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Northeast Asia is a resource-rich region that has become of increasing importance in recent years due to the oil crisis affecting the Middle East. Because it is renowned that oil and natural gas are running out worldwide, Russia, China, Japan, and the two Koreas have been seeking to become regionally dependent on the sources of petroleum in Siberia and, in particular, on Russia’s Sakhalin Island. In fact, oil companies from Northeast Asia have become oil-drilling leaders in the region and in the world. What does this imply for oil security in Northeast Asia? And how are these countries coping with sustainability and oil consumption?
LEADERS IN THE OIL SECTOR
As previewed by the title of this analytical report, Sino-Russian drillers have become leaders in the oil sector. To the left, a column chart showing the capital expenditure of key companies on planned and announced projects across the oil and gas value chain between 2018 and 2025 shows Russia’s Gazprom and China’s Sinopec (China Petrochemical Corporation) as the leader developers for present and future projects. European and American firms like Shell and ExxonMobil, once the undisputed leaders in this sector, rank now 3rd and 4th according to GlobalData’s Oil & Gas Intelligence Centre. Another important contribution of these values is that, in the same chart, one can find two Russian leaders, Gazprom and Rosneft Oil, as well as two Chinese leaders, Sinopec and CNPC (China National Petroleum Corporation), which is a clear sign of the increasing importance of these countries in the oil and petroleum extraction and distribution across the globe.
According to the Russian Oil and Technology Magazine, Gazprom and Sinopec are expected to become top spenders across the oil and gas value chain with capital expenditure (Capex) totaling up to US$ 259.1 billion by 2025. This source confirmed that, already in 2018, Gazprom led with “an estimated capex of US$170.2bn expected to be spent on 93 oil and gas projects globally. Sinopec and Royal Dutch Shell Plc (Shell) follow with capex of US$88.9bn (69 projects) and US$84.5bn (107 projects), respectively”. The Russian oil and gas agenda has so far been stressing on the building of pipelines, projects, and processing plants, therefore it is focusing on creating the needed infrastructure to facilitate the uninterrupted supply of gas in multiple markets. As expressed in the Asia Times, “Russia has the opportunity to create Canada out of Siberia,” and in recent years has indeed involved multiple international companies on Russian soil to contribute to projects. In particular, China is an appreciated guest due to the potential help it may give to infrastructure projects, as demonstrated in other whole-Chinese initiatives like the BRI.
The Power of Siberia pipeline inaugurated by Russia and China in December 2019 may be one of the most successful projects to have so far seen Russia and China cooperating in mutually benefiting initiatives. The Power of Siberia is a 3000 kilometers-long pipeline that connects Lake Baikal in Siberia to the Chinese cities of Harbin, Jilin, and Liaoning, and has the potential to be extended to Shanghai as a multibillion-dollar project. According to the Chinese approach, economic deals such as the Power of Siberia pipeline are key components of diplomacy and are what drives good relations with countries like Russia. This is a very different, pragmatic, and rapid approach compared to the approach preferred in Europe, where countries tend to prioritize communication, and multilateral conversations often end up in the delaying of important projects such as that of the Nord Stream 2 pipeline, involving Russia and EU.
Politics and the structure of the government certainly do affect decision-making. In China, while most companies are state-owned, this does not necessarily obstacle progress. In fact, China has now five of the world’s largest crude oil companies. Other than Sinopec (China Petroleum and Chemical Corporation), one could easily list the China National Petroleum Corporation (CNPC), The China National Offshore Oil Corporation (CNOOC), the Shaanxi Yanchang Petroleum, and the Sinochem Group. The supply potential both Russia and China have in Northeast Asia could not only satisfy the consumption demands of this region but possibly address those of a greater East Asia.
ADDRESSING CONSUMPTION IN NORTHEAST ASIA
Considering that Northeast Asia is made of Russia, Mongolia, North Korea, South Korea, Japan, and China, then it is easy to understand the reasons why addressing consumption is a key concern for these countries’ leaders. Firstly, population growth is a common concern due to the over 2 billion people inhabiting these countries. Population is not only a concern for the present, but it is also a factor shaping energy security for the future. Other reasons are certainly the distribution of the population and the climate. In fact, this may not only affect the import and export of oil but also the construction of advanced technology and infrastructure to allow the distribution of resources. This, however, is not only the only type of climate one has to worry about because the geopolitical climate is also a very important feature for the successes of projects that may address public consumption in Northeast Asia. For instance, including both North Korea and South Korea in the same project may be a double-edged sword as it can certainly have positive effects on the relations between these two countries, but it can also enhance conflict and therefore disrupt stability in the region.
This is why oil security is extremely important when it comes to discussing oil diplomacy between very diverse countries. As written by expert Se Hyun Ahn in the article “Energy Security in Northeast Asia: Putin, Progress and Problems”:
“Energy security is defined as the securing of reliable and affordable energy supplies that are sufficient to support social, economic, and military needs, while at the same time being environmentally sustainable.”Ahn, S.H., 2007. Energy Security in Northeast Asia: Putin, Progress and Problems. LSE Asia Research Centre (ARC). Working Paper, p.2.
