- May 31 2013
Edited Proceedings of the 11th Petro India Conference organised by India Energy Forum and Observer Research Foundation.
The creation of a new 'architecture' for regional cooperation in the area of energy in general and hydrocarbons in particular will be a critical step in the process of Asia's development. This would require support of the concerned governments and various other players including industries, institutions, regulatory bodies and consumers. The
intense hostility between India and Pakistan, the largest nations in South Asia is one of the biggest barriers to regional cooperation, but the story of the European Union offers hope. European nations fought many wars and yet they took the first step of creating the coal and steel network which proved to be instrumental in bringing the nations together.
South Asian economies are quite different from each other, but there are some commonalities as well. They have high levels of energy import dependence, particularly for oil, and are vulnerable to volatility in global crude prices. India, the largest South Asian economy, imports 80 percent of its crude oil needs while Pakistan, the second largest, imports over 84 percent of its needs. Bangladesh imports over 95 percent while all other South Asian economies are completely dependent on imported oil. All economies have highly regulated domestic energy markets and have limited ability to alter their energy consumption patterns significantly. As the price of energy does not often reflect the 'value' of energy, these economies are not among the most efficient energy users. Millions of the subcontinent's energy consumers are energy poor, as they do not have access to modern energy services even to meet basic needs such as lighting and cooking. Energy transportation and distribution infrastructure is inadequate within each country and existing infrastructure is often poorly maintained.
On the other hand, the rise of Asia in the midst of the global economic downturn is opening up unprecedented opportunities for cooperation. The economic crisis has 'levelled' the field, by proving that, irrespective of the size of the GDP of industrialised nations, it is the limited 'room for manoeuvre' in the domestic space that defines their stand in international forums. The economic crisis has in fact shrunk the space even further and
consequently, policies that impact energy costs no longer find political support even in the richest nations. The persistent argument from developing nations that creating and sustaining jobs and livelihoods must be given the highest priority is finding new meaning in richer nations.
Furthermore, the growing use of coal in Europe on account of its economic competitiveness despite its negative carbon emission credentials has muted criticism over Asia's dependence on coal for power generation. There is better understanding of the fact that climate change policies need to be aligned with economic reality.
Gas markets are in a state of flux, but this too presents a unique
opportunity. Long term contracts with rigorous 'take or pay' arrangements are being threatened by competitive short term deals made possible by surplus supplies that have been displaced by shale gas production in the United States. This has brought home the fact that energy prices and supplies respond more to competitive markets rather
than policy fiat. This is an important message to South Asian nations which are likely to increase their dependence on imported oil and natural gas substantially. Growing resource nationalism in energy exporting countries such as Indonesia, which is the source of most of South Asia's imported coal, is an emerging concern. The State, as both owner and producer of resources, does not respond well to changing market conditions which create insecurities for consuming nations.
Closer to home, the coal based energy system of India is going through a crisis. Domestic coal production, which had been growing more or less steadily at 5 to 8 percent annually until 2009, has faltered on account of a lethora of domestic hurdles. Problems in obtaining environmental clearances as well as inability to acquire land for mining have reduced the annual growth in domestic coal production to about 2.5 percent and coal imports have surged to over $ 15 billion. Under the Business as Usual scenario, China and India would be requiring additional imports of about 1 billion tonnes over the next two decades. That would be 75 percent of the entire incremental demand for coal in the world. This huge demand
for coal may well have resulted in a substantial increase in prices but for the fact that shale gas displaced much of coal use in the United States. Even before the first LNG export terminals appear in the US, shale gas exports have begun, not as gas but as coal to Europe, and it is just a matter of time before US coal heads to Asia. Natural gas too may be exported from USA in the form of products like fertilizer and petrochemicals.
Emergence of unconventional gas is a welcome development, but there
are certain uncertainties in terms of quantity, price in the early stages of estimation and the possible laying of cross-border pipelines which are likely to affect the price. These factors include LNG capacity in Australia, US, Africa and South America and increased risks for mega projects. Potential delays in LNG projects could tighten the market, but judging by developments, the global LNG markets may balance out by 2020. Spot markets have increased to 20 percent of the global trade and more spot quantities could be available after the expiration of long term contracts in 2015 or 2017.
The question on everyone's mind is whether a 'shale gale' similar to that in the USA would sweep across Europe and China leading to a global oversupply of natural gas. China's total gas imports will be 93.6 billion cubic meters (BCM) by 2015, bringing the country's import dependence for gas to over 35 percent, from 15 percent in 2010. Seeing the writing on the wall, China has moved rapidly to tap its own considerable shale gas reserves. Its
second offer for 20 shale blocks concluded in October 2012 with 152 bids.
The Central Asian Gas Pipeline is already a reality with the first section of two 650 km pipelines having been commissioned in December 2009. Beginning at the Turkmen-Uzbek border it is meant to transport gas from China National Petroleum Corporation’s (CNPC) gas fields in Turkmenistan through central Uzbekistan and southern Kazakhstan before reaching Horgos. From here, an 8700 km Second 'West-East' Pipeline (crossing 14 states linking other domestic gas fields in the Pearl River and the Yangtze River delta and ending in Hongkong) will be built. By the end of 2013, this could be supplying 30 BCM of gas from Central Asia to China.
India's situation, however, may be less fortunate. Despite the Turkmenistan-Afghanistan-Pakistan-India (TAPI) deal, it is estimated
that 40 to 50 percent of demand will need to be met by imported LNG, making India one of the largest LNG importers in the world. It is very likely that India would be entering into large volume and long term gas contracts over the next few years. Given the infrastructure requirements as well as the 'take or pay' commitments these could involve, it is absolutely essential to understand that gas markets are almost impossible to predict. If the EU experience regarding long term supplies from Russia shows anything, it is that flexibility has to be an essential part of these contracts. More than ever it is vital that market realities be taken into account to formulate a robust gas sourcing strategy for the country and the region.
Across Asia, there is huge unmet gas demand resulting from poor infrastructure and severely restrictive markets. Both impact the region’s
ability to either produce its own gas or import gas. China perhaps is the only country which has been aggressively trying to align domestic prices with the market.
Over the coming years, given the resource constraints, there will be an inexorable march towards market prices. However, if Asia strives to build strong regional markets, it can source fuels competitively. Such regional integration can have far reaching consequences across the world. It would facilitate major shifts in global inter-dependence, and could re-define global geo-politics.
Countries across the region need to move rapidly to upscale their poverty alleviation programmes through employment generation in the secondary and tertiary sectors of the economy in the next few years. Given the context of access, it would be futile to wish away energy subsidies. But subsidies have to be administered in ways that allow markets to allocate and substitute scarce resources and also promote conservation. The recent announcement of the roll out of direct cash
transfers in India, if taken to its logical conclusion, can be the biggest single reform since 1991.
Given the right vision and the capacity to learn from each other's experiences and mistakes, the coming years can see very different regional alignments as priorities are re-defined and Asian neighbours increasingly deal and transact with each other. It is evident from the experience of developed nations that mature and integrated markets are the only means of ensuring that the world's largest emerging consumers finally emerge as the 'price-makers' rather than the 'price takers' they have traditionally been. In the way forward, the constant need is for better integration rather
than isolation and this is the most important lesson for emerging Asia.