IEEJ:October 2005

Major Issues of Crude Oil Procurement andCooperation Measuresin Northeast Asian Economies
Dal-Sok Lee
Senior Research Fellow
Korea Energy Economics Institute2005 Northeast Asia Petroleum Forum
September 21~22, 2005
JW Marriott Hotel, Seoul, Korea
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IEEJ:October 2005

Trends and Prospects of Oil
Demand in Northeast Asia (NEA)2

IEEJ:October 2005

Trends of Oil Demand in 3 NEA Countries• Oil consumption in 3 NEA countries increased by 3.7% per annum
from 1990 to 2004.
• Oil demand growth by country- Korea: 5.8% per annum- China: 8.0% per annum(Taiwan: 3.4%)- Japan: 0.0% per annum• Oil Consumption in 2004
[See Figure]- Korea: 2.28mb/d- China: 6.68mb/d(Taiwan: 0.88mb/d)- Japan: 5.29mb/d- NEA total: 15mb/d
3

ThousandThousand B/D
B/D
18000
18000
16000
16000
14000
14000
12000
12000
10000
10000
8000
8000
6000
6000
4000
4000
2000
2000
00
1990
1990
Korea
Korea

Source: BP1997
1997
China
China

2004
2004
TaiwanTaiwan

Japan
Japan

IEEJ:October 2005

Comparison with Major Oil Consuming Region• Oil consumption in NEA accounts for 66% of Asia-Pacific (A-P)
consumption and 19% of world consumption in 2004.
• Oil demand growth by region
from 1990 to 2004
- NEA: 3.7% per annum- US: 1.7% per annum- Europe: 0.4% per annum- World total: 2.3% per annum• Oil Consumption in 2004
[See Figure]- NEA: 15.4mb/d- US: 20.5mb/d- Europe: 15.9mb/d- World total: 80.8mb/d4

MillionMillionB/D
B/D
25.00
25.00

20.00
20.00

15.00
15.00

10.00
10.00

5.00
5.00

0.00
0.00
19901990
NEA
NEA

Source: BP2004
2004
USUSEuropeEurope

IEEJ:October 2005

Position of 3 NEA countries in the World (2004)
Rank

EnergyOil
Consumption Consumption

Crude Oil
ImportCrude OilProduction

Oil
Refining

1

USAUSA

USA

Saudi

USA

2

China

China

Japan

RussiaChina

3Russia

Japan

China

USARussia

4JapanGermany

Korea

IranJapan

5

India

RussiaGermany

MexicoKorea

6Germany

India

France

China

India

7

Canada

Korea

Italy

NorwayGermany

8

FranceCanadaSpain

CanadaItaly

9UK

FranceUK

Venezuela

France

10

Korea

Italy

Netherlands

UAE

CanadaSources: BP, Energy Intelligence, Blackwell etc.
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IEEJ:October 2005

Prospects of Oil Demand in 3 NEA Countries• With rapid increase in China’s oil consumption, NEA is expected
to become the central region of world oil consumption.
- Out of the total demand increase of 9.7mb/d in NEA during
2002-2025, 91% will be contributed by China.
- Oil consumption of NEA countries will surpass the consumptionin Europe within a few years.
Actual(mb/d)
2002

Projection (mb/d)
2010

2015

2020

2025

Annual%Change

Korea

2.2

2.6

2.8

2.9

2.9

1.3

China

5.2

9.2

10.7

12.3

14.2

4.5

Japan

5.3

5.3

5.4

5.4

5.3

0.0

NEA 3

12.7

17.1

18.9

20.6

22.42.5

Source: EIA, International Energy Outlook, July 2005
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Major Issues of Crude Oil
Procurement in Northeast Asia

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IEEJ:October 2005

Increased Dependency on Outside the Region(1)• China’s crude oil import demand will be 5.5mb/d in 2010, 6.5mb/din 2015, 10.7mb/d in 2025.[See Figure]- China’s Crude oil production till 2025 will maintain current
level of 3.5-3.7mb/d.
T ho us a nd B /D
16000

