Yuji Morita The Institute of Energy Economics Japan · gasoline exports Coal: lesser imports & more exports Hopefully leading to lowering Japan’s LPG and coal import costs Export

1

The 6th IEEJ/CNPC Seminar

Shale gas revolution and its implication to international gas markets

Yuji MoritaThe Institute of Energy Economics Japan

December 6, 2012

IEEJ:December2012 All Right Reserved

2

What is shale gas revolution?

The essence of shale gas revolution is huge expansion and less concentrated distribution of gas resources

（Source） BP Statistical Review of World Energy June 2012、IEA World Energy Outlook 2012

Unit：Tcf

Reserves（end-2011）

ProductionR/P

（Years）Tight Gas Shale Gas

CoalbedMethane Total

E. Europe/Eurasia 2,634 27 98 390 420 710 1,550

Middle East 2,826 19 149 320 140 0 420

Asia-Pacific 592 17 35 740 2,010 570 3,320

OECD Americas 382 31 12 390 1,660 320 2,370

Africa 513 7 73 350 1,060 0 1,410

Latin America 268 6 45 530 1,170 0 1,700

OECD Europe 145 9 16 140 570 70 780

World 7,361 116 63 2,860 7,060 1,660 11,580

Conventional2011

Unconventional（Remaining Technically Recoverable Resources）

（end-2011）


3

Natural gas demand, supply, and prices in the US

（Source） DOE/EIA

Demand and supply increasing at 2.3%/y and 4.2%, respectively

Imports declining since 2007, exports increasing Henry Hub price declined rapidly since 2008

Demand/Supply Spot Price＠Henry Hub

0

5

10

15

20

25

1994 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 2012

WTI @Cushing

Natural Gas @Henry Hub

US$/MMBTU

0

5,000

10,000

15,000

20,000

25,000

30,000

1980 85 90 95 2000 05 2011

TCF ConsumptionProductionImportExport

Production

Consumption

Export

Import


4

The US natural gas supply outlook

（Source） DOE/EIA Annual Energy Outlook 2012

Shale gas revolution still ongoing to share half of the gas production in 2035

17.818.6

19.2 18.1

21.623.7

25.226.0 26.8

27.8

0

5

10

15

20

25

30

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

TCF

Shale gasTight gasAlaskaCoalbed methaneAssociated with oilNon-associated offshoreNon-associated onshore

Forecast

23%

26%

21%

49%

21%

9%


5

Shale gas revolution aftermath（1）


Production shifting from shale gas to higher-value shale oil Power generators shifting from coal to natural gas

Shale Oil Production（North Dakota） Shift from Coal to Nat. Gas Power Station

728

148

0

100

200

300

400

500

600

700

800

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

×1000 B/D

Bakken

Others0

50

100

150

200

250

300

350

400

450

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug Se

pO

ctN

ov Dec Jan

Feb

Mar

Apr

May

Jun

Jul

Aug Se

pO

ctN

ov Dec Jan

Feb

Mar

Apr

May

Jun

Jul

Aug Se

pO

ctN

ov Dec Jan

Feb

Mar

Apr

May

Jun

Jul

Aug Se

p

2009 2010 2011 2012

TWh

Other

Petroleum

Hydro

Nuclear

Coal

Nat. Gas


6

Shale gas revolution aftermath （2）


Increasing shale oil and NBL leading to more LPG and gasoline exports

Coal: lesser imports & more exports Hopefully leading to lowering Japan’s LPG and coal import

costs

Export of LPG and Motor Gasoline Export of Coal

0

1,000

2,000

3,000

4,000

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

×10000 Ton ImportExport

Import

Export

0

5,000

10,000

15,000

20,000

1981 85 90 95 2000 05 10 2012

×1000 BBL

Gasoline

LPG


7

LNG export projects in North America

（Source) FERC、Company websites

Sabine(Cheniere, 18MT)

Freeport(Freeport LNG 11-22MT)

GCorpus Christi

(Cheniere, 14MT)

Kitimat(Apache/EOG/EnCana, 5-10MT)

Douglas Channel(BC LNG Export, 2MT)

LNG Canada(Shell/Mitsubishi/KOGAS/CNPC, 24MT)

