Asia Pacific Review Trans-Asian pipe

The Trans-ASEAN Gas Pipeline (TAGP) project envisages the creation Building of a trans-national pipeline network linking ASEAN’s major gas production and utilisation centres. Once realised the TAGP will have the potential of linking almost 80% of the ASEAN region’s total gas reserves and will embody a far-reaching expression of the region’s the Trans- energy interdependence and long-standing interest in the co- ordination of energy activities. There is still much to do however in order to realise the dream, not least in establishing a solid legal and Asean gas regulatory basis upon which the TAGP could operate in the best interests of all those who would derive benefit from such a network. pipeline By Peter Roberts and Alex Cull, Jones Day, Hong Kong.

ASEAN’S ENERGY POLICIES (ii) The ASEAN plan of action for Energy Co- ASEAN, the Association of South East Asian Nations, operation 1999-2004 (Bangkok, 1999) - The Bangkok is a ten-state co-operative framework intended to Plan was adopted by the Seventeenth ASEAN promote greater regional development through Ministers of Energy Meeting and identifies six mutual assistance. Originally founded in 1967 by programme areas to be focused on in order to , , the , and implement the Hanoi Plan, including the development , the membership of ASEAN has since of the TAGP as part of an integrated ASEAN energy doubled to include (1984), (1995), grid.The Bangkok Plan provides for the establishment (1997), (1997) and (1999). of the ASEAN Council on Petroleum (ASCOPE) TAGP Task Force to formulate a masterplan for the ASEAN promotes various regional policies in the most likely scenario for the short term development furtherance of the economic, social and political of the TAGP following the successful completion of a interests of its members.An integral part of ASEAN’s conceptual project feasibility study and the resolution regional economic co-operation focuses on the energy of relevant institutional, legal, financial, commercial and sector where it is ASEAN’s declared intention to technical issues. ensure greater security and sustainability of regional energy supplies through diversification, development (iii) The ASEAN Memorandum of Understanding on and conservation of resources, the efficient use of the TAGP (Bali, 2002) - The Bali Memorandum was energy and the wider application of environmentally adopted at the Twentieth ASEAN Ministers of Energy sound technologies. Meeting and sets out a co-operative framework within which ASEAN member states agree to study the ASEAN’s energy policies are founded upon a regulatory and institutional frameworks for the combination of various accords, policy declarations cross-border supply,transportation and distribution and summit undertakings. Critical amongst these for of gas throughout ASEAN. the realisation of the TAGP are:

(i) The 1998 Hanoi plan of action - The Hanoi Plan was adopted at the Sixth ASEAN Summit THE ASEAN ENERGY PERSPECTIVE and calls for member states to implement initiatives A consideration of the demographic and geophysical to ensure security and sustainability of energy aspects of ASEAN reveals three essential features: supply,efficient utilisation of regional energy resources and the rational management of energy (i) Energy demand - ASEAN represents more than demand. In particular the Hanoi Plan calls for 500m people, spread between 10 countries over an area the institution of a policy framework and of approximately 4.5m sq km.While the 1997 Asian implementation modalities by 2004 for the economic crisis and the global economic slowdown early realisation of the TAGP. since 2001 has hampered the region’s economic and

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energy demand growth the underlying factors which MATCHING REGIONAL ENERGY DEMAND & SUPPLY propelled Asia’s miracle growth in the 1990s - greater When considering the centres of energy demand and industrialisation, increased urban migration into highly supply across Asia one thing becomes apparent - there concentrated areas of population, an expanding middle is rarely a happy coincidence of population and class and increasing consumer disposable incomes – are resources and it is usually necessary to transport energy still largely intact. resources to where they are most needed.

These characteristics present an inherent demand for Coal, which at the present time comprises approximately energy which should continue to grow as the global 11% of power generation feedstock in ASEAN, is economy recovers and regional industries regain lost typically transported by ship. Crude oil, refined into ground.This potential is recognised for example in a products such as fuel oil, presently constitutes predicted 60% growth in demand for energy within approximately 54% of power generation feedstock ASEAN for the period to 2010. in ASEAN and is also typically transported by ship.

