[Kabar-indonesia] Economist Intel Unit: Energy Security in Asia [incl: Indonesia]

[Joyo at aol.com]

Economist Intelligence Unit 
Issue cover dated June 26, 2006

Pursuit of power

With oil prices unlikely to fall much this year or
next, what is Asia doing to offset the impact of high
energy costs and, more broadly, to improve its energy
security?

Asian economies seem to be coping well with high
international oil prices so far. However, the
situation is highlighting broader long-term worries
about energy security. Asia's biggest economies—Japan,
China, India and South Korea—are heavily dependent on
energy imports, and China and India in particular face
a widening gap between domestic supply and their
energy needs. The tight oil market magnifies
geopolitical and supply risks—with little spare
capacity available, even a small disruption in supply
could have economic and political repercussions.

Although many factors determine a country's energy
security, heavy reliance on imports and high "oil
intensity"—a term referring to the amount of oil
required to produce a given unit of economic
output—are two indicators of potential vulnerability
to high prices.

So how do Asian economies perform on these measures?
In most countries in the region, oil consumption
exceeds domestic production. During parts of 2005 even
Indonesia, Asia's only OPEC member, was a net oil
importer. Moreover, of the world's biggest importers
of oil, the three most oil-intensive countries are in
Asia—China, South Korea and India.

In 2004 China and India each consumed more than 1.5m
barrels per US$1bn of GDP, twice the world average.
Several other Asian economies—notably Thailand and the
Philippines—also are net oil importers and highly
oil-intensive. There are, however, exceptions to the
rule: Singapore ranks highly on the oil-intensity
index, but this reflects its large refining industry
rather than high levels of petroleum consumption;
Japan depends heavily on imported oil, but it is the
least oil-intensive major economy in Asia.

If import-dependence and oil-intensity are good rough
indicators of energy insecurity, then countries should
be trying to minimise their vulnerability by reducing
reliance on imports and expanding alternative sources
of energy. In theory, an obvious means of reducing
import-dependence is to increase domestic production.
In reality, few Asian countries are in a position to
wean themselves off imports given escalating demand,
limited domestic reserves and inadequate
infrastructure. Another strategy is to diversify
overseas sources of energy imports to reduce reliance
on imports from any one region.

Oil-intensity can be lessened by improving efficiency
and investing in alternative energy sources. Countries
that require less oil to run their economies are
better able to weather high prices and minimise the
risk of supply disruptions.

China

China overtook Japan in 2003 to become the world's
second-largest oil consumer, and the country's red-hot
economy currently consumes more than 7m barrels per
day (b/d). As industrial production continues to
expand rapidly and vehicle sales grow, Chinese demand
for fossil fuels is unlikely to slacken—the Economist
Intelligence Unit estimates that China's energy
consumption will increase by almost 30% between 2006
and 2010. Although the government is stepping up oil
exploration and production, particularly in the
western part of the country, the domestic energy
sector cannot keep pace with surging demand. As a
result, China has grown increasingly dependent on
imported oil since becoming a net importer in 1993.

Gaining access to energy supplies abroad is therefore
a top government priority. In the hope of reducing its
dependence on Middle East oil, China is taking a
particular interest in potential sources in Central
Asia. A newly completed pipeline from Atasu in
Kazakhstan to Xinjiang is expected to deliver 200,000
b/d of crude oil. In the past few years, China's three
largest energy firms—China National Offshore Oil
Corporation (CNOOC), China National Petroleum
Corporation (CNPC) and Sinopec—have also made
significant investments further afield, in Africa,
Latin America and South-east Asia. However, attempts
to cultivate overseas suppliers sometimes carry a
political cost: China's investments in Iran, Myanmar
and Sudan have hurt its international image and
undermined its attempts to convince the world, and
particularly the US, that it intends to become a
responsible stakeholder in the international system.

