Energy Problems and Cooperation in Asia-- Aiming to Establish Asian Superiority --

Yoshiki Ogawa

Professor, Faculty of Economics, Toyo University, JapanVisiting Researcher, the Institute of Energy Economics, Japan

25 November, 2005, New Delhi, IndiaMinisterial Round Table on Cooperation between North and Central Asian

Producers and Principal Asian Consumers Regarding Stability, Security and Sustainability in the Asian Hydrocarbons Economy

Contents of Presentation

1. Energy Problems in Asia

2. Strategic Subjects Should Be Challenged by Asian Countries

3. Concluding Remarks

1. Energy Problems in Asia

Economic Growth and Energy Problems inAsia

Rapid expansion of energy consumption due to steady economic growthDepending fossil fuels (about 80%) up to 2030Large coal dependencyInsufficient gas pipelines networkLow share of natural gas (less than 10%)Rapid increase of oil demand centering transport fuelIncrease of net oil import due to oil production in Asia which can not follow demand increaseIncreasing import dependency to Middle East oil more than doubled from 1985 through 2004Severe impact of emergency happenings which bring oil supply disruption from Middle East

-5

0

5

10

15

20

25

30

35

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

OECD Asia

China

East Asia

South Asia

(1 mil. B /D)

2.0

4.5

18.7

26.5

33.4

Increasing Net Oil Import in Asia

(Source) Made from data in BP Statistics and IEA, “World Energy Outlook 2004”

5

10

15

20

25

30

35

40

45

50

55

60

65

1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7

85 86 90898887 999897969594939291 00 01 02 03 04

($/B)

Gulf Crisis Iraq war

Dubai

Brent

WTI

9.11 Terro

Price collapse

Asia economic crisis

05

Hurricane Katrina

Skyrocketing Rise and Violent Fluctuations of Crude Oil Price

Weakened Oil Supply Cushions in Production, Refining, and Inventory

• Reduction of structural surplus made by oil crises in 70’s# Lowering crude production surplus -- about 1 mil. B/D# Lowering refining surplus -- rate 90％< for all region# Lowering oil inventories -- price hike of products and NG in US

• Overshooting reactions in US and Europe future markets# Sensitive responses made by expectations to daily news# Expansion of speculative activities using fundamental bottlenecks# Price fluctuations and risks intensified by overshooting reactions

• A vicious spiral of violent price fluctuations and low plant investments# Supply increase by suitable investments if price hike continues# But unable to invest due to large risk of unexpected changes# Increasing price fluctuations due to weakened supply cushions

Higher Crude Oil Price in Asia

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 110

14

18

22

26

30

34

38

42

46

50

1991 200019991998199719961995199419931992 2001

AL Formula Price for AsiaAL Formula Price for EuropeAL Formula Price for USA

($/B) ($/B)

AL for Asia－ AL for Europe

Average s ince 1991 0.97$/B

2002 2003

Average s ince 1997 1.10$/B

2004 2005

Higher Energy Prices and International Competitiveness of Asia

• Average differential of 0.97$/B at long-term from 1991 to 2005# Continuation of higher prices more than 10 years# Differential reduced in pricing rising stage of 1996, 2004-05# Average premium 1.10$/B since 1997

• Higher price not limited to oil but exposed on whole energies# Price of other energies such as LNG is raised by oil price# LNG has an another original problem for higher price.

LNG Prices for Asia also remained higher than those for Europe by average 5.7 $/B-oe since 1992.

# LPG contract price shows ups and downs like emergency time – one-way force by producing countries

• Additional income transfer of 5 to 10 billions $ from Asian consuming countries to oil producing countries

• International competitive of Asian Economy largely influenced byhigher energy prices

2. Strategic Subjects Should Be Challenged by Asian Countries

Strategic Subjects for Asian Countries(1) To prepare oil stockpile for emergency and to develop

coordinated system for oil stockpile use (2) To develop international oil markets in Asia(3) To strengthen fuel switching flexibility at demand side(4) To prepare oil stockpile at final consumer(5) To develop oil and gas resources in FSU and to prepare

supply networks(6) To develop technologies for effective use of coal, rich

domestic resources(7) To develop and to infiltrate technologies for energy

conservation and environmental protection(8) To develop competitive renewable and new energies

