Energy Security in Northeast Asia: A Pivotal Moment for the U.S.-Japan Alliance

Two years have passed since the Great East Japan (Tohoku) Earthquake devastated northeastern Japan and the subsequent meltdown of the Fukushima Daiichi nuclear power plant shook the world. The government, then led by the Democratic Party of Japan (DPJ), proved unable to revive the ailing economy (the problems of which pre-dated the earthquake), and also made no clear-cut decision on a new energy policy for Japan. Faced with popular opinion and public demonstrations against nuclear power but faced with a high energy economy, the DPJ administration’s equivocal stance on nuclear power generation remained unchanged. As Japan’s nuclear reactors shut down after Fukushima, Japan once again found itself a resource-poor country whose energy security is seriously affected by international surroundings.

The DPJ suffered its own virtual meltdown in the December 2012 lower house election, suffering incessant intra-party strife and a complete lack of leadership as a ruling party; it won only 57 seats in the election, compared to the 231 it held before. Its ambiguously anti-nuclear stance in the aftermath of the Fukushima disaster did not help it with voters as the more pro-nuclear Liberal Democratic Party (LDP) scored a landslide comeback victory, increasing its seats from 118 to 294 and recapturing the Prime Minister’s office, which it had lost in 2009.

At the U.S.-Japan summit in Washington, D.C. on February 22, 2013, new Prime Minister Shinzo Abe asked President Barack Obama to approve liquefied natural gas (LNG) exports to Japan at an early date, as this is an important way for Japan to reduce fuel costs which increased sharply after the Great East Japan earthquake. According to a press release by the Ministry of Foreign Affairs of Japan, President Obama noted that the export licensing issue was still under review, but he is aware of the importance of Japan as a U.S. ally. Prime Minister Abe also pledged to conduct a zero-based review of the previous administration’s policy of exploring a possible phase-out of all nuclear reactors by 2030, and noted that he intends to formulate responsible energy policies with a view toward working with the United States at various levels in international nuclear cooperation. Besides nuclear power, bilateral cooperation on development of clean energy and climate change issues were highlighted. The two leaders basically agreed that their governments would continue to work on Japan’s prospective participation in the TPP on the condition that they recognized both countries would have bilateral trade sensitivities.

Amid this broad range of issues, energy security is a key issue that the United States and Japan must emphasize in reconsolidating and broadening their alliance beyond mere bilateral issues. The construction of a U.S.-Japan energy security alliance based on the two pillars of nuclear power generation in Japan, and exports of U.S. LNG to Japan, could be used as a model for reducing volatility in energy markets and even helping to ensure geopolitical stability in the Asia-Pacific region.

Nuclear Power as a lynchpin of the alliance

Given rapid changes in the international energy landscape, Tokyo can not waste any more time in clarifying its post-Fukushima energy strategy. Japan is the world’s third biggest oil consumer and tops the list of LNG importers; it depends almost completely on imports to meet its hydrocarbon consumption needs. The rapid increase of LNG imports following the post-Fukushima nuclear reactor shutdowns led to dramatic increases in natural gas prices in Asia. LNG import prices in Asia are indexed to oil prices, but do not benefit from the trend of decreasing prices elsewhere―including North America―that is a feature of the shale gas revolution. Therefore, in Asia imported gas prices basically hover at high rates in accordance with high oil prices while in North America gas prices are set competitively as supplies come from numerous domestic sources.

Therefore, the energy policy choices Tokyo makes will have major consequences not just for the domestic economy, but also for international energy markets. Given its extremely low energy self-sufficiency rate of four percent (without nuclear power), Japan’s policy options for ensuring its future energy security are limited.

