Policy Study on CrossBorder Energy Trade and its Impact on the Poor

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Policy Study on Cross-Border Energy Trade and its
Impact on the Poor

• Presented to
• UNDP Technical Review Committee
• 23-24 March 2006, Bangkok
• Econ Analysis

2
Study Objectives

• Review recent developments in cross-border trade
  in energy at global, regional, sub-regional and
  bilateral levels involving AsiaPacific
  countries.
• Assess the overall economic, social,
  environmental and energy security impacts of
  cross border energy trade from the perspectives
  of both exporting and importing regional
  countries.
• Assess the economic, social, environmental and
  energy access impacts of cross-border trade on
  the poor.
• Assess the qualitative and quantitative impact
  of energy trade on various components of MDGs and
  relate the outcomes to progress made towards
  meeting the MDGs.
• Identify opportunities and barriers for
  cross-border energy trade involving Asia-Pacific
  countries, and make recommendations on strategic
  directions and policy options for regional
  governments, with special reference to the
  economic, social and energy needs of the poor.

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Coverage of Interim Reports

• Global assessment
• overall macro-economic impacts at
  international level based on secondary data and
  live consultations
• Regional assessment
• region-specific impacts, accounting for
  sub-regional diversities, based on secondary data
  and live consultations
• National assessment
• macro level assessment based on secondary
  data, combined with micro level survey of poor
  communities in 2 villages in India

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Key Findings of Global AssessmentTrade in Oil,
2003
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Key Findings of Global AssessmentTrade in gas,
2004
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Key Findings of Global AssessmentTrade in coal,
2004
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Key Findings of Global AssessmentTrade in
electricity, 2000-2003
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Key Findings of Global AssessmentOutlook for
energy goods trade by 2030

• Share of oil trade expected to increase by more
  than 50
• Share of gas trade to double
• Share of coal trade in coal to remain the same
• Share of electricity trade to increase as demand
  in Asia more than doubles
• Much of additional oil and gas exports to come
  from Middle-East, with imports by Asia rising
  threefold
• Most of world coal trade to remain in Asia
• Several new electricity interconnection projects
  under consideration within Asia

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Key Findings of Global AssessmentFDI flows in
energy, gas and water services 1989-2003 (million
USD)
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Key Findings of Global AssessmentInvestments in
energy infrastructure with private sector
participation, 1990-2003
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Key Findings of Regional AssessmentPotential
impacts of energy goods trade on exporters

• Increased revenue for trading company, with
  possible knock-on benefits for economy ()
• Increase in government revenues ()
• Additional finance for increasing access to poor
  people ()
• Financing new infrastructure with dual
  domestic/export use ()
• System benefits of electricity grid
  interconnection ()
• Possible lower or higher domestic prices (/-)
• Risk of Dutch disease and commodity price
  volatility (-)
• Corruption, predatory governance and conflict (-)
• Environmental damage (-)
• Social dislocation and disruption (-)

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Key Findings of Regional AssessmentPotential
impacts of energy goods trade on importers

• Savings by importer can mean lower costs/tariffs
  ()
• Savings by importer can mean more capital for
  expansion of access ()
• Greater supply reliability and diversity ()
• Decreased need for government subsidies to energy
  importer ()
• Avoidance of pollution from domestic energy
  production ()
• Eventual improvements to reliability and access
  to modern energy will help lower unsustainable
  biomass use ()
• Exposure to price volatility (-)
• Greater environmental impact from higher economic
  activity (-)

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Key Findings of Regional AssessmentPotential
impacts of energy services trade on importers

• Reduced investment costs for government ()
• Transfer of technology and know-how can lower
  costs, improve reliability ()
• Eventual lower costs present opportunity to lower
  tariffs ()
• Eventual lower costs and imported technology
  provide opportunities to increase access though
  government leverage to impose it will be more
  limited (/-)
• Constraint on governments ability to impose
  public service regulations (/-)
• Effects of energy market liberalisation
• Lower costs due to competition could lead to
  lower tariffs ()
• Competitive markets may not promote investment
  (-)
• Liberalisation of off-grid market may lead to
  increased rural access ()

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Key Findings of Regional AssessmentEnergy trade
trends in China

• Continued high reliance on coal, but declining
  share in total energy consumption
• Interest in expanding coal exports within region
• Rapid increase in oil demand 3-5 p.a. over
  next 25 yrs. with 80 to be imported
• Rapid increase in gas demand 5-12 over next
  15-25 yrs. switch to net importer status by
  2010
• Ongoing expansion of global sourcing of oil and
  gas from a growing number of countries

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Key Findings of Regional AssessmentEnergy trade
trends in Indonesia, Malaysia and Thailand

• Indonesia became a net oil importer in 2004 due
  to decline in crude production, but gas
  production in increasing and coal production is
  planned to double regional gas and coal exports
  set to rise in future
• Malaysias oil production stable with new
  production-sharing ventures aimed at increasing
  net supply, gas production on the rise regional
  gas exports set to increase
• Thailands oil import dependency declining but
  remains high (92), coal imports (33), gas
  imports (21) and electricity imports (3)
• All three countries replacing oil with natural gas

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Key Findings of Regional AssessmentEnergy trade
trends in Pacific Island Countries

• All countries, except Papua New Guinea, are oil
  importers
• Papua New Guineas oil reserves are depleting
  and, in any case, it is a net importer in the
  absence of refining capacity
• All countries import mainly from Singapore, a few
  from Australia
• Fuel import costs have increased 60 during
  2000-2004 for PICs, forming a significant part of
  their trade deficits
• Several countries now exploring biofuel options
  from palm oil, coconut oil and cassava for fuel
  and electricity

