Why China is Building an Imposing Navy, and Why No One Can Stop Them
October 25, 2011 § 3 Comments
Future clashes in the Asia-Pacific highly likely due to modernizing navy and disconnect between China’s perceived “rational” behavior with the international community’s understanding of their actions.
As of 2008, oil represented 17.2% of China’s total share of primary supply making it the second widely used energy source after coal. Although coal is widely used in China, its share has been decreasing due to its pollutant nature. External and internal pressures to reduce carbon emissions also have a factor, as well as the overall health and environmental costs it poses to their society. Oil, on the other hand, continues to increase as China’s middle class rises up and starts adopting private transportation. This phenomenon has concerned Chinese officials, as they begin to think about how China will be able to source enough oil to satisfy its population? And more importantly, how can they secure a continuous flow of it?
China’s Oil Dependency
As of 2009, China was using a total of 8.3 million barrels of oil each day with foreign oil accounting for more than half of their daily usage with 4.3 million barrels.
If we isolate the foreign oil and investigate the sources in which the Chinese government is importing their oil from, we can see that out of the 8 countries: 6 of them are from the Middle East, 1 is from Africa, and 1 is close by in Russia. In terms of distance, this is a highly unstable and potentially dangerous situation for China as they are overly dependent on Middle Eastern oil. To make matters worse, the Middle East is politically unstable and disruptions to supply can happen at any point of transit.
The Chokepoints
The Strait of Hormuz: Center of Middle Eastern Instability
As an oil importer, China is fortunate that it has as many as 8 suppliers for its imported oil. However, it continues to be at risk as Russia is the only supplier with a direct pipeline into its territory and only represents 6% of their total foreign oil imports. The other 77.5% (minus Angola) are found in the Middle East and need to bypass the Strait of Hormuz in order to reach the Indian Ocean on its way to Asia.
The Strait of Hormuz is a narrow sea lane located in between the Persian Gulf and the Gulf of Oman. At its narrowest, the Strait of Hormuz is only 54 km wide. This strait are of strategic significance as the oil and gas producing countries in the Middle East (Saudi Arabia, Qatar, Kuwait, Iran, Iraq, UAE, and Oman) all need to bypass this sea lane in order to export their oil and gas products to the global market. In 2009, a total of 15.5 million barrels of oil passed through this strait everyday representing 33% of all sea-traded oil and 17% of the world’s daily total.
As a result, China increases its investments and activities in this area are to ensure the safety of its oil imports from this region. From the Chinese perspective, these stakes will help China maneuver its way into negotiations for increased protection, preferential treatment, and possibly even deploying their own security forces to protect their oil tankers. These measures are all developed to combat the regional instability, as well as threats of piracy and terrorist activities in the Persian Gulf.
Strait of Malacca: A Pirate’s Dream
The second chokepoint that oil tankers need to bypass on its way to China is the Strait of Malacca. The Strait of Malacca is a long narrow stretch of sea in which ships need to bypass Malaysia, Indonesia, and Singapore in order to move further up into the South China Sea and beyond. It is a chokepoint for many countries in the Asia-Pacific and is estimated to bring in 13.6 million barrels of oil per day from overseas locations in 2009. For China, this represents more than 80% of their foreign oil imports (minus Russia).
This strait is also geographical difficult since at its narrowest, it is only 2.74km wide and it is 900km long. Therefore, expert navigation is needed as the risk of accidents and oil spills present problems to not only neighboring countries but also countries heavily dependent on oil shipments. The Strait of Malacca also has a history of piracy. In recent years this has been substantially curbed, but the theft of oil tankers is still not out of the ordinary as it can carry a large ransom.
Due to these risks, China has been active in forging relationships with countries such as Sri Lanka and Myanmar to establish naval ports, refineries, or pipelines to dock their oil tankers.
Taiwan Strait: Bound by Political Tension
The last chokepoint is more of a political matter than of actual geographical risk to Chinese oil imports. The Taiwan issue has been long debated since the PRC has maintained that Taiwan is part of their country, while Taiwan itself has maintained that they are their own entity and on some occasions have proclaimed that they are the rightful government to today’s China. Either way, the Taiwan Strait becomes a security issue once political tensions are high or the United States begins to sell arms to Taiwan again.
Recently, this has not been much of an issue since Taiwan and China have been meeting to discuss the possibility of a peace-pact. However, peace is not always on the agenda and the political atmosphere should be gauged through the rhetoric of Taiwan and China’s political leaders. In either case, the Taiwan Strait should not be out of consideration when considering security risks to China’s oil and economic tankers.
Explaining China’s Naval Activities
If we look at these through the lens of energy security, or even the broader lens of seaborne economic activity, China’s actions are easily understood.
Let’s first take the Strait of Malacca as an example. The Strait of Malacca was originally protected by Indonesia, Malaysia, and Singapore. However, these countries were unable to combat piracy in this area and had to enlist the help of the Indian navy. The Indian navy regularly helps with drills and cooperative activities in the area.
If we move onto the South China Sea, the navies of ASEAN, the American Navy and sometimes the Indian and Japanese navy are all present and greatly influence the maritime politics in the region. There are also some “1,000 oil tankers” which are not owned by the Chinese and an additional “4 airfields” on the Spratly Islands which are also not Chinese.
