IEEJ e-NEWSLETTER
No. 225(Based on Japanese No. 220)

Published: January 24, 2022
The Institute of Energy Economics, Japan(As of January 21, 2021)

Sources:(1) DOE-EIA(2) Investing.com

Sources:(1) Ministry of Finance "Japan Trade Statistics"(2) Ministry of Economy, Trade and Industry (arrival month basis)(3) Estimated by World Bank (Netherland Title Transfer Facility)(4) DOE-EIA, NYMEX (Front-month Futures)

Source: x-rates.com

Sources:(1) Finance. Yahoo.com(2) Investing.com

Contents
Summary【Key Points for 2022 (2)】
I. The Domestic Energy Industry and the Challenges It Faces
1. Oil Industry
2. Electricity and Gas Industries
II. International Politics, Geopolitics, and Energy
1. Biden Administration Facing Hardships Heading into the Mid-terms
2. EU: Focus on Surging Energy Prices and Gas Market Decarbonization
3. China: Stability as Top Priority ahead of the Autumn National Congress of CPC
4. ME: Oil Producers Start Moving toward Net-Zero Emissions
5. Russia: Putin Leans toward China amid Standoff with the West1

Summary【Key Points for 2022 (2)】
I. The Domestic Energy Industry and the Challenges It Faces
1. Oil Industry
Oil demand is expected to recover after the Covid-induced decrease, but there are many
uncertainties. The structural decline in oil demand could accelerate amid the current trend
toward decarbonization. Progress in the structural business reform efforts of major wholesalecompanies deserves attention.
2. Electricity and Gas Industries
Spot LNG prices are soaring, together with wholesale electricity prices, which could havean impact on electricity and gas retailers. System and policy design will be considered forboth electricity and gas businesses to ensure consistency with decarbonization.

II. International Politics, Geopolitics, and Energy
1. Biden Administration Facing Hardships Heading into the Mid-terms
The November mid-term elections are expected to be challenging for the Democratic Party,
which holds a historically slim majority in both houses. Voters are greatly frustrated with
inflation. Attention must be paid also to any revision to climate measures in the US.
2. EU: Focus on Surging Energy Prices and Gas Market Decarbonization
EU regulators will issue keenly-awaited analysis and assessment reports on the issue ofhigh energy prices in April. Other issues include the decarbonization of the gas market andthe moves to develop a hydrogen market and industry.
3. China: Stability as Top Priority ahead of the Autumn National Congress of CPC
Politics will be a key issue in 2022, when the five-yearly National Congress of CPC will beheld. As the leadership places top priority on stability, its success in meeting the dual goals of
decarbonization and a stable energy supply deserves attention. Meanwhile, it remains to be seen
whether sales of NEVs exceed 5 million units.
4. ME: Oil Producers Start Moving toward Net-Zero Emissions
Middle Eastern oil producing countries have begun to declare their net-zero emission targets,
starting with Gulf countries. Covid-19 has been contained and oil prices have recovered, but
the economic outlook is uncertain due to the omicron variant.
5. Russia: Putin Leans toward China amid Standoff with the West
Amid tensions with the West over Ukraine and other issues, Russia is strengthening ties
with China, which is also wary of the West’s “coalition” against it. 2022 will be another toughyear for Russia as its growth is expected to slow.

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I. The Domestic Energy Industry and the Challenges It Faces
Oil Industry
Akio Ichihara
Board Member
President of The Oil Information CenterWith the economic recovery from the Covid-19 pandemic, Japan’s fuel oil demand for the
first half of FY2021 (April–September) measured 71.18 million KL, up 3.2% year-on-year.
Demand for jet fuel increased sharply by 30.6% year-on-year, while gasoline and light oil also
showed signs of recovery, growing by 1.7% and 1.8%, respectively. Refineries had anavailability factor of 68% in the first half of the fiscal year, up 6% year-on-year.
The domestic petroleum product market has been following the fluctuations in benchmark
oil prices with a two- to three-week delay. In 2021, the domestic gasoline price began the year
in the upper 130 yen range per liter in January and continued to increase with oil prices as the
economy recovered from the pandemic. The price climbed for 10 consecutive weeks startingfrom the end of August, marking an all-year high of 169.0 yen on November 8, the highest inseven years since August 2014. As the price threatened to exceed 170 yen, the Ministry of
Economy, Trade and Industry established an emergency remedial project to cope with thesurging price by providing wholesalers with funds for curbing wholesale price increases, toprevent further rises in oil prices from hurting the economic recovery.
While oil demand is expected to recover from the Covid-induced decline in 2022, there isgreat uncertainty as this will depend on the spread of the omicron variant and whether
therapeutic agents become available. Meanwhile, domestic fuel oil demand has alreadydecreased by 38.5% between the peak in FY1999 and FY2020, and as efforts to attain carbon
neutrality accelerate, this structural decrease in demand is likely to accelerate in the medium tolong term.
The Sixth Strategic Energy Plan positioned oil as the “energy supply of last resort” in adisaster, as did the previous Plan, and required the oil industry to strengthen the fuel supply
system so that it can function in emergencies as well as in normal times, while promoting
measures to decarbonize.
Major oil wholesale companies have long been transforming their businesses, anticipating adrastic decline in oil demand from the 2040s. However, with decarbonization proceeding fasterthan expected, they are also working on structural reform of their businesses, including aiming
to attain carbon neutrality for their own emissions by 2040 or 2050, concentrating investments
on offshore wind power and other renewable energies and hydrogen-related projects, andutilizing existing service stations as a new regional infrastructure that caters to the needs of eachregion.
Meanwhile, even in the transition phase of energy headed towards decarbonization, theindustry will still need to fulfill important roles, including securing stable supplies and supply
chains for petroleum products, including for depopulated areas and remote islands, and a
resilient supply structure in the event of disasters.

