IEEJ：February 2016○ｃ IEEJ 2016

Special Bulletin
A Japanese Perspective on the International Energy Landscape (257)

February 4, 2016

Prospects for Future Oil/Energy Situation: International Panel Discussion
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn February 4, an international panel discussion took place at Nikkei Hall on how to view thefuture oil/energy situation, cosponsored by JX Nippon Oil & Energy Corporation, JX Nippon
Research Institute, Ltd. and the Institute of Energy Economics, Japan. Panelists at the meeting wereFACTS Global Energy Group Chairman Fereidun Fesharaki, Sierra Oil & Gas Chief Executive
Officer Ivan Sandrea, JOGMEC (Japan Oil, Gas and Metals National Corporation) Chief

Economist Takayuki Nogami and I. Nikkei Shimbun Senior Staff Writer Yasuhiro Goto served
as moderator. In the 25th international panel discussion, participants discussed the future oilsituation, liquefied natural gas market trends, the prospects for Japan’s oil industry and othertopics in consideration of current international oil and LNG markets featuring low prices,
covering a wide range of issues. In the following, I would like to summarize the points that wereparticularly interesting to me.
Regarding oil market and price prospects, the panelists roughly agreed that the oil market willremain weak for the immediate future as excessive supply is difficult to eliminate, that this year’s
crude oil prices will remain in a main range of $30-50 per barrel, that crude oil prices may further
decline in the first half of this year and that supply and demand will be rebalanced in the second half.
Interestingly, the panelists shared the view that crude oil prices may rise back to a $70-80/bbl range
over a medium term through around 2020 from the current low levels that would not be sustainable.
As explained by most of the panelists, a factor behind the outlook is that global oil demand may
continue to firmly increase unless destabilizing factors such as a global recession emerge. If oil
demand is assumed to increase by an annual average of 1.2 million barrels per day, global demand
may expand by a total of 6 million bpd in cumulative term by 2020 from the present level. The
demand increase will gradually eliminate the present supply surplus. Given that a natural output
decline at existing oil fields in operation would have to be covered, supply will have to come fromhigher-cost oil fields, requiring price levels to increase back to the abovementioned levels, according
to some of the panelists.
Nevertheless, various uncertain short-term factors exist in regard to global oil demand growth.
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In this respect, the panelists discussed the possibility that oil demand growth may decelerate due tothe Chinese economic slowdown. China’s economic deceleration may gravely affect not only crude
oil prices but also overall energy and commodity markets and may be a serious problem that cannot
neglected for the whole of the world economy. Whether China would make a soft landing on the“New Normal” may remain a matter of concern to the world.
Regarding oil supply problems, it was dominantly pointed out that low oil prices are leading tosharp investment cuts that could impose tough constraints on future supply growth. In some cases,
the investment cuts could lead to a future supply shortage, boosting crude oil prices again. While
investment cuts for large conventional oil development projects featuring massive initial investment
may affect supply over a medium to long term, U.S. shale oil may feature a shorter investment andsupply cycle. We must take note of the fact that long and short cycles coexist now. At a time when
the international oil market has lost functions to manage surplus supply capacity and adjust supply
and demand, it may be inevitable for crude oil prices to remain unstable at low levels. The
possibility of such functions being restored cannot be denied. In the panel, there was discussion thatwhen, how and whether the functions could be restored would be very significant for analyzing
crude oil prices.
As for natural gas problems, the panelists focused on the Asian LNG market. The market is
now amid a supply glut as LNG projects of which final investment decision were made underpreceding high prices are reaching the production start-up stage with LNG demand being sluggish.
The current situation is likely to continue until around 2020, according to some of the panelists.
Under the recognition that buyers’ choices and actions are decisively important during a supply glut
or a buyer’s market, discussion was made that major Japanese LNG buyers’ strategies have a major
opportunity to determine the future direction of the Asian LNG market. In addition to the traditional
system to link LNG prices to crude oil prices, various options have emerged, including those to link
LNG prices to U.S. Henry Hub, spot LNG prices and others. Various initiatives have been taken toincrease the flexibility of LNG supply. The next several years would be important for market
participants’ initiatives to increase LNG’s competitiveness against other energy sources and increase
supply flexibility to greatly develop the whole of the market in Asia.
The panel discussion comes at a critical timing when an expected structural downward trend foroil demand in Japan and present low oil price levels are prompting the Japanese oil industry to berealigned through large-scale integration. The realignment was interpreted at the discussion as
designed to promote the greater rationalization or disposal of surplus refining capacity or to launch
initiatives for future growth potential. New business areas on which expectations are placed include
new business opportunities under the domestic electricity and gas market deregulation, an expansion
into growing Asian oil and gas markets including the Association of Southeast Asian Nations and theenhancement of upstream projects. However, these areas are not easy for launching business but2

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rather very challenging. Oil companies must enhance their business administration in order toimplement such tough challenges. In this sense, industry realignment may be very significant. I hopethat the oil industry as supplier of a mainstay Japanese energy source would take on challenges andmake achievements.

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