Asian economies in the global arena

Asian economies in the global arena

The following article is an excerpt of a paper presented by
Dr. Subroto at the first annual Asian-Pacific Chemical Industry
Meeting on Feb. 27 in Singapore. This is the second of two
articles.

SINGAPORE: Since oil and gas are the most important feedstock
for the chemical industry, the petrochemical industry in
particular, they merit a brief discussion on the global and
regional energy outlook.

Many energy industry observers argued that the perturbations
of the past 22 years, the price shocks in 1973, 1980 and 1990,
have been an aberration and that the underlying problems have
been more or less solved, and the pressures that led to violent
price fluctuations in oil and other energy prices over the past
two decades have now been addressed. The perception is that there
is enough energy in the world to satisfy the growing energy needs
of the developed world and the rapidly developing world
everywhere at roughly current prices. There is definitely a
feeling of complacency in the industrialized world that there
will not be any energy security problem in the immediate future.
While the abundance of potential energy resources is not in
dispute, the present combination of high energy demand and low
energy prices may, however, not be sustainable.

In the event of flat real energy prices persisting under the
macroeconomic assumption of world economy growing by 3 percent
annually and world population growing by one billion people every
10 years, the demand for oil, natural gas, coal and electricity
will grow very rapidly. World total primary energy demand is
projected to increase by more than 44 percent between now and
2010, or at an average annual rate of 2.1 percent, to about 11500
million tons of oil equivalents (Mtoe). There is some doubt that
sufficient investment in world energy production and
transportation would be forthcoming at current prices over the
next 15 years in order to meet such increased demand.

For the period 1995 to 2000, world oil demand in OPEC's
reference case, is expected to grow by an average of 0.9 percent
per annum, from 66,96 million barrels a day (mb/d) to 72.3 mb/d,
representing an increase of 5.34 mb/d. World demand in 2010 and
2020 is estimated at 80.4 mb/d and 86 mb/d respectively.

The oil demand in non-OECD countries will be dramatic. For
every barrel of oil demand growth in the OECD countries, the
demand growth in the non-OECD countries, will be 4.7 barrels.
Such a high proportion of growth in oil demand will have
important consequences in the oil market.

For the supply side, our median projection for non-OPEC oil
supply is in the range of 42 to 47 mb/d for the period from 1995
to 2020. OPEC is expected to meet extra demand of around 14 mb/d,
from 25 mb/d in 1995 to 39 in 2020. This 14 mb/d addition in OPEC
production is given as a yardstick, since in fact it depends very
much on the non-OPEC supply. Although the discovery of giant-size
oil reserve is considered unlikely, the combined evolution of
small non-OPEC supplies can have appreciable effects on the
future level of production by OPEC.

In order to meet the above supply and demand scenario, OPEC
member countries would have to expand production by more than 50
percent or 25 mb/d to around 39 mb/d in the span of 25 years.
The oil reserve base of OPEC, estimated at around 787 billion
barrels, out of a world total of 1043 billion barrels at the end
of 1993, is not going to limit increased production in the
future. However, the availability of geophysical capabilities,
though a prerequisite, cannot guarantee timely development and
supply of the required levels. It needs the right price and
sufficient stability on top of geophysical potentialities to get
regular and steady flow of oil. It needs capital to finance the
doubling of production capacity. Even if capital is available,
the question is whether investment will be done in time. In view
of the lackluster oil prices, rising environmental costs,
increasing interest rates and a worldwide shortage of capital,
providing funds for these investments constitutes a major
challenge for both private and government entities dealing with
these decisions.

The second decade of the 21st century, based on OPEC's base
case, provides the most food for thought. OPEC's capacity has to
reach 40 mb/d or more to ensure market stability. In this decade
the oil market's momentum of strong demand has to be met by an
increasing oil dependence from OPEC.

By that time the global utilization in the upstream sector may
approach 100 percent. The absence of adequate spare capacity can
only raise the probability of price volatility. IEA predicts that
by 2005 oil prices in real terms will have risen by 50 percent to
US$28 a barrel (in 1993 prices). Forecasting energy demand,
supply and prices is a risky business, but the risk is that in a
tight market, a sudden shock could push prices up sharply. This
mismatch in supply and demand could, however, happen sooner than
the second decade of the 21st century as foreseen in the base
case scenario.

A new driving force in the oil industry is the emergence of
Asia as larger market than the industrialized West, because of
the relatively flat demand in North America and Europe. For the
first time in the history of oil, North America will not be the
centerpiece of world oil demand. By 1997, oil consumption in
Asia, -- including Japan -- will exceed that of North America. By
2000, total consumption in Asia (including Japan) will already be
18.47 and 21.63 mb/d by 2005, compared with 14.20 mb/d in 1993,
an increase of 7 mb/d, slightly less than the production of Saudi
Arabia.

Crude oil production in the Asia-Pacific region totaled 6.76
mb/d in 1993. There have been increased exploration activities in
the region, using foreign oil firms' capital and technology,
making it possible for some countries in the region to expect an
increase in crude oil production. Compared with other areas of
the world, however, crude oil reserves, the reserves to
production ratio and productivity of oil wells in the Asia-
Pacific region are at low levels and crude oil production is
unlikely to show a sharp increase in the coming years. Maybe only
China and Vietnam are projected to increase their oil production,
judging from their current exploration and development
activities, but Indonesia and Australia are expected to show a
decrease, while production in Malaysia and Brunei will level off.
As a result, crude oil production in the region will not increase
very much from the present production of 6.76 mb/d, to 7.0-7.2
mb/d in 2000 and 6.9-7.1 mb/d in 2005.

