Energy Issues in the Asia-Pacific Region 9789814279284, 9814279285, 9789814279291, 9814279293

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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 more than 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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First published in Singapore in 2010 by ISEAS Publishing Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace Pasir Panjang Singapore 119614 E-mail: [email protected] Website: http://bookshop.iseas.edu.sg 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. © 2010 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 issues in the Asia-Pacific region / edited by Amy Lugg and Mark Hong. 1. Energy policy—Asia. 2. Power resources—Asia. 3. Energy consumption—Asia. 4. Energy policy—Pacific Area. 5. Power resources—Pacific Area. 6. Energy consumption—Pacific Area. I. Lugg, Amy. II. Hong, Mark. HD9502 A82L95 2010 ISBN 978-981-4279-28-4 (soft cover) ISBN 978-981-4279-29-1 (E-book PDF) Typeset by Superskill Graphics Pte Ltd Printed in Singapore by Photoplates Pte Ltd iv

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Contents Foreword Khoo Chin Hean

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Preface K. Kesavapany

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The Editors

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The Contributors

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SOUTHEAST ASIA 1. The ASEAN Countries’ Interest in Asian Energy Security Andrew T.H. Tan 2. Biofuels Development and Prospects in the Philippines N.A. Orcullo, Jr. 3. The Biofuels Industry in Indonesia: Opportunities and Challenges Djatnika S. Puradinata 4. An Overview of the Cambodian Energy Sector Pou Sothirak

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6. New Partnerships in Energy Security in Asia: India, ASEAN, and Singapore Mark Hong

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INDIA 5. India’s Energy Challenges Rajiv Sikri

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CHINA 7. China’s Global Quest for Energy Security Wenran Jiang

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8. Energy and Geopolitics in the South China Sea Michael Richardson

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UNITED STATES 9. Energy Security and Mitigating Climate Change: Plug-in Hybrid Electric Vehicles (PHEVs) and Alternatives to Oil in Asia Benjamin K. Sovacool JAPAN 10. Japan’s Energy Supply-Demand Situation, Energy Conservation Policy, and Energy Challenges Yuji Morita ALTERNATIVE ENERGY SOLUTIONS 11. Jatropha Curcas: A Solution for a Sustainable Energy Supply? Hong Yan

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12. Singapore’s Solar Challenge Christophe Inglin

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13. Sustainable Mobility for Singapore Jan Croeni

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Index

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Foreword How energy needs can be met will be the greatest global challenge in the coming decade. Up to the point before the financial tsunami lashed upon all our shores, the relentless increase in the demand for energy to feed burgeoning global economic growth had led to a US$150/barrel oil. The impact of this high oil price alone on food, competition for resources and ultimately on costs of living was cause for significant concern. Implicit in this was the element of security of food, energy and resources needed for economic growth. Notwithstanding the current recession, these concerns have not gone away. Before the recession, producers were preparing to increase production to meet demand. Many of these projects were deferred later due to the ensuing fall in demand. Without these investments to increase production capacity, another supply crunch and high oil price may arise when economic recovery begins. While high oil price is bad for the economy and cost of living, it is perversely good for other reasons. There were many anecdotes of consumers around the world and in Singapore adjusting their purchases and consumption habits to minimise waste and ensure energy is used efficiently. The world will enter into the Copenhagen round of talks at the end of 2009 to hammer out an agreement to curb climate change. Central to the agreement will be how much reduction in the emission of greenhouse gases such as carbon dioxide each country can offer to make. The global economy is still fuelled primarily by carbon fuels and this is not likely to change in the foreseeable future unless there is a new technology that can curtail carbon dioxide emissions. The challenge will be how economic vii

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growth can be secured with less fuel to feed it. Much can be done before that point is reached. Singapore has switched from oil to gas for power generation and this has significantly reduced Singapore’s carbon dioxide footprint. The Singapore Government has also been promoting energy efficiency on several fronts. The Building and Construction Authority (BCA) has implemented standards and programmes to steer Singapore towards energy efficient buildings. The Ministry for the Environment and Water Resources (MEWR) and the National Environment Agency (NEA) had for many years been promoting recycling and have more recently focused attention on energy efficiency in consumer habits and choices. The Energy Market Authority (EMA) has started programmes to test-bed and pilot clean and renewable energy technologies such as electric vehicles. The pioneering work by the Land Transport Authority (LTA) to promote public transport and to reduce congestion has helped reduce the amount of carbon dioxide that vehicles emit while stuck idling in traffic jams. At the individual level the public will need to support these national efforts to reduce our carbon footprints by adjusting our own consumption habits and choices. For this to happen, the public has to understand why such change has become necessary. The ISEAS Energy series of books comes with a wealth of information covering a wide range of energy topics that will help build public awareness and knowledge of the issues. This book is the second volume in the series. The essays in this book are based on contributions from the very popular ISEAS energy seminars and from various experts. The Energy Studies Institute (ESI) has been working with ISEAS on several energy projects and seminars. I commend ISEAS for the great work it has done in promoting the energy seminars and in capturing the thoughts in the ISEAS Energy books series. Khoo Chin Hean Executive Director Energy Studies Institute Singapore August 2009

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Preface This book is volume two of the ISEAS Energy Perspectives on the Region. It comprises papers based on the seminars delivered by speakers at the ISEAS Energy Forum as well as invited contributions from various experts on energy issues. This book serves to educate the general public on energy issues as well as to raise awareness in Singapore and the wider region about energy issues — both aims of the ISEAS Energy Forum. The range of topics is wide in scope as well as touching on a number of countries, such as the United States, Japan, China, India, and Southeast Asia. It is also timely as some papers discuss the Spratlys, renewable energy, nuclear energy, and biofuels such as Jatropha. They are written by eminent experts who have kindly and graciously agreed to share their knowledge with the public. In an interesting departure, some papers are written by senior executives from the private sector who make their case for biofuels, solar energy, electric vehicles, and nuclear energy. Energy issues continue to remain important to the world at large, intimately linked as they are to climate change and the environment, as well as to sustainable economic development. The price of oil has now crept inexorably upwards as the world economy slowly stabilizes and resumes growth from the global recession of 2008–09. Without adequate investments in new oil and gas resources, the price of energy in 2010 can be expected to rise in step with the global economic recovery. Thus continuous attention and effort must be paid to issues such as energy efficiency and conservation. Both the United States and Singapore, as well as other countries, have in 2009 launched sustainable development programmes, emphasizing green or clean technology and energy efficiency. We hope this volume will help to inform readers about topical energy issues that remain high on the international agenda. We thank the paper ix

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writers and the co-editors, Ms Amy Lugg and Mr Mark Hong, for their hard work and careful editing, as well as all those in ISEAS Publishing who have made this volume possible. Ambassador K. Kesavapany Director Institute of Southeast Asian Studies June 2009

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The Editors Mark Hong is a Visiting Research Fellow at ISEAS. He obtained a Bachelor of Arts degree in Economics from Cambridge University in 1969 and a Master of Science degree in International Relations from Georgetown University, Washington, DC on a Fulbright Scholarship in 1982. He served in the Singapore Foreign Ministry from October 1969 to March 2002, with postings in Cambodia, Hong Kong, Paris, and New York, as Deputy Permanent Representative to the UN (1988–94). At the Ministry of Foreign Affairs Headquarters, he has served in various senior capacities. His last foreign posting was as Singapore Ambassador to Russia and Ukraine, from November 1995 to March 2002. From May 2002 to January 2004, he was attached to the Institute of Defence and Strategic Studies, Nanyang Technological University, Singapore, as a visiting senior fellow. He is currently Vice-Chairman of the International Committee of the Singapore Business Federation. He has edited five books for ISEAS: two on energy issues, two on ASEAN-Russia relations, and one on Southeast Asia, with chapter contributions in each. E-mail: [email protected] Amy V.R. Lugg, co-editor, is a Visiting Associate at the Institute of Southeast Asian Studies (ISEAS). Amy obtained her MA in International Relations from Curtin Institute of Technology, Perth, Australia, in 2007. Her research interests include energy security, human security, and transnational crime. E-mail: [email protected]

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The Contributors Andrew Tan is an Associate Professor at the School of Social Sciences and International Studies, University of New South Wales. He has taught various courses, including in the Masters programme in Defence Studies at King’s College London (University of London), part of the renowned Defence Studies Group of leading experts on defence, based at the Joint Services Command and Staff College (JSCSC), Britain’s only joint military staff college. Prior to this, he taught in Singapore at the Institute of Defence and Strategic Studies (now the Rajaratnam School of International Studies) in its Masters programme in Strategic Studies. At UNSW, he headed the International Studies programme at its Singapore campus (now closed) before being relocated to the Kensington campus. He now works under UNSW’s Strategic Priority Fund and is also Convenor for International Studies in the Faculty of Arts. His research interests are in strategic studies, particularly the areas of terrorism, insurgency, defence, and strategic issues. He has also written on defence studies, broader Asia-Pacific security issues, and on international security. His most recent books have focused on terrorism in Southeast Asia and the nature of maritime power. His forthcoming books are on U.S. counter-terrorism strategy since 9/11 and the global arms trade. He has co-edited or is sole author of twelve books and many articles. Education: PhD (University of Sydney), M. Phil. (Cambridge University), B. Soc. Sc. (Hons) (NUS), BA (NUS). E-mail: [email protected] N.A. Orcullo, Jr. is Professor at the College of Business Administration, De La Salle University-Dasmariñas, Cavite, the Philippines. He is an agricultural engineer with a PhD in management. He has been actively engaged in research in the areas of management education, energy policy, renewable xiii

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energy technologies, and environment management. He was previously affiliated with the Philippines Department of Energy for over a decade. He has been a consultant to the Bangkok-based United Nations ESCAP under its Regional Energy Development Programme and a research fellow at the Institute of Southeast Asian Studies (ISEAS) as well as at a number of academic institutions in the Philippines. He has also acted as a consultant to private organizations. He is a member of the APEC Expert Group on New and Renewable Energy Technologies (APEC/EGNRET) and a UNESCO expert on renewable energy. He has over thirty years of professional work experience in the government sector, as well as in international community and academic institutions. Several of his works have been published, including four books. E-mail: [email protected] Djatnika S. Puradinata is President Director of PT Medco Methanol Bunyu, Indonesia. He has held this post since 2001. MMB was established in 1997 as part of the Medco Group’s participation in the downstream oil and gas industry in Indonesia. The company operates the methanol plant in Bunyu Island, East Kalimantan, which was set up on a KSO (Kerja Sama Operasi: Joint Operation) scheme with Pertamina — Indonesia’s national oil company — for twenty years starting from April 1997. Mr Djatnika graduated with a Bachelor degree in Chemical Engineering from the Bandung Institute of Technology (ITB) in 1976, and received a Masters in Development Studies in the field of Management and Planning in 1998. He started his career in 1976 in the fertilizer industry, eventually holding the positions of Expert for the President Director of PT Pupuk Kujang (1999–2001). E-mail: [email protected] Pou Sothirak is Visiting Senior Research Fellow at ISEAS. Pou Sothirak received his secondary education in France from 1973–75, and later settled in America from 1975–1986. He received a Bachelor Degree in Electrical and Computer Engineering from Oregon State University in 1981 and worked as an engineer at the Boeing Company in Seattle, Washington, from 1981 to 1985. He joined the crusade to safeguard Cambodia from foreign occupation and internal conflict from 1986–92, serving as Humanitarian Coordinator at a refugee camp on the Thai-Cambodian border. He also worked in the fields of education and community development for Cambodian refugees under an USAID programme. He was elected as Member of Parliament twice during the general elections in Cambodia of 1993 and 2003. He served as Cambodian Minister of Industry, Mines and Energy from 1993 to 1998. He was appointed xiv

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as Cambodian Ambassador to Japan from April 2005 to November 2008. On 5 January 2009, he joined ISEAS as Visiting Senior Research Fellow. E-mail: [email protected] Rajiv Sikri has had a rich and varied diplomatic career as a member of the Indian Foreign Service from 1970 to 2006. He retired as Secretary (East) in India’s Ministry of External Affairs (MEA), handling East Asia, ASEAN, Pacific region, Arab world, Israel, Iran, and Central Asia (2004–06). Earlier, he was Additional/Special Secretary for Economic Relations supervising India’s foreign economic relations, including India’s external technical and economic assistance programmes to developing countries in Asia, Africa and Latin America (2002–04). Closely involved in work related to strategic and policy planning, Rajiv Sikri has been Additional Secretary for Strategic Policy and Research (2001–02) and Director (Policy Planning) in MEA (1984), and Senior Fellow at the Institute for Defence Studies and Analyses in New Delhi (2000–01). Now a strategic consultant, Rajiv Sikri is associated with leading think tanks in India and abroad. He was a Consultant with the Institute of South Asian Studies in the National University of Singapore in 2007–08. He is a Member of the United Services Institution of India, New Delhi; the Institute for Defence Studies and Analyses, New Delhi; the International Institute for Strategic Studies, London; and the Royal Institute for International Affairs (Chatham House), London. He has recently published a book on India’s foreign policy titled Challenge and Strategy: Rethinking India’s Foreign Policy (2009) and has contributed numerous articles to edited books, journals, newspapers and magazines. Rajiv Sikri studied at St. Stephen’s College in Delhi, and holds a Master’s Degree in History from Delhi University. E-mail: [email protected] Wenran Jiang is Acting Director, Associate Professor, and Mactaggart Research Chair of the China Institute, University of Alberta, Canada. He is also Senior Fellow of the Asia Pacific Foundation of Canada, the Special Advisor on China, and the Energy Council Senior Research Fellow at the China Energy Security Research Institute, China University of Petroleum (Beijing). Dr Jiang obtained his PhD from Carleton University, Canada, his MA from the International University of Japan and his BA from Peking University. His research interests include: the process, cost, and impact of China’s modernization efforts; the relationship between energy, environment, and sustainable economic development in China; China’s relations with neighbouring countries, and Canada-China relations. He is currently President of the Chinese Canadian Professors Association, a board member xv

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of the East Asian Council of the Canadian Asian Studies Association, and a board member of the Canadian Consortium on Asia Pacific Security. He has twice been a Japan Foundation Fellow, and has served as visiting scholar to a number of universities in East Asia over the years. Dr Jiang’s areas of teaching and research include development studies, Chinese politics and foreign policy, Japanese politics and foreign policy, East Asian international relations, and Canada’s relations with the Asia Pacific region. He is the editor of a book on Canada’s energy relations with China. Dr Jiang has organized several conferences on Canada-China energy cooperation. He is a regular commentator in the media and contributor to op-ed pages in major East Asian and Canadian newspapers. E-mail: [email protected] Michael Richardson is Visiting Senior Research Fellow at ISEAS. He focuses on a wide range of challenges to growth and stability in Asia, including energy and sea lane security in the Asia-Pacific region. His columns and commentaries appear in a number of regional newspapers, including The Straits Times and The Business Times in Singapore, and the South China Morning Post in Hong Kong. Based in Singapore, he was the Asia Editor at the International Herald Tribune from 1987 until 2001, with broad responsibility for writing Asia-Pacific news and analysis, and coordinating the IHT’s reporting from the region. E-mail: [email protected] Benjamin K. Sovacool is currently Research Fellow in the Energy Governance Programme at the Centre on Asia and Globalization, part of the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is an Adjunct Assistant Professor at the Virginia Polytechnic Institute and State University in Blacksburg, VA, where he has taught in the Government and International Affairs Program and the Department of History. Dr Sovacool recently completed work on a grant from the National Science Foundation’s Electric Power Networks Efficiency and Security Program, investigating the social impediments to distributed and renewable energy systems. He has also worked closely with the Virginia Center for Coal and Energy Research, New York State Energy Research and Development Authority, Oak Ridge National Laboratory, and the U.S. Department of Energy’s Climate Change Technology Program. His most recent book is an edited volume entitled Energy and American Society: Thirteen Myths, in 2007. E-mail: [email protected] xvi

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Yuji Morita is Senior Research Fellow and Director at the Energy Data and Modelling Centre (EDMC), The Institute of Energy Economics, Japan (IEEJ). Mr Morita joined IEEJ in 1998 as Senior Economist of the Team for Strategic Research Projects. In 2005, he was appointed Senior Research Fellow and Director. His responsibility covers project management for various kinds of research, analysis, and forecast projects on energy demand, supply, energy policies, and energy technologies. Prior to joining IEEJ, he worked at Japan Energy Corporation, where he held a variety of engineering and commercial posts. From 1995 he served as Senior Manager of the Research and Planning Department, where he was responsible for the company’s upstream businesses in China, Russia, and the Middle East. He received his B.Sc. from the University of Kyoto, majoring in Organic Chemistry. E-mail: [email protected] Hong Yan is Director of the Plant BioTechnology Group, Temasek Life Sciences Laboratory in Singapore. Since obtaining his PhD from Peking Union Medical College (now part of Tsinghua University) in 1989, Dr Hong has worked in the biotech industry and at academic organizations in the United States and Singapore for twenty years. His research focuses on the biotechnology of tropical forest trees and the bioenergy plant Jatropha curcas. He is also the general manager for JOil (S) Pte Ltd, a company specializing in Jatropha breeding and commercializing elite Jatropha plantation materials. He is also a member of the Singapore Genetic Modification Advisory Committee (GMAC), an evaluator for the Singapore Centre for Drug Administration (CDA) and part of the expert panel for herbal medicines, Health Sciences Authority (HSA), Singapore. In addition to more than thirty scientific publications, he also has nine patents awarded or pending. He also serves at two biotechnology companies in Singapore. E-mail: [email protected] Christophe Inglin is Managing Director of Phoenix Solar Pte. Ltd, which designs and installs solar photovoltaic (PV) power systems. From December 1996 until June 2006, he was Managing Director of Shell Solar Pte. Ltd (formerly Siemens Showa Solar). Christophe also chairs the Clean Energy Committee at the Sustainable Energy Association of Singapore (SEAS). He is the invited trainer for the PV technology courses regularly held at Singapore’s National Environment Agency (NEA) and the Building & Construction Authority (BCA). Before moving to Singapore, Christophe worked for Siemens Semiconductors and Siemens Management Consulting in Munich, California, xvii

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and Zurich. Christophe is a Singapore Permanent Resident, with Swiss and British citizenships. He has a B.Sc. in Electronic & Electrical Engineering, and an MBA from INSEAD. E-mail: [email protected] Jan Croeni is CEO of Eonlux, a Singapore-based sustainable mobility and energy consultancy which develops holistic solutions from scratch and manages businesses successfully. He is one of Singapore’s pioneers in the field of electric mobility, and worked closely together with Singapore’s Government on plans for the development for electric vehicles and charging infrastructure. Eonlux conceptualized in July 2008 and managed until October 2009 the Singapore-based Zeco Systems Pte Ltd (“Zero Emission Company”) for its client, a cleantech boutique investment company. Jan possesses more than five years’ business experience as Managing Director of Zeco Systems, as Representative for leading companies offering MobilityOn-Demand and green logistics solutions, in marketing of premium consumer goods, and furthering economic development initiatives for the German Chambers of Commerce and the Ministry of Economic Affairs in Germany, Denmark, and Singapore. E-mail: [email protected]

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Southeast Asia

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THE ASEAN COUNTRIES’ INTEREST IN ASIAN ENERGY SECURITY Andrew T.H. Tan

ABSTRACT Energy security is an issue of particular significance to ASEAN states as well as other regional states such as India, China, Korea, and Japan. Given the possibility of high oil prices, diminishing oil supplies and increased competition for resources, disputes over territories, and the strategic importance of sea lanes passing through Southeast Asia, there is much scope for competition as well as opportunities for cooperation. The paper discussed two key questions: What is the energy problem in the region and what have its consequences been? INTRODUCTION Eleven years ago in 1998, Ji Guoxing wrote presciently in the Korean Journal of Defence Analysis that “energy security is of particular importance in the Asia Pacific owing to its physical unavailability to meet demand, and energy security is now becoming a fundamental cornerstone of economic policy for the Asian Pacific economies”.1 He cited a report in the Los Angeles Times, which predicted that “some time in the next twenty years or less, global petroleum output may begin a permanent decline, even as world oil demand

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continues to rise … though market forces and improved oil production technology should keep petroleum flowing well into the twenty-first century, the peak of the Oil Age may come far earlier than conventional thinking now assumes”.2 Ji therefore concluded that world oil production would begin to decline around 2010, and oil prices would rise in real terms.3 Yet, the concentration of two-thirds of the world’s proven oil reserves in the Persian Gulf area means that Asia’s dependence on imported Middle Eastern oil would increase. The problem, however, is that “these supplies remain potentially vulnerable to military or political events that have nothing to do with markets, but which can have an enormous impact on oil and gas”.4 Moreover, the fact that these oil supplies must traverse vast oceans, through long and vulnerable sea lines of communications (SLOCs) that pass through the narrow and troubled Gulf of Hormuz as well as the narrow, strategic Straits of Malacca on their way to lucrative Asian markets to fuel their explosive economic growth, has resulted in much greater vulnerabilities to any disruption. To further complicate the picture, this growing dependence on oil is led by the major economic powerhouses of Asia, namely India, China, South Korea, and Japan. Energy security in the Asia Pacific is therefore bound up with the policies and responses of Great Powers such as China and Japan.5 To the extent that China’s rapid economic growth and growing dependence on external energy sources are driving its strategic, foreign, defence, and maritime policies, and to the degree that Japan and the United States are bound to have to respond to this growing competition for a scarce resource, it follows that Southeast Asia may increasingly find itself a battleground in this competition, given the presence of oil and gas deposits as well as strategic waterways and SLOCs in the region. In addition, the ongoing quest for energy security is in fact giving rise to greater insecurity in the region. This is due to a host of reasons. For instance, the increasing interstate rivalries to secure energy supplies have raised the stakes in maritime territorial disputes, such as the Ambalat dispute between Indonesia and Malaysia and overlapping Exclusive Economic Zones (EEZs). There are also growing concerns over maritime security, especially the long and vulnerable sea lines of communications as well as the security of strategic waterways such as the Straits of Malacca. Related to these concerns are growing anxieties over piracy and terrorism that could disrupt the supply chain. Complicating the picture is the presence of historical interstate rivalries and mutual suspicions that have limited a cohesive regional response to energy security challenges, resulting in a lack of preparedness in meeting future challenges.

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The purpose of this paper is to examine the ASEAN states’ interest in energy security. It poses two key questions: What is the energy problem in the region and what have its consequences been? How have the ASEAN states responded to the energy problem and what are the future prospects? The essay begins by examining the energy problem in Southeast Asia, with rising demand sparking a search for alternatives, a regional scramble for oil and gas, and heightening concerns over the security of vital sea lines of communications, an issue that also involves external Great Powers. The paper then goes on to examine the efforts that the ASEAN states have made in regional energy cooperation. Finally, the paper concludes with an assessment of the prospects for regional cooperation. ENERGY DEMAND AND SUPPLY IN SOUTHEAST ASIA The Southeast Asian states (comprising the ten members of the Association of Southeast Asian Nations, or ASEAN) have a strong interest in Asian energy security for a number of reasons. A key reason lies in the generally rapid economic growth of the ASEAN economies, despite the problems registered during the 1997–98 Asian financial crisis and the 2008–09 global recession. This has resulted in expanding demand for energy. The strong growth in transport, including the increasing number of motor vehicles, is a main driver of oil demand. Power generation, industrial boilers, residential and office airconditioning, cooking, and petro-chemical feedstock are also sectors that have increased demand. A selected comparison of primary energy consumption (namely, of oil, gas, and coal) below demonstrates the steady rise in energy consumption of key ASEAN states, with the figures for China and Japan given for comparison. According to British Petroleum, world primary energy consumption increased by 2.4 per cent in 2006, with the Asia Pacific region recording the most rapid growth at 4.9 per cent. Although this reflected the general overall economic growth of the region, including Southeast Asia, the growth was led by China, where energy consumption increased by 8.4 per cent. China thus continued to account for the majority of global energy consumption growth. By contrast, consumption in North America fell by 0.5 per cent in 2006.6 The key issue here is whether Southeast Asia has sufficient energy resources on its own. The picture is a mixed one. Oil is clearly still the main source of energy. In this respect, there are important oil producers in the region, namely, Indonesia, Malaysia, Vietnam, and Brunei. The four countries produced 51.9, 33.8, 17.8, and 10.8 million tonnes of oil in 2006 respectively (see Table 3.2). Despite this, Indonesia’s enormous growth in energy

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Table 1.1 Primary Energy Consumption in East Asia (in million tonnes of oil equivalent)

Indonesia Malaysia Thailand Philippines Singapore China Japan

1990

1999

2006

52.3 21.5 28.8 13.0 20.3 668.0 428.3

79.6 38.0 59.3 21.6 29.6 752.6 507.4

114.3 67.0 86.1 25.2 50.0 1697.8 520.3

Source: BP Statistical Review of World Energy. Table 1.2 Oil Production and Proven Reserves in the ASEAN States (2006) (in million tonnes)

Brunei Indonesia Malaysia Thailand Vietnam

Proven Reserves (Thousand ml.tonnes)

Production (ml.tonnes)

0.2 0.6 0.5 0.1 0.4

10.8 51.9 33.8 11.8 17.8

Source: BP Statistical Review of World Energy July 2007, p. 6.

consumption means it has become a net importer of oil. While oil production in Malaysia has been generally positive, it is predicted that this country too will become a net importer of oil after 2010. Cambodia, which currently produces no oil or gas, has been the fortunate site of important offshore discoveries in recent years and could well benefit once they are developed. Southeast Asia does have major energy importers, namely, Singapore, Thailand, and the Philippines. Vietnam had to import oil products as it did not have refining capacity until after 2008. The increasing importance of regional waterways as a conduit for energy supplies to the booming economies of Northeast Asia, especially China, has also provided countries in the region with some limited opportunities. For instance, as China continues to search for alternative routes for oil imports, new pipeline and port service projects in Thailand and Myanmar may benefit these countries.

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Another major beneficiary is Singapore. Indeed, the key role that Singapore plays in the regional oil industry deserves mention. Singapore has already established itself as a major oil refining and bunkering centre on account of its strategic location at the tip of the Malay Peninsula. It is the third-largest oil-refining centre in the world, is a regional oil storage hub, has a significant petrochemicals industry, and builds 60 per cent of new jack-up oil rigs.7 Yet, this belies it own insecurity, given that it does not have a large domestic oil market and that other countries, with lower infrastructure costs, could pose a significant challenge in the future.8 This brief analysis points to the fact that, given the region’s dependence on oil and its growing energy requirements, ensuring that energy supplies are sufficient and secure will be a growing challenge for the region as a whole. EFFORTS AT DIVERSIFICATION A number of factors have combined to galvanize the ASEAN states into diversifying their energy sources. The first is the unabated rise in oil prices, which has put a strain on public finances in those Southeast Asian states that have costly fuel subsidies. There is also growing concern over the continued and increasing dependence on imported oil, as security of access to reliable oil and energy sources is important for continued economic growth and political stability in Southeast Asia. Moreover, the possible uncertainties of external supply from the volatile Middle East have raised concerns over the region’s preparedness to meet energy contingencies, given the general lack of national and regional stockpiles.9 Growing concerns over climate change and the accession to the Kyoto Protocol by a number of countries in the region have also sparked efforts to become less carbon-intensive. At the same time, the presence of energy resources in the region, and the possibility of alternative energy transport routes through the region, have attracted the attention of the Great Powers, particularly China, in the search for more diversified sources of energy that could lessen dependence on the Middle East or reduce strategic vulnerabilities. For the ASEAN states, one major challenge has been the ability to secure adequate energy supplies in competition with these Great Powers and even with each other. The above factors have combined to galvanize national and even regional efforts to develop alternative, indigenous supplies of energy as well as strategies to increase energy efficiency. The intensified search for alternative energy sources has led states in the region to explore nuclear energy, biofuels, and hydroelectricity.

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NUCLEAR ENERGY This topic has recently received a great deal of attention owing to plans by a number of ASEAN states to build nuclear plants. Thailand has announced plans for two nuclear power plants with a total capacity of 4,000 MW by 2020, while Vietnam plans to build its first nuclear power plant by 2015. Malaysia, set to become a net oil importer after 2010, has stated its interest in acquiring nuclear power plants by 2020 as part of its energy diversification strategy.10 The most concrete plans are that of Indonesia, which announced that it would build a 4,000 MW nuclear plant near Mount Muria in Central Java, with construction to begin in 2011 and operations in 2018. However, in 2009, there were some indications that Indonesia may be rethinking its nuclear plans. The decision to build nuclear plants in Indonesia was not smooth sailing, given the heated debates since the early 1990s about the safety of such plants, especially as much of Java is prone to earthquakes and volcanic activity. In 1997, however, a Nuclear Energy Law was eventually passed by the Suharto government. The current Yudhoyono government has included nuclear energy in its 2005 National Energy Policy.11 Opposition continues to come from the public, however, particularly from environmentalist groups that have expressed concern over inadequate infrastructural and institutional frameworks and lack of preparedness in dealing with natural disasters.12 Yet what surprised everyone was Myanmar’s move to develop nuclear energy with the assistance of Russia under an agreement signed in May 2007. Under this agreement, Russia’s atomic energy agency, Rosatom, would build a nuclear research centre that would include a 10 MW nuclear reactor. The entire facility would initially support medical and agricultural research. However, Myanmar had in fact been exploring means of acquiring nuclear technology for some years, with allegations of contacts with Iran, Pakistan, and North Korea.13 This should come as no surprise, given its isolation from the rest of the world on account of its human rights abuses and the chronic energy shortages that it faces. Moreover, the paranoid Myanmar military regime genuinely believes that the United States is implacably hostile to it. It should therefore be no surprise that it would at least explore the option of a nuclear deterrent against invasion by foreign forces. However, significant barriers remain before Myanmar can harness nuclear power; these include a lack of adequate infrastructure, funds, personnel, and regulatory controls. Any further moves to develop nuclear power, even for peaceful purposes, would raise suspicions of nuclear weapons

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ambitions as in the case of Iran, and consequently attract closer scrutiny from the international community. BIOFUELS Biofuels have great appeal to governments in the region, as they engage existing, well-developed agricultural resources such as sugar cane, coconut, and palm oil. Biofuels have been developed from two sources: bioethanol gasoline from food crops such as sugar cane and cassava; and biodiesel from oil-producing crops such as coconut, castor kernel, and oil palm. Thailand, Indonesia, and the Philippines are making serious efforts to develop bioethanol (or gasohol). In fact, Thailand’s programme began in 1985, and there are now some 4,000 petrol stations serving alternative fuel in that country. As for biodiesel, initiatives have been launched in Thailand, Philippines, Malaysia, and Singapore. Malaysia’s Envo Diesel programme, announced in 2005, is expected to produce up to 500,000 tonnes of biodiesel. However, it is Indonesia that is leading the way, with the announcement in 2006 by its Ministry of Energy to raise and invest 200 million rupiah (over US$23 billion) over the next five years for biofuels production and distribution. Much of this will focus on palm oil. The problem with biofuels, however, is that already endangered forests might be cut down for such plantations; such crops could also compete with food crops for scarce farmland.14 A note of realism should also be sounded, as although “the development of bio-fuels is promising … it cannot be assumed at this stage that they will fully substitute for crude fossil fuels”.15 HYDRO POWER Hydroelectric power is another promising alternative source of energy, given the mountainous nature of the region and the abundance of rainfall in the tropics. In efforts to diversify its energy sources, Thailand has tapped into hydroelectric power in Laos and more recently in Myanmar. Indeed, the Thai MDX Group has recently signed a contract to build a huge, US$6 billion hydroelectric power plant at Ta Sang in Myanmar.16 Yet, as the consumption of hydroelectricity in Table 1.3 indicates, it continues to provide only a useful supplement to the electricity supply, constituting merely a drop in the total energy consumption of key ASEAN states. With the even smaller contribution of alternatives such as wind, solar, and geothermal power, and the still nascent state of hydrogen power research, the ASEAN states will have to continue to rely on primary energy resources, particularly oil and natural gas, for the foreseeable future.

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Table 1.3 Consumption of Hydroelectricity in Key ASEAN States (2006) (in million tonnes of oil equivalent) Indonesia Malaysia Philippines Thailand

2.3 1.6 1.9 1.8

Source: BP Statistical Review of World Energy July 2007, p. 38.

Table 1.4 Natural Gas in Southeast Asia: Reserves and Production (2006)

Brunei Indonesia Malaysia Myanmar Thailand Vietnam

Trillion Cubic Metres

Share of World Total

Production (ml. tonnes oil equiv.)

0.34 2.63 2.48 0.54 0.30 0.40

0.2 1.5 1.4 0.3 0.2 0.2

11.0 66.6 54.2 12.1 21.9 6.3

Source: BP Statistical Review of World Energy July 2007, pp. 22–25.

NATURAL GAS Natural gas, the region’s most abundant fossil fuel, poses the best possible alternative to oil. Table 1.4 shows proven reserves, share of world total, and production in 2006. According to Daniel Yergin and Michael Stoppard in their seminal Foreign Affairs article, natural gas is “the next prize”. They explain that the need to find sources of energy for future economic growth, as well as the environmentally friendly nature of this natural resource, has resulted in the emergence of the global gas market. In addition, they point out that the ability to cool the gas and transport the resulting Liquefied Natural Gas (LNG) by sea has opened up new markets, opportunities, and sources of supply.17 According to the International Energy Agency (IEA), cumulative gas demand will grow the most in Asia, more than tripling from 208 billion cubic metres in 2002 to 672 billion cubic metres in 2030.18 In this scenario, the demand from China and India will increase markedly. Indeed, a key source

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of gas imports for them will be Southeast Asia, which will equal the Persian Gulf in importance by 2030. Indonesia, for instance, has emerged as a key source of LNG, which earned US$6.5 billion and formed some 12 per cent of total exports in 2003. According to the U.S. Embassy in Jakarta, Indonesia produced 3.15 trillion cubic feet (TCF) of gas in 2003, making it number six in world gas production. Indonesia also currently supplies some 26 per cent of the world’s LNG from two production centres, Arun in Aceh and Bontang in East Kalimantan. There also remain large, uncommitted reserves in Papua and the Natuna Sea. British Petroleum, in partnership with Japanese and Chinese companies, is currently developing a US$6.5 billion LNG project at Tangguh in Papua province.19 However, Indonesia has in recent years been losing market share to other new suppliers such as Russia, Qatar, and Australia. This has been attributed to the lack of a coordinated strategy to improve the gas infrastructure and attract new investment that would create new sources of production.20 After years of instability as a result of the financial crisis in 1997 and the fall of the Suharto regime in 1998, there has been under the Yudhoyono government better strategic direction in the country’s energy policy. In 2005, the removal of fuel subsidies raised domestic prices by almost 50 per cent, affecting fuel efficiency and demand. Also, new investments have finally begun to flow, particularly to the Tangguh natural gas field in Irian Jaya, and with Exxon-Mobil developing the vast Cepu oilfield.21 Apart from Indonesia, Myanmar is also emerging as a key player in natural gas. It has abundant natural gas deposits and currently supplies it to China and Thailand. The gas comes from the discoveries in the Gulf of Martaban, with massive new finds in the Gulf of Bengal the focus of an intense bidding war among Thailand, China, and India. Myanmar is estimated to have total gas reserves of around 88 trillion cubic feet, slightly less than Indonesia. Despite energy shortages within the country, Myanmar is already earning around US$400 million from the gas fields in the Gulf of Martaban. There are significant offshore oil and gas exploration activities by companies from China, India, Malaysia, Thailand, and South Korea. In addition, China has begun building an oil pipeline from Sittwe in Myanmar to Kunming in southern China as an alternative oil transport route.22 Malaysia also has gas deposits and signed, in October 2006, a massive gas deal with the Shanghai LNG Company. Under this agreement, Malaysia will supply China with 3 million metric tonnes of LNG annually for the next twenty-five years through its LNG complex at Bintulu in East Malaysia.23 Given the evident need to rely on oil and gas for the foreseeable future, the ASEAN states have made significant investment in the exploration

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and production of oil and gas, as well as new infrastructure in support of these industries. Malaysia’s strategy has been to invest heavily in other Muslim countries. Today, one-third of the revenues of the state-owned oil company, Petronas, come from operations overseas, especially in Africa. The new Kikeh oilfield will soon be in full production, following an agreement with Brunei in 2009 which resolved the maritime territorial dispute. Another big offshore oilfield, the Gumusu-Kakap field off Sabah, is due to start production around 2012.24 In 2007, Malaysia also approved the construction of a US$7 billion pipeline stretching some 200 miles, or 320 kilometres, across the north from Kedah on the west coast, facing the Straits of Malacca, to Kelantan in the east, facing the South China Sea. A joint venture with Indonesian and Saudi firms, the pipeline is meant to help ease congestion as well as to provide a shorter oil transport alternative to the Straits of Malacca. The pipeline facility would transport 6 million barrels of oil a day and store some 180 million barrels when fully completed in 2014, diverting some 20 per cent of the oil currently traversing the Straits of Malacca. This pipeline could obviously undercut Singapore’s role and position as a regional oil hub, though this could happen only if supporting infrastructure such as ports, oil storage depots, and oil refineries are also put into place. Needless to say, Singapore, Thailand, and Philippines are particularly vulnerable in terms of energy security, given their heavy dependence on imported oil and energy resources. They have only tentatively begun to explore alternative energy sources, but for the foreseeable future will have no alternative but to continue to rely on oil and gas for much of their energy needs. Despite being a major oil exporter, Brunei’s oilfields are heavily depleted and potential new offshore finds are problematic, given territorial disputes in the South China Sea. Vietnam is a significant oil producer, producing 17.8 million tonnes in 2006. It is the third-largest oil producer in Southeast Asia after Indonesia and Malaysia and is aggressively increasing both exploration and production. Indeed, oil drilling activity has doubled since 2005 and there has been a substantial increase in foreign investment. There are offshore oilfields in northern Vietnam, and new discoveries along the south coast as well.25 But China has applied pressure on Western oil companies prospecting for offshore oil in disputed waters, which could dampen the momentum. THE SCRAMBLE FOR OIL IN SOUTHEAST ASIA The high price of oil in 2008, with benchmark crude prices reaching US$147 a barrel mid-year, was partly the result of the massive increase in demand

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from China, among other countries, and has led to a scramble for energy resources in Southeast Asia. China is today the world’s second-largest consumer of oil, surpassed only by the United States. Because of its high growth and industrial expansion, China is expected to account for one-third of the annual increase in Asia’s demand for oil and half the increase in demand for natural gas, until 2025. China became a net importer of oil after 1993 and imported oil accounts for over half its needs. Its efforts to diversify sources, particularly away from the volatile Middle East, have led it to invest in exploration and production in a number of countries.26 In the region, China has acquired natural gas from Indonesia and Myanmar, and has discussed oil pipeline projects with the latter. SOUTH CHINA SEA DISPUTES But it is in the South China Sea that apprehensions over China appeared in tandem with its growing interest in offshore oil resources. The South China Sea may potentially contain deposits of up to 225 billion barrels of oil as well as undetermined but possibly large deposits of natural gas. China, however, has been in direct conflict with Vietnam, Malaysia, Brunei, and the Philippines over the potentially oil-rich Spratly Islands. In 1992, China passed a “Law on Territorial Waters” asserting its claims to the South China Sea and reserving for itself the right to use military force to enforce its claims in the area. In the same year, China awarded Crestone, an American oil company, a contract to drill exploratory wells in an area that Vietnam considered part of its continental shelf, while promising naval protection. The member states of the Association of South-East Asian Nations (ASEAN), concerned over the prospect of conflict, issued a Declaration of the South China Sea in July 1992 in Manila, which called upon all parties involved in the South China Sea dispute to resolve all sovereignty and jurisdictional issues by peaceful means. This was ignored by China, which increased its naval presence in the Spratlys and proceeded to blockade Vietnam’s oil-prospecting facilities in May 1994. In early 1995, China also occupied the aptly named Mischief Reef in the Spratlys. This territory was claimed by the Philippines. The incident marked the first time that China actually seized territory from an ASEAN state.27 In view of this incident, as well as China’s previous propensity to use force to resolve bilateral territorial disputes as when it seized the Paracel Islands in 1974, there were fears that the Spratly Islands had become a potential regional flashpoint. But this has not happened as yet. The response of the states in the region has not been confrontation but accommodation towards a rising China. For its part, China has reaped the benefits of its sophisticated approach to foreign

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policy that became evident since the late 1990s. Two developments explain this embrace of diplomacy. The first is the evident need for stability as China pursues its primary objective of economic development. The second is the emergence since the late 1990s of a new generation of diplomats and academics trained in the best Western universities that has brought an emphasis on “soft” power. No longer is China uneasy with, or opposed to, multilateral forums dealing with the issue of the Spratlys.28 In November 2002, China signed the Declaration on the Conduct of Parties in the South China Sea with the ASEAN states, whereby it affirmed the use of peaceful means to resolve the dispute. This was followed by an agreement with the Philippines and Vietnam in March 2005 to jointly develop the resources in the South China Sea, with the question of sovereignty put into abeyance.29 The Philippines also signed a series of agreements in April 2005, under which China would provide development aid to the Philippines. Unlike the United States, China also signed the ASEAN Treaty of Amity and Cooperation. The ASEAN states and China thus enjoy close relations today, the result of a pragmatic approach on both sides. For the ASEAN states, China is after all in close geographical proximity and represents enormous economic opportunities. The Spratlys issue remains unresolved for the time being. Its ultimate resolution is likely, however, to be on China’s terms, given that it will be in a much stronger position in the future. Apart from the Spratlys, there are other maritime disputes and flashpoints in the South China Sea concerning oil and gas. For instance, Indonesia is developing gas fields in the Natuna islands, which are also claimed by China. Similarly, Malaysia’s gas fields off the coast of Sarawak in East Malaysia also fall within China’s claims. Significantly, China has not raised any strong objections to these activities. The Kikeh dispute between Malaysia and Brunei, however, arose in July 2002, when a large offshore oilfield was found in the waters off Sabah in East Malaysia. It is estimated to have a recoverable reserve of between 350 to 700 million barrels. However, Brunei and Malaysia both claim 200 nautical miles of Exclusive Economic Zones (EEZs) that overlap near Kikeh and other potentially oil-rich areas nearby. After the Kikeh find, both countries awarded oil-prospecting contracts to different companies to search two nearby areas covering some 10,000 square kilometres under dispute. This led to tense naval standoffs involving gunboats on both sides in March and April 2003, resulting in stoppages of all work in the area. Subsequent negotiations resulted in an in-principle agreement to redraw the maritime boundary on the basis of the oil claims.30 This contrasts with the approach taken by Thailand and

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Malaysia, which put aside their sovereignty dispute in the Gulf of Thailand to set up a Joint Development Authority in 1990 that would see revenues split equally between the two parties. Another dispute in the region that has a bearing on offshore oil and gas exploration has been the maritime boundary dispute between Vietnam and China that is a consequence of overlapping EEZs. This has been settled tin a June 2004 agreement that delineates their respective EEZs in the disputed Beibu Gulf.31 EAST TIMOR The one big winner in the regional scramble for oil has been Timor-Leste. Although it is not yet an ASEAN member state, its situation has relevance here and will be briefly examined. In 1979, Australia’s de jure recognition of Indonesia’s annexation of East Timor, following its invasion of the former Portuguese territory in 1975, paved the way for a possible joint development of the resources of the Timor Gap. The Timor Gap refers to a 135 nauticalmile stretch of seabed left undelimited by Australia and Indonesia in drawing their 1972 seabed boundaries. In December 1989, the Timor Gap Cooperation Treaty defined a large, three-area Zone of Cooperation for joint development, covering some 61,000 square kilometres. Area A would be jointly developed by the two countries with the benefits of offshore oil production to be shared equally. Areas B and C, adjoining Area A, would be fully administered by Australia and Indonesia respectively. After the East Timor crisis in 1999 that led to the territory’s independence from Indonesia, the question of the Timor Gap Cooperation Treaty came to the fore. UNTAET (United Nations Transitional Administration in East Timor), acting on behalf of the East Timorese people, signed an agreement in 2000 that upheld the treaty but with East Timor replacing Indonesia as the implementing party. The East Timorese Transitional Administration subsequently signed a Memorandum of Understanding with Australia in July 2001 proposing a treaty that would formalize a Joint Petroleum Development Area (JPDA) for Area A, but with revenues split 90:10 in favour of the new Timor-Leste. As independence drew closer in May 2002, another issue that needed resolution was the lucrative Greater Sunrise oil reservoir, which straddled the eastern lateral boundary of the JPDA.32 In January 2006, Australia and East Timor reached final agreement over the sharing of revenues from oil and gas deposits in the disputed area of the Timor Sea. Known as the Treaty on Certain Maritime Arrangements in the Timor Sea, it was reaffirmed that Timor-Leste would get 90 per cent of

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revenues of oil produced within the joint development area. Outside this zone and within the Greater Sunrise area, revenue would be shared equally. In addition, both also agreed to defer for fifty years the final delineation of their sea boundaries. The net result is that Timor-Leste could get up to US$10 billion over the life of the Greater Sunrise oilfield, as well as some US$15 billion for the oil produced within the joint development area.33 SECURITY OF SLOCS An energy-related concern in the region is that the bulk of oil imports by China, Japan, and South Korea traverse the Straits of Malacca. The high incidence of piracy in Indonesian waters, the unregulated and insecure nature of the maritime trade, the presence of terrorist networks, and the fact that any disruption of global trade will have a devastating impact on a globalized manufacturing system dependent on just-in-time business operations (particularly by the booming Northeast Asian economies), have raised fears over maritime security in the Straits of Malacca. Unlike the aviation industry, the maritime industry is poorly regulated. There is no proper vetting or certification of shipping crews, and ships are not tracked in real time like aircraft. The waters around Indonesia also suffer from the world’s highest incidence of piracy. Indeed, there was a dramatic increase in pirate attacks following the fall of the Suharto regime in 1998 and the accompanying crisis of governance, but the situation has improved with more frequent coordinated naval patrols by the littoral states. Since the events of 11 September 2001, these concerns have assumed increasing urgency and priority. The vital Straits of Malacca is very narrow and congested (it is only 800 metres wide at its narrowest point), with a huge amount of seaborne traffic passing through each day. It also lies within the Malay Archipelago, which has been designated the “second front” in the U.S.-led Global War on Terrorism, given the presence of militant groups affiliated with or sympathetic to Al Qaeda. Given the trend of increasing links between transnational organized crime and terrorism, fears have been expressed that high-value shipping, such as cruise ships and chemical tankers, could prove to be tempting terrorist targets. Ships could also be used to smuggle terrorists as well as weapons of mass destruction. One scenario is the hijacking of a chemical tanker and its use as a floating bomb to devastate ports — a maritime version of 9/11.34 An attack on a super container hub such as Singapore would have devastating consequences in a globalized age that has seen an increasing reliance on seaborne trade and just-in-time manufacturing processes. Moreover, Al Qaeda

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has already carried out maritime terrorist attacks, as on the USS Cole in 2000 and a French oil tanker, the Limburg, off the coast of Yemen in 2002. MARITIME SECURITY The problem with the maritime industry, however, is vast, given that the entire logistical chain needs to be secured. This entails improving ship, container, and port security. Ports in the region have therefore moved swiftly to implement the requirements of the International Ship and Port Security (ISPS) Code, which came into effect on 1 July 2004. Under the code, governments, ships, and ports are required to have enhanced security measures to ensure better control and monitoring of the movement of people and cargo.35 The region is also gradually responding to U.S.-led initiatives designed to improve port and container security as part of preventive measures against terrorism. Under the Container Security Initiative (CSI), U.S.-bound containers would be inspected at source by U.S. Customs. Under a separate International Port Security Program, U.S. Coast Guard inspectors would be permitted to inspect the region’s port facilities and verify their implementation of the ISPS code. In March 2004, the U.S. Pacific Command also floated a Regional Maritime Security Initiative (RMSI), aimed at dealing with transnational maritime threats in the Asia-Pacific. An initial suggestion that U.S. Special Forces might be stationed in the vicinity of the Straits of Malacca, however, drew strong reactions from Malaysia and Indonesia, due to sovereignty issues as well as domestic political sensitivities.36 The prospect of an active U.S. presence also pushed the littoral states of Indonesia, Malaysia and Singapore into declaring in July 2004 that they would cooperate more closely in coordinated, year-round patrols that are linked by communications hotlines, to ensure the security of the busy sea-lanes in the Straits of Malacca.37 This was followed up by an agreement to conduct joint air patrols.38 Although Malaysia and Indonesia remain opposed to foreign naval patrols and private armed escorts, there is now a consensus that they could accept foreign assistance in the areas of capacity-building, equipment, and training, so long as these do not compromise national sovereignty. The littoral states have also taken measures to improve counter-terrorism cooperation through the Five Power Defence Arrangements (FPDA) involving Britain, Australia, New Zealand, Singapore, and Malaysia. From 2005, FPDA multilateral military exercises have focused on maritime security, particularly on countering terrorist threats.39

