I EEJ： August 2014ｃ○ IEEJ 2014

Special Bulletin
A Japanese Perspective on the International Energy Landscape (183)August 18, 2014

Discussion at the “2014 North Pacific Energy Dialogue in the Shale-Gas Era”
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
On August 13-15, the “2014 North Pacific Energy Dialogue in the Shale-Gas Era” took
place in Honolulu, Hawaii. The conference was cosponsored by the Honolulu-based East-WestCenter and the Korea Energy Economics Institute of South Korea. As indicated by the conference
title, some 30 energy experts from the six North Pacific countries -- Japan, the United States, China,Russia, South Korea and Canada -- frankly exchanged views on energy problems and challenges ofthese countries and the entire North Pacific region under the ongoing shale revolution. Major topics
included not only the impacts of the shale revolution but also the Fukushima nuclear accident'simplications for the energy situation and policies. The following are impressive points of thediscussions for me:
First, participants reaffirmed that various uncertainties and challenges exist in regard toenergy supply and demand conditions and future energy markets in all these countries. For example,discussions involving Japan focused on nuclear energy and energy mix problems after theFukushima accident. Conference participants were greatly interested in the pending restart of nuclear
power plants and the future position of nuclear energy in Japan. Intense discussions also took placeon the accident’s impact on Japan's fossil fuel demand (including liquefied natural gas).
Regarding prospects for future fossil fuel demand, discussions focused on coal as well as
natural gas. Expectations are predicted to grow on coal as a competitive base load electricity source
in Japan where nuclear power plants are left offline and in South Korea where the position of nuclear
energy has been lowered. Meanwhile, China, where coal has a dominant position as a major
electricity source, has begun to enhance efforts to reduce its dependence on coal in response to theserious air pollution problem.
As a matter of course, we must give considerations to the impact of global warming
prevention measures and of the air pollution problem on coal demand. In addition to moves incoal-using Asian countries including Japan, China and South Korea, discussions at the Honolulu
conference covered the U.S. Environment Protection Agency's toughened restrictions on coal, U.S.
government-backed financial institutions' curbs on financing for overseas coal projects and otherfactors that could affect coal demand in a wider range of regions. Some participants in theconference pointed to the importance of clean coal technologies for effective use of abundant coalresources. Many noted that a close watch should be kept on the coal problems in the future.
Nevertheless, the main focus of discussion at the conference was natural gas. In both Asia
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and the United States, gas demand is expected to powerfully expand over a long term. Japan's gas
demand was forecast to fall from the present level due to the expected restart of nuclear power plants
over a medium term but turn upward again over a long term. Conference participants noted that
South Korea's gas demand had grown faster than projected in the government's long-term plan.
Some pointed out that China would substantially expand gas demand in the future as the gas use
expansion is promoted as one of measures to address air pollution.
An interest finding at the conference was that natural gas/LNG supply was dominantly
expected to increase even faster than demand in the region. Many participants projected U.S.
licensed LNG exports to top 80 million tons, despite some uncertain factors. Interestingly, many U.S.
participants in the conference were bullish about LNG exports. Any sharp increase in U.S. LNG
supply, which features a pricing formula different from the Asian formula and greater flexibility,
could change the Asia-Pacific LNG market dramatically and structurally. One participant in theconference noted that ongoing changes in the European market including the pricing formula could
come to Asia.
It is not just the United States that has the potential to expand natural gas supply. Canada isconsidering more than 10 LNG projects. Despite high initial investment costs, cost inflation andother problems, several advantageous projects among them are expected to be realized to provide
new LNG sources for Asia, as noted in the conference. Russian moves are also important in thisregard. While Russia's confrontation with Western countries is growing more serious over theUkraine situation, Russia is now required to look eastward to the Asian market. Symbolizing
Russia's “Look East” strategy was its contract signed with China in May on massive natural gas
supply. Many participants in the conference noted that Russia could drive the strategy further.
One participant in the conference said gas suppliers were waging a “gas war” over theexpanding Asian market. I interpret this view in two ways. In one way, the “gas war” means a purecompetition between various gas supplying countries for Asian market shares. In the other way, thewar can be viewed as being waged between the United States and Russia over the Asian market
while they confront each other over the Ukraine situation. In the past, the two countries had neverconfronted each other over the gas market. But the shale revolution and the current Ukraine situation
can be interpreted as having led them to compete in the gas market. Such broad perspective may
grow more important for anticipating the future Asian gas/LNG market.
Another interesting point about the conference is that participants gave various views on
Western countries' toughened Russian sanctions that have encouraged Russia to accelerate its
strategic approach to China. For Russia, China may now be viewed as an alliance partner regarding
not only energy but also financing, technology and labor (in some cases). We would have to analyze
what implications Russia's growing dependence on China would have for future international
relations and energy geopolitics.
The six countries surrounding the North Pacific include key energy producers andconsumers that have mutually complementary relations. But their future relations are unforeseeable,given various political, economic and energy challenges as well as uncertainties. The six-country2

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dialogue platform must be expanded to address the uncertainties.

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