ASIAN INTELLIGENCE An Independent Fortnightly Report on Asian Business and Politics No. 826
Wednesday May 4, 2011
The Roller-Coaster Ride in Oil Prices (US Dollars per Barrel) 160
140 120 100 80 60
40 20 0
REGIONAL OVERVIEW ..................... 2
PHILIPPINES ..................................... 10
CHINA .................................................... 5
SINGAPORE ........................................ 11
HONG KONG ........................................ 6
SOUTH KOREA .................................. 12
INDIA ..................................................... 7
TAIWAN .............................................. 13
INDONESIA .......................................... 8
THAILAND .......................................... 14
JAPAN .................................................... 8
VIETNAM ............................................ 15
MALAYSIA ............................................ 9
EXCHANGE RATES ........................... 16
POLITICAL & ECONOMIC RISK CONSULTANCY LTD.
Political & Economic Risk Consultancy, Ltd.
Issue #826 insist on developing nuclear power even though they are unwilling or unable to initiate security precautions that are up to international code?
REGIONAL OVERVIEW Energy as a force uniting or dividing Asia Wanted: someone with the wisdom King Solomon to sort out the world’s energy conundrum. What is the best energy mix countries should be pursuing in terms of oil, gas, nuclear, hydro, bio or some other? Is it better to risk global warming, massive oil spills or deadly radioactive leaks? Is it worth risking higher food prices by using agricultural products to produce fuel? Is it safer to source from Libya, Iraq or Russia? Should a country compete against China for energy resources and fight over disputed territory that might contain oil or gas or look for ways to cooperate with China to develop new sources of energy or to tap previously unreachable fuels? What is the best way to ensure security not only of energy imports but also of domestic supply systems? How much should a country spend on safety precautions and when does “safe” really mean safe? What is appropriate regulation? Is it better to invest globally in energy resources for purposes of supply security and price advantages or to develop trading expertise? What are appropriate levels of strategic oil stockpiles? Environmentalists have one point of view – but only one. Those warning about the perils of global warming have always had trouble convincing the public that the threat from current energy consumption policies was imminent. However, this was definitely not the case with the radioactive scare following the March earthquake and tsunami in Japan. The world’s third largest economy stared the downside risks of a nuclear power disaster in the face and now has to deal with energy shortages, massive bankruptcies in industries spoiled by radioactive contamination, and health risks that could cost billions, take an unknown number of lives and last decades. At the very least, the extra checks and balances required to ensure safety in nuclear power plants will push up the costs of relying on this energy resource in Japan and elsewhere. It is possible that many governments will decide the risks of nuclear power are just not worth it and therefore will switch their sights to other sources of energy. And how should the world treat governments that
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Prior to the earthquake, the Japanese government was betting heavily on nuclear power to be a major source of the country’s energy in the future. Japan already has 54 nuclear plants, which provide 30% of the nation’s energy needs. It was in the process of building two more plants and studying proposals for 12 more. The government’s goal was to increase the share of nuclear power to 40% - 50% of the country’s total needs. In the wake of the disaster, this goal will now have to be revisited. It would not be very difficult for Japan to supplement the 4.7 GW generation capacity lost at the Fukushima No. 1 plant since, for example, the two plants currently under construction would suffice. However, construction of additional nuclear capacity is likely to encounter extreme difficulty given the bankruptcy of the socalled “Safety Myth” and the people’s loss of confidence in the technology. The objections environmentalists have to oil and coal are just as strong as they are to nuclear power. In addition to problems associated with carbon emissions and global warming, there are other safety and pollution issues. The Deepwater Horizon oil spill in the Gulf of Mexico happened almost exactly one year ago today. This nightmare highlighted the risks of offshore drilling. Since this disaster, finger-pointing is still going on. The pace of issuing new oil-drilling permits in the Gulf of Mexico has slowed. Like the Japan nuclear disaster, the oil spill in the Gulf of Mexico has prompted governments to tighten their environmental reviews. The US State Department, for example, recently ordered an additional environmental review of a proposed 1,700-mile TransCanada Corp. pipeline that would bring up to 1.1 million bpd of crude oil from Canada’s oil-sands region to Gulf Coast refineries. Proponents of renewable energy resources like wind and solar power will get a lot of support for being the “safe” energies of the future, but the reality is that these sources have no chance of accounting for more than a small fraction of global energy needs for decades, if ever, especially in countries like China, Russia, Brazil and India, which is where energy demand is growing the fastest. Then there are those
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who favor turning to agriculture for energy – crops like corn, coconuts and sugar. However, is it already clear that there are big downside risks to an energy policy linked too heavily to biofuels, not the least of which is that it can put food prices under serious upward pressure. The world’s poorest are affected a lot more directly by food price inflation than they are by fuel inflation, and a bio-fuel strategy runs even greater social unrest risks than the current strategy favoring fossil fuels. The world’s biggest and most rapidly growing users of oil and gas (namely, the US, China and India) can and will try to boost their domestic production even if this means running Deepwater Horizon-type risks. However, it will be a lot easier and less environmentally threatening for their home markets if they rely more on imports. But this is where national security risks really come into play. There are just not enough Australias in the world. Again, the risks are easier to see of you confine the perspective to Japan, but Japan’s concerns are really the same as other major fuel importers. Japan imported 86.5% of its crude oil and 22.5% of its LNG from the Middle East in 2010. Oil held 45.8% and natural gas 17.5% of its primary energy supply in 2009. In summary, Japan depends on 44% of its primary energy supply on the Middle East. This is why it has been watching with bated breath the recent upsurge of democratic movements in the Middle East and North Africa. The turmoil in Libya has really sent shockwaves through the world’s oil markets, although as the graph on the cover of this report clearly shows, the current uptrend in global oil prices began back in January 2009 – two years before events in the Middle East took a turn for the worse. Still, the 30% jump in oil prices that has taken place since the start of 2011 is starting to ring alarm bells – and with good reason. Given the fragile relationship between rising oil costs and a global economy that is still in the early stages of recovery, it is possible that the current surge in the cost of crude could seriously disrupt the global economy in the second half of this year and in 2012. The magnitude of this risk depends on such unknown variables as how long the civil war in Libya lasts and if this kind of disruptive unrest could spread to even bigger oil producers like Saudi Arabia.