These points all threaten China’s national security as other countries are exerting influence in what they believe to be their backyard. As a result, many reports of China modernizing its naval capacity is not irrational, but logical to the Chinese government as they will not only be able to go much further, but will also be able to protect their interests at the chokepoints described above. The construction of a modern navy has also allowed China to create the “String of Pearls,” or docking ports for its tankers from the Persian Gulf to the mainland.
Greater Clashes in the Future Likely
In my opinion, these chokepoints and sea security issues serve as strong points of interest for Chinese governmental policy as they have to secure their growing interests overseas. Their reliance on maritime trading will not end anytime soon and they will be going head to head with many of their neighbors in East Asia, Southeast Asia, and South Asia.
At the moment, many countries in the Asia-Pacific view China with apprehension and fear for their growing size and power. As a result, countries in the region will likely link together to deter China from influencing the region too much. For instance, Japan is currently deepening ties with ASEAN countries, in an act of defiance against China. Vietnam and India are currently cooperating to fight against China over the Spratly Islands to begin exploration and possibly drilling of oil and gas reserves under the seabeds of the South China Sea. India and Japan are beginning to conduct closer ties, which may result in joint-naval practices. These countries are all cooperating without the inclusion of China to forge alliances in future standoffs with the imposing giant.
China also risks being isolated by countries in the Asia-Pacific due to its continuing insistence on bilateral talks over multilateral talks. This strategy does not make China the stronger power and the nonexistence of compromise in China’s strategy will be its downfall as it competes with its neighbors for increasing amounts of fossil fuels, territorial seas, disputed islands, and the rights over which navy can conduct practices in the Pacific and Indian Oceans.
For in-depth analysis of China’s conflicts in the South China Sea and the Spratly Islands click here.
What It Will Take to Market EVs in China
October 21, 2011 § 8 Comments
The New EV Consumer Profile is highly correlated to the current luxury market, make EVs a status symbol and Chinese Consumers will buy.
Clean technology, renewable energy, eco-cities and the like have been buzz words in China for the past couple of years. Millions of dollars has been invested in these technologies, allowing China to now lead in the largest total capacity for renewable energy in the world. However, as a share of China’s total energy, renewable energy amounted to less than 15% in 2008 (this includes comb. renewable & waste, hydro, geothermal, wind, and solar).
China and the rest of the world still have a long way to go until they become sustainable, renewable, and environmentally friendly. However, China continuously looks for ways in which to decrease its fuel dependency on foreign countries. Recently, China has been charged by American Solar PV companies for unfairly “dumping” solar cells in the U.S. market, disallowing American Solar PV manufacturers to compete fairly. But as these companies fight for more protectionist measures, China takes its next step by being the first movers in the next generation of electric vehicles. This will once again help China place as the world’s market leader, allowing for the innovation of cheaper and better batteries, infrastructure, and vehicle design.
The only problem is, how do you get Chinese citizens to start buying these low-carbon, energy efficient vehicles?
The Government’s Failing Efforts
EVs have been promoted because of their energy efficiency and low urban pollution profile. They also have the capability to reduce China’s ridiculous dependency on foreign oil.
However, many are hesitant to embrace the new technology due to the current lack of infrastructure and investment. Recently, the government has implemented national and local initiatives to make the technology cheaper and more convenient. For instance, these initiatives are used to bolster EV consumer convenience, as seen in city of Beijing, where city officials have committed to increasing the amount of charging stations to 256, for distribution stations to 210, and charging posts to 42,000. At the moment, Beijing has only for 19 charging stations and is unprepared for the projected 100,000 EVs to be on Beijing’s streets by 2015.
The central government, on the other hand, has already committed to investing “$15 billion… over the next five years” for vehicle electrification and infrastructure. They have also promised potential EV consumers subsidies of up to $10,000 USD to offset the price of the battery and technology. The Beijing Municipal Government has even suggested the exemption of EVs from their license plate lottery system. These governmental policies have all aimed at enticing everyday Chinese citizens to buy electric vehicles, but at the moment, these initiatives are not strong enough to tempt them.
What is holding Chinese Consumers back?
So, why have these initiatives not been able to dramatically increase the sale of EVs in China?
To answer this question, we need to have a closer look at the amount of interest Chinese consumers hold for EVs. Initial reports on consumer interest in EVs from management consulting firm McKinsey & Company in 2009-2010 was hardly optimistic. The report focused on the Shanghai automobile market, illustrating the “lack of confidence” consumers had with EVs at the time for their “inconvenience of charging, insufficient mileage endurance and lack of confidence in technological stability and reliability.” This led to only 3.8% of respondents to even consider purchasing an electric vehicle. The worst part was that even with hypothetical government subsidies of $4,400 USD, this number increased only 1.4% to a total of 5.2% of McKinsey’s survey group.
Deloitte Consulting followed up with an expanded survey this year and found Chinese consumer requirements have stayed relatively the same. For instance, the study showed that it would take a substantial and quick oil shock for even 50% of respondents to consider EVs and to get this number up to 75% is highly unlikely. In addition, there is also a negative correlation with fuel efficiency to consumers willingness to consider an electric vehicle. For instance, if internal combustion engine cars can achieve fuel efficiency levels of “3.0 liters per 100 kilometers” then 82% would be less willing to buy an electric vehicle. Chinese consumers (55%) also expect battery charging time to be around 2 hours, which is in complete contrast to the full 8 hours that current EVs require. In terms of price, 44% of Chinese respondents expect to pay the same price for an electric vehicle as they would an internal combustion engine car, while “only 14% are willing to pay a price premium of more than 20,000 RMB (US $3,055).” The realities of EV pricing when compared to consumer expectations, despite government subsidies of a reported $8,800-10,000 USD, are currently not low enough to interest regular Chinese consumers.
