Energy Security and Challange For Japan

1
Energy Security and

Challenges for J apan
14 February, 2012
Masakazu Toyoda
IEEJ : April 2013 All Right Reserved
Contents
(1) Japans Energy Security Is Fragile
(2) Risks to Energy Security Are Increasing:
1) Contingent Risks
2) Structural Risks
(3) If Energy Security Is Not Ensured..
(4) Actions for Energy Security and Status of
Nuclear Power Generation
2
3
Energy security means:
" to secure adequate energy at reasonable prices necessary for the
peoples lives, and economic and industrial activities of the country."
However, Japan is one of the weakest nations in terms of energy
security:
The lowest energy self-sufficiency rate (4%) among G8 members
No northeast Asian network (power grid and pipeline) like that in the EU
Energy self-sufficiency rate of major countries (2010)
Source: International Energy Agency
Grid interconnections in Europe
Non-nuclear
4%
(1) Japans Energy Security Is Fragile
Nuclear
Non-nuclear
Italy J apan Germany France UK US Canada Russia
Nordic
United Kingdom
North Africa
Synchronous
Continental
Europe
Turkey
Baltic
4
19%
4%
Source: EDMC Handbook of Energy & Economic Statistics in Japan, the Institute of Energy
Economics, J apan, IEA, etc.
Reference 1: Insufficient Development of
Energy Security
75%
17%
65%
94%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2009
First oil
crisis
Second
oil crisis
Dependency on fossil fuel
Dependency on oil
79%
10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2009
Including nuclear power
Excluding nuclear power
Energy self-sufficiency rate
First oil
crisis
88%
71%
78%
68%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
60%
65%
70%
75%
80%
85%
90%
95%
Volume of crude oil import
10,000kL
Dependency on
Middle East 87%
First oil
crisis
Second
oil crisis
83%
43%
4.2%
4.8%
2.4%
0%
1%
2%
3%
4%
5%
6%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2011
Nominal GDP ratio
of crude oil import
4-6
2.4%
First oil
crisis
Second
oil crisis
5
(2) Risks to Energy Security Are Increasing
The various risks that could trigger a crisis can be
classified into two types:
Contingent Risks
Structural Risks
Since the Oil Crisis in 1973, there have been
many supply disruptions and energy crises.
Risk factors are increasing in scale and
complexity.
6
1) Contingent Risks
Political events in main supplier countries including wars,
revolutions, riots and terrorism
The 4th Yom Kippur war: led to the 1st oil crisis (1973)
Iran-Iraq war: led to the 2nd oil crisis (1979)
Political actions by consumer nations
Sanctions against Iran
Accidents in energy supply chains
Accidents at facilities that produce, import, ship and transport oil
and gas
Accidents at transport bottlenecks (Strait of Malacca, Strait of
Hormuz, etc.)
Accidents and troubles at power plants (nuclear power plants, etc.)
77
Reference 2: Sanctions on Iran:
Scenarios and Influences
1. Policies of US and Future Scenarios
1) The US decided to impose sanctions on Iran including crude oil
export to hinder its nuclear program.
Europe supported the decision, which influenced other
countries including Japan and South Korea.
2) Possible Scenarios
a. Iran decides to compromise and abandons its nuclear program
(uranium enrichment).
b. Iran blockades the Strait of Hormuz and enters military conflict
with the US and others.
c. Uranium enrichment by Iran is accepted, but limited to peaceful
use.
d. Regardless of moves by the US and Iran, what will Israel do?
2. Influences on Oil, LNG and LPG Trades
If Iran stops producing, oil prices will soar and cause an energy
crisis.
(Note) Approx. 80%, 25% and 85% of oil, LNG and LPG of Japanese imports pass through the
Strait of Hormuz. There are no LNG stockpiles or international interchange schemes. The inventory
is equivalent to approx. 20 days. Since the nuclear power plant accident, it accounts for 40% of
power generation.
8
Reference 3: Sanctions on Iran:
Schematic View of Strait of Hormuz
2-mile wide passages
each to the Persian Gulf
and to the Indian Ocean
2-mile wide interference
zone between the passages
Amount of oil traffic: more than 17
million B/D
(Approx. 20% of world oil production)
(85% of oil imports of J apan)
Amount of LNG traffic: more than
82.6 million tons
(Approx. 30% of world LNG
production)
(18% of LNG imports of J apan)
* Figures for J apan are derived from trade
statistics in 2010, assuming that imports from
Iran, Iraq, Bahrain, Saudi Arabia, Kuwait,
Qatar, and UAE passed through the Strait of
Hormuz.
9
Reference 4: Influences on Crude Oil Prices in 2012
The two most important factors influencing the international oil market in 2012 are the
situation of the world economy and international finance, and geopolitical risks.
In the reference case with no major turbulence, supply and demand will remain almost in
equilibrium. The actions of OPEC are the focus of attention in terms of supply and demand
adjustments.
Depending on how uncertainties in the world economy and oil supply/demand develop,
crude oil prices (WTI) could vary dramatically from the second half of 2012.
Reference Case: around $100 $10 (annual average, same applies hereafter)
(Note) Saudi Arabias Minister of Oil said in J anuary that an oil price of $100 was ideal. Conventional
prices are $60-80.
High Price Case: around $120 $10 assuming tensions with Iran
Low Price Case: around $70 $10 assuming worsening of the European economic crisis
Probability: around 60% for Reference Case; High Price and Low Price Cases are on an
equivalent level.
With an emergency in Iran, prices could soar above the High Price Case (beyond the
previous maximum of $147?)
(Note) Brent price is about $10 higher than WTI price. The CIF of Japans crude oil is also
about $10 higher.
Large fluctuations in prices cannot be avoided this year.
(Note) Average crude oil price (WTI) was $100 in 2008, $62 in 2009, $80 in 2010, and
$95 in 2011. What will it be in 2012?
10
2) Structural Risks
Demand side
Rapid increase in demand mainly in Asia
Competition for resources
Energy options for measures to address global warming; shift from coal and oil to
LNG
Supply side
Embargo imposed by supplier with political tension (resource nationalism, etc.)
Use of market power by supplier (state-owned companies and oligopolistic
system)
Depletion of resources and chronic lack of energy (shale gas and environment?)
Lack of investment in supply due to environmental controls, deregulation of
market, etc.
Political issues
Uncertainty caused by the Arab Spring
Regional instability resulting from declining influence of US hegemony
11
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1
9
7
1
1
9
8
0
1
9
9
0
2
0
0
0
2
0
0
9
2
0
2
0
2
0
3
0
2
0
3
5