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You know Middle East risks are high when those in the oil industry are starting to talk about Russia as being a safe haven. Japan has had a strained relationship with Russia since long before the Cold War started. Russia occupies islands still claimed by Japan. The two countries have fought wars in the past, and there is still no love lost between them. Yet Japan has been relying more on imports of Russian crude to reduce its dependence on Middle East oil. Japan’s imports of Russian crude from new Pacific coast ports decreased Japan’s dependence on the Middle East by four percentage points from 89.5% in 2009 to 85.6% in 2010, and the Russian share is expected to increase another 5% or so when the trans-Siberian pipeline is fully completed in 2012. Japan is not the only country looking more to Russia as a source of energy. So are Korea and China, which means governments of Asia’s three wealthiest economies are in direct competition for access to Russian resources. Add to this mix major Western oil companies like BP, Total, Shell and ExxonMobil, all of which are flocking to Russia amid turbulence in the Middle East. It is clear that leverage in the oil and gas industry is shifting to Russia. China’s position is even more complicated and in many was more vulnerable than Japan’s. Its demand for oil and gas imports is growing more rapidly; Beijing is similarly motivated to reduce reliance on Middle East and North African supplies in favor of other countries; and its historical relationship with Russia is not much better than Japan’s. On the one hand, China is actively trying to court Russia in order to get more access to its oil and gas resources, putting it in direct competition to Japan. On the other hand, it is trying to reduce Russia’s leverage by providing a market for central Asian oil and gas so countries like Uzbekistan, Turkmenistan and Kazakhstan do not have to export all their fuel to or through Russia. Moscow can hardly feel comfortable with Beijing’s initiatives towards its neighbors and the response it is getting from them. Uzbekistan recently promised to double the amount of gas it will supply China to 25 bcm a year, more than one third of the central Asian country’s current production. China began making inroads into central Asian gas markets in late 2009 when it launched a 1,800 km pipeline running from
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Turkmenistan through Uzbekistan and Kazakhstan to its northwestern frontier in Xinjiang. Many of China’s neighbors are wary about becoming too dependent on the Mainland as a market. Russia is definitely in this group, which is why it extended its Siberian oil pipeline all the way to the east coast port city of Nakhodka. Land-locked Mongolia is even more wary. It does not want to accept investment from China in developing its coal and other energy resources or to become too dependent on China as a market for these resources. South Korea is cleverly positioned itself as a much less threatening investor and partner in developing Mongolia’s energy resources. China has territorial disputes with Japan, Vietnam, Malaysia and the Philippines. Oil and gas deposits are an issue in all these disputes and could be one thing that continues to strain China’s relations with these countries. The situation is even more complicated in Southeast Asia. About the only country whose energy policy is really aligned with that of China is Myanmar, which has offshore oil and gas resources it would like to ship to China through a pipeline that is currently under construction. China is not a member of the Mekong River Commission, but the important river has its source in China and then flows through Laos, Thailand, Cambodia and Vietnam. These four countries, which depend on the Mekong for their agricultural and fishery sectors, are at the mercy of China to keep the water flowing. So far local governments on the Chinese side of the border have built some dams but nothing that has seriously damaged the flow of water to the Mekong Delta. Now, however, Laos, with the help of financing from Thailand, is proposing to build a US$3.8-billion, 1,260 megawatt dam, which Laos wants to turn into a major foreign exchange earner by selling electric power to neighboring countries. Cambodia and Vietnam are against the project, however, on the grounds that it would hurt their environments and agricultural industries. The four parties recently agreed to delay a decision on whether or not to proceed with the dam, but the more oil prices climb and the more that countries are limited in their choices for electric power, the higher the odds that this project will eventually go ahead. If it does, this dam would be the first of 11
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hydroelectric schemes proposed for the lower Mekong – nine in Laos and two in Cambodia – with a combined capacity of 13,600MW. The downside risks of such projects are obvious, but are these risks any worse than those posed by nuclear power or fossil fuels? And in the case of Laos and Cambodia, we are talking about two of the poorest countries in the world, with the shortage and high cost of power being some of their biggest obstacles to development and deterrents to attracting more foreign direct investment. The question of whether or not to dam the Mekong might seem like a small thing – but it is of vital interest to the four countries involved, and it is symptomatic of the difficult choices other, bigger countries are facing. The issues are complex and proponents and opponents both have strong arguments. It would be nice to think that the governments of the four countries can sit down at a table and come up with a solution that is optimal to all concerned, not just for one or two at the expense of the others. This is still possible. After all, the four governments have agreed to work together in the Mekong River Commission. However, it is just as possible that, in the end, individual governments will do what they think they can get away with and what they think is in their individual best interests, neighbors be damned (literally and figuratively). This is exactly the same dilemma bigger countries like India, Russia, China and Japan are facing in Asia, and the US and European countries on a glolal scale. It would be nice if the major governments concerned would cooperate on this important issue, but it is just as likely that narrow self-interest will prevail, in which case might will make right. If, as we contend, energy is one of the driving forces in the world, the major question mark of this driving force is whether the spirit of cooperation or competition prevails. At this point in time, it is impossible to say for sure, but the trend seems to be toward greater confrontation. Within Asia, China is emerging as the deciding factor. It is speaking a strategy of cooperation with its neighbors and there are examples where this is the case. But there are other examples relating to energy where China is exhibiting confrontational behavior, with no signs of being willing to compromise.