What Do I Need to Know About the Automobile Market in China?
Market Potential for EVs
At the moment, researchers have forecast that Chinese citizens will be the leading buyers of EVs by 2015 in the Asia-Pacific. Firms such as Pike Research claim that China will represent “half of the region’s total sales” in the next 4 years. Others have indicated that China’s EVs market will represent about “10-15%” of China’s total car consumption by 2020. In total numbers, this could amount to a potential market of 4-6 million electric vehicles (Calculated from 2020 forecast of 40 million new cars).
Current Market Preferences
The 2010 automobile market was 18.1 million and is expected to grow “15 percent this year.” The vast majority of these automobiles are for private use, where in 2007 this category accounted for 71.6% of all cars sold. Moreover, Deloitte’s survey suggested that the vast majority of Chinese automobile consumers want a mid-sized sedan (43%), while small sedans and hatchbacks represented 36% and 9%, respectively.
Of these vehicles sold, foreign brands represent the top pick for Chinese consumers. Shanghai GM Wuling, Shanghai GM, and FAW Volkswagen take the top three spots, with only the only domestic automobile maker Chery represented. This is because foreign brands have not only recognition but are also linked to quality, reliability, stability, and status. On the other hand, domestic vehicles, although cheap, are not reliable and have a bad reputation for “breaking down after two years.” 
To Sell EVs, Make Them A Status Symbol
The EV Consumer Profile
With a country of 1.3 billion people and a GDP per capita of only $3,744 USD in 2009, the majority of Chinese citizens do not have the capacity to buy a car, nonetheless an electric vehicle that is said to cost upward of $30,000 USD. However, identifying segments that would be interested in electric vehicles in China is not that difficult through the analysis of China’s current consumer preferences and Deloitte and McKinsey & Co’s consumer surveys.
Despite the fact that the majority of Chinese citizens have not considered electric vehicles, there is a segment of the society that would be willing to be the “first movers” on the EV train. In Deloitte’s survey, these individuals are those that are well-educated (Bachelors degree or higher), live in urban areas, belong to middle or upper classes, and they tend to be male. They also identify themselves as environmentally conscious individuals and see EVs as another aspect of their “tech-savvy[ness],” “trend[iness],” and overall “coolness.” These first buyers also tend to be well-informed about their society and governmental policies, allowing them to be stylish yet more environmentally friendly than their peers. As a result, the new EV consumer profile is closely correlated to today’s luxury car market (without the environmentally conscious aspect), explaining not only China’s preference for foreign cars but their need for status and prestige.
The Counter-intuitive Truth: To Make People Want EVs, Put Them Out Of Reach
Walking along the streets of Beijing today, the most numerous and recognizable car brands are Audi, GM, and Volkswagen. In today’s China, capitalism and consumption have taken over as the traditional fabrics of society erode. Reports of students and young adults using their entire salary for the newest electronic devices are real, illustrating the competitiveness for “perceived” status in the society. Luxury cars are very much part of this game and are now the “it” commodity in the market today. However, luxury cars such as China’s coveted Audi A6 (preferred choice for government officials and CEOs) are becoming more commonplace now, making it hard to differentiate between the newly affluent and the super rich.
This void can now be filled in by electric vehicles as the super rich search for another identity to call their own. In this strategy, car producers will need to aggressively market EVs as a luxury product that is not only esteemed but also discreet (Similar to Audi’s reputation in China, where other German luxury brands are considered too “loud” and therefore, too arrogant).
The first EVs launched into the Chinese market will need to be manufactured by a recognizable foreign brand, or as part of a luxury car group (i.e. SmartCar Ala Mercedes Benz). It’s design will need to be sophisticated, trendy, and almost “couture” to illustrate the almost untouchable nature of the car. Yet, at the same time, allow normal middle class citizens the dream of one day owning it. It should also be marketed in a way that illustrates the esteemed nature of their user, as they consciously decided to forego traditional luxury cars to benefit their society. Meanwhile, the car should also portray an underlying message that the super rich have higher moral values, illustrating how money and an internal combustion engine (ICE), does not add to society, culture, or the betterment of the environment. This strategy would be able to tap into the status-conscious minds of today’s Chinese consumers while correctly identifying with the consumer segment most likely to buy EVs.
By marketing EVs in this way, car manufacturers will have more time to reduce costs and improve battery functions of future generations of EVs. At the same time, middle class consumers will begin striving toward EVs as the next level of wealth prominence. In this way, EVs will be able to mimic the same trickle-down effect seen in China’s current ICE market, where middle class families strive for prestige through the ownership of luxury cars, while lower to lower-middle class strive for foreign car brands. Through this strategy, electric vehicle car manufacturers would be creating an entire lifestyle catered to those who are educated, affluent but not flashy, and environmentally conscious. This will enable them not only to elevate their position in society but also make them enviable as normal citizens covet their electric vehicles and green lifestyle.
The Other Energy Superpower: Central Asia? (Part II of II)
October 18, 2011 § Leave a Comment
Although Kazakhstan, Turkmenistan, and Uzbekistan have the capacity to significantly influence the energy sector, their current development of oil, natural gas, and coal are too varied and many obstacles still stand in the way before they can be coined an “Energy Superpower.”
So, what are these obstacles?
