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  1. 1. UNECE UNESCAP United Nations Economic United Nations Economic and Social Commission for Europe Commission for Asia and the Pacific SPECA Economic Forum 25-26 June 2006 Baku, Azerbaijan THE ENERGY DIVIDEND: SPREADING THE GROWTH IMPULSE FOR PROSPERITY AND STABILITY IN THE SPECA REGION Session 2: Investing energy dividend for energy infrastructure: Opportunities and challenges Introduction 1. Energy exporting countries in Central Asia face enormous challenge in accessing and securing energy market to support their economic growth. Energy infrastructure that countries inherited requires extensive improvements physically and in terms of a strategic shift towards a market oriented energy system. The current infrastructure is grossly inadequate to capitalize on the opportunity of trading and sharing of energy within the sub-region as well as for large scale energy export to the global market. On the other hand energy deficient SPECA countries lack easy access to energy supplies for their economic growth. This latter group of countries has other resources, such as water and agriculture products, to share with others. All countries have one thing in common which is they all need greater cooperation and integration in optimizing their mutual benefits. One opportunity that has arisen in recent months and years is the growing revenue from the energy exports from the Subregion. Some of the export revenues, generated or expected to be generated from oil and gas export, could not only be used more effectively to accelerate economic and social development, but also for investments in energy related infrastructure that links neighbouring countries and facilitate access to a third country or countries. This will enhance the economic prosperity of the border regions benefiting neighbouring countries and also support development of international energy transmission infrastructure such as pipelines and electricity networks for exporting energy outside the sub- region. Energy exporting countries can take the initiative to seek strategic partnerships with the concerned stakeholders, including the business community, as their longer-term economic development and investment strategies. In investment planning attention should also be paid to sustainable energy development, taking into account social and environmental dimensions along with the economic development. Energy situation overview 2. Following their independence, the economic growth of the SPECA sub-region slowed down, along with the energy consumption, until late 1990s. As the economies picked up later, the energy consumption also started to stabilize or move up since 1998. Central Asia, as of 2002, produced almost
  2. 2. -2- 90 per cent more energy than it consumed, a three-fold increase over that of 1992, indicating a considerable improvement in the production of energy, mainly oil. The strategy of the energy exporting countries in Central Asia has been to export the energy resources to support the growth of their transitional economies. 3. On the other hand, SPECA countries as a whole are a net importer of electricity. Potentials exist for developing hydropower plants in countries where fossil fuel is scarce such as in Kyrgyzstan and Tajikistan. Table 1: Energy Production and Consumption among the SPECA Countries (MTOE) Year 1992 1995 1999 2002 Year 1992 1995 1999 2002 Total Energy Total Energy Production 209.36 169.05 162.39 239.55 Consumption 162.82 128.12 118.34 134.81 Liquid 45.68 41.49 60.51 80.71 Liquid 42.47 26.21 21.61 21.51 Solid 57.89 37.65 26.69 36.44 Solid 41.94 29.59 21.45 27.39 Gas 102.30 86.28 85.73 118.68 Gas 74.24 68.36 71.43 81.85 Electricity 3.49 3.63 3.54 3.72 Electricity 4.16 3.97 3.86 4.06 Source: United Nations Statistics Note: SPECA countries include Afghanistan, Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. Energy outlook 4. Export opportunities are expected to grow with the global energy demand growth projected, as shown in table 2. According to the IEA Energy Outlook 2004, the global energy demand is expected to grow by 60 per cent by 2030 compared to 2002. In particular the Asia and the Pacific region will grow by 80 per cent with China and East Asia doubling the demand for energy during the same period while the European demand will grow by about 20 per cent. By 2030, China will have the largest demand of energy, which will be equivalent to both South Asia and East Asia combined, which is also similar in size compared to the demand of Europe. According to the demand forecast, China will meet half of the demand by coal. While the demand for oil will still be considerable, the forecasted demand for oil and gas in South and East Asia will be larger than that of China and comparable to the demand forecast for Europe. Countries in Asia for energy security reasons will most likely pursue policies to diversity the energy mix as well as the origin of imports. Hence, the potential for SPECA countries to expand their market to the Asia exists. Table 2: Total primary energy demand projections to 2030 for selected countries and regions (MTOE) OECD World Asia Pacific South Asia China East Asia Pacific Europe Coal 3,601 2,333 369 1,354 272 221 274 Oil 5,766 2,100 345 636 467 453 743 Gas 4,130 1,294 190 158 241 216 649 Nuclear 764 343 32 73 18 172 146 Hydro 365 134 24 63 17 13 33 Biomass and waste 1,605 732 318 236 132 37 147 Other renewables 256 91 4 20 41 20 57 TOTAL 16,487 7,027 1,283 2,539 1,188 1,132 2,048 Per cent increase in total 59.37 80.64 99.22 104.43 122.89 32.86 21.18
