Speech By Mr Raymond Lim
Minister of State for Foreign Affairs & Trade and Industry

At the 3rd Annual Indonesian International Oil, Gas & Energy Conference and Exhibition
on 6-7 JULY 2002, BALI, INDONESIA

STRENGTHENING REGIONAL RELATIONSHIPS THROUGH TRANS-ASEAN GAS PIPELINE PROJECT

Your Excellencies, Distinguished guests, Ladies and Gentlemen

I am honoured to be given the opportunity to speak on the Trans-ASEAN Gas Pipeline or TAGP for short, having signed an ASEAN Memorandum of Understanding on the TAGP two days ago on behalf of Singapore.

I am glad to see many of my fellow Ministers who had represented their countries in signing the MOU are speaking at this conference as well.

History of the TAGP

The TAGP was conceived out of the 2nd ASEAN Informal Summit in Dec 1997, when the ASEAN Heads of State adopted the ASEAN Vision 2020. The vision calls for greater co-operation to establish interconnecting arrangements for electricity and natural gas within ASEAN through the ASEAN Power Grid and the TAGP.

The ASEAN Council on Petroleum, or ASCOPE, was tasked to lead the TAGP project to enhance greater energy security in the ASEAN region. ASCOPE established a TAGP Task Force in November 1998 to review and formulate a Masterplan of the TAGP.

The Masterplan, which was completed in April 2001, identified seven possible TAGP interconnections for full integration of the pipeline network in the ASEAN region.

Two days ago, ASEAN Energy Ministers signed a Memorandum of Understanding or MOU on the TAGP. This MOU will provide a broad framework for ASEAN member countries to co-operate towards the realisation of the TAGP Project to help ensure greater regional energy security.

The signing of the MOU is not merely symbolic but is an excellent starting point for ASEAN members to co-operate on a deeper level to realise the TAGP and the benefits accruing to such an integrated regional gas network.

Importance of the TAGP

The TAGP project is important to ASEAN, as it will better enable member countries to source natural gas from fellow ASEAN members. This would encourage ASEAN member countries to source for natural gas internally as well as enhance the security of supply within the region.

The TAGP also gives natural gas producers greater access to markets within ASEAN, improving their competitive advantage over non-ASEAN sources.

Currently, at least six ASEAN members use natural gas for power generation, and seven ASEAN members have identified potential reserves of gas. The TAGP will therefore bring extensive benefits to ASEAN.

The Trans-ASEAN Gas Pipeline will thus contribute to the enhancement of energy security in the region, which is vital for the economic growth of ASEAN, and is of great importance to every nation.

It is in ASEAN’s interest that the TAGP is realised. With the TAGP, development of untapped gas-fields, such as the East-Natuna gas-fields, could be accelerated. This would allow us to maximise the use of natural gas resources in the region to achieve greater energy stability for ASEAN member economies involved.

In 2000, ASEAN’s energy requirements were estimated to be 150 million tonnes of oil equivalent (mtoe) of which 10.5% was met by natural gas. It is projected that ASEAN’s energy requirements would reach nearly 400 mtoe by 2020.

Natural gas can be expected to meet 18% of total ASEAN energy requirements by then. Fuel oil’s share on the other hand, could fall to 44%. The TAGP would be the key to realising this shift in fuel dependence.

At our current rate of production, our proven gas reserves would last us over the next 40-50 years. As the TAGP project matures and more gas fields are discovered and developed in future, due to the availability of better technology and greater private sector participation, we expect our proven gas reserves to increase, and this could only be good news to the whole of ASEAN.

How can the TAGP be successful?

The success of the TAGP would depend on the foundations on which it is built. If market forces are allowed to determine the supply, demand and price of natural gas, we would eventually move towards the creation of a competitive regional gas market.

Before this can happen, we must recognise that there are fundamental differences in the institutional and regulatory mechanisms that each ASEAN member country has towards the exploration, production, transportation and utilisation of natural gas.

In order for a cross-border pipeline to be operated successfully, there must be a good understanding of each economy’s institutional and regulatory regimes with respect to natural gas, before we can derive a set of rules, regulations and pricing structure that fulfils the interests of all the different parties involved.

In this regard, we should capitalize upon the warm working relationship between ASEAN nations and work hand in hand at the government to government (G-G) level to achieve this exchange of information amongst member economies that will facilitate the formation of these rules and regulations.

