Asia-Pacific Policy Papers Series

TOWARD A NEW ERA OF TRANS-PACIFIC
ENERGY INTERDEPENDENCE
Edited by Kent E. Calder

Johns Hopkins University The Paul H. Nitze School of Advanced International Studies
tel. 202-663-5812 email: reischauer@jhu.edu

The Edwin O. Reischauer Center for East Asian Studies
Established in 1984, with the explicit support of the Reischauer family, theEdwin O. Reischauer Center for East Asian Studies at the Paul H. Nitze
School of Advanced International Studies (SAIS) actively supports theresearch and study of trans-Pacific and intra-Asian relations to advancemutual understanding between North-east Asia and the United States.
The first Japanese-born and Japanese-speaking US Ambassador to
Japan, Edwin O. Reischauer (serv. 1961–66) later served as the center’s
Honorary Chair from its founding until 1990. His wife Haru Matsukata
Reischauer followed as Honorary Chair from 1991 to 1998. They both
exemplified the deep commitment that the Reischauer Center aspires toperpetuate in its scholarly and cultural activities today.

Asia-Pacific Policy Papers Series

TOWARD A NEW ERA OF TRANS-PACIFIC
ENERGY INTERDEPENDENCE
Edited By Kent E. CalderAsia-Pacific Policy Papers Series, No. 14©2012 by the Edwin O. Reischauer Center for East Asian Studies
Johns Hopkins University–SAIS
1619 Massachusetts Avenue, NW
Washington, D.C. 20036
Tel. 202.663.5812 Fax: 202.663.5940
All rights reserved
Printed in Japan
Cover design by Automated Graphics Systems, Inc.,White Plains, Md.

TOWARD A NEW ERA OF TRANS-PACIFIC ENERGY
INTERDEPEPENDENCE:

TABLE OF CONTENTS

Foreword

Kent E. Calder

Trans-Pacific Energy Trade:
A Canadian Perspective

Yuen Pau Woo

Two Challenges for Energy Security
In the North Pacific Region

Shoichi Itoh

Prospects for Trans-Pacific Energy Trade

PECC

The Emerging Trans-Pacific Energy Economy:
Implications for Policy and Economic Partnership

Kent E. Calder

ABOUT THE AUTHORSKENT E. CALDER is Director of the Reischauer Center for East Asian Studies at SAIS/Johns
Hopkins University. He served previously as Special Advisor to the U.S. Ambassador to Japan,
and as Japan Chair at the Center for Strategic and international Studies. Before arriving at SAIS
in 2003, he taught at Princeton University for twenty years, and previously also at Harvard
University. He completed his PhD at Harvard University under the direction of Edwin O.
Reischauer.

YUEN PAU WOO is Director of the Asia-Pacific Institute of Canada, based in Vancouver,
British Columbia.

SHOICHI ITOH is Senior Researcher at the Institute of Energy Economics, Japan (IEEJ). He
previously served as Visiting Fellow at the Center for Strategic and International Studies (CSIS),
in Washington, D.C.

THE PACIFIC ECONOMIC COOPERATION COUNCIL (PECC) is one of the preeminenttrans-Pacific private-public cooperative research organizations. This paper is a supplement to the
PECC State of the Region report for 2011-2012, coordinated by Dr. Yuen Pau Woo.

TOWARD A NEW ERA OF TRANS-PACIFIC ENERGY INTERDEPENDENCE:FOREWORD

Three quarters of a century ago, trans-Pacific energy trade was vigorous, with the United States
serving as one of Japan’s principal oil suppliers. Indeed, the abrupt American oil embargo of
1941, in response to Japan’s invasion of Indochina, was a major factor intensifying thedownward spiral toward war between the two major Pacific powers. For six decades and more
following war’s end, trans-Pacific energy interdependence was limited largely to coal andnuclear power, although both Canada and the United States came to develop significant
relationships with Japan in those two vital energy areas. Indeed, Canada became Japan’s largest
uranium supplier, while the American and Japanese civilian nuclear industries came to be tightlyintertwined. Yet trans-Pacific gas trade in 2010 still accounted for only 0.3 percent of theworldwide total, while trans-Pacific oil trade only constituted 1.2 percent of global totals.
This monograph chronicles and analyzes the dawning of a historic new era of deepened
and broadened interdependence in trans-Pacific energy relations. Two fateful developments
divide the past of trans-Pacific energy relations clearly from its future, and thus preface that new
chapter: the Fukushima nuclear tragedy, and the North American shale-gas revolution. The
former has, since March, 2011, dramatically constrained Japan’s energy supplies, while the lattershows significant promise of expanding them. Both developments also inspire important newtrans-Pacific policy agendas who outlines and implications we are only just beginning to fully
grasp.

1

The contributions to follow consider both the momentous technical and economicchanges now newly underway in trans-Pacific energy relations, and also their policy implications
for Japan, Canada, and the United States. These three countries comprise an especially important
unit for energy analysis, as they are all both major democratic, capitalist nations, and also central
players in the political economy of global energy. The United States and Japan, after all, are twoof the three largest importers and consumers on earth. At the same time, the United States andCanada are also two of the world’s largest oil and natural gas producers, whose productive roles
are both being enhanced by rapidly rising shale-gas production. Meanwhile, Japan’s role as thelargest liquefied natural gas (LNG) importer on earth is being further enhanced by the need foralternate energy sources in the wake of the Fukushima nuclear accident, creating important newcomplementarities with the Canadian and American roles as major energy exporters. And thegeopolitical issue of Iran sanctions, against a volatile nation that has traditionally been one ofJapan’s largest hydro-carbon suppliers, looms in the background as well.
The views presented are, as the reader will readily note, written from three distinctly
different national perspectives: those of Japan, Canada, and the United States. Yet they are
unified in their belief in the historic nature of the transformations now impending in trans-Pacificenergy relations, and the importance of market tools in dealing with them. They all agree that the
major changes in energy flows are likely three to four years away, at least: major capital
investments in energy have long lead times. Yet they also suggest that the impending changes,
especially in liquefied natural gas, could have momentous global impact. Most importantly,
expanded low-cost LNG exports from North America to Japan, and also to China and Korea,
could put substantial pressure on the oil price linkage in natural-gas contracts upon which Middle

2 TOWARD A NEW ERA OF TRANS-PACIFIC ENERGY INTERDEPENDENCE

Eastern suppliers have traditionally insisted, and which has kept Japanese LNG consumer prices
comparatively high.
The authors all note that some domestic interests in both Canada and the United States
are ambivalent about trans-Pacific hydro-carbon interdependence. Petro-chemical producers andother domestic consumers benefitting from a decline in feedstock prices due to the shale-gas
revolution naturally desire to see the returns to declining hydrocarbon prices remain at home. Yet
the authors note that such domestic pressures are weaker in Canada than in the United States, andthat the two countries are inevitably competitors also in broader global markets. If the UnitedStates fails to see the benefits of Northeast Asian markets and investments, Canada is very likely
to capitalize on U.S. inaction. The more constructive strategy for both nations, the papers
conclude, is thus for both countries to maintain open trade and investment policies with respect
to trans-Pacific energy, first and foremost with democratic allies such as Japan.
These papers were presented at the third trilateral conference on prospects for US-JapanCanada mini-lateral cooperation, hosted by the SAIS/Johns Hopkins University Reischauer
Center for East Asian Studies in Washington, D.C., and co-sponsored by the Japan Institute ofInternational Affairs (JIIA), and the Asia-Pacific Institute of Canada. The Washington
conference followed parallel sessions in Vancouver, Canada (October, 2009); and Tokyo, Japan(August, 2010), from which many of the key ideas originally evolved. All three conferencesfeatured trans-Pacific energy issues as a central concern. The co-sponsors are deeply grateful forthe generous support, over the past three years, of the Japan Foundation’s Center for Global
Partnership. The editor is personally grateful, in particular, to three members of the Reischauer
Center, Mika Brooks, Shinichiro Ichiyama, and Izumi Sano, who contributed greatly to researchand publication. The editor is also most grateful to key colleagues in this project—JIIA director
3

Ambassador Yoshiji Nogami and Deputy Directors Naoko Saiki and Hideki Asari, as well as
Research Fellow Asuka Matsumoto, together with Asia Pacific Institute Director Dr. Yuen Pau
Woo, as well as to Ambassadors Jonathan Fried and Sadaaki Numata, who played a catalytic andinspirational role at the very beginning.
Kent E. Calder
Washington, D.C.
June 23, 2012

4 TOWARD A NEW ERA OF TRANS-PACIFIC ENERGY INTERDEPENDENCEPRESENTATION TO JAPAN-US-CANADATRILATERAL COOPERATION PROJECTWASHINGTON, DC
8 MAY 2012

YUEN PAU WOO

Trans-Pacific Energy Trade:
A Canadian Perspective

more than 350,000 Canadians. In 2011, crude oil was Canada’s mostvaluable export commodity with sales of $50 billion. Government
revenues generated from the industry – close to $22 billion in 2011 -provide indispensable support for the social programs Canadianscherish.
 Oil and natural gas development will play a role in generating
government revenues well into the future. The economic contributionof the natural gas industry is expected to be $1.3 trillion over a 25 year
period, while oil sands and conventional oil developments are expected
to make a combined contribution of $3.2 trillion.
 For an energy exporting country with abundant natural resources,
Canada’s biggest challenge is security of international
demand for our resources. This sets us apart from other G7
countries and emerging economies which are more concerned withsecurity of supply.
 The key to security of demand is diversification of markets

 Accounts for about 7% of GDP and 23% of export sales, and employs

The Canadian Oil and Gas industry

7.7%
99.8%
100.0%
95.6%

Coal

Crude Oil(including Oil
Sands)Natural Gas

Total

2006

95.9%

100.0%

99.4%

6.6%

2007

94.3%

100.0%

99.9%

3.9%

2008

91.9%

100.0%

99.2%

3.2%

2009

91.9%

100.0%

99.5%

5.2%

2010

Percentage of Canada’s energy commodity exports,
by value, destined for the US

Source: Energy Information Administration

Projected US consumption of oil and natural gas.

Source: Energy Information Administration

Projected US crude oil and natural gas imports.

Source: Energy Information Administration

Non-OECD Asia’s projected demand by fuel type.

