Contents (1) Japan s Energy Security Is Fragile (2) Risks to Energy Security Are Increasing: 1) Contingent Risks 2) Structural Risks (3) If Energy Sec

Energy Security and Challenges for Japan 14 February, 2012 Masakazu Toyoda 1

Contents (1) Japan s Energy Security Is Fragile (2) Risks to Energy Security Are Increasing: 1) Contingent Risks 2) Structural Risks (3) If Energy Security Is Not Ensured.. (4) Actions for Energy Security and Status of Nuclear Power Generation 2

(1) Japan s Energy Security Is Fragile Energy security means: "to secure adequate energy at reasonable prices necessary for the people s lives, and economic and industrial activities of the country." However, Japan is one of the weakest nations in terms of energy security: The lowest energy self-sufficiency rate (4%) among G8 members No northeast Asian network (power grid and pipeline) like that in the EU Energy self-sufficiency rate of major countries (2010) Grid interconnections in Europe Nuclear Nordic Baltic Non-nuclear United Kingdom Italy Japan Germany France UK US Canada Russia Non-nuclear 4% North Africa Synchronous Continental Europe Turkey Source: International Energy Agency 3

IEEJ: April 2013 All Right 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 65% 17% Reserved Reference 1: Insufficient Development of Energy Security First oil crisis 94% 75% Second oil crisis Dependency on fossil fuel Dependency on oil 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2009 79% First oil crisis 10% Energy self-sufficiency rate Including nuclear power Excluding nuclear power 83% 43% 19% 4% 35,000 30,000 88% 25,000 20,000 15,000 10,000 0% 0% 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2009 1965 1970 1975 1980 1985 1990 1995 2000 2005 2011 Source: EDMC Handbook of Energy & Economic Statistics in Japan, the Institute of Energy 4-6 月 Economics, Japan, IEA, etc. 5,000 6% 5% 4% 3% 2% 1% 0 10,000kL First oil crisis 78% Second oil crisis 71% 68% Dependency on Middle East 87% Volume of crude oil import 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 4.2% First oil crisis 4.8% Second oil crisis Nominal GDP ratio of crude oil import 95% 90% 85% 80% 75% 70% 65% 60% 2.4% 2.4% 4

(2) Risks to Energy Security Are Increasing The various risks that could trigger a crisis can be classified into two types: Contingent Risks Structural Risks Since the Oil Crisis in 1973, there have been many supply disruptions and energy crises. Risk factors are increasing in scale and complexity. 5

1) Contingent Risks Political events in main supplier countries including wars, revolutions, riots and terrorism The 4th Yom Kippur war: led to the 1st oil crisis (1973) Iran-Iraq war: led to the 2nd oil crisis (1979) Political actions by consumer nations Sanctions against Iran Accidents in energy supply chains Accidents at facilities that produce, import, ship and transport oil and gas Accidents at transport bottlenecks (Strait of Malacca, Strait of Hormuz, etc.) Accidents and troubles at power plants (nuclear power plants, etc.) 6

Reference 2: Sanctions on Iran: Scenarios and Influences 1. Policies of US and Future Scenarios 1) The US decided to impose sanctions on Iran including crude oil export to hinder its nuclear program. Europe supported the decision, which influenced other countries including Japan and South Korea. 2) Possible Scenarios a. Iran decides to compromise and abandons its nuclear program (uranium enrichment). b. Iran blockades the Strait of Hormuz and enters military conflict with the US and others. c. Uranium enrichment by Iran is accepted, but limited to peaceful use. d. Regardless of moves by the US and Iran, what will Israel do? 2. Influences on Oil, LNG and LPG Trades If Iran stops producing, oil prices will soar and cause an energy crisis. (Note) Approx. 80%, 25% and 85% of oil, LNG and LPG of Japanese imports pass through the Strait of Hormuz. There are no LNG stockpiles or international interchange schemes. The inventory is equivalent to approx. 20 days. Since the nuclear power plant accident, it accounts for 40% of power generation. 7

Reference 3: Sanctions on Iran: Schematic View of Strait of Hormuz Amount of oil traffic: more than 17 million B/D (Approx. 20% of world oil production) (85% of oil imports of Japan) Amount of LNG traffic: more than 82.6 million tons (Approx. 30% of world LNG production) (18% of LNG imports of Japan) * Figures for Japan are derived from trade statistics in 2010, assuming that imports from Iran, Iraq, Bahrain, Saudi Arabia, Kuwait, Qatar, and UAE passed through the Strait of Hormuz. 2-mile wide passages each to the Persian Gulf and to the Indian Ocean 2-mile wide interference zone between the passages 8

