Speech by Dr Vivian Balakrishnan
Minister of State for Trade & Industry and National Development

At the 7th Annual Asia Power Conference
11 Feb 2004, 9.00am at the Grand Hyatt Singapore

Ministerial Opening Address

Distinguished Participants

Ladies and Gentlemen

Thank you for the opportunity to join you for the 7th Annual Asia Power Conference today. Welcome to a country with no indigenous sources of energy. We have no mountains and rivers to generate hydroelectricity. We have no volcanoes to generate geothermal energy. Geographically, we are in a sheltered region of South East Asia, so we have no wind or tidal currents to generate electricity either. We import all our sources of energy, except for the 1.5% that we produce by incinerating our garbage.

I will speak from a political and regulatory perspective. There are three issues that keep most of us here awake at night. These are security of supply, reliability of delivery systems and affordability.

SECURITY OF ENERGY SUPPLY

Asia is becoming even more dependent on imported energy. Oil and gas imports, especially from the Middle East, have risen significantly with the large increase in demand for energy in developing Asian countries and limited regional production. This is especially so in China, where demand outpaces domestic supply due to its fast-paced industrialisation.

The problems in the Middle East have underlined the importance of energy security to Asian countries heavily dependent on Middle Eastern oil. These countries were reminded that political instability in the Middle East would have a serious impact on oil supply and their economies.

Yesterday, OPEC decided to cut its quota to 23.5 million barrels a day from 1 April 2003, and to try to stop "quota busting". If they succeed, this potentially represents up to a 10% cut in OPEC production. Oil prices rose almost immediately.

To address energy security, Asian countries have tried to mitigate political and security risk by buying oil and gas from other parts of the world. Even countries like China and Malaysia who have indigenous oil production, have aggressively pursued development of oil fields in Africa and other parts of the world, in order to secure their supply in anticipation of declining resources.

Diversifying types of fuel also enables Asian countries to wean their dependence on specific energy producers and encourage countries to look to other energy sources, such as renewable resources.

In addition, diversification also promotes competition in energy supply and hopefully, moderation in prices.

RELIABILITY OF DELIVERY SYSTEMS

All Governments are concerned with ensuring that their energy infrastructure is robust and reliable. Even brief moments of failure can have very costly impact on industrial economies.

In 2003, major blackouts occurred in Europe and US due to inadequate new investments in energy infrastructure. The economic cost of such disruptions is immense. The impact of these disruptions extends well beyond the actual period of the blackout. The damage to the reputation of the country and its systems exacts a compounded economic cost as far as investors are concerned.

We need to have efficient, reliable delivery systems. For this to occur, a transparent, fair and competitive market framework has to be set up by Governments. An investor-friendly environment will facilitate improvements to energy infrastructure through private investments.

AFFORDABILITY

Without affordable energy, countries would not be able to satisfy their energy demand even when supply is available. The impact of high energy costs on the economies of countries can be very significant. Looking back in history, one is reminded of the Middle East oil crisis in 1973 and its impact on economies all over the world. This was an invaluable lesson for all countries and spurred efforts to devote resources to R&D to find alternative energy resources for economically viable use.

For the gas industry, gas buyers are becoming more concerned about competitive pricing. A few years ago, most gas contracts were long-term contracts. Producers, especially those supplying from new fields and expansions, required contract certainty and anchor customers to secure finance. Now, producers are expanding their production without firm buyers and offering shorter-term contracts. This has arisen from an over-supply of gas and the liberalisation of electricity and gas industries. Gas buyers today are more sensitive to locked-in fuel prices as they face increasing competition in their domestic markets. For these gas buyers, security of gas supply remains important but increasingly, competitive gas price is becoming just as important for the survival of their businesses.

SITUATION IN SINGAPORE

Singapore pays great attention to ensuring that its energy market is robust, competitive and secure. We recognize our vulnerability. We are entirely dependent on imported fuel to keep our engine humming, except for a tiny 1.5% that we generate from incinerating our rubbish. Hence, our energy policies are designed to ensure competitive market structures, open access to energy infrastructures for all players, and ensuring diversity in fuel sources. We do not dictate a fuel mix policy, but leave it to market forces to drive the use of the most cost efficient technologies to produce a competitive energy price.

We do not believe in fixing energy prices. This leads to inefficient allocation of resources. Worse still, as is the experience in other countries, without proper price signals from a properly functioning market, the outcome is subsidies; subsidies which governments eventually cannot afford or brownouts as there are no new investments in capacity. We believe in a zero subsidy policy.

Singapore imports gas from Malaysia and Indonesia. The gas is mainly used for power generation. At this point of time, 60% of our electricity is being generated from gas. We envisage that we will need more gas in the future, as it is a more efficient fuel than fuel oil.

In August 2002 and November 2003, our supply of gas from West Natuna was disrupted. In 2002, there were electricity blackouts in parts of Singapore for about 2 hours. We learnt our lessons well, and when there was a disruption to the gas supply in November 2003, there was no blackout. Consequently, these incidents did not result in serious disruptions to our economy and our people.

To enhance our gas security and to ensure that there is adequate supply to meet future demand we are exploring the possibility of importing liquefied natural gas or LNG. LNG is an attractive option as it allows us to buy gas from any part of the world. LNG can also be used as a back-up fuel in the event of a disruption of our piped gas imports. In addition, import of LNG provides us with the opportunity to introduce new players in the gas market, which would enhance competition.

In addition, if technological changes result in the hydrogen economy taking off, it is likely that the hydrogen molecules for cars and homes will be obtained from natural gas, thus increasing the demand for natural gas even further.

We will be commissioning studies to look into the business, financial and technical aspects of importing LNG. We hope to have some expert findings in the course of the next year or so, so that the government can decide whether to proceed. LNG is an attractive option in the longer term, to ensure our energy security by diversifying our fuel sources.

WHAT CAN INTERNATIONAL COMMUNITY DO TO ENHANCE ENERGY SECURITY?

Asia is expected to be the fastest growing energy consuming region in the world. There is therefore potential for Asian countries to become one of key players in the international energy market in the future, especially through the effective utilisation of regional resources through the Trans-ASEAN Gas Pipeline and the West-East China gas pipeline. However, these energy infrastructure projects will require huge investments from the international private sector.

Asian countries' supply of oil and gas are vulnerable to terrorist/piracy attacks and accidents at sea, especially in the Straits of Malacca, which is a key choke point in the oil route. It is therefore crucial that Asian countries co-operate on sea-lane security, as a choke point would not only affect oil supply but other essential goods transported through it.

Last but not least, Asian countries need to co-operate to enhance energy security to achieve economic growth. In Shanghai in November 2001, APEC Leaders agreed at the APEC summit meeting to co-operate in developing specific measures to ensure energy security in the Asia-Pacific region. Although APEC was established to address economic issues, the declaration in Shanghai highlighted the growing importance of energy security as a facet of economic development and prosperity.

I am pleased to note that the ASEAN + 3 energy forum comprising ASEAN, China, Republic of Korea and Japan, has established a Natural Gas Forum. This Forum will look into the development of petroleum resources, use of natural gas and also explore and identify ways to facilitate commercial activities for wider use and development of natural gas, including LNG in the ASEAN + 3 region. Such examples of co-operation would not only enhance energy security in the region, but also help to strengthen ties between each country, as energy security increasingly becomes geopolitical in nature.

Your deliberations are very timely, and I hope the lessons learnt will help us achieve energy security, reliability and affordability.

Thank you.