The coming energy explosion
By Tony Boyd
Beneath the surface of Asia's severe economic crisis lurks an emergency of a different kind with far-reaching implications for regional security, commodities suppliers and the environment. The brewing crisis stems from Asia's enormous long-term appetite for energy and the simple fact that it cannot possibly be met from domestic supply.
Even assuming a protracted financial mess with no economic recovery until after 2000, energy demand in Asia is forecast to outstrip domestic supply by 30 per cent by 2010, according to the Asia Pacific Energy Research Centre.
Meeting the supply gap will be essential for the region's economic growth and the maintenance of political stability in countries adjacent to Asia's strategic shipping lanes.
Japan and China, the region's two key energy consuming countries, are forecast to show strong long-term energy demand, and the region's three energy exporters -- Thailand, Indonesia and Malaysia -- will be net energy importers by 2010.
"If energy demand growth in the region resumes the speed shown between 1980 and 1996, the years beyond 2010 may turn out to be a danger zone," says Akihiko Nomiyama, chief executive of Japan Energy Corp.
The widening gap between energy supply and demand in Asia will strengthen the market power of the Persian Gulf oil producers, heightening the vulnerability and potential for bottlenecks in the Straits of Malacca between Sumatra and peninsular Malaysia. The Middle East is forecast to increase its share of East Asia's total oil consumption to more than 76 per cent by 2010.
No-one is predicting another oil shock along the lines of the 1970s, but as demand concentrates increasingly on the Gulf, the Middle East share of global demand is likely to rise to levels that are similar to those of the 1970s.
East Asian imports of oil through the Straits of Malacca are expected to double by 2010. Those straits also serve as the route for Australia's exports of liquefied natural gas and iron ore.
"Supply routes, rather than the supply itself, may well be the security issue of the future," says Ken Thompson, executive vice-president of US energy company ARCO.
The combination of expected robust long-term energy demand and widespread resistance to nuclear energy in Asia suggests expanding opportunities for Australia with its enormous reserves of fossil fuels. But liquefied natural gas (LNG), which experienced a 124 per cent growth in East Asia between 1980 and 1995, is facing a glut of supply as Asia's biggest buyer, Japan, shows reluctance to commit to long-term contracts.
"One of the biggest problems I see in the Asian financial crisis is the possible cancellation of new supply contracts, and this is something that may affect Australia," says Kent Calder, special adviser to the US Ambassador to Japan, Tom Foley. "I think that is a policy issue for the future: how do we sustain supply contracts that could be vital for the future."
Japan's unwillingness to commit to new long-term contracts from the North West Shelf have delayed a $6 billion expansion of that project and placed under a cloud the $10 billion Gorgon gas project and the $10 billion North Australian Joint Venture in Darwin (see "Local producers get set", facing page). Even before the Asian financial crisis hit, the number of proposed LNG supply projects in the world were creating the potential for oversupply in the Asia Pacific region, according to analysts Sara Banaszak and Fereidun Fesharki.
The Asian financial crisis has increased pressure on competing LNG projects in Malaysia, Alaska, the Middle East and Russia as Asia's three buyers of LNG -- Japan, Korea and Taiwan -- hold back from new contracts. Calder says this poses long-term risks to energy security in Asia because it will increase the region's reliance on Middle East oil.
"Everybody is going to say, 'Oh, we have a glut of demand here, we don't need to worry about any of this, like your Australian projects that get cancelled' and so on," he says. "What may then happen is that demand may fall short of original forecasts but supply falls even shorter, exacerbating the problem."
Daniel Yergin, president of Cambridge Energy Research Associates, argues that the market mechanism will resolve the burgeoning long-term energy demand in Asia by acting as an incentive for fresh exploration and development. Yergin says the growing long-term demand would act as a catalyst for the exploitation of alternative oil and gas resources in the Caspian Sea, said to be the world's new oil frontier.