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In turn, the concern over maritime security has attracted the attention of the Great Powers and increased their rivalry within the region. While the United States has moved to improve maritime security in the Straits with the support of its regional allies, China has increasingly expressed concern over the ability of the United States to disrupt China’s access.40 Since 11 September 2001, Japan has also moved to increase its strategic and security roles in the region, especially through the provision of capacity-building assistance to Indonesia and increased coast guard cooperation with regional states such as Singapore. It is undeniable that a motivating factor has been the increasing influence that a rising China will have on the region.41 REGIONAL COOPERATION IN ENERGY SECURITY The ASEAN states have recognized that energy security is an issue that affects the entire region. Attempts have therefore been made to improve regional cooperation. In 1999, a five-year ASEAN Plan of Action for Energy Cooperation covering the period 1999–2004 was launched, involving all ten ASEAN member states. At the same time, the ASEAN Centre for Energy (ACE) was set up in Jakarta, Indonesia, to better coordinate a regional approach to energy development and cooperation. The Plan of Action focuses on the following: an ASEAN power grid, a trans-ASEAN gas pipeline, coal and clean coal technology promotion, energy efficiency and conservation promotion, new and renewable energy development, and energy policy and environmental analysis.42 To achieve these objectives, the Centre coordinates the work of the following meetings and networks relating to energy: the Energy Efficiency and Conservation Subsectoral Network, the New and Renewable Sources of Energy Subsectoral Network, the Heads of ASEAN Power Utilities/Authorities (HAPUA), the Senior Officials Meeting on Energy (SOME), the ASEAN Energy Business Forum (AEBF), the ASEAN Forum on Coal (AFOC), the ASEAN Ministers of Energy Meeting (AMEM), and the ASEAN Council on Petroleum (ASCOPE).43 Although the Centre was set up in 1999, ASEAN regional cooperation in energy has in fact been ongoing for a number of years. For instance, under the ASEAN Petroleum Security Agreement signed in June 1986 in Manila, the ASEAN states agreed to assist each other in cases of over-supply or severe shortages.44 At the 22nd ASEAN Ministers of Energy Meeting in Manila in June 2004, a new five-year ASEAN Plan of Action for Energy Cooperation covering 2004–2009 was adopted. A key focus of this Plan of Action is the implementation of the ASEAN Power Grid and the possible commissioning

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of up to five power connection projects that would increase electricity interconnectedness. However, it must be pointed out that although a power grid might be feasible for land states, it would be difficult and expensive to link up the rest of maritime Southeast Asia, with its archipelagic nature. The Ministers also strongly endorsed the recommendation of the Senior Officials Meeting on Energy (SOME) to increase the share of renewable energy in power generation in the ASEAN region to at least 10 per cent over the six years to 2009, in view of rising oil prices and the consequent greater pressure to utilize renewable energy sources.45 Another area of focus for the Plan of Action is the Trans-ASEAN Gas Pipeline project. Eight possible gas interconnection projects could be implemented under this Plan, four of which would originate from the Natuna gas fields operated by Indonesia. A third area of focus, coal, includes objectives such as the environmental assessment of coal projects and the promotion of clean coal technology. Apart from the above, there are also three other areas of cooperation meant to improve conservation and the use of renewable energy. There are strategies for energy efficiency and conservation, involving capacity-building, expansion of private sector involvement, information-sharing, setting common energy standards, and promoting energy efficiency in the transport sector. There are also projects relating to the development of renewable energy in the energy supply, the promotion of the use of biofuels, and the utilization of biomass-based cogeneration technology. Finally, the Plan also focuses on improving regional energy policy and planning through information-sharing, capacity-building, promoting sustainable development and concern for the environment in policy formulation, the strengthening of regional cooperation, and the monitoring of the progress of the Action Plan.46 Regional cooperation has also expanded beyond the ASEAN states. For instance, in 2003, an ASEAN Plus Three meeting (that is, including China, Japan, and South Korea) was held in Bangkok to discuss improving regional oil stockpiles. In 2004, the first ASEAN Ministers of Energy Meeting Plus Three issued a joint declaration on strengthening infrastructure-building in the region.47 CONCLUSIONS Ji Guoxing’s prescient observation in 1998 that “energy security is of particular importance in the Asia Pacific owing to its physical unavailability to meet demand” accurately describes the energy problem in Southeast Asia. Of the region’s two biggest oil producers, Indonesia has become a net

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importer of oil and Malaysia is likely to follow suit after 2010. This fact, together with rising oil prices and the continued dependence on imported oil by a number of states in the region, has led to countries in the region making efforts at diversification. They have focused on developing alternative, indigenous sources of energy as well as strategies to increase energy efficiency. The intensified search for alternative energy sources has led states in the region to explore nuclear energy, biofuels, hydroelectricity, and natural gas. These efforts are aimed at reducing dependence on increasingly expensive imported oil and increasing self-sufficiency in order to ensure reliable and affordable energy supplies that might sustain future economic growth and hence political stability. The steady rise in primary energy consumption (namely, of oil, gas, and coal) in Southeast Asia as well as China’s and other Great Powers’ interest in the region for its energy resources and as a transit point for energy supplies have made the region — particularly the South China Sea with its potentially lucrative offshore oil deposits — a competitive battleground for energy. In these circumstances, the ASEAN states have found themselves pitted against each other as well as against China in the scramble for oil, particularly in disputed maritime territories. An energy-related concern, one which has attracted the attention of the Great Powers, is the security of the sea lines of communications (SLOCs) that traverse the region, particularly the narrow, crowded and strategic waterway, the Straits of Malacca. In the context of the post-September 11th 2001 Global War on Terrorism, this has resulted in a number of initiatives taken by the United States, as well as the littoral states, to improve maritime security. The ASEAN states have also responded to the energy problem through regional energy cooperation. In 1999, the ASEAN states announced a fiveyear Plan of Action for Energy Cooperation. This was renewed in 2004 to cover the period up to 2009. Despite competition, therefore, there have been genuine attempts by regional states to work together to ensure adequate and secure supplies of energy for their continued economic development. Although there are disputes over maritime oil and gas resources, with potentially huge stakes involved, no actual conflict has broken out. Instead, states in the region have pragmatically entered into cooperative agreements with each other or with external powers such as China and Australia, in order to reap the benefits of development and cooperation. Yet, regional cooperation has proceeded slowly in the actual implementation of plans. A lot has been said in the form of meetings and declarations, but many of these statements, in true ASEAN style, are declaratory in nature, non-binding, and have no legal force. The ASEAN way of consensus-building

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over every issue has posed real limits to institution-building and actual functional cooperation. This is due to barriers such as national sovereignty, mutual suspicions, differing national interests, and the complex and diverse nature of the energy needs and economic structures of the states in the region. Indeed, the institutional frameworks and structures necessary for regional cooperation on most issues, let alone on energy, remain on the whole poorly developed. The ASEAN Centre for Energy, for instance, was set up in 1999 but remains a small coordinating outfit located in Jakarta. In the final analysis, however, there is a clear trend as far as energy is concerned: energy security will remain high on the agenda of the ASEAN states, both individually and collectively. The impetus comes from the increasing demand for energy, the high price of oil, and the continued rapid economic growth in the region. This should provide momentum towards a regional approach in the coming years, though there will invariably be limits to this, and large external powers such as China will have an increasing voice. NOTES 1 Ji Guoxing, “China Versus Asia-Pacific Energy Security”, Korean Journal of Defence Analysis 10 no. 2 (1998): 109–41. 2 Los Angeles Times, 7 June 1998, p. 109. 3 Ji, “China Versus Asia-Pacific”, p. 109. 4 Robert J. Lieber, “Oil and Power After the Gulf War”, International Security 17, no. 1 (Summer 1992): 172. 5 Indeed, Ji Guoxing makes the point that “Asian Pacific energy security is inseparable from China’s security”. See Ji, p. 112. 6 BP Statistical Review of World Energy, June 2007, p. 2. 7 Mark Hong, “Overview of Singapore’s Energy Situation”, in Energy Perspectives on Singapore and the Region, edited by Mark Hong (Singapore: Institute of Southeast Asian Studies, 2007), pp. 2–4. 8 See, for instance, the cautionary warning in Esa Ramasamy, “Singapore’s Role as a Key Oil Trading Center in Asia”, in Energy Perspectives, pp. 40–41. 9 A point made by Jun Tsunekawa, “Energy Situation in East Asia and its Impact on the Strategic Environment”, NIDS Security Report No. 3, March 2002, p. 91 (Tokyo: National Institute for Defence Studies). 10 “Nuclear Plans in ASEAN”, Straits Times, 23 June 2007. 11 “The Nuclear Conspiracy”, Editorial, Jakarta Post, 26 February 2007. 12 “Alternative Energy: Beware Hidden Costs”, Straits Times, 22 July 2006. 13 Larry Jagan, “Myanmar Drops a Nuclear Bombshell”, Asia Times, 24 May 2007. 14 “Alternative Energy: Beware Hidden Costs”, Straits Times, 22 July 2006. 15 Eric Holthusen, “Bio and Synthetic Fuel”, in Hong, Energy Perspectives, p. 304. 16 Morten B. Pedersen, “The Future Takes Form — But Little Change in Sight”,

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in Southeast Asian Affairs 2007, edited by Daljit Singh and Lorraine C. Salazar (Singapore: Institute of Southeast Asian Studies, 2007), p. 234. See Daniel Yergin and Michael Stoppard, “The Next Prize”, Foreign Affairs, November–December 2003. International Energy Agency, World Energy Outlook 2004 (OECD, 2004), p. 161. Andrew Symon, “Petroleum and Mining in Southeast Asia: Managing the Environmental and Social Impacts”, in Singh and Salazar, Southeast Asian Affairs 2007, edited by Daljit Singh and Lorraine C. Salazar, p. 90. Report from the U.S. Embassy in Jakarta, undated (accessed 10 August 2007). Vincent S. Perez, “Who Wins in the Asian Scramble for Oil?” in Hong, Energy Perspectives, p. 257. Pedersen, “The Future Takes Form”, p. 234. Ooi Kee Beng, “Malaysia: Abdullah Does it His Own Vague Way”, in Singh and Salazar, Southeast Asian Affairs 2007, p. 194. Ioannis Gatsiounis, “ASEAN Explorers Head for Deeper Waters”, International Herald Tribune, 24 May 2007. Ibid. Manjeet Singh Pardesi et al., Energy and Security: The Geopolitics of Energy in the Asia-Pacific (Singapore: Institute for Defence and Strategic Studies, Nanyang Technological University, 2006), p. 19. See Andrew T. H. Tan, Security Perspectives of the Malay Archipelago (Cheltenham, Glos: Edward Elgar, 2004), pp. 228–30. For an excellent analysis of the new Chinese diplomacy, see Allen Carlson, “Constructing the Dragon’s Scales: China’s Approach to Territorial Sovereignty and Border Relations in the 1980s and 1990s”, Journal of Contemporary China 12, no. 3 (November 2003): 677–98. Perez, “Who Wins in the Asian Scramble for Oil”, p. 254. “Malaysia and Brunei near deal on sea-border dispute”, Biz News Databank, 14 August 2007 (accessed 16 August 2007). People’s Daily Online, 1 July 2004 (accessed 16 August 2007). Andrew T. H. Tan, A Political and Economic Dictionary of Southeast Asia (London: Europa, 2004), p. 284. “Australia, E. Timor Sign Oil Deal”, CNN News, 12 January 2006 (accessed 20 August 2007). See for instance Graham Gerard Ong, “Pre-empting Maritime Terrorism in Southeast Asia”, ISEAS Viewpoints (Singapore: Institute of Southeast Asian Studies), 29 November 2002. See International Maritime Organization, “What is the ISPS Code?” (accessed 19 August 2007). “Officials Clarify Maritime Initiative Amid Controversy”, Defence Link, 4 June 2004 (accessed 19 August 2007). “Malacca Straits Anti-Piracy Patrols Start Next Week”, MIMA News Flash, July 2004 (accessed 19 August 2007). “Joint air patrols over Malacca Strait to start next week: Indonesia”, AFP, 8 September 2005. The Age, 22 November 2005. Ian Storey, “China’s Malacca Dilemma”, China Brief 6, no. 8 (12 April 2006). Andrew T. H. Tan, “Singapore’s Cooperation with the Trilateral Security Dialogue Partners in the War Against Global Terrorism”, Defence Studies 7, no. 2 (June 2007): 199–202. ASEAN Centre for Energy, Introduction (accessed 19 August 2007). ASEAN Centre for Energy, ACE in ASEAN Structure (accessed 19 August 2007). ASEAN Petroleum Security Agreement, Manila, 24 June 1986 (accessed 19 August 2007). See The 21st HAPUA Council Meeting, 10 May 2005, Vientiane, Lao PDR , p. 7 (accessed 19 August 2007). ASEAN Center for Energy, Work Programme (accessed 19 August 2007). Christopher Lee, “Energy Cooperation in Asia”, in Hong, Energy Perspectives, p. 162.

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BIOFUELS DEVELOPMENT AND PROSPECTS IN THE PHILIPPINES N.A. Orcullo, Jr.

ABSTRACT Economic growth is a goal and an aspiration of developing countries such as the Philippines. The challenges to economic growth presented by the escalating prices of petroleum product imports have motivated governments to consider localized and renewable sources of energy as a major aspect of the countries’ energy supply. For the Philippines, an essentially agricultural economy, one option is to develop renewable energy resources, particularly biomass-based feedstock. As a result, localizing energy supply by exploring and developing renewable energy has always been a part of the country’s priorities since energy planning was institutionalized there in the 1970s. INTRODUCTION The Department of Energy (DOE) is the primary agency of the Philippine Government mandated to develop and implement the overall agenda for the energy sector. The agenda is embodied in the Philippine Energy Plan. Developing the alternative/renewable energy sector through the Alternative Fuels Program is among the components of the Philippine Energy Plan. The DOE emphasis on the harnessing and utilization of renewable energy comprises

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a critical component of the government’s strategy to provide energy supply for the country. This is evident in the power sector, where increased generation from geothermal and hydro resources has lessened the country’s dependence on imported and polluting fuels. In the government’s rural electrification efforts, on the other hand, renewable energy sources such as solar, microhydro, wind, and biomass resources are now used on a wide scale. Based on current projections of the DOE, renewable energy is foreseen to provide up to 40 per cent of the country’s primary energy requirements over the ten-year period beginning in 2003. Although its share will decline in relation to the total figure, renewable energy is estimated to grow at an average annual rate of 2.4 per cent in absolute terms. Biomass, micro-hydro, solar, and wind will remain the largest contributors to the total share of renewable energy in the energy mix, with an average share of 27.5 per cent. Meanwhile, hydro and geothermal will contribute the balance and continue to be significant sources of electric power. THE ALTERNATIVE FUELS PROGRAM This is one of the five key components of the Arroyo administration’s Energy Independence Agenda, which outlined the roadmap that will lead to the country’s attainment of 60 per cent energy self-sufficiency by 2010 (www.doe.gov.ph). The DOE is implementing a long-term Alternative Fuels Program meant to (1) reduce the country’s dependence on imported oil and (2) provide cheaper and more environment-friendly alternatives to fossil fuels. Through this programme, the DOE intends to tap the country’s domestic produce as viable sources of energy. The goal is to develop indigenous and renewable energy fuels for long-term energy security, so that these sources of energy may become a pillar of the country’s sustainable growth. The Alternative Fuels Program has four major subprogrammes, namely, the Biodiesel Program, Bioethanol Program, Natural Gas Vehicle Program for Public Transport (NGVPPT), and Autogas Program. Other technologies advocated under the programme are hybrid, fuel cell, hydrogen, and electric vehicles. The direction to address biofuels was given more specific emphasis with the enactment of the Biofuels Law (RA 9367), which was signed by President Gloria Macapagal-Arroyo on 12 January 2007. Development of a comprehensive biofuels programme is underway. The Department of Energy (DOE), Department of Agriculture (DA), and other partners as identified in the Biofuels Law are now pursuing an action plan focused on biofuels, as mandated by the said law in the spirit of the energy plan already in place.

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THE BIOFUELS ACT OF 2006 The encouraging results of tests evaluating coconut mythel ester (CME) as a diesel fuel additive, the existence of the biodiesel standards, and the growing number of private business organizations engaged in the production and marketing of biodiesel all indicated that biodiesel in CME form was promising. Eventually, President Gloria Macapagal-Arroyo launched the Coco-Biodiesel Program on 21 April 2004 in San Pablo City, a coconut-producing area where a number of coconut-based processing companies are located. These developments somehow inspired the fast tracking of the enactment of the law known as Biofuels Law (RA 9367) — a landmark piece of legislation for the energy sector and a boon for the Alternative Fuels Program. The Biofuels Law made it mandatory to use biofuels (see, in particular, Section 5 of RA 9367). DEFINITIONS AND CONTEXT OF BIOFUELS AND BIOFUELS PRODUCTS As defined under the Biofuels Law (RA 9367), biofuels refer to bioethanol and biodiesel and other fuels made from biomass and primarily used for motive, thermal, and power generation with quality specifications consistent with the Philippine National Standards (PNS). The law also specifically defines biodiesel as referring to Fatty Acid Methyl Ester (FAME) or monoalkyl ester obtained from vegetable oil, animal fats, or other biomass-derived oils that shall be technically proven and approved by the DOE for use in diesel engines, with quality specifications in accordance with the Philippine National Standards (PNS). This generic definition of biodiesel points to the fact that the law is not really all about biodiesel sourced from coconut feedstock in the form of coconut methyl ester (CME). Rather, it provides a window for sourcing or producing biodiesel from other sources/feedstocks, given the existing marketing and supply/value chain system for the coconut-based product. Operationally, biodiesel in the Philippines is a renewable and biodegradable diesel fuel extracted from plant oil. It is a form of natural hydrocarbon with negligible sulphur content that will substantially help in reducing emissions from diesel-fed engines. Coconut Methyl Ester (CME) is essentially the kind of biodiesel fuel blend now being discussed in the Philippine market. Biodiesel, on the other hand, is the international name for methyl ester when used as a diesel fuel or enhancer. The coconut methyl ester is not the same as the coco-diesel blend that was used in the country in the 1970s and 1980s. That was a mixture of commercial diesel fuel and crude coconut oil that did not

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undergo esterification process. The properties of CME-based biodiesel result in more efficient combustion that translates to increased engine power, longer mileage, and less emission. Bioethanol refers to ethanol (C2H5OH) produced from feedstock and other biomass. It refers to hydrous or anhydrous bioethanol suitably denatured for use as motor fuel, with specifications in accordance with Philippine National Standards (PNS). It is a high-octane, water-free alcohol produced from the fermentation of sugar or converted starch. In its purest form, it is a colourless, clear liquid with a mild, characteristic odour and that boils at 78°C and freezes at 112°C. Bioethanol can be produced from sugar cane, sorghum, cassava, and other crops that can be grown in the Philippines. Like coconuts, sugar cane is a major industry in the country, with a number of distilleries producing alcohol from cane sugar and serving the needs of various industries, including the food and beverage sectors. Ethanol, up to 190 proof (95% strength), can be produced using simple distillation. Removal of the last 5 per cent water from an ethanol solution requires more complex methods. Hydrous (water-containing) ethanol can be used in a modified gasoline engine, as in Brazil. If the ethanol is to be blended with gasoline at any rate, the ethanol must be completely anhydrous (dry), or 200 proof. Otherwise, separation of the fuels will occur. The use of ethanol as a fuel additive was extensively tested in the Philippines back in the late 1970s and early 1980s, under the government’s Alcogas programme. Despite the data and experience accrued, however, no comprehensive application or large-scale use was ever developed, in contrast to the progress made with CME-based biodiesel. THE NATIONAL BIOFUELS PROGRAM As mandated by the Biofuels Law, a National Biofuels Program (NBP) has to be pursued by the Department of Energy (DOE), the Department of Agriculture (DA), and other agencies specifically identified. An important provision in the Biofuels Law is the establishment of the National Biofuels Board (NBB) to ensure coordinated and sustainable implementation of the Biofuels Law, particularly the National Biofuels Program (NBP). With the convening of the National Biofuels Board, the timeline for the implementation of the National Biofuels Program has been drawn as shown in Figure 2.1. Running in parallel with the timeline for the NBP is the programme framework as shown in Figure 2.2. As shown in Figure 2.2, the programme has six major components as follows: a) Feedstock development, production, and extension; b) Research development and deployment; c) Industry

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First Month

Sixth Month

Third Month

IRR Promulgated

IRR publication – May 23, 2007

1% biodiesel – May 6, 2007

Four Years

10% bioethanol May 6, 2011

Blends can still be decreased

Two years

5% bioethanol 2% biodiesel May 6, 2009

Source: Department of Agriculture/Agribusiness Lands Investment Center, October 2007.

Publication – Jan. 22, 2007

Effectivity – Feb. 6, 2007

NBB convened – Feb. 27, 2007

President Signed Biofuels Law – Jan. 12, 2007

Phase Out MTBE

Figure 2.1 National Biofuels Program — Timeline of Implementation

Fifth Year

Blends can no longer be decreased

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Community Development

■

By-products development Protocol & standards development Blend performance tests & standards development

■

■

■

Pilot plant & showcase projects

Process enchancement

■

■

Varietal improvement & management

■

Research, Development & Deployment

Distribution & sales Application development

■

■

Competitive Pricing

Transport & handling

■

■

Fuel storage & exchange

Plant construction, operation & expansion

■

■

Biofuels road map

■

Industry Development

This covers all major areas and strategies of the Program.

Tax incentives

Seminars, conferences, & Worshops Tri-media info Web access

■ ■

Manpower development

Social amelioration

■

■

■

Market development services

■ ■

Government financing Credit facilitation services

■

Pertains to additional Enabling Rules and Regulations that shall avoid and/or resolve conflicts during the implementation of the Law ■

Standards and Quality Assurance

Policy Formulation & Dissemination

Source: Department of Agriculture/Agribusiness Lands Investment Center, October 2007.

Farmers’ Organization

Agriculture Propagation/ Cultivation Fertilization Expansion Mechanization

■

-

-

■

■ Land use - Survey - Validation of existing plantations

For Coconut, Sugarcane, Jatropha & Other Feedstocks:

Feedstock Development, Production, & Extension

NATIONAL BIOFUELS PROGRAM

Figure 2.2 National Biofuels Program Framework

■

■

Penalizing

Inspecting & monitoring

Enforcement:

Utilization technologies

Biofuels & blends ■

■

Production Facilities Utilities and services ■

■

Covers technical & environmental compliance in the following areas:

Investments, Incentives, & Promotions

Biofuels Development and Prospects in the Philippines 29

N.A. Orcullo, Jr.

30

development; d) Policy formulation and dissemination; e) Investments and incentive promotions; and f ) Standards and quality assurance. KEY PLAYERS IN THE NATIONAL BIOFUELS PROGRAM The Biofuels Law mandated several agencies to pursue the biofuels agenda. Their respective roles are as follows: a) Department of Energy (DOE): DOE’s role is to prepare the Biofuel Program within the Philippine Energy Program while taking into consideration the DOE’s existing biofuels programme. b) National Biofuels Board (NBB): Purposely created under RA 9367, NBB is the technical secretariat for biofuels and is tasked to monitor the implementation of, and evaluate for further expansion, the National Biofuel Program prepared by DOE. c) Department of Agriculture (DA): In coordination with the Department of Science and Technology (DOST), DA shall coordinate the identification and development of viable feedstock for the production of biofuels. Through its relevant agencies, and within three months from the date of effect of the biofuels law, DA will develop a national programme for the production of crops for use as feedstocks. The agency is further tasked to ensure increased productivity and a sustainable supply of biofuels feedstock and shall institute a programme that would guarantee that a sufficient and reliable supply of feedstock is allocated for biofuel production. d) Department of Science and Technology (DOST): Through the Philippine Council for Industry and Energy Research and Development (PCIERD), DOST shall develop and implement a research and development programme supporting a sustainable improvement in biofuels production and utilization technologies developed locally and abroad. e) Department of Labor and Employment (DOLE): DOLE’s task is to promote gainful livelihood opportunities and facilitate productive employment through effective employment services and regulation: to recommend plans, policies, and programmes that will enhance the social impact of the National Biofuels Program. f ) Local Government Units (LGUs): LGUs are to assist the Department of Energy in monitoring the distribution, and sale of biofuels and biofuels blends. g) Department of Finance (DOF): DOF’s role is to monitor the production and importation of biofuels through the Bureau of Internal Revenue and Bureau of Customs.

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One important aspect of the Biofuels Law is the administrative intervention it has provided for ensuring the coordinated and sustainable implementation of the Biofuels Law, in particular, the creation of the National Biofuels Board to serve as the technical secretariat for biofuels-related activities. VISION AND OBJECTIVES OF THE NATIONAL BIOFUELS PROGRAM The country’s ideals for its biofuels development agenda comes in the form of a bolder vision statement that reads as follows: The Philippines shall be the leader in a globally competitive biofuels industry by year 2011. Towards the realization of the vision, the country shall accelerate the commercialization of biofuels in order to achieve energy selfsufficiency, protect the environment and spur socio-economic development.

As drafted by the Department of Agriculture, with inputs from the Department of Energy and other concerned agencies, the National Biofuels Program set forth the following objectives: a) Maximize the contributions of indigenous biofuels in the country’s energy mix towards self-sufficiency and better environmental conditions; b) Establish the Philippines as a leader in sustainable biofuels feedstock development, technology generation, and market development; c) Harmonize research, development, demonstration, and commercialization efforts in the country; d) Coordinate efforts towards the creation of new applications and markets for biofuels; e) Update national incentives and regulatory requirements to encourage production and use of biofuels; and f ) Ensure improvement of the quality of life of the people, particularly the farmers and other workers in the related areas of endeavor, through the growth of the biofuels industry. Vital to achieving the end goals of the National Biofuels Program is the National Biofuels Feedstock Program, whose main goals are as follows: a) To produce a sufficient amount of feedstock to meet the demand for biofuels; b) To augment farmers’ income;

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c) To generate rural employment; and d) To spur the development of idle and marginal lands. To achieve the goals of the National Biofuels Program, the Department of Agriculture is initiating several interventions as shown in Figure 2.3. The primary feedstock for biodiesel is coconut, while Jatropha is an emerging feedstock. While not yet included in the programme, palm oil is a possible option. In the case of bioethanol, sugar cane is being targeted as the primary feedstock source, with cassava and sorghum as the emerging feedstocks under consideration. BIOFUELS PROJECTS The private investment projects meant to address the supply requirements of feedstocks both for biodiesel and bioethanol are shown in Figure 2.4. As shown, there are now eight major investment projects in the area of plantation projects that cater to the feedstock needs, covering a total area of 400,000 hectares. In the case of bioethanol feedstocks, there are now ten major investment projects for plantations meant to produce raw materials for bioethanol (sugar cane and cassava) covering an area of almost 100,000 hectares. The investment projects for the biodiesel and bioethanol feedstock programme are in the form of new plantation areas found in three major islands and growth regions. The projects are expected to generate employment in the agriculture and industry sectors in these areas. QUALITY STANDARDS FOR BIOFUELS Given the commercial potential of the biofuels market, there is a need to develop technical and quality standards for biofuels. The standards for CME were the first to be established. The Technical Committee on Petroleum Products Additive (TCPPA) came up with the Philippine National Standards (PNS) for biodiesel — essentially referring to the coconut methyl esters (CME). The TCPPA prepared the standards for biodiesel based on CME, which has to be blended with commercial diesel fuel as mandated by the Biofuels Law of 2006. Apart from energy considerations, the standards for CME were made pursuant to the intent of the Clean Air Act (RA 8749) for the development and utilization of cleaner alternative fuels. These standards are also designed to standardize the quality of CME to ensure its effectiveness when used either in its pure state or as a blend.

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Technical Assistance for Production (PCA, SRA, BPI, NCPC, BPI, BAR, UPLB, PFC, PCCARD, PCIERD) • research and development • regulatory

Produce sufficient amount of feedstock

Augment income of farmers

Feedstock Supply Assurance (PCA, SRA, PFC, PAFC, BSWM/DA-Goal 1 Program DA-PADCC/Philippine Agribusiness Center) • rehabiltation • establishment of new plantations • identification of new lands • investment promotion/intermediation/facilitation • crop protection • irrigation

Source: Department of Agriculture/Agribusiness Lands Investment Center, October 2007.

Infastructure (DA-FOS, DA-RFU’s, PCA, BPRE, AFC) • development of farm to market roads • provision of post harvest facilities • provison of hauling facilities • establishment of processing plants

Policy Support and General Supervision (DA-Planning Service, PCA, SRA, DOE, DOLE) • inclusion in the IPP formulation of guidelines

Credit Facilitation (Quedancor/ACPC, GFIs) • development of financial packages

IEC Activities (info support) (DA-AFIS, PCA, SRA, BAR) • distribution of IEC materials • primers • audio visual aids • re-toolind and capacity building activities • media relations • press conference

Figure 2.3 Department of Agriculture Biofuel Feedstock Interventions

Biofuels Development and Prospects in the Philippines 33

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SUMMARY:

15,000 Has

7/12/10, 3:51 PM ALSONS POWER Jatropha for Biodiesel General Santos City 56,000 has

ROBSON AGRO VENTURES Cassava for bioethanol S Cotabatoand Saranggani 25,000 has

ALSONS POWER Cassava for bioethanol MisamisOriental and Saranggani 16,000 has

BASIC ENERGY Sugarcane for bioethanol Zamboangadel Norte 10,000 has

FUELS Inc. Sugarcane for Bioethanol Talakag, Bukidnon 5,000 has

PNOC-AFC Jatropha for Biodiesel General Santos City 30,000 has

44

33

ARMM ARMM

44

NCR NCR

11

CAR CAR

99

66

55

12 12

CARAGA CARAGA 10 10 ARMM ARMM 11 11

77

88

PNOC-AFC Jatropha for Biodiesel Quezon Province 10,000 has

EASTERN PETROLEUM Cassava for Bioethanol Sarangganiand General Santos City 50,000 has

22

ENERFUSE Davao CME for biodiesel production

GMC Oil Palm for Biodiesel production Dalurong, Bukidnon down to ArakanValley, Cotabato 30,000 has

GMC Oil Palm for Biodiesel Production Laak, CompostelaValley to San Isidro and Asuncion, Davao 30,000 has

PNOC-AFC Jatropha for Biodiesel Bukidnonand Misamis Oriental 160,000 has

SAN CARLOS BIOENERGY San Carlos City, Negros Occ. Sugarcane for ethanol production 5,000 has

Leyte ArgiCorp. Ormoc, Leyte Molasses for bioethanol production

E-CANE FUEL LaloCagayan Sugarcane for ethanol production 20,000 has

Source: Department of Agriculture/Agribusiness Lands Investment Center, October 2007.

ECO GLOBAL BIO OIL Jatropha for Biodiesel Provinces of Region 12 50,000 has

AM: 464,000 Has

CP:

LUB: 20,000 Has

NLAQ: 248,000 Has

Southern BukidnonBioenergy Sugarcane for bioethanol Bukidnon 2,000 has

Negros Biochem Sugarcane for bioethanol BagoCity, Negros Occidental 10,000 has

BENLINC Coconut for CME production Magsinggal, Sto. Domingo, Kabugao(IlocosSur) 100,000 has

Figure 2.4 Biofuels Accounts — Ongoing (as of 21 September 2007)

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Biofuels Development and Prospects in the Philippines

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For the time being, the sole standard for biodiesel is limited to coconutbased feedstock, in particular, CME. The Philippine Government is expanding and considering diversifying its feedstock sources to address the demands of biodiesel blends as mandated under the Biofuels Law (RA 9367). The efforts of the Technical Committee on Petroleum Products and Additives (TCPPA) are ongoing. Eventually, standards for feedstock other than CME will evolve after a thorough evaluation of its technical performance when used with transport vehicles or motive power in general. ACCREDITATION OF CME SUPPLIERS The results of laboratory and road tests on the use of commercial diesel blended with CME, using government vehicles and private commercial buses, were positive and promising. The private business sector thus saw the potential of CME to serve the emerging energy market. With the standards for biodiesel (CME) now in place, the Department of Energy established a procedure on accrediting potential suppliers of CME. There are now six companies already issued with CFAR (Certificate of Fuel Additive Registration) and one with provisional accreditation (Mt. Holly Coco Industrial Corporation), with a combined output of 256.7 million litres (as of August 2007). Other than the CME that flows out of petrol pumps all over the country, there are 304 CME outlets in various parts of the country, as of 2006. Aside from the seven companies already issued with CFAR, the accreditation of two other companies are underway (namely, Lion Chemical and Atson Coco Inc.), thus placing the number of CMEproducing companies at nine. The additional CME producers will provide an additional 34 million litres per year after the completion of their accreditation requirements. In all, the nine CME producers are expected to have a combined production capacity of about 391 million litres annually. DEMAND FOR BIODIESEL The mandate of the Biofuels Law now in force translates to a biodiesel demand projection shown in Table 2.1. As seen, a 1 per cent CME blend with biodiesel means a biodiesel demand of 78 million litres for 2007. This demand increases up to 173 million litres in 2010 when the blend is doubled and further to 209 million litres by the year 2015. This means a demand of 123,810 metric tonnes of coconut oil, or 260,000 metric tonnes of biodiesel sourced from Jatropha curcas. In terms of the production area required, the biodiesel demand for the year 2007 (at 1 per cent CME blend) requires

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Table 2.1 Projected Biodiesel Demand

Blend

1% 2%

Year

2007 2010 2015

Demand (M liters) 78 173 209

Equivalent Feedstock Volume (MT)

Equivalent Area for Production (Has)

Coconut

Jatropha

Coconut

Jatropha

123,810 274,603 331,746

260,000 576,667 696,667

121,382 269,219 325,241

52,000 115,333 139,333

Source: Department of Agriculture/Agribusiness Lands Investment Center, October 2007.

121,382 hectares to be planted with coconut, or some 52,000 hectares of land planted with Jatropha. By the year 2015, when the biodiesel blend has to be increased to 2 per cent, about 331,746 metric tonnes of coconut oil and 696,667 metric tonnes of Jatropha-based oil are needed. This means a production area requirement of 325,241 and 139,333 hectares for coconut and Jatropha respectively. Comparing the current and projected demand for biodiesel at various levels against the production capacity of the existing CME suppliers, it appears that local suppliers will be able to handle this demand. This means that the Philippines has the potential to be a net exporter of CME-based biodiesel. In fact, one CME producer (Chemrez, Inc.) is already exporting biodiesel to Japan and Germany. China is also reported to have expressed confidence in the Philippine’s biodiesel product. The existing demand for other coconut-based products is a matter that might potentially threaten the biodiesel (CME) supply. The demand for biodiesel is seen as a threat to the supply chain of the food- and industrybased markets. This situation demands that feedstocks other than coconut, or biodiesels other than CME, be considered for production. It is in this context that the biofuels programme of the Philippines is exploring other options besides CME as an additive for the diesel fuel. Jatropha curcas is therefore under serious consideration as another feedstock for biodiesel production. DEMAND FOR BIOETHANOL The National Biofuels Program projects a demand for bioethanol as shown in Table 2.2. As seen, the 5 per cent blend for bioethanol translates to a bioethanol demand of 268 million litres. This bioethanol demand is expected to increase to 594 million litres in the year 2011 and further to 721 million litres by the year 2015.

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268 594 721

2009

2011

2015

5%

10% 10,300,000

8,485,714

3,842,857

Sugar cane

14,420,000

11,880,000

5,380,000

Sweet Sorghum

4,005,556

3,300,000

1,494,444

Cassava

Equivalent Feedstock Volume (MT)

Source: Department of Agriculture/Agribusiness Lands Investment Center, October 2007.

Demand (M liters)

Year

Blend

Table 2.2 Projected Bioethanol Demand

158,462

130,549

59,121

Sugar cane

144,200

118,800

53,800

Sweet Sorghum

500,694

412,500

186,806

Cassava

Equivalent Area for Production (Has)

Biofuels Development and Prospects in the Philippines 37

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To supply the projected demand for bioethanol, the National Biofuels Program expects to source alcohol from three feedstocks, namely sugar cane, sweet sorghum, and cassava. The equivalent feedstock volume needed to supply the demand for bioethanol for the year 2009 is about 3.84 million tonnes of sugar cane, 5.38 million tonnes of sweet sorghum, and 1.49 million tonnes of cassava. By the year 2011, the volume of feedstock needed will increase to 8.48, 11.8, and 3.3 million metric tonnes for sugar cane, sweet sorghum, and cassava respectively. By the year 2015, this demand level for bioethanol translates to 10.3, 14.2, and 4.05 million metric tonnes of sugar cane, sweet sorghum, and cassava respectively. To grow these amounts of sugar cane, sorghum, and cassava, substantial tracts of land have to be developed or converted into plantations. As shown in Table 2.2, to supply the need for bioethanol at a 5 per cent level by the year 2009 means planting 53,121 hectares of sugar cane, 53,800 hectares of sweet sorghum, and 186,806 hectares of cassava. By the year 2015, when the blend level will increase to 10 per cent, the area required is about 158,462 hectares of sugar cane, 144,200 hectares of sweet sorghum, and 500,694 hectares of cassava. As shown in Table 2.2, the bioethanol programme requires a substantial acreage to be planted. MEETING THE DEMAND LEVELS FOR BIOFUELS While it appears that the current producers and suppliers of CME will be able to meet the demand for biodiesel all the way to 2015, the existing market system for coconut-based products must be taken into consideration. For instance, producers have the option of exporting their biodiesel (CME) to other countries for profit and other corporate considerations. As mentioned earlier, the existing demand for other products based on coconut might potentially threaten the biodiesel (CME) supply and hence the price of CME. The demand for biodiesel is also considered a threat to the supply chain of the food- and industry-based markets for coconut-based companies that also serve the biodiesel market. This situation demands consideration of feedstocks other than coconut, for example, Jatropha curcas. This would be in line with the mandate to generate other forms of economic activity in the agriculture sector. While it appears that meeting the demand for biodiesel appears not to be much of a problem, the supply of bioethanol is a different and more challenging issue even though a number of alcohol distilleries are already in place or operating in various parts of the country. To address the demand-supply gap for bioethanol, the National Biofuels Program envisions the establishment of

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alcohol distilleries for the sole purpose of producing alcohol for the energy sector. The NBP will need to have established nine distilleries by the year 2009 (each with a 30 million litre capacity), seventeen to twenty-five distilleries by the year 2011, and at least twenty-five distilleries by the year 2015. As it is, a substantial investment is needed to address the intents of Biofuels Law for bioethanol alone. Building the distillery facilities is a relatively simple task but making the plants operational and delivering the necessary feedstocks is another matter. The high level of expectations is not easy to meet in light of the peculiar nature of the agricultural investment projects that support the bioethanol programme. ROLE OF THE AUTOMOTIVE INDUSTRY The automotive industry of the country plays a critical role in the acceptance of biofuels as well as of the biofuels programme in general. As the major industry behind the transport sector, car manufacturers and assemblers are directly affected by the use of blended fuel. While the vehicle itself may not be directly affected, the performance of the engine that uses a biofuel blend may have a bearing on the overall performance of the vehicle. A more valid reason for the automotive industry to be apprehensive about the use of biofuel blends is that the engines were originally designed to run on pure gasoline or diesel; the issue of product warranty is therefore critical. Like the petroleum products companies, the automotive industry has shown its initial apprehension over the use of biofuels. In fact, the Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI) openly displayed its opposition to the passage of the Biofuels Law. One fear expressed was over the purported effect of ethanol-blended gasoline on particular engine parts. However, an advocacy group (Philippine Fuel Ethanol Alliance) countered CAMPI’s stand and has repeatedly asserted that such fears are unfounded, as evidenced by the Worldwide Fuel Charter and the example of a number of oil firms that are already selling E10, or gasoline blended with 10 per cent ethanol. REGULATORY CONSIDERATIONS As a priority area for development, and in accordance with the desire of the executive leadership to address the energy component of its development agenda, the biofuels sector is not regulated. Instead, there are basic considerations and existing laws and regulations that have to be complied with in pursuit of the biofuels agenda.

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The petroleum distribution sector is a deregulated industry. Major petroleum companies may choose where to source the biofuels that are to be blended with diesel and gasoline. Similarly, biodiesel suppliers are free to transact with whichever major petroleum companies they feel comfortable with. In addition, biodiesel suppliers may sell their products as additives that individual motorists can buy and blend with the fuel loaded in their gas tank. While there may be minimal economic advantage to the individual in having a blend higher than what is mandated by law, the contribution to the environment in having a cleaner exhaust emission is laudable in itself. In a way, the enactment of the Clean Air Act in 1999 contributed greatly to the wider and commercial use of biofuels, particularly the CME-based biodiesel. Undergoing the emission testing mandated under the Clean Air Act may be costly and cumbersome for some vehicle owners, but the outcome of this initiative, especially in view of the country’s commitment to the Kyoto Protocol, extends beyond simply promoting clean air and good governance. The only regulatory requirements of the Biofuels Law thus far are the registration requirements for biofuels producers and the accreditation of their products and brands with the DOE. To be able to sell biofuels in the Philippine market, prospective producers and sellers need to pass the Philippine National Standards (PNS) for a particular product. Passing the standards requirements means eventually being granted a CFAR by DOE, as earlier mentioned. CHALLENGES AND BUSINESS OPPORTUNITIES The requisites of the Biofuels Law and the targets set under the National Biofuels Program translate to challenges and business opportunities for individuals and corporate organizations that want to respond to the biofuels programme at large. In specific terms, the business opportunities come in the following forms and sectors of the economy: A) Feedstock Producers and Suppliers Given the substantial volume of biofuels required for blending with diesel (namely, biodiesel) and gasoline (namely, bioethanol), the need to establish feedstock plantations (coconuts, sugar cane, cassava, and sweet sorghum) is an open arena for any interested parties — from individual farmers to corporate giants. Individual farmers or farmer groups can seek permission from the government to plant any of the feedstock in demand where they find it technically possible and economically viable, then sell the produce to processors (namely, millers, refiners, and blenders). This is the area where

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employment, entrepreneurship, and industrialization or development of the agriculture sector can be addressed as mandated and implied under the Biofuels Law. In parallel, corporate organizations can integrate production of biofuels feedstock with processing into biodiesel or bioethanol to take advantage of efficiency considerations as well as economies of scale, perhaps gaining a competitive advantage thereby. B) Feedstock Processors For existing companies now engaged in producing biofuels (e.g., CME producers and alcohol distilleries), the demand for biofuels is both a product and market development opportunity. By adding a new product line to an existing production facility, such a company would have the potential for transforming itself into a biofuels company to supply local and external demand. Biofuels represent an opportunity for capacity and market area expansion and also a greenfield investment area. Feedstock processors can either play the role of agricultural producer and integrator or simply act as downstream players in similar fashion to the existing coconut and sugar cane millers. C) Feedstock Trading With agri-based feedstock to serve as raw material in the production of biofuels (namely, crops such as coconut and Jatropha), the upsurge in the market for this kind of product will result in a vigorous commodity trading system that may potentially affect the supply chain system for coconut-based products. In the case of Jatropha, this is a relatively new product in the market that new and existing entrepreneurs can quickly move on. Either way, traders and third parties that are engaged in this kind of product can look forward to brighter prospects both for the domestic and export market. D) Biofuels Product Trading The trading of biofuels in the form of biodiesel or bioethanol generates potential for another level of commodity trading, given the fact that there are institutional buyers for biofuels domestically and abroad. Institutional buyers (e.g., petroleum companies operating refineries where the biofuels blending process takes place) are more concerned with the price of the product delivered to their refineries/depots than about the cost of production of the biofuel additives. This may provide commodities traders with an entrepreneurial opportunity.

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E) Backward Integration Opportunity The Biofuels Law of 2006 set the minimum blend level at 1 per cent during the initial year of implementation (2007) and increasing the blend to 2 per cent by 2009. Hence, there is an increasing level of demand for CME to form the commercial biodiesel that will be sold in the market. Similarly, the higher volume of blend requirement for bioethanol to form the E5 or E10 gasoline production also means a large volume of ethanol requirement that petroleum companies have to procure to meet market demands. Hence, the high demand for ethanol and CME in the long-term, particularly among the major petroleum industry players and refiners, also means huge demands for ethanol and CME to be delivered at the blending facility. The scenario can motivate or drum up the need for backward integration among major petroleum fuels providers and refiners to ensure that there is sufficient volume of biodiesel and bioethanol in the market to meet the requirements of the Biofuels Law. Backward integration through investments in biofuels projects is both a challenge and opportunity for the petroleum-based companies which might not be prepared to do so. It is a critical corporate decision that these organizations have to seriously look into. F) Biofuels Technology Providers and Suppliers In the case of coconut-based biodiesel and alcohol from sugar cane feedstock, the production technology and market systems are already in place, hence production costs and market prices are already established. Such is not the case for the production of bioethanol from sorghum or of biodiesel from Jatropha. In fact, current cost estimates for sweet sorghum and Jatropha plantations are paper-based, as large or industrial-size plantations are yet to become operational. Moreover, the costs and returns at the milling and processing levels have yet to be proven. Nonetheless, there exists an opportunity for foreign technology and equipment providers (especially where sweet sorghum and Jatropha oil are the inputs to refineries and processors) to supply the ambitious biofuels programme of the Philippines. G) Engine/vehicle Manufacturers The biofuels programme of the Philippine Government is designed so that traditional and existing engine models (both diesel and gasoline-fed) may use biofuel blends without any modification whatsoever. While some testing has been done as to the effects of blended fuels upon engine performance, the fact remains that the engines used in the country were designed for pure diesel

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and pure gasoline fuels; the use of such fuels is considered a requisite product for warranty. This makes it a challenge for engine and car manufacturers to consider biofuels-friendly engines, not only in supporting the Philippines’ biofuels agenda but also in responding to the country’s Clean Air Law as well as the global imperative to fight climate change. H) Biofuels Export Potentials Given the recurring fluctuations in petroleum prices on the global markets, the potential for biofuels export is not only in domestic but also in international markets. In fact, some local producers of biodiesel are already exporting CME to advanced countries. Given the country’s large tracts of idle land that can be explored for biodiesel and bioethanol feedstock production, there is substantial potential for producing biofuels for export. The development of a biofuels standard should prime the market, opening it up for export-oriented business organizations. The export trade in biofuels might serve as an equalizer for the ever-increasing price of imported petroleum products; at the same time, it might catalyse the growth and development of the agriculture sector and address the employment objectives of the biofuels programme. Local Government Units The role that can be played by the local government units (LGUs) should not be underestimated. The LGUs have to cooperate with the national leadership in addressing local requirements as well as the business aspects of putting up commercial-sized plantations to produce the required amounts of feedstock for biodiesel and bioethanol production. SOME CONCERNS ABOUT LONG-TERM BIODIESEL USE Blending commercial diesel with 1 per cent CME by volume was feared by car manufacturers and vehicle owners to have a negative impact upon engine performance. Petroleum producers also showed apprehension in the initial stages on their products about possible effects. However, with the laboratory and road tests by commercial users as well as by various government agencies under DOE Memorandum Circular 55 in 2004, and with promotional campaigns, the apprehension seemed to have vanished. In a way, it helped that the Technical Committee on Petroleum Product Additives (TCPPA) was composed of representatives from various stakeholder groups. Now that the Biofuels Law is being implemented, there is no other choice but to use the one per cent CME diesel product sold all over the country.

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At the level of one per cent blend, concerns about engine performance may not be relevant as the improvement in the level of engine emissions outweighs any perceived disadvantages. Nonetheless, as the level of blend moves up to two per cent and higher, long-term impact upon vehicle engine performance must be addressed as any negative indications might potentially undermine the future of the biofuels programme in general and the biodiesel initiative in particular. Given the potential for biodiesel to be blended with commercial diesel at a level as high as 20 per cent, the incentive to explore other feedstocks for biodiesel production is immense. The opportunities for the agriculture and biodiesel production sectors are substantial. The production technology, infrastructure, standards, and market system for CME-based biodiesel are now in place. However, the same cannot be said for other biodiesel feedstocks (notably Jatropha curcas). These matters must be pursued with vigour by all stakeholder groups, most principally the government sector. While the economy at large stands to benefit in the long term, the concerns of the public about the implication of using biofuels is a matter that must be addressed now. The positive contribution of biodiesel on the emissions levels of vehicles, from the call for a cleaner environment as mandated under the Clean Air Act to the agriculture sector in terms of employment and other business opportunities, are all sufficient reason for the Philippine Government to pursue a vigorous agenda on biodiesel usage. CONCLUSION The use of biofuels, either in biodiesel or bioethanol form, is something that the Philippine Government is fully committed to. It is a programme that must be implemented by virtue of the mandate of the Biofuels Law. While biodiesel using CME as an additive is now being sold throughout the country at one per cent level, the introduction of the bioethanol blend is to be made two years from now. The challenge at hand is the production of feedstocks for both biodiesel and bioethanol. It appears that the biofuels programme has the necessary elements and inputs for achieving the government’s aspirations. One can only look forward to the effective implementation of the National Biofuels Program, with the hope that it will meet the expectations of all stakeholders. The use of fuel additives in existing engines will hopefully move forward without technical problems and with results that are favourable to stakeholders in the movement to biofuels.

