IEEJ：August 2016

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Special Bulletin
A Japanese Perspective on the International Energy Landscape (282)

July 29, 2016

Japanese and Global Energy Outlook for 2017
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn July 26, the Institute of Energy Economics, Japan, opened the 423rd forum on research
work where a report was given on the economic and energy outlook of Japan through FY2017 andthe latest international oil, natural gas, oil and renewable energy situations. As indicated by the title,
the report analyzed and forecast the oil, natural gas, coal and renewable energy situations through2017 and presented a short-term Japanese energy supply and demand outlook based on the global
energy situations. The following summarizes key points of each market outlook and provides anoverall short-term outlook through 2017.
First, we expect that the international oil market will see gradual rebalancing of supply anddemand through 2017 with moderate upward pressure being exerted on crude oil prices. We forecast
that global oil demand in 2017 will post a moderate increase of 1.1 million barrels per day driven bygasoline demand growth mainly in the United States, China and India. Meanwhile, oil production inoil producing countries outside the Organization of the Petroleum Exporting Countries will remain
weak as U.S. shale oil production continues to stagnate. OPEC production has remained and willremain high with declines in Nigeria, Libya and Venezuela offset by increases in major Middle
Eastern OPEC members. Supply and demand rebalancing will lead crude oil prices to moderately
rise. The average West Texas Intermediate crude futures price will rise from $40 per barrel in thefirst half of 2016 to $49/bbl in the second half and $54/bbl in the whole of 2017. However, themarket has various turbulence and disturbance factors that would lead crude oil prices to fluctuate
wildly. Downside risks for crude oil prices include economic and financial destabilizing factors suchas the impacts of Brexit. There are also some factors to cap crude oil prices, including very high oil
inventories at present and a possible brake on the shale oil production fall.
Second, the international natural gas market will also go in the direction of rebalancingover a medium term as is the case with the oil market, mainly due to the impact of current lowgas/LNG prices on reduction in investment on the supply side.

However, we expect that it would

be difficult to eliminate oversupply through 2017. A factor behind the expectation is that thepresence of strong competition from coal, renewable energy and nuclear in the power generation
sector is leading gas and liquefied natural gas demand to grow more slowly than earlier expected. A
golden age of gas in which abundant gas supply meets a smooth, robust increase in gas demand has
been seen only in the United States. Gas demand is struggling to grow in Asia and Europe. In theAsian LNG market, demand is growing more slowly than expected earlier. Meanwhile, LNG
projects that were subjected to investment decisions amid high prices will launch production one
after another. As a result, oversupply will continue or accelerate until 2017 (or a later year). As Asian1

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LNG prices for long-term contracts are basically indexed to oil prices, however, the average price ofLNG landed in Japan will fall from $7 per million British thermal units in the first half of 2016 to$6.6/mmbtu in the second half and rise back to $7.4/mmbtu in the whole of 2017. On the other hand,
Asian spot LNG prices reflecting supply and demand will remain around $5/mmbtu through 2017. A
gap between long-term LNG contract and spot LNG prices in Asia will widen, exerting various
influences on discussions or negotiations between LNG sellers and buyers.
Third, coal prices are stopping their downtrend since 2011 and signal an upward turn. Thisis because coalmine shutdown and coal production suspension amid prolonged low prices and coalmining companies’ production cuts have reduced supply, with a decline in Chinese imports coming
to a halt after making great contributions to lowering prices on the demand side. While coal demandremains weak, slumping production through coalmine shutdown is leading imports to stop declining.
Although both the supply and demand sides have various uncertainties, prices are likely to gradually
go upward. Spot prices for steam coal for power generation, which slipped below $50 per ton in
January 2016, are likely to rise back above $55/t in the second half of 2016 and to around $60/t in2017. Similarly, spot coking coal prices are likely to rise from levels below $95/t in the second halfof 2016 to those above $95/t in 2017.
Fourth, renewable energy has rapidly expanded so far thanks to policy support and decline
in power generation cost. At present, the expansion is shifting from Europe to Asia. In Europe, theexpansion is decelerating as the feed-in-tariff system has been modified to hold down an increase innational burden through surcharge hikes and address the integration of wind and solar power
generation into the electricity market. In European and other deregulated electricity markets, massive
renewable energy (wind power and solar photovoltaics) expansion has brought about a decline inwholesale electricity prices, reducing capacity utilization ratios and profitability for fossil fuel power
plants. Capacity mechanisms are being introduced or considered to secure operating and reserve
supply capacity for stable electricity supply. Japan should learn from these changes. In Japan, power
generation capacity authorized under the FIT system has reached 87 gigawatts at the end of March
2016, of which only 19 GW is in operation. As operation makes progress, operating capacity isexpected to reach 65 GW at the end of FY 2017. If all the authorized capacity of 87 GW is operated,
the total surcharge amount in 20 years will swell to 56 trillion yen (or 3.2 yen per kilowatt-hour) andhow to hold down the national burden will become a challenge. Therefore, how to address the issues
related to non-operating portion of the authorized capacity and how to realize cost-efficient supply
systems for growing renewable energy will become important.
Fifth, Japan’s primary energy supply is likely to continue a slight decline mainly due toenergy efficiency improvement as the economy grows at an annual rate of a little less than 1%
through FY2017. In that process, Japan will continue a structural change in which non-fossil energy
demand would grow on the restart of nuclear power plants and the expansion of renewable energy
with oil and gas demand falling. Sales for electricity and gas among energy sources will expand
while fuel oil sales will continue declining due to the sustained improvement of vehicle fuelefficiency and the restart of nuclear power plants leading to a decline in fuel oil sales for power
generation. In the baseline scenario where 19 nuclear reactors will be restarted by the end of FY2017,
fossil fuel import bill in FY2017 will decline by 4.7 trillion yen from FY2010, with carbon dioxide
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emissions falling by 45 million tons. Due to a FIT related cost expansion, however, the unit
electricity cost including the FIT cost in FY2017 will increase by 1.1 yen/kWh from FY2010. A
sensitivity analysis using lower and higher nuclear power generation scenarios indicates that fossil
fuel imports, CO2 emissions and the unit electricity cost in the higher nuclear power generation
scenario will be far lower. We attempted to indicate the importance of analyzing the impact ofnuclear power generation on a region-by-region basis as well as a nationwide basis. The analysis
indicates that if a 1 GW nuclear reactor is closed for one year in a region with power generation
totaling 100 billion kWh, fuel costs will increase by 60 billion yen from a case in which the reactor
is in operation and the region’s unit electricity cost will increase by 0.4 yen/kWh or about 10-foldfaster than on a nationwide basis.

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