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Asian Energy Futures
Event Report (IV):
The Here and Now of Asian energy
Having completed our cursory tour of Asia’s Starting Line energy environment, let’s now turn our attention to the dialectics of Plans versus Realities. The analysis presented in this section comes directly from the GroupSystems sessions and facilitated discussions of Session II(A) of the 1 May decision event, which we labeled, "You Make the Call!"
In this session, we put the participants through an alternating series of GroupSystems exercises and facilitated discussions for each of four subjects:
The process, in each case, unfolded as follows:
The updated DoE projections (not available at the time of the event) for 2020 are presented in this revised edition. In the cases of Japan and India, the baseline update from 1997 to 1999 was statistically insignificant, but in the other two cases (China and Asia As a Whole), it was not only significant in terms of the baseline, it also reflected dramatically different DoE projections for 2020. We will compare and contrast the 2000 and 2001 data from DoE for China, Asia as a Whole, and India (whose long-term projections have likewise changed dramatically despite no significant change in baseline numbers).
As an initial point of comparison, we show the percentage spread across major energy categories for the United States in 1999 and the expected shares for 2020. The Quad Btu growth in this case is from 97 in 1999 to 127 in 2020—a 31 percent increase.*
The modesty of the U.S. growth rate (roughly half the global average) is reflected in the relatively minor percentage share shifts than occur over the 21-year time frame:
This is clearly the profile of an advanced economy enjoying predominately intensive growth (i.e., greater productivity) vice extensive growth (i.e., more resources employed).
* All energy data presented in this section comes from the EIA’s International Energy Outlook 2000, pp. 169-77 and International Energy Outlook 2001, pp. 175-84.
In our first case, Japan, we see an Asian economy that is distinguished by a very small reliance on coal (13 percent) and a relatively high reliance on "Other" (22 percent), which reflects the country’s extensive employment of nuclear power. Compared to the similarly advanced economy of the United States, Japan uses substantially more oil (although per capita use of oil in the U.S. is much higher) and a bit more than half the percentage share of natural gas.
Despite the small percentage share of coal, Japan remains the world’s biggest importer of coal, with a quarter share of the global market. As such, it has had an historically substantial influence over the global price of coal, as—according to the EIA—"other Asian markets also tended to follow the Japanese price in settling contracts." Japan’s influence is no longer what it was following a 1996 revision of its benchmark pricing system, which marked an Asian-wide shift from contract purchases to greater reliance on the spot coal market.*
Japan is also "by far the world’s largest importer of LNG," according to the EIA, which, when combined with its heavy reliance on imported coal and oil, makes it one of the world’s most energy-dependent nations—and basically all of it is shipped.**
Looking at Japan’s overall Quad Btu growth, we see a most modest rise of just under 20 percent.
* EIA’s International Energy Outlook 2000, pp. 79-80.
** EIA’s International Energy Outlook 2000, p. 119.
In our "handicapping" section (top half of slide), we offer a three-way comparison between:
DOE’s latest prediction is basically that Japan will swap oil for gas, reducing the former’s percentage share to 46 (from 53) and increasing the latter’s to 16 (from 12). Our workshop participants essentially agreed with this prognosis in their vote, but then backtracked substantially in the subsequent discussion (as signified by the white arrows at the far right), where many doubts were raised about Japan’s commitment to further expansion of it nuclear power industry, largely as a result of its increasingly poor safety record. Several of our energy experts noted that Japan was in the process of drastically downsizing its plans for new plants in the coming decade, signaling perhaps a new era in Japanese energy planning. Given these concerns, we think it’s fair to say that the group’s final consensus on Japan’s energy profile in 2020 was that it would be forced toward greater reliance on coal and natural gas to produce electricity, and that the "Other" share would decline.
Turning then to "handicaps," we cite three (arrayed in Waltzian fashion):
* The 1997 shares we displayed to our participants at the actual event
differed only in Oil (54 percent) and Coal (12 percent).
** International Energy Outlook 2001 projections. The 2000 edition
projections were: Oil, 50 percent: Natural Gas, 17 percent; Coal, 12 percent;
and Other, 21 percent).