Simply put, Japan must restart nuclear reactors, and it must also introduce and enforce stricter safety regulations. In order to do so, the government must make a clear political decision to end the endless ideological and emotional debate about nuclear power. The “mythification” of nuclear safety before Fukushima was an important lesson the whole population obviously learned from the tragedy; people will and should now be more skeptical. Some activists argue that nuclear reactors should restart only after their “perfect safety” can be assured; obviously, it is an illusion to think that humankind could ever create perfect safely in its literal sense. However cautious we may be; complete mastery over nature, science, and the future is not possible. Only strong political leadership can put an end to this pointless debate; the government should identify, at the earliest stage and in light of international experience, a set of yardsticks to satisfy legal requirements for nuclear restarts even if we must recognize that it will be a learn-by-doing process. This is Japan’s inescapable responsibility for its own economic life, the U.S.-Japan alliance, and the international community.

Postponing nuclear reactor restarts have drained Japan’s national wealth considerably. It became a trade-deficit nation for the first time in more than three decades. A major factor in this development is the jump in LNG imports due to replacement of nuclear power generation by gas-fired thermal plants. Imports grew from 70 million tons from 2010 to 78.5 million tons in 2011 and 87.3 million tons in 2012 – an increase of almost 25 percent in two years. However, during the same period, the total value of LNG purchases increased by more than 70 percent from about 3.5 trillion yen in 2010 to 6 trillion yen in 2012 due to the sharp increases in LNG prices per million Btu (British thermal unit) destined for Japan: the average LNG import prices for Japan increased by about 55 percent from approximately $11 per million Btu in 2010 to approximately $17 per million Btu in 2012. The increase in Japan’s LNG imports accounted for the predominant chunk of its trade deficit of about 6.9 trillion yen in 2012. Nuclear restarts would result in huge savings in domestic fuel costs. Moreover, it would help stabilize the global LNG markets; the Northeast Asian natural gas market is most seriously affected with Japan consuming about one-thirds of the world’s LNG demand.

It also must be emphasized that Japan’s nuclear future will directly affect the range of U.S.-Japan cooperation which goes by far beyond mere energy issues. The Japanese and U.S. nuclear industries have developed as “twin brothers” for more than a half century. Today, Hitachi and GE, as well as Toshiba and Westinghouse, have nuclear power joint ventures. Japanese nuclear vendors have made significant contributions to make up for the declining of the nuclear industry in the United States after the Three Mile Island accident in 1979, by developing high-tech nuclear products for civilian use and producing a large number of the world’s top-class engineers.

A phase-out of nuclear power in Japan would also have an adverse impact on the global non-proliferation regime. While shale gas causes natural gas prices to remain low, there is increased uncertainty in the United States about introducing new nuclear power plants. Ironically, this has increased the importance of sustaining high standards for nuclear technologies against the background of diffusion of nuclear power for civilian use in the world. This diffusion is irreversible, regardless of U.S. and Japanese domestic nuclear policies, in order to meet drastic rises in energy demand in emerging economies. The loss of Japanese nuclear vendors’ international competitiveness would jeopardize the bilateral alliance’s presence in global nuclear markets, which would in turn weaken Washington’s and Tokyo’s voices in the future non-proliferation regime. Japan needs to rediscover its role as one of the most serious advocates for reinforcement of global efforts on non-proliferation.

Maintaining a certain amount of nuclear power in the energy mix is also important from a climate change perspective. Tokyo must realistically readjust the over-ambitious target of cutting greenhouse gas (GHG) emissions by 25 percent below 1990 levels that was announced by then-DPJ Prime Minister Hatoyama at the United Nations Summit on Climate Change in September 2009, which received little support from the domestic business community. But Japan should continue to play its own roles to combat climate change as long as a principle of fairness of international burden-sharing is guaranteed. A nuclear restart is an indispensable way to reduce a certain amount of GHG emissions, given that too many uncertainties await dramatic expansion of renewable sources in the energy mix at least in the foreseeable future, due in part to high costs.

