Energy security and trade in APEC

The energy industry and energy trade in the Asia-Pacific Economic Cooperation (APEC) region have faced significant challenges in recent years as a result of global energy supply and price shocks reverberating from the Ukraine-Russia war. As Europe’s access to Russian pipeline natural gas was progressively reduced beginning in late 2021 and accelerating throughout 2022, the scramble for substitute supplies of liquefied natural gas (LNG) in an already tightening global market sent prices up sixfold, rippling through the trade of the major LNG importers in APEC. Oil prices spiked due to fears over a potential loss of Russian oil exports, at one point reaching over US$120 per barrel—a major shock to Asia’s heavily import-dependent oil markets. Coal prices jumped fourfold as Europe scrambled to find substitute fuels for power generation, driving Asian-traded coal prices equally upward. The overall rise in imported fuel costs was passed through electricity markets, leading to dramatic price increases in many APEC members.

Responding to energy security challenges

Facing an urgent energy security crisis, countries took notable emergency steps that reversed progress on opening energy markets and transitioning toward a cleaner energy mix, including defaulting to coal and strategically managing—and sometimes hoarding—supplies. China, for example, doubled down on domestic coal production in order to rely less on imports, while Japan and South Korea stepped up their use of coal to meet electricity needs. Indonesia, the world’s largest coal exporter, imposed a one-month ban on coal exports in January 2022 to ensure adequate domestic supplies, wreaking temporary havoc among contract buyers in Japan and South Korea. Australia worked toward gas “reservation” plans to potentially restrict LNG exports in order to ensure adequate domestic natural gas supplies. Many LNG cargoes were diverted from lower-priced long-term contract buyers to extremely high-priced spot sales to other buyers desperate to secure supply, flagrantly violating contract arrangements.

Nevertheless, many APEC members face a precarious and uncomfortable LNG market until 2025–26 when these projects and several enormous new US projects begin production and major new supplies begin to arrive from Qatar. In an indication of how important LNG trade has become to the energy security of the region, Japan recently called for the creation of an LNG emergency strategic stock reserve system that the International Energy Agency would oversee, just as it oversees the existing joint oil strategic reserve system established in the wake of the oil shocks in the 1970s.

The United States’ role in supporting traditional oil security has also been critical, thanks to the rapid rise in US exports enabled by the shale oil revolution. US exports have provided an important new source of crude oil for the APEC region, especially among buyers in Japan, South Korea, and China. According to the US Energy Information Administration, US crude oil exports reached nearly five million barrels per day in mid-2023 and have been instrumental in reducing prices following the immediate shock of Russia’s invasion of Ukraine.

Opportunities for clean energy trade and development

In December 2022, Japan announced its new “Green Transformation (GX) Basic Policy,” a ten-year, US$1.1 trillion roadmap for the country’s decarbonization strategy. Under the policy, a new carbon fee and emissions trading system will be launched in 2026. The program will also promote the development of hydrogen, ammonia, and battery storage, as well as carbon capture utilization and storage. Notably, it proposes construction of new nuclear reactors, along with restarting existing nuclear reactors shut down in the wake of the Fukushima disaster. While progress on renewables is more limited due to challenges particular to Japan’s geography and coastal communities, this roadmap nevertheless represents an ambitious strategy to improve energy security by reducing dependence on imported fossil fuels. It will also promote the energy transition across Asia, as Japan seeks a stronger role as a lender and technology exporter, and will strengthen regional cooperation on clean energy.

The United States and Japan have launched several important new clean energy partnerships focused on Southeast Asia, which remain heavily dependent on coal and oil. Under the Indo-Pacific Economic Framework’s clean economy pillar, for example, the United States will deliver technical and financial assistance and encourage new agreements on clean energy standards. Other new initiatives include the Japan-US-Mekong Power Partnership and the Just Energy Transition Partnerships (JETP).¹ Japan and the United States are also the largest funders of the Asian Development Bank’s Energy Transition Mechanism. These programs are supported by the principles of Japan’s Quality Infrastructure Investment initiative, which promotes high-quality infrastructure in developing Asia. The United States has also launched its Clean EDGE Asia initiative, which leverages government and private sector resources to advance sustainable energy growth in Southeast and South Asia. Other longer-term regional energy trade efforts have gradually progressed. The ASEAN Power Grid, for example, has moved forward with the opening of the Laos-Thailand-Malaysia-Singapore Power Integration Project that allows Singapore to import clean hydroelectric power from Laos via existing transmission lines through Thailand and Malaysia.

Other countries in the region are similarly working to maximize the domestic benefits of expanding critical mineral exports by capturing investment in downstream processing industries and final markets like electric vehicle and battery production. Vietnam has substantial reserves of rare earth minerals and bauxite, the Philippines has large reserves of nickel, Myanmar has large reserves of tin and rare earth minerals, and Malaysia is a large producer of refined rare earth elements. Ultimately, the APEC region has the potential to be a major beneficiary of the rapidly developing clean energy trade system.

Conclusion

APEC members have reacted to the ongoing energy crisis with two impulses. On the negative side, at least from a climate perspective, countries across the region are doubling down on energy and economic security, resulting in a surge in coal use and strong interventions to ensure vital oil imports. There also has been a major push to secure supplies of LNG. While LNG use could, in principle, help reduce the region’s heavy reliance on much dirtier coal, the current spike in LNG consumption alongside the rise in coal use makes this more difficult. On the positive side, the crisis has in many places accelerated efforts to transition to cleaner renewables and other low-carbon energy sources as a long-term solution to the threats to energy and economic security posed by the region’s historically heavy dependence on imported fossil fuels.

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Adapted from the original article by the National Bureau of Asian Research.

[1] Indonesia, for example, recently unveiled a JETP agreement to mobilize $20 billion in public and private financing to accelerate its net-zero timeline. One notable goal is to freeze the building of new coal-fired power generation that exists in the current long-term power plan.

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