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REFERENCES Ables, R. Coconut Methyl Ester as Quality Enhancer for Petro Diesel, Philippines, Quezon City: Philippine Coconut Authority, 2001. Department of Agriculture, National Biofuels Program, Agribusiness Lands Investment Center, Quezon City, 18 August 2007. Department of Energy. Biofuels Law (RA 9367) and its Implementing Rules and Regulations. Department of Energy. Clean Air Act (RA 8749) and its Implementing Rules and Regulations. Department of Energy, Status Report on Compliance to DOE MC 55, 2006. Department of Energy, Status Report on Biofuels Program, Makati City, October 2007. Department of Trade and Industry/Bureau of Products Standards, Makati City, 2007. Isla, P.A. and J. Cadacio. “Biofuel Players Gear Up for Action”, Business Mirror, vol. 1, no. 145, 21–22 April 2006. Lopez, A.B. “Automakers’ Anti-ethanol Stand v. National Interest”, Sun Star Bacolod, 12 August 2006. Paredes, D. “Trains and Biodiesel”. Columns from Malaya and Abante, 16 March 2007 , 2007.

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3

THE BIOFUELS INDUSTRY IN INDONESIA Opportunities and Challenges Djatnika S. Puradinata

ABSTRACT Energy facilitates all human endeavours. It is used for heating and cooling, illumination, health, food, education, industrial production, and transportation. Energy is essential to life. The development of human society and civilization has been shaped by energy. Countries across the world have considered the sufficient production and consumption of energy to be two of their main challenges. Modern economies are energy-dependent. Energy availability and consumption are such important considerations to economies worldwide that the energy consumed per capita has become one of the key indicators of modernization and progress in any given country. The security of energy supplies has been a geostrategic issue throughout this century. At the same time, the sheer intensity of energy production and its use has begun to result in negative impacts on the environment. INTRODUCTION Broadly speaking, the final form of energy can be found in three types, namely, electricity, fuel, and heat. These are normally found in applications

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such as cooking, heating, cooling, lighting, the safe storage of food, clean water and sanitation, and in other services required by society, such as transportation, power for industry and agriculture, energy for commerce, communication, and other economic activities. The appetite for energy has often exceeded the capacity of local resources. During the twentieth century, the energy supplies of many countries were imported from distant sources. Efforts to establish influence and control over oil wells, gas fields, or oil shipping routes have generated persistent tensions and political problems. This situation has often influenced national policies in foreign affairs, economics, and science and technology. It has been a factor in influencing the political map of the world. Since the discovery of massive, subterranean oil resources in the early 1900s, the world has consumed petroleum-based products as its main source of energy. As the engine of growth, energy has played a key role in achieving real improvements to human welfare. Over time, technological innovations in the petroleum sector, from identification and exploration of oil reserves, drilling and production activities, to refinery and processing the business chain, have created an inevitable global dependency on oil and gas. The second half of the twentieth century was the age of oil, during which human civilization became dependent on fossil fuels. The leading oil companies, known as the “Seven Sisters”, were truly global enterprises; in many cases, they were more powerful than states and governments. Several worldwide crises were linked to competition over fossil fuels. Such crises included the 1974 Arab-Israeli War, the 1978 Iranian Revolution, and the 1980s Iran-Iraq War. The oil shocks of 1973 and 1979 brought the energy problem into the consciousness and awareness of peoples throughout the world. Price increases led to economic disruptions at international, national, and local levels. The vulnerability of all economies to energy prices and supply fluctuations became evident to government policy-makers and consumers alike. Some oil-importing developing countries faced serious balance-of-payments problems and, in some cases, became mired in debt. The development of indigenous fossil fuel resources and power generation was hindered by capital scarcity together with a lack of control over energy resources. This situation has highlighted the importance of national and local self-reliance and the need to diversify energy sources and production patterns as a means of minimizing risks. FOSSIL FUELS, BIOFUELS, AND INDICATORS OF GLOBAL MOVEMENTS Biomass fuels, commonly known as biofuels, are defined as any solid, liquid, or gaseous products derived from a wide range of organic raw materials, either

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directly from plants or indirectly from industrial, commercial, domestic, forest, or agricultural wastes. They are produced in a variety of ways. The liquid biofuels, ethanol and biodiesel, are attracting interest worldwide. Industrial countries view biofuels as a way of reducing greenhouse gas (GHG) emissions from the transport sector and as a means of diversifying energy sources. Developing countries see biofuels as a highly promising way to stimulate rural development, create jobs, and save foreign exchange by the reduction of imported goods. These concerns, taken together and highlighted by recent surges in world oil prices, have been major rationales for many countries to include biofuels implementation in their energy programme. Oil prices have the largest impact on the economics of biofuels production. If world oil prices remain at high levels over a considerable period of time, biofuels programmes will have a better chance of becoming financially viable without sustained government support. Our own calculations show that at a sustained crude oil price of US$80 per barrel, the biofuels feedstock supply could be maintained securely without having to rely on government-induced policy measures. Developing countries’ interest in biofuels is motivated by a number of factors. Substitution of Fossil Fuels and Energy Diversification Countries that are net importers of crude oil, gasoline, or diesel fuel may be able to enhance their energy security through the substitution of fossil fuel consumption with locally produced biofuels. Particularly for land-locked countries, domestic biofuels production could be competitive with imported fossil fuels, which have significant delivery costs. The extent of energy diversification possible from biofuels will depend on their supply potential and also on the demand for transport fuels relative to the amount of energy used in other sectors. Rural Development and Employment Creation Biofuels hold the promise of contributing to rural development and creating jobs through the multiplier effects of industrial development in every business chain: plantations (feedstock procurement), processing plants, product transportation, and the distribution and retail marketing of products. Particularly on the upstream side, feedstock procurements for biofuels production will absorb significant numbers of workers and utilize rural land. This is a condition of improving rural development and helping to prevent increasing and protracted migration from rural areas to the cities, which already creates unresolved problems for many large urban areas.

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Role as Environmentally Friendly Fuels Since vehicles contribute significantly to the deterioration in urban air quality, biofuels, broadly considered to be environmentally benign, compare favourably to fossil fuels for use in motor vehicles. In a worldwide trend to move to sulphur-free fuels (industrial countries have already adopted Euro 3 and 4 specifications), biofuels could be an eligible alternative, since their naturally very low sulphur content provides a remarkable advantage. Ethanol has the greatest air quality benefits when used in older vehicles, as is commonly found in developing countries. It contributes much towards reducing local pollutants such as carbon monoxide, residual hydrocarbon, and particulate matter, especially in cold climates. The higher octane number of ethanol fuels could offer another advantage for countries suffering from extensive lead pollution. As an octane number enhancer, lead constitutes a low-cost option for increasing engine performance when added in substantial volume to low-quality gasoline. However, lead emissions, when released in fuel combustion, pose a hazardous toxicity to human health. In many countries (particularly industrial countries), lead as an octane enhancer is officially banned. The implementation of the Kyoto Protocol in 2005 was a prime mover in the switch to biofuels. The Kyoto Protocol included the Clean Development Mechanism (CDM), a single mechanism allowing for the active involvement of developing countries in the current global commitment towards greenhouse gas reduction. Under the CDM, biofuels could play a significant role in such countries. The European Union (EU), the United States, India, and several other countries have mandated significant roles for biofuels in their transport sectors. Brazil has been the worldwide pioneer in ethanol promotion since 1975. After a period of decline in ethanol consumption, the positive results of using flex-fuel vehicles, which are capable of running on a wide range of levels of ethanol, are revitalizing the ethanol market. Ethanol and biodiesel are two primary biofuels consumed in the transport sector. Ethanol has a much longer commercial history and a larger market than biodiesel. The world’s largest biofuels market is Brazil, where ethanol is made from sugar cane. Between 1975 and 2004, the ethanol programme in Brazil replaced approximately 230 billion litres of gasoline. The secondlargest market for ethanol is the United States, where corn provides the feedstock. The Brazilian and U.S. ethanol markets are nearly comparable (the latest data show that the United States is the number one ethanol fuel producer). However, ethanol constitutes only about 3 per cent of the gasoline market in the United States, as compared to more than 40 per cent in Brazil.

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Although growing rapidly, the global biodiesel market is much smaller in size than the ethanol market. The EU is the world’s largest producer and consumer; its biodiesel comes primarily from rapeseed oil. Other countries base their production on various crops: soybean in the United States, sunflower in several European countries, palm oil in Malaysia and Indonesia, and coconut in Philippines. INDONESIA MOVES TO BIOFUELS Although Indonesia is a major petroleum producer, it became a net petroleum oil importer for the first time in 2004. Domestic petroleum product prices have historically been considerably lower than on the international market, leading to widespread smuggling of subsidized fuels out of the country and to increasing domestic consumption. The cost of fuel subsidies was close to US$10 billion in 2005. Although domestic fuel prices more than doubled in 2005 (the price of kerosene tripled), they remained below international levels, thus posing a budgetary burden. Based on an assumed world crude oil price of US$57 per barrel, the government allocated Rp 54 trillion (US$6 billion) for fuel subsidies in 2006. The government is focusing on reducing demand and switching to alternative fuels to cope with the large fuel subsidy bill. One of the government’s strategies for reducing the consumption of subsidized petroleum fuels is to switch to biofuels. As specified by the National Team for Biofuels Development (Timnas BBN), Indonesia is targeting for 10 per cent domestic consumption of liquid fuel to be replaced with biofuels by 2010. In order to facilitate introduction and consumption of biofuels, the Government of Indonesia has set forth some policy measures, both at the macro-level as well as at the more technical levels. The Presidential Decree No. 5/2006 on National Energy Policy provides overall policy guidance. This policy serves as the strategic basis for national energy planning. It has become important for biofuels development since this document specifically sets the target for biofuels at up to 5 per cent of the overall national energy mix by 2025. Even though it is unclear about the choice and implementation of strategies to achieve this target, the Government of Indonesia now has at least an official document that both stipulates the role of biofuels in the future of national energy and marks a new era for biofuels development in Indonesia. Several other policy measures already set forth were as follows: (i) Presidential Instruction No. 1/2006 on Biofuels Supply and Utilization as Alternative Fuel;

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(ii) Gasoline and Diesel Fuel Specification, including regulations allowing blending of 10 per cent ethanol in gasoline and 10 per cent biodiesel in diesel fuel; (iii) Biodiesel and Ethanol Fuel Specification issued by BSN (National Agency for Standardization); (iv) Presidential Decree No. 10/2006 on the Establishment of the National Team for Biofuels Development; (v) Government Regulation No. 1/2007 on Income Tax Facilities for Investment Activities in Specific Industries and/or Particular Regions; (vi) Government Regulation No. 8/2007 on The Government Investment; and (vii) Minister of Finance Decree No. 117/PMK.06/2006 on Credit for the Development of Biofuels Energy and Plantation Revitalization. In fact, these kinds of policy measures were hitherto perceived as having minimal impact. They had failed to achieve noticeable progress in biofuels development. Although economic conditions were a major hurdle, the lack of willingness on the part of the government and private sector in tackling obstacles is also considered to have contributed to the ineffectiveness and reduced influence of the biofuels programme. OPPORTUNITIES The new official fuel standard set by the Government of Indonesia through the Ditjen Migas represents a milestone in the transition to biofuels utilization. Continuous support and pressure by biofuels proponents, through various organizations and institutions, and crude oil price hikes at the end of 2005 (which imposed burdensome expenditures on the government budget) opened the Indonesian Government’s eyes to the importance of adopting biofuels in country fuel mixes as soon as possible; new fuel specification reflects this. Indonesia has learned some obvious lessons from the success stories of other countries with regard to the introduction of biofuels into markets and society. The recognition of biofuels as proper and ready-to-use fuels in the existing infrastructure is a necessary step before going further. Official fuel specifications, which would become guidelines for all stakeholders, have to state clearly the functions of biofuels, as fuel, as neat, or as blending components. Besides serving as an initial guarantee for related parties — particularly for the end users, retailers, and automakers — such a standard would also propel the biofuels issued forward. Indeed, if this fuel specification were accompanied by a series of detailed and continuously updated regulations, this would act as a real guarantee in the marketplace.

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In fact, what is already set forth in this specification marks a major step forward as retail markets are permitted to have a maximum of 10 per cent volume of biofuels (ethanol and biodiesel) blended with commercial, conventional fuel (diesel fuel and gasoline). In the most recent Worldwide Fuel Charter (regularly updated), the official reference issued by leading automobile manufacturers’ associations recommended the adoption of only 5 per cent volume of biofuels, without major modifications to the engine system and fuel channel. Should the opportunity provided by the specification bill be followed by necessary, suitable, and harmonized supporting policy measures, there is a huge market potential for biofuels in Indonesia. For example, if all consumer gasoline nationwide were blended with 5 per cent ethanol (or E-5 as sold across the country), 1.2 million kilolitres (kls) of ethanol would have to be domestically produced to fulfil the expected increase in demand. Supposing a capacity of 200 kls per day, approximately fourteen new distilleries would need to be established across the country. Achieving such levels of production would require a cassava supply of roughly 6.5 million tonnes per year (if cassava is assumed to be the single chosen feedstock for new ethanol production). Through a rough estimation (without conducting thorough research and assessment via mathematical models), we can imagine the size of the multiplier effect that would stimulate employment and rural development through such biofuels activities. This is not wishful thinking, since scientific research findings on issues such as macroeconomic impact and life cycle assessment have regularly been published in many countries to promote biofuels. For example, research studies by the Ifo Institut, a German-based research centre, have yielded positive conclusions on biodiesel development using Input/Output (I/O) methodology. Similar studies have also been carried out in several other countries such as Nicaragua, the United States, and Australia. Furthermore, the potential demand for biofuels will also come from the Asian region, from countries such Japan, India, and Korea. These countries will require considerable volumes of ethanol but they have constraints in feedstock availability. For example, as projected by F.O. Licht, a leading ethanol consultancy agency, Japan and the EU countries (due mainly to respective government policies to stimulate the domestic biofuels market) will potentially need up to five or six million kls of imported ethanol respectively by 2010. This demand will not be easily met by Indonesian producers. Other countries such as Thailand (widely regarded as an agricultural development role model in the Southeast Asian region), India (the major player in the sugar cane industry in Asia), and Brazil (known as the Saudi

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Arabia of ethanol fuel) will enter the market and make competition tighter. Therefore, to grab the lion’s share of the rising demand in Asia, Indonesianbased producers need to ensure their costs are controlled at every stage of production. Ultimately this should be reflected in the price competitiveness of the product. CHALLENGES The biomass-to-liquid fuels business is not necessarily a low-risk business, nor is it secure. These high-risk business ventures often result in a very high percentage of business failures. Unless companies have significant financial resources, they could be risking all of their assets, along with other thirdparty investments. The whole biofuels business chain requires that strict criteria be met in order to minimize potential risks and vulnerability to business fluctuations. The end price may be influenced by government pricing schemes representing how important cost control is at each stage of the chain. A successful biofuels business venture should not focus only on one area but should pay attention to other areas. The lessons learned from biofuels operations in the energy marketplace, particularly as provided by influential countries such as Brazil and various EU states, are beneficial to this fledgling industry in Indonesia. At the very least, they demonstrate the need for a strong chain of interlinked stages that comprise the following: (i) Feedstocks; (ii) Processing Plants; (iii) Storage and Blending; and (iv) Distribution and Retail. The company that can best manage this chain will limit the problems associated with biofuels so that they become controllable, even negligible, issues. KEY FEEDSTOCK ISSUES Biofuels producers resemble the agriculture-based industries more than energy producers. Petroleum refinery owners, in order to run their plants, need not occupy specific oilfields to produce crude oil by themselves. By making agreements and long-term contracts with dedicated upstream companies,

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they are able to secure supplies for normal production. Meanwhile, the agriculture-based industries, such as oleo-chemical companies, normally secure substantial volumes of feedstock from their own plantations (i.e., upstream sector). Certainly, there are several logical explanations for this difference, mostly pertaining to the nature of each business environment. With regard to the feedstock chain — referring to our own short experience and that of other national producers — the shining future of biofuels could come true, if related stakeholders could ensure the following. Land Availability It is inevitable, as biofuels are treated much more like agriculture-based industries, that land availability becomes a major issue. Countries that are able to set aside substantial land possess a significant advantage, while small and densely populated countries will be disadvantaged. Indonesia, having 17,508 islands and 1.9 million square kilometres of land area, is well known for its high level of land availability. However, in terms of economics and industrial feasibility, this land potential has to be treated in a prudent and careful way. Land use competition is the first obstacle. Despite it being often mentioned in academic speeches and biofuels forums that crops for biofuels production may be grown in less fertile land in vast, unutilized areas, the required high and stable crop productivity can be maintained only on fertile, irrigated, and premium land. In the most suitable lands, producers need fewer acres of planted area and feedstock costs can be maintained at affordable levels for the entire production cycle. This in practice creates competition for land use, not only between biofuels crops, but also with crops grown for other purposes. The vast, underutilized areas spoken of are mostly located in marginal, remote areas with poor infrastructure; though most suitable land can be found in these locations, the extent of infrastructure development required often sends daunting signals to potential investors. Compared to the investment costs for a processing plant facility, say, a 200,000 tonne per annum biodiesel plant that costs US$30 million in capital expenditure, the budget required for infrastructure development might be two or three times bigger. Large-scale plantations require large-scale labour. The high level of land availability outside Java could be optimized by programmes to attract Javabased farming labour (since they have the best work attitude and are completely reliable for large-scale plantation work). But this would create problems such as the following: besides the foreseeable and significant costs of providing good salaries, housing, and other facilities, tensions might arise between local

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people and immigrant labourers. The current political atmosphere in Indonesia, which is the result of rapid and stunning democratization processes, sometimes appears to place a great deal of stress on people. Violent acts become the most common way to express disaffection and discontent. It is not an uncommon experience for company assets to be vandalized, facilities to be left idle, and plantation areas to be encroached upon. The large land requirement for biofuels production is the major reason for the limited role of biofuels in the foreseeable energy supply. Take for instance a petroleum refinery that has a 150,000 barrels per day capacity. If the biofuels producers seek to emulate, say, just one-tenth of this capacity in the initial effort, 1,500 barrels, or 2,000 kls, per day of ethanol production must come to the marketplace from one plantation. To take the current data as the benchmark (in which 180 kls per day requires 13,000 hectares cassava farming), imagine how large the land area to be cultivated and managed would have to be. Imagine the delivery, transportation, and feedstock management problems that would need to be resolved on a regular basis! Crop Productivity Crop productivity issues are highly important for economies of scale, both for farmers and producers. Farmers must be convinced of the returns and producers need to believe in business sustainability through the limiting of costs as a consequence of crop productivity. For example, reluctance of many parties to develop Jatropha plantations is due to the low level of productivity. Five or six tonnes per hectare of seed production after reaching the peak period (starting from the fifth crop year) is not necessarily sufficient to earn farmers adequate revenue and to win the land use competition. If seed prices are set at high levels, the problem will be shifted to the biodiesel plant. The end-product price will go up and become uncompetitive. Higher crop productivity would bring costs per unit down, but the farmers’ absolute revenue would not be significantly affected. Farmers’ Welfare The sustainability of feedstock supplies also necessitates the improvement of farmers’ welfare. Basically, the condition of farmes does not determine reactions to the business of biofuels. However, in the medium term, the security of feedstock supply would be in jeopardy if this issue became sensitive, and if tight competition for supply arose. The issues of farmers’ welfare must be raised, since one of the declared objectives of biofuels development is to increase the quality of the farmers’

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lives and to contribute to rural development for the people. From the beginning, all stakeholders have to pay attention to this issue. There are lessons on how often economic development has not benefited the rural population, despite the fact that rural development aims to benefit the farmers. Biofuels development in Indonesia must include farmers’ welfare improvement as an indispensable target that is integral to the progress of the entire programme. Infrastructure Concerns over infrastructure are related to feedstock production itself and the delivery method from farms to the processing plant site. As already discussed, adequate infrastructure, notably road and irrigation facilities, are important in getting a critical mass of biofuels investors to come to Indonesia. In fact, as long as farming operations can be considered economically feasible and to promise high returns, many companies are willing to open new plantation areas, even though they may be sited in remote, sparsely populated regions with poor facilities. The recent oil palm plantation expansion in Papua province (the easternmost province in Indonesia, possessing large tracts of virgin land) indicates how infrastructure constraints can be overcome. KEY PROCESSING ISSUES A project can achieve success by focusing tightly on these points: Capacity The bigger the capacity installed the larger the investment needed. This is a common reason why investors decide to build small-scale production facilities. However, empirical studies show that greater capacity brings costs per unit down to the level where the project economy can be maintained, even when there is price volatility of feedstock and products. It is better for potential producers to design their plants to a capacity that produces economies of scale. For reference, 100,000 tonnes per annum for biodiesel plants and 200 kilolitres per day for ethanol distilleries are currently the minimum capacities deemed feasible. Main Contractor The selection of the main contractor plays a key role in achieving efficient and cost-effective production. Therefore, biofuels project owners have carry out fair, detailed, and comprehensive selection procedures before reaching a

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decision. The project owner that uses poor or irrelevant selection will experience constant production problems and higher operating costs, if not failure and the need to redesign. Waste Treatment One of the main concerns over the expansion of ethanol production in Indonesia — mentioned by many parties, particularly environmental pressure groups — is the poor quality of ethanol waste treatment. This concern makes sense since the bad reputation of ethanol distilleries is due to the failure to fulfil government mandated waste standards. Such failure results in protracted complaints from the surrounding community over the contamination of rivers and over the pungent smells. If this issue can be resolved, the public support for ethanol will be more widespread, and the “Not in My Back Yard” (NIMBY) syndrome will be minimized. Waste treatment using anaerobic digestion is one option. Besides fulfilling the required standard for waste water, the electricity generated by methane gas as a byproduct could provide additional benefits for project owners in reducing utilities costs. Ethanol distilleries have adopted this technology in several countries. These projects are under construction or in the planning stage. Manpower Manpower problems should not be as critical as the other issues mentioned above. The technology to produce biodiesel and ethanol is not so advanced and complex as those for fertilizer and Liquefied Natural Gas (LNG). However, the availability of domestic labour is one of the key factors in tackling the challenges of developing biofuels industries. Therefore, concerted efforts (by government, private sector, and universities) to provide a pool of skilful and well-trained workers should be made from the developing stages of the industry. KEY DISTRIBUTION ISSUES Broadly speaking, one of the key advantages of biofuels, as compared to other alternatives such as Compressed Natural Gas (CNG), fuel cell, or Liquefied Petroleum Gas (LPG), lies in the ability to use existing distribution and retail marketing infrastructures already widely in place all over the country. Since biofuels may be perfectly mixed with petroleum-based fuels, it is not necessary to build dedicated filling stations for biofuels or blended fuels (such as B5 and

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E5). As already implemented in several Pertamina-managed pump stations that sell biofuels, consumers have practically no difficulties in getting the fuel and using it correctly in their vehicles. However, there are several issues related to the distribution that should be resolved to speed up biofuels utilization and consumer acceptance. Unfortunately, they are in danger of being ignored by the government (whether by the relevant ministry or an ad hoc team): Storage There should be standardization of biofuels storage. There should be several important indicators to ensure the expected levels, such as water content, specific component content (i.e., methanol, gum, free glycerol), and others. Guidelines for quality assurance and procedures to ensure this should also be established. Trans-shipment For producers that have export-oriented or island destinations, threshold shipping volume becomes a specific limitation to growth. Only the large producers will regularly deliver products and maintain proper cash flow. Small and medium producers have to wait for three to four months before the cargo arrives, with a further wait for payment from the customer. Blending Stations In popular thinking, the practice of blending biofuels with petroleum-based fuels is quite similar to some notorious adulteration practices. The most common consists of mixing gasoline or diesel fuel with kerosene. This commonly happens in areas near highways, and is often done by truck or bus drivers as a way to get cheaper fuel at the expense of engine durability. This practice can be seen along the Northern Highway in Java, where many small stalls offering a low-cost fuel in bottles can be seen. Despite the fact that this practice is illegal and that the sellers could be brought to jail, truck or bus drivers prefer to use it as a short-cut to reduce operating costs. They assume the expected engine damage due to low fuel quality will be borne by the fleet owners and not by themselves. To ensure that this poor image of illegal blending is not applied to biofuels, strict regulations and guidance in blending procedures must be set from the very start of biofuels utilization. The regulation should serve as the

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single reference for every venture involving blending. It should be made very clear that numbers, parameters, test methods, punishments, and sanctions for failure have been prescribed. Filling Stations The filling station is the place for customers to obtain biofuels. Therefore, efforts at quality assurance become useless if filling stations are underdesigned and undermanaged. As these stations function as a showroom to the public, it is very important to set a series of quality assurance procedures and to implement the monitoring programme as well as possible. Pump operators often play tricks and disappoint customers. These unfortunate experiences become lessons for biofuels producers in how to maintain product quality and prevent deterioration of service quality. Without strict regulation and monitoring of practices at filling stations, the rapid progress of biofuels development could be just a daydream. CONCLUSION: THE BIOFUELS BUSINESS The zigzag progress of the biofuels business in Indonesia today is much about the inability of all the related players to implement the ideal picture as described in Figure 3.1. Essentially, if the biofuels business is to have solid growth, all sectors from farming to retailing should be well run, and government revenues will be higher as taxpayers increase in number. The flow of materials, products, cash, and taxes, if taking place as described in this ideal picture, will obviously render biofuels a success story in Indonesia. However, since progress is very slow, if not stalled, support can act as a lubricant for the biofuels engine so that it can accelerate and find stable velocity. Furthermore, the plan described in Table 3.1, if implemented well, will ensure that the future in biofuels is not just a daydream.

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material

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Source: PT Medco Energi Internasional.

MATERIAL REVENUE

FEEDSTOCK REVENUE

Farming

tax

material

Industry

tax

Supportings

subsidy

Government

Consumer

tax

PRODUCT REVENUE

product

tax

Figure 3.1 The Inter-relations among Players in the Biofuels Industry

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Source: PT Medco Energi Internasional.

– simplified permit procedures – taxation exemption (value added, income, excise) – special interest rate

*Incentives in whole chain

✓

– ✓

– – –

– –

– quality monitoring & certification – blending & storage procedure – mandatory scheme – manufacturing adaptability – fuel spec assurance

✓

Status – fuel specification

*Market certainty

*Comprehensive technical regulation

Policies required

Government of Indonesia has set taxation exemption in several lines Government of Indonesia only focus to provide this incentives to upstream side

Third party inspector and sanction penalty mechanism

Improvement must be continuously undertaken to win trust of stakeholders

Remarks

Table 3.1 Several Major Policies Required to Boost Biofuels Development in Indonesia

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4

AN OVERVIEW OF THE CAMBODIAN ENERGY SECTOR Pou Sothirak

ABSTRACT Cambodia’s power sector has been severely damaged by years of war and neglect. Since 1993, the government has started to restore the electricity infrastructure with support from the World Bank, the Asian Development Bank, Japan, France, and other donor countries. The 2007 statistics show that per capita consumption is about 100 kWh per year. Only 16.4 per cent of households have access to electricity, the lowest electrification rate in Asia. Electricity costs in Cambodia remain one of the highest in the world due to the reliance on imported fuels and the lack of a grid system. INTRODUCTION Cambodia’s public electricity supply at present comprises twenty-six small, isolated power systems that serve Phnom Penh and the capitals of the provinces. The largest system is in Phnom Penh, which has a population of around 1.4 million. In 2007, the system in Phnom Penh had a maximum output capacity of 243 MW with an actual installed capacity of 270 MW, out of which 224.4 MW was provided by Independent Power Producers (IPPs) and 45.6 MW was supplied by the state-owned power stations. The

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total output capacity for provincial capitals is estimated at 50 MW, with sizes ranging from 1MW to 10MW. Cambodia imports 95 MW of electricity from Thailand for the three northwestern provinces and 9.25 MW from Vietnam for the northeastern provinces. ELECTRICITY DEMAND GROWS According to the 2007 Power Development Plan of Cambodia, electricity demand is expected to increase significantly in the next fourteen years. Electricity generation is projected to grow from 808 MW and 1,550 GWh in 2009 to 3,867 MW and 8,300 GWh in 2020. The Government of Cambodia has intensified its efforts in enhancing energy resources and infrastructure development in order, firstly, to provide stable and affordable supplies of energy; secondly, to meet the rise in energy demand as the key element of fuelling national economic growth; thirdly, to provide adequate supplies of electricity to the rural areas and to improve the electrification ratio; fourthly, to tap sustainable sources of clean energy in order to offset the great increases in oil and gas prices in recent years. In the short term, these efforts should result in the restoration and development of the electricity infrastructure and supply, as well as in reforms to the electric power sector. In the medium term, they should alleviate the shortages of reliable power and reduce electricity costs. In the long term, they should develop renewable energy in order to reduce reliance on imported oil for energy generation, and to promote the export of energy to neighbouring countries. NATURAL ENERGY RESOURCES Cambodia has substantial hydropower resources and indications of oil, gas and coal deposits. There is an urgent need to assess the extent of these energy resources. Other renewable energy sources such as biomass, solar, and minihydro are available and their use has been implemented. The challenge is to diversify the sources of supply and to intensify the exploration of natural resources and the development of renewable energy resources. IMPORTANCE OF THE ENERGY SECTOR The energy sector is very important to the growth and development process of any nation because of its size, strategic role, and major environmental impacts. The Government of Cambodia views the development of this sector in the context of sustainable development. It has been encouraging private sector participation in the energy sector through direct, open processes and

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transparent competition. This paper presents an overview of the energy sector in Cambodia. It will describe in more detail the power sector, the renewable energy, hydroelectricity, and oil and gas sectors in present-day Cambodia. HISTORICAL NOTE Electricity was first made available in Cambodia in 1906. Until 1958, electricity was supplied by three private companies: Compagnie des Eaux Electricité (CEE), Union d’Electricité de l’Indochine (UNEDI), and Compagnie FrancoKhmer d’Electricité (CFKE). In October 1958, the Royal Government of Cambodia took over CEE and UNEDI and established a new state-owned enterprise called Electricité du Cambodge (EDC). At that time, EDC supplied electricity to Phnom Penh and all provincial towns in the country except the provincial town of Battambang. Other smaller towns were supplied by private enterprises. In 1958, the total installed generation capacity in the Kingdom of Cambodia was approximately 30 MW, of which 16 MW was supplied by EDC and 14 by the private companies. In 1970, the total installed generation capacity of EDC had reached 61,125 kW, 77.5 per cent of the total electricity production capacity of the whole country (78,805 kW). In 1970, the EDC produced 123,820,000 kWh in Phnom Penh and 12,230,000 kWh in provincial towns. During 1971–79, Cambodia experienced civil war (1971–75) and the Khmer Rouge regime (1975–79). Electricity facilities, including generation, transmission, and distribution networks, were nearly destroyed not only in Phnom Penh but also in other provincial and smaller towns. Most of the data and other information relating to this period on the electricity sector did not survive these traumatic events. In 1979, the government started to restore the electricity infrastructure in Phnom Penh and in the main provincial towns. At the time of the UNsponsored election of 1993, the serviceable generation capacity in Phnom Penh was less than 20 MW. The actual demand was estimated to be 60 to 70 MW; consequently, the capital city suffered daily blackouts in all areas. Similarly, the distribution network was in a very run-down condition, which contributed further to the unreliability of supply. It was immediately obvious that urgent measures needed to be taken to rectify the situation if there was to be an adequate electricity supply system to attract investments in the development of Cambodia. The power system in Cambodia is different from most other countries. Most countries in the world have an interconnected grid consisting of large

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generating stations, high voltage (HV) lines and substations, and medium voltage (MV) and low voltage (LV) systems to take the power supply from the grid substations to the consumer. In addition, few countries have isolated systems for supplying power to remote areas. In Cambodia, there is no national grid, and the supply to cities and towns is through a large number of isolated systems. Except for two hydropower stations, all generators use heavy fuel oil or diesel as fuel. GENERAL INFORMATION The Kingdom of Cambodia covers a land area of 181,035 square kilometres — approximately 284 times the size of the Republic of Singapore. The country is situated in the Lower Mekong region bordering with Thailand in the west, Vietnam in the east and Laos in the north. Cambodia has a population of more than 14 million people, of which more than 80 per cent live in rural areas. Most of the existing energy sources in the country are used by the people living in rural areas. (Figure 4.1) Wood and charcoal are the only source of energy for cooking, and kerosene and car batteries are the main source for lighting. The exact amount of coal, petroleum, and gas available in Cambodia is not known, as no specific studies were conducted in the past, even though at present some companies are exploring petroleum and gas fields in offshore areas of Cambodia. The potential for hydropower in Cambodia is high (more than 10,000 MW). However, the development of these energy sources has not been implemented mainly due to the lack of pre-feasibility studies and shortages of investment, capital. At the moment, imports of electricity from neighbouring countries at low tariff rates are an appropriate choice for bridging the gap between demand and supply and for reducing the electricity tariff. This approach will increase the size of the electricity market and lead to large-scale power development in Cambodia. POWER SECTOR DEVELOPMENT The Royal Government of Cambodia formulated an energy sector development policy in October 1994. Its objectives were: • •

To provide an adequate supply of energy throughout Cambodia at reasonable and affordable prices, To ensure a reliable, secure electricity supply at affordable prices, in order to facilitate investments in Cambodia and development of the national economy,

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Figure 4.1 Map of Cambodia

Source: Travel Blog, Cambodian Geography .

•

•

To encourage exploration and environmentally and socially acceptable development of energy resources needed for supply to all sectors of the Cambodian economy, To encourage the efficient use of energy and to minimize detrimental environmental effects resulting from energy supply and use.

To achieve these objectives, the government has undertaken sector reform measures and rehabilitation of the power sector with the support of multilateral and bilateral agencies aimed at: (1) mobilizing support from donors and private investments to generate an adequate supply of electricity; (2) strengthening sector managerial assets and implementing capacitybuilding; (3) creating a conducive environment for private sector participation in the development of a sustainable and efficient power sector, on the basis of open competition; and (4) extending the power development programme to rural areas.

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Sector reforms and rehabilitation of the power sector have been in progress since 1994. With the rehabilitation work undertaken, the power supply in Phnom Penh and Sihanoukville has improved considerably. Rehabilitation of the distribution network in Phnom Penh, Siem Reap, and Sihanoukville was completed in 1999. The review and study of the electrification of provincial towns under ADB assistance has been completed, and a Power Transmission Master Plan of Cambodia and Rural Electrification Strategy has been conducted under World Bank sponsorship. CURRENT SITUATION Isolated Load Centres Cambodia’s power sector was severely damaged by its turbulent history of conflict, civil war, and invasion. With donor assistance and private sector participation, the government has managed to provide only the most basic electricity services to the main load centres. Cambodia’s public electricity supplies at present comprise twenty-six small isolated power systems that serve Phnom Penh and the capitals of the provinces. The largest system is in Phnom Penh, which has a population of about 1.4 million (Figure 4.2). Figure 4.2 Load Centres in Cambodia

Source: JICA (see note 1 for detail).

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The system in Phnom Penh is by far the largest and had a peak demand of 204.5 MW in 2007, accounting for about 60 per cent of the national demand with maximum capacity output of 243 MW, out of which 158 MW is provided by eight IPPs and 46.5 MW by the state utility company, EDC. The total maximum capacity output for provincial capitals is estimated at 159 MW, out of which 105.5 MW is provided by importation from Thailand and Vietnam, 25 MW by IPP, and 28.5 MW by EDC. Cambodia has one of the lowest electrification ratios in Asia, with only 16.4 per cent of the country’s total households. The national per capita consumption is just 100.7 kWh, according to 2007 statistics. Electricity costs and tariffs are among the highest in the world. There is no national grid, and most towns are supplied through isolated systems (Figures 4.3–4.7). PRINCIPAL ENTITIES IN THE ELECTRICITY SECTOR The Ministry of Industry, Mines and Energy (MIME) was established in 1993, and is responsible for setting and administering government policies,

Figure 4.3 EDC’s Installed Capacity in 2007

Source: Electricité du Cambodge (see note 2).

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Figure 4.4 EDC’s Generation by Source for 2007

Source: Electricité du Cambodge (see note 2).

Figure 4.5 EDC’s Install Capacity by Kind in 2007

Source: Electricité du Cambodge (see note 2).

strategies, development, and investment plans for the power sector. Its functions encompass power sector restructuring, electricity trade with neighbouring countries, major investment projects, and full management of the rural electrification sector. The Royal Government of Cambodia entrusts the

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Figure 4.6 EDC’s Output Capacity in 2007

Source: Electricité du Cambodge (see note 2).

Figure 4.7 EDC’s Generation from 2002 to 2007

Source: Electricité du Cambodge (see note 2).

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Ministry of Economy and Finance (MEF) and MIME as co-owners of the Electricité du Cambodge (EDC). The Electricity Authority of Cambodia (EAC) is the power sector regulator, an autonomous body created by law in September 2001 and responsible for licensing, approving tariffs, setting and enforcing performance standards, and settling disputes. EAC regularly reviews tariffs and charges to ensure reasonable prices for consumers and adequate returns to investors in the supply of electricity. EAC is responsible for the regulation of both private and public suppliers of electricity, including EDC. Electricité du Cambodge (EDC) has functioned as an autonomous commercial legal entity since August 1997. It has become a wholly stateowned limited liability company, with responsibility to generate, transmit, and distribute electricity throughout Cambodia. Its Board of Directors conducts monthly board meetings and is charged with designing corporate objectives, annual budget, and yearly performance plans. On a national scale, its key functions are the creation of the main transmission grid and the import and export of electricity to and from neighbouring countries. EDC functions under a seven-member Board of Directors, and is managed by a managing director and three deputy managing directors. Cambodian National Petroleum Authority (CNPA) was established in 1998, with the responsibility of managing and developing both upstream and downstream activities within the petroleum sector. It also acts in policymaking, planning and drafting legislation in relation to petroleum management and development in Cambodia (Figures 4.8 and 4.9). In Cambodia, electric power is generated and distributed by, firstly, the EDC, Phnom Penh and six large provincial towns; secondly, by private entities including Independent Power Producers, accounting for about 65 per cent overall in the city and provincial town capitals; thirdly, MIME Provincial Electricity Operators (PEO), managing electricity imported from Vietnam and Thailand for the border provincial towns and accounting for about 30 per cent; and fourthly, Rural Electricity Enterprises (REEs) in the rural areas, accounting for about 5 per cent. Between 2006 and 2007, electricity energy generation registered a growth of about 21 per cent, whereas peak demand remained at approximately 262 MW due to a shortage of installed capacity. Phnom Penh accounted for the largest sale of electricity by EDC: its customer base increased from 263,730 to 286,660, a growth of about 8 per cent. Domestic customers account for about 50 per cent of the energy consumed in Phnom Penh, while commercial, government, and industrial consumers account for the other half.

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Figure 4.8 Current Structure of Cambodia’s Power Sector

Source: Ministry of Industry Mines and Energy of Cambodia (see note 3).

In Phnom Penh, eight IPPs form the biggest power generation group, supplying about 67 per cent of the city’s power, EDC generates about 32 per cent with power plants mainly operated by conventional diesel or heavy fuel oil and a small, 480 kW capacity hydropower station operating in the northeastern province of Rattanakiri. In the small towns and rural areas, licences were given to private electricity suppliers operating diesel-based generators and accounting for less than 5 per cent of Cambodia’s total consumption — they have about 200,000 customers. These licences are issued by EAC. The licensees near the borders purchase power from

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Figure 4.9 Current Power Supply Environment in Cambodia

Source: JICA (see note 4).

neighbouring countries under MIME’s authorization, and the agreement is executed with MIME. The EAC issued 41 licences in 2007. In this year, the first Special Purpose Transmission Licence was issued to the Cambodia Power Transmission Line Company for the construction of a 115 kV line from the Thai border to Bantey Meanchey, Siem Reap, and Battambang, to transmit electricity from Thailand to the substations of three northwestern provinces. The import of electricity over this line started in November 2007. This is the first major development of a grid system in Cambodia. By the end of 2007, the EAC had granted 192 licences to electric power service providers in accordance with the Electricity Law. The table below describes the type and number of licences issued at the end of 2007 (Table 4.1). ELECTRICITY TARIFFS One of the biggest challenges in Cambodia’s energy sector is the high cost of electricity, which is among the highest in the world due to the isolated system, the high dependency on imported fuel, and the absence of a grid system. The EDC purchases electricity from the IPPs at tariffs ranging from 7.0 U.S. cents per kWh for the Kirirom Hydropower plant to between 13

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Table 4.1 Licences Issued by 2007 Number of Licences Issued No.

1

2 3 4 5 6

Type of Licence Issued

Consolidated Licence consisting of Generation, Distribution, and Transmission Licences Generation Licence Special Purpose Transmission Licence Distribution Licence Retail License Consolidated Licence consisting of Generation & Distribution Licences TOTAL

up to 2006

during 2007

1 20

2

Total

Licences valid at end of 2007

1 22

1 14

1 2

1 15 1

1 16 1

116

36

152

147

151

41

192

180

13 1

Source: Electricity Authority of Cambodia (see note 5).

and 18 U.S. cents per diesel-based IPPs. Through a competitive bidding process, some of the IPPs contracted have a purchase tariff of cheaper electricity. However, due to the fluctuation in oil prices, the cost of electricity in Cambodia still remains high. The import tariffs from Vietnam and Thailand are charged according to the agreements signed with the two countries. Accordingly, during 2007, Vietnam charged a fixed rate of 6.9 U.S. cents per kWh for electricity imported at medium voltage. In the case of the electricity imported from Thailand through the 115 kV line, this is calculated based on several criteria such as demand charges, energy charges, service charges, power factor penalties, and changes in expense charges. Because of such a tariff structure, the costs of electricity per kilowatt-hour range from 2.9 to 3.28 U.S. cents. The tables below present the electricity tariff to consumers in Phnom Penh and Kandal Provinces and tariff comparisons with neighbouring countries (Tables 4.2 and 4.3). THE CAMBODIAN POWER DEVELOPMENT PLAN (2008–2021) According to the Power Development Plan of Cambodia developed in 2007, electricity demand is expected to face significant increases for the next fourteen

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Table 4.2 Electricity Tariff in Phnom Penh and Kandal Province (As of December 2007; U.S. currency) Category of Consumer

Electricity Tariff Riels/kWh

Condition

Domestic

390 (9.5¢) 610 (14.8¢) 720 (17.5¢)

Up to 50kWh/Month Between 1 and 100kWh/Month More than 100kWh/Month

Embassy, NGO, and Foreign Resident

890 (21.7¢)

Customer paying by Government

780 (19¢)

Commercial and Industrial Customers

15 to 21¢

(Special Formula)

– ELECTRICITY TARIFF IN SIHANOUKVILLE: 17.5 to 19.5¢/kWh – ELECTRICITY TARIFF IN SEAM REAP: 17.5 to 21.2¢/kWh – OTHER PROVINCIAL TOWNS: 12 to 27.2¢/kWh Source: Electricity Authority of Cambodia (see note 7).

Table 4.3 Tariff Comparison with Neighbouring Countries Country

Electricity Tariff for Residential

Condition

Cambodia

9.5¢US (390 riels) 14.8¢US (610 riels) 17.5¢US (720 riels) 1$US = 4,100 riels

Up to 50kWk/month 51 to 100kWh/month > 100kwh/month

Lao PDR

0.5¢US (41 kips) 1.11¢US (91 kips) 1.67¢US (137 kips) 1$US = 8,200 kips

0 – 50kWh/month 51 – 100kWh/month 101 – 200kWh/month

Vietnam

3.93¢US (550 vnd) 4.57¢US (640 vnd) 5.71¢US (800 vnd) 1$US = 14,000 vnd

0 – 50kWh/month 51 – 100kWh/month 101 – 150kWh/month

Thailand

3.12¢US (1.123 baht) 4.45¢US (1.602 baht) 4.64¢US (1.670 baht) 1$US = 36 baht

5 – 35kWh/month 36 – 100kWh/month 101 – 150kWh/month

Source: JICA (see note 8).

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years. Electricity generation in Cambodia is projected to grow from 329 MW and 1,548 GWh in 2006 to 3,867 MW and 8,300G Wh in 2020. To meet future demand, the government has developed a Power Development Plan for the period of 2008–21, which takes into account the following strategies: • • • •

• •

Reducing reliance on import oil for power generation (through diversification of energy sources) Increasing operational efficiency of the system Encouraging least-cost development of provincial load centres (through grid expansion and local private generation) Increasing competition in power generation by providing access to competitively priced external sources of energy from Vietnam, Thailand, and Lao PDR Maintaining reliability of power supply Promoting export of energy (Table 4.4). Table 4.4 Forecast Electricity Demand Year

2009

2010

2015

2020

Power, MW Energy, GWh

808 1,550

1,015 1,895

1,915 3,500

3,867 8,300

Source: Electricité Du Cambodge (see note 2).

The Cambodia Power Strategy focuses on (1) the development of a sufficient, efficient, and sustainable electricity supply through the isolated system, with special attention given to the city of Phnom Penh and provincial towns, (2) the construction of a skeleton transmission system throughout the country, (3) the power trade with neighbouring countries, especially Thailand, Laos, and Vietnam, and (4) the expansion of the power system to cover all provinces and rural areas of Cambodia. DEVELOPMENT OF HYDROPOWER GENERATION AND TRANSMISSION Generation Currently there are a number of hydropower stations being constructed others are being studied, with the aim of increasing the generation capacity. These projects are as follows:

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193 MW Kamchay Hydro-project, BOT (Building, Operating, and Transfer Scheme) by Sinohydro from China (2010) 18 MW Kirirom III Hydropower Plant, BOT by CETIC from China (2010) 120 MW Atay Hydropower Plant, BOT by China Yunnan Corporation (2012) 338 MW Lower Russei Chhrum Hydro Power Plant, BOT by China’s Michelle Corporation (2014) 246 MW Tatay Hydropower Plant, feasibility study may lead to BOT by China Heavy Machinery Corporation (2015) 260 MW Stung Chay Areng Hydropower Plant, feasibility study may lead to BOT by China Southern Power Grid (2015) 2600/450 MW Sambor Hydropower Plant, feasibility study may lead to BOT by China Southern Power Grid (2019)

POWER TRADE WITH NEIGHBOURING COUNTRIES To provide electricity to towns and villages at the border areas, the strategy generation as an interim measure, is to import electricity from neighbouring

Figure 4.10 Generation Expansion Plan (2008–2020)

Source: Ministry of Industry, Mines and Energy and Electricité du Cambodge (see note 8).

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countries at affordable prices. Currently, the government plans to increase the power trade with Thailand, Vietnam, and Laos. Some of these developments are listed below: • • • • •

200 MW from Vietnam at 220 kV by 2009 90 MW from Thailand at 115 kV, to serve northern grid starting in 2007 20 MW from Vietnam to Kampong Cham Province at 115 kV by 2009 20 MW from Laos to Stung Treng Province at 115 kV by 2009 Five cross-border MV links from Vietnam and eight cross-border links from Thailand at 22 kV to serve border towns and villages.

PROVINCIAL AND RURAL ELECTRIFICATION PROGRAMME The government of Cambodia has prepared a ten year, three-phase Renewable Energy Action Plan (REAP) to meet the need for rural electrification. This action plan calls for better access by rural households to reliable grids, affordably priced electricity, and an expansion of the scale of operations of the rural electrification enterprises. Some of these efforts are as follows: •

• • •

•

Complete rehabilitation of eight provincial towns, supported with $18.6 million from ADB and €3.75 million from AFD (Agence Française pour Development), Grid extension and rural electrification, with SDR 27.9 million from the World Bank and $5.75 million from GEF (Global Environment Facility), Renewable energy master plan to study three micro-hydro developments, supported by JICA Rural electrification targets: – 100 per cent of villages to have access to electricity services by 2020 – 70 per cent of rural population to have access to quality electricity services by 2030 Rural Electrification Fund to subsidize part of rural electricity project investment

RENEWABLE ENERGY Currently, there is no renewable energy policy in Cambodia, although the government has adopted the Renewable Energy Action Plan (REAP) and has expressed its commitment to promote renewable energy for remote applications. There is a lack of information on various renewable energy options and their costs and benefits. Efforts at information dissemination

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are weak, and marketing of products is non-existent. The REAP should be rigorously pursued as a component of the country’s overall energy sector strategy. In the medium to long term, the government needs to consolidate a rural electrification policy framework that clearly articulates its policy, strategies, and procedures so that the much-needed private sector investments may be attracted to participate in the electrification of rural Cambodia. However, there is a growing awareness about utilizing renewable energy resources in Cambodia, especially for the rural areas, where 85 per cent of the population reside. Prospects for the utilization of biomass and biogas are very promising, and significant progress has been made. The tapping of wind and solar energy resources is also being evaluated. Solar Energy The following are developments in Cambodian solar energy: •

•

• •

Phnom Penh showed an average sunshine duration of six to nine hours per day, with a high average of 5 kWh/m2/day, indicating considerable potential for solar energy. Photovoltaic systems with a total installed capacity of around 130 kW are a recent development in Cambodia, donated by international organizations such as UNICEF. The Red Cross, SIDA, and FONDEM have installed demonstration systems on health and rehabilitation centres. Solar Home Systems (SHS) with an output of 12V, 50–70 Ah are being used for low-income households in rural areas and require a US$40 investment per household.