Geopolitical
Central Asia’s geographical location is landlocked: Russia to its north, China to its east, the Middle East to its south, and Eastern/Western Europe to its east. Of the three major resource-rich countries in Central Asia, only Kazakhstan and Turkmenistan have access to the Caspian Sea which has the potential to link them to the world energy market via the Black Sea.
This geographical position potentially allows them market access to many countries in the area. But the lack of direct access to the sea and to locations further in Eastern/Western Europe, the Middle East, and Asia makes the proliferation of their energy products politically sensitive and challenging.
Markets
At the moment, the markets available for Kazakhstan, Turkmenistan, and Uzbekistan are limited depending on the energy source they are exporting. Kazakhstan, a major producer of sweet crude (lower sulfur= less processing) but not yet gas, has access to Russia, Turkey, Georgia, and China. Uzbekistan, an exporter of natural gas and to a lesser degree of petroleum products, sends its products to Kazakhstan, Kyrgyzstan, Tajikistan, and Ukraine. Uzbekistan will also add China to its profile, as the country has already begun the third stage of pipeline production earlier this year. Lastly, Turkmenistan has traditionally exported the majority of its oil and gas to Russia, but has now diversified into China, Afghanistan, Pakistan, India, and Iran. Turkmenistan is also in talks with Western Europe as a possible gas supplier for the Nabucco pipeline project.
These overlapping markets make competition fierce as Russia, Azerbaijan, and Iran also wish to have increasing influence on the energy supplies of these countries. However, due to Russia’s long monopoly over energy supply and the political sensitivity surrounding Iran, Central Asia has become a welcomed entry into the market.
Transit Countries
Despite being preferred as an alternative energy supplier, Central Asia still faces barriers in expanding its oil and gas to overseas markets. The most efficient way to transport oil and gas is through pipelines, however, in Kazakhstan, Uzbekistan, and Turkmenistan’s case, their geographical location hinders their ability to directly connect to consumers. Therefore, these three countries are intrinsically dependent on transit countries to help supply their products. This will require a great deal of regional stability, as well as bilateral or even multi-lateral negotiations to secure the safety and completion of cross-border pipelines in the future.
However, despite these efforts, problems can still occur. In a World Bank study of cross-border oil and gas pipelines, the organization highlighted historical conflicts arising from “profit”, “rent-sharing”, competition of market share, differing political interests, and the lack of enforced contracts as the main reasons pipelines fail to be completed or managed. Central Asia is not immune to this, and will potentially have difficulty coming to an agreement with countries such as Russia, Iran, and Azerbaijan who are currently competing for increased market share in the region. For this reason, a regional body (formed by contracted countries) which regulates and enforces the contracts of transit countries, while monitoring the supply and demand of oil and gas producing states would be needed in order to give consumers confidence and ensure that disruptions to supply will not happen.
Infrastructure
Another large barrier in the development of oil and gas for the global market is the infrastructure required. Infrastructure, in this case, refers to oil and gas pipelines, exploration and production technology, transportation links, oil refineries, and where needed, gas processing centers. At the moment, many of the exploration, mining, and transportation networks built in Kazakhstan, Uzbekistan, and Turkmenistan were done during or immediately after the Soviet Era. This illustrates Central Asia’s heavy reliance on Russia as their primary market and transit point, as well as the possibility that the technology being used could be out of date. At the same time, new infrastructure is very costly and requires a tremendous amount of investment, as these countries are still developing and do not have the resources to explore or produce domestically.
For this section, I will take the construction of pipelines as an example to explain the difficulties of increasing energy infrastructure in this region.
One of the issues facing pipeline construction is the large initial investment it takes to complete a project. Pipelines are often constructed through complicated terrain that require additional funding to bring in supplies, laborers, and managers to properly handle the pipeline construction. As a result, a single project can cost billions of dollars as seen in Turkmenistan and India’s recent negotiations to build a 2,000km pipeline through Pakistan and Afghanistan where the proposed pipeline would take $7.6 Billion to complete. This amount of money is possible to raise when cross-border pipelines are constructed. However, is rather difficult for developing countries such as Uzbekistan, who had to borrow 1.8 Billion from foreign institutions to build their vast network of domestic gas pipelines.
Secondly, pipelines can handle only one type of crude or gas pressure. This makes pipelines inflexible and much analysis and care should be taken in order to maximize the use of pipelines once they have been built. This issue is especially pertinent to exporting countries that have different varieties of gas, such as Uzbekistan and Turkmenistan, which require the construction of gas processing facilities to accommodate the nature of the pipelines.
The last issue plaguing the creation of pipelines is the actual security of the structures once they have been constructed. Often dubbed as pipeline security, many countries are concerned about the physical security of the pipelines from militia groups, protesters, or even everyday citizens disrupting the supply of energy products. At the moment, not much as been done to secure these pipelines but the implementation of regular checks along the length of a pipeline would ensure timely discoveries of leaks or breaks in the structure.
Implications for future investors or markets
Although there are still a number of obstacles standing in the way of Kazakhstan, Uzbekistan, and Turkmenistan’s control of the global energy trade, they cannot be ignored and should be engaged in international discussions on oil and gas. The amount of resources that these countries hold, in combination with their location and growing diplomatic ties will create fierce competition with other energy producers. This will either help reduce the cost of energy in the future or bring catastrophe as countries fight to monopolize energy markets.
