Joint stockpiling and emergency sharing of oil: Arrangements for regional cooperation in East Asia

Energy Policy 39 (2011) 2817–2823

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Joint stockpiling and emergency sharing of oil: Arrangements for regional cooperation in East Asia Eui-soon Shin a,n, Tim Savage b,1 a b

School of Economics, Yonsei University, 50 Yonsei-ro, Seodaemun-gu, Seoul 120-749, Republic of Korea The Nautilus Institute, 58-14 Shinmun-ro 1-ga, Hangeul Hall Room 503, Jongro-gu, Seoul 110-061, Republic of Korea

a r t i c l e i n f o

abstract

Article history: Received 13 July 2010 Accepted 14 February 2011

The East Asia region includes three of the world’s top five oil-importing nations—China, Japan, and the Republic of Korea. As a consequence, international oil supply disruptions and oil price spikes, and their effects on the economies of the region, have historically been of significant concern. Each of these three nations, as well as other nations in East Asia, has developed or is developing their own strategic oil stockpiles, but regional coordination in stockpiling arrangements and sharing of oil stocks in an emergency could provide significant benefits. This article describes the overall oil supply security situation in East Asia, reviews the attributes of different stockpiling arrangements to address energy supply security concerns, summarizes ongoing national approaches to stockpiling in East Asia, describes the development of joint oil stockpile initiatives in the region, and suggests the most attractive options for regional cooperation on oil stockpiling issues. & 2011 Published by Elsevier Ltd.

Keywords: East Asia Oil stockpiling Emergency fuel sharing

1. Introduction Few regions in the world are dependent on oil imports as East Asia. Densely populated, with large, export-oriented economies, the countries of the region produce enough oil to meet only a small fraction of their demand. Moreover, the majority of East Asian oil imports come from the volatile Middle East, and are imported via ships that must pass through the Malacca Straits, where they are vulnerable to piracy or accidents due to marine traffic congestion. This makes East Asia highly susceptible to oil shocks, such as those caused by the 1974 Arab oil embargo, the 1979 Iranian revolution, or the recent Iraq War. As an example, Table 1 demonstrates the effect of the two oil crises of the 1970s on economic growth (shown in percent per year) in the South Korean economy, which was then still in a developing phase (Shin, 2005). Despite such vulnerability, however, up to now there has been no regional mechanism in East Asia for stockpiling emergency petroleum supplies. This not only leaves the countries of the region dependent solely on their own stocks in case of an emergency, it also exacerbates ongoing disputes over off-shore territories in the region that may contain recoverable oil reserves. Energy security, and security of energy supply in particular, in East Asia remains a complex and multifaceted challenge, due to

n

Corresponding author. Tel.: þ82 2 2123 2476; fax: þ 82 2 2123 8638. E-mail addresses: [email protected] (E.-s. Shin), [email protected] (T. Savage). 1 Tel.: þ82 70 7504 9122; fax: þ82 17 212 1253. 0301-4215/$ - see front matter & 2011 Published by Elsevier Ltd. doi:10.1016/j.enpol.2011.02.054

the diverse scale and scope of national resource endowments, energy needs, and economic interests. This paper examines the problem of oil insecurity in East Asia, looks at existing efforts at stockpiling, and suggests possible regional solutions for ensuring emergency supplies.

2. Regional energy security in East Asia East Asia has seen a pattern of increasing energy insecurity in recent years, as economic growth, particularly in China, has meant that energy supplies from local and regional sources have been unable to keep up with demand. Despite the current global economic downturn, the outlook for the medium and longer-term future looks particularly troublesome, with rising consumption levels of crude oil and oil products in the countries of East Asia occurring as depletion of regional and global petroleum reserves continues. Table 2 compares the oil consumption and imports of China, Japan, and South Korea with those of other leading economies. These three countries all rank in the top ten world oil consumers, and top five world oil net importers. Aside from dependence on oil imports from the Middle East, with its attendant risks, there is also a danger of tension among major oil-importing countries in the region stemming from an oil shortage within the Asia-Pacific region itself. Many countries in the region have territorial disputes over off-shore islands or continental shelves that may contain oil. These include disputes between South Korea and Japan over the Tokdo/Takeshima islets in the East Sea (Sea of Japan), between China, Taiwan and Japan