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2. Electricity and Gas Industries
Junichi Ogasawara, Senior Research Fellow, Manager
Electric Power Group
Assistant Director, Electric Power Industry & New and Renewable Energy Unit

In 2021, many electricity retailers were hit hard by the soaring day-ahead spot electricity
price in January. The day-ahead price has been on the rise again since around October due tohigh LNG prices. In western Japan, some thermal power plants have been reportedly
experiencing fuel constraints since early November due to an increase in LNG-fired power plant
operation caused by unscheduled outages of coal-fired power plants, and an increase in oil-fired
power plant operation due to high LNG prices. However, major power companies currently
have more LNG in stock than in past years, and the fuel constraints that occurred during thetight supply period last January and caused power supply constraints are unlikely to be a major
problem this winter.
Meanwhile, in Europe, there are concerns that high electricity prices will linger, as electricity
futures for 2022 were trading at just under 10 yen/kWh in the Nasdaq market as of December
in Nordic countries, which are less susceptible to gas prices, but at almost 30 yen/kWh in the
OMIP market in Spain, which is strongly affected by LNG prices. Being highly exposed to
LNG prices, Japan should prepare for a daily average price range of 15–20 yen/kWh until atleast around March.
Amid unstable primary energy prices, securing medium- to long-term supply capacity is
becoming a challenge. To simultaneously pursue carbon neutrality and supply stability, theSubcommittee for Sustainable Power Systems has presented an idea for encouraging newinvestments by guaranteeing capacity income over the long term by using the capacity market
mechanism. The Subcommittee will flesh out the detailed design going forward. While thisinitiative will apply only to mixed combustion of hydrogen and ammonia in thermal power forthe time being, the path up to 2050 must be defined carefully to ensure that assets do not become
stranded. Meanwhile, as renewables increase, it is becoming harder to find the optimum
operational patterns of energy storage-type equipment such as batteries and pumped-storagehydropower plants that offer adjustment capacity, making them less profitable. The UK isconsidering supporting pumped-storage hydropower by changing its category to low-carbon
power supply. Japan should consider the cases in other countries when determining how to
improve the business environment.
Regarding the city gas business, there is concern that the extremely wild fluctuations andincreases in spot LNG prices may affect competition among retailers. Because major powercompanies are required to maintain high LNG stocks to prepare for fuel constraints, the highspot LNG prices could undermine their competitiveness in the gas retail business. Meanwhile,in April 2021, the Study Group on the Future of the Gas Business toward 2050 issued an interim
report that describes the essential role of gas in decarbonization, the contribution of gas toresilience, and the industry’s active efforts for attaining carbon neutrality, including synthetic
methane. The question is, under what kind of framework will the gas industry specificallycontribute to the enhanced 2030 GHG reduction goal presented in the Sixth Strategic Energy
Plan?

