Asia Pacific Review Trans-Asian pipe

Building
the TransAsean gas
pipeline
 ASEANS ENERGY POLICIES
ASEAN, the Association of South East Asian Nations,
is a ten-state co-operative framework intended to
promote greater regional development through
mutual assistance. Originally founded in 1967 by
Indonesia, Malaysia, the Philippines, Singapore and
Thailand, the membership of ASEAN has since
doubled to include Brunei (1984),Vietnam (1995),
Laos (1997), Myanmar (1997) and Cambodia (1999).
ASEAN promotes various regional policies in the
furtherance of the economic, social and political
interests of its members.An integral part of ASEANs
regional economic co-operation focuses on the energy
sector where it is ASEANs declared intention to
ensure greater security and sustainability of regional
energy supplies through diversification, development
and conservation of resources, the efficient use of
energy and the wider application of environmentally
sound technologies.
ASEANs energy policies are founded upon a
combination of various accords, policy declarations
and summit undertakings. Critical amongst these for
the realisation of the TAGP are:
(i) The 1998 Hanoi plan of action - The Hanoi
Plan was adopted at the Sixth ASEAN Summit
and calls for member states to implement initiatives
to ensure security and sustainability of energy
supply, efficient utilisation of regional energy
resources and the rational management of energy
demand. In particular the Hanoi Plan calls for
the institution of a policy framework and
implementation modalities by 2004 for the
early realisation of the TAGP.

July 2003

The Trans-ASEAN Gas Pipeline (TAGP) project envisages the creation

of a trans-national pipeline network linking ASEANs major gas
production and utilisation centres. Once realised the TAGP will have
the potential of linking almost 80% of the ASEAN regions total gas
reserves and will embody a far-reaching expression of the regions
energy interdependence and long-standing interest in the coordination of energy activities. There is still much to do however in
order to realise the dream, not least in establishing a solid legal and
regulatory basis upon which the TAGP could operate in the best
interests of all those who would derive benefit from such a network.
By Peter Roberts and Alex Cull, Jones Day, Hong Kong.

(ii) The ASEAN plan of action for Energy Cooperation 1999-2004 (Bangkok, 1999) - The Bangkok
Plan was adopted by the Seventeenth ASEAN
Ministers of Energy Meeting and identifies six
programme areas to be focused on in order to
implement the Hanoi Plan, including the development
of the TAGP as part of an integrated ASEAN energy
grid.The Bangkok Plan provides for the establishment
of the ASEAN Council on Petroleum (ASCOPE)
TAGP Task Force to formulate a masterplan for the
most likely scenario for the short term development
of the TAGP following the successful completion of a
conceptual project feasibility study and the resolution
of relevant institutional, legal, financial, commercial and
technical issues.
(iii) The ASEAN Memorandum of Understanding on
the TAGP (Bali, 2002) - The Bali Memorandum was
adopted at the Twentieth ASEAN Ministers of Energy
Meeting and sets out a co-operative framework within
which ASEAN member states agree to study the
regulatory and institutional frameworks for the
cross-border supply, transportation and distribution
of gas throughout ASEAN.

 THE ASEAN ENERGY PERSPECTIVE

A consideration of the demographic and geophysical
aspects of ASEAN reveals three essential features:
(i) Energy demand - ASEAN represents more than
500m people, spread between 10 countries over an area
of approximately 4.5m sq km.While the 1997 Asian
economic crisis and the global economic slowdown
since 2001 has hampered the regions economic and

Asia Pacific Review

15

Trans-Asian pipe Asia Pacific Review

energy demand growth the underlying factors which

propelled Asias miracle growth in the 1990s - greater
industrialisation, increased urban migration into highly
concentrated areas of population, an expanding middle
class and increasing consumer disposable incomes are
still largely intact.

When considering the centres of energy demand and

supply across Asia one thing becomes apparent - there
is rarely a happy coincidence of population and
resources and it is usually necessary to transport energy
resources to where they are most needed.

These characteristics present an inherent demand for

energy which should continue to grow as the global
economy recovers and regional industries regain lost
ground.This potential is recognised for example in a
predicted 60% growth in demand for energy within
ASEAN for the period to 2010.

Coal, which at the present time comprises approximately

11% of power generation feedstock in ASEAN, is
typically transported by ship. Crude oil, refined into
products such as fuel oil, presently constitutes
approximately 54% of power generation feedstock
in ASEAN and is also typically transported by ship.

Demand for gas in particular will increase due to

the improving cost-competitiveness and greater
recognition of the ecological benefits of gas-fuelled
power generation, increasing emphasis on regional
petrochemical production and the ongoing
development of essential gas transportation
infrastructure.

