Northeast Asia Petroleum Forum 2009
Session-5 Trends and Prospects of Natural Gas in Northeast Asia

Outlook for the Natural Gas Market in Japan

Satoru YASUOKA
Tokyo Gas Co., Ltd.
27 October, 2009
Northeast Asia Petroleum Forum 2009 (Keidanren-Kaikan, Tokyo)
1

IEEJ: November 2009

Slide2

Role of LNG in Northeast Asia
北東アジアのLNG

Gas sales volume(million m3, 45MJ/m3)

・Poor indigenous resources and limited
Seasonal fluctuations(FY2007, Tokyo Gas)
energy options
1,600
・Politically stable island and peninsula 1,400
Wholesale (15%)
nations
1,200
・Traditionally, industry and logistics by
1,000
marine transportation
Residential (24%)
800
・Seasonal climate, combined with
Business (21%)
600
economic trends and unpredictable
400
weather (heavy winter)Industrial (40%)
・As an alternative to coal and petroleum, 200
LNG in Japan has 40-years history0
4 5 6 7 8 9 10 11 12 1 2 3
since Alaska
month
・Joint efforts by electric and gas utilities
Source: Tokyo Gas(2:1)
IEEJ: November 2009

Slide3

Need for Greater Flexibility

柔軟性を求める• LNG is much more than simple buffer/complement for nuclear power,

renewable energies and pipeline natural gas (PNG) as claimed by someWestern Countries• LNG in Asia is a major player = base load energy and traded mostly underlong-term base load contracts• Contract terms by themselves cannot become the fundamental solutions
in maintaining necessary flexibility
69% (1988)

Asia 2%Africa 1%
Middle East 3%

Europe48%

PNG 72%South America 2%

LNG
28%
North America
16%

Total 437Mton

Europe
24% Japan

41%
America7%
68MtonAsia (Emerging)Asia
7%(Traditional)
21%
Total 170Mton

Break down of global natural gas/LNG trade (2008)
IEEJ: November 2009

Source: BP Statistical Review of World Energy June 2009

Slide4

3 Solutions for Flexibility (Hardware)
量的柔軟性創出へのハード面の3つの工夫•

Buyers, within their countries, need to make shortand long-term preparation and maximum effort:(1) Emergency adjustments: self-controlled LNG
tankers (19 LNG tankers in Japan) and floating(2) Regular adjustments: reserves in storage tanks(27 LNG terminals, 14.6 million kL in Japan),underground storage, and pipeline connections
between LNG terminals(3) Demand adjustments: multi-fuel facilities and
LNG-fired power plants⇒Multi-fuel Facilities such as blast furnace⇒Adjustment of operation hours of LNG-fired power plants
including (PPS) utilizing the power market (holiday/night)
IEEJ: November 2009

Slide5Buyers’ Portfolio (Software)
買主ポートフォリオ(ソフト面の工夫)

 Currently popular “portfolio” is not only for the sellers
 Minimizing elements such as geopolitical risks, buyers

diversify sources and utilize “ spot ” (substitutive LNG)
⇒ (country, direction, distance, climate, operator,liquefaction performance, origin of source and qualities)

IEEJ: November 2009

RussiaAbu Yemen
６％Dhabi 2%
4%

Qatar
19%
Oman
6% Australia
15%

Oceania

Brunei
6%

Malaysia
19%

Indonesia23%

SE AsiaSoutheast Asia, Oceania, the Middle
East and Russia
 Cooperation among buyers for offsetting
seasonal fluctuations (different demand
patterns, such as between electric powerand gas or between countries) Respecting the philosophy of long-term
relationship and project start-up

Middle East As a consequence: diversification toCountry breakdown of exports
to Northeast Asia
(2009, quantities based on long-term contracts)

Slide6

Tripolarizing LNG Markets

三極化しつつあるLNGマーケット Asia-Pacific, North American and Europe were the world's 3 major LNG

markets
 But now actually there are 4 major regions, because the BRICs
countries are rising In Atlantic LNG market, we should focus on the South in the day ahead
4 LNG regions

Asia-PacificMTA (%)(2008)

Excess LNG tanker
capacity & pricedifference

Traditional

Emerging economies(Japan, Korea, Taiwan)(China, India)

105.6 (62%)

11.4 (7%)

Atlantic

North America

Europe11.4 (7%)

41.5 (24%)?