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CHINA Comments Fears about the negative impact of higher energy prices on social stability are likely to prompt the government to ask oil refiners and power producers to refrain from passing on rising costs to end-users. The recent trucker strike in Shanghai following a 5% increase in petrol and diesel prices, combined with worries that taxi drivers might also strike, show how sensitive the public is to higher prices. Since the national leadership wants above all else to preserve social stability in the period between now and next year’s generational change in political leadership, the government will go all out to protect the public from higher oil and electric power prices. China’s National Energy Administration has forecast the Mainland’s total oil consumption will rise 8% this year to 265 million tons. China’s oil imports have risen from 4.3 million bpd in 2009 to about 5 million bpd today. This means every US$10-increase in the cost of crude adds about US$18.2 billion to the country’s annual oil import bill. Considering that the country’s trade surplus last year ran more than US$180 billion, the extra cost of crude is not going to be huge economic burden on China. However, the indirect economic costs could be much larger in the form of lost production if the freeze on prices results in fuel and energy shortages, similar to what happened in 2008 when the price controls forced many small refiners controlled by local governments to shut down. Sinopec has already warned of fuel shortages if Beijing does not raise fuel prices to stem refining losses, while electricity supplies are also bumping against capacity constraints (mainly because coal-fired power plants cannot pass on rising costs to power users) and could result in power shortages throughout the country this summer. Restrictions on power usage have been put in place in central, southwestern and eastern provinces, while provinces in southern China could face electricity shortages of up to 6.2 gigawatts (about 6% of maximum demand) in the second quarter. The government has some other steps it can take to counter the upward pressure on crude prices. Oil companies might be losing money on their refining business but they are showing hefty profits from upstream activities, which can be used to cover losses on downstream business. The government can also provide relief by reducing import tariffs and allowing the renminbi to appreciate faster. These moves would help to hold down the local currency cost of oil, but in so doing they could stimulate demand for crude, putting upward pressure on the world market dollar value of crude, making matters worse for other countries, including the US. Last year China’s imports of crude grew 12.2%, representing a third of the global increase. The International Energy Agency is forecasting that the growth of China’s oil import demand will slow to 6% this year, but that would still be a very significant increase. The rapid growth in China’s oil consumption lends support to those who are arguing that, while the government might be talking about the need for more balanced growth in which private consumption plays a larger role, the government is really sticking to its tried and true model of heavy investment and emphasis on exports. This view is also supported by recent statistics showing that the profits of Mainland industrial firms rose 32% in the first quarter compared with a year ago. This does not indicate that the economy is really slowing despite the government’s tightened monetary policies. Moreover, the way truck and taxi drivers, farmers, and factory workers have been increasingly outspoken about their difficulties in making ends meet despite the threat of tough retaliatory measures by police and security forces indicates that some people really are desperate. The implication is that the benefits of high growth are going more to state-owned industry than to working-class people. This is not an impression the government wants people to have as it prepares for a generational change in leadership. While Beijing's power
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is strong, it is also brittle. Managing energy issues is critical to striking the right balance. Proof that the government views this the same way is the fact that Zhou Yongkang, China’s public security chief and a member of the Politburo, was a former president at China National Petroleum. He is just one of a long line of senior oil officials who have gone on to leadership roles covering other aspects of the economy and national security, implying energy’s central role in all these areas. The more world market prices of crude rise and the more that China invests in foreign energy assets around the world, the more important central figures in the country’s oil sector are for both economic and political reasons.
HONG KONG Comments
HK’s Changing Reliance on Oil Imports HK$ million 140,000
9.00% 8.00%
120,000 Fuel imports
100,000
% of total imports
7.00% 6.00%
80,000
5.00%
60,000
4.00%
Hong Kong’s fuel bill (mainly oil) surged from only HK$7.6 billion back in 1980 to over HK$119 billion in 2010, and as the blue line in the chart here shows, the increase has been especially rapid since 2003. Moreover, judging from the 30% increase in oil prices in the first quarter, this year’s total fuel bill could easily top HK$150 billion.
However, due to the restructuring of Hong Kong’s economy 2.00% 20,000 toward services, it is much less affected 1.00% by high oil prices than most other Asian 0 0.00% economies, which are more dependent on manufacturing than services. This is reflected in the red line in the chart here. In the 1970s Hong Kong was mainly dependent on manufacturing, but as the 1980s began the importance of this sector started to fall steadily relative to financial services, real estate, and transport (focusing on re-export business rather than transporting products made in Hong Kong). Manufacturers require a lot more fuel than bankers, stock market brokers and real estate developers. Consequently, the share of fuel imports to total imports fell sharply from a peak of 7.77% in 1982 to a low of 1.64% in 1998. Since then the share of fuel imports to total imports has been rising gradually but steadily. Last year saw a recovery from the recession year of 2009, when oil imports were depressed by both low crude prices and a declining economy. In 2010 they accounted for 3.54% of total imports, back almost to the peak of 3.69% hit in 2008. This year fuel imports could account for as much as 4% of total imports, which would be the highest ratio since 1985. 40,000
3.00%
The upturn does not mean that manufacturing is making a comeback in Hong Kong. But it does indicate that certain important sectors of the economy are becoming more energy-intensive and therefore are vulnerable to the steep increase in fuel prices that is currently taking place. Those industries include shipping and airlines (required to move both re-exports and people), local car transport, and property. There are already indications that Hong Kong’s high costs are prompting some major shipping companies to rely more on neighboring Chinese ports than on Hong Kong’s facilities. Over time this could put a damper on Hong Kong’s re-export growth. The bigger change higher oil prices is likely to force in Hong Kong is a move toward greater efficiency, especially since there is a close linkage between fuel consumption and pollution. Hong Kong is a place where
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conspicuous consumption is encouraged, not discouraged. Perhaps the biggest single factor behind the increase in the ratio of fuel to total imports over the past decade is the rise in household incomes and corporate profits. People are driving more and bigger cars. And they like prestige vehicles like BMWs and Mercedes over the new fuel efficient hybrids. Perhaps even more importantly, people and companies are demanding more from the buildings in which they live and work. There is more use of air conditioning in summer months and heating in winter months than there used to be. Buildings are wired much more for the Internet, and this has driven demand for appliances like computers and entertainment systems. The number of shopping malls and hotels has mushroomed over the past decade, and people want to be comfortable even moving between buildings in ways they never really worried about before. Hong Kong may be more service-oriented than ever, but the types of services it is using require more electric power and fuel, and this trend is likely t continue since there is really no strong incentive to cut energy use.
