Executive Summary

Even though oil and gas is the most traded product in the Asia-Pacific region, there is virtually no energy trade across the Pacific. The major energy importing economies of Northeast Asia source their oil and gas largely from the Middle East, Southeast Asia and Australia, while the United States imports energy from the Americas, West Africa, and the Middle East. Indeed, transpacific trade in energy products (oil, gas, and coal) accounts for only 1.4 percent of global trade in those products. The segmentation of energy markets between Asia and the Americas is seen in the sharp price differential for natural gas between the two regions, and – more recently – in a price differential for crude oil as well.

A number of developments in recent years have raised the possibility of transpacific trade in oil and gas, and the emergence of a more integrated and competitive market in energy products in the Asia-Pacific region. These include:

• A) The discovery of massive unconventional (shale) gas deposits in the United States and Canada which are creating a gas glut in North America;
• B) Increased demand in Asian countries for less carbon-intensive energy sources, in particular a shift away from coal to natural gas;
• C) Concerns about nuclear power following the Fukushima Daiichi disaster and the resulting search for clean alternatives to nuclear energy; D) The changing energy balance in Southeast Asia, particularly Indonesia and Malaysia, which are expected to become importers of LNG due to rapid increases in domestic demand; and
• E) Rapidly growing investment by Asian national oil and gas companies in North American energy assets, especially in the Canadian oil sands, which has the third largest proven reserves of crude oil in the world.

Even taking into account the higher cost of shale gas production, the substantial investments required to build pipelines and liquefaction plants, and the transportation cost of shipping LNG across the Pacific, North American gas could be competitive in Asia against existing suppliers, or at the very least serve as an secondary source of supply for Northeast Asian economies looking to diversify their energy imports or seeking more secure sources. Likewise, the prospect of North American crude oil exports to Asia is increasingly attractive given the gas glut in the United States and a widening price differential between benchmark West Texas Intermediate and Brent crude oil prices.

Favorable economics, however, do not guarantee that transpacific energy trade will become a reality, since there are political, regulatory, and environmental risks to be overcome, as well as a need for substantial capital investment. Nevertheless, the prospect of transpacific energy trade would be good news for Asia-Pacific regional integration, since it would lead to a more competitive energy market and more transparent pricing of energy products, likely resulting in a reduction in price differentials between Asia and North America. In addition, transpacific energy trade would allow both exporters and importers in the region to diversify their markets, and hence support energy security objectives.

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