South America

3

40%

2

25%

16%

50%

60%

24%

70%

23%

23%

16%

23%

1 - not at all serious

25%

11%

6%

6%

2%2%

2%2%

16%

3%

100%

2% 4%

Total

90%

11%

15%

15%

8%

80%

Don't know

Source: PECC (2011) Prospects for Transpacific Energy Trade /State of the Region Report

42%

60%

56%

52%

30%

Oceania

45%

20%

60%

10%

4

Southeast Asia

North America

Northeast Asia

All

0%

5 - extremely serious

How serious is the issue of safe and secure accessto energy for your economy?

value, yet there is virtually no trans-Pacific trade inenergy products.
 Oil trade across the Pacific accounts for only 1.2% of
global oil trade in 2010. Trans-Pacific natural gas
trade is only 0.3% of the global total
 Trans-Pacific coal trade is slightly more significant,but even so, it only accounts for 4.6% of overall tradein coal. Aggregating across all three fossil fuels,trans-Pacific energy trade only accounts for 1.4% of
global energy trade Energy is the world’s most traded commodity by

Trans-Pacific Energy Trade Virtually Non-ExistentPattern of Global Oil Trade

Choke Points in International Oil and Gas Trade

Natural Gas Prices in North America and Asia

Sources: Nexant (2011), Platts (13 Apr 2011), WGI Various Issues (2011),
Petroleum Association of Japan (2011) ,in PECC (2011)

Cost buildup for breakeven prices for US and Canada
LNG exports to Japan, 2011)

Oil Pipelines and Refineries in North America

Go West to Go EastProposed Northern Gateway andTrans-Mountain Pipelines

CanadaCanadaPetronas/Progress

Douglas Chanel LNG

USA
USA

Cove Point LNG (Dominion)

North Slope, Alaska

Jordan Cove LNG, Oregon

USA

USA

Lake Charles (BG)

(BP/ConocoPhillips)

USA

CanadaBritish Gas

Freeport LNG

CanadaShell/Mitsubishi/CNPC/KOGAS

USA

CanadaBC LNG

Sabine Pass LNG (Cheniere)

CanadaCountry

Kitimat LNG

Project

West Coast--West Coast

17.6

15.0

-

-

16.0

1.8

-

15.0

10.0

-

year)

-

-

-

-

> 2015

-

-

2015

2014

2016-18

2015

2015

date

startingpermilliontons

Expected

Export capacity (inEast Coast

Gulf Coast

Gulf CoastWest CoastWest Coast

Gulf CoastWest CoastWest CoastWest CoastWest Coast

Location

Proposed LNG export projects in North America

Pipeline
Shale gas
Shale gas &oil
Oil sands
Conventional
Oil
Shale Gas
Shale gas

Jan-11
Feb-11

Oct-11
Nov-11
Feb-12Mar-11
Jul-11

Jan-11Category
Oil sands
Oil sands
Oil sands
Oil sands
Shale gas &
oil

Date
May-05Aug-06
Apr-10Nov-10

China
Japan
Japan

S Korea
China

China
India

China

Investingcountry
China
S Korea
China
Thailand

SINOPEC
Inpex
Petrochina

KNOC
CNOOC

Sinopec
Reliance

CNOOC

Investingcompany
CNOOC
KNOC
Sinopec
PTTEP

CanadaCanadaCanadaUSA
CanadaCanadaUSA

USA

Recipientcountry
CanadaCanadaCanadaCanadaDaylight
Nexen
EncanaAnadarko
OPTI Canada

ChesapeakeNorthern Gateway
Pipeline
Atlas, Chevron

Project/ company
MEG
Black Gold
SyncrudeKai Kos Dehseh

2.2
0.7
2.9

1.6
2.1

2.3
3.2

0.6

Valuation(in billion
US$)
0.2
1.7
4.6
2.3

Recent Investments by Asian oil & gas companies inNorth American oil and gas industry

Kitimat, BC

Navigating the Douglas Channel

Opposition to Pipelines and Tankers

57%

44%

39%

26%

The economic benefits ofAsia’s investment in
Canada’s energy sector
outweigh concerns about
foreign ownership of our
natural resources.

In all things related toenergy, our relationship with
the United States is the mostimportant; we shouldn’t
venture too quickly into Asia.

The potential risks to theenvironment of transporting
oil and gas from Canada to
Asia outweigh the potential
economic benefits.

Canada needs to act now totake advantage of Asian
countries’ need for energy
resources.

26%

Agree

43%

47%

61%

Source: Asia Pacific Foundation of Canada 2012 National Opinion Poll

Disagree

Canadians Willing to Look to Asian Markets to Export Energy
Resources, but are cautious about Foreign Ownership andEnvironmental Concerns

43%

34%

27%

Oppose

45%

53%

62%

Source: Asia Pacific Foundation of Canada 2012 National Opinion Poll

Allow tankers carrying crude
oil to enter the waters off
Canada’s west coast

Build pipelines to facilitate
the movement of crude oil toports on Canada’s west coastfor export to Asia

Ensure that the developmentof energy projects have theapproval of affected First
Nations communities

SupportCanadians Are Split about Facilitating the Transportof Oil and Gas Exports Asia

overall strategic relationship Reducing the trade imbalance Japan has expertise in clean technology and energy efficiency toshare with Canada and the US
 Reducing Canada’s dependence on the US market
 Providing a basis for broader and deeper trans-Pacific ties, in thecontext of growing Asian regionalism Strengthening Japan’s energy security, which in turn enhances thelongstanding energy relationship. It is in the interest ofboth countries to also forge a trans-Pacific energy
relationship, separately or together. Apart fromcommercial benefits, there are other important factors toconsider: Canada and the US already have an intimate andCanada-US-Japan Energy Interdependence?

















The discovery of massive unconventional oil and gas deposits in North America, together
with slowing energy demand in the US have made possible the prospect of energy exports
to Asia
Canada has a range of energy assets that are exportable, IF the physical and institutional
infrastructure is put in place
There is growing Asian interest and investment in Canadian energy assets
The economic case for oil and gas exports to Asia is compelling, but the window ofopportunity is not indefinite.
Environmental and First Nations (aboriginal) concerns are major domestic challenges
A national consensus on the role of oil and gas exports in the Canadian economy and theneed for diversification of markets must be forged in order to build the infrastructure thatis needed for shipping energy across the PacificCreation of a Trans-Pacific Energy Market would increase economic welfare, havepositive environmental impacts, contribute to reducing trade imbalances, and improveenergy security in Asia.
It is in the interest of US, Japan, and Canada to advance the idea of trans-Pacific energy
trade as a way of strengthening Asia-Pacific relations.
Energy trade has strategic significance in virtually every region of the world. The same islikely to be the case for trans-Pacific energy trade – more work is needed to understandand anticipate the implications of any such development.

Summary<shoichi.itoh@tky.ieej.or.jp>

Senior Researcher,
Institute of Energy Economics, Japan (IEEJ)

Shoichi ITOH

May 8, 2012, 9:00-10:30 am.
Rome Auditorium, SAIS, Washington, D.C.

1

Two Challenges for Energy Security
in the North Pacific Region

Panel I: Emerging Energy Issues

The 3rd Meeting of the Japan-Canada-US Conference Series
on Trilateral Cooperation

Lessons from the 3.11 Fukushima nuclear accident.
China-led expansion of natural gas consumption
Implications of the ‘shale gas revolution’

New frontiers of offshore hydrocarbon development
Convergence of energy and security issues.

II. Russia’s Asia-Pacific Pivot







I. The Future of Asian Natural Gas Markets

MENU

The Future of Asian Natural Gas
M ark ets

1Q 2010

4Q 2011

3Q 2011

2Q 2011

4Q 2010

3Q 2010

2Q 2010

Without
Nuclear











Coal : +6.3 Mt
 Crude oil : +280 kb/d
 LNG : +20.0 Mt+JPY 4.6 trillion(= $ 57.5 billion)

Without NuclearCoal : －5.0 Mt
 Crude oil : －150 kb/d
 LNG : +7.0 Mt+JPY 2.6 trillion(= $32.5 bllion; $1=\80)

Increase in fuel imports in FY2012
compared to FY2010:
 With Nuclear

Nuclear shutdowns have led to a big loss of national wealth due to increases inimport prices of LNG ・・・ Japan had its first trade deficit (= $35 billion) in morethan the past three decades.

Source: IEEJ

-3,000-2,500-2,000-1,500-1,000-500

01Q 2012500With Nuclear

Projection

2Q 20121,000

Actual

3Q 212

1,500

Bilion JPY

4Q 20122,000

1Q 2011

Trade Balance of Japan

I-1. Estimated Impact of Nuclear Power Plant Shutdown

1Q 0213

Source: IEEJUS Gas Market

EuropeanGas Markets

 Price is much higher than elsewherein Northeast Asia.

Natural Gas Prices (2011)

Source: IEEJ

oil prices in Northeast Asia.

 LNG prices are linked to crude

Crude Oil Prices (2008-11)

I-2. Oil-Linked Natural Gas Prices in Northeast Asia

Source: Asia / World Energy Outlook 2011, IEEJ.

World by Region

Asia by Region

I-3. Estimated Natural Gas DemandSource: Asia / World Energy Outlook 2011, IEEJ.

World by Region
Asia by Region

I-4. Estimated Oil DemandShale Gas
Revolution

Source: BP Statistical Review of World Energy.

I-5. An Expected New Dimension of Natural Gas
Flows in the Asia-Pacific Region











Mitsubishi, Shell, CNPC,
Kogas are reportedly
in negotiation over joint
production of LNG(12 million tons/y) in
British Columbia.
Source: FERC

Dec. 2011- Gail (India) signed an agreement of 3.5 million tons/y from
Sabine Pass (LA).
Jan. 2012- Kogas signed an agreement of 3.5 million tons/y from Sabine
Pass (LA).
April 2012- Mitsubishi and Mitsui began negotiation over importing a
total 8 million tons of LNG from Hackberry (LA).
April 2012- Tokyo Gas and Sumitomo began negotiation over importing a
total 2.3 million tons of LNG
from Cove Point (MD).

I-6. LNG Imports from North America in negotiation

(3) Possibility of changing gas pricing formula in Asia.

(2) Expansion of China’s share in the regional gas
market.

(1) The volume of LNG exports from North America.

I-7. Key Questions for the FutureR ussia’s Asia-P acific P ivot

Source: original map from UNDP HP.

 EU’s effort to reduce dependence
on Russia.

 European (western) energy
markets have matured.

 Oil and Gas Productivity inwestern Siberia has peaked.

New Frontiers of Oil and Gas Development – high costs, long lead time.

II-1. Russia Looks East and North Enhancement of a confidence-building
mechanism for the new route is amatter of urgency.

 LNG export from Yamal
Peninsula is planned tostart in 2016-17.

• Northern Fleet’s access to the Pacific Ocean;commercial interests; territorial claims, etc.

II-2. Russia’s Development of the Northern Sea route toward
the Pacific Ocean across the Bering Strait
 Energy and military security are intertwined.

(3) Engagement in constructing a new regionalarchitecture with Russia and China.

(2) How much LNG will Russia be able to ship
to Asian market via the northern route?

(1) Participation of foreign capital and realization of
offshore development in the Arctic Sea.