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over the Senkaku/Diaoyu islets and the continental shelf in the East China Sea, and between China and the ASEAN countries over the Spratly Islands in the South China Sea. While these disputes remain a concern, the immediate problem is the effect of oil market volatility on the regional economy. The Asia-Pacific region as a whole had net imports equal to nearly two-thirds of the 25 million barrels per day of oil and oil products it consumed in 2007 (BP, 2008). The import dependence is even higher in the OECD countries in the region (i.e., Japan, South Korea, Australia, and New Zealand), which depend on imports for more than 90% of their oil, a ratio that will increase to 94% by 2030 (Ehara, 2003). In East Asia as a whole, import dependency is forecast to increase from the current 30% to 74% in 2030. Leading the recent regional growth in import dependence is China, which in 1992 became a net oil products importer and in 1996 switched from a net exporter to a net importer of crude oil. Fig. 1 shows the change in China’s oil production and consumption pattern from 1990 to 2010. In 2008, China consumed 8 million barrels per day of oil and became the second-largest oil consumer in the world. During the same year, China’s net oil imports were approximately 3.9 million bbl/d, making it the third-largest net oil importer in the world next to the United States and Japan. As of 2009, China supplanted Japan as the world’s second-largest net oil importer (BP, 2010). China’s oil consumption and imports situation has been described as follows: ‘‘What is unique about China – the largest oil consumer in Asia and the second-largest in the world – is that its demand has been growing very fast, while domestic production has been stagnant. This has led to rapidly rising net oil import requirement.’’ (Reuters, 2 April 2007: ‘‘China’s SPR: Massive Buildup, Policy Imperatives’’)

China’s oil import dependency ratio was about 50% in 2008, but FACTS Global Energy forecasts that the ratio will increase up to 70% in 2020, with net oil imports increasing to more than 9 million bbl/day, as shown in Fig. 2.

3. Oil stockpiling approaches to address energy supply security Energy security in the Asia-Pacific region, as noted above (and in other articles in this Special Issue), remains a complex and multifaceted challenge. The sheer scale of diversity and scope of diverging national interests in the region have significantly impeded even efforts at coordination. First among these are the vastly different sizes and levels of development of the countries in the region. Although the Association of Southeast Asian Nations (ASEAN) represents a dynamic, populous region, its total economy and oil consumption are not significant compared to those of Northeast Asian countries. Tomoko Hosoe of Facts, Inc., and the East–West Center (as quoted in Giragosian, 2004) noted that Japan’s oil stock holdings were large enough to supply all of ASEAN’s net oil imports for more than two years. Because of the vast gap in demand, Hosoe concluded, ’’ASEAN can do very little in terms of supply to East Asia.’’ Providing oil security in the region thus will require both longterm and short-term policy measures (APERC, 2000). Long-term

Table 1 Impact of the first and second oil crises on the ROK economy. Source: Shin, 2005.

1st oil crisis (1973–74) 2nd oil crisis (1979–80)

International oil market

Effects on Korean economy

Oil shortage Oil price (%) increase

Economic growth

Oil price increase

7.40

3.9 times

11.8%-6.7%

3.7 times

8.60

2.3 times

6.8%-  4.3% 2.8 times

Fig. 1. Sources: USDOE EIA (2011a) International Energy Statistics (data through 2009); UDOE EIA (2011b) Short-term Energy Outlook (forecasts, 2010–2012).

Table 2 World Top 10 primary energy consumers, oil consumers, and net oil importers. Sources: Top World Primary Energy Consumers and Top World Oil Consumers, BP Statistical Review of World Energy 2010 (BP, 2010); Top World Net Oil Importers: USDOE EIA, Country Analysis Briefs, July 2009. Rank

1 2 3 4 5 6 7 8 9 10

a

Top World primary energy consumers (2009)a

Top World oil consumers (2009)

Country

Country

Consumption (million B/D)

United States China Japan India Russia Saudi Arabia Germany Brazil South Korea Canada

18.7 8.6 4.4 3.2 2.7 2.6 2.4 2.4 2.3 2.2

22.2 10.2 5.2 3.8 3.2 3.1 2.9 2.9 2.7 2.6

World Total

84.1

100.0

Share (%)

United States China Russia India Japan Canada Germany France South Korea Brazil

19.5 19.5 5.7 4.3 4.2 2.9 2.6 2.2 2.1 2.0

World Totala

100.0

World total primary energy consumption in 2009: 11,164 million TOE (BP, 2010).

