FEBRUARY 8, 2015
Could Asia enjoy a 21st Century Pax-ASEAN-Ameri-China? It’s not that farfetched.
That’s because current territorial tension in the South China Sea isn’t about islands. It’s about access to energy, fisheries and control over navigation.
The first two can be priced and auctioned. The third can be ensured by cooperating navies enforcing the recognized property rights created by the first two.
The path to this future looks wide open. China, Vietnam and the Philippines, the three main countries butting heads in the South China Sea, all support the concept of Joint Development.
Joint Development Areas (JDAs) are created when countries with disputing claims to an offshore area agree to set those claims aside for an indefinite period while they jointly develop the resources within them.
JDAs have pedigree. They already exist all over the world. Three exist in the South China Sea.
My research organization, Grenatec, proposes nine more be created.
The result? Market arbitration of South China Sea territorial claims for, say, 20-40 years. After that, territorial finality can be negotiated when the stakes are lower because the hydrocarbons have been exhausted.
Under Grenatec’s plan, these nine South China Sea JDAs would be interconnected by an open-access, common-carrier offshore pipeline connecting them to downstream regional markets.
The reason is that there’s more in the South China Sea than just oil and gas. This needs to be incorporated into investment decisions.
JDAs connected to downstream infrastructure allows oil and gas development over the short-term. This would be followed by development of methane hydrates, wind, ocean thermal, biofuel and offshore aquaculture over the long-term. All have already been suggested for the South China Sea.
Auctioning off access to JDAs not only shelves territorial claims indefinitely, but also provides a big pot of money to recycle into building the needed downstream delivery infrastructure.
The result: a multi-generationally useful Asian ‘internet’ of energy.
Consider current developments.
Undeniably, there’s dangerous tension in the South China Sea. The media, as they do, plays this up with head-butting headlines focusing on water cannon fights, surreptitious island building and flotilla-accompanied oil exploration rigs.
A less sexy, less reported parallel reality is that Vietnam, China and the Philippines already cooperate in the South China in constructive, precedent-setting ways.
In the Tonkin Gulf, China and Vietnam now cooperatively manage fisheries. China and Vietnam are jointly exploring for oil and gas on either side of their jointly-acknowledged Tonkin Gulf offshore territorial equi-distance line.
Meanwhile, Philippine energy explorer Philex is talking with China National Offshore Oil Corporation (CNOOC) about joint exploration of the hot-button Reed Bank. This is occurring with the apparent acquiescence of the Philippine government.
Grenatec proposes the nine new JDAs be established in four geographic zones. These are north of Indonesia’s Natuna Island; in the eastern offshore waters of Vietnam and in the Tonkin Gulf, off Southern China southeast of Hong Kong and southwest of Taiwan; and in the Scarborough Shoal and Reed Bank areas west of the Philippine islands of Luzon and Palawan.
Proceeds of JDA auctions would be recycled into access infrastructure. Initially, this would be a Pan-Asian Gas Pipeline. This would run along the eastern and later the western sides of the South China Sea from Singapore to southern China. Spurs would connect this mainline to individual JDAs.
The basic idea has been around for years. The most detailed template is the moribund Trans-ASEAN Gas Pipeline conceived by ASEAN’s Council on Petroleum. It’s been shelved due to ASEAN dithering.
Private industry concepts akin to a Pan-Asian Gas Pipeline include the Malaysian private-industry proposed Trans-Asian Oil and Gas Grid and its intellectual precursor, the Asian Gas Grid.
Oil and gas exploration auctions have become common, as have auctions of wireless telecommunications spectrum. Both allocate scarce, contested resources to those willing to pay the most.
In the case of South China Sea JDAs, auction proceeds could be recycled through — among others — the Asian Development Bank or new-kid-on-the-block China’s Asian Infrastructure Investment Bank (AIIB). Roughly half the AIIB’s founding members are ASEAN countries. The South China Sea represents a key part China’s Xi Jinping’s One Belt, One Road vision.
Astute Chinese charm-offensive politics would suggest that AIIB investing in an inaugural big infrastructure project in South East Asia would burnish the new bank’s credibility and build legitimacy as an emerging regional multilateral investment institution.
It would also further China’s stated goal of deepening regional economic ‘connectivity.’ This was a big theme of China’s currently completed 2014 rotating leadership of the Asia-Pacific Economic Cooperation (APEC) group.
A Pan-Asian Gas Pipeline would mark a start in building out the estimated trillions of dollars of new energy infrastructure Asia needs.
It would also generate sizable demand for goods and services in the littoral countries: Vietnam, the Philippines and Indonesia. This would spread the wealth, and increase the economic multiplier effect.
Perhaps most important, it would move Asia toward a more integrated, efficient regional energy market for natural gas. The Asian Development Bank and the International Energy Agency both have been calling for this for years now.
