Current Situation and Outlook for the Oil & Gas (LNG) Market · LNG Market Outlook up to 2018 ......

Current Situation and Outlook for the Oil & Gas (LNG) Market

S i 2Session 2IEEJ/CNPC ETRI Joint Symposium

November 8th, 2017

Dr. Ken Koyama

Chief economist and managing directorInstitute of Energy Economics, Japan

©2017 Institute of Energy Economics, Japan

All rights reserved

IEEJ：November 2017 © IEEJ 2017

©2017 IEEJ, All rights reserved

Crude Oil Price VolatilityKen Koyama, IEEJ, November 8th, 2017

yCrude oil price continued to be volatile

(US$/bbl) Collapse

140

(US$/bbl) pafter

Rehman shock

Euro Zone crisis hit oil

price

Supply-demand softening and OPEC

100

120Continued up-

swing in Price surge

after MENA

Brentg

decision to leave price fall

80

100 after MENA

WTIWTI hit 26$ in

Feb 2016

60 Rebound from the

i d d

20

40

7 7 7 7 8 8 8 8 9 9 9 9 0 0 0 0 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7 8 8 8 8

Price drop under Euro crisis

2Source: NYMEX data, etc.

Jan-

07A

pr-0

7Ju

l-07

Oct

-07

Jan-

08A

pr-0

8Ju

l-08

Oct

-08

Jan-

09A

pr-0

9Ju

l-09

Oct

-09

Jan-

10A

pr-1

0Ju

l-10

Oct

-10

Jan-

11A

pr-1

1Ju

l-11

Oct

-11

Jan-

12A

pr-1

2Ju

l-12

Oct

-12

Jan-

13A

pr-1

3Ju

l-13

Oct

-13

Jan-

14A

pr-1

4Ju

l-14

Oct

-14

Jan-

15A

pr-1

5Ju

l-15

Oct

-15

Jan-

16A

pr-1

6Ju

l-16

Oct

-16

Jan-

17A

pr-1

7Ju

l-17

Oct

-17

Jan-

18A

pr-1

8Ju

l-18

Oct

-18



OECD Oil InventoryKen Koyama, IEEJ, November 8th, 2017

OECD Oil Inventory2,900

（Million bbl）

2,700

2,800 OECD Inventory

10 year average

2,600

,

2456

2,500

2,300

2,400

2,200

Jan-

06A

pr-0

6Ju

l-06

Oct

-06

Jan-

07A

pr-0

7Ju

l-07

Oct

-07

Jan-

08A

pr-0

8Ju

l-08

Oct

-08

Jan-

09A

pr-0

9Ju

l-09

Oct

-09

Jan-

10A

pr-1

0Ju

l-10

Oct

-10

Jan-

11A

pr-1

1Ju

l-11

Oct

-11

Jan-

12A

pr-1

2Ju

l-12

Oct

-12

Jan-

13A

pr-1

3Ju

l-13

Oct

-13

Jan-

14A

pr-1

4Ju

l-14

Oct

-14

Jan-

15A

pr-1

5Ju

l-15

Oct

-15

Jan-

16A

pr-1

6Ju

l-16

Oct

-16

Jan-

17A

pr-1

7Ju

l-17

Oct

-17

3Source: Outlook by the Author based on data from IEA “Oil Market Report”



Call on OPEC vs. OPEC ProductionKen Koyama, IEEJ, November 8th, 2017

Call on OPEC vs. OPEC Production3,400

（10,000B/D) （Days)

653,200

3,300OECD Inventory daysCall on OPECOPEC Production

3,000

3,100

55

2,800

2,900

2,600

2,700

452,500

4Source: IEA “Oil Market Report”



US Oil Production and Rig Count

Ken Koyama, IEEJ, November 8th, 2017

US Oil Production and Rig Count

170010000(1,000B/D) (Counts)

15009000

9500 Crude oil production

Oil rig count

1100

1300

8000

8500

900

6500

7000

7500

500

700

5500

6000

6500

3005000

5500

2010/1/1 2011/1/1 2012/1/1 2013/1/1 2014/1/1 2015/1/1 2016/1/1 2017/1/1

5Source: Data from EIA and Baker Hughes



Outlook for Oil Supply-DemandKen Koyama, IEEJ, November 8th, 2017

Outlook for Oil Supply Demand3.50101

Oil Demand（Over supply）

（Million B/D）（Million B/D）

2.50

3.00

99

100

1.30 1.42 1.50

2.00

97

98

Oil supply

0.48 0.30

0.07 (0 05)

0.60 0.50

1.00

95

96

(0.05)

(0.51)

(0.12)

(0.20) (0.23) -0.50

0.00

93

94

Balance (S ppl min s deamnd)(0.81)

-1.50

-1.00

91

92

2016-1Q 2Q 3Q 4Q 2017-1Q 2Q 3Q 4Q 2018-1Q 2Q 3Q 4Q

Balance (Supply minus deamnd)

（Excess demand）

6Source: Outlook by the Author based on data from IEA “Oil Market Report”



O l k f N T Gl b l Oil M k


Outlook for Near-Term Global Oil Market

Current price level likely to remain in the near term.

Market is heading for “Re-balancing”, but…g g ,

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?

C t i l l i t t i bl f id t M k t Current price level is not sustainable for mid-term. Market may head for 70 in 2020s

Another uncertainty has emerged for longer term Another uncertainty has emerged for longer term…

7



Instability in the Middle EastKen Koyama, IEEJ, November 8th, 2017

Te o ist Attacks

Iraqi situations after the warUncertainty over

Tensions on Iran Nuclear development

Terrorist AttacksIn Paris, Brussels,

etc.