LNG growth(short-term)
Increasing complexity of global financial and economic crisis (How deep? How long?)

OptionPrice index

Little domestic gas

Large domestic gas
fieldsUnconventional gas
PNG

Diversification of sources
PNG
Nuclear power

JLC and others

JLC

Henry HubPetroleum product/NBPIEEJ: November 2009

Slide7Comparison of Trends in Tripolarizing Gas
Markets
ガス市場三極化の流れを見る• The differences come from the availability of substitutes• Are price differences unreasonable, or acceptable commonsense in the

24
22
20
18
16
14
12
10
8
6
4
2
0

120
100
81.19
80
60 8.31
40
20

5.70

Crude Oil Price ($/bbl)

140

HH
NBP
JLC
WTI

4.95

0

99
/0
1
99
/0
7
00
/0
00 1
/0
7
01
/0
1
01
/0
02 7
/0
1
02
/0
7
03
/0
1
03
/0
04 7
/0
1
04
/0
7
05
/0
1
05
/0
06 7
/0
1
06
/0
7
07
/0
1
07
/0
08 7
/0
1
08
/0
7
09
/0
1
09
/0
7

Natural Gas Price ($/mmbtu)

world of business?
• If the gap continues, gas in Asia will face be compared against andbalanced with other sources of energy

Source: Trade statistics of Japan, NYMEX, etc.

Figures in square brackets
are market prices as of
October 23

IEEJ: November 2009

Slide8

Relaxation of Market Strain
LNGマーケットのひずみを緩和する• Local production/local consumption is normally efficient forenergy and manufactured goods, however, centralized
production by proficient producer can also be rational• For normal products, generally price gap other than the
difference in cost of transportation dissolve with time500

1 5 0 ,0 0 0400

1 4 0 ,0 0 0300

1 3 0 ,0 0 0200

1 2 0 ,0 0 0100

1 1 0 ,0 0 0

0

1 0 0 ,0 0 0
20 1 2Average Capacity (m3)

Ave rage Capac ity

20 1 1

20 1 0

20 0 920 0 820 0 7

Un de dic ate d

20 0 620 0 5⇒ Increase of spot vessels; self-controlled
LNG tankers for FOB, faster, larger andmore efficient⇒ The world is round (export terminals
along the Pacific coast of North andSouth America, expansion of the Panama
Canal, shipment across the Arctic Ocean.
Protection from pirates)⇒ New blood of entrants into the
upstream, who can revolutionize
distribution, are awaited

20 0 4

Dedicated

Nu mber of LNG ve ssel

• Actions for relaxing market strain:

Completion Year
Source: Poten & Partners
IEEJ: November 2009

Slide9Index Prices Linkage with Oil Unnecessary?

価格指標、石油リンクは無用かNatural Gas
100%

Oil

5%
4%

90%

Coal

70%

Nuclear

Hydro

9%

6%

7%

9%
18%

3%

5%

11%

9%

25%

21%

19%

40%

40%

25%

26%

80%

57%

60%

32%

50%
40%

44%

30%
27%

20%

35%

10%

17%

pe
ro
Eu

Am

er

ic

a

D
EC
O

JaJ
papa

a
si

ann

7%

0%
.A

i
a
b
u
C
D
I
C
T
J t
W
n
e
t
r
n
B
e
r
B
i
a
b
I
u
T
D
C
W
C
J

Primary Energy Consumption- World Comparison (2008)

NE

We had enough of local index “WTI”, also
anxious about GASPEC• Index is useful if neither complacent nor
permit speculation• Should sellers and buyers insist on linkage
with oil prices?
⇒ Buyers in Asia think of LNG as an oilalternative (The share of natural gas in the
total primary energy demand: 7% inNortheast Asia, while 25% in OECD)⇒ Developing gas market in NE Asia vs.
matured gas market in western countries thathas lost substitutability⇒ At the consumer end, LNG competes withhydro , nuclear and renewable energies(fixed-cost based energy), and coal andpetroleum (variable-cost based energy)⇒
Sellers wish to recover the cost ofinvestment in expensive projects• The Asian LNG market still requires “some”
linkage with oil prices with S-curve•

