NS4054 “Japan, Southeast Asia, and Australia” Mikkal E. Herberg Good morning, everyone. My chapter is about Japan, Southeast Asia, and Australia.

Author Mikkal E. Herberg Research Director of NBR’s Energy Security Program, University of California Senior lecturer on international and Asian energy, UCSD Specialist on energy geopolitics and economics with a special focus on Asia 1981-2000 Strategic planning roles for ARCO Publications China’s Search for Energy Security: Implications for US Policy Energy Security in the Asia-Pacific Region and Policy of the New U.S. Administration The author is Mikkal Herberg. He is research director of the energy security program of the National Bureau of Asian Research and senior lecturer on international and Asian energy at the Graduate School of International Relations and Pacific Studies, University of California at San Diego. He wrote this article in 2013.

Overview Key arguments Japan: a result of the Fukushima earthquake Energy insecurity challenge for Japan, Southeast Asia, Australia Japan: a result of the Fukushima earthquake Southeast Asia: disputes with China over conflicting maritime territorial claims Australia: become the world’s largest LNG exporter U.S. Implications Strengthen Asia’s energy security and cooperation A opportunity for a stronger and constructive US role in Asia Energy consumption in Asia has been booming over the past two decades. It means rising dependence on imported energy. As a result, energy security is a vital economic and strategic concern in Asia. Japan is facing a new national energy crisis as a result of the Fukushima. Because of South China sea conflict with China, Southeast Asia’s hope for new oil and gas supplies is likely to be delayed. Australia is also facing major new challenges to become world’s largest LNG exporter because of strong competition and rising costs. The United States has important long-term strategic interests in Asia’s continuing search to strengthen the region’s energy security. Therefore, strengthening Asia’s energy security and cooperation will provide an ideal platform for a stronger and constructive US role in Asia.

Japan (1/8) Poor resource, high demand Now, we get into the Japan’s energy security. Japan has poor resources and totally dependent on imported energy. In 2009, 96% of Japan’s energy needs were met by imported energy. 80% of which was fossil fuel, and the Middle East accounts for approximately 90% of Japan’s oil needs. So, these supplies would be at serious risk If conflict were to break out in the Arabian Gulf. Therefore, energy security is national security for Japan.

Japan (2/8) Efforts Diversification of energy sources Cause: the two 1970s oil shocks Contents: Oil → natural gas, coal, and nuclear power Results: energy security, economic efficiency, environmental protection 1973 2010 To strengthen its energy security, Japan has tried to diversify its energy sources. After the Japanese economy was hit hard by the two 1970s oil shocks, Japan has worked to diversify its energy mix away from oil toward natural gas, coal, and nuclear power. At the same time, it has sought energy security, economic efficiency, and environmental protection. As a result, before the Fukushima accident, the primary energy consumption in Japan had changed like this. Oil’s share of energy use was reduced from 75% to 42 %.

Japan (3/8) Radical Improvements in Energy Efficiency Strengthen its domestic energy foundation Japan has reached the highest level in the world Industrial energy efficiency: fuel-efficient vehicles, hybrid-vehicles Multilateral efforts to strengthen its energy security A founding member of the International Energy Agency Promote regional energy cooperation in Asia ASEAN The East Asia Summit The ASEAN+3 The second way Japan strengthened its energy security was through radical improvements in domestic energy efficiency. As a result, Japan’s energy efficiency has reached the highest level in the world, such as fuel-efficient vehicles and hybrid-vehicles. In addition, as a founding member of the IEA, Japan has been proponent of energy security cooperation at G8 and G20. Although Japan has tried to promote regional energy cooperation in Asia, it is hard to build a cooperative system because of recent disputes with China and South Korea.

