IEEJ: November 2009

Northeast Asia Petroleum Forum 2009

Northeast Asian Energy
Situation & Multi‐lateral Cooperation Outlook
By ZHANG YINGHONG

Research institute of petroleum exploration & development
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PETROCHINA COMPANY LIMITED,CNPC
OCT‐26‐2009

IEEJ: November 2009OUTLINE
The World Economy Is Entering into A New Era
Strengthen Energy Cooperation in NE Asia:
Russia’s Reasonable Choice After Financial Crisis
Energy Premium : Common Challenge Faced by
China, Japan and South Korea
Outlook of NE Asian Energy Cooperation
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PREFACEThe “Regional (Energy) Cooperation” has been discussed formore than 10 years . Why do we need to talk about old topic
again today? The main reason is for “CHANGE”. Especially, theworld and the region were been changed profoundly after
financial crisis.

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The world is being changed(1) Globalization has changed the world economic growth pattern
Major Economies’ GDP Growth Forecast ($1 billion )Globalization had broken thefence of nations. Many
manufacturing have been moved
to China, India… from developed
countries. The social resources
have to be rearranged worldwide
and finally results in changing of
economic growth modes andtransferring of industry centers.

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As the major economic body after the War‐II, OECD is becoming a mature organizationin the last ten years of the 20th century. On the another hand, new rising economic
bodies developed quickly. The GDP of China took an average increasing ratio of 13.3%
year on year after 1990.

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The world is being changed(2) Traditional energy supply-demand system is increasingly
matureAnd the cheap oil era will be overWorld Oil Supply‐Demand Balance Forecast(10 thousand tons/day)

RIPED•The world oil production isunlikely to increase dramaticallyin the future. The annual
production will fluctuate around
4.1 billion tons.
•The
exploitationof
unconventional resources and thedevelopment of
IOR/EORtechnology will may extend thetermofstableproduction
between 10 to 20 years•The substitutions of natural gas
for oil, and oil for coal, together
with the development of newenergy are the main features of
the world energy .

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The world is being changed(3) The world NG industry is stepping into a sharp increasing period

North America
Middle East, Pacific Ocean

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After 2005, along with the improvement of the technique in the scale production of
unconventional in North America gas and the development of LNG/FLNG technique ,the world natural gas industry is stepping into a quick developing and global stage.
But the two hotspots appeared out of Russia. But where is the GPEC?

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The world is being changed(4)The change of energy economy in transition period will be more
dramatic•Due to the decline of the costforunconventionalgas
producing, the gas price in NA
has lapsed from oil price since2006, and obviously lower thanin Japan or Europe.
•The gas generation costs was
lower than coal generation costsof USA in 2008
•The price of coal dramaticallyincreased 190% in 2008

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•Duo to the credit crisis of the
U.S. dollar, oil will become asubstitute for speculation.
A
dramatic change will take place
not in supply and demand but inthe world energy economy

IEEJ: November 2009OUTLINE
The World Economy Is Entering into A New Era
Strengthen Energy Cooperation in NE Asia:
Russia’s Reasonable Choice After Financial Crisis
Energy Premium : Common Challenge Faced by
China, Japan and South Korea
Outlook of NE Asian Energy Cooperation
RIPEDIEEJ: November 2009

Russia: The key role in the regional energy cooperation(1) Unique geographical predominance

EUROPERUSSIANE ASIAMIDDLE EAST

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Russia possesses unique geographical advantage by locating in the heart of theworld . Besides, it is also the core energy resource country in NEA. Europe andNEA like two weights for the Eurasia balance. Along with the rising of China,
the scale inclines to the East. So Russia will need to adjust its energy strategy.

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Russia: The key role in the regional energy cooperation(2) Energy security need to make NE Asia to be thecounterweight of Europe in the pattern of energy resources export

RUSSIA CRUDE EXPORT AND CONSUMPTION
（MOT）

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Since the disintegration of the former Soviet Union in 1991, the oil export volume of
CIS region has kept growing 16% year on year. And the export volume account for
15% of the global export volume. Russia’s oil are mainly exported to Europe in thehistory. In 2008, 78.5% of Russia’s oil is exported to the European market; only 11%
of its oil is sold to the Asia‐Pacific region.

