© 2017 Institute of Energy Economics, Japan - IEEJ

Japan's pursuit of its own LNG hub

Wednesday 5 April 2017Gastech 2017 in Tokyo

Hiroshi HashimotoInstitute of Energy Economics, Japan (IEEJ)

hiroshi.hashimoto@tky.ieej.or.jp1

© 2017 Institute of Energy Economics, Japan - IEEJ

Strictly private and confidential - Disclaimer This presentation has been prepared by Hiroshi Hashimoto for delivery on Wednesday 5 April 2017 at the Gastech 2017

Makuhari Messe Chiba, Japan. It has not been prepared for the benefit of any particular attendee and may not be reliedupon by any attendee or other third party. If, notwithstanding the foregoing, this presentation is relied upon by any person,Hiroshi Hashimoto does not accept, and disclaims, all liability for loss and damage suffered as a result.

The presentation may contain forward-looking statements concerning some companies’ or organisations' strategy,operations, financial performance or condition, outlook, growth opportunities or circumstances in the countries, sectors ormarkets in which those entities operate. By their nature, forward-looking statements involve uncertainty because theydepend on future circumstances, and relate to events, not all of which can be controlled or predicted.

Although Hiroshi Hashimoto believes that the expectations reflected in such forward-looking statements are reasonablyreasonable, no assurance can be given that such expectations will prove to have been correct. Actual results could differmaterially from the guidance given in this presentation for a number of reasons. For a detailed analysis of the factors thatmay affect somebody’s business, financial performance or results of operations, Hiroshi Hashimoto urges you to thinkyourself very carefully.

Nothing in this presentation should be construed as a profit forecast and no part of this presentation constitutes, or shallbe taken to constitute, an invitation or inducement to invest in any specific entity, and must not be relied upon in any wayin connection with any investment decision. Hiroshi Hashimoto undertakes no obligation to update any forward-lookingstatements.

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© 2017 Institute of Energy Economics, Japan - IEEJ

The global LNG market is undergoing a structural shift

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Until 2000's From the latter half of 2010's

LNG supply sources

Developed mainly in Southeast Asia, Oceania, Middle East and Africa

Major expansion in Australia and the United States The United States remains as the largest consumer of gas in the world and becomes one of the largest LNG exporters in the world

LNG consuming markets

Developed in industrial nations in North Asia and Europe, followed by India and China

Market saturation in traditional importers and new markets emerging in Latin America, Southeast Asia, the Middle East and Africa

Status of LNG Premium energy and natural gas supply source

A major driving force to expand new natural gas demand (including newly emerging markets and emerging demand sectors)

© 2017 Institute of Energy Economics, Japan - IEEJ

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Until 2000's From the latter half of 2010's

Value-chain structure

Vertically-integrated simple line value chain to promote projects

Diversified and more complicated value-chains through portfolio supply, tenders, and commodity traders

Project development

Vertically-integrated project development from gas field to liquefaction facilities

Diversified to include brownfield, backfill, and medium-scale development

Sale practice Relatively rigid and inflexible More flexible, including relaxation of destination restrictions

Pricing conditions

Mostly linked to crude oil prices More diversified ways to determine prices

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Shrinking values of LNG markets

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Japan 2014 2015 2016 2016/2015 (%)million tonnes 88.51 85.05 83.34 -2.0%USD billion 75.6 45.9 30.0 -34.6%USD / million Btu 16.25 10.36 6.95

China 2014 2015 2016 2016/2015 (%)million tonnes 20 20 26 +33%USD billion 12 8.899 8.974 +0.84%USD / million Btu

11.94 8.77 6.65Korea 2014 2015 2016 2016/2015 (%)million tonnes 37 33 34 +0.33%USD billion 31 19 12 -35.2%USD / million Btu

16.41 10.91 7.04Chinese Taipei 2014 2015 2016 2016/2015 (%)million tonnes 13.5 14.5 15 +2.74%USD billion 10 6.36 5.03 -20.8%USD / million Btu

14.32 8.46 6.51(Sources) Compiled by the author, based on data from custom statistics

© 2017 Institute of Energy Economics, Japan - IEEJ

Why an LNG hub in Asia and Japan

• At the height of the Asian and Japanese premium of LNG prices in 2013

– The main cause of the unfavourable LNG prices (for the buyers at that time) were thought to be:

• the lack of its own pricing system that can reflect supply and demand balance of LNG in the region; and

• the lack of an actively traded market.

