Gas Markets in 2015: Outlook and Challenges

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1 The 418th Forum on Research Work Gas Markets in 2015: Outlook and Challenges December 19, 2014 Tetsuo Morikawa The Institute of Energy Economics, Japan

2 Natural Gas Demand in Major Regions Natural Gas Demand in Major Regions Year-on-year Changes OECD Americas OECD Europe Northeast Asia (Japan, China, Korea, Taiwan) Taiwan China South Korea Japan OECD Europe OECD Americas (Sources) IEA; China OGP; Bureau of Energy, Ministry of Economic Affairs, Taiwan Natural gas demand in January-August 2014: OECD Americas 620 Bcm (up 29 Bcm or 3% year on year) OECD Europe 283 Bcm (down 48 Bcm or 9%) Northeast Asia 360 Bcm (up 15 Bcm or 2%) Demand collapse continued in Europe. 1

3 Monthly LNG Imports in Northeast and Europe MT Northeast Asia MT Europe China Taiwan Netherlands UK Turkey Spain Portugal Italy Greece France Belgium South Korea Japan (Sources) Customs statistics in each country, IEA LNG imports in January-September 2014: million tonnes in Northeast Asia (up 2.74 MT year on year), MT in Europe (down 3.07 MT) LNG imports in Europe remained slack as LNG s price competitiveness declined. 2

4 LNG Export Projects in North America Triton LNG (Idemitsu) Pacific Northwest LNG (JAPEX) Aurora LNG (INPEXJGC) LNG Canada (Mitsubishi) Mitsubishi, Chubu Electric, Tokyo Gas, Osaka Gas, JOGMEC Mitsui Sumitomo Mitsubishi INPEX, JGC Marubeni Itochu Freeport LNG Planned to launch operation in 2018 (Liquefaction tolling: Chubu Electric, Osaka Gas, Toshiba) Sumitomo Tokyo Gas INPEX, JGC Cameron LNG Planned to launch operation in 2017 Equity:Mitsui, JLI(NYK, Mitsubishi) Liquefaction tolling: Mitsubishi, Mitsui, GDF Suez Buyers: Tokyo Electric, Toho Gas, Kansai Electric, Tohoku Electric JGC Mitsui Cove Point LNG Planned to launch operation in 2017 Liquefaction tolling:sumitomo Buyers: Tokyo Gas, Kansai Electric Sumitomo Mitsui LNG export projects in which Japanese firms are involved DOE has approved nine projects (about 800 million tons per year) for exports to non-fta countries FERC has approved four (about 53 million tonnes per year) of them for LNG plant construction. DOE and FERC streamlined the authorization process of LNG export and plant construction applications. North American LNG export projects are important for diversifying supply sources and pricing formulas. Marubeni Osaka Gas JAPEX Shale oil and gas (confirmed) Shale oil and gas Coalbed methane Coalbed methane (Sources) IEA and company websites 3

5 Europe and Russia Confrontation Ukraine turmoil (Source) JOGMEC Shift to Asia The EU and Russia had confronted each other over the third energy package and a revision to a pricing formula for Europe. Diplomatic relations deteriorated through the Ukraine turmoil. Russia resumed gas supply to Ukraine for the first time in a half year. Withdrawing South Stream project Supporting Russia s shift to Asia The EU is holding down gas demand and diversifying gas supply sources. 4

6 Natural Gas Supply and Demand in China Gas infrastructure development Domestic production and imports Domestic output 30 Bcm 38 Bcm Pipeline gas imports LNG imports (Source) JOGMEC (Source) China OGP Demand has steadily increased, though with growth decelerating. China s conclusion of a pipeline gas import contract with Russia contributes to holding down demand for LNG imports. 5

7 Spot and Short-term LNG Trade Spot and short-term LNG trade volume Spot LNG exports/imports (2014) MT Share for spot and short-term contracts Middle East Exported cargoes Asia & Unknown: 16 Oceania: 35 Trinidad and Tobago: 72 Latin America Share for spot and short-term contracts North America Europe Other Asian countries China India Other African countries: 30 Other Middle East countries:16 Americas (including reload): 6 Nigeria: 87 Taiwan South Korea Other European countries (including reload): 71 Norway: 26 Qatar: 48 Japan Imported cargoes Argentina: 68 (Source) GIIGNL MT (of which Japan accounted for 33%) traded via spot and short-term contracts in 2013 Japan s spot procurement in 2014 estimated at 87 cargoes (about 5.2 MT) Middle East: 3 Other Asian countries: 39 Other American countries:15 Europe: 13 Taiwan:13 Thailand: 11 Mexico: 7 Unknown: 67 South Korea, 26 Japan, 87 (Source) ICIS Heren Brazil: 58 6

8 LNG Supply and Demand Outlook MT Africa Middle East Americas Europe Asia and Oceania Demand Supply Demand Supply Demand Supply 2013 results 2014 estimates 2015 estimates (Source) IEEJ Firm Asian demand and stably low Atlantic demand Despite Egypt s and Angola s suspension of exports, new project launches help expand capacity substantially. 7

