July 7, 2012
EDITOR’S NOTE: A recent study released by the Asia Pacific Foundation of Canada and the Canada West Foundation argues that Canada’s approach to energy should be more clearly based on its national interest, not a collection of private interests. It therefore calls for the establishment of a framework that will bring into play the interest of not only the private sector and federal and provincial governments, but also First Nations governments, communities and environmental interests. This backgrounder was written by Yuen Pau Woo, from the Asia Pacific Foundation of Canada and Roger Gibbins, with the Canada West Foundation.
The evidence is clear that Asia will be the locus of global economic growth in the 21st century. In 2012, more than 75 per cent of total world growth will come from outside the OECD, with a sizable portion coming from China alone.
Within the next decade or two, Asia will account for more than half of total world output. Accompanying this growth will be increasing demand for energy.
Asian energy demand growth: Rapid Asian economic growth will reflect the well-established relationship between economic growth and demand for primary energy.
Between 1971 and 2007, every 1 per cent increase in global GDP was associated with a 0.7 per cent increase in global primary energy demand (International Energy Agency 2009). Generally speaking, the wealthier a country is, the more energy it consumes, holding all else constant, at least in early stages of development.
This relationship is likely to continue despite concerted efforts to break the historical link between economic growth and energy use. Energy demand growth in Asia is expected to be significant between now and 2035 (see Figure 4).
While non-OECD energy demand growth in general is expected to be strong, growth in Asian non-OECD countries is expected to be blistering with primary energy demand set to double its 2008 level by 2035.
This provides an excellent opportunity for Canada to align its abundant energy resources and expertise with rapidly growing demand from Asia. Currently, traditional energy sources (coal, natural gas and oil) make up most of Asian energy consumption (see Figure 5), and, despite significant efforts to green Asian energy systems, the rapid growth in demand is expected to occur across the entire energy mix (renewable energy sources, coal, natural gas, oil and uranium) (see Figure 6).
Opportunities for Canada reach well beyond commodity exports to encompass Asian investment to help finance the development of Canadian resource projects, the marketing of Canadian energy, environmental and regulatory expertise, the export of cutting-edge renewable energy technologies, and the construction of new energy and infrastructure systems in Asia. This broader energy relationship, however, is likely to be built on the platform of commodity exports.
Global energy demand growth will not be limited to Asia, but Canadian prospects for market diversification beyond Asia are limited. Although the Government of Canada has acted aggressively to expand Canadian trade ties with Europe and Latin America, potential global energy markets are more limited in scope than are the potential markets for manufactured and agricultural exports.
Shipping energy resources to South America, Russia, the Middle East or Africa would be akin to shipping coal to Newcastle, and the European Union poses significant logistical and market access challenges for Canadian energy.
While China has substantial shale gas deposits, recent indicators suggest that these energy sources are years away from meaningful production.Asia, therefore, is the primary growth market for Canadian energy commodity exports, keeping in mind that global markets for Canadian expertise and technological innovations are much broader.
At the same time, we need to recognize that other countries are also aggressively pursuing Asian markets as a source of growth for their energy exports, particularly Australia.
Price differentials between North America and Asia: There are significant natural gas and crude oil price differentials between American and Asian markets.
Historically, there has been a small spread between the price of imported natural gas in Japan and the spot price at Henry Hub, Louisiana. However, that is no longer the case (see Figure 7).
The differential is significant, ranging from $10.00 to $30.00 in recent years. Canadian natural gas would yield better producer returns on the international market than in North America where Canadian firms face a glut of natural gas, growing competition and limited bargaining power. This large price-arbitrage potential would bring billions of dollars of additional income to Canada, given our daily gas production potential, if we had greater access to Asian markets for our gas.
A similar price differential exists for crude oil. For many reasons – the infrastructure bottleneck at Cushing, Oklahoma (causing inventories of crude to rise), inadequate pipeline access to Gulf Coast refineries, no access to West Coast refineries and lack of access to Asian markets – Canadian crude faces a significant discount relative to world prices.