Demand for gas in particular will increase due to Gas, which now comprises approximately 27% of the improving cost-competitiveness and greater ASEAN’s power generation feedstock mix, may be recognition of the ecological benefits of gas-fuelled transported by ship as LNG. LNG projects have high power generation, increasing emphasis on regional capital expenditure requirements in the construction of petrochemical production and the ongoing expensive gas liquefaction and regasification terminals development of essential gas transportation and specialist LNG ships, although from a project infrastructure. development perspective they raise potentially simpler legal, regulatory and administrative issues than (ii) Energy supply - ASEAN covers a region rich in cross-border pipelines as they tend to be bilateral energy resources, with aggregate proven reserves of arrangements with limited land use requirements. around 27bn barrels of oil and 350tr cu ft of gas, particularly in the major supply areas of Indonesia, LNG tends to be more cost-effective than pipelines only Malaysia, Brunei,Vietnam and Thailand.However, where longer distances or especially difficult terrain is demand for energy in many member states will involved.An LNG project will have a large initial capital outstrip domestic supply capabilities and the import requirement but its overall cost will not significantly of energy will be common across the region. Domestic increase over greater distances, whereas pipeline costs imbalances will need to be satisfied by a combination increase linearly as pipeline distances increase. of intra-regional energy transportation supplemented through extra-regional imports, primarily from the Short distance pipelines should therefore be the most Middle East. cost-effective form of gas transportation within ASEAN. This would explain why,of all the cross-border energy (iii) Interconnection – The relative proximity of the trades within ASEAN, the only proposed LNG trades are demand concentrations and the prospective sources for a recently announced LNG regasification terminal to of supply within ASEAN, when viewed in light of be built in the Philippines which may source LNG from regional pockets of supply shortage, together suggest Indonesia, Brunei or Malaysia.All other LNG trades an inherent justification for the creation of a regional involving an ASEAN member country are exports of energy network. Commentators on the Asian energy LNG to purchasers outside ASEAN. scene are, when faced with a map of the region which demonstrates the centres of demand and supply, Increased pipeline infrastructure will also enable the seemingly incapable of resisting the urge to ‘join the development of gas fields located near pipeline routes dots’ with a series of interconnected pipeline systems, which may otherwise be uneconomical to develop in transporting gas in particular from where it is to where their own right.This development will in turn be used it needs to be. to increase the extent by which regional demand for gas can be met by regional supply. The first two features are empirically quantifiable components and establish the demand and the supply sides of the energy equation which are required before a successful energy network can be established.The third THE TRANS-ASEAN GAS PIPELINE PROJECT is different. It is not an objective reality but rather it is a The first cross-border gas pipeline in ASEAN exports vision that combines geopolitical, economic and cultural gas from Malaysia to Singapore and was commissioned conjecture, and thus is the basic hypothesis of in 1991. Since then several regional gas pipelines have connecting supply to demand through a single regional been completed and several more are in the process of interconnector suggested by the promoters of the TAGP. design and construction or are envisaged:

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The route compression equipment (excluding drilling costs).These investment costs will need to be met from various sources including private equity, India China commercial debt, state aid and multilateral agency advances.

Myanmar (ii) Technical specifications - any integrated network Laos is only as strong as its weakest link. Harmonised standards and protocols for construction, operation Philippines and maintenance, safety and measurement will be Thailand necessary to ensure that the operational integrity of 2 Vietnam the TAGP is not jeopardised by substandard materials, 3 Cambodia equipment, techniques or services being utilised in Andaman any particular segment of the network. Sea South 13 China Sea 7 11 (iii) Access and use - There will need to be effective Malaysia 5 Brunei 12 and stable contractual arrangements for the supply, 4 distribution and transportation of gas, including 10 9 1 adherence to the principles of open access as well as 8 Singapore management of the network in accordance with internationally accepted oil and gas industry standards. 6 At the nineteenth meeting of the ASCOPE TAGP Task Indonesia Force in 2001 it was resolved to establish an ASCOPE joint venture company to manage the TAGP and to draft a model gas sale and purchase and a gas Full interconnection of these pipelines, which is transportation agreement in addition to considering envisaged by ASEAN to be done by 2020, would see the standard terms to apply to all future gas sales and the creation of an interconnected gas grid throughout transportation agreements. ASEAN and links between demand and production centres beyond pipelines which have hitherto been built between countries solely where single project 1 Malaysia to Singapore (commissioned 1991). economics have dictated the necessity for such 2 Myanmar (Yadana) to Thailand (Ratchaburi) infrastructure. (commissioned 1999). 3 Myanmar (Yetagun) to Thailand (Ratchaburi) (commissioned 2000). 4 Indonesia (West Natuna) to Singapore REGULATORY AND INSTITUTIONAL ISSUES (commissioned 2001). The stated objective of the Bali Memorandum is to 5 Indonesia (West Natuna) to Malaysia (Duyong) provide a broad framework for ASEAN member states (commissioned 2002). to co-operate towards the realisation of the TAGP to 6 Indonesia (Grissik) to Singapore (commissioning help ensure greater regional energy security. scheduled 2003). 7 Thailand (Joint Development Area) to Malaysia Under the terms of the Bali memorandum the ASEAN (commissioning scheduled 2005). member countries, individually and/or jointly,will 8 Indonesia (South Sumatra) to Malaysia study the legal, regulatory and institutional frameworks (commissioning estimated 2005). for cross-border supply,transportation and distribution 9 Indonesia (Arun) to Malaysia (commissioning of gas in the region, with particular attention to the estimated 2010). commercial and economic feasibility of construction, 10 Indonesia (East Natuna and West Natuna) to financing, operation and maintenance of the proposed Malaysia (Kerteh) and Singapore (commissioning network. estimated 2010). 11 Indonesia (East Natuna) to Thailand (JDA-Erawan) The Bali Memorandum specifically identifies nine (commissioning estimated 2012). issues to be addressed in developing the TAGP: 12 Indonesia (East Natuna) to Malaysia (Sabah) and the Philippines (Palawan-Luzon) (commissioning (i) Financing - The costs of constructing the TAGP will estimated 2015). be monumental. One estimate is of US$7bn for the 13 Malaysia-Thailand (JDA) to Vietnam (Block B) necessary pipeline infrastructure, platforms and (commissioning estimated 2016).