Indeed China's energy interests are increasingly
driving its foreign policy. Most of China's oil
imports come from the Middle East, using sea lanes
patrolled by the US navy and passing through the
narrow Malacca Strait. To reduce these strategic
vulnerabilities, China is modernising its navy and may
finance overland pipelines from the Burmese port of
Sittwe on the Bay of Bengal to Yunnan province (in
south-west China) and from Gwadar, Pakistan to
Xinjiang province (in north-west China).
Unfortunately, China's military modernisation poses a
security dilemma—China cannot acquire the military
means to safeguard its oil supply without unsettling
its neighbours and the US.

Another element of China's energy security strategy is
the acquisition of foreign firms, but this has had
mixed success. CNOOC's bid for US-based Unocal in 2005
was sunk by political opposition in the US, where a
growing number of policymakers believe that China is
determined to "lock up" energy supplies rather than
participate in global markets. However, other
ownership bids by Chinese companies have been more
successful, such as CNPC's US$4.2bn acquisition of
Canadian-owned PetroKazakhstan last year.

Although China has made steady progress since 1978, it
remains one of the least energy-efficient countries in
Asia. The government is determined to improve this. A
new energy conservation law is under consideration,
and the government has committed to reducing energy
costs per unit of GDP by 20% between 2000 and 2010.
But this will be exceedingly difficult to achieve
without radical adjustments to the country's
energy-pricing system, which forces energy firms to
buy high on the international market and sell low at
home. There are signs that high oil prices are forcing
the government to liberalise its energy-pricing
policies—the government raised fuel prices in May—but
progress is likely to be slow. China's leaders are
anxious not to trigger social unrest.

A partial solution may lie in China's growing use of
nuclear and hydroelectric power. China also has vast
coal reserves, which offer substantial potential for
the adoption of clean-coal technology. The search for
cleaner power is likely to become a more prominent
theme in China over the next few years, dovetailing
with growing attention to (and concern over) the
country's serious environmental problems. Both to
reduce pollution and conserve energy, China recently
introduced car emission standards higher than those in
the US.

India

Like China, India is highly dependent on imported
energy. According to Economist Intelligence Unit
projections, India's petroleum consumption will rise
sharply over the next few years from around 2.5m b/d
per day at present to 3.3m b/d in 2010. Energy demand
will remain robust, as manufacturing and consumption
of electrical goods take off. The prospect of growth
in India's largely untapped automotive market—which
has a current penetration rate of under nine cars per
1,000 people—also has the potential to boost petrol
consumption and thus demand for imported oil.

Despite climbing demand, India's domestic oil
production has been stagnant for a decade at about
800,000 b/d—equivalent to only about 30% of
consumption in 2005. The government is trying to
offset import-dependence, but domestic production
cannot keep pace with escalating demand. Although the
government's New Exploration Licensing Policy opened
India's petroleum sector to foreign involvement in
1997, continuing restrictions on foreign investment,
as well as severe infrastructure bottlenecks, have
prevented the country from taking advantage of almost
5.4bn barrels of proven oil reserves.

India is therefore looking to secure overseas sources
of energy in a number of regions around the world. The
government-owned Oil and Natural Gas Corporation,
India's largest oil producer, has several major
investments in Russia, Vietnam, Africa and the Middle
East.

Reliance Industries, India's biggest private-sector
energy firm, which is already present in Oman and
Yemen, recently won an exploration bid in East Timor.
Compared with China, however, India has not tied up
significant long-term contracts or external supplies
and it remains reliant on the world market.

Energy diversification is also a priority. India has
large coal reserves and is building gas pipelines and
liquefied natural gas terminals. It is seeking to
expand its use of nuclear power, hydroelectric power
(for which the country offers vast potential) and
clean-coal technology.

Japan

At 5.6m b/d in 2005, Japan is the world's
third-largest oil consumer.