9 Jan 2010 May 2010 Sep 2010 Jan 2011 Jan 2011 May 2011 Sep 2011 Jan 2012 May 2012 Sept 2012 Jan 2013 May 2013 Sep 2013 Jan 2014 May 2014 Sep 2014 Jan 2015 May 2015 Sep 2015 IEEJ: Published in January 2014 All rights reserved Natural Gas Prices Natural gas prices Japan s LNG import volume and value Billion yen Yen/t Total import value Average import price Japan Spain NBP futures JKM US UK Henry Hub futures (Source) Energy Intelligence, EIA, Platts (Source) Trade Statistics The import price for Japan remained in a $15-16/MMBtu range in 2014, though with spot prices declining. LNG import value increased further due to the weakening yen. The import price in 2016 is forecast to fall to around $10/MMBtu due to crude oil and spot price drops. 8

10 Pricing Formula Options Gas vs. gas competition Hybrid Linked to other fuel prices Asian domestic wholesale hubs European and American domestic wholesale hubs (Henry Hub, NBP) LNG hub (Spot LNG) Oil Electricity, coal Advantag es Reflecting domestic supply/dema nd conditions Available Low prices (at present) Available Easiest solution Rationale for power generation Disadvan tages No hub exists High volatility High volatility Asian supply and demand fail to be reflected Price levels vs. pricing formulas High volatility Low liquidity (at present) Declining rationality of oil indexation Asian supply and demand fail to be reflected Low liquidity of electricity market Asian benchmark natural gas prices, based on wholesale prices in Asian LNG importing countries or on an Asian LNG hub, most desirable 9

11 Asian Benchmark Price Formation Domestic approach (wholesale hub) Gas market deregulation International approach (spot LNG) Relaxation of destination clauses Domestic wholesale hub price formation Spot LNG market development Deviation between domestic wholesale hub and import prices Deviation between spot and oil-linked prices Ending link to oil prices Increasing influences of spot LNG prices Asian benchmark price formation The international approach is easier for forming an Asian benchmark price. The benchmark price formation will accelerate in the event of substantial, rapid supply/demand changes. 10

12 Electricity and Gas Systems Reform Basic Problem Committee Strategic Policy Committee Elect ricity Electricity Systems Reform Subcommittee Legal revision Legal revision Legal Revision? Full retail deregulation Legal unbundling of the electricity transmission and distribution sector Gas Gas System Reform Subcommittee Legal Revision? Full retail deregulation? Electricity system reform has triggered gas system reform. Differences between electricity and gas systems: (1) underdevelopment of gas infrastructure, (2) abundant gas companies, (3) competition with other energy sources Objectives of gas system reform: (1) creating new services and businesses, (2) invigorating competition to hold down gas prices, (3) developing gas supply infrastructure, (4) protecting consumers interests and securing safety 11

13 Gas System Reform Launching system reform committee Interviews with business operators (1) retail, (2) pipes, (3) security, (4) wholesale, (5) community gas, (6) integrated energy companies, (7) institutional reform schedule Seven issues cited Retail business system Pipe business Security Community gas Wholesale Integrated energy companies Summing up past discussions Heat supply, overseas gas businesses Protecting users, securing pipe sector neutrality, heat supply Developing pipes, securing pipe sector neutrality Heat supply, securing pipe sector neutrality Securing pipe sector neutrality Securing pipe sector neutrality Discussions have been underway on seven issues. Present discussions cover how to secure the neutrality of the pipe sector through the unbundling of business operators and the relaxation of requirements for third parties access to gas facilities. 12

14 Gas System Reform Issues Retail market participation Business operator categories Retail prices Implementing full deregulation Reform measures Integrating categories into two transporters and retailers Abolishing price regulations after a transitional measure (coexistence of regulated and deregulated prices) Transportation Unbundling TPA Legal unbundling or accounting-based unbundling plus behavior regulation. Only the three largest companies will be subjected to stricter unbundling. Easing TPA conditions. Regulated TPA to LNG terminals. Safety Incumbents (new pipe business operators) and new entrants (new retailers) will share roles. Infrastructure development Heat supply Sharing demand forecasts, preferential tariff, power generation demand uptake, deregulating pipeline construction requirements Deregulating prices and new market participation Can these measures achieve the system reform objectives? 13

15 Deregulating wellhead prices Introducing TPA (third party access) Separating interstate traders Deregulating retail, introducing TPA Ownership unbundling Privatization Full retail deregulation Full retail deregulation Introducing TPA Functional unbundling IEEJ: Published in January 2014 All rights reserved Gas System Reform US UK Germany Wellhead price Import price Power Industrial gas price Residential gas price generation gas price Pipeline gas import price Industrial gas price Power generation gas price Residential gas price (Sources) IEA, EIA Pipeline gas import price Industrial gas price Power generation gas price Residential gas price Retail prices are linked closely to wellhead or import prices. No unified views have been given on whether deregulation can help cut retail prices. 14

16 Gas System Reform High-pressure pipelines LNG reception terminals (existing) LNG reception terminals (under construction or planning) Japan s gas infrastructure LNG terminals can undertake most of transportation pipelines functions Many pipeline construction lacking profitability Pipeline gas imports will be effective for competitive procurement and domestic infrastructure development. (Source) IEEJ 15

17 Conclusion Natural gas supply and demand Global natural gas demand is expected to moderately expand. But European demand is projected to remain weak. Sufficient supply capacity exists to meet LNG demand growth. Natural gas prices Downward pressure on LNG import prices for Japan due to crude oil and spot LNG price drops. The international approach is an easier way for the formation of an Asian benchmark price. Gas market liberalization Correlations between liberalization and lower retail prices cannot be ascertained. Can the gas system reform hold down retail prices or promote infrastructure development? Contact: 16