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Joint Stockpiling and Emergency Sharing of Oil: Update on the Situations in the ROK and on Arrangements for Regional Cooperation in

Northeast Asia

Asian Energy Security WorkshopMay 13-16, 2005

Beijing, China

Eui-Soon ShinDepartment of Economics

Yonsei University

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Growing Energy Insecurity in Asia-Pacific

Most of the large oil consuming countries are located in the Asia-Pacific regionAsia-Pacific imports about two-thirds of the oil it consumes (Around 23 million barrels per day in 2004) Energy insecurity in Asia-Pacific is closely related to the fast oil demand growth of China and IndiaAside from the vulnerability from oil imports dependence to the Middle East, there is a tension among major oil-importing countries stemming from oil shortage in the regionThere is no regionalized energy security system in Asia-Pacific Energy security in Asia-Pacific remains a complex and multifaceted challenge due to diverse scale scope of and national interests

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China’s Net Oil Imports since 1990s

In 2002, the net oil imports of china reached 71.85 million tons, about 30% of the overall national oil consumption

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Oil Security Policy Measures

Long-Term Diversify oil import sources Improve oil use efficiency Develop alternative fuels to oil Cooperation with oil producing and consuming countriesShort-Term Mandatory restraining of oil consumption during

emergency Fuel switching Disseminate accurate oil market information to

discourage hoarding or panic purchase Drawdown of emergency oil stockpile

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Emergency Oil Stockpile System

Government vs. Private Stockpile U.S. SPR is financed entirely by federal government Japan uses a small portion of oil tax revenue to cover the cost of

government stockpile There are other varieties in EuropeCrude Oil vs. Petroleum Products U.S. holds only crude oil Small countries hold only petroleum products Most countries hold both crude and products Japan and ROK set separate reserve requirement for LPGJoint vs. Individual Stockpile EU members are allowed for joint stockpile within EU and outside the

member states by the EU Directive However, joint stockpile among EU member countries has not yet been

widely observed

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Growing Concern over Strategic Oil Stockpile in Asia-

PacificCountries in Asia-Pacific began to recognize the importance of establishing strategic oil stocks as a reserve against sudden cut or shortfalls in oil supplySome recent cost benefit analyses have found that, for smaller Asian oil-importing economies, a stockpile covering around 30 days of net imports is optimalThese studies also recommended a joint stockpiling scheme sharing a common large-scale facility for the APEC regionOverall trend of decreasing oil stocks among IEA members for the past 15 years and a steady decline in OPEC spare capacity have also served to reinforce the importance of such strategic reserve

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Petroleum Stockpiling System in Japan

PetroleumStockpiling

in Japan

Government stockpiling

Private industry stockpiling

・ Started in 1978

・ All in the form of crude oil

・ Target Volume 50 million kl 　⇒　 50.98 million kl (As of Oct.2003)

・ Owned by Government ， Managed and operated by JNOC

・ Obligatory inventory ： 70-day of consumption 　　・ Trade inventory・ Owned ， Managed and operated by each private-company

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Petroleum Stockpiling System in Japan

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Historical Change of Petroleum Reserve Stocks in

Japan

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Impacts of Oil Crises to the Korean Economy

Measures taken after the two worldwide oil crisesEstablished the KNOC (Korea National Oil Corporation)Began strategic oil stockpilingDues are imposed on all imported oilEstablished the three-phase contingency plan as a short-term emergency measure

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History of Strategic Oil Stockpiling Plan in ROK

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Oil Stock Level as of Sep. 2002 (ROK)

Started government strategic oil stockpiling from 1980.Started mandatory stockpiling of private enterprises from 1992 (40 days of domestic sale volume to crude oil refiners and oil products importers; 30 days requirement to LPG importers and petrochemical enterprises).As of September 2003, there are 107 days of oil stocks which account for 49 days of strategic and 58 days of private stocks (based on IEA standards).Target for strategic oil stockpile: 141 million barrels of oil stocks by 2007 and 146 million barrels of storage facilities by 2008.

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Joint Oil Stockpiling: the case of ROK

<Basic concepts>KNOC leases unfilled storage facilities to petroleum producing countriesKNOC holds the preemptive right to purchase the stored crude oil in case of emergency

<Diverse benefits>Improve the ability to cope with the oil crisis Increase the volume of stockpile Contribute to diversify supply source and to ease Asian

premiumDecrease the financial burden of oil stockpilingPetroleum producing countries can develop or expand market share in Northeast Asia

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Lease Contract with Statoil

KNOC started the joint stockpiling business with Statoil (Norway’s state oil company) in July 1999.It expanded the contract volume in July 2000 from 8 mmb to 11.3 mmb.

