Oil and Gas for Asia: Geopolitical Implications of Asia's Rising Demand

Introduction: Oil and Gas for Asia

1 the national bureau of asian research nbr special report #41 | september 2012 MIKKAL E. HERBERG is a Senior Lecturer in the Graduate School of International Relations and Pacific Studies at the University of California–San Diego and Research Director of NBR’s Energy Security Program. He can be reached at . Introduction: Oil and Gas for Asia Mikkal E. Herberg 3 INTRODUCTION u HERBERG A sia has become “ground zero” for growth in global energy and commodity markets. The region’s rapid economic growth is driving an enormous rise in the consumption of oil and liquefied natural gas (LNG) to fuel booming motorization and industrial growth. This energy boom has been centered in China, but energy demand is rising dramatically across developing Asia and is being shaped by shifting economic, environmental, and geopolitical factors. In the case of oil, Asia has accounted for 66% of growth in global oil demand over the past two decades. Moreover, according to the 2011 World Energy Outlook by the International Energy Agency, Asia is likely to account for over 85% of the entire increase in demand over the next twenty years—with virtually all demand growth occurring in developing Asia. Furthermore, Japan and South Korea remain 100% dependent on oil imports, China now depends on imports for more than half of its oil needs, and India and Southeast Asia also depend on imports for three-fourths of their oil needs. At the same time, Asia’s demand for oil imports has chronically bumped up against a very tight global oil-supply environment. New growth in oil supply around the world has barely exceeded declining production in the world’s large older oil fields, leading to very slow overall net supply growth. Moreover, the geopolitics of oil are deeply worrisome, characterized by strong resource nationalism, shrinking access to new oil resources that is driven by political factors, chronic geopolitical instability in key exporting regions, and what many call the end of the era of “cheap oil.” The oil price spike of 2006–8 intensified this view of an increasingly zero-sum future oil environment, which Asian countries fear could seriously threaten economic prosperity. Although oil prices declined with the U.S. and European Union (EU) financial crisis after 2008, prices are again on the rise with the gradual, albeit uncertain, global economic recovery. Asia’s natural gas consumption has also been rising strongly over the past decade to fuel booming industrial needs and power generation. Asia accounts for 70% of the worldwide LNG market, and global demand for LNG has been growing in excess of 10% per year. In effect, strong demand, combined with oil-linked LNG pricing, has driven prices higher in the Asia-Pacific. This phenomenon has been severely aggravated by a spike in demand from Japan as the country scrambles to meet its electricity needs in the wake of the virtual total shutdown of its nuclear generation capacity. The so-called Asian premium for LNG has been driven to extreme levels. There is also growing concern about LNG supply availability, particularly until 2016, when new projects around the region will begin to expand supply. Consequently, angst over high and volatile prices, as well as over the availability and reliability of future energy supplies, is a critical driver of the strategic and economic agendas of Asia’s powers. The region’s major states have responded with a state-driven approach, characterized by national competition to control future supplies through governmental support of investments abroad by their own national oil companies (NOC), expanding oil diplomacy, oil pipeline projects to feed national markets, growing competition for potential future offshore supplies, and concern over the security of sea lanes. Rather than seeking ways to cooperate to find common regional solutions to these problems, the region’s powers have increasingly embarked on a national competitive approach that intensifies distrust, worsens maritime tensions, and aggravates key strategic rivalries. Asia’s scramble for resources also risks pushing oil and LNG prices even higher and strengthens producers in using energy for political and diplomatic leverage. The region’s quest for more secure oil and LNG supplies is also driving it toward greater dependence on and engagement in key oil- and gas-exporting regions, most importantly the Persian 4 NBR SPECIAL REPORT u SEPTEMBER 2012 Gulf and Middle East. This reliance is drawing Asia, especially China, into much more powerful diplomatic roles in these regions. The tug of war...