Biomass and Biogas The following are the developments in this sector: •

•

As in most ASEAN countries, biomass energy plays a major role in satisfying the rural demand in Cambodia. Besides wood for fuel, an estimated 167,000 tonnes of agro-industrial residues, such as rice, sugar cane, maize and cattle excreta, are also available as fuel. Biomass is used in the industrial sector for copra drying and power generation. Rice husks are used in bakeries, brickworks, and other commercial establishments.

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•

Cambodia has joined the EC-ASEAN Cogen Programme in August 2002 and now has a Full Scale Demonstration Project in the form of a 1.5 MW cogeneration plant using rice husks as the primary fuel.

No reliable estimates of the amount of biomass energy consumption are available; a study needs to be conducted for this purpose. Wind Energy The following are the developments in this sector: •

• •

The potential of wind energy in Cambodia has not yet been assessed. There are some data on the annual average wind velocity for example in Sihanoukville 5.06, in Pursat 1.89. In general, inland average wind velocity is estimated at 2.01 metres per second (m/sec), whereas in the coastal areas it is 2.65 m/sec, with an annual average of 3 m/sec. Mechanical wind pumps are probably the best choice for using wind energy when the annual average wind speed is less than 4 m/sec. It is possible that small wind power systems or individual household wind power systems may be applicable in some areas, particularly along the southwest coast close to the Cardamom Mountains or in the highlands along the Vietnam border.

Wood Energy Energy derived from wood (wood fuel and other woody biomass) has played a crucial role in meeting rural energy needs for many years. It is no longer confined only to rural households and traditional industrial and commercial activities. Today, wood fuels may be available in solid, liquid, or gas forms. With advancements in technology, new wood fuels in the form of charcoal, briquettes, dendro-thermal power, wood alcohol, and producer gas are used to generate heat and power through cogeneration. Recently, both woody and non-woody biomass for energy generation have been utilized in the wood and agro-industries. HYDROELECTRICITY Cambodia has abundant hydropower potential, estimated at 10,000 MW. However, according to a World Bank study, the realistically exploitable potential in the mid- to long term is about 1,900 MW; 9,000 GWh p.a., at an average cost of about US$1,668/kW, or 3.5 U.S. cents per kWh.

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With an inventory of twenty-nine hydropower sites capable of delivering 6,695 MW (3,580 MW from Mekong mainstream, 1,771 MW from Mekong Tributaries, and 1,344 MW from outside the Mekong Basin), the government is of the view that the development of hydroelectricity power plants will ultimately make electricity power more accessible to more people at a reasonable price and will provide the nation with a measure of energy independence. Existing Hydropower Projects These are the completed projects: 1. Kirirom I, 12 MW, BOT by CETIC Chinese company 2. O-Chum, 480 KW, built and operated by EDC There are five “Projects under Implementation”. They should be included and are not the same as in the “Committed Projects under Private Sector Study.” Committed Projects under Private Sector Study The following are proposed projects: 1. MOU for 2600 MW Sambor Hydro project feasibility study by China Southern Power Grid Figure 4.11 29 Projects for MP Study

Source: Ministry of Industry, Mines, and Energy (see note 10).

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2. MOU for 420 MW Lower Sesan 2 Hydro project pre-feasibility and feasibility study, by Vietnamese company 3. Letter of Permission for 375 MW Lower Sesan 3 Hydro project prefeasibility study by Korean company 4. MOU for 330 MW Lower Sre Pok 3 Hydro project feasibility study by Chinese company 5. MOU for 235 MW Lower Sre Pok 4 Hydro project feasibility study by Chinese company 6. Letter of Permission for 24 MW Stung Battambang 1 Hydro project prefeasibility study by Korean company 7. Letter of Permission for 36 MW Stung Battambang 2 Hydro project prefeasibility study by Korean company 8. MOU for 100 MW Stung Pursat 1 Hydro project feasibility study by Chinese company 9. MOU for 17 MW Stung Pursat 2 Hydro project feasibility study by Chinese company 10. Letter of Permission for 64 MW Prek Liang 1 Hydro project prefeasibility study by Korean company 11. Letter of Permission for 64 MW Prek Liang 2 Hydro project prefeasibility study by Korean Company 12. Letter of Permission for 38 MW Stung Sen Hydro project feasibility study by Korean company 13. MOU for 980 MW Stung Treng Hydro project feasibility by Russian company Transmission There were three high-voltage lines operating at the end of 2007: a 115 kV line around Phnom Penh, a 115 kV line from the Kirirom I hydropower plant (12 MW) to the Phnom Penh distribution system, and the 115 kV line from Thailand to the three northwestern provinces. Based on two studies carried out under World Bank technical assistance in 2000 and 2006, the government sought support from the World Bank, the Asian Development Bank, the Japan Bank for International Cooperation (JBIC), the German development bank Kreditanstalt für Wiederaufbau (KfW), and the private sector to construct the primary transmission system and to expand the subtransmission system from substations to provide electricity service from the main grid to national customers. Some of these development projects are:

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•

• • • • • •

83

115 kV transmission line from Thailand to supply Banteay Meanchey, Siem Reap and Battambang provinces. The licence was issued to Cambodia Power Transmission Line Company in 2007; 115 kV line connecting Kampong Cham, Soung, and Kraek to Tay Ninh in Vietnam, with a grant from the World Bank and scheduled operation in 2009; 115 kV line connecting Stung Treng and Suong to Ban Hat in Laos, with a grant from the World Bank and scheduled operation in 2009; 230 kV transmission line connecting Phnom Penh to Kampong Cham, the World Bank (2009) 230 kV transmission line connecting Phnom Penh to Kompong Chhnang, Pursat, and Battambang, BOT by China Yunan Corporation (2012) 230 kV transmission line connecting Phnom Penh and Takeo to Vietnam, from the World Bank loan (2009) 230 kV transmission line connecting Takeo to Kampot, under loan from KfW (2009) 230 kV transmission line connecting Kampot to Sihanoukville, under joint loan from ADB and JBIC (2010) Figure 4.12 Transmission Expansion Plan (2001–2020)

Source: Ministry of Industry, Mines and Energy and Electricité du Cambodge (see note 9).

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Coal The following are the developments in this sector: •

•

•

From 1958–61, a mineral countrywide survey mission from China reported indications of coal in Kampot, Kampong Thom, Kratie, Stung Treng, and Battambang provinces. One deposit in Phum Talat in Stung Treng province has been identified and the reserve has been estimated at around 7 million tonnes. Its exploitation might be feasible for application in cement production and for domestic fuel. The promotion of the clean coal technology is an important strategy involving coal-fired plants and the feasibility studies are need for such generation at the coal mines, as well as for the coal imports.

ASEAN POWER CONNECTIONS As the Cambodian power sector continues to evolve, and with the possibility of tapping into the huge potential for hydropower, the government is currently studying the viability of connecting with the ASEAN Power Grid and using it to export excess energy. Cambodia places great importance on interconnection with neighbouring countries such as Thailand, Laos, and Vietnam. This is a key element of the Greater Mekong Sub-region (GMS) strategy. In addition to cross-border exchanges with Thailand and Vietnam, already occurring at 115 kV and 220 kV, there are plans to import electricity at 115 kV from Laos. This connection would subsequently be stepped up to 220 kV, with Vietnam supplying power to Phnom Penh under an ADB credit. Transmission is envisioned at 500 kV in the long run when large hydropower plants are developed in Cambodia (Table 4.5). Table 4.5 Summary of Hydropower Stage

Installed Capacity (MW) Annual Energy (GWh)

2 Existing Projects 5 Committed Projects 10 Projects under Master Plan studies 13 MOU Projects

13 915.2 1,031 5,283

51 3,022 4,601 28,516

TOTAL

7,242.2

36,190

Source: Ministry of Industry, Mines and Energy (see note 11).

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The ASEAN Power Grid Consultative Committee (APGCC) established and adopted a master plan in 2002. Among the ten interconnection option studies, the link between Cambodia and Vietnam is ranked fourth and is classified as a potential short- to medium-term project for completion before 2010. OIL AND GAS DEVELOPMENT IN CAMBODIA Although offshore oil exploration has resumed in Cambodia after a respite of twenty years, the history of oil and gas exploration in Cambodia dates back to the 1950s. The first reported geological surveys in Cambodia were undertaken from 1958 to early 1960 by a team of Chinese geologists. From 1960–62, geologists from Poland and the Soviet Union performed

Figure 4.13 Oil and Gas Development in Cambodia

Source: Ministry of Industry, Mines and Energy (see note 12).

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geological field mapping, mainly in Western Cambodia. Then in 1966, a partnership of French and Cambodian bodies compiled maps of areas with petroleum potential. In the early 1970s, Elf of Cambodia performed seismic surveys and drilled a wildcat well. This well reached a depth of 2,437 m and was rumoured to have discovered oil and gas. Further exploration was carried out by an Elf-Esso consortium, which performed a 2,159 km marine seismic survey during 1973 and drilled two wells in 1974. Both wells were believed to be dry. Between 1987 and 1989, Soviet and Cambodian geologists studied and identified seven sedimentary basins (Khmer Trough, Siam Basin, Tonle Sap Basin, Khmer Basin, Preah Basin, Chung Basin, and Mekong Delta Basin) with oil and gas potential in onshore and offshore areas. The basins covered a total area of 116,000 square kilometres, of which 38,200 are located offshore.

Figure 4.14 Cambodian Acreage Map

Source: Cambodian National Petroleum Website (see note 13).

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The previous Government of Cambodia passed a new law in July 1989, called the Foreign Investment Law, under which the government encouraged investments from overseas and exploration for hydrocarbons by international oil companies. The exploration was focused initially in the Cambodian sector of the Gulf of Thailand, on the acreage previously held by the Elf-Esso consortium. A total of seven offshore blocks and nineteen onshore blocks were created for oil and gas exploration. In 1991, the previous government awarded these concessions to the foreign companies listed in Table 4.6 to operate four of the offshore blocks (Table 4.6). Table 4.6 Offshore Blocs Concessions to Foreign Companies (1991) Bloc

Area (km2)

Operator

Partners

Bloc I

4,700

Enterprise Oil

4,900 3,669 4,595

Enterprise Oil Campex Premier Oil

Enterprise Oil Total British Gas CEP As above

Bloc II Bloc III Bloc IV

Premier Oil Idemitsu Ampolex

Award Date 40% 30% 20% 10% 100% 33.33% 33.33% 33.33%

03/10/91

03/10/91 26/12/91 07/11/91

Source: Ministry of Industry, Mines and Energy.

CAMBODIAN PETROLEUM INDUSTRY Cambodia’s petroleum industry is in the early stages of development. However, since the government created the Cambodian National Petroleum Authority (CNPA) in 1998, there has been growing interest in dormant upstream projects, both offshore and onshore. The recent reported discovery by Chevron Texaco in December 2004 is believed to contain predominantly crude oil. It sparked interest in the hydrocarbons industry, leading to new rounds of bidding for offshore blocks. The government has rearranged the blocks and offered concessions to the international companies listed in Table 4.7 and Figure 4.16 (Table 4.7 and Figure 4.16). The CNPA is tasked by the government to •

promote investment in Cambodia’s upstream oil and gas sectors by giving licences to firms for exploration and production (E&P)

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Figure 4.15 Map Showing Petroleum Areas and Blocs

Source: Cambodian National Petroleum Authority (see note 14).

Table 4.7 International Companies’ Blocs Bloc

International Company

Bloc A

Chevron 55%, Meoco 30%, and GS Caltex 15% PTTEP 33.33%, SPC of Singapore 33.33%, and Resourceful Petroleum 33.33% Polytec of Hong Kong 100% Petrotech Holding of China 100% Medco 60%, Kuwait Energy 30%, and JHL 10% Chinese National Offshore Oil Co., (CNOOC) 100%

Bloc B Bloc C Bloc D Bloc E Bloc F

• • • •

oversee the activities of these firms investigate potential downstream markets for natural gas in Cambodia, including electricity generation update and enhance regulatory framework and reliability of information report directly to the Council of Ministers.

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Figure 4.16 Map Showing Offshore Blocs

Source: Cambodian National Petroleum Authority (see note 15).

The vision and purposes of oil and gas development in Cambodia are •

• • • • •

To promote economic growth, energy security, environmental protection and conservation, poverty alleviation and peace and stability in the region To enable Cambodia to monetize its petroleum resources To reduce Cambodia’s total dependence on imported petroleum products To develop a natural gas and crude oil market nationally, regionally, and internationally; To use indigenous gas for electricity generation To reduce electricity prices, expand energy consumption, and build networks

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Presently, there is limited downstream infrastructure to meet the growing demand for petroleum products in Cambodia. There is no refining capacity, even though there is an old and inoperative refinery with the capacity of 0.5 million tonnes per annum in Sihanoukville, built with French assistance in 1969. All major oil products such as super gasoline, regular gasoline, highand low-speed diesel fuels, kerosene, lubricating oil, Jet A1, and LPG are imported by oil marketing companies, transported by either barges or road tankers from the coast to Phnom Penh. Fuel supplies from Vietnam are shipped along the Mekong River. Currently there are nine downstream operators, four local (Sokimex, Tela, Savimex, and Mitapheap) and five international (Caltex, Shell, Total, PTT, and Petronas). There are approximately 360 retail outlets, of which about 200 are located in the Phnom Penh area. It is difficult to estimate properly the annual consumption of petroleum products that are smuggled from Thailand and Vietnam. Historical growth rates in petroleum consumption are estimated at four to five per cent per annum for different products. Currently, there is no consumption of piped natural gas in Cambodia. Due to high taxation, the petroleum products in Cambodia are more expensive than those in the ASEAN region. Figures 4.17–4.20 show oil product statistics for Cambodia from 1995 to 2006.

Figure 4.17 Cambodian Imported Petroleum Products

Source: Ministry of Industry, Mines and Energy (see note 16).

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Figure 4.18 Petroleum Consumption by Economic Sector

Source: Ministry of Industry, Mines and Energy (see note 17).

Figure 4.19 Share of Petroleum Products Consumption in 2006

Source: Ministry of Industry, Mines and Energy (see note 18).

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Figure 4.20 Projected Petroleum Consumption by Sector

Source: Ministry of Industry, Mines and Energy (see note 16).

OVERLAPPING CLAIM AREA BETWEEN CAMBODIA AND THAILAND Cambodia and Thailand have overlapping claims to the same seabed natural resources, including petroleum, in the continental shelf of the Gulf of Thailand. From the late 1960s to the early 1970s, Thailand awarded concessions to Amoco, British Gas, and Unocal for exploration in the overlapping claims area (OCA). However, disputes first arose in 1972 when Cambodia made its sea border claim at the United Nations, followed by Thailand’s claim in 1973. On 24 November 1997, the Cambodian Government granted conditional exploration licences over the exact same areas to the following international oil companies: Block Blocks I & II Block III Block IV

International Company Conoco and Idemitsu Enterprise Oil and BHP Billiton BHP Billiton and Inpex

As the area of dispute remains in force majeur, licence-holders on either sides are not allowed access to exploration. Exploration is subject to the

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Figure 4.21 Map Showing Cambodian Claim in 1972 (blue line) and Thailand’s Claim in 1973 (red line)

Source: Cambodian National Petroleum Authority (see note 20).

resolution of the overlapping claims. It is widely believed that the resources in the OCA are plentiful, based on results from blocks nearby in the Pattani basin in Thai territory. Although data on petroleum reserves in the disputed OCA have not been revealed due to the sensitivity of the maritime border claims, it is believed that there is more natural gas than oil, and it is estimated that the area may hold up to 10 or 11 trillion cubic feet of gas. There have been discussions between Cambodia and Thailand in relation to the OCA. In 1995, high officials from both countries exchanged views about their respective claims; such talks have created mutual understanding. During these talks, Cambodia proposed the principle of a benefit-sharing model of 50 per cent each, with no boundary delimitation.

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Figure 4.22 Map of Overlapping Maritime Claims

Source: Cambodian National Petroleum Authority (see note 21).

On 18 June 2001, there was a memorandum of understanding signed between the two countries with regard to the overlapping maritime claim. This MOU called for a Joint Technical Committee to work on an agreed and mutually acceptable basis:

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95

To conclude an agreement on joint development of the hydrocarbon resources for Areas II, III, and IV, without prejudice to maritime claims To agree upon a mutually acceptable delimitation of the territorial sea and continental shelf for Area I in accordance with International Law. There were two OCA meetings during 2003: a Senior Officials meeting in January and a Joint Technical Working Group meeting in December. The meetings were positive and there was a mutual exchange of materials and proposals. A road map for future discussions was also proposed.

OVERLAPPING CLAIMS AREAS BETWEEN CAMBODIA AND VIETNAM More than sixty years ago, Jules Brevie, a French colonial administrator, attempted to clarify what jurisdiction the various islands in the Gulf of Thailand fell under Cambodia or Cochinchina, as the southern part of Vietnam was then called. He issued an administrative notice of 31 January 1939 that has since been at the heart of all maritime border quarrels between Cambodia and Vietnam. Using the land border as his starting point, Brevie traced a straight line into the Gulf of Thailand, indicating that the waters and islands north of the line would be administered by Cambodia, while those south of it would be governed by Cochinchina. Vietnam rejected the Brevie line as a maritime border, while Cambodia insisted on keeping it. The only agreements on maritime borders between Cambodia and Vietnam were signed on 7 July 1982. They were part of a series of pacts that were based on the Treaty of Peace, Friendship, and Cooperation signed on 18 February 1979. The 1971 South Vietnamese claim constituted a median line between offshore of the islands of Tho Chu and Poulo Wai and the opposite coast of Thailand. There have since been efforts between the two countries to cooperate in Cambodia’s potentially rich offshore oil reserves, but there have been no discussions about the overlapping maritime boundary between Cambodia and Vietnam. ESTIMATED OFFSHORE OIL AND GAS According to a study done by the Economic Institute of Cambodia, when all of the potential oil and gas reserves are extracted, the Government of Cambodia can expect to gain an approximate annual revenue of US$3 to 4 billion, which is roughly equivalent to about 50 per cent of the Gross Domestic Product of 2006 and to an annual revenue per capita of US$235 (the GDP per capita in 2006 was US$510). The estimated government annual revenue coming from Block A and Block D alone amount to US$1.3 billion, and this

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Figure 4.23 Map Showing Overlapping Claims

Source: IBRU Boundary and Security Bulletin (see note 22).

is more than the national budget of 2006. This study was done based on the following main assumptions: the price of crude oil prices is at US$50/barrel, that of gas is at US$0.005 ft3, the government revenue from oil and gas (royalties plus tax and others) is at 50 per cent of the total sale, and the production period is set for twenty years.

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Figure 4.24 Potential Offshore Oil & Gas Reserve

Source: The Economic Institute of Cambodia (see note 23).

According to the World Bank, the United Nations Development Programme, and a study by Harvard University, the recoverable reserves in Cambodian offshore blocks are estimated at a very substantial 2 billion barrels of oil and 10 trillion cubic feet of natural gas. “Depending upon the world price of oil, Cambodian reserves may be contributing annual revenues of $2 billion per annum — several times the current level of domestic revenue and ODA combined — within perhaps five to ten years,” according to a 2006 World Bank report. Cambodia might well have these reserves in its possession, but some analysts fear that unless they are handled well, the country, already ravaged by acute poverty, may become the Nigeria of Southeast Asia. Nigeria has netted $450 billion from its oil during the last thirty-five years, but more than half the population still earns less than $1 a day and there is a national debt of US$30 billion. Therefore, if — but only if — the Cambodian Government manages this industry well, oil and gas should provide excellent opportunities for sustainable growth and for fostering sound development in Cambodia.

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NOTES 1 Nishikawa Tsutomu, “Overview of Cambodia Power Sector” (presentation, MIME, August 2001) (accessed 10 February 2009). 2 Electricité du Cambodge, Annual Report 2007, December 2008. 3 Tung Sereyvuth, “Hydropower Development in Cambodia” (presentation at the Regional Multi-Stakeholder on MRC’s Hydropower Program, 25–26 September 2008. Vientiane, Lao PDR) (accessed 20 February 2009). 4 Tsutomu, “Overview”. 5 Electricity Authority of Cambodia, Report on Power Sector of the Kingdom of Cambodia for the Year 2007, September 2008, p. 37. 6 Ibid., p. 51. 7 Tsutomu, “Overview”. 8 “Cambodian Power Development Plans”, Ministry of Industry, Mines and Energy and Electricité du Cambodge (presentation at the Greater Mekong Subregion (GMS)’s Fifth Meeting of the Planning Working Group in Vientiane, Lao PDR, 17 June 2008) (accessed 16 February 2009). 9 Ibid. 10 Tung, “Hydropower Development”. 11 Ibid. 12 Exploration Opportunities in Cambodia, a brochure published by the Ministry of Industry, Mines and Energy with the collaboration of Enterprise Oil in 1994. 13 Cambodian National Petroleum Website (accessed 25 February 2009). 14 Te Duong Tara, “Petroleum Resource Management: Standard Reserves Classification” (a presentation at the 2007 Cambodian Outlook Conference: Opportunities for Growth Development and Shared Responsibility at Hotel Cambodiana, Phnom Penh, 22–23 February 2007). 15 Ibid., p. 12. 16 Heng Kunleang, “Cambodia Oil Statistics Situation” (presentation at the International Energy Agency (IEA), Paris, France, 11–15 February 2008)

(accessed 27 February 2009). 17 Ibid. 18 Ibid. 19 Ibid. 20 Te, “Petroleum Resource Management”. 21 Ibid.

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22 By Nguyen Hong Trao, Deputy Director of the Marine Affairs Department, Continental Shelf Committee of the Government of Vietnam, published in IBRU Boundary and Security Bulletin, autumn 1997, Article Section page 74–78, (accessed 27 February 2009). 23 Kov Phyrum, “Prospects of Oil & Gas in Cambodia” (presentation at the Workshop on Capital Market Development in Cambodia at the Intercontinental Hotel, Phnom Penh, 30–31 May2007). REFERENCES Electricity Authority of Cambodia. Report on Power Sector of the Kingdom of Cambodia for the year 2007. Electricité du Cambodge. Annual Report. December 2008. Kov Phyrum. “Prospects of Oil & Gas in Cambodia”. Presentation at the Workshop on Capital Market Development in Cambodia, Intercontinental Hotel, Phnom Penh, 30–31 May 2007. Graham Lee. “Cambodia Set for Oil and Gas Development Bonanza”. World Politics Review, 4 December 2006. Ministry of Industry, Mines and Energy. “Cambodia Power Sector Strategy 1999– 2016”. January 1999. Ministry of Industry, Mines and Energy and Electricité du Cambodge. “Cambodia Power Development Plans”. Presentation at the Greater Mekong Subregion (GMS) Fifth Meeting of the Planning Working Group (PWG-5), Vientiane, Lao PDR, 17 June 2008. Nishikawa Tsutomu. “The Overview of Cambodia Power Sector” Presentation to the Ministry of Industry, Mines and Energy, Cambodia, August 2001. Te Duong Tara, H.E. “Petroleum Resource Management: Standard Reserves Classification”. Presentation at the 2007 Cambodian Outlook Conference “Opportunity for Growth, Development, and Shared Prosperity”, at the Hotel Cambodiana, Phnom Penh, 22–23 February 2007. Nguyen Hong Trao. “Vietnam’s First Maritime Boundary Agreement”. IBRU Boundary and Security Bulletin (Autumn 1997): 74–78. Tung Sereyvuth. “Hydropower Development in Cambodia”. Presentation at the Regional Multi-Stakeholder on MRC’s Hydropower Program, Vientiane, Lao PDR, 25–26 September 2008. Vachon, Michelle. “Defining Cambodia”. Cambodian Daily, 14–15 February 2004. World Bank. “Cambodia — Energy Sector Strategy Review: Issues Paper”. Report no. 43349. April 2006.

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India

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INDIA’S ENERGY CHALLENGES Rajiv Sikri

ABSTRACT India is already the world’s fifth-largest energy consumer and is likely to move up to third place by 2030. Its energy needs will grow sharply over the next twenty-five years. Currently, India’s primary energy mix is dominated by coal (51 per cent), followed by oil (36 per cent), natural gas (10 per cent), hydropower (2 per cent), and nuclear (1 per cent). India’s incremental energy demand for the next decade will be among the highest in the world. The overall energy mix will continue to be dominated by coal, oil, and gas for the next twenty-five years. Other renewable sources of energy such as hydropower, wind, solar, biofuels, and hydrogen remain important, but not critical, for India’s energy security. Even if a twenty-fold increase took place in India’s nuclear power capacity by 2031–32, the contribution of nuclear energy to India’s energy mix would also, at best, be about 4.0–6.4 per cent. Coal will remain India’s principal source of commercial energy (estimated at about 45–50 per cent but under no circumstances less than 40 per cent) for the next few decades. India’s continued and significant dependence on imported oil and gas is inescapable. Various pipeline issues are being discussed. India must get involved in Eurasian oil and gas projects, not only for its energy security, but also for political and strategic considerations. India must have a strategic understanding on energy with China too, since both are major energy consumers seeking energy from the same sources.

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INTRODUCTION India is today the world’s fifth-largest consumer of energy, even though its current per capita consumption of energy is very low (490 kg of oil equivalent per capita, compared to a world average of 1,780 kg). If its economic growth remains at the recent high levels of 8–9 per cent per annum, it is likely to move up to third place by 2030. It is axiomatic that efficient and reliable energy supplies are a precondition for sustaining India’s economic growth. Even if India’s economic growth slows down to 5–6 per cent per annum, its energy requirements will still increase sharply over the next twenty-five years. The Integrated Energy Policy report of the Indian Planning Commission, released in 2006, envisages that by 2031–32, India’s primary energy supply will at least treble, and demand for electricity will increase by five to six times from 2003–04 levels. Currently, India’s primary energy mix is dominated by coal (51 per cent), followed by oil (36 per cent), natural gas (10 per cent), hydropower (2 per cent), and nuclear (1 per cent). In rural areas, the current high share (more than 60 per cent) of traditional fuels (fuel wood, dung cake, etc.) for household energy purposes is likely to decline as an increasingly prosperous population steadily shifts towards the use of commercial energy (coal, LPG, and kerosene). This is also desirable for health and environmental considerations. Thus, as India develops, its population will become more urbanized, mobile, and prosperous, making India a voracious consumer of energy. India’s commercial energy requirements are anticipated to increase at an average rate of over 6 per cent per annum over the next quarter-century. India’s incremental energy demand for the next decade will be among the highest in the world. There is general agreement that hydroelectricity, nuclear energy, and non-conventional sources of energy will have only a marginal impact on India’s energy security. They can at best be supplementary sources of energy to the overall energy mix, which under any scenario will continue to be dominated by coal, oil, and gas for the next quarter-century. ROLE OF RENEWABLE SOURCES OF ENERGY The Integrated Energy Policy Report makes the point that “even if India succeeds in exploiting its full hydro potential of 150,000 MW, the contribution of hydro energy to the energy mix will only be around 1.9–2.2%”. However, it does add the significant caveat that a hydroelectric plant converts one unit of primary energy in the form of potential energy to almost one unit of electricity, whereas the fossil fuel or nuclear routes need almost three units of a primary energy source to produce the same unit of electricity. Moreover,

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hydroelectricity’s ability to meet peak demand makes it valuable. Thus, the share of hydropower in electricity generation should be more significant. Perhaps this share could increase to a more significant level if, in addition to India’s own potential, the hydropower potential of Nepal, Bhutan, and Myanmar (perhaps even of Tajikistan and Kyrgyzstan) could be tapped to India’s benefit. No doubt, India should continue to work with its neighbours in this regard because, while the net contribution to India’s energy security may not be so great, the income from such projects for the countries concerned could make a significant contribution to their overall development, as is already the case with Bhutan. It would also hard-wire their economies with India’s, with a beneficial impact on overall relations. The success of such regional projects depends on the overall political relations that India has with its neighbours. At the same time, environmental concerns, and the problem of resettlement and rehabilitation of people affected by the setting up of hydropower plants, should not be minimized. Other renewable sources of energy such as wind, solar, biofuels, and hydrogen remain important, but not critical, for India’s energy security. The Integrated Energy Policy Report concludes realistically that even with a concerted push and a forty-fold increase in their contribution to the energy mix, renewable sources of energy may account for only 5–6 per cent of India’s energy mix by 2031–32. Nuclear In the context of the controversial India-U.S. civilian nuclear deal, finally concluded in late 2008 after hectic diplomacy by both the United States and India, nuclear energy has been touted as the solution to India’s energy problems. In reality, this appears to be unjustified hype generated by political considerations. On nuclear energy, the Integrated Energy Policy Report has this to say: Even if a 20-fold increase takes place in India’s nuclear power capacity by 2031–32, the contribution of nuclear energy to India’s energy mix is also, at best, expected to be 4.0–6.4%. If the recent agreement with the US translates into a removal of sanctions by the Nuclear Suppliers’ Group, possibilities of imports of nuclear fuels as well as power plants should be actively considered so that nuclear development takes place at a faster pace. Nuclear energy theoretically offers India the most potent means to longterm energy security. India has to succeed in realizing the three-stage development process … and thereby tap its vast thorium resource to become truly energy independent beyond 2050. Continuing support to the threestage development of India’s nuclear potential is essential.

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There remains widespread and justifiable scepticism about many critical issues, namely, the cost-competitiveness of nuclear power; the inherent environmental and security risks of nuclear plants; the problems of waste disposal; the ambiguity about India’s right to reprocess spent fuel; the guaranteed availability of uranium at economical prices by a suppliers’ cartel that is even smaller than in the case of oil; and the jeopardy into which India’s investments in nuclear power plants could be put in case India feels that its security interests compel it to test a nuclear weapon at any time in the future. It bears recalling that the Nuclear Suppliers Group was set up with the original objective of preventing India from developing its nuclear capabilities, and the whole thrust of the U.S. Hyde Act that governs India-U.S. nuclear cooperation is to monitor India’s nuclear programme to ensure that any civil nuclear energy cooperation with India does not help India’s nuclear weapons programme. It is evident that geopolitical considerations will be most important in determining the degree of support that foreign countries will give to the development of India’s civil nuclear programme. Thus it would hardly be prudent for India to rely unduly on nuclear power for its energy security. CRITICAL IMPORTANCE OF COAL Coal will remain India’s principal source of commercial energy (estimated at about 45–50 per cent but under no circumstances less than 40 per cent) for the next few decades. Although India does have large deposits of coal, the coal is not always of the right quality, cost-effective, or available in sufficient quantities. As Indian coal deposits are concentrated in one region, namely, in eastern India, Indian coal is relatively expensive compared to imported fuels along the western and southern coasts of India. Moreover, Indian coal has a high ash content, making it unsuitable for steel-making. India has to import about 65 per cent of its coal requirements for the steel industry. There is also a current, slight deficit in coal for power generation. For all these reasons, India will be compelled to import coal in increasingly large quantities in the coming years. The Indian Government has set up a new public sector undertaking, International Coal Ventures Ltd, along the lines of ONGC Videsh Ltd. to pursue opportunities for investments in coal-mining projects abroad. Coal imports would also necessitate setting up an infrastructure for imports. In the long run, however, keeping environmental concerns in mind, India will have to reduce its reliance on coal as an energy source. Even though India does not currently have any global commitments to reduce emissions of greenhouse gases, this situation is likely to change in the coming years. Coal

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will increasingly have to give way to gas for power generation, provided India can tie up long-term arrangements for the import of gas as a cleaner substitute fuel for power generation. OIL AND GAS IN INDIA’S ENERGY SECURITY Over the next quarter-century, the share of oil and gas in total energy consumption is forecast to be at least 45 per cent in the overall energy mix. India’s problem is that it has only 0.5 per cent and 0.6 per cent respectively of proven global oil and gas reserves, but a share of 3.1 per cent and 1.4 per cent respectively of global oil and gas consumption. Demand for oil will increase because of increasing urbanization and development of the transport sector, whereas the demand for gas will be driven primarily by the power and fertilizer sectors (80 per cent) and to a lesser degree from the transport and household sectors. Unfortunately, India’s indigenous oil and gas production has reached a plateau. Despite the recent discovery of new gas fields in the Krishna-Godavari basin, the additional output from these sources will contribute only marginally to bridging the supply-demand gap in the coming years. Therefore India’s continued, significant dependence on imported oil and gas is inescapable. The dependence on imported oil, currently about 70 per cent, is likely to increase to more than 90 per cent by 2030. This makes the oil and gas sector by far the most crucial for India’s energy security. The critical issues to be addressed are availability, affordability, and security of oil and gas supplies. Oil from the Gulf At present, two-thirds of India’s imported oil comes from the Gulf region and another 15 per cent from Nigeria. Important foreign policy implications flow from these parameters of India’s energy security requirements. In the foreseeable future, India will have to continue to rely largely on Gulf oil. The presence of a large and prosperous Indian population in the Gulf region is an additional factor that makes this region important. India thus needs to give much greater attention to the Gulf countries in its foreign policy priorities, in particular the major powers such as Saudi Arabia, Iran, Kuwait, Iraq, and the United Arab Emirates, which are current and potential major oil suppliers to India. Although over the last five years nearly all the rulers of the Gulf countries (including the King of Saudi Arabia) have visited India, the Indian Prime Minister has managed to visit only Oman and Qatar so far, and is

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scheduled to visit Saudi Arabia in early 2010. Nor has the Indian Foreign Minister paid sufficient attention to the Gulf. Fortunately, these important gaps in India’s diplomacy are now being plugged. For India, it is a great advantage that the Gulf region is located so close to India. The sea routes for energy supplies are much shorter than for other major countries. India can also leverage the presence of Indian nationals in the Gulf to protect its interests, as can other South Asian countries such as Bangladesh and Pakistan that also have large numbers of their citizens working in the Gulf. But, like other countries, India is concerned that there should not be instability or disorder in the Gulf as this could lead to severe supply disruptions, as has happened in the past. India’s decision to establish a strategic oil reserve will mitigate the adverse consequences of short-term oil disruptions, but this will not solve the problem of prolonged disruptions or permanent denial of supplies. India has agreed in principle with the major oil-producing Gulf countries such as Saudi Arabia, Kuwait, and the United Arab Emirates to develop long-term strategic relationships on such issues as the supply of crude oil and petroleum products, upstream and downstream joint ventures, refineries, petrochemical industries, and marketing. Such strategic relationships would enhance India’s energy security. If the oil-producing countries develop stakes in India’s downstream sector, this will provide some assurance that India would continue to receive adequate oil supplies from them. India should also try to get some guarantees of uninterrupted oil supplies in the Free Trade Arrangement that it is currently negotiating with the countries of the Gulf Cooperation Council (GCC), namely, Saudi Arabia, Kuwait, Qatar, Bahrain, the United Arab Emirates, and Oman. India has also initiated meetings between key Asian producers and consumers of energy, to work out a strategy that would protect their respective long-term interests. But this effort has not been followed up with sufficient vigour over the last couple of years. With the U.S. occupation of Iraq likely to be long term, and the potential danger that Iraq could break up, India must be alert to ensure that the oil reserves of Iraq and other Gulf states do not come under the control of outside powers that may be in a position to deny them to India. Thus, unless India can secure the sea lines of communication between the Gulf and India, hostile countries could use India’s energy vulnerability to exert pressure on it. The development of Gwadar Port in Pakistan with Chinese assistance has caused understandable concern among Indian security planners. India, for its part, should also develop its sea denial capability vis-à-vis other powers centred around its Tri-Services Command military base in the Andaman and Nicobar Islands. This base is not only located very close to the main shipping

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route from the Indian Ocean to the Pacific Ocean but also enables India to monitor the northern entrance to the Malacca Straits. India thus cannot afford to have a passive approach to issues of Gulf security. It needs to build a “blue water” navy to secure the sea lanes of trade and energy flows from the Gulf. This is even more necessary because of the increased, post-9/11 U.S. military and naval presence in the Gulf and the northern Arabian Sea. Closer cooperation with the United States on patrolling the sea lines of communications is a possibility that India could consider, but so far the United States itself is reluctant, no doubt at Pakistan’s behest, to involve India in the area covered by the U.S. Central Command. In any case, while a cooperative approach with the United States in this regard does have some benefits, it should be handled cautiously to ensure that there is no adverse fallout on India’s long-term interests in the Gulf. For India, too close an association with the United States, which evokes widespread hostility among people in the Gulf, could put in jeopardy the welfare of the millions of Indians living and working in the Gulf. India needs to establish its independent military presence in the Gulf, but only in consultation with concerned countries so that no undue suspicions are aroused. There are signs that the Gulf countries are keen for the major Asian consumers of Gulf energy to help in ensuring the stability of the region. As a major consumer of Gulf oil and gas, as the nearest significant military power, and as a country with five million of its citizens living in the Gulf, India should take the lead in providing an alternative paradigm for Gulf security. One initiative that could be taken immediately would be to set up a forum for regional security. Such a forum would have the GCC at its core, and would bring together the countries of the region (including Iran and Israel), neighbouring countries (Afghanistan, Pakistan and India), and outside powers with a legitimate interest in the region (the United States, Russia, China, Japan, and the European Union). Equity Oil Abroad In order to diversify its sources of oil supplies, as well as to ensure that its dependence on imported oil does not go beyond the existing 70 per cent, India has embarked on a policy of making equity investments in oilfields abroad. In the last few years, Indian oil companies, both publicly and privately owned, have made significant investments in discovered or producing oilfields as well as in exploration blocks in countries as diverse as Russia, Sudan, Vietnam, Myanmar, Iran, Iraq, Yemen, Oman, Syria, Egypt, Libya, Colombia, Brazil, and Cuba, as well as Nigeria and a number of other countries in West

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Africa. While such measures will certainly help in assuring supplies as well as protecting against high oil prices, they will have only a marginal impact on India’s energy dependency on the Gulf. The anticipated output from all the existing and potential properties abroad is at best expected to contribute not more than 25 per cent of India’s rapidly growing demand. This ratio would not mitigate the security risks in the transportation of oil. Thus, equity oil assets abroad cannot really provide energy security, although such investments are commercially profitable for the oil companies. LNG or Pipeline Gas? India is fortunate that rich sources of gas are available in its vicinity. These can be imported in large volumes by pipeline, an option that is not at all available to many large gas-consuming countries. Of course, techno-economic considerations dictate a mix of LNG and gas pipeline options for India. Thus, it would probably be more economical to use LNG in the southern states that are near existing and planned LNG terminals. Natural gas transported from Myanmar and Bangladesh through onshore/offshore pipelines is most suitable for the eastern states, whereas Iranian gas by offshore/onshore pipelines are most appropriate for the western and, to some extent, the northern states. Gas from the Gulf Gas-rich and proximate Qatar and Iran are the obvious sources for India to tap. Since 2004, India has been importing a small volume of gas, in the form of LNG, from Qatar to supplement domestic production, but there is considerable unsatisfied demand for much larger quantities of gas if it were to become available. India is negotiating with Qatar for additional LNG contracts. A number of LNG terminals are being built on both the western and eastern coasts of India to handle imported gas from Gulf countries such as Qatar, Iran, and Oman as well as other sources such as Algeria and Australia, with which India is also negotiating for purchases of LNG. Although other Gulf countries, especially Saudi Arabia and the United Arab Emirates, also have considerable gas reserves, albeit not on the scale of Qatar and Iran, they do not export gas. Most of the gas they produce is used for domestic consumption. They also prefer to use the gas for re-injecting into oilfields to boost oil output. But they are open to a variant of exports of gas, which India has successfully initiated with Oman, and is discussing with Saudi Arabia. This involves setting up joint venture gas-based fertilizer plants, using the gas resources of the Gulf countries to produce fertilizers that the Indian joint venture partner guarantees to buy back. The advantage of such

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a model is that the gas is used to set up industrial units that generate employment in the concerned country which also gets to export not just natural gas but value-added products manufactured from gas. Gas from Myanmar India had been trying to get access to Myanmar gas through a pipeline to be built either across Bangladesh or via the northeast region of India, but was upstaged by China. While India dithered and perhaps failed to properly coordinate the technical discussions with diplomatic efforts, China moved swiftly, leveraging its economic, military, and political clout with the Myanmar Government to clinch the deal. However, India has recently managed to get rights to some additional offshore exploration blocks in Myanmar, and if the reserves are enough a gas pipeline could yet be constructed from Myanmar to India. This episode brings out starkly the importance of geopolitical considerations in concluding large oil and gas deals, and the stiff competition that India faces from China. Iran-Pakistan-India Gas Pipeline For gas imports by pipeline, the most promising, but also the most controversial, has been the Iran-Pakistan-India (IPI) gas pipeline project. Although it is a logical project since Iran is a major producer of gas while both Pakistan and India are large consumers with a growing demand, for many years India refused to countenance the idea of such a pipeline as it could not trust Pakistan not to disrupt supplies. It was only after Prime Minister Vajpayee’s visit to Islamabad in January 2004 and the initiation of the India-Pakistan composite dialogue that India agreed to de-link the question of the gas pipeline from outstanding bilateral issues such as India getting MFN treatment in trade and transit facilities to Afghanistan. As a result of the Indian Government’s decision — which itself reflects how important energy security issues are in its foreign policy priorities — a series of trilateral and bilateral meetings among Iran, Pakistan, and India have been held over the last three years. Iran and Pakistan appear to have resolved most of the issues between them and have signed an agreement for an Iran-Pakistan gas pipeline, irrespective of India’s involvement in this project. Indian participation in the IPI pipeline remains uncertain. There are still some differences between India and Pakistan over transit fees. More than the financial and security issues, it is political considerations that are holding back India’s participation. Despite official denials, India has given

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the impression that it is deliberately going slow on the IPI pipeline because of U.S. pressure. The appearance of succumbing to U.S. pressure has created deep mistrust and loss of credibility for India in Iran: as a result, Iran has abrogated an attractive and significant LNG deal with India, which has also lost other opportunities in Iran for investment and cooperation in the energy sector. The geopolitical significance of an Iran-Pakistan-India pipeline would be immense. On the energy front, it would provide Pakistan and India with plentiful gas supplies for many decades. Politically, it would be a huge confidence-building measure between India and Pakistan that could create momentum for a fundamental transformation of relations between the two countries. Iran too would benefit immensely. As Iran cannot, for both political and logistical reasons, easily break into the European gas market, gas exports to Pakistan and India would give Iran valuable long-term customers and a steady stream of much-needed revenue. The IPI pipeline would also bring Iran important political benefits, as it would undermine the U.S. policy of sanctioning and isolating it. As a regional energy project, the IPI pipeline could form the nucleus of a regional cooperation arrangement, in the first instance between South Asia and Iran (which has become an observer of SAARC, the South Asian Association for Regional Cooperation), and later perhaps within the framework of the Shanghai Cooperation Organization, where Iran, Pakistan, and India are all observers. While it may be difficult to get technical and financial support for this pipeline project from Western countries, it is noteworthy that Gazprom of Russia, which is rich and technically competent, has shown interest in the project. Diverting Iranian gas to markets such as Pakistan and India would leave the lucrative European market free for Gazprom to continue exploiting, without competition from Iranian gas. Turkmenistan-Afghanistan-Pakistan-India Gas Pipeline Another gas pipeline proposal that has been under consideration for some time is the Turkmenistan-Afghanistan-Pakistan-India (TAPI) project. However, there are many unanswered questions that must be addressed before India can seriously commit itself to this project. Although there have been recent encouraging reports on the extent of Turkmenistan’s proven gas reserves, Turkmenistan has already pledged considerable quantities of gas to many other parties that have great influence on it. Turkmenistan has traditional commitments to Russia that it will keep especially in light of the generous price increase recently negotiated. Turkmenistan has also made generous

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promises to a gas-hungry, cash-rich China, and is being wooed by Europeans keen to reduce their dependence on Russian gas. Thus, there are serious doubts over whether Turkmenistan has adequate supplies to satisfy the present and anticipated demand of Afghanistan, Pakistan, and India over the next couple of decades or more. Without assurances on this front, it would not be prudent to make such a huge investment in a politically risky country such as Turkmenistan. India will also have to bear in mind the Russian opposition to the TAPI pipeline, since this threatens to reduce Turkmenistan’s gas supplies to Russia and consequently Russia’s hold over Turkmenistan. So far, the existing pipelines have ensured that Central Asian gas flows to Russia; Russia can be expected to use all its available leverage with the Central Asian countries to keep them from stepping out of line. The security situation in Afghanistan and in the Afghanistan-Pakistan border regions of the North West Frontier Province (NWFP) and the Federally Administered Tribal Areas (FATA) also creates serious doubts about any international consortium’s ability to construct and maintain a pipeline. Despite so many uncertainties, India is participating in the discussions on the TAPI pipeline for geopolitical considerations. A TurkmenistanAfghanistan-Pakistan gas pipeline that leaves India out would pave the way for Pakistan to emerge as the key country outside the Central Asia region with which Turkmenistan (and later the other Central Asian countries) would be anchored economically, politically, and strategically, through oil and gas pipelines, roads, and railways. This would give Pakistan the dominant influence and strategic depth it has been seeking for a long time. Pakistan would become a key long-term strategic partner of the United States in this region. This would strengthen Pakistan enormously, strategically and economically, and be a disincentive for its military leadership to seek an enduring peace with India. A stable, united Afghanistan is in India’s interest, but not if it becomes an economic appendage of Pakistan. Thus, it is not in India’s interests for a gas pipeline to link Turkmenistan to Pakistan via Afghanistan without Indian involvement. Since India’s interests would be better served if it were part of such a project than not, India has wisely managed to get its foot in the door of the TAPI project. Between the two projects, IPI pipeline may be preferable from India’s point of view as it involves only one transit country as compared to two for the TAPI project. Geopolitically, Iran is no less important (because of its intrinsic size, resources, location, etc.) than Afghanistan. Moreover, Pakistan is unlikely to allow India into the TAPI project if there is no agreement on the IPI project, which in any case is on a much faster track than the TAPI one. At the same time, it would be prudent for India to spread its risks and not rely

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exclusively on gas pipeline transit routes via Pakistan — whether IPI or TAPI. The only possible alternative, or supplement, to the IPI and TAPI pipelines is gas from Russia and Central Asia. A STRATEGIC VIEW OF EURASIA India must be involved in Eurasian oil and gas projects, not only for energy security, but for political and strategic considerations, too. Eurasia is likely to remain an important centre of global geopolitics. From a geopolitical perspective, the major global players, namely, the United States, China, and Russia, are very much present there. A “New Great Game” is being played around energy issues. Among the regional players, Pakistan wants to dominate Afghanistan and keep India out of Central Asia. Aspiring to play a global role, and in order to protect its vital national interests, India too must be an active player in the New Great Game on an equal footing with the other major players. In other words, India must remain integral to Eurasian energy politics. If it is pro-active and takes a strategic view, India could try to leverage its position as a geographically proximate, major potential market that is about the same distance from both west and east Siberia, and much closer to Central Asia than the major consuming regions of eastern China. Can India count on Russia and Central Asia in its overall energy security strategy? Russia clearly views its energy resources as a key strategic asset. As a long-time trusted friend and strategic partner of Russia, India could expect Russia to be positively inclined towards its quest for access to Eurasian energy. India was allowed to invest in the Sakhalin-1 project on very favourable terms because of political considerations. Now, as India seeks equity investments in other projects in Russia, including the giant Sakhalin-3 project, a hard-nosed Russia is unlikely to accommodate India unless India reciprocates with favoured treatment in other areas, including defence. In other words, India is unlikely to get any concessions from Russia in the energy sector except as part of a larger strategic relationship and understanding. If India remains committed to an overarching India-U.S. strategic relationship, which has already had a negative fallout on relations with Russia, there is not much hope for a meaningful India-Russia energy relationship. South Asia does not figure in Russia’s proclaimed long-term Energy Strategy up to 2020 (approved in 2003). India will therefore have to explore all possibilities in obtaining oil and gas from energy-rich Russia. India will have to fashion long-term policies today, before the slight window of opportunity shuts completely. In the first instance, India must open a serious energy dialogue with Russia, which exercises considerable, often

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decisive, control over Central Asia’s oil and gas exports. Naturally, India will have to be ready to make significant investments, at competitive market rates, in greenfield oil and gas exploration and production projects for which there are many takers. Among the discovered gas fields that India might be able to access is the giant Kovykta field in east Siberia (near Lake Baikal), over which Gazprom has recently regained control from TNK-BP. Although there is an understanding that any gas from Kovykta not consumed in eastern Siberia would be used for export to China and South Korea, Russia may prefer to sell Kovykta gas to India rather than China in the present, changed circumstances. China’s interest in Kovykta may weaken now it has managed to access Turkmenistan gas, despite Russia’s efforts to remain the sole buyer of that resource. The planned gas pipeline from Turkmenistan to China via Uzbekistan and Kazakhstan, on which an agreement was concluded in January 2008, would inevitably pick up supplementary gas from Kazakh and Uzbek fields located along the route of the pipeline. Alternatively, under a swap arrangement, Turkmen and other Central Asian gas contracted for by China could be sent to the more proximate market of India, while China receives Kovykta or other Siberian gas resources located much closer to China’s main consuming centres. Sino-Indian Energy Cooperation India must have a strategic understanding on energy with China, since both are major energy consumers seeking energy from the same sources. China also holds the key to finding a viable transportation route from Eurasia to India. Any pipeline from Eurasia to India that does not come via Afghanistan or Pakistan must be routed via the Xinjiang region of China and then across the Karakoram and Himalayan mountain ranges. Apart from the considerable technical challenges, the political obstacles to such an alignment are likely to be daunting, since the pipeline route would have to cross Aksai Chin, an area of dispute between India and China. The traditional mistrust between India and China, which has increased of late, will need to be overcome. But such an understanding should not be ruled out if the leaders of the two countries, after carefully weighing the pros and cons, come to the conclusion that such a project would bring considerable long-term energy and strategic benefits to both countries. A gas pipeline project across the Karakoram-Himalaya ranges could lead to the development of a major energy corridor between Eurasia and the Indian Ocean. Although technically much more challenging, it is possible