Gas, which now comprises approximately 27% of

ASEANs power generation feedstock mix, may be
transported by ship as LNG. LNG projects have high
capital expenditure requirements in the construction of
expensive gas liquefaction and regasification terminals
and specialist LNG ships, although from a project
development perspective they raise potentially simpler
legal, regulatory and administrative issues than
cross-border pipelines as they tend to be bilateral
arrangements with limited land use requirements.

(ii) Energy supply - ASEAN covers a region rich in

energy resources, with aggregate proven reserves of
around 27bn barrels of oil and 350tr cu ft of gas,
particularly in the major supply areas of Indonesia,
Malaysia, Brunei,Vietnam and Thailand. However,
demand for energy in many member states will
outstrip domestic supply capabilities and the import
of energy will be common across the region. Domestic
imbalances will need to be satisfied by a combination
of intra-regional energy transportation supplemented
through extra-regional imports, primarily from the
Middle East.
(iii) Interconnection The relative proximity of the
demand concentrations and the prospective sources
of supply within ASEAN, when viewed in light of
regional pockets of supply shortage, together suggest
an inherent justification for the creation of a regional
energy network. Commentators on the Asian energy
scene are, when faced with a map of the region which
demonstrates the centres of demand and supply,
seemingly incapable of resisting the urge to join the
dots with a series of interconnected pipeline systems,
transporting gas in particular from where it is to where
it needs to be.
The first two features are empirically quantifiable
components and establish the demand and the supply
sides of the energy equation which are required before a
successful energy network can be established.The third
is different. It is not an objective reality but rather it is a
vision that combines geopolitical, economic and cultural
conjecture, and thus is the basic hypothesis of
connecting supply to demand through a single regional
interconnector suggested by the promoters of the TAGP.

16

 MATCHING REGIONAL ENERGY DEMAND & SUPPLY

LNG tends to be more cost-effective than pipelines only

where longer distances or especially difficult terrain is
involved.An LNG project will have a large initial capital
requirement but its overall cost will not significantly
increase over greater distances, whereas pipeline costs
increase linearly as pipeline distances increase.
Short distance pipelines should therefore be the most
cost-effective form of gas transportation within ASEAN.
This would explain why, of all the cross-border energy
trades within ASEAN, the only proposed LNG trades are
for a recently announced LNG regasification terminal to
be built in the Philippines which may source LNG from
Indonesia, Brunei or Malaysia.All other LNG trades
involving an ASEAN member country are exports of
LNG to purchasers outside ASEAN.
Increased pipeline infrastructure will also enable the
development of gas fields located near pipeline routes
which may otherwise be uneconomical to develop in
their own right.This development will in turn be used
to increase the extent by which regional demand for
gas can be met by regional supply.

 THE TRANS-ASEAN GAS PIPELINE PROJECT

The first cross-border gas pipeline in ASEAN exports
gas from Malaysia to Singapore and was commissioned
in 1991. Since then several regional gas pipelines have
been completed and several more are in the process of
design and construction or are envisaged:

Asia Pacific Review

July 2003

Asia Pacific Review Trans-Asian pipe

The route

compression equipment (excluding drilling

costs).These investment costs will need to be met
from various sources including private equity,
commercial debt, state aid and multilateral
agency advances.

China

India

(ii) Technical specifications - any integrated network

is only as strong as its weakest link. Harmonised
standards and protocols for construction, operation
and maintenance, safety and measurement will be
necessary to ensure that the operational integrity of
the TAGP is not jeopardised by substandard materials,
equipment, techniques or services being utilised in
any particular segment of the network.

Myanmar
Laos
Philippines
Thailand

Vietnam

2
3

Cambodia

Andaman
Sea

South
China Sea

13
7

Malaysia

5
4

11
12

Brunei

10

Singapore

8
6

Indonesia

Full interconnection of these pipelines, which is

envisaged by ASEAN to be done by 2020, would see
the creation of an interconnected gas grid throughout
ASEAN and links between demand and production
centres beyond pipelines which have hitherto been
built between countries solely where single project
economics have dictated the necessity for such
infrastructure.

 REGULATORY AND INSTITUTIONAL ISSUES

The stated objective of the Bali Memorandum is to
provide a broad framework for ASEAN member states
to co-operate towards the realisation of the TAGP to
help ensure greater regional energy security.
Under the terms of the Bali memorandum the ASEAN
member countries, individually and/or jointly, will
study the legal, regulatory and institutional frameworks
for cross-border supply, transportation and distribution
of gas in the region, with particular attention to the
commercial and economic feasibility of construction,
financing, operation and maintenance of the proposed
network.
The Bali Memorandum specifically identifies nine
issues to be addressed in developing the TAGP:
(i) Financing - The costs of constructing the TAGP will
be monumental. One estimate is of US$7bn for the
necessary pipeline infrastructure, platforms and

July 2003

(iii) Access and use - There will need to be effective

and stable contractual arrangements for the supply,
distribution and transportation of gas, including
adherence to the principles of open access as well as
management of the network in accordance with
internationally accepted oil and gas industry standards.
At the nineteenth meeting of the ASCOPE TAGP Task
Force in 2001 it was resolved to establish an ASCOPE
joint venture company to manage the TAGP and to
draft a model gas sale and purchase and a gas
transportation agreement in addition to considering
the standard terms to apply to all future gas sales and
transportation agreements.