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Russia: The key role in the regional energy cooperation(2) Energy security need to make NE Asia to be thecounterweight of Europe in the pattern of energy resources export

Although the R/P ratio of natural gas is as high as 72 years, the export volume
remained at about 150 bcm in the past 15 years. However, Russia’s gas are mainly
exported to Europe in the history. In 2008, 100% of Russia’s natural gas is exported
to the European market.
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Russia: The key role in the regional energy cooperation(2) Energy security need to make NE Asia to be thecounterweight of Europe in the pattern of energy resources export
The Coal Production and Consumption of
Russia(mtoe)

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World coal reserves

Similarly, although the reserve‐production ratio of coal is as high as 481
years, the output was only 326 million tons in 2008 which is only 12.5% ofChina’s coal production. Among the 100 million tons of coal export
volumes, the total export volume to China, Japan and South Korea is only
25 million tons

IEEJ: November 2009

Russia: The key role in the regional energy cooperation(2) Energy security need to make NE Asia to be thecounterweight of Europe in the pattern of energy resources export
WORLD CRUDE OIL CONSUMPTION(MOT)WORLD COAL CONSUMPTION(MTOE)

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WORLD NATURAL GAS CONSUMPTION(BCM)

Huge Market: NEA has become the world’s second
energy consumption region. In 2008, the primary energy
consumption volume of China, Japan and South Korea
reached 2.75 billion tons of oil equivalent, while primaryenergy consumption volume of North America was 2.77
BTOE. By 2020, the primary energy consumption is
expected to reach 40 BTOE, which is about 1.48 times ofcurrent North America’s consumption volume.

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Russia: The key role in the regional energy cooperation(3) Huge remaining fossil energy resources in Russia’s far east

YET TO DISCOVERIED OIL AND GAS RESOURCES

BARENTS(10 BILLION BOE)

TIMAN

FAR EASTNW OF CASPIANRIPEDThe Russia’s Far East oil and gas exploration has made considerable progress in the past 20 years.
Now there are 66 discovered oil and gas fields in the Far East, where oil and gas resources to befound account for 27% and 45% respectively of Russia’s total oil and gas resources to be found. The
proved coal reserves in the Far East is 20 billion tons which accounts for 40.8% approximately of
Russia's coal reserves, and 50% of which could be open‐pit mining

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Russia: The key role in the regional energy cooperation(4) Recovery of Russia’s economy relying onenergy consumption of other economies in NE AsiaWORLD OIL AND GAS RESOURCES DISTRIBUTION

RIPEDEurope and the United States have limited contribution for Russia's future
economic growth. At present, China economy is showing signs of recovery andleading the Northeast Asia’s economy out of the financial crisis. Therefore, thethree biggest consumers in Northeast Asia will become the main engine of
Russia's economic recovery

IEEJ: November 2009OUTLINE
The World Economy Is Entering into A New Era
Strengthen Energy Cooperation in NE Asia:
Russia Reasonable Choice After Financial Crisis
Energy Premium : Common Challenge Faced by
China, Japan and South Korea
Outlook of NE Asian Energy Cooperation
RIPEDIEEJ: November 2009

Premium : the common challenge

faced by the three big consumers in Northeast Asia

RIPED“Competition Index” is the function of differential coefficient of oil price to time
“ Asia Premium” = Price Saudi Arabia‐Asia ‐ Price Saudi Arabia‐America“Asian premium” problem has existed since the early 1990’s. The average premiumfrom 1997 to 2004 is 1.46 $/b. Since 2005, with the continuous rising ofinternational oil prices, the average premium exceeded 2 $/b and the highestmonthly premium reached 7 $/b.

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CHINA

One of the major engines of regional economy
Resuscitation
But the Economy more and more laying on import of oil
OIL IMPORT OF CHINA

2008 GLOBAL OIL IMPORT2008 OIL IMPORT OF CHINA
In 2008, 49.5% of China’s oil consumption
needed to import.
China’s import oil took around 8% of global
import crude oil.
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JAPAN & SOUTH KOREA
Energy security need to make NE Asia to be the counterweight ofEurope in the pattern of energy resources export
WORLD OIL IMPORT PATTERNJAPAN OIL IMPORT PATTERN

Japan took around 9% of total oil import of the world, and the 81% of your country’s
oil import came from Middle East in 2008RIPEDIEEJ: November 2009

JAPAN & SOUTH KOREA
Energy security need to make NE Asia to be the counterweight ofEurope in the pattern of energy resources export
WORLD LNG IMPORT PATTERNRIPEDJapan and South Korea hold around 41% and 16% (more than 50%)of global LNG
trade. Because the world energy price system takes crude oil price as reference,the crude oil premium phenomenon has spread to other energy areas such as
LNG and LPG.

IEEJ: November 2009

Premium : the common challenge

faced by the three biggest consumers in Northeast Asia

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NEA, USA,EUROPE hold 20%,24%,25% of
global trade oil. But we have to accept
passively the international oil priceIn 2006 and 2007, the additional payment
caused by the premium is as high as 10
billion dollars. The consequent effects
damaged the Northeast Asia’s economy
seriously.