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II. International Politics, Geopolitics, and Energy
1. US: Biden Administration Facing Hardships Heading into the Mid-terms
Ayako Sugino, Senior Researcher
Associate Professor
Musashino University
The US will hold the mid-term elections in November 2022. It is usual for the president’s
party to lose seats in the mid-term election, and likewise, the media are reporting that theRepublicans are in the lead for 2022. If the Republicans gain a majority in one or both houses,
by however small a margin, America will have a divided government instead of the current
united government with a Democratic president and a Democratic majority in both houses.
Legislation struggles to make progress under a divided government; however, not much is
expected to change even if the government becomes divided. Currently, the Democrats have amajority in both houses, but with an extremely small margin: they have a majority of 51 seatsin the 50-50 equally split Senate only by counting Vice President Harris and have a mere 10seat margin in the House. In the past, the Clinton government, for example, after losing the
mid-terms and becoming a divided government, focused on Congressional affairs, and achieved
legislative success by listening to the opposition party and seeking the middle ground. Thus,
the same as during the past year, the key point will be whether the Biden administration and theRepublicans can meet in the middle and whether the progressive Democrats will accept that.
The Biden administration enacted the 1.9 trillion-dollar American Rescue Plan Act in Marchand the 1.2 trillion-dollar Infrastructure Investment and Jobs Act in November 2021. This is aremarkable legislative success compared with any past governments. However, theinfrastructure bill was slashed from the initial plan of 2.3 trillion dollars, while the climate
measures portion, a topic of fierce partisan contest, had to be moved to the Build Back Betterbill (which covers childcare support and free education, alongside climate measures), which isstill under deliberation. The Build Back Better bill, too, has been halved from the initial 3.5
trillion dollars to 1.75 trillion. Even after this cut to appease the Republicans and Democratic
fiscal conservatives, the Democrats are still wary that the bill might accelerate inflation.
Inflation is one of the major threats to the Biden administration delivering on key promises
and to the support for the Democratic Party. The current inflation is caused by the excess money
supply injected through the financial easing and fiscal stimuli of national governments after the2008 financial crisis, the pandemic-induced supply chain disruptions around the world, as well
as bottlenecks at ports on the US West Coast (the result of a historical lack of infrastructure
investment), and the Biden administration has already begun strengthening the supply chainsfor semiconductor production, large-capacity batteries including for EVs, important minerals
including rare earths, medicines, agricultural produce, and foods. It is almost certain, however,that the ambitious decarbonization commitments made by countries around the world, including
the US, as well as their municipalities and companies, have indirectly disrupted the supplydemand balance of these essential supplies and fossil fuels.
During the Trump presidency, the US was so reluctant to take climate measures that it evenquestioned the scientific knowledge on climate change issued by the IPCC. In 2022, attention
will focus on whether the US issues a proposal to explore a realistic timeline and intensity forclimate measures, for the stability of supply chains and in turn the economy of the US and theworld.
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2. EU: Focus on Surging Energy Prices and Gas Market Decarbonization
Kei Shimogori, Senior Researcher
Global Energy Group 1, Strategy Research Unit
Surging energy prices remain an urgent issue in Europe, and measures will continue to betaken in 2022. In November 2021, the European Union Agency for the Cooperation of Energy
Regulators (ACER) and the European Securities and Markets Authority each released aninterim report on the functions of the energy and carbon markets. The final reports are due in
April 2022, and will analyze and assess the current EU-wide energy market design, which
deserves attention.
In the UK, following the rapid exit of a string of suppliers from the market due to surging
energy prices, the Office of Gas and Electricity Markets announced that they will conduct a
stress test of energy supplier finances from January 2022. The UK’s initiative should serve asa reference not only for the EU but also for other countries with a liberated energy market.
In December 2021, the European Commission proposed a new framework for decarbonizing
the gas market, promoting hydrogen energy, and reducing methane emissions. The Hydrogenand Decarbonized Gas Package (regulation and directive) aims to facilitate the transition fromnatural gas to renewable and low-carbon gases (particularly biomethane and hydrogen) and to
make the gas system more resilient.
One of the key objectives of the Package is to establish a hydrogen market, prepare an
optimal investment environment, and assist the development of dedicated hydrogen
infrastructure. Further, the European Network of Network Operators for Hydrogen (ENNOH)
will be established as a new governance structure to promote dedicated infrastructure and crossborder adjustment, construction of cross-border networks, and formulation of technical rules.
In November 2021, the European Clean Hydrogen Alliance released a list of hydrogen-related
projects currently under way by European industry. The list included more than 750 projects
spanning various areas from hydrogen production to its use in industry, mobility, energy, andbuildings. In 2022, in addition to the progress of discussions on the Package, attention must be
paid to how the hydrogen market and industry develop in the EU as these numerous projects
are implemented.
The Council of the European Union will be chaired by France in the first half of 2022.
President Macron has named promotion of a new growth model for the EU as one of the focusesduring France’s term as chair. The President’s goals during the term include introducing mirror
clauses to avoid unfair competition between imports and locally-produced goods in the EU,
accelerating the Carbon Border Adjustment Mechanism, and combating deforestation related
to imports. President Macron’s leadership deserves attention as France heads toward thepresidential and parliamentary elections in 2022.