Ⅱ-3. Key Questions for the FutureThank You Very Much
for Your Attention!

Supplement to theState Of The Region
2011-2012

Prospects fortranspacificenergy tradeState of the Region
2011-2012
Supplement

Executive Summary
Even though oil and gas is the most traded product in the Asia-Pacific region, there isvirtually no energy trade across the Pacific. The major energy importing economies ofNortheast Asia source their oil and gas largely from the Middle East, Southeast Asia andAustralia, while the United States imports energy from the Americas, West Africa, and the
Middle East. Indeed, transpacific trade in energy products (oil, gas, and coal) accounts for
only 1.4 percent of global trade in those products. The segmentation of energy markets
between Asia and the Americas is seen in the sharp price differential for natural gas
between the two regions, and – more recently – in a price differential for crude oil as well.
A number of developments in recent years have raised the possibility of transpacific tradein oil and gas, and the emergence of a more integrated and competitive market in energy
products in the Asia-Pacific region. These include:A) The discovery of massive unconventional (shale) gas deposits in the		 United States and Canada which are creating a gas glut in North America;B) Increased demand in Asian countries for less carbon-intensive		 energy sources, in particular a shift away from coal to natural gas;C) Concerns about nuclear power following the Fukushima Daiichi disaster		 and the resulting search for clean alternatives to nuclear energy;D) The changing energy balance in Southeast Asia, particularly Indonesia
		 and Malaysia, which are expected to become importers of LNG due to		 rapid increases in domestic demand; andE) Rapidly growing investment by Asian national oil and gas companies in		 North American energy assets, especially in the Canadian oil sands,		 which has the third largest proven reserves of crude oil in the world.

Even taking into account the higher cost of shale gas production, the substantial
investments required to build pipelines and liquefaction plants, and the transportation
cost of shipping LNG across the Pacific, North American gas could be competitive in Asia
against existing suppliers, or at the very least serve as an secondary source of supply for
Northeast Asian economies looking to diversify their energy imports or seeking moresecure sources. Likewise, the prospect of North American crude oil exports to Asia
is increasingly attractive given the gas glut in the United States and a widening pricedifferential between benchmark West Texas Intermediate and Brent crude oil prices.
Favorable economics, however, do not guarantee that transpacific energy trade will becomea reality, since there are political, regulatory, and environmental risks to be overcome, as
well as a need for substantial capital investment. Nevertheless, the prospect of transpacificenergy trade would be good news for Asia-Pacific regional integration, since it would leadto a more competitive energy market and more transparent pricing of energy products,
likely resulting in a reduction in price differentials between Asia and North America. In
addition, transpacific energy trade would allow both exporters and importers in the region
to diversify their markets, and hence support energy security objectives.

iSection
ONE

Section01

Status of Asia-Pacificenergy use and energy trade
Energy use in Asia-Pacific economies
Figure 1: Energy mix of selected economies in 2010

Source: BP Statistical Review of World Energy 2011

100.0%
90.0%
80.0%
70.0%
60.0%

Renewables

50.0%

Hydro

40.0%

Nuclear
30.0%

Coal

20.0%

Natural Gas

10.0%

Oil

0.0%

US

Ca

na

da

in
Ch

a

Ja

pa

n
S.

r
Ko

ea
Au

a li

st r

a
Ind

on

es

ia
M

ys
a la

ia
g
S in

ap

or

e

Figure 1 illustrates the mix of energy use in some of the major economies in the Asia-Pacific region.
The use of fossil fuels is predominant in the Asia-Pacific region, with hydro-electricity, renewables
and nuclear energy typically accounting for less than 20% of overall energy use. Oil is the fuel ofchoice in most Asia-Pacific economies (the key exception is China which relies heavily on coal),accounting for 30-40% or more of energy needs in most economies. Coal constitutes more than
20% of overall energy use in the majority of Asia-Pacific economies, while natural gas typicallyaccounts for 10-20% of the energy mix (China is again the exception, with only 4% of its energy
needs met by natural gas).

02

P

ip
h il

pin

es

State of the Region
2011-2012
Supplement

Figure 2: Energy mix of selected economies in 2010 and 2035

Source: BP Statistical Review of World Energy 2011

100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%

Others
30.0%

Coal

20.0%

Natural Gas

10.0%

Oil

0.0%

'10 '35'10 '35'10 '35'10 '35'10 '35'10 '35

North America

US

Japan

Russia

China

India

The basic patterns of energy use in the Asia-Pacific region areunlikely to change materially in the foreseeable future. Figure 2
illustrates how the energy mix in Asia-Pacific economies (including
Russia) can be expected to change between now and 2035, under
IEA’s New Policies Scenario. In this scenario, the use of non-fossil
fuel sources of energy (nuclear, hydro-electricity and renewables)
increases appreciably in each of the major economies. Nevertheless,fossil fuels continue to dominate the energy mix, accounting for
60-80% of the energy mix in most economies. The share of coal, inparticular, as well as oil decreases in almost all countries- particularly
dramatic is the reduction in the share of coal in China’s energy mix
from around 70% in 2010 to 38% in 2035. By contrast, natural gas
shares remain relatively stable, reflecting its status as a cleaner fuelrelative to oil and coal.

1

In the analysis that follows, Asia is definedso as to include Brunei, Cambodia, China,
China Hong Kong SAR, Indonesia, Japan, Laos,
Malaysia, Mongolia, North Korea, Philippines,
Singapore, South Asia (Afghanistan,
Bangladesh, India, Myanmar, Nepal, Pakistan
and Sri Lanka), South Korea, Chinese Taipei,
Thailand, Vietnam, Australia, New Zealand,
Papua New Guinea and Oceania.

2
The calculation is carried out by converting
import and consumption figures for each of the
3 fuels into a common unit, millions of tones
equivalent (Mtoe), before summing import andconsumption figures across each fuel.

The significance of energy trade to the Asia-Pacific economies isunderscored by the fact that much of the fossil fuel needs of Asia
are met by imports1 . In particular, 94.3% of the region’s oil needs
are met by imports. Natural gas imports are fairly significant,accounting for 37.2% of total natural gas use, while coal imports
are comparatively less significant, only accounting for 14.9% of total
coal use. Aggregating across all 3 fuels, 41.2% of fossil fuel needs of
the Asian economies are met from imports.2

03

SectionONE

Status of Asia-Pacific energy trade
To place Asia-Pacific energy trade(specifically, fossil fuel energy imports ofAsian economies) in context, it is useful to
begin by looking at patterns of global energy
trade. Figure 3 demonstrates the major interregional oil flows in the global economy in2010. By far the largest single flow of crude
oil trade is from the Middle East (ME) to
Asia (AS), of around 14.1 million MMBD;
this reflects both the large base of demandin Asia and its limited domestic crudes.
The only other significant inter-regionalflows of crude into Asia are from West
Africa (WAF) and from the Former Soviet
Union (FSU), approximating 1.5 MMBD
each. The North American market not only
produces significant proportions of its own
crude requirements, but also has access toshort haul and long haul crudes from Latin
and Central America (LA, 2.3 MMBD),
Europe (EUR, 1.0 MMBD, not shown on themap), West Africa (1.8 MMBD) as well as
the Middle East (1.8 MMBD). Europe is arecipient of FSU crude (5.9 MMBD), North
African crude (1.9 MMBD) and ME crude(2.3 MMBD), apart from being an exporter of
crude to other regions.

Figure 3: Pattern of global oil trade in 2010

I
J
g
d

e

F

c

A: ME => AP
B: WAF => AP
C: LA =>	NA
D: CAN	=> US
E: WAF =>	NA
F:	NAF => EUR
G: ME =>	NA
H: ME => EUR
I: FSU => EUR
J: FSU => AS

14.1
1.5
2.3
2.5
1.8
1.9
1.8
2.3
5.9
1.5

a

b

ME = Middle East

AS = Asia

WAF = West Africa

NAF = North Africa

NA = North America

CAN = Canada

EUR =Europe

LA = Central & S America

FSU = Former Soviet Union

All figures are in MMBD

Source: BP Statistical Review of World Energy 2011

Figure 4: Pattern of global gas trade in 2010

g

f
c
d

h

e

b

A: SEA =>	NEA 93.9
B: ME =>	NEA 46.8
C: CAN	=> US 92.4
D: AF => EUR 84.3
E: ME => EUR 45.0
F: FSU => EUR 185.7
G: FSU =>	NEA 16.0
H: CA => RUS 31.9

HaME = Middle East

NEA = Northeast Asia

SEA = ASEAN+Australia

AF = North and West Africa

CAN = Canada

EUR =Europe

FSU = Former Soviet Union

CA = Central Asian FSU members

Figure 4 illustrates the major flows ofnatural gas (both pipeline and LNG) in theworld in 2010. In contrast to oil, the global
gas market is regionally segmented to asignificant degree, and intra-regional flows
of gas are important, with gas flows from
Canada to US (92.4 Bcm), from Southeast
Asia and Australia (SEA) to Northeast Asia
(93.9 Bcm) and from Central Asia to Russia(31.9 Bcm). The largest flow of gas is from
Russia and the Central Asian FSU countries
to Europe (185.7 Bcm), though Europe also
receives significant gas imports from Africa(84.3 Bcm) and the Middle East (45.0
Bcm). In addition to gas imports from SEA,
Northeast Asia receives imports from theMiddle East (46.8 Bcm) and, increasingly,
from the Former Soviet Union as well (16.0
Bcm). Note that North and South America
are effectively ‘gas islands’ isolated fromthe rest of the world, with few significant
transpacific or transatlantic gas flows.

All figures are in Bcm (Billions of cubic metres)

Source: BP Statistical Review of World Energy 2011

04

iv

State of the Region
2011-2012
Supplement

Figure 5: Oil trading pattern in the Asian region in 2010

Figure 6: Gas trading pattern in the Asian region in 2010

100

400

90

350

80
Gas Import Volume (Bcm)

Oil Import Volume (Mt)

300
250
200
150
100

70
60
50
40
30
20

50

10
0

0
China

India

Japan

Singapore

Other
Asia

China

India

Japan

South
Korea

ChineseTaipei

Intra-Asia

South & Central America

AfricaNorth America

AfricaNorth America

Europe & FSU

Middle East

Europe & FSU

Middle East

South & Central America

Intra-Asia

Figure 5 shows the areas from which major Asian oil
importers obtain their product. The Middle East is by
far the biggest source of oil imports, but there are alsosignificant intra-regional flows, while China and India
import some of their oil from Africa and China also
imports oil from South and Central America.

