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U.S. burnishing energy card

by Michael Richardson

The United States is rapidly emerging as a key potential exporter to Asia of natural gas, and perhaps even oil in the longer term, after several decades of heavy dependence on imports of these major sources of energy. How will the U.S. wield its new strategic leverage?

Building energy ties with Japan, as part of a broader strengthening of commercial links and the military alliance between the world’s largest and third-largest economies, is expected to be an early result.

Other Asian allies and security partners of the U.S., among them South Korea, India and Taiwan, are likely to receive similar favorable treatment from Washington.

Meanwhile, China, the world’s second- biggest economy, is moving in the opposite direction to the U.S. China is becoming increasingly dependent on imported oil and gas, much of it from faraway sources of supply in the volatile Middle East and Africa. In December, Chinese net oil imports exceeded those of the U.S. for the first time. This could change America’s relationship with China if Beijing fails to cooperate with U.S.-backed sanctions, including an oil-buying embargo, against Iran and Syria.

Still, Jeffrey Ball, a Stanford University energy specialist, says that if the U.S. produces more oil at home, it has less need to spar with China for oil in other parts of the world, and more need to woo Chinese investment to help develop U.S. fossil fuel reserves. Chinese involvement in U.S. shale projects buys access to the technology that China will need to exploit its own shale gas resources, the world’s largest.

Ball believes that the upshot of increased U.S. oil and gas output could be more, not less, Sino-U.S. cooperation, which would be good for global development and stability.

U.S. National Security Adviser Tom Donilon appears to have a similar view. He said April 24 that America did not see its energy security in zero-sum terms and was working with other countries to ensure they did not either. “For example, China will be increasingly reliant on imported oil and natural gas through this decade and beyond,” he noted. “That means secure, affordable and cleaner supplies of energy is a goal we share with Beijing.”

However, Donilon said if Beijing were to use or threaten force in energy-related maritime disputes with Japan and Southeast Asian states, it would meet U.S. resistance. He said the promise of offshore oil and gas was contributing to tensions in the East and South China Seas that would test East Asia’s political and security architecture. While the U.S. has no territorial claims in the region, and does not take a position on the claims of others, it “firmly opposes coercion or the use of force to advance territorial claims.”

Donilon added that Washington has “consistently made clear our position that only peaceful, collaborative and diplomatic efforts, consistent with international law, can bring about lasting solutions that will serve the interests of all claimants and all countries in this vital region.”

In 2005, 60 percent of U.S. oil was imported. Today the ratio is down to 40 percent and falling as advances in drilling technology have unlocked the U.S.’ massive shale gas and oil reserves.

The U.S. has become the world’s top gas producer, outpacing Russia. Output is up by one-third since 2005, driven by the increase in shale gas which now accounts for 40 percent of U.S. gas production.

In a landmark report in December, the International Energy Agency forecast that the U.S. would surpass Saudi Arabia and Russia to become the world’s biggest oil producer by 2020, while North America (meaning the U.S., its energy-rich ally, Canada, and Mexico combined) could turn into a net oil exporter 10 years later.

U.S. gas exports are a far more imminent prospect than oil exports. One project to export shale gas in liquefied form (LNG) by sea in giant tankers, starting in late 2015, has already been approved by U.S. authorities. At least 15 other LNG projects are in a queue awaiting approval, a process that officials have said will start very soon.

Like the first shale LNG export project, in which Indian and South Korean buyers are prominent, long-term sales are expected to go mainly to Asia, where demand for gas, the least polluting of fossil fuels, is rising fast. In Asia, five countries — Japan, South Korea, China, India and Taiwan — accounted for 70 percent of global LNG demand in 2012.

Under U.S. law, the Department of Energy must quickly approve applications to export LNG to countries that have formal free trade agreements with the U.S. The Department can reject or impose limits on proposed exports to non-FTA nations if it believes they are not in U.S. interests. At present, only one of the five leading LNG importers in Asia, South Korea, has a free trade agreement (FTA) with the U.S.

Japan recently joined the U.S. and other Asia-Pacific countries in negotiating a new multilateral free trade deal, known as the Trans-Pacific Partnership. When the negotiations are completed, probably by 2014, Japan will be eligible for preferential treatment as an importer of American LNG.

Japan is by far the biggest single LNG importer. Last year, it bought a record 87 million tons of LNG from producers such as Qatar in the Persian Gulf, Australia and Indonesia. Japan is looking to the U.S. as a reliable new LNG supplier to help bring gas prices down by increasing competition in the global market.

In its impending decision on LNG exports, the U.S. will start playing its energy cards. In doing so, it will reveal critical parts of its hand: when, how much, at what price, and to which countries. U.S. energy diplomacy and leverage appear destined to become an important part of America’s engagement with Asia.

Michael Richardson (mriht43@gmail.com) is a visiting senior research fellow at the Institute of Southeast Asian Studies in Singapore.