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Jurisdiction over offshore pipeline segments, particularly outside of a state’s territorial seas, is more contentious. Despite the aura of close co-operation that surrounds ASEAN’s activities, there are presently a number of territorial disputes between the member states.

(iv) Security of supply and emergency supply development and transportation infrastructure, which arrangements - This will entail the implementation might not result in the development of the necessary of“ appropriate measures to enhance security and infrastructure in those states most in need of it. safety and the uninterrupted flow of gas through the ” network, including a framework for co-operation in (viii) Abandonment - Increasingly stringent the event of a serious disruption to supplement the environmental obligations have been imposed on oil emergency response provisions in the 1986 ASEAN and gas companies over recent years, both by Petroleum Security Agreement. imperative legislative requirements and by corporate shareholder expectations.The oil and gas industry in (v) Health, safety and environment - HSE issues Asia is still in its relative infancy when compared to will become increasingly prominent throughout more established regions such as the North Sea and the region as the TAGP is developed. Evidence of Gulf of Mexico and consequently the issue of increased environmental awareness can be seen in the abandonment of petroleum infrastructure has only construction of the Thai-Malaysia JDA pipeline which become an immediate concern of regional industry was first scheduled to commence construction in early participants in recent years. 2001.The original pipeline route was met with strong protests from environmental activists and affected (ix) Jurisdiction - Determining jurisdiction over villagers in Thailand and resulted in re-routing of the onshore pipeline segments is a relatively straightforward landing point and delayed construction until the matter with the principle of territorial integrity,which second half of 2003. ASEAN strongly respects, dictating that each ASEAN member state will have jurisdiction and responsibility (vi) Transit rights - This issue envisages acceptable over the pipeline segments located in its own territory. measures which would facilitate the issue of permits, licenses, consents, or other authorisations for pipelines Jurisdiction over offshore pipeline segments, and gas being transported through the territory of any particularly outside of a state’s territorial seas, is more member state. contentious. Despite the aura of close co-operation that surrounds ASEAN’s activities, there are presently The TAGP is based upon the integration of the a number of territorial disputes between the member existing and proposed pipeline interconnections states in respect of offshore territories.While into a single regional network grid.The existing agreements have been struck between some states, gas pipelines between ASEAN states are based on allowing development in disputed contiguous areas bilateral arrangements between two states with no (eg the Thai-Malaysia JDA), development of potential pipelines passing through a transit country.As a reserves in other disputed areas has been delayed for consequence it has not been necessary in the past many years while disputes remain unresolved (eg in to consider issues pertaining to transit across third the Thailand-Cambodia OCA). Diplomatic tensions countries, but such issues will need to be considered are rife where claims compete, as evidenced in the in the near future before a truly integrated network recent award of production sharing contracts by both can be realised. Malaysia and Brunei for blocks which Malaysia claims are in its territorial waters and Brunei claims are (vii) Taxation and tariff - The harmonisation of within its exclusive economic zone. taxation, tariffs, subsidies, controls on rate of return and other fiscal terms applicable to pipeline construction Each of the above issues might best be addressed and operation will help to ensure a more consistent by the ASEAN member states through some form development of infrastructure and will enhance the of government–level accord which establishes a prospects for freedom of transit throughout the region. common regulatory and fiscal regime. Such an If fiscal terms vary between ASEAN states then accord might also provide for principles of investment investors may be encouraged to forum shop to find the protection and the preclusion of unwarranted state most lucrative state in which to invest in gas intervention.