Other
Asia

Figure 6 illustrates where Asian economies source their gas
imports. Intra-regional gas flows are the most important, withgas flowing from the Southeast Asia belt (Indonesia, Malaysia,
Brunei, and Australia) to Northeast Asia (China, Japan, South
Korea). The Middle East is the only other significant exporter
into Asia, accounting for almost all of India’s gas imports and asignificant proportion of the gas imports of South Korea and, to alesser extent, Japan.

Source: BP Statistical Review of World Energy 2011

The above figures demonstrate that transpacific energy trade (i.e. trade between North
America and the Asian economies) is comparatively insignificant relative to both global
energy trade and energy imports into the Asian region. Transpacific oil and natural gas
trade are particularly limited in their scale, respectively accounting for only 1.2% of global
oil trade and 0.3% of global natural gas trade in 2010 (BP Statistical review of World Energy,
June 2011). Transpacific coal trade is relatively more significant in global coal trade, buteven so, accounts for only 4.6% of overall trade in coal. Aggregating across all 3 fuels,transpacific energy trade only accounts for 1.4% of global energy trade, more than twothirds of which is from North America to Asia.

05

Section
Two

Section02

Prospects for transpacificnatural gas trade
Energy use in Asia-Pacific economies
Table 7: Primary Natural Gas Demand by Region (bcm)

CAGR

Share

1980

2008

2035

1980-2008

2008-2035

2008

2035

958

1,541

1,758

1.7%

0.5%

48.9%

38.8%

North America

659

815

913

0.8%

0.4%

25.9%

20.1%

United States

581

662

664

0.5%

0.0%

21.0%

14.6%

Europe

264

555

628

2.7%

0.5%

17.6%

13.8%

Asia

35

170

216

5.8%

0.9%

5.4%

4.8%

Japan

25

100

117

5.1%

0.6%

3.2%

2.6%

Non-OECD

559

1,608

2,777

3.8%

2.0%

51.1%

61.2%

Asia

36

341

934

8.4%

3.8%

10.8%

20.6%

China

14

85

395

6.7%

5.9%

2.7%

8.7%

India

1

42

177

14.3%

5.5%

1.3%

3.9%

Middle East

36

335

608

8.3%

2.2%

10.6%

13.4%

1,517

3,149

4,535

2.6%

1.4%

-

-

OECD

World

Source: IEA World Energy Outlook 2010 (New Policies Scenario)

Compared to the markets in oil and coal, the natural gas market has traditionally been the least integrated, with the global market effectively
segmented into three regions (Asia, Europe and North America) and trade largely occurring within these regions3 . The scale of transpacific natural
gas trade is particularly small in relation to global gas trade (0.3%), as opposed to 1.2% for oil and 4.6% for coal. Moreover, existing gas flows from
North America to Asia were largely from the Kenai LNG export terminal in Alaska, which is scheduled to shut down later this year.
Recent developments in both gas demand and supply have led to a scenario where significant growth in LNG exports from North America to Asia
has become a distinct possibility. On the demand side, natural gas demand in Asian economies is projected to grow substantially in the next 25
years, as Table 7 above illustrates. One reason is simply the strong economic growth forecast for Asia’s developing economies, in particular China
and India, which consequently are expected to experience a higher than average CAGR (Compound Annual Growth Rate) in gas demand of over
5%. Indeed, recent estimates of China’s future natural gas demand by the Institute for International Oil Politics are even more bullish, with demand
projected to reach 450 bcm by 2020, compared to IEA’s estimate of 395 bcm by 2035. Moreover, the implementation of greenhouse gas policies,
even at a modest level (as in IEA’s New Policies scenario), favors natural gas over other fossil fuels, which explains why the share of natural gas in
Asia’s energy mix is expected to nearly double by 2035.

306This can be visually illustrated by comparing Figures 3 and 4.

State of the Region
2011-2012
Supplement

Two other factors could further boost Asia’s future demand for LNG imports. First, Indonesia and Malaysia, two of the largest
gas exporters in the region, are both experiencing dwindling supply from aging fields. Coupled with increasing domestic natural
gas demand, both countries appear set to be transformed into LNG importers. Indeed, Indonesia’s first import terminal is
expected to begin operating in 2012, and private firms have already been given permission to import LNG. Malaysia has planned
the construction of 3 LNG receiving terminals, and expects to begin importing LNG from 2014. As such, other Asian/Oceania
economies that currently import gas from Indonesia and Malaysia may well have to scout for new import sources in the future.
Second is the impact of the earthquake in March this year on Japan’s LNG demand. The earthquake not only resulted in the
shutdown of much of Japan’s nuclear generating capacity, in the aftermath of the Fukushima disaster, but also damaged oil
and coal-fired thermal power stations. As Japan seeks to replace its lost thermal and nuclear capacity by running all its gasfired units, Japan’s LNG demand has increased and may be expected to continue to do so in the short-run. Whether Japan’s
LNG demand will grow even further beyond the next 5 years is less clear- while Wood Mackenzie forecasts relatively flat LNG
demand for Japan in the next decade, Ziff Energy expects strong growth in demand.
Growing demand in Asia for natural gas is also set to be accompanied by a large increase in North American gas production,
driven by the shale gas revolution which has made feasible the extraction of vast reserves of unconventional gas in the US andCanada. An indication of the ‘game-changing’ nature of shale gas is provided by Table 8 below, which presents the proved
reserves of natural gas at the end of 2010. While proved dry-gas reserves of the US only amount to 273 tcf (4% of the world’s
total), the addition of potential gas reserves (as estimated by the Colorado School of Mines) inflates that figure to 2170 tcf(22% of the world’s total); shale gas accounts for 687 Tcf of that figure. Similarly, Canada’s recoverable gas reserves jumpfrom 61 tcf to 1338-1407 tcf (14% of the world’s total) if unconventional gas reserves are included. Thus, whereas the US wasonce expected to be a major LNG importer, the EIA now expects US LNG imports to decline progressively as gas demand isincreasingly met by domestic production.
Table 8: Natural Gas Proved Reserves, end 2010 (US & Canada unconventional gas included)

Tcf

Share of Total

R/P Ratio (yrs)

351

5.3%

12.0

3525-3594

36-36.5%

US

272.5

4.1%

US (incl. potential reserves)2170

22.0-22.2%

Canada61.0

0.9%

1,338-1,407

13.7-14.3%

S. & Cent. America

262

4.0%

45.9

Europe & Eurásia

2,228

33.7%

60.5

1,581

23.9%

76.0

Middle East

2,677

40.5%

>100

Iran

1,046

15.8%

>100

Qatar

894

13.5%

>100

Africa

520

7.9%

70.5

Asia / Oceania

574

8.7%

37

Australia

103

1.6%

58.0

Indonesia

108

1.6%

37.4

Malaysia

85

1.3%

36.1

North America
North America (incl. potential reserves)

Canada (incl. potential reserves)

Russian Federation

World
World (incl. NA potential reserves)

6,609

12.6

10.8

58.6

9,784-9,853

Sources: BP Statistical Review of World Energy 2011, Colorado School of Mines (2011) as cited in WGI (World Gas Intelligence),
4 May 2011; Energy Futures Network and Canadian Society of Unconventional Gas (2011) as cited in WGI, 9 Mar 2011.

07

Section
Two

Figure 9: Natural gas prices in North America and Asia
18.00
16.00
14.00

Price (US$/MMBtu)

12.00
10.00
8.00
6.00
4.00
2.00
0.00
2005

2006

2007

2008

Henry HubJapan Spot

Alberta

Japan Contract

2009

2010

2011

China Imported LNG

Sources: Nexant (2011), WGI (various issues, 2010-2011), Petroleum Association of Japan (2011)
Notes: The Henry Hub and Japan spot prices for 2011 are the averages for the first six months of 2011.
The Japan contract price for 2011 is calculated using the assumed formula: Contract price = 0.1485*
Average JCC crude price for 1st 6 months of 2011 + 1.0. The formula is derived from Gary Eng(www.med.govt.nz/upload/65505/Formula_for_LNG_Pricing.pdf, 2008), and is consistent
with recent estimates of the oil slope amounting to 0.14-0.1485 (WGI, 17 Aug 2011).

Table 10: Proposed LNG export projects in North America(In million tons per year)

Expected
Starting Date

West Coast

10.0

2015

CanadaWest Coast

15.0

2015

Petronas/Progress

CanadaWest Coast-

2016-18

Douglas Chanel LNG

CanadaWest Coast

1.8

2014

Sabine Pass LNG(Cheniere)USA

Gulf Coast

16.0

2015

Freeport LNG

USA

Gulf Coast

15.0> 2015Lake Charles
(BG)

USA

Gulf Coast

17.6

-

Cove Point LNG(Dominion)

USA

East Coast--

Jordan Cove LNG,
OregonUSA

West Coast--

Project

Country

Location

Kitimat LNG

CanadaBC LNG

Export Capacity

Sources: WGI (24 Nov 2010), WGI (02 Feb 2011), WGI (23 Mar 2011), WGI (20 Apr 2011), WGI (11 May 2011),
Nexant (May 2011), Oregon Live (16 Jul 2011), WGI (17 Aug 2011)08

The effect of the North American gas
glut coupled with the Asian demand
surge has been to widen natural gas
price differentials between North
America and Asia. Historically, natural
gas in the Asia-Pacific region has been
priced at a premium relative to North
American natural gas (see Figure 9).
Several factors have contributed to the
Asian premium- the absence of multiple
import sources, the fact that gas ispurchased under long-term contracts
and finally the use of oil-indexed
formulas to determine the prices ofnatural gas contracts. As Figure 9
illustrates, however, in the last few years
the price differentials have widened
considerably. The difference between
the Japan contract price and the Henry
Hub price in 2010 was approximately$6.40, and is estimated to haveincreased even further in 2011 to around$12.50 due to the oil price hike as wellas the increase in Japan’s LNG demandfollowing the Fukushima disaster.
With such large price differentials, gas
exports from North America to Asia
are increasingly attractive to investors,
resulting in a number of export projects
in both the US and Canada (Table 10).
All of the projects proposed in Canada
are new terminals to be located on
the West Coast in British Columbia,
with access to the vast reserves ofmostly unconventional gas in theWestern Canadian Sedimentary Basin(WCSB) that span over the provincesof Alberta and British Columbia. In
contrast, the US export projects largely
involve re-purposing existing importterminals on the Gulf and East Coast
into bi-directional terminals thatcan both export and import LNG.

