Rising Energy Competition and Energy Security in Northeast Asia: Issues for U.S. Policy

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

Asia has become a principal driver in world energy markets, largely due to China’s remarkable
growth in demand. As the gap between consumption and production levels in Asia expands, the
region’s economic powers appear to be increasingly anxious about their energy security,
concerned that tight supplies and consequent high prices may constrain economic growth. Rising
energy competition in East Asia promises to affect U.S. policy in many ways, from contributing
to price spikes because of China’s rapidly increasing demand to altering the geostrategic
landscape in the years to come as regional powers struggle to secure access to energy supplies.
This report analyzes how China, Japan, and South Korea’s pursuits to bolster their energy security
impacts U.S. interests. It also examines decisions being made by Asian states now that will
significantly shape global affairs in the future, how these decisions might play out, and how
Congress and the executive branch might play a role in those decisions.
China, Japan, and South Korea have been moving aggressively to shore up partnerships with
existing suppliers and pursue new energy investments overseas, often downplaying doubts about
the technical feasibility and economic profitability of new development. Their outreach to
suppliers includes the development of close ties with Iran, a key concern to U.S. policymakers
given skepticism about Tehran’s nuclear program. This report outlines the energy portfolios and
strategies of the three countries, including their pursuit of alternatives to petroleum.
The Russian Far East, with vast energy reserves and relative geographical proximity to northeast
Asian markets, is already an arena for competition among the Asian powers. The current struggle
between China and Japan over access to Russian oil via a pipeline from Siberia may be indicative
of more conflicts ahead. If Russia continues to attract commercial and political overtures to gain
access to its resources, Moscow stands to gain considerably more power in international affairs.
The possible implications of the surge in energy competition are wide-ranging, from provoking
military conflict to spurring unprecedented regional cooperation. Depending on how events
unfold, the U.S. alliances with Japan and South Korea, as well as relationships with Russia and
China, could be challenged to adapt to changing conditions. Central Asia, with its considerable
energy supplies and key strategic location, has re-emerged as an arena for geopolitical contests
among major powers.
Many analysts concur that it is in the interest of the United States for the governments of China,
Japan, and South Korea to approach energy policy from a market perspective. They believe that if
Beijing, Tokyo, and Seoul instead link energy supply with overall security, the potential for
conflict and instability is heightened. The report concludes with a number of options, including
those that U.S. policymakers might pursue to encourage a trend towards cooperation and the de-
politicization of energy policy.
This report will be updated periodically.

Introduc tion ..................................................................................................................................... 1
The Role of Congress......................................................................................................................1
Profiles of Country Energy Sectors.................................................................................................1
Japan’s Energy Sector...............................................................................................................1
National Energy Strategy....................................................................................................2
Foreign Suppliers................................................................................................................3
Japan’s Engagement with the Middle East.........................................................................3
Tension with U.S. Over Iran...............................................................................................4
Korea’s Energy Sector...............................................................................................................4
National Energy Strategy....................................................................................................5
Emphasis on Natural Gas....................................................................................................5
North Korea Factor.............................................................................................................6
China’s Energy Sector...............................................................................................................7
Government Activism.........................................................................................................7
Pursuit of Alternatives to Oil..............................................................................................8
Coal’s Bounty and Detriment..............................................................................................9
Seeking Energy and Partnerships Overseas........................................................................9
U.S.-China Bilateral Energy Cooperation..........................................................................11
Rising Competition Over Access to Oil and Gas in the Russian Far East.....................................12
Diplomatic and Economic Rivalry over Angarsk/Taishet Pipeline...................................12
Moscow Equivocates........................................................................................................12
Natural Gas Competition Ahead?.....................................................................................14
Sakhalin Resources Under Development..........................................................................14
Assessing the U.S. Strategic Interest................................................................................15
Implications ................................................................................................................................... 15
Bilateral Relationships with Asian Allies..........................................................................15
Enhanced Regional Cooperation.......................................................................................16
Heightened Sensitivity of Sea Routes...............................................................................16
Increased Russian Stature.................................................................................................17
Renewed ‘Great Game’ Rivalries in Central Asia.............................................................17
Casus Belli for Major Conflict?........................................................................................18
Options for Congress and Executive Branch Policymakers..........................................................19
Taking a More Aggressive Approach to Securing Exclusive U.S. Access to Energy
Supplies ....................................................................................................................... ......... 19
Bilateral Measures with U.S. Allies........................................................................................19
Greater Bilateral Efforts with China.......................................................................................19
U.S. Leadership in Developing Multilateral Cooperation.......................................................20
Iran Sanctions Act Enforcement..............................................................................................21
Figure 1. Japan’s Energy Consumption...........................................................................................2
Figure 2. Korea’s Energy Consumption..........................................................................................6

Figure 3. China’s Energy Consumption..........................................................................................8
Figure 4. Chinese Oil Imports 1995..............................................................................................10
Figure 5. Chinese Oil Imports 2005..............................................................................................10
Figure 6. Proposed Oil Pipeline Routes: Angarsk/Taishet-Nakhodka and Angarsk/Taishet-
Daqing ......................................................................................................................... ............... 13
Figure 7. Strait of Malacca............................................................................................................17
Author Contact Information..........................................................................................................22

Rising competition for energy in China, Japan, and South Korea are of interest to U.S.
policymakers for three primary reasons. First, the surge in China’s energy needs has emerged as a
major factor in influencing world oil prices. Second, the tightening global oil market could
increase the bargaining power of oil exporting countries, possibly driving a wedge between the
United States and our Asian allies over important foreign policy issues. Third, competition in Asia
over access to energy supplies could significantly alter the geopolitics of the region, with
important ramifications for U.S. foreign policy. Analysts alarmed at the developing trends are
quick to mention that energy insecurity is often cited as the proximate cause of the Japanese
attack on Pearl Harbor in 1941.

Congress plays an important role in developing U.S. foreign policy and energy policy. In addition
to its ongoing oversight and legislative responsibilities, in 1975, through the passage of the
Energy Policy and Conservation Act (P.L. 94-163), Congress authorized U.S. participation in the
International Energy Agency (IEA), the creation of a strategic petroleum reserve (SPR), and
support for efforts to enhance energy efficiency and alternatives to petroleum. These measures are
among those proposed by many analysts to address current concerns about how China’s demand
will impact the global oil markets and national security. Congress also established the United
States-China Economic and Security Review Commission in 2000 to review the national security
implications of trade and economic ties between the United States and the People’s Republic of
China, including an assessment of China’s energy needs and strategies.
When the China National Offshore Oil Corporation (CNOOC) attempted to acquire the U.S.
energy company Unocal for $18.5 billion in cash in June 2005, Congressional opposition to the
takeover played a key role in the eventual CNOOC withdrawal of its bid in August 2005.
Congressional activity included hearings, statements, studies, letters to the Secretary of Treasury, ¹
and legislation aimed at the Committee on Foreign Investment in the United States (CFIUS).

As the world’s fourth-largest consumer of energy, Japan, with few indigenous natural supplies,
has long depended on external sources to keep its economy running. Economic slowdown and ²
efficiency measures have helped keep Japan’s consumption of oil steady since 1980, but Japan’s
government has consistently demonstrated concern with energy security, particularly its
dependence on the volatile Middle East for oil supplies. Since the 1970s, Japan has embarked on
a focused campaign of diversification of suppliers and forms of energy, conservation, the

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^{Dick K.}^Nan^t^o^{et al.}
²^“^T^he^Big^T^h^{irst: Burning}^T^h^ro^ug^{h Oil,”}^{New Y}^o^{rk Times}^{, A}^p^r^{il 2}⁰^,²⁰^08.

establishment of strategic oil reserves, and research devoted to alternative energy sources. Japan’s
stockpiles are among the highest in the world. Japan also subsidizes its oil companies working ³
overseas, a strategy that has cost millions and, by many accounts, met with only limited success.
Observers point out that Japanese policymakers have linked energy policy and security policy,
citing threats to the Persian Gulf or to the sea lanes that bring oil to Japan. Japan is a member of
the International Energy Agency (IEA).
Figure 1. Japan’s Energy Consumption
⁴⁸^%
^1%
^4%
²²^%¹²^%
¹⁴^%
Oil
Coal
Natural Gas
Nuclear
H yd r o e l e ct r i ci t y
Other Renewables
^Source:^E^nergy^{Information Ad}^{ministration Japan Cou}^ntry^Analy^{sis Brief, 200}^{4 estimates.}
Japan has invested heavily in diversification, successfully reducing its share of petroleum as its
primary energy sources from over 70% in 1970 to under 50% in 2004. Since the 1973 Arab oil
embargo, Japan has increasingly relied on nuclear power generation to reduce its dependence on
oil and curb carbon emissions. Safety concerns have at times shaken the public’s confidence in
the industry and led to temporary declines in power generation when plants are shut down
following accidents. Despite occasional setbacks, however, Japan remains the third-largest user of
nuclear energy in the world and depends on nuclear reactors for over one third of its electricity.
Japan has 55 light-water nuclear power reactors and has plans to build up to 13 more over the
next decade.
Japan relies on natural gas for about 14% of its energy consumption, importing primarily from
Southeast Asia (40% from Indonesia, 20% from Malaysia) in the form of liquified natural gas ⁴
(LNG). Japanese firms have embarked on a major project to develop the natural gas and oil on