Top World net oil importers (2008) Share (%)

Country

Net imports (million B/D)

United States Japan China Germany South Korea India France Spain Italy Taiwan

11.0 4.6 3.9 2.4 2.1 2.1 1.9 1.5 1.5 0.9

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Fig. 2. China crude production and net oil import requirement. Source: Graph format after, and 2015/2020 projections from, FACTS Global Energy (Fesharaki and Wu, 2008). 1990–2009 historical data from BP (2010). 2010 projections from USDOE EIA (2011b).

Fig. 4. Relative net benefits of coordinated oil stockpiling arrangements versus volume stored in non-U.S. APEC Nations. Source: Leiby, 2003. Fig. 3. Relative net benefits of coordinated oil stockpiling arrangements versus volume stored. Source: Leiby, 2003.

measures would include diversifying oil import sources beyond the Middle East, improving oil use efficiency, developing alternative fuels to oil, and cooperation between oil producing and consuming countries. Short-term measures can include mandatory restraining of oil consumption during an emergency, fuel switching, disseminating accurate oil market information to discourage hoarding or panic purchases, and/or drawdowns of emergency oil stockpiles. There has been a recent movement recognizing the importance of establishing strategic stocks of oil as a reserve against sudden cuts or shortfalls in oil supplies. According to a cooperative stock analysis conducted by Oak Ridge National Laboratories (ORNL) in the United States, all oil consuming regions in the world remain quite vulnerable to supply disruptions. By reducing competition at times of shortfall, oil stockpiling provides benefits not only to the stockpiling economies but also to other economies with no stake in the stockpile. This public good aspect of stockpiling justifies collaborative initiatives in oil stockpiling. Fig. 3 (from Leiby, 2003) demonstrates the advantages, based on the ORNL model, of a globally coordinated joint stockpiling approach over regional stockpiling approaches. Fig. 3 also shows that there is a net benefit, over a range of capacities from zero to 1200 million barrels, for coordinated oil stockpiling in the Asia-Pacific region.

Oil consuming regions could benefit from more stockpiling. Collective groups of countries sharing a reserve generate a larger size and achieve greater benefits than the sum of individual countries acting alone. ORNL’s Asia-Pacific study shows increasing benefits from the expansion of collective reserve size up to about 600 million barrels. A related study by ORNL (Leiby, 2003) showed qualitatively similar results, with net benefits of increased oil stockpiling among the APEC nations (excluding the U.S.) rising until storage volumes reach 900 million barrels (see Fig. 4). Additional qualitative benefits of coordinated international oil stockpiling, including the ‘‘international public good’’ aspects of strategic oil stockpiles, are described by Mukherjee (2008). Currently, however, different policies and measures are being pursued by the economies of Northeast Asia, without much regional coordination. Taiwan and Indonesia maintain independent oil stocks. China and India are establishing strategic oil stocks. Japan and South Korea are International Energy Agency (IEA) members. The International Energy Agency (IEA) works to promote energy security in cooperation with regional organizations such as APEC and ASEAN (Ehara, 2003). In terms of oil stockpiling, the IEA’s Agreement on an International Energy Program (IEP) requires participating countries to maintain emergency oil reserves equivalent to at least 90 days of net oil imports, and to participate in a crisis-allocation system through an Emergency Sharing System. ASEAN members signed the ASEAN Petroleum Security Agreement in Manila in 1986, an important strategic approach containing sudden shortfalls in oil supplies. The Manila agreement