Reference 4: Influences on Crude Oil Prices in 2012 The two most important factors influencing the international oil market in 2012 are the situation of the world economy and international finance, and geopolitical risks. In the reference case with no major turbulence, supply and demand will remain almost in equilibrium. The actions of OPEC are the focus of attention in terms of supply and demand adjustments. Depending on how uncertainties in the world economy and oil supply/demand develop, crude oil prices (WTI) could vary dramatically from the second half of 2012. Reference Case: around $100 $10 (annual average, same applies hereafter) (Note) Saudi Arabia s Minister of Oil said in January that an oil price of $100 was ideal. Conventional prices are $60-80. High Price Case: around $120 $10 assuming tensions with Iran Low Price Case: around $70 $10 assuming worsening of the European economic crisis Probability: around 60% for Reference Case; High Price and Low Price Cases are on an equivalent level. With an emergency in Iran, prices could soar above the High Price Case (beyond the previous maximum of $147?) (Note) Brent price is about $10 higher than WTI price. The CIF of Japan s crude oil is also about $10 higher. Large fluctuations in prices cannot be avoided this year. (Note) Average crude oil price (WTI) was $100 in 2008, $62 in 2009, $80 in 2010, and $95 in 2011. What will it be in 2012? 9

Demand side 2) Structural Risks Rapid increase in demand mainly in Asia Competition for resources Energy options for measures to address global warming; shift from coal and oil to LNG Supply side Embargo imposed by supplier with political tension (resource nationalism, etc.) Use of market power by supplier (state-owned companies and oligopolistic system) Depletion of resources and chronic lack of energy (shale gas and environment?) Lack of investment in supply due to environmental controls, deregulation of market, etc. Political issues Uncertainty caused by the Arab Spring Regional instability resulting from declining influence of US hegemony 10

Reference 5: Outlook for World Energy Demand (by Region) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Oil 石油換算百万トン equivalent MT Annual Average Growth Rate 80-09 09-35 World 1.8% 1.7% Asia 4.6% 2.6% North America 0.7% 0.4% 3.9 GT Reference Case 7.6 GT Asia North America European OECD Members World In 2009 11.2 GT In 2035 17.3 GT (1.5 times) Asia In 2009 3.9 GT In 2035 7.6 GT (1.9 times) European non-oecd Members Central and South America Middle East Africa 0 Oceania 1971 1980 1990 2000 Under steady economic growth, energy consumption in Asia in 2035 will be nearly double the current volume (3.9 GT in 2009 7.6 GT in 2035). Non-OECD countries account for approx. 90% of the increase in world energy consumption from 2009 to 2035. Source: Asia/World Energy Outlook 2011, the Institute of Energy Economics, Japan 2009 2020 2030 2035 11

Reference 6: Intensified Competition for Energy Resources Increase in dependency on energy imports means greater fragility (especially in China). To address this, strategies including development of domestically produced energy, diversification of supply sources, independent development overseas, and strengthening of companies as players will be fully implemented. If such actions become excessively exclusive, protection of or competition for resources may intensify, leading to instability in the international market. 900 700 500 300 100-100 600 500 400 300 89 Outlook for Supply and Demand of Oil and Natural Gas in China Oil Oil equivalent of 1 MT bcm Consumption Production Net Import -21% 108-25% 138 110-19 -28 382 49% 647 Natural Gas 68% 438 73% 769 194 187 209 204 1980 1990 2009 2020 2030 Consumption Production Net Import Import Dependency 278 46% 504 285 564 43% 219 Source: Asia/World Energy Outlook 2011, the Institute of Energy Economics, Japan 200 100 0 5% 150 0% 128 0% 83 79 13 13 14 14 0 0 4 1980 1990 2009 2020 2030 12

Reference 7: Shift of Surplus Production Capacity of OPEC Causes of lowered surplus production capacity include decreased production in Libya. The level as of January 2012 was 3.67 million B/D. (ten ( 万 thousand B/D) B/D) 900 799 800 700 600 500 400 367 300 200 100 58 0 2012 年 03 月 Mar. 2012 2011 年 09 月 Sep. 2011 2011 年 03 月 Mar. 2011 2010 年 09 月 Sep. 2010 2010 年 03 月 Mar. 2010 2009 年 09 月 Sep. 2009 2009 年 03 月 Mar. 2009 2008 年 09 月 Sep. 2008 2008 年 03 月 Mar. 2008 2007 年 09 月 Sep. 2007 2007 年 03 月 Mar. 2007 2006 年 09 月 Sep. 2006 2006 年 03 月 Mar. 2006 2005 年 09 月 Sep. 2005 2005 年 03 月 Mar. 2005 2004 年 09 月 Sep. 2004 2004 年 03 月 Mar. 2004 2003 年 09 月 Sep. 2003 2003 年 03 月 Mar. 2003 2002 年 09 月 Sep. 2002 2002 年 03 月 Mar. 2002 2001 年 09 月 Sep. 2001 2001 年 03 月 Mar. 2001 13

Reference 8: Expected Trend of Long-term Oil Prices Due to the recent soaring crude oil price, the price outlook has been revised upward in the past 5 years. ((dollars/barrel) ドル / バレル ) 160 140 120 100 80 60 40 20 Forecast 2009 予測 for 2009 2010 Forecast 予測 for 2010 2011 Forecast 予測 for 2011 Forecast 2008 for 予測 2008 Forecast 2007 for 予測 2007 Forecast 2006 for 予測 2006 2005 Forecast 予測 for 2005 0 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 Sources: Annual editions of the International Energy Outlook, Energy Information Administration (EIA) 14