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the Russian island of Sakhalin, located just 160 km from Japan’s northern border. Japanese
electric and gas companies have secured contracts to receive gas in the form of LNG from ⁵
Sakhalin; beginning in 2009, Sakhalin should provide about 8.5% of Japan’s LNG. Earlier plans
to build a gas pipeline to Japan have stalled because of lowered expectations for demand from the
Japanese market.
Japan has been a world leader in creating a more energy-efficient economy. Its per capita energy
consumption is one of the lowest in the developed world at 175.6 million Btu, versus the U.S. ⁶
value of 340 million Btu. It has invested in energy conservation programs and national energy
savings plans to reduce per capita consumption to lower levels. Japan has also committed funds to
developing solar, hydro, and other carbon-free, environmentally friendly renewable energy
sources. Japanese automakers are leaders in producing hybrid cars which over time are expected
to reduce dependency on petroleum. Japan has a dual interest in improving efficiency: to enhance
its energy security and to meet its own environmental goals, particularly emissions targets set
under the Kyoto Protocol.
The announcement of a “New National Energy Strategy” in Japan in 2006 sets ambitious goals
for increasing conservation, lowering oil dependence, developing more nuclear energy, and
increasing the amount of equity oil overseas. Analysts say the strategy may reflect a shift toward
a more state-directed, interventionist approach.
Japanese oil firms have actively sought foreign supplies of energy on several continents for
decades to reduce its dependence on the Middle East. The companies have been active in the oil-
rich Caspian region, specifically in Azerbaijan and Kazakhstan. The Russian Far East has also
been identified as an attractive alternative supplier (see later section). Although Japan earlier
worked to diversify its supply elsewhere in East Asia, imports from China and Vietnam ⁷
reportedly dried up after 2000 as those countries become net importers themselves. In an
indication of both increased political rivalry and the quest for assured supply to resources, Beijing
and Tokyo have had diplomatic confrontations over the territorial rights of parts the East China
Sea, an area with at least some oil and gas reserves. In 2006, Japan imported 2% of its crude oil
from Sudan.
Despite attempts at diversification, Japan still imports close to 90% of its oil from the Middle ⁸
East. This dependence has driven Tokyo’s Middle East policy, which at times has been at odds
with American policy in the region. Japan has actively sought supplies in the region for four
decades and has maintained diplomatic relations with OPEC (Organization of Petroleum
Exporting Countries) nations to serve its energy needs. After the 1973 oil crisis, the Japanese
government undertook a new policy toward the Middle East, emphasizing its support for the

⁵^Sa^k^h^a^lin^pr^oje^c^tⁱⁿ^f^o^r^m^a^{tion f}^r^om^Ene^r^gy^Iⁿ^f^o^r^m^a^{tion A}^g^eⁿ^cy^f^a^c^t^s^h^e^e^t^a^{nd v}^a^rⁱ^ous^pr^e^s^s^r^e^por^ts^.
⁶²⁰⁰³^estⁱ^m^at^{e f}^r^o^m^t^h^{e E}ⁿ^erg^y^In^f^o^rmatⁱ^oⁿ^A^g^en^c^y^.
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⁸^Pe^t^e^r^E^v^aⁿ^s^,^The^Br^ookⁱ^ngs^F^o^r^e^{ign Polic}^y^Stu^d^ie^s^Ene^r^gy^Se^c^u^rⁱ^t^y^Se^rⁱ^e^s^:^J^apa^n.^Decem^b^e^r^2006.

Palestinians and developing relationships with regional powers independent of the United States.⁹
In relations with Iran in the 1990s, Tokyo adopted the European “critical dialogue” approach,
which emphasized engagement through trade and investment to moderate Tehran’s hardliners.
Japan has distributed millions in Official Development Assistance (ODA) to the region to further
economic development. Japan’s major trading companies reportedly are heavily involved in ¹⁰
investment in the Middle East and receive substantial government support for their activities. As
part of the effort to strengthen dialogue with Arab nations, Japan has engaged in the Israel-
Palestinian peace process by hosting conferences and facilitating governmental and business
exchanges.
The conflict between Japan’s energy diplomacy and U.S. security interests is particularly evident
in the case of Iran, which is the world’s fourth largest producer of oil, and is accused by the
United States of pursing a nuclear weapons program and supporting international terrorism. The ¹¹
loss of drilling rights in the Khafji concession in Saudi Arabia in 2000 compelled Japanese
policymakers to turn their attention to cultivating a nearly $3 billion deal with Tehran in the large
Azadegan oilfield in southwestern Iran. The field was reportedly expected to produce up to ¹²
300,000 barrels a day, nearly 10% of Japan’s crude imports, once operational. The Bush
Administration voiced its concerns to Japanese officials about investment in Iran based on its
suspected nuclear weapons development program. Though such pressure reportedly stalled
negotiations in 2003, the deal was salvaged and signed in 2004. However, as Iran became
increasingly defiant of International Atomic Energy Agency (IAEA) demands to open up its
facilities for inspection and the United Nations Security Council imposed sanctions on Iran, Japan
adjusted its position. In October 2006, Japan’s Inpex firm (about 30% of the company is held by
the Japanese government) reduced its stake in the project from 75% to 10% and transferred
operational authority to a national Iranian oil company. The consortium of firms working on ¹³
Azadegan was reportedly nervous that it will lose its rights to the deal, possibly to China. Press
reports indicate that since Japan’s reduced involvement, China and India have stepped up their ¹⁴
activities in energy deals with Iran.
The Republic of Korea has a similar energy portfolio to Japan, but its production and
consumption of energy is slightly less efficient and less environmentally-advanced. South Korea
is the world’s fourth largest oil importer and second largest LNG and coal importer (after Japan).

⁹^Sak^a^{i, Keik}^o^.^“Jap^an^-Iraq^Relati^oⁿ^s^{: T}^h^e^P^e^rcep^ti^oⁿ^G^a^p^an^d^{its I}ⁿ^f^l^u^eⁿ^{ce o}ⁿ^Di^p^l^o^m^{atic Po}^licies,”^Ar^{ab St}^udie^s
^Q^uar^te^r^l^y^{. Fa}^ll²⁰^01.
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^de^v^e^lopm^eⁿ^{t pr}^oje^c^t^sⁱⁿ^Sa^u^d^{i A}^r^a^b^ia^.
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It depends on oil for about half of its energy consumption. Korea’s consumption of energy has
remained flat since 2000, and, like Japan, all its energy imports must arrive by boat because of the ¹⁵
division of the Korean peninsula. Energy consumption per capita is 181 million Btu. The
government has built up a strategic oil reserve, managed by the state-owned Korea National Oil
Corporation. Like Japan’s trading houses, the Korean chaebol are active in the Middle East
energy sector. Korea is a member of the International Energy Agency.
President Lee Myung-bak, elected in late 2007, has indicated that he would like to focus on
energy diplomacy during his term. Ongoing restructuring of the energy industry, including the
deregulation and privatization of the Korea Gas Corporation (Kogas) has progressed slowly
because of labor union and other interest group opposition. South Korea has increased its nuclear
power generation, although has struggled to find appropriate sites for new plants due to limited
land availability. After ratifying the Kyoto Protocol on greenhouse gas emissions (though it is not
an Annex I party, so is not under the same obligations to reduce emissions), the government made
plans to introduce up to twelve new nuclear plants before 2015. Relatively little attention has
been given to the development of renewable energy resources.
Because most of the imported petroleum comes from the Middle East (Saudia Arabia alone
provides about one third of its imports), South Korea has taken measures to diversify its sources
by seeking equity stakes in energy exploration worldwide, including South America, the Middle ¹⁶
East, and Asia. Russia’s geographic proximity makes it an attractive supplier for Korea, and it ¹⁷
increased its imports of both oil and gas from Russia in 2007.
Korea has turned increasingly to natural gas for its power needs, importing considerably more
LNG in recent years. Energy specialists assert that Korea’s domestic configuration and
infrastructure lend itself well to increasing natural gas usage, and the government has promoted ¹⁸
demand through tax incentives and other measures. Natural gas in the form of LNG makes up
about 10% of South Korea’s consumption, and is mostly imported from Qatar, Indonesia,
Malaysia, and Oman. Increasing the use of natural gas has taken on added importance as South
Korea has found coal prices from China, a major supplier, spiking due to increased domestic
demand in China. Kogas has signed a long-term deal to import LNG from the Sakhalin-2 project.
Kogas also hopes to eventually import gas by pipeline from Siberia, but has expressed frustration
with the slow pace of progress on several proposed pipeline projects from Russia.

