Issues and Challenges to Gas Market in Japan and NE Asia

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Issues and Challenges to g

Gas Market in Japan and NE Asia

Presentation at Session 3 in Korea-China-Japan Joint Energy Conference For KEEI’s 28

^th

Anniversary Celebration

September 25^th, 2014 Ken Koyama, PhD Ken Koyama, PhD

Chief Economist, Managing Director Institute of Energy Economics, Japan

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Japan’s LNG consumption p p

90,000

70,000 80,000

City Gas Power Other

(1,000 tonne)

50 000 60,000 70,000

40,000 50,000

20,000 30,000

0 10,000

(FY)

2 Source: METI and MOF statistics

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

(FY)

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Japan’s LNG import by company p p y p y

TEPCO

Tokyo Gas Chubu Ele.

Kansai Ele.

Osaka Gas

Kyushu Ele.

Tohoku Ele.

FY2012

Chugoku Toho Gas Kyushu Ele.

FY2012 FY2010

Others g Ele.

(1,000 tonnes)

3

0 500 1000 1500 2000 2500

Source: Prepared by the author

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World gas prices by region

24 140

Units: USD / million Btu (left), USD / bbl crude oil equivalent (right)

120

18 20 22

Henry Hub NBP

80 100

14 16 18

Japan LNG average JCC

10 60 12

40

4 6 8

0 20

0 2 4

5 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1

Source: US EIA and IEA

4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

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LNG Supply-Demand Outlook for Asia

M illion tonnes

 Asia’s LNG demand will increase by 189 million tonnes, accounting for 80% of the world’s LNG demand growth through 2035.

 Supply capacity will be enough to meet growing LNG demand in Asia

450 500

Branded/equity supply portion for Atlantic market Projects being planned

M illion tonnes

350 400

j g p

Projects with SPA or HOA Existing projects

Hi h d d

250 300

High demand case Low demand case

150 200

50 100

Source: IEEJ estimate 5

0

2010 2015 2020 2025 2030

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Growing expectations for US LNG exports



Export projects with total capacity of more than 200 mil tonnes are on the list.



Government permitted volume approaching 80 million tonnes.

LNG exports projects in North America US natural gas production outlook

Source: FERC; DOE 6 Source：EIA

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Gas development PJs in East Siberia and Sakhalin

Sakhalin - Khabarovsk - Chayanda

Gas development PJs in East Siberia and Sakhalin

サハリン・センターサハリン3 既存

既存チュメニ州

Vladivostok Gas P/L （ Existing ） Kovykta

Chayanda Gas Field

Sakhalin 1

ヤクーツク・センターサハリン1、2

リ

ティンダユジノサハリンスク

2007-2009 2016-2030

2016-2030

既存既存

クラスノヤルスク・センター

北部

2013-2015

Gas Field

Sakhalin 3

ブラゴベシチェンスクスコヴォロディノ

ハバロフスク

2007-2009

イルクーツク・センター

アンガルスククラスノヤルスク

Vladivostok LNG

Sakhalin 2

3^rdTrain

ウラジオストック→

大慶ナホトカ

ピョンヤンアンガルスク

China-Russia PL gas deal

2007-2009 2013 2015 2010-2012

ガスパイプライン建設・ガス田の開発

の時期

^北京 ^ソウル

ピョンヤン

Russia～DPRK～

ROK Gas P/L

7

2013-2015 2016-2030

（Source）Prepared by IEEJ based on Eastern Gas Program of Gazprom

ROK Gas P/L

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Measures for Gas/LNG supply security

 Diversification of fuels for power generation

 Restarting nuclear g

 Renewables

 Coal

 Diversification of supply

 North America

 Russia

 Africa

 Diversification of gas transportation mode

 Introducing pipeline gas

 Efficient use of gas for power generation

 MACC

 Co-generation

 Joint efforts

8

 Joint development

 Joint procurement

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LNG Pricing Options for Asia

Hub pricing

Spot LNG pricing

Adjustment within oil-linked

pricing

Link with other fuels (Electricity,

Coal) Henry Hub,

NBP

Hubs

i A i p g )

