INTRODUCTION:

The word "Security" has taken on an expanded meaning since September 11, 2001. However, for the purpose of this paper, the question of "terrorists" will not be addressed. This is not to diminish the risk of terrorism in the security of energy supplies; instead it is believed that the matter of "terrorists" is a much larger subject, and it is recommended that it be considered in more detail in future Dialogues.

This paper will address the more conventional security risks to natural gas energy, such as supply, transportation, and distribution disruptions, as they appear to those of us who are located in the Western Hemisphere.

BACKGROUND:

At this time, most of the natural gas consumed in the Asian Pacific countries is transported as Liquefied Natural Gas ("LNG") from its source of supply to its markets. Although this may change in the future (as recommended later in this paper), this paper will discuss LNG.

LNG transported for fuel has moved from a "niche" business to a huge industry over the past 30 years. The first LNG transported from Alaska to Japan occurred in 1969. The liquefaction plant had a capacity of 1.4 million tonnes per year (approximately 70 BCF per year). This plant was followed in 1972 with a 1 million tonnes per year (50 BCF/yr.) plant in Algeria and the Shell Brunei plant with a capacity of 5.5 million tonnes per year (275 BCF/yr.)

Since that time, improved technology has greatly reduced capital costs for liquefaction plants (costs are estimated to have dropped by 50% in the 10 year period ending in 1995.) As a result, LNG can now be delivered to markets at prices competitive with natural gas delivered by pipeline where it is available.

With these reduced costs, the worldwide LNG market has grown to 100 million tonnes per year (5 TCF/yr.) in 2000. However, liquefaction plants are still capital intensive even after the reduced costs mentioned above. Raising capital for such plants has been further complicated by the reluctance of purchasers to sign fixed price long term contracts with take or pay provisions. In some cases this has resulted in purchasers making equity investments in liquefaction plants to assure supply. (This is reported to have occurred with Osaka Gas Co. investing in the Timor Sea Sunrise project.) Nevertheless, financing of liquefaction plants may threaten the availability of additional supplies of LNG in the future. With the growth of the use of natural gas as described in the next section, financing of new plants may well be a risk for new supplies in the future for Asian Pacific countries.

MARKET PROJECTIONS:

In the period of 1998-1999, natural gas consumption by Asian Pacific countries grew at a 7% per year rate compared to 2% per year for the remainder of the world. Forecasts for the next 10 years are in the overall range of 5% per year. This growth is certain as these countries develop, and their present per capita consumption of energy is low compared to the developed countries. The greatest growth is projected to occur in Korea and India. A much lower growth rate is forecasted Japan, which already has a relatively high consumption of natural gas. In 1999, Japan consumed 51.3 million tonnes (2.57 TCF).

Individual country growth rates for the consumption of natural gas for the period of 2005-2010 are forecasted to be:

Japan: 1.6% per year

South Korea 7.0% per year

Taiwan 9.1% per year

China 13.6% per year

India 19.1% per year

Overall 6.3% per year

Total proved and probable reserves for the Asian Pacific area are estimated to be 363 TCF. This compares to total proven reserves in the U. S. of approximately 160 TCF, and 5,172 TCF worldwide. The Asian Pacific reserves are respectable, and should supply the area for at least the next 10 years. However long term, the area should anticipate acquiring natural gas supplies in the middle eastern countries and/or eastern Russia.

While none of the Asian Pacific countries have formally adopted the Kyoto Protocol, nevertheless there are increasing concerns about the environment, which results in increasing demands for a clean fuel. There is also as a desire to emit less carbon dioxide. This trend, should it continue, will undoubtedly accelerate the growth in demand for LNG in Asian Pacific countries.

NATURAL GAS SUPPLY SECURITY:

Major sources of LNG supply for the Asian Pacific countries are in Malaysia, Indonesia, Brunei, and Australia. Russia may be a large source of natural gas in the future, but a large part of the reserves in Russia will require huge capital infusions to pay for development and transportation. Of all of the far eastern Russian natural gas reserves, the reserves located on, and off shore Sakhalin Island will be the most readily available and least expensive to develop.

All of the countries from which LNG is exported now and for the near term future are relatively stable, with major oil companies being the big players in the development of these supplies. For this reason, these sources of supply are perceived to be relatively secure from political or military disruptions. Security of Russian supplies of LNG will depend how they are developed in the future and upon the stability of the Russian government when they are developed.

Perhaps the greatest concern about supply security should be the possibility of intense competition for LNG in the future. While China has not started the importation of any significant quantities of LNG yet, this will occur around 2006. China is currently developing their Guangdong LNG project and is buying LNG supply for this project. Demand for natural gas will be growing rapidly as China and India develop their economies with the related energy needs. When China and India enter the market for LNG in earnest after 2005, there may well be a shortage in regional supplies, resulting in rapidly rising costs for LNG. Should this occur, then there will be a shortage of, and a security issue with regional supply of LNG.