INDIA Comments India’s economic growth is likely to moderate in the face of high energy prices. Optimists think India can match China’s double-digit real growth on a sustained basis. However, it does not have the infrastructure to sustain this kind of growth, and high fuel prices will be a further drag. Industrial production has been decelerating for the past eight months, from highs of more than 15% in the middle of last year to an 18-month low of 2.5% in December. Industrial production grew only 3.6% in February, the result of a sharp contraction in capital goods output. There are a lot of complaints about difficulties in land acquisition, environmental clearances and slow government decision-making, but one positive aspect of these national traits is that it will slow the growth in demand for oil and energy much below what would be required to sustain a double-digit rate of GDP growth. Asia’s third-largest economy grew an estimated 8.6% in the fiscal year that ended last March and the government is forecasting that it could grow 9.25% this year. However, with inflation running at close to a double-digit rate and oil prices surging, actual growth this year could be only 7% to 8%. This would still require significant levels of oil imports. In view of the government’s policy of setting low market prices for most fuels to make them affordable and then compensating its oil refiners for some of their losses, the main short-term threat arising from higher oil prices is a big deterioration in the government’s fiscal situation. The budget for the fiscal year that started on April 1 calls for a deficit of 4.6% of the GDP. However, every US$10 increase in the price of a barrel of oil costs the government up to US$3.3 billion, or 0.2% of the GDP, assuming it compensates companies for one-third to half of lost revenue. The difference between actual oil prices and what the government used in its budget could mean the actual fiscal deficit this year will be closer to 5.5% of GDP. Another dimension to the risk lies in the potential for high oil prices to fuel inflation and result in protests by those segments of the population that are hurt the most. Although state-run fuel retailers have been free in theory to set their own prices since last June, when the government decided to end state control over prices and allow them to move freely with global markets, any increase is still informally approved by the central government. India is in a similar quandary to China and it is why the government is likely to favor negative fiscal consequences of higher subsidies over the social and political risks of higher prices. The Japanese disaster has added yet another wrinkle to India’s energy worries. New Delhi had been putting high hopes on developing nuclear power as a way to reduce the country’s dependence on fossil fuels. With about 4,000MW of installed nuclear power capacity, India would like to increase that to 30,000MW by 2020
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to help meets its chronic power shortages. But since the crisis in Japan, many Indians have grown increasingly skeptical about their country’s ability to cope with a potential nuclear accident. The Congress Party of Prime Minister Manmohan Singh, a strong advocate of nuclear power, plans to introduce legislation in the coming session of parliament that will create an independent and autonomous nuclear power regulator to oversee the expanding nuclear energy industry, but that is unlikely to satisfy those who fear corruption, bureaucratic inefficiency and other problems will inevitably interfere with any program involving as much money as current nuclear power plans do and that the risks to India from a Japanese-type crisis are too large to contemplate.
INDONESIA Comments Although one of the policies with which President Susilo Bambang Yudhoyono is most identified is his campaign against corruption, the one which is equally important and he could be having more success with is in reducing the country’s reliance on fuel subsidies and strengthening the government’s fiscal accounts. Early in his first term the president did what none of his predecessors had the courage to do: he slashed oil subsidies. There were demonstrations but the government stuck to its guns. Inflation shot up immediately, but the burden of fuel subsidies on the government’s fiscal accounts lessened, and after one year, inflation had settled back to levels that were lower and more stable than anything the country had achieved in its recent history. There are still fuel subsidies, and government’s budget for the current year assumes an average per barrel oil price of only US$80. Legislators do not have the same backbone as the president and have shelved a plan to cut subsidies further this year – even though the subsidy cuts would have affected mainly wealthier Indonesians, not poorer households. Because of this backsliding, the bill for oil subsidies will climb sharply this year, and if the government is to limit the increase in the size of the deficit, it will have to compensate by making spending cuts someplace else. Still, with the benefit of hindsight it is easy to see that the first big fuel subsidy cuts pushed through by President Susilo had such a dramatic positive impact on the economy – and foreign creditors’ and investors’ perceptions of its prospects – that the government is not going to turn back the clock. There will be a big effort to push domestic exploration and production and to develop even further exports of LNG. A difference between today and when Mr. Susilo first came to office is that major energy importing countries like China and Korea are even more aggressive in investing in energy assets in countries like Indonesia and that these governments are willing to underwrite investments in infrastructure required to help facilitate the extraction, transport and exports of commodites they need. Japan is likely to focus even more on Indonesia too now that its future plans for the use of nuclear power are in doubt. The higher oil prices go, the more urgent these governments are likely to be in bidding for projects in Indonesia. This, we expect, is where higher oil prices will drive the focus of attention on Indonesia, not on the growth of subsidies and the weakness this poses for the government’s fiscal accounts.