1 Malaysia to Singapore (commissioned 1991).

2 Myanmar (Yadana) to Thailand (Ratchaburi)
(commissioned 1999).
3 Myanmar (Yetagun) to Thailand (Ratchaburi)
(commissioned 2000).
4 Indonesia (West Natuna) to Singapore
(commissioned 2001).
5 Indonesia (West Natuna) to Malaysia (Duyong)
(commissioned 2002).
6 Indonesia (Grissik) to Singapore (commissioning
scheduled 2003).
7 Thailand (Joint Development Area) to Malaysia
(commissioning scheduled 2005).
8 Indonesia (South Sumatra) to Malaysia
(commissioning estimated 2005).
9 Indonesia (Arun) to Malaysia (commissioning
estimated 2010).
10 Indonesia (East Natuna and West Natuna) to
Malaysia (Kerteh) and Singapore (commissioning
estimated 2010).
11 Indonesia (East Natuna) to Thailand (JDA-Erawan)
(commissioning estimated 2012).
12 Indonesia (East Natuna) to Malaysia (Sabah) and
the Philippines (Palawan-Luzon) (commissioning
estimated 2015).
13 Malaysia-Thailand (JDA) to Vietnam (Block B)
(commissioning estimated 2016).

Asia Pacific Review

17

Trans-Asian pipe Asia Pacific Review

Jurisdiction over offshore pipeline segments, particularly outside of a

states territorial seas, is more contentious. Despite the aura of close
co-operation that surrounds ASEANs activities, there are presently a
number of territorial disputes between the member states.

(iv) Security of supply and emergency supply

arrangements - This will entail the implementation
of appropriate measures to enhance security and
safety and the uninterrupted flow of gas through the
network, including a framework for co-operation in
the event of a serious disruption to supplement the
emergency response provisions in the 1986 ASEAN
Petroleum Security Agreement.
(v) Health, safety and environment - HSE issues
will become increasingly prominent throughout
the region as the TAGP is developed. Evidence of
increased environmental awareness can be seen in the
construction of the Thai-Malaysia JDA pipeline which
was first scheduled to commence construction in early
2001.The original pipeline route was met with strong
protests from environmental activists and affected
villagers in Thailand and resulted in re-routing of the
landing point and delayed construction until the
second half of 2003.
(vi) Transit rights - This issue envisages acceptable
measures which would facilitate the issue of permits,
licenses, consents, or other authorisations for pipelines
and gas being transported through the territory of any
member state.
The TAGP is based upon the integration of the
existing and proposed pipeline interconnections
into a single regional network grid.The existing
gas pipelines between ASEAN states are based on
bilateral arrangements between two states with no
pipelines passing through a transit country.As a
consequence it has not been necessary in the past
to consider issues pertaining to transit across third
countries, but such issues will need to be considered
in the near future before a truly integrated network
can be realised.
(vii) Taxation and tariff - The harmonisation of
taxation, tariffs, subsidies, controls on rate of return and
other fiscal terms applicable to pipeline construction
and operation will help to ensure a more consistent
development of infrastructure and will enhance the
prospects for freedom of transit throughout the region.
If fiscal terms vary between ASEAN states then
investors may be encouraged to forum shop to find the
most lucrative state in which to invest in gas

18

development and transportation infrastructure, which

might not result in the development of the necessary
infrastructure in those states most in need of it.
(viii) Abandonment - Increasingly stringent
environmental obligations have been imposed on oil
and gas companies over recent years, both by
imperative legislative requirements and by corporate
shareholder expectations.The oil and gas industry in
Asia is still in its relative infancy when compared to
more established regions such as the North Sea and
Gulf of Mexico and consequently the issue of
abandonment of petroleum infrastructure has only
become an immediate concern of regional industry
participants in recent years.

(ix) Jurisdiction - Determining jurisdiction over

onshore pipeline segments is a relatively straightforward
matter with the principle of territorial integrity, which
ASEAN strongly respects, dictating that each ASEAN
member state will have jurisdiction and responsibility
over the pipeline segments located in its own territory.
Jurisdiction over offshore pipeline segments,
particularly outside of a states territorial seas, is more
contentious. Despite the aura of close co-operation
that surrounds ASEANs activities, there are presently
a number of territorial disputes between the member
states in respect of offshore territories.While
agreements have been struck between some states,
allowing development in disputed contiguous areas
(eg the Thai-Malaysia JDA), development of potential
reserves in other disputed areas has been delayed for
many years while disputes remain unresolved (eg in
the Thailand-Cambodia OCA). Diplomatic tensions
are rife where claims compete, as evidenced in the
recent award of production sharing contracts by both
Malaysia and Brunei for blocks which Malaysia claims
are in its territorial waters and Brunei claims are
within its exclusive economic zone.
Each of the above issues might best be addressed
by the ASEAN member states through some form
of governmentlevel accord which establishes a
common regulatory and fiscal regime. Such an
accord might also provide for principles of investment
protection and the preclusion of unwarranted state
intervention.

