This article was originally published by New Security Beat, the blog of the Environmental Change and Security Program (ECSP) at the Wilson Center, on 26 March, 2015.
The past decade has brought ground-shaking changes to global energy markets. The unconventional fuel boom has unexpectedly reduced U.S. dependence on oil imports, while in the Asia-Pacific region, energy-constrained nations are increasingly reliant on foreign sources to meet their soaring demand. With the U.S. slated to export liquid natural gas (LNG) to Asia as early as 2017, a new energy era has come.
The shifting landscape is forcing countries such as Japan, South Korea, and China to rethink regional cooperation on energy issues such as strategic oil stocks, and technological and institutional coordination, said Mikkal E. Herberg, senior lecturer at the University of California, San Diego, and research director of the Energy Security Program at the National Bureau of Asian Research, at a Capitol Hill event on February 24.
Expanding LNG and crude oil imports from the United States is key to strengthening energy security in the Asia-Pacific and bolstering trade ties, said Minister Yasushi Akahoshi from the Embassy of Japan. Japan and South Korea will soon be the first recipients in Asia to receive U.S. LNG exports, and the U.S. may well be on the eve of an energy pivot to the region.
But many diplomatic and regulatory steps await before trade is more solidly established and countries in the region begin trusting each other. The option of crude oil exports from the United States, for the most part, is currently off the table due to laws passed decades ago.
U.S. Boon a Gain for Asia Too?
U.S. domestic natural gas production has increased at double the rate of consumption in recent years, reducing net imports by two thirds since 2007. The abundance of shale gas production has set expectations for the U.S. to become a net natural gas exporter by 2020.
Asian countries, especially Japan and China, would welcome U.S. energy exports with open arms, said Akahoshi. “Japan is facing the challenge of losing nuclear energy,” he said, “which largely needs to be made up by natural gas.” In the aftermath of the Fukushima disaster, Japan shutdown nearly all of its nuclear capacity and had to escalate fossil fuel imports to make up for the loss. Coal, natural gas, and oil now generate nearly 90 percent of Japan’s electricity.
Meanwhile China’s State Council, the country’s highest governing body, has set a goal to raise the country’s natural gas share to more than 10 percent of domestic energy by 2020 from a current level of 6 percent to reduce the amount of highly polluting coal being burned. China is unlikely to meet this goal without expanding natural gas imports, as technical difficulties and insufficient water resources hamper the development of domestic shale gas reserves.
A major reason why natural gas is attractive to Asian importers is the greater diversification in sources compared to crude oil. “Natural gas has much more independence, since there are a lot of natural reserves in various states of the world, and of course, North America,” said Akashoshi. Currently, LNG prices for Asian importers are nearly four times U.S. spot prices, but the minister believes greater access to U.S. gas will encourage the development of a more market-driven pricing system and reduce this “Asian premium.”
Japan and South Korea will get U.S. LNG earlier than other countries in the region, as they have already made several deals with terminals on the Gulf Coast, said Kei Shimogori, a researcher at Japan’s Institute of Energy Economics. The Korea Gas Corporation has signed a 20-year deal to import gas beginning in 2017, and Japanese companies have secured about 1,000 billion cubic feet of LNG via long-term contracts by 2020 for the future.
China, on the other hand, has not imported U.S. gas in the past three years and has yet to make any LNG deals. “China is not very satisfied with the current situation,” said Lin Bin, counselor of the economic affairs section at the Chinese Embassy in Washington, D.C. To attract Chinese investment, Li suggested the U.S. give clearer guidelines and standards to Chinese state-owned enterprises on how to navigate Department of Energy and Federal Energy Regulatory Commission approval processes.
Oil Exports Face Hurdles
Unlike LNG, exports of U.S. crude oil to Asia do not yet have a timetable. Alongside increased gas production, thanks to the rising production of tight oil and oil sand extraction, the U.S. has doubled crude oil production since 2008 and halved its net imports. This surplus, however, hasn’t directed U.S. oil to Asia due to a nearly 40-year-old crude oil export ban set during the 1970s oil crisis.
As global oil prices have plummeted, Japan and China have stocked up. Asian oil demand is expected to rise 60 percent by 2035, and importing countries are anxious to diversify from Middle Eastern sources. However, unlike the European Union, there is no collective emergency oil stock mechanism among Asian-Pacific countries, not even among ASEAN states. Thus the United States could potentially serve as Asia’s strategic fuel reserves partner. This, of course, would require a significant amount of political trust though, as “oil stock piles are primary tools for energy security,” said Tom Cutler, former director of the Department of Energy’s Office of European and Asia Pacific Affairs.
Last December, the Obama administration relaxed restrictions on overseas sales of lightly processed oil, which has sparked a debate over whether the oil export ban should be lifted entirely. “The key is to normalize the conversation,” said Congressman Charles Boustany from Louisiana, and look at the policy “from the economics, foreign policy, and security sides.” He pointed out, however, that political gridlock in Congress will be a major barrier to changing U.S. exports policies.
A New Paradigm
Besides developing a strategic oil reserve mechanism, the new energy era calls for Asian-Pacific nations to ramp up other institutional collaboration at the technical level through forums such as APEC, ASEAN, and the IEA, according to a newly released National Bureau of Asian Studies report.
Some private sector cooperation frameworks already exist. Japan’s Chubu Electric and the Korea Gas Corporation reached an agreement to jointly import U.S. LNG, and China and Japan resumed an annual public-private energy conservation forum in 2014 after the previous year’s was called off due to political friction.
Country-level coordination, however, is still inadequate because of “unhealthy” political relations among Asian oil importers, according to Li. Yu Nagatomi, a researcher at Japan’s Institute of Energy Economics, said they need to focus on finding common ground. “Energy conservation and efficiency is in the common interest for Asian countries,” he said.
Another common interest is the stability of Persian Gulf exporters. The region now supplies over half of China’s and nearly 80 percent of Japan’s oil imports and it’s unlikely future imports from the U.S. will completely replace them. Given the United States is less reliant on imports, some analysts argue Asian countries can no longer “free-ride” on U.S. commitments in the region. “Should the load the U.S. has carried to stabilize the Middle East since the last Iraq War be carried alone in the future? Or with Asia, especially China?” asked Herberg.
As demand appears set to grow for some time, Asian-Pacific countries will continue to seek oil and gas from both the U.S. and the Gulf. But the new paradigm portends more changes to come. With oil prices so low, now is the time for Asian countries to build up reserves, said Cutler, and the U.S. could help by enabling more reliable and equitable access.
Qinnan Zhou is an intern with the Wilson Center’s China Environment Forum.
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