Assessing Risks/Challenges in Energy Cooperation Christopher Findlay Asia Pacific School of Economics & Management The Australian National University Presented to the Korea Energy Economics Institute, 18 October, 2002, Seoul, Korea

Main Propositions The efficiency of local production and consumption is central to achieving stable and secure energy supply. Domestic deregulation of energy related infrastructure is central to energy security by enabling pro-market structural adjustment. Regional cooperation needs to be contestable to achieve global best practice in energy through the contribution of foreign capital, innovation and entrepreneurship. A more detailed discussion of the issues in this presentation are set out in a Background Paper.

The Evolution of the Energy Security Risk Focus in Northeast Asia Geo-political Risk Freedom of Navigation Security of Physical Supply Time = main focus= risk management & outcome Impact on Economic Efficiency 1970s1990s2000s Cost of Energy Price Stability Efficient fuel type adaptability Economic Security Develop geographic proximate resources. Emphasise regional cooperation. Pro-market regulatory regime in home markets. Promote foreign capital, technology & entrepreneurship. Mitigate environmental risk & potential Kyoto Protocol sanctions.

Key Messages on the Evolution of Energy Security Risk Economies gain from measures that assist with the efficient absorption of world price instability. This can be achieved through a thoughtful and carefully designed pro-competitive regulatory regime. ……that will achieve allocative efficiency in the short term (ie decision making based on prices which reflect costs at the margin) and will support the necessary investment to underpin new competition and technology across the energy supply chain. These are critical elements of an enduring solution to the lack of energy security.

Challenges for cooperation Infrastructure policy small group cooperation and preferences environmental parameters government agreements

Infrastructure policy Domestic –debate on price now vs investment later investment in critical Cross border –same challenges arise in a more difficult setting cooperation at government level required –value of looking at some models »including within countries, eg Australia

Small group arrangements Preferential structures –risk of locking-in inefficient solutions imposing costs on downstream users value of openness and competition –including in provision of services/technology not just resources –are there any bargaining gains from promoting local supplies? Let the market decide - the “premium” provides the incentive!

Environment Now a key element of decision making in energy policy Complication for cooperation is when participants or potential participants have adopted different positions –eg on Kyoto opportunities may be lost/risk of sanctions applied positions need to be reviewed and reevaluated

Government agreements Reduce risks in projects by making credible commitments to each other on policy Or provide other mechanisms for shifting that risk (development bank models) –and in Northeast Asian context the two-way links with security may demand more participation by governments than in other regions –issue then is making explicit the burden and meeting it efficiently

Private sector Value of deregulation in domestic markets and private participation in domestic and cross border projects –imposes a test on commercial grounds (the project finance model) –and constrains ability to pass on costs of inefficient forms of cooperation

Value of a dialogue Agenda items –infrastructure policy (at home and across borders), environment/Kyoto, how to apply the principles of open regionalism might also include –design of tax on energy projects –research priorities Value of interaction not only by governments but also the private sector –eg on policy priorities and contract design

Value of a dialogue Consistent with the open regionalism and contestability principles –a Northeast Asian dialogue within a larger grouping that includes other major suppliers Australia, Southeast Asia –the data shows they continue to be major suppliers to the region