Source:BP Statistical Review of World Energy, June 2009
IEEJ: November 2009

Slide10

Global Warming - Strong Paradigm Shift

地球温暖化…猛烈なパラダイムシフト•••

There is a strong headwind against fossil fuels
Nuclear power and renewable energies (photovoltaic,
solar, wind, wave, hydro and biomass) are more CO2friendly at LCA base
Even though we support greater use of such energies,
each alternative requires a long time for implementation(the time factor)⇒ Renewable energies vs. nature (density, lack of stability,
suitability, transmission distance and cost-effectiveness)⇒ Large scale facilities can cause further damage to theenvironment, biomass is a trade off to food production⇒ Nuclear power: siting problem, decommissioning, anduncertainties about final disposal•

Is the next role of natural gas, after serving as analternative to oil, a bridge until the era of renewableenergies? What is the true role of natural gas?
IEEJ: November 2009

Slide11

Multi-Variable Equation on CO2 Based on
the Emission Factor
排出係数で作るCO2の多元方程式• Energy saving first and to improve the qualityof life in emerging countries without loweringthat in advanced countries• Decreasing the primary energy consumption(conserving energy resources) or reducing
CO2 emissions (mitigating global warming) ?
• 1.00×C+0.76×O+0.56×G+0.01×H+0.07×
R+0.03×N = CO2• Infinite combination of solutions in case of a
25% reduction of CO2⇒However, if we set a deadline,
H, R, N<α, C, O>β is undeniable

Conceptual illustration

N
R
H
C

N
R
H
C

O

• There are so few real solutions, G=?

O
GGConsumption

CO2

IEEJ: November 2009

Slide12

Realistic Solution on the
SupplySide
サプライサイドでのリアリティのある解決•

Since efforts to expand the use of renewable energies andnuclear power take much time, fossil fuels cannot be abandoned⇒ Coal is abundant at low prices, will draw more attention with therealization of CCS⇒ Petroleum will decline, but will remain having the transport sector as itscore. With the domestic reserve storage capacity (6 months), the quick
availability and the substitutability, petroleum still useful for utility
business⇒ With relative cleanliness, transportability and quick response, natural
gas is important for supporting the networks of distributed power
generators and compensating for unstable outputs from renewableenergies••

How should we best manage presently-available resources?
Natural gas holds “casting vote” because it has the smallest
CO2 emission factor among fossil fuel options
IEEJ: November 2009

Slide13

Energy-saving Potential on the Demand
Side = A New Resource

デマンドサイドでの省エネ、もうひとつの資源
Energy Efficiency in Asian-Pacific Countries

Mtoe

1,879

Toe/mil US$@2000

600

1000
900

500

800
700

400

600
300

500
400

200

300
200

100

100
Japan

Singapore

Australia

Chinese Taipei

Korea

Malaysia

ThailandIndia

0Indonesia0
China

Large energy consuming
countries have thehidden treasure• Buyers should actively
encourage efficient andadvanced use of energy
at the consumer end• Success depends
greatly on how well
Japan's advancedenergy-saving
technologies spreadworldwide•

Blue line: Primary energy consumption per GDP
Green column: Primary energy consumption
Source: IEA Key World Energy Statistics, 2008

IEEJ: November 2009

Slide14

Real Potential of Energy Conservation

省エネの底力••••Promote the use of energy-efficient appliances andspreading of distributed generator networks withrenewable energies
Examples of remarkable progress: fuel efficiency of
automobiles, power generation efficiencies, COP(coefficient of performance) of appliances, innovation offuel cell
Calorific value adjustment in city gas improves quality
and energy conservation in JapanThe CO2 emission factor of natural gas is usuallyreported as 0.56. However, considering that switching tonatural gas results in an energy conservation of at least
10% (both for power generation and for direct
combustion), the real CO2 emission factor is 0.5 or less.
IEEJ: November 2009

Slide15

Immediate Effect of Shifting to Natural Gas

天然ガスシフトの即効性• Cumulating CO2 emission

is an urgent issue for the
global warming• Natural gas, together with
nuclear power, presently
plays a key role in energy• With its excellent
compatibility withrenewable energies,
natural gas will remain an
invaluable partner• Natural gas is not just a
bridge to renewableenergies, but a continuous
road and will not
disappear after 50 years.

