Hormuz and ASEAN: Are we ready?
Nowadays, it seems like everyone stares at the board of oil prices. The rising oil price due to the growing Iran-related tensions on oil, LNG and oil products markets has resulted in strong reasons for every government, especially in a net importing country, to adjust the price in every gas station.
For example in Indonesia, all of the seven refineries owned by Pertamina, National Oil Company, blend their mix of crude from domestic production with imported oil from Persian Gulf states. About 45% of Indonesia’s national fuel demand, or about 75% of fuel demand in Java, is imported from Iran. It’s not difficult to imagine what would happen if the crisis there escalates.
Beyond Indonesia, every country in the ASEAN region is in the same situation. The region has been a net importer of oil since 1995 as the rapid increase in oil demand was not matched by oil production. During that year, the region’s net oil import was equivalent to 5.3% of its consumption or 7.9 MTOE. In 2007, the difference in consumption and production further increased where 35% of oil consumption or 70 MTOE had to be imported to the region. Figure 1 shows the consumption and production of coal, oil and gas. It could be seen that while production of coal and gas were greater than consumption from 1990 to 2007, oil production had become less than consumption in 1995 and much lesser in 2007.
Figure 1: Regional Indigenous Production and Consumption of Fossil Fuels (1)
From the 3rd ASEAN Energy Outlook (ASEAN Centre for Energy, Institute of Energy Economics, Japan, 2011), it’s forecasted that until 2030 oil will remain as the most used fuel and it’s projected to grow at 4.9% per annum over the forecast period. Its share to the total consumption mix will increase from 41.7% in 2007 to 45.8% in 2030 under Business-as-Usual (BAU) Scenario. This is driven by the rapid growth in consumption of the transport sector, which is largely fuelled by oil products. The Energy Efficiency programmes that introduced by every ASEAN Member State under the Alternative Policy Scenario (APS) are expected to reduce the average annual growth rate of oil consumption at be 3.9% or 18.6% oil saving potential. However, the role of oil will still be dominant with its share increasing to 45.0% in 2030 from 41.7% in 2007 as shown in the Figure 2 below.
Figure 2: Final Energy Consumption in ASEAN by Fuel Type (2)
On another note, IEEJ, on their own publication, forecasted the net oil import in ASEAN will expand from 0.5 mb/d in 2009 to 4.6 mb/d in 2035. Oil production in ASEAN Member States, such as Indonesia, Malaysia, Viet Nam, and Thailand, will slowly decline, while the oil demand will steadily increase. Therefore, net oil import ratio will reach 67% in 2035, compared with 15% in 2009.
This high dependency on import oil is of course not good news for economic growth, especially in the ASEAN region, which has enjoyed rapid economic growth in recent years. The situation in Hormuz, from which a big number of oil imports for ASEAN comes, is definitely affecting the situation in the region.
Wood Mackenzie, through its short report entitled Iran Political Tensions & Potential Energy Implications (released on 10 January 2012), informed us about their assessment on the potential 2012 implications of the growing Iran-related tensions on oil, LNG and oil products markets under two cases: Further US and EU sanctions against Iran and Closing of the Strait of Hormuz.
Mackenzie noted total liquids exported via the Strait of Hormuz are 17.3 million barrels per day and almost a third of global LNG trade flows through the Strait of Hormuz. Two ASEAN Member States, Singapore and Thailand are among the top 10 buyers, as shown on Figure 3. Considering Singapore’s position as the hub of the oil trade for the region, of course anything that affects Singapore will affect other ASEAN Member States who rely on them, including Indonesia.
Figure 3: Top 10 buyers of Middle Eastern crude (3)
ASEAN should consider acting as a peace mediator in order to avoid or minimize the potential risk. However, ASEAN Member States – including Indonesia – should be ready with their back up plan called the Oil Stockpiling (or Strategic Reserves) Programme.
Two or three decades ago, this was not a viable topic for ASEAN, as some of them were big oil producer countries. But today, as I mentioned above, it's a different story. Among 10 ASEAN Member States, only Brunei Darussalam and Malaysia are still net producer countries.
The Oil Stockpiling Programme was developed after the experience of developed countries suffering oil disruptions due to the oil embargo by Organization of Arab Petroleum Exporting Countries. Realizing their high dependency on oil imports, in 1974, The International Energy Agency (IEA), a Paris-based autonomous intergovernmental organization, was established within the framework of the Organisation for Economic Co-operation and Development (OECD). The IEA’s initial role was to help countries co-ordinate a collective response to major disruptions in oil supply through the release of emergency oil stocks to the markets. As per today, every IEA Member County has an obligation to stockpile 90 days of their net oil imports which means if the oil disruption happens, they are able to continue their economic activity in normal practice, without any supply from outside, for 90 days. This policy has proven effective. At the time of the first Gulf War (1991), IEA implemented a 2.5 million barrels a day contingency plan, most of which was stock draw. In September 2005, the IEA implemented a collective action, which made available to the market 60 million barrels of crude oil and oil products, in response to concerns about interruptions to oil supply as a result of the severe hurricane damage caused by Hurricanes Katrina and Rita in the US Gulf of Mexico. IEA officials consulted closely with US Department of Energy officials in managing their response to Hurricanes Gustav and Ike in August/September 2008. Most recently, on 23 June 2011, the 28 IEA member countries have agreed to release 60 million barrels of oil in the coming month in response to the ongoing disruption of oil supplies from Libya.