The main issue identified in the region is that countries like China are extremely hungry for all kinds of energy sources and these demands will only keep growing steadily, as shown in a presentation on Oil Security and Collaboration in Northeast Asia, created by the Head of the Non-Member Countries Division Asia/Pacific and Latin American countries of the International Energy Agency, Norio Ehara, the gap between oil demand and production in China will continue to rise and will become a very tough issue to resolve in 2030. In this year, Northeast Asia is also expected to consume over 20% of the world’s available oil, through dependency on mostly Siberian projects rather than Middle Eastern.
This is why it will be increasingly important for North East Asian countries to improve policies, bureaucracy, sustainable development, and work on renewable energy.
THE DECREASING ROLE OF US EXXONMOBIL
As the former leader in the oil and gas sector, US’s company ExxonMobil has, since the early 2000s, seen great potential in Far East Russia. As shown in the map at the very start of this article, the region of the Bering Strait, dividing Alaska from the Far East Russia leaves space for important cooperation between the US and Russia. In fact, ExxonMobil has taken part in significant projects like Sakhalin-1, one of the largest offshore investment projects in Russia. The project operator of Sakhalin-1 is Exxon Neftegas Limited, subsidiary of ExxonMobil, which holds 30% of the ownership, more than its Russian counterpart Rosneft (20% of the share), Japanese SODECO (also 30%), the Indian state-owned ONGC Videsh (20%).
But, despite the strength and value of Sakhalin-1, as shown in the table to the right, Gazprom has later largely taken over projects in the Russian Far East, replacing ExxonMobil as the world’s top energy conglomerate in 2017. In subsequent projects such as Sakhalin-2 and Sakhalin-3, indeed, sought the advent of East Asian companies like Japanese Mitsui and Mitsubishi, and Chinese Sinopec, rather than the continuation of ExxonMobil as major driver to these energy initiatives. Additionally, the rise of Sinopec has increasingly shaped ExxonMobil’s policy of working with East Asian state-owned companies despite eventual differences in the institutional and bureaucratic structures, but its dominance in the region has decreased to the point that, in 2005, ExxonMobil sold its 3.7% stake in Sinopec in 2005 and continued to decrease until 2020, when Exxon cut costs at Russia’s Sakhalin-1 project due to the impact of COVID-19 on the job market.
The economic sanctions imposed on Russia by the US in recent years may also be a determinant for the lack of US presence and the rise of Chinese oil and gas companies in Northeast Asia. The Race for the Arctic, however, may interestingly revolutionize these roles, as the US has interests in maintaining a dominant position along with Canada and Nordic countries in Europe.
PROJECTING OIL SECURITY AND SUSTAINABILITY
The main conclusion to this analysis is that projecting oil security development and sustainability in the future is difficult mainly due to the durability of this resource and the limited methods used to consume it. According to the International Energy Agency and the Global Energy Institute, however, economic interdependence may be a key feature to ensure cooperation among states on energy security.
The issue that remains is that countries like China are among the world’s top consumers, therefore it will be increasingly difficult to diversify the energy sources of these economies and deviate from the nuclear source. While Chinese metropoles have been increasingly prioritizing environmentally-friendly technologies and, for instance, transport has started turning electric, however, there is still much to do to address the huge demands for such a big population. On the other hand, while the role of Far East Russia is central to Northeast Asian oil security, Far East Russia, or Siberia, has an important need to develop both in terms of infrastructure and in terms of general economic growth because Siberia does not host a huge population, therefore, the economy runs differently from that of European Russia.
While Sinopec and Gazprom, along with other Sino-Russian drillers, have been working extensively on growth and seem to have found a shared dimension and vision, in the future, it will be essential to do the same with Mongolian, Korean, and Japanese oil companies. As Ahn (2007) predicts:
“From the regional economic security perspective, Northeast Asian regional integration depends upon a certain degree of shared economic, political, and ideological interests before it can be successfully launched.”Ahn, S.H., 2007. Energy Security in Northeast Asia: Putin, Progress and Problems. LSE Asia Research Centre (ARC). Working Paper, p.20.
The Arctic could expand the potential for cooperation between multilateral entities, however, this means Northeast Asia will have to set the agenda and prioritize climate-related problems, as it already finds itself suffering from on a smaller scale. Environmental degradation and climate change are pivotal to make projections on oil security policies and decide the right path to follow both politically and economically to ensure the sustainable future of this region.
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Tata, S., 2017. Deconstructing China’S Energy Security Strategy. [online] Thediplomat.com. [Accessed 23 October 2020].
Meliksetian, V., 2020. Energy Deals Are Creating A Powerful Alliance Between China And Russia | Oilprice.Com. [online] OilPrice.com. [Accessed 23 October 2020].
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