JAPAN Comments Japan’s energy shortages currently are being forced on the country as a matter of policy, with the main debate being whether rationing and energy savings plans should be imposed by the government or left to businesses to come up with their own plans. The government has floated the idea of imposing a 25% cut on
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industrial use of electricity and a 15% cut on residential use. Companies are arguing that this type of black and white approach will not work since different industries have different needs, with some like semiconductors depending on an uninterrupted supply of electricity, while others have more flexibility. The country is actually still producing more energy than it is consuming, but that will soon change as the summer months cause peak time demands for electricity to soar. Consequently, individuals and companies are being pressured now to change their behavior, since it is only a matter of weeks before the power shortage is very real. Tokyo Electric Power can now deliver about 42 million kilowatts of power, which is about 10 million kW more than peak demand at this time of year. However, once the weather heats up and air conditioners go on, peak consumption can reach 60 million kW, while Tepco does not expect to have its generating capacity to recover to more than 52 million kW by the middle of this summer. The shortages should lessen in the autumn but they could return once the winter months arrive and heating bills soars. Although the country would like to shift to oil and natural gas as quickly as possible, there are limitations to this switch away from nuclear power. The earthquake and tsunami damaged three oil refiners seriously (the Sendai refinery of JX Nippon Oil and Energy, the Chiba refinery of Cosmo Oil, and JX Energy’s Kashima refinery). As a result, about 14% of the 4.5 million bpd of the Japanese refining capacity needs to be repaired over the longer term. To lessen the problem in the near term, the government has reduced the mandatory oil stockpiling level on private companies from 70 days to 45 days, enabling oil suppliers to draw down their inventories for emergency relief. It is also clear from March production figures that the economy will contract in both the first and second quarters of this year, reducing actual demand for imported crude to much less than would have been the case had there been no disaster. In March, for example, crude-oil import volumes declined by 6.6%. Consequently, fuel prices in Japan might go up sharply, but the country’s actual oil import bill might not rise as much as one would think. There will be opportunities emerging from this crisis. One obvious one is that demand for power-saving technology will surge. Another is technology that can bridge the divide that separates the country’s two power grids, each with its own distinct frequency – 50 Hz for eastern Japan and 60 Hz for western Japan. The existing relief connection system can accommodate only up to 1,000 MW, or equivalent to less than 2% of the electricity demand on both sides of the border. Unifying the power frequency system nationwide is a lot easier said than done, but there could be heavy investment in constructing convertible power stations with a flexible frequency control system along the frequency border.
MALAYSIA Comments As a major oil and natural gas producer, Malaysia stands to benefit from the surge in world market prices for fuel. Crude petroleum was the country’s fourth largest export product last year, accounting for 4.8% of total exports. In addition, petroleum products accounted for another 4.0%, while LNG made up 6.0%. Altogether, exports of these fuels earned the country M$94.4 billion or the equivalent of US$30.6 billion at the exchange rate that prevailed at the end of the year. A 30% increase in the average world market price of oil would therefore mean an extra US$9 billion for the country. This is less important for what it would mean for the country’s external accounts and foreign exchange reserves than it is for the government’s fiscal accounts, development plans, and political aspirations. Petroleam Nasional Berhad (Petronas), the national oil and gas company, holds exclusive ownership rights to all oil and gas exploration and production projects in Malaysia and is the single largest contributor of Malaysian government revenues, almost half in 2010, by way of dividends and taxes.
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A major part of the government’s Economic Transformation Plan calls for the energy sector’s contribution to gross national income to rise from M$110 billion in 2009 to M$241 billion in 2020. The higher prices will make this a lot easier to achieve. As a follow-up to these goals, the government has unveiled new incentives, including an investment tax allowance of 60% to 100% of capital expenditures to be deducted against statutory incomes to encourage the development of capital-intensive projects, reducing the tax rate for marginal oil-fields and waiving export duties on oil produced and exported from marginal oil fields. The government has also designated Tanjong Agas Supply Base and Marine Services Sdn. Bhd. to develop an industrial park to support upstream oil and gas exploration and production activities in the region. The park will involve an investment of M$3 billion between 2011 and 2012. Taking a shorter term view, high oil prices will make it easier for the government to keep subsidizing certain foods and retail petroleum prices, holding down the official rate of inflation. As the Latest petrol price, US$ per liter 2.00 graph here shows, Malaysia already has 1.731 1.80 the lowest retail gas prices for cars of any 1.60 country in the region, including Indonesia, 1.40 1.271 which also subsidizes fuel prices. The 1.20 1.004 surge in oil prices means the cost of the 0.912 1.00 subsidy will be that much more expensive 0.80 for the Malaysian government – probably 0.60 at least US$4.6 billion this year compared 0.40 with US$3.3 billion last year -- but the 0.20 0.00 extra tax revenue from Petronas will make Indonesia Malaysia Singapore Thailand this possible. This policy is expensive, but Prime Minister Najib Razak is desperate to get more of the population behind the government and to lead the National Front coalition and especially his UMNO party to a big victory in the next elections. The subsidized prices actually might not help much since the population has come to regard such low prices as an entitlement, but the alternative – allowing local fuel prices to rise to reflect the global prices – could be so unpopular that it costs the government the elections.
Comparing Retail Petrol Prices
PHILIPPINES Comments Since the Philippines must import 94% of its oil, the country has had to look to other sources for energy. It is currently the world’s second largest producer of geothermal energy and also has big ambitions to develop alternative energy sources like wind and solar power and even wave power. The fuel crisis that erupted in 2008 compelled the Department of Energy, responsible for overall policy goals in the energy industry, to design a Renewable Energy Act. Its aim is to promote the development of renewable energy resources and their commercialization to achieve national energy security, as well as to reduce the Philippines’ greenhouse gas emissions through the promotion of sustainable energy measures; and reduce energy imports in order to achieve self-reliance. These targets are currently being supported by the provision of fiscal and non-fiscal incentives to private sector investors and equipment manufacturers and suppliers, but with oil prices possibly headed for new record levels, the government might have to revisit its incentive plans in order to make them even more attractive.