¹⁵²⁰^{02 e}^s^tim^a^t^e^,^pr^ov^ide^d^by^the^Eⁿ^e^r^gy^Iⁿ^f^o^r^m^a^{tion A}^g^eⁿ^cy^{, U}^.^S.^D^e^pa^r^t^m^e^{nt of}^Ene^r^gy^.
¹⁶^Sta^tistic^{s f}^r^om^{South K}^o^r^e^{a C}^o^uⁿ^tr^y^An^aly^s^is^Br^ie^f^{, Ma}^y²⁰⁰^{6, E}ⁿ^e^r^gy^Iⁿ^f^o^r^m^a^{tion A}^d^mⁱ^nis^t^r^a^tion^,^U^.^{S. D}^e^pa^r^t^m^e^nt
^of^Ene^r^gy^.
¹⁷^“^K^or^e^a^’^s^C^r^ude^I^m^por^ts^f^r^om^R^u^s^sⁱ^a^Soa^rⁱⁿ²⁰⁰⁷^,”^Yo^nh^ap^En^gli^s^{h N}^e^w^s^{, Fe}^br^ua^r^y^{11, 20}⁰⁸^.
¹⁸^K^e^{nt E. Ca}^l^d^e^r^,^Kore^a’s^Ene^r^gy^Inse^c^u^ritie^s^{. Kore}^a^Ec^on^om^ic^Institute^,²⁰⁰⁵^.

Figure 2. Korea’s Energy Consumption
⁵⁰^%
^1%
¹²^%¹⁴^%^1%
²⁴^%
Oil
Natural Gas
Coal
Nuclear
H yd r o e l e ct r i ci t y
Other Renewables
^Source:^E^nergy^{Information Ad}^{ministration, 200}^{4 data.}
For South Korea, the uncertainty of the future of the Korean peninsula makes it difficult to
consider long-term strategies for energy security. In the event of a collapse of the regime in
Pyongyang and reunification with the South, Korea would certainly face rising demand for
energy, as North Korea has a critical energy deficit already. North Korea has very little
operational infrastructure, its electrical grid is in poor condition, and transportation systems are ¹⁹
weak or failing. North Korea relies on coal for about 85% of its energy consumption.
Energy has played a central and controversial role in the ongoing Six-Party Talks among the
United States, China, North Korea, South Korea, Japan, and Russia to deal with North Korea’s
nuclear weapons programs. Under the 1994 Agreed Framework, North Korea was to be provided
with two light water reactors (LWRs) to compensate for shutting down its Yongbyon nuclear
reactors. Under the February 2007 agreement, Russia, South Korea, China, and the United States
are providing heavy fuel oil to North Korea in exchange for disablement of key nuclear facilities.
Proponents of engagement with North Korea may support the construction of gas pipelines or
other energy infrastructure through North Korea to link the peninsula and other Asian markets
with resources from the Russian Far East. Such arrangements would provide Pyongyang with
foreign exchange in the form of transit payments, and could provide energy without relying on its
nuclear program. Some who support the expansion of the Six-Party Talks to a broader regional
security forum have pointed to energy as a potential platform for region-wide cooperation.

¹⁹^Sta^tistic^{s f}^r^om^N^o^r^t^{h K}^o^r^e^{a C}^o^uⁿ^tr^y^An^aly^s^is^Br^ie^f^{, J}^aⁿ^u^a^r^y^2004,^Ene^r^g^y^Iⁿ^f^o^r^m^a^{tion A}^d^mⁱ^nis^t^r^a^{tion, U}^.^S.
^D^e^pa^r^t^m^e^{nt of}^Ene^r^gy^.

China’s energy demand has changed dramatically in line with its rapid economic growth as its
GDP continues to grow at a double-digit clip annually. Between 2000 and 2007, China’s energy
consumption doubled. Previously almost entirely dependent on coal, China has turned
increasingly to oil to satisfy its soaring energy demands. Although coal still provides nearly 70%
of energy consumption, China surpassed Japan in 2003 to become the world’s second largest oil
consuming country after the United States. The source of nearly 30% of world oil demand growth ²⁰
since 2000, China is projected to demand over 16 million barrels per day by 2030. Electricity ²¹
and coal consumption have grown by 60% since 2000. By nearly every conceivable metric,
China has become a primary driver in world energy markets. According to the IEA, China is on
course to overtake the United States as the world’s largest consumer of energy by 2010.
Beijing has become increasingly concerned about its growing energy needs. Experts say that the
electricity crisis of 2003-2004, during which areas of China suffered from shortages and ²²
blackouts, surprised Beijing and drove a new approach to managing China’s energy security.
The formation of the Energy Leading Group, headed by Premier Wen Jiabao, and the State
Energy Office in 2005, to coordinate all agencies’ efforts, reflected the leaders’ dissatisfaction
with the existing energy policymaking apparatus. However, critics say that China’s overall energy
strategy is still hindered by inter-agency conflict and tension between the government and the ²³
national oil companies (NOCs). The creation of coordinating bodies is unlikely to eradicate the
problems of competing interests, manpower and funding shortages, and the larger firms’
influence.

²⁰^Sta^tis^tic^s^f^r^om^I^E^A^’^s^W^o^r^l^{d E}ⁿ^e^r^gy^O^u^tlook²⁰⁰⁷^.
²¹^Sta^tistic^{s f}^r^om^C^h^{ina C}^o^un^tr^y^An^aly^s^is^Br^ie^f^{, A}^u^g^u^s^t²⁰⁰⁶^{, E}ⁿ^e^r^gy^Iⁿ^f^o^r^m^a^{tion A}^d^mⁱ^nis^t^r^a^tion,^U^.^S.^D^e^pa^r^t^m^e^{nt of}
^Ene^r^gy^.
²²^E^rⁱ^{ca Do}^wⁿ^s.^T^h^{e B}^r^oo^ki^ng^{s F}^o^rei^gⁿ^P^o^lⁱ^{cy S}^t^u^dⁱ^e^{s E}ⁿ^erg^y^S^ecu^ri^t^y^S^e^ri^{es: Ch}ⁱⁿ^a^.^Decem^b^e^r²⁰⁰⁶^.
²³^T^h^e^pe^tr^ole^u^m^ind^u^s^t^r^y^ha^s^unde^r^g^one^m^a^ss^iv^e^c^h^aⁿ^g^e^s^{in the}^pa^s^t^d^ecad^e:^t^h^{e m}^a^j^o^{r st}^at^e-o^wⁿ^e^d^en^erg^y
^co^m^p^anⁱ^e^s—t^h^{e Ch}ⁱⁿ^{a Nat}ⁱ^oⁿ^a^l^P^e^t^r^o^l^eu^m^Co^rp^o^r^atⁱ^oⁿ^(CN^P^C),^t^h^{e Ch}ⁱⁿ^a^P^e^t^r^o^l^eu^m^an^d^Ch^emⁱ^cal^Co^rp^oratⁱ^oⁿ
⁽^S^ino^p^e^c⁾^{, a}ⁿ^{d t}^h^e^C^hⁱⁿ^a^N^a^tiona^l^O^f^f^s^hor^e^O^{il C}^o^r^p^or^a^tio^{n (}^C^N^O^O^C⁾^—^ha^v^e^be^eⁿ^r^e^s^t^r^u^c^t^ur^e^d^,^br^o^u^g^h^{t u}^nde^r^the
^re^g^u^la^tory^ov^e^r^si^g^h^{t c}^ontr^o^{l of}^th^e^Sta^t^e^Ene^r^g^y^A^d^mⁱ^nistra^{tion (S}^EA^{), a}^{nd c}^a^rrie^d^o^u^{t i}ⁿ^itia^l^pu^blic^of^fe^ring^{s (IP}^Os),
^a^f^te^r^w^h^ic^{h the}^g^o^v^e^rnm^e^{nt still h}^e^{ld m}^a^jorit^y^sta^k^e^s^.