Lake Charles(Southern/BG, 15MT)

Jordan Cove(Veresen, 9MT)

Cove Point(Dominion, 8MT)

Cameron(Sempra, 12MT)

Gulf Coast LNG(Gulf Coast LNG, 22MT)

Alaska North Slope(ExxonMobil, ConocoPhillips, BP)

Pascagoula(Gulf LNG, 11MT)

Elba Island(Southern LNG, 4MT)

Lavaca Bay(Excelerate, 3MT) Golden Pass

(ExxonMobil/QP, 15.6MT)

Oversupply resulting in many LNG export projects

Export potential close to 200MT/y

Lowering Asian LNG price?

Export authorization as a risk


8

Global Shale gas revolution?

（Source）DOE/EIA、World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States、April 5, 2011

Shale gas developments in China crucial for Asia

Imports(Exports)

Europe 10.8 14.6 35% 186.2 639France 0.0 1.7 98% 0.2 180Germany 0.5 3.3 84% 6.2 8Norway 3.7 0.2 -2156% 72.0 83U.K. 2.1 3.1 33% 9.0 20Poland 0.2 0.6 64% 5.8 187Ukraine 0.7 1.6 54% 39.0 42North America 28.0 28.0 0% 346.5 1,931United States 20.6 22.8 10% 272.5 862Canada 5.6 3.0 -87% 62.0 388Asia 5.7 6.3 10%China 2.9 3.1 5% 107.0 1,275India 1.4 1.9 24% 37.9 63Australia 1.7 1.1 -52% 110.0 396Africa 3.6 1.6 -56% 217.1 1,042South Africa 0.1 0.2 63% - 485Libya 0.6 0.2 -165% 54.7 290Algeria 2.9 1.0 -183% 159.0 231South America 1.9 3.4 81% 239.2 1,225Venezuela 0.7 0.7 9% 178.9 11Argentina 1,46 1.5 4% 13.4 774Brazil 0.4 0.7 45% 12.9 226Total of above areas 53.1 55.0 -3% 1,274.0 6,622Total world 106.5 106.7 0% 6,609.0

2009 Natural Gas Market(Tcf) Proved Natural

Gas Reserves(Tcf)

TechnicallyRecoverable

Shale GasResources

(Tcf)Production Consumption


9

Japan’s LNG imports

(Source) GIIGNL、Trade Statistics

Gas-fired generation as the major replacement of the lost nuclear capacity, and the LNG demand increasing rapidly

0

10

20

30

40

50

60

70

80

90

Long Term Contracts Actual Imports Long Term Contracts Actual Imports

FY2010 FY2011

Belgium

Yemen

Norway

EQ Guinea

Nigeria

Egypt

Algeria

Peru

Trinidad Tobago

USA

Russia

Australia

Oman

Qatar

Indonesia

Malaysia

Brunei

UAE

MT

65MT

71MT

59MT

83MT


10

LNG trade by spot/short-term deals

（Source）GIIGNL、Cedigaz

Spot supplies to Europe since 2009 as one of the reasons for gas pricing changes

61MT (16MT imported by Japan) traded by spot/short-terms deals in 2011

0

10

20

30

40

50

60

70

80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0%

5%

10%

15%

20%

25%

30%Middle EastLatin AmericaNorth AmericaEuropeIndiaTaiwanChinaKoreaJapanShare of spot/short-terms deals

