Redefining Energy Security

Yonghun Jung

136

-embark on environmentally friendly energy projects and programs in an effort to accommodate public interest in environment conservation. Now that climate change and the Kyoto Protocol are deeply engrained in the minds of all walks of the society, it is hard to imagine that the issue of climate change would ever fade away unnoticed from the energy scene.

resources neglected careful economic assessment of the investment vis-a-vis other alternatives.

The focus of energy security has shifted gradually to energy price and environmental protection from the mere physical supply. Involving these dimensions, energy security means to safeguard the supply of energy in an environmentally friendly and economically efficient way, making energy supply structure a sustainable one. There are two elements in this concept: one is to improve the capacity to brace for potential disruptions, and the other is to systematically reduce the risk of disruption itself. Both elements require a clear strategy and identified targets in light of the expanding scope of clean fuels and technologies that are available.

Simple economics teaches that it is better to have more alternatives. Since the oil crisis, most governments have been searching for alternative sources of oil and alternative forms of energy. The oil crisis served as an impetus to more extensive use of coal-fired and nuclear power, while adoption of the UN Framework Convention on Climate Change (UNFCCC) has encouraged natural gas consumption and energy efficiency improvement. Energy industry and policymakers alike have been forced to make corrections in their ways into the future.

Most projections by international organizations on energy demand and supply in the next two decades suggest that demand for conventional energy including oil, gas, and coal will grow in line with past trends. Although the rate of growth in energy demand is not expected to change very much, the volume of energy trade is projected to expand considerably. Hence, the economic impact arising from an international energy supply disruption will be significantly larger than in the past.

Finding alternatives is not an easy task for any government. As seen in Figure 2, despite pronounced energy diversification policies of the US and Japan in the aftermath of the oil crisis in the 1970s their dependency on the Middle East oil has in fact gone up quite substantially. This demonstrates how difficult it is to change the course of the energy supply system.

Yonghun Jung

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-[Figure 2] Energy Security Index of Japan and U.S.A. (1970 and 2000)

93%

72%

13%

82%

51%

87%

31%

39%

68%

23%

85%

100%

45%

25%

5%

100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Imported Energy/TPES

Share of Oil/TPES

Oil Import dependency

Middle East Dependency

Imported Energy/TPES

Share of Oil/TPES

Oil Import dependency

Middle East Dependency

1970 2000

Japan USA

Source: IEA(2002), "Energy Balances of OECD Countries" and BP(2002), "Statistical Review of World Energy" and EDMC(2002), "Handbook of Energy & Economic Statistics in Japan"

Investment in alternative energy sources has two-fold merits. First, it would increase the flexibility of the energy supply system to cope with contingencies. Second, it could serve as a critical bargaining chip for price negotiation on energy imports. For example, energy source diversification could lower dependence on suppliers, lowering energy price. In the case of Asia, improving energy security by adding alternatives to the energy mix can be translated into reducing the so-called Asian premium on the cost of imported oil. In this context, natural gas and new and renewable energies appear to be most attractive alternatives for diversifying energy sources.

Natural gas appears to be widely appreciated as a relatively clean fossil fuel, although its reserves are finite, the perception of natural gas availability has changed dramatically. Some even argue that natural gas resources are quite abundant and more widely distributed that those of oil. Currently, growth in natural gas consumption growth is outstripping that of other fuels. Most nations including China, Japan and Korea have increased the share of natural gas in total primary energy

supply, and they are likely to continue doing so since the supply cost of gas has been on a steady decline. With abundant resources and declining supply cost, expansion of natural gas consumption to, say, a quarter of total primary energy supply, which is its level in the industrialised economies of the OECD, would significantly improve energy security in Asia by reducing hopelessly high oil dependence. The main obstacles to further expansion of gas use are lack of pipeline infrastructure the high price of gas relative to oil.

In order to enhance energy security Northeast Asian Economies including China, Japan and Korea are either considering or implementing trans-boundary natural gas pipeline projects aiming to exploit natural gas reserves in the Russian Far East and Western Siberia. The Irkutsk, Sakhalin, and Yakutsk projects have been under scrutiny for economic feasibility. These projects are regarded as means to diversify energy sources. However, these projects would be neither inexpensive nor easy to implement.

Energy security is the main raison d'etre for the nuclear programme in most economies. Unpopular as it may be in the wake of a series of accidents including Three Mile Island in the United States, Chernobyl in Russia, and Tokai Mura in Japan, no one can deny the contribution of nuclear power generation to the stability of energy supply even at a time of fast-growing demand. Nuclear power generation, whether one likes it or hates it, has become an integral part of the energy supply system.

For those countries with few energy resource endowments and substantial nuclear power programmes, maintaining at least the current level of nuclear generating capacity is essential to safeguarding the energy supply system. To illustrate, if nuclear power programmes were to be abandoned at a stroke in Korea or Japan, a huge amount of oil and natural gas would need to be imported, and oil stockpiles would have to grow in proportion to oil consumption levels. This would require greatly increased capital expenditure on refineries, pipelines, and storage facilities. Environmental costs would also soar if oil and coal consumption were to grow at the expense of nuclear power.

Debate on nuclear power generation is thus about a choice among alternatives.

Yonghun Jung

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-Non-conventional oil, including Australian oil shale, Canadian oil sands, and Venezuelan orimulsion, could make a debut as a major fuel for the next generation.

Non-conventional reserves are much larger than conventional oil reserves, and their economics seem to be better than those of nuclear power and most renewable energy sources if environmental costs are not factored in. The environmental costs of production (in-situ), processing and consumption of non-conventional oil are declining.

Development of new technologies for producing non-conventional oil in a cost effective and environmentally friendly way could pave the way for its introduction and expansion in Asia and elsewhere.

The role of new and renewable energy resources may play in future energy systems has been hotly debated recently along with growing awareness on environment.

APERC's forecast indicates that renewable energy consumption (including conventional hydropower) will increase quite modestly in APEC economies over the next two decades. Some individual New and Renewable Energy (NRE) sources are reaching commercial viability in some areas of application, but most NRE technologies still fall far short of being competitive with conventional fossil fuels in general use. Also, owing to the intermittency of sun and wind, the ultimate share of renewable technologies for electricity production will be limited unless much cheaper technologies for energy storage can be developed.

Oil stockpiling has been used effectively as a buffer to external shocks including accidents, extreme weather event and temporary disruptions. It has not only improved emergency preparedness, but has also played a role in preventing major crises. It would not be an exaggeration to say that it has served well as a bargaining chip in oil price negotiation. Although the cost of oil stockpiling is a matter for debate, its benefits, both direct and indirect, are worthy of serious consideration by those economies with high or fast growing foreign oil dependences. China's interest in oil stockpiling appears to be opportune, taking into account its fast growing oil demand and dwindling oil production.