IEEJ: October 2005

Brief analysis of cooperation prospect on oil and gas industry of China, Japanand South Korea
An Fengquan(Consulting Corporation Of Sinopec)

1. Favorable cooperation conditions are provided in the oil and gas industryof the three countries
Currently, the wish for strengthening cooperation among China, Japan and South
Korea is intensifying continually on the macro background of unsteady internationalsituation and unceasing conflicts between regions. An universal consensus has beenreached that the economic and social development depends on good international andregional circumstances, and strengthening cooperations among China, Japan andSouth Korea correspond with three nations’ fundamental interests. Especially in theoil and gas cooperation field, a solid foundation and some favorable conditions havebeen formed, and they are as follows:Firstly, China, Japan and South Korea are friendly near neighbours depending oneach other, with centuries-old historical ties. Confucianist culture nurtured People ofthe three countries, and the “harmarmony” in the common culture background laida solid foundation for communication and cooperation of the three countries, guiding
their future cooperation. Since the establishment of diplomatic ties, three countries’
cooperation relationship in various economic fields developed drastically.
Secondly, the rapidly growing oil & gas demand provids huge market for thethree countries’ strengthening resource cooperation. With continuous and rapid
development of the three countries’ economy, the oil and gas demand is also
increasing fast and stably, and the proportion of this region’ total oil and gas demandin the world gross need is rising continuously.
According to the BP statistical review, the oil demand of Japan, China mainlandand South Korea accounts for over 90% of that in entire China, Japan and South
Korea region. Especially china’s rapid economic growth provides more
opportunities for economic cooperation in this region. Currently, china’s economy isin the rising phase of the new round of growth period, and internal vitality promoting
growth enhanced. So China’s economy will grow rapidly in the next 10~20years,
thus driving the fast increase of oil and gas demand. In terms of the goal of GDP
tripling by 2020 over GDP in 2000, the oil need in china is predicted to climb up to350 million tons by 2010 and 450 million tons by 2020, 1.1 fold and 1.5 fold over2003 respectively. The demand for three major oil products of Gasoline, kerosene and1

IEEJ: October 2005

diesel and chemical feedstock is the primary driving force, and it will rise by 240
million tons by 2010 and 320 million tons by 2020, 1.4 fold and 1.8 fold over 2004
respectively. Meanwhile, gas demand also grows rapidly, the demand is predicted toreach 100 billion cubic meters by 2010 and 200 billion cubic meters by 2020, with agood market potential, so the rapidly growing oil and gas demand provides morecooperation opportunities for China, Japan and South Korea region.
Thirdly, they are jointly facing Challenges from oil and gas resources shortage.
According to BP statistical review, China, Japan and South Korea are the second, thirdand seventh largest oil consumers in the world respectively in 2004, and the total oil
consumption amounted to 655 million tons, accounting for 17.38% of the global total,
with china 8.19%, Japan 6.41% and South Korea 2.78%. Among the above threecountries, Japan is the traditional importer for oil and gas resources, the oil import up
to 263 million tons in 2004, and is the importer of second-largest in the world andlargest in China, Japan and South Korea region. Oil and gas resources in South Korea
depend on import entirely, the oil import up to 106 million tons in 2003, and is theimporter of fourth-largest in the world and second-largest in the China, Japan andSouth Korea region. Though the remaining oil recoverable in china ranks the world
eleventh, the production up to 175 million tons in 2004, ranking the sixth in the world,
the robust oil demand growth led to the oil import dependence rising continuously.
China became the importer of fifth-largest in the world and third-largest in the China,
Japan and South Korea region, due to the 123 million tons of crude import in 2004
causing the dependence up to 38.7%. It is worthy to be pointed out that China, Japanand South Korea all rely heavily on the oil resource of Mid-East region, and thecurrent dependences of the three countries on Mid-East are 79%, 75% and 50%. From
the above data we can see that oil consumptions of China, Japan and South Korea all
depend on external oil supply to some degree, and their oil imports mainly come fromMid-East. So how to efficiently meet the oil and gas need and secure the oil and gas
supply have already been the jointly facing challenges.
Fourthly, there is complementarity in oil and gas cooperation among China,
Japan and South Korea, and more favorable conditions are existent for developing
cooperation. China has great market potential, advanced fundamental science research
capacity, valuable experience of oil and gas production, plentiful labor force andcontinuously rising industrial manufacture level. Especially in oil and gas E&P field,
China accumulated valuable experiences, and got competent E&P capability.
Otherwise Japan and South Korea have strong competition predominance in capital,
operation, industry technology, marketing and so on, and especially have valuable
experiences in oil stock system, energy-saving, improvement of energy efficiency andcontrol of CO2 emission. If the predominances of three countries could be wellcombined, the international competition capability of three countries on oil and gas
industry would be improved further.
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IEEJ: October 2005