But security analysts have suggested this is fraught with risks, because of the need to resolve geopolitical issues and the potential for religious and ethnic conflict along any pipeline supply route. The dangers of failing to meet energy demand in Asia were brought sharply into focus in Indonesia in May when a 70 per cent rise in fuel prices imposed by the IMF's austerity program triggered a wave of riots that led to the downfall of President Soeharto.
"The Indonesian experience was an object lesson in terms of the delicacy of sharply constraining energy demand," says Calder. "If communalism became much more intense, you could see, in the worst case, political confusion, insurgent groups, a breakdown of central control that could lead to random attacks potentially on shipping.
"I am not predicting that will be the case, but political disintegration and the breakdown of central authority and rising regionalism could be dangerous to the sea lanes."
Calder says China's thirst for oil is at the root of Asia's energy security problem because it will be competing vigorously with Japan, Korea and Taiwan for imported fuel. China shifted from being an oil exporting nation to an importer of oil in 1993. Its imports of oil are now running at 720,000 barrels a day, a figure that is expected to double by 2010 despite a slowing in its economic growth. At current growth rates of per capita energy use, China's consumption of oil will exceed that of all OECD nations in Europe by 2000.
Japan, the world's most import-dependent energy consumer, is contributing to the uncertainty about regional energy demand by sticking with an unrealistic forecast for its use of nuclear energy. Major Japanese power producers describe the latest energy consumption target released by the Ministry of International Trade and Industry as like a painting on the wall -- it looks good but it's not reality.
A scathing assessment of this policy target was released last month by Kazuya Fujime, managing director of the Institute of Energy Economics in Tokyo. He says MITI's insistence that 20 nuclear power plants will be built in Japan between now and 2010 is totally unrealistic. Reality will be more like half that number. The implication is that Japan's demand for oil and gas will be much higher. He says Japan is facing a 15 gigawatts gap in energy supply which will have to be filled with fossil fuels.
MITI has always been too optimistic with its policy targets, but the acceptance of the numbers in government has fed complacency about formulating a more decisive policy toward the development of alternative natural gas supplies in Asia. Japanese policy support will be essential for the realisation of major new gas projects in Asia because they are so capital-intensive.
The United States, working through APEC, is attempting to promote natural gas pipeline projects in Asia, but it has yet to back that with official development aid.
The other critical energy issue looming over Asia is the environmental impact of continued use of the fossil fuels that dominate the region's energy mix. Economic growth has taken precedence in Asia over environmental concerns, but that is gradually changing as governments and power equipment suppliers impose more stringent pollution controls.
Asia is more heavily reliant on oil and coal for its primary energy compared to the rest of the world, which is partially explained by its endowment of energy resources, says Dr Charles Johnson of the East West Centre in Hawaii. Coal accounts for 45 per cent of primary energy demand in Asia, compared to only 20 per cent in the rest of the world. Natural gas accounts for only about 9 per cent of Asia's primary energy mix compared to 29 per cent for the rest of the world.
If Asia were to depend solely on domestic oil supplies, Asia's oil reserves would be depleted in less than seven years. In contrast Asia has 33 per cent of world coal reserves, which are concentrated in four countries: Australia, China, India and Indonesia.
Johnson forecasts Asian consumption of coal will rise 75 per cent between 1997 and 2020. But Asian reliance on coal for power generation opens up a whole new set of problems. China sources 75 per cent of its power from coal-burning power stations, which is raising political tensions with Japan as it feels the impact of acid rain.
Johnson calculates that natural gas will have a long-term economic advantage over coal in Indonesia, Malaysia and Vietnam; but without a sustained major effort to reduce coal-related environmental problems, Asia's environment will continue to deteriorate.
Chris Rawlings, the head of QCT Resources, says modern coal technologies have the potential to improve energy efficiency of coal for power generation and further reduce electricity costs and emissions. He says the Kyoto protocol on greenhouse gas emission reductions was a thinly veiled attempt at impeding one key element in the competitiveness of Asian economies.
"Asian economies have as much right to access European standards of living as do the Europeans and should not be denied the right by financially and technically biased fuel mix imperatives," he says.
afr.com.au |