CO2 Reduction

CO2 reduction effects ofwidespread use of naturalgas

CO2 reduction effects ofrenewable and nuclear
power plants
10year20yearTime
IEEJ: November 2009

Slide16

Achieving Healthy LNG Supply-Demand
Balance
LNG需給バランス健全化に向けて• Anxieties about supply-demand and the
300
250
200

Planning
LNG Demand Outlook(2008/3)

150
Under Construction
LNG Demand Outlook (2009/3)

100

Existing

50

2019
2020

2014
2015
2016
2017
2018

2009
2010
2011
2012
2013

0
2007
2008

Unit: million ton (LNG)

turbulence in prices will cool down
consumers’ appetite and drive them toalternative options (not necessary bad)• Technological progress is creating an
expectation for a breakthrough in the
expanded use of renewable energies• The economic crisis, caused by energy
and financial sectors, seems to havenormalized the supply-demand balance forthe moment• Globalization of distribution and financetends to lead to simultaneous economical
growth or recession, which are difficult tomanage• Unless action is taken, a crisis in LNG
prices will easily happen again

Outlook for LNG supply in Asia-Pacific Region

Source: IEEJ, Tokyo Gas

IEEJ: November 2009

Slide17

Encouragement of Upstream
Development
上流開発をエンカレッジする• Easy gas is disappearing and upstream

development will be characterized by higher costs
and greater difficulties• Existing reserves are decreasing while the need fordomestic gas is increasing• Buyers will encouraged development of small-scale,
deep-sea and remote offshore projects andconsequently extend the R/P years• Expectation for LNG-FPSO and small-scaleliquefaction• Expectation for new sources and unconventionals⇒ The US may quickly meet 50% of the demand with tight-sand,shale and CBM⇒ Unconventional resources exist in various countries, thedevelopment of which will soon offer 200 R/P years, and LNG
from unconventionals are also under review⇒ Japan has high expectations for indigenous methane hydrate

Large-scaleconventional typeprojects
More difficult projects
with conventional
engineering(deep-sea, smaller-scale,and remote projects)

200 years
Non-conventional projects(tight-sand, shale, CBM and MH)

IEEJ: November 2009

Slide18

Involvement in the Value Chain

バリューチェーンへの進出• Sellers and buyers must come to mutual agreements that are

justifiable and clearly understood by both parties⇒ Development of projects cannot be actualized if buyers simply
demand lower prices without taking risk
⇒ Additional demand will not be cultivated if the sellers expect
exceptionally high profits• Increase buyers’ advancement into the value chain(transportation, upstream) to take on a appropriate share of risk
and increasing flexibility• Buyers must always remember the need for demand-side
management.
E&P,
Liquefaction

Shipping

Regas Terminals

Pipelines

Customers

IEEJ: November 2009

Slide19

Impartial Outlook on the Trend forJapan's LNG Trade
日本LNGトレンドの正しい見方• Predictions during bubble (①) and after⇒ The 20% drop in demand from the previous year
reported for the first half of FY2009 is largely becauseof a comparison against the bubble period in the firsthalf of FY2008⇒ A similar comparison between the second halves ofthese fiscal years will give a very different impression

100

64Mton(forecast)

80

②

70
60

③

50
40
30

• Maximum share of spot will be 10% or lower

20• What is the most impartial prediction? We

10

Power
Power
Generation
Generation

City
City gas
gas

0
2 00 02 00 1
2 00 22 00 32 00 42 00 52 00 62 00 72 00 82 00 92 01 02 01 12 01 22 01 32 01 42 01 5shall carefully examine how past trends canbe extrapolated into the long-term future (②)①

