SEARCHING FOR SUSTAINABLE SOLUTIONS TO ENERGY SECURITY CONCERNS IN APEC ECONOMIES 

 

Robert Pritchard

ResourcesLaw International

 

 

 

 

Executive Summary     This article is based on a paper delivered to the 5th Asia-Pacific Economic Cooperation (APEC) Energy Ministers Meeting held in Mexico City on 23 July 2002.   APEC’s energy policies, which are non-binding in nature, are developed through meetings of the energy officials of the 21 APEC member economies known as the APEC Energy Working Group. The Working Group adopted a policy known as the APEC Energy Security Initiative on 28 September 2001, on which it had commenced work before the terrorist attacks in the United States on 11 September 2001.    In the view of the writer, global energy sustainability will never be achievable without a secure energy supply.  It is suggested that policymakers in most economies have been complacent about the energy security risk for decades.  In almost 30 years since the 1973 energy crisis, the main focus of international efforts to reduce energy supply risk has been on short-term responses and on producer-consumer dialogue, principally through OPEC and the IEA.  However, because of demand growth and shifts in centers of global demand, the vulnerability of APEC economies to supply disruptions and price shocks has been increasing at a greater rate than any short-term measures could ever have hoped to control.   The APEC Energy Security Initiative recognizes that there is a pressing need to move beyond short-term responses and to find lasting (in other words, sustainable) solutions to the causes of energy insecurity.  This requires amongst other things, a cooperative search for mechanisms to overcome impediments to exploration and development, to accelerate the development of cross-border power and gas projects and to enhance national self-reliance.

 

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1.                            Background

 

In the aftermath of the events of 11 September 2001, it is now more widely appreciated that volatility in the oil market poses significant risks to the world economy, as well as to particular economies.[1]  Adding to this, world energy consumption is projected to increase by 60 percent between 1999 and 2020[2].  During this period, it can be anticipated that near-to-market reserves will be depleted and that the need for additional volumes to be transported long distances will increase.[3]

 

The balancing of oil supply and demand is therefore likely to become more delicate than it is at present.  According to Professor Paul Stevens, “the scene is being set for a potentially serious conflict between oil producers which could lead to great instability in the oil markets”.[4] 

 

To some extent, oil prices have become desensitized to the geopolitical alarm bells that are frequently sounded in the market.  Despite this, the promotion and protection of future investment in the global energy sector is potentially the most important single issue of international economic development other than the management of the world economy itself.  As noted in a recent UNCTAD report:

 

“… energy is one of the most important drivers of economic development and is a key determinant for the quality of our daily lives … it is probably the biggest business in the world economy, with a turnover of at least US$1.7 – 2 trillion a year … global investment in energy between 1990 and 2020 will total some US$30 trillion at 1992 prices.” [5]

 

 

2.                            What Are the Problems and Barriers?

 

A mismatch between points of global energy demand and sources of production of primary energy has always been apparent, whether one looks at oil, gas, coal or the storage of water for hydroelectric production.  The heart of the problem seems to be that familiarity has bred complacency amongst policymakers.

 

In the case of oil, the main, well-understood, difficulty is that much of global oil production comes from the Middle East and has to be transported long distances.  Asian economies are becoming increasingly dependent on the Middle East for their oil supplies.  As shipping routes have become more congested, choke points are developing, most notably in the Strait of Malacca.[6]

 

In the case of gas, the transportation difficulty is much greater than in the case of oil because gas can only be transported by pipelines, unless of course it is converted into LNG for shipment.  With either option (pipelines or LNG), the infrastructure investment needs are immense and many investment barriers need to be overcome.  The barriers arise from a combination of a large number of political, technical, economic, environmental and legal issues.

 

 

3.                            The APEC Energy Security Initiative[7]

 

The APEC Energy Security Initiative, adopted by the APEC EWG on 28 September 2001, seeks to address energy security concerns in two ways: first, it sets out certain measures to respond to temporary supply disruptions and, secondly, it proposes certain longer-term policy responses that it considers are “practical in a policy context and politically acceptable”.

 

On 21 October 2001, APEC Leaders met in Shanghai and released a statement on counter-terrorism.  They affirmed that a key measure would be the “strengthening of energy security in the region through the mechanism of the APEC Energy Security Initiative, which examines measures to respond to temporary supply disruptions and longer-term challenges to the region’s energy supply”.  Following this, the APEC EWG further reviewed the Initiative at a workshop in Chinese Taipei on 23-24 April 2002 and made a number of recommendations for further action, some relating to the measures to respond to temporary supply disruptions[8] and others relating to the longer-term challenges. 