Asia
North America
European OECD Members
European non-OECD Members
Central and South America
Middle East
Africa
Oceania
Annual Average
Growth Rate
80-09 09-35
World 1.8% 1.7%
Asia 4.6% 2.6%
North
America
0.7% 0.4%
Under steady economic growth, energy consumption in Asia in 2035 will be nearly double the current
volume (3.9 GT in 2009 7.6 GT in 2035). Non-OECD countries account for approx. 90% of the increase
in world energy consumption from 2009 to 2035.
In 2009
11.2 GT
In 2035
17.3 GT
(1.5 times)
World
Asia
In 2009
3.9 GT
In 2035
7.6 GT
(1.9 times)
3.9 GT
7.6 GT
Reference Case
Source: Asia/World Energy Outlook 2011, the Institute of Energy Economics, J apan
Reference 5: Outlook for World Energy Demand
(by Region)
Oil equivalent MT
12
Reference 6: Intensified Competition for Energy Resources
Increase in dependency on
energy imports means greater
fragility (especially in China).
To address this, strategies
including development of
domestically produced energy,
diversification of supply
sources, independent
development overseas, and
strengthening of companies as
players will be fully
implemented.
If such actions become
excessively exclusive,
protection of or competition for
resources may intensify,
leading to instability in the
international market.
Source: Asia/World Energy Outlook 2011,
the Institute of Energy Economics, J apan
Oil
Natural Gas
89
110
382
647
769
108
138
194
209 204
-19
-28
187
438
564
-100
100
300
500
700
900
1980 1990 2009 2020 2030
Consumption Production Net Import
Oil equivalent of 1 MT
-21%
-25%
49%
68%
73%
Outlook for Supply and Demand of
Oil and Natural Gas in China
13 14
83
278
504
13 14
79
150
285
0 0
4
128
219
0
100
200
300
400
500
600
1980 1990 2009 2020 2030
bcm
0%
0%
5%
46%
43%
Import Dependency
Consumption Production Net Import
13
Reference 7: Shift of Surplus Production Capacity of OPEC
Causes of lowered surplus production capacity include decreased
production in Libya. The level as of January 2012 was 3.67 million B/D.
367
58
799
0
100
200
300
400
500
600
700
800
900
2
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1
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3
2
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B/D
(ten thousand B/D)
M
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14
Reference 8: Expected Trend of Long-term Oil Prices
Sources: Annual editions of the International Energy Outlook, Energy Information Administration (EIA)
Due to the recent soaring crude oil price, the price outlook has been
revised upward in the past 5 years.
/
2005
2006
2007
2008
2009
0
20
40
60
80
100
120
140
160
1
9
7
9
1
9
8
1
1
9
8
3
1
9
8
5
1
9
8
7
1
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2
0
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2
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5
2
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7
2
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9
2
0
2
1
2
0
2
3
2
0
2
5
2
0
2
7
2
0
2
9
2010
2011
(dollars/barrel)
Forecast
for 2009
Forecast
for 2010
Forecast for 2011
Forecast for 2008
Forecast for 2007
Forecast for 2006
Forecast
for 2005
15
Reference 9: Emerging Concerns over Limited Energy Supplies
+ Arab Spring + Lower Influence of US
Unstable factors and issues in Middle East
Situations in and
outside of Iraq after
the Iraq War
Risk of terrorism
targeting oil
facilities
Uncertainty over
future of
peace situation in
Middle East
Discontent with and
objections to the US
prevailing in Arab and
Islamic societies
Tensions in
international relations
caused by Irans
nuclear program
Unstable factors
accompanied by current
administrations and
systems in Middle East
Source: Developed by the Institute of Energy Economics, J apan based on various documents and materials
Actions to deal with
increasing domestic
energy demand
16
Reference 10: Uncertainty over Supply of Natural Gas
While worldwide demand for natural gas is expected to increase, supplies of
unconventional natural gas are likely to increase. Will the benefit to J apan be limited?
Where will the effect of the US "shale gas revolution" extend in the world including Asia?
The pipeline market is different from the LNG market.
After the surge in gas demand in Asia following the Great East J apan Earthquake and the nuclear
accident, the Asia premium was raised.
(US: $2-3/MMbtu, spot LNG price for Asia: $14-15/MMbtu)
Major Exporters of LNG: Qatar and UAE would be significantly affected by closure of the
Strait of Hormuz.
Different from oil, LNG is vulnerable to a crisis.
No international cooperation mechanism (unlike IEA for oil) during an emergency
No surplus production capacity (surplus production capacity of OPEC for oil) in the international
market
Limited inventory (equivalent to approx. 20 days for J apan) in consuming countries
Disruption of supply leads to skyrocketing price as well as physical problems.
The price of LNG in J apan is linked with the crude oil price. Therefore, if the crude oil
price rises, so will the LNG price.
The spot LNG price has significantly increased due to tight supply and demand, rising
by 6-70%in the past 10 months.
LNG Production Capacity
(World trade volume: 221 MT in 2010)
LNG Import by J apan
(7.17 MT in total in Dec. 2011)
Qatar 77 MT (25.7%) 19.4%
UAE 5.6 MT (2.8%) 5.9%
17
Source: Monthly Report of Mineral Resources and Petroleum Products Statistics, etc.
0
200
400
600
800
1000
1200
1400
1600
1800
J
a
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-
0
8
M
a
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-
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M
a
y
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J
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o
v
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8
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9
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a
r
-
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9
M
a
y
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9
J
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0
9
S
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N
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9
J
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-
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1