  3. 3. -3- energy demand from 2002 Notes: East Asia includes: Afghanistan, Bhutan, Brunei, Taiwan (province of China), Fiji, French Polynesia, Indonesia, Kiribati, Democratic People's Republic of Korea, Malaysia, Maldives, Myanmar, New Caledonia, Papua New guinea, the Philippines, Samoa, Singapore, Solomon Islands OECD Pacific includes: Australia, Japan, New Zealand and Republic of Korea South Asia includes: Bangladesh, India, Nepal, Pakistan and Sri Lanka Europe includes: Austria, Belgium, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden and the United Kingdom Asia Pacific includes: East Asia, OECD Pacific, South Asia, China and the Russian Federation Source: International Energy Agency Energy efficiency and conservation 5. Measures to enhance sustainability of the energy sector in contributing towards economic development need to be built into the strategies in developing energy infrastructure. To that end, enhanced utilization of hydro power and other renewable sources of energy as well as improvement of energy efficiency will contribute towards sustainable energy development in meeting the unmet demand for energy. 6. The energy intensity measuring the efficiency of energy used in producing national income, the SPECA region showed relative improvement over the ten-year period, 1992-2002, indicating efficiency gains in the economic sector. However, as of 2002, the energy intensity (0.88 toe/1990 US$1,000 GDP) was still about three times higher than the world average and about five times the developed countries of the ESCAP region (Table 3). Through aggressive promotion of energy efficiency in the SPECA countries, the energy intensity could be further improved, which will enable exporting countries to conserve more for export, while the energy importing countries will be able to build resiliency to the volatile energy prices. Energy efficiency measures could be initiated by any agency, including government agencies, research and development centres, NGOs and private sector entities. In this respect, any of these groups could propose collaborative initiatives to improve energy efficiency in partnership with the relevant stakeholders. The key challenge would be to reach an agreement on the vision, strategies and action plans among the relevant stakeholders and seek active collaboration of large energy consumers and/or energy intensive industries. (example: the energy efficiency by the Ulaanbaatar, Mongolia http://www.unescap.org/esd/energy/information/cost/index.asp) Table 3: Energy Intensity Ratio of amount of energy consumed (toe) to produce USD 1,000 (1990 price) 1992 1995 1999 2002 SPECA countries 1.126 1.161 0.954 0.881 Iran (Islamic Republic of) 0.734 0.806 0.888 0.859 Russian Federation 0.963 0.996 0.988 0.839 Total World 0.359 0.350 0.320 0.317 Total Asia-Pacific 0.436 0.428 0.390 0.390 ESCAP Developed countries 0.146 0.151 0.150 0.148 Source: Based on United Nations Statistics Energy reserves
  4. 4. -4- 7. Among the Central Asian Countries, Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan have oil reserves, of which Azerbaijan and Kazakhstan have considerable reserves lasting 60 to 80 years as of 2004. With OPEC countries having a share of approximately 75 per cent of the oil reserve of the world, the four SPECA countries together has a share of about 4 per cent of the global reserves. More countries have natural gas, which will last for a considerable amount of time (30 to over 100 years) under the current production capacity. For example, although Azerbaijan only has a share of 0.8 per cent of the global gas reserve, it can support the entire annual global pipeline based trade for 2.7 years. 