Turning now to India, we note a 1999 energy profile that—when compared to Japan’s advanced economy—is clearly far more dependent on coal. If we think in terms of "high carb" versus "low carb" (i.e., carbon emissions), then India’s economy is just over four-fifths high carb (52% coal + 33% oil = 85% high carb), compared to a Japan that is only two-thirds high carb (13% coal + 53% oil = 66%).*
The upshot is that low carb elements (natural gas, nuclear, and renewables) remain marginal within India’s overall energy profile, although EIA predicts an almost 10 percent decline in India’s carbon intensity over the 1999-2020 time period.**
It only makes sense that India’s high-carb diet will change, given the predictions of increased energy use through 2020. India, according to the EIA, should more than double its energy needs in the coming generation, meaning that even if the current shares were held constant, all would have to grow 100 percent or more.
* As a point of comparison, the U.S.’s 1997 high-carb share was just 58
percent (19% coal + 39% oil).
** EIA’s International Energy Outlook 2001, p. 164. Carbon intensity is
measured as millions of metric tons of carbon equivalent per quadrillion Btu.
India’s carbon intensity in 1999 is 19.88, and is predicted to drop to 18.23
in 2020. China, in comparison, will see its carbon intensity drop 5 percent over
the same time frame (20.92 to 20.01). The U.S.’s carbon intensity will
actually increase 3 percent by 2020, rising from 15.62 to 16.06.
When handicapping India’s future energy profile, our workshop participants basically agreed with DOE’s prediction that the country would substitute natural gas for coal, primarily in terms of electricity generation. However, our experts were far less sanguine about the size of that percentage share shift, given the tremendous overall rise in energy consumption.
While access to natural gas is not considered a problem for India (e.g., neighboring Bangladesh possesses substantial amounts), attracting the necessary foreign capital is. As one participant noted, China attracts about 25 times more foreign direct investment (FDI) than India (although FDI there has increased dramatically in the last couple of years), signaling an overall lack of investor faith in a political system that is marred by center-regional government tugs-of-war over subsidies (e.g., electricity) and substantial amounts of corruption at all levels of administration.
Sub-nationally, state governments seem caught between a rock and a hard place on infrastructural investments: unreliable miners (who often strike) push them to move off coal, and yet, their poor state of finances makes investing in natural gas difficult. Meanwhile, India’s electrical transmission system remains porous and in great need of upgrading, as EIA estimates that a fifth of the country’s electrical power is lost en route to consumers. Worst still, much of this loss is through "nontechnical" means (theft, bad accounting, etc.).*
One result of this poor state of affairs is that India’s booming high-tech industry, the shining star of its economy, has taken—in many instances—to do-it-yourself energy generation, meaning the construction and operation of stand-alone electrical generation and transmission systems. While this answers the short-term specific needs of one economic sector, it bodes poorly for India’s long-term potential to meet it’s growing energy requirements.
* The 1997 shares we displayed to our participants at the actual event
differed slightly in Oil (31percent), Coal (53 percent), and Natural Gas (8
percent).
** EIA’s International Energy Outlook 2000, p. 118.
The Energy Information Agency’s International Energy Outlook 2001 presents radically different projections for India in the year 2020 from that of the previous year’s edition. Dramatically curtailed projections for both natural gas (a full 2 trillion cubic feet less) and coal (roughly 100 million short tons less) combined with a projected 40 percent increase in the oil requirement (up from 4.1 million barrels a day to 5.8) makes for a very different energy share profile.
What gives? On oil, DoE’s explanation is a revised appreciation of the impact of automobiles in India’s future. The vast bulk—or 86 percent—of the projected increase from 1999 to 2020 is accounted for by transportation. With its demand increasing an average of 5.4 percent a year, India basically leads the global pack over the next generation.* Simply put, car ownership is seen in India as a sign of wealth, and enough wealth is emerging there to cause this dramatic shift over time.
On natural gas, DoE says the following:
Many LNG import schemes are proposed for the country, and there are frequent announcements about them, but few are under construction or making concrete progress. To facilitate gas development, India needs and continues to pursue comprehensive policies for natural gas and, specifically, LNG. However, related policymaking and reform are proceeding slowly in India’s complex democracy.**
As regards coal, DoE notes that India is moving to deregulate its domestic production market, which up to now has been dominated by a single company, Coal India Limited. Projected long-term consumption is presumably expected to decline as prices increase.***
* International Energy Outlook 2001, p. 30.
* International Energy Outlook 2001, p. 59.
* International Energy Outlook 2001, p. 71.
Turning now to China, we encounter a high-carb profile in the extreme, as just under 90 percent of the country’s energy needs are met with coal and oil (61% coal + 28% oil = 89%). Given the projected huge increase in overall energy usage by 2020 (163 percent), any reduction of that combined percentage share would require massive investment in energy infrastructure for natural gas, nuclear, hydroelectric (e.g., Three Gorges Dam project), and other renewables.
