IEEJ: April 2011

Special Bulletin
A Japanese Perspective on the International Energy Landscape (39)

April 15, 2011

Future Prospects for Natural Gas Market under the Prevailing New Situation
Ken Koyama, PhDDirector
Strategy and Industry Research Unit
The Institute of Energy Economics, Japan

The international energy market has entered a turbulent time since the beginning of 2011. It
is no exaggeration to say that world-shaking events have been closely linked with energy problems
to continuously produce great impacts. The first factor behind the turbulence is the growing tensions
in the Middle Eastern and North African situation accompanied by crude oil price spikes. The second
factor is the Great Eastern Japan Earthquake combined with the Fukushima Daiichi Nuclear Plant
crisis. Particularly since March, most energy news headlines in the world have been related to eitherof the two big factors in various ways.
These two major factors are likely to remain very significant and continue attracting global
attention. But I feel that a new attention-attracting problem will grow more significant in theinternational energy market. The problem is the expansion of natural gas demand that may lead tochanges in market and supply/demand environments.
Natural gas has increased its presence in the international energy market, as indicated by theInternational Energy Agency’s World Energy Outlook 2010 that described natural gas as entering “agolden age.” Behind the growing presence has been the U.S. shale gas revolution that has heightened
expectations on abundant unconventional gas resources throughout the world. Apparently, however,
the growing tension in the Middle Eastern and North African situation and the Fukushima Daiichi
Nuclear Plant crisis may work to further increase expectations on natural gas. The growing tension
has destabilized the international oil market, prompting crude oil prices to shoot up and deviate fromnatural gas prices particularly in the United States. The nuclear crisis has stimulated antinuclear
sentiment.
Of course, future developments in the international energy market under the new situation
are very uncertain. Depending on future developments involving various uncertain factors, theworld’s energy supply/demand structure could deviate far from that was projected in the recent past.
In pursuing balanced measures to solve complicating energy security and global warming problems
while maintaining economic growth, the world may have to adopt all useful options, including the1IEEJ: April 2011

enhancement of energy conservation, the increased use of renewable energies such as solar energy
and wind power, the effective, intensive utilization of coal with advanced technologies, the efficientutilization of oil as a convenient, economically efficient energy source, and the use of nuclear energy
based on safety enhancement and confidence restoration efforts. All of these options are important.
Under the current international energy and environment situation, however, expectations may
undoubtedly increase on gas as an energy source that can make significant quantitative contributions
to satisfying global energy demand that is likely to expand substantially.
In a specific case expected for the immediate future, demand for natural gas, particularly
LNG, is likely to expand by at least several million tons in Japan this year. Toward this summer
when electricity demand will increase, Japan is required to expand electricity supply to cover power
generation capacity losses on the disaster. Most of the expansion may depend on oil and LNG
thermal power generation. Particularly, LNG thermal power generation may play a significant role inexpanding electricity supply. In contrast, oil thermal power generation played a greater role incovering a capacity drop on the suspension of operations at the Kashiwazaki-Kariwa nuclear power
station hit by the Chuetsu Earthquake in 2007. Reasons for the expected shift of emphasis to LNG
include the larger LNG power generation capacity, skyrocketing crude oil prices which resulted in
improved economic competitiveness in LNG prices because of the characteristics of LNG pricing
and advantageous characteristics of LNG as a clean fossil fuel.
How will the world market react to the growing LNG demand? The answer to this question
attracts attention next. My answer is that the world LNG market now has sufficient supply capacity
and can absorb the expected demand increase. But any large demand expansion is expected togradually affect the overall supply/demand balance. Tightening the focus, we may have to pay
attention to how the supply/demand environment and prices would change in the spot LNG market
as a last resort to cover the demand increase.
How will the world gas market develop or change over a medium to long term? This is alsoa major question asked under the new situation. As noted earlier, various scenarios are conceivablefor the international energy market. Under the new situation, representative economic institutes may
be required to pay attention to scenarios in which natural gas demand would increase faster thanearlier expected. How will the world gas supply/demand balance change in the future? Will gas
increase its economic efficiency advantages over rival energy sources under the changing
supply/demand balance? Will the conversion or integration of the three major markets (Europe, theUnited States and Asia) make progress for natural gas that is expected to play a greater role thanother energy sources? Thus, there are many problems or challenges for natural gas. In 2011, naturalgas market under the new situation will inevitably become a very important topic in anticipatingworld energy supply/demand over a long term. I will definitely try my best to deepen informationcollection and analysis on natural gas market.

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IEEJ: April 2011

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