 

This short article concerns itself almost entirely with the longer-term challenges.  However, before proceeding to examine those challenges, it should be recalled that energy security is the core mission of the International Energy Agency (IEA), established by OECD economies in 1974 as a response to the 1973 energy crisis.[9]  It is sobering to realize that, almost 30 years after that event, oil importing economies have been unable to find real and lasting solutions to their energy security concerns. 

 

Of course, the energy security issue is not confined to APEC economies.  When the G8 Energy Ministers met in Detroit on 3 May 2002, the Co-Chairs issued a statement, key extracts of which are set out below:

 

“We discussed the key role that energy plays in our economies, and how vital it is to economic and social development around the world.  Access to secure, economical, and reliable supplies of energy is a lynchpin of progress.”

 

“We believe energy security and flexible emergency response are critically important in today’s world and agreed to continue close cooperation in enhancing them.”

 

“We reaffirmed the necessity of being prepared to respond to oil disruptions.  We agreed on the importance for net oil importing countries of maintaining emergency oil stocks and of commitments to coordinate their use during significant disruptions.”

 

“We discussed how energy security, economic growth, environmental protection and, therefore, sustainable development are supported by improved energy efficiency, and diversification of energy sources and fuels.  Countries can improve their ability to respond to changing energy supply conditions through increased energy efficiency and a mix of energy sources and types — oil, gas, coal, nuclear and renewables — chosen by each country as most appropriate.”

 

“We believe that continued research, development, demonstration and deployment of a broad array of energy technology options will play an essential role in diversifying the energy mix and reducing the environmental impacts of energy production and use, thereby making a vital contribution to sustainable development.”

 

“It is important that clean, reliable, and affordable energy be available for all.”

 

“Significant investments will be needed in energy development, production and infrastructure, as well as an improved energy efficiency, to meet growth in demand for energy services in an environmentally sound way.  To meet growing energy needs, countries must foster a favorable investment climate by ensuring open markets with transparent business practices and stable regulatory frameworks.” [10]

4.                            What Have We Been Doing for the Last 30 Years?

 

Since 1973, OECD production and consumption of electricity has actually doubled.[11] Individual economies have been seeking to attain energy self-sufficiency by domestic exploration and development.  However, particularly in Asia, growth in demand has exceeded growth in domestic discoveries and net importing economies have become increasingly dependent on the Middle East.

 

We should all now be asking ourselves: what on earth have we been doing about global energy security for the last 30 years?  The broad answer seems to be that we have been focusing, through institutions such as OPEC and the IEA, on short-term measures, without fully appreciating that growth in global energy demand, and shifts in the centers of energy demand, may have been increasing our vulnerability to supply disruptions and price shocks at a greater rate than any short-term measures could have ever hoped to control.  Individually and collectively, governments seem to have been complacent about energy security risk and their long-term responses have been inadequate. 

 

Ten years ago, one important longer-term initiative was taken: the establishment of the Energy Charter Treaty.[12]  However, amongst the APEC economies, only Australia, Japan and Russia have become signatories[13] although, in a promising move, China applied for and was granted observer status in November 2001.

 

 

 

5.                            Why Has It Been So Difficult to Develop Longer-Term Solutions?

 

As the World Energy Council has suggested, inertia of energy systems is a key constraint:

 

“Energy systems are characterized by inertia and their adaptation to new price realities is either slow or costly.  There must be room for the development of new energy forms that would compensate for the finite nature of some types of existing energy supplies or would use technologies in new ways to reduce harmful side-effects of current energy production or utilization.  Energy diversification, regional integration of energy systems, and enhanced trade in energy services are relevant strategies”.[14]

 

So far, efforts to develop longer-term solutions through producer-consumer dialogue, although dialogue is very useful and informative in itself, have not been productive. Typically, this is because, after the discussants return home, they run into domestic obstacles. The writer can identify at least three common factors which cause these obstacles:

 

•                One common factor is that many host governments find it difficult to create stable and attractive investment conditions which are conducive to investment in new energy projects.

 

•                A second common factor is that domestic reforms are often restrained by the basic fears of people: for example, fears of being unfairly treated; fears of becoming dependent on foreign capital; and fears of energy depletion if valuable resources are allowed to be exported.