What complicates this picture even further is the projected five-fold increase in China’s per capita motorization (i.e., ownership and use of cars). While this increase, if it occurs, would still leave China several times removed from the U.S.’s per capita rate (54 cars per 1,000 compared to 797 in the U.S.), the pressure it would place on the nation’s poorly developed road network would be substantial, generating competition for scarce public funding that might otherwise be employed in energy.* This "motorization" of China’s transportation system likewise creates certain pressures for more oil use.
But the biggest driver by far for China over the next generation is the more than three-fold increase predicted in electricity consumption (1,084 billion kilowatt-hours in 1999 to 3,331 in 2020). By 2020 China will be consuming as much electricity as the U.S. is today.**
Foreign direct investment has, in the words of the EIA, "played a critical role in financing the expansion of China’s electric power infrastructure and is expected to play an even more important role in the future," despite being restricted—for now—to strictly joint ventures involving less than 50 percent ownership.*** The question is whether such an approach can accommodate a three-fold increase in power generation requirements.
* EIA’s International Energy Outlook 2000, p. 133.
** EIA’s International Energy Outlook 2001, p. 184.
***EIA’s International Energy Outlook 2000, p. 120.
On this slide, we will show you exactly the numbers we presented to our participants, which were based on the 2000-edition DoE International Energy Outlook. The next slide will contrast that year’s projection with the 2001 edition.
In 2000, DOE predicted China would seek to swap coal for gas in very large absolute amounts, resulting in an 7-point percentage share decline for coal and an almost five-fold percentage share increase for natural gas (representing more than a ten-fold increase in trillion cubic feet). In discussion, our workshop participants displayed a hefty skepticism regarding China’s ability to increase its use of natural gas so dramatically over a single generation, and yet arrived—on their own—at the same 2020 percentage share of 10 percent predicted by DOE.
Where our experts differed from DOE’s projections is that they predicted an even steeper decline in the percentage share of coal. As the discussion unfolded, we discerned four rationales for this vote:
In terms of
handicaps, participants voiced much concern over a perceived "coming train wreck" between China’s immense need for FDI and the reality of its technically bankrupt banking system. In short, something’s got to give, leading to an overall strong skepticism about China’s ability to achieve the Quad Btu increase currently projected by DOE within the 2020 time frame.
DoE’s 2001 International Energy Outlook not only drastically alters its 2020 projections for China, it details significant shifts in the country’s energy profile in just the last two years (1997 to 1999).
The first two columns above detail the shifts that have occurred since 1997:
What these shifts say about China is that the country is very serious about weaning itself off coal, and that the impact of the emerging car culture is already being felt. Of course, we may be underestimating China’s use of coal, as official statistics may not capture unsanctioned mining operations.
Looking to 2020, we see equally dramatic shifts in DoE projections that reflect the changes of the past two years:
DoE offers no special explanations for these dramatic shifts in projections in the 2001 edition. In reality, these shifts just demonstrate how today’s changes can be amplified over tomorrow’s expected growth trajectory. But note this: DoE’s projections are now much closer to those of our workshop participants, who are looking far more prescient with time—at least on China.
Turning now to Asia as a whole, we see a high-carb quotient of 79 percent (36% coal + 43 % oil = 79%), although that coal number is largely a reflection of India and China alone, rather than the region as a whole. Asia’s oil and "Other" ratios are roughly similar to that of the U.S. Asia’s energy consumption is predicted to roughly double over the next generation, with electricity and transportation being key drivers.
As the EIA 2001 report states, "The most rapid growth in electricity use is projected for developing Asia, at 4.5 percent per year." At that growth rate, "Developing Asia" (not including Japan) will see it’s share of global electricity consumption leap from 18 percent in 1999 to 26 percent in 2020. That represents a 250-percent increase in total electricity consumption, with coal expected to maintain its current 50+ percent share of generation input.*
EIA’s take on transportation in Asia is equally bullish, stating that the sector’s growth "is expected to be among the fastest-growing" through the 2020 time frame. While per capita motorization rates will skyrocket, most of the region’s countries are starting at a very low baseline. Still, given that we’re talking about roughly half the world’s population, any sizeable per capita increase will, in EIA’s words, "have an enormous impact on world fuel markets."**
As we noted earlier, the latest consensus predictions of Asia’s oil import needs foresee an increase of roughly 12 million barrels a day by 2020. Factoring in EIA’s estimate that total transportation energy use in Developing Asia will expand from 6 mbd to 16 (or an increase of 10 mbd),*** that transportation growth will account for the lion’s share of Asia’s increasing oil import requirement over the coming decades (understanding that oil is not much used for electricity generation anymore).
