Current Situation and Outlook for the Oil & Gas (LNG) Market Session 2 IEEJ/CNPC ETRI Joint Symposium November 8 th, 2017 Dr. Ken Koyama Chief economist and managing director Institute of Energy Economics, Japan 2017 Institute of Energy Economics, Japan All rights reserved
Crude Oil Price Volatility 140 120 Crude oil price continued to be volatile (US$/bbl) Continued upswing in Collapse after Rehman shock Price surge after MENA 100 after MENA 80 Euro Zone crisis hit oil price Brent WTI Supply-demand softening and OPEC decision to leave price fall WTI hit 26$ in Feb 2016 60 Rebound from the Price drop under 40 Euro crisis 20 Jan-18 Apr-18 Jul-18 Oct-18 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-111 Apr-111 Jul-111 Oct-111 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 2 Source: NYMEX data, etc.
OECD Oil Inventory 2,900 (Million bbl) 2,800 OECD Inventory 10 year average 2,700 2,600 2,500 2,400 2456 2,300 2,200 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Source: Outlook by the Author based on data from IEA Oil Market Report 3
Call on OPEC vs. OPEC Production 3,400 3,300 3,200 (10,000B/D) OECD Inventory days Call on OPEC OPEC Production (Days) 65 3,100 3,000 2,900 2,800 55 2,700 2,600 2,500 45 Source: IEA Oil Market Report 4
US Oil Production and Rig Count (1,000B/D) 10000 (Counts) 1700 9500 9000 8500 8000 7500 7000 6500 6000 5500 Crude oil production Oil rig count 1500 1300 1100 900 700 500 5000 2010/1/1 2011/1/1 2012/1/1 2013/1/1 2014/1/1 2015/1/1 2016/1/1 2017/1/1 300 Source: Data from EIA and Baker Hughes 5
Outlook for Oil Supply-Demand 101 100 (Million B/D) (Over supply) (Million B/D) Oil Demand 3.50 3.00 99 2.50 98 2.00 97 1.30 1.42 Oil supply 1.50 96 1.00 95 94 0.48 0.30 0.07 (0.05) 05) 0.60 0.50 (0.12) 0.00 93 92 Balance (Supply minus deamnd) (0.81) (0.51) (0.20) (0.23) -0.50-1.00 91 (Excess demand) 2016-1Q 2Q 3Q 4Q 2017-1Q 2Q 3Q 4Q 2018-1Q 2Q 3Q 4Q -1.50 Source: Outlook by the Author based on data from IEA Oil Market Report 6
Outlook for Near-Term Global l Oil Market Current price level likely to remain in the near term. Market is heading for Re-balancing, g, but US LTO production is resilient and start to pick up again if oil price goes beyond a certain level. What can be a surprise? OPEC decision? Supply disruption in oil producer countries? Economic downside risks? Current price level l is not sustainable for mid-term. Market may head for 70 in 2020s Another uncertainty has emerged for longer term 7
Instability in the Middle East Terrorist Attacks In Paris, Brussels, etc. Uncertainty over Middle East Peace issues Gaza crisis Impacts of Arab Spring Immigrants to Europe Syria, Yemen, Egypt Iraqi situations after the war Impacts of Islamic State Tensions on Iran Nuclear development Stability in Kurdish region Tense Saudi-Iran Relations Future of nuclear deal US attack on Syria Power concentration ti to MBS Tensions surrounding Qatar Impact of US policy by new administration Growing Anti US sentiments in Arab and Islam society Domestic challenges for existing rulers and regimes Terrorism, threats to energy production and exports Source: Prepared by IEEJ 8
<Peak Oil-Demand Analysis> Oil demand peaks by rapid penetration of ZEVs Oil consumption Oil for Road [Peak Oil Demand Case] 120 Ref erence 122 40 33 105 30 Mb/d 100 80 86 90 98 Advanced Technologies 97 89 Peak Oil Demand Mb/d 20 10 21 18 22 16 15 Non- OECD 11 60 2010 2020 2030 2040 2050 In the Peak Oil Demand Case, oil consumption hits a peak of 98 Mb/d around 2030 then declines. The reduction from the Reference Scenario is 7 Mb/d and 33 Mb/d in 2030 and in 2050, respectively. Source: IEEJ Outlook 2018 (IEEJ, October 2017) OECD 0 2000 2010 2020 2030 2040 5 2050 Note: Dotted lines are the Reference Scenario Oil consumption by cars in Non-OECD, which continues to increase rapidly in the Reference Scenario, also declines from around 2030. It is as much as one third of the Reference Scenario in 2050. 9