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that oil pipelines could be built along the same alignment as the gas pipeline but in the opposite direction. That could be of great interest to China, which is reportedly examining a Pakistani offer to create an energy corridor for oil from the Gulf to China via Pakistan, while simultaneously working on an energy corridor to Yunnan via Myanmar. India could offer a similar oil transit corridor. An Indian transit route may turn out not only to be more secure and technically feasible, but would also have the advantage of creating a mutual dependence — Chinese dependence on India for the transit of Gulf oil, and Indian dependence on China for transit of Eurasian gas. Both China and India would gain from cooperating on a north-south energy corridor from Eurasia to the Indian Ocean. They would be assured energy supplies for their own domestic needs, and become central to the energy flows out of Eurasia. Although they may be competitors for finite global energy resources, India and China share a larger long-term interest that the energy resources of Eurasia remain available to meet the demand of Asian consumers too, not just those of the West. To ensure this, the two countries need to use their clout as large and growing consumers of energy. If they cooperate in acting quickly, boldly, and imaginatively, they could offer a viable, more secure pipeline route for Eurasian gas than the alternatives being considered. There are other benefits outside the energy sector that could flow to China from pipelines connecting China and India. China could earn considerable amounts of money in transit fees from pipelines traversing Xinjiang and western Tibet. Investments for pipeline projects would provide employment opportunities and stimulate the economic development of both Xinjiang and western Tibet. This in turn might stabilize the political situation of both regions. China may welcome more people-to-people contacts and economic ties between Xinjiang and India (as an outlet for the frustration of the Uighurs and to relieve the drain on China’s own financial resources) in preference to the linkages between Uighur separatists with fundamentalist elements in Pakistan. The widespread disturbances in Xinjiang in July 2009 may contribute to a realization on China’s part that the unresolved problem of Xinjiang separatism, which is also linked to the situation in the Central Asian republics, has the potential to spin out of control. Thus China has an important stake in the prosperity and stability of both the Central Asian region and Xinjiang. If China can be made to understand that closer economic ties between Xinjiang and India might serve its long-term interests, it may welcome proposals for sub-regional cooperation for Xinjiang along the lines of, and perhaps as part of a package deal including, its own “Kunming Initiative” for sub-regional cooperation between southwest China, Myanmar, Bangladesh, and India. While Pakistan can be expected to oppose any such

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links, there are recent, encouraging signs of a more realistic Chinese approach, even if it remains tilted towards Pakistan. India too stands to gain enormously from such a project. Eurasian-Indian pipeline projects would not only boost India’s energy security but also bring India many significant long-term advantages. The availability of a cheap and plentiful clean energy source such as gas would go a long way towards resolving the growing problems of deforestation and environmental degradation in the Himalayas. It would also stimulate the economic development of the state of Jammu and Kashmir as well as Himachal Pradesh. Most importantly, such a project could open the way for a long-term solution to the festering problem of Kashmir. The emotionally alienated Kashmiri people, particularly the frustrated, unemployed youth, must become part of the Indian mainstream economic and political life if they are to turn away from militancy. The economic angle is as important as the military and political ones in finding a long-term solution to Kashmir. Geographically remote from India’s heartland, Jammu and Kashmir has not attracted private investment, and tourism has not proved to be a sufficient catalyst for the state’s economic development. As a state in the Central Asian geostrategic space, Jammu and Kashmir could benefit enormously from a re-opening of traditional links with Xinjiang and western Tibet via Ladakh. An energy project between India and China traversing sensitive and strategic areas such as Jammu and Kashmir and Xinjiang would have a positive effect on overall bilateral relations. Notwithstanding mutual security concerns and suspicions, there is no logical reason why proposals for energy pipelines between Eurasia and India via China should not be pursued. After all, India and Pakistan, who share a similarly antagonistic relationship, have agreed on road links across the Line of Control in Jammu and Kashmir, and are actively discussing a gas pipeline from Iran to India crossing Pakistan. Major joint energy projects such as pipelines would not only give an enormous catalytic boost to economic relations, but would also hard-wire an interdependent relationship between the two countries, helping to create a climate of greater mutual trust and confidence. If both China and India remain stable and grow more prosperous and powerful, as is likely, they need to work out a non-hostile and cooperative relationship. Moreover, there will be a more stable Pakistan-China-India strategic equilibrium if China feels that its long-term national interest lies in closer ties with India too, rather than in an exclusive strategic relationship with Pakistan, cemented by shared animosity towards India. The gas from Eurasia could also be shared with Pakistan, if needed, through pipeline extensions from Jammu and Kashmir to Pakistan-occupied Kashmir (POK) across the Line of

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Control and from the Indian State of Punjab to Pakistan’s Punjab province across the international border. Such an arrangement would, in fact, build in a reciprocal Pakistani dependence on gas piped via India that might assuage India’s security concerns about its dependence on gas transiting Pakistan, whether by the IPI or TAPI pipelines. An energy pipeline project might even create a better climate in India for eventually resolving the border dispute with China on the basis of the Line of Actual Control. Both sides reiterated, during the visit of Indian Prime Minister Manmohan Singh to China in January 2008, that there must be a political solution to the India-China border dispute on the basis of the April 2005 Agreement on Political Parameters and Guiding Principles. The 1962 Indian Parliament Resolution on the subject complicates the task for any government to settle with China on the basis of the existing ground realities, even though it is widely recognized that China is unlikely to give up control of Aksai Chin, across which it has built a strategically important road; on the other hand, Aksai Chin is not much use to India militarily. Perhaps the Aksai Chin problem can be finessed. There might be acceptance by the Indian parliament and public of a settlement broadly along the Line of Actual Control in the western sector, if the Aksai Chin road built by China at great cost and effort were seen to benefit India economically by serving as a major economic artery linking the two countries, including oil and gas pipelines in both directions. While this would not resolve all the issues in the long-standing India-China border dispute including China’s preposterous claim to the Indian state of Arunachal Pradesh, a large and strategic energy-related project across the disputed border would definitely constitute a huge confidence-building measure. The technical difficulties in a Eurasia-India pipeline project cannot be underestimated. In general, pipelines can be built more easily and cheaply along existing roads and rail links, since those would clearly facilitate the transport of heavy equipment for pipeline construction. Secondly, it is much easier to transport gas, as compared to oil, at high altitudes and low temperatures. A gas pipeline from eastern Siberia could easily be built along the rail link to Kashgar. While a proper topographical and techno-economic feasibility study would have to be done to determine the optimal route, preliminary studies have shown that the best route may be along the existing Aksai Chin road alignment, with entry into India either at Rutog or Demchok. Both these places would easily connect to the existing road from Leh in the Ladakh region of Jammu and Kashmir to Manali in Himachal Pradesh. If, on detailed examination, it turns out that gas pipelines are technically too difficult and too expensive to construct across the Karakoram and

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Himalayan ranges, the project could be modified. Eurasian gas could be used to supply gas-fuelled power plants in Central Asia and Xinjiang, while the electricity generated is transmitted across the Karakoram-Himalayas ranges. This would add value to the gas reserves, create local employment, and promote regional economic development. Another, complementary approach would be to set up hydropower plants in Kyrgyzstan and Tajikistan, both of which have enormous hydropower potential, for the export of electricity to South Asia. It might be cheaper and simpler to import hydropower from north of the Himalayas than to set up hydropower projects in the Himalayas. The latter projects have not taken off because of political hesitation on the part of Nepal, in addition to environmental concerns, geological surprises, and the problem of resettling displaced persons. A successful Eurasian energy project is possible if Russia, as a major energy producer, develops a strategic understanding with India and China, both major energy consumers. If the three countries agree in principle that they should have strategic cooperation in the field of energy, the details can be quickly worked out. Perhaps this could constitute a concrete project within the India-China-Russia trilateral framework, where energy is an agreed area of cooperation. It could also be subsequently considered within the framework of the Shanghai Cooperation Organization (SCO), where Russia, China, Kazakhstan, Uzbekistan, Kyrgyzstan, and Tajikistan are members, while India, Pakistan, Iran, and Mongolia are observers. Turkmenistan and Afghanistan, while being neither members nor observers, nevertheless have an interest in the SCO, seen in the presence of their respective heads of state at the 2007 Bishkek summit of the SCO. In this way, all the countries involved in the SCO are either major producers or consumers of energy, or key transit countries in energy flows between Eurasia and South Asia. Despite justifiable scepticism on this count, the new geopolitical realities of the twenty-first century demand bold and innovative, even visionary, approaches in inter-state relations, including in the area of energy security. The Eurasian energy blueprint outlined above offers the exciting prospect of a Central Asian region being transformed into a strategic space uniting major Asian energy producers, consumers, and transit countries in a web of interdependence. Instead of being the battlefield of a New Great Game, Central Asia could become the twenty-first century version of the traditional Silk Route, with oil and gas pipelines replacing caravan convoys. The Himalayas-Karakoram region could truly become a frontier zone of peace, friendship, and development, rather than one of confrontation and conflict. A mega-project like this would also act as a huge stimulus for the global economy. Such a conceptual breakthrough would have far-reaching

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long-term consequences. It would bring not only economic advantage, prosperity, and social and political stability, but also create a solid and enduring foundation for greater trust, confidence, and understanding, extensive people-to-people ties, and communication links that will hopefully lead to new, lasting, and stable political and strategic relationships. CONCLUSION Global energy geopolitics will be principally shaped by the “arc of energy” stretching from the Gulf region to the Caspian Sea, through Siberia and the Arctic region to the Russian Far East, Alaska, and Canada. It is in this region that nearly 80 per cent of the world’s oil and gas, including potential reserves, are located. Asian countries, having the world’s most dynamic economies and comprising half the world’s population, will remain dependent on energy from this arc. They will also be the principal consumers of energy from this region in the coming decades. The Indian Ocean, earlier the principal conduit for the colonization of Asia and eastern Africa, and today controlling the access to and from the Gulf, has become the world’s “energy super-waterway”. Southwest Asia, washed by the northern Indian Ocean and the Persian Gulf, and adjoining, landlocked Central Asia have become the most militarized region in the world, much as Europe was during the Cold War era. Even though the United States, the world’s largest consumer of energy, is following a conscious policy of reducing its energy reliance on Asia, it remains firmly entrenched at multiple locations on land and sea in the Eurasia-Indian Ocean region. Its traditional policy of dominating the Gulf, which is inextricably linked to energy geopolitics, remains in place. Unfortunately, this has given rise to many globally destabilizing tendencies, such as terrorism and fundamentalism. The already complex traditional geopolitics of this region, marked by myriad inter-state disputes and instability, have been further complicated to an immense degree by energy geopolitics, creating enormous tensions and potentially deadly conflicts. Given its location and size, its economic and military strength and potential, and its position as a growing consumer of energy, India will be very much a part of global energy geopolitics in the coming years. Since energy flows and energy projects are often key determinants of many bilateral relationships, invariably having a regional, at times even a global, significance, India needs to give much greater and more focused attention to energy issues in its foreign policy. India can no longer assume that global markets will provide solutions to its long-term energy requirements. Nor can energy security considerations be made to fit into existing paradigms of foreign

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policy. Rather, foreign policy will have to be reshaped to take account of India’s continued dependence on imported energy. India’s energy security requires that it give much greater attention to its relations with the Arab Gulf states, Iran, Russia, and China. However, India will have to deal with these neighbours to the north and west from the perspective of its own long-term energy and other interests, rather than through the prism of the United States. Aspiring to play an increasingly central role on the world stage, India has to evolve a determined, coordinated, and sustained long-term strategy to ensure its energy security. Although there is much greater awareness of the issue of energy security in India today than even a few years ago, India needs to develop a holistic energy policy that dovetails with domestic policies and reforms in the energy sector, foreign policy, national security, economic development, and environmental concerns. NOTE This chapter is a revised version of the Institute of South Asian Studies’ Working Paper 37 dated 11 February 2008.

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6

NEW PARTNERSHIPS IN ENERGY SECURITY IN ASIA India, ASEAN, and Singapore Mark Hong

ABSTRACT Energy supplies are the Achilles heel of the rising Asian economies in ASEAN, India, and China. Without assured supplies at affordable prices, the Asian economic boom would soon fizzle. Energy supplies are clearly and directly linked to geopolitics. Energy issues figure prominently in key relations among the Great Powers, and between India and Pakistan; they are important in Middle East-South Asia relations, and in Iran-India relations, as well as in maritime security issues involving sea lines of communications, such as the Straits of Malacca and the Straits of Hormuz. Finally pipeline issues — such as those planned in Turkmenistan-Afghanistan-PakistanIndia, Iran-Pakistan-India, the trans-peninsular across northern Malaya, from Central Asia outwards, and from Siberia to China and Japan — have loomed large in interstate relations. Much of the competition on energy access is based on a zero-sum game approach. An interesting question is whether we can turn such an approach into a win-win approach; but how would we achieve this?

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INTRODUCTION First, we can define energy security in terms of the following parameters: • • •

•

Physical: the availability and accessibility of energy supply sources Economic: the affordability of resource acquisition — mainly oil and gas — and energy infrastructure development Environmental: Sustainable development and use of energy resources in ways that do not harm the environment or cause adverse climate change, and that satisfies the needs of the present and future generations Geopolitical: since energy is highly politicized, as shown by the dispute between Russia and Ukraine in January 2009 over natural gas in transit to the European Union.

When ASEAN countries survey the region in search of science and technology to assist their economic development, they may assess that Japan, China, Australia, and India are possible sources. Each of them have the needed expertise, as shown in their space, nuclear, industrial, and defence sectors. This applies equally to their energy sectors. Both India and China are similar to the ASEAN countries in terms of having large rural sectors, with many people living in villages, and in being developing countries. For instance, villagers living in ASEAN countries need electricity for lighting and appliances such as water-pumps for irrigation and wells; they also need efficient stoves that do not emit health-endangering smoke. India has good programmes for village electrification through solar photovoltaic panels and for providing efficient stoves. There could be ASEANIndia energy cooperation in these areas. FRAMEWORKS FOR COOPERATION The framework for energy cooperation between ASEAN countries and India could take the following forms: •

•

•

Bilateral cooperation between India and individual ASEAN countries: for instance, Singapore could cooperate with India on Jatropha biofuels, as we have expertise in our Temasek Life Sciences Laboratories Multilateral cooperation as in Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC); Mekong-Ganga Cooperation; the Asia Cooperation Dialogue; and the East Asia Summit; Regional cooperation: ASEAN has set up an ASEAN Plan of Action for

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energy cooperation (2004–09), which includes proposals for an ASEAN Power Grid and Trans-ASEAN Gas Pipeline. The India-ASEAN Free Trade Agreement on goods has been finalized and was ready for signing in December at the India-ASEAN Summit in Thailand, but because of Thai domestic political problems, the signing ceremony has been postponed until August 2009. This FTA does not seem to include energy issues. More on the existing relations between India and ASEAN follows. Below, we briefly mention some of these agreements. First, we take note of the ASEAN-India Partnership for Peace, Progress and Prosperity. Under the Plan of Action, in paragraph 2.6 on Energy, there are proposals to: promote and develop trade and investments interests in gas-related projects and the electricity sector, to establish compatibility of electricity grids, and work to liberalize electricity power trade between ASEAN countries and India; develop institutional linkages between the ASEAN Centre for Energy and India to cooperate on R&D in energy efficiency and renewable energy; promote sustainable utilization of renewable energy, coal and new hydrocarbon projects and cooperate in energy policy and planning, energy efficiency and conservation and setting up institutional linkages. The state of progress on these areas is not known. In terms of cooperation between ASEAN countries individually with India, we take note of possible areas of cooperation, focusing on energy. India seeks to diversify its energy sources and to step up exploration for oil and gas. Indonesia and Malaysia have expertise in these areas, and could thus cooperate with India. India’s national oil company is cooperating with Vietnam in oil exploration through a joint venture. Cooperation in civil nuclear power sector is another area for India and individual ASEAN states, like Vietnam. BILATERAL RELATIONS WITH INDIVIDUAL ASEAN STATES India’s existing energy relations with individual ASEAN countries are as follows: Brunei During a visit by HM the Sultan of Brunei to Delhi in May 2008, four agreements were signed, with a major emphasis on energy. India is interested in importing crude oil and LNG from Brunei.

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Malaysia India imports large quantities of palm oil from Malaysia. Indonesia A Joint Commission has been set up focusing on Special Economic Zones (SEZs), alternative energy, legal assistance, and an extradition treaty. India is interested in importing natural gas from Aceh to the Nicobar Islands. India is the largest purchaser of Indonesian palm oil, at over two million tonnes annually. Thailand See under the BIMSTEC section. Philippines Both sides will cooperate on renewable energy, according to a working group meeting that took place in September 2005. A Memorandum of Understanding (MOU) was signed in 2003, targeting cooperation on natural gas between the two countries. Vietnam Vietnam is the third-largest energy supplier in Southeast Asia, after Indonesia and Malaysia. It has coal, hydropower, and offshore oil and gas. It has a complex oil and gas geology. Vietnam has about 600 million barrels of proven oil reserves, perhaps even more with new discoveries. Offshore oilfields may be discovered in the Spratlys and in the South China Sea. Chinese oil companies have estimated that the Spratlys could have up to 105 billion barrels of oil. Since 1995, there have been impressive discoveries of gas fields made by Russian, Korean, Japanese, Thai, Malaysian, and Indian oil companies. Border disputes with China and other neighbours also pose problems for Vietnam but, fortunately, China and Vietnam concluded land and sea border treaties in 1999–2000. Vietnam has negotiated joint exploration agreements with Thailand and Malaysia. Two new refineries are being built, one with Russian assistance. The four largest customers of Vietnamese oil and gas are the United States, Japan, China, and Singapore. Some historical background on Vietnam-India relations follows. Both countries have close and cordial relations based on anti-colonial sentiments and from being on the same side during the Cold War. Together with

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Canada and Poland, India also played an important role in the International Supervisory and Control Commission that was set up to implement the Geneva Accords of May 1954. This peace agreement ended the First Indochina War between France and the Vietminh. During the 1960s, both Vietnam and India were anti-China and shared common interests in the Non-Aligned Movement. India also recognized the Heng Samrin puppet regime in Phnom Penh that was set up by Vietnam after its invasion of Cambodia — a move that alienated the countries then comprising ASEAN. Major visits by leaders from both countries consolidated Indo-Vietnamese relations over several decades. After Vietnam joined ASEAN and India became a full dialogue member, both states continued their close ties within an ASEAN framework. Both sides also signed a Memorandum of Understanding on defence in March 2000. Bilateral trade, however, remains at a low level, between US$200–$300 million. Vietnam has welcomed Indian investments in its coal, gas, and nuclear sectors. The Indian firm ONGC is in a joint venture with PetroVietnam, BP, Amoco, and Conoco to develop two gas fields in Vietnam. India cannot import Vietnamese crude due to a technical incompatibility with Indian refineries. The problem of transporting Vietnamese gas to India has yet to be solved. India has shown interest in refinery projects in Vietnam. Vietnam’s role in India’s energy security has potential but much work remains to be done, such as in building pipelines across Indochina, Thailand, and Myanmar to India. Myanmar Myanmar and India have long, well-established relations dating back some 2,000 years. Both Buddhism and Hinduism spread to Burma in the precolonial era. The British colonial era in Burma lasted from 1886–1937, when Burma was ruled from British India. During this era, there was an influx of Indians into Burma; their presence became a source of anti-Indian sentiment and tensions. Forced expulsions of Indians from Burma took place. After General Ne Win took power in March 1962, 200,000 Indian refugees fled Myanmar for India. Tribal insurgencies spread across the border — mainly involving the Nagas, Mizos, and others. Both states signed a Treaty of Peace and Friendship in 1951. However, during the Sino-Indian War of 1962, Myanmar did not support India. Yet as China supported various insurgencies, Ne Win became friendlier to India. A border agreement was signed in March 1967 and a maritime border agreement was signed in 1986. In the 1980s, insurgencies in India’s border areas posed problems, as the Kachins of Myanmar provided support for the Assam and Mizo rebels in

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India. In the 1990s, the SLORC regime seized power in Myanmar, India supported Aung San Suu Kyi and her NLD party, which had won the elections of 1988. This led to a deterioration in bilateral relations. But as Chinese influence grew and in Myanmar as insurgencies continued in its northeast regions, India began to support SLORC from 1991 and muted its criticisms. India also launched its Look East policy after 1991, and Myanmar was its most immediate ASEAN neighbour as well as its partner in the BIMSTEC and Mekong-Ganga cooperation programmes. Both sides have exchanged high-level visits since 2000. Cross-border roads now connect India, Myanmar and Thailand. Myanmar has rich energy resources, ranging from hydropower (40,000 MW) to oil and gas. Proven and recoverable onshore oil reserves are estimated to be around 3,000 million barrels, and gas reserves are about 3,328 billion cubic feet. Offshore gas is estimated to be about 80 trillion cubic feet, and offshore oil reserves about 85 million barrels. There are many reasons for Myanmar’s poor record in oil and gas production: the lack of capital; an underdeveloped domestic energy market; outdated equipment and technology; domestic politics that are dominated by an oppressive military junta; and Western sanctions. India is becoming an attractive energy market to Myanmar as it faces an energy supply deficit of 50 per cent in its oil and gas sectors. An offshore field sold by Myanmar to Daewoo was subdivided with the Indian companies ONGC and GAIL as partners. Myanmar is a problematic country for India. China had moved faster than India in getting exploitation rights to offshore oil and gas fields in Myanmar. The energy interests of India are also linked to issues of access by pipeline across Bangladesh, which has tried to extract a bargain for its own national interests. Myanmar has proposed to build a pipeline from Mizoram in India to Sittwe in Myanmar and then to West Bengal by undersea pipeline, bypassing Bangladesh. The pipeline could run in part along the Kaladan River. In general, Myanmar plays a sensitive balancing game in its relations with India and China. In March 2006, Myanmar agreed to join India in offshore oil and gas exploration off the Myanmar coast. Three Indian firms, Essar, ONGC, and GAIL are operating in Myanmar oil and gas fields. India has also agreed to take part in a hydropower project with the Myanmar Electric Power company on the Chindwin River. Singapore Bilateral relations between India and Singapore are warm, close, and flourishing. Cooperation covers a wide field. Trade and investments, facilitated by the CECA, are under renewal negotiations. Over 3,000 Indian firms have set up

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operations in Singapore, while Singapore is involved in Special Economic Zones (SEZs) in India. The two countries have close defence ties, conducting joint training exercises. Singapore has assisted India in entering the ASEAN Regional Forum (ARF) and the East Asian Summit (EAS). The two countries cooperate in the arts and culture; Singapore is actively involved in the Nalanda University project, which seeks to establish an international university based on the ancient Buddhist centre of learning. There are no formal energy cooperation programmes between India and Singapore. The bilateral Free Trade Agreement, or CECA, has no provision for cooperation on energy. It would seem logical to include this issue in the next revised CECA, as Singapore has announced plans to focus on clean energy and as India needs to greatly increase its energy production, including from renewable sources. MULTILATERAL COOPERATION BIMSTEC BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation) is a regional grouping that was formed in June 1997. Thailand is the initiator and driver of the BIMSTEC process. The Thai Prime Minister Surayud Chulanont visited India in July 2007 to strengthen bilateral relations and to discuss energy cooperation with Indian Prime Minister Manmohan Singh. There are several energy projects under BIMSTEC involving India and ASEAN states such as Thailand. There is the Trans-BIMSTEC Gas Pipeline Project. Thailand has offered ten scholarships for 2006–2010 in technical support. Secondly, there is the BIMSTEC Trans-Power Exchange and Development Project. Thailand has offered technical training for BIMSTEC members. It also organized a workshop on the petroleum reserves of BIMSTEC members and another workshop on renewable energy. Thailand is also willing to share its knowledge on community-scale biodiesel production processes. India has set up the BIMSTEC Energy Centre to act as a focal point for strengthening energy cooperation via experience-sharing and capacity-building. The areas covered include: grid connectivity, gas pipelines, hydropower, renewable energy, energy efficiency, energy reforms, access to energy, restructuring, regulations, and best practices. MEKONG-GANGA COOPERATION The Mekong-Ganga Cooperation was launched on 10 November 2000 in Vientiane, the capital of Laos, with the objective of increasing cooperation in

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tourism, culture, and education. The signatories are India and five Southeast Asian nations, namely, Thailand, Vietnam, Laos, Cambodia, and Myanmar. The member states emphasize four areas of cooperation — tourism, culture, education, and transport links — in order to build a solid foundation for future trade and investment cooperation in the region. With its membership, India extended its strategic presence further into the ASEAN region, in competition with China’s Kunming Initiative. The six member countries have undertaken to develop transportation networks, including the East-West Corridor project and the Trans-Asian Highway. Without the development of the northeastern Indian states, cooperation with Southeast Asia cannot be meaningful. For Mekong-Ganga Cooperation to be effective, the Brahmaputra Valley is a crucial factor. Energy cooperation should be included in the Mekong Ganga Cooperation programme. THE EAST ASIA SUMMIT (EAS) FRAMEWORK India and the ASEAN countries are members of the East Asia Summit (EAS). Singapore hosted the EAS in December 2007 and sought ideas to add substance to the EAS agenda. Energy cooperation was one obvious area. In fact, the EAS Cebu Energy Declaration, issued in January 2007, mentioned such cooperation. In the Cebu EAS Energy Declaration, the EAS agreed to focus on: • • • •

energy security renewable and alternative energy sources energy efficiency and conservation, and climate change

The Cebu Declaration also heard various project proposals made on cooperation in energy security, including Japan’s four-pillar initiative entitled “Fueling Asia — Japan’s Cooperation Initiative for Clean Energy and Sustainable Growth”. An EAS Energy Cooperation Task Force, based on the existing ASEAN Energy Sectoral mechanisms was also established. The next EAS Summit held after Cebu was Singapore. The EAS Singapore Declaration on Climate Change, Energy and Environment was issued in November 2007 and reaffirmed at 41st ASEAN Ministerial Meeting in July 2008 in Singapore.1 Inter alia, the Singapore Declaration in paragraph 8 elaborated on energy issues, including proposals: Intensify ongoing cooperation to improve energy efficiency, and the use of cleaner energy, including the use of, renewable and alternative sources,

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based on the Cebu Declaration and the Joint Ministerial Statement of the 1st EAS Energy Ministers’ Meeting on 23 August 2007 …

A related event was the signing by ASEAN leaders of the ASEAN Declaration on Environmental Sustainability at the 13th ASEAN Summit in Singapore. The Declaration signifies ASEAN member countries’ concern about the environment and climate change and the need to ensure environmental sustainability while pursuing economic development. The leaders pledged to address issues of environmental protection and management, responding to climate change, and conservation of natural resources. Included in the Declaration was a pledge to promote the use of renewable and alternative energy sources as well as safe civilian nuclear power. The 1st EAS Energy Ministers’ Meeting (EMM1) was held on 23 August 2007 in Singapore. It was attended by the ministers responsible for energy from the ASEAN member countries, Australia, China, India, Korea, and New Zealand. The ministers agreed to push forward the Cebu Declaration and produce concrete results through greater cooperation and coordination of measures and activities. They welcomed Japan’s Cooperation Initiative for Clean Energy and Sustainable Growth and Japan’s energy cooperation package that focuses on promoting energy efficiency, biomass, and utilization of clean coal. The ministers acknowledged the formation of the East Asia Summit (EAS) Energy Cooperation Task Force (ECTF) on 1 March 2007 to follow up on the outcome of the 2nd EAS. The work of the EAS ECTF shall be based on existing ASEAN energy sectoral mechanisms where possible. ACD QINGDAO ENERGY INITIATIVE The third ministerial meeting of the Asia Cooperation Dialogue (ACD), held in Qingdao, China, was attended by foreign ministers and other senior officials from twenty-two countries, including India. The “Qingdao Initiative” on energy cooperation, pledging to stockpile strategic energy reserves and a regional energy transportation network, was issued. The Initiative proposed that Asian countries should share their experiences so that all of them can benefit from the solutions. The “Declaration on Asia Cooperation: Hand in Hand for a Better Asia”, issued at the end of the meeting in June 2007 along with the “Qingdao Initiative”, acknowledged that Asia’s economic integration is still at an initial stage and its level of cooperation has to be further strengthened. The Qingdao Initiative recognized the need for a “secure and stable” energy supply and demand scenario in Asia. The Initiative states that a secure

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and sustainable energy supply has a direct link to economic development and the welfare of future generations. It also noted that Asia was home to some of the world’s major energy producers as well as consumers and that there existed opportunities for cooperation in sustainable energy development. Of particular interest to India was the ACD group’s endorsement of voluntary cooperation, consistent with “national interests” in the construction of oil and gas pipelines. An ACD “energy forum”, which had met in Indonesia in September 2006 and in Pakistan in November 2007, would be endorsed as “the sole platform for energy cooperation in the ACD framework”. ASEAN-India FTA India’s engagement with East and Southeast Asia in the political and security arena has been accompanied by progressive economic integration in terms of Free Trade Agreements and Comprehensive Economic Cooperation Agreements with individual countries of the region. A Framework Agreement on the FTA between India and Thailand was signed in 2003 and the Early Harvest Programme has been implemented since 1 September 2004. India concluded a Comprehensive Economic Cooperation Agreement with Singapore in June 2005 and established a Joint Study Group to examine the feasibility of a similar agreement with Malaysia. Energy trade and cooperation should be included in these FTA agreements. However, there have been ministerial meetings such as the 25th ASEAN Ministers of Energy Meeting (AMEM) plus Six (which included Australia, China, India, Japan, South Korea, and New Zealand) in Singapore from 20–24 August 2007. A technical study visit by the SAARC Energy Centre to the ASEAN Centre for Energy in Jakarta was organized in June 2007. Plans for energy cooperation may materialize out of these contacts. ASEAN itself has identified six areas for intra-ASEAN energy cooperation, namely, the ASEAN Power Grid; the Trans-ASEAN Gas Pipeline; energy efficiency and conservation; new and renewable sources of energy; coal technology and trading; and regional energy policy and planning. Indian energy expertise could fit in one or two of these areas, for example energy efficiency or renewables. INDIA-JAPAN ENERGY DIALOGUE Looking beyond ASEAN-India, we can envisage trilateral India-Japan-ASEAN energy cooperation. The India-Japan energy dialogue already exists: The question is whether we can extend such a dialogue to all EAS members. We shall not discuss the Indo-Japanese energy dialogue in detail except to take

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note of certain aspects. On 4 July 2007, the Indian Minister Shri Montek Singh Ahluwalia, (Deputy Chairman of Planning Commission) stated that: We would also like to expand our cooperation so that the best practices in Japan can be utilized for formulation and implementation of policies and projects in India, through activities such as training of trainers in India; introduction of Top Runner Program, capacity building of energy service companies, and information dissemination and demonstration of new energyefficient technologies. India proposes that the two countries undertake joint research, design and development in specific areas such as MW scale biomass, integrated gasification, combined cycle power generation systems, solar voltaics and solar thermal systems.

India is ahead of the curve in setting up energy cooperation projects with Japan: What about including Singapore, ASEAN, or EAS? Here we can see the potential of a tripartite India-Japan-Singapore energy efficiency cooperation programme, as all three are deeply interested in this area, and each partner could bring their respective strengths to the alliance. All three countries have strong and friendly relations and are already cooperating in areas such as naval exercises, for example Exercise Malabar in August 2007. Such cooperation could be done under the EAS framework of which all three are members. JAPAN LEADS IN ENERGY EFFICIENCY Japan is the world’s leading practitioner of energy efficiency. Take as an example: a Matsushita fridge uses 160 kWh a year, one-eighth of old models from ten years ago. From 1973 to the present, Japan’s industrial sector has tripled its output but has kept its energy consumption nearly flat! Japan leads in hybrid cars. Its firms produce 50 per cent of the world’s solar PV panels. Japan has set targets for further reducing the power consumption of the four main household appliances: televisions, personal computers, air-conditioners, and fridges. We can learn from Japan, which offered its Cooperation Initiative for Clean Energy and Sustainable Growth at the Cebu EAS in January 2007. Specifically, Japan leads in: energy conservation measures in industrial, commercial, residential, and transport sectors; improving equipment efficiency with the Top Runner Program; and in energy-saving labelling systems. EAS NETWORK OF ENERGY-EFFICIENT CITIES Singapore’s former Prime Minister and present Senior Minister Mr Goh Chok Tong proposed building an eco-city in China (now an ongoing project in Tianjin), leveraging on the success of the earlier Suzhou Project and also on

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Singapore’s expertise in environmental protection — in such matters as water desalination and the recycling of waste water into potable water — and in urban planning for livable cities. Indeed, a whole network of energy-efficient partner-cities, comprising many of the major Asian cities could be set up to implement various energy conservation and efficiency measures, while sharing best practices? Eventually, the network could include all sixteen capitals of the EAS member states. The implementing mechanism could be the EAS Energy Ministers Meeting. EAS senior officials should work out the details of the proposed project. Singapore’s Potential Role Singapore has much experience in planning and implementing mega-projects, such as industrial parks (eight in different countries), special economic zones, even entire cities. It has credibility, trust, and knowledge earned and demonstrated by success in its developmental record. Hence it can add value to regional efforts by its proven ability to conceptualize, implement, monitor, and guide massive, new projects. Most of Singapore’s projects are executed on time and under budget. So it brings valuable assets to the idea of setting up a String of Diamonds — or energy efficient cities — especially with such strong partners as India and Japan. India has the demands and a vast consumer market; Japan has the technology; and Singapore brings its experience credibility, and reputation in project management. Another indicator of Singapore’s well-regarded expertise is in water management: In August, the World Health Organization (WHO) signed an agreement with Singapore to help improve public health worldwide through the proper management of potable water. Singapore also received the Stockholm Industry Water Award in August 2007 for its integrated approach to water management. In December 2008, the World Bank signed another memorandum of understanding with Singapore to set up a joint Urban Hub, in order to disseminate Singapore’s rich experience in urban management.

Clean Energy Focus Singapore is now focusing on clean energy development. Its Economic Development Board (EDB) has described a vision of setting up new “energy verticals” in oil and gas, clean energy — comprising solar, biomass, gas, hydrogen and fuel cells — and in developing energy solutions for an urban environment. Singapore has a comparative advantage in producing low-cost, thin-film solar panels, as it has a strong electronics industry, capabilities in precision engineering, chemical industries, and strengths in systems integration

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and in supply-chain management. The EDB also plans to nurture an “Energy Services Ecosystem”, in which a variety of private firms would provide all kinds of clean and green energy services. Such firms are also called ESCOS or energy service companies.

Business Opportunities in Solar Power in India In the region around Singapore, there are about one billion people who are not connected to electricity grids. This represents massive deprivation as well as a huge business opportunity. For instance, in India, 579 million people living without electricity; in Pakistan 65 million; in Bangladesh 104 million; in Nepal 20 million; in Sri Lanka 7 million; and in Indonesia 98 million. The total number of such people in Thailand, Philippines, Cambodia, and Vietnam is 50 million. With Myanmar’s poor numbering 45 million, this represents a vast portion of humanity living in darkness, ignorance, and poverty. We recall what Lenin had said during the early years of the USSR, that electrification plus Soviets (or worker councils) equals Communism. A modern-day equivalent would be: electrification plus education equals progress and prosperity. How many Einsteins would have flourished in Asian villages by now if they had had electricity and education? By 2002, India’s power sector had a total installed capacity of about 102,000 MW, of which 60 per cent was coal-based, 25 per cent was hydro, and about 15 per cent was nuclear. There are serious power shortages. Another 100,000 MW are proposed, mostly from coal and hydropower. In order to protect the environment, the government has planned for the accelerated development of renewable energy resources, under the Indian National Environment Action Plan. In most regions of India, sunny weather is experienced for about 250 to 300 days of the year, with the highest solar radiation in Rajasthan and North Gujarat. Not surprisingly, a huge power station producing 140 MW of electric power has been built in Rajasthan, using solar thermal parabolic troughs to produce steam to drive turbine generators. Project costs are estimated at about US$200 million. There is great interest in and demand for solar photovoltaic electricity in rural India. One Indian company trying to meet part of this huge demand is SELCO (Selco Photovoltaic Electrification, Pte Ltd). It was set up in 1995 with initial funding from the Rockefeller Fund to market, install, and service solar home systems in South India. It aims to provide reliable electricity services to rural customers, using Tata-BP modules to power lights, television sets, and radios, in states such as Karnataka and Andhra Pradesh. It also provides financial programmes. Selco provides small photovoltaic systems

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such as solar headlamps to poor villagers — these lamps have helped small markets in rural areas to remain open at night. They also benefit people who need to work at night, such as sewing co-operatives. Singapore companies that produce thin-film solar photovoltaics could supply Indian companies such as Tata, which in turn work with other Indian firms such as Selco. The Norwegian company REC has set up the world’s biggest solar panels factory in Singapore, at a cost of S$6 billion. The rural Indian demand for electricity is as huge as the demand for clean, potable water. Similarly, rural India has huge demands for affordable health care, quality education, and excellent housing, all of which Singapore can supply. Wind Power Wind power is quickly emerging as a serious energy alternative in India and China. India had already installed more than 1500 MW of wind-power capacity in 2001, and is now the third-largest wind power producer in the world after the European Union and the United States. The potential for wind energy in India is estimated at around 45,000 MW. Some estimates that, project of the additional proposed capacity of 100,000 MW in the next ten years, 10 per cent will come from wind power. Asia has a total installed wind capacity of 5618 MW as of 2005. Major Indian wind power companies include Suzlon Energy, Reliance, Essar Group of Mumbai, and Tata. Reliance is proposing a 150 MW wind farm in Maharashtra, while Tata is proposing a 100 MW wind-power farm. The three largest states with wind power projects are Rajasthan, Maharashtra, and Tamil Nadu. Suzlon runs a large wind farm in Khori with more than 300 wind turbines. About 70 per cent of the demand for wind power comes from industrial users looking for alternatives to the electricity grid. One estimate is that wind power in India will remain competitive as long as the price of oil remains above $40 per barrel. The demand for wind turbines has quickened in India; installations rose by 48 per cent in 2006. In China, demand rose by 65 per cent. India leads China in wind power and is also quickly building more wind turbines. According to the Indian Minister for Commerce and Industry, Mr Kamal Nath, India is ideally suited for wind energy. The costs work well and India has the manufacturing capacity. But experts are sceptical that wind power will displace coal to a large extent. Vestas, a leading Danish wind-power company, has a regional R&D operation in Singapore. Vestas had 35 per cent of the world market share in 2005. It appears that there are possibilities for cooperation between Vestas

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and Indian wind-power companies, especially in third markets such as China and Southeast Asia.

Anti-Pollution Programmes Singapore also has expertise in environmental protection and enhancement. It has a well-deserved reputation as a clean and green garden city, and has been ranked as one of the best cities in Asia where quality of life is concerned. This is thus another sector where India and Singapore can work together. Traffic management and the reduction of car emissions through such programmes as Electronic Road Pricing are Singaporean innovations that might interest Indian cities, just as London and New York have adopted these concepts and systems. Specifically, we are referring to the well-known Asian Brown Cloud phenomenon. This is a layer of air pollution covering South Asia, the Indian Ocean, China, and Southeast Asia. It is created by airborne particles and pollutants from wood fires, car emissions, and factories. It is most visible from December to April, during which there is no precipitation washout. It was first observed in 1999 by the UNDP Indian Ocean Experiment expedition (INDOEX). Some observers believe that it has a warming effect on Himalayan glaciers and may also change rainfall patterns. In order to combat this huge pollution cloud, multi-country and multi-year programmes are needed. Rural electrification, clean water, and education programmes are vital factors. Just as Singapore tries to assist Indonesia in fighting the haze, it might think about assisting South Asia with the Asian Brown Cloud.

Oil Refining in India The plans to turn India into a major refining centre will have an impact upon Singapore, which is a huge refining centre. Firstly, the new Indian refineries are meant to serve the domestic market, which is expanding due to the huge growth in Indian car-ownership and high Indian growth rates. Many other countries, such as China and in the Middle East, are also planning new refineries to meet expanding domestic demands. India’s Reliance Company has built a giant new refinery that is profitable at about US$10,345 (in terms of investment per barrel per day of refining capacity) as compared to Kuwait’s refinery costs at US$27,000 per barrel per day. The low costs are largely due to the low cost of operations in India. But very few countries can play the roles that Singapore performs, such as a swing role to meet unsatisfied demand at certain times from various

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countries. This role stems largely from the skilled oil-trading services found in Singapore, its excellent logistics (in shipping) and financing (banks and insurance). Singapore’s refineries are more efficient than Indian refineries: their Gross Refining Margin stands at US$4.84 in the first quarter of 2007, as compared to that for Reliance at US$12.25. Secondly, Singapore has already migrated upstream into the manufacture of sophisticated petrochemical products. So Singapore is not just a large refining hub but also a major petrochemical hub. In fact, Singapore has become what we might describe as an Energy City, as it has oil refineries, petrochemical complexes, vast storage facilities, major oiltrading expertise, energy R&D, presence of international and national oil companies, major bunkering businesses, world-class oil rig manufacturing, growing energy sectors such as biofuels and solar, and energy logistics and financing. In terms of energy infrastructure, Singapore ranks second in the world after Iceland, according to the IMD World Competitiveness 2007 Yearbook. Singapore plans to build a major oil refinery in the next few years as well as an LNG terminal, thus enhancing its comparative advantage in the energy sector. India can thus tap the energy expertise available in Singapore. There is still room for Singapore to take on the higher role of adding value in the petro-chemicals sector. India will be an important market for Singapore’s petrochemical products. Singapore could play a management role in the new refineries and in trading oil products so that regional supply and demand may be matched. In fact, Singapore’s forte is in oil trading; these skills might be called upon to meet the booming demand generated by the dynamic growth of India and China. CHINA-INDIA ENERGY COMPETITION As rising economies, both China and India need to secure energy resources from all over the world. There is intense competition between both countries as well as with other countries. China has been more aggressive and successful in bidding for overseas oil and gas fields. In the past few years, Chinese oil firms have trumped Indian firms such as ONGC in Myanmar, Kazakhstan, Ecuador, Nigeria, and Angola. China has also objected to the presence of Indian energy firms in disputed areas off Vietnam’s coasts. But India has also tried to cooperate with China in order to dampen competition, which only drives up the prices of energy assets overseas. Two memorandum of understanding were signed between GAIL and China’s CNOOC to cooperate in oil exploration in various parts of the world. There have been many

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suggestions that both countries should join the International Energy Agency (IEA) as both are major players in and consumers of energy. CONCLUSION Cooperation among India, ASEAN, and Singapore on various aspects of energy, such as energy efficiency, and within various frameworks like the EAS, would help to add more substance to bilateral relations as well as help to strengthen the nascent EAS. It would also enable India to enhance its profile within Southeast Asia. As Singapore has already helped India gain entry into the ARF and EAS, the proposed energy cooperation between ASEAN and India would serve as another bridge between both sides and further consolidate inter-regional relations. Most ASEAN members perceive India as a benign power and welcome it to play a greater energy role, as it would enlarge the spectrum of options for them. In turn, India should add more substance to India-ASEAN relations and project its soft power more effectively. For India, the benefits lie in the diversification of energy resources in which Southeast Asia is rich. Within South Asia, India on its part is active with proposals of the Energy Ring and of pipelines across Iran, Afghanistan, and Pakistan. But such pipeline proposals like TAPI and IPI cannot realistically proceed because of conflict in Afghanistan and terrorist attacks such as the Mumbai attacks in November 2008. NOTE 1

For full details, refer to (accessed 18 March 2008).

REFERENCE Muni, S.D. and Girijesh Pant. India’s Search for Energy Security: Prospects for Cooperation with Extended Neighbourhood. New Delhi: Rupa & Co. in association with Observer Research Foundation, 2005.

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China

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7

CHINA’S GLOBAL QUEST FOR ENERGY SECURITY Wenran Jiang

ABSTRACT The purpose of this paper is threefold: to provide the most up-to-date analysis of China’s energy situation; to argue that China’s global quest for energy is primarily driven by its rapid economic growth in recent years, out of insecurity rather than a master plan to dominate the world; and thirdly, that China’s energy security issues have multiple implications beyond simple economic concerns. The paper seeks to recommend a forward-looking engagement policy to be adopted by other countries, especially OPEC states, Canada, and the United States, in dealing with China’s growing energy demands. INTRODUCTION When China began to experience energy shortages early in this decade, many Chinese military strategists were concerned about the security of the country’s energy supply. A recent book entitled Liberating Taiwan, published by the Chinese Military Publishing House, portrayed a hypothetical conflict scenario set around 2010.1 The arena is the vast West Pacific region. To break the U.S.Japan-Taiwan military containment of China, the combined air, naval, and armed forces of the People’s Liberation Army (PLA), equipped with newly

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established carrier battle groups, have destroyed all U.S. military bases in the region, taken control of all strategic sea routes from the Strait of Malacca to the Persian Gulf, and imposed an oil embargo to choke the United States, Japan, Taiwan, and their allies. The attention paid to strategic oil routes only highlights the fact that energy security is closely linked to China’s national security and the nation’s future.2 This paper analyses the relationship between China’s economic growth and its energy security concerns, the latest developments in China’s energy demands, major policy shifts, and the implications for the rest of the world. In view of the global recession since the second half of 2008, it will also examine the latest Chinese policies in responding to changes in oil prices, and how the latest round of Chinese energy and resources acquisitions, for instance in Africa, are a part of China’s overall strategy to strengthen its global financial position while securing further energy supplies.3 The purpose of this paper is threefold: to provide the most up-to-date analysis of China’s energy situation; to argue that China’s global quest for energy is primarily driven by its rapid economic growth in recent years, out of insecurity rather than a master plan to dominate the world; and thirdly, that China’s energy security issues have multiple implications beyond simple economic concerns. The paper seeks to recommend a forward-looking engagement policy to be adopted by other countries, especially OPEC states, Canada, and the United States, in dealing with China’s growing energy demands.4 CHINA’S ECONOMIC DEVELOPMENT AND ITS APPETITE FOR ENERGY Being the world’s fastest growing economy in the past quarter-century, China has a huge appetite for energy that has grown rapidly in recent years. In just fifteen years, China has turned from a petroleum exporter to the secondlargest oil consumer in the world,5 consuming 7.93 million barrels of oil a day.6 Although still far behind the United States, which consumes over 20.7 million barrels a day,7 China is projected to reach a daily level of 10 million barrels within the next two decades or so (see Figure 7.1).8 During the period 1980–2006, China’s energy consumption increased by 5.6 per cent annually, boosting the 9.8 per cent annual growth of the national economy. Calculated at 2005 constant prices, the energy consumption for every 10,000 yuan of GDP dropped from 3.39 tonnes of standard coal in 1980 to 1.21 tonnes in 2006. The annual energy-saving rate was thus 3.9 per cent, putting an end to the rising trend of per-unit GDP energy consumption.