One suggestion is that the Asian Pacific countries should form a multinational "Asian Energy Agency" (AEA) to function similar to the International Energy Agency. It would be AEA’s responsibility to study and forecast the LNG needs of the area, encourage development of the new reserves and facilities as needed, and assure that energy supplies are distributed equitably among the various countries. This would minimize intense bidding competition for available LNG supplies.

Long term (starting around 2015) the Asian Pacific countries will have to begin to import LNG from the Middle Eastern countries and/or eastern Russia. When this starts, it will cause a whole new group of security concerns, including stability and security of the sources of supply as well as greater exposure of shipping of LNG. Costs for LNG will escalate significantly at that time due to much greater transportation costs. Perhaps these new security concerns will be the subject of papers presented at a future Japan-U. S. Dialogue in the 2015 era.

Also, other Asian Pacific countries must recognize the tremendous appetites of China and India for natural gas and LNG, which is expected to start around 2005. Their demands for energy may absorb all of the LNG that becomes available. The other Asian Pacific countries should strive to maintain an orderly market, and should take steps now to assure that there will be adequate LNG available for India and China at that time. It also might prudent to tie up LNG supplies on long-term contracts at this time. Some have expressed a concern that China’s entry as a purchaser in the LNG market may create an economic "war for energy resources." Although there are mutual suspicions among the LNG buyers and future buyers in the Asian Pacific area, cooperation on acquiring, allocating, and transportation of energy supplies is very much to everyone’s benefit. In summary, assuring a stable supply for China is probably one of the most important steps to assure energy security for all.

As mentioned above, far eastern Russian natural gas reserves may be the most important and the most feasible source for long-term natural gas supplies for Asian Pacific countries. (As compared to the Middle East with multiple countries, each of which is subject to instability for itself and its neighbors, far eastern Russian reserves fall totally within one country, under hopefully a relatively stable government.) Western estimates are that far eastern Russia has 847 trillion cubic feet of proved, probably, and possible natural gas reserves. However, to develop these reserves, the three "T’s" must be overcome, i.e., "Temperature, Terrain, and Transportation." Each T alone represents a formidable hurdle to develop these gas reserves and transport them to the markets in Asian Pacific countries.

Of the natural gas reserves located in far eastern Russia, those on and around the Sakhalin Islands represent reserves that can be developed and delivered to Japan and/or Korea today at competitive prices. Japan and/or Korea need to make a decision to develop these reserves before 2020. These Sakhalin reserves are also attractive to China, which is undoubtedly also considering them at this time.

China and Russia have executed a pact, supposedly to counter U. S. forces in the far east. So far, the pact has been primarily diplomatic, but one of its announced purposes is the development of energy supplies and joint industrial development. It is obvious that China will look to eastern Russia for at least some of its future energy supplies.

It would be an excellent intermediate strategy for Japan and/or Korea to consider making the investment necessary to developing these Sakhalin reserves, estimated to be up to 65 trillion cubic feet (1,300,000 tonnes). Cost estimates indicate this gas could be delivered to Japan for costs similar to LNG from other sources, with the Sakhalin gas to be delivered either by LNG tankers or by underwater pipeline. If costs of delivered LNG and pipeline delivered gas from Sakhalin are comparable, then serious consideration should be given to a pipeline as a much more secure means of transportation. However, a pipeline for delivery of this gas would require the development of a national pipeline grid within Japan (as discussed in "Distribution Security" below) to deliver this gas to the various markets.

When one discusses the security of natural gas supplies in Japan, we should mention the development of the Yufutsu Gas Field in Hokkaido by Japex. When fully developed, the Yufutsu Field should deliver 300,000 tonnes per year (15 BCF). While this is small compared to Japan’s overall needs of natural gas (about 0.6%), all countries should look for and develop every local source of energy.

In summary, when one considers security of energy supplies in the Asian Pacific area, we must be keenly aware of the instability of eastern Asia. Sources of instability include a divided Korea, the Taiwan situation, and the dispute over the ownership of the Spratley Islands, to mention only some of the disputes. To accomplish regional stability, it will be necessary that all parties overcome cultural, historical, and political barriers. A flare up of any of these disputes would at the very least increase the cost of LNG transportation (due to increased tanker insurance rates and the probability that tankers would have to take longer circuitous routes), and might cause total disruption of LNG transportation.

NATURAL GAS TRANSPORTATION SECURITY:

It is recognized that Japan and the other Asian Pacific countries are most vulnerable to sea-lane security for their energy supplies, including LNG. Transportation of energy supplies is subject to interruption due to wars (both international and regional), accidents, pirates, embargos, as well as market forces and shortages. These countries must maintain access and security of their Sea Lanes of Communication (referred to as "SLOC’s").

Since World War II, the U. S. has maintained a strong presence in the eastern Pacific due to its treaties with Japan, Taiwan, and other countries. This strong U. S. presence has assured that sea-lanes remain open in the past, and so long as the U. S. continues with its far eastern presence, this should assure that the sea-lanes remain open. However, the U. S. presence does not assure security against accidents, embargos, or market forces. It is well recognized in the U. S. that withdrawal of its naval forces in far eastern waters would not be good strategic policy. The withdrawal of U. S. Forces would create a void that would be tempting for China or other nations to attempt to fill.