NBP in Asia

Ad t

•Already

available • Possible to • Possibly the • Rational for

Advantages ^available

• Lower prices (for now)

reflect regional market balance

•Already available quickest solution power utilities

Disadvantages

• Higher volatility

•Asia market

b l t

• Not yet available

• Higher

• Higher volatility

• Limited liquidity ( f )

•Gas market balance not

fl t d

• Irrational for gas utilities

• Lack of power balance not

reflected

g

volatility (so far) reflected p

market liquidity

 Rationality of oil-linked pricing being questioned

 Sustainable and rational pricing needs to emerge for mutual

b fit b t ll d b

9

benefit between sellers and buyers

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To find a better solution…



In the long term, pricing mechanisms including hub-pricing based in Asia that reflect gas market fundamentals in Asia needs to be devised.

that reflect gas market fundamentals in Asia needs to be devised.



In the medium term, Asian buyers will explore to increase LNG imports based on Henry Hub (HH) pricing (or possibly NBP pricing) and “Hybrid pricing” in order to di ersif pricing mechanism as ell as to alle iate the pricing”, in order to diversify pricing mechanism as well as to alleviate the problems associated with oil-linked pricing



In case of Japan, LNG import volume linked with HH pricing may reach about 17

illi t t d 2020 ti f b t 20% f t t l LNG i t

million tonnes at around 2020, accounting for about 20% of total LNG import



Japanese buyers will also be required to explore more rational pricing mechanism for the existing LNG contracts, taking full account of new market development including expected growth in LNG imports based on HH pricing

expected growth in LNG imports based on HH pricing



In any case, demand/supply fundamentals as the key



More supply sources: diversification of supply, including pipeline gas imports

10

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LNG P d C C f

LNG Producer-Consumer Conference

11

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What we should do (1) What we should do (1)

Individual effort in Northeast Asia to deal with Asia Premium

Countermeasures

Industry: ・Pricing diversifications (Henry Hub, Asian hubs, spot LNG)

Government: ・Diplomatic effort towards export countries for rationale LNG pricing Pricing

Countermeasures

Industry: ・Supply diversifications (including pipeline gas imports)

・Flexible contractual terms (destination free, lower ToP) Government: Creating competitive domestic energy market environment Market liquidity

Government: ・Creating competitive domestic energy market environment

Industry:

・Supply expansion (domestic gas development, overseas upstream investment)

J i t t/S

y ・Joint procurement/Swap

・Infrastructure developments

・Nuclear re-start as a first option (Japan) & development (other Asian

i t )

Demand/supply fundamentals

Government:

importers)

・Financial and diplomatic assitance for domestic and overseas gas/LNG developments

・Promoting efficient use of gas (MACC, CHP etc)

12

・Domestic pricing reform especially in China and India

12

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What we should do (2) ( )

Joint effort in Northeast Asia to deal with Asia Premium

Governments Industries

・Joint upstream financing Supply

g

(avoid resource acquisition race)

・Joint E&P technology developments

・Diplomatic effort for

・LNG swap, Joint procurement

・Joint upstream developments regional pipeline network

Demand ・Efficient gas usage technology transfer

・Taking advantage of the coming buyers’

Trade

・Joint legal actions on destination clause

・Improving market transparency through basic gas statistics

(e.g. JODI-Gas)

g g g y

market in terms of price & pricing

・ Information sharing (only if adopted as procurement strategy)

・Improving market liquidity

( g ) p g q y

(e.g. creating surplus capacity) Importers’

Relations ・Promoting cooperation with Southeast and South Asian importers

13 Relations

13

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Conclusion Conclusion



Unprecedented energy challenges after “March 11 th ” for Japan p



Comprehensive review for Japan’s energy policy is required while taking into full account of achieving

“3Es” 3Es plus Safety and impacts on macro economy plus “Safety” and impacts on macro economy



Natural gas/LNG demand in Japan increased

substantially to replace reduced nuclear contribution



Security of gas/LNG supply is a top priority in Japan



Asian Premium needs to be addressed

Implications of LNG exports from US Russian supply



Implications of LNG exports from US, Russian supply potential and other emerging supply options



Importance of cooperation among consuming t i i A i

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Issues and Challenges to Gas Market in Japan and NE Asia