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Cablegate: Progress Made During Five Party Energy Ministerial

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PP RUEHFK RUEHKSO RUEHNAG RUEHNH RUEHRN
DE RUEHKO #1592/01 1630731
ZNR UUUUU ZZH
P 110731Z JUN 08
FM AMEMBASSY TOKYO
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UNCLAS SECTION 01 OF 02 TOKYO 001592

SIPDIS

STATE PASS DOE FOR KFREDRIKSON, MWILLIAMSON
STATE FOR G, EEB, OES, AND EAP/J
NSC FOR PAUL BROWN AND JONATHAN SHRIER
CEQ FOR JAMES CONNAUGHTON

E.O. 12958: N/A
TAGS: ENRG KGHG AADP OVIP JA
SUBJECT: PROGRESS MADE DURING FIVE PARTY ENERGY MINISTERIAL

REF: TOKYO 1505

1. Summary. Representatives from the U.S., Japan, China,
India, Korea and the International Energy Agency (IEA)
gathered for the five-party energy ministerial in Aomori,
Japan June 7. Participants agreed recent volatility in
global energy markets and skyrocketing oil prices are largely
due to the lack of investment in energy infrastructure,
although the Chinese representative argued that financial
market speculation was a major factor. Participants cited
the need for open and transparent legal and regulatory
environments to encourage investment. They also called for
greater energy efficiency, diversity of energy sources,
better emergency preparedness and for the elimination of
subsidized energy prices. The Chinese representative noted
ending subsidies would unduly impact its rural communities
while the Indian representative stated his country could not
completely lift price controls given "irrational" oil prices.
End summary.

2. Representatives from the U.S., Japan, China, India, Korea
and the IEA gathered in Aomori, Japan June 7 for the second
five-party energy ministers meeting, preceding the G8 energy
ministerial June 8. Discussions focused on oil markets, and
the themes of global energy security challenges, emergency
preparedness, the investment climate and energy efficiency
and diversification.

Five Steps to Energy Security
-----------------------------
3. During the session on global energy security challenges,
IEA Executive Director Nobuo Tanaka posited five steps to
ensure energy security in the future. First, significantly
more investment is needed to address under-capacity across
the oil value chain. Second, governments must encourage more
efficient consumption. Third, more diversity in terms of
alternate energies and other sources is necessary to reduce
reliance on oil. Fourth, more transparency in reporting of
key data such as strategic reserve holdings and other indices
would provide accurate information to oil markets to help
reduce volatility. Finally, Tanaka advocated emergency
preparedness to avoid supply chain interruptions in the event
of natural disasters or geopolitical upheavals.

Subsidies
---------
4. Both Tanaka and Energy Secretary Bodman urged elimination
of subsidies that keep oil prices artificially low and
prevented a demand response to high international prices.
Chinese National Development and Reform Commission (NDRC)
Vice Chairman Zhang Guobao argued forcefully that financial
market speculation was a major factor in the jump in the oil
price, and observed that eliminating subsidies would unduly
harm China's citizens, particularly in rural areas. Indian
Ambassador to Japan H.K. Singh noted recent hikes in India
for fuel and heating oil to encourage consumers to be more
energy conscious while indicating that complete removal of
price controls were not possible given the "irrational" level
of prices.

Strategic Reserves Not a Weapon Against High Prices
--------------------------------------------- ------
5. China's Zhang led the discussion on emergency
preparedness, saying China's eleventh five year plan calls
for the development of a strategic oil reserve. He said
China is not trying to hide information about its stock
build-up but is concerned more transparency regarding oil

TOKYO 00001592 002 OF 002


purchases may drive markets even higher. Singh stated, while
the Indian government had approved building a reserve of 15
million metric tons, storage facilities would not be ready
for another three years. Both China and India noted their
interest in further cooperation with the IEA on emergency
preparedness and other issues. In response to Korean
Knowledge Economy Minister Lee Youn Ho's suggestion that IEA
members could release some stocks should oil prices reach a
"certain level," Secretary Bodman cautioned using strategic
reserves as a weapon against high prices would be
unsustainable.

More Investment in Production Capacity Needed
---------------------------------------------
6. During the session on investment climate, Secretary
Bodman stated high oil prices are primarily due to the lack
of investment in the energy supply chain. Countries need to
have open and transparent legal and regulatory environments
to encourage investment in the sector, he said. Bodman
called for countries to fulfill their Joint Oil Development
Initiative (JODI) commitments and noted the importance of the
Extractive Industries Transparency Initiative (EITI) to a
good investment climate, urging candidate countries to
complete implementation of the EITI criteria. (Korea echoed
Bodman's EITI comments.) Japan's Minister of Economy, Trade
and Environment Akira Amari decried the rise of resource
nationalism and stated the private sector's short-term focus
on profits together with the lack of attractive short-term
projects had dampened investment. China's Zhang said his
country's investment in international energy projects should
not be seen as a threat but rather as contributing to
stabilizing global oil markets.

Energy Efficiency and Diversification
-------------------------------------
7. ROK's Lee led the discussion on energy efficiency and
diversification, describing his country's efforts to increase
nuclear power, liquefied natural gas (LNG) and renewable
energy sources, as well as Korea's extensive energy
efficiency efforts. Meeting participants accepted the
Minister's offer for the ROK to host the next Five-Party
Ministerial.

8. Secretary Bodman stressed the need to let markets set
energy prices and commended India's recent actions to reduce
energy subsidies. Vice Chairman Zhang noted that China's
energy intensity is related to its stage of development, but
as a result, there is great potential for improvement by
phasing out older, less efficient industrial plants for
example. Amb. Singh remarked on India's use of public policy
to promote efficiency and create markets for renewable energy
and alternative fuels.

Comment
-------
9. The second Five-Party Energy Ministerial marked a major
advance over the first such gathering in Beijing in December
2006. The group agreed to a strong statement on data
transparency, committed to an eventual phase-out of
subsidies, welcomed countries' efforts to implement EITI, and
endorsed the St. Petersburg Energy Security Principles agreed
by the G8 at its 2006 Summit. The five parties welcomed the
forthcoming discussion on oil markets at the G8 Finance
Ministers Meeting on June 13-14.

10. The Secretary's party has cleared this cable.
SCHIEFFER

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