IEEJ：July 2016ｃ○ IEEJ 2016

Special Bulletin
A Japanese Perspective on the International Energy Landscape (277)June 24, 2016

At the 2016 Pacific Energy Summit
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn June 22 through 24, the 2016 Pacific Energy Summit took place in Singapore. The
annual conference has been organized by the U.S. think tank National Bureau of Asian Research
since the first one held in Tokyo in 2009. The Singapore conference was the seventh following thosein Tokyo, Jakarta, Hanoi, Vancouver, Seoul and Beijing. Under the theme of “Sustainable Future:Energy and Environmental Security in Times of Transition,” participants in the Singapore
conference discussed Asia Pacific energy challenges under the new situation including crude oil
price plunges, energy market oversupply and the Paris Agreement at the 21st Conference of Parties
to the U.N. Framework Convention on Climate Change. The conference consisted of six sessions
and two roundtable meetings, with about 120 people participating from Western, Asian and othercountries on a registration basis. In the following, I would like to summarize particularly impressive
points in the vigorous discussions at the Singapore conference.
Focuses of the discussions at the Summit included how to select energy under theabovementioned new situation. A particularly interesting topic in this regard was how to position gas
or liquefied natural gas. While some years have passed since the International Energy Agency cameup with the concept of “a Golden Age of Gas,” we have not seen the realization of the Golden Age.
Gas is the cleanest among fossil fuels, featuring stable supply and abundant resources under theongoing shale revolution. Therefore, gas was globally expected to play a greater role in the futureenergy mix. Nevertheless, the United States, where gas prices have substantially dropped to around$2 per million British thermal unit under the shale gas revolution, remains the only energy market
where gas demand has continued rising robustly with a bright future seen for gas. Asia and Europe
are plagued with various challenges regarding future gas demand.
What are the challenges regarding present and future gas demand? Discussions at theconference covered various problems that can be roughly divided into those related to the pricecompetitiveness of gas and those involving the future courses of energy sources competing with gas.
Since crude oil prices plunged in the second half of 2014, Asian LNG prices linked to crude oilprices started to drop sharply. For example, the average LNG import price for Japan in May stood at$5.89/MMBtu. Amid the globally loose supply-demand balance for gas and LNG, spot LNG prices
reflecting the supply-demand balance have declined further. The latest benchmark spot LNG pricefor Northeast Asia was around $5/MMBtu. Such low prices are usually expected to increase gas’s
competitiveness and stimulate gas demand. However, the actual situation has not necessarily met
such expectations. One of the largest reasons for the current situation is a substantial price drop forcoal that competes directly with gas. Another problem is that low carbon prices seen typically in the1IEEJ：July 2016ｃ
○ IEEJ 2016

European Union market have made it difficult for gas to take advantage of its environmental
characteristics to become more competitive. These problems differ depending on regional conditions,but are almost common for Europe and Asia.
Another important point is that multiple energy sources have emerged as competitors
against gas due to various fundamental, policy and institutional factors. The first factor is Asia’s richendowment of coal that now has very strong price competitiveness. In many Asian countries whereelectricity demand is expected to increase in line with economic growth, great expectations areplaced on coal as a competitive base-load electricity source. As a matter of course, moves to restrict
coal consumption under measures against climate change and air pollution are growing in the world
including Asia. However, market realities are not necessarily advantageous for gas exposed tocompetition from coal. In countries where electricity market deregulation is implemented, an urgent
challenge is to secure competitive power generation sources. In this respect, coal is often selected asa major source to generate electricity in many countries including Japan.
In Asia, nuclear energy cannot be ignored. In Japan as the world’s largest LNG importer,
the restart of nuclear power plants greatly affects gas demand. In Asia, China, India and othercountries are proceeding with numerous nuclear power generation plans. Progress in these plans may
also affect gas demand growth. If nuclear plans fail to make progress on schedule or some nuclear
troubles come, however, demand may grow for gas or LNG as an alternative to make up for the
reduced electricity supply from nuclear energy. We must take note of this possibility.
Another interesting point in discussions at the conference was the relationship between
renewable energy and gas. In many Asian developing countries other than China, solar and windenergy development has just begun. However, each Asian country has plans to use proactive policy
support for promoting renewable energy. There had been a view that gas power plants with excellent
capacity to adjust supply and demand in flexible manner may be well combined with intermittent
renewable energy electricity sources. However, European and other cases indicate that renewable
power generation’ massive flow into a competitive wholesale electricity market lowers wholesale
electricity prices, pushing out gas power generation according to the system of “merit order”. As aresult, gas demand declines. Participants in the conference argued that renewable energy’s spread inAsia has potential to lead renewable energy to compete with gas. While competition conditions
differ from country to country, an interesting point is that coal, nuclear and renewable energy meet
the abovementioned competition conditions in Japan, making future gas/LNG demand uncertain.
What is required for gas with excellent characteristics to play greater roles to enter agolden age? The basic problem is how to improve gas’s price competitiveness. In this respect, how
to use carbon prices to this end may be considered in many countries. An argument made at theconference was that a flexible and well-functioning gas market should be developed to enhance gas’s
convenience and overall competitiveness. There is a view that such development may also contributeto improving gas supply security. Another possible view is that market system designs, regulations
and other policy initiatives may be ultimately required to contribute to sound gas market
development and expansion. This may mean that appropriate policy intervention as well as market
dynamics may be required for achieving the best energy mix including gas.
2IEEJ：July 2016ｃ○ IEEJ 2016

Contact: report@tky.ieej.or.jp
The back issues are available at the following URL
http://eneken.ieej.or.jp/en/special_bulletin.html

3