We would then be able to create a regime that would be transparent and easily understood by potential investors, to allow them to assess their risks fully before they decide to invest in the projects.

For the TAGP to succeed, the crucial role that the private sector plays in funding and implementing energy infrastructure projects in the region cannot be ignored. It is estimated that the TAGP would require US$7 billion in investment.

The private sector would therefore play a critical role in funding and implementing the interconnections making up the TAGP.

As more ASEAN countries open up their energy markets, it is envisaged that the private sector will increasingly play a bigger role in the TAGP. Governments should welcome and encourage their participation by pro-actively cultivating good working relationships (B-G) with the private sector and provide an environment that is transparent and competitive, to give them the assurance that their investments are protected, such that they are willing to contribute their expertise and capital base.

ASEAN should also be open to foreign participation in the TAGP as involvement and participation by multilateral institutions such as the ADB and the European Investment Bank would be useful in financing the TAGP project.

It is envisaged that there will be more bilateral and multilateral pipeline interconnections in future. As such, it is critical that ASEAN identifies and addresses all potential cross-border related issues that may hinder or impede the smooth implementation of the proposed interconnections.

ASEAN Member Countries will have to ultimately address any perceived need to evolve a compatible institutional, legal, and regulatory framework for the management of cross-border natural gas pipelines.

ASEAN member countries have taken the first step in making the TAGP a reality. We have strengthened our resolve and shown our solidarity with the signing of the MOU on the TAGP on 5 July 2002.

The signing of the MOU will provide ASEAN member countries with more incentives to co-operate on issues relating to the TAGP. Co-operation would help to address common concerns and enable ASEAN member countries to learn from each other’s experience.

Gas trade infrastructure projects such as the TAGP would need sufficient revenues to repay their financing and provide a return on the equity investment. In ASEAN, the base-load, revenue driver for the TAGP project is the power sector. Therefore the domestic electricity infrastructure and deregulation of the electricity industries in ASEAN member countries is envisaged to be the economic driver of the TAGP.

In this respect, the gas industry should not be looked at in isolation from the power industry as they intimately intertwined with each other.

ASEAN countries have taken steps to liberalise their energy markets to enable market forces to optimise production and use of energy. The liberalisation of energy markets will be an essential ingredient in the success of the TAGP as only then would market forces be allowed to function properly.

Without liberalisation, there can be no free movement of gas across national boundaries, and with no freedom of movement, the price mechanism would not be able to allocate resources effectively across the region.

However, the opening up of national markets is a complicated matter, and can only be done step by step. With careful planning and implementation, the liberalisation of energy markets will make us all more efficient and competitive.

Lessons Learnt from California Energy Crisis

Following the California energy crisis, critics of liberalisation of the energy sector have used California as an example of the failure of market liberalisation. However, the lesson to learn from this crisis is not that liberalisation does not work, but that the structure of a liberalised energy market has to be sound and that the market must be allowed to operate.

In Caifornia the market was not allowed to operate, and prices not allowed to find free expression. If market signals to drive investments in generation is not strong enough, new capacity will not be planted in a timely manner and the result will be inadequate energy supply.

Similarly, for investments in pipeline projects, the decision by the private sector to invest in the financing of the pipeline projects must be driven by the economic signals of demand and supply.

We must be mindful of the trouble that can be caused when politics intervene in economic decisions, and we must make sure that good politics and economics go together in ASEAN.

Challenges facing the Energy Regulators and Businesses

In the process of creating a liberalised regional market that is open and competitive, energy regulators will face the challenging task of formulating policies that not only ensure the smooth implementation of competitive energy markets domestically, but are also well coordinated with those in the other ASEAN countries.

Energy regulators from each country would have to work closely with their regional counterparts in order to understand the policies in the counterpart countries, ensure that rules are compatible, and resolve the various bilateral and multilateral issues that may arise from the TAGP.

Similarly, businesses from the various ASEAN countries would have to work closely with their regional business and government counterparts in implementing the TAGP.

Conclusion

We have come a long way since the TAGP Vision was first conceived in 1997. We must continue to strengthen regional relationships and enhance co-operation to make the TAGP happen.

It is up to us to work together for the benefit of our peoples’ energy security and economic prosperity.

Thank you.