Figure 3. China’s Energy Consumption
^22%
^6%
^1%^3%
^69%
H ydr oe l ect r i ci t y Oi l
CoalNuclear
Natural Gas
^Source:^E^nergy^{Information Ad}^{ministration China Count}^{ry Anal}^{ysis Brief, 200}^{4 estimates.}
Beijing’s 11^th Five-Year Plan for 2006-2010 indicates the pursuit of comprehensive energy
strategies, including a targeted 20% reduction in energy intensity (consumption per unit of GDP)
by 2020. This indicates a shift to emphasizing demand moderation instead of only focusing on
expanding the supply of energy. China has also imposed fuel economy standards and a tax on
large cars. Under the Tenth Fiscal Five-Year Plan for 2001-2005, the government began creating a
strategic petroleum reserve for its energy sector, although filling the stockpile has been slow
because of the high price of crude oil. The government has agreed to finance the construction of
an SPR, and has set the final target at 90 days, the IEA requirement, although doubts remain
about how quickly that can be accomplished.
There appear to be cleavages within the leadership on whether to embrace market forces to meet
China’s energy needs or to continue to pursue equity oil, and differences on the broader question
of whether to engage China in global and regional initiatives designed to facilitate cooperation
among oil importers. Among those who argue against multilateral engagement, distrust of the
United States appears to be strong. Some in China see “economic nationalism” as a threat to their
energy security, citing the scuttled 2005 Unocal deal and a similar defeat of a bid for Russian oil
producer Slavneft in 2002.
Beijing has worked to diversify its supplies aside from oil by aggressively pursuing several other
forms of energy, but all face limitations. Energy specialists say that despite interest in increasing
the percentage of nuclear power, hydropower, renewables, and natural gas, these alternatives to
oil are likely to remain a small portion of the mix. Major initiatives include expanding the
national gas infrastructure and developing gas-fired power plants that will use liquefied natural
gas instead of oil. Natural gas is an attractive long-term alternative for China in that it is plentiful
outside the Middle East and relatively environmentally friendly. Development of both domestic
reserves and overseas gas exploration are ongoing. In the short term, however, the cost of gas

infrastructure and of gas itself, as well as the availability of inexpensive coal as a substitute, likely
will preclude extensive use of natural gas.
China has pursued a nuclear power program with the help of European manufacturers, and plans ²⁴
to add up to 30 reactors to its existing 11 reactors by 2020. Despite misgivings about providing
nuclear equipment to China, the United States and Japan reportedly have loosened restrictions on ²⁵
supplying parts to Chinese plants in the interest of safe operations.
After suffering from widespread electricity shortages for several years, China has approved scores
of new electricity generating projects and limited the number of rolling blackouts and ²⁶
manufacturing disruptions. The largest hydropower project by far is the Three Gorges Dam;
upon completion, expected in 2011, the project will have the world’s largest electric generation
capacity (18.2GW). Beijing has cautiously begun to restructure electric power production and
distribution, but many bureaucratic hurdles and inefficiencies remain. As demand increased,
Beijing began allowing foreign companies to invest in the Chinese energy sector and has made
efforts to shift away from the state-owned model. Although very modest progress has been made
in developing competition among the many power generating plants, critics point out that the
absence of a true national electric grid leaves some areas with surplus power despite the national
shortage of generating capacity.
China became a net importer of coal for the first time in 2007.²⁷ China is currently the world’s
number one producer and consumer of coal; although coal is expected to decline as a percentage
of China’s energy consumption, overall use of coal is likely to rise in absolute terms in the ²⁸
coming years. Some experts predict that China could double or even triple its use of coal by
2020. The destructive environmental impact of coal use has led to severe air pollution in many
Chinese cities and spurred international pressure to reduce emissions. In addition, despite
attempts to impose stricter safety standards on China’s 24,000 coal mines, thousands of miners ²⁹
die each year from accidents.
Severe winter weather in China in late 2007 demonstrated China’s strained and fragile rail
capacity, a further challenge for coal. After blizzards halted trains, coal was not able to reach
power stations, causing widespread blackouts. Although rail expansion continues, the capacity
cannot keep up with the demand for transit of coal and other commodities. Switching to travel by
road is a far less efficient option.
China currently depends on the Middle East for roughly half of its oil imports with Saudi Arabia
providing the largest amount. Beijing has aggressively sought to buy into foreign oilfields in over

²⁴^“Chⁱⁿ^a^P^oⁱ^s^ed^t^o^Beco^m^e^Nu^cl^ea^{r Ki}ⁿ^g^pⁱ^n,^”^B^l^oo^mb^{erg N}^e^w^s^.^Nove^m^b^er³⁰^,²⁰⁰⁷^.
²⁵^“^E^ne^rgy^Se^c^u^rity^{in Asia}^a^{nd Ja}^p^a^ne^se^P^o^lic^y^,^”^Asia-Pac^ific^Re^vⁱ^e^w^{, Ma}^y^2003.
²⁶^“^C^hina^B^e^a^t^s^the^Pow^e^r^C^r^unc^h,^”^Re^ute^r^s^{. Se}^pte^m^be^r^21,²⁰⁰⁵^.
²⁷^“Ra^w^M^a^t^e^ri^al^s:^Chⁱⁿ^{a F}^eed^{s i}^t^s^Need^,^”^C^hⁱⁿ^{a Ec}^o^nom^ic^Re^vⁱ^e^w^.^Ma^y^{1, 200}^8.
²⁸^Chin^{a C}^o^uⁿ^try^An^aly^s^{is Brie}^f^{, A}^u^g^u^s^t²⁰⁰⁶^{, E}ⁿ^e^r^g^y^Iⁿ^f^o^r^m^a^tion^A^d^mⁱ^nis^t^r^a^{tion, U}^.^{S. D}^e^pa^r^t^m^e^{nt of}^Ene^r^gy^.
²⁹^“^M^ine^Sa^f^e^t^y^Driv^e^Fa^{ils in Chin}^a^,^”^{BBC News On}^lin^e^,^Se^pte^m^be^r^23,²⁰⁰⁵^.

30 countries, many of them outside the Middle East. In general, Beijing has taken a bilateral
approach to ensuring its oil supply. Not a member of the International Energy Agency, China does
not participate in broad multilateral energy coordination fora. Chinese companies have acquired
oil concessions in Central Asia, East Asia, the Middle East, Latin America, North America, and
Africa. Africa and Russia have provided the largest growth opportunities, as supplies from East
Asia have declined in percentage of China’s total imports.
China’s political leaders have actively encouraged new cooperation, and energy deals are often
packaged with other financial assistance incentives and high-level dialogue. For example, a
China-Africa summit conference in Beijing in November 2006 brought together nearly 50 African
heads of state and ministers to explore investment and aid agreements, and President Hu toured
eight African countries in February 2007 to seek further cooperation. However, energy analysts
point out that the Chinese national oil companies (NOCs) pursue deals on a profit-driven basis, ³⁰
and hold increasing clout over other elements of the national energy policymaking process.
Analysts also argue that the NOCs competitiveness stems mostly from their willingness to accept ³¹
higher risk and lower returns on investment rather than direct government support.
Figure 4. Chinese Oil Imports 1995 Figure 5. Chinese Oil Imports 2005
^Per^sⁱ^{an G}^u^l^f^-^46%^P^e^r^s^iaⁿ^G^u^lf^-⁴⁶^%
^O^t^her^-^2%^A^m^erⁱ^c^as^-³^%
^A^f^ri^c^a^{- 1}¹^%^F^S^U^an^d^Eu^r^ope^-¹²^%
^A^f^ri^c^a^-³¹^%
^A^sⁱ^a^P^a^cⁱ^fi^c^-^41%^Asⁱ^a^Pacⁱ^fⁱ^c^-^8%
^Sources:^Int^{ernational Petroleu}^{m Economics and Re}^{uters, as cite}^{d in}^{Brookings Foreign Policy Studies Energy}
^{Security Se}^{ries: China}^{, by Erica Downs.}
Particular inroads have been made in the Caspian region, most prominently a landmark accord
between China and Kazakhstan that gives CNPC a 60% stake in the Kazakh state firm
Aktobemunaigaz. An oil pipeline carrying Kazakh oil to China was completed in late 2005, and
crude delivery began in July 2006. U.S. oil majors had also tried unsuccessfully to secure access
to Kazakhstan’s oil, estimated at about 35 billion barrels of discovered reserves. In addition to
Kazakh deals, strategic acquisitions in Azerbaijan and preferential rights to develop natural gas in
Turkmenistan have also heightened Beijing’s presence in Central Asia. As these deals have
progressed, China has strengthened the Shanghai Cooperation Organization (SCO), a regional
security organization that includes China, Russia, Kazakhstan, Uzbekistan, Tajikistan, and
Kyrgyzstan. The SCO flexed its political muscle when it called for timetables for the withdrawal