With Western Canadian crude oil production expected to rise, flat North American demand, and limited pipeline capacity to access refineries in the United States, there will be further downward pressure on prices for Canadian crude. One study projects the discount between Western Canadian Sweet crude and West Texas intermediate at $27 a barrel by 2014. Another recent study estimated that with improved Gulf Coast, West Coast and Asian access for crude oil, Canada would see an increase of $132 billion in GDP (in current dollars), spread over a 15-year period.
This presents a significant opportunity, should the differential persist, and one that could be lost if Canada fails to act.
Asia’s quest for security of supply: Energy security has been a preoccupation of major Asian economies for nearly 40 years, since the oil shocks of the 1970s.
With the rise in overall energy demand in the region, led principally by China, the quest for secure, long-term sources of oil and gas has become more acute. Recent developments have added to the urgency of energy security in Asian countries:
â– There is heightened concern about security of supply from volatile regions such as the Persian Gulf, and about transportation safety through the Straits of Hormuz and the Straits of Malacca. China, Japan, and Korea, all heavily dependent on oil and gas from Gulf States, are actively seeking alternative sources of supply. They are also concerned about the security and safety of supply from Russian and Central Asian pipelines. The recent imposition of sanctions against Iran adds to the pressure for diversification, even for Asian countries that are not part of the sanctions regime.
â– The Fukushima nuclear disaster in Japan led to a suspension of about 80 per cent of the country’s nuclear capacity, prompting a frantic search for alternative energy supplies. The best prospect in the near term is LNG, for which Japan already has well-developed infrastructure.
â– Southeast Asia is becoming a less important source of energy for the rest of the region because of dwindling supplies. Indonesia, for example, is now a net importer of LNG. The national oil companies of Malaysia and Thailand are seeking investment opportunities abroad, including in Canada.
â– Major Asian countries are looking to reduce their greenhouse gas emissions and are switching to less polluting sources. The export of cleaner fossil fuels (especially LNG) from Canada to Asia could result in a net environmental and health benefit for the region. Many Asian countries are also looking to energy efficiency and the use of renewables as part of their overall energy security strategies.
China is already a leader in solar panels, and is investing massively in other green technologies in an effort to address severe environmental challenges in the country, and to create industries of the future.
In Korea, ‘green growth’ has become a national priority, with set targets for the use of renewables in the overall energy mix and significant investment in clean energy such as wind power.
Japan is an established leader in energy efficiency and technologies for a low-carbon economy, and can be expected to continue in this direction even as it seeks near-term alternatives to nuclear power in the wake of the Fukushima nuclear disaster.
British Columbia and Alberta now have hundreds of millions of cubic meters of dead lodgepole pine equivalent to more than 10 years of annual harvest. This wood is quickly deteriorating for saw log availability, but could be an excellent source for Asia’s bioenergy market, especially those that seek to convert from burning coal to a cleaner source of energy such as wood.
The quest for energy security in Asia, therefore, is multi-faceted and presents a range of energy opportunities for Canada. In the foreseeable future, major Asian economies will continue to rely overwhelmingly on fossil fuels for their energy needs and they will be looking for secure, long-term sources of supply. Canada is very much on the global energy radar not just as a potential supplier, but, in many respects, as a preferred choice over alternative suppliers in troubled parts of the world.
At the same time, the determination of Asian countries to become more energy efficient and less reliant on fossil fuels presents an opportunity for Canada’s energy relationship with Asia to include cooperation on clean energy, energy efficiency and environmental protection in the energy sector.
For most Asian countries, securing reliable, long-term sources of fossil fuels and investing in green growth are part and parcel of the same overall energy security strategy. There is no contradiction between the two and, hence, no reason why the Canada-Asia energy relationship should not embrace both.
Yuen Pau Woo is the President and CEO of the Asia Pacific Foundation of Canada and Roger Gibbins is the President and CEO of the Canada West Foundation. To download a complete copy of their report click here.
This backgrounder is FREE to use on your websites or in your publications. However, Troy Media, the Asia Pacific Foundation of Canada and the Canada West Foundation, with links to their web sites, MUST be credited.