Outlook for Energy Prices and Supply
Session 2: Implications of Prolonged Low Energy Prices on the Energy Mix
APERC Annual Conference 2016 May 25th, 2016 Ken Koyama, PhD Chief Economist, Managing Director Institute of Energy Economics, Japan
©2016 Institute of Energy Economics, Japan All rights reserved
Ken Koyama, IEEJ, May 25th, 2016
©2016 IEEJ, All rights reserved
Outlook for Oil Supply Supply-Demand Demand 100
（Million B/D） 3.50
（Million B/D） （Over supply）
99
3 00 3.00
98
2.50
2.18
Oil supply
97 1.40
96
1.52 1.50
1.58 0 98 0.98
95 94
2.00
1.72
1.37
0 90 0.90
Oil Demand D d 1.04
1.00 0.50
0.17
93
0.00 (0.24) (0.30)
92
(0.50)
Balance (Supply minus deamnd) 91 90
(1.00) （Excess demand） 20142014 2Q 3Q 1Q
(1.50) 4Q
2015 20151Q
2Q
3Q
4Q
2016 20161Q
Source: Outlook by the Author based on data from IEA “Oil Market Report”
2Q
3Q
4Q
2
Ken Koyama, IEEJ, May 25th, 2016
©2016 IEEJ, All rights reserved
Background to Saudi’s Saudi s Decision
Protecting prices by cutting production is self-defeating.
Tough lessons from the swing producer experience
“The market will naturally balance itself out.”
Various “strategic thoughts” ≠ “conspiracy theory”
Availability of financial resources to withstand low prices for some time
Searching for new price equilibrium while maintaining its market share
Market lost its foothold and plummeted.
Response to the idea of concerted production restrain?
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Ken Koyama, IEEJ, May 25th, 2016
©2016 IEEJ, All rights reserved
US Oil Production and Rig Count (1,000B/D)
(Counts)
10000 9500
1700
Crude oil production Oil rig count
1500
9000 1300
8500 8000
1100
7500 900
7000 6500
700
6000 500 5500 5000 2010/1/1
300 2011/1/1
2012/1/1
Source: Data from EIA and Baker Hughes
2013/1/1
2014/1/1
2015/1/1
2016/1/1
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Ken Koyama, IEEJ, May 25th, 2016
©2016 IEEJ, All rights reserved
Low Oil Price and US LTO
US LTO, relatively high cost oil production But cost differs greatly by area, area well and producer “Breakeven cost” vs “Short-run marginal cost” Rig counts decline dramatically dramatically, but “shift shift to quality quality” Financial problems of shale oil producers Low oil price results in lower production cost Existence of uncompleted wells
US LTO shows resilience to low oil price LTO production may bounce back if price goes up
5
Ken Koyama, IEEJ, May 25th, 2016
©2016 IEEJ, All rights reserved
O l k for Outlook f Near-Term N T Gl Global b l Oil Market M k
Current price level likely to remain in the near term due to prevailing over-supply situation.
The impact on the production of high-cost oil (US shale, etc.) is emerging, but full scale impacts will be felt later this year.
But US LTO production may be 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?
Speed and degree of Return of Iranian oil?
Current price level is not sustainable for mid-term. Market may head for 70-75$ in 2020
6
Ken Koyama, IEEJ, May 25th, 2016
©2016 IEEJ, All rights reserved
Pros and Cons of Low Oil Prices: Macro
Positive for the global economy in general
G Great t benefits b fit for f consumers (highly (hi hl import-dependent) i t d d t) countries t i
Also benefits for energy-importing companies and users
Tax-break b k effect ff on people’s l ’ li lives
Serious negative impact on resource-rich countries
Economic instability of resource-rich countries could precipitate financial and credit crisis.
Risk of economic and financial crises spreading internationally
Most vulnerable: Russia, Venezuela, Nigeria, etc.
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Ken Koyama, IEEJ, May 25th, 2016
©2016 IEEJ, All rights reserved
Impact of Low Oil Prices: Energy
Crude oil p prices: “the deeper p the valley, y the higher g the p peak”?
Destabilizing oil-producing and resource-rich countries
Adverse effect on investment in energy gy supply pp y ((high-cost g PJs))
Difficulty in decision-making on choice of energy, LNG price formula, etc.