Since the country has almost no oil reserves, it is
overwhelmingly dependent on imports to meet demand.
Although this ensures that energy security is a
fundamental concern of the Japanese government, many
of its similarities with the rest of Asia end there.
For example, Japan's demand for energy is unlikely to
increase substantially over the next several years.
The government has also successfully promoted energy
efficiency—Japan's economy is almost six times as
large as South Korea's but uses only two and a half
times as much energy.

Nevertheless, Japan's extreme import-dependence has
motivated efforts to improve its energy security by
diversifying its oil supply away from the Middle East,
especially through equity stakes in Central Asia, the
Caspian Sea region and Russia. This strategy has
placed Japan at odds with China, as both countries
compete to secure supplies from the same sources. The
rivalry has exacerbated territorial disagreements in
the East China Sea, where the suspected existence of
vast oil reserves (in addition to gas, already
discovered in the area) has complicated efforts to
agree on a maritime border. Competition between Japan
and China for energy resources has also been manifest
in both countries' lobbying of Russia over the route
of a proposed pipeline that would transport Siberian
oil eastwards—Japan wants the pipeline to lead to the
Russian coast on the Sea of Japan, from where it could
be shipped by tanker to Japan. It hopes to dissuade
Moscow from choosing a shorter route into China.

Given Japan's unavoidable dependence on imports and
already impressive energy efficiency, the key to
Japan's energy security will be to expand its nuclear
power sector. However, this will require overcoming
significant popular opposition rooted in the country's
poor nuclear safety record.

South Korea

South Korea has no oil of its own but is among the
world's largest oil consumers. In 2005 all of the
country's oil supplies, some 2.3m b/d, were imported,
making it the fifth-largest net importer in the world.

This reliance on imports has led to efforts to
diversify supply. South Korea's strategy has been to
acquire stakes in oilfields in various countries.
Fearful of over-reliance on Middle Eastern oil, the
state-owned Korea National Oil Corporation (KNOC) has
pursued investments in Central Asia and the Caspian
Sea region, which are viewed as relatively stable.
KNOC has recently signed exploration agreements in
Azerbaijan and Uzbekistan.

South Korea is also trying to diversify the types of
energy it uses.

The country has reduced its dependence on imported oil
by expanding its nuclear power industry. Nuclear power
already accounts for almost 40% of electricity
generation, one of the highest levels in the world.

(Even for Japan, the figure is only around 23%.)
However, despite this South Korea also stands out as
one of the least energy-efficient advanced industrial
economies, consuming nearly 1.1m barrels of oil for
every US$1bn of GDP produced in 2004. This in part
reflects rapid industrialisation and a booming,
export-led economy fuelled by heavy industries like
shipbuilding, vehicle manufacturing and steel
production. South Korea's energy security will slowly
improve as the economy continues to mature and
diversify.

Taiwan

Taiwan lacks significant domestic petroleum reserves.
The Economist Intelligence Unit expects a modest
increase in petroleum consumption in 2006-2010, from
968,000 b/d to about 1.1m b/d. Rapid economic growth
in the last few decades has made Taiwan a large
consumer of energy, and the island relies on imported
fuels for almost all of its energy requirements.
Energy consumption per head is generally in line with
neighbouring countries such as Japan and South Korea.
Taiwan's oil imports form a comparatively large
proportion of its total energy imports; much of this
oil is refined for use in industrial production,
although energy usage in the industrial sector will
decline as industrial capacity continues to relocate
overseas.

A number of forces, notably the growing threat of
competition from China for oil and a push to improve
environmental standards, have encouraged the
government to review Taiwan's energy mix. In order to
minimise imports, Taiwan is exploiting wind power and
hydropower. It will probably expand its gas imports
and invest in clean-coal technology, though the latter
is likely to be expensive; any new coal-fired stations
are likely to have to use clean-coal technology.

The island's fourth nuclear plant is set to be
completed in 2009, but public opposition may block
further expansion of the nuclear-power sector.

