"Economic Development and the Environment"
on the Sakhalin Offshore Oil and Gas Fields II

Copyright (C) 1999 by Slavic Research Center, Hokkaido University.
All rights reserved

The Russian Far East and Northeast Asia:
Aspects of Energy Demand and Supply Cooperation

Victor D. Kalashnikov


The Ramifications of Energy Demand and Supply for International Cooperation in Northeast Asia
Since the 1970s, energy issues have become tightly interwoven with economic, social and political problems, largely determining the development process of global and regional economies, as well as influencing national security and political stability.
The end of the Cold War has brought positive political changes in the NEA region and the opening of the Chinese and Russian economies has enhanced multilateral economic cooperation. However, there is no widely recognized conception of economic cooperation in the region. Even the geographic definition of "the NEA region" itself remains rather "vague", lacking definite territorial identification. Policy-makers and researchers have included a variety of countries along with various sub regions with different economic and political characteristics to the NEA region's definition.
The concept of regional economic cooperation in NEA still lacks a basic driving force behind economic cooperation. It is also necessary to take into account the existing political tensions among the region's members as well as cultural, ethnic and institutional obstacles. NEA has no general economic or sectorial institutional agreements or unions like the European Union, ASEAN, OPEC, the European Energy Charter, or the ASEAN Council on Petroleum (ASCOPE, NORDEL, etc.).
Despite recent positive political and economic trends, Northeast Asia lacks sufficient mechanisms to facilitate economic cooperation as well as those to facilitate trade, technology and investment transfers.
The NEA energy demand-supply sector holds significant potential for multilateral resource cooperation. Such interaction goes beyond simple export-import trade relations; the ramifications and implications of such interaction could link the region in an "energy community" and thus contribute to the process of regional integration. Similar to the International Energy Agency's*7  approach, three key policy challenges derived from the ramifications and implications of energy demand-supply can be applied to Northeast Asia. These are the so-called "Three Essential E's":
Energy Security:
The central point for providing energy security is diversification. Diversification implies diversification of energy sources in the energy balance and diversification of energy supplies. The largest energy consuming NEA countries (China, Japan, South Korea) have identified natural gas as a cleaner and/or underutilized source of energy and plan to increase its share as a percentage of total energy consumption. These three countries, along with North Korea, also have ambitious nuclear power programs to meet electricity demand but face problems due to financing and public opinion. A failure to meet nuclear power targets will affect future oil, coal and gas demand in these countries and the region.
Within the region, Japan and South Korea have long been dependent on imported fossil fuels to meet their energy demands. Among fossil fuels, Japan's import dependence on oil is almost 100 percent, 96 percent for coal, and 100 percent for LNG. Over the next 15 years, Japan will continue to import nearly all of its fossil fuels. Like Japan, South Korea is completely dependent upon imported oil and LNG, and 92 percent dependent upon imported coal. Through 2010, the country will retain its high dependence on imported fossil fuels.
In 1993, China became a net oil importer, dramatically changing the Northeast Asian energy picture. Over the next 10 to 15 years, China will expand its own oil production, but the growth rates in production will be obviously lower than the predicted rates of oil consumption. In 2010, China will join the ranks of Japan and South Korea as Asia's largest oil importers.
A key issue regarding the region's oil imports is the dependence on supplies from the Middle East. In the 1990s, 70 to 80 percent of Japan's oil imports came from the Middle East. More than 70 percent of South Korea's current oil imports also come from this region. It is predicted that through 2010 the share of Middle East crude oil imports in the Asia-Pacific region as a whole will increase from 75% in 1995 to 90% and 93%, respectively, in 2005 and 2010*8.
Such a high degree of dependence on one region for oil supplies will make Northeast Asian economies especially vulnerable to oil price shocks. As well, instability in the Middle East or along the oil's transport routes could threaten the security of their supplies.
An important feature in strengthening energy security rests in developing and transforming the infrastructure of international shipments of energy resources. In recent years, various organizations have formed several large and, for the region, technologically advanced bilateral and multilateral international energy projects; some of them are as follows:
The practical realization of these multinational and bilateral projects will reinforce the participant-countries' energy interdependence and expand the basis for the formation of a Northeast Asian "energy community".
Economic Development:
Energy is not simply a product or complex of products; it links other needs and issues. The energy industry is relevant to people in terms of the services it can render to them in terms of heating, cooling, light, and transportation. Energy is also an important and universal production factor for the manufacturing of a vast variety of non-energy commodities and services. Providing energy services and facilitating the production of other commodities and services are important economic goals.
On the other hand, in terms of economic development, international cooperation needs to focus on ensuring the availability of capital for large-scale investments with long repayment periods to meet increasing energy needs. A country's ability to mobilize sufficient capital for its energy investment needs will depend on the quality of its investment, fiscal and regulatory policies. Investor confidence is also a critical factor.
The NEA countries' combination of interrelated production characteristics represents an ideal and unique combination. Table 7 illustrates the point that regional cooperation can take place in Northeast Asia because of complementary conditions among the principal countries and sub regions*9.  These production characteristics can ensure profitable economic-related energy cooperation in the region. As shown, each country and sub region has certain comparative advantages which complement each other. Resource-rich and capital-poor and managerial-expertise-poor and energy-demand-scale-poor areas exist alongside resource-poor and capital-rich and managerial-expertise-rich and demand-scale-rich regions.
Table 7. Qualitative Comparison of Northeast Asian Countries' Production Characteristics
  Scale of
Energy
Demand
Oil and
Gas
Coal and
Minerals
Labor Capital Techno-
logy
Managerial
Expertise
RFE
China
N. Korea
S. Korea
Japan
P
VR
P
R
VR
VR
R
A
A
VP
VR
VR
R
P
P
P
VR
R
P
P
VP
P
VP
R
VR
P
P
VP
R
VR
P
P
VP
R
VR
Note: VR= Very Rich; R = Rich; P=Poor; VP = Very Poor; A = Absent.
Source: revised version from Keun-Wook Paik, 1993. Multilateral Energy Cooperation in Northeast Asia: a Focus on oil and Natural Gas Development. J. Dorian et.al. (eds.). CIS Energy and Minerals Development. Prospects, Problems and Opportunities for International Cooperation. Kluwer Academic Publishers in cooperation with East-West Center. Honolulu, Hawaii.
Efficiency and Environmental Sustainability:
Along with regional economic development, energy growth in Northeast Asia has resulted in a host of regional and global environmental problems, including:
Fossil energy will continue to be major source of energy for every Northeast Asian country in the foreseeable future. Even a superficial reading of the Kyoto Protocol demonstrates that energy is central to the issue, although quantifying the exact level of required reductions in energy-related emissions is very difficult.
Carbon dioxide emissions from fossil fuel combustion represent about four-fifths of all greenhouse gas emissions in industrialized countries. Policies to reduce energy-related CO2, SOx, NOx emissions in Northeast Asia and increase energy efficiency can be grouped into several categories:

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