How about ASEAN? In 2008, ASEAN, through a partnership with China, Japan and Korea under the umbrella of ASEAN+3, started the study and recognized the necessity of oil stockpiling initiatives in the light of persistent risk of supply disruptions and the highly volatile oil market by developing the Oil Stockpiling Roadmap (OSRM) for ASEAN+3. The development of this OSRM is based on four (4) principles: i) voluntary and non-binding, ii) mutual benefits, iii) mutual respect and respect for bilateral and regional cooperation, and iv) step-by-step approach with long-term perspectives.
The oil stockpiling development in the region is required in the light of persistent risks of supply disruptions and highly volatile of oil market price which obviously related to energy security. To mitigate the region’s heavy dependence on oil, ASEAN prioritizes the importance of implementing short, medium and long-term policy responses to address the broader challenges facing the region’s energy supply security and sustainability through the ASEAN Plan of Action of Energy Cooperation (APAEC). The participation of the +3 countries will be further strengthening deep cooperation on energy security to ensure a stable and affordable supply over the long–term and to achieve the goals set under the ASEAN Economic Community 2015.
Through a meeting on ministerial level, ASEAN+3 Ministers on Energy Meeting (AMEM+3) in Viet Nam on 2010, endorsed the Report of Oil Stockpiling Roadmap (OSRM) for ASEAN+3.
According to submitted country report on OSRM, currently no ASEAN Member Country has established a national stockpiling system, while in the +3 Member Countries, this is already in place. Japan and Korea's programme, who are also members of IEA, has been operational since 1970. China has also shown progressive development in stockpiling in the last decade.
To further promote stockpiling policy for emergencies, it is required to establish a national stockpiling system, establish a standard for emergencies which includes an increase in the capacity of private-sector stockpiling and procedures for release of stockpiled oil following increase of demand, and enhancement on the security of stockpiling facilities.
Once the OSRM’s initiative started, actually ASEAN has the agreement already on the oil sharing scheme for emergency named the ASEAN Petroleum Security Agreement or APSA. The ASEAN Petroleum Security Agreement (APSA) 1986 signed in Manila, Philippines, on 24th June 1986, established the ASEAN Emergency Petroleum Sharing Scheme for crude oil and/or petroleum products in times or circumstances of both shortages and oversupply. Through the emergency mechanism, called Coordinated Emergency Response Measures (CERM) (APSA endorsed this in 2009), all ASEAN Member States endeavoured to supply petroleum to an ASEAN Member State in Distress at the aggregate amount equal to ten percent (10%) of the Normal Domestic Requirement of the ASEAN Member State in Distress.
Unfortunately, the implementation of CERM-APSA is yet to happen as two 10 ASEAN Member States, Cambodia and Indonesia, haven’t ratified it.
Back to the potential risk of the disruption of oil imports from Iran. Japan and South Korea and dialogue partners of ASEAN will likely respect sanctions and look to replace Iranian crude imports with supplies from Saudi Arabia or elsewhere. China could well use sanctions as an opportunity to seek discounts in its long term oil supply contracts with Iran, playing the risk to Iran’s supply card.
So how about ASEAN?
Quite simply, if the collaboration of the OSRM initiative and CERM-APSA happen, ASEAN has a very good mechanism for its energy security. If not, it gets difficult.
In 2010, I participated on the Emergency Response Exercise 5 (ERE5), a bi-annual event organized by the International Energy Agency (IEA) in their headquarters in Paris, France. This Exercise brought together oil and gas security experts from government and industry around the globe for a series of simulation exercises of crisis responses in the real-time setting of the global market. In that three days simulation, we managed the situations from small numbers to big numbers of oil disruption, whether we just wait and see and let the market adjust itself, or decide on a collective action to release the stock.
The situation is “easier” when we do have the stock like IEA Member Countries. But, again, this is not yet the case. Indonesia has 23 days of stock, but it’s commercial stock, not strategic reserves. If the crisis happens and there's no quick alternative on the table, what happens? Big chaos.
Of course, going with stockpiling is not an easy thing to do. It’s take time to plan and develop the program. And the most important issue is about its economic side. As most of ASEAN Member States are still in the developing phase, furthering economic growth needs a lot of funding and allocating the money for stockpiling would be controversial to say the least. However, in a volatile oil market, any supply disruption or widespread perception that there is a serious risk of a supply disruption would impose an unacceptable burden on economies. Under present circumstances, it is prudent to be prepared for a rapid, effective and concerted initial contingency response. We need to learn from the experiences of IEA Member States with their various options for stockpiling (i.e. obligation on the Government, or obligation on the private sector with the incentives, or even co-sharing between Government and private sector).
Hence, oil stockpiling is the only solution for ASEAN countries worried about their energy security.
(1) and (2) ACE, IEEJ,. (2011), The 3rd ASEAN Energy Outlook.
(2) Wood Mackenzie,. (10 January 2012), Iran Political Tensions & Potential Energy Implications.
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