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The government itself does not have the money, which means it has no choice but to rely mainly on the private sector to invest in new energy sources. Fortunately, there are some large domestic companies that are interested in investing in the energy sector, and they might be able to partner with foreign companies to get the required technology and funding. The key question is one of credibility. Under the former Arroyo government there was a decided lack of trust in the government’s willingness to stick with contract terms or to ensure that future governments would. There were also concerns that local partners would be selected more on the basis of their connections to the government than on their capabilities. This reputation is something President Aquino is trying to change. So far at least there are no rumors of either him or his close family members positioning for plum infrastructure projects. This is a good thing, since the country really does need to improve its electricity generating capacity. Existing infrastructure is inadequate to meet current peak demand, and there is no way the country can sustain a higher rate of economic growth or attract foreign investment in a range of industries unless it can reduce power sector bottlenecks. Last year parts of the country experienced up to 12 hours of power outages a day when the power crisis hit its peak. The Philippines already has some of the highest fuel prices in Asia, which is one important factor deterring foreign investors. Since January this year, the price of gasoline has gone up by over P6 per liter, while the cost of diesel has risen by over P8. Some sectors like transportation will be hit hard by the latest rise in oil prices, which is why Mr. Aquino recently approved a 450-million peso (US$10.4 million) fuel subsidy for bus, jeepney and tricycle drivers. President Aquino has ordered the state-owned Philippine National Oil Co. Exploration Corp. (PNOC-EC) to stockpile diesel fuel “not just to ensure the country’s energy security but also to help provide competitively priced fuel for the local market.” However, this implies the country will be importing more, not less, oil this year. Last year the country’s import bill for crude oil rose 63.8% to US$5.4 billion. Assuming a 30% average increase in the US dollar per barrel price this year, it would imply the country’s oil import billion for 2011 will to US$7 billion even if the volume of oil imports holds steady.
SINGAPORE Comments The main concern the government has about high crude oil prices is its impact on inflation, not its impact on the country’s trade balance. With elections less than one week away, the government knows that the relatively rapid rise in consumer prices is one issue that could cost it votes. Consumer prices rose by 5.0% in March-over-March, and the cost of transport (both cars and petrol) was the category of pricing that experienced the most rapid rate of increase – 13.4%. At this point, with elections so close, there is not much more the government can do to affect voter sentiment. So in a few days we will see just how big an issue this is. As a small city-state without any significant energy resources, Singapore is dependent on imports of oil and natural gas to meet its energy needs. About 76% of Singapore’s electricity is generated from piped natural gas transported from Malaysia and Indonesia, while some 80% of the country’s crude oil imports are from the Middle East. Singapore’s energy costs are fully exposed to global movements in oil and gas prices. Moreover, unlike larger countries, hydro, geothermal and wind power are not available in Singapore or really options. Due to Singapore’s small size and high population density, nuclear power is also not feasible. This means that Singapore will remain more dependent on fossil fuels than most other countries and that any strategy will have to deal with the risks of both higher costs and reduced or interrupted supplies from traditional sources. To diversify energy sources, the government is planning to import liquefied natural gas (LNG) by 2012. However, because Singapore has such a large refining industry, it views energy more as a growth industry than as cost and national security risk. Singapore’s energy industry is centered on oil refining and trading, with spin-
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offs into the chemicals, oil-field equipment manufacturing, shipping and logistics industries. Due to strong demand for oil in Asia, there is considerable upside for Singapore to grow its refining capacity from its present 1.3 million barrels per day. It is also in a position to benefit from Japan’s need to find alternative sources to compensate for the damage done to its own refining capacity by the recent earthquake and tsunami. One special risk is that the differential between retail prices for petrol in Singapore and Malaysia could be a cause of diplomatic strains, especially if global prices keep surging, since this will widen the gap that exists between Singapore and Malaysia. As can be seen in the graph in the Malaysia section of this report, the retail price of petrol in Singapore is much higher than in neighboring Malaysia – nearly 90% higher to be exact. This makes it worthwhile for Singaporeans to drive across the Causeway and fill up in Malaysia. This is hardly a new phenomenon and is a source of strain between Singapore and Malaysia since Malaysians resent Singaporeans taking advantage of their subsidies and adding to Malaysia’s fiscal problems. Since 1991 Singapore has had a rule that requires all motorists travelling north out of Singapore to fill their petrol tanks to at least three-quarter full. The higher oil prices climb, the more people are likely to risk violating this rule. Singapore Customs said the number of people who violated the three-quarter-tank rule doubled last year to about 4,000 people. This year could set a new record.