8. Currently at the global level, over 500 billion cubic meter of natural gas is traded through pipelines. While the Russian Federation has extensive gas pipeline network, except for Turkmenistan SPECA countries have limited pipeline network. Table 4: Reserves of various energy resources in Central Asia and neighbouring countries (As of 2004) Oil Gas Coal Global R/P ratio Global R/P ratio Global R/P ratio share (%) (Years) share (%) (Years) share (%) (Years) Azerbaijan 0.6 60.2 0.8 >100 Kazakhstan 3.3 83.6 1.7 >100 3.4 360 Turkmenistan - 7.4 1.6 53.1 Uzbekistan - 10.6 1.0 33.3 Russian Federation 6.1 21.3 26.7 81.5 17.3 >500 Islamic Republic of Iran 11.1 88.7 15.3 >100 Source: BP Statistical Review of World Energy June 2004 9. Currently, 2.4 billion toe of oil is traded globally. Europe imports about 26 per cent of this amount and Asia (Australia, China, Japan and Other Asia-Pacific) imports about 39 per cent. The value of energy trade from the SPECA region doubles virtually every 3 years, which is largely due to the rising oil prices. Currently, from the SPECA region, more oil is exported to market outside the Asia-Pacific region (over 12 billion USD) and more gas is traded within the Asian-Pacific region (378 million USD). Considering the continued expansion of the economies in Asia, the share of the Asian- Pacific as a market for energy resources of Central Asia is expected to be higher. However, despite the market potential of SPECA countries, the current energy infrastructure to export to the Asian market is grossly inadequate. Table 5: Value of energy commodity exports from SPECA countries (Million US$) Export destination 2001 2003 2004 Within AP 214.2 221.2 231.1 Coal External AP 8.4 28.8 36.0 Within AP 1.7 1.1 2.5 Lignite External AP 0.0 0.0 0.0 Within AP 681.7 1,066.6 1,650.8 Oil External AP 5,311.9 7,762.0 12,031.0 Within AP 88.1 169.3 378.3 Gas External AP 28.1 171.1 321.9 Within AP 63.8 69.2 93.5 Electricity External AP 0.0 0.0 0.0 Total global export value from 6,397.8 9,489.3 14,745.0
  5. 5. -5- SPECA countries Source: Comtrade Database, United Nations Statistics Within AP indicates that the commodity is exported to a country within the Asia Pacific region External AP indicates that the commodity is exported to a country outside the Asia Pacific region Afghanistan and Azerbaijan not included in data. Energy market 10. Energy security is a critical global concern, in particular in the current trend of narrowing supply/demand gaps and high and rising energy market. Asia, with expected rapid economic growth of large economies, such as China and India, together with South-East Asian economies will continue to have strong demand for energy resources. Competition to secure such energy resources by each country is expected intensify to a level which may bring about undesirable impact on supplies and prices. 11. By 2030, a number of potential markets are likely to be available or grow fast both within the Asia Pacific region and other parts of the world. In the international energy market, SPECA countries have a great potential to become significant players in providing the energy supplies, if adequate infrastructure is developed. While it is expected that SPECA countries will continue to focus on developing access to the European market, the Asian energy market is growing fast. Its import is already larger than that of the European market and it is likely to continue with the trend. Collaborative development 12. SPECA as a subregion is homogenous and has a great potential to strengthen their collaboration through a politically acceptable and economically feasible modality to collectively develop their economies and facilitate energy export. SPECA countries, which are not endowed with energy resources, could potentially benefit from extensive energy trade by providing transition facilities for energy export to a third country. Resources generated from the transit could be used to promote economic and social development of these countries. In addition these countries will have easy access to energy supplies. One of the challenges in SPECA region would be to address sustainability issues in developing energy infrastructure. Removing barriers in order to widen the access to energy services in Central Asia will contribute to the overall welfare of their citizens in having better quality of life. In addition, promotion of enhanced utilization of renewable energy resources among the SPECA region will enable countries to shift towards a more sustainable path of economic development, while increasing the export of energy resources to generated the revenue. 13. There are good examples in other parts of the world which could be replicated or adapted in Central Asia. For example, subregional organizations, such as ASEAN through the ASEAN Center for Energy (ACE), SAARC and ECO through their working groups are working towards enhancing energy security through energy trade within its subregion. In particular, ACE has been active in pursuing an integrated energy system within the ASEAN including integrated electric power system, gas and oil pipelines, promotion of energy efficiency and renewable energy. Recently the North East Asia has also initiated an Intergovernmental Collaborative Mechanism to promote energy cooperation in their subregion. Such a mechanism within SPECA could also be beneficial to further consider the expansion of the energy system in SPECA taking into account the markets in not only Europe but also Asia.