IEEJ: November 2009

Why did we bear the high Premium?
(1) Impacts of Import Growth Rate
First of all, Asian premium is mainly impacted by the growth rate of import volume
rather than the total import volume. Only when there are new entrants or sharp
increase in oil demand, there is significant premium. New entrants have to adopt
price strategy to squeeze into the market and win market quota. Meanwhile,
incumbents have to raise price to defend their market share.
The emergence of new entrants and demand increase strengthen market
competition. The premium would disappear only when the energy market finishes
the share adjustment. From Figure 1, we can find that the premium weakens when
the import volume keeps at stable growth rate for more than two consecutive years.
Therefore, one key to reduce premium is constructing oil stockpiling to smooth short‐term fluctuations in energy supply and demand.
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Why did we bear the high Premium?
(2) Simplex Import Structure & Negotiation without BATNA
The international crude oil market is still a seller market. Whether possessing
alternative projects would impact trader’s bargain power directly.

Best Alternative Projects in international oil trade: include substitutive crude
oil supply regions, own production amplification capacity, substitute energy anddemand reducing ability. For the three major oil consumers in Northeast Asia,
Japan and South Korea is poor in energy resources; China’s future production
capacity can be amplified up to 1.5 million tons / year. With the increase of energy
consumption, these three countries would be a passive price accepter if they could
not diversify import sources or develop substitute energy.
In fact, it is difficult for Middle East crude oil to obtain premium from U.S. as theUnited States has diversified import sources.
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Why did we bear the high Premium?
(3) Security and Environment Premium

In order to reduce the reliance on the Strait of Malacca and to maintainenvironmental sustainability, Japan government frames a basket of effective
policies to promote natural gas consumption during 1984 to 2003.

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At present, Japan's LNG import volume is 92.13 billion cubic meters, accounting
for 40.67 % of the global LNG trade volume, and 65.58 % of the import volume isimported from the Pacific region. During this period, LNG price in Japan keeps
higher than the calorific value of crude oil, that is, the price is added security andgreen premium on crude oil premium

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Why did we bear the high Premium?
(4) Other reasons: Correlation

Except the synchronous premium caused by the crude oil premium, correlative
premium exists among the three big consumers in NEA, namely, China, Japanand South Korea. If any country change its price, other members will be
influence. So, no country can deal with the energy premium problem alone.

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Why did we bear the high Premium?
(5) Relative Premium
Premium is one relative concept. When there is a noticeable oscillation in the reference
prices of energy premium, namely, the F.O.B prices to U.S.(WTI), even if there is no big
fluctuation in Asian energy prices, it’s still possible to find energy premium.
The high premium in 2001 is one good example. The premium reached its peak value
while the Asian competitive degree fell down. Further data analysis shows that theadjustment price of Saudi Arabia light crude oil to the United States is ‐5.59 $/b in 2001,
while the previous average adjustment price is ‐3.36/b. This led to the high Asianpremium phenomenon directly.

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Premium & Cooperation
Generally, the energy discount appears when the regional energy demand
dropped due to unexpected events or temporary excess supply in the source
region. But a high energy premium may occur as the quick recovery of theregional economy.
In fact, all above reasons just are exterior. The real reasons are conflicting
between globalization and nationalism, and limited resources and unlimited
demand.
Therefore, in order to reduce the energy premium thoroughly, it’s necessary
to strengthen regional cooperation, utilize energy resources orderly, increasestrategy and commercial storage and diversify import sources
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IEEJ: November 2009OUTLINE
The World Economy Is Entering into A New Era
Strengthen Energy Cooperation in NE Asia:
Russia’s Reasonable Choice After Financial Crisis
Energy Premium : Common Challenge Faced by
China, Japan and South Korea
Outlook of NE Asian Energy Cooperation
RIPEDIEEJ: November 2009

The regional cooperation situation
Has made radical progress since the financial crisis
Since the financial crisis, the cooperation between Russia and China, Japan andSouth Korea has made radical progress.

China: there is 15 million tons of crude oiltransported through Sino‐Russian pipeline
to China every year from 2010.

Japan: Russia expands its energy export
market by inviting Japanese companies toparticipate in the Far Eastern natural gas
pipeline and the “Sakhalin‐3” project. Sakhalin ‐ Khabarovsk ‐ Vladivostok gas
pipeline is designed with annual transmission capacity of 30 billion cubic meters.