SOUTH KOREA Comments As in Singapore, the main concern of the Korean government with surging crude prices relates to its impact on inflation, not the trade balance or even the competitiveness of the country’s exports. President Lee Myung-bak, who in January declared a "war on inflation", has seen prices accelerate steadily since then, with rising energy prices helping to fuel a rise in South Korea's annual consumer inflation in March to a 29-month high of 4.7%. His failure to tame inflation is believed to be one of the reasons his party, the GNP, performed so badly in last week’s by-elections (the GNP lost two of the three contested races). This was the last major vote before the next general elections in April 2012 to fill all 299 parliamentary seats and other offices. The stage is now set, therefore, for the opposition to select the issues on which it wants to challenge the government. One that is likely to be top on the list is inflation and, more generally, the ruling GNP’s push to enact reforms that reduce the government’s role in business and the economy. The opposition is likely to counter that the public wants the government to intervene more in order to deal with such problems as inflation. It is also possible that the government will read the pulse of the public and decide to reverse its own agenda by intervening more directly in the economy. For example, it has been pressuring the country’s oil refiners to cut retail prices for gasoline and diesel even though their raw material costs are soaring. Refiners bowed to this pressure and in April made a coordinated price cut. The 100-won cut is to last for three months. After that it will be telling whether the government permits the companies to raise their prices or keeps the pressure on them to foot the bill for further cuts. There are some bright spots for refiners. Strong refining profit margins, and exports to plug the gap left by Japanese refiners damaged during the March earthquake and tsunami, could cushion the impact of the price cuts. Korean refiners, with a capacity of nearly 3 million barrels per day, are likely to raise their crude runs further following a 4% increase last year. South Korea imported a total of 872.4 million barrels, or 2.4 million bpd of crude last year. Despite its lack of domestic energy resources, South Korea is home to some of the largest and most advanced oil refineries
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in the world. This is one reason why the country is the fifth largest oil importer in the world. South Korea is highly dependent on the Middle East for its oil supply, with the Persian Gulf accounting for nearly 75% of its 2010 total oil imports. Saudi Arabia was the leading supplier, and the source of more than a quarter of total oil imports. Korea feels especially vulnerable to the rise in world market prices and to political turmoil in the Middle East. The government places a high priority on reducing this vulnerability both by diversifying supply sources and investing in foreign energy resources. State-owned oil, gas, and electricity companies are aggressively seeking overseas exploration and production opportunities. This foreign buying program moved into high gear this past month. Korea National Oil Corp. (KNOC) agreed to pay US$1.55 billion to buy a 23.67% stake in a shale oil producing block in Texas from Andarko Petroleum. KNOC acquired a 95% stake in Kazakhstan’s Altius oil field for US$515 million. The government signed an agreement with the United Arab Emirates to cooperate in oil and gas development and a preliminary contract for the development of three Abu Dhabi oil blocks. A consortium led by Korea Gas Corporation and Korea Resources Corp. initialed an agreement with Mongolia to jointly invest about US$300 million in a coal-gas power generation project; Korea is also bidding for the right to develop Mongolia’s huge Tavan Tolgoi coal reserves. A Korea consortium signed an agreement to pay US$84.15 million for a 90% stake in the 244-million-ton Kapuas coal mine in Indonesia. Over the last three decades, South Korea has enjoyed 8.6% average annual growth in GDP, which has caused corresponding growth in electricity consumption -- from 33 billion kWh in 1980 to 417 billion kWh in 2008. Prior to the Japan disaster, Korea had high hopes for nuclear power. Today 21 reactors provide almost 40% of South Korea's electricity. As plans currently stand, nuclear capacity is to increase by 56% to 27.3 GWe by 2020, and then to 35 GWe by 2030. However, it is very likely that this will be scaled back now that there are new safety concerns. The heightened wariness to nuclear power is a double whammy for South Korea, since some of its companies had big hopes of exporting technology and building nuclear power plants abroad. For example, a Korean consortium last year won a US$20-billion contract to supply four nuclear rectors to UAE. Shortly following the UAE deal, the South Korean Ministry of Knowledge Economy declared that it aimed to achieve exports of 80 nuclear power reactors worth US$400 billion by 2030. All of this will now probably have to be reviewed and scaled back considerably.
TAIWAN Comments Taiwan is one government that believes in subsidies of key commodities like oil in order to keep industry competitive and consumers happy. If the authorities have any phobia, it is with respect to inflation, and with elections approaching the government will be even more sensitive than usual to consumer prices. The official CPI fell 0.87% in March from February. Compared with March 2010, prices were up 1.41%, led by fuels and some food prices. This was one of the lowest rates of inflation in Asia – and government subsidies had a lot to do with it. State-owned CPC has been given the task of securing oil and gas supplies, but has no significant domestic volumes to contribute. It does what the government tells it with respect to pricing. Last December, in response to rising international oil prices, the government carried out phase one of its oil-subsidy plan by instructing CPC to absorb half the cost of gas price increases. According to the Ministry of Economic Affairs, now that world crude prices have climbed as high as they have, the government might soon carry out phase two of its oil-subsidy plan, whereby CPC would be asked to make up for two thirds of the difference. According to MOEA figures, CPC has shelled out more than NT$3.6 billion (US$124 million) to cover oil price increases in the three months since the first phase of energy subsidies was introduced. The tab could run to NT$15 billion for the whole year.
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Oil consumption is forecast to increase by around 2.0% per annum to 2015, implying demand rising from 1.02 million bpd to 1.13 million bpd by the end of the forecast period. Gas usage is expected to rise from the estimated 2010 figure of 11.6 bcm to 13.8 bcm by 2015, supplied largely by LNG imports. Taiwan has a domestic oil refining capacity of just under 1.2 million bpd. Originally CPC forecast that it would utilize less of its capacity to turn crude into oil products this year after shutting some units. However, the disaster in Japan might prompt CPC to rethink that strategy, especially if Japan looks to Taiwan to help make up the difference for the lost production it experienced due to the March earthquake and tsunami disaster. Another dimension of Taiwan’s energy program that could become a major issue in the next election is what role, if any, nuclear power should play. Taiwan currently has three operational nuclear power plants and a fourth one is nearing completion. Nuclear power accounted for 20% of the island’s energy last year. Antinuclear sentiments in Taiwan have been greatly strengthened by the Japanese disaster. The government has voiced its concerns about China’s plans to build 13 nuclear power plants across the Taiwan Strait, while the opposition DPP is taking an even stronger line and wants Taiwan to scale back its own nuclear power program. Protesters in Taiwan want the government to scrap plans to operate the new fourth nuclear power plant and turn the facility into a museum to highlight the dangers of nuclear power. Clearly this is an issue that could become even more politicized as the time for the next elections approach. The government has just changed the schedule for the next elections. Instead of holding the legislative elections in December 2011 and the presidential election in March 2012, both elections will be held simultaneously on January 14, 2012, one week before the Lunar New Year. President Ma’s thinking is probably that the biggest threat to the KMT’s chances is not that people switch their vote from the KMT to the DPP but that traditional KMT supporters are so put off by the KMT’s performance that they simply stay at home. This would be to the advantage of the DPP, which has a more activist base that can be counted on to turn out to vote. By holding the two elections simultaneously and at a time when more Taiwanese who are working in China are home for the Lunar New Year holidays, the KMT is probably hoping that its own voter turnout will be maximized.