MT


11

Natural gas demand outlook in Asia

0

300

600

900

1200

1971 1980 1990 2000 2010 2020 2030 2035

China India

Japan Korea

Taipei Indonesia

Malaysia Philippines

Thailand Vietnam

Singapore Hong Kong

Other Asia

China

India

Japan

Mtoe

10%

39%

13%

12%20%

19%

（Source） IEEJ, Asia / World Energy Outlook 2012

2010450MTOE（500BCM）

（LNG 360 Million Ton）↓

20351,280MTOE（1,430BCM）

（LNG 1,040 Million Ton）

Asian demand increasing at 4.3%/y to share 28% of the world demand

AAGR China India Japan Korea Taipe i Singpore

1980-2010 6.9% 13.3% 4.7% － 7.3% －

2010-2035 7.2% 4.6% 1.6% 0.2% 2.8% 2.6%

Indonesia Malaysia Phi l i ppines Thailand Vietnam Other As i a

7.1% 9.2% －－－ 6.3%3.0% 3.2% 5.5% 4.7% 3.1% 4.1%


12

LNG demand supply outlookWorld Asia/Middle East

Adequate supply potential, but timely investment is the key（Source） IEEJ

0

50

100

150

200

250

300

350

400

450

500

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Divertable from Atlantic

Planning

SPA・HOA signed

Existing

High demand

Low demand

MT

0

100

200

300

400

500

600

700

800

900

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Planning

SPA・HOA signed

Existing

High demand

Low demand

MT


13

International gas prices (2011-2012)

（Source） World Gas Intelligence、DOE/EIA

Price gap between Europe/US and Japan widening

0

2

4

6

8

10

12

14

16

18

202011/4/7

2011/4/22

2011/5/7

2011/5/22

2011/6/6

2011/6/21

2011/7/6

2011/7/21

2011/8/5

2011/8/20

2011/9/4

2011/9/19

2011/10/4

2011/10/19

2011/11/3

2011/11/18

2011/12/3

2011/12/18

2012/1/2

2012/1/17

2012/2/1

2012/2/16

2012/3/2

2012/3/17

2012/4/1

2012/4/16

2012/5/1

2012/5/16

2012/5/31

2012/6/15

2012/6/30

2012/7/15

2012/7/30

2012/8/14

2012/8/29

2012/9/13

Japan LNG spot for North East Asia UK Spain Germany USA

$/MMBtu


14

International gas pricings

HubHub--based pricing penetrating into continental Europe, possibly intobased pricing penetrating into continental Europe, possibly into AsiaAsia

? ??

Oil Linked PricingHub PricingOil Linked/Hub Pricing Mixed


15

Gas pricing disputes in continental Europe

Oil-link vs Hub Exporters => Oil-link (Investment, both oil & gas

hydrocarbons) Importer => Hub (Competition, price transparency)

Oversupply after the Lehman shock and dual prices Demand destruction in 2009 Shale gas revolution and cheap spot LNG imports Divergence of oil-link and hub prices Huge loss of incumbent importers

E.ON & Gazprom：seeking solution Partial introduction of hub price （2010）

Arbitration （2011）

Price reduction while keeping oil-link as tentative solution（2012）


16

LNG imports and prices in North East Asia

（Source） Customs Data

More imports & increasing prices

0

100

200

300

400

500

600

700

800

900

Oct

Nov Dec Jan

Feb

Mar

Apr

May Jun

Jul

Aug Sep

Oct

Nov Dec Jan

Feb

Mar

Apr

May Jun

Jul

Aug Sep

Oct

2010 2011 2012

Import×10000Ton

0

100

200

300

400

500

600

700

800

900

1,000

JapanKoreaChinaJapan (Right Axis)Korea (Right Axis)China (Right Axis)

Import PriceUS$/Ton


17

LNG Pricing Options for Asia

• Irrational for gas utilities• Lack of power market liquidity

• Rationality of oil-linked pricing• Gas market balance not reflected

• Higher volatility• Limited liquidity(so far)

• Not yet available• Higher volatility

• Higher volatility• Asia market balance not reflected

Disadvantages

• Rational for power utilities

• Possibly quickest solution

• Already available

• Possible toreflect regional market balance

• Already available• Lower prices (for now)

Advantages

Hubsin Asia

Henry Hub,NBP

Link with other fuels (Electricity,

Coal)

Adjustment within oil-

linked pricingSpot pricing

Hub pricing


18

Summary

Shale gas revolution Huge expansion of resource base Less geographical concentration of the resource Affecting oil & coal markets A number of LNG export projects

International gas markets Asian gas demand to increase rapidly Growing LNG demand and widening price gap International gas pricing as the issue in

continental Europe and Asia


Contact: [email protected]

Documents

Yuji Morita The Institute of Energy Economics Japan · gasoline exports Coal: lesser imports & more exports Hopefully leading to lowering Japan’s LPG and coal import costs Export