6

3. China: Stability as Top Priority ahead of the Autumn National Congress of CPC
Li Zhidong, Visiting Researcher
Professor at Graduate School, Nagaoka University of Technology
2021 was the first year of China’s “second centenary goal” of building a “modern socialist
country” with the world’s highest national strength and international influence, and the firstyear of the Fourteenth 5-Year plan, which is a milestone in reaching the goal. The government
worked hard to fully contain the Covid-19 pandemic and revive the economy, and achieved
success. There were 12,852 Covid cases between January 1 and December 14, 2021, and thecumulative total up to December 14 was 99,923. The GDP growth rate showed slowdown from
18.3% for Q1, to 7.9% for Q2, and to 4.9% for Q3, but is expected to be around 8% for the fullyear, and thus the goal of “at least 6%” is certain to be surpassed. The growth rate is highcompared with other countries.
2021 was also a year which saw massive efforts toward reaching peak CO2 emissions before
2030 and net-zero GHG emissions before 2060 (see the December 2021 edition of thisNewsletter). As an international commitment, China raised its 2030 NDC and released its longterm low-emission strategy. Within the country, the government set forth the basic policy andspecific measures for achieving the targets. As examples of specific efforts, the country
established the world’s largest national emissions trading system that covers 4.5 billion tonnesof CO2 emissions and commenced its operation on July 16. A cumulative total of 84.95 million
tonnes worth 3.5 billion yuan were traded in the 100 business days through December 13 (1yuan = 17.8 yen). Further, renewable power sources increased from 935 GW at the end of 2020
to 1,002 GW at the end of October 2021 (including 385 GW of hydropower, 299 GW of wind
power, and 282 GW of solar PV and heat), and the share of renewables in generation capacity
increased 1 point to 43.5%. The electrification of cars also made progress with 2.99 million
new energy vehicles (NEVs) sold between January and November, 2.2 times the 2020 total,
and their share of total sales reached 12.7%, up 7.3 points. In November, sales of NEVs reached
450,000 units, accounting for 17.8%.
2022 is a year of politics in which the five-yearly National Congress of Communist Party of
China (CPC), the 20th, will be held in the autumn. At the Central Economic Work Conference
held in December 2021, the leadership set “seeking progress, with stability as the top priority(穏字当頭、穏中求進)” as the basic governance policy for 2022. The reason for “setting
stability as the top priority” is because the government considers that stable economic growthand stable expansion of domestic markets, international trade, and foreign investment are
crucial for the success of the 20th National Party Congress, which will decide on Xi’s thirdterm, as well as for turning around worsening foreign relations, particularly with the US. To
ease the downward pressure on the economy, it was decided to introduce new tax reductions
and infrastructure investment ahead of schedule and to support the housing market in line withreal demand. The target growth rate has yet to be announced, but the Chinese Academy ofSocial Sciences predicted a rate of around 5.3% in its study released on December 6, 2021.
At the Central Economic Work Conference mentioned earlier, the simultaneous pursuit ofdecarbonization and a stable supply of energy was emphasized. Given the current dominanceof coal, the decision was made to secure a stable electricity supply through the clean use ofcoal-fired power, then to expand renewables, particularly variable renewable energies. Key
points for 2022 include whether electricity supply problems will be resolved and whether NEV
sales will surpass 5 million units.
74. ME: Oil Producers Start Moving toward Net-Zero Emissions
Shuji HOSAKA, Board Member
Director of JIME Center
The Covid-19 pandemic hit Middle Eastern oil-producing countries hard, causing oil demand
to weaken and oil prices to plummet. However, hopeful signs began to appear in the second
half of 2021 as the pandemic came under control mainly in the Gulf countries and oil prices
recovered. However, the economic future became uncertain again with the emergence of theomicron variant at the end of last year. The Middle East is scheduled to host a series of majorinternational events in 2022, including the Dubai Expo (continuing from last year), FIFA World
Cup Qatar 2022, and COP27 in Egypt. A resurgence of the pandemic could affect these events.
Meanwhile, in 2021, there were changes in the Middle East regarding climate measures,
particularly in Gulf oil-producing countries which have been slow to act compared to Westerncountries. The UAE declared its net-zero emissions target for 2050, followed by Saudi Arabia
and Bahrain which set 2060 as their goal. Other countries are expected to follow suit indeclaring net-zero emission targets.
These countries are also switching to renewable energies, mainly solar PV, and have alsoannounced various projects, mainly for hydrogen and ammonia. In recent years, there is
growing attention on the geothermal power generation potential of Saudi Arabia. However,many Middle Eastern countries, whether oil producers or not, are seeing their economies
deteriorate, and their top priority is rebuilding the domestic economy.
For example, in Iran, Ebrahim Raisi, purportedly a conservative hardliner, became president,
and Iran began talks with the US and other countries to restart the Iran nuclear deal (JCPOA).
However, as the opinions of Iran and the US still differ greatly, restarting the JCPOA remains
a distant prospect. Meanwhile, the Iranian economy is worsening and public frustration is
mounting. In particular, extreme water shortages caused by droughts are sparking antigovernment protests in various parts of the country. Mounting frustration and public anger are
also approaching the limit in Iraq and Lebanon, which have been hit by serious electricity andfuel shortages. Meanwhile, the withdrawal of US military forces from Iraq at the end of 2021
is not expected to cause major problems.
Regarding foreign relations, the Qatar crisis was resolved in early 2021 and the relationships
among GCC countries improved. This has caused changes in the overall power balance in the
Middle East, and moves toward reconciliation have emerged between the GCC and Iran, Syria,
and Turkey. However, there is no end in sight for the war in Yemen, and turmoil is also
deepening in North African countries. Relations between Algeria and Morocco are strained tobreaking-point, while in Tunisia, the opposition parties and the people are becoming frustrated
with the concentration of power in the president. Emerging from the long civil war, Libya wasscheduled to hold a presidential election on December 24, 2021, but it was postponed due to
disputes about fundamental rules for it. Few expect the election to restore order in the country.