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specifically established an ASEAN Emergency Petroleum Sharing Scheme for petroleum products in times of both shortage and oversupply. The overall trend of decreasing oil stocks among IEA members for the past 20 years and a steady decline in spare oil production capacity – until the recent global economic downturn – by OPEC (APERC, 2002), have also served to reinforce the importance of strategic reserves such as the IEA and ASPA systems. There are many different models for stockpiling emergency supplies, both in terms of financing, type of reserves held, ownership (public or private) of the reserves, and whether the reserves are held by individual countries or jointly (Soh, 2006). Strategic petroleum reserves (SPR) are related to national security and are thus different from commercial oil stockpiles. Strategic stockpiling is classified into three types: state stocks, agency stocks and private (or company) stocks. The state stocks are financed, managed and operated by the government organizations or organizations entrusted by the government, while the agency stocks are managed and operated by the agency and financed by the members of the agency who are oil-related businesses. In the private stockpiling system, all the costs of stockpiling are borne by oil-related companies. The U.S. Strategic Petroleum Reserve is financed entirely by the federal government. Japan and South Korea use a combination of state stockpiling and private stockpiling. The state stocks in Japan and the ROK are managed and operated by JOGMEC (the Japan Oil, Gas and Metals National Corporation) and KNOC (2002) (the Korea National Oil Corporation), respectively. There are other varieties of stockpiling approaches in use in Europe. Many of the European countries have adopted the private stock system, but some countries combine the agency stock system with private stock system. Strategic petroleum stockpile agencies in Europe are CPSSP (Comite Professionnel des Stocks Strategiques Petroliers) and SAGESS (Les Stocks de Securite de Produit Petroliers en France)

¨ in France, EBV (Erdolbevorratungsverband) in Germany, CORES (Corporacio´n de Reservas Estrate´gicas de Productos Petrolı´feros) in Spain, and COVA (Centraal Orgaan Voorraadvorming Aardolieproducten) in the Netherlands. The U.S. holds only crude oil, while small countries hold only petroleum products. Most countries hold both crude and products. Japan and South Korea set separate reserve requirement for liquefied petroleum gas (LPG). European Union members are allowed to conduct joint stockholding both within the EU and outside the member states by EU Directive. However, joint stockholding among EU member countries has not yet been widely observed. Table 3 categorizes the different oil stockpiling systems of IEA member countries.

4. National approaches to stockpiling in the East Asia region The three countries in the region with the largest oil consumption – Japan, the ROK, and China – each have or are building national oil stockpiling systems. Table 4 summarizes the different approaches to stockpiling in use in Japan, the Republic of Korea, and China, including a list of the organizations involved, the stockpiling system used, and current and future oil stocks included. 4.1. Japan Japan started building private oil stockpiles in 1972. In 1975, the Japanese government enacted the Petroleum Stockpiling Law, requiring private oil companies to hold oil stocks, and started the 90-days stockpiling plan. The private stockpiling target was set to 70 days of refined product consumption in 1989. State stockpiling in Japan was initiated in 1978 with the enactment of the Petroleum Development Corporation Law, and the

Table 3 Oil stockpiling systems of IEA member countries. Source: MOCIE, KEEI, 2006. Stockpiling system

Countries

Private stocks State stocks Private þ state stocks Private þ agency stocks Private þ state þagency stocks

Australia, Austria, Belgium, Greece, Italy, Luxemburg, New Zealand, Portugal, Sweden, Switzerland, Turkey, Canada, Norway, and U.K. U.S. Japan, Korea Czech Republic, Finland, France, Hungary, Netherlands, Germany, Spain, and Denmark Ireland

Table 4 Stockpiling systems and stocks of Japan, Korea and China. Sources: MOCIE, KEEI, 2006; Shin, 2005; Hanguk Gyungje, 2010; China Daily, 2011. Japana

ROK

China

Japan Oil, Gas and Metals National Corporation (JOGMEC) State and private

Korea National Oil Corporation (KNOC)

State Oil Stockpiling Center

State and private

State and private

74.5 MMbbl (crude: 85%, products: 15%) (53.9 days)—2004.2 73.4 MMbbl (crude: 50%, products: 50%) (55 days)—2004.2 147.9 MMbbl (108.9 days)—2004.2

178 MMbbl at the end of 2010

Total

48.32 million kl (50.87 million kl in crude base) (91 days) 43.11 million kl (products: 53%, crude: 47%) (82 days) 91.43 million kl (173 days)

Future plan State Enterprise Total

50.00 million kl (completed in 1998) N/A N/A

141.0 MMbbl (by 2013) N/A N/A

Stockpiling organization Stockpiling system Current stocks State Enterprise

N/A ¼Not applicable. a

One million kl (kiloliters) is equivalent to 6.29 MMbbl (million barrels), in the case of crude oil.

