Asian nations seek to set up energy co-operation scheme

Apr 22, 2005 02:00 AM

As record oil price rises threaten economies around the world, Asian countries are exploring the possibility of establishing a regional co-operation framework that may change the landscape of the global energy market.
The framework, both at the governmental-level and company-level, will include an integrated regional oil market and an emergency mechanism for sharing strategic oil stockpiles among the countries. Under the scheme, Asian countries will also wrap up long-term oil supply deals, cross-border oil and gas pipeline projects, and joint investment in oil and gas exploration, production, refining and marketing and promote clean and renewable energy.

Though it may take a decade for the ambitious scheme to be put into effect, many Asian countries, including Saudi Arabia, China, Japan and India, believe the project could help stabilize energy supply and security in the region.
Energy co-operation may also bring in neighbouring resource-rich areas, such as Australia and Russia. Australia is already a major supplier of LNG and coal to East Asia, while Russia holds one of the world's largest oil and gas fields in its Far East region.

Experts even suggest energy co-operation could be a foundation from which the region could form a European-Union-style integrated community using the basic framework to promote market efficiency and accelerate liberalization across the region.
"The political and economic systems vary a lot among Asian countries. But energy co-operation can be a breakthrough to integrate the countries together, economically and politically," says Zhao Hongtu, deputy director of World Economy Research Centre with the China Institute of Contemporary International Relations.

Signs show such co-operation has been gathering steam in the past few months. Earlier in January, the first roundtable talks by Asian and Middle East ministers discussing regional oil and gas co-operation were held in New Delhi, India. It was the first time the oil ministers of Asia's four largest consumers -- China, Japan, South Korea and India -- had got together with eight Middle East oil producers to discuss Asian energy co-operation.
On the commercial level, 12 major oil companies from China, Japan and South Korea are expected to gather together in Seoul this September. They are to discuss the possibility of setting up an oil exchange centre in Northeast Asia, share oil storage tanks, and co-operate on crude imports.

The meetings are being held against a backdrop regional co-operation, including the potential energy partnership between the 10-member Association of Southeast Asian Nations (ASEAN) and China, Japan and South Korea.
"The desire for energy co-operation has become increasingly strong," says Zhao.
Such co-operation is especially important for oil consumers such as China, Japan, South Korea and India. The countries are among the world's largest oil importers. China relies on foreign suppliers for 40 % of its oil, while Japan and South Korea import almost all theirs from abroad, most coming from the Middle East.

The biggest common challenges the countries share are in securing adequate energy, safeguarding transportation, diversifying importing resources and energy sources, and fending off price fluctuations. Even though the countries have to compete worldwide to secure reserves, experts say co-operation is needed. Co-operation, such as setting up an emergency network to share oil stockpiles, will help the countries guard against disruption to supplies.
"As Asia is expected to account for 45 % of the worlds oil demand by 2020, developing emergency response capacity will be critical," says a report from the Paris-based International Energy Agency. Consumer countries also hope the co-operation will improve their bargaining power on the price of crude imports.

Asian oil consumers have long been plagued with price discrimination over oil imports from the Middle East, known as the "Asian Premium". Due to the heavy reliance on the Middle East, and insufficient information, Asian countries have to pay $ 1-$ 1.5 a barrel higher for imports than their North American and Western European counterparts. At the moment, the Asian Premium costs Asian countries more than $ 10 bn a year.
"Collective Asian demand should have market power vis-a-vis suppliers," said Yasuo Tanabe, director of international affairs division in Japan's Ministry of Economy, Trade and Industry, at a Northeast Asia energy co-operation seminar in March. Zhao of the World Economy Research Centre says Asian countries can also address environmental pollution by promoting cleaner energy resources such as natural gas, hydropower and nuclear power.

Still, daunting challenges are ahead for the potential co-operation framework. For one thing, heterogeneous political and economic systems and market behaviour set the countries apart. Meanwhile, energy markets in many countries around the region are relatively immature with strict import barriers.
Cross-subsidies on energy prices and entangled tax systems could also deter creation of a competitive energy market, says Doh Hyun-jae, Research Fellow at the Korea Energy Economics Institute.

Then the old story of trust. It is still a big question whether countries are willing to bank their energy security on a regional framework.
Zhao calls for continuous multi-lateral dialogue and government-level talks to clear out political risk, and enhance mutual understanding.

Source: China Daily
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