³⁰^E^rⁱ^{ca Do}^wⁿ^s,^“Chⁱⁿ^a^{’s Qu}^est^f^o^r^Oversea^s^Oi^l^,^”^F^a^{r E}^a^st^{ern E}^c^ono^mi^{c R}^evi^ew^{. Se}^pte^m^be^r²⁰⁰^7.
³¹^T^r^e^v^or^H^ous^e^r^{, “}^T^he^R^oots^of^C^h^ine^s^e^O^{il I}ⁿ^v^e^s^t^m^e^{nt A}^b^r^o^a^d^,”^A^s^ia^P^o^lic^y^,^N^o^{. 5. J}^aⁿ^u^a^r^y²⁰⁰⁸^.

of “appropriate participants in the antiterrorist coalition” from the region at its June 2005
meeting; shortly after, the Uzbek president ordered U.S. forces to leave their bases by the end of
the year.
China’s energy relationship with Sudan has raised concern among some U.S. officials because of ³²
the ongoing atrocities in Darfur. CNPC has invested at least $8 billion in Sudan’s oil sector, and ³³
received 5% of its oil imports from Sudan in 2005. Some analysts say that increased
international pressure to cease dealings with Sudan is making some in Beijing question whether ³⁴
the investment in Sudan is worth a loss of Chinese “soft power” on the global stage.
Despite working to reduce dependence on the Middle East, China reportedly considers its
relationship with Iran crucial to maintaining energy security. The number of energy-related deals
has reportedly risen substantially between Beijing and Tehran, as have overall trade and ³⁵
commercial ties. Beginning in the 1980s, Beijing provided Tehran with military equipment,
including technology that some assert could be used for creating weapons of mass destruction and ³⁶
assisting with missile programs. China reportedly agreed to cease sending Iran dual use ³⁷
technology in 1997 and, according to some analysts, its arms sales to the region have dwindled. ³⁸
Others claim that the flow of arms continues. Under the Iran Sanctions Act (H.R. 6198, P.L.

109-293), which made WMD and advanced conventional weapons exports to Iran sanctionable, ³⁹

the United States has imposed sanctions on Chinese companies at least seven occasions.
Energy issues are among those included in the Strategic Economic Dialogue, an effort begun by
former Deputy Secretary of State Robert Zoellick in 2005 and continued under Secretary of
Treasury Henry Paulson. The twice annual talks mark the first regular exchange between senior
officials in the U.S.-China bilateral relationship. According to Department of Energy officials,
bureaucrats are more engaged on cooperative energy agreements as a result of the SED. These
efforts have included protocols on fossil energy, renewables, and energy efficiency; a
Memorandum of Understanding in which the United States agrees to export technology for four
AP1000 nuclear reactors if purchased from Westinghouse; and the Oil and Gas Industry Forum,
which brings together U.S. and Chinese private sector companies. The Bush Administration has
also touted the Asia-Pacific Partnership (APP) for Clean Development and Climate to develop
clean energy technologies with private sector partners; the forum includes the United States,
Japan, South Korea, India, China, and Australia. The APP is mostly focused on the “deployment”
of new technologies, as opposed to research and development.

³²^Chin^{a C}^o^uⁿ^try^An^aly^s^{is Brie}^f^{, A}^u^g^u^s^t²⁰⁰⁶^{, E}ⁿ^e^r^g^y^Iⁿ^f^o^r^m^a^tion^A^d^mⁱ^nis^t^r^a^{tion, U}^.^{S. D}^e^pa^r^t^m^e^{nt of}^Ene^r^gy^.
³³^E^rⁱ^{ca Do}^wⁿ^s.^T^h^{e B}^r^oo^ki^ng^{s F}^o^rei^gⁿ^P^o^lⁱ^{cy S}^t^u^dⁱ^e^{s E}ⁿ^erg^y^S^ecu^ri^t^y^S^e^ri^{es: Ch}ⁱⁿ^a^.^Decem^b^e^r²⁰⁰⁶^.
³⁴^D^a^nie^l^R^o^s^e^{n a}^{nd T}^r^e^v^or^H^ous^e^r^{, “}^C^hina^Eⁿ^e^r^g^y^:^A^G^u^ide^f^o^r^the^P^e^r^p^le^x^e^d.”^Chⁱⁿ^a^B^a^l^aⁿ^{ce Sh}^eet^{, Ma}^y^2007.
³⁵^“^C^hina^T^o^Sw^oo^{p o}ⁿ^I^r^aⁿ^O^{il Fie}^l^{d if}^T^oky^{o Pulls}^S^u^p^por^t^:^Fir^m^s^,^”^T^h^{e Ja}^pa^{n T}ⁱ^mes^{. A}^u^g^u^s^t¹⁸^{, 2}⁰⁰⁵^.
³⁶^F^e^lⁱ^x^K.^Ch^an^g.^“Chiⁿ^e^{se E}ⁿ^erg^y^an^d^A^sⁱ^aⁿ^S^ecu^ri^t^y^,^”^Orbⁱ^s^{, Vol}^45,^#²^.^Sprⁱ^ng²⁰⁰¹^.
³⁷^Ro^b^e^rt^A^.^M^aⁿⁿⁱⁿ^g,^“T^h^e^A^sⁱ^aⁿ^Eⁿ^erg^y^P^r^edⁱ^cam^en^t^,^”^S^u^r^vi^va^l^,^V^o^l.^42,^I^s^s^u^e^3.^Fa^ll²⁰⁰⁰^.
³⁸^Eng^d^a^h^l^,^W^illia^m^.^“^C^hina^L^a^y^s^D^o^wⁿ^the^G^a^untle^{t in}^En^e^r^g^y^W^a^{r: T}^h^e^G^e^opolitic^s^of^O^{il, Ce}^ntra^l^A^s^ia^{, a}^{nd the}
^Unⁱ^t^e^d^S^t^at^es,^”^{Asia Time}^s^.^Decem^b^e^{r 1}⁹^,²⁰⁰⁵^.
³⁹^For^de^ta^ils^,^ple^a^s^e^s^e^e^C^R^S^R^e^por^{t R}^L³²⁰^48,^I^r^an:^U^.^S.^C^o^nc^e^r^ns^and^Po^lic^y^Re^s^p^oⁿ^s^e^s^{, by}^K^e^nne^{th K}^a^tz^m^a^n.

As China and Japan scramble to meet their energy needs while reducing dependence on the
Middle East, the largely undeveloped resources of neighboring Siberia have become a prize.
Although the Russian Far East’s promise is significant, many strategists have cast doubt on the
commercial viability of tapping the Far East’s reserves. This has not discouraged China and Japan
from engaging in a bidding war over Russian projects to bolster their energy security. Boasting
huge reserves of natural gas (1,680 trillion cubic feet of proven reserves, nearly twice that of Iran)
and potentially rich oil fields, Moscow has played Tokyo and Beijing off one another to maximize
concessions for itself. Although China and Japan have expressed frustration with Russia’s opaque
policymaking, the proximity of Siberian energy supplies remains attractive.
The largest and most contentious project thus far has centered on the destination of a pipeline
originating in an eastern Siberian oilfield in the Lake Baikal region. An agreement between
Russia and China, endorsed by presidents Putin and Hu in May 2003, cleared the way for the
pipeline to go from the city of Angarsk to Daqing, China’s flagship oilfield with refining facilities
in the industrial northeast. The arrangement stalled, however, after the arrest of Russian oil
tycoon Mikhail Khodorkovsky, chairman of Yukos, the company that brokered the deal and
planned to construct the pipeline. In 2005, Moscow reversed course and designated the route
preferred by Japan: from the nearby city of Taishet to the Russian port of Nakhodka, near
Vladivostok on the Sea of Japan and a short tanker trip away from Japan. Presently, the Kremlin’s
position appears to try to satisfy both demands by postponing the decision on the ultimate
destination to a later date. Most energy analysts caution that the decision is far from finalized and
that significant obstacles remain to realizing any arrangement.
The Nakhodka option is far more expensive and ambitious: the pipeline would cover over 2,580
miles and cost up to $18 billion, according to some estimates, compared to the 1,400 mile, ⁴⁰
estimated $2.5 billion that the Daqing route would cost. But the Japanese proposal also offered
nearly full financing for the construction and oil exploration, largely through the government
owned Japan Bank for International Cooperation (JBIC), and Russia would own and control the
entire length of the pipeline. Japan is anxious to diversify its suppliers, and analysts estimate that
if Japan imported a million barrels a day from Russia, its dependence on the volatile Middle East ⁴¹
would fall by 10-15%.
Russia, flush with oil revenues because of the high price of oil worldwide, has resisted making a
firm commitment to either project, and instead claims it will try to satisfy both Japan and China’s
appetite for relatively nearby energy supplies. In September 2005, Putin announced that the