Reference 9: Emerging Concerns over Limited Energy Supplies + Arab Spring + Lower Influence of US Unstable factors and issues in Middle East Uncertainty over future of peace situation in Middle East Situations in and outside of Iraq after the Iraq War Tensions in international relations caused by Iran s nuclear program Actions to deal with increasing domestic energy demand Discontent with and objections to the US prevailing in Arab and Islamic societies Unstable factors accompanied by current administrations and systems in Middle East Risk of terrorism targeting oil facilities Source: Developed by the Institute of Energy Economics, Japan based on various documents and materials 15

Reference 10: Uncertainty over Supply of Natural Gas While worldwide demand for natural gas is expected to increase, supplies of unconventional natural gas are likely to increase. Will the benefit to Japan be limited? Where will the effect of the US "shale gas revolution" extend in the world including Asia? The pipeline market is different from the LNG market. After the surge in gas demand in Asia following the Great East Japan Earthquake and the nuclear accident, the Asia premium was raised. (US: $2-3/MMbtu, spot LNG price for Asia: $14-15/MMbtu) Major Exporters of LNG: Qatar and UAE would be significantly affected by closure of the Strait of Hormuz. LNG Production Capacity (World trade volume: 221 MT in 2010) LNG Import by Japan (7.17 MT in total in Dec. 2011) Qatar 77 MT (25.7%) 19.4% UAE 5.6 MT (2.8%) 5.9% Different from oil, LNG is vulnerable to a crisis. No international cooperation mechanism (unlike IEA for oil) during an emergency No surplus production capacity (surplus production capacity of OPEC for oil) in the international market Limited inventory (equivalent to approx. 20 days for Japan) in consuming countries Disruption of supply leads to skyrocketing price as well as physical problems. The price of LNG in Japan is linked with the crude oil price. Therefore, if the crude oil price rises, so will the LNG price. The spot LNG price has significantly increased due to tight supply and demand, rising by 6-70% in the past 10 months. 16

Reference 11: LNG Imports from the Middle East In 2011, imports from Qatar doubled. 1800 1600 1400 (1000 トン ton) ) マレーシア Malaysia ブルネイ Brunei インドネシア Indonesia カタール Qatar オマーン Oman アラブ首長国連邦 UAE オーストラリア Australia その他 Others ロシア Russia 1200 1000 800 600 400 200 0 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Source: Monthly Report of Mineral Resources and Petroleum Products Statistics, etc. Qatar (Compared with 2010: +106.6%) UAE (Compared with 2010: +18.2%) Note: The recent LNG ratio accounts for 40% of power and is heavily reliant on Qatar. 17

(3) If Energy Security Is Not Ensured What happens if energy security is threatened? Disruption of energy supply Soaring energy prices and volatility Competition for energy resources, resulting in useless disputes Resource nationalism, market power issues brought by oligopoly Compulsory acquisition and imposed higher prices Global warming issues inhibit sustainable development Climate changes and abnormal weather attracting attention worldwide Impacts of the Great East Japan Earthquake and Nuclear Power Plant Accident If nuclear power plants fail to be restarted in FY 2012: Switching to LNG/oil - imports will exceed 3 trillion yen Shortage of electricity supply - there will be almost a 12% shortage in Japan this summer Increase in global warming gases - 14% increase compared with 1990 Adverse effect on macro economy (GDP, employment, etc.) 18

Contact: report@tky.ieej.or IEEJ: April 2013 All Right Reserved (4) Actions for Energy Security and Status of Nuclear Power Generation Market mechanism alone is insufficient (R&D, subsidies for introduction, resource diplomacy, safety regulations, etc.) What is the contribution of nuclear power? Demand side: Control of demand (R&D/subsidies for introduction) - Energy conservation Supply side: Improvement in energy self sufficiency - renewable energy + nuclear power Inexpensive energy - nuclear power/coal and LNG Securing of a large volume of high density energy efficiently (support for introduction and compensation) - nuclear power Secured power stability of renewable energy - linked with coal and LNG + batteries Diversification of energy sources (R&D/subsidies for introduction) - renewable energy + nuclear power Measures for distribution and diversification of import sources (resource diplomacy) - LNG + nuclear power Measures to strengthen relations with major suppliers + enhance negotiating capability (resource diplomacy) - oil, coal, LNG, and nuclear power Actions to prevent global warming (R&D/subsidies for introduction) - renewable energy + nuclear power Measures to strengthen emergency response (reserve effect) (national reserves/support for introduction) - oil (200 days) and nuclear power (5 years) Export of infrastructure, assurance of safety and cooperation to cope with global warming (resource diplomacy) - coal fired, renewable energy, nuclear power, etc. Safety aspect: Secured nuclear safety: stricter regulations, independent regulatory organizations, international cooperation through IAEA, etc. 19