Japan s LNG Policies and Japan-Argentina Cooperation December 2014
High Dependency On Fossil Fuels For Power Generation The nuclear power ratio in domestic power generation has decreased after the Great East Japan Earthquake due to the long-term shutdown of nuclear power plants. On the other hand, the thermal power ratio has increased to 90%. Currently, LNG thermal power alone accounts for nearly 50% of domestic power generation. 100% 90% 80% 70% 60% 50% 40% 30% 32% 8% 60% 5% 32% 32% Trend in Domestic Power Generation Ratio 2% 1% 0% 0% 0% 12% 9% 9% 11% 12% 11% 89% 90% 89% 88% 89% 9% 13% 11% 10% 9% 79% 16% 12% 48% 51% 52% 53% 48% 43% 20% 10% 0% 23% 12% 23% 25% 28% 27% 26% 27% 2% 1% 0% 0% 0% FY2010 FY2011 FY2012 FY2013 FY2014 April May June Coal LNG Oil, etc Hydro, etc Nuclear Nuclear Thermal Source: Compiled by METI through power company hearing etc 1
Increase in LNG Demand and LNG prices After the Great East Japan Earthquake, Japan s LNG demand increased by 24% due to the shutdown of nuclear power plants. (2010FY 71 MTA 2013FY 88 MTA) In addition, Japan s LNG import price, linked to crude oil import price, has soared. As a result, Japan recorded a trade deficit for the first time in 31 years. Japan s Energy Demand Natural Gas price trend(us$ / MMBTU) (10 15 kcal) 6 2010FY to 2013FY Increase by 20 M tons 25 20 Japan's crude oil import price (JCC) Japan's LNG import price EU Gas price (NBP) 18.0$/MMBTU 5 US gas price (Henry Hub) 4 3 2 1 71 MTA 83 MTA 87 MTA 88 MTA Others Nuclear Hydro Gas Oil Coal 15 10 5 15.6$/MMBTU 8.31$/MMBTU 0 2010FY 2011FY 2012FY 2013FY 0 3.92$/MMBTU Source: The Institute of Energy Economics, Japan 2
Japan Suffers Huge Trade Deficit The overall cost of LNG imports to Japan has increased from 3.5 trillion yen (2010) to around 7 trillion yen (2013). 1 trillion yen = $10 billion Japan recorded a trade deficit for the first time in 31 years. Trade deficit for 2013 was 11.5 trillion yen, which is not a sustainable level for Japan. Changes in trade balance and current account balance (trillion yen) 30 25 20 15 10 5 0-5 -10 Trade balance Current account balance Trade deficit (2013) 11.5 Trillion yen Trade Balance 2010 2013 Difference 6.6-11.5-18.1 Net Import Costs LNG 3.5 7.1 +3.6 Crude Oil 9.4 14.2 +4.8 Petroleum Products 2.4 3.7 +1.3 Coal 2.1 2.3 +0.2-15 2007 2008 2009 2010 2011 2012 2013 3
Enhancing Gas Security Diversifying Supply Sources Japan has mitigated supply disruption and secured stable supply by diversifying supply sources. In June, Papua New Guinea became a new supplier of LNG to Japan. Japan has a diversified portfolio with the largest supplier only accounting for 20% of total supply and the Middle East Dependency at 30%. ( Russia) Vladivostok LNG Project Far East LNG Project (Alaska) Alaska LNG Project (Canada) LNG Canada Project Pacific Northwest LNG Project Kitimat LNG Project (Southeast Asia) PNG LNG Project Donggi Senoro Project (U.S.A) Sabine Pass Project Freeport Project Cove Point Project Cameron Project (Mozambique, Tanzania, Nigeria) Rovuma Area 1, Area 4 Project Brass LNG Project (Australia) Ichthys LNG Project Wheatstone LNG Project 4
Paradigm Shift: Impact of the Shale Gas Revolution The development of fracking technology and the rapid increase in shale gas production in the US has brought drastic changes to the supply-demand structure and the pricing mechanism in the global LNG market. Three Key Impacts of the Shale Gas Revolution are: 1. Abundant supply 2. Competitively priced LNG and Introduction of gas-link pricing 3. Emergence of Potential LNG Suppliers Japan is taking proactive actions to fully enjoy the benefits of this Revolution. 5
Abundant LNG supply from the US to Asia Currently approved projects amount to 80 MTA => Scheduled to be exported to Japan and other Asian markets as early as 2016 => Equivalent to half of Asia s current LNG demand (160 MTA) Japan s LNG claims from US projects totals 17 MTA (Equivalent to 20% of Japan s annual LNG imports). 6
