Cross Border Energy Trade and its Impact on the Poor

1
Cross Border Energy Trade and its Impact on the
Poor

• Presentation on draft final reports

2
Overview

• Introduction
• Key research questions
• Approach methodologies
• Findings
• Literature review
• Trends and drivers of energy trade
• Energy trade and poverty linkages
• Recommendations

3
Key Questions

• Trade patterns trends
• What are the motivations for trade?
• What is the extent of trade anticipated trends?
• What institutions play a decisive role?
• Impacts
• What have the impacts of energy trade been? On
  the poor?
• Rural/urban poor/non-poor gaps?
• Access to modern fuels?
• Policy measures
• Opportunities barriers for energy trade?
• Pro-poor policies mechanisms?

4
Approach
Global Review of Energy Trade
Whats happening? Wheres it going? Why?
Regional Review of Trade Poverty
How does A-P trade energy? What may be poverty
linkages? Are there trends at the regional level?
Nationalcase studies
Focus on specific energy trade types Can we see
poverty/MDG linkages?
Synthesis
What does it all mean?
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Methodologies
Literature Review
Trade poverty Public sector revenue
management Sector liberalisation poverty
Regional Global Reviews
Secondary energy poverty data Interviews with
experts Cross-sectional analysis
NationalCase Studies
Micro macro level analysis Macro-economic
modelling techniques Localised fieldwork
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Documents Prepared

• Inception
• Inception Report
• Literature Review
• Global Assessment
• Regional Assessment

• National Case Studies
• Indonesia LNG
• China Oil Coal
• Mekong Power Trade
• Timor Leste Services Trade

• Synthesis Report

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Themes from literature review

• Price effects
• Trade reforms have price impacts
• These have expenditure earnings effects
• Fiscal effects
• Exporters Natural resource curse
• Reformers Subsidies other fiscal effects
• Policy matters
• Trade policies are linked to sector policies
• Increased access does not come naturally
• Protection against adverse impacts

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What is the resource curse?

• Dutch disease
• Foreign exchange appreciation
• Squeeze out other export industries
• Vulnerability
• To oil price decreases
• Unstable Govt budgets

• Poor governance
• Undermines good governance
• Govt neglects other industries
• Govt neglects poverty reduction
• Corruption

Oil exporters often have poor non-oil economic
performance high poverty statistics
9
Choice of case studies
Gas Oil Coal Power Services
Importer China Timor Leste
Exporter Indon-esia China Laos
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Case study themes methods
China Indonesia Laos Timor Leste
Themes Price effects Localised impacts Resource curse Localised impacts Fiscal effects Localised impacts Access Price Technology
Macro-methods Macro-economic modelling Secondary data/interviews Secondary data/interviews Interviews
Micro-methods Local survey at coal site Local fieldwork at LNG site Local fieldwork at hydro site Local fieldwork urban rural sites
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Trends and drivers of energy trade
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Trends in energy balances
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A-P accounts for 30 of energy trade
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Oil still dominates, but gas is growing
15
Power trade is small, but NB for some
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Energy balances in A-P are changing

• The China/India factor
• Oil export from major regional producers is on
  the decline
• Although coal gas production is increasing
• Increasing import dependence on Middle East

17
Interest in regional power gas trade

• ASEAN power gas grids
• Indias gas import options
• From East West
• Increasing interest in LNG
• For export import
• Hydropower exports
• Himalayas
• Mekong

18
Looking for investment technology

• Increasing domestic energy supply
• Exploration capital
• Investment capital for production
• Acquire technology (power petroleum)
• Expanding abroad
• Importers Acquiring equity oil energy
  security
• Exporters Replacing depleting reserves