168 MMbbl at the end of 2010 346 MMbbl at the end of 2010 (36 days) Planning stage Planning stage Planning stage

Eui-soon Shin, T. Savage / Energy Policy 39 (2011) 2817–2823

national strategic petroleum reserve system was established. According to the Law, JNOC (Japan National Oil Company) was made responsible for the ownership, management, and operation of the state oil reserve. The state reserve volume was set at 30 million kiloliters (kl) in 1978 and the strategic reserve was stored in large tanks or in private oil companies’ storage tanks before the national storage base was constructed. All of Japan’s state stockpile is in the form of crude oil. The target volume was increased to 50 million kl in 1989. Ten national storage bases were completed by 1996 and the goal of 50 million kl in storage was accomplished in 1998. In February 2004, JNOC and the Metal Mining Agency of Japan were merged into JOGMEC (Japan Oil, Gas, and Metals National Corporation) and METI (the Ministry of Economy, Trade and Industry) nationalized the national storage base and state petroleum reserve, and entrusted the state oil stockpiling task to JOGMEC. The operation of the national storage base is consigned to the private operation service company by JOGMEC. The Japanese government is considering decreasing the enterprise mandatory storage volume to 60–65 days from the present level of 70 days.

4.2. Republic of Korea In response to the two worldwide oil crises of the 1970s, the ROK government established KNOC (Korea National Oil Corporation) in 1979, and began strategic oil stockpiling. To support the stockpiling, duties were imposed on all imported oil. A three-phase strategic oil stockpiling plan was established to construct the national strategic oil storage base. The first phase was to build 44 MMbbl storage capacity during 1980–1988, the second phase was to build 52 MMbbl during 1990–1999, and the third phase was to build 50 MMbbl during 1995–2010, with a total capacity of 146 million barrels. In the early 1980s, the government planned a state stockpiling volume of 36 million barrels, which was equivalent to 60 days of daily consumption, to be met by 1990, and there was no requirement for private mandatory stockpiling. South Korea introduced a mandatory requirement for stockpiling of private enterprises starting in 1992. It required crude oil refiners and oil products importers to hold 40 days of domestic sales volume, and LPG importers and petrochemical enterprises to hold 30-day volumes. As of April 2007, KNOC held 76 million barrels of state strategic oil stocks, 64 million barrels of crude oil and 12 million barrels of petroleum products, totaling approximately 34 days of net import cover. By May 2010, KNOC had built and was operating nine strategic storage bases with a total storage capacity of 146 million barrels. The actual state strategic oil reserve had been increased to 120.75 million barrels as of May 2010, and the South Korean government plans to increase the state reserve to 141 million barrels by 2013. What is unique about the South Korean strategic oil system is KNOC’s joint oil stockpiling businesses with foreign partners. KNOC (2003) leases unfilled storage facilities to oilproducing countries or international traders. The joint stockpiling business begun in July 1999 with Statoil (Norway’s state oil company) and the contract volume was expanded from 11.3 million barrels to 38.7 million barrels. KNOC’s joint stockpiling partners include Algeria’s state-run Sonatrach, China’s Unipec and Chinaoil, international oil majors such as Total and Shell, and international trading giants Glencore, Vitol, and Trafigura in addition to Statoil. During the initial lease period (mid-1999– mid-2002), Statoil paid facilities-use fees of USD 0.65–1.0 per barrel per year, and handling charges of $0.0275 per barrel of throughput. KNOC holds the preemptive right to purchase the jointly-stored crude oil in case of emergency. South Korea’s stockpiling system provides diverse benefits. It improves the country’s ability to cope with an oil crisis by