350.0 LNG Market Outlook up to 2018 LNG supplies continues to be abundant up to 2018 and beyond due mainly to substantial increase in supplies from new projects million tonnes 300.0 6 6 275.6 263.6 263.6 280.4 290.2 297.4 250.0 Africa 200.00 Americas US 150.0 FSU Europe 100.0 Middle East Asia-Oceania 50.0 0.0 Demand Supply Demand Supply Demand Supply 2016 2017 2018 Source: Yoshikazu Kobayashi, Outlook for the World Gas Market (July 25, 2017) 10
LNG demand in Asia The share of Asia will remain high despite emerging countries start to import LNG. The market becomes more price-elastic. Emerging countries prefer more flexibilities in supply. The share of Asia in world LNG demand LNG demand of JKT and other Asia 600 mtpa 80% 400 mtpa 73% 68% 67% 66% 70% 350 500 60% Int'l bunker 300 400 Africa 50% L America 250 300 40% N America 200 Non JKT Europe JKT 30% 200 Middle East150 20% Asia 100 Asia % 100 10% 50 0 2016 2020 2025 2030 0% 0 2016 2020 2025 2030 Source: Yoshikazu Kobayashi, The Role of Natural Gas in Japan and Asia (September 11, 2017) 11
Factors to affect Gas/LNG Demand in Asia Economic growth Need to protect environment Lower price Competition against coal Future of nuclear power Competition against renewable energy Competition with LPG Impact of power/gas market reform Pipeline vs. LNG 12
World LNG Supply-Demand Outlook mtpa Supply surplus is likely l to continue in the medium term (~2024). Realization of planned capacity in a timely manner is needed to keep the demand and supply balanced beyond the mid-2020s. Qatari expansion of its capacity may greatly contribute to maintain the balance. a 900 Planned 800 FID, under construction 700 600 Existing Demand 500 400 300 200 100 0 2015 2017 2019 2021 2023 2025 2027 2029 Source: Yoshikazu Kobayashi, The Role of Natural Gas in Japan and Asia (September 11, 2017) 13
Units: USD / million Btu 20 World gas prices by region Price gaps by regions significantly narrowed 18 Henry Hub 16 14 NBP 12 Japan LNG average 10 Platts JKMTM 8 6 4 2 0 5 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 1 7 12 1 4 7 10 1 4 7 10 1 4 7 10 1 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: US EIA and IEA 14
Issues for LNG Pricing in Asia Given the dominance of the existing contracts, JCC pricing likely to remain dominant mechanism in Asia at least up to early 2020s But tide is changing: Prevailing over-suppled market Inflow of US LNG with HH pricing will increase in Asia Spot/short-term term trading continue to grow Initiatives to create hubs and new price discovery in Asia Power and gas market reforms in Japan and Asia Major Asian buyers such as JERA have a strategy to diversify pricing Buyers continue to search for possible alternatives to JCC and the share of JCC pricing will be reduced So far there is no clear answer as to what is the best alternative What will happen if divergence emerges between LT contract and spot price? 15
Contact: report@tky.ieej.or IEEJ:November JFTC s study on LNG trading Japan Fair Trade Commission (JFTC) published a study of international LNG trading practice. Significance of the study The study clearly mentions that the destination restriction in the existing LNG long-term contract violates the Japanese Anti-Monopoly Act. It urges Japanese companies not to accept the destination clause in the new and renewed contract. It recommends the companies to renegotiate the destination restriction also in the existing contracts. It first comments that Take-or-pay provision also can violates the Anti-Monopoly Act. Challenges Effectiveness to foreign firms is the biggest challenge. Application to DES contracts It can set a standard of long-term contract if FTCs in other countries may follow the JFTC study. Source: Yoshikazu Kobayashi, The Role of Natural Gas in Japan and Asia (September 11, 2017) 16