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Figure 7.1 Oil Consumption (Percentage of Total World Consumption)

Source: BP, Statistical Review of World Energy June 2008 9

The comprehensive utilization efficiency in the processing, conversion, storage, and end-use of energy was 33 per cent in 2006, up eight percentage points over 1980.10 China pays great attention to improving its energy consumption structure. The proportion of coal in primary energy consumption decreased from 72.2 per cent in 1980 to 69.4 per cent in 2006, while that of other forms of energy rose from 27.8 per cent to 30.6 per cent, with the proportion of renewable energy and nuclear power rising from 4.0 per cent to 7.2 per cent.11 The National Development and Reform Commission (NDRC) predicted in February 2009 that oil product and power consumption will shrink for at least the first half of 2009 due to the global economic slowdown, though consumption could recover in the second half due to the government’s stimulus package. According to the same NDRC news release, the slowing economy is also expected to erode China’s electricity demand, which has been declining since October 2008, and lead to a power surplus in 2009. The International Energy Agency (IEA) estimated that the crude oil demand growth for China in 2009 is a moderate increase of 90,000 barrels per day, the lowest growth

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rate since 2001.12 This gloomy prediction follows a year of growth in Chinese energy consumption. In 2008, domestic oil product consumption and power consumption increased by 10.2 per cent and 5.2 per cent, respectively.13 This is against the backdrop of decreased global energy demand. According to the IEA’s revised January 2009 data, the estimate of world oil demand in 2009 is 85.26 million barrels per day (b.p.d.), a decrease of 0.5 million b.p.d. from 2008, by 0.27 million b.p.d. from 2007. The expected two-year contraction in demand would be the first since 1982 and 1983.14 The commonly held view is that the Chinese market alone is responsible for 40 per cent of the global increase in oil demand since 2000, and that this explains the rise in oil prices.15 The Chinese Government and some scholars have countered by pointing out that China is not the decisive factor in the rise of oil prices, as it accounts for only 6.3 per cent of the world’s total oil consumption and less than 3 per cent of the world’s total oil trade. China is also the fifth-largest overall energy producer in the world.16 The debate continues, but what is certain is that China’s economy and its increasing consumption of energy will not slow down in the foreseeable future. While the Chinese economy has continued to grow by 9.5–9.9 per cent in the past few years, its oil imports jumped 12.3 per cent in 2004 and another 9.6 per cent in 2008.17 The forecasts say that the Chinese demand for crude will increase annually by 12 per cent until 2020 (see Figure 7.2). According to the IEA’s 2007 forecast, China’s energy demand will grow by an average of 5.1 per cent every year to 2015, and then slow down. The annual average growth to 2030 is projected at 3.2 per cent. Transport fuel demand will almost quadruple from 2005 to 2030, accounting for more than two-thirds of China’s total oil demand growth. China will rely for 80 per cent of its oil needs on imports in 2030, from 50 per cent in 2006. Oil imports will rise to 13.1 million b.p.d. in 2030 from 3.5 million b.p.d in 2006.18 If China is to achieve its goal of quadrupling its economy by 2020, its demand for energy and other resources must grow and much of the new energy must come from external sources.19 There are clear indications that China is following in the footsteps of the United States and Japan in its demand on foreign supplies: While China’s current dependency on foreign oil is about 42 per cent, this figure will exceed 60 per cent in less than twenty years.20 A fast-growing economy typically requires more energy, but China’s modernization drive has produced a manufacturing structure that requires huge increases in energy consumption, creating an inefficient energy consumption system and a consumer trend that is difficult to sustain. China is now the “factory of the world”. The major portion of its economic output

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Figure 7.2 China’s Oil Balance (Production vs. Consumption) 1995–2008 (million barrels per year)

Source: Energy Information Administration (EIA).

is oriented towards industries that are primarily energy-driven. China is the world’s second-largest energy user. Energy consumption in the country increased from 990 million tonnes of coal equivalent (TCE) in 1990 to 2,648 million TCE in 2007, reflecting the rapid growth of its economy.21 With about 4 per cent of global GDP, China consumes 31 per cent of the world’s coal, 30 per cent of its iron, 27 per cent of its steel, and 40 per cent of its

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cement, 20 per cent of its copper, 19 per cent of its aluminium, and 10 per cent of its electricity.22 This heavy industrial structure generates a tremendous waste of energy. As acknowledged by Zhang Guobao, Deputy Commissioner of China’s National Development and Reform Commission, to generate every 10,000 yuan of GDP, China uses energy at a rate as much as three times the global average.23 The ratio is even higher when the comparison is to major advanced, industrialized countries. To produce US$1.00 of GDP, China consumes eight times as much energy as Japan; in producing the same industrial goods, China uses 11.5 times as much energy as Japan.24 According to Wang Chao, former Minister of the Petroleum Industry, the unit energy consumption level of China’s GDP in 2004 was 2.4 times taht of the world average; 3.6 times that the United States; 4.9 times that of Germany; 4.4 times that of Japan, and 1.6 times that of India.25 The unit energy consumption of thirty-three Chinese industrial goods is 46 per cent higher than the international average. To generate each tonne of steel, China consumes 40 per cent more energy than the international average. Coal supplies nearly 70 per cent of China’s energy needs (Figure 7.2). In 2005, China built 117 government-approved, coal-fired power plants — a rate of roughly one every three days — while the number of illegally built stations is believed to be far higher.26 In 2007, Chinese coal consumption rose 7.9 per cent, the weakest growth since 2002, but more than two-thirds of global growth.27 But officially acknowledged statistics show that, in the past fifty years, Chinese coal mines wasted two tonnes of coal in producing each tonne, losing as a result 65 billion tonnes of coal while producing 35 billion tonnes from 1949–2003.28 China has set a goal of cutting the energy used per dollar of national income generated — i.e., its energy intensity — by 20 per cent in the 2006– 2010 period, or 4 per cent a year. However, in 2006, it managed to lower its energy consumption per unit of GDP by just 1.79 per cent, well off the 4 per cent target.29 The figure for 2007 is 3.66 per cent, and that for 2008 was 4.21 per cent, but uncertainty remains as to whether China can achieve the overall 20 per cent target by 2010.30 At the same time, China is building one of the most extensive highway infrastructures in the world, to replace its one billion bicycles with cars. In 1999, only 220,000 vehicles were sold. In 2004, China produced and sold over 5 million automobiles, ranking third in the world in car sales. By 2010, domestic auto demand will reach 8–9 million units, and China will have around 55 million automobiles.31 The number of vehicles has surged from five per 1,000 people in 1991 to thirty-eight per 1,000 people in 2006.32 Oil consumed in transportation will account for half of the total oil

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consumption. Thus China will not only rival the United States in overall national strength in a few decades, but it will also have the most number of cars in the world — that is, if such growth can be sustained. This situation brings its own challenges. In the fall of 2004, Beijing’s traffic authorities set up a special unit to cope with the more than 300,000 new drivers who were about to begin their first winter on the slippery city highways.33 The heavy industrial structure and a fast-growing auto industry have made China one of the worst polluters on earth. While the United States remains the biggest producer of carbon dioxide emissions, China is catching up fast. Being a signatory of the Kyoto Protocol, but not subject to its emission reduction standards as a developing country, China is releasing ever more greenhouse gases into the atmosphere. China’s obsession with cars has led to more than traffic jams and higher pollution levels. According to the UPI Energy Watch, the annual average fuel consumption per car in China is 2.28 tonnes, 10 to 20 per cent higher than in the United States and 100 per cent higher than in Japan. Beyond cars, the use of consumer appliances such as air-conditioning, refrigerators, and other electronic gadgets is growing at an unprecedented rate.34 It is no wonder that energy has become a bottleneck for the Chinese economy in recent years. Factories have been forced to work night shifts to avoid peak consumption times or else their power supply was cut off altogether. All major cities have experienced power shortages on a regular basis. Electricity is rationed in the summertime and power cuts have become frequent. Even the decorative lights on the skyscrapers along the Yangtze River in Shanghai’s tourist centre have had to be dimmed to conserve power in recent summers. China’s energy consumption during the period between 2002 and 2007 was equal to the total consumption of the previous twenty years.35 Dai Yande, an expert with the NDRC’s Energy Research Institute, warned in 2007 that China must decide whether it wants to remain the “factory of the world” in the light of acute domestic energy supply problems. He noted that much of the additional consumption in caused by factories and plants supplying goods to the international market. Britain’s Tyndall Centre estimated that around a quarter of China’s carbon emissions can be attributed to China’s export trade.36 The broader picture is even more alarming: If every one of the 1.3 billion Chinese were to use twenty times more energy every day, i.e., the same per capita consumption as in North America, China would require 80 million barrels of oil a day — more than the entire world’s current daily consumption. Even if only a quarter of China’s population begins to consume as much energy as North Americans, there will be a major crisis. No one should deny China’s right to use more

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energy, but even Chinese themselves are now questioning how best to deal with the country’s energy situation. China’s energy vulnerability was further demonstrated during the hike in the price of crude in the first half of 2008. In the first four months of 2008, China paid US$22.3 billion for crude imports, a surge of 80.8 per cent over the same period of 2007 (with an import increase of 9.8 per cent year-to-year in terms of the trading volume) and US$4.86 billion for oil products, a jump of 78.6 per cent from 2007 (with a 9.2 per cent import surge year-to-year in terms of the trading volume). Rapid expansion of energy-guzzling industries in early 2008 worsened the situation, as crude steel output reached 170 million tonnes, up 9.1 per cent over the same period in 2007, and steel products output increased by 12 per cent to 193 million tonnes.37 SECURING CHINA’S ENERGY Not surprisingly, a major debate has been going on in China for some time on how to solve this energy problem.38 Some advocate securing the energy supply primarily by traditional means. They argue that, by 2020, China’s dependence on foreign oil will increase from today’s 36 per cent to 60 per cent, and thus China must establish a strategic oil reserve and develop a strong military force, especially a blue-water navy equal to that of the United States and Japan.39 When necessary, Beijing should be ready to use force to secure the nation’s oil sources abroad, from dealing with increasing piracy in Southeast Asia to confronting a potential U.S.-Japan military stranglehold on China’s supply routes.40 Others argue that China must curb its demand for energy and focus on conservation. If each car had consumed 20 per cent less fuel last year, China could have cancelled out the year’s increase in demand for finished oil products. These push for cooperation between China and other major powers to explore energy and secure the oil supply, thus easing China’s energy crisis through non-traditional means.41 Yet others point to China’s problematic energy system and argue the need to diversify its energy sources. Most of China’s power is still generated by coal, and its coal production represented 40 per cent of world output in 2007.42 The country’s existing eleven nuclear power plants account for just 2.29 per cent (in contrast to more than 30 per cent in Japan) of the nation’s total power supply, with a capacity of 9,100 MW. Even under the 2007 National Medium- to Long-Term Nuclear Energy Development Plan, the share of nuclear will be raised to only 5 per cent by 2020, with a capacity of 40,000 MW.43 China has large deposits of natural gas, yet that makes up only 2 per

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cent of its energy supply, far below the world average of 23 per cent. There is also great potential in wind energy, solar energy, hydropower, biomass, marine energy, and other renewable energy resources.44 The Chinese Government seems to have adapted and combined all the above approaches in its overall energy strategy. In the draft of China’s Mediumand Long-Term Energy Development Programme for 2004–2020, approved by the State Council (China’s cabinet) in the summer of 2004, strategic reserves, energy conservation, diversification, security, further exploration, and environmental preservation are all on the agenda.45 At the People’s Congress in March 2006, a number of challenges were identified in the energy sector. As reported by Vice Premier Zeng Peiyan, China faces the following problems in the energy sector: • • • • •

Sustained strong energy demand that places pressure on the supply; Shortage in resources that limits the growth of the energy industry; Coal-centred supply structure that is detrimental to the environment; Backward technologies that inhibit the efficient supply of energy; and International market fluctuations that negatively impact domestic energy supply.

To counter such challenges, the Chinese leadership has set the following new priorities: • • • • • •

Coal mining with high-efficiency and clean-burning technology; Adjusting the electricity supply structure for higher efficiency; Increasing the supply of natural gas; Speeding up the development of new and renewable energy sources; Building up petroleum reserves; and Enhancing energy resources survey capabilities.46

POLICY AND LEGAL FRAMEWORK China’s recent draft Energy Law, the Renewable Energy Law, and Energy White Paper all emphasize the need to move to non-conventional, cleaner energy.47 Mr Gu Jie, the Deputy Director of the Investment Promotion Affairs Bureau in the Ministry of Commerce, commented at a recent conference that the implementation of the new energy and renewable energy laws will create a huge market space for the new and renewable energy industries, and this will promote investment and financing activities in those sectors.48

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Renewable Energy Law China’s legislature, the National People’s Congress, enacted in 2005 the nation’s first renewable energy law, which entered into effect on 1 January 2006. According to the law, renewable energy includes solar, wind, geothermal, biomass, and marine energy, all of which should be taken into consideration in state- and local-level development plans.49 The law also calls for China to set specific renewable energy development targets and instructs the national and provincial governments to develop and execute plans for meeting these targets. In response, the NDRC recently drafted its 2020 renewable energy development plan, with ambitious national targets — by 2020, 16 per cent of all primary energy consumed in China should come from renewable sources (from 8.5 per cent in 2006) and China must have 120 GW of renewable power generation capacity.50 The Revised Energy Conservation Law The revised Energy Conservation Law came into force on 1 April 2008, against the backdrop of a fast-growing economy, rising energy and fuel prices, a growing awareness of environmental issues, and increasing world pressure on China to use environmentally friendly and technologically advanced energy sources. While economic circumstances have changed since late 2008, the new stimulus plan announced by the Chinese Government in 2009 revitalizes opportunities in the energy sector arising from the Energy Conservation Law.51 The law has three principal goals: to promote policies for energy conservation and environmental protection; to restrict the development of high-energy consumption and high-pollution industries; and to encourage the development of energy-saving and environmentally friendly industries.52 It also links officials’ career prospects with their energy conservation efforts. Local governments have been asked to report to the State Council on an annual basis on how they are implementing the energy-saving targets.53 The law proposes many policy initiatives for achieving energy conservation, ranging from passive measures — education, energy efficiency labelling, accreditation systems for products, publication of energy use statistics, and awards systems for energy conservation achievement — to more direct measures such as government funding, tax incentives, subsidies, prohibitions on the use of high-energy-consuming or polluting technologies, maximum emission standards for motor vehicles, and focused government procurement of energysaving products.54 The law is supported by regulations in specific sectors. Banks, for example, are required to monitor and actively support energy-

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efficiency projects while developers must incorporate energy-efficient technologies into new projects. The present economic environment is vastly different from that existing when the law was introduced, threatening the opportunities expected to arise from it. There has been a general slowdown in the Chinese economy and oil prices have dropped, making the introduction of energy-efficient technologies relatively more expensive. However, the State Council’s announcement that one of the ten measures of the stimulus package is the enhancement of environmental and ecological development makes the prospects for this sector brighter.55 The Draft Energy Law China’s energy law was drafted in 2006 and circulated for public consultation in December 2007. The draft law is still being held in the National Energy Administration, which was recently created to strengthen the government’s management of the energy sector. There is no detailed timetable of submission yet. But according to industrial sources familiar with the drafting process, the earliest it could come into effect is expected to be in 2009. The latest version — its fifth draft — was released in March 2008 for public comments, including to the International Energy Agency (IEA). Xinhua reported that the draft had been submitted to the Legislative Affairs Office of the State Council and is expected to enter the deliberation procedure of the State Council in 2009. Afterwards, the law will be submitted to the executive meeting of the State Council. At the final stage, it will be sent to the National People’s Congress Standing Committee for readings and then submitted to the plenary meeting for voting.56 The preparation of the draft law has been a lengthy process and the final law’s ultimate content is far from certain. While it remains the shell of a law waiting to be approved, the draft provides a glimpse of the talking points and opportunities of coming years. There is also a decidedly green tinge to it. References to sustainable energy sources, pollution control, and conservation of natural resources are sprinkled throughout the text.57 According to the draft law, “pricing should reflect the scarcity of resources and costs of damaging the environment”. The government would also adopt tax policies encouraging the development and use of renewable energy, energy-saving products, and imports of related technologies.58 Under the draft law, which is designed to address energy consumption and promote efficient energy use, China would establish energy pricing systems determined mainly by market forces and reduce the government regulation of prices.59 An energy consumption tax regime is also proposed to

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promote energy saving, through encouraging the use of renewable energies and discouraging the use of high-polluting, energy-consuming technologies.60 The energy law in drafting will mainly resolve six problems concerning energy development and utilization, including state energy and economic security; energy conservation and environmental protection; optimization of energy structure and change of economic growth mode; energy management system reform and standardization of government activities; access to energy market and competition rules and optimization of investment structure; and energy technology innovation.61 The Circular Economy Law The Circular Economy Law was adopted on 29 August 2008 at the 11th National People’s Congress, and came into force on 1 January 2009. The law is aimed at resource conservation by targeting enterprises with high energy and water consumption. It mandates the government to closely monitor energy consumption and pollution emissions in high energy consumption industries, including those involved in steel and non-ferrous metal production, power generation, oil refining, construction, and printing.62 The 11th Five-Year (2005–2010) Energy Development Plan (FYEDP) In this plan, an average annual growth of 3.5 per cent in primary energy production is targeted, for an output of 2.446 billion TCE by 2010.63 By 2010, China’s primary energy consumption will be controlled at 2.7 billion standard tonnes of coal, at an average annual growth of 4 per cent. According to this plan, by 2010, the energy mix will be as follows: coal, 66.1 per cent; oil, 20.5 per cent; natural gas, 5.3 per cent; nuclear power, 0.9 per cent; hydropower, 6.8 per cent; and other renewable energy, 0.4 per cent respectively.64 The 12th Five-Year (2010–2015) Energy Development Plan (FYEDP) This plan aims to meet the energy demands generated by economic growth in 2010–2015 and to ensure the sustainable development of China’s environment and energy security. According to the Xinhua News Agency, China’s future strategic energy targets in this policy document probably include reducing dependency on foreign oil, slowing down growth in thermal power consumption, and adjusting the energy structure. The development of

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clean energy and renewable energy, including nuclear and wind power, also stands as key items for the government’s investment and support.65 The Renewable Energy Development Plan for 2006–2010 Under this plan, issued by the NDRC in 2008, China’s annual consumption of renewable energy will reach the equivalent of 300 million tonnes of standard coal by 2010, which would be 10 per cent of its total annual energy consumption. The plan says the consumption of renewable energy in 2010 would be nearly double that of 2005, which was equivalent to 166 million tonnes of standard coal. This would represent a reduction of 3 million tonnes of sulphur dioxide emissions and more than 400 million tonnes of carbon dioxide emissions. The plan projects that by 2010: •

• • •

the nation will have hydropower projects with a combined installed capacity of 190 million kW and wind power projects with an installed capacity of 10 million kW the installed capacity of bio-energy projects will reach 5.5 million kW and that of solar energy projects will be 300,000 kW domestically produced hydropower equipment and solar water heaters should become competitive on global markets wind power equipment manufacturers should put generating units with installed capacities of at least 1.5 million watts into mass production.66

THE MEDIUM- AND LONG-TERM PROGRAMME FOR RENEWABLE ENERGY DEVELOPMENT China also released the Medium- and Long-term Programme for Renewable Energy Development in early 2007, with the goal of increasing renewable energy consumption to 10 per cent of the total energy consumption by 2010 and 15 per cent by 2020.67 In 2007, renewable energy consumption accounted for only 7 per cent of the country’s total primary energy consumption.68 Increasing Domestic Production Facing growing international criticism that China was responsible for the sharp increase in world oil prices, Chinese policy-makers and academics, since the middle of 2005, have put much emphasis on the fact that China is not only the second-largest energy consumer in the world, but also the second-largest energy producer. Zhang Guobao, Deputy Commissioner of

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the National Development and Reform Commission, gave a number of talks and speeches to rebut the idea that China is the main cause of global oil price increases. He stressed that only 6 per cent of China’s total energy needs comes from external sources; that China exports 80 million tonnes of coal every year; that its export of coke is 56 per cent of world’s total volume; and that it is making efforts to develop more domestic oil, gas, hydro, and nuclear sources.69 Three years after Zhang’s comments, a September 2008 statistical report still shows domestic sources provided more than 90 per cent of China’s energy needs, and its self-sufficiency rate was higher than that in OECD countries and the United States by 20 and 30 percentage points respectively. China has already taken measures to cut energy consumption per unit of GDP by 20 per cent from 2006–10, with further reductions expected after 2010.70 According to data released by the NDRC Energy Bureau, China’s energy consumption totalled 2.46 billion TCE in 2006, the second highest in the world. But at the same time, China was also the world’s second-largest energy producer, producing 2.21 billion TCE the same year. This breaks down to 2.38 billion tonnes of coal, 184 million tonnes of crude oil, and 58.55 billion cubic metres of natural gas. Therefore, China’s energy self-reliance ratio in 2006 was close to 90 per cent.71 In 2008, during the five-party energy ministers’ meeting in Japan, Zhang again dismissed the idea that rising demand in China is to be blamed for the surge of oil prices. He argued that instead, “a huge amount of oil trade is conducted in the financial market and the oil prices are no longer up to the traditional marginal utility, but have become a financial concept under the influence of a lot of factors”. Zhang also noted that from 2003 to 2006, world oil consumption posed annual increases of 1.9 per cent, 3.8 per cent, 1.2 per cent and 0.7 per cent respectively, all “in normal range”. He suggested that rising oil prices should be viewed in the context of global financial markets, which could be affected by a wide range of factors such as exchange rates, geopolitics, political instabilities, and natural disasters.72 A former head of NDRC also noted in 2006 that China achieved an average annual GDP growth of 9.6 per cent while keeping the consumption of primary energy growth rate at 5.16 per cent.73 Others see oil as the single largest import commodity of China; whenever each barrel of oil increases in price by US$10, China would have to pay an extra US$10 billion per year just to be a major victim of world oil price hikes.74 These comments and arguments have become more audible since the failed bid by the China National Offshore Oil Corporation to acquire the U.S. energy company Unocal in 2005. So the refocus on domestic production

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may have two purposes. The first is to put priority on domestic energy exploration and production, thus reducing external dependence and uncertainty. The second is to show to the world that China is not so powerhungry that it needs more and more imports, thus reducing expectations that China’s energy demands from abroad would continue to rise (Figure 7.3). DIVERSIFICATION OF ENERGY SUPPLY SOURCES China’s energy diversification initiative is bold. Currently, close to 70 per cent of China’s power is generated from coal (see Figure 7.3). This is in sharp contrast to the average world primary energy mix (see Figure 7.4). Nuclear

Figure 7.3 China’s Energy Growth Potential (Quadrillion BTU)

Source: EIA (2004).

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energy and natural gas have very little share in China’s overall energy supply.75 With only eleven nuclear plants in operation (the United States has 104 licenced reactors), China produced 9,100 MW of nuclear power in 2008,76 accounting for just 1.1 per cent of the country’s total annual electricity supply. This is much less than the world average of 16 per cent77 (Figure 7.4). Figure 7.4 China’s Primary Energy Composition

Source: BP Clean Energy Research and Education Center.78

CHINA’S NUCLEAR ENERGY While the rest of the world is debating the dangers of increasing the use of nuclear energy, China has announced that it plans to build as many as forty nuclear power plants by 2020, with roughly three times the generating capacity of the Three Gorges Dam, which is already the world’s largest hydroelectric plant.79 In 2004, China invited foreign bids for four nuclear reactors, each with a capacity of 1,000 MW. Bids were received from Framatone (France), Candu (Canada), Westinghouse (U.S.), and General Electric Company (teamed with a Japanese engineering group).80 According to the materials released by China’s State Council Information Office at the Fortune Global Forum in Beijing last May, a conservative estimate of China’s investment

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in nuclear power plants over the next fifteen years exceeds $40 billion. The United States may provide China with some twenty of the forty planned nuclear power plants, at a total cost of $24 billion, according to the same materials.81 If so, nuclear power plants will replace civilian aircrafts as the largest products of U.S.-China trade in the coming years.82 Chinese scientists have confidently claimed that they have successfully developed a way of using nuclear energy to produce power without any risk to humans or the environment.83 They have set their eyes decades ahead and are speeding up the research and development of the fourth-generation pebble-bed modular high-temperature gas-cooled reactor (HTGR). As the industrial leader in this area together with South Africa, China is the only other country besides Japan to operate a HTGR experiment unit.84 China currently has four plants running, in Guangdong, Zhejiang, and Jiangsu provinces, with a combined generation capacity of 9,100 MW. The country has another twenty-two nuclear reactors under construction and another four are scheduled to begin construction in 2009 and 2010.85 In early 2009, China’s National Energy Administration (NEA) raised the country’s 2020 nuclear power target to 75,000 MW, nearly double the generation capacity initially planned for in 2007. Under the new target, nuclear power will account for 5 per cent of China’s total generation capacity and 8 per cent of its total power output by 2020. The NEA’s new target for nuclear power is in line with the central government’s recent effort to stimulate the domestic economy through infrastructure development projects.86 As the country steps up the installation of nuclear power plants, China is hoping to buy uranium mining and exploration rights overseas, particularly in East Asia, Australia, and Africa, to satisfy its ever-increasing demand for ore. To meet the target of 100,000 MW by 2020, it is estimated that about 84 per cent of the uranium ore needed will have to be imported. In December 2006, the China National Nuclear Corporation (CNNC) established the China Nuclear International Uranium Corporation, known as Sino-Uranium, to facilitate global mining and acquisition.87 RENEWABLE ENERGY By 2006, the total capacity of all renewable power in China was 622,000 MW. According to the State Renewable Energy Medium- and Long-Term Development Programme, China hopes to raise the proportion of renewable resources in total production from the current 7 per cent to 16 per cent by 2020. Specific targets for major renewable sources are: hydropower, 290,000 MW; biofuels, 20,000 MW; wind, 30,000 MW; and solar, 2,000 MW.88 The

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Table 7.1 China’s Nuclear Power Plants Already Operating, Under Construction or Approved by the Government Plant (province)

Capacity

Start-up

Technology supplier

Qinshan phase I (Zhejiang) Qinshan phase II (Zhejiang) Daya Bay (Guangdong) Ling Ao phase I (Guangdong) Qinshan phase III (Zhejiang) Tianwan plant I (Jiangsu) Tianwan plant II (Jiangsu)

300 650×2 984×2 990×2 700×2 1,060 1,060

1991 2002/04 1994 2003 2003 2006 2007

indigenous AECL, Canada Framatome, France Framatome AECL Rostam, Russia Rostam, Russia

TOTAL

9,068

UNDER CONSTRUCTION Qinshan phase II (Zhejiang) Ling Ao phase II (Guangdong) Hongyanhe (Liaoning) Ningde (Fujian) Fuqing (Fujian)

650×2 1,080×2 1,000×4 1,000×4 1000×6

2011 2010/11 2012/14 2012/15 2013–

AECL Framatome indigenous indigenous indigenous

APPROVED Haiyang (Shandong) Sanmen (Zhejiang) Qinshan (Zhejiang) Taishan (Guangdong) Yangjiang (Guangdong)

1000×2 1000×2 1000×2 1,600×2 1,000×2

2013 2013 2013/14 NA NA

Westinghouse Westinghouse indigenous Areva indigenous

Source: Jim Bai, “China’s Nuclear Power Plants and Plans”, Reuters, 23 November 2008.

Asian Development Bank estimates new energy investment in Asia will reach US$6.4 trillion; other surveys show that China has become the country absorbing the most renewable energy investment in the world with a 2005– 2006 investment of US$6 billion.89 The proportion of oil and gas consumption rose from 18.7 per cent in 1990 to 24 per cent in 2005 while that of hydropower and nuclear power rose from 5.1 per cent to 7.3 per cent.90 NATURAL GAS AND WIND POWER China is also making large capital investments in building multiple terminal facilities along the China’s coastal cities for importing liquefied natural gas (LNG). At the same time, the Chinese Government is working with Greenpeace to build new structures that will generate wind energy. The nation’s total wind installation reached nearly 6,000 MW in capacity by 2007. The government set the wind target for 2010 at 10,000 MW, and experts predict that actual installation may reach 20,000 MW by this time.91

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In late 2005, Beijing announced to the world that it would spend US$150 billion in the next fifteen years on renewable energy, an unprecedented amount of financial commitment for ensuring China’s energy security. SOLAR ENERGY China now leads the world in the production and application of solar panel heaters. By 2006, it had 2,000 businesses engaged in the thermal application of solar energy and produced 75 million square metres of solar panel heaters, or 60 per cent of the world’s total. With these heaters, China avoids burning 110 million tonnes of standard coal annually. It is estimated that the Chinese market demand for solar panel heaters will rise to 300 million square metres by the year 2020.92 In 2007, 40 million Chinese families, or 150 million people, were using solar energy collectors.93 HYDROPOWER China’s hydro potential ranks first in the world. The country has a long history and rich experience in harnessing hydropower. Installations of hydropower reached 145,000 MW through 2007. The target is 190,000 MW for 2010.94 China is home to the world’s largest stock of hydropower resources, two-thirds of which remain unexploited.95 NUCLEAR POWER The latest statistics available show that the country’s nuclear power capacity totals 9,100 MW, with eleven reactors in operation. By 2020, the State Nuclear Power Development Plan aims at a total installation of 40,000 MW, which would account for 4 per cent of the nation’s total power capacity.96 ENERGY CONSERVATION While more oil-burning and coal-burning power plants are being built and many more planned, bulldozers are working day and night to turn China’s ancient Silk Road into a new Eurasian continental bridge that will serve as an energy and materials supply route. But there is also the realization that China is one of the worst energy-wasting countries on earth. In 2004, for example, while China’s GDP grew by 9.5 per cent, the country’s consumption of petroleum and electricity increased by 19.7 per cent and 15 per cent respectively.97 Beijing is now thinking seriously about how to conserve energy. Accompanying the Medium and Long-Term Energy Development

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Programme Outline 2004–2020 was another document, the Medium and Long-Term Energy Conservation Itemized Plan, also developed by the National Development and Reform Commission.98 The plan calls for aggressive conservation standards to be implemented, with a reductions target of 1.4 billion TCE from 2003–2020; reaching international standards in energy consumption levels for producing major industrial goods by 2020; and approaching international standards of energy efficiency in large and household electronic equipment. 99 It also identified ten large conservation projects.100 During the People’s Congress gathering in March 2006, the Chinese Government announced strict energy conservation measures in its eleventh five-year economic programme. Beijing has called for a nationwide paradigm shift in development strategies. The new model is labelled as a “scientific development concept” that will endorse an environmentally friendly approach to industrialization, and that regards resource and energy conservation as top priorities. For the first time, Beijing set some compulsory targets on the efficient use of energy: Energy consumption per unit of GDP is to decrease by 20 per cent, water consumption per unit of industrial added value is to decline by 30 per cent, and industrial solid waste recycling and conservation is to grow by 60 per cent — all by 2010. In 2008, the NDRC announced that the government had set aside 14.8 billion yuan for energy-saving projects that year.101 This measure was apparently prompted by China’s worst power crisis since 2004 as nationwide generators could not source enough coal supplies or refused to pay soaring coal prices while they had to sell electricity at state-capped prices. This led to more than a dozen provinces imposing power rations.102 THE “GOING-OUT” STRATEGY In their overseas trips, top Chinese leaders have shown a particular focus on energy. China has signed billions of dollars in deals around the world for energy-purchasing and pipeline-building. It has forged closer ties with countries ranging from Australia to Saudi Arabia, from Venezuela to Iran. Beijing wants to have a strategic partnership with any country that can supply China with energy. Chinese companies have also stepped up their investments abroad to acquire direct control or partial rights in some of the world’s potential petroleum fields. They have opened the doors for multinational corporations to enter China’s domestic energy market. Shell, Exxon Mobil, and GE Energy are all doing business in China.

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STRATEGIC OIL STORAGE Beijing has also begun to implement a strategic oil reserve system. In view of the falling global energy prices, the timing now seems optimal. In early 2009, Zhang Guobao, director of the newly established National Energy Administration, advocated that, in order to seize this opportunity, China should increase the import of oil and gas resources and speed up its crude oil reserve construction. Phase I of China’s largest crude oil reserve has been completed and put into operation, with a total storage capacity of 8 million cubic metres, or 50 million barrels. PetroChina will build four such crude oil reserves in North China. These crude oil reserve projects will be completed by the end of 2009, forming a total storage capacity of 6 to 8 million cubic metres, or 38 to 50 million barrels. Beijing plans to start developing sites for the second phase of its strategic petroleum reserve between 2009–2011, with the aim of bringing its total stockpiling capacity to 44.6 million cubic metres (280.5 million barrels).103 Reuters reported that China was filling nearly 40 per cent of its third strategic reserve base of SPR Phase I in Huangdao in the last two months of 2008, with more expected for January 2009. State-owned Sinopec and PetroChina have also been stockpiling their commercial reserves (Reuters, 29 December 2008; 12 January 2009). But statistics released by Chinese customs show that in both November and December, Chinese imports of oil decreased substantially (Caijing, 15 January 2009). There is no official confirmation that the first phase of stockpiling has been completed, but as current regulation stands, it would still meet only less than thirty days of China’s need in case of an import cut-off. By contrast, the United States and most Western major economies have up to three months of stored reserves. There are also doubts about the wisdom of rushing to stockpile more oil. Zhou Dadi, former director-general of NDRC’s Energy Research Institute, argues that there is no consensus on what amount of SPR a country should hold. As the cost of storage is high and the utility is low, China may not need to have a huge SPR (Caijing, 26 December 2008). AFRICAN SOURCES Africa is an important example of how Beijing has pursued its “going out” strategy for securing its energy supply. China’s quest for energy and other resources has brought it to Africa with urgency in recent years. Chinese customs statistics show that from 2001 to 2007, China’s trade with Africa

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increased 681 per cent, only slightly slower than the growth of China’s trade with Latin America in the same period (687 per cent), but faster than China’s trade growth with the Middle East (546 per cent), ASEAN (487 per cent), the European Union (415 per cent), and North America (378 per cent).104 It is not surprising, therefore, that in such a broad economic context, Africa has become a major energy supplier to China in recent years. Back in 2003, both President Hu and Premier Wen visited several oil-producing African states with Chinese energy company executives; since then, China has become involved in an increasing number of energy deals on the continent that bear a number of unique characteristics. First, Beijing is willing to get into “troubled zones”, with bold investment and aid packages in exchange for energy. When Angola ended its twentyseven-year civil war in 2002, few foreign countries and firms were willing to invest in the country. China, on the other hand, committed US$3 billion in an oil-backed credit line to rebuild the country’s shattered infrastructure. Beijing also made Angola its largest foreign aid destination. Now, Angola is the second-largest oil producer after Nigeria in sub-Saharan Africa, producing 1.4 million barrels per day, with one-third of its oil exports — 13 per cent of total Chinese imports — going to China. In the first four months of this year, Angola was also the largest supplier of crude to the Chinese market after Saudi Arabia.105 Similar arrangements have also been made with Nigeria and other countries. Second, Chinese energy companies are committing large amounts of funding and labour for exploration and development rights in resourcerich countries. Sudan is the recipient of one of the earliest and largest overseas energy projects by China’s major energy companies. Chinese operations in Sudan include investment, development, pipeline-building, and a large number of Chinese labour deployments. Today, China has US$4 billion of investment in the country. The China National Petroleum Corporation (CNPC) has a 40 per cent controlling stake in Greater Nile Petroleum, which dominates Sudan’s oilfields. Last year, China purchased more than half of Sudan’s oil exports; earlier this year, the China National Offshore Oil Corporation (CNOOC) announced that it had bought a 45 per cent stake in a Nigerian oil-and-gas field for US$2.27 billion and also 35 per cent of an exploration licence in the Niger Delta for US$60 million. Chinese companies have made similar investments in Angola and other countries. Third, Chinese energy companies enter into joint ventures with national governments, state-controlled energy companies, or individual enterprises in order to establish a long-term local presence. It appears that the Chinese companies are often willing to outbid their competitors in major contracts

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awarded by African governments, because their concerns are not in shortterm returns but rather in strategic positioning for the future. Fourth, China does not take into consideration the particular concerns of the United States or other Western countries when selecting energy cooperation partners; it has a different set of standards on how to advance political reform and human rights in Africa. Most notoriously, China has been willing to engage in energy deals with the Sudanese Government despite the ongoing crisis in Darfur. Likewise, China has just reached an energy and mining deal worth US$1.3 billion with Zimbabwe. In exchange for building three coal-fired thermal power stations, Zimbabwe is likely to repay the Chinese investment with its rich deposits of platinum, gold, coal, nickel, and diamonds.106 Today, Africa supplies China with nearly a third of its oil imports. Beijing’s extensive engagement and its ascending status in Africa raises important questions on the nature of China’s involvement in the continent as well as about Beijing’s long-term objectives in the region. Critics charge that China has pursued mercantilist policies for pure economic benefit without regard to human rights or environmental concerns. Due to China’s support, they argue, the Sudanese Government has been able to continue its genocidal policy in the Darfur region, and the Mugabe regime has been able to survive and carry on its abuses of human rights in Zimbabwe. Officially, Beijing rejects the criticism with two arguments. The first is China’s trademark policy of non-interference in domestic affairs. As Premier Wen stated, “We believe that people in different regions and countries, including those in Africa, have their right and ability to handle their own issues”.107 The second argument is China’s insistence that its involvement in Africa is different from the colonialism of the past, and that an affluent China is now putting money back into the local African economy. As Chinese leaders like to say, it is a win-win situation. China’s quest for energy security has gone well beyond its borders.108 Beijing’s growing prominence and its competition for energy has alarmed both Washington and Tokyo and caused long-term, strategic adjustments in all the three capitals. Will China have to go to war, as described by the aforementioned book scenario, or will China pursue peaceful means in solving its energy crisis in the twenty-first century? This is a tremendously important question. At present, as one Chinese academic put it, China is anxious and proactive, but not paranoid. BEIJING’S RESPONSE TO FALLING OIL PRICES Oil and other commodity prices have been declining as the major economies of the world go into a recession, but the Chinese are now more convinced

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than ever that their country had very little to do with the sharp climb and subsequent nosedive of oil prices in the past five years. It took only five months for the price of oil to plummet from US$150 to under US$40. Chinese officials and energy company executives have maintained that China was a victim of increasing oil prices, and that a large amount of its US$1.95 trillion foreign reserves had to be used to import more than 40 per cent of its daily consumption. While China’s intensified domestic energy development programme and its “going-out” strategy were designed to cope with a prolonged period of high oil prices, the recent drop in the global energy market has presented new sets of challenges to Beijing’s energy security. NEW NATIONAL ENERGY ADMINISTRATION The booming Chinese economy was confronted with a severe energy shortage shortly after entering the twenty-first century. Yet the Energy Bureau, under the National Development and Reform Commission (NDRC), was understaffed and overwhelmed by day-to-day administrative tasks. With the worldwide rise of energy prices, there were growing calls for the Chinese leadership to strengthen its government institutions to deal with the mounting challenges in the energy sector. A major study published jointly by the World Bank and China’s State Council urged the establishment of the Ministry of Energy. However, the long-anticipated Ministry of Energy did not materialize among China’s overall “super ministries” reform programme last year. Although it has been argued that a strong and independent Energy Ministry is crucial to China’s long-term energy security, experts suggest that those with vested interests in the status quo have sufficient influence to thwart such a development. Among them are the top three Chinese national oil companies and various government bodies that currently manage the country’s various energy sectors. China’s new energy bureaucracy is named the National Energy Administration (NEA). Under the dual leadership of the State Council and the NDRC, NEA does not have full ministry status but is headed by the deputy minister of the NDRC, Zhang Guobao, who has a ministerial ranking. This energy management reshuffle not only expanded the administrative scope of the NEA by absorbing a number of functions from other agencies, but is also in the process of setting up nine director-general level bureaus that combined will have almost four times the size of the original Energy Bureau personnel under the NDRC. The new functions of the NEA have been redefined in important ways. First, it will take more responsibilities for research on key energy issues and

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macro-control at the policy level. Second, it will undertake day-to-day supporting duties assigned by the newly established National Energy Commission, a high-level strategic and coordinating body that replaced the National Energy Leadership Group. The latter was established in 2005 and was headed by Premier Wen Jiabao; it was in charge of formulating mid- and long-term national plans for China’s energy development. Third, the NEA will emphasize energy conservation, new energy technology, and clean energy development. Fourth, it will take over the management of China’s Strategic Oil Reserves, enhance international energy cooperation, and secure energy supply. Finally, it will participate in domestic energy price reform. DOMESTIC POLICY IMPLICATIONS The most significant sign of NEA’s assertiveness was the publication at the end of 2008 of a detailed account of China’s new strategic thinking on energy, authored by Zhang Guobao, head of the NEA. Euphemistically describing the current energy situation as “opportunities” within a “crisis” (wei zhong zhi ji), Zhang outlined the challenges and opportunities associated with the global financial crisis. Zhang identified the symptoms of the crisis as decreasing demand in the energy sector, for instance, for oil and coal; declining prices for oil, coal, and related products; and the deterioration of operating conditions for energy enterprises such as electricity generation, petrochemical, and coal plants. These new developments, as conditioned by the international financial crisis, demand new thinking and new adjustments. Zhang clearly sees opportunities as he elaborates on how China will proceed with a series of new energy policy measures. First, China’s energy strategy will be in concert with the broader US$600 billion stimulus package that Beijing has already announced. This means boosting domestic demand and further building up China’s energy infrastructure: three new nuclear power plants (US$17.5 billion), the second West-East gas pipeline of 5,300 kilometres, and related projects (US$44 billion), plus a range of coal, electricity-generating, and transmission projects. Second, China will speed up the restructuring of its energy mix, expanding large electricity-generating plants while reducing the number of small ones; focusing on thirteen large, national coal-mining areas with large-scale, modernized operations; increasing the share of electricity generated from nuclear power plants; putting more resources into renewable energy development; and encouraging the development of large energy enterprises.

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Third, China sees the recent lower energy and commodity prices as providing breathing space for the much-needed but complicated task of domestic product oil price reform. Despite the fluctuations in oil prices, the government seems committed to an “indirect and controlled connection” between domestic and international product oil prices. Finally, China is likely to take advantage of the low oil prices not only for importing more oil but also for filling up its strategic petroleum reserves (SPR), a task that was delayed by the persistence of high energy prices in recent years. Zhang indicated that China’s first phase of SPR, already in place, has a stockpile capacity of about 100 million barrels of oil, and the second phase now under construction will accommodate 170 million barrels (Huanqiu Shibao, 8 January 2009). The speculation that China’s move to stockpile more oil would drive up oil prices has not proven to be accurate. In fact, the U.S. Department of Energy also announced in early January the addition of 12 million barrels to its own SPR due to low oil prices, and so far the market has not responded with any clear trend. PIPELINES China is working hard on a number of pipeline projects that began in 2008. China and Russia reached an agreement last year on a Russian oil pipeline that will be built to China’s Northeast. But most notable is the beginning of construction in July 2008 of a natural gas pipeline starting at the border of Turkmenistan and Uzbekistan, running through Uzbekistan and Kazakhstan, and finally connecting with China’s second phase of its WestEast Pipeline in the Northwestern Xinjiang Autonomous Region. This ambitious project has gone through multi-year, multi-country negotiations, with large Chinese investment. The first component is the 1,818 kilometre, $7.3 billion pipeline outside China, in Uzbekistan and Kazakhstan; the second is a natural gas production-sharing agreement that will satisfy part of the pipeline’s capacity; and the third part is the second West-East gas pipeline inside China. This project is important to China’s overall energy strategy in many ways. First, it will increase the share of natural gas in China’s overall energy mix (currently at 2.8 per cent in contrast to the global average of 23 per cent). Second, it will reduce China’s growing dependency on Middle Eastern and African energy imports (currently at over 80 per cent). Third, the use of natural gas will decrease the reliance on coal, thus reducing the country’s overall greenhouse gas emissions.

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CAUGHT BY RISING HIGH PRICES What is less clear is how Chinese energy companies will readjust their acquisition activities in other parts of the world, given that they, like other companies, have been caught off guard by the sharp decrease in oil prices in recent months. The dilemma facing both Chinese energy policy-makers and large Chinese oil companies today is exemplified by Sinopec’s recent purchase of Tanganyika Oil, a Canadian company whose main assets are in Syrian oil blocks. When Sinopec International Petroleum Exploration and Production Corporation, through its wholly owned Mirror Lake Oil and Gas Company Limited, offered RMB $2.5 billion (US$2.1 billion) to acquire Tanganyika Oil last September, the price of oil was hovering around $90 per barrel. But by December, the price had dropped to about $40. Yet there was no revision of the deal and both the State Council and NDRC went ahead with the required government approval (Wall Street Journal [Chinese edition], 22 December 2008). Many see such a commitment, especially in the face of large financial losses, as a move for the sake of credibility. Others, among them the chairman of China’s state-owned Assets Supervision and Administration Commission, question the wisdom of putting so much money abroad without immediate benefit when there is so much need for cash at home in dealing with the domestic economic downturn (Caijing, 15 December 2008). Yet others, represented by China Petroleum and Chemical Industry Association, view the purchase as a healthy long-term investment, in light of the expectation that the oil price will go back up again in the near future. The latter camp seems to have the upper hand. Only days after the Tanganyika acquisition, Sinopec reportedly offered $130 million to Urals Energy, a London-listed, oil-producing company with a Russian focus. The price tag is said to be five times higher than the firm’s market value; the news generated a 100 per cent increase in the shares of Urals Energy (China Daily, 28 December 2008). Nevertheless, such debates demonstrate that China’s energy policy-makers are far from being a monolithic bloc. Chinese officials, business leaders, and their foreign counterparts are all exploring the implications of China’s “going-out” strategy at this moment of economic crisis and oil price uncertainty. CONCLUSIONS Domestically, the Chinese leadership well knows that its own legitimacy depends in large part on its ability to provide economic benefits to its people. With a huge population demanding jobs, continuous prosperity is seen as the

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primary key to social stability. Thus, China’s quest for energy security is about more than simple economics. It is about China’s overall development strategy; the direction of China’s modernization programme; about the kind of China that is emerging as a world power; and ultimately it is about whether China will be a responsible leader in protecting the global environment. China remains the second-largest emitter of carbon dioxide after the United States. Most of its cities and rivers are severely polluted. It burns three times as much energy as the global average and many times that of industrialized countries in producing every unit of GDP. To solve some of these problems, it is willing to spend US$150 billion on renewable and alternative energy in the next fifteen years. It is clearly in the interests of the United States, Japan, and other Western countries to establish a constructive relationship with Beijing in the energy area. This will help persuade the Chinese leadership to craft a more conservationist development strategy. Developed countries can pursue technical collaboration with China for energy conservation and efficiency, for using clean and renewable energy sources, for seeking safe and alternative energy, and for reducing oil dependency by jointly developing the next generation of energy sources. In the process, countries in Europe and North America that have a high rate of energy consumption per capita may also be forced to think seriously about changing their own energy-greedy habits and lifestyles. Large-scale, long-term cooperation between Western countries (especially Europe and the United States) and China in the energy and environmental sectors has profound strategic implications: It will benefit all parties economically; it will guide China’s energy policy in a more environmentally friendly direction; and it will modify Beijing’s foreign policy along a more peaceful and less confrontational path, thus serving the comprehensive security interests of the United States, the European Union, and the rest of the world. Instead of blaming Beijing for its energy demands or containing China as an energy threat, the West should pursue a cooperative approach in solving the energy security concerns that are common to China and the West, thus making easier the task of solving tough issues such as the ongoing Iranian and North Korean nuclear crises. NOTES 1 Jiefang Taiwan (Liberating Taiwan), author(s) unknown (Beijing: The Chinese Military Publishing House, 2005). 2 Another popular book, entitled Shiyou yanhou baoweizhan [The Battle in Protecting Key Oil Routes], depicts a series of battles in which the Chinese navy

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defeats the U.S. and Japanese carrier groups near the Straits of Malacca. It is available at . 3 For recent studies of China’s energy security, see International Energy Agency, China’s Worldwide Quest for Energy Security (OECD/IEA, 2000); China’s Quest for Energy Security, by Erica Strecker Downs (RAND Corporation, 2000 Erica Strecker Downs,; and C.P. Andrews-Speed, Energy Policy and Regulation in the People’s Republic of China (The Hague: Kluwer Law International, 2004). 4 The article is less focused on theoretical explorations, due primarily to the fact that the readers of this book are more interested in policy implications of the given subject. 5 China became a net oil importer in 1993, and it overtook Japan to become the world’s second-largest oil consumer in 2003. The Washington Times, 6 September 2004 . 6 Forecasts and Analysis of Energy Data, Energy Information Administration (EIA), available at . 7 IEA estimated that in 2009, demand in the United States would fall by 2.8 per cent to an average of 19 million b.p.d. In 2008, its crude oil demand fell 5.6 per cent from 2007 levels. See “Chinese Oil Demand to Grow by just 90,000 b/d in 2009: IEA”, Platts Commodity News, 16 January 2009. 8 EIA, “Short-Term Energy Outlook”, released in May 2008 . 9 Data is based on a worldwide average gravity: 1 metric tonne = 7.33 barrels. A barrel is equal to 159 litres (42 gallons). The chart is formulated based on the 2007 statistics. 10 “China’s Energy Conditions and Policies,” Information Office of the State Council of the People’s Republic of China, December 2007. 11 Ibid. 12 “Chinese Oil Demand to Grow by just 90,000 b/d in 2009: IEA”. 13 “China’s Energy Demand to Shrink in 2009 — NDRC”, Interfax, 26 February 2009. 14 “Chinese Oil Demand to Grow by just 90,000 b/d in 2009: IEA”. 15 For an earlier, comprehensive review of China’s energy situation in the regional context, see “China’s Quest for Energy and Northeast Asian Security”, Canada Asia Commentary, No. 30, August 2003, Asia Pacific Foundation of Canada . 16 BP Statistical Review of World Energy, June 2008. 17 Simon Hall and Steven Yang, “China 2008 Crude Oil Imports + 9.6% — Source”, Dow Jones Chinese Financial Wire, 10 January 2009; “China’s Import of Crude Oil up 12.3 pct in 2007”, Asia in Focus, 23 January 2008. 18 “IEA’s China Energy Forecasts to 2030”, Reuters, 7 November 2007. 19 China quadrupled its economy from late 1970s to the mid-1990s, largely using domestically produced energy supplies. 20 See “Asia’s Great Oil Hunt”, Business Week, 15 November 2004.