  6. 6. -6- 14. Building on various sub-regional initiatives on energy cooperation, the Sixty-Second Commission session of UNESCAP attended by the members and associate members of ESCAP noted the proposal to consider working towards developing an initiative on Trans-Asian Energy System. The objective of the Trans-Asian Energy System is to enhance energy security through greater coordination and integration of regional energy system in support of sustainable development. For this purpose, the secretariat will take steps towards undertaking preliminary studies to identify opportunities and challenges for such a system. (More detailed information could be obtained from http://www.unescap.org/publications/detail.asp?id=1148) Investment financing 15. The major constraint for developing energy infrastructure will be financing issues. In the Asian-Pacific region, IEA estimates that approximately 6.5 trillion USD between 2001 and 2030 or approximately 218 billion USD annually would be needed to develop the necessary energy infrastructure. Mobilizing financial resources to meet this challenge seems formidable. However, inspired by the rising energy demand for energy resources, strategic partners, such major energy industries and financial institutions, are expected to be interested in developing the infrastructure in partnerships with concerned governments in the region provided that the necessary legislative framework to secure and protect the investment is in place. Energy exporting SPECA countries could lead such partnership by committing themselves to play a major role in infrastructure planning, development and management, including investing back part of their energy revenues. 16. It should be noted that as in the case of ASEAN, promotion of energy efficiency and renewable energy are also an integral part of their energy policy. Enhanced utilization of energy efficiency and renewable energy will reduce the domestic consumption of conventional fuel enabling those resources to be either exported or be utilized for other economic or social development purposes domestically. In particular, countries without energy resources in other subregions have given careful consideration to the cost of energy and managed to accomplish economic growth with less energy consumption. Therefore, along side development of the energy supply infrastructure, SPECA countries could also embark upon an aggressive policy to promote energy efficiency improvement and energy conservation. In this respect the Baku International Symposium on Energy Efficiency and Sustainable Development, held in Baku March 2006, has adopted the Baku Declaration urging member states to take a number of measures in promoting energy efficiency including inter alia, assigning energy efficiency a higher policy priority, and launching collaborative initiative of demonstrating public private partnerships, which could be integrated and supported within the framework of SPECA strategic energy policy. Here again, financial support may come from the export revenues, either as a grant or a special fund created for the purpose. 17. In order to further promote the discussion on collaborative energy infrastructure development, it would be necessary for the concerned member states to exchange views to develop a shared vision and strategies to proceed further. In holding such dialogues, it would be essential to base the discussions on the most updated and accurate data and information. Such background information should be the basis of understanding in further developing a collaborative framework on energy infrastructure among the SPECA countries. 18. It may be noted here that the members of the Project Working Group on Water and Energy has adopted a policy paper entitled Cooperation Strategy to Promote the Rational and Efficient Use of Water and Energy Resources in Central Asia in 2004, which includes a Diagnostic Report on Energy
  7. 7. -7- Resources in Central Asia. It is therefore prudent that future initiative(s) should take advantage of this useful conclusions and recommendations of this report. Policy options 19. As discussed above, Central Asian countries have a good opportunity to develop a coordinated energy system capable of enhancing energy export and effective utilization of the revenues for their mutual benefit. Towards realizing these potential, there appear to have several policy options that need serous consideration by all stakeholders. (1) Strategic partnership to develop a collaborative mechanism to look at various options for a coordinated SPECA energy system to promote energy export and intra-subregional energy trade and exchange; (2) Sustainable development of SPECA countries by optimum utilization of energy resources, including fossil fuels, hydro and other renewable energy resources; (3) Developing a follow-up strategies in supporting the implementation of the Baku Declaration on energy efficiency including developing a collaborative initiative to demonstrate public-private partnership to promote energy efficiency; and (4) Allocating part of the energy export dividend in support energy infrastructure development, energy efficiency and enhancing access to energy by all SPECA countries. Issues calling attention of the Forum for its consideration 20. The major key policy issues that need to be addressed by the member states would be on developing various strategies to initiate a coordinated SPECA energy system: (a) What are the critical elements to be built in strategies for member states of SPECA to collaborate in enhancing energy security for the socio-economic development of Central Asia? (b) What are the necessary strategies needed to further develop energy infrastructure to expand the market to Asia? (c) How to ensure incorporating appropriate measures into energy infrastructure development strategies that addresses the promotion of energy efficiency improvement and energy conservation, enhanced utilization of renewable energy and widening access to energy services?