 

•                A third common factor relates to the process of investment negotiations.  Host governments frequently disagree internally: finance, energy and environmental ministries have distinct responsibilities and often have different views on what constitutes the national interest; consequently, government officials often find it very difficult to confidently articulate a “whole of government” approach to investment negotiations.

 

In addition, efforts by governments within a particular region to address the need for common policies in support of regional initiatives are commonly hampered by the lack of established regional mechanisms. 

 

Although some progress is being been made with regional initiatives, it is suggested by this writer that, without concerted efforts, it will be increasingly difficult to sustain these initiatives because of the emergence over the last decade of a number of “new” complications.  These include:

 

•                as already referred to, shifts in centers of global energy demand, especially the increasing dependency of Asian economies on Middle East supply sources

 

•                the breakout of many ethnic and religious conflicts, both within individual economies and across national borders

 

•                the breakdown, in a few economies, of core competencies of government

 

•                the intractability of some key environmental issues, particularly global warming, and

 

•                the emergence of new challenges, such as demands to adhere to policies to ensure sustainable development.

 

In its submission to the World Summit on Sustainable Development in Johannesburg in August - September 2002, the IEA listed energy security as the first of eight areas in which it considers action is necessary for the achievement of energy sustainability. The writer agrees that global energy sustainability will never be achievable unless a series of auxiliary initiatives and policies, starting with the basic maintenance of a secure energy supply, can be successfully implemented by individual economies.  Policymakers therefore need to be careful that policies they propose to advance the pursuit of sustainable development do not diminish or destabilize energy security itself.

 

For all individual economies, energy security is only one aspect of security in the broader sense of national security and self-reliance.  For most individual economies, energy security depends on the continuing efficacy of the global trading system.[15]

 

 

6.                            Recommendations of the APEC EWG Energy Security Initiative Workshop

 

We should now return to the longer-term recommendations made by the workshop on the APEC Energy Security Initiative held in Chinese Taipei on 23-24 April 2002.  Its first recommendation was to carry out a study of impediments to energy exploration and development, including regulatory and fiscal impediments, and the impacts of energy market reform.  The following comments may be made about this recommendation:

 

•                Although most of these impediments to investment are becoming better understood, the impacts of energy market reform are not so well understood and require analysis. 

 

•                In particular, the dismantling of traditional monopoly structures has impacts which vary from one economy to another. 

 

•                As well, even after impediments to investment are recognized and understood, the process of overcoming them can be long and tortuous and success cannot be taken for granted.

 

The workshop’s second longer-term recommendation was to carry out a study of cross-border impediments to trade in natural gas, building on a study on cross-border impediments to electricity trade carried out in March 2002.[16] A number of comments may also be made about this recommendation:

 

•                The APEC cross-border electricity trade study emphasized that interconnection of power systems brings great economic and technical benefits to the interconnected systems, providing the participating economies with significant trading opportunities. 

 

•                The APEC study also emphasized that interconnection provides opportunities for more environmentally favorable outcomes than would be the case if power systems remained isolated from each other.

 

•                One of the potential advantages of power grid interconnection projects is the ability to transport low-cost hydroelectric power from remote areas of one economy to consumption centers in neighboring economies; in other words, to overcome the mismatch of power supply and demand within a particular region.  For example, it has been pointed out that, if the Greater Mekong Subregion (GMS) economies were able to exploit 50% of their hydropower potential, this would create additional generating capacity of five times the present total generating capacity in the subregion.[17]

 

•                Of particular importance in the context of energy security (and contrary to what many people might assume) is that interconnection reduces the vulnerability of power systems to most events of force majeure which fall outside the control of transmission system operators, such as storms, sabotage and  terrorist activity.[18] 

 

•                Cross-border power and gas grid interconnections, provided they are technically and economically feasible, provide economic, social, environmental and strategic benefits to the participating economies. 

 

•                For energy security, interconnections offer risk-spreading and, in consequence, risk reduction benefits.

 

The APEC EWG workshop made some other longer-term recommendations in relation to energy security which deserve consideration.[19]  These are not dealt with in this article, only because they are considered by the writer to be within a lower order of priority.

