1. Energy Outlook of Northeast Asia and Regional Energy Cooperation June 9, 2006 Kensuke Kanekiyo Managing Director The Institute of Energy Economics, Japan The Institute of Energy Economics, Japan 財団法人日本エネルギー経済研究所 Copyright IEEJ 2006 Seminar on EU Russia Energy Relations Aleksanteri Institute, University of Helsinki

2. 1.1 Oil Price Skyrocketing 1 1.Strong demand surge US plus Emerging economies(China, India, Brazil) 2. Shrinkage of surplus supply capacity in upstream, downstream and US gas & power market. 3. Speculation by money funds. The Institute of Energy Economics, Japan 財団法人日本能源経済研究所 Copyright IEEJ 2006

3. 1.2 Energy Outlook of Asia 1.Japan: Leveling off while fossil energy consumption decreases. 2. Developing Asia: More than double by 2030 as China’s presence and import dependence greatly increase. 2 The Institute of Energy Economics, Japan 財団法人日本能源経済研究所 Copyright IEEJ 2006

4. 1.3 Energy Import Dependence 1. Coal is imported only by Japan & Korea. China is self-sufficient on coal consumption and would not affect the world market, though deteriorates environment seriously. 2. Oil and gas import dependence is high in Northeast Asia. China’s oil import is expanding rapidly, casting serious security concern. 3 The Institute of Energy Economics, Japan 財団法人日本エネルギー経済研究所 Copyright IEEJ 2006

5. 2.1 Petroleum Outlook of NE Asia 1.Oil consumption of Northeast Asia (13 MMBD in 2005) will increase more than 5 MMBD by 2020. 2.Since China’ s domestic production would be more or less leveling off, oil import will also increase by 5 MMBD. 4 The Institute of Energy Economics, Japan 財団法人日本能源経済研究所 Copyright IEEJ 2006

6. 2.2 Middle East Dependency of Oil 5 1. Northeast Asia depends on the Middle East 3/4 of oil Import 2. This causes vulnerability of supply and other issues such as the Asian Premium of the Middle East crude oils. Source: National statistics The Institute of Energy Economics, Japan 財団法人日本エネルギー経済研究所 Copyright IEEJ 2006

7. 2.3 Natural Gas Outlook of NE Asia 1. China’s gas demand was expected to grow fast to double natural gas import of NE Asia by 2020, while a. East-West gas pipeline has spurred natural gas consumption. b. Switching to natural gas is expected to improve environment. 2. About 20 LNG terminal projects have been listed in China. However, skyrocketing gas price may cause substantial delay. 6 The Institute of Energy Economics, Japan 財団法人日本エネルギー経済研究所 Copyright IEEJ 2006

8. 3.1 Status of Energy Cooperation 1. Institutions discussing on energy cooperation APEC, ASEAN+3, SOM, Asia Pacific Partnership, etc 2. Active Projects only for Information Exchange 1) APERC (Energy Outlook and other research work) 2) JODI (Joint Oil Data Initiative) 3) RTEIS (Real-Time Emergency Information Sharing) 3. Candidate Energy Projects for Regional Cooperation 1) Joint Oil Stock Piling 2) Siberian Oil/Gas Pipelines 3) New Asian Oil Market 4) Rationalization of Energy Use / Energy Conservation 5) CDM/JI/ETS 6) Nuclear Power Development No specific institution to talk on Northeast Asian Energy Cooperation, yet !! 7 The Institute of Energy Economics, Japan 財団法人日本エネルギー経済研究所 Copyright IEEJ 2006

9. 3.2 Russia and Northeast Asia Stranded oil & gas resources in eastern Russia will be an important answer to energy security of Northeast Asia. 8 East Siberian Fields West Siberian Fields For Europe Over 6000km For Northeast Asia 2000 - 3000km Caspian oil fields (Major competitor for Russia) 2000km 3000km 4000km 6000km The Institute of Energy Economics, Japan 財団法人日本エネルギー経済研究所 Copyright IEEJ 2006