90

LNG Demand (Mton)

recession (③)are often strongly
psychologically biased (Where is thereasonable middle?)• We should not be misguided by uninformedinterpretation of statistics

FY
Source: Our estimation based on the Tradestatistics of Japan, etc.
IEEJ: November 2009

Slide20

Japan's Strategy for Growth

Real GDP(Japan)(FY1990:100)
Real GDP(China)(FY1990:100)
UMCSI

600
500
400
300

Effect ofgetting up

200
100

2008

2006

2004

2002

2000

pillars of the economy in Japan, is notexpected to grow much
• However, Japan still has high potential needfor natural gas as an alternative to otherfuels.
• For the maximum deployment case of
nuclear power plants, the government's
energy supply-demand outlook predicts adrastic decline in the demand for natural gas.

1990

• Domestic demand, which is one of the two

1998

0
1996

*: University of Michigan Consumer Sentiment Index

700

1994

growth, and in USA, as the major. Both are
indispensable for the growth of Far East(especially, Japan).
GDPJapan ∝ GDPChina + UMCSI* ⇒gradual recovery of the Japanese economy.

Evolution of substantial GDP in Japan and China,
and the index of buying interest of U.S. consumers

1992• The trend in China, as a leader in industrial

日本の成長戦略

Outlook for LNG Demand in Japan
Unit: million oilequivalent KL

Business-as-usual case

120
100

?

80

Power
Power
Generation
Generation

60
40

City
City gas
gas

20
02005 Actual 20072020 deployment
2030 case
Maximum

Source: Our estimation based on the proposed revision to theLong-Term Energy Supply and Demand Outlook, August 2009
IEEJ: November 2009

Slide21

Japan's Near-term Recovery
40,000②
CAGR: 4.4%
35,00030,00025,000

13
20

12
20

11
20

10
20

09
20

20

08

20,00007•

Gas supply plan in Japan (City gas business)

20•

A surprising V-shaped recovery
is unlikely and the actual
pattern of recovery is expected
to be almost L-shaped
Even if gas demand grow by anaverage of 4.4% annually fromFY 2009, recovery to the peakdemand (observed in thesecond half of FY2007 and thefirst half of FY2008) is expected
to take at least 4 years
The tightening of environmental
regulations in Japan and otheradvancedcountries
may
become meaningless if itcauses industries to migrate toother countries

Gas Demand in Japan(million m3, 46MJ/m3)•

近未来日本の回復

FY

IEEJ: November 2009

Slide22Preparing for Recovery
•

•

•
•

The mountainous topography of Japan makes
transportation between cities difficult. For bulk
transportation, marine transportation has historicallyenjoyed dominance.
While the demand for natural gas is expected togrow, we face many challenges, not only withsecuring supply sources but also constructing
pipelines in JapanAs a quick measure, we are expanding the use oftransportation by trucks and coastal vessels
As a result, Japan has as many as 27 LNG terminals
in its relatively small territory, and there are still manyplans to construct additional LNG terminals (mostly
small- to medium-scale)

回復への準備: Operating (27): Planned (8): Tokyo Gas

IEEJ: November 2009

Slide23

We are all in “the same boat”

正しいメッセージ：皆同じ船に乗っている

Considering the whole situation, sellers and buyers should cooperate toestablish stable supplies and surely increase the value of natural gas•
Players in energy markets should understand the urgency of conserving
resources and taking environmental actions, and should intelligently
manage available resources•
Buyers in the Asian market, traditionally seen as less vocal, should show
greater presence and begin to speak out more on behalf of their customers.
⇒ Countries with a long history of LNG trading should assert themselves basedon their proven achievements and creditworthiness⇒ Emerging countries should assert themselves based on their purchasing
power and growth potential•
Sellers should make proposals that capture the needs of buyers•
A business axiom in Japan is that we must ensure “benefits to three”「三方良」, that is, benefits to society, benefits to the business partner, andbenefits to oneself in this order. Sun Tzu in China once said that even bitter
enemies sometimes find themselves in the same boat (forgetting theconflicts and together tackle the crises at hand) 「呉越同舟」•

Contact : report@tky.ieej.or.jp

IEEJ: November 2009