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21 “China’s Energy Efficiency the Target of Three New World Bank Projects”, M2 Presswire, 28 May 2008. 22 Zhongguo shichang [Chinese Market], 7 June 2005 . 23 People’s Daily (overseas edition), 14 September 2005. 24 The Beijing Youth Daily, 4 July 2005. 25 The People’s Daily website, 9 April 2004 . 26 “China Enslaved by Rising Demand for Coal”, Agence France Presse, 13 December 2006. 27 “BP Calls for Energy Efficiency in China”, China Daily, 9 July 2008. 28 Zhongguo shichang [Chinese Market], 7 June 2005, op. cit. 29 “China to Implementing Energy-Saving Law in April”, Reuters, 12 December 2007; Clarissa Oon, “China ‘Must Do more to Rein in Energy Use’ ”, Straits Times, 30 November 2007; Ian Ransom, “China Says Makes Progress in Energy Efficiency”, AFX, 12 December 2008. 30 “China’s 2008 Energy Consumption Per Unit of GDP Down 4.21%”, Dow Jones News, 23 January 2009. 31 New China News Agency, 16 October 2005. 32 David Stanway, “China’s Role as Factory to the World Threatened by Energy Problems — NDRC”, Xinhua News Agency, 25 October 2007. 33 Author’s interview in Beijing, Spring 2005. 34 The Washington Times, 6 September 2004 . 35 Stanway, “China’s Role”. 36 Ibid. 37 “China’s Energy Balance under Heavier Pressure, Official”, Xinhua News Agency, 2 June 2008. 38 For a good review, see Christian Constantin, “China’s Conception of Energy Security: Sources and International Impacts”, Centre of International Relations, Liu Institute for Global Issues, Working Paper No. 43, March 2005, University of British Columbia. 39 There is considerable disagreement among Chinese policy-makers and academics on the extent to which China should pursue its strategic reserve buildup, as acknowledged by Zhang Guobao, Deputy Commissioner of the National Development and Reform Commission. See the China Daily report . 40 Author’s interviews in China from late 2004 to early 2006. See also, Anniwa’er Amuti et al., eds., Shiyou yu guojia anquan [Oil and National Security] (Ulumuchi: Xinjiang renmin chubanshe, 2003); Zhou Huayou et al., Nanhai yu zhongguo de nengyuan anquan yantaohui lunwenji [Proceedings of the Conference on South China Sea and China’s Energy Security] (Hainan: China South China Sea Research Institute, 2004).

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41 For a comprehensive study of China’s energy sustainability in the future, see the joint research report by China’s Energy Research Institute of the National Development and Reform Commission and a number of foreign energy institutions, Zhongguo kechixu nengyuan qingjing [China’s Sustainable Energy Scenarios in 2020], edited by Zhou Dadi et al. (Beijing: Zhongguo huajing chubanshe, 2003). 42 “China’s Road to Energy Security”, Xinhua News Agency, 6 October 2008. 43 Mark Hibbs, “China’s New Energy Bureau Raises Nuclear Power Target”, Nucleonics Week, 27 March 2008. 44 See Figure 5 for comparisons. 45 The original document has not been released, but detailed reports on its contents are available. For the eight major priorities for energy security in the next fifteen years identified by the National Development and Reform Commission, see Jingji cankao bao [The Economic Reference Daily], 14 July 2004. 46 Xinhua, 27 December 2005. 47 Anna Howell, “China’s New Market”, International Financial Law Review, 1 March 2008. 48 “China Offers Opportunities in New Energy Investment,” Hong Kong Commercial Daily News, 25 June 2008. 49 Yang Liu, “Update of Renewable Energy Development in China”, Xinhua News Agency, 21 May 2007. 50 “Pushing towards Sustainable Energy”, Petroleum Review, 30 September 2007. 51 Matthias Voss and Matthew Bisley, “Stimulus Package Boosts Green Efforts”, South China Morning Post, 5 January 2009. 52 Ibid. 53 “China to Implementing Energy-Saving Law in April”, Reuters, 12 December 2007. 54 Voss and Bisley, “Stimulus Package”. 55 Ibid. 56 “China’s Energy Law Likely to Enter Deliberation Procedure of State Council in 2009”, Xinhua News Agency, 5 February 2009. 57 Bruce Schulberg, “Draft Energy Law Points to Reform”, South China Morning Post, 31 March 2008. 58 “China’s Energy Law Likely to Enter Deliberation Procedure of State Council in 2009”, Xinhua News Agency, 5 February 2009. 59 “Effort to Enact New Energy Law in China Stalls amid Government Reorganization”, Renewable Energy Report, 15 September 2008. 60 Schulberg, “Draft Energy Law Points to Reform”. 61 “Framework of ‘Energy Law’ Takes Shape”, Xinhua News Agency, 12 October 2007. 62 Tina Zhang, “PRC Law on Encouraging the ‘Circular Economy’ ”, Asian Counsel, March 2009. 63 “China’s Road to Energy Security”, Xinhua News Agency, 6 October 2008.

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64 “China Issues New Five-Year Energy Plan to 2010”, Asia Pulse, 12 April 2007. 65 “China to Launch Pre-Stage Study for 5Y (2011–2015) Plan on Energy Construction”, Xinhua News Agency, 5 February 2009. 66 “China Unveils Renewable Energy Development Plan for 2006–2010”, Xinhua News Agency, 18 March 2008. 67 “China’s Energy Conditions and Policies”, Xinhua News Agency, 27 December 2007. 68 Yang Liu, “Update of Renewable Energy Development in China”. 69 Zhongguo gongye bao [China Industry News], 14 September 2005. In 2008, China exported 40.45 million tonnes of coal. Note, however, that China imported 40.4 million tonnes of coal during the same period, making China’s net coal export figure 5.03 million tonnes. This 2008 data is from “China’s Relatively Tight Energy Supply Tends to Loose, NDRC”, Xinhua News Agency, 6 February 2009. 70 “Energy Demand May Ease by 2018 in China”, Asia Pulse, 16 September 2008. 71 Yang Jianxiang, “Feature: China Looks to Energy Independence”, Xinhua News Agency, 8 October 2007. 72 “Chinese Energy Official Attributes Surging Oil Price to Speculation”, Xinhua News Agency, 7 June 2008. 73 “Chinese Minister on Current Energy Situation, Five-Year Energy Development Plan”, Xinhua News Agency, 8 July 2006. 74 See Li Ruixin, “The United States ‘hijacks’ international oil prices”, Guoji xianqu daobao [International Tribune], 5 September 2005. 75 For a more detailed review of China’s nuclear industry, see Wenran Jiang, “CCP celebrates 50 years of nuclear achievements”, China Brief 5, no. 23 (8 November 2005). 76 “China’s Road to Energy Security”. 77 “China to Accelerate Localization of Nuclear Power Equipment”, Xinhua News Agency, 20 February 2009. 78 Li Zheng, “Polygeneration Based on Coal Classification: A Strategic Technology for China”, presented at the 3rd US-China Clean Energy Workshop, 18 October 2004 (accessed 18 March 2005). 79 Denis McMahon, “China Energy Watch: Energy Search Puts Uranium Into Play”, Dow Jones, 15 September 2005. 80 “China races to expand nuclear power industry”, AP, 14 July 2005. 81 The PRC State Council Information Office, China New Opportunity — Energy, “Comment on Hot Energy Problems of China”, Beijing, May 2005, pp. 17–19. 82 The U.S. Government under President Bush has been doing the sales job. See Pittsburgh Post-Gazette, 19 November 2005. 83 See “Super-efficient nuke reactor set for trial”, Xinhuanet, 5 October 2005. 84 Nuclear Power Generation in the APEC Region 2004 (Tokyo: Asia Pacific Energy Research Centre, 2004), p. 75.

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85 “China Eyes Independent Nuclear Power Projects”, China Daily, 19 February 2009. 86 “China Doubles Nuclear Power Target for 2020”, Interfax, 31 March 2009. 87 Stephen Chen, “Nuclear Needs Drive Quest for Overseas Uranium Rights”, South China Morning Post, 31 March 2009. 88 Yang Jianxiang, “Feature: China Looks to Energy Independence”. 89 “China Offers Opportunities in New Energy Investment”, Hong Kong Commercial Daily News, 25 June 2008. 90 “China Minister on Current Energy Situation, Five-Year Energy Development Plan”. 91 “China’s Road to Energy Security”. 92 “China to See Greater Development of Renewable Energy”, China Daily, 5 February 2006. 93 “China’s Solar Energy Industry Provided with Huge Opportunities”, Xinhua News Agency, 17 September 2007. 94 “China’s Road to Energy Security”. 95 Yang Jianxiang, “Feature: China Looks to Energy Independence”. 96 “China’s Road to Energy Security”. 97 Caijing 140, 22 August 2005. 98 For the entire document in Chinese see . 99 Report from Xinhuanet, 25 November 2004 . 100 See . 101 “China Budgets 14.8 bln yuan for 2008 Energy-Saving Projects”, Xinhua News Agency, 5 September 2008. 102 Andrew Torchia, “China Urges More Power Conservation amid Shortage”, Reuters, 2 August 2008. 103 “China Should Increase Oil and Gas Import on Falling Price, Official”, Xinhua News Agency, 5 January 2009. 104 Author’s calculations based on data from Chinese Customs. 105 AFP, 20 June 2006. 106 The Guardian, 16 June. 107 South China Morning Post, 19 June 2006. 108 For China’s energy relations with Latin America, see Wenran Jiang, “China’s Energy Engagement with Latin America”, China Brief 6, no. 16 (2 August 2006).

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8

ENERGY AND GEOPOLITICS IN THE SOUTH CHINA SEA Michael Richardson

ABSTRACT Despite China’s claim that it wants close and cordial relations with the ASEAN states, the steady increase in its military capabilities and its capacity to enforce its claims in the South China Sea have raised concerns among the ASEAN countries and other powers. The South China Sea is of strategic maritime importance and has potential oil and gas resources. The Spratlys are claimed by six countries and have been the source of disputes. China’s ninedotted line designing its claimed boundary in the South China Sea raises a number of problems. In short, the South China Sea could prove to be a cockpit for disputes over energy resources. THE SETTING China has declared that it wants close, cordial, and cooperative relations with the ten ASEAN states.1 Such cooperation has gained impressive momentum since the end, simultaneously, of the Cold War and of Chinese support for communist-led insurgencies in the region. However, China’s military power is growing steadily; at the same time, it claims ownership of the Spratlys and Paracel Islands, together with their surrounding waters and

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resources in the South China Sea, one of the world’s largest semi-enclosed seas (see Figure 8.1). These claims overlap in a substantial way with those of four ASEAN countries — Vietnam, the Philippines, Brunei, and Malaysia, as well as Taiwan. China is expected to gain the military capability to enforce its claims in the South China Sea in the next few years. This creates uncertainty over the future of China’s relations, not only with ASEAN members but also with ASEAN’s main dialogue partners, including the United States, Japan, India, South Korea, and Australia. These countries have important links with China. They also have significant strategic and commercial interests in the South China Sea and in ASEAN.2 At three million square kilometres, the South China Sea is the maritime heart of Southeast Asia. It is two-thirds the size of the combined ASEAN land territory. Most Southeast Asian countries have coastlines overlooking or close to the South China Sea. Some are wary about having to share a common maritime boundary with a large and increasingly powerful China. Meanwhile, oil and gas reserves under the seabed of the South China Sea are being discovered and exploited further and further from shore, as advances in drilling and production technology enable coastal states and energy companies to tap hydrocarbons in ever deeper waters (see Figure 8.2). MARITIME DISPUTES The Spratlys form a widely scattered archipelago of more than 100 small islands, coral cays, and reefs in the South China Sea (see Figures 8.4 and 8.5). The sea lanes running through it connect the Straits of Malacca and Singapore with China, Japan, and South Korea, the main oil-importing industrial economies in Northeast Asia. These sea lanes carry a large part of the world’s maritime trade and are frequently used by leading navies, especially those of the United States and, increasingly, China. Located about two-thirds of the way between southern Vietnam and the southern Philippines, the Spratly archipelago covers an area of nearly 410,000 square kilometres in the central South China Sea.3 The seabed of the South China Sea consists of about one million square kilometres of continental shelf less than 200 metres deep, and about two million square kilometres of continental shelf deeper than 200 metres. In some areas, the water is over 5,000 metres in depth. This deeper basin is punctured by the outcrops of the Spratly Islands. Much of this zone is now within reach of deepwater and ultra-deepwater drilling vessels. Beijing’s claims to the Spratly Islands in the South China Sea are disputed by Vietnam, the Philippines, and Malaysia (see Figure 8.3). Brunei in 1984

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Figure 8.1 Southeast Asia

Source: US Central Intelligence Agency, The World Factbook 2008 online.

established an exclusive fishing zone that encompasses Louisa Reef in the southern Spratly Islands but has not publicly claimed the reef. About fortyfive of the islands are occupied by relatively small numbers of military personnel from China, Vietnam, the Philippines, Malaysia, and Taiwan.

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Figure 8.2 South China Sea

Source: CIA Maps and Publications for the public.

Although the total land area of the Spratlys is less than 5 square kilometres, this important piece of real estate might be used to establish naval patrol and surveillance bases. It could also be used to bolster claims to fisheries and offshore oil and gas resources in the South China Sea. China, Taiwan, and Vietnam claim all of the Spratlys, their surrounding waters, and any resources they may contain. The Philippines and Malaysia assert sovereignty over smaller portions of the Spratlys closest to their shores (see Figure 8.3). Vietnamese Claims Vietnam asserts sovereignty over the Paracel Islands (see Figure 8.4) as well as the Spratlys. The Paracels were seized by China from South Vietnamese forces in 1974 during the closing stages of the Vietnam War, when Hanoi and

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Figure 8.3 Competing Claims in the South China Sea

Source: .

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Figure 8.4 South China Sea Islands

Source: Wikipedia Commons.

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Beijing were supposed to be allies. Chinese forces have since reinforced their garrison on the Paracels and have extended an airport runway there, thus strengthening their grip on a strategic outpost southeast of Hainan Island. There are 130 islands and rock outcrops in the Paracels group.4 Vietnam asserts that both the Spratlys and the Paracels are part of its national territory and have historically belonged to Vietnam. In the 1930s, France had annexed the Spratlys and Paracels on behalf of its colony. Hanoi treats the Spratlys as an offshore district of the province of Khanh Hoa. Both China and Vietnam protested in February 2009 after the Philippines passed new legislation spelling out its claims to several of the Spratly Islands and to Scarborough Shoal. China’s U-shaped Claim China’s claim appears to be far wider than that of Vietnam, encompassing much of the South China Sea. The precise limits are not clear from the broken, U-shaped line drawn on official Chinese maps (see Figure 8.4 for the approximate location of this line). Still, this claim, if acknowledged by ASEAN countries or enforced by Beijing, would bring China right into the maritime heart of Southeast Asia. It would make China the next-door neighbour of Vietnam, the Philippines, Malaysia, Brunei, and Indonesia (through its Natuna Islands). Moreover, this U-shaped line seems to coincide with the location of the so-called “first island chain”, which extends from the southern tip of Japan through Okinawa and east of Taiwan to the northern Philippines and around the perimeter of the South China Sea (see Figure 8.6). Chinese military theorists say this first island chain forms a geographic basis for China’s maritime defensive perimeter. It is the inner of two such barriers, the second and outer of which extends southeast from Japan to and beyond the U.S. island territory of Guam.5 CHINA’S GROWING MILITARY POWER Taiwan maintains a claim similar to that of Beijing. China, Taiwan, and Vietnam have the most extensive claims in the South China Sea. But it is important to note that neither Vietnam nor Taiwan have the military might to enforce their claims. Only China has or will have that power, if its programme of military modernization continues at or close to the pace of recent years. China’s annual military spending has grown fourfold or more over the last decade, rising from 0.9 per cent of GDP to at least 1.5 per cent, or US$58

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Figure 8.5 The Spratly Islands

Source: CIA World Factbook 2008 online.

billion. By some assessments, China’s real military spending may be several times the published figure, when off-budget defence items are included. Even so, China’s declared spending on military modernization overtook that of India in 2002 and of Japan in 2008. While Chinese land forces are being upgraded, maritime and air forces (the instruments of power projection) are modernizing faster. Meanwhile, defence budgets in Southeast Asia, including

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Source: U.S. Department of Defense, Annual Report to Congress: Military Power of the People’s Republic of China 2007.

Figure 8.6 Military Power of the People’s Republic of China 2007

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those of the Spratly claimants, are small by comparison with those of China and other countries in Asia.6 China’s navy has around 860 vessels. Some are old, small, and able only to operate in “brown water”. But the navy has “blue water” ambitions. It is extending its reach and capability to protect China’s offshore interests, including those in the South China Sea and beyond. Since 2000, China has built at least sixty warships. According to the U.S. Department of Defence, China already has the largest force of principal combatants, submarines, and amphibious warfare ships in Asia. Of the Chinese navy’s 232 vessels, 168 are in China’s East and South Sea Fleets.7 In November 2008, a Chinese military spokesperson indicated that the next major addition to the navy will be several domestically built aircraft carriers, though analysts doubt that the first will be in service before 2015.8 China’s ability and will to use its naval power to protect trade and other interests far from its shores was underscored in December 2008 by Beijing’s decision to send two advanced warships and a supply vessel from its naval base near Sanya, on Hainan Island, to protect Chinese ships from pirate attacks in the Red Sea. CHINA’S MILITARY-INDUSTRIAL COMPLEX China’s military-industrial complex, the largest in Asia, is also improving in both the quantity and quality of production. China is one of the few countries in the world to produce a full range of military equipment, from small arms to surface ships, submarines, and nuclear weapons. Since 2000, China has been producing several new types of weapons that are highly competitive in terms of quality and capability, among them the Song-class diesel-electric submarines and the Type-052C destroyer. One consequence of this growing self-sufficiency in arms acquisition could be the rise of a more technologically advanced China that would increasingly challenge the United States for regional, even global, predominance. Another consequence of a militarily self-confident China could be a more assertive policy in the Taiwan Strait, the South China Sea, and the Pacific and Indian Oceans — this could upset regional security.9 Still, the U.S. intelligence community estimates that China will take until the end of this decade or longer to produce a modern force capable of defeating a moderately sized adversary, and that it will not be able to project and sustain even small military units far beyond China before 2015.10 If this assessment is correct, there is still time to engage China more fully in a regional relations system based on international law, non-use of force,

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and negotiated settlement of disputes. Indeed, since 1998 China has settled at least eleven territorial disputes with six neighbours, among them Russia, Vietnam, and Japan. The most recent of such settlements was the land border delimitation treaty with Vietnam in December 2008.11 China’s policy since 1975 has been to “shelve” the conflicting sovereignty claims to land features and waters in the South China Sea and, in the meantime, to undertake cooperative activities in the area.12 ASEAN formalized a similar approach to the peaceful resolution of these maritime disputes when it issued the Declaration on the South China Sea in 1992.13 However, the plurilateral nature of the claims and the sensitive national interests at stake mean the search for solutions is complex and difficult. Moreover, China calls for joint development only in the areas where Beijing has overlapping claims with Southeast Asian countries, where these countries have asserted legal jurisdiction and established authority, such as in the Spratlys or on the continental shelf southeast of Vietnam. China refuses to countenance joint development in the Paracels, which are already under Chinese control. Some Vietnamese scholars refer to this as the “yours is ours, ours is mine” principle. IMPLICATIONS OF CHINA’S MARITIME CLAIMS China’s U-shaped claim in the South China Sea is the source of considerable controversy, even among Chinese analysts. The “nine-dotted line”, so called because it is composed of nine dashes, has been on official Chinese maps dating back to 1947, when the Kuomintang ruled China. After 1949, the new government of the People’s Republic of China adopted the same U-shaped claim in the South China Sea. Chinese maps published since 1953 have displayed the nine-dotted line.14 The dotted line encloses the main islands, atolls, and rock outcrops of the South China Sea: the Pratas Islands in the far north, the Macclesfield Bank, the Paracels and Spratlys (see Figure 8.4). In its full extent, the Chinese claim covers about 80 per cent of the South China Sea. China asserts sovereignty over all the islands and their adjacent waters, based on prior discovery, occupation, and use stretching back through history. But does the contemporary Chinese claim mean that Beijing is asserting sovereignty over all the waters within the dotted line? Does it mean that Beijing regards them as internal waters or territorial seas, and that the line is viewed as China’s maritime boundary in the area, even though it is not marked by any coordinates? The PRC’s 1998 law on its Exclusive Economic Zone and Continental Shelf says that the legislation will not affect the state’s “claim of historic

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rights”. This suggests that China may maintain its claim to historic rights and waters within the dotted line of the South China Sea. However, it may also indicate that China no longer regards waters within the line as historic waters, because historic waters can be treated only as internal waters or territorial seas. They cannot be included in exclusive economic zones and continental shelves, as defined by the 1982 United Nations Convention on the Law of the Sea (UNCLOS), which China ratified in 1996.15 Hasjim Djalal, former president of the International Seabed Authority and Indonesia’s former ambassador-at-large for the Law of the Sea and Maritime Affairs, says that China’s claim, at least historically, is presumed to be limited to the islands, rocks, and perhaps the reefs, but not the whole sea area enclosed by the nine-dotted line, which has no coordinates. He argues that it is inconceivable for China to have claimed the entire South China Sea in 1947, when general international law still recognized only a three-mile territorial sea limit. A careful reading of recent Chinese law strengthens this assumption, though some Chinese writing seems to imply that Beijing also claims the “adjacent sea” of the islands and rocks within the dotted line. However, “adjacent sea” is not clearly defined and the concept does not occur in UNCLOS, which China has ratified. UNCLOS deals only with internal waters, archipelagic waters, territorial seas, contiguous zones, exclusive economic zones, continental shelves, and high seas. Moreover, UNCLOS stipulates that measurements of these waters or zones should start from base points on land, or be formed from appropriate baselines connecting legitimate points. Such lines should not be arbitrarily drawn.16 TUG-OF-WAR AT SEA Why does the Chinese Government not clarify the situation? If Beijing abandoned its U-shaped, dotted line claim to a vast area of the South China Sea, its Exclusive Economic Zone (EEZ) would extend to a maximum 200 nautical miles from southern points of Hainan Island. If China’s jurisdiction over the Paracels were recognized, its EEZ would stretch further south. UNCLOS allows a piece of land at sea to be defined as an island on two conditions. First, if it is “a naturally formed area of land … which is above water at high tide”. Second, if it is capable of sustaining human habitation or economic life. Under international law, only natural islands can generate a legitimate EEZ or a continental shelf claim. Of the Spratly Islands, perhaps only Itu Aba would meet the definition of a natural island, and it is occupied by Taiwan. Conceding this issue would significantly reduce the extent of China’s territorial and maritime claims in the South China Sea.

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Retaining the U-shaped claim may also be intended by Beijing as a strategy for retaining a negotiating card and keeping rival claimants in a state of uncertainty. There have been several armed clashes and standoffs among contending claimants to the Spratlys in the past decades. The main encounters have involved China and Vietnam. In 1988, they fought a brief naval battle near one of the Spratly reefs. There have been numerous incidents since then, raising nationalist sentiment on both sides. In December 2007, China announced that the Xisha (Paracel) Islands department in Hainan Province would be elevated to a country-level office named “Sansha City”, which would have administrative jurisdiction over the Xisha and Nansha (Spratly) island groups and the submerged reefs of the Macclesfield Bank (see Figure 8.4). A PRC spokesperson said that China had “indisputable sovereignty” and effective jurisdiction over the islands of the South China Sea “and the adjacent waterways”. In reaction to China’s declaration, Vietnamese protesters demonstrated outside the Chinese embassy in Hanoi.17 A Vietnamese foreign ministry spokesman said that Hanoi objected to China’s move, as the three island groups specified included Vietnam’s Hoang Sa (Paracel) and Truong Sa (Spratly) archipelagos. “This action is a violation of Vietnam’s sovereignty, (and is) not in line with the common perception of high-ranking leaders of the two countries or beneficial to the bilateral negotiation process”, the spokesman added.18 In the Spratlys, all the claimants except Brunei have stationed armed garrisons on the tiny dots of land they claim. In some cases, these garrisons have been reinforced. Vietnam reportedly occupies 21 of the Spratlys, while the Philippines occupies 8, China 7, Malaysia 3, and Taiwan 1.19 The code of conduct for the South China Sea, signed by Beijing and ASEAN in 2002, is voluntary.20 Meanwhile, a joint seismic survey of hydrocarbon resources, agreed to by the national oil companies of China, Vietnam, and the Philippines in 2005, lapsed in July 2008 and may not be renewed. Even when it was operational, the tripartite seismic survey did not include other Spratly Island claimants. Moreover, it covered only a small part of the contested sea area. SINO-VIETNAMESE RAPPROCHEMENT? In October 2008, China and Vietnam outlined new steps to resolve their long-running territorial disputes in the South China Sea, in an effort to avert further conflict and improve their relations. Although both countries are ruled by Communist parties and share extensive land and sea borders,

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they have had a tense relationship. They have now evidently decided to strengthen bilateral party, trade, and investment ties to offset the wider economic downturn. These measures for improving relations emerged from the visit to China of Vietnam’s prime minister, Nguyen Tan Dung, during 20–25 October 2008. Mr Dung held talks with his Chinese counterpart, Prime Minister Wen Jiabao, and Chinese President Hu Jintao. A joint statement issued at the end of the visit said the two sides believed that “to deepen the bilateral all-round strategic cooperation partnership conforms to the fundamental interests of both countries, ruling parties and peoples”.21 Under the plan, Chinese and Vietnamese companies were encouraged to form joint ventures and large-scale projects in infrastructure construction, chemicals, transport, and electricity supply. The aim of these projects is to build bonds between the neighbouring provinces of southern China and northern Vietnam. The new transport connections would be part of a growing network of highways linking China with Southeast Asia. In an attempt to boost bilateral trade to the targeted US$25 billion by 2010 from $16 billion in 2007, there will be a joint crackdown on cross-border smuggling, counterfeiting, and swindling. The two sides also agreed to promote investment in two “international economic corridors”. One links their land border towns while the other links China’s Guangxi, Guangdong, and Hainan Island provinces as well as Hong Kong and Macao with ten coastal areas of Vietnam.22 Whether this promised increase in two-way trade and investment materializes remains to be seen. But the proposed expansion of economic ties will also depend on progress in managing and eventually settling the festering territorial disputes between the two countries. The demarcation of their 1,350-kilometre land border was completed by the end of 2008. Intriguingly, the joint statement included an agreement to undertake joint surveys in disputed waters outside the mouth of Beibu Bay (the Gulf of Tonkin) at an early date and to exploit the demarcated zones for their fisheries and oil and gas potential.23 Vietnamese analysts say that the “disputed waters” refer to a small area that immediately connects to the mouth of the Gulf of Tonkin and not to the wider South China Sea dispute. SOUTH CHINA SEA STAKES The most contentious and difficult China-Vietnam territorial issues are the conflicting claims to the Paracel and Spratly Islands. In their October 2008 joint statement, China and Vietnam agreed to find a “basic and lasting”,

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mutually acceptable solution to the South China Sea issue. No detail was offered on how such a resolution might be reached. But, significantly, they said it would be in accordance with the UNCLOS treaty. Meanwhile, both sides would observe the ASEAN-China code of conduct in the South China Sea and refrain from any action that might complicate or escalate disputes. They would also explore avenues for joint petroleum exploration. On the principle of starting with the easier steps, they agreed to collaborate on oceanic research, environmental protection, weather forecasting, and information exchanges between the two armed forces.24 A strategic cooperation pact between the state-run China National Offshore Oil Corporation (CNOOC) and its Vietnamese counterpart, PetroVietnam, was also reported to have been signed during Mr Dung’s visit. Together, these accords would be important measures for building mutual restraint and confidence, provided their terms are strictly and consistently observed by both sides — something that has not been a feature of past agreements on the South China Sea between China and Vietnam. CHANGED CIRCUMSTANCES However, several factors may be different this time, apart from the desire for bilateral economic ties that might cushion both countries from global trouble. Beijing may want to defuse widespread concern in Asia over its growing military power and the fear that its military muscle will be used to enforce numerous territorial and maritime boundary claims that stretch from Japan through Southeast Asia to India. In this context, the South China Sea is a sensitive touchstone. In October 2008, not long before Vietnamese Prime Minister Dung arrived in Beijing, China banned its fishing fleet, one of the largest in the world, from operating in waters contested by neighbouring countries. Fishing disputes in recent years have become an irritant in relations with Vietnam, North and South Korea, Japan, the Philippines, and Indonesia. In the South China Sea, Chinese fishermen have been detained by the Philippines, for allegedly fishing in waters claimed by Manila. Similar incidents have been reported in Vietnam. China’s cabinet, the State Council, issued a directive for the coast guard and fishery authorities to stop Chinese fishing vessels from entering “key sensitive maritime areas”.25 Another new factor is the steep fall in oil and natural gas prices since mid2008. This has removed some incentives for petroleum companies to explore in ever deeper waters of the South China Sea. Deep-sea drilling is very expensive. But when the price of oil surged and peaked at just over $147 a barrel in July 2008, the expense seemed fully warranted.

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Around that time, China told the U.S.-based ExxonMobil to cancel planned oil exploration ventures with PetroVietnam off the Vietnamese coast, implying that if it did not do so, it could be barred from operating in China. A Chinese foreign ministry spokesman said China opposed any act “violating China’s territorial sovereignty, sovereignty rights or administrative rights in the South China Sea”.26 Following a similar warning from Beijing, BP halted plans in 2007 to carry out exploration work with PetroVietnam off southern Vietnam, citing territorial tensions. This was also in an exploration block approved by Vietnam but contested by China, about 370 kilometres offshore. With the price of oil falling below $40 a barrel by February 2009, as slowing global growth crimped demand, the race for offshore hydrocarbon resources in the South China Sea had lost some impetus. This has provided a political respite, allowing China and Vietnam to pursue more conciliatory measures. ENERGY RESOURCES COCKPIT What could upset the fragile equilibrium in the South China Sea and resurrect emotive issues of national sovereignty, prestige, and pride? The biggest risk is that economic recovery, rapid growth, and a resurgence of strong demand for energy in Asia will again push China and its Southeast Asian neighbours into contention. China’s oil and gas production has been failing to keep pace with its surging consumption. The leadership is worried that existing reserves will not last much longer. These concerns are shared by other petroleum producers such as Vietnam, Malaysia, and Indonesia. These countries are currently net exporters of oil or gas or both, but all can see the time approaching when their energy reserves will be insufficient to meet domestic demand. This is both an energy security and an economic growth imperative, because oil and gas are vital for transport and industry. Meanwhile, the Philippines, a net importer of both oil and gas, also urgently needs to find more fossil fuels and regards its offshore zones in the South China Sea as a key to greater self-sufficiency in the future.27 For the Chinese Government, energy policy has become an arm of foreign policy. From being a net exporter of oil in 1993, China today relies on foreign supplies for about half the oil it uses. It is also becoming a major gas importer. For reasons of energy security, China has placed a high priority on getting as much of its future oil and gas as it can from within its own land territory, from offshore zones, or as close to home as possible, in areas such as Russia and Central Asia. At present, around 75 per cent of China’s oil imports

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come from the politically volatile areas of the Middle East and Africa.28 These imports have to be shipped to China through distant sea lanes, which the Chinese armed forces do not yet have the means to protect. These maritime arteries of energy supply could be cut off in a crisis. NOCs VERSUS IOCs Countries are not the only entities under pressure to increase their oil and gas reserves at a time of perceived looming scarcity and high prices. Major energy companies also face this pressure, whether they are state-controlled or majorityowned by private sector interests. National oil companies (NOCs) have now emerged to challenge the dominance of international oil companies (IOCs). The NOCs are partially or wholly state-owned firms through which governments control access to reserves of oil and gas and retain profits from production.29 Today, these national champions in Asia and other parts of the world control much of the world’s oil and gas. Thirty years ago, the big international oil companies lorded over 75 per cent of global reserves and 80 per cent of output. Now they control about 6 per cent of oil reserves and 25 per cent of production.30 Western energy giants such as ExxonMobil and BP are struggling to secure shares of new finds of oil and gas to boost their falling reserves. This is the only way for investors to measure the health and attractiveness of integrated energy companies that explore for, produce, process and market oil, gas, and related products.31 Meanwhile, leading international petroleum service firms are helping the national oil companies to break their dependence on Western energy majors, by providing seismic survey, drilling, training and a wide range of other skills and technology to both NOCs and smaller, listed, independent firms, as they move to tap onshore and offshore resources.32 Deepwater Drilling Advances in expertise and equipment are enabling NOCs, IOCs, and independents to explore and exploit energy resources further and further from shore in ever deeper waters, although it remains a very high-risk, highcost business. Dozens of new drill ships and rigs are being built to explore for oil and gas in the deep waters of the Gulf of Mexico, West Africa, Brazil, Australia, New Zealand, India, and the South China Sea. In the next three years, ODS Petrodata, which tracks drilling rigs and other industry equipment, expects 160 new offshore rigs to enter service. Seventy-five of these rigs will be for ultra-deepwater drilling. They can operate

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in waters up to 4,000 metres deep and have a total drilling depth of as much as 13,000 metres. At the height of the oil price boom in the first half of 2008, owners of these rigs were able to charge as much as US$600,000 per day.33 The global credit crisis and recession will constrain deepwater drilling for a while. But as the world economy recovers, demand for oil and gas will revive and the rush to explore for and produce hydrocarbons from deep waters will resume. Deepwater drilling is usually considered to mean depths of 800 metres or more. Ultra-deep drilling starts at around 2,500 metres. Nearly half of the world’s marine waters are over 3,000 metres deep. This is a new frontier for the discovery and exploitation of oil, gas, minerals, and other valuable resources. The drill ships and rigs being built in Asia and elsewhere are capable of tapping into oil and gas reserves at such depths. The amount of oil pumped from deepwater fields will nearly double between 2005 and 2010, to about 11 million barrels a day, or about oneeighth of estimated daily consumption in 2008, according to the U.S. Energy Information Administration. The consulting firm Douglas-Westwood expects capital spending on deepwater oil and gas to rise to US$25 billion annually by 2012, nearly double the figure for 2003. Enter CNOOC, Husky, and Other Explorers In December 2008, the Chinese Government approved a programme by the state-owned China National Offshore Oil Corporation (CNOOC) to spend 200 billion yuan (US$29.2 billion) with partners to expand oil and gas exploration in the South China Sea over the next ten to twenty years, starting in 2009. CNOOC, China’s third-largest oil producer, declared in November 2008 that it aimed to increase hydrocarbon output in the South China Sea to 50 million tonnes per year (1 million barrels per day), equivalent to the current production of China’s biggest onshore oil field at Daqing.34 CNOOC said it would focus on deepwater and ultra-deepwater oil and gas exploration at depths of 1,500–3,000 metres.35 CNOOC claims it already has 3.1 billion tonnes of oil equivalent in proven reserves in its deepwater zone in the South China Sea.36 The company announced in July 2008 that it was buying the Norwegian oil exploration contractor, Awilco Offshore ASA, for US$2.52 billion, so that it could reach depths of up to 1,500 metres with Awilco’s deepwater drilling platforms and equipment. At present, CNOOC itself is unable to drill in depths of over 300 metres.37 CNOOC has also placed an order for deep-sea drilling rigs with a Norwegian supplier. Canada’s Husky Energy Inc. works with CNOOC and moved a new deepwater drilling rig into the South China Sea in November 2008 on a

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three-year contract. It is delineating and evaluating a giant gas field that Husky and CNOOC Ltd, the listed arm of the state-owned parent company, announced they had found in June 2006 in the northern sector of the South China Sea.38 Husky, controlled by Hong Kong tycoon Li Ka-shing, who has close ties to China, said the Liwan field could contain up to six trillion cubic feet of recoverable resources. This would add around 7 per cent to China’s total gas reserves. Significantly, it was China’s first deepwater petroleum discovery. The exploration well was drilled 250 kilometres south of Hong Kong at a depth of 1,500 metres. Under its production-sharing agreement with Husky, CNOOC has the right to participate in development of the field by taking a stake of up to 51 per cent. Apart from Liwan, Husky has five other exploration blocks in the South China Sea. The discovery of gas in mid2006 sparked a burst of interest in the surrounding deepwater zone of the South China Sea, with other independent energy companies — including BG Group, Devon Energy Group, and Anadarko Petroleum Corporation — preparing to drill in adjacent blocks. METHANE HYDRATES In 2007, China announced that it had for the first time managed to tap into seabed sediment containing gas hydrates in the northern part of the South China Sea. Zhang Hongtao, deputy director-general of the China Geological Survey, said that by collecting the gas hydrate samples in May 2007, China had become the fourth country after the United States, Japan, and India to achieve this technological breakthrough. The huge quantities of methanerich hydrates, kept stable by low temperature and high pressure on the sea floor or below the Arctic, could become an important fuel for the future. Methane is the main component of natural gas. Mr Zhang stated that initial estimates had indicated the potential volume of gas hydrates in the area of the South China Sea tapped by China was equivalent to more than 100 million metric tonnes of oil (two million barrels of oil per day) — about one-quarter of China’s oil consumption of 7.8 million b.p.d in 2007. He added that because it was difficult to produce a continuous gas flow from hydrates, China might not be in a position to develop the resource for many more years. However, China is clearly in a race with Japan, the United States, South Korea, India, and other countries to try to master the technology needed to exploit a potentially important offshore energy source for the future.

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ASIA’S RISING GAS DEMAND Meanwhile, China, the world’s second-largest energy consumer after the United States, wants to increase its gas consumption to reduce heavy reliance on coal, which causes serious air pollution. Southeast Asian countries are also turning to cleaner-burning gas to generate electricity and for industrial and home use. The use of natural gas among Asian countries is forecast to rise by about 4.5 per cent annually on average until 2025 — faster than any other fuel — with almost half of the increase coming from China. If this growth rate is maintained, Asian demand will exceed 21 trillion cubic feet, nearly triple the current consumption, by 2025. The South China Sea is considered to have greater potential for gas than oil. Most of the hydrocarbon fields explored in the South China Sea near Brunei, Indonesia, Malaysia, the Philippines, Vietnam, China and contain gas, not oil. Estimates by the U.S. Geological Survey indicate that between 60 per cent and 70 per cent of the region’s hydrocarbon resources is gas. Even so, a significant proportion of the more than six million barrels of oil per day produced by China and Southeast Asian countries comes from the South China Sea region. An even larger proportion of the region’s gas output of over eight billion cubic feet per day comes from the South China Sea basin, although no precise figures are available. Chinese estimates of the overall oil and gas potential of the South China Sea tend to be much higher than those of non-Chinese analysts.39 The most bullish of the Chinese estimates suggest that potential resources may be as high as 213 billion barrels of oil, nearly fourteen times China’s proven oil reserves at the end of 2007 of 15.5 billion barrels. For gas, the potential production level, according to the most optimistic Chinese estimates, stands at over 2,000 trillion cubic feet, although only about half of this might be recoverable, even if fields on this scale were found. China’s proven gas reserves at the end of 2007 amounted to 67 trillion cubic feet.40 CHINA’S SOUTHERN THRUST China’s emergence as an increasingly important gas consumer and the emphasis it puts on getting as much of its future oil and gas from as close to home as possible may help explain why China rates the energy potential of the South China Sea so highly. Such estimates buttress its sweeping claims to sovereignty in the area. Of course, these estimates have yet to be

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tested. Much of the area, particularly in region of deep water, is unexplored because it is remote and contested. However, China seems intent on expanding its offshore energy search. Until a few years ago, the state-owned Chinese energy giants were discouraged from competing and CNOOC had a virtual monopoly on offshore work. Now all of the Chinese oil and gas majors can bid for onshore and offshore projects, both local and foreign. PetroChina — an arm of China National Petroleum Corporation — China’s biggest oil producer, announced in March 2006 that it would be turning its attention to the southern sector of the South China Sea in the next few years. As Southeast Asian governments and the energy companies working for them probe deeper into the South China Sea, they can only hope that China’s southward push will lead to better cooperation, not confrontation. China has handed out exploration contracts or production licences over most of its deepwater oil and gas blocks in the South China Sea south of Hong Kong. These are contested only by Taiwan. However, future Chinese permits seem set to overlap with those from its Southeast Asian neighbours.41 Unlike in the 1980s or 1990s, China may soon have the military power to enforce its territorial claims against rivals in the region, should it decide to do so. But at what cost to its international reputation, to stability in the maritime heart of Southeast Asia, and to its relations with ASEAN? China seems to be confronting ExxonMobil and BP with the choice of pursuing their offshore plans in Vietnam or jeopardizing their already substantial investments in China, potentially the world’s biggest energy market. China, of course, would argue that it is Vietnam that should exercise restraint. How would Vietnam react if Chinese pressure again stops Western oil and gas majors from proceeding with planned projects off the coast of southern Vietnam? THE UNITED STATES AND JAPAN More importantly, how will the United States and Japan react when they see hard evidence of Beijing’s southward extension into areas of the South China Sea? About a quarter of the world’s trade and around 20 per cent of its daily oil consumption is shipped through Southeast Asian straits and the South China Sea. Japan, which is entirely dependent on imported oil and gas, gets over 80 per cent of its supplies via the South China Sea. South Korea, another U.S. ally and a major energy importer, is also heavily reliant on shipments through the South China Sea. Taiwan, too, depends on South China Sea shipping routes for most of its energy imports.

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The United States puts a high strategic priority on support for its AsiaPacific allies and also on maintaining freedom of navigation around the world. America regularly sends its Pacific fleet warships through the South China Sea and the Malacca and Singapore Straits to reinforce its military presence in the Arabian Sea and Persian Gulf. This naval “surge” capacity from the Pacific to the Indian Ocean is especially important to Washington at times of crisis in the Gulf or Indian Ocean region. If the world economy recovers and an era of perceived petroleum scarcity and high prices returns, the United States and other Western nations will be under pressure to protect the interests of their leading energy companies in any confrontation with China in the South China Sea. WHAT NEXT FROM CHINA? Beijing is likely to keep restating its sovereignty claims in the South China Sea whenever it feels they are under challenge. However, although China is building its own deepwater drilling rigs, the first is not due to be delivered before 2010. Chinese NOCs have limited experience in deep-sea oil and gas exploration, let alone production such a challenging environment. They will continue to depend on the small group of energy companies that have the necessary expertise and equipment to work in deep waters. CNOOC says it can hire service companies to do the work. But first China must persuade more energy firms that the South China Sea is an attractive alternative to the world’s hottest deep-sea frontiers, among them the Gulf of Mexico and the Atlantic Ocean off Brazil and West Africa, which account for nearly 75 per cent of global deepwater expenditure by energy companies.42 Energy firms are unlikely to go to the expense of working in deepwater areas of the South China Sea unless they are assured of a peaceful environment. Meanwhile, Beijing has held out an olive branch to its neighbours by publicly declaring on many occasions its preference for joint development of energy resources in contested offshore zones. In June 2008, it reached such a deal with Japan in the East China Sea. But reaching a workable arrangement in an area like the South China Sea, where there are multiple claimants, would be much more difficult. Meanwhile, pressure within energy-hungry China to tap oil and gas in the areas claimed is intensifying as its onshore production fails to keep pace with demand. CHINA-SOUTHEAST ASIA TIES Relations between China and Southeast Asia have greatly improved in the past two decades. Past mistrust has largely been dispelled. Two-way trade,

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investment, and tourism are booming. Security ties, though moving far more slowly, are also taking shape. There is closer collaboration between China and ASEAN countries in various fields. China has acceded to the treaty that bans the development, possession, or storage of nuclear weapons in Southeast Asia — something the United States has so far failed to do. But these are easy, cost-free steps for Beijing. To cement its ties with ASEAN for the long term, China could go further. Indeed, it may already have signalled a willingness to do so. CHINA-MALAYSIA DEAL In October 2006, China and Malaysia announced a deal worth around US$25 billion, in which Petronas, the Malaysian national petroleum company, will supply liquefied natural gas to Shanghai for twenty-five years starting in 2009. The gas is to come from Malaysian offshore fields in the South China Sea. Some of these fields fall within, or straddle, China’s broken line claim. The deal with Petronas indicates Beijing now accepts that Malaysia, not China, owns the fields. Beijing would not buy gas from another country if it maintained a claim to ownership of the field from which the gas was drawn. FURTHER STEPS China could preempt a potential conflict over energy, fisheries, and sea lane control in the South China Sea by formally and finally abandoning its broken line maritime boundary claim in the area. This claim may not now be active. But it could always be revived if China believed it had the military might to enforce the claim. Dropping it would make it clear that Beijing bases its claims in the South China Sea on UNCLOS and current international law, not pre-modern law. Alternatively, China and the Southeast Asian contestants could agree to put their rival sovereignty claims to arbitration or adjudication before the UN Law of the Sea Tribunal or the International Court of Justice, as some Southeast Asian countries have done with their island and maritime boundary disputes. As an interim measure, China and the Southeast Asian claimants to the Spratly Islands could move beyond their 2002, non-binding joint declaration on conduct in the South China Sea and sign a mandatory code of conduct that would freeze unilateral activities and permit no further occupation of atolls and reefs or new construction on inhabited parts of the widely scattered archipelago.

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Southeast Asian countries with significant navies or coast guards could develop a more intensive programme of training exercises with China that include a search-and-rescue, counter-terrorism, and anti-piracy component, similar to programmes they now have with the United States and Japan. For its part, China could accept the standing invitation from the United States and Southeast Asian countries to take part in regional military cooperation exercises, such as Cobra Gold, held annually in or off Thailand. The main focus of these exercises is no longer on defence from external attack, but on peacekeeping, disaster relief, and combating terrorism, piracy, and other potential threats to the safety and freedom of navigation. However, possibly the most effective action ASEAN countries can take to ensure peace in the South China Sea is to engage the commercial interests of China and as many other countries and foreign companies as possible in the search for offshore energy in the area. This is already happening. However, it could be accelerated by making contract terms more attractive to investors, especially in costly, high-risk deepwater work. Besides the Western energy companies, firms from Russia, India, South Korea, Japan, Australia, and other ASEAN dialogue partners are exploring for, or producing, oil and gas in the zone claimed by Vietnam and in other parts of the South China Sea claimed by other Southeast Asian states. China has close ties with many of these countries and would not want to upset relations with them, particularly if it felt it had substantial access to the resources of the region through commercial ties. For example, Indonesia has said it may offer the China National Petroleum Corporation an equity stake in its Natuna D-Alpha block. The block is estimated to hold 46 trillion cubic feet of gas, making it one of the biggest reserves in Asia, although it has a high carbon dioxide content that will make it expensive to exploit.43 On a visit to Indonesia in December 2008, Chinese Vice-Premier Li Keqiang suggested that the two countries combine to explore for energy in third countries and “jointly tap oil and gas in the South China Sea”.44 CONCLUSION Some analysts believe that China is biding its time until it has the military muscle to enforce its claims to sovereignty and resource control in the South China Sea. Then it would be able to negotiate with other claimants from a position of strength. But this approach would not enhance mutual trust and security cooperation between China and Southeast Asia, or between China and other important players in the region.

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NOTES 1 The ten ASEAN countries are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. 2 ASEAN’s Dialogue Partners are Australia, Canada, China, the European Union, India, Japan, New Zealand, Russia, South Korea, the United States, and the United Nations Development Programme. ASEAN also promotes cooperation in some areas of mutual interest with Pakistan, although it is not a Dialogue Partner (accessed 8 June 2009). 3 (accessed 4 June 2009). 4 (accessed 4 June 2009). 5 U.S. Department of Defence, Military Power of the People’s Republic of China 2008, pp. 23 and 25. 6 Richard C. Smith, Asian Military Modernization, Lowy Institute for International Policy, October 2008, pp. 2–4. 7 U.S. Defense Department, Military Power of the People’s Republic of China 2008, p. 54. 8 “China hints at aircraft carrier project”, “Chinese army turns on charm”, 17 November 2008. 9 Richard A. Bitzinger, “China’s Military-Industrial Complex: Is It (Finally) Turning a Corner?” RSIS Commentaries, 21 November 2008. 10 U.S. Defense Department, Military Power of the People’s Republic of China 2008, p. 22. 11 . 12 Rodolfo C. Severino, “Deng legacy after 30 years”, The Japan Times, 29 December 2008. 13 ASEAN Declaration on the South China Sea, Manila, Philippines, 22 July 1992 (accessed 27 May 2009). 14 Li Jinmeng and Li Dexia, “The Dotted Line on the Chinese Map of the South China Sea”, Ocean Development & International Law, 34: 287–90. 15 Ibid., p. 293. 16 Djalal, H. “South China Sea Disputes”. The Raffles Bulletin of Zoology, Supplement no. 8, pp. 2 and 3. 17 . 18 (accessed 8 October 2009). 19 . 20 Declaration on the Conduct of Parties in the South China Sea, signed by ASEAN member states and China, 4 November 2002 (accessed 8 June 2009). 21 (accessed 14 July 2009).