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Lessons from ORNL Cooperative Stock Analysis

All the oil consuming regions in the world remain quite vulnerable to supply disruptionsOil stockpiling provides benefits not only to the stockpiling economies but also to other economies with no stake in the stockpileThis public good aspect of stockpiling justifies collaborative initiatives in oil stockpilingAll oil consuming regions could benefit from more stockpilingCollective groups of countries sharing a reserve prefer larger size and achieve greater benefits than the sum of individual countries acting aloneAsia-Pacific study shows sharply increasing benefits from the expansion of collective reserve size

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Public Good Aspect of Stock Expansion Cooperation Benefits Much Greater than

Independent Action

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Asian-Pacific (APEC excluding U.S.) Study

Shows Sharply Increasing Benefits

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Talks on Joint Stockpiling and Emergency Sharing of Oil in Asia-

Pacific (1)IEA/China Oil Stocks and Emergency Response Seminar, Beijing, China, 9-10 December 2002APEC-EWG Oil Emergency Response Workshop, Portland, Oregon, USA, 18 June 2003APEC Joint Oil Stockpiling Workshop, Seoul, ROK, 2 December 2003Second ASEAN+3 Oil Stockpiling Forum, Philippine, February 2004

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Dialogues on Joint Stockpiling and Emergency Sharing of Oil (2)

Second Meeting of the Asia Cooperation Dialogue (ACD) – Energy Working Group, Manila, Philippine, 19-20 May 2004

- ACD- Energy Working Group was established in 2001 with the objective of exploring possibilities of creating cooperation within the energy sector. The working group's member-countries are Bahrain, Bangladesh, Brunei, China, Cambodia, India, Indonesia, Japan, Kazakstan, ROK, Kuwait, Laos, Malaysia, Myanmar, Oman, Pakistan, the Philippines, Qatar, Singapore, Sri Lanka, Thailand and Vietnam.

- ACD members agreed to study the possibility of joint stockpiling as one of the measures in ensuring the reliable supply of oil. - The ACD declaration, said a seven-member panel will be formed to examine "the possibility of joint stockpiling among interested member countries.

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Dialogues on Joint Stockpiling and Emergency Sharing of Oil (3)

ASEAN+3 Ministers Meeting, Manila, Philippines, 9 June 2004

- The ASEAN+3 consists of the 10 ASEAN countries -- Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam - and Japan, China and South Korea.

- The ministers see the need for a joint oil stockpile in the region, saying the move will ensure "greater energy security and sustainability" in a region expected to become the largest energy consuming area in the world.

- The ministers noted the existing oil stockpile programs of Japan and South Korea and also welcomed the initiative of China to establish a national oil stockpile program.

- Philippine Energy Secretary said Southeast Asian countries might set up a regional stockpile. It was announced that the Philippines had proposed the former US naval base at Subic Bay north of Manila as a storage facility for Libyan oil for distribution in Asia.

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Dialogues on Joint Stockpiling and Emergency Sharing of Oil (4)

First Roundtable of Asian and Middle East Ministers on Regional Oil and Gas Cooperation, New Delhi, India, 6 January 2005

- Gulf producers and Asia's oil-importing economies face growing mutual dependence, as expanding economies like China and India seek more oil abroad and producers look to rising regional demand to justify investment in higher production capacity.

- Asia already takes some 60 percent of crude exports from the Middle East, home to nearly two-thirds of the world's oil reserves, and its reliance is set to rise as the region leads global demand growth and its own resources dwindle.

- "Asia should build a joint oil storage facility for an emergency stockpile to enjoy uninterrupted supply. The storage depots would give both sellers and buyers security of supply and demand", India's Petroleum Minister said.

- ROK officials proposed the idea of creating a joint stockpile for Asia, storing supplies in countries where facilities are available. They stressed the need for an Asian energy policy forum at the ministerial level, saying that organizations such as the International Energy Agency do not take care of Asian interests.

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Dialogues on Joint Stockpiling and Emergency Sharing of Oil (5)

29th APEC Energy Working Group (EWG) Meeting, Hanoi, Viet Nam, 16-17 March 2005

- The United States presented a proposal for implementing Best Practices for the Establishment and Management of Strategic Oil Stocks, as endorsed at EMM6. A workshop will be held in Honolulu, USA, in the second half of 2005 and prior to EMM7. Its objective is to discuss and refine implementation, including implementation in the context of varied stockpile models and economy specific situations, the feasibility of joint or regional oil stocks, how to use the IFAT model, and the identification of priority principles. Members endorsed the proposal.

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Many Talks but No Action, Why?

There is no regionalized energy security system in Asia-Pacific.

Absence of recognized common goal, which makes the pledges for joint strategic reserves unfulfilled promises.

 Although the ASEAN is a dynamic, populace region, its total economy and oil consumption are not significant compared to Northeast Asian countries. ASEAN can do very little in terms of supply to East Asia.

OECD countries like Japan and ROK already have government stockpiles, but China and India are only now building theirs. 

