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China’s Infrastructure Investment Bank’s First Loan – Analysis

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China’s Asian Infrastructure Investment Bank will make its first loan this year. Nothing would have a greater impact than funding a Pan-Asian Gas Pipeline.

A Pan-Asian Gas Pipeline could connect a series of Joint Development Areas in the South China Sea. These in turn would develop the region’s offshore oil, gas and methane hydrate resources. This is being held up by territorial uncertainties created by China’s Nine-Dotted Line.

Funding a Pan-Asian Gas Pipeline serving Joint Development Areas represents the most powerful signal China could send of its commitment to regional multilateralism. Markets would do the rest. The timing couldn’t be better.

Graphic by GRENATAC.

China and the US recently agreed to binding targets for reducing carbon emissions. In December, the globally-pivotal Paris COP21 climate change negotiations must agree binding global carbon cuts.

South China Sea oil and gas exploration and drilling has been largely limited to near shore areas due to uncertainty over China’s maritime claims. Large potential oil and gas deposits remain unexplored as a result. This is economically inefficient.

A Pan-Asian Gas Pipeline linking Joint Development Areas solves this problem. It would mark a first step toward creating an integrated regional energy market.

Coupled with carbon prices, it would be the most powerful tool possible for reorienting the Asian economy to low emission energy using markets, energy fungibility and universal access.

Asia is now the world’s largest economic bloc. Reducing future destructive climate change largely hinges on Asia and the energy choices it makes. A gas pipeline increases economic growth through expanded trade — a massive double win.

Both the International Energy Agency and the Asian Development Bank both repeatedly stress the importance to the global economy of deeper Asia energy market integration. With China in the lead, now’s the chance. Everyone wins.

A Pan-Asian Gas Pipeline connecting Joint Development Areas distributed through auctions, prices and markets binds China constructively into a universally-beneficial multilateral order. Funded through China’s AIIB with its neighbors as partners, it would represent an economic Marshall Plan that would eliminate the major territorial irritant China’s expansive territorial claims present in relations with her neighbors.

In coming years, Asia needs trillions of dollars of new infrastructure investment. Half of this need will be for energy.

A number of Pan-Asian Gas Pipeline proposals already exist. These include the Association of Southeast Asian Nations’ (ASEAN) Trans-ASEAN Gas Pipeline and others. All have had the aim of brining South China Sea natural gas to Chinese markets.

Given that ASEAN members comprise half the AIIB’s membership, funding its first project in the ASEAN region is a logical outcome of the bank’s creation.

It would not stand alone. It would represent merely the first step toward creating a larger energy network topology in Asia to deliver a broader array of future fuels.

That’s because a properly-constructed gas pipeline can carry natural gas initially, andmethane hydrates, bio-energy, hydrogen over the long term. Liquid Natural Gas infrastructure can’t do this. This has created huge, undiscounted obsolescence risk to LNG investments in Asia, most demonstrably in Australia’s Queensland.

Pathways laid down by natural gas pipelines enable other infrastructure (such as fiber optic cables and High-Voltage Direct Current power lines) to be added later. Power lines, for instance, will enable offshore wind, wave energy and ocean thermal energy to be developed and delivered. Rigid, single-purpose LNG can’t do this.

The potential for such multi-purpose South China Sea energy infrastructure is readily apparent in ASEAN’s proposed Trans ASEAN Electricity Grid — a companion project to theTrans-ASEAN Gas Pipeline. Laying the foundations for a regional HVDC infrastructure to a regional gas infrastructure could be the AIIB’s second investment.

Offshore energy infrastructure in the South China Sea could become an important source of food for a rising income region. Offshore infrastructure becomes fish aggregation devices. Aquaculture can take root there, providing protein to a hungry region.

With all countries working together toward a common goal, the role of military forces can change from preparing for conflict to ensuring infrastructure security and engaging inhumanitarian activities, like providing emergency relief from typhoons, tropical storms and earthquake induced tsunamis. Cooperative militaries also could provide security for the infrastructure.

A Pan-Asian Energy Infrastructure of gas pipelines and power lines would create a regional energy market marked by fuel substitutability. Relative prices could be weighted by carbon content, creating a better pricing mechanism. The infrastructure, being flexible (through a network) instead of single purpose (like LNG) could last a century or more.

If spearheaded by the AIIB, this new kind of infrastructure thinking would mark a big step away from the economic orthodoxy of 25-year depreciation periods and unpriced negative externalities (ie carbon pollution) that have created the destructive, destabilizing climate change problem in the first place.

In the future, investing in flexible, adaptable, long-term infrastructure enabling multiple energy sources to be delivered to multiple markets governed by carbon pricing and open access, common-carrier markets enables economic orthodoxy to work its magic in solving climate change.

Bankrolling a Pan-Asian Gas Pipeline connecting South China Sea Joint Development Areas funded by China’s Asian Infrastructure Investment Bank represents a ‘Berlin Wall moment for Asia and the world.

It would replace this old thinking with a new paradigm of multilateral, forward-looking, positive sum thinking in which efficient markets determine national policies. The result would be a ‘Warm War,’ not a ‘Cold War.’

As at only a few times in history before now — the timing is perfect for this kind of big ‘step change.’ China’s Asian Infrastructure Investment Bank is coming on line, the US and China now see eye to eye on reducing bilateral carbon emissions and COP21 meets in Paris later this year.

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Stewart Taggart

A former economic and energy market journalist in the United States, Western Europe and Asia, Stewart is the founder and principal of Grenatec. Sydney-based Grenatec is a research organization studying the viability of a Pan-Asia Energy Infrastructure. This infrastructure would be comprised of parallel natural gas pipelines, high capacity power lines and fiber optics cables stretching from Australia to China, Japan and South Korea.

One thought on “China’s Infrastructure Investment Bank’s First Loan – Analysis

  • December 26, 2015 at 10:37 pm
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    Very informative and well written

    Reply

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