Importance of Oil Market Development in Asia and Middle East

• Formation of marker price by spot trading of ME crude# Marker crude in US and Europe takes just a marginal position# ME crude (Es. Saudi crude) is a representative of global supply# Formation of marker price through global arbitrages in spot

trading• Oil market development in Asia and linkage with US

and European markets# Asia is a large consuming area with oil demand of 15 mil. B/D

which is a similar size to Europe/US# Immature international oil market functions in Asia compared

with US and Europe# Sending price signals from consuming area by development of

oil market# Establishing Oil product market linkage with US and Europe

Global Links of Oil Markets

North Africa

US Market

Asia Market

Europe Market

Canada

West Africa

North Sea

Former USSR

Latin

Middle East

Southeast Asia

Oceania

Links of Product Prices

Links of Crude PricesFlow of Crude Oil

Importance of Alternative Crude Oil Developments in Area excluding ME

Procurement expansion of West African and North Sea crudesDevelopments of neighboring oil resources-- Sakhalin and Far East Russia-- Central Asia such as Azerbaijan, Kazakhstan and

TurkmenistanDevelopments of oil resources in Atlantic Sphere such as West Africa and LatinDevelopments of unconventional oil such as oil sand and oil shaleDevelopments of liquid fuel (GTL) from NG, coal etc.

Efficient Use of Coal Positioned as Rich Domestic Resource in Asia

1) Development of coal mines* Rational coal mine development plan and industry control* Modernization of coal production

2) Upgrading of transportation system* Rational roles of road, rail and ship transportation* Optimizing nationwide transportation system including

optimum allocation of fuels* Regional optimization of export and import of coal

3) Rationalization of coal use* Identifying coal’s position and role in rationalizing the energy

structure* Technology for efficient use of coal* Clean Coal Technology for cleaner environment

4) Joint technology development* Efficient Clean Coal Technology* Gasification and hybrid use for CCGT

Recent Coal-fired Power Plant

Berth

Closed Belt Conveyor

Silo

To Play Consumer’s SuperiorityTechnology Development and Suitable Energy Mix• To increase consumer strength and advantages

# Mainly adopting supply measures by fixing demand till now# Important to develop demand flexibilities in consumer from now# Flexibility between crude and product, Flexibility of fuel switch

• To create consumer strength by technology development# Higher-grade energy saving technologies not to increase energy

use unnecessarily# Technologies for effective uses of various energies

Ex. CCT, gasification plant• To pursue appropriate energy mix and to establish comprehensive energy industries# Borderless conditions among energy industries by deregulation# Energy selection is a source of consumer strength

Required various options# Important to grow out of a comprehensive energy industry

making the best use of each own advantages

Importance on regional and international cooperation in energy sector

Energy security is a common issue in AsiaRegional and international cooperation is beneficial from the following viewpoints# Synergies# The most suitable utilization of resources, capitals,

technologies, infrastructures etc. # Bargaining power# Shift from national energy market to regional energy

market= Energy efficiency improvements= New business opportunity

Examples of regional and international cooperation in Asia# Cooperation among North East Asian countries# Cooperation in ASEAN+3 (China, Korea, Japan)# Cooperation in ASEAN

Cooperation among Asian Countries and Dialogues with Oil Producing Countries

• Cooperation among Asian countries# Important to make a common perception among Asian countries# Consultations on response measures# Necessary to intensify negotiation power through cooperation# Pursuing win-win relations by cooperation and competition# Cooperation between North and Central Asian producers and

Asian consumers

• Dialogues with oil producers# Important to have opinion exchanges with oil producing

countries through dialogues such as IEF# Crucial to have a dialogue between East-West Asian countries

whose interdependent relations will be tight

3. Concluding Remarks

Aiming to Establish Asian Superiority in the Hydrocarbon Economy

Asia is now faced with various energy problems such as oil supply security, violent price fluctuations and higher energy prices.

Asia should challenge various strategic subjects in the hydrocarbon sector. There is no single all-mighty option. Asia need to tackle all of the possible options to establish her superiority.

Regional and international cooperation among Asian countries in the hydrocarbon economy is quite crucial to achieve sound and sustainable developments .