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increasing the volume of stockpiles and, by allowing oil to be sourced from more distant suppliers, contributes to diversifying supply sources, thereby easing the Asian oil cost premium. The joint oil stockpiling contracts also decrease the financial burden of oil stockpiling on the ROK government through leasing of tanks to foreign partners, while allowing partners to develop or expand their market share in Northeast Asia. Now that the state strategic oil reserve bases construction project is completed, the Korean government plans to accelerate the ‘‘Northeast Asia oil hub project’’ to promote Korea as a center of oil flow in the Northeast Asia by constructing commercial oil reserve bases in Ulsan and Yeosu with capacities of 27.89 million barrels and 8.9 million barrels, respectively (Hanguk Gyungje, 2010). 4.3. China The Chinese government officially announced its intention to establish a government-administered strategic oil reserve program during the 10th 5-year Plan (2000–2005). China’s SPR plans have three phases: The first phase was the construction of stockpiling facilities in Zhenghai and Aoshan in Zhejiang Province, Qingdao in Shandong Province, and Dalian in Liaoning Province, with a total storage capacity of 101.9 million barrels. This first stage started in 2004 and was completed in the early 2009. The phase 1 oil storage could cover about 13 days of China’s oil consumption, 24 days of net oil imports (crude oil and oil products combined), and 30 days of net crude imports as of 2008. The second phase of the state reserve of 170 million barrels will be completed by 2011. The third phase, which is in the planning stages, will be completed by 2020, by which time the completed strategic petroleum capacity will be the equivalent of 100 days of oil imports, according to China’s midand long-term oil reserve plan. China’s strategic stockpile of oil reached 178 million barrels at the end of 2010, and the contents of its commercial inventory reached 168 million barrels. Together, the strategic and commercial inventories are currently capable of meeting about 36 days of domestic oil demand (China Daily, 2011). China’s SPR system is comprised of state and corporate strategic oil reserves. State-owned oil companies are required to hold government-mandated oil stocks and build their own commercial oil reserves. The State Oil Stockpiling Office, which was established in 2004 by the NDRC (National Development and Reform Commission), is responsible for China’s strategic oil reserve policy. The management and operation of the SPR is carried out by the State Oil Stockpiling Center.

5. Development of joint oil stockpile initiatives in Asia-pacific In recent years, several international fora have been held to discuss joint oil stockpile initiatives in the Asia-Pacific region. These have included:

 IEA/China Oil Stocks and Emergency Response Seminar, Beijing, China, 9–10 December 2002

 APEC–EWG Oil Emergency Response Workshop, Portland, Oregon, USA, 18 June 2003

 APEC Joint Oil Stockpiling Workshop, Seoul, ROK, 2 December 2003

 Second ASEANþ3 Oil Stockpiling Forum, Philippines, February 2004.

 Seventh ASEANþ3 Oil Stockpiling Forum, Philippines, 28 November 2008. Key initiatives discussed at these and other meetings are described below.