State of the Region
2011-2012
Supplement

Outlook for
North American LNG exports to Asia

Figure 11: Cost buildup for breakeven prices for US and Canada LNG exports to Japan, 2011
18.00

16.70

16.00
14.00

US$/MMBtu

12.00
10.00

9.00

4.00

6.00
4.25

6.80

5.80

7.40
Canada LNG
Break-even Price

4.05

US Costs
Japan Contract Price

9.60

8.00
6.00

Canada Costs

US LNG
Break-even
Price

Required Price
Differentials:
Canada: $3.35
US: $5.35

2.00
0.00
Home Price

Liquefaction

Shipping

Fuel Surchange

In evaluating the outlook for North American LNG export projects, a key question iswhether exports from the USA or Canada to Asia are economically viable. The step-chartin Figure 11 illustrates the estimated prices at which LNG exported by US and Canada
break even, and compares it to the actual price that LNG exporters can hope to obtain if
they sell LNG to Japan under long-term contracts. At current prices, the break-even export
price is approximately $9.60/MMBtu for US Gulf Coast terminals and $7.40/MMBtu
for Canadian export terminals, both of which are considerably less than the estimatedJapanese contract price of $16.70. Thus, at current prices it makes economic sense forgas producers in North America to export LNG to Asia as opposed to selling the gas
domestically, with estimated profit margins of $9.35/MMBtu for Canadian exporters and$7.15/MMBtu for US exporters.

Sources:
Nexant (May 2011),
Platts (13 Apr 2011),
WGI (various issues, 2011),
Petroleum Association ofJapan (2011)

Notes:The Japan contract price andthe Henry Hub price (i.e. homeprice for the US) refer to 2011 andIndependent of the price of natural gas in North America and Asia, it is estimated that US
terminals will require a minimum price differential of US$5.35/MMBtu (between Henry
Hub prices and Asian LNG prices) for US LNG exports to be economically feasible4 , while
the corresponding price differential required for Canadian terminals (i.e. the difference
between Alberta prices and Asian LNG prices) is US$3.35/MMBtu. Canadian terminals(and any terminals on the US West Coast) thus have a substantial cost advantage overterminals on the US Gulf Coast due to the difference in shipping distances to Asia -transportation costs for West Coast export terminals are only $1/MMBtu versus $3/
MMBtu for the Gulf Coast terminals. The impetus for Canada to export gas is also greaterthan for the US due to the presence of domestic push factors. Most of the gas demand in
North America is in the U.S., and with US gas production increasing Canada’s gas exports
to the US have been steadily declining.

are calculated as described in
the notes to Figure 9. The homeprice for Canada refers to theAlberta average spot price for2010 (Nexant, 2011). The costsof liquefaction, shipping andfuel surcharge are estimated by
Barclays (Platts, 13 Apr 2011).
The fuel surcharge is a fee paid tothe hauler to cover the fuel costs
incurred while shipping and is
calculated as a fixed percentage
of fuel prices so as to cushion the

In view of the large reserves of unconventional gas in both Canada and the US (Table 8),
there are unlikely to be any physical constraints on gas production. Liquefaction capacity,
however, is the key capacity constraint. Projected liquefaction capacities of Canada andthe US are presented in Table 12 together with those of Qatar, Australia and Russia (which
are likely to be the other key competitors in the Asia-Pacific LNG market).

4

hauler from changes in fuel prices.

Note that this is consistent with the $5.40/MMBtu that Cheniere Energy (operator of Sabine Pass LNG) estimates
will be added to Henry Hub prices when gas is exported to Asia (WGI, 20 Apr 2011).

09Section
Two

Despite the wide variability in the estimates, it is clear thatthe liquefaction capacity of Qatar and Australia will exceedthat of North America in the medium-term (i.e. up to 2016)
and quite likely in the long-run as well. Nevertheless, evenconservative estimates of North America’s liquefaction
capacity represent a sizeable chunk of the total liquefaction
capacity that is to be used to direct LNG exports to Asia5 .
Thus, the possibility of profitable exports to Asia, coupled withgrowing liquefaction capacity, underscores the significant
potential for large volumes of transpacific gas trade.
The actual volume of transpacific LNG trade in the mediumterm may be constrained by the cost advantage of existing
LNG suppliers such as Qatar (and to a lesser extent, Australia),
who have the luxury of reducing their prices to aggressively
compete against North American exporters as well as the“first mover” advantage of existing suppliers to enter into
long-term contracts for the rapidly growing demand for LNG,
especially for Japan, in the wake of the Fukushima disaster.
However, a desire for energy security on the part of Asianbuyers might lead to significant North American LNG exports
despite higher prices compared to existing supplies. Buying
North American gas would allow Asian buyers possibilities
for diversification by including multiple indices in their gas
portfolio, and might further reduce risks for buyers given that
North American gas prices (e.g. Henry Hub prices) are lessvolatile than the JCC crude price.
There are also regulatory risks in Canada and the UnitedStates related to environmental concerns around thehydraulic fracking process that is used in the recovery of
shale gas, and opposition from large buyers of natural gas in
the US, including Dow Chemical and American Public Gas
Association, which have opposed LNG export plans on the
grounds that they would lead to higher domestic prices andexpose the domestic gas market to the potentially unstableglobal crude oil market.

5Note that Australia exports LNG almost exclusively to
Asia / Oceania (BP, 2011); Asia / Oceania remains
the most attractive market for Qatar while Russia’s
Northeast Asian LNG export terminals are very likely
to cater only to Asia and Oceania.

10

Table 12: Liquefaction capacities of potential exporters to Asia (million tons per year)

Capacity in
2011

Projected
Capacity(2015-16)

Projected
Capacity(2020+)

Qatar

77

77

77

Australia

20

60-70

60-160

North America

2

12-34

26-113

Canada

0

5-27

10-50

US

2

7

16-63

10

10-15

10-25

Country

Russia(Northeast Asia)

Sources: Capacity estimates for Qatar were compiled from Petroleum Economist (Feb 2011) and Nexant(2011); for Australia from Nexant (2011), Petroleum Economist (Jul 2011), APPEA and Deutsche Bank (bothcited in Business Times, 12 Apr 2011); for Russia from Nexant (2011) and WGI (30 Mar 2011) and for North
America from Nexant (2011), WGI (17 Aug 2011) and Table 10 in this paper.

For the lower bounds of the 2015 and 2020 estimates, we assume that Kitimat LNG in Canada andSabine Pass LNG are partially operational by 2015 and fully operational by 2020. For the upper bounds,
we assume that all proposed projects are completed on schedule.

State of the Region
2011-2012
Supplement

Impact on gas and oil price differentials
Regardless of actual export
volumes, the prospect ofsignificant North American LNG
exports is likely to have an impact
on gas price differentials and oilgas price differentials in the region.
Asian LNG importers currently do nothave access to a competitive market.
Japan and South Korea source their
LNG imports from a limited number ofcountries which hold significant market
power. This market power is further
enhanced by the pricing formulasof most long-term LNG contracts,
which tie natural gas prices to theprice of crude oil. While oil indexing
was logical in the 1960s when natural
gas used to be a substitute for homeheating oil, natural gas today tends
not to be a substitute for oil and theearlier logic behind indexation nolonger holds. Instead, oil-indexed
prices allow suppliers to assert theirmarket power by charging high prices,
partly because of high crude prices
but also because such formulas canserve to aggregate the market powerof a number of producers by providing
an implicit collusive mechanism -- if
all suppliers utilize oil-indexation (andcrude oil prices are high enough), LNG
prices will be maintained at high levels,to the benefit of all LNG exporters
and LNG exporting countries.
Given the oligopolistic nature of the
Asian LNG market and the high Asiangas price, the entry of North American
producers into the Asian LNG market
will challenge the market power ofexisting producers and threaten tocapture some of their market share. At
the same time, though, the break-evenprices for North American producers
are higher than those for producers
from countries such as Qatar. In such a
scenario, a rational response by existingproducers will be to reduce the pricethey charge Asian buyers, so as to priceNorth American producers out of themarket while continuing to maintaintheir share of the market (albeit withlower prices and therefore lower
profits). There are already indications
that Qatari gas producers behave in themanner described above. In responseto the growing threat of Australiancompetition, Qatar has recently reduced
its price demands towards Japaneven in spite of the post-Fukushima
surge in Japan’s LNG demand.
One way Asian prices might decrease,in response to the entry of North
American producers, is throughadjustments to oil-indexation formulas(e.g. a decrease in the slope in a typicalformula). What is unique about theNorth American gas supply push,however, is that it may eventuallychallenge the very basis of Asian
LNG pricing- the use of oil-indexed
formulas. North American gas prices
are not oil-indexed and thus provide
their own alternative benchmarks for
pricing (e.g. Henry Hub pricing). Given
the large differential between oil andgas prices in North America, prices ofNorth American LNG based on gas-hub
indices are likely to be much lower thanprices determined using traditional
oil-indexed formulas, which could
lead buyers to increasingly explore
alternative pricing mechanisms forcontract LNG. Although oil-indexation
formulas are likely to stay, if pricing
based on North American gas-hub
prices is adopted at some point in
the future due to the influx of North
American exports, Asian prices (andtherefore price differentials between
Asia and North America) are likely tofall, independently of whether sellers
pursue a strategy of lowering prices
in order to maintain market share.

Furthermore, price differentials canbe expected to decline because of apotential shift in the balance between
contract and spot LNG prices used by
Asian buyers. While contracted LNG
has been the traditional mainstay, anumber of economies have recently
demonstrated an increased openness
to purchasing spot LNG. For instance, in
the aftermath of the March earthquake,Japanese buyers have tended not torush into new long-term contracts,
relying instead on spot LNG and LNG
from short-term contracts to cover up
for lost nuclear and thermal capacity.
North America’s entry into the Asian
LNG market, by providing Asian buyers
with an additional source of LNG
supplies, might persuade them to buy
a greater proportion of their LNG fromspot markets. The fact that Henry
Hub spot prices are far lower thancontract LNG prices would mean thatthe average price paid by Asian buyers
for their LNG would decline (even if
contract prices remained the same).