%

14000

70

12000

60

10000

50800040600030

4000

20200010001993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025

P ro d uc tio nNote: Based on EIA Projection in 2005
880

C o nsum p tio n

Im p o rt R a tio

IEEJ:October 2005

Increased Dependency on Outside the Region(2)• Asia’s crude oil import from outside the region is expected to risefrom 67% in 2002 to 75% in 2015, 80% in 2025 [See Figure],leading higher dependency on Middle East crude.
- Dependency on ME(2004): Korea 78%, China 46, Japan 81%
45

M illio n B /D40353025201510502002

2010
P ro d uc tio n

9Note: Based on EIA Projection in 2005

2015
C o nsump tio n2020
Im p o rt2025

IEEJ:October 2005

Asian Premium of Middle East Crude Oil(1)• Crude oil prices for Asian market remained higher than those ofEuropean and U.S. markets by around $1/barrel.
4.0
4.0• Price Difference of Arabian Lightduring 1995-2004- Asia – Europe : $1.17/B[See Figure]- Asia – U.S. : $0.95/B- U.S. – Europe : $0.22/B• The extra costs due to relatively
higher crude prices can be a factor
to suppress economic activity inAsia.
10$/B$/B

3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
-2.0
-2.0
-3.0
-3.0
-4.0
-4.0
1995.1
1995.1 1997.2
1997.2 1999.3
1999.3 2001.4
2001.4 2003.5
2003.5 2005.6
2005.6

Note: 6-month moving average

IEEJ:October 2005

Asian Premium of Middle East Crude Oil(2)• The fundamental cause for Asian premium underlies in the limited
supply sources of crude oil to Asia and Asia’s heavy reliance on
the Middle East (ME).
• Asian premium is also caused by the fact that ME producers havecreated a marketing system that inhibit arbitrage between Eastand West.
- Destination restrictions- Third-party trading restrictions• As long as the inflexible supply system remains unchanged, Asia’s
rising dependency on the ME crude only dampen Asian premium
phenomenon.
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IEEJ:October 2005

Strong Demand for Sweet-Light Crude Oil(1)• Oil importing countries in NEA compete for sweet (low sulfur) andlight crude of which the export availability is already in decline.
• Oil product demand in 3 NEA countries is characterized bya transformation of demand pattern, i.e., the lightening of demand.
100%8060
40201990

1997

2004

1990

K o re a
G a s o lin e & L ig h t F e e d s to c kSources: KEEI, BP121997

2004

1990

C h in a
M id d le D is tilla te

1997
Jap anF u e l O il

O th e r s

2004

IEEJ:October 2005

Strong Demand for Sweet-Light Crude Oil(2)• Although China has enough capacity to deal with heavy crude,
most of its refining facilities are equipped to run only sweet crude.
- Low capability to process sour (high sulfur) ME crude• Korea, which has higher capability for running sour ME crude,
has not enough cracking capacity to refine heavy crude.
• The lack of sweet-light crude supply will be maintained in thenear future, leading to widening the price spread between sweetlight crude and sour-heavy crude

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IEEJ:October 2005

Vulnerability of Transportation Routes(1)• Increased trade, especially from ME to NEA, will intensify
concerns the vulnerability of maritime transportation routes.
- Export of ME in the world: 30%(2002) → 41%(2025)- Import of China in the world: 4%(2002) → 12%(2025)• Maritime routes have narrow and congested sections that aresusceptible to piracy, terrorist attack or accidents.
- The Straits of Hormuz, The Straits of Malacca etc.
[Projection of oil tanker traffic]
2002

2030

VolumeShareVolumeShare

Straits of Hormuz

15mb/d44%

43mb/d66%

Straits of Malacca

11mb/d32%

24mb/d37%

Source: IEA, World Energy Outlook, September 2004
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IEEJ:October 2005