Japan (4/8) Japan Energy Inc. The development of the Japan National Oil Company(JNOC) The Ministry of Economy, Trade, and Industry subsidized the company, the guidance of the government Despite huge subsidies and investments, the effect is low Koizumi dissolved the JNOC and created the Japan Oil, Gas, and Metals National Corporation (JOGMEC) in 2006 But, rising oil and LNG prices, Beijing’s emergence in energy market Tokyo returned to its emphasis on nationally controlled oil supplies Target for oil imports by Japanese companies: 15% → 40% by 2030 Goal of raising overall self-sufficiency: 18% → 36% by 2030 Expand its financial support for Japanese companies After the oil shocks of the 1970s, in order to secure its energy security, Japan sought to create competitive Japanese national oil companies under the guidance and support of the Ministry of Economy, Trade and Industry. However, despite huge subsidies and investments, the situation had not changed. So, Prime Minister Koizumi dissolved the JNOC and created the Japan Oil, Gas, and Metals National Corporation to better assist Japanese oil and gas companies in their projects abroad. However, rising oil and LNG prices and rising China in energy market are threat for Japan. As a result, Japan returned to its emphasis on national controlled oil supplies. The government wanted to raise oil imports by Japanese companies and also increase overall energy self-sufficiency by 2030. So, it expanded financial support for Japan’s oil and gas industry.

Japan (5/8) Results Azadegan oil field : abandonment Far East oil and gas : dissatisfaction Diversification in LNG : successful, but Indonesia has diverted the gas to domestic use (50%↓) Despite these efforts, Japan has failed to get national control over significant amounts of oil abroad, or reduce its heavy dependence on the Middle East. In the early 2000s, because of US diplomatic pressure and unattractive Iranian contract and operating conditions, Japan gave up the huge Azadegan oil field in Iran. And, Japan has also tried to gain access to Russian Far East oil and gas to reduce its dependence on the Middle East. Although Japan has been able to source roughly 300,000 to 400,000 bpd from Russia, this figure has not solved its heavy dependence on the Middle East. However, Japan’s efforts in LNG has been successful to some extent. However, Indonesian shipments have declined by 50 percent since 2003 because Jakarta has increasingly diverted the gas to domestic use. So, Japan began to focus on Australia’s LNG.

Japan (6/8) Fukushima and Its Fallout Results: shutdown of entire 54 nuclear power generation, the loss of 30% of normal electricity supplies, the decrease of 5% of electricity production in 2011 Short-term Solutions: much higher imports of LNG LNG imports: 79mmt(‘11) → 88mmt(‘12) The 2011 Fukushima nuclear disaster has exacerbated its energy security worries. 54 nuclear power generations were shut down, so electricity production was cut. So, the government had increased LNG imports.

Japan (7/8) Tokyo’s anxieties Rising LNG prices However, rising LNG prices were burden for Japan. As a result, that increase led to the first trade deficits for Japan in many years.

Japan (8/8) Tokyo anxieties Long-term Solutions Future nuclear power Public: opposition to restore nuclear power Government: energy costs without nuclear are too high In 2012, DPJ announced a plan that would phase out it by 2040 But Abe announced plans to restart it gradually under new, tougher safety standards. Aug 11, 2015: Japan restarted first nuclear reactor Long-term Solutions Expand its energy diplomacy and seek stronger access to LNG US shale gas, participation in many LNG projects around Asia and U.S. In addition, the outcome of the domestic debate over future nuclear power is uncertain. Despite strong opposition, Abe administration restarted first nuclear reactor in August 11. In the long-term, Japan has responded to this energy security predicament by expanding its energy diplomacy and seeking stronger national access to future LNG projects. US shale gas would be a good option for Japan. Australia’s North West project would be also a good choice.

Southeast Asia (1/3) Changing Energy Export Roles (Oil) Until the 1990s, Oil supplier to Northeast Asia Since the 1990s, Southeast Asian domestic oil demand has increased → Oil importer emergence 75% of oil imports come from the Middle East Myanmar’s rising gas and oil production Southeast Asia is significant in a number of ways with respect to global and regional energy trends. Traditionally, Southeast Asia exported oil, mainly to Japan and South Korea. However, because Southeast Asian domestic oil demand has grown rapidly and production has plateaued or declined, its oil output has declined after 2000. Indonesia became a net oil importer in 2003, Thailand, Philippines are now overall an oil importer. On the other hand, Myanmar has increased its gas and oil production.

Southeast Asia (2/3) Changing Energy Export Roles (LNG) LNG supplier to Northeast Asia Increasing domestic demand Indonesia, Malaysia, and Brunei have long been major LNG suppliers to Northeast Asia, but these supplies are now beginning to lag.

