Oil routes diversification

The rationale behind oil routes diversification is to reduce the chances of piracy and terrorism. Currently, two-thirds of Indian oil comes from the Middle East and most of the additional oil needed by India up to 2030 will be supplied by this region because it has huge resources and because it is close to India. As for China, the Middle East currently accounts for 45 per cent of Chinese imports while the remaining 55 per cent comes from Africa, the former Soviet Union and other developing countries. The additional oil needed by 2030 is likely to be supplied by the Middle East and the former USSR countries. Once again, these two regions have both the resources and proximity as advantages for supplying China. The main problem of this reliance on the Middle East and Africa is the fact that oil is shipped through two critical shipping channels, namely the straits of Hormuz and Malacca. The Strait of Malacca is 900 kilometres long with a flow of 12 million barrels per day in 2006.

At its narrowest point it is only 500 metres wide. The Strait of Hormuz, which lies at the mouth of the Persian Gulf, is the busiest oilshipping route in the world with a flow of 13.4 million barrels per day corresponding to 16 per cent of the global oil supply (and close to onethird of trade volume). Growing tensions have highlighted the potential risks of piracy and terrorism and, more generally, the risk of supply disruptions. Therefore, countries have recently tried to bypass these two routes. To do so, China and India have tried to agree on the building of pipelines. Oil can be transported by pipeline, rail, road or ships. This partly explains the Chinese willingness to obtain oil from Africa and the former Soviet Union. The other reason is related to the diversification of oil suppliers. Indeed, it makes it possible to reduce the share of imports coming from the Middle East. This is a strong motivation for the Chinese authorities as they fear a potential oil blockade in case of a conflict over Chinese Taipei. Consequently, the idea is to reduce imports from the Middle East and by sea. There have, therefore, been many pipeline projects involving various Asian countries. This illustrates how cooperation can lead to mutual benefits as countries get either energy or markets for their resources. One example is the Kazakhstan-China pipeline, whose eastern leg was completed in 2005 and for which discussions are underway to increase capacity. There is also under discussion a project called Iran- Pakistan-India (IPI) that would transport gas from Iran to India and Pakistan.

This pipeline would provide benefits to the three countries: Iran would find markets for its gas, India and Pakistan would obtain the natural gas they need and Pakistan would receive transit fees. Other projects for pipelines such as Turkmenistan-Afghanistan-Pakistan-India and Myanmar-Bangladesh-India are also currently under discussion. These initiatives underline the Indian objective of pushing forward gas as the energy source of the future. The East Siberian Pacific Ocean (ESPO) pipeline is a good example of both cooperation and competition among Asian countries. The idea is to transport oil from Russia to China and Japan. The question was which leg would be constructed first: either a pipeline from East Siberia to the Russian Pacific coast or a spur to China. After some indecision, the Chinese won the political battle over the Japanese and therefore they will be served first, in 2009, with a capacity of approximately 0.6 million barrels per day. In the late 1980s, China launched its policy of ‘going-out' which corresponds to acquiring equity stakes in exploration and production assets overseas. This policy has two goals, the first being to supply its increasing oil needs and the second, to create competitive international companies. Concerning energy security, the rationale is to enable the country to establish its oil reserves. Therefore, in case of a supply disruption from any of the country's oil suppliers or in case of an oil blockade, it would be able to reroute the physical flow of its oil. In addition, it provides a hedge in case of price increases. Indeed, if prices were to rise, the government could cap the price and divert the oil to the national market. Today, Chinese national oil companies own 0.6 million barrels per day of oil production overseas while India owns 0.1 million barrels per day. Chinese companies have invested in countries such as Kazakhstan, Sudan, Indonesia, Nigeria and Angola. The volume currently controlled by Asian national oil companies is rather small compared to their needs and is mostly sold on the market rather than shipped towards the home country. On the other hand, between 40 and 50 per cent of the Chinese companies' oil is shipped to China.

These acquisitions of equity oil abroad have set the stage for fierce competition among Asian countries. Recently, Chinese national oil companies won four deals over Indian companies: in 2004 in Angola, in 2005 in Kazakhstan and Ecuador and in 2006 in Nigeria. Japanese companies are also investing abroad. Currently, the proportion of oil produced by Japanese national oil companies corresponds to just under 15 per cent of the oil consumed in 2005 and the government wishes to increase this share to 40 per cent by 2030, a number that might be difficult to reach. This policy is not supported by a strong consensus. For example, the IEA is rather dubious of the effectiveness of such a policy and is in favour of a market solution. According to the IEA, transparent international oil markets coupled with energy efficiency measures and oil stocks would achieve better results than a countervailing policy of building up market power. Besides, quantities held by Asian national oil companies are not significant enough to really improve their physical oil supply and thus, to protect them against a price hike. Since the 1970s, strategic oil reserves have been recognised as crucial to limit the effects of oil supply disruptions. For example, the International Energy Agency requires its member states to have the equivalent of, at least, 90 days of net oil imports in oil reserves. The ASEAN Petroleum Security Agreement (APSA) signed in Manila in 1986 is an example of cooperation concerning oil. Indeed, this agreement mentions an ASEAN Emergency Petroleum Sharing scheme.

This means that if at least one member country is in critical shortage, the ASEAN oil exporting countries will help the affected state(s). This scheme has not been used yet. The imperative for stockpiling has been of increasing concern in recent years because of the fear of supply disruptions. Of the Asian countries, Japan and South Korea have reserves of at least 90 days of net imports as they are both OECD and IEA members. Currently Japan reports a 160-day oil stockpile, including state-owned reserves (90 days) and private reserves (70 days). Non-OECD countries also hold stockpiles. Examples are Thailand (mandated by its 1978 Fuel Act) and the Philippines. It should also be noted that the Chinese government launched a project of strategic oil storage construction. Four sites are being built with a capacity of almost 100 million barrels, which corresponds to 27 days of current imports and should be completed by 2008. Second and third phases of construction with two additional sites of 200 million barrels are planned. This would raise the capacity to the equivalent of 75 days of 2015 net imports. The Indian government is doing the same and a strategic petroleum reserve was due to start in 2007 and should be completed by 2012. It will have a capacity of 36 million barrels, the equivalent of 19 days of current net imports, and is expected to increase to 110 million barrels.

Oil routes diversification

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