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Whats driving energy trade?
Economic Growth
Declining reserves
Technology
Industrialisation
DEMAND
SUPPLY
Open economies
1990s oil prices
And at todays oil prices?
EnergySecurity
RELIANCE ON TRADE
20
The institutional infrastructure of trade
Seldom have energy chapters Set trade
framework/relationship
Regional bilateral FTAs
NB for infrastructure development Joint
institutions established
Political co-operation
Resolve resource conflicts From no objection to
JMAs
Joint resource management
Often preceded by Govt-Govt Long-term for power
gas Contractual flexibility is increasing
Bilateral commercial agreements
21
Energy Trade and Poverty Linkages
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What are the potential impacts Exporters
Positive impacts Negative impacts
Increased revenue, with knock-on economic impacts Increase in fiscal revenues Economies of scale Interconnected power grids Exposure to international prices volatility Resource curse Dutch disease Social conflict inequality Environmental damage, social impacts
23
What are the potential impacts Importers
Positive impacts Negative impacts
Adequate supply at lower cost Savings can provide fiscal relief Higher security diversity Avoided social/enviro impacts of production Interconnected power grids Exposure to international prices volatility Subsidies can be difficult to manage sustain Environmental social impacts from increased industrial activity
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What are the potential impacts Services
Positive impacts Negative impacts
Reduced public investment cost Technology transfer know-how Efficiency gains can reduce tariffs/subsidies Competition can reduce prices Liberalisation of off-grid improved access Foreign investors require higher returns can increase prices Commercial disincentive to increase access Limited ability to impose subsidies obligations Competitive markets may not promote investment
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Topics arising

• Economic growth, energy poverty
• The curse of natural resources
• Energy trade and access
• Energy trade, costs and prices
• Localised impacts
• Energy services poverty

26
Energy imports, growth poverty
Increased energyconsumption
Increased energyimports
For EnergyImporters
ECONOMIC GROWTH
Fiscalmechanisms
Povertyreduction
Incomegeneration
27
This link can be seen, e.g. in Thailand
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But not in exporters.
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Is there a formative period?
Or do exporters behave like importers?
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A-P exporters avoided resource curse

• Indonesias success
• 3 decades of growth
• Broad reduction in variety of poverty statistics
• Income distribution stable
• But still governance problems
• Industrial wealth was concentrated in few firms
• Unhealthy relationship with Government
• Lost opportunity?

Energy Exports
Industrial growth
Fiscal growth
Poverty Reduction
31
Energy trade and improved access

• Access Links to MDGs
• Many energy-poverty linkages relate to access to
  modern energy, esp electricity
• How does trade affect access?

Socialexpenditure
Export profits
Fiscalbenefits
Investment in electrification
Lowercosts
Company profitability
Reducedtariffs
Import offuel
Expansion ofsupply
Removed bottlenecks
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Policy matters

• Laos Bhutan
• Much of benefit retained in power sector
• Political trade-offs between different objectives
• The fiscal impacts are/expected to be very large
• Other countries are less extreme cases
• Removing bottlenecks more likely to be important
• Policies for access
• Less a question of energy trade
• Than domestic policies that promote access

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Energy trade, costs and prices

• Trade and prices
• Open trade should increase prices when exporting,
  and decrease prices when importing
• Most energy products are traded freely already
  few tariff or quota barriers exist
• How does trade policy, thru prices, affect the
  poor?
• Macro-economic model of Chinese economy
• Compared free trade with counter-factuals of
  trade barriers

FREETRADE
GDP GAIN
GDP GAIN
Increasecoal exportprices
Reducesoil importprices
EQUITY LOSS
EQUITY GAIN
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Other Price Effects

• Diversification away from oil
• Other economies are less dynamic/adaptable than
  China
• Inflationary impact, fiscal impacts etc.
• Interest to diversify away from oil imports
• Biofuels
• Local gas
• Increased exploration
• May represent opportunities for poverty benefits,
  but early to tell
• Economies of scale
• Depends on size of local market
• Signficiant in smaller countries
• Possibly important during early stages elsewhere

35
Price volatility

• Resource curse (again)
• An important factor for exporters
• Energy prices and growth
• Resiliant so far
• But still a signfiicant risk
• Energy price subsidies
• Energy subsidies are proving unsustainable
• Although subsidies are often captured by wealthy,
  it is poor who feel their removal
• Indonesia moving towards other forms of poverty
  relief