Asia Pacific Review

July 2003

Trans-Asian pipe Asia Pacific Review

The Energy Charter Treaty, originally signed in

December 1994 and with a strongly European flavour,
is a multi-national energy infrastructure investment
treaty and may have significant value as a precedent for
ASEAN.The objective of the Energy Charter Treaty
was to secure reliable supplies of energy for western
Europe while attracting foreign capital investment to
countries of eastern Europe in the overall context of
strengthening security through close co-operation in
a key economic sector and also the definition of a
multi-national legal and regulatory framework for
private investment and cross-border gas trades.
Such fundamental investment protection principles
provide at least some protection for investments from
political risk events without seeking to determine or
undermine national energy policies.This is in harmony
with ASEANs long-standing position of noninterference with member state internal affairs.There
may therefore be merit in the ASEAN states creating
an equivalent ASEAN energy treaty, whereby
governments make legally binding commitments
in favour of common principles supporting the
co-operative development of regional energy
infrastructure and markets against unilateral actions
or inactions which may jeopardise the overall integrity
of the network.
The great diversity of legal and regulatory systems
and economic development throughout ASEAN will
inevitably make the harmonisation of institutional
frameworks challenging.ASEAN does however have
in its favour a long history of regional co-operation
through the various ASEAN forums, and an
understanding of the importance that co-operation
in the energy sector is essential to the well-being of
all ASEAN states.
The 21st ASEAN Ministers of Energy Meeting
was held in Langkawi, Malaysia on 3 July, 2003.The
Ministers agreed that an enabling framework was
required to stimulate strong private-sector participation
in the TAGP on a commercial basis, and they agreed to
enhance the ASEAN Energy Business Forum as an
important platform to facilitate cooperation between
ASEAN energy authorities and the private sector in
business interaction, technology transfer and project
financing opportunities.The Ministers also welcomed
the establishment of the ASEAN Gas Consultative
Council (AGCC) to serve as the strategic technical and
information resource and capacity building advisory
body to ASCOPE in the facilitation and
implementation of the TAGP.
With respect to greater regional and extra-regional
cooperation, the Ministers called on the Senior Officials
Meeting on Energy to expeditiously

20

conclude a new petroleum security agreement to replace

the existing 1986 agreement, agreed to strengthen
cooperation with China, Japan and the Republic of
Korea through the SOME+3 Energy Policy Governing
Group, and expressed an intention to apply for observer
status at the Energy Charter Conference so as to foster
more active dialogue and regular exchange of
information with the Energy Charter Secretariat.

 BEYOND TAGP
Given the ambitious magnitude of the TAGP it may be
natural to wish to continue the momentum and to
think even further afield for possible extensions to the
network.
It is not inconceivable that a pipeline from Myanmar,
Laos or Vietnam could extend into the southern
Chinese provinces of Yunnan or Guangxi.Yunnan, for
example, is already part of the ADB-assisted Greater
Mekong Sub Region Program of economic cooperation, including co-operation in the energy sector.
Thailand has already signed a preliminary accord for
imported power from Yunnan, and this sub-regional
co-operation could extend to gas transmission if
suitable markets can be established.
From Yunnan or Guanxi a pipeline could be linked
to Chinas planned West-East gas pipeline either via
existing pipeline infrastructure in Sichuan province
and the planned Chongqing-Wuhan pipeline or to
Shanghai through the eastern seaboard pipeline system
sometimes envisaged by the Chinese government.
Beyond this there is an irresistible tendency to look
beyond the western fields of China to see the WestEast pipeline linking with central Asia and, looking
further north, talks have been held considering an
infrastructure system to carry gas from Russian fields in
East Siberia and Sakhalin to markets in China, Korea
and Japan.
The possibility of extending the TAGP into south Asia
has also been considered, such as during the October
2002 India-ASEAN Business Summit.This would
involve the extension of existing pipelines through
Myanmar into India, possibly transiting Bangladesh and
thereby facilitating the export of gas from Bangladesh
into the Indian market.
Although the thought of one interlinking network
of gas transmission pipelines stretching from Java to
Sakhalin and from the Philippines to central Asia may
only be a flight of fancy now, such an ambition could
soon be capable of realisation if the will exists to
progress from pipedreams to practicalities.

Asia Pacific Review

July 2003