* EIA’s International Energy Outlook 2001, pp. 119-22.
** EIA’s International Energy Outlook 2000, p. 140.
***EIA’s International Energy Outlook 2001, p. 137.
In the 2000 edition of the International Energy Outlook, DOE predicted a swapping of oil for gas through the 2020 timeframe, with coal’s percentage share not declining (meaning a rough doubling in absolute terms).
We asked our workshop participants to vote on Asia’s 2020 energy shares both pre- and post-discussion of the various subsets (Japan, India, China). Prior to these discussions, participants differed from DOE’s take by emphasizing a strong coal for gas swap. As a result, our participants calculated no substantial shift in oil’s percentage share, reflecting their oft-stated sense of uncertainty surrounding Asian transportation demand.
In post-discussion voting, participants enunciated the same basic shift, albeit a more muted one, with coal coming down less and gas going up less. This shift reflected the participants’ growing appreciation of the challenges involved in increasing Asia’s use of natural gas to the extent they originally imagined. When this final participant prediction is compared to DoE’s latest (2001) projections, their reasoning seems more than sound.
The main challenge participants cited was the lack of sufficient rule sets throughout the Asian economies to attract the necessary amount of FDI. In short, the argument offered was that the region had not sufficiently "cleaned up its financial act" as a result of the Asian Flu of 1997-98.** As such, participants were openly skeptical of the Asian governments’ ability to rationally allocate resources in the absence of better market mechanisms and greater financial accountability. In a word, there’s not enough transparency to make FDI flow at rates commensurate with envisioned growth trajectories.
* The 1997 shares for Asia As a Whole were 38 percent Oil, 10 percent Natural
Gas, 42 percent Coal, and 10 percent Other.
** At the beginning of the workshop, we asked participants (using GroupSystems)
to give us the year of the next Asian financial crisis and tell us why it would
occur. The consensus opinion was that one was highly likely within the
next five years and that poor banking/financial market practices would be the
main cause.
Having explored the dialectical tension between Asia’s best laid plans and the realities these countries will likely encounter along the way to 2020, we now turn our attention to how these challenges could alter our perception of the roles played by these countries both within the region’s political arena and on the international stage.
In this session, we played a variation on the theme of VH-1’s late-night cable show, "The List":
The six awards were as follows:
In the category of Best New Villain, or the country or non-state actor most likely to prove disruptive to Asian energy markets/development, we received a trio of messages, which we categorize along Waltz’s three-tier perspectives.
On the system level, the non-state actor most cited as likely to prove disruptive were NGOs, or non-governmental organizations. When we probed more deeply in discussion, what we heard tended to center on environmental groups, such as a World Wildlife Fund or a Greenpeace. In short, given Asia’s burgeoning healthcare and environmental "bill" stemming from years of unrestrained economic and energy growth, our participants voiced the expectation that transnational advocacy groups would inevitably play a larger role in voicing green-based "public good" concerns regarding future economic development. Probably because Asia itself has few such groups with any real political weight, it was assumed that existing international groups would step into this arena from outside—thus the potential for perceiving them as "villainous," i.e., presumptive application of the West’s post-industrial environmental concerns when Asia remains quite "industrial age."
On the nation-state level, China was cited as most likely to prove disruptive, in large part because of the consensus opinion that so much would be required on its part in terms of greater transparency to attract FDI, that natural tensions with the West would result from time to time.
On the individual level, corruption and criminality were the chief concerns, reflecting the oft-stated sense that Asia had not sufficiently "cleaned up its act" in banking and financial sector markets, allowing for still too much "crony capitalism" and the corruption that entails.
In the category of Best New Ingenue, or the country or non-state actor most likely to seek and/or receive U.S. security assistance or alliance, the biggest vote-getter by far was India. Based on the day’s discussions and various GroupSystems inputs, we’ve strung together a variety of rationales for why so many participants foresee a significantly closer U.S.-India relationship in coming years:
In the category of Best New Odd Couple, or in-region pairings of states resulting from developments in Asian energy, participants focused on three dyad relationships involving three states. The most popular dyad was Russia and Japan, which makes a lot of sense when you think of it. Japan’s energy future is greatly dependent on accessing natural gas, and Russia has more than anyone else. So it’s a pairing of a state that has plenty to sell and needs the cash badly (Russia) with a state with plenty to buy and good credit (Japan).