Fifthly, the top leaders of China, Japan and South Korea region attach much
importance to strengthening energy cooperation. We are glad to see that the energy
cooperation of China, Japan and South Korea has made practical advancement. In theJoint declaration of China, Japan and South Korea promoting three parties’cooperation, it is definitely declared that the win-win cooperation in energy field of
the three parties should be expanded, jointly dedicated to ensuring regional and worldenergy security. In July 2004, the first session of energy ministers from ASEAN andChina, Japan and South Korea (10 plus 3) announced a joint declaration, whichemphasized once more strengthening energy infrastructure building up in the region.
In ASEAN 25th session, intensifying establishment of transportation and energy
infrastructure in the region was also stressed. All of these fully expressed the keen
wish on energy cooperation of each government in the region, unveiled thecooperation curtain in the region, and laid a solid foundation for the future energy
cooperation development.
Sixthly, unstable Mid-East region is the major source for oil import in China, Japanand South Korea, so all of the three countries are facing the “Asian crude premium”of $1~3 per barrel. And the crude exported from Mid-East and Africa must betransported through more and more crowded Malacca Strait with security under threat.
So the three should make joint efforts to solve the problem of “Asian crudepremium” and ensure the transportation passages security.
Seventhly, oil and gas industry is confronted with more and more rigid
environmental protection requirements, and China, Japan and South Korea are allfacing the critical challenges for fulfilling their commitments in Kyoto Protocol.
According to Kyoto Protocol, the developed countries must meet the requirements ofreducing greenhouse gases by 5.2% during the period of 2008~2012 over 1990, andJapan and South Korea have signed. Japan must decrease the greenhouse gases
emission by 6% by 2008~2012 over 1990. Therefore, the three pay more attention
to the R&D of the new technology. The three need to actively exploit alternative
energy while strive to improve energy efficiency and save energy,Eighthly, the three are all facing the impact of high oil price, and are the victims
of price hike with wide fluctuation range. The three countries’ governments have agoal in common, that is ensuring oil security and steady economy at home. The three
have established or are establishing strategic petroleum reserve systems. Strategic
petroleum reserve is crucial for resisting the regional sudden oil supply disruptions. In
the case of emergency, establishment of ASEAN joint oil stock will make for thesecurity and stabilization of ASEAN and its adjacent countries. But there is somedifficulty in building up such regional oil stockpiling, and the costs for establishment
and maintenance are rather high. So it need to obtain capital and technology
assistance of other economies through expanding the “10 plus 3”energy
cooperation framework (ASEAN plus Japan, China and South Korea). China, Japan
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and South Korea need to establish “10 plus 3” energy security system.
2.Some suggestions for strengthening oil and gas cooperation of threecountries
Currently, China and South Korea have formed benefit-sharing basis andconditions in oil and gas industry, the petroleum and petrochemical enterprises ofChina, Japan and south Korea should intensify communication, develop further
cooperations in resource, market and technology, striving for more substantial
headway.
2.1 Enhance cooperation, jointly ensure oil security
China, Japan and South Korea are all giant oil consumers and importers. In theface of future growing oil supply shortage in China, Japan and South Korea region,
developing cooperation is the efficient ways to solve the problem. There are five ways
as follows:First, strengthen the communication and cooperation in oil stock, give full play
to respective advantages, and search cooperation program of mutual benefit; second,reinforce monitoring the navigation on the transportation passage of Malacca Strait,
maintain navigation order, jointly ensure the “throat” transportation passage’s
security; third, develop new oil transportation passages together, for example, actively
promoting the crude pipelines between Russia and East Asia region; fourth, jointly
intensify the exploitation of renewable energy and new energy, utilize widely clean
energy such as natural gas, reduce the dependence on oil; fifth, develop and applyadvanced energy-saving technologies, improve energy efficiency.
2.2 Strengthen the communication and cooperation in oil trade
Basing BP statistical review, the total oil trade in 2003 was 2.3 billion tons, while
the oil trade of China, Japan and South Korea was about 240 million tons, accountingfor 10.4% of the world total. As the world oil trade has the characteristic of strongmonopolization, relying on gigantic transportation system and complicatedtransportation means, so China, Japan and South Korea should enhancecommunication continuously, establish some cooperation mechanism mode step bystep, make great efforts to solve the problem of currently existent mid-east crude“premium”, raise their negotiation status in the global oil market, and efficiently
reduce the impact of oil price fluctuation. In addition, they can further discuss toorganize and establish ocean oil transportation fleet, build up continuously thecapacity for dealing with international oil market change and emergency.
2.3 Intensify the cooperation on oil and gas E&P
Oil companies of China, Japan and South Korea have respective technology
advantages and features. China has formed E&P theory and technology series on oil4