⁴⁰^L^yⁿ^e^,^Jac^k^.^“P^ri^ci^est^Pⁱ^p^e^lⁱⁿ^{e E}^v^er,^”^The^Site^Se^le^c^tioⁿ^{. Ja}ⁿ^u^a^r^y^{17, 2}⁰⁰⁵^{. A}^c^c^e^sse^{d a}^t^http://w^ww^.^c^onw^a^y^.c^o^m^/
^s^sⁱ^ns^ide^r^/^s^na^ps^hot/^s^f⁰⁵⁰¹^17.^htm^.
⁴¹^“^J^a^p^aⁿ^{to R}^e^t^u^rⁿ^{to D}ⁱ^s^c^us^sⁱ^on^o^f^Aⁿ^g^a^r^s^k^-^N^a^k^hodk^a^O^il^Pⁱ^pe^lⁱ^ne^P^r^oje^c^t^,”^W^P^S:^Rus^sⁱ^aⁿ^Oⁱ^l^a^nd^G^a^s^Re^por^t^.
^Ma^r^c^{h 5,}²⁰⁰⁴^.

pipeline would be built first from Taishet to Skovorodino, near the Chinese border, and then on to
Daqing. Later, the pipeline would be extended to Nakhodka and the Asia-Pacific market, in order ⁴²
to diversify its exports, Putin continued. Although estimates vary widely, the initial phase, to be
completed in 2009, is estimated at a capacity of 300,000 barrels per day; some figures cite the
final pipeline capacity at 1.6 million barrels per day. Before the pipeline is extended to Nakhodka,
about one third of the deposits would be transported to the Pacific—presumably for Japan, and ⁴³
possibly South Korea—by rail. Construction on the first stage began in April 2006. As
construction costs have continued to climb, oil analysts are casting more doubt on whether the
volume of reserves could satisfy the pipeline projections.
Figure 6. Proposed Oil Pipeline Routes: Angarsk/Taishet-Nakhodka and
Angarsk/Tai shet-Daqing
^Source:^{Adapted b}^y^{CRS. Based}^{on a map}^{from The}^Economist.
In addition to the obvious benefits of extracting the most lucrative deal, Moscow has its own
strategic calculations to consider as well. The downside of constructing a pipeline to Daqing is
the sole dependence on the Chinese market, while the Pacific option would open up other Asian
markets and possibly the United States. Despite their past rivalry, Beijing and Moscow have
stepped up relations, including holding regular bilateral military exercises. Russia is the top
supplier of arms to China, and both countries are wary of the U.S. military presence in Central
Asia. Russia has promised to increase the supply of oil by rail to China. Through the Shanghai
Cooperation Organization, Russia and China successfully called for a withdrawal of American
forces from Uzbekistan in summer 2005. Building a pipeline into China would solidify the
growing partnership. Yet expanding economic ties with Japan is also attractive for Russia;
restricting the pipeline to only China risks alienating a potentially valuable source of capital and
technical expertise.

⁴²^“^T^he^G^r^e^a^t^G^a^m^e^{is Re}^vⁱ^v^e^{d by}^Pⁱ^pe^line^Pol^itic^s,”^The^Tim^e^s^{. Se}^p^t^e^m^be^r^{17, 20}⁰⁵^.
⁴³^“^R^us^sⁱ^a^:^Pⁱ^pe^li^ne^to^Sk^ov^or^o^dⁱⁿ^o^K^e^e^p^s^J^a^pa^{n in}^Pla^y^,”^Ox^{ford An}^aly^tic^a^.^Ma^y^{6, 20}^05.

As the world’s largest exporter of natural gas and with abundant reserves, Russia is poised to be a
natural gas superpower. Projects under development now in Sakhalin and for the massive
Kovykta gas field in the eastern Siberian region of Irkutsk indicate that China and Japan, along
with South Korea, are major potential markets. As a result, East Asian governments have been
actively engaged in negotiations with Gazprom, the state-owned agency responsible for
coordinating all gas exports to Asia. Natural gas is an attractive alternative to oil because of its
relative proximity in a less volatile region than the Middle East and its milder environmental
impact.
Gas pipeline politics could develop similarly to the competition over the Angarsk/Taishet oil
pipeline. So far Beijing’s and Tokyo’s projects have been mostly divided geographically: China is
pursuing gas supplies from the Kovykta field while Japan is mostly focused on securing gas from
neighboring Sakhalin. However, the uncertainty of the development schemes, particularly
whether the gas will be shipped by pipeline or in the form of liquified natural gas (LNG),
indicates that competition will continue. Gazprom is reportedly considering a variety of options
for exporting gas: Rusia Petroleum (a subsidiary of TNK-BP), the China National Petroleum
Corp, and Korea Gas Corp signed an agreement for a pipeline to extend from East Siberia to
China and South Korea, but Gazprom also is assessing the possibility of developing a giant ⁴⁴
pipeline system to connect to the Japanese market as well.
With natural gas reserves estimated at 96 trillion cubic feet and oil reserves at about 14 billion
barrels, the Russian island of Sakhalin, north of Japan, is primed to become a major gas supplier ⁴⁵
to the region as well as an important oil producer. Revenue from ongoing projects has spurred
rapid development of the island’s infrastructure. Sakhalin I, led by ExxonMobil with Russian,
Indian, and Japanese consortium partners, has begun providing oil to Asian markets and natural
gas to the Russian market. Consortium members are divided on whether future natural gas
exports will be shipped by pipeline or as LNG. Sakhalin II, under the
Gazprom/Shell/Mitsubishi/Mitsui consortium, is the largest single foreign investment in Russia
and expects to become Russia’s first LNG facility in 2008. Sakhalin II will supply natural gas to
the United States, Japan, and South Korea. Chinese and Indian firms are among those competing
for a stake in the Sakhalin III development (oil and gas), and several other Sakhalin projects are
in preliminary stages.
The question of whether to transport gas by pipeline or through liquefaction is linked to broader
issues of national energy security. Japan, as the primary market, prefers the pipeline option
because it ensures an exclusive supply and helps to diversify its energy sources away from the
Middle East. Sakhalin I reportedly may be hoping for additional incentives from the Japanese ⁴⁶
government to pursue the technically difficult pipeline proposal. LNG producers, on the other
hand, are eyeing other potential markets, including South Korea, China, and the United States.

⁴⁴^“^K^ovy^k^t^a^G^a^s^Suppl^ie^s^{to C}^h^ina^,^So^{uth K}^o^r^e^a^Se^eⁿ^D^e^la^y^e^{d to 20}^10-²⁰^12,”^P^l^{atts C}^o^mmo^dity^Ne^ws^{. O}^c^tobe^{r 2}⁵^,
²⁰⁰^5.
⁴⁵^Sa^k^h^a^{lin I}^s^laⁿ^d^{, E}ⁿ^e^r^g^y^Iⁿ^f^o^r^m^a^t^{ion A}^g^eⁿ^cy^C^ountr^y^Aⁿ^a^l^y^s^is^B^r^ie^f^s^{, a}^cces^sed^{at h}^ttp^://w^ww^.^e^ia.d^o^e^.g^o^v^oⁿ
^11/^8/2⁰⁰⁵^.
⁴⁶^“Breakiⁿ^{g t}^h^{e Ice,}^”^Pe^tr^ole^u^m^E^c^onom^is^t^.^J^a^nua^r^y^{1, 2}⁰⁰⁴^.