The knock on effect would almost certainly be the emergence of an Asian marginal supply market-clearing ‘Henry Hub’-style price that could end (among other market distortions) the ridiculous oil indexation of many Asian gas trading contracts.
This ‘Asian hub’ price could be set in Hong Kong or Singapore. Add in carbon prices generated from, say, China’s Shenzen exchange in 2016 — and the result is a massively catalytic shift toward a more efficiently, integrated, lower carbon-emission regional ‘clean energy’ economy.
This is all basic economics. Climate change itself is the result of energy market distortions, primarily unpriced carbon and autarkic national markets. These date back to the Industrial Revolution. Removing these distortions through economic reform is now mankind’s biggest task. Inertia benefits no one.
Replacing gunboats with rules (JDAs) and applying efficient economic allocation methods (auctions) that result in better investment signals (‘Asian’ hub prices) and improved security (re-purposed, cooperating navies) results in a massively synergistic positive feed back loop.
In engineering terms, a Pan-Asian Gas Pipeline is no great shakes. The coastal benthic environment is shallow. It’s already densely criss-crossed by the first-mover telecommunications industry and its global trade, efficiency and innovation-boosting fiber optic cables.
These were laid as a result of the telecommunications industry’s own 1990s economic reforms when the Internet came along. The parallels are striking.
Today, roughly 20 years later after the telecoms industry freed itself from Rip Van Winkle practices, it’s the energy industry’s turn to ‘wake up’ to the efficiency revolution.
A Pan-Asian Gas Pipeline is merely the beginning.
Down the track (2035 or so, possibly earlier), high capacity power lines could be laid parallel to a Pan-Asian Gas Pipeline. That would open the way for development of offshore wind, wave and ocean thermal energy development when the gas starts to run dry.
ASEAN’s ASCOPE’s already developed a plan along these lines as well. It’s called the Trans-ASEAN electricity grid. It’s another big ASEAN project gathering dust.
A Pan-Asian Gas Pipeline modeled on the Trans-ASEAN Gas Pipeline and later paralleled by a Trans-ASEAN Electricity Grid would create an interconnected Asian energy market serving two billion people.
It would be the biggest market the world has ever known. The catalytic upward effects on regional and global economic growth are impossible to overstate.
Among other things, it would finally bring online the roughly 100 million people in Asia who still lack electricity. A more worthwhile goal is hard to imagine.
With transparent markets arbitrating energy resource access, development and delivery decisions in the South China Sea, regional navy assets now deployed for water cannon fights and protective flotillas can be shifted to providing security for infrastructure and access for trade.
In their spare time, cooperating navies could shift efforts to reducing illegal fishing, drug trafficking and people smuggling. They could also provide humanitarian aid for natural disasters like earthquakes and typhoons common to Asia.
Major military bases fringe the South China Sea. These are located on China’s Hainan Island, at Vietnam’s Cam Ranh Bay, on Indonesia’s Natuna Island, at Subic Bay on the Philippine Island of Luzon and on Taiwan’s south coast port of Tsoying.
These bases are ideally situated for providing cooperative, multilateral security for energy development, fisheries patrol, smuggling enforcement and humanitarian aid. And this is just the kind of confidence-building, cooperation-enhancing tasks they need.
Moves along these lines are underway.
The US Navy recently took part in Chinese organized maneuvers off China’s Hainan Island. China’s Navy recently participated in the US organized RIMPAC maneuvers off the US state of Hawaii. US, Chinese, and Australian troops recently undertook joint maneuvers in North Australia.
This dovetails with China’s Six Priorities for relations with the United States. China’s invited the US to become involved in both the AIIB and SIlk Road projects. China and US both stress their respective political commitments to improving military ties.
The world is now a pivot point in history. Twenty-five years after the fall of Communism and roughly 36 years after China’s opening to the world, we’re all capitalists now. The ‘the world’s business is business.’
It’s time to start acting that way. Contrary to what the generals and military contractors claim, there’s more money and geopolitical benefit in positive-sum peace than negative-sum war. That is, at least for the common man.
America’s post war Marshall Plan and the 1957 creation of the European Union’s precursor (the Coal and Steel Community) offer worthwhile analogies here. China’s AIIB already is being referred to as a kind of regional post World War II Marshall Plan.
But a better analogy for Grenatec’s proposed South China Sea Joint Development Areas connected to a Pan-Asian Energy Infrastructure is the 1951 creation of the Franco/German-led European Coal and Steel Community (ECSC).
The aim of that agreement was to entwine two vital post war French and German industries so deeply that a new war between the two became unthinkably impractical. The result has been more than a half century of peace, rising incomes, expanding membership, and vasty broadened trade in Western Europe.
The parallel between the 1951 creation of the ECSC and the potential presented by a multilateral Pan-Asian Gas Pipeline connecting Joint Development Areas in the South China Sea is uncanny. It tethers everyone in Asia to a common-watering hole that rewards cooperation.
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