• During the last five years LNG players in the region, mostly LNG buyers, as well as government authorities, have discussed how they can develop such an LNG market in the region

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Three cores in the LNG Strategy

• Enhancement of tradability

• Creation of a proper price discovery mechanism

• Open and sufficient infrastructure

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Pros and cons

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Negative elements Positive elements

Progress looks slow Preconditions and necessary elements for a more active market are steadily coming true

The share of spot and short-term transactions did not grow much in 2015

Potentially tradable and flexible LNG is growingMore LNG sales and optimization deals are concluded

LNG from the United States may not look attractive in terms of price levels

LNG export projects in the United States are expected to enhance flexibility Price information is transparent at both ends

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Price information is already there• January 2017

LNG import prices into Asian importers from selected LNG supply sources

• Some LNG is more expensive than other LNG

9(Sources) Compiled by the author, based on data from custom statistics

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5

6

7

8

9

10

11

12

Average Australia United States

Qatar Indonesia Malaysia

USD / million Btu Japan Korea

China Chinese Taipei

Thailand

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Supply sources are evolving• Japan's LNG

contract portfolios for the years 2015 and 2020

• New generation projects mean those starting operation in 2014 and thereafter which in general supposed to be more flexible than older ones

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Asia Pacific traditional projects, 60

Asia Pacific traditional projects, 46

Asia Pacific new generation projects, 12

Asia Pacific new generation projects, 25

United States, 12

Portflio deals, 5

Portflio deals, 8

Malaysia, 14

Malaysia, 7

Australia, 24Australia, 35

Qatar, 9

Qatar, 9

United States, 0

United States, 12

0

10

20

30

40

50

60

70

80

90

2015 (by type) 2020 (by type) 2015 (by country) 2020 (by country)

million tonnes per year

(Sources) Company announcements and author's estimate

© 2017 Institute of Energy Economics, Japan - IEEJ

Players increase control over supply

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0 50 100 150 200 250 300 350 400

2015

2020

million tonnes per year

QP (Qatar Petroleum) Shell Petronas ExxonMobil Total BP

Chevron Sonatrach Mitsubishi NNPC ConocoPhillips Mitsui

Novatek Woodside Pertamina Inpex Gazprom Gail

KOGAS Gas Natural Fenosa ENGIE CNOOC Santos Origin Energy

CNPC Eni BHP Billiton JERA Osaka Gas JX

Sinopec Endesa Toshiba SK E&S Oil Search VICO

Centrica Silk Road Fund Statoil Sumitomo JILCO Tokyo Gas

LNG Japan KG Berau Marubeni EDF Iberdorola CPC

Itochu Talisman Energy KORAS Kansai Lyse Gass Hunt Oil

KOREA LNG Medco KG Wiriagar SK Kyushu RWE

Partex Hyundai Japex Toho Gas Marathon Oil Others

(Sources) Company announcements and author's estimate

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Japan’s market reforms continue

April 2016: Residential sales of electricity were deregulated.

April 2020: The nine regional electric utilities will unbundle power businesses - generation, transmission, and retail businesses (legal unbundling).

April 2017: Residential sales of city gas are deregulated.

April 2022: The big three will separate their gas pipeline businesses - TPA(Only the big three must unbundle the domestic pipeline businesses.)

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Consolidation may be inevitable as regional and business boundaries are removed. Companies seek different business models.

Significant alliances are already emerging.

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Efforts by the government and Tokyo Commodity Exchange

• Energy dialogues to promote LNG flexibility

• Japan OTC Exchange (TOCOM) is reforming its market

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© 2017 Institute of Energy Economics, Japan - IEEJ

14Thank you for your attentionContact: Hiroshi Hashimoto hiroshi.hashimoto@tky.ieej.or.jp

Japan’s LNG market continues evolving with larger and more flexible LNG supply options with different pricing Japan’s LNG users (electric power and city gas utility companies) enter each others’

markets, at the same time as different pricing and diversification of the global LNG market.

The greater flexibility should be enhanced from the LNG supply in the global market and the energy distribution system within the domestic market.

Anticipated partnerships and consolidations, as well as different mindsets, will alter faces of players.

Japan (and Asia) should be able to take advantage of their own market positions and information assets to establish their own equitable and fair LNG market.

An LNG hub does not necessarily mean a spot trading hub but can be a combination of more flexible term contracts and enhanced spot trading.

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