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At the ‘‘First Roundtable of Asian and Middle East Ministers on Regional Oil and Gas Cooperation’’ held in New Delhi, India, on 6 January 2005, participants noted that Arabian Gulf producers and Asia’s oil-importing economies continue to face growing mutual dependence, as expanding economies like China and India seek more oil abroad and producers look to rising regional demand to justify investment in higher production capacity. Asia, including India, takes some 75 percent of crude exports from the Middle East (BP, 2010), which is home to nearly twothirds of the world’s oil reserves, and Asia’s reliance on the Middle East is set to rise as the region leads global demand growth and its own resources dwindle. In turn, Gulf producers also need to secure supply outlets in booming, oil-consuming nations. Importers also would like to stamp out once and for all the notion of an ’’Asian Premium’’ – whereby Asian importers pay more for Saudi and Gulf crude than Western counterparts – by establishing a more liquid regional market. Rigid long-term arrangements might increase supply security, but they are not necessarily the best route to lower costs. Production of West Texas Intermediate, the U.S. benchmark grade of crude oil, declined three-quarters over two decades, and the U.K.’s Brent declined two-thirds in one decade, and both are set to decline further. In contrast, production and demand is booming across Asia. Asia needs an Asian market for Asian realities. At the 2005 New Delhi roundtable, India’s Petroleum Minister Alyar stated, ’’Asia should build a joint oil storage facility for an emergency stockpile to enjoy uninterrupted supply. The storage depots would give both sellers and buyers security of supply and demand’’. The oil consuming countries at the roundtable, led by Japan, South Korea, and China, stressed the need for stability and security of supplies through mutual investments, stockpiling and the forging of an Asian energy policy. Japan suggested that a combination of stockpiling crude, energy conservation measures, spare upstream capacity, and increased upstream investment is needed to ensure supply security. Korean officials mooted the idea of creating a joint stockpile for Asia, storing supplies in countries where facilities are available. They stressed the need for an Asian energy policy forum at the ministerial level, saying that organizations such as the International Energy Agency do not take care of Asian interests. At the first ASEAN-plus-three energy ministers meeting in the Philippines, 9 June 2004, Japan’s Economic, Trade, and Industry Minister Shoichi Nakagawa told his colleagues, ’’Oil stockpiles, which form the basis of energy security response, are not yet sufficient in our region. It is necessary to further strengthen the program and to consider a coordinated operation in the future.’’ The ministers at the meeting agreed on the need for a joint regional oil stockpile, saying the move would ensure ’’greater energy security and sustainability’’ in a region expected to become the largest energy consuming area in the world. The ministers noted the existing oil stockpile programs of Japan and South Korea and also welcomed the initiative of China to establish a national oil stockpile program. The ASEANþ3 consists of the 10 ASEAN countries – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam – and Japan, China and South Korea. Philippine Energy Secretary Vincent Perez said Southeast Asian countries might set up a regional stockpile. It was announced that the Philippines had proposed the former U.S. naval base at Subic Bay north of Manila as a storage facility for Libyan oil for distribution in Asia. Thailand’s Deputy Secretary of Energy announced in a seminar, ’’Energy Economy: Thailand as an energy hub’’ that Thailand plans to construct an oil storage site in its south for Asian countries as part of its ‘‘Land Bridge Project’’. He said that not

only Mideast oil-producing countries but also Asia’s major oil consumers such as China, Korea and Japan are also interested in investing in the site. The Asia Cooperation Dialogue (ACD) Energy Working Group was established in 2001 with the objective of exploring possibilities of creating cooperation within the energy sector. The working group’s member countries are Bahrain, Bangladesh, Brunei, China, Cambodia, India, Indonesia, Japan, Kazakhstan, South Korea, Kuwait, Laos, Malaysia, Myanmar, Oman, Pakistan, the Philippines, Qatar, Singapore, Sri Lanka, Thailand, and Vietnam. At the Second Meeting of the (ACD)—Energy Working Group, Manila, Philippines, 19–20 May 2004, ACD members agreed to study the possibility of joint stockpiling as one of the measures to ensure the reliable supply of oil. The ACD declaration said a seven-member panel will be formed to examine ’’the possibility of joint stockpiling among interested member countries.’’ At the 29th APEC Energy Working Group (EWG) Meeting, Hanoi, VietNam, 16–17 March 2005, the United States presented a proposal for implementing Best Practices for the Establishment and Management of Strategic Oil Stocks, as endorsed at EMM6 (the Sixth Meeting of APEC Energy Ministers; see, for example, APEC, 2004; Jung, 2007). A workshop was held in Honolulu, USA, in the second half of 2005 and prior to EMM7. Its objective was to discuss and refine implementation, including implementation in the context of varied stockpile models and economy-specific situations, the feasibility of joint or regional oil stocks, how to use the IFAT model, and the identification of priority principles. Members endorsed the proposal. At the 7th ASEANþ3 Oil Stockpiling Forum, Manila, Philippines, on 28 November 2008 (ASEANþ3, 2008a), the Philippines offered to host a regional oil stockpile if one is agreed to by other nations in the region. Vietnam, the Philippines, and China have begun developing national oil stockpiling plans, with the former assisted by Japan and South Korea. The ASEANþ3 countries also began consultations through a set of ‘‘Working Group Meetings on the Development of Oil Stockpiling Roadmap (OSRM)’’ (ASEANþ3, 2008b). The Working Group is tasked with putting together a road map for stockpiling in the region over the period 2008–2010. Nakai (2009) lists four principles of the ASEANþ3 Roadmap effort as having regional stockpiling based on voluntary and non-binding cooperation, designing stockpiles so as to offer mutual benefits, making sure new regional stockpiling systems respect each country’s existing national and regional stockpiling policies, and addressing ASEANþ3 stockpiling using a step-by-step approach with a long-term perspective.