Restructuring and institutional issues of domestic and overseas energy industries (Corporate integration and asset reshuffling)
Increased need for cost reduction and higher efficiency
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Ken Koyama, IEEJ, May 25th, 2016
©2016 IEEJ, All rights reserved
Need d ffor Higher i h Cost Oil il Production d i 14
million b/d
12 10 8
3.5~ 11 5 11.5
6
2.0~ 10.0
1.5 4 6.0
3.0
2 0 Demand growth Supply surplus as Supply growth until 2020 of 2015 from MENA
Source: Prepared by IEEJ based on IEA data and others
Depletion from existing fields
Incremental supply from higher cost fields 9
Ken Koyama, IEEJ, May 25th, 2016
©2016 IEEJ, All rights reserved
Global LNG Balance up to 2016 MT 300 250
Ample A l supply l continues ti tto exist i t iin th the short h t tterm and d LNG market will be weakened further in 2016 285 248
239
254
245
263
Africa Middle East
200
Americas
150
Europe
100
Asia Oceania
50 0
Japan Demand
Supply
2014
Demand 2015
Supply
Demand
Supply
2016
Source: IEEJ 10
Ken Koyama, IEEJ, May 25th, 2016
©2016 IEEJ, All rights reserved
World gas prices by region Price g gaps p by y regions g significantly g y narrowed
20 18
H Henry Hub H b
16
NBP
14
Japan LNG average
12
Platts JKMTM
10 8
7.85
6 4
4.38 3.97
2
1.99
0
5
7 2000
1
7 2001
1
7 2002
1
7 2003
1
7 2004
1
7 2005
1
7 2006
1
7 2007
1
7 2008
1
7 2009
1
7
1
2010
Source: US EIA and IEA
7 2011
1
7 2012
1
7 2013
1
7 2014
1
7 2015
12 1
4
7
12
2016
11
Ken Koyama, IEEJ, May 25th, 2016
©2016 IEEJ, All rights reserved
LT LNG Supply-Demand pp y Outlook for Asia Supply potentials can continue to exceed demand
Million Tonnes 600
Divertable supplies from Atlantic New projects under plannning
500
New projects with SPA/HOA signed 400
Existing projects High demand High demand
300
Low demand
200 100
2030
Source: IEEJ LNG will be oversupplied at least till 2020 Timely upstream investment is the key to meet the demand growth towards 2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
0
12
Ken Koyama, IEEJ, May 25th, 2016
©2016 IEEJ, All rights reserved
Key Points for the Asian LNG Market Up to 2020 and beyond be ond
Demand side Demand in Japan p will decline subject j to the degree g of restart of nuclear power p plants. p Demand in Korea (and Taiwan) will depend on nuclear, competition with coal and economy. China’s gas demands may grow, spurred by action to curb air pollution. But key question is economic growth trend. LNG demands will basically expand, but economy, Russian PL and d domestic supplies l could ld slow l growth. h Overall, Asia’s LNG demand will see some growth ← The impact of the fall in LNG price? Competitive and flexible procurement of LNG will be a key.
S Supply l side id US LNG export permission will exceed 80 million tonnes. New LNG projects are to be launched in Australia, possibly in Canada and East Africa as well. Russian gas exports (PL) to China may expand. Russia will try to reinforce sales in Asian markets, depending on the Ukraine situation. Risk factors on the supply side include geopolitical situation and others. O Overall, ll there th is i enough h (or ( more than th enough) h) supply l potential t ti l to t cover the th increase in demand. → The impact of the fall in oil and LNG prices? 13
Ken Koyama, IEEJ, May 25th, 2016
©2016 IEEJ, All rights reserved
Primary Energy Demand by Source 6000
World
Mtoe
S lid lilines: R Solid Reference, f D Dashed h d lilines: Ad Adv. T Tech. h
29%
Fossil share 81%→78% （Ref. 81%→78% （Ref ） 71% （Adv. Tech. ）
5000
Oil
3000
2000
24%
21%
Coal
19%
1000
Nuclear 0 1990
2000
11%
6%
5%
3%
Hydro 2% 2013
2% 2020
2030
2040
41%
84%→81% （Ref. （ ） 71% （Adv. Tech. ）
51% 33%
2500
24%
2000
18% 1500 14% 10%
Natural gas Other renewables
Fossil share
3000
29%
The percentages indicate the shares of total global/Asian primary consumption
Mtoe
3500 25% 28% 24%
31% 4000
4000
Asia
24% 16% 16% 15% 12% 10% 6%
23%
1000
12% 500
10% 2% 2%
0 1990
2000
2013
2% 2020
2030
2040
• In both the Reference and Advanced Technologies Scenarios, oil continues to be the largest share of primary energy consumption and remains a major energy source up to 2040. 2040 • In Asia, coal remains the largest share among energy sources. In the Advanced Technologies Scenario, coal consumption declines substantially while retaining the largest share among energy sources. • Share of fossil fuel declines until 2040, while maintaining the 70% in the Advanced Technologies Scenario. Source: IEEJ, “Asia/World Energy Outlook 2015”
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Ken Koyama, IEEJ, May 25th, 2016
©2016 IEEJ, All rights reserved
INDC by Country Date of submission
Target type
Reduction target
Base year
Target year
Coverage
EU
Mar 6 6
Absolute emissions b l i i
40%
1990
2030
G G GHG
United States
Mar 31
Absolute emissions
26～28%
2005
2025
including LULUCF
Russia
Apr 1
Absolute emissions
25～30%
1990
2030
GHG
China
Jun 30
GDP intensity
60～65%
2005
2030
CO2
Japan
Jul 17
Absolute emissions Absolute emissions
26%
2013
2030
GHG
Indonesia
Sep 24
Reduction from BAU
29%
BAU
2030
GHG
Brazil
Sep 30
Absolute emissions
37%
2005
2025
GHG
India
Oct 1
GDP intensity
2005
2030
GHG
Party
-
（43% for 2030）
33～35%
GHG
In advance of the United Nations Climate Change Conference (COP21) in Nov. Nov 2015, 2015 the participating countries have submitted the Intended Nationally Determined Contributions (INDCs) which present the post-2020 climate actions each country intends to take.
Byy Oct 1st, 117 countries and regions g (totaling g 144 countries) have submitted their INDCs. - The 8 major countries and regions shown above cover 65% of global GHG emissions in 2010. -
Source: IEEJ, “Asia/World Energy Outlook 2015”
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Ken Koyama, IEEJ, May 25th, 2016
©2016 IEEJ, All rights reserved
Factors to affect Coal Demand (in Asia)
Economic growth Lower price F t Future off nuclear l power Competition against natural gas and other th competing ti fuels f l Need to protect environment (both for climate li change h and d air i pollution) ll i ) In particular, coal demand in China is a key 16