Future investors and potential markets, however, should pay close attention to the domestic energy policies of these countries. As most of these oil and gas fields are owned by national governments, their main priority will be to fuel their economy and provide for their citizens. This has already been seen through the long-standing oil and gas subsidies these countries give to their to their industries and citizens, increasingly not only their energy intensity but also energy inefficiency. As a result, their current and future practices will affect the amount of reserves available for export (i.e. Uzbekistan’s former oil reserve to production ratio was to last 13 years, in 2002 it was revised to only 11 years. The same goes for their gas reserve to production ratio, which was 42 years but is now only 33 years.).
Author’s Forecast
In my opinion, the most important issue to note will be their relationship with Russia as this will dictate how far and wide their exports will go. At the moment Russia controls a large proportion of European markets and is steadily increasing in the Asian market. In order for countries such as Kazakhstan, Turkmenistan, and Uzbekistan to have an impact, Russia needs to be willing to cede control and influence. In the coming months, if not years, close monitoring of the Nabucco Project (bringing Caspian Sea resources to Western Europe, while weaning off Russian resources) is of extreme value as it will illustrate Russia’s position on Central Asian resource expansion.
Monitoring of the Chinese and Indian pipelines is also of extreme value as it will dictate the importance of Central Asian energy as these countries will be the largest consumers of energy in the coming years. However, since India’s pipeline has to pass through the troubled countries of Afghanistan and Pakistan, China will have an advantage due to their direct pipelines. In this regard, I foresee Kazakh oil primarily relying on the Chinese market, while Uzbek gas will run into trouble as the country balances its own energy needs with its export dreams. Additionally, if the Nabucco pipeline does not halt again, Turkmen gas will be primarily directed to Western Europe.
The first part of this series can be seen here.
For a closer look at the region’s major oil pipeline projects: http://maps.grida.no/go/graphic/major-oil-pipeline-projects
The Spratly Islands Dispute: Why is this important?
October 13, 2011 § 6 Comments
As recently as yesterday, the Spratly Islands disputes were again highlighted in the international media. This time we see India lining up with Vietnam against China to vouch for India’s state-owned ONGC company to begin their “legal” exploration activities in Vietnam’s territorial waters. Just a few months earlier, in May and June of 2011 Chinese ships cut sonar cables attached to PetroVietnam’s boats in the same area.
In the wake of the continuing Spratly Island disputes between China and Vietnam (among others), many still wonder why these small group of islands are so important?
The Spratly Islands dispute can be looked at from a variety of angles. In terms of national security, these islands are important due to their location in the South China Sea, where many merchant ships pass through to deliver goods, people, and energy products to Asian-Pacific countries. By controlling these islands, the country in question would be able to ensure the safe passage of their goods.
In terms of energy security, the Spratly Islands are considered indispensable to countries in the region due to the potential sources of natural gas and oil found under the islands’ seabed. Whichever country wins the dispute would have the right to explore and develop these resources for their own domestic consumption. This would help in diversifying a country’s energy portfolio while making them less vulnerable to foreign oil and gas markets. At this time, however, the amount of recoverable oil and gas that these islands contain have not been fully proven.
In terms of national pride, these islands are of particular importance to countries currently claiming all or part of the islands (Vietnam, China, Taiwan, the Philippines, Malaysia, and Brunei) due to the historical claim these countries have over the territory. These countries have a long sea-faring history, however, it has been tremendously difficult to say which country first inhabited or used these islands.
So, which of these reasons is the real motive for the dispute?
In my opinion, although the potential oil and natural gas that the Spratly Islands offer is compelling, what is more important to these countries is the ability to control of the sea lanes surrounding these island. By controlling the sea lanes in this area, the country in question would be able to increase its national security by rerouting merchant ships, block potential threats, or even divert the delivery of goods to a disputing state. The country in question could also secure itself by building a naval base in this area, potentially protecting itself and its shipments while increasing its own “sea lane security.”
However, what does “sea lane security” actually mean?
Sea lane security, at its present time, is notoriously hard to define due to the legal, geopolitical, and diplomatic connotations of the term. However, I will attempt to synthesize this concept through articles taken from the United Nations Convention on the Law of the Sea.
In the UN Convention of the Law of the Sea, all ships are given the right to conduct the innocent passage (unarmed, no unloading of goods or people, etc.) of their ships on all territorial seabeds (Part II, Section 3, Subsection A, Articles 17-19). This means that ships are allowed to get within 12 nautical miles from the coast of a country, as long as they are not a threat to the national security of that country. However, tankers or ships that may carry hazardous material may be directed to use specialized sea lanes to conduct their passage through a country’s territorial waters (Part II, Section 3, Subsection A, Articles 22-23).
The laws regarding the passage through straits, on the other hand, are a bit more complex as they require the determination of whether the straits form an island that are connected to a State’s mainland. If they are not connected, ships have a right of transit passage. However, if the straits are connected to a State then other transit passages will be recommended for the security of the state in question (Part III, Section 2, Articles 38-39). The principles of innocent passage in the previous paragraph also apply to the passage of ships through straits.
Sea lanes, in this instance, are essentially the roads of transportation for ships on seas and oceans. The rules above apply to specific cases in which these roads of transportation might be blocked or redirected according to the what the ships are, what they are transporting, and how the passage of ships affect a state’s national security. As a result, the United Nations Convention on the Law of the Seas offer the nation who owns the islands or territorial seabeds an incredible amount of control, while nations who depend on these sea lanes for the delivery of foreign goods limited influence.
Implications for the Spratly Islands Dispute
For these reasons, the country that ends up claiming territorial ownership over the Spratly Islands also gains control of most of the South China Sea. This is because their territorial seabeds would extend not from their mainland coastline but from the islands’ coastline.
