Rising East Asian oil, gas demand poses US policy questions

Oct. 8, 2012
The US may need to reconfigure several economic, military, and other strategies as well as energy policies in response to rising East Asian oil and gas demand, experts agreed at a Sept. 20 forum.

The US may need to reconfigure several economic, military, and other strategies as well as energy policies in response to rising East Asian oil and gas demand, experts agreed at a Sept. 20 forum.

They noted that countries there already are the primary Persian Gulf crude oil consumers, and will seek more LNG as they continue to industrialize. Many have national oil companies that are trying to secure supplies by acquiring foreign production. And their cooperation will be necessary to enforce oil sanctions against Iran.

A US transition from a major oil and gas importer to a potentially large exporter raises questions ranging from the extent of military protection of East Asian energy supply routes to whether US LNG exports will be allowed and how to construct the necessary US infrastructure, the experts said.

Their observations came at the release of a new report, "Oil & Gas for Asia: Geopolitical Implications of Asia's Rising Demand," by the National Bureau of Asian Research. The organization and the Woodrow Wilson International Center for Scholars hosted a discussion of its findings.

It urged Washington policymakers to emphasize global oil and gas issues instead of a possibly outmoded energy independence goal; contribute to broad economic development in Siberia, Kazakhstan, Brazil, Angola, and other "swing" suppliers; seek more East Asian involvement in protecting supply routes, handling disruptions, and creating more open trade and investment markets; and prepare to militarily protect swing oil and gas exporters.

Vulnerable beneficiary

"[East] Asia is the most direct beneficiary of secure oil flows from the [Persian] Gulf," said Mikkal E. Herberg, research director at NBR's Energy Security Program who previously spent 20 years in ARCO's strategic planning department. "It's also the most vulnerable to supply disruption.

"So the question becomes whether it's appropriate for the US to remain in its role as the strategic military presence in the gulf and sea lanes between there and East Asia," he continued. "China particularly is beginning to look like a free rider who is the main beneficiary of supply security measures but currently contributes nothing to them."

US policymakers will need to decide whether they want the Chinese to directly participate in such supply security measures or take a role similar to Japan's and simply pay some of the costs, according to Edward C. Chow, a senior fellow at the Center for Strategic and International Studies who formerly worked 20 years for Chevron Corp. on US and overseas assignments.

But Robert D. Hormats, US Undersecretary of State for Economic Growth, Energy, and the Environment, noted that decreasing US reliance on imported crude does not mean the country will disengage from oil and gas discussions with other parts of the world.

"This particularly applies to maintaining open and free supply chains, which require full collaboration and cooperation with all the countries involved," he said. "This will remain a significant US supply priority."

Broad opportunities

The changing US oil and gas supply situation nevertheless presents broad opportunities to reconsider many long-standing US policies, many of the experts agreed. "Growing markets in Asia provide this country with significant investment opportunities, not just in energy but also in the environment," Hormats said. "We see this as a new opportunity to develop energy partnerships while addressing our diplomatic interests in Asia."

Getting more East Asian cooperation in a global energy collaboration will be challenging, observed US Rep. Charles W. Boustany Jr. (R-La.), who chairs the House Ways and Means Committee's Oversight Subcommittee.

The Chinese, particularly, will need to be convinced that this simply is not an attempt to encircle them, he said. "This is going to take diverse and multipronged approaches, and it's not going to be easy," Boustany said.

This is especially true of US attempts to get Chinese support for tightening oil sanctions against Iran because China generally dislikes trade sanctions, particularly unilateral ones, noted Erica S. Downs, a fellow in the Brookings Institution's John L. Thornton China Center who previously was a Central Intelligence Agency energy analyst.

The Chinese also recognize that their most important bilateral relationship now is with the US, she continued. While the government issued one kind of statement on Iranian sanctions, its NOCs quietly reduced their purchases of Iranian crude, Downs said.

Another choice

"One way the US could get more cooperation from China on limiting Iran's nuclear aspirations would be to welcome Chinese companies as investors and operators of North American oil properties," Downs said. "That basically would give their government a more attractive choice."

Her remarks came the same day that Nexen Inc. shareholders approved a proposed acquisition by CNOOC Ltd., one of China's NOCs, of the Calgary independent producer with operations in British Columbia, the UK North Sea, and the US Gulf of Mexico. CNOOC needs all three national governments' approvals to complete the deal.

Several congressional Democrats oppose it. Downs said the US Department of the Treasury's Committee on Foreign Investment is looking at it. "I think CNOOC is a relatively autonomous company, but it's hard for it to make that pitch," she said.

Other participants at the NBR-Wilson Center forum suggested that US concerns over foreign NOCs acquiring US oil and gas properties is inappropriate. Herberg said it would be "deeply cynical" for the US, with its free market heritage, to try and limit outside investments in North American energy resources.

"Chinese investment here would be more welcome if we could be convinced [the companies] were not receiving large government subsidies, but were moving actively toward operating more as private commercial entities, competing on a level playing field with US firms," said Hormats.

Asian perspective

Many East Asian nations consider NOCs necessary to offset publicly trade multinational firms that government leaders in the region see as vulnerable to political pressures in their home countries, observed Seethpathy Chander, director general of the Asian Development Bank's Regional and Sustainable Development Department.

"Consequently, the Asians see [NOCs] as a major corrective, creating more diversified investments in global oil and gas resources," he said.

Chow suggested that in China's case, the government will need to determine if continuing to let the Communist Party select the national oil companies' chief executives and hold directors seats on their boards is preferable to letting the companies operate as competitive, economically efficient global enterprises.

Speakers also generally indicated that the global oil market is too big for national oil companies' acquisitions of oil and gas resources outside their countries to be a legitimate issue. Such purchases, which supposedly are supply security-driven, actually include assets too small to serve that purpose, they said. Their production could be exchanged more effectively for oil and gas closer to home on open markets, the experts said.

"Whether these are politically good or bad [oil and gas] investments hardly matters," Chow said. "They're investments, which need to be encouraged."