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The Energy Charter Treaty,originally signed in conclude a new petroleum security agreement to replace December 1994 and with a strongly European flavour, the existing 1986 agreement, agreed to strengthen is a multi-national energy infrastructure investment cooperation with China, Japan and the Republic of treaty and may have significant value as a precedent for Korea through the SOME+3 Energy Policy Governing ASEAN.The objective of the Energy Charter Treaty Group, and expressed an intention to apply for observer was to secure reliable supplies of energy for western status at the Energy Charter Conference so as to foster Europe while attracting foreign capital investment to more active dialogue and regular exchange of countries of eastern Europe in the overall context of information with the Energy Charter Secretariat. strengthening security through close co-operation in a key economic sector and also the definition of a multi-national legal and regulatory framework for private investment and cross-border gas trades. BEYOND TAGP Given the ambitious magnitude of the TAGP it may be Such fundamental investment protection principles natural to wish to continue the momentum and to provide at least some protection for investments from think even further afield for possible extensions to the political risk events without seeking to determine or network. undermine national energy policies.This is in harmony with ASEAN’s long-standing position of non- It is not inconceivable that a pipeline from Myanmar, interference with member state internal affairs.There Laos or Vietnam could extend into the southern may therefore be merit in the ASEAN states creating Chinese provinces of Yunnan or Guangxi.Yunnan,for an equivalent ASEAN energy treaty,whereby example, is already part of the ADB-assisted Greater governments make legally binding commitments Mekong Sub Region Program of economic co- in favour of common principles supporting the operation, including co-operation in the energy sector. co-operative development of regional energy Thailand has already signed a preliminary accord for infrastructure and markets against unilateral actions imported power from Yunnan,and this sub-regional or inactions which may jeopardise the overall integrity co-operation could extend to gas transmission if of the network. suitable markets can be established.

The great diversity of legal and regulatory systems From Yunnan or Guanxi a pipeline could be linked and economic development throughout ASEAN will to China’s planned West-East gas pipeline either via inevitably make the harmonisation of institutional existing pipeline infrastructure in Sichuan province frameworks challenging.ASEAN does however have and the planned Chongqing-Wuhan pipeline or to in its favour a long history of regional co-operation Shanghai through the eastern seaboard pipeline system through the various ASEAN forums, and an sometimes envisaged by the Chinese government. understanding of the importance that co-operation in the energy sector is essential to the well-being of Beyond this there is an irresistible tendency to look all ASEAN states. beyond the western fields of China to see the West- East pipeline linking with central Asia and, looking The 21st ASEAN Ministers of Energy Meeting further north, talks have been held considering an was held in Langkawi, Malaysia on 3 July,2003.The infrastructure system to carry gas from Russian fields in Ministers agreed that an enabling framework was East Siberia and Sakhalin to markets in China, Korea required to stimulate strong private-sector participation and Japan. in the TAGP on a commercial basis, and they agreed to enhance the ASEAN Energy Business Forum as an The possibility of extending the TAGP into south Asia important platform to facilitate cooperation between has also been considered, such as during the October ASEAN energy authorities and the private sector in 2002 India-ASEAN Business Summit.This would business interaction, technology transfer and project involve the extension of existing pipelines through financing opportunities.The Ministers also welcomed Myanmar into India, possibly transiting Bangladesh and the establishment of the ASEAN Gas Consultative thereby facilitating the export of gas from Bangladesh Council (AGCC) to serve as the strategic technical and into the Indian market. information resource and capacity building advisory body to ASCOPE in the facilitation and Although the thought of one interlinking network implementation of the TAGP. of gas transmission pipelines stretching from Java to Sakhalin and from the Philippines to central Asia may With respect to greater regional and extra-regional only be a flight of fancy now,such an ambition could cooperation, the Ministers called on the Senior Officials soon be capable of realisation if the will exists to Meeting on Energy to expeditiously progress from pipedreams to practicalities.

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