LNG as a fuel to increase Japan’s burden-sharing

Increases of LNG exports from the United States to Japan will become a new way to strengthen the alliance, and the impacts extend beyond energy. Undoubtedly, Japan would benefit from prospective participation in the TPP, and co-designing the future framework of economic rules in the Asia-Pacific region would also reinforce the bilateral alliance. TPP membership for Japan would remove a potential obstacle to increase LNG exports from the lower 48 states. According to the U.S. Natural Gas Law, LNG exports to non-FTA trade partners must be authorized by the Department of Energy on a case-by-case basis (Japan has imported LNG from Alaska since 1969.) However, the meaning of increasing LNG supplies to Japan should be emphasized in a wider context, entailing geostrategic importance besides the economic benefits of improving the U.S. international balance of payments. LNG imports from the United States will beef up Japan’s economic muscle, better allowing it to play the role of the main “bridgehead” of the U.S. strategy toward the Asia-Pacific region. With sound economic growth, Japan can be expected to contribute more to burden-sharing as it will be able to increase its budgets for defense, economic aid to developing countries, and many other issues that benefit the U.S.-Japan alliance.

Even if Tokyo decides in principle to restart nuclear reactors, both the political and technical processes will take some time. Public support will have to be nurtured in a step-by-step manner. This means that increased access to economically competitive LNG supplies remains urgent. As late as February 2013, Japan paid approximately five times more than the U.S. Henry Hub price per million Btu (British thermal unit), on average, for LNG purchases. Although of the price of future imports of LNG from North America remains uncertain, it is generally estimated that the final cost of LNG from the lower 48 states―including liquefaction costs, transportation fees, and other costs―are still lower than the average price of Japan’s current LNG imports.

Aside from the price issue, securing new LNG supply routes from North America is also important to ensure the safety of Japan’s seaborne hydrocarbon transportation. Currently, approximately 80 percent of crude oil and 30 percent of LNG destined for Japan cut across the East China Sea, where Sino-Japanese tension is simmering.

Toward a joint architecture for Asian-Pacific energy security

Against the background of the shale revolution, there are rising expectations about “energy independence” in the United States, which is thought not only to boost the domestic economy with cheap energy prices and reduce vulnerability to international oil prices, but also to increase policy options for U.S. diplomacy. The ongoing debate about diplomatic implications of U.S. energy independence within the next decade by and large tends to focus on the question of how it would affect the U.S. military presence in the Middle East. However, a blueprint for placing energy independence in the context of the so-called U.S. “pivot to Asia” has yet to emerge. New roles and functions for the U.S.-Japan alliance should be designed in the context of U.S. energy independence. Today in Northeast Asia, the energy security environment is rapidly changing with impending new challenges for the U.S.-Japan alliance to tackle.

First, the rise of China with its surging energy demand has raised concerns about its impact on the global energy market. According to estimates published by the International Energy Agency in its November 2012 World Energy Outlook 2012, China is forecasted to account for more than half of increases in global oil demand by 2030; its dependence on imported oil will increase from 54 percent in 2011 to 77 percent in 2030. Likewise, China is projected to account for about 28 percent of increases in global demand for natural gas with its import dependence to rise from 14 percent in 2010 to 44 percent in 2030. Its impact on global oil prices and thus on the growth of the world economy would be considerable. Furthermore, Beijing’s anxiety about ensuring stable access to energy resources may stimulate the expansion of Peoples’ Liberation Army Navy’s power projection capabilities, as a means to increase and secure access to overseas oil and natural gas supplies.

The deepening of China’s economic interdependence with both the United States and Japan is unstoppable in the foreseeable future. Steady growth of the Chinese economy, which requires finding a solution to the upsurge in China’s energy demand, is of great significance to the United States and Japan. In this regard, the two allies should explore possibilities for strengthening cooperation with China in a number of areas, especially energy efficiency, clean energy, and nuclear power generation. Outside (or uninformed) observers of Sino-Japanese relations tend to be overwhelmed by the contemporary geopolitical dispute and rising nationalism that fill the headlines, and overlook the fact that Beijing and Tokyo have developed extensive cooperation in the energy sector, including on energy conservation and clean energy technologies, for more than three decades. Japan can share its rich experiences in energy and environmental projects in China with the United States to capitalize on the recent success of Sino-U.S. clean energy cooperation. Beyond the business benefits, such collaboration could have invaluable political implications. If the three biggest energy consumers in the world could find a joint flagship project it could help create a new international framework for engaging China.