Vulnerability of Transportation Routes(2)• The rapid rise in oil tankers embarked from ME to Far East is
expected to make tanker shipping market tight.
[Trends of tanker freight costs]4 0 .0

$ /to n3 5 .03 0 .02 5 .02 0 .01 5 .01 0 .05 .0

15Note: 10-day moving average
Applied World Scale of VLCC to the flat rate of Gulf - Far East
Source: SK

2004-10-02

2004-07-02

2004-04-02

2004-01-02

2003-10-02

2003-07-02

2003-04-02

2003-01-02

2002-10-02

2002-07-02

2002-04-02

2002-01-02

2001-10-02

2001-07-02

2001-04-02

2001-01-02

0 .0

IEEJ:October 2005

Cooperation Measures amongst
Northeast Asian Economies

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IEEJ:October 2005

Cooperation for Overseas Oil Development• China, Japan and Korea have been pursuing overseas oil
development for energy security.
- Supply source diversification strategy- Control over foreign oil supply• In order to avoid over-competition amongst NEA countries,
joint investment (e.g. consortium) in overseas oil development
projects has to be encouraged.
“Anecdotal reports indicate that Chinese companies continue tooverbid on some tenders ….. Overbidding causes concern
because it gives producers a false sense of value for their resources
and contributes higher global prices.” (IEA report, Feb.2005)

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IEEJ:October 2005

Cooperation for Crude Oil Import Logistics• China has only a few crude oil tanker ports to bring VLCC
alongside due to shallow-water coastal area.
- VLCC accessible crude oil tanker ports are 5 out of 24 in China,compared to 4 out of 5 in Korea and 21 out of 39 in Japan.
• When oil companies in NEA import crude oil, the efficiency ofcrude oil import logistics can be enhanced through a joint purchaseor joint transportation.
- Primary transport by VLCC to NEA region- Secondary transport by small tanker to Chinese port
• Surplus oil reserve facilities in NEA region can be efficiently
utilized amongst oil companies in NEA by appropriate rentalsystem.
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IEEJ:October 2005

Cooperation for Safety of Maritime Transport• To establish a stable maritime order, UN Maritime Law Treaty
ratified in 1994 can provide a foundation.
- Uniform interpretation regarding critical concerns on security• Maritime security cooperation should be sought by ASEAN
Regional Forum (ARF) and Council for Security Cooperationin the Asia-Pacific (CSCAP).
• Alternative route for the Strait of Malacca should be consideredfrom a long-term perspective.

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IEEJ:October 2005

Cooperation for Creating Oil Market in NEA• East Siberia and Far East Russia could become a sub-center ofcrude oil supply to NEA through cooperation amongst NEA
Thousand B/Dcountries.
8,000- Providing a marker crude
7,000
for the region
6,000- Reducing ‘Asian premium’
5,000• China could reduce the demandfor crude oil import from outside
the region by activating oil
product trade in NEA region.
- Lack of refining capacity inChina [See Figure]- Surplus refining capacity inKorea and Japan
204,000
3,0002,000
1,000
China

Korea

Consumption

Japan

Refinig Capacity

Sources: BP(China), KNOC(Korea), PAJ(Japan)

IEEJ:October 2005

Cooperation for Enhancing Bargaining Power• To cope with ‘Asian Premium’, oil importing countries in NEA
should require ME producers to improve their inflexible supply
system.
- Undoubtedly, NEA oil importers have to maintain close
relations with ME oil exporters.
• In NEA region, China, Japan and Korea need to change thecompetitive oligopsony into cooperative oligopsony in order todeal with the monopoly supplier, Russia.
• NEA countries’ energy cooperative body such as SOC (SeniorOfficial Committee) should be established to deal with various
energy issues including the cooperation for oil supply security.

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IEEJ:October 2005

Thank Youfor Your Attention !

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Contact: report@tky.ieej.or.jp