The Sakhalin energy projects, particularly Sakhalin II, are seen as a major test of the feasibility of
foreign direct investment and frontier development in Russia. In late 2006, Sakhalin II’s
consortium agreed to cede a majority stake to Gazprom, Russia’s national natural gas monopoly.
The project had been held up because of a revoked approval that cited environmental concerns,
although energy analysts say that the environmental issues were used as a ploy to pressure the
foreign investors into accepting Russian state control. Most international observers agree that the
episode indicates that Moscow wishes to expand its control over energy projects and assert its
policy of “resource nationalism.”
U.S. interests in Asian energy issues are manifold and complicated by sometimes competing
economic and security priorities. U.S. international economic policy emphasizes free trade and
open markets. As the world’s largest consumer of energy, the United States has an interest in
getting as many energy resources to market as possible in order to keep supply high. However,
concern about China’s rising economic and political power and security commitments in the
region prevent U.S. policymakers from approaching the issue from a strictly economic
standpoint.
U.S. officials have resisted getting directly involved in the competition between China and Japan
over pipeline routes from Russia. Policy analysts are divided on which of the pipeline routes
better serves the U.S. national interest. Reducing China’s dependence on the Middle East could
enhance its sense of energy security, therefore lessening the likelihood of potentially destabilizing
partnerships between Beijing and OPEC members. If China feels threatened, the chances of
conflict likely increase. On the other hand, pipelines between China and Russia could lead to
much closer economic and political ties between the two giants, and potentially a large regional
bloc that could exclude the United States. Some foreign policy analysts see a strong partnership
between Moscow and Beijing as unfavorable to Washington.

The long-term potential consequences of rising energy competition in East Asia range from dire
predictions of military conflict to scenarios for unprecedented regional cooperation. This section
will explore different arguments about outcomes, as well as consider the possible impact on U.S.
foreign relations.
Energy security is an essential concern for the governments of Japan and South Korea, both key
American partners in Asia. A fundamental basis for the U.S. alliances has been the maintenance
of stability to promote open trade and investment in the region. This arrangement has allowed
Seoul and Tokyo to secure access to distant energy sources, particularly in the Middle East. As
competition intensifies because of China’s demand, the U.S. alliances might face new strains.
Japan’s and South Korea’s energy dependence, and any threat to existing supplies, may affect
their willingness to support U.S. policies, particularly in the Middle East. The tension between
Tokyo and Washington over the Azadegan deal in Iran may foreshadow more diplomatic
difficulties ahead.

On the other hand, concerns about access to energy resources could also strengthen alliance
cooperation. Japanese leaders have indicated their view that energy and security are interlinked.
Japanese leaders have asserted that stability in the Middle East is in Japan’s national interest
because of its dependence on the region’s oil. If Japan continues to move slowly toward
becoming a more “normal” nation by developing military capabilities beyond its own self-
defense, it may be more willing to move beyond its “free rider” approach to the Middle East.
Japan’s unprecedented deployment of Self Defense Forces to Iraq, as well as its active
encouragement of Southeast Asian nations to join the U.S.-led Proliferation Security Initiative,
may be indications of this trend. Resolving the issue of North Korea’s nuclear weapons programs
is crucial to maintaining the U.S.-South Korean alliance; a diplomatic solution through the Six-
Party Talks will likely require careful attention to the considerable energy needs of the peninsula.
Some analysts point out the potential for unprecedented cooperation among Asian countries, with
the shared goal of enhancing energy security for the region. Various regional groupings, including
ASEAN Plus Three (Southeast Asian nations plus Japan, South Korea, and China), APEC (the
Asia Pacific Economic Cooperation forum), and the East Asia Summit, have introduced programs
for enhancing energy cooperation as high oil prices have continued. At the 2007 East Asia
Summit, leaders pushed for concerted effort to explore nuclear, hydropower, and biofuel
alternatives. If institutions devoted to shared infrastructure and information are developed, East
Asia may find the mechanisms helpful for other political, economic, and security-related issues.
Although such a development may lessen dependence on the United States for stability, which
could threaten U.S. influence in the region, stronger regional dialogue might also allow for a
drawdown of the U.S. military presence in the region.
The strategic importance of the transit routes of the South China Sea, particularly the narrow
Strait of Malacca, is likely to become more pronounced as Asian dependence on oil from the
Middle East grows. More than half of China’s and 70% of Japan’s oil supplies from the Middle
East pass by ship through the Strait, a pass that faces organized piracy and could easily be
blocked militarily. In the event of a confrontation between the United States and China, the Strait
of Malacca is one of the most likely flashpoints for military conflict. China does not have the
naval might to prevent an economic blockade by a power like the United States, a fact that drives
its desire to invest in closer energy sources. As China’s military modernizes, one of its key ⁴⁷
objectives is likely to be the protection of its sea lanes to the Middle East.

⁴⁷^S^ee^G^l^ob^{al Tr}^eⁿ^ds²⁰²⁰^-^E^as^{t As}^ia^{. Nati}^oⁿ^a^{l I}ⁿ^tellig^en^{ce Co}^uⁿ^cil.^{Fall 2}⁰⁰³^{. A}^ccess^e^d^{at h}^t^t^p^://w^ww^.dⁿⁱ^.g^o^v^/n^ic/
^N^I^C^_20²⁰^_pr^oje^c^t^.htm^l.

Figure 7. Strait of Malacca
^Source:^{Adapted b}^y^{CRS. Based}^{on a map}^{from The}^{Economist p}^{rint edition, June 1}^{0, 2}⁰⁰^4.
Particularly if Asian consumers turn more to natural gas to satisfy their energy needs, Russia
stands to gain considerable leverage in the Asia-Pacific. Some energy analysts have dubbed
Russia “the gas superpower” based on its massive proven reserves. If foreign investment and
infrastructure in Russia improve, presumably so too will Russia’s potential strategic economic
power. In the oil markets as well, Russia’s untapped reserves and its status as a major non-OPEC
producer are already increasing its regional influence, evidenced in the Chinese and Japanese bids
for early inroads. Moscow may find that the energy sector provides a way to reassert itself in East
Asia, where Russia’s power has been greatly diminished since the fall of the Soviet Union.
China’s thirst for oil has led to new partnerships with Central Asian states, an area of traditional
rivalry between great powers. Russia, China, and the United States will likely remain attentive to
the sensitive issue of pipeline construction in the region. Russia retains considerable influence
over the Caspian region because the existing pipeline network crosses through Russian territory.
Moscow is also wary of expanding Chinese presence in the Russian Far East, fearing that

Beijing’s influence will grow in a region already populated with hundreds of thousands of ethnic ⁴⁸
Chinese.
Although Moscow may be challenged by Beijing’s inroads with members of the former Soviet
empire, the two powers appear to have moved toward cooperation to counter U.S. presence in the
region. In addition to holding large-scale bilateral military exercises, Moscow and Beijing have
beefed up the influence of the Shanghai Cooperation Organization. According to some analysts,
the development of China-Central Asia-Russia energy cooperation lessens U.S. strategic leverage ⁴⁹
considerably. As U.S. foreign policy has emphasized democracy and human rights, some
analysts see the leadership of Central Asian republics drawn toward a more sympathetic Beijing
and Moscow. As economic and political partnerships between China and the republics grow,
observers suggest that Beijing’s increasing presence might have a negative effect on the
struggling democratic and market reforms in Central Asian states.
Some energy experts suggest that China’s quest for energy security will inevitably lead it to
aggressively seek new sources of supply in the Middle East. Given that U.S. alliance partners
Japan and South Korea have been willing to engage countries like Iran to secure energy contracts,
some fear that a rising China would be even more assertive in cultivating relationships with U.S.
adversaries. Some scholars have posited that Asian nations’ competition for energy supplies with
the West could lead to an eventual Middle East-Asia nexus, in which Asian governments become
closer politically with the Gulf states in order to secure long-term access, thereby marginalizing ⁵⁰
U.S. power. Other observers have envisioned dire scenarios that could emerge from a protracted
U.S.-China struggle over oil, including an increasingly close China-Saudi Arabia relationship that ⁵¹
could lay the groundwork for a world war-level conflict.
Other analysts, however, point to the reported decrease in China’s weapons trade with Iran and
the fact that China did not side with Iraq in the U.S.-led invasion in 2003. The current leadership
in China places economic development as a high priority, and many assert that China will not ⁵²
initiate military action based solely on energy resources unless it is seriously threatened. In
addition, Beijing would likely be reluctant to challenge the United States for access to energy
supplies because of its need for American investment and U.S. markets.