 

 

7.                            What Was Learned from the APEC Cross-Border Power Project?

 

In the APEC study on cross-border power, 14 commonly encountered barriers to power system interconnection were identified and a strategy to overcome these barriers was recommended for each barrier.[20]  Each recommendation was directed at accelerating the rate of investment in essential energy infrastructure in APEC member economies, at the same time as maintaining national power system integrity and preserving national sovereignty and autonomy.

 

The key policy recommendation of the study was to drop unnecessary political restraints and allow free reign to pragmatism.  It was also recommended that foreign investment should be utilized subject to appropriate regulation.  Regulation of the electricity industry should be light-handed and should be directed at ensuring transactional transparency and progressively exposing industry participants to competitive pressures.

 

It was further recommended that each APEC member economy should actively participate in regional initiatives to progress any cross-border interconnection opportunity from which it may benefit.  It must be emphasized, however, that each regional initiative has its own distinctive characteristics and requires tailor-made solutions.[21]

 

 

8.                            Addressing the Barriers to APEC Cross-Border Gas Trade

 

The need for development of cross-border gas pipeline infrastructure amongst APEC economies is even more urgent than for power grid interconnection.[22] 

 

There are immense resources of “stranded gas”, that is, gas which cannot enter world markets unless pipelines are developed to transport it across national borders and through transit countries.  These resources will remain unavailable to markets unless conducive policies can be established, and appropriate structural and regulatory frameworks can be installed, to attract the required investment in gas field development and in the necessary pipeline infrastructure. 

 

Although many of the issues which arise with power grid interconnection also apply to cross-border gas pipelines, there are some important differences.  To begin with, gas is both a fuel for power generation as well as a form of energy in its own right. However, at least gas, unlike electricity, can be stored until it is ready to be consumed.

 

The development and financing of pipeline infrastructure in many APEC economies poses two special challenges: the first is the absence of established gas markets; the second is that very substantial long-term investments and product offtake commitments are required to be made by reliable and creditworthy parties in order to create the markets.  As well, massive amounts of debt financing are required to be committed by multilateral and commercial banks.

 

 

9.                            Conclusions

 

The APEC Energy Security Initiative recognizes the need to identify longer-term responses to energy security concerns that are not only “practical in a policy context” but also “politically acceptable”.  This implies a need for cooperative solutions.  There is of course no single solution.  The energy perspective and the energy debate need to be broadened beyond single solutions and individual institutions and there should be no room for complacency. 

 

An effective response to energy security concerns requires a combination of policy approaches by each APEC economy.  It is suggested that, for each APEC economy, there are at least ten essential elements:

 

(i)                           recognising that, without the maintenance of a secure energy supply in individual economies, global energy sustainability will never be achievable

 

(ii)                          keeping all energy options open

 

(iii)                        maintaining the efficacy of the global trading system

 

(iv)                        encouraging the utilization of foreign investment and foreign technology

 

(v)                         recognizing and overcoming inertia — not only in the energy systems themselves but in the energy policies that have fostered the development of today’s energy systems and made them increasingly vulnerable to supply disruptions and supply shocks

 

(vi)                        overcoming impediments to energy exploration and development

 

(vii)                      adopting national energy policies that are internationally realistic, paying particular regard to the impacts of energy market reform on markets for energy goods and services

 

(viii)                     adopting diversified national risk-management strategies, including the development of diversified generation portfolios

 

(ix)                        accelerating the development of cross-border transportation infrastructure, with top priority being given to transportation of stranded gas to potential markets, and

 

(x)                         accelerating efforts towards regional integration of gas and electricity systems.

 

It is suggested that it is imperative for APEC economies to leave no stone unturned in searching cooperatively for lasting, sustainable solutions to their energy security concerns.  All avenues of cooperation need to be pursued.

 

At the 5^th APEC Energy Ministers Meeting in Mexico City on 23 July 2002, Ministers reiterated their endorsement of the APEC Energy Security Initiative and directed the APEC EWG to expand its work on barriers to cross-border power grid interconnection to cover gas pipeline networks as well.  Ministers reaffirmed the commitment of APEC to work closely with the business sector in fostering regional energy cooperation. Ministers acknowledged the mutuality of interest involved in regional cooperation and acknowledged that enhancement of each other’s energy security offers economic and strategic benefits for all. 

 

Although there is now a high degree of consensus amongst APEC economies, the reality is, of course, that each economy regards its national interests as paramount.  The challenge therefore remains for each economy to delineate its own risk management strategy in order to address its own energy security concerns and enhance its national self-reliance.

 

 

 

August 2002

 

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