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22 (accessed 14 July 2009). 23 (accessed 14 July 2009). 24 (accessed 14 July 2009). 25 (accessed 21 August 2009). 26 (accessed 14 July 2009). 27 Kang Wu and Fereidun Fesharaki, eds., Asia’s Energy Future: Regional Dynamics and Global Implications (Washington, D.C.: East-West Center, 2007), p. 126. 28 International Energy Agency, World Energy Outlook 2007, p. 325. 29 Special Report on National Oil Companies, The Economist, 12 August 2006. 30 “To BP or not to BP”, Financial Times, Lex column, 30 July 2008. 31 Ivo J.H. Bozon, Stephen J.D. Hall, and Svein Harald Oygard, “What’s Next for Big Oil?”, The McKinsey Quarterly, May 2005. 32 Carola Hoyos, “Nationals’ champion: How the energy-rich rely on Schlumberger”, Financial Times, 30 July 2008. 33 Jad Mouawad and Martin Fackler, “Dearth of ships delays drilling of offshore oil”, New York Times, 19 June 2008. 34 (accessed 13 July 2009). 35 (accessed 13 July 2009). 36 (accessed 27 January 2009). 37 (accessed 13 July 2009). 38 (accessed 8 July 2009). 39 U.S. Energy Information Administration, Country Analysis Briefs, South China Sea, March 2008, pp. 4 and 6. 40 BP Statistical Review of World Energy, June 2008, pp. 6 and 23. 41 “China’s deep sea no easy waters for CNOOC”, Reuters, 2 November 2007. 42 Douglas-Westwood, “Deepwater: A robust market in a climate of uncertainty?”, news release, 5 February 2009. 43 “Uncertainty over Natuna as ExxonMobil fights back”, The Jakarta Post, 9 January 2009. 44 (accessed 14 July 2009).

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9

ENERGY SECURITY AND MITIGATING CLIMATE CHANGE Plug-in Hybrid Electric Vehicles (PHEVs) and Alternatives to Oil in Asia Benjamin K. Sovacool

ABSTRACT How can countries in Asia avoid the pitfalls faced by the United States, with its oil problems? This chapter argues that policy-makers have a wide variety of options available to them, drawing mostly on techniques promoted (but seldom implemented) in the United States and Europe to help reduce dependence on foreign sources of oil. Starting with an evaluation of “demandside” options before moving to “supply-side” options, it will then focus indepth on the benefits of plug-in hybrid electric vehicles (PHEVs) before offering general conclusions about energy policy.

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INTRODUCTION While Singapore, Southeast Asia, and Asia at large face numerous energy challenges, perhaps none is more significant than the growing dependence on foreign sources of fuel for transportation. The International Energy Agency (IEA), for instance, expects India and China to increase their imports of crude oil from 50 per cent today to 80 per cent by 2020. Singapore already imports more than 99 per cent of its own consumption of energy. The problem arises because the skewed distribution of oil resources allows a small number of states to supply a very significant share of the world market for transportation fuels. Around ninety countries produce oil, yet only a few producers dominate world output. The members of the Organization of Petroleum Exporting Countries (OPEC) — Algeria, Iran, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela — account for approximately 75 per cent of the world’s proven conventional oil reserves and 40 per cent of world oil production. The Persian Gulf contains an estimated 674 billion barrels of proven reserves, which represent around 67 per cent of the world total. In 2006, the region maintained 32 per cent of the world’s total oil production capacity (about 23 million barrels per day).1 While market supply and demand conditions for the past two decades would not support the assertion that OPEC members have been in complete control of the oil market, its members have historically been able to exert considerable influence. The September 1973 oil embargo orchestrated by the Arab members of OPEC — that removed 19.8 million barrels per day (b.p.d.) from the market — constituted the first supply disruption to cause major price increases and a worldwide energy crisis. In unadjusted terms, the price of oil in world markets rose from $2.90 per barrel in September 1973 to $11.65 per barrel in December 1973. Further price hikes and economic repercussions accompanied the Iranian revolution in 1979, when only a 3 per cent reduction in supply sent spot prices jumping from $15 per barrel in December 1978 to a peak of $42 in May 1979. Eleven years later in 1990, when Iraqi forces invaded Kuwait, OPEC controlled roughly 5.5 million b.p.d. of spare capacity, enough to replace the oil from the combatant countries and to supply about 8 per cent of global demand. Even so, the elimination of Iraqi and Kuwaiti shipments contributed to a jump in oil prices from around $21.50 per barrel in January 1991 to $28.30 in February 1991. During these times, large oil-producing states were able to influence oil prices by (a) their market share, (b) their ability to condition supply, and (c) the relative price inelasticity of demand for oil compared to other commodities.

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Researchers at the Oak Ridge National Laboratory, for instance, estimate that the costs of American dependence on foreign sources may be in the trillions of dollars. They calculate that, from 1970 to 2004, dependence on foreign supplies of oil cost the United States between $5 to $13 trillion. If these “hidden costs” had been reflected at the gasoline pump, they would have more than doubled the price of gasoline paid by most Americans in 2003. So how can countries in Asia avoid the pitfalls faced by the United States, with its oil problems? This paper argues that policy-makers have a wide variety of options available to them, drawing mostly on techniques promoted (but seldom implemented) in the United States and Europe. To reduce dependence on foreign sources of oil, Asian policy-makers could • • • • • • • •

Lower demand for oil by legislating more stringent fuel economy standards for light and heavy duty vehicles or by lowering the speed limit on highways; Promote transportation alternatives such as mass transit, light rail, and carpooling; Establish telecommuting centres and incentives for commuters to work from home; Promote rigorous standards for tire inflation and reduce oil consumption in other sectors of the economy; Increase domestic supplies of oil; Mandate the use of advanced oil recovery and extraction techniques; Promote alternatives to oil such as ethanol, biodiesel, and Fischer-Tropsch fuels; Most importantly, aggressively push plug-in hybrid electric vehicles (PHEVs)

This paper will briefly explore each of these options, starting with a discussion of “demand-side” options before moving to “supply-side” options. Then, it will focus in depth on the benefits of PHEVs before offering a few conclusions about energy policy in general. THE TYPICAL “DEMAND-SIDE” AND “SUPPLY-SIDE” OPTIONS Fuel Economy Standards for Automobiles, Trucks, and Rail Light-duty fuel economy standards are perhaps the best historical method for affecting the demand for petroleum. In the United States, Corporate Average Fuel Economy (CAFE) standards for cars pushed fuel economy up from 13 miles per gallon (mpg) in 1975 to a peak of 27.5 mpg in 1985, when the Department of Energy estimated that they were displacing around 5 million b.p.d. of imports per day compared to business as usual. Today, however, the

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country lags behind almost every other developed country in terms of fuel economy, including Australia (30 mpg), China (30 mpg), the European Union (37.5 mpg), and Japan (46.5 mpg). Consumer preferences for larger and more powerful automobiles, a perceived uncertainty over the cost of future fuel-saving technologies, concerns about vehicle safety and performance, and fear that standards would hurt overall economic competitiveness have created a general reluctance to comply with CAFE standards on the part of automobile manufacturers. So much potential for improvement exists in the United States that increasing fuel economy standards to 43 mpg by 2030 would obviate the need to import 3.5 million b.p.d. Increasing fuel economy standards to 40 mpg in 2015 and 55 mpg in 2025 would save 4.9 million b.p.d by 2025. Recent advances in engines, transmissions, hybrid electric technology, and vehicle materials suggests that such improvements can be achieved without compromising vehicle luxury, horsepower, or reductions in size and weight. Relatively simple modifications — enhancing aerodynamics, lowering rolling resistance in tires, improving engine fuel injection and thermal management, using fuel cells for idling, using more hybrid electric drive trains, and reducing vehicle weight — could greatly improve the fuel efficiency of heavy-duty trucks. If standards forced Class 8 long-haul trucks to improve their fuel efficiency by 60 per cent, the savings could be as high as 1.0 million b.p.d by 2025. The establishment of standards for light rail and ships could save an additional 0.2 million b.p.d. Lowering Speed Limits Reducing the national speed limit could also significantly lower oil consumption. The DOE notes that gasoline mileage decreases rapidly at speeds above 90 kilometres per hour (kph). Lowering speed limits to 90 kph would improve average fuel economy in vehicles by 7 to 23 per cent. Between 1974 and 1983, for instance, setting the national speed limit in the United States at 90 kph saved around 685,000 barrels of oil per day. If policy-makers implemented these changes today, between 416,000 and 1.1 million barrels per day could be displaced in India and China, if these policies were accompanied by improved police enforcement, speed cameras, and appropriate signage. Encouraging Mass Transit Changing community design and promoting mass transit and light rail systems would also induce substantial oil savings. The suburbanization of industrialized countries has resulted in a tripling of vehicle use over the past

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thirty years. The promotion of (a) location-efficient mortgages that reward those who build and buy homes near public transit, (b) tax-free benefits for employees who use mass transit or bicycle to work, (c) streamlined financing for public transportation projects that significantly increase the mobility of commuters, and (d) more transit-oriented development zones could drastically reduce oil consumption. If builders constructed all homes in the next ten years as smart-growth communities (communities that offer housing near jobs, public transportation, and pedestrian-friendly neighbourhoods), more than 500,000 barrels of oil per day could be reduced for many countries. If the government were to support a large programme designating carpool lanes along all motorways, park and ride lots, and rider matching, an additional 1.0 million b.p.d. might be saved. Providing Incentives to Telecommute Similarly, increasing incentives for commuters to work from home or travel to a nearby telecommuting centre could cut oil consumption. Enabling commuters to work from home or from a telecommuting centre directly reduces oil consumption by keeping commuters off the road and relieving traffic congestion during rush-hour traffic jams and bottlenecks. A 42-gallon barrel of oil makes roughly 19.5 gallons of gasoline. For every ten million drivers that telecommuted three days out of the week, approximately 660,000 barrels of oil would be displaced per day. Improving Tyre Inflation Oil consumption could also be significantly reduced by improving the performance and maintenance of tyres. As tyres roll under a vehicle’s weight, their shape changes repeatedly as they experience recurring cycles of deformation and recovery. In the process, mechanical energy that would otherwise be available to turn the wheels is transformed into heat and dissipated from the tyre. Correctly inflated tyres help reduce this rolling resistance. Automatic tyre inflation systems could monitor and continually adjust the level of pressurized air for tyres and reduce fuel consumption by at least 90 gallons per year for typical trucks. In the United States, ensuring that replacement tyres are as fuel-efficient as original vehicle tyres would save 270,000 barrels oil per day. Keeping tyres properly inflated could save as many as 200,000 barrels of oil per day by 2013. Enhancing Industrial Energy Efficiency Another option would be to reduce oil consumption in other sectors of the economy, such as electric utilities and energy-intensive industries. Industrial

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manufacturing plants and residential dwelling spaces consume approximately one-third of all oil in the United States. The promotion of more efficient industrial boilers, the enhanced use of recovery heating, and the advancement of alternative feedstocks could save more than 300,000 barrels of oil per day by 2015 and 620,000 barrels of oil per day by 2030 in the United States. Improving industrial boiler use, promoting polygeneration technologies as an alternative to petroleum feedstocks, recycling existing products in the construction of roads, and improving the efficiency of off-highway equipment could save 5.38 million b.p.d. by 2020. Increasing Domestic Oil Production On the supply side, increasing the domestic production of oil could help insulate Asian economies from the vagaries of the international oil market. If such resources were developed using conventional drilling techniques, the IEA estimates that more than 15 million b.p.d. of production could be sustained in China, India, and Southeast Asia for roughly thirty years. Deepwater oil reserves could provide another 2 million b.p.d. Mandating Advanced Recovery Advanced recovery techniques (such as thermal recovery and gas and chemical injection) could also displace imported oil. Oil companies already inject nitrogen and natural gas into mature American oilfields to recover oil. With an ample supply of carbon dioxide, between 47 and 60 billion barrels of oil could be recovered from most major oilfields. Developing Alternative Fuels The development and use of alternative transportation fuels such as cellulosic ethanol, biodiesel, and coal could further minimize dependence on foreign oil. The conversion of biomass into cellulosic ethanol may be accomplished by distilling and fermenting agricultural waste, forest residue, and energy crops. The region also possesses significant potential reserves of synthetic petroleum products in the form of coal. The Fischer-Tropsch process is a gas-to-liquid conversion technique that uses a catalysed chemical reaction to heat coal and transform the resulting carbon monoxide and hydrogen into a colourless, odourless fuel interchangeable with diesel fuels. Synthroleum has used the process to produce more than 400,000 gallons of diesel and jet fuel at a demonstration plant near Tulsa, Oklahoma. FischerTropsch fuel facilities, if expanded regionally, could produce 3 million b.p.d. per day by the end of the decade.

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The “V2G” Option The vehicle-to-grid (V2G) concept links two critically important technological systems — the electric power system and the petroleum-based transportation system — in ways that may address significant problems in both. By drawing on the power grid at off-peak times, electric vehicles could displace the use of petroleum, mitigating the pollution and security issues related to oil exploration, importation, and combustion. Indeed, a V2G strategy employing PHEVs could offer manifold benefits to automobile drivers, electricity consumers, and society. A transition to V2G could significantly lower greenhouse gas emissions, reduce oil imports, improve the economics of the electric utility industry, and provide additional revenue for PHEV owners.2 Most automobiles employ internal combustion (IC) engines, which start quickly and provide power as soon as drivers need it but which operate inefficiently and waste energy when idling. Hybrid electric vehicles, by contrast, add a battery and electric motor to a car that uses an IC engine. Such vehicles, which have seen great commercial success in the form of the Toyota Prius, Honda Insight, the Honda Civic Hybrid, and others, operate more efficiently than those that run on IC engines alone. By marrying advanced power electronics and computer controls with conventional and electric drive trains, hybrid electric vehicles improve fuel economy and reduce emissions. They reduce fuel usage because they employ the electric motor frequently (especially in slow traffic), they shut down the IC engine when the vehicle has stopped for a predetermined amount of time, and they recapture otherwise discarded kinetic energy during braking.3 Hybrid vehicles achieve higher efficiency through five main mechanisms. The biggest fuel savings for HEVs derive from regenerative braking, a technology that converts much of the energy normally lost as frictional heat into electrical power. Driving conditions such as stop-and-go city traffic and riding up and down hilly roads provide the greatest opportunity for fuel savings. Second, internal combustion engines run most efficiently in a narrow range of torque and speed. Because a hybrid’s battery and motor can provide the boost required for acceleration or hill climbing, engineers can downsize the car’s engine and optimize it to run at higher efficiencies, burning less fuel. Third, most conventional automobiles run the air-conditioning, power steering, water, oil pump, and other powered systems directly off the gasoline engine. The large hybrid battery can power these full electric components without relying on combustion. On a hot summer day, an electrically operated air-conditioning unit can consume 20 per cent less energy than a conventional system — making HEVs more efficient than traditional vehicles. Fourth, hybrid cars use their electric motor to generate motion without relying on the

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gasoline engine. Fuel can be saved by running the car as an electric vehicle when the engine would otherwise be burning fuel or idling. In the near future, new hybrids will contain a larger battery and a higher-powered electric motor that will allow for significant downsizing of the engine and other mechanical systems. Prototype PHEVs will travel sixty miles on electricity alone, on engines that are less than half the size of standard engines.4 A “plug-in” or “pluggable” hybrid (PHEV) uses hybrid electric vehicle technology, but it features a large battery (one that can hold greater energy than those used in traditional hybrids) and a plug-in charger that uses electricity from the utility grid to replace a portion of the petroleum-fueled drive energy.5 Most PHEV prototypes have a battery capable of powering the vehicle for between 20 and 60 miles (30 to 100 km) on electricity alone. The connection of the hybrid electric vehicle to the grid (through the plug) creates the possibility of achieving the benefits promised by advocates of the V2G concept. On the one hand, the PHEVs will draw power from the grid during off-peak times, enabling them to use energy that might otherwise be wasted in the utility system. On the other hand, the plug-in feature enables the vehicles to offer electricity to the grid at times when utility generators are taxed to their limit (i.e., during peak times). In other words, the V2G cars serve as distributed generators — supplements to utility power plants — that provide peak generation capacity along with voltage regulation and spinning reserve services.6 By connecting to the grid, V2G vehicles can be thought of as more than just transportation devices. Owners can view them as mobile, self-contained, and highly reliable power resources that also provide conveyance services. The V2G concept excites advocates because it offers mutual benefits to the transportation and the electric power systems. It could benefit the former by reducing petroleum use, strengthening the economy, enhancing national security, reducing strain on petroleum infrastructure, and reducing harm to the natural environment. It could benefit the latter by providing a new demand for electricity, ideally during the parts of the day when demand remains low. Four recent studies in the United States suggest that grid-connected PHEVs would drastically (and directly) mitigate greenhouse gas emissions and improve air quality in urban areas. One study, from the Pacific Northwest National Laboratory (PNNL), estimates that, for the nation as a whole, shifting roughly half the vehicles on the road in 2007 to V2G would have reduced total greenhouse gas emissions by 27 per cent.7 Its analysis rests on the assumption that PHEVs are more efficient than conventional vehicles because of their regenerative braking capability and because they operate at

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near optimal conditions more of the time than do conventional vehicles. Moreover, PNNL projects that pollution from total volatile organic compounds and carbon monoxide emissions would decrease radically, by 93 per cent and 98 per cent respectively. Total nitrogen oxide emissions would also be reduced (by 31 per cent) as internal combustion engines are displaced along with the corresponding refining processes needed to fuel them. The authors note that total particulate matter emissions are likely to increase by 18 per cent and sulphur oxide emissions by 125 per cent if additional electricity demand is met by coal-fired plants, but that pollution could be greatly reduced if natural gas or renewables were used instead. While these two types of emissions may increase, they are removed from the local urban areas to the more distant locations of power plants. Using a “well-to-wheels” metric, which includes the energy and greenhouse gases used in the manufacturing of the vehicle as well as its fuel cycle and operation, an Electric Power Research Institute (EPRI) study projected that the average PHEV emits only about 8 per cent of the carbon dioxide emitted from a conventional vehicle.8 EPRI noted that under California’s Super Ultra Low Emission Vehicle standards, with vehicles operating on gasoline and PHEVs charged only at night, an average conventional vehicle emits 320 g/ ml of carbon dioxide over the course of its lifetime, while an HEV with no allelectric range emits just 25 g/ml. In another study, the Minnesota Pollution Control Agency calculated that per-mile emissions of particulate matter and carbon dioxide dropped by around 60 to 70 per cent when compared to conventional vehicles.9 The study documented that PHEVs reduce emissions of carbon dioxide by 59 to 66 per cent, nitrous oxide by 48 to 80 per cent, and particulate matter by 66 to 76 per cent. Figures were based on the assumption that the PHEVs had an all-electric range between 20 to 60 miles, were phased in for light-duty vehicles (compact cars, sedans, and station wagons) only, and were powered with electricity from a portfolio of 60 per cent coal and 40 per cent wind. The Carnegie Mellon Electricity Industry Center looked at the environmental impact of V2G cars differently, but it found that even when powered entirely by coal-fired electricity, PHEVs still produce around 25 per cent fewer greenhouse gas emissions per mile than do conventional vehicles.10 The Carnegie Mellon Electricity Industry Center study assumed that (a) electricity would power about 85 per cent of average annual vehicle travel; (b) PHEVs had a sixty-mile, all-electric range and were charged once per day at night; (c) vehicles were assumed to travel 12,000 miles per year; and (d) electricity generation to power them came exclusively from bituminous coal in a pulverized coal plant. Under these conditions, PHEVs would lead to

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a reduction of greenhouse gas emissions by around 25 per cent. The study underscored that the assessment greatly underestimated the greenhouse gasreducing potential for PHEVs, as such emissions would be typically met by a utility portfolio that included low-carbon generators such as renewables and cogeneration units (and not 100 per cent coal, as the study assumed). Simply put, consumers may profit from the use of plug-in vehicles because electricity is cheaper than gasoline for equivalent distances travelled. Using 2006 average electricity rates (of 7.6 cents per kWh), it would cost only about one dollar for a PHEV to travel the same distance as a conventional car using a gallon of gasoline.11 EPRI estimated that if a PHEV sedan needs around three to four hours to charge per night (and a commercial delivery van around four to five hours), the electricity will cost around $170 to $215 annually. By contrast, the gasoline needed for a car to drive the same distance as the PHEV would cost more than four times as much (assuming a gasoline price of $3 per gallon). EPRI concludes that PHEVs would save the average American driver around $600 per year. Benefits may also accrue to the electric utility system, which would not only supply electricity to the new vehicles, but draw power from them as well. The first benefit derives from the fact that many utility resources go underutilized, an effect of the fact that utility managers have traditionally (and logically) designed the electricity infrastructure to meet the highest expected demand for power. Except for these periods of peak use, the power system could generate and deliver a substantial amount of the energy needed to fuel the nation’s vehicles at only a fraction of the cost of fuel. A recent study suggested that 8 to 12 per cent of peak demand occurs within just 80 to 100 hours during the year.12 Because much of the generating capacity remains unused, other researchers estimated that 84 per cent of electrically powered cars, light trucks, and sport utility vehicles in the United States could be supported by the existing electric infrastructure if they drew power from the grid at off-peak times. Consequently, utility companies would earn extra revenues at these periods.13 But these cars as a supplier of power to the grid — especially during times of peak demand — offers an even more tantalizing benefit.14 In other words, the vehicles would play the role of distributed generators that, with the use of sophisticated electronic devices, would safely send surplus power and ancillary grid services from the cars’ batteries to other electricity users. The technology for such small-scale, distributed-generation (DG) devices has been advancing rapidly, as have state and federal policies that permit non-utilities to sell power into the grid. Using net-metering provisions, for example, customers can literally watch their electricity meter run backward if they sell more

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electricity into the grid than they use. At the same time, the utility would benefit because it would not need to build new generating capacity as quickly as it would otherwise.15 Power companies could operate more like “cash cows” — producing income from existing equipment — and less like construction companies that constantly need to raise funds to build new generating resources. The situation is reminiscent of companies in the 1980s that refrained from building new power plants during a time of increased energy-efficiency efforts (which led to lower demand growth). Relying on existing equipment, they made money even while reducing rates to customers. Some of these potential benefits have already been carefully studied. The PNNL, for example, has assessed the impacts of a V2G transition on the revenue and cost streams of two sample utilities, Cincinnati Gas & Electric (CGE) and San Diego Gas & Electric (SDGE). The first primarily generates its own power, while the second mostly serves as a power marketer.16 CGE owns a substantial fossil fuel-fired base load along with some load-following generating resources. As part of Cinergy, CGE serves 659,444 customers using coal and natural gas as 99 per cent of its fuel. The utility offers relatively low electricity rates, with an average residential rate of 7.3 cents per kWh (in 2004 dollars). PNNL selected SDGE because it depends largely on purchased power, operating mostly as a “wires only” company. Part of Sempra, SDGE serves 1,297,693 customers, generates only 36 per cent of its own electricity at the San Onofre, California, nuclear plant, and imports the rest. Its customers pay relatively high electricity rates with an average retail rate of 14.6 cents per kWh (in 2004 dollars). The study assumed that the charging time for PHEVs occurred only between 10 a.m. to 6 p.m., that each vehicle only needed 13 kWh per night, and that each residential customer could have no more than one PHEV per home. They concluded that, with 60 per cent penetration, PHEVs would generate income during off-peak hours and help both companies recover their fixed costs and borrowing expenses more quickly than if they did not sell power to vehicles. By doing so, the utilities could reduce overall rates by as much as 0.4 cents per kWh for CGE and 5.0 cents per kWh for SDGE. In the case of CGE, the utility could acquire increased profits in the short term, enabling it to invest and maximize infrastructure and earn more rapid returns on investments. In the case of SDGE, the utility could use its transmission and distribution capital more effectively in off-peak periods, meaning that its cost of power declined. In other words, sales of power to V2G cars would improve the companies’ load factors (i.e., allow the companies to use their equipment more effectively) and reduce the overall cost of service on a per kilowatt-hour basis. As the cost of service declines, so would prices to customers.

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The National Renewable Energy Laboratory (NREL) also studied the hypothetical addition of PHEVs to actual recorded utility loads and considered their impact on peaking generation and reserve capacity.17 Assuming a PHEV penetration of 50 per cent, the study found that utilities could use large amounts of existing capacity to power PHEVs as long as they retained some control over when charging occurs. In other words, the company could increase revenues if it could restrict charging of the vehicles to off-peak times. A third study, by V2G concept pioneer Willett Kempton and postdoctoral scholar Josna Tomic, estimated that PHEVs could provide much-needed services that support the reliable operation of the transmission grid. They estimated the value of those electric services at up to $12 billion per year as a source of additional revenue for V2G owners.18 Indirectly, V2G PHEVs can further reduce emissions and air pollution in the electricity sector by providing storage support for intermittent renewable energy generators. In other words, the batteries in the vehicles could store electricity produced by renewable energy technologies such as wind turbines and solar photovoltaics and then provide the power back to the grid when needed. The power produced from these technologies fluctuates greatly from the moment to moment due to wind gusts and cloud cover, over the course of the day due to weather and thermal cycles, over the course of the month due to the movement of weather fronts, and from month to month as the seasons change. V2G PHEVs can offset the need for the spinning reserves and load management that are necessary to integrate these intermittent resources into the grid.19 The cars would replace (or, more likely, supplement) large-scale pumped hydroelectric and compressed air energy storage systems, which have already proven effective for renewable energy technologies. CONCLUSION The point is that achieving oil independence for Asia is possible, and foreign policy is not the only pathway. Countries in Asia and Southeast Asia can accomplish oil independence through robust and coordinated energy policies. To battle the “oil problem”, policy-makers need not talk only about securing supply in Iraq or Saudi Arabia nor about drafting new contracts with Nigeria and Russia. They could also focus on curbing demand for oil and expanding domestic conventional and alternative supplies. The key to implementing a strategy of oil independence is more a matter of managing the interdependence of technologies available to reduce oil demand and increase supply, rather than trying to establish the independence of countries from foreign supplies of oil.

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The most promising component of an oil independence strategy may be V2G PHEVs. The V2G transition has much to offer. Reducing petroleum use would help insulate regional economies from oil price spikes and shocks on the global market, enhancing national security and mitigating the transfer of wealth to oil-producing countries. It would also greatly improve the quality of the regional environment, displacing noxious emissions and damages to human health, the environmental, and the climate. Moreover, PHEVs offer motorists cost savings from efficiency and from the use of electricity as a fuel instead of gasoline, and they could greatly improve the economic performance of electric utility companies. NOTES 1 Benjamin K. Sovacool, “Solving the Oil Independence Problem: Is it Possible?” Energy Policy 35, no. 11 (November 2007): 5505–14. 2 Benjamin K. Sovacool and Richard F. Hirsh, “Beyond Batteries: An Examination of the Benefits and Barriers to Plug-in Hybrid Electric Vehicles (PHEVs) and a Vehicle-to-Grid (V2G) Transition”, Energy Policy 37, no. 3 (March 2009): 1095–103. 3 Lucy Sanna, “Driving the Solution: The Plug-In Hybrid Vehicle”, EPRI Journal (Fall 2005): 8–17. 4 For more details of these means used by HEVs to obtain better overall fuel efficiency, see P. Denholm and W. Short, “An Evaluation of Utility System Impacts and Benefits of Optimally Dispatched Plug-In Hybrid Electric Vehicles”, National Renewable Energy Laboratory Technical Report NREL/TP-620-40293, October 2006; and Joseph J. Romm and Andrew A. Frank, “Hybrid Vehicles Gain Traction”, Scientific American (April 2006): 72–79. 5 Denholm, “An Evaluation of Utility System Impacts and Benefits of Optimally Dispatched Plug-In Hybrid Electric Vehicles”. 6 Ibid. 7 Michael Kintner-Meyer, Kevin Schneider, and Robert Pratt, “Impacts Assessment of Plug-In Hybrid Vehicles on Electric Utilities and Regional U.S. Power Grids Part 1: Technical Analysis”, Pacific Northwest National Laboratory Report, 2007 (accessed 10 August 2007). 8 M. Duvall, “Comparing the Benefits and Impacts of Hybrid Electric Vehicle Options for Compact Sedan and Sport Utility Vehicles”, Electric Power Research Institute Final Report 1006892, July 2002. 9 Minnesota Pollution Control Agency, “Air Emissions Impacts of Plug-In Hybrid Vehicles in Minnesota’s Passenger Fleet”, Report for Plug-In Hybrid Task Force, March 2007. 10 Paulina Jaramillo and Constantine Samaras, “Comparing Life Cycle GHG

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Emissions from Coal-to-Liquids and Plug-in Hybrids”, CEIC Working Paper 07-04, June, 2007 (accessed 10 August 2007). NREL estimated that the electric equivalent of the “drive energy” in a gallon of gasoline that delivered 25–30 miles in a typical midsized car is about 9–10 cents per kWh, assuming a vehicle efficiency of 2.9 miles/kWh. The cost to drive the car would be less, of course, if utilities offered lower off-peak electricity prices for when the cars charge. See Steven Letendre, Paul Denholm, and Peter Lilienthal, “Electric and Hybrid Cars, New Load or New Resource?” Public Utilities Fortnightly (December 2006): 28–37. Amnad Faruqui, Ryan Hledik, Sam Newell, and Hannes Pfeifenberger, “The Power of 5 Percent”, The Electricity Journal 20 (October 2007): 68–77. Kintner-Meyer, Schneider, and Pratt, “Impacts Assessment of Plug-In Hybrid Vehicles”. Steven E. Letendre and Willett Kempton, “The V2G Concept: A New Model for Power?” Public Utilities Fortnightly, 15 February 2002, pp. 16–26. See Christopher Cooper, James Rose, and Shaun Chapman, Freeing the Grid: How Effective State Net Metering Laws Can Revolutionize U.S. Energy Policy (New York: Network for New Energy Choices, 2006), available at (accessed 10 August 2007). See Michael J. Scott, Michael Kintner-Meyer, Douglas B. Elliott, and William M. Warwick, “Impacts Assessment of Plug-In Hybrid Vehicles on Electric Utilities and Regional U.S. Power Grids Part 2: Economic Assessment”, Pacific Northwest National Laboratory Report 2007 (accessed 10 August 2007). Denholm and Short, “An Evaluation of Utility System Impacts and Benefits of Optimally Dispatched Plug-In Hybrid Electric Vehicles”. Willett Kempton and Josna Tomic, “Vehicle-to-grid Power Fundamentals: Calculating Capacity and Net Revenue”, Journal of Power Sources 144 (2005): 268–79. Dr Kempton has been advancing the V2G concept since 1997, if not earlier. See Willett Kempton and Steven E. Letendre, “Electric Vehicles as a New Power Source for Electric Utilities”, Transportation Research Part D: Transport and Environment 2, no. 3 (1997): 157–75. Willett Kempton and Josna Tomic, “Vehicle-to-Grid Power Implementation: From Stabilizing the Grid to Supporting Large-Scale Renewable Energy”, Journal of Power Sources 144 (2005): 280–94.

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JAPAN’S ENERGY SUPPLY-DEMAND SITUATION, ENERGY CONSERVATION POLICY, AND ENERGY CHALLENGES Yuji Morita

ABSTRACT In the decade after World War II, the main energy source in Japan was coal, which was replaced gradually by oil in the 1970s. After the two oil shocks of the 1970s, awareness of the need for energy conservation grew. Active efforts were made to shift to a post-oil economy, with reduced reliance on oil and a shift to coal, natural gas, and nuclear power. However, the question of how to secure a stable oil supply remains a major challenge for Japan, as the country still depends on oil for much of its energy supply. The manufacturing industries have curbed their final energy consumption despite the subsequent economic recovery, thanks to an industrial structure that shifted emphasis from materials to IT and other industries, and to the introduction of energy conservation technology in response to a rise in energy prices. The income elasticity of energy (GDP elasticity) is a useful yardstick for directly examining the relationship between economic growth and energy consumption. The energy demand of a country is essentially determined not only by the size of its economy but also by a variety of factors such as its industrial structure, the

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lifestyle of its people, the level of its technology, and the condition of its climate. As a result of the two oil crises, change in Japan’s industrial structure was undertaken and energy efficiency improved during this period. The two oil crises of the 1970s raised awareness of the importance of energy conservation and led to the implementation of energy conservation measures, including the establishment of legislation, various subsidies, and tax measures. In recent years, Japan’s energy security has remained fragile not only because of a rise in the crude oil price but also because of the growing energy demand of Asian countries such as China and India and increasing oil dependence on the Middle East. Therefore, it is an urgent challenge for Japan to secure its energy supply, particularly by ensuring crude oil supply and promoting a shift to other energy sources such as natural gas and coal. INTRODUCTION Energy Supply-Demand Conditions in Japan The total primary energy supply in Japan in the fiscal year of 1955, ten years after the end of World War II, stood at 641 trillion kcal, or 64.1 million tonnes of oil equivalent (TOE).1 The main energy source at that time was coal, which accounted for 47.2 per cent of the total energy supply, compared with only 17.6 per cent for oil. The primary energy supply continued to expand in line with Japan’s subsequent economic growth, totalling 3,854 trillion kcal (385.4 million TOE) in the fiscal year of 1973, when the first oil crisis occurred, up 10.5 per cent over the previous year. Oil gradually replaced coal as the main energy source, with the proportion of oil in the total supply reaching 77.4 per cent in fiscal 1973, compared with 15.5 per cent for coal (Figure 10.1). Prompted by the first oil crisis of October 1973 and the second oil crisis of February 1979, the Japanese became aware of the need for energy conservation, and active efforts were made to promote a transition to a “postoil economy” (reduced dependence on oil and a shift to other energy sources such as coal, natural gas, and nuclear power). Although the primary energy supply in Japan continued to increase thereafter, the pace of increase slowed due to the subsequent economic recession and other factors. The amount totalled 3,972 trillion kcal in fiscal 1980 (representing an average annual rise of 0.4 per cent over the period from fiscal 1973), immediately after the second oil crisis of February 1979, and 4,910 trillion kcal in fiscal 1991 (representing an average annual rise of 1.9 per cent over the period from fiscal 1980), after the Gulf Crisis of August 1990. In fiscal 2006, the primary energy supply totalled 5,601 trillion kcal, representing an average annual rise

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Source: Compiled based on the 2008 version of the EDMC Handbook of Energy & Economic Database in Japan, published by the Institute of Energy Economics, Japan.

Figure 10.1 Trend in the Primary Energy Supply by Type of Energy Source

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of 0.9 per cent over the period from fiscal 1991. The proportion of oil in the total primary energy supply, which had stood at 74.4 per cent in fiscal 1974, declined to 66.1 per cent in fiscal 1980, after the second oil crisis of 1979, and to 56.7 per cent in fiscal 1991, after the Gulf Crisis of 1990. In fiscal 2006, the proportion fell further to 47.9 per cent. However, the question of how to secure stable oil supply remains a major challenge for Japan, as the country still depends on oil for much of its energy supply. TRENDS IN FINAL ENERGY CONSUMPTION Energy consumption in Japan totalled 279.58 million tonnes in fiscal 1979, when the second oil crisis occurred. Over the following three years to fiscal 1982, however, the amount declined at an average annual rate of 3.8 per cent, before starting to rise again. Energy consumption totalled 248.84 million TOE in fiscal 1982, and it thereafter continued to increase due to factors such as stabilization of energy prices at low levels, the “bubble economy” of the late 1980s through the early 1990s, and the massive energy consumption of the huge volume of equipment and devices purchased during the bubble economy era, which continued into the post-bubble era. Energy consumption in fiscal 2006 totalled 367.0 million TOE, about 1.0 per cent reduction from 371.4 million TOE in fiscal 2005 (Figure 10.2). A sector-by-sector breakdown shows that the final energy consumption in the industrial sector, after peaking at 165.66 million TOE in fiscal 1973, continued to decline, down to 130.13 million TOE in fiscal 1982.2 In fiscal 2006, final energy consumption in the industrial sector totalled 171.16 million TOE, representing an average annual rise of 1.1 per cent over the period from fiscal 1982, lower than the rise in the overall final energy consumption (Figure 10.3). In the industrial sector, manufacturing industries have curbed their final energy consumption despite the subsequent economic recovery, thanks to a change in industrial structure that shifted emphasis from materials to IT and other industries and to the introduction of energy conservation technology in response to a rise in energy prices (which would lead to an erosion of the cost competitiveness in international markets). The steel industry, in particular, has made remarkable progress in promoting energy conservation. As a result, the proportion of final energy consumption by the manufacturing industries of Japan, which had stood at 36.4 per cent in fiscal 1974, declined to 25.8 per cent in fiscal 2006. The combined proportion of the four energy-intensive industries — steel, paper and pulp, chemicals, and cement declined from 44.4 per cent in fiscal 1974 to 31.0 per cent in fiscal 2006 (Figure 10.4).

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Source: Compiled based on the 2008 version of the EDMC Handbook of Energy & Economic Database in Japan, published by the Institute of Energy Economics, Japan.

Figure 10.2 Trend in Final Energy Consumption

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Source: Compiled based on the 2008 version of the EDMC Handbook of Energy & Economic Database in Japan, published by the Institute of Energy Economics, Japan.

Figure 10.3 Trend in Final Energy Consumption by Sector

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Source: Compiled based on the 2008 version of the EDMC Handbook of Energy & Economic Database in Japan, published by the Institute of Energy Economics, Japan.

Figure 10.4 Trend in Final Energy Consumption in Manufacturing Industries

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Meanwhile, energy consumption in the transport sector totalled 43.43 million TOE in fiscal 1973 and continued to rise consistently thereafter. In fiscal 2006, energy consumption in this sector totalled 89.73 million TOE, representing an average annual rise of 2.2 per cent over the period from fiscal 1973, much higher than the rise of 1.0 per cent registered by the overall final energy consumption. The transport sector can be broadly divided into the freight transport sector and the passenger transport sector. Energy consumption has increased particularly sharply in the passenger transport sector. As automobiles account for most of the passenger transport volume, the rise in energy consumption in the passenger transport sector is closely connected to an increase in the number of automobiles owned. The number of automobiles owned in Japan almost tripled from 25.16 million units in fiscal 1973 to 75.68 million units in fiscal 2006. Energy consumption has continued to grow despite the implementation of various measures such as improvement in automobile fuel economy and enhancement of road traffic systems. Although the freight transport sector also depends on automobiles to a large degree, energy consumption has not grown as sharply in this sector, due to factors such as change in the industrial structure, a modal shift to other transport means, and a decline in transport demand reflecting the economic slump of recent years (Figure 10.5). Energy consumption in the residential and commercial sectors has shown a remarkable increase, as in the transport sector. Energy consumption in these sectors totalled 48.03 million TOE in fiscal 1973 and continued to grow thereafter. In fiscal 2006, energy consumption in these sectors totalled 100.71 million TOE, representing a sharp average annual rise of 2.3 per cent over the period from fiscal 1973. Energy consumption in the residential sector represents consumption in households, while energy consumption in the commercial sector represents consumption in office buildings, hospitals, school buildings. The rise in energy consumption in the residential sector is closely related to an increase in the number of households, and the rise in energy consumption in the commercial sector is closely related to an increase in the total floor space of buildings.3 In the residential sector, various energy sources such as electricity, city gas, liquefied petroleum gas, and kerosene are used for the purpose of air conditioning, water heating, cooking, lighting, and so on, in accordance with the equipment and devices used. Particularly notable is the rise in the amount of electricity consumed due to the diffusion of electrical appliances such as refrigerators, air conditioners, and IT products. Although the government has been promoting energy conservation in such electrical appliances by

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Source: Compiled based on the 2008 version of the EDMC Handbook of Energy & Economic Database in Japan, published by the Institute of Energy Economics, Japan.

Figure 10.5 Trend in Energy Consumption in the Transport Sector (Fiscal 1973=100)

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introducing the Top Runner Program, energy consumption is still continuing to increase. The amount of energy consumption in this sector increased from 23.59 million tonnes in fiscal 1973 to 53.58 million TOE in fiscal 2006, representing a high annual rise of 2.5 per cent (Figure 10.6). In the commercial sector, energy is also consumed mainly for the purpose of air conditioning, water heating, and lighting, with a variety of energy sources used as in the case of the residential sector. In the commercial sector, the use of cogeneration systems, which improve energy efficiency by utilizing both electricity and heat, is expanding. However, the total floor space, which is a benchmark for energy consumption, is continuing to increase year on year. The total floor space increased to 17.76 million square metres in fiscal 2006 from 6.76 million square metres in fiscal 1973, representing an average annual rise of 3.0 per cent over the period. In line with the expansion of the total floor space, energy consumption in the commercial sector is continuing to increase. The amount of energy consumption totalled 47.13 million TOE in fiscal 2006, up from 24.44 million TOE in fiscal 1973, representing an average annual rise of 2.0 per cent over the period (Figure 10.7). THE RELATIONSHIP BETWEEN JAPAN’S ENERGY AND ECONOMY GDP Elasticity The income elasticity of energy (GDP elasticity) is a useful yardstick for directly examining the relationship between economic growth and energy consumption. The energy demand of a country is essentially determined not only by the size of its economy but also by a variety of factors such as its industrial structure, the lifestyle of its people, the level of its technology, and the condition of its climate. Income elasticity examines the relationship between economic growth and energy consumption by considering all such factors as elements of economic growth. Let us take a look at the relationship between Japan’s economic growth (real GDP) and energy consumption (domestic primary energy supply) in successive, ten-year periods after 1965. Between 1965 and 1975, during which time the first oil crisis occurred, GDP grew at an average annual rate of 7.6 per cent, while domestic primary energy supply expanded at a higher annual rate of 8.5 per cent. Calculated on these figures, the GDP elasticity comes to 1.12. However, over the ten-year period between 1975 and 1985, during which time the first oil crisis continued to have an impact and the second oil crisis occurred, the annual GDP growth rate slowed down to 3.6 per cent and

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Source: Compiled based on the 2008 version of the EDMC Handbook of Energy & Economic Database in Japan, published by the Institute of Energy Economics, Japan.

Figure 10.6 Trend in Energy Consumption in the Residential Sector (Fiscal 1973=100)

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Source: Compiled based on the 2008 version of the EDMC Handbook of Energy & Economic Database in Japan, published by the Institute of Energy Economics, Japan.

Figure 10.7 Trend in Energy Consumption in the Commercial Sector (Fiscal 1973=100)

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the growth rate of domestic primary supply declined even more sharply to 1.4 per cent, with the GDP elasticity dropping to 0.37. This indicates that, as a result of the two oil crises, a change in Japan’s industrial structure was implemented and energy efficiency improved during this period. Over the forty-one-year period between 1965 and 2006, the GDP grew at an annual average rate of 3.8 per cent and domestic primary energy supply expanded at an annual rate of 3.0 per cent, with the GDP elasticity coming to 0.78 (Figure 10.8). Energy Intensity “Energy intensity” is an index that indicates the amount of energy consumption per unit of GDP. A lower energy intensity means more efficient GDP production. Therefore, energy intensity is often used as a yardstick in the measurement of year-to-year changes in the level of energy conservation on a macroeconomic basis and in international comparisons thereof. As in the case of GDP elasticity, let us take a look at the trend in energy intensity in successive ten-year periods after 1965. Between 1966 and 1975, Japan’s energy intensity stood at 152.0 TOE/100 million. However, between 1976 and 1985, a period affected by the two oil crises, energy intensity declined to 128.2. Energy intensity between 1996 and 2006 declined further to 108.2, or 71 per cent of the level between 1966 and 1975, which is equivalent to energy conservation of 29 per cent (Figure 10.9). The indexes usually used to examine energy intensity on a sector-bysector basis are ones closely related to energy consumption, such as the production volume and the production index in the case of the industrial sector, the number of households in the case of the residential sector, and person-kilometres and tonne-kilometres in the case of the transport sector. In energy-intensive industries such as steel, paper/pulp, and ceramics/cement, energy intensity improved significantly after the two oil crises (Figure 10.10). The steel industry, in particular, substantially improved its energy intensity through measures such as replacing fuel oil used for temperature adjustment of blast furnaces with coal, taking advantage of new technology developed after the two oil crises, and recycling waste energy by introducing blast furnace top pressure recovery turbines and coke dry quenching equipment (Figure 10.11). Promotion of Energy Conservation The two oil crises of the 1970s raised awareness of the importance of energy conservation and led to the implementation of energy conservation measures,

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Source: Compiled based on the 2008 version of the EDMC Handbook of Energy & Economic Database in Japan, published by the Institute of Energy Economics, Japan.

Figure 10.8 Trend in GDP, Energy Consumption and GDP Elasticity

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Source: Compiled based on the 2008 version of the EDMC Handbook of Energy & Economic Database in Japan, published by the Institute of Energy Economics, Japan.

Figure 10.9 Trend in GDP, Energy Consumption and Energy Intensity

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Source: Compiled based on the 2008 version of the EDMC Handbook of Energy & Economic Database in Japan, published by the Institute of Energy Economics, Japan.

Figure 10.10 Trend in Energy Intensity in Energy-intensive Industries

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Source: Compiled based on the Handbook for Iron and Steel Statistics, published by the Japan Iron and Steel Federation.

Figure 10.11 Trend in Fuel Oil Consumption in the Steel Industry

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including the establishment of legislation, various subsidies, and tax measures. Regarding legislation, the Law Concerning Rational Use of Energy, also known as Energy Conservation Law, was established and put into force in June 1979, immediately after the second oil crisis. The Energy Conservation Law specifies actions that should be taken by companies in each sector and assistance measures that should be implemented by the government. In 1993, provisions concerning the establishment of basic policies for energy conservation and the requirement for periodical reports regarding specified energy management factories were added to this law. Meanwhile, based on the results of the third session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP3), held in Kyoto in 1997, the Energy Conservation Law was revised in 1998 to include provisions for additional measures, such as the Top Runner Program for the fuel efficiency of vehicles and energy efficiency of electrical appliances, requiring large-scale, energy-consuming factories to compile and submit medium- and long-term energy conservation plans, and obligating medium-scale factories to appoint energy managers. Furthermore, in order to enhance energy conservation efforts in the residential and commercial sectors, where energy consumption was growing at a remarkable pace, the law was revised in June 2002 to obligate largescale office buildings to conduct energy management in a similar way to large-scale factories as well as the reporting of energy conservation measures in residential and commercial buildings with a floor space of 2,000 square metres or larger. Later, following the effectuation of the Kyoto Protocol in February 2005, it became inevitable to require the total control of energy consumed by factories as part of energy conservation efforts. Furthermore, the need for another legal revision grew due to factors such as the accelerated introduction of cogeneration systems and heat pump technology, progress in the mutual replacement of heat and electricity and increased need for energy conservation in the transport sector in particular. As a result, the Energy Conservation Law was revised in August 2005 and the revised law was put into force in April 2006 (Figure 10.12). Major measures implemented as a result of the revision were as follows: • • •

Promotion of total control of heat and electricity at factories and businesses; Obligation for large-scale transportation companies and cargo owners to make periodical reports and formulate and submit action plans; Expansion of the range of buildings regarding which notification of energy efficiency measures is obligated.

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Source: The Agency for Natural Resources and Energy in the Ministry of Economy, Trade and Industry.

Figure 10.12 Revision of the Law Concerning the Rational Use of Energy (The Energy Conservation Law, Effective since Apr.1 2006)

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INDUSTRIAL SECTOR Energy Conservation Measures at Medium- and Large-Scale Factories The Energy Conservation Law obligates Type 1 specified energy management factories (with a annual energy consumption of 3,000 kilolitres or more of crude oil equivalent, including both heat and electricity), to appoint energy managers, formulate and submit energy conservation plans (medium- and long-term plans), and periodically report the status of energy use. In addition, since 2001, comprehensive inspections have been conducted since 2001 on Type 1 specified energy management factories, regarding the status of compliance with standards based on the Energy Conservation Law so as to ensure thorough energy conservation efforts. Furthermore, Type 2 specified energy management factories (with annual energy consumption of between 1,500 kilolitres and 3,000 kilolitres of crude oil equivalent, including both heat and electricity) are obligated to appoint energy managers, provide training to ensure improvement in the quality of the managers, and periodically report the status of energy use. Keidanren Voluntary Action Plan In June 1997, the Nippon Keidanren (Japan Business Federation) announced the “Voluntary Action Plan on the Environment”, which set a goal of keeping the total amount of carbon dioxide emissions by the relevant industrial sectors in 2010 at or below the level of fiscal 1990. The Keidanren also set sector-by-sector emission reduction targets and has been promoting voluntary efforts based on the action plan. Currently, a total of sixty-one industries and companies are participating in the plan. The carbon dioxide emissions of thirty-five industries in the industrial and energy-conversion sectors totalled 512.03 million tonnes in the base year of fiscal 1990, accounting for around 45 per cent of the total carbon dioxide emissions in Japan and around 84 per cent of the combined emissions by the industrial and energy conversion sectors (612.32 million tonnes in fiscal 1990). The carbon dioxide emissions of the thirty-five industries totalled 504.58 million tonnes in fiscal 2006, down 1.5 per cent compared with fiscal 1990 (down 0.2 per cent compared with fiscal 2005), achieving the emission reduction target for seven straight years from fiscal 2000 (Table 10.1). Decisions on targets and other details of the Voluntary Action Plan are up to businesses. However, in order to ensure the transparency and reliability of the plan and to increase the chance of target achievement, government councils and other entities periodically conduct follow-up evaluations.

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Table 10.1 Trend in CO2 Emissions in the Industrial Sector FY1990

CO2 Emission Mt % to FY 1990

2001

2002

2003

2004

2005

2006 2008–2010 Average

Actual

Target

512.03 490.62 499.76 503.99 504.97 505.67 504.58 100.0 95.8 97.6 98.4 98.6 98.8 98.5