud can, 77 sugarcane as fuel source, 17 stabilization, 107 stable energy supplies collective initiatives, 163 State Economic and Trade Commission (SETC) China, 192 State Planning Commission (SPC), 192 Statoil’s Lufeng field, 182 Straits of Malacca, 97, 213, 220 strategic storage, 107 Sumatra, 4 Sudan, 139, 210, 211, 260 Sudi Aramco, 215 Sumitomo and Kansai Electric Power, 238 Sunrise project, 276 Susilo Bambang Yudhyono, 244 Sustainable and Flexibile Energy System (SAFE), 161 Sustainable Energy Association of Singapore, 13 Swan Hunter Group, 79 swing refiner, 3 synthetic fuel derived from natural gas, 295 from gas, coal and bio-mass, 294 synthetic fuels, 285–91 advantages, 296 Syria, 153

T Taishet Pacifi-bound oil pipeline, 163 Taiwan, 100, 101 gasoline from, 94 oil stockpiling, 159 Tajikistan, 191 Tanjung Pelepas, 41

26 EnergyPersp Index

370

Tanjong Penjuru, 106 tar sands, 27 Tarim basin, 179 technology efficiency improvements, 129–30 meeting supply challenges, 124–25 TechScan on Energy, 20 Teikoku Oil, 239, 243 Teikoku Oil Co., 228 Temasek Holdings, 79 temperature, global mean, 61 temperature profiles, 62 tender rigs, 68 Thailand, 34, 100, 103, 152, 258, 318, 322 diesel subsidy, 258 gasoline from, 94 introduction of bio-ethanol, 291 urban sprawl, 53 Third Asian Cooperation Dialogue (ACD), 162 Three Mile Island incident, 237 top class crude oil, 204 Tokyo Commodity Exchange (TOCOM), 34 Tokyo Gas Engineering, 4 Toyota Prius, 16 trading companies, 38 transport use for, 52 Trans-Siberian pipeline, 164 Treaty of Amity and Cooperation (TAC), 169 Tsinghua University, 217 Turkmenistan, 161 Turkmenistan-Pakistan-India pipeline, 140 Turkmenistan-Afghanistan-Pakistan (TAP) gas pipeline, 164 Turkmenistan-Afghanistan-PakistanIndia (TAPI) gas pipeline project, 164 turntable, 107

3/21/07, 9:05 AM

Index

371

U UK White Paper (2003), 22 ultra-low sulphur diesel (ULSD), 104 undersea electricity cable connection, 17 UN Industrial Survey Mission, 79 UN Security Council, 263 United Arab Emirates, 32, 245 United Kingdom, 27 United States 8, 27, 34, 39, 45 emission rates from major electric power sources, 45 energy demand, 198–200 establishing clear supply cushion, 209 ethanol production capacity, 216 global energy supply, 197–218 leading oil supplier, 208 marginalizing of certain regimes, 207 notion of equity, 202 oil refiners, 215 suburban separatism, 51 University of Newcastle, 12 UNOCAL, 9, 252, 255 Universal Terminal project, 37 Uranium Resources, 238 uranium-plutonium mixed oxide fuel, 234 urban and industrial development delinking of, 15 urban development re-think, 51–53 urban development trends, 47 Urban Redevelopment Authority, 46 urban transportation high carbon emission, 53 US Department of Energy, 113, 198, 199 forecasts, 201 Freedom Car and Fule Partnership, 130 US drilling contractors, 70

26 EnergyPersp Index

371

US Dollar impact of depreciation on oil prices, 150 US West Coast, 108 US-backed trade embargoes, 207 US-China relation, 10 US-led invasion of Iraq, 209 Uzbekistan, 166 Uzbekneftegaz, 164

V Valero, 215 value added tax exemption China, 189 Van Ommeren, 109 competition against, 110 merger with Paktank, 111 Pulau Sebarok products storage, 112 vehicle impact of ethanol on performance, 291 Venezuela, 8, 9, 207 Very Large Crude Carriers (VLCCs), 94 Vietnam, 8, 97, 152, 261, 322 Vitol, 37, 111 Vopak, 10, 37, 95, 111 Fujairah storage, 111

W Wal-Mart, 203 Watts, Phil, 20 Well-to-Wheel analysis assessment of FAMEs, 302, 303 Well-to-Wheel approach new focus of, 305 West Africa, 10, 139 West Natuna gas field, 26, 101 Western Gray Whales, 347 western hemisphere energy supplies from, 202 Western oil companies consolidation, 101 Westinghouse, 237

3/21/07, 9:05 AM

Index

372

wind technology, 28 wind power China, 187 potential, 120 World Bank, 13, 191, 224 World Competitiveness Yearbook, 14 World Economic Forum, 13 World Economic Outlook, 200 world energy order, 208 World Health Organization, 222 World Hydrogen Technologies, 20 World Petroleum Congress, 12 World War I shift from coal to oil, 198 World War II, 33 WTI crude oil, 205

26 EnergyPersp Index

372

X Xinjian oil fields, 182 Xinjiang-Uighur Autonomous Region, 191 Xinoa Group, 224

Y Yadavaran agreement, 212 Yadavaran oil field, 211, 240 Yemen, 277 Yom Kippur war, 82

Z Zhenhai, 215 Zoellick, Robert, 190 Zukoski, Charles, 20

3/21/07, 9:05 AM