THAILAND Comments Thailand’s first two 1,000-megawatt plants were to have begun generating power by 2020, but that schedule has been put back at least three years to 2023 by the Japanese nuclear power disaster. Nuclear power has been part of a national energy master plan for some five years but no real progress has been achieved, although the government has spent considerable sums promoting nuclear energy. Today there are no politicians and other policy makers in sight who will openly endorse the advent of nuclear power any time in the future. Prime Minister Abhisit Vejjajiva and his minister colleagues were not questioning the wisdom of going nuclear until the accident in Japan. Then came a swift change and suddenly the prime minister was saying that he was opposed to Thailand having nuclear power in the short term but he would not entirely reject it. Handily for him he was able to turn to support to the International Atomic Energy Agency (IAEA), which in new report that politely upbraided the Thai authorities said the country was not ready for nuclear power. The agency said there had been a failure to inform the country about atomic power and the problems and benefits associated with it. Consequently, public acceptance of nuclear power did not exist. Indeed, strong protests from local people greeted announcements that nuclear plants would be built in their areas. The government quickly cancelled such plans and nominated new locations but similar protests erupted. Moreover, said the agency, the government had done virtually nothing about setting up appropriate laws and regulatory bodies required if Thailand were to go nuclear
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The abandonment of the nuclear option at least in the short to medium term means that plans for energy security, which has top priority among policy makers, must be recast. The national oil company, PTT, said it would have to seek more gas from the Gulf of Thailand and from overseas sources, particularly Burma. Thailand’s pursuit of energy security will so deepen its relationship with Burma that questions of military dictatorship and human rights abuses in that country will in future be of even less relevance for Thai governments. Similarly, protests about hydroelectric power will also carry less weight with the authorities. At present Thai and foreign activists are campaigning for the cancellation of the proposed hydroelectric dam on the Mekong river near the old Lao capital Luang Prabang. Vietnam and Cambodia have protested against the construction because of its danger to the environment and downstream residents. The Thai authorities are not heeding the protests. Their plan is for hydro power together with solar, wind, and biomass, to supply 20% of total energy needs within 10 years. However, the Thai government and the energy industry say strong protests from environmental activists and local residents rule out any expansion of coal-fired power generation. More than 80% of Thailand’s energy derives from power generated by imported crude oil. Its annual cost has been running at about US$24 billion, Thailand’s biggest import. Other imported energy sources, mainly natural gas, are responsible for about 10% of total power supplies and cost another US$6 billion a year. Political considerations are major shapers of energy policies. Cheaper power in the form of subsidized auto fuel, electricity and cooking gas plus public transport fares are being promised by politicians contesting the forthcoming election. These subsidies will become even more costly if the price of oil continues to rise. Thailand is more vulnerable to dearer oil than its competitors. Imported oil supplies almost all the power for all sections of industry, agriculture and business. The transport system relies almost exclusively on road vehicles because rail and sea services are inadequate. The vital tourist industry is hit when the airlines apply heavy fuel surcharges as they are doing now. Foreign investors who are well aware of this reliance on oil are deterred more by high oil prices in Thailand than by any other negative development.
VIETNAM Comments Vietnam is the odd-man-out in Asia. It is suffering from the highest rate of consumer price inflation in the region – somewhere between 14% and 18% on an annual basis – but higher fuel prices have almost nothing to do with the increase. Rather, Vietnam’s problems reflect the policies of a government that cannot control lending and have resulted in serious imbalances. The most recent increases in inflation stem mainly from higher prices for education services, food and foodstuffs, and housing and building materials, not oil. The government welcomes the rise in world crude prices since that is one of the country’s leading exports, and the higher prices paid for crude helped total exports in the first quarter rise 33.7% to US$19.2 billion. The government says that crude oil output increased by 2.2% in the first quarter over the like span of last year to 3.67 million tons. Exploration success has been on the rise in Vietnam, with a growing number of international oil companies teaming up with PetroVietnam and finding and developing hydrocarbon resources – particularly gas. Higher world prices and security concerns over Middle East energy supplies should stimulate investor interest in Vietnam further.
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A difference with Vietnam compared with other oil and gas producers is that Hanoi is likely to be less receptive to investment from Mainland China, even if it comes with generous terms and substantial help with building infrastructure. Vietnam would prefer working with other countries like India, Japan and Korea, since it does not have a border dispute with these countries the way it does with China, especially involving areas that are believed to hold sizable oil and gas reserves. Vietnam still depends on imports of refined oil products to satisfy domestic demand, but it is increasing its own refining capacity. Vietnam’s first refinery, the US$2.5-billion Dung Quat complex, started operations in early 2009. Dung Quat will process at least 140,000 bpd of locally produced and imported crude, producing diesel, gasoline, jet fuel, liquefied petroleum gas (LPG) and propylene. However, low levels of demand for the plant’s output have so far led to the refinery operating well below design capacity. Vietnam’s economic growth rate is slowing, and this could dampen the growth in energy consumption. Preliminary official estimates put the increase of the GDP in the first quarter at 5.4% compared with the like span of 2010, down from 6.8% in the final quarter of last year. The agriculture sector grew just 2.05%, industry by 5.47% and services by 6.28%. Electric power demand increased only 10% in January-March over the same period last year, which was one third less than the 15% rise government economists had been predicting and the 13% average annual increases registered for most of the past decade. Electricity generation in Vietnam is largely based on hydro (43%), gas (34), and coal (21%), with oil accounting for only 3%.
EXCHANGE RATES Currency
4/29/11
Chinese renminbi
6.4910
Hong Kong dollar
7.7663
Indian rupee
44.248
Indonesia rupiah
8,562
Japanese yen
81.123
Malaysian ringgit
2.9621
Philippine peso
42.808
Singapore dollar
1.224
South Korean won
1,068
Taiwan dollar
28.6862
Thai baht
29.869
Vietnamese dong
20,645
Commercial middle rate expressed in terms of US$1.
Published by: Political & Economic Risk Consultancy, Ltd. 20th Floor, Central Tower 28 Queen’s Road, Central, Hong Kong Mailing address: G.P.O. Box 1342, Hong Kong
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