Southeast Asia (3/3) South China Sea Challenges 2/3 of Asia’s oil supplies transit the critical sea-lanes of the South China Sea and the Strait of Malacca: Key energy sea-lanes In 2002, U.S. proposed a new Regional Maritime Security Initiative, but it was rejected Control of the energy sea-lanes is a key aspect of today’s conflict between U.S. and China in South China Sea Increasing conflict between China and neighboring states Oil and gas exploration in the South China Sea will be delayed Recent conflicts in South China Sea made the situation becomes unstable. In 2002 and 2005, U.S and Japan proposed a new regional maritime security initiative to safeguard the Strait of Malacca. But, these proposal met with deep Chinese suspicion and were rejected by the littoral states. As China’s regional maritime power grows, conflict between China and neighboring countries will increase. Control of the energy sea-lanes is a key aspect of today’s conflict between U.S. and China. Thus, oil and gas exploration in the South China Sea will be delayed.

Australia (1/2) The Opportunities and Challenges of Energy Plenty 2nd largest coal exporter, 5th largest LNG exporter, uranium Australia takes advantage of Asia’s booming energy demand Challenges: Indonesia’s rising coal exports, China’s low growth, declining refining capacity Based on abundant resource base, Australia is as a major energy supplier to Asia. Thanks to geographical advantage, Australia has take advantage of Asia’s booming energy demand. It is the world’s second-largest coal exporter, the fifth-largest exporter of LNG in 2011, and a major uranium exporter. As a result, Australia has benefited from rising prices for coal in Asia. However, Australia will have to compete with rising coal exports from Indonesia, and in the long-term, China’s slowing economic growth is likely to present new challenges for Australia’s energy industry. In addition, Australia’s declining domestic refining capacity is one of its challenges. Critics argue that Australia needs to retain enough refining capacity to ensure product supplies in a strategic emergency.

Australia (2/2) Australia LNG LNG Boom Risks: increasing costs of engineering, labor, equipment strong competition for Asian market(shale, Qatar, Russia, Africa) In 2011, Australia exported 26 mmt of LNG from the Northwest Shelf and Darwin projects to Japan, South Korea, and China. With combined investments of $168 billion, the government has constructed seven major LNG projects. This is a good news for Northeast Asia and some of Southeast Asia, but the construction is driving up the costs of engineering services, labor, equipment, and port services. Moreover, Australian LNG will face strong competition for Asian market from U.S. shale gas, Qatar, Russia Far East gas, African offshore gas, Papua New Guinea, and Alaskan LNG. As a result, growing competition will lead to the more balanced and potentially oversupplied after 2016. This forecast would not bode well for Australia’s higher cost projects.

Conclusion Asia’s Energy Angst U.S. Implication Energy becoming key factor in Asia’s geopolitical architecture Energy nationalism rising with prices, the difficulty of cooperation Zero-sum competition for control of supplies and transport routes Intensifying focus on transit security, control U.S. Implication Strengthen Asia’s energy security and cooperation Strong US-Australian strategic and economic partnership US engagement with Southeast Asia through ASEAN, East Asian Summit Strengthen energy security cooperation in the Pacific islands A opportunity for a stronger and constructive US role in Asia Energy security is a key factor because of China’s, Japan’s, and Southeast Asia’s high and growing dependence on imported oil, combined with the region’s heavy reliance on the Middle East. Because of rising oil and LNG prices, energy security has aggravated the underlying sense of strategic competition and major power rivalry. In this highly charged atmosphere, achieving regional energy cooperation has been difficult. Therefore, the United States needs to make strengthening Asia’s energy security and cooperation a much more salient dimension of its regional strategy. The author presents three strategies. First, thanks to Australia’s unique geographic position, the strong US-Australian strategic and economic partnership provides an ideal basis for new efforts to craft regional approaches to securing the energy sea-lanes vital to the region. With its booming commodity export dependence on China, Australia can potentially provide a bridge between the U.S. and China in finding new ways to collaborate on energy sea-lane security. Second, US engagement with South Asia through ASEAN, the East Asian Summit and the ASEAN Regional Forum also presents opportunities to draw the regional powers into new energy security arrangements. These groups include all the key players and could provide an architecture for regional energy cooperation. Third, another approaches for promoting regional energy cooperation would be to strengthen energy security cooperation in the pacific islands. The islands would be important beneficiaries from and contributors to a regional emergency oil stock system. Through these approaches, energy security will provides an ideal platform for a stronger and constructive US role in Asia. If managed properly, it could ease some of the energy and strategic tensions between the U.S. and China.