36
Localised impacts
LNG Export Facilities in Bontang a new town

• Lower poverty indicators
• Mainly through employment
• But public expenditure NB
• CSR

• Bontangs gain, others loss?
• Insiders and outsiders
• Migration traditional livelihoods
• Environmental impacts

Theun Hinboun Hydropower Facility, Laos

• Roads
• Projects health facilities
• CSR Agricultural extension
• CSR Electrification

• Increased flooding in wet season
• Reduced food security
• Contaminated water supplies
• Move away from river for longer

37
Services trade poverty

• Sector liberalisation
• Should improve efficiencies, but at risk to the
  poor
• Again, policy matters

Power Sector Reform
Management services
Operating improvements
Access
Price effects
Reduce subsidies
Improvedaccess
Priceincreases
Training
External factors
Contract design
Policy
Regulation
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Policy measures
39
Outlooks for trade On the way up
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Key outcomes

• Increasing oil dependence on Middle East
• By 2030, ME will account for 2/3 of oil exports
• Gas trade
• Strong prospects for LNG
• Asian imports set to increase Russia ME
• Services trade
• Investment technology drivers are strong
• But policy drivers are weakening
• Energy security increasing concern

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Pro-poor policy measures

• Fiscal mechanisms
• Price mechanisms (subsidies)
• Financial mechanisms (promote access)
• Public service obligations
• Impact mitigation requirements

42
Fiscal measures

• Meeting the MDGs
• Most depend on public expenditure
• Especially health and education targets
• Exporters export revenues
• Most A-P exporters capture export revenues in
  fiscal system
• Using fiscal system to benefit the poor risk of
  resource curse
• Esp NB since many energy exporters are enclaves
• Policies are improving
• Stabilisation funds, governance, targeted poverty
  alleviation
• Decentralisation of benefits
• Zero sum game or avoiding conflict?

43
Price mechanisms

• Subsidies everyones doing it
• Importers Shielding consumers from price
  increases
• Exporters Sharing the resource with consumers
• OK while energy prices are low but
• Is it efficient?
• Is it sustainable?
• Is it targeted poverty relief?
• The opportunity cost of subsidies
• Reformers expect a development dividend
• But reforms appear unpopular with the poor

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Best Practices Fiscal Management

• Good governance
• Essential to avoiding the resource curse
• Becoming an element of loan agreements
• Avoiding Dutch disease
• Avoiding temptation to spend when prices are high
• Establish stabilisatoin funds and Invest abroad
• Industrial diversification
• Decentralisation
• Avoid urban focus defuse natural resource
  conflict
• Focus on MDGs
• Getting the priorities right

45
Best Practices Energy Pricing

• Limits to subsidies
• Avoid their negative effects
• Non-energy interventions
• Targetting the poor
• Lifeline tariffs
• Focus on access
• Especially public services

• Diversification
• Can reduce price volatility
• Local supplies can have poverty benefits

46
Policy and Regulation

• Esp important when liberalising services
• Where to liberalise is important
• Regulators can impose obligations
• Promoting access
• By regulation or financial incentives
• Passing through the benefits
• Regulation of prices
• Pro-poor contract design
• Ensure that poverty concerns are addressed

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Impact Mitigation

• Managing the trade-off
• National benefits v local costs
• Ensuring that latter is taken seriously
• Focus on livelihood impacts
• Regulatory agencies financiers
• Have important roles to play
• Government intervention
• Not all impacts can be handled thru company
  mitigation

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Recommendations
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Recommendations for Govts

• Governance
• Targeting public sector expenditure
• Avoiding the resource curse
• Revenue sharing and decentralisation
• Policy
• Addressing poverty in sector liberalisation and
  regulation
• Containing and targeting energy price subsidies
• Mitigation
• Regional co-operation
• Infrastructure development
• Integration benefits

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Recommendations for UNDP

• Facilitation and information sharing
• Sharing of regional experiences dissemination
• Energy price subsidies
• Addressing price volatility
• Energy services contracts
• Support for market liberalisation design
• Areas for further research
• Export-orientation v local utilisation
• Further work in energy services
• Poverty impacts of biofuels