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Options Towards Regional Cooperation (1)

Enhance cooperation with IEA (International Energy Agency) - Most of the major growth in world oil demand and imports come from the Asia-Pacific region. - As China and India have embarked on stockpiling programs, it is a right time for IEA to enhance cooperation with them. - The IEA actually seeks to cooperate and complement the work of regional organizations such as APEC and ASEAN, and promotes the shared goals of energy security. - In terms of oil stockpiling, the IEA's Agreement on an International Energy Program (IEP) requires participating countries to maintain emergency oil reserves equivalent to at least 90 days of net oil imports, and to participate in a crisis-allocation system through an Emergency Sharing System.

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Options Towards Regional Cooperation (2)

Create new regional organizations and build regional joint stocks (consumer-consumer cooperation)

- ASEAN+3 based: Japan and ROK proposed to construct a joint oil stockpile facility to ASEAN. The ASEAN recognized the importance of oil stockpile for supply security. They waits for Japan to provide a financial assistance for feasibility studies for oil stockpiling. They also wish to get technical assistance from Japan and Korea for planning, establishing and/or maintaining stockpiling programs in the region as stated in the ASEAN+3 Ministers Meeting in Manila in June 2004.

- APEC based: In a METI report containing international energy strategy up to 2030, Japan proposed to establish an Asian IEA after China and India set up their national stockpiling plan, to jointly deal with growing oil import dependency of China and India, pointing out that only Japan and South Korea are members of IEA.   

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Options Towards Regional Cooperation (3)

Enhance cooperation with producing countries (consumer-producer cooperation)

- Middle East oil producers and major Asian consumers:

Middle East producers are basically against strategic oil stockpiles. Propose a joint stockpile, jointly owned by member producers/consumers, held in Asia at targeted level. Require exporters to deposit proportion of incremental exports into a regional stockpile.

- Russia and NEA Consumers:

Russia once considered to stockpile one third of 2001 oil exports according to Nihon Gezai Shimbun. Russian Energy Minister had also mentioned EU-Russia joint oil and gas stockpile utilizing harbor storage and/or salt cavern near Caspian Sea. It will be possible to build a regional oil stockpile in the Russian Far East financed by Russia and NEA countries.

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Then What Now?

Combination of the three approaches mentioned above will be useful to Northeast Asia

- Establish an Asian version of IEA when each country in the region accomplish certain level of emergency stockpile.

- Start with Japan, ROK, China, Russia (RFE) and then extend to other Northeast Asian and ASEAN countries.

- During the interim period, lease spare storage capacity of Japan and ROK to China and other countries.

- Eventually expand fully to account for all APEC member.

- Promote joint cooperation with IEA and oil exporting Middle East countries.

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ReferencesAPERC, “Emergency Oil Stocks and Energy Security in the APEC Region”, Tokyo, March 2000. Ehara, Norio, “Recent Developments in Stockholding by Non-Member Countries”, IEA Seminar on Oil Stocks and New Challenges in the Oil Market”, Berlin, 9th September 2003.Houssin, Didier, “Emergency Stock Holding and Oil Stocks in France”, IEA Seminar on Oil Stocks and New Challenges in the Oil Market”, Berlin, 9th September 2003.Iwahara, Tatsuya, “Topics of operational aspects of Japan’s emergency stockpiling”, ‘APEC Joint oil Stockpiling Workshop’ Seoul, 2nd December 2003.KNOC, “Korea’s Strategic Oil Stockpiling”, IEA/China Oil Stocks and Emergency Response Seminar, Beijing, 9-10 December 2002.KNOC, “Need for Launching Joint Stockpiling to Enhance the Oil Security in the APEC region”, December 2003.Kurumada, Naoaki , “Outline of Petroleum Stockpiling and Emergency Response in Japan”, IEA/China Oil Stocks and Emergency Response Seminar, Beijing, 9-10 December 2002.Leiby, Paul N. , “Economics of Energy Security Policy – Oil Shocks and Strategic Oil Stocks”, USAEE Policy Symposium – Energy (in)Security in the 21st Century, MIT, 4th December 2003.LIU, Xiaoli and ZHANG, Yousheng, “China Petroleum Security and Regional Cooperation”, ‘International conference on Cooperative Measures Enhancing Oil Security in Northeast Asia’, Seoul, 6th September 2003.MOCIE, “Korea’s Emergency Response Measures in Perspective: short-term vs. mid & long-term energy security policy and programs”, IEA/ASEAN Workshop, September 2003. Morse, Edward L., "The US and the Changing Geopolitics of Asian Energy: Security and Foreign Policy Interests," paper presented at the Conference on Asian Energy Security and Implications for the United States, National Bureau of Asian Research and The Pacific Northwest Center for Global Security, Seattle, September 29, 2004.

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Thank You!