Diversification of LNG Pricing Formulas Progress has been made in developing an array of different LNG pricing formulas in Asia. The emergence of US LNG projects has played a key role in this movement: 1. Gas-linked pricing formulas (Henry-Hub link) will be introduced for the first time to the Asia-Pacific Market. => Asia will be able to enjoy the fruits of the Shale Gas Revolution US LNG to Asia are expected to be 20-30% lower than current LNG import prices => Non-US LNG contracts to Asia are being signed using HH link pricing formulas 2. Hybrid pricing which blends both oil-linked and gas-linked pricing are emerging Japanese Government strongly supports this trend to diversify pricing formulas with the hope that having a range of different formulas could help lower LNG prices and reduce volatility Long term contracts remain an important role for the continuous growth of the LNG market Example of new trends 1. Nov 2012, Kansai Electric and BP Henry-Hub linked pricing of non-us LNG(Trinidad and Tobago, Egypt) 2. May 2014, Kansai Electric and Cheniere 3. June 2014, Chubu Electric and Cheniere Start of US LNG exports to Japan to be moved up from 2017 to 2016 4. Sep 2014, Tokyo Electric and BP Henry Hub linked pricing 7
Cooperation with Potential LNG Suppliers The development of fracking technologies will provide new opportunities for countries with shale gas reserves like US, Canada, Mexico and Argentina. Japan will work to further enhance the security and stability of its supply sources through cooperation with such potential LNG suppliers. Western Canada US West Coast US Gulf Canada Sep 2013: Summit Meeting between Prime Minister Abe and Prime Minister Harper. Oct 2013: Memorandum between METI and NRCan Dec 2013: Memorandum between METI and BC Government Technically Recoverable Shale Gas Reserves (EIA 2013) Rank Country Tcf 1 China 1,115 Mexico Mexico July 2014: Summit Meeting between Prime Minister Abe and President Nieto. MOU between PEMEX and JOGMEC 2 Argentina 802 3 Algeria 707 4 U.S. 665 5 Canada 573? Argentina Cooperation Between Japan and Argentina 6 Mexico 545 8
What is JOGMEC? Japan Oil, Gas and Metals National Corporation (JOGMEC) Established: February 29, 2004 [succeeded the functions of Japan National Oil Corporation(JNOC)] President: Hirobumi Kawano Capital: 689 Billion Yen (As of July, 2014) = around 5.8 Billion US$ (118US$/Yen) Mission Securing Stable Supply of Oil, Natural Gas, Coal and Mineral Resources for Japanese Industries and Citizens Activities Oil & Gas Upstream Investment and R& D Metals Strategy & Exploration, and Technology Development Stockpiling Mine Pollution Control Coal Strategy & Exploration, and Technological Support Geothermal Resources Development 9
E&P Projects Worldwide E&P Projects Worldwide Oil & Gas Exploration & Production supported by JOGMEC Equity Capital (45 companies) Liability Guarantee (13 companies) Arctic Shale Gas Oil Sands IOR / EOR Methane Hydrate Deep-Sea Heavy Oil Deep-Sea As of December 1, 2014 10
JOGMEC s Current Activities in Shale Gas Development Towards Japan-Argentina Cooperation in unconventional resources Financial Support 4 projects in the west of Canada Mitsubishi Corp. Cordova Basin Mitsubishi Corp. Cutbank Dawson Land Joint Research Core Analyses Geomechanics Seismic 100 um SEM image of shale sample JAPEX North Montney Land INPEX Horn River, Cordova, Liard 3D Model of shale pores Increase of the asset values Cost reduction Productivity optimization 11
Integrated Shale Study Project Optimization Laboratory study Deep understanding of shale properties. Frac Design Optimization Sweet Spot Mapping Geomechanical study Integrated G&G study Seismic and Related Study 12
Study Area of JOGMEC s Shale R&D Plan Done / On-going Core Analysis (2012) Shale Core at Horonobe in Japan Frac Simulation + Reservoir Simulation (Cordova) Core Analysis Horn River G&G / Core / Frac (on-going) Canada Montney Core Analysis (2012) Onnagawa in Japan METI 説明世界地図 Core Analysis (on-going) Marcellus Well Stimulation (2012-14) Onnnagawa in Japan Frac Simulation (on-going) Eagle Ford Core analysis (2012) Cooper Basin 13 13