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Asia's surging energy demand

WHEN Hu Jintao, the president of China, went half way round the world in February to see President Omar Bongo of Gabon, he was not merely paying a courtesy visit to the African ruler of a population one-thousandth the size of China's. Hu was after oil.

And a guaranteed supply of oil -- in exchange for the honour of his visit and $7.0m of Chinese financial aid -- is exactly what he got. Among other deals, Sinopec, the state-controlled Chinese oil company, signed a contract to buy Gabonese oil from Total, the French oil group.

Hu's African trip to hunt for hydrocarbons -- he also oversaw the signing of oil and gas agreements in Algeria and Egypt -- is the latest sign of China's thirst for energy to fuel the biggest industrial revolution in history.

"Consumption of energy is symptomatic of the emergence of economic and political power," says S. Chander, an energy and infrastructure expert at the Asian Development Bank (ADB). "China has emerged."

"The rapid growth of energy use is an Asia-wide phenomenon. India is achieving high economic growth and requires ever-greater supplies of energy. Growth in the developing economies of east and south Asia and the Pacific region is expected to accelerate to 6.8 per cent this year from 6.3 per cent in 2003, the ADB says. Japan, its economy recovering after years of stagnation, remains one of the world's biggest consumers of energy and increasingly competes with China for access to natural resources.

The effects of Asia's rising energy needs are far-reaching, from electricity blackouts in Shanghai to a sharp rise in world coal prices affecting countries as far afield as Australia, Poland and South Africa. The shipping industry has profited from high demand, for freight services, while environmentalists are appalled by the prospects of more pollution and global warming.
US, Canadian and French supplies of nuclear reactors see the best chance for years to sell their products to Asian utilities; contractors in the liquefied natural gas (LNG) business see similar opportunities as energy importers try to cut dependence on oil and diversify into cleaner sources of power.

From Moscow to Tokyo and Washington to Abu Dhabi, diplomats are grappling with "pipeline politics", the result of Asian attempts to reduce reliance on Middle East oil and gas by turning to central Asia, Siberia and the Russian Far East.
China's energy demand has been a central theme in discussions in the boardrooms of the world's biggest oil companies, at meetings of the Organisation of Petroleum Exporting Countries and in White House strategy meetings. "The problem we have in the world," said President George W. Bush recently, "is that China is cranking up (its) economy. Energy prices are high because demand in China is really high.

"Yet it is probably in China itself, where the economy is expanding at over 9.0 per cent a year, that the energy market upheavals caused by the country's recent transformation into a global manufacturing force are most keenly felt. Factory managers face a summer of electricity rationing in industrial cities such as Shanghai and Guangzhou because of a lack of power stations.

"It's an energy crisis," says Joe Zhang, head of China research at UBS, the investment bank, in Hong Kong. "It's a long-term crisis, and one that will deepen." Andy Xie, Asia-Pacific chief economist for Morgan Stanley, is equally concerned. "The whole system is basically maxed out," he says. "The cities even have to shut down neon lights to give power to the factories operating at night.

"China is racing to build the infrastructure to meet energy demand. It plans to install 42 gigawatts of generating plant this year, about the same as the UK's entire installed capacity, and do the same again in 2005. Even before the power stations are built, oil consumption is being boosted by the use of emergency diesel generators and the growing number of cars on the roads. The impact is reverberating across Asia, and is felt in Europe and North America, where drivers are complaining about the high price of fuel.
Commodities analysts such as Jeffrey Currie of Goldman Sachs in London say it would be wrong to attribute high oil prices purely to surging Chinese demand. The real problem, he argues, is one of supply. For decades there has been severe under-investment in the global infrastructure to deliver oil due to poor rates of return on energy-related investments, he says. "Essentially demand has caught up with the capacity to produce," Currie says.

The quest for oil has been suggested as an-explanation for Bush's obsession with Iraq, for Japan's military presence there as a US ally, and for China's interest in the disputed Spratly islands of the South China Sea, thought to possess substantial natural resources. The tightness of energy supplies in Asia has raised concerns about a possible Islamist terrorist threat to shipping in the narrow Strait of Malacca and the port of Singapore.

Already there are visible tensions among east Asian nations over competition for oil and gas, and between the US and Asian governments over the political credentials of Iran (suspected of plans to build nuclear weapons) as a source of additional oil.

"We all will struggle for Middle Eastern oil among the three of us -- China, India and Japan," says Yoichi Funabashi, a leading commentator for Japan's Asahi Shimbun newspaper. He argues that China's willingness to sell military hardware, not an option for pacifist Japan, could give Beijing the edge over Tokyo in negotiations with Middle East oil producers.

The tortured progress of two oil projects, one in Russia and one in Iran, illustrate how seriously the issue of energy security is taken in Asian capitals. For months Japan and China have been at loggerheads over the destination of a proposed oil pipeline from Angarsk in Siberia. Beijing wants the pipeline to come to Daqing in northern China. Tokyo has vigorously promoted a longer and more costly route to the Russian port of Nakhodka near Vladivostok, from where oil could be shipped to Japan, China or further afield.

The latest signs are that Japan has triumphed by offering to help finance the pipeline, although some Japanese officials question the financial viability of a scheme that could cost as much as $10bn. Nor is the battle necessarily over. "The Chinese are not naive," says one government adviser in Tokyo. "They will counter-attack."

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