IEEJ： February 2014

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Special Bulletin
A Japanese Perspective on the International Energy Landscape (161)

February 24, 2014

Are We seeing the Start of a Turning Point for International Oil/Gas Market?
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanAt the Keidanren Hall in Tokyo on February 19, JX Nippon Oil & Energy Corp., JX
Nippon Research Institute Ltd., the Committee for Energy Policy Promotion and the Institute ofEnergy Economics, Japan, cosponsored the 23rd International Panel Discussion, dealing with views
about the future oil and energy situation. Fereidun Fesharaki from the FACTS Global Energy Groupof Energy Market Consultants (UK) Ltd., Guy Caruso from the U.S. Center for Strategic andInternational Studies and Takayuki Nogami from the Japan Oil, Gas and Metals NationalCorporation attended the discussion as panelists and I served as moderator. The three famous expertson the oil and gas market had a very interesting discussion on the future oil and gas situation.
The panel discussion impressed me with talks about whether the year 2014 will see thestart of a turning point for the international oil and gas market. Crude oil prices in the internationaloil market have remained above $100 per barrel for three years. There have been various factors
behind the high crude oil prices including supply-side problems like the destabilization of the Middle
East, growing geopolitical risks and supply interruptions in some major oil producing countries. The
prices are still high and dominantly expected to remain so in the first half of this year. In the second
half, however, the supply-demand balance in the international oil market is likely to ease as U.S.
shale oil production leads overall oil supply to expand faster than demand, as agreed between thepanelists.
On Iran's negotiations with the so-called P5+1 countries (the five permanent U.N. Security
Council members and Germany) on the Iranian nuclear development problem, the panelists pointed
to great uncertainties. But they noted that Iran's oil exports could increase slightly in the second halfof this year if its present interim framework agreement with the P5+1 countries is extended, with
their break-off avoided even without any comprehensive agreement. Given downside risks for theworld economy, their remarks indicated that they were very conscious of the possibility that
downward pressure will emerge on crude oil prices from the second half of 2014.
The supply-demand relationship change is significant because it could represent the startof a turning point. The shale oil production expansion is not limited to 2014 but is expected tocontinue until around 2020. In response to the present output expansion, a rising number of analysts
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have grown even more bullish, revising their shale oil production forecasts upward. In addition, thepanelists pointed to many medium- to long-term factors that could exert downward pressure on
crude oil prices. Mexico has decided to allow foreign firms to participate in its oil production.
Canada is expected to increase unconventional oil production. Brazil will substantially expand oil
production through deeper offshore oil development. Iran may be able to substantially increase oil
production if economic sanctions on the country are eased. Iraq already has plans to greatly increaseoil output. These supply-expanding factors may put downward pressure on crude oil prices beyond
2014. The panelists differed over a medium-term crude oil price range but commonly predicted thatcrude oil prices could slip far below $100/barrel.
The expected drop in crude oil prices is good news for oil consuming countries such as
Japan. But the crude oil price decline would be a grave and unignorable problem for oil producing
countries that depend on oil (and gas) export revenues for economic growth. Depending on thedegree of the oil price drop, their domestic situation could be destabilized. Therefore, future policy
management will grow more difficult for major OPEC countries as supply-demand coordinators,including Saudi Arabia. Regarding policy management, full discussions are emerging on lifting aban on oil exports amid the shale oil output expansion in the United States, which has effectively
banned crude oil exports since the oil crises in the 1970s. In this sense, the year 2014 could also see
the start of a turning point.
The abovementioned possible decline in crude oil prices is important for anticipating thefuture natural gas/LNG market. In the Asian LNG market including Japan, how to reduce higher
LNG prices than in other regions is an urgent issue. Asian LNG importers are trying to secure new
LNG supplies including those from the United States to help diversify supply sources. They are also
looking for LNG pricing approaches that could allow them to procure LNG at more competitive
prices. If crude oil prices decline, present Asian LNG import prices linked to crude oil prices will
drop irrespective of these efforts.
The possible LNG price drop accompanying an oil price fall, though being good news for
Asian LNG importers, has complex implications. It could affect the economic efficiency of LNG
imports based of the U.S. Henry Hub price. Any substantial crude oil price plunge could discourage
LNG developers from deciding to invest in or launching high-cost LNG projects. As noted in thepanel discussion, the United States is realizing massive LNG exports exceeding 60 million tonnes,
while Australia and other LNG exporters are making progress in their LNG export projects. Suchreal changes in the LNG supply-demand balance could be coupled with a crude oil price fall toprovide a major change and start a turning point for the Asian market. The Asian LNG market has
two different (and mutually influencing) pricing problems – lowering absolute prices to achieve
lower-cost procurement and developing a more reasonable pricing mechanism. I would like to pay
attention to if a turning point would start for these pricing problems as the supply-demand
relationship and prices change.
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