For instance in the map below, China’s claim over the islands would make their sea territory extend all the way south to Vietnam, the Philippines, Brunei, Malaysia, and Indonesia (Orange line segment), making the “Hypothetical EEZ (Exclusive Economic Zone) limit from coastal states” part of China’s territorial waters. This would not only make it tremendously hard for Southeast Asians to protest against Chinese naval operations in the future, but would also limit their economic activities (fishing, oil and gas exploration and production, shipping) in the “EEZ.”
How do you solve this?
Thus far, the only approach taken to pacify this conflict has been bilateral agreements. However, this approach breeds distrust as countries immediately place their national sovereignty first by creating overlapping yet contradictory agreements. For example, this can most recently illustrated by the agreement signed by Vietnam and China (October 11, 2011) to hold biannual talks on border disputes and establish an emergency hotline for the South China Sea. Yet, at the same time, Vietnam aligns itself with India (October 13, 2011) to explore the South China Sea for oil and natural gas.
What is needed for the resolution of this dispute is multilateral talks by all the parties involved in the conflict. This would not only establish a mutual foundation of understanding, but also send a message to the countries involved that there is a willingness to compromise and work together.
Full Articles:
http://globalspin.blogs.time.com/2011/10/12/a-step-back-from-the-brink-in-the-south-china-sea/
http://globalspin.blogs.time.com/2011/06/10/tension-rise-over-south-china-sea-claims/
http://blogs.wsj.com/chinarealtime/2011/10/13/vietnam-india-stand-firm-on-china-row/
How Dependent are Asia’s Top 4 Economies on Foreign Oil?
October 11, 2011 § 2 Comments
Economies in Asia have been growing rapidly over the last decade due to the exponential use of fossil fuels in the region. But exactly how dependent are these countries on oil, especially foreign oil? And how does it affect their national security?
To understand the context of the question we are asking, let’s take a look at Asia’s top 4 economies (excluding South Asia and Oceania). The top GDP in Asia, unsurprisingly, is China with 5.8 trillion USD. While Japan follows behind quite closely with 5.5 trillion USD, South Korea and Indonesia ‘s GDP are much lower at 1 trillion USD and 706 billion USD, respectively. By understanding the size of these economies, we can now examine the energy mix of each country to see the impact that oil has on each country.
Among these 4 economies, Japan and South Korea use the most oil in their energy mix. These two countries are among the most resource deprived countries in the world and require the majority of their energy to be imported. Japan’s energy mix relies heavily on oil, which accounts for 43.2% of the country’s total energy supply. South Korea, is similar, with oil accounting for 39.5% of the country’s total energy supply.
China and Indonesia, on the other hand, have a number of domestic resources that have relieved oil as the country’s predominant energy source. China, for instance, holds the world’s 2nd largest coal reserves. This is directly reflected in their energy mix as coal represents 66.5% of total energy supply. The second most used energy source is oil, at 17.2%, a much smaller percentage than both Japan and Korea. Indonesia, on the other hand, is endowed with rich natural resources, including oil, gas, hydro-power, and expansive forests and agricultural farmland. Due to this fact, Indonesia’s energy mix is the most balanced among the 4 economies. Indonesia’s oil dependence is at 30.9%, with Combined Renewable and Waste fuels coming in second with 26.7%. Indonesia also combines equal shares of coal, natural gas, and renewable energies into their energy mix, making them the most diversified and least vulnerable among the 4 economies.
So, how much influence does foreign oil actually have in these four economies?
China:
Although, the majority of China’s energy mix is dominated by coal, oil still plays a large role in China’s growing economy. China used to be a net oil exporter in the early 1980s, when the country’s largest oil field- Daqing- was producing oil for domestic and foreign markets. Daqing, combined with China’s coal reserves, made the country very secure as their energy needs were independent from the whims of the international energy market at the time.
However, since 1993, Daqing’s reserves have significantly declined, making China a net importer. Combined with China’s exponential growth during the 1990s and early 2000s, the country is now 52% reliant on foreign oil. This number is projected to grow over the next 20 years as the Chinese government struggles to subsidize domestic oil production. This will not only make domestic oil much more expensive, but will also force the government to become more dependent on the international oil market.
Although China energy mix only contains 17.2% of oil, in absolute numbers this amounts to 8,324,000 barrels per day (bpd) in 2009. This is already almost double that of Japan’s daily consumption of oil, who’s share of oil usage is much greater than that of China at 43.2%. Moreover, China’s continuing development has also produced produced a strong consumption culture, as middle-class Chinese citizens wish to acquire private cars for their transportation needs. Private car use is already increasing steadily at 12% a year and with China’s current population size of 1.3 million, this will make China the world’s next largest car market and oil importer if new bio-fuel or electric vehicle (EVs) technologies are not introduced. This has large implications for China’s socioeconomic stability and energy security, as the country is expected to provide a better life for its citizens while the country becomes more vulnerable to the global oil market.
Japan:
Among these 4 economies, Japan is the second most reliant country on foreign oil at 97% (behind South Korea). Japan does not hold any domestic energy sources and has for years been importing energy from all over the world. It is constantly at risk, as any shock to fuel prices, oil supply, or blocks to oil tankers will affect the island nation.