Middle East Peace issues

Future of

Immigrants toEurope

Stability in Kurdish region

Gaza crisis Impacts of Islamic State

Future of nuclear deal

US attack on Syria P t tiImpacts of

“Arab Spring”Tense Saudi-Iran

Syria Power concentration to MBS

Tensions surrounding Qatar

Syria, Yemen, Egypt…

Tense Saudi IranRelations

Impact of US policy by new administration

su ou d g Qata

Terrorism, threats to energy production

Growing Anti US sentiments in Arab

Domestic challenges for existing rulers

new administration

Source: Prepared by IEEJ

to energy production and exports

sentiments in Arab and Islam society

for existing rulers and regimes

8



Oil demand peaks by rapid penetration of ZEVs<Peak Oil-Demand Analysis>Ken Koyama, IEEJ, November 8th, 2017

･ Oil consumption ･ Oil for Road [Peak Oil Demand Case]

Reference40

105

12212033

30

8690

Advanced Technologies

9798

89

100

Mb/

d

15

21

18

22

20

Mb/

d

Peak Oil Demand

89

8016

18Non-OECD

1110

602010 2020 2030 2040 2050

OECD50

2000 2010 2020 2030 2040 2050

Oil consumption by cars in Non-OECD, which continues to increase rapidly in the Reference Scenario, also declines from around 2030. It is as

In the Peak Oil Demand Case, oil consumption hits a peak of 98 Mb/d around 2030 then declines. The reduction from the

Note: Dotted lines are the Reference Scenario

Scenario, also declines from around 2030. It is as much as one third of the Reference Scenario in 2050.

9

Reference Scenario is 7 Mb/d and 33 Mb/d in 2030 and in 2050, respectively.

Source: “IEEJ Outlook 2018” (IEEJ, October 2017)



LNG Market Outlook up to 2018Ken Koyama, IEEJ, November 8th, 2017

LNG supplies continues to be abundant up to 2018 and beyond due mainly to substantial increase in supplies from new projects

p

million tonnes

263 6 263 6 275.6 280.4 290.2

297.4300.0

350.0million tonnes

263.6 263.6

200 0

250.0

Africa

A i

150.0

200.0 Americas

US

FSU

Europe

50.0

100.0

Europe

Middle East

Asia-Oceania

0.0

50.0

Demand Supply Demand Supply Demand Supply

10Source: Yoshikazu Kobayashi, “Outlook for the World Gas Market” (July 25, 2017)

2016 2017 2018



LNG demand in AsiaKen Koyama, IEEJ, November 8th, 2017

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

73%67% 66%

68%70%

80%

500

600 mtpa

350

400 mtpa

50%

60%

400

500

Int'l bunker

Africa

L America 250

300

30%

40%

200

300 N America

Europe

Middle East

Asia

150

200 Non JKT

JKT

0%

10%

20%

0

100

Asia

Asia %

0

50

100

11

0%02016 2020 2025 2030

02016 2020 2025 2030

Source: Yoshikazu Kobayashi, “The Role of Natural Gas in Japan and Asia” (September 11, 2017)



Factors to affect Gas/LNG Demand in Asia


/

Economic growthg Need to protect environment Lower price Lower price Competition against coal

Future of nuclear power Future of nuclear power Competition against renewable energy Competition with LPG Impact of power/gas market reform

12

p p /g Pipeline vs. LNG



S l l i lik l i i h di ( 202 )

World LNG Supply-Demand OutlookKen Koyama, IEEJ, November 8th, 2017

Supply surplus is likely 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.Qata e pa s o o ts capac ty ay g eat y co t bute to a ta t e ba a ce

900 mtpa

Planned

700

800 FID, under construction

Existing

Demand

500

600

300

400

100

200

13

0 2015 2017 2019 2021 2023 2025 2027 2029




World gas prices by regionPrice gaps by regions significantly narrowed


g p y g g y

18

20 Units: USD / million Btu

16

Henry Hub

NBP

12

14

Japan LNG average

8

10 Platts JKMTM

4

6

0

2

14Source: US EIA and IEA

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



Issues for LNG Pricing in Asia


Issues for LNG Pricing in Asia

Given the dominance of the existing contracts, JCC pricing likely to Given the dominance of the existing contracts, JCC pricing likely to remain dominant mechanism in Asia at least up to early 2020sremain dominant mechanism in Asia at least up to early 2020s

But tide is changing:But tide is changing: Prevailing overPrevailing over--suppled marketsuppled market

f f S Gf f S G Inflow of US LNG with HH pricing will increase in AsiaInflow of US LNG with HH pricing will increase in Asia Spot/shortSpot/short--term trading continue to growterm trading continue to grow Initiatives to create hubs and new price discovery in AsiaInitiatives to create hubs and new price discovery in Asia Initiatives to create hubs and new price discovery in AsiaInitiatives to create hubs and new price discovery in Asia Power and gas market reforms in Japan and AsiaPower and gas market reforms in Japan and Asia

Major Asian buyers such as JERA have a strategy to diversify pricingMajor Asian buyers such as JERA have a strategy to diversify pricing Buyers continue to search for possible alternatives to JCC and the share Buyers continue to search for possible alternatives to JCC and the share

of JCC pricing will be reducedof JCC pricing will be reducedSo far there is no clear answer as to what is the best alternativeSo far there is no clear answer as to what is the best alternative

15

So far there is no clear answer as to what is the best alternativeSo far there is no clear answer as to what is the best alternative What will happen if divergence emerges between LT contract and spot What will happen if divergence emerges between LT contract and spot

price?price?



JFTC’s study on LNG trading


y g

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 contractThe 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

contractscontracts. It first comments that Take-or-pay provision also can violates the Anti-Monopoly Act.

ChallengesEff ti t f i fi i th bi t h ll 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 f ll th JFTC t d

16

follow the JFTC study.



Contact: [email protected]

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