The next most popular dyad was Russia and China, which make sense in the same way, although here the buyer’s credit is somewhat suspect over the long term. An additional factor is the military sales relationship whereby Russia has become—once again—the significant source of major combat platforms.*
The third most popular dyad was China and Japan, and here the logic centered around three key interests:
Of course, in all three instances we’re talking about dyad relationships that carry a great deal of historical baggage, which is why they’re somewhat "odd," despite the underlying logic. In short, the economic rationales are clearly there, it’s more a question of whether the politics can catch up.
As a side note, we point out that India was not selected by anyone for a significant pairing with another regional or bordering power. We found this odd given India’s relative importance to the region as a whole, and yet, it dovetailed nicely with India’s selection as Best New Ingenue.
* In recent years, China and India have accounted for 60 percent of Russian military exports, and deliveries to both countries are expected to double within the next two years, according to new Russian Deputy Prime Minister Ilya Klebanov, quoted in Nikolai Novichkov, "Russia's Deputy PM Reveals Rescue Plan," Jane's Defense Weeking, 19 July 2000, found online at <http://ebird.dtic.mil/Jul2000/s200007109russias.htm>.
In the category of Best New Long-Distance Romance, or the pairing of an Asian state with some extra-regional power, we received two very incongruous pairings, suggesting a possible pivot point in U.S. relations with both Asia and the Mideast.
On the one hand, the most popular pairing involved China with either Iran or Iraq, or both. This was viewed primarily in terms of Chinese military sales in exchange for Iraqi and Iranian oil, with the former bringing instability to the Mideast and the latter energy stability to the Far East. If that sounds like a oxymoronic coupling of effects, then you’re just starting to get warm, for the second-most frequently mentioned long-distance romance was China and the U.S., purportedly over Washington’s growing interest in making sure Beijing feels confident about its future access to energy supplies.
Now, given the state of bilateral affairs between the U.S. and these two Persian Gulf powers over the very issue of that region’s stability, it’s clear we’re looking at the beginning of a very complex trilateral relationship among these states and China. Some of the key issues in this triangle include:
In the category of Most Likely to Get Hitched, we see essentially a replay of the Best New Odd Couple pairings, with one key exception.
The two replays involve Russia-Japan and Russia-China, with both focused on north-to-south natural gas pipelines that would greatly deepen already existing trade in Russian LNG (currently moved by rail to China and by ship to Japan).
With regard to Russia and Japan, while many observers cite the lack of a World War II peace treaty and the continuing territorial dispute over the Kurile Islands as roadblocks, our workshop participants viewed neither as significant, and virtually everyone saw some pipeline relationship as inevitable given the economic incentives.
With regard to Russia and China, far more suspicion was voiced about cross-border infrastructural development due to:
The new element separating this award from that of Best New Odd Couple was the oil connection envisioned between China and the Central Asian states (aka, the "Stans"). Of the three pipelines cited, this was seen as being least likely to achieve full fruition due to the great costs involved (i.e., difficult terrain), the long distance covered (i.e., getting the oil to China’s eastern coast), and the availability of cheaper sea-transit alternatives. As such, participants spoke of the likelihood of a modest pipeline relationship between western China and Central Asia, with the "spread" into China limited by the country’s less-developed railroad and motor vehicle networks.
In the category of Most Likely to Get Dumped, or the country most likely to have either its production or consumption of energy disrupted, participants focused their concerns on three separate situations.
In terms of external disruptions to energy consumption or imports, Japan received by far the largest number of votes. This only makes sense given the fact that Japan is the world’s largest importer of both coal and gas. Likewise, Japan accounts for about half of Asia’s purchases of Persian Gulf oil, virtually all of which is shipped through the exceedingly narrow and busy SLOCs of the Indonesian archipelago, a country currently featuring significant levels of instability.
In terms of internal disruptions to energy supplies, Russia was cited as the state most likely to experience some sort of internal chaos leading to diminished capacity for export. Given the central role Russia could play in both Japanese and Chinese demand for foreign gas, this perception does not bode well for attracting foreign investment.
Finally, in terms of the actual threat of war, Pakistan and India were cited for their current nuclear stand-off, although much hope was also expressed for a market logic that would—in the end—bind these two countries economically with others in southwest, central and south Asia for the purposes of creating gas and oil pipelines that would take advantage of that combined region’s significant energy resources. Along these lines, participants voiced the notion that India’s security situation with Pakistan would likely push it in the direction of greater economic cooperation with Bangladesh to take advantage of that country’s large natural gas reserves.