Indonesia

Indonesia has abundant oil, coal and natural gas
reserves and is the world's largest exporter of
liquefied natural gas. Despite being a major energy
exporter, however, Indonesia has significant energy
security worries. Petroleum production has declined in
recent years as output from newly developed fields has
not offset falls from older, declining oilfields. By
2010, according to the Economist Intelligence Unit's
projections, Indonesia's petroleum consumption will
outstrip production by 600,000 b/d (about 50% of
domestic production). The country's oil-intensity is
also very high at 1.45m barrels/US$1bn GDP in 2004.

To improve the country's energy security, Indonesia's
government needs to expand domestic production,
progressively reduce fuel subsidies, and diversify
sources of energy. In recent years, a lack of legal
certainty, unfavourable tax treatment, corruption and
political instability have discouraged investment in
the energy sector. In a step in the right direction,
the president, Susilo Bambang Yudhoyono, recently
resolved a high-profile dispute between a US oil
giant, ExxonMobil, and the Indonesian state oil and
gas company, Pertamina.

Indonesia is also trying to reduce fuel subsidies,
despite worries about civil unrest. Retail prices were
raised by 127% in October 2005, and the government has
pledged to eliminate subsidies altogether by end-2006.

Indonesia is diversifying its energy sources and has
set a target that oil will account for only 30% of
fuel consumption by 2025, with the remaining 70% to be
made up of gas, coal, water, solar and biomass.

Indonesia is the world's second-largest producer of
crude palm oil, which can be refined to make
bio-diesel, and the country's first ethanol factory is
expected to start commercial production in 2007.

The government is making a major drive to cut gas
exports this year in a bid to improve supplies for
local needs. Nuclear power is under consideration, but
there is strong public opposition to the proposal,
owing to concerns about radioactive leaks or bombing.

Philippines

In the Philippines, the big energy story is the
emergence of natural gas, negligible as a source of
energy before 2001, as the country's second-largest
energy source. It is largely due to expanded domestic
production of natural gas that the Philippines has yet
to return to the levels of imported-energy consumption
it sustained before the Asian financial crisis in
1997. At the same time, the use of oil in energy
production has fallen, reducing the country's
dependence on oil imports. In addition to increased
production of natural gas, the government is looking
to clean-coal technology and geothermal energy.

Thailand

Thailand relies heavily on imported oil to meet its
domestic consumption needs, and the Economist
Intelligence Unit expects the country's petroleum
consumption to rise by about 20% from 2005 to 2010.
Although domestic production is continually
increasing—the Ministry of Energy announced in early
2004 that crude oil output would double to 200,000 b/d
by 2008—rising demand also ensures that Thailand's
traditional reliance on imports will persist.

Thailand's energy security improved when high oil
prices forced the government to remove all subsidies
on the retail price of fuel in July 2005, prompting a
marked decline in demand. Thailand has also taken
positive measures to curb consumption, such as closing
petrol stations between midnight and 5 am and
providing tax breaks for individuals and companies
using energy-saving tools.

The government's longer-term strategies include
promoting alternative fuels, such as natural gas and
bio-diesel; ordering state agencies to use energy more
efficiently; locating new sources of energy (for
example, by investing in hydroelectric power projects
in Myanmar, southern China and Laos); and initiating
an energy conservation campaign. Given the high cost
of some of these projects, it remains to be seen
whether they would survive a drop in oil prices.

Oil intensity rankings, 2004 

Country Barrels of oil per US$1bn of GDP* 

Singapore 2,117,863 
China  1,588,467 
Thailand 1,552,430 
India  1,547,392 
Indonesia 1,452,196 
Malaysia 1,346,461 
Pakistan 1,308,008 
Philippines 1,096,819 
South Korea 1,075,767 
Taiwan 836,559 
World average 794,443 
New Zealand 637,982 
Australia 581,638 
Hong Kong 564,757 
Bangladesh 511,718 
Japan  385,217 

* in 1996 US dollars 

Source: Economist Intelligence Unit

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