Japan’s unique position has made the country driven to increase energy efficiency in all sectors of society through the implementation of energy efficiency standards and technology. Although these policies have slowed down the growth of Japan’s energy demand, oil still continues to play a large share of their energy needs and the island nation continues to be constrained by this energy security risk. For instance, Japan is overwhelmingly supplied by Middle Eastern sources, and continues to be vulnerable to oil supply shortages and price shocks. These concerns are at the forefront of Japanese energy policy, and plans to diversify oil sources, invest in renewable energy, and incorporate more natural gas, nuclear, and coal into their energy mix are always present.
South Korea:
South Korea represents a similar situation with Japan as the country is the most reliant on foreign oil among the 4 economies in this article. South Korea holds a small amount of domestic resources and imports almost 98% of its oil from overseas suppliers. However, South Korea holds a unique niche in the oil industry as the country’s shipping industry and oil refineries help secure the country’s crude oil supplies. For instance, South Korea has 3 of the world’s top 10 largest oil refineries. Their refineries are technologically advanced and are capable of refining “sour” or high sulfuric oil into petroleum products. This is in contrast to much older refineries in the region, that are used to refining easier “sweet” or low sulfuric oil found in Asia in the past. This has made South Korea one of the centers of oil refining in Northeast Asia, allowing them to process over 2.5 million barrels of oil per day in 2009.
However, this position has also made South Korea vulnerable to oil shocks as the country is now highly dependent on oil exports from the Middle East which account for 83.3% of the country’s total oil imports in 2011. South Korea, at the moment, does not have even one non- Middle Eastern oil source (unlike Japan who has Russia) and continues to fear for supply disruptions.
Despite these problems, South Korea holds significant capital allowing it to hedge for a better energy security future. For example, the South Korean government has continued to invest heavily in oil rich nations to help with exploration and production, while securing stakes in the oil to be produced. Earlier this year, Korea National Oil Corporation secured a combined 1.7 million barrels of oil from the United States and Kazakhstan. The same corporation also increased its stakes in the United Arab Emirates, allowing it to increase the country’s ownership of foreign oil to 10-15% of their total consumption. These overseas activities are only part of South Korea’s strategy as they acknowledge their continued oil dependence.
Indonesia:
Indonesia has the smallest economy of the 4 being studied and is also the only country from Southeast Asia. Yet, it is one of the few countries in Asia blessed with abundant natural resources- oil, natural gas, coal, copper, tin, forests, etc. These natural resources have for years helped Indonesia’s economy grow exponentially while maintaining a large degree of independence from foreign energy sources. But since 2004, Indonesia has become a net importer of oil causing the country’s political leaders to be concerned over their future energy security.
At the moment, Indonesia only imports 17.5% of foreign oil due to the country’s continued dependence on fuel subsidies that has artificially made Indonesian oil more affordable for citizens. This has amounted to 10% of their GDP or 10 billion USD on fuel subsidies for 2010. This policy is not sustainable, however, and will threaten the stability of Indonesia in an economic crisis when the government will be incapable of paying subsidies (like when the Indonesian Rupiah lost its value in the Asian Financial Crisis of 1997/1998).
As a result, the government has been looking for other ways around this problem. In 2006, Presidential Decree No. 5/2006 declared that the Indonesian economy should diversify its energy mix and move away from its dependence on oil. As a result, local governments implemented the usage of more natural gas, coal, hydro-power, and biomass into the power sector. But oil still remains as the country’s most used fossil fuel. Indonesia will continue to be dependent on oil in the coming years, and will need to expand their petroleum activities overseas, upgrade their refineries, and invest or collaborate with foreign oil companies to ensure the needs of their country. This will enable them to develop diplomatic relations with oil-rich nations, have stakes in overseas petroleum fields, and reduce their vulnerability by producing their own refined oil products.
The Other Energy Superpower: Central Asia? (Part I of II)
October 11, 2011 § 2 Comments
Ask anyone where fossil fuels come from today and they will probably say Canada, Qatar, Australia, Saudi Arabia, or the United Arab Emirates. This is not surprising seeing how these countries are the current leaders in exporting oil, natural gas, and coal in the world and will continue to do so over the next decade. However, what about countries that have not fully exploited their fossil fuels yet?
Central Asia is one such region that has been often neglected by the international media and investors. But how much oil, natural gas, and coal reserves do countries in this area of the world actually have?
Central Asian Oil
Of the five countries in this region, Kazakhstan holds the highest proven oil reserves at 30 billion barrels, making it rank 11th in the world. It also has 3 giant oil fields (i.e. oil fields that have 500 or more million barrels of proven recoverable oil) from which it produces the majority of its oil from. What is more important is that Kazakhstan’s oil production limit has not been reached, where in 2009 the country’s giant oil fields produced 1.682 million barrels of oil per day (bpd). This number is projected to grow over the next few decades as technology advances and Kazakhstan can successfully exploit not only their 3 onshore giants but also their two Caspian Sea fields (which have a proven reserve of 14 billion barrels of oil).
The next two Central Asian countries with the largest oil reserves belong to Turkmenistan and Uzbekistan who are currently producing 198,150 bpd and 70,880 bpd, respectively. Their total oil production potential is much smaller than Kazakhstan, as is their future perceived influence on the international petroleum market due to problems with transportation, regional stability, and lack of investment. Nonetheless, Turkmenistan has recognized this vulnerable position and decided to refine their crude in-house and export only petroleum products. This has allowed Turkmenistan to not only reap in value-added service fees but also provide for countries that may not have refining capabilities. Uzbekistan, on the other hand, has made it a priority to produce oil to meet domestic consumption needs rather than export to foreign markets.