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Key Findings of National AssessmentIndonesia
Macroeconomic impacts of energy trade (exports)

• Export of energy resources (oil, gas and coal)
  created huge state revenues since oil price boom
  of 1970s
• In spite of corruption and governance problems,
  substantial investments made in infrastructure,
  education and health, especially in rural areas
• By and large, Dutch disease and other natural
  resource curses were avoided, but governance
  problems underpinned pace of development
• Following Asian economic crisis of 1997,
  large-scale decentralization initiated, including
  sharing of LNG revenues between central, state
  and local governments
• Significant poverty reduction gains were induced
  by economic growth accompanied by pro-poor,
  rural-directed policies but relatively low
  priority to social services compared to other
  sub-regional countries
• Decentralization of resource allocation has
  increased regional disparities, with poor
  remaining vulnerable
• Recent steep reduction in fuel price subsidies,
  with eventual intent to remove them altogether,
  accompanied by poverty reduction measures but
  benefits of these to richest 10 five times more
  than those for poorest 10

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Key Findings of National AssessmentIndonesia
oil and gas revenue-sharing arrangements
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Key Findings of National AssessmentIndonesia
investment in social sectors
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Key Findings of National AssessmentIndonesia
poverty reduction measures to offset reduction in
fuel price subsidies

• Direct cash payment to registered poor households
  of Rp. 100,000 (equivalent to about US11) per
  month, totalling about Rp. 4.7 trillion
  (equivalent to US520 million) in 2005.
• Operational aids for schools at primary and
  junior secondary level. A grant of about Rp. 300
  000/pupil/year has reduced school fees throughout
  the country. Allocation in the 2005 budget was
  Rp. 6.3 trillion (US 700 million).
• Basic health care and health insurance for the
  poor, through free of charge service at public
  health clinics, and free in-patient treatment at
  third class hospitals for the poor. The planned
  2005 budget for this was Rp. 3.9 trillion (US430
  million).
• Provision of block grants for rural/village
  infrastructure in a set of prioritised districts.
  The planned budget was Rp. 3.3 trillion for 2005
  (US 370 million).

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Key Findings of National AssessmentIndonesia
microeconomic impacts of energy trade Bontang
township and LNG plant

• PT Badak NGL started in 1977, leading to rapid
  development of Bontang township
• Significant infrastructure development has taken
  place since then roads, market, school, water,
  gas, electricity
• Several new shops and establishments have emerged
• Fertilizer and coal mining facilities set up
• PT Badak NGLs community development programme
  has spent more than USD 6 million in
  infrastructure, health, education and
  environmental impact mitigation
• Poverty levels in Bontang township declined
  significantly in comparison to provincial and
  national averages
• Access to civic amenities and social services of
  by Bontang population increased commensurately
• However, unemployment levels in Bontang are
  higher than provincial average, likely due to
  high reliance on migrant workers
• Adverse environmental impacts on local population
  have risen due to growth in air and water
  pollution, and reduction in mangrove forested
  areas taken up by the large corporations

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Key Findings of National AssessmentIndonesia
microeconomic impacts of energy trade Poverty
indicators of Bontang township
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Key Findings of National AssessmentIndonesia
microeconomic impacts of energy trade
allocation of PT Badak NGLs community
development funds
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Comments for Follow-Up

• Global Assessment
• More analysis required of global energy
  transitions arising from heightened competition
  in international energy markets e.g., revival
  of interest in nuclear energy, effects of Kyoto
  Protocol on fossil fuel demand and clean
  technology exports
• Trade in energy services not adequately explored
  in terms of implications for structural changes
  in developing country energy markets
• Many changes have occurred and are in progress in
  energy market liberalization in the region,
  particularly in electricity sector, which should
  be more fully captured
• A discussion is needed on ongoing debate under
  WTOs GATS for liberalization of energy services,
  reflecting both developed and developing country
  viewpoints (some discussion is currently in
  regional assessment)
• More disaggregation needed to bring out
  investment implications in energy sectors other
  than electricity (although electricity is the
  most significant)

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Comments for Follow-Up

• Regional Assessment
• Potential impacts of energy market liberalization
  need to be discussed in more balanced manner to
  bring out negative short-/medium-term price
  increases, effects on domestic industry and
  access issues for the poor.
• Coverage of countries needs to be wider,
  following UNDP sub-regional classification.
• In particular, more attention is needed on South
  Asia, especially in relation to gas and
  electricity trade between India and its
  neighbours (current discussion relating to Iran
  is cursory and not very useful).
• Discussion of energy consumption trends in
  Pacific Island Countries excessive and unmatched
  by similar discussions for other countries
  covered.
• While poverty and MDGs are summarized for
  countries covered, correlation with energy trade
  comes through to some extent only for Pacific
  Island Countries. Table A-1 attempts to link
  energy trade and energy access, but data needs to
  be handled cautiously (e.g., Nepal where biomass
  consumption has grown despite rise in energy
  trade). If further refined, especially for
  poverty implications, it can be brought into main
  report.
• Overall, there is a need to map out energy trade
  trends and developments in the region more
  systematically, with an eye to their global
  geopolitical implications.

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Comments for Follow-Up

• National/micro assessment
• Temporal dimension of poverty not sufficiently
  captured in micro assessment, need to assess
  poverty trends among indigenous population since
  establishment of township
• Higher unemployment among local population not
  explained and needs further exploration
• Environmental impacts not sufficiently
  elaborated/quantified
• Socio-cultural impacts due to large influx of
  migrant population not assessed
• On the whole, case study presents an overly
  positive picture and needs a better balance
  against negative impacts of boom town
  phenomenon