11Section
Three

Section03

Prospects for transpacificoil and coal trade
In general, prospects for transpacific oil
and coal trade are relatively muted incomparison to natural gas trade. According
to IEA’s projections, the share of coal in theenergy mix of all the major Asian economies
will decline substantially, as we saw inFigure 2. On the other hand, in absoluteterms, Asia’s coal consumption is projected
to increase substantially (from 2601 Mtce
in 2008 to 4081 Mtce in 2035), driven byincreases in coal consumption in China,
India and Indonesia. While consumers ofcoal have not been as reliant on imports
as oil and natural gas consumers (recall
that only 14.9% of the Asia’s coal needs
are met by imports), the importance ofimports to coal has been rising in this region,
with China becoming a net coal importerin 2009 for the first time. By contrast,
OECD countries such as the USA andJapan will reduce their coal demand overthe next 25 years (World Energy Outlook
2010, International Energy Agency), thusincreasing the supply of coal available forexports in such countries. The combinationof the growth in demand in Asia (largely
China and India) and the increased net
supply in North America (largely USA)raises the possibility of transpacificcoal trade, with the USA potentiallyselling coal on a major basis to China.
However, the Energy Information
Administration (2010) points out a numberof reasons why a significant rise in US
coal exports to China is unlikely. The main
reason is that the US produces coal at a
relatively high cost, and is thus a “swing”
supplier in the international coal trade
market, only exporting to other countries
when the price increases. Geographicalfactors also come into play- the global coalmarket is effectively segmented into the
Atlantic and the Pacific regions, and the
US is only a marginal player in the former
whilst rarely participating in the latter.
Exporting coal from the West Coast, an
attractive idea in theory since it would

12

result in reduced transportation costs, isrendered unlikely by the absence of a large
dedicated coal terminal on the West Coast.
As for China’s new status as an importer,
it is likely to import its coal requirementsfrom Australia, Russia, Mongolia andMozambique, rather than from the US.
Prospects for transpacific oil trade aresomewhat more upbeat, in particularfor Canada which has plentiful oil sands
deposits in the state of Alberta. In fact,according to IEA, even the US has thepotential to become an oil exporter, withan additional production of 500,000
barrels a day from oil shale fields in Texas
and North Dakota (New York Times, 16
Jun 2011). However, given that the UScontinues to import significant quantitiesof oil from the Middle East, Africa and Latin
America (see Figure 3), increased US oil
production is more likely to be substituted
for imports rather than exported.
Canada seems the more likely candidate toexport oil to Asia. Canada can increase its
oil production by 1.3 million barrels a day
according to IEA, so supply is certainly not
an issue. The key choice for Canadian oil
producers is between exporting oil south
to the US and west to Asia. Currently
Canada is almost entirely reliant on asingle market- the US - for selling its oil,with exports to US accounting for close to98% of its overall oil exports (BP Statistical
Review of World Energy, June 2011). Exporting
oil to Asia would provide Canada withthe benefits of diversification and reduce
its reliance on a single market for oil.
There are also purely economic reasonsfavoring export of oil from Canada to Asia.
Firstly, the costs of transporting oil to
China, Japan, S Korea and Chinese Taipei(via pipeline and tanker) are lower thanthe costs of transporting oil to US (viapipeline). Secondly, while crude market
prices generally tend to match each otherquite closely, in the past year or so a
differential has opened up between WTI
prices and crude oil prices in the rest of
the world. Starting from 2010, the JCC
crude price has inched ahead of the
WTI price. The new oil price differential(a result of the relative oil supply glutin North America and in particular
Canada), though small in relative terms,
also favors Canadian oil exports to Asia.
The economic advantages of Canadianoil exports to Asia, however, must bebalanced against the fact that oil produced
from oil sands is less fungible thansweeter grades from traditional sources.
The biggest obstacles to Canadian oil
exports to Asia, however, have to do withenvironmental and regulatory issues. Thereis domestic and international opposition
to the oil sands in general due to theenvironmental impacts, even though theseconcerns are highly unlikely to bring further
development of the oil sands to a complete
standstill. The more immediate roadblockis opposition to the proposed Northern
Gateway Pipeline that would transport oilfrom the Athabasca oil-sands in Alberta
to Kitimat, British Columbia on the Pacificcoast, for onward shipment to Asia.
If North American crude oil exporting
capacity can be achieved, it is likely that
there will be a narrowing of the differential
in WTI and Brent/JCC crude prices,similar to the reduction in natural gas
price differentials between North Americaand Asia. The price spread in crude oil
is a relatively recent phenomenon, but
it is a function of the same fundamental
causes that affect gas price differentials,
namely surplus energy supply in North
America coupled with the very limited
ability (especially for Canada) to export
oil to destinations outside the continent.
In recent months, the spread between
Brent and WTI prices has widened
to as much as US$25 a barrel.

State of the Region
2011-2012
Supplement

SectionFour

Section04

Asian investments in North
American oil and gas industry
In addition to growing interest in transpacific energy exports from
North America to Asia, the past few years have also featured atrend of increasing capital and equity investments by Asianstate-owned oil & gas companies in the North American oil andgas industry. Table 13 below summarizes some of the key recent
investments that have been made. Almost all of the investments
have been in unconventional oil and gas resources.
Most of these investments are likely motivated by straightforward
profit-maximizing interests that take into account the growthprospects of shale gas and oil, as well as oil sands. In the case ofoil sands, rising crude oil prices imply greater profits from thoseinvestments. Investments in shale gas are harder to defend froma profit-maximizing perspective, given the low price of natural gas
in North America, if there is no intention of exporting the gas tohigher paying markets.
It is likely, therefore, that some of the Asian investments inunconventional gas are motivated by broader objectives. One
source of motivation could be the desire to acquire experienceand technical know-how to develop similar unconventional gas
fields in home economies. China, for example, is known to havesubstantial shale gas reserves, even though these are in remoteareas that do not have access to the vast amounts of water thatare needed for hydraulic fracking.

Furthermore, some of the investments appear to be tailored
towards securing Asian oil and gas imports. Sinopec’s investmentin the Northern Gateway Pipeline (which, if completed, would
allow the transport of heavy oil to the west cost for onward
shipment to Asia) appears to be motivated by a desire to secure a
new import source for oil. In the same way, the recent initiative byPetronas to set up an LNG export terminal in Canada (see Table
10 above) is likely motivated by a similar desire to for access to asecure long-term energy source.
Hence there are important synergies between the North
American drive to export LNG to Asia, and the Asian drive toinvest in the North American oil and gas industry. Both thesetrends point to an important conclusion - North America andAsia are becoming increasingly interdependent in energy terms,
with each having a stake in the other’s energy sector. North
American LNG exports to Asia could mean that the Asian andNorth American gas markets will no longer be disconnected, withprices in one market affecting prices in the other. By the same
token, Asian investments in North American unconventional oil
and gas industry will mean that both Asia and North America
will have a stake in how the unconventional gas boom in North
America plays out.

Table 13: Investments by Asian oil & gas companies in North American oil and gas industry

Date

Category

Investingcountry

Investingcompany

Recipientcountry

Project/
company(in billion US$)

May-05

Oil sands

China

CNOOC

CanadaMEG

0.2

Aug-06

Oil sands

S Korea

KNOC

CanadaBlack Gold

1.7

Apr-10Oil sands

China

Sinopec

CanadaSyncrude

4.6

Nov-10Oil sands

ThailandPTT

CanadaKai Kos Dehseh

2.3

Jan-11

Shale gas & oil

China

CNOOC

USA

Chesapeake

0.6

Jan-11

Pipeline

China

Sinopec

CanadaNorthern
Gateway Pipeline

2.3

Feb-11

Shale gas

China

Petrochina

CanadaEncana6.9

Feb-11

Shale gas

India

Reliance

USA

Atlas, Chevron

3.2

Mar-11

Shale gas & oil

S Korea

KNOC

USA

Anadarko

1.6

Jul-11

Oil sands

China

CNOOC

CanadaOPTI Canada

2.1

Valuation

Source: Wall Street Journal (31 Jan 2011), Business Times (11 Feb 2011), Financial Times (22 Mar 2011), Financial Times (13 Apr 2011), and Wall Street Journal (20 Jul 2011)13

THE EMERGING TRANS-PACIFIC ENERGY ECONOMY:IMPLICATIONS FOR POLICY AND ECONOMIC PARTNERSHIP

By
Kent E. Calder
Director
Reischauer Center for East Asian Studies
SAIS/Johns Hopkins University

PRESENTED AT THE CENTER FOR GLOBAL PARTNERSHIP CONFERENCE ON
TRILATERAL COOPERATION, WASHINGTON, D.C., MAY 7-8, 2012

THE EMERGING TRANS-PACIFIC ENERGY ECONOMY:IMPLICATIONS FOR POLICY AND ECONOMIC PARTNERSHIP

By
Kent E. Calder
SAIS/Johns Hopkins University

Energy was at once a strategically crucial and a conflicted agenda for the twentieth century,
serving as a major catalyst for global military conflict, and for two major Oil Shocks to theindustrialized world as well. So it promises to be, albeit in hopefully more pacific fashion, acrossthe twenty-first century as well. Energy supply and price remain among the most importantparameters of global economic life, for producers and consumers alike.
Few major democratic, capitalist nations are more central in the political economy ofglobal energy than the United States, Japan, and Canada. The United States and Japan are two of
the three largest oil importers and consumers on earth.1 Simultaneously, the United States andCanada are also two of the world‟s largest oil and natural-gas producers. Their productive roles
are being enhanced by rapidly rising shale-gas production in both countries, and the future
prospect of substantial exports. Meanwhile Japan‟s role as the largest liquefied natural gas(LNG) importer on earth is being further magnified by the need for alternative energy sources in
the wake of the Fukushima nuclear accident, creating important new complementarities with theCanadian and American roles as major energy exporters.

1

The U.S. is the largest oil consumer in the world in 2010 (21.1 percent of the global total), followed by China (10.6 percent)and Japan (5.0 percent). The three countries are also the world‟s largest oil importers, with 21.8 percent, 11.1 percent, and 8.5
percent of world oil imports respectively. See BP. Statistical Review of World Energy, June, 2011 edition, p. 9 and p. 18.

61

The Trans-Pacific Energy Economy in Historical Context
For the first four decades of the twentieth century, the United States was an important supplier ofenergy to Japan, particularly in the form of oil. The end of that interdependence on the eve ofWorld War II arguably accelerated the onset of military conflict.2 After World War II, American
majors such as Standard Oil of New Jersey, Mobil, and Texaco held a central role as distributorsof petroleum products in Japan for over three decades, but the actual flow of energy imports into
Japan was mainly from Southeast Asia and the Middle East, rather than the United States. Even
when oil and gas were discovered in large quantities on the North Slope of Alaska in the 1970s,
domestic interest-group pressures within the U.S. made the economically rational export of oil toJapan politically impossible.3
Both the U.S. and Canada have of course exported substantial amounts of coal to Japanfor years, and Canada has exported significant amounts of uranium as well. Indeed, Canada hasrecently been Japan‟s largest source of uranium supply. Yet hydrocarbon exports from North
America to Japan have been limited, and, in the case of the United States, non-existent.
For more than seventy years—since the U.S. oil embargo of 1941, on the eve of WorldWar II—the United States has not engaged in significant hydro-carbon exports to Japan. Moregenerally, oil and natural-gas trade across the Pacific has been virtually non-existent—transPacific gas trade in 2010, for example, accounted for only 0.3 percent of the worldwide total,
while trans-Pacific oil trade only constituted 1.2 percent of global totals.4 Yet that un-integrated
pattern, in the wake of historic developments on the two shores of the Pacific—the shale-gas
2See, for example, Daniel Yergin. The Prize:The Epic Quest for Oil, Money, & Power. New York: Touchstone Books, 1991, pp.
305-327.
3
See DOE/NETL. Alaska North Slope Oil and Gas—A Promising Future or an Area in Decline? at:
http://www.netl.doe.gov/technologies/oil-gas/publications/EPreports/ANSSummaryReportFinalAugust2007.pdf.
4
BP. Statistical Review of World Energy, June 2011 edition, p. 18.