Central Asian Natural Gas
In terms of natural gas, Turkmenistan takes the lead among its Central Asian neighbors at 7.504 trillion cubic meters, making it the 6th most abundant natural gas nation in the world. Turkmenistan currently produces 38.1 billion cubic meters of gas a year (2009 est.). However, it is ranked at only 24 among all natural gas producers illustrating its potential in the coming years. Turkmenistan’s future success in this arena will largely depend on its ability to attract foreign investment while diversifying their consumer markets, where in 2009 it added Iran and China to its portfolio.
Kazakhstan and Uzbekistan come in second and third place for natural gas reserves at 2.407 trillion cubic meters and 1.841 trillion cubic meters. Kazakhstan’s natural gas production is behind in exploration, production, and general infrastructure when compared to its oil industry. The country has failed to implement domestic pipelines to connect its gas reserves in the west to its industries in the east. Pipelines to export gas to neighboring countries have not been completed as well. As a result, Kazakhstan was forced to import a sizable amount of natural gas from Uzbekistan up until 2009. However, recently Kazakhstan become a net exporter of natural gas and remains optimistic about their future in the industry due to its contract with the Chinese government to produce a Kazakhstan-China pipeline by 2014.
Uzbekistan, on the other hand, has been developing its natural gas production for years. It is currently ahead in natural gas production in Central Asia due to government initiatives that borrowed foreign loans to supplement the budding energy industry at the time. This has allowed the country to now rank as the 14th largest gas producing country in the world. Moreover, Uzbekistan’s natural gas is used for both domestic consumption and foreign export. However, Uzbekistan currently exports to only Kazakhstan, Kyrgyzstan, Tajikistan, and Ukraine due to its landlocked geographical location. This has made Uzbekistan heavily dependent on regional stability to carry out its contracts.
Central Asian Coal
In terms of coal, Kazakhstan again takes the lead with proven reserves of 31.3 billion tons, making it the most coal abundant country in Central Asia and 8th in the world. The Kazakh government predicts the coal will last for the next 100 years, but does not provide information on the country’s current production rates. At the moment, the biggest importers of Kazakh coal are Russia and Ukraine. However, growing energy scarcity will make Kazakh coal enticing for China, Tajikistan, Kyrgyzstan, and Eastern Europe in the near future.
Kyrgyzstan comes in second place among the region’s coal reserves with 2.5 billion tons. Kyrgyzstan has a long history of coal production that started since the 1900s. During the Soviet Union era, state-owned coal mining companies were opened to feed the Soviet economy. However, since gaining independence Kyrgyzstan has been unable to operate many of these mining facilities due to lack of funding, infrastructure, and transportation. This has made Kyrgyzstan’s coal output drop dramatically in recent years.
Uzbekistan comes in third among Central Asian coal reserves with 1.9 billion tons. Uzbekistan has also seen a decline in coal production in recent years, where in 2009 the country produced 3.602 million short tons, some 25 thousand tons less than 2008. Uzbekistan also heavily depends on coal (85%) for its power sector making it difficult to calculate how much coal is available for foreign export. Nonetheless, the government has shown significant interest in upgrading their technology to make their coal reserves, mining techniques, and energy usage more efficient.
So, what does this imply?
In the next post, a deeper look into the geopolitical, infrastructural, and diplomatic obstacles of Central Asia will be analyzed to determine the region’s ability to influence the future global energy market.
Shell’s Refinery Fire in Singapore: Implications
October 2, 2011 § Leave a Comment
Singapore is a key hub for the entry of energy into the Asia-Pacific. The majority of crude oil coming from the Middle East stops by Singapore in order to be traded, refined into oil products, and exported to countries in the region. The Shell refinery alone, accounts for about 500,000 barrels of oil per day (bpd), which is roughly one-third the capacity of all the refineries in Singapore.
So, when a fire broke out at Shell’s largest refinery in the world on September 28, 2011, governments, companies, and traders sent out shock waves of concern, as it forced those in the industry to comprehend the ramifications of this event. As Shell slowly closed down unit after unit on its refinery complex, customers began to wonder if Shell would able to deliver the contracted products on time? Or would oil prices rise in the region? Even worse, how long would these refineries close and if Shell would be forced to declare “force majeure,” where this unforeseeable event would make Shell incapable of fulfilling its contract obligations?
While none of these questions have been answered, Shell is starting to take action. For instance, Ann Koh from Bloomberg reports that Shell has started to buy gasoline only two days after the fire. Shell has also stated its commitment to obtaining additional oil products from their international refinery facilities and storage stockpiles. These strategies, I believe, will be used to offset the impact of the temporarily closed refinery, allowing Shell time to deliver its current contracts while redoubling its efforts to investigate the causes of the fire and deem the refinery safe for operation.
While these efforts will help the Shell and the refinery normalize business, what about the environmental impacts this single fire will have on the region? The fire took 48 hours to contain and was widely visible from the Singaporean mainland. Concerns about air pollution migrating from Singapore to Indonesia and Malaysia are real, as are the effects of the fire’s byproducts on the wildlife and waters surrounding Singapore and the Pacific Ocean. These effects have yet to be investigated or measured, and Shell and the Singaporean government should be cautious to implement additional infrastructure or processes to limit the negative effects of future accidents.
Full Story: http://www.reuters.com/article/2011/09/29/shell-refinery-fire-idUSL3E7KS43L20110929