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^e^t^hnic^Ch^ine^s^eⁱⁿ^the^re^gⁱ^on^v^a^r^y^f^r^o^m^200,⁰⁰^{0 u}^p^t^o^ne^a^r^ly²^m^illion.
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As the world’s sole superpower, the United States has pursued an energy policy that, while
protecting the American interest in securing energy suppliers, also generally assures access for
other energy consuming states. Some analysts suggest that with China and other economies
developing voracious appetites of their own, a policy of explicitly attempting to lock up energy
resources for the United States alone is warranted. Such a policy, which might include more
diversification from the Middle East, may deny the “free-rider” option to other nations, including
U.S. allies.
Increased transparency and energy sector reform could alleviate many of the strains placed on the
energy industry that threaten to spur conflict in East Asia. Transparent pricing allows oil to be
traded efficiently and visibly. In general, the region’s refining sector has moved toward ⁵³
deregulation, but many barriers remain to outside competition. Similar obstacles to open market
competition exist in the power sectors in Japan and South Korea. The United States could seek to
reduce these barriers by encouraging its allies to create independent regulatory bodies. Some
specialists suggest that U.S. officials could also work with the Japanese and South Korean
governments in restoring public confidence in nuclear energy by sharing technology and
expertise, as available, to assure safer operation of nuclear reactors.
Some say that collaboration on energy research might also be beneficial in fostering a
cooperative, market-based approach to energy security, in addition to offering the promise of
technological breakthroughs that eventually reduce global dependency on oil. The Department of
Energy has taken modest steps to enhance energy efficiency cooperation with Asian nations,
including efforts to develop fuel cell technology research and development with the Japanese
government; to cooperate with Chinese officials in pursuing cleaner air, with a particular focus on
the 2008 Olympic Games to be held in Beijing; and to promote the use of cleaner-burning fuels ⁵⁴
and reform in the energy sector in the Philippines.
Energy competition and security are among the many issues included in the debate over how the
United States should deal with a rising China. Some policymakers and experts resist the idea of

⁵³^Jeff^re^{y Bro}^wⁿ^an^d^Kan^g^W^u^.^“Asi^an^Oi^l^M^a^rket^Ou^t^l^o^o^k^:^R^o^l^e^o^f^t^h^{e Key}^P^l^ayers,^”^{Asia Pac}^ific^Iss^u^e^s^,^N^o^{. 7. Ea}^s^t^-
^W^e^s^t^C^e^nte^r^{. O}^c^tobe^r²⁰⁰³^.
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⁵^,²⁰⁰⁴^.

aiding China’s increasing prosperity, viewing Chinese growth as a serious security risk for the
United States. Others see the potential for mutually-beneficial Sino-American cooperation
because of the shared interest in stability in oil-producing regions. Today China is labeled by
many as a “free-rider,” in that it reaps the rewards of the security that American power brings to
the Middle East and Asia. Allowing China to continue to be a “free rider” could lessen the risk of
conflict. Assertions of military strength or regional tension over access to oil supplies could cause
price spikes in the global market, which would be harmful to U.S. interests as well. Positive
bilateral relationships and overall regional stability might enhance the perception of oil as a
global commodity.
As the consumption giant in the region, China likely could benefit from U.S. assistance in
developing alternatives to oil, such as bio-fuels or coal-based fuels, hydrogen and natural gas.
Japan could also be helpful to China in developing energy conservation strategies; encouraging
Japan to include energy efficiency programs as part of its development assistance to China could ⁵⁵
also serve the U.S. interest. In addition, some analysts suggest the United States or its allies
could consider providing technical assistance to China in expanding its strategic stockpile of oil.
According to this view, the “cushion” of a strategic reserve would allow China to cope better with
a short-term disruption to global oil supply without causing shocks to the market.
The campaign to pressure Beijing to become a “responsible stakeholder” in the world
encompasses energy cooperation with the United States and the international energy community.
Enhanced funding and attention to energy cooperation programs (see “U.S.-China Bilateral
Energy Cooperation” section above) under the overall engagement of the Strategic Economic
Dialogue could support this approach.
If, as many analysts believe, further globalization of the energy market will reduce the potential
for major power conflict and instability, strong leadership is essential to coordinate cooperation
between actors. Many feel the United States should take the role of rule-setter and enforcer
through economic organizations, military cooperation (for safe transit of energy resources),
technical expertise, approval of international development assistance, and the promotion of
common standards and shared infrastructure. In their view, expanded American engagement can
help lead energy security to a more open, regulated mode instead of actors resorting to old-style ⁵⁶
“resource diplomacy.”
Some energy specialists have suggested that inviting China to join the International Energy
Agency (IEA) could alleviate many of the concerns of managing China’s surging demand. The
Paris-based agency, made up of the 27 industrialized countries that comprise the Organization for
Economic Cooperation and Development (OECD), including Korea and Japan, is committed to
ensuring energy security through cooperative solutions and safeguards, such as national strategic
stockpiles. Proponents assert that engaging China in the IEA mechanism could help to maintain
the stability of world oil prices as well as lessen Beijing’s sense of strategic vulnerability that
could ultimately lead to military rivalry. Providing a multilateral safety net could discourage

⁵⁵^Sug^g^e^s^t^e^d^by^K^e^{nt E. C}^a^lde^rⁱⁿ^h^e^a^r^ing^be^f^o^r^e^the^U^.^S.-^C^hi^na^Ec^o^nom^ic^a^{nd Se}^c^u^r^ity^R^e^vⁱ^ew^C^o^m^m^issⁱ^{on. O}^c^to^be^r
^{30, 20}⁰³^.
⁵⁶^S^{ee M}^a^rt^h^a^Cal^d^w^e^l^l^Harri^s,^“G^l^o^b^a^lⁱ^zatⁱ^oⁿ^o^f^Eⁿ^erg^y^M^a^rket^s^”ⁱⁿ^E^l^l^e^{n F}^r^o^s^t^an^{d Ri}^ch^ard^K^u^gl^er,^ed^s.^T^h^e^G^l^ob^al
^C^e^ntur^y^:^G^l^o^baliz^ati^on^an^{d N}^a^tio^nal^Se^c^u^r^ity⁽^W^a^s^hing^ton^,^D^.^C^.^:^N^a^tiona^{l D}^e^f^e^ns^e^Uⁿ^iv^e^r^sⁱ^t^y^{, 200}¹⁾^.

China from taking measures such as hoarding oil (some observers claim that China hoarded up to ⁵⁷

30 million barrels ahead of the invasion of Iraq in 2003) that put pressure on the world market.

However, opponents may argue against admitting China into the agency because the current
members are defined as being industrialized democracies, a category which does not include
China because of its Communist political system. Others have suggested that the IEA could create
a mechanism specifically for emerging markets that does not demand full membership in the
agency but still provides a mechanism to mitigate the effects of supply disruptions, as well as
inclusion in coordinating the release of reserves. Another approach might be for the IEA to ⁵⁸
sponsor oil stockpiles in regions of concern.
Another multilateral alternative for the U.S. could be one of forming a regional energy
coordination body. Some analysts advocate the creation of an Asian version of the IEA in order to
share information, transfer conservation technology, and coordinate regional strategic stockpiles
to reduce the effects of supply disruptions. A multinational framework could spur concerted
efforts to make projects like gas pipelines feasible and beneficial for the region as a whole. A
possible coordinating institution is the Asian Pacific Economic Cooperation (APEC) forum,
which has called for cooperation in developing measures to ensure energy security for the region.
As energy cooperation between northeast Asian countries improves, strategies to develop the ⁵⁹
Russian Far East might energize regional trade and spur economic growth. A regional approach
likely would require considerable U.S. and international leadership, such as the assistance of
international financial institutions to develop shared infrastructure and consultation on
establishing shared guidelines and enforcement mechanisms.
Under the Iran Sanctions Act (P.L. 104-172, originally known as the Iran-Libya Sanctions Act),
non-U.S. companies that invest over $20 million annually in Iran or Libya are subject to
sanctions. However, ILSA has never been invoked to punish companies, and only one official
waiver has been granted (to Russian, Malaysian, and French companies to develop gas reserves in
southern Iran by President Clinton in 1998). Meanwhile, since the passage of the legislation,
billions reportedly have been invested in Iran’s oil and gas sector without being sanctioned, ⁶⁰
mostly by European companies. Under ILSA, the United States has the option to impose
sanctions on companies involved in such ongoing deals with Iran, but most observers say that the ⁶¹
Bush Administration is unlikely to take this step.

⁵⁷^T^e^s^tⁱ^m^on^y^of^Edw^a^r^d^L^.^Mor^s^e^{in he}^a^r^ing^be^f^o^r^e^the^U^.^S.-^C^hina^E^c^onom^ic^a^{nd Se}^c^u^r^ity^R^e^vⁱ^ew^C^o^m^mⁱ^s^sⁱ^on.
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^E^m^m^a^C^h^an^le^tt^-^A^v^e^r^y
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