6. Possible cooperation in East Asia There are several options to encourage cooperation in stockpiling in East Asia. One is to enlarge and enhance the IEA to include more Asian countries. Most of the major growth in world oil demand and imports come from the Asia-Pacific region. As China and India have embarked on stockpiling programs, it is a right time to induce China and India to join the IEA. While these two countries remain outside the agency, they did agree at a meeting with energy officials from the United States, Japan, and South Korea in June 2008 to stockpile reserves for concerted actions at the time of supply disruption. The three IEA members at the meeting pledged to help China and India to establish oil stockpile systems and introduce techniques about how to employ the stockpiled reserves in case of emergencies (Xinhua, 2008). One option to build on existing efforts would be regional consumer cooperation. This option would create a new regional organization (an ‘‘Asian Energy Agency’’) and concentrate on building regional stocks (see, for example, Gavin and Lee, 2008).

Eui-soon Shin, T. Savage / Energy Policy 39 (2011) 2817–2823

In a METI (Ministry of Economy, Trade and Industry) report looking at how to develop international energy strategy by 2030, Japan proposed to establish an Asian IEA after China and India setup their national stockpiling plans, to jointly deal with the growing oil import dependency of both China and India, pointing out that only Japan and South Korea are members of IEA. Japan and South Korea proposed constructing a joint oil stockpile facility to ASEAN in 2003. ASEAN disagreed, mentioning the enormous financial investment required and the vulnerability of such a facility to attack. These concerns can be addressed through operation of a regional organization. In such a scheme, each country would carry its own stocks. In addition, a ’’joint-company’’ stockpile could be created, owned by a few governments, with options or tickets sold to others. Another option to address oil-supply security issues is regional producer–consumer cooperation. Middle East producers oppose strategic oil stockpiles as limiting their ability to control prices. Therefore a stockpile jointly owned by member producers and consumers, held in Asia at targeted levels, could be proposed. This would require exporters to deposit a proportion of incremental exports into a regional stockpile as a hedge against supply disruptions. A third possibility is to instead turn to Russia as a source of stockpiling. Russia considered stockpiling one-third of its 2001 oil exports. The Russian Energy Minister also proposed an EURussia joint oil and gas stockpile utilizing harbor storage and/or salt cavern near the Caspian Sea. It would be possible to construct a regional stockpile in the Russian Far East financed by Russia and Northeast Asian countries. In the final analysis, it is likely that a combination of the three approaches mentioned above will be useful to Northeast Asia, resulting in establishment of an Asian version of the IEA when each country in the region accrues a certain level of emergency stockpiles. Such an organization could start with Japan, the ROK, China, and Russia (the Russian Far East), and then extend to other Northeast Asian and ASEAN countries. During an interim period prior to the countries of the region reaching appropriate stockpile levels, cooperation would include the leasing of spare storage capacity available in Japan and the ROK to China and other countries. Eventually, the regional oil stockpiling organization would be expanded to cover all APEC members. Part of the mission of the regional organization would be to promote joint cooperation with the IEA and with oil exporting Middle East countries. Despite its benefits, cooperation on oil stockpiling in East Asia will face significant obstacles to implementation. One of the concerns is the difficulty of cooperation on significant energy security issues among traditional military (and current economic) rivals in the region. Another concern (for schemes involving Russia) is Russia’s influence over oil consumers as a producer nation. In addition, potentially diverging geopolitical interests among joint stockpile participants may make cooperation more difficult. There could also be concerns among participants about the impacts of cooperation on their national security, challenges in setting up the international administrative procedures for a joint stockpile, and the influence of financial speculation in oil commodities markets on the costs and operations of oil stockpiles (see, for example, Itoh, 2009; Choo, 2009). This is hardly a complete list of the possible impediments to joint oil stockpiles in East Asia, and the challenges to regional stockpile development and operation do require careful assessment. Overall, however, the suite of economic, energy security/risk reduction, and political (including confidence-building) benefits from establishing stockpiles, and the regional structures needed to operate them seem likely to make the establishment of regional fuel stockpiles worthwhile.

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