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Prospect and Challenges in the World and Asian LNG Market

September 10, 2013

The Institute of Energy Economics, Japan

Masakazu Toyoda

LNG Producer–Consumer Conference

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LNG Outlook

Source: IEEJ

World Asia and Middle East

While world LNG demand will expand from 236 million tonnes in 2012 to 305-390 million tonnes in 2020, Asia’s LNG demand will increase by 85-165 million tonnes to reach 195-230 million tonnes in 2020. Supply capacity will expand rapidly after 2015. Supply capacity will increase significantly by 2020, leading to fierce competition among LNG suppliers.

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100

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2010 2015 2020 2025 2030 2035

Divertable LNG from Atlantic

New projects under planning

New projects with HOA/SPA

Existing projects

High Demand

Low Demand

Million Tonnes

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2010 2015 2020 2025 2030 2035

New projects under planning

New projects with HOA/SPA

Existing projects

High Demand

Low Demand

Million Tonnes

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Japan’s LNG imports

Japan’s LNG imports increased by 25% between FY2010 and FY2012 Nuclear restart could push down the imports by 10% in FY2014

Source: Trade Statistics and IEEJ

Nuclear Low-, Mid- and High-level cases assume six at most, 16 and 28 reactors restart by the end of FY2014, respectively.Full operation case assumes full operation of the 28 reactors throughout FY2014.

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FY2010 FY2011 FY2012 FY2013 FY2014

Mt

Low-levelMid-levelHigh-levelFull operation

Cases by nuclear:

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Japan’s LNG import price curve in 2012

LNG import prices vary from less than $5/MBtu to around $23/MBtu, quintuple.

Expensive LNG can be displaced by restarting nuclear power generation and U.S. LNG, which will be produced with Japanese companies’ participation.

Average, 16.7

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Mt

$/M

Btu

21 Mt of displacedby restarting ofnuclear to 2010 level

15 Mt ofdisplacedby U.S. LNG

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China J apan Korea India

Mt

Competition with other energy sources

Changes in natural gas demand by price rises by 10%

Rises in natural gas price result in decline of its demand.The major four natural gas importers in Asia combined will reduces ultimately the demand by 9 Mt to 14 Mt if the price rises by 10%.

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Measures for Gas/LNG supply security

Diversification of fuels for power generation Restarting nuclear Renewables Coal

Diversification of supply North America Russia Africa

Diversification of gas transportation mode Introducing pipeline gas

Efficient use of gas for power generation MACC Co-generation

Joint efforts Joint development Joint procurement

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LNG Pricing Options for Asia

Rationality of oil-linked pricing being questioned Sustainable and rational pricing needs to emerge for mutual benefit between

sellers and buyers

Hub pricing

Spot LNG pricing

Adjustment within oil-linked

pricing

Link with other fuels

(Electricity, Coal)

Henry Hub,

NBPHubs

in Asia

Advantages

• Already available• Lower prices (for now)

• Possible toreflect regional market balance

• Already available• Possibly the quickest solution

• Rational for power utilities

Disadvantages

• Higher volatility• Asia market balance not reflected

• Not yet available• Higher volatility

• Higher volatility• Limited liquidity(so far)

•Gas market balance not reflected

• Irrational for gas utilities• Lack of power market liquidity

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Multilateral Joint Study Group on LNG

For the sound development of LNG market, IEEJ proposes a Multilateral Joint Study Group on LNG that involves multiple research institutes.

The outcome of the joint study group is expected to be reported at the 3rd LNG producer Consumer Conference.

Outline of the Group

Host: The Institute of Energy Economics, Japan (IEEJ) Members: Research institutes in Asia and Europe Observers: LNG related governments and international organizations Meetings:

1st meeting: December 2013 in Tokyo 2nd meeting: 2014 (before the 3rd LNG Producer–Consumer Conference)

Issues to be addressed: Natural gas and LNG supply–demand outlook Pricing mechanism LNG market transparency Other measures

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World gas prices by region

Source: US EIA and IEA

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5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Henry Hub

New York citygate

Russia-Germany (Border)

Algeria-France LNG

Japan LNG

(USD/MMBTU)

Reference