62 TOWARD A NEW ERA OF TRANS-PACIFIC ENERGY INTERDEPENDENCE

revolution and the post-Fukushima energy transformation in Japan—appears to be changing indramatic fashion. Suddenly, the prospects for an era of true trans-Pacific energy interdependence,fraught with important geostrategic implications, appears to be emerging.
To fully understand the new profile of trans-Pacific energy interdependence and its
historic policy and geopolitical implications, it is important to review the embedded patterns ofenergy supply and demand prevailing in the United States, Japan, and Canada. Following thatsurvey, this paper then considers economic prospects for the new era of deepening trans-Pacificenergy interdependence. In conclusion, it enumerates the strategic benefits of the emerging transPacific energy relationship, and reviews policy issues which the new trans-Pacific energy
economy evokes.
North America and Japan in the Global Energy Economy Today
To fully appreciate emerging policy issues in U.S.-Japan-Canada energy relations, it is importantfirst to grasp concretely the role of these three nations in the broader global energy economy. As
noted previously, and in Figure I, the US and Canada are major energy producers, while the US
and Japan are major energy consumers and importers. The US and Canada both have substantial
untapped coal and shale gas reserves, while Canada also has substantial un-utilized export
capacity with respect to non-conventional oil and uranium.

63

FIGURE I: U.S., JAPANESE, AND CANADIAN ENERGY TRADE IN
COMPARATIVE PERSPECTIVE (2010)

Country
United States

CanadaJapan

World total

Oil[tb/d]
Ex: 2,154
Im: 11,689
Net: - 9,535
Ex: 2,599
Im:
846
Net: +1,743
Ex:302
Im: 4,567
Net: -4,265
Ex: 53,510
Im: 53,510
Net: 0Natural Gas[bcm]
Ex: 31.98
Im: 105.48
Net: -73.50
Ex: 92.40
Im: 22.91
Net: +69.49
Ex:[0]
Im: 93.48
Net: -93.48
Ex: 975.22
Im: 975.22
Net: 0

Coal

Uranium

Exporter

Little Trade

Exporter

Exporter

Importer

Importer

Source: BP, Statistical Review of World Energy, June 2011 edition.
Notes:(1) tb/d = thousand barrels per day, bcm = billion cubic meters per year, Ex = Export, Im = Import(2) Japan‟s natural gas exports assumed to be 0.
(3) „+ (plus)‟ indicates exports and „-(minus)‟ indicates imports.

Japan’s Energy “Angst”
As the data above suggest, Japan and its North American partners stand in radically contrasting,and yet complementary, relations to the global energy economy. Japan is a massive importer ofall variety of energy inputs—Canada and the United States are largely exporters, although the
US also does import substantial amounts of oil. To compound Japan‟s energy vulnerabilities, its
economy is highly energy intensive, and it is radically dependent for hydro-carbon supplies on

64 TOWARD A NEW ERA OF TRANS-PACIFIC ENERGY INTERDEPENDENCE

the Middle East. Indeed, close to 80 percent of its oil imports come from the Persian Gulf,
compared to only around 15 percent for the United States.5
This radical Japanese dependence on the Middle East is driven by both geography andenergy economics. The Persian Gulf is directly accessible to Japan, via the Strait of Malacca andthe Indian Ocean, while both supply and price of Gulf oil are relatively predictable. Despite thepast predictability, Japanese are nervous about two aspects of the Middle East situation: risingcompetition from other East Asian demandeurs, including China and South Korea; as well as theapparently waning geopolitical role of the United States in the region. Especially in the wake of
the Fukushima accident, which is forcing them to seek alternatives to nuclear power, and to
procure more and more LNG, over-reliance on the Persian Gulf is making them increasingly
nervous.
Three forms of energy have historically assuaged Japanese misgivings about heavyenergy dependence on the Persian Gulf: coal, nuclear power, and natural gas. The first of these,
however, has become more problematic in recent years, due to increasing concerns about global
climate change. The second is at least temporarily impractical, in the wake of Fukushima. Thatleaves the third: natural gas.
Natural gas, felicitously, is suddenly available from a new, non-Middle Eastern source—
North America—thanks to the emergence of shale gas. And it is available precisely as the needfor it is intensified by the Fukushima accident. Almost unbelievably, it is also available atpotentially very reasonable prices, with the spot price of LNG in North America, excluding

5

Japan obtained 79.7 percent of its total oil imports from the Middle East in 2010, while the United States obtained only 14.9
percent from that region. See BP. Statistical Review of World Energy, June, 2011 edition, p. 18.

65

transportation costs, hovering around one fourth of contract price levels prevailing in Japan that
included those costs.6
Prospects for Future Trans-Pacific Energy Interdependence
Given trans-Pacific LNG price trends of the past two years, driven by the shale-gas revolution in
North America and the Fukushima accident in Japan, natural gas trade across the Pacific is now
economically feasible. The infrastructural obstacles, of course, are not inconsequential: (1)greater gasification capacity in Japan, (2) green-field liquefaction facilities along Canada‟s West
Coast to process natural gas exports; and (3) significant technical modifications on LNG importterminals along the U.S. East and Gulf coasts, to make them suitable instead for LNG exports
across the Pacific. Yet the long-term economic logic makes trans-Pacific trade in natural gas atlast economically feasible.
In April 2012, the U.S. Federal Energy Regulatory Commission (FERC) authorized theconstruction and operation of up to four modular LNG trains for the liquefaction of domestically
produced natural gas at the Sabine Pass LNG terminal in Cameron Parish, Louisiana7, following
Department of Energy authorization to export LNG to FTA countries in September 2010, and tonon-FTA countries in May 2011.8 The Sabine Pass facility is expected to begin exporting natural
gas in 2015, with an export capacity of 8 million tons per year9, and with all capacity already6

See Tilak K. Doshi and Nahim Bin Zahur. Prospects for Trans-Pacific Energy Trade. Singapore: Pacific Economic Cooperation
Council, 2012.
7“Cheniere gets FERC approval for Sabine Pass LNG export facility”, at:
http://www.marinelog/com/index.php?option=com_content&view=article&id-2277:cheni...
8
See http://www.cheniereenergypartners.com/liquefaction_project/DOE_filings.shtml.
9
The first two trains will commence operation in 2015-2016, and another two trains will commence in 2017-2018. 16 mtpa will
be available once four trains are completed. Full operating capacity will thus be 16 million tons, available in 2017-2018. See
http://phx.corporate-ir-net/phoenex.zhtml?c=207560&p=irol-newsArticle&ID=1683623&highlight=.

66 TOWARD A NEW ERA OF TRANS-PACIFIC ENERGY INTERDEPENDENCE

committed.10 As indicated in Table II, Sabine Pass is only one of ten major LNG export projects
currently planned in the United States, which are directed largely toward supplying the East
Asian market.
TABLE II: PROPOSED LNG EXPORT PROJECTS IN THE U.S.
Applications Received by DoE/FE to Export Domestically Produced LNG from the Lower-48
States (as of March 23, 2012)
Company
Sabine Pass Liquefaction,
LLC
Freeport LNG Expansion,
L.P. and FLNG
Liquefaction, LLC
Lake Charles Exports,
LLC
Carib Energy (USA) LLC

Dominion Cove Point
LNG, LP
Jordan Cove Energy
Project, L.P.
Cameron LNG, LLC
Freeport LNG Expansion,
L.P. and FLNG
Liquefaction, LLC
Gulf Coast LNG Export,
LLC
Cambridge Energy, LLC

Location/ Quantity
Gulf Coast
2.2 Bcf/d
Gulf Coast
1.4 Bcf/d

FTA
Applications
Approved
Sep. 2010
Approved
Feb. 2011

Non-FTA
Applications
Approved
May 2011
Under DoE
Review

Gulf Coast
2.0 Bcf/dSouth-Eastern
0.03 Bcf/d: FTA
0.01 Bcf/d: non-FTA
East Coast
1.0 Bcf/dWest Coast
1.2 Bcf/d
Gulf Coast
1.7Bcf/d
Gulf Coast
1.4 Bcf/d

Approved
Jul. 2011
Approved
Jul. 2011

Under DoE
Review
Under DoE
Review

Approved
Oct. 2011

Under DoE
Review
Under DoE
Review
Under DoE
Review
Under DoE
Review

Gulf Coast
2.8 Bcf/dSoutheast, Gulf Coast
0.27 Bcf/d
Total of all Applications Received

Approved
Dec 2011
Approved
Jan. 2012
Approved
Feb. 2012

Under DoE Review
Pending
Approval
14.00 Bcf/d

N.A.
13.71 Bcf/d

Source: Office of Oil and Gas Global Security and Supply, Office of Fossil Energy, U.S. Department of Energy
Note: Bcf/d = billion cubic feet per day.

10

Some of this capacity is committed to non-Pacific buyers, suggesting that it may well be delivered partially to non-Pacificdestinations, although that of course still remains uncertain. See http://phx.corporate-ir.net/phoenix.zhtml?c=207560&p=irolnewsArticle&ID=1653972&highlight=

67

Japan has also, it should be noted, historically purchased some LNG from Alaska, and will likely
continue to do so in future, although those amounts so far have been relatively modest comparedto Japan‟s other supplies.
Apart from large and rapidly expanding LNG trade, substantial trans-Pacific investmentin the Canadian oil sands is also in progress that may lead to future trans-Pacific oil exports,
together with major infrastructure projects, such as the $2.3 billion Northern Gateway Pipeline in
Canada. This pipeline will carry oil from the oil sands district of northern Alberta to Canada‟s
Pacific coast, for export across the Pacific. Asian investment in Canadian oil sands projects andrelated infrastructure now totals well over $12 billion.
A decade ago most trans-Pacific investment in North American energy was from Japan,
but there has been a significant shift in recent years. Energy demand has surged in China,
together with rising affluence, and an increasing share of investment is from China. Korea has
also become a significant investor, facing fewer regulatory obstacles to its investments andexports from the United States than Japan, due to provisions of the US Natural Gas Act of 1938
as amended by the Energy Policy Act of 1992, stipulates preferential treatment, through a
Department of Energy approval process, for nations concluding free-trade agreements with theUnited States. 11 Coal is historically an important part of trans-Pacific energy trade andinvestment, and cannot be neglected in future. It is particularly salient in Japan-Canada economic
relations. Coal (mainly metallurgical, to fuel Japan‟s massive steel industry), is Canada‟s largest
export to Japan, totaling $2.3 billion in 2009, or over 19 percent of Canadian exports.12 In 2011
coal also surged into prominence in US-Japan relations, following the reduction in Japanese

11

On these regulatory details, see http://fossil.energy.gov/programs/gasregulation/How to Obtain Authorization
to_Import_an.html.
12Japanese trade data, at: http://www.mofa.go.jp.