10. 3.3 Potential Energy Flow from Eastern Russia 9 The Institute of Energy Economics, Japan 財団法人日本エネルギー経済研究所 Copyright IEEJ 2005 Phase-1:Taishet – Skovorodino Distance: 2400km Capacity: 0.6 MMBD Investment:$ 8 Billion Completion: End of 2008 Mohe Branch Line ?? Phase-2: Skovorodino - Perevoznaya Distance: 2000km Capacity: 1.6MMBD (Whole line) Investments: $6 Billion Completion: 2012? East Siberian Oil & Gas Fields (For Development) Hydro Power Offshore Sakhalin Fields (Under Development)

11. 3.4 Petroleum Resources of Eastern Russia ProbablePossibleTotal Oil East Siberia Billion Barrels 6.1 Billion Barrels 15.3 Billion Barrels 21.4 Krasnoyarsk & Irkutsk4.114.818.9 Sakha Republic2.00.52.5 Sakhalin4.35.69.9 Eastern Russia 10.420.931.3 Natural Gas East Siberia Tcf 106.2 Tcf 91.6 Tcf 197.8 Krasnoyarsk Krai22.223.045.2 Irkutsk Oblast41.031.072.0 Sakha Republic42.937.680.5 Sakhalin21.18.429.5 Eastern Russia127.3100.1227.4 The Institute of Energy Economics, Japan 財団法人日本エネルギー経済研究所 Copyright IEEJ 2006 Source: IEEJ World Bank Report “Northeast Asia Natural Gas Trade” 10 Oil and gas reserves located in eastern Russia are yet to be developed except those in Sakhalin.

12. 11 3.5 Geology of Siberia Lava flew out ↑↑↑↑ ↑↑↑↑ The Institute of Energy Economics, Japan 財団法人日本エネルギー経済研究所 Copyright IEEJ 2006 Geology of east Siberia is old, peculiar and difficult to interpret.

13. 3.6 Implication of Russian Resources Expected benefits of introducing Russian resources are huge. 1. Improving Demand/Supply Security a. Diversify oil import source for NE Asia b. Diversify oil market for Russia c. New Asian oil market at Nakhodka 2. Introduction of Natural Gas a. Life line for eastern Russia b. Environment improvement for NEA 3. Improving regional security through economic development a. Develop east Russian Economy b. Substantially increase trade among Northeast Asian countries c. Activate mutual investment Russian Oil Export Siberia 1.6MMBD Sakhalin 0.4 Total 2.0 (12.5%) NEA Oil Import (2020): 16MMBD 12 The Institute of Energy Economics, Japan 財団法人日本エネルギー経済研究所 Copyright IEEJ 2006

14. 4.1 Simple Principles to Apply 13 The Institute of Energy Economics, Japan 財団法人日本エネルギー経済研究所 Copyright IEEJ 2005 1. Role of public sector: Externality to improve 3E and 3S 1) Government role to realize huge social benefit 2) Various policy measures are available 2. Factor of Scale 1) Power of Scale: Demand security for suppliers 2) Economics of Scale: Lower cost for construction Power of Scale

15. 4.2 Pipeline Economics 14 The Institute of Energy Economics, Japan 財団法人日本エネルギー経済研究所 Copyright IEEJ 2005 1. Economics of Scale works greatly in long distance pipeline. 2. Pipeline tariff can be lowered by policy consideration, such as long term credit, lower tax, or subsidy.

16. 4.3 East-West Dialogue 15 The Institute of Energy Economics, Japan 財団法人日本エネルギー経済研究所 Copyright IEEJ 2005 1. Supplier/Consumer Dialogue x Energy development and transaction with Russia, CIS and Middle East countries x International cooperation and rational order in energy development x Technology development, energy transit issues, etc. 2. Consumer/Consumer Dialogue x Energy conservation and rational use x Rational market design and government role x Technology development 3. Global Energy-Environment System: Post Kyoto Protocol x Participation of every stakeholders  Integration of KP(Top-down) and APP(Bottom-up) approaches x Harmonizing interests of developed and developing countries. Thank You