85. Russia: Putin Leans toward China amid Standoff with the West
Shoichi Itoh, Manager, Senior Analyst
Global Energy Group 2, Strategy Research Unit

Tensions between Russia and the West are coming to a head yet again over Ukraine. On
December 3, 2021, the Washington Post, based on reports of US intelligence agencies andothers, released a shocking report on Russia’s plot to invade Ukraine by mobilizing as many as
175,000 troops in the early 2022. Just a week earlier, in a press conference on November 26,
Ukrainian President Zelensky had alerted the international community that he had received
information on a plot involving Russia to topple the Ukrainian government on December 1. The
Russian government dismissed the plot to invade Ukraine and its involvement in a coup as acomplete fabrication.
On December 7, 2021, in a virtual summit with Russia, US President Biden issued a stern
warning that the US and its allies would respond with strong economic and other measures inthe event of a military invasion, which would have profound consequences for Russia, but in
effect, did not reach an agreement with President Putin who demanded guarantees that NATOwould not expand eastward toward Russia’s borders, including into Ukraine. Government
officials and experts of both countries are now more openly pessimistic about any improvementin bilateral relations in the near future. The day after the summit, President Biden held a virtual
summit with the leaders of nine NATO member states in central and Eastern Europe and theBaltic region and made clear that the US will be strongly involved in the “Ukraine crisis.” On
December 12, the G7 foreign ministers issued a joint statement to prevent the invasion of
Ukraine.
While the West is firmly united in its policies toward Russia, on December 15, 2021, Russia
held a video summit with China, which dislikes the West’s “coalition” against China. President
Putin promised to attend the opening ceremony of the Beijing Olympics scheduled for February2022, which the leaders of the UK, US, Canada, and others decided to boycott diplomatically.
Yuri Ushakov, Assistant to the President of Russia for Foreign Policy, expressed support for
President Xi Jinping who hailed China–Russia relations and quoted him as saying: “although
they [China and Russia] are not allied, their effectiveness even exceeds this level.” China andRussia have reportedly agreed to cooperate in international affairs in the Asia Pacific, bycountering groups such as QUAD (Japan, the US, Australia, and India) and AUKUS (the UK,
the US, and Australia).
In its Russia Economic Report released on December 1, 2021, the World Bank predicted
Russia’s GDP growth rate would reach 4.3% in 2021 as it rebounds from the slump the year
before, but then slow to 2.4% for 2022 (oil price: $74/bbl) and 1.8% for 2023 (oil price: $65/bbl).
As early signs of worsening relations with the West become a reality and as tougher sanctions
become more likely, Russia is reportedly in talks with China on the possibility of building afinancial system that is independent of the West. Russia also hopes to attract investment from
China. However, as of the first half of 2021, China’s direct investment in Russia is less than
1% of all foreign investments.
In 2022, Japan will be preparing for the G7 summit it will host in 2023. Japan must exercise
caution in its diplomatic relations with Russia, mindful of a possible worsening of ties between
the West and Russia, and with China too.
9

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