South Korea: Sakhalin Energy Company and South Korea signed a 20‐year LNG
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import contract with the annual capacity of 1.5 million tons; Gazprom and South
Korea signed a 30‐year natural gas supply agreement with the annual capacity of 10
billion cubic meters.

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The future of regional cooperation•According to the existing scale, the values of Russia’s oil and gas
exported to China, Japan and South Korea would reach about 10
billion dollars and 18.8‐20 billion dollars respectively after 2010.
•Northeast Asia’s economy development requires further energy
cooperation between Russia and China, Japan and South Korea.
The long‐term cooperation should be based on mutual benefit,
mutual trust and win‐win situation

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Proposal(1)Utilizing Energy Resources in Order•Utilizing energy resources in order
is one effective way to maximize theinterests of energy suppliers.
•Utilizing energy resources in order
is one effective way to minimize thecosts of energy consuming countries.
The regional cooperation with Russia
would enhance the bargain powersof China, Japan and South Korea in
the Middle East energy negotiations
and would be helpful to reduce
premium.
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Proposal(2)Regional Joint Bargain•In the international oil market, the import
volumes of China , Japan and South Korea
are 320 million tons respectively. China’s
import volume of crude oil is expected to
exceed that of Japan in 2012 and ranks
second in the world.
• In the international natural gas market,
the import volume of Japan accounts for
40.7% of the global volume and ranks firstin the world； China is the major potential
LNG consumer in the world. By 2012, the
LNG import volume of China, Japan andSouth Korea is expected to account morethan 65% of the global volume.
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Proposal(2) Regional Joint Bargain•Among the three big energy consumers in Northeast Asia, China is the only one possessing richenergy resources and production capacity. China’s reserves of oil, gas and coal account for 1.2%,
1.3% and 13.9% respectively of the global reserves; China’s production of oil, gas and coal accounts
for 4.8%, 2.5% and 42.5% respectively of the global production. Hence, China’s existing resources
would play an important role in the risk defense once establishing of regional energy cooperation
mechanism.
• Japan has have obvious advantages in capital and technology. It possesses perfect oil strategy
reserve system and high oil‐refining capacity. Besides, Japan has complete law system, advanced
technology and rich experience especially in nuclear power, energy saving, environmental
protection, new energy development and other areas.
•South Korea is also good at energy storage, market operations, etc.
•If the Northeast Asian region can follow European experience in “Coal and Steel Community” toestablish regional cooperation mechanism, China, Japan and South Korea could form alliances ofoil‐consuming countries and achieve a joint bargain in energy procurements. This would change
their passive position in the international energy market in some extent.
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Proposal(3)Regional Strategy Storage•The establishment of the regional joint energy reserve system would be one key
method to build multilateral energy cooperation mechanisms and control nationalenergy risks.
•In the late 1970s, the second oil crisis broke out. Japan rode out the storm by the 90
days oil reserves. In 2008, Japan’s strategy oil reserves are 328 million barrels,commercial reserves are 302 million barrels and the total reserves are 630 million
barrels which reach 124 days. South Korea’s strategy oil reserves are 79 million barrels,
industry reserves are 56 million barrels and the total reserves reach 49 days.
•In the first half of 2009, China has completed the first period national strategy reserve
which is 175 million barrels. Japan and South Korea possess advanced technology andrich experience in energy reserves. China, Japan and South Korea can build regional
joint reserve system.
• The joint oil reserve system is helpful to ensure the oil & gas supply and to control therisk premium caused by geopolitical conflicts and finally prompt the establishment of
the multilateral energy cooperation mechanism in Northeast Asia.
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CONCLUSION
Although the multilateral energy cooperation mechanism has not yet been establishedso far, China, Japan and South Korea have made preliminary attempts to build
cooperation mechanisms in different methods. From the joint declaration of China,
Japan and South Korea in 2003 to the Boao Asian Forum in 2009, the establishment ofregional energy cooperation community has always been one of the core topics. Since
the global financial crisis, the cooperation between Russia and China, Japan and South
Korea has been prompted comprehensively. The global energy economy structure andeconomy growth centers have been shifted to the east gradually. The establishment ofmultilateral reciprocal energy cooperation has become the common needs of thecountries in the Northeast Asia. One cooperative Northeast Asia would make animportant contribution to the world future economy development

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CONCLUSION
In the Northeast Asian regional
relations, there is a variety ofcomplex and interwoven
contradictions which is impossible toresolve in a short time. Therefore, thework has to be done from easy todifficulty, from bilateral tomultilateral. The cooperation can beachieved from the readily agreed
contents. Cooperation contents andscopes could be expanded graduallyand finally make substantial progress.
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Contact : report@tky.ieej.or.jp