From the standpoint of reducing hydrocarbon consumption and carbon dioxide emissions, the U.S.-Japan “nuclear twins” should pursue nuclear cooperation with China, which has 18 nuclear power plants currently in operation. The nuclear stakes in China are about to get much bigger: there are about 30 reactors under construction and more than 50 in the planning stage. This expansion is of global importance. Successful growth in nuclear power generation would reduce China’s hydrocarbon consumption and GHG emissions, and operational safety of the plants amidst such a rush of construction is an obvious concern.

Secondly, Russia has devoted every effort to enhance its presence in the Asia-Pacific region, taking advantage of hosting the 2012 APEC Summit in Vladivostok last September. Moscow is anxious to accelerate the development of untapped hydrocarbon resources in the eastern regions of the country as a way to gain new business opportunities while enhancing its geopolitical influence in Northeast Asia. The 4700 km crude oil pipeline from Eastern Siberia to the Pacific Ocean (ESPO) was completed in December 2012. Russia currently exports about 0.6 million barrels per day by the ESPO pipeline, but aims to increase the volume as much as possible.

The U.S. shale gas revolution came as a harsh blow to Moscow, given that Russia is frustrated by the gradual decreases of its natural gas exports to Europe as consumption there declines and the EU seeks diversification of natural gas supply routes. The Sakhalin-2 is the only LNG project in Russia, as of today, with a maximum capacity of exporting 9.6 million tons per year; a new LNG plant in Vladivostok is in the planning stages. In recent months Russia has aggressively approached Japan, China, and the Republic of Korea to strengthen partnerships in oil and gas sectors.

Meanwhile, the United States already has a bastion in the energy landscape of Northeast Asia, with ExxonMobil as the operator of the Sakhalin-1 project. The destination of natural gas exports from the project has remained undecided due to conflicts of interest between ExxonMobil and Russia’s state-owned gas company, Gazprom, which has monopolized Russia’s natural gas exports to date. Yet, while President Putin has recently disclosed a plan to liberalize the natural gas export market, the state-owned oil company, Rosneft, has galvanized itself to find new foreign partners. It has expanded agreements with ExxonMobil, addressing new oil and gas projects in Russia’s Far Eastern and Arctic regions, and has acquired a stake in Exxon’s gas project in Alaska.

However, Russia does not yet seem to have emerged as a factor in the U.S. pivot to Asia. Especially since the collapse of the former Soviet Union and the demise of the Soviet military threat in the Asia-Pacific, Washington’s approach to Russia has been overwhelmingly Euro-centric. Russia’s aggressive move to the Asia-Pacific region in the energy sector should be taken into account, when we imagine diplomatic implications of U.S. energy independence for this region. Obviously, one of the impetuses of Russia’s rapid move to the east is Moscow’s concern about the rise of China. Notwithstanding the economic benefit of the drastic increase in oil trade volumes with China, voices among the Russian power elite are gradually emerging to alarm that Russia might become a “resource appendage” to its neighboring geopolitical rival. It should be noted, however, that increasing hydrocarbon exports from Russia’s eastern regions would also be one of the ways in which the impact of China’s explosive energy needs upon the global energy market can be reduced peacefully. U.S. and Japanese policymakers should consider this point when they discuss Russia’s role as a big energy supplier in the context of energy security in the Asia-Pacific region.

Energy security in the Asia-Pacific region entails numerous uncertainties in both energy markets and geopolitical dynamism. The robust U.S.-Japan alliance must be anchored in solving energy challenges, but this requires clarification of Tokyo’s post-Fukushima energy policies including an internationally responsible political decision on restarting Japan’s nuclear power plants. Wisdom and long-term perspectives are needed to reduce the economic and security costs of ensuring regional stability in the years to come. It is high time for the United States and Japan to begin to design a roadmap for an international framework of energy security in which other regional key players such as China and Russia are effectively engaged.

The views expressed in this article are those of the author and do not necessarily represent those of the Institute of Energy Economics, Japan, or any other organization.