(1000
Qatar
(Compared with 2010:
+106.6%)
UAE
(Compared with 2010:
+18.2%)
In 2011, imports from Qatar doubled.
Reference 11: LNG Imports from the Middle East
Note: The recent LNG ratio accounts for 40% of power and is heavily
reliant on Qatar.
(1000 ton)
Malaysia
Qatar
Australia
Brunei
Oman
Others
Indonesia
UAE
Russia
18
(3) If Energy Security Is Not Ensured
What happens if energy security is threatened?
Disruption of energy supply
Soaring energy prices and volatility
Competition for energy resources, resulting in useless disputes
Resource nationalism, market power issues brought by oligopoly
Compulsory acquisition and imposed higher prices
Global warming issues inhibit sustainable development
Climate changes and abnormal weather attracting attention worldwide
Impacts of the Great East J apan Earthquake and Nuclear Power Plant
Accident
If nuclear power plants fail to be restarted in FY 2012:
Switching to LNG/oil - imports will exceed 3 trillion yen
Shortage of electricity supply - there will be almost a 12% shortage in J apan this
summer
Increase in global warming gases - 14% increase compared with 1990
Adverse effect on macro economy (GDP, employment, etc.)
19
(4) Actions for Energy Security and Status of
Nuclear Power Generation
Demand side:
Control of demand (R&D/subsidies for introduction) - Energy conservation
Supply side:
Improvement in energy self sufficiency - renewable energy + nuclear power
Inexpensive energy - nuclear power/coal and LNG
Securing of a large volume of high density energy efficiently (support for introduction and
compensation) - nuclear power
Secured power stability of renewable energy - linked with coal and LNG + batteries
Diversification of energy sources (R&D/subsidies for introduction) - renewable energy + nuclear
power
Measures for distribution and diversification of import sources (resource diplomacy) - LNG +
nuclear power
Measures to strengthen relations with major suppliers + enhance negotiating capability (resource
diplomacy) - oil, coal, LNG, and nuclear power
Actions to prevent global warming (R&D/subsidies for introduction) - renewable energy + nuclear
power
Measures to strengthen emergency response (reserve effect) (national reserves/support for
introduction) - oil (200 days) and nuclear power (5 years)
Export of infrastructure, assurance of safety and cooperation to cope with global warming
(resource diplomacy) - coal fired, renewable energy, nuclear power, etc.
Safety aspect:
Secured nuclear safety: stricter regulations, independent regulatory organizations, international
cooperation through IAEA, etc.
Market mechanism alone is insufficient (R&D, subsidies for introduction,
resource diplomacy, safety regulations, etc.)
What is the contribution of nuclear power?
Contact: [email protected]

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