With oil demand growing sharply and sluggish oil production,
the Asia-Pacific region's oil imports is projected to increase,
raising the dependence on oil imports from 59 percent in 1993, to
62-64 percent in 2000 and 68-69 percent in 2005. Indonesia, at
present the largest net oil exporter in the region, is expected
to become a net oil importer by 2005.

The logical oil supply for this region will be the Middle
East, where production capacity has to be increased. This
relationship will strengthen the economic linkage between these
two regions. Asian countries will be more and more involved in
the financial and technical requirements of developing Middle
East production capacity, while the Middle East oil producing
countries will enhance their interest to be active in downstream
development of Asia.

For the world as a whole, the demand for gas is expected to
increase by 2.5 percent from 1992 to 2010. Global demand for gas
in 2010 is projected by IEA to be more than 50 percent higher
than in 1992, and, in absolute terms, world natural gas
consumption will rise to 2708 Mtoe in 2010. This projected
increase raises the question: From where and at what cost this
demand can be met?

Although the gas resource base worldwide is immense and
reserves are abundant, something like 141,024 billion cubic
meters (BCM), gas is not necessarily easily available in any
market or at any time. In contrast to the oil market, there is no
world market for gas, primarily because transportation of natural
gas is difficult and costly. In relation to its volume, the
energy content of natural gas is relatively low. Transportation
is the limiting factor and explains why only 16 percent of the
global gas production is traded internationally.

Gas markets are regionalized because transportation is
expensive. In 1994 the average price of gas in the U.S. was $1.70
per Million British Thermal Unit (Mbtu). The average import price
of LNG to Japan was, during the same year, $2.95 per Mbtu,
whereas the average import price to the European Union was
estimated to be around $2.15 per Mbtu.

Demand for natural gas in the Asia-Pacific region has
increased substantially during the past two decades. In 1993 the
Asia-Pacific countries consumed nearly 6,2 trillion cubic feet
(TCF), compared with only 1.1 TCF in 1973, an increase of almost
six times increase. Japan is by far the largest consumer,
accounting for 32 percent of the total gas consumption of the
region. In almost all scenarios, demand for gas is projected to
increase. According to a study by the East-West Center, the base
case growth rate of a 6 percent annual increase will increase
total gas consumption in 2010 to 16.2 TCF.

Asia-Pacific countries produced 17.3 TCF of natural gas in
1993, with Indonesia as the biggest producer, followed by
Australia and Malaysia. About 7.1 percent of the proven world
reserve is the Asia-Pacific region, and since production is still
relatively low the reserve to production ratio is about 50 years.
Malaysia has the largest reserve of the region (76.7 TCF),
although Indonesia produces two times more than Malaysia.

The region is still in the early stages of finding gas. It is
very likely that any significant new gas discoveries will be used
domestically, and there will not be much available for export.
Consequently, buyers look to other suppliers, namely towards the
relatively low cost 1500 TCF reserve of the Middle East.

The Asian gas market appears to relatively well supplied, at
least until the turn of the century. An apparent supply-demand
gap of 3.7 million tons of LNG is forecast at the end of the
century. By the year 2010 the potential gap widens to 28.8
million tons of LNG, and new projects have to be brought on
stream. Malaysia and Indonesia are logical suppliers, but Qatar,
Oman, Abu Dhabi and Australia will also be in the market.

It is certain that gas uses will continue to increase in the
region and the power sector will be the major impetus for this
growth. Under any scenario, Japan, South Korea and Taiwan will
remain dependent on the natural gas imports, either in the form
of LNG or through pipelines. Given the very slow progress of the
pipeline projects in the region, and the cost of related
infrastructure, LNG is the only option for transporting natural
gas to the consuming countries.

The world economic balance in the first half of the next
century will be determined, more than anything else, by what
happens in Asia. The North American economy, no doubt, will
remain strong, though it may in relative terms decline somewhat.
Europe will inevitably have a big say in the political and
economic arena, whatever difficulties it may encounter. But if
growth is sustained for another generation, and it probably will
be, Asia's output will almost certainly overtake both regions.
This does not mean that Asia will dominate them.

Clearly, Asia will not look up to the West anymore as number
one. Beijing, Tokyo and even ASEAN dare to say "no" to Washington
or Brussels. In international affairs ASEAN has gone its own way,
such as in engaging constructively with Myanmar and declaring the
ASEAN region a nuclear free zone, which the U.S. has opposed.
Asia is demanding a level playing field when interacting with
Europe and the U.S. Asians do not want anybody to dictate to
them, and do not ant to dictate to anybody else.

How should Asia act on the global stage? It would be unwise to
struggle for supremacy over the West. If one can learn a lesson
from the Asian miracle, is that it has more to gain from
cooperation and partnership than from confrontation. Asia must
not be a new hegemony but a catalyst for global growth. It should
search for a new spirit of partnership and shared destiny with
the West. It should continue to press for peace through
disarmament, respect for national sovereignty, increasingly open
market and development cooperation.

On the other hand, the West has much to lose by not being a
partner in Asia's growth. The West should view Asia not as a
threat but an immense opportunity. This partnership will shape
the world in the 21st century.

Dr. Subroto, several times a cabinet member, is a former
Secretary-General of the Organization of Petroleum Exporting
Countries.

Window: For the first time in the history of oil, North America
will not be the centerpiece of world oil demand. By 1997, oil
consumption in Asia, -- including Japan -- will exceed that of
North America.