At the present time, the Chinese navy, while growing, is still not equipped to operate at long distances from its home ports. With limited range, Chinese surface vessels will not be able to reach all of the SLOC’s used by the cargo vessels of the Asian Pacific countries. Also, as the energy requirements of China grows, it will be using these same SLOC’s, and will be just as interested in keeping them open as all the other countries.

SLOC’s for the various Asian Pacific countries pass through certain so-called "choke points", or narrow channels which handle large amounts of shipping traffic. These include:

1. Strait of Malacca, between Sumatra and the Malaysian Peninsula
2. Natuna Islands, between Borneo and the Malaysian Peninsula
3. Spratley Islands, between the Philippines and Vietnam
4. Taiwan Straight, between China and Taiwan
5. Bashi Channel, located off the south coast of Taiwan

Of the above choke points, the Strait of Malacca is the most critical. However, in the event it were closed, alternate routes are available as follows:

1. Sunda Channel, between Sumatra and Java
2. Selat Lombok, between Java and the Lesser Sunda Islands

Some of these passageways are subject to being blocked if a large cargo vessel were to become disabled within the channel. With the heavy traffic through these passages, there is substantial risk of collisions (and blockage). There are also reports of pirates operating in these waters. A localized war in one of the countries adjacent to a passageway could result in blocking the channel, or at least cause tanker rates through the passage to rise.

With all of these risks described above, there is a need for an organization, such as the AEA proposed above, to oversee these choke point passages, and to control traffic, arrange for protection from pirates, and to take steps to stop or control local conflicts in countries on each side of these passages. Too much is at risk not to take steps to assure safe passage of energy cargos through these passages.

DISTRIBUTION SECURITY:

Asian Pacific countries tend to receive LNG and consume it in the vicinity of the receiving terminals, with no pipeline transportation and distribution grid.. Japan has 22 such receiving terminals, and little in the way of pipeline distribution.

LNG is an excellent alternate to other energy sources, such as oil and nuclear. It is an exceptionally clean fuel and offers the least carbon emission per btu released. For these reasons, it should be the fuel of choice for future energy needs. However, the lack of a distribution pipeline grid makes natural gas available only near receiving terminals. Distribution of natural gas as LNG, transported by rail, offers safety concerns, and certainly is less secure than buried pipelines. Only a national buried pipeline grid will offer the highest security for natural gas distribution in Japan and other Asian Pacific countries.

Also, if Japan and/or Korea do develop the Sakhalin gas to be delivered by underwater pipeline, a distribution pipeline grid will be essential to deliver this gas to the various markets in Japan and/or Korea.

Distribution security can be greatly enhanced by diversification of energy sources and supply. Having available alternate energy sources will also keep energy costs low.

Conservation can also help insure energy security. Every unit of energy conserved represents a unit of energy that does not have to be developed, transported, and distributed, and also will not be subject to security of supply.

One of the most important methods of insuring energy security for all Asian Pacific countries is strategic storage of energy supplies. Only Japan and Korea have established large strategic energy storage. (Taiwan has a modest amount of oil storage, sufficient to last 60 days.) Storage is expensive to construct and even more expensive for the cost of inventory. (The U. S. government maintains its strategic oil storage of approximately 600 million barrels. The U. S. gas companies have approximately 3 trillion cubic feet of underground natural gas storage, but this is a working inventory, to be drawn down as needed, usually in the winter.)

Asian Pacific countries should jointly develop centralized strategic storage of energy supplies, including LNG. Centralized storage represents the most economical approach. As an example:

1. A storage location in Brunei or Thailand might offer central storage for Myanmar, Cambodia, Malaysia, Singapore, Vietnam, the Philippines, and Indonesia.
2. A storage location in Okinawa might offer central storage for Japan, Korea, and Taiwan
3. China would probably prefer to establish their own strategic storage.

A centralized storage facility would have to establish a governing body which would establish costs, rules for draw down, and allocation.

CONCLUSIONS:

The Asian Pacific countries presently have little risk in their LNG and other energy supplies. However, conditions are fragile, with much stress in some of the relations between countries. It is clear that all countries stand to gain by keeping everyone’s energy supplies secure. So far there has been little in formal joint agreements or operations regarding energy.

It is important that in this period of time the Asian Pacific countries look forward and take steps to formally make energy supplies more secure. Already a large part of oil supplies come form the middle east, and it is certain that future growth in oil supplies will definitely come from the middle east. It is also probable that at least part of the LNG supplies will come from the middle east after 2020.

Asian Pacific countries have an opportunity to organize now to address regional energy security. It must be remembered that unless they do organize now, they will have far less influence on their future sources of supply in the middle east. They will need the strength of a large organization with plenty of market power to negotiate effectively for middle east energy supplies in the years ahead.