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and gas fields of terrestrial facies, with valuable oil and gas E&P experiences,established large scale E&P engineering technical service troops andequipment-manufacturing troops, owned predominances of advantaged market andtalent, while Japan and South Korea hold abundant finance and advanced
management experiences. As such, the three should develop oil and gas E&P activities
in Asia and world, exploit oil and gas fields through joint venture. For example, theyshould actively participate in the E&P activities in Mid-Asia region, Russia and Africaetc., organize and establish oil technical service companies and so on, give full play toadvantages of three countries’ resource, capital, technology and market, exert
synergistic effect and reduce respective overseas investment risks.
2.4 Strengthen wider cooperation in midstream and downstream, trying forcommon development
In recent years, Korean enterprises have begun to enter into the staple
petrochemical product field and oil product field, on the basis of consolidating
downstream investment projects of fine chemicals industry, plastics processing,chemical fiber and textile. While Chinese government is also actively encouraging
foreign enterprises to launch investment cooperations in multiple fields, such as gas
exploitation and utilization, basic organic chemical feedstock, engineering plastics,
specialty equipment manufacture etc. Therefore, the petroleum and petrochemical
enterprises of china, Japan and south Korea should intensify communication, discuss
jointly the cooperations in gas exploitation and utilization, oil refining, petrochemical
equipment, improvement of old plant technology level and establishment ofdistribution system and so on, realizing the goal of mutual benefit and win-win.
2.5 Reinforce cooperation, jointly deal with maritime transportation risks
Maritime transportation of oil and gas resources has become importanttransportation means, thousands of millions of oil need to be transported on the sea
each year. Once shipwreck accidents happened, such as oil leakage, it will yield great
impact. So china, Japan and south Korea should discuss to establish jointly
responding system for emergency, develop cooprations in fund, equipment and talentetc., deal with together maritime sudden events. Moreover, the three should consider
to build up common bearing maritime risks system. In case shipwreck happens, they
can bear risks together, reducing the great risks and loss taken on by one country.
2.6 Formulate periodical communication mechanism, promote jointly thestabilization and development of Asia-Pacific petroleum and petrochemicalmarketWith the acceleration of Asia-Pacific economy integration process, Asia-Pacificpetroleum and petrochemical market became an inseparable market further. Therefore,
the petroleum and petrochemical enterprises of china, Japan and south Korea need to5

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strengthen communication and cooperation in market information, formulate
periodical communication mechanism, deepen and expand communication, promotemutual trust and understanding, discuss together the approaches and programs forsolving problems.
We believe, the continuous deepening and extending cooperation of energy
enterprises in china, Japan and South Korea will surely provide reliable oil supply forthe three countries, thereby make great contribution to healthy and rapid developmentof economy and society of china, Japan and south Korea region.

Contact: report@tky.ieej.or.jp

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