68 TOWARD A NEW ERA OF TRANS-PACIFIC ENERGY INTERDEPENDENCE

nuclear capacity in the wake of the Fukushima disaster, with American exports increasing 119
percent, to almost 7 million tons.13
Civilian nuclear power has traditionally been the energy sector where trans-Pacificinterdependence has been the deepest. The Eisenhower Atoms for Peace program inspired theoriginal siting of nuclear plants in Japan, and most of the early equipment—including the
Fukushima nuclear plant itself—was supplied by American manufacturers. General Electric, forexample, provided substantial capital equipment for nuclear plants to Tokyo Electric Power, both
independently, and cooperatively with Toshiba. for many years was the largest American
exporter to Japan and Tokyo Electric Power was the largest corporate importer from the UnitedStates, with the bulk of their mutual trade in the nuclear power area. Japan also has traditionally
imported substantial amounts of nuclear fuel from the US—Y84.7 billion in 2010. 14 Seven
percent of Japan‟s uranium supplies, in total, come from the U.S., which is Japan‟s fifth largest
supplier. 15 The nuclear industries of the U.S. and Japan are also intimately intertwined, with
Toshiba owning Westinghouse as a subsidiary, and Hitachi and General Electric enjoying alongstanding joint-venture relationship.
Many parts of the United States are natural energy partners for Japan, but among the mostpromising is Alaska. Geographically, it is the closest part of the U.S. to Japan, and it is notably
well endowed with energy resources. In 2011 Alaska exported nearly $388 million in energy
resources to Japan, including LNG, refined petroleum products, and coal. Over half of this total,

13

Bill Chappell, “U.S. Coal Exports Soar to 1991 Heights”, at: http://www.npr.org/blogs/thetwo-way/2012/04/10/150360355/us-coal-exports-soar-to-199.
14
See Ministry of Finance statistical database, at:
http://www.customs.go.jp/toukei/srch/index.htm?M=13&P=1,2.....4.1,2010,0,0,0,3,50105....1.....50.
15
The other largest suppliers are Canada, Australia, Namibia, and Niger. See http://www.enecho.meti.go.jp/topics/energy-injapan/energy2006html/gragh/gfa.html.

69

or $198 million, consisted of LNG exports, and those will likely increase substantially infuture.16
Canada has also been an important participant in trans-Pacific energy trade17, including
the nuclear dimension. Canada continues, for example, to serve as Japan‟s largest supplier ofuranium ore, supplying well over a quarter of Japan‟s total imports.18 Total Japan-Canada tradein radioactive elements, including uranium, totaled 2.6 billion yen in 201019.
Over the past year since the Fukushima accident, nuclear regulators of the United States
and Japan have been in intense communication with one another as never before on safety issues,
but their dialogue will inevitably broaden. Looking to the future, it is hard to see how Japan will
be economically able to radically phase out its existing nuclear plants, despite continuing public
opposition in the wake of the Fukushima accident. If and when Japanese nuclear plants resume
operation on a larger scale, North America will no doubt once again play a significant role inproviding both raw materials and services to Japan. And U.S. and Japanese firms will in any casecontinue to cooperate in garnering nuclear contracts in third countries, capitalizing on theiradvanced technology.
The Fukushima accident, and the aging of existing Japanese nuclear plants, may in fact
also open a new and quite dynamic area for U.S.-Japan energy cooperation. The United States, asa pioneer in the nuclear industry, has by definition many older nuclear plants, and substantial
experience in the decommissioning of nuclear facilities. This experience will be valuable in

16

See “Alaska Exports Reach Record Highs”, at: http://gov.alaska.gov.
Canada has, for example, exported CANDU reactors to South Korea, although not to Japan.
18
See METI data, from: http://www.enecho.meti.go.jp.
19
These figures are for Statistical Code 2488 (Radioactive chemical elements and radioactive isotopes, etc.) See Trade Statistics
of Japan database, at: thhp://www.customs.go.jp/English/tariff/2012_4data/i201204e_28.htm.
17

70 TOWARD A NEW ERA OF TRANS-PACIFIC ENERGY INTERDEPENDENCE

helping Japan deal with its current problems, and could be an area for deepened trans-Pacificpartnership.
The Emerging Trans-Pacific Energy Policy Agenda in an Era of Interdependence
In a nation like Japan that imports nearly 99 percent of its oil and gas, adequate energy supply isnaturally seen, almost instinctively, as a core element of national security. That instinctive
dimension is arguably lacking in the United States and Canada, which perceive national
security—especially in the U.S.—in more narrowly political-military terms. Conceptions ofenergy security on the two shores of the Pacific are complementary to one another, especiallywhen the United States provides military security for Japan‟s energy sea lanes to the Persian
Gulf, and for the political stability of key nations in the Gulf as well. Yet U.S. and Japaneseconceptions of energy security, in particular, differ substantially in subtle, subjective dimensions.
Japan and its North American partners have, however, developed a considerable level oftrust with one another, including broad Japanese confidence in the transparency and stability ofNorth American institutions, as well as the U.S.-Japan alliance. This confidence makes Japaneseenergy interdependence with North America attractive, especially given Tokyo‟s high current
levels of dependence on the Persian Gulf for vitally needed hydro-carbons. The attractiveness iscompounded by both the new availability of shale-gas supply, and the new Japanese domestic
requirements for gas in the wake of Fukushima.
Energy issues, of course, are embedded in larger parameters of political economy. To
assure optimal cooperation on energy, including shale gas, more explicit Japanese support of the
TPP framework would be helpful. The United States and Canada, for their part, should affirm

71their commitment to free trade in energy, including shale gas, as potential for LNG exports
begins to rise.
It is important to keep in mind the tangible benefits to Japan, especially important in thatstrategic nation‟s fragile post-tsunami circumstances, that would flow from expanded access,under free-trade provisions, to North American natural gas supplies. Access to U.S. andCanadian natural gas, much of it no doubt derived from rapidly expanding shale-gas supplies on
the continent, would afford Japanese distributors powerful leverage with Middle Eastern andother suppliers, forcing them to drop or revise traditional oil-linked pricing formulas thatseverely disadvantage Japan and impede its economic recovery. The availability of lower-cost
North American gas under a free-trade regime would thus help reduce the burden of high energy
prices that is impeding Japan‟s recovery.
Flexible provision of expanded North American natural-gas supplies to Japan would also
likely have tangible diplomatic benefits to the United States and Canada that would help
strengthen trans-Pacific alliance relations. Expanded gas supplies would, for example, help
reward Japan for its economically costly cooperation with Iran sanctions, help insure longer-termcooperation with those sanctions, and reduce resentment at special U.S. efforts to encourage
China and South Korea to cut Iran procurements by compensatory benefits in the Arab Gulf,
predominantly a traditional energy supplier for Japan. Expanded North American gas supplies
for Japan could also slow the deepening of political-economic relations with Russia, a potentially
important alternate energy partner for Tokyo.
With the first authorizations for North American gas exports to Asia, including Japan,
just now in progress, and with memories of the Fukushima tragedy still fresh, it is an excellent

72 TOWARD A NEW ERA OF TRANS-PACIFIC ENERGY INTERDEPENDENCE

time to deepen the trans-Pacific energy dialogue at the policy as well as the economic level. Suchdialogue no doubt needs both bilateral and trilateral dimensions. To deepen and broaden theirstrategically important but politically delicate bilateral relationship, the United States and Japanneed a forum for deliberating diverse issues of mutual energy security and efficiency in an
ongoing fashion. Such a dialogue, potentially patterned after the SII talks of the early 1990s with
their multiple policy baskets, could cover such diverse topics as nuclear safety, nuclear
decommissioning, renewable energy, and smart grids and improved energy infrastructure, as wellas energy efficiency. Involving multiple government agencies of both the United States andJapan, the Dialogue could also provide a role for working-level communication between
embassies and local specialists in both nations.
Canada, Japan, and the United States together also need more intense trilateral energy
discussion. The three countries, after all, have substantial shared interests and concerns, as transPacific energy interdependence continues to rise. These shared interests center on maintaining
free trade and transparent investment practices in the energy sector, while also assuring thattrans-Pacific energy trade and investment does not undermine shared national-security concerns.
IN CONCLUSION
The trans-Pacific world is approaching a true critical juncture in the energy sphere. The Japaneseand the North American shores of the Pacific share important core values of democracy andrespect for free enterprise that make them natural partners. Until recently, however, they haveengaged in remarkably little energy trade and investment, apart from coal and uranium, despite
their intense interaction in other spheres.

73

A new, much broader era of trans-Pacific energy interdependence is dawning. BothCanada and the United States are rapidly emerging as potentially substantial suppliers of LNG to
Japan, just when Japan itself, in the wake of Fukushima, most needs those supplies. For both
symbolic and substantive reasons, Canada, Japan, and the United States must grasp this historic
opportunity to re-affirm the importance of free trade in energy, as it begins to accelerate acrossthe Pacific; and to engage in a broadened energy dialogue that will examine in a far-sighted way
avenues of cooperation that may steadily broaden in future.

74 TOWARD A NEW ERA OF TRANS-PACIFIC ENERGY INTERDEPENDENCE

Asia-Pacific Policy Papers Series
Contributing actively to public-policy debate in the nation’s capital, the Reischauer Center
publishes occasional papers disseminating its analytical work. Subjects of concern include:
the Korean nuclear crisis, Northeast Asian relationships with the Middle East; Asian energy
prospects; and assessments of Japanese economic reform.

No. 1

The North Korean Nuclear Crisis and American Policy

No. 2

Japan’s Stealth Reform: The Key Role of Political Process

No. 3

China’s Energy Diplomacy and Its Geopolitical Implications

No. 4

Stabilizing the US-Japan-China Strategic Triangle

No. 5

Enhancing Japan’s Energy Security

No. 6

Moving (Slightly) Closer To Iran

No. 7

Japan’s Asianism, 1868-1945

No. 8

The Politics of the Futenma Base Issue in Okinawa

No. 9

The Reischauer Heritage in the Twenty-First Century

No.10 Demystifying FTAs
No.11 Central Asia’s Oil & Gas Sector Since the 2008 Financial Crisis
No.12 Cracks in the Alliance? Futenma Log: Base Relocation Negotiations
No.13 A Changing Arctic and the Trans-Pacific Relationship: American Perspective
No.14 Toward a New Era of Trans-Pacific Energy Interdependence